Unrealized Gains.
Well, a nice week for a change. 5 up days in a row, and here we are bumping up against all-time highs again. The week before was particularly nasty – short and sharp, very unpleasant, which meant that I had a few emails from people worried about drawdowns.
Drawdowns
A drawdown simply means the percentage decline from the peak to the lowest point before a new peak is achieved. It corresponds to the pain you feel when looking at your account: the bigger the drawdown the more severe the pain. Which leads people to ask:

Why not get out quicker?
That would avoid big drawdowns! At first this seems eminently reasonable, but let’s look at the practicalities. If we had a more sensitive indicator, say the 10/30 SMA then it would definitely show a death cross before the 10/200 SMA enabling us to get out more quickly. So, let’s check it out.
The 10/30 SMA Death Cross

Looking at the last few months, the 10/30 death cross was on the 29th July, confirmed the next day, so we get out the day after (31st July) at $550.81.
The market proceeds to drop and we sit smugly on the sidelines watching everyone else’s pain.
Genuis, really.
But the problem is . . .
Yes, we got out and missed the downturn – when do we get back in again? At the 10/30 golden cross? That happened on 21st August, confirmed the next day, so we buy the next trading day. At $562.13.
See the problem? We are buying back at a higher price than we sold. We missed most of the downturn, but we also missed most of the upturn.

Maybe the problem could be fixed with even more sensitivity? OK, so let’s try the 5/20 SMA, that should be really sensitive.
The 5 / 20 SMA Death Cross
Now we have to be very much more hands-on traders as we now have more crosses in the same time. The results?
Death cross 23 July, confirmed 24th, sell on 25th at $538.41
Golden cross 15 August, confirmed 16th, buy on 19th at $559.61 (next trading day)
Death cross 6 September, confirmed 9th, sell on the 10th at $548.79
Golden cross? Not yet happened, so we are out of the market, but supposing the trend continues up and the golden cross happens you will be buying back at above $560.

Backtesting results
You can see that a more sensitive pair whips you in and out of trades, usually losing money because you have to buy back at a higher price than you sold. This seriously depletes your account. I have run both these pairs through backtesting, and they crashed and burned pretty early on in the piece.
Trade The Tide, Not The Waves
By trying to avoid waves we miss the tide. I didn’t just pick the parameters 10 / 200 SMA because they were nice round numbers but because after exhaustive backtesting these were the ones that worked. Nothing else even came close.
Trigger Warning – Presidential Election
Please do not click if you are likely to be offended.
One of the candidates in the presidential election has a policy for taxing unrealized gains, something that has never been done before in the US. In case you are not familiar with the term, it means imposing taxes on the increase in the value of an asset (like a stock or a house) even if you have not sold them.
This would be devastating to the stock market, and I expect it would drop precipitously. I can’t help thinking that last week’s market dip has had something to do with investors realizing what possibly lies ahead and heading for the exits.
Investor Behavior: It could force investors to sell off their shares prematurely to cover tax liabilities on gains they haven’t realized in cash, potentially driving stock prices down due to increased sell-offs. (AFP Fact Check, PolitiFact).
Reduced Long-term Investment: Investors might be discouraged from holding stocks for extended periods, as they would face yearly tax bills based on fluctuating market values. This could reduce overall investment in listed companies, negatively impacting their stock prices and growth (Cato Institute, Tax Foundation).
Higher Capital Costs: Companies rely on long-term investors to provide stable capital. If investors pull back due to tax burdens on unrealized gains, the cost of capital for companies could rise, making it more expensive for them to fund operations, R&D, and expansion. (Tax Foundation).
And since we have been talking about Buffett let’s see what he things about taxing unrealized capital gains:
Liquidity Issues: Buffett argues that taxing unrealized gains could force investors, particularly those with large holdings like himself, to sell assets to generate cash to cover tax liabilities. This would impose a financial burden on investors who haven’t actually realized any cash from their gains, potentially disrupting their long-term investment strategies.
Investment Disincentives: He believes that such a tax would discourage long-term investing. Investors would be taxed on fluctuating market values rather than actual sales, making it riskier and less appealing to hold onto assets for the long term, which could hurt companies that rely on stable capital from investors.
Complexity and Fairness: Buffett has also highlighted the complexities in valuing assets that aren’t publicly traded and the potential for unfair outcomes, such as taxing gains that may later disappear if asset prices fall. This could introduce administrative challenges and complications in the tax code.
Triple Witching
It is Triple witching this Friday, and conventional wisdom is, of course, that there is increased volatility.
Could there be a very short-term trading opportunity I wondered?
So, I checked:


So – nothing there that I can see. Shame.
To the Markets
A good week, a run of 5 up days. I can handle that!
SPY Charts
SPY has bounced neatly off support at $540 (amazing how exact it can be, isn’t it?) and is approaching its all-time high reached in July and again in August. Last week we said it was possible that a double top could be forming, but luckily it didn’t. Will the red dashed line prove to be resistance a third time? Or will SPY punch through it? We’ll know soon.

On the weekly chart we can see that it bounced off the uptrend line just as we hoped.

QQQ Charts
QQQ has bounced off the support level (pink) as we hoped but is still some way below its all-time high of $500 in early July.

On the weekly chart we see that it is right back up to the bottom of the previous trading channel. Hopefully it will get back in and carry on!

SPYG Charts
SPYG is very similar to QQQ. It has bounced off support (green) and has stopped any talk of a head-and-shoulders pattern. I have never been very fond of this pattern – always smacked to me of retro-fitting, and not particularly useful anyway. Yes, I am very opinionated, I know.

And on the weekly chart we can see that it bounced off our makeshift uptrend line and hopefully it will keep going up.

VIX Chart (Volatility)
The VIX is settling down and in low-volatility territory again.

ITMeter

The week ahead . .
I’ve just read about a second assassination attempt on one of the candidates, which may affect the markets this week. We have the Fed announcing interest rates on Wednesday and there is quite a lot of economic data during the week, so we may be up for some volatility.
The futures:
At this stage they look neutral – but 10 hours to market open.

Reading and Reality
I have just finished ‘Buy Back Your Time’ which was good, but something I needed 10 years ago. I have just realised that I have effectively ‘bought back my time’; which is probably why I am getting restless for a new challenge.
I have just started The 10X Rule. The idea is that going for a 10X goal is easier than a 2X goal. and I realized that I have already done it. The first iteration of ITM, the SPY DITM options without timing the market was a 2X goal; I then achieved the 10X goal with the second iteration and the book.
I have loved upsetting conventional wisdom in my own small way by showing that you can time the market and beat the market 10X, so I am thinking why stop there? Is there a way to beat it 100X? I am exploring lots of new ideas, and I am going to focus on that. I’ll still keep the blog going but all spare energy is going into the new challenge.
A Puzzle
Whenever I think about the new 10X, I keep getting this picture (19th century Cornish mine lift) popping into my brain, and I think it is my subconscious trying to tell me something. Not sure how I can apply this to the stock market. I thought I would share it and see if you have any idea what it could be?
Fingers crossed for a good week!
Heather
Q & A
Remember - trade the tide not the waves!

34 Responses
Thanks for the great books and content. I read two of your books a couple years ago and have since read many other authors on options trading plus YouTube content as well. I keep coming back to your site. Great information presented in a meaningful and fun way.
Appreciate your feedback on current environment and when to enter. Right now I’m mostly in bonds but planning to implement your strategy post election. Just wanted to pass along thanks from another fan.
HI Dave – thank you!
Hi Dave – thank you for your kind comments!
Yes, I too have read hundreds of books on options trading but have never found one that I can whole-heartedly recommend. They all seem to leave some aspects out and concentrate on the bits that have worked (past tense intentional!).
h
Dear Heather,
I have broken down the ITM strategy’s performance and analyze it using your information. Please keep up the good works and thank you for your weekly updates. I appreciate it.
ITM strategy increases 10 times every 15 years.
1993: $1k
2008: $10k
2023: $100k
While the S&P500 with dividends increases 10 times every 25 years.
1993: $1k
2018: $10k
2043: $100k
While Warren Buffett’s wealth increases 10 times every 20 years.
His age at 50s: worth $1billion
His age at 70s: worth $10billion
His age at 90s: worth $100billion
Sincerely,
George Halongton
Hey George – thank you, great information. Wouldn’t it have been noce tp start ITM when we were 11 just like Buffett? We’d be rolling in it!
h
Dear Heather,
Although we did start at 11 like Warren Buffett, we can still learn from him. He made most of his money starting in his age of 50s in the 1980s. His net worth went down in the 1970s.
George
I enjoyed your book(s). I am retired and like you have tried all sorts of market ideas over the years. Finally decided that SPY and QQQ were the best to invest in. I started option about 4 years ago and found what really works best for me… “Stock Replacement” options. Buying far out 6 months – 12 months. These are deep ITM options but only about 85 Delta or around 20% in the money strikes. Naturally I became interested in your “In The Money” book when I came across it as it seemed to be similar to what I was doing. However, you go deeper ITM than I do… both work, however. A few comments. The time expiration chart you are using is the ATM graph. It shows most of the time decay near expiration. That is true for ATM options, but the deep ITM (and OTM) time decay curves are the opposite… they lose money (decay) faster at the start and less at the end, which means you don’t have to close a deep ITM option early. Also, since you are deep ITM the extrinsic value is minimal anyway and can’t drop much from there. The Theta (daily decay) at 12, 6, 3 and this month SPY (Deep ITM 280 strike) is -0.02, -0.03, -0.04 and -0.02. And for the ATM options is -0.08, -0.10, -0.13 and -0.76 (big decay at the end). Also, the reason the Call options cost more than the Put options is that Call options also contain the “cost of carry” or the interest on the money you would have left over when you buy the Call instead of the stock. The actual Call extrinsic value is just about what the Put option (at the same strike) is. Also, with my 85 Delta options (which are about 20% of the stock cost) I roll. In other words, if the stock was 100 and I have the 80 Call, if the stock goes to 110 I roll from the 80 to the 90 call. I won’t get the entire 10 points since the extrinsic value is different, but I shoot for at least 80% of the roll, in this case $8 +. But that also decreases my cost and therefore risk. Also, with the Call I can only lose the 20% plus the option cost, so my downside is protected somewhat. I am recommending you book(s) to my friends.
Joe
HI Joe – thank you for your nice comments!
I’ll try to take your points one by one.
Time decay graph: yes that was for an ATM or OTM graph – with DITM if there is less than 1% time value then this is ll that can decay.
Interest rates: I didn’t really go into them in the books – I was trying to keep it simple and not cover things that were not necessary for ITM, and they are not something we can control.
It sounds like you have your strategy all worked out and it works for you so congratulations! Well done!
Maybe I should start having guest articles – what do you think?
h
There is a lot going on economically and politically right now. Does it make sense to enter the market now, or wait until after the elections to see what happens. I don’t want to give in to FOMO if holding back a couple months would prevent a lot of pain. Thanks, Mary
Hi Mary, my usual advice is that when you have decided to get into the market just get in. You can spend a lot of time looking for a ‘good’ time to enter.
BUT – maybe this time my advice should be different.
We are in uncharted waters, we have never had this situation before so we can’t look at previous elections for guidance. We did in one of the blog posts, but not sure how relevant it is: https://heathercullen.com/election-years/
The situation is so volatile – 3 assassination attempts- a candidate that was selected not elected, the rhetoric absolutely hyperbolic – maybe staying out until after the election is a good idea.
I really can’t advise you what to do – I wish I could!
h
Hi Heather,
I spent a LOT of time backtesting AIM some years ago.
I found it worthless. It made bad decisions. But maybe I missed something.
But as it didn’t work for stocks, I don’t intend to try it for options.
Bob
HI Bob
I agree – it doesn’t pass the sniff test: buy something – anything – and sell it when it goes up and then buy something when it has gone down?
Not reasonable in my uiverse!
h
Hi Heather, I enjoy reading the ITM books and want to invest with my initial 10K account. However, I could not find the premium for SPY call (for 1Y) that is lower than 10K with this ITM bull criteria. (c) Is the effective price less than 1% away from the current price? with SPY ($563 as of 9/16/24), the closest option I could find for the premium 5%. Can I skip this criteria ? Regards, CT le
Hi CT le
I think you must be reading an old edition of the book? In all the updates since 2021 I have had a strategy for smaller accounts – ITMS – which uses SPYG as a proxy for SPY. SPYG is now trading around $80 so a 50% strike ca be bought for around $4k.
If you bought the eBook from Anazon you could try their customer service and get the updated version for free – alternatively bite the bullt and get the latest version here: https://heathercullen.com/bookstore/
Hope this helps.
h
I like the idea that the SPY is bouncing along this resistance line…
Since we’re looking at the same chart is it a stretch to say that it’s created a double bottom. I’ve seen that same pattern before. And of course I’ve seen that same pattern in clouds flying in a Cessna not to mention also seeing turkey buzzards too.
R
Hey Randy – I remeber flying in a little cessna years ago – I couldn’t believe how 1950s it was, everything was so manual. My instructor told me that it was because they don’t make training aircraft any more because they are afraid of getting sued if a student crashes it. I’m not sure if that is correct – but its a good story about unintended consequences!
Re the doubel bottom – isn’t that pattern usually ment for the bottom of a bear or at least a correction? Not sude.
h
In your animation, your “men” would not be making any progress if they did not “trade” from one side to the other.
My belief is that to make 100x you will need to do more trading. I’m looking at systems that trade put credit spreads weekly trying to make 100x. Without getting clobbered by the stock or index coming down over the put spread.
If I come up with something exciting (and I may be close) I will post back here.
Bob
Hi Bob – please do!
I have played with condors before in the past, based on statistical probability from past data, which is what I am looking at now. However, when I did it before it was more of an income thing, 2X not 10X. But please let us know if you work out anything, we would love to know!
h
Thank you for continuing to blog. I love reading them and I’m not as afraid in trading options when I see your viewpoint. As for the unrealized tax gains, I always dismissed those thoughts thinking that I probably will never have 100 million so it doesn’t apply to me but hearing how it will affect companies, and the stock market is making me look at it from a totally different angle. Thanks again for your insight! It is much appreciated!!
Thank you Charity – very kind.
Yes, I think people get blinded by the idea that it is only going to be a tax on very rich people, but it is a huge precedent and will affect the markets hugely – in my opinion anyway.
I really hope it doesn’t happen!
h
Charity, when they started income tax it was only suppose to tax the rice. enough said! It scars me to death.
Yes, here in Australia there are ‘temporary levies’ for this and that – they ALWAYS become permanent. And they wonder why people don’t trust the govt?
h
Interesting numbers on the drawdown section. What’s the possibility of marrying Robert Lichello’s AIM automatic ‘buys’ here? I’m not endorsing it, but just curious how it would fit into our DITM strategy?
HI Jolly – I had to look up Rob Lichello and I think his strategy seems to be:
Selling: When a stock’s price increases, AIM instructs to sell a percentage of the holdings. The cash reserve grows, ready for future buying opportunities when prices drop.
Buying: If a stock’s price decreases, AIM allocates part of the cash reserve to buy more shares, increasing the investment at lower prices.
Naturally, I checked to see if there were any results and found:
Backtesting Studies: Some investors and analysts have backtested the AIM strategy using historical stock data. The results are mixed, often depending on the specific stocks, market conditions, and the timeframe used in the backtests. These studies are typically informal and shared on personal blogs or investing websites.
So – my initial reaction is there is no guidance on what to buy and when and no documented results. The automatice buying and selling is interesting though, and what I want to incorporate in my new strategy – but I also want it to have a sound statistical basis.
Thanks fr bringing him to my attention!
h
Looking at the simple mechanized lift in the Cornish tin mine, only instant thought was ‘ achieve wealth, your goal,
by incremental steps ‘ Thank you for your blog I religiously read it every week good luck with 100x!
Thank you Rob – re the incremental steps – I thinks its more the action, and automatic getting on and off but progressing one way – I’m working on it in the background!
h
Keep up the fantastic work. I love your blog posts, and of course your books too.
Jeff
Thank you so much Jeff!
x
h
Any comments regarding a proposed unrealized gains tax must include the caveat that it would be applied to taxpayers with net wealth greater than $100 million.
Hi Vern
I guess it is the precedence that worries me most – and while people tend to think of it only affecting rich individuals think about how it would affect companies, especially those who are still in start up mode.
Amazon and lots of others would never have got off the graound!
h
Heather– I dont think the unrealized capital gains tax will ever pass.It would effect to many politicians,big time campaign donors,etc.All the same,I pray that Harris loses.
Take care-
Steve
Hi Steve – yes, I understand that it would still have to pass – i am just worried that the threat of it may make the market freak out. You know, buy the rumour, sell the fact.
Interesting times – I could do with them being a little less interesting!
h
Go for it with your restlessness for a new challenge.
Thank you Tommy!