The Two Big Reasons I Use Thinkorswim

Choosing a discount/online broker is one of the most important decisions you'll make as an investor, because picking the right one will improve both your profits and help keep your sanity as a trader. There are an awful lot of choices out there but fortunately, I made the right choice by going with thinkorswim, a Chicago-based outfit known primarily for its sophisticated options trading tools.

Here are the two reasons I recommend thinkorswim to anyone who asks about them:

1) All Costs Are Reasonable
When it comes to commissions, thinkorswim is better than most brokers, but certainly not as dirt-cheap as Interactive Brokers. However, one thing I love about thinkorswim is that you can choose between different commissions plans, including those of other brokers!

I am on the standard rate plan, which on the options side is the lesser of $2.95 per contract or $1.50 per contract plus $9.95. For stocks, I pay 1.5 cents a share with a minimum of $5 per trade. Best of all covered call trades involving one contract are just $5 all-in. Again, not as cheap as IB, but a lot cheaper than most of the competition like optionsXpress!

There are also no order cancellation fees, no stupid inactivity fees, no software/data fees, and mutual fund orders are free! And as far as trade executions go, I regularly get filled at prices that are slightly better than my limit-order prices.

2) The Customer Service is Off the Charts
I'm a firm believer that things just aren't the way they used to be in terms of customer service, and I absolutely despite dealing with financial institutions whether they be banks, credit card companies, or anything else. However, thinkorswim simply does things differently.

For example, when I had some trouble installing thinkorswim's software on a PC, I called up the company and a live human being answered the phone right away. And more importantly, he started giving me instructions right away, without asking me for my name, account number, and my favorite animal. I've also been impressed with the online customer service as my issues are typically addressed and

And when I opened my account, I chose to do so with a check. Believe it or not, thinkorswim actually paid for the check to be overnighted to them via Fedex!

So to wrap it up, I found that thinkorswim offered the perfect combination of low cost and high-end service. I don't use more than 10% of the sophisticated thinkorswim software's charting and order-entry capabilities, but I plan to be a customer for a very long time and maybe I'll eventually grow into it.

One caveat - thinkorswim probably isn't the best broker for a beginner because the sheer volume of features in the software might overwhelm a novice trader/investor.

Full disclosure - I'm also a thinkorswim (SWIM) shareholder!

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Consumer Confidence Hits Record Low, Is It Time To Buy?

I like to think that when life beats you down to the point where you can't take any more, there's some good thing right around the corner that will get you going again. I found that was true when I met my girlfriend last summer, when I went to the most amazing vacation of my life this past May, and when I had my hot chocolate this morning.

This morning, consumer showed just how beaten down they feel, as the Conference Board reported that its Consumer Confidence Index dropped to a record low of 38 in October, a whopping 38% decline from September.

Now what does this mean for stocks?

According to Ken Fisher:

"We find that high consumer confidence is generally followed by low returns. There are statistically significant relationships between some components of consumer confidence and subsequent Nasdaq and small cap stock returns. But the relationship between consumer confidence and subsequent S&P 500 returns is not statistically significant."

The data isn't terribly conclusive, but I find myself becoming more positive on stocks as a result of the awful Consumer Confidence reading, especially since major stock market lows occurred near major lows in Consumer Confidence. You want to buy when sentiment is very negative, and we're at that point. The economy isn't likely to improve anytime soon, but that doesn't mean we can't get a significant bounce. I'm not in "throw money at the market" mode just yet I'm seeing a number of covered call trades that look fairly attractive.

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3 Options Trades on Central European Distribution (CEDC)

Polish vodka company Central European Distribution Corp. (CEDC) has been on one heck of a rollercoaster rider this year, as shown by this chart:


CEDC has more been a victim of forces like the meltdown in emerging-markets related stocks rather than company-specific issues. Since CEDC does most of its business in the Polish Zloty and reports results in U.S. dollars, the strengthening of the dollar has been a clear headwind for the stock in terms of sentiment.

However, the dollar actually hasn't hurt CEDC's reported results much, as the company preannounced better-than-expected third-quarter results while also saying the following:

The Company expects to see the strongest brands getting stronger in this consolidating environment, especially in the Russian market where its brand Green Mark, the number one brand in Russia in terms of volume and value was up over 40% in volume terms in the third quarter 2008. The Company's premium vodka brands which include Parliament (volume growth over 20%) and Bols (volume growth over 15%) have continued to not only outperform the market for vodka brands in Russia and Poland but also accelerating gross margins which are estimated to be between 25% to 26% for the 3rd quarter 2008, as compared to 20.6% in the 3rd quarter 2007.

CEDC also reaffirmed its 2008 net sales guidance of $1.65-$1.80 billion and earnings guidance of $2.75 to $2.95 a share.

So as I'm writing this, CEDC is trading at $18.72, meaning the stock is trading at roughly 6 times full-year earnings that are expected to grow by about 40% vs. 2007. At these levels, the market is taking an incredibly negative view of the company, which is unwarranted given how well the company is executing.

It's also important to note that slow-growing consumer products company that also have significant exposure to the movement of the dollar are trading at incredibly high valuations relative to CEDC. Plus, I wouldn't count out a larger beverage company making a play for CEDC as a way to expand in Eastern Europe and Russia.

With all this good stuff in mind, I'm going to outline three options trades on CEDC that I'm looking at:

1) Short November $12.50 Put

I'm considering shorting the November $12.50 puts on CEDC to take advantage of the 150%+ implied volatility reading on the options, which is stunning for a company that just announced good news. Assuming I could get 60 cents or better, a 5% ROI would not be bad if the option expired worthless, and if CEDC stock collapsed in the next month, going long under $12 (or about 4.5 times earnings) seems like a sweet deal to me.

2) Long CEDC Stock, Short November $20 call

This covered call trade would bring the cost basis of the stock down under $17 at current levels, with a potential return of 18%, assuming the November $20 call was sold for about $2.05.

3) Long CEDC Stock, Short December $20 call

This is very similar to trade idea #2, except we're dealing with a December option instead of a November one. By shorting the December $20 call against the stock for about $2.70, cost basis for the trade would come down to about $16, with a maximum profit of roughly 21%.

Okay, that's it for now. I'm in no particular hurry to put money to work, but if the market breaks down a bit, I'll look to take a position in CEDC. Until then, I'm doing my best to sit tight!

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3 Ways to Play Research In Motion With Options

As I've noted before, I'm a cautious bull on the stock market, and reflecting that mentality, I took a bullish position in Research In Motion (RIMM). The VIX is hovering at sky-high levels, and implied volatility readings on individual stocks are through the roof. Therefore, rather than buying the stock outright I decided to sell puts on RIMM. In addition, I'll outline two covered call plays on RIMM.

Here's the math:

I sold the November $30 put for 71 cents. In others words, if the stock is below $30 on November 23, I will be forced to buy the stock for $30 a share. If that happened, my net cost basis excluding commissions would be $29.29 a share, a whopping 36% below the current stock price of $46.

Given the slowing economy, RIMM won't see its earnings growth exploding the way it used to, but the stock is trading at just 13 times expected full-year earnings of $3.60 a share. And let's say that number comes down by 15% to $3.06 a share, my buy point is $29.29 a share, and 9 times earnings seems like a fair price for RIMM. Keep in mind that the company also has $3 a share in cash on the balance sheet.

The maximum profit on the trade is $71 for each contract I sold (not telling how many!), with a total potential loss of $2,929 per contract if the stock went to $30. Of course, I don't see RIMM going anywhere near $30 in the next month let alone $O, and if I went long the stock outright, I'd have significant risk anyway. RIMM options are also very liquid, so I can get out pretty much any time I want.

With that out of the way, let's look at two potential covered call plays:

Trade #1: Long RIMM stock, Short November $50 call for about $3.45

This brings the cost basis of buying RIMM down to $42.23 a share, with potential upside to $53.45 ($50 + $3.45).

Trade #2: Long RIMM stock, Short November $45 call for about $5.85

This trade, which I actually like better because it is more conservative, creates a long RIMM position with a cost basis of $40.15, with upside capped at $50.85.

That's it for now. I plan on posting more trading/investment ideas in the coming days, so stay tuned. Good luck out there!

P.S. I was stopped out of my AMZN short at a loss. Must stop daytrading. Now.

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5 Tips for Covered Call Traders - Tip #3

Stick with Short Durations

When I stay stick with short durations, I am referring to the short call portion of a covered call position. When you're short a call, you want that call to decline in value. One component of an option's value is time, and the closer the option is to expiration, the smaller that value gets.

Therefore, I find it best to sell call options that are a month or two to expiration. In addition, when you are selling a month or two out, you can avoid volatility-inducing events (which can increase the value of an option) like earnings reports. Remember, higher volatility means higher options prices, which isn't what you want when you are short an option.

I knowingly and stupidly broke this rule with by performing a covered call trade on Raymond James Financial (RJF) on Monday, a day before earnings, and the stock has fallen over $3 since then, putting the trade in the red.

I am now paying the price for my cockiness - don't be as dumb as I was!

The Rest of the "5 Tips for Covered Call Traders" Series

Tip #1 - Pick a Stock You Believe Will Go Up!
Tip #2 - Shoot for the Clouds, Not the Stars

Tip #4 - Watch Those Commissions!

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AllianceBernstein Results May Indicate Capitulation

I don't hide the fact that I am a bull, albeit a somewhat cautious one. I've been increasing my long exposure via covered call and short put positions, and I'm actively looking for new names to pick up. One of the main reasons I'm bullish is that we are getting to the point of capitulation, where investors just give up and cash out because the market is just too painful.

This afternoon, while everyone was watching Amazon.com (AMZN), I happened to notice mutual fund giant AllianceBernstein (AB) delivered much weaker-than-expected third-quarter results, complete with layoffs and a 50% cut in its hefty dividend.

The key line for me in the press release was this:

"Retail outflows were driven by both significantly slower sales and a marked increase in redemptions."

The best time to build market exposure are when others are pulling out, because amazing bargains are created. This is especially true when the redemptions come after a big market decline. Stocks go down when there are more sellers than buyers, and mutual fund selling are making a huge contribution to the recent market weakness. And when fund managers are losing assets by the billions, they sell everything that isn't nailed to the floor, not just the junk.

On a positive note, futures are up just a tad, so maybe we'll have better action tomorrow. I'd settle for a decline in the out-of-control VIX, but even a flat market would be a welcome rest from the recent havoc.

Full Disclosure: I am short AMZN as of the time I'm writing this.

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5 Tips for Covered Call Traders - Tip #2

Shoot for the Clouds, Not the Stars

I'm not talking about your hopes and dreams. I'm talking about returns. It is tempting to write covered calls on highly volatile stocks (though what isn't volatile these days?) because of the extremely high call premiums that can be reaped.

This is a double-edged sword, because extremely high implied volatility readings tend to be associated with extremely volatile stocks! Shocking, huh? This is especially true with small caps, biotechs, and these days, financials.

Let's take Citigroup (C) as an example. The stock closed at $14.18 on October 21, while the November $15 call option closed at $1.13. The implied volatility on that option is currently 101%, which is pretty fat. By buying the stock and selling that particular option, the cost basis per share would be $13.05. And in the absolute best case, you could earn a return of 14% in about a month.

But there's a problem - Citigroup is one heck of a wacky stock, and it could be at $10 in a month (-22% return) just as easily as it could be at $20. As a personal rule, I tend to stay away from stocks where the options carry volatilities that are out of whack relative to the options of similar companies.

Occasionally, there are traders out there with some piece of information you don't have, and they will aggressively buy options, which has the effect of increasing implied volatility readings. Remember, implied volatility tends to be high for a reason, so don't go crazy with your covered call trades!

The Rest of the "5 Tips for Covered Call Traders" Series

Tip #1 - Pick a Stock You Believe Will Go Up!
Tip #3 - Stick With Short Durations
Tip #4 - Watch Those Commissions!

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3 Easy Tips for Surviving the Credit Crunch

Let's face facts. Not everyone is graceful under pressure. We'd all like to be James Bond - cool as a cucumber and ready for action, even when chained to a nuclear bomb that will go off in 30 seconds. However, we are all human, and we're going to get upset when we lose money.

The emotional roller coaster that is the bear market can make it exceedingly tough for investors to avoid losing both their money and their minds. So if you want to be a survivor rather than a victim, you'll want to read these three simple, but effective tips that will help you keep both your wallet and your mind in good shape for the long run.

1) Reduce Your Position Size

With less money at risk, you have a far greater chance at staying rational when the market is exceedingly volatile. In addition, very few stocks are holding any kind of sustainable rally, which makes holding cash a lot more sensible than holding stocks. So if your normal trade size is 5% of your account, take it down to 3%. This sacrifices some upside potential, but the trade-off is worth it.

2) Focus on Downside Risk, Not Upside Potential

When you consider a trade, ask yourself: how much am I willing to lose on this stock? That question should the first one you consider before hitting the buy button. By asking yourself how much you can lose, you are far less likely to make irrational trading/investment decisions.

3) Be Very Wary of "Cheap" Stocks

Do you want me to name you a cheap stock? How about a hundred? I can do that. Or maybe a thousand? No problemo. Always remember that cheap stocks can get cheaper, especially in a slowing economy and/or when earnings estimates are declining.

Take Garmin (GRMN), which is trading at $25, or 6 times expected full-year earnings.
Cheap, right? Yes, but it was also cheap a month ago at $35 and a year ago at $100.

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Attention to My Followers on Covestor

I just wanted to send a quick message to those following my portfolio on Covestor. Please keep in mind that Covestor does not track options positions which has resulted in a material adverse impact on my performance as tracked by Covestor.

For example, my Covestor portfolio lists a long stock position in (Raymond James Financial) RJF that was called away due to a covered call trade. In addition, the thrashing my longs took in the market meltdown was offset by puts I owned on US Global Investors (GROW), which skyrocketed as that stock collapsed.

Note: Incidentally, I initiated a covered call trade in RJF yesterday.

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5 Tips for Covered Call Traders - Tip #1

Pick a Stock You Believe Will go Up!

Many traders view covered calls as a means of generating a never-ending stream of income earned by selling options against a particular stock that never moves. The problem with that is that the options on stocks that don’t move much tend to be cheap – meaning you can’t earn much from selling those particular options.

And believe it or not, many traders actually want the stock they select to go down! This way they can earn income as the call options they sell expire worthless. That logic is a bit off-kilter considering that the income earned from selling the option can easily be offset by a decline in the stock price.

Remember, The best-case scenario in a covered call trade is for the stock to go up significantly, forcing you to sell and lock in a profit. The second-best scenario, is that the stock goes up but the option still expires worthless. Here’s the mathematical breakdown, with commission expenses excluded for the sake of simplicity:

On Monday October 20^th, I made the following trade:

• Bought RJF at $24.20
• Shorted November $25 call against it for $1.80

This gives me a cost basis of $22.40 per share. Now let’s assume the stock finishes at $25.50 at expiration on November 21. I am forced to sell my stock at $25 (the strike price of the option) a share, giving me a profit of $2.60 a share ($25 + $1.80 - $24.20) or 11%.

But what if finishes below $25 on November 21? Say, $24.75, I’m happy because the call option I sold expires worthless, and I’ve made a total profit of $2.35 a share. And more importantly, I can sell another option against my stock and increase my total profits.

However, keep in mind that in the first scenario, I have a realized gain that nobody can take away. I’m free to spend it on a toaster, new golf clubs, or some barbecue ribs. In the second scenario, I am still long the stock which has the potential to go down and offset any prior gains I made.

So if you’re trading covered calls – do yourself a favor and pick a stock you think will go up, rather than one whose options can just provide you with income.

The Rest of the "5 Tips for Covered Call Traders" Series

Tip #2 - Shoot for the Clouds, Not the Stars
Tip #3 - Stick With Short Durations
Tip #4 - Watch Those Commissions!

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5 Simple Tips for Covered Call Traders

In yesterday's 90-Second Primer On Covered Calls, I noted that I would be posting a series of 5 tips to help investors improve their covered call trading strategies. This page will mark a home of sorts for those tips, which are easy to understand and potentially helpful to your profitability.

So without further adieu, here are my 5 Simple Tips for Covered Call Traders:

1) Pick a Stock You Think Will Go Up!

2) Shoot for the Clouds, Not The Stars!

3) Stick With Short Durations

4) Coming Soon!

5) Coming Soon!

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A 90-Second Primer On Covered Calls

When it comes to trading options, covered calls are one of the most popular strategies out there. Covered calls are far from perfect, but many investors find them to be very useful as a way to take a bullish position on a stock while modestly reducing both the risk and reward aspects of the trade.

By selling a call option against a long stock position, you can reduce your cost basis by agreeing to sell your stock at a fixed price. The vast majority of the time, a call option represents the right to buy 100 shares of a stock at a particular price, so typically, a covered-call trade will involve the sale one option for every 100 shares bought.

Here's a hypothetical example of a covered call trade on Apple:

• buy 100 shares of AAPL stock at $98
  

• sell 1 November $100 call option for $9

The result of this trade is a cost basis of $89 per share ($98 - $9). The buyer of the covered call position will not lose money unless the stock falls below $89, so by selling the call option against the stock position, there is a modest reduction in (not an elimination of) downside risk.

However, one should keep in mind that while downside risk is reduced, upside potential is also capped. The seller of this particular call option has agreed to sell 100 shares of AAPL at $100. So even if AAPL stock went to $150, the seller of the call option would be required to sell his/her stock at $100.

To calculate the maximum profit per share on a covered call trade, take the strike price on the option ($100) and add the premium received for ($9), and subtract from it the price of the stock when it was purchased ($98). In this case, the maximum profit is $11 per share. ($100 + $9 - $98)

And if the stock finishes below $100 at expiration, the option will expire worthless, and the call seller has earned $900 for his troubles. (total profitability at that point in time) will also depend on where the stock is) However, the owner of the call option may purchase the stock from you at $100 at an earlier time, which would only happen if it was above $100.

Please keep in mind that this post was meant to be a brief primer on covered calls, and for the purposes of simplicity, I did not include the impact of trading commissions or taxes on profitability. For more information on covered calls, I recommend reading this document from the Chicago Board Options Exchange.

Here are 5 Simple Tips for Covered call Traders!

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Still Under Construction... But Now With Twitter Updates!

According to my stats, there are only a few people reading this blog. But if you came from my old blog and were following my trades - I covered my HAR short and sold my puts on GROW for big gains. They offset my big losses on ALL of my longs, including GME which I dumped at about $36. Could have been a lot worse though!

I've been slowly adding market exposure by selling out of the money puts on RJF (Oct $22.50, expiring worthless today, yay!) and on ERTS (Nov $22.50). Anyway, I added a Twitter thingie on the left sidebar, I'll be posting thoughts and trades there until this blog is whipped into shape! Or if you want to email me, just click here.

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Starting a New Stock Blog!

Hi folks, I'm launching a brand new stock/trading blog at LongShortTrader.com. I will soon redirect this site to that URL, but this will probably be my last word here.

Visit my new MMA Blog!

Hi folks, just wanted to let you all know that I have launched a new blog focused entirely on the sport of mixed martial arts (MMA). You can find it at MMAEruption.com.

So if you have a minute, check it out and let me know what you think!