Larry,
In one of the recent posts you mentioned that you use leverage with the COT system. I have a percentage of my assets that I'm willing to risk. Would you be willing to outline the mechanics of your leverage strategy as it pertains to the COT system?

Thanks,
George J

George,

I don’t think I’ve said that I am personally currently using leverage with my COT positions. I’m not. I may have talked about how one could use leverage.

My basic leveraged COT strategy is detailed in Strategy No. 4. The S&P would have to close below its 40 week moving average for that strategy to move to a leveraged position. Currently, the 40 week moving average is at about 1012 – a long way down from where we are now. There are three basic ways you can use leverage – 1. a margin account. 2 . Options 3. leveraged mutual funds like those offered by ProFunds and Rydex.

I think the leveraged funds are the most straight forward way to do it. For example, ProFunds has what they call “Ultra” funds. The Ultra Bear fund seeks daily investment results, before fees and expenses, that correspond to twice (200%) the inverse (opposite) of the daily performance of the S&P 500 Index. So if the S&P went down by 10%, you would expect that fund to go up by about 20%.

If you were following Strategy No. 4 right now, you would be in the Bear fund, which corresponds to 100% the inverse of the S&P and then when the S&P closed below its 40 week moving average you would simply switch to the Ultra Bear fund.

The other leveraged approach you may be referring to is Gary’s system of buying options after earnings season according to the trend established during earnings season. That strategy is detailed and discussed in a thread below this one titled, “New System.”

If you have specific questions on any of the above ways to use leverage, I’ll be happy to answer them.

Larry

I'm sorry when I read that post you mentioned that you could apply leverage to the COT system and produce good results, I guess I misunderstood, I thought you meant you had a mechanical system for using leverage other than strategy 4. My mistake. If I wanted to use leverage with a small portion of my capital would you just suggest using the system in that thread?

Thanks for the help,
George J

George, I hesitate to recommend anything that I haven't done myself. I spent about an hour or so testing it and posted the results. All I can say is that it tested well. However, when you start applying options to anything it is hard to say how well it will do in real time. First of all, transaction costs would be significant on a strategy like that. Also, there are so many factors that can affect option behavior that it is really difficult to make assumptions.

I got to thinking about that thread and some day I ought to test the basic COT strategy using short term options and just rolling them over. Since the COT is on the right side of the market the great majority of the time my instinct tells me that it would test very well. But I would have to include a huge disclaimer that said my option assumptions (whatever they would be) are very likely to be wrong.

Larry