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Author: Mike Celeste Editor: Tony Ponzo November Circulation:

Stat Sheet Week Ending November 14th 2009

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+270.0+2.5%+1,494.0+17.0%
S&P+25.0+2.3%+191.0+21.0%
NAS+72.0+3.4%+591.0+37.5%

Auto Trading Update: It is not official yet but it looks like there is a very good chance that auto trading for the Momentum Strategy and the Indicators will be officially announced sometime this coming week. As soon as we get the official word, we will send out a notice and those who have been waiting can get started. We are excited!!

Highlight of this past week: The Momentum Strategy just keeps on giving profits this week with 9 new plays that catapults the strategy into a 507% profit for the year. Learn More

In this Issue---
Options---
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For the last 2 weeks we have been talking about writing Puts on one of the splitters, EBIX. There was already one trade that fit the bill and that was 2 weeks ago. Last week we brought it up again, as it seemed the stock was at the low point and could move forward. We wrote that it was up 1.28 and the low was 52.37. We said we'd see if it would continue up on Monday. Well, Monday came and the stock went to 57.88, which is about 5 1/2 points above the Friday low. We bought the Put back that we wrote and made a 58% profit. If we had waited a bit, the profit would have been over 80%, but 58% is nothing to sneeze at. The time to write Puts is when the stock has dropped to an attractive price. That way the chances of it dropping lower are less than if the stock was running around its high. When it is at its high, and if you own the stock and want some extra "dividend" you would write a Call. You should write it at a strike price that you are comfortable with if it is called away from you after that. There is lots to be said about this strategy, with these kinds of benefits. By the way, EBIX has dropped back to about 54.00, so there might be another opportunity if the market drops next week and takes this stock down with it. If the stock is heading up on Monday we may sell the Nov. 50 Put if there is any premium left. It was going for about .35 bid to .60 ask. If we can still sell it for about .40 we would put it in right away to buy it back at .10 making a .30 profit. Since this is expiration week coming up, that premium should drop fast, especially if the stock is going up. So it may be a one or two day play if all those conditions exist. We'll see on Monday but remember, these are just ideas that we publish and anyone thinking about making such trades should only do so if they have a full understanding of the nature of options and the risks involved. And consider consulting your financial advisor first.

Momentum Plays-- A Great Week!--
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This was a week that was full of exciting action in the strategy. We had 9 plays and although four of those nine plays were small losses, the dollar in profits on the five winners far exceeded the losses bringing the strategy up to a 507.87% profit for the year. Here are the plays for the week.

FLR: Nov. 45 Put -------38.89% profit
PCLN: Nov. 210 Call ----25.00% profit
SPY: Nov. 109 Put -----10.24% loss
GMCR: Nov. 70 Put ------ 9..09% profit (but on a bigger dollar amount)
SPY: Nov. 100 Put ----- 9.45% loss
SPY: Nov. 100 Put ---- 24.30% profit
SPY: Nov. 100 Put ----- 4.59% profit
JWN: Nov. 34 Put -----15.38% loss SPY: Nov. 100 Put -----11.96% loss

There you have it and keep in mind most of these plays are in and out in less than 30 minutes and sometimes less than 5 minutes. Where else are you going to get those kinds of returns? Learn More

There is a technical trading issue that a member brought up concerning some of the plays in this strategy. I'd like to talk about it but will do so below in the Feedback section and you'll see why.

Indicators---
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The strength of the markets did us in this week, for the most part. We had 3 plays and won 1 (aggressive play) and lost on 2. We stayed away from another potential Indicator play and it saved us, so overall we didn't do too badly.

Feedback---
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There was an email sent by member Barney that was of particular interest to us this week. Summing up Barney's email he stated that when we trade an option that has a larger than usual bid/ask spread, the stop becomes vulnerable to being prematurely executed. This is an excellent point! For example, we went into an earnings play this week - GMCR. When we entered the option it was trading with a wide bid/ask spread of about 3.10 to 3.40. We would rather see it be only a .10 spread but this play looked very promising. We got executed at 3.30. The stock did its usual thing of floundering around going up a little and going down a little but for the most part it did as expected. However, we posted a stop of 3.00 and at one point the option was trading with a bid of 3.00 and an ask of 3.40. The spread widened for some reason and we became a bit nervous and posted a change in the stop to 2.95. At the price the stock itself was trading, there is no way the option should have had a bid of 3.00 but it did. Luckily that bid was only there for a second and raised back to 3.10 and then higher but the point is, if the market maker saw traders with a stop of 3.00 they just might take it. Fortunately stops are not triggered until a trade has been made. So since a trade for 3.00 at that time was not made, no stops showed up to the market maker and everyone was safe. That plus lowering the stop to 2.95 kept us in the trade. How did that play turn out? Not too long after, the stock shot in our expected direction and we got our profit target and even more so it all ended on a happy note. But here is what we wrote to Barney about the situation:

First, when an option has a wide bid/ask spread, we usually just pass on the play. But when the trade is too compelling to pass up, if the bid/ask is wide but not into ridiculous territory we'll go in. But instead of actually ordering a stop at 3.00 in this case, we'll set up a ticket to sell and get it read to go but not submit it. If we see the stock is most like going to be executed at the stop target or lower, we make a quick judgment put the price in and submit it and that works nicely. But if it goes to our stop price on the bid with a high ask price and does not look to be in danger of going more in the wrong direction, we do not pull the trigger. In many cases like in GMCR, it goes back in the right direction and when our profit target is getting close we submit that sell order. When the bid/ask is normal we will often pre-order the stop but sometimes even on those plays we'll wait and watch a bit before submitting the order. At any rate, I hope this discussion was helpful as that is what our goal is to do in our weekly newsletters ---- to be informative and helpful.

The Economy, The Markets & Commentary---
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The markets decided that negative news was going to be outweighed by any positive outlook and as a result the Dow was up 4 of the 5 days, setting new recovery highs in the process for the S+P 500. We even survived a Friday the 13th, with a nice gain. The Dow was up 247 points for the week, with the other indices doing well, too. See the weekly and yearly stats above. It seems that investors are looking only at the short term and not much at the long term. By that I mean that the government continues to be the spark in preventing further declines in the economy.

Fannie Mae is now going to aid homeowners in trouble by allowing them to lease the home back for a year at market rates. There are qualifications to be met, but again, it is a step to manage properties from adding to the foreclosure sale list. Market lease rates won't be easily met, and we shall see if this helps the situation.

Still in the housing sector, we see that the FHA is now below the legal limit for reserves, so that is another problem that has to be overcome. The FHA insures, it doesn't make loans, so if the reserves run out, it would be a first for the FHA since its creation in 1934. They can hike its insurance premiums or increase required down payments, both of which would not be a positive factor.

It was reported that the first time buyers credit accounted for 47% of total sales in resale housing. That program was extended and expanded, with previous buyers eligible for a $6,500 credit. Again, another band-aid on a sore. We know what will happen if the program is stopped. Also, it is unfortunate that the upper priced homes have very few first time buyers, and that area has not done as well as the low priced homes. Of course, the higher priced homes didn't drop as much as the lower ones, either. They did drop, but not as much.

Home prices nationwide continued to drop from last year's prices, but new home builders were encouraged by sales activity. Loan applications, rose but that was a bit misleading. While applications were up, most did not come from home buyers but from homeowners refinancing their existing homes.

Retail sales were pretty good, but again it was a mixed bag about what to expect for Christmas sales. Most expect figures above last Christmas, but nothing to get excited about.

A side note--The Clunker Program had an interesting feature in the details. It seems the most purchased vehicles were trucks and they were trucks that barely got better mileage than the older ones they replaced. One of the main reasons for the program was to replace vehicles with poor mileage with those that got substantially better mileage. So, that theory didn't seem to work out.

At some point down the road there will be an accounting of all the government stimulus--and that will start to be accountable when the government programs come to a halt. It would really be something if, by that time, we had something to take its place that would keep the economy growing.

Employment will have to be the main item to be repaired and this week President Obama said he is giving that a very high priority. People are still being laid off and announcements are still coming from companies stating more layoffs are in the works. It appears the unemployment rate is expected to go higher. In the meantime, there were Congressional extensions to provide aid to the unemployed.

But, for now, enjoy the market run to the upside. Up, up and away--where she stops, nobody knows.

Stay tuned, these are interesting times.

Today's Thought---
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A clear conscience is usually the sign of a bad memory.

Mike

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