Archive for January, 2011

Profit from rising oil prices using options on the XOP

Monday, January 31st, 2011

The Oil & Gas Exploration etf (XOP) broke resistance today, advancing 2.6% to a new two year high on heavier than normal volume. Today, North Sea Brent topped $100/barrel signaling a further advance in the price of oil, according to some industry analysts. Also, during periods of rising oil prices, it’s the exploration companies that fare the best.

Should this be the case, one way to play this trend to purchase a long-term (LEAP) call option on the XOP. Currently, the 12 Jan 55 call is trading around $6.35. (The January 2012 call at a $55 strike.)

There are several ways to reduce your cost basis. Writing covered calls would be one method but here you risk getting called away (in which case you’d have to close out your LEAP) which you don’t want to do since your position is that the oil prices will be going up, at least for the next 6-12 months.

A better way to reduce your cost is by writing a bull-put credit spread. Here, you’d sell the higher strike put and buy the lower-priced strike. (You could also just sell the higher-strike put but you’ll then risk getting the stock put to you and you probably don’t want that to happen.) The February 55/50 bull-put credit spread is currently trading for around 50 cents. Should the XOP be trading above $55 at February expiration, you’d pocket the money.

Repeating this process every month (and rolling up to the next appropriate level, depending on where the stock price is) could reduce your cost to essentially nothing come next January when the LEAP expires. By then the LEAP should have appreciated in value leaving you with a tidy profit.

[Note: Please don’t attempt this or any other options strategy without first learning about options and paper-trading them and only risk an amount you can afford to lose.]

Afternoon Cuppa Joe – Jan. 28

Friday, January 28th, 2011

Special Dividend: Sara Lee (SLE) announcing that it will split its operations into two public entities. The split includes a special $3.00 cash dividend to be paid sometime before the split which is slated for next year. Stock is currently down 2% on heavier than normal volume.

Java Jolt: Coffee (JO) etn (exchange-traded note) breaking recent 6 week consolidation to hit a brand new high. Forget gas at $4/gallon; how about a $4 cuppa joe?

How low can we go? I can’t tell you that but I can say that markets have a strong tendency to correct according to a Fibonacci number of days: 1, 2, 3, 5, 8, 13. (Check it out for yourself if you don’t believe me.) What’s the reason for this? Nobody knows. It’s just one of those mysterious phenomena.

When the market hands you some lemons, make some lemonade: Take advantage of increased volatility by placing a covered put on dowdy woman’s apparel retailer Talbot’s (TLB). Stock broke $6 support today and is now trading at $5.93. To place a covered put, you must first short the stock and then sell a put against it. Currently, the Mar 6 put is trading around $0.55 which gives an 8% ROI (return on investment) if the stock is put to you, 9.3% if not. You’ll profit from this trade even if the stock rises to $6.48. (Note: Do not attempt this trade if you have no shorting experience or are unfamiliar with options trading.]

Investing trend: Closed end income funds have been rallying as investors search for ways to boost income. Making new highs today: AVK, FCT, EVF, JCE. All of these boast dividend yields in the 5-8% range.

See our Subscriber Services for more investing ideas and strategies. Have a good weekend!

Afternoon Cuppa Joe – Jan. 27

Thursday, January 27th, 2011

A quick spotlight on some of today’s compelling plays & market observations. 

Market movements

Martha Stewart Omnimedia (MSO) breaking major $4 support. Stock has been falling faster than a souffle from a $7 high set last May. Open interest in the Feb 5 & Mar 5 puts.

AdvisorShares debuting a new actively managed etf, Active Bear (HDGE), consisting of short stocks and ETFs. Fund’s goal is inverse correlation to the market, making it an alternative portfolio hedging tool (to say the VXX or the VXZ). Its expense ratio is 1.85% making it the most expensive US listed ETF according to Michael Johnston’s recent SA article. The stock is trading just under $25; over 200k shares have already been traded today.

 Housing may be down but housing related stocks are up. Check out the iShares Real Estate (IYR) etf which today broke $58 resistance to hit a new high. Volume in the March 56-60 calls also picking up. Funds top 4 holdings: SPG, VNO, EQR, PSA. Dividend yield 3.4%.

Cramer’s Take: The Big Booyah yesterday predicting a secondary offering for SunTrust Bank (STI). He says that bank secondaries have been very profitable, low risk plays as the banks shows a return to profitability with the means to begin repaying the TARP monies. Sounds good to me and I’ll keep my readers posted when (and if) that secondary is announced.

Change of Pace: Looking for a different perspective on US markets and politics? Check out CNBC Worldwide (listed as channel CNBCW). It’s a refreshing change from the highly polished US program format where everyone has the same world view. Did you know that many Europeans think Obama is a wuss in regards to foreign policy?

So, if you still can’t find anything to watch on your 500+ channels late at night, try giving CNBCW a shot. I’d like to hear what you think, and no, this is not a paid announcement. Unfortunately

For a technical snapshot of today’s market action including low-priced leaders and leading speculative stocks, please check out our *Blue Plate Specials*, a part of our subscriber content. In addition, you’ll get an extensive database of channeling stocks and companies that have compelling upward earnings revisions plus detailed strategies on how to use them–all for less than the price of a cup of coffee!

Afternoon Cuppa Joe – Jan. 26

Wednesday, January 26th, 2011

A quick spotlight on some of today’s compelling plays & market observations

Channeling Stock After a disappointing earnings report, Boeing (BA) stock has sharply reversed course, tumbling from its channel high of $72. Lower channel support is at $62. The stock is optionable and you get a lot more bang for your buck by playing channeling stocks with options (without ever having to short a stock!). [For an extensive list of channeling stocks plus a free “recipe” on how to play them (including options), please check out our subscriber services on our website}

Options Plays
1. Corning (GLW) – $21.84Corning stock broke out yesterday after it beat revenue estimates due to its expanding Gorilla glass unit which makes glass for touch screen applications. The stock got another shot in the arm today when an analyst called the company undervalued and raised the price target to $27. If you’re interested in buying the stock at a discount, consider selling a put. Here are two worth considering:

Feb 21 Put @ $0.25: Cost basis = $20.75. This is more than a dollar below the current price but you risk losing out on price appreciation if the stock keeps advancing.
Feb 22 Put @ $0.65: Cost basis = $21.35. This is still about 50 cents below the current price and again you would lose out on price appreciation but not by as much as with the lower strike put. Should the stock reverse direction, you could get stuck buying it at a higher price if you don’t buy back the put option first.

Note that if you do elect to buy any stock using this method your broker will require you to have the appropriate amount of cash in your account should the stock get put to you.

2. Kapstone Paper & Packaging (KS) – $17.00
The packaging and container industry has been on fire with Kapstone well into new high territory. The stock has been appreciating at a rate of $1/month. This means that a Feb 17.5 covered call written now has a high probability of getting assigned, good news for income seekers. The Feb 17.5 call is currently trading at 65 cents which gives a 6.7% assigned return and and a respectable 3.8% return unassigned.

Speculative Leader

The parabolic rise in PHC, Inc. (PHC, $2.32) stock must be a residual effect of Celebrity Rehab since there’s no other news to account for its movement. (The company operates rehab facilities located in the West, Mid-west, and on the East Coast.) The stock began the month at $1.60. It broke $2 major resistance and is looking to test the $2.50 level. Investor interest is apparent by the heavier than normal (38k) volume. Day-traders especially may want to take a look at this one. (See weekly chart below.)


For a technical snapshot of today’s market action including low-priced leaders and leading speculative stocks, please check out our Subscriber Services and sign up for a subscription. You’ll get all the information you’ve grown accustomed to reading here plus an extensive database of channeling stocks and companies that have compelling upward earnings revisions plus detailed strategies on how to use them–all for less than the price of a cup of coffee!

Is a market correction on the horizon?

Tuesday, January 25th, 2011

Ben & Company is back in the boardroom to determine if they should start to worry about inflation. The Street seems pretty confident the Fed will leave interest rates alone but you can be sure that the decision notes will be examined with a fine-toothed comb.

We can’t do anything about the Fed but we can do something to protect our portfolios. Any hint of negative wording could provide the catalyst for a market correction. From a technical standpoint, we’re do for one any day now, anyway.

Why? Because the daily chart of the S&P 500 (SPX) has been trading above its 40 day simple moving average (dma for short) for almost two months now. That’s getting to be a long time. I did a cursory check of the chart from 2000 to present and found that out of the 33 times the SPX has traded to the upside for periods lasting a month or more, the index returned to its 40dma seventeen (17) times after a month, nine times (9) between one and two months, four (4) times after three months, and just one time for a period longer than three months which was a record five months hit in 2006.

Currently, the SPX has been trading above its 40dma for almost two months. Sure, we could go on like this for another month or possibly longer, but the odds are sharply against it.

So, what’s an investor to do?

Well, you could protect your long position with puts on the SPY (the S&P500 tracking stock), or you could play the volatility (which is negatively correlated to the broad market) by buying a call on the VXX, the short-term volatility ETN, or the VXZ, the medium-term volatility ETN. If you’ll be hedging for more than a week, I’d recommend the VXZ to avoid the contango problem and use March options.

Mid-morning Cuppa Joe

Tuesday, January 25th, 2011

A quick spotlight on some of today’s compelling plays & market observations:

Commodity Action

Precious Metals: Gold ETFs the IAU & GLD plus precious metals ETF the DBP testing support.
Gold miners, GDX, broke support yesterday.

Oil: Crude oil ETFs OIL & USO, heading down after breaking support yesterday.

Cocoa: NIB continues up 1.9% today after breaking out yesterday.

Hot Stocks

Israeli biotech Pleuristem (PSTI) up sharply on past few weeks, today gaining over 15% to $3.75. Was recently listed on 4 Tel-Aviv exchanges and is moving peripheral artery disease drug PLX-PAD into PhaseII/III clinical trials. Stock has also made the “failure to deliver stock” list for the past 22 days. Looks like the shorts are getting squeezed!

Covered call play

Ion Geophysical (ION) breaking out of recent consolidation on heavier than normal volume. Stock at $8.91:

Feb 9 Call @ $0.50 gives 6.6% return assigned, 5.6% unassigned

Feb 10 call @ $0.30 gives 15.6% return assigned, 3.4% unassigned

Net resource shows level II market makers and bid/ask spreads for bulletin board stocks.

Find more indepth info in the daily *Blue Plate Specials*, a compendium of today’s market action from the technical perspective, a part of our Subscriber Services.

Covered Call Play: Precision Drilling Corp. (PDC)

Friday, January 21st, 2011

Oil driller Precision Drilling Corp. (PDC) has been rallying since October along with the oil services space (see OIH chart below) but it doesn’t come with the high price of the OIH or many of its competitors, making it a good candidate for an affordable covered call strategy. The stock has been steadily adding about $1 per month onto its price since October and is up almost 5% today on heavier than average volume.

For those of you wishing to add income to your regular or retirement accounts, the Feb 11 call is now trading at $0.20. With the stock priced at $10.44, this gives a return on investment (ROI) of 7.3% assigned or 2% unassigned. Going out one month further (which I wouldn’t do but some people prefer a longer time frame), the Mar 11 call is trading at $0.40 giving a 9.2% return assigned and a 2.8% return unassigned.

Remember that covering a stock limits your upside potential but it does offer you some downside protection (by the price of the call that you sold) should the stock lose value. There’s always a tradeoff in options!

Woulfe-fram, Jack! A note on Canadian-based precious metal/rare earth miner Woulfe

Wednesday, January 5th, 2011

Knock Knock!

Who’s there?


Orange who?

Orange-chyou glad the Christmas blog is gone?

I’m probably more bored looking at my Christmas blog pictures than you are so, for the sake of my sanity, I decided to do something about it. Since I began generating the daily *Blue Plate Specials*, I haven’t had as much time to put into crafting full-blown articles as I would have liked. On top of that, we’re in the midst of finalizing a new website that I hope will be much more informative and user-friendly.

So, until more free time warps its way into my life, I’ll be posting “smaller” blogs that require less reseach but are no less important. (Research, along with generating new products, portfolios, and trading systems, is my passion.) But I also love writing and communicating with my readers, so today I thought I’d post a response to an interesting inquiry sent today from a reader on SeekingAlpha where I’m a contributor:

Dear Dr. Kris,

Today, North Korean Leaders manifested a clear intention to open discussion with South Korea to assure harmony and prosperity…

South Korea has a Strong Mining Industry History. There is a Canadian project to reopen mines which have not been in production for over 20-25 years. History proved the strength of that mining at the new name of: WOULFE Mining. Canadian stock symbol is: WOF

I would appreciate so much you tell me what you think about investing in this company.

–SA Reader (not the real SA id)

My response (edited and expanded for more clarity):

Thanks for writing and bringing this interesting company to my attention.

Perhaps at the “behest” of their good friends the Chinese, N.Korea is offering up the olive branch to S. Korea. As you probably know, the Chinese have been gobbling up every natural mineral resource they can and they’ve been threatening to cut exports on rare earth metals, including tungsten and molybdenum, aka moly. I can see why they’d be really interested in Woulfe’s tungsten/moly Korean project–not to mention the company’s uranium/vanadium and gold/silver stakes—as the mine’s proximity to China can’t be ignored.

I wish I had time to sift through Woulfe’s financials, but technical analysis is more my bailiwick. Interest in the company is reflected in the stock chart which trades on the Toronto exchange as WOF and as a thinly traded bulletin board stock (WFEMF) in the U.S.

Volume and price in WFEMF have both been rising since 11/5 when the company announced they had moved drilling equipment onto the S. Korean tungsten mining site. (See weekly chart of WFEMF below.) Volume has risen from essentially nothing to no less than 750k shares, and price has steadily increased from the November 2008 low of 4 cents to 30 cents (as of today’s close).

The chart shows support/resistance at the quarter (25 cent) levels (more evident on the daily chart). The stock was firmly rejected at 50 cents recently, but it looks to be on the rebound. If it breaks through that level, the next major barrier would be $1.

Sure, small stocks come with more risk, but they also offer greater upside potential. Per my cursory perusal, company management appears to be solid (the CEO is a graduate from the Aussie School of Mines) and the company’s mine stakes have already been proven.

I would say buy the stock with your mad money and set a stop-loss if losing money will keep you up at nights (I’d set it at 24 cents). You could easily ride this puppy up to a dollar (US) and perhaps beyond. 

And doubling your money wouldn’t be so bad, would it?

Hope this helps and best investing!

Dr. K

Note: Wolfram is the chemical symbol for tungsten (W).