The last edition of the Sterling Weekly was February
2nd, and when I wrote it, I did not realize it would be three (3) weeks before
I would get a chance to write the next newsletter. That delay has created some
interesting items to deal with. When writing the various newsletters I have over
the years I have always maintained that my number 1 priority was to the readers
of the newsletter and the information that they have access to. This is especially
relevant to the strategy discussed concerning the February Puts on General Electric
In the February
2nd edition of the Sterling Weekly, I discussed selling the February $25.00
Puts. While I did not actually get the chance to actually execute the trade in
one of my accounts, I did keep track of the prices for the proverbial "Paper
Trade". Early Monday morning, February 3rd, the GE February 25 Puts were
quoted $1.80 bid, and I considered this to be the entry or sales price on these
While I did not get the hoped for rally in the market
that I would have liked that allowed for a quick buy back and profit. I had chosen
this strategy with that possibility in mind. Early on as the market moved lower,
the value of the Puts increased, not what I wanted, and limited our options (no
With a few days left before their expiration
I was talking to a friend of mine who I used to work with as a stock broker and
we were discussing the GE Put strategy I had written about. At the end of the
conversation I stated that with the current market, if I had a chance to buy back
the Puts at a decent profit, I would and then look to sell the March contract
after the February expiration. But alas, even though I discussed that in the January
26th edition of the Sterling weekly, I did not get a chance to write it up
before options expiration, so I'll skip the "paper trade" on the buy
back and treat our future strategy as if the stock was "put" to us at
$25.00/share. This is where I really regret being tied up on a consulting project
and not getting the chance to write the Sterling Weekly the last few weeks and
put my opinions on record.
The GE February 25 Puts closed
at $1.10 bid by $1.20 offer. If we would have bought them back, then our profit
would have been $0.60/contract, or $600 minus commissions on a 10 contract position
covering 1,000 shares of GE. based upon the $25,000 cost of 1,000 shares of GE,
a $600 profit from a $25,000 capital commitment would have been 2.4% in 30 days
or annualized at approximately 28% per year. That equates to a $7,200 profit if
we could do that every month.
Since we ended up keeping the
GE February 25 Puts at expiration, we purchased GE Monday at $25.00 per share,
but got to keep the $1.80/share that we sold the GE puts for on February 3rd.
This reduced our cost on GE to $23.20/share. By the way, GE traded today between
$23.42 and $24.20/share, providing plenty of opportunity to exit the position
at a profit.
Since I think the overall market is headed lower,
if I get the chance to sell GE above our cost basis of $23.20/share, I am going
to take it. If I do not get this opportunity, then I will look to sell March $25.00
or $22.50 Calls on any rally. As of tonight, February 24th, the March $22.50 Calls
closed at $1.30 bid by $1.35 offer. The March $25.00 Calls closed at $0.25 bid
by $0.25 offer. I know, locked market (same bid & offer).
I sell the March $25.000 Calls, then I will receive $0.25/share, reducing my cost
basis in GE to $22.95/share. IF GE closes above $25.00/share on the expiration
of the March contracts, then we will sell our GE at $25.00/share. This will net
us a profit of $2.05/share. IF this happens, then we will have received a profit
of 8.2% in approximately 60 days, for an approximate annual rate of 49.2%. On
a hypothetical position of 1,000 shares that is $2,050 in 60 days, and annualized
is a profit of $12,300.
If I sell the March $22.50 Calls, then
I will receive $1.30/share, reducing my cost basis in GE to $21.90/share. IF GE
closes above $22.50/share on the expiration of the March contracts, then we will
sell our GE at $22.50/share. This will net us a profit of $0.60/share. IF this
happens, then we will have received a profit of 2.6% in approximately 60 days,
for an approximate annual rate of 16%. On a hypothetical position of 1,000 shares
that is $600 in 60 days, and annualized is a profit of $3,600.
So the question now becomes where do I think GE will close in
late March??? Will it close above $25.00/share? Will it close below $22.50/share?
Or somewhere in between? OOPS! I forgot to cover that. IF GE closes below $22.50
at the expiration of the March contracts then we will most likely be selling the
April $22.50 Calls. IF GE closes between $25.00 and $22.50/share then we will
most likely sell the April 25 Calls. Back to my question on where GE will close
at the expiration of the March contracts??? I'm not sure, it all really depends
upon when we attack Iraq, and how it is going. Unless we delay the attack or if
it goes badly, we should close above $22.50/share, but will it close above $25.00/share?
I am not sure. So, if you're very risk adverse, then I would sell the March $22.50
Calls. If you are less worried above risk and more concerned about profits, then
I would sell the March $25.00 Calls. However, since I believe the market will
move lower in the near term, I would look to sell the March $22.50 Calls if I
could receive better than $1.25/contract, and then buy them back for a profit
if the market moves lower as expected.
Dow Jones Industrial Average:
The Dow Jones Industrial
Average closed yesterday @ 7,858.24 and in the process generated a "Sell
Signal". While the market rally I had expected in the
previous edition of the Sterling Weekly failed to occur, it is clear that
I under estimated the concerns regarding the Iraq situation. I believe the biggest
risk we are currently facing, and what is continuing to cause concern for the
market is our inaction and lack of a clear outcome to the current uncertainty
over Iraq. Traders and investors do not like uncertainty, and once we attack or
walk away the situation will be easier to evaluate, and I expect a rally to occur.
But until then, I believe the uncertainty over Iraq will continue to cause the
market to move lower.
Today's Opinion: Closed @ 7,858.24
Last Signal: Sell Signal on Feb. 24th, 2003 from
the closing level of 7,858.24 Current Expectations: The index should move
lower and test 7,749.87 and then 7,702.34. If it closes below 7,702.34 then the
next level of support would be 7,286.27
The S&P 500 closed Monday at 832.58 down
15.59 points. In the process our indicators generated a "Sell Signal".
I am expecting the S&P 500 to move lower and test 817.37, and then 803.92
on a closing basis.
Today's Opinion: Closed @ 832.58 Last Signal:
Sell Signal on 2-24 with the close of 832.58 Current
Expectations: Lower The index should test 817.37 and then 803.92 on a closing
The NASDAQ 100 (NDX)
Of the three (3) major market indices, the one I currently feel the most
comfortable with, or I should say has the chart that shows the most points of
support is the NASDAQ 100 (NDX). Now that is something I do not think I have ever
written before, so please pay attention to that remark. This is probably from
the fact that the NDX declined the quickest and most of any of the major market
indices. In the process it has numerous short lived rallies and has developed
a decent trading history at these levels. This does not mean I am expecting a
major rally in the NDX anytime soon, but it does mean that I see the most points
of support at these levels and believe that the NDX has the least amount of risk
of a significant drop when compared to the other indices I track. However, our
indicators turned lower with yesterday's close on the NDX, and I am expecting
the NDX to move lower and test 984.36, and then 972.48 on a closing basis. If
the NDX closes below 972.48 then our next downside target is 951.90 If the NDX
is lower again today, our indicators will generate a "Sell Signal".
Opinion: Closed @ 994.69 Last Signal: Called lower on 2-24-03 @ 994.69
Current Expectation: The NDX should move Lower and test 984.36 and then
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