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  1. The Ground Rules
  2. A Model Portfolio
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This chapter is from the book

A Model Portfolio

In the examples used in the following chapters, these five underlying assumptions demonstrate how options work within the conservative framework. These criteria are applied to a model portfolio of ten stocks, which are used in various combinations throughout. This helps to tie together the various examples and range of possible outcomes. This model portfolio is by no means a recommendation of stocks you should own. It was selected to include stocks with some common attributes. Many have increased dividends every year for the past ten years and reported low volatility in trading. Others have exhibited rising market value in recent years. All these stocks have available both listed options and long-term options (LEAPS), enabling you to look at a variety of scenarios for each conservative strategy.

Employing a single portfolio throughout the book is helpful in another way. Not every strategy works well for each stock in the model portfolio, so you can walk through the selection process to demonstrate how a particular strategic decision is made. Although your portfolio may contain a number of excellent value investments, some strategies simply do not work at all times or in all cases. You can compare the different potentials for strategies across a range of stocks by following the model portfolio throughout the explanations in each chapter.

The values of each stock, current bid, and asked value of every option used in this book are based on the closing prices reported by the Chicago Board of Exchange (CBOE) on April 18, 2009. Table 1-1 summarizes this model portfolio.

Table 1-1. Model Portfolio

Stock Name

Trading Symbol

Closing Price*

Caterpillar

CAT

32.29

IBM

IBM

101.27

Johnson & Johnson

JNJ

53.05

Coca-Cola

KO

45.02

McDonald's

MCD

56.09

3M

MMM

53.81

Altria

MO

16.99

United Parcel Service

UPS

54.65

Wal-Mart

WMT

50.20

Exxon Mobil

XOM

66.75

Is this a "conservative" portfolio? That is a matter of opinion—and one that depends on the timing of purchase, long-term goals, and your personal opinion about the fundamentals for each corporation. These ten stocks provide a cross section of stocks that illustrate where strategies work well and where they do not work at all. The actual definition of a conservative portfolio is (and should be) always evolving based on changes in the market, in a stock's market price and volatility, and, of course, in emerging information concerning fundamental strength or weakness of a particular company.

Is this information out of date? The data gathered on the closing date—April 18, 2009—is old, but it would be impossible to perpetually update 10 stocks and still meet the publication date of this book. However, all the information is relative. The values of options for a particular stock will probably be consistent from one period to the next—assuming the proximity between closing price and option strike price is about the same, and that months to go until expiration are the same as well. Although these relationships can and do vary based on ever-changing perceptions about a particular company, the data is valid for the purpose of illustrating strategies. The use of some measurement in time is necessary, and all these stocks were selected and summarized on the same date. Given all these qualifications, these closing prices (and the option values used in this book) are fair and reasonable. As of that same date, April 18, 2009, there were about 2,500 stocks that had options available to trade—a lot of choices for conservative investors.

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