Today I would like to share with you an analogy about options. But first, one thought about the old adage – “Sell in May and go away.” Does it apply in today’s world?
Over the past 50 years, the market has been its weakest during the summer months. On balance, there was hardly any net gain if you held stock from mid-May until Labor Day. But that does not necessarily mean that was the case in every year. In some years, there was actually a summer rally.
Today we are facing unprecedented challenges to our economic system. The market has already fallen more than it ever has in its history. Unemployment, volatility, and uncertainty continue at extreme high levels.
I think a good argument could be made that there are many issues far more compelling to the stock market than an old adage that works some of the time. I suspect that today might be a better time to get into the market than most of the last several years. Of course, that’s just my opinion. I know that I really don’t know about the short-term direction of the market.
That is why I conduct an options strategy that makes gains even when the market goes down, as it inevitably does much of the time.
Terry
An analogy – Checkers is to buying stock as chess is to trading options
Someone said that investing in stocks is pretty much like playing checkers. Any 10-year old can do it. You really don’t need much experience or understanding. If you can read, you can buy stock (and probably do just about as well as anyone else because it’s basically a roulette wheel choice in spite of the near universal belief that you are smarter than anyone else).
Options, on the other hand, is more like playing chess. It can be (and is, for anyone who is serious about it) a life-time learning experience.
You don’t see columns in the newspaper about interesting checker strategies, but you see a ton of pundits telling you why you should buy particular stocks. People with little understanding or experience buy stocks every day, and most of their transactions involve buying from professionals with far more resources and brains (and for some reason, these professionals are selling the stock to them instead of buying it).
Option investing takes study and understanding and discipline that the purchase of stock does not require. Every investor must decide for himself or herself if they are willing to make the time and study commitment necessary to be successful in option trading. Most people are not.
It is a whole lot easier to play a decent game of checkers than it is to play a decent game of chess. But for some of us, options investing is a whole lot more challenging, and ultimately more rewarding.
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.
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I look forward to having you on board, and to prospering with you.
Terry
Despite being options expiration week it was a fairly quiet week for the market. Last week I spoke of the recent two-month surge in the S&P 500 due to the resurgence of bank stocks. Up until this week the S&P had gained 37.4% since early March. The two-month rally saw the NASDAQ and Russell move higher for nine straight weeks and the S&P and Dow advance eight out of those nine weeks.
As we all know this type of pace cannot be sustained over the long haul so some profit taking was expected and after the highly anticipated bank stress tests were released and first quarter earnings came to a close it seemed to be the perfect time to take a few of the recent profits off the table. As I stated before, it was a fairly slow week for the market, particularly when it came to economic releases.
The big news for the week was the PPI and CPI. On Thursday, PPI was reported at 0.3% in April while the core rate was in line with economists’ expectations of 0.1%. The report was followed by CPI on Friday, which was also in line with expectations at 0.0% in April, while the core rate came in at - 0.7%.
Paul Ashworth, senior U.S. economist at Capital Economics in Toronto, noted that despite the moderation in headline consumer prices, "there are few signs of a deflation developing in core prices, quite the opposite in fact." He noted price pressures on core inflation from increases in vehicle prices, hotel room rates, and medical care costs.
"Nevertheless, with the unemployment rate and the output gap both headed for 10%, there will be an awful lot of downward pressure on prices over the next couple of years," Ashworth said. We still expect core inflation to moderate sharply in the second half of this year and through 2010.
Surprisingly, the most important data for the week seemed to be the Industrial Production report which continued to display weak demand. The numbers remain at their lowest point since the report began back in 1967.
"Overall, yet another report that fits within the picture of an economy contracting more slowly but still far from an actual recovery," Paul Ashworth, senior U.S. economist at Capital Economics, wrote in a note Friday.
On a technical basis, we have a market that is back in a neutral position so there is no real edge on a short-term basis. However, as we all should know by now, the trading day following expiration is typicallyweak so I expect to see much of the same Monday.
Also, I don't think we've seen the end of the short-term selling pressure. I expect to see another move or temporary break of 875 over the short-term (1-3 days) before a more meaningful rally attempt into the end of May. We shall see soon enough.
Overbought/Oversold as of May 15, 2009