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Posted by Martin October 15, 2020
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Cup and handle in making?


As expected, the market topped in a parabolic run-up a few days ago and retreated.

It is possibly creating a cup and handle formation and if completed and correct, we may expect another leg up:
 

S&P 500
 

Cup and handle and all charting is not an exact science. But if we take into account what an ideal cup and handle looks like, or should look like, the market is currently behaving to confirm this pattern.

When we create a cup, the handle should be about 30% of the rally from the bottom of the cup. So, if we agree on the bottom to be at 3230 level (again, not an exact science), and the top of the cup at 3550, then 30% of this rally is 96 points (3550 – 3230 = 320 * 0.30 = 96). Subtract 96 from 3550 and you get 3454 level.

Today, the market dropped to the 3440 level and bounced back up. If this level holds and the market starts going higher, we can conclude that we had a successful cup and handle formation and we would go higher from here.
 




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Posted by Martin October 13, 2020
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Did the market sprint to finish today?


The stock market can be compared to a sprint in athletics. When runners are running they run at a constant speed but as the finish line nears they start adding speed and take their reserves of energy to sprint faster to the finish line.
 

Bullish Twist
 

Yesterday, the market started showing the signs of a sprint. Today, we stalled and we had a 0.61% pullback. Is this a beginning of a bigger pullback or just a blip? I want to think we will see more and I wish we do as I have a few positions which I would like to adjust and a pullback would offer a great opportunity to do so.

But, we would have to wait and see what this market wants to do next.

 

S&P 500
 




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Posted by Martin October 12, 2020
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Another parabolic craziness


The stock market, fuelled by hopes and wishes about more stimulus and more free money poured into the system, is going crazy. And the market loves free money and wants more of it.
 

Bullish Twist
 

As a dividend growth investor, I do not mind this behavior. There are still companies that are undervalued even in this crazy market. These companies do not participate in this crazy rally which is driven by tech stocks only. The rest of the market is churning its way up (or down). For example AT&T (T). In my opinion, this stock is undervalued and offering a nice potential return of 60.7% (23.80% annualized) with a growth of 43%. The rest is dividends.
 

ATT stock analysis
 

Will it happen? I hope so. But it may not. In this case, I use the position monetization to make money selling options around the position and lower my cost basis. If I lower my cost basis low enough, any fluctuations of the stock do not matter anymore. And at some point in the future, most of the stocks reach a level where the gains are irreversible.
 

And this market is on it again. Rallying hard killing all bears on the way. But this rally is once again a parabola in making. The 10% correction we saw a few weeks ago was nice and healthy. The recovery from it is horrible and stinky.
 

ATT stock analysis
 

What can we expect?

1) We are creating a cup and handle and we may see a pullback before we continue higher.
2) This is a crazy, parabolic move, and we will create a double top and crash again. However, double tops are rare events unlike the popular belief in them.
3) The craziness will continue, the market smashes through the previous highs and keep going higher.

I do not want to predict any of the outcomes. I have no clue what this market is going to do next. My feeling is that we will pullback again. But how much and how deep? I do not know.




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Posted by Martin October 07, 2020
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Why do so many people selling puts fail?


Maybe, you are one of the people who got excited and started selling put contracts against stocks or even dividend stocks and failed.

I was there too. I was selling as a hell. I was selling puts a lot. And I failed too. Many times. I lost tons of money selling puts. Then the puts got in the money, I couldn’t roll them, got assigned, and I didn’t have money in my account to handle the assignment. I had to close the position at a loss.

Why do so many people fail?

The problem is in overdoing this type of trading. Many people sell too many puts beyond the ability of their accounts to handle it. If, for example, your account is a $5,000 net liquidation value and you sell put options worth $30,000 of net liquidation value (yes, it is possible with a margin account), then you are in trouble. And you are irresponsible and have no place in the stocks market.

Solution?

Sell only so many puts that if you get assigned, you can hold the position.

But, if you are impatient as I am, what can you do to ensure that you do not over-trade your account? Also, believe me, it is very easy to get overboard when in a margin account. I set aside the money I need for the assignment. In the past, I found this rule horrible and ridiculous. Why would I let free money sitting in an account doing nothing? I can invest them and make more money! Yes, you can. But then you are doomed over-trading your account.

In a margin account, I found it easier to set aside money in a margin account than in a cash account. In a cash account, the broker actually does it for you and if you have a small account, it will take years of savings for you to be able to start trading options due to extensive capital requirements. In a margin account, you only need 50% to set aside (of course, it fluctuates but we can discuss this in another post).

So, let’s say, you want to start selling put options against Coca-cola (KO) which trades for $49.56 a share. To buy (or be assigned) in a cash account, you would need $4,956.00 to cover the assignment. In a margin account, you would only need $2,478 cash to cover the assignment. Save that money aside and you can trade puts against KO without fear of being assigned and not having enough cash to cover that assignment. And, I found a way of saving that cash in my account and be comfortable with it.




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Posted by Martin October 06, 2020
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Where Do You Keep Your Money In The Current Low Interest Environment?


I mentioned this topic in my previous post. But since then I developed this “cash storing” a bit beyond the original post.

In the older post, I mentioned that I was buying a short-term bond ETF which was able to keep the value consistently over time. Even during the 2020 stock market slump, it dropped only 4% while the entire market dropped almost 40%. And, it recovered fast.

On top of this feature of preserving value, it pays a nice dividend, yielding about 2% (or slightly more). Definitely, a lot better than the current high yield interest savings accounts pay. Why saving money in a savings account that pays you barely 0.80% annual interest, when you can use this ETF and get 2.20%?

However, I did a bit more search to find what other similar ETFs are there available. I found an article on Seeking Alpha providing me with a better insight into this type of savings.

And that led me to create a savings plan and abandoning savings accounts:
 

SPY LEAPS trade
 

Is saving in this type of investment safe compared to a savings account?

If you believe that the stock market is flawed and everything, even bonds, and Treasuries, are doomed to an irreversible crash, then stay with a bank and their products when they borrow money from you, pay you 0.80% annual interest rate, and then charge you 16% annual rate on credit cards or other types of loans (if you qualify in the first place). Just make sure, these same banks survive that irreversible market crash.

I personally believe that these types of ETFs are relatively safe. Just look at the long term chart of those ETFs. The price fluctuations over time are minimal and well offset by the dividend.




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Posted by Martin October 05, 2020
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#004 Trades opened today


We have added a few more trades today to our accounts:
 

Bought 1 SPY Jan20 2023 (LEAPS) 335 call for -44.30 debit
Sold 1 SPY Oct 9 (weekly) 348 call for +0.42 credit
 

We completed our goal in our account and saved enough buying power to buy LEAPS against the SPY index (3 years expiration). The premise of this trade is that in three years, I expect this market to be higher, a lot higher, even with corrections and bumps on the road (possibly we get at $400 or higher in the next three years). If that happens, our LEAPS call will be worth $90.9 per share, which means we would more than double our money. Our investment would go from $4,430 to $9,090.

But, we will not sit tight on this trade, we will also start selling covered calls against this trade. We sold our first weekly covered call and collected $42 credit. At current prices, we can collect around $40 per week or $120 per month. If we happen to collect that amount, during the lifespan of our LEAPS, we should collect an additional $7,900 in premiums in the next three years. Our total profit would then be $12,560 in three years or 283%.
 

SPY LEAPS trade
 

Roll 1 IWM Oct 30 (weekly) 153 call to Nov 6 (weekly) 154 call for +0.63 credit
 

Markets continue higher in a strong rally which made our IWM covered call in the money. We decided to roll the trade higher and away in time. However, we rolled an in the money call to in the money call. We will be slowly rolling higher and tracing the market until the call gets out of the money.
 

IWM roll
 

Bought 4 T shares @ 28.66
 

Roll 1 PPL Nov 20 (monthly) 28 call to Jan 15 (monthly) 28 call for +0.42 credit

Our poor man’s covered call is not working as wanted, so we rolled our short call to January expiration, making our PMCC trade a regular vertical call spread. In January, we plan on converting this trade to short put trade.

 

PPL roll
 

Roll 1 BAC Oct 9 (weekly) 24.5 call to Oct 16 (monthly) 25 call for +0.11 credit

Our covered call with 24.50 strike got in the money and we only had 4 days to expiration. We do not want to give up our shares so we decided to roll the trade higher and one week away. We collected a small credit.

 

BAC roll
 

 

You can see all our trades on Trades & Income page.




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Posted by Martin October 05, 2020
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Stocks to accumulate in October 2020


Our September accumulation was a great success. We have reached 100 shares accumulating a few of the positions such as PPL, PBCT, and now we will be accumulating more shares of other companies such as AT&T (T), Altria (MO), or Tyson Foods (TSN).

There are still good companies which are undervalued even in this overvalued market. It takes time to find them but once you know which companies to look for, it will pay off, in the long run, to be buying them.

Most of the stocks are dividend aristocrats. Some lost the status many years ago yet I decided to keep them, others lost the status this year due to COVID, and I decided to keep them too as I still think they are good companies, e.g. Disney (DIS) and the dividend cut or suspension is temporary.
 

S&P 500 heat map
 




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Posted by Martin October 01, 2020
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#003 Trades opened today


We have added a few more trades today to our accounts:
 

Sold 1 PPL Nov20 30 call for +0.22 credit
Bought 1 T shares @ 28.50
Bought 1 ICSH shares @ 50.55
Sold 1 TSN Oct16 63.5 call for +0.25 credit
Bought 1 T shares @ 28.52
 

Since we have reached 100 shares, we can start selling covered calls to generate income. We sold November 20 (monthly) covered call with 30 strike price.

We are now accumulating shares of AT&T (T) in account #1. We used credit (+ some cash) from PPL covered call and reinvested that credit to one share of T. After we reach 100 shares, we will start selling covered calls too.

We sold 1 naked call against TSN converting our existing put trade into a strangle. This trade is uncovered so it poses a high risk and thus needs to be monitored. We expect, however, that both legs (put and call) of this trade expire worthless at expiration day.

We used the credit received and bought another share of AT&T (T).

Today's trades
 

You can see all our trades on Trades & Income page.




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Posted by Martin September 30, 2020
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#002 Trades opened today


We have added a few more trades today to our accounts:
 

Bought 10 PPL shares @ 27.08
Roll 1 IWM Oct9 150 call to Oct23 152.50 call for 0.21 credit
 

We bought 10 more shares of PPL reaching our goal of 100 shares in our account #1. Now we will start accumulating AT&T (T) shares in this account and selling covered strangles against PPL.

We rolled our IWM trade higher as the market had large swings – the futures were almost 0.90% down, then we swung up to +1.70% and collapsed back to +0.22%… big intraday swings. It ultimately helped our IWM and we could stay in the trade without rolling but no one could know what the market would do next. So we rolled to be safe.

IWM trade
 

Bought 10 PBCT shares @ 10.34
Sold 1 PPL Nov20 30 call for 0.15 credit

We also added 10 more shares of PBCT stock to our holdings in our account #4 reaching 100 shares too. We can start selling covered strangles in this account too. We will now continue accumulating a PPL stock.

We also added a call to our PPL holding in account #4.

IWM trade

 




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Posted by Martin September 28, 2020
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#001 More trades opened today


We have added a few more trades today to our accounts:
 

Roll 1 IWM Sep30 148 call to Oct9 150 call for 0.53 credit
With the market renewed rally, we had to roll our IWM trade once again. We rolled it into the next week’s expiration and 150 strike. With the rally, we may need to roll this trade again tomorrow.
IWM trade
 

Bought 10 PBCT shares @ 10.17
We added new shares to our account #2 and now hold 31 shares total in this account. Our goal is to reach 100 shares so we can monetize the position by selling options around it.
 

Bought 30 PBCT shares @ 10.20
Sold 1 BAC Oct9 (weekly) 24.50 call for +0.33 credit
We added few more shares of PBCT stock in our account #4, we now hold 80 shares of this stock and our goal is to reach 100 shares so we can start selling covered calls, or covered strangles.

We also had our BAC covered call expired last Friday and therefore we sold a new covered call today for additional 0.33 credit (or $33 total credit).
 




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