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Posted by Martin August 11, 2015
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A Stunned Wall Street Reacts To China’s Currency Devaluation


WS Tyler Durden: There is much stunned confusion among Wall Street’s “best and brightest” following China’s historic Yuan devaluation overnight which was predicted by exactly zero of said best and brightest, just like nobody expected the SNB to give up its own peg to the EUR in January.

 
yuan
 

The problem as the WSJ puts it, is that a devaluation for China is both good, and very bad. Good because it will help the struggling export sector, which has stalled amid weak global demand. Exports in July, for example, sank more than 8% and they were down nearly 1% for the first seven months of the year.

At the same time, it was essential for the People’s Bank of China not to alarm domestic and foreign investors to avoid triggering a wave of capital outflows. Investors tend to dump a weakening currency and move their assets into other currencies. Thus, the PBOC said the move was a one-time reform effort to bring the yuan more in line with the markets.

That, of course, is a lie: the Fed’s first QE was a “one-time” abnormal monetary intervention which has since become the de facto standard of every single central bank.

Finally, the central bank may also have had the International Monetary Fund in its sights. The yuan is up for possible inclusion in international agency’s Special Drawing Rights, a basket of currencies that serves as a global reserve. Too big a move might have damaged Beijing’s case that the yuan is a suitable candidate for addition to that basket of currencies, analysts said.

To show the many different and often opposing views, here is a summary of sellside views compiled by Zero Hedge and the WSJ:

 
 

The PBOC adjusted the CNY fixing mechanism, which prompted a step weakening in today’s fixing. From now on, FX market makers are asked to base their contribution to CNY fixing on: i) the closing FX rate in the previous day, ii) CNY supply-demand conditions, and iii) the movements of other major currencies. While public comments suggest this could be a one-off move, in our view it increases the uncertainty around the future path of the CNY, especially if closing FX rate significantly deviates from the fixing. In our view, the market’s previous expectations for a fairly stable CNY have seemingly been de-anchored by the surprising move today. Although information at this stage is limited, our current expectation is that the PBOC will likely use open market FX operations to try to reduce sharp volatilities and avoid further destabilizing the market’s CNY expectations in coming days. – MK Tang, Goldman Sachs

 
 

The People’s Bank of China shocked the market today by weakening the yuan reference rate in the largest single-day depreciation since the central bank’s exchange rate reform on July 21, 2005. The PBOC statement interprets the depreciation as a one-off adjustment to fix the persistent discrepancy between the reference rate and the actual spot rate in the market. Since June, the yuan/dollar spot has been consistently about 1.5% higher than the daily fixing. The PBOC statement said that today’s adjustment will fix the discrepancy, and going forward daily fixing will align more closely with the closing spot rate on the previous day. The strong appreciation of the yuan has put a lot of pressure on China’s exports. It is unlikely that China will achieve the 6% trade growth target set for this year. Today’s announcement is also a response to weakening currencies around the Asian region.- Haibin Zhu, JPMorgan

 
 

The PBOC was hitting two birds with one stone: The PBOC’s move will lead to a weaker yuan, lending support to export growth. It will also make the yuan exchange rate more market-determined, which could help China at the upcoming Special Drawing Rights review in November. In the past, one major problem with the yuan exchange rate setting was too much emphasis on its stability against the U.S. dollar while neglecting [trends in] other currencies. In the past 12 months, the yuan appreciated by 23% against the euro and 17% against the yen. As a result, so far this year, China’s exports to the EU and Japan are down 4% and 11% year on year. Today’s change should mitigate the problem. –Larry Hu, Macquarie Securities

We believe the unexpected devaluation today is more about the Special Drawing Rights bid rather than an intention to support exports. Tomorrow’s fixing will be the key to test whether this devaluation of fixing is one-off event or a start of new fixing system. Our best guess is that it may be a one-off adjustment. Should it prove to be a one-off event, we think a combination of a widening of the yuan’s daily trading band and a cut in the bank reserve requirement ratio is likely to be the next policy option to increase the yuan’s flexibility. In the near term,
we may see more volatility ahead.

 
 

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Posted by Martin August 10, 2015
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Stock Splits: How You Can Benefit As An Investor


With awe, I’ve watched stocks soar to highs that were once deemed impossible by some market players. Companies whose share prices are well over $500 are those that may be considered ripe to split their stocks.

Stock splits can be advantageous to investors, as well as to companies.

In this piece, I will discuss these advantages, in terms of the pros and cons of stock splits. I’ll also provide you with five companies that I think should consider splitting their stocks.

 · Stock splits explained

Before we get into the nitty gritty details of profiting from stock splits, let’s make sure we clearly understand what stock splits entail. Simply put, stock splits entail a company’s board of directors voting to increase a company’s float, or outstanding shares, by issuing more of them to current shareholders. The shareholders may also vote to approve a stock split.

 

 

Investopedia gives this spot on example:

In a 2:1 stock split, every shareholder with one stock is given an additional share. So, if a company had 10 million shares outstanding before the split, it will have 20 million shares outstanding after a 2:1 split. (Investopedia.com)

The ratios can be of any structure, although the most common are 2:1, and 3:1. So in a 2:1 or 3:1 split, the shareholder will have two or three shares, respectively, for every share held earlier.

Back in 2010, the world’s most expensive stock, Berkshire Hathaway (NYSE: BRK-B), had a 50:1 stock split for its Class B shares. Back then, it was trading around $3,500. Those who got in on Warren Buffet’s company after the split were able to buy in for around $70 a share.

To put that in perspective, consider this. They were able to buy a share in the world’s most expensive stock to own for the same price as buying a share in Panera Bread (NYSE: PNRA) back then!

 · The makings of a good stock split

The most important thing you must look at if you are considering whether to buy in to a stock split is the company’s stock price. Companies whose stock prices have soared so high that they are out of reach for the normal investor, like the four-digit per share Berkshire Hathaway, splits are ideal.

When Netflix (NASDAQ: NFLX) split earlier this summer, it said in regulatory filings that by issuing new stock it would have better flexibility for dividends, equity financing, and acquisitions. So companies following this strategy should make for good choices.

 · What’s in a stock split for you

Just as the stock split will decrease the stock’s price, it can also boost the price. That’s due to investors who had not been able to afford the stock before the split anteing up for a piece of the pie. Observers also note that an increase may have been already anticipated by investors because a company’s share price has already been on a tear. The demand to own the stock may increase as believers cling to the notion that the price will continue to rise.

 

 

Because stock splits create a larger number of shareholders, there is a theory that a company could be protected from government regulations.

Also keep in mind that an increase in the size of the float could create more liquidity for the stock. Many observers believe this could ease trading and even cause thee bid-ask spread to narrow.

 · Stock split cons

Stock splits can be disappointing to say the least if the value of the company falls. If a company splits its stock and then the value of the company itself falls, the shares may fall below this requirement and be delisted from NASDAQ or the New York Stock Exchange.

Also, remember that a stock split does not directly affect the company’s value.

 · Stocks that should split

Now that we’ve gotten those nitty, gritty details out of the way, let’s look at five of the companies I think are ripe for splitting – their stocks.

 

Company Name Price p/share as of 8/7/15
AutoZone (NYSE: AZO) $704
NVR (NYSE: NVR) $1472
Chipotle (NYSE: CMG) $749
Priceline (NYSE: PCLN) $1317
Intuitive Surgical (NYSE: ISRG) $533

 

As one of the largest aftermarket, auto parts retailers, AutoZone has more than 5,000 retail stores. In 2010, the stock was trading at just about $47 a share. Now, five years later, it trades at $700, with few dips as it climbed.

NVR Inc. managed to survive the housing collapse of 2008, and continue to break new highs. In addition to building homes, the company also provides mortgages. NVR boasts building almost 365,000 houses in the U.S., and it shows no sign of slowing down.

I remain completely in awe of Chipotle. Who would have thought that a Mexican fast-food restaurant chain would demand a share price way above that of consumer household name McDonald! McDonald’s trades around $98 a share.

Naysayers of Chipotle say that it is extremely overvalued. That makes for one of the cases for why it should split its stock.

Priceline also baffles me. It remained a strong choice among investors even when consumers traveled less during the economic slowdown. The “Priceline negotiator” seems to truly be paying off for the company.

Intuitive Surgical makes robotic surgical systems, and has seen its share price soar since it IPO’d in 2000. According to Zacks, over the course of July, the stock moved higher by almost 13%. It’s also moved above its 20-day single moving average. The stock is seen continuing to its run for a little longer by Zacks, which states, “this isn’t the top for the in-focus company.”

 




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Posted by Martin August 08, 2015
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How you can start trading SPX Iron Condors


I started trading my new strategy some time ago and my options ladder is already fully developed (meaning that now I have expiration every week and widening my spreads). If you’ve just subscribed to my newsletter, considering mirroring this strategy, and start trading it, this post is meant to help you as the newsletter may differ from what you can afford to trade.

This post will be about money and trade management to allow you jumping in our moving money making train or even jump ahead of us.

In this post I will show you how to find out how wide spread you can trade and how to adjust the trade idea from our newsletter.

 · First, determine how wide spread you can trade

This is quite easy. Take the total amount you can or you want to trade, divide it by seven, then divide the result by 100 to find out how wide spread you can trade.

For example, you have $5,000 available to trade. Divide 5000 by 7. The result is 714.28. Divide it by 100 and the result is 7.14. That means that you can trade 7 dollar wide spread. But SPX doesn’t have such width. SPX trades in 5 dollar increments. So the nearest available spread is 5 dollar wide spreads.

 

 

If you have $30,000 available, you proceed the same way. Divide 30,000 by 7 = 4285 then continue dividing by 100 = 42 dollar wide spread. The nearest available will be $40 wide spread you can afford to trade.

 · How to adjust Iron Condor strikes

As of this writing we are trading 10 dollar wide spreads going towards 15 dollar spreads. Our goal is to widen the spreads to 40 dollars, then we will start adding contracts. If, for example, we put our 10 dollar wide spread, but you can afford 40 dollar spread, the diagram below show how to proceed.

Basically, you use our short strikes as in the newsletter, but adjust the long strikes to yours by adding calls 40 dollar higher and puts 40 dollars lower than ours:

Adjusting IC

Now you know how adjust your trade both directions – narrowing the strikes or widening them.

 · Start building the ladder

Now that you know how much you can trade and how to adjust the strikes, start building up the ladder. What does it mean? The ladder’s purpose is to create expiration every week. We want weekly income. We want trading weekly, but we want as high probability of profit (POP) as possible.

In the past I used to trade weekly options against SPX with 4 to 7 DTE (days to expiration). The risk was high and never I was sure how the trade ends up. Trading 45 DTE increased my probability of profit to 80% – 92%.

Every Monday evening you will receive a newsletter with our trade idea. Start selling one Iron Condor per week. Do not invest all money at the same time. Use only one trade. Every week you will be opening a new trade and at seventh week you will be opening a trade #7 while on Friday, your trade #1 will be expiring. From then you will have expiration every week. Your trading will now simulate weekly trading. You will have weekly income money making machine on and running.

 · Widening your strikes

Let’s say you have been trading for some time and cash is piling up in your account. It is a good opportunity to start widening your spreads. This takes some ahead planning. You do not want to widen your spread in one week and then have no money the next week to open a new trade.

Here is a procedure how to determine if you can widen a spread or not yet.

Look at your money available to trade for options (options buying power). Let’s assume we are trading 10 dollar wide spreads and thinking to widen them to 15 dollar. To find out check to following.

For example, your latest options BP (buying power) shows $773 and you will have a Friday expiration the next day. On Saturday, your BP jumps to $2248.

If we open 15 dollar wide spread next Tuesday, will we have money for the subsequent trades? Let’s do some math.

Starting BP week #1 $2248
Minus $15 wide spread in week #2 – $1355 (assuming we collected
$145 premium, thus
$1500 – $145 = $1355
Remaining BP in week #2 $893
Friday expiration in week #2 + $1000
New BP for the week #3 $1893

This shows that if we open a new trade with 15 dollar wide wings, we will have enough money for the next week trade. Thus it is doable to widen your spreads. You can continue counting this every week to see whether you should stay with your current width or widen it.

 · Adding new contracts

My goal is to reach 40 dollar wide Condor wings after which I plan on start adding contracts. This goal may change, I may later on adjust to 50 dollar or 100 dollar wide wings if it makes sense. I do not know where the cut off of feasibility is, but once I find out, I will let you know. If it won’t make sense to trade 50 dollar spread because of credit will be same as with 40 dollar spread but risk larger, then it will be better add contracts instead of widening the spreads.

In this case, we will start opening new trades on Tuesday and Wednesday. We will open one contract on Tuesday and one new contract on Wednesday. So if you still have more money than us allowing you trading more contracts than us, you can go ahead and open more contracts.

For example, let’s say you have $150,000 available to trade. Using math as mentioned above you will find out:

$150,000 ÷ 7 = $21428
$21428 ÷ 100 = $214 wide spreads

But, you want to trade only 40 dollar wide spread and not 210 wide spreads:

$210 ÷ 40 = 5 contracts

Per this math, you can trade five $40 wide spreads. This will allow you opening two contracts on Tuesday and one contract on Wednesday and one contract on Thursday. Still all trades will have 45 DTE on Friday, but now you will be trading every day (we will not trade on Mondays and Fridays).

 · Why avoiding Mondays and Fridays?

I do not have this empirically verified and only go with what I read other traders commented on this. It is said that on Mondays and Fridays the value of options decays the fastest and on Fridays, there is very little to no extrinsic value in options, so you are literally leaving money on the table.

As I said, I do not have my own experience on this, but I have seen many experienced traders advocating and opening new trades on Tuesdays or Wednesdays and sometimes on Thursdays.

Because of that, I do the same, but do not ask me for a reason. Once I find out, I will let you know.

 · The case for wide spreads

The last thing I want to mention is the reason for trading wide spreads and one contract rather than narrow ones with more contracts. There are two large benefits to this:

  1. It is cheaper.
  2. The probability of a full loss is lower with wider spreads.

It is cheaper
Yes, it is cheaper to trade wider spread than narrow one with more contracts. Try it for yourself. If you open for example a 15 dollar wide spread and three 5 dollar spreads, you will pay commissions for 15 dollar spread for one contract. It could be let’s say $11.00.

For three contracts of 5 dollar spread you will pay more, let’s say 21 dollars.

The probability of loss is lower with wider spreads than narrower.

This is the best and strongest argument for wider spreads. You need to understand how spreads work and when they bring the full loss.

You will experience a full loss when the underlying price slices through both of your strikes. What is your probability of full loss then?

Check the picture below then:

Spread width

As you can see from the picture above, wider spread is actually protecting you from a full loss. While your 5 dollar spread is already losing everything, your 25 dollar spread may still be above your breakeven price and thus no loss. If you also move your calls down (converting to Iron Clad), you can offset any potential loss from this trade whatsoever.

The last benefit is that if you decide rolling the trade, it will be easier to roll the 25 dollar wide spread for a credit than the 5 dollar spread.

 · Rinse and repeat

In this post I tried to show you how you can start trading Iron Condors I provide in my newsletter when you start late or have different money available for trading. I presented you with money management, how many contracts to trade, how wide spreads and why.

If you decide to give it a shot and trade, just follow the rules and be consistent. Do this every week and your account will grow fast and fat. And if you need to gain some experience first and see how the strategy works, then just paper trade it. Paper trade it as long as you see how it works, how the strategy makes money, loses money, and how you can defend it. Nevertheless, I give you a hand and help you if you want. But the decision is yours.

Happy trading!
 
 




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Posted by Martin August 05, 2015
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Earnings Season Can Be Bountiful With Options Trading


Earnings season is in full swing, with a third of S&P stocks scheduled to report this week. If the S&P 500 is any indicator of how companies performed during the first half of the year, stock investing continues to be one of the best ways to line your financial coffers.

That being said, there are plenty of ways to play the market during earnings season, and one of those is through buying options. For this blog, I’ll keep it simple. I won’t go in to the various, complicated strategies that very experienced traders, and those with high tolerances for risks will use.

Instead, I’ll lay out the basics of options trading so you can decide if earnings season is a good time to play the options market.

 · What Options Entail

Before tackling how to play the market during earnings season using option strategies, let’s be clear on what they entail.

As defined by Nasdaq.com, options are contracts through which a seller gives a buyer the right, but not the obligation, to buy or sell a specified number of shares at a predetermined price within a set time period. Because they are considered to be derivative products, their value comes from the value of an underlying investment, which usually is the stock of the company.

Here are some main terms you’ll hear when talking about options: call and put contracts, strike prices, expiration dates.

While call options allow the buyer to purchase a stock at a set price on or before a determined date, put options allow the buyer to sell a stock on or before a later date. That determined date is referred to as the expiration date. It is typically the Saturday following the third Friday of the expiration month. Expiration dates can also fall at the end of the quarter.

Exercising the option means you buy or sell the stock via the option contract. The strike price refers to the price at which the options contract can be executed. In the case of call options, the strike price is the amount the option can be bought any day leading to the expiration date. For put contracts, the strike price is the price it can be sold.

The last day to trade options before they expire is the Friday before expiration, or the third Friday of the month. This is also generally the last day an investor may notify his brokerage firm of his intent to exercise an expiring equity call or put, notes Investor Place. The website also notes that brokerage firms, can set earlier deadlines for notification of an option buyer’s intention to exercise. “Therefore, you should check with your brokerage firm about its procedures and deadlines for instruction to exercise any equity options. If Friday is a holiday, the last trading day will be the preceding Thursday,” states Investor Place.

 · Show Me the Money

A key element of options trading deals with the strike price, which can help you determine the best time to buy or sell an option.

When the strike price is the same as, or is close to, the price of the underlying stock, it is considered to be at the money. If that strike price is less than the price of the underlying stock, it is in the money. And if it is above the price of the underlying stock, it is out of the money.

 · Open Interest

During earnings season, one of the ways I look at options is to gauge where other investors and traders think a stock will move. That may entail the stock climbing as it’s believed the company will beat analysts’ estimates. It could also entail the stock moving lower if it’s believed the company will miss its earning’s estimates.

More open interest is better because it tends to mean there is more liquidity for the call option you are trading, according to BornToSell.com. It notes that more liquidity means smaller spreads between the bid and ask , which is good for the trader if they need to close out a position before the expiration date.

To get an idea of what direction investors think a stock will move, I look at the amount of open interest there is in that company’s options. It is imperative the option traders understand open interest; doing so can help you to see how much liquidity there is in an option. You want that option to be liquid so that you can essentially sell it if the trade goes against you. Options that have no open interest als have no secondary market. On that same note, options that have a lot of open interest means just that – there are many interested sellers and buyers. Furthermore, there is likelihood that orders for that option will reap good prices! That will make it easier to trade the option, with a spread between the bid and ask that you may be able live with.

 · Ideas

Let’s look at some of the companies that have reported, and who are reported earnings this week. More specifically, we’ll look at those that have option expirations this week, too.

Tesla (NASDAQ: TSLA) on Wednesday reported earnings on Wednesday. Although it reported that its losses triple during the second quarter, and cut the number of deliveries for the rest of the year, options activity indicated traders and investors have some faith in the auto/battery maker.

Specifically, its $300 call contract that expires on Friday, Aug. 7 had open interest of more than 5,000, This is the most open interest than any of its other call contracts. This means that many watching the stock think it may trade up to $300 a share from roughly $270 a share where it closed Wednesday.

As far as puts, its put contract with a strike price of $235, and also expires Friday had open interest of about 2,100. The thought is that Tesla could sink this low as of Friday.

For equity options expiring prior to Feb. 15, 2015, the expiration date is the Saturday immediately following the third Friday of the expiration month.

For equity options expiring on or after Feb. 15, 2015, the expiration date is the third Friday of the expiration month. The day expiring equity options last trade is the Friday before expiration, or the third Friday of the month. This is also generally the last day an investor may notify his brokerage firm of his intent to exercise an expiring equity call or put. Brokerage firms, however, may set an earlier deadline for notification of an option buyer’s intention to exercise. Check with your brokerage firm about its procedures and deadlines for instruction to exercise any equity options. If Friday is a holiday, the last trading day will be the preceding Thursday.

 · Conclusion

How much you will profit on the transaction depends on whether you’re right. On that same note, how much you will lose depends on how wrong you are. Anything can move a stock price, but it is the near certainty that the price will move during the days following the release of earnings is what makes buying the around this time appealing to many traders.

Some rules of thumb: buying a call typically means you are bullish on the stock; and buying a put means that you are bearish. Open Interest

If you see a lot of call activity, it usually means that traders think the price of a stock will go up by the time the contract expires. On that same note, if you see a lot of activity in put options, it may mean that traders are betting that the stock will trade lower by the time the contract expires.

 




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Posted by Martin July 31, 2015
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July 2015 trading, investing, and dividends results


July 2015 is over and it is time to review my trading, investing, and dividends results for the month.

A month ago I adopted a new trading strategy, which works perfectly so far. It is however too early to judge. Also, the market is relatively calm (except a few sell offs) and I would like to see how would the strategy perform in a tumorous days.

Nevertheless, we still can see markets bouncing within a range for the rest of the year with large swings either way, and what’s perfect with my options strategy is that it is immune to those swings. Unlike my previous trading, I now do not have to worry about those moves anymore.

 

 
You may be interested in:
 
Too Thin?! By Bryan with Income Surfer
 
Looking for Gold By Roadmap2Retire
 
STOCKS GO NOWHERE: Here’s what you need to know By Akin Oyedele with Business insider via Yahoo Finance
 
Are Investors Really Panicking In A Historically Boring Market? By Ryan Detrick with Tumblr
 
Greece crisis escalates as IMF withholds support for a new bail-out deal By Mehreen Khan with The Telegraph

 

Yet this month, I realized some losses as I decided to get rid of my stock trades and hold them no more. I expect this to be happening in August 2015 too. However, after August is over, I should only have my SPX spreads traded according to my new rules and start showing profits and growth only.

 · July 2015 trading results

My July 2015 trading shows a loss. All my trades under the new SPX strategy were however, positive and profitable. All trades ended with average 12% gain. Compared to the entire account value I am making nice 1% weekly! It was the old and closing trades sending my account down.

 

With 1% weekly gains I should end the year 20% higher than what I have today. For the entire next year I should see at least 52% gain (compounding excluded).

This is an excellent outlook and a great hope that I finally found a working strategy which will allow me making money now and not 20 years later.

Although my new strategy works, I realized a loss this month because I was reducing exposure to oil companies. I had (and still have) a few trades against OXY, ESV, AGU, SDLP, and LGCY companies, which are showing mixed results. Since I decided no longer trade options against individual stocks and focus solely on SPX, I closed trades against SDLP (with a small loss), and OXY (with a larger loss).

In my opinion, it was a good move to start fresh.

 

 
You may be interested in:
 
Options Expiration – July 2015 By Alex Fotopoulos with My Trader’s Journal
 
Daily Scan for Thursday, July 30th, 2015 By Options Guru
 
Standard & Poor’s 500 Stock Index Outlook By Financial Forecast Center
 
Buying oil stocks at these prices is just spilling money By Jeff Reeves with Market Watch

 

I also closed a spread against LGCY with a small gain and moved naked puts against LGCY lower to improve the trade. After some time I plan to close this trade entirely.

Here is my trading result for the month:

 

July 2015 options trading income: -$344.38 (-2.94%)
2015 portfolio Net-Liq: $8,657.95 (-6.72%)
2015 portfolio Cash Value: 12,927.95 (-0.13%)
2015 overall trading account result: -26.04%

 

Here are the results of my options trading:

Options Income
(Click to enlarge)

As I mentioned, this month and the next one will be losing months as I decided no longer holding positions against some stocks and focus on SPX only. I am also getting rid of one old SPX trade which is already a losing trade. However, September 2015 should be already a fresh start month with 45 DTE SPX options trades.

 
Here is the entire account value from the beginning of tracking it up to today:

TD Account Value
 

 · July 2015 dividend investing results

I like my new trading strategy so I decided to use it in my ROTH IRA account. I plan to use proceeds from options trading to buy dividend stocks. I no longer use my non-transaction fee strategy saving money in RWX ETF. Instead, I use the money to trade options to generate income along with dividends I receive.

Once I make at least $2,000 per month, I will use 50% of that money to buy a dividend growth stock. I will reinvest the remaining cash back to options trading to make sure my account is growing faster and generates more money to invest.

Since I started trading options in my ROTH IRA account later, my results are still small. Actually, this month I had my first expiration this Friday. So, I can only report $60 dollar income this month. But in August, the account is set to make $150 from options. That’s twice as much as I make with dividends in weak months and about 50% more in stronger months.

It doesn’t mean that I want to stop investing in dividend stocks. No, read my strategy where I speak about the reasons, why I will continue investing into dividend stocks, but the major reason is, that now I like trading options, it brings me excitement I want from trading and it brings income. But it is not a passive income and one day I want to stop trading too. I may not even be able to trade anymore. And dividends should substitute that income.

So I trade options for income now and have dividends for income in 20 years from now.

 

 
You may be interested in:
New Purchase – Whole Foods Market (WFM) By All About Interest
 
August 2015 Stock Considerations By DivHut
 
Recent Buy – IBM By DividendDiplomats
 
Dividend Growth Stocks Protect Investors from Inflation By Dividend Growth Investor
 
Five Reasons Why Florida Might Be The Best State To Seek Out And Achieve Early Retirement By Jason Fieber with Dividend Mantra
 
Market Cycles: How to Build Wealth Quickly By FI Fighter

 

This month, I only traded options against SPX and I had no new stock addition or removal from my portfolio. The portfolio is down because of some oil exposed companies I added in the previous months. I still will be accumulating oil and energy companies to my portfolio if my money management rules allow it and as long as those companies will be depressed.

 

Dividend stocks added or removed from portfolio:

 

July 2015 dividend stock buys: none
July 2015 dividend stock sells: none

 

Here are my ROTH IRA trading/investing results:

 

July 2015 dividend income: $84.52
July 2015 options income: $60.00
2015 portfolio value: $17,835.69 (3.48%)
2015 overall dividend account result: 2.21%

 

Here is the entire account value from the beginning of tracking it up to today:

ROTH IRA account value

Below is my dividend income review for the entire year:

Dividend Income
My ROTH IRA dividend income breakdown per month and per company.
 
 

 · All accounts

Besides trading and dividend accounts I also have 401k account, emergency savings account, etc., which I do not report in detail. You can review those accounts in my “All Accounts Value” table at the bottom of My Trades & Income page.

My accounts dropped from previous month, but are still up 2.96% for the year. Considering how bad the market was this month I think, this is not a bad result.

What do you think?

How about your investing or trading result?
 
 




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Posted by Martin July 28, 2015
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Options trading strategy adjustment


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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Posted by Martin July 28, 2015
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Forget Greece. The Sky Is Falling In China


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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Posted by Martin July 26, 2015
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Want To Get In On Apple? Consider Its Suppliers as Investments


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.

 

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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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Posted by Martin July 20, 2015
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Bootstrapping


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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Posted by Martin July 05, 2015
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Greek finance minister resigns – futures rally


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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