The Alpha Hunter: Profiting from Option LEAPS

289 Pages·2009·1.96 MB·English

by  Jason Schwarz

T h e
A l p h A
hu n T e r
Profiting from
O p t i o n L E A P S
J a s o n sc h w a r z
New York Chicago San Francisco Lisbon London
Madrid Mexico City Milan New Delhi San Juan
Seoul Singapore Sydney Toronto
Copyright © 2010 by Jason Schwarz. All rights reserved. Except as permitted under the United
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CONTENTS
Introduction: The Elements of an
Alpha Hunter v
one The New Wall Street 1
two The Four Winds of Investing 21
three Economic Timing 45
four Navigating with LEAPS 67
five Rules for the Perfect Economic LEAPS 97
six Monitoring Economic LEAPS Trades 123
seven Bubble Investing 147
eight Crisis Investing 169
nine Case Study: A Tech Revolution Poised
for Takeoff 193
ten Case Study: China’s Obsession with
the Year 2020 217
Conclusion: Harnessing the Elements 237
Notes 243
Index 259
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introduction
the elements of
an alpha hunter
The recession of 2007 to 2009 has ushered in a host of new
market variables. The president of the United States is intent
on upending the status quo in a way we haven’t seen since the
Reagan Revolution. We will exit the recession with a reformed
financial sector, a reforming automotive sector, and likely with a
health care sector on the verge of radical transformation. Already
digital technology has infiltrated and interconnected our society
in ways beyond what all but the brightest dot-com investors of
1999 envisioned. Cyberroads of high-speed 3G and 4G wireless
Internet have sparked a quantum jump in the breadth of commu-
nication: “tomorrow the world” is a boast of the past. As the world
slowly recovers from the recent economic disasters, investors must
absorb the implications of these massive changes, which have done
nothing less than kick us all into a new world with new rules.
I feel fortunate to be working as an options strategist in such
a volatile and exciting time. Options strategists are something
• v •
vi • IntroductIon: the elements of an alpha hunter
like Special Forces members—the Green Berets or the Navy
SEALs—to investors. We are trained to identify market opportu-
nities and to take direct action. We understand how to profit from
special situations in ways that the average investor doesn’t have the
time or means to master.
As with most professions, sophisticated options trading doesn’t
happen simply as a result of good academic training; it needs to
be rooted in street smarts. If you want to know where the market is
headed, you’d better talk to an options strategist.
I was trained by a master of option LEAPS investing whose inno-
vative approach helped me develop a clear eye for the challenges
presented by the new Wall Street. Since 2000, this market has
abandoned its established, rigid patterns, and it is in the process of
setting new precedents of volatility. The insights contained within
these pages will help you navigate the new patterns, or the lack of
them, whether you’re out to improve as a LEAPS investor or simply
to better understand the general motions of the stock market.
I’ve been studying the investment world for as long as I can
remember. One of my earliest, sharpest instructors was Wilma
Rosenberg, my second-grade teacher, who tasked our class with
collecting and recycling thousands of empty aluminum cans and
using the proceeds to buy one share of Disney stock. (She had us
convinced that with one share of Disney we would be owners of our
favorite place in the world, Disneyland!) She instructed us to track
that ticker symbol in the newspaper every morning until we came
up with the $60 we needed to buy our share (not a bad investment
by the way: adjusted for splits, the stock has risen 557 percent since
then). Don’t think it’s easy to make $60 from recycling cans at
Introduction: The Elements of an Alpha Hunter • vii
$0.02 per can refund. My buddies and I had to swill gallons of
Dad’s Root Beer in order to reach our quota; and I became and
remain an expert at the one-stomp soda can squish.
I had to fight off a sugar addiction after that, but more impor-
tantly Mrs. Rosenberg got me hooked on stocks. It’s still exciting
to think that I can be a shareholder in any publicly held company
I want. The liquidity of ownership is what makes stock investing
the greatest profession in the world. The freedom to enter and exit
positions is more profound that most realize.
Since I was a kid, I’ve compiled a list of people who, if you
combined their key characteristics, would create the greatest
investor of all time. While this “greatest investor” amalgam is per-
petually a work in progress, I’m going to share it now, before we
discuss the specifics of my investment strategy, because it incor-
porates the basic tools you’ll need to outperform the new Wall
Street. We’re in an era of unprecedented volatility, but we’re lucky
that there are still plenty of excellent lessons to be culled from
the past.
So without further ado, I now present you with my nine
exemplary elements of general investment theory.
Element 1: Interpret Reality and Make
Something Happen—John F. Kennedy
Nobody took advantage of the present like our thirty-fifth president,
John F. Kennedy. This was a man ahead of his time. Consider that
President Kennedy was traveling by private jet and helicopter in
the technologically inferior 1960s while you and I are still stuck in
viii • IntroductIon: the elements of an alpha hunter
freeway traffic in 2010. It’s easy to be distracted by his vices and the
cult of personality that surrounds him in death as it did in life, but
there always was much more substance to the man than the cool
persona that he used to captivate the world.
I believe Kennedy’s legacy has grown, to a great extent, out of
three of his abilities. First, he was able to recognize when current
norms of human behavior had negative impacts. This is never a
simple thing if you’re a leader because you have to stand against
the crowd. But it was precisely this ability that allowed him to
enable the Civil Rights movement and have a real impact on
ending racial injustices in our country. Traditionalists were never
his fans, but he had the intellectual capacity to identify the wrongs
of the past and the courage to act on his belief in the present.
Second, he never relied on stereotypes to define how cultures
differ from one another. Before being elected to public office, JFK
made a point of traveling abroad to learn about what made each
nation tick. Effective foreign policy presumes that a traveler’s own
culture is just as “foreign” to outsiders as the foreign culture is to
the traveler. American diplomats are guaranteed to offend when
they act under false assumptions, and Kennedy made certain he
never did.
Third, by refusing to accept the limitations of the past, JFK lived
in real time and took advantage of the opportunities in front of
him. He helped launch a space program that put a man on the
moon not even six years after his death. He took care of the poor.
He halted the Cuban missile crisis. Undeniably his achievements
were aided by opportunities created by his family money, ath-
leticism, and good communication skills, but his true gift was his
ability to achieve in the present and ignore false information.
Introduction: The Elements of an Alpha Hunter • ix
There’s plenty in the JFK biography that is of immediate value
to the alpha investor. We must have a real understanding of the
events going on around us. We need our own effective foreign policy
on the new Wall Street; globalization is an economic variable that
has never been more powerful than it is today.
New variables insinuate themselves into society slowly—and
with such little disturbance that we don’t feel the need to imme-
diately adapt in the short run, even when long-run adaptations are
necessary to continued success. This is exactly what has happened
on Wall Street. Small changes have crept incrementally into the
daily workings of the market; and the only investors succeeding
are those who work to understand new dynamics in the same way
that JFK did.
Element 2: Become a Seer—Steve Jobs
Nobody sees the future like Apple CEO Steve Jobs. He has earned
the reputation as a “seer” over 30 years, starting with his rev-
olutionary work with computers in the 1970s. In the 1980s, he
unveiled Apple 2 and the Mac; in the 1990s, animated movies
with Pixar; in the 2000s, digital music with the iPod; and before
the 2010s hit, we’ve got the iPhone reinventing the smart phone
market and a touch Mac Tablet device on the horizon. Where
would we be without this guy? How does he do it? If you could
project future trends the way Steve Jobs does, investing would be a
cakewalk. Give us some answers, Steve!
Well, he did. In an interview with Rolling Stone, Jobs spilled
his secret: “You can’t really predict exactly what will happen, but
you can feel the direction that we’re going. And that’s about as