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Stocks retreat taking some break as I expected

Stocks retreat taking some break as I expected

Stocks retreated today. I didn’t have time to check why actually it was happening, but honestly, I do not care.

I look at the market trend and stocks trends from technical analysis perspective and trying to eliminate the noise media are creating every day.

What I see is an insignificant pullback on 1 year chart with a very strong uptrend move and inflow of money. The intraday chart was flat the whole day.

The market broke from a consolidation pattern in May 23 and since then strongly moving up. When looking at my indicators, we will most likely see a little more of an uptrend as the growth is not slowing down.

It may change of course. I am not an expert and do not have a crystal ball, but we may see some growth still.

This movement however made me to open a new trade against TEVA (bull put spread), which was a violation of my rules, money management, and increasing free cash reserves. Heck, I realized that I must keep my trading platform closed during the day as the temptation opening a new trade as soon as I have free cash in my account is very strong.

 




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I officially doubled my account today. TASR helped a lot.

I officially doubled my account today. TASR helped a lot.

I did it once before when I started trading options and I doubled my account from $4000 to $8000 couple of years ago (in 2011), but then I lost everything back down to $2000; $1914.70 to be exact.

That was my wakeup call and I started looking for a strategy, which would no longer be a losing game for me. I also needed to recover my losses once again. It looks like I found that strategy.

I still had losses from 2006 – 2010 years of my trading career. I had no strategy, didn’t know how to invest and I lost quite a lot of money. The first account doubling was a great achievement to me and I started celebrating what a great trader I was. Yea, only until I erased everything again.

I hope this time it is different and I keep the money I made so far and I hope I won’t do anything stupid to give them back. I will defend them as strongly as possible to keep them and make more in my quest of doubling my account every year.

I ended year 2013 with $10,072.35 account value (note, that this is my TD Ameritrade account only, it doesn’t include ROTH, 401k, or Motif Investing accounts).

Today I closed at $20,274.69 value.

Of course, the game isn’t over yet. I still have many open trades which can shake this number and I expect it to fluctuate. But I hope, it will have growing tendency as we will be getting closer to the end of the year.

The biggest help came from TASR, which was beaten up a lot recently. It lost 60% of its value and I was in that trade. I was forced to roll my trade all the way from 18 strike price down to 13. I was ready to continue rolling it lower to 12 strike, but today the company said that Google Maps co-creator and former Facebook chief technology officer Bret Taylor would join TASER’s international board of directors, lending his expertise in technology toward advancing the stun-gun’s product lineup.

The stock shot up from $13.4 to $14.28 a share. It boosted my income today by nice $880. I still have almost $2000 in this play so if my options contracts end up worthless, I will get even juicier revenue.

I am expecting some pullback tomorrow or even in a few more days, but overall, the account looks promising.

I wish you good luck and happy trading!
 




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Keeping cash reserves is crucial to survival

Keeping cash reserves is crucial to survival

It all depends on your trading style, plan and strategy. If you are a long term investor buying dividend stocks for a long haul, it probably doesn’t matter if you use all your available cash.

If you use margin however or trade options, I learned that it is a very important thing to maintain some free cash in your account. That free cash or buying power protects you and allows you to make adjustments to your trades.

I learned this the hard way during stocks sell off a couple of weeks ago, when TASR suddenly dropped significantly down, my tiny cash reserves (around 3% only) quickly evaporated due to constantly changing maintenance and I had no chance to adjust my trades to get out of the mess. I also faced a margin call.

A margin call puts you into involuntary trading where you are doing what others want and not what you want or should do. You are completely exposed to a mercy of the market. And your broker.

Fortunately, I had a few winning trades which I could close to raise cash and avoid a complete disaster. But I failed to learn from it and yet again I opened new trades sending my cash reserves to 1% level.

Very irresponsible playing with fire. If the market strikes again I will be caught with my pants down unable to react. I know the rule and advice of many experienced options traders about keeping free cash in reserves, but I failed to follow that rule.

It’s time to change it and increase cash at 30% (my very original rule) and keep it in there and trade with the rest. I even started tracking it and I added it to my options evaluation spreadsheet to see that I cannot open new trades when I am below 30% threshold. That 30% free cash can only be used for trades adjustments and no new trades at all.

As of this writing I raised my free cash to 5.27%

I know, way below and long way to go to raise it up above 30%. It’s time to fix my finances in my trading account. A money management is a very important party of any trader. So I should not neglect it.

What about you? Do you keep some cash in reserves for great opportunity which may show up or for repairing disasters? If so, how much cash do you hold?




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Why selling puts against dividend paying stocks is a win-win strategy

Why selling puts against dividend paying stocks is a win-win strategy

There is a simple answer to this question, but I will make it a bit longer and complicated. It may be difficult for novice investors to engage in options trading, because from everywhere around us we keep hearing how dangerous options are.

Financial advisors of all sorts will tell you that options are very dangerous, you may lose money, it is a gamble, it is not for average investors, you shouldn’t trade options with your retirement money, and much more or similar nonsense.

Mostly, people who are discouraging you from trading options have never traded options. They are just playing their old scratched record they have been taught at their last seminar.

And brokers? Unfortunately they have to tell you that because the law forces them.

Trading options doesn’t mean jumping into complicated advanced strategies. A simple put selling strategy is enough to make you profits others will never believe you can make.

If I tell you that I have been making in average 45% profits annually in my last three years selling puts, you will not believe me and you will think about “too good to be true” thingy.

And yet it is possible to reach those numbers and without taking enormous risk with your money. One way to reduce the risk is trading options against stocks you want to own. And as a dividend investor, which stocks do you want to own?

Making money
(credit: Business Insider)

If you understand basics of options, how you can make money using them, you will find out, that trading options is very easy, simple and not risky at all. The best way to find out for yourself is to take a small trade and try it. If you do not want to commit your own cash trade in a paper money account first. I did it myself recently even after two years of trading I still use paper money account to practice trading. My small account doesn’t allow me trading as often as I wish, so for the rest of time I use paper money account.

Trading options, and in our case selling puts is all about an investor’s mindset. If you let your mind thinking how dangerous it is and never try even on your paper money account, you will miss a great opportunity of your life. I understand that it is not easy to get into a mindset of an option trader. I have been there myself. It is difficult at first when your understanding about options is limited. But do not worry, you do not have to make it complicated.

How to change your mindset to an option trader?

There are a few steps you can take and repeat yourself as long as you become comfortable with them. I did it myself a couple of years ago when looking at trades I would take.

A rule number one – sell puts against stocks you want to own – dividend stocks.

Rule number two – choose a strike price you are OK to pay for the stock in case you get assigned (when you will be forced to buy a stock)

Rule number three – if you have a small account and cannot afford more contracts than one, choose as long expiration as possible to collect at least 1.00 in premiums (before commissions). If you can afford more contracts you can choose shorter term (I like 56 days) and go with a smaller premium (for example 0.38 – see my latest trade of MSFT).

Rule number four – check the stocks supports and resistances, is the trend bullish? Will it last? Do you have a bullish or bearish expectations? If you are bullish, go ahead and sell the option. If you are bearish on that particular stock, go and choose another stock or wait for the bearish trend to finish and then sell the option.

Rule number five – sold your option? You collected a premium then. Never give it up! Defend it! Were you wrong on your assessment and stock went down? Do not worry, if the stock went ITM (in the money, meaning below strike) you have two options how to defend your premium:

  1. You do not want the stock yet – roll the option down.
  2. You do not want to bother with rolling options, take the stock.

Rule number six – never buy options. Always sell them. Have time decay on your side, not against you. You can buy options only as a part of a spread, or when you are really 100% sure that a certain stock will go down or up. But who is 100% sure today, right? People buy puts as protection, but even then you need to be 100% correct or you will lose all you paid for the option.

What you need to know?

First, you do not have to know anything about Greeks behind option prices, valuation, or movement. All you need to know is what option is and how you can use it. All other stuff is just a noise.

Options Greeks

Second, you want a watch list of stocks you want to trade.

Third, you need a broker’s approval for trading options.

Fourth, you need a good platform. I like ThinkorSwim platform, but you can use any other platform

Fifth, you need cash for cash secured puts or margin approval for naked puts. I prefer naked puts as I can use other people’s money to trade. But with naked puts when using margin, be sure you have enough cash anyway to potentially cover your assignment. It would be unpleasant being put a stock and not having money to buy it. That’s when losses can become large.

So what is an option?

Since I am talking about puts, let’s take a look at puts. A put option is a right to buy or sell a stock at a certain price (strike) at a certain time (expiration).

Every option is a time sensitive instrument. That means that as it is getting closer to expiration, its value is becoming smaller and smaller as long as it gets to zero, but only, if the option is out of the money. And this is the main reason why I do not buy options, but sell them. When you sell an option you get paid. You receive a premium.

By selling a put option to a guy on the other side you sell him a right to sell you his stock at a certain price at the time of expiration (and sometimes even earlier). That means that if you sell a put option with $20 strike price and 3 months left to expiration, you are selling a right to a person on the other side of the trade to sell you his 100 shares for $20 a share three months from now. If the stock falls to $13 a share, you will have to buy 100 shares for $20 a share. For this inconvenience you will get paid. You will get paid a premium.

Stock options

And here you may say: “ouch”, I do not want to buy a $13 stock for $20! It is a loss!! What a risk! I can lose money! The advisors were right! And you freak out.

This is a reason why I trade options (sell puts) against dividend growth stocks. Dividend growth stocks are mature companies and it is very unlikely that they would fall dramatically in price during market panic.

If they happen to fall during a sell off (like a few years ago JNJ dropped for no reason* to $56 a share) they tend to recover pretty quickly or if not quickly over a course of a few years (again check the chart of JNJ as it went from $56 all the way up to $100 a share).

* There actually was a reason. A few products of JNJ were recalled by a company and investors freaked out about it. It was a ridiculous sell off, which offered great opportunity to buy.

So if any of the panicked investors out there decides to give up their stock (use their right to exercise their option) and assigns you to a stock like JNJ, will you be mad? Will you consider it as a loss?

If your option gets in the money at expiration and you decide not to roll to a lower strike but accept the stock, you will be forced to buy at strike price minus premium a share. And you start collecting dividends!

When selling puts against dividend stocks, there are only two possible outputs:
 

  1. An option expires and you keep the premium.
  2. An option doesn’t expire worthless and you get assigned to a dividend paying stock, so it is a win-win situation, isn’t it?

 

There are options traders out there who are very successful and they trade options for a living. One of them is a self-made multi-millionaire Teddi Knight from Ontario in Canada. You can find information on her website fullyinformed.com

Have you ever heard about “Karen the Supertrader”? Karen is another self-made millionaire who learned trading options and made millions. She started with $100,000 account and turned it into $41 million in three years! And she is using a simple naked put & call selling strategy (unprotected iron condor – 1 short OTM call + 2 short OTM puts)
You can watch a video with Karen being interviewed by Tom Sosnoff in Tasty Trade:

 


Trader – Made $41 Million Profit in 3 Years Option Trading

 

Karen the Supertrader could do it. Of course, it took her circa 5 years before she found her strategy and mastered it and then another 3 years to turn her account into a fortune. She is now my role model trader. I will do all in my power to find out my own strategy to multiply my account the same way. Since I started with less money, it will take me longer. Now I must increase my account from current $18k to $100k and then to millions. In three years!

Tell me, do you trade options or consider trading it? Are you afraid to start? I was afraid as a hell, but as time went by I realized how easy it was. If you need any help, write me an email and I can help you with a trade set up and you can learn and start your own money making machine – collecting dividends and options premiums.
 
 




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May 2014 results; should I have sold and ran away?

May 2014 results; should I have sold and ran away?

There is an old adage on Wall Street – “Sell in May and run away”. If you have done that, then you missed a nice returns overall as markets grew quite nice in May 2014. S&P 500 rose by nice 2.18% in May and closed near all-time high. What a blessing!

Should I have sold and stay away from the markets? Absolutely not! Well, it depends.

My overall May 2014 account was down by -2.15% but only because I made a few deposits which lowered my adjusted balance and also my options trades are normally deferred into a later time. What does it mean?

It means that when I sell a premium, I receive cash right away, but my account balance won’t reflect it until expiration or a significant time decay destroys the value of that option. So if I sell a put premium at bid price, let’s say $1.05, my account liquidation value at that same point will be the ask price at let’s say $1.10 and thus showing a loss.

This principle is behind my May 2014 negative account growth along with some deposits I made during the month.

But, because of a sell off at the beginning of May (see my post “Today it was a massacre in my account” or “Disaster continued, but navigated my account well thru the storm” my account was actually down by -10.54% at the beginning of the month!

I was able to recover almost everything! Thus far, I am satisfied with May 2014 returns and results. But my satisfaction is actually elsewhere, not only in the overall recovery during the same month. Check the graph below showing my account balance (note, this is my TD Ameritrade balance only, for all accounts visit “My Trades & Income” page and scroll all the way down to see a table of all my accounts):

Account value

A hint: the red area indicates previous years closing balance. With a previous year closing balance of $10,072.25 I am about to double my account value this year! In May 2014 I closed at 17,804.66 with only $2,195.34 to go to close at 20k mark. This is something exciting to me. If my dividend growth & options strategy continues providing with the same results in the following years, I believe I should retire in 6 years.

I understand that it might be tougher every year since it seems easy to double my money when you need to make only $10k to double your account instead of $80k of dollars, for example. But I am optimistic.

To be fair I am posting my account vs. S&P 500 chart. The chart is adjusted for contributions (basically it shows only gains or losses). That clearly indicates what I mentioned above, that the account closed at a small loss of its value or balance.

Account value vs. S&P500

That didn’t affect my income at all. May 2014 was my second best month as far as options premiums collected goes and the second best month when speaking of dividends.

Here are new results for May 2014 (TD account only):

 

January 2014 premiums: $156.10 (1.55%)
February 2014 premiums: $139.26 (1.38%)
March 2014 premiums: $746.62 (7.41%)
April 2014 premiums: $421.63 (4.19%)
May 2014 premiums: $803.32 (7.98%)
   
January 2014 dividends: $25.87 (0.26%)
February 2014 dividends: $167.02 (1.66%)
March 2014 dividends: $68.77 (0.68%)
April 2014 dividends: $25.91 (0.26%)
May 2014 dividends: $168.51 (1.67%)
   
Total 2014 income: $2,733.09 (27.13%)
2014 unrealized premiums: $2,318.00 (23.01%)
   
Account balance: $17,804.66 (4.53%)
December 2013 balance: $10,072.25

There is one more thing I would like to mention. Today I also reached my last year options income. Last year I made $2,576.30 in collected premiums. As of today, this year 2014, I collected $2,634.01 in premiums.

You can see my dividend and options income on My Trades & Income page.

I think that’s it for now. I am looking forward to the next month. What about you? How was your May 2014 and the entire year so far? Post a link to your website or write down your results to encourage other investors!

Have a great June 2014 at the markets!
 
 




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New Trade: Bull Put Spread: OCT14 MSFT

New Trade: Bull Put Spread: OCT14 MSFT

This is another test trade I am going to open on Monday if my price limit is met. It is a live test of my squeeze signal reading. Microsoft stock has experienced a strong squeeze lasting roughly a month and a half and recently it shot up to release the squeeze energy.

Will this move last until October? I do not know, but I am going to take advantage of it and open this credit trade – bull put spread.

MSFT Bull Put Spread

Above see the chart of the stock which went sideways for a long time and now broke through the range. As the pressure is up (more buyers) I believe this stock will be pushed higher over time.

Trade Detail

I placed a following order today which should execute tomorrow:

STO -10 MSFT Oct17 14 40/39 put @ 0.38 CREDIT

This means that tomorrow I will:

SELL 10 MSFT Oct17 2014 40 strike puts and
BUY 10 MSFT Oct17 2014 39 strike puts

for LIMIT @ 0.38 CREDIT

 

Max Profit $380 Max profit occurs if MSFT is above 40 on expiration day, which is October 17.
Max Loss $620 Max loss occurs if MSFT is below 39 on expiration day, which is October 17.

 


 

 
 

In many occasions on this blog I advocated having a plan for each trade. So what is my plan for this one?

There are a few outcomes for this trade:

  1. The stock ends above $40 at expiration for a full profit – there will be no need to do anything
  2. The stock ends below $40, but above $39.61 break even at expiration – there will be a small gain (depends where the stock will be). I may close the short put and let the long put expire, or roll the short put down making it a single put selling trade and let the long put expire.
  3. The stock ends below $39.61 break even but above $39 – there will be a small loss. My strategy on fixing this trade would be the same as mentioned above.
  4. The stock ends below $39 at expiration – it is when the full loss occur. I might roll the entire trade lower and collect more in premiums to mitigate the loss.

Since this is a spread trade, there will be no need to do anything with this trade until October, so after selling this spread, I will wait.
 
 




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Posted by Martin May 27, 2014
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New Trade: BUY AUG14 CALLS on GLW 1 AUG14 22 $.57

New Trade: BUY AUG14 CALLS on GLW  1 AUG14 22 $.57

I once traded advanced option strategies which involved all sorts of spreads as well as buying options. At first, I was successful and doubled my account.

But also I wasn’t very comfortable with those trades. Many of them were directional trades and I was unable to make money. When the trade went against me, it was very expensive to repair it or get out, when the trade was directionally correct, the magnitude of the move was so slow that time value decay destroyed my trade and I ended up empty handed.

So soon I lost all the money.

This experience took me out of advanced trading or buying options and I rather started selling premiums, which are a safe bet compared to buying options for example.

Although my account is growing rapidly, currently my put selling strategy is up almost 24% for the year, my dividend income up 2.9% so far (up to date, the year-end income should be 10.54%), and my account is up 74.95% up to date, I am realizing that it can grow even faster.

There are directional options strategies which can grow my account a lot faster, exponentially faster. The key, however, is to find stocks, which show a setup for such a trade. But how to find them?

I am not going to reveal how I am finding those trades yet, but GLW is one of those stocks providing such probability.

 

Max Profit unlimited There is no max profit on calls. In theory, the stock could keep going up forever. But remember, your profit is limited to the move the stock can make before the call option expires. Profit occurs anywhere above 22.57. With 1 contracts, you will profit $100 per point GLW is over 22.57.
Max Loss $57 A call option gives you the right to buy the stock at the strike price. If the stock is below the strike price on expiration day, it will be worthless. So, max loss occurs if GLW is $22 or less on expiration day, which is August 15 for this option.

 

With this trade I have a potential to double my money or even triple my money, if the stock moves up as expected. The key is to find the momentum. Is this stock going to have such momentum? All I can see now, that the stock is in a relatively long squeeze (since the end of April) with a very strong upside potential. I can see that there really is a very high probability that the stock shoots up.

But am I right? I do not know. I am taking a few more trades in my paper money account, but also decided to take a very small trade with real money to test the waters. If my new strategy ends up as correct, I may be returning to advanced options strategies once again.

Trade Detail

Tomorrow morning I should open a test trade as follows:

BTO 1 GLW AUG14 22 CALL @ $0.57

Of course, the profit is unlimited, but if the stock moves fast up above 22.57 I should double my money.
 
 

 
 

 
 

And of course, once this test trade is done, I will report its result.

Happy Trading!

 




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Posted by Martin May 26, 2014
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Memorial Day


Caen

Today, I would like to take the opportunity to express how grateful I am for all our men and women who served this country and paid the highest price for it. I am old enough to remember how Americans treated their soldiers in 70’s and it was sad. I also remember how this attitude changed and Americans realized how precious those people willing to die for their country are.

WWII

I am also seeing how is this attitude changing again. Not just towards soldiers, but overall. Are we really forgetting? Do we need a thread to value our way of life? Do we really need Hitlers, Hussains, Al-Qaedas, Stalins, or other tyrants around the world to constantly remind us that, unfortunately, peace on Earth is still fragile?

Flag

Let’s remember all those who fought in all wars and died, so we can be sitting behind the computer and trade stocks without fear or worries. God bless their souls.

US Navy
 




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The best trade ever

The best trade ever

My yesterday’s trade finished today with full profit. I managed to keep the entire premium I collected and the option against GameStop (GME) expired worthless.

Although there were many doubts out there whether GME is a good stock to own or not I trusted my sense and expectations when opening the trade. Of course, I was afraid. There still was a small “what if” back in my head but I tried to believe my intuition as well as my strategy and homework I did before opening the trade.

GME is a dividend stock. It is not a champion, it started paying dividends in 2012 and has only 1 year record of raising it, but still, this gives me a confidence when trading options.

One rule I have is: sell options against stocks you are OK to own and the second rule sell options against dividend paying stocks, which you are OK to own.

GME is one of such stocks. My expectations were correct and I made $109 dollars cash overnight (3.08% overnight gain) selling put contract against this stock. I know, in an absolute numbers, $109 doesn’t look too much, but I didn’t have more available cash to open more contracts (and now I am kind of beating myself for not trusting myself more), and opening more contracts would lower my free cash lower, below my level of confidence. If the stock behaved differently, it could get me in a trouble.

This trade can be marked as my most profitable, prosperous and best trade I ever made and I wish I will be able to spot more similar opportunities in the future.

What about you? What was your best trade ever, which still makes you proud? Comment below or send me an email and I will publish it in a separate article.

Regards and Happy Trading!
 
 




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New Trade: SELL MAY4 14 PUTS on GME (weeklys)

New Trade: SELL MAY4 14 PUTS on GME (weeklys)

This morning I entered another trade against GameStop (GME). It was a bit speculative trade and a source of either a quick profit or a big burn.

Today after market close GME reported 1Q results and I took a risk of being burnt if the company reported disappointing results.

This trade will expire tomorrow, so it was just a one day trade, but the premiums and volatility were very appealing and literally screaming for taking this trade.

Check the options chain:

GameStop premiums

Note those juicy premiums and the volatility way over 100%. And even now those are the most current numbers indicating how nervous investors were about this stock.

The company reported somewhat better than expected results. Apparently, the results were good enough to make the stock rally after hours (by 5% at first, then it slowed down to 3%).

Will it survive? If so and the stock ends above my strike tomorrow, it will be my most profitable trade ever.

Trade detail

STO 1 GME MAY4 14 36.5 put @ 1.09

The trade has a low BP (buying power) or maintenance requirements, expected ROI 3.08%, expected ROM 13.58%, and a safety factor at 1.40%. The trade opened in the morning and if all is good it should expire tomorrow.

That is a whooping 6,436,545.721% annualized return!

Okay, to be fair, it didn’t happen yet and tomorrow everything can be different and I may lose this trade. If the stock starts falling tomorrow, I still am ready to roll it over and away in time to preserve my money.

 

Max Profit $109 When selling puts, the hope is that they will expire worthless, so the max profit is equal to your execution price. Max profit occurs if GME is above $36.50 on expiration day, which is May 23 for this option.
Max Loss $3541 In theory, GME could keep going down all the way to zero, and since you are giving someone else the right to sell it at 36.50, your max loss is very high. However, remember that this trade has a time limit on it. On expiration day, May 23 for this option, if GME is below 36.50 you will either need to buy back (cover) the put, roll it, or you will be assigned -100 shares of GME as a long position, with an entry of 36.50.

 
 

 
 
If the premiums stay elevated tomorrow and it will become obvious that the stock remains above the current strike or will have a strong momentum upwards, I may open another put selling trade against this stock as this is a great opportunity to make money.

Happy Trading!
 
 




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