Money and Portfolio Management with the PCCRC. PART III

By far, the most elegant approach to money and portfolio management I have seen is possible when one trades the PCCRC. Yes, this is an unconventional approach to trading, but as it is often the case, thinking out of the box is what generates the $1,000,000 idea.

If you are to make $1,000,000 starting with $100,000, it will take you 10 years at a rate of 30% per year to succeed. If you trade stocks, let’s say 10 positions at a time, you cannot afford to have a stock fall 30% at any point, yet you are very much aware that any stock can easily fall 30% overnight, without you being able to stop the loss until the market opens. If you trade options, you can hardly limit your risk to 2% of your portfolio, or you’d have to trade 50 positions at any given time, to maximize the use of your available cash. All that is changed with the PCCRC.

If you hold stocks, you cannot exit the position unless the stock has reached its maximum potential. If you have an options spread, you have to wait until the position reaches its ultimate conclusion, or exit when you feel there is no further profit to be had by continue to hold the position until expiration. All that is changed with the PCCRC.

The power of options is in the leverage, but its secret is in the risk management. Only a few option’s strategies take full advantage of the leverage. A long call, for example, allows for an unlimited reward if the underlying rises to unsuspected levels. With a vertical spread, you’d make about 100% on your trade, whether the stock goes up $5 or $10 or $20 per share. The PCCRC takes advantage of the leverage of options in either direction, making it difficult to lose money, while maximizing profits, should the stock rally or collapse well beyond your expectations.

Here are the rules:

1. Enter 10 PCCRC’s at a cash overlay of 10% of your account each. For a $100,000 account, that is a $10,000 position. Yes, 10% capital but NOT 10% risk.
2. Limit the estimated risk of each trade to 2% of your account. Yes, this is right. The estimated maximum loss of each PCCRC is about 2% in most cases. This is assuming that IV will not decline, but if you follow my rules, you will not lose as much as 2% in any position. I have not experience a 2% loss in any PCCRC after > 3 years of trading them.
3. Take profits by selling a portion of your long calls as the stock rallies. This is a unique an elegant approach because as you sell long calls, your risk graph begins to change to take advantage of a potential reversal. As a stock rallies, the chances of continued rally decrease, the chances of reversal begin to increase. In either case, you can still profit further. This is something no other strategy can do.
4. Profit from each Greek alone or in combination. Delta positive or negative, Vega, Theta and even Gamma profits are all possible with the PCCRC. Most other strategies profit from one or two of the Greeks, but are exposed to the risk from the other Greeks. That means that only one or two outcomes turn a profit. With the PCCRC 5 out of 6 outcomes may turn a profit.

There is one final point I want to make. If your purpose is not to become rich but to create a stream of income, the PCCRC strategy, as I have outlined, brings with it a nice surprise: There is always cash available for one more trade. Unlike stock trading or most other option’s strategies, you are constantly generating credit. Besides the obvious profit taking describe above, every month you can roll over your shorts to the next month options. By buying back the front month options and selling the next month options, you effectively take a credit of about 10% to 15% of the capital invested in the position. One week before expiration, your rollovers bring you a credit from most, if not all of your PCCRC. You may decide to discontinue some. The result is that there is always cash available in your account.

If you goal is to grow your account to $1,000,000 in 10 years, you can easily accelerate your growth by opening a new position when the cash becomes available. However, if you goal is to have a steady source of income, then it is easy to take a “Salary” of your cash account, every time your account grows by 10%. I do that routinely. For a $100,000 account, a $10,000 “paycheck” may show up once every one or two months. Paying yourself a salary is a reminders that you are doing well, and that you are entitled to a nice vacation! And that is what trading is all about, isn’t it?