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:
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.
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):
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1- To our premium members
2- To all those on our mailing list
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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.
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,