The Trend is Your Friend

I am learning to trust the trends in the charts that I make.  Today MCP had a huge gain, and I was able to sell my Call options for a $90.04 gain.  That is 11.93 % of the $754.97 that I spent, and I earned it in just seven days!  Multiply that by 52 weeks in a year and the annual % yield is 620.17%!  I don't know about you, but my savings account doesn't earn that much interest. (Correction: I think I got a little carried away on my calculations.  To be fair, I consider this a monthly investment, even though I made the money in seven days. So, I think the actual annual % rate would be 143.16%)

I sold my options early in the morning, around 7:00 a.m..  Had I held on and waited to sell them near the closing bell, I could have made over $400.  I was a little bummed that I sold them early, and lost out on the opportunity to earn more. But, I have to remember that I made $90.  Just think how much I would have made if I would have invested all of my money, $5,188.  That is a little too risky for my blood right now.

I am just stunned that I made so much, with so little money.  This is far better than leaving it in a savings account, and a lot more fun.  I have included a chart with today's movements. The stock actually broke past the upper trend line that I drew earlier in the month.

Figure 1: MCP

I will put two entries on my spreadsheet for October since I made two trades. Now it is time for me to research my next move for November.

My first time with buying Call options

I have been away from my blog for a few days, but that does not mean that I have not been working on my investments.  Far from it.  I decided to branch out a few days ago and try something new......Buying Calls.

A week or so ago, I read that China produces 95% of the Rare Earth Metals.  In the article it stated that China consumes a lot of these materials, and in the years to come will be consuming all that it produces.  Around the time that I read this China had cut off Japan from receiving these metals.  The article also stated that the U.S. and other countries use these metals for military purposes, and in a lot of the electronics that we use everyday.  I did some more research into this situation, and feel that Rare Earth Metals might be a good investment opportunity for the future.

So, with that in mind I have been following a company that just recently went public.  MolyCorp inc. (MCP).  They are a mining company based in the United States, that digs for Rare Earth Oxides. The one thing that made me hesitate about investing in this company is that it does not have a dividend.  If you remember, I said I like to invest in dividend stocks so I can get multiple streams of income.

Below is their chart.

Figure 1: MCP charts

I drew two lines on the candlestick chart, showing that the stock is trading upward within two resistance levels.  I decided to try my hand at trading Call options on 10/20/2010.  I bought two MCP December 2010 calls at $3.70, for a total of $754.97.  Now I must sit and wait for the price of the stock to go up. Since buying the options, the price has gone down.  I am not off to a good start for November.

I only used a portion of my $5000 with this investment, so I would like to also sell one or two Puts for November as well.  I just need to pick the stock.

A Little too Close for Comfort

Wow! This was a crazy day for DMND.  As a reminder, I chose a $40 strike price for the Put I sold.  In one of my previous posts I think I mentioned the stock price could go down to $38.85 and I would at least break even on my investment if the option was exercised by someone. (This is not including fees.)

Well.....take a look at the chart below.  The stock gapped down from its high yesterday of $42.45, and it continued to drop to $37.91.  This was below my stated $38.85.  Was I nervous today?  Absolutely.   Did I freak out?  Nope.  The drop was related to bad news about future expectations of the company.  Yesterday Diamond Foods, inc. came out with an earnings report that showed they did better than expected, and the stock market rewarded them with a day high of $42.45.  The earnings report is a fact, as far as I know.  And then today the stock took a beating because of some speculative information?  It did not seem rational.  Still there was a potential for me to lose some money.  I decided to hold on for the ride.  In looking at the charts, I think tomorrow will be a better day.  I still see upward movement for at least a week.

Chart 1: DMND stock with candlestick information
(charts thanks to MachTrader)

Side Note: For those of you who are interested, I have been reading a lot about Rare Earth Metals in the news lately.  China controls 95% of the production of these metals, and countries and companies seem to be concerned about it.  I think it might be a good investment opportunity for those of you who are interested.  As always, do your research before you start investing in them.

My Stock Option Pick for October

I decided to sell a Put for Diamond Foods, Inc. (ticker: DMND).  This company sells nuts and snacks, including popcorn.  The strike price of the option is $40, which ties up $4,000.  The option expires in October.

Below is a snapshot of the chart that I looked at when deciding to invest in this stock.  Verbal permission was obtained from MachTrader prior to showing any charts. 

The red and green bars are known as candlesticks.  Green bars tell me that the stock closed above its opening price for a particular day and red bars tell me the stock closed below its opening price for a given day. 

Figure 1: DMND stock chart

 The stochastic chart was showing me that the stock was oversold, and the blue line had crossed over the red line indicating that the stock was getting ready to move up in price.  This was the only stock that I could find where the stochastic was showing me that the stock was oversold.  Every other stock I looked at was overbought, indicating the price was going to go down.  I coupled this information with the MACD chart, where it looked like the blue line had just crossed over the red line, also indicating the stock price was going to increase. 

Points of concerns

1. The strike price is really close to the actual price of the stock.  One bad day in the market could cause the stock price to tumble way below the strike price, requiring me to purchase the stock.  If the price goes below $38.85, and I am required to purchase it, then my premium of $115 would be eaten away.
2. The earnings report is expected next week, and I am concerned the news may not be favorable.

Below is what the stock charts looked like at the end of today.

Figure 2: DMND stock chart on 10/01/2010

The 30-day Moving Average has moved lower since I first made my investment choice, which makes me worried that the stock is going to continue down in price.  However, the Stochastic and MACD charts have trended upward as I predicted. 

I am pushing my comfort level on this trade.  Hopefully I can find a stock with a little bigger cushion for error next month.