Thursday, December 26, 2013

frisky dogs of the dow

one of the first investment strategies i took seriously was the venerable dogs of the dow strategy. in that strategy one buys equal dollar amounts of stock of the top-ten dividend payers in the dow. this is done at the beginning of the year which is why you might be hearing about it in the media once again. there is at least one variant of this strategy that i also once took seriously: the small dogs of the dow. in the small dogs of the dow one invests in only the 5 lowest priced dogs of the dow. to be sure, i borrowed the appellation for the title of this blog.

now, after being steeped in option selling techniques i would like to propose a new strategy of investing in dow stocks that is based on option metrics: frisky dogs of the dow. in the frisky dogs strategy i select the ten dow stocks with the highest implied volatility percent range (or iv percentile, or iv rank as it is variously known in the haunts i frequent.) iv%r tells you where in last 52 week range the current implied volatility lies. stocks with a high iv%r are more active and usually this is because they have recently sold off, thus they are dogs. 

here is the current list of frisky-dogs listed in small dog order:

my idea is that one should short puts on some or all of these stocks starting in january and roll them from month to month to take advantage of time-decay. at the end of 2014, a new list is generated indicating which stocks are to be added or removed from the portfolio. i would drop the smallest frisky-dog, csco, as it does not pay a good enough premium relative to my commission structure.

happy new year to all.

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