Having more information and knowing how to use it can help you make more money with your investments
While you’re out in the field putting in your crop, you might have some time to think about how a free charting service called Barchart.com could help you buy good shares low and sell them a little higher to lock in a swath of profit from the middle.
There certainly is a lot of money out there to be had. We just have to learn how to get it and keep it. I try to teach readers these two things all the time. Some learn faster than others, but if you stick with it, odds are almost anyone can learn.
To get to the free site, enter www.barchart.com. Next, on the left side of the screen, type in the symbol for the stock you want to study and click “go.” Some days the site seems to prefer U.S. stocks; to find a Canadian stock type “.to” after the stock symbol.
Next, on the left hand side of your screen click on “Barchart opinion.” You should see a screen full of stuff — find the word “trendspotter” and click on it. If all goes well you should see a blue chart of the daily price of your chosen stock and below the blue you should see a series of black dots that sort of follow the price chart most of the time, either above or below the blue chart.
From there on it is simple. If the blue chart is above the black it is a bullish sign and we might want to hold the shares (and, if we are selling calls, sell calls above the price of the day). When or if the share price falls below the black dots, that’s a signal to sell (or sell calls well below the price of the day or even buy puts).
If the shares have bottomed and poked above the black dots, it could be a signal to buy the shares. When or if the blue chart drops below the black dots it might be wise to sell the shares or sell calls deep in the money.
For many stocks I checked, if I had bought shares when the price jumped above the black dots and sold them when the price dropped below the black dots, I would have made money (or at least not lost money). Check to see how your stocks have behaved on those charts over the past year or so.
I did not study the background of this charting system but it seems to match about the 50 day moving average. That is a bit slow, but as I said it does take some of the judgment out of buying low and selling before the price of shares drops too much.
Spreads and covered calls
I think my education on doing bull put credit spreads is paying off. Here are a couple of rules I’ve set up for myself. One is to only do bull put credit spreads on rising stocks. If a stock drops after I do the spread, I should get out of the contracts totally or get out and roll them down a few notches.
The other rule is to do spreads on stocks that have a low beta. Beta on a stock is an indicator of how much the shares move up or down compared to the overall market. If a stock has a beta of one it moves more or less with the market. If the beta is two it would normally move twice as much as the market. If the beta is less than one the shares move up and down less than the market.
Last week I did a bull put credit spread on 1,000 shares of Home Depot (HD). I sold the May put with a strike price of $67.50 and bought the May put with a strike price of $65. I collected $507 and spent $332 (to keep $175). That was on $2,325 of margin money for three weeks — roughly eight per cent return for less than a month. The price of HD was around $74 and more or less rising. I did a bull put credit spread well below that price, reducing the odds that I might have to buy the shares.
A reader called and we talked about doing a spread on Phillip Morse (PM), the smokes company. The price of shares was around $95 so I sold the expensive put at $92.50 and collected $315, then bought the cheaper put for with a $90 strike price for May for a cost of $172. I kept $143 for two weeks and $2,357 of margin money — six per cent for two weeks.
HD and PM both have betas around 0.86, so neither move much unless the market moves a lot.
Finally, I bought 100 shares of PotashCorp (POT) for $42.71 per share. This is a starter position. Ag stocks often go up starting in June but we could see some downturn for a while, so I figured 100 shares was a good way to start.
Yamana (YRI): I owned YRI stock several years ago when shares were trading at $11 to $12. I made thousands of dollars selling calls around that price, then the shares moved up so I let them go. YRI went to about $22; now they are again around $12. I paid around $15 for 1,000 shares but expect to break even over time. I sold a call with a strike price of $12 for May; today I bought them back and kept about $90. Then I sold a call with a strike price of $12 for June and picked up another $427.
Disney (DIS): On May 7 I did a spread on Disney shares. This might be the season for “sell in May and go away.” Disney has a beta of 1.2, so I did the spread well below the price of the day — $65. I sold the June $60 and bought the June $57.50. I kept $75, which on $2,425 of margin money is a three per cent return for five weeks.
First Majestic (FR) After reading FR’s annual report and talking to their investor relations person in Vancouver, I’ve determined that their in-house cash cost of silver production is $5.20 per ounce. There is a big difference between the numbers used to calculate actual production costs, taxation costs and costs net of credits. The investor relations person said that FR’s total cost of production was likely in the bottom 10 per cent of the industry.
FR has recently commissioned its latest silver mine, so its fixed costs will be spread over more ounces. I don’t know if the price of silver will drop below $20, but if it did, it sounds like FR would be a survivor. I own a few thousand shares that I bought between $18 and $20 per share, but by selling calls I’ve brought my paper cost down anywhere from $2 to $6 per share.
FR’s business strategy is to stick to mining in Mexico, which is friendly to miners, and to stick to finding, mining and selling silver.
FR’s investor relations person also said that the company has $100 million in cash so it can withstand a short downturn in prices. He agreed with me that the price of silver was trashed by a series of events which included speculative action that triggered stop losses on margined silver and gold and the price of silver was oversold.
He also said that FR was in a position to hold back silver if the price dropped too much. Some in the industry have suggested companies should not sell more silver than necessary to keep cash flow going which would help drive prices up a little sooner. My chat with FR has more or less assured me that we are on a good track with shares of FR and with silver in general.
My big mistake this winter was that I was hoping the price of silver would go up as it normally does in the early part of the year so I didn’t sell calls on all of my shares. If I had believed the charts on silver and gold and their shares, I would have sold calls deep in the money or dumped the shares. While these commodities move up and down a lot, I don’t think speculators can resist playing in this sand box so I look forward to believing the charts and making money as the shares move up and down.
Normally silver prices are affected by the seasons and by weddings in India, Christmas, Valentine’s Day and so on. With FR’s low production costs, good cash position and lots of silver to mine, I might be wise to buy more shares at these low prices but that might be overdoing it with one stock.
Next time (that famous “next time”) when the price of silver crosses the 10-day moving average going down and the price of shares drops on the barchart I mentioned above, I will either sell some shares or sell calls well below the price of the day and get ahead of the drop.
This has been an interesting winter. I learned how to bring in cash by doing spreads on some select stocks. I figured out a few rules to use when doing spreads. Plus I proved once again that if the price of a commodity or stock is dropping we should not invest with hope: we should take steps to keep losses small and or to lock in profits near the top. After all it doesn’t matter what any expert says or what the price of silver will be in five months or give years. All that really matters is what my stocks are doing. Price action really is all that matters, not promises or hope.
I believe, or at least hope, that I have a few thousand opportunities to make money with our stocks in my lifetime. If I screw up now and then I believe I can work my way back to success. †