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  • Emerson Electric (EMR) – A Bearish Trade

    Emerson Electric Co. (EMR) is a diversified global technology company. The Company is engaged in designing and supplying products and technology, and delivering engineering services and solutions in a range of industrial, commercial and consumer markets globally. The Company operates in five business segments: Process Management, Industrial Automation, Network Power, Commercial and Residential Solutions, and Climate Technologies. The Company’s production operations are electronics assembly, metal stamping, forming, casting, machining, welding, plating, heat treating, painting and assembly.

    After recent retracement rally, EMR has been consolidating below 200dma and around 50dma. On Thursday and Friday last week, EMR closed below both 50dma and 20dma and based on the price action I see a potential bear pattern emerging (at least for the short term).

    So here is how I am planning to trade EMR-

    • Buy to Open Oct Monthly Put 65
    • Sell to Open Oct Monthly Put 60

    This vertical debit spread will cost $120 which is also the maximum risk. The maximum gains are limited to $380 or >300%. In order for this trade to make money, EMR needs to be below $63.80 by Oct expiration ($65-1.20 =$63.80). My stop loss for this trade is $65.75, just a bit above 200dma. My initial profit target is around $63 i.e. if EMR drops to $63, I will place a mental trailing stop order (which will continue to maximize profit if EMR drops, but will close the trade if EMR bounce back above $63). These rules are just for guidelines.

    If you decide to follow this trade, make sure you post in the comment section and follow-up via staying in touch. I usually post short updates on Facebook/Twitter.

    Should you have any questions, kindly write those in the comments sections and I will be glad to answer.

    Disclaimer- As of this writing I am in an EMR bearish trade position (a different combination of spreads though). I might open, change strikes, close etc, anytime without prior notice. AS ALWAYS, All e-mails are for educational and entertainment purpose only. These are NOT trade recommendations. You should do your own due diligence and follow your own trading plans.

  • Tesla Motors Double Top or New Break Out?

    Tesla Motors (TSLA) just hit another all time high and then quickly slipped below the previous 52 wks high. Points from such extremes are of importance.

    Is TSLA going to make a new high or making a double top?

    TSLA Double Top or New BreakOutFrom technical charting perspective, there can be both bullish as well as bearish case. However, as I see it, I see a quick pullback trading opportunity.

    This is how I plan to trade it –

    – Sell to Open Sept Monthly 270 Call
    – Buy to Open Sept Monthly 275 Call

    This vertical credit spread will generate $152 credit for every $348 investment. The maximum risk is limited to $348 while maximum gains are limited to$152 or +43% ROM. This trade has 3/4 chances of being profitable by Sept expiration. Let me show you how –

    1. If TSLA moves sideways, this will be profitable
    2. If TSLA drops, this trade will be profitable as it is a bearish vertical trade
    3. If TSLA rises but stays below $$271.5, this will breakeven or be profitable.

    It will lose if TSLA starts to rally. Since TSLA might also break-out, I will use a stop loss at $269 i.e. if TSLA closes above $269, I will close my vertical spread for whatever profit or loss be at that time. From profit perspective, I will book my first profit at $245+/-

    No one can predict where markets are going, at least in the short-run. All we can do is increase our PROBABILITY of success. Options trading gives us that edge by aligning more chances in our favour. We can still be profitable even if we are wrong, not just too wrong though.

    Should you have any questions, kindly write those in the comments sections and I will be glad to answer.

    Disclaimer– As of this writing I am not in this trade as markets are closed. I might open, change strikes, close etc, anytime without prior notice. Please do your due diligence before investing any money based on the ideas listed here. These are for educational and information purpose only.

  • How To Trade Wheat Futures Going Forward?

    Wheat futures are trying to recover from its 3 month fall. For the past 2-3 weeks, the buyers have defended the 520 level valiantly and 520 has become the low of Wheat’s 3 month fall. Buyers have also succeeded in pushing prices higher. (wheat now at 557, up 30+ points from 520)

    Despite the recent success of the bulls / buyers, the overall trend is still down and the next resistance lies close by at 580. If you refer to the attached weekly chart, you will see a red horizontal line that marks where 580 is. You will also notice that the 580 level has acted as both support and resistance multiple times, going all the way back to 2009.

    (We just opened -up few spots for our INCOME THROUGH FUTURE OPTIONS newsletter. If you would like to take advantage of it, here is your chance for the RISK FREE Trial for 14 days)

    Until 580 (and 600, the next significant resistance level) are taken out, the medium term trend remains down.

    Happy Trading,

    Ethan

  • How To Trade Gold Now?

    After failing to breach a critical level of 1350, Gold has been falling steadily since 14th July and has fallen to its current level at 1284.80. Since Gold has fallen so much, is it time to go short? Let’s analyse the daily chart.

    Firstly, in the medium term (3 to 6 month period), gold is moving more sideways than trending downwards. This means there are no strong and obvious directional bias yet.

    Secondly, there are 2 important support levels, 1280 and 1260 just under current price level. (please see attached daily chart) These 2 levels have acted as bother support and resistance and go all the way back to Jul last year. Since gold is in a sideways mode, it is harder to tell if sellers will gather enough strength to break support. (I doubt bears will break support right away)

    So what’s the trading plan then? For directional traders, it would be more prudent to observe how Gold behaves at support before jumping in. If support is really taken out, then we can start looking for shorting opportunities.

    Regards
    Ethan

  • Structure, Not Strategy, Gives You Freedom

    Time and again, I am asked about the ultimate profitable option trading strategy i.e. which is the best strategy to trade markets? Which is the best strategy to trade options? and so on …as if there exists a HOLYGRAIL for trading and winning in the markets. My answer, has always been –

    “IT IS STRUCTURE, NOT STRATEGY, THAT GIVES YOU FREEDOM”

    I will explain more about that later but before let me share with you a great video, a very powerful one which is appropriate for traders as well.  So here it is >>>  BE WATER, MY FRIEND:

    Trading requires one to be like water as well, you have to adapt to changing market conditions. What worked in 2006/07 doesn’t mean it will work in 2014 too. Yes, there are things that won’t change i.e. fundamentals e.g. profit will still matter, valuation will matter too. Even though markets are rising non-stop, reality will return to normalcy as well. However, once you have acquired necessary skills and systems to profit from market, you have to choose what works best in current market conditions. Markets are dynamic and so should be your strategy selection.

    Once a trader is like water, it is important to determine the shape he or she needs to take.

    Strategy is not going to give you freedom. Structure will.

    Strategy is like a set of code that enables one to achieve certain results. Let use a simple example first- You want to got to the top of the building, you can take elevators, or walk-up the stairs? or maybe a mix of both. “Reaching at the top” is the objective and which method do you use under the set of condition you have is going to be THE STRATEGY.

    For instance – if time is utmost important factor for you, you may choose elevators but if the goal is to get healthy and fit, you may use both elevators and stairs or just stairs. But how do you choose the strategy, how do you determine the goals, objectives, how do you measure the outcome, this complete process is THE STRUCTURE.

    It is THIS STRUCTURE that will give you freedom.

    Do you have a structure in place?

    A structure consists of a PROCESS FLOW, a set of rules that drives your behavior BEFORE, DURING and AFTER the trade.

    A structure of a trade consists of PREPARATION, PROFIT with Discipline and PRESERVATION of capital.

    Becoming a consistently profitable trader just might be the hardest thing you will ever do in your life. And even if you become one, enjoying the freedom and money will still require a process, a structure to be in place. So why not start it from the beginning. Respect the Structure and Pay attention to the process.

    Hope this helps. Let me your views about Strategy vs Structure.

    Should you have any questions, post it in the comments section or let me know via Ask(at)OptionPundit(dot)com

    Profitable Trading, OP

  • Why Isn’t Warren Buffett Saying This Now?

    Image source – Biography.com

    Ever since I met with Mr Warren Buffett in 2004, my respect for him has been growing by leaps and bound, year after year. Even though I have read many major books written about him, there is nothing quite like meeting in person. I consider him my mentor, someone, who has always inspired me from investing perspective ever since I was kid.

    A very famous quote Mr Buffett is the following-

    “Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett

    Wise words indeed!!

    And the worth of those words was again proven right in late 2008 when Mr Buffett announced  “BUY AMERICAN. I AM”  via an Op-Ed in NY Time in Oct 16 2008. I read it too with lot of enthusiasm. In Fact, as long time OPN members may recall, we started preparing for bull market on Oct 14, 2008, just two days before that OP-ED (just a pure coincidence). I shared a list of stocks, with target valuations and purchase prices with Margin of Safety built in. The sheet is still there, if you are an OPN Member, find it here.

    Just like what Mr Buffet said-

    I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.

    There was further weakness in the markets (which means one could have purchased stocks even cheaper than his purchase price), but since then S&P has more than doubled. That was an advice that must have produced fortunes for many.

    That was then in 2008. How about now and going forward when Dow is at 17,000 and S&P almost 2,000?

    Based on the same famous quote, we have two choices now..

    1. Are people still FEARFUL >>> So should we continue to be GREEDY ? or
    2. Are people GREEDY now >>> So should we be FEARFUL?

    Buying cheap was a good idea, in fact a fortune making, once in a decade opportunity. SELLING is different. You will have to decide it for yourself because I don’t think we are ever going to see an Op-Ed that will say SELL AMERICAN. I AM; Markets moves in CYCLES and in between there are TRENDS. You will have to decide for yourself when is your entry or exit. No one has better interest in it but you.

    So while thinking about Buying/Selling/Timing etc, I tried to recall other wise words, here is what I remember >>

    1. Know what’s the security is worth AND
    2. Know when is it worth buying

    By “when”>> he was not referring to technical charts but more so from a long term investor’s perspective who understand the business, numbers and the concept of margin of safety. So if you are struggling with decision to buy or sell, go find hard facts, revisit your assumptions, your calculations behind what the security is worth and then decide for yourself if it is time that you should sell or buy more. It’s your hard earned money and you don’t want to leave it for “chance” or “speculation”..

    Profitable Trading, OP

    What is your opinion about current state of markets? Kindly leave your questions/thoughts/comments in the comments section. I will respond within 24-48hrs!!

    (Disclaimer– The words I quote here are my interpretation of his teachings and is by no means endorsed by Mr Buffett. I might have understood it right or wrong, but whatever it is, that’s my interpretation. I have very high regard from Mr Buffett. You should not buy or sell based on above. Consult your financial adviser and do your own due diligence before making any investment decision).