So there are many factors that effect Option Trading Price the two basic ones are Time Value (The Time left for an Option Contract to expire) and Intrinsic Value (Basically that is how close is the Option Contract price to the price of the actual stock price (also known as the Strike Price) the closer to the Strike Price the More expensive the Option Contract; since the Option price is a derivative of the actual stock price.
I hope that is clear to everyone because it is the basis of my Options Strategy. So first, In general I trade 20 to 53 day options or less second I use the stock screener explained in the “About Us” Page to find Strong stocks that I would like to own at a discounted price. (Options were created to hedge risk in the market place.)
So at the end of 2012, I found that 4 good sectors for 2013 were Aerospace and defense, Business services, and Property and Casualty Insurance and Heath Care Insurance.
So at the end of December 2012 I “sold” 4 Hum Puts at the 67.5 Strike. Now because the Government had not come to an agreement on tax brakes Hum like all stocks were trading at a substantial discount. it had great numbers and as expected after all the political posturing was over and they came to a decision Hum went up to 70 but then a stock annalist at Pipper Jeffery posted a negative out look on the stock siting “industry headwinds” causing the stock to go 65 so right away I sold 4 65 puts for February. two days later UNH posted great earning causing hum to go back up to 70 and a week later Hum beat expectations proving in the short term the Pipper Jeffery’s Annalist was wrong. Hum hit 80: my options expired worthless and I won.
now three week later the US Government announced that they had a bill going though Congress to change the rules on Medicare and Hum has a lot invested in that so they went down to 67.89 but that does not mean they don’t have strong fundamentals.
I had sold two contracts of Hum at 77 at 1.35 each so if I did not close out my position I would be forced to buy 200 shares at 76.15 but wait no need to panic first I have enough money in the account to buy them and normally when a stock goes down 8 to 9 percent in the following days it will go back up about 2 to 3 percent and then drop down again so what I did is after the initial drop to 69.65 it went up to 73.42 in the following days so I sold 2 75 call at 85 (in retrospect I should have sold more) but in any event they expired so I reduced my cost for 200 shares to 75.30 but wait it gets better 2 days after the Medicare announcement the COO announced he was going to retire at the end of the year so that brought down the stock to 66.56.
Now every stock has “key levels of resistance”; remember HUM before it reporter great earning and with the uncertainty about taxes it went down to 64.99. so if we assume with out the tax worries its bottom would have been 67.50. As a result I sold two puts at 67.50 for .85 and 4 puts at 65 for 1.65. the 67.5 expired lowering my cost to 74.45 the 65 for April 19 should expire lower my cost to 72.8 lastly knowing that I was going to be assigned 2 77.5 puts I sold 2 70 call for 1.40 (in retrospect I should have sold the April 75 call when the stock was at 73.42) but in any event it lowers my cost to about 71.5.
Another two stocks that that were good options trades for me were LMT (Lockeed Martin)when I first saw this stock it had met my criteria, but it was trading near its 52 week highs and it had earnings coming up so before I sold it I said “let me wait for earnings” and I also found out that LMT had beat expectations for 2 quarters that is why it was so high. now I asked myself what’s the likely hood that it beats again unless you are Apple back in the days of Steve Jobs Not likely (and please let me say here every person has their own unique way of running a company and I am sure that Tim Cook has something in the pipeline but I would say his delivery of new products lacks the “Pan-ash” of Steve Jobs. Tim Cook runs the company like Dwight Eisenhower with the “hidden hand” I guarantee you that if Steve Jobs was still alive Apple would be at 800 per share when you bought apple you were buying Steve Jobs’s persona more than anything else) getting back to LMT I was right it had good earnings but it did not beat so it dropped 10 from 96 to 85 and I sold 10 puts of the 82.5 for 1.15
The same thing happened with TRV it reported great earnings went up to 77 from 72 I sold 6 Puts at 1.20 and won. one thing to keep in mind at the beginning of the year you can usually get a sense of what sectors will do well and in May that people sell and go away to August but I don’t believe in that I say that in the stock market an opportunity can arise at any time and you have to be ready for it
Lets now talk about Big Lots “BIG” it was hammer in November for disappointing earnings went to 26.52 and then started to go up ever since I stayed away from it until now in retrospect it would have made a great Iron Condor (for those of you who are not familiar with that term that just means you have positions on both sides of the trade Calls and Puts with the same expiration date. I sold 20 of the 35 puts and even those I feel it wont drop that far bellow 35 and is very unlikely to go to 32.5 again soon I bought back my position for a loss of only about 125 dollars because in my view after they reported great earnings and beat all the SHORTS left and the volume of trading decreased dramatically from 2.5 million to 650 thousand that bothered me tremendously.I need to see 2 more quarters of solid growth before I reconsider “BIG” and next time I am going to stat out by selling the calls now most people say that is dangerous I say it deepens and keep an eye on it (note most investors like to be out of Uncovered Calls a week before exasperation)
So lets talk about the Market action for the past month if you did an Iron Condor for BIG that is sold the 37.5 Calls for April Expiration for .82 cents and sold the 35 Put in April for 1.20 as I did you would have won because BIG closed above 35 on the Put side and below 37.50 on the Call side.
Now, let’s talk about HUM in April even though the government had announced the sequester, which is basically (spending cuts to certain areas of the government apparently as the analysts were reading through the sequester didn’t realize that the government was going to cut so much of the Medicare budget that would have affected HUM business tremendously because more than 50 percent of their business comes from Medicare payments so even though HUM beat expectations had Washington voted against them analysts predicted that they would go down to the high 40s. so of course this affected option prices and maintenance requirements; BUT lets be realistic how many of you out there think that the government would do anything to jeopardize the constituents who vote to keep them in office? So a bad call by an analyst caused traders to go into a panic for a week this brings me to a conversation about macroeconomics. You know analysts don’t look at the practical side of life they just look at numbers- (who beat on the top line who beat on the bottom line how much of there income is coming from foreign ECT… and by the way they will tell you if the government did not have QE “we would be right” but I have news for them; we do have QE and the government is helping the economy. It does not matter what you can prove on paper you have to combine numbers on paper with common sense and practicality. in the 1980′s a group of mathematicians from a well known university tried to invest a computer program that would predict market fluctuation but it failed miserably because it could not compute human emotion the Human Mind is still the best computer
A few other news notables that happened in April and May; with a booming economy gold went down Italian elections and bond actions were better then expected Cyprus Sold its gold to help pay off its debts. let me say this the only countries that befitted from the Euro Coherency are the Netherlands and Germany all the other countries would have been much better off staying out of the Euro.
I am happy to read the majority of your positive comments!! Remember if you would like to invest with my please send me an e-mail with your contact information.
Now onto this weeks events, for month of May I had “ROST” sold 5 of the 60 Puts and “ACN” sold 6 the 72.50 Puts I won and kept the premiums for July I have sold the Puts for “TRV 82.50 “LMT 92.50 “NOC 75.00 and “TWC 95.00″ Now lets talk a little about “TRV” the Stock beat the Streets expectations and briefly hit an all time high the day it reported of 89.00. Right away a few red flags came to my mind one we are in may and most major investors mentalities are “Sell in May and go Away” it has been that way for the past five years unfortunately or fortunately depending on how you view it, that did not work out for them this year. (So I asked myself why did it fail this year? The answer was quite simple first many potential investors had already seen the Market rise a tremendous amount and the felt the need to start investing again so that they would not “miss the boat”, but more importantly Where Else Are You Going To Put Your Money? In Bonds with super Low yields, last time I checked investors want to grow their money and Bonds although safe do not grow your money they just provide a higher level of protection but with the Market rising Bond Yields are going down. perhaps Gold or the Commodities would be a better fit but again with the economy getting better Gold ect… are getting crushed. so as a result investors who want a decent return these days find themselves investing in stocks. Now for people who say you have a point but if the Government was not interfering with the Markets by flooding them with money gold would be higher I would say you would be right if we were living in a Utopia, but the reality is that the Government has a vested interest in seeing to it that their people do well because The People are who elect them. Some time one must except certain political realities. Its a whole Bourgeoisie/Proletariat discussion that I do not want to get into right now…) another red flag for TRV is the fact that there are a lot of weather related events in the summer like the tornadoes in the Plains States so I assumed that that TRV would fluctuate between 82.50 and 89.00 and so far I have been right!!
In the interest of thoroughness, I am going to dive deeper into the Bourgeoisie/Proletariat argument it will help explain the Markets, and Market fluctuations as a whole. first, these two terms are used to explain the idea behind Communism, while I am very much a Capitalist understanding Communism provides a greater understanding of Capitalism, basically, Communism is a unique way of thinking about economic and social issues as a whole. it says that the individual does not own anything and that everyone is the same and they all work for the betterment of the state. (or society) They get paid the same no matter if they work hard or not. Sounds like Welfare doesn’t it. The underlining problem with it is that the idea has never fully materialized into pure Communism why because it always turns into Socialism.
In Socialism there is less of a gap between the Bourgeoisie (rich people) and the Proletariat (working class or poor people) But in both Ideologies there is a gap. Socialists feel that their system is butter because they say that in Capitalism the people are just being used by big business so that business can make more money and leave them behind and that big business will eventually collapse because big business will get too greedy and take too much and the end result will be the downfall of Capitalism.
This is what what one could say happened on October 10th of 2008. The Banks pursuant to a law passed by Congress in 1994 started easing their lending practices and lending to more people under the belief that the people had enough intelligence to know how much they could afford to barrow but unfortunately they did not; they just wanted what their neighbor had; if their neighbor had 5 homes they wanted it even if they could not pay for it. They figured in time they would sell and it would be someone else’s problem; that worked for about 5 year then it came crashing down and everyone wanted to blame someone else for their miscalculation; but here is the thing even if you find a place to put the blame IT DOES NOT MAKE THE PROBLEM GO AWAY. So the end result; in 2008 the Government bailed the big banks and auto makers and flooded the Markets with money and lowered interest rates to basically 0%. The banks have since paid back the Government (the auto makers are a different story) and the Markets are doing well holding their own so now the Government wants to pull out of the Markets again to make it a free Market again and investors are worried about what will happen and that is why we had a sell off the last week End of Tapper is near.
The auto makers, I would not have bailed out the auto makers unless they got rid of the Unions; its not that Unions’ idea for fair wages for the Blue Collar Worker is wrong rather the definition of fairness as defined by the Unions that I contend. Fairness is fine but “having your cake and eating it too” is wrong. The Unions’s idea is the more the big company makes the more they want for the worker between healthcare benefits pensions ect.. if the Unions keeps taking more and more how is the company supposed to invest in a better quality product to roll out to consumers and compete with the foreign automakers who are paying their non Union workers about 28.50 an hour with everything included verses 46.50 an hour for the Union workers here? It forces the American Auto makers to use cheaper lower quality parts just to compete with their foreign counter parts; by the way before GM went under in 2008 they had not been profitable since 2001. To be profitable and roll out a better product should pay their Union worker about 18.50 an hour in total. The same kind of thing happened recently with the Hostess Company.
Today however the Weekly Jobs Report came out and everyone is happy! I do not know how many of you watch the Financial News Networks but on Thursday before the report came out most of the networks were negative on both sides of the number good or bad. Their argument was if the number come in too low we will loose another 5% if it comes in too strong the Fed will Tapper faster. It is because of these types of extreme views on both sides of the spectrum that I choose to tune out most of the news and be very selective on the advise I take. Many of these networks have an agenda and get together with their contributes and discuss before hand what stocks they will be promoting. Let me give you an example: Netflix “NFLX” in its early days 2004 to 2007 it was trading at 10 dollars but the networks did not choose to initiate substantial coverage of it until it hit 200. At that point their contributors said buy buy buy then it went down to 185.00. three weeks later it went up to its high of 267.00 only to then begin a downward spiral to 59.00 before eventually going back up to its price today. One may ask why did that happen the answer is quite simple because its competitors like “TWC,” “DTV” started aggressively targeting their consumers with similar products. “NFLX” honeymoon period was over long before the networks said “buy buy buy”!! The same can be said for the Facebook IPO because of all the hype it was priced at the top of the range and a lot of investors got hurt and angry so here is a piece of advice do your own research listen to your gut go with it then when you hear about your stock on TV take the profits. I will say this when you do take advice take an over view perspective and interpret it yourself.
So these past few weeks the market has been choppy it was worried about the 2 day Fed Meeting that started today. As it turned out Wall Street liked what it heard the markets were up across the board; it a two day meeting so we will see if it carries over to tomorrow but so far so good well except for those advisers who were shorting the Market and buying gold. Gold Is Down! I would not buy gold until it hits 600 to 650 dollars an ounce; keep in mind that as the economy improves the Fed will begin to raise interest rates which will effectively cause a massive drop in gold prices as investors will find better returns in Equities or Money Market Funds.
As for me I used the recent Market choppiness to Sell Put Options on the stocks in the latter part of this page it worked out well so bring on the choppiness!!
lets get into some specifics: I usually Buy all my options back for 5 cents therefore I do not have to pay a commission on the way out of the trade however TRV had been a bit choppy the past month so although I did not buy it back for 5 cents but rather .25 cents I still made a significant profit. “You gotta know when to holdem and when to fold em” as Kenny Rogers would say. LMT 92.5, NOC 75.00, ROST 62.5, and TWC 95.00 all expired for 5 cents.
TWC was unique this month because last Friday it announced a merger which caused their stock to shoot up to 103.00 that must have caught some financial advisers off guard because Raymond James downgraded the stock from Outperform to Preform they said the stock price was too high but really there was no legitimate reason for the downgrade other then to allow their advisers to unwind their trades; this was evident in today’s trading as TWC hit 104.00.
Boy, am I glade I closed all though options yesterday because The Fed saved the “so called” bad news (which was not that unexpected) that they would not stop tapering for today the last day of their meeting; after all we are a free market economy. Now, if you listened to the various media outlets they had you believing that the Fed would not tapper for a long time because of fears that tapering now would send us back into a rescission; that is why I routinely do the opposed of what they suggest ; non more so then Jim Cramer of Mad Money. In fairness I do listen to the first 8 minutes of his show when he is giving the overview of the Markets’ action that day but after that I change the station or do the opposite of his recommendations; just as an example, he was one of the people who suggested before the start of the Fed meeting the the Fed would not start tapering until very late in the year and that investors should Buy! Buy! Buy! after the Fed meeting; not for nothing, but if you buy after the Fed meeting and the information is good then you miss out on profits; of course the converse is true too; but my point is your buying or selling of Stocks and Options should be based on strong fundamentals and a strong understanding of sentiment. For all those inquiring minds out there who want to know; my sentiment about Mr. Cramer and his recommendations have also been echoed by Hollywood on shows like “King of the Hill” when Peggy Hill says “every time I follow this guy’s recommendations on a stock I loose money.” I guess that’s why CNBC puts a special disclaimer that they airs right before his show listener be ware! For my money if I was going to take advise, I would give more weight to advice by David Tepper (the Fund Manager who is up 24 percent year to date) or Larry Kudlow of CNBC and of course me!
What a day WOW! Markets were down at one point of the day 375 points I used this day to “Sell to Open” Strong stocks: 10 “ACE 85 strike 1.00″ “5 BA 95 Strike for 1.00″ “7 ROST strike 62.5 1.00″ we will see what happens.
After two and a half days of losses the Markets finished by 45 points higher. It took me two days to gather my thoughts and organize them in such a way that all my loyal readers out there could understand them. After The Fed announced two days ago that he would be accelerating the tapering of the stimulus, due to the fact that he felt the economic numbers (housing, and unemployment mainly) indicated to him that the economy was getting strong and now could stand on its own. (By the way he has been echoing that sentiment since The Fed began the stimulus in 2008: he has said when the economy shows signs of improvement I will tapper off the stimulus. Ever since his 2008 announcement annalists, economists, and Hedge Fund Managers have been crunching the numbers trying to figure out when would be the ideal time for The Fed to get out. Unfortunately for them they miss calculated what The Fed defined as a “good enough economy” to survive on its own) As a result of his announcement all the people that miss calculated say they were caught off guard when in actuality they chose to ignore the tail tail signs that the economy was and is improving. All these people were taking shelter in higher yielding Bond Funds, gold and other commodities. When The Fed announced that he is no longer going to artificially keep interest rates low and that he was going to allow The Markets’ to function as a “Free Market” again there were certain inalienable truths that would occur: Bond Yields would go down Gold and other commodities would go down and currency value (in this case the US Dollar) value would go up. All of that has happened in the past two days. (By the way, I predict that you will see the dollar become stronger the the Euro but it’s too rich for my blood to make that bet!) As a result of what I just put forth, all the investors that made the wrong bet wanted out and they wanted out quickly so we saw a massive hit to Wall Street in the form of a mass exit-us out of Bonds and Gold; but all those investors had two problems: one it’s Options exasperation week (a lot of them own options) and once they got out where were they going to put their money to get the same returns? At this moment they had no other alternative but to reinvest it in strong fundamental stocks in the Markets’ That is why we went up today.
This idea of procrastination by investors and annalists alike is nothing new I talked about it earlier on this page in my “HUM” segment. To reiterate, annalists knew in advance how the sequester would effect certain areas of the economy more than other, but they choose not to take action until the last minute. We saw the same thing happened in the Tax Debate at the beginning of 2013 (Let me just say that both sides need each other Democrats represent mostly the young Blue Collar working class people who believe that the so-called rich people (Republicans) should pay more because they can afford it; but here is the thing when they pay more the worker pays more in the form of higher commodity and other prices. when the Blue Collar Worker asks for more money the Business owner has to raise the prices of their goods to pay their employee the more money and that drives the business owner’s out look down and when the business owner does not feel good because he has to deal with higher costs it trickles down to the worker aka “Reagan’s Trickle Down Economics Theory” which still holds true today; after all the business owner is the one who puts up the Capital to start and run the business that employs the worker. The worker has nothing to worry about all he does is take his check at the end of every two weeks. The worker does not pay business overheads. The worker in this scenario has a short term view; that is also the basis of the Democratic platform on all issues including economics: as long is I get out and I get what’s mine I don’t care about anyone else. It is all those short term fly by the seat of their pants investors with no real long term outlook beyond tomorrow that mostly cause these short term huge fluctuations in the Markets: lack of a long term view it will be someone else’s problem tomorrow!)
By the way I would disagree with Larry Kudlow that the Fed acted too soon. Let’s suppose for a moment that The Fed waited longer than he did to announce serious tapering and The Markets went up to 16000.00, his announcement would have caused an even bigger sell off than was seen in the past 3 days under the notion that “the bigger they are the harder they fall.” When people anywhere are receiving help of any kind very few of them will elect to give up that help and go off on their own for the simple reason of “fear of the unknown.” I like to call the people who go off on their own the “Business Owners” of the world and those that don’t the “Employees” of the world. Fear of the unknown also speaks to the reason why we have such a big problem with the Welfare System in this country it’s not some much that “people can’t work” (because 95 percent of the people in this country can work) but, rather “why should they work” when they are receiving free food stamps medical care along with a host of other free services; they say to themselves no I will just do a few jobs “under the table” so to speak, for cash; effectively operating in the “shadow economy” and thus continue to receive my free services. “I fear the unknown” I need “Big Brother there to help me; after all “I am not paying for it someone else is” which is true but those costs eventually effect everyone in one way or another. So, that, in a nutshell is why no one should bet against the Fed you will loose every time! That’s just some free advice.
A few house keeping notes before I get to today’s topic of tangible and intangible assets and investments:
1. I would like to thank everyone out there for their overwhelmingly positive comments I read every single one
2. I would like to ask everyone out there to please keep their comments good or bad relevant to the topic of investments. any other comments are subject to deletion.
3. I have had some questions as to what service I use for this site. i use Go Daddy but there are others out there.
4. I have been asked to include some visual aids: videos and such; I am working on that but again I am a trader not a web developer.
Now that housekeeping is out of the way on to the new of the day and the topic of the day:
AS I foretold after the mass exit-us from bonds and the volatile Asian Markets traders and investors alike had no other option but to put their excess capital to work in the U.S. Markets. As has often been said “in a dark tunnel there is always a ray of light that shines through.” that ray of light in this case is the U.S. Markets, and investors are buying up the stocks I have previously mentioned why because they are strong stocks that have shown the ability to hold up in this a volatile market.
Now on to the Topic of the Day tangible and intangible assets; a tangible asset to me is physical I can touch it; examples: my house, my car my boat, gold ect; even though 2 out of the 4 traditionally loose value to me they are “long term assets.” Long term is 10 to 30 years. using that time horizon it is difficult on the surface of it, to understand why people would rush to sell their house in these uncertain times. In 30 years my house will most likely be worth 3 times what it is now. Digging deeper, I came to find out that many of those people owned more than one house and over extended themselves, essentially viewing their houses as their own personal Stock Market when the Stock Market itself is, by definition, “intangible” (you can’t hold it) it is more vulnerable to everyday fluctuations. So the question is with the traditional safe havens discussed above taking a hit; in addition to the strong stocks and the “Leveraged Covered call Strategy” discussed above where does an investor go for safety: Mutual Funds Exchange traded Funds (ETFs) are good but to me they charge too much in fees. (if you plan to by a Mutual Fund make sure it is a “No Load” Mutual Fund Loaded Funds Charge more fees) rather for my money I prefer to own “Closed End Funds.” “Closed End Funds” are basically Mutual Funds. However, they are riskier than traditional Mutual Funds and ETFS but they trade like a stock on the Stock Market; you can buy and sell them at any time, which is not the case with Mutual Funds, they give you a higher dividend, and their fees are worked into the price of their Stock; hence no hidden fees, but again a higher risk investment. I am invested in NFJ to find out more about “Closed End Funds” you can go to http://www.cefconnect.com.
Today we saw outstanding Housing Sales figures and the Asian Markets stabilized, so market sectors saw gains across the board withe Dow Jones Industrial Average gaining 100 points. All the other major averages were higher which dispelled the notions held by many skeptical trades had the recent move by The Fed would cause another Bare Market.
To all those Investors who seek safety in Bonds and other tangible assets I say your time is up! You knew that your time was going to be short lived after all tangible assets only serve to protect your wealth not grew it. Rich people and poor people like to grow their wealth not allow it to stagnate. Get on the train or get left behind! In 2008 for every one up day in the Markets we had 20 down days thanks to you, but now thanks to a changing dichotomy that trend will be reversed: for every one down day we will have 20 up days!
If it is not one worry it is another, yesterday after Asia stabilized and the major Averages went up 100 points the Bears in an attempt to keep fears heightened brought up the fact that interest rates were rising too fast. They projected that a rapid rise in the interest rate would lead to an economic slow down because consumers would no longer find that owning a house was cheap. Again, I have to say that the Bears are gaping at straws in the hopes of recuperating some of their huge losses. Their claims are simply unsubstantiated: first of all, The Fed is not completely withdrawing its hand from the economy it is simply not being as aggressive; and if you took a look back to 2007 before this crisis you would find that The Markets were trading right around where the are now with an interest rate of about 8.00 percent which is still low as compared to historical standards. Even as we moved closer and closer to the recession the interest rate still held steady at about 5.00 percent. It was not until about November of 2008, in an effort to stimulate the economy that The Fed lowered rates to about zero percent. Secondly, The Fed has a vested interest in growing the economy so you can bet that it will do whatever is necessary to keep rates between 4 and 8 percent to keep the economy growing. The end result is that Bears’ fears are unwarranted as was evident in today’s 162 point rise in the Averages.
With the Averages up another 114 points due to subsiding worries on tapering front, another set of worries is just around the corner: “Earnings Reports” (like I had said earlier “if its not one thing its another.”) Earning season is the time when the financials of a given company take on more weight then any other events which may be happening in the financial world. Earnings occur every three months. This is the time when investors have to be smart about their investment strategies and stock picks. I am going to use an example from one of the above mentioned stocks “ACN,” which reported earnings today. “ACN” came in slightly above expectations on “Earnings Per Share,” but came in slightly below on their “Sales Revenue” and gave a weaker then expected year end outlook. As a result the stock went down 7 percent in after hours trading. To me that move was not unexpected: first the IT, Aerospace and Insurance sectors held up amazingly well during the recent market turmoil. investors saw those sectors as safe havens. They outperformed the S and P 500 Index. Looking more closely at the trading behavior of “ACN” you would come to find out that upon releasing its Earnings three months prior to the current one, on the day of its release, it traded between 67.86 and 72.35. The next day it revised those numbers and the stock went to 75.00 pursuant to that a lot of positive information about the company came out causing it to rise to above 80. To me at that point it was over bought investors were just trading it on emotion so I stayed away. Its miss on earnings just brought it down to levels at which I would consider buying it again I would Sell the Put at around 67.50. Another indicator that trouble may have been on the horizon for “ACN” was its competitor “IBM.” As the leader in the IT space, it had previously reported a mediocre quarter. It is always I good idea to look at an entire space as a whole to gauge how your company may fare in that space. A simple rule of thumb is if a stock rises quickly it can fall just as quickly if not quicker so be weary of Earning Season!
I have not written since Thursday because what I had already spoken about in my above articles are coming to fruition, on Friday investors continued to move out of Bonds into Stocks. Gold is moving down towards 600.00, and with China’s economic wows, investing in The united States is looking more and more attractive. The real question is what is the best approach to Earnings Season? The best way as I alluded to above is if you have a particular stock in mind; (as a successful investor you should always keep a list of your favorites;) I keep mine in my head, look at your stock’s sector as a whole, and play “follow the leader” so to speak. Every stock in your stock’s sector is usually going to report its Earning on a different day, use those earning to gauge how you think your stock will do. Then wait until your stock reports its earnings and then employ the proper Options Strategy. In this way you loose some of the premium that you would have received for the Option if you had held it before your stock’s earning’s report came out, but at the same time you greatly reduce your risk of a loss, and as is often said “a little bit of something is a lot better then a whole lot of nothing.” For example I like “DLTR” I want to “Sell to Open” some Puts for the July 20th Expiration. Exploring the sector I find out that its big competitor “FDO” is reporting its earning on July 10th. Digging deeper I find out that another competitor “DG” missed on its revenue and went down earlier in the month, so if I wait until July 10th it’s more likely than not that I will get the best price for “DLTR.” The key point here is when investing “patience is a virtue.”
This will be a short update since I am going on vacation for a week. It is my first Wedding anniversary. I will keep abreast on The Markets If I can update I will, but it’s a short week nothing too exiting should happen but you never know with The Markets. Have a nice 4th of July Holiday!
I hope everyone had a great 4th of July Holiday I know I did but now its time to get back to work! With the nice steady gains we have had in these last 2 weeks I have been hearing a lot of chatter “around the water cool” that “The Markets” are due for a correction; basically they are too high. Fist let me say I dislike General generalizations like “The Markets themselves are too high” because to me for every rule there is an exception. I would rather break it down and say certain sectors are over bought. The way I see it Stocks should move according to the “Options Strike Price” The “Options Strike Price” is the price that an investor agrees to buy or sell The Stock on The Options Marketplace. The time frame should be every 3 months. for example “ACN” three months ago was trading between 68 and 72.50 it had great earnings 3 months ago so they jumped up to 80 but in reality it should have just gone up to 75 the next “Options Strike Price” but investors considered The IT Sector as a safe place for their money, that is to say safer than most other sectors. In their most recent reported quarter however, they down graded their forecasts for the year so “ACN” went back down to normal levels so to speak around 75.00. My point here is that yes, some sectors are “overbought” but not all and each Stock should be considered on a case by case basis. It is also worthwhile to note that when the Stock Market is slowly gaining its harder to play the Options Market.
Yesterday Investment Professionals were worried about The Fed Minutes that came out today, but their worries were for-not because they failed to take into consideration that The Fed would be mindful of the extreme fluctuation that occurred in the Markets’ last month when He made his comments. Last month Investors reacted violently to The Tapering News that was already taking place. So, in an effort to avoid the panic he was intentionally ambiguous this time around; saying something without saying anything at all. (That’s Politics The Science of BS.) This is done because “Mathematically inclined individuals” that dominate The Markets only understand 1+1=2 but when you mix that in with a lot of political diction and syntax it leaves “Mathematically inclined individuals” scratching their heads in aw, thereby avoiding a major move in “The Markets.”
As a side note, after “FDO” reported a better than average Quarter I Sold 5 The July 20 65 Puts at .85.
In keeping with my comments 2 days ago, Last night after The Markets closed “The Fed” made it absolutely clear that Taping would continue for as long as it takes to make sure that The Markets stay on track that caused a lot of selling better known as “Short Covering” in The Bond Markets after hours.
The idea that there is very little “bad news” to come presents a problem for me in the way that I trade Options, because other than “TRV” and “BA,” all my favorite Stocks are over bought so now I am focusing on Stocks that have beat Earnings Expectations of course their numbers have to be good too.
There is not much to analyze this week except to reiterate that we are in the heart of Earnings Season, and also that “The Fed” will be making comments about the state of our economy later this week.
An interesting story transpired on Friday regarding “BA,” lately it has been having issues with its new 787 “Dream Liner” Aircraft. On Friday one of its 787′s had another in cabin fire. Those continuing mishaps bring to mind the “Topic of the Day:” When Trading on the Stock Market Always Have a Predetermined Exit Strategy. In my case, whenever I “Sell to Open” an Option I try my best (depending on Market conditions) to “Buy” The Option back (“Buy to Close”) for .05 cents. Why .05 cents you ask, because my broker allows me to “buy it back” at that price or lower without paying a commission. (everyone however, regardless of where you trade, must pay a minute Reg Fee, usually a few pennies per trade. (check with your individual broker to find out the exact amount of this fee.) I buy it back to avoid any unnecessary down side risk close to the Option Expiration Date; as was the case with “BA,” one day before they had their plane fire I sold The Option back for .05 cents, thereby saving me a lot of undo aggravation. I thought about taking on the same Option again, but, with the uncertainty of the company occurring so close to “The Option’s Expiration Date” I deiced against that. Instead I sold 5 “FDX” 100 Strike for JUL 20 at .85 on the back of “UPS’s disappointing Earning Report. I also scooped up 10 “FDO” 65 for AUG at .75 cents. As a side note you can choose to simply let your Option Expire and if it expires “Out of the Money” You pay nothing. But again why take the risk?
So, “The Fed” made a few comments today essentially saying that they would say with the status quo until the end of the year. Towards year end they will begin to Taper. That means that investors will most likely wait until the end of the year to have another panic attack over Market conditions!
With the market running on all cylinders and no major political stories on the horizon, as I have stated previously Quarterly Earnings are in focus, so for today’s discussion I thought it would be fun and interesting to dig deeper into some of them from this past week namely “IBM,” “YHOO,” “GOOG,” “MSFT,” and “AXP.”
Let’s start with “IBM,” before “IBM” reported its Earning this past week it was hammered by annalists based in large part on its competitor “ACN’s” earnings witch were not necessary bad because “ACN” met expectations but they narrowed their outlook for the year. In turn that caused annalists to worry about the IT Sector as a whole, and of course the biggest player in the sector is “IBM.” When a stock like “IBM” takes a beating before its earnings announcement it is usually an indication that annalists are taking into account the inevitable bad news to come. So if a stock reports anything better than an annalist’s “doomsday forecast” the stock will go up as was the case for “IBM.” “IBM” by all accounts had a bad quarter but it was not “as bad as” annalists predicted.
“YHOO” was in the same boat as “IBM,” by all accounts a bad quarter, but the annalists are “in love” with new CEO Marissa Mayer, she is still in her “honeymoon” period. As a result, the annalists set the bar so low that practically anyone at the helm could have met their expectations. “YHOO” even got away with narrowing expectations for the year.
“GOOG” and “MSFT” had been on a tear for a long time now with “AAPL’s” disappointing performance of late, investors reallocated their investments to exclude “AAPL” and include “MSFT” and “GOOG.” It is also worth while to note that before “MSFT” reported its earning, it said goodbye to CEO Steve Ballmer. Perhaps a telltale sign of its up coming disappointing earnings report.
Last but certainly not least “AXP,” which by all accounts had a great quarter beating expectations, but it did come in slightly lower than expected on revenue, but because it also had been on a tear for a while annalists had, in my opinion, unrealistic expectations for “AXP” to meet; that is the “Great Tragedy,” as a company like “AXP” does better and better annalists expect more and more almost like they are setting up the company to fail. We saw this same phenomenon with “AAPL.”
This week there has not been that much to report. There have been a few Earning Surprises “AXP” I had mentioned previously. There was also “KMB” which beat earning expectations bet fell short by a very narrow margin on revenue, so I took that as an opportunity to “Sell 5 of the 95 Puts for Aug 17th.” Also, today “TRV” reported a fabulous Quarter blowing by annalists EPS expectations; revenue was also up 85 percent, but with the stock near an all time high annalists exceptions were also at an all time high and they were looking for any excuse to force the stock lower and they found it when the company said they were going to let go of 450 employees and slash their auto insurance rates to compete with the other providers in the marketplace, which to me just means that the consumer has more choices and that is a great thing, however the annalists did not see it that way; the stock fell 3.8 percent. As a result I used that as an opportunity to “Sell 8 of the TRV 82.5 Puts at 1.50″ for Aug 17th.
In the heart of Earnings Season last week, the talk on the Street was that companies were not meeting their “Top Line” Revenue Numbers; in other words companies’ EPS Estimates were topping expectations but their revenues were falling short. Wall Street Annalists expected this to happen. (In this day and age companies are expected to do more with less.) As a result, many investors speculated that “The Markets” would go down significantly, they did not count on two events taking place however; first, and perhaps most important, was the fact that the world “Markets” were doing a lot worse then The United States; as a result, that left investors with little recourse; secondly Companies’ said “Trust US-we will do better in the second half of the year.” Now, when a company says “Trust Me” it makes me think about things I do not want to think about… It makes me nervous; but before I “jumped the gun” I thought about it; What, with Obama Care Costs on the horizon, and the consumer still not feeling that great, along with rising prices on just about everything, and a “housing market” that will never enjoy the luster it had five years ago (it will grow but not at the pace previously seen,) maybe for now investors have to except the “status quo.” In any case I used last week’s weakness to “Sell Puts” on both FDO and FDX.
The Global Impact Story today came from Russia. The Russian Government said it would no longer accentual manipulate the price of Fertilizer. Thanks in large part to Russia, the price of Fertilizer until today was 300 dollars a ton; with Russian influence out of the picture so to speak, all the aspects of “The Free Market Trading System” took over; worldwide competition in turn, drops prices. Hence, The Fertilizer Sector as a whole was hit hard today.
This is not a new concept we have seen it in the past with companies like “T,” and “MSFT.” In 1983 “T” was the biggest telecommunications provider in the country. Smaller companies like MCI were complaining that they could not compete with “T” essentially because “T” had a virtual monopoly on the telephone lines and other aspects of the industry. As a result, The United States Government forced “T” to break up leading to the eventual collapse of the company. Now in the late 90s “T” (not the same “T” from the 80′s) does buy Cingular Wireless. Unfortunately, two year ago, in an attempt to gain “Market Share” “T” attempts to buy its rival T-Mobile but the deal is once again blocked by the U.S. Government over monopoly concerns; there by obligating “T” (as per their contract with T-Mobile,) to pay them 4 billion dollars.
In the late 90s “MSFT” found itself in the same boat as “T;” companies like Netscape complained that “MSFT” had a virtual monopoly on The Web Browser Business because they refused to pre-install a competitors web browser. “MSFT” argued that their browser was the only one compatible with their Windows Operating System and that if the consumer uninstalled their Explorer Web Browser Windows would not work. Shortly thereafter at trial, a judge found “MSFT’s” claims to be total fabrications as Windows worked just fine with out their Explorer Web Browser. “MSFT” was forced to pay a huge fine and include its competitors’ software in its prepackage software bundles in Windows.
The take away here is that when in a sector or industry that is manipulated by a government or government entity, or a company is too large and monopolizing The Market, an investor should take into account that variable.
Nothing new today more of the same, I did “Sell to open 2 “Amgn” 105 Puts” as they beat Earnings Estimates but fell a bit short on revenue. (after adjusted revenue numbers)
I suppose the major story of today was that Exxon Mobile lost 9 billion dollars in Market Cap. In general, the Oil and Industry was hit hard which should not surprise many of my readers since I had mentioned in previous articles that a stronger Dollar leads to lower commodity prices, which in turn, results in lower corporate profits.
After last weeks historic highs, this week has been relatively stagnant; mostly investors being cautious; perhaps taking some “profits off the table.” There has also been a lot of chatter about the “unusually lite” volume being traded, but to me, that is to be expected given the fact that the “Housing Market” has not really recovered (and will probably never see its historic peak again). The Stock Market crash of 2008 really created a wider gap between potential investors verses non investors; meaning that prior to October of 2008 (at least on paper) more people across all of the social classes had money to invest. Also, before 2005 investors would typically by 50 to 100 stocks for their portfolio but, in recent years, ETFs have become more and more popular; whereby an investor can just by an ETF to cover a whole sector or industry.
This week did have an interesting story though “IBM.” You will recall that “IBM” reported a mediocre quarter last month but still managed to rise because it was not as dire as projected. To me however, after their mediocre quarter “IBM’s” Stock became just for “Day Traders” because I knew that when the “false sense of excitement” wore off among-st investors the stock would be downgraded-which it was. This Idea can be applied across the board to all stocks just because a stock reports a “better than expected loss” does not make it a “good” stock to own for the “long haul per-say.” A loss is still a loss, and you as an investor, should treat it as such.
I have not written in about a week mostly because history is repeating itself; high end retailers are reporting week sales which is an indication to investors that consumers have not fully recovered and are still feeling the pinch or perhaps they have chosen to reallocate their discretionary spending; either way the result is “White Collar” Workers do not feel good and those feelings “trickle down” to “Blue Collar” Workers.
Last week, though the beginning of this week have been all about Jamie Dimon’s miss management-rather the lack of oversight for trades done in the European Markets that cost the company 8 billion dollars and hurt many investors. At the heart of the financial crisis in late 2008 his company JP Morgan Chase was seen as “somewhat” of a safe haven for investors and by all accounts he did a great job with a few exceptions: One he froze Home equity Loans across the board; even for those borrowers like myself; who were in good standing. Now, to me, if you want to freeze assets of borrowers who are not paying on their obligations that’s fine but don’t hurt responsible borrowers we are the “bread and butter” of your business. What he did made me feel like I was back in grade school and the teacher told us we could not chew gum because a few students were disposing of the gum improperly; last time I checked we live in a Capitalist Country not a Communist one. His second mistake also took place in late 2008 when he temporally froze the assets of a certain institution who was bidding to take over a few troubled financial institutions so his company could take them over for pennies on the dollar. And of course his third and biggest mistake not disclosing his company’s losses quick enough. to me he blocked The Home Equity Loans of borrowers in good standing only to give the cash to a supposed “Whale” who lost even more money and that is beyond despicable and irresponsible behavior by a CEO of one of the biggest companies in the world. As a result of his misdeeds he is now facing the “Firing Squad” in the form of a Congressional Oversight committee; and I for one think he deserves everything that is coming to him. Maybe next time he will learn to put “People first then Money then Things.”