Another bout of procrastination in Europe over Greek debt was enough to prompt a rally in European and US stock indices, albeit one which tended to weaken over the course of the day. The postponement of potential write downs on Greek debt also helped the Aussie market to rally about half a percent but that gain has nearly vanished now in a repeat of Friday's pattern.
In a stock specific sense, LYC rallied up to 196 early on a company press release that things are progressing smoothly with the building of the processing plant in Malaysia. That's good news but the crucial news concerns the approval – or not – of the plant by the Malaysian government and this is due by the end of the month. It reminds me that I need to be careful with this stock as a yes could force a decent rally. The stock is still up 4.5 at 188.5. I shorted more stock at 194 and bought it back at 189 and I still have most of the short from Friday.
Twenty years ago, I heard a story about an older client who simply wrote puts on his favoured stocks until he eventually became long a stock, after which time he'd write calls on that stock. Despite spending more than a decade as a market maker and understanding that this is simply a buy write and can be disastrous in bear markets, the strategy is still quite appealing and makes some sort of sense when you have money on the sidelines. Apparently, this client did very well over many years, and I assume it was because he didn't apply the strategy thoughtlessly and chose his stocks wisely.
Having dithered over my call selling when trying to get my longer term strategy started, I realise that it would be a lot less hassle to simply follow this example. With that in mind, I've been looking at weekly charts of some of the major stocks, which are the ones with liquid option markets. Unfortunately, the charts are just too weak to seriously look at initiating my plan. Some of the biggest falls occur in markets which have already been weak for some time and with QE2 coming to an end, there's every chance of liquidation in the US if the Fed doesn't immediately step up to the plate with more stimulus.
An example is RIO. At 7815, it's on a prospective PE of around 7 for the next 2 years, the consensus target price is $110 and it's close to the bottom of the trading range. The trouble is, it has just made a sell signal with the trade below 7850 last week and if the 7671 support doesn't hold, the next plausible level is August 2010's swing high at 7422. This may turn out to be a great buying level but the level of risk is too high.
11.49 The market is recovering, up 19, and looks potentially bullish on an intraday basis. Asian markets are generally firmer and I'm watching my short positions carefully, but so far there's no need to take action.
12.55 The index doesn't seem to be under any real pressure but the gains have faded and the rise is just 5 points. The 10 minute chart shows the story, a marginally lower peak relative to Friday then the disappointment (for the longs) kicks in. One of these days, there'll be a second pulse up and it could still happen today.
1.18 Underwater now, down 3.
I doubled up on the OSH Jun 675 puts earlier, at 12.5, and that's turning out well as light crude is under pressure in the Asian session. The stock has given up minor gains to be down 9 at 656 and the puts are pretty much intrinsic with expiry on Thursday.
I've also gone long June puts in FMG. The chart is weak now but the best entry level was at 625 last Wednesday. The stock has stalled at 617 for 2 days so I think there's a reasonable chance that the consolidation is over and another down leg is due. The reason for buying the puts is that it's basically a 625 stop plus a few cents of premium. Long them at 18 with the stock at 609.
2.32 Out of a third of the OSH puts at 20 since the stock has hit the recent low and could have a minor bounce. Also, the position was on the large side. I've had a salutary lesson this month in FMG through punting rather than trading via options and I need to stick to my disciplines.
3.37 The index is following the recent script, now down 23. FMG has dropped to 601 but OSH is holding support at 655. LYC is clinging onto gains, up 1.5 at 185.5.
3.52 Further to the point about the longer term charts being weak. BHP has now broken the August 2010 swing high which was at 4165. BHP is currently at 4135.
4.14 We closed at 4452. This is the low for the day and a loss of 33 points. Even the safe haven, TLS, eventually fell a cent. I bought back another 5k of LYC at 185.5. The report is complete but the judgement will not be made for 10 days.
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