SPY within arms length of recent highs

This market still has plenty of bids to keep it moving higher. Monday we got a much needed move lower to work off some overbought conditions and finally had some volatility come back into the market for the first time in a long time. On the dip I added a few more long positions to my portfolio as I tend to believe this market has an agenda to the upside for the year. We are within a $1 of all multi year highs made just the other day. The question is whether we will trade sideways for a while before resuming the trend higher.

Ultimately I think we will get a test of all time highs this year around the $157 handle. So for know I will continue mostly with covered call positions.

Good Luck Trading!

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BAM! Volatility jumped 30% yesterday

We finally have a two sided market. It is kind of funny how markets will stair step there way higher and just fall off a cliff when they need a break. But it is healthy for a market to have corrections and consolidate moves. I don't think anyone was surprised that the market finally traded lower, what surprised most people is how fast it happened. You would think we would know this by now that markets always seem to fall much faster then they rise. I still don't think this changes anything with respect to the overall trend of the market. But I do however think that we could see some price consolidation for the next few weeks in the $147-$153 range.

With that being said I may look into trade ideas for some iron condors that may look attractive now that we finally have some volatility back in the market. I will also be searching for opportunities to add some more high yield covered call plays.

The first place I will be monitoring is the Dow 30 stocks for what you may call accidental high yielders. Here is the scan that I have set up and the different metrics I am looking at:

I already have positions in 5 of the top 10 on this list based on yield. DD or Dupont is the one looking like it has the most potential for me at the moment. But I will wait and see what the market does over the next few days. I would like the RSI reading to get a bit closer to 30 increasing not only the yield but my margin of safety with respect to price or cost basis. If we do get a bit more downside it should also increase volatility a bit, which means more premium I get to collect from the call I will sell against it. All these things lead to a higher probability of success.

If you don't have criteria for a trade, take a moment to think about things that make you compelled to take a position. Then put those things aside and think about what you know about options and how you can increase your edge over the other retail participants.

Please share your trade criteria with us below in the comments. It can be criteria for trades in general, or criteria for certain strategies.

Good Luck Trading!

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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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ES Video Update

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Why you should max out your 401k contribution

First let me start off by admitting that I am not the biggest fan of the limited options that you have in an employer 401k. However there are many other advantages that I am going to go through in this post. Here are the top 3 benefits to maxing out your 401k:

1) Reduces your taxes. Contributions to a 401k are deducted from your pay before taxes are calculated. In 2013 the individual contribution limits are $17,500 or $23,500 if you are 50 or older. Not only will you not pay taxes on your contribution, but it may also put you in a lower tax bracket for the remainder of your income that will be taxed.

2) Free money with an employer match. Now most companies will not match 100% of the money you put in. But a typical match is 50 cents for every dollar you put in for up to 6% of your salary. So if you are making $100k a year your employer would match half of the first $6k of your contributions ($3k in free money from your employer).

3) Tax deferred growth. Since you don't pay taxes on your 401k money until you start pulling money out, your nest egg gets to grow tax free which allows your money to compound more quickly.

In my opinion these are very compelling reasons to max out your 401k and the earlier you start the easier it is. If you get use to this strategy early you wont miss the money.

Now I started this post stating the big elephant in the room. That is that you don't have that many choices of where you can invest your money. Most companies have a dozen or so different funds and a money market option.

I would typically recommend that you choose a broad market fund. But if you are super paranoid than just leave it in a money market fund. Also remember that you don't have to always be invested. You have the ability to move money between funds and the money market if you think the markets are in for a large decline.

Good Luck Trading!

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Coffee, Bonds, and Interest Rates

So yesterday I was sitting in a local coffee shop working on a financial model for my day job, when a gentlmen asked me if I was studying. That question led to about an hour long conversation about what I do and a lengthy discussion about the financial markets. Michael was his name and he is a retired pilot trying to figure out what to do with his idle cash. From our conversation I gathered that he had been trading bonds from the long side had been recently raising cash as he realizes that bond prices likely don't have much room to the upside. We talked about interest rates being near zero, with no room to go lower. Although neither of us know the timing, eventually interest rates are going to go up. At the very least we agree that they can't go any lower.

After we talked through a few different ways and trading vehichles to play out this thesis I reccomended to him two resources that I reccomend to everyone. That is the Think or Swim trading platform by TD Ameritrade and Tastytrade.com (links below). And of course a shameless plug, I gave in our blog url.

You could say that I am on a mission. I want people to take a more active role in their finances. I am not suggesting that you need to be glued to your computer screen 24/7, but you should know that trading is not as complicated as the media makes it out to be. You are smart enough to manage your own money. And there are ways to not only provide you with downside protection, but also to enhance your returns. The best thing is that most of the strategies that I would be an advocate of for the average retail investor will only reduce the amount of risk taken and increase the probabilty of success where comparing it to the traditional buy and hold strategy touted by financial advisors (glorified salesman).

I want you to have more than one way to make money. Don't you?

Good Luck Trading!


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Selling Option Premium

When it comes to trading options I have to admit that I have a pre-disposition to selling option premium vs buying it. My brain goes to great lengths to prevent me from buying option premium. Now this has not always been the case. When I first started trading options I was mostly a buyer, except for the old covered call strategy. Now theoretically you can find an option strategy that you pay for that has the same risk profile and probability for success. For example, you could buy a callspread vs selling a putspread.

So why do I prefer to sell options? The first reason I prefer to sell option premium is because of theta or time decay. Every option that trades is a decaying asset. By selling an option I get paid for everyday that goes by. Additionally I am selling an option that has no real or intrinsic value, based on the way I choose what to sell. What I mean by this is that lets say I sell a $25 put on MSFT for $1 when MSFT is trading for $27. The option has no intrinsic value because it is out of the money. MSFT would have to fall $2.01 to be in the money by a penny and would have to fall greater than $3.00 before I even begin to lose any money. I refer to this as my downside protection or cushion. You can think of it this way I am buying a stock with a fair market value of $27/share for $24, I know have an edge over every other market participant that went and paid $27 for the stock.

I especially like the fact that when I sell options I have more than one way to be right. Lets stick to the example of selling a $25 put on MSFT. I can make money the following ways:

1) MSFT continues to trade higher = Money in the bank
2) MSFT doesn't move and stays at $27/share at expiration = Money in the bank
3) MSFT trades lower but stays above my breakeven of $24.

So as you can see in this example I make money at any price greater than $24/share. Now lets compare that to buying options. When you are a buyer of options now you have time working against you. Now instead of making money for every passing day, you are now losing money through the theta or time decay of the option purchased. When you buy options you have to be right about the following: Direction, Timing, and Volatility. And as we know timing the market can be like catching a falling knife.

And then there is my least favorite way of trading...buying or shorting a stock outright with no options traded against the position. This is the way most retail investors trade. You know have a 50/50 shot at making money. And you only have one way to make it, if you buy the stock it has to go up in value to make you money (unless its paying a dividend of course), and if you short a stock it has to go down in value to make you money.

I don't know about you but selling options still sounds way more favorable to me. I will take multiple ways to making money on a trade vs a single way every day of the week.

Good Luck Trading!

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Long Volatility via VXX

As I have been talking about over and over for the past few weeks. Right now the market direction is up and  I am trying to sit on my hands and not add to any new long positions. The risk/reward to adding new positions with markets at the upper end of their range and at 5+ year highs is very hard to justify. The SPY is possibly starting to show signs of getting a bit tired. With that Volatility (VIX) is at the lower end of its range and is currently in the 13% percentile.

With that, this morning I sold the Mar '13 $22 put @ $1.28. In other words I collected a $1.28($128 bucks), betting that volatility is not going much lower and could go higher between now and March Expiration. By break even is at $20.82. I really like the fact that my Theta is about $2.33/day.

After adding this to my overall portfolio I am net long about 42 SPY deltas.

Additionally this week PBI will be paying its quarterly dividend. /The covered call I sold against my stock position is about $2 ITM. So I will update the original post on this position as to whether I get exercised to sell the stock or if I go under the radar and keep the dividend. Either way I make money :)

Good Luck Trading!

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If you like the hard work we put into our blog posts and videos, PLEASE help us out by sharing them. Click the share links below and share them on FB, twitter, etc. It really helps us get more exposure and grow IN THE MONEY TRADES!

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!

What goes up...must go higher?

The markets continue to ride this bull run higher. As we all know, the market is just one big auction where buyers and sellers take turns being in control. But there are times when it seems like one side or the other takes a longer term than they deserve. It is times like these where the market seems one sided. But as they say, the trend is your friend and being long is working in this market.

As I have been saying over and over again the last few weeks since I started blogging again, the only real positions that I have been able to initiate in this low vol environment are long dated high yield dividend plays with covered calls. I am slightly short some SPY's via a short call spread, but my short delta exposure here is very small. I don't plan on adding to this position until we get signs that the market is ready to let the bears into the driver seat for a while.

This morning we are going to see markets gap higher as the overnight markets trade higher and a well accepted US jobs report. I think the report said the private sector added some 157,000 jobs with the unemployment rate at 7.9%.

I will admit that its been a struggle to sit on my hands. But it is honestly hard to initiate new longs at these levels. I did however put on a covered call position in AT&T (T). I know currently have about 40% cash in my portfolio.

Don't get emotionally attached and don't try to force a position. The market doesn't care what your position is or what you think.

Good Luck Trading!!!