How to make Money in the Stock Market.This blog looks at how you can make money trading and investing in Forex, Stocks Options and Futures.

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Wednesday, 28 February 2007

Lightening up on Some positions-Think there is increased possibility of Downside

Firstly apologies that I have not been able to post for a week or so I had some computer problems and I was travelling so was not able to get any posts out.Well yesterday was a real shake out.Today there seems to be some buying on weakness, I am glad I bought some SPY Puts a little while back as they softened some of the downside-I still was down around 3.5 % yesterday though.


I am not convinced we have seen the last of the selling and yesterday was a timely reminder of what can happen when everyone rushes for the exits at once.I am waiting to see where the Market closes and also what the voulume is like today, if we are up but volume is weak then I think we are in for some more selling sooner rather than later.


Some selling was long overdue, it would have been nice if it had not all happened at once though !! I took the opportunity to lighten up on some positions today so that I have some cash to take advantage of any opportunties but also to take profits or to reduce my exposure to some of the more High Beta stocks which will move a lot if the market sells off again.


I sold the following from my Pension Portfolio and My ISA


Linear Technology- LLTC sold for an annualised 6.38% Loss


Realty Ome Exchange -O sold for an annualised 24% Gain


Level 3 Comms LVLT-Sold for an annualised 26.5% Gain.



I would be extremely cautious about adding any positions at the moment I think we need to take some time to see what transpires in the next couple of weeks before we decide our next moves.


Sometimes the smart trade is to do nothing !!


For those of you old enough to remember the TV series Hill Street Blues -


" Lets be careful out there "


Best Wishes



Alan


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Friday, 16 February 2007

LEAP in to Caterpillar(NYSE:CAT)

As I have said before I am increasingly looking at using longer term option plays to get myself in to stock. I have been looking at Caterpillar( NYSE: CAT) for a while as it has come off its highs steadily since May last year. It is currently not in favour as most people think it is a play on the state of the US housing Market.As I have outlined in this blog on previous occasions the big money is to be made going against what your psyche is telling you.


We tend to not want to buy something that is out of favour but want to pile in with the crowd-remember the halcyon days of Dot.com ?? The issue with Caterpillar is that it is not solely reliant on the US housing mkt in fact a large proportion of its revenue comes from the heavy mining and construction side of things.Therefore these two old chestnuts of Natural resources and China come to the fore again.


If you look through this blog, it is unmistakable that I am a commodities bull, as our needs for raw materials and commodities such as copper, coal, iron ore etc etc increase-China and rest of world demand, then the machinery necessary to excavate, transport and deliver these commodities is bound to be in increasing demand.Caterpillar is a major player in this market so increased demand for these commodities is likely to drive increased demand for their equipment.


This is not a story that has been really picked up by the general investing public hence the shares are languishing. I believe though that eventually this will sink in and people will start to pile in.


To further enhance the potential upside Caterpillar today announced a 5 year plan to buy back $7.5 Billion in stock, that is about 17% of the outstanding shares.On its own that would be enough to give them a boost.Coupled with a likely increased demand for the shares then I think Caterpillar is a good mid term play.


The shares were up today closing at $67.62, there are a couple of ways to place this, you could buy the stock outright, or as I favour you could look at a LEAP option, if you have read my previous post on Delta then you will know we want to go for an ITM (in the money option).I favour the Jan 2008 60 Call, it shot up a bit today closing around the $11-50 mark this means you would pay $1150 for the right to buy 100 shares of CAT for $60 any time up to Jan 2008.The break even is $71.50 at today's close, the delta is around 80 which means you will get approx 80c movement in the option for each $1 movement in the stock -but you are paying a lot less to control 100 shares worth of stock than you would buying them outright.


I am going to buy the LEAP and will pay up to $12 with a view to holding it for 6-9 mths unless we get a short sharp increase in the stock when I may consider selling it early.



Best Wishes



Alan


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Sunday, 11 February 2007

Performance Curve Updates




Posted above are the latest Performance Curves for my Pension Plans.The top graph is the GBP Portfolio and the lower one is the US$ Portfolio, pleasingly both have shown improvements this month particularly the GBP portfolio with a 4% gain on the month bringing the overall performance from the start to 40% return. The US Portfolio was also up but only slightly up about 0.5% for the month.The US portfolio is showing a 15% increase since inception.The US portfolio suffered a bit this month as the LEAP options on Microsoft (MSFT) gave back some of their gains.I am expecting that the US portfolio will shine when the Commodity and Natural Resource stocks do well as it is fairly heavily weighted in that direction. If we continue to see gains in Crude Oil and Precious Metals then the holdings in companies such as Goldcorp (NYSE:GG), Silver Wheaton (SLW-T) and the Oil and Equipment Services ETF (NYSE : IEZ) will generate some good returns. Silver and Gold seem to be looking to go higher here , although we could see some consolidation or even a pullback before we see Gold over $700 and Silver over $14.

Oil has been flirting with $60 all week and it is still uncertain which way it will go, weather and increasing Geopolitical tensions are playing their part and if these ease then we may see another pull back to the $55 area or below.However I firmly believe that Oil at those prices is a good buying opportunity as I do not believe these low levels will be sustainable.

It is interesting to note that once they got used to the revenue with oil at $60+ a barrel the OPEC Cartel seem very reluctant to see oil back down at the $50 mark.I imagine every time we see any pullbacks to those levels we will hear the jawboning from the Oil rich countries about production cuts etc, which will serve to put a floor under the price.

In my next article I am going to look at the part Dividends and High Yielding Assets can and should play in your Portfolio.

Best Wishes

Alan

Tuesday, 6 February 2007

New Purchases FXS & FXE

Just a quick note to say that I am adding two of the Currency ETF's to my ISA. I am buying the FXS( Swedish Krona ETF) and the FXE (Euro Currency ETF).


Sweden is performing very well and its economy is strong, I expect that the Swedish Krona will strengthen further as we move into 2007.It will also give me some hedge against the potential of a falling Dollar(which doesnt seem to have happened yet !!-but I think it will).The dollar may confound its critics for the next while as (if you buy in to the conspiracy theories) the Presidential elections may mean that certain factions within the US government do not want their currency falling out of bed and impacting on the economy, in the run up to the Presidential elections.


I am looking at this holding being a longer term one anyway-assuming we do not hit our stop loss.I do not believe however that Krona strength will be dependent on Dollar Weakness anyway.


The second ETF was the FXE-Euro Currency Trust, the euro has pulled back here and we should find support in the mid 128 range if not before, from there I see that as a good launching pad for the euro to hit 133-136 sometime later in the year.


I have placed a stop loss of 5% on each of these as a 5% swing in the currency would be a fairly substantial move.



Best Wishes



Alan


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Sunday, 4 February 2007

Options Trading-Mind Your Delta Part2

Following on from my last post let's look at how to use Delta to ensure we get the best possible opportunity for options to move nearly dollar for dollar with the underlying asset.


In order to do this it will be necessary to look at the Delta of the option this will tell us how the option will move in relation to the stock or asset, the higher the Delta the more it will move in relation to the underlying stock. A Delta of 100 means that the option will move more or less identically to the underlying asset.


What we want to do then is to find options with a Delta of at least 85 this will ensure that we get good movement of the option in relation to the asset. If you trade options frequently then it may be worthwhile investigating some of the options software available on the market today. Alternatively lot of modern brokers platforms will provide the relevant information for options, assuming they allow you to trade them.


An excellent site is http://www.ivolatility.com/ this site will allow you to find out the Delta of the option that you are considering using, it will also provide you with a number of other statistics such as implied volatility and the rest of the Greeks such as Theta.


Another advantage of trading options rather than the stock is they allow you to utilise a lot less in terms of your accountfunds than buying say one hundred shares of the stock, this means that you can either buy more positions thus increasing the diversification of your account or utilise the funds that would otherwise have been used to buy the stock in another fashion such as an interest bearing account or T Bill.


It is therefore a very important that we start to think of options not as cheap or expensive(in terms of dollars to buy) but whether are not we have the necessary Delta to ensure the upside or downside that you are looking for based on the movement of the stock or other asset.


Certainly looking for options with a Delta of 85 or greater will cost a bit morer than it would do to buy out of the money options but your chances of success are greatly increased, no longer will you watch the stock move in the direction you want it to but find that your option stays the same or goes backwards.There are other factors at play that will determine the value of your option such as volatility levels but if you have historically been purchasing out of the money options then this one change to your approach will radically improve the success that you have.

If you want to learn more about options I can highly recommend any or all of the following Books :

High performance Options Trading by Len Yates

http://www.amazon.co.uk/exec/obidos/ASIN/0471323659/flatwave-20

Trade Options Online by George A Fontanills

http://www.amazon.co.uk/exec/obidos/ASIN/0471359386/flatwave-20

How I trade Options by Jon Najarian

http://www.amazon.co.uk/exec/obidos/ASIN/0471312789/flatwave-20




Best wishes



Alan


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Friday, 2 February 2007

Options Trading-Mind Your Delta Part 1

I wanted to look a bit at Options trading-increasingly I am trading more and more options.They are extremely versatile and the more you use them and learn about them the more you will start to appreciate what they can do for your portfolio.


I like most options traders when they first started out made the classic mistake of focusing on price.I perceived that cheap meant they only cost 5 cents !!! and that an option costing $6 must be expensive. So like most people I watched as I bought a call or a put and .............YES fantastic the stock moved in the right direction AND my option-stayed the same or worse-went backwards.


I had made the classic mistake of buying "cheap" out of the money options.


Options can be one of three things :



  1. Out of the Money (OTM)

  2. At the Money (ATM)

  3. In the Money (ITM)


For example Stock XYZ is trading at $25


If you want to buy an option then



  • a $25 option is at the money(same price as the stock),

  • a $20 option is in the Money(less than the price of the stock)

  • a $30 option is out of the money(More than the price of the stock)


Options that are out of the money do not move in line with the movement of the underlying stock, options that are at the money will move at approximately half the pace of the stock(i.e. for every $1 movement of the stock up or down then the option will move approx 50 cents).


For options that are in the money then the more they are in the money the closer they will move dollar for dollar with the stock.


There are other factors that affect the price like time to expiry etc-but we will cover that in another post.


Therefore the reason I was not getting any movement in my option even when the stock move din the direction I wanted it to was because I was buying "cheap" out of the money options-ahhhhh I eventually realised...there is a reason they are "Cheap"


In fact they were not cheap at all and in some instances they were a lot more expensive than options at 10 or 20 times the price.


In the next part of this article I will look in a bit more depth at why this is the case and what you can do and what you should look at to give yourself more of a chance .



Best Wishes



Alan


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