Be an Amazon Consumer, Not an Investor

Amazon [AMZN:NSD] shareholders may want to sell this week because the good times probably won't last. The world's largest online retailer surged about 15 per cent to over $230 after first-quarter earnings, but carrying that momentum for the remainder of the year will be a tough act with so many storm clouds hovering over the company. And with short sellers licking their fingers at this company, who's left to buy?

For some irrational reason, many analysts upgraded the company, even though the shares are trading at 185 times earnings. Any sane investor would glance at that P/E and know Amazon is extremely over valued. At these valuations, the company would have to be nearly perfect, no wait, better than perfect, to grow their shares. However, this is not the case. Declining profits, declining margins, declining guidance: these are not triggers to buy an expensive stock. No, these are cases to sell a company that appears to be the next Netflix [NFLX:NSD], Research in Motion [RIM:TSE, RIMM:NSD], or Netscape. If this company went private tonight, the new owners would have to wait 185 years to break-even, and that excludes the declining value of money.

Case in point: 2012 Q1 earnings indicated a profit margin of 0.99 per cent. That is, for every $100 I spend on Amazon.com, the company profits 99 cents. With so little room for error and a cut-throat industry that leaves losers in the dust, Amazon has to execute on a very high level. Take a look at the numbers. Revenue rose to $13.18 billion last quarter, a huge increase of 34 per cent but net profit was just $130 million, down 35 per cent by slashing prices to entice buyers. Its strategy of growing revenue may have worked, but it sacrificed its margins too much. Looking forward, the company's second quarter guidance was reduced to a net loss of $240 million. That's right folks. A company that sells more than $10 billion in products every three months will lose $240 million. If that doesn't scream sell, I don't know what else does.

It also doesn't help that the Kindle, their e-reader, is being sold at a loss. It was a strategy Microsoft [MSFT:NSD] and Sony [SNY:NYSE] employed with their video game consoles. The hopes for these two brands was that sales of video games, memberships, accessories, and down-loadable content would cover the losses on the consoles and it has worked. The major difference between Microsoft and Amazon - video games are $60, books are $6.

Add the expected sales tax collection which will eventually be law all across the United States, starting with California and Texas, and you have diminished price-advantage. For the last 18 years or so, with exception of five states, US Amazon customers never paid state sales taxes for purchases online, but this is about to change in 2013, as some customer's will now have to pay taxes like they do at brick-and-mortar shops. In Canada, it would be like never paying GST/HST/PST on Amazon.ca and then finding out that you have to start paying it next year. It will change consumer's behaviour and Amazon could see large-ticket items being left in stock for significantly longer.

What's ultimately problematic for me is the motive of upgrades by 9 analysts the day after earnings. Most traders ignore the noise from analysts. Their estimations and predictions are as educated as sophisticated investors, but their motives are often questionable. Paulo Santos of seekingalpha.com pointed out that Citigroup analyst Mark Mahaney upgraded his price target from $190 to $300 in a single day. But back in 2010, Mahaney predicted the company would earn over $5.32 a share by 2012. Amazon's real EPS: $1.27 (Full article here). How do so many companies change their perception of the company with one report, especially when the report showed that their margins are declining? There has been no significant change in the company's direction and profitability. Are they pumping the shares so they can dump them?

The company's total profit is less than it was at the end of 2008, but the shares are up 150 per cent in that time span. Revenue has risen significantly, but what's the point of selling more when you end up with less? It is energy well-wasted. It does not feel like Amazon's management wants to thrive as a business, but rather survive. Are they now fearful of Microsoft, Google [GOOG:NSD], and Apple [AAPL:NSD]? Amazon hasn't even considered paying a dividend. That's a sign that management knows their cash flow is not stable enough to pay out long-term holders. 70 per cent of its shares are owned by institutions, so one sell button by one firm could knock the shares back to normality.

Honestly, I believe Amazon will be the number one online retailer for decades and quite possibly for the entire 21st century, but being at the top only pushes competition to be better. And being number one doesn't mean your shares should be outrageously overpriced either. Realistically, for a company that is nearly two decades old and as established as this, the shares should be trading at a generous 15 times earnings, much like the rest of the market. That puts the shares at $20 not $230.

Disclaimer: I am short Amazon shares post-earnings.

Stick With the Market

If there were any lessons from last year's market correction in August, it was that those who sold in the summer lost out on massive gains in the winter. And those who have panicked and sold this summer will surely miss out on another fall and winter rally.

Historically, the summer is often the most volatile and least profitable months. It just happens to be for whatever reason. But those who stick with the market over the years have seen the resilience of stocks through optimistic eyes.

Short-term corrections like this often clean house. Investors and traders who are reactionary or lack discipline in their long-term strategies are weeded out of the market. It enables the major players, hedge funds and banks, to start adding to their portfolios. Those who generate income on a monthly or quarterly basis will now be able to put their cash into good use. The market has no reason to be negative this year and there are many good reasons why to get ready to start buying again.

Even if American debt gets a downgrade, it is expected to be AA (highest is AAA), which is still healthy. The rating on government bonds has no real correlation to American corporations and profitability. Yes, the government will have to pay more on their debt, but let's not forget that American corporations are not as connected to the government as they once were. And so far this year, 78 per cent of stocks on the S&P 500 have beaten estimates, suggesting that American corporations are still extremely healthy and have hired executives who know how to make money, unlike the lawmakers Americans voted in. Just look at today's big earnings. Proctor & Gamble [PG:NYSE] recorded profits that rose 18 per cent or 84 cents per share, beating estimates handily. Same goes with clothing retailer Abercrombie & Fitch [ANF:NYSE], construction giant Fluor [FLR:NYSE], and online travel company Priceline.com [PCLN:NSD], whose shares all rose significantly today.

Low interest rates won't attract many buyers. Bonds and treasuries aren't exactly paying you much money for borrowing your money and you'd be lucky to earn a penny on a thousand dollars in the bank. Investors should not be happy with returns that par inflation, so expect money to be injected into the healthiest and most efficient system, the stock market.

Many established companies have dividend yields that exceed most 5-year US notes and even Canadian bonds. Add hedging strategies like covered calls to top up your profits and you could be earning well over 15 per cent annually. Remember that as you age, your investment accounts should be geared toward income strategies and not overall growth.

Low interest rates have also allowed companies to borrow cheap money to purchase their shares back (often termed buyback programs), which lowers their float, and eventually increases share value. A company's profit is measured in two ways, net income, but more importantly, earnings per share (or EPS). The larger the float (or shares outstanding), the more profits must be divided evenly by shares. But if a company has fewer shares in the market, that $1 billion is divided into fewer shares, which increases EPS. And if you've ever read anything before about investing, the P/E ratio is the price of the stock divided by the EPS, so a higher EPS means a lower ratio, and a lower ratio means a better time to buy, all things being equal.

Another reason why it's time to buy, or even to argue, the time not to sell, is that even with all the fear that has appeared in the market over the last week, the economic reports that have been released have not differed much from what we've been seeing over the past three years. Factors that helped the market rally and create the bull market are still relevant today. Yes, growth is very stagnant and jobs are not being created fast enough, but this isn't something new. And until the market hears that unemployment has risen to 13 per cent, GDP is actually negative, and manufacturing data has consistently been below 50, I will not sell. Fear always subsides once rational thinking re-enters the market.

The governments know that their nations are in turmoil and they will do anything and everything to get their country back on track. Whether that country is America, Italy, Greece, Canada, Brazil, Russia, or Japan, governments have nearly total control on the supply of money, thus currency, interest rates, taxes, and many macroeconomic factors. And we're seeing an international battle for devaluing one's currency. This means inflation and an increase in asset values. They also want to stay in power for as long as they can so doing what's best for the nation isn't just their job, but it's how they keep their job.

Of course, it's hard to get out of the moment. There is so much negativity, but if you stick with the market, you will handsomely be rewarded.

In 2010, the market peaked in April then corrected in August. As referred to in the opening paragraph, after an autumn rally, the stock market gained roughly 15 per cent by the end of the year. In 2011, the market peaked in April then corrected in August. What autumn has in store for us this year has yet to be seen, but considering that the stock market is a gauge of the health of companies that comprise it, I'm confident that those who sold in the past week will regret their final decisions.

Playing Baidu Earnings

If you've bought even just one at-the-money call option on Apple, Google, or IBM this quarter for its earnings, you've made yourself some good money. Google up $60 the next day, Apple up $25, and IBM, normally less volatile than the former two, up $10 on knee-jerk reactions. All moves greater than expected volatility priced on the weekly options.

Later today, Baidu, the Google of China, will release its own second quarter earnings and the stock is being pushed to new heights. Trading currently at over $157.40, the stock is at a new all-time high, with growth nearly doubling every year. That's unbelievable growth, but also unbelievable expectations.

There are typically four ways to make money on an earnings via the options route. If you're bullish on the earnings report, and think that the stock will fly higher, even at nearly 100 multiple, then a bullish options trade might be best.

Today, I implemented a bull call spread. This type of trade mimics buying the stock and writing a call, without risking an additional $150 per share. I purchased the July29 calls at a strike of 155.00 for a cost of $7.70. I later sold, after the stock made a move, the 165.00 call with the same expiration for $3.77. This comes to a net cost of $3.93. Instead of buying the shares for $157.50, I only paid $3.93 to make the same gamble. The only difference is that my profits are capped if the stock moves above $165, but I would still earn $6.07 or 154 per cent return with the best-case scenario.

The reason one may implement a bull call spread versus a regular call purchase is that it lowers the cost to something reasonable. It also significantly lowers the cost if one were to purchase the shares, with the loss limited to just the net cost.

Let's hope the only time I do open up a bull call position is the time it doesn't fall. Happy trading.

Disclaimer: All trades mentioned are real-life trades implemented by the author and is not meant to be taken as investment advice. When trading options, consider its risks and investment objectives. Speak to a licensed financial advisor or representative.

Connecting with LinkedIn Options

LinkedIn [LNKD:NYSE] has seen some massive volatility since its IPO date, and as a result, its options, which started trading on May 30, have seen its premiums priced accordingly. At the start of June, options trading $15 out of the money were holding more than $1 in time value. Even today, $4 out of the money puts are holding nearly $1 in value. If you are an options writer, you may want to consider opening up some positions.

On Monday, I opened up bullish position on LinkedIn. Although I firmly believe the stock is well over valued at current levels, I believe that the shares are ready for a dead cat bounce. I sold to open put options at 72.50 for June, gathering $1.40. The share have climbed a few dollars since, but the put option is still bidding 80 cents at the close of Tuesday. The 75 puts look more attractive, bidding $1.55 at today's close, but also provide less downside protection.

Writing the 72.50 puts and earning a conservative 80 cents would provide you with 6.07 per cent protection, for the remaining three days of the week. You would also earn 1.05 per cent over the next three days by completing this trade. That's better than a GIC over a year! The margin requirement is also very limited, and required less than $2,000 margin per contract.

If you are less bearish (that is, more bullish or neutral), a 75 put may be more for your liking. At close, the June 75 puts were valued at $1.55, returning 2.03 per cent over the next three days. However, you would only be protected 3.78 per cent.

Considering the stock's volatility, expect the value of the options to hold significant risk value until the final hour of the week. Being patient on LinkedIn may reap benefits.

Those who are more neutral should consider writing the 77.50 or 80 call options. This would require no additional margin, because it would be a short combination trade, something I will most likely be attempting later this week. The 77.50 call was bidding $1.35 while the 80 call was 60 cents.

One final consideration would be an immediate short straddle at 75. The premiums on the call and puts at bid were netting $4.10. You would profit if the stock traded between $70.90 and $79.10 on Friday. This trade gives you substantial up and downside protection, more protection than the 72.50 put and the 77.50 call alone. However, your total profits will be limited depending on when you close the in-the-money option.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker. As already mentioned, I currently have option positions and have plans on making more trades on the above mentioned stock in the next 72 hours.

Playing the Expiry for May 18: CBOE Volatility

The CBOE Market Volatility Index [VIX:INDX], also known as the VIX, is a market tool to calculate risk and volatility in the market. Unlike regular equity options, VIX options expire 30 days before the following month's regular options expiry. This typically means the VIX and many other index options that follow this rule expire on a Wednesday. The VIX is an AM settled product, which means the index value is calculated using the opening price on Wednesday. Therefore, all positions must be entered before the close of Tuesday.

The VIX is roughly valued at 18.40. The VIX has not had substantial volatility in the past few weeks, with exception to a large spike in March. Consider writing out-of-the-money call or put options. There is still substantial value for one day. The 20 strike, about 1.60 out-of-the-money, still holds 20 cents per contract. The 21 strike is currently bidding 10 cents.

VIX options may require larger account equity. Index options are settled by cash, not by an underlying asset, like a stock. However, one major advantage with index options are the low margin requirements. 20 contracts will require no more than $3,000 margin, but writing 20 contracts on a similarly priced stock would require as much as four times the margin. This does not mean firms deem index options less risky, it's just that the requirement for trading is smaller, so ensure you fully understand the potential consequences of larger contract sizes.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

Playing the Expiry for May 21: Yahoo!

Shares of Yahoo! [YHOO:NDQ] have taken a turn for the worse as controversy lingers in regards to a transfer of payment from Alibaba. The stock has plummeted from just under $19 to about $16.25 currently in a week. The stock is now trading near a medium-term support at $16. The massive support has held at least five times prior, with a few minor dips into the $15.xx trading range only to be pushed back up above (see chart below).


Chart courtesy BigCharts.com

There are two ways one can play this trade. Personally, I would rather look at writing the put options. The May21 put option at a strike of $16 (this is the regular monthly option as well), are bidding about 22 cents. The premium received represents 1.35 per cent income against the value of the stock and protection on a drop of 2.89 per cent or less.

Another trade consideration would be to buy the call. I normally buy at- or in-the-money options, never out-of-the-money. The current time value on the options for May is relatively small against the volatility of the stock. Expect to pay 20 cents of time value for the remaining four and a half days on the May $16 calls. The current price is 47 cents.

Based on the chart patterns, if the stock were to drop below $16 by Friday, consider taking assignment and wait for the stock to push back above $16. However, any change in fundamentals related to the Alibaba payment could create volatility downwards (or hopefully upwards).

Note, normally I take a position and then post it on my blog, however, due to my uncertainty on the outcome, I have no position at the moment. The technical pattern looks promising, but due to the underlying issue with Alibaba, I have decided to wait a few more days.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

Playing the Expiry for May 13: Las Vegas Sands

Have you had enough of hearing about Las Vegas Sands [LVS:NYSE] nearly every week? Well, hopefully not, since every post here has shown to be profitable.

I took a short straddle position on Las Vegas Sands just now with the 44 strike price. As usual, they are the weekly options, thus, they expire on May 13, which is two days and a half away. The current option premiums available by writing both the call and put at the same time nets out to just over $1.00. I got $1.11 with a fortuitous spike up and down, but you should be able to gather a premium of about $1.03.

The current stock price is about $44.12. $1.03 represents a 2.33% payout for the rest of the week. Your break even range is roughly $42.97 to $45.03 (again, it varies on the total premium received).

The margin requirement is surprisingly small, roughly $1,300 per pair of legs, which earns you over $100. That's a very efficient use of margin. Again, the stock is quite volatile, so for those who want a more conservative approach, writing a short combination using the 45 call and 43 put will also be very reasonable. The net premiums received on these pair of legs will net you roughly 45 cents, giving you a break even range of $42.55 to $45.45.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

A Small Wager on Las Vegas Sands

About two weeks ago, I wrote how Las Vegas Sands [LVS:NYSE] had been trading in a small range for several weeks, giving arise to great option writing opportunities (click here). Those that heeded the trade suggestions and continued, would have seen healthy profits.

Well, the shares of Las Vegas Sands are still trading in a tight range, although the range has shifted upwards by about $2. The shares have continued to resist breaking through above $46.50 and has held support in the high $46.00 range, give or take a few cents. It also helps that the upper Bollinger Band, which have also thinned over the last few days, indicating lower volatility, is floating below $47. I took the opportunity this week, earlier than usual, to write a short straddle on Las Vegas with the weekly 46.00 calls and puts.

The current premiums received on the pair is roughly $1.20, giving you a break even range of $44.80 to $46.20 (excluding commissions and SEC fees). This range gives downside and upside protection of over 2.6% each from the strike price.

Normally, I write the options on Wednesday or Thursday, but decided that I would rather take advantage of one extra day to capture a few more cents on time value. My outlook on the stock most likely won't change over the next few hours, unless significant news were to change that.

If you are slightly more bullish or bearish on the company over the next four days or risk adverse, consider implementing a short combination trade, instead of the short straddle mentioned here. One could cut their potential earnings today by writing a higher strike on the call or lower strike on the put. The 47 call expiring April 29 are trading at about $0.26 while the 45 puts are roughly $0.22.

A combination is less risky but also potentially more profitable, as it may require only two trades instead of three. It is only more profitable if the stock deviates further from $46 but still remains between $45 and $47. With a short straddle, one leg must be closed out, and the further away from $46, the lower the net profit. In this situation, if the stock closes near $45.30 or $46.70, the short combination would be more profitable than the above short straddle.

Disclaimer: Writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

Continued Consolidation on Las Vegas Sands

Shares of Las Vegas Sands [LVS:NYSE] have made option writers, like me, wealthier over the last three weeks. Having recognized the early signs of a consolidation pattern in the making, short combination trades have proven profitable. A short combination is a spread trade where the trader writes two naked/uncovered options: A put at a lower strike and a call at a higher strike. This is a neutral strategy with the hope the stock's value remains between these two values by the expiration of the options, allowing the trader to earn money.

The stock's value took a turn for the worst in March when rumours about legal issues arose. Early reaction was negative; the stock's value plummeted about 25 per cent in under a month. But as it approached its 200-day moving average, the stock saw some support. It was at this point that more information about the legal suit hit the news and it was apparent that a big disaster was not looming. The stock then gapped up back to the mid-40's.

The stock had some trouble trading above $45 at the end of March and continues to show some resistance in the $45 area, meanwhile, holding above $43. This sideways pattern, often referred to as a trading range or consolidation trade, has held very well for over three weeks now.

Option writers have taken advantage of this range by writing weekly puts at a strike of 43 and weekly calls at a strike of 45. The stock has closed between $43 and $45 on Friday for four consecutive weeks. More importantly, the stock has been volatile enough to allow traders to capture added risk premiums and the ability to wait and write options when the stock falls or rises to $43 and $45 levels.

Often is the case, when implementing a spread strategy, traders will write both legs at the same time. However, because of the volatility, by writing the options on different days or even different times during the day, traders are earning additional premiums. The table below shows the bid value of the options at the high and the low of the day during the stock's high and low.

Time Stock Price Apr 21 45.00 C Apr 21 43.00 P 10:14 AM EST $42.84 $0.14 $0.83 3:55 PM EST $45.86 $1.33 $0.10

As we see, under traditional spread timing methods, if the trader implemented the short combo near the low of the day in the morning, the trader would have earned a net premium of $1.02 (14 cents on call, 88 cents on put). However, seeing that the stock has traded in such a volatile range, a trader could have written the put only, and waited a day or two for the stock to move closer to $45. In this case, the stock did it in three hours. So, instead of earning $1.02, the trader could have earned as much as $2.21 (1.33 cents on call, 88 cents on put). That's roughly 120 per cent more!

However, a trading range is always temporary. It could last only a few weeks, or even a few months. The caveat to a short combo trade is that when a break out up or down occurs, a trader must recognize and close out the in-the-money option before the trade becomes unprofitable. One could consider rolling up the option helping offset losses, if any, while capturing additional time value on a new leg.

Note: I started writing this before the stock made a major move in the final hour of trading today. The material above is for informational purposes only and is not meant to be advice or an opinion that the stock will remain sideways for this week. I have NOT yet opened up a position on LVS this week.

Disclaimer: writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

A Short Straddle on Alcoa

Alcoa [AA:NYSE] kicks off the unofficial earnings season for the first quarter this evening, when it is prepared to announce its own Q1 results. But today, I'm not going to discuss the numbers and its estimates and forecasts. No, you can get that anywhere. Today, I'm going to quickly discuss a common trading strategy that may be employed to take advantage of the risk premium priced into stocks before an earnings report.

A short straddle is a neutral trading position in which a trader believes the stock will have a small move. Because of the higher risk and expected volatility in the stock, the option premiums will be substantially higher than it would be under normal circumstances. This strategy requires the ability to write an uncovered call and an uncovered put. In the case of Alcoa ($17.70), you could consider writing a short straddle at a strike of 18.00. The current bids on the call and put are $0.34 and $0.66 per contract respectively. That nets you $1.00 per pair of legs. Excluding commissions, the break even range on this trade is $17.00 to $19.00. That gives downside protection of 3.95% and upside protection of 7.34%. This means if the stock falls no more than 3.95% or rises less than 7.34%, you will profit. The closer it is to $18.00 by Friday, the more you earn.

But if you think the stock might move slightly lower than the current price of $17.70, then you could consider writing the 17.00 call and put. The net premiums would earn you $1.07, which would give you a break even range of $15.93 to $18.07. This strategy would profit if the stock fell less than 10.00% or rose less than 2.04%.

You must also close at least one leg on or before the expiration date. The closer it is to the strike price, the less you will have to pay to close the in-the-money option.

Disclaimer: writing uncovered (or naked) options requires substantial margin and is only available to sophisticated traders. Uncovered calls have unlimited risk and can have infinite losses. Before making any trade, always discuss this with your advisor or professional broker.

Baidu Trading Above Bollinger Bands, 52-Week High

Shares of Baidu.com [BIDU:NSD] have surged $10 over three days, also surpassing its old 52-week high of $131.61. The stock is now trading closer to $133 at the moment. There is a rumour that the company is about to enter the mobile OS business, following the footsteps of its American counterpart, Google.

I have continued to implement bullish strategies on the stock, as posted in my previous blog articles, but today, I took a short-term bearish move, one I hope that will pay off. I didn't time it right, but I wrote an in-the-money call hoping to capture intrinsic value and the time value. A March25 130 weekly call option for $2.50 was what I received. However, the option is now trading at $3.60 and continues to push higher.

Many people are hesitant on buying stocks at 52-week highs for psychological reasons. Personally, I take little stock, no pun intended, in that. However, when the shares of a company are this high above the Bollinger Bands, it is more likely than not that it will correct back into its consolidated trading range determined by the bands.



Bollinger Bands create and display a trading range based on the volatility. Stocks near the top of the band are said to be overbought, while stocks near the bottom are said to be oversold. This is one of the most common technical indicators used by traders.

With that said, stocks trading above the Bollinger Bands do not necessarily correct. It is highly possible that the bands will extend upwards due to increased volatility, as currently seen. The stock could hold in the low-130's for a week while the bands expand. The Bollinger Bands are moving upwards as noted above, so it is possible shorting the stock may not be profitable, hence why I wrote an in-the-money call option, which serves the same purpose with the added benefit of disintegrating time value.

As always, I am not a licensed or registered trader, broker, or representative. The above post is a summary of my trading for the week and are ideas of ways to make money in the market. It is not meant to be taken as investment advice. Always consider your investment objectives and needs before implementing any strategy. Always talk to your advisor.

Baidu, Netflix Present Good Option Strategies

I don't normally write weekly options on the Monday when the market is so unstable and unpredictable, but the option premiums were worthy of a look, and my gut instincts told me to take a calculated risk that could pay off. Down days often increase put prices as people seek protection in the market. Big down days also present good opportunities to write options as many speculators tend to over pay for puts. This week, I took a look at writing puts on Baidu and Netflix.

Mar11 weekly Baidu 115 puts look attractive at this level. The Market Intelligence Center indicated bullish technicals with resistance at $124.42. A bullish sentiment on the stock would make writing puts a less risky trade. Baidu [BIDU:NDQ] is trading at $118.62, with the out-of-the-money option selling for more than $0.80/contract. That would net you 0.62% return for four days and 2 hours of trading, and allow you to profit if the stock were to rise, remain flat, or drop no more than 3.05%, a significant buffer.

Mar11 weekly Netflix 200 puts also look attractive. The stock has shown support in the low $200's for two weeks now, suggesting many traders are willing to pay $200-204 for Netflix [NFLX:NDQ] here. Until the fundamentals change, writing a 200 put for the week will earn you $2.50 per contract, with the stock trading at $205.85. This trade would earn you 1.21% for the next four days and change, also giving you a buffer of 2.84%.

To implement both of these trades, approximately $9,500 margin will be required per contract. To implement only one of the trades, at least $6,000 margin will be required per contract. Note, these figures may vary depending on brokerage requirements.

As always, I am not a licensed or registered trader, broker, or representative. The above post is a summary of my trading for the week and are ideas of ways to make money in the market. It is not meant to be taken as investment advice. Always consider your investment objectives and needs before implementing any strategy. Always talk to your advisor.

Playing the Expiry for August 27, 2010: Google (GOOG)

Last week, my first installment of "Playing the Expiry..." proved popular and profitable, so here is another post for option traders to consider. Again, as always, before implementing any strategy, understand the full risks of all trades discussed today.

Again, Google [GOOG:NSD] appears to be back in play. It's highly-priced stock comes in handy for those looking to the options. Today, we will do a bull call spread for the Aug27 weekly options. Here is the strategy and its potential profit.

Google is currently trading at $453.23, down $1.39. The 440 call (long) is priced $13.60 x $14.40 and the 450 call (short) is priced at $5.50 x $6.00. In a worst case scenario, if your fills are at the market or natural price, your net cost is $8.90 or $890 per contract excluding commissions. Because of significant support at $450, Google has a high probability of remaining in the money, allowing you to profit $1.10 or $110, which is a 12.35 per cent return. Not a bad return if you do ask me.

Your profits can be improved by attempting to fill your buy and sell in between the bid and ask prices. My fills were $14.30 and $5.80, saving me $0.40 a contract, allowing me to earn an additional 5 per cent profitability and lowered break-even points.

Remember to close both options out (if needed) before the 4 PM EST close on Friday, to avoid paying exercise/assignment costs on the options.

P.T.E. record book located at the top bar, to the right of "MAIN".

3PAR (PAR) Trading Opportunity

3PAR Inc. [PAR:NYSE] has found itself caught in the middle of a war, but unlike most times, this has proven beneficial. A week ago, the company announced that Dell [DELL:NDQ] was planning to buy them out for $1.1 billion. Shares surged from under $10 to $18. Then, late last Friday, Hewlett-Packward [HPQ:NYSE] announced it was going to buy the data-storage system for $1.6 billion, or $24 a share. Shares surged once again, to nearly $27 on speculation that Dell would raise its bid and has three days to make a new offer (from Aug 25).

Both Dell and HP have billions of dollars in cash laying around, so a bidding war is anticipated, especially since both companies want to compete with IBM and others.

So what can a trader like you do to profit? With $24 a share a near guarantee on the valuation, consider buying in-the-money September calls to replace the purchase of the underlying security. The Sep 20 calls have almost no time value to worry about, and a final number is expected in the next few days. If Dell decides not to make a move, the most one can lose as of today is $2.60 a contract (or share if equity bought). And rumours are circulating that the $24 a share may be bumped by 3PAR management, with an average estimate from 9 brokers of $29 a share, representing a 7.5 per cent premium. And to the option trader, a profit of around 35 per cent.

Note: these figures are based solely on current available information and speculative information. These figures are not guaranteed and likely to change if a new bid is placed by Dell lower than $27/share or HP decides not to negotiate with 3PAR from its current bid of $24/share.

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Due to the speculative nature of this trade, highly consider its risks with your financial advisor before implementing any strategy or similar strategy discussed within this post.

Playing the Expiry for August 20, 2010: Google (GOOG)

It's a new segment in my blog, and hopefully I can continue to do this weekly (or at least monthly). I will have a new layout soon so it should give you a chance to visit it every Thursday before close to make a trade.

With the market having taken a beating today on bad employment news, some stocks have taken a larger drop than need be. Today's focus is on Google [GOOG:NSD].


The following trade was executed today in my account creating a bull call spread on Google, trading at $470.25. I purchased the Aug260 call ($11.00) and sold the Aug270 call ($3.60). The total net debit is $7.40, meaning my break even is $477.40 on the underlying. My reasoning for this trade is a technical one. Google fell below the Bollinger Bands today, which indicates that a technical rebound is more likely than a drop. My trade is not trying to capture a big up move, but a lack of a continued down move. If Google remains at $470.25 (now $471.20 as I write this), I will be able to capture about $250* per contract (or 33% profit), not too bad for a $740 investment for one day.

*The 460 call will gain $0.20 and the 470 call will lose $2.40, netting about $250, allowing for spreads and commission.

As with all trades, profits are not guaranteed and losses may occur. Ensure options trading is suitable for your investment needs and objectives. Talk to a financial advisor if you are always unsure.

Apple (AAPL), Goldman (GS) Trading Opportunities

Apple [AAPL:NDQ] took a huge hit today, along with the rest of the market, but has shown a key support at $250.00 - at close: over 20,000 shares bidding. The stock dipped below the level intraday but surged above and held on for the remainder of the day. I decided to take advantage of the weekly options to capture two more days of time value. I purchased the AAPL Aug13 240 call and sold the AAPL Aug13 250 call, that is, a debit or bull call spread. As of 3:12 PM EST, the security was hovering $250.55, the 240 call was asking $10.90, and the 250 call was bidding $2.53, creating a natural trade of $8.37. If the stock remains above $250, you simply close both options on Friday and capture the $1.98 on the short, and take a $0.35 loss on the long.

For traders with excess margin, you could consider writing the 250 puts for Aug13 for $2.00, but if traders decide to push Apple lower, you could see larger losses than the bull call spread strategy.

Goldman Sachs [GS:NYSE] broke the (up) trend line on Tuesday, which could be a bearish signal. The MACD and the DMI are also converging into bearish territory. My only concern is that the volume was not significant, only average, and today's large drop could be a result of market sentiment, not a technical drop. I bought puts late last week, but unfortunately sold them yesterday before the FOMC announcement. If this drop is indeed a technical sell off, GS would most likely trade down to the lower bollinger band, which is $140.

The Death Cross Will Happen

"The charts don't lie" is a common phrase that exists amongst traders. It is an accurate, but not guarantee, barometer of investor sentiment and long-term concerns or beliefs. The charts on the S&P 500 and the Dow Jones have continued to show bearish signals since the start of May.

In the middle of May, I noted that the 200-day moving average was breached by all the major North American exchanges (see link) and discussed in a technical analysis blog about the functions of the moving average (see link). Since that date, the Dow Jones has fallen about 1,000 points. And now, we have two big signals the market may fall a little more.

Yesterday, the S&P 500, the Dow Jones, and the NASDAQ all hit 2010 lows, with more lows reached today. The S&P 500 had a key support level at 1,040 which was breached to the downside, indicating further drops to follow. And today, the market is now watching an upcoming death cross.

The death cross, which occurs when the 50-day moving average drops below the 200-day moving average, is a sign that stocks or asset classes will fall further, hence the name. Although the event has not yet occurred, it is fair to say this will happen in the next few days. Mathematically, the Dow Jones must move up 2,000 points in the next day to reverse the falling 50-day average. If you check the charts, the 2-week upward run in June of 800 points did not deflect the 50-day average.



I am anticipating the death cross to occur next week. We may see traders or firms try to delay the event by pushing the market up, even if tomorrow's job reports is positive, but the negative sentiment will take over.

It would be a wise decision to purchase some insurance or write in-the-money calls until a real turn around in the fundamentals is evident.

Seasonality Stocks for the Summer

The dog days of summer are just around the corner, which means it's time for short-shorts, camping, road trips, and ice cream! And if you're like 35 per cent of Americans [1], you'll be gone for a few weeks on a memorable summer vacation. With an economy that is still struggling to find a foothold and news continuing to shake the markets, what can you do this summer to protect your account or even add to your equity while you're gone?

CNBC today discussed seasonal stocks that tend to move higher during the months of summer. Between Memorial Day and Labour Day, airline stocks moved up 8 per cent! Not only that, but from Labour Day to Year-End, it added another 8 per cent. Other notable industries were the travel companies and casino and hotel companies.

Airline companies Delta Airlines [DAL:NYSE], Southwest Airlines [LUV:NYSE], United Airlines [UAL:NYSE], Continental [CAL:NYSE], and AMR Corp. [AMR:NYSE] are the five biggest by market capitalization, all in excess of $2 billion. The move in the industry seems obvious - summer means more passengers. But a sophisticated investor would know that these expectations are already priced into the stocks, and companies don't move on quarterly expectations, but yearly.

The main culprit is in fact falling energy prices in the summer. Many investors often seek safety in energy over the summer with the belief that increased demand from driving and vacations pushes oil up, however this is incorrect. Seasonality for energy is between April to June. This is the time when corporations buy in preparation for summer. Like baking a cake, you buy the flour before you bake, not when you make it.

In the last decade, oil prices have fallen eight times in the summer. Oil prices usually peak in June and collapse until the fall; airline stocks tend to move in the opposite direction of oil.

If you already own airline stocks, you could consider adding positions into casino and hotel stocks. Las Vegas and Macau have seen substantial growth and hotel bookings in the past year, signs people are spending money again. If you want to get involved in these stocks, consider Las Vegas Sands [LVS:NYSE], Wynn Resorts [WYNN:NASD], or MGM Mirage [MGM:NYSE], the three biggest American casino/hotel stocks by market cap. These guys don't pay dividends, so consider writing options for additional income because premiums are extremely good.

Tip for the summer: Sell your energy stocks and buy airline stocks or casino and hotel stocks. Don't forget to enjoy it!

Disclaimer: I currently own Las Vegas Sands and MGM Mirage.

The Memorial Day Effect

History has shown that the markets tend to suffer during the summer months, something I made note of in "Sell in May, Go Away" but one small blip seems to occur right around Memorial Day.

A 6-day span comprising the Thursday before Memorial Day to the end of the Friday after Memorial Day has returned an average of 1.3 per cent, a significant amount considering the summer months rarely return 1 per cent.

Since the start of Thursday, the Dow Jones Industrial Average has gained over 250 points, or 2.5 per cent, with two days to go. Strong fundamentals in the American economy took over trading Wednesday, pushing the markets up 2 per cent, giving this seasonality trend a chance to fulfill. Concerns in Europe continue to linger in the market, but with all the bad news out of the way, traders are starting to focus on the economy in the United States and Canada.

Today, US May auto sales showed double-digit growth and US pending home sales grew at a larger-than-expected pace in April, fueled by tax credits. According to an Associated Press article featured on Yahoo! Finance, values of home equity seems to have bottomed, and used car prices are increasing, persuading car buyers to buy new. Friday could prove to be the decisive trading day with monthly job reports to be released.

The technicals also show significant support at the 1,075 level on the S&P 500. The market's reluctance to fall below this level has been supported by big surges in the following trading day; today was the third time this has happened. A second signal that the bear market is over: higher lows have formed since the market dropped almost 10 per cent from a "computer glitch." The sudden rise at 2:30 PM today also broke a short-term down trend that formed in the last week. And the forth reason there may be a short-term rally: the MACD patterns on the NASDAQ have gone positive, and the S&P 500 and Dow Jones are approaching this as well.

The final hour proved to be another profitable and predictable day for me, something I mentioned in "Trading the Final Hour", as bullish momentum continued throughout Wednesday.

With all this said, there are still dangers in this market. Fundamentals continue to shine, but there are still pockets of negativity emanating from Europe that have been the focal point of traders. I had been bearish in May, but I believe this rally today will lead into a better June.

Trading the Final Day

Seasonality and technical analysis stems from the idea that investors are partially predictable. Those that believe in technical analysis can reap the benefits of the daily fluctuations that exist in the market without concerns on the fundamentals of the company or the economy. Yesterday, I pointed out that the final hour has become a trader's paradise as momentum up- or downward has become extremely predictable as the final hour unfolds. Today, I would like to point out another profitable trade that has worked for me.

Since November 2009, the first trading day of every month has been a positive day for the Dow Jones with an average gain of 88 points. Most believe that this is typical because new money from managed investment funds enter the market on the first of each month, creating a small but predictable push.

So what trading vehicles allow you to capture this behaviour? Instead of choosing a stock which may decide not to move with the market, one should consider purchasing an ETF. For the Dow Jones, this would be the Diamonds Trust [DIA:NYSE], for the S&P 500, this is the "Spiders" ETF [SPY:NYSE], and for the NASDAQ, it is the "Cubes" or Powershares QQQQ Trust [QQQQ:NSD]. These three ETF's track the exchange on a 1:1 ratio. You can also purchase calls or puts on these as well which can limit your risk to just a fraction of the cost.

If you're looking for leveraged ETF's to potentially double your profits (or losses), you can purchase some of the Proshares Ultra ETFs: The Dow Jones [DDM:NYSE], the S&P 500 [SSO:NYSE], and the NASDAQ [QLD:NYSE]. These three products provide double the exposure to the market. A full list of products, including inverse products for hedging and triple exposure, is available on their website.

There are always simple patterns that develop in the market, and the brave will try to take advantage of it. However, we were in a bull market for over a year, and now that the market is in correction mode, we may not see this pattern develop. For those that want to take the chance, the aforementioned products may allow you to capture the move of the market with little margin and less risk compared to a common equity.