MyTradingBlog » Educational

The current markets are a gold opportunity.

admin — Thu, 04 Aug 2011 14:13:39 +0000

To most average investors, the current markets may be scary. One word comes to my mind that many investment authors may use to describe the current market condition: “capitulation”. Capitulation basically described the knee jerk reaction that most average investors have in response to such rapid downfall of the stock prices. Such rapid fall actually, in my humble opinion, is often a golden opportunity for a leveraged investor to enter into positions. The current market is such an opportunity. Why? Well, think about it. Nothing has really changed from, say, 1 month ago. Basically it’s the same old story: US economy slowing down? US debt? Euro zone crisis? Tell me something that I haven’t heard as of yet. So, what should a smart investor do? I don’t know what you would don But for me, I’ll do the opposite or the contrarian way. When people capitulate and throw in the blanket, I’ll buy (of course, don’t forget your hedge). Believe it or not, the market will recover faster than you can think.

There has been minimal negative impact of current market downfall on my portfolio. This is because most of my stocks are deep in the money, such as BIDU, PCLN, CRM, LVS, SLW and MCP. The only stock in my portfolio that is out of money now is FFIV. I have some FFIV options that are due to expire Aug. 20. The majority of my FFIV options are to expire in Oct. Therefore, I won’t do much to my FFIV positions until at least after Aug. 20th when my first batch of FFIV options expire. At that point, I will re-assess the situation and decide if I’ll need to add more FFIV options for protection.

How my other positions are faring in this volatile market.

admin — Sun, 19 Jun 2011 04:22:55 +0000

I have BIDU, CRM, FFIV, PCLN, LVS, OPEN, SLW and MCP in my holdings. I already discussed about OPEN, SLW and a portion of my FFIV holdings. Here is how my other positions are doing. BIDU, CRM and PCLN and FFIV comprise the bulk part of my holdings (82%).

BIDU: covered call. strike 105. Even after the recent drop, my BIDU positions are still deep in the money. I believe before BIDU sees 105, the markets will rebound. The time value of my BIDU option has already decayed by $10 (i.e., I already made $10/sh), it still has ~$20 in time value for its Sept 105 call (i.e., if BIDU stays above $105/sh by the 3rd Sat in Sept, I’ll make another $20/sh, that’s about 63.5% return).
PCLN: covered call, strike 450. My PCLN positions are still in the money, although at 462, it’s only 12 points above my strike. I wouldn’t worry about this for now. I already made $42/sh of time value on PCLN (since Apr. 15, 2011), there is still $35.35/sh time value to be made until its expiration on Oct. 22, 2011 (or 26.3% return).
CRM: covered call, strike at 130 (est. May 20, 2011). I already made $7.4/sh on time value since May 20. There is still $15.75/sh time value to be made until Aug. 2011 (or 40% return). Even after the recent market fall, I am still sitting very comfortably with this position.
FFIV: covered call, with slightly more negative position. My call options strikes are 97.5 and 100. These options have 28 days to expire and the residual time value is ~18%.
Summary, even with the recent significant market pullback, 82% of my portfolio positions are still in good conditions. This shows again the power of covered call.

CRM: I rolled up my short options for more time value.

admin — Fri, 20 May 2011 16:02:28 +0000

CRM reported good earnings. My covered call (short May 21 $125 call) is due today. CRM is a good stock with good time value and I want to keep it. So I bought back the call (strike 125) and sold Aug. 20 call (strike 130). This spread has a different expiration date and different strike prices. It is called diagonal spread. The price difference of this diagonal spread is $0.3/sh. So I made $0.3 x 100 = $30 for each pair of contract (1 contract = 100 shares). But my new strike price is $5 higher (at $130) than the previous strike at $125. This means that when the option is exercised (when the call buyer buys my CRM stock), the buyer now has to pay me $130/share, instead of $125/share before. Or in other words, I am making $5/sh more in the stock. The total profit = $0.3/sh (option spread) + $5/sh (strike price difference) = $5.3/sh. ($5.3 x the # of shares I own)/$ of margin requirement (the money that I have to have in my margin account) = 16% (in 3 months), or 54.3% annualized. My option strike price is now 12% in the money (ITM). This 12% ITM means that CRM has to drop >12% of its value (down to below $130/sh) for me to start making less money.

Take home lesson:

CRM has gone up a lot. We are still in a bull market. I expect CRM to stay at this price level or go higher. Therefore, my previous strike price at 125 is a bit too deep in the money. Although safer, it’s not as profitable. So I wanted to gradually go up on the strike price, but not too fast to put myself in harm’s way. That why I rolled up from 125 to 130. Why did I choose Aug expiration at 130? Because Aug 130 options were selling at slightly higher than the prices of May $125 options. When I rolled up my spread, I didn’t have to pay any money. Instead, I received $0.3 per share. This way, in case CRM prices come down, my value in CRM stock per se will come down. (But if I hold CRM long enough, I expect CRM price to bounce back. ) But I won’t lose any money on the options, since today’s roll up I made money ($0.3/sh). Should the options expire worthless by Aug 20, I won’t lose any money. Consider another scenario: rolling up from 125 to 135. If I bought back my May $125 options and sold Aug $135 options, instead of receiving $0.3/sh, I’d have to cough up $3.2/sh. This is higher risk with higher potential gain. If CRM stays above 135 by Aug expiration, the extra profit would be $1.8/sh (5 – 3.2). But if CRM drops below 135, particularly if it drops below 130, my potential would even higher. Should this happens to me, not only I’d lose money on CRM stocks, but also on options. So one lesson I learned: Do not pay extra out of pocket when you roll up (with exceptions). Better be safe than sorry.

Option Basics

admin — Wed, 27 Apr 2011 15:51:26 +0000

To learn the basics about option trading, read the following sites:

www.Investopedia.com (1st choice for definition of various terms and concepts).
www.Schaeffersresearch.com
www.CBOE.com

How to Monitor Market Conditions

admin — Wed, 27 Apr 2011 15:48:52 +0000

MUST Read:

ChartAdvisor.com. This site publishes a weekly Market Summary on Friday. An excellent chart pattern analysis site, it gives a good reading on the market condition. I use this to help gauge my trades. If one reviews the Market Summary reports, it warned investors about the 2008 market crash as early as Nov. 2007, when the market turned bearish. It continued to warn investors of the bearish conditions throughout 2008 and early 2009 until around Mar. ’09 when the market started turning around. This is an excellent site to follow for us to change our investing style when the market turns bearish again in the future.
Schaeffersresearch.com: This site publishes a weekly Monday Morning Outlook usually around Saturday noon. This site combines technical analysis with market sentiment readings.

AVOID:

Do not watch any talking heads on TV, including James Cramer or other stock analysts. The main reason to avoid them is this: on Wall Street, you make money from other investors. So you must always be one step ahead of them. Millions of people watch those TV talking heads and analysts. Many of these people will follow their advices. From whom are you going to make money, if you follow the same advice? The only way to make money from these talking heads, if you really want to listen to them, is probably by doing the exact opposite. This is called contrarian thinking.
Do not read or subscribe to too many sites or journals. They will only confuse you.