ETFs Versus Individual Stocks

After analyzing my past trades alongside the S&P and their corresponding ETFs I have come to conclusion that from here on out I will be trading the ETFs.  Although AAPL has the highest return I could have made a comparable return by trading the highly liquid ETFs that have similar or higher premium.

I can also use other contrarian ETFs to hedge my trade and make my overall portfolio delta neutral.  

 

SPY, YHOO, AAPL 52 week comparison

 

QQQ, SPY, YHOO, AAPL 52 week comparison

 

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.

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.

Market Watch for 7-6-12

Well I couldn’t help myself…I got back into WMT.  The way the options move is the main reason I can’t stay away from WMT.  My other options positions just move too slow and WMT seems to respond to the market moves a lot quicker.  This could be for any number of reasons, but I’m guessing it’s because of volume.  

DNKN started to make a breakout today and the technicals look good for it to continue tomorrow.  I wanted to get out of my ATT position but it went below my profit level and I will just hold onto it to see what will happen.  Hopefully the fact that the dividend date is passed won’t affect it too much.  

The main thing to watch tomorrow is the jobs data and the consumer price index which both come out in the morning.  Hopefully they have good news for us tomorrow and the market rallies up. It may seem like the market is a virtual Las Vegas slot machine right now but that’s because there is so much data and news to absorb.  Normally the technical set ups will work more consistently but there is a lot of noise throwing them off.  If the fundamentals of the company are sound and the stock looks good from a technical standpoint, then regardless of market conditions the price will respond eventually.  It’s just a matter of time.  So we just got to be patient and let the waves develop.

This is also the reason why it is important to be investing in individual stocks in this type of market.  The ETFs and sector stocks are too generalized to really respond to this type of market volatility.  Individual stocks will move because they are good companies and are well positioned.  Sometimes there are a bunch of stocks in a sector that are not healthy companies and they are dragging down the sector.  While there may be one good stock that is in that bunch, the ETF doesn’t have a chance if the other stocks offset that good company.  Stick with the individual stock approach for now until there’s more stability.