Category: Daily Market Update

Daily Market Update – March 20, 2014 (Close)

After yesterday’s late day swoon following some confusion and maybe too much candor from new Federal Reserve Chairman Janet Yellen, it looks as if the market is willing to forget the brief pseudo-panic and move forward.

After a few years of press conferences in which very little was said that surprised anyone or took the markets for a ride, it was an unexpected reminder of how tentative and fickle prices may be at any moment in time.

The market’s initial reaction to yesterday’s confusion was a good example of the perils of trading at or near historical highs even when there is news to support such highs. When the support is less than compelling it probably doesn’t take too much to see a sudden shift in gear.

What you never know and sometimes sit in fear of, is at what point do you reach a breaking point or when frenzy begins to feed upon itself. In the case of a short squeeze most of us like that kind of self-feeding frenzy, but when the market is heading lower it’s a completely different set of emotions.

However, there was never really a true sense of panic at any time during the 56 minutes or so of reaction and the market did recover nearly half of its very quick loss, so the news can’t be all bad.

At least today, after trading was ended, we were moved a bit further away from any mythical breaking point as the market spent most of the day slowly working its way to a 100 point gain until giving a little back b y the close.

When these kind of things happen, as yesterday’s sell-off as one example, it does have to make everyone watching increase their personal level of unease, even if you can put somewhat of a positive spin on the outcome. Even if the phenomenon is short lived it has to leave at least a little bit of an imprint on people’s minds and maybe a little bit of hesitancy regarding increasing risk levels or the kind of risk taken on.

On the flip side you’ll find those who will now say that some of the uncertainty regarding interest rates may now have been removed and that lifting of uncertainty clears the way for the market to move higher.

Today they were right.

The nice thing is that either of those scenarios will eventually come true. One or the other. Unlike 2011 when the market finished unchanged for the year or when green comes up on the roulette wheel, something is likely to happen and one group will be able to point to their visionary prowess while the other will conveniently ignore their position and pretend to be unwounded and just move forward.

What you can be certain of is that some algorithms are being re-tweaked and certain words in official statements, speeches, or off the cuff remarks will be given new weightings based on yesterday’s comments. That’s despite the fact that there is no definitive intent confirmed in yesterday’s comments. Instead, they’ve been interpreted in any number of ways.

For me, my vision runs out at the end of each week. I just want to get to that endpoint and start wiping off the lenses to see what may be on the next near term horizon , which generally happens to be a week or two away. I’m not thinking ahead to this Fall, nor much less to the Fall of 2015, as those focusing on interest rates have suddenly set their sights.

What my vision didn’t foresee was another onslaught on Walter Energy.

Yesterday it was about 8% higher as news came out that it was ready to bring notes to market following news the previous week that it was granted a further lending facility. Shares took a hit after that news and it was nice to see that the actual announcement of the event was met with some kindness. AS with everything else, Walter Energy gave up most of its gains in the final hour of trading after the Federal Reserve “mis-speak.”

This morning, however, I was stunned to see a large decline in the pre-open. What made this different from other large pre-open price indications was that there was actually heavy volume to support that move, as opposed to a transaction of 100 shares at a ridiculous price.

It took a couple of hours before finally finding the reason behind the drop, having received a link from a subscriber regarding a Bank of America downgrade of the sector, with especially haqrsh words for Walter Energy.

By the close of trading its rop was almost as large as the one taken this past June 2013.

The good news is that the last time it recovered that loss by the second day after.

Hopefully history repeats itself, but today was especially discouraging on that front, while the rest of the day turned out to be fairly pleasant.

With the pre-open trading suggesting that a reasonably calm opening looked likely that provided some level of comfort that yesterday’s sell off wouldn’t do irreparable damage to the ability to see respectable numbers of assignments and rollovers tomorrow.

Thankfully, there is more than Walter Energy.

Daily Market Update – March 20, 2014 (9:30 AM)

After yesterday’s late day swoon following some confusion and maybe too much candor from new Federal Reserve Chairman Janet Yellen, it looks as if the market is willing to forget the brief pseudo-panic and move forward.

After a few years of press conferences in which very little was said that surprised anyone or took the markets for a ride, it was an unexpected reminder of how tentative and fickle prices may be at any moment in time.

The market’s initial reaction to yesterday’s confusion was a good example of the perils of trading at or near historical highs even when there is news to support such highs. When the support is less than compelling it probably doesn’t take too much to see a sudden shift in gear.

What you never know and sometimes sit in fear of, is at what point do you reach a breaking point or when frenzy begins to feed upon itself. In the case of a short squeeze most of us like that kind of self-feeding frenzy, but when the market is heading lower it’s a completely different set of emotions.

However, there was never really a true sense of panic at any time during the 56 minutes or so of reaction and the market did recover nearly half of its very quick loss, so the news can’t be all bad.

When these kind of things happen it does have to make everyone watching increase their level of unease, even if you can put somewhat of a positive spin on the outcome. Even if the phenomenon is short lived it has to leave at least a little bit of an imprint on people’s minds and maybe a little bit of hesitancy regarding increasing risk levels or the kind of risk taken on.

On the flip side you’ll find those who will now say that some of the uncertainty regarding interest rates may now have been removed and that lifting of uncertainty clears the way for the market to move higher.

The nice thing is that either of those scenarios will eventually come true. One or the other. Unlike 2011 when the market finished unchanged for the year or when green comes up on the roulette wheel, something is likely to happen and one group will be able to point to their visionary prowess while the other will conveniently ignore their position and pretend to be unwounded and just move forward.

What you can be certain of is that some algorithms are being re-tweaked and certain words in official statements, speeches, or off the cuff remarks will be given new weightings based on yesterday’s comments. That’s despite the fact that there is no definitive intent confirmed in yesterday’s comments. Instead, they’ve been interpreted in any number of ways.

For me, my vision runs out at the end of each week. I just want to get to that endpoint and start wiping off the lenses to see what may be on the next near term horizon , which generally happens to be a week or two away. I’m not thinking ahead to this Fall, nor much less to the Fall of 2015, as those focusing on interest rates have suddenly set their sights.

With a reasonably calm opening looking likely that provides some level of comfort that yesterday’s sell off won’t do irreparable damage to the ability to see respectable numbers of assignments and rollovers tomorrow.

This is looking like another in a recent series of weeks in which relatively few new positions have been opened. Fortunately there have been a number of existing positions finding cover, even if only briefly for “DOH Trades” but that does help add to returns, little by little.

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Daily Market Update – March 19, 2014 (Close)

With what appears to be a day of relative quiet coming from Europe and not too much expected from the FOMC minutes the only thing capturing attention today is the prospects of Janet Yellen having a slip of the tongue during her first post-FOMC release press conference.

Although I was listening, I’m not certain of what she said that at 3:04 PM EDT set off a massive sell off. Looking at this minute by minute chart of today’s trading, you don’t see many precipitous drops like the one in the late afternoon.

We’ve started taking these press conferences for granted, but it wasn’t too long ago when we were all shocked when Ben Bernanke announced that he would hold a first ever such press conference. Given the very precise and methodic way in which Bernanke weighed each word, he could have spoken daily without spooking anyone unless that was his intention.

Now there’s clamoring for the press conferences to become a monthly event despite the fact that it hasn’t really yielded much in the way of new or market moving information.

At least if you ignore today.

Although there are people hoping for some new information to be passed along, even if unintentionally, the past hasn’t indicated that to be the case, but the past has only included a single individual in control of the words.

I didn’t expect much different from Janet Yellen. It would be hard to imagine that after so many years of public exposure and lots of opportunities to have provided unintentional information that she would start doing so today. However, her precision in defining the time frame of actions related to interest rates may have caught some by surprise. She put, what some may interpret as a concrete time frame of 6 months for rates to rise after Quantitative Easing ends.

There was confusion regarding her precision and then her imprecision in referring to whether referring to this year’s fall season or next year’s. That’s because QE is likely to end in January 2015 and one would have interpreted her initial words to mean that interest rates would be expected to rise some “considerable time” thereafter. However, she then referred to that time as “this fall,” instead of “next fall.”

That reportedly got traders or their algorithms nervous.

Whatever.

Coming up to the mid-way point of the week I’m not seeing very many more new positions for the week but am hopeful that there are more opportunities for getting new cover and hope to see a reasonable number of assignments as the monthly expiration comes to a close on Friday.

For those having done this long enough you do know that even when there is nothing new in an FOMC release that doesn’t mean that the market will just find itself in a big yawn. Sometimes the reaction is really inexplicable.

Today was just one of those times, but it was pretty orderly, even though it did reflect a nervous market.

What can make those kind of moves especially frustrating and maddening is when that inexplicable reaction occurs just days before that expiration, especially a monthly expiration and serves to steal your fantasies of being awash in assignment cash and rollovers.

Never take anything for granted; don’t count your chickens before they’re hatched; or whatever aphorism you prefer, but there is a lot to be said for that warning.

For that matter that may also apply to the belief that absolutely nothing of news will come from today’s events.

You never do know until it’s all said and done.

Heading into the monthly close I am still optimistic regarding assignments and maybe even some additional rollovers to help next week get off to a decent income flow start. Today turned out to be a quiet day other than for the past 56 minutes.

While the first two days of this week have been a good antidote to the  successive losses of last week, it has removed some of the ability to spend on new positions. Who knows, maybe the final hour’s sell-off created some new opportunities, but I didn’t really have the  desire to test the market.

While still optimistic that the market may go higher, based on the volatility pattern I mentioned earlier in the week, I did take the opportunity yesterday to purchase some portfolio protection in the form of a Volatility ETN.

On the one hand while low volatility causes low option premiums it also makes such insurance relatively inexpensive.

In this case I purchased iShares S&P 500 Short Term Volatility ETN (VXX) at about $44 and sold January 2015 $100 calls.

For those that understand the ETN vehicle, they really aren’t meant for long term holding as they get re-balanced everyday and can lose some value each time. Compound that loss over time and it can add up even if your directional bet is correct.

The Volatility ETN acts as portfolio protection because it tends to move higher when the market moves lower and it tends to do so in a leveraged fashion, so you buy a position that is much less in overall value than your typical new position. For example, a 1% decrease in the market may show a 5% increase in the Volatility ETN. In that case your portfolio will show a smaller loss. How much smaller depends on how convinced you are that insurance will pay off and at what levels you are willing to purchase it.

I didn’t purchase very much but may add even more if volatility gets even cheaper, especially if heading back to about the 2 level on the underlying index.

The use of this kind of portfolio protection is just like any other kind of insurance. Sometimes you’re happier if it never gets used, but it does represent a cost and detracts from your overall ROI if purchased.

Purchasing the protection is an expression of  bearish sentiment, but at some point if shares are inexpensive enough you can dally with it without really making a strong statement regarding your sentiment.

Or you can look at it as simply hedging your hedges and then take it to yet another derivative when you also sell calls on the hedge. Whatever its use, these volatility products are very high maintenance and can lead to disappointment on their own, so know about it, but don’t go rushing in to any of them.

PS: The early morning version of the Daily Market Update referred to Janet Yellen in a gender specific fashion that was pointed out by one reader to have been incorrect. In fact, it is inappropriate to refer to Janet Yellen using the word “his,” although if you do close your eyes she does sound like Woody Allen.

Daily Market Update – March 19, 2014 (9:15 AM)

With what appears to be a day of relative quiet coming from Europe and not too much expected from the FOMC minutes the only thing capturing attention today is the prospects of Janet Yellen having a slip of the tongue during his first post-FOMC release press conference.

We’ve started taking these for granted, but it wasn’t too long ago when we were all shocked when Ben Bernanke announced that he would hold a first ever such press conference.

Now there’s clamoring for it to become a monthly event despite the fact that it hasn’t really yielded much in the way of new or market moving information.

Although there are people hoping for some new information to be passed along, even if unintentionally, the past hasn’t indicated that to be the case, but the past has only included a single individual in control of the words.

I don’t expect much different from Janet Yellen. It would be hard to imagine that after so many years of public exposure and lots of opportunities to have provided unintentional information, she’s probably not going to start doing so today.

Coming up to the mid-way point of the week I’m not seeing very many more new positions for the week but am hopeful that there are more opportunities for getting new cover and hope to see a reasonable number of assignments as the monthly expiration comes to a close on Friday.

For those having done this long enough you do know that even when there is nothing new in an FOMC release that doesn’t mean that the market will just find itself in a big yawn. Sometimes the reaction is really inexplicable.

What can make it especially frustrating and maddening is when that inexplicable reaction occurs just days before that expiration, especially a monthly expiration and serves to steal your fantasies of being awash in assignment cash and rollovers.

Never take anything for granted; don’t count your chickens before they’re hatched; or whatever aphorism you prefer, but there is a lot to be said for that warning.

For that matter that may also apply to the belief that absolutely nothing of news will come from today’s events.

You never do know until it’s all said and done.

Heading into the monthly close I am optimistic regarding assignments and maybe even some additional rollovers to help next week get off to a decent income flow start.

While the first two days of this week have been a good antidote to the  successive losses of last week, it has removed some of the ability to spend on new positions.

While still optimistic that the market may go higher, based on the volatility pattern I mentioned earlier in the week, I did take the opportunity yesterday to purchase some portfolio protection in the form of a Volatility ETN.

On the one hand while low volatility causes low option premiums it also makes such insurance relatively inexpensive.

In this case I purchased iShares S&P 500 Short Term Volatility ETN (VXX) at about $44 and sold January 2015 $100 calls.

For those that understand the ETN vehicle, they really aren’t meant for long term holding as they get re-balanced everyday and can lose some value each time. Compound that loss over time and it can add up even if your directional bet is correct.

The Volatility ETN acts as portfolio protection because it tends to move higher when the market moves lower and it tends to do so in a leveraged fashion, so you buy a position that is much less in overall value than your typical new position. For example, a 1% decrease in the market may show a 5% increase in the Volatility ETN. In that case your portfolio will show a smaller loss. How much smaller depends on how convinced you are that insurance will pay off and at what levels you are willing to purchase it.

I didn’t purchase very much but may add even more if volatility gets even cheaper, especially if heading back to about the 2 level on the underlying index.

The use of this kind of portfolio protection is just like any other kind of insurance. Sometimes you’re happier if it never gets used, but it does represent a cost and detracts from your overall ROI if purchased.

Purchasing the protection is an expression of  bearish sentiment, but at some point if shares are inexpensive enough you can dally with it without really making a strong statement regarding your sentiment.

Or you can look at it as simply hedging your hedges and then take it to yet another derivative when you also sell calls on the hedge.

Daily Market Update – March 18, 2014 (9:15 AM)

Yesterday was a great day in the market and a perfect example of why not to listen to Wall Street adages.

In this case, “buy the rumor and sell the news,” would have led you astray as events in Crimea had come to their initial conclusion and the entire chain of events and speculation started with selling and ended with some kind of jubilation yesterday.

While events were in their nascency there was lots of uncertainty and that’s precisely what the markets were reacting toward. Upon casting the final votes in the referendum at least the first phase of that uncertainty was completed.

This morning’s pre-open showed that the market values words more than actions. The pre-open had been headed lower until Russia’s President Putin addressed his Parliament and seemed to give an indication that Crimea was an endpoint for Russian expansion interests and that there was no interest in dividing Ukraine. He specifically said that no one should believe those who said that Crimea was just the beginning of Russian actions.

At that point the futures turned around and headed higher, despite the fact that this was the same man who a month earlier had denied that Russia had any interests or intended actions in Crimea. World history is filled with those kinds of statements of denial of intent.

But words have value as they point toward the future, while actions are so yesterday.

With actions still to come in response to any steps taken by Russia in the aftermath of the referendum in Crimea, there may still be some short term risk as sanctions, whether meaningful or not are going to be met by a “tit for tat” kind of response so reminiscent of the Cold War.

While the market’s early reaction seems to be one of confidence it just seems hard to put too much faith into the words. It also points out that the market is susceptible to disappointment, having already experienced that kind of disappointment as events began to initially unfold.

Most people don’t like to see the markets being swayed back and forth by external events upon which we have no control. Deciding what side to take is purely one of guesswork, made palatable by the knowledge that every event driven series of events comes to an end sooner or later.

Waiting for a conclusion isn’t necessarily a strategy as a multitude of events in waiting can easily become a streaming source of uncertainty. A few years ago it was Greece, then Spain, then the debt ceiling and on and on.

As always that shouldn’t preclude at the very least consideration of taking new market positions even in the face of an actively developing situation. While the market, as a whole, may have downside risk related to specific events, it’s often very difficult to extend that risk to specific individual stocks, other than what they may experience through some contagion.

Not that Best Buy is a great stock, but what does Best Buy or an investor in Best care about what is occurring in Crimea? T-Mobile? Where is the added risk with an expansion of the Russian Federation?

Increasingly, as the market is working its way higher against common sense both the laggards and the losers have greater appeal for me, particularly after an acute loss.

With a small number of new positions to start the week there’s still some room for more this week even as we wait for international events and Janet Yellen’s first press conference as Chairman of the Federal Reserve. However, following yesterday’s run higher many positions just aren’t as appealing as they had been as the market closed on Friday.

While the pre-open turnaround and move higher hasn’t re-created what seemed to be relative bargains just a few days ago, sometimes the market comes to its senses. Waiting a little while to see whether this morning’s early optimism really has any legs will make some sense, although I wouldn’t mind a repeat of yesterday and the opportunity to just watch exisiing shares go higher.

Daily Market Update – March 17, 2014 (Close)

It was nice seeing the market pointing toward a higher open in the early trading to start the week, despite the fact that I usually like to see a weak start so that there is some opportunity to pick up early bargains.

It was even nicer see it add to that early move higher and never even give the slightest hint of faltering.

In this case, however, after 5 straight losing days, as with any stock that you’re interested in buying after a sustained fall, it’s always nice to see some stability return before making your commitment.

The stability that is appearing this morning is reportedly due to quiet over the weekend from Crimea after the referendum and then no real further news as the day wore on, despite the announcement of some very limited sanctions.

But none of what has transpired over the past couple of days and the US response should have come as a surprise. The result was fully expected as should have been the realization that the Ukrainian people and Army had enough discipline to not so anything stupid while there is a Russian Army looking for the slightest pretext to unleash some force.

In all likelihood the only wild card in the equation is whether there are further unilateral acts by the Russian Army, especially within the borders that are universally recognized as being part of Ukraine, even by Russia.

While the appearance of stability brings with it some comfort, it’s not enough to immediately start with a personal “buy program.” As has been the case the past month the first hour of trading hasn’t necessarily reflected where the rest of the day will go, especially if that first hour has been a move higher.

As may be appropriate at a time when we’re all looking to the East to see what kind of a pall may be cast over the markets, before I’m ready to dip into cash there’s a need to “trust, but verify.”

While there’s no real way to verify that the market means what it appears to be doing, there’s good reason to discount initial appearances for now.

With cash standing at about 36% I am, however, more optimistic than in the past few weeks and am willing to get down to a 20% level.

I doubt that will be the case, but I am looking for volatility to stop its upward movement and along with that there is the expectation that the market itself will equilibrate while events play themselves out.

For today, at least, volatility was stopped dead in its tracks, but I couldn’t justify just chasing anything, although there was enough reason to consider a few purchases as well as some personal put sale trades for the day.

At this point the script still calls for the Russian Parliament to make some decision regarding the fate of Crimea, whether to annex it or have it as an autonomous region. Then comes any further reaction from the United States and, perhaps Europe. With those reactions and counter-reactions may come trickle down to the markets, but I don’t expect that there will be anything of substance. In fact, there is reason to believe that last week’s weakness may already have been the result of selling by Russian nationals looking to remove money from the United States in advance of any potential freeze in the assets.

What I don’t understand is the belief that Europe will not express it’s disapproval in concrete ways because it is beholden to Russia for energy sales. Aafter all, who else is Russia then going to sell to? They need the currency as much as Europe needs the energy. At this time of the year, maybe even more than Europe needs it and China, if it is slowing down, doesn’t need to stock pile energy just to help Russia.

With international events put to the side this week’s FOMC isn’t likely to lead to anything of great substance either, although as we’ve seen in the past the way the market reacts doesn’t necessarily have to be tied to substance.

Those particular series of events in the making don’t have a particular chilling effect on me this week and I plan to use the level of attractiveness of premiums, especially in the outer week as a guide for this week’s purchases, as there are already a fair number of positions expiring this week as the March 2014 cycle comes to its conclusion.

If outer week premiums look promising and provide additional value then there is reason to look for longer time frames. Otherwise, there will be additional positions added to this week’s list of expiring names.

Hopefully this will be a better week than the last even though the overall portfolio outperformed the market. While it’s always nice to beat the competitor, it’s even better when you don’t come out of the match totally battered.

For those who believe that hope isn’t a strategy, it couldn’t hurt.

Daily Market Update – March 17, 2014 (9:00 AM)

It’s nice seeing the market pointing toward a higher open in the early trading to start the week, despite the fact that I usually like to see a weak start so that there is some opportunity to pick up early bargains.

In this case, however, after 5 straight losing days, as with any stock that you’re interested in buying after a sustained fall, it’s always nice to see some stability return before making your commitment.

The stability that is appearing this morning is reportedly due to quiet over the weekend from Crimea after the referendum.

But that shouldn’t have come as a surprise. The result was fully expected as should have been the realization that the Ukrainian people and Army have enough discipline to not so anything stupid while there is a Russian Army looking for the slightest pretext to unleash some force.

In all likelihood the only wild card in the equation is whether there are further unilateral acts by the Russian Army, especially within the borders that are universally recognized as being part of Ukraine, even by Russia.

While the appearance of stability brings with it some comfort, it’s not enough to immediately start with a personal “buy program.” As has been the case the past month the first hour of trading hasn’t necessarily reflected where the rest of the day will go, especially if that first hour has been a move higher.

As may be appropriate at a time when we’re all looking to the East to see what kind of a pall may be cast over the markets, before I’m ready to dip into cash there’s a need to “trust, but verify.”

While there’s no real way to verify that the market means what it appears to be doing, there’s good reason to discount initial appearances for now.

With cash standing at about 36% I am, however, more optimistic than in the past few weeks and am willing to get down to a 20% level.

I doubt that will be the case, but I am looking for volatility to stop its upward movement and along with that there is the expectation that the market itself will equilibrate while events play themselves out.

At this point the script calls for the Russian Parliament to make some decision regarding the fate of Crimea, whether to annex it or have it as an autonomous region. Then comes the reaction from the United States and, perhaps Europe. With those reactions and counter-reactions may come trickle down to the markets, but I don’t expect that there will be anything of substance. In fact, there is reason to believe that last week’s weakness may already have been the result of selling by Russian nationals looking to remove money from the United States in advance of any potential freeze in the assets.

By the same token, this week’s FOMC isn’t likely to lead to anything of great substance either, although as we’ve seen in the past the way the market reacts doesn’t necessarily have to be tied to substance.

Those particular series of events in the making don’t have a particular chilling effect on me this week and I plan to use the level of attractiveness of premiums, especially in the outer week as a guide for this week’s purchases, as there are already a fair number of positions expiring this week as the March 2014 cycle comes to its conclusion.

If outer week premiums look promising and provide additional value then there is reason to look for longer time frames. Otherwise, there will be additional positions added to this week’s list of expiring names.

Hopefully this will be a better week than the last even though the overall portfolio outperformed the market. While it’s always nice to beat the competitor, it’s even better when you don’t come out of the match totally battered.

For those who believe that hope isn’t a strategy, it couldn’t hurt.

Daily Market Update – March 14, 2014 (Close)

The Week in Review is now posted and the Weekend Update will be posted by noon on Sunday.

Daily Market Update – March 14, 2014 (9:00 AM)

The Week in Review will be posted by 6 PM and the Weekend Update will be posted by noon on Sunday.

Today’s possible outcomes include:

Assignments: SBUX

Rollovers:  CHK, COH, KSS, MSFT

Expirations:  AIG, APC, C, FDO, IP, MOS, VZ, WFM

Trades, if any will be attempted to be made before 3:30 PM EDT, where possible.

Daily Market Update – March 13, 2014 (Close)

This was already shaping up like another shapeless day before the distasteful afternoon occured, but at least the morning brought us closer to the end of what has not been a terribly good week, principally due to some poorly timed new positions. They not only faltered with a teetering market, but like General Motors, brought their own problems to the table.

As the afternoon unfolded the week only got worse as it was really anyone’s guess as to what caused the sell-off, although Crimean rumors caught some blame, as did more moaning about the Chinese economy being worse than thought.

For the first time that I can recall, this has been a week that I’ve made more personal trades than recommended trades. While that includes a trade in Cypress Semiconductor, the other trades were all put sales, none of which were included as Trading Alerts. 

That adds to my characterization of this week.

The Cypress Semiconductor trade was was never sent as an alert because it appeared as if I had gotten the last person willing to buy contracts at $0.20, the price I thought necessary to make it a worthwhile trade. For those that occasionally check “market depth” to see what the outstanding offers are at various prices, at the time my trade was executed there was no shortage of bids at $0.20, but literally as my trade was filled and right before sending that alert I watched the market depth indicate that all of those $0.20 bids were gone and instead replaced by $0.10 bids or nothing at all, despite the fact that the share price was unchanged or even $0.01 higher.

A couple of days later that $0.20 still hasn’t come back even though shares have gotten more expensive.

Back to the puts.

One of my reasons for being more reluctant to recommend the sale of puts is that I know that not all brokerage firms, including Scottrade, allows the sale of cash covered puts.

I know that some subscribers use that brokerage and while I don’t understand the basis for not allowing that kind of trade, as the alternative, buying shares and selling calls isn’t always an equal alternative. A cash covered put is no more of a risky trade, neither to the investor nor to the brokerage than a similar buy/write trade. The money is simply held in escrow by the brokerage until it’s absolutely certain that it won’t be needed to purchase the underlying security because of assignment.

There must be a reason and it must be for someone’s protection, but I still don’t understand, particularly since that need to protect someone doesn’t appear to be very universally appreciated by other brokerages.

Additionally, I tend to sell puts following some bad news and a precipitous drop in share price. That immediately is a more risky situation as for many stocks that first big move is the beginning of a new momentum that may carry it further in the same direction.

Selling the puts is a statement of bullish sentiment in the belief that the move won’t be continued to the level of the selected option strike. What often makes that kind of trade appealing is that the premium is enhanced because of the initial large move and emotion takes over as the supply/demand curve is shifted because people believe that momentum will continue.

While adherents of the belief that big moves beget more big moves in the same direction or even continued and sustained movement in the same direction, there are plenty of examples where that’s just not the case.

Although many refer to dead cat bounces and dismiss them as being meaningless in the big picture in terms of changing direction, the reality is that what really matters is the time frame with which one looks to create a specific outcome.

While a dead cat bounce may not mean much for the prospects of a stock or even an entire market looking months forward it may certainly buy some time until expiration a few days later.

My own use of puts has evolved over the years. To some degree it does require a modification of the thought process as the concept isn’t always intuitive. After all, most of us think in terms of good happening when shares go higher.

With puts the good can occur with both lower and higher moves, with the latter being simply a question of degree.

Additionally, the common belief is that if you sell a put and shares fall below the strike price you will be assigned shares.

The reality is that if the market exists and at prices that are attractive enough you can roll over the puts in an effort to continue to generate option premium and buy time for your hoped for rebound in price.

However, the further reluctance in recommending put sales very often is that often the rollover, if necessary, involves some wide bid and ask spreads and really works best when the trader executes the trade as a spread, rather than individually executing the BTC and STO legs of the trade.

Deciding on the appropriate NC (Net Credit) may appear daunting when the spreads are wide, but is actually fairly simple and uses the following formula:

STO bid price minus BTC ask price plus average of BTC bid – ask difference plus STO bid – ask difference.

Or you could just follow the NC that I provide, to make it even more simple.

The reason that I put all of this down is that I am probably going to make more put sale Trading Alerts, where it appears appropriate in the future as market conditions may warrant that additional strategy to not be overlooked.

For those that can’t sell put contracts, contact me to see if there is an equivalent buy/write alternative.

Today, however, did point out how momentum can build on itself as the market just kept going lower once it made it to a triple digit less. The next 150 points lower were far easier than the first 100. Having chosen to start testing the market when it was down 100 may often make sense, whether doing so via buy/writes or the sale of puts.

But not today.