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Netflix will be a part of your cable service. Will it hurt Comcast?


As I hold a position in Comcast (CMCSA) I typically tend to monitor what’s going on around those stocks and how that activity may affect my position. Comcast has a lot cooking under the hood which I deem to be a good reason for holding this stock.

There is a merger with Time Warner Cable (TWC) on the horizon which is on hold for now, but it will move one way or the other soon. Many people consider it a bad thing and try to stop the merger, but that may actually be a good thing for customers and Comcast. If you ask me why I think so, then my answer would be because they will be combining together all features from both companies – bad and good ones. Then they will be able to get rid of those bad features and keep the good ones. They will have enough strength to afford such clean up.

While people are still occupied by the merger with TWC Netflix (NFLX) came with a proposal to partner with its rivals. How can a strong competitor of companies like Comcast (CMCSA), Amazon (AMZN), Dish Network, Direct TV, Apple TV, AT&T, and others become a partner? How would Netflix benefit from it and will this hurt my position in Comcast?

Comcast Netflix

The biggest benefit from this partnership I see is that now even cable companies will be able to offer Netflix in their network. That would be a great benefit for Netflix as they would gain more channels to stream their content. But even bigger benefit I see with cable companies as they will gain access to the content of TV shows and movies they normally do not provide. This may attract more viewers to their service.

In the recent trend of people slowly shifting from cable to internet streaming of the TV content, this move would be a very smart one from your cable provider. That would help them to retain their service in families which were thinking abandoning the cable and provide even better on demand content.

And of course there will be a bunch of people who would consider this a bad thing monopolizing the world of TV content, yet they will benefit from it at the end.

So what does that do to Netflix and Comcast for example?

As far as Netflix goes, this partnership would be a great growth catalyst for the company. According to the Wall Street Journal Netflix added just 980,000 new subscribers in the 3rd quarter of 2014 compared to 1.33 million new subscribers in Q3 of 2014. That is a severe slowdown in growth for a company with an exceptionally high valuation because of its high rate of growth. A Partnership with at least one cable provider would significantly increase Netflix’s viewer base and bring on more revenue.

Super 8 Film to DVD
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Netflix has around 50 million subscribers. Let’s say that 50% of them are already Comcast subscribers. If Comcast jumps in, they may add another 25 million of new subscribers to their network. On the other hand Netflix would gain another 75 million of subscribers if all above mentioned networks jump in.

From my point of view as an investor it is a great deal for both companies. As a costumer I like the idea as I may get into another great content. The question of course is how that new content will be incorporated in the cable company’s fee structure.

And those who murmur about this deal? Get over it. It is a better deal for everybody.

My outlook for Comcast hasn’t changed amid the recent selling. I am still bullish and keep holding my position in Comcast. Note that I do not hold stocks, but bullish call spread. The only reason I would be selling my spread would be to release cash and take smaller gain than originally planned. But if that happens I will announce it and explain my reasons for it. If the market rebound from current selling, then there will be no reason to liquidate my position early.

What do you think about this deal?

 




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Posted by Guest December 29, 2014
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Experts, Publications Or Algorithms? Who To Turn To For Stock Picks


Everybody wants to have only the best stocks in their portfolio. This need leads us to the question – Who to turn to for stock picks? While you can very well pick your own stocks, reaching out to experts, publications or using algorithms to arrive at the perfect stock is a more sure shot approach. Let’s take a look at how they help you pick stocks.

Expert’s Advice

 
Advice
 

An expert is anyone with a comprehensive knowledge of a subject matter. It is true that when you enter the stock market you do tons of research and gain sufficient market expertise. But, there lies a huge difference. While as a regular trader, you might possess knowledge of the first layer of a stock market and companies, stock experts have detailed knowledge of the trends of the industry, market, and the company. They are privy to insider knowledge, which people like us might not possess.

How Expert’s Help?

There are experts, and then there’s the rest of us. However, many believe that stock picking experts are poorer at predictions than dart-throwing monkeys. While that certainly isn’t true, these experts do make wrong judgements at times. They’re humans too after all. So how do you rely on them? First thing’s first- too many cooks spoil the broth. Don’t bank on the advice of 5 different experts, otherwise you’ll just end up with a chaotic portfolio. Identify a reliable financial expert and conduct your own round of research on the stock advised. This way you’re not blindly going by the word of the expert, but using your judgement too.

Should I Take The Word Of Publications?

 
Publications
 

Publications from Standard & Poor, Morningstar, Value Line Investment Survey, Amigobulls and Investor’s Business Daily help spread vast amount of knowledge. These publications provide important information related to the company’s financials and its general business. Keeping up with these publications can definitely help you assess stocks of various companies and also predict its future direction, to an extent. Extensive reports like the 10-K, 8-K, Cashflow, Balance Sheet, and Earnings report can be obtained via these publications. You can always bank on these to identify an opportunity since they reflect the true financial data of a company.

Can Computers and Math Be The Answer?

Many people look up companies that are making news, study recent stock trends, and analyze favorable media presence to invest in a stock, hoping it would go higher. Then there are those who buy stocks of companies that make products they like. And then there are those cool-head know it all accounting ones, who take the tried and tested fundamental and technical approach. Who’s to say their approach is wrong? But, there’s another way to pick stocks. A more analytical and more technical method – The Algorithm Method.

What Is This Method?

 
Forecast
The table on the left is the stock forecast. The green box represents a positive forecast and the red represents a negative forecast. The table on the right represents comparison between the actual stock performance and the algorithm prediction.
 

In this method computers, math, and a set of algorithm rules are used to pick the best stocks. These algorithms detect the movement or the waves in the market and predict future movement. The algorithm is fed with input from various stock related sources. Contrary to popular belief, stock picking algorithms are not random predictions. You need to patiently follow stock fundamentals, price moves, news, company reports, management changes, industry growth, economy, and politics.

The Verdict:

In all honesty, there’s no one particular method that can stand out as a clear winner. Most of the stock picking strategies are connected by the hip. Stock picking is much like an art form, it requires the use of a combination of techniques to reflect a perfect result. Blindly taking an expert’s advice would be foolish, but completely ignoring it would be even worse. Publications are sources of knowledge, not the bible of stocks. Use them wisely to arrive at a decision. And finally, algorithms don’t have a mind of their own, so they obviously can’t be trusted completely. But, it can be used as a tool to focus and forecast fruitful opportunities.

References:
http://www.theatlantic.com/business/archive/2014/10/do-financial-experts-make-better-decisions-than-the-rest-of-us/381902/
http://www.mymoneydesign.com/personal-finance-2/stocks/experts-find-good-stocks-9-month/
http://www.altaassociates.com/expert-advice
http://seekingalpha.com/article/960271-stock-picking-by-algorithms?page=2

Image References:
http://iknowfirst.com/stock-picking-by-using-algorithms-7-62-average-return-in-7-days
http://geek4eva.com/2009/09/14/guidance-on-avoiding-redundancy/
http://energy.gov/eere/services/publications




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Which stocks to buy in 2015?

Which stocks to buy in 2015?

I trade mostly dividend paying stocks, but watch a few companies which I consider good companies although they do not pay dividends. These I use in my portfolio as growth play stocks (for example a few months ago I did buy Alibaba (BABA) for this same reason).

In my watch list I have approx. 100 stocks I watch. Some I trade actively, some I only invest in. For example in my ROTH IRA I only invest into stocks, I do not trade. But in my TD Account I trade stocks and options, but use those exact same stocks as underlying symbol for my trades.

Among the stocks I have in my watch list I try to find those, which are currently undervalued. I use the difference between current P/E, current EPS, EPS estimates, and current price. A formula I created tells me what stock has a bigger potential for growth compared to its current pricing at the market.

The result of my screener for an undervalued stock means, that there is a significant chance that investors are not investing in those companies yet, but potentially will in the future and drive the price of the stock higher. That would be the best time to sell them the stock you purchased at the time you spot it as undervalued.

Here is a list the stocks I believe will become winners in the next year of 2015. Let’s take a look at them.

Agrium Inc. (AGU)

Agrium is in Basic materials sector but in Agricultural chemicals industry. It is not thus beaten down that much as precious metals for example. It produces, retails, and distributes the crop nutrients, crop protection products, seeds, and agronomics primarily in North America, South America, Europe, and Australia. The company operates through two segments, Retail and Wholesale. The Retail segment supplies crop protection products, such as herbicide, fungicide, insecticide, and adjuvant products; crop nutrients, including dry and liquid nitrogen, phosphate, potash, sulfur, and micronutrients; seeds; and merchandise comprising fencing, feed supplements, livestock-related animal health products, irrigation equipment, and other products.

Agrium is a dividend paying company but it is not a true dividend growth stock. It was founded in 1931 but it paid dividends only since 1993 and increased dividends in only two consecutive years.

At its current price $95.91 a share it yields 3.30% dividend yield. Its dividend growth of 160.55% is impressive, but it is hard to say whether sustainable or not. I would say, it is not and as the dividend payment plan of the company matures over time, it will decline to a more standard level.

Morningstar provides a fair value at $96 a share with a very high uncertainty and a target to sell at $148.8 a share. My own calculated fair value is at $164.83 a share.

With that said, I would consider this stock a growth play rather than a dividend growth investment. If you buy at the current price and hold until it reaches $148.80 a share, you will collect a nice 55.14% profit and in the meantime you will be collecting a nice dividend. If you play this stock, I would use a stop loss at $86.32 a share. But, be also prepared for a long holding period as it may take quite a long time to get to the target price.

 
AGU
 

In my TD account I am taking this trade as an option play selling a credit put spread expecting this stock to stay above $90 a share at expiration. In my ROTH IRA account I am currently fully invested, thus I have to skip this opportunity.
 

BreitBurn Energy (BBEP)

BreitBurn Energy, as its name provides, is an energy stock and it was beaten hard in the last days. Many analysts predict that price of oil will stay down until 2016 and that the oil crisis is worse than ever and similar to 80s or as in 1997 – 1999, 2001 – 2002, or 2008 – 2009. It could be. But as of now, the stock got so beaten in price that it pushed its dividend yield to levels never seen before. It now yields a staggering 21%. The company pays dividends (distribution, since it is a partnership) since 2007 and it has been increasing dividends in 4 consecutive years by average 7.64%, which is not a bad rate.

The old adage says, when there is blood on the street be buying. I believe that this is an opportunity. Investors are panicking and selling energy stocks. Buy them. I bought Legacy Reserves (LGCY) for this same particular reason. Although everybody shouts sell, sell, sell, I would buy this stock. But it will be a long run and there is a risk involved. If the oil price war continues well beyond 2016, the portfolio hedging of BBEP (as well as LGCY) would be depleted and the company may cut its dividends. Even if that happens, however, it still will be at around 10% range rate and while waiting for price recovery (to get back to 20s) you will be collecting nice dividends. When the stock returns to 20s, which may take up to two years or more, you will see a nice capital gain too.

Saudi Arabia claims that they wouldn’t cut production of oil which sent prices lower. But with their current 17% budget shortfall, they too will not be able to sustain this war for prolonged period of time as their economy is fully dependent on oil. If they start pushing oil price back up, companies involved in oil will go up again (as they did many times in the past).

 
BBEP
 

If buying this stock, be prepared for nice profits, but accept increased risk. The risk is in dividend cuts and further price fall. Nobody knows how low oil and the price of this stock can go. I believe this will be a winner at some point, but it will take some time, even two or more years. I would also consider this trade as a growth play, rather than a dividend growth holding.

Baidu, Inc. (BIDU)

Baidu is not a dividend paying stock whatsoever, but the recent sell off from $250 to $225 sent the stock to undervalued territory. Some investors may not agree with me, but its growth rate is more aggressive than its current valuation. Its price to growth rate is very low making this stock an attractive growth play. Baidu’s growth rate is at 37% which is more than any other stocks in my watch list. There are only a few competitors competing with this growth rate such as Netflix (NFLX), Mosaic (MOS), Alibaba (BABA), Go Pro (GPRO), and some others (some listed below). All those stocks are in a category of young companies with a huge potential for growth, while mature companies (such as AAPL) are slowing down.

 
BIDU
 

Morningstar considers a selling price for this stock to be at $341 a share although their fair value is at $220 a share. I would be satisfied with $280 a share where I would sell this stock.

GameStop (GME)

GameStop is my favorite stock. I was able to make good profits with this stock in the past. A recent sell off of this stock, mostly based on fear and panic that they won’t be able to survive online shopping of the games and a new competition such as Walmart (WMT) entering into used games business, sent this stock again into undervalued territory.

Game stop is a dividend company, although it is not a true dividend growth stock. It yields 4% at its current price and it increased dividend once since 2012 when it started paying dividends.

 
GME
 

GME still may continue falling, however, there is a strong support at $30 a share. If the stock holds this level, we may see it marching back up towards my calculated fair value at $47.2 a share. Buying and holding this stock would be a growth play rather than dividend investment, but during waiting time for the stock to grow, you would collect a nice dividend. I also may use this stock for my options plays opening a credit bull put spread with around 30 strike.

Mosaic Company (MOS)

Mosaic is in the same category as Potash Corp. of Saskatchewan, Inc. (POT) producing and marketing concentrated phosphate and potash crop nutrients for the agriculture industry worldwide. Mosaic is a dividend company currently yielding 2.20%, but it only increased dividends for 2 consecutive years since 2008 when it started paying dividends. Also the dividend growth rate is quite low (only around 2%). That would make this stock a growth play too.

 
MOS
 

This stock’s growth may be a bit tricky when looking at the long term chart. Morningstar considers this stock’s fair value to be at $56 a share which would deliver 20% capital gain if it gets to that level. That would be my selling point although Morningstar recommends a selling price to be $86 a share. While waiting for this stock to grow, you would be collecting an acceptable dividend. There is a nice potential potash contract waiting in India and China and if that happens (expected early in 2015) that can lead to increased potash prices and Mosaic would benefit from it greatly.

Micron Technology (MU)

Micron Technology, Inc., provides semiconductor solutions worldwide. The company manufactures and markets dynamic random access memory (DRAM), NAND flash, and NOR flash memory products; and packaging solutions and semiconductor systems. It doesn’t pay dividends and therefore this would be a growth play. The stock recently ran up in 2014 due to expectation of more massive use of NAND – solid state drives (or SSDs) which could soon replace traditional hard drives. Although it will surely happen unless something better shows up on the scene, the price of SSDs is still prohibitive.

The target price for this stock is at $43.75 a share. At current price $34.91 a share this trade could provide a nice 25% profit.

 
MU
 

But there is a danger that the stock will exhaust its run up (as the volume is declining with the new highs), so I would play this trade with a stop loss at around $31.40 a share.

Old Republic (ORI)

Old Republic (ORI) is a dividend growth stock with 7 years of consecutive dividend increases. It is engaged in underwriting insurance products primarily in the United States and Canada. The company’s General Insurance Group segment offers automobile extended warranty, aviation, commercial automobile, commercial multi-peril, general liability, home warranty, inland marine, travel accident, and workers’ compensation insurance products; and financial indemnity products for specialty coverages, including errors and omissions/directors and officers, fidelity, guaranteed asset protection, and surety.

 
ORI
 

It currently yields a nice 5% dividend yield, but its dividend growth is only 1.43%. Recent sell off in August and October this year sent the stock to $14.59 a share. Yet this price is still below resistance at $15 a share and well below $17 a share of two year max price. I would also consider this stock as a growth play, but it will be okay to add this stock to a dividend growth portfolio too since the stock shows nice disproportion between the EPS growth and stock valuation. Therefore there is still a good potential to catch some capital gains while collecting high dividend in the meantime.

My expected sell target would be at $21.98 a share unless you decide to keep this stock longer or forever to collect dividends.

Qihoo 360 Technology (QIHU)

Qihoo 360 Technology provides Internet and mobile security products and services in the People’s Republic of China. Its core Internet security products include 360 Safe Guard, a solution for Internet security and system optimization; 360 Anti-Virus, an anti-virus application that uses multiple scan engines to protect users’ computers against various kinds of malware, as well as 360 Mobile Safe, a security program for the Google Android, Apple iOS, and Windows smartphone operating systems.

Qihoo is undervalued compared to its growth rate and makes it a good growth play as it doesn’t pay dividends. It, however, fell thru its long term support at $75 a share completing a head and shoulders pattern. Now it is marching towards $25 support. And it may get there.

 
QIHU
 

I recently played this stock on the downside and made money. There is unfortunately nothing to be seen what can stop this stock from further fall. Although this stock is now undervalued when comparing its price valuation vs. EPS growth rate, it still doesn’t mean the stock will rise again. If you decide to play this stock, I would do so with a tight stop loss and get out of this stock at $75 a share (target) or move the stop loss higher with the stock.

Amid the price fall QIHU has been under heavy accumulation since October 2014 and that may continue well in 2015 as China will stabilize their economy and the rest of the world will move its attention somewhere else. Their government has been encouraging the Chinese people to enter the equities market. Like the US during the boom, China wants to prove to the world that their system works. They know that in order to do so they have to be economically sound and financially seen as superior.

Tallgrass Energy (TEP)

It would be surprising if there wouldn’t be any other energy stock which wouldn’t show up as undervalued on my radar. Originally, I thought almost all energy stocks would be undervalued, but it doesn’t seem to be true – yet.

Tallgrass Energy (TEP) is one of the stocks which shows symptoms of discrepancy between price valuation and its growth rate. As is typical for partnership, this stock pays nice dividend and yields 4.30% at its current price at $42.75 a share. Surprisingly this stock wasn’t beaten down too much during the energy stocks sell off and so far it recovered quickly:

 
TEP
 

If purchasing this stock I would purchase it at this level as a growth play and sell $50 a share collecting dividend while waiting. Since the stock recovered nicely from recent sell offs while oil prices are still down, we may expect that the stock would grow fast with the oil recovery. Then we may capture nice capital gain and dividends.

Vipshop Holdings (VIPS)

I have this stock in my watch list for my options trading. VIPS doesn’t pay dividends, so it is a pure growth play.

Vipshop Holdings Limited, through its subsidiaries, operates as an online discount retailer for various brands in the People’s Republic of China. It offers a range of branded products, including apparel for women, men, and children; fashion goods; cosmetics; home goods and other lifestyle products; footwear; sportswear and sporting goods; luxury goods; and gifts and miscellaneous products. The company provides its branded products through its vipshop.com and vip.com websites, as well as its cellular phone application.

 
VIPS
 

The stock may see a growth back to around $25 a share (after split) where I would sell realizing a nice 25% profit. However, the stock may continue its fall down to $17 a share support and if it breaks it, it can fall all the way down to $15 a share. Therefore I would trade this with a tight stop loss or wait how this stock moves in a couple of few days in January 2015. The entry point into a position in this stock isn’t clear. For this reason I would use a contingency order placing a buy order above previous day high so I would buy this stock only on its way up.

YY Inc. (YY)

This is my last stock in my watch list which is shown as undervalued. Why Why company operates an online social platform in the People’s Republic of China. The company engages users in real-time online group activities through voice, video, and text on personal computers and mobile devices; and enables users to create and organize groups of various sizes to discover and participate in a range of activities, including online games, music activities, education, live game broadcasting, and conference calls.

It doesn’t pay dividends and therefore I would consider this stock again as a growth play only. The stock recently bounced from $60 support. If it doesn’t hold, the next stop is at $50 a share. But the stock seems to be holding and marching back up. If we add its valuation vs. growth rate into an equation, we may see this stock marching up to $70 or even to $80 a share.

 
YY
 

These were the stocks which seem to be undervalued when taking into account their current price, EPS, P/E, and EPS estimates. Of course, as anything in the stock market, this doesn’t guarantee that those stocks will grow and make you money. I however see high chances of doing so. If trading those stocks which are not dividend growth stocks I would trade them with a stop loss, but those which pay and grow their dividend I would consider not using a stop loss at all and potentially keep them.
I take these stocks a good opportunity for 2015 investment.

Which of the stocks you would buy for the 2015 year?

Disclosure: I hold bull put spread against AGU (long). I do not have any positions in other stocks mentioned above. I may open new stock positions in my ROTH IRA or options positions in TD account against the stocks mentioned above. If I will be opening a new position I will post it on this blog.
 
 




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Posted by Martin December 25, 2014
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MERRY CHRISTMAS


Merry Christmas

I thank you all my readers for visiting my blog, reading, and commenting. I hope you were able to get a few trade ideas on my blog during the last year. I mostly had many interesting trades, although I also had a few losing trades this year, too.

Last year we were able to make 154.43% profit. This year was tricky and many violent moves in the market created some severe losses. Until September 2014 our portfolio was up 113.47%, but later we gave those profits back. We will be closing 2014 year up only 15%. It is not a bad result, but it could be a lot better. I had bigger expectations.

But that’s a part of this job. If you want to trade in the market, you must be ready to learn and be ready for losing trades too. They will happen, but the goal is to have more winning trades than losing trades, trade carefully, and do not over extend your account.

I definitely learned my lessons this year and I hope that the next year will be even better and prosperous than the old one.

In the meantime I wish you a Merry Christmas!




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Posted by Martin December 17, 2014
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New purchase – Legacy Reserves LP (LGCY) MLP with 17.80% dividend yield (ROTH IRA)

New purchase - Legacy Reserves LP (LGCY) MLP with 17.80% dividend yield (ROTH IRA)

A recent sell off of energy stocks provided excellent opportunity to add a few good dividend stocks to investors’ portfolios for great prices which may not repeat again. Well, I wouldn’t say that they wouldn’t repeat again as the opportunity of purchasing Legacy Reserves for this great price actually repeated again.

I had a few candidates to buy and couldn’t make a decision but then I decided to go with Legacy Reserves (LGCY) Company. I purchased this stock some time ago in my TD account and now I am adding this stock into my ROTH IRA account too. When I was buying this stock a year ago the stock was trading at $27.10 a share and offered a nice yield of 8.55% at 12.10% growth.

Today, the stock is selling for $12.50 a share and the yield skyrocketed to 17.80%. And it is all because of oil and natural gas sell off we saw recently. There are some concerns about the ability of the company to sustain its operations and mainly its distribution level if the prices of oil stay this low for longer period of time.

I don’t believe energy cost will stay this low for a long time. It has never stayed that low in history. In 2008 oil prices fell from 140 per barrel to below 40 a barrel. The fall took almost the whole 2008 year time period, but in 2009 we saw a recovery to 110 a barrel. During that period of time Legacy was able to sustain its dividend policy (unlike some others).
 

WTI Oil

 

Today, we are approaching those same levels as in 2008. Oil is close to $50 a barrel, but if you take a look at RSI, we are in an oversold territory, deeper than the one in 1986. Will this mean that we are seeing a bottom? Maybe, maybe not. Nobody knows. But I would say we may see a recovery. It may be a slow one, but recovery.

The reason why I see this as a chance for recovery is the magnitude of the oil price fall. When the decline was more like sequential, step by step, then the recovery was slow too. Whenever the oil fell like a rock, the recovery was faster. I hope that this pattern will repeat.

Even if not and a recovery will be slow and painful, I believe that LGCY management will be able to react to it and adjust their portfolio and hedging accordingly.

The stock of LGCY fell down hard along with oil prices and it was selling a bit over $10 a share. I wanted to buy at that point, but I didn’t have cash available.

LGCY
Source Yahoo

I use a strategy of saving free cash in a commission free ETF (in this case I use RWX fund). Every penny I save, every dividend I receive, I save in RWX by buying even one share of this fund. It is free with no commission. After I save $1200 I then sell shares of RWX worth of $1000 and use that money to buy a dividend paying stock. While saving and waiting for my minimum amount for a new purchase, I collect dividends from RWX.

There is however a limitation with this commission free ETF. You must hold for 30 days before you can sell shares. If you sell before, you will be charged a penalty and commissions.

Today, I cleared this limit and was able to sell shares of RWX to release cash to buy LGCY stock.

If Legacy will do what it did in 2009 then I should see a great capital gain and collecting nice dividend in the meantime.

Stock detail

Total shares holding after the purchase: 81
Estimated annual dividend: $197.64
Consecutive Dividend Increase: 3 years
Dividend yield today: 17.80%
Dividend 5yr Growth: 2.96%
Dividend paid since: 2007

I was thinking purchasing CVX, but later decided to go with LGCY. What do you think, was is better to buy CVX instead or is LGCY a good purchase?

Happy Trading & Investing!
 
 




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Posted by Martin December 10, 2014
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Defending Iron Condor


The good news is, that with Iron Condor you can be wrong only once, not on both sides. But when one or the other leg goes bad what would you do to defend your position?

Defending Iron Condor is the same as defending any credit spread, be it put or call spread.

I opened an Iron Condor against SPX 2105/2110/2045/2040 last week and collected $70 premium. I could see the stock market being weak so I skewed my trade towards downtrend and opened it with more room to the downside.

It didn’t help much as on Monday the stocks got hit hard thanks to energy stocks. It was in the morning when I didn’t know that SPX would recover by the end of the day.

So I decided to roll the put side. I chose to keep expiration day the same, but lowered the strikes.

I rolled my put side from 2045/2040 to lower 2035/2030 strikes. To collect credit I had to buy back my one contract and sell two new contracts increasing my risk. I rolled the trade and collected additional $30 premium.

Why I did it? I hoped that by lowering the strikes the trade could still stay safe and still expire worthless for a full profit. Therefore I accepted a higher risk for the remaining three days of this trade.

Yesterday and today the SPX continued in a sharp decline. Surprisingly, on Tuesday the market recovered all day losses, but today SPX reclaimed them and fell even lower attacking my new 2035 strike.

What to do in such situation?

There are only a few options since the trade is so close to expiration:
 

  1. Close it and take the loss
  2. Roll it further away in time but same strikes for credit
  3. Roll it further away in time and try to lower strikes, but only if you get a credit, or small (really small) debit

 

I am not going for a loss! That is not an option for me. So what can I do here?

I will try to roll it away in time and lower the strikes. If I won’t be able to roll it away and lower the strikes, then I will roll it in time only.

By rolling it I am “buying” more time for the market to recover back above the current strikes allowing it to expire worthless for a profit. That means that I am still bullish on SPX and that the market would go up.

If I am wrong and this is a beginning of a deep market decline, then I would have to take a loss and close the trade. However, I do not think that we are in such bad shape that markets would slump deep down and stay there.

Then the question is, how far away and when to roll? How much time would this market need to recover potential losses?

The last decline lasted almost a whole month. If we are about to see the same decline this time again, I would need at least a month to recover.

Thus I tend to roll into the next month expiration, which would be January 9th and give the market a whole month. After that we will see what would happen next.

When to roll? If the market continues down in a frenzy sell off, then there may be nothing to be done and the roll may be out of question. It would be better to close the trade. I will wait until Friday and see where the market will be to decide whether to roll or close for a loss.

Happy Trading!
 
 




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How to create bullish option spread?


Jerry, my newsletter subscriber, asked me the following question: I like (The Walt Disney Company) DIS long term, say out to 2016. How do I set up a bull spread on it?”

I liked his idea and the company, so I decided to post my answer how I would set up a bullish spread against this company and make money. The Disney Company pays dividends (1.20% yield) and if you do not have enough money invested in this company, spreads can help you to receive even more money for less, which you can invest back into this company and buy more shares.

And you can do it with even less risk than owning the stock!

So how do you create a spread?

It depends on your outlook and what you expect from DIS over time. First, you need to find out what spread you want – debit spread or credit spread?

How to create a debit spread?

If you want to go with a debit spread, for such a long outlook or time span of the trade we need to estimate where the stock can get by, let’s say, January 2016. If we project the trend until 2016 we can see that the stock may reach a level around $110 if it continues in the current trend and growth. See picture bellow:

Disney (DIS)

Click on the picture above to enlarge it

However, we want to be slightly conservative and select trend slope not that steep. We would go with a median growth and then our target price would be around $100. We would construct the debit spread around this price:

BTO 1 DIS Jan 16 100 call
STO 1 DIS Jan 16 105 call
 
@ 1.53 LIMIT GTC (debit)
 
Max gain: $347.00 (226.80%)
Max loss: $153.00
Margin: $162

Then you have to wait for the stock to get to your target. The stock must end above $105 in order to gain full profit. This trade starts to be profitable when the stock moves above $93.86 per share if closed prior to expiration and if it gets above 101.54 or higher at expiration.

How to create a credit spread?

If however you want a credit spread (receive money now) then you would have to open bull put spread:

BTO 1 DIS Jan 16 100 put
STO 1 DIS Jan 16 105 put
 
@ 3.45 LIMIT GTC (credit)
 
Max gain: 345.00 (222.58%)
Max loss: $155.00
Margin: $164.50

The stock must grow up above $105 to make full profit. The only risk I see here is that we will be selling ITM (in the money) options and since these are American style options there is a risk of early assignment (unlikely) which can ruin the trade. For this reason I would prefer a debit trade.

I think this is not a bad trade idea and I may open one myself. I like shorter trades however, so I will be looking for a shorter expiration term than January 2016.

Hope this helped you to understand how I create spreads or trades. If you have any question, you can always contact me.

And if you want to see what trades I am about to open every week, subscribe to my options alert newsletter. It is free until the end of 2017 and you can follow the trades I post or mirror them in your own account.

Happy Trading and good luck.
 
 




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Friday expiration tomorrow may bring nice profits


ProfitsAm I getting it right already? I do not know. For almost three years I was profitable trading options and suddenly a backlash of last three months erased all my previous gains. I tried hard to stop bleeding but all trades were turning against me, one after another.

That’s frustrating and I was desperate to stop losses. When I thought I finally found a way how to limit my losses I got hit with another unsuccessful trade which ruined my P/L again.

What to do when you get hit with a strake of losses? What worked for me was to stop trading.

Yes, stop trading and go away.

So I sold all unprofitable positions and waited. I only opened one trade – Iron Condor against SPX, which was very conservative and setting a trade in such manner paid off so far. But market was calm so it worked. What if it was violent and the price breached one or the other way and again breached my spreads?

I do not want to think the consequences of such outcome. It would be another losses piling up.

I know of one mistake I still keep doing – hoping for a trade to reverse, so I favor rolling it hoping for next week better outcome. Many times such trade finished even worse.

It looks like this is a dead end route and killing losing trades faster is a lot better way of trading. But many times cutting losing trades is worse than rolling. When I roll a spread or option away in time and strikes, many times I get credit. On the other hand I increase my risk.

When closing such trade, it is more expensive than the credit received. Let’s say I have an Iron Condor for which I received a credit of $40, but if the trade goes against me I have to close for $100 loss. True, it is better than let the Condor end with a full loss of $470-ish loss, but still, I hate taking a loss.

There is a strategy for this case – close the trade when all your credit is lost – 100% of received credit, for example, you receive $40 credit and when you close the trade because it goes against you, you pay 40 dollars to close it, not more.

I tried this but it never worked well for me. If I closed as described above, it was always too early.

For example, I had a bull call spread against SPX and when the markets started showing weakness a few days ago and the trade started showing a loss of approx. 200 dollars (a half of the entire loss) I decided to close the trade. If I held however, the trade recovered and I could close for a partial profit instead of a partial loss.

I have heard that it is a good strategy anyway. It is better to take a small loss no matter what happen later than hope for a recovery which may not come. In my example it did come, but it could have a totally opposite outcome and the position could get worse.

It is this balance between cutting losses or give a trade more time to work. Which is better?

Time will show. Hopefully in the meantime I will stay afloat.

Expiration Friday

Tomorrow is expiration Friday when all weekly options are set to expire. I have a few trades out there which are set to end tomorrow (I wouldn’t call them expire as they will not expire but get exercised).

I have an Iron Condor against SPX 2115/2120/2035/2030 which will expire worthless for a full profit of received credit tomorrow if the market stays between 2035 and 2115 price. This is very likely to happen. The market would have to drop more than $35 in a day in order to this to happen. The expected move for tomorrow is only around $13, so unless a disaster occurs I can claim that this trade ends up profitable. I collected 0.40 premium per contract which will be an 8.70% profit in a week.

The next trade I have is a bear put spread against CVX. I opened this trade yesterday. It was a debit spread CVX 115/114 puts. I paid $270 debit to open this trade. If the stock ends up below $114 tomorrow by the end of the trading session, both legs of the spread will end in the money. Then they will be exercised against each other (the short option will offset the long option) and the trade will end up with a $230 profit (85.19% profit in three days). Today the stock continued falling and closed at $112.28 a share. If tomorrow it continues falling or stays where it is (must stay below $114), this trade will be profitable.

The last trade for this week is a bear put spread against CLF. I also opened this trade yesterday and it is a debit spread too. I opened 8.5/8 put spread and paid $280 debit. Now the stock must close below $8.00 a share tomorrow in order to collect a full profit. Today the stock dropped down but it wasn’t as smooth sell off as I could see with the CVX. Thus I am expecting some resilience in selling tomorrow. Should the stock grow tomorrow, I will close the spread for a partial profit. A full profit was $220 (78.57%) for the entire trade. As of now the trade shows $125 (44.64%) profit in three dyas. Tomorrow, we will see how this trade ends up.

These are all the trades I will deal with tomorrow. I have a few more trades open against CMCSA and AAPL, but these have expiration next week. That would determine my trading for that week. To keep my trades small, I will only open a new trade against SPX (possibly an Iron Condor) and one more debit spreads next week (in lieu of three spreads). It will all be determined by the outcome of tomorrow’s trading.

If you want to be informed about those trades I am about to open tomorrow and next week, you need to sign up to my newsletter as I announce those trades via newsletter only. It is free and it will stay free until the end of 2017. Then I will start charging a fee.

Good luck next week and happy trading!

 
 




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Posted by Martin November 28, 2014
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Expiration Friday mostly flat

Expiration Friday mostly flat

The week looked good until last Thursday end of the trading. Markets were slightly up which was good for our options positions set to end this Friday.

I had an Iron Condor against SPX set to expire today. It was 2105/2110 calls and 2030/2035 puts. Since the market ended at $2067.56, both legs of the Condor ended out of the money and expired worthless for a full profit.

When I was opening the trade I collected $40 premium per contract. This represented a gain of 8.70% in a week.

My second trade was a bull call spread or debit spread against SPX. I had 2065/2070 call spread and my risk was $290 to make $210. Not bad if the trade could end profitable.

On Thursday the stock market was well above 2070 making this trade a great deal. Even today morning the stock market went up above 2075 a share. But then it reversed and continue falling heavily pushed down by energy stocks.

If the market ended above 2070, both calls would end up in the money and could be exercised against each other for a full $210 (76.36%) profit. Unfortunately, it didn’t happen. The market fell hard and I had to decide what to do with this trade. I had an option to either close the trade for a partial profit, let it expire and offset both calls against each other for partial profit, or roll it.

Since the market continued falling hard and my lower long call option (2065 strike) became also endangered I decided to roll the trade. If I closed it, the profit could be very little or I could be closing with a loss. Rolling the trade increased my risk, but also increased a chance that this trade ends up in the money and I will profit.

So I rolled my debit spread 2065/2070 further away in time (into December 12, 2014 expiration) and hope the market will continue higher by then.

But what if the market won’t continue higher in the next two weeks?

Then I have a plan to close my short call position (2070 strike) and sell 2060 strike converting my debit call spread into a credit call spread. That will turn my bullish trade into a bearish trade and hopefully also expire worthless. We will see next week.

Happy Thanksgiving Trading Day!




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