ANR: -920.76

Bought 50 ANR May 3 2013 7.5 Put @ 0.45.

Closed on May 3rd at 11 for a loss of $920.76.

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10 Factors to Consider When Selecting a Stock

10 Factors to Consider When Selecting a Stock

#1. 52-Week Range

Typically a stock is considered a good value if it is trading near its 52-week low.  However, make sure the stock is on a rebound if it is near the low, because it could always drop farther and create a new low.  Don’t get caught in the assumption that a stock can’t possibly go any lower.  A stock can always go in either direction, no matter how much the price has fallen.  On the other hand, if a stock is trading near its 52-week high, it should probably be avoided because it will likely hit a resistance level and shoot downward.

#2. Volume

Volume is the number of stocks bought and sold in a single day of trading.  Make sure the average volume of the stock is over 50,000 or so.  If the volume is low, then liquidity is low.  This means it is hard to buy and sell because there aren’t many buyers and sellers and the stock moves in a very choppy fashion.  This creates a lot of unnecessary volatility, which most traders generally avoid.  This is the unfortunate scenario often involved with trading penny stocks.

#3. Price/Earnings Ratio (P/E)

The PE ratio is a critical number in evaluating stocks.  The formula for finding the PE ratio is a simple one:  Price per share/Earnings per share.  So if the price of the stock is $2 and the EPS is $1, then the PE would be stated as 2.0x.  It is unnecessary to remember this formula since the PE ratio is always listed on the “quote page” of a stock.  The reason for the formula was to show the relationship between the numbers, and also give an idea of how to tell if a stock is over or undervalued.  Think of undervalued as underpriced and overvalued as overpriced.  This means if the PE is very high, then the price per share of the stock must be much more than its earnings per share, which means the stock is overvalued, or overpriced.  The opposite is true if the PE is low.  So basically, it is beneficial to look for companies with low PE ratios between the range of 1.0x and 10.0x.  When the market is performing better, the preferable range would be increased to around 10.0x and 20.0x.  Also if the company has a negative earnings per share, then the PE will not be listed.

The quotes page, sometimes called a "snapshot", shows the PE ratio, as well as the last trade price, earnings per share, volume, 52-week range, dividend information,market cap and more.
The quotes page, sometimes called a “snapshot”, shows the PE ratio, as well as the last trade price, earnings per share, volume, 52-week range, dividend information,market cap and more.

#4. Earnings Per Share (EPS) and Cash Flow Per Share (CPS)

EPS is determined by the following formula:  Net Income – Dividends on Preferred Stock/Average Number of Shares Outstanding.  It breaks down the profit, or earnings of a company in terms of individual shares.  Investors should look for positive earnings as well as consecutive growth over each quarter.  If a company fails to meet the earnings expectations of analysts, it instantly decreases the stock price when the actual earnings are announced.  EPS has one fatal flaw.  A company’s accounting department can easily manipulate it.  However, it should still carry some weight in choosing a stock nonetheless.  A similar measure that has grown increasingly popular is cash flow per share or CPS.  Accounting may be able to hinder earnings to look more favorable, but cash is impossible to manipulate.  CPS gives a true account of how much cash a company really has on hand, and how effective its operations are.   This is a crucial statistic in itself to determine if there is enough cash to pay off debt and engage in future endeavors that contribute to stock price increases.  Look for a company that has both positive EPS and CPS.

#5. Market Cap

Market cap is determined by the following formula:  Number of Shares Outstanding x Price per share.  Remember that owning a stock is actually a partial ownership in the company.  If someone were to buy the entire company, they would have to buy all of the stock.  The market cap could be thought of as the overall price to buy out a company.  The market cap is used to classify the size of the company into one of the following categories: nano, micro, small, mid, large, and mega caps.  The large and mega caps are worth billions of dollars, while the micro and small caps my only be worth several million dollars.  Basically, the larger the company is, usually the more stable and safe it is.  There are exceptions such as GM and Enron, of course.  Think of the sizes and the stability of stocks as trees.  The nano cap could be compared to a small maple tree that is violently blown around in storms (market crashes) and could be easily uprooted (bankruptcy).  The large caps are like mighty oaks that can withstand many violent storms with little damage.  However, the small maple tree can grow several feet over a few years, while the large oak has matured and fosters little potential for extreme growth.  Basically, when investing, look at the market cap or size classification to find something that matches your risk tolerance.  The smaller the company the more potential growth, and the more possible risk.  The opposite is true of large companies.

#6. Beta (Volatility)

Beta is an indicator of a stock’s standard deviation, or volatility.  It is somewhat difficult to calculate, but is provided on many websites.  The calculation involves taking the standard deviations of the monthly returns of the particular stock along with the S&P 500’s monthly returns for five years within the same time horizon and inserting the two standard deviations separately into an overall variance formula and dividing by the population variance.  Actually, using beta is much less complicated than its calculation.  If a stock has beta of 1.0 it moves in congruence with the market.  This means if the S&P 500 goes up 1% in a day, the stock should go up 1% in a day.  The opposite is true if the market goes down.  If the beta is 2.0, and the market increases by 3%, then typically the stock will go up 6%.  Sounds great until the market drops 3% and the stock falls 6%.  If the beta is negative then it moves inversely, or opposite of the market.  Very few stocks have negative betas.  Typically, large blue chip companies will have the lowest betas.  Microsoft is normally around a 0.9 or 1.0, moving with the market.  Pfizer is usually a 0.8 beta; meaning if the market goes up 1% it will only increase 0.8%.  Casinos usually have the highest betas.  The Las Vegas Sands is currently a 4.7.  Beta is really a double-edged sword.  Theoretically, an investor could make the quickest, and most significant gains with a high beta stock, but could lose the most as well if the market underperformed.   If you like to watch your money move like crazy from day to day, I would recommend a high beta.  If you like to play it safe and preserve your money, I would recommend searching for a low beta that has little volatility.

This is basic proof that higher beta stocks on average have higher returns than low beta stocks.
This is basic proof that higher beta stocks on average have higher returns than low beta stocks.

#7. Dividends

Dividends are cash paid per share by companies to reward their shareholders for holding their stock. They are comparable to coupons on bonds, except they are not as much. When investing in a company, check to see if they are currently paying a dividend. If a company has money to hand out, then they are usually doing well. The companies that pay the highest dividends often have steady growth also.

#8. Open Interest in Option Chains

Many stocks offer options contracts for buying and selling in the future.  An investor doesn’t have to understand options to take advantage of this following tip.  When researching a stock on a financial website, there is typically a link for options chains.  These are simply the options available for the stock.  They are often listed in “T” shaped boxes with call options (the right to buy the stock) on the left and put options (the right to sell the stock) on the right.  The strike prices are listed down the center of the “T”.  These prices give a range in which the stock is expected to move.  Both the call and put sides have open interest columns; this is the key.  The people in the open interest column on the left are bullish; they think the stock price is going up.  The people in the column on the right are bearish; they think the price is going down.  There is a different amount of open interest for each expected price.  Basically, look for stocks that have more open interest on the call side than the put side.  This shows that more people want to buy the stock in the future than sell it.  It is worth getting a second opinion, or in this case, thousands of opinions when purchasing a stock.

This shows us that the current price of INTC is $22.82 and there are 2918 people (Open Int.) that believe it will reach $30 and only 770 who think it will not break $30.  This gives us a nice idea of future price expectations.
This shows us that the current price of INTC is $22.82 and there are 2918 people (Open Int.) that believe it will reach $30 and only 770 who think it will not break $30. This gives us a nice idea of future price expectations.

#9. Insider Activity

Take note of what is happening inside of the company itself.  If the CEO just dumped 50,000 shares, it may be time to get out.  The insiders know the company better than any analyst.  If the number of shares bought by individuals inside the company has been increasing, it may be a good time to buy.

If your stock makes the front page of the Wall Street Journey, you're in for big gains or big trouble!
If your stock makes the front page of the Wall Street Journey, you’re in for big gains or big trouble!

#10. News/Popularity

News affects the expectations and decisions of the investing public and expectations determine stock prices.  Popular glamour stocks such as Yahoo or Apple are always in the news, and the prices are sometimes inflated by the hype of the press.  Try to choose stocks that are not the victim of newspaper publicity and television headlines, and there’ll be much smoother sailing.

Quick Checklist for Selecting a Stock

1.     Make sure the stock is trading closer to the 52-week low than the high and also has upward momentum.

2.     Average volume should be around 50,000.

3.     The PE ratio should be somewhere between 1.0x and 10.0x.

4.     Earnings and cash flow per share should both be positive with positive growth over each quarter.

5.     There is no specific market cap to look for, just be aware of the risk/reward trade off of each size and their stability as well.  (Personally, all of my highest returns have come from mid caps.)

6.     Beta is much like the market cap, in that there is no specific beta to look for.  It just depends on risk tolerance.  However, if you have a longer time horizon to invest, I would recommend a higher beta and vice versa.

7.     Look for stocks that offer dividends.  Dividends are usually, but not always, a sign of good financial health.

8.     Look at the open interest on options chains for a specific stock to see how many people are planning on buying and selling and at what price.  This basically serves as an opinion poll on the stock’s expected performance.

9.     Always consider the amount of shares CEOs and other executives are buying and selling, to get an accurate picture of what is happening on the inside.

10.   It may be a good idea to avoid stocks that are constantly in the news.  Stock prices will often reflect the investors’ perception of the stock, which is usually not an accurate evaluation of the underlying company.  The dot com bubble in the 90’s is a perfect example.

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Week 1 Results of CRM, Kors and V

Five days ago, I adapted a new stock screening strategy to combine fundamental and technical parameters to select stocks for my modified covered call strategy.  I set up covered calls on 3 stocks from my list: CRM, KORS and V.

1. CRM: CRM closed above my strike (175) with a gain.  The call was in the money, so I did a credit spread (BTC 175 3/22 and STO 175 3/28) with a credit of 1.58.  The weekly gain on CRM is 4%.  CRM fundamental didn’t change much.  The only technical parameter that changed is the RSI (>50%) on Friday.   I kept the stock.

2. KORS: This stock needed down by Friday, but the options expired with a gain.  Overall, there is a 1.2% loss on the week.  Kors fell below SMA50.  On Monday, if KORS is able to go back above SMA50, I’ll keep it and sell another call.  If not, I’ll sell it.

3. V. Before the closing bell on Friday, V shot above 160, my strike.  I tried to roll out the calls, but didn’t have enough time.  So V is called away with a nice profit (~1.68% gain in 5 days or ~122%/yr).

Next week.  I need to replace the expired calls and set up new ones.  V is no longer on the FinViz.com chart (V’s RSI is >50 now).  I will find a replacement for V.

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My favorite websites

Schaeffersresearch.com: great weekly market analysis

StockCharts.com: great technical analysis tool

ChartAdvisor.com: brief weekly technical analysis of the overall market

FinViz.com: excellent stock screening tool (providing both fundamental and technical parameters.

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How to select stocks for covered calls

Stock screeners are useful tools to screens stocks.  I use FinViz.com.  I used the following criteria to select stocks for my covered call:

  • Overall market condition is bullish or neutral (We take a different strategy for bear market).  I use Chartadvisor.com (Weekly Summary, published every Friday) and Schaeffersresearch.com’s Monday Morning Outlook (published every Saturday) as well as technical analysis of  S&P 500, DJ’s Industrials and Nadaq indexes to determine the market sentiment.
  • The stock price chart must be bullish (Stock price has to be above 50 and 200 SMA, on a 1-yr or 2 yr chart, at least above 200 SMA).  This makes it less likely for a stock to suddenly go down.  Remember, covered call is a bullish strategy and we may lose money if the stock goes down. I usually use Stockcharts.com and also use yahoo’s interactive charts.
  • Price> $10 (excluding penny stocks which are too speculative in nature).
  • Sales Growth of past 5 years > 15% (suggesting growth stock with expanding business)
  • Price > SMA50 and > SMA200 (indicating the stock is in a upper trend)
  • Volume >500K (relatively high option volume and open interest, enabling the buy and sell of option contracts.  We need to be able to get in and out of positions easily.)
  • Optionable (a must for covered call) with high option premium (high time value).  This is where the profit is.
  • Dividend.  I look for stocks that pay >5% dividends (annualized).  There are more and more stocks these days that both pay a decent dividend as well a nice option premium (my favorite stock is LVS, which is relatively stable that pays a high dividend.  AAPL is also on my list).

Sometimes FinViz.com will give you a very long list based on the criteria I enter.  In that case, I may change the selecting criteria (e.g., increasing dividend to 10%) to narrow the list down to a manageable 10 or less.  Then I use a spreadsheet to compare the percentage of option premium using at the money call to determine which stock has the most time value.  Finally, I choose stocks that have the best annualized return (option time value + dividends).

 

 

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Next week: long term bullish with a possible pullback

Schaeffersresearch.com: “Potential short-term resistance for the SPX is at 1,320, the site of the pre-Lehman Brothers high in 2008, and 1,345-1,350, which was the site of resistance in 2011. Short-term support is in the 1,285-1,290 area, site of a late-October peak.”

ChartAdvisor.com: “…It would be very difficult for the markets to stage an extended rally from this point, so some consolidation or pullback remains likely. If the pullback is tame, it could set the stage for a healthy rally moving forward.”

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Market condition: bullish with a possible near term pullback.

ChartAdvisor.comt: The bottom line is that the markets are still truly at a crossroads. There has been some very positive price action as many indexes have cleared some significant resistance levels and intraday price action this week was positive. Buyers have been stepping up and selling pressure has been fairly light on pullbacks. However, overall, the markets are overbought while still near critical areas of resistance. The pullbacks have been swift and severe over the past few months and it would not be shocking to see one in the coming weeks. That being said, overall the market’s price action has improved somewhat, and could be signaling a healthier intermediate trend.

Schaeffersresearh.com: bullish with a possible near term pullback

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What is Covered Call?

Definition of ‘Covered Call’

An options strategy whereby an investor holds a long position in an asset and writes (sells) call options on that same asset in an attempt to generate increased income from the asset. This is often employed when an investor has a short-term neutral view on the asset and for this reason hold the asset long and simultaneously have a short position via the option to generate income from the option premium.

This is also known as a “buy-write”.

Investopedia explains ‘Covered Call’

For example, let’s say that you own shares of the TSJ Sports Conglomerate and like its long-term prospects as well as its share price but feel in the shorter term the stock will likely trade relatively flat, perhaps within a few dollars of its current price of, say, $25. If you sell a call option on TSJ for $26, you earn the premium from the option sale but cap your upside. One of three scenarios is going to play out:

a) TSJ shares trade flat (below the $26 strike price) – the option will expire worthless and you keep the premium from the option. In this case, by using the buy-write strategy you have successfully outperformed the stock.

b) TSJ shares fall – the option expires worthless, you keep the premium, and again you outperform the stock.

c) TSJ shares rise above $26 – the option is exercised, and your upside is capped at $26, plus the option premium. In this case, if the stock price goes higher than $26, plus the premium, your buy-write strategy has underperformed the TSJ shares.

Courtesy of Investopedia.com.

Read more: http://www.investopedia.com/terms/c/coveredcall.asp#ixzz1j7NMLxNP

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The Weekly Report For January 9th-13th


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The Weekly Report For January 9th-13th

Commentary: The stock market kicked off 2012 with a gap higher, extending the rally that occurred in late December. While the markets gapped higher on Tuesday as traders returned from the holidays, they closed weakly and spent a couple of days digesting the gains. Friday saw the markets gapping higher again on a better than expected unemployment report which was faded right at the start. The markets did finish close to their highs for the week though, despite the lackluster intraday action. If the markets can quietly consolidate in this area, it could set the stage for a push higher in the coming weeks. 

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF is now testing a very important level. The $129 level is where the rally in October ended. After a few months of consolidation, SPY has finally come back to test this level for a breakout. SPY has been setting progressively higher lows as it follows its 50-day moving average higher. The price action for SPY has been positive over the past few weeks as it first reclaimed its 200-day moving average and then pushed higher. Setting and closing at a higher high ($129.42) would be a very positive development for SPY, and could signal an upcoming test of last years highs. (For related reading, see Day Trading Strategies For Beginners.)

The DJ Industrial Average as represented by the Diamonds Trust, Series 1 (NYSE:DIA) ETF actually cleared its October highs already and could be acting as a leading indicator. While DIA is comprised of only 30 stocks and can be influenced by a move in only a few stocks, the fact that it is already close to last years highs is very positive. Traders should keep an eye on the $122 in case DIA pulls back as this level should attract buyers. However, if DIA continues to act well, it could challenge last years highs in short order.  

The Nasdaq 100 as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF actually had a very good start to the year. While it also suffered from a lackluster close after its gap on Tuesday, it had a decent follow through the rest of the week as it closed higher every single day. QQQ ended the week solidly in the green and cleared its December highs. It also failed to fill its open gap which was a nice display of strength. It is a positive sign that QQQ is resuming its role as a leader, and it is actually still pretty close to all time highs. If QQQ can continue to lead the way, it would bode well for the rest of the markets.

While the smallcaps as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF didn’t fare as well as QQQ, the index ETF did finish higher for the week. IWM is still technically underperforming its peers, as it remains the only one of the four index ETF’s still below its 200-day moving average. Smallcaps typically outperform early in the year, so traders should keep a close eye on how they perform relative to the other index ETF’s. If the market is truly healthy, then this group should start gradually performing better than DIA and SPY at a minimum. This weeks highs are the first level to keep an eye on, as IWM failed to approach it after the gap on Tuesday. IF IWM can close above this level, it should set the stage for a push into the high $70’s.

While the markets didn’t exactly set the world on fire after the strong gap on Tuesday, there are a lot of positives to take away from this week’s price action. The markets did close higher for the first week of the year and QQQ performed very well. Technically, the markets are a little on the overbought side, so further consolidation would actually be healthier than a surge higher. However, they are not so overbought as to prevent a push higher and that remains a possibility. That being said, for several months this market has punished the chasing of a breakout or breakdown. Nothing occurred this week to call this pattern into question. The few gaps higher were faded, and the markets quietly consolidated. Traders need to remain cautious despite the positive action on the surface. (For related reading, see Mastering Short-Term Trading.)

Charts courtesy of stockcharts.com

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Have a Great Day!By Joey Fundora

Joey Fundora is an independent trader located in South Florida. Joey focuses on using technical analysis techniques to uncover supply and demand imbalances in equities. To see more of his work, visit his site on Stock Chart Analysis.

At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

 


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