When making 60% hurts!

Yes, in hindsight it hurts to make 60% when you have left potentially 1500% + on the table.

How does this happen? By not:
- keeping emotions out of your trading
- following your methodology (you do have a methodology right?)
- letting your profits run (as opposed to thinking "it can't go any higher")

Take a look at the daily chart of the SPY below.

The Spiders were coming off an extremely oversold condition and hitting a pretty key level of support. One needs to keep in mind that "anything can happen" and prepare for it. Most folks probably expected the market to sell off. Instead we got a nice rally.


Above is the 15 minute chart of the Spiders. You can see that the rally started on Monday the 13th.

Noting that we were oversold I bought 1 SPY July 92 Call option for 15 cents ($15).

I exited at 24 cents for a whopping 60% profit (before commissions) and was a happy camper for a little while before I started kicking myself for making the mistakes listed above. As you can see it climbed as high as 40 cents to finish out the day.

But what is even more frustrating is what happened over the next few days as the rally continued (to the surprise of many I am sure).

That little scribble mark on the lower left is my entry and exit that TradeStation makes. Sure looks tiny doesn't it?

How was this option able to make such a large % gain? As we near options expiration the time value component drops to near zero so a SPY 92 call option trades almost penny for penny above $92.

I bought the 92 Call when it was "out of the money" as the SPY was around $88. Once it crossed $92 the intrinsic value was penny for penny. At the time of these screen captures the option was worth $2.57 and the SPY was trading at $94.43.

$94.43 less $92 equals $2.43 of intrinsic value compared to $2.57 the option was at (meaning a little bit of time value was still in the option which makes sense).

Had I held this option the return could have been north of 1500%.

Trading options around Op Ex (options expiration date) allows you the ability to control shares for a very low cost and yet capture almost a penny for each penny of the move.

Trade well,
MM

Starting to fire on all cylinders

It is a good feeling that one gets when their trading not only becomes profitable but consistent. A number of the strategies/methods I have been working on for quite some time are doing quite well.

My main trading account had a 10% gain last month and the Investopedia simulation account saw a gain of $7554 or 25% as well.

The screen capture above is of one of my simulation games. Keep in mind that the only valid stat is that of the bottom one (since start) because when I took this capture we were already into July (so the "Today, Week, Month, and Quarter" stats are all as of July 1st on). Notice how the blue line was flat until I started using this method at the beginning of June!

Also the title is misleading as I use this account to short momo stocks (not options trading, but once you give a title to a game you can't change it). The only difference between this game and my real life account is I have traded with size in the game and hence the better return.

The methods I use with options are also coming along fine but need a trending market, which we have not had lately.

Work and family still keeps my plate full leaving little time for blogging. What little time I do have left I have spent recording all of my trades (and then reviewing them each night) as well as making simulation trades for each of the strategies I am implementing. I can not stress enough how much this has helped me improve as a trader.

All and all I feel that my trading is finally starting to fire on all cylinders.

Best wishes for your success.

MM

LEAP simulated Portfolio

I have mentioned on many occasions that one great way to learn is to use the various simulation tools available to us. With that in mind I created another portfolio over at Yahoo with the intent of watching how some long term options pan out.

Here is a screen shot showing the transactions so far:

I started this portfolio on June 6th with $10,000. There has been a lot of speculation that the financials have bottomed and that the Jan 2010 $20 call option would go up 10X (or more). I am not so sure, but decided to place this option in my portfolio to track it.

LDK has a nice rounded bottom chart and should the economy improve, this stock could rally hard. So I placed the Jan 2010 $10 call option in the port.

Natural Gas has been a significant under performer for a while now and my reason for watching this is two fold. One because it is an under performer, when the stock market decides to go into a full bull market, those assets or groups that have not done well tend to do so in the next bull market. Also, should folks feel that inflation is a real threat they will bid up a lot of the commodity stocks. Hence I chose the Jan 2010 $2o call option.

My next LEAP option is with KV Pharmaceutical company. I like the chart and the fundamentals. A part of me is thinking that bio/pharma stocks will do exceptional well in the next bull market. I did not see any Jan 2010 options, so I went with the Dec 09 $5 call option.

Here is a screen shot of the performance to date:

XLF option is not working out. I didn't think it would but there is still plenty of time.
UNG option is also down and may have been a tad early as the chart suggests it's bottoming.
LDK is coming along fine and is riding a channel that rising.
KV-A is a long shot.

I have tried to place an equal amount of $ into each trade (around $500) and have more cash to deploy. But with work and trading for real consuming the majority of my time I haven't been able to research finding more ideas.

Maybe you folks can suggest a trade or two!

MM

Gold - short term oversold?

My last call on Gold seemed to be spot on. Now it is looking like gold might be oversold. Here is a chart of AUY (which the puts on them worked out great FYI!!!).


Hmm, maybe time to pick up some call options.

Trade well,
MM

Using Options to capture long term trends

Another key use of options is to take advantage of the leverage they offer. Options can go up 100's to 1,000's of percent but you need the underlying to make a major move. One way to get that is to capture a long term move.

Back in May of 2008 I set up a portfolio of options in the Yahoo Finance Portfolio section as shown below:

These are my entry prices as of that day one year ago.

Now here are the current prices with the percentage gains:

Pretty good returns huh?

Let's look at AAPL, here is the weekly chart:

The blue circled area is the approximate time I placed this option in the portfolio.

Let's take the Apple Jan 2009 $180 Put and look at a weekly chart of this option:

The blue arrow and circled area is the week I placed this option in my portfolio.

This AAPL Jan 2009 $180 put rallied from $24/contract to well over $100/contract. So $2400 turned into $10,000+ in less than one year! (had you been paying attention and sold in this past March).

Now let's look at the AAPL Jan 2009 $120 put:

This put rallied from $4.25 to over $50!! But since Apple is now trading over $120 and should it stay above that level heading into January 2009 expiration ... this option will continue to lose value and could very well go to zero! The current price of $10.72 is all time value at this moment.

The above are examples of the amazing returns that can be achieved using options should you capture a longer term trend. One of the powerful advantages of using leverage!

I have mentioned in many posts how I am a big advocate of using trading simulators, games, and portfolios such as this one to learn the various aspects of investing/trading. No doubt it is a lot of work but the things you will learn can pay off in the long run. So use Yahoo portfolios, Investopedia trading simulation games, or countless other avenues available to you, - just "do it".

Trade well,
MM

Gold - short term overbought?

Gold miners have had a nice run over the last few months but today I am seeing a good number of these stocks that appear to have exhaustion gaps.

Here is NG


and here is AUY


to see others jump over to FinViz here.

The other alternative is that inflation expectations are increasing dramatically.

Either way there are a number of ways to play this. You could put on short positions or you could buy puts (providing they are not overpriced and have sufficient liquidity).

Trade well,
MM

FWIW - I am short NG and am looking to pick up puts on AUY (or a similar stock).

Trade Logs

It is very important to create a trade log, which is a separate item from your trade journal.

I use Open Office's Calc spreadsheet to record all of my trades (and I like the price ... free!).

For example here is a screen shot from a tab which contains my trades over at Investopedia (simulation trading account).

It has all of the basic columns that one needs to track the results. Adding notes as to what you did correct and what you did wrong will help you improve over time.

They say hindsight is 20/20, so use it to your advantage to learn from past trades.

Trade well,
MM

Stock Certificates

I wish I was a gifted writer as I would love to research and tell stories on how challenging and different it was back 10, 20, and 30 years ago to trade equities. Mind you I didn't start trading till within the last 5 years or so. But I did dabble a bit in the early 80s for a brief period.

Shortly after my son was born (partly responsible was a trip to Disneyland) the wife and I decided to pick up 1 share of Disney. I believe I paid just over $100 and it cost me $50+ in commissions. You can see the historical prices here.

What is neat is the stock certificate was one of the coolest looking ones around at the time.


Since then the stock has split a few times and we have had additional certificates mailed to us. I am in no hurry to sell these shares.

So you young bucks who are new to trading, these certificates are real but are being held in your brokers name electronically (unless you request them to be put in your name).

A number of folks collect stock certificates just like folks collect stamps, coins, bills, etc. It's not a hobby that I plan to get into but if you want to take a gander at a few more certificates check out the Scripophily web site.

Now had I only purchased INTC instead, lol.

Trade well,
MM

3rd Political Party?

We all have a lot to be thankful for these days. Even though there seems to be more strife and hardships these days. I could go on listing all of the reasons why I am thankful, especially for those brave men and women in uniform serving our country.

But instead I would like to point out that USA is slowly going down a path that I feel has deviated from what our founding fathers intended for this great country. It was never intended to have a Federal government stronger than the individual states.

Maybe it is time a 3rd political party was created. One that really is of the people and for the people. Please take a gander at The American Federationist site. And should you be interested in reading for yourself about our great Constitution you can go here. I believe this site has the best commentary and interpretations of what the founding fathers wanted and did not want for this country.

So on this Memorial Day, take time not only to be thankful for all that we have, take some time to learn why we all need to protect what we do have as it is all under attack.

Trade well,
MM

Time out

Sorry for the lack of posts lately. This economy is hitting my customers (and therefore me) very hard. I wish I had the time to expand on what is happening and how I plan to address the challenges in front of me.

I will say that I need to focus on my company as that is what brings home the bacon. I have made major progress in trading over the last year and have enjoyed some nice consistent profits each week but not enough to garner me the income I am accustom to on a yearly basis.

Blogging has helped me and I wish I could continue as I have made a lot of friends all over the world.

I will continue to trade and will be back for this is my passion.

Best of luck to all of you.

Trade well,
MM