Testy Tuesday - Have the Markets Become Comfortably Numb?
by Phil - January 19th, 2010 8:08 am
"There is no pain you are receding
A distant ship’s smoke on the horizon.
You are only coming through in waves.
Your lips move but I can’t hear what you’re saying.
When I was a child
I caught a fleeting glimpse
Out of the corner of my eye.
I turned to look but it was gone
I cannot put my finger on it now
The child is grown,
The dream is gone.
but I have become comfortably numb." - Pink Floyd
I have a theory that the markets (and the American people in general) aren’t irrational, they are simply shell-shocked after suffering a very traumatic group financial experience…
To be shell-shocked is to be "mentally confused, upset, or exhausted as a result of excessive stress" and the most common symptoms are: Fatigue, slower reaction times, indecision, disconnection from one’s surroundings, and inability to prioritize - That certainly sounds like our Congress doesn’t it? Combat stress disorder was first diagnosed in WWI, when 10% of the troops were killed and 56% wounded - far worse than had been experienced in previous wars. Our current financial crisis has similarly affected more people than any previous crisis with almost everyone knowing someone who is bankrupt or lost their jobs or homes and almost no one escaped the carnage of the downturn without some financial damage.
Combat fatigue may go a long way to explaining the severe drop-off in volume that has plagued the markets since March, with participation now down to 25% of where we were last January and that leaves us open to the blatant sort of market manipulation that Karl Denninger caught last week as well as the usual nonsense we get daily from HFT programs that drive the market with such precision that we are able to tell how the day is going to go by simply checking our hourly volume targets. Here’s a clip from CNBC where a floor trader discusses market manipulation as a fact of trading (2 mins in).
As Nicholas Santiago points out on In The Money Stocks, "January is usually a very high volume month, yet it has started off the New Year even lighter than the last two months of 2009. Light volume markets are very difficult to short. Hence the old saying, ‘never short a dull market’." Not only is the market volume light, but over 60% of the trading volume is concentrated on 5 stocks: AIG, C, BAC, FNM and FRE!
We have often noted that high-volume (relatively) days almost always tend to be down days and PSW Members can tell you how the…
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$112,291 Portfolio Update, Week 16
by Phil - August 8th, 2009 8:23 am
Next week will be the last week for our very profitable portfolio, that started with $100,000 on April 10th.
This portfolio has already made 19% in 16 weeks and many members wanted to start a new one from scratch. So, by popular demand, we will be restarting a brand new portfolio the week after options expiration, also with $100,000 and also a hedged portfolio but this time with the goal of drawing a monthly income. I got this idea when I went down to Florida last week and spoke to many people who asked me about their investing accounts. Many of these "safe" accounts had been cut in half or worse and the returns they were producing were coming in at 5% year - if that and people were counting on this money for their monthly expenses. I spoke to many people with $1M in the bank who were living off $50,000 a year in interest and dividends!
Using options and good hedging strategies, we have been able to produce a return in our virtual portfolio of 19% in just 16 weeks (12% cash, 7% unrealized). I’m not advocating someone take a whole $1M and shift it to stocks and options but, if you can make 20% on $200,000 while your other $800,000 makes a "safe" 5%, your annual income goes from $50,000 to $80,000 - that’s a lot of early-bird specials! I will, of course, be happy to answer any adjustment questions on this portfolio anytime during chat but we will no longer be tracking it weekly or making new plays. The goals of the new portfolio will be similar and the new trade ideas can be applied whether you are looking to draw an income or just start building long-term set of holdings for reinvestment.
In the last $112,007 Portfolio Update, from July 28th, we remained bullish and it really paid off with another $2,117 in unrealized gains ($6,690 not included in above total) as we made a very well-timed bottom call the week before and ran with it. We have haven’t had to call an "audible" in two weeks, sticking to our plan as the market held up nicely.
The first few weeks after you sell options are usually the worst and the rising VIX had boosted the premiums of the puts and calls we sold but none of that matters because we played a little more aggressive to the upside and, despite losing $3,080 on our covers, we are still way ahead of goals. As usual, we are…
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Hedging Your Way To Healthy Dividends - Part 3
by Phil - May 25th, 2009 5:56 pm
We’re going to go out with a bang here and give you a 3-for-1 in this final post on the issue.
In Part 1, we discussed the idea of going after former dividend payers who may bounce back while creating an artifical dividend through option hedging. In Part 2 we looked at using the buy/write strategy to give ourselves a nice discount on the stock, giving us a 30% hedge on the stock on top of the dividends. Today we will look at a couple of ways to play the safer bets and how to simply and effectively boost your dividend yield while also protecting your investment.
In Tuesday’s post we had 21 dividend payers divided into 3 categories. We’ll look at what we consider a "pretty safe" dividend payer, PGH, who pay a MONTHLY dividend of about 8 cents on a $8.11 stock (12%) as well as our long-time favorite, KMP who pay about $1 per quarter and our Blue-Chip selection will be CAT, who have a 4.9% dividend and are trading at a nice, cheap $34.31.
As we have 3 trades here I’m not going to go too heavily into the merits of each one. Suffice to say we like them at these prices and we like the option hedges we can put to work on the postions…
PGH is a stock we went crazy for back in March, when they were under $5 but that was when they were in the category of stocks where people felt the dividend was in jeopardy. It didn’t take much for them to fly back to $8.11 but, through the magic of hedging, we can knock that price back to an entry price of $5.29 by selling the Jan $7.50 puts and calls. As always, our major risk is that the stock falls below $7.50 and another round of shares are put to us at that price on Jan 15th. That would create an average entry of $6.40, which is 21% below the current price. Should we get called away as $7.50, that would be a $2.21 gain on cash so 42% PLUS 7 months worth of dividends, perhaps another .56.
Sticking with our $5,000 per position maximum risk, we can make the play the following way:
- Buying 400 Shares at $8.11 ($3,244)
- Selling 4 Jan $7.50 calls for $1.50 and 4 Jan $7.50 puts for $1.32, netting $2.82 ($1,128)
- If the stock is put to us on Jan 15th we will own 800…
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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
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