SplitMaster.com:: Newsletter
Home :: Strategies :: Membership :: Past Results
Author: Mike Celeste Editor: Tony Ponzo March Circulation: 7153

Stat Sheet Week Ending March 13th 2010

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow+59.0+0.6%+197.0+1.9%
S&P+12.0+1.0%+35.0+3.1%
NAS+42.0+1.8%+99.0+4.4%

In this Issue---
Options---
*******************************
This week I saw something occur two days in a row, and I had to keep looking at the numbers to make sure I wasn't reading them wrong. We were asked to look at a stock (DNDN) and its options. With the momentum being so strong in the general market, we thought it might be good timing to wait for a little pullback, especially since this stock has had a run up from something over $2 to it's current $36 in the last 52 weeks. We then followed the options, both the Calls and Puts, for a couple of days. The first day the stock dropped a bit, and the Call went up. The next day, Friday, the stock went up a bit and both the Puts and the Calls went up. Now, it is common knowledge that when a stock goes up, the Put goes down, and when the stock goes down, the Call goes down. Our conclusion is that the option players are expecting something to come out that is positive about the company. By the way, these were April options. Mighty strange, but it could be that someone knows something, or is willing to gamble that we will see good news. It will be interesting to see what direction this stock takes. If it has a big spike up at some point, then we have to conclude that maybe some of those Call buyers new something. Or maybe they have been following the stock and have read a lot of company news and suspect something is in the works that would make the stock shoot up in the near future. We'll see.

Here is an option strategy that some of you may want to look at. The strategy is a credit strangle. This is like a regular strangle only instead of buying the options you sell them to open. When you sell them to open you actually receive the proceeds in your account that day and pay for nothing but commissions. NOTE - you DO have to have the proper margin account however to be able to back up the play if someone wants to put the stock to you or call you out of the stock. This is not going to happen though as long as the stock stays within your strikes. And if it does go out of your strikes, it almost never happens until expiration date. But if the play goes against you, can always buy back either option or both to close the play out. The point is, traders make sure you fully understand the play before attempting it. Here is how it works:

Let's say you have been following a stock and know its character very well. Now let's say this particular stock is one that stays pretty tight within a certain range. MSFT is one such stock that usually trades in a pretty tight range. It never really goes any place fast. Right now it is trading between $30 on the high side and $27 on the low side. So the idea with MSFT for example would be to sell the 30 Call and sell the 27 Put which is a strangle. Or if you want to put a bigger buffer on it you could Sell the 31 Call and the 26 Put though there might not be much premium in them. Since March expiration comes this Friday, you would want to check out the Aprils. At any rate the idea is to sell the option to open and hold them into expiration. As long as the stock stays within the parameters of your strikes, both options will expire worthless and you get to keep the premium and you never invested a nickel. even the commission comes out of the premium you received for selling the options.

Momentum Plays---
************************************************
The volatility and the trading range in the market has become so small that it is hard to get a play that has enough momentum to pull off our profit targets. We always look for stocks that are on the move and have action going on. That's where we get our profits from. But lately, even stocks that have big gaps pre-trading in the morning, due to some story such as earnings or upgrades, seem to fizzle out after the opening bell rings. They just go into a small trading range and lose their momentum. POT is a great example. It had an upgrade and a target raise on its stock price. As a result the stock gapped up Friday nearly $8. We told members about this being a possible good straddle. However after the bell, the stock lost most of its action. It did barely move enough to get a .40 profit but only if traders entered the straddle at a good spot right after the bell. Other similar plays during the week resulted in stocks that did not make enough of a move after the bell and consequently we had a number of losses. We did have one straddle however on MA at the beginning of the week that made a very nice profit in minutes. But as the week continued the market and stocks seemed to get weaker and weaker in terms of volatility.

Lack of volatility goes against us in the Momentum Strategy so we will continue to watch the market and stay out of plays in this strategy until that volatility picks back up. You know the saying. Not trading during such times is more profitable than playing and losing. Hopefully the volatility will improve this week. We'll take it day by day.

Indicators---
****************************
We have had Indicator signals every day, and they pointed to a down move in the market, but with this momentum tide pushing to the upside, we passed on every one, but one. We thought we saw an entry point, but it did not hold for the Basic players, and a stop loss was reached. Aggressive players that averaged down and didn't use a stop, saw the Spy Put come back later in the day and depending on what price they averaged down at, saw a profit potential as a reward. It would have taken a great deal of fortitude to do it, and by the very end of the day, the Put dropped again---but the profit was there.

The Economy, The Markets & Commentary---
*************************************************
This week we saw the 3 major index levels go pretty solidly into the positive for the year. We closed the week with the Nasdaq not dropping more than I point for 11 straight days. Now if that isn't steady up momentum, I don't know what is. What is ahead for us? It's a tough call, and the markets did struggle a bit on Friday, but there is no definite indication that we have switched to a downward direction. The VIX, or Volatility Index remains down at pretty close to a support level and when the VIX is down, the indication is that the market has room to go up. When it is very high, we look for a downward correction. On the other hand, having so much up lately, there can be a good point made that maybe we are due for a breather---but---we are not going to bet against that upward pressure.

The economic news was pretty solidly on the positive side, and retail sales gave us another surprise. Now, I can understand why unemployment figures wouldn't be too affected by the winter storms that went thru, but one would expect that retail sales would be adversely affected. That was not the case, since the expectations were for a decline, but the results showed retail gains. That seems to be very good news.

Foreclosures were up, but were up the smallest amount in quite a while, so that is another positive. Where are all these people getting the money to spend at retail? Whatever, if there is no major revision, it is pretty hard to fight the facts.

Oil is over $80/barrel and that is a warning that higher gasoline prices can eat into spending on other essentials. The refiners are losing money, according to them, by having to pay these high prices, when there isn't the gasoline demand. Speculators continue to control this market and it is a real shame, when it can so easily be corrected by raising the margin to at least the same as for stocks, 50%. Some refiners have gone so far as to curtail refining or put up refineries for sale.

Natural gas prices aren't skyrocketing, and with good reason. We are awash in natural gas, and it should be utilized far more than it has been. The lobbyists for this industry are not doing a good job, or else the administration is purposely avoiding the adaptation of this fuel source. Here in the Los Angeles area, the Department of Water and Power is going to propose an additional 2.7 cent/kilowatt hour charge in order to cover the cost of using alternative fuels. What a ripoff !!! Here we have an immense supply of natural gas and we are being forced to use alternate sources of energy that cost far more than natural gas. Industry and buses have switched to natural gas for vehicles and they are saving a bundle. We the people, tho, have to pay all this extra money and I'm predicting it will end up going by the wayside, for the most part, when the most efficient and practical source is finally what we use. When was the last time you heard anything more about ethanol? That is one of those alternate energies that we subsidize and it costs us an arm and a leg. No, it is a slow process, but we will eventually see the light and start using our natural gas---but only after billions of dollars have been wasted.

The President is pushing for a Health Care vote, and he wants a yes or no vote---so he is apparently willing to sink or swim with his proposal. Nancy Pelosi said that the people will just have to see what is in the bill AFTER it is passed, if it does get passed. Where is all the transparency that we were promised? It's unbelievable that anyone can make that statement. When something this big and something that will affect us for generations to come is proposed, doesn't it make sense to agree on a proposal, but before voting, let the people see it, and let the people be given time to understand what is in there, and time to let our representatives know how we stand? At this point, in all honesty, I don't think there is anything to be for or against, as we don't have a concrete proposal ready from both the House and Senate. They each have their own thoughts, and nothing is firm, anyway. The health insurance company did the President a huge favor by announcing price increases for health insurance of up to 39%, with the ability to raise them even more anytime they want. That's walking right into the opposition's hands---all the President has to say is "See, I told you this is what would happen." This is an ongoing and heated topic, and will only get hotter as we get close to a vote.

There is something that has taken a back seat lately, what with all the good economic news that has come out. No one seems to be mentioning the cost of the recovery programs and how long it will take (if ever) before these costs can be paid back. I guess it is sort of fix the problems first and then later worry about how much it costs and how to pay for them. Of course, the positive reports are small in size, but most "experts" seem to think that if we have seen the bottom and if we are now seeing some--any--signs of recovery, that is good news.

One comment about the problem Toyota is having in the US with the acceleration of some of their models. The company denies that it is electrical, and this week, here in California, we had another runaway Toyota car on the freeway. The Highway Patrol talked the driver into braking the floor pedal and yanking on the emergency brake at the same time. It worked as it slowed the vehicle down from 94 miles an hour to 55 which allowed him then to put the car in neutral and safely pull over. But I'll bet that driver won't be buying a Toyota anytime soon. Here is the part that really bothers me----More than one TV commentator has brought up the number of deaths caused by this "problem" and said that the number is so small compared to other things that maybe we are putting too much emphasis on the problem. Yes, I heard it with my own ears. That is sort of like going back to the problem Ford had. They calculated how many deaths would probably occur and how much it would cost the company to settle those deaths, versus the cost of fixing the problem. They decided it was cheaper to pay the settlements. Boy, I never thought that theory would be supported again, and especially not in the public limelight, by so called intelligent people.

Maybe if it were their family member that was killed, they would think differently. Why care about any safety threat, etc., ?--Let's apply that theory to everything. How cold hearted can these people be?

Stay tuned.............these are interesting times..................................

Today's Thought---
*****************
Whether you think you can or whether you think you can't, you're right..........Henry Ford


Mike

Published by Splitmaster.com, LLC.
P.O. Box 960 San Dimas CA 91773
Copyright © 2006 All Rights Reserved.
Privacy Policy

To unsubscribe from our newsletter or edit your delivery address go to our Newsletter Page. To edit membership information login to the Splitmaster.com members page. For inquiries regarding this or any other Splitmaster.com Information Delivery System publication contact us at staff@splitmaster.com.