Fear/panic levels suggest bottom may be near
Fear and panic further escalated last week – with some sentiment indicators reaching multi-year bearish extremes – increasing the odds that the market is nearing a significant bottom (in time, if not necessarily in price). While the sentiment ingredients for such a bottom are in place, the market trend picture itself remains negative (or at best mixed short term), still leaving open both of the scenarios mentioned in last week’s post.
New positions
New positions this week include short March 30 puts against Kraft (KFT), and short April 55 and 35 puts against Weyerhaeuser (WY) and UnitedHealth Group (UNH), respectively.
Watchlists
There were no real “upside strength” candidates of interest this week.
“Oversold” candidates of interest include Ameren (AEE), Ashland (ASH), Baldor Electric (BEZ), Cardinal Health (CAH), Carnival Corp. (CCL), China Petroleum & Chemical Corp. (SNP), Ecolab (ECL), Granite Construction (GVA), Honda Motor (HMC), Huaneng Power (HNP), J.C. Penney (JCP), and NiSource (NI).
Dear Sir,
Thank you for your continued posts..
Question on your recent Short PUT sale on WY. Wondering about your thinking on double sale (higher and lower ) ? (One for cash and other for discount and eventual dividend via owning ?
best regards,
FS
Hi,
Sorry for the confusion – I probably could have been clearer. What I meant to say was that I sold April 55-strike puts against WY and April 35-strike puts against UNH.
I hope this answers your question.
Thank you for reply. Make sense now.
Have thought occasionally of building a DIV paying portfolio, by seling best return PUTselling options, put the stock etc..
but ATM seem to always be the best unless I go why out and that seems to nick the overall thinking…
Thanks again for your continue posts. Whatch them closelly while I continue to papertrade.. (This market scares me to death trying to play/risk real retirment investment with such large VIX swings.)
Have been trying to PT your general strategy as I understand your selection aproaches, but underwater still..(seem to get crushed on big down days, support is broken…).
Look forward to you thoughts/post on the recent week of WOW..
Thanks again for your willingness to keep your post going.
FS
P.S. Happy Easter..
Hi,
I certainly agree with the idea of having a dividend-paying portfolio. It can be counted on to “throw off” cash on a regular basis regardless of how much the stocks in such a portfolio fluctuate up or down.
For example, just within the last month I collected dividends from Alcoa, Citigroup, Wachovia Bank, International Paper, Microsoft, Pfizer, and Jabil Circuit – all of which amounted to some significant “passive” additional income. And I’m increasingly focusing on high-quality dividend payers and dividend growers (companies that regularly increase their dividends) as stocks to sell puts against.
It’s true that many of these stocks are low volatility, and it’s sometimes difficult to find options to sell against them, especially if a stock is trading between strike prices. So patience is key I’ve found. I generally won’t try to sell puts against a stock until 1.) it’s at or approaching a price that I’m willing to own it long term, and 2.) I can sell the puts at a price from which I can expect a reasonable net return (usually at least 1% in 4 or 5 weeks).
The further out you go in time, the option premium received does go up of course, but the return is usually less. And, for me, it also means less flexibility and predictability (unless I’m prepared to trade in and out of the position during the option’s lifetime, which means more time spent trading, and higher commission costs). I’d rather pick a spot once to sell the near-term option and then sit back and let time decay (and maybe stock price action) work in my favor. That way I only have one commission to worry about if the option expires OTM; if the stock goes down and I end up being put it, that’s usually fine too.
I would again emphasize that while I’m using some trading techniques to enter and exit positions, I’m starting from a fundamental perspective – both on the individual stocks that I keep on my watchlists, and on the market in general. I know that from a short- or intermediate-term perspective I can’t expect to pick bottoms or avoid some paper losses on occasion, but from a longer-term investing perspective I also know that the odds of coming out ahead are in my favor.
And this is key – evaluating the odds and trying to align them as much as possible in my favor (in terms of entry times and prices) and using appropriate risk management (in terms of position sizes, diversification, and spreading my “bets” out over time).
A great way to have a better appreciation for all of this is – believe it or not – by studying the game of poker. (I never paid any attention to it – I thought it was just “gambling,” which never interested me – until I learned that by understanding the probabilities and statistics in the game (things like “pot odds” etc.) it can be played so that over time the odds are in your favor.)
Investing and trading in the market have many similarities to playing poker (and blackjack), as the following articles all touch on:
What Poker Can Teach You About Investing
What Poker Can Teach Investors
Old Pros Size Up the Game
I find that having an appreciation of the odds and risks makes me much more comfortable with the market risks I’m taking with my approach, which is inherently lower risk than just buying the same stocks outright anyway. Not only am I (potentially) buying stocks at lower than the current market prices, my account balance is likely to suffer far less volatility than that of the overall market. This has held true during the recent market decline.
And I see high volatility and big declines as opportunities to sell puts at higher premiums and to potentially buy stocks at better values. To quote Warren Buffett, “be greedy when others are fearful.” This is another way of saying “place your bets when the odds are in your favor.”
Hopefully this gives some further insight into my general approach. Perhaps if you’d like to give an example or two from your paper trading that didn’t work out, I could offer comments on what – if anything – I might have done differently.
Continued best of luck in developing your investing strategy.
Dear Sir,
Thank you for the detailed reply and thoughtfull comments.
I appreachiate the references to the gambling articles, which I will study/review in detail. I have to admit I have always thought of poker and related as purely gambling as well.. I never learned how to play the game for the same reason. I will surely try now to see the merits/values/concepts to investing..
Regarding your kind offer to review a view of my bad papertrades, I surely welcome the idea. I will try to get organized and send a reply later in the week.
I have more comments/questions, but I’m little late on time thsi evening.. Look forward to your new post.. Thank you for keeping your blog going.. Your returns are still amazing…(and inspirational)..
You seem to have mastered a kind of patience, discipline and focus, all well in-tune… Something I surely haven’t yet..
Thanks again for feedback and comments. I will be reading it several times to grasp the message and meanings…
F.S.