call, Call, CALL!! Options trading 101

Wow!  I just learned how to invest in OPTIONS trading with Robinhood and am having some success.  A few observations:

1) Spread the wealth around: When buying an option, make sure you give YOUR SENTIMENT/analysis enough time to take effect!  I found that with my first few options picks that my sentiment for the change in stock price was over ambitious. The longer the time to expiration the better chance the option has of being closer to/or in the money! Take one small contract as far out as you can, and move in date wise on your contracts as you gain more confidence in the stock movement! Don't put all of your eggs in one basket.

2) Buying PUTS can be a bit more tricky: One important aspect of buying a PUT option hopefully headed south is that the company may be a candidate for take over or bankruptcy which may actually make the stock price go up! Also, in volatile market conditions, it's hard to gauge the actual health of a company that may have numerous underlying issues and is in constant transition to stay afloat. The management of the company may also be taking extreme measures (not always best practices) to make the company look better than it actually is, so gauging an accurate valuation may be harder to do. I am currently only buying puts on older, slower moving, larger companies that have less volatility.  Still can be risky.  More motivated buying calls of healthy, focused companies most interested in providing value to shareholders. 

3) Liquidity: Make sure there is enough volume and OPEN INTEREST before buying a CALL or PUT option. You can check out your options at BARCHART. Sometimes, if the company is big and the option you are buying is way out there is the future, it is still ok to buy because you may be ahead of the game and will get a lower price than later entrants. Be careful, because you DO NOT want to get to expiration and NOT have a buyer for the contract!

4) The Greeks: Delta, Gamma, Theta, Vega, Rho:  Still wrapping my head around the Greeks. The way I see/use this data is that IN GENERAL: Delta/Gamma address the AMOUNT of price change towards expiration, whereas, Theta/Vega address the PASSAGE OF TIME and VOLATILITY towards expiration. Rho has to do with how interest rates effect the option price. Understanding these variables helps me to gauge when I should sell a contract leading up to expiration.  Here is an article that discusses the Greeks more.  

EXAMPLE: Think of looking through a rifle telescope at a moving target. As the target (Delta/Gamma) is farther away, moving left to right in the scope (the straighter the line better/less volatility!), the image is smaller (risk/reward) and appears to be passing through at a slower pace (time passage/volatility - Theta/Vega) . If the target (Delta/Gamma) is closer (risk/reward), it will appear larger and moving at a faster pace (time passage/volatility - Theta/Vega). This is how I utilize the Greeks. A metaphor for RHO (the fifth major Greek)(variable/fluctuating interest rates) might be how clean the scope is, affecting how well you can zero in on the target!

Good luck out there! 

OK to PARK. Cash is an asset!

Yesterday money flew out of the red hot tech sector and into more post Covid S and P 500's and Russell 2000 small cap bets. Also, bond yields are back up a bit which may have created a bit more confidence in certain sectors. These changes were most likely affected by rising investor confidence due to the economy opening up and also institutionally triggered buys. 

I look to buy more calls and discounted shares for my long term portfolio in this kind of market. Also, cash is an asset! It's ok to park money and wait this out a bit longer to see what happens in the near term.

I came across this article yesterday on Seeking Alpha by Daniel Schönberger about the stock market back in the Great Depression starting in 1929. Notice the chart after the first initial drop in 1929. It is followed by a short term recovery (similar to now) before falling into a downward spiral until the summer of 1932 and longer. Obviously, these are different times. There is exponentially more liquidity in our markets and more government safeguards to thwart long term free falls. However, one thing that cannot be created by these safeguards is CONSUMER DEMAND.

CONSUMER DEMAND is the currently big unknown and will undoubtedly cause the failure of many businesses in the near term.  

Resistance in stock sentiment...goes both ways, up and down!

FULL DISCLOSURE: My dream is to be more like Warren Buffett and Charlie Munger from an investment perspective. Low and slow, steady and/or near zero growth in the short term until eternity, I am just not there yet!

Hence, I discuss short/midterm stock strategies to help my stock positions/decisions/choices evolve. Enter the term "resistance."

A great aspect of this volatile market is that it's like learning to sail a boat in rough seas. One has to adapt, adjust, and learn rather quickly or get fed to the dogs.  The idea of resistance in regard to a stocks movement up or down helps me to stay on course. 

TRUE: one should think of a stock buy as a marriage with committing to a company. Similarly, shorting is committing to a divorce of a company from its' shareholders. That's why I would bet that Warren and Charlie take into account the idea of resistance prior to entering a long position. 

The idea of resistance for a stock up or down, depends more on ones sentiment that your thesis about the future of a company is accurate. A simple way to gauge resistance is tracking if a bullish position stays steady in down markets. Similarly, do your short bets continue to head down over time in down markets?  Does your sentiment towards a company/stock reflect the movement of the stock in less favorable market conditions?  This will help you wiggle in or out of a position for the long term.

I typically do my valuations based on overall financials and time.  How has a company held up or 5 years, 10 years, prior to Trump's tax cuts, things like that. Then, when I commit to a companies overall good or bad health, I will estimate the bottom and high limits in "real time."  When I estimate a bottom or top number for a stock, I will generally discount this number by 3% - 7% or even more depending on the type stock in question, then stake out my entry/exit from there. I generally use +11/-11% as a basis to consider entering a position or exiting. (Stocks and Options). Hence the name of this blog 7net11.com.

IN CONCLUSION: The idea of resistance, and the variables one feels comfortable using to keep the ship on course, is a great tool for positive gains, in the short and long term! 

Negative Interest Rates - Maybe not such a bad idea in the short term

I have been listening to various analysis regarding negative interest rates on the treasury bond offerings. Shooting from the hip here, maybe it's not such a bad thing.  It appears that corporations and institutional investors have always utilized these bonds as safe havens for low risk protection of cash assets. These bonds have also provided a way for companies to offset payroll and overhead costs. So...in the current situation, if these negative rates occur, here is my take. 

Negative interest rates most likely will:

1) push more cash into the stock market with yields much better than 2%! This makes the stock market look very desirable and will keep the markets liquid and flush with cash.

2) Remember those corporate tax cuts? Perhaps this is an indirect way for the gov't can claw back some of those breaks by charging basically additional interest rates for the big players who wish to PARK their money behind the safe haven of the US Gov't.

Thinking FUTURE crazy thoughts:  Will the Fed start charging higher negative rates for foreign investment in the US? This could greatly slow incoming investment cash from all over the world, but seems in sync with this FED's recent sentiments.  

At the end of the day, issuing negative interest rates seems like a bad move because it could inhibit investment in the US, create more restrictions/fewer safe havens, and perhaps spark inflation, the exact opposite of what these negative rates are supposed to stave off. 

Coupled with bank issues, est: 1 trillion in unpaid mortgages last month and overall bankruptcies on the horizon, this is a delicate balancing act that feels a bit like the FED is waiting on the river card to win the hand.

Thinking of everything as BUYING a CALL or PUT Option...

Beginning investors: Of course, the GOAL long term is to be in steady consistent investments that gradually increase over time. Minimize RISK. Embrace The Oracle of Omaha principle. "Buy companies, not stocks."

Alternatively, for those risk takers who wish to nudge/accelerate their short term results, especially in volatile markets, I heard a talk show personality say the other day that he took a small position in a high priced stock and considered it like an option CALL. I liked that analogy, especially in a situation where you are buying a few shares of AAPL, AMZN, FB or other stock that one has to pay more than a few dollars for. From there, the buying of a few shares will help you to focus and learn more about the company, track the stocks movement, and at the same time, give you a better understanding of either building/buying into a longer position, or selling to take shorter term profits and move on to another opportunity.

To minimize risk when first starting out, it's a good idea to cautiously diversify and not overly commit to any one stock/idea. When you find something that works, commit more on a graduating basis. Regarding options themselves, I generally invest in options with a one year expiration by first buying one or two contracts, then based on a result over time, I may buy more contracts, similar to expiration and price, or sell.

Being able to balance risk and reward is important when starting out as a new investor. Put the gambler in you on the sidelines and work to find opportunities that are relatively safe. Slowly build momentum, and as you gain confidence, take more incremental risks.

Freakin Phony Stock Market 5/18/20

I started back in April with a strong Covid play on both stocks and options. I have cleared a 10% return with very conservative moves.  My mantra during this stretch since early April has been, "Vaccines are great, but folks need hand sanitizer now." Also, "what do people do with so much time on their hands while stuck at home?" Watching movies and playing video games comes to mind. Hint, hint.

On the bearish, put side of things, I have stuck with the basic mantra, "If there are properties, rent, lots of inventory, outdoor aspects to a business, run for the hills and short that S_ _ _ !"

This philosophy has worked reasonably well in the short term, while holding back on what look like bargains in the SP 500. Airlines comes to mind, yet I have not taken the bait....

However, today was really weird. The Fed comes out with statements basically saying that they have unlimited resources and the economy will forever be propped up. This is not cause for relief in my estimation. True, the US economy stands as one of the strongest if not the strongest on earth, but we are still limited in the sense that if consequences of this pandemic hang on for the long term, we might never be the same again. Once something stops or severely slows down, well, unless it rains (alot) again, there isn't going to be much fresh water to go around!

As a result, the DOW was up almost 1000 points today. Coupled with positive vaccination prospects from MODERNA (we have seen/heard this before from many companies) the DOW went into overdrive. I didn't believe the hype for a minute.

It seems that investors are: 1) Either stuck with old habits and/or 2) Completely jaded by the past four years.

The fact that many stocks bounced back over 50% since pre-Covid, tells me that it is already  overpriced in general. Also, many P/E ratios are absolutely off the charts. Time to keep some cash, pick a choose wisely, and short that SH_ _!

Hello again...PreMarket Prep Podcast anyone?

Check out  Premarket Prep podcast sponsored by Benzinga. Great podcast and community based info sharing.  

One can trade options for free using Robinhood, user friendly, provides basic how to information.  In addition, barchart goes deeper into the data to help you make your bets. The main things I focus on regarding options trading are Price, Volume, Open Interest, and Liquidity. I started in options to mainly find a simple short strategy, so buying puts solved this problem. I learned that making short term options bets are a very risky proposition, especially in volatile markets. One really has to understand the basics and take baby steps to get a good working strategy going.  

Understanding the GREEKS very important as options head towards expiration.  More on that later. 

Investopedia.com  great source of information.  Stay Tuned!