HOT TRADING STRATEGIES FOR A COLD MARKET
Daily Stock Market Equity and Options Trading Commentary

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Sunday, March 6, 2011

Getting Defensive: 7 Blue Chip Stocks With 7 Buy-Write Option Ideas

Today I will write about five stocks which I am rotating into that will allow me to get a little more defensive but still participate in this market. As stated in a recent article How to Hedge With Vertical Put Spreads I believe we are long overdue for a slight pull back. But the stocks I will cover today have already corrected and are undervalued in my opinion. In this article I will explain how I am buying into these already beaten up stocks for a bigger discount with options.

I plan on purchasing the shares of blue chip companies and selling covered calls, allowing me to get into these shares cheaper and allowing me to still clip the coupon at least twice. I will be trimming some of the higher beta names out of my portfolio and replacing them with these seven lower beta stocks. This will allow me to participate if the market continues higher, but if the market happens to correct, my portfolio will likely decline less in value.

To continue reading this, view the full article on Seeking Alpha HERE. Sphere: Related Content

Thursday, February 3, 2011

Options Trading With My Three Favorite Consumer Discretionary Stocks

Today I will explain why I plan on getting into three consumer discretionary stocks and how I plan on getting into them. First, I will state that I do expect a bit of a pull back (no more than 5%-7%) as outlined in How to Hedge With Vertical Put Spreads. And second, I will mention that I have taken this into account for the strategies in this article, and two of the three stocks outlined below have already pulled back nicely.

I believe a real recovery is underway and I think the stocks outlined in this article will benefit from this greatly. If we look at the Consumer Discretionary SPDR (XLY) compared to the S&P 500 SPDR (SPY) over the last year, we can see that the Consumer Discretionary SPDR has outperformed the S&P 500 SPDR by almost 9%.

To continue reading this, view the full article on Seeking Alpha HERE. Sphere: Related Content

Monday, January 31, 2011

Return Some Green Betting on the Greenback with This Bullish Option Strategy

Someone once asked me "how have you made the most money playing in the stock market?" I had to think long and hard because in today's market there's no easy answer like the old days "buy and hold", today it's necessary to constantly research and change positions on the market, as the economic environment and other factors change. After I put some thought into it, I was able to come up with one theme that equated to my most successful runs in the market, that is being a contrarian. First of all I'm a big believer of "the trend is your friend", but when things seem to be extremely overdone, I like jumping to the other side and sticking to my guns.

A good question would be when are things extremely overdone? It's just a feeling that comes naturally to most people. One example would have been when the market was melting down in late 2008 and it seemed every person on TV, article online, and even your neighbor, who has no idea how to play the stock market, was calling for an even deeper correction, this would have been a great time to get long the market. Even though you wouldn't have caught the bottom in late 2008 (came in March of 2009), it was an excellent time to be buying stocks.

To continue reading this, view the full article on Seeking Alpha HERE. Sphere: Related Content

Wednesday, January 26, 2011

Corning Benefits Most From the Verizon-iPhone Marriage

Perhaps the worst kept tech secret in history was that the Apple (AAPL) iPhone would be on Verizon (VZ) someday. Now that it has finally been confirmed by both companies, we're seeing examples of classic buy on the rumor and sell on the news. I'm not saying either company is a sell or a short by any means - I actually plan on accumulating shares of both on weakness. In this article, I will shine some light on one company that will certainly benefit from the increased number of iPhones expected to be sold on the Verizon network.

First I will explain why I am choosing this company versus other companies that will benefit from this news. In the spring of 2010, rumors heated up when The Wall Street Journal broke the news that Qualcomm (QCOM) was ramping up production for the long awaited Verizon iPhone and that it would likely be coming in Q1. As we know, that was right on, since the iPhone is set to debut on Verizon in February. The Google Finance chart below shows the performance of Apple (AAPL), Qualcomm (QCOM), and Verizon (VZ) since May 26, 2010.

To continue reading this, view the full article on Seeking Alpha HERE.
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Monday, January 24, 2011

How to Hedge With Vertical Put Spreads

I always say it's better to have insurance before your house burns down rather than try to buy it as it's burning down. This can also be said when talking about purchasing insurance or put options to hedge an equity portfolio.

With the market up over 25% since early July and the market being quite complacent lately, volatility is relatively cheap making portfolio insurance or put options also relatively cheap. Many have been stating the market is overdue for a pull back, and I also believe a correction could occur whether it be worse than expected economic data in the United States, some bad news out of Europe or Asia, or even another flash crash that spikes fear in the markets, who knows what excuse the market will use to pull back, but it will likely find one soon as we all know trees don't grow to the sky. Another thing to remember is the more we rally before any type of pull back, the worse the pull back will likely be. A 25% move higher in just 6 months is certainly a gift and some of the profits made in the recent months should be set aside to hedge out the next few months, as I stated the greater the rally - the greater the correction is typically.

To continue reading this, view the full article on Seeking Alpha HERE. Sphere: Related Content

Thursday, January 20, 2011

Time for a Correction? 5 Hedging Strategies

As the market has been grinding higher over the past few months, we've heard many bears state that we are overbought and that we're due for a correction. The overbought part was likely true, but no correction was in sight on the back of QE2. I don't like being short when the printing presses are on full steam and I believe a real recovery is underway, but I'll never flinch at taking a profit or even use some of them to put on some hedges... After all, would you buy a house without insurance?

I have spent the majority of Wednesday evening reviewing charts - mainly of indices and sectors, to see where I would like to place my hedges. When I believe we are due for a correction, and only expecting a minor 5-7% one if that, I have no problem putting up to 2%-3% of my entire portfolio value into hedges. Just like it is smart to be diversified when purchasing equities and call options, it is smart to be diversified when shorting and buying put options. In this article I will show you 5 ideas on how I plan on hedging my portfolio and why I believe it is a good idea.

Idea #1: Hedging the S&P 500
Most portfolios have exposure to the S&P 500, so it is worth spending some money on insurance against this index.
(click chart to enlarge)
As we can see from the S&P Index SPDR (SPY) chart above, we had a pretty ugly day on heavier than normal volume Wednesday. You can also see that the RSI or relative strength has been trading in overbought territory since January 3. Typically it is a good time to lighten up or purchase protection when trading in overbought levels like this. We sold off by close to 1% Wednesday and the RSI still is trading at the higher end of the range, 64.59. You can pull up a chart of the VIX or Volatility Index, which trades inversely to the S&P 500, and you will see the VIX was trading near oversold levels in that same time frame. The VIX also had a big 9% spike Wednesday regaining the 20 day moving average, the VIX is another great indicator to get an idea of when to hedge.

S&P Hedging Strategy:

Although volatility is cheap (yes even with the 9% spike Wednesday) I would purchase put spreads versus outright put options on the S&P 500 SPDR (SPY), but I would purchase more time versus if I were just buying puts I would likely choose to purchase less time. Purchasing more time requires me to be proactive as I might have to decide when to trade out of this strategy so the hedge actually works. I would purchase March 127 put options and sell (1 for 1) March 117 put options against them. This strategy would cost me roughly $210 per put spread and would protect me down to just above the 200 day moving average at 117. If the market corrects more significantly and the SPY is trading below 117 on March expiration this strategy would return $1,000 per put spread or a return of 476%. Of course us bulls out there don't want the maximum return from this spread, but it would certainly help pad the portfolio if the market did correct in such a manner.

Idea #2: Hedging the NASDAQ 100
Like the S&P 500, many of us have exposure to big tech names which fall into the NASDAQ 100. One way we can hedge many of our stocks in the NASDAQ is to purchase similar put spreads on the Powershares QQQ Trust (QQQQ).
(click chart to enlarge)
From the chart above, we can see many similar comparisons to that of the S&P SPDR chart. ETF was trading in overbought territory for days, heavier than normal volume to the downside. But the really bearish signal I see from Wednesday's price-action, and signals a potential key reversal, is that the QQQQ managed to open on the highs, which also happens to be higher than Tuesday's high as well as the 52 week high, but gave all of Tuesday's gains back closing below Tuesday's low and on heavier volume. This is called a bearish engulfing candle pattern and cannot be illustrated any better than this.

NASDAQ Hedging Strategy:

Again I would look at using the 20 and 200 day moving average to get an idea on where to purchase and sell put options. I would buy the March 55 put options and sell the March 50 put options. I could get this strategy for roughly $84 per put spread. If the NASDAQ corrected significantly and the QQQQ was below 50 on March options expiration this strategy would return $500 per spread or a return of 595%.

Next I will outline 3 specific sectors using the Sector SPDR ETFS. I have looked at many sectors and believe the three to follow have the greatest risk and could have the most significant correction if we get a pull back.

Idea #3: Hedging the Health Care Sector

This sector had some very ugly price action as well Wednesday. We can see a very similar bearish engulf candle pattern from the chart below of the Health Care Select Sector SPDR (XLV).
(click chart to enlarge)
We can see the ETF opened within pennies of its 52 week high before selling off throughout the day. This ETF also engulfed all of Tuesday's move on greater volume. Not looking too promising for the bulls out there.

Health Care Sector Hedging Strategy:

With this ETF I am going to stay shorter term and purchase at the money February 32 put options for $46 per contract. I am choosing to stay shorter term on this ETF because the volatility stands at a whopping 14.75% (sarcastic) for February, and because I am trading on this signal and because this is sector specific I wouldn't want to overpay for time value.

Idea #4 Hedging the Energy Sector

This sector is by far one of the best performing sectors since the most recent market bottom, which leads me to believe it may have the biggest correction if we get an overall market correction.
(click chart to enlarge)
As we can see from the Energy Select Sector ETF (XLE) above, it opened on the 52 week high and sunk like a stone all day engulfing Tuesday's entire move higher, all on greater volume. This again is very ugly price action and would signal me to sell energy stocks or purchase put protection. This is one of very few ETF's that traded above 70 on the RSI for more than 3 days.

Energy Sector Hedging Strategy:

I would also plan on purchasing shorter tem puts on this ETF, because this is sector specific and would think based on the ugly price action and recent overbought levels, it is due to correct sooner rather than later. I am structuring my bet on this ETF a bit differently than the last few. As you can see from the chart of the XLE above, the stock left a couple of gaps on the way up, and I believe those have a high probability of being filled if we get a pull back. I would purchase puts below the 20 day moving average at minor support near 68, and I would sell puts near 60. Therefore I would put on a February 68/60 put spread. This would cost me roughly $75 per spread. This strategy is a bit more bearish and factors in quite a significant correction, but selling the 60 puts versus the 61 or 62 puts didn't make too much of a difference compared to potential returns, especially because that lower gap which would need to be filled around 59.94. If this ETF sold off and closed at or below 60 on February options expiration this strategy would return $800 per spread or 1,067%.

Idea #5 Hedging the Materials Sector:

This sector was perhaps the ugliest of the day Wednesday. Many of the largest holdings in the Materials Select Sector ETF (XLB) such as Monsanto (MON) and Freeport-Mcmoran (FCX) have had unbelievable runs lately and need to take a breather.
(click chart to enlarge)
This ETF had an extremely ugly potential reversal day Wednesday . The ETF opened near the high and 52 week high and sold off the entire day on very large volume engulfing all of the previous two days moves higher. This stock also fell below the 20 day moving average for the first time since mid November. This again is a potential key reversal day to watch and would be a signal to sell material stocks or put on some hedges.

Material Sector Hedging Strategy:

As we can from the minor pull back in mid November the ETF broke below the 20 day but then bounced off of the 50 day moving average and continued a nice uptrend. You will also see Fibonacci retracement levels drawn on the chart which are also key levels to watch. The Fibonacci levels come in very close to the moving averages on the chart, but I will use both to structure my put spread. Again I would choose the February contracts to keep this hedge shorter term. I would purchase my first put near the 50 day moving average at 37 and sell put options near 34. If it broke below the 50% retracement, I would want to roll out into the next month and purchase another put spread (perhaps the 34/30) as the stock would likely head lower. This strategy would cost roughly $45 per spread and would return $300 per spread or 667% if this ETF closed at or below 34 per share on February options expiration.

The ideas outlined above are bearish strategies and should not be considered if you think the ETF will continue higher or have a very minor correction in the near future. However if you feel the ETF could correct in the near future, these strategies could help protect your portfolio. To get a better understanding of stock options and different option strategies please check out my Simplified Stock Option Trading E-Books. These are just examples and are not recommendations to buy or sell any security; if you're more bullish/bearish, you’ll want to adjust the strike price and expiration accordingly.

The reason option volumes have surged in the last five years is because they are a great way to hedge your portfolio as well as create income off of your shares (see chart here). Keep in mind when using this strategy it is essential that broker commissions are low enough to profit from the position.

I currently do not own any strategies mentioned above, but may open them in the next few days. Sphere: Related Content

Tuesday, January 18, 2011

Options Market Findings: January 18, 2011

Today we have a continued Bull and a BIG Bear. One strategist looks like they're going to keep their bet on CB Richard Ellis Group (CBG) rolling out of the January 20 calls and into the February 22 calls. Over 9k January 20 call contracts traded on open interest of 9,223, and 9,019 of the February 22 calls went out against open interest of 22. This indicated to me the strategist is taking a large portion of risk off the table, but keeping the bullish bet intact. The net credit received from this strategy would be about $1.15 per share. Going back on my option chart it looks as if the strategist opened this strategy on December 16 for just under $1 per share. Now the strategist is almost 50 cents in the money and playing with the houses money. Not a bad deal at all!

The BIG Bear bet we have on January 18 was on the Dow Jones Transportation ETF (IYT). Over 12k contracts traded for the March 90 puts on open interest of 228. It looks like multiple institutional size blocks were taken out throughout the day, with the majority of them being purchased near the ask price. This could be a hedge but it would be a very expensive one if that. It looks more like someone is betting on a correction and thinks this sector may perform the worst. I will likely follow this trade for a hedge myself, as this type of conviction is worth following.
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Banking on Citigroup to Outperform: A Bullish Option Strategy

As stated in my last article 3 Dow Stocks to Buy-Write Now I believe financials will outperform the market in the early part of this year. The most attractive financial stock to me is Citigroup (C). I believe Citigroup will outperform both the market and the very popular Financial Sector SPDR ETF (XLF). Below you will see a chart from Google Finance comparing many of the largest financial stocks as well as the Financial Sector SPDR ETF (XLF)...

To continue reading this, view the full article on Seeking Alpha HERE. Sphere: Related Content

Monday, January 17, 2011

3 Dow Stocks to Buy-Write Now

In this post I will outline three Dow stocks which are attractive at the current levels and will explain why I would choose to buy-write them. The buy write option strategy is the simplest option strategy it is simply purchasing at least 100 shares of a particular stock and then sell one option contract against it (standard contracts in multiples of one hundred so you could sell 5 contracts against 500 shares of stock). This strategy is a way of creating income and for those already holding the stocks with a nice gain it is also a form of hedging or protecting to the downside by taking a little profit off the table. The downside is that it locks your shares up and if the stock catches fire you may be called away and miss out a ton of upside.

The first stock I find attractive from the Dow Jones Industrial average is Boeing (BA). I feel this stock is undervalued based on the future of the company and the dividend they pay. The last dividend of 42 cents was paid on November 3, 2010, so it should yield another two dividend payments by May options expiration - therefore I would likely look to write shares of Boeing out no later than May expiration. I could write the May 75 calls against shares of Boeing for about $2.00 per share bringing my cost down about 2.67% to $68 per share...

To continue reading this, view the full article on Seeking Alpha by clicking HERE.
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Thursday, January 13, 2011

Corning a Buy on Apple Verizon Marriage

I am getting long Corning (GLW) on the back of this deal. I believe demand for the Apple (AAPL) iPhone will pass even the most bullish estimates once it's selling on Verizon (VZ). Both Verizon and Apple have rallied greatly as well as Qualcomm (QCOM) in anticipation for this announcement, as this was a poorly kept secret.

This deal is also good for glass maker Corning Incorporated (GLW) which has been trapped in a tight range between 15-19 the last year. It looks as if the stock is finally trying to break out. I am long January 20 calls, as well as February 22 calls but I am looking longer term. I believe May 22/25 call spreads look very attractive at this point and plan on purchasing some for my portfolio on any weakness. For more information in how to trade these strategies check out my options ebook.

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