Magic Formula Investing

How to find quality stocks to for creating a profitable stock option trading strategy! Today I would like to introduce you to “The Little Book That Beats the Market. An investment guide for all ages”. It is a recommendation for something that I found brilliant and thought it might be of interest to my readers. I shall share later on how to use it for options trading.

As published on the website: Two years in MBA school won’t teach you how to double the market’s return. Two hours with The Little Book That Beats the Market will. Let Joel Greenblatt, Founder and Managing Partner at Gotham Capital (with average annualized returns of 40% for over 20 years) show you how “beating the market” can be made simple and easy. The Little Book does more than simply set out the basic principles for successful stock market investing, it provides a “magic formula” that is easy to use and makes buying good companies at bargain prices automatic.
Though the formula has been extensively tested and is a clear breakthrough in the academic and professional world, the common sense method is convincingly explained using 6th grade math skills, plain language and humor. Readers will learn how to use this low risk method to beat the market and professional managers by a wide margin. Along the way, readers will also learn: how to view the stock market; why success eludes almost all individual and professional investors; and why the formula will continue to work even after everyone “knows” it.

This is not a get-rich-quick book. He explains what really matters and what’s behind successful investing and it’s so simple that you may not believe it. Magic formula investing is an essential tool in OptionPundit’s Toolbox Please note, it’s a free tool and you can browse their website and get stock list everyday after registering. You don’t have to pay to those “magic investment letters” to get this list.

So how do we use it for options trading? My interpretation is that the screened stocks will go up over the long term so we need to use strategies that are bullish over long term. So put it simply, a strategy that has positive delta, positive theta so we gain from upwards movement in stock and time decay due to long term holding. For instance, long leaps and short current month (same strike) as theta for current month will be higher than leap month so you get positive theta (i.e. Calendar spreads or diagonal spreads). Let me know via comments if you would like to discuss more on how to play this.

Note: See The Little Book That Beats the Market for full instructions. In general, purchase 5 to 7 top ranked stocks every 2 months or 7 to 9 top ranked stocks every 3 months. After 9 or 10 months, this should result in a portfolio of 20 to 30 stocks. Sell each stock after holding for one year (for taxable accounts refer to Step-by-step section of the book) and replace with a new pick. Remember, maintaining a diversified portfolio over a long period of time is an integral part of the Magic Formula strategy.