Archive for 2008

Scaling In Or Averaging Down

The thoughts of others

Were light and fleeting, 

Of lovers’ meeting

Or luck or fame.

Mine were of trouble,

And mine were steady,

So I was ready

When trouble came.

- Charlie Munger

Investing in the stock market is as much about conquering oneself as conquering the markets.  We consider greed and fear to be our arch-enemies, recognizing that both impact our ability to think rationally.  Even those who hope to think rationally and who are aware that the best results in the stock market emanate from rational thinking often succumb to temptation and panic.

So how can we avoid acting irrationally and succumbing to greed and fear?

First, we must recognize that we tend to create the circumstances that lead to irrational behavior.  Perhaps we decide to risk too much on a single trade, perhaps we over-leverage, perhaps we borrow from a home equity line of credit.  Whatever the reason, an unexpected market event can lead to a decision between holding existing positions at the risk of experiencing continued losses or capitulating and banking losses.

Next, it is imperative that we are willing to hold cash in the absence of compelling investment opportunities.  At Stock and Option Trades, we have been emphasizing a heavy cash position for almost 6 months.  Indeed, in last week’s commentary we pointed out that we expected one last surprise before a spring/summer rally and last Friday’s big down move certainly appears to have taken most by surprise.  In this week’s Market Commentary accompanying the Trade Alert, we will highlight when we believe the optimal buying opportunity is.

Another way of mitigating risk of surprise from a market event is to employ substantial hedging, which is another approach we have been advocating for many months on any positions opened.  And one of the most important temptations to avoid is leverage.  Too many examples in history have highlighted how excessive leverage leads to demise when unexpected events occur.  Even the most conservative investors can become paralyzed by losses due to excessive leverage. 

It is imperative to realize that the effects of a mistake do not necessarily stop with the mistake itself.  A loss at one moment in time may diminish confidence and may result in one taking a smaller position on another investment that may be a great opportunity.  This creates a chain reaction, whereby…
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From GE to G7 – What a Week!

FearWhat a difference a day makes!

We were right on track and doing great for the week until Friday, when GE rained on our parade.  Right at the end of a lovely 2-week consolidation above 12,500 we had to have a down 256 day that dropped us back to 12,325, sill a nice improvement over March, but certainly not where we wanted to be.

Needless to say, other than our Short-Term Virtual Portfolio, which had very nice gains due to housing our index puts, the other virtual portfolios all took hits but, on the whole, we gave back very little of last week's gains, which were spectacular.  As option sellers, we really don't care about a pre-expiration dip, the question that faces us next week is the classic Shakespearian puzzle "To cover or not cover." That is the question.  Whether it is riskier in our virtual portfolios to brave the depletion of value that may lower our fortune or to take deep covers against a further downturn and, by covering our longs, to cap our gains, to profit no more from a recovery that we still dream of…

The gains of the index puts in the Short-Term Virtual Portfolio took the sting out of the losses on Friday and we were very lucky to get good prices for our Long-Term Virtual Portfolio covers from our timely Thursday review as many of the contracts were slow to drop.  Hopefully we are not OVER-covered into the weekend but it is better safe than sorry I think:

  • Short-Term Virtual Portfolio: Up 9% for the week.  Just 11 open calls dwarfed by the value of 8 naked puts and our 1/2 covered DIA puts.
  • Long-Term Virtual Portfolio: Down 4% for the week.  14 naked calls, 29 covered positions. 
  • Stocks: 2% gain for the week.  4 covered positions, 1 short put (IBM).
  • Complex Spreads:  Down 12% for the week, too much naked Google!  Still half naked on Apple and Google, all naked on CROX.  Google earnings are Thursday so this is going to be a crazy week!
  • $10,000 Portfoio:  Down 7% for the week.  More naked than last week with 3 open calls – we'll see if that risk pays off next week.
  • $25,000 Virtual Portfolio: Down 7% for the week.  4 naked positions, 9 covered positions.
  • Day

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Friday Morning – GE, I Wish I’d Stayed In Bed!

GE missed!  They never miss!

Not a little miss, mind you but a 7 cent miss (out of .51 expected) that is sending their stock down 10% pre-market, knocking off $36Bn in market cap and pretty much freaking out the entire market.

I'm very excited, this will be a great chance for us to take out our callers and, in looking over the report, I have to agree with Jeff Immelt, who says the miss is a "bump in the road" as the company took hits (just like every other major financial) in financial services and health care, leading to an overall 6% drop in profit.  GE's financial services businesses were hit hard and Immelt said the Bear Stearns situation accounted for 5 cents of the 7 cents a share by which the company missed earnings estimates.

Since the BSC issue came up during GE's "quiet period," it was too late for the company to post a warning so much will be made today about how GE is usually right on the money and even they didn't see this coming but it's simply not true, it was an accident of timing and is no reason to panic.

The possibility that GE’s results might not be up to par came to mind in late March, when GE agreed to sell its commercial card and corporate purchasing business unit to AXP.  GE said it was selling the business as a step to prepare for its exit from the private-label credit card business, as part of an asset-sale plan announced in December,Reuters reported.  But the $1.1 billion deal, which was announced on the afternoon of March 27, was “expected to be completed by the end of the month,” the American Express press release said – an unusually fast closing that suggested to the conspiracy-minded that GE might have been looking to book a quick gain that would make its first-quarter numbers look healthier. Obviously, it didn’t work out that way

Infrastructure profit climbed 17% and NBC Universal's profit rose 3% and GE generated 8% more orders, to $24 billion, and its equipment backlog climbed 41% to $52 billion. GE lowered its 2008 profit target to a range of $2.20 to $2.30 a share, with second-quarter earnings pegged at 53 cents to 55 cents a share. Analysts had expected annual earnings of $2.43 and second-quarter earnings of 58
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Thursday Wrap-Up

Thank you Mr. President!

We have a new rule at PSW and we go short whenever Bush goes on TV and he is now 11 for 11 since March in killing a rally, possibly one of the single most reliable market indicators we have.  Today the President said the surge was now working so well it’s no longer a surge and he will now permanantly raise troop levels to 140,000.

Now in its sixth year, the war in Iraq has claimed the lives of more than 4,000 U.S. troops and cost (officially)more than $500 billion. An estimated 80,000 Iraqi civilians have died, and 5 million have fled their homes.  In the US, we’ve lost 5M manufacturing jobs and 3 million American families have had their homes taken from them in foreclosure and another 20% have fallen behind on their mortgage payments.  Mission accomplished!

Of course the President took the time to reverse the downturn in oil, that sent the energy sector down 1.5% early in the morning by banging the war drums on Iran again saying: "The regime in Tehran also has a choice to make: to live in peace with its neighbor, enjoy strong economic and cultural and religious ties, or it could continue to arm and train and fund illegal militant groups, which are terrorizing the Iraqi people and turning them against Iran.  If Iran makes the right choice, America will encourage a peaceful relationship between Iran and Iraq. Iran makes the wrong choice, America will act to protect our interests and our troops and our Iraqi partners.

Not content with that, Bush also took the time to tell us we could be spending even more money: "Today, we face an enemy that is not only expansionist in its aims but has actually attacked our homeland, and intends to do so again," he said. "Yet our defense budget accounts for just over 4 per cent of our economy; less than our commitment at any point during the four decades of the Cold War."

"And if all others accepted the lie which the Party imposed—if all records told the same tale—then the lie passed into history and became truth. ‘Who controls the past’ ran the Party slogan, ‘controls the future: who controls the present controls the past." – George Orwell, 1984

I warned of all this in my Big
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Long Term Virtual Portfolio Review

Well I sure am glad we took out some callers yesterday!

It's always important to remember in the LTP that we have a clear and well-defined goal each month – we simply want to make enough money to cover our premium loss on the longer calls.  Once we do that, we have won and we then need to decide if we have indeed turned bearish on our position or not.  Stocks are not in the LTP because we think that they are worth LESS than our strikes – we pick a stock for the LTP because the strike price PLUS the cost of our leap contract is LESS than our target for the expiration date.

Of course, just because I feel very strongly that AXP will finish the year  at $51.30 or higher, that doesn't mean I think it's going to get there in a straight line.  You may love your baseball team and expect them to get to the World Series but that doesn't mean you are going to go around telling everyone they're going to go 162-0 this season does it?  Sometimes you have your weakest pitcher going up against another team's best pitcher and one of your key guys is injured.  You may want to win the game but it's doubtful that will be your big bet for the year right?

Just like following a team we love, we need to know our stocks' strengths and weaknesses, we need to know how they play at home (when the sector is moving with them), how they do on the road (when the sector is going against them), how they do after back to back wins (some teams and stocks have a lot of trouble winning 3 in a row)…  You need to know what gives you real trouble (with AXP it would be slowing consumer spending) and what doesn't give you real trouble (credit card defaults) compared to the competition.  You need to know your market (upscale global consumers) and know how they are behaving in order to get your own game face on etc. etc.

Most importantly, you need to know what you need to do to win.  With AXP, we paid $6.30 for the Jan $45s and the stock is at $45.  That means we need to collect at least .80 per contract between now and December
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Virtual Portfolio-Trend following

OK, we have a new post! Let’s post comments here from now on


Thursday Thump – For the Dollar!

The dollar is challenging it’s lows again.

This morning the BOE lowered rates by just .25 to 5% while the ECB left rates unchanged at 4% while Iceland RAISED their rates another half point to 15.5%. The ECB has a mandate to keep inflation in check. In the Frankfurt-based bank’s view, concerns about the credit squeeze are no match for inflation running at 3.5% and recent wage deals in Germany — the largest economy in the 15-nation euro area — that could send it even higher.

Euro-zone inflation is well above the roughly 2% level preferred by the ECB, which sets monetary policy for the bloc of 317 million people that accounts for some 15% of the world’s global domestic product.  ECB President Jean-Claude Trichet underscored his bank’s tough stance on interest rates last week, saying that "price stability is something which is essential for the poorest and the most vulnerable of our citizens."

Note that oil is NOT making record highs against the Euro or the Yuan for that matter, which just set a record at 7 Yuan to the dollar, up 13% since last year.  The Yuan’s is still down more than 11 per cent against the euro, 11.2 per cent against the yen and 6 per cent against the South Korean won, indicating they are still artificially keeping the currency in check against the dollar, should China stop doing this, the dollar could snap sharply lower still.

We get our trade IMbalance report today and the rapid Yuan inflation should sting a bit, we’ll have to see how that turns out but, as I said in last night’s post, my main concern is today’s treasury auction, where we need to borrow another $50Bn worthless dollars from our foreign masters.

The Nikkei fell below 13,000 again, dropping 166 points with a weak finish but the Hang Seng broke over 24,000, gaining about 1% in a strong overall day as China’s economy grows in size to rival Germany’s for standing as the world’s 3rd largest economy at around $3.8Tn.  China’s GDP grew at 11.9% last year and is projected to be about 9% this year but inflation is pushing 8.7% so China will have some tough choices to make, one of which may be to stop wasting money propping up the dollar…

European Markets are off about 1.5%…
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Wednesday Wrap-Up

Well, so much for a sell-off in oil!

Although we had a rally back into the close, we failed to break our day's levels of Dow 12,500, S&P 1,350, Nas 2,325, NYSE 9,100, Russell 700 and SOX 360.  At 12:54 I had reminded members that we needed to hold them to stay bullish and we just couldn't get them back at the day's end.  Oil hit $112 per barrel intra-day, $2 over our target high due to a greater than expected draw in inventories, possibly due to Srping Break driving but any excuse was a good excuse for the NYMEX pump crowd, who were chomping at the bit to make that new high.

Notice in the Spring Break article that 17% of the people surveyed by AAA have CANCELED their summer vacation plans due to gas prices and another 23% have "revised" their plans.  This does not bode well for the travel industry and perhaps EXPD and PCLN are ripe for a fall.  Another fuel demand booster last week was the cancellation of over 1,500 flights by American Airlines (now up to 2,500) which stranded roughly 200,000 passengers, many of whom were forced to drive instead.  Add to all that some persistently cold weather and you have a surge in fuel demand but we'll have to wait until next week to see if it's a one-hit wonder or not.

On the whole, it's been a decent 7 sessions of consolidation since the last time we put up the Big Chart so I'm not too worried just yet:





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Option traders express long volatility view in Ford, short view in Burger King

Today’s tickers: F, BKC, NKTR, YHOO, C, CHS, BSC, BBBY



F – Shares in automaker Ford are down 1% at $6.84 this morning, one day after Standard & Poor’s warned that restructuring plans underway at all major car makers could be seriously jeopardized by soft U.S. sales and hard-to-come-by credit. S&P also warned that the automakers would face additional adversity if asset-backed securities markets continue to struggle. S&P’s ominous warning was released on the same day that Ford reported a 47% gain in Q1 sales in China, creating an interesting ambivalence in its outlook that would be enticing to a volatility trader. Implied volatility on Ford options at 54.8% actually rests below the 56.1% historic reading, a relationship that should keep option premiums lower in price, making long volatility trades more economical. To that end, it looks like a trader paid 29 cents to position long the May 6/8 strangle, a position that generates profit for the buyer with a break to the upside past $8.29 or below $4.71.


BKC- Yesterday we noted a wave of defensive positioning in forlorn fast-food chain Wendy’s in the form of a September collar trade that might have been deployed to protect a vulnerable position in the underlying stock. It was with this in mind that we observed a bump in option trading volume to more than 59 times the normal level in the world’s number-two burger chain, arch-rival Burger King, the highest level of volume in at least at year. Shares are 1% lower at $27.00 at present dispatch. Earlier today the company debuted the latest addition to its budget breakfast menu, the so-called cheesy bacon wrapper. The unveiling is in keeping with a Wall Street Journal interview with the company’s CEO, John Chidsey this week, who said that Burger King had deliberately resolved not to go head-to-head against McDonald’s or Dunkin’ Donuts on the discount coffee market – a strategy that would have required its franchisees to make costly investments in new equipment – preferring instead to put product and advertising spending behind the breakfast segment. Hence the cheesy bacon wrapper. Confident that its concentration on the breakfast crowd – and effective management of its turnaround by CEO Chidsey – will keep Burger King shares on an even keel, it looks like a trader today opened to sell the May 25/30 strangle, taking the 80-cent combined premium on…
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Which Way Wednesday?

This is a tough one.

There is a frenzy of hyena attacks led by Gross and Greenspan attempting to talk down the markets, trying to remind us how terrible everything is and pushing the Fed to lower rates further at their upcoming meeting.  This was timed with the release of Fed minutes (that a former Fed Chairman would have gotten an early copy of) that show the Governors are worried about a further downturn.  Since the Fed is also very concerned about inflation though, with Fisher (Dallas) and Plosser (Philly) voting against the rate cut.

Fisher stated: "That focusing on measures targeted at relieving liquidity strains would improve economic prospects more quickly and lastingly than would further reductions in the federal funds rate at this point." – That's a pretty dangerous dose of rationality if it catches on!  This is very bad news for commodity bulls, who need more financial voodoo to prop prices past the 50% gains they tacked on since last Q1.  As we've been saying for quite some time, it's possible for one commodity to spike up but when they all try to spike up at the same time, people simply start running out of money.  If the Fed and the Administration don't keep fueling the commodity fire with more money drops, like any blaze it will eventually exhaust itself as it runs out of combustibles.

Still you can't seem to stop investors from rushing into commodities because they WERE up 50% LAST year, ignoring the fact that for the previous 100 years they averaged 5% and that, IF THEY WERE TO AVERAGE 50% FOR JUST 2 MORE YEARS, then a gallon of gas will cost $8 and a gallon of milk will cost $9 and gold will be $2,000 an ounce and the lousy 100% gain they make on the commodity bets won't buy them a decent bottle of champaign to celebrate with. 

I've decided that the problem with commodity investors (and many investing classes) is that they don't live in the real world.  Our modern market systems make it possible for kids to graduate college, never have a real job and become traders who are given Billions of dollars to invest before they are 30.  They view the market as some sort of video game and have no sense of the reality of the numbers…
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Zero Hedge

Enemy Of The People?

Courtesy of ZeroHedge. View original post here.

Via The Zman blog,

There has never been a time when normal people did not know the media was biased and biased in a predictable direction. For every non-liberal in the media, there were at least ten liberals. The ratio was probably higher, but then, as now, some lefties liked to pretend they were independents or some third option.

The media used to invest a lot of time denying they had a bias and an agenda, but the only people who believed them were on the Left, which had the odd effect of confirming they had a bias and an agenda.


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Phil's Favorites

A 2019 Earnings Recession?


A 2019 Earnings Recession?

Courtesy of 

Shout to Leigh!

On the new Talk Your Book – Josh Brown is joined by Leigh Drogen of Estimize, one of the leading providers of crowdsourced financial and economic data to talk about the trend in corporate profits that could potentially lead to an earnings recession later this year.

What is the thing that Leigh is seeing in the data that Wall Street isn’t yet picking up on? What segment of the stock market is most at risk? Why is the crowd smarter than the narrow consensus of Wall Street analysts?

Check out Estimize ...

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D.E. Shaw Investment Calls For Leadership Change At EQT

By ActivistInsight. Originally published at ValueWalk.

Elliott Management has offered to acquire QEP Resources for approximately $2.1 billion, contending the oil and gas explorer’s turnaround efforts have done little to lift the company’s share price. The company responded and said that a thorough review of the proposition is imperative in order to properly act in the best interests of shareholders, “taking into account the company’s other alternatives and current market conditions.” The news came only a month after Travelport Worldwide agreed to sell itself to Siris Capital Group and Elliott’s private equity arm Evergreen Coast Capital for $4.4 billion in cash and two months after Athenahealth was bought by Veritas and Evergreen for $5.7 bi...

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Kimble Charting Solutions

Gold & Silver Testing Important Breakout Levels!

Courtesy of Chris Kimble.

Gold and Silver from a long-term perspective have created a series of lower highs over the past 8-years. Will 2019 bring a change to this trend? A big test is in play!

Gold since the lows in 2016 has created a series of higher lows, while Silver may have created a double bottom.

Gold & Silver are currently facing break attempts a (1) and (2). These falling resistance lines have disappointed metals bulls for the past few years.

The direction of Gold and Silver weeks and months from now should be highly influenced by what each does as they are attempting to break above important resistance levels.

To become a member of Kimbl...

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Insider Scoop

UBS Says Disney's Streaming Ambition Gives It A 'New Hope'

Courtesy of Benzinga.

Related DIS Despite Some Risks, Analysts Still Expecting Double Digit Growth From Communications Services In Q4 ... more from Insider

Digital Currencies

Russia Prepares To Buy Up To $10 Billion In Bitcoin To Evade US Sanctions

Courtesy of Zero Hedge

While the market has been increasingly focused on the rising headwinds in the global economy in general, and China's economic slowdown in particular, while the media is obsessing over daily revelations that Trump may or may not have colluded with Russia to get elected, a far more critical, if underreported, shift has been taking place over the past year.

As we reported in June, whether due to concerns over draconian western sanctions and asset confiscations following the poisoning of former Russian military officer Sergei Skripal, or simply because it wanted to diversify away from the dollar, Russia liquidated virtually all of its Treasury holdings in the late spri...

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Chart School

Weekly Market Recap Jan 13, 2019

Courtesy of Blain.

In last week’s recap we asked:  “Has the Fed solved all the market’s problems in 1 speech?”

Thus far the market says yes!  As Guns n Roses preached – all we need is a little “patience”.  Four up days followed by a nominal down day Friday had the market following it’s normal pattern the past nearly 30 years – jumping whenever the Federal Reserve hints (or essentially says outright) it is here for the markets.   And in case you missed it the prior Friday, Chairman Powell came back out Thursday to reiterate the news – so…so… so… patient!

Fed Chairman Jerome Powell reinforced that message Thursday during a discussion at the Economic Club of Washington where he said that the central bank will be “fle...

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Members' Corner

Why Trump Can't Learn


Bill Eddy (lawyer, therapist, author) predicted Trump's failure based on his personality, which was evident years ago. This article, written in 2017, references a prescient article Bill wrote before Trump became president, in July, 2016, 5 Reasons Trump Can’t Learn. ~ Ilene 

Why Trump Can’t Learn

Donald Trump by Gage Skidmore (...

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Opening Pandora's Box: Gene editing and its consequences

Reminder: We are available to chat with Members, comments are found below each post.


Opening Pandora's Box: Gene editing and its consequences

Bacteriophage viruses infecting bacterial cells , Bacterial viruses. from

Courtesy of John Bergeron, McGill University

Today, the scientific community is aghast at the prospect of gene editing to create “designer” humans. Gene editing may be of greater consequence than climate change, or even the consequences of unleashing the energy of the atom.


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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...

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Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.


This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...

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Free eBook - "My Top Strategies for 2017"



Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:


·       How 2017 Will Affect Oil, the US Dollar and the European Union


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About Phil:

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...

Learn more About Phil >>

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About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

Market Shadows >>