A Tip For Option Trading

Today I learned a lesson when it comes to trading options. There may be an option that you are in the money on and are thinking of selling, which is good because no profit should ever turn into a loss, however, in some cases stocks can become extended and pure emotion and irrationality comes into play. In these cases one can profit from being in the money on a call option by taking advantage of the irrationality of others while maintaining gains and minimizing risk. It’s never a bad decision to take gains off of the table for a profit, but there is nothing wrong with leaving some exposure in your portfolio when a stock is hot.

Last week, I purchased AAPL $385 calls for $2.80 and sold them shortly after for $4, a 70% gain. Not bad. Today those same calls are going for over $40 and will most likely run higher as the market floats up on low volume ahead of the Fed.

Yes, I sold those calls for $4 for a 70% gain, but today they would have gone for – $40/$2.8 = 14.2 or 1420% gain from principle.

What I am trying to say is – take some profits but it doesn’t hurt to LEAVE RUNNERS ON THE TABLE!!

And that, is my tip today for option traders.

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Markets Pause On Light Volume After Holiday Weekend

Divergence In Top SPY SPDR Holdings – LNKD Trading 135% Higher Following IPO

Last week I discussed the divergence between copper and the S&P which added to my argument which is that the S&P is closing in on a medium term top. In addition to the divergence in copper, AAPL, XOM, and CVX, the three largest components of the SPY, are also diverged from the overall market activity. This divergence is important to note because it means that money is moving out of large cap companies which are normally considered to be the safe haven in the equity markets when there are headwinds. If money is moving out of these companies at any time, then it can signal that bullish confidence is weakening.

AAPL has been weak since late February and has clearly underperformed the rest of the market. Perhaps the company is becoming more fair valued as competitors are moving in but with POMO still active, AAPL should at least be at sector performance but that has not been the case over the last 2 months and unlike the SPY, it has not recovered since the Japan scare. Note the bear flag that is setting up on the chart which is a continuation signal of a downtrend.

I gave out the alert to short XOM at $83.18 and it has since fallen to the target that I had put out of $80. It has bounced off of that support level on average volume and is testing the 100 MA. I don’t think that this 3 day rally is sustainable as the price of oil hasn’t gained back any ground and on the chart, XOM like AAPL is setting up a bear flag on this small move to the upside.

CVX hasn’t quite hit it’s target of $97.50 but it has fallen from when I gave out the short alert on the 9th of this month. It has outperformed the market and the chart isn’t as weak as XOM, but it is finding resistance at the 50 and 26 MA’s. If it cannot manage to confirm a close above these moving averages, then it is safe to say that it is in a downtrend and is unlikely to recover in the near future.

Confirming the moves in CVX and XOM is crude. It has not recovered from the $12 drop and is consolidating in a bearish pattern that is in the spirit of a bear pennant. With the dollar strengthening and QE 2 still set to expire in June, oil will likely consolidate over the summer as some economists have already been predicting.

On to the S&P SPDR, by observing the charts above, you can visually see the divergences taking place without using a performance chart. The S&P may continue to rally higher as divergences can take some time to fully correct themselves but the important thing to remember is that it will in fact correct itself one way or another. These divergences reinforce my belief that we’re going to see a weaker market and a stronger dollar over the summer. For those who do not wish to play the dollar from the long side, you can use this as an opportunity to buy stocks and commodities as they play out their own consolidations.

There are no charts for LinkedIn (LNKD) yet but the stock has soared over 135% since the open this morning. It sold for $45/share but with one hour left of trading, it is currently selling for $103/share. Market cap has more than doubled from $4 billion to $9 billion on it’s first day as a public company. Here’s the company profile from Yahoo for more info: http://finance.yahoo.com/q?s=lnkd&ql=1

*** On a side note, I am sorry for the delay in putting out any commentary but this past week has been beyond exhausting unfortunately due to non-finance related work, but such are lifestyles in this economy. I’ll be as active as I can and I’ll try to get back to the emails, so thank you to all who read my work and send me comments. – Aaron

Key Reversal

My outlook recently has been that the market is massively overextended, and today’s trading provides overwhelming proof.

Key Reversals include: SLV, GLD, AAPL, GOOG, SPY, QQQQ, BAC

In other words, the reversals today included the largest bank in America, gold, silver, the best company in America, the Nasdaq 100, the S&P 500 proxy, and the best dotcom company of all time. That means you should be running from equities right now.

I want to continue on about SLV since it is without question the story of the day in my opinion.

The charts speak for themselves here. Volume for today was almost 10 times the average daily figures and it happened on a day where we had a key reversal as well.

It’s more than safe to say that we’ve hit a top. Repeat after me: “I’m bearish”.

One more thing, the S&P 500 has formed a “short day” formation over the last few trading sessions and has failed to break the 1226 level again after touching it last friday. I speculated that it would hold, and it appears that it will for sometime.

Market Wrapup, More Dollar Selling

So the foreign markets reacted swiftly last night in their efforts to sell the dollar on yesterday’s FOMC statement and stocks had their best day in recent memory as the DOW finished 219 points to the upside. PowerShares QQQ is looming near 2007 highs at 53.67, The S&P 500 SDPR (SPY) closed at 122.21, the highest close since the 2008 crash, the actual S&P Index finished at 1,221.06 which breaks the previous resistance from earlier this year of 1220 which is also its highest close since 2008. 20% of the S&P 500 hit new 52 wk highs as well. The IXIC and DJIA also made new 52 wk highs.

In the precious metals sector gold closed at a new all time high of $1392 and silver managed to break $26 an oz. The HUI was up over 4% while the GDXJ gained over 7%.

Every technical indicator in this market is telling you to sell. I personally closed a few positions today and have tightened stop losses on the rest. I am not willing to fight the Fed, but I also do not plan on acting defiantly towards the technicals, which are overwhelmingly bearish. I think that within a week or so, we will hear about whichever country will be next to devalue their currency in order to keep up with the US. There’s nothing wrong with being long here, but you absolutely cannot be greedy in this situation. Analyze the market’s next moves carefully and buy only when it is safe.

Recommendations Performance/Apple

I’d like to give an update on some of the stock suggestions I’ve made as well as add a few new ones and I want to talk a little bit about everyone’s favorite stock: AAPL.

Apple has reached its once price target of $300 and doesn’t show any signs of slowing down. But is AAPL more valuable now then say, 3 months ago? The market does in fact say so, as it is beating the S&P 500 by about 20%. But then, the market as whole from 3 months ago is also up 10%, so that must mean that it is also 10% more valuable… I say no. This isn’t an earnings, or fundamental, or technical rally, it’s a quantitative easing rally as we all should know by now. But even in light of that fact, it hasn’t stopped the market cheerleaders from proclaiming themselves as geniuses because they recommended Apple at $250.

Don’t get me wrong, only a fool would think that they aren’t an outstanding company, but the point of this post is to show how and where QE hits the hardest, and also to show you why I think that there are better deals with higher upsides than AAPL, and several of them I have already recommended on this webpage. This rally can be covered using a 3 month chart, and all examples I list here will based on that time frame.

Let’s start with Revett Minerals, a speculative silver mining play that has no dividend, low volume, and almost no mainstream coverage. RVMIF is beating the S&P 500 by over 40% and AAPL by roughly 20%.

Aurizon Mines (AZK), a productive junior gold miner has also beaten the S&P and AAPL by 40% and 20% respectively.

Silver Wheaton Corp, symbol SLW, a company that I’ve named as the standard for silver miners- they are the AAPL of silver stocks, has outperformed the S&P by 60% in the last three months. That translates to 40% better than AAPL and they’re share price, like all others I’m naming, is a fraction of AAPL’s.

Endeavour Silver Corp (EXK) like the first two, has outperformed AAPL and the S&P by just under 40% and 20%.

First Majestic Silver (FRMSF) has beaten AAPL by……. nearly one hundred percent in the last three months. Also outperforming AAPL is Molycorp, symbol (MCP) by yet again just under one hundred percent.

As stated previously, the point of this article is not to rip on Apple, but rather to show you exactly what QE has done, what it will do in the future, and to point out that QE does not make companies more valuable, it simply has the ability to increase they’re share prices in nominal terms. The companies that own hard assets and are hedged against the dollar will beat the consumer based equities day in and day out when the policy makers are trying their best to devalue the currency. I honestly feel sorry for the bears of this market who had everything correct in technical terms but have been getting crushed by the quantitative easing mania.

Another (rather amusing) example is RIMM, up 5 points in the last 2 months, but underperforming AAPL by roughly 40%. Quantitative easing can have a “meltup” effect on equities including the underperforming companies that have no reason to be trading higher and RIMM, as well as the other companies that I listed above are a perfect example of that.