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.