Market Beating Options Blog

Long Call Options Struggle With Market Woes!

2010-07-18T08:52:00.000-07:00

Another tough week with options, as market woes continue to pressure our long term call options. We need the market to rebound sharply by September to put us back in the money on many of the call options with expirations in Sep and beyond. The summer months are traditionally slow months, but hopefully the market will begin to gain traction by late August, otherwise we risk running out of time on some of these positions. We had a call spread position in Base Metals (DBB) expire in July with a net loss. Unfortunately, commodity prices have taken hits following the correction in May which put us out of the money by expiration. We had also taken a put spread position against the market index for insurance against further losses. We show a slight loss on the spread position, but remember this was purchased as protection against a sharp decline, so the expected loss is not really a bad thing. We will occasionally buy or sell protection as market sentiment becomes extreme in either direction. Unfortunately, we have been on the wrong side of the market over the short term and that has wreaked havoc with a near term option returns. We are moving to reduce our long positions and to move toward more short positions and income producing strategies. That transition will allow us to take advantage of the range bound trading that we have been experiencing. The challenge with trading options is that investors have to get both the direction and timing of price moves correct. We believe we understand the direction, but our timing was off as we did not anticipate the market correction that began in May. However, this is still our best performing portfolio long term, and we know that option returns can recover just as sharply as they fall.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Another Tough Week, Portfolio Will Recover When Market Rebounds

2010-06-27T13:52:00.000-07:00

Another tough week in our options portfolio as the market malaise continues to drag down our long call positions. We are down YTD in this portfolio, but also know how quickly returns can turn. We fully expect this portfolio to outperform the market by the end of the year. We have some call options in financial stocks including Bank of America and EZCorp and expect both to take off now that clarity over financial reform has improved. Most of our call options expire in September or later, so hopefully that will be enough time for the overall market to recover and restart its advance. We did purchase a call spread position against AutoZone last week having a January expiration. We need the stock price to rise just 3% by January to breakeven, but could make big gains of up to 100% if the stock price rises just 7%. We like the risk return tradeoff on this one and the January expiration gives us plenty of time to profit. The broad market volatility spiked again last week and if premiums continue to rise, we make take a short position on options that are close to expiration.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Rising Back from Yearly Low!

2010-06-13T13:36:00.000-07:00

Our options portfolio has begun to recover from the losses in May due to the market correction. The time limits on options really magnify returns when the market moves sharply down over short periods. There is always concern that the market may not recover quickly enough for long positions to regain value prior to expiration. As a portfolio management strategy we try to reduce this risk by spreading expiration dates on options holdings throughout the year. We also limit the capital allocation that we make to any one position. Amerigroup (AGP, Healthcare Facilities) and Clearwater Paper (CLW, Paper Products) are currently on our buy list. We have written before about our interest in purchasing an AGP Dec call spread with exercise prices of $35 and $40. We would buy the $35 and sell the $40 for a net debit. The option is already in the money and we would have six months to realize additional price appreciation. Healthcare has been an underperformer the past six months, and we expect that to change providing additional lift to Amerigroup. We may also sell the $25 put for additional premium to offset our net debit entry cost. Selling the put does have risk, but we are prepared to own the stock at $25 which in our mind represents exceptional value. Clearwater Paper was just added to our buy list and we may look to play a similar option structure but with January 2011 expiration. We plan to wait for the market to open next week and gauge sentiment before taking positions. Option premiums have declined from recent highs, but remain elevated. We may dip our toes back in the water and evaluate near term VIX short positions to cash in on elevated premiums. However, as learned in May, short positions can hurt if the market moves sharply against us. We remain very optimistic that our portfolio will bounce back sharply and finish the year much higher than the market averages. Over the longer term, this continues to be our best performing portfolio.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Rise Back From Yearly Lows!

2010-05-30T09:22:00.000-07:00

A good week as our options portfolio increased 4%. We are still at a loss YTD, but are confident we will have another market beating year. The biggest gain for the week was our call option on SanDisk which benefited from the 12% increase in share price. We are now up 76% on our SDNK call position, but expect more since expiration is not until October. We are holding a number of long call positions with expirations that range from June through January. These positions all took big hits with the May market turbulence. However, we think the market will settle down over the summer and these positions will return to profitability. Our short position against the VIX position has now also expired, and that had been by far the biggest drag on this portfolio. Amerigroup (AGP, Healthcare Facilities) stock is currently on our buy list. Options are also available for trade on AGP, and we are currently evaluating a Dec call spread with exercise prices of $35 and $40. We would buy the $35 and sell the $40 for a net debit. The option is already in the money and we would have six months to realize additional price appreciation. Healthcare has been an underperformer the past six months, and we expect that to change providing additional lift to Amerigroup. We may also sell the $25 put for additional premium to offset our net debit entry cost. Selling the put does have risk, but we are prepared to own the stock at $25 which in our mind represents exceptional value. We will wait for the market to settle a bit before setting up these trades next week. The month of May has been our worst options trading month ever. As we have said before, trading options can be very rewarding, but investors need to understand the trading risk and volatility that can occur over short periods. We remain very optimistic that our portfolio will bounce back sharply and finish the year much higher than the market averages. When measured over the longer term, this continues to be our best performing portfolio.

Big Bounce, But Could Have Been More!

2010-05-16T09:12:00.000-07:00

Once again, volatility wreaked havoc with our options portfolio. After four trading days, our portfolio return was back to breakeven, a whopping reversal of 23% over the prior week. Unfortunately, volatility once again spiked higher on Friday which cause some of those gains to evaporate. We still ended the week with an overall gain of 9.6%, but Friday’s losses still hurt! Our short position against the VIX index is causing the biggest drag on the portfolio. We think the market will bounce back again on Monday and Tuesday, so we plan to hold through the position’s expiration which is Wednesday next week. We expect to take a loss, but are optimistic we can minimize that loss if we get that market bounce. We fully expect this portfolio to recover in the near term once volatility begins to subside.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Volatility Delivers Crushing Blow!

2010-05-09T06:39:00.000-07:00

Ouch. The surprise volatility in the market last week delivered a crushing blow to our options portfolio. Our options portfolio had been trading significantly above the market return, and after one short week has fallen behind. Options returns are by nature far more volatile than stock movements. In that sense, the risk is higher, but so are the rewards. We purposely set limits on our overall options allocation to no more than 20% of our investment portfolio. We know the risk and returns for trading options is higher, so we manage our overall risk by placing limits on what is allocated to speculative investments. We also know that our options portfolio will bounce back sharply when the market recovers from this short term panic. Volatility will test patience and conviction, but now is not the time to bail on long positions that still have time to run. We expect our options portfolio to bounce back sharply once market fears begin to subside.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com/

YTD Return Rises to 33%!

2010-04-25T09:59:00.001-07:00

Our Aggressive portfolio has been on a tear rising another 6% last week bringing its YTD return to 33%. That is a great start to the new year, but the bigger story is our return since inception which has now reached 570%. That is an incredible return in just over three years in what has been one arguably one of the most difficult investing periods in history! We have laddered our option positions to take advantage of different expiration dates that close over the next eight months. That helps reduce some of the market timing risk that can wreak havoc with options trading. Generally speaking, option premiums are relatively cheap so now remains a good time for taking long positions. We have also taken more call spread positions where we buy to open a call with a lower expiration while selling to open a call having a higher strike price and the same expiration. This strategy reduces risk by lowering entry cost and the price required to breakeven. We look for six month positions where we have the opportunity for 150% gains while limiting our entry cost to 7% or less of the current stock price. Having six months until expiration provides enough time for the underlying stock to gain in price and for our option positions to make money. We use our Momentum and Value Stock Screen to find and select the stock and option combinations for investment.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

YTD Return Hits 17.5%!

2010-04-11T09:50:00.001-07:00

Our Aggressive portfolio moved up again last week, increasing the YTD return to 19%. Our short positions once again gained ground as time decay played to our advantage. Basic materials had a good week overall and that propelled our DBB call option higher. Volatility will rise as quarterly earnings season begins, which means our call positions may experience significant movement over the next few weeks. In particular, we are watching Bank of America closely as they will release quarterly earnings next week. We have a BAC Jan 2011 call option and currently sit on a 68% gain, so we expect to earn big money on this position. We do have some cash to put to work and have placed two orders for execution on Monday. The first is a call spread order on UAM (buy Oct $15 and sell Oct $17) and the second is a buy order on the DLM Sep $15 call. We are looking for aggressive pricing on both options, so there is no guarantee the orders will execute when the markets open.

Market Beating Options YTD Return Three Times Better Than Market!

2010-03-21T09:28:00.000-07:00

Our Aggressive portfolio fell last week, but its YTD return remains three times better than the market performance. The return on this portfolio does fluctuate due to the speculative nature of these investments. We expect volatility to rise slightly until the market consolidates. In this context, we expect to lose some ground on portfolio performance over the near term. However, we like how this portfolio is positioned for the rest of this year and expect to have another market beating year! We purchased a new call spread position on Aeropostale last week at an excellent price. We purchased the Oct $29 call and sold the Oct $35 call for a net debit spread of $1.95. The position could yield up to a 200% return and there is plenty of time to run given 8 months until expiration. We really like the risk return tradeoff on the Aeropostale position as our loss is limited to $1.95 or 7% of the current stock price. We also bought the Sep $20 call on Hanger Orthopedic Group. On Hanger, we are taking some risk buying in front of the Healthcare decision, but thought the position was worth the risk given the small premium cost. We were able to purchase this call at an exercise price and premium that is less than 15% above the current price. That will give us an excellent chance to get in the money prior to expiration in September. We do have cash to invest and will continue to look for other buying opportunities. This remains a good time to buy options, as low volatility encourages attractive premium prices.

Aeropostale Call Spread

2010-03-15T16:02:00.000-07:00

We really like Aeropostale and in fact wrote about this stock in our last newsletter after adding it to our buy list. Investors could choose to be long the stock or buy a call option, either will work. However, we decided to enter a call spread position instead of buying the stock outright. We bought to open the Oct $29 call and sold the Oct $35 call for a net credit of $1.95. In short, we got in at a great option price using the net credit spread. We really liked the risk reward tradeoff on this position. For $1.95 per contract, we get a potential gain of $6, which translates to a 200% option gain if the stock price rises just 24% by October. That is the beauty of options and leverage. The most we can lose is the $1.95 per contract which equates to a share price decline under 7%. In other words, if we held the stock instead of the option, and the share price fell more than 7%, we would lose more money holding the stock. The retail sector has been performing better than expected and we think that momentum will rise over the remainder of this year. With that in mind, we think our Aeropostale position could be very profitable prior to expiration in October!

58% Gain on Del Monte Call Option

2010-03-15T16:01:00.000-07:00

We closed our call option position on DLM today for an exceptional 58% gain! The option was expiring at the end of this week, so we decided to cash in and take our profits. DLM stock made a strong recovery after their latest quarterly earnings report and that put our option in the money!

Market Beating Options: YTD Return Impressive At 19.4%!

2010-03-14T12:35:00.000-07:00

Our Aggressive portfolio was once again the big winner last week rising nearly 4%. That brings our YTD return to an impressive 19.4% in just two short months! Even more astounding is our return since inception which surpassed another milestone after increasing more than 500% just since January 2007. Returns like those make the additional risk we take in this portfolio extremely worthwhile. We caution that we use this portfolio for more speculative investments like options which can carry higher risks. For this portfolio, we still have cash to invest and plan to increase our allocation in long call options as we find attractive buying opportunities from our Momentum and Value (MAV) Stock Screen.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

YTD Return Explodes to 15.5%!

2010-03-07T11:31:00.000-08:00

Wow! The Aggressive Portfolio exploded last week taking our YTD return to 15.5%, an increase of 11% for the week. That is a huge gain as we saw a number of our long call positions move into the money. We think this portfolio is very well positioned for gains, particularly if the market stays strong for the next few months. Our long call positions in Del Monte, Ezcorp, and the Materials Index were the biggest gainers. Del Monte expires in March so we may sell next week in advance of that expiration. Volatility has dropped significantly which means that option premium prices are very low. The best time to take long call positions is when markets are rising and premium prices are low like they are right now. We plan to increase our investment allocations in long call positions. We find these options using the same Momentum and Value Stock screen by identifying breakout stocks that also trade options. When we find a stock that has options, we look for call options that are reasonably priced with 5-6 months to expiration. Those timelines give our stocks plenty of time to appreciate and the leverage from options can provide for big returns. As for other trading, we closed our March VIX spread position last week for a small loss. For protection, we had purchased the $21 VIX call and sold the $25 VIX. This is an insurance strategy in case the market had a meltdown. This spread position would have gained in value if volatility rose sharply. We decided to sell this protection since the market strength was very strong last week and the position was nearing expiration. We expected to take a loss on the spread, but did that for the insurance protection the position provided. In another trade, we purchased a 20%position in the IWM ETF that is based on the Russell 2000 index. We took this position as part of a new strategy we plan to utilize for this portfolio. In our Aggressive portfolio, we allocate 60-70% of our funds to long call options, 10-20% to income producing trades, and 20% to a trend trading strategy based on a market index. We have spent significant time researching this trend strategy and have now decided to put this in action. The strategy is to take a 20% long position in the IWM ETF (Russell 2000 Index) whenever the market trigger moves up more than 4% on a weekly basis. The long position will be held until that same market trigger moves down more than 4% on a weekly basis. The sell trigger will invoke the sale of the long position and at the same time selling short an equivalent position in the same IWM ETF. In other words, we will always be invested in an IWM position, with that position either being long or short depending on the direction provided from the latest market trigger. A trigger will indicate a change in position only if the weekly change in the index is greater than 4%. Our research indicates that the best market trigger for use with the Russell 2000 index is the Value Line Geometric Index (VLIC). This index is widely available and published on several websites including Value Line and Yahoo Finance. The VLIC trigger was reached just this past Friday as the weekly gain was greater than 4%. That triggered our purchase of a 20% position in the IWM ETF. Our plan is to hold this long position until the Value Line Geometric Index falls more than 4% on a weekly basis. This is a fairly simple strategy, but our research shows this strategy has had tremendous success over a long period of time (420% return from 1/1/2001-11/2/2009). We would emphasize that the use of a weekly percentage change is important as that filters out the noise from daily price movements. We think this strategy works very well in our Aggressive portfolio and will actually offset some of the speculative risks taken with options trading. For this portfolio, we still have cash to invest and plan to increase our allocation in long call options as we find attractive buying opportunities from our Momentum and Value Stock Screen.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Market Beating Options - Monthly Update

2010-02-28T13:52:00.000-08:00

BofA and Ezcorp Calls Enjoy Big Gains!

Our options portfolio finished the month well above the YTD market return. Furthermore, our return since inception is a phenomenal 425% just since January 2007. The biggest gains last week came from our call positions in Bank of America and Ezcorp which rose 17% and 20% respectively. Unfortunately we lost ground on our Del Monte Call position. This investment will soon expire in March and the loss from time decay has been sharp. The option is not too far out of the money, but the stock would need to make a major advance over the next week or two prior to expiration for us to make money. There is a potential catalyst in that Del Monte's quarterly earnings are due for release next week, but it would take a significant and positive surprise to move the stock price enough for us to be in the money. Our call position (DBB) against the base metals index also moved sharply down last week. This call has a July expiration, so there is time for a recovery in the metals industry. Remember, using our strategy, success ratios with picking long call options will be lower than for stock picking due to the option trading characteristics. However, the rewards with trading call options are greater when we do get those picks right and that more than compensates for a lower overall success ratio. We also supplement our call option positions by selling short index options that can generate income throughout the year. Overall, our record speaks for itself as our portfolio performance with options trading has been outstanding.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Wow, Portfolio Rises 14% for Week!

2010-02-21T11:03:00.000-08:00

Our Aggressive portfolio had a major burst rising 14% last week as volatility continued to fall. That brings our YTD gain to 9%, well above the market return. The big story was the decline in volatility at just the right time. We had two short option positions against the VIX index and the drop in volatility ensured that both expired worthless leaving us with 100% gains on both positions! We like to take short positions against the VIX index whenever volatility moves sharply higher which we did during the most recent market crisis. Fortunately the market recovered just in time prior to expiration. Remember selling options short is risky; however there are ways to mitigate that risk. In addition, the vast majority of options expire worthless, so selling options short is a way to generate income and take advantage of those statistics. We also took a long position against the VIX index following the recent fall this week. We purchased a long VIX call option that expires in March at an exercise price of $21. The call is slightly out of the money. We are looking for protection in case volatility rises sharply over the next month. We also sold a farther out of the money March VIX call with an exercise price of $25 to help offset our protection cost. We were able to get this spread for essentially $1.10 per share and consider this relatively cheap insurance. If volatility does rise sharply our gain will be limited, but we will still make over three times our investment. If volatility does not rise, that will likely mean that our overall portfolio is increasing in value and that increase should more than offset the cost of the insurance protection. Remember, one of the keys to successful options trading is to manage risk and that is what we are doing by entering positions like this one. We also plan to increase our investment allocations in long call options.

Time to Buy Protection!

2010-02-19T15:31:00.001-08:00

We decided to enter a complex spread position on the VIX today to buy protection for the next month. We bought to open the March $21 call ($2.00) and sold the March $25 call ($.90) for a net debit spread of $1.10. We sold the call with the higher strike price in an effort to offset the cost of this insurance, in other words to lower our entry cost. The most that we can lose on this position is our entry cost of $1.10 per share. However, if volatility rises sharply prior to the March expiration, we could make as much as $4 per share less the entry of cost of $1.10. All in all, we are able to buy protection for the next month at a reasonable price and will have significant protection if volatility does spike again. We saw a significant short term spike in volatility during February so we could certainly see that again in March. There are a number of sources that could bring volatility back to the market, including the recent FED action over raising a key interest rate. The best time to buy protection is when volatility is relatively low and premiums are more reasonable.

Market Beating Options: Ouch, Volatility Creates Havoc!

2010-02-07T10:51:00.000-08:00

Ouch, the volatility last week created havoc with our Aggressive portfolio which lost nearly 8%. Frankly we opened a short position on the Volatility index a few days early, just prior to the extreme bursts experienced this past week. We are at a loss on our short VIX position, but expect the market fears to subside next week, which may put us back in the black. However, if volatility remains high through the end of next week we will likely close this position to cut losses. The market meltdown also took a significant bite out of profits on our long positions. Call options can be very sensitive to market selling pressure, and we saw a lot of that last week. For the most part, we plan to sit tight on our long positions for now. In fact, we plan to stay aggressive and trade the volatility over the next week or so. If the VIX approaches 30 again this week, we plan to sell short the index to take advantage of higher premiums. We will use those proceeds to take long call positions in the market index. We do expect volatility to decline over time, but frankly are uncertain how long the higher levels will persist. However, an encouraging sign was the sharp decline in the VIX over the last hour of trading on Friday. We also purchased a long call option on the S&P Index on Thursday as the selling pressure intensified. Our exercise price is at $1065, essentially flat with the most recent S&P close. This call is a short term option that expires in February, so we do not plan to hold for long. We expect to get a bounce upward early next week and will close our position when that happens. All in all, we expect this portfolio performance to vary greatly week to week due to the aggressive and leveraged nature of options investing. However, over time, we do expect to be richly compensated for carrying this addition risk, as our performance since January 2007 bears out (+360% return)!

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Market Beating Options: Option Play On Ezcorp

2010-01-31T14:42:00.000-08:00

We now have three spread positions in play on Natural Gas, Base Metals, and the Volatility Index. Unfortunately we have lost ground on all three long positions as the market downtrend wreaks havoc! Volatility has increased and concerns over economic growth, particularly fears over China, have depressed Natural Gas prices and prospects for the Metals industry. Last week, we think the market overreacted and became oversold. We expect all three spread positions to recover and become profitable. Our Natural Gas position expires in January 2011 and our Base Metals position in July of this year so there is plenty of time for corrections to take place. We also expect volatility to subside and our VIX position will make money if that happens prior to February expiration. The other long call positions we hold on Del Monte, Par Pharmaceutical, Paragon, and Healthspring also lost ground with the market sell off last week. Our Bank of American option rose slightly and we remain v ery optimistic that this position will make significant returns prior to expiration in January 2011. We also added a stock, Ezcorp to our stock buy list. This particular stock also has options available for trade. After reviewing Ezcorp options, we think there is an excellent trading opportunity in their September 2010 options. Specifically, we are looking to buy the September call with an exercise price of $17.50 and at the same time sell the September $17.50 put option. This is a very bullish strategy as the call will allow us to leverage gains in stock appreciation, while the sale of the put helps us offset our entry cost on the call. We expect to to pay a net debit of 75 cents (put sell minus call cost) to get in on this position, but the call is already in the money nearly 65 cents. In short, for almost no cost, we get to carry a call option on a stock that has significant price appreciation potential through September of this year. However, while the cost is pr actically free, there is risk that the stock price could fall to the point where we could lose money on the put we sold. Our strategy will be to quickly close the put position to limit loss if the stock price moves in the wrong direction. We plan to try to get into the Ezcorp position when the market opens on Monday!

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Buy Call Option on Bank of America Stock

2010-01-27T10:48:00.001-08:00

Bank of America’s stock price has declined sharply recently – 10% over the past five days. The company released quarterly earnings that fell short of expectations and the selling pressure intensified. We think the stock price has now stabilized at support levels that have been established over the past six months. Despite the troubles in the financial sector, Bank of America is an excellent franchise, one that will weather the storm. In fact, we think the much maligned Merrill purchase will return exceptional results over the long term. The new CEO may not be the most dynamic of leaders, particularly on the acquisition front, but that is not what is needed now. The leadership emphasis should be execution over what they now have and we think Moynihan can provide that. This is a very well run bank that will bounce back with a vengeance!

How is the best way to play the turnaround? Investors could buy the Bank of America stock outright or buy a call option. We found a great buy on an “at the money call” with an exercise price of $15 that doesn’t expire for one whole year (VBAAC). Expiration is not until January 2011 and you can buy the call now between $2.50 and $2.60. Option buyers would have a whole year to wait for price appreciation and we think the underlying stock will take off by the second half of the year. If the stock moves in the right direction, the potential returns on the option could be huge and much larger than the return from owning the stock outright. The option cost has a breakeven that is only 17% above the current stock price and that represents a very low premium for this stock option having a full year until expiration. Investors could also buy the stock, but the option play has the potential for bigger returns over a smaller capital outlay.

Amedisys Call Sold For 164% Gain!

2010-01-24T14:08:00.000-08:00

The Aggressive portfolio held up well despite the market difficulties. YTD the portfolio is up 5% which is a very good start relative to the -2% loss on the market. Amedisys was the big story as we sold our call option position for a 164% gain. We set our target stop order once we saw the underlying stock start to take off. Our stop order was hit as the stock approached its high in the middle of the week before falling back. By setting a target gain and stop order, we were able to get out just before the market starting pulling back. Stop orders are a great way to manage positions when you can’t watch the market every second of the day. We also bought a call option position on Bank of America last week after watching the underlying stock drop 8% in one day. We think the bank is an excellent long term franchise and consider the current pricing pressures a very short term problem. We purchased an “in the money” call for just $2.67 that does not expire until January 2011. We think the upside on Bank of America stock is very good and we have a full year to wait out those gains. If we get the direction right, our profits will be much higher on our option position than if we had bought the stock outright. We also sold to open a short spread position on the Volatility Index by selling the February 22.50 call and selling the 17 put. We wanted to take advantage by selling the rise in premiums due to the sharp increase in volatility. We think this position will end profitably, but frankly we could have sold for even more money if we had waited just one more day. Rising volatility will increase the opportunities for making money trading options, so we plan to monitor those developments very closely.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Market Beating Options: Long Call Options Heating Up!

2010-01-10T07:55:00.000-08:00

The Aggressive portfolio also had a strong week rising 3.35%. Our long call options on Paragon Shipping, HealthSpring, Amedisys, and Par Pharmaceutical all had strong weeks rising 33%, 13%, 12%, and 7% respectively. Our long call option positions are beginning to heat up and we think 2010 should be another good year. However, we did lose ground on Del Monte Foods and we remain far out of the money on our AgFeed Industries call option. Market volatility is down significantly and that means option premiums have also trended lower. Lower option premiums make it harder to find good opportunities for writing options as the smaller rewards often just are not worth the risk. However, we think volatility will likely rise over the next few months and option premiums should also rise as well. All in all, we think 2010 will be a good year for trading options. We expect to decrease cash levels in this portfolio over time as we uncover good buying opportunities.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Year End Review

2010-01-02T08:41:00.000-08:00

Market Beating Options: 400% Return In Three Short Years!

Our Aggressive portfolio turned in another exceptional year in terms of performance. We trade mostly options in this portfolio and our returns have truly been exceptional. Yes, there is higher risk with this portfolio, but so are the returns. We have earned 400% on this portfolio in just three short years! That is truly phenomenal over what has been a very difficult investing environment. We do take bigger risks in this portfolio, but we also seek higher returns to compensate. We spent much of the first half of 2009 on the sidelines given the uncertainty over market direction. However, by mid-year, we became more confident in the market stability and began to get more active with buying long call options. For example, just last week we entered a new spread position against the Natural Gas Index. We think Natural Gas Prices are near their lows and expect prices to rise in 2010 as industrial and residential demand improves with the economy. We bought the January 2011 call options with an exercise price of $11.00. To reduce our investment and risk, we also sold the January 2011 call options that have an exercise price of $16.00. This means our initial outlay is reduced along with our risk. However, that also means that we are capping our potential gain at 45% ($16 Divided by $11). We were able to get into this spread position with a net debit per contract of only $1.00, so in our minds the risk reward payoff is very good on this trade. We are also looking to take similar spread positions in options against industrial and/or precious metals. As for 2010, we think the New Year will provide ample opportunity for trading long call options. We expect volatility to remain at lower levels from what we experienced in 2008 and early 2009 and that should help keep option premiums more reasonably priced. We also plan to continue writing short term options against the market index and volatility index when opportunities present as that income will supplement the returns in this portfolio. We also plan to opportunistically take short term positions whenever the market overreacts or moves to aggressively in one direction.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Market Beating Options: SPX Short Position Expires For 100% Gain

2009-12-20T08:26:00.000-08:00

Not much movement in the Aggressive Portfolio as the portfolio essentially ended the week where it began. Despite ending flat, we had two positions that made strong moves during the week. Amedisys stock turned sharply upward helping our call option on the stock rise 95% for the week! That is a big move and highlights once again the volatility in trading options. Our position expires in March, so we still have time to ride the option and the stock price higher. The other big gain came from our short position on the SPX index which expires this week worthless. Since we were on the short side, that means a 100% gain for us! Generating income through the short sale of options can be very lucrative if risks are managed properly. We have several other long call options that are out of the money and some will surely expire worthless. Options are different from our stock portfolios in that we expect to win less often, but expect much larger gains when we do win to more than make up for lower win ratios. Our portfolio returns over time, clearly show our strategies toward buying and selling options is working very well. Since inception, our total return has now grown to 378% in just three short years!

SPX Short Position Gains Ground as Expiration Approaches

2009-12-13T12:55:00.000-08:00

The Aggressive Portfolio rose 1.2% for the week, a good gain in light of the flat market performance. Our biggest gainer was our short put position on the SPX index that expires in December that has an exercise price of 995. The put premium lost 63% of its value last week which is money to us. Out of the money options drop in premium value rapidly as expiration dates close in. We feel pretty confident that we will our close this position with a 100% gain. The other big mover was Amedisys which rose 37% for the week. The underlying stock made a big move and our call option followed suit. All in all, we are happy with the turnaround we have had in this portfolio over the past two months. We expect 2010 to be another good year for trading options. We do plan to become more aggressive trading call options next year as long as the market can hold the 1100 level on the S&P. We also plan to trade more income producing opportunities as that will help enhance returns in the slower growth market that we expect next year. Since inception in January 2007 this portfolio is up an astronomical 378% versus a market loss of 22% over that same time period. We know we need a higher return on this portfolio to compensate for the additional risk. But no doubt returns like these more than compensate for that additional risk.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

108% Gain On American Electric Option

2009-12-06T10:32:00.000-08:00

The Aggressive Portfolio also had another big week rising 5.5% to bring the YTD return to 34.6%, well above the market performance. Our return since inception in January 2007 is an astronomical 374% in just three short years despite one of the worst market periods in history. The big winners last week on our call positions were American Electric, Par Pharmaceutical, and Paragon Shipping. We sold our call position in American Electric for a whopping 108% gain. Par and Paragon were both up 18% and 13% respectively. We also made big gains on our short put position against the SPX index. We are now up 65% on this short position just since November 27! We expect to close this position with a 100% gain by the expiration date the third week of December. All in all this was a very good week in our Aggressive portfolio. We will have a call option expire in December for a loss, but we know that is to be expected when trading options as the vast majority of options expire worthless. We plan to become more aggressive trading options in 2010 as long as the market can build strong resistance over time above the 1100 level on the S&P Index.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Weekly Options Trading Update

2009-11-22T14:20:00.000-08:00

Market Beating Options: 100% Gain On VIX Expiration

The Aggressive Portfolio fell slightly for the week but the YTD remains exceptional at 29% and well ahead of the market return. We had two short option positions expire last week leaving us with 100% returns on both. We had taken a short spread position against the VIX index when the market suffered setbacks about a month ago. We got in at just the right time for when the market quickly recovered our short positions were quickly in the money. We do have other call option positions we are holding, but frankly they have just been moving sideways over the past week or so. We are currently sitting on a lot of cash in this portfolio. We are watching the overall market movement closely and will make additional investments in call options if market levels stay above the 1100 level. We bought one call option last week when the market hit this level and that was an option on Par Pharmaceutical. We were able to buy this option at a premium price that was only 11% above the current stock and exercise price. That is an excellent value for a long term option on a stock that has strong appreciation potential. We think we may be in position for big gains on this one if the underlying stock does well. We will buy more call options if the market can continue its march upwards. If we have another short term panic and premium prices rise, we may jump in and take another short position against the VIX and/or S&P Index. As we have said before, we remain cautious on call options at least until the market can sustain the 1100 level on the S&P. We do not feel the need to be too aggressive right now given that we have already earned an astounding 355% return on our portfolio return since inception in January 2007.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Weekly Options Trading Update

2009-11-15T11:38:00.000-08:00

Market Beating Options: Portfolio Rises 15% In One Week

Wow! A big move in our Aggressive Portfolio last week rising 15% and increasing the YTD return to 32%. That is a big move in just one week, but as we have said many times trading options is risky and returns can be very volatile. The biggest mover last week was our call option sale on Innophos Holdings. We sold this call option for a huge 202% gain as the underlying stock price made a strong move up based on their recent earnings report. Returns like that are possible on call options, if you can pick underlying stocks that make big moves like this one. We also closed our short position against the SPX index for a 95% gain. This was a short put position that expires in November which lost value quickly when the market rose sharply. We held this position for less than two weeks and were thrilled with a 95% gain! Our other short positions against the VIX Index have also made big moves. We took these positions on November 2 when the market moved sharply down and premiums were high. Now that the market has recovered, premium prices have fallen sharply and our positions have made big moves. We are now sitting on a 95% gain on a short VIX call option and a 20% gain on a short VIX put option, both purchased less than two weeks ago. Both options expire next week and if we can hold out until expiration that will bring 100% gains on both positions. We are 50% invested and may buy another call option or two if we find compelling opportunities. However, we remain cautious on call options at least until the market can break through the 1100 level on the S&P. We do not feel the need to be too aggressive right now given that we have already earned an astounding 365% return on our portfolio return since inception in January 2007.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap

2009-11-08T12:42:00.000-08:00

Market Beating Options: Portfolio With Biggest Weekly Gains

Our options portfolio though had the biggest turnaround rising 10% just last week! As we have said before, this is our most aggressive portfolio and returns can move sharply in either direction. That said, we think we are well positioned to finish the year strong and well ahead of the market return. However, the most important success measure in the portfolio return since inception and that is well this portfolio excels. Since inception in January 2007, the return on this portfolio is 312% versus a market loss of -25% over the same time period. No question that we take more risk in this portfolio, but we consider those risks worthwhile in light of returns like those. We took three new short positions which accounted for most of the weekly gain last week. We took these positions to take advantage of what we considered were oversold conditions from the prior week. The overall market got very pessimistic the prior week as the market indices dropped significantly. With those market declines came a sharp increase in volatility which helped push up option premiums. Higher option premiums make it more worthwhile to take short positions like the ones we took last week. All three short positions expire in November and we expect each of them to expire worthless which will leave us with 100% gains. We still believe this portfolio can make a strong run prior to the end of the year. We are 70% invested and may invest in another call option or two if we find compelling opportunities. However, we remain cautious on call options at least until the market can break through the 1100 level on the S&P.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Weekly Options Trading Update

2009-10-18T14:20:00.000-07:00

Market Beating Options: Portfolio With Biggest Gains Since Inception

The aggressive portfolio experienced a slight gain for the week as it continues a strong upward trend. That trend has propelled our performance gains to a whopping 317% just since January 2007. As we have said before, this portfolio does show a lot more volatility, but we think that risk is worth high returns like those. We just sold our call option position on the S&P Market Index to break even. We decided to sell as the market rose sharply this week. We had less than two months to expiration and grew concerned that the overall market may not continue its advance over the last two months of the year. We do not think we are in for a fall per se, just that the market may not continue to move up fast enough to warrant holding the risk on this position. We decided to sell and at least get our investment back. We have some other options that will expire in two to three months, so we will be watching those carefully to take advantage of selling opportunities. Option price volatility can increase significantly as expiration dates rapidly approach. The challenge with trading options is that investors not only have to get price direction right, but also have to get the timing correct as well otherwise options will expire worthless on expiration day. We are 60% invested and do plan to invest in another call option or two. However, the market is currently trading on the high side of what we believe is a reasonable trading range. In that light, we do not want to be too aggressive in this portfolio so we are not looking to get 100% invested right now. However, if we find a compelling buying opportunity we will invest and assume that risk.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Labor Day Options View

2009-09-07T07:02:00.000-07:00

Market Beating Foresight: Is Sentiment Changing

The stock market lost ground last week as the S&P dropped -1.2%. The week started with declines, but did recover some of those losses by the end of the week. Economic data was mixed as the Manufacturing Indexes showed improvement along with pending home sales. Payroll data was released on Friday and those numbers too were better than expected. But the market seemed spooked by an unemployment rate that rose more than expected. We sense that market sentiment is becoming more pessimistic with traders selling good news while bad news carrys more weight than it did just a few short weeks ago. September is traditionally the worst performing month and that too may be adding to the caution. The economy is still in declining although the pace of the declines has decreased. The worst may be over, but it will take time before consumer confidence returns and that is an essential ingredient for economic growth. We expect the unemployment rate to continue rising into next year, and those job losses will dampen any recovery. All signs still suggest that the recovery will be slow and could take several years as consumers regain confidence, rebuild wealth and reduce debt loads. Over the short term we expect the market to remain very bumpy, in range bound trading. We can make money in such a market by taking gains more quickly and turning over stocks more frequently. If volatility stays low, we know our trading strategy will exploit current market conditions, allowing expansion of our performance lead over competitors, as well as the broad market index.

Options Portfolio: Whopping 254% Gain Since January 2007

Our Options Portfolio is now up a whopping 254% just since January 2007. It is returns like those that make the additional risk worth while. We expect the market to end the year slighly higher. Not a great market for buying call options, but one for selective buying. We do plan to increase our allocations in call options but will do that slowly and selectively as the market shows continued improvement.

Weekly Recap - Stock Options

2009-08-30T11:28:00.000-07:00

Market Beating Options: Looking for more Call Options

The Aggressive Portfolio (Options) had another strong week bringing the Year To Date return to 13.4%. We are not surprised at the big jump in performance. The aggressive nature of options trading can bring big moves in portfolio performance. We expect to beat the market by a large margin again this year. Options trading has been very lucrative for us. We now have an incredible 299% return since inception in January 2007. Yes there is higher risk, but we think that risk is worth returns like these. Our short spread position on the VIX continues to gain ground as the September expiration approaches. Options lose value as their expiration date approaches, which benefits short positions. All of our option positions increased in value except AgFeed Industries. AgFeed stock has come under pressure this month and that has reduced the value of our call position. The call does not expire until February 2010 so there is still time for this one to recover. As for future plans, we have cash to invest in this portfolio, and we remain optimistic regarding an overall positive trend over the next six months. In that light, we are looking for additional option buying opportunities and plan to increase allocations over the near term.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap

2009-08-23T09:00:00.000-07:00

Market Beating Foresight: Market Hits Fresh New Highs

Volatility returned as the Stock Market hits fresh new highs for 2009. For the week the broad market (S&P) ended 2.2% higher, a strong turnaround from earlier in the week. For the most part economic data was poor with jobless claims rising more than expected and housing data failing to meet consensus estimates. The stock market was able to shrug off the bad news and rise further. By the end of the week, better than expected home sales were released which helped the market realize a weekly gain. A lot more economic data is due for release next week, which we expect will confirm an economy that is slowly beginning to stabilize. Most key measures are still declining, but the pace of decline has certainly slowed. We think the worst is over, but acknowledge that the recovery will likely be weak and slow. We just do not see a quick return to the high flying days of the past few years. The de-leveraging underway amongst consumers and businesses will temper spending and economic growth. That said, we think the stock market is still an excellent place to invest. We are very optimistic that our stock selection strategy and portfolio management approach will significantly outperform the market indexes in this environment. Frankly, we would welcome a stock market with lower volatility, even if that means somewhat slower market appreciation. We know our strategy can far exceed market returns in just such an environment.

Market Beating Options: Looking for more Call Options

Our Aggressive Portfolio (Options)is up a whopping 283% just since January 2007 versus a -28% market loss (S&P) over that same period. That is truly a tremendous difference in performance in what has been the worst recessionary period since the great Depression. We continue to trade short spread positions on the Volatility Index (VIX) as that generates income for the portfolio. However, our trading of call options has had the biggest postive impact on our returns over time. At this time we are aggressively searching for more opportunities to buy call options. Our strategy is to buy six month "at the money call options" based on stocks that we find through our Momentum and Value stock screen. This has been a proven and lucrative strategy for us over time. We keep subscribers fully informed with all transactions that we make and maintain a buy list of stocks directly on our website. Many of the stocks on our buy list also trade options. Those are the options that we consider, particularly if option premiums are reasonably priced.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com
Also Review Our Blog At: http://marketbeatingoptions.blogspot.com

Weekly Options Recap

2009-07-12T11:00:00.000-07:00

Market Beating Foresight: Summer Swoon Stokes Anxiety

The market lost ground for the fourth straight week as the summer swoon stoked more anxiety amongst investors. The market has been in the doldrums as concerns rise over the progress and outlook for an economic recovery. There was not a lot of economic news or quarterly earnings reports last week, but what was shared was not good. Oil led the market lower as concerns over declining oil demand from a faltering economy drove prices sharply down. The most recent ISM Services report showed economic contraction and jobless claims continue to rise. On a positive note, U.S. Treasury yields dropped significantly as investor demand drove prices higher which lowered yields. Smaller yields are good for Mortgage Rates as they trend closely the yield direction on longer term treasuries. To us, the market decline over the past four weeks is not all that surprising. We view recent performance as a correction and consolidation from the big run-up that started in March. The market had simply moved too far too fast and needed to catch its breath. Hopefully, four weeks of decline is all that is needed! The calendar next week will bring a heavy dose of economic data on inflation, production, retail sales, housing and jobless claims. In addition, reporting for second quarter earnings will be in full swing and will continue over the next few weeks. We believe the developments over the next few weeks have the potential to swing the market in a major way. Those developments could have a significant impact on the trend and direction that the stock market takes for the remainder of the year. We still view the stock market as reasonably priced, but caution that trading could become very volatile over the next few weeks. At the annual halfway point, the broad market is now down -2.7%. We still expect the market to finish with a positive annual return, that is as long as we avoid another market meltdown. We do have concerns that the market could test the lows hit earlier this year, but do not think that scenario is likely. We plan to stay fully invested in our stock portfolios and also plan to increase investment allocations in our options portfolio. The recent downturn in the oil industry has really pressured the stocks that we own related to that industry. We plan to carefully review these holdings over the near term and will make investment decisions based on future outlooks and price momentum.

Do we have option tips for investors? We have slightly downgraded our outlook from last week as we expect the market (S&P) to swing between a trading range of 860 and 960 over the near term. The market is currently trading near the bottom of that range and we expect that to continue over the very near term. We also expect volatility (VIX) to trade between 23 and 35 through the end of July. We think taking a short position on the SPX index with an August position might be attractive, particularly for investors that are primarily long in the stock market. Premiums on SPX put positions have risen with market fears, and now may be a good time to capture income. Overall, the economy remains fragile, and anxiety is rising that any recovery will be long and slow. The economy is not yet in recovery mode, although declines have slowed considerably. We think the current market offers attractive call buying opportunities but we favor options with at least 5 to 6 months to expiration. That extra time to expiration may be needed for the stock market to regain its footing and advance forward. We currently like the following call options PQOLW (Innophos Holdings), and newly added FQIBC (Calumet Specialty Products). Calumet is in the Oil and Gas industry and we like this option despite current industry woes. This option is already in the money and the premium remains low. We think the option offers good value If you can get in at $2.00 or less. We dropped WLTGH (Walter Energy) from our options buy list as the energy sector has come under pressure with expiration rapidly approaching. We are looking for additional option buying opportunities and plan to increase allocations over the near term.

Weekly Options Market Recap

2009-07-05T13:15:00.000-07:00

Market Beating Foresight: Rocky Week Dampens Enthusiasm

The market started last week sharply lower, then recovered in the middle of the week only to drop 3% on Thursday. It was certainly an up and down week as investors searched for market direction and a near term trend. The weekly news was more negative than positive and the lighter trading volumes due to the holiday week combined to make for a rocky trading. The biggest news was jobs data and consumer confidence, both of which came in with a negative bias. Job losses continue to mount and results have been worse than expected. But frankly this remains no big surprise to us as we expect job losses and unemployment to rise through the rest of this year. Even if we hit an economic bottom in the fourth quarter, it will take time before businesses to show an interest and willingness to expand payrolls. Unemployment may not improve until well into 2010! Investors were also startled at greater than expected declines in June consumer confidence. Consumers will likely continue to hoard cash and reduce spending which will restrict growth in demand for goods and services. Furthermore, oil prices fell over 4% last week in large part due to falling expectations of global demand due to weakening economic conditions. That negative bias, along with lower trading volumes, made for a rocky week of trading. In the end the bears won and the market ended with another weekly loss. As we have said before the economy is not good, and its recovery will likely be slow and weak. Quarter two earnings releases will begin in full force through the month of July and that will have the potential to move the market in a big way. We plan to closely monitor those earnings releases over the coming month. The market could be in for a major bump if companies fail to meet earnings expectations or if their future outlooks deteriorate. However, we still view the stock market as reasonably priced at the 900 level (S&P) and we plan to buy stocks and options long when we can at those levels. Volatility has been trending down, but could spike once again if investors get spooked with earnings news. At the 2009 halfway point, we are fully invested in our stock portfolios, but do plan to increase investment allocations in our options portfolio. In addition, over the near term we plan to prune laggards from our stock portfolios and replace with stocks that show stronger investor demand. We fully expect our portfolios to outperform the market for the remainder of the year.

Option Tips For Investors

Our outlook remains unchanged from last week as we expect the market (S&P) to swing between a trading range of 880 and 980 over the near term. We also expect volatility (VIX) to trade between 23 and 35 through the end of July. We think taking a short position on the SPX index with a July or August position might be attractive, particularly for investors that are primarily long in the stock market. With long positions, if the market moves up strong, investors lose on the short position but gain on their overall portfolio. However, if the market maintains a narrow trading range, investors can collect the income from the short at relatively low risk. However, risk is high particularly with naked positions, as those investments not offset by long positions theoretically offer unlimited loss. Overall, the economy remains fragile, but there appears to be a growing sense that the worst is over. The economy is not yet in recovery mode, but declines have slowed considerably. We think the current market does offer attractive call buying opportunities but we favor options with 5 to 6 months to expiration. That extra time to expiration may be needed for the stock market to regain its footing and advance forward. We currently like the following call options PQOLW (Innophos Holdings), and newly added WLTGH (Walter Energy). We dropped QYKLD (Chart Industries) from our options buy list as the premium on this one has gotten too expensive after the recent declines in the underlying stock price. We are looking for additional option buying opportunities and plan to increase allocations over the near term.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Options Market Recap

2009-06-21T09:28:00.000-07:00

Market Beating Foresight – Profit Taking Rules

Profit taking on low trading volume was the theme last week. Investors were selling early in the week and cashing in on profits from the strong market run since March 9. The good news is that trading volumes were low which suggest that conviction on the sell side was lacking. Profit taking seemed to be the biggest driver as the overall market news and trading was relatively light. On the economic front, housing starts were better than expected, however that was offset by greater than expected declines in industrial production. The rate of economic decline has slowed considerably, but it has not yet reversed course. We think the market has fully baked into current stock prices the improving outlook. We also think the market is currently trading in a reasonable range given the current market and economic outlook. It will likely take more significant and upbeat news on the corporate and economic fronts before the market goes on its next big advance. That advance will happen and we plan to stay fully invested to make sure we do not miss out. However, we think that market prices could remain trade range bound over the near term, at least until those big market moving events unfold. We plan to increase our investment allocation in long term call options as we do think the market will continue the advance over the next six months. We will also begin pruning our stock portfolios for stocks that are currently lagging the market returns. Our goal is to pick winners – stocks that perform better than the market benchmark - in seven out of ten stocks we purchase. However, that also means that we expect to pick at least three losers. In other words, 30% of our stocks will fail to beat the market. That is why portfolio pruning is necessary, with the intent to replace laggards with better performing alternatives. Replacing laggards with better performing alternatives is one of the key principles in our portfolio management strategy and investment approach. This approach has been a big factor in our success and helps ensure that we remain unemotionally attached to any one stock. We would also add that as a goal, a 70% success ratio represents an extremely high bar. Most investors would be lucky to achieve a success ratio of 50% over the relatively short trading periods we follow. In fact, the data would suggest that the majority of investors fail to consistently beat the market and that includes professional money managers!

Option Tips For Investors?

We expect the market (S&P) to swing between a trading range of 900 and 1000 over the near term. We also expect volatility (VIX) to trade between 25 and 35 through the end of July. The volatility or fear gauge continues to trend down, a good sign for long term investors. In light of our recent success, we are looking again for another opportunity in a short spread position on the VIX index having a July expiration. If we can get in with an attractive net credit position, we will sell the call above 35 and sell the put below 25. Again, these positions are an excellent way for us to generate portfolio income. However, risk is high as these positions theoretically offer unlimited loss. However, we try to minimize that risk with other holdings that would offset potential losses. Overall, the economy remains fragile, but there appears to be a growing sense that the worst is over. The economy is not yet in recovery mode, but declines have slowed considerably. In that light, we are now more optimistic over the long term health of the stock and options markets. We like the following call options PQOLW (Innophos Holdings), QYKLD (Chart Industries), and CYHLE (Community Health Sys), all of which are based on stocks selected from our Momentum and Value screen.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap

2009-05-31T15:41:00.000-07:00

Light Trading But Positive Week

Last week the S&P index ended 3.6% higher in light trading due to the holiday shortened week. The Year To date return for the broad market is now in positive territory at 1.8% after what was a pretty slow week in terms of news and corporate developments. One important news item was the consumer confidence reading which came in much better than expected. Those readings helped the market off to a good start for the week. But perspective and caution is important here relative to consumer confidence. We like the up tick in consumer confidence readings and the fact that results were better than expected, but readings remain at very low levels. We will breathe a sigh of relief once these readings show a sustained uptrend. On a different note, Long term bond yields fluctuated significantly last week which caused a market stumble when yields rose. Initial jobless claims slowed again last week which suggests the pace of layoffs is indeed slowing. However, continuing claims continue to grow which indicates that the economy is still not generating enough jobs to compensate for even a slowing pace of job loss. That is a trend we do not expect to see reversed any time soon. General Motors was the big corporate news as the company continues to teeter on bankruptcy. The market speculation is that the company will enter bankruptcy as early as next week.

Option Tips for Investors?

We expect the market (S&P) to swing between a trading range of 875 and 975 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 28 and 38 over the next month, mostly in the low 30 range. The volatility or fear gauge has been trending down which is a good sign for long term investors. However, there is always downside risk given the fragile economy and uncertain corporate outlook, although that risk has been decreasing. As we mentioned last week, the biggest downside risks that we see center on housing and unemployment. We expect unemployment to rise throughout this year, but if it gets above 10% that could bring fear back to consumers and investors. Housing measures continue to disappoint. While the pace of decline has slowed, the bottom in housing remains elusive. Housing represents a large part of our economy and also makes up a large part of investor wealth. Investors are more risk averse since their wealth has come under pressure in part from falling real estate holdings. Despite these risks, we are still optimistic for the stock and options market.

Weekly Options Recap

2009-05-24T10:46:00.000-07:00

Housing & Jobs Weigh on Market

Last week started off with a bang only to end with a whimper. However, the broad market did end the week with a slight 5% gain leaving a Year to Date loss of -1.8%. The start on Monday was strong and encouraging following the losses the prior week. Financials and investment firms led the way based on their improving outlooks. The bulk of first quarter earnings reports are nearly complete. Several key retailers announced particularly strong results that exceeded expectations, a sign that distressed consumer spending may be finally turning the corner. Frankly, spending has a long way to go before returning to levels seen from prior years, although the slowing decline we now see is encouraging. But the real story last week was the release of poor economic data on Housing and the Job market. Housing starts fell again to record lows on larger than expected declines. Jobless claims rose higher than expected with continuing claims once again setting new records. Frankly, these economic reports are not a surprise to us. The rate of deterioration in Housing and unemployment may be decreasing, but the bottoms remains elusive. In fact, we continue to believe that unemployment will not peak until later this year or even next year. For some reason, the market woke up and that realization weighed on efforts to push the market advance forward. It should be no surprise that the economy remains very weak and continues to decline across most measures.

Market Beating Foresight

We find the modest gain this week encouraging following the pullback from the prior week. The market had gotten a little ahead of itself, so we view the two week consolidation as a positive sign. Too much growth too fast just raises volatility levels. High volatility creates anxiety amongst investors and that usually slows the net inflow of funds into the market. Moderate and sustainable growth is what we like to see, and that helps investors maintain staying power for the long term. The economy remains very weak and in decline. However, first quarter earnings season was generally better than feared, and did not cause another market meltdown. We think now is an excellent time for investors to increase their stock allocations. The stock market will likely remain choppy, but we do not expect another meltdown barring an unforeseen world event. The market will certainly not be immune to bad news over the remainder of this year, such as bankruptcies that continue to mount. In fact, speculators are betting that General Motors will declare bankruptcy. It that does happen, we do not expect that announcement to cause another market meltdown. We think that investments made now and over the next few months will be very rewarding over the long haul. Investments made in the stock market today will look very good three to four years out. We also expect net cash inflows into the market to grow sharply over the remainder of this year. That will help drive a strong stock market recovery. Investors will not want to risk missing out on that recovery by sitting on the sidelines. In keeping with our plan, we are now moving aggressively to 100% equity investments in our stock portfolios now that the market has survived the first quarter earnings season. Generally speaking, we do not try to time the market as we like to stay fully invested in our stock portfolios except during times of unusual market volatility. The volatility we experienced in 2008 was truly unprecedented, and we expect the market to revert back to more normal volatility levels over time. That means we expect to carry higher stock allocations this year than what we carried last year. In addition, we are optimistic that the stock market will maintain a positive bias and uptrend for the remainder of this year.

Option Tips For Investors

We expect the market (S&P) to swing between a trading range of 850 and 950 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 28 and 38 over the next month, mostly in the low 30 range. The volatility or fear gauge has been trending down which is a good sign for investors. However, there is still downside risk given the fragile economy and uncertain corporate outlook, although that risk has been decreasing. The biggest downside risks that we see center on housing and unemployment. We expect unemployment to rise throughout this year, but if it gets above 10% that could bring fear back to consumers and investors. Housing measures continue to disappoint. While the pace of decline has slowed, the bottom in housing remains elusive. Housing represents a large part of our economy and also makes up a large part of investor wealth. Investors are more risk averse since their wealth has come under pressure in part from falling real estate holdings. Despite these risks, we are still optimistic for the stock and options market.

Weekly Options Recap

2009-05-17T09:07:00.000-07:00

Market Pulls Back!

Last week was tough for the stock market with the S&P 500 declining 5%, dropping the Year To Date return back in negative territory. The market pullback is not all that surprising after experiencing two months of unusually large gains. The reality is the market just got a little ahead of itself. As we have said before, we think it is healthy for the market to take a breather over the near term, 30% plus gains are just too much over a two month period in a declining economy. Yes, the economy is still in decline, although that rate of decline has slowed. Retail sales came in lower than expected last week, a big disappointment for the market. Consumer spending will likely continued to be challenged with unemployment fears and overriding concerns regarding economic health. Industrial production is still declining, although recent reports suggest the pace of that decline is slowing. Reports next week will provide more light on Housing, but a recovery in this sector just does not seem near. All in all, this is still a declining economy, although the positive is that the pace of that decline is slowing. That is good news, but we also suspect that economic recovery will be modest and slow when it does come. First quarter earnings season is almost over, and while most companies have treaded water, results show just how deep the economic impact has been.

Option Tips For Investors!

We expect the market (S&P) to swing between a trading range of 850 and 950 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 28 and 38 over the next month, mostly in the low 30 range. The volatility or fear gauge has been trending down which is a good sign for investors. However, there is still downside risk given the fragile economy and uncertain corporate outlook, although that risk has been decreasing. The biggest downside risks that we see center on unemployment and corporate earnings. We expect unemployment to rise throughout this year, but if it gets above 10% and market expectations, that could bring fear back to consumers and investors. Quarterly earnings to date have held up for the most part relative to low expectations. But if future earnings do not make up lost ground, the stock market could suffer. Despite the risk, we are still optimistic for the stock market. One options trade would be to write a spread position on the volatility index (VIX). We currently like the following spread position with VIXRY and VIXFH, both of which expire in June and have a net premium around $2.00. We also like the put option on the market index (SPXRE) that expires in June and currently trades around $14.00, but would caution there is significant risk with this trade if the market falls.

Portfolio Details Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap

2009-05-10T13:42:00.000-07:00

Amazing Two Month Turnaround!

Wow, another strong week with the broad market (S&P 500) advancing a whopping 5.9%! That brings the Year to Date performance on the index into positive territory, now at 2.9%. That is an amazing turnaround from the market lows hit on March 9. Over the past two months, the broad market index has risen an incredible 37%, for what is surely one of the best two month performances in stock market history. To many of us, it feels like the worst is over for the stock market, and recent money flows into the market would support that. Late March and April cash inflows were at their highest percentage levels since 2003, which coincided with the start of our last bull market. Net cash inflows are highly correlated with stock market performance, as inflows drive up demand for stocks and prices follow suit. For this recession, we do think that the March lows may turn out to be the stock market bottom. However, we also know that the market cannot sustain 30% plus gains every two months for the remainder of this year. Do not be surprised if there is a bit of a pullback or market consolidation over the next few months. In fact, it might be healthy to see the market take a breather over the near term. However, we suspect there is still a great deal of money on the sidelines that will eventually enter the stock market. Those inflows have the potential to drive the market significantly higher. Our only concern is that the stock market may be getting a little ahead of itself, as the economy is still in decline as we discuss below.

Rate of Decline is Slowing!

Has the recession hit bottom? The evidence suggests that the recession is still very much in force. Most economic measures are still declining, although the rate of that decline has indeed slowed significantly. That slowing rate of decline is what has most investors excited. For example, most manufacturing activity still shows contraction and the unemployment rate continues to rise, although jobless claims did come in lower than expected last week. Measures on GDP continue to show declines, although that rate (pace) of decline is slowing. Housing measures are still very poor and a bottom still appears elusive. However, it is fair to say that the economic news and forecasts today are less bad than they were a few months ago. Those are encouraging signs that we too think are positive. However, we do not think we will see the end of the recession until later this year. In fact, we think unemployment will continue to rise through the end of this year. Real economic growth and job creation may not reverse trend and start upward until 2010. However, the stock market is considered a leading indicator on economic measures, with past history suggesting it will lead the economy out of recession by 6 to 8 months. If March was the bottom that would suggest economic trends will turn positive by the end of the fourth quarter this year. While it will take time for the economy to reverse trend, the stock market has already begun its march upward. The other big news last week was the financial sector. The government released the bank stress tests, and results were better than the market expected. The financial sector exploded, rising more than 23% in one week alone! Also, the 1st quarter earnings season is now winding down. All in all, corporate earnings have come in mostly better than expected, although they are down from prior years. On the other hand, companies have not done as good a job meeting revenue expectations, which we view as a reflection of just how poor the economy really is.

Option Tips For Investors!

We expect the market (S&P) to swing between a trading range of 875 and 975 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 28 and 38 over the next month, mostly in the low 30 range. The volatility or fear gauge has been trending down which is a good sign for investors. However, there is still downside risk given the fragile economy and uncertain corporate outlook, although that risk has been decreasing. Quarterly earnings for the most part have been better than expected, although revenue expectations have fallen short for a majority of companies. Earnings are easier for companies to manipulate over the short term than revenue, with the later perhaps a more objective measure of the long term business health. Lower revenue expectations are a sign to us that the economy is having a more negative impact on companies that initially expected. That leads us to believe that the recovery may take longer than expected. Our primary options strategy is to buy long call options on stocks that hit our Momentum and Value screen. Given the rocky market since November, that strategy has been pretty much on hold. However, with the recent market strength and growing investor optimism, we have begun to invest in this strategy again. We are not ready to go all in on options, but do plan to increase our allocation on long call options over the near term.

Weekly Options Update

2009-05-03T13:48:00.000-07:00

Market Shrugs Off Flu!

The market was able to resume its advance last week, despite wide ranging fears over spread of the swine flu. Concerns over the swine flu appear to have been overdone and by the end of the week the broad market (S&P 500) finished up 1.3%. The Year to Date loss on the market index has now been trimmed to -2.8%. However, the NASDAQ continues to be the big winner and is now up 9% for the year thanks to technology and smaller capitalization stocks. Subscribers will notice that our investment activity has begun to pick up over the past month. The number of opportunities that show on our stock screen has grown each week over the past month. We remain optimistic as the market continues to show strength and resiliency. First quarter earnings season is still in full swing, but will wind down over the next couple of weeks. All things considered, the market has held up pretty well with the onslaught of earnings reports.

Earnings Down, Revenue Lower Than Expected!

Economic reports last week were mixed. On the positive side, consumer confidence readings came in much higher than expected. In addition, manufacturing readings also come in higher than expectations. However, for perspective, the manufacturing readings still indicate contraction, although the pace of contraction has slowed significantly. There were also some negative economic readings released. Preliminary readings on first quarter GDP came in much lower than expected for a declining annualized rate of -6.1%. It appears that some of that GDP decline is attributed to sharply reduced inventory levels, which may tend to overstate the ongoing economic weakness as inventory replenishment will need to happen over time. In addition, reports on technology and construction spending were drastically down for the quarter. We are very encouraged with the consumer confidence readings as improvement in that key measure is vital towards jumpstarting spending levels. And without consumer spending, economic growth will be challenged. Consumer confidence remains at low levels, but the upward trend is an encouraging sign that a economic bottom may be near. However, other reports such as GDP and construction spending highlight just how weak the economy is. Our view is that the economy is still declining, but at a much slower rate. Early bird speculators might see that as the green light to rush in and buy more stocks. We also see this as a sign to increase equity allocations, but would caution those investments are best made only gradually over the near term.

Option Tips for Investors!

We expect the market (S&P) to swing between a trading range of 825 and 925 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 30 and 40 over the next month, mostly in the mid 30 range. The volatility or fear gauge spiked a little early last week before stabilizing in the mid 30 range. There is still downside risk given the fragile economy and uncertain corporate outlook. Quarterly earnings for the most part have been better than expected, although revenue expectations have fell short for a majority of companies. Earnings are easier for companies to manipulate over the short term than revenue, with the later perhaps a more objective measure on the long term health of the business. Lower revenue expectations are a sign to us that the economy is having a more negative impact on companies that initially expected. That leads us to believe that the recovery may take longer than expected. Our primary options strategy is to buy long call options on stocks that hit our Momentum and Value screen. Given the rocky market since November, that strategy has been pretty much on hold. However, with the recent market strength and growing investor optimism, we have begun to invest in this strategy again. We are not ready to go all in on options, but do plan to increase our allocation on long call options over the near term. We currently are adding the following option to our buy list LLIAE (Energy Transfer, Jan, 25). We are currently 75% cash in this portfolio, and are looking to buy one or more long call options, if we can get in at good prices and market conditions remain favorable.

Weekly Options Recap

2009-04-26T12:36:00.000-07:00

First Down Week In Nearly Two Months!

The broad market (S&P 500) had its first weekly loss in nearly two months. Market results were mixed though as the S&P 500 fell, but the NASDAQ posted yet another weekly gain on the strength of technology stocks. The S&P index dropped to a -4.1% return Year to Date. Trading was volatile as the market swung widely throughout the week. On a positive note, the market continues to hold the gains made over the past seven weeks. The NASDAQ has been the big winner so far this year in large part due to technology stocks. The NASDAQ has now reached a 7.4% Year To Date return, which is a big premium over the S&P Index return. Smaller cap stocks which make up more of the NASDAQ index have clearly performed better than the large cap stocks that dominate the S&P index. That is a good sign for our strategy as our stock screens tend to uncover more smaller cap stocks. Company size is not a criterion in our stock screen. However, small caps are more prevalent on our screens since our focus is on momentum, growth, and value, attributes where small cap stocks often excel relative to their larger counterparts. The facts suggest it is a lot easier for a $200 million company to grow 25% than a $20 billion company. We continue to be optimistic on the stock market as the recent trend continues to show significant strength. First quarter earnings season is now in full swing, and will continue to be the primary driver on market direction over the near term.

Earnings Down, Revenue Lower Than Expected!

Earnings reports were the primary driver last week and will likely be the focal point next week as well. So far, most companies are reporting significant drops in earnings which news reports suggest are down overall on average 40%. However, the majority of companies did beat analyst expectations relative to their earnings performance. Beating expectations is a positive, although we would caution that expectation levels were in general very low. However, we do think companies overall have been aggressive and successful with reducing expenses quickly, and that has help sustain higher earnings levels. In our mind the bigger concern is the behavior of top line growth, revenue. News reports suggest that overall revenue is down nearly 11%. That is a smaller decline that earnings, but what is interesting is that the majority of companies are posting revenue numbers that are worst than expected, the opposite of the earnings situation. Our concern is that it is easier for companies to manipulate earnings over the short term than it is to manipulate revenue. Revenue growth is usually a very good barometer for the long term health of a company. The fact that most companies are missing revenue expectations suggest that market and economic factors are indeed having a significant impact, one that will likely continue for some time. Declining revenue will certainly pressure companies over the near term, declines that could have a more significant impact as companies exhaust their cost cutting measures. The Treasury stress test is also causing volatility in the financial sector, although preliminary reports suggest that most banks are carrying more than enough capital. Existing home sales were down again in March, while new home sales were up slightly from very low levels. The Housing sector has just not responded yet to low mortgage rates, lower house prices, and government efforts to increase available credit. We view that as a sign that a recovery in housing is not going to happen overnight as job fears and higher inventories depress sales. In fact, we see a long term housing trend that will demand adjustments to what we would call the re-pricing of American real estate. That means a downward bias in long term real estate price trends, including smaller and cheaper homes.

Option Tips For Investors!

We expect the market (S&P) to swing between a trading range of 825 and 925 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 30 and 40 over the next month, mostly in the mid 30 range. The volatility or fear gauge spiked a little early last week before stabilizing in the upper 30 range. There is still downside risk given the fragile economy and uncertain corporate outlook. However, the next quarterly earnings cycle will shed light on the future outlook, and we remain encouraged that the market has held the large gains from the prior two months. Our primary options strategy is to buy long call options on stocks that hit our Momentum and Value screen. Given the rocky market since November, that strategy has been pretty much on hold. However, with the recent market strength and growing investor optimism, we are now ready to begin investing in this strategy again. In fact, we made one additional purchase on Force Protection which we introduced on our buy list last week. We are not ready to go all in on options, but do plan to increase our allocation on long call options over the near term. We currently like the following options, ERQJC (Sepracor, Oct, 15), ETEJE (Energy Transfer, Oct, 25), and TSLLV (Trina Solar, Dec, 12.5), for which all have underlying stocks that currently show on our Stock Buy List.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap, April 10, 2009

2009-04-12T15:05:00.000-07:00

Fifth Straight Week of Market Gains!

Another strong week as the broad market advanced last week for its fifth weekly gain in a row! The S&P Index has now pared its Year to Date loss to -5.2%. That is a dramatic 26% turnaround from the lows that were hit in early March. But the NASDAQ has been an even better performer and now sits with a Year to Date gain of 4.8%. We definitely sense that the market is beginning to stabilize and that investor confidence is growing. The stock market advance over the past five weeks has been strong and has been supported by higher trading volumes. The optimism that is building will encourage more and more investors to leave the safety of cash bringing even greater demand for stocks to drive prices higher. We too are feeling that the worst may be over for the stock market, although the economic struggles are likely to continue for some time.

Signs Economy is Stabilizing!

The economic data was a bit better last week, but still provides overwhelming evidence of a struggling economy. However, the economy appears to be showing some signs of stabilizing although at very low levels. US retailers posted smaller-than-expected sales declines, a hopeful sign that consumer spending may turn soon. In fact, the S&P retail index gained 4.6% for the week with Macy as one of the industry leaders. But the economy will likely continue to struggle for some time. New jobless claims fell last week, but claims remain at very high levels that suggest peak unemployment is still a ways out. Perhaps the biggest market mover last week was the financial sector. Financial stocks got a big lift from Wells Fargo after the bank forecast a profit of $3 billion for the first quarter and indicated they saw significant strength in their mortgage business after refinancing hit a six-year high. The financial sector has been at the heart of the global economic crisis, and an improving outlook for banks will surely drive the stock market higher. Another sign of the changing market sentiment is the Volatility Index (VIX), often referred to as the fear gauge. Last week the volatility index closed at its lowest level since September 2008. Lower volatility is a sign that the market is beginning to stabilize. However, as we have seen over the past year, market movements can swing wildly very quickly, particularly when there have been strong moves in one direction.

Option Tips For Investors!

Do we have option tips for investors? We expect the market (S&P) to swing between a trading range of 775 and 900 over the near term in what may remain choppy trading. We also expect volatility (VIX) to trade between 33 and 45 over the next month, mostly in the upper 30 range. We still consider the market downside risk moderate, but are encouraged that the market has held the large gains from the prior four weeks. Our primary options strategy is to buy long call options on stocks that hit our Momentum and Value screen. Given the rocky market since November, that strategy has been pretty much on hold. However, we now see encouraging signs including growing optimism and confidence amongst investors. We are now planning to selectively buy long-term options based on our Momentum and Value Screen. This strategy will not work in periods of a sustained market downturn, so we have been waiting until we felt the worst was over for the stock market. We still are not ready to go all in on options, but do plan to increase our option allocations over the near term. We are also prepared to buy calls and puts on the market index if there are large swings that show signs of a market overreaction. We expect to have more choices on options to buy now that the number of stocks showing on our Momentum and Value buy list is trending upward with the overall market. We are currently 80% cash in this portfolio, but plan to increase our investments and reduce our cash level over the coming weeks as long as market conditions remain favorable.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap, April 3, 2009

2009-04-05T13:14:00.000-07:00

First Monthly Gain in Eight Months!

Another strong week as the broad market advanced 3.3% last week for its fourth weekly gain in a row! Even better, those four weeks left the broad market index with a monthly gain of 8.5%, the first monthly gain in 8 months. However, despite the large monthly gain, Year to Date performance remains at a loss of 6.7%. All things considered, it does feel like the market is starting to stabilize and investors are gaining more confident. March price movements were indeed rocky, but we find the recent strength very encouraging. We mentioned last week that the market has been trading in a wide range around 800 now for the past six months. Right now the market is on the upper end of that trading range and we think the next few weeks will be very telling with regard to its long term trend. Many stock market pundits now consider the worst to be over. That could be right, but we also don’t think the market can sustain the recent trend and rise 8% each month for the rest of the year. Given the strong advance, do not be surprised if the market pulls back or trades in a much smaller range over the near term. Nonetheless, this appears to be a good time for investors that are sitting on the sidelines to gradually re-enter the market.

Market Advances Despite Weak Economy!

The economic news last week again highlighted the weak economy. The stock market was able to advance for the week despite less than good economic news. Home prices came in with declines worse than expected at 19% year over year. In addition, consumer confidence remains at low levels and was lower than expected as measured by the recent March reading. Manufacturing reports continue to show a contracting economy, although the rate of that contraction is slowing. The jobs situation continues to be the more troublesome indicator, as jobless claims continue to mount. Most economists expect unemployment to trend upward and at 8.5% is already at the highest level since 1983. We would not expect the unemployment rate to crest until later this year or even early next year. The other big news was the pending bankruptcy of GM and Chrysler. The CEO for GM was forced out last week, and news rumblings are rife with bankruptcy talk. It may be very likely that GM does enter some form of bankruptcy protection, although we suspect the government will help soften the impact of such an event on the larger economy. As for Chrysler, the government has been blunt suggesting that they have 30 days for which to consummate an agreement with FIAT. The government message is that Chrysler will not be bailed out if a merger agreement is not reached. The market has been taking the potential for bankruptcy from these automakers in stride as stock prices still advanced through the week despite all the talk. We are more cautious as bankruptcy with one or both of these automakers will have significant downstream impacts on supply chain participants and other industry stakeholders. The market did appear to get a lift from the Financial Accounting Standards Board when it was confirmed that mark-to-market accounting rules would be eased.

Option Tips For Investors?

Do we have option tips for investors? We expect the market (S&P) to swing between a trading range of 750 and 875 over the near term in choppy trading. We also expect volatility (VIX) to trade between 35 and 50 over the next month, mostly in the low 40 range. We still consider the market downside risk high, but are encouraged that the market has held the large gains from the prior four weeks. Our primary options strategy is to buy long call options on stocks that hit our Momentum and Value screen. Given the rocky market since November, that strategy has been pretty much on hold. However, we now see encouraging signs such as the market strength shown over the last four weeks, poor but stabilizing economic indicators, and a growing optimism amongst investors. We are now getting closer to putting our strategy of buying long term options back in play. This strategy will not work in periods of a sustained market downturn, so we have to feel comfortable that the worst is over for the stock market. We are not ready to go all in on options, but do plan to increase our allocation on long call options over the near term. We are also prepared to buy calls and puts on the market index if there are large swings that show signs of a market overreaction. We expect to have more choices on options to buy now that the number of stocks showing on our Momentum and Value buy list trends upward with the overall market. We are currently 80% cash in this portfolio, but may increase our investments and reduce that cash level over the coming weeks if market conditions remain favorable.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap, March 27, 2009

2009-03-29T12:48:00.000-07:00

Bull Market or Consolidation?

Another strong week as the broad market advanced 6.2% last week. That makes the third straight week that the market has advanced reducing the Year to Date loss to 9.7%. Most of the weekly gain came on Monday, but the fact that the stock market held those gains through the rest of the week was an excellent sign of resistance. Investor confidence appears to be returning and with that will come the more cash to push stocks higher. In our view, the stock market has been consolidating in the 800 range (S&P 500) for nearly six months now, since November of last year. Yes, there have been large swings above and below that level as we have seen over the prior two months, first losing more than 24%, before recovering 22% over the last three weeks. These percentage movements have made for a very rocky market over the last six months. However, when those market movements are smoothed out over a longer period, we see a market that has been consolidating in that 800 range. Many consider a bull market to have begun once the stock market moves more than 20%. The market has now moved up more than 20% from its March lows! However, our view is more cautious as we believe it is still too early to call for the start of the bull market. Frankly, we see the recent move as more of a consolidation back to that 800 level. Although not ready to jump on the Bull stampede, we are growing more optimistic that the worst may be over for the stock market. We sense that investor confidence is building and eventually that will bring the necessary demand to drive stock prices higher.

Economic Data Fuels Optimism!

Last week the economic news was pretty good. Existing home sales and new home sales both rose substantially more than expected. Estimates called for month over month declines, but instead both new and existing reports increased in the 5% range! Granted these increases need to be validated over a longer trending period, but nonetheless are encouraging signs. Reaching a bottom in housing will certainly help the economy regain its footing. Another positive was durable goods orders which rose 3.4% for the first increase in six months. Retail sales also showed strength with results that exceeded expectations. Consumer spending appears to be showing signs of life and that is critical for an improving economy. Last week long term mortgage rates moved lower as a result of recently introduced FED programs to buy up long term treasury securities. Those programs will help drive mortgage rates down for consumers, and lower rates will encourage refinancing and in turn put more money in consumer pockets. Consumer spending will pick up as the cash available to consumers grows. Mortgage refinancing is not the only factor driving up cash levels. Tax refund checks have begun to arrive and government relief programs are now taking hold which result in additional cash to taxpayers and consumers. We do believe having additional cash will help build consumer confidence pushing spending levels higher and driving the economy forward. However, we have not yet seen the jobs situation improve and unemployment may continue to rise over the next few months. The concerns over job loss and employment will certainly temper any growth in consumer spending that we do have.

Option Tips For Investors

We expect the market (S&P) to swing between a trading range of 725 and 875 over the near term in choppy trading. We also expect volatility (VIX) to trade between 35 and 50 over the next month, mostly in the low 40 range. With that in mind, we may look to write an April call on the VIX at 50 and write a VIX put at 35. The sales prices will not be great given the short duration, but we also think the risk is low for falling out of this range. This strategy allows us to pick up income as long as the volatility stays within this range, the most likely scenario. We may also consider writing an April call option on the market index in the 875 range if we can get in at a good price. We still believe writing call options are less risky than writing naked puts given the downside risk in the market. However, we consider the likelihood of the market exceeding 875 by April 18 as small, so picking up income on writing the call may be worthwhile. As we have mentioned before, we are more protected writing call options since most of our other portfolio positions are long stock positions which will tend to move in opposite directions to the call position. In short, if we guess wrong on writing the call that will mean the market has risen sharply which will benefit our other long stock positions and mitigate the loss on the call. We still consider the market downside risk high, but are encouraged that the market has held the large gains from the prior three weeks. We are also prepared to buy calls and puts on the market index if there are large swings that show signs of a market overreaction. We have also recently added a number of stocks to our Momentum and Value buy list. All of these stocks also trade options and we may buy a medium term call option on one or more of these stocks if we can get in at a good price.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap, March 20, 2009

2009-03-22T15:22:00.000-07:00

Market Holds Gains From Prior Week!

The broad market advanced 1.6% last week, a good showing in that it held the extraordinary gains achieved over the prior two weeks. The market declined on Thursday and Friday as investors took profits, although there was enough resistance to still end the week with a weekly gain. We view the market strength shown last week in a very positive light as investors did not run following the recent strong advance. Our sense is that investors may begin to return to the market. As cash flows in, the demand for stocks will rise, driving stock prices upward. It is still too early to say the worst is over, although we are encouraged with the recent resistance the market has shown. Our view is that the S&P will remain rocky, swinging back and forth within a trading range of 150 points. We expect the economic struggles to continue over this year, and that will temper the stock market advance. The stock market is usually a leading indicator for economic recovery, so the stock market should begin to recover well before the economic conditions improve. Overall, we want to see the market display strength and resistance over several months before feeling comfortable that the bottom has been reached. Another strong indicator will be first quarter earnings, for which reports will begin April and May.

FED Purchases Expand!

Last week the economic news was somewhat mixed. Industrial production declined slightly more than expected, although at a slower rate than the prior month. Inflation figures also rose more than expected, but remain at very modest levels. On a positive note, housing starts and building permits both showed unexpected increases in February. Housing starts in particular showed a very large percentage increase. Both signs are encouraging, but we want to see an uptrend with several months of advances before calling a housing bottom. The biggest news for the week came from the Federal Reserve after announcing they would purchase up to an additional $750 billion of mortgage-backed securities. In addition, the Federal Open Market Committee decided to purchase up to $300 billion in longer-term Treasury securities and $200 billion in other agency debt. Bonds rose sharply following these announcements and stocks too followed that lead. To date, the FED has been aggressive with monetary policy by dropping interest rates to near zero levels. The commitment to expand purchases of troubled assets has propelled their program to a new level. We do think these measures will help both the economy and financial markets find and regain their footing over the near term. However, we do have long term concerns over the amount of this funding and the resultant burden placed on taxpayers in future years. Over the long term, we certainly would expect interest rates and inflation to rise sharply in response to all of the government spending and outstanding debt. We do not expect interest rates to rise this year in light of a sour economy, but at some point in the future, consumers and taxpayers will bear the burden of the actions taken today.

Option Tips For Investors!

Do we have option tips for investors? We expect the market (S&P) to swing between a trading range of 700 and 850 over the near term. We also expect volatility (VIX) to trade between 35 and 55 over the next month. With that in mind, we may look to write a call on the VIX at 55 and write a VIX put at 35 if we can get in at good prices. This strategy allows us to pick up income as long as the index trades within this range, the most likely scenario. We may also consider writing a call option on the market index in the 825 or 850 range if we can get in at a good price. Right now, we consider writing call options less risky than writing naked puts given the downside risk in the market. In addition, we are more protected writing call options since most of our other portfolio positions are long stock positions which will tend to move in opposite directions to the call position. In short, if we guess wrong on writing the call that will mean the market has risen sharply which will benefit our long stock positions and mitigate the loss on the call. We still consider the market downside risk high, but are encouraged that the market held the large prior week gains. We may also buy calls and puts on the market index if there are large swings that show signs of a market overreaction. It was a positive sign that the market held the gains from the prior week. However, it is still too early to call a bottom is this rocky market. Frankly, we want to see the trend in stock prices and consumer confidence move up over several months before we go all in with our option allocations. This is still a short term traders market, and can be quite rewarding for option investors that can handle the risk. We are 80% cash, but will continue to look for short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap, March 13, 2009

2009-03-15T10:13:00.000-07:00

Market Rallies From Oversold Levels!

Relief! The broad market advanced 10.7% in its best week since November. The market had gotten oversold over the past few weeks as the selling pressure and short interest intensified. It is good to see the market break the downtrend, as it had become far too easy for short sellers to make money. We like the market rebound, but are still very concerned with the downside risk, and consider the recent move more of a bear market rally. We expect the market to be rocky, swinging back and forth between a trading range of 150 points. We would like to think that last week was the beginning of a sustained bull run, but just do not think the economy and financial sector are quite ready to support a prolonged uptrend. In our view, the economy is a long way from recovery, and will likely continue to deteriorate in 2009 and perhaps into 2010. As reported last week, even if the market has hit bottom, the upside may be limited over the short term, whereas the downside risk remains high.

Market Beating Foresight

Next week will bring an onslaught of economic reports on inflation, manufacturing, housing, the labor market. These measures will help us gauge the state of the economy and perhaps offer more clarity on its near term direction. The data is likely to confirm the gloomy view of the economy and its future prospects. It will interesting to see how the stock market responds particularly after the strong market gains last week. We do think the market got oversold over the past month, so part of the strong advance can be attributed to those adjustments. But as we have said before, the market remains very shaky and further downside moves are possible. We continue to believe the market will remain rocky over the next three months as job losses continue to mount and economic conditions deteriorate. The market can move up in this kind of environment as it did last week, but investors need to be prepared for large swings. In our view, the market is not yet poised for a sustained bull market advance. On a positive note, volatility (VIX) did fall significantly last week and that is one of the measures we watch closely. Lower volatility levels will help bring investors back to the market. We are currently 20%invested in our option portfolios.

Option Tips For Investors?

We expect the market to swing between a trading range of 675 and 825 over the near term. We also expect volatility (VIX) to trade between 35 and 55 over the next month. With that in mind, we may look to write a call on the VIX at 55 and write a VIX put at 35 if we can get in at good prices. This strategy allows us to pick up income as long as the index trades within this range, the most likely scenario. We still consider the downside risk high, even after the strong market advance last week. Investors could consider buying puts for protection, but we would shy away from writing naked puts given the downside risk in the market right now. Investors could be more aggressive writing naked calls on the market index, as the current market is still far more bearish than bullish right now. However, extremely low premiums may not warrant the call risk. We are going to watch the market carefully over the next few days following the remarkable gains last week. It will be a positive sign if the market can hold recent gains, particularly if the economic data released next week is not good. However, it is just way too early to call a bottom is this rocky market. This is still a short term traders market, and can be quite rewarding for option investors that can handle the risk. We are 80% cash, but will continue to look for short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Options Market Recap, March 6, 2009

2009-03-08T10:57:00.000-07:00

Fourth Week of Declines!

Ouch! Another very tough week as the broad market lost 7% in a fourth week of declines. Year to Date the S&P has declined 24% in just over two months and those declines come on the heels of nearly 40% losses last year. We reported our concern last week that volatility and fear was rising, and sure enough the market turned sharply down. We wish we could say the stock market is at bottom, but there is just too much fear and uncertainty to make that call. We continue to be concerned with the downside risk, as there are just not a lot of positives right now to drive the market sharply higher. In our view, the economy is a long way from recovery, and will likely continue to deteriorate in 2009 and perhaps into 2010. As reported last week, even if the market has hit bottom, the upside may be limited over the short term, whereas the downside risk remains high. In that light, we do not like the risk reward tradeoff for the long side of the market. Investors with long time horizons (5-10 years) could consider buying now, but even then we would suggest only slowly entering the market with incremental stock allocations over the next six months. In other words, if you want to resume investment in this market, invest 10% to 20% of your available cash into stocks each month. Investors do not need to hit the market bottom, to be successful over a long time horizon.

Economic Conditions Deteriorate!

The financials were the biggest loser last week as the sector dropped 19% as fears over financial health and nationalization continue to grow. Citigroup stock stoked nationalization fears as their stock price dropped below $1. Mortgage delinquency rates continue to rise sharply as the numbers mount on consumers unable to pay bills. The unemployment rate hit a 25 year high, rising to 8.1% as job losses grow across all industries. Economic data on Housing remains bleak and continues to deteriorate. The auto industry is a disaster as General Motors reported February sales sank nearly 53% with Ford sales dropping 48%. The losses at General Motors are huge, and bankruptcy concerns loom large. Retailers are also showing declines in monthly sales as consumers continue to tighten the purse strings. With all the bad news, it is tough to see the glass as half full. There needs to be more clarity from regulators on how toxic assets will be dealt with and how those remaining assets will be valued in the financial system. Asset valuation is a tall order for the Fed and Treasury to resolve, but may be critical to any meaningful and lasting recovery.

Option Tips For Investors!

Do we have option tips for investors? We expect the market to swing between a trading range of 650 and 825 over the near term. We also expect volatility (VIX) to trade between 35 and 55 over the next month. With that in mind, we may look to write a call on the VIX at 55 and write a VIX put at 35 if we can get in at good prices. This strategy allows us to pick up income as long as the index trades within this range, the most likely scenario. We consider the downside risk high, and if the market does move down further, it could be a sharp and severe move. Investors could consider buying puts for protection, but we would shy away from writing naked puts given the downside risk in the market right now. Investors could be more aggressive writing naked calls on the market index, as the current market is far more bearish than bullish right now. However, extremely low premiums may not warrant that risk. This is still a short term traders market, and can be quite rewarding for option investors that can handle the risk. We are 80% cash, but will continue to look for short term trading opportunities.

Options Market Recap, February 27, 2009

2009-03-01T08:55:00.000-08:00

Worst Start Ever Brings 12 Year Lows!

Ouch ... another very tough week on Wall Street as the broad market lost -4.5% for the week bringing the Year to Date loss to -18.6%! In the long history of the stock market, that is the largest decline ever over the first two months of the year. Furthermore, the -18.6% decline brings the broad market index to a 12 year low. Investors that are long stocks are clearly losing money, and most are losing lots of money. Could we now be at market lows? We sense investors are very apprehensive with many sitting on the sidelines. Volatility and fear could be poised for another strong run. If volatility returns, the market could take another severe turn downward. Our concern is that we just do not see a lot of positives on the immediate horizon to help push the market significantly higher, particularly in light of the worsening economy. Even if the market has hit bottom, the upside may be limited over the short term, whereas the downside risk remains high.

Economic Conditions Deteriorate!

Last week the financial sector and economy were again the big market drivers, although there was a surprise development in Healthcare. Investors remain wary over nationalization of large banks as the government now owns 36% of Citigroup common stock. The Obama administration announced its Capital Assistance Program, which includes stress tests for banks that will determine the capital assistance levels provided by the government. But it was the deteriorating economy that brought the most bad news. Existing and new home sales, along with home prices all declined more than expected and provided further evidence that we have not yet hit that elusive bottom in housing. Bernanke gave the market some hope in his latest congressional visit when he said the recession may end in 2009 with recovery in 2010. We hope the Fed chairman is right, but suspect that could be a little optimistic given that economic conditions continue to deteriorate. For example, fourth quarter GDP was reported to be sharply lower (-6.2%) than its advanced reading of -3.8%. That is a big difference and shows just how quickly economic conditions deteriorated. The other surprise was the announcement from Obama that he will cut Medicare spending as part of his healthcare plan. The healthcare sector, which had been holding up better than most, proceeded to lose more than 11% for the week following those remarks. On the employment front, jobless claims continue to hit record levels resulting in the lowest consumer confidence readings ever recorded.

Option Tips for Investors?

Do we have option tips for investors? We expect the market to swing between a trading range of 725 and 850 over the near term. We also expect volatility (VIX) to trade between 35 and 55 over the next month. With that in mind, we may look to write a call on the VIX at 55 and write a VIX put at 35 if we can get in at good prices. This strategy allows us to pick up income as long as the index trades within this range, the most likely scenario. We may also look to write options on the market index. Writing puts are always more risky in volatile markets, so we would look for a put around an exercise price of 700 to give investors more breathing room. However, we consider the downside risk high, and if the market does move down further, it could be a sharp and severe move. Given the risk, these investments should only be made if the price is right and expiration is near term. For a market index call, we would look for one to write in the 875 range. Investors can be a little more aggressive on writing call options, as the current market is far more bearish than bullish right now. This is still a short term traders market, and can be quite rewarding for option investors that can handle the risk.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Options Market Recap, February 20, 2009

2009-02-22T07:44:00.000-08:00

Market Drops Amidst Growing Resignation!

Another tough week on Wall Street as the broad market lost -6.9% last week and is now down a staggering -14.7% Year to Date. It is scary to think of extrapolating those losses across the rest of the year particularly since we have not yet even closed the month of February! We should probably be thankful it was a holiday shortened week, as that may have been one of the few factors limiting the weekly loss. There are just not many positives out there to counteract the continuing mantra of a deteriorating economy, housing woes, and a financial sector in shambles. We sense a growing resignation amongst investors that this recession will indeed be severe and long lasting. Investor fear has moderated, only to have been replaced with the resignation that it will be a long time before conditions improve in the economy and stock market despite the best intentions of government efforts over financial sector reform and massive spending programs.

Nationalization Fears Harvest Market Attention!

Last week started off poorly with Global economic and financial fears taking their toll on US markets on Tuesday. A manufacturing survey was also released that showed a significantly greater decline than what was expected. On the government front, Obama announced his plan for Homeowner Affordability to provide stability to at risk homeowners, assist in refinancing, and to support lower mortgage rates indirectly through Fannie Mae and Freddie Mac assurance. The government efforts are positive, but in reality the reach of this initiative is miniscule in light of the overall mortgage debt at risk. On the housing front, a dismal report was released showing housing starts at their lowest levels ever recorded. Unfortunately, a housing bottom just does not seem near. But last week, the really big news concerned the financial sector, as fears over bank nationalization grew astronomically. Overall the financial sector plunged another 15.9% from already depressed levels. Bank of America and Citigroup took the hardest hits. The administration came out late Friday to reassure Wall Street in its belief that the private sector should run the banking system, and that nationalization is not goal or preferred option. Despite their best efforts, the government was not able to reverse the downward momentum in financial stocks.

Option Tips For Investors?

Do we have option tips for investors? We expect the market to swing between a trading range of 750 and 875 over the near term. We also expect volatility (VIX) to trade between 35 and 55 over the next month. With that in mind, we may look to write a call on the VIX at 55 and write a VIX put at 35 if we can get in at good prices. This strategy allows us to pick up income as long as the index trades within this range, the most likely scenario. We may also look to write options on the market index. Writing puts are always more risky in volatile markets, so we would look for a put around an exercise price of 750 which corresponds to the November 2008 lows. But given the risk, these investments should only be made if the price is right and expiration is the current month or next. For a market index call, we would look for one to write in the 900 range. Investors can probably be a little more aggressive on writing call options, as this market is far more bearish than bullish right now. This is still a short term traders market, and can be quite rewarding for option investors that can handle the risk. The financial sector remains very volatile right now, and that will continue to present short term trading opportunities. There have to be call options on Bank of America stock that investors can buy that are more than worth the risk! Now is a good time to buy as the cost of entry is low and the reward potential high. We are now 75% cash, but will continue to look for short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Options Market, Weekly Recap - February 6, 2009

2009-02-08T09:19:00.000-08:00

Losing Streak Ends!

Last week brought an end to the weekly losing streak. The broad market gained 5.2% for the week, an excellent start to the month of February. Those gains are encouraging after following on the heels of the worst January performance on record. The tech sector was the real market leader as evidenced by a NASDAQ gain of 7.8%. The market though showed volatility after having been down early in the week before rallying over the last two trading sessions. Investor sentiment appears to be growing more positive, particularly now that the large institutional funds are done with massive selling. What was the driver for the gains this week? There were no real surprises on the economic front, so we speculate the optimism came from hope and closure over the pending government packages for the economy and financial sector. We are encouraged with the market advance, but caution there is still much uncertainty on the details of these packages. We will likely learn more details next week and that additional clarity will likely drive the market higher. However, we still expect the market to remain rocky over the near term.

Job Losses Hit Record Highs!

Quarterly Earnings releases continued last week and overall reflect the weight the poor economy is having on earnings and future outlooks. The uncertainty and lack of clarity on future guidance is still an achilles heel for many companies. Both the manufacturing and services surveys recently completed beat market expectations, but remain at poor levels indicating contraction. Personal spending and personal income both declined, not a big surprise given the state of affairs. Jobless claims hit another record high, and major companies continue to announce additional layoffs. Last week, it was reported that nearly 600,000 positions were lost in January, the largest monthly loss in 34 years. Surprisingly, the market rallied following announcement of the poor jobs data, presumably from the optimism surrounding government progress on the economic and financial sector stimulus. The unemployment rate now stands at 7.6%, but that is likely to grow over the next few months as we search for a climax in jobs lost. The financial sector had a volatile week, but ended the week over 6% higher as optimism returned over hope of financial sector reform.

Option Tips For Investors

Do we have option tips for investors? We expect the market to swing between a trading range of 825 and 925 over the near term. We also expect volatility (VIX) to trade between 35 and 50 over the next month. With that in mind, we may look to write a March call on the VIX at 55 and write a February VIX put at 35 if we can get in a good prices. This strategy allows us to pick up income as long as the index trades within this range. We may also look to write options on the market index. Writing puts are always more risky in volatile markets, so we would look for a put around an exercise price of 775, but only if the price is right. For a market index call, we would look for one to write in the 950 range. This is still a short term traders market, and can be quite rewarding for investors that can handle the risk. The financial sector remains very volatile right now, and that may present some short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap, January 30, 2009

2009-02-01T11:05:00.000-08:00

Worst January Ever!

A fourth straight losing week as the S&P declined -.7% last week. The weekly decline was not horrible, but the loss ensured that this month would be the worst January performance on record. The S&P lost a whopping -8.6% for the month. What might that performance signal for the rest of the year? Statistics from Stock Traders Almanac suggest that 90% of the time the market will end the year with an overall loss if January has negative performance. Should we move completely to cash? These kinds of statistics are always interesting, but in reality have little relevance or predictive power. However, the significant market decline in January clearly communicates the state of the markets and the economy. There are recessionary factors that we may very well have to live with through the rest of the year if not longer. The weight of those factors has more credibility than the Stock Traders almanac. But how bad is it? For perspective, January was bad, but the market is still above lows hit in November. However, we could test those November lows if government credibility and resolve towards solving the economic challenges comes into question. Given all of the challenges currently in play, we expect the market to remain very rocky over the near term.

Dismal Corporate & Economic Data!

Many companies reported fourth quarter earnings last week that reflected the poor economic environment. But the other disconcerting news was the uncertainty and lack of clarity most companies had giving further guidance. Many companies would not or could not provide guidance for the remainder of the year. That showcases the concerns and impact the global meltdown is causing. Consumer confidence hit a record low just as jobless claims hit another high. Housing brought mixed results as December existing home sales rose 6.5%, yet new home sales fell to their lowest annualized rate since 1963. Gross Domestic Product (GDP) dropped -3.8%, a significant drop, but that was not as sharp a decline as expected. The roller coaster ride in the financial sector continued as the sector was up strong through Wednesday before giving back gains by the end of the week. Each week, companies from nearly all industries announce more and more layoffs. No doubt there is considerable uncertainty over what this year will bring in terms of economic activity, and that just adds to investor fear.

Market Beating Foresight

Fourth quarter earnings reports continue, but there is little doubt most companies are struggling as evidenced by the reports last week. The Obama spending plan passed the House and the Senate will take up review this week. It is worth noting that the House version had no republican support. Changes in the Senate are likely and failure to make progress on the plan could swing the market severely. Another item that could sway the market is the government plan for the financial sector. Last week discussions centered on a possible plan to create a “Good Bank” “Bad Bank” structure by segmenting all bad assets into the “Bad Bank”. Early discussions propelled the market higher on Wednesday despite the lack of details and clarity around the proposal. However, by the end of the week the market and financial sector came back to earth after succumbing to the uncertainty and the lack of details over the proposal. The market is clearly looking for a plan, something to hold onto for hope. Greater definition and agreement on a plan of action will help restore investor confidence at least for the short term. Next week, additional reports will again be released on the economy, but they will likely provide more evidence of the decline in housing, jobs, and economic growth. The market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. Volatility has increased, although it remains well below the extremes from October and November. In addition, the massive selling and flight to cash from stocks and mutual funds that we saw late last year has subsided. We think this means investors are just adjusting to the realization of a longer lasting recession. As investors resign themselves to a difficult market, bad news just doesn’t carry the shock value that it did late last year. But for stocks, we remain concerned over the next three months as the market will remain rocky as the full weight of poor earnings, bankruptcies, and bailouts reach critical mass. Consumer spending is extremely weak and we do not see consumer confidence returning any time soon.

Option Tips For Investors?

We expect the market (SPX) to swing between a trading range of 800 and 925 over the near term. We also expect volatility (VIX) to trade between 40 and 55 over the next month. With that in mind, we may look to write a February call on the VIX at 55 and write a February VIX put at 40 if we can get in a good prices. This strategy would allow us to pick up income as long as the index trades within this range. We may also look to write options on the market index. Writing puts are always more risky in volatile markets, so we would look for a put around an exercise price of 775, but only if the price is right. For a market index call, we would look for one to write in the 925 or 950 range. This is still a short term traders market, and can be quite rewarding for investors that can handle the risk. The financial sector remains very volatile right now, and that may present some short term trading opportunities. We may look to buy a call on BAC stock if we can get in at a good price prior to release of a government plan for the financial sector. We are now 90% cash, but will continue to look for short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Options Recap, January 23, 2009

2009-01-25T09:17:00.000-08:00

Pessimism, Volatility Rise!

Another depressing week as our 44th President of the United States takes office. The market fell -2.1% and is now down -7.9% for the year. The NASDAQ lost even more during the week with declines of -3.4%. The pessimism in the marketplace continues to boil, with volatility/fear again on the rise. The financial sector is driving the most fear, but corporate earnings for all sectors continue to deteriorate. The market remains above November lows, but nervousness and confidence is shaky as volatility and fear escalate. Fear is what investors have to watch, as that can cause quick and violent downward moves in stock prices. Current news on the whole is primarily bad, and that is not likely to change anytime soon, which will surely keep many investors on the sidelines. We expect market movements to remain rocky for some time.

Market Beating Foresight

Fourth quarter earnings season is in full swing. Next week, 137 companies in the S&P 500 will report earnings. There is little doubt those earnings reports will confirm what we already know. The economy is in dire straits as this will surely be another quarter of significant decline. 4th quarter GDP will also be released and is expected to show a contraction of more than 5%, a much larger decline than the previous quarter of .5%. There will also be reports next week on consumer confidence, home sales/prices, jobless claims, and manufacturing volume. The news next week is not likely to renew optimism in the market. We believe the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. We are also seeing increases in the volatility index and that could be a sign of more dramatic stock swings to come.

Option Tips For Investors

We expect the market to swing between a trading range of 800 and 925 over the near term. We also expect volatility (VIX) to trade between 40 and 60 over the next month. With that in mind, we may look to write a February call on the VIX at 60 and write a February VIX put at 40 if we can get in a good prices. This strategy would allow us to pick up income and will be a winning strategy as long as the index trades within this range. This is still a short term traders market, and for investors that can handle the risk, can be quite rewarding. The volatility in financial sector is intense, and that may present short term trading opportunities. For example, Bank of America stock (BAC) had daily moves of 30% on more than one day last week. That kind of volatility offers option players the chance to make a lot of money on positions over a very short time period. It may be worth the risk to play an option favorable to a move in the opposite direction after you see a large price change in your stock after just one trading day.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Recap, January 16, 2009

2009-01-18T11:19:00.000-08:00

Rocky Trading Week!

Last week marked the second straight down week as the market fell sharply 4.5%. It could have been worse if not for the Friday rebound. We have not gotten the start to the New Year like we hoped as the S&P is down -5.9% and the NASDAQ -3%. It was a rocky week of trading as prices fell sharply before recovering somewhat by week end. The market remains well above November lows, but recent declines are spooking already nervous investors. News has been predominately bad and in a good light has not carried the shock value we saw in 2008. Nonetheless, the news appears bad enough to pressure stocks and to keep investors on the sidelines. Market movements will likely remain rocky for some time.

Market Beating Foresight

About the only good news last week were reports of lower inflation, levels that have not been seen for many years. Of course, some argue that low inflation is just another sign of how bad the economy really is. Inflation is so low that concerns are circulating that we may enter a painful period of severe deflation. Fourth quarter earnings season is in full swing, and to date, has provided only downward pressure on stocks. Investors will begin receiving year end reports on retirement accounts, which will cause more angst as investment losses will be significant. That will be just one more challenge to overcome before investors return to the market in large numbers. Obama takes office next week and no doubt will enact massive spending programs. Those initiatives may help consumer confidence, but material impacts to jobs and the economy will not happen for months. We believe the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs. Last week, oil dropped to $33 dollars, a level we view as a good long term buy. For stocks, we remain concerned over the next three months as the market will likely remain very rocky as the full weight of poor earnings, bankruptcies, and bailouts reach critical mass. Even those consumers that have jobs are fearful, hoarding cash, and restricting spending. Consumer spending will need to return before the economy can gain momentum and start growing, a prospect not likely over the very near term.

Option Tips For Investors

We expect the market to swing between a trading range of 825 and 950 over the near term. With that in mind, we may look to buy a call on the market index at the floor 825 or above if the market swings sharply down and we can get in with a good price. We are also looking at writing a February put and call option on the market index (SPX) at 825 and 950 respectively, if we can get good prices. In addition, we have started to look for straight call options on individual stocks, but will invest only selectively as the short term direction of the stock market is still volatile and difficult to predict. We are now 90% cash, but will continue to look for short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Options Recap - 01/09/2009

2009-01-11T10:19:00.000-08:00

Market Performance, First Full Trading Week

Last week marked the first full trading week of the New Year. Unfortunately the week marked the worst market decline (-4.4%) since November 2008. The NASDAQ was also down 3.7% for the week. Does this foretell doom for the rest of the New Year? Obviously, one trading week does not have any predictive power for the entire year. For perspective, the market has advanced more than 20% since November so a pullback is not surprising particularly in light of the constant bad news released every day. Furthermore, despite the losses last week, the market continues to show signs of moderating with lower volatility. Higher trading volume also returned last week, which often provides more reliable signals on both the direction and conviction of price moves.

Economic Insight, Job Losses Mount!

Most of the news last week was not good. Increasing unemployment numbers are grabbing most of the headlines. The unemployment rate rose to 7.2%, the highest figure in many years. In addition, the line of companies announcing cutbacks continues to grow as job losses continue to mount. Major retailers reported dismal December sales, no real surprise although Wal-Mart had been expected to do better than reported. Automakers also reported December sales declines of more than 30%. Oil prices were volatile, first rising early in the week on tensions in the Middle East, before falling sharply due to demand concerns from the worsening global economy. The fourth quarter earnings season has begun which is also causing investor anxiety. The quarterly reports that have trickled in to date highlight the toll the weak economy is causing. In addition, companies are adjusting future outlooks downward with greater regularity.

Market Beating Foresight

Fourth quarter earnings and future outlooks have the potential to really move the market. If earnings results and future outlooks are worse than expected, the market could plunge to much lower levels. Most observers expect results to be very weak. But at issue will be how bad results relative to expectations are. Obama is gearing up to take office January 20 and we are confident that his administration will push massive spending programs to stimulate the economy. That will help boost confidence in the economy and market, but will certainly take months before having any material impact on jobs and economic growth. We continue to believe that the market will remain rocky over the next several months as the economy finds better footing and searches for bottoms in housing and jobs.

Option Tips for Investors

Do we have option tips for investors? We expect the market to swing between a trading range of 825 and 950 over the near term. With that in mind, we may look to buy a call on the market index at the floor 825 or above if the market swings sharply down and we can get in with a good price. We are also looking at writing a February put and call option on the market index (SPX) at 825 and 990 respectively, if we can get good prices. In addition, we have started to look for straight call options on individual stocks, but will invest only selectively as the short term direction of the stock market is still volatile and difficult to predict. We are now 90% cash, but will continue to look for short term trading opportunities. Again, we would caution that investing in options is very risky and is appropriate only for the most aggressive investors who understand the inherent risks.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

2008 Year End Review

2009-01-04T11:37:00.000-08:00

Did Anyone Make Money?

Last week marked the end of the 2008 trading year. Surely most investors are glad to see 2008 come to an end, as last year marked the worst stock market performance since 1937! How bad was it? The S&P 500 lost 38.48% for the year, and the NASDAQ followed suit losing 40.58%. Those are horrendous numbers, but frankly it could have been worse as the market had lost nearly 50% from market highs at one point. Sure we lost money in our Options portfolio, but relatively speaking our performance was exceptional. We only lost 13% for the year versus the NASDAQ loss of 40%. That is a tremendous difference in returns of more than 27%.

Recession in Full Force!

No surprise to anyone that the economy has been shattered. Eventually, we got official word that the recession began in late 2007, which of course by the time of the announcement, was well known. This may come to be the worst recession since the great depression. It started with the subprime mortgage collapse which then spread to the rest of the mortgage market and asset backed securities. Credit markets became locked and a liquidity crisis ensued. The housing market collapsed as home prices fell to levels not seen in years which put many homeowners underwater on mortgages. Increasing delinquencies and massive corporate write-downs brought a financial collapse that will permanently changed the landscape on Wall Street as companies fell, got acquired at fire sale prices, while survivors became bank holding companies for access to government bailout funds. But the problem became bigger than Wall Street, as job losses began to mount, home equity vanished, and consumers slowed spending. Consumer confidence hit record lows, while investor fear hit record highs. Volatility (VIX), often viewed as the investor fear gauge, started the year just above 22 and hit an intra-year high over 89, a disastrous 300% increase. Furthermore, the market had 18 daily moves of 5% or more in the S&P 500 over just the last three months of the year. That is a higher volatility than the market experienced over the last 50 years combined! That volatility and the bear market certainly pushed many investors out of stocks, as the cash levels on the sideline continues to grow. Yep, no doubt we are in a severe recession, one that has roiled the stock market and frankly nearly every other asset class as well.

Hope? What Can We Cling To?

No one can predict what 2009 will bring. However, in our view, we see more job losses, foreclosures, bankruptcies, and spending cutbacks as the economy continues to contract and deleverage. This will be painful, but will probably not carry the same shock value that we experienced in 2008 as companies and consumers adjust. On the positive side, we have a new administration taking office that has big stimulus plans and a government eager to intervene with bailout funds and additional spending. Interest rates are extremely low, at levels not seen in many years. Rates will likely remain low for most if not all of 2009, which will help spur economic activity. Low interest rates and lower commodity prices will improve cash flow for consumers and over time spur consumer confidence. All of these factors are positive for the economy and the stock market, but all will not be cured overnight. We expect the economy to be very sluggish over the first 6 to 9 months of the new-year, as more time is needed for all these measures to take effect. For the stock market, volatility ended the year at 43, still on the high side, but much lower than 2008 highs. Volatility has been trending down, and if that continues, investors will return to the market. In addition, with the flight to safety, there is a lot of cash on the sidelines and in Treasuries, as investors wait out this rocky period. The stock market may skyrocket once this money comes back into the market propelling the demand for stocks higher. History is also on our side with respect to a strong recovery. Since World War II, the S&P 500 index has soared 32% on average during the nine months following a bear market. The trick, of course, is identifying when the bear market ends and the recovery begins.

Market Beating Foresight, 2009 Outlook

Overall, we think the economy has a long way to go before it gets better. However, the stock market has begun to show signs of life. We are very encouraged with the downward trend in volatility. Stability is critical to bringing investors back to the market which will increase the demand for stocks and therefore prices. The market has also been showing strength over the last few weeks and has shown resistance to the lows hit in November. However, trading has been light over this time, and the real test will be the first quarter 2009. If the market can hold current levels through the first quarter, the worst may indeed be over for the stock market. A case can be made that equity prices today represent compelling values. The PE ratio of the S&P 500 index now stands at 11 or 50% below its ten year average. In addition, the S&P dividend yield is a juicy 3.4%, which is more than twice its ten year average. Although stocks are compelling, it does not mean that prices could not fall further, as we saw even lower PE ratios during the depression. But we do not think lower valuations are all that likely, as governments worldwide demonstrate their inclination to take action and provide the economic stimulus needed in 2009. However, we do think that the market will likely remain rocky over the first half as the economy searches for bottoms in housing and jobs. Hopefully, by the second half, enough time will have passed for government interventions to take hold, for corporate earnings to stabilize, and for deflationary concerns to subside. Interest rates will likely remain low and by fourth quarter 2009, consumer confidence should hopefully already be trending upward. With time, the market will return to normalcy, that is, a market not ruled solely by fear. The stock market is usually a leading indicator for an economic turnaround, so in that light we expect a more consistent and upward market trend later this year.

Tips for Market Beating Options

Do we have option tips for investors? We expect the market to swing between a trading range of 850 and 950 over the near term. With that in mind, we may look to buy a call on the market index at the floor 850 or above if the market swings sharply down and we can get in with a good price. We will also look for additional opportunities for writing options, but will only consider those with exercise prices that are more than 10% from current market prices and with very short durations. Volatility is still too high as market swings of more than 5% are still too common, which makes writing options very risky. In addition, we plan to now look for straight call options on individual stocks, but will do so only selectively as the short term direction of the stock market is still volatile and difficult to predict. We are currently mostly in cash, but do plan to look more aggressively for short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Recap, December 26, 2008

2008-12-28T13:35:00.000-08:00

Market Beating Foresight

The market continues to show resistance at current pricing levels, along with a lower downward trend in volatility. Both trends are encouraging despite a very difficult economy. Next week will bring reports on manufacturing and services, along with consumer confidence and jobless claims. Trading volumes will likely remain low in another holiday shortened week. The other story unfolding next week is the Santa Claus effect which began last week and will run through January 3. Quantitative research suggests that the Santa Claus effect has been responsible for an average market increase of 1.5% from the last five trading days of the year through the first two trading days of the new-year. A net gain for the Santa Claus period is considered by many as positive for the new-year, while a loss is viewed as a negative. We remain hopeful that the market is starting to show signs of stabilizing, although it could remain very bumpy or even rocky over the next few months.

Do we have option tips for investors? We expect the market to swing between a trading range of 825 and 925 over the near term. With that in mind, we may look to buy a call on the market index near 850 or below if the market swings sharply down and we can get in with a good price. We will also look for additional opportunities for writing options, but will only consider those with exercise prices that are more than 10% from current market prices and with very short durations. Volatility is still too high as market swings of more than 5% are still too common, which makes writing options very risky. In addition, we are still not ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict, and the 3-6 month outlook very uncertain.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Recap - December 19, 2008

2008-12-21T13:34:00.000-08:00

The market continues to show resistance at current pricing levels, along with a downward trend in volatility. Both trends are encouraging despite a very difficult economy. However, the stock market is likely to remain very bumpy over the near term as volatility is still high despite recent declines. For short-term investors, a bumpy market will provide many profitable opportunities on both short and long positions as the market swings back and forth, within a 100 point trading range.

How is our performance?

The Aggressive Portfolio (Options) ended the week slightly down, but continues to sport an exceptional 263% return since January 2007. Year-to-date, this portfolio continues to beat the market return by a large margin, with an excess premium of almost 30%!

Our tips for option investors?

We expect the market to swing between a trading range of 850 and 925 over the near term. With that in mind, we may look to buy a call on the market index near 850 if the market swings sharply down and we can get in with a good price. We will also look for additional opportunities for writing options, but will only consider those with exercise prices that are more than 10% from current market prices and with very short durations. Volatility is still too high, although it is trending down, but market swings of more than 5% are still common, which makes writing options very risky. In addition, we are still not ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict, and the 3-6 month outlook very uncertain. We are now 70% cash in this options portfolio and will look for more short term trading opportunities.

Remember, our complete list of options is Available Online At: http://www.marketbeatingstocks.com

Weekly Recap - December 12, 2008

2008-12-14T11:23:00.000-08:00

The market finished the week flat, after having been up strong until Friday when the auto bailout failed to pass. Volatility has recently started to trend downward although it still remains at historically high levels. Investor sentiment appears to be improving, as bad news announcements seem to have less shock value. The fact that the market has declined over 50% since October 2007 highs lends support for an oversold market that might be ready for a trend reversal. As we have said before, there is no doubt that the economy is bad and that only time and government intervention can turn the tide. Next week will bring additional reports on industrial production, consumer price index, housing starts, and another round of jobless claims. The FED is also meeting next week and is widely expected to lower the FED funds rate to .5%. To date, the FED has been an active participant in helping to stabilize the financial markets. However, after the next cut, interest rates cannot go much lower so future FED plans will be of great interest as the FED has to find another way to help with economic recovery. The looming bankruptcy of General Motors and the auto industry bailout will also surely be a hot topic next week. Our speculation is that relief will come from either an agreement over the bailout proposal or perhaps administration approval to use TARP funds. We continue to believe that the economy has a long way to go and could be as long as year-end 2009 before improving. However, we also believe the market has reached a trading range bottom. Volatility is starting to trend down and the market has been resilient in resisting sharp drops over the past two weeks despite bad economic news. We think the market is starting to show signs of stabilizing, although it could remain very bumpy or even rocky over the next few months until volatility returns to normal at much lower levels.

For short-term investors, a bumpy market will provide many profitable opportunities on both the short and long positions as the market swings back and forth, within a 100 point trading range. We expect the market to swing between a trading range of 825 and 925 over the next few weeks. With that in mind, we may look to buy a call on the market index near 850 or below if the market swings sharply down and we can get in with a good price. If we can get in at good price, we will sell after the market swings back for a target gain of 30%. We will also look for additional opportunities for writing options, but will only consider those with exercise prices that are more than 10% from current market prices and with very short durations. Volatility is still too high, with daily market swings of more than 5% occurring frequenctly, which makes writing options very risky. In addition, we are still not ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict, and the 3 month outlook very uncertain.

Weekly Update Ending December 5, 2008

2008-12-07T12:46:00.000-08:00

Resilient Despite Economic Woes!

The market lost 2.3% on the S&P and 1.7% on the NASDAQ last week but that performance was much more interesting when viewed in context of what transpired. We expected a pullback following the extreme performance from the prior week and the market responded by dropping 8.9% on Monday to start the week. But then, the market showed its resilience by increasing 7.3% over the next four days despite an avalanche of bad economic data. The strength shown by the market was very encouraging in light of an economy that continues to worsen. No doubt the economic woes will continue well into 2009. However, the market appears to be showing more resistance at current levels probably due more to the fact the market had been way oversold even after consideration of the ongoing and deep recession.

Economic Conditions Worsen!

We finally got the official word on what we all already knew, we are in a recession! In fact, the experts now say we have been in recession for one year, since December 2007. That is no surprise to us as that has been our prediction all along. But last week brought stark data on just how bad the economy really is. The ISM manufacturing index came in at 36.2, the lowest reading since 1982 and far below the level considered contraction. The ISM Services index also hit record lows. November same-store sales reported declines and continuing claims for jobless benefits reached a 26-year high. Some reports have the percentage of home loans at risk of default (foreclosed loans and those with late payments) at record levels. Of course, the biggest news was that payrolls declined 533,000 in November, the largest decline in 34 years! Obviously the unemployment rate continues to rise as companies across many industries rush to announce more job cuts. The automakers testified on Capitol Hill to receive bailout funds, but no agreements were reached. The prospects for the auto industry are indeed very dim, as GM reported a decline in November sales of 41%. On a positive note, the government is looking at initiatives to help drive mortgage rates down and interestingly, mortgage applications showed an increase over the prior week. Also, gas prices continue to fall after hitting a 4 year low, and lower prices will help improve cash flows and confidence. But the real story is housing and employment, both of which have to improve before the economy can make headway and start growing again.

Market Beating Foresight

Despite the overwhelming bad news, the market only lost 2.3% and in fact, gained significant ground over the last four trading sessions. What could account for this resiliency? We think the stock market has reached oversold levels given a 53% decline since October 2007 highs. That and the fact that the market has largely already accounted for much of the bad news just released. There is little doubt in our minds that the economy is bad and that only time and perhaps government intervention can turn the tide. Next week will bring additional reports on unemployment and retail sales. In addition, there is speculation that a bailout plan for automakers may finally be settled. Given the weight of bad economic conditions, the government will likely implement other initiatives to help provide support for the economy. Obama will likely push additional measures when he takes office in the new-year. These efforts will help the economy over time, but it is still likely to be well into 2009 if not year-end, before we start to see an economic revival. Short term these government measures will help, but we are also concerned that inflation over the long term may again rear up as we struggle with growing budget deficits as a result of government interventions. The market has risen in eight of the past ten trading sessions, a remarkable feat considering the plethora of bad economic news. We view this as a positive sign for the market, a sign that lends support to the argument the market may have established a trading range bottom. We think the worst may be over for the stock market, despite the poor economy. However, that does not mean the market will not drop further, in fact the market trend will likely remain very bumpy or even rocky over the next three to six months.

Market Beating Options

The Market Beating Options Portfolio ended the week up strong and now sports an exceptional 263% return since January 2007. Year-to-date, this portfolio continues to beat the market return by a large margin, with an excess premium of almost 30%! We mentioned in prior discussions how to make money writing options as the risk premiums remain quite high given recent market turbulence and the extreme volatility. The spread position we entered against the market index remains in positive territory, but is now teetering with an index trading at levels near the exercise price. We still may get a market pullback this week, which may put this position back in the red. However, the spread options expire in two weeks, and we still think the market will close above 875 (our exercise price) as the general market selling pressure subsides. In the prior week we also sold to open a put option (VIXXN) on the CBOE Volatility Index with an exercise index of 60. Option premiums are still high given the extreme volatility we have seen over the past two months and we thought we would take advantage of that. The volatility index remains above 60, but is trading at levels near the exercise price. We made huge gains last week on this position with the option increasing in value 48% just last week alone. The option expires in less than two weeks and we still expect to make money. However, volatility may start to trend down which is a good thing for the overall market, but not for this position which would put us at risk for losing some of our gains. However, for us this was a very short term trade that is also a hedge against the overall market. For example, if the market does well this position may lose money, but this position will do well if the market convulses. In other words, if we lose on this position because the market does well, that would not be bad since our long position gains will more than make up for the loss. Our other position, a long term call option on the market index, was down slightly in line with the overall market decline, but we think this option will do very well over the next year as the market recovers.

We still think there are option plays that can be very profitable given the volatility and price swings that are occurring regularly in this market. We expect the market to swing wildly up and down within a trading range of 825 and 900 over the next month or so. With that in mind, we are looking to trade both a call and a put on the market index with the same expiration date. We are looking to buy an 850 Jan 09 call and an 875 Jan 09 put if we can get in at good prices. If we can get in at good prices, we will sell each position after the market swings in the right direction after target gains of 20-30%. We will also look for additional spread positions for writing options, but will only consider those with exercise prices that are more than 10% from current market prices and with very short durations. With daily market swings of more than 5% occurring frequently, writing options is risky and investors need to manage risk by limiting their risk of loss. We are still not ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict, with the 3-6 month outlook very uncertain.

Sign Up Today for complete access to all of our option picks and portfolios through http://www.marketbeatingstocks.com/! To keep subscribers informed, we send email alerts immediately after every trade we make, and provide a weekly newsletter summarizing the week's activities and our portfolio performance.

Short Term Call Option

2008-12-02T05:49:00.001-08:00

Market was oversold on Monday after losing almost 9%. The market continues to trade in extremes with high volatility. We would expect the market to bounce back today, particularly if the hearings go well with the automakers on their capital infusion. Buying a call option on the market index could be a good short term play if the premiums are low.

Thankgiving Holiday - Weekly Wrap

2008-12-01T06:35:00.000-08:00

Market Beating Foresight

Next week will be a busy week for economic reports with releases on jobless claims, unemployment, manufacturing, car and truck sales, and service sector activity. The big news will likely center on retail sales data from Black Friday and the holiday weekend. The prospects for consumer spending and employment will also be primary market drivers. However, the government has been the wildcard, as intervention into the private sector to stimulate the economy has been bold and frequent. The hearings will resume for a bailout package for automakers and that result could also drive the market. Volume which has been light with the holiday, but will return in full force next week, and may represent an excellent barometer for where the market may head for the remainder of the year. If the market can hold last week gains in high volume and lower volatility, that would be a strong bias towards a year end rally. Of course, we could also get a pullback from recent gains, or even worse, hit new lows. While volatility decreased significantly last week, we still think volatility will remain at high levels over the near term. We were very encouraged with the market gains last week, but do expect a pullback given the extreme 21% gain over the past five trading days. This is still a very good market for short term trading as market swings are very wide in both directions.

We mentioned in prior posts how to make money writing options as the risk premiums remain quite high given recent market turbulence and extreme volatility. The spread position we entered against the market index is now back in positive territory given the strong market advance last week. However, we do expect a market pullback this week which may put this position back in the red, but the options expire soon in December, and we still think the market will close above 875 prior to expiration. We still think there are option plays that can be very profitable given the volatility and price swings that are occurring regularly in this market. One play is to look for an opportunity to buy both a call and a put on the market index with the same exercise price. If the market is trading in the range between 875 and 900, and premiums are reasonable, our plan would be to hold the put – call position only a few days, hoping to take advantage of a 5% market swing eventually in both directions. Granted, it may take a few days to get the second swing, but if trading patterns continue, the current volatility and average price swings we have been experiencing will give us a very good chance. We also may look for spread positions for writing options, but will only consider those with exercise prices more than 10% from current market prices, along with very short durations. With market moves of 6%on average daily, we caution that writing options is risky and investors need to limit their risk of loss.

Week in Review - Volatility Reigns!

2008-11-23T09:53:00.000-08:00

Volatility Extreme At Historic Levels

Market volatility remains at extremely high levels. The historic average for volatility as measured by the popular VIX index is 30, versus the off the chart levels we see today near 80. The volatility level has been above 30 for 50 straight trading days, which is truly remarkable. But it is also the dramatic swings that we see each day that has investors running to the safety of cash and treasuries! Over the past two months, the daily average percentage change on the market index has been 6% versus an historical average of 1.17% that is almost 5 times the normal level of volatility. There is little doubt that volatility is extreme and at historic levels, as fear runs rampant and drives investor behavior. Turning points usually occur when reliable measures become extreme, and that is where we think the market is now. The critical question is how long will we stay in this period of high volatility and when will it normalize which at some point it will. Market Beating Stocks believes that volatility will remain high at least through the end of the year and likely well into next year. There is simply too much uncertainty and moving parts with regard to financial stability, government intervention programs, the new administration, and other bailout programs. More time is needed for the storm to settle, and consumers have to begin to feel safer when it comes to their jobs and financial assets.

Market Beating Foresight

Next week, economic reports will be released on existing home sales, consumer sentiment, and weekly jobless claims which will further weigh on the market, along with a Black Friday that carries a bleak forecast. The viability of Citigroup is being tested as the share price falls below $4. Government intervention may be necessary to avoid a failure, concerns that certainly trouble the financial sector. As we have said before, we think that volatility will remain very high over the near term. However, we also believe there are signs the market has reached extreme levels in volatility, interest rates, and equity valuations, levels that usually represent turning points. Are we at the bottom? No one can predict, but we may have hit bottom on Thursday last week, but as investors you do not have to worry with calling the exact bottom. Market Beating Stocks believes we are at a trading range bottom based on extreme volatility levels, near zero treasury interest rates, and compelling equity values following market losses nearing 50%. Are there ways to profit in this environment? Fear and risk aversion is very high which drives up the price investors pay to manage risk. Now may be a good opportunity to play the volatility in your favor by trading options, particularly writing puts in spread positions. However, if investors write puts, they really need to limit their risk on the downside by purchasing a put option a little farther out of the money than the one sold. We are also going to look for more short term trading opportunities with the market indexes to take advantage of large daily price swings. Over the past two months, the market index has averaged price swings of 6% per day and that is truly amazing. We are going to look for an opportunity to buy both a call and a put on the market index with the same exercise price. If we can get in with reasonable premiums, the plan would be to hold only for few days, hoping to take advantage of a 5% market swing eventually in both directions. Granted, it may take a few days to get the second swing, but if trading patterns continue, the current volatility and average price swings we have been experiencing will give us a very good chance.

Profit From Volatility

2008-11-15T15:00:00.000-08:00

We reported last week that volatility would likely remain high and boy was that an understatement! The market has had extreme movements throughout the week and now with growing regularity has moves of 5% or more in just one hour of trading. Last week marked the Nov 15 deadline for hedge fund redemptions and surely that had an impact on volatility. However, fears of a deepening recession continue to grow and that too is weighing heavily on the market. The volatility will likely continue as concerns over the economy and skepticism over government interventions continue to grow. The change in administration will also bring uncertainty as new players are chosen and future plans announced. With year-end approaching, there is also the looming tax sale deadline for dumping losers which again will further pressure stocks.

But the real story is volatility and with how to take advantage of that. If the market moves strongly in one direction, there may be opportunities to play a bounce, as intraday swings of 5% or more occur quite frequently. A good way to play these short term movements is by trading options on the market indexes. In fact, we are going to look for an opportunity to buy both a call and a put on the market index with the same exercise price. If we can get in with reasonable premiums, the plan would be to hold only for a day or two, hoping to take advantage of a 5% market swing eventually in both directions. Granted, it may take a few days to get the second swing, but if trading patterns continue, the current volatility will give us a very good chance. The key will be to limit the loss on the second position if it goes against us once the first position is closed. Investors can stay abreast of all our positions and recent trades directly through our website at www.marketbeatingstocks.com.

Take Advantage of Volatility

2008-11-13T16:49:00.000-08:00

Volatility remains extreme. Just today the market moved from a 4% loss to an almost 7% gain before closing. That is a swing of 11% in just one day without any earth shattering news! There is simply no explanation, other than the market is out of control! Volatility is so high that it is clearly hard for investors to stay rational, particularly given an irrational market. But options give investors an excellent tool to take advantage of the volatility. With option premiums high due to volatility, now is an excellent time to cash in on premiums by shorting options. Just make sure you protect yourself at least on down market moves by limiting your risk. Another strategy, buy both the put and call on at a specific exercise price, and sell each option when the index moves 4 to 5% in your favor. With the swing today, you would have made money on the put in the morning and the call by the close! The market is moving in 5% swings with frequent regularity. It make take several days to close both positions, but you may be able to profit on the price swings. Just set limit orders on the sale, so when the market bounces you can get out with your profits.

Post Election Recap - Weekly Options Summary

2008-11-09T09:59:00.000-08:00

Volatility will likely remain high next week as more companies report earnings and Obama moves forward with his administration appointments. In addition, the looming Nov 15 deadline for hedge fund redemptions may also contribute significantly to the volatility. The economy is not well and that will not change next week. We still believe that the market is at attractive levels, and that this is not the time to move to cash. That said one risk of concern is that the market could move down further on “bad appointments” on the part of the incoming administration. Some of the selections for cabinet positions may be market movers like the choice for the all important Treasury secretary. We hope that Obama is deliberate and insightful with his selections. Oil prices are always a wild card, and we hope the recent declines continue which relieves some pressure on consumers. Another major risk is whether the selling pressure returns that we saw in prior weeks, particularly from the Hedge funds. It could be a very volatile and difficult week if the selling pressure overwhelms the market with the Hedge Fund redemption deadline looming. Investors need to be patient, and perhaps even opportunistic in light of the current volatility. If the market moves strongly in one direction, there may be opportunities to play a bounce, as the market has intraday swings of 5% increasing regularity. A good way to play these short term movements is by trading options on the market indexes. Volatility can be very trying for buy and hold strategies, but it does offer opportunities for short term trading. We are going to look for more short term trading opportunities with the market indexes to take advantage of the high volatility in the market.

As an example, last week we found a good opportunity with put options against the S&P 500 Index (SPX). First we sold to open a December 2008 SPX Put with an exercise price of 875. The market had fallen sharply on Thursday and the option premium ($55) rose significantly as a result. We will pocket the premium regardless of what happens. However, given market volatility and our exposure to downward moves, we also bought a December 2008 SPX Put a little farther out of the money having an exercise price of 850. This purchase completes our spread position and will minimize our risk of loss if the market moves against us. The insurance this position provides cost a premium of $35, a good price as we executed this transaction after the market rallied with a resultant drop in premium over $10. We expect the spread position to make money at expiration as we do not think the market will drop below 875, but if it does we will incur only a small loss. In a separate transaction, we also purchased a long term call option against another market index (SPY). This option expires in December 2009 and carries an exercise price of 100. The option became attractively priced in the sharp downturn that occurred on Thursday. We think the market is overly pessimistic and think that this option can increase considerably in value over the coming months. However, we wanted an option with a longer time to expiration to ensure the market had adequate time to recover. We also completed these transactions using limit orders that when set were significantly better than current prices prior to trade. With the current volatility in the market place today, option prices can fluctuate widely throughout the day and using limit orders can help investors take advantage of significant price swings in their favor. As we mentioned before, we may also consider some tax strategies that involve writing puts and buying calls on certain oversold stocks in our portfolios that allow us to take advantage of tax losses before year end. We are still not quite ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict. The market is just too fragile and volatile right now, with the 3-6 month outlook very uncertain.

For complete online access to all of our stock and option portfolios, please access our website at www.marketbeatingstocks.com!

Setting Limits on Options

2008-11-07T17:13:00.000-08:00

Today was a much better day for the market as it rose 2.9% in rebound from the 10% loss from the prior two days. We purchased a put option to complete the spread we started yesterday when we wrote a put option option against the S&P index (SPX). Today we purchased the DEC 20, 2008 $ 850.000 PUT(SPXXJ: OPRA) at $35. The put was purchased as insurance against the PUT we sold on Thursday that had same expiration, but an exercise price of $875. With the strong market gains today, this PUT option became more attractively priced, and we felt the insurance to limit potential losses was prudent. The market volatility is still too high, and declines can be steep and severe making options very risky. Managing risk is critical in this market. We expect the combined position to make money at expiration as we do not think the market will drop below 875. If the market does crash, we will incur only a small loss, and still pocket the premium we sold in either case.

Setting limit orders on options when buying or selling is advantageous in this market. Because of the extreme volatility options prices can fluctuate wildly throughout the day. Investors that set the prices on entry and exit can really profit in this market by taking advantage of the volatility. A good strategy is to set the buy price really low or the sell price really high, and the volatility on a quick bounce will often trigger the transaction. This is a good strategy if the investor is not pressured to buy or sell and is comfortable if the transaction doesn't close. In today's trade, I set a $35 buy price when the option was trading at $45. The option briefly traded at $35 only long enough to execute before moving quickly back to the $40 range. With the volatility in today's market, big price swings are common and limit orders can offer advantages.

Volatility Still High After 2 Down Days

2008-11-06T16:31:00.000-08:00

The market was down sharply again ending the day more than 5% down, and 10% over the past two days. Frankly, there was not a whole lot of new information released today, investors must be getting jittery with the post election blues and the realization the economy is pretty bad. But everyone already knows the economy is bad, as Employers continue to cut jobs and consumers restrict spending. We still think the market is trading at attractive levels despite the turmoil in the economy. Yes, there could be further drops, but we think the market is closer to that bottom. Option prices continue to reflect the high volatility in the marketplace. With two days of significant drops, we decided to sell a December put option for the current high premium betting that the market won't go too much lower. There is certainly risk to this position if the market continues to move down and if that happens, it could take a really big tumble if it breaks through old October lows. We likely will buy a put option a little farther out of the money in order to minimize our risk on the downside. Hopefully, the market will bounce back over the next few days so we can get that insurance at a lower cost. We also purchased today a long term call option on the market index to take advantage of the low prices and the pessimism in the marketplace. We think the value of this option will increase significantly over the coming year. For more on these purchases, please review the transaction details on our website, www.marketbeatingstocks.com.

Obama Wins Election, But Market Falls

2008-11-05T17:41:00.000-08:00

The good news is the elections are now over with Obama winning. Frankly, we are just glad the negative political advertising is finished and that we can now move past the political uncertainty. Nonetheless, the market tumbled today 5.3%, giving back all of the gains from the prior day and then some. We are not particularly surprised at the fall today in part because of the large advance on Monday. The economic news that was released today was not good as employment continues to deteriorate and activity in the services sector clearly shows contraction. Frankly, this is no surprise, the economy is not doing well and in our view, will continue to struggle for some time. However, we still think the stock market is at attractive levels, although it could easily see saw back in forth over the short term. The volatility is still too high. However, we still think the market is trading in a very attractive range. We have put a limit order on the Dec 09 Call Option on SPY which we hope we can pick up at a good price. We have low balled the limit order at 10, so the option will need a significant drop for us to get in, but with the current market volatility that could easily happen. We want to get in at the right price, so if doesn't happen, that's okay!

Still Too Fragile For Call Options

2008-11-02T15:05:00.000-08:00

The Aggressive Portfolio (Options) ended the week unchanged as we are now 100% cash in this portfolio. The portfolio continues to sport an exceptional 244% return since January 2007. Year to date, this portfolio continues to beat the market return by a large margin, an excess premium of almost 20%! As we mentioned before, we do plan to look for more opportunities to make money writing options as the risk premiums right now are quite high given recent market turbulence and the underlying volatility. We may also consider some tax strategies that involve writing puts and buying calls on certain oversold stocks in our portfolios that allow us to take advantage of tax losses before year end. We may also look for an opportunity to buy a long term call option against the market index, although with the market gains last week, prices are not quite as attractive. If there are significant market losses for a day or two over the coming weeks, that may open a buying window for a better price. We are still not quite ready to begin buying straight call options on individual stocks as the short term direction of the stock market is still volatile and difficult to predict. The market is just too fragile and volatile right now, with the 3-6 month outlook very uncertain. We are now 100% cash in this options portfolio and will likely stay mostly in cash though year end unless we uncover very compelling opportunities. We would caution again that investing in options is very risky and is appropriate only for the most aggressive investors who understand the inherent risks.

Market Soars

2008-10-28T16:31:00.001-07:00

This marked one of the best up days ever on a percentage basis. Even more remarkable was the fact that the major part of the move came all in the last hour of trading. We have seen the last hour of trading bring significant trading swings over the past few months. This is again a sign of the extreme volatility we are experiencing in the market, which moves the market in both directions. We are encouraged with the move up today and volume was up as well which lends support and conviction to the move. However, 10% is a huge move on a day with little significant news. An interest cut is widely anticipated for tommorrow, and that might account for some of the move, but we would caution investors to be careful. The volatility is still extremely high, and the market could easily reverse and drop another 10% tommorrow or the next day. We hope that doesn't happen, but wouldn't be surprised if the market slid some, as this was just too much gain too fast. One way to profit is to buy a short term Put with a November expiration on the SPX index. That way if there is a bounce down, investors can profit short term. However, longer term, we think the market will move up from these levels, but surely will be rocky along the way given the extreme volatility in the market.

Too Fragile For Call Options

2008-10-26T11:32:00.000-07:00

Options: 25% Premium Over Market Return YTD

The Market Beating Stocks Options Portfolio continues to sport an exceptional 244% return since January 2007. Year to date, this portfolio continues to beat the market return by a large margin, an excess premium of almost 25%! As we mentioned before, we do plan to look for more opportunities to make money writing options as the risk premiums right now are quite high given recent market turbulence and the underlying volatility. We may also consider some tax strategies that involve writing puts and buying calls on specific “oversold” stocks in our portfolios that allow us to take advantage of tax losses before year end. We are not quite ready to begin buying straight call options on new investments as we are still not comfortable with future market direction over the short term. The market is just too fragile and volatile right now and the 3-6 month outlook is very uncertain. We are now 100% cash in this options portfolio and will likely stay mostly in cash though year end unless we uncover very compelling opportunities.

What To Do With Options

2008-10-21T18:00:00.000-07:00

We plan to look for more opportunities to make money writing options as the risk premiums right now are quite high given recent market turbulence and the underlying volatility. We may also consider some tax strategies that involve writing puts and buying calls on specific stocks we consider oversold in our portfolios and that allow us to take advantage of tax losses before year end. We are not quite ready to begin buying straight call options on new investments as we are still not comfortable with future market direction. The market is just too fragile and volatile right now and the 3-6 month outlook is very uncertain.