Anatomy of an NLS trade

I just had one of my No Lose Stocks (NLS) trades pay off, so I thought it’d be fun to run through it as an example.

On 2/15/2011, I got my daily email with 21 NLS trades available that met my personal criteria. You can look at the NLS Historical Data if you want to see the spreadsheet. (I still had a few bugs to work out at the time, so there are some duplicate entries, and the first two are probably buyout situations. And my personal preference is not to buy any trades that require more than 25% Annualized Percent to Profit.)

I placed 12 of the trades by buying the call options. All expired in January of 2013. In total, this cost $958. That was money that was gained as interest on CDs. So spending this money did not lower my core capital. There were no commissions because I was (and am) using ChoiceTrades “no commission during option expiration week” feature. (I only bought 12 of the 21 because I didn’t have the interest earnings to buy all 21. I would have had to dig into core capital to do that, and that’s a no no.)

Once the trades went through, I then entered 12 alerts in my Fidelity account. One for each stock, set to alert me if the stock ever reached the call option’s strike price.

The specific one we’re talking about here is MCD. The strike price was $95. The closing price on 2/15/2011 was $76.15. And the option cost $1.03…which is $103 for 100 shares.

Doing all of that took about 20 minutes on 2/15/2011, and I was done placing trades for that month.

During the time between then and now, the only time I spent on investing was to place trades during the option expiration weeks. Fewer and fewer trades because NLS hasn’t been finding as many trades that fit the criteria lately. That again took less than 20 minutes each month…some months less than 5 minutes when there weren’t any worthwhile trades to place.

Fast forward to 11/8/2011…9 months later. I got an email alert from Fidelity that MCD had gone over $95. I logged into ChoiceTrade, found the MCD call option with a $95 strike and a January 2013 expiration. Then I placed a sell order at the market.

The call option sold shortly after for $7.05 per share…or $705. But this wasn’t during option expiration, so the commission was $5.55 with a $0.04 fee for a net of $699.41. (There’s no need to wait for option expiration to hit when I have a nice profit that I need to harvest.)

So I made ($699.41 – $103) $596.41 over 9 months. And I still have 11 other call options that expire in 2013 that might still pay off.

And if you take a look at the MCD chart between 2/15/2011 and 11/8/2011, you’ll see a number of places where I might have sold early, or at least been anxious about whether or not I should sell. But since I didn’t follow the stock at all, and just waited for my alert, I didn’t have to suffer through that at all, and the $596.41 is all the much sweeter for it.

That $596.41 will now be added to my core capital, and since I never spend my core capital, it will never be less than this new total. And this will add to the amount of interest earnings that I can place on future trades.

Little time to place the trade, no worry while waiting, and a fun pay off. Good stuff.

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16 thoughts on “Anatomy of an NLS trade”

  1. I am brand new to NLS. Question. You spoke about your purchase of the call options with your interest money, but in the NLS strategy, there is talk of Puts as well. Did that come into play here? With no Puts, you risk the call cost, but since it is done with interest, is it considered expendable?

    Thanks
    Steve

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  2. Hi Steve,

    Thanks for asking.

    The Puts are just used to find the stocks and the strike prices to buy the Calls for. The Puts aren’t actually purchased in this usage of the strategy.

    Yes, the way I’m looking at the strategy, the interest is considered expendable. I’m happy as long as my core capital doesn’t go down.

    Thanks,
    Aleks (aka Dividendium)

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  3. That was one win out of 11. What about the other 10? So far you spent $958 and gained $596.41 for a net loss of $361.49. Do you have other payoffs from the remaining 10 to give you an overall net profit?

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    1. These all expire in January of 2013, so there are still some months left on some of the options. But along with MCD above, 5 others have been sold. The total profit so far, including MCD, is $1640.30 – $958 = $682.30.

      So there are still 6 more that might turn into profits, but probably won’t. The majority of these trades end up expiring worthless.

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  4. I also am a newbie to your site. Can you walk me through the sequence of steps (and numbers) you took to implement the Jan 11 GE trade? What must happen in order for you to make a profit on the trade? Must GE stock price rise to $ 30?

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    1. Sure! I actually did purchase this trade myself on 1/12/2013. You’re talking (for those reading) about the GE trade found in the NLS data for 1/11/2013.

      Overall my goal for this trade is to buy the GE CALL option expiring on 1/16/2015 at a strike price of $30. And then sell that CALL option when GE hits $30. The sequence of steps I follow to do that is:

      – Receive NLS nightly data email. See a trade I like. Enter a LIMIT trade to be executed the next day for that CALL option. The Ask price at the time NLS sent out the data was $0.26 (per share). I always bid the Ask price that NLS reports because that’s what NLS bases it’s calculations on. So for one contract, that was $26, plus a $5.15 commission (my broker no longer does free commissions). So total, I was offering $31.15 to make this trade.

      – Next day, I wait for an email to tell me that my trade was executed. If it wasn’t executed, the trade would just have been forgotten. Since it was, I now own the above CALL option for a cost of $31.15.

      – Now I enter an “alert” in my Fidelity account to tell me when the price of GE goes over $30. This is key for me because I don’t want to watch the market at all. So this way, if/when GE goes over $30, I’ll get an email, and until then I basically forget that I even own GE. (I actually had to go look to see if I did or not before replying to this comment…even though I had only placed the trade yesterday.)

      – In the future, if I do receive that email telling me it went over $30, as soon as I see that email, I immediately place a trade at MARKET to sell the CALL option. My intention is NOT to pay attention to the market at all, and to have as few emotions involved as possible. So I try not to pay attention to which stocks I own, so even accidentally hearing information about them won’t bother me. And I try not to second guess if I should hold the CALL a little longer to squeeze just a little more money out of it because the emtoional cost is too high for me. With most of these trades, the CALL option ends up expiring worthless before it hits the Strike Price…but I don’t pay attention to that either, since the money in my CD account stays the same…or goes up when one of these pays off as MCD did in the above post.

      Let me know if that didn’t answer your questions.

      The Ask price at the time NLS sent out the data was $0.26 (per share). I always bid the Ask price that NLS reports because that’s what NLS bases it’s calculations on. So for one contract, that would be $26, plus a $5.15 commission (my broker no longer does free commissions). So total, I paid $31.15.

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  5. Yes, “cash covered”, I’m not buying on margin. Remember, I expect the call is going to expire worthless.

    IF GE hits the $30 strike price, the option will probably sell for between $2.67 and $0.32, depending on how close to the expiration date it is.

    I grabbed those numbers from the GE Jan 2015 $20 call, and the Jan 2013 $20 call…since $20 is “just in the money”, which is what the $30 strike would be if the stock had just hit $30.

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  6. Thanks Aleks,
    Will you please let your readers know the results of Jan 2013 Calls expiration?
    Since the only way to profit from your strategy is for the company stock to rise to the strike price, you must gain faith that the stock will indeed rise, nominally 10-15% or perhaps as much as 25%. Does this imply your stock picking identifies companies you would otherwise buy with that expectation of price gain, except that you like the loss protection of the fixed call option price? I realize you pay for the option through dividends, so do you ever consider higher paying dividends (think mReits or commodities like SCCO) as suitable for your method? Or do you stick with large global enterprises with fair but not great growth prognosis? Or “undervalued” companies which you feel are poised to spring up to more historical valuations? Such as MCD and WMT were not long ago.

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  7. Great idea. I will work on pulling the data together for the 2013 call expirations. I will probably do that as a new blog post. I will work on it this weekend, but I’m not sure if I will have it done this weekend.

    “Does this imply your stock picking identifies companies you would otherwise buy…”

    No, definitely not. These stocks are only picked because someone ELSE (a put option seller) sold a put so cheaply that the dividends alone can pay for that put. I’m taking that as a sign that THAT seller thinks the stock won’t go down, and so probably will go up.

    I don’t look at the stocks, or the companies, or the fundamentals, or the market. I just take the other side of those trades…or rather, I take a call option that is basically equivalent to that trade.

    To be clear, I don’t recommend buying these stocks…or any stocks really. My view of the stock market is that it’s a scam. (http://www.dividendium.com/blog/is-market-scam/)

    Also, please note, I EXPECT any given call option I purchase to expire worthless. I have no faith in any of the individual trades. I have a suspicion that every 7 years or so this strategy will pay off big when a bull market comes rumbling through…and again when the bear market tears everyone else down but leaves me standing at my same height. But in the between years, this strategy probably won’t return much.

    To specifically answer your question about REITs, every day the software that runs Dividendium looks at 2,012 stocks to see if they meet the “dividends can pay for put” criteria. Some of them are REITs, some ETFs, and all the regular stocks as well. The 1 to 2 stock trades you see in the daily results for NLS are the only ones out of the 2000+ stocks that met the criteria that day.

    If you want to see that 2,012 stock list, the Daily Dividend Data Email has a “Download Spreadsheet” link that has the full list.

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  8. Hi Aleks,

    I just stumbled upon your site and I am intrigued about the NLS concept. Especially the ‘peace-of-mind’ aspect. Can you please give some statistics on the success rate since you applied the method? How much CD interest did you put in and what results did you get?

    One suggestion: once you get a sell signal, why don’t you put a 10% trailing stop order in? That way you will profit from any further rises, always reap the bulk of the gains, and still sleep well at night.

    Regards,

    Jan

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    1. Hi Jan,

      I’m supposed to be working on a blog post on the success rate (or just the results in general), but I didn’t find the time this weekend.

      There are a couple reasons that I don’t use trailing stops.

      First, if I don’t sell immediately, there’s still some question (in my mind) of whether or not I’m going to profit. Even if I have a trailing stop, there still has to be someone on the other side to take the trade on the way down. If the option is lightly traded, that might not happen within the 10% trail. And since I use this method to avoid those emotional ups and downs, I’d rather just sell and get out.

      Second, and probably more important, the most leverage in cost vs price change of the option is going from “out of the money” to “in the money”. Moving deeper “in the money” is pretty much the same leverage as owning the stock. A better move for me is to sell the option when it goes “in the money” and turn around and use the profits (or in my case the interest on the profits) to buy another “out of the money” option to keep up the leverage. This is the idea that if I wouldn’t buy in to a trade today, I shouldn’t be holding it.

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