New York HS Student Allegedly Made $72 million From Trading

The recent article about the Stuyvesant High School Student Mohammed Islam making $72 million is now under question but he still supposedly made a few million trading on the stock market.  

The reporter stated that she saw his account statements but didn't verify that all the money was from trading.  Either way the story of a high school student trading on his lunch break and netting millions is an inspiration to many who have dreams of being a successful trader.

I am the first person to champion the benefits of trading but I also want people to be safe and not lose their life savings.  I do believe that it is possible to build wealth in the markets and that if you plan and strategize effectively you will be successful.  

Here's the article:

NY Post Article

*Update: This story has since been debunked 12-16-14

Bull Market Indicators

An interesting article shows how the International Security Exchange Equity Ratio is showing that the market may be showing bullish signs.

I don't understand the angle about options traders being "fearful" but I gather that he is saying that people who are short on the market are skiddish.

He shows how there were only 4 other times since 2006 where the ratio is where it is now and most of them were key bullish indicators.

Yahoo Article

Strategy Update

I successfully exited my bull put option spread on Facebook today.  It was a volatile week and I had hoped to have gotten out yesterday, but there was a lot of negative chatter about the effect of oil prices on the market.  That kept Facebook from bouncing up on the positive news from the Instagram announcement.  Instead the bounce came today which was helped me exit my trade.  

After a month and a half of successful trading and 7 consecutive wins, I can now confidently recommend my strategy.

Here it is again if you missed it:

YCTT Bull Put Spread Trading Strategy

Current Market Conditions

There seems to be a bias to the downside in the current market because of the bottoming oil price fear mongers.  I personally (and apparently many others) think low oil prices are a good thing because the general consumer has more money to spend.  Many pundits on the other hand think failing oil companies will cause loan defaults that will bring down the banks and that will somehow reach other markets.  

I don't think low oil prices are going to be a problem but the market has it's own reason for moving which may or may not coincide with my belief.  Because my current strategy is bullish I am going to proceed with caution and look to time my trades after pullbacks.

IMPORTANT NOTE ABOUT OPTIONS

If you are trading large numbers of contracts:

NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

Let me say that again NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

I don’t care if you are up and you can make more money if you let them expire.  It’s not worth the risk especially if you are trying to make more money by overleveraging your trade. 

Let’s say you sold 10 contracts on AAPL and bought 10 for a put spread.  Your high strike was 114 and your low was 110.  Your thinking the most I can lose is $4,000 because of the spread.  WRONG

When you get close to expiration the 110 contracts go down to zero value and there are no bids out there for you to close your trade if you really need to.  

Once your insurance trade has gone to zero you are essentially in a naked put and you are at the mercy of the market for whatever happens.

If your 114 contracts become “In the Money” you are now on the hook for $114,000 with no way of exiting the trade.  You can’t sell or roll over to the next week because there are no bids out there for your 110 contracts. 

SO I REITERATE… If you don’t have the margin to cover the trade NEVER LET AN OPTIONS TRADE GO TO EXPIRATION

Trading Large Numbers of Options Contracts

I’ve been experimenting with using larger numbers of contracts on my credit spreads for a larger gain and after executing a few trades I can say that I do not recommend this strategy for everyone but it has been very lucrative.  You have to be a lot more vigilant when executing these trades and there are some tighter rules you have to follow.

• Make sure you are only trading larger name stocks with a large amount of volume (liquidity). Names like AAPL, SPY, BABA, etc.
• Make sure the lower leg of your trade has some bids out there so you can close your position or roll your position, preferably no less than .05.
• Never let these trades go to expiration.  You never know what the stock is going to do and you don’t want to be exercised with high volume contracts especially if you don’t have the money to cover the transaction. 

This last reason is the precisely why I do not recommend these trades for everybody but if you can stomach the risk they can be highly lucrative.  Just be ready to deed your house over to your broker if it goes south on you.

Yahoo and Alibaba are Climbing Higher

Alibaba and Yahoo have been steadily crankin' these past few weeks even when the rest of the market has been chopping up.  I've been trying my new strategy on YHOO options and have been doing well.  I also picked up some BABA too.  Technically they are both on a trend and the "trend is your friend." Fundamentally they both are sound companies and trading at low multiples,Yahoo especially. The P/E for the technology software service industry is 20-60 and YHOO is at a bargain rate of around 6.  With all that new 6-8 billion in cash from selling some BABA IPO shares, that is a serious discount. 

Bull Put Spread and Cash Secured Put Strategy

Sorry I’ve been a little absent but I wanted to refine my new option strategy before I shared it. I made a couple of trades that went south on me and I didn’t want to share a strategy that didn’t work.

After some losses and then some wins after doing some tweaking I feel that this strategy is something that will have a high success rate.

As I started my strategy I originally only wanted to trade ETF’s because of their improbability of going under.  However I feel that you can successfully trade this strategy on reputable stocks that are trading at a discount.  

Here’s the strategy in a nutshell:

• Decide what you are willing to risk and then divide that by 100 for the 100 shares you may have to buy for on options contract. 
• That will give you the price of the underlying stock you are going to scan for.  So for instance if I am only willing to risk $4,000 then I need to look for stocks that trade around $40 a share.
• I only look for reputable companies or ETF’s and that’s about the lowest price range you will find.  A good range to trade at is around $60-$100 a share.
• For this cash-secured put strategy you need to have the money to buy 100 shares of the stock just in case you get assigned.  Our goal is to not get assigned but in case you need to save a trade that went bad you have another option of selling a call to make back some money.
• Make sure the stock is on an uptrend – the trend is your friend.
• Check the weekly options chain and look for a Bid price on the Put side of at least .60 (it can be .50)
• There should be less than a .30 difference between the Bid and Ask price.
• The strike price should be at least 2 strikes out of the money.
• Check probabilities to make sure that the probability of the option being in the money is less than 30% and the probability of it touching that price is less than 50%
• You want to execute your trade between Monday and Thursday before the next week’s option expiration to get the most premium and to take advantage of the accelerated time decay.
• Sell the put close to .60 and buy the closest put that costs .05 or less.  This is for insurance in case the trade moves against you but you don’t want to pay too much for insurance.  It makes this a bull put spread.
• Set your alerts on your trading software to notify you of 10% moves of the stock either way.  This way you can go about your day and not have to watch the stock until the end of the day. 
• If the stock starts moving against you, get out of the trade and find another stock.  But don't be too scared if the stock moves down to a technical line of support, let the trade play out especially if it's in an up trend.
• If the stock price moves in your favor be patient and wait for the next week Wednesday or Thursday before expiration and then close your positions to get as much profit as possible.

Win in Any Market … Play the Opposite Side

I know a lot of people have been hit with the market sell off over the past week or so.  I started my options strategy at this time and got hammered on a bio tech stock that had bad results on a failed trial.  This got me focused on really tightening up my strategy to make it work with a higher percentage of success.

At my level of trading I’m looking at ETFs that trade around $40 a share that preferably have weekly options with a high premium.  I am trying to sell puts for the premium on Thursday and use the time decay to make my buy back price lower thus netting me a profit.

With the whole market on a downward tailspin right now the only ETF that fits this criteria is VXX.  The VXX is an ETF that follows the volatility of the market and it moves in contrary motion to the S&P 500. 

I got into a position on Monday and closed today making a decent profit.  I just got into another position and hopefully with all of this volatility I can get out today with another profit. 

Trading Strategy – Cash Secured Puts

After setting up my new trade strategy over the past couple of weeks I realized that buying the stocks is like buying a car.  Why own the car and deal with all the headache of getting it fixed and replacing parts when you can lease for a cheaper price and get a nicer car.  The correlation is similar to stocks versus options.  If you can trade options and get better leverage, i.e. make more money, why buy the stock that has inherent risks of losing value?

I started out trading options but never really appreciated the seller’s side of the option chain.  If you become the seller you net your premium and then wait for the trade to play out.  I always like getting my money up front.  In any deal if you can get paid first before the actual transaction you are headed in the right direction. 

The trades I am making now are selling cash secured puts.  This is probably the safest option trade.  The only potential loss you have is by being assigned the stocks at a low price at expiration.  But if you traded on a decent stock, why wouldn’t you want that stock at a discount? Other than this you are net positive because you got your money up front as the seller of the put option.

As with any trade you have to make a smart decision about where and when to sell and where and when buy.  But if you are good at technical analysis then you should be OK if you keep your trades farther out of the money.  The key is to check the support and resistance lines to make sure your strike price is beyond that and then you will more than likely be OK.

More info on cash secured puts:

Options Industry Council - Cash Secured Puts

Selling Cash Covered Put Options

Here are some great videos that explain credit spreads which are the other safe play that I may be getting into soon.

Credit Spread Option Trading Strategies part 1

Credit Spread Option Trading Strategies part 2

Market Conditions 9-29-14

Today’s market was crazy and I hope everyone has survived with some dignity left.  I have been revamping my strategy over the past couple weeks and haven’t been posting as much.  I fortunately got out of my Ford trade last week to initiate my new trading strategy.  As providence would have it, I got out just in time. 

I started to advocate selling covered calls for safe extra income but after I started learning how to sell cash secured puts and credit spreads, I no longer feel that covered calls are the best option trade.  The problem with covered calls and especially in a market that has become volatile, is that your money is tied up in a security that may lose value while you wait for the expiration of the option.  If you sell a cash secured put you keep your money safe in your account while you wait for expiration.

What happened to Ford today was a confirmation of that fact.  I had initially planned to hold Ford until the October 18^th expiration of one of my covered calls.  After learning about selling cash secured puts I liquidated my Ford position and started selling a few out of the money puts on some volatile bio tech stocks.  If I get assigned the shares at the end of expiration I will have bought the stock at an extreme low which is not a bad situation because the stock will most likely rebound.  If I am able to wait till expiration then I will keep the entire premium.

This is my new strategy now and I will provide more details as my trade develops.  In the meantime it is important in this market with its new found volatility, to keep as much cash as possible and to enter options trades without owning the underlying stock.  Credit spreads are probably the best plays in this market.

Alibaba IPO

It's a staple of China's internet economy. It is Paypal, Amazon, Linked In, Youtube, Twitter and a bunch of other companies all rolled into one in a country of a billion people. Now it's making a play for the international market namely the U.S... will it continue to grow? Will a billion people make more people...uh yes. Market movement is not absolute but population growth is.

Alibaba may have a rocky start, we all know how IPOs are...chaos... it may fluctuate for a day, 3 days, a week, a month...but like Facebook who had a horrible IPO it recovered and kept moving up...yes it is a guess but it's not about will it go up but when.

REITS Are Taking Heat

I quit while I was ahead.  I got out of CYS as well.  The REIT sector is taking a hit and even though the dividend yield is enticing I don’t know how they will sustain it going forward.  If it starts to make a recovery I will re-examine it, but for now I will stick to my covered call strategy to reap the “dividends” I’m looking for.

Here’s another article about the drop in the REIT market:

Why REITS Are Falling And Will They Recover?

Quick Tip

I would highly recommend picking up some more TSLA stock especially after it dropped in price and after Elon Musk’s Space X just got part of a $7 billion bid from NASA. I got some more yesterday. This has been the best performing stock in my portfolio.

Selling Covered Calls For Extra Income

As the saying goes, “When you know better, you do better.”  I have changed up my strategy after watching what was going on with ARR.  I was a champion for this stock for months because I felt that it was eventually going to go back up to its $7-$9 price range.  Well you can’t wish something to happen, there has to be concrete steps and data to follow it up.  ARR never improved its financials and consequently the value of the stock stayed stagnant even when comparable stocks were rising. 

After a conversation with a friend of mine I realized that a safer and possibly more lucrative strategy would be better.  If you buy a well-known blue chip stock with sound financials that has enough volume, you can sell covered calls each month for steady income, much like the dividends I was seeking with ARR.  My own personal requirement was to find a stock that was trading below $20 so I could load up on it to have enough to buy at least 200 shares.  As you know (if you have traded options before) you have to have at least 100 shares to buy or sell 1 options contract.  To make the minimal return that I want to make I need to sell at least 2 options contracts.  The stock I chose was Ford (F).

Here is some more information on covered calls.  Many of the people and sites I’ve come across go into a lot of detail about covered calls but just know it’s not as complex as a lot of people make it seem.

Investopedia – Covered Calls

Trade King – Covered Calls

Alan Ellman - The Blue Collar Investor

Monthly Income From Covered Calls

If you look at the Bid price, that’s what you will be selling your call at.  Just remember that the Ask price is what you will be buying your call back at if you choose to buy it back (you will do this if you want to keep holding your shares and don’t want to be assigned at expiration).  To make any money you want the Ask price to keep getting lower so you can buy the options back for a price cheaper than you sold them for (buy low, sell high).  Either way if you sell a call at a strike price higher than the price you bought the stock (out of the money), then you have already made your money so you can just sit back and wait for expiration (always factor in fees and commissions).

Always buy the next month’s option because you want enough movement to occur in the time value of the stock.  Some people trade the weekly options.  I haven’t tried that yet but I may.

If you are new to covered calls, after you watch some of the videos and read some of the information on the links I posted, all of what I just said will make more sense and hopefully will simplify what you have learned.

Let me know how your trading goes by leaving a comment and if you have any other ideas I would love to hear them.

Apple is a Buy

Back when Apple was in the 400s I wanted to buy but it would have used up a lot of my investment money.  Now that it is trading around 100 (after the stock split) I am jumping in.  This is a great opportunity for the small investor to get in on a stock that is only going up.  Because of its consistent innovation and its entrenched following in the marketplace, Apple is a bulwark stock that will bolster any portfolio.  Now with the Apple Pay announcement, Apple is poised to take a commanding lead in the smartphone market.  I don’t even own an iphone, but I own Apple stock.  

I’m Changing My Tune On ARR and Singing CYS

Alright I have finally been convinced…a friend of mine has talked some sense into me about ARR. I have been championing this stock for a while now because of its fantastic monthly dividend.  Well things have changed and the performance of the stock over the past year has been lackluster compared to other comparable stocks.  I also own CYS and it has completely outperformed ARR over the past year.  I did some more research and the company is sound.  It only invests in real estate that is backed by government lenders like Fannie Mae and Freddie Mac and the company is run by a former investment strategist.  Having a company run by someone who understands things from an investor perspective makes me feel more secure because it makes him more cognizant of market considerations.

Also the website of the company is a bit more professional and there is more information about the company and its strategy than there is on ARR’s website. 

The downside with CYS is the fact that they pay quarterly and the dividend yield is 2 percent less than ARR.  Even still you are making around the same amount of money.

Overall I think CYS is a better investment because of its consistent equity growth versus ARR’s poor equity performance over the past year.  Even if ARR rebounds CYS will already be ahead. 

SPY Missed

I missed my entry point of 188 on SPY and it hit around 193 shot back up before I could get in.  I still think it has more room to go but I think I'll wait for another pullback.  Historically the chart shows that between November and December it makes a run due to the holidays.  I'll probably start scaling in around mid September.

SPY Is A Buy

People are talking about a big market correction.  Last week was a small one and I think it may be petering out.  If you look at the chart on SPY, the S&P ETF managed by Spyder, when there is a small correction, the price drops around 10 or 9 points and then heads back up. 

I'm waiting for SPY to drop down to $188 and then I will pick up some shares. The way this market is moving I think the bulls are still in charge.

Facebook Is A Buy And Hold Play

Normally I wouldn't say buy a stock if it is not paying a dividend, however because of the way Facebook is handling it's business I can see this stock appreciating in value like Apple.  I bought FB at the initial IPO and then sold it after the drop.  In retrospect I should have held onto it but I was day trading at the time and needed the cash for other stocks.  

The way that Facebook is buying other businesses and monetizing ads for users makes a lot of sense and I can see these new additions bringing in larger and larger revenue overtime.  I bought some shares last week and I expect it to go up over the next few quarters.

In Defense of ARR

A recent article in Motley Fool questioned whether ARR is a good investment.

“Though ARMOUR Residential presently exhibits a dividend yield of nearly 14%, investors should be carefully watching ARMOUR Residential's book value in the coming quarters. This should yield a clue as to whether further dividend cuts are looming down the road."

There are two points I would make about this article: first ARR has declared their dividend through the end of 2014 so the dividend won't change either way until then, second the real estate market is at its lowest point so the price is not going to get any lower.

Some would say that ARR went down 43% last year but I would contend that that's the time to buy.  “Buy low, sell high” is the basic law of investing.  If you buy high then you won't make any money.

Here's the thing about ARR:  it's a numbers game.  In my humble opinion it's the best stock out there to make the most monthly income off dividend payments.  Because of its low price and consistent high yield you can buy more of it and make more each month.  Most dividend stocks cost too much to buy in bulk and make a decent monthly income.  I did a lot of research to find this stock and that's the reason why I've been in it so long.

If you were to put $100,000 in ARR since the dividend is declared till the end of the year, you would make $7000 by the end of the year just off dividends. That's 7 percent for 6 months not including the possible equity gain. If there is an equity loss it most likely won't be any larger than 7 percent.

For the general investor I would agree that a more conservative strategy is better.  It also depends on how old you are and how long you have to invest.  Investing in ARR is definitely an aggressive strategy and if you are risk averse, it would be prudent to balance things out with other stocks and maybe some ETFs.

Indeed, not one of us knows what's going to happen tomorrow.  If an investor says they do they're lying. We're all just making the best educated guesses we can.

We all have our strategies so you got to trust your gut. I could come up with a ton of articles to support buying ARR and just as many not to support buying ARR.  At the end of the day you got to call a play and hope your team wins.

Musk Opens Patents

When Tesla opened up its patents last week, that was a game changer for the electric car industry.  Some may question the move but as I said before, it’s not a good bet to bet against Elon Musk.  Aside from having a fighter’s spirit he has the ability to look long term and the resources to support it.

According to Musk, his reasons for opening up his patents were based on the situation we are in regarding climate change.  He wants the conversion to electric cars to happen faster than it is already so we can reduce carbon emissions before things get any worse.

Musk stands to gain immensely from the increased output of electric cars through the ancillary sales of his batteries and components and through his charging stations. Sometimes the stars align for certain individuals and it looks like this is a great set up.   

Here’s the company’s full statement:

Tesla Motors Statement on Patents