The markets turned around yesterday to the downside. Maybe it was news that the Greek austerity agreement would be delayed. Perhaps it was the turnaround in shares of Apple after news out of China that iPad sales would be suspended due to a trademark dispute. I have to say that the timing of this news release seems to be more than just a coincidence with the concurrent visit of Chinese Vice President Xi Jinping’s to the United States. Then again we have to ask if yesterday’s action was just the atypical sell-off we get on expiration Wednesdays? Perhaps it was just time for a pullback and the media was just fishing for a reason, as they often seek to do.
I have been writing for a while on Wall Street All-Stars that we would likely get a mild pullback in mid-February. After all, we have come a long way in a short period of time. That is why I have been accumulating some cash. Pullbacks are normal, healthy and necessary elements to a constructive market. Once they have run their course, you will be happy to have some cash to put to work.
Yesterday’s pullback was mostly technical nature. The marginal buyers in the last few days were likely renters and weak holders. They tend to scatter at the first sign of weakness like cockroaches do when the lights get turned on. Weak holders have little patience or intestinal fortitude. They pray at the feet of momentum and five second charts without understanding the true nature of finance or capital markets.
My greatest concern right now is to inform people about a new financial scourge. You see, there is new drug which has hit the markets. This drug is more potent than the ones – leveraged ETFs - which caused so much havoc in the Great Recession and the resultant market crash. This new form of market crack is weekly options, or “weeklies” in street vernacular. Street junkies who need to the juice up their returns with leverage with little money down are turning to the weeklies. It is happening in droves. I hear about it all the time. People are turning day trading into a more exotic form using the weeklies. After pointing out a stock that I like or dislike, in the Wall Street All-Stars Finance Classroom, I am often asked which option I would trade instead of the stock. I see the same questions being asked in the Wall Street All-Stars Tech Diary. If our small but burgeoning community of subscribers is more concerned about and focused on options rather than stocks, imagine what goes on outside the pages of Wall Street All-Stars?
It am shocked how prevalent options trading has turned into an art rather than a science. When I say art, I am being kind as it is really become an obsession or addiction. If you insist on trading options, please make sure that you fully understand Black Scholes pricing and how much risk you are assuming by having an options position. Should you not understand the risks of options trading and how they are priced then I suggest that you stop trading options right way. Next, take a course in derivatives or at the very least read an expert book on the subject. My favorite is Options as a Strategic Investment by Lawrence McMillan. The money you will make or save with less than a $30 investment in this definitive work on options will be amazing. I first read this book nearly thirty years ago, I have used it to teach courses in derivatives at Seton Hall University's Stillman School of Business for many years and have a copy near me at all of my desks.
Disclosure: At the time of this commentary Scott Rothbort, his family and/or clients of LakeView Asset Management, LLCwas long AAPL stock and long and short AAPL calls — although positions can change at any time.
Scott Rothbort is also the publisher of the LakeView Restaurant & Food Chain Report, a newsletter focusing in on food, restaurant and agricultural stocks. You can subscribe at www.restaurantstox.com
You can access more daily commentary from Scott Rothbort, on Wall Street All-Stars.
Posted By Scott Rothbort at February 16, 2012