Hello Suckers ... http://hellosuckers.net Making 45% Annually Trading Options Against Dividend Growth Stocks Tue, 28 Jul 2015 23:19:38 +0000 en-US hourly 1 http://wordpress.org/?v=4.2.3 Options trading strategy adjustment http://hellosuckers.net/options-trading-strategy-adjustment/ http://hellosuckers.net/options-trading-strategy-adjustment/#comments Tue, 28 Jul 2015 23:19:38 +0000 http://hellosuckers.net/?p=2196 Continue reading →]]> Three years ago I started trading options. I started with covered calls first, later moved to selling naked puts. Was I successful? Yes and no.

I made money and I lost money. My trading was like a roller coaster.

Euphoria was replaced with deep disappointment and anger when I doubled my account in one season and lost it all in the next one.

I was looking for a strategy which would work and make money consistently. Even naked puts which I thought would be an easy trading couldn’t do it. And I was running out of money to trade naked puts.

So I turned to spreads.

I made money and I lost money. And my strategy still didn’t work. I started trading SPX options. I made a lot of money. And I lost it again. All my trades provided with good excitement but they all were dangerous and risky. Every expiration I felt a stomachache worrying where the market ends.

I knew what I wanted to trade, but still didn’t know how. It seems like this is something every beginning trader is going through.

After desperately searching for the new way of trading I decided to adjust my strategy to make it safer, increase my probability of success and make money consistently without stomachaches.

Here is how I will be trading options.

I trade options spreads against SPX

I decided to trade options spreads against SPX only. No stocks. I want to focus on the market, be in sync with it and not get distracted by stocks, announcements, earnings, or any other aspects which move the stock price and create distraction.

For that I will only trade bull put spreads, bear call spreads and Iron Condors against SPX. If needed, I may adopt other options structures as a way to save a trade, for example converting a spread into a butterfly, etc.

I trade SPX options spreads with 45 days to expiration (DTE)

Before I traded 4 days DTE spreads. I opened a trade on Tuesday which was supposed to expire the same week on Friday. With the market volatility as seen throughout 2015 many of my trades got wiped out. The probability of success was very low.

By trading 45 DTE spreads I could widen my strikes and increase my probability of success beyond my imagination.

I trade 45 DTE SPX options spreads in a ladder to simulate weekly trading

I loved trading weekly options, but they were risky and unpredictable. I was thinking how to trade 45 days options weekly. I decided to create a structure I call a ladder. A period of 45 days represents seven weeks.

To start a ladder I sold one trade per week. After seven weeks I achieved opening a new trade on Tuesday and have expiration that same week on Friday. Exactly the same as when I traded my 4 DTE options. The only difference now is that on the seventh week, I open a seventh trade but my first trade is the one which expires. In eight week I open a trade #8 and my trade #2 expires and so forth.

The first 45 day cycle when I started a ladder I had to wait 6 weeks to achieve weekly expiration.

Same illusion of weekly trading, but a lot higher probability.

I use standard deviation channel and linear regression channel to set up a trade

In my Think Or Swim (TOS) program I use 9 months SPX chart with two studies – a standard deviation channel and 50 day linear regression channel. They are set up to represent 1st standard deviation and 2nd standard deviation.

When placing my call spreads I want the short strike to be as close to the 2nd standard deviation as possible or above it. But when opening that spread I want to collect min 30 dollars premium.

When opening my put spreads I use delta 8 – 10 for my short strike to open the spreads.

This increased my probability of success to 92%

I trade SPX options spreads with 40 dollar wide strikes

I started opening new spreads with five dollar wide spreads. But my goal is to reach a 40 dollar wide spread before I start adding more contracts. I believe, wider spread is better than narrower.

Why is wider spread better?

First of all, it is safer and you actually risk less money if the trade goes against you. You receive more credit per contract and commissions are same as if you traded a narrow spread.

For example, if you open a five dollar spread, you receive 30 dollars premium and pay approx. $11 in commissions (depends on which broker you trade with). With a 15 dollar spread you get 80 dollars premium and also pay approx. $11 in commissions.

To get 80 dollars premium, you would have to open at least 3 contracts (assuming each can bring 30 dollars only) and with that, you will pay around 20 dollars in commissions.

The chance that the price of SPX slices thru both strikes is lesser with wider spread, so potential loss is smaller compared to a full loss of more contracts of a narrow spread. And here is the safety of the trade. If for example you trade a 2035/2040 put spread and 2000/2040 put spread, it is very likely for SPX to drop below 2035. And if that happens, this trade is in full loss, while the second trade is still only slightly in relatively good shape as you are losing only a small portion of the entire risk.

For this reason I will be widening my spreads as time goes on.

I open SPX options spreads on Tuesdays

I do not open trades on Mondays and Fridays. I have seen experienced traders avoiding these days. I do not know the details why, but I adopted that policy. John Carter for example doesn’t open trades on Fridays (maybe because they are expiration days). Other traders and schools do not open trades on Mondays. So do I.

However, as my account grows I plan on opening trades not only on Tuesdays, but Wednesdays and Thursdays too.

Defending my trades

This is the hard part. I didn’t like defending trades. If I had to defend trades or close them, it was always for a loss and I hate taking a loss. All my search for a strategy was to find one where I do not have to defend a trade.

Although, I believe I have a strategy where I do not have to defend a trade, if it however happens and a trade goes against me I need to have a plan what to do.

I will not roll the trades as I did before. If any of the spread gets touched, I will either open an opposite spread or in case I already have a Condor I will move the untouched spread down and create an Iron Clad trade. Then I let the entire trade expire as is. There will be a loss, but smaller than if I did nothing or rolled trades away in time.

Once I will have more contracts opened I will attempt reducing risk by closing half of the spread when the spread gets touched. But I will only do this 7 days to expiration. If there is more days left, I will do nothing as it is very unlikely for the market to drop so deep (or raise so high) without recovery or correction.

Follow my trades with my free newsletter

I will be publishing the trades in my free newsletter showing each trade as I will be putting it on in my trading platform. So you can watch, follow, or even trade those trades with me.

You will be able to see the open trades and number of contracts in “My Trades & Income” tab on my blog. I will also post these trades in “Calendar” where you will be able to check expiration of each trade and the entire process of creating and managing the options ladder.

Trading options vs dividend investing

Dividend investing is a great strategy, but now I look at it slightly differently. I no longer consider the dividend growth strategy my main investing or trading goal. I however look at it as my wealth preservation.

I have seen some traders investing their proceeds to other instruments or investments. Some invest the proceeds to gold or silver, some buy land, others real estate. I want to do the same. Or similar to be exact. I want to be buying dividend stocks.

I understand that at some point in my life I will no longer be able to actively trade options. Dividend stocks will be here to subsidize trading. My options trading is here to create an income now. Not 20 years from now. Now I want to trade, grow my account and enjoy income from trading. Once I will not be able to trade (maybe 20 or 25 years from now), I will have my dividend stocks to take over.

For this purpose I will trade this option strategy in my taxable TD account and in my ROTH IRA account.

Money distribution

To grow my accounts and enjoy my income I have the following distribution rules.

In my TD account:

For every $1,000 monthly income I withdraw $200 for my own use and spending (paying bills, debt, vacation, but also buying dividend stocks, or saving to my ROTH IRA account). After I reach $10,000 monthly income, I will take out 50% for my own use. The rest will be left for taxes and account growth.

In my ROTH IRA:

After I reach $2,000 monthly income I invest 50% of that income into dividend growth stocks. The rest will be used to grow my options trading portion of the account.

Dividend investing

In my ROTH IRA account once my options trading generates $2,000 or more per month I will invest 50% into dividend growth stocks. This means I will invest $1,000 or more monthly into dividend growth stocks.

To choose a stock I want to invest in I created a screener which selects the most undervalued stocks for me. All I have to do is to look at the stock’s rank and invest in it. I publish the results of the screener below. The lowest the rank the more the stock is undervalued.

 

If any of the stock changes from “Buy” into “Avoid” or increase the rank I stop investing into such stock but I keep it in the portfolio. I only sell if it stops paying dividends.

In my TD account I do not invest into stocks and I sold all positions when adopting this strategy. My TD account is now only for options trading.

I wish you good luck and a lot of money :)

 
 

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Forget Greece. The Sky Is Falling In China http://hellosuckers.net/forget-greece-the-sky-is-falling-in-china/ http://hellosuckers.net/forget-greece-the-sky-is-falling-in-china/#comments Tue, 28 Jul 2015 16:38:43 +0000 http://hellosuckers.net/?p=2241 Continue reading →]]> Greece’s three-week bank shutdown cost businesses over 3 billion euros according to the Athens Chamber of Commerce and Industry. Despite such astonishing news from Greece, this week national news outlets focused their resources into forecasting that the sky is falling in China.

In the famous children’s story of Henny Penny, the chicken who believes the sky is falling has a difficult task in convincing her friends that danger is imminent. When it comes to investing in China, the entire world already knows the Chinese market is too perilous for pension and hedge fund managers. No one needs a Henny Penny warning to understand that since China’s government itself owns the primary companies that control the indexes, and they have propelled unregulated cash into these unprofitable ventures, a correction was forthcoming.

Indeed, there is a story to report in China. After recording record highs in June of 2015, it appears that China’s asset nest egg cracked up and sent Chinese stock prices spiraling down more than 30% last week. Over 700 companies listed on the Shanghai and Shenzhen stock exchanges asked to suspend trading. As a result headlines such as “China looks like it is heading for its version of the 1929 stock market crash.” (Source: The Telegraph, UK, July 9, 2015) and even CNBC News “China’s Market Looks Like the Dow in 1929.” (Source: CNBC, July 3, 2015) have every wealth managers attention.
 
 

What has happened? Once upon a time China was a very wealthy country. They made a lot of cheap things and sold them to countries that liked to purchase things that were cheap. Times changed, and the world market changed. In the last decade, China built housing, and highways and infrastructure within their country. Exports from China’s workers dwindled. China over built, and their housing market egg cracked. At the same time their stock market fell. Ouch. It now really does feel like the sky fell in China and China’s mega wealthy citizens have taken a duck and cover stance because of it.

As a result, the top one percent of the Chinese mega-rich are sneaking not all, but large sums of their personal savings out of the country. Since China does not have a public program like Social Security, China’s most wealthy citizens have been investing in U.S. dollars and treasuries to protect their money for retirement. According to the Wall Street Journal, China’s top 2.1 million families control between $2 and $4 trillion in stocks, bonds and real estate outside of China’s borders. (Source: Andrew Browne, “Mega Rich Keep Eyes on Yuan,” Wall Street Journal, February 25, 2015)

 

 

The real danger and panic for China’s markets looms shortly. Since China’s yuan is fixed at 6.21 yuan which is equal one U.S. dollar, China’s banks cannot afford to devalue the yuan, even though the market is begging for a mending. Since China’s double-digit growth has slowed to only a rate of 7% in July, this will cause the U.S. to pressure China again to raise the yuan’s value. China’s government is estimated to own $1.224 trillion in U.S.Treasuries. China buys U.S debt to support the value of the dollar. China will refuse to change the yuan’s value and will instead threaten to call in their debt, reminding the U.S. that China is their biggest banker. It’s a vicious circle of who is in debt to whom much like Henny Penny herself running around in a circle that never seems to end.

If we all learned anything from 1929, it was not that the danger was in the market correction itself, the real danger was in the bail out pressures made on the banks. Since China happens to be their bank, the pressure for bail outs from their local governments, property developers, and state-owned companies is going to be a tough case to solve. With so many needing a cash infusion, China is going to feel, very American while they use their state-owned banks to carry their state-owned builders and companies through this new financial crisis.

“The sky is falling, cried Henny- Penny, and a piece of it fell on my tail.”

In the various versions of Henny Penny, Cocky Locky, or Goosey Loosey, the birds name changes depending on which country the folktale is shared, the ending of the story remains the same. While the bird tries to warn of impending doom in her efforts to save the world, she ends up in Foxy Locks’s den and is eaten. The moral to be drawn is similar. Although we still are unsure of which country will represent the Fox.

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Want To Get In On Apple? Consider Its Suppliers as Investments http://hellosuckers.net/want-get-in-on-apple-consider-its-suppliers-as-investments/ http://hellosuckers.net/want-get-in-on-apple-consider-its-suppliers-as-investments/#comments Sun, 26 Jul 2015 23:01:35 +0000 http://hellosuckers.net/?p=2234 Continue reading →]]> Apple (NASDAQ: AAPL) is still trying to recover from the negative reaction to its third quarter earnings report last week. While the reasons investors were unhappy varied, the main reason related to the recently unveiled iPhone 6. Worried that Apple may have reached its pinnacle in selling the high-end smartphone, investors sent the stock lower.

The leaner than anticipated iPhone 6 sales caused angst among investors, but how are Apple suppliers for the iPhone 6 faring? They include: Skyworks Solutions (NASDAQ: SWKS),  NXP Semiconductors (NASDAQ:NXPI), and ARM Holdings (NASDAQ:ARMH) chip design.

Apple Disappoints

Before getting into the details about how Apple’s suppliers were affected by its stock decline, let’s take a look at how the tech giant fared during its third quarter, ending June 27.

Company officials chalked up the quarter as having record sales of the iPhone and Mac, all-time record revenue from services and the successful launch of Apple Watch.

According to Apple’s earnings press release, the company posted quarterly revenue of $49.6 billion and quarterly net profit of $10.7 billion, or $1.85 per diluted share. These results compare to revenue of $37.4 billion and net profit of $7.7 billion, or $1.28 per diluted share, in the year-ago quarter. Gross margin was 39.7% compared to 39.4 % in the year-ago quarter. International sales accounted for 64 percent of the quarter’s revenue.

Luca Maestri, Apple’s chief financial officer, had the following to say about the quarter in the earnings press release.

“In the third quarter our year-over-year growth rate accelerated from the first half of fiscal 2015, with revenue up 33% and earnings per share up 45%,” said “We generated very strong operating cash flow of $15 billion, and we returned over $13 billion to shareholders through our capital return program.”

When the market opened for trading last Tuesday, Apple was trading around $131 a share. After it reported the Q3 earnings for the period ending on June 27, the stock dipped as low as $119.20. It closed at $120.33, effectively wiping out about $60 billion of its estimated $753 billion market cap.

Although smartphone sales are typically lower during the spring and summer months as consumers wait until the holidays to make purchases, partly due to holiday deals, the lower sales for Apple’s last quarter was different.

 

Super 8 Film to DVD
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The Wall Street Journal noted that the decline in iPhone sales dip to 47.5 million amounted to a drop of about 23% from Apple’s fiscal second quarter of 2015. Furthermore, that was a steeper rate of decline than the previous two years when quarter-on-quarter sales fell by 19% and 17% respectively, according to The Wall Street Journal.

Apple also briefly fell below its 200-day moving average Tuesday and Apple hasn’t closed below this metric since Sept. 17, 2013, according to news reports. At its lowest point around $120, Apple had lost $62 billion off its market cap, which had soared to $753 billion, making it the most valuable company the world.

What Apple’s Slump Means For Suppliers

Now that we’ve gone over Apple’s numbers for the last quarter, let’s look at the suppliers, specifically those whose parts power the iPhone 6.

There are two main we see you as getting in on Apple as investment.

If you are considering investing in Apple, there are viable options. First, buy now while it is trading lower because the stock tends to rebound nicely. It’s trading now around $125 a share, which is about $10 share of its 52-week high. Just keep in mind that the Q3 results may very well be a sign that the smartphone market is saturated and the good old days of record sales of the devices may be waning.

Another way to ride the coattails of Apple may be through its suppliers. The following is a list of some of the suppliers whose parts are in the iPhone 6.

Skyworks Solutions (NASDAQ: SWKS) had a good third quarter in terms of earnings. It supplied the chip for the iPhone 6’s 5.5 inch screen models. After beating the street’s estimates several analysts increased their price targets on the company. It closed Friday around $99.

Pacific Crest Securities raised the price target to $120 from $110. The analyst for the firm is banking on the increasing content on iPhone 6S and improving Chinese demand as reasons.

Skyworks reported earnings being up 61%, and revenue rose 38% to $810 million. Analysts had expected $1.29 and $801.5 million.

Then there is NXP Semiconductors (NASDAQ: NXPI). Apple uses its near-field communications technology in its mobile pay service. Following Apple’s earnings release last week, NXP’s stock fell 2.38% to $90.20.

The company produces several components for the iPhone, including a part required for the Apple’s new mobile Pay feature. Providing iPhone users a pay system is slowly catching on. Over the long term it’s likely that NXP could significantly benefit from supplying Apple with the parts for this feature.

Keep an out on the stock this week; it reports its Q2 earnings on July 29.

ARM Holdings licenses (NASDAQ: ARMH) its chip technology to several smartphone manufacturers, including Apple. ARM Holdings receives royalties from Apple and other smartphone manufacturers that pay royalties. While it performed

It reported earnings for its second quarter last week. While it missed analysts’ estimates, it did meet profit projections. Specifically, its revenue in the three months ended in June was up 15%, year over year, totaling about $357 million. Estimates were $359 million.

Its earnings per share were $.34, which met analysts’ estimates.

Do consider ARM Holdings for many reasons. One of them is the royalty revenue it receives when products using its licenses are sold. According to an interview ARM Holdings’ CEO gave to Bloomberg. Its chips are in 95% of the world’s smartphones.

He noted that the company is experiencing “very strong” growth in royalty revenue.

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Bootstrapping http://hellosuckers.net/bootstrapping/ http://hellosuckers.net/bootstrapping/#comments Mon, 20 Jul 2015 19:10:30 +0000 http://hellosuckers.net/?p=2225 Continue reading →]]> Trading as a business may be difficult to start if you have little money. In the past, I tried to raise cash for my trading business, but this endeavor is something nobody will ever believe you or trust you with. It looks like times when people like Warren Buffett collected money from his friends, invested them and made them rich are gone.

I do not have such friends and public will not trust you at all.

How much money do you need for a stock market trading business?

How much money would you need to start your trading business? It depends. If you want to live off of your investments you would need at least $150,000 to start with. This amount is of course needed for trading options. If you want to invest in dividend stocks instead and live off of the dividends, you would need a lot more than that.

Let’s say you build a portfolio of dividend stocks which delivers you 4% annually and you want $50,000 a year income, you will need at least $1,250,000 to get there. This is a life time effort and if you want to go this direction, you need to start early and be very aggressive in saving.

If you are like me who started late, you need to adopt other strategies which will help you to get there. I believe, options are such strategy. My options trading strategy I recently adopted is set to deliver 7% weekly gain. That’s 28% a month! Or 336% a year. But let’s say not all trades will be profitable and I will only make 60% a year. How much money would I need to live off of my trading?

If I only want $50,000 a year, it would be $83,300 account value to make $50,000. Of course, you need more to make money for taxes, fees and some reserves to grow the account. Thus $150,000 is ideal amount to start trading for a living. There is one more benefit to that amount. You can apply for portfolio margin (a lot less margin requirements) and get better deal on commissions too.

Of course, if you can get more than $150k, good for you.

Raising money for trading is difficult

Now, that we know how much money is the best to start with, the question is where do we get that money if we do not possess them in the first place. Getting money for trading business or investing is extremely difficult. Nobody will trust you and nobody will fund you.

Even if you try to start a hedge fund and take all required exams and licensing, you will not be able to raise cash without track record competing against already existing funds. And even if you decide to compete, it will be difficult to put your couple thousands of dollars against millions of dollars in existing funds.

And if you decide to be the only owner of your business and investor at the same time, you still run into an issue of being underfunded.

In the past I tried many approaches how to raise money. I tried to ask friends, family, personal loans, business loans, angel investors, and crowdfunding. The result? Laughter. All I could do is to save and use my own money.

What is bootstrapping?

Bootstrapping is just that – raising money by an entrepreneur himself from his own resources (personal finances) without investors. If you put your own little capital to work and reinvest the profits back into the business to grow it all on your own, you are bootstrapping.

It looks like that trading business is doomed to this kind of funding style. Unless you are a genius make incredible profits immediately from day one, work in the financial industry and attract immediate attention.

I am not such person at all but rather a regular, unimportant guy who wants to accomplish his dream and had to learn trading the hard way by losing his little capital. My fate is bootstrapping.

But I wasn’t just dreaming! I was also actively searching for ways how to raise capital for trading. I found two possible ways and I plan on using them at some point.

Borrowing money against your possessions like a mortgage

When purchasing a house, you borrow a lot of money and use your house as a collateral. I wouldn’t borrow money against my house, but I would do that against any other stuff I own and I do not care that much if I lose it. Trading business can be risky and I can lose money (and it happened), so the house wouldn’t be the right possession to use a loan against it. Although, I know at least one investor from StockTwitts who admitted that he did it and took a HELOC loan against his house.

I am a bit more conservative and I wouldn’t use HELOC at the beginning phase of bootstrapping. Once the business starts generating a consistent revenue, it could be a good source of funding, but at the beginning phase it can be dangerous.

What other property can you use then? I found a good option recently which can be beneficial to you twofold – a loan against your car (car title loan). You can borrow money against your car, fund your business and help your credit score at the same time. And if you happen to fail, you lose the car and not the house.

We have two cars in our family. I do not need mine so badly as my wife, so using my car as collateral would be a viable option.

Credit card cashing

Carding or credit card cashing is typically referred to a credit card fraud. This is not what I have on mind. Recently I found an option how to cash your own credit card without the transaction being treated as cash advance.

There are a few businesses out there who provide this service for a fee. They send you an invoice, you pay that invoice with your credit card and they send you back a check with hard cash minus their fee (plus the card transaction fee).

When I was in a process of applying for a business loan the loan provider offered me this option how to cash the credit cards. I do not remember the exact name for this type of cashing the cards, but I liked the idea.

If you have your own business, which should be a completely separate entity from you, why not use this strategy directly on your own? Recently, to test the waters, my own trading company sent me a small invoice which I paid off using my own credit card.

Now I have a hard cash in my checking account and a purchase transaction in my credit account. And in the transaction list it is recorded as a purchase to ZZ Capital Management, LLC.

Of course, there will be a small fee to my card processor, but I am OK with that.

I plan using this strategy to fund my trading business, but also not right away. I will be testing it first with small amounts only but use it in full once my trading starts generating sustainable income. I need some cash flow first to be able to pay off those loans.

Of course, if I use a credit card and take out for example $4,000 and then pay it off slowly over time, there will be interest involved. My creditors charge me in average 16% annually. If I make 60% annually, I still end up 44% profit left. In that case, even a credit card loan is a good loan to me.

The long story short, two conditions must be met to use this strategy:

 

  1. have regular monthly income from the business
  2. make more in revenue than the creditor charges in interest

 

Of course, you shouldn’t do it, if you make 3% and CC charges you 23%. It would be a losing game. And costly.

What do you think about funding a business such way? Is it a good idea or crazy gambling?
 

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Greek finance minister resigns – futures rally http://hellosuckers.net/greek-finance-minister-resigns-futures-rally/ http://hellosuckers.net/greek-finance-minister-resigns-futures-rally/#comments Mon, 06 Jul 2015 05:55:53 +0000 http://hellosuckers.net/?p=2213 Continue reading →]]> A Greek finance minister Yanis Varoufakis announced that he resigns due to “certain preferences” among some Eurogroup participants. In other words, those participants couldn’t stand him anymore.

Greece

And $SPX futures responded to the news with a rally (which of course will be a short lived, most likely):

SPX futures

I only have a few words for this: What a joke!
 

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