For some people this is an example of greed and all bad in America. For some it is a dream and a goal to strive for.
Which side are you personally standing for?
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Making 45% Annually Trading Options Against Dividend Growth Stocks
The Fabulous Life of Billion Dollar Wall Street Ballers
Last week trading – is the outlook for April still bright?
A week ago trading was about trend continuation. At least I saw it that way and I could see markets breaking thru marking this bull trend as intact. The entire last week markets were confirming my assumptions and all my accounts were growing. It was a filthy grow and I made quite nice cash.
Well, until Friday. Friday’s trading erased all my gains for the week and put back a question about the future of this trend. Although from a long term perspective, we are still in a bull market and there are no signs of changes yet.
Although, technically, I cannot see any significant red flags signaling reversal in trend (except one on my side) I can see one change, which may end up as a game changer.
Today we received unemployment data and these reveal a few things. One, it shows how out of reality Janet Yellen is when a few weeks ago she claimed that FED would start raising interest rates in six months, later she denied it and today data indicates that economy is probably, really, improving a bit and that they may actually start raising the rates.
Two, you can see a significant change in investors behavior. In the past they were accustomed to rising markets. The whole 2013 markets were rallying and investors jumped in any dip on the way. A complacency has never been bigger. Today it all has changed and investors are panicking whenever they see s slight dip or selling. They are afraid that markets are so extended than they no longer take a dip but run away. And that may be a significant change.
The result of this is a sideways market with last week attempt broken. Will today’s selling spark a broad sell off or is this just a blip and we are seeing a consolidation? What do you think?
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March 2014 review
Markets regained the upward trend momentum as it confirmed its trend continuation last Friday. What does that mean? It is simple, the trend will continue and it will make sense to be buying any dips should they occur.
In this post I would like to review my view of the market in the past and my April 2014 outlook, but most importantly to review the results of my investing and trading.
In the previous post from February I revised my goals and the way I invest my money. I still will focus on dividend investing, but not in all of my accounts as I did before. I am shaping my strategy and tweaking it to make me comfortable and satisfy my way of investing.
I still use dividend growth strategy as my main strategy in my ROTH IRA account and Motif Investing account. In my TD account, however, I shifted my focus on options trading as a main strategy and dividend investing as a supportive strategy. That means, that I will invest a percentage of proceeds from options trading into dividend stocks and use the rest reinvesting into options contracts. Read my revised strategy in my previous post
“February 2014 progress, goal changes, and TD portfolio vs. S&P500“.
March 2014 market review
If you take a look at the latest market chart (SPY below) you will see a nice consolidation. What is it I see in the chart? I look at a few indicators:
- Bollinger Bands
- 10 day MA vs. 20 day MA
- Chaikin Money Flow
Let’s start with the Bollinger Bands. This indicator will not tell you, which direction the market will go, but it will tell you what momentum the market is experiencing. The bands work like a rubber band. They contract and expand. Look at the chart. When you see them contracted, you may expect a dramatic move and a strong expansion of the bands. It will not tell you which direction the trend will go. It will just tell you that it will happen sooner or later.
When I see 10 day MA crossing above (or below) 20 day MA, then it is a moment when the trend reversal or breakthrough is going to occur. But, in order to avoid a false signal, the 20 day MA must be also trending up (for upward trend, or down for downward trend). If you check the chart below, you will see, that 20 day MA trend was moving up when it was crossed by 10 day MA.
Chaikin Money Flow indicates money flow into or from the stock. Although the flow is still negative, you can see a reversal in it as well. We may expect more money flowing into market which would support the trend.
Janet Yellen backing off
As many were expecting, myself included, FED’s (empty) chair (woman) is already backing off from her boasted proclamations about the stimulus and she announced that the interest rates will stay low longer than she originally claimed. To me, this is a confirmation of what Peter Schiff was saying all the long, that Yellen has no clue of what is happening and that she is just a Bernanke 2.0. She has no exit strategy, just pretends.
So, the new “trend” in FED’s policy boosted stocks more up and it looks like we have a clear path for new highs.
Earnings expectation
I do not have much to say about this item. All I could find is that Alcoa (AA), which is always the first to start reporting was recently also breaking thru upwards in expectation of great earnings season. It will be fun to see if it comes true. Alcoa has been downgraded many times last year by analysts, so if it beats their expectation this time, we may expect that this would boost the entire market.
April 2014 outlook
Historically April is considered as a good month for markets. Out of 19 years, Dow was up for 15 years. My indicators I watch are turning positive, so, I expect April to be a good month and our accounts should collect more gains. During last month I was increasing my cash reserves up to 30% (although not all in all of my accounts as this was a lot slower process this time than I expected). In some of my accounts I increased my cash reserves to 20%, but for April 2014 I will slightly use them down to 10 – 15% only as I do not see a need to keep reserves higher.
Remember that besides dividend growth investing I also actively trade naked options. In order to be able to manage the risk, I like to keep cash reserves which would allow me to roll contracts up and down as needed to avoid assignment.
March 2014 results
Although March 2014 was choppy and fear index I like to watch dropped down to 34 points I made money.
I had nice dividend and options premium income during this past month. Here are some numbers (TD account only):
| January 2014 premiums: | $156.10 (1.55%) |
| February 2014 premiums: | $139.26 (1.38%) |
| March 2014 premiums: | $746.62 (7.41%) |
| January 2014 dividends: | $25.87 (0.26%) |
| February 2014 dividends: | $167.02 (1.66%) |
| March 2014 dividends: | $68.77 (0.68%) |
| Total 2014 income: | $1,303.64 (12.94%) |
| 2014 unrealized premiums: | $926.00 (9.19%) |
| Account balance: | $12,418.73 (23.30%) |
As you can see from the table above March 2014 was a great month to me. What about you? How was your March 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 April in the markets!
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New Trades (GME, GLW, O, TASR) put selling – closing trades and opening new for average 8% profit
During March I made a few more trades which I haven’t reported due to lack of time. I decided to close a trade against Realty Income (O) where the option was traded at 0.05 per contract, so I bought the put option back. The return on investment for this trade was 8.58% ($316.00).
This trade happened before the market correction and Realty Income drop in price and way before expiration day. I was able to release my maintenance cash and open a new trade.
GME trade details
I opened two new trades in GameStop (GME) as these days investors are nervous about this stock due to Walmart (WMT) entering into a “used games” business. Let’s see how WMT succeeds in this endeavor. Analysts do not expect Walmart to gain much with the “buy used games” program which would be damaging GME, since GME has a stable base of clients using their PowerUp rewards program provides strong incentive of using points to buy more games. The company also benefits from expertise in dealing with local regulation and has a proprietary system for used inventory and pricing.
Morningstar analysts says to this:
we also believe GameStop’s competitive advantages in the preowned business relative to other brick-and-mortar retailers is fairly robust. Many retailers have entered the preowned market in the past, including Best Buy, Target, Amazon, and Wal-Mart itself. However, these efforts have not gained meaningful traction, and NPD data suggests that GameStop has gained share in the video game market.
GME pays dividend (3.03% yield), it however has no dividend history as it started paying dividend in 2012 and hasn’t increased it since. But we will see how this ends up.
All mess around WMT makes premiums very attractive and I believe that with a proper strategy it is possible to navigate put selling against GME successfully.
STO 1 GME Apr 18 2014 34 put @ 0.81
STO 1 GME Oct 17 2014 36 put @ 3.71
I am expecting my April contract to expire worthless and my October contract to either expire or lose value so I can buy it back. If that won’t happen, I will roll those contracts out and lower.
GLW trade details
Today I decided to close a trade against Corning Inc. (GLW). This trade wasn’t completely worthless, as it traded for 0.14 a contract, so buying it back incurred commission, but I was satisfied with the premium and decided to close the trade in order to open a new one. Instead of waiting until the end of May, I could close it today and collect $101.43 (7.53%) gain (after commissions). I released my maintenance cash and I could open a new trade, this time against Taser Int. (TASR).
BTC 1 GLW May 16 2014 17 put @ 0.14
TASR trade details
By closing GLW trade above I could open another trade against Taser Int. (TASR). Today put options are becoming more expensive as investors are getting nervous and buying more put protections. This demand pushes prices up and it becomes juicy again selling puts. Since we can see weakness in the market and who knows what happens in the next few months I decided to sell a long term contract. If markets start running up again, this contract will lose and I will buy it back. If it won’t run up and we will see a correction, I hope I am giving enough time to my trade to overcome it and gain again when investors become reasonable again.
STO 1 TASR Sep 19 2014 16 put @ 1.60
These trades are making my March 2014 quite successful. Hopefully it will stay that way.
Happy Trading!
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My Stock Rank Picker screener results after 6 months +18.25%
Do you remember the strategy testing I announced a while ago? Circa 6 months ago I finished a work on a screener programmed in Strategy Desk. And I decided to put it in a forward test before I commit my own money.
You can read the article about testing a new strategy here.
I ran a back test and the results were very promising. I would say, the results were so good, that I couldn’t believe them although I ran the back test twice.
So I decided to perform a forward test to see the results in real time and when handled manually by an average investor.
So, how the strategy works?
It is for all non-dividend investors. If you believe in growth stocks, this strategy is for you.
About this strategy
We developed a proprietary ranking system which selects stocks based on their fundamental and technical data. The stocks are then evaluated and a rank is assigned to each of them. Stocks which received 100 points rank are then selected for a purchase.
You will be receiving two type of newsletters. Every week you will receive an accumulation newsletter with the stock recommendations. Twice a year you will receive a re-balancing newsletter.
Accumulation phase
During the accumulation phase you will be buying the recommended stocks. You should buy the stocks in equal amount. For example, if you have $100,000 available to invest, you may decide to invest only $3,000 in each stock. Then you will be purchasing each stock for $3,000 only and not more.
Once you buy a stock, do not buy that stock again even though the next newsletter will recommend it again, unless specifically recommended in that newsletter. You will only purchase stocks you do not own. This is very important to prevent accumulating cash in stocks you already own and having your portfolio imbalanced. If you receive a newsletter with stock recommendation and you already own all of the recommended stocks, you will ignore the entire newsletter and wait for the next one.
Once you are fully invested you stop investing and wait for a re-balancing newsletter.
Rebalancing phase
Every 6th month you will receive a re-balancing newsletter. This newsletter will tell you how to re-balance your portfolio and which stocks to drop from it. Once you sell all recommended stocks you will start accumulating new stocks except those you will continue holding unless specifically mentioned in the newsletter.
You will repeat this process as long as you will become rich.
Today, my account is going to be rebalanced. That means that I am going to sell all stocks, which no longer fit my screener criteria and start accumulating new stocks.
And what is my result? As of today, I achieved 18.25% gain and I am going to lock in those profits.
Check the account here:
Do you want to see what stocks I am adding and dropping from my portfolio? Well, I am giving away a free subscription to a newsletter. If you subscribe, every week you receive an email what stocks I am adding to my portfolio. You can follow my trades and see. It’s free – for now. After my test is done, the subscription will no longer be free, but my early subscribers will be grandfathered.
Give it a try. It is free and you can cancel anytime.
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Is there a room for more tapering?
The Federal Reserve gets a lot of credit for what passes as an economic recovery. Whether it deserves that credit, going forward the Fed has very little power to influence events because it is essentially out of ammo to further ease. The economy, meanwhile, is still lackluster, despite the central bank’s unjustified optimism.
The Fed cast a warm and fuzzy glow in January, when it predicted a pickup in economic growth, which it cited as its rationale for tapering its bond buying campaign, called quantitative easing (QE). And if that acceleration doesn’t happen in the near future?
Don’t worry: Wall Street will just shift its predictions for a growth resurgence to the second half of the year, as it’s done every year since about 2005 — if memory serves correctly. At this time of year, the Street always says that things will get better in the second half.
The revision of fourth-quarter 2013 gross domestic product growth of 2.8% is not enough of a reason to reverse the Fed’s QE policy, which seems to have less and less effect on the real economy, according to the central bank’s own research. The Fed says it will gradually taper its monthly bond buying, most likely ending it altogether late in the year. But the Fed’s new chief,Janet Yellen, adds that it reserves the right to change course and increase the purchases if the economy dips.
If the current first quarter does end up with say, 1.5% GDP growth, the bad weather in much of the nation will be a factor. But the weather effect is still amorphous enough not to reverse course. Once winter fades, there will inevitably be a rebound effect, so the bank may have to wait until the third quarter before it feels comfortable saying anything about the true core rate of growth (although it probably will cut its 2014 forecast by the June meeting).
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New Trade – Taser Int. (TASR) and Realty Income (O) put selling
As soon as I bought back a few of my put contracts (SWY and TASR) I released my maintenance cash and was allowed to open another trades.
I was searching for new candidates for put selling and these days it became difficult to find some which would provide nice and juicy premiums.
It is an evidence of the market being overbought. There are three tools out there I use to watch Mr. Market mood.
The first tool is a Feed & Greed indicator on CNN Money website. See the chart below:
As you can see, the market is in overbought territory and we may expect a correction. And a correction may be violent.
The second tool I usually look at is a CBOE volatility index (VIX) itself. The index reading may be relative and if you want to use it, you have to compare it to its long term average value.
VIX index is considered to have a long term average at 20. From the chart above we can see that the index is below this average, which indicates complacency at the market. You can see two periods of 7 and 6 years when the markets were in this low territory (1990 – 1997; and 2002 – 2008 periods). In 2012 we entered this “low” period again. We may see another 6 years (until 2018) of confidence and growing markets or a correction above 20 average as is seen in 1997 – 2002 period.
A third tool are the options themselves. When investors are confident, complacent about stocks, they tend not to be buying protective puts and their price is going down. And it is our case here. Puts are very cheap and it is difficult to find contracts with nice premiums.
What is in it for you as a dividend investor?
As a dividend investor, you do not have to worry about all this at all if you choose to. It is the beauty of dividend investing as your priorities lay elsewhere – in growing income stream rather than an account balance. Any storms like this won’t be bothering you.
If, however, you are playful, have time to watch your stocks and want to squeeze more money out of your investments, those tools may help you. When the indicators indicate that the whole market is probably oversold, stocks are expensive, it may be a wise move to save cash and do not purchase new shares. Some investors want to wait for their price. During overbought markets you stay aside, save cash, and just cherry pick stocks, which are pressed down by panicking investors.
A great example of such stocks in recent days can be Kinder Morgan Partnership (KMP), Realty Income (O) or Coca-Cola (KO). Investors are selling based on rumors or bearish articles of nationwide media rather than based on fundamentals.
When the whole market collapses you will be able to find even more stocks pushed down by investors rushing to exit. Your saved cash will be a King here.
What is in it for you as an option trader?
It is a lot whole different story if you are an option trader. You want to be watching such indicators or similar. You want to be watching stocks you are trading and you want to be watching the whole market.
Although the whole market is running up and everybody is optimistic, it may be actually quite dangerous to your option trading. With expensive stocks and cheap puts your risk-reward ratio is horribly against you and there is a constant risk of a sudden market drop.
After a market collapses, it is easy to start selling puts as the probability of the market and stocks going up is a lot higher than when the markets and stocks are already way up. Yes, they may continue raising, but they may not. Such reversal may be a hot ground for you.
If the stocks start falling slowly (more like drifting, rather than collapsing) you will be able to manage your portfolio and roll down. If the market collapses and you trade at margin, then Lord be with you.
How you can prevent it? The best prevention would be selling puts against mega-cap dividend paying stocks as they tend to be slow in growth, but also in collapsing. Limit your trades and increase cash reserves (meaning don’t go all in), and select deeper OTM strikes. If you happen to select 10% or even 20% lower strike from underlying price, your chance of getting in the money is lesser. The stock would have to fall 10% or 20% and that is very unlikely with a huge dividend company, unless there is a storm, flash crash or the company goes bankrupt.
A great example of struggling premiums is Realty Income (O). Last August in 2013 I could sell a put contract at 40 strike 6 months ahead and collect 3.21 or $321 premium. Today, the same equivalent contract – September 2014 contract 40 strike will deliver me only 1.55 or $155 premium.
My Trade detail
And this is my case. I try to be all in as long as possible, but these days I have a feeling (yes, I cannot quantify this otherwise) that it is time to increase cash and slow the put selling pace.
I opened new trades and besides rolling I might not open new trades and increase my cash reserves in the near future.
03/04/2014 20:01:34 Sold 1 TASR Apr 19 2014 19.0 Put @ 0.75
03/07/2014 16:34:10 Sold 1 O Jun 21 2014 40.0 Put @ 1.11
I have a few trades “shovel ready” for next term, but will see after March expiration if I go for them or wait.
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Trade exit – Taser Int. (TASR) put option buy-back (14.94% profit)
This is a trade I forgot to report, so, I am doing so now. I had another put selling contract against TASR, which reached $5 or 0.05 per contract on March 4, 2014. Therefore it didn’t make sense waiting for expiration to get this option removed from my account as worthless. By buying back this contract for only 5 dollars, I could release my maintenance cash for next trade and lock in a profit.
And this trade was profitable as I reached 14.94%.
Here is a trade detail:
03/04/2014 19:54:15 Bought 1 TASR Mar 22 2014 15.0 Put @ 0.05
Such trade is commission free because the contract is at or below 0.05 per contract. A great opportunity to close it and release maintenance cash for another trade.
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