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So, how can we avoid falling in such forex scams? Casey Stubbs already covered this issue and gave 3 ways to avoid forex scams. I’ll expand on his advice, and add some more thoughts:

  1. If it looks too good…: Sites that promise automatic and big profits in no-time should raise your first suspicion. There’s no easy money in this market. Sites that try to sell such products will usually have only one page that showing blinking dollars and no serious explanations. The graphics are usually “loud” and not humble.
     

  2. Talk to people: Casey suggests talking to people in the company and also with people that use the product to get an idea. In some cases, the people you’ll see in the promotional video will already look like clowns. In other cases, they will look serious, but you need to verify that they really stand behind their product.
     

  3. Google the product and search for problems: I’ll add that you easily do a Google search, and add words such as “sucks” or “scam” to the name of the product. If the search results yield too many convincing results, it isn’t only competitors that are complaining – it’s real people that have already suffered.
     

  4. Check the people on LinkedIn: The world’s leading professional network has a very wide audience. Searching for the people behind the company in Google will almost always yield the LinkedIn page in the first results. If the people behind the venture don’t have a profile on LinkedIn, that’s a problem. If they do, see who recommends them. Solid recommendations will help you feel better.
     

  5. Regulation: A serious participant in the market will be regulated by at least one authority. The American NFA is the toughest authority (sometimes too tough). A stamp from the NFA, FSA, CFTC or another reputed institute in a normal country doesn’t mean that the company is bona fide, but it’s better than nothing. Companies listed in some exotic island look suspicious.
     

  6. Demo account: As aforementioned here, a forex demo account is the basic broker check. Some robots can actually have an OK performance, but how can you know that? You need to check it out. Ask to try it without real money.
     

  7. Intuition: Well, at the end of the day, you get a feeling about the people on the other side. As you can see, the forex industry has lots of bad people in it. Contrary to the basic rule at court, where a person is innocent until proven otherwise, you should assume that everyone is guilty and that they need to prove their innocence to you.

This is a guest post from FXStreet, a leading provider of data, real time analysis and actionable tools for Forex traders.

 

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“The CBOE S&P 500 30-Delta BuyWrite Index is designed to track the performance of a hypothetical covered call strategy that holds a long position indexed to the S&P 500 Index and sells a monthly out-of-the-money (OTM) S&P 500 Index (SPX) call option. The call option written is the strike nearest to the 30 Delta at 10:00 a.m. CT on the Roll Date.The BXMD Index rolls on a monthly basis, typically every third Friday of the month.”
 

Historical index data is available since July 1986 to compare the performance of BXMD to the S&P 500 Total Return Index. The below chart created at www.portfoliovisualizer.com highlights the summary statistics and equity curve with portfolio 1 representing BXMD.
 

Past performance doesn’t guarantee future results. You cannot invest directly in an index.


From July 1986 – December 2018, BXMD outperformed the S&P 500 by 0.43% per year. Since the only difference is the short call, this tells us that selling a 30-day call every month has been a profitable trade over time. Since a short call is negatively correlated to the underlying index, it results in a slight reduction in portfolio risk where standard deviation, worst year, and maximum drawdown are all reduced. Alternatively, in months where the S&P 500 increases by more than expected, the short calls lose money and BXMD underperforms.
 

Overall, I prefer to think of put options as financial insurance and call options as lottery tickets. In both instances, it’s rational to expect sellers to profit over time (but not every time). As a covered call seller, you retain almost all of the downside, yet cap your upside. In a world of generally efficient markets, why would any rational market participant do this without the long-term expectation of profit? This theory matches the empirical data.
 

Additional recommended reading on covered calls:

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

 

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Trusts originally served four primary purposes. (Yes, there are others, but these, historically, have been the big four)

  1. Avoiding probate. Probate is seen as a “big, long, expensive, painful” process. It takes court filings, hearings, money, etc. General consensus has been to put all of a person’s assets into a trust or have a pour-over will that moves things to a trust when the person dies to avoid probate.

    Depending on the state where someone lives, this may or may not still be valid. I don’t know the probate process in all of the states. (I’ve only probated wills in two states). In Texas, this concern is over-blown. The process of probating a will is not that expensive. If an estate is too small for a normal probate process, there’s even something called the “small estate affidavit” that allows heirs to “skip” most of the formal probate process. I personally think, in Texas anyway, the use of a revocable/pour-over trust for purposes of avoiding probate is unnecessary;
     
  2. Avoiding taxes. Depending on the year, the estate tax exemption has ranged from $0 to $11m for couples and everything in between. This means if someone had as little as $500,000 (which I realize for a lot of people is a TON of money, but there are millions of people that have more than that in this country), that person’s heirs could (again depending on the year), find the government taking upwards of 33% and 40% of that when they inherit. This is particularly problematic if a large amount of real property (land) is included in the inheritance because that isn’t particularly liquid.

    What happens when there is family property? For example, should a family own a ranch worth $5m.  When parents die, the children inheriting the ranch will have to either come up with $2m cash or sell the property to pay the 40% tax. The other option would be for the parents to setup trusts to transfer outside of estate taxes years ahead of their demise. (It is more complicated than that, but that is the general premise).

    Since the estate tax exemption is currently around $11m for couples, this is much less of a problem today than it was in the past. Of course, there are democratic candidates calling for the elimination of the exemption and taxing estates at 100%…so this could go back the other way. I refer to the constant changing of the estate laws as the “Estate Lawyer Employment Acts.” You should have seen the mad scramble at the end of 2012 when there was a chance the exemption was going to $0 (didn’t happen);
     
  3. Protecting Minors. For parents who have a lot of money or who may have life insurance policies with large payouts, upon their deaths, they don’t necessarily want their 12-year-olds to have a million dollars at their disposals. A trust continues to be a good way to help manage the funds until any children are old enough to manage the funds independently.
     
  4. Liability Protection. If a person moves assets to an irrevocable trust in which that the person is not the named trustee, the assets can be shielded from liability. Meaning if I have the right to income and “expenses to maintain my standard of living” but NOT the right to actually control the trust, and I get sued for $10m, that trust, if setup correctly and in advance, might protect against that judgment or from creditors. This is still a legitimate use of trusts, but I personally prefer investment companies, particularly in Texas with how strong the corporate liability shields are and/or the difficulty (if not impossibility now) of piercing the corporate veil in the state. 

Of course, there are some MAJOR disadvantages to passing assets via a trust:

  1. No step-up in basis. To me, this is the number one reason to be cautious about using trusts (living trusts aside). A step up in basis means the heirs don’t have to pay capital gains tax. So if a trust includes stock ABC that was bought at $100,000 for $1 per share that is now worth $10 per share (so $1m total), without a step-up in basis, that’s a $900,000 capital gain the heirs will have to pay in taxes. If you get a step-up in basis, you don’t have to pay that tax;
     
  2. Tax inefficiencies. During the lifetime of the trust creator, trusts are tax inefficient, particularly irrevocable trusts. LLC’s, if you have real estate, tend to be a much better vehicle from a tax rate perspective. Why put something into a trust that’s going to get taxed at over 33%, when if it is put into an LLC, the tax rate will be lower on the property. (TALK TO YOUR ACCOUNTANT/LAWYER ABOUT THIS AND WHETHER IT ACTUALLY HELPS IN YOUR SITUATION);
     
  3. PODs. For many assets, it’s just as easy to pass them via a POD (payable on death)/beneficiary designation. IRAs, bank accounts, insurance, brokerage accounts, etc, all allow holders to designate beneficiaries upon death. This happens as soon as upon death — no need for probate, trusts or anything else. MOST assets can be passed this way, which eliminates the need for paying for a trust).

The answer to the question “Are trusts the best way to leave money to heirs” is “it depends.” Why are you using one? What state do you live in? How much do you have in assets? What KIND of assets are they (real property, cash, stocks?); How old are you? How much life insurance do you have? Do you have kids or young heirs? Do you care what your heirs do with the money?

No matter what people decide for dispersal of wealth after death, it is better to make these plans when young, than when on death’s doorway. Doing it later in life removes options. Trusts aren’t as necessary as they used to be — which doesn’t mean they aren’t necessary — it just means people need to have discussions with their attorneys and advisors.

 

Christopher Welsh is a licensed investment advisor and president of Lorintine Capital, LP., LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Trades and and Lorintine CapitalBlog.

 

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Steady Momentum

In the first 5 months of 2019, Steady Momentum 6.7% return. This compares to 3.2% return for our PUTW benchmark. Not only our strategy outperformed the benchmark, but it did it with less volatility.

May was a good example how the strategy can reduce the volatility of your portfolio. While S&P 500 was down 6.6%, Steady Momentum was down only 1.8%. The term risk premium (IEI-BIL) was positive this month, with IEI outperforming BIL by 160 bps (1.81% vs. 0.21%). Overall, it was a strong month for our strategy on a relative return basis, and the strategy is performing very well so far.

Over the long term, the put write strategy is expected (based on historical data) to produce stocks like (or slightly better) returns with about 30% less volatility.
 

Anchor Trades 

On May 4 (when we last received the BIL dividend), SPY hit 294.75, which was the high transaction point for Anchor. Over the past several weeks, we've finally experienced a "significant" market decline, from our transaction peak and from the last time I rolled the long hedge.  Specifically, the market is down 6.50% over that period and 2.3% since our last roll of the long hedge.

How is the strategy performing during this down move on the market?

Since our last roll of the short hedge (5/19), in Leveraged Anchor, SPY has declined 2.3% and we've declined 2.45%  -- that's actually a GREAT result.  Our long position is levered, we have a short option position that is hurt in declines, and we're declining at close to the same rate as the market. 

 

Remember, the strategy was "adjusted" to accept some of these draw-downs in exchange for a cheaper hedge.  The hedge won't really start kicking into gear until it's hit.  It's at 270 -- so until SPY is below 270, if we can track market losses, in a leveraged account, above our hedged price, that's a stellar result.  

 

In January, our account started with $100k in the Leveraged Anchor and SPY was at $249.  SPY is currently at $278.59 and our account is at $113,225.  That means our Leveraged Account is up 13.22% while SPY is up 11.88%. In other words, we're still beating the market in a hedged strategy.

 

To say that result exceeds our expectations is an understatement.  We had an amazing bull run to the start of the year, where we had to roll our long hedge (rolling the long hedge during the year is always a significant cost and, historically), one of the biggest drags on Anchor performance.  We then have had a swift drop from that point, resulting in losses on the short puts -- but the losses aren't exceeding what is expected and having them hedged at a higher point than the entire portfolio has been helpful.
 

Summary

We are very pleased with the performance of both strategies. Remember: those strategies are designed to reduce the volatility of your portfolio, and provide you protection in case of a big market decline. When the next bear market finally comes, you will be protected and stay in the game.

Related articles:

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After a tear-provoking meeting with her backbenchers, UK PM Theresa May has pledged to set a date for her departure after the upcoming Brexit vote in early June. And, she will do regardless of the result. It is now clear that "The end of May is in early June."
 

For pound traders, there is no time to delve into May's legacy but rather to look to the near future with the clock ticking down to Brexit, which is due on October 31st. On the same day that May faced her political executors, her former foreign secretary Boris Johnson threw his hat into the ring by saying he would run if there is a vacancy. His early announcement was well-timed, and most British newspapers put his picture on their covers alongside the news about May's upcoming resignation, portraying him as the PM in waiting.
 

Johnson is the leading candidate as he is well-known and is popular among the membership of the Conservative Party. Under current party rules, MPs filter candidates until two are left. The vote then goes to the membership. Assuming he makes it to the shortlist, the road to Downing Street is paved for him.
 

GBP/USD already fell on the specter of PM Johnson

Johnson has a staunch supporter of Brexit. The former London mayor, in addition to his role as FM, is a eurosceptic, was one of the proponents of Brexit in the referendum, and also quit May's government over a Brexit strategy that was not "clean" or hard enough.
 

Markets have a clear opinion against the UK leaving the EU, and the pound dropped on the latest political developments, including Labour's decision to end cross-party talks. Johnson's probable ascent contributed a lot to the mix.


Apart from his senior posts, Johnson is known for his gaffes and erratic style. If he becomes PM, his unscripted comments may result in sharp moves in the pound. That can be taken as a certainty.
 

But will the pound keep on falling?

Another characteristic of Johnson is his love of himself and another one his aspiration to become PM. Long before announcing his candidacy, he wrote an admiring biography of Winston Churchill, the heroic PM during the Second World War. Political analysts saw the book as a declaration of intent: that Johnson is also aiming for 10 Downing Street.
 

After achieving his career goal of entering Churchill's role, the colorful Mr. Johnson may want to cling to power more and creating a worthy legacy, like his protagonist. He may want to secure Britain's position in the world and maintain a stable economy. And for that, he may follow the footsteps of another wartime hero. 
 

Johnson may do a de-Gaulle on Brexit

General Charles de Gaulle fought the Germans in the war and then became France's long-serving president. He vowed to keep Algeria French but then made a 180-degree about-turn and retreated from the former colony.
 

Johnson may follow de Gaulle's footsteps. by stepping away from his rhetoric on Brexit and finding a compromise with the EU. And if takes this path, unthinkable at the moment, he will be instantly rewarded by a stronger pound.
 

All in all, Boris Johnson cares more about Boris Johnson and than about the UK's exit from the EU, and his colorful style may result in surprising rather than dogmatic moves. His entrance to the famous house in central London may mark the bottom in GBP/USD.

This is a guest post from FXStreet, a leading provider of data, real time analysis and actionable tools for Forex traders.

 

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In addition to the S&P 500, CBOE also tracks the same strategy on RUT with their index PUTR. Below is the historical data since 2001.

 

Portfolio 1: PUT

Portfolio 2: PUTR

 

Past performance doesn't guarantee future results, and shouldn't be relied upon exclusively when making investment decisions. 

 

PUTR has beat PUT by 210 bps from 02/2001 - 05/2019, which is largely explained by the fact that IWM beat SPY by 199 bps (7.47% vs. 5.48%). This should not be thought of as random chance, as academic research has found there to be a persistent and pervasive size premium (small outperforms large...see charts below from Dimensional) in the historical data that is intuitive as a risk premium. For example, we can see that PUTR's 40% relative higher return (7.26% vs. 5.16%) came also with 25% higher risk (13.5% vs. 10.75%). Therefore the Sharpe Ratio's are similar. This is what would be expected in a world of highly (although not perfectly) efficient markets...All asset classes are expected to have roughly comparable Sharpe Ratio's over a long period of time, and therefore the best way to increase your expected Sharpe Ratio is with diversification. 

 

 

 

This same thought process of an expected long term risk premium can be applied to our usage of collateral in the form of ~ 5 yr treasuries. I had Dimensional create the following chart, highlighting the persistence of 5 yr treasuries outperforming T-bills since 1926. 

 

 

I hope readers find this type of scientific data analysis transformational to your way of thinking, as I know I certainly did when I first learned of it. I believe this type of thought process should inform your entire investment portfolio, not just this particular strategy. For example, this same process has also gone into the construction of our ETF portfolio alerts, which are provided to Steady Momentum subscribers at no additional charge. 

 

If you were seeking out advice for a health related issue you were having, wouldn't you rather get that advice from a professional who has spent their career studying peer reviewed scientific research vs. picking up a magazine at the checkout line at the grocery store or asking a friend/family member/co-worker what they think you should do? These sources of advice may be sincere, but the consequences of bad advice are simply too high. If so, shouldn't the same standard apply to your financial planning and investment decisions? 

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.

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If you use any strategies that combine equity positions with option hedges or cash generators, you need to know how to pick the right stocks. So covered calls, protective puts, covered straddles, and many more strategies should be opened on the best possible companies and their stocks.
 

Picking stock just for maximum yield (on both options and dividends) is unwise because it is likely to expose you to greater volatility and market risk. Options trading is not isolated from stock performance, and that grows from well-picked companies – meaning fundamentally strong, consistent, and competitive companies. Weak companies often reveal higher than average dividend yield and option premium, but not always for good reasons. These can be danger signals that every trader should know.
 

Dividend achievers and dividend aristocrats

Companies increasing dividend per share for `10 years or more are called dividend achievers; those increasing dividends consistently for 25 years or more are called dividend aristocrats.

These are important and distinguishing features for one reason: These companies with exceptional dividend record also tend to out-perform the market in the long term. Not all, but most, have demonstrated lower market risk and consistent returns in the stock prices, dividends, and options.
 

As a starting point, checking the status of dividends per share is a strong indicator. But it is not the exclusive test of whether a strong dividend record is enough.

 

Growing dividends and growing long-term debt

Dividend should always be understood in the context of how a company funds those dividends. You might have noticed that some companies report net losses in certain years but continue to raise dividends. Is this accomplished from cash reserves or from somewhere else?
 

Observing ever-higher dividends per share over many years is only half of the total equation. Also check the status of the debt-to-capitalization ratio. Total capitalization is the combination of long-term debt and stockholders’ equity. Dividing long-term debt by total capitalization reveals the percentage of total capitalization represented by debt.


If this ratio is increasing over several years, it is a red flag. The more a company relies on debt and the less on equity, the more future earnings will have to be used for debt service, and the less will be available for expansion and dividends.


Some companies take on increasing long-term debt to finance dividends when earnings are not high enough to do the job. As the ratio approaches 100%, equity shrinks to near zero. To see examples of where this leads, consider the recent history of one-time solid Blue Chips General Motors, Eastman Kodak and Sears. All of these saw their long-term debt outpace equity and cause bankruptcy.


When dividends increase but a corresponding increase in long-term debt occurs at the same time, those higher dividends are not positive signs. The dividend trend along with the long-term debt trend tells the real story.

 

The problem of higher dividends

Is a higher dividend always good news? No.

You need to evaluate the recent history of the stock price as well as dividends per share. If the share price falls many points, the dividend yield moves up and becomes a larger yield. For example, a $50 stock paying a $2 dividend yields 4%. If the stock falls to $40 per share, that $2 translates to a 5% yield.

A move from 4% to 5% looks pretty good at first glance. But why did the stock price fall 10 points?

If the most recent earnings report included a negative revenue or earnings surprise, that could be the cause for the loss of share price. If the company’s guidance is revised to forecast weaker future revenue and earnings, that also brings down the share price. In this situation, the dividend yield is not as positive as it appears at first glance.

 

The yield you earn is fixed

Some investors with equity positions in a company’s stock tend to track dividend yield often, even daily. This makes no sense.

The yield you earn is going to be based on what you paid for shares of stock. No matter whether the stock price rises or falls, the true yield is the dividend per share, divided by your basis and not by the current price.

The dividend trend is useful for determining whether to keep the position in your portfolio or to purchase additional shares for increased option hedging or cash generation. But your yield remains unchanged.

 

Dividend yield as a starting point in picking stocks

Options traders who also hold equity positions must decide which stocks to acquire for options trading. A popular method is to compare option yield based on premium value and time to expiration. This is not the best method for deciding which stocks to use for options trading; the higher premium often translates to higher volatility. Translation: Higher-yielding options premium equals higher market risk.
 

For some traders, that higher risk is acceptable. But for most, a consistent and reliable level of yield from options trading makes more sense. To pick the best stocks, use dividend yield to narrow down the list of candidates. You will find that if you select only those stocks yielding 4% or more, you end up with a very short list. When a test of the long-term debt trend is added, the list shrinks again. Adding in annual P/E range, revenue and earnings, the final list will come down to a very small number of companies, perhaps under 10.


The methods for picking options range from high-risk to extremely conservative. When it comes to dividends, widespread misconceptions cloud the decision. Many analysts continue to rely on the current yield as the primary test of how a company controls working capital. But combining dividend yield and long-term debt trends tells the real story.


Dividend trends tell a much larger story for options selection than most fundamental indicators. Picking the best option is a function of picking the best stock; and the combination of dividends and long-term debt reveals the long-term strength or weakness of the company’s policies.
           
Michael C. Thomsett is a widely published author with over 80 business and investing books, including the best-selling Getting Started in Options, coming out in its 10th edition later this year. He also wrote the recently released The Mathematics of Options. Thomsett is a frequent speaker at trade shows and blogs on his websiteat Thomsett Guide as well as on Seeking Alpha, LinkedIn, Twitter and Facebook.

 

 

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BTC/USD has broken above the $8,250 level escaping the long-term bearish channel that had governed its movements since early 2018.
 

Its teammates on the crypto podium have followed King Bitcoin up, but with worse performances. This characteristic of the rise means that the second condition that I pointed out in a previous article is not fulfilled.


Let us review the requirements. The first was that BTC/USD exceeds $8,250. The second condition is that the ETH/BTC crypto cross goes into bullish mode, and that has not been accomplished yet. However, it may change in the next few days.

 

ETH/BTC 4 Hours Chart
 

The ETH/BTC is trading at the 0.03067 level, moving between the EMA50 and the SMA100. Trading between mobile lines generates sudden short travel movements.
 

Above the current price, the first resistance level is at 0.0312 (upper parallel bullish trend line and EMA50), then the second resistance level awaits at 0.03161 (price congestion resistance). The third resistance level for ETH/BTC is at 0.0332 (upper parallel bullish trend line and price congestion resistance).


Below the current price, the first support level is at 0.0301 (SMA100, price congestion support, and SMA200), then the second support level is 0.0298 (price congestion support). The third support level for ETH/BTC awaits at 0.0275 (price congestion support).

 

 

The MACD on the four-hour chart shows a slightly bearish profile, although it can easily turn up and quickly enter the positive zone of the indicator. This is a misleading profile at the time of analysis.
 

The DMI on the four-hour chart shows bears controlling the asset but with a downward profile. Bulls lose the ADX support, potentially complicating bullish development.

 

BTC/USD Daily Chart
 

BTC/USD is currently trading at $8,777 after hitting a relative high of $8.944. The Japanese daily candlestick chart is currently drawing a doji that jeopardizes the technical conquest if it ends the session with this figure.
 

Above the current price, the first resistance level is at $8,780 (price congestion resistance), then the second resistance level is at $9,160(price congestion resistance). The third resistance level for the BTC/USD pair is at $9,700 (price congestion resistance).


Below the current price, the first support level is at $8,400 (price congestion support), then the second support level is at $8,250 (price congestion support and upper trend line of the long term down channel). The third level of support is back into the bear channel at $8,000 (price congestion support).

 

 

The MACD on the daily chart shows how after a bearish cross attempt, it bounced back and now takes advantage of the momentum to break out of the past bearish scenario. The next two days will mark the medium-term scenario.
 

The DMI in the daily chart shows the bulls increasing the advantage against the bears but still far from surpassing the ADX line that would start a new bullish pattern.

 

ETH/USD Daily Chart
 

The ETH/USD is currently trading at $268.16 after yesterday's new high relative to the close. The next resistance level is further away at $290, and reaching it requires accumulating bullish strength.
 

Above the current price, the first resistance level is at $290 (price congestion resistance), then the second resistance level is at $305(price congestion resistance). The third resistance level for ETH/USD is $318 (price congestion resistance).
 

Below the current price, the first support level is $260 (price congestion support), then the second support level is $250 (price congestion support). The third level of support for ETH/USD is at $234(price congestion support).

 

 

The MACD on the daily chart shows a bullish rebound after the first bearish cross attempt. It is not a very solid structure, so if it continues to rise, it will be in an overbought scenario.
 

The DMI on the daily chart shows how bulls keep control of the situation and barely celebrate the new relative high. The bears, on the other hand, weaken and remain at the lows.

 

XRP/USD Daily Chart
 

XRP/USD is currently trading at the $0.41 price level after sitting a daily high at $0.42. At this hour it loses support for price congestion at$0.412 and hints at a possible downward turning Japanese candle figure.
 

Above the current price, the first resistance level is $0.412 (price congestion resistance), then the second resistance level is $0.43(price congestion resistance). The third resistance level for the XRP/USD pair is $0.438 (price congestion resistance).


Below the current price, the first support level is $0.39 (price congestion support), then the second support level is $0.37 (price congestion support). The third support level for the XRP/USD pair is $0.35 (EMA50).

 

 

The MACD on the daily chart shows a small upward bounce after the first bearish cross attempt. As in the other cases, it may continue to rise, but in an overbought environment.
 

The DMI on the daily chart shows the bulls reacting up and moving very close to the ADX line. If the D+ were above the ADX, we could easily see a bullish explosion. The bears continue to show weakness.

 
This is a guest post from FXStreet, a leading provider of data, real time analysis and actionable tools for Forex traders.

 

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It is not. (Well, it is rarely a problem).  In fact, almost 99% of the time, early assignment is a better outcome.  Below will set forth two common assignment examples, work through the potential outcomes, and demonstrate why assignment is typically a better outcome than having just held the position.

 

For Steady Option’s Anchor members, there is a persistent risk of being assigned a long stock position on the income producing portion of the strategy (the short SPY puts).  This only happens in sharp market declines or very close to rolling of the position, but it can happen.  Assignment risks increases the closer the position gets to a delta of 1.  Most recently, this happened the week of May 13, 2019.For purposes of this example, we’ll use the actual SPY positions and walk through what did occur and could have occurred in other possible market situation. 

 

In early May, the strategy sold four contracts of the May 20, 293 put for $3.11.  The market started to drop. On May 19, 2019, the options were early exercised when SPY hit 285.  The value of the contract when assigned was $8.11.  All of a sudden, most accounts had 400 shares of SPY and were down $117,200 (4 contracts x 100 x $293).  Most accounts don’t have cash in them to cover the position and may have received a Reg-T notice (a Reg-T notice is a form of a margin call by your broker).   What is a trader to do?

 

Well first, the next trading day, simply close the position.  Sell the stock, and the margin call should be covered.  If it’s not, you can always sell other holdings to cover it.  The way the Anchor Strategy is structured, it is virtually impossible not to have available cash or stock to cover in this situation.  After closing the assigned position, is the trader worse or better off than if the position had been held?  In all market conditions (up, down, flat), the trader is either in the same position as not having been assigned or better off.

 

Note: This assumption ignores transaction costs.  Some accounts have assignment fees, different commissions for buying and selling stocks and options and other various fees.  These fees could make a difference on the analysis, depending on a trader’s individual account.  Since such fees vary widely, the below discussion ignores all fees.

               

The Market stays flat, SPY stays right at 285
 

In this case, the trader sells the assigned shares back at $285, facing a loss of $8.00/share.  ($293 - $285)[1].    In other words, the trader has lost $1,956 ($8 stock loss less $3.11 received for selling the original position). This seems like a poor outcome.

[1] For purposes of this article, I am going to ignore the fact that the position was hedged and look at it just from the assignment point of view. 
 

However, this is better than if the trader had just closed the short put at $8.11 at the market open.  In that case, the trader would have lost $2,000.  (($8.11 - $3.11) x 4 x 100).  By being early assigned, the trader saved $0.11/share.  This is what actually happened in actual trading the week of May 13.

 

The Market moves up the next morning


What would have happened though if the market had gone up?  Let’s say to SPY $288.  In this case, instead of selling the stock back at $285, you would sell it back at $288.  That is a loss of $5 per share ($293 - $288) for a total loss of $756 on the trade ($5 - $3.11).

 

Once again, the trader is better off.  Delta of the short put is not one, rather it had a dynamic average of .95.  This means the value of the put would have declined not to $5.11 (the previous price of $8.11 - $5.11), but, by $2.85 to $5.26.  Closing that option position would result in a loss of $860 on the trade ($5.26-$3.11).

 

The Market goes down


The scariest situation for a trader is waking up the next morning and the market has declined.  Instead of SPY $285, the market might have continued to go down to SPY $282 (or worse).  In this case, the trader sells the stock for $282, resulting in a loss of $11 per share for a total loss on the trade of $3,156 ($11-$3.11).

 

Yet again, the trader is better off.  With the market going down from $285 to $282, the dynamic delta average is .98 and time value has dropped a bit, and the short put is now worth $11.03.  Closing this put for a loss of $11.03 results in a total loss on the trade of $3,168.  Even if the market had plunged down to SPY 100, the two positions would have been equivalent – meaning that the loss by being assigned equals the loss of having been in the short put.

 

In other words, in every market situation, the trader is either better off or exactly the same when assigned the position rather than having simply held the short put.  The closer delta is to 1, the more likely you are to be assigned, but even in that situation, you would be no worse off between assignment and holding.

 

But if that’s true for puts, is it also true for calls?


Let’s take a common example.  You sell 5 contracts of the $100 call on Stock ABC that is currently trading at $99 for $2.00.  You are now short the $100 call.  You receive $1,000.  It expires in 3 weeks.  Two weeks from now the stock is trading at $99.80 with earnings coming up tomorrow, and the option is trading at $1.00.You have $1,000 in cash and -$500 in call value.  Someone exercises the option.  The next morning your account looks like:

  • Short 500 shares ABC at a value of $49,900
  • Long $51,000 cash ($50,000 for sale of stock at $100/share plus $1,000 from the sale)

               

Are you in trouble?  Did you lose money?  Once again no, you’re not. Let’s look at what happens in each situation at market open:

 

The Market stays flat at $99.80


In this situation, you buy back the 500 shares of Stock ABC for $49,900.  You keep the $51,000 and did not have to buy back the call.  So you’re up $1,1000.
 

If you had not closed the position out, not been assigned, and the market stayed flat, the price of the option may have declined to around $0.50. 


Clearly, you are better off because of the assignment – by over $800.

 

The Market goes down (any amount)


Earnings come out and the price drops to $90 (or any value below $100).  In this situation, you buy back the 500 shares for $45,000.  You keep the $51,000 and did not have to buy back the call.  So you’re up $6,000.
 

If you had not closed the position out, not been assigned, and the market went down, the price of the option may have declined to $0.01.
 

Again, you are better off because of the assignment – by almost $6,000.


The Market goes up by less than $2 (to under $102)


Earnings come out, and the price increases to $102 (or anything between the last close and $102).  You buy back the shares for $51,000.  This nets out the cash you already had and did not have to buy back the calls.  In this situation you break even.


If you had not closed the position out, not been assigned, and the market went up, the price of the option contract would have increased to at least $2.00. 


In this case, you are in the same boat because of the assignment.  Closing the short contract at $2.00 would cost you $1,000, which nets to $0.00 with the $1,000 you received from the sale.

 

The Market goes up by more than $2 (e.g. $110)


Earnings come out, and the price increases to $110.  In this situation you must buy the shares back for $55,000.  Offsetting with the cash already received, you have lost $4,000.


If you had not closed the position out, not been assigned, and the market went up a significant amount, the option price would have increased to at least $10.  Closing this short contract out will cost $5,000. You are again better off because of the assignment.


In other words, in every situation you are in an equal or better situation because of an assignment.  This is because options have time value – which an early assignment forfeits to the option contract holder.  Even if the option contract had no time value left in it, the worst situation is still break even.


The only real risk to assignment is failing to quickly move and adjust the position (eliminate the over sized short position), your account goes into a Reg-T call, and your broker starts closing positions in a non-efficient manner.There are brokers who also require margin calls to be covered by cash deposits, instead of adjusting positions.  (Very few).  If that’s the case, you may get a demand for cash (and switch brokers). 

 

As long as you stay on top of your positions and address any assignments, there is no reason to fear early assignment since in all situations you will be either equal or better off on early assignments.  This is why I am almost always surprised by early assignments.  The only time early assignment really ever makes sense is on surprise dividend announcements that weren’t originally calculated into the option prices – and even then, as the price of the option likely moved before the assignment occurred, there may be no impact.

 

What any option investor should always keep in mind is what to do if they get assigned early, what that will look like, and what trades will need to be entered the next business day.  Being prepared prevents fear and mistakes – particularly when there is no need for that fear in the first place.

               

Christopher Welsh is a licensed investment advisor and president of LorintineCapital, LP. He provides investment advice to clients all over the United States and around the world. Christopher has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™. Working with a CFP® professional represents the highest standard of financial planning advice. Christopher has a J.D. from the SMU Dedman School of Law, a Bachelor of Science in Computer Science, and a Bachelor of Science in Economics. Christopher is a regular contributor to the Steady Options Anchor Strategy and and Lorintine CapitalBlog.
 

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The important point is that these lessons are simple and can be systematized so that in real-time you can simply follow your well-designed plan without having to interject human judgement which is often heavily influenced by emotion and short-term performance.


For example, below are the net returns of four funds representing four distinct equity asset classes from 1995-1999. This example is meant for illustrative purposes only, and past performance doesn’t guarantee future results.
 

 


Notice the stark differences in performance during this time period. US equities dominated both International and Emerging Markets, especially US Large Cap compared to International Small Cap Value. Considering that the average investor instinctively thinks five years is a long enough period of time to evaluate performance, what do you think he or she might feel like doing at this point? Certainly not rebalance the portfolio back to its original weighting by selling a material amount of SPY to buy DISVX. That would feelbackwards, but it’s an important part of successful long-term investing. Let’s now look at the next decade, from 2000-2009, to see why.
 



 

What a contrast. From 2000-2009, US Large Cap actually produced a loss and International Small Cap Value produced the largest gain. Since most investors are far too concentrated in US Large Caps, it explains why this decade is referred to as “The Lost Decade.” This clearly wasn’t true of all stocks in the US or the rest of the world as we can see. Investors who abandoned diversification in 1999 would have experienced a lot of pain in the 2000’s, while the average of the four asset classes was more than double the starting value.Let’s now put the entire 1995-2009 period in context and also highlight the power of rebalancing.
 



 

During this entire period, we see all four asset classes produced strong results with the average growth of $100,000 being $369,560. In other words, if an investorput $25,000 into each fund in 1995 and did absolutely nothing, the investment would have been worth $369,560 at the end of 2009. This is a compounded annual return of 9.11%, which highlights the power of equity investing. Yet you’ve probably noticed I’ve added one additional line item to highlight the benefits of rebalancing a portfolio.
 

The rebalancing rule is as follows: Each month, review if any of the funds have drifted by a relative >25% from their target weightings. Since we are targeting 25% in each fund in this simple illustrative example, that means you would rebalance anytime a fund has drifted by more than 6.25% from the target 25% allocation. In other words, as long as each fund’s current weight is between 18.75% and 31.25%, you do nothing. During this period of 1995-2009, you would have rebalanced only eight times.

But as we can see, rebalancing would have added more than $45,000 to the portfolio, increasing the compounded annual return to 9.95%. This is more of a “rebalancing premium” than we should expect over the long term, which is no surprise since I intentionally picked funds and a time period for this article to emphasize a point. Vanguard has expressed in its “advisor’s alpha” concept that a good advisor can add “about 3% per year” of value to a client’s situation of which 0.35% per year is estimated to come from disciplined rebalancing. This rebalancing premium is intuitive when we stop and think about it, as it forces us to “buy low/sell high.
 

Conclusion

Human nature is a failed investor, and the best way to overcome the most common investor mistakes is with a well thought out evidence-based plan that incorporates the important concepts of equity asset class diversification and disciplined rebalancing. Working with a financial advisor who intimately understands these concepts can help improve the odds of a successful long-term investment experience.

 

Jesse Blom is a licensed investment advisor and Vice President of Lorintine Capital, LP. He provides investment advice to clients all over the United States and around the world. Jesse has been in financial services since 2008 and is a CERTIFIED FINANCIAL PLANNER™ professional. Working with a CFP® professional represents the highest standard of financial planning advice. Jesse has a Bachelor of Science in Finance from Oral Roberts University. Jesse manages the Steady Momentum service, and regularly incorporates options into client portfolios.


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