Traders Corner   25 comments

Yesterday’s drop in the S&P 500 took some of the overbought stress off of the technicals. However, futures are negative right now, so we could see a drop today, which wouldn’t necessarily be bad. As usual, dips are just buying opportunities in this bubble market.

The S&P 500 levels to watch today:

UPSIDE: 1795 (top of the Bollinger Bands), 1798 (November 15th’s high), and 1802 (November 18th’s high and the all-time high).
LAST CLOSE: 1791, inside the 1790-1791 (2 data points) range.
DOWNSIDE: 1788 (November 19th’s low), 1782 (November 13th’s high), 1780 (November 14th’s low), 1773-1775 (3 data points and October’s high), 1770-1771 (2 data points), 1764-1768 (5 data points and the 20 day moving average), 1760-1762 (3 data points), 1752-1755 (2 data points), 1746-1747 (2 data points), 1739 (bottom of the Bollinger Bands), 1729 (September’s high), and 1726 (50 day moving average).


Posted November 19, 2013 by edmcgon in Daytrading, Investing, Market Analysis, Technical Analysis

25 responses to “Traders Corner

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  1. Trader – I have an options question for you. I have outsized gains so far on NUS and GTAT. I do not want to sell either of them as I want to wait until march of 2014 to minimize my capital gains taxes. What could I do using options to minimize my downside? How much would it cost per share?


    • Marshall, what is your basis?

      • GTAT is 3.39 and NUS is 41.94.

      • Marshall, I’m going to assume you plan to hold these until March no matter what. Since you have not used options, I would suggest you keep it simple and use covered calls. w_seattle and mdistas use options and may have some other ideas for you to consider. First thing,is do you think the market will go up or down between now and next March? Are these two stocks likely to follow the market? Based on your belief, you can select either in the money or out of the money options.

        NUS – if you think NUS will move higher you could sell March 2014 120.00 calls for 10.10 per share or 1010.00 per contract (100 shares). No matter what happens that 10.10 is yours to keep. This will reduce your basis to 31.84 per share. If NUS is above 120.00 on the third friday of March you will be called out and will be paid 120.00 per share. Your pofit will be 120.00- 31.84=88.16 per share. If NUS is less than 120.00 you’ll have the 10.10 and still own all of the stock. If you think the market may go down and NUS is likely to drop, you could sell the in the money calls. I’ll use the 100’s as an example. The 100’s are currently 21.70 or 2170.00 per contract. If you sold these your basis would be reduced to 20.24. If NUS is above 100 on the third Friday you will be called out. Your profit will be 100-20.24=79.76 per share. If it is below 100 you keep the 21.70 and still own the stock.
        As for GTAT the same concept applies. Just pick different strike prices and run the numbers. Hope this helps.

      • Trader – thank you for the response. Sorry if I ask some stupid questions. So for NUS, when I look at yahoo finance I see at march 2014 $21 for a 100 strike price. I think where I get confused is your saying I would “sell” those. How can I sell them if I do not own them right now? My fear is something happens that causes the price to crater by 30%. So if I look at the put options does the 5.90 at 100 strike price mean I can pay 5.90 per share and guarantee I can sell at no less than $100 per share in march?



      • Marshall, you have the put exactly right. You are buying the right to sell the stock to someone on or before March 2014 for $100 and paying them $5.90 for that right. Not sure what your buy in date was but make sure the expiration date of 3/22 is after your buy date.

      • All of these seem lightly traded. Do you put in a limit order? Is the smallest amount you can buy is in hundred share lots?

      • Marshall,

        I would also recommend the covered call strategy. In response to your question directed at Trader you can sell an opton without owning it. For example If you sell a call to me you are taking on the obligation to sell stock to me at that strike. I am buyin the right to buy that stock from you. For puts if you buy a put from me I agree to buy your shares at that price. Considerng your trading style I would also recommend the covered call strategy. I understand you are concerned about a steep drop but youcan always sell a call further in the money. Keep in mind the money you receive on the option is taxed according to the irs rules regarding covered call strategies so you might want to consult your accountant or do some research yourself

      • Marshall, you can sell the call with little risk because you already own the stock. If you sold the call without owning the stock, ie, a naked call, you’d have to buy the stock to deliver it to the optionholder- a risky proposition. Selling a call is essentially a bet that the price falls, and if it goes up you could take a bath (because while a stock can only fall to zero, it could theoretically rise to infinity).

        Buying a put is the essentially also a bet that the price of the underlying security will go down.

        If you think of options as like insurance, the question is would you rather buy insurance (i.e., buy the put) or sell the insurance- (i.e., sell the call). Like all insurance products, being either a seller or a buyer is neither bad nor good, unless the risk is mispriced and you pay too much as a buyer or charge too little as a seller.

        AIG is apparently giving seminars on how to charge too little as a seller and the potential negative consequences to those forced to bail you out.

        As an expert in insurance, I’m sure you’ll do great using options to juice your returns.

        Much thanks to W. Seattle over the years for the awesome lessons he’s taught on this board about options.

      • Thanks everyone. I am starting to fill out a form with Merrill Lynch that allows this sort of trading. They ask a lot of personal questions (income, net worth, accounts with other firms). I am not sure all of that is any of their business. In your experience, do I have to provide all that and what do they do with it?

      • Marshall, I always use limit orders on options. I test the market by entering a limit price slightly above the bid price. If it doesn’t sell right away, I’ll adjust the price to the bid. You would surprised how often the better price will fill. Almost all option contracts are in 100 share lots.

      • They want to make sure you are a sophisticated investor. It’s a cya in case you sue them because you claim you were too stupid to know what you were doing and they let you do it. As far as I know, the info sits in your file unless they need it for defense.

      • Final question – for each of these securities there are numerous strike prices etc. how do you look at them to decide which is optimal?

      • Actually, one more question. Do the options (if they are covered calls) have to be in the same account as the underlying security? Right now a lot of my holdings are in fidelity, but I am applying in Merrill lynch.

      • You just have to run the numbers and decide what you are comfortable with. I don’t know of any magic formula. Don’t know the answer to your other question. Why wouldn’t you trade in Fidelity? My guess is commissions would be less.

  2. I’m looking at AVG today. One of Marshall’s picks and I use the software and like the company.

    Anyone have any thoughts?

  3. Has anyone else noticed how terrible Yahoo Finance’s website has become? This used to be my favorite site for monitoring my portfolio. But recently they decided to redo the portfolio pages and they have become utterly useless. All the old functionality is gone and the site is slow, unstable and unreliable. The site has thousands of comments from users complaining about the mess and even after a couple months, the site has not gotten better?

    Doesn’t Yahoo read user’s comments? If I owned Yahoo stock I’d sell it just based on their apparent lack of concern for their user experience and lack of urgency to try to fix the problem.

    • Jeff, I have noticed it. Several times I have thought about switching. I have not found anything with real time quotes that I like yet.

    • Marshall I’m trying Google finance right now but it does not have some of the single page portfolio tracking that I’m used to with Yahoo.

      My Fidelity Pro site is probably the best alternative that I’ve found so far.

  4. I’ve got a few updates that have been long awaited for a few trades I posted here.

    First is FB. I orginally sold March 28P for .47 which was assigned and April 27.5 for .64. This gave me a basis of 27.18. I sold a few covered calls on this position which amounted to around 3% but I’m only going to cover the ones I was called out on. I sold a Aug 29.5C for .2 and a Sep 38C for .42. The Aug was to partially hedge prior to earnings which turned out to be the absolute wrong thing to do but oh well. Total return on the trade is 34.06 a share which equates to a 25% return. I’ve been selling puts ever since but have not posted them, and I have yet to be assigned. The stock is consolidating and getting choppy, but I think there is still room for more and I’m still long via the short puts and a few calls. Personally up here I’m getting less inclined to own the stock anyway and more willing to stay long via calls at least a few months out.

    Another trade was NOV November75/85 call spread. Which I initiated in April. I purchased the 75C for an average price of 3.62 and sold the 85C for an average of 1.38. Total cost for the trade was 2.24 a share. I exited the position a week before expiration for an average of $6.50 a share, and $4.26 a share profit. I own the stock at $70 a share and plan to stay long. I’ll update if I initiate another spread. For anyone interested in this sector I’d also recommend the OIH ETF. Gives you exposure to alot of companies making a ton of money in the shale boom.

    I had bought MCD Sep110C for an average price of .35 in April. I sold a portion of them a couple weeks later for $1.02. I held the remaining contracts until the end of July which I sold for .05 and a .30 loss.

    Jeff I also noticed the switch as I am a long time user of Yahoo for news updates and stock quotes. Completely different and cumbersome. Not a very smart strategy on their part.

    Additionally I purchased shares of NICK on November 1st at 15.13 for anyone interested. Plan on holding until it hits 16.75-17.

  5. Thanks to everyone for the education in options. I am leaning towards not using them. The big reason I did not want to sell my positions early was tax driven. But reading through covered calls and heir tax treatment, if I sell them that income is considered a short term capital gain. So I really have not achieved one of my major goals of avoiding st capital gain taxes. I. Could still buy the puts, but that feels like pretty expensive insurance.

    • Marshall, another thing to consider is that as the price of NUS goes up, the price of the $100 puts will drop. Keep your eyes peeled and the numbers may get more to your liking. If it moves up another $10, the puts will probably move under $4. Also, as you get closer to March, the price of the puts will decrease as well as long as the stock price holds or increases which makes sense as the time risk decreases.

      It honestly depends upon how valuable that insurance is to you. If the stock is at $125 and the $100 puts are $4, you’re basically losing money on anything that is less than a 23% drop ((125-96)/125) after the cost of the put. You may want to consider the covered call strategy if you get to January/February. You could sell deep in the money calls to juice the return and protect against a lot of downside. Pretending the stock is at $125 in January and the $115 March calls are $15, you would get the $15/share in your account immediately and then upon expiration (or before if the buyer decides to call the shares) you would keep the shares if the price was 114.99 or less and they would be called at 115 and above. If called, your total sell price would be 130. If below, you keep the shares and the $15 so that if it is above $100 you’ve come out ahead and had your protection for a 20% drop from 125. Now you will have to figure out the tax implications for the trade, but it is certainly a good strategy if you are still feeling comfortable with the stock based upon your metrics. Basically your insurance costs at that point are the extra taxes that you will pay for selling the covered call vs riding it out. Hopefully that all isn’t too confusing…

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