Another nice rally. The buy and hold strategy has outperformed the put selling strategy at this stage about a 2 to 1 ratio. If I took much more risk, I would have closed the gap, but I would still be somehow behind the eight ball. Needless to say, we stayed put. Here's today's market recap:
U.S. stocks advanced, sending the Standard & Poor’s 500 Index to an 18-month high, as signs of growing demand for steel and semiconductors boosted confidence the economic recovery is strengthening.
Cliffs Natural Resources Inc. led a rally in steel companies on a report that Brazil’s Vale SA raised prices. Intel Corp. paced gains among chipmakers as Taiwan Semiconductor Manufacturing Co. lifted its forecast for global output in 2010. Caterpillar Inc. and Kraft Foods Inc. led the Dow Jones Industrial Average to its biggest rally in more than two weeks. Benchmark indexes extended gains as European nations moved closer to an agreement to provide financial aid to Greece.
The S&P 500 increased 0.7 percent to 1,174.17 as of 4:33 p.m. in New York, its highest close since Sept. 26, 2008. The Dow average climbed 102.94 points, or 1 percent, to 10,888.83, also an almost 18-month high.
“We’re seeing revenues begin to accelerate, and current- quarter profits will be up close to 40 percent year-on-year,” said David Sowerby, a Bloomfield Hills, Michigan-based money manager at Loomis Sayles & Co., which manages $140 billion. “That has been an incredible stimulus to stock prices.”
The S&P 500 has rallied 74 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 the year- earlier period for the first time since the second quarter of 2007. Analysts estimate first-quarter earnings will grow 30 percent, according to a Bloomberg survey.
Cliffs Natural, U.S. Steel
Cliffs Natural Resources, North America’s biggest iron-ore producer, rose 6.9 percent to $69.72, the highest since September 2008. U.S. Steel, the second-largest U.S.-based steelmaker by 2009 sales, gained 4.9 percent to $63.32. Steel companies in the S&P 500 rose 4.6 percent as a group.
Vale SA, the world’s largest iron-ore producer, more than doubled the rate for one type of ore for three months starting April 1, Valor Economico reported. Credit Suisse Group AG said the company is pushing for a pricing system that would allow it to increase rates by about 90 percent. The company said it hadn’t communicated any product price changes to capital markets. The company’s American depositary receipts climbed 5.1 percent to $31.57.
Industrial companies were among the biggest gainers in the S&P 500, led by General Electric Co. and Caterpillar Inc. General Electric, the biggest seller of jet engines, medical- imaging equipment and power turbines, gained 1.4 percent to $18.33. Caterpillar, the world’s largest maker of bulldozers and excavators, increased 4.1 percent to $62.41 for the biggest gain in the Dow.
‘More Confident’
“People have gotten a little more confident,” said Bob Tull, chief operating officer of the Boston-based Old Mutual Global Index Trackers fund, which has about $5 billion under management. “Our economy has as much perception to it as reality. People are thinking it’s getting better and it is getting better.”
Intel, the world’s largest semiconductor maker, rose 1.9 percent to $22.67. The Philadelphia Semiconductor Index climbed 2.3 percent to the highest intraday level since August 2008. A gauge of chip companies in the S&P 500 also closed at a 19-month high and posted the biggest advance among 24 industries, rallying 2 percent.
Chip Demand
Taiwan Semiconductor, the largest custom-chip maker, forecast global semiconductor market output will grow 22 percent this year, compared with a previous forecast of 18 percent, the Economic Daily News reported, citing Chairman Morris Chang.
Integrated Silicon Solution Inc. rallied 15 percent to $8.58. The maker of chips for consumer electronics and mobile phones said it probably earned at least 20 cents a share in the fiscal second quarter, beating its earlier forecast of 12 cents at most.
Apple Inc., the maker of the iPhone, jumped 1.6 percent to a record $228.36.
Google Inc., the world’s largest Internet search engine, fell 1.5 percent to $549 and was the biggest drag on the S&P 500. Google yesterday defied China’s censorship rules by redirecting Chinese users to an unfiltered Hong Kong Web site, threatening its ability to operate in the world’s largest Internet market.
Amazon.com Inc., the world’s largest Internet retailer, declined 0.9 percent to $129.26. The Wall Street Journal reported Sony is dropping the price on its Pocket Reader to $169 until April 4, $90 less than Amazon’s Kindle.
Housing Data
Builders’ shares rose even after an industry report showed sales of existing homes fell for a third month in February, indicating unemployment is hindering government efforts to revive demand for housing. A gauge of 12 homebuilders across S&P indexes advanced 0.7 percent.
Existing home dropped 0.6 percent to a 5.02 million annual rate, the lowest level in eight months and in line with the median forecast of economists surveyed by Bloomberg News, figures from the National Association of Realtors showed. The median price decreased 1.8 percent from February 2009.
Walgreen Co., the largest U.S. drugstore chain, increased 1.6 percent to $35.91. The company reported second-quarter sales in line with analysts’ estimates and said its profit margin improved from the year-earlier period.
Carnival Corp. increased 2.4 percent to $38.81. The biggest cruise-line operator raised its full-year profit forecast as ticket prices rebounded from last year’s lows.
Wendy’s/Arby’s Group Inc. rose 3.9 percent to $4.86. The third-largest U.S. fast-food chain said that its board boosted the company’s stock repurchase authorization by $50 million to a total of $250 million.
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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