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Posted by Martin October 15, 2014
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S&P 500 down almost 50 points, DOW down more than 400 points! Time to buy? Not yet.

S&P 500 down almost 50 points, DOW down more than 400 points! Time to buy? Not yet.

I think we are hitting a true bear market here. For more than 5 years we haven’t seen such selling. Some even say that they do not remember such volatility and drops, so that must have happened long time ago.

It is not usual to see markets falling this much. Look at it from a perspective of a standard technical analysis we are taught in every book or by every trader. It goes that trends move in steps, creating higher highs and higher lows in uptrend and lower highs and lower lows in downtrends.

In a 5 year chart this is still true, but if you look at 6 months daily chart the market falls down as a rock.

When did you see last time markets falling by 30 – 50 points (S&P 500) or 200 – 400 points (DOW) every day?

Well some traders I know off and talking heads are mentioning “capitulation”. Are we really seeing it? If so, we will see a slump and bottom of the market soon.

Is this a time to buy stocks?

As a dividend investor, this is a great opportunity to buy stocks cheaper as now they are on sale. There are two ways you can deal with the market.
 

  1. Dollar cost averaging.
  2. Market timing.

Dollar cost averaging

If you do not have to deal with every day market fluctuations and panics, you already use this strategy and buying regularly every month (or any other period of time) your stocks. Now you will definitely be enjoying lower prices and benefit from the future growth.

Market timing

Here I am not referring to “fishing” for bottoms trying to buy low and later sell high. Dividend investors and long term investors do not do this anyway. I am referring to a strategy when you time your purchase of the stock and wait for your price.

I do this strategy all the time and I like it. I watch a few stocks and when I see them falling that’s the time when I start tracking them down with a contingency order. I place my buy order above the previous day high (high enough not to be triggered by day-by-day fluctuations) and track the price down. When the stock stops falling and reverses high enough to trigger your order you get in.

Sometimes it happens and the stock turns back down and continue falling. In that case I do not use all the money I plan to spend on the stock. I split it into two or three sums and repeat the process on the way down. Worked well for me so far.

Markets look ugly with a dash of ugly

Looking at the chart made the market look ugly in the morning. However, there is one thing which caught my eye and which was different from the other days.

In previous sessions we could see markets rallying in the morning and then fail heavily the last hour of the trading session. Today was different. We saw a heavy selling – ugly and very ugly selling in the morning until about noon. Then a sudden rally!

SPX Ugly

Does this mean we are bottoming? We will see in the coming days if this is just a trap, bounce, return to the mean, or a reversal. Nevertheless, markets are still in a downtrend – clear downward moving trend with no sign of reversal (although today’s trading may be a clue for a change).

If you plan buying stocks, I would still wait for a clear sign that we are really reversing. If you plan shorting stocks, wait for some bounce to add more short positions.

And what about options? I am selling call spreads towards SPX. I have two call spreads out there. One spread at 1940/1945 level and a second spread at 1930/1935 strikes. Both are set to expire worthless this Friday unless the market continues heavily rallying up to breach those levels, which is very unlikely.

Another trade I have is a put spread against Twitter (TWTR), which held ranks extremely well during this market slump. Although I am not a fan of the company and its business model, I must admit that the stock performed brilliantly.
This spread is also set to expire this Friday. It was volatile a lot the last three days and the expiration may be jeopardized. If so, I may roll the spread into the next week.
 
Have a great day and happy trading!




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Posted by Martin October 09, 2014
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The worst market results in 2014 so far

The worst market results in 2014 so far

Wow, the market had the worst time ever. It looks like we are at the top of the trend and reversing. I do not remember seeing such swings of 300 points (Dow Jones) in just three days. At least for a few last years, this behavior didn’t happen.

I watch weekly, daily, and intraday charts to see how the markets do and what would be the next outcome (see below). I am not an expert in it, but learning. And I have learned a few things so far.

The weekly chart held the trend until today. The large sell off pushed the trend into a reversal. When the market closes below 21 EMA, it is a warning sign to me. On Wednesday, FOMC meeting provided a relief to the markets and we saw a huge rally up.

This also provided a great relief to my positions, mainly to my Iron Condors which are supposed to expire tomorrow.

I though, all is good.

Although, the markets were in a downturn as was clear from the daily charts, today’s trading changed the wheel of fate again. I expected the markets sliding down or moving in a normal matter. I haven’t expected a panic sell off which was even larger than the one in Tuesday.

As I felt “all is good” yesterday, I am back nervous today.

Now we have the weekly chart flashing a red light of a trend turning point, and the daily chart in deep downtrend. No sign of strength at all.

Our rigged market in its 5 year history makes shorting this trend difficult. Is this really a trend reversal or just a dip to buy?
 
SPX
 

My Iron Condors are in danger again today. The lower, put legs are in jeopardy to get ITM. Calls side is okay and the calls will expire worthless for a full profit tomorrow. I need to pay attention to my puts side.

If the market bumps up a bit tomorrow, I will be safe and all my Condors expire worthless. If it, however, continues in a dramatic sell off, I will have a problem.

Today, I could roll down one of the spreads to a lower strike (from 1925 to 1920), but if we see another wild selling tomorrow, even this rollover will not help.

I will have to watch tomorrow’s trading carefully and if the market slides bellow 1920 and there will be no sign of it going back above it, I will have to roll those puts again.

I am hoping for the best. I hope, my puts will not get breached tomorrow and all my spreads expire.

What do you think? Will the market bounce up or continue sliding tomorrow?




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New Trade – SPX Iron Condor

New Trade - SPX Iron Condor

As I described in my monthly report, I am slowly building my damaged account back up taking small trades and small income every week.

Last week, I opened a few trades against SPX – one bear call spread, and two Iron Condors. All expired worthless and I could keep all premium I received.

I will try to replicate such trades this week as well.

First, I need to assess what the market would do this week.

By looking at weekly and daily charts, I can see that on a weekly chart we are still bullish. But the daily chart tells a different story. The markets dropped the last few days. On Friday and today the markets tried to rally back.

Will this rally continue or is it just a return to the mean and we will see more selling coming?

Difficult question with even more difficult answer.

SPX

There are not too many events happening this week. We will see a FOMC meeting minutes on Wednesday and Jobless Claims on Thursday which may move the market either way (I would suspect up). I do not think that those moves will be that dramatic to breach my trade I put on today.

If so, I will move the leg of the trade or close it and sell a new one. Time will show.

Trade Detail

Today I entered the following trade (Iron Condor):

 

BTO 1 SPX Oct2 14 2020 call

STO 1 SPX Oct2 14 2015 call

STO 1 SPX Oct2 14 1920 put

BTO 1 SPX Oct2 14 1915 put

 
@ 0.45 LIMIT GTC
 

Typically, Iron Condor is a high probability trade, but its risk/reward is bad. With a high probability, it is OK to take such trade.

This trade will expire this Friday, October 10th, 2014. I collected a premium of $45.00 which translates into 9.78% gain if it expires worthless on Friday.

The max risk of this trade is $460.00 per contract and my margin requirement was $471.00 which will be blocked until Friday.

I believe, this trade will end up successful. I will hold it until expiration. Only if any leg of the Condor gets breached or endangered, I might roll it further away in time or roll it up by buying that leg and selling a new one. To do so, a sufficient cash reserves need to be sitting in a trader’s account (and that means mine too).

Let’s see how this trade ends up.

You can watch that trade on My Trades & Income page.

Happy Trading!
 
 




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September 2014 results

September 2014 results

September 2014 was a very bad month to me. It was a month when I destroyed my account once again. I did it back in 2011 and I thought I learned my lesson. Apparently I didn’t.

This is what happens when you do not follow rules or have none in your investing/trading. Trading options can be very beneficial and rewarding unless you break rules you set up. Then it can hurt a lot.

Long story short – I blew off almost $15,000 of profits this month.

How could that happen?

If you are subscribed to my options trading newsletter, in the “welcome letter” and at the bottom of each letter, I have an advice for all my readers about money management. I advise trading only 50% – 70% of your available cash in options. Then keep the rest in reserves in case the trade goes against you and you need adjustment.

I broke that rule. After I made almost $5,000 in a single month trading options I became greedy and overinvested my account. September was a very volatile month and that broke my ability managing my account. I suddenly run out of cash and was forced closing my positions due to margin calls. I was closing with a loss. A huge loss.

That was a painful slap into my face from Mr. Market. A painful reminder that the rules are here to protect me and not to be broken.

New trading plan

This experience made me think again how I want to trade options. I was thinking start trading indexes only. Start trading SPX only. But always I was telling myself that I will start trading SPX after “this trade ends and then that trade ends, and this or that one”; and I have never ended any trade. As soon as one trade ended, I immediately opened a new one. My cash reserves were close to zero.

I deserved the blow.

But it was good for one thing. I closed all risky and volatile trades, increased my reserves and decided to trade SPX indexes only with a few exceptions of strong stocks showing a good opportunity. I also was thinking that if I take small trades, risking no more than $500 a trade and collect $30 – $100 per trade premium, it will one day compound into a robust money making machine. I also wanted to shorten my waiting time and decided to go with weekly options.

It would be very rewarding if I can trade and collect $30 – $100 a week. One day, as my account starts growing again, this can easily grow into #300 – $1000 a week or even more. That would be a sufficient income.

I will also gain a better control over my margin requirements than when sitting in a long term trade.

So what my trade plan would look like?

 

  1. Trade weekly options against SPX – spreads and condors (later maybe touch butterflies).
  2. Risk no more than $500 per trade (I would rather take two different trades than multiple contracts of one trade) – 3% per account.
  3. Increase risk per trade (number of contracts) once the account starts growing again – keep it at 3% however.
  4. Collect minimum $30 per trade. This would equal to 6% gain weekly per trade.
  5. Reach 2% weekly gain of the account (as of this report I have 1.6% weekly gains.
  6. All trades shall be set up to be out of 1 standard deviation as close as possible to the 2 SD.

 

Newsletter

Do you want to follow those trades? I decided to start a newsletter in which I would place a new trade idea whenever I am going to open a trade as described above. What that means for you if you subscribe?

Any time I am about to open a new trade, you will receive a newsletter in which I describe the trade. I explain why I am taking the trade and show all legs of the trade and how it should be entered. I will show probability of success, risk, and reward, so you will see what you will be risking and what you can make. The good thing is that each trade is a real trade I open myself, so I watch it carefully and send out a newsletter any time adjustment or exit is needed to protect four (and my money). And as a subscriber, you can ask me anytime, if you need explanation in regards to that trade.

And the best thing is that the subscription to the newsletter will be free for the next three years (until the end of 2017). Then I will start charging a fee.

But by then, you will already learn well trading on your own and making money without the newsletter.

Sounds good? Then subscribe here.

 

September 2014 results

And now let’s proceed to those miserable results I am ashamed of:

 

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%)
June 2014 premiums: $230.21 (2.29%)
July 2014 premiums: $4,602.44 (45.69%)
August 2014 premiums: -$172.58 (-1.71%)
September 2014 premiums: -$14,399.60 (-142.96%)
   
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%)
June 2014 dividends: $68.81 (0.68%)
July 2014 dividends: $25.96 (0.26%)
August 2014 dividends: $150.49 (1.49%)
September 2014 dividends: $68.86 (0.68%)
   
Total 2014 income: $8,283.15 (82.24%)
2014 unrealized premiums: $-6885.98 (-68.85%)
   
Account Equity: $17,329.61 (00.00%)
Account Net-Liq: $15,555.66 (-31.83%)
December 2013 balance: $10,072.25

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

What about you? How was your September 2014 and the entire year so far? I hope better than mine! Post a link to your website or write down your results to encourage other investors!

Have a great October 2014!!
 
 




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My trades against SPX, TWTR, expired for full profit today, VMW got filled

My trades against SPX, TWTR, expired for full profit today, VMW got filled

During last week and the week before I opened a few new trades against SPX, TWTR, and VMW. All of the trades against SPX & TWTR expired today for a full profit.

After losses I generated during September 2014 I had to go back down from the “heavens” of my pride and basically start over. Slowly rebuild the account I once again destroyed by not following my rules and being greedy.

If it ever happened to you finding yourself saying to yourself “That cannot and won’t happen to me.” then make sure it really won’t happen by following your own rules.

Part of my trading plan adjustment was to get into trades which would generate income in shorter time frame although I will be taking smaller premiums at first. I started that way myself about three years ago taking small profits and slowly growing up to large profits. Until I overextended myself.

Back to basics. I will focus more on trading index rather than volatile stocks which are influenced by earnings and all sorts of hype, pump and dump and which can make you ton of cash, but also blow up your entire account.

During last week I opened the following trades:

1 SPX 2000/2005 bear call spread – collected $85 premium (since Tuesday, September 30th) – trade expired worthless for the full profit 9.7%

1 SPX 2020/2015/1910/1905 iron condor – collected $30 premium (since Tuesday, September 30th) – trade expired worthless for the full profit 6%

1 SPX 2020/2015/1910/1905 iron condor – collected $35 premium (since Wednesday, October 1st) – trade expired worthless for the full profit 7%

2 TWTR 51/49 bull put spread – collected $50 premium (since Wednesday, October 1st) – trade expired worthless for the full profit 28%

Totally I collected $250 during the last week (since Tuesday). Not bad. The plan would be repeating such trades every week.

Also this morning a trade against VMW I sent out via a newsletter got executed. I collected $180 premium with a total potential profit of 22%. This trade has time until expiration and I may actually take more trades over time or next week.

Also next week, I will repeat some trades against SPX by selling more spreads.

Happy trading next week!
 




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New Trade – Bull Put Spreads against Twitter (TWTR)

New Trade - Bull Put Spreads against Twitter (TWTR)

Twitter (TWTR) – a stock I have always looked at with disrespect, because it does nothing, it creates nothing, it delivers nothing. It is worthless. It only allows people to waste their time online.

That was what I thought about this stock and many times I told myself that I would never invest in a company like this.

Although everything I said about Twitter above hold water in my opinion, I changed my mind about investing into this stock. Why?

This stock showed resilience in today’s market and continues growing. It is considered one of the strong, bullish stocks. Although it fluctuates, it continues trending up.

How is that possible? Let’s take a look at a few things – business model and expectations.

How Twitter Makes Money?

How Twitter makes money when it makes nothing, builds nothing and the only thing it does is allowing users to waste their time online messaging about everything and nothing? Advertising.

Yes, that is the only income stream this social media giant can offer to investors.

I still feel disrespect to this stock, what about you?

What Makes Twitter a strong stock in this market?

It is expectations of investors and a massive growth of the company. Yes you have heard me correctly – a massive growth. It will not last forever, but until it ends, let’s take advantage of it.

Let’s take a look at a few numbers. When Twitter started in 2006 it hosted approx. 20,000 tweets per day. In 2010 it was 50 million tweets per day, and today, just FIFA World Cup caused users to send more than 650 million tweets. Enormous growth in user base and a revenue potential.

This growth in user base and revenue potential paid off itself. In the second quarter of 2014 Twitter reported $277 million in revenue – a 129% increase in growth.

Twitter is becoming a more international company than domestic. 77% of all users reside outside the United States. Recently Twitter announced that it had doubled their advertising in Europe itself.

All these news and efforts are pushing the stock resiliently higher in today’s market. I still wouldn’t invest in Twitter for a long haul. I still am not convinced that I would ever fall in love with the business model of the company. But from a short term perspective, Twitter presents a great short term option trading opportunity.

Trade Detail

To take advantage of this opportunity I opened two trades recently. Both were bull put spreads speculating that Twitter would stay above my short strike in upcoming three weeks.

The first trade is a short one. It will expire next Friday (October 3rd, 2014) and the second trade will expire on a regular option expiration day – a third Friday in October.

The first trade was selling a bull put spread made of weeklys options.

Twitter

When creating a spread, you sell a short put (or call) and buy a lower put (or higher call) for protection. If the stock stays above the lower short strike (or below the short call), the spread expires worthless for a full profit.

If the stock drops below your short put strike but stays above the lower long put strike, you will see a partial loss or partial gain (it depends where the stock lands, if still above your breakeven point or below it).

If the stock lands below both of your strikes, you will end up with max. loss.

The first trade I entered was as follow:

STO 2 TWTR OCT1 14 51 put
BTO 2 TWTR OCT1 14 49 put

@ 0.50 LIMIT GTC

The trade executed on Thursday last week and I collected $100 in premium. The trade is set to expire next Friday.

The second trade I entered was as follow:

STO 1 TWTR OCT1 14 49 put
BTO 1 TWTR OCT1 14 44 put

@ 0.60 LIMIT GTC

The trade also executed on Thursday last week and I collected $60 in premium. The trade is set to expire the regular third Friday in October.

If any of the trade turns against me, I will most likely exit it. I will not be rolling those trades.

If you are interested in receiving an alert for the trades I am about to open myself, you can subscribe to a newsletter to receive a trade alert prior to entering it myself.
 

Happy Trading!




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Posted by Martin September 26, 2014
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10 Billion hedge fund liquidation forced me to review my portfolio


If you wondered what spurred such hasty sell-off yesterday, we may have an answer to it. According to Wall Street Journal a “$10.6 billion BlueCrest Capital Management LLP, one of Europe’s largest hedge-funds (and best known for its credit market expertise), laid off several stock traders in the U.S. Thursday and began liquidating their investments, according to people familiar with the matter, not long after it aggressively expanded into equities.”

So here we go. The selloff caused Nasdaq to fall by 2% and it also had a very negative impact to my portfolio.

If one hedge fund could almost destroy the market’s bull trend, then it is an evidence that the market is vulnerable, pumped, unstable, and definitely not “contained” as Janet Yellen is trying to convince us.

I made a scary discovery that my own portfolio wasn’t stable either. After I was forced to liquidate some volatile and overextended positions in my portfolio which caused me taking large losses at the beginning of September, I once again could see that I still hold risky and volatile positions on a very low cash reserves.

Michael Platt of BlueCrest, which has done worse than many competitors. BlueCrest Capital Management/Bloomberg News
Michael Platt BlueCrest Capital

As sometimes a farmer must take drastic measures in his vineyard, prone and cultivate his crops before he could reap juicy fruits, I too decided to take some further drastic and painful measures to get rid of rotten portion of my portfolio.

At the beginning of the month I liquidates too volatile position against Taser Int. (TASR) and yesterday I decided to liquidate a second risky position against Cliffs Natural Resources (CLF). Both positions had severe impact to my portfolio, but I decided to take it to be able to start fresh again.

Not only I can sleep better now, I also could raise my cash reserve closer to my target (30% or more). I can also shift to more safe instruments such as indexes (SPX, RUT, and others).

With indexes you will not be exposed to hypes, pump and dumps, or earnings.

I cut bad branches of my money tree and wrote this month off. Sometimes it happens to traders (newbies like me) that they wipe out their accounts. Fortunately, in my case, my dividend stocks saved my butt. I only wiped out my options earnings, not stocks nor dividends.

Next month, I will be starting fresh

Today’s trading was a bit better than yesterday. Bears were excited to jump on the wagon and load up. Today, they were chopped into small pieces. But the battle is not over. The next week will renew the battle for the power in the market. Will bears win, or bulls? I do not know and the next week will reveal it.

Nevertheless, I will continue trading options adding weekly money making trades into my portfolio trading weekly options against SPX plus long term options to increase income.

For example, just yesterday, I opened a new trade against Twitter (TWTR) which showed continuation in trend, unlike the rest of the stocks (along with GoPro (GPRO) which also refused to drop yesterday). I opened two different contracts expiring next week and in October. Both trades are short term weekly money making trades.

Next week I will look for opening another trade against SPX, which also is a part of my weekly strategy.

Let me post an offer to all of you interested in trading options. If you wish to follow my trades and get an alert of a trade I am about to open, you can subscribe to a free newsletter.

You will receive an alert whenever I am going to open a new trade, trade adjustments, or trade exit. I not always publish all my trades here on this blog before I place the trades with my broker. On this blog, I post the trades after they happen and sometimes I do not post them at all. I just publish them in “My Holdings” and “My Trades & Income” where you can see results of those trades.

With a newsletter, you will receive a trade alert with explanation before I place it myself. If you like the trade, you can follow it and place it too.
 

 
Happy Trading!
 
 




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New Trade – Alibaba (BABA), I too decided to take this play and bought a few shares

New Trade - Alibaba (BABA), I too decided to take this play and bought a few shares

Not exactly a dividend growth stock here, but the prospect was appealing and made me think to buy some shares of Alibaba (BABA).

When I first heard about BABA in the news and all the frenzy it created I said myself “Not interested”. I do not do IPOs nor buy post IPOs. I only made one exception to this rule when several years ago I bought Visa (V) post IPO. I bought in the very first day at approx. $55 a share when Visa got on the open market the very first day.

Unfortunately, I was stupid enough to sell a few months later approx. at $65 a share. If I stuck with the stock, today my shares would be worth around $210 a share (as of this writing).

So why I bought post IPO shares of Visa? It was a perfect business model which many people fail to understand and even greater growth.

And that made me think about BABA. Will BABA follow the same fate as Visa, Google, Apple and even Facebook? Or what about Netflix, my another investment failure? Should I repeat my mistakes or is all BABA hype a frenzy?

What if BABA is really a great business with great growth potential and I will once again miss the boat if I stay aside? I decided to do some reading to see if I can justify my strong feeling that BABA is a great play for the long run and I should jump in.

BABA Logo
 

What makes BABA a great business model?

It operates on a similar way as Groupon, Amazon, and eBay. It is a portal which connects together manufacturers from China, Asia, and part of Europe with buyers. It operates mostly on a whole sale level, so not for a small guy who wants to buy a single piece of goods BABA offers thru its website. But if you plan opening a store, BABA can be a great source for you. You no longer need to go large scale shopping to Costco (COST) to get the best price.

If you are a manufacturer, you can join BABA for free (as well as buyers), but what makes BABA unique, unlike eBay you can upgrade for a fee which gets you a better deal, position and listing. Higher chances to sell your stuff.

And that’s a great potential in BABA. It not only gets a share from all transactions it makes. Last year the company netted $8.5 billion dollars. You may say, it’s tiny, Walmart cashes in $246 billion net revenue! It is BABA’s growth potential which is intriguing.

BABA is the only significant ecommerce player in Chinese market and worldwide. And the Chinese market is a big one.

Last year, the Chinese ecommerce market was a $298 billion business. Slightly bigger than the United States’ $263 billion market, making China the largest e-commerce business in the world.

What is impressive however, is the predicted growth of that market. E-commerce in China is predicted to hit $540 billion by 2015!! The consumer base of BABA is expected to grow from 140 million shoppers annually in 2010 to 520 million by 2015. The US is expected to grow the base to only 200 million by 2015.

That is the market potential, what about company growth potential?

If we look just at the mobile division, BABA sales grew 100% last year.

Compare it to Apple for example. Although AAPL is a great company, it went from 45% sales growth in 2012 to approx. 5% this year or even more sluggish 2% in 2016. Alibaba is expected to hit 50% sales growth in just next 12 months.

Apple’s operating margin in 2013 was 28.7% versus Alibaba’s margin of 51%, according to USA Today.

The numbers are just expectations and we yet will see how accurate they are, but when thinking about the E-commerce market and who is who in that field I strongly believe this stock will be a great play over the long run. It may actually outperform even faster, maybe in a year.

You may compare BABA with another Chinese e-commerce company – Baidu (BIDU). Its outrageous performance makes me feel that BABA has a great chance following the same pattern. BIDU went public in the US in 2005 and since then the stock surged 1,600% from its first closing day. Over the past nine years, BIDU outperformed stocks like Apple (APPL), Amazon (AMZN), and Google (GOOG). And BIDU is still growing, its last quarter report showed 34% growth and 58% sales growth.

I believe BABA has a great chance to grow the same way as BIDU did. It operates in a different segment than BIDU and as of now I do not see any stronger competitor besides eBay or Amazon.

Let’s see if my assessment of BABA is correct and maybe five years from now we will see a similar stock price surge.

Moreover, BABA is expected to start trading options next week. Another good reason for me to invest in this company.

For that reason I decided to take a small play in this stock.

Trade Detail

Today, I bought only 12 shares and I am ready to add more if the stock continues lower.

BTO 12 BABA @ 89.99 LIMIT GTC

To get into this trade I used my contingency order system. I was tracking the stock since Friday last week and lowering entry stock as long as the stock reversed and hit my trigger. It happened today.

 
BABA
 

Good luck to all of you who bought BABA recently. I believe, it will be a good investment.

 




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Trade adjustment – Carlyle Group (CG)

Trade adjustment - Carlyle Group (CG)

On 8/22/2014 I opened a put selling trade against Carlyle Group (CG). I sold 2 put contracts to collect premiums. Here is the trade detail:

STO 1 CG Dec14 30 put @ 1.10 LIMIT GTC

Later, after opening the trade it turned against me. I wasn’t panicking and continued sitting tight to see the outcome. Will the stock recover or will it continue down and endanger my strike price?

The stock price continued getting closer to the support level and my strike price.

The stock may reverse, bump off of the support line, but thanks to the nervousness in the stock market, where investors expect the Fed raising interest rates, all income producing assets continued to be on sale.

The stock may also breach my strike, fall below it, and I may have troubles to manage the trade.

I have the following options:

 

  1. Sit tight as the stock may reverse. There is a plenty of time until December
  2. Roll the trade down to the next lower strike, but the same month – December. This would create a cushion for our trade but it will increase our margin requirements by circa $370 because we will have to sell more new contracts.
  3. Roll the trade down and further away in time into March 2015. This will also create a cushion to our trade, but increase time we have to wait for this trade to end. On the other hand, this option will not increase our margin requirements. We will also sell more new contracts to keep the trade a credit one.
  4. You like the stock and want to own it. At this case you may decide sitting tight and let it exercise in December. In that case you will own 100 shares of CG at $30 minus received premium.

 
 

I chose option #3 to roll down and further away in time.

I entered the trade with my broker as one trade (a custom vertical spread), but in reality, the trade will however look like this:

BTC 1 CG Dec14 30 put @ 1.65 LIMIT GTC

STO 2 CG Mar15 27.5 put @ 1.50 LIMIT GTC

By rolling this trade I collected additional $154 in premiums (CREDIT trade)

New delta 29% (probability ITM)

Probability OTM 61.24%

 
This trade adjustment lowered my strike price below the current support line which should give me a plenty of room to overcome and sustain the general stocks selloff of the dividend stocks. If the stock doesn’t breach the $30 support, bounces, and continues up, I may expect the option losing value faster and be able to close the trade earlier than in March 2015.

See the chart below for the existing strike (and support) as a solid line at $30 a share, and a new strike as a dashed line at $27.5 a share.

CG

And again, if the trade continues going against me, I will roll it down and further away in time. If the trade expires worthless, I will keep the entire premium (the original one and the new one).
 
 




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Posted by Martin September 19, 2014
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Volatile week offered opportunities again

Volatile week offered opportunities again

Another trading week is over and we can review our accounts and see how we were doing and how our investments performed.

The last week was volatile as many investors were nervous about the Fed and its policy. On Wednesday we were expecting what Janet Yellen would come up with in regards to interest rates and that created nervousness among investors.

That nervousness had a long track into a previous week where we could see many good quality stocks falling apart. But not all of them lost ground. Majority of the losing stocks were in energy sector, REIT, BDC, and MLPs.

You may ask, why were those stocks falling hard? Why other regular dividend stocks were not following them? If you check other stocks such as Johnson & Johnson (JNJ), Abbot (ABT), Apple (AAPL), and others you will notice no selloff during last two weeks. Especially, JNJ performed excellently last two weeks creating new highs after a selloff in August.

Interest Rates Effect

As I wrote in my previous post, the reason for a selloff was interest rates and that many stocks in REIT, MLP, and BDC are influenced by them. Some more, some less. Therefore, all income producing assets in this category sold hard.

That offered a great opportunity adding some of those stocks into your portfolio.
I believe, the expectation of rising rates is already priced in. The market knows this, it is considered inevitable. However, there will be an impact on stocks if Fed raises the rates and the stocks may start drifting down or slow in growth. Also dividends may not look attractive for some investors anymore and that would be a reason for them to sell stocks and create a hard sell off, a panic.

But as long term investors who know the power of compounding and growing dividends we know, that compounding dividend will overcome the short term effect of rising rates and end up as a winning strategy.

Look at the interest rate this way, if the Fed wants to slow economy down, they increase interest rates. If the Fed wants to speed economy up, they lower the rates. It’s that simple.

And now answer yourself a question. Is the US economy speeding up so much that we need Fed jumping on brakes?

I don’t think so.

And answer yourself another question. The US has 17 trillion debt, for which it pays around 2% interest. If the Fed raises rates, the interest will go up too. It might be 3%, or 4%, or even more normal 5%. Can we afford paying such interest without increasing taxes? Or can the US economy growth offset the debt interest so much that it offsets a higher interest on our debt?

I also do not think so.

That means, in my opinion, that Fed is trapped in a situation of keeping the interest rates at zero forever.

Unfortunately, they cannot do it forever. One day, our economy speeds up and Fed will be forced to raise the rates involuntarily.

On Wednesday, we have heard about a “Considerable time” rhetoric. The investors could feel the tone of Yellen’s message and today, they are again returning back to complacency. The beaten stocks started recovering and rising again. Mostly this Friday.

Stocks Which Are Still a Good Buy

Some of the stocks I listed in my previous post recovered and I wouldn’t be buying them at this time. Instead, I would wait for the next panic and fear. Yet there are a few stocks left, which are good candidates for addition into our portfolios.
 

Realty Income (O)

This stock recovered on Friday a bit, but is still significantly down and in a buy zone.

 
Realty Income
 

O pays $2.20 annual dividend
yield: 5.10%
Its projected 10YOC is 15.15%,
payout ratio 235% (note, this is a REIT, the ratio will be at or higher than 100%)
5 yr average growth: 5.33%
paid dividend since: 1994
# of years of consecutive dividend increases: 16 years
 

American Capital Agency (AGNC)

AGNC also recovered a bit on Friday, but not enough to escape the buy zone. This stock can still be a good addition to your portfolio.

 
AGNC
 

AGNC pays $2.75 annual dividend
yield: 11.80%
Its projected 10YOC is 11.80%,
payout ratio 129% (note, this is a REIT, the ratio will be at or higher than 100%)
5 yr average growth: -6.88%
paid dividend since: 2008
# of years of consecutive dividend increases: 0 years
 

McDonalds (MCD)

I didn’t list this stock in my previous post, but I believe it offers a good entry too. In the past few months McDonalds was beaten down by investors. They punished the company for bad results, or slow growth and for the risk of being forced to pay $15 per hour for hamburger flippers recently rioting on the streets.

But yesterday MCD announced dividend increase. Dividend investors already know that dividends could be used as an indicator of a company’s health. The dividend is paid from the company’s cash. If there is no cash, then there is no dividend. If a company is losing, the dividend is cut.

If MCD is as bad as we could hear in media lately and it is going to sluggish or even die, why they increased the dividend yesterday? Did they do it to speed up their suffering?

Maybe they did it because there is no suffering at all and it is all a hype.

 
MCD
 

MCD pays $3.40 annual dividend
yield: 3.60%
Its projected 10YOC is 6.64%,
payout ratio 59%
5 yr average growth: 10.17%
paid dividend since: 1976
# of years of consecutive dividend increases: 37 years
 

Prospect Capital Corporation (PSEC)

PSEC is still hovering around $10 a share which is a good price entry. You will enjoy stable, almost 13% annual dividend while waiting for appreciation to $11.50 a share or more.

 
PSEC
 

PSEC pays $1.33 annual dividend
yield: 12.90%
Its projected 10YOC is 19.47%,
payout ratio 171% (note, this is a BDC, the ratio will be at or higher than 100%)
5 yr average growth: -3.43%
paid dividend since: 2004
# of years of consecutive dividend increases: 2 years
 

Vanguard Natural Resources (VNR)

This MLP didn’t recover and it continued down. At the end of the trading day, it paired some losses, but ended the day in red. It still offers a good entry. It pays monthly dividends. Today, the company announced increased distribution at a new annual rate of $2.52 per unit. It is a slight increase from $2.51.

 
VNR
 

VNR pays $2.52 annual dividend
yield: 8.70%
Its projected 10YOC is 8.70%,
payout ratio N/A
5 yr average growth: 4.77%
paid dividend since: 2008
# of years of consecutive dividend increases: 0 years
 

Goldcorp Inc (GG)

Goldcorp continued in a harsh selloff today. It is offering an even better entry point than a week ago. But to entry into this stock I would use a contingency order. It means, that I wouldn’t buy outright, but track the stock down and buy at reversal. For example, I calculated my next entry point to be at $24.33 a share. A contingency order means, that you place a conditional order, which activates your buy order if conditions are met, (if you do not know how to place such order, contact your broker and ask them how you can achieve it).

Then, the order would look like this:

If GG is at or above 24.33 activate a buy limit order at or below 24.33 a share. If on Monday the stock continues lower, the activation price at 24.33 will not be hit and nothing happens. You just lower your price lower for the next day. If however the stock continues higher and hits the 24.33 the limit order will become active, but you would buy the stock only if the price stays or drops below 24.33 a share. That will protect you from the price jumping way over the limit. I will write about this type of order in my next post.

 
Goldcorp
 

GG pays $0.60 annual dividend
yield: 2.40%
Its projected 10YOC is 4.01%,
payout ratio 31%
5 yr average growth: 30.18%
paid dividend since: 2001
# of years of consecutive dividend increases: 4 years
 

HCP (HCP), Ventas (VTR), Omega Healthcare invest (OHI)

These are the stocks I didn’t list in my previous review. They were brought to my attention by Keith from DivHut blog.

All three candidates are in REIT sector, but they invest solely in a healthcare industry. I knew about OHI for example, and I even have it in my watch list as a good candidate for addition, but that’s where my knowledge about these kind of REITs ends.

I reviewed the price action of all three stocks and they all copied the other REIT price patterns. From that perspective they look like a good addition to portfolio along with other REITs I mentioned above. If you want to be exposed to healthcare REITs (and as our nation will be aging the healthcare industry will prosper more and more, so the REITs involved in that industry), it makes a perfect sense investing in them.

But are they good dividend stocks?

Let’s take a look.

HCP pays $2.18 annual dividend
yield: 5.50%
Its projected 10YOC is 8.45%,
payout ratio 99%
5 yr average growth: 3.32%
paid dividend since: 1990
# of years of consecutive dividend increases: 19 years

The dividend growth is quite low, so I would use this stock as a money making machine to generate cash which can be later used to purchase more shares of another dividend growth stock. It is a good dividend payer with excellent history of consecutive dividend increases.

My calculated fair value is at $36.5 a share (based on DCF). Morningstar estimates its fair value at $51 a share. With that said, I am OK purchasing this stock around 36 – 39 level (as close to 36 as possible). To buy in I would again use a contingency order.

 
HCP
 

VTR pays $2.90 annual dividend
yield: 4.80%
Its projected 10YOC is 12.76%,
payout ratio 176%
5 yr average growth: 7.21%
paid dividend since: 1999
# of years of consecutive dividend increases: 4 years

This stock has a nice dividend growth as well as current yield. The history of consecutive increases is short, so investing into this stock would require caution. It is, in my opinion, a good candidate to buy. The stock price still has a tendency to fall lower, so to buy in I would use a contingency order, too.

Morningstar estimates its fair value at $76 a share (as of 09/15/2014). The median price for this stock (5 year time frame) is at $63 a share. To me, the actual price at $61.12 looks acceptable.

 
VTR
 

OHI pays $2.04 annual dividend
yield: 5.90%
Its projected 10YOC is 14.76%,
payout ratio 256%
5 yr average growth: 10.58%
paid dividend since: 1992
# of years of consecutive dividend increases: 10 years

As I mentioned above, I had this stock in my watch list but wasn’t aware of its performance. From the numbers above, it is a very good candidate for addition, too. It has a nice history, good dividend growth and superior yield. Morningstar doesn’t follow this stock and my DCF didn’t return anything due to lack of data needed to calculate a fair value. The median price is at $30 a share, so it may be worth to wait if the stock drops lower.

It may not happen, so to get in, I would split my cash dedicated for this stock in three parts and leg into positions in a sequence using contingency order. That way you could buy a third of your future position now and see if the stock continues falling. If so, you buy a second third using a contingency order and average down. You do it as long as you get into your target position.

 
OHI
 

That’s my review of stocks which were beaten down last two weeks and which could offer a good opportunity to buy REITs, BDC, or MLP stocks cheaper. When investing into these stocks be sure you understand risk involved with these stocks. A risk I can see is the interest rates hike as that may send these stocks even lower than they are today. If you are eager to invest and have your money working for you, invest now only a portion of the entire amount you plan to invest.

You can also use put options to buy these stocks, although not all of the stocks mentioned above are optionable.

What do you think about these stocks and which of them would you invest in?
 




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