Monday, August 31, 2009

Checking Up On the Top 5

What a difference a day makes! Well three day's really when you count the weekend. Here's what our closing numbers looked like last Friday, Aug 28.

Now take a look at the numbers for our candidates at the close of Monday, Aug 31. Note that I added an extra row for 'CAT' and 'O' for alternate strike prices to watch (more on that later).

With the S&P500 pulling back 0.81% some good things happened to our prospective Put positions. For one thing the premiums and profit percentages naturally went up. Alternately, the lower stock prices moved closer to our strike prices, so naturally the probability of them staying above the strike price 18 days from now went down. More importantly the Williams R% indicator moved closer to the oversold side, which is what we need to time the entry of our trade for the best deal (less risk, lower strike price and higher profit). In fact, Nike (NKE) registered our first green light in the group as it went above 80.

So what's currently the best deal? Personally, I like the $43 strike price on CAT (circled in red). Why? Because although the probability and profit are not in the green zone they are both extremely close to it.

The problem is CAT is still not oversold enough with a Williams %R of 64, so while the timing is close and we have our finger on the trigger, we're not close enough to pull the trigger. I would much prefer being closer or above 80.

This is why I added the next lower strike price for CAT (and O) because as their stock price drops the probability of the higher strike prices (i.e.: $44) moves out of the 70% favorable range. Dropping down to the lower strike price gives us back our margin of safety cushion, and of course a lower purchase price if we get assigned the stock. So the qualifying indicators act as a system of built-in checks and balances to help you choose the best deal.

I know, I know... for us geeks it's the coolest thing since the IBM PC Jr. came out! Well for us finance geeks anyways. (For my Son it would be the Apple IPOD Touch.) Remember geeks rule!

1 comment:

  1. I finally junked my original PC jr???

    Hated to get rid of the basketball game, but it was time??