My (Current) Strategy

I have fully disclosed my actions, and some reasoning behind those positions. However, I would like to clarify what I envision as the long-term strategy I am building towards with these positions.

The reason I say current strategy is that I think there is a right strategy for optimizing reward and minimizing risk depending on where we are in the market cycle. I would label our current market cycle as a bottom trading range, with the possibility of a full recovery and bull market.

In this part of a market cycle my ideal portfolio would consist of holding fairly valued large-cap stocks from which I could routinely sell OTM call options. These large-cap stocks would be the core positions of my portfolio. The other part of the portfolio would consist of OTM put options for small-cap companies with a higher beta. These small-caps are great companies, but are too overpriced to justify buying at their current valuations.

The portfolio is leveraged because the capital required for the put options if they were to be exercised is not in cash, rather the large-cap companies. If the market were to fall again, the large-caps would be sold at a loss, but you would enter small-caps with potential for explosive growth when the recovery does happen. If the market stays in its range, you have made a nice return, repeat. If the market goes up, you have made a nice gain, think about adjusting your strategy.

I think the best way to explain would be through an example, I'll make the example the portfolio I am building towards.

Long position in AAPL stock

Short Dec '09 CMG $55 put

Short Jan '10 ISRG $100 put