At Securities & Investment Planning Company, we know that no single portfolio format will serve the needs of the diverse clients who seek our guidance. Instead, we tailor investment strategies to the particular risk tolerance and goals of each client. Our experience enables us to draw on a wide range of approaches in response to client needs and changing market conditions.

To give you a taste of the variety of approaches we employ, we offer examples below of option and equity strategies, and share some of our thoughts about how to find the "special situations" that can lead to advantageous fixed income investment.

1. Option Strategies

While our strategies vary at any given time depending on market conditions, the following are two examples of option strategies we employ:

Example 1

Buy 500 ABC @ 18
Sell 5 ABC jan 17 1/2 call at 3 1/2

This is a strategy you would use when you don't expect the stock to move much. It allows you to make money primarily from the option premium, rather than from movement in the value of the stock. You make an initial investment of $18.00 per share ($9,000.00 + $40.00 commission = $9,040.00). You collect $3.50 per share as a premium ($1,750.00 - $30.00 commission = $1,720.00) on the option. Thus, even though the option you've written is 1/2 point in the money (the difference between buying at 18 and selling at the strike price of 17 1/2), the $3.50 per share you bring as premium will more than compensate for the 50¢ you lose per share if the option is called away-leaving you with a profit of $3.00 per share or $1,500.00 ($1,470.00 after commission) on an initial $9,040.00 investment. In other words, you make approximately a 16% gross return (before taxes) in the six weeks until the option expires.

If the stock were to move downward more rapidly, the option would expire worthless. In this scenario, you'd be left with a paper loss on the stock that, if you sold, could be larger than the $1,470.00 you made. But even then, as long as you don't sell, you'd not only have the $1,470.00 in hand, you'd still have the stock (at a reduced price of $14.50), allowing you to write a similar February call against your stock position and do it all again.

A possible disappointment would be if the stock were to go up above 21, in which case you might wish you hadn't sold the option against the long position, but you've still got the $1,470.00 or 16% profit in hand, which is hard to complain about. So you give up some upside potential for the more conservative strategy and still have an enviable return on your original investment.

Example 2
Note: This strategy will incur substantial commissions, which will affect return results.

Buy 10 XYZ jan 15 call at 2 3/4
Sell 20 XYZ jan 25 calls at 1 1/4

This strategy is not for the faint of heart, but sophisticated investors can put it to good use if it fits their investment style and risk tolerance. Basically, for a $250.00 investment (before commissions) you can effectively be long XYZ from 15 to approximately 35 with the possibility of turning that $250.00 into $10,000.00 (before commissions and taxes) if the stock were to close at expiration at $25.00 per share. You pay a premium of $2,750.00 for the 10 January 15 calls (plus approximately $35.00 in commissions) and collect $2,500.00 (less commissions of $70.00) for 20 of the January 25 calls that you sell. So the net cash outlay for this position in this size (10 by 20) is $250.00 plus $105.00 in commissions. You might initiate this position, for example, if the stock were around $13.00 per share and your expectation is that the stock price would not rise above $35.00 per share prior to expiration in January (six weeks).

Initiating this position could result in four different scenarios:

1. The stock doesn't go up to 15 and all options expire unused. You're out 25¢ per share or a total of $355.00.
2. The stock closes at 25 and you make maximum profit. You exercise your option and spend $15,000.00 for a stock that you can now sell for $25,000.00, bringing in $10,000.00 (before commissions) or $10.00 per share in profit or you could just sell your option at $10.00. If this were to happen, your $250.00 investment would turn into $10,000.00 (before commissions). That's a somewhat staggering return and represents an unlikely although not impossible result.
3. The stock closes somewhere between 15 and 25 or between 25 and 35. You still make something-more the closer the close is to 25, less the farther from 25 it goes in either direction-but not the $10.00 per share you'd make at 25.
4. The stock closes at 35 or above. Here is where the real danger lies-above 35, you lose money, with no limit on how far the losses could go as the stock rises. But this would require the stock (currently at 13) to jump more than 22 points in a period of six weeks-a gigantic and somewhat unlikely move.

Note: Commissions, taxes, and margin requirements are not figured into all of the above examples. In order to accurately assess profits, you would need to figure in commissions and capital gains taxes as well. Both examples are set in December and assume a six-week option expiration from the time the position was initiated.

Investment always involves risk. You assume full responsibility for your investment decisions. Consult your investment advisor or registered representative before experimenting with new strategies, and remember: a strategy that works with a particular investment under particular market conditions may not transfer effectively to other types of investment or other market conditions. Options are not suitable for all investors and certain options strategies can expose your investment to entire loss in a relatively short period of time.

2. Equity Strategy

Market participants often trade in herds, which has led to the development of a number of "sentiment indicators" that gauge their behavior and allow traders and investors to recognize and capitalize on the collective optimism and pessimism of money managers. The indicators allow traders and investors to recognize and capitalize on the collective optimism and pessimism of the herd. The data is readily available, easy to track and can be followed on a daily or weekly basis. The strength of the indicators comes from evaluating them in the aggregate.

The Volatility Index (VIX) measures the implied volatility of index options. The VIX provides investors with up to the minute market estimates of expected volatility by using real time OEX index option bid/ask quotes. The VIX usually runs counter trend to the equity markets. A falling VIX indicates optimism while a rising VIX accompanies pessimism. Look for market tops when the VIX gets under 20 and bottoms when the VIX gets above 40 for a short term bounce and above 50 for a larger bounce. We have found the indicator works better calling bottoms.

The Put/Call Ratio, calculated by the Chicago Board Options Exchange (CBOE), compares the number of calls traded in a given period to the number of puts traded in that same period. A ratio over 1.00 signals too much pessimism while a .50 reading equals too much optimism. This indicator can be more helpful when calculated as a 10-day moving average. The smoothing can give you a better feel for the mood of the market.

The McClellan Summation Index is a long-term indicator which oscillates in relation to a zero line. The calculations for the summation index are derived from exponential moving averages of advancing minus declining stocks. Some of our traders have found it advantageous to trade in the direction of the summation index. In the context of finding market extremes, readings of +4000 accompany market tops while reading of -2000 often leads to bottoms reinforcing the "contrarian's" position.

Investor sentiment as measured by Investor's Intelligence is reported each week. The report surveys professional money managers. The survey includes the number of bulls, the number of bears, and the number of those who believe we will be getting a correction in the short term. History shows that market participants are extremely bullish at market tops and extremely bearish at market bottoms.

When used in conjunction these four indicators create a powerful market-timing tool. When three or more of the indicators are flashing extreme, there is probably a good chance the market will reverse. When following the indicators regularly investors can develop a good "feel" for the ebb and flow of the markets. For those who don't have time to watch quotes all day this can be a useful way to track the market.

3. Fixed Income - Looking for Special Situations

Bond strategies are not so much "textbook" strategies, but rather special situations that offer particular opportunities. Different market, financial or credit situations really decide where opportunity lies at any given time. Whether it be the Corporate market, Municipals, Asset Backed Securities or any hybrid thereof, it pays to be flexible enough to be able to enter any of these markets for a variety of duration scenarios.

Whether it be a particular default situation or simply "bad news," different industries or specific projects can become so cheap as to provide for above average returns for the risk-tolerant investor.

In the past, we've bought specific-project secured municipal bonds at levels that limit downside risk while providing upside that well exceeds the risk involved. Similarly, when a particular company has been "in the news," its visibility can lead to depressed prices in other companies within the industry that may not be subject to the same scenarios. Good research is key.

Our goal is to seek out those situations where we feel the potential upside well exceeds the downside risk. Each situation is different and requires thorough analytics and discussion to determine if it's right for a particular investor.