Morningstar’s Ultimate Stock Picker

• There’s been no change in the list of top 10 holdings of Morningstar’s Ultimate Stock Pickers so far this year, but one wonders about the fate of Microsoft (MSFT) after its much criticized purchase of Nokia’s main handset business; it had been the top high-conviction holding in the group.

• The top 10 holdings: MSFT, GOOG, WFC, JNJ, BRK.B, AIG, PG, WMT, PEP, UPS.

• Among purchases during the most recent period, National Oilwell Varco (NOV) topped the top 10 list of high-conviction buys, followed by WFC, GM, SLB, INTC, AAPL, XOM, APA, CHRW, EMC.

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AAPL Repair Strategy Example

2013-04-06 15_35_12-AAPL - SharpCharts Workbench - StockCharts.com 2013-04-06 15_33_14-AAPL - SharpCharts Workbench - StockCharts.comThis article outlined my recent experience on employing repair strategy on my options trade that went wrong. The trade is on AAPL stock and the timeframe used was 1 week. This happened between 26 Mar 2013 to 4 Apr 2013.

26 Mar 2013: My initial analysis on AAPL on that particular date was bullish. The trade was speculative trade during a low volatility. I entered the trade buying 1 contract of AAPL AprWk1 470 C. This trade costed $777,98 ($765 premium + $12,98 costs). As I was unsure about the direction of the trend, I hedge my trade with AAPL AprWk1 465 C for $677 ($690 premium – $13 costs). The objective of this second leg is to reduce my initial trade costs and to gain from time decay. Thus my net position on this spread is debit $100,98. Margin required for this transaction was $2000 (485-465 x 100).

27 Mar 2013: AAPL price action went against my initial analysis; it reversed lower than the previous day! On this short timeframe, option time decay also hit my long trade very hard but profitable on my short leg. The long call current value went down to $1,31; so I decided to close the position at loss. I closed my long AAPL AprWk1 470 C for $124,48 ($1,31 premium – $6,52 costs). Net impact to my account is: loss $653,50 (buy for $777,98 then sell for $124,48) from 1 day trade.

Now, if I want to salvage my loss from this initial speculative venture, I must capture some premiums on this bearish move. I decided to employ bearish call strategy on this trade. The strike price selection will determine whether the net spread trade would be debit or credit. As the bearish move seems to pick up momentum, I decided to long OTM call + short lower OTM call with the same timeframe. In effect creating credit vertical call spreads. My long OTM call will be used as anchor point to pair my short lower OTM call which would provide my cashflow during this repair trades. So, the core idea was to capture time decay by employing bearish call spread. Your margin requirement was calculated by the difference between your call strike price legs. For $5 difference you’ll need $500 margin.

I closed the long 1 contract AAPL AprWk1 470 C trade and  replaced it with a relatively cheap 1 long AAPL AprWk1 485 C which costs me about $41,50 ($35 premium + $6,5 costs). This trade will enable me to short call options to recoup my loss on the initial trade.

At the same time, my short AprWk1 465 C now only worth $2,07. I decided to realize this profit by buying back the short call for $213,50 ($207 premium + $6,5 costs) and rolled the short call to lower strike price at 460. I captured $463,50 profit from this trade. Now the total impact to my account after this transaction is reducing my loss to $190. My new short 1 contract AAPL AprWk1 460 C brought in $318,48 ($325 premium – 6,52 costs). Margin required for this transaction was $2500 (485-460 x 100).

28 Mar 2013: I closed AAPL AprWk1 460 C trade for $148,50 ($142 + 6,5 costs) and rolled into lower strike price 455; capturing $169,98 profit. Total impact to my account after this transaction was reducing my loss to $20,02. My new short 1 contract AAPL AprWk1 455 C brought in $226,48 ($233 premium – $6,52 costs). Margin required for this transaction was $3000 (485-455 x 100).

1 Apr 2013: I closed AAPL AprWk1 455 C for $105,5 ($99 premium + 6,5 costs) and rolled to lower strike 450; capturing $120,98 profit. Total impact to my account after this transaction was net profit to $100,96. I’d recouped my initial loss and somehow managed to capture small profits on these trades! As the bearish move continued, I rolled the short call into lower strike 450. My new short 1 contract AAPL AprWk1 450 C brought in $264,48 ($271 premium + $6,52 costs).

 4 Apr 2013: I closed AAPL AprWk1 450 C for $30,5 ($24 premium + $6,5 costs); capturing $233,98 profit. Total impact to my account after this trade is net profit $334,94! The last trade was to close my long AAPL AprWk1 485 C which had became my anchor point to short call against. The value was practically expired worthless, netting loss $41,5.

The last trade on this series of repair strategy was completed with small loss of $41,5 thus reducing my total net profit to $293,44.

NOTES:

  • When adjusting short options, replace them with more expensive options, for net credit.
  • When adjusting long options, replace them with cheaper options, for reducing capital used.
  • Repair strategy should be used on the same timeframe as the initial trade.
  • Tap around the strike price, up and down, to effectively capture time decay.
  • Watch your margin requirement when adjusting the trades! The basic rule is the spread strike price difference x 100 will be your required margin.

Number Of 52-Week Highs Expands Despite of Weak Market

By VINCENT MAO, INVESTOR’S BUSINESS DAILY

Even though the number of stocks hitting new 52-week highs on Tuesday rose from Monday’s total, the bulk of them either closed well off their session highs or reversed lower as the overall market tumbled.

Google (GOOG) ramped up to another record high, but turned tail to end a smidge lower in more than twice its average trade. Despite the reversal, it’s still 9% past a 689.09 buy point from a three-weeks tight pattern.

The stock surpassed its high from November 2007 on Monday and had been rallying since mid-July.

Nationstar Mortgage (NSM), which has been on fire since clearing a flat base earlier this year, ended well off its intraday peak. Nationstar closed with a 3% gain after being up more than 8%.

Last week, the stock had its largest weekly spread since the start of its move. On Sept. 19, Nationstar racked up its largest daily volume since the start of the advance. On Tuesday, the stock closed higher for the eighth time in 10 sessions. These could be signs of a climax top.

Natural Grocers By Vitamin Cottage (NGVC) had a big change of heart. It turned a 2% gain into a 3% loss. Shares were off by more than 5% at Tuesday’s low. Volume grew from Monday’s pace, but was below average.

The thinly traded stock has been volatile since going public in July. Although it blew past a 20.58 buy point from an IPO base Aug. 27, investors were likely shaken out during wild action Sept. 12 and 13.

Restaurant operator DineEquity (DIN) closed in the upper half of its daily range as volume was 49% above average. It’s now 2% past a 55.70 buy point from a base cleared Sept. 7 in weak trade.

DineEquity runs the Applebee’s and IHOP chains. While profit growth has improved in recent quarters, sales growth continues to be a drag.

Thinly traded Dorman Products (DORM) added to its breakout Monday past a 30.59 buy point.

List of 52 Week New Highs and Lows:
http://www.investors.com/pdf/NEWHIGHS_092612.pdf