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George Acs
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I am a simple individual investor who believes that the playing field is level, but may require active management of one's holdings. I've devised a series of steps that constitute a highly defined covered option strategy that most anyone can follow and that I've described in Option to Profit... More
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  • The Clock Is Ticking On The S&P 500

    The age old question and certainly having its application in the stock markets is how does one see the glass. Is it half full or half empty? Is the market going higher from the current levels or have we already seen its best days?

    I often like to say that I neither believe in technical nor fundamental analyses. Saying so is probably a reflection of the denial that has me refusing to believe that my intellectual capacity has greatly diminished.

    While not really spending terribly much time with charts, I do glance at them. Like the spooky kid from "The Sixth Sense," I do think I occasionally see patterns. I suppose to some degree that's somehow related to a very basic aspect of technical analysis.

    About a month ago, I started getting a bit leery about the market's climb and have found it increasingly difficult to commit funds to new positions. That feeling was based upon what I perceived to be a very similar path that the market was following to that exhibited in the beginning of 2012.

    Both paths are the kind that covered option sellers dislike, but fortunately don't come along very often. Both times the market has essentially done nothing but climb higher.

    This Thursday morning we're fresh off closing higher nine straight days. In fact, March 2013 has yet to see a lower close. Needless to say, my prescience has yet to be fulfilled.

    The last time that the market enjoyed a nine day winning streak was in November 1996 and it do so in May 1996, as well. I can say "enjoyed" because back then i wasn't selling call options, so I'm fairly certain that I enjoyed those periods as well.

    Out of curiosity and with an abundance of time on my hands as I await something to break in one direction or another, I was interested in seeing just how the market has done historically following such consistent daily climbs higher.

    The short and quick answer is that such climbs in the S&P 500 or its related trading products, such as SPDR S&P 500 ETF (NYSEARCA:SPY) do not result in a reactive and sharp drop once the string of advances has come to an end. The market continues to climb.

    So much for my theory and hopes that I could return to the more fulfilling days of trading ups and downs in the market.

    While the current advance should, therefore, be a source of continued optimism, there may be a competing dynamic to be considered.

    Looking at the bigger picture, beginning in May 1996, when that first 9 day advance occurred, which happened to be at the beginning of a secular market climb, it seems as if some kind of pattern was appearing.

    Looking at the 17 year period illustrated above there may be some reason to believe that we are in the process of completing a 52 month cycle.

    In each of the two previous broad and sustained market rallies the time frame has been approximately 52 months and the rallies have been on the order of 100% or greater. For those not chased out of the market as the nadirs were reached the recoveries were satisfying.

    However, that satisfaction may have been tempered by the large market drops that ensued. In both previous cases the market plunged more than 40% over the course of the subsequent 18-30 months. Greed, optimism, a sense of invincibility may all have been factors in being caught in the continued downdrafts that devoured paper profits.

    In hindsight, there were certainly precipitating factors that may have played a role in these drops, not all of which could have been predicted.

    While perhaps the technology bubble should have been no surprise, nor should the real estate bubble, extrinsic factors, such as the terrorist attack of September 11, 2001 contributed to market declines during an already susceptible period. However, in the period from May 1996 to the present, there have also been an astonishing 18 periods of time when the market fell 10% or more.

    As hard as it is to understand that the occasional fire that burns down a beloved forest is part of a cycle that sustains and evolves the environment, so too are those market declines an apparently necessary, or at least unavoidable component of reaching greater heights.

    Clearly, and again, focusing on the big picture, those intermediate declines have been part of a healthy process as the S&P 500 has appreciated by more than 130% since that nine day trading range in 1996. Of course, that's little solace to those that did see their profits disappear and that may have exited the market and greatly delayed their re-entry.

    Being prepared for those declines is the tricky part. Balancing the need to be invested with the knowledge that much of your good work can be undone by a simple hiccough is disconcerting.

    As we are now in the fifth year of the current climb and may be approaching that wall that we've seen twice before in the past 17 years, I continue to believe that there is ample reason to create reserves and take profits, even if that means leaving some on the table. Transitioning a portfolio may be a good strategy to gradually respond to future uncertainty.

    In my case, that means being less likely to rollover covered contracts into the next cycle and instead being happy to see share assignments and realization of cash proceeds. It may also mean writing longer term contracts for those positions not likely to be assigned and grabbing larger premiums, albeit at lower time adjusted ROIs, in order to have a better chance of riding out any reversal.

    Timing the market is something that most sane people would agree is impossible, certainly on a consistent basis. Everyone has the same charts to look at, yet the interpretations are in a wide range, often fitting personal outlooks and human emotions. The cynic and the optimist see the same data very differently and respond consistent with their own biases.

    I am, by nature, a long term optimist, but a short term pessimist. Rarely, however, have I felt this level of pessimism. Sadly, I didn't feel it in 2007, even after first having one of those warning mini- drops of 8% in July 2007.

    The nice thing about being wrong is that you can always get back, although given that scenario, I have to believe that I would be even more pessimistic, as I don't care to chase stocks as they've moved higher.

    The other nice thing is as today (Thursday March 14, 2013) is thus far shaping up to be the 10th straight day of gains, I can look at the data all over again and perhaps arrive at a completely different conclusion.

    Just like the professionals.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Tags: SPY
    Mar 17 9:19 AM | Link | Comment!
  • Having Faith That Europe Will Disappoint. Again.

    I love huge upward moves in the market, especially on Fridays.

    As a option contract seller, I often find myself wishing for competing winds and at very specific times. so that in the ideal world, with everything going on about my shares, they would be safely tucked inside the eye of the tornado.

    To be more precise, I especially like large advances on Fridays when it makes the rest of the week at least end up looking reasonably respectable. I was a little surprised at the negative trading for most of the day on Thursday (June 28, 2012) when the market was down by as much as 170 points going into the final hour. The surprise was because the markets had traded in a very healthy way the previous 2 1/2 days, first recovering from deep losses and then just slowly adding to gains for a couple of days.

    Instead, I just turned out to be a day off on my optimism.

    I especially like those big moves if it means that some of my shares will be assigned and that for others that were floundering, I could sell call options for the next week or for what's left in the month.

    In this case, July 2012 is one of those 5 week months, so there's also plenty of time value to take advantage of when looking for opportunities.

    Each week I put together a "Game Plan" for subscribers. It looks forward to what moves we are hoping to make in the coming week with existing positions.

    That's my least favorite of all tasks, because it represents "losers" in one way or another. Even when the mounting call premiums and dividends become tangible and may in fact offset paper losses on the underlying shares, there's still a sense of defeat when looking at a stock whose present value is below its cost. At the moment. the longest held position goes all the way back to the end of April 2012, when I recommended the sale of ProShares Ultra Silver ETF (AGQ).

    As I look at my personal accounts, my longest holding is ProShares UltraShort Silver ETF (ZSL), but with option premiums like it has, I wouldn't mind seeing its price jump up and down as it does until the day that I can no longer discern up from down.

    Otherwise, I have shares in Cablevision (CVC), which I am grateful that I never recommended to anyone. I think I bought into the Jeremy Lin story. Remember him? He once almost won the Republican nomination for President in 2000.

    Fortunately, I always have faith and believe that even the beaten down have a chance to be revived. Maybe i drink too much?

    What is even better than a really nice triple digit gain on a Friday, resulting in either assignment and/or writing new calls is when the following Monday brings about a market drop.

    For the 14 months that I've been specifically tracking the correlation between triple digit moves in either direction on a Friday with the following Monday's action, the correlation just hasn't appeared.

    So as everyone is giddy over what is being described as Angela Merkel's blinking over the issue of Euro bonds, you can't help but think we've been down this path before in the past 12 months, not to mention the past 4 weeks. A number of those weeks had positive news breaking right before or during the weekend that pushed the futures mightily and then quickly retreated as reality came into play. I think we've learned that we can count on Europe to not let our cynicism down.

    As it will likely turn out, the German translator hired by the major brokerage houses and hedge funds was at the bottom of her class, because Merkel's pronouncement of the newly proposed plan was not "Das funktional," instead it was "dysfunctional."

    So with that in mind, I'm hopeful of re-capturing some of the positions that were lost in the after-math of that simple mistranslation.

    For the past three weeks in a row, although I don't think it will be likely this coming week, or at least not on Monday, assigned shares in Morgan Stanley (MS), MolyCorp (MCP) and Deere (DE) were easily repurchased at lower prices after assignment. Sometimes with a dividend capture to boot.

    After the market closes on Friday I usually like looking for what appear to be bargains for the coming week, but those are hard to find when the market spends most of the day up 200 points. Besides, I already sent out Trading Alerts to sell JP Morgan Chase (JPM) puts on Thursday, then recommending buying back on Friday mornings, only to recommend selling again later in the morning. So, I'll have to look for some other bargain, maybe JP Morgan itself.

    As usual, the weekly recommendations fall into the same three categories; Traditional, Momentum and Double Dip Dividends (See details). Lately, only about 60% have resulted in actual trading alerts, as the market does what it wants to do when it opens on a Monday morning and sometimes what looked enticing at one moment in your life isn't quite as appealing when you sober up.

    After a day that the DOW goes up nearly 300 points it may be a bit harder to find a bargain the very next day. One stock that may just be right, despite a nice gain today, is Caterpillar (CAT), a somewhat cousin of Deere, but not really. It certainly has been flagging Deere of late and if you stick with the monthly option sale, you may even squeeze a dividend out of th deal.

    (click to enlarge)

    Among stocks that didn't share in the same degree of exhilaration and celebration of the quarter's end is YUM Brands (YUM), over fears of a Chinese slowdown. Given that we can never really know what's going on in China, especially as it regards accounting, why start stressing now? Besides, another one of this week's picks, JP Morgan Chase, hasn't exactly shown that it's the most reliable when it comes to reporting numbers.

    Although JP Morgan is one of this week's Double Dip Dividend choices, you could just as easily make a case for selling puts. When it comes right down to it, your banker doesn't care where your money was derived when your about to deposit your trading profits.

    Eastman Chemical (EMN) definitely shared in today's rally, but I think there's more to go. The only thing that has me a little hesitant is that it only trades monthly options and it is already about $7 higher than it was just 3 weeks ago.

    Although Walgreen (WAG) was added by subscribers a few weeks ago a few days after waiting for the dust to settle after its announced purchase of Alliance Boots, I think it's still a good position either to add shares or one to open. Ordinarily, I tend to sell calls concomitantly with purchase of shares or shortly thereafter, but in the recent case of Walgreen we waited two days for an expected bounce following what I believed to be an over-reaction to the buy-out news.

    On the Momentum side of the fence, Alcoa (AA) is once again looking appealing. Of course, the only problem is that it will be kicking off earnings season on July 9, 2012 and it can be a wild ride. I'd be more inclined to recommend its purchase if the price rose above $9 and would then jump at selling the $9 call.

    More easily justified is Storage Technology, despite a outsized gain on Friday. With that gain in mind, I'd be more likely to select the in the money strike price and would be accepting of a pullback next week. There's something perversely satisfying about making a profit when shares go downward, yet not be a cursed short seller.

    The dividend payers next week include Verizon (VZ), American Express (AXP), the previously mentioned JP Morgan and Interdigital (IDCC). The latter of those is for the fearless of heart and is not one that I'm likely to end up recommending, but I'll be watching in the event that I feel like doing something where the reward is outweighed by the risk by an order of magnitude.

    Traditional: Caterpillar, JP Morgan Chase, Eastman Chemical, YUM Brands, Walgreen

    Momentum: Alcoa, Storage Technology

    Double Dip Dividend: American Express (July 3), JP Morgan (July 3), Verizon (July 5) and Interdigital (July 9)

    Remember, these are just guidelines for the coming week. Subscribers will get Trading Alerts if these appear to be reasonable actions as trading begins next week. If you're on your own, please adjust accordingly with market movement and you'll have the makings of a healthy income stream for the week with reduced risk.

    Close feedback(s).

     

    SA editor's feedback

    03 Jul, 09:45 AM

    Thanks, but this needs to be updated, as you discuss what is likely to happen "on Monday" and it is now Tuesday. We apologize if we weren't able to get to this one in time but our resources are thinner than normal during this vacation period.

    Disclosure: I am long CVC, JPM, WAG, AGQ, MCP, ZSL, MS.

    Additional disclosure: I may purchase shares of AA, AXP, IDCC, VZ, DE, YUM. EMN, CAT

    Jul 03 10:15 AM | Link | 2 Comments
  • Weekend Update May 7, 2012

    Weekend Update May 7, 2012On a positive note, owning shares in Green Mountain Coffee Roasters does not obligate you to drink their coffee.

    Green Mountain is among the shares that I've recommended among the weekly selection of "Momentum" class of stocks on this site, but with lots of caveats, especially before earnings I've owned shares on and off for nearly two years, but I've long ago been at the point that paper losses or gains don't move my needle.

    If only there was a blue pill for that.

    Green Mountain, along with MolyCorp, ProShares UltraShort Silver and Barclays Volatility ETN help to satisfy that portion of me that needs to seek some level of stupidity.

    I recently updated a post that originally appeared in TheAcsMan and called it "My Personal Green Mountain," not because I wanted to entice anyone to join me on the wild and wrong sides of momentum waves, but rather as a Case Study to demonstrate how lemonade is made.

    It just got a little more sour this week. That's all.

    But for a week that included major hits to Green Mountain and Chesapeake Energy, it wasn't terribly bad. My personal account was down 2.3%, while the S&P 500 was down 2.5%.

    But on a negative note, whereas I usually like to see 20-40% of my positions turnover each week, I'll only have about a 3% turnover. That means that I'm not very likely to follow my own suggestions unless I close out a position or two to raise the money. I'm usually not inclined to do that unless I want to take a strategic tax loss, but it's far too early to be thinking defensively like that.

    Besides, I look at each week as its own opportunity.

    For example, even though I may now be sitting on a capital loss on the shares of Green Mountain Coffee Roasters, it's entirely possible that the income that I can generate by selling calls on its shares will be at least as good, if not better, than I could get on anything else at the moment.

    Besides, it's not how you got to the finish line. It doesn't have to be pretty.

    As an aside, if you followed the last three week's of advice regarding Chesapeake, you coined put premiums for two weeks and a call premium for this past week, with another 2% weekly premium possible if Chesapeake opens at or above its Friday close at $17.40. If you get that premium on Monday and finally get assigned at your purchase price of $18, your 4 week return would be 12.3% on a stock that ended up right where it started.

    Were there too many "ifs" in the preceding paragraph? But that's precisely the same situation that you may be faced with on Monday if you were following the past few week's recommendations regarding the ProShares UltraSilver ETF. After two weeks of collecting nice put premiums, now's the chance to get a call premium, and before you know it, you'll be out of the position, awaiting a new entry point and a new escape point.

    Maybe so, but I hope you get the idea. If not, it may really be helpful to use the OTP Profit Tracker spreadsheet. That tool is a simple way to keep track of your aggregate net on any position, taking into account all premiums, dividends and capital gains or losses on the underlying stock.

    Hedging your bets works best during a downslide, but still won't offset bad stock picks. Maybe if we could figure out a way to use Chesapeake's natural gas reserves to roast those Green Mountain coffee beans the bottom line would have been better at both, although the other human issues still remain.

    But enough about me.

    The past week turned out to be a perfect one to trade, re-trade and re-trade the volatility shares. I may have done so and Tweeted so ad nauseum, but it never gets tiring.

    This week, I jumped the gun a bit with one of the recommendations, having Tweeted the suggestion that British Petroleum was looking like a good Double Dip Dividend play for the week. In fact this coming week had a few contenders. I thought about Starbucks (Monday ex-div), Weyerhauser and Boeing, as well, which go ex-dividend on Wednesday. But British Petroleum looked to be the best. At $40.98 (it eventually closed the afternoon at $40.95), the May 11, 2012 $41 call premium was $0.38 and the dividend, if not assigned, was another $0.48. Knowing what I know about rationale option purchasers, the weekly shares of BP would not be assigned by Tuesday's market close, unless shares were well in the money. So there's needs to be an additional 1% upside gain to steal the dividend out of your ravenous Double Dipping hands.

    After a week of falling prices, there appear to be some bargains to be had, as long as there aren't further better bargains down the line.

    At some point the inexplicably optimistic rise in stock prices had to ease.

    If anything, volatility has been back the past three weeks as it may be the investing world's metaphor for the Four Horsemen of the Apocalypse.

    One of my favorites, that appears to be bargain priced is Halliburton.

    I often own shares of Halliburton, British Petroleum and Transocean at the same time and refer to them as my "Evil Troika." I lost my Halliburton shares to assignment just a week ago, as I wrote a call option in the last hour of trading, trying to squeeze out a few pennies.

    Sometimes it's the wrong decision, but you know that sooner or later the opportunity to re-purchase shares will appear.

    Just usually not this soon.

    Halliburton at $32.45 looks like a good purchase, although I usually try to find shares that are priced closer to a strike price. That way, regardless of share movement, if you sell a near the money call you squeeze the most out of the premium, whether the contract is exercised or not.

    I like JP Morgan this week. The financial sector has taken it on the chin the pat week or two, but the post March 2009 history is that those downturns are short lived. On a premium bang for buck basis, Morgan Stanley, with its $15.95 close on Friday offers a 2% premium for the $16 strike, since it is already right at the strike's edge.

    I like that kind of proximity.

    If you're the gambling kind, MolyCorp reports earnings on May 10, 2012. At Friday's close of $26.49, it's offering a $0.92 premium for the $27 call contract or $1.37 for the $26 contract expiring May 11, 2012. Take your choice, depending on your level of daring behavior.

    Continuing on the speculative side, if you weren't assigned the ProShares UltraSilver ETF after two weeks of writing puts, if silver opens with a neutral or negative bias, I would either buy shares or sell $48 weekly calls on the ones that I own.

    Not to be overly repetitive, but I still have to go with both Caterpillar and Goldman Sachs.

    If you followed that advice over the past few weeks and collected the premiums, the decline in their prices have been greatly mitigated. Although sometimes you're wrong to say "If I loved Caterpillar at $103, I really love it at $99," but I do.

    So, if you don't have shares, great time to pick some up and immediately write the calls.

    If you did pick up shares the past few weeks, now would then be a great time to pick up some more and follow the "Having a Child to Save a Life" strategy. It is an absolutely great way to reduce paper losses by applying an "averaging down" approach, yet keeping the lots separate and distinct for hedging purposes.

    To do so, buy new shares at the lower price and write calls near the money only on that lot. The higher priced lot can either go unhedged or have calls written more closely aligned with its purchase price.

    Traditional Stocks: Halliburton (NYSE:HAL), British Petroleum (NYSE:BP), Morgan Stanley (NYSE:MS), JP Morgan Chase (NYSE:JPM), Caterpillar (NYSE:CAT), Goldman Sachs (NYSE:GS)

    Momentum Stocks: MolyCorp (NYSE:MCP), ProShares Silver ETF (NYSEARCA:AGQ)

    Double Dip Dividend: British Petroleum

    Happy Trading.

    Are you an existing Twitter Follower? If so, special subscription offer expires May 13, 2012

    Disclosure: I am long MCP, GMCR, HAL, AGQ, MS, JPM, BP, RIG.

    May 05 10:33 AM | Link | Comment!
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