Busy busy July

Hey everyone,
Things have been moving fast in July. I cashed out of Big Lots finally a few weeks ago. Because of the way it moved, there was minimal gain. In the next few days we went into Nike Inc., and didn't do too well.

Nonetheless, we are now into a LEAPS covered write on Dean Foods (DF). For those who are curious what this is, let me explain. A typical covered call involves buying the stock, then selling (AKA writing) the front month call option.

Example:
XYZ stock sells for $10/share. You buy 100 shares, totaling $1000.

Next, you find the front month call option, first one OTM (Out The Money), which in this case would be $12.50 strike. Lets say you are only a couple weeks out from expiration, and therefore the cost of this option is $0.50/contract.

Therefore, selling 100 contracts would yield a profit of $50. $50/$1000=5% ROI/Month.

Not bad. But remember this play is designed for flat or mildly bullish stock. It should be obvious that if the stock value decreases, your core value in stock goes down. And if we see a very bullish move, you lose on profit.

The LEAPS covered write is similar, replacing the stock with the LEAPS (Long Term Equity Anticipation Securities). The benefit here is you spend about 25% of what you would spend buying stock outright. Given our example, lets look how this pans out.

Stock is $10. Therefor, 25% of this is $2.50. 100 contracts=$250.

Selling front month options (per our previous example): $12.50 strike @ $0.50/contract=$50

$50/$250=20% ROI/Month.

The downfall to this play, is our risk graph curves down from profit to losses if the stock price rises too high. This occurs due to a number of reasons, such as delta values, time decays, ect.

The point here is seeing how powerful some plays are. Right now our play is in action. Assuming things swing our way, we will see a $0.80 return per contract.

Until next time.

Trade Adjustment - Big Lots Inc

Hello,
We saw a nice move to the bear side in our Big Lots Inc. (BIG) put play. We opened at a nice low $20.24, dove down to $19.60, only to rise to close at $20.00. Because of our initial target of $19.89 intraday, I have decided it is time to adjust to start locking in profits.

The first goal hear is to define our next, intermediate office. After plotting average price movements & Fibonacci levels, I've made a decision to set the next target at $18.27.

Taking a look at volatility, we can see that 30 day HV is on the rise, which is expected of a falling stock. This is confirmed by bearish volume, which is rising. The best thing I can see is the stock price breaking the 200 MA.

So far, I'm feeling confident we will end up profitable. Only time will tell.

This Week Was Frustrating

Hello all,

This week has been an interesting one. After a few days, we finally are in a long put position on Big Lots Inc. (BIG). I saw this play develop earlier this week as I scanned them market.

As we can see from the chart above, this is a classic down trending stock, gaining momentum. We have the 20 day MA below the 50 day MA. Our stock is riding the 200 day MA. We can see a retracement , followed by a red dark cloud cover candle stick. After reviewing volume, and secondary indicators, I decided to place a trade, using a buy trigger order contingent on this stock going below $20.78 ($0.05 below Mondays low)

This stock has been frustrating. The next two days have seemed to be consolidating. We've seen down days, but no significant movement to our trigger. Then, finally after three days on Thursday, we saw some action.

We finally got in. And after some nice movement, Big Lots closed at $20.32. We anticipate a nice movement down, and if Fibonacci works out, may see a new low at $18.27.

USO Update

The market opening today provided a bittersweet condition. The good news is that USO opened above our stop, lowering our exposure to assignment. However, we had been stopped out, buying to close the June 38 puts at $0.65. This produced a loss of $0.25.

Lessons learned, many! First, dropping down to the next lower strike price may have kept us in this position, and lowered our risk of assignment. Although we would have received a lower premium, we would have more likely made a profit.

Second, when we opened this position, intraday trading appeared to be pivotal, in that our intraday trending was on the verge of changing. Although the rise in volatility at the time may have contributed to higher premiums, I feel we should have taken a more conservative approach.

Lastly, and I think this should be a new rule for me, DON'T TRADE WHILE TRAVELING! I did not have access to all my tools, and this is a severe mistake.

I would like to explore more cash flow plays for USO, provided it finishes it's current retracement and continues its up trend.

I am on my way to Hawaii for my honeymoon. I will write again next week.

John
Sent from my Verizon Wireless BlackBerry

Long time no hear?

Hello everyone. It has been a while since I've posted anything, so let me fill you in. I just married my beautiful wife, Melissa on Saturday. We are heading to Maui tomorrow.

The market has been interesting lately. We have seen a good rally, but now lately we have seen retracement. This is interesting for this week since June options are expiring soon. Therefore it has been hard to find any items to sell puts on.

Nonetheless, I had sold the $38 June puts on USO for $0.40. Realizing that the chance of assignment within the next 3 days is possible, although unpreffered, still leaves us with an option with creating a nice covered call play in an overall uptrending ETF.

Overall, this position is managable and I feel confident in making it profitable.

Until next time.
Sent from my Verizon Wireless BlackBerry

We're at support...Again.

DJIA MARCH 30, 2009

Here we go again!

Most stocks opened today at a GAP - when there is a gap between the last candle and the present candle. This is interesting since the market has been on a rally lately.

Now we have this gap, not present here, but all over the place everywhere else.

DIA ETF MARCH 30, 2009

Now check this out, the DJIA ETF, the Diamonds. Classic gap. I can list all the examples I want, but a lot of EVERYTHING looks like this.

Now I'm not Cramer, but I would wait a couple of days before I'd do ANYTHING. Generally gaps have a habit of returning to the original level, but after that......who knows!

The Bull Market Comback?

Are we in a comeback? After what we saw in the market today, I'm sure a lot of people are hope full. After all, $1 Trillion is a lot of money. Is it enough to stimulate out of recession?

We are seeing signs of comebacks, but I wouldn't say 100% we're out of the woods. Keep in mind that I speak technical, not fundamental analysis. When I think something may occur, it's usually from what I see in a chart and not in the papers.

First, I made the assumptions that the market would go down due to a few indicators:

1) We saw consistent rally for several days, bouncing off a new low, in an existing downtrend. This was confirmed by a sell off last week.

2) We were between 20 and 50 day moving averages, and appeared in a great spot to sell off.

3) Secondary indications of an overbought condition.

4) Price was hitting an established ceiling.

However, as we saw, the market went UP. First rule of trading, know you are not perfect. Check. But now we know this information, let's see the case for a bull run:

1) Breaking the new barrier. That ceiling we were testing is now being broken, and we could have entered a new price band.

2) Commodities. I notice how commodities are looking like they are struggling to maintain their trends. This could indicate confidence flowing back into the markets.

3) Volume. Generally positive volume, and not really decreasing.

Although I think I made some valid points, I feel overall that traders are still undecided. The next few weeks may establish where the market may go. If we see a trend change, I'll be sure to tell you.