Saturday, June 6, 2009
Sphere: Related Content
It was a very nice night and my friend and I decided that we'd stay in the Best Buy parking lot to get this new Palm device... Well we were the first people in the parking lot, so if Best Buy (BB) was going to get the new Palm (PALM) Pre I would sure to be getting one, correct? Incorrect! At about 5 AM cars starting showing up and a car dropped a guy off right in front of the door which forced me to get out and wait in line behind him... So here I am thinking I have a good chance of getting this phone, as I assumed they'd get at least 3 and I was second in line. So 7 AM rolls around and the Best Buy employees start coming into work. We kept asking them: “how many Palm Pre's do you guys have?”, and they simply answered: we can't tell you... So we wait some more and finally at about 9:30 a Best Buy Mobile guy comes out and takes the first 3 people in lines info to verify they are eligible for the Pre. So I was one of them, and very excited, as I've been waiting for this phone since January. Well after 10 minutes of taking our numbers and info, he says: "due to inventory constraints, we only got one Pre in". I was pretty upset at first, but then the guy starts going on about how long the activation process will take and all these other "bad" things about the Pre, as if he wanted the guy first in line to leave. He was saying it would take more than a month to learn all the gestures; it was definitely for a business person (the guy in front of me couldn't stop talking about the facebook syncing deal... I told him I trade stocks off my HTC Touch Pro every day, and manage my online website GoldenAgeCheese.com (my family business for over 25 years). Well the mobile guy got to bashing the Pre and the guy in front of me seemed pretty scared (I didn't care, as Palm stock has paid for this phone 100 times over for me), he kept asking when they'd get more in, he didn't want to wait but he didn't want to be upset, etc... So I am saying I want it no matter what, I don't care I won't be returning it anyway, and the Best Buy mobile guy wanted me to take it (as I told him what I'd be doing with it versus line stander #1 and I could tell he was pulling for me ;-) ).
So the guy in front of me definitely had every right to the Pre as he was first in line, but he was kind enough to offer me a coin flip. Sure enough I had my lucky "pocket analyst" which has a bear on one side of the coin and a bull on the other, I told him to call bull or bear, he chose bear and sure enough it was a..... BEAR! Fair is fair and the guy deserved it. However I feel Palm, Sprint, and Best Buy all blew this wonderful opportunity to sell many more phones today.
I did get the guy to reserve the next one they get for 24 hours though since it was such a close call. In a way I am kind of happy I didn't get it, this way I can check out more opinions online.
Sphere: Related Content
This seems to be a similar trend, and by the looks of it the VIX does not want to stay below 30. I think if we can stay below 30 and eventually move lower, it will attribute to the overall confidence in the market, and push the market higher. Looking at the chart below, we can see that the last time the VIX closed below 30 was on September 12, where it closed at 25.66, this correlates to the S&P 500 at 1251.70. (click image to enlarge)
I am not saying that the next time the VIX is at 25.66, the S&P 500 will magically be at 1270. However I am stating that it should attribute to a market rally. The chart above shows the VIX (red and white) and the S&P index (green), and as you can see is almost perfectly negatively correlated. As the VIX gets higher the market sells off, and as the VIX drops the market rallies (this should make sense).
Historically entering the summer months the market does not perform as well as the other months, however if the VIX could stay below 30 and get lower, it may help to keep the rally going into fall.
However something very different happened on Monday June 1, 2009. With the market rallying near 2.6% on Monday, we’d expect the VIX to sell off correct? Incorrect, the VIX also rallied 3.9%. This is a major disconnect from the way these two have been correlating in the previous 6 months. We can see from the 10 day chart below. (click image to enlarge)
This sends a signal to me that the market is factoring in more volatility ahead. Some ways to hedge against volatility are outlines below.
Strategy 1: Purchase the iPath S&P VIX Short-Term Futures ETN (VXX)
Strategy 2: Purchase the iPath S&P 500 VIX Mid-Term Futures ETN (VXZ)
Both of these are ETN’s and will help hedge your overall portfolio against volatility. As you can see from the chart below both ETN’s track the VIX quite well (VXX in green, and VXZ in blue). (click image to enlarge)
However I prefer using a bit riskier strategy with options. This captures the actual move of the volatility or “fear index”.
One way I hedge against volatility is to purchase call contracts on the VIX. Friday I used the weakness in the VIX to open a 35/40 option spread (learn more about options here) for the August expiration. It was $160 per contract to open this position, and I am protecting my portfolio against the VIX spiking. This may seem like a stupid idea, but let’s not forget those days back in October where the market sold off tremendously and the VIX spiked. Currently the options market is factoring in a 29.1% chance the VIX is at or above 40 come August expiration.
Using options to predict the probability the VIX is below 30:
As posted on my blog about VIX options, we can see that the options market is factoring in a 51.7% probability the VIX closes at or above 30 by June expiration (all data as of close Friday June 5, 2009). If we go out to July the options market is factoring in a 56.8% chance the VIX will be at or above 30 at July expiration.
Disclosure: Long VIX July 35/37.50 call spread, VIX August 35/40 call spread
Sphere: Related Content
Friday, June 5, 2009
As posted previously in my blog, ETFs are some of the safest securities to purchase when planning on investing. An even more conservative way to invest with ETFs is to write covered calls on them once purchased. Writing call options allows you to get some of your investment back immediately (gives you some downside protection), however if the stock takes off you cap your upside.
The buy/write option strategy seems ideal when purchasing diversified ETFs. This is because diversified ETFs are less volatile than purchasing specific stocks (however leveraged ETFs are extremely volatile and click here to see why I don't believe they are investment vehicles).
Below is a list of 60 ETFs and their % probability (risk-neutral) of expiring above the indicated strike, as well as the % return if they expire above the indicated strike. The list below is sorted alphabetically, and all options are for the July expiration (July 18, 2009). Every strike price is near the money unless indicated in the money (denoted by IN $).
(All option data priced as of pre-market Friday June 5, 2009).
|Stock||Ticker||Strike||% Probability||% Return|
|Consumer Discret Select Sector SPDR||XLY||24||54.2||3.9||IN $|
|Consumer Staples Select Sector SPDR||XLP||24||42||2.7|
|DIAMONDS Trust, Series 1||DIA||88||47.8||3.5|
|Direxion Daily 10 Yr Trsy Bull 3X Shares||TYD||50||68||2.6|
|Direxion Daily 30 Yr Trsy Bull 3X Shares||TMF||40||42.3||16.9|
|Direxion Daily Devlpd Mrkts Bull 3X Shrs||DZK||55||59.1||9.7||IN $|
|Direxion Daily Energy Bull 3X Shares||ERX||40||48||16.4|
|Direxion Daily Financial Bear 3X Shares||FAZ||5||49.1||27.7|
|Direxion Daily Financial Bull 3X Shares||FAS||10||62.8||12.9|
|Direxion Daily Large Cap Bear 3X Shares||BGZ||35||49.3||13.9|
|Direxion Daily Large Cap Bull 3X Shares||BGU||35||62.4||8.6||IN $|
|Direxion Daily Small Cap Bear 3X Shares||TZA||22.5||46.9||20.3|
|Direxion Daily Small Cap Bull 3X Shares||TNA||32||56.6||12.8|
|Direxion Daily Technology Bull 3X Shares||TYH||85||61.4||8.2||IN $|
|Energy Select Sector SPDR||XLE||53||48.8||5|
|Financial Select Sector SPDR||XLF||12||61||4.7||IN $|
|Industrial Select Sector SPDR||XLI||23||59.2||3.3||IN $|
|iShares Dow Jones US Energy||IYE||30||65.7||2.4||IN $|
|iShares Dow Jones US Real Estate||IYR||35||54.9||5.5||IN $|
|iShares MSCI EAFE Index||EFA||48||50.2||3.5|
|iShares Russell 2000 Growth Index||IWO||59||48.7||4.6|
|iShares Russell Midcap Growth Index||IWP||35||73.1||0.85||IN $|
|iShares Russell Midcap Index||IWR||65||65.7||2.1||IN $|
|iShares S&P 100 Index||OEF||44||50.3||3.2|
|iShares S&P 500 Index||IVV||95||49.9||3.4|
|iShares Silver Trust||SLV||15||64.5||3.8||IN $|
|Materials Select Sector SPDR||XLB||28||50||4.7|
|Retail HOLDRs||RTH||80||54.4||3.8||IN $|
|Short Dow30 ProShares||DOG||66||43.7||5.2|
|Short Financials ProShares||SEF||59||40.8||10.8|
|Short QQQ ProShares||PSQ||55||60.2||3||IN $|
|Short Russell2000 ProShares||RWM||55||51.7||5.3|
|Short S&P500 ProShares||SH||66||42||5.2|
|SPDR Gold Shares||GLD||97||49.2||4.2|
|SPDR S&P 500||SPY||95||48.9||3.7|
|SPDR S&P Metals & Mining||XME||40||53.4||8|
|SPDR S&P Retail||XRT||30||38.6||8.1|
|Technology Select Sector SPDR||XLK||18||56||3.3||IN $|
|Ultra Basic Materials ProShares||UYM||21||55.2||9.4||IN $|
|Ultra DJ-AIG Crude Oil ProShares||UCO||12.5||61.7||8.4||IN $|
|Ultra Dow30 ProShares||DDM||31||51.8||6.2|
|Ultra Financials ProShares||UYG||4||64.2||8.2||IN $|
|Ultra Gold ProShares||UGL||37||55.5||6.6||IN $|
|Ultra Industrials ProShares||UXI||22.5||72.5||8.5|
|Ultra Oil & Gas ProShares||DIG||31||54.8||8.2||IN $|
|Ultra QQQ ProShares||QLD||40||47.6||8.6|
|Ultra Real Estate ProShares||URE||4||61.7||9.7||IN $|
|Ultra Russell2000 ProShares||UWM||21||54.5||8.7||IN $|
|Ultra S&P500 ProShares||SSO||28||48.6||7.8|
|Ultra Semiconductor ProShares||USD||20||52||9.7|
|Ultra Technology ProShares||ROM||30||65.7||5.2||IN $|
|UltraShort Financials ProShares||SKF||42||48.2||15.1|
|UltraShort Oil & Gas ProShares||DUG||18||39.2||15.6|
|UltraShort QQQ ProShares||QID||34||41.4||12.9|
|UltraShort S&P500 ProShares||SDS||55||47.5||9.4|
|United States Natural Gas||UNG||15||50.4||11.4|
|United States Oil||USO||38||51.1||6.3|
|Utilities Select Sector SPDR||XLV||26||44.5||3.1|
The table above allows you to see which ETFs (out of my list of 60 chosen) have the best chances at the highest possible returns ("best bang for your buck"). I use this method to choose which ETFs I'll be buying to write out immediately. As a high risk investor, from this table I am most interested in the following ETFs: SPDR S&P Metals & Mining (XME), Direxion Daily Technology Bull 3X Shares (TYH), and the Direxion Daily Small Cap Bull 3X Shares (TNA). This is because all three of these ETFs (two of the three leveraged) have higher than average returns, and probabilities (of the 60 ETFs analyzed).
When writing in the money calls for expirations greater than 30 days, I usually use ETFs. This is because they are less volatile (on average) than individual stocks. As you can see from the table above, some ETFs written in the money will return a decent profit, while others return very high profit (considering the options expiration is 43 days away).
I like using this strategy especially with ETFs, because even if I'm not called out on the ETF (at expiration), I'll still have it to write out again at my desired strike price and date again for another premium. Check out my blog for more strategies like the ones mentioned above, options pricing, probabilities, and more.
Using this strategy during the months of September, October (2008) allowed me to protect my portfolio greatly, and I actually returned a profit in November (2008).For your convenience I have ranked these 60 ETFs by return % and % probability. To download these spreadsheets for the July expiration click here (Excel 2007 and Mozilla Firefox recommended).
The first sheet has the ETF's ranked by return %. The second sheet has the ETF's ranked by probabilities they'll expire in the money.
Sphere: Related Content
Thursday, June 4, 2009
It has been a very profitable 5 months.
My Top 5 Biggest % Gainers:
- Palm 5 July Calls
- BGZ 60 Puts
- SDS 100 Puts
- Goldman Sachs 90 Leap 11 Calls
- American Express July 15 Calls
The buy/write option strategy seems ideal when purchasing diversified ETF's. This is because diversified ETF's are less volatile than purchasing specific stocks (however leveraged ETF's are extremely volatile and as I state here I don't believe are investment vehicles).
I have put together a list of 80 ETF's (yes 80!) and calculated each of their % probability of expiring above the indicated strike, as well as the % return if they expire above the indicated strike. The list below is sorted alphabetically, and all options are for the July expiration (July 18, 2009). All strike prices are near the money unless indicated they are in the money (IN $).
Below is a list of the 80 Exchange Traded Funds. (All data priced as of pre-market Thursday June 4, 2009).
|Stock||Ticker||Strike||% Probability||% Return|
|Consumer Discret Select Sector SPDR||XLY||24||54.2||4.3||IN $|
|Consumer Staples Select Sector SPDR||XLP||24||42.2||3|
|DIAMONDS Trust, Series 1||DIA||88||44.4||3.9|
|Direxion Daily 10 Yr Trsy Bear 3X Shares||TYO||70||61.2||3.2||IN $|
|Direxion Daily 10 Yr Trsy Bull 3X Shares||TYD||50||46.5||4.8|
|Direxion Daily 30 Yr Trsy Bear 3X Shares||TMV||85||53.8||9.2|
|Direxion Daily 30 Yr Trsy Bull 3X Shares||TMF||40||50||9.9|
|Direxion Daily Devlpd Mrkts Bear 3X Shrs||DPK||30||61.1||9.7||IN $|
|Direxion Daily Devlpd Mrkts Bull 3X Shrs||DZK||55||57.4||12||IN $|
|Direxion Daily Emrg Mrkts Bear 3X Shares||EDZ||14||58.7||17.2|
|Direxion Daily Emrg Mrkts Bull 3X Shares||EDC||90||53||17.7|
|Direxion Daily Energy Bear 3X Shares||ERY||20||53.9||15|
|Direxion Daily Energy Bull 3X Shares||ERX||35||58.1||12.7||IN $|
|Direxion Daily Financial Bear 3X Shares||FAZ||5||56.3||20.7|
|Direxion Daily Financial Bull 3X Shares||FAS||10||55||18|
|Direxion Daily Large Cap Bear 3X Shares||BGZ||35||53.8||12.3|
|Direxion Daily Large Cap Bull 3X Shares||BGU||35||58.4||9.5||IN $|
|Direxion Daily Mid Cap Bear 3X Shares||MWN||30||51.4||12.4|
|Direxion Daily Mid Cap Bull 3X Shares||MWJ||60||60.1||10.5||IN $|
|Direxion Daily Small Cap Bear 3X Shares||TZA||22.5||53.2||18|
|Direxion Daily Small Cap Bull 3X Shares||TNA||32||51.2||15.3|
|Direxion Daily Technology Bear 3X Shares||TYP||22.5||58.1||10.8||IN $|
|Direxion Daily Technology Bull 3X Shares||TYH||85||55.1||9.7||IN $|
|Energy Select Sector SPDR||XLE||53||40.9||6.3|
|Financial Select Sector SPDR||XLF||12||52.4||6.7||IN $|
|Industrial Select Sector SPDR||XLI||23||53.2||4.3|
|iShares Dow Jones US Energy||IYE||30||57.4||4.1||IN $|
|iShares Dow Jones US Real Estate||IYR||35||48.5||7.4|
|iShares MSCI EAFE Index||EFA||48||47.2||4|
|iShares Russell 2000 Growth Index||IWO||59||42.7||5.7|
|iShares Russell Midcap Growth Index||IWP||35||70.5||2.2||IN $|
|iShares Russell Midcap Index||IWR||65||60||3||IN $|
|iShares S&P 100 Index||OEF||44||46.6||3.4|
|iShares S&P 500 Index||IVV||95||45.5||4|
|iShares Silver Trust||SLV||15||55.9||4.9||IN $|
|Materials Select Sector SPDR||XLB||28||43.3||2.6|
|Retail HOLDRs||RTH||80||56.9||3.7||IN $|
|Short Dow30 ProShares||DOG||66||46.9||4.8|
|Short Financials ProShares||SEF||59||47.6||9|
|Short QQQ ProShares||PSQ||55||63.5||2.8||IN $|
|Short Russell2000 ProShares||RWM||55||56.8||4.8||IN $|
|Short S&P500 ProShares||SH||66||46.1||4.8|
|SPDR Barclays Capital High Yield Bond||JNK||34||54.5||1.4||IN $|
|SPDR DJ EURO STOXX 50||FEZ||36||44.3||4|
|SPDR Gold Shares||GLD||96||45.4||4.7|
|SPDR S&P 500||SPY||95||44.5||4.3|
|SPDR S&P Metals & Mining||XME||40||44.8||10.8|
|SPDR S&P Oil & Gas Equipment & Services||XES||24||52.8||6|
|SPDR S&P Retail||XRT||30||43.5||7.1|
|Technology Select Sector SPDR||XLK||18||50.6||4.1||IN $|
|Ultra Basic Materials ProShares||UYM||21||47.1||12.6|
|Ultra DJ-AIG Crude Oil ProShares||UCO||12.5||49.7||12.1|
|Ultra Dow30 ProShares||DDM||31||47.8||7|
|Ultra Financials ProShares||UYG||4||56.5||10.9|
|Ultra Gold ProShares||UGL||37||46.9||8.8|
|Ultra Industrials ProShares||UXI||22.5||43.4||11.5|
|Ultra Oil & Gas ProShares||DIG||31||48.2||10.6|
|Ultra QQQ ProShares||QLD||40||43.1||9.7|
|Ultra Real Estate ProShares||URE||4||56.1||13.5||IN $|
|Ultra Russell2000 ProShares||UWM||21||49.3||10|
|Ultra S&P500 ProShares||SSO||28||44.4||9.1|
|Ultra Semiconductor ProShares||USD||20||46.8||11.1|
|Ultra Technology ProShares||ROM||30||59.2||5.7||IN $|
|UltraShort Basic Materials ProShares||SMN||17.5||54.8||11.5|
|UltraShort Dow30 ProShares||DXD||46||53.8||7.1|
|UltraShort Financials ProShares||SKF||44||50.7||14.7|
|UltraShort Industrials ProShares||SIJ||40||56.1||7.8||IN $|
|UltraShort MidCap400 ProShares||MZZ||38||50.2||10.4|
|UltraShort Oil & Gas ProShares||DUG||18||45.9||12.7|
|UltraShort QQQ ProShares||QID||34||45.3||11|
|UltraShort Real Estate ProShares||SRS||20||50.5||21.5|
|UltraShort Russell2000 ProShares||TWM||42||50.8||11.5|
|UltraShort S&P500 ProShares||SDS||55||51.7||8.4|
|UltraShort Semiconductor ProShares||SSG||40||44.6||15.1|
|UltraShort Technology ProShares||REW||45||41||12.4|
|United States Natural Gas||UNG||15||47.5||12.8|
|United States Oil||USO||37||47.5||7|
|Utilities Select Sector SPDR||XLV||26||52.2||2.6||IN $|
The July options expiration has 44 days left. Some people use the buy/write option strategy to write in the money covered calls and capture a 3% gain. If you write an in the money call every 2 months and happen to be called out every time, this would yield a return of 18% annually, not to mention dividends and capital gains distributions. The likelihood of continuously getting called out month after month is not too realistic, but not impossible either (and of course it depends on both the strike price and stocks volatility). For more information on options pricing, probabilities, check out my E-Book for under $4.99!
Among these ETF's are some which are very volatile such as the (TNA) and the (FAS), and some less volatile such as the (DIA) and the (SPY). As you'll see the greater the volatility of the underlying stock, the higher % return. You will also notice calls written in the money have a higher probability of expiring above the indicated strike (this should make sense).
Of these strategies I am most interested in the: (FAS), (IWJ), and (ERX). For one I am bullish on the underlying stocks (more reasons discussed on my blog), and their return % and probabilities of expiring above the indicated strike are both above the average for my analysis of these 80 ETF's.
Below is a spreadsheet I have created for 80 ETF's sorted by % return (click to enlarge).
Below is the same list but ranked in order by the current % probability they'll expire above the indicated strike price (click to enlarge).
Sphere: Related Content
Hottest Blog Posts of All Time
I sold my 500th E-Book on July 5, 2009. Thank you to all my readers for purchasing my E-Books and reading my blog. I will continue to blog b...
I am going to do an analysis on the top 20 Financial stocks in the S&P 500. I will be analyzing these stocks by selling below the curren...
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...
I am going to do an analysis on the top 20 tech stocks in the NASDAQ 100. I will be analyzing these stocks with the buy/write option strate...
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 thi...
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 bee...
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. ...
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 toda...
When I was 16 years old, I took a vacation to Italy and purchased a gold chain. At the time I remember everyone telling me the price of Gol...