RSS is one of my favorite tools available on the web. Before my implementation into the blog world my morning regiment of catching up on the overnight news was unorganized and time consuming. Everyday I would get up at 7 am and start typing www.somenewssite.com to get the daily juice. News and markets are tied like roots on trees. Any one critical happing in early morning earnings, military actions, or government data releases can really move the market before the open. As volatility and direction is crucial to stock and options trading, along with planning trades ahead of time, the immediacy of news stories links time and money. The faster I can catch up on happens and trader reaction the more money I can make.
You will notice I have placed in the sidebar of my blog a number of RSS feeds. The most important ones have a description of the last three posts at the feed. This gives me rough overview of different happenings and the ability only click the stories I feel relevant. Useful huh? I think so.
Even in the mid-day If step away from my computer I can access my site via mobile phone. This is even greater, for a phone connection to the web can be trying on patience. I only load on page to get all of the news from Reuters, AP, and the Financial times. One of my other RSS feeds is a site called Stocktwits which has a Twitter engine and thousands of traders. It is like having the noise from the trading floor right in front of you. To a non-trader this may seems irrelevant, but…
In the design of a web application there are so many resources that need to be used if you are embarking on new ground. What do you do when you get stuck? Load up few RSS feeds of popular coders blogs and your answers will be flooding onto your home page before you have time to ask the question.
Fashion or Interior Design. Think of how far ahead of the crowd you can be if everyday you see the updated version of the top designers ideas. Our parents could never do research this fast. Use there updated info to inspire your creations all delivered right to your blog.
This whole RSS feature is so great on WordPress because you can customize the look and feel of each feed. On most blog sites you have your feeds in one location and they all look the same. WordPress has plug-ins allowing you make your feeds display as many, or few, feeds with your own title images and CSS. Customizable, useful syndication = CUS = RSS = Really simple syndication.
Alright people. As part of the contest at the Art Institute this is my first blog about 16 things. I have had this blog just a short while, started December 2008, and have continued to post stock market jargon nearly everyday since its inception. When I saw the banner ad for “16 Things” immediate interest came over my personality.
Who: My Name is Brett and I run an options trading company out of my house. I have learned to trade reading many books (look in the library for some of them) and following tons of traders on tools like Twitter and Facebook. The web has been pinnacle to this chapter in my life hence the participation at AIM and “16 Things”
What’s Next: As this is the first blog about connecting to 16 things it should satisfy the first thing!!! Yea! Take the time to take the poll in my sidebar for the next few weeks it will be about Geothermal energy. Also I have RSS feeds up and down the sidebar with news organizations and trader commentary, but more on that in my next blog on RSS!
I just read a blog post on finance.google.com about a guy who lost $22,000 over night in the $FAZ. In case you weren’t up on the last post about $FAZ. This ETf if the 3X leveraged short of the russel financial index. A very volitile stock with large over night distributions. This thing can eat people up and sent them back to a day job if they aren’t carefull. I will show an example of today after hours action in the market
Open the link to get a better view of the sell-off after hours. I shouldn’t even call it a sell off, because it is more of a distribution in the fund than a sell off of investors. Regardless it is vital to have hedge of some sort before trading a product like this over night.
For example. I am long this ETf with an average of $60.59, but I am short a call ratio +1@45 & -2@50. Yesterday when I purchased the shares i also went a short a 60 call and I have hiding in portfolio a short 95 call. this gives me a neutral delta between 48 and 63 with time decay in my favor. I can add to my position if it rises and add puts or sell the stock if it sags much further. An acceptable rate of return and genuine safety of principle.
Alright so I have been getting used to my school situation and trading so hard the days have been flying almost too fast to write. The market has successfully sagged just a bit more in recent weeks with an emphasis in failing financials. We are on the brink of what the elliott wave people think is wave five. Which means with one more push to the downside we could begin our next bull run to the upside. This would coincide with the Obama administrations tactics to shore up anymore financial failures and start creating manufacturing jobs.
This brings me a slogan people seem to throw around these days as an indication of reversal. The term is coined as
as defined in the American Heritage Dictionary as the following:
1. The act of surrendering or giving up. Surrender.
2. A document containing the terms of surrender.
Analysts use this term to define the moment when all of the week blood has been completely lost a grip and sold out in the markets. We might just see this if the market contiues to sag beyond the previous two lows of the last quarter. Watch the technical levels between 7500 – 7000 on the DOW. I would think if we broke down below those levels we will see a bottom in the mid to high 6000s.
The previous post determined we have the possibility of a reverse head and shoulders pattern. In the analysis I put forth the upside reaction will be accompanied by a an increase in volume.
In the chart today I have drawn a few trendlines in the volume section to show how the volume reacts in this pattern. I referenced Technical Analysis of Stock Trends By Edwards, Magee, & Bassetti to understand a bit further of this pattern. We can see how the volume tracks a bit higher into the first hand or shoulders and the whole pattern has an increased volume significance – especially in the right shoulder.
It is important to note the second shoulder is finding resistance at the congestion level marked by the lower support line, but it has also tracked a bit lower than the original analysis. Personally Personally I am waiting to see a more bullish indication on the intraday and daily chart before working into a long position. Last fall before the bog breakout to the downside we had a similar pattern emerging in the ($XLF) Watch out! This may be a falling knife.
In today’s trade I took some of the lessons from Technical Analysis of Stock Trends and applied them to the ($USO) United States Oil fund. This pattern is developing nicely as an inverse head and shoulders. Volume is not visible on this chart, but is has receded since the top reversal a few days ago. We have had four declining days of volume which can indicate every day the volume does decline further we increase our chances of a reversal to the upside. We never know if this will be the case, so it is best wait until a reversal in the trend breaks one of the trendlines and/or use a very small position pyramiding the purchase of more shares if your analysis is correct.
The volume action is nearly obvious on this price chart with the second test against the downward trendline. Today we see how flat the actions was. The trending looks to be taking its course with flat lows in price today; meaning the sellers are loosing their steam and buyers are holding but not yet powering to the upside. When the buyers grab control again possibly only a few sellers will try and hold back their momentum. The price will invariably rise.
We can see in the photo how ($USO) landed with a a few “gaps” in a consolidation pattern at the top of the head (center of picture or low point) and then proceeded a strong move upward to latest peak. In Technical Analysis of Stock Trends it is mentioned that “gaps” need to be closed, although not a certainty. So with this point we could assume a possible uptrend will need to take place in the coming days to close two “gaps” highlighted in green on the recent down swing. The sooner these “gaps” greater the chance we have the stock will retrace back towards the neck line in a bull action.
To conclude, my indication is to go long tomorrow or the next day, depending on how we open in the morning, and look for today’s low to hold as we watch the bulls push this ETF back above the neck line (top of the chart) to start the next bull swing. I am currently short Calls @ 35 in ($USO) and @ 30 ($DUG) so this week could prove an adjustment in my position in a need to cover one to retain profits.
A recap of what I am seeing in order of importance:
Sinking volume everyday since the peak five days ago. This increases the probability of a reversal.
Flattening lows inter-day and two touches into the downward trendline.
Two unclosed “Gaps” on the latest declining price move. These “Gaps” will need a rise to close.
The consolidation in the center of chart has two noticeable “Gaps” which were closed almost immediately.
The chart gives a broad indication an inverse head and shoulders is developing.
I took a tour of the Grain Exchange trading floor this fall and heard some interesting stories from one of the old timers who had been around the market for decades. He told me how cheap wheat was trading compared to previous years. He also let me know the farmers in the Midwest and Southern United States wheat could not get much cheaper, for the cost of growing the crop is still high. The price of the land, the equipment, the fertilizer, and the man power put the break even price at about $6.50 bushel. Wheat at the time of my tour was trading at about $6.40 a bushel. After the crash in the fall prices fell over a hundred points lower (the chart below indicates a low $4.71). Since the decline started to flatten last fall the market has seemed to consolidate with a slight upside bias. Do a search online for some newsletters regarding the crop and read the COT report, because it seems like the price is about to start its next move up.
Options are a great way mitigate risk in the markets as discussed before. In this example I will illustrate how a “delta spread” can be used to stay market neutral and adjust a position to take advantage of time decay.
This is an advanced strategy and I would not recommend this or any other trade on this blog. For more information about this see my ***disclaimer***
I will use (RIMM) as the stock for today’s trade of the day. With ($RIMM) trading down in a range of $35-$50 we have come upon an opportunity to exercise a Put spread using deltas to stay neutral. By selling twice as many out of-the-money (OTM) puts as in-the-money (ITM) on two different strikes we have generated a Put spread which will become more profitable if the stock stays within the desired range until expiration. If the stock heads higher the holder of the put spread will take no loss, for the premium brought in from the sale of the OTM puts will still be in possession.
With deltas we can find the neutral ratio of the spread and adjust into expiration.
If we take the -0.54 delta from the ITM, or higher strike and divide by the -0.40 of the OTM, or lower strike we find out how many puts we must sell to become market neutral. Let’s try it!
-0.54 / -0.4 = 1.35
This ratio indicates we must sell 1.35 puts for each put bought. As time progresses the premiumes decay and the buyer will have his/her profit. With any trade the stock will adjust in price, and if the postion moves to far the holder can adjust his/her postion back into neutral by buying another 50 or selling another 45.
In the world of options many terms exist which can scare new investors from very safe and potentially profitable additions to a portfolio. This post is about the definition of a “PUT”
Options provide the right but not the obligation to buy or sell a particular stock at certain price for a limited time.
A Put is a form of option which gives the purchaser the right to sell or Put a stock at a specific price. The price which this action will occur is labeled as the strike price. A put Increases in intrinsic value, or price value, as a stock goes down. Like all options a put will decrease in time value, or extrinsic value, the closer to the expiration date.
An investor or trader may purchase and hold a put:
or a put may be writen or sold by an Investor, trader, or market maker:
Each of these models above illustrate how the put will work visually in different situations.
Last September Warren Buffet made a decision to purchase a $5bn stake of preferred holdings in Goldman Saks (GS). At the time I regarded the position as risky but intelligent. A few week later the market was getting killed and I watched this (GS) drop right along with it. My assertions were confirmed for only a short time. The pullback today has held the previous trend and this baby of Buffets is looking pretty strong.
For my trading I would think to watch this pullback and observe how the market takes the reaction we are looking to bring us into February. If DOW theory holds the bullish pattern on the stair step up it should provide many opportunities for a long and profitable investment.
February should provide a very clear message as to the ending of the sub-prime debacle and I believe this company could be a new bellwether in a new era of investment banking.
“Hey ya’ll shoppers the time to get into these returned slightly used pants and button down is now.” This is what I hear coming from the sales associates at a commission based fashion retailer around the country.
Last night with some friends visiting we enjoyed a meal of sushi and half price wine. The story one of our friends told was of her days working at (JVN) Nordstroms. What she exclaimed indicated for as many items she sells to consumers just as many walk into the store as a return. This is rather frightening to hear. We as traders all know the retailers are having a tough time moving inventory, but it seems as if the challenge is two fold.
Another thing that happens at the retailers I have personally noticed is the give away syndrome. In the early fall Macy’s (M) seemed to be having these little incentives to get people into the store. Music, food, and drinks were being offered in conjunction with sales events. As the fall season progressed the little party halted sharp and giveaways started. About a month ago I picked up a retail $700 jacket for a cool $35. If that isn’t a shear handout I don’t know what is. Will this ever stop or did this sell off really change the landscape we shop for a long time.
My last retail feature for today is the Gap (GPS). This baby boomer favorite has broken its stock range from the $16-21 range it held for years to a new $10-14. As part of my very unscientific research we walked into this retailer to see what they were doing to combat the inventory surplus. To my surprise nothing had changed; yea they had an after holiday sales rack, and a deal if you spend more than $75, but nothing seriously stood out as dire or needy. The actually had a good variety of clothing and a clean well kept store and happy employees. Better than I could say for the other two examples.
Technically Gap seems to be recovering better than Macy’s and Nordstroms after the 2008 sell-off. And after walking into their store the merchandise managers seem to have prepared better than others. They are not giving away the store, they may have returns but you can’t tell by looking around, and the employees seems ready to help. I can conclude this is why Gap has been such a strong company for so many years. They may be the one to preform better in the near future as well.
Everybody I talk to, trader or not, is speculating the next big rise in oil. Today I found a bit of evidence this speculation might be occurring now. The MACD indicator as a lower indicator is one indication of a new trend, and the chart is showing a breakout to the upside.
The MACD (moving average convergence divergence indicator) in this example has a crossover below its divergence line which can indicate a bull trend may be starting. Many traders will wait until the two moving averages pass above the 0 line before taking a long position to avoid a fake-out or bull trap.
The combination of a trendline breakout and the crossover might be all some traders need to make a quick profit off the biggest moves in a new trend. An early entry can also benefit a trader by allowing the greatest risk reward ratio. If the breakout falls back to below the halfway mark of the rise it may be a fake move and selling will overcome once again.
In the world of options a vocabulary exists which seems to help scare many people away from the opportunities these products provide. This post will hopefully help provide a snap back for the you to reference what these Greek terms represent.
The amount by which an option’s price will change for a one-point change in price by the underlying entity. Call options have positive deltas, while put options have negative deltas. Technically, the delta is an instantaneous measure of the option’s price change, so that the delta will be altered for even fractional changes by the underlying entity.
The rate of change in option’s delta for a one-unit change in the price of the security.
For example: this correlated numeral is tied to the delta in a way that they mathematically help each other. When the price of the security changes the option price needs to change and an exponential factor needs to be addressed. The gamma number is the ratio of the square of that number.
A measure of the rate of change in an option’s theoretical value for a one-unit change in time to the option’s expiration date.
For example: in company (XYZ) we notice the stock has been in a down trend for about six months and the price is around 28 in the begining of December. The JAN25 Calls have a theta of -0.4. At one month (January 1st) to expiration we see the theta has been shriking and now the theta is -0.2. Cut in half. Thetas will decrease more rapidly the closer we get to expiration.
A measure of the rate of change in an option’s theoretical value for a one-unit change in the volatility assumption.
For example: if we own a JUL60 call with a vega of .18 and the market volatility falls from 2% to 1% we can assume the vega will drop to maybe .15 The other element we notice with a vega is how the price will drop the closer we come to expiration. This makes sense because the less time you have left in an option the less time there is for the stock/option to move a great deal.
Use these variables to think about and evaluate different trading strategies using options in the markets always abiding by the margin of safety.
Last year we saw levels in the (VIX) CBOE Volatility index reach soaring heights and near record levels. As proclaimed by my brokers over at thinkorswim.com retail investors have a very difficult time timing and making money trading the index. It is best used as an indicator for retail investors as a guide to position sizing.
We reached the spiking high of 96.40 during our large market sell off last fall. This is an incredible feat for it has only reached this high twice before. Once in the 1987 crash and again we flirted with triple digit highs in the 2000 – 2001 dot com debacle. An option trader will relish this sort of environment, for price increase substantially for the options markets. out-of-the-money options have premiums matching in-the-money and can provide big profits for a trader.
example: If company (XYZ) was trading at $50 dollars and we walked into a large sell off with 7-9% volatility, or 90 on the (VIX), we may see the equity sell down to $40 or even $35. With the (VIX) trading above 70 we will see option pricing explode. This gives traders and investors the ability to reposition with covered calls, naked calls and naked puts in the short term. Normally these trades can take six months to a year for a good 20% profit to set in, but when short term calls and puts, one or two month expiration, have high prices a 20% profit can be achieved in a quarter or less. As a trader selling a one month expiration call at high volatility brings in credit for his/her account immediately. If the stock rallies higher the trader will need to purchase the stock equal to as many contracts sold. If the market continues to sag then the traders will do nothing. It is important for the investor that he/she has the capital available to purchase the equity when, or if, the stock climbs or he/she will be called out at a loss when the option expires. If the trader stays and watches the postion an acceptable margin of safety is achieved.
Other considerations for the (VIX) are not to trade the instrument outright. Floor traders use the (VIX) as a hedging tool but for the retail investor this can proof dire. In times of dystress, like last fall, the (VIX) will move large spans in a short time. Any account under $100,000 with a 0.5% or 1% risk ratio could be seriously damaged in a very short time. If one were to use the (VIX) as a trade it would be very important to stay with the trade at all times and use very little capital.
The volatility index is best used as a guide to the near future for options and equities. The index provides us with a sort of crystal ball into the moves the market will make in the short term. Directly correlated to the size of the market moves it is possible, as a retail or semi-professional, to use the index in position sizing, setting stops, and time horizon. At (VIX) around 40 indicates the general market has the posssiblity to run 2-3% any given day. Using this information can really help with choosing the width of condors and butterflies. If you invest or trade a stock with a beta of 1 it would be safe to asssume that stock could move 3-2% and stops need to relfect that. For the long term investor any loss occured in a high volatility time may take longer than expected to return, and purchases made during these times, for the longer term investor, could return short than normal.
New editions to the library… feel free to leave comments.
With the new year now behind us it will be a number full trading weeks. Welcome back to work everyone. Over the last few days we have seen incredible volume and gains in the (USO) United States Oil ETF. Look at the acceleration on this chart and the volume spike. Watch for the pull back, but this seems to be pretty strong.