Monday, September 29, 2008

Sell GS (buy back short puts)

Sell GS via buying back short Oct 70 puts

Panic! Blood in the streets after House vote thumbs down on the bailout bill. The bill has failed. Some serious arm twisting went on trying to garner more votes, but as of this writing the bill has failed.

I am following my trading rules and covering for a big loss, as much as I think something will be worked out, if not today then tomorrow. I typically set a mental stop at a 100% move against me on the option premium. With the fast moving market, the GS puts are a bigger loser than 100% (on the premium amount). Still, it is a relatively small loss in dollar terms. This loss puts me at about break even on my short term trades for the year. I think a lot of folks would be happy to be break even for 2008, though of course, a tiny percentage has timed the swings well and made hay. A larger group is likely wiped out entirely, especially those that tend to double down when the market moves against them.

I do not see this as a time to be the hero and stand against the tide. Little fish tend to all get swept away when they go against the tide. It certainly isn't a low risk time to be short, or to be buying puts either. Position traders like myself are too slow moving to react when the market is swinging widely.

No trading positions

Thursday, September 25, 2008

Buy GS (sell puts)

Buy GS via selling Oct 70 puts, 65 points out

Betting with Buffett that GS will muddle through and not crash and burn.

Positions: long GS

Wednesday, September 24, 2008

Buffett and Goldman Sachs GS

The headline story is about Buffett taking a $5 billion stake in Goldman Sachs. As is often the case, Buffett is getting a special deal that other investors would not get. Still, with the halo effect, it makes it much less likely that Goldman will go the way of Bear Stearns or Lehman Brothers. While $5 billion sounds like a big bet, but Berkshire was looking to invest $20 to $30 billion and is worth about 400 billion.

No trading positions at this time

Friday, September 19, 2008

3-3-1 for September cycle

Three winners, three losers, one break even trade for the September option cycle that just ended. Unfortunately, the three losers were far, far larger than the winners, making for a small loss. Everyone of the trades that I bought back would have been winners had I held on through expiration. The catch is that the draw down would have been terrible, both in terms of dollars and emotional drain.

FDX, GLD, USO all come home safely, after the fox got into the hen house and killed off MCD, BUD, SPY, with AMZN a break even. USO was the only short play, all others were on the long side. Given that, and the beating the market took, it shows some discipline to come out of this month with only small trading losses. Yes, some folks made profits, some made big profits, however, a lot of players suffered catastrophic losses by taking on more and more risk as the market moved against them. A few are wiped out, never to return.

As always it is easy to trade in hindsight. If someone knew the Dow would rally a full 1000 points off Thursday's low, it would have been shooting fish in a barrel, both on the long and short side.

Monday is a new day. Starting flat with no positions has a calming and clearing effect, and one reason I like options. There is often a new start after options expiration Friday.

Thursday, September 18, 2008

Ban on short sales in England

From Marketwatch (link)
>>
Britain's financial regulator, the Financial Services Authority, on Thursday banned short selling in financial stocks after a week in which its top mortgage lender, HBOS, was pushed into a merger after its share price tumbled.
>>

Those in charge have decided to change the rules. This won't be the first time, and will not be the last time.

Wednesday, September 17, 2008

More Bananas

Another round of bananas for the stock market. Gold had a huge up move. My tiny position in GLD is a modest consolation prize.

As I always write, it is rarely ever a good time to be making "all in" or "all out" decisions. Fast moving markets are almost always a high risk time for decision making. There is almost always a lower risk time to get in, after the dust has settled. For traders, it is a good idea to trade smaller or take a break after a losing streak. For long term investors, dollar cost averaging and age appropiate diversification, will almost always produce better results over the long term than market timing and jumping in and out. Trading is real easy in hindsight, not so easy in real time (like I post here).

I am limping into Friday option expiration, battered and bruised, hoping my remaining short options expire without incident. I am reluctant to do any new trades until calmer waters flow into the maelstrom.

Positions: long FDX, GLD. Short USO
All are short options, expiring Friday 9/19

Tuesday, September 16, 2008

Sell BUD (buy back short puts)

Sell BUD via buying back short Sep 60 puts

FUD (Fear Uncertainty Doubt) on BUD. Yikes! BUD stock tumbling down on unsubstantiated rumors that the deal may fall through. I HATE to do it based on pure rumor and no news, but I cover my short puts for yet another huge percentage loss. I don't want to take the chance on real news resulting in the stock gapping down another $5 or $10.

What a lousy trading week it is has been so far. My trading losses are for small dollar amounts thanks to my chicken-ness, but I feel like I have been put through the ringer. I am sure many other traders feel the same way. I am sure that a small group are still finding ways to make money, however, a larger group is likely getting margin calls as the wide market swings continue.

Positions: long FDX, GLD. Short USO

Monday, September 15, 2008

Sell SPY (buy back short puts)

Buy back short SPY Sep 116 puts

I am taking my lumps and my loss. Again, there is some hesitation as to wait until a close below 121, or to cut and run now. Another huge percentage loss, but again, a smallish dollar amount.

Positions: long BUD, FDX, GLD. Short USO

As always, fast markets are a hazardous place for position traders

Sunday, September 14, 2008

Nusbaum: people like making big bets...

Most old timers have seen this over and over, folks making big bets, getting in way over their heads, and often resulting in big losses. These bets might be on sectors, or individual stocks, or using leverage in the form of margin and/or options. Some folks seek esoteric and complicated explanations for market movements, when they would be better off trying to grasp the basics.

Roger Nusbaum writes the following

>>
For some reason people seem to want to make big bets, do things that are very complicated (relative to their experience or the time they are able to commit to their portfolio) and allow emotion to do them in.

Investing does not have to be complicated. If you are a lazy portfolio person then you already understand simple.

If you make sector decisions then realize you are starting to take on risk when you let any sector get bigger than 20% of the portfolio.
>>
(blog link, search for September 14, 2008 entry if you are reading this later)

Again, for the average person, the average investor, getting an average price by dollar cost averaging, and diversifying in various asset classes, are likely to produce far better long term results than making big bets.

Thursday, September 11, 2008

Buy SPY (sell puts)

Buy SPY via selling Sep 116 puts (7 points out)

Another low risk, low reward trade. I am encouraged that SPY has gone positive. Support at the old lows near 121.

Long BUD, FDX, GLD, SPY. Short USO

Buy GLD (sell puts)

Buy GLD via selling the Sep 66 puts

GLD near my buy range target of 72.5. Selling these puts are a low risk, low reward shot on the long side. No need to cover my USO position because it has moved so far out of the money, it almost surely will expire worthless.

Positions: long BUD, FDX, GDX. short USO

Wednesday, September 10, 2008

Buy FDX (sell puts)

Buy FDX via selling the Sep 75 puts

Fed Ex out with good earnings. I am still mostly in "chicken" mode, so am selling the puts 12 points out for a small premium, trading off the lower risk for the lower return.

Positions: long BUD, FDX. Short USO

Elsewhere, oil continues to lead most commodities lower. Given the price action, I keep looking for signs of a panic bottom, but it doesn't seem close in time. As long as newbies continue to step up and buy precious metals, odds favor lower prices.

Tuesday, September 09, 2008

A look back to June 23

At this time, lots of trades look attractive. However, I remind myself, that I am out of synch with the markets right now, and that many times the best thing to do is nothing. There will be better days, better opportunities, than just doing something out of boredom. To put it in plain terms, I am still a chicken.

Back in June, I wrote about big premiums skewed to one side for GLD and SPY. The small time punters were leaning heavily towards bets on the SPY crashing and GLD going through the roof. I admit that to my surprise, for a short time after that blog entry, SPY did tumble down and GLD did spiral up. However, like so many gamblers that get ahead by a small amount then lose that gain, plus everything they have, those option buyers paying the big premiums that are still holding are now in a total loss situation.

Going back to June, those buying the options highlighted as poor value, the SPY Sep 110 puts and GLD Sep 103 calls, have lost virtually everything. There was a brief time when both those options were up big, but as expiration draws near, all the money is gone.

>>my entry from Monday, June 23, 2008
Sentiment and option pricing

On Friday I mentioned that puts are priced higher than equivalent calls on SPY. For example, today the SPY closed at 131.45.
Sep 120 put is bid 2.18, the Sep 110 bid 0.85
Sep 143 call is bid 1.21, the Sep 153 call 0.12

So the put 11 points out of the money costs almost twice as much as the call. The put twenty-one points out is six times as much as the call that far out. Six times! What does that mean? It means that option buyers and sellers are pricing in the probability of a big drop in stock by September, with minimal chance of a big rise.

Options on GLD show the opposite expectation. With GLD closing at 86.86
Sep 76 put is bid 0.65, the Sep 70 put is bid 0.20
Sep 97 call is bid 1.60, the Sep 103 call is bid 0.90
>>

Saturday, September 06, 2008

Sector glance ETFs year to date

These numbers may be off a bit, as I took them from eyeballing charts, looking at Jan 1, 2008 to present. These are only a few sectors and a few ETFs.

+2% TLT* Treasuries
+2% RTH Retail
unch XHB Housing
- 3% XPH Pharmaceutical
- 7% IWM Russell 2000
-11% XME Mining stocks
-14% VTI Total US stock market
-15% EWJ Japan fund
-15% XLE Energy stocks
-17% SPY S&P 500
-28% EWG German fund
-32% GDX Gold mining stocks

* Treasury fund paid another 2 to 3% in dividends.

At the start of the year, how many would have imagined that Retail and Housing stocks would be two of the better sectors, and that German and Gold mining stocks would be among the worst.

It has been a frustrating market for me the past couple of months. However, I am basically treading water on my short term trading. I can claim that as a moral victory even if some are making big money on the big swings. It sure beats betting the farm and losing, like those over leveraged in European stocks, and in gold stocks.

Positions: long BUD, short USO

Friday, September 05, 2008

Sell MCD (buy back short puts)

Sell MCD via buying back short Sep 57.5 puts

I am taking my lumps, a big percentage loss on these puts, though a small dollar amount. Support at 60 is now broken. I consider waiting for a close below 60, but decide to cut and run here.

Positions: long BUD, short USO

Thursday, September 04, 2008

Bolling on the urge to get even

With today's down day for the stock market, it may be useful to read Eric Bolling story (link) about the urge to get even, posted on TheStreet.com.

>>
I foolishly decided to defend my position. (That's a very bad idea, as no one is bigger than the market -- a golden rule to successful traders). As prices tumbled, I added to my long positions, assuming that I would need only a small bump up in price to "get back to even."

...

The main point: Trading bigger positions in a bad trading market is ill advised. In markets that move in percentage points and turn on a dime, we should be trading smaller.

I am not saying to close shop, just trade small positions so that you can get out quickly and live to trade another day.

>>

Every one of us is human. The urge to trade bigger, trying to get back to even is strong. There is something about the break even point. I am taking some lumps in this market decline, and it is useful to remind myself to trade smaller, not bigger when the market is going against me. The alternative is to be defiant and as in Bolling's story, continue to double up, until a relatively small move can wipe you out. Those traders foolish enough to do that, usually exit the game sooner rather than later.

Positions: short USO, long BUD, MCD

Tuesday, September 02, 2008

XLE and USO divergence day

Wow, another roller coaster day, with a huge stock rally at the open reversing for a lower close. Hurricane Gustav did not live up to advance billing and oil tumbled, taking most metals with it.

An interesting divergence for the day, with XLE an oil stock ETF closing near its lows, while USO the oil ETF rallying well off its lows. I don't trade oil often enough to reach any conclusions, but thought it worth a mention.

Positions: short USO, long BUD, MCD