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| Author: Mike Celeste | | Editor: Tony Ponzo | | August Circulation: 8266 |
Stat Sheet Week Ending August 26th 2006
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| Changes | Weekly | Year to Date |
| Indexes | Points | Percent | Points | Percent |
| Dow | -97.0 | -0.8% | +566.0 | +5.3% |
| S&P | -7.0 | -0.5% | +47.0 | +3.8% |
| NAS | -24.0 | -1.1% | -65.0 | -2.9% |
| Splitmaster Strategies |
| Basic | ............... | +13.2% |
| Big Dipper | .............. | +25.8% |
| Option Calls | .............. | +105.0% |
| Option Puts | .............. | +33.0% |
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Highlight of this past week: --RAI--closed out with a very nice 49% gain on the CALL. (A good gain on the stock, too.)
In this Issue---
SplitMaster Basic System---
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Even tho it is not quite the end of the month, we don't have any more splitters that will be selling out during August, so our monthly total will be as it now stands. We ended up the Basic showing a net gain of 2.33%, which tables out to be about a 28% annual return. In that respect, it wasn't a bad month. We are now showing a net gain of 13.2% for the year to date, far ahead of the major indexes--with Nas still at a loss for the year. We have only one splitter left to buy in August, and it will show a sell date of September. The announcements have been slow at this time of year, sort of like the volume. Everyone seems to be gone on summer vacation.
Big Dipper System---
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There is only one stock even in consideration for the Big Dipper, and it isn't close to the target buy price, so all remains very quiet on this front.
Options---
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It was good to see both the CALLs and PUTs return to the plus side this month. We had a very unusual stretch of a losing quarter--3 straight down months for the CALLs. This month we netted a plus 18% in the CALLs and a plus 32% in the PUTs. We like to see winners in the CALLs, but we aren't satisfied with just showing a plus, we want a good sized plus figure, and we hope that we have made some variations to our criteria so the net results return to higher levels. One of the factors that worked out well for us was going a bit more conservative on our buy prices for the options. It worked out well, with only one, RAI, showing a CALL value higher than the price we projected as a buy price. We missed it, but the net results showed that the others we missed would have shown net losses, even tho the stocks were net winners. In other words, the profit on the stocks were low enough that they would not have made up the time value that was in the CALL for each of those stocks. If we had bought at the CALL market prices, we would have shown net losses, due to that time value. So it is important to not buy options that are over priced as that can make all the difference in whether or not a profit is made when the stock has a marginal move up.
We also want to again point out that we are continuing to look for a workable system to buy PUTs long on some splitters. The area that we are concentrating on now is the longer time frame after the split is finalized. If we see something consistent over a period of time, with enough samples, we will let you know.
More on the new Spread testing ---
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OK. Let's get a little more into what is going on with our Spread testing. For now, we will call it the Two-Way Spread. We may give it a more technically correct name later but for now it is called Two-Way because as we mentioned before, this spread is designed to make profit whether the underlying stock goes up or down. It doesn't matter as long as it moves in some direction. So the chances of making profit are greatly enhanced. Some brokers will call this a Straddle but in some cases we will have an uneven number of contracts between the CALLs and the PUTs giving it some difference from a traditional Straddle.
The first criteria is to find stocks that have a chance of making a good move on a particular day. For that we look to stocks that are announcing their earnings. Since there are calendars that give out earnings dates for almost every publicly traded stock, this part is easy. Then, we look at stocks that are announcing and that have split recently since we are a company that deals in splits, and since many companies that have recently split their stock tend to be more volatile in price movement. Still, there is no guarantee the earnings announcement will move the stock. So we have to do a lot of research on the historical and recent volatility of any stock we feel may qualify. Luckily, we use tools that can help us make this determination rather fast. Otherwise the play would be over before we could determine what to play.
Once we have picked a stock we think has a chance of making a big move after it announces, we start testing the combination of CALLs and PUTs to see if we can project a profit. Our test is to make a small profit or a break even on a $1 move either way. If we can do that, then we will make a nice profit on a $2 move and it really starts to get exciting if it can move $3 or more. Can you lose on this play? Yes. If the stock moves less than a $1 there will most likely be a loss but so far, we have found that the loss is minimized because, it is a short play. If the stock does not move, we are out before the options have a chance to start fading. By short we mean, typically we will enter the play within the last hour before the market closes on the day before a stock makes its announcement. Then we are usually out within 45 minutes after the announcement. Almost always, if the announcement is going to make the stock move, it does it immediately or not at all.
You can also lose if the options entered were overpriced or not spread properly or if the options do not produce as they should for whatever reason beyond traders control - such as a stingy marekt maker. This is why a lot of testing has to be done before we enter the play. Here again, we use pricing models which are option prediction tools that will give fairly accurate predictions to the various "what if" scenarios we pose to it. Things like price of the stock as related to the CALL and PUT strike prices come into play, historical time premium as oppossed to current time premium (if the option is over-priced) come into play. Also coming into play is the expiration month and option volumes. Is one month better than the other, and so on. And in some cases, as mentioned above, it works out best when one option has slightly more contracts traded than the other. FORTUNATELY, members will not have to worry about all this work and decision making as it will be done by us before the enter signal will be delivered.
There will be some decision making by members however. We have not figured out yet exactly how to deliver the signals but it will be something along the lines of an email alert that gives the spread play (CALL/PUT and strike on each) and gives a stated combined amount between the CALL and PUT to enter the play. It will also include some kind of variance in pricing to give some leeway in making the play. (Note: thanks to member Randy for his suggestions) It will then leave the exit up to the member's discretion but the exit time as mentioned above, will be within a 45 minute window of the announcement. That means if it was announced after hours the night before, you would want to exit within 45 minutes of the market open. Unfortunately, this means the play would not be an auto trading candidate.
Now for some samples. Announcement season is slowing down so there were not as many plays this week but below are the three recent plays we tested.
1. On 8/21/06 we entered a play on CLZR when the stock was at 14.06. We purchased 5 contracts of the Sept 12.50 Sept. CALLs and 5 contracts of the Sept. 15 PUTs for a combined cost of $1,975. The stock announced and on the morning of 8/22/06 it moved down $2.66 and we sold around 7:10 am (PST) for a combined total of $2,375 making a $400 profit.
2. On 8/21/06 we entered a play on TOL when the stock was at 24.77. We purchased 5 contracts of the Sept 25 CALLs and 5 contracts of the Sept. 25 PUTs for a combined cost of $1,300. The stock announced and on the morning of 8/22/06 it unfortunately only moved up $.38 in the morning and we sold around 7:00 am (PST) for a combined total of $1,090 for a $210 loss.
3. On 8/23/06 we entered a play on CHS when the stock was at 24.05 We purchased 5 contracts of the Sept 22.50 CALLs and 6 contracts of the Sept. 25 PUTs for a combined cost of $2,315. The stock announced and on the morning of 8/24/06 it made a nice move down of $5.28 and in the morning and we sold around 7:00 am (PST) for a combined total of $3,625 and for a nice one day profit of $1,310. Just think if you had double the contracts.
OK, we could go on but this is enough for now. We have more work to do but we may be fairly close to performing some beta testing with a few members. If that is a success it would then be a go, but first ----
We would like to hear from those members that would be interested in this play. We need to know if we have enough interest out there to continue with this project.
Chart Indicator---
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The major markets were all down this past week, after the great week before. The nice thing to see was that the CI still remained positive. We have also started posting the date the CI changes, and team members can see it on the Big Dipper page, at the top, along with the other stats. Keep track of it and you can match your other investments to those date changes. We think it will be a help to you to see the results using this key factor.
Stock Split Comments---
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Summer volume is light and we expected it to show a similar tracking in the number of split announcements. So far, it has done just as expected---not much. While we are looking forward to September splits that have sell dates in October, we realize the number won't be very high. Also, we will return to a longer run for holding the splitters, between buy and sell dates. The 4th quarter is something we are eagerly looking forward to. Unfortunately, the 3rd quarter started earlier this year--running downhill from about the middle of May, with some rallies and fallbacks. All we can say is that we are planning on committing a far larger amount of our own trading pool for splitters that have sell dates in the 4th quarter.
The Economy---
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It appeared to us that this week we saw more net negative news about the economy. The "experts" are finally starting to question the "soft landing" theory in real estate. They have to be hit over the head, tho, to see the lights of reason. There were 2 reports out this week--one on home resales and one on new home sales. Resales saw the lowest numbers in 9 years. New homes were down, too, but they play little games by saying it dropped more than expected, showing a decline of 4.9%. That really isn't too bad, but they later on say that the number was compared to the month before, and if you look at the same month last year, the decline was over 20%. The added kicker was that inventory on both resale and new were at absolute record high levels. So much, at least in the new area, for only taking orders for houses that are sold. We mentioned that before, but it is a good way to catch these people and expose them for saying things that aren't quite true. Yes, some builders do build only based on new sales contracts, but obviously many do not. Another factor there is that agreements to buy can be cancelled--and they are being cancelled. The stocks of the major builders edged up this past week, after taking poundings, but we think that the worst is not over in this area. If you are a potential buyer, you might want to join the growing list of people that are waiting to see how much of a better deal they can get.
Interest rates are coming down a bit for mortgages. They are now back to the levels last seen in April. Again, the "experts" don't seem to know which side of their mouth they are talking about. One report we heard stated that rising mortgage rates were another reason that housing sales had slowed. Sorry, but the figures show that rates are going down--and sales are still going down, too. Sure, there are tons of people that would like to buy a house, but the prices are just too much above their ability to pay. Way above their ability to pay.
We want to be careful to point out that not all sectors of the real estate market are equally negative. With mortgage rates going down, and with more mortgages coming due for adjustment, the refinancing of mortgages is definitely not a dead market.
Can negative be a positive? We think so. How? OK, let's take a look. Stock prices have dropped, we all know that. However, did you know that there has been a very substantial increase over last year in the area of stock buybacks by companies? Yes, indeed--a very marked increase. We feel that more and more companies just feel that all the cash they have been accumulating can best be spent by buying up their stock at bargain prices.
Another negative that could turn to positive. Stock split announcements. They are few and far between lately. It can be the summer doldrums, and it can also be that companies don't want to split their stocks at these price levels. Another point is that if earnings decline, as is becoming a belief, the companies that do announce a stock split will be in a smaller group, and therefore have less competition when related to those people that like to buy stock splits. With lesser competition, the remaining splitters can show higher profits. It remains to be seen as to whether this will happen, but we think it is pretty logical, and we pride ourselves on doing the most research in the stock split area. We don't know what every other company does related to splits, but no one that we know of does the in-depth analysis that we do. Results are the name of the game, and we want better results, so we are working harder. When comparing us to other services, we just want to be compared apples to apples---showing every single play with every single buy date and price, and at prices that can be checked out. That's why we use opening prices---not the high of the day for sales and the low of the day for purchasing. That's how the computer gets accurate numbers and it would be impossible to take prices that go across during the market day.
Keep watching for those other negatives that turn positive---what is a tragedy for some is a bonanza for others. Hey, just for kicks, why don't you write in to us and tell us about the examples you see. There are lots of them, and it would be interesting to get your samples. How about it? It can be simple stuff, too--like extremely hot weather is a negative for our electric bills, but look at what is happening to the icemaking companies, along with the ice cream makers. Out here in CA we see production of ice cream going 24 hours, and still not keeping up with demand---the heat returned to 109 this week in the LA area. Every ice cream store I see is filled with customers---and those cones are not cheap, either. I've previously mentioned the historic floods that hit my old hometown area in upstate NY---and how all the construction companies are working overtime. Let us know what you come up with.
Today's Thought---
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Everyone needs to be valued. Everyone has the potential to give something back......Princess Diana
Mike
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