Weekly Stock Options Trading Tips: March 30, 2009

Stock Options Trading Idea of the Week

Comparing the Graphing Software Models

On nearly a daily basis, I check how our 8 actual portfolios will perform between now and the next monthly expiration, using two different software packages.  Next Tuesday there is a mini-expiration when the March quarterly options expire, and the two software packages predict different outcomes.  This week we will look at how they differ.

Comparing the Graphing Software Models:  In the Mighty Stalagmite portfolio, there is a big discrepancy between the thinkorswim Analyze graph and the risk profile graph that our software produces.  I have not been able to figure out what assumptions are made by the two models that cause such differences, and for that reason, I continually refer to both graphs before making trading decisions. 
 
The Analyze graph shows a gain of only about half as much if the stock stays absolutely flat for two days.  My sense of it is that the true number is somewhere between the two graphs, although a bit closer to the Analyze number.  I don't believe we can make as much as $1000 at any SPY stock price.  There is just over $1000 in time premium that will disappear in two days, and the average daily decay for the April long options is about $400 ($4066 total value divided by 20 days) although we know that those options should fall by considerably less than the average daily decay this early in the expiration month.  It would be nice if the stock managed to stay flat so we could easily decide which graphing software is more accurate in this case.





The Mighty Stalagmite portfolio is worth only $3300 at this time, so the expected returns over the next two trading days (if SPY doesn't fluctuate much) are quite impressive on a percentage basis.  We are hoping for a flat or slightly higher stock price so that these gains come our way.
 
Any questions?   I would love to hear from you by email (terry@terrystips.com), or if you would like to talk to our guy Seth, give him a jingle at 800-803-4595 and either ask him your question(s)  or give him your thoughts.
 
You can see every trade made in 8 actual option portfolios conducted at Terry's Tips and learn all about the wonderful world of options by subscribing here.   Why wait any longer to make this important investment in yourself?
 
I look forward to having you on board, and to prospering with you.

Terry 

Andy's Market Report

Stocks took a tumble Friday, but the decline was not enough to stop the major indexes from advancing for the third straight week. The Dow, S&P 500 and NASDAQ advanced 6.8%, 6.2% and 6.0%, respectively.
 
The bulk of the gains were established Monday after Treasury Secretary Timothy Geithner unveiled his new plan to solve the banks' toxic assets problem.
 
The Treasury estimated that the new program "will generate $500 billion in purchasing power to buy legacy assets - with the potential to expand to $1 trillion over time."
 
The CBS Evening News said Geithner "wants to make sure Wall Street and the rest of the country never see a repeat of the financial meltdown." Geithner wants to "establish what some are calling a 'super-regulator,' a new entity to identify and oversee large financial firms whose failure would pose a risk to the entire economic system. The idea is to spot trouble before it grows and spreads." 
 
The news of the plan sent the stock market 6% higher for the day. Financials led the charge as the sector advanced 17.7% on the day.
 
Another factor in the surge Monday was the release of the existing home sales in February. Home sales increased 5.1% month-over-month. Economists predicted a drop of 0.9% month-over-month.
 
Lawrence Yun, NAR chief economist, said first-time buyers accounted for half of all home sales last month, with activity concentrated in lower price ranges. "Because entry level buyers are shopping for bargains, distressed sales accounted for 40 to 45 percent of transactions in February," he said. "Our analysis shows that distressed homes typically are selling for 20 percent less than the normal market price, and this naturally is drawing down the overall median price."
 
In other economic reports, February durable goods increased 3.4% which was the first time in six months that orders have reported an increase. Economists' anticipated a decline of roughly 2%. Moreover, the final fourth quarter GDP reading came in below economists' expectations.  All in all there were some glimpses of economic recovery out there. Yes, it could just be a blip, but now market participants will look for a trend and if that occurs over the next few months we could see a continued surge as we move further into 2009.
 
As for the technical aspects of the market, well, we remain in a short-term neutral state.
End-of-month seasonality could come into play at this juncture. Typically, this type of seasonality is positive for the market. However, according to sentimenttrader.com "since the inception of the S&P 500 futures, the index has shown a positive return during the last three days of March only 38% of the time, averaging a return of -0.6%.  If the month was up more than 5% heading into the last few days, then the last three days of March were up only 1 time out of 5 attempts (and that one successful instance gave back all its gains and then some during the first few days of April)."

Overbought/Sold Condition Report

Overbought/Oversold as of March 27, 2009

Major Benchmarks

• Dow (DIA) - 52.3 (neutral)
• S&P 500 (SPY) - 52.2 (neutral)
• Russell 2000 (IWM) - 53.8 (neutral)
• Nasdaq 100 (QQQQ) - 61.1 (neutral)

Testimonial of the week

"Congratulations on dodging a big bullet in the last expiration month when volatility was so high."  ~ Denise