This past week I was in Dallas teaching some amazing Rich Dad Education students how to trade.  I absolutely love speaking for Rich Dad Education.  They truly are the perfect blend of trading system and mindset.  At the workshop I was asked what it takes to be successful and prior to answering I paused.  I wanted to be specific in my response because there are many things that makes people successful.  My response “stop watching Reality Television”.  While I was only partially joking, I then got serious and said “people who take action”.

The reason this was my response and not one of the other countless things that I could have said that is common amongst successful people and those that have yet to achieve success is due to a story one of the Hall of Fame Richdad real estate inductees recently said.  This individual is an immensely successful investor who is now out of the Rat Race and controlling her financial future.  She recently made a post on facebook wondering why no one took her up on her offer to network while at a NETWORKING event this past week.  This is all too common.  People not taking action.  People not putting in even the smallest of effort for their own longer term gain.  This is why Wall Street and the banking system controls the great majority of consumers financial future.

There is so much opportunity around us in the markets and in life that it often only takes a willing desire to ACT.  If people can simply take a step outside their internal safety box they will see that there is a vast world of opportunity.  A good friend of mine once told me it was our role to help people take that first step because if we can get them to take that first step they will be very motivated to take the second.

Another reason why people do not succeed is they often give up when things do not work out initially or they do not find the success they seek early in their trading or investing career.  This reminds me of the story of R.U. Darby and his uncle.  The uncle got caught up in the gold rush, upon finding a vein of gold he covered up the mine, went back east and told his relatives about the discovery.  Darby and the uncle purchased all the mining equipment and went back to the gold mine and started bring the shiny ore out of the earth.  They mined enough to cover their expenses and were excited about the possibilities of the future.  However, one day they finished mining all the gold out of the mine and decided since the mine was done they would “QUIT” and sell the equipment to a junk dealer.  They then went home without achieving their dreams.  The junk dealer then hired a mining engineer to survey the mine.  The engineer discovered that 3 feet from where Darby and the uncle QUIT, the largest gold mine in territory history was simply 3 feet away.  Darby quit 3 feet from gold.

Recalling this years later Darby stated that this experience taught him one very valuable lesson…never give up.  Darby went on to enormous success selling life insurance.   Over 500 of the most successful individuals the United States has ever produced told Napoleon Hill that their success came one step after defeat seemed certain.

After telling this story to the group I was asked by a woman in the audience at what point do we give up and my response was simple, “death”.  Nothing stops us from achieving our dreams.  Success is a choice but it is not a choice without difficulty, failure, and hard work.   If the end result is you achieve your dreams then we would pay 100 times the price in terms of time, money, and effort.  Take a step and then keep digging team as it is a journey with many turns and not a straight line.

The recent run up in the markets has been historical.  At no point in the stock market history has there been a bigger total point move then it has had in the last 16 days.  The movement has been driven my a very good earnings season, good economic reports, and international Quantitative Easing news out of Japan and the Euro zone.  Due to this movement I have now revised my bias in the market to Neutral from slightly bearish.  However, I am not jumping completely on the Bull bandwagon due to the over extended movement as I expect a retracement soon.  I am buying dips at this point.

The concept of over-extended simply means the stock or market has ran past where it typically moves.  I call this past the point of probability.  For example.  If the market moves on average from support to resistance 10 points and the current movement is past 10 points then that is “past the point of probability” and thus over-extended.

While I cannot ignore the historic movement, the all-time high, and the bullish breakout in the recent few weeks.  I also cannot deny the very technical analysis that has made me successful long term.  It is time to lock in profit on short term bullish trades and enter into short term bearish trades once confirmed down.  Once again, with the expectation to buy on the next retracement.

Economic Reports

Most economic reports were fairly decent last week.  The big news of the week was the unemployment data received on Friday.  While not a great report, it did nothing to curtail the believe that the economy is improving slightly and the FED will raise interest rates in mid 2015.  A couple of concerning economic reports from last week was the trade balance which came in at a negative 43 billion when the expectation was negative 40 billion.  I expect this trend to continue as the dollar strengthens will put pressure on foreign countries purchasing our goods as it now costs more for them to do that.  Keep an eye over the next few months on the trade balance and dollar divergence.  The second disappointing report was manufacturing which came in 57.1 with an expectation of 58.2.  Manufacturing and housing have both been a drag on the economy.  While they are both slightly improving, the improvement has not been what most expected.

This week in the market does not have much that will drive the market very much.  Consumer confidence and retail sales on Friday will be the focal point but that is just due to it being a very light week economically.

Earnings Season

Earning season is coming to a close with only about 15 companies reporting earnings this week.  3rd quarter earnings have been above average with 71.6% of SPX companies reporting better than expected earnings.  Revenues and earnings per shares are also up in comparison to 2013 3rd quarter earnings.  The only sector we have yet to get a majority of earnings calls from is in the retail sector.  With companies like Walmart, Macy’s, Nordstrom, and Kohl’s reporting this week we will be close to finishing up the retail sector and have a final tally of the quality of 3rd quarter earnings.

Trading Strategy of the Week: Naked Put

The naked put is a very conservative and simple strategy with high probability and great monthly ROI.  It involves selling a put option in many conditions, such as, if the stock has strong fundamentals, if the stock has gapped down in price, if the stock has implied volatility, if the stock is severely oversold (i.e. slowing momentum downtrend) or if you just think it’s bullish.  it is a great strategy is you want to own the stock at a discount, want to cash flow, or simply want positive theta.

Rules: Theta Trade

Technical: this is a neutral to bullish strategy

Delta: Sell a delta less than .25

Theta: Sell 4-6 weeks of time

Position Size: Less than 4% of portfolio

ROI Target: 5-15% ROI

Target: Expiration or 75% of net liquidation

Management: Place an alert 1/2 ATR above strike sold.  If Alert is triggered, either pull the trade off, roll the strike down and out.  If you want to own the stock, let it continue.

Case Study: GPRO Naked Put for positive theta and cash flow

Short Put Dec 55

$130 per contract / $550 margin per contract

Happy hunting this week all.  Make sure to check out all the latest on www.tackletrading.com

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