Option Trade Allocation

I am often asked about trade allocation when trading options, so I thought I’d do a video about the topic. Enjoy!

The first week of the December 2010 options’ month is over.

Here is the week and month summary

Market Summary

Market is slightly down for the week.  Not surprisingly it was not very active especially the day before Thanks Giving (Wed) and after, which was only ½ day.  Usually Thanks Giving week is good for the market.  Not this year.  I am not sure if it is telling anything but certainly there is not “feel good” kind of feeling based on the market.   Watch:

Naturally, low volumes during the past two days (before and after Thanks Giving) as people were going away (Wed) and taking the Friday off.  Also Friday was only ½ day on the market.  The circle indicates a narrow sideways or a channel movement of the market. It could be simply because of this particular week but it also could indicate an exhaustion or wait-and-see attitude.

This is it for this week.  I hope you all had a great holiday (at least from the market if you do not celebrate Thanks Giving).  So far indications of “Black Friday” indicating increase in shoppers but not much in actual sales.

As always,

“Keeping It Simple is Smart (K.I.S.S.)”

Regards,

Erik Epp

The November 2010 options’ month is over.

Here is the week and month summary

Below is what the Year To Date (YTD) month chart looks like.  Notice the resistance lines and also Daily Moving Average (DMA) lines; the 20 in yellow and the 50 in blue.  The SPY (as a proxy to the SPX) declined below the 20 DMA but not below the 50 and reversed up below getting there and settled, for now, at the 20 DMA level.

The SPY may go up to the resistance level or may go below the trend line. If it does below the trend line the next likely point is the support line, around 113-114 (1130 – 1140 on the SPX).

The November 2010 options’ month is over and with it the typical trend to prop the market at expiration.  Next weekend, starting Friday is “Black Friday”, the Thanks Giving weekend “official” Christmas’ shopping season (Ok, I am not using the politically correct version the “holidays” shopping season).  This is supposed to be the signal or indicator as to how the economy is doing, depending on how good sales are.  Well, if you take the huge discounts that being offered (and therefore a much lower profits, if any, margins to the sellers), as an indication of anything, let me ask you this:  Would the consumer buy the same amount of items, and therefore spend more dollars if the retailers did not cut their prices (and therefore their profits) significantly?  Also, is the average American consumer really capable of deciding to stop buying things s/he does not need, when Christmas or the holidays are equated in the US (and Canada, Britain etc.) with how many presents one gets? So is it a really good indicator?

Every year my 3 daughters ask me what I want for Christmas and every year I tell them the same thing:  I DO NOT NEED A THING.  I have too many clothes, too many sweaters, too many shoes, too many tennis rackets, enough cell phones, enough computers etc.  However, I still get something (albeit small) every year, such as a $10 gift certificate to my local coffee shop, which I will use.  At our family, we allocate the larger amount of dollars to a “shoe box” package where we choose a child by age, and sex and fill up the box with things s/he NEEDS (such as clothes and other necessities) and give it anonymously, via a local charity, to the poor or needy. That way we keep the economy going (by buying) while bettering, even if it is for a short period of time, the life of someone else.  Imagine the number of “miracles”, applicable to both the Christmas and Hanukah holidays, $4 billion dollars (yes, the amount used to buy the US elections) could do.

Last, but not least, if you do not read this already, I highly recommend it:  http://www.huffingtonpost.com/ .  Also, if you want to read some REAL articles about business, Wall Street and politics, subscribe to Vanity Fair. Yes, Vanity Fair.  It has writers such as Michael Lewis (who wrote Liars’ Poker) and others, who write some facts, rather than parroting the “party line” or repeating the politicians lies without checking the facts.  Many of these articles are really eye openers where I, for one, would not know where to get that information anywhere else.

One more thing:  You may want to watch the movie “LiarLiar”.

As always,

“Keeping It Simple is Smart (K.I.S.S.)”

Regards,  Erik Epp

The fourth week of the November 2010 options’ month is over.

Here is the week and month summary

A slight drop in the market while a bit of a rise in the SPX Volatility Index (VIX).

Here is what the 3 month chart looks like:

Notice the following:

The SPY (white line top part) crossed below its 20 day Moving Average (DMA), represented by the purple line AND the lower trend line represented by the orange line.

The RSI (Relative Strength Index) is turned downward as emphasized by the orange color (mid-section).

The 50 day moving average of the volume (white line in volume section) is slopping downward which may suggest bullish exhaustion, and the green arrow in the bottom section points to a down crossing of the MACD line below its own 9 day moving average.

What all these may suggest is a market reversal, even if it is for a short time.

Once again (I am sounding like a broken record) the market fundamentals do not support this market rise during the past 2 months, something I commented on at length previously.  Sooner or later, as Buffett and Graham will tell you, the market will return to its fundamentals.  The only question is when?

As always,

“Keeping It Simple is Smart (K.I.S.S.)”

Regards,  Erik Epp

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The US Mid-Term elections are over.  The Cartel (Fed) QE2 (Quantitative Easing i.e. creating counterfeit (out of nothing) money) is now established.  Tomorrow the “Employment” numbers are coming.

The elections cost $4 billion dollars.  When you spend that kind of money to buy an election you owe somebody something and it is not the regular US taxpayer.

Here is what the Gold and Silver, as represented by their respective ETFs did after the Fed’s announcement:

Notice the huge jump?  It tells us that market participants are hedging against a falling US dollar and against an upcoming inflation which usually follows these kind of actions, namely artificially inflating (increasing) the money in circulation via counterfeiting actions.  As I mentioned last week, Germany did that and eventually the German Mark became worthless.  People used it to start their fireplaces, that is how low value it had.

Take a look at the chart comparing the US dollar and Gold during the past 6 months:

Let’s see how the market is reacting so far, keeping in mind that many times the market (controlled by institutions) will react one way just before it reverses itself.  Here is the market, as represented by the SPY, which also jumped up:

Why it is up like that? Unlike the GLD and SLV, there is no real fundamental reason for it, UNLESS of course the Fed action is nothing more than to prop up the banks and Wall Street firms, who in turn prop up the market at the expense of the individual American tax payers who foot most of the bill, since this QE2  is nothing more than the US Treasury (runs by a former Fed executive; remember that prior to the current one, a former Goldman Sachs executive was running it) borrowing this money from the Cartel.

Now watch the “magic” (scam is more like it) unfolds:  The Cartel creates the funds  for the loan out of nothing (called counterfeiting). The Treasury (tax payers) then have to PAY INTEREST on this counterfeit loan on top of having to repay the loan itself.  The Fed is  SECURING (getting a collateral) this loan with REAL Treasury Bonds which legally COMMITS tax payers to pay for it. Treasury Bonds are nothing more than a PROMISE made by politicians ON OUR BEHALF.  I do not trust politicians to make promises on my behalf (see quote below), how about you?

Unless we are extremely short term traders (which we are not) getting into options and/or stock trades at this moment is too risky in my opinion.  Let’s see how the markets settle in the next few days after the knee jerk reactions and in my humble opinion a manipulation by the Cartel members and their friends.  After all, they carry no risk:  They make billions, and if they fail they get bailed out (as we see once again in QE2) by the American people who shoulder all the risk, REGARDLESS which party is in control.

Once again, when you spend $4 billion dollars to buy an election you owe something to somebody.

The second week of the November 2010 options’ month is over.

Here is the week and month summary

Market Summary

As you can see above, the market went nowhere during the past week and very little during the past two weeks. The average daily range is down to 12, meaning it is tightening, which I eluded to last week.

I think that Wall Street is waiting for the Cartel (Fed) to officially announce their QE2 (Quantitative Easing), which I think is a forgone conclusion.  QE is nothing but a Double Speak for creating billions more dollars out of nothing.  When Germany did exactly the same thing in the late 20s and early 30s (the words Quantitative Easing were not invented yet in that scenario) eventually the German Mark became worthless.

The other thing we are all waiting for is the Mid Term US elections on Tuesday, Nov 2, 1010.  I think that it is also a forgone conclusion as far as the Congress goes and may even tilt the balance in the Senate.  By the way, over $2 billion ($2,000,000,000) were spent to buy these elections.  When you spend that kind of money you owe something to somebody (the donors, lobbyists etc.) which of course leaves out the average American out in the cold.

So the real question is what the market will do after these two events pass?

Here are some links to articles.  While reading these keep in mind the quote and slogan below.

http://finance.yahoo.com/news/5-Reasons-Americans-Are-So-atlantic-870082825.html?x=0&sec=topStories&pos=3&asset=&ccode=

http://finance.yahoo.com/news/Poll-Americans-Dont-Know-bloomberg-2909319248.html?x=0&sec=topStories&pos=8&asset=&ccode=

http://finance.yahoo.com/tech-ticker/poised-for-victory-gop-faces-%22the-burden-of-doing-something%22-wapo%E2%80%99s-cillizza-says-535553.html?tickers=^dji,^gspc,spy,dia,tlt,tbt,^tnx&sec=topStories&pos=6&asset=&ccode=

http://finance.yahoo.com/news/The-Biggest-Myth-of-the-usnews-420375109.html?x=0&sec=topStories&pos=main&asset=&ccode=

I guess that the saying “Let’s not let the facts get in the way of a good story” (or whatever word you want to substitute story with) fits well here.

“The difference between truth and fiction is that fiction needs to be made credible” – Mark Twain.  Timeless quote; fits well with the slogan “Ignorance Is Expensive®”

As always,

“Keeping It Simple is Smart (K.I.S.S.)”

Erik Epp