Following the smart money...

I constantly here the phrase "Follow the smart money", as the "Smart money" represents the people who set the prices in the market.

Anyways, I recently read the following:

Finally, Goldman Sachs lifted its rating on U.S. steel makers to "attractive" from "neutral." The brokerage firm cited the sector's underperformance and the emergence of "incrementally positive data points." Goldman also said that, "Steel and scrap prices in the U.S. have bottomed in our view, Chinese prices are rising, inventories remain low, a weak dollar has brought the U.S. close to being a net exporter, and we expect better industrial and auto demand in 2010." It added U.S. Steel (X) to its "conviction buy" list, and said its favorite stocks are Steel Dynamics (STLD), AK Steel (AKS), and Nucor (NUE). Goldman also removed Freeport-McMoran Copper & Gold (FCX) from its "conviction buy" list.

With that said I am looking at initiating a position in STLD, not sure how yet, but I will keep you posted.

Worden Charting Software Workshop

Last week I attended a workshop for Worden in Anaheim. I've been using their Telechart Platinum charting software since May and was excited to see that they were giving away $50 to those who attended the workshop. Initially I was only going to go for the coupon but ended up staying the entire day 6 hours learning about features, scans, filters, indicators, etc... Julia Ormond was the presenter and I was really impressed with her expertise and insight. Anyways they sent me a recap of what was covered and I thought I'd share.:

Right now I pay $60 for Telechart & will wait until May to renew and possibly add Stockfinder. Worden is the maker of freestockcharts.com.

http://videos.worden.com/classes/AnaheimClassNotes_1109.pdf

Volatility at the open and close

I am not sure if you guys have read any of the sentiment magazines that I placed out on the drop box. But in one of the issues they talk about volatility on the open and close in options. The take away that I got is that options are usually over valued during the open and close and market makers are trying to hedge their positions. It is difficult with all of the buying and selling that goes one during the first 30 minutes of the open and the last 30 minutes of the close.

This morning I wanted to observe this, so I looked at some of the more volatile names. For example, I was looking at the $200 strike puts with December expiration, they traded as high as $6.99 during the open and with in an hour they were trading at $4.65. Or RIMM at the $55 strike traded as high as $2.3 and is currently trading at $1.85.

This is just something I am going to be keeping my eye on for the next few weeks to see if I can capitalize on the supply/demand inbalance to make some money.

Closed MJN position

A week and a half ago I shared a trade idea with you guys from ONN.TV. They recommended selling puts on MJN at the $45 strike with December expiration. Just to test the idea I sold one contract at $3.70. I closed the position this morning for a profit of $110 buying the put back for $2.6.

I will continue to look at their trade recommendations, but one thing I will do is learn a little more about the company before I jump into it. As I kind of jumped into this one pretty blindly.

On Monday after the market close I will write a post to summarize my trade activity for the month of November and what positions I am still holding.

Hope you all had a great Thanks Giving.

Dominic

Day Trading Update

I stared my Day Trading account with $5,000. As of Today my account balance is about $1,500, Below is a breakdown of my losses:

1) Losses related to day trades : -$2,180
2) Losses related to Commissions & Fees: -1,213
3) Losses related to Platform Fees: -$87

Total Loss: $-3,480
Remaining: $1,520

I will not be placing any more day trades for the remainder of this year. I will try again in January. I am not in the right frame of mind to continue my day trading activities. Over the next month in a half I will re-group and make a decision if day trading is the something I want to continue and if it is for me. I find that I am much more comfortable and a lot less anxious trading options on a longer time frame.

I will keep you guys posted. This is all part of the process. I am Leaning a lot towards discontinuing all day trading activities at this point.

Tax Time is just around the corner...

So as I plan for this upcoming year and still testing and deciding what tools I'm going to be adding in 2010(i.e. filters, news service, charting software, educational resources) the necessity for me to understand how these can be used as deductible business expenses become increasingly more relevant.

I really need the deductions because on average I spend over $100 a month on trading related services.

I'll probably look to form an LLC in 2011 after the Bush tax cuts expire and there will probably be more need for me to shelter my income.

Here's a great article that I believe sums up the very gray IRS tax laws for traders v. investors:

http://www.greencompany.com/EducationCenter/TradersExpoCAJune2009GreenTaxArticle.pdf

Another:

http://www.tradersaccounting.com/product.php?productid=16174&cat=250&page=1

November Expiration

I had two positions expire worthless today and I had closed out one on Monday for a big loss. This was a bad month for me. I made $400 with naked puts on PM and $250 with naked puts on KMP, but lost $3750 on LEAP. I originally sold naked puts on LEAP at $17.50 in October, then sold $17.50 CC this month to bring my cost average down to $16.00. When it kept hitting new 52-week lows while the market was making new 52-week highs I panicked and sold at $12.25 on Monday. Today it closed at $14.25 so we're up $2,000 from when I sold and just feeling stupid right about now for both getting involved in the first place and then watching it run the second I got out. The bottom line is I lost -$3100 this month.

I never had a valid reason for entering the LEAP position, and certainly didn't have an exit strategy. I just wanted to push the button and have $1,000 sweep in to my account and then hope it expired worthless. I was just gambling and lost. The only thing I learned is that I keep repeating the pattern of going from ultra conservative to riverboat gambler. And had I made money on LEAP I would have just done it again until ultimately I got burned hard enough to force me to take a real look at what I was doing. That's pretty much my pattern.

Going forward I'm basically in almost all cash right now and not sure what I'll do for next month. I've still got 20 naked puts on XLE for Jan and Mar at the $45 strike, so I either need to buy those back or wait until they expire. I don't want to double commit that money elsewhere. I'm thinking about selling OTM puts and calls on a few selected stocks for December. I have no general feeling for what is going to happen other than I don't feel comfortable getting long at these prices.

Options Meet-Up Recap

Hey guys, I attended that options meet-up group on Wednesday. It's not something I will be attending again, however, it might be something we want to spearhead ourselves and start our own group. I was the first to arrive and the first to leave after about an hour. I was skeptical as to the motive of the group administrator. I wondered if maybe he was a broker or fund manager that was looking to recruit. I didn't get to talk to him that much. He was kind of unpersonable. It was surprising to me for someone putting together a social group how unsocial he was. He didn't look anybody in the eye, didn't try to monitor the meeting. There didn't seem to be a theme or purpose. He said that last week only one person showed up so he was taken back that there were 12 of us this time.

We started out by going around the table and introducing ourselves and give some information on our trading background and/or interests. There weren't any two of us that were alike. I htink this part scared him because he just learned about options two years ago. He passed out some packet of simulation trade ideas to talk about the risk/reward. Once he learned he wasn't the most experienced in the group he ran a disclaimer that said if anyone sees anything I did wrong to tell him because he's still kind of new to this. He definitely knows all the strategies and terminologies. One person was a broker who just started his own firm and he was there to recruit clients. This guy was a yahoo. His didn't even proofread his own business cards, if he did then he's a moron. There is a P.O. Box but no city or state listed. His phone number is listed twice and there was a grammatical error. You turn the card over and there is a web address where he got his "free business cards". Between the errors and acknowledging that you're too cheap to spend $20 for 1000 business cards I don't see this firm going anywhere.

One guy was holding himself out as a "trading coach/mentor" with a P.H.d., though he never said what his degree was in. I'm not sure what his background is with investments. I told him I sold naked puts occasionally and his eyes bulged out. He asked me if I knew how dangerous that could be. I said I only sold them if I actually had the cash to take possession of the stock so it was no more risky than selling an ITM CC. This got him excited and he asked for my business card, that's when I knew he probably didn't have that much experience with options. He hit me up in person before I left and with email the next day offering me 10% of any fees he makes from referring clients to him.

The group quickly broke up in to six groups of two people talking about whatever, so at that point I left. One of the guys was a Elliot Wave theorist who wouldn't stop talking about Nov. 22 being the day the market crashes because we're at the end of wave 5. One woman next to me told me she believed the five biggest bankers engineered the market crash so they could profit from it. There wasn't anybody who worked in the industry and other than myself and an older man who said he had been trading for 20 years, nobody had more than two or three years experience. So it was kind of a joke, perhaps the few people I didn't get to talk to had something interesting to offer. I don't know. Everybody seemed concerned with trying to predict what the market was going to do for the rest of the year.

In general I didn't see the potential to learn or benefit from idea sharing from anybody with more experience than I currently have, and I didn't learn anything in particular about options or investing, but from a social standpoint it was interesting to see people from different backgrounds and both sexes all want to be a part of the market. All had different opinions on how to go about it. And obviously that's what makes a market. It reminded me of the Texas hold em' phenomenon that swept the country or even world a few years back. There were so many people that just wanted to be a part of it that if you had an average skill level you could make money off the people who had none. Maybe the market is the same way. There will always be people like I met that are willing to lose money just to be a part of the game. Since the market is a zero sum game, that means for every dollar they lose someone else makes it.

Closed DRYS positions today

Today DRYS has begun to act really weak again after announcing a $300 million debt offering. I decided to book my profits for now and look for another entry if it comes. It feels like this is the weakest of the dry bulk shippers.

I closed 10 short puts of DRYS for a net gain of $146 of the $2,700 potential.

I also closed my 10 put spreads for a net gain of $220 of the $1,100 potential.

An interesting think that I did notice today, is that although the stock was down today, as implied volatility came in I was actually able to take some extra profit on this down move.

Baltic dry Index

Very close to testing the June 3rd high of 4,291.

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View the full BALDRY chart at Wikinvest

ONN.tv new position alert

I recently signed up to recieve position alerts from the traders at ONN.tv. Here is the latest one. They are for the self-directed trader as an idea, and it is up to the individual trader to see if the position fits there risk/return profile and overall strategy.

Just thought I would share.


Option Trading Alert: MJN Cash Secured Put
by Jud Pyle
Posted on Mon, 16 Nov 2009 15:37 EST

Related Symbols:MJNFor our next Option Trading Alert, we are initiating a cash secured put in infant formula maker Mead Johnson Nutrition Company (MJN) as follows:

Trade Idea: MJN Cash Secured Put
•Sell to open 10 December 45 puts for $3.80 or better
•The limit price (i.e., when you execute your order, you should collect this amount for the puts) is $3.80

The Sentiment
MJN is declining today because Bristol Myers (BMY) has announced an exchange offer where BMY shareholders can turn in their shares of BMY, and receive $1.11 in MJN stock for every $1 of BMY they turn in. This exchange offer creates and arbitrage that puts pressure on MJN shares as arbitrageurs buy BMY and simultaneously sell short MJN. The shorting of MJN has caused the stock to become very expensive to borrow, causing the puts to become very expensive.

On a fundamental basis, MJN currently trades at 17-times estimated earnings for 2010. That valuation makes us feel that the shares can maintain the level needed for this trade to be profitable. MJN is also in a business area that has the potential to see mergers and acquisition activity. With such potential out there, we think that it will enable MJN to hold above the level we need to be profitable.

Trade Analysis

MJN is currently trading around $43.80, down roughly $1.50 today.

Cash Secured Put Spread:

•Sell to open 10 December 45 puts for $3.80 or better
•The limit price (i.e., when you execute your order, you should collect this amount for the puts) is $3.80


The Upside: Maximum profit for this short put is the $3.80 per put collected upon entry (minus commissions). The maximum profit will be achieved if MJN shares are above $45 when the options expire Dec. 18. The potential return on risk for this trade is 9.2% in 33 days.

The Downside: Maximum risk is $41.20 per short put, which is the put strike minus the credit received. For maximum loss to occur, MJN would need to be trading at $0 at December expiration. At this point, the 45 put is in-the-money by $41.20 and you would be assigned.

The margin requirement for this put could be as high as $41.20, or $4,120 per contract ($41,200 for a 10-lot).

Breakeven: Breakeven is the strike price of the sold put ($45) minus the credit, or $41.20. Below this level, the short put to lose money. MJN is currently trading about 6.3% above the breakeven point.

Probability of Success


Click here to enlarge


This strategy has a 38.93% chance of losing money and a 39.68% chance of achieving the maximum potential profit.

Trade Management
Because MJN is involved in this arbitrage, patience is going to be key. We feel that if we get assigned on the puts, that entry price of $41.20 represents a very reasonable value in the shares. To be disciplined, we would set a stop loss of $37.08 because that is 10% below our entry point.

Remember, Option Trading Alerts (OTAs) are generated by the www.ONN.tv team as a starting point for self-directed investors. OTAs are not intended as trading or investment advice or recommendations that any particular security or strategy may be suitable for any specific person. You are solely responsible for your investment decisions and should consult with a financial advisor if you require customized advice.

Sold 2/3 of my UDN position & UAUA CC's,

- Dollar dropped significantly today took the opportunity to lighten my dollar short position and take profits. Still holding 200 shares. Will look to add on a pullback unless the Fed signals otherwise.

- Sold 2 UAUA cc for Dec. $8 strike price. Collected .45¢ for each $90. I'm hoping to either have the stock called away in Dec. or for a pullback to buy my calls back or let expire.

- Scaling back into my TBT position as a hedge against a dollar bounce back and the Fed's hand being forced to counter the dollar's demise.

A few sites to check out

http://www.wikinvest.com/

and

http://www.traderplanet.com/

Baltic Dry Index is finally on the move

The Baltic Dry index has nearly doubled in the last few months. During the height of the financial crisis the index tumbled from a high of around 11,600 to a low of about 630 of like a 95% drop. We are nearly a hundred points away from testing resistence at around 4200.

Historically this index has been a leading indicator. I have been making a lot of plays in the dry bulk shipper space and plan to do so until it does not work anymore. Sounds like most of the catalyst is coming of China.

But there is one thing to keep in mind while playing these company's. And that is theat the upside is a bit limited through 2010 and 2011 as a majority of these company's have locked in a lot of there vessels in contracts in order to risk their business and cash flow risk. But by reducing their risk they have taken a lot of the upside off the table. This just means we probably will not return to the high flighing prices that we saw in 2007 like DRYS at over $100.

But I still see good upside overall. Especially on rally's in the dry baltic index.

Currently I have the following positions in the Dry bulk shipper space:

10 naked puts on DRYS @ $7.50 strike with Jan '11 expiry for a total max gain of $2,710.

10 Vertical spreads on DRYS @ $2.5/$5.00 with Jan '11 expiry for a total max gain of $1100

200 share covered call position in EGLE at $5 with Dec '09 expiry for a total max gain of $134

And as you recall I have already closed my 10 naked puts on EGLE for front month experation last week.

I will keep you guys posted.

Good Luck Trading!!!

Naked options and adjustments

More often than not, when I read about options traders, I hear a lot about making adjustments to your positions. Recently I read an article in Sentiment magazine that was talking about Market makers selling naked calls that were out of the money, but as they approached the strike price they would begin to hedge their position by buying stock, thus creating a covered call position.

This go me to thinking about naked puts. You could apply the same concept by shorting the stock that you have naked puts on, thus accomplishing the same hedge. Just another what if scenario to add to the quiver.

Dom

New Options Magizines...

Hey Guys,

I stumbled across a few options magizines that are sent out quarterly. One is from thinkorswim.com and the other is from www.schaeffersresearch.com/sentiment.

I have downloaded all of the archived copies and saved them into a file called "Options magizines" in the dropbox if you guys would like to view them.

Dom

The only two things that are a guarantee...

Many people try to predict the market, myself included. Which is fine and all, it is healthy to have a view as to where you think the market might go. The real trouble comes into to play when you so stuck on being right that it becomes very dangerous to your trading.

When I make predictions I know that I could be wrong and I am ok with that. Because the truth of the matter is, is that the market does not care what I think. I do not get to set the prices. So as traders we just have to try and make educated guesses.

But there are two things that are for sure when you trade options:

1) Prices fluctuate

and

2) Options expire

This should always be in your mind when you are trading options. These are the only guarantees that you get in the market. So use them wisely.

New risk tools

Recently my in my trademonster account, they have added some nice new risk tools. The tools are very easy and intuitive to use. It allows you to first see visually the risk profile of the position you are about to put on, you can have single legs or multi leg strategies. There are two tools: Snapshot Analysis and Spectral analysis.(See pictures above).

Snapshot analysis: Gives you risk profile, probabilities of max profit, loss, and break even. It also calculates your risk/reward and future events to consider that may effect your position.

Spectral analysis: Allows you to see visually the profit/loss areas, it also allows you to play what if scenarios by making adjustments to price, volatility, or adding and/or removing pieces of the position. It calculates the Greeks. It also calculates the probability of a stock landing in a current trading range.

I am sure I have left out some of the functionality of this tool. But my point is that if you guys want a tool to help better understand risk, and to play what if scenarios with your position that you may want to open a trademonster account which is free to use these awesome tools.

I am convinced that I will only use IB to execute my trades because of the low commissions and trademonster for charts and risk management and generating ideas. It is a much more intuitive and visual appealing platform. I hope that eventually trademonster will move away from the minimum commission per order so that I can move my trading back so that everything is in one platform. Trademonster is by far the best platform I have ever used.

Understanding the power of global leverage

Traderfeed: Flat days

Good read on range days

http://traderfeed.blogspot.com/2009/11/maintaining-mental-flexibility-and.html

My Plan

As of November I have set a new challenge and strategy with my options trading. I opened my IB account with $17,000. This is going to be my "Working Capital". My goal is to try to extract $500-$1000 a month of income out a month. I will have a high water mark of my original Capital of $17,000.

Withdrawl strategy: I will withdrawl 90% of all profits that I realize. So today I booked $600 in profit and have set up an ACH to withdrawl $540.

I am just trying to keep things interesting and see how well I can do.

Trade Videos

So excited I'm going to be able to review my trades especially the bad ones. I am hoping that this will be the most important and effective learning tool I'm incorporating into my trading progression.

http://blackmarkt.blogspot.com/2009/11/one-bad-trade.html

10 Open Positions

November expiration

1)RIMM sold 1 put at $60 strike with Nov 09 expiry for (Max profit:$100)
2)STEC Sold 5 puts at $12.5 strike with Nov 09 expiry for (Max Profit:$250)
3)AA sold 5 puts at $13 strike with Nov 09 expiry for (Max Profit:$200)
4)EGLE sold 10 puts at $5 strike with Nov 09 expiry for (Max Profit:$400)

December expiration

1)EGLE bought 200 share covered Call at $5 strike with Dec 09 expiry (Max Profit:$134)
2)MGM bought 100 share Covered Call at $9 strike with Dec 09 expiry (Max Profit:$104)

January Expiration

1)DRYS sold 10 put spread at $2.5/$5 strikes with Jan 11 expiry (Max Profit:$1100)
2)SOHU sold 1 put Spread at $55/$80 strikes with Jan 11 expiry (Max Profit:$1665)
3)STEC sold 5 puts at $12.5 strike with Jan 11 expiry (Max Profit:$1800)
4)GE sold 5 puts at $12.5 strike with Jan 11 Expiry (Max profit:$900)

Will we see a breakout tomorrow?

Who knows but watch the 110 level on the SPY. It closed today at a strong 109.57 with very little headroom. The dollar has made all new lows for the year and sitting right on 75 support. Oil just trading sideways but look for any catalytic event to push it higher like a serious tropical storm in the Gulf. Could see a technical pullback and resume sideways trading. Still expecting the expected... will be watching to possibly add more to my positions if tomorrow is the start of pullback.

The financials which have been lagging the market are beginning to show life and of course there's the dollar carry trade favorite: commodities. Will gold continue to trade strongly? Will be watching the GLD as it approaches 110. Trying to add more to my TBT position but the sucker doesn't want to pull in.

Going to be watching AMZN & RIMM as day trading opportunities & watching my swings especially UDN, TBT, etc...

Studying video

Ironically Dom gave me a tool that I naturally gravitate to in whatever I do. When I was passionate about surfing I would collect surf videos and watch them incessantly which meant I had no real social life all throughout school. My favorite athletes from Kobe to Peyton Manning to Kelly Slater study film like no one else. It becomes they're obsession to learn and progress. So it's time to get serious about taking the trading to the next level. I just installed the recorder and will begin recording my trading and plays. ThanX Dom! BTW- What is the PlanetMaster file for? And was I supposed to install the program under the Administrator?

Selling PUTS on STEC

Taking a gamble on this STEC. It is down $30 points from its 52 week high. Just reported fantastic earnings. The concern is its concentration of customers. There is a possible order from a large customer that may be in jeopardy in the 1st QTR. I am looking to sell the $12.5 puts with Jan 11 expiration, they closed yesterday at $3.8. I was able to sell 5 contracts at $3.6 per contract or $1800. This would put my purchase price at $8.90 if exercised.

Futures Account

I'm probably going to close my futures account and transfer the money back to IB. There isn't anything I can't do on IB and their commission fees are much more expensive. I had only opened an account there hoping to learn more about all the different futures products, but my account rep is just like any other, he works on commissions and isn't really interested in helping me learn anything. He gets ideas generated from someone above him, and his job is to call and email to try to sell you on an idea. I'm not interested in that. I'm sure I can learn all there is to know online or from the Series 3 exam book.

New positions

So today I put on half of my position with the GE puts I was looking to sale. I sold 5 $12.5 puts for $1.80 per contract or a total of $900 with Jan 11 expiration. Would not mind owning this stock if I were exercised. The best part is the commission was only $2.25 to put this on.

I also put on a cash flow trade by selling 10 $5 puts on EGLE with Nov 09 expiration for $0.44 or $440 about three weeks. Again a stock that I would not mind owning. You may see me get more aggressive with these dry bulk shippers as they have yet to see much of a rally in my opinion.

I do not really like the layout of the platform for IB as it is awdward to navigate. I guess it will take some getting use to. But for now my plan is to use my trademonster to find my trades and data and then just place the trades in IB until I get more familiar with the platform. Either way it is totally worth it for the commission rates.

SPY straddle spreads

I never did look at options prices over this past weekend. I changed my mind about laying out cash to play a straddle. I think I was itching to put back on another play because I closed out the XLE and SLV calls spreads I had on for what felt like an eternity. The addict in me wanted some new action. However, thankfully this time I didn't just put something on for the hell of it. I still currently favor selling naked puts on dividend paying stocks that I would like to own.

I'm also still naked on $45 XLE Jan and Mar puts so I want to root for the stock to not go down so I don't lose any money there, but I also don't want it to run up because I'll just second guess myself for selling out if it does so. Also, when I closed the SLV $15-$20 call spread, I sold all the $15's at my ask price. On the $20's, I had an order in for .25 to split the bxa of .20x.30. Only 1 contract got filled so I've still got 24 naked $20 strike price calls and SLV is up .80 today. I was supposed to get on yesterday and decide if I was going to try and middle the bxa again or just pay the ask and be done. The impetus for not just paying the ask when I closed out the spread was just being greedy, it might end up costing me now, we'll see.

New position and Position Ideas

Today I picked up a position on EGLE buying shares at 4.75 and selling Dec 2009 Calls @$0.42/contract. I have a max potential profit target on this of about 13.5% for a six week holding period.

I am looking to possibly sell some naked puts again on GE at the $10 strike, which are currently selling for about a $1. I have to wait for some more money to transfer over to my account so I will have to keep you guys updated. But I am looking to sell 10 contracts.

Also on my radar again is FSLR. I am ready to put a SMALL position on this one. Looking to play this by buying a call spread (1-2 spreads). I am currently looking at buying the $115 Jan 11 call and selling the $160 Jan 11 Call which is trading for about $15.40 currently. I have a bid out for $12.50. Not sure it will fall enough to get hit, but we will see. I am also exploring other ways to play it. I will keep you posted.