Recently I received a question concerning an option strategy known as in-the-money (ITM) covered calls. This is a variation on the more common out-of-the-money covered call, and it has some interesting uses.
What Is an In-the-Money Covered Call?
The ITM covered call can be used as a device to sell an appreciated stock at a price that is somewhat above the market price. It can also be used as a cash-flow generation strategy and tuned to be almost as conservative as treasury bills, or as aggressive as a biotech stock or anywhere in between.
How to Use an In-the-Money Covered Call
The mechanics are simple. You buy (or already own) 100 shares of a stock or exchange-traded fund. You then sell a call option, with a strike price that is...
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Whether you consider yourself a technical analyst or not, there are very few investing techniques that do not at least give a nod to the technical side of investing. Some investing styles use nothing but technical analysis, with their practitioners often claiming that they know nothing of stock fundamentals because all they need is in the charts. This segment of investing didn't sprout from nothing and in this article we will look at the men that pioneered the field of technical analysis.
All Things Flow from Dow
Charles Dow occupies a huge place in the history of finance. He founded The Wall Street Journal – the benchmark by which all financial papers are measured – and, more importantly for our purpose, he created the Dow Jones...
Most traders and investors are familiar with the saying "the trend is your friend." But deciding what constitutes a trend often proves challenging because it depends on the trader's preferred time in the trade. Furthermore, once a trend has been identified, the trader must determine its strength.
In his book "The Logical Trader," Mark Fisher describes a number of techniques to help his reader spot trend breakouts and identify their strength. Fisher's ACD trading system uses intraday data to identify the daily opening range for finding trades. Fisher, an independent trader, is the founder of MBF Clearing Corp., one of the largest clearing firms on the NYMEX.
While this intraday ACD technique may not appeal to the long-term trader or...
Channels provide a simple and reliable way for traders to define their entry and exit points within an equity. Although the basic channel-trading rules provide traders with a good idea of where the price is going within the channel, they leave little insight into where breakouts might occur. Identifying patterns known as Wolfe Waves and Gartleys, however, can help predict these breakouts in terms of both their timing and scope (their proportion to the established channel). This article will take an in-depth look at the channelling techniques centered on these patterns and how they can be applied to help you profit.
Wolfe Waves
The Wolfe Wave is a natural pattern found in every market. Its basic shape shows a fight for balance, or...
Many years ago, when my wife and I first made a home together with three children by a prior marriage, we encountered a problem. The kids complained that I was taking too much time in the shower in the morning, making them late for school. Upon a moment's reflection, I recognized that I indeed was the culprit. But why would I do this? Was it selfishness or insensitivity?
The answer came in a flash of memory. My own parents came from troubled childhood backgrounds and bent over backwards to create a close family environment. In fact, at times, it felt too close for me. On those occasions, I craved solitude. So one way I created alone time was to take nice long showers. As much as my parents wanted closeness, they were sane enough to...
Have you ever played musical chairs? Do you remember those instances when there are only a few players left and the music is playing longer than normal with the tension building as everyone knows the music will end at any second? It reminds me a little bit of the feeling of this current bull market. With reports, at the time of writing this article, that it is the longest bull market in history, supported by what might become the longest economic cycle without a recession in history, the music feels as though it has been playing longer than normal.
Add on top of that, stock market valuation indicators like the Schiller P/E ratio and the Buffett Indicator hitting record, or close to record, over-valuation metrics, and one might ask...
Is there anything more frustrating than taking a breakout trade to have it fade back into its previous range and stop you out?
What if you could learn to take advantage of these so called ‘fakeouts’ with a clear, simple trading system that has a great risk to reward ratio?
Here is a strategy I have been using to successfully take advantage of false breakouts that occur on a regular basis throughout different currency pairs. I’ll take you through a trade I took recently so you understand this strategy in 5 simple steps.
Step one: Identify support and resistance
I am a strong believer that support and resistance levels should be obvious. I am interested in levels everyone else is aware of and looking at. An exercise I often suggest is...
While using algorithmic trading, traders trust their hard-earned money to the trading software they use. The right piece of computer software is very important to ensure effective and accurate execution of the trade orders. Faulty software, or one without the required features, may lead to huge losses.
A Quick Preview on Algorithmic Trading
An algorithm is defined as a specific set of step-by-step instructions to complete a particular task. Be it the simple-yet-addictive computer game like Pac-Man or a spreadsheet that offers huge number of functions, each program follows a specific set of instructions based on an underlying algorithm.
Algorithmic trading is the process of using a computer program that follows a defined set of...
Scalpers seek to profit from small market movements, taking advantage of a ticker tape that never stands still during the market day. For years, this fast-fingered crowd relied on Level 2 bid/ask screens to locate buy and sell signals, reading supply and demand imbalances away from the National Best Bid and Offer (NBBO), or the bid and ask price the average person sees. They would buy when demand set up on the bid side or sell when supply set up on the ask side, booking a profit or loss minutes later as soon as balanced conditions returned to the spread.
That methodology works less reliably in our modern electronic markets for three reasons. First, the order book emptied out permanently after the 2010 flash crash because deep standing...
This article will show you how to use a smaller economy’s currency to help you decide what to do with a larger economy’s currency.
Just like in the stock and futures markets, there are always things that seem to lead the way of the larger markets. For example, very often a few of the FAANG stocks (Facebook, Apple, Amazon, Netflix, Google/Alphabet) will lead the S&P 500 and Nasdaq higher or lower, or even just watching the Nasdaq in futures will often lead the S&P futures market. In Forex, oftentimes a smaller currency pair will lead the direction of a larger pair.
Now, when I say smaller vs. larger currency pair, what I’m really referring to is the respective size of the economy, or Gross Domestic Product (GDP). Looking at the last...
You got it – with all that training and knowledge gained, you are poised to achieve your trading dreams. You know this stuff and you work hard. You are ready to win and grow wealth. Confidently you put money on the line. Then, WHAM, when the money is real, you hit the brick wall again, again, and again. Suddenly your trading mind is hacked and you spin out of emotional control, again. Trying harder next time simply does not help. Despite your best efforts, something is missing that blocks you from achieving the success you know is possible. But nobody is talking. And maybe, just maybe, you do not want to hear that the problem is you and your secret, primitive brain.
There is a gap between your dreams and the reality of trading...
Though the efficient market hypothesis as a whole theorizes that the market is generally efficient, the theory is offered in three different versions: weak, semi-strong and strong.
The basic efficient market hypothesis posits that the market cannot be beaten because it incorporates all important determinative information into current share prices. Therefore, stocks trade at the fairest value, meaning that they can't be purchased undervalued or sold overvalued. The theory determines that the only opportunity investors have to gain higher returns on their investments is through purely speculative investments that pose substantial risk.
Weak Form
The three versions of the efficient market hypothesis are varying degrees of the same basic...
When considering options expectations and what makes option prices change, it would be nice if we could visualize this in some way that makes the concepts of extrinsic value, intrinsic value and strike price more concrete. Below is one attempt at that, which I hope will add to your understanding.
What is depicted in the chart below is a partial list of the call options for the stock of Apple Computer when it was selling for $190.25 per share. All the options were for a certain expiration date a few weeks in the future.
In the table above right, each row shows a call option at a particular strike price. For each call, the amount of Intrinsic Value and the amount of Extrinsic Value are shown. Calls at strike prices below $190 (shown as...
Tips for beating the market tend to come and go quickly, but one has held up extremely well: if executives, directors or others with inside knowledge of a public company are buying or selling shares, investors should consider doing the same thing. Research shows that insider trading activity is a valuable barometer of broad shifts in market and sector sentiment.
But before chasing each insider move, outsiders need to consider the factors that dictate the timing of trades and the factors that conceal the motivations.
Reasons to Follow Insider Trading
The argument for shadowing insiders makes a lot of sense. Executives and directors have the most up-to-date information on their companies' prospects. Intimately acquainted with cyclical...
Have you ever had to endure the tedium of listening politely to a loquacious individual at a party brag about the killing he made through investing in stocks or the stunning returns his little-known investment manager generated? If you’ve wondered whether there’s a way to get in on the action, mirror trading or investing may be the answer. But before you plunk down your hard-earned savings into a mirror trading account, you should know this fad has a number of drawbacks that may restrict its appeal to a tiny slice of the investing populace.
What is Mirror Trading?
The concept of mirror trading was first introduced in the foreign exchange market in the early 2000s but it took a few years for the equity market to catch on.
Mirror...
What Is a Futures Contract Rollover?
In the futures market, the transition from an expiring futures contract to a new futures contract is called a rollover. Since futures are derivatives contracts that control an underlying asset they, like many contracts, have a start and finish date. Because there is a shelf life to futures markets, traders must close their existing positions in the contracts that are close to expiring. If they elect to continue trading that asset, before the contract expires they will rollover their position (close the expiring position and open a new position) which will trade until the next cycle of expiration, usually several months into the future.
Timing of Futures Contract Expirations
To someone new to trading...
There are thousands of equities to choose from and day traders can pick virtually any sort of stock they want. So the first step in day trading is figuring out what to trade. Once one, or several, stocks or ETFs have been selected, the next step is coming up with some ways to profit from them. Here is how to select stocks for Intraday Trading.
1) High Liquidity.
Liquid stocks have big volume, whereby larger quantities can be purchased and sold without significantly affecting the price. Since intraday trading strategies depend on speed and precise timing, a lot of volume makes getting into and out of trades easier. Depth is also critical, which shows you how much liquidity a stock has at various price levels above or below the current...
Most people who are interested in learning how to become profitable traders need only spend a few minutes online before reading such phrases as "plan your trade; trade your plan" and "keep your losses to a minimum." For new traders, these tidbits of information can seem more like a distraction than any actionable advice. New traders often just want to know how to set up their charts so they can hurry up and make money.
To be successful in trading, one needs to understand the importance of and adhere to a set of tried-and-true rules that have guided all types of traders, with a variety of trading account sizes.
Each rule alone is important, but when they work together the effects are strong.
Trading with these rules can greatly...
Futures
trade with high leverage in comparison to the stocks making up the
indexes. Buying 100 shares of the SPY
(the ETF that tracks the S&P 500 index) would cost nearly $29,200 at the
time of this writing. Even with 2:1
margin, a trader would need $14,600 to maintain the position. To trade one contract of the ES (the S&P
500 eMini future), a trader only needs $6930.
For an intraday trade, the margin could be as low as $500!
The
first half hour to hour of the equity markets can be very volatile. Sometimes
it seems like prices are fluctuating wildly with no rhyme or reason. However,
there is a technique that could help you predict the morning price movement and
even potential price reversals. This technique could be used for...
Warren Buffett once said that as an investor, it is wise to
be “Fearful when others are greedy and greedy when others are fearful.” This
statement is somewhat of a contrarian view on stock markets and relates
directly to the price of an asset: when others are greedy, prices typically
boil over, and one should be cautious lest they overpay for an asset that
subsequently leads to anaemic returns. When others are fearful, it may present
a good value buying opportunity.
Keep in mind, the price is what you pay and value is what
you get, pay too high a price and returns are decimated. To elaborate on this,
the value of a stock is relative to the amount of earnings it will generate
over the life of its business. In particular, this value is...
Hello
traders! This week, my Lesson will show how to use multiple time frames to
trade the Forex market. In the grand scheme of this core strategy, we recommend
using three time frames to help make your investing and trading decisions,
whether you are trading stocks, Forex, Options or futures. The first time
frame, or largest time frame, is to determine where we are in the ‘big
picture’, essentially showing us where the biggest institutions are trading.
The next time frame down shows us the direction/trend between these
institutional levels. And the third or smallest time frame show us smaller
supply and demand zones so we can join the trend in between those the larger
time frame levels. Pretty easy, huh? Let’s get into a bit more...
Although they would not admit it, most portfolio managers take a core/satellite approach when managing their equity portfolios. The part of the portfolio that might mirror the overall market could be considered the "core" and the part of the portfolio that deviates from the overall market can be considered the "satellite" portion. When you hear portfolio managers say they are trading around their "core" bank holdings - or they are currently overweight oil stocks and underweight technology stocks, or they have a small cap tilt to their portfolios - they are essentially taking the core/satellite approach.
But what about the average investor? Exchange-traded funds (ETFs) provide an easy way of implementing a core/satellite approach. We...
Investing
opportunities today are not bound by geographical location. If you're intrigued
by the reports of emerging economies and booming growth in many nations around
the world, you may well want to invest in some of them. You just have to know
how to get started.
6 Paths to Global Growth
There are six ways to invest in foreign growth that are available to any
investor:
American
depositary receipts (ADRs)
Global
depositary receipts (GDR)
Direct
investing
Mutual
funds
Exchange traded
funds (ETFs)
Multinational
corporations
The Ups and Downs
For most
investors, the main points of investing in foreign stocks are to diversify
their portfolios and to take a stake in the growth of other economies.
Most
financial experts and...
Short
term trading can be very lucrative, but it can also be risky. A short term
trade can last for as little as a few minutes to as long as several days. To
succeed at this strategy as a trader, you must understand the risks and rewards
of each trade. You must not only know how to spot good short term opportunities
but also how to protect yourself. In this article, we'll examine the basics of
spotting good short term trades and how to profit from them.
The Fundamentals of Short Term Trading
Several basic concepts must be understood and mastered for successful short term trading. These fundamentals can mean the difference between a loss and a profitable trade.
Recognizing Potential Candidates
Recognizing the "right" trade will mean...
Penny stocks come with high risks and the potential for extraordinary returns, so investing in them requires care and caution. Due to their inherent risks, few brokerages even offer penny stocks to their clients. Penny stock companies are often headed for bankruptcy or are highly overleveraged, because of that investing in penny stocks is risky. There are two ways to make money with penny stocks, but they’re both high-risk strategies. Below is a breakdown of the risk and rewards of penny stocks.
The Lowdown on Penny Stocks
Penny stocks can be defined in many different ways. Most people logically assume that penny stocks refer to stocks trading for less than $1. However, the SEC defines penny stocks as stocks trading for less than $5...
The currency price of one country becomes stronger or weaker against another country's currency on a daily basis, but what exactly does that mean for those who don't trade in the forex market? Currency exchange rates affect travel, exports, imports and the economy. In this article, we'll discuss the nature of currency exchange and its broader impact on people and the economy.
For the sake of this article, we will be using the relationship between the Euro and the U.S. dollar as our primary example. More specifically, we will be discussing what happens to the economies of the U.S. and Europe if the Euro trades markedly higher against the U.S. dollar. Although the Euro has recently lost ground against the U.S. dollar (1 USD = 0.89 EUR)...
Amid thousands of stocks actively trading in global markets, a significant percentage are very thinly traded stocks, in other words, stocks that trade irregularly at low volumes. Investors should be aware of the considerable risks of trading in these low-volume stocks.
One risk of low-volume stocks is that they lack liquidity, an important criterion in stock trading. Liquidity is the ability to be easily bought or sold in the market without a change in price. This means that a stock which is trading at $25 per share should be easily bought or sold in large amounts (say 100,000 shares) while still maintaining the price of $25 per share. For stocks, a good measure of liquidity is the average daily trading volume. In general, any stock...
Mindfulness, over the past few years, has become synonymous with meditation. Now, that doesn’t mean that all who read this missive will know that to be true. In fact, there are still great numbers of people, traders included, who have no clue that this is so. Additionally, when the word trading is coupled with meditation, there are large swaths of traders whose eyes roll and glaze over at the notion. There are a number of reasons for this phenomenon; for example, meditation is still not fully understood and is often mischaracterized as strictly a religious exercise and/or it is thought to be so esoteric as to not be useful for something as practical as trading.
To combat this notion, I’ll list some of the benefits of a mindfulness...
If ever there was a rock star of economics, it would be John Maynard Keynes. He was born in 1883, the year communism's godfather Karl Marx died. With this auspicious sign, Keynes seemed to be destined to become a powerful free market force when the world was facing a serious choice between communism or capitalism. Instead, he offered a third way, which turned the world of economics upside down. In this article, we'll examine Keynes' doctrine and its impact.
The Cambridge Seer
Keynes grew up in a privileged home in England. He was the son of a Cambridge economics professor and studied math at university. After two years in the civil service, Keynes joined the staff at Cambridge in 1909. He was never formally trained in economics, but...
Many say that charting is nothing more than predicting the direction of a price between significant support and resistance levels. We know that a support level is a price level which a stock has had difficulty falling below. This is where a lot of buyers tend to enter the stock.
Similarly, we know that resistance is a price level above which a stock has difficulty climbing. This is where a lot of buyers take profits and shorts enter. Typically, a stock's price will range between these levels until it breaks out or breaks down. Hundreds of different methods can be used to locate these areas of support and resistance, but one of the most underrated methods is simply using price by volume, or PBV, charts.
In this article, we explain what...