CHAPTER 1
Divergence Coupling
This book will differ some from its predecessor in that I'll needyou to access the Internet while you review the discussion. Let'sstart at http://www.optionarmy.com. Click Command Centerat the top. What opens next has several useful features. We will focuson two. In the left column, clicking Futures tells me of any overnightsurprises before I execute trades. I discussed this in Compound Yield. Forthis book, click Sector & Broad Market Analysis in the right column.This brings up a PerfChart. Below the graph is a list of ticker symbolsreflecting the subsectors of the S&P index. Clear the chart. Now enterUUP, which is an exchange-traded fund (ETF) bullish on the USdollar. Then add FXE, which tracks the euro. Do you see somethingamazing? Presently, in our crazy "stimulus" market, the US dollar andthe euro are exact mirror images. They are exactly reciprocal and inlockstep. When one goes up, the other ETF goes down and vice versa.This is so perfect that it's shocking.
Let's assume UUP to be a perfect company called ABC that willalways pay its dividend of 5 percent. Next imagine that FXE is also aperfect company called XYZ and will never fail to pay its 5 percentdividend. Now we size each to $20,000. Let's assume a share of eitheris $10. Each pays dividend installments on a quarterly basis. A share ofeither pays 12.5 cents every three months. Compound Yield tells us totake profits when a company's value has increased the equivalent of itsannual dividend and then reinvest the profits elsewhere at the same orbetter yield. Here, in this idealized system, every time either ABC orXYZ goes up enough to take profits, we would sell enough shares tofully capture the profit and reinvest in the other stock, back and forth,back and forth. Both have a 12.5-cent quarterly dividend. When wetake profits on ABC, our remaining shares still have the same yield.However, by investing now in XYZ, which went down exactly asmuch as ABC went up, our new shares are cheaper and therefore havea higher yield since the dividend is still 12.5 cents quarterly. When thereverse happens, we then take profits on XYZ. We know automaticallythat ABC went down in lockstep. By trading again, the yield on theremaining XYZ shares is preserved, and our new shares of ABC enjoya higher yield. Again, we are in a perfect system, and there is no failureto pay the owed dividend.
We are optimizing divergence pairings in such a way as to producean incredible cash-generating machine. By repeatedly trading back andforth, the combined value of the two companies stays $40,000. Thereis no lost principal because the stocks can't go down together. Theirmovement is equal and opposite. In essence, all capital gain is convertedto geometrically increasing income because of compounding. Theyield on cost ($40,000) keeps increasing. Also, because ABC and XYZmove reciprocally, we really don't have to care about market direction.The more market volatility there is, the better. Volatility provides thetrading opportunity. The more we trade, the faster our income increasesand the higher the yield on our cost basis.
In fact, let's do a little math. If either ABC or XYZ moved up 1%at some point in any given month, and we consistently executed tradeseach month, in one year's time, between the two positions, we wouldhave 12% more shares, and our average share would be at 12% lesscost. We are not even talking about the compounding effect of month-over-monthtrading. We are just talking about a flat 12% annually.Additionally, we haven't even included reinvesting the dividends comingin. We've just pocketed these. At the end of one year, our 5% dividendyield is now 12% larger at 5.6%; by the end of the second year, 5.6%becomes 6.27%; by the end of the third year, we're at 7.02%; and bythe end of the fourth year, we have 7.86%. Year over year extrapolatesto 8.80%, 9.86%, and then 11% at the end of the seventh year!
This is truly exponential income, and we haven't reinvested anyof our dividend stream. We've accomplished this by focusing onyield and compounding it. If we had reinvested, we would have beencompounding this compounding yield. I could only call this ultimatecompound yield. This is explosive and of profound importance in reachingour retirement income goals and maintaining these throughout ourretirement. You really should be breathless now!
Unfortunately, it's not easy to find great diametric pairs and securitiesthat are perfect in paying the promised dividend. On the other hand,ABC and XYZ aren't raising their dividends with time, and we wouldexpect our real world choices to do so. When a dividend is raised, we'vebeen God blessed as the effect gets magnified. We have been reducingthe overall cost of an individual share and increased our total numberof shares. Every share pays a dividend. You have my permission to blackout now!
By using all of the risk-management techniques taught in CompoundYield, I think we can realistically achieve 70 percent to 80 percent ofour idealized model. For those not already retired, reinvesting dividendsshould massively amplify success. The rest of this book concerns itselfwith achieving near-perfect ultimate yield. As we go, you'll be amazedwith how plan execution simplifies to the point that references tomindless income are neither deceptive nor misnomers. Having readCompound Yield, you know my philosophic and spiritual perspective. Weare accessing here the perfection of what God's universe has to offer usmathematically. All I know is that I greet each trading day with hope,optimism, and conviction. If you are not sitting on the edge of yourseat with your heart palpitating, please close the book. Your time mightbe better spent trying to find some sugar daddy or sugar mama to takecare of you in retirement. Don't count on our government to save youeither: it will be broke.
Now, ready for some more math? Again, Compound Yield focuseson trading when a position has moved the equivalent of one year'sdividend. By doing this and reinvesting elsewhere with the same yield,we essentially doubled that position's return with just one trade in ayear. Growth to Exponential Income takes trading to once a...
