Archive for December, 2008

-We continue to trade in a channel.  Volatility is reducing as evidenced by the VIX closing at 44.93.  Watch the critical areas of support and resistance and how the market reacts to those levels.  I will keep you updated midweek if I see anything of significance.

-See INDU comments.

-See INDU comments.

TOOLS OF THE TRADE

THE MARRIED PUT

 

The ‘Married Put’ sometimes characterized as the ‘Protective Put’ is a combination strategy that comprises two trading instruments. 1) long stock and 2) the long put.  The position is the synthetic equivalent to the ‘Long Call’.  In fact, you will notice that the risk graph of the ‘Married Put’ is identical to the ‘Long Call’.

The risk in the trade is equal to the cost of the put and the difference between the stock value and the put strike price.  Example- XYZ stock trading at $26.25 with a 25 strike put costing $1.75.  The risk in the position is $3.00.  ($26.25 stock minus the 25 strike put = $1.25 plus the put cost of $1.75 = $3.00.)  In effect, the trader could purchase a long call at a value of $3.00 or less with the expectation of the stock rising and establishing a position that carries a risk/reward that is equivalent to a married put.  The risk control in the long call is that the trader is limited to losing only the cost of the long call which is in this example limited to $3.00 or less.

The advantage of the ‘Married Put’ is that stock does not come with an expiration date and if the stock pays a dividend, it can create and additional income.  On the other hand, the long call allows the trader to leverage the position because the trader can control shares of stock for less money. 

The ‘Married Put’ strategy is a wonderful way to protect the downside risk and reduce the cost basis of the stock when and if the stock should fall.  In a way, one could view the ‘Married Put’ as portfolio insurance.  If the stock falls for any number of reasons, the trader is guaranteed to be able to sell shares at the long put strike price for as long a period of time as the long put is in effect.

Study the risk graph of the ‘Married Put’ and you will gain insight into the risk/reward of the position.  Happy Holidays!!  Best, Robin

 

ECONOMIC REPORTS

MONDAY 12/22

None

TUESDAY 12/26

Chain Deflator-Final, GDP-Final, Existing Home Sales, Michigan Sentiment-Rev, New Home Sales

WEDNESDAY 12/27

Durable Orders, Initial Claims, Personal Income, Personal Income, Crude Inventories

THURSDAY 12/28

Market Closed for Christmas

FRIDAY 12/29

None

 

 

EARNINGS OF NOTE

MONDAY 12/22

RHT, SCS, WAG

TUESDAY 12/23

AM, MU

WEDNESDAY 12/24

NONE

THURSDAY 12/25

MARKET CLOSED FOR CHRISTMAS

FRIDAY 12/26

NONE

 

            This is the time of year that we begin to reflect on the events of the last 12 months and begin to think about how we can make better the year to come.  We have just lived through one of the ugliest years in the history of the stock market.  Many are disillusioned.  Most have suffered tremendous financial loss.  It leads one to question who and what to trust.  It is human to want to trust.  It is part of who we are as social beings.  Yet, our recent financial debacle points up the importance of taking control of your own financial situation. 

I want you to consider what seems to me to be almost too elementary in that its’ very mention as an investment strategy will evoke a, “Why didn’t I think of that?” response.  For many of us, one of our most important assets is our home.  Would you even consider not insuring your home?  Yet most of us have neglected doing the same on our stock portfolio.  When you pay your homeowners insurance are you upset if your home didn’t burn down and then consider your insurance purchase as a waste?  Maybe some of you view it that way, but more likely, the premium you pay is peace of mind that you are protecting your home and its’ value. There are many perils that can negatively affect the value of your home.  Homeowner’s insurance policies list those perils that the insurance company will protect against.  So it also is with your stock portfolio.  There are many factors that can hurt you and your investments.  The following is a list of some of those factors:

·         Market Risk- the market buying and selling pressure controlled by supply and demand that will move the stock either up or down.

·         Interest Rate Risk- This will effect primarily fixed income investments like bonds.  Typically as interest rates rise bonds will decrease.

·         Inflation Risk- This will affect your purchasing power and the value of the dollar.

·         Business Risk- This is the risk that the business that you are investing in is not financially strong and is not running the business using best practices and methods.

·         Credit Risk- This is the risk that addresses the possible inability of the bond issuer being able to repay debt at maturity.

·         Currency Risk- This risk has more to do with investment in stocks that carry risk due to fluctuation in international currency exchange rates.

·         Political Risk- We deal with this risk daily in the volatile global environment that we currently live.  Geo/political events can decimate the value of your stock portfolio in a heartbeat.

·         Liquidity Risk- Some stocks contain limited liquidity therefore creating susceptibility to volatile movement and bad fills caused by large bid/ask spreads.

This weeks’ educational article has to do with insuring your portfolio.  It is called a “Married Put”.  I ask, “Why in the world would you not consider insuring your stock portfolio after really understanding the risks?”  We wish all of you joyous holiday season and a happy and prosperous new year.  The band of traders at http://www.marketamer.com want to help you be prosperous in 2009.  Best, Robin

  

 

 

 

 

 

We began the week with a follow through move on Monday as Obama’s proposed infrastructure program gave the market a lift as the DOW closed up 298 points.  I issued a market alert on Monday calling for a pullback.

Tuesday we pulled back as predicted and closed down 243 points on the DOW due to poor earnings from FDX, TXN and BRCM.  Announcements of layoffs continued to plague corporate America.

Wednesday, the market eeked out a small 70 point gain on the DOW on reduced volume as Capitol Hill continued to hash out the details of an automakers bridge loan package.

Thursday continued the market pullback peeling off 196 DOW points as the House ok’d the $14 billion bridge loan for the “Big Three”.  Doubt still remains how the Senate will view the package.  The unemployment report added to the angst as the numbers registered at their highest mark in the last 26 years.

Friday began with the knowledge that the Senate did not approve the Detroit bridge loan and it looked like it was going to be a blood bath.  However, the White House stepped up and assured all that the TARP will be there to stabilize the car people as the DOW gained 65 points. 

Week over week, the DOW lost 5, the SPX was up 4 and the COMPQ gained 32.

If you want to learn the secrets of the 5% who consistently win in the markets go here.

For the short term, we are still in a channel.  However, the market’s strength in the face of ugly news is very impressive.  We ended the session on Friday with a modest gain but we formed a “Bullish Harami, Hammer”  I feel that in the next few sessions we will go higher to test the recent swing high at 9026.  I will give you midweek updates as necessary.  Pay close attention to how the market reacts at critical levels of support and resistance. 

My comments here are very much the same as the DOW.  We are going up for the for the next few sessions.  The first test will be the recent swing high at 918.  If we break that level with conviction, we will go into the end of the year with bullish sentiment.

Friday’s session was a “Piercing Line” candllestick pattern.  Look for the COMPQ to test 1603 on a bullish move this week.  If it breaks that level with gusto, we will finish the year on a bullish note.  Stay tuned for midweek updates as necessary.

TOOLS OF THE TRADE

COVERED CALL 

This is a combination strategy that is very popular amongst traders and is represented by many to be an ultra conservative strategy.  The position has risk and in fact, its’ synthetic equivalent is a naked put.  You will see from the risk graph, that the covered call is identical to the short put. 

The covered call can be a marvelous strategy if the trader realizes the risk involved in the position.  If the trade is left unmanaged, it can be dangerous.  The informed trader can do well by following some rules and managing the position from entry to exit.  Consider the following suggestions when initiating the covered call:

·         Stock selection is critical. Select a stock with enough volatility to offer a decent premium but be skeptical of those stocks offering extraordinarily high short call returns.  There is a reason for the high premium and it may foretell a volatile move.

·         Initiate the covered call in a neutral to bullish market on a neutral to bullish stock.

·         Examine the stock chart and stay away from stocks that have a tendency to gap.

·         Only trade stocks that have high liquidity.

·         Do not initiate covered calls around earnings or other fixed news events.

·         Research the message board for the stock you are considering.  You will learn about issues surrounding the stock that are not necessarily in the general news releases.

·         Learn to adjust the position if the stock moves bearish and don’t be afraid to close early for a profit.

Study the graph of the covered call and you will gain a strong understanding of the risk/reward of the position.  Best, Robin