Great information on how to deal with taxes and day trading. The wife of Mr. Day Trader Rock Star is a CPA and she gives some great advice and answers some questions on taxes and day trading. Some of the key things that traders deal with are the "wash sale" rule, what software to use, and mark to market filing with the IRS.
The market swung to the upside overnight off of the good news from Europe and pretty much held there till the end of the trading session. I was in a position in WMT and got to see my position break even and then move to the profit side. I set my limit price a little high to see if the stock price/option price would reach it at the end of the day and it did (it pulled back after that which makes me feel even better to know that I got out in time). That was pretty cool to see the market actually chase my price in the last 30 seconds of the trading day. I made a decent profit and I may consider getting back in WMT on Monday. I like the way the option prices move with the 30-40 delta and with WMT the stock price moves fast. It could go either way but no matter what I like to see the options price move so I know there’s a chance I can make money. I guess that’s the impatient side of me coming out.
My other positions moved close to their break even point so let’s see what happens on Monday.
Markets are set to rally off of the good news from Europe
and the news from yesterday’s Supreme Court Ruling.What the market was looking for was some type
of stability and they have that now with these two pieces of information.Today should be one of those high volume
swings to the upside.Hold on to your
hats again.
We had a very volatile day with the landmark healthcare decision in favor of the healthcare mandate. There was a lot of heavy volume in the market today and that opened up a lot of opportunities. I saw Dunkin Donuts head way down off the healthcare news and got in a position near the bottom. DNKN had risen to new highs and was overbought on the stochastics. It is now oversold on the 60 minute chart and could be poised to swing upwards. I regained my losses on AT&T today as well as it shot up because of high volume.
Today is a big day. The Supreme Court is coming out with its decision on President Obama's healthcare package. That is going to have an affect on healthcare stocks. The EU is also meeting and whatever comes out of the meeting today will likely affect the markets as well. There are some other market-related events taking place so we will most likely see an active day of trading. Hold on to your hats folks.
Its days like today that make it important to have a solid investment plan and solid technical analysis skills. In unstable markets you can create your own stability by coming in with a plan and some well-thought out rubrics that will help guide you through. Its like the difference between saying that you what to go to NY City and saying you are going to NYC with a map of your route, with toll prices calculated, traffic updates and gas amounts tallied. Having a plan makes the trip much easier because you know what to expect.
The market was slow today except at the end. There was a
small rally in telecom as the market closed.As I stated before just because a company has good news or good earnings
it doesn’t necessarily translate into a rise in the stock.Disney had a great weekend but the stock
barely moved today.It’s up a little in
after hours trading but it still didn’t pop like some might have thought it
would.
There's another European Summit this week which is not expected to have any affect on the issues over there and the Supreme Court is expected to rule on the healthcare bill this week (possibly today). The ruling will definitely have an affect on healthcare and biotech stocks.
Disney and Pixar had a better than expected release of "Brave" this weekend which may drive Disney shares higher today.
I’m going to take a break from the stock discussion and take
a broader view of financial goals in general.
The overall goal is to become financially self-sufficient, meaning in short
to become YOUR OWN BANK. The current
financial climate has underscored the fact that in order to have financial
freedom you need to have cash on hand.
Instead of depending on banks to lend credit we need to be able to personally
finance whatever goals we are setting whether they are buying a car, home
repair, schooling, etc.
Trading stocks is just a tool to help you get to your
broader goal of financial freedom. By
putting your money into equities that are increasing in value you are getting a
higher rate of return on your money as opposed to just letting it sit under a
mattress.
With that goal in mind it makes a lot of sense to buy stocks
that pay a dividend because they are making money for you while you sleep
(passive income). The only reason to buy
non-dividend paying stocks is to make money on the volatility or stock
movement. That’s why trading options is
a more effective way of making money from stocks that don’t pay a dividend because
of the leverage that options provide. You
make more money off less investment. In short,
if you are not buying the stock for its dividend then it’s better to buy the
option.
I suggest researching stable stocks that pay a high dividend
and buying those so your money is relatively safe and is generating a
profit. Then research stocks that you
think are going to move in medium to large swings and buying options to make
money from the trade. Take that money
and buy more dividend paying stocks to make even more stable income off of your
cash.
Today was a good reminder to always take profits. Even when
you are up a modest profit you never know what’s around the corner. There’s also the psychological affect that
knowing you made a profitable trade has on you.
When you see a lot of green on your balance sheet it looks better to you
psychologically then looking at a bunch of red or even worse, nothing on the
balance sheet. This whole game is
psychological. The market responds to
people’s emotions around any given stock and what they think might happen to
the company. The key is to know yourself
and be able to talk yourself up when there are down days and talk yourself back
when there are good days. Having a lot
of green on the balance sheet helps you to have confidence in yourself as a
trader and know that you can be successful.
Nothing breeds success like success.
Today’s just one of those days in the market. Just ride it out today and wait and see how
we open tomorrow. The markets are
selling off today, thankfully my trades are holding on to support levels and
have actually bounced up. That’s also an
important lesson: buy well-known, reputable companies that are heavily traded
and are vanguards in their industry.
These stocks always tend to hold up better during these big sell-offs.
If you have stop-losses on any stocks make sure you really
want to keep them because days like today are usually an anomaly and
stop-losses can actually go against you and end up costing you money. It may be better to wait till tomorrow and
see what direction the market takes.
A great piece of advice I heard today was: “panic is not an
investment strategy.” The point is when markets go down it’s a good time to buy
some stocks that have been too expensive.
Just wait till they start to make an upswing or have flat-lined and gone
horizontal. You want to make sure you
buy the actual bottom not buy on the way to the bottom.
In order to make a decent amount of income from your options
trades your need to buy between 10-20 options contracts. I suggest buying 10-20 contracts of an option
that is 1-3 legs out of the money. The
minimum investment is usually around $200 - $500. The reason I make this suggestion is because
during any one day a stock’s price will only move 1 percent meaning the options
will not move as much. In order to make
money on a daily or weekly basis you need to buy larger amounts of options so
you can make money on the small moves.
Just think about Walmart versus the local convenience
store. Walmart can make a lower profit
margin on any one item versus the local store because of volume. Walmart has numerous stores and if it sells
any item with just a $1 profit margin it will still make money. Whereas the local store will make a $1 profit,
Walmart has 7,437 stores. If it sells
one of the same item at each store it will make $7,437.
Let’s look at Walmart’s stock for example. If you bought 5 contracts of the August 18 $70
call option valued at $0.81 yesterday, because the option value is now $0.86, you
would be up $24 ($9 minus the commissions) by the end of today versus buying
only one call option. You would need for
the price to go to $0.92 (because of commissions) before you could see a profit
from just having the one contract.
If we take AT&T from the previous article example you
could buy 3 shares of the August 18 call option strike price of $37 at $0.12
for a total of $42 ($36 + $6 commission).
You will need the option price to go up four points to $0.16 in order to
break even (3 contracts * $16 = $48 minus the commission of $6 = $42). On the other hand if you buy 15 shares of the
same option for a total of $195 ($180 + $15 commission) you need the option
price to go up to only go up two points to $0.14 to break even (15 contracts * $14
= $210 minus $15 commission = $195).
Now of course this is a larger risk of $195 versus $42, but
if you’ve done your due diligence and vetted the stock via technical analysis,
market conditions, recent and upcoming news, and following the trend, you
should come out on top.
It can be difficult to judge the value of options price vis
a vis the underlying stock price. It’s
frustrating watching the stock value climb to new heights and then watch your
options price not even move an inch. Of course the price of the option will be affected by the Greeks (Delta,
Theta, etc.) and Implied Volatility, but if you aren't familiar with
those concepts (which you should be at some point), here's a layman's way of figuring out price.
When
watching the options prices, Look at the prior history of the stock’s price and
the option price. They move in sync with
each other in increments.
One example is
AT&T…for some options values, each time the price of the stock moves a tenth of a point, the option
price will move one point. For instance:
When AT&T’s (symbol T) stock price
is at $35.20 the August 18 call option strike price of $37 is valued at $0.12. When AT&T’s stock price goes to $35.30 the
option price will go to $0.13 and so on.
Another example is Walmart (symbol WMT): When the stock price is at $68.10 the August
18 $70 call option is valued at $0.81.
When the price goes up to $68.20 the option is valued at $0.82.
I figured out a way to possibly save an options investment
that has gone bad. If you buy more of
the same options (same strike price and calendar date) when it has gone down to
its lows, you can realize the profit on the way up. Case in point: if you bought 3 options contracts
of AT&T at $0.18 then as of today (6-20-12) you would be at a loss because
they went down to $0.12. However, if you
buy 15 options contracts of the same strike price at the new low of $0.12, you
can realize a profit once you get back to break even of $0.18. As with any trade make sure you calculate the
commission costs ON BOTH SIDES OF YOUR
TRADE when you do your break even analysis.
Always go with the total cost amount not just the face value of the
option.
The market found some support today with the news of Ben
Bernanke extending the Twist program, also with Germany hinting that they will
be willing to help some more with financing.
My SBUX trade was executed when Starbucks went up yesterday,
I made a small profit of around $6 but that’s still 10 percent of my $60
investment. I probably should have
watched it more closely because SBUX is up even more today and I could have
gotten more profit out of the trade.
I saw Walmart getting ready to make a run yesterday and unwisely
broke my rules of buying stock off of emotion.
I hadn’t done my homework and looked at the setups and got beat up when
the stock went down yesterday. However
the market was forgiving today and WMT has rallied to new highs and I am now
close to a profit.
Here is a good free site that scans the market for various
technical indicators. You can look for
stocks that are on a new uptrend and catch them on the way up. Remember to wait for the trend confirmation
and then buy on the pull back.
Step 1 – Use trend following systems to select stocks
Step 2 – Use historical price data to select time length
with high accuracy
Step 3 - Purchase in the money options with low time value
Option Time Value Characteristics
Options consist of time value and intrinsic
value
Options lose all time value at expiration and
consist of only intrinsic value
The time value of an option is a wasting asset
In the money options have more intrinsic value
Out of the money options consist of only time
value
Goal is to minimize time value and maximize
intrinsic value
Advantages of In the Money Call purchases versus Out of the
Money
In the money calls allow us to employ money
management to limit losses
In the money calls contain less time value and
more intrinsic value
Does not require large stock price increase to
break even or profit
Helps prevent a total loss of investment
Less overall risk
Higher percentage of wining trades
Reduce risk by setting stop loss at 25% below premium
Check the 50 day and the 100 day moving average for areas of
support
Check the 1 month and the 20 month moving average for areas
of convergence
Trend Confirmation:
At any given time there can be hundreds of stocks in a price
up trend
Trend confirmation indicators can help us narrow the list of
eligible buys
Volume
New 52 week high/low
Industry grouping
Price level confirmation
On Balance Volume Line:
Need to see up sloping line to confirm trend is supported –
buying pressure is exceeding selling pressure
Buying pressure must continue to exceed selling pressure in
order to sustain a price trend
Confirmed up trend – stock price is trending up, volume
increasing on the days the stock closes up, volume decreasing on the days the stock
closes down.
As expected the market tried to rally on the good news from Greece but Spain's issues put a damper on things and halted any real upward movement. I'm still up in my positions but I'm waiting for the next pop upward to take profits. Individual stocks did jump off of their own good news like the interesting development with Japan subsidizing the solar industry. That pushed solar stocks up today. FSLR and TAN shot up off the news and maintained their levels throughout the day.
I came across an interesting article on Seeking Alpha by
Paul Zimbardo. He outlines another
dividend earning strategy where you scout out stocks that are paying a dividend
during the month and then buy the stock to get a weekly dividend. To make sure you don’t lose value on your
investment you should buy the stock on a retracement and then watch it rise
close to the ex-dividend date (last day to buy the stock to get the dividend)
as investors buy the stock for the dividend.
You can read the article for his recommendations and more explanation of
his technique.
Things got a bit more interesting. Even though Greece had positive news for the market Spain brought in some uncertainty and brought down the international markets overnight. So we'll see what the market has in store for today. Individual stocks may move on their own based on their own good or bad news so we will see.
The market is supposed to rally tomorrow off of the Greek election results. If you are in a trade look for it to rise tomorrow and consider taking profits at different intervals.
When timing a trade look at the earnings dates and see if
the stock is poised to beat earnings.
Also see of the stock is being talked about as having good growth. Sometimes a good earnings call will still
result in the price driving lower because of profit taking and/or some people
may feel that the earnings could have been better. NEVER assume the price will go up just
because of a good earnings report.
Disney was a good call back in May after they posted
earnings because even though they had losses with John Carter they just had a
blockbuster weekend with the highest earnings of a film ever and they had good
revenue numbers in their ancillary businesses.
They also have growth areas with the new acquisition of Marvel. More sequels and more content will drive
their stock value up.
Now the important thing in making the stock play is to buy
the stock low or on the uptick the day before earnings and then hold over night
if you feel the stock is going higher.
Then the next morning let it run in the first 5-10 minutes of trading
and then take profits before it drops or levels off.
This is a dividend stock strategy that people in retirement do. They put
large amounts of money into dividend paying stocks and live off of the monthly
or quarterly dividend.
ARR (Armour REIT-Real Estate
investment Trust) – pays a dividend of 10 cents a share each month and the
stock value is around $7. What also
makes this stock attractive is that over about 3 years the stock’s price hasn’t
changed much, making it a pretty consistent income source.
Buy 100 shares for $700 and earn $10
a month
If you buy 18,571 shares for a total
of $130,000 you will make $1,857 a month.
Compare that to buying a rental
property for $130,000 and renting it for $1,500 a month (you also don’t have to
pay a property manager or worry about unruly tenants)
There are other dividend paying
stocks that pay quarterly that are close to ARR’s monthly dividend. Verizon pays a nice quarterly dividend of 50
cents which works out to around 16.6 cents a month. Of course you’re not going to make as much
money because you can’t buy as many shares at $43 a share but it’s a nice way
to diversify your dividend portfolio.
Here are some key things to focus on for all equity trades
(stocks, options, forex):
pick one or two stocks (whose industry that your
familiar with) to follow at first so you can see how they move and react
to market conditions.
mark the trend... is it going up, down or sideways (not
changing price) - the trend is your friend
mark the areas of support and resistance (where does
the price consistently stop rising or stop falling)
use technical indicators to time your trade
(stochastics, RSI, MACD, Moving Averages, Bollinger Bands, Candlestick
setups)
set your entry and exit points (limit and stop loss)
and monitor daily to make adjustments if necessary
take profits even if it seems it may go higher - a
trade completed is better than a trade defeated or a bird in the hand,
etc....
take emotion out of the game, the market will play you
like a fiddle if you don't have a plan
stick to the plan unless all hell breaks loose...
otherwise if the setup was there and you took it, don't get out just
because of one bad candlestick...let the trade develop... you have your
stop loss there for a reason, it will take you out of the trade if
necessary
And in the words of Kenny Rogers:
know when to hold em, know when to fold em, know when to walk away and know
when to run....
So you are into you’re trade and you are watching it go up
and down during the day. The best thing
to do is set your chart to the 5 minute chart and look at it periodically while
you go about your day. If you watch the
minute chart you will get freaked out every time you see a bearish candlestick. You can also check the 15 minute, 30 minute
and 60 minute charts to see where your moving averages are lining up and do you
see another technical set up forming.
Also, do not panic if you see the candlestick going below a
line of support or a moving average. If
the trend is strong and your indicators are right the price will go back above
those support lines and push higher.
However, don’t wait around too long if the set up wasn’t that strong to
begin with. If the market has been
pulling price down consistently that may be your cue to take profits or exit
the trade to prevent losses.
I was just sitting around thinking about stocks and my mind went
off on a tangent into sports (of course the finals are happening) and I thought
about the Chicago Bulls and then also realized that that city has two sports
teams that correspond to the market. The
Bulls and the Bears. I wondered if
anyone else saw this correlation.
Chicago is an important financial center and they are home to the CBOE (Chicago
Board Options Exchange) which is the world’s largest options exchange and home
of the VIX (volatility index for S&P 500 options).
I double checked and the guy who named the Bulls wasn’t even
thinking about the market:
Here is another example of the power of leverage in options
trading. This is a picture of a back
test of Wells Fargo (WFC) from January, 1 2012.
The trade was an option call for April 12 expiration at a $34 strike
price. The cost of the trade was $1,300
plus commission. The gross on March 16th
was $8,200.
I’m currently in an options trade for ATT (symbol - T). I have 3 August 18 $37 calls at $18. Currently I’m up $31 minus commission costs. Both ATT and Verizon have been on a huge
upswing trend since last week. ATT has
been going higher all year even when the rest of the market has pulled back. I’ve been taking profits at various technical
levels and have been timing entries on the way up. This options play is a classic case of “the
trend is your friend.”
I saw that Starbucks (symbol - SBUX) had a huge sell off and
was setting up for a decent comeback. I
missed my early entry but got in at a decent level with 2 Oct 20 $67.50 calls
for $31 . It has since gone up but
unfortunately not enough for me to make a profit yet because of
commissions. I will wait to see if it
goes higher today.
Always trade stocks with high volume of at least 500,000 so
you can get in and out of your trades with more confidence…you can’t trade if
there is no one to trade with.
Keep some cash in your account so you can exit your trades should they go south on you. There’s nothing worse than watching the market tank and you can’t get out because you don’t have to money to pay for the trade.
Take profits regularly. Watch for key technical indicators and take profits at regular intervals. A bird in the hand is worth two in the bush. You can get back into the trade when necessary but at least you realized the gain. It’s not a profit until you see it in cash.
Don’t get emotional. Your emotions will definitely get the better of you in this business because its money. Everyone is emotional about winning or losing money. You have to conquer that because if you let one loss intimidate you, you may miss an opportunity down the road. Also if you get too cocky you may start to make stupid mistakes.
Don’t chase the market. Let the market come to you. If you see the price of a stock start to rocket up and you wanted to get into that trade. Don’t get into it right away. Wait until the pull back, it will pullback. You can guarantee a pullback just like gravity. Everything that goes up, must come down. Just be glad you now know that this stock has just started an upswing. You can watch the stock come back down to support levels and then get in and watch it go up again. It will do it at least a few times.
I apologize for a couple mistakes in this post. The actual paper investment would have been made on Jan 31, 2012 for a total cost of $1,100 plus commissions. That would have yielded the $109,000 profit in February 2012. I wanted to show the difference of investing in the option trade versus the stock trade and how leverage can really make you a lot of money.
Risk management is key as well. If you are trading options and the price is
falling check the news on the stock. Only
hold the option if you think it has a chance of getting back to where you want
it to go in enough time to make a profit.
If it is a major development about the company and they are going
bankrupt you better pull the stop on your trade and save whatever money is
left. If that whole industry is falling
on some long term news, get out. Sometimes
you can stay in the trade because there is no news and the stock is just
reacting to technical data. As long as
you have time to recover your losses and realize a gain you should be fine.
Also don’t overexpose yourself to the same industry. Get options that are in different sectors
like technology, retail, energy, etc.
However, don’t buy a stock that you know nothing about. Familiarize yourself with the industry and
the stock you are potentially trading. Watch
how it reacts to different market conditions.
Look at the price spread of the option to see how long it takes for the
option price to increase to the level you want it. Options prices don’t move like stock prices
unless the Delta is large and even then volatility and other factors affect the
price. Study how the stock’s options
prices move to better anticipate what will happen when you trade it.
If you don’t have a lot of money to trade (which is most of
us) start out small and learn how things work.You can start with as little as $100 but I suggest going with $500 to
$1,000.Now before you trade a dime you
should spend at least 2 weeks to a month trading paper money on Think or Swim
from TD Ameritrade.It gives you a
handle on how to place a trade, what things mean, and how not to make major
mistakes.I suggest doing your actual
trading on Trade King or any other low commission site because TD Ameritrade’s
commissions make it pointless for small investors.Its nigh impossible to make a profit when
your commission price is $10 a trade which means it will cost $20 to get in and
out of a trade.That’s my profit horizon
on some stocks.
The goal is to keep it simple.I start out with saying I’ll make $20 a day
on one trade and even if my profit is $8 I still made money.
Disclaimer: I am not an endorser of any trading platform I just found out which platform worked best for me and was a good value for the money.
