Post-2008 Wealth Creation: A Guide, Part 5

Edit: Part 3 contained a mistake in the integration that has been fixed

Part 4 discusses the allocation and the past performance of the strategy. In the fifth and final section, I’ll show how to place the orders.

To recap, the the method involves using 50% of the capital to short TMV and the other 50% to short SPXU or SPXS (they are identical except for price). Note: margin account and option trading ability is required for this to work.

As of 7/25/2016, SPXU is trading at $23.70 and TMV is trading at $16.60. For a $50,000 account, about 1050 shares of SPXU must be shorted and 1500 TMV.

However, the shares may be hard to borrow, so you may see a message like this:

Or you may have to pay an annual fee (usually around 2-3%) to short them. There is a way around fees and hard-to-borrow, by using options, which is to sell the collar to create a synthetic short. This means you buy an in-the-money put and sell an out-of-money call.

Here is what the order execution screen looks like for 10 collars of SPXU for 35 strike, March 2017 expiration:

The 35 put and purchased and the 35 call is sold, forming the synthetic short.

This is also done with TMV:

The nice thing about TMV is because is it typically has much less extrinsic value than SPXU, so only buying in-the-money puts is necessary to create a decent short. In the screenshot above, I chose the 28 puts that expire in Feb. 2017. Because there is extrinsic value of around 20 cents per contract, the total ‘fee’ is around $300. This can be mitigated by selling the out-of-the money call at the 25-28 strike, but I find that it’s not worth the loss of buying power.

The total annual ‘fee’ is around 1% (due to commissions, slippage and other factors), which is why the performance is not quite as good as the screenshot in part 4, but it’s very close.

But this a pretty good way to make money on autopilot. In early 2015 I had someone put $30k into something similar to this and the account balance is at $50k now, a gain of 66% vs. a 6% gain for the S&P 500. The newest version, as described in this 5-part series, is better.

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