Covering High return Balanced Investing Strategies To
Make Money In Up Or Down Markets
A Publication of Princeton Research, Inc. (www.PrincetonResearch.com)
February 21, 2016
Charles Moskowitz Discussion
Week 7 was another quiet one for us. We had only one completed trade in VA with a 100% Up rule liquidation on Wednesday and the balance on Thursday with a total gain of $546, bringing YTD performance up to $2,661. We are only carrying one open position again this week; BAC 3/12 calls, using a total of $378.
The markets seem to want to believe that we have made a “double bottom” between January 19th and February 11th, but until we close solidly above the 1950 level in the S&P500 cash, I’m not convinced. Reason # 1 for me is that these bottoms coincide with the bottoms in the oil market, and to me this is not convincing…. While a couple of the “experts” are calling the 2 days that the oil went down and the market didn’t an uncoupling, a chart of the S&P overlaying the oil shows a continuing correlation. This does not cease to exist overnight. If you take an unbiased look at the oil chart you cannot deny the trend or the fact that we have nothing but lower lows and lower highs since we broke below $105 in June of 2014. The only sign of a bottom in the making to me is the decline in momentum in early November while we continued to make new lows. Add to this the increase in volume over the past 6 weeks as a hopeful sign. It is however, a process and I don’t expect to burst through the resistance between $35-40 and run straight back up. I’m not bearish on oil, it’s just that I’m not bullish…..As they say in Missouri, “Show me.”
The markets are as extremely news sensitive as the Fed is reliant on new data. This leaves plenty of room for surprises in either direction, and frankly, the biggest surprises have been on the downside. The elections are also becoming an issue. It won’t be long before we start to see the results of primaries and the strengths or weaknesses of some of the specific candidates come into play. How do you think the market reacts to continuing strength of the Trump wins?? Hillary vs. Trump has no winners.
So, what do we do? As you can see by our YTD there are clearly ways to make money even in this environment. In this account, since it is limited to options, I have scaled back the size and number of trades to reflect my risk profile. However, for those who trade both stocks and options there is an alternative. It is a twist on the “covered write” method of creating income. If you find a stock with good fundamentals and a good dividend the covered write is a great way to limit risk and create more income. We did this with APC in our big account but the weakness in this strategy is what happens when the stock goes into more of a freefall. You simply cannot write new calls fast enough to manage the decline. The answer can be simple…use the proceeds of the written call to purchase a put under the stock for protection.
An example of this would be a fundamentally strong company, like SUN. The company has several things going for it, including a diversified portfolio of enterprises. Currently, it sells for a PE of just over 10X and has a current dividend of $2.77 or 7.7%. The company has the retail stores and distribution of all of its products via those stores to increase margins. On the technical side, while the stock has reacted well coming off a possible bottom, it also has a short interest equal to 30% of its float. This will be a strong bid (and probably was this past week) under the stock on any further good news.
The trade looks like this:
Buy 300 SUN @ $29.50 $8,850
Sell 3 SUN 6/32.50 calls @ $2.00 $600 Credit
Buy 3 SUN 3/27.50 puts @ $1.20 360
Net debit: $8,610*
If the stock goes up you would lose it @ $32.50 for a gain of $5 and a loss of $1.20/ option with a net gain of $3.80/share.**
If the stock goes down back to $25, you have a $4.50 loss on your stock but have collected $2.00/share and the puts are now worth $2.50, so it is breakeven.
However, the puts move point for point on the downside, and you can rewrite and start again.**
If the stock stays even you neither win or lose on it, but you get to keep the position and you gain the $1.80 between the written call and the purchased puts.
*This can also be done on margin and increase your ROI.
**You will have also collected $ .745 dividend in either example.
While not my cup of tea in the OPTIONS ONLY account, this trade shows that there are ways to profit and protect………………………..CAM
Additional New Trades Options Account
( 1 ) Buy 4 SJM March 130 Calls @ $ 2.30
All trades were based on your participation in the texting service to receive updates. Previous closed out trades not listed here may be seen in previous market letters.
New trades $ 10,000 account...In Texting we have a limited amount of words. In the interest of brevity: OPTIONS ONLY: 1 January , 2 February. The Quantity and Strike Price for each trade is specific. Trading is hypothetical. We may trade weekly options and they are noted: SPY 1/25 147 for SPY Jan 25th 147 Calls or Puts.For questions please call 702 650 3000. Closed out positions are found in previous letters dating back four years: Feb 15th; 8th; 1st;Jan 25th; 18th; 11th; 4th; Dec 28th;21st;14th; 7th; Nov30th; 23rd; 16th; 9th; 2nd; Oct 26th;19th;12th; 5th;Sept th;21st;14th;7th;Aug 31st; 24th; etc
New Stock and Options Recommendations $ 100,000 Account
( 1 ) BUY 500 STNG @ MKT.....CLOSED $5.93
( 2 ) BUY 200 SUN @ $29.50
WRITE 2 SUN 6/32.50 CALLS @ $2.50
BUY 2 SUN 3/27.50 PUTS @ 1.20
( 3 ) Buy 8 SJM March 130 Calls @ $ 2.30
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