Daily Market Update | TheAcsMan

This was already shaping up like another shapeless day before the distasteful afternoon occured, but at least the morning brought us closer to the end of what has not been a terribly good week, principally due to some poorly timed new positions. They not only faltered with a teetering market, but like General Motors, brought their own problems to the table.

As the afternoon unfolded the week only got worse as it was really anyone’s guess as to what caused the sell-off, although Crimean rumors caught some blame, as did more moaning about the Chinese economy being worse than thought.

For the first time that I can recall, this has been a week that I’ve made more personal trades than recommended trades. While that includes a trade in Cypress Semiconductor, the other trades were all put sales, none of which were included as Trading Alerts.

That adds to my characterization of this week.

The Cypress Semiconductor trade was was never sent as an alert because it appeared as if I had gotten the last person willing to buy contracts at $0.20, the price I thought necessary to make it a worthwhile trade. For those that occasionally check “market depth” to see what the outstanding offers are at various prices, at the time my trade was executed there was no shortage of bids at $0.20, but literally as my trade was filled and right before sending that alert I watched the market depth indicate that all of those $0.20 bids were gone and instead replaced by $0.10 bids or nothing at all, despite the fact that the share price was unchanged or even $0.01 higher.

A couple of days later that $0.20 still hasn’t come back even though shares have gotten more expensive.

Back to the puts.

One of my reasons for being more reluctant to recommend the sale of puts is that I know that not all brokerage firms, including Scottrade, allows the sale of cash covered puts.

I know that some subscribers use that brokerage and while I don’t understand the basis for not allowing that kind of trade, as the alternative, buying shares and selling calls isn’t always an equal alternative. A cash covered put is no more of a risky trade, neither to the investor nor to the brokerage than a similar buy/write trade. The money is simply held in escrow by the brokerage until it’s absolutely certain that it won’t be needed to purchase the underlying security because of assignment.

There must be a reason and it must be for someone’s protection, but I still don’t understand, particularly since that need to protect someone doesn’t appear to be very universally appreciated by other brokerages.

Additionally, I tend to sell puts following some bad news and a precipitous drop in share price. That immediately is a more risky situation as for many stocks that first big move is the beginning of a new momentum that may carry it further in the same direction.

Selling the puts is a statement of bullish sentiment in the belief that the move won’t be continued to the level of the selected option strike. What often makes that kind of trade appealing is that the premium is enhanced because of the initial large move and emotion takes over as the supply/demand curve is shifted because people believe that momentum will continue.

While adherents of the belief that big moves beget more big moves in the same direction or even continued and sustained movement in the same direction, there are plenty of examples where that’s just not the case.

Although many refer to dead cat bounces and dismiss them as being meaningless in the big picture in terms of changing direction, the reality is that what really matters is the time frame with which one looks to create a specific outcome.

While a dead cat bounce may not mean much for the prospects of a stock or even an entire market looking months forward it may certainly buy some time until expiration a few days later.

My own use of puts has evolved over the years. To some degree it does require a modification of the thought process as the concept isn’t always intuitive. After all, most of us think in terms of good happening when shares go higher.

With puts the good can occur with both lower and higher moves, with the latter being simply a question of degree.

Additionally, the common belief is that if you sell a put and shares fall below the strike price you will be assigned shares.

The reality is that if the market exists and at prices that are attractive enough you can roll over the puts in an effort to continue to generate option premium and buy time for your hoped for rebound in price.

However, the further reluctance in recommending put sales very often is that often the rollover, if necessary, involves some wide bid and ask spreads and really works best when the trader executes the trade as a spread, rather than individually executing the BTC and STO legs of the trade.

Deciding on the appropriate NC (Net Credit) may appear daunting when the spreads are wide, but is actually fairly simple and uses the following formula:

STO bid price minus BTC ask price plus average of BTC bid – ask difference plus STO bid – ask difference.

Or you could just follow the NC that I provide, to make it even more simple.

The reason that I put all of this down is that I am probably going to make more put sale Trading Alerts, where it appears appropriate in the future as market conditions may warrant that additional strategy to not be overlooked.

For those that can’t sell put contracts, contact me to see if there is an equivalent buy/write alternative.

Today, however, did point out how momentum can build on itself as the market just kept going lower once it made it to a triple digit less. The next 150 points lower were far easier than the first 100. Having chosen to start testing the market when it was down 100 may often make sense, whether doing so via buy/writes or the sale of puts.

But not today.

Mar132014

Daily Market Update – March 13, 2014

TheAcsManDaily Market Update

Daily Market Update – March 13, 2014 (9:30 AM)

This is already shaping up like another shapeless day, but at least that brings us closer to the end of what has not been a terribly good week, principally due to some poorly timed new positions. They not only faltered with a teetering market, but like General Motors, brought their own problems to the table.

That adds to my characterization of this week.

A couple of days later that $0.20 still hasn’t come back even though shares have gotten more expensive.

Back to the puts.

One of my reasons for being more reluctant to recommend the sale of puts is that I know that not all brokerage firms, including Scottrade, allows the sale of cash covered puts.

While a dead cat bounce may not mean much for the prospects of a stock or even an entire market looking months forward it may certainly buy some time until expiration a few days later.

With puts the good can occur with both lower and higher moves, with the latter being simply a question of degree.

Additionally, the common belief is that if you sell a put and shares fall below the strike price you will be assigned shares.

Deciding on the appropriate NC (Net Credit) may appear daunting when the spreads are wide, but is actually fairly simple and uses the following formula:

STO bid price minus BTC ask price plus average of BTC bid – ask difference plus STO bid – ask difference.

Or you could just follow the NC that I provide, to make it even more simple.

For those that can’t sell put contracts, contact me to see if there is an equivalent buy/write alternative.

Mar122014

Daily Market Update – March 12, 2014 (Close)

TheAcsManDaily Market Update

Daily Market Update – March 12, 2014 (Close)

This is getting to the point of becoming more than just simply a dreary week. Today’s final results did nothing to change my opinion even though the bottom line was better.

Dreary I can take, but when it’s accompanied by portfolio losses I have a harder time accepting the lack of anything of substance. Even with a better day today I don’t particularly like it when a market has me selling put contracts, even though that’s an indirect expression of bullish sentiment by most standards.

Instead, I look at it as a question of “how much worse can things possibly get?”

For some stocks, like Walter Energy, the answer is “worse,” although even death may take an occasional break, as it did today.

Despite Monday’s comeback late in the session there was no follow through to Tuesday and that day saw lots of large moves that smelled of profit taking. The kind that doesn’t necessarily lead to re-investment, but rather the kind that’s borne out of caution. That lack of substance can also be a call to put something away for a rainy day.

This morning’s pre-open trading continued with that mildly negative tone, but has seen in the past few days that kind of non-committal tone can easily become one of surrender even when there’s no news to create conviction, elation or fear.

The rest of the day was no different and the rest of this week is essentially devoid of expected news. Too bad, because that creates a situation similar to someone who is should be racked by guilt but finds diversion from daily events suddenly being cast into a desolate room and forced to be alone with his thoughts.

Not a pretty sight.

Somehow engineers from centuries ago were able to figure out architectural designs that allowed their works to stand up under their own weight. That may be what’s needed now as the market is at such heights that common sense would suggest that some kind of support would be necessary to sustain the heights.

Where is the support coming from?

Despite that question being a reasonable one to be asked it has been the same reasonable question for much of the rally that we’ve all come to consider the normal state of affairs. While you can make a case that the Federal Reserve was responsible for much of that rally its impact should only decrease unless events convince the FOMC to turn the flow higher. That can’t be a good thing if it ever got to that point, despite the response having potentially positive impacts.

Ultimately support can only come from economic news that reflects a growing economy. Unfortunately, with the interconnected nature of the world that also requires similar news coming from other corners of the world, especially China.

Looking backward, however, most would agree that markets climb higher during that part of an economic cycle that is in recovery. During such phases relative measures of growth are exaggerated due to the low baselines that receive comparison. By contrast, when improvement becomes truly tangible markets slow down. Then, of course, comes the invariable slow down of growth which is the signal fo
r markets to reverse direction.

If accepting that simplistic summary of economic and market cycles then the best situation is continued economic mediocrity, never quite getting to its potential, with alternating bits of good and bad economic news.

Of course, that’s the same scenario whereby a covered option strategy for any particular stock does its best, as well.

As usual, I try to see a positive light out of a weaker market. That positive would be increasing volatility and improved option premiums that would also make it easier to use longer term options instead of the weekly variety. What is sometimes difficult is the period of transition. The premiums don’t immediately go higher, especially in the out weeks. Very often you can see just how the options market is predicting the future course of the market by looking at the premiums in successive weeks. Higher than usual weekly premiums with low premiums in more distant weeks tells you if a market that is bearish acutely, but not extending that outlook very far.

Barely a month ago that transition seemed to be occurring as the market headed toward a quick 7% decline and even out weeks were beginning to show some premium expansion. but the volatility quickly declined as the correction was stopped dead in its tracks and even more quickly saw its course fully reversed.

Today turned put pretty much as expected and was a day of watching to see where the market decided to go at the mid-way mark for the week and planning for dispositions for this and next week monthly cycle expiration.

Although I made some trades for my personal account and know that some of you followed in them, I never feel very good about only making personal trades and not any portfolio Trading Alerts. I may re-think some parameters that I use in weighing risk and reward, especially as the market may be more opportune for the use of put contracts, especially as an alternative to “having a child to save a life.”