Next Video coming soon

I will be posting a new video in the next day or two. i tried to post one over the weekend but had some technical difficulties. But i think I have them all fixed now. next video will be up on the afternoon that I think the market, or at least some stocks on my list, get finished with their current swing downs. As for the markets in general, the dow broke through key support, and is just under 200 away from 7000. S&P is sitting a millimeter above support, as is the Nasdaq. Ill go into more detail on these later.

First Video Weblog

RIO

Here is a stock I have been watching for a while. In my real money account, I was buying this puppy up ever since it dipped below $10. With several hundred shares at an average price of 12, I had a large enough position to put on some covered call trades over the past couple days. I sold the Feb. 17 call on monday for 1.25 each while the stock was at just over 17. That was a lot of time value for just two weeks left in the stock. I closed them out today for 0.2 each. That was a nice 1.0 per share, or $100 per contract, profit i made in just a couple days. And with the stock looking like it is ready to bounce here, I may load up with some more shares with my new profits. i would like to see RIO stay above 14.9 by the close.

Need a Stimulus for the Stimulus

WHAMMY!!! And there you have it. Geithner drops the stimulus on our laps and the market hates it. Perhaps it had to do with how vaguely it was described. Perhaps it had to do with the talk being directed to "Main Street" and not towards "Wall Street" (i hate those generalizations by the way). Perhaps it had to do with the fact that wall street hates the idea and wants government out of the way. Either way, the markets responded as expected, with a hard move in one direction. Unfortunately for bulls it was down. But thats okay. I just take things as they come. And right now, all the major indices are sitting right on support. It never fails to amaze me how that happens time and time again. I wont post any charts but ill describe the general levels of support. The Dow is sitting right on support at 7900. This has been acting as support for really dating all the way back to the 2001, but looking at more recent times, it has been hit repeatidly and has ever time but once in November. The S&P is sitting right on diagonal support in the 825 area. If this breaks the next area of support is at 800. The NASDAQ is sitting on horizontal support in the 1520-1530 area. If this fails, which it very well may, the next support will likely be at 1480, where both diagonal and horizontal support will meet. As for my current positions, I closed out LNCR right after the open. The stock gapped lower by a couple bucks following earnings, but as I watched it premarket, the opening price kept creeping up and up. And this continued right through the open. I closed quick as i could. My other 2 positions, BTU and KALU, I am still holding on to. Both followed the market down. No biggie. My stops remain where they are. But I am really watching the diagonal support line to see if it holds. As of right now there is no reason to think it wont, but if it gets penetrated, I may close out before my stops get hit. Perhaps a little pre-emptive but I can always reenter later, whereas i cant necessarily recoup lost money so easily.

A Turning Point In the Market

So last week ended pretty well. All three major indices were up nicely. And ending the week in such a will typically carry over to monday more often than not. However, we didnt see it happen here. From a fundamental standpoint, this could be because the market does not want to get to assertive ahead of the vote on the Obama's stimulus package. From a technical standpoint however, its because all three indices are right up against resistance. The S&P500 is hitting horizontal resistance, and is about halfway to the top of a larger triangle pattern. The Dow is at both horizontal and diagonal resistance, and the NASDAQ is at diagonal resistance. This only means one of two things. Either things will explode through these levels, or they will go down. Neither move will affect me to much as I have plans for either scenario, but for right now, I am leaning towards a move to the downside.

TGIF

Just some updates on my current positions. I closed out of CRS at 18.30 for a 6% loss. I remain short in LNCR as my only remaining short position. As for my longs, they are performing nicely in the early part of the day. BTU is up about $1.20 per share, and has broken out of the ascending triangle. At the end of the day if BTU remains above the breakout point, I will add to my position and raise my stop. As for KALU, the stock is up but on light volume. It cant quite seem to hold above resistance, which i place about about 27.50. Perhaps as the day wears on it will see some more bullish action, but as of right now I am a little skeptical. Also, keep in mind the covered call article I wrote the other day. This stock may be a prime candidate for repeating this. I will however probably hold off until monday to see how stimulus package news affects the general market. At this point in the package's life, its not IF it will pass, but WHEN, and with what details. I am eager to see how the market will react once all the details are finallized. After all, its not the news that matters, but the market's reaction to that news that makes or loses money for the trader.

Covered Calls And Spreads

While I am not trading options on this "portfolio" I do however trade them in real life. My last post I briefly talked about taking a position in KALU. KALU recently had a move that I look for in a stock that provides a short term small scale profit on a position using a covered call or debit spread strategy. Let me start from the beginning. One of the things I like about this stock is that the current trend is linear relative to the diagonal support. A stock like this provides a good opportunity to make short time profits by writing a covered call against a stock position or selling a short dated option to create an option spread (if I was long a call option to begin with). When I do this, I look for stocks that I think will continue in the current overall direction based on strength of support areas. I generally like to do this in stocks that have a relatively low level of volatility. While lower volatility implies a lower option premium, it allows for my strategy to be more effectively executed. Here is what I do. In a bullish stock where I have a long position, I like to sell the nearest out of the money call in the current expiration month. For KALU this would have been the Feb 30 Call. In this case the trade would have brought in a premium of about $90 per option contract if I had sold the call on 1/28/09 when the stock began to show some weakness. I then hold the option until it makes a higher low near support. At this point I rebuy the call (close the position), locking in a profit of about $60 per option in this trade.

The reason I trade the nearest out of the money option is because I want to leave myself room incase what I perceived to be a higher high is just a hitch in yet a larger movement. In this case, the 30 call would have given me just over $2 of reaction time should the stock move higher and I wish to hold onto my position. Plus, options near the money have the highest time value, which is what I am trying to lock in. The reason for selecting the nearest month is because time decay occurs at the highest rate in the final month of expiration. So not only will the option lose value as the stock declines, but it will lose value as the month wears on.

The major difference between a covered call and a debit spread creation is that in a covered call you own the stock where as in the spread you own a lower priced call. In the trade above I locked in a profit of $60 per option that can be deducted from the total price of the long position. This may not sound like much. If i bought 100 shares at the break out above 24 on 1/23/09, i would have spent roughly $2400. In effect I am reducing the total price to $2340 by the end of this trade. Conversely, if I had bought the $25 call upon the breakout, I would have spent about $2.50 per share, or $250 per contract. In this case, I would be significantly lowering the total per contract price of the initial call position (2.5-.6=1.9 and 2.5-1.9/2.5 = .24 or 24% reduction in total cost per long contract.) I have indicated with the big blue arrow where the call should have been sold, and indicated with the big red arrow where it should have been rebought to close the trade. .