Option mystery solved

Adam Warner has been writing about an option anomaly, a huge position in way out of the money options. Rumors started flying that someone had inside information about another terrorist attack and was using options to leverage their inside information. As with many wild rumors, and conspiracy theories, this wild rumor is unfounded. Turns out the trade was part of a package deal. If you are curious and well versed in options read about it here: link
Search for Dan Perper

My point is that wild rumors are easy to spread and easy to believe, and rarely are near the truth. Many newsletter writers take these rumors and half-truths (it is true that someone took that position), and twist them into stories to fit whatever they want to sell that day.

The long bond bell-wether

A bell-wether is a sheep that the flock follows. Some folks hypothesize that the long bond (U.S. Treasury 10 or 30 year) is a bell-wether for the other markets.

From TrueContrarian (link)
...long-dated U.S. Treasuries and funds such as TLT just touched their highest levels since May 15. Whenever Treasuries are setting new highs, it is just a matter of time before equities and commodities decline. U.S. Treasuries are an important vanguard of economic behavior...

(TLT chart)

Meanwhile, conventional wisdom is that a sharp decline on heavy volume followed by rally on low volume, often means the lows are going to be retested or broken. It seems I was wrong about my Friday blog entry--it wasn't too early to short. I thought the upcoming Labor Day holiday might bring an upward bias, and it still might, but it will be difficult to overcome the losses on Monday and Tuesday.

The recent market swings have been a bonanza for that tiny percentage of "hot" traders that have been in sync with the markets. Those traders, such as myself, that have been out of step, have gotten whipsawed or worse. A few that trade on full margin or use options for full leverage and also refuse to cut losses might be exiting the game for good.

Gold currents and cross-currents

From an article at Marketwatch on gold (link)

>>

Current catalysts for gold prices include: inflation, especially global inflation, geopolitical concerns, rising demand for gold, moves in the dollar and others -- in addition to the global financial crisis, said Dan Hassey, a senior research analyst for Boca Raton, Fla.-based Gold & Energy Advisor.

Some believe a lot of those factors are already in the price of gold and that's why gold has not moved much -- it's already doubled in the last five years with investors having anticipated some of these problems and bidding up the price, he said.

>>

Meanwhile back at the ranch, a good rally day for stocks (and gold). It feels too early to short, and too late to buy. Being on the sidelines during this decent rally is an uncomfortable situation. However, jumping in for the sake of doing something, just for kicks is rarely a wise move.

T-shirt: I sold at the bottom

I took a break from the markets and missed the huge Fed rate cut rally. The losses hurt, as does missing the super Fed rally. When a trader cuts losses, sometimes the turn happens right there and then. I'm sure some folks were smart enough or lucky enough to call the turn.

I start with a clean slate and will see what tomorrow brings.

Sell IWM (buy puts)

Buy back short IWM Aug 74 put.
It sickens me to do this one day before expiration, with premiums through the roof. However, IWM breaks the old low at 74 with some steam. This is more than a 100% loss vs. the premium. Remember, that I described this as a fat pitch down the middle when entering the trade. Seemingly safe trades can go terribly wrong, when the market makes big moves in a straight line for six days in a row.

I am all cash for now. Time to heal my nasty wounds and clear my head. Sometimes the best thing to do is take an extended break and then come back fresh.

Good luck to anyone still in the market. Mondo money is being made on the short side. Huge losses for longs. Hedgers are losing as volatility continues to expand.

Sell HANS Hansen

Sell HANS Hansen. I am taking my loss. There was one week worth of shorts when good earnings came out. That one week is over. Support at 45 breaking down in a serious way.

Sell DE Deere (buy back short puts)

Buy back short DE Sep 115 puts
Taking a big 100% loss on the value of the puts as the stock declines over five points in one day. I got this one wrong and am taking my lumps.

SP500 now touching the 10% correction milestone. Like the major indices, my trading account is now in the red for the year. Sigh.

I live to fight another day.

Another down day

Another terrible day for the longs. My positions take another big hit. So far this week has been the worst one of the year for me. My buying strength in a weak market is generating percentage huge losses. The good news is that positions have been hedged or small or both. I will live to fight another day. Right about now, my portfolio is battered and bruised, despite a huge cash position.

Positions: long HANS, hedged long IWM, DE

Buy DE Deere (Sell puts)

Sell DE Sep 115 puts. Deere higher on earnings, 115 is below recent support (chart).

Sell GRMN (Buy back short puts)

Sell GRMN (Buy back short Aug 95 puts)
I take a huge percentage loss on my short GRMN puts. The stock slices through support at 95. I can not justify risking another big down day before expiration. Someone is dumping the stock big time and I am a little fish being swallowed up.

Wednesday has been a rally day the last couple of weeks. We will see what tomorrow brings.

Long: HANS, hedged long IWM

Van Tharp on Trading Psychology

Van Tharp series of posts on Trading Psychology (link). Van Tharp has been working with traders for 25 years on overcoming their psychological obstacles and self-destructive behavior.

Monday saw an early rally give way to a flat day at the close. Sort of the opposite of Friday, which saw a weak open give way to a flat finish.

Dramamine or Tums?

That fat pitch I saw, turned out to be a nasty cutter. It is a sickening day for longs. The NASDAQ briefly touched break even in the morning. The last five minutes into close was weak.

Positions: long HANS, hedged longs GRMN, IWM

Buy IWM fund (sell puts)

Sell IWM Aug 74 puts
Market play on this morning's weakness. The 74 strike is four points out of the money, so the market would have to get really hammered over the next weak for these to be exercised. Strike price is below the previous lows. Not exactly swinging for the fences on this one, but it feels like a fat pitch down the middle.

Buy HANS Hansen

Buy HANS Hansen, small position

Stock gaps up on earnings report. Top line especially strong. Chart is nice, though it can fade back towards the base at 41. Options spreads are very wide, so it is more efficient to buy the stock. Products include Hansen's natural and Monster Energy drinks.

Buy GRMN Garmin (sell puts)

Buy GRMN, via selling the GRMN Aug 95 puts

Garmin is in a strong uptrend. I am selling the put where I would buy the stock on a pullback to the earnings breakout.

"Coffee house" portfolio

Mentioned at Marketwatch (link):

Bill Schultheis, a Smith Barney broker for thirteen years, quit and wrote a bestseller, "The Coffeehouse Investor," for people who wanted solid returns "without spending one ounce of energy" playing the market.

... he put 40% in bonds, creating a well-diversified portfolio. His "Coffeehouse philosophy" is so simple, just three principles:
1) Build a well-diversified portfolio,
2) own the entire market with low-cost, no-load index funds, and
3) develop a long-term financial plan and save regularly.

Really a good way to go for the average person. The percentage of bonds (or CDs/cash) would be less for younger folks (age 20-35), perhaps more for those closer to retirement. Personally, I'd suggest adding in a small percentage (3%) in hard assets such as gold and/or silver.

Meanwhile the market is moving, sometimes hard and fast. Big boys (and girls) are causing the wild swings, and the little guy (or gal) is often best off waiting until the dust settles. Those that are extremely nimble can profit on this intra-day swings, however, as readers know, intra-day timing is not my strong suit. To quote Clint Eastwood: "A man has to know his limitations."

The red line (200 day moving average)

The SP500 closes under its 200 day moving average (red line on chart). Some folks including Random Roger (blog) use this for long term timing. Over the long term this indicator has been one of the best. Sure there have been false signals, and periods where it didn't work. It is so simple, that many folks pooh-pooh it. As Marty Zweig used to put it: the trend is your friend, and with today's action, some would say the long term trend is now officially down.

I missed the boat

I missed the boat on the rally. If I had to buy it might be XLF Financial fund or BRKB Berkshire Hathaway.

If the rally continues, often a retest of the top is a good shorting opportunity. Most stocks have gotten hit. Some have not rallied off their lows.