The record for each portfolio (as of March 22, 2008):

Terry's Tips maintains several actual brokerage accounts where the basic strategy is carried out with different underlying stocks or ETFs.  Subscribers can follow every trade ever made in every portfolio. Each portfolio has a distinct risk profile and annual profit target (for most of them the annual target is 36%). Many Terry's Tips subscribers mirror these portfolios on their own or through an Auto-Trade program with their broker.

The basic strategy is called the 10K Strategy because it is not a marathon (like buying a stock and doing nothing) nor is it a sprint (like daytrading).  Rather, it involves creating option positions and adjusting (or rolling over) some options each month.  The 10K Strategy is designed to make exceptional investment returns every year regardless of which way the general market goes.

The underlying premise of the 10K Strategy is that we own options with several months (or years, when LEAPS are used) of remaining life, and we sell options to someone else which usually have a month or less of remaining life.  While all options go down in value over time (if the underlying stock stays flat), the decay rate of the long options we hold is less than that of the short-term options we sell, and our profit comes from the difference in these decay rates.

The major challenge of the 10K Strategy is how to contend with volatility.  (The strategy works best in a flat market, although it can be altered to do best in a directional market of the investor's choice.) If the underlying stock or ETF stays flat, we earn a maximum profit every month.  Generally, the more the underlying fluctuates, the worse we do.  We have established a set of Trading Rules for both variations that determine when adjustments need to be made to contend with the enemy of volatility.

The 36% Solution: We started three separate 36% Solution portfolios using the Russell 2000 (IWM) as the underlying in 2007, one using puts, one using calls, and one with a bearish stance (the Big Bear).  At the end of the year, their annualized gains had been 59%, 56%, and 73%, all well above the 36% annual goal (all figures are after commissions were paid).  Then 2008 came along and pretty well crushed all of them except the Big Bear.

In the January 2008 expiration month, the market fell more than it had in any expiration month except one in the last 50 years (October 1987).  Even when the 9/11 disaster struck and everyone believed our entire economic system was in peril, it did not fall as much as it did this year.

We faced the decision whether we should protect ourselves against an occurrence that might come along only once every 25 years or not.  If we provided this kind of protection, our annual gains would be less in the 24 years when a huge tumble did not take place.

We ended up deciding to compromise.  With the strategy we had been following, we were making far more than the 36% target.  We believe that by providing a little more downside protection in our portfolios, we should be able to achieve the 36% goal but probably not much more.  Only time will tell whether we are right.

We also added two new portfolios that operate much like the Big Bear but with different underlyings.  The first of these was called the Black Swan, using the Emerging Markets ETF (EEM). It has two goals – to be able to withstand a market drop of 10% without losing any money, and 3% to be withdrawn from the portfolio each month forever.  In its first month of existence, it was put to the test.  EEM fell by over 15%, and not only did the portfolio hold its value, but it gained 6% for the month.  We started the 3% monthly withdrawals before the portfolio was even a month old. (This portfolio is now 3 months old, and an average of 10% has been withdrawn each month.)

Recent Modifications to our Basic Strategy: Other changes were made because of the market melt-down. Bottom line, we adopted a more conservative stance. Some of the changes we made included:

1. We no longer use individual stocks as the underlying.  We trade options on 5 ETFs instead.  We are no longer subject to big price swings because of bad (or good) news at an individual company.
2. We abandoned our portfolios that used shorter-term options for our long positions, and shifted to true LEAPS for most of the long positions.
3. We are aiming for a 36% annual gain (with an extremely high likelihood of achieving it) rather than the 50% - 100% we formerly sought.
4. We use a larger range of short option strikes so that we can tolerate wider swings in the ETF price.
5. We suspended an important Trading Rule when it was triggered early in the expiration month.  This change helped avoid losses we might incur from excessive whipsaw price behavior.
6. We withdraw money from all portfolios whenever 6% is made in a single expiration month, thus “locking in” those gains.
7. At the end of each expiration month, we withdraw all gains in increments of 3% as long as the portfolio value is above its “starting” value.
8. We have established portfolios that are bearish (i.e., they are “short” so that the biggest gains come when the stock falls in price). 
9. We encourage subscribers to “pair” a bullish portfolio with a bearish portfolio using the same underlying ETF.  If there is a big move in the stock, the gains in the winning portfolio should offset the losses in the other portfolio.
10. We have set up 10 portfolios using the 5 ETFs, 3 of which are bearish and 7 are bullish.  Eight portfolios have a “starting” value of $10,000, one started at $15,000, and one at $5,000.  Because of the withdrawal policy, subscribers are able to mirror these portfolios at approximately the starting values at any time.

Here are the results for the remaining portfolios:

36% Solution - Calls Portfolio This portfolio was created in February 2007 with $10,000, using the Russell 2000 (small cap ETF – IWM) as the underlying with Jan09 LEAPS as the long side.  The annual goal of the portfolio was to earn 36% each year regardless of which way the market moved.  Each month when there was a gain of 3%, $300 was withdrawn from the portfolio.  If a gain of $600 or more was made (and the portfolio value was still above $10,000, $600 was removed).  After 11 full expiration months, $5,400 had been withdrawn from the portfolio and the portfolio value was worth over $10,000.

At this time, the annualized gain has fallen to 15% because of the January melt-down. In its first year of existence, the stock (IWM) had fallen 15.4%.  An investor who owned mutual funds would probably have experienced a loss of that magnitude.  While we were disappointed with an 15% gain, we felt some consolation in knowing that the great majority of investors in conventional investments suffered large losses over this same time period.

As of the March 22, 2008 expiration, subscribers who mirrored this portfolio as well as our Big Bear portfolio as we have recommended earned an average annualized gain of 35% on the two portfolios.

36% Solution - Puts Portfolio This portfolio was created in June 2007 with $10,000, using the Russell 2000 (small cap ETF – IWM) as the underlying.  It employs the same strategy as the 36% Solution – Calls portfolio except that puts are used rather than calls.  Put spreads are typically cheaper to place than same-strike call spreads, and the short-term time premium is about the same for puts and calls, so we expected that this portfolio might out-perform the same strategy using calls. 

The annualized gain for this portfolio was 56% for 2007, and $3,600 was withdrawn, but the January 14.5% melt-down in IWM caused the annualized gain to fall to 23% by the March 2008 expiration.

Subscribers who mirrored this portfolio as well as our Big Bear portfolio as we have recommended have earned an average annualized gain of 40% on the two portfolios.  

36% Big Bear Portfolio This portfolio was created in August 2007 with $10,000, using the Russell 2000 (small cap ETF – IWM) as the underlying.  It employs the same strategy as the 36% Solution – Puts portfolio except that a negative net delta position (i.e., it will be short) is retained at all times.  This portfolio is designed to do best when the market is weakest.  It is a good addition for investors who have other investments that do better in up markets.

The portfolio made excellent gains when the market was flat, and made good gains when the market rose moderately.  It, too, was hurt when the market fell by 14.5% in a single month (huge changes in either direction hurt our portfolio performance – it is a good thing they come along only every 25 years or so).  Even with the huge drop in stock value, the Big Bear managed to keep its annualized gain at 56% after the March 2008 expiration.

I have written a small book that gives the details of both variations of the 10K Strategy.  It is called Making 36%.  The revised 2008 edition of the book explains:

• Why writing calls against stock is not a good investment strategy.
• Why buying individual stocks is a loser’s game.
• Why the 10K Strategy is less risky than owning individual stocks or mutual funds, even in an IRA.
• Complete Trading Rules for the 10K Strategy.

A special offer for this book follows this Track Record discussion.

DIA Sleeping Giant Portfolio This, one of our more “conservative” portfolios, was created in September 2004 with $20,000.  The underlying is the Dow Jones Industrial Average tracking stock (DIA).  It uses in-the-money call LEAPS for the long side.  The portfolio maintains a slightly bullish posture, and is designed to gain a relatively modest 20% - 30% a year in value.  In its first two years, the portfolio gained an average of 26% each year.  After 2 years, $15,000 was withdrawn from the portfolio (leaving a balance of about $15,400), and just over a year later, the portfolio had grown to a value of $23,158, for a gain of 42% annualized. However, when the Dow fell from over 14,000 to under 12,000 in a very short time span, this portfolio suffered.  After the February 2008 expiration, the portfolio had gained only 6%.  On February 15, 2008, $1,321 was removed from the portfolio so that we could establish a modified, more conservative strategy with a "starting" value of $15,000. In its first month of existence, the market cooperated and the Dow fell a miniscule .2%, enabling the portfolio to gain 10% (120% annualized), so it is off to a good start.

Emerging Elephant Portfolio This portfolio was started at the end of November 2007 using the Emerging Markets ETF (EEM). EEM is made up of companies in over 20 “emerging” countries with a concentration in BRIC (Brazil, Russia, India and China) but also Indonesia, South Korea and South Africa.  True LEAPS are bought as the long positions, and both puts and calls are employed.  In the first three months of existence, this portfolio maintained a bullish posture, and when the stock fell by over 16%, it had lost 26% in value.  It was our only losing portfolio in the March 2008 expiration month (9 out of 10 of our portfolios gained an average of 5.3% in value for the month). 

The poor results for this portfolio were due to extreme volatility in the underlying EEM stock.  During a single month, the stock surged over 15% only to fall back even further, ending the month 7% lower than it started.  Our strategy cannot cope with this kind of volatility.  However, if a subscriber had paired this bullish portfolio with the BlackSwan which is the bearish version using EEM as the underlying, he or she would have made a net gain on the two portfolios for the month.

The Black Swan - The Perfect Portfolio? This portfolio was set up at the end of 2007 using EEM as the underlying.  The objectives were to withdraw $300 each month from the $10,000 starting account value and do this forever while protecting against a 10% drop in the stock price at all times.  In the first month, the stock dropped by 15% and not only did the portfolio retain its value, it actually gained 6%.

For the first three months of the Black Swan’s existence, it has gained a whopping 30%, thanks in large part to a stock price that fell 15% over that time period.

Check out the risk profile graph for this portfolio with EEM trading near $129 (and 4 weeks to go until the April expiration). The stock can fall a full $10 a share and the portfolio will gain over 10% in 4 weeks. It will also make this much if the stock should gain $7 over the next 4 weeks. If the stock should fall about $5, a gain of over 25% should result.   Operating in tandem with the Emerging Elephant portfolio, good gains will collectively be made no matter which way the stock moves (as long as it doesn't move by an extraordinary amount).

Smiling Spider Portfolio  This portfolio was started in October 2007. It uses the S&P 500 tracking stock, SPY, as the underlying. True LEAPS are bought, and the portfolio consists of about equal numbers of puts and calls. In the last three months of 2007, the portfolio gained at the annualized rate of 57%, but when SPY fell more than it had in one month in 25 years, the portfolio lost value to the point where it was down 2% at the March 2008 expiration.  We have confidence that this portfolio will soon recover from this lost ground.

Spider Bear Portfolio This portfolio was started on January 24, 2008 to give subscribers another bearish portfolio alternative.  It uses the S&P 500 tracking stock, SPY, as the underlying, true LEAPS as the long side, and exclusively puts much like the Big Bear portfolio.  By March 22, the portfolio had gained at the rate of 39% annualized while the stock fell by 2%.

Here is what we reported to our subscribers about our three bearish portfolios recently:

If there is to be a sudden large move in the stock, our experience tells us that such a move is almost always to the downside.  We are totally protected in that direction by our bearish portfolios.  Our gains grow larger if there is a sudden drop in the stock value.  And if the stock goes up, it is usually a moderate gain which will give us time to adjust on the upside which we can do without having to come up with any new cash or selling off any LEAPS to accomplish. As with all our 10K Strategies, if the stock remains flat, we invariably make extremely high gains.

New Portfolios  We opened two new portfolios on February 21, 2008. The Mini-Russell uses the Russell 2000 (IWM) as the underlying, true LEAPS for the long side, both puts and calls, and has a "starting" value of $5,000 so that subscribers who wish to invest a lower amount at first have a portfolio they can follow.

In its first full month of operation, the portfolio covered the bid-asked-spread-penalty that every new portfolio endures (normally 3% - 5%), and made a 4.4% gain (52% annualized).  $300 was withdrawn from the portfolio so that new subscribers could mirror it with approximately the starting value of $5,000.

The second new portfolio, Oil Services, uses OIH as the underlying (an ETF made up of 18 companies in the Oil Services industry), true LEAPS for the long side, both puts and calls, and started with $10,000. At the end of its first month in operation, the stock had fallen by $10 and the portfolio had gained over 12%  (144% annualized), and $1200 was withdrawn according to our withdrawal policies so that new subscribers could mirror the portfolio with about $10,000.

Cash Withdrawal Policy:  In February 2008 we established a cash withdrawal policy for our 10 portfolios that have a total “starting” value of $100,000.  Whenever a portfolio gains 6% during an expiration month, short options are prematurely rolled out to the next month to generate enough cash to withdraw that 6% gain, thus locking it in.  At the end of each expiration month, any gains above the starting value will be removed in increments of 3% of the starting value.

The March 2008 was the first expiration month for our new withdrawal policy.  The goal is to withdraw at least $3000 each month from the $100,000 combined starting values.  That withdrawal rate would work out to 36% for the year for all 10 portfolios.  In the March expiration month, a total of $4800 was withdrawn, 53% above our monthly goal.  We were able to achieve this in spite of the month being one of violently whipsawing stock prices, the one thing our strategy has the most difficulty coping with.

Discontinued Portfolios  In 2006, 2007, and early 2008, several portfolios were discontinued. Some portfolios were discontinued (usually at a loss) because the underlying stock or ETFs became too volatile compared to the option prices.  One underlying (Phelps Dodge) was bought out by another company and ceased to exist.  The buy-out premium was unusually large, Phelps Dodge shot up in price, and we suffered a $3,100 loss on our $5,000 starting portfolio value.  It was a reminder of the potential danger of using a single company as the underlying rather than an ETF consisting of many companies (like DIA, IWM, and OIH that we use in other portfolios).

In early 2008, after the market melt-down, we eliminated the 5 portfolios that used shorter-term options rather than true LEAPS as the long side of our spreads. While these portfolios had averaged over a 50% gain in 2007, they could not withstand the sudden drop in underlying prices. Our remaining portfolios, including some new ones that use different ETFs for diversification (e.g., OIH) can generally be considered to be less risky than those that we eliminated.

Bottom Line for Discontinued Portfolios On average, these portfolios had been in existence about a year.  If a subscriber had mirrored these portfolios (by himself or through Auto-Trade with his broker), he would have earned over 22% on his money (after commissions) for the year.  Since most of our “failures” were included in this group, we think a 22% gain for a year isn’t really so bad.

Earlier Year Results

The first year that Terry's Tips ran actual portfolios for subscribers to follow (and mirror if they wished) was 2003.  Results were spectacular.  Our QQQQ portfolio gained 196% for the calendar year.  Our DIA portfolio gained 60% in value.  2004 was an entirely different story.  A combination of 9-year-low option prices and a choppy market caused devastating losses in our QQQQ portfolios in 2004. This experience caused us to modify our strategy dramatically, and to select individual stocks or ETFs which had higher option prices and/or lower volatilities than QQQQ.  We have concluded that unless option prices become considerably higher, our strategy does not work with QQQQ.

Results for 2005 - 2006

In 2005, with our modified Trading Rules in place, we enjoyed a big turn-around from our dismal results in 2004.  The average annualized gain for all 8 portfolios for 2005 was 103%. Some of the underlying stocks went up dramatically (some so fast that our gains were actually diminished, as the 10K Strategy likes a flat market best).

In 2006, we expanded the number of portfolios we carried out, and shifted our focus to ETFs rather than individual stocks as the underlyings.  While results were not as exceptional as they were in 2005, the average portfolio gained approximately 50% for the entire year in 2006. 

We can't promise that we have created the perfect options strategy that achieves extraordinary gains in all kinds of markets, but we are quite proud of our performance for the past few years.  We believe that our results have proved that the 10K Strategy is just about the best possible investment strategy available to the individual investor.

Remember, options are leveraged securities, and are inherently more risky than conventional investments. Otherwise, the kinds of gains we have achieved in these years would not be possible.

We invite you to re-visit this page from time to time and see our portfolios perform in the future.

Auto-Trading the 10K Strategy.  Many Terry's Tips subscribers prefer to select one or more of our portfolios, and let their broker make all the trades for them, often in their IRA.  There is no extra charge for this service.  Most of them have selected the Auto-Trade program at thinkorswim.   This broker has been named by Barron’s as the #1 software-based discount broker for both 2006 and 2007.  They offer a choice of commission plans, some of which are the lowest in the industry.

And Now, the Offer!  As a reward to getting all the way down this long page, here is a special offer for you – your own copy of my book, Making 36%: Duffer’s Guide to Breaking Par in the Market Every Year, in Good Years and Bad.  Thousands of copies have been sold for the original price of $19.95.  You can get it here for only $12.96, including first-class postage.  It tells you everything you need to know about the 10K Strategy and how to put it to use for yourself.

Just go to www.Making36Percent.com and enter the Discount Code T6 and you will receive the electronic copy immediately as well as the paperback version sent by first-class mail for only $12.96, including postage and handling.  It could open up a whole new world of investment opportunities for you.  Do it today.

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