Holiday Trading
It is always quiet the day before Thanksgiving and the Friday half day - trading volumes are lower as traders are out for the holiday. This is not to say that there is no trading to do.
There is always business news around holidays, just fewer people to act on it. This year inflation data came out Wednesday. The reading was as expected which brought the market down a little. The concern is that if the economy seems to be performing well, there is less of a rush for the Federal Reserve (the Fed) to reduce the Federal Funds rate. The federal funds rate is the rate banks use to lend to each other overnight. It impacts the interest rates on the consumer (esp. mortgage, credit cards and car loans) and business loans. It also impacts bond yields, exchange rates and the expectation of businesses about their investment returns. Since inflation news was neutral and the economy is strong, the expectation that the Fed will lower interest rates after their December meeting came down a little, thus the market slip. Higher rates for longer could slow the economy overall, so less homes sold, less cars and goods bought, less businesses ramping up and investing in their future.
For me, market slips muffle returns but gives me an opportunity to ‘re-stock’ my options. After almost 20 years of trading options my trading platform (Merrill Edge) allows me to have 560 uncovered option contracts. [Note: I started with permission for less than 5.] Since I closed over 170 contracts yesterday, I wrote 160 new ones today. (Puts on CRWD, VST, SNOW, PANW, GEV, APP, NFLX)
I did buy back the Amgen (AMGN) put contract I wrote yesterday at the close. AMGN was pretty much flat but since it did not fall further meant the option premium fell and I could close the put contract I sold at a nice profit. I closed the AppLovin (APP), Snowflake (SNOW) and the Netflix (NFLX) puts I wrote after the inflation data slip this morning before the close of day as well. Nice trades.
There are also small profits on CRWD and PANW and some of my other positions. as well. Since I have already reached my daily option trading goal, I will leave them until Friday morning in the hope that the market opens after a down day today. (I just checked and pre-market is up so I might be right). The market does vacillate like this when things are just chugging along, a down day is followed by an up one, at least initially. Need to be careful about this though. When the market’s mood is too euphoric or pessimistic, that is a up or down over a week or two it is often followed by a sudden strong reversal. The strong reversal can be dangerous if someone gets too cocky. For my trading, I find the ideal is a gentle couple days in one direction, followed by change in the other.
I did do some investing today which I do infrequently. I bought shares of AES Corporation (AES). It is a utility, a diversified power company using various fuels and technologies to generate electricity, including coal, gas, hydro, wind, solar, and biomass, as well as renewables comprising energy storage and landfill gas. It sells direct and wholesale. It is headquartered in Virginia.
I heard a trader talking about it today on CNBC (which I watch all day while I trade). It is common knowledge that the US needs to upgrade our power grid. Data centers in particular are going to pull unheard of megawatts out of our system. I like AES because at its current stock price (about $13) it has a P/E of 9, a target price of just over $20 and a dividend yield of 5.3%. It has a solid free cash flow (although a negative levered cash flow which is common in utilities which have to invest heavily in their infrastructure.) and 8% profit margin. These are things I always check before I invest (these statistics are readily available on Google Finance). My portfolios are light on utilities so it was a good add today as a diversification play. A 5.3% dividend yield is a solid return, and any appreciation I get is a bonus.
I also always look at option premiums on investments to see if I can add to the dividend income with option income by writing covered calls. Call premiums are very small on AES, but that is to be expected as the stock trades at $13. It would be a good place for beginners in option trading to start though. Since you need 100 shares of something to trade option contracts, 100 shares of AES would only cost $1,300. You will only make pennies on covered calls, maybe just covering the cost of the trade, but it might be a good place to start if you can get a couple hundred shares. You would have a small dividend income in the meantime. Remember, I don’t believe in getting rich quick but getting rich over time. Be patient and build. (P: 13.2)