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Rolling Can Help You Dodge Assignment

Rolling is a way of trying to put off assignment (or avoid it altogether). It’s a time-grabbing play, essentially, but it’s not one to enter into lightly. Rolling can get you the extra time you need to prove out your opinions, but it can also compound your losses.

You can roll short or a long position, but for the purposes of this discussion we’ll focus on the short side.

Our First Example: Rolling a Covered Call

Let’s imagine you’ve sold a covered call according to the following terms:

Stock XYZ at 87.50
Sold 1 30-day 90 Call at 1.30
XYZ moves against you to 92

In case you’re not familiar: “writing” a covered call involves selling a call for an underlying stock that you already hold. You earn a premium for selling the call, but you also take on an obligation: to sell the underlying stock at the strike price if you’re assigned. Because you already hold the shares, your obligation is “covered” – you can always just hand over these shares, which is much less risky than trying to buy shares in a market where prices are probably rising. (Rising stock prices are probably why the call owner exercised their right to buy anyway.)

When the call is first sold, your potential profit is limited to the strike price minus the current stock price plus the premium received for selling the call. As for your max potential loss, it’s trickier to quantify. You receive a premium for selling the option, but most downside risk comes from owning the stock, which may potentially lose its value. However, selling the option does create an “opportunity risk.” That is, if the stock price skyrockets, the calls might be assigned and you’ll miss out on those gains.

When we put on this trade, the goal was for the stock to reach 90 and be called away, but now our view has changed and we’d like to avoid being assigned. Since the stock is now in-the-money (ITM), at expiration we will most likely be assigned. Let’s assume you see some more upside in the stock going forward. If only you could buy yourself a little more time, maybe you could prove your assumptions correct and eek out a little more profit on the stock.

Rolling is one way to respond to this situation. Specifically, we’re looking at two choices to dodge that potential assignment:

1. You can buy back and close the 90 call you sold, taking a loss on the call, but leaving you long stock with unlimited upside going forward.
2. The other option is to roll the short call roll “up” in strike and “out” in time. To do this we will enter an order to buy to close the short call and the sell to open a new call. The new option will have a higher strike price and go further out in time. Moving up in strike will lower the premium received for a short call, but going out in a time will increase the premium. The net effect, we hope, will be a credit to the account for the entire trade. (Check out the example in bold below.)

Don’t forget to factor commissions into whichever choice of the two you pick. Depending on your online broker, commissions for scenario #1 can be as low as $5.60, for scenario #2 $11.20.

If you buy back the 90 call, that will cost you $2.10 – resulting in a net loss of $0.80 on the trade ($1.30 – $2.10). If you “roll up and out”, you can help offset the cost of buying back the call by choosing a strike price that’s higher (“up”) and further “out” in time.

If you decide to roll, you’d enter the following spread trade with two parts:

Buy to close the front-month 90 call -2.10
Sell to open a 95 call that’s 60 days from expiration +2.30
= 0.20 net credit for the roll

Good News and Bad News

Rolling helped you secure a $0.20 net credit to add to your initial premium received for selling the covered call (1.30). If all goes well, your 95 call will expire worthless in 60 days, and you’ll keep 1.50 in net credit.

That’s the good news, but keep the potential bad news in mind, too. Every time you roll, you may be taking a loss (2.10 – 1.30 = .80 in this example) on the front-month call. You’re also tacking on even more time to your trade, in which your stock turned course and headed lower. If the stock loses more value than the net credit received for the roll, in the big picture you’d be down for the whole trade.

Rolling can be useful, but you should definitely go in with your eyes wide open.

Brian Overby is Sr. Options Analyst at TradeKing, an online options and stock broker. Brian appears frequently on CNBC, FOX Business, Bloomberg, and other financial media and is the author of the award-winning TradeKing Options Playbook. Check out Brian’s Options Guy blog and other actionable market commentary at community.tradeking.com.

Options involve risk and are not suitable for all investors. Please read Characteristics and Risks of Standardized Options. While implied volatility represents the consensus of the marketplace as to the future level of stock price volatility or probability of reaching a specific price point there is no guarantee that this forecast will be correct.

Any strategies discussed or securities mentioned, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell securities. TradeKing provides self-directed investors with discount brokerage services, and does not make recommendations or offer investment, financial, legal or tax advice.

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The Dogs of the Dow – those high-yielding stocks that are supposed to represent the bottom of the blue-chip barrel – have some unlikely company.

General Electric once stood as the bellwether of American industry but now sits among the 10 Dow stocks that produce the highest yield and, theoretically at least, represent the most risk for investors.

GE’s [GE  19.121    0.281  (+1.49%)   ] yield is clocking in at a robust 3.6 percent, more than double the 1.7 percent that Dow stalwart Caterpillar [CAT  107.43    1.14  (+1.07%)   ] produces. (GE is minority owner of CNBC.com-parent NBC Universal.)

Joining GE as newcomers to the 2012 Dog pound is Procter & Gamble, with a 3.2 percent yield.

The two companies replace Chevron [CVX  107.071    0.351  (+0.33%)   ] (3 percent) and McDonald’s [MCD  99.22    0.47  (+0.48%)   ] (2.8 percent), both of which boosted the Dogs to the status as one of the top trades of 2011.

As the Dow 30 gained about 5 percent and the Standard & Poor’s 500 finished flat for the year, the Dogs posted an average total return of 16.7 percent, according to calculations from Bank of America Merrill Lynch.

But the strategy has been a loser so far in 2012.

The Dogs, as tracked through their ETF proxy, the Deutsche Bank ELEMENTS Dogs [DOD  9.77    0.03  (+0.31%)   ] has gained just 1.2 percent even though the Dow had gained 3.7 percent and the S&P 500 4.5 percent heading into Wednesday trading.

That’s been the story of trading this year: What worked in 2011 has faltered in 2012. High-yield boomed last year but has faltered this year; high short interest worked as a contrary indicator then but not so much now, and non-domestic stocks are crushing their U.S.-based counterparts, again reversing a 2011 trend.

Still, the Dog collar hasn’t chased away those who believe the hunt for yield will resume.

“Yield is expected to remain scarce as the 76 million baby boomers head into their retirement years,” said Mary Ann Bartels, technical research analyst at BofA. “The equity market is supplying an abundance of yield and investors can get paid to wait for price appreciation.”

The rest of the current Dog pack: AT&T [ATT  25.388    0.006  (+0.02%)   ] , DuPont [DD  50.16    0.75  (+1.52%)   ] , Intel [INTC  26.9001    0.0051  (+0.02%)   ] , Johnson & Johnson [JNJ  65.16    0.16  (+0.25%)   ] , Kraft Foods [KFT  38.31    0.01  (+0.03%)   ] , Merck [MRK  38.71    -0.07  (-0.18%)   ] , Pfizer [PFE  21.661    0.001  (+0.01%)   ] and Verizon [VZ  37.5999    -0.1901  (-0.5%)   ] .

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For investors looking for protection from a chaotic market environment, Cramer on Wednesday outlined his top high-yielding stocks.

Windstream[WIN  11.86    0.07  (+0.59%)   ]: This rural telco provider’s stock sports an 8.5 percent dividend yield. While Windstream’s wire-line phone business is in decline, the company has been focusing on areas of growth, such as broadband and business services. Of Cramer’s top high-yielding stocks, he said Windstream’s dividend is the least safe, even though it has enough free cash flow to cover the payout. For investors looking for a safer play, though, he suggests Verizon[VZ  37.39    0.50  (+1.36%)   ].

Solar Capital[SLRC  23.41    1.07  (+4.79%)   ]: This specialty lender’s stock pays a massive 10.7 percent dividend yield. Cramer would typically view a yield that high as a red flag, but this is a special case. As a business development company, Solar Capital lends money to small- and medium-sized companies that are too tiny or risky for most people to invest in. Solar Capital then returns 90 percent of its profits to shareholders by way of a huge dividend, Cramer explained. He likes the stock at current levels.

Energy Transfer Partners[ETP  43.3999    0.5299  (+1.24%)   ]: This pipeline master limited partnership yields 8.3 percent. Cramer thinks of this company as a “steady toll operator for moving oil and gas around.” Thanks to recent oil and gas discoveries, demand for new pipe has skyrocketed, benefitting ETP. Some investors are upset that the company did a massive stock offering that knocked its stock price down, but Cramer sees it as an opportunity to get shares at discount.

American Electric Power[AEP  38.83    0.40  (+1.04%)   ]: This utility company is committed to paying out higher dividends, Cramer said, and the stock already has a 4.9 percent dividend yield. American Electric Power is one of the U.S.’s top generators of electricity and has the country’s largest transmission system. Cramer prefers this utility to others, though, because he thinks its utility portfolio is among the strongest in the country and it provides power to the “Heartland” where manufacturing is “very strong.”

Sanofi[SNY  33.49    0.63  (+1.92%)   ]: This drug company pays a 5.4 percent dividend yield. Cramer likes Sanofi because it’s a defensive play that doesn’t need a growing economy for business to be good. In addition, it has the lowest exposure to Medicare of any big pharma company. So any potential cuts U.S. lawmakers make to the program are less of a concern. Meanwhile, the company is moving into faster growing areas, such as vaccines, diabetes, generics and more.

Read on for Cramer’s Top Dividend Stocks 2011

 

 

When this story was published, Cramer’s charitable trust owned Sanofi.

The United States will likely suffer the loss of its triple-A credit rating from another major rating agency by the end of this year due to concerns over the deficit, Bank of America Merrill Lynch forecasts.

The trigger would be a likely failure by Congress to agree on a credible long-term plan to cut the U.S. deficit, the bank said in a research note published on Friday.

A second downgrade — either from Moody’s[MCO  32.00    0.62  (+1.98%)   ]or Fitch — would follow Standard & Poor’s downgrade in August on concerns about the government’s budget deficit and rising debt burden.

A second loss of the country’s top credit rating would be an additional blow to the sluggish U.S. economy, Merrill said.

“The credit rating agencies have strongly suggested that further rating cuts are likely if Congress does not come up with a credible long-run plan” to cut the deficit, Merrill’s North American economist, Ethan Harris, wrote in the report.

“Hence, we expect at least one credit downgrade in late November or early December when the super committee crashes,” he added.

The bipartisan congressional committee formed to address the deficit — known as the “super committee” — needs to break an impasse between Republicans and Democrats in order to reach a deal to reduce the U.S. deficit by at least $1.2 trillion by November 23.

If a majority of the 12-member committee fails to agree on a plan, $1.2 trillion in automatic spending cuts will be triggered, beginning in 2013.

Those automatic cuts, mostly in discretionary spending, would weigh further on a fragile U.S. economy, Merrill said.

In the same report, the bank reduced its 2012 and 2013 growth forecasts for the United States to 1.8 percent and 1.4 percent, respectively.

If there were a downgrade, it was not clear which ratings agency would move first.

Moody’s Investors Service, which has a negative outlook on the United States’s Aaa rating, said it is looking at several other factors, including the results of presidential elections and the expiration of the Bush-era tax cuts late in 2012, to decide on the rating.

“It’s not that we’re waiting just for this committee to decide on the rating,” Steven Hess, Moody’s lead analyst for the United States, told Reuters in an interview last week.

Failure by the committee to come up with an agreement, he said, “would be negative information but it is not decisive in our view about the rating.” To be sure, Hess did not rule out the possibility of an early move on U.S. ratings if the country’s economy slips into recession.

So far, however, the economic performance “is certainly not super positive but not a disaster either,” he said.

Fitch Ratings, on the other hand, still has a stable outlook on its AAA rating on the United States, meaning it is more likely to revise that outlook to negative before actually downgrading the rating.

In its latest report on the United States, Fitch says a “negative rating action,” which could be only an outlook revision, could result from a weaker-than-expected economic recovery or by failure by the bipartisan committee to reach agreement on at least $1.2 billion in deficit-reduction measures.

See full article here

 

 

USD/SGD Divergence Cues Swing Trading Opportunity

USD/SGD Set to Swing from 1200 Pip Retracement

The USD/SGD has been one of the strongest market trends. The pair has steadily made lower lows dating back to the March 2010 high at 1.557. Recently the pair has reversed. Since July 2011 the pair retraces 1208 pips from its low of 1.1988 up to the October 4th high of 1.3196. This move against the trend offers traders a chance to rejoin the broader daily trend and potentially swing the pair back with a selling bias.

 

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USD/SGD Divergence Cues Swing Trading Opportunity

Fundamentally, the USD remains weak. Unemployment is still residing at 9.1%, with most market participants predicting the rate to not to change for Friday news event. Expectations can be found updated on the DailyFX economic calendar. As this news week unfolds we will look for chances to enter in the market with our daily trend.

Taking Price in to an 8HR chart we see divergence forming on the USD/SGD. Divergence can be seen by noting the USD/SGD created a higher on October 3rd. The MACD (Moving Average Convergence Divergence) Indicator has created a lower low during the same time frame. Traditional divergence, as represented by a separation of price and an indicator, is a tool utilized by swing traders looking to find a top / bottom after a period of price volatility.

My preference is to sell the USD/SGD in the direction with our broader daily trend with entry’s placed under 1.3000. Stops should be placed over resistance at 1.3250. Limits should be placed at 1.2500 for a clear 1:2 risk reward ratio. A second target may be placed at the 200 MVA on our 8Hour chart near 1.2290.

Alternative scenarios include price breaking through resistance found from the December 2010 high.

 Walker England contributes to the Instructor Trading Tips articles .To receive more timely notifications on his reports, email wengland@fxcm.com to be added to the distribution list.

Read more: http://www.smh.com.au/business/daily-forex/usdsgd-divergence-cues-swing-trading-opportunity-20111006-1la1o.html#ixzz1agaB1rTA

I think we’ve all heard that 90-95% of futures traders blow up their trading account. How does that make us feel? These statistics may prevent some people from even trying. But is it possible to use these numbers to our advantage?

One of the most important concepts to understand regarding trading is that “the public” is always wrong. This can be useful information, however. To quote Larry Williams, “There is one little problem… WE are the public!”

In other words, we have to fight the traditional trading and investing programming that we’ve listened to our whole lives! We will no longer follow the herd; traders are mavericks. Therefore, don’t expect to win popularity contests in online trader chat rooms. Most of the these chat rooms are filled with paper traders who have yet to put money in the markets and who love to talk about the trades they “did” and how bright they are. If you feel a need to hang out in these chat rooms, I would suggest you enter these rooms to determine what trades most of them are taking and take the other side!

This may sound strange to you if you haven’t heard this before but we have to be a contrarian. If this philosophy is hard to swallow, consider the following facts. The Commodity Futures Trading Commission publishes a report every week called the Commitment of Traders (COT) report. The report is sometimes referred to as legal inside information due to the fact that any futures trader that holds a reportable position overnight has to inform the government. Reportable positions are open futures positions that are sizable and not typical of a small retail traders position.

From the COT data, we are able to determine what the net positions are for the large commercial traders and the small retail trader. Sometimes there is no significant difference between the commercials and the small traders (the public.) However when there is a significant difference, pay attention!

For example, let’s imagine that there has been a bearish trend in soybeans for the past six months. We look at the Commitment of Traders report and it says that the small retail traders are significantly more short than long. In fact, they haven’t been this short for about two years. Now we turn to the commercials and their net open positions. The COT states that the commercials are significantly more long than short, and they haven’t been this long for two years. This is useful information as the commercials and small retail traders are polar opposites at this point. Guess who is going to win this fight? Remember the golden rule? The one with the gold makes the rules? Yes, the commercials always win and the public is always wrong.

When you see the charts to prove the above COT example, you truly will become a believer in the fact that the public is always wrong! Armed with this contrarian information, we can give ourselves an edge when it comes to trading futures, and it will help us avoid staying in the 90-95% club.

Ross Beck, FCSI (AKA Mr. Gartley) is a Fellow of the Canadian Securities Institute and world renowned public speaker on technical analysis. Ross writes The Climb newsletter for Majestic Peak Trading and the Gartley Trader newsletter at gartleytrader.com. Click here for more information.

It’s only appropriate that the morning of the last day of the quarter is again dominated by negative news from Europe. The unwinding of long positions followed by the triage has led to one of the more volatile quarters in history. And the media, with their lack of insight, is having a wonderful day leading most stories with “this is the worst month (quarter) in X years for (fill in the index or commodity here)”.

The market is getting to the point where it’s now priced-in a lot of bad news. Should the news get worse, prices will move lower in Q4 (you don’t need me to tell you that). This is especially true as just about everything broke under its 200-day this quarter. But with short interest so high and everyone (except the long only crowd) positioning themselves for the worse, any good news is going to lead to large rallies. If the good news is structural, the rally could be very substantial.

For us, we’re going to continue to trade as we have. I’m very grateful for the high cash levels and the short positions we’ve had this past month and our traditional bear market portfolio has begun to take shape. Add the hedging in (for both the long and short side) and we’re well positioned to handle whatever the political and economic environment brings through the end of the year.

For today, the market is still in neutral territory and even though the futures are down 1% at 7 am, there’s still the potential for the powers that be to try to run the market higher as they did yesterday in order to make the month/quarter look better. Overall though, the trend is down and there is no short-term bias on either side (you can further see that with so few set-ups today in The Machine).

Have a great weekend!

The above is from Larry Connors’ Daily Battle Plan.

To learn more about the Daily Battle Plan – including access to Larry’s daily ETF trading signals, click here for more information.

And for more on ETF trading, be sure to visit us here to check out the book that Stocks, Futures and Options (SFO) Magazine called one of the best trading books of 2009: High Probability ETF Trading: 7 Professional Strategies to Improve Your ETF Trading.

Larry Connors is founder of TradingMarkets.com

A financial transaction tax? It didn’t work when it was tried in Sweden.

Another potential factor in today’s late market drop: word that the European Commission will unveil a financial transaction tax on bond and stock trading, as reported by DealBook.

This is a variation on the Tobin Tax, first suggested by Nobel Laureate James Tobin, who proposed a tax on currency transactions.

France and Germany are reportedly in favor, but the UK and Sweden are not, and with good reason: it didn’t work when it was tried in Sweden.

In 1984 Sweden instituted an 0.5 percent tax on the purchase or sale of equities…a 1 percent tax on a round trip! It was doubled in 1986, and was subsequently modified depending on how long the security was held.

The result: taxable trading volumes fell, and the taxes collected were disappointing. Also, revenues from capital gains taxes fell at the same time (duh), so any gains from the transaction tax were offset by the fall in capital gains taxes.

The tax was abolished in 1991.

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