Archive for February, 2009

TOOLS OF THE TRADE

THE IRON CONDOR

The Iron Condor is a very popular non-directional trade.  It optimizes a stagnant range bound stock or index.  It is comprised of four option instruments.  The name itself can be quite intimidating, but you will learn that even seemingly complex multi-leg trades are really nothing more than a composite of previously known and understood positions.  That is so in this case.  The Iron condor is just a 1) Bull Put credit spread and a 2) Bear Call credit spread.  When combined together, the trade can be a very powerful and profitable position as long as the underlying security remains between the short call and put options and stays there until expiration.

The trade is best implemented on stocks and indexes that have established a definitive trading range.  I personally prefer placing the trade on indexes like the SPX.  My preference is for several reasons.  1) Indexes provide instant diversification 2) they are broad based and cash settled and as such, may qualify for IRC 1256 and more favorable tax treatment on gains (consult your tax advisor) and 3) indexes usually are not prone to frequent and severe gaps which is not what you want to see when trading this strategy.  One other aside, your broker should apply SPAN margin rules in this trade which means that they will only hold margin on one side of the trade which will increase your ROI.  The reason they should only hold margin on one side is that the stock or index can only be trading at one place at time so therefore the broker cannot be at risk on both sides at once.

Study the risk graph and you should begin to understand the risk/reward of the trade.  Best, Robin

MONDAY 2/23

None

TUESDAY 2/24

S&P CaseSchiller Home Price Index, Consumer Confidence, Bernanke Monetary Policy Report

WEDNESDAY 2/25

Existing Home Sales, Crude Inventories

THURSDAY 2/26

Durable Goods Orders, Durable-Ex Tran, Initial Claims, New Home Sales

FRIDAY 2/27

GDP- Prel, Chain Deflator- Prel,  Chicago PMI, Michigan Sentiment – Rev

 

 

EARNINGS OF NOTE

MONDAY 2/23

CPB, DTE, FST, JWN, ONXX, MALL, TXRH, USNA

TUESDAY 2/24

CRDN, DWA, FSLR, FWLT, HNZ, HFL, HD, M, ODP, PZZA, RSH, SHOO, TGT, TASR, JOE, VNO, WYNN

WEDNESDAY 2/25

ABK, CBOU, DLM, DNR, DLTR, ESRX, FLS, FLR, GRMN, WOLF, ISIS, STM, MSO, RMX, SKS, CRM, ZLC

THURSDAY 2/26

ADSK, BCSI, BYD, BTI, CTB, DECK, DELL, DUF, DYN, EPB, FTO, FRO, GPS, HANS, KSS, NOVL, SWY, BID

FRIDAY 2/27

JRCC, BX

 

I am an established and profitable trader and have paid my dues over the years.  I am primarily a technical trader and have developed a keen sense for the market and where it is likely to trade.  With that said, I am not 100% accurate.  Nobody is.  You will see that my calls have been fairly spot on.  However, I was premature on my call for a Bullish move this past week.  Stay tuned, we are due for a bear market rally and it’s coming soon.  When that happens, a bear market rally is usually exacerbated by short covering and can be quick and large.  It is difficult to say the duration of the move, but you may want to consider positioning yourself to take advantage of the bounce.  Make sure that you do your due deligence before making such a decision.

 Friday’s market action formed an almost classic bottoming pattern with a Hammer candlestick on better than average volume.  The psychology behind this pattern is that the smart money drives the market down to shake out the weak holders and then come back in to buy at bargain prices.  I would have liked to see even more of a down spike on more volume.  However, the message is the same.  When you see a long wick on the candle at the bottom of the range and a smaller real body at the top of the candle on good market participation as represented by volume, then you are likely to see a reversal.  I couple this with the fact that we are at a triple bottom on the 20 year chart of the DOW and I see a reversal in the near term.  If the market does not hold these levels the fall could be really bad.  I don’t see that happening, but you must be aware that the market is going to do what it wants to do.  I continue to be bullish bias at this point and I am looking for a bounce off of these lows.  We will then analyze how the market reacts at each important level of resistance on the way up.  Best, Robin

ROBIN CONTINUES HIS UNCANNY ABILITY TO CALL THE MARKETS!!  He felt it was time to break out of the recent trading range as announced in the blog posted on 2/7/2009, but before the close on Monday 2/9/2009 he called a market pullback and the DOW proceeded to drop over 400 points in the next 4 days (see recent posts on the blog).  If you want to learn how he does it click here.

The week started with hopes that the Economic Stimulus Package would soon be voted on.  The DOW posted a small loss on a very narrow range trading day closing down 10 points.

Tuesday was Secretary of the Treasury Geithner’s debut and he flopped bigtime as the “Bad Bank” bailout plan was surprisingly absent of details.  Geithner was totally unconvincing.  The market reacted with a whopping 382 point drop in the DOW.

Wednesday saw the market linger at Tuesday’s lows and finally posted a small gain on an afternoon bounce based on positive news on the stimulus package.  The DOW closed up a modest 50 points.

Thursday, the DOW dropped to a low of 7650 before rebounding to close at its’ opening price of 7932.  The market strength to pull off of the days’ lows was significant.  It signals that lower prices were not acceptable and typically is a sign of a turn in the market.

The week ended with a drop of 83 points on the DOW on lower volume.  The Michigan Sentiment report was lower than expected.  The move was after several attempts throughout the trading day to close in the green.  I don’t feel that Friday’s price action is an indication of further bearish sentiment since the decline was on less than impressive volume. 

Week over week, the DOW retraced 430 points, the SPX was worse by 42 and the COMPQ lost 58.   

 

-Thursday’s candlestick was telling.  The market doesn’t want to move lower, although it did on Friday but with lack of conviction as evidenced by low volume.  The index is at the low end of the trading range and is ready to bounce.  The first target is 8315.  It is possible that the market will briefly test Thursday’s low of 7694 but unlikely.  We may linger for a session or two before heading back up.

-The SPX formed a hammer on Thursday with better than average volume.  Friday was a bearish narrow range session with no conviction to drive the price lower.  I am looking for the SPX to begin to move back up in the trading range with the next target at 875.

-I am looking for a breakout to the upside.  We will see how the index reacts at pre-defined resistance levels on the way up.

TOOLS OF THE TRADE

THE PUT CALENDAR  

The Put Calendar is comprised of two trading instruments 1) the Long Put and the 2) Short Put.  Similar to the call calendar, the position has tremendous potential for gain, but is a high maintenance trade.  Excessive changes in volatility can hurt the position.

The traditional application of this trade begins with buying a long put 3-6 months out, slightly OTM and shorting a put in the front month at the same strike price as the long put.  The trade is a debit trade.  The debit is equal to the long put minus the credit received from the short put.  The maximum risk is the debit.  The trade optimizes a slow deliberate bearish trend.  The key to the trade is to take advantage of the time decay of the front month short put which will decay faster than the back month long put.   Ideally, the stock will move in a slightly bearish fashion resulting in a profit from the time decay of the front month put as well as appreciation in the back month long put.

The trade can be closed after the front month expires allowing the trader to hopefully bank profits.  The trader can continue to short puts against the back month long put in successive months if he/she chooses.

Review the risk graph of the Put Calendar and you should gain an understanding of the risk and reward of the position.  Best Robin

MONDAY 2/16

None

TUESDAY 2/17

Empire State Mfg., Net Long Term TIC Flows

WEDNESDAY 2/18

Building Permits, Export Prices Ex-Ag., Housing Starts, Import Prices-Ex Oil, Capacity Utilization, Industrial Production, Crude Inventories, FOMC Minutes

THURSDAY 2/19

Core PPI, Initial Claims, PPI, Leading Indicators, Philadelphia Fed

FRIDAY 2/20

None

 

 

EARNINGS OF NOTE

MONDAY 2/16

BRO, GLBC, WLT

TUESDAY 2/17

A, AMED, ACC, CHK, DAI, FOSL, RAIL, LZB, MDT, TEVA, WMT

WEDNESDAY 2/18

BIDU, NILE, CFL, CBS, CYBX, DE, DENN, DTG, DBRN, GT, HPQ, HST, ING, NTRI, OII, OMX, PAAS, PLA, PCLN, SKX, FUEL, WFMI, ZOOM

THURSDAY 2/19

APA, BUCY, BBW, CAB, CECO, CROX, CVS, DSX, HRL, INTU, MORN, NANO, NEM, NBL, OSIP, RRGB, RGC, RS, SPAR, S, TSO, TTC, TRAD, WMB, XTO

FRIDAY 2/20

JCP, LOW, PNW