Vacation Proofing Your virtual Portfolio
by OptionSage - July 25th, 2008 6:43 am
NEW INFORMATION = TAKE ACTION
Save it. Post-it. Record it. Use it.
When driving a car and some object appears on the road ahead do you usually run right over it or do your best to avoid it? Don’t we all take action in real-life based on the new information we receive that changes the old paradigm? Take the first two guys in this video: Who would you rather be, the first or the second guy? While the second gentleman reacts and looks ridiculous in so doing, he’s the guy that is more likely to survive when real disaster hits because he’s reacting to new information. In fact he doesn’t even know what’s making everyone else react, he just knows that when 99% are moving one way in panic, it’s best not to fight the crowd or he will be trampled. It’s no different in the market. Pride, ego and old theses have no place when new information directly contradicts an existing trade.
When the market is up, we use DIA puts and calls to "react" to quick changes in the market while we wait for better information before making more permanent changes in our positions. This gave us the benefit of the quick reaction of gentleman #2, the one who went unquestioningly with the crowd, while also giving us the "wisdom" of gentleman #1, who was confident (or oblivious) enough to soldier onward, despite the fact that the world seemed briefly to be against him.
When new information does arrive, one of the first things I look to do is minimize risk - hedging the existing position. The next step for me is to become more aggressive in reacting to the new information and shifting the bias of the trade in the opposite direction. In this article, I will outline our basic strategy for protecting your virtual portfolio from a major dip, which can then be used to adjust your risk profile, based on changes in outlook arising from new information.
The strategy outlined can be applied also when you know that you will be unable to monitor your positions. Many of you will likely be taking vacations this summer and, with them, a break from actively monitoring your positions. …
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DiggThe Trading Virus
by OptionSage - July 23rd, 2008 10:22 am
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Vampiric!
by OptionSage - July 13th, 2008 11:48 pm
Black Hole: a region of space in which the gravitational field is so powerful that nothing, not even light, can escape its pull after having fallen past its event horizon. The term "Black Hole" comes from the fact that, at a certain point, even electromagnetic radiation (e.g. visible light) is unable to break away from the attraction of these massive objects. This renders the hole’s interior invisible or, rather, black like the appearance of space itself.
If it ever felt like the market had a black hole, now might be that time! An inescapable magnetism with vampiric tendencies is exhausting the patience and energy of the most steely and experienced stock market traders. In the depths of the gloom and amid the contagion of panic, solace and wisdom can often be found in the words of those who have seen it all before, long before any of us had begun to even dabble. The following quote is from Remiscences of a Stock Operator:
"And right here let me say one thing: After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying and selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine – that is, they made no real money out of it. Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money."
Having dipped a little toe in the water this week only to find blood-thirsty sharks hiding under the surface, this quote serves the purpose of reminding not just the reader but the author of the imprudence of ignoring market sentiment. But words tend to be poor descriptors of raw sentiment. Instead pictures have a habit of conveying the heart of an issue. And perhaps, this chart of Fannie Mae in freefall suffices…
A Noisy World
by OptionSage - July 6th, 2008 12:04 pm
All around us signals are transmitted and received each day. Within those signals valuable information is intertwined with spurious content. As a result, receiving devices have filters built in to discern the ’signal’ from the ‘noise’. High Signal to Noise ratios convey A LOT of information while low Signal to Noise ratios convey very little information! Indeed, when the noise levels increase above threshold levels, signals may be corrupted entirely, resulting in no information at the receiving end.
But what has this to do with the stock market? As traders, we are receiving information each day that we must learn to process and indeed we must learn to filter some of it out. This is an enormously challenging task because our natural inclination is to apply bias to the information we receive. For example, if we are bullish on a stock and an analyst disseminates a report that aligns with our views, our opinions are more likely to strengthen. In order to achieve our objective of trading without bias, we must recognize that history is laden with examples of the stock market confounding expectations.
In the 1970s, few envisioned that commodity prices would elevate to the degree they did or that bond yields would rise up to 15% by 1981 or that bond yields would decline to around 3% in 2003 or that a protracted equity bull market would ensue. Few expected that almost two deacdes after the Japanese market reached its peak, it would still be down 60% from its highs. Few recognized in 2000 that commodity prices were at historic lows while China and India were emerging rapidly.
Recognizing that the opinions you hear from others originate from a place of vested interest means critically analyzing comments becomes imperative. For example, just a couple of months ago, Lehman’s CEO announced that "the worst is behind us". It is evident from the chart below that the worst had certainly not been priced into the stock yet!
Clearly a delineation between expressed views and market action took place in all previous examples. The insurmountable challenge most traders encounter when confronted with such a delineation is their own attempt to justify the action. Why did Lehman go down? Why did bond yields surge? Why did commodity prices soar? Why has the Japanese market not recovered? A lot of calories may be wasted in striving to justify market action. The reason they are wasted is not because it…
k1p – The k1 virtual Portfolio
by k1 - July 5th, 2008 3:39 pm
New Members Entry Point – If you’ve arrived on this page looking for the k1 Project and all the reference material on Phil’s strategy, follow this: Front Page of the K1 Project.
k1p – ETF Madness with SPY
by k1 - July 2nd, 2008 7:36 pm
New Members Entry Point – If you’ve arrived on this page looking for the k1 Project and all the reference material on Phil’s strategy, follow this: Front Page of the K1 Project.
k1p – The k1 virtual Portfolio
by k1 - June 29th, 2008 7:58 pm
New Members Entry Point – If you’ve arrived on this page looking for the k1 Project and all the reference material on Phil’s strategy, follow this: Front Page of the K1 Project
Blame It On The Beatles!
by OptionSage - June 29th, 2008 5:02 pm
Maybe we can blame it all on the Beatles invasion of America. The bustling 60s with its expressions of freedom was the time when the transition seemed to sweep the nation. Instead of purchasing what we wished AFTER we had earned the capital to do so, as in generations past, we learned to purchase BEFORE we had earned sufficient capital to match our desires. The availability of credit has forced grown-ups to take a grown-up version of The Marshmallow Test.
Recall the MarshMallow Test was a test given to youngsters to determine the correlation between patience, self-discipline and success in life. A marshmallow would be placed in front of a child, who was told if the marshmallow had not been consumed by the time the adult returned to the room, the child would recieve a second marshmallow. The end result being children who passed the Marshmallow Test did better financially in life!
Most of the population are tempted by the proverbial marshmallow every day under the guise of credit offerings. These days credit card offerings are expected daily in the mail and homes have been turned into ATM machines. And those homes were in turn purchased through borrowing. The excesses are compounded by the fact that some studies have reported that over 9 out of 10 borrowers mis-represent their net worth during applications. Not only is most of the public failing the Marshmallow Test, but the government is too. A balanced budget, once demanded as part of fiscal responsibility, is now all but a distant memory.
The pervasive excesses of borrowing inevitably lead to greater gains during upswings and greater losses during corrective phases. During the declines, few stock market participants have a containment strategy. Account value fluctuations are exacerbated and panic sets in. Growth-oriented investors realize that declines in future earnings inflate P/E multiples and bargains soon turn into over-priced securities. Supposedly sophisticated quant funds who rely on black box models are often most at risk because leverage is frequently so integral to their performance. And as the models stop working, the losses are exacerbated by the earlier dependence on leverage.
For most it is too late to salvage a virtual portfolio or to take corrective action when the news media frenzy reaches peak levels and the front covers of magazines tell tales of stock market woes. But the difference between defeat and failure is the difference…
(The Real) Super-Spike Theory!
by OptionSage - June 24th, 2008 3:01 am
Firstly, the snapshot of the major indexes…
DJIA: 11,842.36 down 0.33 points
S&P 500: 1,318.00 up 0.07 points
Nasdaq: 2,385.74 down 20.35 points
In spite of today’s action doing absolutely nothing to inspire confidence in banking sector – you need only look at the action in the XLF today – we decided to go hunting, believing that certainly, somewhere out there, a solid bank existed (even if its stock had been taken out for a beating of late).
Well the search took us across the Atlantic to Ireland. Oh sure, Ireland has its share of problems right now, but Bank of Ireland reported a 5% increase in underlying profits for the year to March 31st – IN SPITE OF doubling its bad debt charge due to the slowdown in the Irish property market.
In spite of its relative outperformance in its peer group, its 12.5% dividend yield and the fact that it’s trading well below 50% of its average 10-year book value, the stock keeps going lower!
One of the big questions is whether the dividend is safe. According to Ireland’s leading full-service broker (you could say the Goldman Sachs of Ireland), Davy, the dividend is rock solid and should not be in any jeopardy. Indeed management is implying the greater likelihood is that dividend growth will be flat this year. For emphasis, note their focus is not on cutting the dividend, it is on not increasing the dividend!
At $38 per share, and a dividend of almost $5 per share that is considered safe, the time window is diminishing before the value players start to differentiate between what appears to be a broken stock, but not a broken company.
On the whole, we decided against publishing a Trade Alert this week because uncertainty reached peak levels. For the bears, the danger is being whipsawed by a quick reversal. Just look at the period past the March lows to see how rapidly the indexes moved up for for evidence of how dangerous it can be to go short at the end of a long downtrend. Yet for the bulls, the danger of John Maynard Keynes line coming into effect is high – "the market can stay irrational longer than you can stay solvent".
At this time, we’re quite happy keeping our heavy cash pile safe for now. While most of January to May has been profitable, June has been a different story! And we’re weathering a dark…
7 Steps To 40%
by OptionSage - June 15th, 2008 3:30 pm
Just a couple of decades ago it would have been almost unfathomable for the retail investor to consider generating consistent returns above 20% per year. Indeed, those who competed in arguably the most competitive financial market place, the stock market, were considered gurus when they beat the S&P 500 year in and year out.
Others, such as Jerome Kohlberg, Henry Kravis and George Roberts made a name for themselves in private equity as did Peter Peterson and Stephen Schwarzman with the Blackstone Group. Gains in the stock market for Joe Public were subjected to a limiting factor – the inability to leverage substantially. Joe Public was also limited in participating in private equity investments; they were the domain of the rich – the insiders. These days, private equity still remains the domain of the rich, but leveraging is possible through the purchase of equity derivatives. And the sale of those same equity derivatives can be highly profitable too.
Whereas it would have been unthinkable years ago to consider making big profits year in and year out on a stock that doesn’t move much – because the only source of income, dividends, tended to be in the low single digits in percentage terms - these days options afford us the opportunity to sit tight and profit while holding stock positions. This can easily be achieved through the sale of short call options against stock holdings, otherwise known as the Covered Call strategy. While the Covered Call strategy may appear straightforward when first encountered, many applications may be employed. In this article, we will consider the application that Stock and Option Trades labels: 7 Steps to 40% per year!
Step 1: Wait for a selloff
Ok, so you want to skip this step and move on to Step 2. Wait!
One of the great quotes in investing comes from Jesse Livermore and pertains to this concept of patience. In Reminiscences of a Stock Operator, it is stated:
"It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level…
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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...
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