Monday Market Analysis

After hitting another new multi-year high last week the markets were seen taking a bit of a breather as volatility came back into the market. We traded down from a high of 153.28 on the SPY to 149.94. I still believe that this market remains in an uptrend and that dips will likely continued to be bought. The big level I am watching to hold as support is around $147 where the SPY broke out after several attempts and failing.

I used last weeks pullback as an opportunity to take profits on my long volatility play and to close my short callspread on the SPY. All in all it was about a wash between the two positions. I also closed out my long position in PBI. I was the owner on record for the ex-dividend date, so I will be getting the dividend of about $300 sometime in the first few weeks of March.

CLF has had a nasty fall after reporting earnings and cutting the dividend and took a hefty portion of my gains for the year. I was up close to $1,500 for the year, but am only up about $350 as I write this post. But I collected a decent amount of premium to assume this risks and was prepared for it. With the PBI dividend coming in a couple weeks and NLY paying me my next dividend in about a month, I should be back up over $1,000.

Look it is slow and steady that wins this race. Like I have mentioned in a recent post, I have set up my portfolio to withstand 15-20% down-moves and still break-even for the year. This have been accomplished through selling calls against my positions to lower my cost basis and the yield from the dividend. Now CLF cut its dividend, so my cushion shrunk a bit there. Just one last note, if you want to see what I did to other positions I had or have blogged about recently, go back to their original posts and read the comments. On that same note, it may be worth subscribing to the comments for anyone trade if you wish to follow the evolution of it.

Good Luck Trading!

Positions in: CLF, INTC, JNJ, MSFT, NLY, PFE, and T


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How do you decide what to trade?

I know one question that I get frequently is how to find what to trade. Its a hard question to answer because the answer really depends on a lot of variables. But there is probably one universal rules to follow:

1) Make sure the stock is liquid. My rule of thumb is that the stock trades at least 1 million shares a day on average. You want a liquid stock because you want to make sure you can get in and out of the stock easily. But on top of the stock being liquid you are going to want to make sure the options are liquid as well. I like to look at open interest to gauge this. If you look at the 8 closest strikes you should see a couple thousand contracts in open interest.

Other than that the sky is the limit. There are so many sources of ideas out there. They range from free to paid services. It really depends how active you want to be and what you cash flow situation is like. I personally like to come up with my own ideas, and I honestly don't like to pay for trade ideas. So I navigate towards free tools for idea generation. But with the internet this is very easy. And if you follow our advice on this blog and get a think or swim account through TD Ameritrade, you will have more tools for idea generation than you know what to do with.

I think a great place to start is to look at companies that you know. What companies do you interact with in your personal life. Write down a list of those companies and look up there stock symbol on www.google.com/finance. Do they pass the liquidity test? You might have some good trade ideas.

As I have blogged about a lot lately I have gravitated towards leap covered call positions on high yield dividend stocks. The first thing I do to identify a candidate to trade is use a free service called dividata (www.dividata.com). Its a really great tool that allows you to set filters, see stocks that are going ex-dividend soon, high yielders...etc. I really like the dividend history and rankings that it provides. After I find some candidates that peak my interest I take those stocks over to the TOS platform and look at the price chart, to decide if it technically looks like a good entry point.

If the timing looks good to enter into the position from a technical standpoint I then precede to the options tab on the platform to scope out the nearest out of the money call option that I can sell against it. Typically I am looking 1 year out on this type of position. I am looking to collect about 7-10% of the current stock price as a "cushion" or a reduction to my cost basis. I should also point out that I am targeting dividend stocks yielding 5-10% (sometimes a little higher), that have a good stable payment history of at least 5 years (preferably 10). All in this sets me up with about 12-20% cushion.

Now this is for just one type of trade idea generation. I also like to look at the popular ETF's for trade ideas. One of my go to index ETF's is the SPY, which for those of you that are not familiar is the index that tracks the S&P 500. I typically look at trading this instrument from the short side when I think the market is a bit overdone.

Other places you can get trade ideas: Tasty Trade, Think Or Swim Scans, Onn.tv, CNBC, stocktwits.com, google.com/finance, investingwithoptions.com, t3live.com.

This is only a small list of the endless pool of opportunity that awaits you.

Good Luck Trading!

The Trend is your Friend...so don't fight it!

The markets continue to move higher. I thought for sure we were finally set for a decent correction of 5-7% after Fridays move lower of more than 1% on the S&P 500. But mine along with all the hopes and dreams of the market bears were crushed after Fridays gains were all but a distant memory as the bulls came in to support the market back near 5 year highs. As tempting as it is to get short, I am fighting the urge and sticking to what has been working...and that is to remain long.

I have a short hedge in place, that is very small compared to my long position. But I also have the downside protection from the calls I have sold agains my positions, as well as the extra cushion I am receiving from the dividend from those positions. All in all I am protected in the tune of a 15-20% down move in 2013 based on the positions I have on. So I feel pretty comfortable with the positions I have on. As I have no expectations of a move so sever this year.

I am conscious every day I check into the markets to leave a sizable amount of my portfolio in cash for future opportunities (currently around 35%). The last thing I want is to be fully invested when the market does decide to correct. Or at the very least to be ready when some decent volatility comes back into the options market, so that I can sell some premium.

I tentatively have plans to get a little more short if we get to all time highs on the SPY of around $157, and not earlier unless the markets significantly change their tune.

So for now I continually remind myself that the trend is your friend....until the END!

Good Luck Trading!