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Posted by Martin March 29, 2015
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Running a zig-zag trade: my worst trade ever ended relatively well


My dream is to trade SPX weekly options and generate weekly income, which I can invest into dividend paying stocks. I believe and hope that with dividends and options income I can boost my portfolio and grow it faster than when just investing into dividend stocks only. I believe, that it is actually my only chance to get up to speed with my retirement savings.

But to trade options, one must do it right. And this is proving to be the hard part of option trading.

Last year was very good although the end of the year ended as a disaster to me, this year seems to be worse. Not in terms of losses, because I, fortunately, created no losses so far, but from the volatility perspective.

Yes, 2015 proved to be the most volatile year to me. For experienced traders this is a great environment for trading. At least this is what traders claim. They say that this falling and rising market is the best for them.

I admire it at one hand, but struggle to follow it up. How they deal with those sudden reversals like we saw a few days ago? I have a hard time to believe it. But the reason of this post is not to expose those traders, dishonest them or envy them. I just say this to say that I admire it and I wish to get there. “There”, meaning to a state of trading that I will be able to see those changes coming on time and react to it properly.

The purpose of this post is to share a trade I recently took against SPX and what SPX did to me and how I reacted. Now, at the time of retrospective I can see my mistakes. But when the trade was happening I didn’t see those mistakes coming.

What is most important however, is that no matter how terrible the trade was, it actually ended well. I didn’t make any money, but I didn’t lose as well. In other words, I was able to turn a sure loss into a break even trade.

What happened?

On March 3rd I did my market review and I got a bearish outlook. I expected the market to fall further down. But on Monday, the next day, the market rallied strong up and I saw this as trend continuation. I saw the first green large candle as an invalidation of my previous bearish outlook. So I opened a bullish trade against SPX – a bull put spread with the following strikes: 2080/2085. If the market remained above 2085, it would expire worthless for a sure profit. At 2116 level, this wasn’t a problem. Below you can see what I was doing:

SPX history

As you can see, my thinking was proved to be wrong. On Tuesday the market continued falling. I was thinking that this was just a temporary pullback and that we will bounce off of the 2093 level. Unfortunately it didn’t happen and on Friday, the market basically crashed. And that forced me to react.

Should I have taken a loss by closing the trade or do something to salvage it?

Defending the trade

I decided to salvage the trade and roll it away in time. I still believed in the trend. I expected the market to shake this selling off, reverse and continue back up. So I moved those options away by two weeks from March 6 expiration into a March 27th expiration. I decided to keep the strikes same as I was bullish:

SPX trade history

The chart above shows where I took action and moved the expiration into a further away time. But the market continued heavily in selling the next week. Monday was green again, but Tuesday hit us again with heavy selling.

I must say, I became nervous. Should I have acted or left the trade alone? If I have left it alone and the market continued in more selling, I would not be able to save this trade at all and it would be a sure loss. I thought that I needed a cushion. I needed to move the trade in case more selling was coming. Now I see this as panicking and being dragged into action by the market and not by a rational thinking.

Stay calm, everything is OK, panic!

After another set of heavy selling I decided to reverse the trade into a bear call spread with the same expiration of March 27th and the 2025/2030 strikes. If the market fell lower and remained below 2025 at expiration, the trade would expire for a nice profit, see the chart below:

SPX trade history

The market continued in heavy selling that day and the following day. But the selling in the following day became weak and stopped at 2040 support created by a lower Bollinger Band and a trend line. I started smelling trouble again. Then the market rallied hard and although after that there was selling again, it started to become apparent, that selling was over.

Is it right this time?

I decided to reverse the trade again from a bear call spread into a bull put spread with 2095/2100 strikes. This time the market had to grow up above 2100 and stay there by expiration. See the chart below:

SPX trade history

I must admit, that at this point I was totally driven by the market and trades were already based on emotions. Although the entire trade was still profitable, I had big doubts whether it could ever end up with a profit. But what was worse was that I was running out of margin buying power. The worst enemy of the trader. Once you get extended on margin, it can kill you without hesitation. I was risking $1,500 to make $285 and that was beyond my comfort zone.

But the trade was still showing a loss. Should I have ended it or continue the struggle? I felt like a hare running zig-zag in front of a wolf trying to save his life.

Soon the market grew above 2100 and was about to stay there. It even started attacking its previous all-time high at 2119 level. I now felt good about the trade that I was able to manage it even at a high cost of margin power. I was completely unaware of what was coming at me.

The market reached 2115 level and started reversing again into a big selling which was coming. Fortunately this time I was able to spot this on time and decided to act once again. I couldn’t roll the trade anymore as I had no margin buying power to do that, but I decided to try reversing the trade into a bear put spread. It is a debit spread and I knew that by doing so, I would lose all gains I made so far, but I would lose nothing.

No matter what I did it was wrong

To reverse the trade I did the following swap. I had a long 2095 put and a short 2100 put. I decided to buy back the 2100 put and sell a new 2090 put. So the original 2095/2100 credit put spread became a 2090/2095 debit spread. For this transaction I paid $5.20 or $520 per contract. This was a losing trade from the beginning because with a debit spread all you can ever make is the spread width, or $500 per contract. I paid more for it than I could ever make. But I had previous credits collected!

SPX trade history

My reaction proved to be correct and right on spot at the right time. I am grateful for this because this saved my trade. As you can see, that same day when I reversed the trade and the very following day the market crashed again.

This could set our trade to expire in-the-money next week. It could end the trade with a nice profit at about 11%, but because I will be traveling next week and I will not be able to watch any of my trades until Wednesday next week, I decided to close the trade earlier. It could be still profitable trade, we actually made $60 on this trade, but commissions ate it all up, se we ended with a small loss of $17.50 (-1.22%). Better than a full loss, right?

Below see a screen shot of my trade book recording to see the entire trade and all steps I just tried to describe above.

SPX trade history

It was a difficult trade full of emotions. I admit that. But I am glad I was able to manage it to end it with a small loss rather than a big one. It was also a very stressful trade but I learned a new strategy on salvaging a trade. Hope I will be able to use it correctly in the future to make money instead of losing them. It also proved one important thing – when trading options, you must stay small, do not overtrade. Once you overtrade and run out of available cash you are doomed to losses. You will be forced to close a trade in the worst time with a loss.

SPX is a canibal ready to eat you alive

SPX is a nice vehicle to trade, but it can be a very dangerous, evil savage, who can eat you alive. Don’t let it happen to you and don’t let it fool you like I got fooled before. This lesson ended well with a very little loss, but it could turn into a huge loss. With a knowledge of how to trade options and how to eliminate risk involved in them, you can win this battle even when it turns against you.

 

What was my lesson from this trade?

So once again – learn a lot about options, learn a lot about technical analysis, be patient and stay small to succeed. I say this again not just to be bossy, I say this again mainly for myself. It is the most important rule ever.

I wish you a great trading next week and I’ll see you the following one.

Happy trading!
 
 






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Stocks to buy in April 2015


March 2015 was a month which brought in losses. If you bought stocks I selected as a buy in March, you would be losing -5.32% for the month.

The reason for losses is energy stocks as mostly they continued in a sell off during the month. However, I expect these stocks to go up at some point as they continue underperforming the market greatly. Remember, when others are in fear, be greedy and when other are greedy be fearful. Now, energy stocks still belong into this category of stocks dumped by investors of fear over their exposure to oil.

But many of those stocks are old dividend paying stocks being around for many years. They survived oil crisis in 2008 as well as in 1987. I believe, these stocks will survive this oil crisis too.

So it is time to rebalance my Motif Investing portfolio, remove good performing stocks, add new, or leave those still in my list. Here is the selection for April 2015:
 
 

I purchased this motif myself to show confidents in my stock selection. You can open your account too and if you start investing, you will receive a $150 bonus from Motif Investing.

 

 

I will be rebalancing this motif every month. Let’s see, how well this portfolio will do at the end of the year.

Good luck to all of you!
 

Previous selection:

Stocks to buy in January 2015
Stocks to buy in February 2015
Stocks to buy in March 2015
Stocks to buy in May 2015
Stocks to buy in June 2015
 






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Posted by Martin March 26, 2015
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Market 3% off of the top. Is more selling coming?


The stock market fell by 3% since all-time high in February. Is more selling coming or are we going up again? Unfortunately, I think the uptrend is broken already and we will see more selling. Although tomorrow we may see a bounce from the oversold territory it looks like that the bounce will be sold off again.

This is a typical behavior of a market phase called distribution. And we should be careful about this because it means that the big players are selling their positions. Retail investors typically unaware of this phase are buying stocks while the big players are selling to them. The distribution phase may take a long time. In 2007 – 2008 this distribution phase took almost the whole year before the market crashed while everybody was optimistic and happy about the market and economy.

Although these days nobody seems to be happy about the economy it doesn’t mean that we are still safe and in an uptrend and that we haven’t already entered into a distribution phase. We may already be in one and yet not knowing about it. A good way to find whether we are in a distribution phase is to realize that the market struggles to make new highs and if it does it, it is heavily sold off immediately.

Sounds familiar? If you look at the market in the recent months, we have moved basically nowhere and all new highs were heavily sold off. A few days ago, we didn’t even make a new high and yet that spike was sold off too. If this continues, we are clearly in the topping pattern and thus we should expect more selling or even a major correction.

If we see a correction of 10% or even 15% then it will actually be a good thing for this bull market and we may see a continuation in the trend. If a deeper than 15% correction is about to hit us, then a bear market will come. But that is still too early to say where we are and what will happen.

What is my expectation for tomorrow?

Yesterday, I expected a bounce. But it didn’t happen and the market continued in selling. Later in the afternoon, we saw a small recovery when the market recovered from 2045 up to 2067. By the end of the session we dropped back and closed at 2056.

I think this weakness will continue tomorrow and in coming days. Since the market is oversold we may see a bounce tomorrow. I expect it to go all the way up to 2070. But then I expect it to be sold off again. If however we will see the market breaking up thru the 2070 level, we may actually go up to 2115 level. Which I believe will be sold off too.

SPX expected move

This potential bounce is better seen from the following chart:

SPX trend

As you can see we broke below the trend and other supports (again) and the potential bounce would have two possible outcomes:

1) We bounce up to 2070
2) Or we break thru it back into the channel, which may be a good thing for this market.

Given the weakness of the market, I do not expect it to break up into the channel and if so, it will be sold off.

SPX trend

Two days ago I received a sell signal. That helped to reverse all our trades into bearish ones. If we get a bounce tomorrow, I do not expect a buy signal to occur yet. Thus I think that such bounce will be only a small bump up before a renewed selling comes back. If however a buy signal fires up, we will know that the market is bound for more upside.

Tomorrow, a GDP report comes out. There are two possible outcomes of it:

1) The report will be good – and investors will panic again out of a fear that FED may change its mind and raise rates earlier.
2) The report will be bad – and investors will panic too out of a fear that our economy is bad.

I would be surprised if the clowns on Wall Street would react positively, but it may happen.

We do not have any trades (except one of my bear call spread) expiring tomorrow and since next week I will be traveling, I will be taking off from my trading for the next week.

So be alert and happy trading!
 

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Posted by Martin March 24, 2015
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Market weak but a bounce may happen tomorrow


The stock market is weak and every move higher is immediately sold. Today we created a lower high which is a significant signal of a trend reversal.

Tomorrow we may see a bounce up higher – I expect the market to bounce up to 2107 level, but then we may see a renewed selling pressure. The market may then fall all the way down to 2050 level before it bounces up again. The renewed selling may happen on Thursday and Friday or next week.

If we bounce tomorrow up, I will take this as an opportunity to unload some of my bullish trades which are currently endangered by the market selling.

Here is my expectation for tomorrow:

SPX expected move

As you can see today, the market smashed through all supports and stopped at the lower support of the channel. This put the market into an oversold territory and we may bounce back up to the previous day high which was at 2107 level.

If that happens, then we will be unloading our short term bullish trades, mainly our bull put spread against SPX 2095/2100 even though it will be at a loss.

What if the market won’t bounce tomorrow and will continue in a downtrend?

In that case I will be reversing the trend into a bearish debit spread. This reversal will most likely be a losing trade. But it will be a lot smaller loss than if we just plainly closed the trade now.

Or another option would be reversing the trade into a call spread. This will all depend on tomorrow’s price action.

What is the short term outlook? Here is a chart showing that the market clearly lost the momentum and is once again in a selling mode which will most likely continue:

SPX trend

As you can see, I asked a question whether we bounce or continue higher. Yesterday, it still was unlikely that we would bounce. Today it is clear that we did. This is a potentially dangerous game changer. If we continue lower, then we created a lower high and that may cause the market changing into a distribution phase.

Here is yet another view on the short term trend showing a first alert of a short term trend reversal. Note that this is a short term trend (1 year, daily market). Long term, this bull market is still intact.

SPX trend

We will be watching this trend very carefully and send a newsletter to our subscribers what we are going to do with our open trades tomorrow or in coming days.

Happy Trading!
 






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Posted by Martin March 22, 2015
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SPX trend expectation for the next week


Last week trading was within my expectations. Thursday trading was a small pullback based on the previous strong rally. That small pullback had a small impact on my trades, but nothing too dramatic and nothing hard to handle, although my profits weren’t as expected thanks to necessary adjustment.

In my quest to assess where the market would go next I am posting my expectation for the next week.

The market is still in a full swing up to higher levels. No matter what zig-zag we may see during the week, the trend is still intact and strong up.

The chart below indicates my overall view for the next week to the next month:

SPX trend

The last candle indicate a strong push up. We may see a small retreat again tomorrow, but overall the trend is still up approaching 2120 resistance. Will we break that resistance or will it push the market lower? Although we may see some choppiness around this level, overall I believe the market will be able to break this level and at least in the next two weeks we will see a strong rally up.

Why I think this rally will continue up? Look at the chart below. This clearly indicates that we are in the middle of an upswing. Both the price chart is uninterrupted in an upswing and MACD just performed a bullish crossover. Even if the crossover and move of the MACD will be miniscule it will still provide a few days of strong move up before we may see a reversal.

SPX trend

Unless something fundamental changes the market, such as very bad data from the technical perspective, there is nothing what would change this trend. Fundamentally, we have a few events being reported next week such as CPI index, jobless claims, and GDP report which may move the market. However, last reports didn’t move markets that much and even if the reports come out weak, the investors will most likely see it as affirmation of FED not raising the rates and that would move the markets up even more (if we assume the same ridicule behavior of last when bad news are good news).

Below is my expectation for Monday. I left my Friday projection on to see how accurate it was. Well, I expected the market to go higher, yet my expectation of the move was totally off. We rallied premarket very strong and then the entire trending was sideways with a small sell off at the end. We still finished Friday up.

SPX expected move

For tomorrow I expect the markets to be somewhat weak (based on MACD expected move) and at the end of the day we may rally again. Also we may see the entire Monday down a bit and resumed rally on Tuesday. It depends on how the MACD swing would look like. Most likely we will return back to the trend line, but may stay in its upper portion.

Let’s see how accurate this would be.

Happy trading!
 






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Posted by Martin March 19, 2015
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Thursday pullback drama and outlook for tomorrow, Friday, March 20


For me, Thursday was a disappointment. I expected the market to gain some momentum after Wednesday’s rally like we saw in the past in similar situations after FED uplifting reports. Today, it didn’t happen and the whole day we were drifting down after morning large sell off.

This price action had an impact to a few trades I opened yesterday with today’s expiration and which I had to roll to keep them safe.

I had a bull put spread 2080/2085 against SPX which I moved lower to 2070/2075 when the stock market fell down to 2085 level and it looked like it would continue even lower. Later during the day the market moved higher, so at the end I didn’t have to roll this trade. But at that moment it didn’t look like that at all.

The second trade against SPX was a bull call spread 2090/2095 expecting the market to end above 2095. It didn’t happen either, so I had to roll this trade up and into a bear call spread at 2100/2105. That gave me some cushion and safety, but honestly, the rest of the day I was nervous fearing that the market would suddenly spike up and above 2100 and I would be toast.

So it wasn’t an easy trade for me at all.

Fortunately, both trades expired worthless today bringing a small profit. Unfortunately, those expected profits I hoped for yesterday vanished. But I finished positive and not with a loss.

Now, I only have one trade expiring tomorrow and that is a bull put spread against AAPL 125/120. So far, this trade is safe, but if the stock goes down significantly tomorrow I may either close this trade or roll it as well. As of now the trade is worth 3 cents, so I may close it commission free tomorrow or let it expire. That would depend on the market action tomorrow.

What is my expectation for tomorrow?

The overall trend is unchanged and we still should be heading up, although today’s price action revealed a lot of weakness in the market. I expect some weakness to continue tomorrow morning, but overall I expect Friday to end higher.

 
SPX expected move
Tomorrow’s expected move

 
SPX trend
Bullish trend UP intact
 

 
SPX channel
Is a new rising channel forming?

There is also a potential that the market shows more weakness and continues back down to 2064 support. If the support won’t hold, then that would have a serious consequence to the overall trend and of course to our trades.
 






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Posted by Martin March 19, 2015
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What’s the Right Minimum Wage?


 

What’s the perfect minimum wage: is it $10 an hour? $15? $20? How about zero? That’s right. Zero. While Congress discusses a minimum wage hike, economist David Henderson shows that any minimum wage makes it harder for unemployed people (particularly young people) to find work and forces business owners to cut the hours of lower-skilled employees.






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Posted by Martin March 19, 2015
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America’s Debt Crisis Explained


America’s national debt stands at $17 trillion. That’s a tough number to grasp. Most people will never come close to making $1 million in any given year. How can we understand the magnitude of the hole our country is in? Well, imagine you owed your credit card company $200,000. On top of that you have to pay them about $4,000 per year in interest. You are bringing in $150,000 per year, but you are spending way more than that. How are you going to ever pay back that $200,000 debt? And what happens if you default? Well, that is America today. The problem is clear. And we brought Michael Tanner, a senior fellow at the Cato Institute, to propose a solution.

 

 






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Posted by Martin March 18, 2015
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FED cleared a path for the market to go higher


The uncertainty has been removed and future is great and bright again. Although it actually is not. But market participants are irrational and many times react the opposite way than any logic or common sense would expect.

In the past few weeks, everybody knew that the US economy is slowing down, that it is not in a good shape, and that many reports are actually showing significant economic decline; (for example housing last week showed a 17% loss). Even the so cheered employment data which showed a better job addition than expected, when looking at them closer, actually showed that they were more bad than good.

It should have been the worsening economic data sending the markets down and not the rates hike anticipation. Clearly, the clowns at Wall Street had it all this backwards. But they were able to spook me enough to stretch my options trading to the very limit.

All those reports showed that increasing interest rates would be foolish and premature, sending the fragile economy to a halt, and possibly into another recession. Even Janet Yellen herself admitted this. Removing the “patient” word from the report doesn’t mean increasing the rates or become impatient. She clearly said that she wanted more employment data improvement, more improvement of inflation, and better growth before setting a date where the FOMC would even start talking about interest rates hike.

And yet investors were heavily selling stocks since the employment data came out at the beginning of March sending the market south.

Now, the sky is clear and clean, new horizons are in front of us, and we may see a new upward move in the market.

At least until the clowns at Wall Street start freaking out again over something else. Or until the next month FOMC meeting takes place with a renewed fear of interest rates hike, or when the investors finally realize that the US economy is in bad shape. Until then we can enjoy a new bullish trend.

SPX expected move

Since now Janet Yellen is “impatient” (what else would they be when they are no longer patient), the clowns are now happy again. I expect them to be buying this market and move it higher into the new all-time highs.

In a few days we may re-test the 2118 – 2120 levels and if we break through those levels, we might go even higher. The next stop would be at 2140 (upper Bollinger Band) where we may stop and bounce down a bit. And even higher stop could be at 2160 level.

It is however, important to go and reach these levels in order to keep this trend bullish. If now the trend stalls and starts turning back down, that would signal a significant trouble to this bull market as we would be witnessing a trend reversal. If we want this trend to continue, we must go up now.

Of course, I am not arguing that this market is healthy. I also think that this is a bubble constantly inflated by FED’s ignorance and that the bubble will pop one day and such pop will be nasty. But I do not want to be sitting on the sidelines waiting for the pop to happen before I get involved in the market. It may still take another 6 to 8 years and in the meantime, the market may still continue higher. I want to ride that wave, but just be ready for the pop and respond to it if and when it happens.

Happy trading!
 






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Posted by Martin March 18, 2015
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FED frenzy


FED announced that the interest rates hike is unlikely although they removed the word “patient” from their report. The market spiked up in seconds. It went from 2061 to 2080 in a few seconds.

SPX

I was able to open a bull call spreads expiring tomorrow and next week for this spike as well as one bull put spread. But I wasn’t fast enough to open it down low. Nevertheless, I expect the market to continue higher tomorrow and in following days.

This frenzy offers a good opportunity to salvage our old trade and make some decent money.






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