48 minutes gone and the index is down 21 points. Given the US jobs number came in well below the already reduced estimates, the performance both there and here has been ok. This is what the XJO chart now looks like.
On recent form, it's where the market rebounds but I had a scan through my stocks and there are no standouts. So, it's watch and wait again.
11.35 LNC is about to resume trading after a day or more of suspension pending an announcement. It's a development of their recent strategy to buy producing oil fields in the US. They hope to increase production from these existing fields with CO2 flooding – something they appear to have expertise in – and they also hope to increase production life of the fields.
With their royalty agreement from Adani which will come on stream in a few years and now with this strategic development, they hope to become more than just asset traders with a long term gas to liquids venture.
11.45 Early signs are good with LNC, the stock is up 7 at 312 despite having been closed during a market fall.
11.52 That was short lived! Back to square. I suppose there's a good chance of a sell off now. It's interesting though, it's clearly a very resourceful company (and not just literally). The management team is very keen to get strong cash flow and ultimately you get a vehicle which is priced on earnings with potential upside surprise from asset sales and GTL coming good. The downside is that the company tends to promise more than it can deliver and there's still some scepticism around.
2.11 The Asx 200 had a rally and slipped again, so once more, down 21.
I've been planning to do some slightly longer term trading with options written against the positions. Legging in to buy/writes, basically, with a few extra short puts from time to time. With that in mind, I'm looking at more long term charts and keeping a closer eye on research.
For example, BHP made a break on the weekly chart last week but failed and is back at new, recent, lows. I'm contemplating buying some BHP because the stock is towards the bottom of an 8 month trading range with a significant previous swing high at 4165. I'm wondering whether it's too premature to buy on a fairly aggressive daily chart signal if there is no equivalent break on the weekly. Like all of these things, there is no correct answer. So, here's the BHP weekly chart.
The daily shows the recent false start and today's new low. I usually find that to be a plausible set up and I need a break of today's high to trigger a short term buy. My hope would be to pick up a dollar, dollar fifty on a 4 or 5 day rally and then write some calls. Let's say, I bought stock tomorrow at 4330 and the stock rallied to 4450 over a few days. My goal would then be to write some 4450 or 4500 calls.The June calls would be 55 to 75 based on today's values with a few days of time decay thrown in. Here's the daily.
If the trade continued to prosper, ie the stock kept rallying, then that's fine, it's roughly a 5% return in a touch under 3 weeks which is not necessarily better than I would normally do but it would be easier to use a larger sum of money and the options provide a level of downside cover. If the stock runs far enough then it's also quite possible to take off the trade early and only lose a fraction of a percent. It can also be a 5% return with the stock only moving 3% – in the situation where the stock firms but doesn't rally hard.
What if I buy a short term peak? Well, my stop would need to be tighter than that 4165 low, so I might use the March spike low at 4220. Alternatively, I could use the low of today's bar given that I'm imagining 1 bar ahead. My initial thought is that I'd prefer to use the wider stop since I don't want to be too knee jerk with the trade. That gives a scenario where I buy at, say, 4330 and stop out at 4220. That's a 2.5 to 3% loss assuming I don't manage to sell any calls.
In what situation would I sell calls early and yet not just stop out? I'm not sure, actually. It might be if there's a break of the first potential stop, eg today's low. In this situation, I might decide that I can try to buy myself some time. Another scenario might see the stock just hovering around my entry level. If that was 4330, I might decide to sell 4350 calls at 60ish if I was confident enough that the stock had based. My idea might be to pick up a couple of percent and be ready to try again in July or even buy back the short June calls at an opportune moment.
When would I add some short puts into the mix? Perhaps, if the first part had gone well and I'd written some calls only for the stock to drift back. If I subsequently thought a higher low was in place, I'd think about selling half the number of puts to pick up some extra premium with a fair amount of protection already in place from the existing short calls.
More scenarios will occur in practice and I have done some of this sort of trading before. The value of research is also higher relative to my usual short term frame. For example, although the picture regarding commodity demand is quite clouded, forward P/E ratios are undemanding and brokers have already downgraded future commodity price assumptions.
3.17 With regard to the strategy above, I'm keen to deal in shorter term options because it's still going to be swing trading and I'm happy to have the exercise of calls take me out of a long position. I've found in the past that I can be holding a stock position against short calls when I no longer have much hope of capital gain on the stock. Therefore, I'm better off to be out fairly quickly and looking for the next opportunity.
3.38 I'm going to focus on the larger stocks because they have the most liquid option markets and the spreads are smaller in percentage term as the stock price gets bigger. It looks like the reduction in shares per contract might have helped with liquidity. For example, if I buy 2300 BHP at 4330 ($99,590), I can sell 23 calls which means it's a more precise hedge than previously where you'd have the choice of 2 or 3.
3.44 Back to the present...FMG is down at 636 and the options are worth 11 now. I missed a trick by not hedging some last week. I'm only really concerned about the 620 low so it has become a bit of an all or none trade.
LNC has had a few wobbles but is holding 300, while SPL is a stop but I haven't done anything yet because I'm unconvinced by the action and volume and it's holding above the previous range. IPL is up a cent.
4.11 Another mildly disappointing day as I hold on to a few longs, waiting for a turning point at the bottom of the trend channel. Reminds me of that disclaimer, something like....Past performance is no guarantee of future results. The Asx 200 finished down 14 at 4569.
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