Sunday, August 30, 2009

Adventures of Captain "One-Lot"

More from the Saturday ThinkorSwim seminar...

Captain One Lot is a not-so-nice nickname, for traders that do complicated option strategies on one lots (one option per leg). I am thinking it might come from the OEX pit days.

In the seminar, Don Kaufman outlines iron condors with his preferences, 2 dollars wide, 66% chance of success, 4 to 10 weeks out, five lot size (five options per leg). He goes on to add, that you probably can't make money doing one-lots because of commissions.

The commissions would be about $12 for a trade that best case grosses $65 and usually has to be taken off. So do the math, $65 - $12 - $12 = $41, equals not much profit, considering 33% of the time a person is likely to lose $135. Win $41 twice and lose $135 once, over and over again, and it is like selling rolls of nickels for $1.30 and making it up on the volume.

So what is Captain One-Lot to do? The initial reaction is to forget about the Iron Condors. The next thing to think about is increasing the size (which is a bad idea for most traders). Another idea is to widen the spread, and/or go out further in time. Look for the same 66% chance of success, increase the credit to the account so the commissions become more manageable.

Going to 5 dollars wide, perhaps 12 to 16 weeks out, with a credit of $170 per unit, and $12 commission increases the chances of actually making money. Yes, the dollar risk is greater, now up to $330 loss per unit. However, this is NOT the same as tripling up on size. At first glance it might appear that way, however, in the black swan scenarios of early exercise and assignment, a trader still only has one unit, one manageable SPY lot to deal with. The black swans are what one worries about.

Again, why iron condors? It is non-directional or delta neutral. Time decays works for you, you make the most money if the stock doesn't move at all. The risk is defined and limited. It is capital efficient, put up $330 to potentially make $170 on a high winning percentage trade. Compare that to what I often do, out of the money, naked puts. I might put up $620 to make $15 on a $60 stock, with more risk if the stock drops. A buy-write person might put up $5800 to make $150, with the entire $5800 at risk if the stock drops to zero. So the potential return on capital on the iron condor, with defined and limited risk, is a powerful lure to the professional trader and one reason it is such a popular strategy.

Saturday, August 29, 2009

ThinkorSwim seminar notes

I attended a free ThinkorSwim seminar in Los Angeles today. A few notes:

* The word on the street is that most pros are short. When instructor Don Kaufman was asked at break time, when he thinks the market is going down, Kaufman quipped "six weeks ago."

* ThinkorSwim preaches defined risk, and having time decay working in your favor. For covered calls, the calls are sold with 4 to 10 weeks of time at deltas of 30% to 40%. Roll the call position with 4 to 10 days left.

* A good deal of time spent on Iron Condors, a delta neutral strategy where time is on your side. For SPY Kaufman prefers two dollars wide, again with a 66% chance of success. If this kind of option talk is all Greek to you, you probably aren't authorized to do these option spreads (you have to request that level of trading).

* Options on widely traded liquid stocks such as SPY are almost always priced correctly. The big firms have computer programs that sniff out mispricing and will quickly put prices back into line when the programs find an opening.

* Next on the horizon for ThinkorSwim customers is Prodigio, software that will automatically place real money orders based on user selected criteria. The user can set up a trading system, it can be simple or extremely complicated, and then lets the program run the money. It is kind of scary to think about that kind of future, but it is coming soon to a computer near you.

Friday, August 28, 2009

Barrons on lower CD rates

From a Barrons column titled "Deflation also hits investors." (link).

>>
Consider a widow left with $500,000. She might have earned $20,000 from 4% certificates of deposit issued last year by troubled (but federally insured) banks. When they mature, she'll be lucky to get 1%. That translates to a $15,000 income cut, which likely translates to some serious belt-tightening.

At a 4% yield, she could have drawn down her nest egg by $35,375 a year for 20 years. At a 1% yield, her annual draw would have to shrink by nearly $8,000 a year, to $27,433. If she maintained her $35,000 rate of withdrawal, her nest egg would be depleted five years earlier if she earned 1% instead of 4%.

The impact isn't restricted to retirees. ...
>>

If you are reading this blog, odds are that you are sophisticated enough to find alternatives to bank CDs. The article covers some of them, and still reaches the conclusion that "there's no easy way out." If a person goes for more risk, they are risking principal. If they go for longer maturities, there is the rate change risk, inflation risk. If they stay in short term, safe investments, the yield is next to nothing.

A large group of Americans do have the bulk of their money in bank CDs. The economic effects of the lower yields, lower retirement income, are going to be felt. Folks that depend on interest income have a lot less to spend. A lot of those folks give some of their money across the generations, so it has a wide ripple effect.

As for the stock market, I got shaken out of IWM by the intra-day sell off. Flat isn't the worst place to be. It gives a person a perspective, and a clarity that often can get clouded when a person has open trading positions.

Flat

Thursday, August 27, 2009

Sell IWM (buy back puts)

Buy back IWM Sep quarter 47 puts, stock around 57.47.
One of my rules is: “Never let a profit turn into a loss.” So, I am taking my small profit and running from today's decline.

Readers might say that there are times I have bent the rule, this time I am sticking to it.

Flat

Investors Intelligence, bears below 20%

In a Marketwatch article there is this:

>>
The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, said the portion of positive stock advisers jumped to 51.6% in the past week, the highest since December 2007.

Bears fell to 19.8%, the first time since October 2007 that the percentage fell below 20%. ...
>>

Sentiment tends to be one of the better indicators at calling turns. I still tend to think any stock market decline, or at least the first leg of any decline, will be relatively mild.

Long IWM

Monday, August 24, 2009

Market looks tired

The stock market rally looks tired. I think it is still too early to be actively shorting. The higher percentage play tends to be to wait for a top to show itself and then short the first reaction rally after that top. There isn't a top yet, much less a rally failure off the top. While a lucky few traders will short at that exact top of this rally, I am unlikely to be in that group.

With all that, I think it is a reasonable time to take some profits, or take some money off the table for the intermediate and long term.

If I had to guess, there is a still a bit of gas in the tank to propel the stock market higher, but not by much. So the bottom line: short term flat to higher, intermediate term flat to down, longer term looks less promising.

Long IWM

Friday, August 21, 2009

6-0 for August

Six winners, zero losers for the August option cycle. I was bullish, but no where near as bullish as the actual stock market action. I was actually hoping for a bit more downside action so I could add more longs at better prices.

My trades for the August expiration cycle were all low risk, low reward trades. I had several guppy size profits, one even a baby guppy, and a couple of minnows.

6-0 is my best month of the year, so I'll take it. The winners were: CELG, INTC, IWM, XLE, MTB, AMGN. I spoke to a buddy of mine about my cautious trading, and he told me to "keep pecking away." It is better to have small winners than some possible alternatives.

Cheers.

Long IWM September quarter

Wednesday, August 19, 2009

Buy IWM (sell puts)

Sell Sep Q 47 puts, stock around 56.13
I already have a position in IWM. My August option positions are close to delta zero, meaning that if the rally continues, I have zero participation. I sell the September quarterly put that expires last day of September, at the chart support strike of 47.

If the IWM Russell 2000 falls below the strike by end of September by that time, I would take delivery and go long the stock. Like I wrote in an early entry, even if September 2009 is one of the worst Septembers ever, that would be a 12% decline. With IWM at 56, a 12% decline would only get us to 50.

Long INTC, IWM, XLE, MTB, AMGN
all expiring this Friday

Long IWM September quarterly option

Monday, August 17, 2009

Three bears: Value Line, Crawford, Eliades

Three more bears are sighted over at Marketwatch. Bear #1 is Value Line (link1). The other two are Arch Crawford and Peter Eliades quoted in this article (link2).

For now, I am steady on the wheel, hopefully safe into harbor this Friday expiration. For now, I think any decline will be modest (5% to 12%) and may be an opportunity to go long, or add to longs. As always, predictions can be entertaining, but the trading money is made by making and executing trading plans, right sizing of positions, managing the risk.

Long INTC, IWM, XLE, MTB, AMGN
all expiring this Friday

Saturday, August 15, 2009

September is the worst month...

Kate Gibson at Marketwatch quotes Art Hogan at Jeffries & Co. with five reasons to be cautious (link).

>>
1) September is historically the worst month...
2) The market has had a significant run up from its March 9 lows, up about 50%...
3) Insider selling...
4) Short interest is winding down...
5) The consumer in general...
>>

The more I read and hear about all the reasons for the stock market to go down, the lower the odds of a significant down turn. Let's take #1 on the list, September is the worst month. If every trader knows that and trades on it, most will jump the line and sell in August. Because of that, I see a quick and sharp sell off as a buying opportunity, SPY 95 would be a decent entry.

The reason seasonal indicators are not that reliable is because once they become widely known and proven by statistical backtesting, traders will jump the trade and mitigate the effect. If every trader and their brother is looking for a smash down in September, the event becomes less likely to happen, and mid to late August become more vulnerable.

The stock almanac gives these nuggets:
* average September is -0.7%
* worst September -11.9% in 1974
If we get an average September it would add up to be like the Friday we just had, Dow down about 70 points, SPY down 0.7, for the month. Even if we get another worst ever month, if we start here, SPY moves from 99 to 87, Dow 9300 down to 8200. Lower numbers than that would be a once in a lifetime kind of event. That doesn't mean it can't happen, but the odds are low, and readers know that I like to bet with the odds in my favor.

Friday, August 14, 2009

Sell CELG (cover short puts)

Sell CELG via buying back short puts to close
Buy CELG Aug 47 puts (to close)

CELG was down a tad early in the day, and I placed the order then. Got filled just before the close, with the updraft for a teeny tiny profit. I reduce my possible long exposure if by some chance the stock market breaks down completely next week. I don't see that happening, but that doesn't mean it can't happen.

Long INTC, IWM, XLE, MTB, AMGN

Wednesday, August 12, 2009

Prechter: March lows will be broken

Robert Prechter of Elliot Wave International is making the rounds with a prediction that the bear will be back and the stock market will take out the March 2009 lows (Yahoo link).

For those who are not familiar with the name, Prechter became famous for some similarly bold stock market calls in the 1980s. Back then he was named timer of the year twice. I am seeing mixed information about Prechter's current record. Wikipedia is saying it is poor, but I remember reading a more reliable link (anyone can edit Wikipedia entries) saying the recent record was quite good, but can't find that now.

Anyway, it is a big name, a person with experience giving his opinion.

Fed just announced, no change in policy, as expected. For now, I am mostly looking to sit tight, hold on to my open positions until expiration on the 21st.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Saturday, August 08, 2009

Don't worry, be happy

The lead article on Marketwatch is "Rally Too Much Too Soon?" (link). With that kind of lead after a 113 point Dow up day, I think of that old song "Don't Worry Be Happy" (YouTube link).

Those that are most unhappy are the bad news bears, or those that keep calling "top." Like I have always written, calling top (or bottom) can be a fun game, but it is rarely profitable. Unlikely as it may seem, I still believe that there is a large group that missed the entire rally off the lows, and didn't get back in on the recent modest pullback.

Of course there is a top out there, however, just going on headlines, it isn't here yet, the market rarely complies like that. It is like a Catch-22, we can't get a top, if people keep calling top. If pundits stop calling top, we might get a top.

With all that, in earlier blog entries, I mentioned SPY 105 (currently 101.2) and late August as a possible price and time. Expiration Friday is August 21, the stock almanac says that the last week in August can be a doozy on the downside, and that September and October can be volatile as well. So as the time gets closer, I will be on my toes, even though for now, I believe we have about two more weeks for the Bobby Mcferrin song.

Thursday, August 06, 2009

Kahn: correction is near

Michael Kahn writing for Barrons, points out two sentiment indicators that may mean the much anticipated correction is near (link).

>>
Last week, the American Association of Individual Investors survey reported that 48% of their members polled were bullish while only 31% were bearish. Historically, the average bullish and bearish readings are 39% and 30%, respectively, so this does present a somewhat unusual optimism on stocks.
>>

Add to that a major stock analyst calling for another 10% up, and that is another piece of the puzzle in place. With all that, the rally isn't going to go without a fight. There is enough steam built up to mitigate any immediate sharp downturn. Resistance often becomes support, so I expect SPY 95 to offer support on the way down.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Monday, August 03, 2009

Romantic notion of selling at the top

Bears get rolled again, as the stock market keeps rolling onward and upward. Many traders, more so novices, but many veterans as well, have this romantic notion that he/she can call the exact top and get out at that perfect time.

Readers know that calling the top, or the bottom is something only a few successfully do, at least those that trade real money. Armchair pundits and paper traders often seem to nail the exact top or bottom. In hindsight, the game is easy, in real time, only a few even try to do it. Most are content with 80% of the move, or to scalp for a few dollars where they can.

Long INTC, IWM, XLE, MTB, CELG, AMGN