Investing Education Advice if You’re New to Options Trading
by Phil - July 3rd, 2009 3:17 pm
By Travis W of PursuingWealth.com
Finding investing education advice for stock options trading can be a frustrating endeavor at times. New traders often share with me that it feels like the options trading community is a very tight-lipped community with a high price of admission. I’ve been through that process so I’d like to offer you some advice.
Learning to invest your own money is a journey, not a destination. It takes time, patience, and education. It’s a proactive journey for those who no longer desire to be a victim of the so called experts.
Over the years I’ve made enough mistakes and have had enough successes to know that the ability to master your money is not something that just happens. It takes a bit of work on your part.
Increasing your investment IQ is a key part, especially when you’re dealing with stock options. You have to find a qualified and trustworthy source for investing education. There’s quite a bit of hype out there so you have to filter out all the "noise".
You may have already searched online for information on stock options, or read a few books. Most people are drawn to options trading by the potential to create large sums of money in a short period of time. Here is my forewarning; having a great deal of head knowledge about stock options doesn’t necessarily mean you’ll be a great trader. It’s going to take some real world practice.
Most of what I’ve learned about investing did not come from a classroom or a book; it came from real world experiences. I found people who were willing to give me unbiased investing education and I applied the knowledge through practice and a bit of trial and error.
Investing Education is your Financial Road Map
Investing education has a purpose in our lives like a map has a purpose to a traveler. A map can take you from point "A" to point "B" when you’re traveling. Investing education can take you from school loans, credit card debt, and no budget to debt-free with money to burn. It’s your financial map so to speak.
You could try to figure out options trading on your own, but if you’re smart and value your time you’ll find a map that can get you to your destination quicker. It’s extremely rare for me to meet someone who doesn’t want to provide additional income for their family, position themselves to retire early,…
Short Weekly Wrap-Up
by Phil - July 3rd, 2009 8:14 am
Wheee, what a great way to end the week!
As I mentioned in yesterday’s post, we had gone into the day flipping our short firepower to BG $60 puts at $1.30 and TOT $55 puts at $1.20 as well as our remaining DIA $84 puts at .84. We went back to cash for the weekend but consider that the DIA $84 puts finished at $2.04 (up 142%), BG $60 puts finished at $2.10 (up 61%) and TOT $55 puts finished at $2.83 (135%) and you can see how even small allocations out of cash yield very nice one-day returns on put options. You do not have to take big risks to make big rewards, playing put options allows us to stay flexible and mainly in cash without "missing" too many market market moves.
We blew right through the upper targets I set in the morning and the Dow flew right down near enough our 8,250 (June lows) target that it looked bounceable, as the other indexes were holding up better than the Dow we felt we could play it for a small recovery over the weekend. We picked up some DIA $85 calls for .76 but elected not to DD at our scale-in target of .64 into the close as we already had bullish plays on ZION as well as Dow components AA, BA, GE and PFE, all longer-term plays that we are looking forward to adding to cheaper if they keep heading down. VLO and SNY were added in the afternoon as well as a UNG spread since they decided to just give it away at $13 again.
While we are just dipping our toes into some long posItions, it is the first time in a month we’ve been happy enough with the pricing to even take a chance. Of course we maintain our long put covers (just in case) but what’s the point of having protection if you have nothing to protect? On the whole, the volume simply wasn’t that impressive and we attribute much of this drop to people who were "shocked" that the economy isn’t as good as they thought it was (cough, Cramer fans, cough, cough) but it’s EXACTLY as weak as we thought it was and that means there are certain price points we are willing to hit long-term. Kudos to all who patiently waited with us for pretty much the whole month of June - now comes…
Thrilling Thursday Morning - Jobless Recovery Edition
by Phil - July 2nd, 2009 8:26 am
As I mentioned yesterday, the ADP numbers were not good.
Now it’s one thing to see something happen and quite another to do something about it. One of the reasons we like to be in cash is we get to wait for the market to do something silly so we can bet against it. Yesterday was a gift as the Dow climbed all the way to 8,577 at 10:30 and we gave it a few minutes for the Crude Inventories, which were a disappointment for the oil bulls and our first Trade Alert of the day went out to Members at 10:35 saying: "OIH $95 puts are a good deal at $1.58." These trades don’t happen in a vacuum - we had been watching OIH all week and decided it was a safer short than USO, which also sold off nicely but the OIH was no slouch with the $95 puts finishing the day at $2.30 (up 45%).
Just a few minutes later, at 10:43, we were able to take advantage of the DIA $84 puts at .84, which finished the day at $1.08 (up 28%) and we were able to get back to cash while speculating on TOT $55 puts at $1.20 and BG $60 puts for $1.30 into today as we expected some downside follow-through to grip Europe, who were overly complacent yesterday. I wanted to mention this as I hear from many traders who are getting hit hard because they feel the need to stay "invested" for fear of missing something and the only thing you are missing in this market by not having a cash position is a good night’s sleep. Having cash allows us to pick our spots, make money and get back out to cash. We’re not day-traders but we sure as hell take our profits if we hit our goals in a day!
We’re still waiting for the market to pick a real direction but there are some things we do know and one of them is that oil is massively over-priced. AAA just released a report stating that the peak for gasoline prices has already passed and estimates that auto trips will be down 2.6% this summer. As I keep saying, people simply CAN’T afford to pay these pumped-up prices, no matter how much speculators wish it to be otherwise. Clearly the dumb money is following Goldman et al into the commodity game - just like last year and…
Which Way Wednesday - A Brand New Q!
by Phil - July 1st, 2009 8:22 am
Well we sure ended Q2 with a bang.
Just because we’re in cash doesn’t mean we don’t have some fun and our final index play of the quarter was a nice 70% gainer on the DIA $86 puts. Other than a TNK spread and some quick GS puts (up a quick 20% and out), that was our only play of the week so far so we’re really picking our spots for that sidelined cash. Now that Q2 is finally fading into the sunset, it is time to see what’s real and what isn’t and we’re really looking forward to earnings season, where we hope to separate the haves from the have-nots.
As David Fry pointed out regarding yesterday’s action: "Stock price declines today were milder than expected given the news. But, silly me, I forget that this is the quarter and mid-year end—there are bonuses to be had and bullish headlines to be written. Why did the market rise this quarter? An overwhelming amount of liquidity plus an equal amount of BS." It has indeed been a very frustrating quarter to be a bear, mainly because you have an administration that turns a blind eye towards bullish market manipulation because it’s "good" for the economy. Unfortunately, it’s only good for the economy the same way rigging baseball so the Yankees would play the Mets in a subway series would be "good" for New York sports - it may be good in the short run but, if people begin to distrust the validity of the games, then they may lose interest altogether…
Professional traders like the market to make some sense. We like to see X data have Y effect in a fairly reliable curve. Consumer confidence fell 10% yesterday and consumer spending is 70% of the GDP so you would think it would affect the market by more than 1% right? Not this market - nothing seems to matter and that’s OK, we’re getting used to the scam but we’re now playing the scam - not the market itself and that’s never a good thing and it’s certainly no reason for us to commit our long-term capital and that’s the only way this market will ever get healthy again.
Meanwhile, over in reality, steel prices in the US fell 3.1% in June - the 11th consecutive monthly decline as the only green shoots we see there are the ones growing through the rust of the abandoned steel mills. Steel…
Q2 Tuesday - Ending With A Whimper, Not A Bang
by Phil - June 30th, 2009 8:27 am
What happened to our great rally?
We started the quarter off well enough, with the Dow at 7,522 and S&P at 787 on April 1st, we flew right up to 8,000 on the Dow and 840 on the S&P the next day but then it took us the rest of the month to gain 200 more points and the last day of May we finished at 8,500 Dow, S&P 920 - nothing to write home about on the whole. June 1st was very exciting as we made all our gains for the month that day, flying up to Dow 8,800, S&P 944 but that’s where we called a top and cashed out and it’s been pretty dull ever since as we’ve bounced up and down between 8,800 and 8,300 on the Dow and 940 and 900 on the S&P, waiting for a breakout one way or the other.
It’s dull to stay in cash, it’s like going to the track and not betting on any races. We really thought we’d get a proper indicator by now and we had fun betting the downturn from the middle of June but even that fizzled and left us back in cash as we head into the holiday weekend. On the bright side, the VIX has come down substantially and we are now able to pick up long options again at reasonable prices. This will be fantastic and give us some great leverage but we still need the market to pick an actual direction.
At least now we have earnings coming so we can evaluate various sectors and place some bets for Q3 but index buying has ruled Q2 and the performance of individual stocks has been washed away as a factor as machine trading has yanked the broader market up and down on a daily basis. It used to matter how IBM or INTC was doing as an individual company, now the entire Nasdaq can fly to the moon and take PALM, AAPL and RIMM with it, even though it’s not very likely that all can do well in the same space for very long (remember MOT?). We are no longer deluding ourselves that 2Bn people in Asia and Africa will be sporting the newest smart phones on the beach next summer yet the pie in the sky valuations persist, as if there is infinite room for all competitors to sell in the global marketplace. In fact, emerging market valuations are are…
Monday Market Madness - Last One in Q2!
by Phil - June 29th, 2009 8:18 am
What a nice, quiet weekend.
There was very little news of note and, despite a nervous sell-off in early Asian trading, the markets are back to their usual pre-market positions of UP. The Dow is up 100 points since 2:30 am, the Nas is up 2.5% as is the S&P and the Russell. Oil has been jammed all the way back to $70 after falling below $68.50 in early morning trading and the dollar has been pressed back down to 95 Yen while it once again costs more than $1.405 to buy a Euro and $1.66 to buy a pound. It’s no wonder we have such success playing the middle - "THEY" don’t allow the market to go anywhere else!
I really thought this morning they’d have trouble holding oil up as the IEA cut its 5-yer oil forecast for EVERY year through 2012 by 3 Million barrels a day (3.5%). In fact, according to the IEA, oil will not return to 2008’s consumption level of 85.6Mbd UNTIL 2012. “The deep economic recession that has spread worldwide in the past year has taken a severe toll on oil demand,” the IEA said in the report, updating estimates made in December. “This marks a break after several years of strong oil demand growth.” In its “lower GDP scenario,” which assumes that a rebound in the global economy will be 3 percent a year, the IEA said global oil demand could fail to reach last year’s levels by 2014, standing at 84.92 million barrels a day, 6.34 million barrels less than predicted in December.
Bloomberg led off this morning with the headline "Commodity Rally May End as Supply Rises, Speculators Sell Bets" but not all speculators seem to have gotten the message as speculation proceeds apace. “Commodities have gotten a little ahead of themselves,” said Walter “Bucky” Hellwig, who helps oversee $30 billion at Morgan Asset Management in Birmingham, Alabama. “As long as there’s uncertainty about growth, that’s going to be headwind commodities won’t be able to overcome.” The World Bank forecast for this year’s economic contraction to be 2.9 percent, rather than the 1.7 percent decline previously anticipated, may curb sales just as producers expand output in anticipation that the worst is over.
Hedge funds and other large speculators are holding a net 653,915 contracts betting on higher prices, according to an index of combined positions in 20 commodities tracked by the U.S. Commodity Futures Trading Commission. Their net long position reached 854,743 contracts earlier this…
Weekend Reading - Can American Consumerism Save Us?
by Phil - June 28th, 2009 10:30 am
There’s hardly any point doing a wrap-up as hardly anything has been happening.
If you are buried in the daily gyrations of the market, lots of stuff happens during the day but, as soon as you step back and look at the action - you’ll notice nothing really happened at all. After a catastrophic downturn on Monday, we pretty much bottomed out at 8,250 on Tuesday until Thursday’s 200-point bump and here we are, back at good old 8,450 - which is where we bumped along for pretty much all of May.
Indeed our best plays have, by far, been our premium burning plays, as attested by the very nice performance of our $111,659 Portfolio, our exercise in conservative hedging that is outperforming most risk-based strategies in this very choppy market. The other winning strategy in this annoying market has been Day Trading, and we’ve had fantastic performance from our Oxen Group picks each morning and Ilene has a good article what David looks for in "The 5 Keys to Identifying a Fundamental Day Trade." Combine that article with our Strategy Section and my article on scaling in and you have your own little day-trader’s manual!
This will be useful next week as we have a 4-day week (Friday is the observed 4th of July) and there’s no way we want to go into the 3-day weekend with too many positions so it’s going to be a lot of in and out trading once again. I probably shouldn’t, but I keep focusing on these silly fundamentals like Bespoke’s GDP chart on the right. These are FACTS, which are the things being ignored as you hear things like Friday’s Michigan Consumer Sentiment hit 70. I often point out that these are the same consumers - 60% of whom, when polled, believe their homes have held their value or gone up in value. Just because they are all chipper for the pollsters, does not mean they will be out there turning these economies around.
US consumers are the New York Yankees of global consumption. They are indimidating, they are record-setting and, from an historical perspective, they give the IMPRESSION of being unbeatable - but I grew up in New York and remember a streak from 1965 to 1975 when they didn’t win a single pennant. That’s a team that has averaged one World Series Title every 3.3 years since 1923 (26 Times World Champs) and one League Championship every 2.3 years over the same time period. Like the US consumer, you come to EXPECT the Yankees to be in contention and…
TGIF - Just Stop the Madness Already!
by Phil - June 26th, 2009 8:29 am
California lost more than Michael Jackson yesterday.
They also lost their credit rating as Fitch dropped them to A-minus and even that rating was immediately placed on negative credit watch. California faces a $24 billion-plus budget deficit for the fiscal year that begins Wednesday, rapidly declining sales tax revenues and an impotent legislature that can’t agree on solutions. Faced with the prospect of running out of cash, State Controller John Chiang said Wednesday the state will begin to issue IOUs for all general fund payments other than those categories protected by the state constitution, federal law and court decisions.
California has always been a trend-setting state and we have to wonder how far behind them the rest of the country is. According the the Congressional Budget Office, the US’s projected debt is now growing so quickly that is will exceed the size of the economy in 2023, that is 7 years earlier than the projections of the last report just 18 months ago. The culprit is not the huge sum of stimulus spending that President Obama and Congress have injected into the economy this year, the budget office said. Instead, rising health care costs and an aging population together continue to push government spending upward at an unsustainable pace, only faster than the budget office last estimated.
“Debt soars because of unrelenting growth in federal spending on health care programs and a rise in Social Security spending” as a share of the economy, the report said. Up to 90 percent of the increase is due to Medicare and Medicaid spending rather than Social Security, it added. Senator Kent Conrad, a Democrat from North Dakota who is chairman of the Senate Budget Committee, released a statement saying that the budget office report “reinforces the importance of not only paying for health reform, but ensuring that it significantly bends the cost curve on health care beyond the next ten years. We simply must get these health costs under control.”
Gee, we can’t afford health care, we can’t afford rising energy costs but people are buying stocks as if both industries have nowhere to go but up, despite lower demand and rising unemployment. I guess we can keep borrowing and borrowing and borrowing and borrowing to pay the ever-increasing prices projected by commodity futures and biotech multiples but one would think there’s a theoretical limit…
There’s a major disconnect going on between the markets and reality - perhaps it is…
GDPhursday, The Negative 5.7% Solution
by Phil - June 25th, 2009 8:28 am
Big day today!
We have our GDP report at 8:30 but that will be quickly forgotten as Bernanke is called to testify on Capital Hill in what is quickly becoming BankAmericagate and the calls are coming for Bernanke’s learned head, most notably from San Diego Republican Darrell Issa, who has charged: "The Fed engaged in a cover-up and deliberately hid concerns and pertinent details regarding the merger from other federal regulatory agencies."
The Democrat who heads the committee, Edolphus Towns of New York, has called Bernanke to testify on Thursday. "I am not going to prejudge these issues. We are not even close to finishing the Bank of America-Merrill Lynch investigation at this point," Towns said in a statement. The issue has become a political football as lawmakers look to blame someone for the troubled deal amid taxpayer anger over the billions of dollars the government infused into banks to try to ease the world financial crisis.
The goal of the Republicans is to vilify Bernanke (as he is now part of the current administration so they are hoping it rubs off on Obama) while trying not to remind people that they were in charge when this happened. That is truly confounding and it should be some circus today up on Capitol Hill as all the Congressmen jockey for their moment in the spotlight to show how much they care about our nation’s financial crisis by tying up the Federal Reserve with endless requests for documents and testimony at this critical juncture in our "turnaround."
I said to members yesterday, as this news was breaking: "So the spin on all this is going to be that it’s the attack on Bernanke and not the Fed move itself, that caused the sell-off. That will be enough to let them jam up the futures (maybe even a stick close) and keep Asia and Europe in the game, hopefully attracting more "bargain hunters" for US equities." That’s pretty much where we’re at this morning with the futures jammed up more than 1% into Asia’s open (midnight US), where Dow futures were trading 100 points above the 4pm close yet the S&P futures got rejected off that pesky 908 mark and have since fallen back below 900 as of 8:15. Asia responded as expected with 2% gains on the Nikkei and the Hang Seng but Shanghai was flat and the Baltic Dry Index has taken another sharp downturn, back to…
German
Spanish
French
Italian
Portuguese
Japanese
Korean
Russian
Chinese
Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the Favorites backup site
(