Just Another "Trade" Toward Paradise!

Biotechnology Stocks

2010-03-10T07:27:00.000-08:00

The Food and Drug Administration (FDA) plays a key role
Responsible for regulating the development of new drugs
Has developed rules regarding the clinical trials that must be done on all new drugs
Companies must test drugs through four phases of clinical trials before they can be marketed to individuals
Every year the FDA monitors the testing of 3,000 new drugs on nearly 200 million people to determine their effects
The FDA is relevant for investors specifically in regards to biotech and pharmaceutical companies
FDA approval can literally make or break the stock of a small company involved in developing new drugs
It is very common to see the stock of these companies skyrocket (or plummet) as test data is released

Upcoming Events In Biotech’s
SLXP (Approval decision date: March 24)
Drug: Xifaxan for hepatic encephalopathy
SOMX (Approval decision date: March 21)
Drug: Silenor for insomnia
CTIC (Approval decision date: April 23)
Drug: Pixantrone for non-Hodgkin's lymphoma
DNDN (Approval decision date: May 1)
Drug: Provenge for prostate cancer
POZN (Approval decision date: April 30)
Drug: Vimovo for pain relief

Large (relatively safe) Biotech Stocks
Amgen (AMGN)
Genzyme (GENZ)
Gilead Sciences (GILD)
Biogen Idec (BIIB)
Cephalon (CEPH)
Celgene (CELG)
Amylin Pharmaceuticals (AMLN)
OSI Pharmaceuticals (OSIP)

Big Pharma
Pfizer (PFE)
Merck & Company (MRK)
Johnson & Johnson (JNJ)
GlaxoSmithKline (GSK)
Sanofi-Aventis (SNY)
Novartis (NVS)
Abbott Laboratories (ABT)
Bristol-Myers Squibb (BMY)
Eli Lilly and Company (LLY)

New Trade Idea in Biotech!

Genzyme (GENZ)
High Risk Category
Bull Call Spread
Contingent on stock being >= $58.02
Buy to open: July 2010 60.00 strike call Sell to open: July 2010 65.00 strike call
Limit debit: 1.65 (or $165 per spread traded)
Maximum reward: 3.35 (or $335 per spread traded)

Metals & Mining ETF (XME)

2010-02-22T12:54:00.000-08:00

Bear Call Spread
Expectations are to convert into an Iron Condor
Sell the March 55.00 strike call
Buy the March 58.00 strike call
Total credit = 0.70

Where does the market go from here?

2010-02-16T14:05:00.000-08:00

The article below are the views of Michael Markowski one of my trading associates. While I do believe the market is going lower overall in the coming months, I am not nearly as bearish as he is. I am expecting a 10-15% further decline in the market, he obviously is expecting much worse. There are always companies (stocks) with great value regardless of market conditions. If what he believes actually comes to fruition you will almost certainly be able to get those stocks later at lower prices.

Author: Michael Markowski
Written in the February edition of Equities Magazine.
Feb. 12, 2010 article: “Stocks Poised for Massive Sell Off”

The Euro’s recent steep decline versus the U.S. Dollar, which began in December is very bad new for the U.S. economy, stock market, commodities markets and the price of gold.

Did you know that since the Euro’s inception in 1999, its highs and lows as compared to its exchange rate with the U.S. Dollar have been accurate in predicting every significant rally and sell off in the U.S. stock market?

The Euro’s steep declines versus the U.S. Dollar in the late summer of 2008 and winter of 2009, preceded or precipitated the crashes in the U.S. stock market, which occurred in the Fall of 2008, and the Spring of 2009, respectively. Even the bursting of the dot com bubble in April of 2000 and the ensuing economic downturn in the U.S. can be blamed on a steep 15% decline in the Euro which began on January 3, 2000.

Since the Euro has already declined by 10% and continues to fall I expect that next shoe will soon drop, which will be a sharp sell-off in U.S. stocks. I am advising all of my family and friends to get into an 80% cash position in their stock portfolios, mutual funds and retirement plans.

Adobe Systems (ADBE)

2010-02-07T20:15:00.000-08:00

Low Risk Option Category
Option Trade
Buy to open: March 34.00 strike calls
Sell to open: March 36.00 strike calls
Limit Debit: 0.50
Max reward: 1.50 (or $150 per spread)
Max risk: 0.50 (or $50 per spread)

Compound Returns

2010-02-07T08:21:00.000-08:00

Suppose you invest $10,000 into Gregory’s Tequila Company
Ticker Symbol: WORM
The first year, the shares rises 20%
Your investment is now worth $12,000
Based on good performance and incredible management, you hold the stock
In Year 2, the shares appreciate another 20%
Therefore, your $12,000 grows to $14,400
Rather than your shares appreciating an additional $2,000 (20%) like they did in the first year, they appreciate an additional $400, because the $20,000 you gained in the first year grew by 20% too!
If you extrapolate the process out, the numbers can start to get very big as your previous earnings start to provide returns
In fact, $10,000 invested at 20% annually for 25 years would grow to nearly $1,000,000
And that's without adding any money to the investment!

Scenario #1
You have $5,000 starting capital
If you can add $5,000 per year for the next 20 years
Total of your funds invested: $105,000
Compounded at 20% annual return
You would have $1,300,000
Scenario #2
$10,000 starting capital
Add $5,000 per year for the next 20 years
Total of your funds invested: $110,000
Compounded at 25% annual return
You would have over $3,000,000
Scenario #3
$20,000 starting capital
Add $10,000 per year for the next 30 years
Total of your funds invested: $320,000
Compounded at 25% annual return
You would have over $56,000,000

It takes some money to invest
It takes knowledge to get better returns
It takes time to compound
It takes patience!!!

All numbers below are hypothetical (expectations)
Swing stock trades (2-8 days in duration)
Expected returns for each type of stock traded:

Low risk stock trade expected return: +1% to +2%
Medium risk stock trade expected return: +2 to +4%
High risk stock trade expected return: +3 to +7%
Some will grow to become double digit performers!

Position stock trades (2-8 weeks in duration)
Expected returns for each type of stock traded:

Low risk stock trade expected return: +2 to +5%
Medium risk stock trade expected return: +5 to +10%
High risk stock trade expected return: +10 to +20%
Some will grow to become +20% performers!

Expected returns for each type of option traded:
Long Calls & Puts: Average return 20-50% of capital placed into the trade
Covered Call or Naked Put: Average return 5-15% of capital placed into the trade
Collar (Conversion): Average return 30% of capital placed into the trade
Calendar or Diagonal Spread: Average return 30% of money placed into the spread trade
Straddle or Strangle: Average return 30% of money placed into the spread trade
Butterfly or Iron Condor: Average return 50% of capital placed into the trade
Risk Reversal: Average return 30% of money placed into the spread trade
Vertical Spread: Average return 20-50% of capital placed into the trade

Exit: Berkshire Hathaway Trade (BRK-B)

2010-02-04T10:57:00.000-08:00

The stock was added to the S&P 500 as anticipated. The market looks shaky and I would be very inclined to short aggressively into the market (we just entered GES short). We will get out of the option "risk reversal" trade now.

Buy to close: March 65 strike put
Sell to close: March 75 strike call
Credit: 1.40 per risk reversal traded

We entered this trade at a debit or cost of .20 or $20 per risk reversal traded. We are taking it off and receiving a credit of 1.40 or $140 per risk reversal traded. That is a profit of 1.20 or $120 per risk reversal traded.

The margin requirement in this type of trade is 25% of the value of the underlying stock (roughly $1,750 per risk reversal). Given our margin requirements in the trade, it comes out to a 7% gain on money invested in under two (2) weeks time. To put that in dollar terms, for every $10,000 invested you have a profit of $700 in under two (2) weeks.

New Trade Idea

2010-02-01T09:30:00.000-08:00

Guess (GES)
Stock Trade
Short the stock with a stop-limit 0rder
Stop = 39.44, Limit = 39.35
Place a buy stop above at 41.14

Buying: Berkshire Hathaway Shares (BRK-B) With Both Hands!

2010-01-22T10:03:00.001-08:00

Berkshire Hathaway (BRK/B) just had a stock split. The class B shares split 50 to 1. In full disclosure: I already have a position and it is one of my largest holdings.

I see fair market value at $88/share, current price is $70/share.
I am also willing to bet the stock will be added to the S&P 500, this should cause an additional spike higher in the shares.

If you don't want to buy the shares outright and want to use leverage, here is the trade idea:

Option Risk Reversal
Sell the March 65 strike put
Buy the March 75 strike call
Debit will be around $.20 or $20 per spread
There will be a margin requirement of around $1,700 per risk reversal
Worst case scenario you own shares at a cost basis of $65.20
Best case scenario is unlimited upside profit potential

Goldcorp (GG) Longer-Term (April) 1 x 2 Put Spread

2010-01-12T07:41:00.000-08:00

Important note: You are naked half of the puts traded so, becoming long Goldcorp (GG) shares at a cost basis of $34.00 (20% lower than today's price) is a real possibility at April expiration. The initial margin requirement is likely in the ballpark of $1,000 for every 1 x 2 put spread traded.

Buy to open @ ratio of 1: April 42.00 strike puts (GAGPP)
Sell to open @ ratio of 2: April 38.00 strike puts (GAGPC)
Limit credit: .05 (try to put this trade on for at least breakeven of a zero debit/credit)

Maximum risk = unlimited below lower breakeven of 34.00/share. This because half of the puts traded are naked.

Maximum reward = 4.05 (or $405 per 1 x 2 traded)
NOTE: A gain of the entire 4.05 is a low probability, some portion of that is what we are gunning for.

The stock price moving higher and we make a small profit in the credit (.05). The stock price declining between 2% - 20% from current prices we make some good profit. If the stock falls further than 20% by April expiration and we are still in the trade, we will be long the stock and under water in the trade.

S&P 500 ETF (SPY) Long-Term Put Butterfly

2010-01-11T13:46:00.000-08:00

This is a long-term trade that we will likely be patient with for multiple months. It is a June Put Butterfly on the Spyder (SPY). We will profit if the market has an intermediate-term pullback. If the short-term downtrend never materializes, then we will be at risk for the cost of the trade (i.e., the total debit).

The trade details are as follows (NOTE: regular June options, NOT quarterly June options being used for this trade):

Buy to open @ ratio of 1: June 112.00 strike puts (SPYRH)
Sell to open @ ratio of 2: June 107.00 strike puts (SWGRC)
Buy to open @ ratio of 1: June 102.00 strike puts (SWGRX)
Limit debit: 0.50

Maximum risk = 0.50 (or $50 per butterfly traded)
NOTE: A loss of the entire 0.50 is a very real possibility, so trade accordingly.

Maximum reward = 4.50 (or $450 per butterfly traded)
NOTE: A gain of the entire 4.50 is a low probability

A realistic gain is probably 1.00 to 2.00 per butterfly traded.

Actual Reward-to-Risk Ratio = 8 to 1 (realistic reward-to-risk ratio = 3 to 1)

What is the difference between the actual and the realistic reward-to-risk ratios? The SPY would have to end up at exactly $107 per share on June expiration to have the maximum gain. That is a very low probability. However, there are many scenarios where we can make between 1.00-2.00 per butterfly in the trade. In option trading, you have to look at your absolute best and wost case scenarios. However, you plan your trades based on "most likely" best and worst case scenarios.

Market Update

2010-01-06T12:21:00.000-08:00

There is an all important U.S. unemployment report this Friday. It has long been our argument that an improving number is not necessarily a positive for stock prices. It would signal that the Federal reserve would begin raising rates sooner. What would likely be best for stock prices would be a continued gradual deterioration in the unemployment number.

The current fiscal stimulus is artificially propping up the market. We got into this mess because we have spent too much and saved too little. Now we are trying to combat that with more debt. In essence, we are like an individual who bought 10 homes and can't make the payments (too much debt). Then he goes out and borrows money to improve these homes or buy more homes to attempt to improve his situation. If the housing market recovers, rents comes in and home values increase, he may make it out okay. However, if things don't improve, then he goes bankrupt and his ability to borrow in the future is ruined.

Whether you believe in what the Fed is doing or not, there is risk and reward in it. The risk with increasing the U.S. debt by trillions is that it may not be successful. Our bullish stance on commodities and precious metals is based on what they are currently doing. If the economy improves, then they will have successfully navigated the first part of the problem, but will have to combat a lower dollar and big inflation. If the economy does not improve, then the dollar would likely get slammed and commodity prices (precious metals) could move dramatically higher accordingly. This increase in money supply has, to this point in time, improved the economy and company profits which has pushed stock prices upward.

We found it quite interesting to research back how the market moved immediately following the release of the unemployment report. You can see in the chart below that there is a common theme. That theme is for the current trend and momentum to turn regardless of which direction it has been in upon the report's release. If this trend continues, then you would want to enter Friday's trading day short stocks as the trend has been up and a reversal would send us lower. There is, of course, no guarantee that will continue, but it was an interesting phenomenon in 2009

Trade Adjustment & Trade Exit

2009-12-30T15:49:00.000-08:00

We attempted to trade into China Mobile ADR (CHL) a few weeks back. We had a buy order to get in on a breakout above $50/share. It never did breakout and at this point looks attractive at the lower prices. We are going to make an adjustment and enter the trade first thing tomorrow morning, the trade is as follows:
Buy: CHL
Limit order: 45.85

It is time to take profits in Mercado Libre (MELI)
We bought the stock at $46.10 per share
We will exit tomorrow above $52.00 per share
A return on investment (ROI) of 12.8%
We have been in the trade for 6 weeks
Sell: MELI
Limit: $52.00

Trade Exit - AMZN Call Spread

2009-12-29T08:47:00.000-08:00

We put on the Amazon (AMZN) bull call spread for a cost of 2.50 or $250 per spread. We can now take it off for 6.15 or $615 per spread. That is a profit of 3.65 or $365 per spread traded. 146% Return on Investment! If you put $1,000 into the trade you can now take it off and get paid out $2,460. Not bad for being in the trade less than 2 weeks.

New Trade Idea

2009-12-19T11:22:00.000-08:00

Amazon (AMZN)
High Risk Category
Bull Call Spread
Contingent on stock being greater than or equal to $129.17
Buy the Jan 135 Call and Sell the Jan 150 Call
Debit = 2.50
Max risk = $250 per spread traded
Max reward = $1,250 per spread traded

Option Expiration

2009-12-18T06:48:00.000-08:00

I want to describe some scenarios for exiting out of an option trade.
For example, assume that you are in a spread trade that expires this month (long an option and short an option on the same stock). If both strike prices are "in the money," then do nothing since they offset each other. If both strike prices are "out of the money," then do nothing since they will both expire worthless. If the stock price is between the option strike prices, then it will be necessary to close the option that is "in the money."

Let's show some examples:

Scenario #1
If you are in a spread trade and both options are going to end up "in the money," then do nothing (same day substitution will occur and they will get exercised for each other).

Example: You are long the 60 calls and short the 65 calls with the stock at $70. Over expiration weekend, these options would offset each other and you would receive the 5.00 ($500/contract) into your account. Why? You have the right to buy the stock at 60 and an obligation to sell at 65. You do so over the weekend (same day substitution) and the gain comes into your account automatically.

Scenario #2
If you are in a spread trade and both options are going to end up "out of the money," then do nothing (they will both expire worthless).

Example: You are long the 60 calls and short the 65 calls with the stock at $55. Over expiration weekend, these options expire with no action taken because your right to buy at 60 and obligation to sell at 65 are both worthless.

Scenario #3
If you are in a spread trade and one option is "in the money" while the other is going to end up "out of the money," then you must close the "in the money" option as it would be exercised into stock.

Example: You are long the 60 calls and short the 65 calls with the stock at $63. Over expiration weekend, the 60 strike call still has value because you have the right to buy at 60 and the stock closed worth 63. Your broker knows this is valuable and will exercise the option for you. This means that you buy the stock, paying $60/share (strike price amount) for an asset worth $63. The obligation to sell at 65 is worthless and expires. IMPORTANT: If you don't want the stock position, then you must always close any "in the money" option that is not offset by stock or an opposing option. So, in this example, you would need to sell the 60 strike call (sell it) so that it will not be exercised into a stock position.

Here is a breakdown of what options become if exercised into a stock position:

Long calls exercise into a long stock position.
Short calls exercise into a short stock position.
Long puts exercise into a short stock position.
Short puts exercise into a long stock position.

Buying Stock with Protective Puts

2009-11-22T19:34:00.000-08:00

One can buy insurance or sell insurance on stocks through the Options Markets.

If you wish to purchase insurance (protective puts) here are a few to consider before purchasing.

How volatile is the stock?
Will a stop loss be sufficient protection or do I need to purchase insurance?
Am I buying insurance while it is inexpensive ($VIX is low) and selling it when it becomes expensive ($VIX is high).
How much does the premium cost?
Do I need complete stock protection down to zero. If so, then just buy puts on the stock outright.
Do you simply need partial protection? If so, then place a lower cost bear put spread against the stock position.

A new trade idea for the week is as follows:
China Mobile ADR (CHL)
Buying the Stock with Partial Insurance
Contingent upon stock breaking above 50.05/share
Buy both the stock and Bear-Put Spread
For every 100 shares of stock
Buy to open 1 of the Dec 50 strike puts
Sell to open 1 of the Dec 45 strike puts
Limit debit = 51.55

Agriculture is going higher!

2009-11-17T21:35:00.000-08:00

We have previously traded this sector with great success (POT, MOS and others). We will go back to the Well once again. The elevator is going up to the top floor or close to it.

Buy: DBA (Agriculure ETF) tracks the price of corn, wheat, soy and other soft commodities.
Limit price:26.30
Stop loss: 25.64
GTC (good til canceled)

New Trade Idea

2009-11-16T11:03:00.000-08:00

MercadoLibre (MELI)
Stock Trade
Buy the stock with a stop-limit 0rder
Stop = 46.07, Limit = 46.22
Place a sell stop below at 43.88

Economics 101

2009-11-16T06:29:00.000-08:00

The stock market is a forward-looking mechanism. Unfortunately, many investors time their entry into and out of the markets at completely the wrong time.
Many investors are surprised that stock prices hit their lows in March of this year while the economy was in shambles and in the heart of the recession; stocks rebounded nicely since March, but the economy continued to falter. It should not really be a surprise at all that the stock market rose while the economy suffered.
Stocks are a leading indicator and are consistently around six months ahead of the current economic condition. A great example of this was back in late (December) 2007 when stock prices began to decline. This was a full six months before the economic recession actually arrived. Everything seemed just fine at the time; however, in reality, late 2007 was the ideal time to be selling your stock positions and possibly begin shorting if you wanted to be more aggressive. This would have kept you out of stocks during the stock market crash of 2008!
The signs were not purely economic as there were also fundamental factors such as the bank credit crisis and declining earnings. There were also technical indicators such as a death cross in the moving averages that foretold the pending doom.
The point is: In trading, you need to understand economics first, worry less about today and more about what is just around the corner! If the economy stabilizes and everything is great and that is when you finally begin to buy stocks, then you have it all backwards. Buy when others are fearful and sell when others are greedy! This one principle helped me to pay off my first home in less than 4 years.

I have posted some of the important economic conditions to watch out for, keep in mind its not where we are today but where we are headed. This principle is why I have bought more precious metal (Gold and Silver) and commodity (Oil and Agricultural) stocks in the past few months than I have ever done previously in my life. Those assets will rise sharply in an inflationary environment and although inflation is not a problem today, it will be soon enough!

Recession
In economics, a recession is a general slowdown in economic activity over a long period of time, or a business cycle contraction. During recessions, many macroeconomic indicators vary in a similar way.
Fall: Production as measured by GDP (Gross Domestic Product), employment, investment spending, capacity utilization, household incomes, business profits and inflation.
Rise: Bankruptcies and the unemployment rate.Governments usually respond to recessions by adopting expansionary macroeconomic policies.
E.g., increase money supply, increase government spending and decrease taxation

Depression
In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen as part of a normal business cycle. Considered a rare and extreme form of recession. Characterized by its length, and by abnormal increases in unemployment, falls in the availability of credit, shrinking output and investment, numerous bankruptcies, reduced amounts of trade and commerce, as well as highly volatile relative currency value fluctuation (mostly devaluations) Price deflation, financial crisis and bank failures are also common elements of a depression

Inflation
In economics, inflation is a rise in the general level of prices of goods and services in an economy over a period of time. When the price level rises, each unit of currency buys fewer goods and services. Consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy
A chief measure of price inflation is the inflation rate. The annualized percentage change in a general price index (normally the Consumer Price Index, or CPI) over time

Stagnation
Economic stagnation, often called simply stagnation, is a prolonged period of slow economic growth. Traditionally measured in terms of the GDP growth. The definition of “slow” Under some definitions, “slow” means significantly slower than potential growth as estimated by experts in macroeconomics. Under other definitions, growth less than 2-3% per year is a sign of stagnation. The term bears negative connotations, but slow economic growth is not always the fault of economic policymakers. E.g., potential growth may be slowed down by catastrophic or demographic reasons

Stagflation
Stagflation is an economic situation in which both inflation and economic stagnation occur simultaneously and remain unchecked for a significant period of time.Economists offer two principal explanations for why stagflation occurs.First, stagflation can result when an economy is slowed by an unfavorable supply shock, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable.This type of stagflation presents a policy dilemma because most actions to assist with fighting inflation worsen economic stagnation and vice versa.Second, both stagnation and inflation can result from inappropriate macroeconomic policies.E.g., central banks can cause inflation by permitting excessive growth of the money supply, and the government can cause stagnation by excessive regulation of goods markets and labor markets. Together, these factors can cause stagflation.

Stock or Option Arbitrage Trading

2009-11-08T14:43:00.000-08:00

The simultaneous purchase and sale of an asset in order to profit from a difference in the price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies. It provides a mechanism to ensure that prices do not deviate substantially from fair value for long periods of time.
Given the advancement in technology, it has become extremely difficult to profit from mispricing in the market. Many traders have computerized trading systems set to monitor fluctuations in similar financial instruments. Any inefficient pricing setups are usually acted upon quickly and the opportunity is often eliminated in a matter of seconds.

Let's look at an example of how a successful merger arbitrage deal works in practice:
Suppose ABC Company is trading at $40 per share when XYZ Company comes along and bids $50 per share – a 25% premium. The stock of ABC will immediately jump, but will likely soon settle at some price higher than $40 and less than $50 until the takeover deal is legally approved and closed. However, if ABC trades at a higher price than $50, then the market is betting that a higher bid will emerge.
Scenario #1
Let's say that the deal is expected to close at $50 and ABC stock is currently trading at $47. Seizing the price-gap opportunity, a risk arbitrageur would purchase ABC at $47, hold on to the shares and eventually sell them for the agreed $50 per share acquisition price once the merger is closed. From that part of the deal, the arbitrageur pockets a profit of $3 per share, or a 6% gain, less trading fees.
From the time that they are announced, mergers and acquisitions take about four months to complete. The 6% gain would translate into an 18% annualized return
Scenario #2
Another possible scenario would be for the arbitrageur to simultaneously do Scenario #1 AND also short sell XYZ stock in anticipation that its share price will fall in value. Of course, the value of XYZ may not change. However, often an acquirer's stock does fall in value. If XYZ shares do fall in price from $100 to $95, for example, the short sale would net the arbitrageur an additional $5 per share, or 5%
From the time that they are announced, mergers and acquisitions take about four months to complete. The 6% gain from target's stock and the 5% gain from the acquirer's stock together would translate into an impressive annualized return of 33% (less transaction costs) for the arbitrager

Merger Arbitrage Trade:

Berkshire Hathaway (BRK) announced that it is paying $100 per share to acquire railroad firm Burlington Northern Santa Fe (BNI). Berkshire will also take on $10 billion of Burlington Northern debt, valuing the total deal at $44 billion
The company said the deal is its biggest acquisition ever. “Our country's future prosperity depends on its having an efficient and well-maintained rail system. Conversely, America must grow and prosper for railroads to do well,” Warren Buffett said in a press release. Mr. Buffett added, “Most important of all, however, it’s an all-in wager on the economic future of the United States. I love these bets.”

Option Arbitrage Trade Details (Bull Call Spread)
Buy the April 90 strike calls
Sell the April 100 strike calls
Net debit = 8.00 or $800 risk and cost of trade
Max reward = 2.00 or $200 per contract
ROI = 25% in four months
A 75% annualized return

Sell Short Commercial ETF (IYR)

2009-11-06T10:04:00.000-08:00

New Trade Idea
We typically try to avoid entering new trades on Fridays. There tends to be choppy trading leading into the weekend. However, this is a trade that we feel can be entered if it meets our entry criteria tomorrow. We still run the risk of having it chop around and stop us out prematurely.

The thesis is part fundamental and part technical. Fundamentally, commercial real estate is in very rough shape. Technically, it has broken below support and is now re-testing it from below. This could be a nice entry opportunity to get short if we roll over. We are keeping a very tight stop loss which means low risk, but also increased risk of being stopped out early. The trade is as follows:

Commercial Real Estate ETF (IYR)
Sell Short: IYR
Stop Limit order:
Stop price: 40.91
Limit price: 40.83

If triggered into the trade, then place your buy stop order above at 41.61.

Ultra and Ultrashort ETF's

2009-11-05T09:12:00.000-08:00

Ultra and UltraShort ETFs
Get more exposure for your investment dollars. Leveraged and inverse funds, designed to pursue a multiple, or inverse multiple, of an index or benchmark on a daily basis, have grown in number and popularity in recent years. Utilize leveraged investment techniques that magnify gains and losses and result in greater volatility in value.

Each Ultra or UltraShort seeks a return that is a multiple or inverse multiple (e.g., -200%) of the return of an index or other benchmark (target) for a single day. Due to the compounding of daily returns, returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period.

Ultra ETFs:

More leverage in the Ultra ETFs. Buying an Ultra ETF is somewhat similar to buying a call option

UltraShort ETFs:

More leverage in the UltraShort ETFs. Buying an UltraShort ETF is somewhat similar to buying a put option since they have an inverse relationship to the underlying component.

Ultralong ETF's:

UYM ULTRA BASIC MATERIALS
UGE ULTRA CONSUMER GOODS
UCC ULTRA CONSUMER SERVICES
DDM ULTRA DOW 30
UYG ULTRA FINANCIALS
RXL ULTRA HEALTH CARE
UXI ULTRA INDUSTRIALS
MVV ULTRA MIDCAP
DIG ULTRA OIL & GAS
QLD ULTRA QQQQ
URE ULTRA REAL ESTATE
UWM ULTRA RUSSELL 2000
SSO ULTRA S&P 500
USD ULTRA SEMICONDUCTORS
ROM ULTRA TECHNOLOGY
UPW ULTRA UTILITIES

Ultrashort ETF's:

DUG ULTRASHORT OIL & GAS
DXD ULTRASHORT DOW 30
EEV ULTRASHORT EMERGING MARKETS
EFU ULTRASHORT EFA INTERNATIONAL
EWV ULTRASHORT JAPAN
FXP ULTRASHORT CHINA
MZZ ULTRASHORT MID CAP
QID ULTRASHORT QQQQ
REW ULTRASHORT TECHNOLOGY
RXD ULTRASHORT HEALTH CARE
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Option Time Value Deterioration (Theta)

2009-11-04T16:49:00.000-08:00

Since options have a specific life span, it makes sense that their values change throughout that period of time. Option Theta tells you the extrinsic value or how much an option changes (loses) each day before its expiration date. Thus, Theta is the estimation of how much of the option’s value has decreased for any specific day it is being traded. Since Theta has a negative influence on an option’s value, it is always represented as a negative value. Assume that you have an option with a value of 3.25 and a corresponding Theta of –0.25. You can then expect that tomorrow the option’s value will decline to 3.00 (i.e. 3.25-0.25). As long as the underlying asset’s price opens at the same price as the previous closing price. This graph shows what happens to an out-of-the-money Call option as it continues toward its expiration date. The amount the option’s value declines each day is ultimately what Theta determines. As the expiration date becomes closer, the option’s value declines at a faster rate. Notice the highlighted area, which represents the last 30 days of the option’s life. This is when the theta is eroding the value of the option at its fastest rate as demonstrated below in this graph.

A trade idea that will take advantage of option value deterioration (theta).
S&P 500 (SPY) Iron Condor Trade Example:
Buy to open: December 115.00 strike calls (FYNLK)
Sell to open: December 110.00 strike calls (FYNLF)
Sell to open: December 100.00 strike puts (FYSXV)
Buy to open: December 95.00 strike puts (FYSXQ)
Limit credit: 2.00

December 115 call = -0.0159 (bought) = -0.0159
December 110 call = -0.0279 (sold) = +0.0279
December 100 put = -0.0304 (sold) = +0.0304
December 95 put = -0.0180 (bought) = -0.0180
Summary
Since we sold the middle options, then the theta is actually a positive for us. The options we bought (outside strikes) have negative deterioration against us.
December 115 call = -0.0159
December 110 call = +0.0279
December 100 put = +0.0304
December 95 put = -0.0180
The sum of -0.0159 and -0.0180 = -0.0339
The sum of +0.0279 and +0.0304 = +0.0583
Adding -0.0339 and +0.0583 = +0.0244
Summary:
This means every day you can stay in the option trade (not taking into account stock price changes) you will profit +0.0244 on the number of contracts traded from time value deterioration. If the stock moves outside of these strike prices and then returns back to them a month later, then you will have a big gain because of all that time that has deteriorated in your favor!

Iron Condor Trade details:
Buy the December Iron Condor
Buy to open: 115.00 strike calls
Sell to open: 110.00 strike calls
Sell to open: 100.00 strike puts
Buy to open: 95.00 strike puts
Limit credit = 2.00
Breakeven prices are $98.00/share & 112.00/share
Max risk = 3.00
Max reward = 2.00