CPSL Wedge

CPSL over the last month has been forming a bearish wedge--lower highs and lower lows--trending down to a prior support at 4.05, and closed yesterday at 4.07. Today it gapped down to 4.00 and made a breakout to the downside.

I am looking for support at about 3.50. It's still falling on low volume, so I'm looking for it in the next few weeks. If it makes support at 3.5 or there abouts I might decide to pick up a few hundred more shares.

Or, I might buy an ITM call at 2.5 and wait for a bounce in the stock. I've got my eye on it. (Sorry no charts)

New Calls

With last Friday, I had 7 short calls expire out of the money, which I was happy about because it meant that I could write at least 7 new calls come Monday. And like Jimmy Buffett say, 'come Monday, it'll be alright.'

November options became available on the options calender. And CPSL was hovering right around 4.5 with some dips below. Compared to the October and December calls, November 5.00 calls seemed like the best deal of the bunch with a bid of .45.

I put in a limit order for Nov 5.0 Calls sell to open 7 contracts. It was filled immediately, and I came out with a net credit. That takes my return to ~10% or 5% over the next two months. That is what covered calls are all about.

CPSL Price Test

CPSL made a test of its support at 4.05 today, but only briefly. It then rallied to close at 4.30. I am going to wait to see if it will test again before I go long on the underlying again.

Today's Expiration

CPSL's geometric mean of historical closing prices is 5.04. And covered calls at 5.00 should yield anywhere between 40% and 50%, depending on volatility and its closing price just after expiration. Expiration dates anywhere from 1 to 3 months out seem to be providing the highest returns right now.

This covered call is not overly bullish and remains a fairly neutral market strategy. Anyone looking for a relatively safe trade in the current market, this is not a bad pick. It's expiration Friday and I am watching and hoping my short calls will expire worthless at the close of the bell today, and there is a good chance that will happen.

Let's see how the rest of the market does.

VIX is High

VIX is high, but I am not buying. I don't believe the VIX has topped out, and VIX has been higher in the past, during the .Com bust, and the '02-'03 recession with the collapse of Enron and Worldcom.

I don't want to go long until well after October, because October 15th is when hedge fund managers close out their books for the year for tax reasons. This is generally when we see those managers jettison their loosers, and the markets sees another major fall.

This year with the collapse of Lehman Brothers and another round of beatings for the rest of the financials, it doesn't look good. October has a chance to be the worst month, and then things will have a chance to get better, but until then, I am not bullish.

Price Watch

I've got a watch on CPSL. With earnings postponed until October, there was a mild sell off, and prices returned to last week's average. This looks like normal behavior for CPSL. People who normally don't trade the stock, see the news--jump in only to find the water not to their liking, and jump right back out.

My price target is 4.05, which looks like a prior low support. If it breaks below, I am going to wait to buy, but if it tests that low support once, maybe twice I am looking to buy a few hundred more shares. My strategy continues to write covered calls on the stock, and I haven't seen any reason to alter that. Implied volatility remains high, and premiums are still large enough.

VIX Spike

The VIX yesterday made a 6 point plus jump shot to close at 31.70. This is near 1 year highs of 32.24, but is this the ceiling? Possibly. In situations like this where volatility is peaking (if it is indeed peaking), it is best to buy a long call on the index.

Two things though, I am not sure if it has peaked yet, the gods are out for sacrificial blood, and Lehman may not be enough. There is still some young goat blood out there. And second, I am very weary of opening any long positions heading into October, the season when the gods become naturally angry and demand homage.

So, if I were to go long, and I not saying I will just yet, is buy index calls with plenty (maybe 6 months or more) time. The DJX's implied volatility is hovering at 31.92% (right on par with the VIX). However, calls far enough out (March 09) are asking about 7.55 at the money--little bit expensive. Take your time and do your homework before you decide to go long.

CPSL Earnings Watch

With earnings announcements on the horizon, the price of the underlying has shot up from 4.20 and change to over 5.50 and back down to close at 4.96 on Friday. As most of you all know I am long 800 shares at 4.87, and short 7 September 5.00 calls, and 1 March 09 5.00 call.

However, with earnings news, volume has spiked, and so has the implied volatility--from 60% to over 116%. Calls that were were a bid ask spread of .1/.15 cents at the beginning of last week are back up to .40/.45.

I was looking to go long a few hundred more shares this last week. It looked like CPSL might be headed for prior support at 4.00 and change (and probably was) until pre-earnings news came out. And for some reason volume spiked from it's normal 4-6 hundred thousand shares traded to 1.2 million. It seems that every time CPSL is in the news it causes some kind of volume price spike. And then it dies off, and so does the price; everyone who got on, gets right back out.

With expiration at the end of this week, I am curious to see what happens. Watch the earnings, and if you aren't long already, don't try and jump abord this stampeed. You will get trampled.

CPSL

CPSL's implied volatility has shot from 60% to 116%. As some of you know, I am long 800 shares, for 4.87, and short 7 September 5.00 calls, and 1 Mar 09 5.00 call.
This last week, CPSL was seeing some drop off in price on low volume, and I was waiting to see if it would find some support at prior its prior support, right around 4.00. But on earnings announcements, the stock shot back up from 4.20 to 5.50 and back down to close the day out at 4.96.

I've got my eye on September 15th earnings report. Earnings are never a great cause for the stocks movement. The last few days volume has picked up to over two million shares (usually it trades 400k give or take, with an average of 1.2 million).

I am not going to going to pick up any more long shares unless the price goes less than 4.20. However, the high implied volatility would make for some good short options plays. I just hope the stock stays below 5.00, so I can write some new calls with this IV.

Ike's Back

Ike's here and he's trying to disrupt the oil supply chain. Look for a mild spike in gas prices, but will come back down quickly. That is until we use up the excess supply we've built up, in about five months from now.

Volatility Cones

These volatility cones are useful in determining the implied volatility of an option relative to the historical volatility. They are also useful for determining the future outlook for volatility, but that's like predicting where hurricane Ike is going to go. However, past performance is the best indicator we have to future events.

(CPSL Volatility Cone)

Looking at the Volatility Cone we can see that high low, and standard deviations from the mean of implied volatility. The October 5.00 calls are sitting above the mean just below the 1st deviation line. This tells me that IV is relatively high, and that this would be a slightly overpriced--expensive--option.

Now I am looking to sell the highest price option I can (or buy the lowest). I want to get as much bang for my buck. The Octobers' look like they have just enough time premium, and I have to get close to the money (yes, the IV of the 17.50 calls are off the charts, but they would not be worth my time--they are too far out of the money).

My September calls are close to expiration, and it looks like it's time again to write some new ones. Right now, October looks like the best choice, but we'll see what the November bunch looks like when they get here.

Double Q's

I have of late been watching the Q's, an ETF for the NASDAQ 100. They are trading near some low support and did not get a boost from the Fannie/Freddie buyout. However, their Implied Volatility is still relatively low at about 25%. And, there is always a lot of volume.

I have been watching VXN to see if it gives me buy and sell signals for the NASDAQ 100 and QQQQ, before I jump in with long calls or puts.

The other thing to watch is the double Q's QLD. They mimic the price movement of the Q's roughly 200%. Every price swing up or down it's done two fold. Because of those larger price swings, they also have twice the implied volatility at 56%. However, there isn't nearly as much Put/Call volume on the QLD's as the Q's.

This is just on my watch list. I'm watching the volatility smile to see where the money goes, and I am testing this system to see if it is going to work.

(QLD Volatility Smirk, Volatility Spiking at near term ITM Calls)

Covered Call No-nos

There are several no-no's when trading covered calls. You can go back and read how I've made some of these mistakes. They are actually easy to avoid, if you just take the time to learn.

No-no #1) Not doing your homework. The only way to make money in the market (I should add consistently) is doing your homework, and doing it better than 80% of the rest of the schlubs out there. And this is key. Forgetting say, fundamental analysis, might lead to something catastrophic. If you ever go long and buy a stock, you want it to be a profitable company--not a looser sitting in their mother's basement.

No-no #2) Failing to manage the trade. Covered calls are a simple to manage--not like herding a flock of pre-schoolers down El Camino Real. But, you do need to watch it. A covered call will give you some down side protection, but does not eliminate risk. Stocks can still go to zero! Make sure you have a mental stop set up for the trade. The short call can give you downside protection of up to 11% or thereabouts, but it is no long Put.

No-no #3) Trading the wrong strategy. Don't do what I did, and trade covered calls on LEH right before they announce their first losses ever. Catastrophic. If I wasn't sure which direction that was going, but knew that whichever way it was going was going to be the bootleggers car of them all.... I would have Straddled or Strangled long. (As a beginning options trader that was not available to me, and instead of staying out, I did the No-no). A stradle would have captured this and made me a lot of money, but I digress.

No-no #4) Writing calls with too much time. As a buyer you want time on your side, so buy way out, buy LEAPs if you want. But as a seller, too much time can hurt you. Don't sell a call 6 months out, the premium may seem bigger, but in actuality you are going to make more money selling calls 1 to 2 months out from expiration than any other. Watch time drop like a led balloon.

(Time Decay of Options)

Trade right and returns will come.

Volatility Smiles

Volatility smiles take options models (such as Black-Scholes) and solves for implied volatility. Be aware that implied volatility and historical volatility are different. Historical Volatility lags current price by several weeks, but usually is near Implied Volatility, otherwise it creates a skew (but that's another post).

Looking at the graph, it forms a smile. That's because the demand on either side of the price is increasing. People are taking gambles, and driving the prices up. Options will generally have a lower volatility At the Money, whereas calls and puts on either side will be considerably higher, forming the smile shape.

The more extreme the price volatility, the more likely we are to see a large move in the underlying, not always though. Good smiles might be a good case for a long straddle, or other strategies.

(Volatility Smile for CPSL Sept '08, note the near term Smiles and the long term Smirks)

What happens when there is no smile, or rahter just a volatility smirk? The money isn't there yet, but as you watch over time, a skew becomes a smile; you know where the money is heading.

Dogs of the Dow

Here is another trading system that has a good track record--The Dogs of the Dow. This system takes the biggest losers of the Dow on 12/31/XX and says go long for the next year.

The Dow is a composite index that encompasses several industries, from oil and gas to pharmaceuticals, and so on. It's made up of 30 stocks, mostly well known companies like AT&T and Exxon Mobil. Mostly fortune 50 companies.

Every year there are some losers in the bunch, and more often than not, after they have a bad year, they like to bounce back. More often than not, these are the stocks that have a high dividend yield. So, if you went long with all of the Dogs of the Dow, you might net 5% dividends at the end of the year--not bad. Add those together with capital gains, and you might have a winning strategy.

But buying into the Dogs is capital intensive. What I would do is buy a long term call on the Dogs. I may forgo any dividends that way, but it's less capital up front. So, rather than tying up everything I own, I can still benefit from the system. And, even if the system falls apart (which all systems will do) my exposure is significantly less than if I had gone long on the stock. Remember a long call has a limited downside risk; you can't loose any more than you initially put in (unlike stock).

DOW-VIX Trading System

There are as many trading systems as there are grandmothers in this world. Everyone who has ever traded a single stock has used a system, more than likely it was news, or loudmouth blowhard driven. Nothing really concrete.

There are several systems I have been testing out, to see whether or not they should be used or put in Shady Oaks Retirement Village. This trading system that I am testing out goes off of VIX--the options volatility index. There is just about an index for everything, from Oil to the Dow and back again. When vix is low, volatility is low; prices in the market are making their slow march up.

It comes to a point when the VIX bottoms out, usually at some prior established support. In 2006 it was establishing itself around 10. 2007 tested 16 as a low support, as well as in the last 6 months. When VIX hits that low, VIX begins to rise and the DOW starts to fall, and in this case, it has fallen over 13%. Now we could short the Dow but as much as I've done shorts, I don't like the risk involved. Or rather we could short the DJX (1:100 ratio on the Dow), instead we could use its derivative--buy a put. Buying an ATM Put 60 - 90 days from expiration on the DJX would allow us to capture the fall from our sell signal without exposing ourselves to unneeded risk.

That is what systems are all about.

Fundamental Analysis, The Buffett Way

The Warren Buffett Way is a great book. Buffett is one of the greatest investors of the 20th century along with Soros. Buffett was able to take a relatively small investment of 100k and turn it into an empire of over 35billion, and there are so many people who try to emulate everything he does.

The book outlines his investment strategies and Buffett is big on solid Fundamental Analysis. Buy only companies that you can understand, that have an edge in their market, and are valued to buy and hold.

Some of his assets include Sees Candy, Coke, Geico, Wells Fargo, The Pampered Chef and several other companies from shoe manufacturers to brick factories. While Buffett did quite well for himself and Berkshire Hathaway, however his is not a strategy that I want to emulate 100%.

Buffett had some right place, right time moments, example being, had he not bought Sees, and done so well, he would have not been able to buy Coke at that time. And for Buffett, Coke was huge.

However, there are a lot of good ideas about Fundamental Analysis to take away from Buffett. How to read financial statements, how to value a company based on their books. These are the ideas that I have take away from Buffett and started to apply to my trading.

Always start with...

1) Fundamental Analysis

before...

2) Technical Analysis

3) Market Analysis

You need the right tools for the job, so add to your toolbox.

Wikinvest

There are several chart tools, Yahoo!, Google, MSN, your discount broker (E*Trade) and on down to your great grandpa's old ticker. Wikinvest does one different, and that is user generated content.

Yes, users can write articles; they can also create sentiment (bullish, or bearish), as well as make comments on charts. Articles are nothing new to the internet foray, but sentiment gives you an idea of what direction that particular stock, or sector might be heading, with the ability to agree or disagree and create a BS meter.

The charts help identify price movements in the stock, whether be it by company event or outside news. Those interested in finding out the whys behind their favorite stock should investigate Wikinvest, or those wishing to contribute to a community, this is an excellent place.

This is a sample chart, from Lehman Brothers.

View the LEH WikiChart on Wikinvest

It's not just about mystics of Technical Analysis. Nor is it Fundamental Analysis, somewhere inbetween is Market Analysis.