Live: Tuesday, November 19, 2019

3:35 p.m. New York time

Two exits, AXE from the momentum portfolio for $85.07 and UCTT from the upgrade and revision portfolio for $22.65. Both were losses.

Given the turnover in the momentum portfolio, I replaced both vacancies with upgrade and revision trades, BCMH for an entry debit of $29.24 and EIG, $42.32.

AXE produced a 0.8% loss over one day for a -283% annual rate. EIG’s loss was 1.4% over four days for a -131.04% annual rate.

Given the high turnover in the momentum portfolio, I’m moving all funds freed by momentum exits to the upgrade and revision portfolio, which is less volatile.

By Tim Bovee, Portland, Oregon, November 19, 2019

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Live: Monday, November 18, 2019

1:35 p.m. New York time

In my Momentum shares portfolio, CUE and NAVI dropped from the pool at the end of the day in which I entered positions, and by my rules, I exited both today, CUE for $8.87 and NAVI for $14.23.

In their place I’ve entered positions in AXE, for $85.74 per share, and MUSA, for $119.35.

CUE resulted in a 1.7% loss — 16 cents — over three days for a -211% annual rate.

NAVI resulted in a 0.8% loss — 12 cents — over the three days for a -102% annual rate.

By Tim Bovee, Portland, Oregon, November 18, 2019

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I’m a fan, but…

I’ve long been a fan of Zacks, the investment research company that brought quality analysis and analytical tools to the trading public independent of the brokerages. I’m still a fan, but in setting up a trading system, I’ve uncovered a few items that make me wish that they would expand their tool set just a little.

I’ve been using Zacks to set up a stock trading system. Since the Fed dropped its funds rate below 2% last September, I’ve lost interesting in government bills and notes and vehicles to house my cash reserves.

I’ve turned to stocks, and as regular readers will know, I’ve been trying to work out a system.

The company was founded in 1978 on the premise that earnings analysis in aggregate by those brokerage analysts was the best way to see ahead to a company’s prospects, earnings being the ultimate basis of stock prices and brokerage analysts being important in setting trader expectations for the future of those prices.

Not exactly the stuff of quants programming their split-second AI underlings, but an approach that has proven solid for many decades.

For me, the beauty of Zacks lies in its analytical tools, a database of information related to 4,000-plus stocks, including fundamentals and analyst opinions, that I can write queries against and download into a spreadsheet for further analysis, all for the price of $20.75 a month. Not out of reach for a trader with limited capital.

My basic outline for a set of trading rules goes like this:

  1. Rule for the size of the portfolio, in either value or number of symbols (portfolio sizing).
  2. Rule for determining the size of each trade (trade sizing)
  3. Rule for conditions that trigger entry (buy signal).
  4. Rule for how long to hold before first evaluating (holding period).
  5. Rule for how often to evaluate the stocks in a portfolio (evaluation period).
  6. Rule for conditions that trigger exit (sell signal).

Zacks comes into play with Rule 3, when to enter. Using the company’s database and my spreadsheet analysis, I can set the conditions for entering a trade — so much change in analyst evaluations, for example, or so much acceleration in momentum, and lot more.  I generally aim for a poll of 25 or 30 stocks from the Zacks query and then pick the trade using my spreadsheet analysis.

When a stock no longer appears on the query, then that’s the signal to sell, without second guessing or remorse.

Zacks’ educational materials recommend slowing down process by evaluating positions and trading once a month or for the obsessive, once a week. I’m used to trading once a day, which shows my level of obsession.

Another brake recommended by Zacks is to not exit a position for the first four weeks after entering it, to avoid whipsaws.

It seems to me to slow down trading through something as arbitrary as a period of days. Back the old days (last spring) it made sense to slow trading, because each trade generated a commission that cut into profits and enhanced losses. But since then many of the major brokerages, following the example of the upstart Robinhood, have eliminated commissions on stock trades.

That simple act has created a whole world where we can, for the first time in my lifetime, trade as often as we wish without a penalty for trading.

Commissions also required that we set a minimum size on trades, in order to reduce the percentage of our profits gobbled up by commissions. In a commission without commissions, there’s no penalty for keeping positions small, thereby increasing diversification.

So if a sell signal invalidates a position, as it does under a system-based strategy, why would I want to hold an invalid trade for a month or a week or even a single day? Either a trading system deserves trust, which argues for a quick response to signals, or it can’t be trusted, which argues for changing to a new system.

My second dissatisfaction with Zacks has to do with the ranking system and whipsaws.

The company’s ranking system — 1 for a strong buy recommendation, 2 for buy, 3 for hold, 4 for sell and 5 for strong sell — is relative. That is, 1 and 5 each account for 5% for the pool, 2 and 4 for 15% each, and 3 for 60%. If a ranking is on the margin, it can change very quickly.

I’ve not found a way to get the score that underlies each Zacks rank. If a given signal has a rank of 1, the top 5%, it makes difference to know wether that’s the top 4.99% or the top 1%. Their query system does allow me determine how much the rank has changed in the past four weeks, but nothing further.

The remedy, of course, would be to increase the granularity in the Zacks score. Perhaps 1A for the top 1% down to 1E for just above the boundary.

So that’s what I’ve been working on for the past couple of months. On Friday I did a restructuring into two portfolios, Momentum (which is prone to whipsaws), and Analyst Revisions (which seems to be less prone to whipsaws).

I also want to create an Income portfolio based on Zacks, rather than the no-system portfolio I have today.

And a third possibility that I’m considering is to analyze solely based on the Zacks rank, Rank Change over the last four weeks, and then limit the choices further by market capitalization or some other characteristic.

Here’s a list of the stocks in each portfolio as of Friday, six symbols in each:

Momentum: CROX, CUE, NAVI, NSIT, ORN, SSD

CUE and NAVI dropped off the screen for action on Monday, giving sell signals, so I shall sell them and based on new analysis, buy AXE and MUSA.

Revisions: AUY, CNNE, FAF, IBP, MHO and UCTT.

No action required.

By Tim Bovee, Portland, Oregon, November 16, 2019

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Live: Tuesday, November 12, 2019

3:15 p.m. New York time

I exited two momentum shares plays, NTRA ($38.38, -1.8% return) and RNG ($173.74, +0.4% return).

I replaced them with two entries using an analysts upward revision screen, FAF at $62.47 and IBP at $69.37.

My options positions are all chugging along within their profit zones.

By Tim Bovee, Portland, Oregon, November 12, 2019

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APA Analysis

Apache Corp. (APA)

I have entered a short iron condor spread on APA, using options that trade for the last time 43 days hence, on December 20. The premium is a $1.29 credit and the stock at the time of entry was priced at $24.01.

The profit zone for this position is between $28.79 on the upside and $18.79 on the downside.

The implied volatility rank (IVR) stands at 72.0%.

Premium: $1.29 Expire OTM
APA-iron condor Strike Odds Delta
Long 30.00 90.0% 14
Break-even 28.79 84.5% 20
Short 27.50 79.0% 26
Puts
Short 22.50 61.0% 33
Break-even 18.79 76.5% 19.5
Long 17.50 92.0% 6

The premium is 34.4% of the width of the position’s wings.

The profit zone covers a 19.9% move to the upside and a 27.8% move to the downside of the entry price, for total coverage of 47.7%

The risk/reward ratio is 1.9:1, with maximum risk of $246 and maximum reward of $129 per contract.

By Tim Bovee, Portland, Oregon, November 7, 2019

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Live: Thursday, November 7, 2019

11:30 a.m. New York time

My short iron condor order on APA has been filled for $1.29, and I’ve posted an analysis.

11 a.m. New York time

I’ve renewed my attempt to open a short iron condor position on APA. The structure is +c30 -c27.5 -p22.5 +p17.5, with an asking price of $1.30. The implied volatility rank is 72.0%

My momentum shares position in ANIK was closed at $60.41, a $9.29 loss, when the price hit my trailing 20% stop/loss. I’ve replaced it with shares of NSIT, entered at 62.45.

By Tim Bovee, Portland, Oregon, November 7, 2019

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Live:Wednesday, November 6, 2019

3:05 p.m. New York time

No fill on the APA short iron condor order. I’ll look at it again tomorrow.

10:45 a.m. New York time

Yesterday’s blow-out buying spree left me with some cash in my options account, so I’ve placed an order for a short iron condor position on a stock (rather than an ETF), APA. The structure is +c32.50 -c27.50 -p22.50 +p17.50, with an ask for a $1.60 credit. no fill as of yet.

APA — Apache Corp. — is an oddity because although it published earnings on October 30, it continues to show a high implied volatility rank, 78.3%. The downside is that it doubles my exposure to fossil fuels, in light of my position in XOP, established yesterday.

By Tim Bovee, Portland, Oregon, November 6, 2019

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XLU Analysis

Utilities Select Sector SPDR Fund (XLU)

I have entered a short iron condor spread on XLU, using options that trade for the last time 45 days hence, on December 20. The premium is a $0.85 credit and the stock at the time of entry was priced at $62.75.

The profit zone for this position is between $64.85 on the upside and $58.85 on the downside.

The implied volatility rank (IVR) stands at 27.0%.

Premium: $0.85 Expire OTM
XLU-iron condor Strike Odds Delta
Long 66.00 92.0% 9
Break-even 64.85 80.0% 20.5
Short 64.00 68.0% 32
Puts
Short 61.00 71.0% 29
Break-even 58.85 80.5% 19.5
Long 58.00 90.0% 10

The premium is 34.0% of the width of the position’s wings.

The profit zone covers a 3.3% move to the upside and a 6.6% move to the downside of the entry price, for total coverage of 10.0%

The risk/reward ratio is 1.9:1, with maximum risk of $165 and maximum reward of $85 per contract.

By Tim Bovee, Portland, Oregon, November 5, 2019

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TLT Analysis

iShares 20+ Year Treasury Bond ETF (TLT)

I have entered a short iron condor spread on TLT, using options that trade for the last time 45 days hence, on December 20. The premium is a $1.62 credit and the stock at the time of entry was priced at $136.97.

The profit zone for this position is between $141.62 on the upside and $130.62 on the downside.

The implied volatility rank (IVR) stands at 39.5.

Premium: $1.62 Expire OTM
TLT-iron condor Strike Odds Delta
Long 145.00 90.0% 10
Break-even 141.62 79.5% 20.5
Short 140.00 69.0% 31
Puts
Short 134.00 71.0% 29
Break-even 130.62 81.0% 19
Long 129.00 91.0% 9

The premium is 32.4% of the width of the position’s wings.

The profit zone covers a 3.4% move to the upside and a 4.9% move to the downside of the entry price, for total coverage of 8.3%

The risk/reward ratio is 2.1:1, with maximum risk of $338 and maximum reward of $162 per contract.

By Tim Bovee, Portland, Oregon, November 5, 2019

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XLY Analysis

The Consumer Discretionary Select Sector SPDR Fund (XLY)

I have entered a short iron condor spread on XLY, using options that trade for the last time 45 days hence, on December 20. The premium is a $1.66 credit and the stock at the time of entry was priced at $121.97.

The profit zone for this position is between $126.52 on the upside and $114.52 on the downside.

The implied volatility rank (IVR) stands at 30.2%.

Premium: $1.52 Expire OTM
XLY-iron condor Strike Odds Delta
Long 128.00 90.0% 10
Break-even 126.52 80.5% 19
Short 125.00 71.0% 28
Puts
Short 119.00 69.0% 31
Break-even 114.52 79.5% 20.5
Long 113.00 90.0% 10

The premium is 33.8% of the width of the position’s wings.

The profit zone covers a 3.8% move to the upside and a 6.4% move to the downside of the entry price, for total coverage of 10.2%

The risk/reward ratio is 2:1, with maximum risk of $298 and maximum reward of $152 per contract.

By Tim Bovee, Portland, Oregon, November 5, 2019

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