Stock Market Analysis – 07-01-2010

July 1, 2010 at 10:33 pm · Filed Under Broader Market, Educational · Comments Off on Stock Market Analysis – 07-01-2010 

S&P 500 Daily ChartMore jobless claims and plummeting pending home sales should destroy the market, as it did at the start.  The semi-recovery at the end was a little surprising, but not unfounded.  Sharp moves typically have a bounce, so make sure you have a predefined exit so that you don’t get too jumpy and misfire early.  If you jumped in short, you still have a little room on the upside, and if you aren’t in yet, you’re probably thrilled that it’s not overextended yet. 

I was asked about using options when shares aren’t available to short.  The fact that you were trying to short it in the first place says you aren’t looking to leverage it to the max.  In that case, typically buying a straight in-the-money put will match your needs the best.  Just buy one that’s not too far out so that you have a high delta, meaning that the option move more closely matches the stock move.  That way it’s closer to your original short position where you don’t have to worry about time.  You can consider bear spreads if the options are too expensive, but then you’ll have to figure out target prices and timelines. 

If you want to get in depth, you should get some options software.  Don’t worry, there’s a lot of free stuff out there.  Most brokers offer at least something.  The ones I’ve used, TD Ameritrade and Options Express have basic things that can help you compare the upside, downside, and timelines of the different options pretty easily.  You could also look at something like options oracle, which is also free.  Hope that helps.

Position Risk

March 17, 2010 at 6:50 am · Filed Under Educational · Comments Off on Position Risk 

If I bought 1000 shares of INTC at $19, how much am I risking?  $19 x 1000 shares = $19k invested, but that’s not how much I’m actually risking.  In order for me to lose $19k on this position, INTC would have to drop to $0 overnight.  Even Enron couldn’t pull that off.

The real answer requires a little more information, like where my stop loss is set.  Let’s look at the following breakout:


Regardless of where I enter the stock, my stop loss would probably be somewhere around $15.  Let’s look at 2 scenarios.  For the first, say I got a good entry of 1000 shares at $17.*  I’m risking $2 a share on 1000 shares, giving me a risk of $2000.  For the second, say I jumped on late and entered at $19, giving me a risk of $19-$15 on 1000 shares, or $4000.  Purchasing the same number of shares on the same stock, I risked twice the amount in the second scenario.

Most people will determine how many positions they want to hold, look at how much capital they have, and then just allocate an equal amount to each position.  For example, I want 4 positions, I have $100k, so I’ll put $100k / 4 = $25k in each position.  What you really want to do is set a constant risk across your positions though.

To even out my INTC scenarios, I would have to buy half the amount to get my risk back down to $2000 in the second case, or 500 shares.  But doesn’t that mean I’ll only make half as much money when it goes up?  Yes!  That’s why it’s important not to buy overextended stocks. Either your risk will go up or your reward will go down, and I think you know which way you want that scale to tip.

Once you get a grasp of risk sizing your positions, you’ll see that buying KO can be just as risky as buying some hot biotech company or even more risky than call options on a Chinese solar firm (risk is easy to determine on call options since it’s actually 100% of your investment). †   I’ll have more on this in a post about risk, reward, and capital in the future.  If the gap between my last educational post and this one is any indication though, don’t hold your breath waiting for it…

* Yes, I know this is a weekly chart and INTC actually gapped through this price.  Ignore the symbol and just look at the chart and numbers.

† This ignores the fact that stocks can gap down through your stop, but slippage is a topic for another post.

Covered Calls

January 9, 2010 at 12:18 pm · Filed Under Automated Trader, Educational, Personal Finance · 2 Comments 

Unfortunately, all good things must come to an end.  My autotrader is still doing great, but it appears that it’s pushing up on the limits of how much capital it can trade before I move the market too much and slippage starts hurting it.  Without any changes, the return on capital will start to slowly dwindle as the capital goes up, but the return levels off.  So I need to find some new investment ideas.

I remember the first time I read about covered calls, aka a buy-write, I thought it was the stupidest strategy.  Capped upside and unlimited downside don’t seem like a good combination.  Then I learned a little more about position sizing and how to set a constant risk amount so that you don’t just view risk as how much capital you put up to establish the position.  That made the unlimited downside part a little more manageable.

Recently I’ve been reading more about real estate (related to the fact that I need new investment ideas) and getting a much better grip on controlling cash flow.  With a far better grip of expectancy analysis over when I first learned about covered calls, they’re actually starting to seem interesting to me when viewed as cash flow.  After rereading chapter 2 in the McMillan options book as a refresher, I think I may start to dabble in this a little.  I don’t know if I’ll actually follow through on this, but it may add some different types of stocks that I look at in the future.

Stock Term – Breakout

February 11, 2009 at 7:17 am · Filed Under Terminology · Comments Off on Stock Term – Breakout 

Breakouts are simply price moves above or below a level of support or resistance.  I’ll usually call a breakout that falls through resistance a “breakdown” for clarity.  I’ll also tend to call things “breakouts” only if they’re supplemented with significantly higher than average volume.  These are the things that kick off new trends, so needless to say they’re important to watch for.

Stock Term – VIX

February 6, 2009 at 2:25 pm · Filed Under Terminology · 2 Comments 

According to Wikipedia:

VIX is the ticker symbol for the Chicago Board Options Exchange Volatility Index, a popular measure of the implied volatility of S&P 500 index options. A high value corresponds to a more volatile market and therefore more costly options, which can be used to defray risk from volatility.

The VIX can be used for a lot of things, but I usually use it as a complementary indicator to volume.  A declining VIX often means a consolidation period, and an increasing VIX often means an accumulation or distribution period.  You can find the chart for it here, but it’s available on pretty much every stock site.

Consolidation Confirmation

January 27, 2009 at 12:53 am · Filed Under Broader Market, Educational · Comments Off on Consolidation Confirmation 

Just checked my blog traffic for the first time in many months and noticed how closely the traffic keeps up with the volatility in the market.  Ramps up at the end of the summer, peaks in October and November, and declines through December and January.  I don’t need the VIX to tell me how volatile the market is, I should just check my web stats a little more often.  Yet another reason to add to my post extolling the virtues of starting a blog

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