Investing? Or Betting?

Heather Cullen

Heather Cullen

In The Money

Heather Cullen Blog In The Money Investing or betting

Is ITM Investing or Betting?

It’s a nice change. I am reading Larry Hite’s book ‘The Rule’, and it has got me nodding and agreeing with him, something I rarely do while reading trading books. I am more likely to be interjecting with ‘rubbish’ or yelling ‘what rot!’, not going ‘yes, yes, that’s right’.

Good Trade? Bad Trade?

Most people think that there are 2 kinds of trades: good trades and bad trades. Actually, there are 4 kinds of trades: Good trades, winning trades, losing trades and bad trades.

Now, most people would say that a good trade is a winning trade, and a bad trade is a losing one. Not so. But first we have to look at the difference between trading and investing. Is there a difference?

Investing, betting – what’s the difference?

Investing is considered a respectable pursuit. It has a gravitas and reputation that is missing from trading, which is seen as vaguely unsavory, somewhat akin to gambling.  According to AI:

‘investing is a long term strategy focused on building wealth gradually through a diversified portfolio and fundamental analysis’

Which pretty well explains why most investment advisors fail to even match the market!  Trading on the other hand:

Is a short term strategy aimed at making quick profits through frequent transactions and technical analysis.

I am more inclined to side with Larry Hite:

‘Trading is about odds. Wall street is about telling stories and making predictions.’

Heather Cullen Blog In The Money Investing or betting
Heather Cullen Blog In The Money Investing or betting

So what's a good trade?

Hite’s idea of thoroughly researching historical data and creating an automated system that takes out human emotion is so like the conclusion I came to with ITM. Like him, I am interested in the odds; to me a good trade is one where the odds are in your favor. A good trade is where you follow your (backtested) system and exit when it tells you. A good trade can be a winning trade, but not necessarily. A good trade can be a losing trade.

Conversely, a bad trade can be a winning trade; like buying a lottery ticket. The odds are terrible, and someone somewhere will win it.

But it is still a bad trade.

Winning and Losing

No system can win all the time. No one can predict what the market is going to do. All we can do is put the odds in our favor, and make sure that our wins are bigger than our losses.

ITM Performance

Over that last 30+ years the ITM bull market system has made 28 trades of which:

      15 were wins

      13 were losses

Not exactly a great result; in fact, barely better than chance! But here’s what makes the difference:

      Average win: 16%

      Average Loss: 3%

And the difference that makes to the performance is quite startling. I updated the figures in the April update to the 28th March 2024 and starting with $1,000 in 1993 (when SPY started)

       ITM: $156k

      Market: $16k (dividends reinvested)

It would be easy to stick with a system that went up every day, but that’s not how the market works. We have to surf it as best we can, putting the odds always in our favor. Anyway, I’m a big fan of Mr Hite right now, and going to watch some of his interviews. He’s given me a few ideas that I’m going to research.

(the 28 trades are not counting rolling out, which we had to do because some of the trades lasted more than a year.)

To the markets . . .

It was a good week. All major indices have reached new highs, which is good, but of course makes people twitchy. Prepare for lots of doom-and-gloom stories, ‘stocks overvalued’, ‘parallels to the GFC’, etc. Ignore them. Watch what the charts are telling you.

SPY Chart

We are now in blue sky territory. SPY has decidedly bounced off the support / resistance line we tentatively drew in back in February; its amazing how often it works. When you consider the millions of people, and trading billions of stocks it seems fantastical, then you remember the Law of Large Numbers and it all makes sense. It is sitting just below $530, which this time last year when we were wallowing despondently in a bear market would have seemed a wonderful figure!

Heather Cullen Blog In The Money Investing or betting

On the weekly chart we see that SPY is getting back to the uptrend line, and the recent bear trap is clearly visible. On the LHS, Covid is becoming a distant memory. All things pass.

SPYG Chart

Good news – SPYG is also in blue sky territory! It also bounced decisively off support and is continuing up. It has cleared the top level of the Darvas box, so that is good news too.

Last week we were wondering whether SPYG would have enough momentum to break through resistance – and it did, and is now in blue sky territory. Yeah!!

Heather Cullen Blog In The Money Investing or betting

QQQ Chart

QQQ is also in blue sky territory, and has cleared the top of its Darvas box which is a good sign. About time really; almost 3 months! This market certainly isn’t rushing anywhere, but personally I prefer it when it is slowly and predictably going up.

Heather Cullen Blog In The Money Investing or betting

On the weekly chart it is now comfortably over the previous high made in 2021 and heading up. 

Heather Cullen Blog In The Money Investing or betting

I’ve extended that chart out for the last 8 years for context.

Heather Cullen Blog In The Money Investing or betting

 An interesting aside: see if you can spot the covid bear on the chart. It looks so small and insignificant now, compared with the great bear of 2022-2023. That really was NOT a good time.

VIX Chart

The VIX has settled down again. It seems to peak in 5-6 month cycles recently so maybe we will have calm for a few more months. I hope so!

Heather Cullen Blog In The Money Investing or betting


Heather Cullen Blog ITMeter

The week ahead . .

The Federal Reserve minutes are due out on Wednesday, and no doubt they will be pored over for clues abut interest rates. The softer inflation figures for April have given renewed hope for a September rate cut.

NVIDIA is reporting this week. Last time it reported (Feb) the whole market went a bit crazy, albeit briefly, and may do again. Will it go up / down more than 10%? Who knows. But if it doesn’t, the straddles and strangles we looked at last week (and decided they were not worth the risk) will finish in the red. So, watch on May 22, after the bell.

The Futures

The futures are positive, although it is 11 hours to market open. But looking good.

Heather Cullen Blog In The Money Investing or betting

Its Summer!

Next week I will be here; sitting by this pool, admiring the fabulous view. It is Folegandros, a beautiful Greek island off the beaten track with few tourists. 

Heather Cullen Blog In The Money Investing or betting

 It’s a tough life, I know, but someone has got to do it!

Questions & Answers

I have a lot of very detailed questions that I WILL answer in the next day or so. and post here. I am afraid holiday mode is kicking in for me.

16 thoughts on “Investing? Or Betting?”

  1. Hi Heather, I’m new to options. I started reading your book for option trading in a bull market. I’m understanding some of it, but I’m a visual learner and was wondering if you had any videos? I want to learn to trade but I have to understand it first. Thank you for your time!

    1. Hi April, no, I’m afraid that I don’t have any videos – and not sure who to recommend. There’s a lot of sharks out there!
      POssibly something like investopedia might be OK.
      Actually – any other readers found any good videos?
      Sorry can’t be more help.

  2. Hi, Heather!

    I wanted to see if you recommend sticking to SPY and SPYG rather than other etfs like VOO, VTI, and VOOG? If so, I was wondering if these are the ones that you use primarily because you have back tested SPY and SPYG and therefore have predictable returns, or if there is other rational? As always, thank you! Really love both ITM books and am so excited for this strategy!

    1. Hi Eric
      yes, there is another reason: the spreads (and also the choice of expiry dates).
      The ones you mention anre comparable if you are buying the stock – (VOO: S&P 500, VTO : S&P Total Market, VOO: S&P Growth) It is buying the optins where there is a difference, mostly caused by how thinly traded they are.
      The daily volumes areL VOO: 2.5m, VTO: 2.2m, VOOG 91k – compared with SPY at 33.4m.
      This difference means that the spreads are much bigger – so (at today’s prices )for a Jan 2025 expiry at 50% strike the spreads are: VOO: 1.9%, VTO: 3.5%, VOOG: 3.2 % – compared with SPY: 1%. This means that you will probably be buying the options at a higher price.
      If the actual price of the stock was much different then it would be offset by the advantage of being cheaper to get into a trade, but with VOO at $488 there isn’t that much different between it and SPY at $531.
      Hope this answers your question? If not please get back to me.

  3. George Halongton

    Hi Heather,

    Your ITM Method doubles at least every 4 to 5 years. Thank you so much for sharing your knowledge with us.

    George Halongton

    1993: $1k
    1998: $2k
    2003: $4k
    2008: $8k
    2013: $16k
    2018: $32k
    2023: $64k

    “And the difference that makes to the performance is quite startling. I updated the figures in the April update to the 28th March 2024 and starting with $1,000 in 1993 (when SPY started)
    ITM: $156k
    Market: $16k (dividends reinvested)”

    1. Hi George,
      thank you – yes, those figures are approximate for the 50% strike / 1% time value strategy. the 60% / 2% is even better. It is amazing how well the 10/200 works – I have tried heaps of other combinations and it always wins out. So i’ll stick with it!

  4. Hi Heather. I am interested in your views on backtesting further back than 1993 using SPX data. I’m on the fence regarding its usefulness because of various changes in monetary and stock trading policies since that time — for example, you mention in a response to another comment about how trading would be paused if a Black Monday-like drop was occurring in the present/future. But, I also think it’s informative because it shows a range of results even if the events won’t be replicated in the future in the same way for the same reasons. Where I’m ultimately landing is that it’s better to go all the way back to 1927 if for no other reason than to increase your sample size. What are your thoughts?

    1. HI Tony,
      I have actually backtested it back to 1927, using SPX, ending on the 28th October 2023.
      I used 50% leverage, and using the 10/200 cross the results were:
      Start 1927: $100
      End Oct 2023:
      With no leverage: $30,354
      With 50% leverage: $592,158
      Trades: 299
      % Winners: 49%
      % Losses: 50% (rounding error here)
      Average gain: $86.24
      Average Loss: $15.45
      As the market has trended up stronly since October, and using the gains from SPY between November and March, the result would have been $876,160.
      I didn’t use the full 100 years in the book mainly because there was no valid market comparison. SPX is an index, and as you can’t trade it you can’t get dividends. For SPY market performance, I included reinvesting dididends, which over 30 years make approximately a 50% increase in outcome. There was no way I could estimate that over 100 years.
      I like my backtesting to be bullet-proof – as in no suggestions of bias or cherry-picking, hence SPY with dividends reinvested was the perfect market comparision.
      So – yes, has been done, results are in line with the last 30 years.
      I can add that Excel really doesn’t like working with datasets that big and slowed down noticeably and often hung, making it very annoying to test!
      Hope this helps.

  5. Hello Heather,
    Re: Profitable Entry Point Clarification
    I have both of your DITM books for Bull and Bear markets. Great information and anxious to start using your strategies. (Perhaps I need to study them more fully.)

    Anyway, my understanding of Bull DITM strategy is, to quote you, hopefully correctly, “We buy DITM options with little or no time value and then hold them until we either get an out signal, or are getting close to 30 days to expiry. “DITM Strategy Approach: It buys deep-in-the-money (DITM) SPY call options at least 6 months to expiry with a low time value.
    I earlier asked for your expertise in identifying a probable profitable entry market price point for buying a DITM SPY call option contract assuming that the lower the market price of SPY, the more likely I could make the trade profitably. Perhaps my assumption is untrue! Here is why I wonder… in re-reading a portion of your book, I note that you suggest entering a DITM call option trade after the occurence of a Golden Cross and REMAIN in the trade until the occurence of a Death Cross? Right? My earlier assumtion was that as the market price of SPY reaches lofty heights, the more likelihood of a significant and lengthy negative reversal. Hope that I’m not wearing you out.
    John 5-18-24
    PS So far, Gemini, formerly Bard, has been free to use. I like it. My impression is that sometime in the unknown future a reasonably priced ($10/month) subscription may occur. Try it now while it is gratis.

    1. Hi, yes, the rule is to remain in the trade until a death cross, and that can be a long time.
      For example, in the question I just answered below, the time from entry to exit was over 3 years, and it increased from 165 to 258. More recently we entereed in JUne 2020 and rode the bull until Jan 22, when it increased from 300 to 440. 2012-2015, from 128 – 200. 2016- 2018 from 200 – 270 (figures all approximate, reading from chart).
      My point is that ITM bull trades can go on for a long time, and waiting for a death cross so that you can have a ‘new’ golden cross can have you sitting on the sidelines for years. We have been in this trade since November 23 when it was trading around $430. It is 6 months later, and we are now trading at $530. Can it go further? Maybe yes. Maybe no. No-one knows for sure.
      But we have backtested and know that statistically if we follow the rules we win big over the long term.
      (Of course, in long trades you would have to roll out your options and would roll up at the same time, but it is still counted as the same trade in ITM.)
      Hope this helps.

  6. What’s Up? Heather, based on Schwab info, I asked Gemini the following question and the answer is fount below: Is the answer correct? Thank you very much! To Gemini… Thank you for the great informatlion in your previous answer. I repeat the question again because I want share your findings with an expert options trader. The question is,
    “at what price and percent per share would I break even if on the day of the trade, the Market Price of “xyz” ETF was $529.
    The strike price of the call was $265.
    The Ask price for the long term call option which was 20 months away was $$279.
    Thanks, again.
    You would break even on this long-term call option for the XYZ ETF at the following price and percentage:
    Break-Even Price per Share: $544
    Break-Even Percentage: 2.82%
    Here’s the breakdown:
    Strike Price: $265 (price you can buy the ETF at if you exercise the option)
    Premium Paid: $279 (cost to purchase the call option)
    Break-even calculation: Break-Even Price = Strike Price + Premium Paid Break-Even Price = $265 + $279 = $544
    Break-even percentage calculation: Break-Even Percentage = (Break-Even Price – Purchase Price (Market Price)) / Purchase Price * 100% Break-Even Percentage = ($544 – $529) / $529 * 100% = 2.82%
    Explanation: For your call option to be profitable by expiration (in 20 months), the market price of the XYZ ETF needs to be above $544. This translates to a price increase of only 2.82% from the current market price of $529

    1. Hi John
      Sorry for the late reply, I glanced at it and thought it was more complicated than it actually was so I have been putting it off!
      Gemini is correct, although it has a very complicated way of explaining it.
      The easy way is to use the effective price, which is the strike + cost, in this case $265 + @279 = $544, so when SPY gets to $544 then you are at breakeven, and any further increase is profit.
      Hope this helps

  7. Heather,
    Thanks for recommending the Hite book.
    Not a casino? He points out the term blue-chip stock.
    ITM bull strategy has had fantastic results (1993 to 2024), but if you look at the strategy with respect to $SPX, check the strategy from August 1987 to November 1987. As far as I can tell a loss of over 30% before the exit in October. Not so good if you’re leveraged at almost 2 to 1.
    Outliers do happen.
    Anyway, thanks for ITM and your blog.
    Enjoy your well-deserved vacation

    1. Hi Al,
      SPY, and hence the back testing, only went back to 1987, but I have checked the charts and the results are below. Black Monday was a real outlier, dropping 22% in a single day, and as a result the ‘circuit breaker’ rules were brought in to halt trading in the event of extreme volatility. The idea was to pause the panic trading and allow the market to settle. The drops of 7%, 13% and 20% would all have been hit during Black Monday if they had been in place.
      Re the ITM results, yes, if you had entered at the market high in August the figures are as follows:
      High August 25 1987: $337
      Death cross: 19 Oct 1987
      Confirmation: 20 Oct 1987
      Trade: 21 Oct 1987: $258
      Loss from peak: $337 – $258 = $79, 23%
      Leverage 50% strike: 46% loss.
      Clearly if you entered at the top of the market then your loss was considerable! But ITM would have entered the trade much earlier, the golden cross that precipitated that trade happening in August 1984 when SPX was trading at $165.
      The overall profit from the trade would have been $258 – $165 = $93, which is 56%, or with leverage $112% at a 50% strike. In practice it would have been more as you would have rolled up during the trade.
      And thank you – I am so looking forward to my summer in Europe!

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