Most investors have what is known as
positive beta to the overall market.
Beta is the term in finance that describes the relationship between a portfolio’s return and the market as a whole. This means even the best individual stock picker in the world could lose money if the market has a day like yesterday and today. Over two days losing almost 5% with every sector falling more than 3%.
What Can You Do When Your Trades Turn Ugly?
I have traded options professionally for more than 25 years, and to me, the one simple key to having a long career is discipline.
Discipline is paramount for success over the LONG term. Every trader has a limited amount of capital (money) available to trade. The trader without discipline will make trades, be quick take the profit when he is right, and call his trade an investment when he is wrong.
This action of cutting winners and letting losers run will almost certainly eventually lead to trading capital being wiped out. The natural tendency in humans is to take profits. Learning to cut losing positions and let winners run is a skill that must be developed.
Have you ever caught yourself saying any of the following statements to justify inaction on cutting a losing position?
- I am holding on to this trade and hoping it recovers
- If I didn’t own it already I would be buying it here
- I just want to get back to break even and then I will get out
- The market is wrong
Everyone has said these things at some point in their trading lives, but let me tell you, any time your position requires HOPE it is likely HOPELESS!
If you say I would buy it here and you don’t want to buy more – you may be better off selling what you have!
The market doesn’t know or care what price you bought a position. The market price of a stock is the value of that stock right here, right now! Even though the market presents opportunities, market pricing is not WRONG.
While I am not giving buy sell or hold advice, I would strongly recommend that when you find yourself staring at a losing position consider selling it! If you close it out completely, you can really make an honest determination when you ask yourself, “Do I REALLY want to own it here?”
Too often I see traders let their existing positions do the talking for them. Don’t fall into that trap!
See the OptionsHouse How-To tutorials on how to use stop order and trailing stops [VIDEO] to learn the mechanics of cutting losing positions.
Keep your discipline!
Photo Credit: Pandiyan
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Airgas Inc (ARG) is topping the Optionshouse hotlist this morning after Air Products & Chemicals (APD) said it may take a 5.1 billion dollar cash offer ($60/share) for Airgas Inc. to shareholders.
The board of directors of Airgas has rejected two prior attempts by APD for a friendly merger that would create the largest American industrial gas company.
Typically cash bids for companies destroy the long dated premium as cash has no volatility value. A hostile cash bid, however, is more complicated. Without the board of directors’ willingness to accept the bid, there is still uncertainty on how this will play out. A white knight may possibly be sought by the company.
Airgas rejected a friendly $62/share offer in December, and in 2007 the company enacted a poison pill strategy to ward off an unwanted bidder should an external company acquire more than 15% of the shares outstanding.
We are seeing over 2,000 contracts trade in the march 60 calls on the offer side at 2.35, which seems to indicate buying interest. This may be a sign that investors are expressing the belief that an enhanced bid from either Air Products or another 3rd party will come to seal the deal.
Photo Credit: Timothy Valentine
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Hostile Bid
This week holds four potentially exciting catalysts; each with the potential to dominate business media headlines. Is it any wonder that the VIX has spiked back above 25%?
- Wednesday night President Obama will deliver his State of the Union address
Will Health Care remain in focus following the Massachusetts run-off election results?
Will new Bank regulations and taxes receive a major emphasis?
Any new initiatives on job creation stimulus?
- FED Chairman Ben Bernanke Confirmation vote expected before his term expires on January 31st
This result will likely be known before it actually comes to a vote. I believe the market may not react well to any uncertainty of a non-confirmation vote
- FOMC meeting January 27
What type of meeting would it be if the pre-confirmation tally turns further against Ben?
Expectations are for no change to the Fed Funds targets but that decision has not been unanimous lately so the statement may change tone
- Earnings season is in full swing
Apple earnings tonight and Tablet launch on Wednesday
136 companies in the S&P 500 report including MSFT, JNJ, PG, CVX, T, AMZN and COP
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T
Google (GOOG) will announce earnings tonight after the bell and many traders are hopeful; looking toward a positive release to shift the current bearish tone in the technology sector and overall market.
Estimates are for around $6.50 per share on the top line on revenues of $4.92 bln. In addition to its actual performance, the company’s recent comments regarding their future plans in China will be closely monitored in the conference call.
In the past year Google has moved anywhere from 20% on earnings to less than 3% most recently.
The front month option straddle is priced at around $45, which to me could indicate about a 5.5% expected move (up or down) for earnings.
Photo Credit: Yodel Anecdotal
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Photo by Anna Prokopová
In a much-publicized spat with the Chinese government, Google (GOOG) has threatened to leave the country because, according to the company, its infrastructure was hacked in an attempt to gain access to the contents of Gmail accounts belonging to human rights activists in China. Obviously, considering that China already has more than 300 million internet users, this is a big deal for GOOG.
What is interesting is that before the open, the reaction of GOOG stock is muted. It is down only about $9, which on a $600 stock is about 1.5%. The biggest reaction is in Baidu, Inc. (BIDU); that stock is up about 15% this morning. The thought is if GOOG leaves, then BIDU will own the Chinese search market.
Because this is expiration week, there are some very large increases in options value in BIDU. With the stock at $445 in premarket this morning, the Jan 400 calls will now be worth at least $45. They closed at about $1.5 last night.
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