3 Models

I will report on three models: Option Model, Non-option Model, the Long-Only Model. You can mix these to fit your needs, but I designed these initially to help me organize my investing. A chief concern of mine is risk management and all are designed to minimize risk. I would suggest you read (or briefly review) the other blog entitled “Investment Choices” before you read this one.

I have concentrated on pattern recognition with respect to the NDX100 (Nasdaq100 index) and previous blogs at this site refer to that. Those concepts are incorporated into these models.

Long-Only Model

This is the simplest model. Some investment accounts have limited investment options (maybe some 401K’s, variable life insurance policies, IRAs or Health Savings Accounts-HAS’s), and you can not invest in anything but funds that “go long the market”. These are accounts where you are only allowed to invest in various stock or bond funds (maybe a fund that invests in government bonds, or one that invests in small cap stocks, or one that invests is stocks that mirror the SP500, or one that invests in international stocks).

With this type of account there is no way to make money when the stocks are going down… except that you can switch your money into a money market fund, to preserve your capital. I have been trading my life insurance policies cash value in this manner. The investment is moved from the “SP500 Index-type” fund that they offer to the Money Market fund, and back and forth. The trading is infrequent, averaging one trade every 5-6 weeks, or so.

Recent 2008 trades:

Entered the SP500 index fund when SP500 at 1320

Moved to Money Market when SP500 at 1390

Entered SP500 index fund when SP500 at 1335 and still in this fund.

Option Model

This is labeled “option” but one could trade this model without using options at all. This model focuses on trading the SP500 (SPX), the Nasdaq100 (NDX) and gold stock indices. Virtually in all instances, when a recommendation is made, one could use options or a 2X index exchange traded fund or a 2X index mutual fund, instead.

For example, instead of buying call options on the SPY (SP500 index), one could buy shares in SSO (Proshare’s 2X SP500 exchange traded fund) or one could buy shares of the RYTNX mutual fund (Rydex’s 2X SP500 mutual fund). If the recommendation is to buy put options on the QQQQ (NDX100 index), one could buy shares of the QID (Proshare’s inverse 2X NDX100 exchange traded fund) or one could buy shares of RYVNX (Rydex’s inverse 2X NDX100 mutual fund).

There may rarely be a few individual stock recommendations.

Non-Option Model

This model will focus on recommendations that are more directed toward end-of-day trading. This requires less active involvement or monitoring. For example, a recommendation may say “With 50% of the account, buy a 2X inverse SP500 fund, on the close of trading tomorrow”. One could place an order to buy the URPIX mutual fund, the Profund’s inverse 2X SP500 fund – it will be executed on the next close. One could plan to be available for the close and buy QQQQ put options, or buy shares in QID, the inverse 2X NDX100 exchange traded fund.

I may also recommend limit orders, so you can place them and go about the day, without needing to monitor the market. The goal is to generate an above average return without needing to trade options.