You sit down in front of your computer and access your online discount broker. You are ready to sell a covered call option for company BCI. You put in a market order to buy 100 shares of BCI and confirm the order. Then you check “order status” and it shows “executed”. In a couple of seconds you bought those shares! How can that be? That transaction took place faster than my fingers could move from one key to another on my keyboard. In this day and age of computers most of us take this incredible technology for granted but it does elicit in many of us a curiosity as to how this is actually accomplished.
A few weeks go I was fortunate to have an opportunity to tour the floor of the New York Stock Exchange. At first it looked like any other convention setting most of us have attended with a series of individual booths. But then I noticed some familiar faces from CNBC and Fox Business Network roaming the floor planning for their next reports and realized that this was a special place and I felt honored to be there. The tour was hosted by the floor governor (head honcho) for me and my son Craig and that made the experience even more special. He walked us over to one of the Designated Market Makers (DMM formerly known as “specialists”). In his area there were eight computer monitors staked in columns of four on each side of his booth. He was standing near his desk which sported a humongous salad and a quart of organic juice. “A healthy eater”, I thought to myself, “good for him”. He seemed rather bored by the days events, a far cry from the way things used to be on the floor of the NYSE when buyers and sellers were yelling and pushing each other and specialists were executing trades at a fever’s pitch. How was he ever going to finish that salad I wondered. We started talking about trade executions and he actually was glad to explain the process as he shared his expertise while yearning for the good old days. Here is what I learned:
1- We place our trade order with our online discount broker.
2- The broker then utilizes an electronic routing system to send the order to a market maker like Citi, UBS and others.
3- The market maker pays our discount broker a fee for this market flow, about $0.01 or $0.10 for the 100 shares.
4- The actual shares can come from one of several sources:
- Internalization- from the market makers own inventory
- The major exchanges like the NYSE and Nasdaq
- Dark Pools like Liquidnet- A dark pool (or dark pool of liquidity) is a private electronic transaction network, typically maintained by major banks and securities companies, where stocks are bought and sold by clients of those companies. Because the matching of buyer and seller is done entirely within the control of the bank, the bid, offer and sale prices are not published to exchanges (such as the NYSE). Dark pool operators have the ability to route orders either to an exchange or to their own private network, depending on availability, pricing and client preference. Ironically, before computers took over the floor of the NYSE, there was a popular saying relating to dark pools: The NYSE was the biggest and most efficient dark pool the markets have ever seen or will see, i.e. when you gave your order to a broker it was essentially dark because he wouldn’t just go into the crowd and announce “a million shares of BCI at the market” because the market would move on him…he kept a portion of the order details (i.e. size) in his back pocket and “worked” the order to get the best price or execution. Real people on floor, not computers, are still significant players for executing large blocks and especially for setting the opening prices…the majority of NYSE order flow comes at open and close because the prices are most accurate.
- *Remain short the stock and look to buy it back at a lower price. This is where they make their money.
Market Makers Profit- The Math:
Let’s say the DMM sells us a stock short @ $30.10 and buys it a few seconds later for $30.09 for a profit of $.01 per share or $1.00 for 100 shares. Since the DMM paid our online discount broker $0.10 for market flow and garnered $1 in profit, that’s a $0.90 profit for the transaction. It may seem like a mere bag of shells on first blush but do this millions of times per day and it becomes an extremely lucrative occupation.
An interesting discussion we had with the DMM was related to the volume of trades transacted through dark pools and internalization. He estimated about 40% of the trades were transacted through these venues and that means that this significant percentage is never regulated and some are never reported. The bottom line is that the “big boys” will get better trade executions with narrower bid-ask spreads than the Blue Collar Investors of the world. However, I do feel that the changes being made by the SEC along with the advantages we also glean through computer technology puts us on a relatively fair playing field. I am told that the SEC is carefully monitoring the dark pool trading to make sure that the percentages do not rise from where it is.
It was, needless to say, an interesting discussion as I thanked the DMM for his time. He was still working on the bottomless salad which now had a shelf life of 2 hours since it was 2PM EST. As I walked away from his post there was something bothering me but I just couldn’t put my finger on it. As we headed for the AMEX options section of the floor it hit me: The DMM didn’t once look at any of his computer screens as we spent at least 15 minutes talking. All his trades were being executed electronically and didn’t even require a glance of the human eye. Sad, I thought.
Here’s what it looked like from the floor of the New York Stock Exchange:
Alan and Craig on the floor of the NYSE
Blog commentary- new features:
At your suggestion we have upgraded this area of the BCI website by creating the ability to upload images from your computer files. We also included a tutorial as to how create a screenshot. We appreciate all the positive feedback, the incredible amount of useful and important commentary you provide and suggestions that greatly enhance the quality of our site:
New blog features
Market tone:
In the second quarter, the economy expanded but remained weak.
The negative reports this week:
- Consumer confidence fell to 48.5 in September, lower than analysts’ expectations.
- The manufacturing index (ISM) fell to 54.4 in September, the slowest pace in 10 months.
The positive reports included:
- Construction spending rose 0.4%, better than anticipated
- Personal income rose 0.5% in September, the fastest pace since December
- Personal spending in August increased by .4%
- The U.S. gross domestic product in the second quarter was revised upward to a growth rate of 1.7%
The market has been trading sideways the past few months on low volume giving us little definitive information to sink our teeth into. September, however, has been unexpectedly strong for price appreciation although not convincing due to the low volume. Note the chart below:
S&P 500 and VIX as of 10-2-10
- Over a 3-month period the S&P 500 trades sideways (red lines)
- In the month of September there has been a definitive uptrend developing on low volume (green arrow)
- Over a 3-month period the VIX has been declining, a positive for the market (orange arrow)
We will continue to look for volume confirmation of the recent uptrend.
Summary:
IBD: Market in a confirmed uptrend
BCI: Cautiously bullish selling a slightly higher percentage of O-T-M strikes
With deep appreciation for all your support,
Alan (alan@thebluecollarinvestor.com)
To join my mailing list:
Premium members:
This week’s “Weekly Stock Screen and Watch List” has been uploaded to your premium site. The ETF report was published on Friday.
Alan
ADTN:
A stock on our premium watch list is scheduled to report earnings on October 14th. Analysts have been jumping aboard this company lately:
http://finance.yahoo.com/news/Analyst-raises-Adtran-price-apf-1451343336.html?x=0&.v=1
Alan
Thanks for the nice “insider” article, Alan.
Despite for the SEC’s “carefully monitoring” the dark pool trading, it is still scary for me, knowing that these “dark pool” guys have a 40% impact and are able to steer the market in any direction they want.
It is like “The Florida Panther is almost extinguished” we are hearing from state officials, “but we are carefully monitoring the situation”. . .
And because they are “carefully monitoring”, at one day in the near future, they will come out with the statement, that they now know for sure, that the Florid Panther is extinguished. (Because they monitored the extinguishing process so carefully. . .
One point more for us Blue Collar Investors to never let an eye off the market, listen to the relating news (not the ones, that the neighbors cat almost drowned and 2 fire trucks together with 9 firemen came to a rescue), reading between the lines and do our due diligence in respect to strike choice in relationship to market tone.
O.K., lets head into another week of nice discussions here.
Last week we made it to a total of 92 comments (not, that the number is any indication of the sophistication, but it shows the necessity).
Some people participating learned a lot, some “”lurkers” :>) maybe too, some got maybe frustrated, because everything has already been discussed in the past, but all in all it was interesting.
Some of us had/have money in GMCR and we as Blue Collar Investors are sticking together to make the best of the situation and not let the market take our hard earned money.
We fight for every Dollar and with the help of the BCI system and the participants here, we are the little David and will mitigate our losses, if any.
I wish everybody a nice Sunday as we garner our forces for next weeks battle.
Cheers
Dirk
Alan,
I have been following ADTN since I saw it on your watch list several weeks ago. Here is an article that may interest our group….
http://pdf.reuters.com/htmlnews/8knews.asp?i=43059c3bf0e37541&u=urn:newsml:reuters.com:20100929:nBw295510a
Barbara
Alan,
Thanks for your very informative article on how the New York stock exchange works at the level of a DMM.
It’s a bit scary that 40% of trades volume can occur withing dark pools about which those outside the pools, e.g. BCI traders, have no insight, and for which there are apparently almost no controls.
Re bid/ask spreads, I would like to thank you again for teaching BCI traders how to keep more of those fees. Following your advice has certainly enabled many of my sales of covered calls to generate more income.
I agree with Dave. The percentage of trades in dark pools seems rather high but I am glad to hear that the SEC is keeping an eye on it. Hopefully it’s a better eye than they kept on Madoff!
Steve
I’m assuming ADTN will be an eligible stock after the earnings report passes for the November options.
Thanks,
Ed
Several things greatly concern me about the dark pool trading.
There is a serious lack of disclosure, so the trading public has no idea what price they are trading at, and how many shares are trading.
One of the scenes from the original Wall Street shows employees of what is presumably the SEC starting to see some unusual trading patterns. Seem to hide this. For all we know there could be some serious insider trading going on in them.
Just a point of clarification, all dark pool trades are reported to the “tape” via a TRF, usually NASDAQ. All trades must be reported within 90 seconds (SEC rule for ATS operators) and most trades (over 99%) are reported within 30 seconds. “Dark” only refers to pre-trade transparency, not post trade.
Thank you for your article.
Alan – Great article! Nice picture too…
All – Any recommendations on my fallen soldier.
GMCR
9/20/10 Bought at $35.48
09/20/10 Sold Oct 34 @ 2.30
10/01/10 Bought back Oct 34 @ .35
Current Price around $28.54
Technical charts were good until news came out on the SEC investigation on revenue recognition issues.
Great example of why diversification works. For my BCI portfolio, I do not place more than 15% of total portfolio value in any one position.
Ed
GMCR
Three different law firms filed, or are going to file a law suit against Green Mountain:
Shuman Law Firm, Federman and Sherwood and Kahn Swick&Foti.
I attach the suit, already filed on Sept. 30 of the latter one.
After the initial $6 plunge, GMCR fell almost a Dollar per trading day.
I too bought back my $36 call for 24 cents and are scratching my head.
Green Mountain wants the SEC to move quickly to get this off their back, but it can drag for months. . .
Alan mentioned last week, that he too is holding a position at GMCR; maybe he joins in and we all combine our brain forces and come up with a good plan.
Cheers
Dirk
My attachment disappeared, because we can only attach .jpeg
Hhhmm, the .pdf file, I attached, is way too big for a picture.
Anyone an idea??
Cheers
Dirk
GMCR:
When a stock declines or gaps down after unexpected bad news early in a contract cycle I usually handle it in the following manner:
1- Buy back the option immediately. Since the stock gapped, it almost always meets our 20%/10% guidelines. Then…
2- If I still believe in the company wait a day or two to see if panic turns into buying at a discount and look to hit a double. If not….
3- Roll down to mitigate losses and if the stock keeps declining….
4- sell the stock and buy another to sell a call and establish a new position.
These steps typically occur over a 4-5 day period. Of course every situation needs to be evaluated on its own merits. For example, in a bull market I am more likely to wait a little extra time to “hit a double” than sideways or bearish markets.
Worst thing to do: the deer in headlights act!
Alan
Edward (#7),
After a company reports, re-check the fundamentals and technicals before including it in your portfolio. The ER is the event that can have the greatest impact on a company’s fundamentals and prospects.
Alan
Alan
Could you add a little more color on how to calculate the 20%/10% exit rule on in the money calls. It seems like if we use the entire premium instead of doing the extra math to compute the time value it has a lot of room for error. For example I sell a call which is in the money a little bit and it is now in the money a lot I will never hit the exit criteria. Your comment in your book is that it will simply be easier to compute. I don’t mind doing it the hard way, I just want to do it the right way.
Let me put it another way. Isn’t what we’re trying to do is measure the erosion of time value. If that is so then isn’t that what we should be measuring is only time value.
Mark
Mark,
In addition to being easier, I should have stated that it is also relatively accurate and extremely practical. I set out to establish “guidelines” or warning signals as to when to consider buying back the options sold. I also needed to make this criteria time efficient and practical for average Blue Collar Investors to use. We are not hedge fund managers having the luxury of 10 hours a day to run calculations. A lot of time and trial and error went into my thinking.
That being said you bring out a great point and something that motivated me to crunch the numbers before setting these guidelines. On first blush it would seem that waiting for an 80% deterioration in the premium of an I-T-M strike would take much longer than an O-T-M strike and perhaps too long. However, I-T-M strikes have deltas of near “1″ which means as the stock goes down in value, the option premium will also go down dollar-for-dollar initially. In other words it will “catch up” to the deterioration of the O-T-M strike premiums which have lower deltas. Is it an exact science…NO! It is a guideline.
I’m sure an algorithm can be developed that can more closely mirror a scientific computation. But will this be a practical solution that retail investors will use (if ever developed)? For the fun of it, here is the Black Scholes formula for calculating the value of a call option:
C0 = S0N(d1) – Xe-rTN(d2)
Where:
d1 = [ln(S0/X) + (r + σ2/2)T]/ σ √T
And:
d2 = d1 – σ √T
That’s a lot of blanks to fill in!
In addition to the different deltas for different strikes, time value in general varies from equity to equity and literally from minute to minute due to different and changing implied volatilities. So I came to the conclusion that “one size doesn’t fit all” and a scientific equation was not feasible. Plan B was a “guideline” that worked in most situations with the understanding that each investor must be prepared to make his (her) own decisions based on the mosaic of information we evaluate.
I have provided specific equations for calculating ROO, upside potential and downside protection but when it came to creating a formula for determining when to buy back an option for every equity, for every strike price, for every delta and for every implied volatility (I know I’m leaving something out) it was at least beyond the scope of my abilities or possibly impossible.
Thanks for the question as it gave me the opportunity to explain this to our BCI community. It refelcts a great deal of sophistication on your part and that is why I spent so much time responding.
Alan
Alan (#13)
Is the trade analysis you mentioned refers to “convert dead money to cash profits”?
Or its combination of many exit strategies you can do on GCMR if stock continue to decline?
I sold the $44 strike for RVBD and the stock is over $48. It will cost me about 1% in time value to close my position and it seems difficult to generate more than that from another stock. My feeling is to wait another week and consider a rolling exit strategy. Any thoughts will be appreciated.
Amy
@ Amy,
depending at what price you bought the stock, it is deep ITM now and there is almost no time value left.
If the stock stays or climbs further, there is not much to gain from a week imho.
In regards to the rolling; the next ER is coming up on 10/21, so rolling into November is pretty much out, except you think the company has an positive ER.
Cheers
Dirk
Allan (#17),
My comments included several exit strategy possibilities:
“hitting a double”
“rolling down”
“convert dead money to cash profits”
I wanted to show some of the thinking involved in mitigating a declining stock.
Alan
Dirk,
Thanks for your response. I should have checked the earnings date.
Amy
Alan –
Just wondering if you have any new information/thoughts on BCSI. Last I heard, you spoke of a shareholders meeting on Oct. 7. Most news (late Sept) is quite positive, but I have misgivings at this point. Presently I am “underwater”. The only one I own that is in deep trouble!
TIA. Don B.
Don,
In my view this is still a great company that got knocked off track by the last two ERs which both disappointed. I haven’t been CLOSELY following this equity since it got bumped from our premium watch list but do post information when I see it as I know some of our members did hold it through those reports. The only interesting new information I can add (you already may be aware of this) is that analysts are still recommending this company. Here are the last 3 analyst evaluations:
20-Aug-10 Reiterated Wedbush Outperform $28 → $23
20-Aug-10 Reiterated Stifel Nicolaus Buy $36 → $30
20-Aug-10 Reiterated FBR Capital Outperform $27 → $24
I am confident that this company will resurface on our watch list at some point in time but it currently does not meet our system criteria.
Alan
Check out WIT:
6 green circles
Scouter of 10
Great chart
$15 stock
Looks like a winner.
Greg
Alan (#20)
I am interested in your strategy when will you do “roll down” over “convert dead money to cash profits” and vice versa?
I own several stocks that are trading higher than the strike price. Most have earnings reports coming up. When options are about to expire is it better to buy back the option and sell the stock or wait for the shares to be sold after expiration friday?
Thanks,
Brian
@Alan,
I have still a understanding problem in regards of one particular part in the rolling up strategy at or close to exp. Friday.
I would like to emphasize that I don’t doubt your calculations and/or the validation of the info in your book or DVDs, but I would really like to understand it.
My problem is understanding the “bought up” value.
Let me put down an example out of your Exit book:
Buy 100 CPO @ $ 23 and sell the $22.50 call option.
CPO closes the contract period @ 24.58
Buy to close 1 x $22.5 call @ $2.45
Sell 1 x $25 call @ $2.10 for the next period.
In this scenario you lose $0.35, because you bought back the call for $2.45 and sold the next higher strike price for the next month @ $2.10
So far, so good and understood.
Since you sold the next higher strike price, you now have the potential to make more money at expiration, because your profit limit is now $25 instead of $22.50
The stock value right now is $24.58 and you call this “buying up” the value and count it as your profit.
And here comes my problem.
I can see this buying-up in the above example only as a potential and not as a profit so far.
Your account is still lacking $.35/share right now.
But let me go on.
There are 3 possible outcomes in the above example, as I am able to see it(except executing another exit strategy next month)
1) The stock price stays roughly where it is until next expiration. In this case, the sold option expires worthless and you make money by selling the stock. The money you make, is the stock price (let’s assume it is still at 24.58) minus the former strike price of $22.50 (your basis, because that is what you would have had to sell it for in the last period) which leaves you with a profit of $2.08 minus the $0.35 you lost by buying back the call. That’s $173 per contract.
A 7.7% ROO, not bad!
2) The stock price rises to or above your strike price.
You get assigned and your profit is #25(strike) minus cost basis $22.50 (former strike) minus the loss on the buy-back of $0.35 which leaves you with a profit of $215. A 9.5% ROO and not bad at all.
3) The stock price goes down to $23
At expiration Friday you don’t get called, because you strike is at $25. If you sell the stock, you make $0.50 minus the loss on he buy-back of $0.35, which leaves you with a profit of $15 per contract. A 0.67% ROO, which is eaten up by the commissions. . .
So, as you mentioned in your book, the rolling-up strategy is really for a bullish market.
I can see the “bought-up” value at the beginning of a contract period only as an unrealized gain, because there is nothing in your account, but a$0.35 loss from buying back the option of the previous period.
Please make me understand your calculations and help me understand the “bought-up” value better.
Cheers
Dirk
@ Brian
it depends. . .:>)
If you could give an example of one of your trades, then it would be easier.
It depends on how deep in the money strike is or will be.
Cheers
Dirk
Allan (#25),
Both exit strategies have the same general goal: utilizing the remaining time value left in the current contract cycle to mitigate losses of the underlying security. In one case (rolling down) we are using the same equity. In the other (CDMTCP) we close our current positions and open a new one.
My decision is based on my assessment of what caused the share value decline. An analyst downgrade…not so bad; an SEC fraud investigation..more serious. I will usually wait a day or two to see how the market digests the news before closing my position but if the stock keeps weakening it’s off to a new position. I will always try to roll down first because there are less commissions involved.
Alan
Brian (Re #26)
Closing out an in-the-money position early depends on a few things.
First, has the time premium been wrung out of the option? If you sold a $40 call, and the stock is $42, but the option is still $3, I would continue to let it run to get that last $1. If the stock is $50, and the option is $10.05 I would close it out. You can’t make any more if it goes to $200/share, so why not pull your investment, and profit, off the table, and look for something else.
Second, how comfortable are you that something won’t reverse the stock between now and expiration Friday? If you have most of the profit captured, but you are starting to worry that the stock has gone up too far, too fast, close it out.
Third, do you have a hot investment replacement that will make you more than you are giving up? If closing the position is going to cost you $145 in time premium, but you found a stock that can make you $405, well, do I really have to answer this one?
Dirk (#27),
I’ll be happy top explain the rationale behind these calculations. First let me premise my remarks by saying that ALL calculations, rolling up or straight option sales, are “initial” returns. That is what the first 4 tabs of the Ellman Calculator gives you. To get “final returns” the options will either:
1- be bought back
2- be exercised
3- 0r expire worthless
To get these final return calculations use the Schedule D of the Elite Calculator or a similar spreadsheet.
Now for rolling out and up
On expiration Friday your shares are worth $22.50 because of your option obligation. To close the short call you will spend $2.45. Most of this premium is intrinsic value ($2.08) which in essence is a debit in our account. If we include a debit in our account we must include the initial credit it results in which is the increase in share value. The remaining time value of this B-T-C premium is $0.37 ($2.45- $2.08). The S-T-O premium (all time value) is 2.10 leaving a credit of $1.73. That is where we stand INITIALLY. You did a great job spelling out the possible scenarios at the end of the contract cycle. Once again, the Schedule D has a separate page for each of these possible outcomes.
Alan
BCI Nation and Premium Members…
A number of stocks on the “Running List” had a down day today. This was a result of a somewhat negative article about “Cloud Computing” that was published in Barron’s “Tech Trader Daily” today. Enterprise software stocks, storage stocks, as well as data center operators were all hit. In addition, other momentum tech stocks were caught in the down draft.
In cases like this, having covered calls in place, while not completely protecting us, at least allows us suffer less.
Best,
Barry
A nice trade avalable right now…
PWRD
Fundementally: Scores an EPS rating of 74 (not bad)
Technically: This stock is well off ts 52 week high, BUT, it has been in a moderate uptrend for the last 4 months.
Trade potential: If we bought the stock right ($26.27) now and sold the october ATM (strike 26) call, we would make 1.8% in 9 days…
SHOW ME THE MONEY!
Dave
RTP:
This stock is a great example of your classic good-news-bad-news scenario. The company has great fundamentals and on August 5th reported stellar 1st half earnings which rose 125% year-to-year. With commodities on fire due to growth in emerging markets analysts are predicitng earnings to double in 2010. It is trading @ a reasonable 17.9 forward earnings and sports a ROE of a solid 14.7%. It also distributes a 1.5%dividend.
If you check today’s A-T-M strike, you see that you can still generate a 2% return in only 7 trading days.
Now the bad news: Take a look at the price chart and tell me it doesn’t resemble a roller-coaster! This price volatility explains the high premiums we can generate as the “implied volatility” is quite high withn these type of equities.
Bottom line: This is a great performer that is best suited for those with a high risk tolerance.
Alan
Alan,
I was checking out BCSI. The Schwab option page has a graph in the corner with Put/Option ratio. The ratio was as high as 4 a few days ago and suddenly is approaching 0. Am I reading this sentiment correctly to indicate the fast money seems to think this stock may have less downside momentum and, perhaps, a covered call might be a good choice?
BCSI:
The computer networking sector that this company resides in is also performing quite well. Here is a 3-month chart of that sector:
Owen,
The P-C Ratio is one of those contrarian timing indicators that shows current investor sentiment. The theory goes that when high like it was for BCSI a few days ago, investors are pessimistic and hedging their positions with puts. Followers of this indicator would then be bullish on the underlying as short covering will take place when the market adjusts. I cannot attest to the reliability of this indicator as I don’t use it in my selection process.
Alan
Alan –
Thanx for the chart of the networking sector, which I find encouraging for BCSI. The shareholder meeting, you had stated, was to be today, the 7th. I shall be watching tomorrow intently to see if selling a covered call, OTM, would be desirable. Just mean to go by what the markets do, as I have no clue about what effects shareholder meetings can have on trading. Found no news. Comments will be appreciated. TIA. Don B.
Don,
It seems that the biggest influence on the price of this stock lately has been the takeover rumors that this company was being acquired by another. This usually will result in a price boost. When the stock hit $25 recently the feeling for a takeover was strong, lately it has been that a takeover was NOT imminent. This is market pyschology at work. Annual meetings usually will not impact as much as a ER unless you are a company like Apple which may introduce a new “hot” product. Fundamentally this is still a great performer but it got hammered by two ERs that disappointed the “Street”.
Alan
Alan,
I’m curious why HMIN is no longer on the last two weeks list of acceptable stocks. It was on 3 weeks ago and then disappeared. Please explain.
Thank you,
Barbara
Barbara,
HMIN was “bumped” from the IBD 100 list so it wasn’t listed in the “Weekly Stock Screen” the last two weeks. Stocks that appear in the lower 10% of the IBD 100 may appear and disappear from this list week to week. We do, however, keep it on the running list for at least 3-4 weeks and give it a chance to resurface. You will notice that although it didn’t appear on the weekly screen it still is on our ‘running list” (page 4 of the recent report). We also re-check all system requirements for these stocks and you will note that this stock does appear in a “white” or eligible cell.
Alan
PREMIUM MEMBERS:
This week’s list of top-performing ETFs with options has been uploaded to your premium site in the “resources/downloads” section. These securities have appreciated in value by 22% – 25% over the past 3 months while the S&P 500 has increased in value by 9%. We have also listed the top 3 S&P sector ETFs which have appreciated by 14% – 17% over the same time frame.
Alan
Don,
If you set up the chart as per figure 28 on page 85 of “Cashing in on Covered Calls” you will note the following:
1- The stochastic oscillator has been trading in the “overbought” range or above the 80% (red arrows). This is no reason to avoid the stock or sell it if you own it but it is a red flag that the price may be nearing a top. Stocks can remain overbought for months at a time in some instances.
2- Recently this oscillator has slightly dipped below the 80% (blue arrows) a slightly bearish signal. On the premium report we want you to be aware of the fact that although still a strong cc candidate that the technicals are not perfect. With this information you can decide if you want to include this stock in your portfolio and if so which strike to select. Further examination of the premium report tells us that all other system criteria are met and this equity resides in an industry segment ranked “A”.
Alan
Alan –
I just noticed on the latest weekly chart that SLW is on the OK for Watch List, but not on our Top section. Seems that this is because the Stochastics Indicator points down. Cannot help but wonder just why it does so, as it looks on my chart like it is, and has been, in the upper 70s range, and is at 77 today. Care to advise? Thanx.
Don B
Don B (#38 & 39)
The entire networking group is falling under the pressure coming out of problems with “Cloud Computing”. Networking stocks, hosting stocks, network “appliances”, and others are being hurt due to a negative halo effect a Barron’s article that I discussed in post # 32. As a matter of fact, FFIV, which was on the running list was hurt badly. Today, Goldman Sachs issued a sell rating for FFIV. I suspect that it will,not make the running list this week. As a matter of fact, I expect many of the technology stocks on the running list will will probably be in “red cells.”
The article focused on EBIX’s lower than expected earnings guidance. This led to a sell off in a number of technology stocks.
Barry
Continuing #45…i hit send too quickly
FFIV was on the Running List for 26 weeks!
Put/Call Ratio:
In comment #35 Owen brought up this subject relating to an individual equity. I checked this ratio in the overall equity market as of the close yesterday:
OCC Totals :
Calls 7,733,344
Puts 6,115,175
Total 13,848,519
Put/Call Ratio is 0.79
This means that overall investor sentiment is slightly bullish. Had the ratio been above 1 then the sentiment would be considered bearish and since this is a contrarian indicator it would suggest a buying opportunity.
Alan
Thanks, Alan. I’m still learning…..and still teaching. Everybody, well U.S. everybody, I got an email from a BCI who asked me if broker charges should be included in the number going into the Schedule D pages. I thought I would answer the question here, as well, just in case there is anyone else with the same question.
The quick answer is “yes”. Now for the slow answer. All “transaction” costs go into the transaction figure. Transaction costs are those that are charged for a specific transaction. The best example i can give is one that is not a transaction cost. I have an account with a brokerage company at http://www.foliofn.com. You can build your own “folio” (mutual fund) and trade in dollar amounts instead of share amounts. They charge an annual fee and no trading fee. So, I pay them $290 for the year to trade shares during the year. If I buy, or sell, $1,000 of stock, that is my cost, or proceeds. The $290 is NOT a “transaction” charge because is not specific to any one transaction, or group of transactions.
So, if you sell 100 shares for $40, and you wind up with $3,991.56 from the trade, your reportable proceeds are $3,991.56 on Schedule D. If you bought 100 shares for $40 and you paid a net amount of $4,009.68, then your basis is $4,009.68 for the Schedule D.
These figures may be adjusted for option premiums, stock dividends, stock splits, or return of capital dividends, but your starting point is the “cash you got” or the “cash you paid”.
Owen,
The information you provide to the BCI community is invaluable. Thank you. I have added this enhanced information to the Elite Calculator User Guide and uploaded it to the premium site in the “resources/downloads section.
Alan