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9:00am (EST)
Like a good UFC fight, the bears finally landed the blow we were all waiting to see.
Before we talk about the market, we would like to talk about the emotional stress that comes with option trading. Sometimes it is hard to see the forest through the trees, and we know it has been a rough couple of weeks for many of you as you watched the market move higher last week.
Now, before we get in today’s lesson on “psychology 101″, we want to make something clear. We are not always right. We have losing trades. Again, we have losing trades. However, our overall goal is to win 70% of our trades on a yearly basis. We will get hot, and we will get cold.
The point we want to make is that option trading is harder than stock picking because options are time sensitive. Often times, we can nail a stock’s direction because we still use fundamental analysis and vision, however, when trading options, you are allowed a smaller window because of the time frame.
We also have an uncanny ability to pick the market’s direction as many of you know. Half of the battle with options is getting on the right side of the market with the options you do have. Naturally, if you owned call options yesterday, they got hammered. You will also have times where the market is volatile and NOT trending which means you have to change your strategies.
This may mean that you will have to use your “gut” feeling as to how long to keep a position open and believe in your original analysis no matter how stupid the market is making you look. We were bullish ALL year until May 5th which is when we started recommending put options. We could see a trend developing, but the volatility has made the trend harder to read. It is that simple folks.
We have been “expecting” a market correction and on June 11 we had this to say:
“Men who can both be right and sit tight are uncommon.” – Jesse Livermore
We used today’s quote for those of you who might be nervous in this kind of market environment. As option traders our job is to speculate on where we think the market is headed and what trades to choose to benefit from the move – up or down.
We have made it no secret that we are expecting a correction, and we have positioned ourselves in the bearish camp (for now). We still think the back half of 2010 will be outstanding as far as the market moving higher, but as traders, we have trained ourselves not to be bullish or bearish. Instead, we look for opportunities when there is volatility and chaos in the market place. We have that right now.
Still, having a trading plan helps to eliminate all of the emotions of not getting nervous about holding your positions. This can be hard when you have a trade that is up 60% one day and then see it at a 17% gain the next day after the market moves against you. Or one that was up 10% is now down 20%. Folks, this is the nature of options and it happens, but the real money is made by staying the course.” (END)
Back to today’s lesson.
You will see “losing streaks” if you look over our three-year track record, and those are the times when the market stayed flat or we got the direction wrong. Some of you asked us how we could sit back and keep recommending put options at the start of June when the market was going up.
Well, we could still be wrong about a further correction, so let’s get that straight. But, with every trade we make, we PLAN for the worst and HOPE for the best. Sounds crazy, but it keeps us in check.
The market owes us nothing, and it can humble you on occasions, but you still have to battle. Which is what we do every day with the bulls and the bears…
The market got crushed yesterday, but all the talking heads were blaming it on a weak consumer confidence number. Folks, it wasn’t just one number, it has been a number of things that has made this market nervous.
Here was another clue we gave you on why we might be headed for a correction. On June 10, our 1pm update was titled “Circuit Breakers Could Be an Omen.”
On Tuesday, the market got the chance to test out its new shiny toys as shares of Citigroup (C, $3.73, down $0.27) were falling off a cliff. Trading in the bank was halted for five minutes while the panic subsided.
The circuit breakers are designed to stop the bleeding of a stock when it drops 10% in a 5-minute period. If they trigger, shares would be halted for 5 minutes to get some liquidity on the buy side.
The end result was a blood bath for the market.
The Dow was hammered for a 268 point loss, or 2.7%, and finished at 9,870. It didn’t take 10,000 long to fall as the index hit 9,999 within 3 minutes of the opening bell. The bulls tried to hold the levy but the flood was too much as the Dow sank to a low of 9,811 for the day. We pegged 9,800 and said a drop below this level could lead to 9,500 so we shall see.
The S&P 500 followed suit and was hit for a 33 point loss, or 3.1%, as it finished at 1,041 for the day. A couple of key points: First, we were watching for the 1,050 level to fall and mentioned that 1,040 would come into play. Second, everybody and their brothers are watching this level and the index traded to a low of 1,035. However, as you can see, we closed above 1,040 which will give the last remaining bulls hope, but the damage is already done.
The Nasdaq was punished the hardest as it fell a staggering 85 points, or 3.9%, to close at 2,135. It was the index’s lowest close since early February. We penciled in 2,150 as the first wave of support and the close below this level isn’t a good sign. The low for Tuesday was 2,122 and our next target is 2,050. A break below here would not be a good sign either.
There are a number of stocks we want to discuss this morning and a couple of them we will point out as ”trades gone bad” because we did have the “timing” wrong and it is part of today’s lesson.
Garmin (GRMN, $29.26, down $1.34) finally dropped below $30 and we have been talking about this dying business for a while. It’s not that the company doesn’t make great products, they do. Other companies are just making their concept cheaper. Garmin has also entered the smart-phone business too late. We doubt there were lines at the stores when they made the splash into this highly competitive market.
In April, we went with the May 32 put options for a buck and got our head handed to us as the stock stayed above $30. Right on direction, wrong on timing.
In late May, we got aggressive and bought the June 25 put options on Wells Fargo (WFC, $25.93, down $1.10) after it broke its 200-day moving average and fell below $30. We looked at the charts, found support, and knew shares were headed to $25. The options expired in less than 3 weeks. Well, the market rallied off then support levels and Wells Fargo went along for the ride until yesterday. Right on direction, wrong on timing.
If we had bought the July 25 puts for Wells Fargo we would still be in the trade and looking good in the ‘hood.
Folks, we didn’t go “all-in” at the start of June; we started “building” positions.
We know we have been long-winded this morning but we felt it was important to explain the ups and downs of the market and to put our “long-term” trading plan in perspective for you.
Trending markets are easy. Volatile and choppy markets take hours a day to study, but the charts still tell a story.
We have a lot to cover in our Members Area this morning, but for those of you who are nervous about the market or are thinking of getting out, don’t. You can make the same gains on the downside as you do on a market going up.
We spend a lot of hours doing the research for you, and we mean a lot of hours. Success is often dependent on how many hours you put into your research, and the results of your trading business or portfolio are reflective of those long hours.
If anybody tells you any different that hard work and long hours aren’t part of trading then they have no clue on how hard it is to read the market at times.
As we head to press, the Dow futures are showing a pop of 11 points to 9,808 while the S&P 500 futures are up by 2 points to 1,036. The Nasdaq 100 futures are also higher by 2 points to 1,766.
Overtime is calling…subscribers, check for the updates.
Financial Stocks Continue to Plunge
Wednesday, August 25th, 2010
12:40pm (EST)
The bears got some more good news after the opening bell when the Commerce Department reported new home sales “unexpectedly” fell 12.4% in July to 276,000. We highlighted “unexpectedly” because the pencil pushers had forecast new home sales would come in unchanged at 330,000.
Are you serious? Unchanged? Anybody who has been watching the housing market knows it is rolling over like Lassie and playing dead. The analysts are always late to the party, or funeral, with their upgrades/ downgrades and are like weather forecasters when it comes to knowing what the heck is going on. That is why you have us.
Despite the double whammy on the economic front today (we mentioned the durable goods numbers this morning), the market is well off its lows for the session as it teeters near the breakeven line heading into the second half of trading.
Financial stocks continue to show weakness and although we aren’t there yet, there will be bargains. We like Bank of America (BAC, $12.48, down $0.16) and we have been watching the move lower since shares broke their 52-week low. In our Members Area we said shares could test the $10-$11 area and we are getting close to adding some attractive LEAP options to our portfolio that could return up to 200% in a year or so.
LEAPs are long-term options that cost much cheaper than the stock itself and BAC will be a bargain here shortly.
Another stock we had targeted for a move lower was Wells Fargo (WFC, $23.22, down $0.42) which has also touched a fresh 52-week bottom. We don’t like the company long-term or anything but back in late May we had a feeling shares would test $25 when they were at $30. We were a couple of months early on that trade but the charts were right.
Shares now look like they could test $22 and a break below there could lead to the high teens. We have been saying the bulls will not be able to break through resistance without the help of the Financial stocks. With the sector setting new lows, it’s hard to imagine a sustained rally taking place.
As we head to press, the Dow is showing off by 13 points and is at 10,027 while the S&P 500 is down 2 points to 1,049. The Nasdaq is up 2 points to 2,126.
We will be back in the morning with a full update.
Tags: bac, option picks, stock options trading, wfc
Posted in Financial Stocks, Market Analysis, Market Commentary | Comments Off