Commentary
Econ 101
There are several dozen economic indicators published each month from
various sources (government, academia, non-profit organizations) that
traders closely follow. Each of these indicators has the power to move
markets up or down, depending upon the results and the traders' expections.
For the remainder of this week we have a couple of dozen still to absorb.
Two of the more important ones are of the Gross Domestic Product (GDP) on
Tuesday and the Federal Open Market Committee's (FOMC) report to congress as
delivered by Fed Chairman Ben Bernanke on Wednesday. GDP, sometimes simply
referred to as "the economy", is an attempt by economists to sum up the
total value of the goods and services a country produces. Then they compare
the current number with past numbers while the market decides whether the
number met or disappointed their expectations. As such the GDP is one of the
more important shaking and moving numbers we get.
In the current scheme of things, however, I think the most important
information we'll get this week is what the FOMC's decision will be on
interest rates. Most traders expect that Dr. Bernanke will stay the course
on interest rates for the upcoming month and that he will give words to the
effect that inflation is still a threat but that we are on course for a soft
landing of the economy (as opposed to a recession which many economists have
been predicting for a couple of years.) Traders can live with this language
but if he adds, amends or deletes even one word and his statement is
interpreted as either more ambiguous than usual or downright negative, then
look for all hell to break out in the marketplace. That's because the two
biggest drivers in today's markets are interest rates and the price of oil.
I've already reported on oil somewhat in earlier reports.
FYI, the two major goals of the Fed are to control inflation and to assure
an employment environment where everyone who wants to work has a job, and
that employers don't have to go begging for applicants. If more people are
looking for jobs then there are jobs available, then unemployment creeps up
and there is downward pressure on wages. Tres bad, economically and
politically because that also means that there are fewer consumers in the
market place buying either less items or no items at all.
Conversely, if there are more jobs available then there are applicants then
there is upward pressure on wages and businesses pass off the increasing
wage expenses to consumers in the form of higher prices. This is one of the
biggest causes of inflation. Nothing more than supply and demand again. Just
remember: Inflation Bad! And the Fed uses interest rates (with a few other
economic tools) to try to adjust the rate at which the economy grows or
diminishes.
Net Liquidating Value (NLV) Portfolio
Paper Profits Table
Good News: For the most part the Dow, S&P and the Nasdaq stayed pretty close
to flat-line for the day. But while the Dow and Nas were up slightly, the
S&P lost a point or so. Happily, our portfolio despite taking a small
beating in our 21-day stops still managed, on paper, to beat the S&P again;
this time by a healthy 10.98 points (annualized). And while many investors
would be delighted with our performance to date (13.04% annualized return on
investment), I know that my trading approach is too new and subject to too
many more tweaks (some to be highly significant but untested by time) for me
to start resting on its laurels.
Bad News: This is not really "bad news" but what I'd really like to see is
my tortoise NLV beating the volatile S&P hare on a consistent basis when
both of us are in the black (green in the table's case, above <g>)
Closed Transactions Table
Good News: This may be reaching somewhat, but our Avg Win dropped just $2.94
while the S&P's dropped $18.45. So now our average has almost caught the
S&P's. It would be nice if we could overtake the S&P, too, wouldn't it?
Bad News: In the P(win) and P(loss) departments, we dropped almost 6 points.
Technically, though, so long as we enjoy a P(win) that is more than 50% we
still have the edge and the edge is what every trader looks for be they
long-term investor, short-term speculator, or outright gambler.
The aggregate of our small losses today did reduce our Avg Net PL/Trx. But
so long as this number remains positive, and we're beating the S&P returns,
we remain good to go.
Put Trading Activity for Report Date
Generally, we want STO Premiums to be as big as possible and we was BTC
Premiums to be as small as possible. This would give us
optimum profits. In other words, we want to buy low and sell high, but with
put writing its always in reverse order. Note that all Premium, STO, and
Profit/Loss Columns should be multiplied by 100 to get the per contract
numbers and that all positions we enter into will always be for as least two
but probably more contracts per position.
Abbreviations: STO-Sell to Open; BTC-Buy to Close; AROM-Annualized Return on
Margin
Sell to Open (STO)
Symbol Expires Strike Premium Target Price Sell By Date Stop-Loss
Price
IDCC 03/17/07 $30 $0.90 $0.55 01/31/07 $1.35
Buy to Close (BTC)
Symbol Expires Strike STO BTC Profit/Loss
Days Held AROM
LCC 01/19/08 $25 $0.70 $0.80 -$0.10 11 -
52.5%
PG 01/19/08 $60 $1.30 $1.45 -$0.15 6
-137.5%
MRK 01/19/08 $35 $0.55 $0.65 -$0.10 4
-259.1%
ZMH 01/19/08 $60 $0.80 $0.65 $0.15 12
62.3%
UAUA 01/19/08 $25 $1.20 $1.25 -$0.05 24 - 17.8%
When you see Days Held that are less than 21 days, the chances are that
there was an earnings report due in the next day or so, and since I do not
want to gamble on whether the street will think the report lived up to their
expectations or not, I BTC early. Earnings announcements, are probably the
biggest consistent driver in what the price of the stock (and its derivative
options) will be right after the announcement. In many cases the
announcements are made when the market is closed. In those cases there is
nothing I, nor any other investor, can do to protect our investments if we
guessed wrong. Hence the stock/option will gap down and our stop-losses will
not be able to take us out of the market before our loss grew too big.
I learned this lesson the hard way. About a year and a half ago, one day I
was up $1,000 at market close on a position but when it reopened again the
next morning after a perceived negative announcement, you can imagine my
chagrin when I saw that that same position was now down $4,000. Yikes! So
the rule I started following then was that if there were no scheduled
earnings announcements within the following 30 days, I would consider STOing
that position.
I followed that rule until earlier this month when I shortened it to 21-days
because of a bigger than expected position loss I'd taken which would have
been a profit if only I'd cashed out the week before. I'll probably
reconsider this rule when I make other changes to my trading method in
February. I don't like the pattern that four out of five 21-day policy
positions finished with a loss, however small they may be.
Administration
Delaying my BTC over the weekend on UAL Corp. (UAUA) saved the NLV portfolio
almost $200. I guessed right on both the oil market (supply and demand as
well as geo-political) and what I thought was the excessive way investors
beat down UAUA on Friday. But I had to get lucky to do it. Therefore, I won
the profit/loss battle but I put myself in jeopardy of losing the
self-discipline war! If, in the long run, my trading approach yields me
better returns than the S&P, then I've got to take the goods with the bads.
Otherwise, why don't I just follow my instincts, biases, and outright
guesses. That would save me the beau coup hours each day that I devote to
education, research and position screening. And while I may save some hours
each day, I'll probably go back to losing another $30,000 or more like I
lost in the first 17 of the total 21 months that I have been actively
trading.
If I break my discipline again, you have permission to slap me on the side
of my head! <grin>
Disclaimer:
This is the fine print and is designed to protect me in these litigious
times, and until I get better wording for this disclaimer, you are under
notice that I am not selling my services nor any other product, nor am I
trying to induce you to trade along or independently, with me. I am merely
offering a journal, so to speak, of my portfolio's transactions and results
with the hope that you will glean information and educate yourselves in the
stock market in general and option trading dynamics in particular. Trading
in the stock market and in options involves substantial risk and much money
may be lost. Beginners, especially those with little or no understanding of
the stock market, lose most, if not all of their capital in a relatively
short time. In other words learn from me and my mistakes and if you want to
risk your money in the markets, that's your business and has nothing to do
with me. I am not your representative, broker, advisor or any other type
agent acting in your interests. As a matter of fact, if you want to invest
your money, I recommend you hire your own advisor other than me.
Copyright (c) 2007 Leonard Mednick, MBA, CPA (Ret); Managing Member LIME
Holdings LLC
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