A question I get often about when to buy or sell with the AIM system (Automatic Investing Method) is if a 50% change up or down means it is always time to buy or sell.
The quick answer is No. Let me explain more. My Bear Strategy starts after one or two regular buys – then the 50% drop in price for the next buy occurs. For sells the 50% rule would never apply because sells are always done using regular AIM which means on LEAPS, sells never have to go up 50% to trigger a sell.
You also don’t ignore all market orders less than 50% for buys and sells as I explained above. What I do for my clients/friends when I manage their accounts is this:
Let’s say they buy 20 LEAPS contracts for $200 a contract. That means they have $4,000 LEAPS & $4,000 cash. (AIM tells you to keep half your investment in cash.)
When it comes to selling I ALWAYS use the original AIM strategy of Robert Lichello which is to also use a 10% SAFE value or 10% of LEAPS Value from the Sell Advice column.
So it works like this: your initial buy was $200 a contract. I figure out how far down this LEAPS have for AIM to have market order to sell at least 3 contracts:
Then I figure out how high the LEAPS have to go to trigger a sell for a minimum of 3 contracts. With 20 contracts you will usually generate buys or sells for more than 5 contracts which is better way to make higher profits.
Say you bought at $2.00 an option. That is the same as $200 a contract because there are 100 LEAPS in every contract. I try a sell price of $3.25 (which is $325 a contract): Remember 15 or 20 contracts is the good number to start with.
$325 X 20 contracts (your initial portfolio) = $6,500. The LEAPS Value is now $6,500 – Portfolio Control 4,000 = $2,500 (sell) advice – $400 SAFE (10%) = Market Sell of $2,100. Divide $2,100 by the sell price of $325 and you get 6.46 contracts. I round it off to 6 contracts and this is my limit sell price and quantity.
Now for a buy I am more conservative especially in this turbulent market. I rarely make the first buy 50% less than original buy price. So if we bought at $2.00 I will try a buy price of $1.25 and see how many that would buy:
$1.25 X 20 = $2,500. Portfolio Control is $4,000 so $4,000 – $2,500 = buy advice $1,500 – SAFE (10%) of $250 = market buy $1,250 divided by $125 = buy 10 contracts exactly. Now if I am bearish about this particular LEAPS I will say only buy 6 or 7 – not all 10 and conserve your cash.
I hope this makes sense to you. You are welcome to call or email me with any further questions.
210-478-0655 (US Central Time Zone)
Disclaimer: Jeffrey Weber is not an investment adviser and gives only his personal view and opinion, never making any investment advice or recommendation to buy or sell specific securities. Investors in financial assets must do so at their own responsibility and with due caution as they involve a significant degree of risk. Before investing in financial assets, investors should do their own research and consult a professional investment adviser.