Welcome to Wall Street, Main Street and Me


Friday, April 27, 2012

Interview on r.k.vr.y literary journal website

I was pleased to be interviewed by poet Elizabeth Glixman in conjunction with the poem "The Red Car" that was published this month in r.k.vr.y magazine. Here's a link to the interview: Beverly Jackson

Wednesday, April 25, 2012

Options - More Baby Steps

I'm earnestly trying to reduce a very complicated system of trading into some simple steps for beginners to follow. My trading group, The Trading Divas, has newcomers who have never traded an option before, and so I'm trying to make things very understandable. Please write to me if you have questions.

In my last post Options- Baby Step Introduction, I tried to introduce the Call and Put, the two instruments used to trade options.

In this post I'd like to put down some additional information for the trade itself, and then in my next post discuss what options are used for. (Making money, right, but how and what else?)

The most important thing to an option trader is the Option Chain. Every option broker website will carry the chain which is constantly changing price list of options (Calls on the Left, Puts on the Right) but is also full of much more valuable information. As a beginner, you should go into your new trading account and find the Chains and start getting familiar with them.

YOUR "MAP" to trading options - THE OPTIONS CHAIN

I have marked up the Chain for the things that are important to know.

1. The Ask Price (premium) is the amount you PAY when you go long (buy) an option.

2. The Bid Price (premium) is the amount you RECEIVE when you go short (sell) an option.

3. You can click through the links for Expiration dates, and get a new chain page for each month (or week.) This sample happens to be June 2012. When you try it yourself, note that the premium goes higher, the further out in time you go.

4.(Most) options on stocks expire on the third Friday of every month. Weeklies begin on Thursday and expire the following Friday.

5. OpInt represents the total number of options (both longs and shorts) open on that particular option. The "open" interest in that option should beat least 100 before you trade it--otherwise not enough interest to move the price. After all, you need someone on the other side of your trades when you are both buying and/or selling.

6. The Strike Price runs down the middle of the chain and applies to both side of the page. It's the Strike Price for Calls and Puts on each line. The chain for the Put is difficult to get used to because it runs "up" the page, while the Calls run "down" the right of the page. You will soon get used to it.

7. The chains are usually shaded in some way (on this sample, it's the yellow areas) to help you discern the three types of options: In the Money, At the Money (or Near the Money), and Out of the Money. Take a close look at how the prices change as you go from ITM options to OTM options. This will have a great deal to do with how you decide a trade. Not only how much spend (or receive) on an option, but what the risks and rewards and probabilities are, depending on the Strike Price you choose. At the Money is the most traded strike of all. But that doesn't make it necessarily the best choice. It depends.

OTM - Out of the Money

When an option is "out of the money," the stock price has not yet reached the strike price. The option has no intrinsic value, only potential value based on time remaining before expiration, expectations of underlying stock price movement, etc.

ATM - At the Money

An option that is "at the money" has a strike price that is the same (or close to) the stock price.

ITM - In the Money An ITM call option refers to any strike prices that are below the stock price. Its called in-the-money because when you exercise, for example, the 75 strike option, you would make $5: you have the right to buy at $75 and sell at $80



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Different brokers have slightly different option chains. The one above is from OptionsXpress (where I have an account). I also have a small account at Trade Monster because I like their tools, and frankly, I like their chains because they show Delta and Theta. (two of "the Greeks") as well as Implied Volatility. The nice thing about these TM chains is that you can configure them with the columns you want.

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Delta and Theta and implied volatility are entire subjects unto themselves, (a later post) but I would like you to notice how the Delta and Theta changes as you look at the different options. Delta is the amount of money the option makes with every $1 that the stock price moves. Theta is the amount of money that the option "decays" for every passing day. Both of these figures change, as the underlying stock changes and the option prices change.

##

Tuesday, April 24, 2012

April Week 4 Trades

Week 3 was too crazy. I made monthly trades and didn't touch the weeklies. But I'm back, (and a little late posting). Here's my 4/27/12 Weeklies. (note that one of them (BIDU) is already failed; I adjusted it to monthlies which IF they succeed will reduce my losses to $49.50.
If you are looking at the schedule, I.C. stands for "iron condor" which I've placed on Apple. It simply means a Bull Put and a Bear Call put on at the same time (thus reducing fees). ##

Sunday, April 22, 2012

Options - Baby Step Introduction

WHAT ARE OPTIONS, ANYWAY?

Options are not stocks, but contracts based on stock and other instruments (like indexes, ETFs, futures, commodities, et al, and thus piggyback the instrument that is optioned. For the sake of simplicity, let's just discuss stocks. (For example, one can buy an option on Apple stock without actually owning any Apple stock. It is a way of playing the stock market for less money than the stock investor.) Options are traded in quantities of 100 shares, which equals one contract. You cannot trade less than one contract (100 shares) using options. So you can control 100 shares of a stock for a limited amount of time, without actually buying the stock. It provides avenues for making profits that exceed buying/selling stocks. But you have to know what you're doing.

There are two types of options: Calls and Puts

You can think of options trading as 2 persons betting against each other. Stock Options are simple contracts with an expiration date that allow the owners to buy or sell a stock at a specific price (called a "strike price") before the contract expires.

Just the language of options is confusing to the newcomer, so I'm going to try to break it down into simple examples:

HOW DO THEY WORK?

Let's use Apple for our stock option example. (Apple is the flavor of the day anyway, and selling for around $600 per share. Keep in mind it would cost $60,000 to buy 100 shares of the actual stock).

First you have to have an expectation of where the stock price is going. Then you go to an "Options Chain" on your broker's website to find how much it will cost or pay to trade the stock. Here is a typical Chain:


Trading a Call

John thinks the price of Apple is going to go up. He buys one option contract, a CALL, and pays premium of $36.25. (x 100 shares = $3,625.00.

Mary thinks the price of Apple is going to go down. She sells one option contract, a CALL, and receives premium of $35.50 (x 100 shares = $3,550.00.

This contract is traded online, anonymously. John and Mary don't know each other. The orders go into buckets, and are matched, Buys to Sells, automatically.

This contract expires next month on the 3rd week of the month.

Trading a Put

In the same way, they could have traded Puts (instead of Calls).

Mary thinks the price of Apple is going to go down. She buys one option contract, a PUT, and pays premium of $35.45. (x 100 shares = $3,545.00.

John thinks the price of Apple is going to go up. He sells on option contract, a PUT, and receives premium of $34.75. (x 100 shares = $3,475.00.

Both of these trades have the same expectation of the stock movement. So what determines the choice of a Call or a Put? Some people just like to play one or the other. The premiums may be different, and that might influence their choice. There are other details (like how many people are trading today, where is the 'action' and the movement? On the Call side or the Put side?) that can affect the choice.

WHAT ARE THE RIGHTS AND OBLIGATIONS?

• The options buyer has the RIGHT to buy or sell the actual stock.

• The options seller (writer) has an OBLIGATION to buy or sell the actual stock

• The Call option: - Provides the buyer the right to buy the underlying stock at a fixed price,($575) if the stock moves favorably. - Obligates the options writer (seller) to sell the underlying stock at a fixed price($575), if the stock moves unfavorably.

• The Put option: - Provides the buyer the right to sell the underlying stock at a fixed price,($570)if the stock moves favorably. - Obligates the writer (seller) to buy the underlying stock at a fixed price,($570) if the stock moves unfavorably.

Wal-Mart Karma has a big Kick!

I've never been a fan of the way Wal-Mart treats its employees, and how it bullies its way into every American town and runs the little guy out of business. People love the low prices, but the family-owned behemoth is due for a comeuppance, and I'm happy to report it's in the New York Times this morning.

I always get a kick out of the photographs of the executives of these dishonest companies. It seems to me that their faces reflect the very essence of the kind of business that they run. Not a fair or kind thing to think, but there it is. I like to think fate writes on the faces of the bastards. Case in point.


Michael T. Duke
As the executive overseeing Wal‑Mart International, he received detailed information about the bribery allegations. He is now Wal‑Mart’s chief executive.


Ho hum, it's just another big business cover up, and here's the openers from the NYT:

MEXICO CITY — In September 2005, a senior Wal-Mart lawyer received an alarming e-mail from a former executive at the company’s largest foreign subsidiary, Wal-Mart de Mexico. In the e-mail and follow-up conversations, the former executive described how Wal-Mart de Mexico had orchestrated a campaign of bribery to win market dominance. In its rush to build stores, he said, the company had paid bribes to obtain permits in virtually every corner of the country.

The former executive gave names, dates and bribe amounts. He knew so much, he explained, because for years he had been the lawyer in charge of obtaining construction permits for Wal-Mart de Mexico.

Wal-Mart dispatched investigators to Mexico City, and within days they unearthed evidence of widespread bribery. They found a paper trail of hundreds of suspect payments totaling more than $24 million. They also found documents showing that Wal-Mart de Mexico’s top executives not only knew about the payments, but had taken steps to conceal them from Wal-Mart’s headquarters in Bentonville, Ark. In a confidential report to his superiors, Wal-Mart’s lead investigator, a former F.B.I. special agent, summed up their initial findings this way: “There is reasonable suspicion to believe that Mexican and USA laws have been violated.”

The lead investigator recommended that Wal-Mart expand the investigation.

Instead, an examination by The New York Times found, Wal-Mart’s leaders shut it down.

Neither American nor Mexican law enforcement officials were notified. None of Wal-Mart de Mexico’s leaders were disciplined. Indeed, its chief executive, Eduardo Castro-Wright, identified by the former executive as the driving force behind years of bribery, was promoted to vice chairman of Wal-Mart in 2008. Until this article, the allegations and Wal-Mart’s investigation had never been publicly disclosed.

I wonder what the stock is going to look like Monday morning? Is Wall Street any better? Are they all thick as thieves? Or are they all just thieves?

Friday, April 13, 2012

Let's Talk Technicals

Okay, for the uninitiated, "technicals" and Technical Analysis is just fancy talk for stock Charts and the overlays, indicators and oscillators associated with charts which are used to help evaluate the expectations on a stock's price movement. Fundamentals (see two earlier posts) always trump technicals, but technicals are a VERY useful tool, once you've learned them. They LOOK a lot more complicated than they really are. There are tons and tons of books on the subject. I suggest for the beginner a simple little book called "Sticky Charts" to learn a bit about patterns and reading them.



By the way, studying charts is one of my favorite pastimes. It is SO fun, like figuring out a crossword puzzle.

Every good options broker's website is going to have a tutorial on charting. Google "stock charts" on the internet and you'll find months of reading. And of course there are endless books on charting. "Candlestick Charting for Dummies" even! It would be worth your while to read more than one book, but don't make the mistakes I made. I got over-enthused and thought I needed to know EVERY indicator and oscillator known to mankind. When I set up my early charts, they were two feet long with all the added indicators. Truly not necessary.

The charts will be available on your broker's website too, and many other free and paid websites have charts that look a little different and have different choices of indicators. You just have to poke around and see what you like, after you learn the basics. I prefer StockCharts.Com because their charts are so fabulous looking, and they have lots and lots of bells and whistles. You can do free charts or paid charts and get more.

After years of fooling around with indicators and combinations of indicators (there are MANY creative souls out there selling you "magic" based on "new" discoveries with indicators) I realized that THREE and only three would serve me very well, if I knew them, used them, and truly followed the signals they provide.

THE NAKED CHART

But first, let's look at a 'naked' chart. You can have charts that represent the movement of stock prices by days, weeks, years, minutes. It's all up to you. If you do long term trading, you probably want to look at years of activity to decide the patterns of that particular stock. If you are a mid term trader, then daily charts will probably suit you just fine. For short term day traders, they like to look at one minute and five minute charts, as their trading is fast and furious.

I like to do weekly and near-month trades, so I use the daily charts for an overview and the 15 minute charts to watch the trends change. So here is a candlestick (my chart of choice) chart with no embellishments.



All the Chart programs these days allow you to write all over the charts, and draw lines and all sorts of gizmos on them. One thing that is often helpful is to draw trendlines. (with this chart on Apple, it's not hard to figure out what the trend is, however). The correct way to draw the lines is that downward trend lines go OVER the candlesticks; upward trend lines go UNDER the candlesticks as shown here. (the lines should touch at least three candles to make it right. But mind you, this is not an exact science, so don't get anal about it.



THE OVERLAYS

THE EMA'S

On the face of the naked chart, you can set parameters for "moving averages" which flow behind your candlesticks or overlay them, so to speak, and provide a lot of information and your first "signal" to look for.

A signal is just that, it is an "event" that tells you the stock is about to move in a particular direction. Think that kind of information might help your trading? You bet. But you can't rely on just ONE signal. It could be a fluke, it could be a dud. But if you can get three technical signals all saying the same thing, you have a good chance of predicting where the stock price is going. You can do simple moving averages, but I've been told many times that Exponential moving averages are better, and so I use them. I use a 5 period moving average, a 20 period moving average, and also a 200 period moving average. (this last one is really historic information, but I find it interesting in contrast to where the price is today.) For the purposes of this illustration I shall only chart the 5 day and 20 day moving averages however.

By the way, there are mathematics behind ALL of these technical charts. Every line, every candle is an equation that has been worked out based on the momentum, volume, volatility or some such. Every good book on Technicals will give you this information in vast detail. You don't need to know all the math in order to use the charts. I don't have the head for it, maybe you do. It helps to know that it's not a ouiji board, however. There are sound principles behind this stuff.If you really must know, you can start here: Moving Averages

So here's my Exponential Moving Averages added to my naked chart. I have also added a graph of the Volume at the bottom of the chart. It represents how much buying and selling in total is going on per period.

Please note carefully how the red line and blue line cross each other occasionally. I have used a Caterpillar chart (instead of Apple) for more up and down activity to illustrate the crossovers.

THESE ARE YOUR FIRST SIGNALS.


When the 5 day line (BLUE) crosses up and over the 20 day line (RED), it is a signal that the stock is going to go up. When the blue line crosses down over the red line, it is a signal that the stock is going to go down. Easy peasy. Just remember that the crossover is ONLY ONE OF THREE SIGNALS NEEDED to trust the technicals.

THE OSCILLATOR

R.S.I.

I usually put this indicator above my chart, where it is separate from the other indicator which I put under the chart. This top side indicator is called the R.S.I. which stands for Relative Strength Index. 50 is the midpoint on the RSI indicator. If the line goes over 50, it indicates an overbought condition, and below 30 indicates an oversold condition. The point is to make sure the direction of the line is matching the signal you are getting from the Moving Average crossovers, Plus one more indicator.

If you must have the mathematics, try this: Relative Strength Index



THE INDICATOR

MACD

The Moving Average Convergence Divergence is the third and last of our Buy/Sell Signals.

For all the details of its innards, here's a link for you: MACD and this is what it looks like beneath my chart. Note there are two lines (much like our overlay moving averages) PLUS a histogram which builds up and falls down along with the price.

So here's my chart, with all the pieces, stacked up: RSI on top, the candlestick chart with EMA's, the Volume graph and the MACD. Note that the circles represent where the signals are. If you have THREE SIGNALS, it's a buy or sell signal. (up or down)



I haven't circled every signal on this chart. See if you can find additional crossovers as well as additional "false signals" (where there's only one or two and NOT all three to verify.) This is the most cursory description of Technical Analysis, and is only MY way, MY opinion, and what I've learned. There are hundreds of different oscillators, indicators and overlays. You will learn many of them, use them, discard them and find the ones that make the most sense to you. But this will kick you off with some bare basics. I welcome all questions and comments. Be KIND. I'm still a student too. :-) ##

Wednesday, April 11, 2012

April Week 2 Trades and Adjustments

The market has begun to pull back, so my weekly bull put spread strategy is not going to work! Almost without thinking, my trading has begun to evolve into bear call spreads. But they have been created (often) from Calls that I bought that didn't work out. (I belong to some 'outside' groups that recommend buys. I am slowly disassociating myself from such recommendations. But the ones I have I'm trying to 'save' with adjustments).

Anyway, these are NOT weekies, but MONTHLIES with different expiration dates. These are apart from my "Bull Put Spread" project which netted me $5962.17 in ten weeks. That's an average of $592 weekly which suits me just fine. It hardly puts a dent into my past losses. Ahem.

So, with this pullback, I will be scratching for a new strategy. Here's my open trades:



I will update these trades in a new post after expiration. ##

Tuesday, April 10, 2012

More Fundamentals - P/E Ratio, EPS, PEG (OMG!)

When I started trading options I had to learn a whole new language. A lot of new words, meanings, and acronyms. It comes with study and time. Regarding Fundamentals, a few of these acronyms are EPS, P/E, and PEG.

These really belong with the section of my previous post about valuation and analyst's projections. After all, what we really want to know is what to expect from a stock. But I've separated them because I feel they deserve their own post given that they're widely used on Wall Street,are referred to on television, and in all books about investments. And for a long time, I had no idea what they were talking about!

IS MY STOCK OVER OR UNDERVALUED? IS IT AN INVESTMENT STOCK OR A SPECULATIVE STOCK?

EPS = Earnings per share. Earnings are another word for profit, so the amount of profit per share of stock is EPS.

P/E Ratio or "Multiple" as it's sometimes known = Price of the Stock divided by (12 months of trailing) earnings per share.

Before you can take advantage of the P/E Ratio in your own investing activities, you need to understand what it is. Simply put, the P/E Ratio is the price an investor is paying for $1 of a company's earnings or profit. In other words, if a company is reporting earnings per share of $3 and the stock is selling for $30 per share, the P/E Ratio is 10 ($30 per share divided by $3 earnings per share = 10 P/E).

I don't have to worry about the arithmetic. Most brokerages, and all the stock-quote systems on FinViz, Yahoo.Finance, etc. will automatically figure the price-to-earnings ratio for you.

Mind you, different sectors (the types of industries: technology, textiles, oil & gas, utilities, etc.) have different "normal" P/E Ratios, so you can compare equities within the same sector to get an idea of their standing. For example, technology companies may sell at an average P/E Ratio of 20, while textile manufacturers may only trade at an average P/e ratio of 8. There are exceptions, but for the most part, these variances between sectors are perfectly acceptable. What's important is how it's used. Get familiar with comparisons and these will start to make sense.

  So take these FinViz. com comparisons in the Technology Sector:

Apple's current price is $636. ($636 divided by EPS $35.11 = $18.12

Google's current price is $631

Yahoo's current price is $15.

So investors are willing to pay over $600 for $1 of Apple and Google earnings, but only $15 for $1 of Yahoo earnings. And yet look how close the P/E Ratios are. This tells you that Apple and Google are reasonably priced stocks, in spite of their high stock price.

Another way to look at P/E Ratio is that it could loosely represent how many years it will take to recoup your initial investment. I don't think this is widely used, however. Just for fun, let's take a look at some less and more flamboyant stocks:
Ford Motor Company (F) 's current price is $11.77
Chipotle Mexican Grill (CMG)'s current price is $416.60.

From what I've read, the higher the P/E Ratio, the more caution should be exercised. The high P/E's in dot-coms and real estate were tip offs that stocks were overvalued. This is not a sure-fire tool, but one of many in your Fundamental tool box. Just remember that because a stock is cheap doesn't mean you should buy it. Many investors prefer the PEG Ratio instead because it factors in the growth rate.

PEG RATIO = P/E Ratio divided by the growth % in earnings per share. In the examples above, the "EPS for next 5 years" is the percentage that is divided into the P/E Ratio. I understand that different websites use different growth rates to compute PEG, so you might want to acquaint yourself with which one you plan to use. On Chiptole above, you would take the P/E of 61.63 and divide it by the EPS next 5 yr of 22.02% to get a PEG of 2.80. If you compare the examples above, it is interesting to note that Apple has the lowest PEG of all, a very cheap stock indeed.

I admit to being a little fuzzy on these ratios, but it is helpful to me to know that a P/E Ratio of 200 is something I might question before I trade it. As I learn, I will revisit these subjects, but I am trying to record my learning, to date. If you google these ratios, you will find many, many articles explaining them much better than I can. But right now, with glazed eyes, I offer an introduction. ##

Monday, April 2, 2012

April Week 1 Trades and Adjustments

Okay, in the interests of learning and a reluctant attempt at full disclosure, I am going to show you how/when things can/do go wrong -- and as i am studying how to make adjustments to trades gone wrong, this is a perfect case! Wrong, wrong, wrong!

The last Apple (AAPL) trade is the easiest to explain. It doesn't appear on my original schedule, as I put on the trade after I started this post. The stock came down below my $620 Short Put. I closed out the trade by adjusting it. So I rolled the $620 Short Put down to the $615 Short Put. Mistake #1 was jumping the gun. The stock bounced back and is sitting at $623.28 as I type this. My $620 Strike would have been safe today (I think). But by adjusting to the $615, I took in some credit, thus reducing my debit loss. So I didn't get to keep the original $304.40 credit, and I lost ($83.19) in the reversal. Not such a terrible loss, but (likely) an unnecessary one.

The Priceline (PCLN) debacle is another thing altogether. Here is a case of emotions getting into the mix and really making a mess. Note this is a Bear Call and not a Bull Put. I don't do well with Bear Calls, and this one is the poster child for my idiocy. In this case PCLN's stock went UP, against the pullback happening all around it, and hit my $735 Short Call. The losses would be extensive, since I had five (5) contracts so I decided I would roll the trade out to another month, and try to save some of the loss.

My intention was to reverse the Apr Week 1 trade, and roll it to May. But when I input the order, I made an error. Instead of reversing the original trade, I duplicated it! I sold 5 more, and bought 5 more of the AprWk1 trade! AND I completed the May trade at the same time. So I was left with 10 contracts on the BAD trade and 5 on the new good May trade. This is where the emotions went NUTS. HOW COULD I BE SO STUPID TO NOT READ THE ORDER MORE CAREFULLY BEFORE I PULLED THE TRIGGER??? With trembling hands, I immediately went back and reversed the 10 contracts, (which cost me more fees) and gave me a headache because again it was all soooo unnecessary!!! As a result the AprWk1 losses were ($1,363.43, offset by the credit I received from the May adjustment of $934.89, leaving me a net loss on PCLN of ($428.54.) But the May option has not expired yet, so that $934 is not "mine" to keep until the trade ends. (for all I know, PCLN will hit that short call too. I have no business being in a bear call in a bull market, but this is an example of how a pullback can fool you.You will note that PCLN was at $723 when I put on the bear call. That gave me a $12 spread. Not nearly enough in a stock this volatile. So this is how I learn, always the hard way. If I'm right about a pullback, it might happen before May, and this PCLN bear call will be good. Otherwise I'll have to adjust again.

So, the bottom line is that this week's earnings on these credit spreads is a total reward of $462.83 instead of $1,343.80. But of course there's one more day of trading left...so who knows by 4 pm today what might happen?

ADJUSTED TRADES on WEDNESDAY OF APRIL WEEK 1 (short week due to Good Friday holiday)



ORIGNAL TRADES PUT ON AT START OF APRIL WEEK 1



Note: these are weekly option trades only. Any other monthly or LEAPS do not appear
here.