Archive for March, 2009

TOOLS OF THE TRADE

THE BULL CALL 

The bull call is a vertical debit spread usually placed 3-6 months out in time in order to allow the market enough time to make its’ move.  Our preferred trade structure is to buy the long call at the money and sell the short call one strike price above the long call in the same month. 

The debit in the trade is the cost of the long call less the credit from the short call.  The maximum risk is the debit.  Maximum reward is the difference between the strikes of the spread less the debit.  Example:  A $5 spread with the long call at strike 20 with a cost of $3 and a short call at strike 25 at a credit of $1 resulting in a net debit of $2.  Since the spread is $5 ($25 less $20), the maximum reward is the difference in strikes less the debit or $2.  If the trader waits until expiration of the spread and assuming the stock is trading higher that the short call, the return is 150% ($2/$3). 

A more prudent approach may be to consider establishing a trade with a favorable position Delta.  The Long option Delta less the short option Delta should result in an attractive position Delta.  Let us assume for illustrative purposes that the long call has a Delta of .50 since it is at the money and the short call has a negative Delta of -.32.  That means the net position Delta is .18 (.50-.32).  The result is that for every $1 move in the stock, the total position will be worth $.18 more.  Knowing this, it is easy to establish an exit point as a percentage ROI.  If the net debit in the position is $2 as previously established, and the trader chooses to exit the position at a 20% gain instead of waiting for the spread to expire in 3-6 months, he/she can do so.  A 20% gain in our example would require the stock to go up a little over $2 ($2 net debit x .20% = $.40 gain on the $2 debit.  $.40/$.18 = $2.22 move).

Review the risk graph to gain further understanding of the risk and reward of the position.  Best, Robin

ECONOMIC REPORTS

MONDAY 3/23

Existing Home Sales

TUESDAY 3/24

None

WEDNESDAY 3/25

Durable Goods Orders, Durables Ex-Transportation, New Home Sales, Crude Inventories

THURSDAY 3/26

Initial Claims, Q4 GDP- Final, GDP Price Index

FRIDAY 3/27

Personal Income, Personal Spending, Michigan Sentiment-Rev

 

 

EARNINGS OF NOTE

MONDAY 3/23

TIF, WAG

TUESDAY 3/24

CCL, DB, WSM

WEDNESDAY 3/25

RHT

THURSDAY 3/26

BBY, CAG, DPS, GME

FRIDAY 3/27

KBH

The average retail trader seemingly has no chance and gets whipped in and out of trades as the policy makers, large institutional investors, hedge funds and analysts move the markets to their favor.  There are always market participants that are in the know and get in and out ahead of the moves.

Jim Cramer, Mad Money host, admitted to manipulating markets when he was a hedge fund manager through releasing inaccurate news that allowed him to enter/exit positions to his favor.  If you don’t believe this occurs, then I would suggest that you are naïve.  One only needs to look at sentiment indicators such as option open interest and volume ahead of large stock moves and more often than not it is a precursor to a move.  How did they know?  At turns in the market, astute retail traders can see on candlestick charts massive down thrusts (distribution) on volume that is more often than not initiated by “smart money” so that they can shake weak holders out of the market to get better long position entries.  You can also see up thrusts (accumulation) on volume, selling to late buyers in a “suckers rally” to get the best exit prices only to see that market reverse with the uninformed retail trader left holding the bag.

I am going to suggest three ideas for you to consider in order to help you combat the wall street shenanigans.  1)  Do not trade without hedging your positions.  You can then learn to trade directionally hedged inside of strategies like collars and reverse collars.  2)  Learn to read candlestick charts with volume analysis.  This will help you spot when the “smart money” is trying to take advantage of you through manipulating the market.  3)  Let the “Big Money” do what they are going to do.  Look for major trends and get the “Belly” of the move and follow the trend.  That way, you are less likely to be hurt at the bottom or suckered at the top of a trend. 

Come visit us at www.marketamer.com and learn how to trade.  Best, Robin

 

 

The Bear Market rally arrived as expected.  I feel that we could pause or slow down for a few sessions before continuing up to challenge 780-800 in the SPX.  We need more participation in this move.  When greed begins to outweigh fear, then new money will once again be put at risk in the market.  When this happens there could be another strong leg up.  Hopefully, we can keep the trend going until others decide to join the party.

Losses continued to extend themselves Monday.  However, today’s candle was an inverted hammer which followed a high wave Harami Cross from Friday’s action.  This was confirmation that the Bears were running out of steam.  MRK acquired SGP and AMZN received an upgrade to buy as the DOW slipped another 80 points.

Turnaround Tuesday!!  The market impressed today, rallying 379 points in the DOW!  Vikram Pandit, CITI CEO announced in the morning that the bank was profitable for the first two months of 2009.  Ben Bernanke mentioned today that the uptick rule may have curbed some of the recent and vicious short selling pressure had the rule been in effect.  He also seemed to support some change to Mark to Market accounting and predicted a possible end to the recession by the end of the year with profit in 2010.

Wednesday, most were expecting selling into Tuesday’s awesome performance.  The Bears and Bulls played “Tug of War” all day long resulting in lack of follow through on yesterday’s move.  The good news is that we finished in the green with a 4 point gain in the DOW.

Wednesday, GE was downgraded primarily due to their Finance Division, GE Capital.  However, the downgrade was not as severe as first expected.  GM indicated it didn’t need as much cash to stay afloat for the time being.  Finally, Ken Lewis, CEO of BAC announced the banking giant had posted a profit so far this year.  It all added up to a gain of 240 points in the DOW continuing a positive three day run.

 The week ended Friday on the upside despite a somewhat tentative performance.  Technically, the indexes have reached areas of resistance as volume has been diminishing.  It may be a harbinger of the market taking a breather.  Expect sideways trading and maybe even a small pullback before once again challenging higher levels.

Week over week, the Market registered its’ best gains since November 2008 with the DOW up 597 points, the SPX better by 74 and the COMPQ positive by 138.

Learn to trade profitably and consistently.  Click here!

 

-The DOW should continue to 7500 before encountering resistance.  Past that, we will look at 7800-8000 which is fairly stout resistance.  We may trade sideways briefly before continuing our trek north.  We need more market participation as reflected in volume.  I’m hoping we get new money coming back into the market to continue to spark this rally.  Stay tuned and stay nimble.

-The SPX may briefly retest 741 before continuing up to challenge 800 as resistance.  741, as you recall was excellent support for a good while and then was broken.  Now that we are back above that level we will probably want to retest 741 to make sure that it wants to remain as support.  After that we can feel free to move up to challenge 800.

-The COMPQ went up to bounce right off of old support at 1434 before closing at 1431.  The first test will be to break that level before moving higher to challenge 1460 and 1492.

TOOLS OF THE TRADE

THE REVERSE COLLAR

Last week we discussed the Collar Trade which is comprised of three trading instruments 1) Long Stock 2) Long Put and a 3) Short Call. Although the Collar is a heavily hedged trade that can optimize bullish, bearish and stagnant trends, its’ construction is slightly bullish bias. This week, we will be covering the mirror image of the Collar Trade, the Reverse Collar.

The Reverse Collar has the same heavily hedged aspect of the standard Collar, however, the trade’s configuration is slightly bearish in its’ construction. It also has the ability to optimize trends in any direction.

There are two reasons the trade may not be quite as flexible as the standard Collar 1) It involves shorting the stock and as such, the strategy may not be appropriate for qualified accounts like IRAs 2) Stocks can only go to zero and since the primary component of the Reverse Collar is short stock, the trade is a bit more limited as opposed to long stock in a standard Collar.

The Reverse Collar has three legs 1) Short Stock 2) Long Call and a 3) Short Put. The Short Stock optimizes a bearish trend; and the Long Call limits losses should the underlying rise which is adverse to a short stock position. Finally, the short put is sold at a credit to help finance the protective long call.

Study the risk graph and you should gain an understanding of the risk and reward of the Reverse Collar. Best, Robin

 

 

 

ECONOMIC REPORTS

MONDAY 3/16

Empire Manufacturing, Net Long-Term TIC Flows, Capacity Utilization, Industrial Production

TUESDAY 3/17

Building Permits, Core PPI, Housing Starts, PPI

WEDNESDAY 3/18

Core CPI, CPI, Current Account Balance, Crude Inventories, FOMC Rate Decision

THURSDAY 3/19

Initial Claims, Leading Indicators, Philadelphia Fed

FRIDAY 3/20

None

 

 

EARNINGS OF NOTE

MONDAY 3/16

JMBA, LNY, SINA,

TUESDAY 3/17

ADBE, GES

WEDNESDAY 3/18

CTAS, DRI, NKE, ORCL

THURSDAY 3/19

BKS, BBI, DFS, PALM, PERY, PLCE, ROST, TKTM, WGO

FRIDAY 3/20

KIRK