Friday, April 18, 2014

38-5 for April, calling the top?

38 Winners 5 losers for the April option cycle. Grade B-. Most profitable month of 2014. Stock market was choppy. Winners include AMGN, IWM, VRX. I sold nine layers of IWM options, five layers of puts, four layers of calls, on the Russell 2000 etf and all came in safe. I took big losses in GILD, UAL, UNH. Had I held on to my losers, it would have worked out, but the draw downs were deep. The bears had one week in the sun, but for the most part, the bears got slaughtered during expiration week.

My profits for the year inch ahead of commissions paid. Any green during this difficult year is welcome, so I'll take it. As always, before any readers get excited by the high win percentage (38-5), those are the approximate odds going in. I tend to sell options that have about a 10% to 20% chance of coming into the money, so 80% to 90% of the time I win. However, some of the losses can be for huge percentages--that's why speculators buy those options, hoping for a 5-to-1 or 10-to-1 payout.

About market tops, it was about a year ago that I posted a Storm Warning for the stock market based on valuations (link). The stock market is up over 20% since that warning, again demonstrating the cliche that valuation tends to be a poor tool for calling market turns. More useful indicators include chart patterns and sentiment. Both charts and sentiment say there remains a good chance for many more sunny days to come. 

The terrible bear market of 2008 has scarred a generation of investors. So much so, that there is still a large group that has never come back to the stock market. The recent buzz about high-frequency trading doesn't inspire confidence either. I often hear chatter from various folks, along the lines of: the stock market is rigged and that they want no part of it. Does a major top have to come with frothy sentiment? No, no indicator is 100%. In any case, a major top is unlikely without a major correction in the 10% to 20% range before the big bear shows its claws.

As I have often written, calling top is a low percentage game. The higher percentage is waiting for a top, and shorting the rally failure. It isn't so easy to do this easier, but the odds are better than calling top. There have been a rash of articles and chatter about a replay of 1929, or 2008 or 1987. Investors still tend towards the cautious side (I almost always tend towards caution). Crashes rarely happen when so many are cautious, and so few are giddy.

The Fed wouldn't let a full on crash occur without major intervention. The Fed has distorted most markets, most especially the bond market with quantitative easing. What is surprising to many is that bonds are the best major asset class for 2014. 

The old cliche is "two steps and stumble," meaning two Fed interest rate hikes then a stock market decline. The earliest Fed tightening guess is late this year. However, the new Fed chief Yellen hinted at 2016 or later for a hike in Fed rates. Again, nothing is written in stone. At some point, I still believe that being short U.S. bonds will be the trade of the century. However, the timing is up in the air. Again, sentiment and charts may be helpful for timing.

As for gold, the upward bias of 2014 continues. My recent small trade in gold is still open and so far is right down the wide middle for profit. Again, I tend to like to sell options and the premiums on options on gold and bonds are tiny, and the margin requirements steep. This makes it hard to justify selling premium on GLD or TLT or similar.

Position summary:
long AMGN BA DAL HON HPQ MSFT SLB UAL UNH VRX
net long APC ASH DIS IWM SPY
short GILD

Thursday, April 17, 2014

Weekly: relief rally, best week of the year

A huge relief rally off the Tuesday lows translates into the most profitable week of the year for my trading account. I make three trades, May positions for AMGN Amgen and VRX Valeant and yet another blot on the record, closing out a big loss in UNH United Healthcare on their poor earnings report. My profits for the year have inched ahead of the commissions paid. Here are the three trades:

Thu Sell VRX May 95 puts @120.9. Sell AMGN May 100 puts @115.6. I open May positions on Valeant Pharma and Amgen. Implied volatility on both are high because earnings will come out before May expiration. Again, I choose the 90%+ probability of profit puts to sell. Valeant and Amgen are two of my best trading stocks for 2014.

Buy to cover UNH May 72.5 puts @73.9. United Healthcare gaps lower on earnings and breaks minor support at 75. I get out in the morning for a big loss, about 300% basis the option premium collected. There was a downgrade yesterday. Thankfully I didn't follow my notion to add to my long position on yesterday's downgrade. Intra-day timing is poor as I cover a few ticks from the low of the morning, By the close, UNH moves up over the 75 support level. Grrr.

Fast markets are not my friend and one reason why I trade the way I do. I trade cautiously, with the odds in my favor, often risking big losses for small gains, with a high percentage of winners. Once in a while, things go wrong. When that happens I tend to take my lumps and live to trade another day instead of risking account crippling losses. It is risky enough selling naked options, even more so to do it with a "let it ride" or "go down with the ship" trading plan when the chips are down. 

Every position trader has hot and cold streaks. A trader that lets losers go exponential is likely to eventually have a cold streak bad enough to destroy the account. A bad cold streak can mean game over, no more trading for you. Rarely does a person hear "game over" stories on the Internet, especially among the hindsight traders and paper traders that enjoy bragging about their wins but never seem to report a single loss in public. Many are doing coin flip probability kind of trades (50/50 up or down) so it is almost certain that over the long term the win percentage is no better than 60% even for the best of the bunch. (60% is considered exceptionally good over the long term for pro sports handicappers).
I'll post a monthly report for the April expiration cycle a bit later. For that observe the holiday, have a meaningful and joyful Good Friday, Easter and/or Passover.

Position summary:
long AMGN DAL HON HPQ MSFT UAL UNH VRX
net long APC ASH DIS IWM SPY
short GILD
expired: BA WDC SLB

Friday, April 11, 2014

Weekly: bear week

The wild ride continues, the market gets even more volatile during this bearish week. I take some more losses. Expiration is Thursday next week because of the Good Friday market holiday. I closed all my in-the-money April short options, now hoping the rest come in on my side, with many getting close to their strikes.

Thu Buy to cover GILD May 60 puts @66.1. Gilead Sciences plummets lower. I take another big loss, about 300% basis the option premium collected. News is that Merck has competing Hepatitus C drug passing Phase II trials. I am still short Apr 62.5 puts and some calls. The entire GILD experience has been a house of horrors. Trade long enough and you will experience these kind of things. Hopefully, have enough winners to compensate.

Wed Buy to cover UAL Apr 43 puts @42.7. A painful loss on one of these worms. United Continental breaks the shelf of support at 43 on heavy volume, so I cover for a 600% percentage loss. As always the dollar amount is small. Some of my Monday hedging moves are also deep in the red. Again, if I could call every top and bottom, I would have no need to be timid, no need to hedge. However, as this 600% percentage loss (basis the option premium collected) in a week shows, an option trader can get in a lot of trouble real quick if wrong. Update a few hours later: Grrr, looks like another whipsaw, another taking out of stop-loss orders as UAL rebounds to even and then booms higher on Fed speak. C'est la vie (such is life), though it is extremely frustrating.

Sell ASH May 85 puts @97.7. Rebalance my position in Ashland, as it moves higher. Selling calls on Monday has the makings of a big mistake. We'll see if the uptrend continues.

Mon The bumpy stock market ride continues, with an early spike lower, a brief fake out rally, then new lows and more selling and signficant losses for me. I sell multiple layers of calls to hedge some of my short put positions. I am on a mechanical plan, to close any short options on a break of the strike price. Some are getting very close, some still have room.

Sell KORS Apr 95 calls @87.1. / Sell KORS May 100 calls @86.7. Michael Kors down again, no news that I can see. I hedge my short puts by selling two layers of calls. The decline has been painful. I will close some short puts on a close below 85 the rest below 80.

Sell IWM Apr 118 calls @113.0. / Sell IWM May 121 calls @112.9. Rebalance a bit by selling two layers of calls on the Russell 2000. April 109s are the nearest puts. April and May 121s are the nearest calls.

Sell ASH Apr 100 calls @93.9 / Sell ASH May 110 calls @93.9. Sell two layers of calls on Ashland to hedge short puts.
Sell DIS May 90 calls @80.1. Same idea, hedging short puts by selling calls.
Sell APC May 110 calls @97.5. Ditto, hedging short puts by selling calls,
Sell VRX Apr 140 calls @119.5. Ditto, hedging short puts by selling calls.
Sell AMGN Apr 125 calls @117.8. Ditto, hedging short puts by selling calls.

Position summary:
long BA DAL HON HPQ MSFT SLB UNH WDC
net long AMGN APC ASH DIS GILD IWM SPY UAL VRX

Friday, April 04, 2014

Weekly: Vomit Comet market

Astronauts train for zero gravity by flying in a modified aircraft that goes up and then zooms down to simulate zero gravity for a minute or so. The stock market followed that kind of flight path this week.

I added longs in APC Anadarko Petroleum and WDC Western Digital. APC is an old friend. I also opened several May positions and most are in the red. Early in the week, it seemed like there was rotation out of bonds into stocks and that reversed on Friday. Continuing down this week are some of the big name winners of this bull market. Google, Amazon, Netflix, some big biotech names, all peaked two or three weeks ago.

Fri A frantic Friday, with a higher open, then a knife down in some stocks.
Sell APC May 87.5 puts @102.1. Add to longs as Anadarko climbs even more.
Sell ASH May 85 puts @98.7. Open a May position in Ashland.
Sell IWM May 123 calls @114.3. Rebalance my net long position in the Russell 2000 ETF.

Thu Sell APC May 85 puts @99.2. Anadarko Petroleum up big on news of a settlement. 85 is the breakout point. I traded APC extensively in 2013, but have stayed away from it this year because of the law suit.

Wed Sell UAL Apr 43 puts @47.8. I rebalance as United Continental moves higher. Another point higher and I will cover my short Apr 50 calls for a loss.

Tue A busy day, eight trades. Let's hope I am not the April Fool.
Sell UAL May 38 puts @46.3. Sell May puts to rebalance my position in United Continental. I am short April strangles.
Buy to cover GILD Apr 80 calls @73.2. I cover these short calls while there is still a small profit, in part to avoid the possibility of losing big on both ends of the short strangle. It is galling enough to have covered short puts near the lows. It would be worse to get crunched on both sides if there is a monster rally.

Sell DIS May 70 puts @81.0. Add to longs in Disney.
Sell UNH May 72.5 puts @81.7. Open a May position in United Healthcare.

Sell MRK May 50 puts @56.1. Open a May position in Merck.
Sell KORS May 80 puts @94.6. Open a May position in Michael Kors.

Sell WDC Apr 82.5 puts @93.0. New long position, Western Digital making new highs. 82.5 is the bottom of the trading range.

Sell IWM May 101 puts @117.1. I add a fourth layer of May short puts for the Russell 2000 to rebalance back to net long.

Most of these eight Tuesday trades are more worm trades. (Fishing analogy of digging for worms instead of fishing.) While April tends to be a good month, May is often not.

Mon Sell IWM Apr 109 puts @.30 @116.5 rebalance. I sell puts to rebalance my position in the Russell 2000 ETF.

Sell GILD Apr 62.5 puts @.30 @70.7 rebalance. Same for Gilead Sciences. In hindsight, Friday might have been the bottom, about where I closed my Apr 70 puts. These things happen. Either a person uses stops and takes losses or they don't. The alternatives are to "go down with the ship" or perhaps even double down. Selling way out of the money naked options, means the odds of losing are low, but there is the potential for huge losses. Again, a popular analogy is picking up nickels in front of a moving. The profits are tiny, with the risk of getting flattened if something unusual happens. It is still painful to lose.

Position summary:
long APC ASH BA DAL DIS HON HPQ MSFT SLB UNH WDC VRX
net long AMGN GILD IWM SPY UAL

Monday, March 31, 2014

1st quarter review, bonds & gold lead the pack

First quarter review, here are some ETFs that I track and sometimes trade:
TLT +7.1% U.S. 20-year Treasury
GLD +6.5% gold
SLV +4.3% silver
SPY +1.3% S&P 500
IWM +0.8% Russell 2000
EEM -1.9% Emerging markets


* These percentages are approximate and do not include the modest dividends.

Most of the gain for U.S. stocks for the quarter was from today's up move. For the most part, it was choppy trade and I am positive for the year, but only about 0.8%, or about in line with the Russell 2000 stock index.

At the extremes, gold was higher, and emerging markets lower. Gilead this month and Boeing last month are the two biggest losers for me, and why I am lagging behind. The option premiums for bonds and gold are too small for my favored strategy of selling naked puts to yield much gain.

April tends to be the a bullish month for stocks, and May more treacherous.

Sunday, March 30, 2014

One sentence financial advice from USA Today/Motley Fool

A list of one sentence financial advice, via USA Today and the Motley Fool. Here are the top 11, the rest of the 60+ are at the link.

1. Dollar-cost average for your entire life and you'll beat almost everyone who doesn't.

2. Only invest in products and companies you can explain to a six-year old.

3. Every five to seven years, people forget that recessions occur every five to seven years.

4. You're twice as biased as you think you are (four times if you disagree with that statement).

5. Read more books and fewer articles.

6. Read more history and fewer forecasts.

7. It's strange that you go to the doctor once a year, but check your investments once a day.

8. Be careful when reading about how stupid investors can be and not realize you're reading about yourself.

9. Your circle of competence is probably 90% smaller than you think it is.

10. You're only diversified when some of your investments perform worse than others.

11. Big risks will always be disregarded; small risks always blown out of proportion.

Friday, March 28, 2014

Weekly GILD a big loser

I take a big loss in GILD, open a position in GLD. Add to longs in several other stocks.

Fri Buy to cover GILD Apr 70 puts @68.9. Crunch! I take a huge percentage loss on these short puts on Gilead Sciences. Yes, it is oversold, but the small timers on the Yahoo finance board keep adding to longs, and the tape action continues to be terrible. Too much pain for me to stay in the game. I remain short May 60 puts and several layers of GILD calls.

Thu Sell GILD May 87.5 calls @71.5. I hedge my net long position in Gilead Sciences. I am getting smacked around like a ping-pong ball on this stock and it is not pleasant.

Sell IWM May 95 puts @114.5. I add a third layer of short May puts on the Russell 2000.

Sell AMGN Apr 135 calls @123.1. I rebalance my net long position in Amgen by selling calls.

Sell HON May 80 puts @90.6. I open a May position in Honeywell.

Sell IWM Apr 121 calls @114.3. A second layer of short calls (3 layers of short April puts) on the Russell 2000 ETF.

Sell UAL Apr 50 calls @43.9. I hedge my United Airline short puts by selling calls.

Wed I continue to put money that came free from option expiration to work. I am ever more cautious in some ways. The premiums collected yet smaller, the probabilities higher.

Sell UAL Apr 39 puts @45.3. Add to longs in United Airlines.

Sell MSFT May 35 puts @40.3. Add to longs on Microsoft.

Sell HPQ May 29 puts @32.9. Add to longs on Hewlett Packard.

Sell GILD May 60 puts @73.9. Rebalance my net long position on Gilead Sciences.

Sell DIS May 65 puts @79.9. Add to longs on Disney
I sold the above five in the morning, and by the close, they were all in the red.

Tue Sell IWM May 99 puts @117.6. I add to my net long position in the Russell 2000.

Mon Option expiration frees up capital and I put some back to work.
Sell IWM May strangles: May 97 puts @116.8
Sell IWM May 128 calls @116.8

Sell GLD May strangles: May 113 puts @126.3
Sell GLD May 142 calls @126.3
I sell May strangles on the Russell 2000 ETF and gold. Again, short strangles are a bet on a trading range. For GLD 114 was the minor low and 142 a minor high.

Sell BRKB May 110 puts @124.2.
Sell WFC May 44 puts @48.9.
I open May positions in Berkshire and Wells Fargo.

Position summary:
long ASH BA DAL DIS HON HPQ MSFT SLB UNH VRX
net long AMGN GILD IWM SPY UAL