Archive for the ‘Trade of the week’ Category

Weelky Markets Update

November 11th, 2015

The Markets

Following a very favorable jobs report at the end of last week, the domestic indexes listed here posted overall gains as of last Friday’s close. The Russell 2000, which had been lagging a bit, saw the largest increase, gaining 3.26%, followed by the Nasdaq, which rose over 93 points. Only the Global Dow regressed by week’s end, but only by 0.11%. Also of note is the sharp increase in the 10-year Treasuries yield–up 18 basis points, as money moved out of bonds, possibly in anticipation of higher interest rates on the horizon.

The price of gold (COMEX) decreased, selling at $1,088.90 by late Friday afternoon compared to $1,141.70 a week earlier. Crude oil (WTI) prices fell, selling at $44.52 per barrel by week’s end. The national average retail regular gasoline price decreased to $2.224 per gallon on November 2, 2015, $0.004 under the previous week’s price of $2.228 per gallon, and $0.769 below a year ago.

Market/Index

2014 Close

Prior Week

As of 11/6

Weekly Change

YTD Change

DJIA

17823.07

17663.54

17910.33

1.40%

0.49%

Nasdaq

4736.05

5053.75

5147.12

1.85%

8.68%

S&P 500

2058.90

2079.36

2099.20

0.95%

1.96%

Russell 2000

1204.70

1161.86

1199.75

3.26%

-0.41%

Global Dow

2501.66

2436.23

2433.65

-0.11%

-2.72%

Fed. Funds

0.25%

0.25%

0.25%

0%

0%

10-year Treasuries

2.17%

2.14%

2.32%

18 bps

15 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

·                    For those at the Fed looking to raise interest rates in December, last week’s employment report will certainly support that move. The Bureau of Labor Statistics reported that nonfarm employment increased by 271,000 in October, while the unemployment rate (5.0%) and did the number of unemployed persons (7.9 million) remained steady. In October, average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents to $25.20, following little change in September. Hourly earnings have risen by 2.5% over the year.

·                    The trade deficit for goods and services narrowed in September compared to August, according to the latest figures from the Bureau of Economic Analysis. The trade deficit was $40.8 billion in September, down $7.2 billion from $48.0 billion in August–the smallest deficit since February. September exports were $187.9 billion, $3.0 billion more than exports in August. September imports were $228.7 billion, $4.2 billion less than August imports. The September decrease in the goods and services deficit reflected a decrease in the goods deficit of $7.3 billion to $60.3 billion and a decrease in the services surplus of $0.1 billion to $19.5 billion.

·                    According to the Institute for Supply Management Report on Business®, the October Purchasing Managers’ Index (PMI®) registered 50.1%, a decrease of 0.1% from the September reading of 50.2%. October’s reading marks the third consecutive month of decline in the manufacturing sector. A reading above 50% indicates that the manufacturing economy is generally expanding; below 50% indicates that it is generally contracting. The report also includes information on a number of sub-indexes, which provide some insight into manufacturing activity. For instance, the New Orders Index, the Production Index, and the Prices Index each increased in October compared to September. Yet, the Employment Index and the Imports Index both regressed. Survey respondents expressed concerns over the high price of the dollar and the continuing low price of oil.

·                    In contrast to the PMI®, the ISM Non-Manufacturing Index (NMI®) has been posting positive data indicating growth. October’s report maintained that trend as the NMI® came in at 59.1%–2.2% ahead of September’s reading. The reading for October represents growth in the non-manufacturing sector, but at a faster pace, since readings over 50% represent some growth. According to the report, the Non-Manufacturing Business Activity Index increased 2.8%; the New Orders Index gained 5.3%; the Employment Index rose 0.9%; and the Prices Index increased 0.7%–an indication that prices decreased in October.

·                    The U.S. Census Bureau of the Department of Commerce reported last week that construction spending during September 2015 was estimated at a seasonally adjusted annual rate of $1,094.2 billion, 0.6% above the revised August estimate of $1,087.5 billion. The September figure is 14.1% above the September 2014 estimate of $959.2 billion. Spending on private construction was at a seasonally adjusted annual rate of $794.2 billion, 0.6% above the revised August estimate of $789.7 billion. In September, the estimated seasonally adjusted annual rate of public construction spending was $300.0 billion, 0.7% above the revised August estimate of $297.8 billion.

·                    Nonfarm business sector labor productivity increased at a 1.6% annual rate during the third quarter of 2015, the U.S. Bureau of Labor Statistics reported last week, as output increased 1.2% and hours worked decreased 0.5%–the first decline in hours worked since 2009. From the third quarter of 2014 to the third quarter of 2015, productivity increased 0.4%, reflecting increases in output and hours worked of 2.3% and 1.9%, respectively.

·                    Continuing a somewhat disturbing trend, new orders for manufactured goods, down in July and August, decreased $4.7 billion, or 1.0%, to $466.3 billion in September, the U.S. Census Bureau reported last week. Shipments, unfilled orders, and inventories each decreased in September from August. The decline in factory orders can be traced, at least in part, to weakness in exports, low oil prices, and a soft energy sector.

·                    Initial claims for unemployment insurance increased by 16,000 for the week ended October 31, to close at 276,000, up from the previous week’s unrevised level of 260,000. The advance seasonally adjusted insured unemployment rate was unchanged at 1.6% for the week ended October 24, while the advance number for continuing unemployment insurance claims increased 17,000 to 2,163,000.

Data sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market data: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

I am not bullish at the moment so I sold a call spread

September 29th, 2012

On Sept 21 I sold 5 calls of the SPY at a strike price of 150, expiring on Dec 22. I took in $952 on that trade.
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At the same time, for protection, I bought the same calls but with a strike price of 160.
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That limits my loss to 10 points, or $5,000, but as a practical matter the potential loss
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if the market goes crazy up, is much less because of the chance to roll up. I paid $135
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for this insurance, so the net premium in the account is about $820 for about 3 months.
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I get to keep the $820 unless the SPY, a basket of 500 stocks reflecting the market as
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a whole, goes up from the 144 price it is now, to over 150. While that is possible, I don’t
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think it will happen. If it does I will take defensive action, but it also means my other stocks
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will have gone up a lot in value. As you can tell from this trade, I am not bullish at the moment.
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Merv

I’M GETTING OUT OF WHR BECAUSE IT HAS RUN WAY UP

September 19th, 2012

WHR, which I recommended some time ago, has moved up from 55 to 85. For me, that’s enough. I bought the stock some time ago, and
lost some money writing calls against it as it soared above my expectations from time to to time. Then it leveled off and I made some money.
At the beginning of December I was about even on the option trading, but way ahead on the stock. I was also way ahead on naked puts, but
lost a bit when the stock went over $75.
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So this week I decided enough with this stock at this price, and I closed out all my positions. I made a handsome profit on the stock and the
puts, and about broke even on recent calls, but lost a bit on older calls. All in all it was a profitable run, but stocks with that much volatility are
not ideal for option writing. I was fortunate that I also bought the stock, and lucky that I sold puts at a low point.
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MLH

TIRED OF WAITING FOR GE

September 1st, 2012

I’ve owned GE stock for a long time. I bought it at $19, saw it decline, then come back up.
At the moment is is $20.70. But the statistics don’t look very good on it, and I don’t see any
reason why it will go up. And the market is up so if anything I supposed it might go down a point
or so over the next few months.

So under these conditions what I decided to do is to sell an “in the money” call. I sold the $20 calls
for December, taking in a premium of $1.30 per hundred shares. Since I have 1000 shares, that’s
10 calls, taking in $1,300 in premium.

If the stock stays the same or goes up, I will have effectively sold it at $21.30, about $.60 more than
the value today. If the stock goes down below $20 I will have collected the premium as a hedge. If
it goes below $19 between now and the end of the year I will not have made a very good deal.

Merv

A NICE TRADE ON GOOGLE

August 10th, 2012

I wanted to tell you about a trade I did in my account recently.

From a reader:

I sold a naked PUT on GOOG right before they announced earnings with the goal that the earnings would be good and the stock would go up and I would eventually keep the premiums.

I was OK with buying the stock at a lower price from what it was trading at when I made the trade if the earnings were not great and the stock had dropped backed down.

What I did is sold 4 contracts on July 10th and took in just shy of $4,000 which was an option price of close to $10.
The stock was at $581 on July 10th and this trade was for just over one month which if it backfired I would be buying a great company at a price of around $571.
I have one week left and the option is worthless now so in a week it will expire and I will keep the $4,000 I took in over just a month.
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Nice trade The stock is now at $639

current trading pattern

August 4th, 2012

I continue to make money writing spreads in this economy.
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Each month I’ve been writing call spreads on the SPY, the S&P 500 index. The trades for this month were:
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Sell 10 calls SPY 140 September, premium $1,600
Buy 10 calls SPY 145 September, pay $400
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This is a net premium of $1,200 with a maximum risk of about $4,000 which can be mitigated by rolling up and out if it begins to materialize with the S&P going over 1400. And of course if it does go over 1400 my underlying portfolio will have gone up much more than $4,000 anyway.
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I am also writing put spreads on a number of stocks. For example, I sold 10 puts on the AAPL 550 for August, taking in $5,280, and bought 10 puts of the Aug 530’s, paying $2,300 to hedge, for a net premium of almost $3,000.

I’m selling more put spreads than call spreads because the premiums are higher and I feel the market will continue to be strong before the election in November.

mlh

A FREE RIDE IN THE MARKET

July 29th, 2012

Maybe there is no Free Lunch, but there can be a free ride in the stock market. Suppose you have a nice million-dollar portfolio, half in bonds and half in equities. And suppose after reading up a bit and doing some research, you are convinced that the S & P index is not going to go up more than 10% over the next two months.

The S &P index is a nice bundle of 500 diversified stocks that kind of tracks the Dow Jones, not exactly, about 1/8th of the price. So when the S&P moves 8 points the DJ moves about 64 point, but not exactly.

That’s the time to sell a call spread. After reading a number of economic reports lately i am only mildly bullish on large cap US equities for the rest of this year.

So while the market was up this month I sold 10 September calls on the S&P index, called the “SPY” 1400 calls ” for $1,700 and bought the same options but at a strike price of 1410 paying $360. I ended up with a net premium of about $1,150. The purchase of the 1410’s is a hedge against a sudden jump in the market above 1400.

Here is the good news. If the S & P does not go over $1,400 by the third Friday in September, I just get to keep the $1,150. That sounds good. But if the market does go up, while I have a risk of $4,000 possible loss on this trade, I will make much more on the increase in my stock portfolio. So I can’t lose!

But there’s more. Suppose the market does go up and I might lose up to $4,000 even though I make more on the rest of the portfolio. I don’t have to take the loss. I can buy back the September1400 calls for a loss and sell back the 1410 calls for a small profit, taking a nice loss for tax purposes, and at the same time sell a new call spread at higher numbers, such as 1410’s hedged with the 1420’s, and bring in a new premium. If I do that as soon as the market hits 1400, the chances are good that the new premium will be almost as much as the loss. So I get a free ride: if the market goes down I pick up a premium, but of course lost some value in my equities that I would have lost anyway. If the market goes up I get a tax loss plus an increase in value of my stocks. Isn’t the stock market wonderful?

Notice that I’m NOT predicting that the market will go down between now and September. Although it might. What this trade relies on for profitability is that the market will not go up very much during the next few weeks.

While profits are doing well in the large cap sector, there are also a number of negative things happening in the world that can affect prices. The Eurozone might fall apart. Spain might go into bankruptcy. Chinese imports are already falling. Some companies, like Facebook, are not showing well. All of this creates a psychology in the market that is negative and holds down prices.

But even when I think that most stock prices will not go up, there are always exceptions. A couple of months ago I bought some Xerox stock, because its way down but the company seems to be improving. I bought the copper ETF, because I read an article about how the world is consistently using more copper than is being produced. Copper has continued to decline since I invested in it, but I’m holding on.

And so it goes for this week. Some advisors are recommending an investment in the “VIX”, which is the volatility index. The think that we are going into a period of higher volatility, and that causes the VIX to go up.

I never invest in the VIX because it has a built-in decline mechanism. But to each his own. That’s one of the things that makes the market so much fun.

MLH, July 27, 2012

Green Mountain Coffee Roasters

May 23rd, 2012

I’ve written here about this company and its ups and downs. But finally this week I took action:
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I sold 10 puts of the Sep 20s for $2,240 and bought 10 puts of the Sep 16s for $1,145 as a hedge against disaster, for a net premium
in my pocket of just over $1,000. The stock has moved up slightly since the trade on May 17 when the stock dipped to around $24.
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I’m OK just keeping the $1,000 if the stock holds or moves up, and I’m also OK with buying it at $20 if it moves down. The company has
a large installed base of customers with its coffee makers, and I still drink coffee myself every morning.

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Merv

A Walmart put spread

May 15th, 2012

On may 10th I wrote a put spread on Wal-mart. I’ve been watching the stock, and I like it, but with the market moving down I thought a put spread is a chance to pick up some cash and maybe get the stock at a bargain.

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So I sold 10 puts sep 55s for $1210 and bought 10 puts sep 45s paying $210, for a net credit of $1,000. I hope the stock goes down to 54 and I buy it there, but if not the $1,000 in my bank account won’t hurt.
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Merv

WAL-MART TRADE

May 10th, 2012

For those of you following my trades, I did this one today:
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sell 10 WalMart Sep 55 puts and buy 10 Sep 45’s for a net credit of at least $1.
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With WMT dipping down below $60 I think it is worth $60 or more and I would be pleased to
buy it at a net $54 if it continues to slide. Otherwise I’ll keep writing these puts and taking in
$1,000 or so at a time.
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Merv