Subdivisions the easy way to make equity

Subdivisions when compared to trading is an extremely simple process to make equity. 

With trading a good foundation is that, the market is still a zero sum game, but with property development and subdivisions, there is only so much land available and the rest is water. We are not creating more land, so that places the odds in the developers favor to make money, as the population grows. Where as a trader has to factor in the zero sum game issue. (Generally speaking)

It is all in the due diligence, but that can be made simple if you create a system (or a robot) to help scan and filter the market for potential opportunities.

The thing about subdivisions is it is a cost plus profit system with a fixed time line. A developer can quite quickly come up with a formula to work out if a potential house(or block of land)  that is for sale can be subdivided, then have a system to work out the base cost and exit strategy. The developer can then work out the sale price and difference between the purchase price, subdivision costs, town planning, (construction if applicable) and then sale price, all that =  profit margin. 

If the development profit margin is enough to compensate for the risk, it is a no brainer. If there is not enough in it then keep looking.

Like stock options, property development can have a time line and expiry date. This is good for peace of mind, strategy, and planning. Knowing the time line to things provides clarity. It is also good for cash flow, and/or done correctly can create instant equity.

The benefit from a risk perspective is the time line. 

Buy and hold property investments do not provide a time line, so an investor/developer will never really know the return on investment, nor can an investor/developer work out a proper business plan and strategy and exit strategy. It’s all kind of up in the air and then common words like “it is a 10 year plan” start coming out, as the investor needs to throw out some sort of figure and going that far into the future is always pretty safe.

But Subdivisions can provide an investor with an actual strategy. The real benefit to me is;

1)      It has a fixed time line

2)      A cost basis can be worked out or put another way the cost of goods sold (COGS) can be worked out.

3)      A profit analysis and risk management system can be built

4)      An exit strategy can be created before the investment takes place

It is like trading the stock market. In fact, I use the same sort of process as one of my trading systems;

1.       Look for undervalued properties

2.       Look for opportunity to subdivide where the land is already zoned ready for creation of titles

3.       Simple excel spreadsheets provides formulas on cost basis

4.       Run Comparative Market Analysis (CMA) reports to find out the sale price of similar properties

5.       Profit factor is easily workable.

6.       Custom built Kelly formula can be applied to provide a guide line on how much to invest into the particular development opportunity.

7.       All this can be automated to a level

The point is that subdivisable properties provide developers and investors an easy way to get into the investment world without spending years build systems and robots that trade at a zero sum game level. The odds are always stacked in the developers favor and a developer can easily work out the profit potential for a subdivisable property.

Writing Options – Information in using the valuation program with Naked Options

The use of writing put and call options can be a highly interesting topic.

Here is my take on how to make risk adjusted positive cash-flow returns by trading naked options.

The main reason is that when a trader is writing/selling an option there is unlimited losses that can occur when selling calls. When selling put options the stock can be exercised and the value of the stock can in theory go to $0. 

The other side is that writing/selling options the writer will receive a premium. This is a fantastic opportunity for option writers to receive cash flow.

If used correctly I see the writing/selling of options an opportunity for cash flow. Using my fundamental stock scanner (see:http://novitytrading.blogspot.com.au/p/trading-programs.html  ) We have the ability to find stocks that are currently trading below valuation. The user then can use the option-scanning tool to provide an outcome with the best option trade for that stock. 

We mainly target the stocks where we have a high probability that the option will NOT end up exercised at the end of the contract term. This means is we can then start a new trade at expiry for further income. It is good for cash flow.

Therefore, what happens with this strategy if it is right all the time? 

Going wrong or being right is relative to the user’s perception. I see being right as making money overall. Just because a stock option got exercised, does not mean the trade was wrong. As long as we can continue to make money from the stock, all is well.

This strategy is not the same as the Forex strategy, but the underlying principles are the same, in the sense, that the outcome is to make money overall, whilst reducing and managing risk and using statistical probability.

I believe that when trading it is all random, and all I am doing here is providing information on how I view the markets and how there are opportunities to make money, by placing as many probabilities and statistics on the traders side to provide some sort of edge in the randomness.

Let us look at a couple of examples; 

• Because I am writing options on stocks that are trading below valuation, I am banking that the value of the stock will increase in value. This means that my option will not be exercised, and I get to keep the premium. This is the benefit of my Option trading program which looks at all time data and provides me with an accurate probability of being exercised or not being exercised. 

• Using a modified version of the Kelly formula, setup specifically for my options program, I can quickly determine which options are worth writing and which options are not. Within my modified Kelly formula, I have worked in the Draw-down and other various algorithms to work specifically for writing options. I had to custom make it, as I have not found anything that is close to being accurate to date.

Therefore, what happens with this strategy if it gets exercised? Well let us look at a couple of examples;

 

• I am writing/selling options on stocks that are trading below valuation. This means that lets say based on my valuation models, I have a stock that is currently trading at $20 but the valuation model is showing that the stock is actually worth $25. You talk to any stockbroker and he will tell you to buy the stock and go long and make some money. Therefore, we can all see that just doing that is a good opportunity for investment.

• Nevertheless, I do not stop at that point; I then use my option strategy program. Using this example, I then scan the history of the stock from the first day of listing. Therefore, this period could be 5 years, 10 years, 30 years, or however long the stock has been trading.  Looking at the probability over all time, we can tell at what price we have the highest probability of NOT being exercised. So let’s look at some examples; the program could say at $19 I have a 70% probability that the option will not get exercised, it will also then say at $18 I have 80% probability that the option will not get exercised; it will also say at $17 I have a 98% probability that the option will not get exercised. But each of these options provide a different rate of return, meaning that the further away from the current share price the option is the less it is going to be worth. Therefore, from this angle it is a balancing act in getting the correct distance and the correct value. I use a modified “Kelly Formula” for assistance with this, to ensure that I am not receiving too little income for the risk taken.

• If it goes wrong, it means that the share price is falling rapidly. Now let us say I have written an option at $18 because based on all the formulas from my programs I see that is the best return for the best risk. So, my stock is still valued at $25, but for some reason the market has fallen. This means I now left own the stock at $18. This is a long way from valuation and is a good buying opportunity providing that the fundamentals of the company have not changed. If at expiry, the stock price is $15 I have made an unrealized loss of $3. I can then wait for the rebound, or write a call option. Either way every time I am writing an option on the stock it is lowering my breakeven which is a good thing, which means I can get out at below purchase value and still come out in front.

We can go on and cover a lot more detail, but we can assume that the understanding is clear enough and/or provides enough ideas.

I assume the reader has read the terms “Renting Shares” and “Buying share at wholesale” whilst these are not technical terms the original writer of these terminologies does provide a more simplistic view point on options, and this is my interpretation of this. In order to make it more real and make it more accurate, I have used various algorithms to increase the accuracy of these styles of trades.

Charting time frames and the value (or lack of value) of different time frames

Charting time frames and the value (or lack of value) of different time frames

Charting periods and chart types, what works and what does not.

There is only one real time frame to work with and that is “tick” charts. Any other value is a modified perception from this raw real data.

Over the years, I have read and tested all the different theories and writings on the different time frames people use for trading. I find it amusing that traders still think there is a holy grail of time frame, and that they are “to close” to the market or a general comment is “if I look at the 15min chart it provides me with better profit or better trends etc”. All this is absolute hogwash, and all a trader is doing here is trying to model and fit a chart time-frame to suit the outcome the trader is chasing. This is a sure way to implode ones trading account.

What must be worked on is that at the end of the day a traders strategy must work on any time frame, otherwise a trader is chasing a perception and trying to create reality. This is called curve fitting.

My opinion is this. I do use various forms of tick data in various ranges of time, from 4 minute to 15minute to hourly or daily etc. However, I build my strategies and trading systems not on time- frame but rather focus only on the strategy. I can place any of my strategies on any time- frame and the results will be the same. 

That is the point. I only use time-frames to condense data and make my analysis more manageable. Do not focus on time-frames and people’s or educators perception of time frames but rather focus on creating a profitable trading system, and it will automatically work on any application of time value. Focus on what you the trader can control, and that is your strategy. Basing your strategy on time frames means you are hoping you have the correct time-frame otherwise your strategy will not work. Trading is hard enough, so why worry about that as well….. Think about it. 

Why is this? Well because a trader needs to focus on the application of their strategy and that if the price rises or falls it is only a movement in price and regardless of what time frame, that movement in price is always the same. This is why if you are going to base any strategy off any time frame the only relevant time frame is raw tick data, not second data, but trade direct live tick data that only moves when buyers meet sellers.

So if you are trading:

• ·        4 minute charts and using time by degrees, where every 4 minutes equals one degree, or

• ·        5 minute charts, or
• ·        15 minute charts, or
• ·        60 minute charts, or
• ·        4 hourly charts, or
• ·        Daily charts,
• ·        Renko Bars

Always ask yourself, would my strategy work on any time-frame or am I modelling and curve fitting to suit a time frame.

Trade your strategy do not trade the time frame.

Trading using valuation models – Warren Buffet and Net Cash formulas to value a company

Trading using valuation models – Warren Buffet and Net Cash formulas to value a company

There are various ways to value a listed company. Fortunately, there is not one exact way to measure the value; otherwise, we would all get it right all the time. These variations and opinions on the way to value a company, provides buyers and sellers in the market place.

The most important thing is not to be hung up on random uncontrollable details. A trader must use the valuation models as an instrument to sort some conformity to the chaos in the market. It must be used a guide to help select trades that are profitable.

This is where the power of random statistical probability comes into play. Using a market-scanning tool a trader can quickly find and produce a list of quality companies that are trading roughly at or below valuation. Depending on the valuation model, and how conservative a trader wants to get, will depend on the various formulas a trader wishes to use. This formula needs to be modeled to suit the trader’s criterion. Each trader has a different perspective, so do not get hung up what other people are doing concentrate on what you’re doing and the results you are generating from your fundamental analysis.

Adding probability to the fundamental formula provides a trader the added reassurance of the profit that can be generated from a trade. By adding probability, a trader can also know how much profit is available on any given trade. This is highly valuable when working out if the trade fits your risk profile and the earnings to risk factor is in the traders favor. 

The way to look at it is to ensure that the company is trading below a valuation that you would be comfortable buying it. Here are some valuation models that may help with your fundamental models;

·        Warren Buffet formula

·        Discounted Cash flow models

·        Net cash formula

·        Graham formula

·        Peter Lynch fair valuation model

·        Net Current Asset Value

These are to name a few, but will help in your accumulation of data and models. All valuations models have limitations, and should be used as a guide.

The bottom line is creating a system that you are comfortable with, and then trade it. Trade it the best way you know possible and use the required instruments that provide you the return you are looking for. We will look at various instruments in a later blog.

Remember: NEVER TRADE UNLESS YOU KNOW WHAT THE POTENTIAL EARNINGS TO LOSS RATIO IS GOING TO BE.