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.  

 





 
 
 

Phil's Favorites

How The Patient Investor Sees the World More Clearly

 

How The Patient Investor Sees the World More Clearly

Courtesy of Cullen Roche, Pragmatic Capitalism 

?One of my favorite things to think about in investing is the theoretical investor who slept through 1987. We all know about “Black Monday”, the crash of 1987, when stocks fell 23% in one day. It was terrifying. But the craziest thing about 1987 is that the S&P 500 had a total return of 5.81% that year. The stock market was positive in a year that is known for being a terrifying crash! So, if you had checked your portfolio on January 1, 1987 and then slept through the entire year and woken on December 31, you would have looked at your portfolio and said “huh, pretty slow year in the markets, but not bad!”

...

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Chart School

Silver is cheap vs Gold

Courtesy of Read the Ticker.

Metal investors will be paying attention to how out of favor silver is relative to gold. And it is hard to wonder why with the well forecast boom of electric cars expected over the next 10 years. Who owns all the silver? JM Bullion has a series of charts here. Notice the stock pile held by JPM. They will do will if silver gets to $30 USD an once!

Chart up to April 2017



As of the 20th of March 2019 the US Federal Reserve has switched to dovish...

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Zero Hedge

"Fed Returns To The Punchbowl": The Biggest Surprises In Today's Fed Decision

Courtesy of ZeroHedge. View original post here.

The Fed is returning to the punchbowl.

That's how Bank of America summarized today's second consecutive dovish surprise by the FOMC regarding rates and balance sheet policy. As we noted earlier, there were two major developments in today's FOMC decision:

  1. the dots dropped substantially to show no further hikes this year and only one hike in 2020. This means that the increasingly "patient" Fed is signaling that policy will remain accommodative relative to the long-run rate expectation.
  2. the balance sheet unwind will start in May and be completed by the end of September....


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ValueWalk

Jamie Dimon On How JPMorgan Is Making The Planet A Great Place [Full CNBC Interview]

By Jacob Wolinsky. Originally published at ValueWalk.

CNBC Transcript: JPMorgan Chase CEO Jamie Dimon and American University President Sylvia Mathews Burwell Speak with CNBC’s Kayla Tausche Today

WHEN: Today, Wednesday, March 20, 2019

WHERE: CNBC’s “The Exchange

Following is the unofficial transcript of a CNBC interview with JPMorgan Chase CEO Jamie Dimon American University President & Former Obama Health...



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Kimble Charting Solutions

Banks Sending Warning Sign To Broad Markets Again?

Courtesy of Chris Kimble.

The financial / banking sector is often a good barometer of the economy and broader stock market.

So when the Bank Index (BKX) began to lag late last summer, it was an early warning sign for investors.

Looking at the chart below, we can see that the banks spilled lower with the December correction. That final swoon lower was set up by a bearish reversal candlestick (1).

Well, the recent rally has brought stocks back up to the scene of that crime! That area is marked by strong horizontal resistance.

Are banks creating a similar reversal ...



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Insider Scoop

Sage's First-Of-Its-Kind Postpartum Depression Drug Clears FDA Hurdle: What You Need to Know

Courtesy of Benzinga.

Shares of mid-cap biotech SAGE Therapeutics Inc (NASDAQ: SAGE), which focuses on therapies for central nervous system disorders, were trading higher Wednesday.

What Happened

Sage ...



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Biotech

Marijuana is a lot more than just THC - a pharmacologist looks at the untapped healing compounds

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

 

Marijuana is a lot more than just THC - a pharmacologist looks at the untapped healing compounds

Assorted cannabis bud strains. Roxana Gonzalez/Shutterstock.com

Courtesy of James David Adams, University of Southern California

Medical marijuana is legal in 33 states as of November 2018. Yet the federal government still insists marijuana has no legal u...



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Digital Currencies

Facebook's cryptocurrency: a financial expert breaks it down

 

Facebook's cryptocurrency: a financial expert breaks it down

Grejak/Shutterstock

Courtesy of Alistair Milne, Loughborough University

Facebook is reportedly preparing to launch its own version of Bitcoin, for use in its messaging applications, WhatsApp, Messenger and Instagram. Could this “Facecoin” be the long-awaited breakthrough by a global technology giant into the lucrative market for retail financial services? Or will...



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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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Mapping The Market

It's Not Capitalism, it's Crony Capitalism

A good start from :

It's Not Capitalism, it's Crony Capitalism

Excerpt:

The threat to America is this: we have abandoned our core philosophy. Our first principle of this nation as a meritocracy, a free-market economy, where competition drives economic decision-making. In its place, we have allowed a malignancy to fester, a virulent pus-filled bastardized form of economics so corrosive in nature, so dangerously pestilent, that it presents an extinction-level threat to America – both the actual nation and the “idea” of America.

This all-encompassing mutant corruption saps men’s souls, crushes opportunities, and destroys economic mobility. Its a Smash & Grab system of ill-gotten re...



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OpTrader

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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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:

 

·       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...

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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.

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