Saturday, December 20, 2008 2:55 PM
I sent out the following e-mail to all of those that I have an e-mail address for...if I don't have your e-mail address then this is what I sent....if you want to recieve our Users Group monthly updates then please send me your e-mail address to my address located below...thanks
Hello everyone, I hope you?re all doing well, enjoying the New England snowfall and getting ready for the holidays.
I wanted to send out this rather lengthy update to all of our Option Users Group members before the holidays. First, please set aside January 17th from 9 ? 11:30 AM at the Sheraton East Hartford CT as our next meeting date. I?ll also try to publish before our January get-together our February thru April meeting dates giving each of you plenty of time to reserve the time.
For our January meeting we?ll kick-off the New Year with an on-going discussion series on Option Spread trades. It will take many meetings to go thru what I consider to be one of the most important Option Trading techniques you?ll ever learn; -that is how to leverage all the power of Option trading while minimizing risk. Over the course of the next 5 or 6 months we?ll be exploring in detail various types of Option Spread strategies, how, why, and when to use them and perhaps most important, how to minimize your risk as you activate your trade position. I think you?ll quickly see how Spread trading is the only correct way to go in the Option Derivative world. Whether you?re trading equities, commodities, futures or currencies, this is it. So plan on making these meetings as each one will build upon the other. As a quick reminder, we?ll start our online webinar series in February and will highlight what we discuss at our on-site meetings. I will send out a separate e-mail on how to sign up for the monthly webinar series. Please remember there?ll be a slight charge to cover our monthly internet fees.
Ok, let?s get started with our December update. If you?ve been following my updates during our monthly meetings you?d have known I had 2 primary trade positions I was following in December. Both of them were Spread Trades and I am happy to report both proved profitable with the December Option expiration cycle. The first was National Oilwell (NOV). My Diagonal Spread position in NOV made 12% in less than 15 days. My other trade was also a Diagonal Spread (this type of option spread trade is a ?pro traders? favorite right now with what the markets are giving us) in Intercontinental Exchange (ICE). That trade put 33% in my pocket in 28 days. Thus far, from Sept thru Dec all trades have been profitable, but remember, we?ll loose some as well so we?ll seriously protect our profits as we make them.
Now that December is effectively over, what am I looking at right now? Here are a few potential trades I?m looking at?.let?s take a look at each of them to give you a flavor for what I?m up to. Keep in mind that as you gain more knowledge in Option trading strategies and techniques your style and/or approach may vary from mine, but at least you?re in control of your own money, not some knucklehead like, say like Bernard Madoff in NYC, who was running a great big ponzi scheme?
First up is one of my favorites, NOV. I mentioned it above, but I continue to like this company. It has a very strong balance sheet, and with a large back order of unfilled business it continues to perform well fundamentally. The downside is that it is in the Oil industry. In figure 1 below you see a snapshot of a NOV. As you can see, they are in the Petroleum industry and have been taken to the woodshed like every other energy company. They have a solid growth rate and strong EPS.
(Figure 1?data provided by VectorVest) (PLEASE NOTE - IF YOU CARE TO RECEIVE THE COMPLETE UPDATE, THEN I NEED YOUR E-MAIL ADDRESS SINCE THIS E-MAIL CANNOT SEND OUT OR INCLUDE ANNOTATIONS)
In figure 2 below you see a weekly chart of NOV and figure 3 a daily chart. Note my annotations on each chart; -first, it is forming a basing pattern with the MACD and RSI turning up. I also put a Fibonacci series on the weekly chart depicting overhead resistance as the stock looks to retrace its fall, the first significant level at 48.05. For those of you not too familiar with Fibonacci, you should be. Basically it?s a sequence of numbers developed in 1202 (by Leonardo Pisa, a great European mathematician during the Middle Ages) that tends to define itself in ratios. No more detail needed here other than you need to know that markets have an uncanny way of following these Fibonacci number series. On the daily chart in figure 3, I have also highlighted those technical indicators I use regularly to help confirm my trading actions. You see I use the 5/20/50 EMA?s and then use confirming signals with the RSI, MACD and EMA crossovers. I am looking at accumulating a position in NOV using Diagonal Spreads as my venue. I will go over this one in more detail in our January meeting along with how I combine my indicators to help support my trading plan.
Figure 2?.chart provided by StockCharts.com
(Figure 3?chart provided by StockCharts.com)
Ok, here are 2 other trades I am looking at but my timeframe or horizon for these are more than 6 months out, but I find them very interesting and thought I?d share them with you. In figure 4 below is a daily chart of TBT (an ETF that follows interest rates). As you can see from my annotation, interest rates cannot go lower than 0% and long term, with all the money the Feds have pumped into the system, inflation will ultimately rear its ugly head forcing the Feds to raise rates?and when they do, this ETF will take off! This one bears watching as it is severely oversold?
(Figure 4?.chart provided by StockCharts.com)
The other potential trade I?m following is TLT (an ETF that tracks Treasury Bonds). As you can see from my chart annotation in figure 5 below, this ETF has gone ?to the moon??this shows how much money is flowing into Treasuries as a safe haven right now?institutions, money managers and others are willing to accept 0% interest to hold their money because they fear if they park their funds anywhere else they?re at risk. This also explains why the US Dollar is still holding up as the international currency of choice (even with almost 0% interest rates) because everyone is putting their money there. Anyway, when that stops, and a degree of safety is put back into the markets, that giant sucking sound you?ll hear is this ETF falling back to more normal levels. Again, this potential trade is worth following as a lot of money will be made when this one falls back to earth as this one is severely overbought.
(Figure 5?chart provided by StockCharts.com)
I want to wrap up this e-mail with a speculative option trade I entered this past Thursday. In figure 6 below you see a weekly chart of Rohm and Haas Co. (ROH). As you can see, the giant spike that occurred in July was a buyout offer by Dow Chemical for over 75 per share. The terms of the buyout stated the transaction would occur mid January. Now, a lot has happened since July 2008 (mainly the markets crashed and credit has dried up) and as you can see in the charts, the stock price is slowly backing off the 75 per share range. Basically the markets are waiting to see if this transaction goes thru (Dow?s CEO has stated it will and the transaction is also backed by none other than Warren Buffet)?if the deal happens the stock valuation holds, if not, the stock will fall dramatically back to hence it came?.now, here is the speculative trade using Options. It has a great risk to reward ratio (almost 10 to 1). The Spread trade here is a Calendar Spread with you selling the front month (January in this case) and buying the back month (April in this case). The markets have put a lot of volatility into this trade with January?s volatility almost double Aprils?this gives the Option Spread trader a good advantage. We will go thru this trade as well during our January meeting.
(Figure 6?chart provided by StockChart.com)
As always, our Option Traders Group?s motto is; -Learn, Practice, Do. Remember, Option trading can be a very risky business if you don?t know what you?re doing. I have almost zero tolerance for those who only want to come to our meetings and then copy what I do. Learn for yourself, draw your own trade conclusions and then execute your trade based upon your personal bias. Our Users Group is all about learning how to properly apply these trading techniques to enhance your personal returns. We?ll be picking up the pace with our trading knowledge so please come prepared to learn.
And finally, I am going to ask those of you who can make our January meeting (and every future meeting) to bring a potential trade with you so that you can share with everyone else what you?re following. If you don?t have one, then I guess you?ll need to find one because I?ll ask. You don?t need to have a specific strategy, just bring a stock you?re following with a trade bias (up, down, sideways) and why?.if you have an option trade strategy then be prepared to discuss?.
Again, our meetings are free so take advantage of them.
Until we meet in January, here?s wishing each of you a great Holiday Season.