Another crazy week in the markets!
I think I nailed it on Monday when I titled the post "Monday Market Measurement – Just Right?" as we have gone nowhere fast since then. Consolidation is always a matter of perspective and perspective in the markets is generally oriented around your trading time-frame. People are in such a hurry to make money they miss a lot of opportunities to invest. While day-trading is sexy and we do it when we are bored, I do prefer to spend more time fining nice, boring, long-term picks that we can "set and forget" – like our Buy List (last update June 26th, S&P 1,076) and our 9 Fabulous Dow Plays Plus a Chip Shot (last update July 7th, S&P 1,028). We also have our shorter-term, speculative list of trade ideas: Turning $10K to $50K by Jan 21st (last update July 26th, S&P 1,115) and, of course, our daily trade ideas.
It's always good to go back to these posts, if you are looking for interesting positions, and see which ones are doing well and which ones are not. If you missed, for example, WFR (our "chip shot") on the July 7th post, then perhaps this week's sell off is an opportunity to get back in. That's what chat is for and several Members took advantage yesterday to ask if I still liked them and if I had a better trade idea than our 7/7 play. At the time, we liked the stock at $9.68 and the trade was to sell the 2012 $7.50 puts and calls for $5 for a net $4.68/6.09 entry.
WFR is now back to $9.56 after disappointing earnings and the 2012 $7.50 puts and calls are $4.85 so this trade is currently net $4.71, about where it was when we selected it. BUT (and it's a big but), aside from the fact that this is a 2012 maturity play, our break-even target is only $7.50 since we already sold the $7.50 calls and anything over that line does nothing to improve the end result. So being flat in a position after a month does suck but – the quesition is – how do we feel about WFR's prospects in January of 2012? The position breaks even way down at $6.09, which is another 36% lower than we are now.
We liked the play on WFR BECAUSE it had such a huge cushion. We knew it was going to be volatile and it shot right up to $12.18 on July 27th before falling back to about our start line on Friday. The exteme moves moved the implied volatility of the long calls higher, keeping them at a high premium relative to our position. Not that this constant ability to sell for a high premium is exactly what hedge funds take adavnatge of when they sell options.
So, unless we now feel WFR is NOT worth $7.50, there is nothing in the earnings report to really disappoint us. We didn't buy them at $12, we bought them for net $4.68 and we didn't expect to make more than $2.82 (60%) as we get called away at $7.50 in 18 months. That means this is still a good entry and that's why we have these lists – they are trade ideas that you can patiently wait for if we get a break and they head lower.
Earnings season is a great time to catch a stock that has stumbled. Sometimes it's hard to tell a stumble from a crippling injury and, again, that's what's great about our Watch Lists and Buy Lists – they give us long-term perspective on the companies we like and the strategies we think will work best for owning them. Right now, our buy/write strategy and our atificial buy/writes seem to be performing best in this crazy, choppy market so we tend to focus on what's working. Despite the cushion, keep in mind these are long-term bullish strategies. Generally we aim for a flat to up market and try to cushion the trades by 15-20% and that's why we jump on short-term bearish bets – that's where we need the balance. If things are going up – we're not worried at all, are we?
IN PROGRESS
