At one point the DOW was up in the triple digits. By 1PM, the markets made a major reversal to close slightly positive at the end the day. This brought the VIX close to that 19% mark. Most positions I wish to implement are somewhat unfeasible at this stage. Here's today's market recap:
U.S. stocks fell for a second day as a disappointing Treasury auction and discord among European leaders about how to rescue Greece erased a rally in the final half hour of the session. The 10-year note’s yield climbed to the highest level since June, and the dollar rallied.
Schlumberger Ltd. and ConocoPhillips paced declines in 38 of 40 energy companies in the Standard & Poor’s 500 Index as a stronger dollar wiped out early gains in oil. Monsanto Co. and DuPont Co. helped lead producers of raw materials lower. Citigroup Inc. advanced 2.9 percent as the government was said to plan an orderly sale of its stake in the bank, while Qualcomm Inc. and Best Buy Co. rallied at least 3.6 percent on profit forecasts that topped analysts’ estimates.
“One of the big things affecting the psychology of the market is concern about global government debt levels,” said Michael Shinnick, a South Bend, Indiana-based money manager at Wasatch Advisors Inc., which manages $7 billion. “To the extent there are signs that the debt problem is not going to be a later problem but a near-term problem, the market gets concerned.”
The S&P 500 slipped 0.2 percent to 1,165.73 at 4 p.m. in New York after rallying as much as 1.1 percent and surpassing its highest close in 18 months. The Dow Jones Industrial Average increased 5.06 points, or less than 0.1 percent, to 10,841.21, wiping out most of a 119-point rally. More five stocks retreated for every three that rose on the New York Stock Exchange and Nasdaq Stock Market.
Yields Spike
The yield on 10-year Treasuries, which determines borrowing costs for homeowners, companies and other governments around the world, climbed 0.03 percentage point to 3.88 percent at 5 p.m. in New York after jumping 0.17 point yesterday. The yield touched the highest since June when it reached 4 percent.
The Dollar Index, which measures the U.S. currency against the euro, yen, pound, Canadian dollar, Swedish krona and Swiss franc, rose 0.5 percent to 82.207, the highest level since May.
The euro weakened as much as 0.4 percent to $1.3268 as European Central Bank President Jean-Claude Trichet told French television that the region needs to take responsibility for its members and that possible International Monetary Fund aid for Greece is “very, very bad.” French President Nicolas Sarkozy bowed to German Chancellor Angela Merkel’s demand for an IMF role in a potential rescue package for Greece.
The record-tying $32 billion sale of seven-year notes today attracted a yield of 3.374 percent, compared with the average forecast of 3.372 percent in a Bloomberg News survey of 8 of the Federal Reserve’s 18 primary dealers. The current seven-year note yield rose 3 basis points, or 0.03 percentage point, to 3.33 percent.
Auction Disappointment
“The bond auction disappointed investors,” said James Paulsen, who helps oversee about $375 billion as chief investment strategist at Wells Capital Management in Minneapolis. “The question is how high bond yields will have to go and how much of a hurdle will that be for the stock market. Trichet’s comments also did not help a market that has gone up too far, too fast.”
Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., told Bloomberg Radio the almost three-decade bond market rally may be drawing to a close.
Excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said. Pimco, which announced in December that it would offer stock funds for the first time, is advising that investors buy the debt of countries such as Germany and Canada that have low deficits and higher-yielding corporate securities.
Bond Market ‘Slammed’
“The U.S. Treasury market has gotten slammed over the past two days,” Peter Boockvar, equity strategist at Miller Tabak & Co. in New York, wrote in an e-mail. “This is the last thing a fragile economy needs because yields aren’t spiking because all of a sudden the U.S. economy is great again.”
Schlumberger, the oilfield services provider, slid 2.3 percent to $60.76. ConocoPhillips, the oil producer and refiner, lost 1.9 percent to $51.53. Crude oil for May delivery declined 8 cents to settle at $80.53 a barrel in New York after rallying as much as 1.1 percent. The contract extended losses in electronic trading after the close of the New York Mercantile Exchange, sliding as much as 0.6 percent.
Genzyme Corp. fell 7.6 percent to $51.13 for the biggest drop in the S&P 500. The world’s largest maker of enzyme- replacement therapies was cut to “underweight” from “neutral” at JPMorgan Chase & Co.
Red Hat Inc. fell 5.9 percent to $28.90. The software maker said 2011 earnings excluding some items will be 71 cents to 74 cents a share. Analysts surveyed by Bloomberg estimated 76 cents.
Ambac Tumbles
Ambac Financial Group Inc. slumped 17 percent, the most since Nov. 10, to 66 cents. The bond insurer will hand control of subprime mortgage-related contracts to a regulator amid concern its collapse would trigger losses for holders of municipal debt.
Earlier gains in U.S. stocks also came as Federal Reserve Chairman Ben S. Bernanke, presenting to the House Financial Services Committee testimony that was released Feb. 10 during a snowstorm that delayed his appearance until today, said the U.S. economy still needs low interest rates and that the central bank will raise them “at the appropriate time.”
The S&P 500 has risen 72 percent from a 12-year low in March 2009 as the economy returned to growth and a record-long slump in earnings ended. The aggregate profit for companies in the S&P 500 increased in the fourth quarter from a year earlier for the first time since the second quarter of 2007.
‘Back in Sync’
Qualcomm climbed 5 percent to $42.19 for the second-biggest gain in the S&P 500. The company said it will earn 56 cents to 58 cents a share excluding some items in the quarter ending this month on sales of at least $2.55 billion. Qualcomm previously forecast profit of 49 cents to 53 cents on sales of at least $2.4 billion.
“This puts Qualcomm back in sync with the rest of the major technology companies that are reporting strong results,” said Howard Ward, chief investment officer for growth equities at Gabelli & Co. in Rye, New York, which oversees $26 billion including Qualcomm shares. “It’s becoming more difficult to refute the notion that we’re going to be looking at 3 or 3.5 percent GDP growth in the first quarter.”
Technology companies in the S&P 500 beat analyst estimates for earnings-per-share by 17 percent in the fourth quarter, according to Bloomberg data. For the index as a whole, profits exceeded the average estimates by 5.4 percent. Adobe Systems Inc., the world’s biggest maker of graphic-design programs, yesterday rose 3.7 percent after its sales forecast topped analyst estimates.
Retailers Rally
Amazon.com Inc. led retailers in the S&P 500 to the biggest gain among 24 industries. Shawn Milne, an analyst at Janney Capital Markets, said industry data suggest sales growth improved in February. Amazon rose 5.2 percent to $134.73, the highest price since Dec. 30.
Priceline.com Inc., the online travel agency, rose 4.6 percent to $255.03. EBay Inc., the most-visited online auction site, gained 2.3 percent to $27.56. Its sales growth also improved in February, Milne’s report said, and Credit Suisse Group AG upgraded the shares to “outperform” from “neutral.”
Best Buy, Citigroup
Best Buy increased 3.6 percent to $42.66. The company earned $1.82 a share in the fiscal fourth quarter, 1.7 percent more than the average estimate in a Bloomberg survey of 17 analysts. Reduced prices for flat-panel TVs before the National Football League’s Super Bowl championship game on Feb. 7 boosted U.S. sales.
Citigroup climbed 2.9 percent to $4.27, leading financial stocks in the S&P 500 to a 0.4 percent gain. The share-sale plan being contemplated by the government is similar to those used by executives to protect themselves against accusations of insider trading, the people with knowledge of the matter said.
The government’s sale of its stake will allow Citigroup to “act more freely and competitively,” said Timothy Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York, which manages $2 billion, including shares of Citigroup. “We like it as a recovery situation.
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
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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)
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