Archive for the ‘Options’ Category

A Catalog of Investing Errors

 

A Catalog of Investing Errors

Courtesy of Tim Richards, Psy-Fi Blog

Love Lists

We're attracted to lists like moths to flames and netheads to clickbait. The Big List of Behavioral Biases is by some way the most popular page on this website, but it actually provides very little insight into investing successfully.

Behind this, though, lies a deeper truth. Lists are processed more easily by the brain, and they're perfectly optimized for the click and go environment that is the Internet. Here I explain why. In a list. Obviously.

1. The Paradox of Choice

Too much information overwhelms us, we're unable to process it and have to take unsatisfactory shortcuts. The more choice we have the less empowered and happy we feel. I discussed this in Jam Today, Tyranny Tomorrow? but Claude Messner and Michaela Waenke have now taken this a step further.

In When Choice is Demotivating: Can One Desire Too Much of a Good Thing? Sheena Iyengar and Mark Lepper showed that consumers get more satisfaction out of choosing from a smaller selection of options. Now, in Unconscious Information Processing Reduces Information Overload and Increase Product Satisfaction Messner and Waenke demonstrate that this is because more options make people think harder.

Given the choice we'd rather not think, and lists help us reduce the conscious processing load: the list is a simple way of presenting information, and reduces the processing overload on our brains. Of course, financial service providers know we have limited time and brainpower, if we didn't many of them would go out of business.

2. The Certainty of an Ending

People dislike uncertainty. In fact we dislike it to the point of denying it exists, as witnessed by the rapid disaster myopia exhibited by many investors in the wake of market crashes or personal investing disasters (see Black Swans, Tsunamis and Cardiac Arrests). Lists provide certainty, although that certainty is often illusory.

I covered the classic research in this area, primarily Daniel Ellsberg's Ambiguity Paradox, in Ambiguity Aversion: Investing Under Conditions of Uncertainty: the main point is that people will preferentially plump for the option that provides more certainty, rather than exposing themselves to unknown risks for a larger


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Apple reaches $700bn market cap

Apple reaches $700bn market cap

By Andrew Wilkinson at International Brokers (originally published on Nov. 25) 

It only took a few minutes to rack-up 100,000 option contracts in early trading as Apple’s market cap surged to a record. The shares touched $119.75 valuing the company in excess of $700 billion. After 15-minutes of trading, option dealers had traded more than 200,000 contracts with the most commonly traded strike of 120.0 accounting for a little over one-quarter of total volume. Around 50,000 call options at the 120.0 strike have dominated trading compared to only 8,000 puts. Bearish plays attracted far less attention across the board as bullish sentiment was maintained. Option implied volatility is up by 4% to 22.6% on Apple options.     

Chart – Call option activity dominated as shares in Apple surged

 

 





Why Sell Puts? More Money, Less Risk.

This Sh*t Really Works.

By Paul Price of Market Shadows

It has been slightly over fourteen months since Market Shadows started our Virtual Put Writing Portfolio.  Readers who tagged along with our easy-to-follow option trades have been big winners.

24 of our put sales have now been completed, either through buying to close or expiration. Of those, 21 have been winners. That is a success rate of 87.5%. Our net profit through Mar. 21, 2014, is a gain of $12,621 on a final net outlay (all buy-to-close [BTC]) of just $4,336.  

Those who insist on measuring the performance might call that a 291% Return on Invested Capital (ROIC).

In real life, we sell our put options in a margin account using buying power derived from the paid-up value of our existing stock positions. The actual cash outlay was always a negative number and our true ROIC is infinite and incalculable.

 Put Writing Portfolio

Today was the expiration date for two of our trades. Both underlying stocks closed above the selected strike prices allowing us to pocket 100% of the put premium we received when we first initiated the trades.

Back on Sep. 5, 2013, we sold one Mar. 2014, $145 put contract on Valmont Industries when VMI shares were going for $136.62. The buyer paid us $15.60 per share for the right, but not the obligation, to make us buy 100 shares @ $145 per share. VMI closed at $147.59 today, making that option a permanently losing bet for the buyer and a $1,560 winner for us.

It is noteworthy that since the trade’s inception date, VMI rose by $10.97 per share yet we made 42.2% more per share. We did that with less risk than if we had purchased VMI stock outright. Our worst-case scenario would have been being forced to buy VMI at a net cost of $129.40 ($145 – $15.60 = $129.40 per share).

Our other expired  option was one contract on Lindsay Corp. (LNN) at a $70 strike price. LNN closed today at $80.65 meaning we keep the $460 premium received without needing to buy any Lindsay shares.  

We might have been too conservative on this one. LNN was $72.72 when we initiated the trade on Oct. 15, 2013. We could have made even more had we sold an in-the-money strike as we did with Valmont.

Our worst-case scenario on LNN was to be ‘put’ 100 shares at…
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Played Oracle’s Opening Dip

Market Shadows Virtual Put Selling Portfolio happily added a new position.

By Paul Price of Market Shadows

We took advantage of Oracle’s (ORCL) early sell-off and high volatility this morning. ORCL reported fiscal Q34 earnings  after the close yesterday.

ORCL Jan. 2016 put

We sold three contracts of the Jan. 2016, $35 puts @ $3.85 per share. Our commitment is to be willing to purchase 300 shares of ORCL, if exercised later, at a net cost of $31.85 per share ($35 strike price minus the $3.85 put premium). 

 

ORCL 18-month chart with Jan. $35 put break-even 

Our $31.85 ‘if put’ price is near 18-month lows that were touched during November of 2012 and again in June of 2013. Both those occasions proved to be excellent entry points for this blue-chip stock.

We have two older short puts commitments (LNN & VMI) coming up on their expiration dates this Friday. Both appear to be on track to expire worthless. That is the best-case scenario for us as sellers. We are likely to pocket 100% of the premiums collected without having to buy any of the underlying shares. Check back after the close on Mar. 21st to see if these worked out as as expected.

You can follow our ORCL trade and all our previous option positions by clicking on this link

Put Writing Portfolio details.

Research firm Trefis also liked ORCL after seeing their latest news release.

ORCL Trefis rating

Disclosure: I sold short ORCL Jan. 2016, $35 puts in my personal account today





Income Investing in a ZIRP World

By Paul Price of Market Shadows

Zero Interest Rate Policy (ZIRP) has been a curse for risk-averse savers and investors. Bank CDs, T-bills, money market accounts and corporate bonds have almost never paid less than they do today.

That led many investors to chase after yield in alternative investments, at prices that they shouldn’t have paid. Holders of the natural gas transmission company Boardwalk Pipeline Partners (BWP), a master limited partnership (MLP) were recent casualties in this struggle for income.

Units (similar to shares) of BWP had spent most of the last seven years trading between $24 – $30. Its valuation was largely based on its cash distributions, which averaged 7.1% over the entire period 2006 – 2013. Investors didn’t pay much attention to anything but BWP’s yield.

Last month, management cut the quarterly payout from 53.25-cents to 10-cents. BWP cratered, plunging from above $25 to around $12. BWP closed last week at $12.55 after hitting a new all-time low of $11.99 early Friday.

 BWP  YTD 2014   Mar. 14, 2014

Disgusted holders who suffered big losses have been dumping BWP while other investors, who like the 3.2% current yield, see rebound potential. These new investors have been buying in for the rebound potential, the current (lower yield), or both.

Option savvy income seekers can use the drop in BWP to try for better returns than before the dividend was slashed.

Better returns are likely achievable using a buy-write strategy--i.e., buying shares of BWP while writing (selling) covered calls. One idea is to sell calls that expire at the close of trading on September 19, 2014, about six months from today.

 BWP quote with options prices

Selling calls on BWP limits upside potential but brings in substantial upfront payment in the form of option premium. The income often rivals anything available in today’s ZIRP environment while also reducing the risk of holding the underlying shares.

Here is an example based on prices that were available just before the close on Friday.

Buy-write-win with Calls Used 

That best-case scenario will play out if Boardwalk goes up, remains unchanged or even if BWP drops down to $12.50 (but no lower). An almost 33% rate of return sounds pretty good in a zero interest rate world.

There’s no guarantee that BWP can’t decline but the money from the covered calls would mitigate up to a 13% drop if the shares fall.

BWP - calls expire 

The buy-write’s break-even price is lower than any actual open market transaction in…
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It Could Have Been Worse

We were buying this week, not selling.  

By Paul Price of Market Shadows

The DJIA was lower all five days while the SPY eked out a minuscule gain on Wednesday in the midst of a bad week overall.

Market Shadows Virtual Value Portfolio dipped along with the broad market but we took advantage of the sell-off to add to existing positions in PVD and BWP. Both were higher at the end of the week than they were when we bought more.

We added one all-new position by shorting some puts on Knowles Corp. (KN) in Market Shadows' Virtual Put Writing (Selling) Account. Knowles was a recent spin-off from Dover Corp (DOV). KN's stock also headed higher shortly after our trade and despite the market’s overall negative action.

Here's what we did: 

We couldn’t resist owning another chunk of Boardwalk Pipeline Partners (BWP) iMarket Shadows Virtual Value Portfolio after it dropped to a new low of $11.99 today. The 52-week range on BWP has been $11.99 (set today) to $33.00.  
 
We got another chance to pick up shares of Chilean-based pension fund manager PVD this morning and didn’t waste it. The Virtual Value Portfolio doubled our 42-share position at $78.94. 
 
We sold three contracts of the KN Sep. 20, 2014, $30 puts @ $3.30 per share.

It Could Have Been Worse

 

SPY week ended Mar. 14, 2014





Played a Recent Spin-Off with Options

Market Shadows Virtual Put Writing Portfolio added a new position. 

By Paul Price of Market Shadows

Knowles Corp. (KN) was carved out of Dover Corp. (DOV). KN started trading 'regular way' early last week.

The shares had been as high as $32.85 just days ago while trading on a 'when issued' basis. They were offered at just $28.42 early today.

We sold three contracts of the KN Sep. 20, 2014, $30 puts @ $3.30 per share.

KN new chart plus put

 

Our maximum profit is limited to the $990 we collected upon sale of the put options. If KN closes at $30 or higher on the Sep. 20, 2014 expiration date we will make that full amount without ever having to buy the stock. Until then we must stand ready to purchase 300 shares of Knowles for a net cost of $26.70 ($30 strike price – $3.30 put premium). 

That $26.70 per share break-even point is lower than any KN shares have actually changed hands for since the spin-off took place.

KN estimate

    Source: Yahoo Finance

Follow this trade and all our other option positions, open and closed, by clicking here …

Market Shadows Option Portfolio.





If the ‘Third Time’s the Charm’ … What about the Sixth?

The Sixth Year of a Bull Market

What can you expect based on the last five experiences?

Sixth Time's the Charm - Optimism

 

Find out what history tells us

by clicking here.





Hopefully You Weren’t Russian to Sell

Because by Friday, Ukraine was Old News

By Paul Price of Market Shadows

No BS  - imageLast weekend brought dire market predictions that were self-fulfilling early on Monday.

By the end of the week, the Russian fatigue factor had set in. Most Americans didn’t care to hear any more BS about how events in the Ukraine would torpedo their U.S. portfolios. The DJIA closed higher by about 0.8%. The SPY was up 1.0% and the NASDAQ up 0.7%.

Our Virtual Value Portfolio was not left behind. Our original $100,000 stake has grown to $142,932 since our October 26, 2012 starting date. That’s our highest closing level so far.

 New Records for the SPY & VVP   as of Mar. 7, 2014

Market Shadows’ readers who took our advice have annualized at a very acceptable 31.53% since inception by following our plain vanilla (no leverage, no options) value strategy.

Check out details on all closed-out and presently held positions by clicking here.

We like to sell ‘put’ options too. Our exploits in that arena can be tracked in Market Shadows’ separate Virtual Put Writing Portfolio.

Our  track record with option sales has been excellent. We collect money by selling puts but we cannot know our final result until the option expires, is exercised, or we buy it back in closing transactions. Our closed-out list tallies up the results of all fully completed positions. Open trades can be followed in the list of current positions, all of which are short sales of puts. 

As long as the ‘if put’ price is below the present quote our position is in profitable territory. This is because if we get exercised, we could immediately sell the shares for more than our net cost basis. The vast majority of our open option trades fall into this category right now. 

 

 Keep your options open - image

 





Never Turn Down a Free Gift

By Paul Price of Market Shadows

We Cashed in on the Big Gift From Big Lots Today

Market Shadows doesn’t mind taking favors from overreactions. Close-out retailer Big Lots (BIG) jumped dramatically on the opening and just beyond, after reporting fourth quarter results that beat estimates on an adjusted basis.

We sold our 100 share position for a very nice price of $35.91 locking in a 26.2% gain. We think other retail names are more attractive after today’s price surge in BIG.

 BIG quote

The $3,591 will now go into our cash reserves bringing the total to about $7,321.

 BIG 5-day chart

Follow all our closed-out and current equity positions at Market Shadows’ Virtual Value Portfolio.  

 





 
 
 

Zero Hedge

What's Hot In Women's Fashion?

Courtesy of ZeroHedge View original post here.

Via Global Macro Monitor,

Capitalism at its best or worst?

We have a few questions:

1)  Does the Tariff Man get a royalty for the sale of each dress sold, and will that violate the Emolumen...



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Phil's Favorites

Look Out Bears! Fed New QE Now Up to $165 Billion

Courtesy of Lee Adler

I have been warning for months that the Fed would need new QE to counter the impact of massive waves of Treasury supply. I thought that that would come later, rather than sooner. Sorry folks, wrong about that. The NY Fed announced another round of new TOMO (Temporary Open Market Operations) today.

In addition to the $75 billion in overnight repos that the Fed issued and has been rolling over since Tuesday, next week the Fed will issue another $90 billion. They’ll come in the form of three $30 billion, 14 day repos to be offered next week.

That brings the new Fed QE to a total of $165 billion. Even in the worst days of the financial crisis, I can’t remember the Fed ballooning its balance sheet by $165 bi...



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Lee's Free Thinking

Look Out Bears! Fed New QE Now Up to $165 Billion

Courtesy of Lee Adler

I have been warning for months that the Fed would need new QE to counter the impact of massive waves of Treasury supply. I thought that that would come later, rather than sooner. Sorry folks, wrong about that. The NY Fed announced another round of new TOMO (Temporary Open Market Operations) today.

In addition to the $75 billion in overnight repos that the Fed issued and has been rolling over since Tuesday, next week the Fed will issue another $90 billion. They’ll come in the form of three $30 billion, 14 day repos to be offered next week.

That brings the new Fed QE to a total of $165 billion. Even in the worst days of the financial crisis, I can’t remember the Fed ballooning its balance sheet by $165 bi...



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The Technical Traders

Is A Price Revaluation Event About To Happen?

Courtesy of Technical Traders

Skilled technical traders must be aware that price is setting up for a breakout or breakdown event with recent Doji, Hammer
and other narrow range price bars.  These types of Japanese Candlestick patterns are warnings that price is coiling into
a tight range and the more we see them in a series, the more likely price is building up some type of explosive price breakout/breakdown move in the near future.  The ES (S&P 500 E-mini futures) chart is a perfect example of these types of price bars on the Daily chart (see below).

Tri-Star Tops, Three River Evening Star patterns, Hammers/Hangmen and Dojis are all very common near extreme price peaks and troughs.  The rea...



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Kimble Charting Solutions

India About To Experience Major Strength? Possible Says Joe Friday

Courtesy of Chris Kimble

If one invested in the India ETF (INDA) back in January of 2012, your total 7-year return would be 24%. During the same time frame, the S&P 500 made 124%. The 7-year spread between the two is a large 100%!

Are things about to improve for the INDA ETF and could it be time for the relative weakness to change? Possible!

This chart looks at the INDA/SPX ratio since early 2012. The ratio continues to be in a major downtrend.

The ratio hit a 7-year low a few months ago and this week it kissed those lows again at (1). The ratio near weeks end is attempting to...



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Insider Scoop

10 Biggest Price Target Changes For Friday

Courtesy of Benzinga

  • Credit Suisse raised IHS Markit Ltd (NYSE: INFO) price target from $68 to $76. IHS Markit shares closed at $67.75 on Thursday.
  • Wedbush boosted Restoration Hardware Holdings, Inc (NYSE: RH) price target from $170 to $185. RH shares closed at $169.49 on Thursday.
  • Mizuho lifted Seagate Technology PLC (NASDAQ: STX) price target from $46 to $50. Seagate shares closed at $52.94 on Thursday.
  • UBS raised the price target for Weight Watchers Intern...


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Chart School

Crude Oil Cycle Bottom aligns with Saudi Oil Attack

Courtesy of Read the Ticker

Do the cycles know? Funny how cycle lows attract the need for higher prices, no matter what the news is!

These are the questions before markets on on Monday 16th Aug 2019:

1) A much higher oil price in quick time can not be tolerated by the consumer, as it gives birth to much higher inflation and a tax on the average Joe disposable income. This is recessionary pressure.

2) With (1) above the real issue will be the higher interest rate and US dollar effect on the SP500 near all time highs.

3) A moderately higher oil price is likely to be absorbed and be bullish as it creates income for struggling energy companies and the inflation shock may be muted. 

We shall see. 

...

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Digital Currencies

China Crypto Miners Wiped Out By Flood; Bitcoin Hash Rate Hits ATHs

Courtesy of ZeroHedge View original post here.

Last week, a devastating rainstorm in China's Sichuan province triggered mudslides, forcing local hydropower plants and cryptocurrency miners to halt operations, reported CoinDesk.

Torrential rains flooded some parts of Sichuan's mountainous Aba prefecture last Monday, with mudslides seen across 17 counties in the area, according to local government posts on Weibo. 

One of the worst-hit areas was Wenchuan county, ...



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Biotech

The Big Pharma Takeover of Medical Cannabis

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

 

The Big Pharma Takeover of Medical Cannabis

Courtesy of  , Visual Capitalist

The Big Pharma Takeover of Medical Cannabis

As evidence of cannabis’ many benefits mounts, so does the interest from the global pharmaceutical industry, known as Big Pharma. The entrance of such behemoths will radically transform the cannabis industry—once heavily stigmatized, it is now a potentially game-changing source of growth for countless co...



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Mapping The Market

How IPOs Are Priced

Via Jean Luc 

Funny but probably true:

...

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Members' Corner

Despacito - How to Make Money the Old-Fashioned Way - SLOWLY!

Are you ready to retire?  

For most people, the purpose of investing is to build up enough wealth to allow you to retire.  In general, that's usually enough money to reliably generate a year's worth of your average income, each year into your retirement so that that, plus you Social Security, should be enough to pay your bills without having to draw down on your principle.

Unfortunately, as the last decade has shown us, we can't count on bonds to pay us more than 3% and the average return from the stock market over the past 20 years has been erratic - to say the least - with 4 negative years (2000, 2001, 2002 and 2008) and 14 positives, though mostly in the 10% range on the positives.  A string of losses like we had from 2000-02 could easily wipe out a decades worth of gains.

Still, the stock market has been better over the last 10 (7%) an...



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Promotions

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:

 

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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...

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