ITM on Stocks?
I have often been asked whether you can use the ITM strategy on stocks. The answer is, of course, absolutely. There is not reason not to. There is just one big problem: we don’t know what the results will be. Let me explain.
ITM on Stocks?
The ITM Strategy has 3 parts:
1 – Buying DITM options so that we get leverage without borrowing and without the risk of leveraged ETFs.
2 – IN and OUT signals, so that we are protected from the worst of any market falls (not limited to bear markets).
3 – The use of large ETFs to as the underlying vehicle.
Clearly parts 1 and 2 can be applied to anything, stocks, bonds, currencies etc. But part 3 is vital for our ability to rely on backtesting of results.
Stocks are Unpredictable
Even the bluest of blue chip stocks are unpredictable. Things change. Markets, consumers, CEOs, directions – all of which can lead to the stock diving or disappearing altogether. Take some of the early dominators in the Internet space:
- Netscape – dominated the browser market in the 1990s, acquired by AOL.
- AltaVista – early search engine, shut down in 2013
- Blackberry – once dominant, overtaken by iPhones and Android.
- Yahoo – once a leader, acquired by Verizon in 2017
- Nokia – global leader in mobile phones, could not compete with smart phones.
Take a look at the Nokia chart over the past 25 years:
Not Just Technology Stocks
There are many other companies who have been dumped from the Dow, but are still trading:
- General Electric (GE) – 2018
- Alcoa (AA) – 2013
- Pfizer (PFE) – 2020
- Walgreens (WBA) – 2020
- AT&T (T) – 2015
There have been huge successes . . .
Yes, of course, there have been some wonderful success stories, like AAPL, NVDA and NFLX. But the point is, we can’t know which ones are going to be winners and which are going to crash and burn.
Professional money managers
But despite all the evidence, many ‘experts’ think that they DO know and can predict. In fact, there’s an entire industry built around choosing winners, but we know that mostly their results are way worse than the market.
Active stock pickers that beat the market are few and far between – and, in my observation, less than there should be statistically by luck alone.
Indexes are Safer
While the stocks in the Indexes vary one thing remains the same:
They are the top companies
If they don’t measure up, they are unceremoniously kicked out of the index. You are always dealing with the top 30 / 100 / 200 / 2,000 stocks.
That’s why Indexes are so much more predictable than individual stocks and why we can rely more on backtesting results.
So - ITM on stocks or not?
Buying a DITM option is safer than borrowing to buy stocks, as you can never end up owing more than you outlaid to buy the option.
It is MUCH safer than the leveraged ETFs that are only designed for day trading and can very quickly deviate from the underlying index they are trying to emulate.
BUT – here is the proviso: even if you back test an individual stock that does not really give you anything to rely on going forward.
Companies and markets change all the time; the only thing with any stability is an index.
That is why we use SPY and SPYG if you have a smaller account.
What about QQQ?
I have made no secret of the fact that I use ITM on QQQ (the ETF that tracks the Nasdaq-100 index). I didn’t write about it in the books because I wanted to make them as simple and easy to follow as possible.
But, yes, QQQ is a good candidate for ITM – but be aware that it is more volatile that the S&P 500 as it is based on 100 stocks not 500.
SPY ITM Performance
Not too shabby at all! With SPY, we got into the market in November almost a year ago, when SPY was trading at $440. On Friday if closed at $573, a 30% increase. If you were using a 50% strike then you would now have a profit of 60%, if you used a 60% strike then you would be up 76%. Annualized, that works out to 66% and 82%. Can’t complain about that!
Of course, everyone got in a different times and would have rolled at different times; the figures above are assuming that you got in the day after the golden cross was confirmed and only rolled out not up.
SPYG ITM Performance
We got the signal earlier from SPYG, in April last year, when it was trading at $55. AS SPYG consists of ‘growth’ stocks it is more closely tied to QQQ, and hence more volatile.
SPYG closed last Friday at $83, a 51% rise.
If you were using a 50% strike then you would now have a profit of 102%, if you used a 60% strike then you would be up 127%.
Annualized, that works out to 72% and 90%. It actually beat the ITM SPY result, although it was a much rockier ride.
QQQ ITM Performance
Although not recommended in the books, let’s look at what happened in QQQ.
Our get in signal was in early 2023, when it was trading at $303. Today it is trading at $482 which is below its all-time high of $500 in July.
If you were using a 50% strike then you would now have a profit of 118%, if you used a 60% strike then you would be up 156%. Annualized, that works out to 79% and 103%. Nice!
Not a walk in the park!
We have had some worrying times when it would have been easy to panic and sell everything. I had a few nights when I started to doubt myself and worried for everyone following ITM. But I’m glad that I didn’t panic and sell, and you probably are too.
I can’t help but feel a little smug about the results: how many professional money managers have done better than this?
To the markets
Last Friday’s job growth figures were the best in 6 months, and as usual good news is bad news. Unemployment is coming down (good) and so it is likely that there won’t be another 50bp interest rate cut (bad). Although you have to wonder why we rely on them; they are the initial estimate, and they are always revised the following months sometimes by quite a lot.
SPY Charts
SPY’s rise on Friday brings it to the previous high made earlier that week. Will it power through or meet resistance? This week will tell. It is still trading above previous resistance at $556.
The weekly chart shows no surprises, the uptrend is still intact.
SPYG Charts
SPYG has retreated from resistance at the previous high of early July, but above support established in June and August.
The weekly chart shows no surprises other than the makeshift uptrend is still there. (Don’t get me started on OptionGear support.)
QQQ Charts
The daily chart shows a similarity to the SPYG chart: approaching (presumed) resistance at July’s high, but trading above support established in June and August.
The weekly chart shows it bouncing along the bottom of the trading range.
VIX Chart (Volatility)
The VIX is hovering around the 20 mark. Considering how close this is getting to the election the VIX seems remarkably unconcerned.
ITMeter
The week ahead
Today’s date is one year after the Hamas attacks on Israel, and after recent attacks by Iran the situation is increasingly volatile with many expecting a response by Israel on this day. Naturally, the market is twitchy.
CPI inflation data for September is due this week, and earnings season kicks off. Banks due to report on Friday this week are JPM, WFC and BK. Bank earnings are often seen as bellwethers for the economy. Strong bank earnings suggest healthy economic activity and can significantly impact investor sentiment.
Futures
The futures are down slightly, as is to be expected after Friday’s strong rise. Traders will be ‘taking profits’. It is still over 10 hours to market open so anything could happen.
ITM Chat
I have decided to host it on this website rather than direct people to an outside chatroom, which might quickly become just one of the many toxic chatrooms there are out there. We are much better than that!
I actually set one up last week, then ran into difficulties with the login process and, having no patience whatsoever, I shelved it and will get back to it tomorrow. It should be ready in the next couple of weeks (as long as I can keep my temper!).
Fingers crossed for a good week!
Heather
27 Responses
Hello Heather,
I just wanted to once again Thank You for all the work you do keeping the Blog up to date, and INTERESTING!!! I have read all of your books and enjoyed them all. Please keep up the Good Work…
Dave
Hi David – thank you! Very much appreciated!
h
Dear Heather,
You are too smart. Please come to the United States and make us more successful like Warren Buffett and Charles Munger of Berkshire Hathaway. I see in you like Warren Buffett.
Sincerely,
George Halongton in Los Angeles
Dear Heather,
Thank you for keeping us updated of the ITM chat room. I appreciate it very much. Using your analysis of the back testing of the ITM method, it is 15% to 18% annual return which doubles every 4 to 5 years. The $1k in 1993 should reach $1m in 2033 in forty years to fifty years.
“The ITM strategy has outperformed the market 10-fold over 30 years. $1,000 invested in 1993 would be worth $181,000 today.”
1993: $1,000
1997: $2,000
2001: $4,000
2005: $8,000
2009: $16,000
2013: $32,000
2017: $64,000
2021: $128,000
2025: $250,000
2029: $500,000
2033: $1,000,000
I am doing some past and future estimations using your ITM method. We can use ITM method in the Roth IRA retirement account in the USA.
Sincerely,
George Halongton
HI George – forward estimates are great to keep you motivated! But remember that it is not like interest where it always goes up – there are some years when we go down (not as much as the market, but down nevertheless).
But the ITM rules keep us out of the worst of it.
h
I just purchased your “In The Money…” book on Amazon today. I am very fascinated by it! My question is, “How does one begin trading/using it today”? I see that the last 10/200 cross was in November 2023. How does one enter the trade when the cross in underway? Also, is the 10/200 cross on the downside the sole exit strategy? Thank you. James
Hi James,
when there is a bull run we have no idea when it will stop. It can and may go on for years. If you wait for a death cross so that you can get a new golden cross then you may be waiting for years! I Have a couple of previous blog posts that deal with this:
Riding the Bull – Heather Cullen : In The Money Online
Market Peaks – Heather Cullen : In The Money Online
So you can certainly join the bull run when it is happening (i.e. now) just remember that the results from backtesting are golden cross to death cross.
Hope this helps.
h
Heather,
Thank you for the reply. How does one access the blogs you referenced? When I clicked on them, it appears they were blocked.
Goodness, you are right – I have no idea why they are blocked from here. But they are still available. Just google:
‘Heather Cullen Riding the Bull’ and
‘Heather Cullen market peaks’
and you will be ablt to read them
I must put an index on the blog – it is getting really big!
h
Dear Heather,
Thank you for your weekly blog as always. Speaking of Nancy Pelosi and Donald Trump and Joseph Biden, one thing that I respect them is in term of their combined age is similar to the total years of American Independence since 1776 that three of them are still working in their 80s. Some other examples are Warren Buffett and Clint Eastwood. Charles Munger is still working until 2023 and he was born in 1924. Keith Rupert Murdoch of Australia is still working and marrying in his 90s. Of course, one exception is George Washington the first American President who retired in his 60s after serving two terms.
Sincerely,
George Halongton
Hey George – so I’ve still got a few good years ahead of me?
Re ITM Chat – I have given up on AJAX – I installed it but it was completely hopeless – no threads, no history. I’m currently setting up bbPress which seems to have all the features needed. But frustratingly awkward to set upm, thryng again today!
h
Hi Heather,
I appreciate the time and effort you take to respond to our comments/questions. It must be hard to stay disciplined when your alternative is to be lounging by the pool all day.
I currently own 7 contracts of the Dec 20 2024 300 strike SPY calls. I will need to roll the position within a month. I’m also sitting on a hefty profit due to the ITM methodology thanks to you.
My question is using yesterday’s closing price of SPY of $567, I can roll up and out to the Dec 19, 2025 350 strike, which is 62% of current price and 3% time value but afford to buy an additional contract making the total 8. Is this attractive enough to pursue or am I stretching to get the additional contract?
Hi Ankur, sorry I didn’t get to this before market! SPY is now $573 so 60% will mean a strike around $345. I’ll have a look at the chain.
Your current position (Dec 24 300) bid / ask is 276.11 / 277.20. 7 contracts means it is worth $194k.
The 20 Jun 2025 possibles are:
$340: 242.07 / 245.47. 8 contracts cost$196.4k
$345: 237.34 / 240.69 . 8 contracts cost $192.5k
$350: $232.61 / 235.93. 8 contracts cost $188.7k
So you can afford 8 contracts with the 60% strike of $345.
I suggest that you go for a slightly earlier expiry date (June) as Dec 2025 is 15 months away and into LEAPS territory. June is still 9 months away so it is still quite a long term trade.
Hop this helps.
h
P.S. – it is spring here and the beach does look terribly inviting . . .
Heather,
Thanks for your suggestion. I went with the June 20 2025 $350 strike and was able to purchase 8 contracts with only a 2% time value. With the Dec 2025 calls, I would’ve paid a 3% time value premium.
When using the turbocharging while rolling up, you will most likely be in a strong bull market. I’m assuming that in most bull markets rolling up near 52 week highs is normal. However, I wanted to ask whether it makes sense to always roll up even at all-time highs as long as we haven’t experienced a sell signal (death cross).
Hi Ankur, rolling up and rolling out means that you are doing both trades at almost the same time (selling your existing option and buying the new one) so the volatility should be almost the same. If you sell on a dip then you get less than if you were at a high, but on the other hand you buy at a lesser price. And vice versa.
So, in my opinion, it doesn’t really matter where the market is (as long as its not a death cross) as long as you execute both trades as close in time as possible.
Hope this helps.
h
When you say 60% strike do you mean 60% below the market price or 60% of the market price? Thanks much.
Hi Jay, no I mean 60% OF the market price.
So if SPY was trading at $500 the 60% strike would be $300.
Hope that helps
h
Totally clear. Thanks much.
SPYG ITM Performance is a duplication error of SPY ITM Performance.
Hi Noel – yes, you are right.
Oops!
I write the blog in Word then cut and paste into WordPress, and I was abviously not paying attantion!
It is fixed now, thank you for letting me know.
h
Deep ITM calls can be a good investing tool if you are confident in a stock, but you are timing your trades without a clear indicator. Nancy Pelosi has had well publicized success with DITM calls, most notably with NVDA recently. But she knows things that we don’t.
Hey Tony, yes trading is much easier with inside information – strange how she hasn’t been charged with insider tradin, isn’t it?
And DITM calls are a really safe way to get leverage without haveing to borrow, but the spread on some of the less-traded stocks can be alarmingly wide. But she probably has a strategy for that too!
h
Dear Heather,
Thank you for your weekly blog as always. In addition to several stocks that you have mentioned, do you still remember Enron? It crashed and went bankrupt in the early 2000s.
Enron’s stock price plummeted from over $90 to less than $1 per share after the company’s accounting fraud was discovered, leading to its bankruptcy in 2001:
Date
Price
August 23, 2000
$90.75
October 2001
$0.26
November 30, 2001
$2.08
Sincerely,
George Halongton
Hi George
yes, I certainly remember Enron – here are some quotes that were made telling us everything was OK! In September 2001:
Jeff Skilling (Enron CEO): “I think what we’re seeing is a very strong company with a very strong future. We’re very comfortable with our financial position.”
Andrew Fastow (Enron CFO): “We have a very strong balance sheet, and we’re very comfortable with our liquidity.”
Analyst from Merrill Lynch: “We continue to believe that Enron’s stock is undervalued and recommend it as a strong buy.”
And, of course, it filed for bankruptcy within a couple of months.
There’s a book about the collapse: The Smartest Guys in the Room: The Amazin Rise and Scandalous Fall of Enron’ – I haven’t read it but I probably should!
h
To me one of the big problems of ITM is earnings as you don’t know what is going to happen with earnings day and the response. You can see a big earnings beat, yet the stock takes a dive, or vice versa. I usually like to be out of a stock as earnings rolls around. Also, even advertising can have a great or bad effect such as with Bud Light. Reliable CEOs leave, and the replacement can change the company for better or worse. A sudden advancement in technology may make a company a pioneer with a huge gain in market share such as with NVDA. Too many things can affect an individual stock. I follow ITM with the ETF’s and do shorter term with stocks, while mostly avoiding earnings day.
Hi Jeff – yes, response to earnings is very unpredictable. I’ve seen stocks slump on good earnings news, and increase on bad. Sometimes it makes no sense.
Re stocks – I sometimes fool around and have a flutter – but it almost invariably ends badly. AMZN, NVDIA and GLD to name a few.
In fact, maybe I should do a blog post on it, just to let everyone know how badly I select stocks!
h
Thanks