Friday, September 26, 2014

Weekly: Not a fan of Rollercoasters

I was never a big fan of riding rollercoasters, and now tend to opt out riding the real life ones. As such, I didn't enjoy this week's market action. Expiration on 9/19 frees up a lot of capital and I put a lot of it right back to work. Highlights include a new net long position in gold GLD and YHOO, new net short positions in bonds TLT, new long positions in IBB and MMM, great earnings from NKE where I add to longs. Here are the trades:

Fri Sell NKE Nov 80 puts @88.0. I add to longs in Nike after a great earnings report. Chart support at 80.

Thu Sell IWM Oct 116 calls @110.3. I rebalance my net long position by selling some calls on the Russell 2000 etf. Looks like I stepped into a pile of crap with some of the trades earlier this week, with lots of big losers. Some like IBB can't even be hedged because the bids have mostly vanished because of the fast market. I just checked the S&P 100 quote list and 99 are down, SO is the only winner at +0.02. Yikes! I never liked fast markets so it is an uncomfortable day for me.

Wed Sell YHOO Oct 35.5 puts @35.5. I rebalance my short strangles on Yahoo! as it finds support.

Sell MMM Nov 130 puts @144.7. New long position in 3M, mostly based on the chart.

Sell VRX Oct 100 puts 124.1. Rebalance short strangles on Valeant Pharma by selling a second layer of puts. I was short Oct 95 puts, Oct 155 calls. Many biotechs are up big today.

Sell IBB Oct 250 puts @278.7. New long position in the Biotech etf. I do this after looking at some more individual biotechs and their wide option spreads. Why the 250 strike? It is near the 10% probability line and also at chart support.

Tue Another active trading day as I continue to put capital back to work after expiration.

New net short position in TLT (20 year treasuries):
Sell TLT Oct 112 puts / Buy TLT Dec 110 puts @115.3 debit
It can be called a diagonal, but I see it is a put calendar with the out month at a lower strike than the front month. Why? Because there is so little premium at Oct 110 puts they aren't worth selling. As I wrote in my monthly update, bonds are still seasonally strong until November 1.

Sell IWM strangles: Sell IWM Nov 95 puts
Sell IWM Nov 122 calls @111.5.
I sell some November strangles on the Russell 2000 etf. This new layer skews net long, adding to a net long position. Again, a short strangle is a bet on a trading range.

Sell WFC Oct 50 puts @52.5. New long position in Wells Fargo.

Sell DIS Oct 92.5 calls @88.3. I hedge my short puts in Disney by selling calls.

Mon Lots of trades for me on the Monday after expiration, and the stock market dips.

Buy GLD call calendar: buy GLD Dec 123 calls
Sell GLD Oct 123 calls @117.1 for debit
New net long position in gold in the form of a calendar spread. Selling the fron month call lowers the cost and decay, risk is a sharp rally before October expiration.

Sell YHOO strangles: sell YHOO Oct 34.5 puts
sell YHOO Oct 44 calls @38.7
Yahoo pulling back on analyst downgrades. 44 is near the high, 35 is support.

Sell IWM strangles: sell IWM Oct 103 puts
Sell IWM Oct 118 calls @112.5
Minor chart support and resistance at 103 and 118 for the Russell 2000 etf.

Sell SLB Oct 110 calls @101.7
Rebalance short strangles in Schlumberger by selling another layer of calls. I was short the Oct 95 puts and Oct 115 calls.

Sell SPY backratio: Sell 2x SPY Nov 180 puts
Buy 1x SPY Nov 183 puts @199.0 credit
I sell a put backratio on the S&P 500 etf. This is a net long position with an explosive upside if there is a decline to the lower strike of 180. If the decline goes past 177, it starts losing big time money.

Sell BRKB strangle: Sell BRKB Oct 135 puts
Sell BRKB Oct 135 calls @139.5
I sell Berkshire Hathaway strangles, which is a bet on a trading range. I was already short the Oct 130 puts.

Position Summary:
long APC ASH BRKB DIS FDX
long HON JWN MMM MRK MSFT NKE
net long AMGN BRKB GLD IWM SLB
net short SPY TLT VRX

Saturday, September 20, 2014

50-6 for September, grade C+

The September cycle was my second most profitable month of the year, so why the low grade? I left a lot of money on the table during a strong up month for the stock market. Many of the calls I sold during the early August dip, became big losers. SPY is up over 5% from the August lows and my account lagged badly during the rally. Winners for this option cycle include APC ASH DIS FB FDX. Losers include GLD MSFT. For the year, AMGN IWM VRX have been among the best trading stocks for me. I skipped VRX this month and missed out on more gains.

My short term timing was not very good. The intermediate term was better, but like that the old Maxwell Smart might say, "I missed it by that much" (holding up his fingers an inch apart).

I again remind readers that seasonal patterns such as the 4-year Presidential cycle and the 10-year decennial pattern point to an upside acceleration starting September 30, 2014 and lasting about 18 months. Year 5 of the decade averages up 28%. Can 2015 live up to that? Stay tuned.

Gold is a recent Exhibit A, that seasonal patterns don't always work. I took a loss as gold kept dropping, even though September tends to be a bullish month for gold. However, it has been nearly a straight slow drop for GLD. Bonds may have topped on Ukraine news, but bull seasonality for bonds remain in effect until late October. Junk bonds and REITs have also been volatile, mostly lower.

I remain mostly bullish on stocks. Many of my biggest losers in 2014 and 2013 were selling calls as part of short strangles. There are bearish arguments that include: the Fed taper ends next month, bonds are topping, BABA the biggest IPO ever. On the bullish side are seasonal factors, the market trend. The Fed is shifting to neutral, but it usually takes several Fed rate hikes to summon the bear. We haven't even seen one Fed rate hike yet.

I'll keep watching out for signs of the bear. These include: inverted yield curve, divergence by transports, frothy sentiment stories, breaking the 50 day and then the 200 day moving averages to the downside. So far none of those signs of the bear are present. Transports continue to make new highs along with the broad indexes. Bond yields have ticked higher, but the yield curve still has short term rates well below long term rates. Virtually no one is publicly talking about the stock market, even with the market at record highs. I have yet to see a stock market bull on a magazine cover or Barrons cover. 

A correction of 5% to 10% can happen at any time, but a bear market usually requires several of the indicators listed to flash to sell. This remains the most hated bull market in recent history with stock ownership below 15% of households (about 48% own mutual funds and/or etfs).

Calendar seasonality turns bearish for bonds in November and lasts until April of the next year. If there is a modest bond market rally into October, it may be a good time to get short. TLT (20 year Treasuries) and TBT (inverse of TLT) are what I like to trade. The bad part is that both require substantial margin to sell options, and right now option premiums are small to tiny. For the most part, I've avoided trading bonds all year because of the tiny option premiums, large margin requirements and unclear trend, but the time for action may be soon.

Gold continues to decline, having given up most of 2014's gains. I may take another shot at the long side. The 52-week low around GLD 114 (2 or 3 points lower than today for GLD) might be a time to try it. Silver is now down for calendar 2014 after being up 15% in February, after a brutal -36% bear year for silver in 2013. REITs and high yield bonds have also been declining. Until about 2 or 3 weeks ago, bonds and REITs were the best performing major asset classes for calendar 2014. High yield bonds broke down first, then regular long term bonds, then REITs.

Readers know that my favorite trade lately is selling naked puts. Some readers might like the idea, but might be in an retirement account, or lack the account authorization level. HVPW (high volatility put writing?) is an etf that sells puts. HVPW sells puts 15% out of the money on 20 high volatility stocks, 60 days out. HVPW has a 0.95% expense ratio and is up about 1.2% for calendar 2014 (vs. about 9% for SPY). The attraction is the 9.3% in dividends paid out over the past 12 months. 

As always, this is a not a recommendation to buy or sell. The big caveat is that HVPW hasn't seen a trial by fire having a launch date of February 2013. That 9.3% yield could be lost in one bad month, or perhaps even in one day if there is another flash crash. As long time readers have seen, the percentage losses on naked options can be eye popping when a strong trending move occurs. Read more about HVPW, the put selling etf with a 9% yield, at Marketwatch (link).

Friday, September 19, 2014

Weekly: BABA IPO, hedge fund divestment


In the news this week is the IPO of Alibaba at $68. BABA rocketed to over $90 on the first day of trading. Yahoo, which owns 22%, dipped slightly. Also in the news California pension funds decide to stop investing in hedge funds. North Carolina is considering a similar move. There are over 10,000 hedge funds today, over 1,000 just for emerging market securities.

Funds charging their clients 2 and 20 (2% of assets and 20% of profits) find it difficult to perform net of fees. The nearly straight up bull market (over 1000 days without a 10% correction) means low cost stock index funds have been the big winners for this cycle.

My trading week was so-so. I'll post a monthly update in a day or two. I cover more short calls for losses. I get pinched on MSFT on expiration day. I open a new net long position in VRX, new long in TTM. I take a loss in GLD. Here are the trades:

Fri Sell AMGN Oct 130 puts @142.7. Rebalance Oct short strangles on Amgen. AMGN continues to rally. I am short the Oct 125 puts and Oct 155 calls. I rebalance as the stock moves up by selling another layer of puts.

Cover short SWK Sep 95 calls @93.5. Stanley Toolworks gapped up in the morning on analyst comments. I put in an order to close my short puts and got filled as SWK whipped back down. The spreads are wide on expiration day, so better to close the position, than having to sit on pins and needles into the close. I have a similar situation in Microsoft.

Sell VRX strangles, I leg in: Sell Oct 95 puts @117.0,
Sell VRX Oct 145 calls @117.4. New net long position in Valeant Pharma. VRX has been a good trading stock for me all year. I skipped the September option cycle.

Cover short MSFT Sep 47 calls @47.4. Crunch, another loser. Looks like shenanigans as open in interest is over 70,000 contracts at this strike. I placed several limit orders, but Microsoft kept rallying. I end doing a buy to close market order about five minutes before the close of trading. Fortunately, the dollar loss is small, even if the percentage loss is about 300% basis the premium collected. It has been a while since I had to "dance with the devil" just before expiration. I am not a nimble trader so I don't enjoy playing it so close.

Thu Cover short IWM Sep 102 puts @115.0. I free up some margin by covering these Russell 2000 puts that were about to expire. Normally, I would let them expire worthless, but am redlining on buying power.

Cover short GLD Sep 118 puts @117.4. I cover for about a 180% loss, as gold declined late on Wednesday after Fed news. The dollar rally related to Scotland's independence referendum is the main reason given. Scotland vote is later today, so there is a chance that this is the short term low. There is also a chance that GLD accelerates to the downside. With the option in the money, I move to the sidelines. When in doubt get out.

Wed Sell FDX Oct 150 puts @161.0. I open an October position in Federal Express. FDX breaking out from a chart base on earnings news. I am short September strangles.

Cover short BRKB Sep 140 calls @140.0. I cover short calls on Berkshire Hathaway for a big percentage loss (about 400% basis the tiny premium collected). This is the second loss this option cycle selling BRKB calls.

Cover short AMGN Sep 140 calls @140.9. Double ouch. I cover short calls on Amgen for about a 300% loss basis the option premium collected. AMGN has a squirrelly day. It was up strong in the morning, then dipped into the red, and then ralied strong after the Fed news. Another big loss. I believe this is the fifth big loser from maybe ten layers of calls that I sold on the dip in early August. It has been a strong five week rally. I have sold more puts to offset, but closing out these calls two days before expiration is painful.

Sell DIS Oct 87.5 puts @90.6. I open an October position in Disney.

Tue Sell TTM Oct 39 puts @45.8. Tiny new long position in Tata Motors, the India car company.
Sell HON Oct 87.5 puts @94.9. I open a small October position in Honeywell, was short September strangles (both puts and calls).

Position Summary:
long APC ASH BRKB DIS FDX HON IWM JWN MRK MSFT NKE TTM
net long AMGN SLB VRX 
net short SPY 
closed/expired: FB GLD SWK VRSN XLU

Friday, September 12, 2014

Weekly: Cat market at all time high (meow)

On a humorous note, this CNN money article compares the percentage of cat ownership to stock ownership (link).

Less than 15% of U.S. households now own any individual stocks, more than 30% own at least one cat. No wonder virtually no one seems to talk about the stock market any more.

What are the reasons? Some explanations include: the big market down turn in 2008/2009, overall meager stock market returns since 2000 with some big down drafts, the events surrounding the IPO of Facebook and how so many small investors felt cheated, the Flash Boys book author telling everyone that the stock market is rigged.

With only about half the population saving any significant amount of money, the other 45% or so have no money to invest any where. I'll spare you the soapbox speech on the 45% non-savers.

Back to the stock market, there is some selling with a small down week. I see these like the little thunderstorms that come and go in some parts of the country. They dump a lot of rain real quick and then are gone. Sometimes a person can have bad luck and get soaked. We will see if it turns into something more serious. 

I feel more discomfort during the week as AMGN, MSFT, XLU flirt with the strike prices of my short call options and ASH, GLD threaten on the short put side. I continue to feel out of synch with the markets. I have been clanking the timing on my entries and exits, often selling near the lows, buying near the highs. Fortunately the market moves have been small.

There were significant declines in bonds (TLT), gold (GLD), and REITs (IYR). Silver is now down for the year, after being up over 15% in February. I am under water on my recent GLD position. It has been a water torture decline, dripping lower a bit each day. With a small decline in stocks for the week, bigger drops in bonds and gold, cash was king for the week (that or being short gold or bonds).

Here are this week's trades:
Fri Sell BRKB Sep 140 calls @136.9. I hedge my short puts in Berkshire Hathaway by selling calls for a tiny premium.

Wed
Sell SLB Oct 115 calls @103.3. I hedge my net long position in Schlumberger by selling calls for a tiny premium.

Sell SPY Sep 202.5 calls @199.0. Ditto on the S&P 500 etf, selling calls for a tiny premium.

Sell NKE Oct 72.5 puts @82.4. New long position in Nike. NKE recently broke out of a chart base.
Mon Sell MSFT Oct 43 puts and Sep 45 puts @46.6. Rebalance short September strangles on Microsoft by selling September and October puts. This is another runner where the short calls are in the red.

Sell APC Oct 90 puts @106.4. I open an October position in Anadarko Petroleum on today's dip.

Position summary:
long GLD MRK NKE
net long APC ASH BRKB DIS IWM JWN SLB SPY
net short MSFT XLU
net neutral AMGN FB FDX HON SWK VRSN

Friday, September 05, 2014

Weekly: Frustration and losses

It was a below average week for me. In early August, I sold layers of calls on the market weakness. This past Wednesday I closed three of these short call positions (BRKB MRK SPY) for big percentage losses. As it turns out, I could have gotten out at better prices before or after. I also opened a few October positions and many of those turned against me. Despite some poorly timed moves, the tail wind of option decay and very small moves in the stock market meant an up week for me. 

The AAII sentiment reading fell back below 50% bulls, which I see as a positive for the market. Another positive is that the transports (IYT) made a new high, confirming that new highs in the S&P 500 (SPY). This is a bull market that many still hate. Public mood remains tepid. Virtually no one is asking me for stock tips or investing advice. The local CANSLIM meet up has low attendance and the few that come are not excited about investing in the stock market. Yes, there are some signs of froth, such as Alibaba about to be the highest valued IPO in U.S. history, but overall the mood is disbelief. 

I will remind readers that the ten year cycle and four presidential cycle point to an upside acceleration starting September 30 and lasting about 18 months. Seasonal indicators are not that reliable, but have some value.

Here are this week's trades:
Fri Sell BRKB Oct 130 puts @138.2. I open an October position in Berkshire.
Sell AMGN Oct 155 calls @137.2. Rebalance my position in Amgen, selling these way out calls for a tiny premium.

Thu Sell AMGN Oct 125 puts @138.8. Rebalance short Sep strangles on Amgen by going out to October. My streak of not-so-good intra-day timing continues as AMGN fades from its morning pop.

Sell IWM Oct 105 puts @116.8. I open an October position in the Russell 2000 etf. I closed the short IWM Sep 95 puts to free up some buying power. I also close out some SPY Sep 173 puts to free up buying power. I often let these way out of the money options expire worthless. However, right now, I am into the red zone as far as buying power. One good thing about my broker ThinkorSwim is that closing out short options at 0.05 or less, is commission free.

Sell SLB Oct 95 puts .32 @106.2. I open an October position in Schlumberger.
Wed I cover some of the calls I sold in early August for huge losses. Captain hindsight tells me that I should have covered much earlier. Why today? One reason is that if the puts come in safe, I'll come out above the line for BRKB and MRK. SPY had more cushion.

Cover short BRKB Sep 135 calls @138.2. Ouch. I cover these short calls for a huge loss. I sold these for not much premium when Berkshire was much lower, and cover for about a 900% loss, basis the premium collected.

Cover short SPY Sep 200 calls @201.6. Double ouch. I cover these for about a 350% loss (basis premium collected).

Cover short MRK Sep 60 calls @60.5. Trifecta. Merck calls covered for about a 500% loss (basis premium collected).

To add to the frustration of big losers, by later in the day BRKB and SPY are well off their highs.

Sell JWN Oct 65 puts @69.8. Rebalance short September strangles in Nordstroms by selling October puts.
 
Position summary:
long BRKB GLD MRK
net long AMGN ASH DIS IWM JWN SLB SPY
net short MSFT XLU
net neutral APC FB FDX HON SWK VRSN

Friday, August 29, 2014

Weekly: Bulls cross the Rubicon, 51% bulls at AAII

The bulls have crossed over the 50% Rubicon at the Association of Individual Investors (link) 51.9% bulls as of 8/27/2014. Going forward, the high percentage of bulls is a red flag for the stock market. That said, the continued rally has me scrambling. Readers might remember I sold tons of calls during the recent dip, and many of these short calls are deep in the red. The loser list include calls that I sold on AMGN MRK MSFT SPY. During this recent rally from the SPY 190 lows on August 7th, I have made money, but have significantly underperformed a buy-and-hold approach on the 5% up move.

A couple of weeks ago, I wrote about everyone expecting a correction and that a sharp rally might be what frustrates the most people. I did not expect so sharp, so immediate a rally and have paid for it. C'est la vie. Bonds also continue to rally even though the most recent QE program is scheduled to end in October. Thank goodness, I didn't go long TBT (short bonds).

I made a record number of trades during the calendar month of August. Some might say, over trading. We will see how it all comes out in the wash at expiration time. I am posting about a hour before the market close. Have a good three-day weekend. Cheers, to the end of summer. Here are this week's trades:

Fri Sell AMGN Sep 134 puts @138.7. Rebalance short strangles on Amgen by selling puts. As AMGN moves up my short Sep 140 calls are threatened. Even after this move I am net short, but less so.

Sell BRKB Sep 135 puts @137.1. I sell another layer of puts on Berkshire to rebalance, I also cover short BRKB Sep 115 puts .01 to free up a smidgen of buying power.

Tue Sell MRK Sep 58.5 puts @60.2. Rebalance short strangles on Merck by selling puts. Those calls I sold on that -317 Dow day a while back are coming back to bite me. As the rally rolls forward, the pain increases. I keep thinking there has to be a retracement of the move, but so far, it has almost been straight up for the major stock indices.

Mon Sell AMGN Sep 128 puts @134.6. Rebalance short strangles on Amgen as it makes new highs.

Sell SPY Sep 195 puts @200.1. Another day, another layer of index puts sold. The stock market rally rolls on. How much gas does it have left in the tank? How many bears still have money to go short? How many are covering? For those that are still short, what is their cry uncle point?

Sell ASH Sep 105 puts @108.1. Rebalance short strangles on Ashland. A curious case here, where a little while back, ASH gapped lower on earnings, but has climbed steadily since then.

Position Summary:
long GLD
net long ASH DIS IWM SPY
net short AMGN JWN MRK MSFT SWK XLU
net neutral APC BRKB FB FDX HON SLB VRSN

Friday, August 22, 2014

Weekly: Market looks tired

The stock market had a decent up week, but seemed to be running out of gas by Friday. There are more signs of a top, that include the lagging transports (IYT is a good proxy), sentiment at AAII (link) finally at a high bullish reading (46.1% for this week). Confounding most is the continued strength in bonds (TLT). Transports had a deeper correction and have not quite recovered the highs. High yield bonds saw a V-shaped chart (JNK, HYG) with a short sharp decline followed by a sharp rally. However, these are not back to the highs either.

I was not well positioned for the continuing stock rally. So while I made money, it could have been so much better. I added long exposure with each rally day. I am thinking the market needs time to digest the gains before any uptrend continues. Here are the trades:

Thu Sell SPY 194 puts @199.6. New highs for the S&P 500 etf. The chart sets up for a short sale, however, the sentiment and macro picture are not confirming that. I am thinking cover my short calls on a close above 201. Every day this week I have added long delta in the index etfs, but the rally has been so strong, I have barely kept up.

Sell BRKB 135 puts @136.2. The rally in Berkshire Hathaway is causing me some consternation. I had a limit order to close the short BRKB 135 Sep calls, but I cancelled that order as the stock kept climbing. I am going near delta neutral by selling these puts.

Wed Sell IWM Sep 109 puts @115.2. I add longs for the Russell 2000 etf. We are at the highs of 199 for SPY, on lower volume. I am short calls on many stocks so this is a bit of a hedging move.

Tue Sell SPY Sep 190 puts @198.3. I sell another layer of the 190 puts on the S&P 500 as the stock market rally rolls on. The 190 level is below the recent spike low. I expect some resistance at the highs of 199 and at the round number of 200. One negative is that I am burning buying power at a rapid rate selling these layers of SPY puts.

Mon Option expiration frees up a lot of buying power. The gap up open has me scrambling to rebalance my positions. I am short strangles (puts and calls) on many products and the sharp rally means many positions are now net short.

Sell SPY Sep 188 puts @196.8. Rebalance short strangles in the S&P 500 etf to net neutral. Later in the day, I sell a layer of SPY Sep 190 puts @197.3 now net long. My thinking is that SPY seems likely to retest the old highs around 199.

Sell DIS Sep 87.5 puts @90.1. Rebalance short strangles to net long on Disney.

Sell ASH Oct 95 puts @105.8. Rebalance my position on Ashland by selling October puts.

Sell MRK Oct 55 puts @58.6. Ditto for Merck, rebalance by selling October puts.Position Summary:

Position Summary:
long GLD
net long BRKB DIS IWM SPY
net short AMGN ASH JWN MRK MSFT SWK
net neutral APC FB FDX HON SLB VRSN XLU