As House Democratic Leader Nancy Pelosi has said, and said again, and said some more, it's all about "jobs, jobs, jobs and jobs". Which proves that redundancy is no barrier to success in Congress.
Nor in the world of econ reporting, where this is jobs week, when every report remotely related to employment will be published. The week will also be a big one for leading economic indicators, with the release of factory orders and the ISM manufacturing index, both discussed below in the Leading Indicators section.
The big jobs report, the government's employment situation report, including the politically important unemployment rate, comes out Friday at 8:30 a.m. Eastern. Also sometime that day, the job-matching site monster.com releases it's Monster employment index, no time given.
But on Thursday, the executive outplacement firm Challenger, Gray and Christmas will release its Challenger job-cut report on corporate layoffs, at 7:30 a.m. That will be followed by the government's weekly jobless claims report at 8:30 a.m.
And there's more. On Wednesday, the payroll services company Automated Data Processing Inc. issues its ADP employment report on private payroll employment, at 8:15 a.m.
In addition, surely we can expect Pres. Obama and Gov. Romney to say much about jobs, jobs, jobs and jobs during the first presidential debate on Wednesday at 9 p.m.
The debate will focus on domestic policy. Employment has been in the doldrums the past few months, making it a hot issue in the flow of campaign spin that we're all swimming through these days.
Leading indicators out this week:
The employment situation report's unemployment rate and job count are mainly considered to be trailing indicators. The report does include a leading indicator, however: Average hourly workweek in manufacturing. As noted above, it's out at 8:30 a.m. Friday.
Average weekly initial jobless claims, also mentioned above, is a leading indicator. It will be reported at 8:30 a.m. Thursday.
Manufacturers' new orders for consumer goods and materials and manufacturers' new orders for non-defense capital goods will be found in the factory orders report, out at 10 a.m. Thursday.
Vendor performance (delivery times index) is part of the Institute of Supply Management manufacturing index released Monday at 10 a.m.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Tuesday: Motor vehicle sales throughout the day.
Wednesday: The ISM non-manufacturing index at 10 a.m. and petroleum inventories at 10:30 a.m.
Thursday: The Federal Open Market Committee minutes from its Sept. 13 meeting, at 2 p.m. The minutes are generally a big deal only if they reveal hidden dissent.
Fedsters
Fed Chairman Ben Bernanke addresses the Economic Club of Indiana on Monday. His topic: "Five Questions about the Federal Reserve and Monetary Policy".
Trading calendar
By my rules, as of Monday I can trade November vertical spreads, as well as January single options and straddles. Of course, shares are good at any time.
Good trading!
Sunday, September 30, 2012
Friday, September 28, 2012
NKE trips into bearishness
Nike Inc. (NKE) tripped over its 20-day low, triggering a bear signal under the Turtle Trading rules (read them here). It quickly recovered but stayed below its initial stop/loss level, remaining in bear phase with three hours to go before the U.S. markets close.
NKE's opening downside gap, 3%, and the ensuing intra-day rise, 2.6%, came after the company published earnings that hit the analyst consensus precisely, but also reported a 6% decline in China orders.
The present price decline began Sept. 12 at a high of $100.92, a peak that ended an uptrend beginning from a low of $85.10 on June 29. That uptrend began correction of a downtrend that began from $114.81 on May 3.
So, the pattern is a decline from may through June, a 50% upward correction of that decline into September, and then an ambiguous fall that may be 1) a continuation of the decline beginning in May, or 2) a correction of the uptrend from late June.
In case 1, NKE remains in a downtrend, and in case 2, it is continuing an uptrend. A break above $100.92 would suggested case 2, and a decline below $85.10 would nail it for case 1.
The Turtle rules, of course, are never ambiguous. It is a bear position now, and will remain one until there's a clear signal saying to close it.
Nike is the world's leading supplier of athletic shoes and apparel, running the business from its headquarters in Beaverton, Oregon.
Nike has always struck me as being a lot like Apple, a glitzy, innovative company with lots of style. Analysts, however, are fairly underwhelmed, with a negative 13% enthusiasm index.
It's not that Nike is unprofitable. The company shows return on equity of 22% with very low levels of long-term debt, amounting to 2% of equity.
Annual earnings have been on the rise since the 2009 recession low.
The peak quarterly earnings period, it's fiscal 1st quarter, covering the summer, declined this year compared to the year-ago quarter. That, no doubt, contributes much to the analysts' angst.
Institutions, however, are less angsty. They own 83% of shares. The price is above par, although not stunningly so. It takes $1.81 in shares to control a dollar in sales.
Implied volatility stands at 23%, in the lower half of the six-month range, having fallen sharply in one day from Thursday's level of 33%, which was in the upper half of the range..
NKE trades 3.5 million shares a day, on average, and supports a wide range of optoin strike prices, with open interest running to the four- and five-digit levels near the money. The front-month at-the-money bid/ask spread for puts is a fairly low 3%.
Options are pricing in confidence that 68.2% of trades will fall between $89.30 and $101.94 over the next month, for a potential gain or loss of 7%.
Options are trading furiously, at nearly four times the five-day average volume. Calls have a slight edge at 392% of average volume, compared to 367% for puts.
The fair-price zone, with 2-1/2 hours until the markets close, runs from $92.72 to $95.05, encompassing 68.2% of transactions surrounding the most-traded price, $94.39. The current price is above the zone.
Nike next publishes earnings on Dec. 20. The stock goes ex-dividend in November for a quarterly payout yielding 1.51% annualized.
Decision for my account: I opened a bear position in NKE under the Turtle rules, structuring it as long puts expiring in January, with a $100 strike price. The position provides 7x leverage.
I would have also opened a bear position at the open based on traditional analysis. However, the upward retracement that ensued would probably caused me to pass on the trade.
Disclaimer
NKE's opening downside gap, 3%, and the ensuing intra-day rise, 2.6%, came after the company published earnings that hit the analyst consensus precisely, but also reported a 6% decline in China orders.
The present price decline began Sept. 12 at a high of $100.92, a peak that ended an uptrend beginning from a low of $85.10 on June 29. That uptrend began correction of a downtrend that began from $114.81 on May 3.
So, the pattern is a decline from may through June, a 50% upward correction of that decline into September, and then an ambiguous fall that may be 1) a continuation of the decline beginning in May, or 2) a correction of the uptrend from late June.
In case 1, NKE remains in a downtrend, and in case 2, it is continuing an uptrend. A break above $100.92 would suggested case 2, and a decline below $85.10 would nail it for case 1.
The Turtle rules, of course, are never ambiguous. It is a bear position now, and will remain one until there's a clear signal saying to close it.
Nike is the world's leading supplier of athletic shoes and apparel, running the business from its headquarters in Beaverton, Oregon.
Nike has always struck me as being a lot like Apple, a glitzy, innovative company with lots of style. Analysts, however, are fairly underwhelmed, with a negative 13% enthusiasm index.
It's not that Nike is unprofitable. The company shows return on equity of 22% with very low levels of long-term debt, amounting to 2% of equity.
Annual earnings have been on the rise since the 2009 recession low.
The peak quarterly earnings period, it's fiscal 1st quarter, covering the summer, declined this year compared to the year-ago quarter. That, no doubt, contributes much to the analysts' angst.
Institutions, however, are less angsty. They own 83% of shares. The price is above par, although not stunningly so. It takes $1.81 in shares to control a dollar in sales.
Implied volatility stands at 23%, in the lower half of the six-month range, having fallen sharply in one day from Thursday's level of 33%, which was in the upper half of the range..
NKE trades 3.5 million shares a day, on average, and supports a wide range of optoin strike prices, with open interest running to the four- and five-digit levels near the money. The front-month at-the-money bid/ask spread for puts is a fairly low 3%.
Options are pricing in confidence that 68.2% of trades will fall between $89.30 and $101.94 over the next month, for a potential gain or loss of 7%.
Options are trading furiously, at nearly four times the five-day average volume. Calls have a slight edge at 392% of average volume, compared to 367% for puts.
The fair-price zone, with 2-1/2 hours until the markets close, runs from $92.72 to $95.05, encompassing 68.2% of transactions surrounding the most-traded price, $94.39. The current price is above the zone.
Nike next publishes earnings on Dec. 20. The stock goes ex-dividend in November for a quarterly payout yielding 1.51% annualized.
Decision for my account: I opened a bear position in NKE under the Turtle rules, structuring it as long puts expiring in January, with a $100 strike price. The position provides 7x leverage.
I would have also opened a bear position at the open based on traditional analysis. However, the upward retracement that ensued would probably caused me to pass on the trade.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Thursday, September 27, 2012
MW: Growth and income
The Men's Warehouse Inc. (MW) on Monday fell below its 10-day low, moving out of Turtle Trading bull phase into neutrality for the first time since early August.
From its Aug. 2 low of $25.97, the stock rose 49% to $38.59 on Sept. 7. Not bad for a month plus change.
The price has sense retreated by 12% to $34.09 on Sept. 26. Today marks the first intra-day rise since the stock broke below the 10-day low, setting up the possibility -- underline possibility -- that today marks a higher low in a zag that sets up a new zig to the upside.
I came across MW, not through a scan for Turtle Trading breakouts (you can read the rules here), but rather because of the stock analysis aggregator Zacks.
Zacks makes a few of its picks public each day to non-subscribers, and today selected MW as its growth and income selection. You'll find the Zacks analysis here. I haven't read it yet because I want my analysis to be independent of theirs.
Longer term, MW been trending upward since its recession low in late 2008. The trend has been marked by steep corrections to the downside, so its a roller coaster, not a tramway.
On the weekly chart, the most recent highest high is $40.97 in early March. A break above $38.59 would count as a continued uptrend on the daily chart, but the weekly chart trend requires a move above the higher $40.97 level.
MW reached its September peak on the second day after a 10% opening gap to the upside that followed a negative earnings surprise. Traders clearly liked the financial details and the accompanying guidance.
By the Turtle Trading rules, it will take a break above $38.59 to produce a bull signal. A break below the 20-day low, $30.85 as of today and rising, would be a bear signal.
By Turtle rules, this is not a tradeable stock as it stands today. My point is that the Turtle strategy turns negative events, such as an exit from bull phase, into a set up for the next trade. Like all bilateral strategies, which take trades in both directions, it requires a very dynamic mindset when reading charts.
Certainly, the handful of analysts following the company are enamored with its prospects. Their enthusiasm index stands at 71%.
The Men's Wearhouse earns its living selling suits from 1,166 retail stores in the United States and Canada. It also rents tuxedos. A video on their web site claims that Men's Wearhouse sells one out of every five suits bought in the U.S.
The company's niche is guys like me that don't want to give a lot of effort to buying or maintaining a formal wardrobe. They aim to make both easy while providing quality and value.
It has paid off with a reasonable return on equity of 12% achieved with zero long-term debt. Annual earnings took a dive in 2010 but recovered sharply and steadily the next two years.
The quarterly earnings peak in the company's fiscal 2nd quarter, which covers summer. Earnings for that quarter rose in 2011 and 2012 compared to the year-ago quarter. The company's 4th quarter, which covers the dead of winter, consistently produces losses.
Eleven of the last 12 quarters have produced upside earnings surprises, and one has surprised to the downside.
Institutions own nearly all the shares (I can feel the love just looking at the numbers!) and yet the stock price, like the suits, is a bargain. It takes just 72 cents in shares to control a dollar in sales.
MW on average trades 666,000 shares a day. It's liquid, but below the levels of liquidity that I generally seek out.
Even so, it has a good selection of option strike prices with near-the-money open interest hitting triple digits on some strikes. The at-the-money call bid/ask spread is 15%, a bit higher than I like.
Implied volatility, at 29%, is in the cellar, near the six-month low. It took a huge dive when the price gapped upward on Sept. 6 and has been creeping sideways since.
Options are pricing in confidence that 68.2% of trades will fall between $31.87 and $37.73 over the next month, for a potential gain or loss of 8%.
Options aren't hugely active, with volume running at 70% of its five-day average. Calls lead at 13% above the average, compared to 56% below average for puts. Speculative sentiment is squarely in the bull column.
With less than two hours before the close, the fair-trade zone today runs from $34.43 to $34.95, encompassing 68.2% of transactions surrounding the most-traded price, $34.75.
The Men's Wearhouse next publishes earnings on Dec. 5. The stock goes ex-dividend on Dec. 7 for a quarterly payout yielding 2.07% annualized.
Decision for my account: I won't be trading MW today absent a Turtle-Trading signal. Nor do I see it as a trade absent some indication that the correction has ended. In the decline from the early September high, there was a four-day pause with $38.75 or so being the ceiling. A break above that level would suggest to me that the uptrend had resumed.
I shall be setting up alerts for Turtle breakouts on MW. Trading lore says that implied volatility tends to return to the mean. With MW's implied volatility at such a low extreme, diagonal spreads will profit from the reversion, although the liquidity is way lower than any diagonal I've ever opened.
Oh, and Zacks says MW is a growth and income play. So one strategy is to simply buy the stock in an uptrend and collect the dividend in December, along with some capital gains. That foregoes the possibility of leverage, but a round lot of 100 shares would allow a trader to sell covered calls against the position for income.
Disclaimer
From its Aug. 2 low of $25.97, the stock rose 49% to $38.59 on Sept. 7. Not bad for a month plus change.
The price has sense retreated by 12% to $34.09 on Sept. 26. Today marks the first intra-day rise since the stock broke below the 10-day low, setting up the possibility -- underline possibility -- that today marks a higher low in a zag that sets up a new zig to the upside.
I came across MW, not through a scan for Turtle Trading breakouts (you can read the rules here), but rather because of the stock analysis aggregator Zacks.
Zacks makes a few of its picks public each day to non-subscribers, and today selected MW as its growth and income selection. You'll find the Zacks analysis here. I haven't read it yet because I want my analysis to be independent of theirs.
Longer term, MW been trending upward since its recession low in late 2008. The trend has been marked by steep corrections to the downside, so its a roller coaster, not a tramway.
On the weekly chart, the most recent highest high is $40.97 in early March. A break above $38.59 would count as a continued uptrend on the daily chart, but the weekly chart trend requires a move above the higher $40.97 level.
MW reached its September peak on the second day after a 10% opening gap to the upside that followed a negative earnings surprise. Traders clearly liked the financial details and the accompanying guidance.
By the Turtle Trading rules, it will take a break above $38.59 to produce a bull signal. A break below the 20-day low, $30.85 as of today and rising, would be a bear signal.
By Turtle rules, this is not a tradeable stock as it stands today. My point is that the Turtle strategy turns negative events, such as an exit from bull phase, into a set up for the next trade. Like all bilateral strategies, which take trades in both directions, it requires a very dynamic mindset when reading charts.
Certainly, the handful of analysts following the company are enamored with its prospects. Their enthusiasm index stands at 71%.
The Men's Wearhouse earns its living selling suits from 1,166 retail stores in the United States and Canada. It also rents tuxedos. A video on their web site claims that Men's Wearhouse sells one out of every five suits bought in the U.S.
The company's niche is guys like me that don't want to give a lot of effort to buying or maintaining a formal wardrobe. They aim to make both easy while providing quality and value.
It has paid off with a reasonable return on equity of 12% achieved with zero long-term debt. Annual earnings took a dive in 2010 but recovered sharply and steadily the next two years.
The quarterly earnings peak in the company's fiscal 2nd quarter, which covers summer. Earnings for that quarter rose in 2011 and 2012 compared to the year-ago quarter. The company's 4th quarter, which covers the dead of winter, consistently produces losses.
Eleven of the last 12 quarters have produced upside earnings surprises, and one has surprised to the downside.
Institutions own nearly all the shares (I can feel the love just looking at the numbers!) and yet the stock price, like the suits, is a bargain. It takes just 72 cents in shares to control a dollar in sales.
MW on average trades 666,000 shares a day. It's liquid, but below the levels of liquidity that I generally seek out.
Even so, it has a good selection of option strike prices with near-the-money open interest hitting triple digits on some strikes. The at-the-money call bid/ask spread is 15%, a bit higher than I like.
Implied volatility, at 29%, is in the cellar, near the six-month low. It took a huge dive when the price gapped upward on Sept. 6 and has been creeping sideways since.
Options are pricing in confidence that 68.2% of trades will fall between $31.87 and $37.73 over the next month, for a potential gain or loss of 8%.
Options aren't hugely active, with volume running at 70% of its five-day average. Calls lead at 13% above the average, compared to 56% below average for puts. Speculative sentiment is squarely in the bull column.
With less than two hours before the close, the fair-trade zone today runs from $34.43 to $34.95, encompassing 68.2% of transactions surrounding the most-traded price, $34.75.
The Men's Wearhouse next publishes earnings on Dec. 5. The stock goes ex-dividend on Dec. 7 for a quarterly payout yielding 2.07% annualized.
Decision for my account: I won't be trading MW today absent a Turtle-Trading signal. Nor do I see it as a trade absent some indication that the correction has ended. In the decline from the early September high, there was a four-day pause with $38.75 or so being the ceiling. A break above that level would suggest to me that the uptrend had resumed.
I shall be setting up alerts for Turtle breakouts on MW. Trading lore says that implied volatility tends to return to the mean. With MW's implied volatility at such a low extreme, diagonal spreads will profit from the reversion, although the liquidity is way lower than any diagonal I've ever opened.
Oh, and Zacks says MW is a growth and income play. So one strategy is to simply buy the stock in an uptrend and collect the dividend in December, along with some capital gains. That foregoes the possibility of leverage, but a round lot of 100 shares would allow a trader to sell covered calls against the position for income.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Wednesday, September 26, 2012
ORCL: Bear signal amid a tech decline
Oracle Corp. (ORCL) gapped below its 20-day low at the open this morning, continuing a steep four-day downtrend and triggering a Turtle Trading bear signal. (I describe the Turtle Trading rules here.)
The decline began on Sept. 21 from $33.29, the peak of a rise from $25.33 that began in mid-May.
Today's 0.9% opening gap was part of a broader tech decline. Even AAPL was hit enough to take out my stop/loss and close my bull position.
For Turtle Trader's, the signal makes it mandatory to open a bear position in ORCL, as long as it fits into the trader's diversification and funding rules.
For traditional support and resistance chartists, the gap marks a lower low, falling below the $31.16 base that marked the start of the final upward push. The pattern is a high followed by a lower low, and a new lower high -- below $33.29 -- will provide the three points needed to declare a downtrend correcting the rise from mid-May.
That has been a series of stair steps, and these provide support levels. The next support level down is $29.74, which was only tested once, and below that, $29.07, which was tested three times.
Oracle, based in Redwood City, California, builds and supports enterprise-level database systems, both software and hardware, for customers globally. It is the third-largest software maker, after Microsoft and IBM.
ORCL gets a 26% enthusiasm index from analysts, up from 24% three months ago.
Return on equity is 28% with a moderately low level of long-term debt amounting to 31% of equity.
Annual earnings have been on a steady rise in recent years, though the company's 2012 fiscal year, which ended in May.
The peak quarter, the 2nd calendar quarter covering the spring, has risen the past two years compared to the year-ago quarter. Ten of the last 12 quarterly earnings have seen upside earnings surprises, and two have surprised to the downside.
Institutions own 61% of shares, and the price is high: It takes $4.08 in shares to control a dollar in sales.
So the chart is contradicting the financials. On the books, for the fundamentalist, Oracle is a company to be bullish about. It is not, however, a value play. The price is just way too expensive for that.
ORCL on average trades 30.2 million shares of stock each day. It has a moderate selection of opton strike prices with open-interst running from three- to five-figures near the money. The front-month, at-the-money puts have a miniscule 1.3% bid/ask spread.
Implied volatility is running at 24%, halfway between the mid-point and the six-month low. It has been rising since Sept. 19.
Options are pricing in confidence that 68.2% of trades will fall between $28.71 and $32.89, for a gain or loss of 7%.
Options volume is running 13% above the five-day average, with puts leading at 50% above, compared to calls trading at 19% below the average.
With 100 minutes left in the trading day, the fair-price zone runs from $30.58 to $30.92, encompassing 68.2% of transactions surrounding the most-traded price, $30.80. That price is within penny's of ORCL's current mark.
ORCL next publishes earnings on Dec. 18. The stock goes ex-dividend on Oct. 10 for a quarterly payout yielding 0.78% annualized.
Decision for my account: I've opened a bear position under Turtle Trading rules, structuring it as January puts with a $33 strike price. This gives 7x leverage. The initial stop/loss for my $30.87 entry is above $31.98, or double the 55-cent average true range of the past 20 days.
I would also open a bear position based on traditional trend analysis, on the bases of the break below the prior near-term correction low.
Disclaimer
The decline began on Sept. 21 from $33.29, the peak of a rise from $25.33 that began in mid-May.
Today's 0.9% opening gap was part of a broader tech decline. Even AAPL was hit enough to take out my stop/loss and close my bull position.
For Turtle Trader's, the signal makes it mandatory to open a bear position in ORCL, as long as it fits into the trader's diversification and funding rules.
For traditional support and resistance chartists, the gap marks a lower low, falling below the $31.16 base that marked the start of the final upward push. The pattern is a high followed by a lower low, and a new lower high -- below $33.29 -- will provide the three points needed to declare a downtrend correcting the rise from mid-May.
That has been a series of stair steps, and these provide support levels. The next support level down is $29.74, which was only tested once, and below that, $29.07, which was tested three times.
Oracle, based in Redwood City, California, builds and supports enterprise-level database systems, both software and hardware, for customers globally. It is the third-largest software maker, after Microsoft and IBM.
ORCL gets a 26% enthusiasm index from analysts, up from 24% three months ago.
Return on equity is 28% with a moderately low level of long-term debt amounting to 31% of equity.
The peak quarter, the 2nd calendar quarter covering the spring, has risen the past two years compared to the year-ago quarter. Ten of the last 12 quarterly earnings have seen upside earnings surprises, and two have surprised to the downside.
Institutions own 61% of shares, and the price is high: It takes $4.08 in shares to control a dollar in sales.
So the chart is contradicting the financials. On the books, for the fundamentalist, Oracle is a company to be bullish about. It is not, however, a value play. The price is just way too expensive for that.
ORCL on average trades 30.2 million shares of stock each day. It has a moderate selection of opton strike prices with open-interst running from three- to five-figures near the money. The front-month, at-the-money puts have a miniscule 1.3% bid/ask spread.
Implied volatility is running at 24%, halfway between the mid-point and the six-month low. It has been rising since Sept. 19.
Options are pricing in confidence that 68.2% of trades will fall between $28.71 and $32.89, for a gain or loss of 7%.
Options volume is running 13% above the five-day average, with puts leading at 50% above, compared to calls trading at 19% below the average.
With 100 minutes left in the trading day, the fair-price zone runs from $30.58 to $30.92, encompassing 68.2% of transactions surrounding the most-traded price, $30.80. That price is within penny's of ORCL's current mark.
ORCL next publishes earnings on Dec. 18. The stock goes ex-dividend on Oct. 10 for a quarterly payout yielding 0.78% annualized.
Decision for my account: I've opened a bear position under Turtle Trading rules, structuring it as January puts with a $33 strike price. This gives 7x leverage. The initial stop/loss for my $30.87 entry is above $31.98, or double the 55-cent average true range of the past 20 days.
I would also open a bear position based on traditional trend analysis, on the bases of the break below the prior near-term correction low.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Tuesday, September 25, 2012
COH: Bearish breakout, bullish financials
The bags and accessories company Coach Inc. (COH) broke below its 20-day low today, triggering a Turtle Trading bear signal. Under Turtle rules (you can read about them here), that's a mandatory new position, as long as it fits into my plan's diversification rules.
It's a bearish breakout, but -- spoiler alert -- the company has great financials. This is known as the Trader's Dilemma. Who do you believe? The accountants or the charts?
The price peaked in the prior swing up at $63.24 on Sept. 10, a price that broke through the 55-day high, triggering a Turtle bull phase that turned out to be a failure.
The rise that led to the the Sept. 10 peak began on Aug. 2, the day a low of $48.24 was set. That is the 55-day low, which in Turtle-land produces an even stronger signal than a 20-day breakout.
Almost always in breakout trading, the question is whether the breakout is the peak of a sideways movement, or an instance of directional momentum. The way a trader finds out, in the Turtle system, is by taking a the trade, setting a stop/loss, and seeing if the position makes money.
The August low was set as a result of a gigantic gap triggered an earnings announcement that surprised to the upside but contained other information that spooked traders.
The current breakout is near the downside support level for the latter half of August, a level that was more of the meandering random variety rather than one that survived repeated tests. I don't consider it to be a strong support level.
The 55-day low is a strong level, one that was also tested in 2011. So that suggests downside potential to around $48. Below that, the future remains to be seen.
Long term, a drop below $46 would set a lower low, removing ambiguity from the retracement of the rise form the recession low of 2009 to the all-time high of $79.70 set in March.
Coach is an older company -- founded in 1941 -- that defines itself by classic styles and quality crafting. Its product line includes handbags, shoes, watches, sunglasses, jewelry, briefcases, belts -- The company started out as leather-crafters, but has branced out since.
Coach operates more than 500 stores in the U.S. and Canada, and more than 300 in East Asia. It's distribution network also reaches into Europe and Latin America, as well as other Asian regions.
Analysts are positive on the company, with a 30% enthusiasm index, although that has dropped from 39% a week ago.
Annual earnings have risen steadily from their recession low and in 2011 stood 85% above the nadir.
The Christmas season's 4th calendar quarter (Q2 in the company's fiscal year) is the earnings peak, and that quarter's earnings have risen the past two years. All of the past 11 quarters have produced upside earnings surprises.
So, based on earnings alone, this is not a downtrodden company facing big trouble, but rather a money-maker going through a rough patch on Wall Street.
I mean, return on equity is 55% (!!). Long-term debt is zero (No debt!!). It's almost an embearrassment to open a bear position on this stock.
But, the signals are as they are. Clearly the market is anticipating rough times ahead. As a trend follower, my strategy is to jump on for part of the ride.
Institutions are certainly on board, although no doubt on the bull side. They own 90% of the shares, and the price is relatively high. It takes $3.33 in shares to control a dollar in sales.
COH on average trades 4.9 million shares a day. It has a wide selection of optoins with open-interest running in the three- and four-digits near the money. The bid/ask spread for at-the-money front-month puts is 3%, a fairly low level.
Implied volatility stands at 37%, just below the mid-point of the six-month range. It has been stair-stepping up since mid-September.
Options are pricing in confidence that 68.2% of trades will fall between $48.905 and $60.57, for a potential gain or loss of 11%. This is more volatile than most of the stocks I've written up of late.
Options are trading actively, at 61% above their five-day average volume. Puts lead at 73% above the average, compared to 36% for calls.
The fair-price zone, with a bit less than two hours of trading left, runs from $54.99 to $55.59, encompassing 68.2% of transactions surrounding the most-traded price, $55.20. The current price is a bit below the zone.
Coach next publishes earnings on Oct. 22. The stock goes ex-dividend in December for a quarterly payout yielding 2.19% annualized.
Decision for my account: I took the trade under Turtle rules, and did so with very few reservations, for the reasons given in my discussion of support levels earlier in this essay. I structured the trade as a January put with a strike price of $60, for 5x leverage. The initial stop loss will be double the 20-day average true range, placing it above $58.90 on the basis of my entry at $55.20.
Disclaimer
It's a bearish breakout, but -- spoiler alert -- the company has great financials. This is known as the Trader's Dilemma. Who do you believe? The accountants or the charts?
The price peaked in the prior swing up at $63.24 on Sept. 10, a price that broke through the 55-day high, triggering a Turtle bull phase that turned out to be a failure.
The rise that led to the the Sept. 10 peak began on Aug. 2, the day a low of $48.24 was set. That is the 55-day low, which in Turtle-land produces an even stronger signal than a 20-day breakout.
Almost always in breakout trading, the question is whether the breakout is the peak of a sideways movement, or an instance of directional momentum. The way a trader finds out, in the Turtle system, is by taking a the trade, setting a stop/loss, and seeing if the position makes money.
The August low was set as a result of a gigantic gap triggered an earnings announcement that surprised to the upside but contained other information that spooked traders.
The current breakout is near the downside support level for the latter half of August, a level that was more of the meandering random variety rather than one that survived repeated tests. I don't consider it to be a strong support level.
The 55-day low is a strong level, one that was also tested in 2011. So that suggests downside potential to around $48. Below that, the future remains to be seen.
Long term, a drop below $46 would set a lower low, removing ambiguity from the retracement of the rise form the recession low of 2009 to the all-time high of $79.70 set in March.
Coach is an older company -- founded in 1941 -- that defines itself by classic styles and quality crafting. Its product line includes handbags, shoes, watches, sunglasses, jewelry, briefcases, belts -- The company started out as leather-crafters, but has branced out since.
Coach operates more than 500 stores in the U.S. and Canada, and more than 300 in East Asia. It's distribution network also reaches into Europe and Latin America, as well as other Asian regions.
Analysts are positive on the company, with a 30% enthusiasm index, although that has dropped from 39% a week ago.
Annual earnings have risen steadily from their recession low and in 2011 stood 85% above the nadir.
The Christmas season's 4th calendar quarter (Q2 in the company's fiscal year) is the earnings peak, and that quarter's earnings have risen the past two years. All of the past 11 quarters have produced upside earnings surprises.
So, based on earnings alone, this is not a downtrodden company facing big trouble, but rather a money-maker going through a rough patch on Wall Street.
I mean, return on equity is 55% (!!). Long-term debt is zero (No debt!!). It's almost an embearrassment to open a bear position on this stock.
But, the signals are as they are. Clearly the market is anticipating rough times ahead. As a trend follower, my strategy is to jump on for part of the ride.
Institutions are certainly on board, although no doubt on the bull side. They own 90% of the shares, and the price is relatively high. It takes $3.33 in shares to control a dollar in sales.
COH on average trades 4.9 million shares a day. It has a wide selection of optoins with open-interest running in the three- and four-digits near the money. The bid/ask spread for at-the-money front-month puts is 3%, a fairly low level.
Implied volatility stands at 37%, just below the mid-point of the six-month range. It has been stair-stepping up since mid-September.
Options are pricing in confidence that 68.2% of trades will fall between $48.905 and $60.57, for a potential gain or loss of 11%. This is more volatile than most of the stocks I've written up of late.
Options are trading actively, at 61% above their five-day average volume. Puts lead at 73% above the average, compared to 36% for calls.
The fair-price zone, with a bit less than two hours of trading left, runs from $54.99 to $55.59, encompassing 68.2% of transactions surrounding the most-traded price, $55.20. The current price is a bit below the zone.
Coach next publishes earnings on Oct. 22. The stock goes ex-dividend in December for a quarterly payout yielding 2.19% annualized.
Decision for my account: I took the trade under Turtle rules, and did so with very few reservations, for the reasons given in my discussion of support levels earlier in this essay. I structured the trade as a January put with a strike price of $60, for 5x leverage. The initial stop loss will be double the 20-day average true range, placing it above $58.90 on the basis of my entry at $55.20.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Monday, September 24, 2012
FB: Helter-skelter
I feel as though I should apologize for writing yet again about Facebook Inc. (FB). It is such a ridiculous stock, in its market behavior at least, that it challenges faith in the two great contradictory truisms of trading.
FB is neither the product of a rational market nor a random walk. Its market paradigm is helter-skelter. It is a panic set amidst a riot.
Barron's -- the influential Wall Street weekly -- in its most recent issue declared that FB's proper value is $15, or 24 times projected profits for 2013.
In true riotous fashion, FB gapped at the open down 3.9%, and then continued in that course, for an intra-day loss of an additional 4.9%.
To briefly review the chart, FB opened on IPO day, May 18, at $42.05, peaked at $45, and then quickly dropped to $25.52on June 6, recovered to $33.45 on June 22, declined again to a low of $17.55 on Sept. 4, and recovered to $23.37 on Sept. 19.
The moves have mainly come on news -- either stock sales by major holders or bashing by analysts or, most recently, a high-profile interview by CEO Mark Zuckerberg.
The Barron's gap is one of the first major moves to be based on fundamental analysis. Barron's argues that traditional web browser traffic to Facebook is declining, as people move their browsing to their iPhones, Android phones and other handheld devices.
Facebook, their argument goes, gets most of its revenue from traditional browsers, and hasn't yet figured out how to monetize the small screens of mobile devices.
Fair enough. Of course, the same could be said of Google, LinkedIn, Politico, Huffington Post, The New York Times -- any ad-based outfit that runs on the web. It is a fact that you can't fit advertising onto a small handheld screen the way you can on to a large browser screen running on a laptop or a desktop.
So the problem doesn't apply to Facebook alone. It applies to everyone.
The article also refers to Facebook's "potentially fickle" base. Well, yes. As is the readership of any site on the Internet. It goes with the territory. Just ask MySpace. Or Yahoo!. Or Lycos. Or AltaVista. Or Private Trader, for that matter.
Barron's, like many analysts, uses estimated earnings. I don't. As a charts dude, my theory is that the current price reflects not only present knowledge but expectations for the future. So some sort of estimate of unknown validity is redundant and of little value.
I trade based on what I know, not on guesses.
What I know is the FB has as price/earnings ratio of 127.62, based on a price of about $20.85 (as of this writing) and earnings for the past 12 months of 0.16 per share.
Let's make some comparisons.
LinkedIn (LNKD), the closest counterpart to FB, has a p/e of 1,050.36.
Google (GOOG), a maturing formerly hot IPO that is still in its innovative phase, has a p/e of 21.76.
Microsoft (MSFT), a fully mature older tech company, has a p/e of 15.59.
If Barron's analysis is correct, then it would lower FB's p/e ratio to 93.75, still on the high side compared to other tech giants, such as GOOG and MSFT but well below LNKD and FB's current p/e.
Barron's is proposing is a radical revision. Does it meet the test of reasonableness? I think the best way to make that test is to compare FB to a competitor, another young publicly-traded social networking company. That competitor is LNKD.
FB has 800 million subscribers from a target audience that potentially includes everyone in the world with Internet access. LNKD has 175 million subscribers from a target audience that is composed of professionals in business and government. (LNKD may have purely entertainment subscribers, of course, but
FB has $3.9 billion in cash. LNKD has $577 million in cash.
Question: Is it possible that FB can use that cash to quickly develop ways to monetize its mobile presence? Well, yes. Especially since the company's CEO said earlier this month, "We are a mobile company."
FB knows where its future lies. It has the commitment. It has the resources. Is there any reason to believe that FB won't find a way to make money off of the smartphone in your pocket or the tablet in your briefcase?
If the Barron's estimate were applied to LNKD, it would lower its price from $123.45 to $11.25, or minus 997%. The reduction in FB's value, in Barron's-world, is a mere 10.9% at today's low (so far).
So, the Barron's analysis really doesn't seem reasonable to me. It's the sort of thing that your aging uncle might come up with as you and he have a beer or two on a bright Saturday afternoon. You smile. You nod. You forget it.
But enough FB traders clearly are listening to their old uncles to have an impact on the price. And that makes trading difficult.
I can trade a rational market, because the prices will move in incremental ways. There will be black swans, but they'll be rare.
I can trade a random walk, using strategies that will help bend the odds in my favor. The random walk theory has no black swans, because it has no expectations.
I cannot trade a panic, where black swans flock every few weeks or months. I can only hold on and hope that the helter-skelter ends.
A note on the chart: In terms of Turtle Trading (you can read the rules here), FB remains in bull phase. It broke above the 20-day high of $21.41 on Sept. 13, with an entry level at close of $20.71. (The actual entry price, of course, would differ for each trader.)
The initial stop/loss would have been $18.68 -- the entry price minus twice the 20-day average true range -- and that has been superceded by the 10-day low, which presently stands at $18.85.
By the Turtle Trading rules, FB remains in bull phase until it drops below the 10-day low. In this context, bull phase according to the Turtle rules means to hold bullish positions but not to open new ones.
Disclaimer
FB is neither the product of a rational market nor a random walk. Its market paradigm is helter-skelter. It is a panic set amidst a riot.
Barron's -- the influential Wall Street weekly -- in its most recent issue declared that FB's proper value is $15, or 24 times projected profits for 2013.
In true riotous fashion, FB gapped at the open down 3.9%, and then continued in that course, for an intra-day loss of an additional 4.9%.
To briefly review the chart, FB opened on IPO day, May 18, at $42.05, peaked at $45, and then quickly dropped to $25.52on June 6, recovered to $33.45 on June 22, declined again to a low of $17.55 on Sept. 4, and recovered to $23.37 on Sept. 19.
The moves have mainly come on news -- either stock sales by major holders or bashing by analysts or, most recently, a high-profile interview by CEO Mark Zuckerberg.
The Barron's gap is one of the first major moves to be based on fundamental analysis. Barron's argues that traditional web browser traffic to Facebook is declining, as people move their browsing to their iPhones, Android phones and other handheld devices.
Facebook, their argument goes, gets most of its revenue from traditional browsers, and hasn't yet figured out how to monetize the small screens of mobile devices.
Fair enough. Of course, the same could be said of Google, LinkedIn, Politico, Huffington Post, The New York Times -- any ad-based outfit that runs on the web. It is a fact that you can't fit advertising onto a small handheld screen the way you can on to a large browser screen running on a laptop or a desktop.
So the problem doesn't apply to Facebook alone. It applies to everyone.
The article also refers to Facebook's "potentially fickle" base. Well, yes. As is the readership of any site on the Internet. It goes with the territory. Just ask MySpace. Or Yahoo!. Or Lycos. Or AltaVista. Or Private Trader, for that matter.
Barron's, like many analysts, uses estimated earnings. I don't. As a charts dude, my theory is that the current price reflects not only present knowledge but expectations for the future. So some sort of estimate of unknown validity is redundant and of little value.
I trade based on what I know, not on guesses.
What I know is the FB has as price/earnings ratio of 127.62, based on a price of about $20.85 (as of this writing) and earnings for the past 12 months of 0.16 per share.
Let's make some comparisons.
LinkedIn (LNKD), the closest counterpart to FB, has a p/e of 1,050.36.
Google (GOOG), a maturing formerly hot IPO that is still in its innovative phase, has a p/e of 21.76.
Microsoft (MSFT), a fully mature older tech company, has a p/e of 15.59.
If Barron's analysis is correct, then it would lower FB's p/e ratio to 93.75, still on the high side compared to other tech giants, such as GOOG and MSFT but well below LNKD and FB's current p/e.
Barron's is proposing is a radical revision. Does it meet the test of reasonableness? I think the best way to make that test is to compare FB to a competitor, another young publicly-traded social networking company. That competitor is LNKD.
FB has 800 million subscribers from a target audience that potentially includes everyone in the world with Internet access. LNKD has 175 million subscribers from a target audience that is composed of professionals in business and government. (LNKD may have purely entertainment subscribers, of course, but
FB has $3.9 billion in cash. LNKD has $577 million in cash.
Question: Is it possible that FB can use that cash to quickly develop ways to monetize its mobile presence? Well, yes. Especially since the company's CEO said earlier this month, "We are a mobile company."
FB knows where its future lies. It has the commitment. It has the resources. Is there any reason to believe that FB won't find a way to make money off of the smartphone in your pocket or the tablet in your briefcase?
If the Barron's estimate were applied to LNKD, it would lower its price from $123.45 to $11.25, or minus 997%. The reduction in FB's value, in Barron's-world, is a mere 10.9% at today's low (so far).
So, the Barron's analysis really doesn't seem reasonable to me. It's the sort of thing that your aging uncle might come up with as you and he have a beer or two on a bright Saturday afternoon. You smile. You nod. You forget it.
But enough FB traders clearly are listening to their old uncles to have an impact on the price. And that makes trading difficult.
I can trade a rational market, because the prices will move in incremental ways. There will be black swans, but they'll be rare.
I can trade a random walk, using strategies that will help bend the odds in my favor. The random walk theory has no black swans, because it has no expectations.
I cannot trade a panic, where black swans flock every few weeks or months. I can only hold on and hope that the helter-skelter ends.
A note on the chart: In terms of Turtle Trading (you can read the rules here), FB remains in bull phase. It broke above the 20-day high of $21.41 on Sept. 13, with an entry level at close of $20.71. (The actual entry price, of course, would differ for each trader.)
The initial stop/loss would have been $18.68 -- the entry price minus twice the 20-day average true range -- and that has been superceded by the 10-day low, which presently stands at $18.85.
By the Turtle Trading rules, FB remains in bull phase until it drops below the 10-day low. In this context, bull phase according to the Turtle rules means to hold bullish positions but not to open new ones.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Sunday, September 23, 2012
The Week Ahead: Income, Outlays, Durables
How much we made, how much of that we spent and how much we socked away dominates the econ week, along with a report on orders for big-ticket items, an important measure of confidence in future growth.
Leading indicators out this week:
Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.
The index of consumer expectations from the University of Michigan/Reuters consumer sentiment report, out Friday at 9:55 a.m.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Monday: The Dallas Fed manufacturing survey of business activity in Texas, at 10:30 a.m.
Tuesday: The S&P Case-Shiller home price index of housing prices in 20 metro areas, at 9 a.m. and the Conference Board consumer confidence index at 10 a.m.
Wednesday: New home sales at 10 a.m. and petroleum inventories at 10:30 a.m.
Thursday: The 2nd quarter final report on gross domestic product at 8:30 a.m. (important only in the event of a major, unexpected revision) and pending home sales at 10 a.m.
Friday: Chicago Purchasing Managers index at 9:45 a.m.
Trading calendar
By my rules, as of Monday I can trade October vertical and butterfly spreads, iron condors and the short legs of calendar and diagonal spreads, as well as January single options and straddles. Of course, shares are good at any time.
Good trading!
Personal income and outlays will be reported at 8:30 a.m. Eastern on Friday. Durable goods orders will be released the day before, on Thursday, also at 8:30 a.m.
I treat durable goods as a confidence indicator because families and companies don't buy big, expensive things unless they think they'll have the paycheck and business to pay for them and put them to use. Fear is a harsh climate for durable goods.
Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.
The index of consumer expectations from the University of Michigan/Reuters consumer sentiment report, out Friday at 9:55 a.m.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Monday: The Dallas Fed manufacturing survey of business activity in Texas, at 10:30 a.m.
Tuesday: The S&P Case-Shiller home price index of housing prices in 20 metro areas, at 9 a.m. and the Conference Board consumer confidence index at 10 a.m.
Wednesday: New home sales at 10 a.m. and petroleum inventories at 10:30 a.m.
Thursday: The 2nd quarter final report on gross domestic product at 8:30 a.m. (important only in the event of a major, unexpected revision) and pending home sales at 10 a.m.
Friday: Chicago Purchasing Managers index at 9:45 a.m.
Trading calendar
By my rules, as of Monday I can trade October vertical and butterfly spreads, iron condors and the short legs of calendar and diagonal spreads, as well as January single options and straddles. Of course, shares are good at any time.
Good trading!
Thursday, September 20, 2012
SDRL: Second-guessing the breakout
Seadrill Ltd. (SDRL) gapped below its 20-day low Thursday morning, triggering a Turtle Trading bear signal, but then rose for a net gain (so far) for the day.
Disclaimer
This is the sort of move that makes traders second-guess their rules.
For the Turtle Trading rules (read them here) say that when a breakout occurs, the trade must be taken as long as the account has uncommitted funds.
Yet, buy into rising stock? One that has gone up nearly 1% intra-day? Madness, I say!
Charts like Seadrill's explains why it is not uncommon to see traders sitting glassy eyed before their screens, muttering softly in a state of mild paralysis.
The psychology of trading is a source of endless fascination. In the end, it all comes down to a simple dictum: "Act!" To trade is to act, and the trader who fails to act is a trader in name only.
(Rejecting a trade, by the way, counts as acting. I'm not at all arguing for indiscriminate commitment of funds.)
(Rejecting a trade, by the way, counts as acting. I'm not at all arguing for indiscriminate commitment of funds.)
SDRL's 20-day low is at $39.45. The gap carried it to an open that was 0.9% below the prior day's close. Today's high so far (three hours before the close) has touched the 20-day low, but has not broken back above it.
The stock has been a sideways trend since early August, with a ceiling a bit below $42 and a floor of around $39.50. Today's decline is the second test of that lower level. The previous test on Sept. 5 set the $39.45 low that is now the breakout level.
It would take a break below $37.45 before I could call SDRL as being in a downtrend using traditional analysis, and that's a highly questionable conclusion. It is just a muddy chart at the near-term range.
Longer term, the stock peaked at $42.34 late last winter, fell to $31.37 in early June, and then again rested the $42 level without setting a higher high. From that view, it would take a decline below $31.37 to produce a lower low that could be called a downtrend.
Seadrill, a off-shore drilling contractor headquartered in Hamilton, Bermuda with operations run out of Stavanger, Norway, is followed by analysts who are, for the most part, firmly in the bear camp. The enthusiasm index is a negative 64%, down from 60% a month ago.
In part, that may be because annual earnings have been flat that past three years, and are looking that way this year as well.
The company is a money maker -- always profitable -- and has a fine return on equity of 22%. That has come at a price, however, of a high level of long-term debt amounting to 125% of equity.
The debt really shouldn't come as a big surprise. Drilling is a capital intensive job -- it takes lots of big, expensive equipment to make it happen. The company is operating about 40 rigs in offshore fields throughout the globe.
Institutions own only 33% of shares, and the price has been bid up to an extraordinary level. It takes $4.36 in shares to control a dollar in sales.
SDRL on average trades 2 million shares a day. It has a wide selection of option strike prices with open interest near the money running in the three- and four-figure range. The bid/ask spread for front-month at-the-money calls is 11%.
Implied volatility, 51%, is near the top of the six-month range. It began declining a week ago but rose today.
Options are pricing in confidence that 68.2% of trades will fall between $33.61 and $45.11 over the next month, for a potential maximum gain or loss of 15%.
Options are trading at only 5% above their five-day average volume, with calls leading at 49% above average, compared to puts at only 32% below average.
The fair-trade zone runs from $39.21 to $39.36, encompassing 68.2% of transactions surrounding the most-traded price, $39.30. The stock is trading at the high end of the zone as of this writing.
Seadrill next publishes earnings on Nov. 30. It goes ex-dividend in December for a quarterly payout yielding 8.54% annualized.
Decision for my account: I won't take the trade because my trading funds are fully committed under my rules. If I were playing it as a Turtle Trade, I would structure it as long the January $40.85 puts for 7x leverage. (The strike price is no type -- it's a foreign company and sometimes their options get weird.)
SDRL is also interesting as a diagonal spread -- big implied volatility means big yield on the short leg. And as a trader, given the ambiguities of the chart, I would be tempted to structure the position as a vertical spread, to hedge against the price rising.
But both of those produce potential problems because of the high dividend yield, which increases the odds dramatically of involuntary assignment of short call options held past the ex-div date.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Wednesday, September 19, 2012
SYY: A no-confidence breakout
Sysco Corp. (SYY), the company that trucks peas and carrots and many other foods to restaurants and hospital cafeterias around the country, broke through its 55-day high in the markets today, producing a Turtle Trading bull signal.
The break above $30.74 sets up a challenge to the prior swing high, $31.18, set early in the year.
SYY has been marking time on the chart since 2009 in a series of large swings with a ceiling of $32 and a floor of $27. May of 2011 saw a break above the $32 level that was followed by a retreat below the $27, which then pulled back up to within the range.
Turtle Trading rules (read about them here) are blunt instruments. They don't deal with such subtleties as sideways trends. A stock is either in bull phase, or bear phase, or neither.
In the case of SYY, though, I think it pays to look at the broader picture. Today's high (so far) is only 3% below the $32 ceiling. It's a breakout, but of the no-confidence variety.
A smart Turtle Trader will break the rules when that $32 level is reached and tighten stop/loss levels until it's clear the the stock won't retrace.
Houston-based Sysco was hit hard by the recession. It serves the dining-out business, with 400,000 clients. When people feel the economy crumble beneath their feat, they stay home and eat cheap. When they grow confident, they start dining out again.
Things are still fairly gloomy in the job market, and that shows in analysts' assessment of Sysco -- they lack confidence in the company, which is another way of saying they have little confidence in consumer confidence, at least for the next earnings-reporting quarter.
The enthusiasm index for SYY is a miserable, negative 60%. If I traded based on analyst opinion (I don't) I would grab my chips and run from SYY as fast as my legs would carry me.
Yet, a closer look shows that Sysco's situation isn't bad at all. It has a return on equity of 25%, and long-term debt, while higher than I like, isn't at crippling levels. It amounts to 59% of equity.
Earnings are where the gloom comes from. The annual figures have been static for three years running. The peak quarter of the year -- the 4th -- declined this year compared to the corresponding quarter in 2011.
Of the last 12 quarters, seven have shown upside surprises, four surprised to the downside, and one was surprise-free.
Institutions own 74% of shares, which can be bought today at bargain-basement prices. It takes only 43 cents in shares to control a dollar in sales.
All in all, it's an interesting set of numbers. Looking at returns and earnings, SYY looks like a growth stock that has fallen on hard times. Looking at the price, it appears to be a value play.
Of course, we're all chart people, yes? We don't care about the financials, just what the chart shows.
SYY on average trades 3.2 million shares a day and supports a moderate selection of option strike prices. Open interest is as much as four figures on some strikes, but it is distributed very narrowly-- the outlying strikes have no open interest at all.
Bid/ask spreads are fairly high, amounting to 33% on the front-month at-the-money calls.
Implied volatility stands at 13%, about the middle of the six-month range. It has been stair-stepping down since late August.
Options are pricing in confidence that 68.2% of trades will fall between $29.93 and $32.21 over the next month, for a potential maximum gain or loss of 4%. This is not a highly volatile stock.
Options are trading actively, at 43% above their five-day volume. Calls lead at 64% above average volume, compared to 10% for puts.
Today's fair-price zone runs from $30.57 and $31, encompassing 68.2% of transactions surrounding the most traded price, $30.84. The stock is trading above the fair-price zone with two hours of trading remaining before the close.
Sysco next publishes earnings on Nov. 7. the stock goes ex-dividend on Oct. 3 for a quarterly payout yielding 3.47% annualized.
Decision for my account: I have no decision to make on this trade. I'm over-committed to bull trades under the Turtle Trading rules. I'll need to close some positions, as stops are hit, before I can trade uptrending stocks again.
If I were trading SYY, I would structure it as January calls at the $30 strike, for 14x leverage. Assuming entry at $31.07, the initial stop/loss would be $30.82 (the entry price minus double the average true range).
Once the price moved above $32, I would narrow the stop to 13 cents below the peak price, running it as a trailing stop as new highs were set. I would switch back to the Turtle Trading stop -- the 10-day low -- once that level came close to the trailing stop.
Disclaimer
The break above $30.74 sets up a challenge to the prior swing high, $31.18, set early in the year.
SYY has been marking time on the chart since 2009 in a series of large swings with a ceiling of $32 and a floor of $27. May of 2011 saw a break above the $32 level that was followed by a retreat below the $27, which then pulled back up to within the range.
Turtle Trading rules (read about them here) are blunt instruments. They don't deal with such subtleties as sideways trends. A stock is either in bull phase, or bear phase, or neither.
In the case of SYY, though, I think it pays to look at the broader picture. Today's high (so far) is only 3% below the $32 ceiling. It's a breakout, but of the no-confidence variety.
A smart Turtle Trader will break the rules when that $32 level is reached and tighten stop/loss levels until it's clear the the stock won't retrace.
Houston-based Sysco was hit hard by the recession. It serves the dining-out business, with 400,000 clients. When people feel the economy crumble beneath their feat, they stay home and eat cheap. When they grow confident, they start dining out again.
Things are still fairly gloomy in the job market, and that shows in analysts' assessment of Sysco -- they lack confidence in the company, which is another way of saying they have little confidence in consumer confidence, at least for the next earnings-reporting quarter.
The enthusiasm index for SYY is a miserable, negative 60%. If I traded based on analyst opinion (I don't) I would grab my chips and run from SYY as fast as my legs would carry me.
Yet, a closer look shows that Sysco's situation isn't bad at all. It has a return on equity of 25%, and long-term debt, while higher than I like, isn't at crippling levels. It amounts to 59% of equity.
Earnings are where the gloom comes from. The annual figures have been static for three years running. The peak quarter of the year -- the 4th -- declined this year compared to the corresponding quarter in 2011.
Of the last 12 quarters, seven have shown upside surprises, four surprised to the downside, and one was surprise-free.
Institutions own 74% of shares, which can be bought today at bargain-basement prices. It takes only 43 cents in shares to control a dollar in sales.
All in all, it's an interesting set of numbers. Looking at returns and earnings, SYY looks like a growth stock that has fallen on hard times. Looking at the price, it appears to be a value play.
Of course, we're all chart people, yes? We don't care about the financials, just what the chart shows.
SYY on average trades 3.2 million shares a day and supports a moderate selection of option strike prices. Open interest is as much as four figures on some strikes, but it is distributed very narrowly-- the outlying strikes have no open interest at all.
Bid/ask spreads are fairly high, amounting to 33% on the front-month at-the-money calls.
Implied volatility stands at 13%, about the middle of the six-month range. It has been stair-stepping down since late August.
Options are pricing in confidence that 68.2% of trades will fall between $29.93 and $32.21 over the next month, for a potential maximum gain or loss of 4%. This is not a highly volatile stock.
Options are trading actively, at 43% above their five-day volume. Calls lead at 64% above average volume, compared to 10% for puts.
Today's fair-price zone runs from $30.57 and $31, encompassing 68.2% of transactions surrounding the most traded price, $30.84. The stock is trading above the fair-price zone with two hours of trading remaining before the close.
Sysco next publishes earnings on Nov. 7. the stock goes ex-dividend on Oct. 3 for a quarterly payout yielding 3.47% annualized.
Decision for my account: I have no decision to make on this trade. I'm over-committed to bull trades under the Turtle Trading rules. I'll need to close some positions, as stops are hit, before I can trade uptrending stocks again.
If I were trading SYY, I would structure it as January calls at the $30 strike, for 14x leverage. Assuming entry at $31.07, the initial stop/loss would be $30.82 (the entry price minus double the average true range).
Once the price moved above $32, I would narrow the stop to 13 cents below the peak price, running it as a trailing stop as new highs were set. I would switch back to the Turtle Trading stop -- the 10-day low -- once that level came close to the trailing stop.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Tuesday, September 18, 2012
SBUX: Game of Cappuccinos
Starbucks Corp. (SBUX), the company that seemingly holds the ambition to put a coffee shop on every block, and sometimes more than one, has ended a near-term rise that began Aug. 2 at $43.04.
It poked above its 20-day high of $48.62 on Aug. 24, moving into Turtle Trading bull phase, peaked at $52 on Sept. 14 and dropped sharply that day, and on Monday tumbled below its 10-day low of $49.05, ending the Turtle bull phase.
(See my explanation of Turtle Trading here.)
A lot of stocks are retreating from highs this week. A few weeks back, I was dealing with several Turtle bull signals each day. But the Turtle has gone into a quiet slumber. A spot check of high-volume stocks found few that, like SBUX, have moved out of bull phase, but they're moving in that direction.
If SBUX falls below $47.01, then that will produce a Turtle bear signal. I've set an alert.
SBUX has been in a bear trend since April 16, when it hit an all-time high of $62. The August-September rise was within that larger decline, and it failed to exceed even the July high of $54.28. The pattern is low - lower high - ????, the question marks being whether the price will indeed fall below $43.04, setting a lower low and showing a full three-leg pattern for the downtrend.
Analysts have been losing enthusiasm for SBUX over the past three months. The enthusiasm index has fallen from 46% to 31%. Now 31% isn't awful, but a drop of that magnitude is a negative sign amid a large pool of positive sentiment, like the first falling leaves of late summer whispering, "Winter is coming."
When it comes to financials, the Game of Cappuccinos has chops: Return on equity of 27%, and debt standing at only 10% of equity. This is a growth stock by those measures.
Starbucks' annual earnings have been on a steady rise since the 2009 recession low -- growth stock -- and the peak quarter, the 1st, has exceed its prior year's counterpart in 2011 and 2012.
Eleven of the last 12 quarter have shown upside earnings surprises, and one -- the most recent, reported July 26, surprised to the downside by 5.1%.
Institutions own 75% of shares, and despite the decline the price remains high. It takes $2.91 in shares to control a dollar in sales.
SBUX on average trades 7.3 million shares a day and supports a wide selection of option strike prices. Open interest runs in the four- and five-figures near the money, and the bid/ask spread for front-month at-the-money calls is a miniscule 1.3%.
Implied volatility is at 27%, near the low end of the six-month range. It has been stair-stepping lower for much of September, although it did set a slightly higher high on Monday.
Options are pricing in 68.2% confidence that trades will fall between $45.35 and $53.07 over the next month, for a potential maximum gain or loss of 8%.
Options trading is slow, running at 87% of their five-day volume. Calls lead at 104% of volume, compared to 70% for puts.
Today's fair-price zone runs from $49.10 to $49.42, encompassing 68.2% of transactions surrounding the most traded price, $49.26. The stock is trading within the range with 2-1/2 hours to go before the close.
Starbucks next publishes earnings on Nov. 1. It goes ex-dividend in November for a quarterly distribution yielding 1.38% annualized.
Decision for my account: I'm not trading SBUX today but am waiting for the Turtle bear signal. At this point I'm fully committed under my trade sizing rules, so I'll need to have a few positions closed before making the trade, if the break below the 20-day low actually occurs.
Disclaimer
It poked above its 20-day high of $48.62 on Aug. 24, moving into Turtle Trading bull phase, peaked at $52 on Sept. 14 and dropped sharply that day, and on Monday tumbled below its 10-day low of $49.05, ending the Turtle bull phase.
(See my explanation of Turtle Trading here.)
A lot of stocks are retreating from highs this week. A few weeks back, I was dealing with several Turtle bull signals each day. But the Turtle has gone into a quiet slumber. A spot check of high-volume stocks found few that, like SBUX, have moved out of bull phase, but they're moving in that direction.
If SBUX falls below $47.01, then that will produce a Turtle bear signal. I've set an alert.
SBUX has been in a bear trend since April 16, when it hit an all-time high of $62. The August-September rise was within that larger decline, and it failed to exceed even the July high of $54.28. The pattern is low - lower high - ????, the question marks being whether the price will indeed fall below $43.04, setting a lower low and showing a full three-leg pattern for the downtrend.
Analysts have been losing enthusiasm for SBUX over the past three months. The enthusiasm index has fallen from 46% to 31%. Now 31% isn't awful, but a drop of that magnitude is a negative sign amid a large pool of positive sentiment, like the first falling leaves of late summer whispering, "Winter is coming."
When it comes to financials, the Game of Cappuccinos has chops: Return on equity of 27%, and debt standing at only 10% of equity. This is a growth stock by those measures.
Starbucks' annual earnings have been on a steady rise since the 2009 recession low -- growth stock -- and the peak quarter, the 1st, has exceed its prior year's counterpart in 2011 and 2012.
Eleven of the last 12 quarter have shown upside earnings surprises, and one -- the most recent, reported July 26, surprised to the downside by 5.1%.
Institutions own 75% of shares, and despite the decline the price remains high. It takes $2.91 in shares to control a dollar in sales.
SBUX on average trades 7.3 million shares a day and supports a wide selection of option strike prices. Open interest runs in the four- and five-figures near the money, and the bid/ask spread for front-month at-the-money calls is a miniscule 1.3%.
Implied volatility is at 27%, near the low end of the six-month range. It has been stair-stepping lower for much of September, although it did set a slightly higher high on Monday.
Options are pricing in 68.2% confidence that trades will fall between $45.35 and $53.07 over the next month, for a potential maximum gain or loss of 8%.
Options trading is slow, running at 87% of their five-day volume. Calls lead at 104% of volume, compared to 70% for puts.
Today's fair-price zone runs from $49.10 to $49.42, encompassing 68.2% of transactions surrounding the most traded price, $49.26. The stock is trading within the range with 2-1/2 hours to go before the close.
Starbucks next publishes earnings on Nov. 1. It goes ex-dividend in November for a quarterly distribution yielding 1.38% annualized.
Decision for my account: I'm not trading SBUX today but am waiting for the Turtle bear signal. At this point I'm fully committed under my trade sizing rules, so I'll need to have a few positions closed before making the trade, if the break below the 20-day low actually occurs.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Sunday, September 16, 2012
The Week Ahead: Housing, Four Witches
The econ scene this week is tilted toward housing, but frankly, there's no over-arching event to move the markets in a big way.
The conventional wisdom has it that housing will lead the way out of recession. But this time, housing received such a powerful punch to the head that it seems to have knocked the conventional wisdom askew.
The two major housing reports will be released on Wednesday, housing starts at 8:30 a.m. Eastern and existing-home sales at 10 a.m.
A lesser report, the National Association of Home Builders' housing market index is due out Tuesday at 10 a.m.
Friday is a quadruple witching day, meaning that stock index futures, stock index options, stock options and single stock futures all expire. Any trader who hasn't closed September holdings in these instruments had better snap to it.
Leading indicators out this week:
Building permits for new private homes from the housing starts report out Wednesday at 8:30 a.m.
Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
The Conference Board's index of leading indicators, which puts together all of the leading indicators that I track in this section, will be released at 10 a.m. on Thursday.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Monday: Empire State manufacturing survey, from the New York Federal Reserve Bank, at 8:30 a.m.
Tuesday: Treasury's International capital report at 9 a.m., tracking the ebbs and flows of foreign money into and out of the U.S. economy.
Wednesday: Petroleum inventories at 10:30 a.m.
Thursday: The Philadelphia Fed survey of economic conditions in the mid-Atlantic region, at 10 a.m.
Fedsters
... are swarming like flies at a September picnic. Looking only at Federal Open Market Committee Fedsters:
Tuesday: New York Fed Vice-Chairman William Dudley, an FOMC member, and Chicago Fed Pres. Charles Evans, an alternate.
Wednesday: Kansas City Fed Pres. Esther George, an alternate.
Thursday: Atlanta Fed Pres. Dennis Lockhart, a member, and Boston Fed Pres. Eric Rosengren, an alternate.
Friday: Lockhart speaks again. Busy guy!
Trading calendar
By my rules, as of Monday I can trade October vertical and butterfly spreads, iron condors and the short legs of calendar and diagonal spreads, as well as December single options and straddles. Of course, shares are good at any time.
Good trading!
The conventional wisdom has it that housing will lead the way out of recession. But this time, housing received such a powerful punch to the head that it seems to have knocked the conventional wisdom askew.
The two major housing reports will be released on Wednesday, housing starts at 8:30 a.m. Eastern and existing-home sales at 10 a.m.
A lesser report, the National Association of Home Builders' housing market index is due out Tuesday at 10 a.m.
Friday is a quadruple witching day, meaning that stock index futures, stock index options, stock options and single stock futures all expire. Any trader who hasn't closed September holdings in these instruments had better snap to it.
Leading indicators out this week:
Building permits for new private homes from the housing starts report out Wednesday at 8:30 a.m.
Average weekly initial jobless claims will be reported at 8:30 a.m. Thursday.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
The Conference Board's index of leading indicators, which puts together all of the leading indicators that I track in this section, will be released at 10 a.m. on Thursday.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Monday: Empire State manufacturing survey, from the New York Federal Reserve Bank, at 8:30 a.m.
Tuesday: Treasury's International capital report at 9 a.m., tracking the ebbs and flows of foreign money into and out of the U.S. economy.
Wednesday: Petroleum inventories at 10:30 a.m.
Thursday: The Philadelphia Fed survey of economic conditions in the mid-Atlantic region, at 10 a.m.
Fedsters
... are swarming like flies at a September picnic. Looking only at Federal Open Market Committee Fedsters:
Tuesday: New York Fed Vice-Chairman William Dudley, an FOMC member, and Chicago Fed Pres. Charles Evans, an alternate.
Wednesday: Kansas City Fed Pres. Esther George, an alternate.
Thursday: Atlanta Fed Pres. Dennis Lockhart, a member, and Boston Fed Pres. Eric Rosengren, an alternate.
Friday: Lockhart speaks again. Busy guy!
Trading calendar
By my rules, as of Monday I can trade October vertical and butterfly spreads, iron condors and the short legs of calendar and diagonal spreads, as well as December single options and straddles. Of course, shares are good at any time.
Good trading!
Friday, September 14, 2012
AAPL: Keep the rabbits coming
This is roll 'em over day for my diagonal spreads and covered calls, the day when I close out the September call options I sold in preparation for new sales of October options.
(Read a description of my diagonal spread and covered call strategy here.)
Roll 'em over day also provides a chance to switch strategies.
Apple Inc. (AAPL) is a case in point.
I've been selling calls against AAPL in a diagonal spread strategy. A Turtle Trading signal on Thursday has given me motivation to switch to a straight bull play.
Turtle Trading is the other side of my strategy mix. Where diagonal spreads and covered calls have a limited profit no matter how high the stock rises, directional trades under the Turtle strategy have unlimited potential for profit.
(See a discussion of the Turtle Trading rules here.)
As the world knows, AAPL has been on a big rise since early 2009, when it hit a swing low of $78.20. It's most recent leg up began in mid-May from $522.18.
No rise is uninterrupted, of course, and the Turtle Trading rules provide scope for opening a position in a stock that is in the midst of a long-term trend. It would have been nice had I loaded up on AAPL in January 2009. But I didn't, so what do I do today?
The Turtle rules say that a bull position is closed when the price breaks the 10-day low, as AAPL did on Tuesday, when it broke below $657.25.
The stock then rose, sharply, breaking through the 55-day high of $683.29 on Thursday and then pushing ahead today to a high of $695.86.
By the Turtle rules, Thursday's breakout was a buying signal, and so I have closed the short half of my AAPL diagonal spread, but I retain a bullish position in AAPL in the form of a long spread.
The point I'm making is that although I'm running multiple strategies, a position can easily be morphed from one into the other. If AAPL should again fall below it's 10-day low, I can salvage some profit by selling calls against the long calls I own, flipping the AAPL play back to a diagonal spread.
By traditional analysis, AAPL has been in blue-sky territory since 2009. There is no upside resistance. So for the trader, it's merely a question of picking a reasonable entry point. The Turtle bull signal provides that reasonable entry point.
By the numbers:
Analysts love AAPL. I mean, swooning, head-over-heels love, with an enthusiasm index of 85%.
Which is understandable, with a return on equity of 42% and no long-term debt.
With annual earnings per share that more than doubled from 2009 to 2010, and then nearly doubled again in 2011.
With estimates for 2012 running at nearly 60% above 2011.
What's not to like is the pattern of the quarterly earnings in 2012. They peaked mightily in the 1st quarter, and then fell sharply in Q2 and again in Q3. The 3rd quarter was one of two downside earnings surprises in the past dozen quarters.
Apple's business model, like those of all computer hardware makers, depends upon coming up with cool products that inspire customers to abandon what they own and to dig deep to buy the new stuff.
Apple's problem is this: It has to keep pulling rabbits out of the hat, each fluffier and cuter than the one before. At some point, presumably, Apple will run out of rabbits. What that will do to the stock price is terrifying to contemplate, given the fact that for many investors, AAPL has been the magic profit engine of their portfolios.
Institutions own 64% of AAPL shares, and the stock is expensive -- it takes $4.30 in shares to control a dollar in sales.
So, Memo to Apple: Keep the rabbits coming.
AAPL on average trades 16.6 million shares a day and has one of the broadest and most complete option strike price grids of any stock.Open interest routinely stands in the four- and five-figures, and the front-month at-the-money bid/ask spread is a ridiculous 0.67%.
Implied volatility stands at 25%, in the lower half of the six-month range. It has fallen sharply this week after a sideways period in early September.
Options are pricing in confidence that 68.2% of trades will fall between $645.24 and $745.66 in the next month, for a potential gain or loss of 7%.
Options are trading very actively, at 269% of the five-day average volume. Calls and puts are equally active, at 268% and 269%, respectively.
Today's fair-price zone, 4-1/2 hours before the close, runs from $685 to $693.81, encompassing 68.2% of trades surrounding the most-traded price, $687.01. The stock is trading above the fair-price zone.
Apple, whose new iPhone 5 starts shipping on Sept. 21, next publishes earnings on Oct. 15. The stock goes ex-dividend in November for a quarterly payout yielding 1.53% annualized.
Decision for my account: As noted above, I'm long AAPL under Turtle Trading rules. The position is structured as long calls with a strike of $640, expiring in December, with 7x leverage.
Disclaimer
(Read a description of my diagonal spread and covered call strategy here.)
Roll 'em over day also provides a chance to switch strategies.
Apple Inc. (AAPL) is a case in point.
I've been selling calls against AAPL in a diagonal spread strategy. A Turtle Trading signal on Thursday has given me motivation to switch to a straight bull play.
Turtle Trading is the other side of my strategy mix. Where diagonal spreads and covered calls have a limited profit no matter how high the stock rises, directional trades under the Turtle strategy have unlimited potential for profit.
(See a discussion of the Turtle Trading rules here.)
As the world knows, AAPL has been on a big rise since early 2009, when it hit a swing low of $78.20. It's most recent leg up began in mid-May from $522.18.
No rise is uninterrupted, of course, and the Turtle Trading rules provide scope for opening a position in a stock that is in the midst of a long-term trend. It would have been nice had I loaded up on AAPL in January 2009. But I didn't, so what do I do today?
The Turtle rules say that a bull position is closed when the price breaks the 10-day low, as AAPL did on Tuesday, when it broke below $657.25.
The stock then rose, sharply, breaking through the 55-day high of $683.29 on Thursday and then pushing ahead today to a high of $695.86.
By the Turtle rules, Thursday's breakout was a buying signal, and so I have closed the short half of my AAPL diagonal spread, but I retain a bullish position in AAPL in the form of a long spread.
The point I'm making is that although I'm running multiple strategies, a position can easily be morphed from one into the other. If AAPL should again fall below it's 10-day low, I can salvage some profit by selling calls against the long calls I own, flipping the AAPL play back to a diagonal spread.
By traditional analysis, AAPL has been in blue-sky territory since 2009. There is no upside resistance. So for the trader, it's merely a question of picking a reasonable entry point. The Turtle bull signal provides that reasonable entry point.
By the numbers:
Analysts love AAPL. I mean, swooning, head-over-heels love, with an enthusiasm index of 85%.
Which is understandable, with a return on equity of 42% and no long-term debt.
With annual earnings per share that more than doubled from 2009 to 2010, and then nearly doubled again in 2011.
With estimates for 2012 running at nearly 60% above 2011.
What's not to like is the pattern of the quarterly earnings in 2012. They peaked mightily in the 1st quarter, and then fell sharply in Q2 and again in Q3. The 3rd quarter was one of two downside earnings surprises in the past dozen quarters.
Apple's business model, like those of all computer hardware makers, depends upon coming up with cool products that inspire customers to abandon what they own and to dig deep to buy the new stuff.
Apple's problem is this: It has to keep pulling rabbits out of the hat, each fluffier and cuter than the one before. At some point, presumably, Apple will run out of rabbits. What that will do to the stock price is terrifying to contemplate, given the fact that for many investors, AAPL has been the magic profit engine of their portfolios.
Institutions own 64% of AAPL shares, and the stock is expensive -- it takes $4.30 in shares to control a dollar in sales.
So, Memo to Apple: Keep the rabbits coming.
AAPL on average trades 16.6 million shares a day and has one of the broadest and most complete option strike price grids of any stock.Open interest routinely stands in the four- and five-figures, and the front-month at-the-money bid/ask spread is a ridiculous 0.67%.
Implied volatility stands at 25%, in the lower half of the six-month range. It has fallen sharply this week after a sideways period in early September.
Options are pricing in confidence that 68.2% of trades will fall between $645.24 and $745.66 in the next month, for a potential gain or loss of 7%.
Options are trading very actively, at 269% of the five-day average volume. Calls and puts are equally active, at 268% and 269%, respectively.
Today's fair-price zone, 4-1/2 hours before the close, runs from $685 to $693.81, encompassing 68.2% of trades surrounding the most-traded price, $687.01. The stock is trading above the fair-price zone.
Apple, whose new iPhone 5 starts shipping on Sept. 21, next publishes earnings on Oct. 15. The stock goes ex-dividend in November for a quarterly payout yielding 1.53% annualized.
Decision for my account: As noted above, I'm long AAPL under Turtle Trading rules. The position is structured as long calls with a strike of $640, expiring in December, with 7x leverage.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Wednesday, September 12, 2012
FB: Chart Talk
OK. Time to look again at everyone's favorite bad boy, Facebook Inc. (FB), in light of Tuesday's TechCrunch interview with CEO Mark Zuckerberg. (See the highlights here.)
Zuckerberg said all the right things -- I think the words "long term opportunities" escaped his lips -- and the stock price responded the way I would expect with an issue widely held by traders who focus on news, image and narrative rather than hard numbers: With a 6.8% opening gap.
That broke free of a sideways trend, and perhaps more significantly, brought the price above its 10-day high, signalling an end to a bear phase from July 16 under the trend-following Turtle Trading rules (read about them here).
Actually, the bear phase ended Monday as the price peaked above the 10-day high at the time, $19.53. So Turtle Traders who were paying attention would have closed their bear positions on that day, before the upside gap.
Since they would opened their ber positions at $20.35, the position would have provided a 4.2% gain, not too shabby for a few months work. Given the typical leverage that options provide, I would have expected a gain in excess of 30%.
A break above the 20-day high, now at $21.60, or 44 cents above today's high so far, would signal the start of a bull phase under the Turtle rules.
The broad chart of FB's movements is a sad tale known by all -- A high amid high hopes of $45 on IPO day last May; steady decline to $25.52 by early June; a recovery up to $33 plus change by late June; and then a slow pull back to $26.85 on July 26, the day before the bottom fell out with the first earnings release.
Since late August, FB has traded in a narrow sideways range with a $19.75 ceiling and a $18.95 floor, but then fell again, hitting an all-time low of $17.55 on Sept. 4.
Today's breakout would signal a trade in my opinion under traditional chart analysis, but there is significant resistance at $22.45, and the cautious trader will wait until that level is breached before opening a position.
Disclaimer
Zuckerberg said all the right things -- I think the words "long term opportunities" escaped his lips -- and the stock price responded the way I would expect with an issue widely held by traders who focus on news, image and narrative rather than hard numbers: With a 6.8% opening gap.
That broke free of a sideways trend, and perhaps more significantly, brought the price above its 10-day high, signalling an end to a bear phase from July 16 under the trend-following Turtle Trading rules (read about them here).
Actually, the bear phase ended Monday as the price peaked above the 10-day high at the time, $19.53. So Turtle Traders who were paying attention would have closed their bear positions on that day, before the upside gap.
Since they would opened their ber positions at $20.35, the position would have provided a 4.2% gain, not too shabby for a few months work. Given the typical leverage that options provide, I would have expected a gain in excess of 30%.
A break above the 20-day high, now at $21.60, or 44 cents above today's high so far, would signal the start of a bull phase under the Turtle rules.
The broad chart of FB's movements is a sad tale known by all -- A high amid high hopes of $45 on IPO day last May; steady decline to $25.52 by early June; a recovery up to $33 plus change by late June; and then a slow pull back to $26.85 on July 26, the day before the bottom fell out with the first earnings release.
Since late August, FB has traded in a narrow sideways range with a $19.75 ceiling and a $18.95 floor, but then fell again, hitting an all-time low of $17.55 on Sept. 4.
Today's breakout would signal a trade in my opinion under traditional chart analysis, but there is significant resistance at $22.45, and the cautious trader will wait until that level is breached before opening a position.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Tuesday, September 11, 2012
CORN: Bearish on food
A household economy is composed of a tripod: Food, energy and housing.
The largest one, housing, is fairly inelastic for most people -- it's a stable expense that takes money to change.
Energy is less than a third of what it was four years ago. It's an issue, but not much.
These days, the volatile leg of the tripod is food, whose cost is way up from where it was at this time last year.
My favorite vehicle for tracking food (and also one of my favorite ticker symbols) is CORN, the Teucrium Corn Fund, a commodity pool that tracks corn futures. It is traded on the New York Stock Exchange like an exchange-traded fund.
CORN today broke below its 20-day low, triggering a bear signal under the Turtle Trading rules. (Click here for a description of how Turtle Trading works.)
The commodity on June 11 began a rise from $35.63 (the CORN price at the opening that day), and it peaked on Aug. 21 at $52.71, a gain of 47.9%.
Today's breakout below $50.15, the low set on Aug. 14, is the first bearish sign in months.
Now, under Turtle rules, this breakout makes it mandatory to open a bearish position.
Traditional support and resistance, analysis, however, makes it much less clear. The price reversed on Aug. 14 from a low of $50.15, on Aug. 1 from a low of $49.60, and on July 24 from a low of $49.28.
The price has traded above $50 every day since July 25. So the bear signal level is part of a persistent support complex, and the piercing of $50.15 by no means signals a rout to the downside.
In fact, July 24 seems to me to be the key date. The price on that day opened at $48.86, and then made a steep run to the downside, hitting a low of $47.10. It then retreated to close at $49.21.
A run to $47.10 again would certainly be a bearish sign, as would a close below the close of that day, $49.21.
Generalizing it, let's say the support and resistance argue for a bear position below $49 or so.
CORN is fairly illiquid -- it trades 103,000 shares a day on average. Yet it has an excellent selection of option strike prices with open interest in three- and four-figures near the money. The front-month at-the-money bid/ask spread is broad, at 14%.
Implied volatility is running at 29%, in the lower half of the six-month range, and has been trending sideways since late August.
Options are pricing in confidence that 68.2% of trades will fall between $46 and $54.48 over the next month, for a gain or loss of 8%.
Options trading is a bit stagnant at this point, with volume running at 75% of the five-day average. Puts lead at 81% of average, compared to 65% for calls.
Today's fair-price zone, two hours or so before the close, runs from $50.02 to $40.47 and encompasses 68.2% of trades surrounding the most-traded prices, $50.23 and $50.24. The price now (1:41 p.m. Eastern) is right that the most-traded level.
Decision for my account: CORN is part of my pool for Turtle Trading, so I opened a bearish position, structuring it as puts expiring in February, with 4x leverage.
Disclaimer
The largest one, housing, is fairly inelastic for most people -- it's a stable expense that takes money to change.
Energy is less than a third of what it was four years ago. It's an issue, but not much.
These days, the volatile leg of the tripod is food, whose cost is way up from where it was at this time last year.
My favorite vehicle for tracking food (and also one of my favorite ticker symbols) is CORN, the Teucrium Corn Fund, a commodity pool that tracks corn futures. It is traded on the New York Stock Exchange like an exchange-traded fund.
CORN today broke below its 20-day low, triggering a bear signal under the Turtle Trading rules. (Click here for a description of how Turtle Trading works.)
The commodity on June 11 began a rise from $35.63 (the CORN price at the opening that day), and it peaked on Aug. 21 at $52.71, a gain of 47.9%.
Today's breakout below $50.15, the low set on Aug. 14, is the first bearish sign in months.
Now, under Turtle rules, this breakout makes it mandatory to open a bearish position.
Traditional support and resistance, analysis, however, makes it much less clear. The price reversed on Aug. 14 from a low of $50.15, on Aug. 1 from a low of $49.60, and on July 24 from a low of $49.28.
The price has traded above $50 every day since July 25. So the bear signal level is part of a persistent support complex, and the piercing of $50.15 by no means signals a rout to the downside.
In fact, July 24 seems to me to be the key date. The price on that day opened at $48.86, and then made a steep run to the downside, hitting a low of $47.10. It then retreated to close at $49.21.
A run to $47.10 again would certainly be a bearish sign, as would a close below the close of that day, $49.21.
Generalizing it, let's say the support and resistance argue for a bear position below $49 or so.
CORN is fairly illiquid -- it trades 103,000 shares a day on average. Yet it has an excellent selection of option strike prices with open interest in three- and four-figures near the money. The front-month at-the-money bid/ask spread is broad, at 14%.
Implied volatility is running at 29%, in the lower half of the six-month range, and has been trending sideways since late August.
Options are pricing in confidence that 68.2% of trades will fall between $46 and $54.48 over the next month, for a gain or loss of 8%.
Options trading is a bit stagnant at this point, with volume running at 75% of the five-day average. Puts lead at 81% of average, compared to 65% for calls.
Today's fair-price zone, two hours or so before the close, runs from $50.02 to $40.47 and encompasses 68.2% of trades surrounding the most-traded prices, $50.23 and $50.24. The price now (1:41 p.m. Eastern) is right that the most-traded level.
Decision for my account: CORN is part of my pool for Turtle Trading, so I opened a bearish position, structuring it as puts expiring in February, with 4x leverage.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Monday, September 10, 2012
WFC: Ongoing head fake
The banking giant Wells Fargo Co. (WFC) is an ongoing head fake. It broke above its 20-day high of $32.45 on June 15, rose at a shallow pace until Aug. 1, and then tripped below the sell point, going for $32.95.
I guess a 1.5% profit isn't something to sneer about, but honestly, I'd like something more for six-week's work.
Last Thursday WFC again broke above its 20-day high, $34.76, and immediately pierced the 55-day high, $34.80, on a powerful upward push stretching 2.9%. And as of this writing, about three hours before the close, $34.80 is precisely where it stands, having gone no where since its spectacular move.
The breakouts in June and last week each triggered buy signals under the trend-following Turtle Trading method, which you can read about here. And each illustrates a weakness of trend following: Often the signal to act on a trend follows the end of the trend, or at least the bulk of the trend's course.
Trend followers freely admit that their methods rules in many losses -- that's why they have strictly defined stop/loss rules. But, they add, the successful trades tend to be wildly so, and that makes up for the false positives.
Wells Fargo is as a regional bank, but I don't buy that. Headquartered in San Francisco, California, it is a multinational behemouth, the second largest U.S. bank in terms of deposits and the 23rd largest company in the country.
Very large, market dominating companies tend toward stability, not only on their balance sheets but on their stock charts as well. WFC has traded between $32.40 and $34.60 since March, with one major breakdown.
Post-recession, it has hit three peaks -- $34.25 in April 2010 and February 2011, and $34.59 in March 2012. Friday's high of $35.19 marked a new peak.
Whatever the signals, WFC is a stock that's going nowhere fast. Which seems odd, given the volume of its cheering squad. Analyst enthusiasm is running at 56%, unchanged for the past two months.
Annual earnings have risen for three straight years since the 2008 recession hit. Quarterly earnings have shown a steady increase since the 1st quarter of 2010. Out of the last 12 quarters, 10 have shown upside earnings surprises, and only two have surprised to the downside. All have made money.
The company reports return on equity of 13%, with long-term debt at 91% of equity. Banks tend to be debt heavy, so that's not a concern for me.
Institutions own 76% of shares, and the price has been bid up so that it takes $2.22 in shares to control a dollar in sales.
These are good figures. It's not Google or Apple, but its growing and good. I can only guess that outside factors -- fear of stimulative inflation and euro-fright -- underlie the failure of the stock to establish a clear uptrend.
WFC on average trades 18.8 million shares a day, making it one of the most liquid stocks listed on the U.S. exchanges. It has an adequate selection of option strike prices, with open interest up into the five figures and very narrow bid/ask spreads, running 1% for the front-month at-the-money calls.
Implied volatiity, at 23% is about a third of the way above the low in the six-month range. It rose from early August but then stumbled in early September. Options are pricing in confidence that 68.2% of trades will fall between $32.52 and $37.22, for a gain or loss of 7%.
This is not a lot of volatility. Arguably, WFC lends itself less to trend following and more to strategies that profit from the passage of time, such as short option spreads.
Option traders are active. The volume is running 62% above its five-day average, with calls leading at 73% above average, vs. 50% above for puts.
The fair-price zone runs from $34.72 to $34.85, encompassing 68.2% of transactions surround the most-traded price, $34.83. The stock price has been toying with the upper end of the range for much of the day.
Wells Fargo next publishes earnings on Oct. 12. The stock goes ex-dividend in November for a quarterly payout yielding 2.52% annualized.
Decision for my account: WFC was in my Turtle Trading equities pool, so I opened the position on Thursday when I got the signal. If I were coming to it late, today, I would still open a position. The price is at the breakout point and hasn't moved far above for dropped below.
Using traditional trend analysis, I would want to see a couple of day's rise above Friday's high of $35.19 -- the establishment of a clear trend -- before opening a position.
Disclaimer
I guess a 1.5% profit isn't something to sneer about, but honestly, I'd like something more for six-week's work.
Last Thursday WFC again broke above its 20-day high, $34.76, and immediately pierced the 55-day high, $34.80, on a powerful upward push stretching 2.9%. And as of this writing, about three hours before the close, $34.80 is precisely where it stands, having gone no where since its spectacular move.
The breakouts in June and last week each triggered buy signals under the trend-following Turtle Trading method, which you can read about here. And each illustrates a weakness of trend following: Often the signal to act on a trend follows the end of the trend, or at least the bulk of the trend's course.
Trend followers freely admit that their methods rules in many losses -- that's why they have strictly defined stop/loss rules. But, they add, the successful trades tend to be wildly so, and that makes up for the false positives.
Wells Fargo is as a regional bank, but I don't buy that. Headquartered in San Francisco, California, it is a multinational behemouth, the second largest U.S. bank in terms of deposits and the 23rd largest company in the country.
Very large, market dominating companies tend toward stability, not only on their balance sheets but on their stock charts as well. WFC has traded between $32.40 and $34.60 since March, with one major breakdown.
Post-recession, it has hit three peaks -- $34.25 in April 2010 and February 2011, and $34.59 in March 2012. Friday's high of $35.19 marked a new peak.
Whatever the signals, WFC is a stock that's going nowhere fast. Which seems odd, given the volume of its cheering squad. Analyst enthusiasm is running at 56%, unchanged for the past two months.
Annual earnings have risen for three straight years since the 2008 recession hit. Quarterly earnings have shown a steady increase since the 1st quarter of 2010. Out of the last 12 quarters, 10 have shown upside earnings surprises, and only two have surprised to the downside. All have made money.
The company reports return on equity of 13%, with long-term debt at 91% of equity. Banks tend to be debt heavy, so that's not a concern for me.
Institutions own 76% of shares, and the price has been bid up so that it takes $2.22 in shares to control a dollar in sales.
These are good figures. It's not Google or Apple, but its growing and good. I can only guess that outside factors -- fear of stimulative inflation and euro-fright -- underlie the failure of the stock to establish a clear uptrend.
WFC on average trades 18.8 million shares a day, making it one of the most liquid stocks listed on the U.S. exchanges. It has an adequate selection of option strike prices, with open interest up into the five figures and very narrow bid/ask spreads, running 1% for the front-month at-the-money calls.
Implied volatiity, at 23% is about a third of the way above the low in the six-month range. It rose from early August but then stumbled in early September. Options are pricing in confidence that 68.2% of trades will fall between $32.52 and $37.22, for a gain or loss of 7%.
This is not a lot of volatility. Arguably, WFC lends itself less to trend following and more to strategies that profit from the passage of time, such as short option spreads.
Option traders are active. The volume is running 62% above its five-day average, with calls leading at 73% above average, vs. 50% above for puts.
The fair-price zone runs from $34.72 to $34.85, encompassing 68.2% of transactions surround the most-traded price, $34.83. The stock price has been toying with the upper end of the range for much of the day.
Wells Fargo next publishes earnings on Oct. 12. The stock goes ex-dividend in November for a quarterly payout yielding 2.52% annualized.
Decision for my account: WFC was in my Turtle Trading equities pool, so I opened the position on Thursday when I got the signal. If I were coming to it late, today, I would still open a position. The price is at the breakout point and hasn't moved far above for dropped below.
Using traditional trend analysis, I would want to see a couple of day's rise above Friday's high of $35.19 -- the establishment of a clear trend -- before opening a position.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Sunday, September 9, 2012
The Week Ahead: Inflation Meme
Economics is politics these days. Last week was the employment report, so the meme of the week was the administration's failures (successes) in creating jobs.
This week we get the consumer price report, so the meme will be the threat (improbability) of inflation because of the administration's recklessly inflationary (responsibly stimulative) policies.
The CPI will be published Friday at 8:30 a.m. Eastern, concurrently with retail sales and shortly before industrial production at 9:15 a.m.
Friday is a big day -- not only for the econ reports but also because late in the day option traders typically will begin to unwind positions that expire Saturday, Sept. 22.
Consumer inflation will get a sneak preview with the producer price index out Thursday at 8:30 a.m.
Playing into the inflation/stimulus meme, the Federal Reserve's Open Market Committee meets Wednesday and Thursday, announcing results at 12:30 p.m. Thursday, followed by committee member forecasts at 2 p.m. and Chairman Bernanke's news conference at 2:15 p.m.
Leading indicators out this week:
Average weekly initial jobless claims will be reported at 8:30 a.m. and the index of consumer expectations from the University of Michigan consumer sentiment report at 9:55 a.m., both on Thursday.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Tuesday: International trade at 8:30 a.m.
Wednesday: Import and export prices at 8:30 a.m.; petroleum inventories at 10:30 a.m.
Fedsters
In addition to the FOMC announcement, Federal Reserve Gov. Sarah Bloom Raskin, a member of the monetary policy committee, will give a speech at 1:45 p.m. Thursday.
This is unusual. Normally, Fedsters are on silent running in FOMC announcement weeks. But Gov. Raskin is breaking with custom to discuss links between civic engagement and employment.
And Atlanta Fed Pres. Dennis Lockhart, also an FOMC member, speaks Friday at 1 p.m. about employment and the recession.
Trading calendar
By my rules, as of Monday I can trade October vertical and butterfly spreads, iron condors and the short legs of calendar and diagonal spreads, as well as December single options and straddles. Of course, shares are good at any time.
Good trading!
This week we get the consumer price report, so the meme will be the threat (improbability) of inflation because of the administration's recklessly inflationary (responsibly stimulative) policies.
The CPI will be published Friday at 8:30 a.m. Eastern, concurrently with retail sales and shortly before industrial production at 9:15 a.m.
Friday is a big day -- not only for the econ reports but also because late in the day option traders typically will begin to unwind positions that expire Saturday, Sept. 22.
Consumer inflation will get a sneak preview with the producer price index out Thursday at 8:30 a.m.
Playing into the inflation/stimulus meme, the Federal Reserve's Open Market Committee meets Wednesday and Thursday, announcing results at 12:30 p.m. Thursday, followed by committee member forecasts at 2 p.m. and Chairman Bernanke's news conference at 2:15 p.m.
Leading indicators out this week:
Average weekly initial jobless claims will be reported at 8:30 a.m. and the index of consumer expectations from the University of Michigan consumer sentiment report at 9:55 a.m., both on Thursday.
Traders also keep track of these financial leading indicators: The M2 money supply, out Thursday at 4:30 p.m. from the Federal Reserve, and two reported continually during market hours: The S&P 500 index and the interest rate spread between 10-year Treasuries and the federal funds rate.
I also like to keep an eye on the Baltic dry index of world shipping, updated daily.
Other reports of interest:
Tuesday: International trade at 8:30 a.m.
Wednesday: Import and export prices at 8:30 a.m.; petroleum inventories at 10:30 a.m.
Fedsters
In addition to the FOMC announcement, Federal Reserve Gov. Sarah Bloom Raskin, a member of the monetary policy committee, will give a speech at 1:45 p.m. Thursday.
This is unusual. Normally, Fedsters are on silent running in FOMC announcement weeks. But Gov. Raskin is breaking with custom to discuss links between civic engagement and employment.
And Atlanta Fed Pres. Dennis Lockhart, also an FOMC member, speaks Friday at 1 p.m. about employment and the recession.
Trading calendar
By my rules, as of Monday I can trade October vertical and butterfly spreads, iron condors and the short legs of calendar and diagonal spreads, as well as December single options and straddles. Of course, shares are good at any time.
Good trading!
Friday, September 7, 2012
The Contract Business
Regular readers of Private Trader will know that it focuses on the fun stuff: Directional trades that can in weeks win a glorious fortune or toss a trader into the pit of despair.
Whether it's traditional trend analysis, as outlined in my essay "10,000 Charts", or the stricter Turtle Trading, as described in my essay titled, appropriately, "Turtle Trading", these positions require constant care, record keeping, updating stop losses, blood, tears, toil and sweat, along with much joy and laughter.
I love them!
In truth, though, I keep the bulk of my funds in positions that are far more staid, boring even. They have their risks, as any profit-seeking position does. But they require very little care once entered -- I deal with them once a month.
These laid back positions are covered calls and their cousins, diagonal spreads. Trend trades are bets on the direction stocks will take. But diagonals and covered calls are a different game entirely. They are the business of writing contracts.
It works like this.
Stock options are contracts. A call option is a contract to buy shares of stock at a specified price. If I buy a call, I'm paying a premium, as in an insurance premium, for the right to purchase stock at the call's strike price. If I sell a call, then I'm promising to sell you the stock on demand at the strike price.
It is directly analogous to the insurance business, buying and selling policies. An excellent book, The Option Trader's Hedge Fund, discusses this way of looking at options.
I will say, in fact, that I found it impossible to truly understand the options game until I began to think of these derivatives in terms of insurance.
When I set up diagonal spreads and covered calls by selling call options, then, I am acting as an insurance agent. I am writing insurance contracts.
Now any insurance company knows that it will have to pay off on some of its contracts. If I sell a call option, then I'll have to pay off if the stock's price rises above the strike price. If it stays below the strike price, then the contract will expire worthless and I get to keep the premium.
An insurance company must have the assets needed to pay off its contracts. Otherwise, it risks bankruptcy.
So when I sell a call contract, I cover my risk by owning the stock on which the contract was written. If the price rises -- if I have to pay off -- then I simply hand my shares over to the person who bought the call.
Shares can be quite expensive. A cheaper alternative is for me to buy a call option allowing me to buy shares at a reasonable price. If I need to pay off, then I'll exercise my call option and then turn the shares over to whoever owns the call I sold.
Basically, I'm buying insurance that allows me to pay off the insurance I sold. My private comes from the difference between the two premiums.
Two other concepts:
Delta describes how much an option's value changes for each dollar change in the stock's price. A delta of 70 means the option value changes by 70 cents whenever the stock changes by a dollar.
Also, delta is a measure of how far away an option is from the current price. An option whose strike price is the same as a current strike price will have a delta of about 50.
The higher the delta, the more the stock is in-the-money, with a strike price higher than the current price, and the more expensive the premium.
Lower deltas cost less.
Expiration tells when an option expires. Option contracts all have limited lifespans. They eventually cease to exist. The term "front month" refers to options expiring next. Options are designed to expire on the Saturday that follows the third Friday of the month, unless that Friday is a market holiday, in which case the expiration is on the Friday. So the front month is either that date this month, or if it has already occurred, that date next month.
When I sell options, I always sell contracts expiring in the front month, typically when that expiration is about 30 days away.
Calls covered by stocks produce smaller yields -- I aim for 3% or so a month. Diagonal spreads, because of the lower cost of covering, have higher yields. I generally aim for 25% to 30% a month.
To summarize,
There is much more to now about covered calls and diagonals spreads. I recommend any trader looking to use the strategies perform the due diligence of Google searches and some book reading. Amazon has a fine selection of books about covered calls. See the results here
. There are far fewer books on specifically on diagonal spreads, which belongs to a class called "time spreads".
This book....
... is a wonderful encyclopedia of option strategies, including diagonal spreads.
ThinkOrSwim, now a division of TDAmeritrade, has a fine explanation of diagonals, which can be read here.
In any case, I find the business of selling contracts to provide a steady income while allowing me to invest more money without being overwhelmed by the workload. I can handle about 20 active positions at a time. Above that, I start making mistakes.
I turned to covered calls and diagonal spreads because I was dissatisfied with results from high-dividend shares and bonds. I like the risk profile of the contract business better because the higher returns will offset more capital loss.
I touched on the subject in an essay, "Risk Free: A Letter to a Friend".
By higher returns I mean much higher. A really high dividend stock or bond will pay, say, 13% a year, and the stock price will go down each time the stock goes ex-dividend.
A covered call position potentially can yield 30% a year, and a diagonal spread series, 300%, without ex-dividend risk.
There are many other risks, to be sure, but the high reward does much to mitigate them.
Whether it's traditional trend analysis, as outlined in my essay "10,000 Charts", or the stricter Turtle Trading, as described in my essay titled, appropriately, "Turtle Trading", these positions require constant care, record keeping, updating stop losses, blood, tears, toil and sweat, along with much joy and laughter.
I love them!
In truth, though, I keep the bulk of my funds in positions that are far more staid, boring even. They have their risks, as any profit-seeking position does. But they require very little care once entered -- I deal with them once a month.
These laid back positions are covered calls and their cousins, diagonal spreads. Trend trades are bets on the direction stocks will take. But diagonals and covered calls are a different game entirely. They are the business of writing contracts.
It works like this.
Stock options are contracts. A call option is a contract to buy shares of stock at a specified price. If I buy a call, I'm paying a premium, as in an insurance premium, for the right to purchase stock at the call's strike price. If I sell a call, then I'm promising to sell you the stock on demand at the strike price.
It is directly analogous to the insurance business, buying and selling policies. An excellent book, The Option Trader's Hedge Fund, discusses this way of looking at options.
I will say, in fact, that I found it impossible to truly understand the options game until I began to think of these derivatives in terms of insurance.
When I set up diagonal spreads and covered calls by selling call options, then, I am acting as an insurance agent. I am writing insurance contracts.
Now any insurance company knows that it will have to pay off on some of its contracts. If I sell a call option, then I'll have to pay off if the stock's price rises above the strike price. If it stays below the strike price, then the contract will expire worthless and I get to keep the premium.
An insurance company must have the assets needed to pay off its contracts. Otherwise, it risks bankruptcy.
So when I sell a call contract, I cover my risk by owning the stock on which the contract was written. If the price rises -- if I have to pay off -- then I simply hand my shares over to the person who bought the call.
Shares can be quite expensive. A cheaper alternative is for me to buy a call option allowing me to buy shares at a reasonable price. If I need to pay off, then I'll exercise my call option and then turn the shares over to whoever owns the call I sold.
Basically, I'm buying insurance that allows me to pay off the insurance I sold. My private comes from the difference between the two premiums.
Two other concepts:
Delta describes how much an option's value changes for each dollar change in the stock's price. A delta of 70 means the option value changes by 70 cents whenever the stock changes by a dollar.
Also, delta is a measure of how far away an option is from the current price. An option whose strike price is the same as a current strike price will have a delta of about 50.
The higher the delta, the more the stock is in-the-money, with a strike price higher than the current price, and the more expensive the premium.
Lower deltas cost less.
Expiration tells when an option expires. Option contracts all have limited lifespans. They eventually cease to exist. The term "front month" refers to options expiring next. Options are designed to expire on the Saturday that follows the third Friday of the month, unless that Friday is a market holiday, in which case the expiration is on the Friday. So the front month is either that date this month, or if it has already occurred, that date next month.
When I sell options, I always sell contracts expiring in the front month, typically when that expiration is about 30 days away.
Calls covered by stocks produce smaller yields -- I aim for 3% or so a month. Diagonal spreads, because of the lower cost of covering, have higher yields. I generally aim for 25% to 30% a month.
To summarize,
- Covered call
- Buy 100 shares.
- Sell a front-month call option with a delta between 30 and 40.
- Continue selling each month until the option is exercised, in which case you turn the stock over.
- Diagonal spread
- Buy a call option that doesn't expire for three or four months and that has a delta close to 70.
- Sell a front-month call option with a delta between 30 and 40.
- Continue selling each month until the option is exercised, in which case you in turn exercise your delta 70 option and turn over the resulting stock.
The main risk is that the price of the stock falls so low that it doesn't pay to sell contracts against shares or calls that I own. Most recently, that has happened to be with Facebook (FB). If I'm covering the calls I sell by owning shares, then I can wait out the slump. If I've covered using call contracts (diagonal spread), then I face a deadline when the calls I own expire.
The process of closing out a contract I've sold and selling a new one is calling "rolling". I roll the calls I sell near the close on the Friday prior to expiration week. Currently, for example, my sold calls all expire on Sept. 22, their last trading day is Sept. 21, and I'm rolling them over for October calls next Friday, Sept. 14.
I treat covered calls and diagonal spreads as time-based positions. I don't set a stop/loss. I don't close out midway through a contract period. I play it by the calendar and take my profits and losses as they come.
Finally, because of the conservative nature of covered calls and diagonal spreads, I am willing to hold larger positions.
For trend and Turtle Trading positions, I make each position 1% of my trading funds, and then adjust for volatility.
For covered calls and diagonal spreads, I make each position 4% or 5% of trading funds.
. There are far fewer books on specifically on diagonal spreads, which belongs to a class called "time spreads".This book....
... is a wonderful encyclopedia of option strategies, including diagonal spreads.
ThinkOrSwim, now a division of TDAmeritrade, has a fine explanation of diagonals, which can be read here.
In any case, I find the business of selling contracts to provide a steady income while allowing me to invest more money without being overwhelmed by the workload. I can handle about 20 active positions at a time. Above that, I start making mistakes.
I turned to covered calls and diagonal spreads because I was dissatisfied with results from high-dividend shares and bonds. I like the risk profile of the contract business better because the higher returns will offset more capital loss.
I touched on the subject in an essay, "Risk Free: A Letter to a Friend".
By higher returns I mean much higher. A really high dividend stock or bond will pay, say, 13% a year, and the stock price will go down each time the stock goes ex-dividend.
A covered call position potentially can yield 30% a year, and a diagonal spread series, 300%, without ex-dividend risk.
There are many other risks, to be sure, but the high reward does much to mitigate them.
Thursday, September 6, 2012
VMED: Bullish breakout
Virgin Media Inc. (VMED), the giant British communications/entertainment company, broke sharply above its highest price of the past 55 days. The company announced that the Samsung Galaxy smart phones were becoming available on Virgin Mobile USA.
The break above $28.19 broke free of a sideways trend that has held sway since July 27.
The breakout produced a Turtle Trading bull signal, as well as one under the traditional trend analysis. The sideways trend generally ran from $28 down to $26.80. The price today so far has peaked at $29. A persistent retreat below $28 would negate the traditional trend analysis breakout. The Turtle Trading exit is presently at $26.82. (My explanation of the Turtle Trading rules can be found here.)
Although operating mainly in the U.K., Virgin Media is headquartered in New York and traded principally on the NASDAQ stock exchange.
Trader enthusiasm is running at 25%, up from 14% three months earlier.
Virgin reports return on equity of 18%, and returns have risen sharply over the last two quarters. The downside has been a heavy load of long-term debt amounting to nearly 12 times equity. That gives the company little leeway to adjust if its business runs into a rough patch.
Annual earnings tanked during the recession and have had a very weak recovery, showing a profit for the first time post-recession only last year.
Quarterly earnings have been, to use the technical term, pathetic. Five of the quarters showed a loss and six showed a profit. One came in at zero. Five quarters showed upside surprises, and seven surprised to the downside.
Interestingly, the losing quarters were all downside surprises, which may say something about the sunny optimism of analysts who analyze this company.
Institutions own nearly all the shares, and the price is near parity -- it takes $1.16 in shares to control a dollar in sales.
VMED on average trades 2.1 million shares a day, sufficient to support a wide selection of optoin strike prices, many with four-figure open interest. The bid/ask spread for at-the-money front-month calls is running at 9%.
Options are very active, with volume six times the five-day average. Calls are well ahead at 11 times the average, but puts are scarecely fallow, running as they are at three times average volume.
Implied volatility, at 26%, is near the six-month low. It has been crawling sideways since mid-August.
Options are pricing in confidence that 68.2% of trades will fall between $26.80 and $31.06 during the next month.
Today's fair-price zone stretches from $28.24 to $29 and encompasses 68.2% of transactions surrounding the most-traded price, $28.83. VMED is trading near the top of the zone 3-1/2 hours before the market close.
Virgin Media next publishes earnings on Oct. 24. The stock goes ex-dividend on Sept. 7 -- Friday -- for a quarterly payout yielding 0.55% annualized.
Decision for my account: I took the trade based on the Turtle bull signal, structuring it as long calls expiring in December with a $27 strike price, giving 7x leverage. I would have taken the trade based on traditional trend analysis, as well.
Disclaimer
The break above $28.19 broke free of a sideways trend that has held sway since July 27.
The breakout produced a Turtle Trading bull signal, as well as one under the traditional trend analysis. The sideways trend generally ran from $28 down to $26.80. The price today so far has peaked at $29. A persistent retreat below $28 would negate the traditional trend analysis breakout. The Turtle Trading exit is presently at $26.82. (My explanation of the Turtle Trading rules can be found here.)
Although operating mainly in the U.K., Virgin Media is headquartered in New York and traded principally on the NASDAQ stock exchange.
Trader enthusiasm is running at 25%, up from 14% three months earlier.
Virgin reports return on equity of 18%, and returns have risen sharply over the last two quarters. The downside has been a heavy load of long-term debt amounting to nearly 12 times equity. That gives the company little leeway to adjust if its business runs into a rough patch.
Annual earnings tanked during the recession and have had a very weak recovery, showing a profit for the first time post-recession only last year.
Quarterly earnings have been, to use the technical term, pathetic. Five of the quarters showed a loss and six showed a profit. One came in at zero. Five quarters showed upside surprises, and seven surprised to the downside.
Interestingly, the losing quarters were all downside surprises, which may say something about the sunny optimism of analysts who analyze this company.
Institutions own nearly all the shares, and the price is near parity -- it takes $1.16 in shares to control a dollar in sales.
VMED on average trades 2.1 million shares a day, sufficient to support a wide selection of optoin strike prices, many with four-figure open interest. The bid/ask spread for at-the-money front-month calls is running at 9%.
Options are very active, with volume six times the five-day average. Calls are well ahead at 11 times the average, but puts are scarecely fallow, running as they are at three times average volume.
Implied volatility, at 26%, is near the six-month low. It has been crawling sideways since mid-August.
Options are pricing in confidence that 68.2% of trades will fall between $26.80 and $31.06 during the next month.
Today's fair-price zone stretches from $28.24 to $29 and encompasses 68.2% of transactions surrounding the most-traded price, $28.83. VMED is trading near the top of the zone 3-1/2 hours before the market close.
Virgin Media next publishes earnings on Oct. 24. The stock goes ex-dividend on Sept. 7 -- Friday -- for a quarterly payout yielding 0.55% annualized.
Decision for my account: I took the trade based on the Turtle bull signal, structuring it as long calls expiring in December with a $27 strike price, giving 7x leverage. I would have taken the trade based on traditional trend analysis, as well.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
Wednesday, September 5, 2012
SWY: The Blackhawk Gap
When I hear the name Blackhawk, my thoughts stray far from gift cards. I think of crashed choppers in apocalyptic cityscapes, Blackhawk Down. But Safeway Inc. (SWY) jumped 4% this morning after announcing plans to spin off its Blackhawk Network gift-card unit via an IPO next year.
Call it Blackhawk Up.
The Pleasanton, California grocery chain will retain a minority stake in Blackhawk.
The opening gap reverses, potentially at least, a downtrend in place since February. It also broke through the high of the last 20 trading days, triggering a Turtle Trading bull signal. (My description of the Turtle Trading rules can be found here.)
One part of the Turtle method is to add to positions as they rise, up to three times following the initial opening. SWY sped through the trigger points in less than two hours.
The 20-day high was $16.35, and the price hit a high so far today of $17.03, although it has retraced all of that rise and more.
The $16.35 level also coincides to the nearest upside resistance, making the breakout legitimate in terms of traditional chart analysis.
But, it is a very bearish chart, and a reversal on news always makes me suspicious as a trader. Did the price leap soak up all of the upside momentum that news is likely to generate? Hard to say. What I can say is that by following the Turtle Trading rules, I am now heavily invested in SWY at an average basis well above today's post-gap opening price.
This is the dark side of Turtle Trading. It is, by its nature, indiscriminate. A more thoughtful approach would filter out news-based opening gaps. But that can also filter out great opportunities. For now, I'm following the Turtle rules that make the trade mandatory.
Certainly, before the spin-off, analysts were far from excited about SWY's prospects. Their combined recommendations score a negative 9% for enthusiasm, down from 7% a month earlier.
And certainly there are reasons to be sour on Safeway. Return on equity is 16%, a good level, to be sure. But long-term debt is a punishing 234% of equity.
Annual profits remain far from what they were before the recession, and 2011 actually saw a decline from 2010. This year so far, each quarters earnings has been higher than the year-ago quarter.
Of the last 12 quarters, all have been profitable and 10 have shown upside surprises. Two have surprised to the downside.
Institutions own nearly all the shares, and the price is in the cellar. It takes only 9 cents (9 cents!!!) in shares to control a dollar in sales.
It's foolish, but when I look at Safeway, laying by the road all battered and bruised, I think its a bargain that can't go anywhere but up. Foolish, as I said. Any stock can go down.
Battered though the company might be, SWY's options grid is a lively place, with a wide selection of strike prices and open interest mainly running to three and four figures. The bid/ask spread is a bit wide, at 18% for the at-the-money front-month calls.
The stock is highly liquid, on average trading 6.1 million shares a day.
Implied volatility stands at 34%, about the middle of the six-month range. It has been stair-stepping higher since Aug. 22, when it stood at 28%.
Options are pricing in confidence that 68.2% of trades will fall between $14.83 and $18.05 over the next month, for a potential gain or loss of 10%.
Options are trading at more than five times their five-day average volume, with calls ahead at eight times compared to double for puts.
The fair price zone runs from $16.20 to $16.86 and encompassed 68.2% of transactions surrounding the most-traded price, $16.51. The stock is trading within the zone 2-1/2 hours before the market closes.
Safeway next publishes earnings on Oct. 11. The stock goes ex-dividend in Sept. 18 for a quarterly payout yielding 4.25% annualized.
Decision for my account: Under the Turtle system the trade was mandatory, and I took it, structuring the position as long calls with a strike price of $15, a December expiration, and 6x leverage.
Had I been using traditional trend analysis, I would have been more cautious about the trade. The gap produced a higher high following a higher low, but the low wasn't much higher than its predecessor and it all looks pretty much like a sideways move to me. The clearest prior high is $18.31 on June 29, and the emerging uptrend would gain much clarity were that level to be breached. At the least, I would wait to see if today's high -- $17.03 -- was exceeded on a subsequent trading day before opening the position.
Disclaimer
Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.
No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.
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