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No. of Recommendations: 3
Today marked 12 weeks since the Options Demo was started in message #9046, and this will be the final weekly update from me regarding these options some of us have been following. (All the weekly messages are at: #'s 9046, 9532, 9979, 10955, 11507, 11979, 12584, 13277, 13988, 14691, 15355).
Thanks very much to those who have followed along, providing great input, and apologies to those annoyed by these long, pedantic messages. If you have Penalty Boxed me, next time please give me a room with a view.
Now, let's get right to how the options portfolio we've been tracking did, over the past 12 weeks. It more than tripled. YYYAAAAAHOOOO!!! (For gamblers only: The annualized return would calculate to over +9000%, but let's not go there.)
Here are the 12-week returns on the three Workshop-screen-picked stocks chosen back on November 5, as well as the returns on the call options I bought on the underlying stocks:

Stocks bought 11/5/98
,,,,,,,,bt. at pr. now %change
ANN 33.125 37.5 +13.2%
NOKA 89.55 149.375 +66.8%
BGEN 73.55 94.625 +28.6%
Avg. Chg. Stocks since 11/5: +36.2%

Options bought 11/5/98
**********************bt. at pr. now %change
ANNFF (Jun 30 call) 8.875 10.25 +15.5%
NKADS (Apr 95 call) 10 55 +450%
BGQDP (Apr 80 call) 7.25 19.25 +165.5%
Avg. Chg. Options since 11/5: +210.3%

Dow Jones Avg., since 11/5/98: +4.50%

The prices for the stocks and options that are listed above are the prices I sold at. The options were sold on different days this week, in accordance with upside moves in the underlying stocks. The ANN and BGEN options are higher as of today.
Our options portfolio rose +210.3% in three months, trouncing every portfolio--including futures funds--tracked by Managed Account Reports, and annihilating all global hedge funds, market averages, and mutual funds. What was the engine that drove this? Foolish Workshop stock picks. Twelve weeks ago, you could have bought into the options tracked here for $2600, which would be almost $8,100 now--options can control large blocks of stock for small buy-ins.
The underlying stocks in this Demo rose 36.2%, so the options, at +210%, achieved 5.81x leverage (delta) on the stock returns. That ending rate of leverage was nearly twice the beginning rate of leverage.
The Nokia option, my beloved NKADS, was the huge winner at +450%. Its return over 12 weeks was about half of Amazon's total return for all of last year, and NKADS was up +500% last week. The Biogen option did very well at +165.5% (thank you MChernick, for this pick!). The Ann Taylor option had been doing okay, but Ann's stock plummeted 15% last week--slamming this option when it was at its most volatile. The Ann option ended up returning paltry leverage.
Now, let's look at the accelerating leverage (a corollary of increasingly volatile gamma, and gains in intrinsic value) that we obtained each week in this demonstration, focusing especially on the last four weeks:

(Wk 1, Stocks +3.62%, Options +11.24%, Levg=3.1x)
(Wk 2, Stocks +5.88%, Optons +25.72%, Levg=4.3x)
(Wk 4, Stocks+11.22%, Options+45.1%, Levg=4.1x)
(Wk 5,Stocks +14.11%, Options+52.03%,Levg=3.75x)
(Wk 6, Stocks +17.00%, Options+71.7%,Levg=4.23x)
(Wk 7, Stocks +18.2%, Options+89.73%,Levg=4.93x)
(Wk 8, Stocks +22.1%, Options+92.15%,Levg=4.16x)
(Wk 9, Stocks +29.4%, Options+137.8%,Levg=4.68x)
(Wk 10, Stocks +36.1%, Options+190.4%,Levg=5.27x)
(Wk 11, Stocks +32.2%,Options+182.5%,Levg=5.66x)
(Wk 12, Stocks +36.2%, Options+210.3%,Levg=5.81x)

******Note:(The avg. leverage received over 12 weeks was 4.55x, the high of 5.81x leverage was in the last week...wks 8-12 brought steady levg. increases...leverage was nearly twice as high in week 12 as in week 1.)

We've talked about what's shown on the right in the table above before. Leverage (delta), and the risk profile change over time with options. Volatility follows a non-linear acceleration path.
In the spirit of how thrilling, and nerve-jangling options can be, and because I owe one of my departed friends--the Nokia option--a proper eulogy, I've decided to end this Demo here in the final weekly update with an options parable (dramatic license taken in triplicate).
Those of you who resent long messages, turn back now. Otherwise, for your surfin' pleasure:

It's funny what you don't forget.
This thought was on my mind this past Thursday, around nine in the morning, as I sped along a desert trail, astride a memorable horse named NKADS. This fine equine and I had been together for nearly 12 lonely desert weeks, and NKADS had galloped along ever faster. The trail we were following had struck a perfect straightaway over that time, and the trail led eventually to the Chicago Board Options Exchange.
Things were starting to get dicey here in the 12th week of our trip, though. The sand dunes we had gotten used to seeing along the trail had been replaced by jagged rocks, and, most alarmingly, the straightaway we had enjoyed for weeks was quickly becoming a steep downhill grade.
The fact that NKADS kept running faster down this sloping grade didn't help, but I knew better than to try to control him. Besides, so focused was this horse on his goal that he had never once even acknowledged that I was riding with him.
There was a more disturbing problem: NKADS and I were not alone anymore out in the desert. Here and there, at first, we kept passing by people carrying books on options trading--books written by Wade Cook. First there a few of them, then many.
They kept sprinting up to us at full speed, Wade Cook tomes in hand, after which they would try to jump up and board NKADS--only to wipe out against the rocks, thwarted by NKADS' particular brand of speed. The horse responded to each of the threats from the Cook boys by stutter-stepping out of the straight line path he had been on--a disconcerting little habit.
The jagged rocks on either side of the path were whizzing by like the teeth on a T. Rex just before you sail down his esophagus, the Cook boys kept growing in numbers, and I was starting to lose my cool. I needed something better to concentrate on.
As NKADS and I accelerated downhill, I went scanning through my memory, in search of a mantra to keep me focused in this unstable environment. The candidates--good, bad, financial and not--raced before my eyes like ticker-tape entries:
“Only the paranoid survive...speed kills...let your winners run...manage the risk, or they will carry you out...the opera ain't over till the fat lady sings...survivorship bias...there are old traders, and there are bold traders, but there are no old, bold traders....more time is more safety...the snail wins the race....cut losses...”
Then, two that sounded better came to mind: “Don't look a gift horse in the mouth,” followed by “the path of excess leads to the palace of wisdom.”
This last one was it. It sounded good, so I stood up in the stirrups, my cheeks beating around in the wind like a pilot in a speeding biplane. Tall in the stirrups, towering over NKADS, I pumped one fist in the air--Che Guevara style--at a couple of Cook boys approaching from the front. I screamed ahead to them: “Yippee-Cay-Ay, savages!! The path of excess leads to the palace of wisdom!!”
No sooner had I called this out, when NKADS--for the very first time since I had boarded him three months ago--cocked a wide-open brown eye up at me. He had a sopping sheet of paper hanging out of his foaming mouth. The great and dignified eye looking up at me said it all: I had disrespected him, standing in the stirrups and waxing pedantic.
While I was still near-airborne in the stirrups, that dignified but unforgiving eye also communicated what was about to happen. In the millisecond before it did happen, I did two things. I snagged the sheet of paper from NKADS' mouth, and I called down to him: “You flew like an angel, boy, and I saw.”
Before the last three words had left my mouth, a great quiver from NKADS' furiously undulating back sent me flying through the air and into the chests of the two approaching Cook boys. The three of us went hurtling keester-over-teakettle down a ravine, and I landed in a heap on the bottom of the dogpile. I was sure the boys were about to pummel me with their Cookbooks, but they went scrambling back up the ravine to chase after NKADS.
Flat on my back in a bramble bush, I looked at the piece of paper in my hand. It was sopping wet--evidence of how very tired NKADS was in my last moments with him. The paper said: “Limit order filled at 55....+450%....Don't look a gift horse in the mouth.”
With my sorry-looking carcass perched on all-fours now, I was calculating whether +450% might pay for my medical bills, when I noticed a pair of shiny leather boots on the ground below. There was a pair of jeans above them, a long-sleeved chapparal shirt above that, and a pair of windmill-waving arms. Whoever this frantic guy was, he had a book in one of his waving hands.
A book!!?! Was it one of the Cook savages, come back to pummel me while I was down? No, this book wasn't by Wade Cook. I spied that it was titled “The Time Value of Money and the Magic of Compounding.” The guy was a friendly, trying to deliver some kind of earnest warning.
I believe he said something to the effect that horses were wasting assets, with finite lives. He may have added something about most horses being worthless on their deathbeds. I probably should've paid more attention to the guy's admonition.
But it just wasn't his moment. Besides, I really couldn't hear him very well.
NKADS' thundering hooves drowned the guy out, as that wild horse accelerated off to his doom.

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