Month: October 2011

The best time to write calls is after the market rips like crazy.

With the SP500 ($SPY) up 13% from the intraday low 9 trading days ago, now is likely a good time to sell some covered calls against longs.

For investors with a longer time horizon, this is a way to incorporate strength to your advantage without selling your shares or trying to flat out market time.

This strategy is not a hedging strategy (as you are only limiting downside up to the price you sold the option for) but more of a yield enhancement or a way to effectively lower your cost basis out in the future.

Selling covered calls into strength also goes against the tendency people have to want to get more aggressive higher which is super common and usually irrational unless based on a defined momentum strategy.

You also let time work for you selling near dated premium as the price of the option decays increasingly as expiration approaches.

So if the stock you sell calls in has had a huge run over the past couple weeks and merely goes sideways for a while digesting recent gains, you earn the premium over time.

The limitation, of course,  is that if the stock continues to run past your strike price, you will have the shares called and be a forced seller higher (which might not be such a bad thing).

Here’s a quick example. Let’s say you are long the NASDAQ 100 ETF ($QQQ). It has ripped 15% from the October 4 low and you want to take a little edge off the position without selling.

You can sell the NOV 61 $CALL for .45 right now and take .75% off the table. If the stock closes above 61 on November 19, you are effectively a seller at 61.45. That’s another 7% higher from current levels in a little over a month after an already big run.

If the $QQQ rises less than 7%, goes nowhere or falls you pocket .45.

Update: Definitely check out more on a similar theme from Options Maven Steven Place: Opening Covered Calls In An Extended Market

The following is a verbatim gmail chat I had this afternoon with a guy who knows $GOOG well. I don’t trade the stock especially around earnings and publish this now only because I had not heard these insights previously. If there is anyone out there who has a smart and novel bullish take into the number, please reach out and I will try to add another post before the close.

A quick price and position update on $GLD. I’m currently flat and looking to reestablish a long term position lower over an extended period of time.

Last week, I posted this chart highlighting a potential bear flag. Below is an updated version of that chart with the upper level more clearly defined.

In contrast, Peter Brandt, who is a master technician, posted this $GC_F chart Monday on Chartly that continues to bare watching. It has a more constructive take on the recent consolidation after the precipitous sell off.

On a longer time frame, I am observing these trend lines.

1. This line drawn from the January low has been tested twice in the past month which may demarcate a double bottom.

2. This line drawn from the July 2010 low is approximately where I am looking to sell near dated puts on extreme weakness.

As an aside: I Love blogging this stuff out as it helps me clarify my point of view.

Over the weekend, I had brunch with a good friend who is an exec at one of the large publicly traded hotel cos. He has been in the industry for 15 years.

I peppered him with questions and his take was well worth a post.

He says revpar for next year looks better and that there are a few reasons for the continued improvement.

First and perhaps most importantly, corporate customers are spending more. This is based on nessecity and an improving business environment despite the uncertainty caused by the complex global economic environment.

Second, he tells me that the hotels have not built out new rooms aggressively since the credit crisis and that any overhang there has been digested.

Big picture, he sees signs of recovery even though it might be uneven and agreed that some of the hold back relates to worry over continued weakness.

My take here is that executives, analysts and the media are often slow to respond to new information and sometimes remain anchored in past projections despite new information.

This must be especially true after the roller coaster ride of the past few years.

$MAR $H $WYN $CHH $HOT

Last Thursday after posting a direct quote from Bill Fleckenstsin I received a bunch of angry emails and a few comments claiming that I had misrepresented him. I quoted him directly fanatic people.

So, here is Bill on video, answering specific questions, all contextualized….  He’s talking banks ($XLF), gold ($GLD), the economy and Mongolia and is smart as per usual…

Last month when $NFLX announced Qwikster, it seemed a bit like they might be on tilt.

I gave them the benefit of the doubt though because I could see the utility of the move. As Dan Frommer wrote then:

Why is this happening? Because the future of Netflix is streaming videos. Period. Not mailing them to your house via the U.S. Postal Service, but delivering them to your TV and devices over the Internet.

But now, just 3 weeks later, the company has announced that it is scratching plans to separate its DVD mail and streaming video businesses and both decisions seem more erratic and hurried.

Tilt is a term borrowed from poker that describes how a card player sometimes responds to one or a series of bad beats. When a player goes on tilt, he tends to increase risk and make poor decisions which lead to further and increased losses.

This occurs not only to amateurs but to pros as well and the concept has a sound theoretical basis in the behavioral finance literature focusing on loss aversion.

The basic idea is that losses affect players emotionally, producing anxiety and a compulsion to try to avoid loss realization. They want to make make up for it quickly instead of realizing it and maintaining sound tactics. The anxiety and compulsion then lead to poor decisions and, paradoxically, taking larger risks.

The phenomenon also applies nicely to traders who are losing money and helps to explain why guys blow up altogether soon after a losing series of trades.

But rarely is it so clear that a company is on tilt.

The catalysts for the hurried and high stakes poor decision making at $NFLX likely relate to this series of bad beats – 1. the loss of the Starz deal, 2. raising prices and the customer outcry which followed and 3 the precipitous fall of the stock price since July 13th.

Regardless, it now appears as if Reed Hastings and company are making hasty decisions motivated by emotions and loss aversion rather than smarts.

The solution is to take less risk and to delay big decisions until exectuives have regained cooler heads but this is much easier said than done.

The world is kept alive only by heretics

– Yvegeny Zamyatin

The Occupy Wall Street protests began on September 17 and are picking up steam.

A month before they began I wrote what now looks like a timely post called Where Is The Activist Threshold in which I discussed the long sleep of activism in the US and what ingredients might be required to further ignite the movement. I wrote:

I wonder what ingredients will be necessary to reawaken the activist spirit in America.  We could sure use it.

It seems like we’ve had a secular bull market in apathy since the end of the civil rights movement and Vietnam.

Meanwhile, our government has been broken for a long time and has proven itself incapable of making difficult decisions much less steering us back onto the industrious course we’ve tradionally held as a nation.

So its going to have to be the citizens who catalyze change in the U.S. via activism and protest.  We can’t count on our leaders even as we share responsibility for having elected them.

The following are critical factors relating to the emergence of a significant activist movement in the U.S. Please add to the list in the comments below.

1. Further deterioration in the standard of living – We’ve had plenty of bread and plenty of circus and we are fat and tv addled. Disruption in the food abundance we’ve grown accustomed to would spur activism. Persistent high unemployment is moving us in this direction but nowhere near threshold yet.

2. An Event – An event must occur which outrages and/or empowers and which captures the imagination of the people.  This will come out of left field and will carry symbolic meaning for the activist movement to rally around.

3. Communication Tools – Social media already exist which can be used to organize a movement and spread information incredibly quickly. We saw it this Spring with the role Twitter and Facebook played in the Middle East uprisings.

4. The Inspiring Leader – A leader must emerge who inspires the people and I’m not talking about a Ron Paul type.

I would like to focus in a bit more on #4 – The Inspiring Leader – because I think it is critical at this moment for OWS.

It seems that this is the key ingredient missing from the protests presently. If there was a single voice to better define the movement and inspire, OWS would accelerate focus and force. A couple of thoughts on this:

1. Anyone who is a part of the establishment who makes his/her ideas public already is tainted, even the lefties and radicals. This goes for anyone who is involved in politics or the media. No matter how outspoken they may be, their motivations are questionable and the organizations they are a part of are not trustworthy.

It is no coincidence that in the great dystopic novels of the 20th century, the potential leaders of the revolutionary movement (and the protagonists of the stories) are unsuspecting and plucked from the unknown.

Zamyatin’s We (embedded below) provides perhaps my favorite example…

2. Social media tools provide the soil from which a seeming nobody who is not tainted by the compromising loyalties of politics or traditional media might gain prominence. One tweet could do it so keep your glove up and your eyes open.

A good friend of mine was a writer on The Rick Mercer Report, a prominent comedy series airing on CBC Television.

A few years back after seeing a blog post I did with a photo of a pizza I’d made, he wrote this piece and they produced and aired it.

My homie was mocking me on Canadian TV, hilarious…

The $SPY managed to rally 2% for the week but a look under the hood suggests a multitude of currents. A host of end of week Chartly charts uncover many of the market’s nascent themes and opportunites.

Click through to find the original posting and larger view.

@WScottOneil is on Chartly and evidently he has done this before. 

His one year study on the $COMPQ provides a look at potential resistance at the 50% retracement of past failed rally attempts.

 @Xiphos_Trading’s complete series on the REITs is well worthy of closer inspection and you can find it here. They’re weak as the $BXP chart attests:

@fallongpicks highlight the $SPX Bullish Percents indicating breadth which, despite index strength this week, still took another step lower:

@kabushiki notes extreme weakness in Soybean Futures ($ZS_F). Still “no dice with the 5-day MA” so no bounce yet despite the cascade:

@upsidetrader points out the lower high series in the financials ($XLF).

And now for some pockets of light…

@1nvestor chalks up the potential for a move higher in Germany’s makets ($DAX)

The @WhaleSongTrader finds a beauty here in Reynolds ($RAI) that pays a divvy to boot:

… And @traderstewie lays out a beautiful little setup here on $SIMO and what you want to look for to get long: