Hello fellow traders,
Well, we went back to our familiar pattern this past week, back to the AAPL and GLD trades. AAPL is sliding as the map app disaster is still unfolding. GLD is still range bound but Friday was testing the downward side of the range.
I am pretty much healed up from the Blackbelt testing. My hyperextended knee is feeling good and the fractured toe is no longer painful to walk on. I did my first class last week and that was a lot of fun. I really like the hyung or forms and that was my responsibility – teaching the new 1st Dans one of their new forms.
Youngest child is now done with volleyball. She had a blast this season. The end of season tournament was cancelled when a couple of teams dropped out. The team dinner is this Friday and then the program banquet is in a couple of weeks. She gets to dress up and man o man she loves that!!!
Eldest daughter graduated Friday from Tech School. Now she has a week off in leave then is off to her first duty station. She is excited to get her career under way but wishes that she could be a little closer to civilization. I like it because she is only a 12 hour drive from me. I feel a road trip or two in my future!!
Our boy is getting very inquisitive on some engineering things. I know just enough to be dangerous. My brother is the engineer. I just picked up some stuff supervising cost engineers and just hanging out with them while I was in the plants. He is also getting involved in the tech side of theatre at school. It is funny how the girls love the stage and the boy loves the tech side. I am just glad they are finding things they enjoy.
AAPL and GLD have been good to us for a while now. AAPL’s continued downward slide has now created a good opportunity because we are seeing some buyers coming in the prop up the price for a day or two then the drop continues. This up and down action gives us some premium that was not there two weeks ago.
ANALYSIS
I am going to use some terminology here to help some of the newbie lurkers that have asked for a more technical bent so they could see what the terms mean.
We will tackle the AAPL trade first. This is a vertical call spread. We are short (selling) the 645.00 strike call and are long (buying) the 650 strike call. The goal of this spread is for it to expire worthless. My basic strategy is called a contrarian strategy. I place trades in the opposite way I think the market is going. In this example I think that APL will continue its downhill slide. Therefore, I entered into a vertical call credit spread hoping that the price will stay below the 645.00 level.
AAPL 645.00 Call $0.68
AAPL 650.00 Call ($0.40) This gave a $0.28 Net Credit for a 5.60% ROI
1. We put this trade on Wednesday afternoon after watching the price action for the first part of the week. Wednesday morning the price dropped through both the 20 and 50 Day SMA (Simple Moving Average). This is when I decided to enter a trade. This drop through both SMA lines had me thinking call spread.
2. Now I look for a set of strikes that are at least 1.5 Standard Deviations from the underlying market price at the time of the trade. The 645/650 Call spread fit that bill.
3. The Probability Calculator gave the 645/650 trade an 89.95% probability of success. Our minimum for the probability calculator is 85%, but if I can go higher I will. Basically this is telling me I have a 90% probability of success. I will take those odds all day long.
4. The IV > HV indicator also showed us that this was a good stock to put a spread on as IV>HV. This gap continually narrowed as the week went on, so our premium was safe, and the time decay was working even more in our favor.
5. The price drop continued throughout the week. That made our premium safer and safer as the week went on. This is exactly the type of setup I like to see. The goal in this system is to make it to Friday and not have to worry that much on our positions. We had that in spades this week.
Trade #2:
GLD 173 Call $ 0.22
GLD 174 Call $(0.13) This gave a $0.09 Net Credit for a 9.00% ROI
The trades this week give us a 7.30% blended ROI. This is a great return!!!
1. Again, we put this trade on Wednesday afternoon after watching the price activity. The price hovered around the 20 and 50 day SMA with a downward bias. This is our clue to go the call spread route. This means that the trend is going slightly down, but very slowly since the price was hovering around the SMA lines and the SMA lines are very close together. Later in the week on Friday the price broke through the SMA lines and that confirmed our decision and made it a pretty stress free Friday. Again, our goal is to have the spreads expire worthless. That we keep the entire premium we collect (less commissions of course – gotta pay the broker!!!)
2. The probability calculator gave this trade a 90.07% success probability. I knew this one would have a higher probability since it was almost 2.0 Standard Deviations (Std Dev) from the underlying price at the time of trade.
3. Our new indicator the IV> HV was in our favor meaning that the IV (Implied Volatility) was greater than the HV (Historical Volatility).
4. The trade was better than our minimum 3%.
5. The overall trend was down so we go call side.
PAPER TRADE
This is one that hit my screen and I thought I would take a flyer and try it in the paper trade environ:
RVBD 26.00 Call $0.42
RVBD 27.00 Call $(0.31) This will give a $0.11 Net Credit for a 11.00% ROI
1. The probability calculator hits in at 89.69%
2. The Std Dev are between 1.0 and 2.0
3. The overall trend is going downward so we look to go Call Spread
4. This stock is not covered by Trademonster so I could not get the IV>HV indicator for tis one
5. One of two things that is a little worry some about this stock is that the Implied volatility for the options is 132.5% This is a very high number. That is why we are putting this in the paper trade account so it won’t cost us real money.
6. The other thing is that RVBD will report earnings this week. Normally I do not trade a stock when it is coming up on earnings, but this looks attractive as any bumps + or – from past earnings would not push the underlying past our strikes. Again this is why I am doing this in the paper trade account instead of the real money account.
COVERED CALLS
We have been doing covered calls on Vivus and McDonald’s. We are continuing with these two stocks in our covered call adventure.
Symbol Company Stock Option Option Initial Annualized
VVUS Vivus 22.74 2,676.00 14.3%*
MCD McDonalds 93.50 Oct 100 .10 9,174.00 1.3%
* Changed this calculation from using the stock price at call option sell to using the initial investment.
VVUS has rebounded significantly since last week, moving up almost 20% this week. We bought back the Oct23 Call at .20 making a .12 profit, and are now waiting to see what happens over the next day or two to sell another one. I want to see what the price action is before getting into another contract this close to expiration. We have made money this month on the stock and we are getting close to breakeven on the stock portion. If I get into another covered call on this stock I will put out another blog post detailing it. Despite selling the call back early we are still on a pace to make more than 10% ROI for the year. This is a ROI I will take any day.
MCD looks like it is on the way back to the $100 mark. WE have come back to show a gain on the stock portion of this covered call and it looks like our call premium is good. The premium is at $0.00 on the bid side. Ask side is $0.04 so even if we have to sell it back we are good. This is working out just great for us.
DIVIDEND STOCKS
Here is our Dividend Stock Portfolio:
Ticker Name Buy Current Date Div
Price Price Yield
KO Coke 38.17 38.13 08/27/2012 2.71%
AGD Alpine Global Dynamic Fund 5.76 5.94 08/27/2012 12.18%
AOD Alpine Total Dynamic Fund 4.37 4.45 08/27/2012 14.80%
MO Altria 34.26 33.17 08/27/2012 5.17%
INTC Intel 22.87 21.73 10/01/2012 3.94%
HIX Western Asset Hi Income Fund II 10.53 10.53 10/15/2012 9.44%
Current Prices as of 10/15/2012 Closing Price
HIX is the latest addition to our Dividend Portfolio. HIX is another closed end fund that yields a monthly dividend. Currently the dividend is .0825 per share. HIX is a high-yield bond fund that invests in non-investment grade bonds (read junk bonds). Until Mr. Bernanke is dropped as Fed Chief HIX should be a good bet since he has stated that interest rates will be kept low until 2013. Now if Obama loses then we will have to reevaluate this addition to our dividend portfolio as Romney’s campaign says they want long term interest rates to rise.
Each of these stocks carry a 15% stop on them, and we are nowhere near that on any of these stocks. If 100 shares in each stock is held that will generate $416 in dividend revenue assuming no reinvestment. This gives a 5.10% return. This is a pretty good return in this market and it is very safe. Two Blue Chips and two funds that are diversified in sectors and globally. If reinvestment is used that number goes even higher.
I have developed a watchlist for this Portfolio. These are stocks that basically meet the criteria we have: (1) a moat business model, (2) dividend of at least 3%, (3) solid fundamental analysis numbers. Here is our watchlist:
Ticker Name Recent Price Date Div Yield Target Price
MSFT Microsoft 29.51 10/05/2012 3.12% 28.00
PG Proctor and Gamble 68.71 09/21/2012 3.27% 62.50
JNJ Johnson & Johnson 68.60 09/21/2012 3.56% 65.00
MSFT – This is close to our target and is heading down to it. Hopefully soon it will be in our range. This stock is literally a household name. If you have a laptop or desktop computer you probably are running a version of Windows on it. Also if you are like me your productivity suite is a Microsoft product. Word is the standard business word processor, Excel is the standard spreadsheet, Access is the standard database system, Outlook is the standard mail program, and Power point is your default presentation software package. MSFT has a lock on these markets. The company is generating tons of cash and is a stable dividend payout stock.
JNJ – I am still looking to get into this stock at $66.00 or lower. The stock is on a slight uptrend again after a slight pull back. There is a recent run from $62 to $68 and so I would like to split the difference and get in at $66
PG – I might have to wait on this one a bit. It is continuing the uptrend and is closing in on a 52 week high. The slight pullback I saw was more of a quick consolidation. So now I just sit back and wait patiently for this stock to come back to Earth. The last thing I want to do is buy at the high and wait for another high to come along. I will be patient as the chart shows that $62 is long term support for this stock. Also at this level that would raise our Dividend Yield to 3.75% AND give us lots of upside potential.
QUESTIONS
None at this time
DISCLAIMER: Hashley Capital Management, LLC; as well as I are not giving any trading advice. All data is historical in nature and is intended for use as an educational tool. Trading in stocks and/or options is risky and can result in loss of capital. Stocks as well carry inherent risks and should be well researched before any buy decision is made. There is no attempt to sell any brokerage services or act as a broker or dealer by Hashley Capital Management, LLC. Any forward looking comments on this blog are not attempts to solicit business for Hashley Capital Management, LLC and are the opinion of Hashley Capital Management only. If you choose to follow the same path and invest in the strategies and trades used by Hashley Capital Management, LLC after doing your own due diligence, that is your decision and yours alone.
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Twitter: @awagel01
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TTFN
Ash
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