It really sucks to be a bear right now. Markets made a new 52-week high today. The markets miraculously closed positive once again. I am sensing a pull back very soon as the bull run seems to be running out of steam. We shall see. With options expiry next week, anything can happen. So far, my only upcoming trade that will expire next week:
sell to open 1 PUT XOM 2010MAR20 65 for $1.18 USD
looks good, although there's not much of a cushion. Tendency wise, XOM seems to move extremely slowly up and down and I should be fine.
Here's today's recap:
U.S. stocks rose, sending the Standard & Poor’s 500 Index to the highest level since October 2008, as Citigroup Inc. led a bank rally and investors speculated that health-care reform will be harder to pass.
Citigroup advanced 5.6 percent as Chief Executive Officer Vikram Pandit said the bailed-out bank should be consistently profitable. Zions Bancorporation rose 4.6 percent after telling investors it would make more money lending this quarter. Coventry Health Care Inc. and Aetna Inc. increased more than 3.2 percent after a Senate parliamentarian made it harder for Democrats to use a process known as reconciliation to bypass Republican opposition to industry reform.
The S&P 500 advanced 0.4 percent to 1,150.24 at 4 p.m. in New York. It fell 0.6 percent earlier after inflation in China accelerated more than economists estimated, spurring speculation the nation will boost interest rates. The Dow Jones Industrial Average rose 44.51 points, or 0.4 percent, to 10,611.84.
“Some people view that 1,150 mark as an important level,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “The economic fundamentals have been improving. It’s good to see that the bad news is unable to shake the market’s confidence.”
The S&P 500 closed at a 15-month high of 1,150.23 on Jan. 19, and then plunged 8.1 percent through Feb. 8 on concern that European nations including Greece will fail to pay back debt and speculation that the Fed will need to rein in emergency stimulus measures as the economy improves. After erasing the loss, the index has surged 70 percent since March 9, 2009.
Government Sale
Citigroup led financial shares to the biggest gain among 10 industries in the S&P 500. The lender surged 5.6 percent to $4.18 for the second-biggest gain in the S&P 500. Pandit said he “wouldn’t be surprised” if the government were considering a sale of its 27 percent stake in Citigroup.
“The stock always bounces a little when there are talks the government won’t be involved anymore,” said Michael Binger, a Minneapolis-based fund manager at Thrivent Asset Management, which oversees about $60 billion. “That would be a good thing for the bank.”
Zions, the best-performing stock on the KBW Bank Index this year, rose 4.6 percent to $21.43. Chief Financial Officer Doyle Arnold said during a conference today that Zions’s net interest margin, the difference between what the bank charges for loans and pays out to gather deposits, improved in the first quarter. Bad-loan write-offs at the company are likely to be stable or slightly better than in the fourth quarter, Arnold said.
Reporting Profits
Synovus Financial Corp. jumped 9 percent to $3.16. The Georgia bank that posted two straight annual losses said it may return to profitability this year. Huntington Bancshares Inc., the third-largest bank in Ohio, gained 2.9 percent to $5.40.
Health-care stocks in the S&P 500 rose 0.4 percent today. Coventry climbed 3.4 percent to $24.55. Aetna increased 3.3 percent to $32.69.
“I’m getting more and more convinced that the health-care reform is completely dead,” said Scott Tapley, a health-care money manager who helps oversee $2.5 billion at 1st Source Investment Advisors Inc. in South Bend, Indiana. “You get a sigh of relief because now they know they’re not going to have radical change in the immediate future.”
GameStop Corp. rose 5.9 percent to $19.35 for the biggest advance in the S&P 500. Trading of bullish options on the world’s largest video-game retailer increased to a record on speculation the company may be acquired. Chris Olivera, a spokesman for GameStop, declined to comment.
Higher Rates
Energy shares had the only decline in the S&P 500 among 10 industries, falling less than 0.1 percent. Higher-than-estimated inflation in China spurred speculation the nation will be forced to raise interest rates, slowing down demand for commodities.
China’s inflation reached a 16-month high, industrial output climbed and new loans exceeded forecasts, putting pressure on the government to cool economic growth.
Consumer prices rose 2.7 percent in February from a year earlier, the National Bureau of Statistics said today, compared with the 2.5 percent median estimate of 29 economists surveyed by Bloomberg News. Production rose 20.7 percent in the first two months of 2010, the most in more than five years.
Premier Wen Jiabao aims to hold full-year inflation around 3 percent after banks flooded the financial system with money to drive a rebound from the global recession. Gross domestic product grew 10.7 percent last quarter and central bank Governor Zhou Xiaochuan said March 6 that anti-crisis policies must end “sooner or later.”
‘Too Far, Too Fast’
“Obviously, inflation is a concern on a global basis,” said Tom Wirth, senior investment officer at Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “China has led us out of the global recession. If they raise rates too far, too fast, that’s going to slow the world down. I don’t think it’s a problem right now, but there’s always an overreaction from investors.”
Semiconductor companies in the S&P 500 fell 0.5 percent as a group, the most among 24 industries. Christopher Danely, an analyst at JPMorgan Chase & Co., said in a report that “negative data points” have begun to appear for the group, especially Texas Instruments Inc., Xilinx Inc. and Altera Corp.
Texas Instruments dropped 2.1 percent to $24.07. Xilinx declined 1.5 percent to $26.50. Altera retreated 0.4 percent to $24.93.
Current Options Portfolio
realized gain
Last updated May 7, 2010
note: calendar year total return is approximate
Reading Material
101 Options Trading Secrets
Using a Put Selling Strategy
The Beauty of Selling Put Options
Put Option Selling: Ge Paid to Buy the Stocks You Want
Options Selling - 5 Simple Success Tips
Risk of 'Unlimited Losses' in Naked Option Selling is a Myth!
Here's a Different Way of Looking at Options
Using a Put Selling Strategy
The Beauty of Selling Put Options
Put Option Selling: Ge Paid to Buy the Stocks You Want
Options Selling - 5 Simple Success Tips
Risk of 'Unlimited Losses' in Naked Option Selling is a Myth!
Here's a Different Way of Looking at Options
Subscribe to:
Post Comments (Atom)
Final Commentary
The experiment was a great success overall. It is very obvious there is no way to beat the indices in a major bull market runup. The selling put strategy works best in a slightly bearish and neutral market. Day to day market movements are mostly dependent on daily economic news as seen throughout 2010.
Success purely depends on market timing and also on lady luck. If you started to sell puts at the market peak of August 2007, obviously you would have gotten burned badly. No technical analysis in the world would have saved your ass at that point. Cash was king in bear market of August 2007 - March 2009.
The best trading advice is being cautious at all times and carefully plan out your trades. Time and sector diversification and selling strikes that are far enough from current market levels will give you the best probability for success.
I hope you have learned a lot from this blog and hopefully you are now ready to start trading with real money. The biggest risk, is not taking risk. No risk, no glory!
Donald
Success purely depends on market timing and also on lady luck. If you started to sell puts at the market peak of August 2007, obviously you would have gotten burned badly. No technical analysis in the world would have saved your ass at that point. Cash was king in bear market of August 2007 - March 2009.
The best trading advice is being cautious at all times and carefully plan out your trades. Time and sector diversification and selling strikes that are far enough from current market levels will give you the best probability for success.
I hope you have learned a lot from this blog and hopefully you are now ready to start trading with real money. The biggest risk, is not taking risk. No risk, no glory!
Donald
Experiment Ground Rules
This is an experiment to evaluate how successful my selling cash covered put strategy over time. The target end date is January 22, 2011. Over the course of the year, market and trade recaps will be posted frequently. This paper trade is solely for educational purposes. To keep things simple, here are some ground rules before we start:
1. We start with an imaginary $100,000 USD cash portfolio as of February 15, 2010.
2. We only sell cash covered puts on large capitalization companies and ETF Indices with expirations at most one year out.
3. The minimum premium received should be at least $1.00 USD per option after commission. We strive to sell near the 52-week low level strike level most of the time if possible. Due to the major runup in the markets since March 9, 2009 lows, this will be extremely hard to find a trade with decent credit within the one year time allowance. The alternate strategy is to find stocks that bounces strongly off a certain support level or trend line and we will sell puts options near that particular strike.
4. Ideally we want all trades to expire worthless. If the option is in the money at expiration, we will take delivery of the stock. While respecting the NET $1.00 premium after commission, we will write a call option (covered call strategy) at the same strike that we sold the put at. Ideally, we want to write the front month option if possible, otherwise we will write the first available month that will give us a minimum of $1.00 premium after commission.
5. We assume there will be no assignment during the life of the trade.
6. Commission used will be $9.95 (base) + $1.25/contract and the assignment fee will be $39 (base) + 8 cents/share.
7. To keep the portfolio diversified, we will trade at most three options within the same sector, but we will trade the same underlier with different expirations.
8. Ideally trades take place on a down day or whenever a stock declined in value.
9. To initiate a position, we will use the closing bid option premium on that day.
10. Interest earned on the cash will not be calculated.
1. We start with an imaginary $100,000 USD cash portfolio as of February 15, 2010.
2. We only sell cash covered puts on large capitalization companies and ETF Indices with expirations at most one year out.
3. The minimum premium received should be at least $1.00 USD per option after commission. We strive to sell near the 52-week low level strike level most of the time if possible. Due to the major runup in the markets since March 9, 2009 lows, this will be extremely hard to find a trade with decent credit within the one year time allowance. The alternate strategy is to find stocks that bounces strongly off a certain support level or trend line and we will sell puts options near that particular strike.
4. Ideally we want all trades to expire worthless. If the option is in the money at expiration, we will take delivery of the stock. While respecting the NET $1.00 premium after commission, we will write a call option (covered call strategy) at the same strike that we sold the put at. Ideally, we want to write the front month option if possible, otherwise we will write the first available month that will give us a minimum of $1.00 premium after commission.
5. We assume there will be no assignment during the life of the trade.
6. Commission used will be $9.95 (base) + $1.25/contract and the assignment fee will be $39 (base) + 8 cents/share.
7. To keep the portfolio diversified, we will trade at most three options within the same sector, but we will trade the same underlier with different expirations.
8. Ideally trades take place on a down day or whenever a stock declined in value.
9. To initiate a position, we will use the closing bid option premium on that day.
10. Interest earned on the cash will not be calculated.
General Investing Guideline
1. You are the best person to manage your own money
2. Treat this as a hobby and have fun. If you treat investing as a chore, your success rate will be much lower on average
3. Patience (There’s no such thing as once in a lifetime investment!)
4. Do your Due Diligence
5. Keep abreast on economic news daily
6. Keep it simple – Focus on large capitalization companies that have high competitive advantage
7. Concentrate on cash flow as opposed to capital growth
8. Buy at value
9. Diversification
10. Risk Management (Risk only what you can afford. Setup stop loss limits. Once the stock hits your stop loss limit, closeout your losing position and move on to the next trade)
2. Treat this as a hobby and have fun. If you treat investing as a chore, your success rate will be much lower on average
3. Patience (There’s no such thing as once in a lifetime investment!)
4. Do your Due Diligence
5. Keep abreast on economic news daily
6. Keep it simple – Focus on large capitalization companies that have high competitive advantage
7. Concentrate on cash flow as opposed to capital growth
8. Buy at value
9. Diversification
10. Risk Management (Risk only what you can afford. Setup stop loss limits. Once the stock hits your stop loss limit, closeout your losing position and move on to the next trade)
Options Trading Guideline
1. Pick up any option book and start reading. There’s ton of information on the Internet and be sure you read difference sources. Make sure you understand the structure, the risk and the profit/loss of any option strategies
2. Always paper trade any strategies that you are unfamiliar with
3. Focus only on highly liquid options with excellent daily volume (DOW JONES listed companies for example)
4. Determine your outlook on a particular stock or index or futures well ahead of time - you can be bullish, bearish or even neutral (only options allow you to trade this particular stance)
5. Options are more a swing trade thing than a day trade (usually 1-6 months in duration) – Never force a trade, just for the sake of trading. Patience is key, you have to give it some time for a strategy to develop.
6. Never use options to speculate (some do, but I don’t)
7. Knowing some basic technical analysis will help you place more successful trades (especially knowing support and resistance levels)
8. On average approximately 80% of options bought expire worthless – it pays off to be a seller
9. Diversification
10. Risk Management
a. Setup stop loss limits, closeout the position immediately once it hits the prescribed threshold and move on to the next trade.
b. Never let a straight and simple long option position expire worthless. Always salvage some premium and move on to the next trade. Avoid 100% losses.
c. Risk only what you can afford and don’t overextend yourself. (10 contracts = 1000 shares or 1000 cash multiplier!). Know how much capital is at risk all the time.
d. Never borrow money to purchase options. Options are highly leveraged instruments and you can easily lose your shirt very quickly. Option premium prices change constantly and rapidly.
e. Always have enough cash at hand to cover an assignment (AMERICAN style options can be exercised anytime)
2. Always paper trade any strategies that you are unfamiliar with
3. Focus only on highly liquid options with excellent daily volume (DOW JONES listed companies for example)
4. Determine your outlook on a particular stock or index or futures well ahead of time - you can be bullish, bearish or even neutral (only options allow you to trade this particular stance)
5. Options are more a swing trade thing than a day trade (usually 1-6 months in duration) – Never force a trade, just for the sake of trading. Patience is key, you have to give it some time for a strategy to develop.
6. Never use options to speculate (some do, but I don’t)
7. Knowing some basic technical analysis will help you place more successful trades (especially knowing support and resistance levels)
8. On average approximately 80% of options bought expire worthless – it pays off to be a seller
9. Diversification
10. Risk Management
a. Setup stop loss limits, closeout the position immediately once it hits the prescribed threshold and move on to the next trade.
b. Never let a straight and simple long option position expire worthless. Always salvage some premium and move on to the next trade. Avoid 100% losses.
c. Risk only what you can afford and don’t overextend yourself. (10 contracts = 1000 shares or 1000 cash multiplier!). Know how much capital is at risk all the time.
d. Never borrow money to purchase options. Options are highly leveraged instruments and you can easily lose your shirt very quickly. Option premium prices change constantly and rapidly.
e. Always have enough cash at hand to cover an assignment (AMERICAN style options can be exercised anytime)
0 comments:
Post a Comment