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Stock Exchanges: The New Way To Calculate Trading Volume

In the BCI methodology for covered call writing, we require an average minimum daily trading volume for the underlying security of 250,000 shares or more. This is important because it increases the likelihood of favorable trade execution pricing and decreases the chances of price manipulation characteristic of highly illiquid stocks. For our premium members the BCI team screens all securities for trading volume and for those of you who do your own screening there are many free sites where that information can be accessed. For example on the http://finance.yahoo.com/ site, here is a screenshot showing the average daily trading volume (3-month average) for PRXL, a stock currently on our premium watch list:

Screening stocks for covered call writing

Average daily trading volume for PRXL

In this case, the average daily trading volume is 535,881, more than double our 250,000 requirement.

 

How is trading volume currently calculated?

Currently trading volume is calculated based on 100-share blocks of trades, ignoring odd lots (anything less than 100 shares).

What is wrong with this current method?

Due to rising share prices and the popularity of computer strategies, the size of current stock trades has been reduced. Another factor is the reduction in stock splits. A company like Apple Computer used to split as the price of the stock rose but hasn’t done so in many years. As a result, the average cost per share for an S&P 500 company now stands @ $65, almost double what it was a decade ago. Ten years ago, the average trade for an S&P 500 company was 800 shares. Today it is less than 200 shares. High-priced stocks like Google now have more than 50% of their trades under 100 shares accounting for 23% of its trading volume. Nearly 40% of Apple’s trades are also under 100 shares. According to a paper published by Maureen O’Hara, a finance professor at Cornell University, on average, 24% of stock trades fall under 100 shares. It is estimated that by adding odd lots the published volume on US exchanges can increase up to an additional 5% and give a more focused vision of what is taking place in our markets.

 What’s being done to correct this issue?

The New York Stock Exchange, the Nasdaq Stock Market and FINRA (Financial Industry Regulatory Authority, Inc.) have agreed to add odd lots to the official records of daily trading volume for individual stocks and the overall market.

 Will this bring trading volume back to the levels of 2008?

NO. According to Bloomberg, the average daily trading volume in the 2nd half of 2008 was $10 billion shares. The average thus far in 2013 is $6.4 billion shares.

Conclusion

Adding odd lots to the stock and market trading volume will provide a much more accurate picture of market and equity activity. It may add a few more eligible candidates for our covered call writing portfolios as well. The need for this change has been a combination of a rising market, the decline of stock splits and the popularity of computer trading.

Coming this summer: Two new educational products

1- We will be making available a new 2– disc DVD/Companion Workbook Series devoted 100% to exit strategies. We discuss position management as it relates to all scenarios that may occur after entering a covered call position. Specific real-life examples are given as well as displaying the charts of both the stocks and the options for each example. The Companion Workbook will include a color version of all charts, graphs and slides shown in the seminar.

2- My fourth book written for high school and college-age students. This is a stock investment plan for our youth explaining how to get rich slowly using only historical data and an easy-to-implement plan. It is the book I’ve always wanted to write and now I have. Our children have watched us work very hard for way too many years. This is a plan our youth can implement to enhance the quality of their lives by having this information when it counts the most….when time is on their side.

DISCOUNT COUPON CODES FOR EARLY ORDERING (coming soon):

We will be sending out two mailings as these products become available:

1- To our premium members

2- To all those on our mailing list

For those of you not yet on our mailing list, you can sign up for our free newsletter at this link:

http://www.thebluecollarinvestor.com/blog/

Scroll down and sign up on the right side of the page. Or just scroll to the right of this article….

Market tone:

Recent market volatility was sparked by concerns regarding China’s economy and to a greater extent Chairman Bernanke’s hinting at a possible decreasing of the Fed’s bond-buying policies. However, a downward revision of GDP estimate and positive statements from banks in Europe and China has calmed most investors. Economic reports continue to show a slow but consistent economic recovery, a major positive for our markets:

  • The Commerce Department lowered its estimate for annualized GDP in the 1st quarter of 2013 to 1.8%. This is well above the 0.4% reading from the 4th quarter, 2012 but below the estimate of 2.4%. Consumer spending, business spending and inventories helped contribute to growth. This revision helped calm fears that the central bank may begin tightening in the near future
  • In May, sales of new single-family homes rose by 2.1% from April, higher than expected,  and by 29% from May, 2012
  • Inventory of new homes for sale stands @ 4.1 months, near cyclical lows
  • The median sale price for new homes in May  was $$263,000, 3.2% lower than April but 10.3% higher than May, 2012
  • Consumer Confidence Index (a gauge of consumers’ attitudes about the present economic situation as well as their expectations regarding future conditions. Consumer confidence tends to have a strong correlation with consumer spending patterns) was up to 81.4, the highest level since January, 2008. A reading of 76.8 was anticipated
  • Personal income rose in May by 0.5%, higher than the 0.2% expected
  • Consumer spending also rose by 0.3%
  • Personal savings rate was up by 3.2% in May
  • May orders for durable goods (a measure of the number of orders for a broad range of products—from computers and furniture to autos and defense aircraft—with an expected life of at least three years. Durable-goods orders are a leading indicator of industrial production and capital spending) rose by $8.0 billion, equaling April’s 3.6% gain. A reading of 0.9% was anticipated

For the week, the S&P 500 was up 0.9% for a year-to-date return of 14%, including dividends.

Summary:

IBD: Market in correction

BCI: This site remains bullish on our economy and stock market. The recent market volatility has led me to using mostly in-the-money strikes but expect this defensive posture to be only short-term. I am particularly bullish because of the positive signs we’re witnessing from the housing market.

My best to all,

Alan (alan@thebluecollarinvestor.com)

www.thebluecollarinvestor.com

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About Alan Ellman

Alan Ellman loves options trading so much he has written four top selling books on the topic of selling covered calls, one about put-selling and a sixth book about long-term investing. Alan is a national speaker for The Money Show, The Stock Traders Expo and the American Association of Individual Investors. He also writes financial columns for both US and International publications along with his own award-winning blog.. He is a retired dentist, a personal fitness trainer, successful real estate investor, but he is known mostly for his practical and successful stock option strategies.

7 Responses to “Stock Exchanges: The New Way To Calculate Trading Volume”

  1. Alan Ellman June 29, 2013 10:28 am #

    PREMIUM MEMBERS:

    We have uploaded a Sample (educational) Portfolio for the August contracts. Here are the assumptions:

    Sample Portfolio For Educational Purposes Only: 8-2013

    (Stats taken on 6-29-2013 from the Premium ETF Report for the week ending 6-26-2013)

    Assumptions

    • $25 thousand available cash
    • Conservative investor with low risk-tolerance
    • Market assessment is slightly bearish
    • Selecting from the top-6 eligible ETFs on the premium ETF Report
    • This is a new covered call writing portfolio with no other securities available
    • We will use ETFs only, targeting a 2% 7-week initial return
    • We will be using the August 16th contracts
    • We will select 3 securities allocating about $8 thousand to each
    • We will favor in-the-money strikes
    • We will favor ETFs priced < $80 to accommodate our $25k cash available • Proper industry diversification will be achieved because ETFs represent baskets of stocks Look in the "resources/downloads" section on the right side of the premium site. Alan and the BCI team

  2. Brent June 29, 2013 10:45 am #

    Alan,

    Interesting article on trading volume, thanks. How about the volume of the options. Do you have requirements for those as well?

    Thanks again.

    Brent

  3. Barry B June 29, 2013 3:40 pm #

    Premium Members,

    The Weekly Report for 06-28-13 has been uploaded to the Premium Member website and is available for download.

    Also, be sure to check out the latest BCI Training Videos and “Ask Alan” segments. You can view them at The Blue Collar YouTube Channel. For your convenience, the BCI YouTube Channel link is:

    http://www.youtube.com/user/BlueCollarInvestor

    You will notice some slight changes to the section headers of the Weekly Stock Screen section. The changes were made to better describe the content of each section.

    Best,

    Barry and The BCI Team

  4. Alan Ellman July 1, 2013 10:23 am #

    ADVS: Special 1-time dividend:

    One of the stocks on our Premium Watch List, ADVS, will be distributing a 1-time special dividend of $9 per share on July 9th. When this occurs the price of the stock will drop by $9 and the option contracts will be adjusted to make all investors “whole” In this case the strike prices will be reduced by $9. For example, if you sold the $35 call, on July 10th your contract will show as having sold the $26 call. Below is a summary of the ADVS contract adjustment (CLICK ON IMAGE TO ENLARGE AND USE THE BACK ARROW TO RETURN TO THIS BLOG):

    Alan

  5. Alan Ellman July 2, 2013 5:52 pm #

    New Webinar Just Booked:

    I have just accepted an invitation by The Money Show to present a webinar @ the July eTradingExpo (Largest Online Trading Expo of the Year):

    Friday, July 19th @ 2:20 PM

    I will post the link once I receive it from The Money Show.

    Alan

  6. Alan Ellman July 3, 2013 4:00 pm #

    Premium members:

    This week’s 6-page report of top-performing ETFs and analysis of ALL Select Sector Components has been uploaded to your premium site. The report also lists Top-performing ETFs with Weekly options.

    For your convenience, here is the link to login to the premium site:

    http://www.thebluecollarinvestor.com/member/login.php

    NOT A PREMIUM MEMBER? Check out this link:

    http://www.thebluecollarinvestor.com/membership.shtml

    Alan and the BCI team

    (We have also uploaded the 3rd quarter High Dividend Yield Stocks with LEAPS Report)

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