December Recap

As promised I would like to provide a recap of my trade activity for the month of December.

Below is a summary of my trade activity for December:

Increase to Options Trading Fees

The following was cut and pasted from Barron's.

OPTIONS FEES HAVE NOWHERE to go but up. U.S. options trades take place on seven major exchanges. Three of them -- The Chicago Board Options Exchange (CBOE.org, CBOE.com), International Securities Exchange (www.ise.com) and Boston Options Exchange (www.bostonoptions.com) -- have recently filed for fee increases that will kick in during 2010. These fee structures are quite complex, but will result in higher fees paid by brokerages to conduct trades.

Firms that have had relatively low fees for options trading will most likely have to raise their rates just to maintain some kind of profit margin. I imagine the firms that have charged higher commissions will just go ahead and absorb the increased exchange fees.

Wade Cooperman, CEO of tradeMonster (www.trademonster.com), says, "We are increasingly concerned the rising exchange fees will lead to retail investors seeing their cost of trading increase."

Signed up for free accounts at other brokers

So I recently signed up for accounts at optionshouse.com (designed by traders at peak 6), and an account at thinkorswim.com. I am checking out the tools in the platform. They still do not offer the low commissions that IB offers but some of the tools are pretty cool. I may provide some screen shots of some of the tools that they have as I explore them. One feature in particular that I am looking forward to is thinkorswim provides a free streaming CNBC feed, which I was going to pay $99 a year to have on my computer. So that is nice.

Not sure I will ever be able to have just one platform. As it is hard to imagine a platform would have all the tools that I am looking for as well as the lowest commissions. But luckily all of the brokers offer their tools for free, regardless of whether you fund the account.

Also thinkorswim has classes on options that we may want to check out:
http://www.optionplanet.com/assembled/list.html . I think I am going to sign up for the level 1 class in San Diego on 2/5/10. And others and they open up. Let me know if you guys are interested.

In the IBD this morning

Read the article below. This may be a REIT looking into. It is yeilding 16.85% dividend and it is only investing in government backed mortgage baced securities. What are your thoughts?

Early Options Assignment

On 10/2/09 I bought 500 shares of MO for $17.51 and sold 5 Mar $18 calls for .68. Cost average is $16.83. I was hoping the stock would move above $18 and get exercised early. Here is why, I received March time premium by selling the covered call but was exercised in December. This frees up the cash to put back to work. The reason I like this type of play is that if the stock didn't get exercised early, I'm either getting two dividends as well during this time period, or the stock never got above $18 in which case selling the closest to strike at the time of purchase also turned out to be a good move.

The ironic thing here is I was exercised today, but today is the ex-dividend date, so the person who exercised might not understand how it works. I will have to wait a few days until payment comes in to confirm, but I think I'm getting the dividend as well. Excluding the possible dividend, total return was 6.9% for a little less than 3 months. This is the type of investing I like to do with larger dollar amounts, or longer-term money. I viewed it as a safe play and originally planned to build the position to 2000 shares but the price moved in my favor from day one and I never got a chance to add to it. The 6.9% for 3 months sound good if you're playing with larger dollars, but the the total dollar gain here was only $585 since it was a small position.

Visa Onn.tv Trade idea

Below you will find two charts. First you will see the 3 month chart of V. As you can see it recently tested a long term resistance level around $90 and has since pulled back. Also notice how V has seemed to find support around $86. Next is a 2 year chart that shows a nice bull flag forming which really could help ignite this stock to the century mark. After you take a look at the charts, look at the trade idea generated out of Onn.tv. I may take a look at this spread for a possible position. But I need to do some more analysis.

Let me know what you think...





Visa Inc. (V) Bull Call Spread
by the ONN Idea Generating Platform
Posted on Mon, 28 Dec 2009 14:30 EST

Related Symbols:VOne way to play the continued strength in technology shares is with a leader in electronic transaction services. Visa Inc. (V) has recently pulled back from 52-week highs reached only 10 days ago on extraordinarily high volume. As the tech sector moves higher during the first quarter of 2010, the odds are favorable that the stock will challenge the $90-level again, the site of its all-time highs in May 2008. This March bull call spread offers a good risk/reward opportunity if a momentum move to the century mark develops.

V is currently trading at $86.46 per share.

Debit Spread/Bull Call Spread -

•Buy the March 95 call for $1.55 per contract.
•Sell the March 100 call for 70 cents per contract.
•Net debit of 85 cents (or $85 per spread)
Profit/Loss Details:


Maximum risk: 85 cents (the debit paid at the time of the trade), plus commissions.

Maximum potential profit: $4.15 (the difference between strike prices -$5 – minus the debit of 85 cents). Return on risk is approximately 488%.

Breakeven: $95.85 (the strike price of the purchased call plus the debit paid).

Idea in XOM

Recently XOM has had about a 10 point selloff since its announcement of the acquisition of XTO for about $30 billion in a all stock deal. It is normal for the acquirer to decrease in price while at the same time for the target to increase in price. But in my opinion XOM is already undervalued if you look just a little bit in the future. Last year they saw profits collapse and saw record profits the year before that. Oil went to $147 in 2008 and sank as low as $33 in 2009. It has since recovered and is currently trading around $79 as I write this blog.

Some will argue that a chunk of the increase in crude is due to a weak dollar and that the fundamentals do not support the price (i.e Supply and Demand). And I can't say that I don't agree, but I don't agree entirely. What I mean is that stock prices do not care about the here and now as that is now the past. They care about what is going to happen in the future. And that is really what the stock price should reflect. So if you believe in the recovery and you think that higher oil prices are here to stay than there is no reason that you should not be looking at oil companies.

I am looking at XOM in particular as it is the best in bread and also because the market has presented a nice entry into this name. If you look at a chart the lowest price in the past two years is about $57 and the 52 week low stands about $62. Not that I am saying that the past is any indication of the future but these are the frames of references that we have to work with. Since the recent sell off it looks as if XOM has found some support at about $68, the next level of support is at $66 and then about $60.

This year XOM is expected to earn about $3.90 per share and with the current price at about $69 that puts a p/e of about 17.69. Next year as oil prices are forecasted to be $75-$100 EPS are forecasted at about $5.80 putting this stock at a p/e of 11.89. Which is a steal of a deal. Now all of these forecast are based on the assumption that the recovery continues through 2010. So you kind of have to make you bet.

With that said I am looking to initiate a position in XOM. As I have been more inclined to sell puts I am looking at selling the Jan '12 $65 puts for around $8.10 per contract. Now you may ask yourself why go so far out in the future. One is it gives my position time to work. It also gives me a large margin of safety. It is not that I really intend to ever really be in the position for that long. With that said I am not going to put on the position just yet, I would like to see how you guys would play it if you were bullish on oil. What strategy would you use? How much time would you give the position to work? What contingencies might you have?


Position:

Today I initiated a position in XOM (Currently at $68.90) by selling the ITM $85 strike put with Jan '12 expiration. As I am bullish on Oil prices going into next year and feel confident with analyst estimates of XOM earning $5.80 a share I think that XOM is undervalued. I am comfortable using a 15 multiple to get a price target for XOM which puts this thing worth $87 a share. You also have to look at the fact that this stock is trading where at close to the same price as when oil was at $33. I think there will be some catch. There is also the XTO acqusition.

What do the probabilities and the Greeks look like?

I am including the Greeks now as I am trying to include them in my trading analysis and position selection. As you may notice with most of my positions that I have been posting about, I never really enter a position with the intention to capture the entire profit potential. Instead I will shoot for a bunch of singles and doubles as this is what fits my risk tolerance right now. My time frame is longer than a day, but I would be suprised if I hold this position past three months.

For now most of my trades are playing the greek Delta. As noted above I have slapped a $85 price target on this baby. So why is the Delta on this particular option. Well ITM options have a delta closer to 1 than OTM option. So with a Delta of $0.78 this means that every point move to the upside that XOM makes this option will move $0.78 or $78 in my favor. So a $10 move would put me in the money by $780, if, and I bold this because this is the big caveat, everything else meaning the other greeks remain constant. Which they all change over time, but this gives a ruff estimate.

What does the chart look like?

Notice the recent selloff. This presents good entry for new positions in my opinion. Looks like investers were able to support the price at about $68. Also notice that the 53 week low is around $62 and it hasn't traded much lower than $57 in the past two years. Like I have said before, not that the past is an indication of the future, but it is a base in which to start from.

Onn.tv XOM April '10 75/80 vertical spread

Here are the probabilities for XOM in this vertical spread idea. As I mentioned it is going to cost about $0.60 per spread for a potential reward of $4.40 per contract or 733%. But as you can see based on the probabilities there is a trade off for such a nice return. The likely hood that it reaches the $80 target is 15.94% . So from here you have to make your bets as what kinds of catalyst will get XOM to hit targets and how confident do you feel. But other than that it is a cheap bet so if you are wrong it is not that much money.

If you have any questions on how to interpret the probabilities, just ask me.

Options Central

http://www.optionseducation.org/resources/literature/options_central/2009_fall.pdf

This is a link to a quarterly publication by the OIC. It's kind of geared toward the beginning options investor as an educational tool. However, it also includes general happenings in the options industry that can be useful. If you're interested you can sign up for a free email alert at their website.

Prosper.com

This post is not trading related. But it is investment related.

I came across this website a few years ago when it was fairly new: www.prosper.com. It is a peer to peer lending site. It was fairly new at the time and to be honest I did not have any extra money to give out any loans.

Plus I wanted to see it develop for a few years before I put any of my own money at risk. There are a few ways for you to invest, Either direct to candidates that you screen or in a predefined portfolio.

Prosper provides you with all kinds of data on the borrowers and on default rates. But the newest and best feature is they have created an open market where you can sell your loans in the open market if you want to get out of them early.

I plan to start with a small $1,000-$2,500 investment and put it in the conservative portfolio that has about a 1.34% default rate which would give an expected return of about 5.7%.

I just thought I would share in case you guys were interested.

Another interesting Screen from Livevolpro

Below you see a screen on the earnings for RIMM. Starting at the far right corner you can see the earnings dates and results for the past 8 quarters. Then to the right you see the meat and potatoes of this screen. Starting with the top row of charts, you see how the underlying trading 5 days before and 5 days after earnings were announced, you also get the range the stock traded in during this 10 day period right below the charts. The next row of charts shows how the front month and next month straddle (ATM Call and ATM put) traded in the same 10 day period as well as the range. The last set of charts is what Implied volatility did during this time frame for the front month and the next month as well as the ranges.

This could be a useful tool when trying to play earnings.

Option Scan from livevolpro.com

I have been exploring the livevolpro.com options analytic platform and have found it very useful. I ran one of the pre-defined scans, "High option Volume" vs daily average volume and below are some of the results. I have highlighted PM with a yellow box as that is the one that stood out most to me.



As you can see from the above screen shot PM traded 434,469 contracts vs a daily average of 13,399. This is represents a 3,242.57% increase over daily volume. Wow that is huge. I scanned the news and could not find any significant new as too why this abnormal volume has crossed the tape. The only thing that I found is that the dividend is paid tomorrow, which I believe it is already too late to get the dividend as the ex-dividend date has already passed. So then I decided to dig a little deeper and see what the order flow was like, See below:



As you can see from the above all but about 10,000 of the 424,158 contracts were puts, the rest were calls. You can also see that the Net premium is positive $114k, which means the majority of the volume represented buying vs selling. Or put another way people were getting long delta vs being short delta. Now I am asking myself: Where or at what strikes was this volume done? I already know that 97% of the volume was from calls vs 3% from puts. And I know that before toady's volume there was an open interest of 281,343 vs volume of 424,158. So lets take a look at where the volume took place and see if we can draw any conclusions:

The first thing that stands out is the Jan '10 $45 strike which had volume of 221,069 call contracts on an open interest of 10,368. Unless there was some serious churning then these were most likely opening positions. This represents about 52% of the total volume just at this strike. There is some extreme bullishness. Lastly you can see that between the strike prices of $40-$55 is where 294,047 or 70% of the volume took place. So now that we now know where the action took place lets take a look at the 20 largest orders that hit the tape.

As you can see above there were some huge block trades that took place at the $45 strike. So how can we use this analysis as a trading idea? With this much call buying is there a floor put in at $45? Let me know what you guys think, I will follow up on this post tomorrow as I figure out how I can use this information to initiate a high probability play.

I would love to hear your insight...

FXI & EWZ

Sold 6 EWS puts Jun 10 $75 for an average of $9.5 each. Stock is at the bottom of support and I've made money trading the stock in the past. Can't but feel absolutely bullish with emerging world markets especially ones that are exploding right now. Stochastics are beginning to show extremely oversold conditions but have yet to crossover. Money supply is at the bottom of the channel where it has previously bounced off from.

Sold 14 FXI puts Jun 10 for an average of $3.25 each. Same situation as EWZ. Wanted to add some juice. This stock is exhibiting some life today and showed some reversal resiliency yesterday. Stochastics are showing extremely oversold conditions and have crossed over beginning to climb out. Money supply is showing a change in the upward direction.

Going to sell out of the positions as the stock climbs back up through the channel.

Looking at BBY too. May have found some support today.

Future Plans

So the time is finally here, the MBA is done and it's time to formulate a plan for my future. Subconsciously I guess I've been mulling some ideas through but it wasn't until last week that I consciously started giving it serious thought. I think I've got a rough game plan that I'm heading towards and that would be the following: study full time for the CFA exam until the end of March, head to Chicago in April and try to network and find an options related job that I think I'll be happy with. The exam is the first week of June with results not coming back until the end of August. That would give me five solid months of networking and job looking. If that doesn't turn up anything worth continuation of that goal, then at least I know I tried and I'll be better equipped to go looking for an analyst or research type position with an MBA and Level II of the CFA on the resume. By that time I hope I would know whether or not I would want to be in Chicago in general or if commuting in LA isn't so bad after all. This could also all change depending on if I'm able to find any LA area job opportunities that I'm interested in. We'll see where my thoughts are as the weeks roll on.

As far as getting back in to investing, viewing the CBOE archived footage has definitely excited me and opened up some new avenues to pursue further. But I had no shortage of those to begin with, which brings me to my conundrum. After years of a steady game plan of selling covered calls and just being long stock, I went to 50% cash before the financial crisis in anticipation or a recession and possibly wanting to have a large cash deposit on a condo, then the financial crisis hit and I ended up going to an all trading account and 90% cash at some point. I'm ready to devise a portfolio for the purpose of income generation but haven't come up with a good construction yet. I think I'm going to stick with what I know best which is covered calls on dividend paying stocks and cash secured puts to produce the income, then slowly add some other types of plays like spreads and flat out speculations as I get comfortable.

I'm still interested in furthering my options education arsenal and for me that means learning the relationships of delta, gamma, theta, and vega to the point where they feel as comfortable as a covered call is to me now. I want to spend some more time with the futures as well, but that is where I start getting overwhelmed. I feel it's important to stick to a few core vehicles or strategies just to keep things simple. There are so many things that can be watched and I don't have the time or interest to do them all. Stocks, ETFs, bonds, options, financial futures, commodity futures, fundamental analysis, technical analysis, gut instinct, a million different indicators, unlimited sources of trade ideas (TV, print, websites, blogs), unlimited trading tools. I mean where does it end? How much is too much? So for simplicity and to get me back in the game I think I'll scout out a few long-term covered calls that I think are attractive income generators, then as time permits continue to try and educate myself in other areas and then add things as I become comfortable with them.

My current plan is to spend 5 hours a day M-F on CFA prep and 3 hours on investments education/portfolio management. As far as the daily sources to follow for idea generation I like Fast Money, Barron's, Wall Street Journal, Interactive Broker's Options Intelligence Report, CBOE video news content, and Yahoo Finance. I had planned to add ONN.tv to this list. What are some of the staples for idea generation that you guys are currently using and what do you like about them? I don't want to limit myself to the same old sources but there isn't an unlimited amount of time to pursue everything either. Let me know what you guys think I should check out. For me this is where the blog has been helpful. Both of you guys have turned me on to things I hadn't heard about or just hadn't come across yet on my own. I'm definitely excited to be where I'm at right now. My anxiety and stress levels are almost non-existent and that is a welcomed change from the last few years. I'll keep you posted of my education findings and and portfolio construction. Let me know what kind of ideas you guys have for me. Thanks.

Notes on GE position

I sold 5 put contracts at the $15 strike with Jan '11 expiration for $2.28 per contract. At the time GE was trading at around $15.75. I have traded in and out of GE for the past year with a very good amount of success. I like GE as I think they are a solid company.

What I like about the position:

1 - I think that GE is currently undervalued. They are very diverse in their operations, which help to keep the company profitable in all different markets. But when the economy comes back and all business are doing well this means really good times for GE.

2 - Again this is another one of those plays where estimates are probably to low. Currently forecast are set at $1 per share for 2009 and about the same for 2010. Now I know they do have some exposure to financials with the finacial arm. But they have been winding that done to get it to about 40% of its business from 60%. They have reported that this has happened much faster than they had anticipated, which is good news for the overall health of the company.

3 - Becuase of its longevity as a company, I think that investors will be willing to place their bets on GE's survival. And because of that even if GE does not make $2 a share like it has in the past in 2010, investors are going to bid the stock up in anticipation of the good times to come. This is what I am trying to capitalize on.

What do the probabilities look like?



What about the chart?

STEC --> Looking to buy back my puts

As the stock approaches $14 resistance I will look to ring the register. Only have 2 puts right now I'm $80 positive and wanna reassess especially after over a week of up days. If the stock starts to fill the gap will look to get back in.

Dom, what are you doing with your puts?

Is this market going to pop soon? I think so...

Still waiting for the major indexes to break out of this consolidation/sideways actions. I'm watching for 112 on the SPY's. Will this occur this week?

OIC Seminars

Hey guys, Feb. 2 & 3 is the OIC Intermediate and Volatility seminars again at the Costa Mesa Hilton. I just signed up for both. The only possible reason I wouldn't attend is if I watched their free online webinars between now and then and didn't believe I had anything to gain from going to an in person seminar. I doubt that will be the case so I'm planning on going.

http://www.optionseducation.org/seminars/default.jsp#2010

CBOE Webinar Archive

Hey guys, that "3 Gurus" webinar from a few weeks ago is archived until 12-31 in case you're interested. Below is the link. I'm going to spend a few hours on it tonight so as of right now I have no idea what it's like. Just thought I would share.

ID: fredpatek

Password: patek2b

http://www.cboe.com/LearnCenter/OnlineU/Modules/Module3Gurus/mod3Gurus_1.aspx?CourseUserId=bc17859c-e290-4cb6-9e5d-321f457110da

Awsome options tool...

This morning I stumbled across what looks to be a really awesome tool for option traders. Check out the following site: www.livevol.com

Notes on BX

On 11/12/2009 I initiated a position in BX (black stone group) by selling 5 puts at the $15 strike price with Jan '11 expiration. At the time of the sale BX was trading at around $15.25. I do believe that the worst of the bleeding is over for this company and that deals are go to start again as they are able to possibly spin off some of the companies through IPO's that they had purchased through leveraged buyouts.

Why I like the position:

1 - They are expected to return to profitability this QTR after a few QTR's of negative earnings.

2 - There is a lot of chatter about them spinning off some companies via IPO, as the activity in this market has been increasing during recent months, and there has be decent interest in IPO's. The CEO said that it was prepping 8 of its holdings for IPO's in the near future. So far, of the 42 IPO's that had debuted this year as of 11/6/09 they have seen an average appreciation of about 7%. This is good for BX.

What do the probabilities look like?

What does the chart look like:

To be honest, I really did not look at the chart on this play.

Trade Idea

C was oversubscribed by 17X in after hours today at $3.15. Tomorrow depending on how this is trading in normal hours after the news is digested I might sell some naked $3 puts for March. I feel comfortable that with that level of interest at $3.15 that a short-term floor is put it at that price.

RIMM Earnings Play

Tomorrow RIMM will report earnings for the 3rd QTR. They are expected to earn about $1.04 per share on $3.78 Billion in Revenue. RIMM is expected to at least meet the streets expectations if not beat them. I think that investors are really going to be looking for a beat on Revenue and guidance for the 4th QTR and the next fiscal year.

Earnings plays are so hard to play. With that being said I do not feel comfortable playing the front month options as if it doe not work out I am screwed and I might as well go to the casino. I do however want to make a play on RIMM going into earnings. I am betting that they are going to beat the streets expectations on all fronts.

I have sold 1 Jan '11 put contract at the $60 strike for $1,050. Currently the Delta on this particular contract is $0.40, meaning for every $1 move in the stock this will move $0.40. From one of the options guys that I follow, he is saying that RIMM is pricing about a 10%. RIMM is currently trading at $64.70, so + 10% would put RIMM at about $71, if this happens I would theoretically be able to buy back the put I sold for $790 for a profit of about $260, in addition to a move of this size it should cause some mis-pricing in the option temporally allowing me to capture a little more. I really do not know what is going to happen, but this is one thing that could.

Why I like the play:

1 - Attractive valuations based on p/e ratio sited below.

2- Although competition has increased with Apple's iphone and the droid from Motorola. I think that RIMM will be okay. First because business's are heavily tied to the blackberry, they will continue to use it because it is what they have adapted to and it is the "name they know". This will continue for the same reason that business continue to use Microsoft Windows. I also think that there is a lot of room for growth internationally for RIMM. I read recently that they were in China and only had 1% of the market and 5% in other foreign markets. You add another 4% in China and that is another 60,000,000 hand sets with a population of 1.5 billion.

3 - And like most of the positions that I enter, I think that the recent sell off over the past few months creates a margin of safety to enter into a position at its current price levels.

See probabilities below:

As you can see in the above, my break-even price for RIMM is $49.55 which is a price I would not mind taking ownership off. At this price with estimates for the year at $4.15 this puts a p/e of about 11.9, and forward estimates are $4.80 which leaves this stock at a bargain with a p/e of 10.3.

I am looking for a quick trade on this play, but if I don't get it I have a back up plan of taking delivery of the stock and selling covered calls on it.

The chart:

As you can see on the chart, RIMM had a pretty sizable sell off that started on 9-24-09 which looks like it bottomed out on 11-2-2009. Since then it has been in a nice up move. Confirmation in the up move came when RIMM traded above its 50 day moving average. I would also like to see the 15 day MA cross over the 50 day to the upside soon.

Dom, the picture attached is in line with your posting earlier about not trading actively just for the sake of trading. I cut this from some article a few years ago and it's been taped above my computer monitor since. I can't say that I read it anymore, but just seeing the piece of paper reminds me as I know the gist of the message.

From the our friend Dr. Steinbarger

Jason,

I think this post really captures the converstation we have all the time about trading full time vs as a supplement to a full time job. I think it really depends on the person. But I do agree with not putting all of my money into trading. That is why I invest in real estate and also have a nice cushion in my savings.

Standing Aside in Slow Markets

I haven't traded this week. I placed two trades last week and closed them out quickly, one for a modest winner; the other for a modest loser. So this will possibly make two weeks where, basically, I haven't swung the bat and haven't made any money trading.

I'm fine with that. And therein lies a lesson.

When I began trading late in 1977, I made a conscious decision: I would pursue the markets, but not for my primary livelihood. My market activity would always be to supplement my income, not constitute my income.

Because of that decision, I've always had savings separate from my trading capital, and I've had investments separate from my trading capital.

And that gives me an important option: the option to stop trading.

My trading is mostly in the S&P 500 Index. Over the last twenty trading sessions, the median daily high-low range in SPY has been 1%. That is down 50% since June. Daily trading volume is down by a comparable percentage.

Here are the daily closing prices for SPY over the last 20 sessions: 111.11, 111.14, 111.14, 110.02, 109.41, 111.00, 110.80, 111.27, 109.44, 109.55, 111.25, 111.36, 110.81, 111.11, 110.93, 109.82, 109.81, 110.71, 111.05, 111.78. That's a little bit more than a 2 point range.

If I'm sitting at the poker table and keep drawing poor hands--a couple of low cards, unsuited--will I be placing big bets? No. I'll muck hand after hand. Eventually I'll draw cards worth playing.

If I'm a good baseball hitter and a pitcher is pitching around me, will I start swinging hard at pitches outside the strike zone? No, I'll stand there and wait for my pitch. Eventually I'll get balls worth swinging at, whether it's during this at-bat or a later one.

And eventually I'll get market moves worth trading for my style of trading.

But one key to longevity in markets is being able to stand aside when markets aren't giving you good pitches. It's the capital I don't have at risk in markets that allows me to keep my trading capital out of unnecessary risk.

To have a passion for trading--but not a need to trade: that's a great place to be if you're going to last in the markets.

Notes on EGLE

On 11-19-2009 I sold 10 puts on EGLE at the $5 strike with Jun 2010 expiry for $0.85 per contract. EGLE was trading around $6.25 per share. This is another Dry bulk shipper. This is just another bet on the global economy.


Why I like the Trade:


1 - It is currently trading at about 10 x forward earnings with estimates for 2009 at $0.65 a share.

2 - Again this is another one that can benefit from a rise in the baltic dry index. Like DRYS they have locked a large percentage of their fleet into contracts through 2010, but there is still a percentage that stands to gain with a rise in daily shipping rates.


3 - Even if earnings remain flat this stock would still be valued at $6.5 with a multiple of 10. So I would be more than happy to see this thing trade sidways for the next 6 months.


What do the probabilities look like:






What am I seeing on the chart?




It looks like EGLE has developed a range between $4.50 and $6.50 which has remained intact since July of this year. It will be interesting to watch to see how this plays out.

GLD short term view...

Mark, take a look at the analysis that the guy that runs the "Afraid to trade" blog.


Monthly Gold Prices Hint at CorrectionDec 14, 2009: 2:32 PM CST

Gold prices have been featured prominently in the news lately, with the strong run-up into the $1,225 level and then the quick decline back to $1,100. Let’s pull the perspective back and look at monthly gold prices to see a possible replay of a pattern that has formed twice in the past… each time forming just before a pullback in price.
I’m highlighting two prior periods in monthly gold prices, starting with the early 2006 spike high just shy of $750 per ounce.
The second highlight is early 2008 with the spike high just shy of $1,050 per ounce.
What do these two periods have in common?
Price rallied at least $300 over both periods and then formed a sharp spike up in price above the upper Bollinger Band… just before a retracement down in price occurred.
Neither of these pullbacks broke the uptrend in monthly prices, but both occurred just prior to a steep pullback.
In mid-2006, price fell from $750 back to $550 before forming a consolidation pattern and bouncing back off the rising 20 period EMA.
In mid to late 2008, price feel from $1,050 to $700, falling roughly $300 over the course of the next few months. Price this time broke the rising 20 month EMA but supported solidly on the rising 50 month EMA.
IF history repeats and the cycle repeats a third time into early 2010, then the next likely support target for gold would be back to the $950 to $1,000 level of the 20 month EMA, or the key breakout zone of $1,000.
That’s not too far away now, and it would seem logical to expect a correction or pullback in prices after such a steep rise we’ve seen over the last few months.
This cycle does not argue for an end to the uptrend, but a steady pullback that could last the next few months.
Keep this structure and prior pattern in mind as we turn the corner into 2010.
Corey Rosenbloom, CMTAfraid to Trade.com

GLD & SLV

Will look to enter a small feeler position (50 shares) in GLD & or SLV tomorrow. GLD is bouncing off the 50 SMA and SLV off the lower BB. Stops just below the key areas of support. Will add if stock continues to show strength and breakthrough resistances. Already scalped about $40 profits today in FCX, still holding 50 shares with a tight stop waiting for some action to the upside.

DRYS

On 11-18-2009 I initiated 2 positions in DRYS, it was trading around $7. I sold 10 put contracts at the $5 strike with Jan '11 expiry at $1.07. And I also sold 10 put contracts at the $5 strike with Jan '12 expiry for $1.56. As we watch the global economy recover I think we will eventually get some nice price action to the upside on the drybulk shippers. In the hieght of the financial crisis we saw the Baltic dry index sink from an all time high somewhere near 11,600 to a low of 666, or a 96% decline. Although like many of the dry bulk shippers DRYS has locked in foward contracts on a large percentage of its vessels through 2010 there is still upside in this name.

Why I like this position:

1 - with current estimates for total earnings for 2009 in at about $0.91 for the year, this means that DRYS is currently trading at a P/E of about 7.

2 - I like the prospects of the Baltic Dry Index turning. Although DRYS has locked in a large percentage of its fleet, it still benefits from rising shipping rates from increases in this index. When I initiated this position the index was trading around 4,200 or about 600% off its lows. I think the shippers have yet to reflect any of that gain in their share price.

3 - Even if you use next year EPS estimates at $0.89 per share (which I think are too low and need/wll be revised) using a very conservitive of 10 that values DRYS at about $9.

4- There have been and continue to be concerns about debt, but DRYS has been succesful at negotiating its debt and I think this will continue. I do see this as a situation that is Temporary and DRYS will be able to earn its way out of this mess as the economy continues to recover. This is not to say there will not be bumps along the way.

5 - Latly this name is not a pure play on the DRY Bulk Shippers. It also has oil drilling rigs that I think will do very well as the economy recovers and oil exploration projects come back online. I cant remember for sure but I think they were locking in with a 5 year contract with Brazilian oil company. I want to say it is PBR, but I can't remember for sure.

What do the probablities look like?



What do I see on the charts:

Again when I first initiated this position it was not so much technically driven as it is fundementally. I don't "normally" play positions on just technicals. I usually use them in conjunction with my fundemental analysis. The only thing I have seen in recent trading days is that DYRS may be forming some level of support at around $6. And over the past few months the $7.50 to $8 range has offered some strong resistance.

Some notes on STEC...

On 11-5-2009 I initated 5 short puts on STEC at the $12.50 strike price with Jan '11 expiry. I like the prospects of this company and think that it was unfairly sold off after reaching a 52 week high of $42.50 a share on 9-29-2009. The big sell off was caused when EMC one of the comany's largest customers reported that it had ordered to much product which gave question to the earnings exspectations of STEC; and also when litigation against STEC by sharelholders from a secondary offering said that top execs may have gave false and misleading statments that caused an artificially high price. Basically a lot of investors who bought in to the 9 million secondary offering near the highs lost a lot of money and they are pist off.

Why I like this position:

1 - it is currently trading at a p/e of 12 which is very low for a tech company. Tech companies usually trade at p/e's of 20-30 or higher beause of the growth potential.
2 - With current earnings estimates at $1.90 a share for 2010, this puts a foward p/e of just 6 on STEC. Even at the low end of P/E's for tech stocks at a multiple of 20, puts the a value of at least $38 ($1.9 x 20) on STEC stock.
3 - There is high institutional ownership at 37%. This puts the motives of the execs inline with thoses of shareholders, as they have a lot to gain or loose depending on the performance of the company.
4 - It has zero debt!
5 - I think that the recent sell off presents a great opportunity to enter a position in the stock.

What do the probablities look like?



In the future I may comment on the interpretation of the risk/reward calcutions. I don't really agree 100% with what is being calculated in the above analysis. But "theoretically" it is all correct. Be we all know how the theorectically can play out in reality!

What do I see on the Charts:

I don't really see anything technical that has made for a strong argument in my favor for this position. Rather I see value in the recent sell off. I think the charts are presenting an opportunity to enter what will be a very lucrative position.



UPDATE: Below are the results of tweeks to variables in the option pricing model that I mentioned in the comment.




Updated Chart

Update: 12/28/09

Pay particular attention to the volume behind the upmove. It traded half of its average daily volume in about 30 minutes. Look for shorts to get trapped and forced to cover on the way up. We are still targeting a move up to about $20. Would be normal to see a pullback or a few consolidation days before it continues the move higher.

I was also looking at implied volatility and the greeks. Today IV has shot up about 10% which has caused my position to lose premium at a slower rate. But I am paying particular attention to the greek vega as this measures how much the contract will move with a point change in IV. Currently it is .05 meaning that every contract that I have will lose $5 of premium value for every 1 point drop in IV. On 5 contracts that gives the total position a Vega of $25 meaning that every point to the downside on IV makes the premium $25 less. This would put me in the money an additional $250 on top of the $600 I am already up on the position. I anticipate that volatility will come in when the stock is ready to rest. It is interesting nonetheless to see volatility rise as price goes up as usually there is an inverse relationship.

Time to go long the dollar?

If you look at the dollar chart you'll see now the DXY0 is staying above the 50 Moving Day Average something it hasn't done since April. Also you can see that it is beginning to enter the Ichimoku Cloud which if it passes all the way through and begins to trade above the cloud can be a reliable bottom or top signal. On Balance Volume is beginning to head north indicating accumulation.

Stochastics may be signaling something different a potential short-term top.

SPY: Breakout or More Sideways Action

What it appears we're seeing right now is a volatility squeeze forming in the markets (SPY, S&P, QQQQ). Just from what I'm seeing on the charts is all indexes are continually moving higher and a contraction in volatility (bollinger bands tightening) . Since volatility is cyclical we should soon see a increase any day now and just judging from the trend we could see a breakout to new highs.

Another interesting developing is the market's behavior in relation to the dollar. Could this be the beginning of a break from the dollar lower/stocks higher relationship? Looks like it. As you can see from the dollar line (in red) both the dollar and SPY are moving higher in tandem. It would be quite a divergence if the market could trade higher with a stronger dollar.

The latter half of December could offer some good trading opportunities but will probably be choppy with all the confluence of action from money managers protecting and locking in their gains to traders close out positions for tax purposes to some individuals trying to chase performance and finish strong.

Keeping SLV on the Radar as it pulls back

SLV is on my alert list as I will look to put the position I recently closed back on if SLV pulls back to the 15.85-16 area. Take a look at the chart below:


Before I sold the Jan '12 at the $16 strike for $2.5 which I closed for even money. I have my eye on the $14 put with Jan '12 experation which are currently trading at 2.07. I am looking to enter with SLV around $16 and would like to collect at least $2.5 per contract at the $14 strike.

Added GE to my options portfolio...

I have traded this company off an on and profitably since the financial crisis and will continue to do so until it does not work anymore. This is one of those stocks that I would not mind owning either. It pays a dividend and in my opinion is naturally diversified not only geographically but by its vast number of business. I feel even more confident since it decided to wind down its financial arm to reduce its exposure to the financial side of the business. Its recent sale of NBC helped it raise a good chunk of cash. Anyways, below is the snapshot of the risk metrics I like to look at before I enter into a position.

Moving Averages (from T3 live)

How to Effectively Use Moving Averages on Daily Charts
Here are just a few simple ideas for putting moving averages to work:
1) Only consider buying a stock if it is above your moving average. By definition, if prices are below the average they are trending down.
2) When picking stocks, never buy a stock when prices are below the moving average, and never sell (short) a stock when price is above the moving average as the odds of being right are heavily against you.
3) Many traders will also use moving averages as an exit signal as they consider selling a stock that closes below the moving average.
4) Consider buying stocks as they drop near an upward sloping moving average. You'll notice when looking at charts that stocks often find support (bounce off) at moving averages. Buying on a pullback into a MA will often give you a good risk/reward entry point.
A Simple MA Crossover Strategy for Swing Traders

For this strategy we are utilizing a daily chart because these trades are meant to last a few days to a few weeks.We are not interested in what’s happening on a 5 or 30 minute time frame as its necessary to step back and look at a slightly bigger picture without all the noise found in intraday charts. The only indicators we place on the daily chart are an 8 and 21 period exponential moving average (EMA).For longs, we want to see the 8 period EMA cross above the 21 EMA. When this upward cross occurs we start looking for a trading setup to take place.The specific trade setup that we are looking for once this cross takes place is for the stock to pullback to the 8 EMA. The initial stop is the 21 EMA or 4 % of the stock price, whichever is greater. Once we are up 4% on the position we will move up stops to the 21 EMA.I will than use this EMA as a trailing stop until the target is hit or the trailing stop is hit. The target is an 8% move in the price of the stock from my entry price.Although we primarily use this tactic on specific stocks, it can be used for ETF’s very effectively.One way to slightly increase success in this setup is to trade only stocks where the 8 EMA is higher than the 21 EMA on a weekly chart for months and even years. If this setup exists on a weekly timeframe than it’s just a matter of waiting for an entry on the daily chart.

Calling a bottom in the Dollar? & Top in Yen?

Just thought I'd post some of my analysis in the dollar's action on Friday. A lot of indicators are pointing to a possible short-term break in the dollar's downward move. If you look at the UUP (Dollar Fund) you will see how it shot straight up and bounced onto resistance or the Ichimoku cloud. The inverse is also apparent in the UDN (Short Dollar Fund) where it is sitting on support 50 SMA after bouncing off the Ichimoku cloud. I will be interested to see how the markets handle a stronger dollar. If the dollar should continue rallying will the markets decouple and trade higher alongside the dollar? Or will the current pattern hold inverse to the dollar which would mean we have some darker days ahead of us and we've hit a short-term top. I now have 200 shares of the UDN buying all the way down on Friday. I have a tight stop at $23.2 to release 3/4 of my position should the dollar confirm the change.

UUP:



UDN:



As for the Yen. If the dollar trend continues I would expect to see the Yen begin to move up and through the Ichimoku cloud which could confirm a bottom and a new trend. I am still holding half my YCS position but had to cash out after buying right at the bottom $18.85 and sold half at $20.30 on Friday.

Trade Journal

Hey guys, I didn't know if you kept a trade journal in addition to financial record keeping. I have off and on. Sometimes I get lazy but I want to get back in to it. It helps remind me of my thoughts at the time I entered in to and out of a trade. For instance, as I watch SLV climb toward $20 I just keep rolling my eyes and calling myself an idiot because I had a $15-$20 call spread on the books that cost me nothing to put on. However, according to my journal I felt at the time I put it on that I had very little chance to make or lose anything on that position. At that time SLV hadn't moved very much the previous six months and I think I put it on when SLV was at about $12. I specifically did this trade to get my feet wet with trading spreads and since it felt like low risk I was comfortable with it. I ended up getting out at about $16.25 and made some money, but obviously could have made a lot more. So the journal has helped remind me that I never thought it had a chance to reach $20. And my thoughts for exiting the trade have been completely wrong, but at least I have something written down to remind me rather than just complain when you should've could've would've made more money.

BAC

Finally my 600 shares are beginning to look green! I think their next big news pop will come once they've found a CEO after this announcement of repaying TARP. Looking at $20 as a logical target but not pinning a target date. WFC will probably follow suit... Hopefully this is the catalyst that turns the under-performing financials around.

UDN & YCS

I've made over $200 on trading in & out of the UDN thus far for the past month or so. I initiated a small position (100 shares) in the YCS because there may be a temporary bottom in the Yen as the Japanese are appearing more serious about reversing their currency's continued strength. If you look at a daily chart it may appear that I have called a bottom but my stops are tight. The YCS is gapping way up this morning as I type. I would do options on both these but they are too illiquid.

UNG & Natural Gas Divergence

Waiting for that dead cat bounce but a good expose on the dis-relationship between the UNG etf and natural gas.

http://www.thedisciplinedinvestor.com/blog/2009/11/16/unnatural-gas-etf-ung-is-this-for-real/

November Options Trade Recap...

I want to get in the habit of recording my results on a monthly basis. As I wrote in earlier posts I am tyring to see if I can generate $500-$1,000 per month on the $17,000 I put in.

For the month of November I was able to generate about $1,250 in income. But I was only able to pull out about $800 in order to maintain my high water mark of $17,000 for the start of December.

As of December 2nd I have the following open positions:

1) 5 short puts on AA at $12.50 stike with Jan 2012 expiry

2) 5 short puts on BX at $15 stike with Jan 2011 expiry

3) 10 short puts on DRYS at $5 strike with Jan 2011 expiry

4) 10 short puts on DRYS at $5 strike with Jan 2012 expiry

5) 10 short puts on EGLE at $5 strike with Jun 2010 expiry

6) 5 short puts on STEC at $12.5 strike with Jan 2011 expiry

7) 1 vertical put spread on SOHU $55/$80 spread with Jan 2011 expiry

At this moment my Net liquidation value is $16,857.67, But there are still a few weeks left in the month.

Until next time,

Dominic

November Options Trade Recap...

What I would like to post for new positions...

For new positions I would like to post the analysis from my platform. Below is the probability of my position in STLD working out:



I am alos looking at possible initiating a position in UNG. It is close to its 1 year lowsof about $8.80.I periodically look on the ETF's website to see whether it is trading at a discount/premium to its NAV (Net Asset Value). Basically what it is really worth. As of yesterday it had a NAV of $8.84 and is currently trading at a premium of about $0.10.

I am looking to sell the some July Puts on UNG. See Analysis below: