Active Trader - Crapple No More

Welcome back Active Traders and Wealth Builders.

Recall in my post Apple Trendline break back on May 4, 2013 that market leader AAPL had turned the corner on its massive sell-off from the $700 level which began in September of 2012.   The shares have moved more or less sideways since then at one point selling off  and re-testing the lows back to the $388 level but ending last Friday right at the resistance area of $465 - not far from where they were back in May.

Everything changed on Tuesday when the shares opened in at $471, quickly traded back to resistance at 468 then reversed and headed steadily higher. Then at 11:21 AM,  Carl Icahn tweeted:

@Carl_C_Icahn - We currently have a large position in APPLE. We believe the company to be extremely undervalued. Spoke to Tim Cook today. More to come.

That got the shares moving and by about 2 PM they were up in the 475 range. Then at about 2:21 PM, Icahn tweeted again:

@Carl_C_Icahn - Had a nice conversation with Tim Cook today. Discussed my opinion that a larger buyback should be done now. We plan to speak again shortly.


That second tweet really lit a fire under the stock and it traded up $10 to about $485 within minutes of this tweet.

Twitter has been gaining prominence in the trading and investing community, but this was a first - a high profile billionaire activist investor releasing market-moving information via Twitter. This second tweet caused an increase of nearly 10 billion in Market Cap in just minutes.

The shares traded up to as high as $495 on Tuesday but settled back and closed just under the $490 area. John Carter came into the Simpler Options room on the close and recommended the 485/490 PCS for about a $2 credit.  I didn't take the trade but he expected to see follow-through to the upside in the shares the next day.

Mr Carter was right and the shares opened at $495 on Wednesday and quickly traded up to $500 and bounced around that level for more or less the remainder of the week, hemmed in somewhat by Friday's monthly options expiration.  Then in Friday's Simpler Options Trading room John put on a number of bullish positions in AAPL, expecting further follow-through and a gap up on Monday.  I followed through as follows:

- Short the Aug 23 Weekly 500/505 put credit spread for a credit of 2.65

- Long the AAPL Aug 23 Weekly 490 calls at 14.30
- Long the shares in both cash and retirement accounts

JC expects a gap up on Monday with a move quickly to the 513 area before consolidating and I am positioned for that to occur.  Anything can happen of course, but JC's ability to see a high probability of continuation, and position himself in advance of it is one of his key money-making techniques.

One other take away from this week - Twitter has become a big and serious player in Social Media.  With everyone from the Pope to President Obama to Carl Icahn using the medium, its no joke.  As it turns out you can say an awful lot in less than 140 characters.  More to come on the Twitter IPO.

Enjoy your weekend and the fruits of your labors.

Active-Trader - Evidence of Autumn

Welcome back, Active Traders and Wealth Builders.

"History recalls how great the fall can be, while everybody's sleeping, the boats put out to sea. Borne on the wings of time, It seemed the answers were so easy to find. Too late, the prophets cry, The island's sinking, let's take to the sky." - Supertramp - Fool's Overture

Of course I am waxing poetic here, but I can't help myself. There is no escape from the cycles of the seasons, and I have taken enough spins around the sun to see this one coming. What the heck am I talking about?

I'm talking about the sell-off in the stock markets that almost inevitable occurs in the late August to October time frame. Plus after the run-up we have had in the averages this year - nearly 20% in the SP-500 - we are more than due for some selling. And we started to see some signs this past week with the Dow Jones Industrial Average posting its first negative weekly return in almost 2 months.

There's plenty of anecdotal evidence of sell-offs in the stock market that come in the autumn months. Notable examples include 1929. 1937. 1966, 1974 and 1987. But every year is different and where we are talking about money nobody, wants to hear anecdotes. You want facts, hard evidence - you want rigor, right?

Well fear not blog readers since I went on a search for some answers and using the awesome data analysis tools at my disposal here's what I came up with. The goal was to determine - is there clear numerical evidence that the stock market sells off in the autumn months?

I started with TradeStation and pulled up a weekly chart of the Dow Jones Industrial Average. I chose the Dow because it has more history than any other index and has weekly data all the way back to 1920. Next, I created an indicator in EasyLanguage which plots the year-to-date returns of the average as an indicator on the chart.  This was basically a two-liner in TradeStation as follows:

{ Grab last year's close } 
dLastYearsClose = CloseY(1); 

{ Percentage Change }
dPctChange = ((Close - dLastYearsClose)//dLastYearsClose*100.0);

Next step was to bring up the data window and export the data to a text file where we had the date, the weekly close and the Year-To-Date percentage change for the date.

Next step was to bring the data up in Microsoft Excel and save it as a spreadsheet which makes it slightly easier to import in MS-Access where the real number crunching gets done.

Next steps is to load up the data in Excel and add a column which returns a week number of the data for that week - first week of January is 1, 2nd week is 2, etc.  This allows seasonality to be extracted on a broad basis without getting involved in what day of the week the month starts on etc.  I used this method with some success in my prior post Fun with Forex Historical.

Next and almost final step was to create a query in MS-Access which groups the data by week number of the year and returns the average historical year-to-date change for that week number of the year.  I took that data and put in back into Excel to create this chart.

Let's stop for a second to understand what this chart means.  This chart represents the typical stock market year by week of the year using 92 years worth of data which is pretty powerful and useful information.

 So there's the information, what are the key takeaways?

- The stock market goes up over time.  In other words, there was not a single week of the year with a negative historical return

- There was a noticeable peek at week 35 followed by a trough at week 42, then it was straight up from there through the end of the year.  Week 35 corresponds roughly to the first week of September.  Week 42 corresponds roughly to the last week of October, or first week of November.

- The sell-off which occurs between these dates - on average - just gives back some of the returns for the year but does not put the overall proposition into the negative.  To illustrate this point, take a look at the screen shot of the data window from Tradestation from 1987.  The market was up over 40% for the year at the peak on 8/21/1987.  And after the historical sell-off ended the year still up +3.59 for the year!

So what does all this mean for my trading and investing?  It provides firm historical data which tells me to hold off on making any large long-side commitments between now and the end of August.  Wait for the sell-off and ugliness which occurs into the fall.  Then pile back into the market and the end of October for the year-end rally.

Like I said above, every year is different and we can't predict the future.  But we have some pretty clear evidence of seasonality in the stock market above.

Enjoy your week ahead and keep your power dry - until the end of October.

Active-Trader - One Wild Ride

Welcome back, Active Traders.

It was one heck of a week filled with upside and downside action, and none more than in my favorite credit card processing company Mastercard.   Recall that we have been on the case with this stock as early as the first week of 2013 when I mentioned it in my post here when it first crossed 500. I've been trading in and out of it in small lots, usually about 10 share blocks. As of earnings which came out this past Thursday, I was long 20 shares in my cash account and 30 in my retirement account.

Anyway, with the stock at about 600 back on 7/30, I tried to get filled on an Iron Condor similar to what I described in last week's post here. With the Market Maker move at about $20, I was trying to sell the 575/580 put credit spread and the 620/625 call credit spread. For whatever reason, I was just not getting filled so I just went home and called it a day.

Come Wednesday morning, earnings are out and at the stock is trading at about 625 in the pre-market. And much to my surprise, I found out I got filled on the 620/625 call credit spread at 0.90! Just when I thought I had seen it all, here I am filled on a spread that I didn't think I had - and I wake up to find myself at a max loss situation!

Well I learned from experience to keep my cool in situations like this, so I just sat on my hands and watched the stock open. It got to as high as about 626 then slowly started pulling back. By about 11AM, the selling got severe on news that a court had ruled against the US Federal Reserve on its ruling regarding Debit Card fees. That sent the stock into a complete free-fall, trading down to as low as 567 before staging a dramatic reversal and closed the day at 610. Someone in the Simpler Options Trading room followed a comment I make to get long the stock at about 580 and made some serious cash on the quick move back up. I wasn't that fortunate, but was able to cover my 620/625 call credit spread at 0.10 for a profit of 0.80 or about 80 bucks. Not bad considering I was looking at a $400 loss a few minutes earlier.

And as if all that were not enough, the next days the stock roared out to new all time highs and traded up as high as about 645. Had I not covered my CCS on the sell-off, I would have been looking at a max loss situation once again! And I held onto the stock the entire time and sold half of my position up in the 645 area thinking this buying was just of a lot of irrational exuberance.

As for the rest of the week, I had a pretty good time selling spreads into earnings and made a little bit of money (less than $100) every day Monday through Thursday. Come Friday, with LNKD shares at 210, I put on the 185/190, 230/235 condor for a credit of 1.85. At the time this seemed like a no-brainer trade and I figured I had a pretty good chance of ending the week taking home the entire $185.

Well it didn't turn out that way and LNKD instead reported stellar earnings that exceeded everyone's wildest expectations. The stock trade as high as 237 and I ended up buying back the 230/235 Call Credit Spread at 4.5 for a loss of $270. That wiped out most of the profits in my TradeStation account for the week.

Over on the E*Trade side, I had a stellar week with nice gains in the broad market ETF's and solid gains in CBOE, CELG, DNKN and the previously mentioned MA. This pushed my net worth out to new all-time highs. But don't confuse brains with a bull market as the saying goes.

That's all for now, enjoy your weekend and the fruits of your labors.

Active-Trader - The Market Maker Move

Welcome back Active Traders and wealth builders.

It was a breakthrough week for my options trading career and I made some pretty decent money trading earnings.  In this post, I will cover how its done so you can do it yourself.  Its not that difficult once you know the tricks which I have learned thanks to the expert tutlage of Henry Gambell and John Carter over at Simpler Options.  Here's how its done:

1) Find companies which are going to report earnings before the next day's open - either today after the close or the next market day before the open.  My favorite source is Yahoo Earnings Calendar. Stick with big, popular high priced and heavily traded stocks if at all possible.

2) Bring up the options chain and calculate the "Market Maker Move" abbreviated MMM as follows:

MMM = Cost of at-the-money put + Cost of at-the-money call

As for an example, with AMZN trading at 300, the 300 Call is asking $9.20 and the 300 put is asking $8.80. Add them together and you get close to $18 so round it up to $20. That means that the Market Makers are pricing just under a $20 move after earnings.

3) Now calculate your upside and downside targets as follows:

Upside Target = Current Price + MMM
Downside Target = Current Price - MMM

In our example using Amazon:

Upside target - 300 + 20 = 320
Downside target - 300 - 20 = 280

4) Next price some options spreads where you are shorting the calls just outside the MMM on the upside and shorting the puts just outside the MMM move on the downside.  In our example:

Short the 320 call
Short the 280 put

For protection, we also want to buy the next further away option for protection since short options have unlimited (or at least very large) risk.  In our example:

Short the 320 call and long the 325 call
Short the 280 put and long the 275 put

So you are basically selling a Call Credit spread above the market and a put credit spread below the market.  Those familar with options parlance recognize that that as an Iron Condor.  The beauty of this trade is that all the price has to do is close anywhere the 2 short strikes and the trade goes out at max profit without even a closing transaction!

5) Calculate the total premium you can collect. For a 5-dollar wide spread, you want to get a credit of at least 1/3 of the distance between the stikes for example $165 for a maximum loss of $335. If can't get a decent credit, don't take the trade. For example, I would not take a $1 credit for a max loss of $400 since the risk/reward ratio is more skewed and not in your favor.

Another cool thing about this trade is that at least one side of the trade will go out at max profit because the price can only have a single closing value.  After all this is trading and not quantum mechanics!

6) If you think you can get a good enough credit, put in a limit order for the side with the bigger credit and see if you can get filled between the bid and offer also known as the natural price.  Once you get filled, on one side, try agressively to get filled on the side since having both legs on actually reduces your overall risk

7) Once filled, sit back and wait for the earnings.

If the stock really pops or drops, you can take off the short option and leave the long on on which I did with some success with AAPL this week.  You can always trade around a position if it moves against you.

Having traded this method several times this week, its uncanny how often the price closes within the MMM! 

Here's a table of trades I did this week and the outcome:

Symbol	Strikes	Credit	Outcome
AAPL	395/400 440/445	+1.90	Max profit plus some due to trading around
NFLX	225/230 300/305	+2.03	Max profit
BRCM	29/30 34/35	+0.35	Max loss but does not expire until August
CELG	131/132 139/140	+0.35	Closed for debit of 90, loss of 0.55
AMZN	275/280 320/325	+1.64	Closed for 0.06 short of max profit

I'm sticking with small volume (1 or 2 lots) until I can get the hang of this.  Also, i'm trying to keep the maximum loss of on any single position less than about 1.5% of the account.

That's all, enjoy your weekend

Active-Trader - 4 Horseman of Biotech

Welcome back Active Traders and wealth builders.

This past week brought more new all-time highs in the broad market indices which was not at all unexpected given the way we recovered from the 5-week corrective pattern as described in last week's post Ripping Higher.

One theme which has been working this year is biotech, specifically Jim Cramers "4 Horseman of Biotech" which are Biogen Idec (BIIB), Celgene (CELG), Gilead (GILD) and Regeneron (REGN). Together and individually, these stocks have trounced the SP-500 on a year to date basis as shown in the comparison graph above.

 I have traded in and out of these stocks this past year and made and lost some money on these. On Friday, I went out long CELG and GILD on continuation plays, since both stocks made new, all-time closing highs in the prior week. Since I now have a financial interest, let's take a brief look at each of these and see what we can find out about the company, about the stock and how they trade.

First up is Biogen Idec which was formed from the 2003 merger of Biogen (founded in 1978 in Switzerland) and Idec Pharmaceuticals which was founded in 1985 in California.  BIIB develops drugs to treat multiple sclerosis AVONEX and TYSABRI.  BIIB also developed RITUXAN which is the world's most prescribed treatment for non-Hodgkin's lymphoma and an effective treatment for rheumatoid arthritis.  The stock gapped out to new all-time high territory back in 4/3/2013 when it announced it purchased the remaining rights to TYSABRI from Elan corporation. 

As for fundamentals, BIIB has been profitable for many years and has nearly a 28% 5-year annual earnings growth rate and a PE of 35 and no dividend yield.  The stock is up 50% for the year so far and earnings are due out before the open this Thursday.   Be very careful going into earnings, but be ready to add longs or sell puts on any gap down in the stock price.

Next up is Celgene which is another global biotech powerhouse founded in the mid 1980's and went public back in 1987.  Similar to BIIB, CELG develops drugs to treat a variety of cancers and other auto-immune diseases.  Most recently the stock gapped out to a new all-time high on 7/11/2013 when the company announced a positive outcome from its Phase III trials of REVLIMID for new indications.  It is already approved for a series of other treatments.  Interestingly, REVLIMID is chemically related to Thalimid which was prescibed in the 1950's as a sleeping pill and lead to a series of limb-related birth defects.  That legacy continues and even now pregnant women should not be exposed to REVLIMID and related compounds.

As for fundamentals, CELG has a 5-year growth rate in the mid 20's but the actual number is missing from TC2000 for some reason, PE is 40 and no dividend yield.  The stock is up 73% year to date and earnings are due out before the open this Thursday 7/25.  I'm almost certainly going to clear out of my long before the close on Wednesday.

Next up in Gilead which was founded back in 1987 and went public in 1982.  GILD produces Flu medicine Tamflu and has been a key player in antiviral drugs to treat patients with HIV and Influenza.  The stock hasn't had any meaningful gaps lately, but is incredibly volatile and traded down to mid 40's in the May/June pullback and is since up 50% to a new all time high breaking $60 for the first time.

As for fundamentals, GILD has 5-year earnings growth of 13%, a PE of 32.7 and no yield.  Earnings are due out before the open on Thursday, so like, CELG, I will be out before the close on Wednesday and look to re-enter on a gap down after earnings on Thursday.

Last up in Regeneron symbol REGN and based in Tarrytown, NY not far from the home of your humble blog author.   Regeneron was founded in New York City in 1988 and has only 3 products on the web site EYLEA which treats Macular Degeneration ARCALYST which treats a rare hereditary condition abbreviated CAPS and ZALTRAP which treats metastatic colon cancer. 

REGN has the least stellar earnings history of the 4 horseman and actually lost money as recently as the 4th quarter of 2012.  So that leaves REGN with a non-existent 5-year earnings growth rate and a PE of 37 and no dividend yield.   Even so that stock is up 60% year to date taking 3rd place behind CELG and BIIB.

Investing in biotech can be more of a minefield than stock investing in general since any bit of news can soar or crater the shares.  Trading the above names, whenever I took full-sized positions with a tight stop, I nearly always go stopped out and lost money.  When I look small say quarter of half-size positions (25 or 50 shares) and took reversals off the daily charts, I did okay.  

As for this week, I need to be out of GILD and CELG by the close of Wednesday, then look to reload on any earnings related downward gaps on Thursday.

Enjoy your Sunday and have a great week ahead.

Active-Trader - Ripping Higher

Welcome back, Active Traders and wealth builders.

Sometimes what's going on in the markets overshadows any individual stock stories.  That was certainly the case this past week with broad market indices SP-500, Dow Jones Industrials and Russell 2000 scoring new all-time closing highs.  What is even more telling is how this was achieved and the daily chart to the left tells the story.

After peaking back on May 22, 2013 markets went into a corrective pattern as identified back in my post on June 2, Signs of Distribution.  At that point, we started taking profits on many individual stock positions to book some good gains for the year.  You can't go broke taking profits as the saying goes.

Counting the daily bars, there were 22 days in the corrective pattern which started on after the peak on 5/22/2013 and bottomed on 6/24/2013. Since then its been almost straight up, and we recovered the entire distance of that pullback (which took 22 bars) in only 13 daily bars - and 8 of those bars were on opening gaps to the upside!   And you know from prior blog posts that when the right side of a correction recovers faster than the time it took to go down, that means the market is straining to move higher and nearly always goes on to make further highs.

Another interesting story to be told is the chart to the right.  This one compares the year-to-date performance of the Dow Jones Industrial s versus the SPY (SP-500 in yellow),  QQQ (Nasdaq 100 in blue) and IWM (Russell 2000 in white).  This shows the broader market Russell 2000 is clearly outperforming the Nasdaq 100, SP-500 and Russell 2000.    This speaks to the broad nature of this rally and also tells me that on dips I should no longer buy DIA, but instead should be buying IWM, SPY, QQQ - anything but DIA contrary to what I noted in last week's post DIA on Dips.

Moving our focus from broader markets to individual stocks, we had awesome performances in individual stocks Tesla (TSLA) and Netflix (NFLX) this past week.  I was able to participate in both stocks along with the other members in the Simpler Options trading room.   I continue to learn a lot from John Carter, Henry Gambell and the other traders in the room.

One important thing I learned from John Carter is that trading nearly 100% a mental game.  Put another way, the state of your mind at the time of the trade determines your actions.  Are you in a state of fear that you will lose money?  Are you more concerned with making money or not losing money?  My behavior is clearly being dictated by my psychology, and my TradeStation account tells the story where I have:

• 31K in cash buying power
• 62K in overnight marginable buying power
• 124K in intra-day buying power for marginable securities

Yet given all that, I won't put on a trade which risks more than $300 or 1% of the account!  I clearly have some mental hang-ups which are preventing me from realizing my full potential as a trader.  So let's just say I have some serious work to so in the area of trader psychology.

Enjoy your weekend.

Active-Trader - DIA on Dips

Welcome back, traders.

Curious about the long term price behavior of the stock market, I loaded up a yearly chart of the Dow Jones Industrials.  I went with the Industrial Average because its history goes farther back than any other Index.  On the TC2000 platform, they have yearly data all way back to 1915 which was older even that TradeStation whose data starts in 1920.

Taking a look at the data, there were a few times when the index was cut in half, and another time when it was cut by about 90% when the Dow went from a high of 386 back in 1929 to a low of 40 in 1931.  More recently in 2007 we had more than a 50% haircut when the Dow went from a high of 14,198 back in 2007 to a low of 6,469 in 2009 only to bounce back and make a new all time high within 4 years.

Aside from the occasional haircut, the overall direction is decidely positive, from the lower left to the upper right of the chart as Dennis Gartman would say.  Based on a simple analysis, the average gain over the 98 year period from 1915 to 2013 is 7.93%.  So I did a simple estimate of what average would look like into the future based on continuation of the current trend, and came up with these numbers:

This chart shows that the Dow will reach 20,000 before the year 2019, 30,000 by 2024 etc.. until it reaches 100K by 2040.  Some of these numbers look fantastical but its really just simple math and clearly i'm not going to win any awards for this research.  Point is the stock market goes up over time and the Dow Jones Industrials is as tried and true and indicator as there is.

Based on all of this I have added to my ETF holdings in DIA and its now my largest position.  I like the fact that the index is focused on the largest most successful companies.  Also, the index is managed for growth as underperforming companies are kicked out, and new successful companies are introduced.  In fact, of the original Dow-30 stocks, only General Electric remains.

Just to give you an idea of how much the index is changed, here are 11 of the 12 original components from the index when it was started by Charles Dow back in 1896:

American Cotton

American Sugar
American Tobacco
Chicago Gas
Distilling & Cattle Feeding
Laclede Gas
National Lead
North American
Tennessee Coal, Iron and Railroad
U.S. Leather
United States Rubber

With the exception of General Electric, every company has been reorganized or otherwise restructured.  This is downside protection to avoid the situation where you get stuck with a dud of a stock since they generally get kicked out of the Index.  Recent cases are Citigroup and General motors, both of which got kicked out of the index back in 2008.

Plan going forward is to add DIA on dips.  And with a 2.4% dividend yield, its paying you pretty good while you wait.

Enjoy your weekend