RIMM did go down quite a bit, a good 7% after missing earnings estimates. I expected a market pull back due to this bad earning report, but it did not materialized. No April Fool's Day joke! Selling the 22JAN2010 45 RIMM PUT would have been nice, but no more margin left for now. Here's today's market recap:
U.S. stocks rose, sending the Standard & Poor’s 500 Index to an 18-month high, as signs of strength in global manufacturing and a drop in jobless claims boosted optimism in the economy.
Alcoa Inc., the largest U.S. aluminum producer, and Freeport-McMoRan Copper & Gold Inc. climbed more than 3 percent as metal prices advanced. Exxon Mobil Corp. and Chevron Corp. rallied as oil rose to almost $85 a barrel. Stocks pared gains as technology companies turned lower amid concern Apple Inc.’s iPad will hurt sales of laptops and tomorrow’s payrolls report may undermine confidence in the labor market.
The S&P 500 gained 0.7 percent to 1,178.1 at 4:30 p.m. in New York. The index capped a fifth straight weekly advance, the longest streak in almost a year. The Dow Jones Industrial Average rose 70.44 points, or 0.7 percent, to 10,927.07. Two stocks gained for each that fell on U.S. exchanges.
“The trend is higher,” said David Heupel, who helps manage $60 billion at Thrivent Financial in Minneapolis. “Businesses are showing strength. We’ve been getting further evidence of a sustainable recovery. We’re seeing a pick-up in cyclicals. The strength in emerging markets is also critical. The market just doesn’t want to go down.”
The S&P 500 erased yesterday’s drop as government data showed the average number of jobless claims over the past month fell to the lowest level since 2008, indicating the economic recovery prompted companies to retain staff. Initial jobless applications dropped by 6,000 to 439,000 last week, in line with the median economist forecast in a Bloomberg survey, Labor Department figures showed.
Jobs Report
Tomorrow’s Labor Department payrolls report is forecast to show employers added 184,000 jobs in March, the most in three years, according to the median estimate in a survey of economists.
Benchmark indexes extended gains in early trading as the Institute for Supply Management’s factory index rose to 59.6, exceeding the most optimistic forecast in a Bloomberg News survey of 77 economists, from 56.5 in February. Readings above 50 signal expansion. The group’s gauge of exports rose to the highest level since 1989, while orders and production increased at faster rates last month.
Overseas reports showed that China’s manufacturing expanded for a 13th month, business sentiment in Japan rose to the highest since 2008 and factories in Britain and the euro region stepped up output as the global economic recovery strengthened.
‘Sustainable Growth’
“I do see a sustainable growth on a global basis,” said Tom Wirth, senior investment officer at Chemung Canal Trust Co., which manages $1.6 billion in Elmira, New York. “There had been a lot of fear about a slowdown of the Chinese economy. There’s a lot of capacity there.”
The S&P 500 yesterday snapped a three-day streak of gains after a private report showed employers unexpectedly cut jobs, spurring concern employment isn’t rebounding as strongly as economists have predicted. The equity benchmark has still climbed for five straight weeks, the longest stretch since April 2009. The index rose 1 percent over the past four days. U.S. stock markets are closed tomorrow for the Good Friday holiday.
S&P 500 gauges of energy and raw-materials producers advanced at least 1.6 percent. Aluminum, copper and lead led base metals prices higher as the manufacturing expansion and shrinking global inventories signaled demand may be improving.
Alcoa, Schlumberger, Caterpillar
Alcoa gained 3.2 percent to $14.70, while Freeport, the world’s largest publicly traded copper producer, added 3.3 percent to $86.28. Schlumberger Ltd., the oilfield services provider, rose 1.8 percent to $64.57 as oil climbed to a 17- month high near $85 a barrel. Exxon Mobil advanced 0.9 percent to $67.61, and Chevron went up 1.1 percent to $76.69.
Ford Motor Co. added 0.5 percent to $12.63. The automaker boosted first-quarter sales in China by 84 percent to 153,362 vehicles. The tally includes ventures and wholly owned units. Ford’s U.S. sales rose 40 percent, trailing analyst estimates.
JPMorgan Chase & Co. rose 1.1 percent to $45.18. The second-largest U.S. bank may raise its annual dividend to between 75 cents and $1 if three conditions are met, Chief Executive Officer Jamie Dimon said in his annual letter to shareholders. The bank would like to see “several months” of improvement in the U.S. jobless rate, “significant reduction” in consumer charge-offs and “more certainty around the regulatory requirements for bank capital levels,” Dimon wrote.
Legg Mason Inc. had the biggest gain in the S&P 500, jumping 6.9 percent to $30.66. The Baltimore-based asset manager was raised to “outperform” from “market perform” at Keefe, Bruyette & Woods Inc.
NetApp, Borders
NetApp Inc. surged 5.3 percent to $34.26 after MKM Partners LLC and Pacific Crest Securities Inc. cited “strong” sales growth at the maker of storage computers.
Borders Group Inc. soared 48 percent to $2.54 after saying that it repaid a loan and secured more financing, while also posting a gain in fourth-quarter earnings.
Technology shares were the worst performers in the S&P 500 among 10 industries, while software companies had the only decline among 24 groups.
Microsoft Corp. fell 0.4 percent to $29.16, after slumping 2.3 percent, amid speculation Apple’s new product will reduce demand for computers running Windows. Amazon.com Inc. slid 2.9 percent to $131.81 as publishing executives said the online bookseller will give publishers control over prices of electronic versions of books to head off competition from Apple.
Weakness in Tech Bellwethers
“I’m not surprised to see this type of selloff,” said Michael James, a managing director at Wedbush Morgan Securities in Los Angeles. “It’s a three-day weekend. Plus, there’s been significant weakness today in tech bellwethers. Microsoft is not the only one that would be hurt by a successful iPad. Anyone that sells either laptops or supplies is certainly at risk of seeing lower demand. And we also got a disappointing report from RIM.”
Research In Motion Ltd. retreated 7.4 percent to $68.48 after the maker of the BlackBerry reported fourth-quarter revenue and shipments that fell short of analysts’ estimates and said its profit margin will shrink in the quarter ending in May.
Analysts at Goldman Sachs Group Inc. lowered their recommendation for the shares to “sell” from “neutral,” saying RIM’s products will lag behind the iPhone and Android.
BlackRock Inc. slid 3.1 percent to $211.05. The world’s biggest asset manager was cut to “sell” from “buy” at Citigroup Inc., which cited “slowing flow and EPS growth.” The broker also lowered its price estimate on the stock to $190 from $269. Separately, Deutsche Bank AG downgraded its rating on the asset manager to “hold” from “buy.”
Mosaic Declines
Mosaic Co. retreated 4 percent to $58.33. North America’s second-largest crop-nutrient producer reported third-quarter profit excluding some items of 50 cents a share, missing the average analyst estimate of 62 cents.
The relative calm in U.S. stock trading during the past four weeks may soon be shattered, according to Michael K. McCarty, managing partner at Differential Research LLC.
“Skepticism is being expressed in the options market” about the absence of volatility, McCarty said today in an interview. He cited the gap between the VIX Index, a fear gauge that’s based on S&P 500 option prices, and a similar indicator tied to the S&P 500’s swings.
The VIX, formally known as the Chicago Board Options Exchange Volatility Index, fell for the fourth day in five, dropping 0.7 percent to 17.47.
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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