Weekend Reading – Reviewing the Reviews
by Phil - January 1st, 2011 8:28 am
I am still trying to get more bullish.
I was thinking about writing something cute like I resolve to get more bullish but that would be wrong. I try, in my own humble way, to "get" the market right. That means I am not bullish or bearish but Truthish (to further botch Stephen Colbert’s use of the word) and, as Buddah says: "There are only two mistakes one can make along the road to truth; not going all the way, and not starting." Confucious reminds us that there are three methods by which we may learn wisdom: "First, by reflection, which is noblest; Second, by imitation, which is easiest; and third by experience, which is the bitterest."
In that spirit, we will spend the day in reflection so that we are better able to start on that long road to the truth so that we will be better able to imitate the things that will work in the year to come while trying to avoid making mistakes that will give us bitter experiences.
This post is not about me – We had a fantastic year and I’ve already given some outlook for 2011 back on the 19th in that weekend’s "It’s Never too Early to Predict the Future" and our current position is short-term bearish in the Jan-April time-frame, looking for a pullback to at least 1,200 on the S&P and possibly back to 1,150.
After that, we are expecting a return to steady gains but without the irrational exuberance we’re currently experiencing. So no, I am not bearish – I simply think we’ve gotten ahead of ourselves. Since we don’t know where the rally train will stop, we have our "Breakout Defense – 5,000% in 5 Trades or Less" from Dec 11th, which were a set of very bullish, highly levered plays where a little bet can pay off a lot if we simply hold our long-established breakout levels.
How much is "a lot"? Well my GE trade idea, for example, was to sell the 2013 $12.50 puts for $1.10 (net $1.15 in ordinary margin according to TOS) and to use that money to buy the 2012 $17.50/20 bull call spread for .95, which was a net .15 credit on a $2.50 spread that was on the money at the time. GE has gained about .75 since the 11th and…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
Wednesday Worries – Ireland “Fixed” – Who’s Next?
by Phil - December 8th, 2010 8:28 am
So many things are pissing me off today.
I got my political outrage out of the way in my earlier post: "Thanks for the Gas Money, Mr. President," so we don’t need to talk about that again. Ireland, as of 7:45, has not actually voted to accept the EU’s deal, which will pull $20,000 per Irish family directly from national pension funds to pay for the speculative mistakes of Irish Banks. Additionally, the Irish people are being asked to borrow another $75,000 per family from the EU at about 6% interest, also to pay for the speculative mistakes made by the Irish Banks. While this may seem insane – it’s only a drop in the bucket compared to what Americans are spending to bail out our own speculators so why shouldn’t they join the club?
At least Ireland gets to vote for their obligations, we have a Federal Reserve System where a single man, known as "The Bernank" is able to spend what is now heading towards $3.5Tn of OUR MONEY to bail out his banking buddies. That’s $31,818 per American family spent over two years IN ADDITION to the stuff I complained about Obama and our spineless Government spending in the last post.
As I said, things are pissing me off today! I should be in a better mood – we had a fabulous day trading in Member Chat yesterday. In yesterday’s post, I closed with "One last stab at making some bearish profits for us (see Morning Alert)" and you can click on that Alert, which was posted on Seeking Alpha and check out our trade ideas for the $10,000 to $50,000 Portfolio which included (at 7:22 am yesterday) QID Jan $10 calls, which opened at $1.80 and finished at $2 (up 11%), DIA Dec $114 puts, which opened at .80 and finished at $1.33 (up 66%), XRT Jan $44 puts, which opened at .35 and finished at .55 (up 57%), USO Jan $36 puts, which opened at .66 and finished at .90 (up 36%), PCLN weekly $400 puts, which opened at $50 and finished at $1.40 (up 180%) and NFLX Jan $155 puts, which opened at $1.70 and finished at $2.30 (up 35%) but should look much better this morning, where we will exit.
Of course I featured the idea to short NFLX last Thursday…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
Defending Your Portfolio With Dividends – Q4 (Members Only)
by Phil - October 23rd, 2010 7:55 am
In uncertain markets, dividends can give you a critical investing edge.
As you can see from the chart on the left, just mindlessly investing in dividend-paying stocks can give you more than a 2:1 annual advantage in your investments.
Of course, here at PSW, we teach the art of selling options premiums – something that turns virtually any stock into a "dividend" payer. For example, MSFT is only a small, 2% dividend-payer but a fairly solid cash-machine of a stock that we don’t feel is likely to go bankrupt overnight so it makes for a nice safe staple in a long-term portfolio. But MSFT is also a very poorly-run company that hasn’t grown in 20 years but we can make it a much more interesting stock by simply selling covered calls.
For example, in our August edition of Dividend Payers, we looked at MSFT for $24.23 and we sell the Sept $24 calls for .77. This lowered our effective basis to $23.46 and selling the call putus in no special danger – we simply agreed to sell MSFT for $24 on expiration day in September (the 17th).
The stock was called away from us, and we made a .54 profit or 2.3% of our net $23.46 cash investment in less than 30 days. That works out to a 26% annualized ROI and we had an opportunity (as we had expected) to buy the stock again and again at $24 on Oct 4th and 5th and sell the November $24 calls for .90 for a net $23.10 re-entry and ANOTHER 3.8% GAIN if we are called away at $24 or greater on Nov 19th. Doesn’t that beat waiting a whole quarter for your 1% dividend checks?
Of course, you can optimize all this with timing and we favor stocks that are on sale – this is just a very simple example of how our most basic options strategy can drastically boost your annual returns on any stock in your portfolio.
Let’s say you don’t want to mess around with MSFT every month. You could have simply sold the 2012 $22.50s for $4.40 (also suggested in the August post), that dropped your net entry from $24.23 to $19.83 and getting called away at $22.50 would be a profit of 13.5% over 17 months PLUS you would be getting your .52 annual dividend…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
Testy Tuesday – 7.5% or Bust!
by Phil - October 19th, 2010 8:28 am
Wheee, this is fun!
Will our 7.5% lines hold? As I mentioned yesterday, we expected a test of our 7.5% lines at Dow 10,950, S&P 1,160, Nasdaq 2,400, NYSE 7,450 and Russell 690 and we remain TECHNICALLY bullish if we hold them. The Dollar was doing well until about 3am this morning but then turned down sharply – some sort of rumor is driving the market and, of course, heading into the G20 pretty much any comment made by any Central Banking official is blown way out of proportion.
China is likely to raise rates today, making a small concession to the US on their exchange rates but more so to cool off the massive property bubble that is forming in their cities. That may put some downward pressure on commodities without strengthening the dollar – an interesting combo, but one that illustrates how China is becoming more important in the Global marketplace than the US.
If China is raising their lending rate to 5.56% and their deposit rate to 2.5%, they risk attracting even more money, including a reverse carry-trade from the US, when money can be borrowed from the Fed at 0.25% and lent to China for 2.5% giving the trader a 2.25% profit for the year. 2.25% may not sound that sexy, but when it’s done by Investment Banks and other investors who can lever their money 10:1, that’s a 22.5% on their cash. This is how Japan has supported their economy for two decades but it’s hard to imagine what will happen if the US Dollar, which makes up 62% of all money on the planet, starts flowing out of the country in even faster quantities.
We were just discussing investing in foreign countries in Member chat and I warned that this may not be the best time to make that kind of move as the dollar is very possibly bottoming here and transferring US Dollars to another currency risks hitting a reversal that wipes out any interest gains and possibly even some the principal as the Dollar rebounds and you find yourself in the wrong currency at the wrong time.
I guess I should talk about AAPL although we’ve already discussed it in depth in Member Chat but they do seem to have had some kind of earnings and, although very nice – expectations were already a bit high so they…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
Monday – Will APPL Earnings Today Keep Bears at Bay?
by Phil - October 18th, 2010 8:21 am
Am I too bullish?
I know I’ve been making a bearish case last week and I know we put out our first bearish list since April this month but, in reviewing October’s Overbought Eight for Members this weekend we reviewed the week’s picks and I realized that, despite all my griping, we had ended up with 21 bullish trade ideas vs. just 10 bearish ones AND, not only that, but half the bearish bets were quickie trades where we played the drops, like Friday’s DIA and QQQQ puts from the morning Alert that didn’t even last an hour (but made 300% and 200% respectively, so worthwhile, nonetheless).
That’s not very bearish. I had said to Members in last Monday’s Morning Alert: "The critical test levels above 7.5% are Dow 10,950, S&P 1,160, Nasdaq 2,400, NYSE 7,450 and Russell 690- all green for day 2 and that does put us technically bullish if we hold it, even though it’s a BS, low-volume day." and we did hold those lines on Tuesday’s dips to we cashed our first set of shorts and ended up flipping more bullish for the ride up to the 10% lines (Dow 11,220, S&P 1,177, Nas 2,420, NYSE 7,500 and Russell 700), despite out misgivings. When the technicals are very strong, you have to switch off the fundamental side of your brain and go with the flow.
It has been ALL about the dollar and, as we mentioned in this week’s Stock World Weekly, Trichet gave us the word we expected on Tuesday that knocked the dollar down to new lows against the Euro, Pound and Yen, with the dollar index bottoming out at 76 which should, in theory be strong technical support.
So, we have strong technical AND fundamental reasons to expect a dollar bounce and we KNOW that a dollar bounce will knock down commodities and we KNOW that a pullback in commodities will knock down the indexes as the energy and metals sector lead us lower. If we KNOW all this, then we MUST be too bullish, right?
Of course we reached that conclusion on Thursday and this is just a recap as 6 of those 10 bearish trade ideas from last week were from Thursday and Friday with EDZ, QID, QQQQ, SQQQ, QID (again), and DIA all picked short as we tested those 10% lines. We like to…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
POMO Thursday – Bernanke Serves Up Another Round
by Phil - August 19th, 2010 8:29 am
Today we get another round of Permanent Open Market Operations.
POMOs are the Fed’s way of creating additional bank reserves to finance asset purchases and loans for it’s Primary Dealers (the Gang of 12 or, as David Fry calls them, Da Boyz). GS and Co. then turn around and use this money to fuel their bots to buy equities and we believe we saw a little test run of those programs a couple of times this week as we had very irrational, sharp rallies for no particular reason and I had commented to Members, during chat, that it looked like some Bot testing.
Note that in David’s picture, Bernanke is still playing the role of the generous bartender he played in the hit video "Hayek vs. Keynes – An Economic Smackdown." Note this all ends badly for Keynes but WHAT A PARTY!
We made 3 aggressive upside spreads looking for a big finish for the week in yesterday morning’s Alert to Members on SSO, QLD and DDM. Fortunately our timing was good as my call to look for a run once we got past the 10:30 oil inventory report was on the money but then we were very disappointed by the size of the sell-off in the afternoon – even though we were short at that point (we can root for the bulls while betting against them). It’s all about jobs this morning and we need to see less the 450,000 pink slips handed out in the past week to get a little more aggressive.
My prediction in the morning was: "We should get our bottoms with the crude inventories at 10:30 so no hurry on bullish plays, most likely. Selling XOM $60 puts for $1 or more (now .47) on a dip today is a nice play into expirations as you can always roll them along." The XOM puts topped out at .63, so no luck there, but the action (see Davids chart) was right on the money for us:
We took a long play on USO at the bottom that did well (and we took money and ran) and we flipped back to bearish at 1:41 with put plays on IWM and DIA that did nicely into the close. As I had said in the morning post – blissful agnosticism!
8:30 Update: 500,000 jobs lost last week! Ouch!!! Looks like we should have held onto those puts because this is going…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
Pass/Fail Friday – Europe’s Stress Test at High Noon!
by Phil - July 23rd, 2010 8:23 am
What a way to end the week!
The EU has decided to leave us hanging until the last moment as they hold off on releasing their bank stress test results until after the markets close (11:30 EST) which leads me to believe the results may not be good or they wouldn’t be waiting until the markets are closed and then giving investors the weekend to digest the results. If the tests are good, then the US will rally and Asia will rally and the EU would have to gap open on Monday and that would annoy investors over there (kind of like we were annoyed yesterday) but, if the results are bad, then we can drop back to 10,200 or lower and Asia can sell off and they will gap down on Monday but perhaps less of a panic sell-off than if they got hit with the news on a Friday morning.
So, because the results were already delayed and because the ECB has chosen to wait until Friday afternoon – I’m going to have to at least make a small bet that we have a failure. We already hedged the Dow in yesterday’s Member Chat as we weren’t sure of the timing and we wanted to lock in our gains for the week but now let’s look at a nice, profitable way to play a sell-off in the financials.
- FAZ is the 3x Ultra Short ETF on the financials and you can just buy that ETF for $14.62 a share and a 3.3% move down in XLF should translate to a 9% gain to $15.94, not a bad day’s work right there! Thanks to the uncertainty we now have, this trade can be augmented with the sale of the August $14 puts and calls for $2.65 and that drops the net purchase price to $11.97. If XLF finishes below $14, another round of stock would be put to you at $14 for an average entry of $12.99, which is 12% lower than the current price so this trade assumes the financials don’t go UP 4% by August 20th. If FAZ finishes over $14 (.62 lower than it is now) the net return on the $11.97 is 17%, not bad for 3 week’s work….
- Since XLF is also $14.45, we can also have some math fun. In theory, XLF should move 1/3 of what FAZ moves so for XLF
…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
9 Fabulous Dow Plays Plus A Chip Shot (Members Only)
by Phil - July 7th, 2010 7:24 am
We were discussing what to invest in in a terrible market this morning in Member Chat.
I thought it would be handy to add this post to our Buy List because 9 of my 10 picks below are Dow components and there are very easy ways to hedge our Dow purchases against disaster so it will be a good opportunity to construct a self-contained portfolio filled with dividend-paying stocks that are suitable for a long-term retirement account that we can buy using our discount strategy.
Let’s say we allocate $5,000 to each of these positions and we intend to buy $2,500 in the first round and hold $2,500 on the side in cash, in case the Dow does fall more than 20% and the majority of our stocks are put to us in a second round. In the below list, XOM and WMT are more expensive but others are less so you can buy 100 of the big boys (price-wise) and see what’s left or allocate a double helping for those two, so you’d be buying 100 shares for about $4,000 a block (after our discount) and hold back $4,000 on those two.
This is acceptable because we do have $50K in cash sitting around and A) We don’t really believe the Dow is falling below 8,000 B) When the stock is put to us our margin requirement will only be about $25K (assuming 50% margin for stocks held) as our short puts will be gone C) We will have a disaster hedge. On all of these plays, the upside is at least 25% so that’s also our built-in cushion, all the way to Dow 7,307 so we really only need our protection to kick in below 8,000.
Aside from our weekend 500% DXD disaster hedge, which is perfect to cover this group, we can do a very simple, margin-free hedge like the DIA 2012 $95/80 bear call spread for $5.50, which pays $15 if the Dow is below 8,000 in Jan 2012. So $5,500 put into this play returns $15,000, offering us an additional 20% downside protection, now down to Dow 5,845. If that seems silly to you (it does to me) then a $2,500 hedge that gives us an additional 10% downside protection would seem to be plenty.
Once we have that hedge in place, we can aim to make it free by selling puts. To make up $2,500 over 18…
Email This Post
del.icio.us
Digg
Reddit
Stumble
Yahoo
BlinkBits
BlinkList
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(