From the Desk of Kimmy Sokoloff
What a week.
On Monday in the live trading room I said $SPY is at 407.40, and we are extended to lock in some profits.
I didn’t think we’d see SPY 390 in a matter of days.
Expert technical analysis of financial markets by JC Parets
by David
From the Desk of Kimmy Sokoloff
What a week.
On Monday in the live trading room I said $SPY is at 407.40, and we are extended to lock in some profits.
I didn’t think we’d see SPY 390 in a matter of days.
From the Desk of Steve Strazza @Sstrazza
Dividend Aristocrats are easily some of the most desirable investments on Wall Street. These are the names that have increased dividends for at least 25 years, providing steadily increasing income to long-term-minded shareholders.
As you can imagine, the companies making up this prestigious list are some of the most recognizable brands in the world. Coca-Cola, Walmart, and Johnson & Johnson are just a few of the household names making the cut.
Here at All Star Charts, we like to stay ahead of the curve. That’s why we’re turning our attention to the future aristocrats. In an effort to seek out the next generation of the cream-of-the-crop dividend plays, we’re curating a list of stocks that have raised their payouts every year for five to nine years.
We call them the Young Aristocrats, and the idea is that these are “stocks that pay you to make money.” Imagine if years of consistent dividend growth and high momentum and relative strength had a baby, leaving you with the best of the emerging dividend giants that are outperforming the averages.
By adding our technical analysis to the mix, the Young Aristocrat setups give you the opportunity to own the best of the market’s future blue-chip winners before they become must-own household names.
Oftentimes, the strongest performers in this universe and even the Aristocrats themselves pay relatively small dividends. This is usually because the stock appreciation makes it tough to keep up with the payout — even for companies that consistently grow their yield in the double-digits! For this reason, we don’t have a minimum threshold for the dividend. What we’re really doing here is creating a list of quality stocks based on their ability to persistently grow their shareholder return.
And maybe the best part? This list is not just designed for long-term investors. Any kind of investor or trader can use this list as it helps generate ideas across all timeframes, even the short term. Remember, some of the most important filters we use for this list are momentum, relative strength, and proximity to new highs.
Yesterday, I published a trade idea in the Materials ETF $XLB that called for selling out-of-the-money (OTM) naked short puts and calls.
This strategy is commonly called a Short Strangle. And for this particular Strangle with April options, we collected around $125 per one-lot.
This is a type of trade I like to put on when implied volatilities are rising in the marketplace and trading action is sloppy, sideways, or down.
A reader emailed me this question:
$1,253 required to make $112 appears expensive to me. $112/$1253 for around six weeks returns around 10%? Does your broker require less margin?
Here’s the thing about short premium plays in general and short strangles in particular: we have a high probability of winning.
The odds are in our favor. That’s the upside. But the downside is, when the odds are high that we’ll win, the profits obtained in these trades are usually pretty small in terms of the capital invested to put the trade on.
And this makes sense. If it was incredibly cheap (in terms of buying power) to put on a trade that has a 90% chance of winning money, everyone would do them —in size.
But there is no free lunch.
In addition to the buying power required to hold naked short options, we need to manage our risks closely. Because in the lower probability scenario where we lose money, there is tail risk (meaning small but not insignificant risk) that could result in us suffering a far larger loss than we intended, far in excess of any potential gains we may have earned if the trade went our way.
And that’s why brokers require us to hold as much margin as they do for naked options.
Again, there is no free lunch.
If we like this trade, but these risks make me uncomfortable or I just don’t have the available buying power to hold this trade, I could always purchase cheap, way out-of-the-money long calls and puts against this Strangle to define my risks and lower the margin requirement.
Options gives us options.
Trade ’em Well,
Sean McLaughlin
Chief Options Strategist
All Star Charts, Technical Analysis Research
by David
From the Desk of Kimmy Sokoloff
All the major indices broke below their 200-day moving averages.
That’s not really what I wanted to see, but it happened.
by David
From the Desk of Kimmy Sokoloff
If the market can hold on to yesterday’s low, I think there’s potential we can head higher.
We really need to push past $SPY 400 with force and head straight to 405, then 408.
From the Desk of Steve Strazza @Sstrazza
When investing in the stock market, we always want to approach it as “a market of stocks.”
Regardless of the environment, there are always stocks showing leadership and trending higher.
We may have to look harder to identify them depending on current market conditions. But there are always stocks that are going up.
The same can be said for weak stocks. Regardless of the environment, there are always stocks that are going down, too.
We already have multiple scans focusing on stocks making all-time highs, such as Hall of Famers, Minor Leaguers, and the 2 to 100 Club.
We filter these universes for stocks that are exhibiting the best momentum and relative strength characteristics.
Clearly, we spend a lot of time identifying and writing about leading stocks every week, via multiple reports.
Now, we’re also highlighting lagging stocks on a recurring basis.
by David
From the Desk of Kimmy Sokoloff
Fed Chair Jerome Powell spoke again today, but the market could not get going to the upside.
The semiconductors have been very strong this week. That’s usually a positive sign for the market.
Maybe they’re decoupling; time will tell.
Today’s trade is going to leverage the rising volatilities introduced into the stock market this week thanks to testimony from the Federal Reserve Chairman (I’ve been told).
When markets get dicey and volatility rises, I like to look at my universe of Sector ETFs and choose one that is both displaying higher relative options prices than its peers and looks set up for rangebound trading action over the next 3-5 weeks.
An ETF near the top of my list is the Materials sector ETF $XLB. We’re going to bet on the recent sloppy trading action to continue sideways for a bit, and we’re going to sell a delta-neutral spread to collect premium and position ourselves to earn the decay.