Let's put this information under the topic of making more money. Well, that's a big surprise, I can hear you commenting. Like all the other messages and blogs are about something different. This is a good time of the year, historically and histrionically. It proves out most every year---except 1997, drats.
There is a tendency for the stock market, and several stocks within the market to a higher degree, to move up at the end of the year. How to play this movement? We'll get to that in a moment. First though, just what is a Santa Claus Rally? Well, you think long and hard and realize it must have something to do with Christmas. And for the most part you would be right on. There is no technical definition of this phenomenon, but there are several ideas that bring it to life. Some say it is the last five trading days of the current year and the first two trading days of the new year. That's close enough.
I think it's a bit longer. My Santa Claus is a little chubbier. It starts earlier, say after the December expiration date, or third Friday, and goes deeper into January. If fact it runs into the January Effect.
If you get into a position on Dec. 23rd instead of Dec. 27th, it's usually no big deal. It is a bullish trade, either in stocks or in options. To add to this you can trade positions that have a higher likelihood of moving in this time period. Stocks like the retail stores, online selling services, gift companies. I'll add to this stocks getting ready to participate in the January Effect.
See the next blog called the January Effect. That will add gravitas to this blog.
Here are some potential things you can do:
1) Check the news. How is shopping going? What was Black Friday like (this year it was awesome); Local Saturday (it was also really good; and Cyber Monday---another homerun.
2) How about sales the rest of December? Great so far.
3) What is the market like? It's range bound. Can it be played? It can and it is. Play the DIA options as they near support and resistance levels.
NOTE: Many options now trade weekly. The DIA (ETFs) have an expiration date for Dec. 29th, as well as the regular option expiration date in January. Some have already traded it once.
4) Do short term in-and-out plays, ROSS Stores (ROST) has been good. There is a lot of life left in this stock.
5) Look for stocks with large swings between support and resistance. Check out LULU, NGLS and now ROST. Choose carefully. Probably slightly in-the-money options are the way to go. Don't get greedy. A quick .50 cents on ten contracts is $500.
6) Consider all the news. I think the blog I wrote called Picturesque is one of the most important articles I've ever written.
Look at the whole picture. Give your stock a chance to work.
7) There are so many great covered calls stocks right now. I'll be putting on a January list by Monday.
8) Survey after survey, analysis after analysis, point to the fact that there are bargains everywhere. Stocks are trading at incredible P/E ratios. Also, many stocks are trading at great book values. For example: MSFT could be at $75 and it would seem normal./ Berkshire-Hathaway ($117,600 per share---and a good bell weather stock for all of America) could be at $250,000 per share and it would be still at a good P/E ratio. There are hundreds of others.
NOTE: Again, read the upcoming blog on the January Effect.
One last thing about the Santa Claus Rally. It's usually followed by a very good January, some think it's the best month of the year. I agree, pending other global news.
That's it for now. Let's all get ready for a great and prosperous New Year.
Wade
Tuesday, December 27, 2011
THE JANUARY EFFECT
I have a particular affectation for the January Effect. It is a good time to be alive. Let me share a few ideas of why human spirits soar and this phenomenon is often followed by a soaring of economic activity, including but not limited to the Stock Market. Here goes:
1) The old year is gone. If you had a bad year, you look forward to a better year. If you had a good year, for optimists it can only get better. Many people right now are looking forward to the new year. Hope and Change spring eternal.
2) Many big funds and pensions start to rebalance their portfolios at the end of the year. They go to cash (which started just before Oct. 31st) and start purchasing better stocks.
3) Here's a comical irony. The big guys want to get in the market in advance of the little guys---you and me. Don't we usually think it is the other way around? We, the little guys, are trying to figure out where the big money is going. Point: at the end of December and in January there is a lot of positioning and re-balancing.
4) There is a flood of new money, well . . . flooding the market in January. Some of this is from the aforementioned move from cash to equity positions. Most is from an event which happens every year. It is the new cash that goes into IRAs, 401Ks, pension plans, etc. Think of this. Most corporate plans max out in the previous summer. Now, people have new freed-up donations to their plans and they want to put it to work as soon as they can. This is huge. Consider your own situation. Do you wait for April 14th of 2013 to make your 2012 contribution to your IRA or do you make it on January 2nd of 2012? Get it in early. Why not pick up another year of tax-free growth?
5) January is the month of the ultimate "Earnings Season." It's the year end. If the year has been profitable and the companies are doing well, it should be good. Well, my opinion is that companies have become lean and mean. They have billions of dollars, and in spite of our current government's bias against profits, growth and businsss, many businesses and investments have excelled anyway. One man cannot hold back our free-enterprise system for long.
"IF THERE'S A WAY, TAKE IT; IF NOT, MAKE IT."
6) This year is also different. Companies have investment capital for acquisitions, expansion and organic growth. And their multiples are incredible. Some say, and I agree, this is one of the best times for picking up great companies' stocks that we've seen in over 80 years.
7) And the best January Effect of all is me. I'm here, ready to analyze, figure-out and plan a great month. I hope to hear from you as you "GROW OUT OF YOUR PROBLEMS!"
H A P P Y N E W Y E A R
1) The old year is gone. If you had a bad year, you look forward to a better year. If you had a good year, for optimists it can only get better. Many people right now are looking forward to the new year. Hope and Change spring eternal.
2) Many big funds and pensions start to rebalance their portfolios at the end of the year. They go to cash (which started just before Oct. 31st) and start purchasing better stocks.
3) Here's a comical irony. The big guys want to get in the market in advance of the little guys---you and me. Don't we usually think it is the other way around? We, the little guys, are trying to figure out where the big money is going. Point: at the end of December and in January there is a lot of positioning and re-balancing.
4) There is a flood of new money, well . . . flooding the market in January. Some of this is from the aforementioned move from cash to equity positions. Most is from an event which happens every year. It is the new cash that goes into IRAs, 401Ks, pension plans, etc. Think of this. Most corporate plans max out in the previous summer. Now, people have new freed-up donations to their plans and they want to put it to work as soon as they can. This is huge. Consider your own situation. Do you wait for April 14th of 2013 to make your 2012 contribution to your IRA or do you make it on January 2nd of 2012? Get it in early. Why not pick up another year of tax-free growth?
5) January is the month of the ultimate "Earnings Season." It's the year end. If the year has been profitable and the companies are doing well, it should be good. Well, my opinion is that companies have become lean and mean. They have billions of dollars, and in spite of our current government's bias against profits, growth and businsss, many businesses and investments have excelled anyway. One man cannot hold back our free-enterprise system for long.
"IF THERE'S A WAY, TAKE IT; IF NOT, MAKE IT."
6) This year is also different. Companies have investment capital for acquisitions, expansion and organic growth. And their multiples are incredible. Some say, and I agree, this is one of the best times for picking up great companies' stocks that we've seen in over 80 years.
7) And the best January Effect of all is me. I'm here, ready to analyze, figure-out and plan a great month. I hope to hear from you as you "GROW OUT OF YOUR PROBLEMS!"
H A P P Y N E W Y E A R
Monday, December 19, 2011
Cash Flow in December
CASH FLOW IN DECEMBER
What a great time of year to make a few short, quick turn trades in the market. No money does not grow on Christmas Trees, but almost every year there is a Santa Clause rally. I won't go into all of the reasons here. I've studied it for years and except 1997, there has been a rally or at least an upturn into the end of the year. Many people (including the big institutions) want to get there money in before January, which is historically the best month of the year.
I'm still looking at the Dow, playing the ETF, the DIA. Again, it trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA is at $119 plus pennies. It is a actual stock. This fund (not a mutual fund) owns all of the stocks in the DJIA, or Dow Jones Industrial Average---made up of 30 stocks in blue chip companies.
The stock trades in one dollar increments on the strike prices. So you can do straight option trades, spreads, covered calls, etc. Let's look at a few straight option trades. Options are risky with a great reward if you're right, and losses if you're wrong. Work out your trade-suitability with your own broker.
One more point before I speak of the Actual Trade. Options historically all expired on the third Friday of the month. Some no have expiration dates every other week. Some larger stocks even now have weekly options. I think these all need to be practiced traded with paper-money, before you put real money in harms way. Do they have the same open-interest? How do they perform? I think they are probably like typical options, but we need to learn more.
Look at the DIA $118, $118 and $120 strike price calls for January, the ones which expire on the 21st.
Jan DIA $118 calls: $3.35 x $3.45
Jan DIA $120 calls: $2.18 x $2.20
Now look at the same strike prices which expire on December 30th.
Dec 30th DIA $118 calls: $2.09 x $2.16
Dec 30th DIA $120 calls: $1.04 x $1.07
You can quickly see how much that extra two weeks cost. Also, while January may be a good month, usually, it will be there when these shorter options play out. Each strike price has its advantages and disadvantages. I've spent many blogs explaining this time value, and buying in-the-money options versus out-of-the-money options.
THE TRADE
Once again, several factors are important. One is where the Dow stands in its own range. I think the short term range is 11,800 (11,600 would be really good support) and about 12,200 (12,400 or 12,600 would be a high short term resistance).
Tomorrow AM, and any AM for that matter, you watch CNBC, or any news channel and watch if they have the Dow Futures. If the futures show up or down about 100 points, then it could be a good play. Read my previous blogs where I explained the 100 point move, up or down, might equal a .50 cent profit in the option. If the futures don't show this, then wait. There will be another day.
For example, if the Dec. 30 $119 calls are $1.20, 10 contracts would cost $1,200. Now if one day the Dow moves 100 points, and assuming you got in at a good time, you could make .40 to .50 cents on that move. Your $1,200 could be $1,600 to $1,700 in a day, or even an hour. Yes, there could be news to spoil the move, but right now the option are out two weeks, it has time to work. If you are worried, and want more time, maybe buy the Jan. $120 calls.
One point is to get your sell order in, right when you make the purchase. And a stop loss at about 50% of the option price. $1.20 purchase, would put the protective stop loss on the option at .50 to .60 cents. Cut your losers and let the winners work.
One last point: You could make a lot more money by getting in the day before, but that presents a whole new aspect of figuring out which way the wind will blow. More profits, but more risk.
Wade
What a great time of year to make a few short, quick turn trades in the market. No money does not grow on Christmas Trees, but almost every year there is a Santa Clause rally. I won't go into all of the reasons here. I've studied it for years and except 1997, there has been a rally or at least an upturn into the end of the year. Many people (including the big institutions) want to get there money in before January, which is historically the best month of the year.
I'm still looking at the Dow, playing the ETF, the DIA. Again, it trades at 1/100 of the Dow. If the Dow is at 11,900, the DIA is at $119 plus pennies. It is a actual stock. This fund (not a mutual fund) owns all of the stocks in the DJIA, or Dow Jones Industrial Average---made up of 30 stocks in blue chip companies.
The stock trades in one dollar increments on the strike prices. So you can do straight option trades, spreads, covered calls, etc. Let's look at a few straight option trades. Options are risky with a great reward if you're right, and losses if you're wrong. Work out your trade-suitability with your own broker.
One more point before I speak of the Actual Trade. Options historically all expired on the third Friday of the month. Some no have expiration dates every other week. Some larger stocks even now have weekly options. I think these all need to be practiced traded with paper-money, before you put real money in harms way. Do they have the same open-interest? How do they perform? I think they are probably like typical options, but we need to learn more.
Look at the DIA $118, $118 and $120 strike price calls for January, the ones which expire on the 21st.
Jan DIA $118 calls: $3.35 x $3.45
Jan DIA $120 calls: $2.18 x $2.20
Now look at the same strike prices which expire on December 30th.
Dec 30th DIA $118 calls: $2.09 x $2.16
Dec 30th DIA $120 calls: $1.04 x $1.07
You can quickly see how much that extra two weeks cost. Also, while January may be a good month, usually, it will be there when these shorter options play out. Each strike price has its advantages and disadvantages. I've spent many blogs explaining this time value, and buying in-the-money options versus out-of-the-money options.
THE TRADE
Once again, several factors are important. One is where the Dow stands in its own range. I think the short term range is 11,800 (11,600 would be really good support) and about 12,200 (12,400 or 12,600 would be a high short term resistance).
Tomorrow AM, and any AM for that matter, you watch CNBC, or any news channel and watch if they have the Dow Futures. If the futures show up or down about 100 points, then it could be a good play. Read my previous blogs where I explained the 100 point move, up or down, might equal a .50 cent profit in the option. If the futures don't show this, then wait. There will be another day.
For example, if the Dec. 30 $119 calls are $1.20, 10 contracts would cost $1,200. Now if one day the Dow moves 100 points, and assuming you got in at a good time, you could make .40 to .50 cents on that move. Your $1,200 could be $1,600 to $1,700 in a day, or even an hour. Yes, there could be news to spoil the move, but right now the option are out two weeks, it has time to work. If you are worried, and want more time, maybe buy the Jan. $120 calls.
One point is to get your sell order in, right when you make the purchase. And a stop loss at about 50% of the option price. $1.20 purchase, would put the protective stop loss on the option at .50 to .60 cents. Cut your losers and let the winners work.
One last point: You could make a lot more money by getting in the day before, but that presents a whole new aspect of figuring out which way the wind will blow. More profits, but more risk.
Wade
Monday, December 12, 2011
DIA UPDATE
CASH-FLOW ON STRAIGHT OPTIONS: PLAYING THE WHOLE MARKET
Please allow me to update you on a straight option trade. Options are risky, but the reward is comensurate with the risk.
Lately, I've been studying the option movement---almost intra-day---on the whole market, this time defined as the Dow Jones Industrial Average. It trades as an ETF (Exchange Traded Fund), which is actually a stock and trades like a stock, not a mutual fund. This ETF has $1 incremental strike prices. If the Dow is at 11,980, the ETF will be about $119.80 +/-.
Here's my observation: If the Dow futures are showing up 40 points, I've observed that the Dow will actually go up two to three times that amount. If it is showing down 80 points, as in -80, before the market opens, it will close down about 160 to 240 points. I've observed about 4 to 5 days in the last month when this has now panned out. It's not fool-proof, but it's a good indicator, and it's worthy of more study.
Here's my contention. If you play an option near-the-money (For example if the Dow is at 12,140, you play the $121 or the $122 calls), and you have a few weeks to expiration (this week is expiration, so we have to be careful), then the option will go up about .50 cents for each 100 point move in the Dow. If what I'm observing is true, this is a very important discovery.
Let's look at today for example. Before the market opened the Dow Futures were showing down 120. It was very erratic, bouncing all around, but when the market opened it was right about there. I projected the market would close down about 200 to 240 points. It was there much of the day, and finally closed down about 170 points. If one would have bought the puts (playing the down-side), and purchased the $120 strike price for $1.22 (They opened at $1.60), one could have sold them for $2.04. That's an intra-day trade of about an $800 profit. This is for a few hours. That's $1,220 to $2,040. Now, these are opening and closing prices. If you would have gotten out about 12:30 PM, you would have sold them for $2.30, or $2,300, not $2,040.
One point that is important to consider, and one I've made repeatedly, is to give the trade space to work. For example, if the Dow is showing up or down about 20 points, and the projection is a 40 point move, that may not be enough to even make .50 cents, on my 100 points=.50 cents in the option. See? And the last point, is the regular news. It seems that most of the good and bad news and all the commentary about the news, is already built into the expectation of the opening, or the Futures. The change however may come from news made during the day, and we have plenty of that. So, be careful, there is a lot of risk here. This is a great strategy to paper trade.
Please allow me to update you on a straight option trade. Options are risky, but the reward is comensurate with the risk.
Lately, I've been studying the option movement---almost intra-day---on the whole market, this time defined as the Dow Jones Industrial Average. It trades as an ETF (Exchange Traded Fund), which is actually a stock and trades like a stock, not a mutual fund. This ETF has $1 incremental strike prices. If the Dow is at 11,980, the ETF will be about $119.80 +/-.
Here's my observation: If the Dow futures are showing up 40 points, I've observed that the Dow will actually go up two to three times that amount. If it is showing down 80 points, as in -80, before the market opens, it will close down about 160 to 240 points. I've observed about 4 to 5 days in the last month when this has now panned out. It's not fool-proof, but it's a good indicator, and it's worthy of more study.
Here's my contention. If you play an option near-the-money (For example if the Dow is at 12,140, you play the $121 or the $122 calls), and you have a few weeks to expiration (this week is expiration, so we have to be careful), then the option will go up about .50 cents for each 100 point move in the Dow. If what I'm observing is true, this is a very important discovery.
Let's look at today for example. Before the market opened the Dow Futures were showing down 120. It was very erratic, bouncing all around, but when the market opened it was right about there. I projected the market would close down about 200 to 240 points. It was there much of the day, and finally closed down about 170 points. If one would have bought the puts (playing the down-side), and purchased the $120 strike price for $1.22 (They opened at $1.60), one could have sold them for $2.04. That's an intra-day trade of about an $800 profit. This is for a few hours. That's $1,220 to $2,040. Now, these are opening and closing prices. If you would have gotten out about 12:30 PM, you would have sold them for $2.30, or $2,300, not $2,040.
One point that is important to consider, and one I've made repeatedly, is to give the trade space to work. For example, if the Dow is showing up or down about 20 points, and the projection is a 40 point move, that may not be enough to even make .50 cents, on my 100 points=.50 cents in the option. See? And the last point, is the regular news. It seems that most of the good and bad news and all the commentary about the news, is already built into the expectation of the opening, or the Futures. The change however may come from news made during the day, and we have plenty of that. So, be careful, there is a lot of risk here. This is a great strategy to paper trade.
Thursday, December 8, 2011
STOCK SPLITS AND ROSS STORES
I wanted to update my thoughts on the projected moves of the next week or so. Ross Stores (Ticker Symbol: ROST) is doing their 2:1 stock split next week, Dec. 15th. That may change because not many stock splits are on a Thursday. But Friday is option expiration and maybe they wanted to avoid the same date.
Anyway, I felt that the stock could go to $100. That is still a possibility. However, when I looked at a chart of the past few months, I noticed it had a tough time with $90. Twice it peaked slightly above that price and then backed off.
I encouraged others to buy the $90 calls, and that proved to be a good trade. Ironically, that is still the price that I feel most comfortable with---and the $92.50s. The past few days it's stayed above $90, and punch up over $93. I would have loved to have seen it over $95, and even $100 before now. Yes, it looks like it's in a rolling pattern, but not much of one.
It still has the other great news: a) great earnings; b) the stock split; c) Christmas and the Santa Clause Rally; and d) the Dividend on the 29th. All this is good. However, there is the weak economy as a backdrop and the Euro Crisis looming (there is supposed to be some big announcement [after a multi-country powwow] this Friday), so who knows?
My feelings are that it will move up slightly and then hold or back off slightly. Kind of like a bird taking off into flight, going in stages. So, let me make a projection. It will move to about $94.50 or $95 in the next day or so. Hold, and back off to about the high $93s or low $94s. Then the next up move will be to $96 and then maybe higher following the same hold and back off scenario.
So, I'm changing the option buy and hold to buy and sell quickly. I now think it best to sell the option and then buy back in at the next dip. For example: If the stock moves up to $94 or $95 quickly, then sell the $92.50s, the $95s and/or any other that you hold. Discuss this with your broker. Maybe he/she can set an alert to notify you if it hits those prices. Then if it backs off for a day or so, get back in---depending on the level, let's assume $94, then consider jumping back in.
One thing this type of trading will do, is get some of your money off the table. This takes more time, but it can be worth it. Also, wait and watch next week as we explain Stock Split Strategy 4B, which is the rally into the split. That should be a good time. Look at the charts again, and see what they tell you. It's about ranges and timing.
Wade
Anyway, I felt that the stock could go to $100. That is still a possibility. However, when I looked at a chart of the past few months, I noticed it had a tough time with $90. Twice it peaked slightly above that price and then backed off.
I encouraged others to buy the $90 calls, and that proved to be a good trade. Ironically, that is still the price that I feel most comfortable with---and the $92.50s. The past few days it's stayed above $90, and punch up over $93. I would have loved to have seen it over $95, and even $100 before now. Yes, it looks like it's in a rolling pattern, but not much of one.
It still has the other great news: a) great earnings; b) the stock split; c) Christmas and the Santa Clause Rally; and d) the Dividend on the 29th. All this is good. However, there is the weak economy as a backdrop and the Euro Crisis looming (there is supposed to be some big announcement [after a multi-country powwow] this Friday), so who knows?
My feelings are that it will move up slightly and then hold or back off slightly. Kind of like a bird taking off into flight, going in stages. So, let me make a projection. It will move to about $94.50 or $95 in the next day or so. Hold, and back off to about the high $93s or low $94s. Then the next up move will be to $96 and then maybe higher following the same hold and back off scenario.
So, I'm changing the option buy and hold to buy and sell quickly. I now think it best to sell the option and then buy back in at the next dip. For example: If the stock moves up to $94 or $95 quickly, then sell the $92.50s, the $95s and/or any other that you hold. Discuss this with your broker. Maybe he/she can set an alert to notify you if it hits those prices. Then if it backs off for a day or so, get back in---depending on the level, let's assume $94, then consider jumping back in.
One thing this type of trading will do, is get some of your money off the table. This takes more time, but it can be worth it. Also, wait and watch next week as we explain Stock Split Strategy 4B, which is the rally into the split. That should be a good time. Look at the charts again, and see what they tell you. It's about ranges and timing.
Wade
Tuesday, December 6, 2011
FOLLOW UP - SUCCESSFUL TRADES
I just reread the blog on making successful trades, and I had a few other ideas for you. Some of these will be by the way of market maxims, others observations I've made recently and over the years.
1) There is an old market saying that is as true today as it ever has been. It is this: "Buy on rumors, sell on fact (news). There are many things that drive a stock, the most common being earnings---or better said, the "anticipation of earnings," both good or bad. See #3.
2) One observation is how the stock moves into an earnings announcement. Remember, just before the announcement, the company is in a "quiet period," or what I call the "red-light" period. This simply means no news---at least, no news from the company. Pundits, analysts, and other news reporters, are free to say whatever they want. So I watch and learn, trying to connect the dots, and then I share that info with you.
I can't prove these exact numbers, but it seems to me that about 80% to 90% of the time that a company makes an earnings announcement---whether it was going up, staying flat, or going down, into the announcement, the stock will back off and go down because the news is out. The rumors were true or not. The stock usually goes down. Sometimes not by a lot, but if you're playing options, and the earnings are near an expiration date, it could be disastrous for your option trade---because they are so time sensitive.
Also, much of the time, it's not about the actual numbers, but the commentary about the numbers. This is where the company makes "guidance" remarks about their future earnings, etc. One of the et ceteras is very important, and that is if the company makes other good announcements at the same time---like, a new dividend, or an increase in the dividend; a stock split or a share buyback; or maybe expansion plans, or the resolution of a lawsuit. This is why it is so important to read the whole news article, and seek info from many sources. I like briefing.com. YahooFinance.com is also very good. There are others.
I try to bring you info, but my comments are limited to the stocks that are currently in the basket of student trades.
3) In the stock market, news is everything. Nothing happens without the news. But as I stated in #2, the commentary about the news is also important. News goes into and out of the red-light, green-light period. The timing is set. However, there is one thing you can do: Figure out when the board of directors meets. Nothing happens until they meet. Yes, it could be by phone, but the list I made above are board decisions. You can call the company and ask them. Ask for the share-holder relations department. They will tell you when the next shareholder meeting is, but that's not what you want. You want: "When is the next board of directors meeting?" You still won't know what they will say or do, but know this: Nothing happens until they do.
4) Rick Santelli (The father of the Tea Party Movement) said this is reference to ongoing news: " . . . good news, but not nearly as good news as the headline shock value." There's a lot to this. Think hard on these words.
5) Last, I want to remind you to not get involved in a trade until you are ready. You should paper-trade extensively. Then when you are so excited---meaning the stars are aligned---that you can't wait, then go ahead (under the direction of your broker). Keep in mind the saying from my books: "I'd rather want what I don't have, then have what I don't want."
H A P P Y I N V E S T I N G ! Thought for the day: "If there's a way, take it; if not, make it."
1) There is an old market saying that is as true today as it ever has been. It is this: "Buy on rumors, sell on fact (news). There are many things that drive a stock, the most common being earnings---or better said, the "anticipation of earnings," both good or bad. See #3.
2) One observation is how the stock moves into an earnings announcement. Remember, just before the announcement, the company is in a "quiet period," or what I call the "red-light" period. This simply means no news---at least, no news from the company. Pundits, analysts, and other news reporters, are free to say whatever they want. So I watch and learn, trying to connect the dots, and then I share that info with you.
I can't prove these exact numbers, but it seems to me that about 80% to 90% of the time that a company makes an earnings announcement---whether it was going up, staying flat, or going down, into the announcement, the stock will back off and go down because the news is out. The rumors were true or not. The stock usually goes down. Sometimes not by a lot, but if you're playing options, and the earnings are near an expiration date, it could be disastrous for your option trade---because they are so time sensitive.
Also, much of the time, it's not about the actual numbers, but the commentary about the numbers. This is where the company makes "guidance" remarks about their future earnings, etc. One of the et ceteras is very important, and that is if the company makes other good announcements at the same time---like, a new dividend, or an increase in the dividend; a stock split or a share buyback; or maybe expansion plans, or the resolution of a lawsuit. This is why it is so important to read the whole news article, and seek info from many sources. I like briefing.com. YahooFinance.com is also very good. There are others.
I try to bring you info, but my comments are limited to the stocks that are currently in the basket of student trades.
3) In the stock market, news is everything. Nothing happens without the news. But as I stated in #2, the commentary about the news is also important. News goes into and out of the red-light, green-light period. The timing is set. However, there is one thing you can do: Figure out when the board of directors meets. Nothing happens until they meet. Yes, it could be by phone, but the list I made above are board decisions. You can call the company and ask them. Ask for the share-holder relations department. They will tell you when the next shareholder meeting is, but that's not what you want. You want: "When is the next board of directors meeting?" You still won't know what they will say or do, but know this: Nothing happens until they do.
4) Rick Santelli (The father of the Tea Party Movement) said this is reference to ongoing news: " . . . good news, but not nearly as good news as the headline shock value." There's a lot to this. Think hard on these words.
5) Last, I want to remind you to not get involved in a trade until you are ready. You should paper-trade extensively. Then when you are so excited---meaning the stars are aligned---that you can't wait, then go ahead (under the direction of your broker). Keep in mind the saying from my books: "I'd rather want what I don't have, then have what I don't want."
H A P P Y I N V E S T I N G ! Thought for the day: "If there's a way, take it; if not, make it."
REASONS FOR TRADE SUCCESS
STOCK MARKET CASH FLOW
Straight option plays have a very high rate of risk. Very few people make consistent money at straight option plays---as compared to writing covered calls. Lately though, I've seen a number of students do really well. Some are several trades profitable without hardly a losing trade. I've been trying to analyze this and have come up with a few observations. I will make a list, but that is a strange way to explain this. Let me explain why the explanation is difficult. I think successful option trading is more of an art than a science. Yes, you gather all the information, but much of it comes down to gut feelings. So, even though I'll make the list to keep things organized, please feel free to think outside of the box.
These trades stretch back to last summer. Primarily they have been on the LULU stock split, then on the DIA (trading the movement of the whole market), and now on Ross Stores (ROST). They have been inordinately successful, generating a lot of cash flow. You can read all of these trades in previous blogs.
2) EVENTS: Do you have a specific event you're using to move your stock? Call it a "Compelling Reason," or an "Other Motivating Factor," or a "Forklift"---it is the cause behind the movement. Now check your event against all that I wrote in #1 above and question it thoroughly. Time to work? Strong enough to be real? Clear and workable strike price?
Speaking of the STARs, let me share the system we use to explain a trade. Let it be known that we can't get the info on all of our student trades in time to share all of it before the trade is entered. However there should be enough information to help you make similar trades. We use the STAR as an acronym. Read the summary at the end of this.
S. The Scenario in the market. What's the storyline? What's going on with a particular stock
and what's going on in the sector, the whole market, and even the economy. Why do this
trade now?
T. The Technique to be used. Is it a covered call; A Bull Put Spread; A straight option, a stock
split, or a spin-off?
A. The Actual trade. What we paid for the option or the stock, then what did we take in for
selling the option if it is a covered call trade.
R. The Results. Either the expected results---and this may change as the trade matures---and/or
the actual results achieved---win or lose. And if appropriate the lessons learned---good or bad.
SUMMARY
I suggest that if you use this S.T.A.R. system in your own trades---after watching us use it for educational purposes---that your trades will go better. In fact, by thinking it through---especially the exit point, or expected profits---it will cause you to rethink many trades and not enter trades that will do harm with little upside potential. All of the above is designed to help you think more clearly, taking into account numerous points, and help you connect the dots better.
Let's return to the first part of this article, we've come full-circle. If I could make a 3 or 4 point list and say if you just do these things in order, all well go well, I would do so. But it doesn't exist. If it did, everyone would follow it and get rich. Many people think that some black box exists. A little inside secret or methodology that works everytime. Sorry. It comes down to the art of the deal. "The Art of the Deal" is a book by Donald Trump. I haven't read it but I know exactly what he is talking about. Sad, but most people will never get it. It comes down to using all the science you can gather, then turning it into an art. And you'll never be a great painter or artist or cash flow expert without starting and learning and growing as you go.
"LEARN TO MAKE CORRECTABLE DECISIONS, NOT JUST CORRECT DECISIONS."
Straight option plays have a very high rate of risk. Very few people make consistent money at straight option plays---as compared to writing covered calls. Lately though, I've seen a number of students do really well. Some are several trades profitable without hardly a losing trade. I've been trying to analyze this and have come up with a few observations. I will make a list, but that is a strange way to explain this. Let me explain why the explanation is difficult. I think successful option trading is more of an art than a science. Yes, you gather all the information, but much of it comes down to gut feelings. So, even though I'll make the list to keep things organized, please feel free to think outside of the box.
These trades stretch back to last summer. Primarily they have been on the LULU stock split, then on the DIA (trading the movement of the whole market), and now on Ross Stores (ROST). They have been inordinately successful, generating a lot of cash flow. You can read all of these trades in previous blogs.
Here are the three things that need explaining: (1) KNOW YOUR EXIT; (2) THE FORKLIFT; and (3) USE A SPECIFIC FORMULA. These three are the perfect storm of a cash flow system.
(1) EXIT POINTS: From my earliest days teaching real estate and stock market seminars I've opinionated how important it is to know your exit before you go in the entrance. In fact one should never go in the entrance without knowing the exit. So let me explain this in everyday working knowledge that Molly, Fiona, and Fred have used.
- They used either a set point on the option to exit the trade, or a price of the stock. For example, Molly just traded the Jan $50 calls on a deep dip on LULU. It backed off $6, almost $7 on their earnings announcement. I've taught, "Don't just read the headlines." The news writers always go for the shock treatment. Read the details. Lululemon Athletica sells high-end yoga wear for women. They're now also selling young girls dance wear. The whole article said that their main problem is they can't supply their stores well enough. What a great problem to have. Sales would be up if their stores had more inventory. Molly jumped in on the slam, and bought the Jan $50 calls for $1.28 (ten contracts), for $1,280 and sold them the next day for $3.40, or $3,400, netting $2,120. Do you see the specific reason she got in? Now, by looking at the chart, she realized the stock may go up to $55 or so, which seems to be the resistance level as of late. So, she didn't get greedy and took her profits off the table. The forklift did its job. There will be another trade on another day.
- The same has been happening with trading the Dow---or the ETF, ticker symbol DIA. Look at the charts, and you'll see a definite trading range. In fact, I think the Dow is stuck in a trading range---11,600 on the support (though it did break below that for a day or so), and 12,200 (maybe up to 12,600) on the resistance. Write it down. Buy calls when low, sell them on the rise and buy puts on the downturn. This is an easy strategy to paper-trade, or simulation trade. Learn and Earn.
- Next, don't exceed expectations. Choose the right strike price. I firmly believe you should enter straight option trades with a chance at a triple, or 300%. Rarely do we ever achieve this level of profit, but we enter the trade with that possibility---meaning that the stock/option has a chance to make it and the time to make it to the point you desire. Within this scenario, the time speaks for itself. It's the "chance" that is the hard part. How good is the news? Where does it stand on the chart? What direction is it heading (check the stochastics)? What is the whole market doing?
- Check the Delta, the relationship of the Stock movement to the Option movement. Now, I would like to introduce you to a new topic. I've covered it before but not in these blogs. It's called the Percent to Double. It's often the heading of a column that many brokers have to help them and you make better decisions. It's listed as %Dbl. What this means is the percentage the stock has to move for you to double your money on your options. Example: Let's say you're trading the Dow, as in the DIA. It's at 119 (meaning the Dow is at 11,900) and the $120 calls are going for $2.20. The Dow would have to move up about 3% or about 400 points for your option to double to $4.40. Can it do so? Of course, if the timing is right. What if it's been struggling with 11,900, or 12,000? What if the news about housing, unemployment or the Euro is all bad? Yes it's possible, but improbable. Nevertheless, it doesn't have to move that much for you to be profitable. Point: You don't have to get a double to be profitable. Remember your expectations, your exit point. I still think the Dow movement of 100 points means about a .50 cent move in the options. Is a $500 profit good on $2,200 (ten contracts at $2.20 each) for a day of two, or even an hour or two? I say, "YEP!!!" The Dow has to only move up 100 points.
2) EVENTS: Do you have a specific event you're using to move your stock? Call it a "Compelling Reason," or an "Other Motivating Factor," or a "Forklift"---it is the cause behind the movement. Now check your event against all that I wrote in #1 above and question it thoroughly. Time to work? Strong enough to be real? Clear and workable strike price?
- The event has to be specific. It has to be important---and important to others, not just you. For example: Great earnings. A Dividend increase. Expansion. The ending of a lawsuit. Is the company big enough to be followed by many analysts? If not, is it a falling tree in the forest?
- Is there more than one event to make it move up or hold it up. For example, Ross stores right now has great earnings (14 quarters of profits); a two for one stock split; Christmas and the upcoming Santa Clause rally (almost every year); and a dividend on Dec. 29th. That's a lot to go on. Watch this one. Analyze the trades and rationale here. You'll see a lot of these.
- The longer I live and trade the more convinced I am that the greatest discovery I've ever made has been the "Red-Light, Green-Light" phenomonon. I feel bad someone has taken my RL-GL title and now sell a course by that name. It has nothing to do with me. My strategies are in a book of the same title, and will soon become part of a new Home Study Course. My point here is that everyone knows how important earnings season is to stock movements, but no one relates it to options. And no one ever says: "Hey everyone, we're leaving earnings season. Get your money out of harms way." You need to use this RL-GL knowledge as the back-drop, the canvas of every trade.
- I call it "Passion, Precision, Persistence and Profits"---as in after the first three comes the profits. If you do not have the passion, a strong desire, you'll never stick with it long enough to gain the knowledge of the details---the precision---to be profitable. This is part of the "ART" that I so frequently speak about. Note also, that two people, with similar backgrounds and training can look at the same facts and make completely different trades. Why? It comes down to acting on your feelings, after you gather the facts.
- You need to put market forces to work for you. Time to options is usually the enemy. Sell covered calls. Only do trades with enough time on your side. If you do straight option trades, remember you have a 2 1/2 chance out of 3 of being wrong. It takes a lot of thought to come out on the right side. I studied hundred million dollar option traders who continually got 20% annual returns. I learned some valuable lessons. My attempt is to make 20% a month, so I need to pay close attention to these strategies.
- Always do a trade with a chance to get a 300% return. A triple. You may not get it, but enter it with that opportunity.
- Cut your losses at 50%. If you have $1,200 in the trade, get out when it goes down to $600. Weed the garden better. Let the winners work, cut the losers.
- Do even dollar trades. If you have $10,000 to trade, then do five $2,000 trades, or ten $1,000 trades (or as close as you can).
- Wishful thinking is not an investment strategy. Don't guess, don't hope. Don't make predictions, make projections. Calculate the exit from the entrance and enter when the stars have aligned.
Speaking of the STARs, let me share the system we use to explain a trade. Let it be known that we can't get the info on all of our student trades in time to share all of it before the trade is entered. However there should be enough information to help you make similar trades. We use the STAR as an acronym. Read the summary at the end of this.
S. The Scenario in the market. What's the storyline? What's going on with a particular stock
and what's going on in the sector, the whole market, and even the economy. Why do this
trade now?
T. The Technique to be used. Is it a covered call; A Bull Put Spread; A straight option, a stock
split, or a spin-off?
A. The Actual trade. What we paid for the option or the stock, then what did we take in for
selling the option if it is a covered call trade.
R. The Results. Either the expected results---and this may change as the trade matures---and/or
the actual results achieved---win or lose. And if appropriate the lessons learned---good or bad.
SUMMARY
I suggest that if you use this S.T.A.R. system in your own trades---after watching us use it for educational purposes---that your trades will go better. In fact, by thinking it through---especially the exit point, or expected profits---it will cause you to rethink many trades and not enter trades that will do harm with little upside potential. All of the above is designed to help you think more clearly, taking into account numerous points, and help you connect the dots better.
Let's return to the first part of this article, we've come full-circle. If I could make a 3 or 4 point list and say if you just do these things in order, all well go well, I would do so. But it doesn't exist. If it did, everyone would follow it and get rich. Many people think that some black box exists. A little inside secret or methodology that works everytime. Sorry. It comes down to the art of the deal. "The Art of the Deal" is a book by Donald Trump. I haven't read it but I know exactly what he is talking about. Sad, but most people will never get it. It comes down to using all the science you can gather, then turning it into an art. And you'll never be a great painter or artist or cash flow expert without starting and learning and growing as you go.
"LEARN TO MAKE CORRECTABLE DECISIONS, NOT JUST CORRECT DECISIONS."
Friday, December 2, 2011
Dead Cat Bounce
Well it's been quite a day for Molly and Fiona. They're way up on their Ross Stores trade. Congratulations.
Also, Molly is in the LULU $50 calls for January. The stock was down after earnings. She didn't see any big reason for the $6 to $7 dip, and jumped in. She was up almost a dollar in a few hours.
Kina is way up also, almost $3,500, but she hasn't sold anything yet.
Sometimes a trade like this is called a dead-cat bounce. If you like cats, stop reading. The theory, so it goes, is this: No matter how dead a cat is, if you slam it against the floor, it will bounce up some. That's this play. Okay, gross, I know, but honestly, that's what it is called. Do you want to hear about the dead dog bounce? Okay, I thought not, but it is different.
Watch Estee Lauder (EL). Also, Ross Stores is still in the game. I still think ROST can go to $100. Will it? Who really knows. I believe in forklifts, and am reticent because of worldwide bad news.
But hey, Christmas is coming.
Also, Molly is in the LULU $50 calls for January. The stock was down after earnings. She didn't see any big reason for the $6 to $7 dip, and jumped in. She was up almost a dollar in a few hours.
Kina is way up also, almost $3,500, but she hasn't sold anything yet.
Sometimes a trade like this is called a dead-cat bounce. If you like cats, stop reading. The theory, so it goes, is this: No matter how dead a cat is, if you slam it against the floor, it will bounce up some. That's this play. Okay, gross, I know, but honestly, that's what it is called. Do you want to hear about the dead dog bounce? Okay, I thought not, but it is different.
Watch Estee Lauder (EL). Also, Ross Stores is still in the game. I still think ROST can go to $100. Will it? Who really knows. I believe in forklifts, and am reticent because of worldwide bad news.
But hey, Christmas is coming.
IDEA FOR CASH FLOW - OMF & GGMM
I have a scenario for all of you to think about. It involves doing a riskier trade to make some money and then a more sensible and stable trade to make monthly income. I'm picking this up from Molly's idea.
It starts with doing some quick trades on a stock that has four fork lifts waiting to move it. Right now that is Ross Stores (ROST). For years I've talked of an event, an announcement or some such that would move a stock---up or down---to a new place. In most of my early books I called them OMFs, or Other Motivating Factors. I wrote and spoke of this in regards to analysis. I taught that Fundamental Analysis (my favorite) check on the health of the company---earnings, growth, debt, other factors---like putting a thermometer in the mouth of the company to see if it is healthy.
Technical Analysis on the other hand explored ways to get into the stock or out of the stock at better points. Money Flows, MACDs, Support and Resistance, and the moon in the seven sky, all played into this aspect of looking at and doing trades.
OMFs were the events that moved the stock now---news announcements like a lawsuit starting or ending, dividends, stock splits, managements changes, etc.
In summary or to solidify the point of this I mentioned that Fundamentals tell you WHAT to buy, Technicals tell you WHEN to buy, and OMFs tell you WHY NOW.
Later I called these OMFs compelling reasons. The past few years I've changed it to the Forklift analogy. It's easier to explain. You want this box in the warehouse moved over there, where's the forklift. No forklift, it's not getting moved.
So, back to Ross Stores. Great earnings. A 2:1 stock split. A dividend on Dec 29th. Christmas and hopefully the Santa Clause Rally. Molly picks up on this and wants to make several trades with options. She'll play it into the split, rolling it beforehand.
It could be a great two weeks. Her attempt is to take $5,000 and turn it into $20,000---netting $15,000. That's quite an undertaking. I hope she makes it, though I think it's a little risky for my blood.
That's why I wrote GGMM---Good Golly Miss Molly. We'll see how she does. She's on her way as of this writing.
Let's say she makes it, and even if not consider the following anyway. She takes the $20,000 plus dollars and buy 10,000 shares of BioSante (BPAX) for $2.25. That's $22,500. Molly, make sure you put in a stop loss at, say, $2. Now she can sell the $2 call for .65 cents, taking in $6,500 now. Yes, she would have to give back $2,500 if called out, but with the buy back there is no reason to get called out.
Or she could sell the $2.50 calls for .40 cents, taking in $4,000 now and maybe $2,500 more if called out. Most of my friends could live on around $4,000 a month. That would be a great month if she can make it happen. She's starting with about $5,000 and could end up retired for the rest of her life. GGMM. Go Get'm Miss Molly.
More on this and other exciting developments coming up.
Wade
It starts with doing some quick trades on a stock that has four fork lifts waiting to move it. Right now that is Ross Stores (ROST). For years I've talked of an event, an announcement or some such that would move a stock---up or down---to a new place. In most of my early books I called them OMFs, or Other Motivating Factors. I wrote and spoke of this in regards to analysis. I taught that Fundamental Analysis (my favorite) check on the health of the company---earnings, growth, debt, other factors---like putting a thermometer in the mouth of the company to see if it is healthy.
Technical Analysis on the other hand explored ways to get into the stock or out of the stock at better points. Money Flows, MACDs, Support and Resistance, and the moon in the seven sky, all played into this aspect of looking at and doing trades.
OMFs were the events that moved the stock now---news announcements like a lawsuit starting or ending, dividends, stock splits, managements changes, etc.
In summary or to solidify the point of this I mentioned that Fundamentals tell you WHAT to buy, Technicals tell you WHEN to buy, and OMFs tell you WHY NOW.
Later I called these OMFs compelling reasons. The past few years I've changed it to the Forklift analogy. It's easier to explain. You want this box in the warehouse moved over there, where's the forklift. No forklift, it's not getting moved.
So, back to Ross Stores. Great earnings. A 2:1 stock split. A dividend on Dec 29th. Christmas and hopefully the Santa Clause Rally. Molly picks up on this and wants to make several trades with options. She'll play it into the split, rolling it beforehand.
It could be a great two weeks. Her attempt is to take $5,000 and turn it into $20,000---netting $15,000. That's quite an undertaking. I hope she makes it, though I think it's a little risky for my blood.
That's why I wrote GGMM---Good Golly Miss Molly. We'll see how she does. She's on her way as of this writing.
Let's say she makes it, and even if not consider the following anyway. She takes the $20,000 plus dollars and buy 10,000 shares of BioSante (BPAX) for $2.25. That's $22,500. Molly, make sure you put in a stop loss at, say, $2. Now she can sell the $2 call for .65 cents, taking in $6,500 now. Yes, she would have to give back $2,500 if called out, but with the buy back there is no reason to get called out.
Or she could sell the $2.50 calls for .40 cents, taking in $4,000 now and maybe $2,500 more if called out. Most of my friends could live on around $4,000 a month. That would be a great month if she can make it happen. She's starting with about $5,000 and could end up retired for the rest of her life. GGMM. Go Get'm Miss Molly.
More on this and other exciting developments coming up.
Wade
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