Category: Stocks & ETFs

I’m a Baby Boomer. Millennials, you shouldn’t trust me. $X $BA $AAPL $SPY $DIA

Brian Sullivan just said, “the market is selling off, but the steel and aluminum stocks are moving up”. 

The reason for this is that another, somewhat older, Baby Boomer just made a decision to favor one old sector of the US economy over, well, all the other sectors. Stocks, except for the one favored sector, are predictably selling off. 

Of course, what I’m talking about is the decision by President Trump to slap tariffs on steel and aluminum imports. He was flanked by Wilbur Ross, who is decidedly not a millennial. 

I have argued here on my blog that one shouldn’t trade based on politics. But I also feel you shouldn’t trade based on ‘old’ thinking. What President Trump and Wilbur Ross just decided was to look to the past to make a present decision. 

Being an old white guy, I think I have a little insight into how old white guys think. And what old white guys think is that there was a golden age in the past that we should strive to return to. The whole ‘Make America Great Again’ thing is a political expression of this thought. The reason for this, I believe, is that when one has been privileged for a long time, a movement toward equality irrespective of age, sex or race feels like we are losing something. 

I listened to the televised ‘news conference’ announcing the tarriffs and there was a decided feeling that the US steel and aluminum industry used to be great, and now they are not. It’s time to return to the old days when steel and aluminum were dominant industries.  

The fallacy is that our economy is not based on that anymore. The world’s largest company makes cell phones. Microsoft, who is in the top 5 of companies, makes nothing tangible at all. If we open up a trade war with other countries, what is that going to do to exports of iPhones or software? Certainly, can’t help. 

We’ve seen this short sighted, old thinking before. We got a taste when we, and everyone in West Virginia, was told we were going to bring coal back, saying that the previous administrations had struck it a death blow.  

What hurt coal was not policies, but natural gas. It got cheap, coal can’t compete with natural gas. Never mind that there were more solar panel installers in the US now than coal miners. Oh yeah, I forgot there were tariffs previously placed on solar panels.  

These tariffs raise the price of the commodity and that is passed on to the consumer, eventually. If solar panels are more expensive, less people will opt to install them. When steel goes up, the cost of construction goes up and the cost of something like cars go up. When aluminum goes up, the costs of planes goes up.  

And here’s where it gets real for a lot of us. Although US Steel is up 5.6%, the recent darling Dow stock, Boeing is down about 4%. 

And Boeing is just the tip, the Dow is down 2% and the S&P is down 1.65% as I write this. Even Apple is down 2.5%. 

Old thinking can be expensive.  

Adding credit spreads to calendar spreads. $TSLA

There was a guy in my west Austin neighborhood that had a Tesla Roadster just like in this picture. Same color. It was the first time I had seen one. Can’t remember the year, maybe around 2008-09? 

Yesterday I alluded to one of my favorite techniques that I use when I am going to roll a short call or put expiring the next Friday. I usually have this short call/put because in the past I have put on a calendar spread and now this is the near dated option that is near expiration. 

When these options are out of the money they are not yet valued at zero, that won’t happen until late on Friday. The simple way to handle this is to roll the call/put to the next week’s contract at the same strike price. 

But what I have become fond of doing is augmenting the trade with a credit spread that expires the following week. This gives me the ability to sell the next week’s option for a slightly higher price. 

Sounds confusing? Let’s look at one of these that I just put on today in TSLA. Today is Wednesday Feb 28. 

I am short the 360 call that expires on Friday Mar 2. This was set up as the near dated option in a calendar spread with the longer dated option being the April 20 360 call, which I am long. TSLA is down for the day about 1.5% 

This short call still has 75 cents of value and I could roll the call till next week and collect about $3.10 for a total credit of $2.35. 

Instead I sold the Mar 9 (next week) 362.5 call and bought the 367.5 call (again, next week) and collected $1.02 for that spread. It costs me $5 in margin requirements to hold this credit spread.  

Come Friday I have more options on my option. I can close out the credit spread by selling the 367.5 call now valued at about $1.88 or keep the credit spread and roll the 360 call to next week, or the week after or roll it to the 370 call next week. 

Another choice would be to keep the credit spread and open another put credit spread to make an iron condor. In fact, should TSLA stay down here, this will be my first choice. 

Happy Trading! 

Hello Friend. Trading a bit of $SPY today and doing a bit of housecleaning.

So, I’ve begun watching Mr Robot from the beginning. I’ve already seen Season 1 and 2 but forgot enough that I need to re-watch before seeing Season 3. Damn, it’s a good show. BTW Season 1 and 2 are on Amazon Prime Video. Should you need some entertainment. During SXSW in 2016, the show came to Austin setting up a ferris wheel downtown for a week. 

Today, Jerome Powell, testified before the House. During that testimony he sounded a bit more hawkish than his predecessor, Janet Yellen. That was enough to get the credit market’s panties in a wad, or I should say it set off the algorithms to sell the $SPY. We gave up a good bit of the gains made yesterday. The VXX shot up 9.5% and SPY was down 1.25%. After hours the SPY took back 0.32% but before you get too comfortable, the futures are down 0.21% tonight. 

I don’t think anything has fundamentally changed. I think this was algo driven. The market changed too quickly and there was no other real news to drive it.  

In my less risky, SPY trading account I did very little, getting a little bit longer and trading out of some put spreads at a small profit. 

In my speculative account I added just a few new long positions in AMZN and opened a few put calendars in AAPL and GOOGL. 

Mostly I just did some housecleaning. 

One technique I use is selling a credit spread for the following week if I am short either a put or call that expires this week and its close to the strike. This way I can close it out on Friday and sell the long call or put I bought this week to offset it.  

I’ll try to give a real-world example of this in the next few days.  

$AAPL is the reason that this snap back may be for real.

One week ago, on February 8th, I stated that I was going to buy this dip. You can find a link to my blog post here. 

On the same day Karen Finerman on Fast Money gave a Fast Pitch touting AAPL, saying for that she was hitting the BUY Button. 

Yesterday, Warren Buffet, announced that AAPL is now Berkshires largest holding. More about that here. 

Today on Fast Money Halftime the traders were a little dumbfounded by the resurgence of the market, now basically covering 70% of the down draft that started a few weeks ago. 

They said that it was essentially a coin flip about whether or not we keep going back to all-time highs or retest the recent lows. My man, Josh Brown, said a pull back to recent lows under low volume would be healthier than a failed run at a new high. 

But I think that a surge higher is the more likely scenario and I think it will be because of AAPL. 

AAPL hit its all-time high on Jan 18 before slowly falling and was flat to down going into earnings and underperforming market. When SPY was peaking on Jan 26, AAPL was trading about where it is right now. AAPL did bump the day after earnings, but then tanked with the market down to 151 or so on or about Feb 9. This represented a 17% pull back for the stock. 

AAPL is the largest company in the world by market cap, and it represents the largest holding in SPY and QQQ. Buffetts unexpected, indirect, endorsement of the stock has really lit a fire under the name. 

So, although the rest of the market may pull back from here, AAPL has already had its round trip and, I believe, is unlikely to repeat. 

Although when I advocated BTMFD I did not specifically mention AAPL, Karen Finerman sure did, and her call was the right call.  

Sometimes you’re right for the wrong reasons, but it’s all part of the game. 

Options Basics, Calendar Call in $XOM

Today I am going to write a bit about Option Basics and then outline one of the trades I put on today. 

What are options? 

Pretty simple question, totally understandable.  

Options are contracts, agreements between parties. 

There are two basic options: 

  • Calls – a purchaser of a call option is buying the right to buy 100 shares of stock or ETF at a certain price (the strike price) at any time before a certain date (the expiration date) 
  • Puts – a purchaser of a put option is buying right to force the seller of the put to buy from the buyer 100 shares of a stock or ETF at a certain price (strike price) any time before a certain date (expiration date) 

Lets look at a real example, today is 2/13/2018 and lets look at a couple of Apple options, AAPL closed today at 164.34: 

  • AAPL Call – Let’s look at the March 16th Expiration call with a strike price of 165. Today this was selling around $445 
  • AAPL Put – Let’s again look at the March 16th Expiration, but this time the put. Unsurprisingly it’s a similar price, $475. Just a bit higher than the call but remember AAPL is 66 cents below 175 

If one bought a 100 shares of AAPL instead of the call, you would have to pay $16,434. If you did not sell any other calls to help offset the sales price of $445 AAPL would need to rise to 169.45 before March 16th.  

The advantage to the call is paying just a fraction of the cost of the stock to control 100 shares. If AAPL trades up to 200 by March you can make up to $3000 on each call. 

The other advantage is you only risk $445. If AAPL takes a big hit, down to 150 or so like it did last week you don’t lose $1,500. 

The disadvantage to the call is that owning the stock has no time limit. AAPL could trade right at $165 up until March 16th and then make a run to $200 in April. Unless you rolled the call up and out, you lose.  

Puts work the same way, but in reverse. Basically, you would buy them if you thought AAPL was going lower.  

In order for the put to pay off, AAPL would have to close at 160.25 or lower, on March 16th. 

Of course, these are not the only options that exist, even in AAPL. There are monthly expirations and many stocks and ETFs have weekly expirations. There are strike prices very far away from where the stock or ETF is currently trading. The two options I mentioned above are basically ‘at the money’. There are strike prices that are ‘in the money’ (lower strikes in calls and higher strikes in puts) and ‘out of the money’ (higher call strikes and lower put strikes). 

You can find these options on your broker’s site and are called an Option Chain. 

Tomorrow I’ll go a little further into this, why people might use calls or puts before we move on to spreads. 

 

Yesterday I wrote about a trade I put on in XOM. I opened a combination call spread pairing a calendar spread (one April 80 call paired with a March 80 call) and a credit spread (selling the same March 80 in the other spread and buying a March 82.5) 

If XOM stays at or below 80 on March expiration I will end up with an April 80 call for $24. 

Today for a while XOM opened just under 76 and made it to 76.7 before pulling back and closing at 76.3. 

So I decided to add another calendar spread to this trade buying one March 75 call for $302 and selling a weekly 75 expiring a week from this Friday (2/23) for $221. The net debit is $81, adding the $24 from yesterdays trade has me in this multi leg, multi date spread for $105.