How the Trading Alert Service Functions
3. OTP Alerts
4. OTP Messages
The “Daily Market Update is posted Monday through Thursdays
Typically, by noontime Sundays, a new “Weekend Update” will be posted. Each week’s posting will be forward looking, despite the name, which suggests a summary of events. The weekend Update is accompanied by a summary spreadsheet containing projected Return on Investment (ROI) information
- The Weekend Update will look at possible opportunities during the coming week, based upon Friday’s closing prices.
In general, the stocks mentioned will fall into 3 categories: Traditional, Momentum and Double DIp Dividend.
The goal, regardless of which stocks are recommended is to generate income from shares. Price fluctuation is exactly what’s required to predictably realize a 1% weekly income flow and should be welcomed, rather than feared. All highlighted stocks, as well as all stocks mentioned in “Alerts” are intended to illustrate points made in Option to Profit and in various articles on OTP trading strategy
The Weekend Update is intended as a guide for the initial plays of the week. However, as with any crystal ball, there’s no such thing as being able to look into the future. Ultimately, the market dynamic on Monday dictates the nature of the Trading Alerts that are sent to subscribers.
Please do not place your trades on Monday morning only on the basis of the preceding “Weekend Update.” You should wait for a Trading Alert SMS or e-mail (if that is your Trading Alert delivery method) to confirm recommended trades and price points. Of course, any trades that you make should be consistent with your own tolerance for risk and consistent with the need to maintain a diversified portfolio.
Please see Diversity 101 Redux for an explanation of the importance of maintaining a diversified portfolio
“Traditional” stocks tend to be more staid and with long histories. They are less likely to suffer irrecoverable losses on the basis of micro-economic news. However, they still show healthy fluctuations in price levels that an options seller can use to their advantage.
“Momentum” stocks tend to have a higher option premium, befitting their share price swings, which can be fairly volatile, as they are more risky stocks. These are generally less appropriate for tax deferred accounts as their sale at a loss receives no benefit from the tax code. The reward, if the trade works as hoped, is very good, as long as micro-econmic or company specific bad news is minimal or if there is not a broad market downturn, in which case such class of stocks can be expected to out-pace the decline. These companies also often represent good opportunities for the sale of puts following large share price drops.
“Double Dip Dividend” stocks are typically the same as those in the “Traditional” category, but represent purchases or option sales made specifically with the intent of either capturing both dividend and option premium, or capturing option premium alomne, coupled with assignment of shares, thus freeing up funds for re-investment elsewhere.
- Alerts typically follow the Weekend Update recommendations.
Alerts take advantage of opportunities that appear to arise, regardless of whether mentioned in the Weekend Update. In addition to sending Alerts, they appear on the website moments after the Trading Alert has been sent.
Occasionally, I will send OTP Messages trying to further illustrate a point and occasionally referencing my own trading, particularly as it applies to positions that may be showing paper losses. Those are intended purely as illustrative only and not recommendations. Under no circumstances will I make trades that are counter to Alerts provided to subscribers.
When I make trades for my personal or managed accounts, I will post them on the My Trades page.
Unless I indicate otherwise, the intention is that every Trading Alert will be accompanied by a trade in my personal accounts. Occasionally a trade may not get executed because of a rapid price movement that alerts the risk-reward profile of the trade. In such cases I attempt to make the trade at the earliest opportunity that a similar risk-reward profile is available so that there is congruence between Trading Alerts and my personal trading. If I have no intention of executing the trade for my own account because I already have a similar position or am over-weight in that security or sector, that will be made clear in the Trading Alert.
Alerts will typically be most meaningful if you have already read the Option to Profit book.
Alerts will either suggest:
1. Buy stocks (Current price is provided as guideline)
2. Sell covered calls – STO (Sell to Open: specifying Strike Price, Current option bid premium and length of option contract)
- Covered calls may be sold on new purchases or on existing lots. New subscribers may not have positions in their portfolio on which to sell recommended covered calls. The recommendation to sell a call is not a recommendation to buy the stock at that time. If you have questions as to whether it is still an appropriate time to purchase shares, Trading Alert subscribers may Text or e-mail for some guidance.
3. Sell cash covered puts – STO (specifying Strike Price, current option bid premium and length of option contract)
4. Buy to Close transactions, typically to lock in profits on call or puts sales (specifying Current price of shares and current ask premium)
5. “Crumb” Sell to Open (STO) transactions to attempt to eke out some marginal revenue. These trades are a bit risky and should only be undertaken with the realization that if shares are assigned, your reward may be substantially less than the risk. (Read Article)
6. Double Dip Dividend Trades that try to capture both dividends and option premiums, but may result in assignment on the same or next day after purchase. (Read Article) These should be done with your “settled funds,” in order to avoid the potential for “free riding” and then restrictions on your trading to the use of only settled funds for a 90 day period.
These are undertaken, ideally, near the end of the option cycle to buy back calls if they can be done so inexpensively and there appears to be good opportunity to do the same trade the next week (or month). Typically, these are performed when the share price is very close to the strike price and the share holder does not want to have shares assigned. Most ideally, contracts are rolled over on positions that are out of the money, but are experiencing trading gains on that final day of trading. Selling calls into strength delivers optimal premium, while buying them back as time value erodes is done at nearly cost, the closer the transaction is to the closing bell.
For those that prefer formulaic approaches, as I do, in general I assess the difference in premium between the bid price to sell a new contract and the ask price to buy the old contract back. If that difference results in an ROI that matches my goal for that particular stock (usually 0.5-1% per week), then I consider executing the trades.
Rollover trades should not be made to chase after a stock whose price has significantly surpassed the strike price. Doing so puts the option writer at dual risk. You may incur a loss on your original sale of options and if the market turns against you on Monday, you will incur a loss in share value. (Read Article)
Trading Alerts represent trades that I plan or have just executed for my personal accounts. Occasionally, those trades may not be executed because my pricing requirements have not been met.
BE CERTAIN TO READ “MATCHING YOUR SENTIMENT TO YOUR STRATEGY” ON HOW INDIVIDUALS CAN MODIFY THE BSIC OTP STRATEGY TO BETTER SUIT THEIR UNIQUE MARKET SENTIMENT
Always pay attention to your own cost basis for shares before initiating trades. Additionally, if you own multiple lots of any given stock, treat each lot individually, based upon their cost basis, before executing Alerts. You will see that I rarely execute a trade to close a position at a loss. Since I trade from within a small selection of stocks that gives me a comfort level regarding their historical performance and ability to withstand downward moves. In such cases, I may suggest the purchase of additional shares, waiting or using further out options in order to “rescue ” positions.
As is stated in the book, fear and greed are the investor’s great enemies. paper losses aren’t meaningful unless yo0u make them so.
Finally, please do not hesitate to Text Message back if you have questions.
The Week in Review is a simple summary of the week’s alerts, trading and fate of positions. It summarizes open positions, expired and assigned positions. It also details which positions require call writing as we enter the next week, as well as which positions are significant showing paper losses (based on purchase price, exclusive of accumulated options or dividends)
The Weekly Performance spreadsheet is a critical look at the performance of all new positions opened during the week and the performance of all existing positions in the portfolio. It is actually updated daily, however, only the weekly performance is archived.
Each trade is compared to the S&P 500 performance during the same holding period. This is a much more accurate way to assess performance and is not used by brokerage firms because it is far too illuminating.
The Weekly Performance for existing positions typically will under-perform the S&P 500. The reason for this is that positions that have been closed, due to assignment are removed from the analysis, thereby removing profitable trades. Otherwise the existing positions include those that are either showing paper losses or have already reached their strike prices and are no longer in a position to accumulate return.
The ideal Weekly Performance result should be that existing positions are underperforming the index by 0.5 -0.9%.As the value approaches zero the implication is that there will be limited opportunities for further appreciation. This will typically occur if the market has had a sudden and sustained upward surge.
In addition to the Weekly Performance, subscribers may see individual stock performance for open and closed positions by clicking onn the stock symbols found on the Trading Alerts page