In this edition, I’m going to dig into USIO, SLVO, and GLDI a bit.
I found USOI, GLDI, and SLVO by using FinViz’s scanner and then ranking ETFs by div yld from high to low. The yields were fat; the charts, not very worrisome. So I bought. For sure, the proper thing would have been to have gone to the issuer’s website and pull the prospectuses and quarterly report to find out what I was actually betting on. But I didn’t. My bad. Were big money to be bet, that’s becomes a necessity. But this is a small money trade. So, let’s approach buying USOI, GDLI, or SLVO (or not) from a purely technical viewpoint.
The easiest charting site to use is www.barchart.com. Setting up a free account will allow you to create 5 watchlists and 5 chart templates. So, go there now, set up an account, and create your first watchlist, calling it something like ‘Trades’. Enter the tickers. Click ‘Save’. You’ll now see the tickers displayed in what BarChart (henceforth, BC) calls ‘Main View’. To the right of that box, you’ll see words in blue. Click on ‘Flipcharts’. The chart you’ll see is ugly and uninformative. So close out the flipcharts and just click on any of the tickers. You’ll see a mini chart. Click on ‘Full chart’. BC will default to an ugly, uninformative chart that can now be modified by changing the bar type, the lookback period, and by adding technical indicators (that BC calls ‘Studies’).
Here is where ‘Chef’s Choice’ comes into play. What you want your charts to look like is entirely up to you, and it doesn’t make much difference in terms of being able to see where/when prices were low and prices were high, because all techical indicator are derivatives of the same facts about ‘price’ and/or ‘volume’ and have zero predictive power. (Indicators are just picture of numbers.) But they do describe very accurately is what buyers and sellers have done and are doing right now. What those buyers/seller might do next is just a guess. But human nature never changes, and what gets over-bought/over-sold tends to ‘mean revert’. (Hence, “Buy the dip; sell the rally.”)
I run a bunch of templates. But let me detail one that might be useful to you in this context. But first, some more theory. “Market time is fractal”, as Mandelbrot demonstated and is detailed in the book he co-authored, The (Mis)behavior of Markets. Therefore, you need to decide which price pattern, in which time frame, you’re trying to trade. But I’ll simplify things. Since we’re trying USOI, GLDI, and SLVO for their divs, not for cap gains, getting in crisply at a local, short-term bottom, such as some chart templates would highlight, isn’t as important as not over-paying in terms of its longer-term price range. Therefore, select ‘Weeky’ as the bar frequency and ‘Heikin-Ashi’ as the bar type. (Slap on some MAs --moving averages-- if you wish. But they aren’t necessary.) If you charted SLVO, you’ll see that it’s trading in a price channel that has ranged since last Sep between 5.00 and 5.50. Meanwhile, it’s been kicking out a monthly div that has ranged from 0.062 cents most recently to as much as 0.188 cents last April. (Yahoo Finance is an easy place to find div data). If you add up and average the past 12 months of divs, which works out to be roughly $0.08/month, you can see that Yahoo’s summary report that SVLO has a div yld of 31% can’t be trusted, but an ETF that’s priced around 5.35 and has paid an an average monthly div of 8 cents --$0.96/yr, or around an 18% ann. div yld-- might be worth betting on.
Therefore, I wouldn’t try to get fancy with order types. Just size an opening position appropriate to your account size and risk metrics, and put your order in the queue to execute at Monday’s opening. Ditto the other two tickers. Figure out where prices have ranged, what an average monthly div been, and whether you want to make a bet or not based on a hoped for yield.
Lastly, a comment on ‘scaling’. Some people like to go “all in” with the stocks they buy, Others scale in by thirds, or whatever scheme makes sense to them. There’s an old-timie pit trader who argues for 3x, 2x, 1x and then looks to get out. Stan Weinstein advocates half and half. There are no right or wrong answers, and all scaling schemes depend on trading ‘price risk’ against ‘information risk’, which is a topic well covered in Jamis Mamis’ book, The Nature of Risk or in Perry Kaufmam’s book on building trading systems.
I’d suggest, though, since I’m trying to reach people with small accounts and small investing experience, that limiting the initial bet size to $25 bucks would be a good way to get started. That’s enough money that gains could be meaningful --in a $200 dollar account-- and losses wouldn’t be devastating. Later, as it makes sense to increase funding in the account, I’d still say to stick with $25 bets, but carry more positions, so that experience could be gained investing in currencies, commodities, country funds, preferreds, MLPs, REITs, common stocks, bond funds, etc., all of which have their time and place, but all in due time. For now, keep things simple.
To summarize. USOI, GLDI, and SLVO are highly speculative plays on which not much money should be bet. I have no idea why they are able to pay the fat divs they do, nor any idea whether the divs are sustainable. But of all the other current opportunities in this over-bought/over-priced market, these three aren’t the worst things one could be betting on, even though their strategy of using covered calls could become a bit riskier as the underlying increases in price.
That latter comment is really just a guess, since I’m not an options guy. But my understanding is this. A covered call strategy works best when you don’t get called. Then you just collect prem. The prices of oil and PMs might be volatile enough that the ETF managers can stay ahead of getting called often enough to turn a profit, which is why reading the prospectuses and quarterly reports for those funds needs to done. (LOL)
Arindam, editor and sole proprietor of The Timid Trader tip sheet, whose intention is financial instruction, not financial advice. DO YOUR OWN DUE DILIGENCE!