"Jersey is my backup"

If you go on a docent tour of Wall Street, you might hear one of the docents say that in a time of emergency, one must be calm because after all...."Jersey is the backup."" After the recent Hurricane Sandy, ya think this might be reviewed? Ya think that maybe Omaha, NE would be considered an alterntive? How about Keokuk, Iowa.....The magic of New York is that despite everything, they still have the ability to stare at their navel in wonder.

A Bit about "Feelings" and "Hedging"--what they have in common

Whenever you hear a pundit on Bloomberg news or such talk about how he or she "feels" about the market....run. Supposedly in a rational universe, where stocks are valued in an efficient manner, how one "feels" is not relevant. Usually when the pundit is opening the stock market about 8:30am central time he feels good about the stocks that he has a position in. Period. That for the record is "self interest" and what follows from his mouth is "self promotion"---yes ditto for those stocks that he has in his charitable trust. How does that relate to "Hedging" or buying calls or puts in the futures market, or buying "bear etf's" to hedge a stock position, or even buying gold. When to buy? When is the time? Now let's talke about "feelings". When you are at a bar and have had two wonderful Guiness, or even two Manhattans, not bar whiskey of course, but the best, you feel...wonderful...What you should be thinking of is who is going to drive home---instead you are thinking of other things....getting your mind to focus on hedging the risk means you have to worry about the ride home. The feeling is the trigger to hedge. The feeling after those two drinks is what the feeling is like...do not forget it. Further....hedging is like insurance...if you get someone to drive you home...which is a hedge...you do not have to worry about a DUI. When you have the bear hedge, you may lose in the insurance, but you will win if the market tanks....so keep the eyes on the donut...the investment...and plan on winning with the hedge only if disaster strikes....When and if you begin trading and gambling with the hedge....you are headed for high blood pressure or worse...make a note of it.

What Will Today Bring? A Trader's Meditation

At the beginning of every day, there is the reflection or meditation---What will today bring? The difference between a monkey and a human is forseeability....and visualizing is what the seasoned investment pro does...it takes imagination...after the imagination, one gets to compare the reality...but the imagination is what the trader and investment pro brings to the equation. On Saturday or Sunday, looking at the events of the coming week is key. These are detailed in Barrons Magazine in the calendar section, one looks at the events and plots what one thinks the week will look like. Is Bernanke going to speak? What job reports or retail sales are scheduled? You need to know. At the end of the week, you can compare what you thought the week would look like and what the reality was. This is important and surprising. Last week for example, ending August 3, 2012, it was speculated by the pundits to be a "Pump and Dump week", or it was a week where during the Mon to Thursday, the EU and the ECB would be making the promises, and then at the end of the week, the jobs report would probably disappoint, and oh yes...the ECB would probably result in nada..nothing...but smoke and mirrors, with the Italians just saying they wanted moral support. In the end, the last part was so, but the rest was a suprise. The market wanted to go higher, and disregarded everything to do so. The jaded news junkies had to just wonder and observe. So....what will next week bring. Visualize it.

Twenty Minutes is an eternity on Wall Street; The story of one Knight

It has long been known among regulars on Wall Street that live real time trading is very different than "delayed" information. In fact, thirty years ago it cost a small fortune to get real live data...but I date myself. One of the most exciting times to trade with live data is the first half hour of trading, when orders from around the world have bunched up over the hours when the exchange is closed, and all begin trading. In fact, it is during this early fifteen minutes that there is the "exception" to the normal circuit breakers that prevent wild swings on the exchanges. Leave it to the program traders to design an algorithm to exploit this weakness---and you have what occured last week with Knight Investments debacle, when an error in their program issued a weeks worth of buy orders all at once. In the end, the firm was 200 + million short and looking for a rescue from someone. Ya think we might have gone too far when the model announcers on the Wall Street channels are talking of "straddle" trades or currency plays that they dimly understand the ramifications of, and indeed should be prevented from even suggesting to innocent investors. Options always were for seasoned investors and serious traders, and were never meant, in my view, for anyone who needed something stronger than a light beer.

The Shot Across the Bow---Wall Street Opening---July 23, 2012

This morning I decided to sleep a bit late, and finally booted up the computer about 9am. When I got on the news, there was a picture of a trader on Wall Street, a floor trader, with his head bent down on his computer---yup it was either prayer or despair, and traders are not the prayerful type generally..... The sharp break at the opening down is a terrifying thing for any floor trader who has maintained his positions over the weekend---luckly for those who did not get stopped out, the market came back, BUT the opening today was like the shot across the bow of a movie, like maybe the "Pirates of the Caribbean"---so... Be watchful, but get ready in case u have to abandon ship and take some of that fine prized ale with you.....

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The Art of The "Covered Call"---the "Grandmother's Option"---

Covered Call Writing is called the Grandmother's Option, because it is so conservative---one is in the "Banker's positon" versus a gambler. The odds for the astute trader can be quite high for success. It does take practice to get the swing of it however.

Consider the following example.; You have bought 100 shares of AAPL at 130 and it has risen to 190. You really do not want to sell, but on the other hand, you would like some income from the investment. You are older and in a perfect world you could get excellent income and then leave the stock for the grandkids. You bet that in the summer doldrums it will not move higher. After all---it has risen from 130 to 190 in just months. You remember the famous "bathing suit rule"-----when summer approaches, the traders are thinking of what? bathing suits. As anyone who has been to Wall Street is aware of---when Friday comes, most have left town to sail in cooler lakes. Trading volume is usually low.

You also know that the summer quarter is the slowest for high tech stocks usually----and you have noticed that few people are on their computers in the heat of the summer. And that translates to low purchases of tech stuff and that in turn might translate into lower earnings.

So---you look at the call option table.: (May 22, 2008


You decide that selling the July 200 Call priced at $540 is attractive ---ie at the strike price of $200 or if Apple stocks gets to 200 between now and July 18 you would sell it for $200 and keep the $540 or buy back the call, which would cost say for example purposes, $800.

The way this works ideally is that Apple stock holds even or drops and the call price gradually drops to zero or you buy it back for $50 say and then repeat the process, and sell a call for october 2008 for another $500----This process creates continuing income and hence provides a method of a senior who does not want to cash in one's "chips" and suffer the capital gains from such a huge capital gain, to get continuing monthly income.

As an investor, you are saying "Show Me" to the market optimists---show me that the market can move higher in the current situation of rising commodity prices and rising unemployment and recession. The covered call writer is the essence of the conservative investor.

Stay tuned for another episode of the Traders little black book which will cover "Short Interest---and why it is not interest in short people. Stay tuned.