For those of you who failed to realize it, my recent trading tactic series of articles were designed for trading higher-volume common stocks, not the usual preferreds I write about. However, as I wrote and re-lived the time I spent developing and trading those tactics, I thought about the possibility of applying one or more of these trading tactics to be specifically designed for low-liquidity and low-volume preferreds.
Furthermore, especially while I recalled my option selling, I wondered if I could design a way of trading preferreds similarly, with built-in protections with a high probability of success and a reduced possibility of loss.
To best accomplish this, I decided to select a number of currently high-yielding, high-risk and volatile preferreds to explore this concept. Therefore, rather than buying and holding preferreds as I have treated my usual long-term investments, I've decided to trade them according to their sine wave price performance. To explain: The prices of both commons and preferreds might trend higher or lower over differing periods of time; but within those trends, all move in a sine wave pattern as pictured below to a greater or lesser degree. No stock shoots straight up or down without a varying degree ups and downs while doing so. Consequently, at different times and with different company stocks the highs and lows of each will usually vary in height.
For my purposes, I prefer to utilize those preferreds that have exhibited a pattern of greater highs and lower lows, as pictured above. Consequently, I begin my search by seeking preferreds of companies that have exhibited marked volatility and wild price springs because of the nature of the businesses or the sectors they trade in. Furthermore, to reduce my risk, I want to be careful to select the preferreds of companies I believe have little chance of failing, at least failing in the near future. I am not concerned about their long-term viability because I have little intention of holding them longer than a short period of time, usually days and on occasion, weeks. However, to further reduce my risk, I want to be comfortable knowing that I can hold them for much longer if need be and be comfortable with the dividends I am collecting during the time I do.
Before I am able to trade this tactic, it will be necessary to select those companies that best meet my still evolving requirements for this strategy to be most effective and ultimately prove consistently profitable. Obviously, I am developing this trading strategy as I write this article. Consequently, I am allowing you access to my thoughts and a window into how I am going about determining which preferreds will best suit my purposes and how I intend to go about researching and locating them.
- I must feel that the companies whose preferreds I am considering face no immediate or even moderately longer-term existential threat. I don't want to purchase a falling knife.
- However, the preferred must display a fair amount of volatility whether or not it is trending higher or lower. Meaning, its sine wave movement along its dominant trend line should exhibit higher peaks and deeper valleys as those pictured above.
- I intend to only employ this strategy with each preferred selected that's earning an attractive enough risk/reward yield that I'd be satisfied to hold over a longer period of time in the event its price movement proves to be not as I expected or hoped for.
- The dominant trend line, on the other hand, should ascend or descend gradually rather than sharply. Extreme volatility trending toward lower prices might indicate company trouble I'd want to avoid. Conversely, preferreds trending too sharply higher will most probably be priced too high to offer a sufficiently high yield to interest me, especially in the event I get stuck with the preferred because its price fell and remained low over a longer period of time than I had anticipated. I certainly would not mind holding a high yielding payer during the wait.
- As with any preferred investment, I want to be sure to do careful due diligence as best as I am able to, according to my capabilities. SA articles could be quite helpful. I suggest my usual research method for those of you like me who get a headache wading through complicated financial statements, long-winded articles, and mostly spun conference calls.
- I will do the math to determine the price of the preferred I'd be willing to pay as long as I earn the effective yield I was comfortable with and wouldn't mind holding in the event I was forced to hold it for a longer period of time than I anticipated.
- To further protect my investment, I will limit choices to those preferreds that are cumulative. This will further ensure my investment, should things go south and I am forced to hold my position to avoid a major loss.
- Because I'll be bidding for and be offering to sell my shares along the highs and lows of the pictured sine wave, I feel it wise to research each preferred's recent past trading history through a graph styled chart. I intend to review both the past year's graph and a graph displaying how it performed over the past week. I can easily do this utilizing my IB trading platform; graphs supplied by MarketWatch and Yahoo Finance will adequately do the job. Both are available with the click of your mouse in the particular preferreds page in Quantum Online, but I prefer Yahoo's charts because they display greater detail.
CMRE-D's 1-year chart that I utilize to display its trend line over the past year:
For our example, I would tend to place my bids at around 25.03 and my asks toward the highs of 25.15. However, because the prices of CMRE-D are so high and also above par value, I eliminated it from consideration. However, according to its yearly trend line, had its prices been lower, I'd have gladly considered it as the perfect candidate to trade; also because I have high confidence in the short and even long-term viability of this company.
And there you have it, place your bids toward the lower end of the average movement of the above sine waves; and as soon as your buy is closed, immediately offer it for sale toward the top end of that same series of sine waves. The worst-case scenario is that CMRE-D prices fall below the cost of your shares. It's the reason why I insist that you only trade those preferreds that offer effective yields you would not mind holding over a longer period of time than originally intended. Above all, be as certain as you can be to only trade preferreds of those companies you believe will not face an imminent or even a distant existential threat.
Give a man a fish and he eats for the day. Teach him to fish and he will always be able to feed himself. I've given you the tools to make this trading strategy work, it's up to you to employ it successfully. However, to start you off, I'm suggesting the preferreds of several of companies of which to begin preparing your list to trade: Costamare (CMRE), Seaspan (SSW), Peregrine Pharmaceuticals (PPHM), Global Ship Lease (GSL), Navios Maritime Holdings (NM), Safe Bulkers (SB), and Wheeler RE Investment Trust (WHLR).
Yes, most are involved in shipping, but at the current, in my opinion, inflated preferred prices it's not easy finding sufficient preferreds to trade this tactic. Although I recommend none of the above, it does not mean they should not be candidates for this trading strategy. I want you to be certain that you have to decide whether or not each is a worthy candidate and that I only selected them because they could be.
Disclosure: I am/we are long CMRE-C, CMRE-D, PPHMP, SSW-G, NM-G, NM-H, WHLRP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.