Thursday, July 17, 2014

Early report: I'll be away, prelim C+ 30-5

I'm doing an informal early report for now because I will be traveling. I'll resume near normal blogging in about a week. What a time to be away, with the markets tumbling on news. So far the grade for the trading month is C+ with 30 winners 5 losers. If the markets continue to crater on Friday, I may have more losers.

The highlights for this week include a short strangle in Michael Kors KORS, a new long in Time Warner TWX in and a roll down for a loss in Monsanto MON. Trades follow:

Thu Cover short IWM Jul 112 puts @112.2. I cover these puts at a loss as the Russell 2000 moves lower on unsettling geopolitical news from Ukraine and Gaza.

Wed Sell TWX Aug 72.5 puts @84.2. New long position in Time Warner Cable. TWX up on a takeover bid from Fox. The strike price is the gap. Not much premium, but with option expiration coming on Friday, I will soon have a lot of free capital. Even if take over doesn't go, there will likely be some speculation premium for some time. Rarely do these events go that quickly.

Tue Sell APC Aug 95 puts @109.2. I rebalance my complex position in Anadarko Petroleum by adding another layer of short puts.

Sell KORS strangles I leg into the position selling the Aug 65 puts @80.5 and and the Aug 100 calls @80.1. New net long position in Michael Kors. KORS moving lower on analysts downgrades. The thinking is fewer Google searches on the name, and more discounting of the luxury merchandise. Why net long then? Because volatility is up, after two big down days. The strike prices of 65 and 100 are way out of the money.

Mon Roll down and out on MON. I cover short MON Jul 120 puts @119.8. I close my long position in Monsanto at a about a 100% loss basis the premium collected. Stock broke through the strike price. I am still bullish on MON so a minute later I sell some August 110 puts: Sell MON Aug 110 puts @119.9. 
Position summary:

expiring EPI VRX WAG

Friday, July 11, 2014

Weekly: Portugal and Wells Fargo

News events this week include a large bank in Portugal missing a bond payment, and poor earnings from Wells Fargo. I close two positions for big losses: short puts on Delta Air and on the Russell 2000 etf. Both rebounded off their lows, making the large percentage losses a bit more painful. Other highlights include new long positions in Cummings Engine CMI, Occidental Petroleum OXY, Federal Express FDX, and AIG insurance. 

My Russell 2000 position flipped to net long on the decline. A lot of my other longs declined in price, with Monsanto MON, and EWG the German stock etf being the most worrisome as they near their respective strike prices of 120 and 30. For now I am holding. Here are this week's trades:

Fri Sell APC Aug 130 calls @104.8. I hedge my long position in Anadarko Petroleum by selling calls. I am going way out of the money, because there were those unconfirmed take over rumors. The nearest short puts are the July 100s.

Thu Cover short IWM Jul 114 puts @114.1. News from Portugal sends U.S. stocks lower. I cover this layer of short put on the Russell 2000 for a 700% loss (basis the premium collected) in nine days. I dance a little too close to the flame, selling these puts so close in, and got burned. The low of the morning is 113.97, so IWM broke the strike price and that is one rule I use for covering. Again, there is a chance that this is the worst of it. As I type this up, IWM has rebounded. I have many layers of short IWM puts at various strikes and expirations. I will not roll the dice, in case this is part of a waterfall decline. I got out using one of my rules, not on emotion. As always, trading is easy in hindsight, not so easy in real time.

Sell OXY Aug 90 puts @104.5. New long position in Occidental Petroleum. I've been in the stock before in 2014. Chart is supportive, company continues to buy back stock, providing additional support.

Wed Sell CMI Aug 140 puts @155.2. New long position in Cummings Engine. CMI announced another $1 billion buy back, market cap is $28 billion. There is chart support, and 140 is a couple of support levels lower.

Sell AIG Aug 50 puts @55.0. New long position in AIG. Chart support at 52 and then 50.

Sell GLD Sep 118 puts @127.8. I open a September long position in gold. Seasonal factors and an ok chart are reasons.

Tue Cover short DAL Jul 35 puts @35.1. I cover these short puts on Delta Air for a humbling 400% loss basis the option premium collected. DAL continues to tumble lower, breaking below 35. When in doubt get out, especially when the stock crosses the strike price of short option. A few hours later, the stock has rebounded, perhaps after taking out some big stop-loss orders around the 35 level. Again, these things happen. It is frustrating to cover at near the worst levels of the move.

Mon Sell FDX Aug 140 puts @152.1. New long position in Federal Express. FDX broke out on earnings in June. 140 is where the stock was before earnings.

Position summary:
net long APC DIS IWM
net neutral DAL DIS GLD SPY

Thursday, July 03, 2014

Weekly: Will the Sky fall on the Bears?

A big push higher on Monday, followed by typical dull summer trade, then the holiday. I didn't do a 2nd quarter recap. The quick version is that stocks were up, bonds and gold are still having very good up years. I have done okay, but nothing to write home about. My weekly trade recap is at the end of this post with new longs in MSFT and XLU.
I found a sky will fall kind of article on Forbes (link1). Countering that a very bullish seasonal pattern that is soon to unfold.

The only certainty is that the more popular these crash columns are, the less likely that a crash is going to happen. This particular writer made a name for himself by calling the 2008 crisis. The old cliche don't mistake a bull market for brains may be in operation. Don't mistake one good call, one profound insight, calling the 2008 crisis, for real expertise in bull and bear markets. 

Sure some of the charts and warnings in the article are valid, even compelling. I have cited some of the same things such as the Schiller PE10 CAPE indicator. I wrote about the signs of a top a month ago (Tea Leaves for a Market top link2 and mentioned it back in 2013 link3).

The Forbes writer does some cherry picking on indicators. While some indicators are in bearish territory, many more are solidly in the average range. Selective vision tends to be the nature of fear mongering, sky is falling, points of view. 

Seeing the big picture the whole picture means the sky is falling (the financial sky will fall, but major market crashes are every 20 to 50 years (depending on how big a decline is a crash), not every five or seven years like so many of the wrong-way bears seem to think. The widely cited CAPE (ten year average of earnings) will see a big shift in 2018, because the year 2008, when many major companies reported a loss, will drop off the ten year average of earnings.

The big surprise for the mega bears might be that the stock market's ten-year pattern is about to enter its most bullish 18 months. This bull period starts September 30, 2014, ends March 30, 2016. In the middle of that, is the decennial pattern, that has year five of the decade as the most bullish of all years (Martin Pring has a good write up but the pdf will not link, search on "stock market decennail pattern, search link).

This means there is a chance that the widely forecast big banana stock market event in the fall turns into a big banana split and ice cream for everyone. With so many traders positioning for a big down move in the fall of 2014, by raising cash, buying puts, buying VIX calls, will the orderly drumbeat of the virtual army of bears turn into a panic and complete rout? Will the bears break ranks and scatter if there is yet another big rally? Will some bigger bolder bears go broke by going against the trend? Stay tuned Bat fans.

As long time readers know, I am not a fan of predictions. Predictions are mostly for entertainment, a fun game, but only have a little to do with making money. The money tends to be made doing the mechanics of trading, right sizing of positions, asset allocation, managing risk, taking losses as needed.

Some bullish arguments include an economy that may finally have some semblance of a normal recovery. The fracking oil boom means energy independence for the U.S. by 2020. Recent quarterly car sales were strong, above expectations. A good economy, might mean that every day people might have some money to spend, and businesses will do well. That would translate to higher earnings for public companies.

Most major market tops typically experience exuberance. While market timers may be super bullish, I observe fewer and fewer people paying much attention to paid market timers. Big time hedge fund managers seem to be more in the public spotlight than in the past. The people I meet in person and online, remain mostly cautious. I continue to be cautiously bullish. Some are raising cash, a few are buying puts for insurance. Yes, there are some signs of froth. The GoPro camera company IPO doubled in its first four days of trading. It is too fast a situation for me to trade. Some other big speculative stocks such as Netflix leaped to an all time record high. I am still looking for much more public exuberance before a major top is in place.

The caveat for the bullish seasonal pattern, is that seasonal patterns tend to the weakest and the most likely to be front run. For a made up example, if it is found that the market is always up on the 3rd trading day of the month, traders will buy on the 2nd day, and then the first as people spot these tendencies. If enough traders do this, the pattern becomes mush. With that, there may be broader psychological and social factors that influence the ten-year pattern because people behave differently at big milestone years such as 2000.

Another caveat is that while a major market top seems extremely unlikely, a correction of 5% to 10% can happen at any time. The recent past has been an unnaturally calm period. This USA Today article says 1000 days, 33 months, without a 10% correction (link5).

Much more natural is up and down trade. Big down days, weeks, months are part of normal action. They will come back, but their first appearance doesn't likely mean an imminent crash. If we do see a continued melt up, there might be a major top without a warning shot correction, but much more common is one or more warning shocks before the big one hits.

My weekly trading summary follows:
Thu Sell MSFT Aug 38 puts .16 @41.8. New long position in Microsoft.

Sell XLU Sep 40 puts .39 @42.5. New long position in the Utility etf, with three hard down days and decent chart support.

Tue Sell IWM Aug 108 puts @119.6. Later in the trading day, I sell some IWM Jul 114 puts @120.4. As the Russell 2000 continues to rally, I keep tap dancing, selling more and more layers of puts, rebalancing my net short position. A close above 120.6 and I cry uncle on the July 120 calls.

Elsewhere, I hold my nose and buy. I open August positions in Anadarko Petroleum APC, Berkshire Hathaway BRKB, Disney DIS, and United Healthcare UNH:
Sell BRKB Aug 120 puts @127.0.
Sell APC Aug 92.5 puts @109.0.
Sell DIS Aug 77.5 puts @86.6
Sell UNH Aug 75 puts @82.1

Mon Sell IWM Jul 112 puts @118.7. I rebalance my position in the Russell 2000 etf. I am still net short, but a bit less so. Nearest short calls are the June 120 calls. If IWM makes a new high on the close (120.6 or so), I will cover these short calls. I have multiple layers of short puts.

Position summary:
net neutral DAL DIS GLD SPY
net short IWM

Friday, June 27, 2014

Weekly: The Fun House Mirror

The stock market has a dip down mid-week then comes back to near unchanged. I found some intereting quotes from Bill Miller (ex-Legg Mason), Investopedia link.

>> Bill Miller writes:
"I often remind our analysts that 100% of the information you have about a company represents the past, and 100% of a stock's valuation depends on the future."

"The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."

As for my week, option expiration frees up some capital and I put some of it to work. Mostly, I open August positions in stocks I had already. One new long is Monsanto, which moved higher on news. Here is the recap

Fri Sell ASH Aug 95 puts @107.7. I open an August position in Ashland.
Sell VRX Jul 105 puts @127.7. I add to my long position in Valeant Pharma.

Sell MON Jul 120 puts @124.9. New long position in Monsanto. MON broke out earlier in the week from 122 on news. Decent chart support at the 120 level.

Wed I open August positions on Honeywell HON and Schlumberger SLB. I am already short July puts on both.

Sell HON Aug 85 puts @92.7. I step in to buy Honeywell on the third down day in a row.

Sell SLB Aug 97.5 puts @113.3. Schlumberger jumping on a better outlook.

Tue Sell SPY put backratios @194.7 consists of buying SPY Sep 178 puts, selling 2x SPY 173 puts for a net credit. This is delta positive trade (net bullish) with the possibility of a large profit on a decline to SPY 173. These backratios provide some downside protection on a modest decline, with the risk of large losses during a crash. If the market is up, I get to keep the small credit.

Mon Sell IWM Aug 105 puts @118.1. I rebalance my position in the Russell 2000 etf. I am still net short, but less so, after selling another batch of puts.

Sell JWN Aug 62.5 puts @67.7. Nordstroms downgraded this morning. I am a buyer and open an August position.

Sell AMGN Aug 100 puts @118.8. I open an August position in Amgen. Staying with one of my big winners for 2014.

Position summary:
net neutral DAL DIS GLD SPY
net short IWM

Saturday, June 21, 2014

34-5 Grade C+ underestimated the rallies

Thirty four winners, five losers for the June option cycle, grade C+. The rallies in gold and stocks were stronger than I anticipated. My trading account is up nicely for the month, but I lost some potential by selling calls and having to cover for big losses on the rally. 

As always, don't get excited by the high percentage of winners. I tend to take high probability trades where the profits are low. Those buying 10% chance of profit options are hoping for a 10-to-1 payout. I tend to take the other side, so the profits are tiny, the losses potentially large.

It is almost half way through the year. For calendar 2014, Amgen AMGN and Valeant Pharma VRX continue to be my two best trading stocks. The Russell 2000 IWM, Ashland ASH, Anadarko APC, Disney DIS, Gold GLD are some more winners. Losers for 2014 include: Gilead GILD, Boeing BA, Toyota TM, United Continental UAL.

Reviewing the signs of a stock market top (blog entry link1), none are present. The American Association Investors Intelligence (AAII) sentiment bullish reading is at 35%, dropping nine percent on a slight downturn last week (link2). Federal Express led the transports higher in a huge up week. Yield curve remains bullish. (An inverted yield curve, is the major warning sign of the bear, wiki link3.) While stock advisers are extremely bullish, the rank and file investors remain skittish, with many turning tail on a small decline. There was a recent article about stock ownership as a percentage of population being near record lows in the U.S.

The bearish argument includes valuations as measured by the Schiller PE10 or CAPE (ten year average of price earnings, wiki link4), record levels of merger activity, record levels of margin debt, some froth in certain sectors. The larger question is will there be time to get out when the bear comes? Odds are heavy on the yes side. There is almost always a warning shot correction, an oversold technical rally, before a big bear market occurs. The worst losses may tag those that buy that dip thinking it is finally their chance to get in, after missing most of the five year bull move.

The elephant remains the Fed and other central banks. While the Fed is tapering, the European central bank and Japan continue to pump money in. The bond market seems to have disconnected from forecasts and interest rates continue to be near record lows, despite open talk of short term rates going to 2% and then 4%. At some point the bond market prices this in. When will that be? Will it be an orderly exit? Or a mad rush? I don't know those answers. For timing, sentiment and charts tend to trump fundamentals. There have been so many calls of a bond market top, I side with the advice of "don't fire until you see the whites of their eyes." In other words, don't move the money (out of bonds, or to short the bond market), until there is clear evidence of rising rates.

As for gold, I am not that excited by the sharp rally this week. Short, sharp rallies often occur during bear markets. The strength in the gold mining stocks, GDX, is a positive, but it needs to continue for a while. Time and price are needed as evidence for the market to have turned. U-shaped chart bottoms tend to be rare, even though we did see a big one in 2009 in the stock market. I am not in any hurry to buy gold or silver. Whether an intermediate bottom has been found, only time will tell. At this point, I believe lower lows are likely. My money is still on a trading range for gold (short strangles, net neutral). Rising interest rates increase the costs of carrying gold.

Position summary:
net long DIS
net neutral DAL GLD SPY
net short IWM

Friday, June 20, 2014

Weekly: burning shorts

I did not expect the strong rally in gold, or the stock market. I took some losses on Thursday, otherwise a quiet week. This week's chart review of the S&P 100 only turns up four interesting charts: LLY LMT QCOM XOM

The trading summary is below and a monthly update will come in day or so.

Thu Three lumps of coal in my morning coffee, as I cover three short call positions for large percentage losses. As almost always, the percentages are eye popping, the dollar amounts relatively small. The margin requirements for selling naked calls and naked puts is substantial. I am reporting the loss percentages against the option premium collected, not the margin requirement. The glass full perspective is that my trading account is up for the week, and the month. Obviously I would be up more without these losses.

Rule #1 is live to trade another day. One way I do that is by taking losses before they snowball. Selling naked puts and calls is a financially dangerous game. The losses can go exponential. I tend to sell way out of the money options and close them out for losses if the strike price is crossed.

Cover short GLD Jul 128 calls @124.6. I cover short calls on gold for about a 200% loss. Gold rally getting uncomfortable, so I take my lumps and regroup.

Cover short IWM Jun 118 calls @118.1. The underlying crosses my strike price. The loss is about 400%. One could say it was a mistake to sell these calls for such a tiny premium. I take my lumps rather than rolling the dice on the next two days. I remain net short IWM, because I am short other calls.

Cover short APC Jun 110 calls @110.1. I take my third lump of coal for the morning, covering short calls on Anadarko Petroleum as it crosses my strike price of 110. It is another time to shake my head with a loss is about 200%, again, all three percentages are basis the option premium collected. The story here is unsubstantiated takeover rumors on Twitter helped drive APC higher and Iraq blew up again. Again, APC moves lower after I cover my calls. Not a good feeling, but these things happen. The cynical might say "they" drove it higher to take out the stops and then took it back down.

Tue Sell IWM Jul 108 puts @117.3. I rebalance my short strangles on the Russell 2000 etf. I add a bit of delta, but still am net short. The rally has been stronger than I thought it might be. Nearest short calls are June 118, which are too close for comfort

net long DIS
net neutral DAL GLD SPY
net short IWM

Saturday, June 14, 2014

Weekly: Wild fire in APC

The takeover rumor rally in APC Anadarko Petroleum causes me some pain. I was short strangles and the stock is near the short June 110 calls. I sold some July puts to hedge my position. Other highlights including covering short puts in BEAV BE Aerospace, hedging in DAL Delta Airlines. I rebalance in IWM the Russell 2000 etf and the move lower gets me to net neutral. 

The sentiment at AAII is getting to be a concern. Others cite a record high bullish reading among advisers at Investors Intelligence. Transports are moving lower. Interest rates have ticked up. So there are reason for concern. It isn't time to prepare for the big one, but a minor squall has been in the forecast for over a year now. Here is this week's recap:

Thu Sell DAL Jul 45 calls @38.4. Delta Airlines knifing lower. I hedge my short Jul 35 puts by selling some calls.

Wed Sell APC Jul 100 puts @108.0. Anadarko Petroleum up on takeover rumors. My short position in APC Jun 110 calls is deep in the red. I sell yet another layers of puts to reduce my negative delta, but my net position is short. It is a difficult situation. I weigh other choices such as buying back the calls and taking the loss, buying shares of stock to hedge the short call, or selling other puts at different strikes and expiration, before deciding.

Tue Sell GLD Jul 115 puts .25 @121.4. Gold showing signs of life with a small up day. I rebalance my short strangles back to net long. I am betting on a continuation of a narrow trading range between 115 and 128. In the big picture this is a narrow window, but in the short term gold is not moving.
Buy to cover BEAV Jun 90 puts .35 @93.9. BE Aerospace says it is splitting into two companies. I took my position on news that they were seeking strategic alternatives. The outcome was not a buy-out, so the stock drops. I get out with a small profit.

Sell SLB Jul 97.5 puts .30 @106.5. I open a July position in Schlumberger.

Sell IWM Jun 112 puts .22 @116.5. I rebalance my complicated position on the Russell 2000 etf. I am still net short. It doesn't want to go down.

Sell WFC Jul 49 puts .17 @52.5. I open a July position in Wells Fargo.

Position Summary:
net long APC DAL
net neutral AAPL GLD IWM SPY