Want to know what I think are the four cornerstones of sound options investing? They aren’t complicated, yet they seem to be elusive too much of the time. They are…

1. Invest in options that respond well to the underlying stock’s movement (high delta)
2. Minimize time decay (the natural erosion of an option’s value over time)
3. Buy enough time to capitalize on major moves (you don’t have to hold it the whole time)
4. Minimize volatility (since volatility can shake up your confidence and your account balance)

Don’t worry – you won’t need a PhD in mathematics, nor will you need to be a seasoned options trading veteran, to apply these four principles. All you need is a little willingness.

1) Invest in options that move well with the underlying stock.

If you’ve ever heard the term ‘delta’ as it pertains to options trading, this is what they’re talking about. Delta is the degree to which each individual option changes with respect to every $1 change in the underlying stock’s price.

For instance, a call option with a delta of 0.30 (30 cents) would increase in value by 30 cents for every dollar’s worth of gain for the stock. That would be a relatively low delta. A relatively high-delta call option might move by 90 cents (a delta of 0.90) when the underlying stock gained a buck.

Obviously high-delta options are more desirable if you’re making a directional forecast for a stock.

(Note that the delta can change as an option moves deeper in the money or deeper out of the money, and as time passes. For our purposes though, you just need to understand the concept.)

2) Minimize your time decay right off the bat.

Have you ever noticed you pay a little more for options than they’re mathematically worth? For instance, a call option with a strike price of $30 on a stock that’s trading at $35 is intrinsically worth $5. However, you may have to pay $7 to own the call option.

That additional $2 is considered to be ‘time premium’. As time passes – even if the underlying stock’s price doesn’t change by a penny - an option’s time premium will sink. As expiration approaches, the time premium will eventually be whittled away to zero…meaning the option will eventually only have intrinsic value (or what the option is mathematically worth).

Option traders call this time decay ‘theta’. Needless to say, keeping theta to a minimum is critical to your long-term profitability.

Continue Reading Here

ETF Trading Signals – Low Risk Entries for ETF Funds HERE

SPY – SP500 Exchange Traded Fund – 60 Minute Chart

The market is currently in a down trend which means bounces get sold. But if you take a look at the buying volume ratio at the bottom of the chart you will notice that in an uptrend buying surges are the beginning of a rally, and during a downtrend buying surges are the end of a rally. I also want to mention that a lot of volume traded at this current level which you can see on the volume by price bars on the chart. This means there will be a lot of sellers to overcome before breaking to the upside.

The situation the market is at now makes things difficult to tell if this bounce will get sold, or if its just the starting of a rally. There are several arguments for each side but the one which I think has the most influence is the buying volume. It was very strong on this current bounce. It feels more like a rally but we will not know for sure for a couple days…

That being said, if the SP500 moves up Thursday then I would consider the market to be in an uptrend and exiting any short positions is a smart play. But if this bounce is sold and the market drops, then the 3% rally on Wednesday could all be given back and then some.

GLD Gold Exchange Traded Fund – 60 Minute Chart

Gold has continued to grind its way up to the previous top. Problem is the volume has been very light and that tells me there is not much demand for gold at these elevated prices. While we are still long gold it is crucial to have your protective stop in place so we lock in as much profit as possible for when the sharp selling spike happens.

In short, the market feels like its trying to reverse back up but at this time its still in a down trend and trading under a key resistance level. READ MORE

ETF Trading Signals – Low Risk Entries for ETF Funds HERE

A portfolio of technologies needed to achieve the carbon emissions under the BLUE Map scenario
So what needs to be done to make this work? Well, gird your loins – the “top priority” will be to increase energy efficiency, reduce energy consumption, and lower energy intensity.
But there’s also some exciting news. The revolution is already under way.
On a global scale, total investment into technology and its deployment between now and 2050 would be about US$45 trillion – 1.1% of average annual global GDP over the period. The good news is, that investment has already begun all around the world.
Even as China grudgingly accepts the mantle of the biggest energy consumer, investment dollars are being poured into renewable energy research. China has already surpassed the United States as the largest producer of clean energy, whether it be hydro, wind, solar, or nuclear.
Germany, Europe’s powerhouse, is lining up renewable energy to compete with nuclear. Currently getting 10% of its energy from renewable energy, Germany’s renewable numbers for 2020 are projected at 38.6% electricity, 15.5% heating and cooling, and 13.2% of the transport sector.
And in the United States, the Obama Administration has been pushing for, and encouraging, clean energy research and development since it came into power. On display are a variety of subsidies and loans guaranteed to tempt even the most conservative producer.
Whether it’s the 30% cash up-front that the government is willing to give renewable energy projects or the vast amounts of cash injections into various energy technologies programs, renewable energy is set to take off in America.
For those investment portfolios that have taken a hit from the BP and Enbridge oil disasters, the IEA report is only going to spur up greater interest in the renewables game. Knowing which companies are enjoying political favor from Washington to Berlin and are at the receiving end of substantial grants is a sure-fire way to repair the damage.

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Find out which renewable energy company – poised to take a moon shot – is Marin’s personal favorite right now. Read more here.

The level holds again, September starting strong

The much-watched 1,040 level on the S&P 500 held on its 5th test since the April highs. My toe dip last Friday turned into an aggressive long yesterday as we saw strength off the open. Of course, reversal trades are never easy and the late-day sell-off tricked me into selling about 1/3 of my position before the close as I started to fear a gap down through 1,040. Alas, the gap up came and the willingness to be a buyer at the 1,040 level is being paid today compounded by a very bullish data point at 10 AM: August ISM data handily topped estimates and came in ahead of July readings. ISM’s Ore was quoted as saying they’re seeing a “major restocking” occurring.

I realize I didn’t get a post out yesterday telling everyone I was buying so writing today talking about how I bought is somewhat useless. Yet, it’s my post so I get to write what I want and you could have seen my portfolio on T3Live.com (and the shameless plug…I’m on a roll today

My rationale for being a buyer was based on many factors which I explained in a long post over the weekend. Long bonds finally had a downtick signaling that, at the very least, momentum in that market had stalled opening up the possibility of a shift to equities. Doctor Copper, my leading indicator, is in breakout mode after showing hardly a whiff of weakness through August as equity markets dropped 4.7% for the month. And, although I generally despise sentiment readings, suffice it to say that sentiment was really poor. All these data points aligned with a level where I believed risk/reward was drastically in my favor.

We’ll see how this all plays out but I think yesterday was the buy of 2010 and I’m holding for much higher prices. We’ll see how long it takes to eat those words

“Make Enough Money in the First 59 Minutes of Trading to Take Off and Do Whatever You’d Like for the Rest of the Day”

Since bad news are great news, great news should be bad news, as all talk of QE2 on September 21 can now be shelved. It also means the sub-50 print will come in September instead of August, or October at the latest, unless all data analysis is outsourced to China in the next month. Reading through the components of the ISM, the report does not seem quite a strong as expected, with decline in New Orders, Backlogs, Exports and Deliveries, with a huge surge in Imports and Inventories pushing the overall number much higher. And the respondents commentary confirms that growth is being pulled exclusively from abroad: “Still experiencing intermittent delays in electronic components due to capacity and raw materials.” (Electrical Equipment, Appliances & Components); “International sales are especially strong. Domestic business is solid.” (Chemical Products); “Orders and business still strong.” (Primary Metals); “Order rate has slowed some. Supplier capacity in general seems to be improved.” (Machinery); “Large customers reducing pull rates for production.” (Computer & Electronic Products).

From the release:

Economic activity in the manufacturing sector expanded in August for the 13th consecutive month, and the overall economy grew for the 16th consecutive month, say the nation’s supply executives in the latest Manufacturing ISM Report On Business®.

The report was issued today by Norbert J. Ore, CPSM, C.P.M., chair of the Institute for Supply Management™ Manufacturing Business Survey Committee. “Manufacturing activity continued at a very positive rate in August as the PMI rose slightly when compared to July. In terms of month-over-month improvement, the Production and Employment Indexes experienced the greatest gains, while new orders continued to grow but at a slightly slower rate. August represents the 13th consecutive month of growth in U.S. manufacturing.”

There was an increase in Production (+2.9), Employment (+1.8), Inventories, of course (+1.2), Customer Inventories, of course (+4.5), Prices (+4), and a trade deficit busting Imports (+4.0). Yet declines occured in the key New Orders, Supplier Deliveries, Backlog of Orders and Exports categories. America continues to export its wealth abroad.

Respondents’ comments:

• “Still experiencing intermittent delays in electronic components due to capacity and raw materials.” (Electrical Equipment, Appliances & Components)
• “International sales are especially strong. Domestic business is solid.” (Chemical Products)
• “Orders and business still strong.” (Primary Metals)
• “Order rate has slowed some. Supplier capacity in general seems to be improved.” (Machinery)
• “Large customers reducing pull rates for production.” (Computer & Electronic Products)

Tabular summary of the results:

The next two days could prove to be very interesting – but probably won’t.

Dick Fuld is prepared to later assert:

Lehman’s demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments.

Uh huh.  It wasn’t caused by 30:1 leverage Dick?  You know, leverage you got “enabled” to use by Pauslon?  Of course you weren’t forced to use that, but heh, if the music is playing, you had to get up and dance, right?

In 2007, when the U.S. housing market began to show signs of weakening, Lehman Brothers and many of its competitors had already accumulated large positions in what were considered less liquid assets. Many market observers, including government officials charged with oversight of the financial markets, believed that the problems in the subprime residential mortgage market were and would be contained.

You were wrong.  But a prudent CEO, and a prudent company, doesn’t “bet the firm” on a premise that their largest-concentration of assets in what is clearly a bubble economic environment, unsupported by the macro level fundamentals, will not only go on forever but will see it’s equivalent of multiple expansion continue forever. That by definition – the belief in expansion of a compound-growth function at ever-increasing rates – is a Ponzi Scheme.

Ponzi schemes are broadly illegal.  While it’s not illegal to place bets on asset appreciation, when you claim to be in a position of “systemic risk” you should be held to a higher standard.  That standard was not only loosened it was destroyed in the years from 2003-2007.  Bear Stearns was a final warning that the Ponzi had collapsed, yet Lehman refused to heed that warning, instead choosing to rely on the premise that a government tit would be proffered to suckle from.  When it was not the firm collapsed.

Then there’s Wachovia.  I read through Scott Alvarez’s testimony (FRB’s Counsel) which goes through the usual mantra of how Wachovia’s business deteriorated due to macro-level economic developments not under it’s control, along with the seizure of WaMu.

Notably missing from this analysis, along with Steele’s, Wachovia’s former CEO, is any mention of the fact that Wachovia was writing credit-default swaps (CDS) on their own deals in the Option ARM space and bundling them with the lower-rated tranches as a means of being able to sell them!

This is important for two reasons: It is roughly equivalent to you writing fire insurance on your own house, when the entirety of your net worth including all your liquid cash is contained within the house in a shoebox.  Should the house burn you will of course be unable to pay off on your self-dealt “insurance.”  Second, there is no mention as to where those instruments are now or what they’re actually worth. We know where they are – they’re off-balance sheet at Wells, which now has roughly one trillion dollars of off-balance sheet exposure – with no way to evaluate the “wisdom” (or lack thereof) on the marks on those “assets.”

It is that fact, incidentally, that led myself and many others, including hedge fund managers, to short the stock.  That in turn drove the CDS spreads out.  But the predicate act that led people like myself to reach this conclusion – that the bank was hiding losses and likely was insolvent – was an act taken by their own hand and enabled by willfully-blind regulators.

Indeed, the bottom line problem here with Wachovia is the same as it has been up and down the line since this mess began – ridiculously over-optimistic asset “values”. This has not abated, as we keep seeing every week with FDIC bank seizures, where banks that are allegedly solvent (by their accounting of “assets” and “liabilities”) are nonetheless seized and huge losses, often as much as 30% of the asset base, are absorbed.  This isn’t possible unless the “asset values” are pure works of FICTION.

After the 1929 crash the Pecora Commission was formed to find the causes and prevent it from happening again.  What Pecora found was that too much leverage combined with self-dealing and lies about asset valuations led to the collapse of banks and other members of the financial system when the falsehood of those asset “value” claims was exposed to the light of day, and that self-dealing in various forms led to covering up these deficiencies until they reached critical levels (where banks were literally unable to pay the light bill), by which point the entirety of the depositors’ funds were often gone. Just as today, banks often maintained that they were “fine” right up until the fact that their assets were worth pennies was exposed.

Glass-Steagall was an attempt to prevent that from happening again by separating deposit-holding banks from securities activities.  Between that and strict leverage limits, along with bank examiners, it was believed that loss-hiding would no longer be possible to a degree where these sorts of panics could develop.

For 40 years it worked.

Then we had the S&Ls, which gamed the system.  Bluntly, they broke the law, “trading” assets between themselves with a wink and a nod, thereby “establishing” asset valuations that were false.  This “supported” their lending and other activities – right up until, just as with the 1920s (and now) it led to their destruction when the truth began to leak out.

But unlike today Bill Black came in with a mandate and started referring cases to prosecutors, who promptly sent over 1,000 people to prison for their lies and scams.

The FCIC will fail to be effective unless we have another Bill Black.  We must reverse those decisions of Congress to extort FASB, as well as exposing and laying bare on the table the inside baseball, hidden caches of alleged “assets” that are not really worth what is being claimed, and other forms of rooking the public while laying off the costs on taxpayers.

Sadly, I see no evidence that the FCIC will do any of this.  There is nothing in the hearings I’ve seen to date that suggests that Wachovia’s Steele, for example, nor The Fed, will be called to account on exactly where are those CDS, what are they worth, and why did The Fed and other regulators ignore their existence and lack of public valuation and disclosure?

Nor has the FCIC asked Henry Paulson (or Tim Geithner for that matter) why is it that the former 14:1 leverage limit was removed and why shouldn’t it be put back in force now, since it is now a known fact that had it been in place neither Lehman or Bear would have failed, and if it had applied to AIG they wouldn’t have failed either!

No, instead we have a circle jerk of monkeys, prancing before the cameras, but with no substantive progress and disclosure.

Phil Angelides is no Ferdinand Pecora.

Every Once in a While, You Find Something Amazing for Investors….Check out FREE Trend TV

A short time ago, ADP reported that U.S. private sector employment fell by 10,000 in August, the first monthly decline since January. Shown below are the changes in employment for goods-producing industries where job losses have accelerated since the spring.

This bolsters the case that Friday’s nonfarm payrolls report from the Labor Department is likely to produce a six figure number with a minus sign in front of it after laid off Census workers and cutbacks in state and local government jobs are included in the mix.

That’s not news, of course. But what you might not know is that there are many ways to trade this sector, none of which involves buying or selling a single stock but, rather, making a single play on the industry as a whole.

How can you make one trade that gives you exposure (whether long or short) to banks, brokerages, insurance companies and other types of asset-management outfits? By adding Exchange-Traded Funds (ETFs) and ETF options to your investment arsenal, you only pay one commission (because you’re only buying/selling one position) to be exposed to the upside (or downside) of its various component stocks.

Know Your ETF Holdings

ETFs (and their options) have exploded in popularity in recent years.  They offer securities that trade like stocks but are micro-focused in almost every sector in the markets (including international, commodity, short, ultra-short, etc.).

But there can be a great difference in the holdings, diversification and trade strategy of ETFs, even within one particular sector.

Let’s take a closer look at some of the various financial-sector ETFs “out there” so that you can see some of the many choices you have when you’re ready to add sector plays to your portfolio.

Among the group of financial ETFs are:

• iShares S&P Global Financials (IXG)
• iShares Dow Jones U.S. Financial (IYF)
• iShares Dow Jones U.S. Financial Services (IYG)
• Financial Select Sector SPDR (XLF)
• Vanguard Financials (VFH)
• Rydex S&P Equal Weight Financials (RYF)
• PowerShares FTSE Rafi Financials (PRFF)
• First Trust Financials AlphaDEX (FXO)
• PowerShares Dynamic Financials (PFI)

This list does not even include international, bank, insurance, preferred and other types of financial-related ETFs like the short and ultra-short ones that aim to give you even-greater leverage on smaller moves.

With so many choices, which one represents the smartest way to play the sector at any given time?

Weigh(t)ing Your Options

Not all ETFs are created equal, and that’s a good thing. The more choices we have, the more control we have over the performance of our portfolio.

Remember, the biggest benefit of trading ETFs and/or their options is that, instead of spreading your capital among several individual trades, you can bet on (or against) an industry with just one investment. That said, your responsibility is to learn exactly which underlying stocks make up each individual ETF.

And, to take it one step further, you should know just how the stocks are “weighted” within each ETF. That is, if 10 stocks are included one ETF, you probably won’t see each of them “weighing” an equal 10% of the overall ETF but, rather, some stocks will represent a bigger percentage than others.

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Let’s examine the diversification and top holdings of the above-mentioned ETFs. (All data from Yahoo! Finance.)

IXG — Top 10 Holdings are 24.44% of assets.
Top 3 Holdings:
JPMorgan Chase (JPM) — 3.66%
HSBC Holdings (HBC) — 4.05%
Wells Fargo (WFC) — 3.36%

IYF — Top 10 Holdings are 37.91% of assets.
Top 3 Holdings:
JPM — 7.9%
BAC — 7.76%
WFC — 6.92%

IYG — Top 10 Holdings are 57.68% of assets.
Top 3 Holdings:
JPM — 12.38%
BAC — 12.15%
WFC — 10.67%

XLF — Top 10 Holdings are 51.15% of assets.
Top 3 Holdings:
JPM — 9.87%
BAC — 9.47
WFC — 8.76%

VFH — Top 10 Holdings are 36.86% of assets.
Top 3 Holdings:
JPM — 8.2%
WFC — 7.26%
BAC — 5.02%

RYF — Top 10 Holdings are 17.01% of assets.
Top 3 Holdings:
SLM Corp. (SLM) — 2.15%
Morgan Stanley (MS) — 1.92%
Federated Investors (FII) — 1.78%

PRFF — Top 10 Holdings are 48.19% of assets.
Top 3 Holdings:
JPM — 11.15%
WFC — 8.59%
Berkshire Hathaway (BRK/B) — 6.34%

FXO — Top 10 Holdings are 14.51% of assets.
Top 3 Holdings:
W.R. Berkley (WRB) — 1.85%
Allied World Assurance Holdings (AWH) — 1.6%
PartnerRe Ltd. (PRE) — 1.47%

PFI — Top 10 Holdings are 25.73% of assets.
Top 3 Holdings:
Ameriprise Financial (AMP) — 3.12%
MetLife (MET) — 2.85%
Unum Group (UNM) — 2.71%

Now, all ETFs have different rules regarding re-balancing of holdings, discretion of holdings, focus, etc. — and some are more-liquid than others, both in stock and option volume.

Recent massive market capitalization changes in individual stocks have certainly made an impact of the relative weightings of holdings in this sector, as well.

But certainly, the active investor would be wise to know what they are buying when they invest or trade in one of these ETFs or the options on them.  For example, the likes of IYG, XLF, and PRFF have around 50% of their holdings in their top 10 assets — meaning, they are not very diversified.

In addition, on IYG for example, around 25% of the holdings are in JPM and WFC alone (based on the data utilized above). So, the performance of that ETF will be greatly affected by just two securities.

In one way, you could say that is much more risky. But from another perspective, you could view this as getting more “bang for the buck.”

Then there are the very diversified ETFs, some of which attempt to equal-weight — such as RYF and FXO, where the top holdings comprise about 15% of assets and the top holdings are around 2% of assets. In the current market environment, we have seen many sectors move “en masse” quite a bit — more than what is normally the case.  So, these ETFs may also move as a group.

Also remember that supply and demand is a big factor in ETF performance, because they trade as stocks, not on the actual value of their assets.  But as the market settles down into more of a “stock-picking” environment — and if arbitrage-type discrepancies are seen in various ETFs vs. individual stocks, etc (as has been seen recently in preferred vs. common, closed-end funds, etc.) — then you may begin to see more price performance disparity in ETFs based on their holdings and diversification.

The bottom line is that, when you’re gearing up to invest in or trade an ETF or options on an ETF, you should examine the holdings, structure and goals of the ETF to see which one most matches the expectations (short or long term) you have for that sector. Join The FREE + Premium Service Here

Trade Well,
Andrew Hart

For a bit of a refresher and to update where we are, in the table above I broke down federal government receipts and outlays (revenue and expense) by month for fiscal year 2009 and year-to-date 2010.
As you can see in the table, we’re through three-fourths of fiscal year 2010 and the deficit is already over $1 trillion. At this point last year, the deficit was also just above $1 trillion. So you can bet we’re on track for a total deficit of between $1.4 and $1.5 trillion this year.
Just like last year, the huge deficit figure will be widely reported, even in the mainstream media. But a related piece of vital information will be glossed over (if reported at all).
This piece of information is the most crucial to why your taxes are set to skyrocket – and nobody is even bothering to mention it.
You see, the “outlays” column above comprises two types of spending: discretionary and mandatory. Mandatory spending, expenditures that must go into the U.S. budget, includes things like Social Security, Medicare, Medicaid, income security programs, and some others. And according to the Congressional Budget Office, mandatory spending reached $2.1 trillion in fiscal year 2009. What’s more, it increased more than 30% from the year before.
Now look back up at the table above. Notice anything?
Total receipts for 2009 were also $2.1 trillion. In 2009, for the first time ever, mandatory spending just about equaled total tax receipts.
That means that basically every single penny the federal government received in taxes last year (including individual income taxes, corporate income taxes, social insurance and retirement receipts, excise taxes, estate and gift taxes, customs duties, and miscellaneous receipts) was already spent on something mandatory before it came in.
It’s also worth mentioning that while mandatory spending grew by 30% last year, tax receipts fell by 16%. So under the current tax structure, a gap will begin to grow where mandatory spending pulls away from total tax receipts.
What this all means is that your tax burden is sure to rise, significantly, over the coming years. That’s the government’s only choice at this point. You think it will cut discretionary expenses by any meaningful amount? Not hardly, it’s too politically damaging. And forget about legislation to cut mandatory spending until the system goes completely bust. In the meantime, both parties will try to kick the can further down the road by extracting as much as possible from you in taxes.
Now, here’s the good news…
Unlike the government, you do have a choice. You can “go global” and protect yourself by internationalizing your wealth through all the legal means available, making yourself a target that’s not easy to hit.

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For the past several months, we’ve had some of our best people working on a special report with the purpose of providing you everything you need to know to internationalize your assets and yourself. And it’s finally finished. You can read all the details here, incl. the 5 best ways of going global… at this point, this is not “Whenever you get around to it” advice anymore – the time to act is now, before new laws and regulations kick in that prevent you from getting your money out of the country.