Here is a strategy that works well for low priced equities. We now have many many to choose from. Bear in mind here that the worse case scenario is for the underlying to go belly up and stop trading in that equity. Since the advent of the ETF's, this is not so much a problem. For this reason I particularly like this strategy.
Example: we have UYG trading for about 5.25. If we were to sell Feb 4 puts and collect .35 we would have a gain of 14% (250.00 margin required) If the stock is above 4 by the 3rd Friday in Feb, this will expire worthless and I pocketed the 35 already. If the stock is say 3 by then (or a week or so before ex date) we can buy the option back for a significant loss (possibly the price would be 1.20) but then we sell the March for a gain (possibly sell the March for about 1.40) We continue to do this until some day the stock does close above 4 and our position expires worthless.
If you are in love with the underlying, you can always take assignment and sell calls against the long equity you own.
I have done this strategy for over 15 years. It is a good cash generating strategy.
Virtual trade it and see.
Monday, December 29, 2008
Thursday, December 18, 2008
By now we have all heard of the "flations"
Is it inflation with all the monies pumped into the economy, or is it deflation as economic growth goes south for a season.
Given the choice between the 2, govs of course prefer the inflation. Tax revenue, business models, retirement planning etc all hinge on being able to have a higher valuation down the road.
I think everyone is as confused. We see gold taking off the last few days like no tomorrow, yet on the other hand, we witness the lowest fed rates in history. Gold screaming inflation while fed funds screaming deflation. What is an investor to do?
Well, I think both scenarios are not good for equities. That should be a given. I supposed that deflation has not run the course yet. I would be on that side of the aisle until proven otherwise. But if after writing this I see inflation getting the upper hand, would it be wrong to switch opinions? Isn't that what trading is about?
As some one commented about 30 year bonds and a 30 year cycle, we are on the edge of yet another bubble. The treasury bubble. If inflation takes hold, these thing are certain to come tumbling down. Since I am not a good timer, I will sit on the sidelines of this show until I feel confident of the bubble popping. Then I expect to get in.
Given the choice between the 2, govs of course prefer the inflation. Tax revenue, business models, retirement planning etc all hinge on being able to have a higher valuation down the road.
I think everyone is as confused. We see gold taking off the last few days like no tomorrow, yet on the other hand, we witness the lowest fed rates in history. Gold screaming inflation while fed funds screaming deflation. What is an investor to do?
Well, I think both scenarios are not good for equities. That should be a given. I supposed that deflation has not run the course yet. I would be on that side of the aisle until proven otherwise. But if after writing this I see inflation getting the upper hand, would it be wrong to switch opinions? Isn't that what trading is about?
As some one commented about 30 year bonds and a 30 year cycle, we are on the edge of yet another bubble. The treasury bubble. If inflation takes hold, these thing are certain to come tumbling down. Since I am not a good timer, I will sit on the sidelines of this show until I feel confident of the bubble popping. Then I expect to get in.
Wednesday, December 17, 2008
Didnt we see this movie before?
If I remember the plot, we watch as lending rates go to zero and we have a horror of a lost 2 decades. It must be a rerun, because certainly we cant be witnessing the same movie twice?
I am referring to Japan for those unaware. I think they tried the same things. They Had the same lies spread about their banks that we do. I remember reading about all the same gimmicks used before.
I guess we can sit back and watch the sequel. As in sequels, we all know what happens. We just watch to see the twist and turns to get us there.
Those that do not learn from history are doomed to repeat the same mistakes.
I am referring to Japan for those unaware. I think they tried the same things. They Had the same lies spread about their banks that we do. I remember reading about all the same gimmicks used before.
I guess we can sit back and watch the sequel. As in sequels, we all know what happens. We just watch to see the twist and turns to get us there.
Those that do not learn from history are doomed to repeat the same mistakes.
Tuesday, December 16, 2008
Fed rates
It is no surprise that the feds will cut the rate. The only question is by how much. If they take the lead from last weeks zero return for t-bills, then it will be 3/4 cut. I personally expect 1/2. They will want to have some left over for the next meeting.
At this time it does not matter much. They will most certainly go to zero before this is all through. Then what? The next great bubble? Treasuries?
Interesting read last night from a respected analyst (respected by me at least) if we are to work the numbers (I wont bore you with the analysis) the projected mean for this recession based on previous recessions that have been as severe, he is expecting a 500 S&P. That tells you the downside potential.
Now we will not go there over night and if this turmoil is anything like the '30's, we still have about 2 years of pain to go and another 20% or so of house prices to fall.
You will need to change your habits of buying on the dips we have done so long and start (or continue) to sell on the rallies.
You all should know my preference. Buy the long month puts and sell the short months. If we get large rallies, buy back the short month wait for the drop and then sell again. Either that or wait for the drop, get out of the entire position, wait for the run up and place the trade again.
For the bold...Buy puts. You will need to have some pepto on hand because the swings will make the most iron stomach wretch as we go down and come screaming back up again.
At this time it does not matter much. They will most certainly go to zero before this is all through. Then what? The next great bubble? Treasuries?
Interesting read last night from a respected analyst (respected by me at least) if we are to work the numbers (I wont bore you with the analysis) the projected mean for this recession based on previous recessions that have been as severe, he is expecting a 500 S&P. That tells you the downside potential.
Now we will not go there over night and if this turmoil is anything like the '30's, we still have about 2 years of pain to go and another 20% or so of house prices to fall.
You will need to change your habits of buying on the dips we have done so long and start (or continue) to sell on the rallies.
You all should know my preference. Buy the long month puts and sell the short months. If we get large rallies, buy back the short month wait for the drop and then sell again. Either that or wait for the drop, get out of the entire position, wait for the run up and place the trade again.
For the bold...Buy puts. You will need to have some pepto on hand because the swings will make the most iron stomach wretch as we go down and come screaming back up again.
Monday, December 15, 2008
Madoff
Excuse me for posting twice in one day, but the news just keeps talking about this guy.
My input. I am so conservative that any one that talks to me cringes at what comes out of my mouth. Anyways, Roosevelt over 40 years ago set up the SEC. Where is this agency? Isn't this what the SEC is supposed to find and stop? I have a neighbor friend that works for the SEC. We spoke about this and the usual blame game is transferred to not my department etc.
Wake up people!!!!
These agencies are setup to hold you in check while the fox raids the hen house. It never has and never will be a level playing field. The sooner you realize this the sooner you can get on with your retirement plans. Do not act surprised or disgusted. This corruption goes on and on and on.
As Warren Buffet is supposed to have said "it isn't until the tide goes out that you can see who is swimming naked"
Now that the tide is out, we are seeing all the cracks of the last 70 years. Best of luck to everyone, you will need it. If you like what you are seeing here and it has helped, let others know because we are a little minority now and the masses are getting fleeced like no tomorrow. They need help and the typical financial advice is unqualified to help.
My input. I am so conservative that any one that talks to me cringes at what comes out of my mouth. Anyways, Roosevelt over 40 years ago set up the SEC. Where is this agency? Isn't this what the SEC is supposed to find and stop? I have a neighbor friend that works for the SEC. We spoke about this and the usual blame game is transferred to not my department etc.
Wake up people!!!!
These agencies are setup to hold you in check while the fox raids the hen house. It never has and never will be a level playing field. The sooner you realize this the sooner you can get on with your retirement plans. Do not act surprised or disgusted. This corruption goes on and on and on.
As Warren Buffet is supposed to have said "it isn't until the tide goes out that you can see who is swimming naked"
Now that the tide is out, we are seeing all the cracks of the last 70 years. Best of luck to everyone, you will need it. If you like what you are seeing here and it has helped, let others know because we are a little minority now and the masses are getting fleeced like no tomorrow. They need help and the typical financial advice is unqualified to help.
Wish they would just do it!
We know the bailout of the 3 dinosaurs will happen. We just wish it would happen already and see what morphed animal it takes on. Tax payers are on the hook we know this already, please put us out of our misery and quickly.
Diagonal puts have been good to us these past few months. We can ignore the sucker rallies and stay the course.
Many were using iron condors and I think they see just how those investments can blow up on you. I am sure there those that have had both side taken out on a single day.
Iron condors are best used in volatile markets that increase the premiums on both sides. then have the volatility subside. Theory anyways practice? You get hammered on both sides and if there is not enough volatility, then you get not premium to make it worth your time.
My opinion only. I get responses from long time option traders that criticize my criticism, but then that is what makes markets.
Diagonal puts have been good to us these past few months. We can ignore the sucker rallies and stay the course.
Many were using iron condors and I think they see just how those investments can blow up on you. I am sure there those that have had both side taken out on a single day.
Iron condors are best used in volatile markets that increase the premiums on both sides. then have the volatility subside. Theory anyways practice? You get hammered on both sides and if there is not enough volatility, then you get not premium to make it worth your time.
My opinion only. I get responses from long time option traders that criticize my criticism, but then that is what makes markets.
Friday, December 12, 2008
Bailouts
We are not even going to get into the fact that these things are unconstitutional. What is that paper anyways.
We are going to get into the fact that emotions are running high...These bailouts while sound good short term, eventually prolong the inevitable. Capitalism (the way I understand it anyways) if to allow each and every individual the opportunity to succeed or FAIL! as they choose. Isn't that why the constitution allows for bankruptcy? Take away the chance to succeed or fail takes away risk. without risk, we go stagnant. Take away short selling or requiring to file when taking a short position does the opposite of what it is intended to do.
So now that we are officially a nationalized nation, where is the risk and the reward?
Off my soap box...as traders we need to understand human behavior since the markets are basically swung from fear to greed and back. We see the auto bail out fail. The market is in a tailspin. The fear is rampant as I write this. But wait...is there anyone reading this posting that really thinks the auto industry is going in the dumpster while central planners are at the helm? How soon we forget only a month or so ago this same play on the nation stage only it was 700 billion. Remember?
If you have a gambling bone, buy calls on GM. If you are conservative like I am, buy into the soon to be rally after this fallout today is over. Remember who is calling the shots. After another round of appeals, the bailout will happen.
My question looking past next weeks massive rally is then what?
Looking to take off the long side on my calendars and diagonals and waiting for the bounce and then buying the long side once again. If this is a bit too complex for you, then just get out of the short SPY and then re-enter next week after the hoopla Detroit is saved mantra wears off and then short the SPY once again.
We are going to get into the fact that emotions are running high...These bailouts while sound good short term, eventually prolong the inevitable. Capitalism (the way I understand it anyways) if to allow each and every individual the opportunity to succeed or FAIL! as they choose. Isn't that why the constitution allows for bankruptcy? Take away the chance to succeed or fail takes away risk. without risk, we go stagnant. Take away short selling or requiring to file when taking a short position does the opposite of what it is intended to do.
So now that we are officially a nationalized nation, where is the risk and the reward?
Off my soap box...as traders we need to understand human behavior since the markets are basically swung from fear to greed and back. We see the auto bail out fail. The market is in a tailspin. The fear is rampant as I write this. But wait...is there anyone reading this posting that really thinks the auto industry is going in the dumpster while central planners are at the helm? How soon we forget only a month or so ago this same play on the nation stage only it was 700 billion. Remember?
If you have a gambling bone, buy calls on GM. If you are conservative like I am, buy into the soon to be rally after this fallout today is over. Remember who is calling the shots. After another round of appeals, the bailout will happen.
My question looking past next weeks massive rally is then what?
Looking to take off the long side on my calendars and diagonals and waiting for the bounce and then buying the long side once again. If this is a bit too complex for you, then just get out of the short SPY and then re-enter next week after the hoopla Detroit is saved mantra wears off and then short the SPY once again.
Wednesday, December 10, 2008
Bear market rallies
Sometimes the rally witnessed in a bear market can really be convincing that the bottom is in and time to go long equities once again. However, fundamentals are decaying around us on a daily basis. News media cannot stop predicting the bottom and investors touting things like the January effect etc. lead me to believe there has not been enough "blood letting" so to speak to have reached the bottom. If the bottom were truly in, I would expect to hear much different tales from the media.
So how does one keep their assets intact? If we stay out of the market, we get "ZERO" yield (anyone notice this yesterday on the t-bills?) if we stay in the market we will get whipsawed even if we are right on the markets continued slide we cannot hold out with the rally we are witnessing. So what is an investor or trader to do?
If you do not like my approach of buying long puts and selling short puts against the long thereby smoothing out the swings, then you can be an aggressive trader and get long on the rallies expecting full well to have sharp drops for which you will need to be short then once again long etc. Problem with this is 1) you need to be in front of a computer during trading hours and 2)You need to be good at timing.
If you want to trade the latter way, then make sure for sake of your sanity to have tight stops in place.
So how does one keep their assets intact? If we stay out of the market, we get "ZERO" yield (anyone notice this yesterday on the t-bills?) if we stay in the market we will get whipsawed even if we are right on the markets continued slide we cannot hold out with the rally we are witnessing. So what is an investor or trader to do?
If you do not like my approach of buying long puts and selling short puts against the long thereby smoothing out the swings, then you can be an aggressive trader and get long on the rallies expecting full well to have sharp drops for which you will need to be short then once again long etc. Problem with this is 1) you need to be in front of a computer during trading hours and 2)You need to be good at timing.
If you want to trade the latter way, then make sure for sake of your sanity to have tight stops in place.
Wednesday, December 3, 2008
Wild swings
These markets are just plain crazy. Having never lived through a depression before, I can only read history and make assumptions.
Looking at history, '29-'32 saw a 90% top to bottom. However, there were many large rallies along the way. Each intervention from the government lead to hopes of the bottom in only to be dashed again. Once the bottom was truly in so many had lost faith in equities that it took 20 years to gain back the glory.
This is why we are not at a bottom yet. We still have pundits predicting the bottom is in. That probably wont happen until no one claims the bottom. Until then these are very wild times. Swings from euphoria to depressed are happening on a daily basis.
Even the fed chairman and his books on the depression fails to see what is before him (at least he wont admit it publicly). What sets this financial tsunami from the 30's is the massive debt load. In the '30's we were a creditor nation and borrowed our way out of the mess. Today we are so far in debt that we are pushing on a string.
When JP Morgan goes on the ropes, it will be much larger than any of the other bailouts we have witnessed. That should take the markets down much more. As noted before, I expect around a 5,000 DOW maybe even more.
If you do not have the skills to trade these wild swings, then go to cash and wait the great buying opportunities that are coming up in businesses that fail, Real Estate on the cheap and stocks that will be at generational lows. (Those that survive)
For now, I am long puts on just about anything and selling the closer month. When we get a rally, I buy back the short side wait for the next large drop and then sell it again over and over.
Later
Looking at history, '29-'32 saw a 90% top to bottom. However, there were many large rallies along the way. Each intervention from the government lead to hopes of the bottom in only to be dashed again. Once the bottom was truly in so many had lost faith in equities that it took 20 years to gain back the glory.
This is why we are not at a bottom yet. We still have pundits predicting the bottom is in. That probably wont happen until no one claims the bottom. Until then these are very wild times. Swings from euphoria to depressed are happening on a daily basis.
Even the fed chairman and his books on the depression fails to see what is before him (at least he wont admit it publicly). What sets this financial tsunami from the 30's is the massive debt load. In the '30's we were a creditor nation and borrowed our way out of the mess. Today we are so far in debt that we are pushing on a string.
When JP Morgan goes on the ropes, it will be much larger than any of the other bailouts we have witnessed. That should take the markets down much more. As noted before, I expect around a 5,000 DOW maybe even more.
If you do not have the skills to trade these wild swings, then go to cash and wait the great buying opportunities that are coming up in businesses that fail, Real Estate on the cheap and stocks that will be at generational lows. (Those that survive)
For now, I am long puts on just about anything and selling the closer month. When we get a rally, I buy back the short side wait for the next large drop and then sell it again over and over.
Later
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