following the stock market activities of Tom Denham

My Tools

Interactive Brokers

I trade through Interactive Brokers where I can sell one out-of-the-money put option for $5, hold it until expiration, and net $4. A profit of $4 does not seem worth the effort until you multiply it by 10 or 20 so that a position represents $40 or $80. Then multiply that number by 100 or 150 positions so that you are talking about $4000 to $12,000 each month. In addition, commission costs fall with volume and you can sell puts for more than $5 apiece, much more.

Interactive Brokers is a professional grade tool that intimidated me when I first moved over from Ameritrade. However, I could not trade profitably the way I do or monitor the number of positions I hold without the low commission costs and spreadsheet style of the Interactive Brokers trading platform.

Morningstar.com

I consult Morningstar.com to identify companies with too much debt, questionable accounting practices, complicated corporate structures, or other business issues that make them especially risky. I avoid taking positions in these companies, even when I can enter with a large margin of safety. On the other hand, I sometimes enter positions with a narrow margin of safety when I think companies are trading at bargain levels. Morningstar.com is again the resource I consult to identify these bargains.

Morningstar maintains a list of 5-star stocks – companies trading at bargain levels – that is one of my favorite hunting grounds. On a busy trading day I may scan 50 stock analyst reports on Morningstar.com. The Morningstar analysts are awful market timers and, like most analysts, tend to extrapolate existing trends, but I frequently consider their Fair Value assessments in choosing the levels where I want to enter positions.

Excel Spreadsheet

My constant companion in analysis and trading is a Microsoft Excel Workbook. I record stock trades, option buys, option sales, spreads, fees, and dividends on separate pages.

I have a “strike” page that calculates levels out-of-the-money in one-percent increments by entering the current price. Standard operating procedure for me is to enter 15 percent or more out-of-the-money with 4-5 weeks until expiration and 20-30 percent out-out-of-the-money with 2 months until expiration. On a busy trading day I may calculate levels out-of-the-money for 100 different stocks, each one taking just a few seconds.

Also on the “strike” page, I keep a table that lists in $250 increments the cost of holding a position for 30 days on margin assuming a rate of 0.02 percent, which is well above the current margin loan rate of Interactive Brokers. I can see at a glance, for example, that holding a position of $3750.00 for 30 days would cost $6.25. That tells me that I need to make more than $6.25 when I enter the trade if I want to cover costs without capturing a dividend during the holding period.

Genesis Trade Navigator Platinum

I consult charts before entering any position and Genesis Trade Navigator is my charting software. I like to enter positions below previous bottoms and under important support levels. I focus on weekly charts during bearish market trends. I focus on daily charts during bullish market trends.

I label charts with position details as I enter them. For example, I might label the VZ chart “+5 Jul24 Calls -5 Jul25 Calls” to indicate that I own 5 July calls at 24 and am short 5 July calls at 25. When I enter the position, I also enter a note in my trading diary to exercise the calls three days before any ex-dividend date.

I consult a few other resources from time to time, but these are the main tools I use in my work.

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2 Responses to “My Tools”

  1. Randy says:

    Tom, I have traded a few options over a long period of time. I wonder how you cope with all those transactions on your 1099? Do you report each and every transaction to the IRS? It seems like you could have 1000 transactions in a year. How do you cope doing your taxes?

    thanks in advance,

    Randy

    • Tom Denham says:

      Hi Randy, I have not prepared my own tax return in decades. All I do is log every transaction in a spreadsheet that my accountants use to calculate my taxes. I log each transaction from real time broker confirmations as they come in. In 2010, that was almost 3000 transactions. That sounds like a lot, but is only about 12 trades per day. My records are so detailed and organized, that my accountants recommended that I pay taxes based upon my records instead of relying upon brokerage statements that consistently under report profits. They include a copy of my spreadsheet with my tax return.

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