My analysis of the million dollar portfolio contest with a fun little twist

1. Presentation by Brian Leip

2.  “Who Wants to be a Hedge
Fund Manager”
 Hosted by Regis Philbin
 20 fresh MBA grads
 Winner of this competition will
manage a new hedge fund
 $363 million - average pay for
hedge fund managers
 Reality show will be shown on
BET

3.  25 year old
 Graduated from CSULB Masters program
 About 5 years experience with stocks, derivitives
 Above average risk tolerance
 Goal – Get Jim Cramer off the TV

4.  Starting Situation:
 Cash to invest: $1,000,000
 Time Frame: 2/20/09 to 5/1/09
 70 calendar days (2.33 months)
 50 market days
 Reallocations: 1 reallocation on 3/18/09
 Goals:
 Minimum ROI of 25%
 Profitable in all major strategies used

5.  High Probability Options Spreads
 Vertical Spreads
 Iron Condor Spreads
 Diagonal Spreads
 Futures Trades
 Forex Trades

6. Forex
1% Cash
14%
Futures
HPT Option
15%
Spreads
50%
Diagonal
Option Spreads
20%

7.  50% - 70% in the direction of the current trend
 30% - 50% countertrend
 Determine trend by using technical analysis
 Started deep in a bear market.
 Difficult because only 1 adjustment allowed

10.  Top-Down approach
 Direction of market as a whole
 Direction/strength of sectors/industries
 Direction/strength of stocks within
sectors/industries
 Use combination of Technical & Fundamental analysis
 Use searches/Screens
 Investools
 Finviz

13.  Ratios only give partial picture
 Thorough fundamental analysis of all stocks
could take years
 By then, opportunity is gone
 Need fast information
 Many services offer stock ratings
 Investors Business Daily
 Investools
 Think Or Swim (free)

14. Investors Business Daily Think Or Swim

16.  Buy 1 call/put and sell 1 call/put
 Same expiration month
 Different strike prices
 Directional trade
 Capped gains & losses
 Passage of time = good
 Volatility = bad
 Slower profits than a naked call or put
 Different risk/rewards depending on strike prices
 Personal Strategy
 Sell an out of the money spread
 80% - 85% probability of success
 Minimum of 6% - 10% gain
 Max of 40% loss

17.  Sell 106 x March 12.5/10 Bull Put Spread
for 0.15 credit
 Max loss: $235 * 106 = $24,910 (also capital used)
 Potential gain: 106 * 15 = $1590 or 6.4% in 1 month
 Sell 115 x June 10/7.5 Bull Put Spread for
0.33 credit
 Max loss: $217 * 115 = $24,955 (also capital used)
 Potential gain: 115 * 33 = $3795 or 15.2% in 4 months

19.  Iron Condor Spreads
 Neutral trade
 2 vertical spreads – 1 above, 1 below price
 Double the profits of a vertical spread
 Risk on strong move in either direction
 Personal strategy
 Sell 2 out of the money vertical spreads
 Minimum 60% - 70% probability of success
 Minimum 12% - 20% ROI
 Max of 40% loss

20.  Sell 150 x Iron Condor March 113/116
Call, 94/91 Put for 0.50 credit
 Max loss is $250 * 150 = $37,500 (also capital used)
 Potential gain is 150 * 50 = $7500 or 20% in 1 month
 Sell 183 x Iron Condor June 117/120
Call, 88/85 Put for 0.95 credit
 Max loss is $205 * 183 = $37,515 (also capital used)
 Potential gain is 183 * 95 = $17,385 or 46% in 4 months

23.  Buy 1 call/put and sell 1 call/put
 Different expiration month
 Different strike prices
 Directional trade
 More directional bias than verticals
 Capped gains & losses
 Passage of time = neutral
 Volatility = good
 Similar to a naked call or put but sold option helps reduce loss of
time value
 Covered call “on steroids”
 Different risk/rewards depending on strike prices
 Personal Strategy
 Buy option 3-4 months out with a delta near .70
 Sell option around 1 month out with a delta near .30
 Aim for 3:1 risk reward ratio
 Started with 50% max loss

27.  Pure technical analysis trades
 Use charts to find momentum, support & resistance
 Spread risk out among multiple futures
products
 S&P 500, Russell 2000, NASDAQ, Dow
Jones, Gold, Platinum, Silver, Crude
Oil, Corn, Wheat, Soybeans
 Make sure there is a stop loss outside
support/resistance
 Let winners run
 Hands are tied from adjustments

29.  Pure technical analysis
 Use 8 most liquid major currencies
 USD – US Dollar
 CAD – Canadian Dollar
 JPY – Japanese Yen
 EUR – Euro
 GBP – British Pound
 CHF – Swiss Franc
 AUS – Aussie Dollar
 NZD – New Zealand Dollar
 Compare the relative strength using the Japanese Yen
cross chart on multiple time frames
 Rank strengths with heavier weight to more recent
time frames

38.  Liquidated everything and started from scratch
 50% bullish, 50% bearish
 Changed allocations
 More in futures, forex
 Less in cash
 Reduced max loss on diagonals from 50% to 40%

39. Before
Reallocation
After
Reallocation

44.  Would have made money in either bull or bear
market
 Profitable in all 4 groups
 Money management
 Asset allocation between
HPT, Diagonals, Futures, Forex
 Diversifying portfolio between long/short
strategies
 Forex strategy (over 550% returns)
 Hedging my futures trades
 Reducing the cash position in the reallocation
opportunity and increasing futures/forex

45.  Underestimated the bullishness of the market
during the reallocation period
 Went long on gold futures twice and lost both
times
 Chose volatile stocks for the high probability
trades category
 Originally had a 50% stop loss on my diagonals
category
 Only 40% accurate on the diagonals category

46.  Nope
 Winner got a taxpayer bailout
 Consolation prize…