Alcoa Strategy Written by Shawn Stewart

For the past couple of weeks, I have been playing around with an income trading strategy with some of my bullish picks for the year. The company I used was Alcoa (AA). Since I was bullish, and I owned the underlying shares, I decided to sell puts (bets that the stock would go down) against my shares. For every 100 shares of a stock owned, you can write/sell an options contract for it. In this case, I owed 500 shares of AA, so I wrote 5 put contracts. Here’s the run down for the transaction:

• On 2/21/2014, I sold to open 5 AA 11 Put contracts. The price per contract was $.15 (or 100 x .15= $15), and the shares were trading around $11.84. This means I received a $75 ($15 x 5 contracts) credit to my account.
•  On 3/14/2014, I did a ‘buy to close’ transaction to buy the contracts back so I could close the position. On that day, AA was trading around $11.84, and contracts were trading for $.06 that day, so my profits were the initial $.15 premium minus the closing price $.06. That’s a $.09 (or $9) profit per contract.
•  Take that $9 X 5 AA 11 put contracts, and my profit was $45

Even though the stock pretty much traded flat despite my bullish conviction, I was able to lock in a profit because the shares never dropped below $11. If I let the contracts expire worthless, I would’ve collected a total premium $75 on the trade instead of $45.

Though this strategy yields less return compared to some of the trades Britney has previously made, it was a comfortable transaction. Some traders want to make returns, and be able to sleep at night, and if that is your risk profile then, I would definitely suggest looking into this type of strategy.

Another upside to writing contracts on your shares is that there is potential on top of potential. First off, you would profit from any upside gain on the shares. Secondly, you will still collect dividends on your stocks. And lastly, you now have more income from collecting the premium!

Disclaimer: This was not a risk free investment. If Alcoa, dropped below $11 per share, I would’ve lost money. In this strategy, it is imperative to find 1) a strike price that has a bit of cushion given the time till expiration, and 2) finding the highest premium to write contracts for.

Thanks for reading.

Shawn

Market Recap 3/21/14

This is the same recap I sent out via text on Friday.


Shawn will be posting an income strategy from his mock portfolio later on tonight. 



The big news this week was the FOMC meeting. The Fed decided to remove the 6.5% unemployment rate as a forward guidance target. Meaning the Fed will continue to keep interest rates low, which will encourage lending until the economy is stable. The removal of the 6.5% indicates that they are looking at more than just employment to gauge economic growth. 

Putin's comments eased some concerns of escalating tensions but commodities are still facing some volatility. 

There was some single stock news that put pressure on the major indexes but all and all, Friday ended light. 


Thanks for reading,

Brit

Market Recap 3/14/14

Hello!

First off, I started sending quick market recaps via text to a couple of people interested in learning more about the market and staying up to date. If you're interested please comment below, find me on twitter @BritReport or email me at britreport@gmail.com
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This week was full of macroeconomic news. I think it's important to understand how the events in the Ukraine  are impacting the U.S economy.


How we got here in less than 30 seconds:

• Russia wanted to invade the Ukraine
• The U.S does not want Russia to invade the Ukraine. To prevent the Russian invasion, the U.S threatened Russia with a number of sanctions. The sanctions will effect a number of businesses within the U.S.
• Russia positioned troops for an invasion 
• Today there was a vote on the decision to unite Russia and Crimea. The results were in favor of the union, however there are a number of questions regarding the validity of the results. 

It's good thing to remember  that geopolitical events effect a number of aspects in our economy, not just. Here are some of the effects:

Energy: Russia supplies Europe's natural gas, if we impose a sanction on Russia we could lose support from Europe. Without Europe, the sanctions will be less effective and Russian investors will pull their money out of the U.S and into Europe.

Currency: In times of uncertainty, investors want to decrease their exposure to risky currencies. On Friday, there was a rally in Japanese Yen. (the Japanese currency) Currencies are valued in comparison of another currency. As the Japanese Yen increased in value the US Dollar decreased in value. This indicates that the Yen was perceived as more stable than the dollar, which has a negative effect on the U.S.

VIX: Considered the "fear guage": was up 9.5%, indicating there is a lot of volatility surrounding the macro tape. As the uncertainity continues the market will continue facing downward pressure. 

In addition to the Ukraine, a slow down in China has also put pressure on the U.S Market.

The last week China released some poor economic data indicating a slow down in their economy. Considering that China has one of the largest economies in the world, a slowdown is definitely something that will be monitored closely going into next week. 

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Trading has been tepid with lower then average trading volumes. I will be using this pullback to buy NASDAQ based techs. (TSLA, SCTY)

• What do I mean by pullback? When the stock market is down it is a good time to buy stocks you like because they are trading lower. 

Thanks!

Brit

P.S 

If you would like to learn more about the Ukraine, I attached a map and a link to a timeline of Ukraines Political Crisis.

I read that American's were the most geographically challenged nation. So here's a map:

Timeline of Ukraine's Political Crisis

3/7/14 Recap

Hello!

This is a just a brief overview of what happened in the markets Friday

• Jobs numbers 
• 175K jobs added in February beating the 140k estimates, a positive indicator considering the dismal January data and the extremely harsh weather conditions. 

• Unemployment
• The unemployment rate rose from 6.6% to 6.7%, the increase was caused by more people entering the workforce. 

These two pieces of data are extremely important as the market begins to prepare for tapering. If you need a tapering recap check out my "What the Fed" post.

With previous job releases, good data indicated that the tapering would end and cause the major indexes to go down. Conversely, missing expectations indicated tapering would continue and the markets would continue their record breaking rallies. That trend seems to be coming to and end as the market has slowly started correcting itself for the September taper. 

Check out this article for more details: U.S gains 175,000 jobs in February 

Going into next week...

Markets will be pretty cautious Monday as the bull market hits the 5 year mark. To put it in perspective the average bull market lasts about 4.5 years. Even though it sounds bad, the economy moves in cycles,so this is information will not catch investors by surprise. 

I don't have any positions on right now but as soon as I will post those.

Thanks,

Brit

New Contributor - Shawn Stewart

Hello!

One of my goals for this year was to update the blog more frequently with market updates. As you may or may not know, I am also trying to graduate this semester! To ensure that the post become more regular I added a contributor to the blog.

Shawn is a junior finance major at the University of Missouri. He will be writing market updates as well as providing insight from his own portfolio. Just like myself, this is a learning experience for Shawn and it will give him the opportunity to look back and analyze his trades. I am excited to have another person writing!

Shawn and I will collaborate but that doesn't mean that we will always have the same opinion. We encourage you to share your ideas as we all expand our market knowledge.


Best,

Brit 

152 Feb14 DIA Puts

I was bearish on the market since last week because of the selloff in EM, mediocre earnings and the heightened sensitivity to economic data. 

I decided to maintain my short into Monday because of knee jerk reactions to economic news. One more data point could end up in a huge selloff, which is exactly what happened. 

How did I profit from a selloff?

Capture market sentiment

• Because I was bearish, an index was the best way  to capture market sentiment instead of the sentiment of just one company

Pick an index

• It was a choice between the S&P and Dow. 
• I did not consider the NASDAQ because it includes a lot of tech companies that are not as negatively effected by the economic info releases.
• I chose the Dow Jones because it seemed to be the most sensitive to the news surrounding the Fed and a the release of  manufacturing data

Pick a position

• Purchasing puts indicates a bearish view
• Most of my trades have been buying calls, this has "unlimited" gains because a stock price can technically  go as high as possible. Buying calls expresses a positive/bullish view
• Puts are less intuitive than calls, I'll spare you the explanation for today 

Execute trade

• This trade was executed with DIA options.  
• DIA: An ETF; which is a security that tracks and provides similar performance to the Dow Jones
• The trendlines indicated that the price would not fall below $150. I did not think it would go all the way to $150, so I picked a $152 strike. 
• Delta ~ 30, which means I needed a decent size move for the position to see substantial price changes

Results

On Monday, bought 2 152 Feb14 DIA puts for $.96. Yesterday (2/3/14), sold both for 1.99. Realizing a $160.00 gain. 

What I learned:

1. I should of bought more options, especially when the market rallied on Friday. This trade was extremely small. By adding to the position, the average price for the contracts would be lower making this trade more lucrative. 

Articles about Monday: 

U.S Sees worst selloff in several months (MarketWatch)

Thanks,

Brit

ISM: The ISM non manufacturing index is a survey of purchases from non manufacturing companies. If the ISM index is increasing the stock market should increase because it perceived as an increase in the company's profitability.

What the Fed?

Our current monetary policy is not a topic that effects just investors. The Feds decisions effect EVERYONE and is something everyone should be familiar with.

The whole Quantitative Easing (QE) concept can be a hard pill to swallow especially if you’ve never heard of it before. The market is really sensitive to the Federal Reserve (The Fed) because their decisions are effecting investors forward guidance (views of the future)

QE  in 30 seconds:

• Fed buys bonds and mortgage backed securities. The asset purchases cause lower interest rates, which encourages spending in the economy. Spending incentivize banks to lend, which increases financing activities for consumers and businesses.
• The Fed was buying 85 billion dollars worth of assets each month and planned to continue until they felt the economy was somewhat stable. (lower unemployment, healthy market performance and growth)
• QE= Fed training wheels for the American economy

Basically everyone is wondering when they are going to take off the training wheels, just like riding a bike if you are not ready to ride the two wheeler you could be in for a very rude awakening.

Instead of cutting the bond buying off cold turkey, The Fed is taking a screw out of one of the training wheels. Each month they are planning to reduce the amount of bond purchases by 10 billion per month, ending the monetary policy in 2014.  The move to decrease bond buying indicates that the economy is  getting closer to meet their standards.

The recent declines in U.S indices is due to the spillover from the selloff in Emerging Markets.

• A selloff in emerging markets was caused by the central banks decision to tighten their monetary policy. Tightening means the Central Banks plan to increase interest rates, which would usually create an incentive for investors. The aggressive rate of tightening is concerning because it may hinder their economic growth, which is causing a selloff.
• Detailed article about the EM Selloff: Emerging Markets Selloff Spreads from WSj

The market was pretty tepid going into the meeting. The Fed announced they will continue reducing the asset purchases. The downward momentum added to the index decline from EM. Despite yesterday's rally, I am maintaining a bearish view.

Here are some articles if you want some additional information about the Fed meeting:
Fed stays the course by tapering another $10 billion from MarketWatch
US stock indexes steeply lower after Fed does as expected from CNBC

Thanks,

Brit

SCTY 72.5 April Calls

Hello!

I decided to separate explanatory and position posts. This will make the information a little less overwhelming. Hopefully, the educational posts will build a foundation for the position posts.



The Story:

I was looking for a trade idea to start the year. Picking a position is a little overwhelming sometimes, there is a lot of data/ information to try and break down. I like to read SeekingAlpha and MarketWatch when I am looking for ideas.

I stumbled on this article: The Solar Outlook for 2014.

I chose SolarCity over the other companies listed because it was not as prominent as FirstSolar and there was more potential for a breakout move.

After picking SCTY, I used FINVIZ to look at the chart, focusing on technical indicators

• SCTY was trading at $59.10, which was very close to the resistance level. Once a stock breaks the resistance level it will gain momentum causing a price jump

The Position: 

I wish I had the chart to show exactly what I was looking at but I don't :(

Anyways, the trendline indicated that if the resistance was broken the stock could rally to $70.

I picked an April expiration, a further expiration can cheapen the price of the option. After the expiration, I picked a strike price that was not too expensive but had a decent delta. 

• Strike price: What you expect the price to be in the future
• Delta: How much the options price is expected to change with the change in the actual stock
• For example the delta was .50, therefore for every 1 point move in SCTY stock the option changed by .50

After all the research I decided on buying two 72.5 April Calls the next morning (Monday).

On Monday Goldman Sachs upgraded SCTY and the stock hit all time high's. Even though the price was way higher than when I initially decided on the trade, the trendline still had momentum to go even higher.

I bought 2 72.5 April calls at $6.85. 

The Profit:

SCTY continued to trade higher. On Jan. 16th my options were priced at $11.75! Almost double my purchase price!!!! I sold my calls and the trade realized a $960 profit.

Although I was bullish on SCTY, the rally seemed a bit overdone and I did not want to lose out on collecting profits. The next day it was trading at close to $80 but today it is at $69.

Here is the chart of the duration of my trade

Thanks for reading!!!

I realize there was not a lot of explanations in this post, hopefully as I write more of the explanation posts the material will be easier to grasp. 

follow me on Twitter: @TheBritReport

Thanks,

Brit

Market March Madness: 1/27/14

I am going to spend more time giving quick market updates, explanations and opinions. I will continue to post my positions but I want to give a little bit more information instead of giving information without laying the foundation.

Lets get into it.

There are 2 important topics going into this week: I'll explain 1 today and the other tomorrow

1. Earnings
2. The Fed Meeting ( I'm saving the explanation for Tuesday)

 

Earnings: The Market's March Madness

In light of Warren Buffet offering 1 BILLION dollars for the most accurate March Madness Bracket, I decided to use the tourney to loosely describe earnings. 

Regular Season: 

Earnings, which are released every quarter, draw a lot of attention because they indicate how profitable a company was during the previous quarter. Investor's pay close attention to earnings because they help paint a picture of  companies' current performance and the outlook for  the future. 

Think of it like this: Investors have been using various pieces of news throughout the quarter to gauge how the company is performing.  During the regular season you watch your teams the games and keep track of their record. The season record gives an idea of what can be expected going into the tournament. 

Filling out the Bracket:

Before earnings are released investors will start to take positions (buying or selling shares/options). Their positions reflect their opinion on earnings data.

• Bullish : Buy into the stock before the earnings release in anticipation of a rally (large increase) and sell once it has hit the price you expected (collecting profits)
• Bearish: Sell the stock in anticipation that the price will go down 
• This is only profitable if your short selling, if the stock is in your portfolio, a sell would be to protect downside losses

Taking a position is similar to filling out your bracket. When filling out a bracket you consider  the teams record (previous earnings/info), the coach (CEO), industry (conference) and products/services (star players). Gathering all that info you are forecasting essentially who is going to lose and win. 

The Championship:

Okay fast forward through all the individual games and let's focus on the championship. For earnings, it is the same as their release.

 

The information people usually receive first is if the company beat or missed their earnings. Beating estimates (winning) and missing estimates (losing). The impact of the actual earnings will be reflected in how much the stock gains or loses. 

• Beating estimates will usually cause the stock price to increase because it indicates that the companies had more revenue than anticipated.
• Missing estimates will usually cause the stock price to decrease

Unlike winning and losing, the amount in which the stock moves in either direction is priced in by the reason the earnings were missed or beaten. Here are some examples of price reactions to earnings:

• Company beats earnings because they fired a bunch of people, that is not considered a sustaining source of revenue growth, so the price decreases
• Company missed earnings because they were hit with a one time legal settlement but has strong fundamentals, price decrease is not as big
• JP Morgan (JPM) is considered a stable bank with the necessary tools to continue growth and maintain strength. A couple weeks ago, JPM missed estimates. JPM's miss was largely attributed to the number of legal settlements it faced during the quarter. This event is not something an investor would see as a fundamental issue, therefore the stock barely dropped.  

• Company beats earnings because they saw a huge increase in advertising, which increased their profitability. This positive outlook will cause the price to go up. 
• Microsoft's ad revenues increased by 34% which caused their stock price to increase 
• Company misses earnings because they are terrible and have no sales and a very bleak outlook. Price goes down.

These are just a few various way earnings can be digested.

So to keep with the March Madness theme, say you expect earnings to beat estimates and you buy in early. The earnings are released and you were correct and the price soars. Just like picking the winning team in March Madness. Woohooo! 

 It isn't as black and white  as March Madness but hopefully I brought some clarity.

Today all eyes are on Apple, which should be reporting earnings shortly.

 

Best,

 

Brit

GLOSSARY

Bearish: Expect prices to decrease, also known as being "short" 

Bullish: Expect prices to increase, also known as being "long"

Profit Margins: The proportion of sales that are kept for revenue, 20% profit margin means for every dollar in sales $.20 are kept for profits. (investopedia)

Quarter: Three month time period, at the end of each quarter companies pay dividends and report earnings (investopedia)

Revenue: The amount of money a company receives from sales, investments etc. (Investopedia)