In my end of the month summary I said I planned to increase my stock exposure and thought I was going to do it yesterday.  Instead, my day was far busier at my non-financial related contract job and I only had time to make a couple of trades for clients and none for me.  I could’ve squeezed it in, but with the market barely clinging to support I thought it might be wise to wait to see how the jobs data came out this morning.  Apparently I should’ve trusted support yesterday, because the employment numbers were very encouraging and the market gaped higher at the open.  At roughly double the expected number for private payroll increases, the market had reason to be giddy.

I saw the S&P 500 open almost directly in the center of the ascending trading channel I’ve been watching and figured SPY would be a quick and easy way to gain market exposure.  While SPY was trading at $133.96 I sold one SPY March $132 naked put for $2.23 and received $222.42 after commissions.  By no means is this an aggressive play.  The strike is below the intraday lows for the past three days, below the two trend …

January was a great month for me and set me up for a great start to the year with my returns better than most stock indexes so far.  My goal for the year is to avoid stupidity.  It sounds so easy up front, but yet somehow I’m not so sure I can pass up the lure of the exciting trade every day for a full year.  I’m trying to keep most of my trades with closer month expiration dates to take advantage of the quicker time value decay.  It’s going to make me work harder for the gains, but will also increase the liquidity of each of my positions in case I want to jump ship when I see a worthwhile decline starting.  That’s the crux of my plan for this year in a nutshell -time trades better, don’t overextend and avoid unnecessary exaggerated risks.  I can still tell that fear and emotions are part of my trading choices.  I’m trying to move past that, but think a healthy dose of fear in a trader can keep us from making too many greedy trades and costing us more than we could have gained.  I look at my gain so far this year …

I charted the past three months of daily prices for the Dow Jones Industrial Average ($INDU, $DJI, DJIA) after the index closed at 12,660.46 on Friday, January 27, 2012.

At the beginning of December, I charted the S&P 500 index and pointed out how the 50 and 100 day moving averages (dma) crossover tends to foretell the early days of a longer bull market.  So far that prediction has held true.  These moving averages had their bullish crossover on December 1st on the DJIA chart too.  Since then the Dow has pulled away from its 50 dma by more than 500 points.  During this run higher the index has followed a tight trading channel as shown by the three trend lines in the chart below.  Each touch on the upper end of this trading channel’s trend line of higher highs sends it lower for a few days until one of the lower trend lines of higher lows comes back into play.  On Friday the two lower trend lines converged just below …

As planned I was ready to jump in this morning for more exposure, but the four main equity index ETFs I watch, DIA, SPY, MDY and IWM were all trading along their trend lines of higher highs.  I couldn’t stomach getting in at those levels, even with the risk of being left behind in the rally that continues to mystify me.  It didn’t take long and reality set in.  The markets started to sell off and I made my first trade of the day at 10:52, after SPY had made it half the way back down through its trading channel.  While SPY was trading at $132.39 I sold one SPY February $134 naked put for $2.83 and received $282.23 after commissions.

I kept the expiration to the closest month to target a quicker profit and keep the contract easier to exit if we see a bigger momentum shift.  More than likely I won’t buy it back, but will be able to work a covered call with it quicker this way.  By selling in the money with such a short time horizon I didn’t gain a big advantage.  I only have a 0.92% cushion.  The profit potential is 2.15% or 32.9% annualized. …

As I mentioned yesterday, I am under-invested right now and wanted to remedy that with some more equity exposure through an index ETF.  I started with IWM this morning as it was sitting below yesterday’s close.  While IWM was trading at $78.25 I sold one IWM February $78 naked put for $1.70 and received $168.97 after commissions.  I sold out of the money slightly with the expectation that small caps are due for a step lower before going much higher.  I kept the expiration to the closest month to speed up the time decay within the option.  If I see IWM rolling over below support I might dump this option quickly and get back in at a lower strike.  Since I’m not invested enough elsewhere I could just let this one play out with little overall risk.

I didn’t wait for this expected dip because I don’t think any move lower is going to last too long and I’m not always perfect on exact date picking.  Having out of the money option exposure gives me the best of both sides.  I make money if IWM stays flat or moves higher and don’t lose as much on the next step backward, whenever …

I was called out of my long running UCO position last week and hesitated to get back in too soon because UCO has weakened recently.  In fact, the ETF has lost more than 10% from its intraday high just two weeks ago.  That volatility can scare off many investors, but for me, it’s why I keep coming back to it with options and why I continue to profit on it each year.  This leveraged oil ETF is not for the faint of heart to say the least.  Seeing 10-20% moves within a month are not just possible, such moves are expected.

While UCO was trading at $40.71 I sold three UCO March $37 naked puts for $2.00 each and received $599.01 after commissions.  If assigned, which I’m half expecting to be, my cost per share will be $35.00.  That’s 14.01% below the price when I made the trade.  More importantly, it’s almost dead on the midpoint for the ETF over the past six months and $1.00 below the intraday low from the past two and a half months.  I expect support to surface before I take a loss.

This is a half position for me on UCO at a total cost if assigned of …

This S&P 500 ($SPX) chart shows the past three months of daily prices after the index finished the week at 1,315.38 on Friday, January 20, 2012.

As I mentioned last week in my Dow Jones chart, technical analysis can be an art as much as a science when using certain technical indicators.  Three of my go-to indicators are trend lines, moving averages and Willliams %R.  None is telling the story of a major sell off coming yet on a scientific view, but the art behind them might be whispering something different.

The S&P 500 moved to the top of its trading channel again on Thursday and hit resistance at the trend line of higher highs.  Each time it has done this over the past month it was foreshadowing of a few points lower in the coming days for the index.  Lately it’s only been a few points, some sideways days and then another run higher.  As with each pattern, this only works for so long.  So after the third touch to the upper trend line I started …

If only all options expiration days went this well for me.  This month’s expiring options included a handful of index ETF LEAPS that I sold 10-13 months ago and other random naked puts and covered calls sold over the past two months.  All of my puts finished with a profit – some with a full profit, others only partially profitable.  I went one for three on my covered calls in finishing with a profit on the series of trades as all three finished in the money.  I leave today with a lot of cash unspoken for and ready to find new options to back.  Ideally we’ll see a slight pull back so I can get back in at lower prices.  If we get another surge higher on Monday or Tuesday I might only chase it lightly.  Most of the index charts I’m watching show prices near (or above) recent trend lines of higher highs.  This usually means sideways movement at the best and more commonly a few down days (if not more).

CSX – 1 January 20.83 COVERED CALL - Expired in the money which means my shares will be called away.  I finished the series of trades with a loss of …

I charted the past three months of daily prices for the Dow Jones Industrial Average ($INDU, $DJI, DJIA) after the index closed at 12,422.06 on Friday, January 13, 2012.

You can find a trend to almost any point on a chart if you look hard enough.  This is a major risk in using trend lines exclusively to make trade decisions.  That said, I drew four trend lines that all pointed to the low of Friday and I “penciled” in one thin one well below that, closer to the 50 day moving average (dma).

The two major trend lines worth watching are the trend of higher lows and the horizontal line that was previous resistance and has been support multiple times since the index moved above the line.  The other two lines are interesting and maybe not just a coincidence.  Each line shows its own path and the coincidence is just that they all came together on the same day to give a strong floor to a group of stocks that were due for a fill in of …