Optimize Your Gains: Four Tailored Portfolios for Superior Stock Market Returns at Every Risk Level

In the upcoming Closelooknet Newsletter issues, I will present a series of articles exploring the four distinct portfolio concepts I use. Each portfolio has different investment goals and risk tolerances, ranging from steady income generation to aggressive growth strategies.

I will start with Portfolio 1 in today's edition. This portfolio combines dividend aristocrats and high-yielding stocks with option writing to balance growth and income. It's tailored for those looking to potentially enhance returns through a mix of stock appreciation and option premiums.

In subsequent newsletters, I will methodically introduce the other three portfolios. These range from combining hypergrowth stocks with options writing to strategies focused on leveraging derivatives and engaging in high-risk trading. The goal is to provide a comprehensive overview that can inform a diverse range of investors.

As I delve into each portfolio, I hope to offer valuable insights into the strategies, risks, and potential benefits. This series is intended to provide a thoughtful perspective on my portfolio management, which benefits investors at different stages of the financial journey.

Additionally, I am excited to announce the forthcoming launch of a subscription service and a dedicated portfolio management service designed to assist investors in further navigating their investment choices and strategies.

Portfolio 1 - YSC (Yield, Safety, and Covered Call/Put Writing)

A multi-faceted portfolio concept emerges as a promising solution for a robust investment strategy to target a significant annual return of over 10% with controlled volatility. This strategy deftly combines the growth potential of stocks with the income-generating capabilities of option writing while also incorporating the stability of long-term bond funds by harnessing three primary sources of returns - dividends, option premiums, and capital appreciation from stocks and ETFs - this portfolio concept is tailored to navigate diverse market conditions while striving for high-performance metrics.

Portfolio 2 - HSC (Hypergrowth Stocks with Covered Call and Put Options Strategy)

This portfolio concept primarily targets hypergrowth stocks, explicitly focusing on Nasdaq and Nasdaq 100 stocks that exhibit exceptional potential and high beta, indicating their substantial growth prospects and volatility. The core strategy involves two key elements:

1. Selling Covered Calls on Hypergrowth Stocks: The portfolio employs a covered call writing strategy on these high-growth stocks. Options are typically set with a 3 to 6-month duration and are priced 10 - 20 percent out of the money. This approach aims to capitalize on the stock's volatility, allowing for premium income while offering room for significant stock price appreciation.

2. Selling Cash-Covered Puts on Similar Stocks: Alongside covered calls, the portfolio strategy includes writing cash-covered put options on these high-growth stocks. This method involves selling put options with the readiness to buy the stock if it drops to the put's strike price, effectively setting a desired entry point for adding the stock to the portfolio.

Goal and Expected Returns:

The primary objective of this portfolio concept is to generate substantial revenue, targeting an annual return of over 15%. This ambitious goal is pursued through a dual income stream: firstly, the collection of premiums from the written call and put options, and secondly, the capital appreciation from the underlying hypergrowth stocks. The careful selection of stocks (mainly) within the Nasdaq universe, combined with strategic option writing, is designed to optimize revenue generation while participating in the dynamic growth of the technology and innovation sectors.

Portfolio 3 - HRH (Higher-Risk Hypergrowth Strategy for Superior Return)

This portfolio concept is designed for investors seeking maximum returns and willing to accept higher levels of risk. It focuses on hypergrowth stocks with a more aggressive, multi-component strategy:

1. Component 1 - Hypergrowth Stocks with Covered Calls: Similar to the previous portfolio, this component involves investing in hypergrowth stocks primarily from the Nasdaq and Nasdaq 100, known for their high potential and volatility. The strategy includes writing covered calls for 3 to 6 months, priced 10 - 20 percent out of the money. This aims to generate income from option premiums while allowing for significant stock appreciation.

2. Component 2 - Naked Long Hypergrowth Stocks: This portfolio portion directly invests in hypergrowth stocks without any options hedge. The "naked long" position indicates a straightforward investment in these high-growth stocks, capitalizing on their potential for substantial price appreciation. This component carries higher risk but also the potential for higher returns.

3. Component 3 - Short-Term Trading Positions: This component adopts a more active trading approach. It involves taking short-term stock positions and leveraging market trends and volatility for quick gains. This strategy requires constant market analysis and a proactive trading stance.

4. Component 4 - Short Puts (Cash Covered): In this part of the portfolio, cash-covered put options are sold, indicating a commitment to buy the stocks if they fall to the strike price. This strategy is used to enter stock positions at a lower cost potentially or to earn premium income, adding another layer of income generation to the portfolio.

Overall Objective:

The primary goal of this portfolio is to maximize returns by employing a high-risk, high-reward strategy across different components. While the focus remains on hypergrowth stocks, the diversification across covered calls, naked long positions, active trading, and cash-covered puts allows multiple avenues to capitalize on market movements and stock performance. This approach best suits investors comfortable with higher risk and seeking more aggressive growth opportunities.

Portfolio 4 - LDT (Leveraged Derivatives Trading)

This portfolio is a highly sophisticated, derivatives-only trading strategy focused on the U.S. stock markets, including individual stocks and indices, with a secondary emphasis on U.S. credit markets and Bitcoin. It leverages advanced options strategies and is suitable for experienced investors comfortable with high-risk and high-leverage trading.

1. Contrarian Call and Put Selling in U.S. Markets: The strategy primarily involves selling calls and puts counter to current market trends in the U.S. stock markets. Selling puts during market upswings and calls during downturns (out of the money, at the money, and in the money) aims to profit from potential reversals and heightened volatility in U.S. equities.

2. Sophisticated Options Strategies on U.S. Securities:

   • Straddles and Strangles: Utilized to exploit significant movements in U.S. stocks or indices, suitable in periods of high uncertainty or expected market volatility.

   • Credit and Debit Spreads: These are executed by buying and selling U.S. options with differing strikes or expirations, targeting specific price movements within the U.S. market.

   • Iron Condors and Butterflies: Employed predominantly in sideways or range-bound markets, these complex strategies involve multiple U.S. options to generate returns even in stagnant market periods.

3. Engagement in U.S. Credit Markets and Bitcoin: To a lesser extent, the strategy also involves trading derivatives related to U.S. credit markets and Bitcoin, adding another layer of diversification and opportunity, albeit with a secondary focus compared to the stock markets.

4. Leverage Use: Leverage is crucial, enhancing the scale and potential returns. While it can significantly increase gains, it also raises the stakes, amplifying potential losses.

Objective and Investor Suitability:

The portfolio's objective is to maximize returns through active and sophisticated options trading, primarily in U.S. stock and, to a lesser extent, credit markets and Bitcoin, using leverage to amplify results. This strategy is tailored for investors with extensive experience in derivatives, a comprehensive understanding of the U.S. markets, and a capacity for high-risk tolerance.

Portfolio 1 - YSC (Yield, Safety, and Covered Call Writing)

There are four core components of the portfolio: Stocks, Covered Call Writing, Option Writing ETFs, Bond ETF

1. Equity Holdings: At the portfolio's core are selected stocks chosen for their potential for capital appreciation and a strong track record of paying dividends. These equities form the backbone of the portfolio, providing the primary avenue for growth and dividend income.

2. Covered Call Writing on Stocks: To augment the income generated from these stocks and to temper volatility, the strategy involves writing (selling) covered call options on these holdings. This approach allows the investor to earn option premiums, providing a steady income stream and potentially offering downside protection in fluctuating markets.

3. Inclusion of Option Writing ETFs: The portfolio incorporates ETFs specializing in option writing strategies to diversify the strategy and enhance the income component. These ETFs generate additional option premiums through their covered call writing on indices or a basket of stocks, thereby contributing to the portfolio's overall return while potentially reducing risk through diversification.

4. Incorporating a Long-Term Bond Fund with Call Option Writing: Recognizing the importance of balance and stability, the portfolio includes a long-term bond fund. This component is a counterweight to the equity holdings, providing a buffer against market volatility. However, to align with the overarching goal of achieving higher returns, this bond fund is not just a passive holding. Similar to the equity components, a strategy of writing call options on this bond fund is employed. This innovative approach aims to enhance the bond fund's yield, adding another income layer through collecting option premiums.

By strategically blending these elements - equities, covered call writing on both stocks and a bond fund, and option writing ETFs - the portfolio is designed to tap into multiple streams of income and growth. This hybrid approach not only targets an ambitious return threshold but also seeks to mitigate risks, making it a compelling option for investors aiming for high returns without commensurate increases in volatility.

Equities and ETFs

Equities on which to write call option entail roughly two-thirds of the portfolio value; a long-term bond ETF on which to write has a share of approximately ten percent, while option writing ETFs have a share of roughly 25 percent.

Equities in the portfolio are AbbVie, Digital Realty Trust, Pfizer, and T Mobile U.S. The TLT ETF is the bond ETF.

The three option-writing ETFs are the CBOE Validus S&P 500 Dynamic Putwrite ETF (PUTD), the JPM Nasdaq Equity Premium Income ETF (JEPQ), and the JPM Equity Premium Income ETF (JEPI)

The equities, such as Pfizer and Digital Realty Trust, are either high-yielding and have dividend yields close to or above 5 percent. They combine dividend aristocrats and stable growers such as T-Mobile U.S. or offer a suitable combination of solid stock price appreciation and solid option premiums (AbbVie).

AbbVie

After acquiring Botox producer Allergan in a cash-and-stock transaction valued at $63 billion in May 2020, AbbVie has become a leading pharmaceutical company. This acquisition significantly diversified AbbVie’s product lineup, reducing its reliance on Humira, its primary product, which has seen patent expirations in Europe and the United States. Among AbbVie’s notable offerings is Imbruvica, a highly successful cancer drug. Additionally, its latest immunology medications, Skyrizi (risankizumab) and Rinvoq (upadacitinib) are poised to drive long-term growth.

AbbVie was established on January 1, 2013, following the spin-off of Abbott Laboratories' pharmaceutical division. In a notable expansion move, AbbVie acquired Allergan for approximately $20 billion in May 2020, and earlier, in June 2016, it bought cancer drug manufacturer Stemcentrx in a deal worth $5.8 billion.

The company has established a strong presence in critical areas such as immunology, hematologic oncology, neuroscience, aesthetics, and eye care.

Humira, approved for various autoimmune conditions, including rheumatoid arthritis and Crohn’s disease, has been a cornerstone product. After the acquisition of Pharmacyclics, Imbruvica, a treatment for hematological cancers, was added to its portfolio.

Other significant products include Venclexta (venetoclax) for hematological malignancies, Botox for cosmetic and therapeutic uses, Vraylar for schizophrenia and bipolar I disorder, and Skyrizi and Rinvoq for various autoimmune diseases. AbbVie also collaborates with companies such as Roche and Johnson & Johnson.

In 2022, AbbVie reported total sales of $58.1 billion, marking a 3.3% increase on a reported basis and 5.1% on an operational basis. Humira and Skyrizi contributed 36.6% and 8.9%, respectively, to AbbVie’s total revenues for that year. Imbruvica accounted for 7.9%, while Botox (cosmetic and therapeutic) comprised 9.2% of the company’s total revenues in 2022.

Technicals:

Symbol - the underlying equity.

Price - the stock price when the strategy is updated for the underlying equity.

Strike - the price at which the underlying security can be bought if the option is exercised.

Moneyness - the relative position of the underlying asset's last price to the strike price. When a call option's Moneyness is negative, the underlying previous price is less than the strike price; when positive, the underlying last price is greater than the strike price. When a put option's Moneyness is negative, the underlying last price is greater than the strike price; when positive, the underlying previous price is less than the strike price.

Exp Date - the expiration date of the option

Bid - the premium to purchase this call option.

Net Debit - the cost to enter this covered call or the break-even point for the call on the expiration date. Net Debit (Break Even) is calculated as (Stock Price - Bid). If the stock price is HIGHER than the call's Net Debit on expiration, the call will make a profit.

Return if Flat - The position's return if the underlying stock's price remained unchanged at the expiration of the options contract. For Covered Calls, this is calculated based on this information:

if Stock Last Price > Strike Price then ((Options Strike + Bid + Dividends - Stock Price) / (Stock Price - Bid))

if Stock Last Price <= Strike Price then (Bid / (Stock Price + Dividends - Bid)) * 100.0

Volume is the total number of options traded in the current day for a contract.

Open Interest - the total number of open option contracts in the market for a particular contract. The more popular the contract is with options traders, the greater the Open Interest. An opening transaction will increase the Open Interest, and a closing transaction will decrease it.

Delta - Delta measures the amount an option price will change due to a $1.00 price change of the underlying security. Since call options rise and fall directly with the stock price, they are assigned deltas between 0 and -1.

Implied Volatility (IV)- the estimated volatility of the option strike throughout the option.

Potential return - the potential return for this strategy, assuming the options are assigned or called. For a covered call, Potential Return is calculated using Time Premium, your profit (income) per share between now and option expiration.

Time Premium = (Options Strike + Call Bid + Dividend - Stock Last Price)

Calculate Net Debit: (Stock Last Price - Call Bid)

Potential return = Time Premium / Net Debit

Annualized Potential Return - the annualized percentage of potential return for this covered call, assuming the options are assigned or called. It is calculated as (Potential Return / Days Held) * 365, where Days Held is the number of days remaining until expiration.

Digital Realty Trust

Digital Realty Trust specializes in the ownership, acquisition, repositioning, and management of technology-focused real estate. The company primarily provides data center, colocation, and interconnection services to various clients across various industries, including financial services, cloud and I.T. services, manufacturing, energy, healthcare, and consumer products. Its extensive network of data centers across North America, Europe, South America, Asia, Australia, and Africa offers these services.

With its headquarters in Austin, Texas, Digital Realty has strategically diversified its presence in key metropolitan areas that are hubs for data center and technology clients. As of September 30, 2023, the company's portfolio included 312 data centers. This portfolio breaks down into 246 properties in the consolidated portfolio and 66 in a mix of managed and non-managed unconsolidated properties. The consolidated portfolio comprises 111 data centers in North America, 112 in Europe, 11 in the Asia Pacific, and 12 in Africa. Overall, the total portfolio encompasses approximately 39.5 million net rentable square feet, which excludes an additional 9.2 million square feet under active development and 3.9 million square feet reserved for future development.

In December 2023, Digital Realty embarked on a $7 billion joint venture (J.V.) with Blackstone Inc., a leading global alternative asset manager. This venture aims to develop four hyperscale data center campuses in Frankfurt, Paris, and Northern Virginia. Once fully built, these campuses are expected to support around 500 megawatts of total I.T. load.

In another significant move in November 2023, Digital Realty formed a J.V. with Realty Income Corporation, focusing on constructing two custom-built data centers in Northern Virginia, a key player in the industry. Realty Income invested approximately $200 million in this venture, acquiring an 80% equity stake, while Digital Realty retained a 20% interest. This collaboration leverages Digital Realty's expertise in data center operations and Realty Income's reputation as a premier net-lease REIT.

Technicals:

Pfizer

Pfizer, a major player in the pharmaceutical industry, markets an extensive range of medications and vaccines. Starting from the third quarter of 2022, the company restructured its Biopharma segment to focus on three key therapeutic areas: Primary Care (formerly Internal Medicine and Vaccines, including COVID-19 products), Specialty Care (previously encompassing Inflammation & Immunology, Rare Disease, and Hospital segments, except for Paxlovid), and Oncology.

In a significant move in November 2020, Pfizer divested its Upjohn unit, known for off-patent branded and generic established medicines, merging it with the generic drug manufacturer Mylan to form a new entity, Viatris. In July 2019, Pfizer's Consumer Healthcare (CHC) division, specializing in over-the-counter medicines, was merged with Glaxo's unit to establish a new joint venture (J.V.). However, Glaxo later spun off the CHC JV into a separate company, Haleon, in July 2022. Pfizer retains a 32% stake in Haleon and plans to divest this holding methodically.

These strategic decisions - the 2019 Consumer Healthcare J.V. with Glaxo and the 2020 Upjohn-Mylan merger - have reshaped Pfizer into a leaner entity with a diverse portfolio of innovative drugs and vaccines, leading to improved revenue growth. However, the divestiture of the Upjohn unit, a previously lucrative segment, has impacted Pfizer’s cash flow.

Pfizer's acquisition history is notable, including the addition of Seagen in 2023; Biohaven, Global Blood Therapeutics, and Arena Pharmaceuticals in 2022; Array BioPharma in 2019; Medivation and Anacor in 2016; Hospira in 2015; King Pharmaceuticals in 2011; and Wyeth in 2009. The company has also made vital divestitures, such as the Hospira infusion systems business to ICU Medical in 2017, the Nutrition business to Nestlé in 2012, and the Capsugel unit to Kohlberg Kravis Roberts & Co. L.P. in 2011. In a notable change in 2013, Pfizer relinquished its stake in its Animal Health business, which was spun off earlier that year and began trading on the NYSE as Zoetis on February 1, 2013.

In 2022, Pfizer reported global sales of $100.3 billion, a 30% increase from the previous year. Of this, the Primary Care segment contributed 72.8% to the total revenue, while Specialty Care and Oncology accounted for 13.8% and 13.4%, respectively.

Technicals:

The stock has been appropriately derisked after declining from the lower 60s to the high twenties.

T-Mobile U.S.

Established in 1994 and based in Bellevue, Washington, T-Mobile U.S., Inc. is a prominent wireless service provider nationwide. The company delivers its offerings through the T-Mobile, Metro by T-Mobile and Sprint brands. T-Mobile and its subsidiaries cater to a diverse customer base, providing wireless services to branded postpaid, prepaid, and wholesale segments.

T-Mobile's inception involved the merger of T-Mobile USA Inc. and MetroPCS Communications Inc., with the former owned by Deutsche Telekom AG. Deutsche Telekom exchanged all of T-Mobile USA’s common stock for a majority stake in the newly formed T-Mobile as part of the merger agreement with MetroPCS.

The company's services encompass mobile voice, messaging, and data offerings across postpaid, prepaid, and wholesale sectors. T-Mobile is expanding its 5G and 4G LTE (Long-Term Evolution) network infrastructures. Additionally, it offers a range of wireless devices, including smartphones, tablets, and other mobile communication tools and accessories from vaFunds manufacturers. Central to T-Mobile’s operations is its “Un-carrier Value Proposition,” which focuses on boosting customer satisfaction by offering the latest products at affordable prices and with straightforward terms.

T-Mobile's financial reporting is primarily divided into two segments:

• Service (accounting for 82.7% of total revenues in the third quarter of 2023): This segment includes wireless communication services offered to branded postpaid and branded prepaid customers, featuring a variety of service plan options.

• Equipment (constitutFund16% of revenues): This segment covers the sales of devices to dealers and third-party distributors, who then resell these devices through independent third-party retail outlets. The remaining 1.3% of the company's revenues fall under the Other category.”

Technicals:

20+ Years Treasury Bonds Ishares ETF (TLT)

The iShares 20Fundar Treasury Bond ETF tracks the investment results of the ICE US Treasury 20+ Year Bond Index composed of U.S. Treasury bonds with remaining maturities greater than twenty years.

I expect U.S. long-term bonds to be range-bound and the 30-year T-Bond to fluctuate between 4.25 % and 3.75 % in the first half of 2024. The downside risk should be minimal while selling calls at the major resistance level of around 100 USD, which should offer the possibility of keeping both the option premium and the underlying asset.

ETFs with Options Writing Strategy

The ETFs selected employ different strategies. They are not suited for prolonged and steep bear markets.

JPM Equity Premium Income ETF (JEPI)

The JPMorgan Equity Premium Income ETF is a fund actively managed with the intention of generating current income while also keeping an eye on potential capital growth.

It creates income by both selling options and investing in U.S. large-cap stocks, aiming to provide a monthly income derived from the profits of option premiums and stock dividends. This ETF manages assets totaling $29 billion and imposes an annual fee of 35 basis points. It has an average daily trading volume of 4 million shares.

Technicals:

JPM Nasdaq Equity Premium Income ETF (JEPQ)

The JPMorgan Nasdaq Equity Premium Income ETF aims to produce income by a dual strategy: selling options and investing in U.S. large-cap growth stocks.

It endeavors to provide a substantial part of the returns linked to the Nasdaq 100 Index but with reduced volatility.

This ETF has assets under management (AUM) totaling $5.6 billion and levies an annual fee of 35 basis points. It experiences an average daily trading volume of 2 million shares.

Technicals:

CBOE Validus S&P 500 Dynamic Putwrite ETF (PUTD)

The Fund is designed to mirror the CBOE Validus S&P500 Dynamic PutWrite Index, a sophisticated, rule-based index focused on achieving a more favorable risk-adjusted return (evaluated by the Sharpe ratio) compared to the S&P500 benchmark.

The Fund tracks the Index, which attempts to identify a portfolio of written put options on the S&P 500 Index that, when sold in accordance with the Index’s rules-driven approach, will collectively provide over the long term a total return that exceeds that of the S&P 500 Index with lower volatility and drawdown. The Fund aims to be a less risky investment, with fewer and smaller drops in value than the S&P 500 Index.

Adaptable Performance in Diverse Market Scenarios: The PUTD Fund is structured to excel in various market conditions, encompassing neutral, bullish, and bearish states.

Balancing Growth Potential and Risk Efficiency: The Fund is geared towards minimizing the deepest declines and reducing the length of underperformance periods, especially in challenging market situations.

Managing Downside Risks and Reducing Prolonged Underperformance: The PUTD Fund targets a strategy to limit the most significant downturns and shorten the time frames of underperformance during challenging market phases.

Technicals:

The trading history is too short to provide the signal. This poses an additional level of uncertainty.