Wednesday, September 30, 2009

3rd quarter ends with a bang

Wow, what a wild ride today. I want to attribute some of the wide moves to end of quarter window dressing, but can't back that up with facts and figures.

Gold has a huge $15 up day, seemingly mostly on the back of weakness in the dollar. I am tempted to get back in GLD, buying strength and selling weakness as I often do.

This is the best quarter for the stock market since 1998.

Long SPY

Tuesday, September 29, 2009

Buy SPY (sell puts)

Buy SPY via selling Oct 96 puts SPY at 106.40

Change of plans. More than a few stock market timers sold the tiny dip, so the odds of this becoming a serious correction seem slim. Here is the Mark Hulbert article at Marketwatch (link).

Puts are 10% out of the money, so worst case would be an exercise where I buy the hard dip.

Long SPY

Monday, September 28, 2009

More on gold seasonality

Here is another chart with 35 years of seaonality data (chart) at Kevins Market blog (link).

By time the short term low for gold projects into late October, even early November. By price, it is maybe $20 lower from current levels. Interesting. The 50 day moving average may also provide support, about $20 lower from here.

Stock market has a big rally to celebrate Yom Kippur. I have a notion to take a shot at the short side, but it is only a notion.

Flat-no positions

Thursday, September 24, 2009

Sell GLD

Sell GLD via buying back short Oct 94 puts

Sound the diving alarm, GLD going down fast. I bail out of the short puts for a decent profit. I warned about 9/24 expiration day for options on futures. I didn't expect this. I entered a limit order to get out of the vertical call spread on GLD Oct 99/104 for a loss, but so far it is not filled because the decline was so fast.

So still long one GLD position with a limit order to get out.

/edit to add: the second order got filled about half an hour later, so I am out for a 40% loss. The short put was about a 40% gain, but a smaller dollar amount, so a modest loss between the two trades.

Flat no positions

Tuesday, September 22, 2009

9/22 W.D. Gann day

There is an entertaining article about 9/22 over at Barrons (link).

>>
GANN DAY! It doesn't appear on any calendar, but Sept. 22 is known among aficionados of various and arcane market indicators as the day pinpointed by the late technical analyst, W. D. Gann, when markets are more likely to reverse than any other day of the year.

For some reason, stocks, commodities and currencies have a curious tendency to make major tops or bottoms on this day ...
>>

Long GLD (2 positions)

Saturday, September 19, 2009

3-0 for September, bull sighting

Three winners, zero losers for the September option cycle. The winners were short puts on IWM, and GDX, long vertical call spread on GLD.

In the weekend edition of the Wall Street Journal there is a graphic of a bear morphing into a bull, with a lengthy article from James Grant about how strong the recovery is going to be. Interesting to say the least, for those that have heard or read Mr. Grant's opinions before. To me, this is yet another reason for stock market bulls to be cautious.

Most of the sideline money is pouring into bonds, not stocks, so it may be that stocks have more room to run, even after a six month 55% rally without a meaningful correction, even as overbought as they are. Wow.

As always, for long term money, age appropriate asset allocation, reached with gradual and modest moves is the way to go. All-in or all-out moves, and betting the ranch, is the kind of stuff for 25 to 30 year olds with a good career and the likelihood of an ever increasing income. For the rest, it is rarely ever a good idea to go all-in or move all-out in one fell swoop. The odds of those kind of decisions being smart ones are exceedingly small.

Long GLD (2 positions)

Friday, September 18, 2009

Pushing the envelope

Bill Luby has an interesting article about exposure to new ideas (link).

>>
Keep pushing the envelope and don’t worry if new pathways look chaotic at first. The more you get out of your comfort zone, the more that zone begins to widen and the better you will be at recognizing important patterns and opportunities across that zone.
>>

I am almost in the other camp, that amateurs especially tend to try too many ideas, too many systems and fail at all of them. The phrase "stick to your knitting," comes to mind. Meaning, find what works for you, and stick to that until it stops working. That doesn't mean a person stops learning. It does mean that it is difficult for a person to change their basic personality or trading style.

If a person hasn't found a style yet, that is where trading journals can be of value. Log each trade, the reasoning behind getting in and getting out. Every now and again, look back at the logged trades. Identify the characteristics of the successful trades vs. the stupid trades, to help find a style that works for you.

As for the markets, GLD is settling back to 99.0 where I initiated the vertical call spread. One theory is that Wednesday's spike up in GLD was in part due to equity options expiring today. Lately, Wednesday before expiration is the day a lot of options get rolled over, causing wider swings.

Another day to mark on the calendar is September 24th when options on futures expire. The futures drive GLD, not the other way around. Usually option expiration moves fade, and are more like hiccups than anything else. Only the most nimble might try and trade these smallish moves, and that would tend to exclude folks like me.

Long GDX*, GLD (2)
*GDX expiring today

Wednesday, September 16, 2009

A tale of three options

My GLD position is:
short Oct 94 put
long Oct 99 call
short Oct 104 call

The 94 put is equivalent to a covered call position, long GLD, short the 94 call.

I entered the 99/104 vertical call spread when GLD was around 99.0. With a few days of time decay and a one point up move in GLD, the 94 call is up a good percentage, the 99 call is up a tiny bit, the 104 call down a smidge. Again, reinforcing the concepts that time decay works against the option buyer, that buying way out of the money options can be a tough game to make money at.

I mentioned the possibility of a short SPY position. I remind myself that calling top (or bottom) can be entertaining, but rarely profitable. The odds go up after a top is in place and to short the rally failure.

As for gold, looks like a three month bullish period with an upside target of $1150, 20% above the breakout point. Keep in mind that while September is the best month for gold, October tends to be flat to down, and on average October is the worst month for owning gold stocks. As always, the disclaimer is that I find seasonal patterns tend to be among the least reliable of indicators.

Long GDX, GLD (2)

Tuesday, September 15, 2009

Sell Rosh Hashanah

Back in the 1920s, the saying was the opposite, to buy Rosh Hashanah, and sell Yom Kippur. Like a lot of calendar trends, once it becomes widely known, it shifts. Since 2000, the average period between the two holidays is down 0.4%, with seven out of eight losers. Rosh Hashanah is this weekend.

SPY has reached the price target of 105. It doesn't look like a great short in here, but I may take a small shot on the short side. The up move in stocks has been a bulldozer, sweeping everything aside.

Long GDX*, GLD (2)
*GDX expiring this Friday

Friday, September 11, 2009

Buy GLD (vertical call spread)

Buy GLD via a vertical call spread Oct 99/104, GLD around 99.0 when filled.
long the Oct 99 call, short the Oct 104

This is five wide vertical so the cost is lower than a ten wide. ThinkorSwim software shows 50% chance of 103 being touched and that would be the first upside target. I do not see a need for a stop-loss on a vertical call spread.

Readers know that my trading style tends to be that of a "singles hitter," mostly low risk, low reward trades, as opposed to a "home run slugger" that takes on big risk for big rewards. This breakout in GLD is testing me. Greed and fear flow freely on these intraday moves. I remind myself that the trend is up, and the old cliche, the trend is my friend. That big moves tend to be rare, only time will tell if this is a big move, and that to take a shot at some bigger profits when my indicators are lined up.

Long GDX, GLD (2 positions)

Thursday, September 10, 2009

Buy GLD (sell puts)

Buy GLD via selling Oct 94 puts, stock at 97.28
This is more my cup of tea, selling options. Compare to the vertical call spread, selling puts has less upside, more downside, but time decay works in my favor. GLD acting relatively well. 94 is the break out point, and support.

Long GDX, GLD

Wednesday, September 09, 2009

Sell GLD (sell vertical call spread)

Sell GLD via unwinding the vertical spread, selling the Oct 95 call, buying back short Oct 105 call.

They turned up the heat, and I got out, when GLD broke support at 97.

A 40% profit is nothing to sneeze about, but remember my comments about taking “small” profits on long option positions. I had trouble with my Internet access today, and that added to my concerns. Another down day for GLD and all my profit might have melted away. The psychological damage of letting a decent winner turn into a loser, is something I like to avoid.

Yet another factor is that sentiment seems to have gotten a bit more bubbly over at Kitco Commentary (link).

Overall, I didn't stick to my plan of using the time stop. I could have held on a bit longer to GLD 96.30 or so and still eeked out a tiny profit, but I chose not to cut it so thin.

Long GDX

Tuesday, September 08, 2009

Gold $1000, now what?

Gold futures broke $1000. Now what? Well, I already wrote that a time stop for the GLD trade set to Friday 9/18 seems like the best move. My first price target would be GLD 102/103 and I would be tempted to roll up as a good deal of the potential profit from the 95/105 vertical call spread would be achieved by that price. To stay long, would require action.

Peter Brimelow at Marketwatch writes that gold timer sentiment remains tepid (link).

Breakouts into resistance like this one are often the best moves. An average move from a breakout is 20% or about $1150. With sentiment the way it is, I would guess that this will be more than an average move. As always, no advice given here, sometimes the odds are good, but the trade doesn't work out.

Long GLD, GDX

Saturday, September 05, 2009

Time stops vs. price stops

The employment report turned out to be a non-event. I did place a early morning order to sell puts on SPY, but got cold feet, and canceled the order. Too bad because it would have been a good trade for the day, as SPY rallied strong after a flat morning.

Anyway back to the subject line, time stops. I am thinking to let my GLD vertical call spread run until Friday 9/18, and then see how it looks. This is using a "time stop" as opposed to the much more common price stop loss. Another commonly used stop is a trailing price stop, to get out if the trade reverses by a certain amount off the high.

The reason for the time stop, is that I think that the action in GLD might get wild and wooly and my usual impulse is to cash in for a small profit, or get whipsawed out (like the last time GLD broke out and went from 70 to 103). The problem with settling for small profits when buying options, is that 66% or more of the trades will tend to be losers. So the 33% winners have to be big winners to make up for the low percentage. I can also use the time stop, because on a vertical spread, the risk is defined, no matter how badly GLD does. Let me caution that a trader will not last long using time stops when risk is unlimited and leveraged (eg: trading futures on full margin).

As for the math of option profits, for example, if a person doubles their money 33% of the time, and loses everything the other 67% of the time, they will lose overall. Basically the person puts up 3 dollars and only wins 2 back. The math is why I usually prefer to sell options and have the odds and time decay work for me, instead of buying options. If a person loses that often, the winners need to be 200% profits to break even.

I signed up for another option seminar. This one by optionseducation.org (link). They also have online tutorials. I am sure some readers have a difficult time understanding some of the option talk. There are a lot of variables. I have always liked options, the complexity suits my mind. I would guess that maybe 5% to 10% of investors have a mind that likes options. I've met any number of investors that can deal with the rest of it, the financial reports, doing research, but are totally bewildered by options. There are not for everyone.

Have a good weekend.

Long GLD, GDX

Thursday, September 03, 2009

Buy GDX (sell puts)

Buy GDX via selling the Sep 38 puts, stock at 44.14. Strike price of 38 is the breakout point. Some may question why I am increasing my gold position, instead of hedging my profit. This move looks the real McCoy. Seasonality, sentiment, technical, fundamental indicators are all lined up to the bullish side. Of course that doesn't guarantee a winning trade, but a trader sometimes might wait for months or years for everything to line up like this. When that time comes, take a shot.

Long GLD, GDX

Wednesday, September 02, 2009

Buy GLD (vertical call spread)

Buy GLD via buying a vertical call spread

Spread consists of: Long Oct 95 call, short Oct 105 call, with GLD around 94.69

GLD moving up, nice looking pennant, moving up through resistance, textbook chart. I'm doing a vertical spread to protect against downside. Pennants sometimes break to the downside. Selling the 105 call helps a bit with cost and time decay on the October options, while giving up the upside if GLD goes higher than 105.

Long GLD

Tuesday, September 01, 2009

Market needs a hero

Today's market action brings to mind the Bonnie Tyler song "I Need A Hero" (youtube link).

Readers know that I am more likely to wait for the dust to settle then to initiate trades in a fast moving market. So on days like today, someone else can try to be the hero.

There is an employment report this Friday. If the sell off continues into anticipation of that report, that might be a good place to take a stab at the long side.

I am still processing some of the information on option strategies from the Saturday seminar. I have thoughts about doing bear vertical put spreads out to December. I wrote about the worst ever September being a 12% decline. Looking three months out, instead of one month, the average decline from summer high to fourth quarter low is 9.8%.

For now, I am standing aside.

Flat