Saturday, October 31, 2009

Barrons: Appetite for risk

Some interesting stuff over at Barrons about the appetite for risk (link).

>>
This UBS gauge combines equity- and currency-volatility measures; credit spreads; and investor preferences for higher-risk geographic regions, like emerging markets, and stock sectors, like cyclicals.

... by late October, the fear of being out of the market had replaced the fear of being in the market

... readings [on the UBS indicator] higher than 1.3 points above the mean, suggesting high risk appetite, have given its best sell signals. Since 1992, equity returns 12 months from such a reading are just 1% on average. In 2009, the figure began moving above 1.3 in September and hit 1.56 on Oct. 23, the latest data available and the highest point since March 2000.
>>

This is a red flag for stock market bulls, though up 1% for the next 12 months would not be so bad after what the market has been through.

Changing the subject, my schedule is changing, and I will have a little less time for trading and blogging for the next two months. If there aren't as many blog updates or trades, the schedule change is one reason why. It is also a contributing factor to closing the AAPL trade instead of holding on.

Long GLD

Friday, October 30, 2009

Sell AAPL (cover short puts) - expensive lesson in Greek

Sell AAPL via covering short Nov 170 puts, stock around 190.1. This was one of my worst trades of the year, over a 200% loss on the value of the option, though still a modest loss in dollars.

I am tempted to hold on, but obviously I made a mistake entering the trade. Best to eat the mistake before it eats me. There is always the chance that AAPL finds support here at 190, but an acceleration to the downside could turn a bad trade into an account devastating catastrophe.

This trade was an expensive and painful lesson in theoretical pricing and option Greeks. Implied volatility didn't move lower after the earnings report, like it has in prior quarters. Delta never did kick in on the rally to 206. Theta (time decay) kept showing a big number every day, but never helped much either as volatility picked up. Ouch. This article at option trading pedia has basic definitions of the option greeks (link).

Long GLD

For every buyer there is a seller

This weeks stock market action brings that old cliche to mind: "for every buyer there is a seller." Two of the bloggers that I read were on opposite sides, the VIX guy was buying the dip (link1), the momentum guy shorting the same market move (link2).

Add the GDP report that came out first thing Thursday, and it was a spicy mix. In this case, the news broke well for the bulls, and poorly for the bears. Next time it might be the opposite and result in a 200 point down day instead of 200 points up.

Personally, my style tends to be to wait until the news is already out and then to trade off support and resistance levels once the dust has settled. I'll look at moving averages, chart formations, sentiment indicators such as VIX, seasonal tendencies, and news.

Changing the subject, it looks like I may have covered my short GLD puts near a low. That kind of event is a necessary consequence of a trading style that cuts losses. It would be terrific to always be right and never have to take a loss, but that is an unrealistic pipe dream for a position trader.

Long AAPL, GLD

Wednesday, October 28, 2009

Sell GLD (cover short puts)

I lighten up on GLD by buying back one of my short puts, GLD Nov 91, for a break even profit. I follow my rule “never let a profit turn into a loss.” The remaining short put is GLD Nov 92 and that is now at a small loss after commissions. Probability for the remaining position is 7% chance of a loss if held until November expiration.

AAPL continues to fade, support at 190 (currently 193, I sold the put at 200). AAPL has been a frustrating trade so far, because time decay (theta) and delta never did kick in for me like I expected it would and the theoretical pricing model indicated after the earnings announcement.

Long AAPL, GLD

Tuesday, October 27, 2009

Wind ebbing from the gold sail

Mark Hulbert via a Nadler article at Kitco (link)

>>
...from the viewpoint of contrarian analysis, gold no longer had strong sentiment winds blowing in its sails.

... the easiest money in gold's rally is now behind us." Ominously, gold timers on average are no less bullish today than they were in mid-October, despite the recent hiccups. The average recommended gold-market exposure among a subset of short-term, gold-timing advisers currently stands at 53.8%, unchanged from where it was on Oct. 15.

That exposure level is right in line with where gold exposure stood on each of the previous occasions over the last two years in which gold's rally failed.
>>

The low bullish readings on gold timer sentiment is one reason I took long positions in GLD, so it is worth noting. As always, sentiment is one indicator out of many to consider.

Long AAPL, GLD (2)

Is this the correction?

Is this the much anticipated correction that so many traders have been waiting for? I lucked out by mentioning the "time is up" top of Wednesday (10/21/09), last week at SPY 110, nailing it to the exact day.

I didn't take the trade because I don't like playing the "call the top" game and in my trading history, the odds of success tend to be low. My view did caution me in to having equity few longs, and those few are way, way out of the money (the 5% probability of losing trades).

Okay, what next? I see a possible decline to SPY 102 and then a relief rally. Depending on what that rally looks like, it might be the high probability short on the rally failure that I have been writing about.

I am taking on some water on the underlying for AAPL and GLD, but those option trades are still in the 5% chance of losing, so I will hold for now. I may roll one of the GLD positions to Dec.

Long AAPL, GLD (2)

Friday, October 23, 2009

A strange Friday

Friday was a strange market day. AMZN and MSFT post blowout upside earnings, and the stock market initially opens a bit higher. Stock market turns tail and ends up with the Dow down over 100 points, yet AMZN powers higher to close near the highs for the day. Some might say this is short covering.

The US dollar has been the lead dog in this market and a dollar rally is cited as causing some of the movements in other markets (stocks, bonds, commodities).

There are lots of stocks moving on earnings. Unfortunately, on many of them the options are not worth much, or the spreads are too wide.

Long AAPL, GLD (2)

Thursday, October 22, 2009

1938 all over again?

Author of the iconic book "Options as a Strategic Investment," Larry McMillan on a ThinkorSwim chat talks about the 1938 analogy for the current stock market. If the pattern holds, the top is one month to four months out, and that will be followed with a slow moving, grinding slide down back to the March 2009 lows that will take two years or more.

For the readers that never heard of McMillan, that book is often THE book that option traders cut their teeth on.

As for the stock market, I had a strong urge to short SPY during morning weakness. Good thing I didn't follow that impulse, as the market came back with a roaring rally into the close. A blowout upside earnings report from AMZN after the close likely means a higher open. As for potential longs, PNC and FCX looked promising, but I didn't pull the trigger on selling out of the money puts on those.

Long AAPL, GLD (2)

Tuesday, October 20, 2009

Buy AAPL (sell puts)

Sell AAPL Nov 170 puts
AAPL higher on earnings, sell the 5% probability puts, stock around 200.3

Long AAPL, GLD (2)

Monday, October 19, 2009

memories: October 19, 1987

I started trading in the summer of 1987. A few months later, the bottom fell out and the market crashed. I had sold some longs and bought some puts before that Monday so basically broke even on the day of the 522 point crash. It was the decline in the week before the crash where I lost most of my money in that move.

The 1987 crash was worse than the recent 2008/2009 bear market. In 1987, all trades were over the telephone. No one could get through, busy, busy, busy. If a person got through, the clerks couldn't give a real price, because the bid and ask was moving so quickly. Market orders often got filled way off the last trade. Some got out anyway, with horrible fills that sometimes cost them an extra 10% on top of the 40% market decline.

In 1987, I thought the financial world was going to end and that the U. S. was in for another great depression.

Fast forward 22 years, and still I tend to be cautious, often overly cautious. Caution allows me to survive severe markets like we experienced last year. At times, caution has hindered me as well. As Popeye might say, "I am what I am," best to find trades that fit my cautious style and profit where I can.

Changing the subject, the stock market booms ahead. AAPL reports blow out earnings. Is there a top out there? Certainly there is. When will it occur? To be sarcastic, I called for a top seven weeks ago in late August at SPY 105 (now 109 and moving higher). To be less sarcastic, time may be up on Wednesday of this week. A blowoff market top with a glamor name like AAPL leading would be a classic top for an intermediate move.

Even if there is a correction, 15% down might be all that is in the cards. More than that would likely require a shift in sentiment, with a lot more little fish in the stock market net. Most of the little fish have been putting their money into bonds, not stocks.

Long GLD (2)

Friday, October 16, 2009

2-1 for October

Two winners, one loser for October option cycle. The loser was a vertical call spread on GLD Oct 99/104. The winners were short puts on GLD and SPY.

Stock market is resilence. A simple time cycle analysis would bring in a top middle of next week. I was tempted to do a bearish vertical put spread on SPY Dec 98/103, but thought better of it.

I haven't done much during this current round of earnings. Options premiums are lower than previous earnings cycles. Even with lower premiums, the anecdotal view is that straddle buyers ahead of earnings are losers.

Still long GLD two positions for Nov

Wednesday, October 14, 2009

Dow 10,000

Dow tops 10,000 for the first time since the crisis. If I were an aggressive trader, it might be a time to short stocks. I'll repeat my refrain on tops and bottoms. It is highly entertaining to make those kind of calls, but rarely profitable. The percentage play is to wait for a top to form and then short the rally failure. Same for bottoms.

GLD doesn't move higher even though the dollar slides. This may be due to options related trade on Witching Wednesday before expiration.

Long SPY, GLD (2 positions)

Monday, October 12, 2009

Luby's option book list, Time magazine on 401k's

Bill Luby at Vix and More has a suggested book list for options (Amazon link). I mostly learned about options from the school of hard knocks.

Roger Nusbaum talks about the Time magazine cover about the problems with 401k's (link).

As for the markets, the moves from jawboning by Fed chief Bernanke are being reversed today, as is usually the case. Now, if Bernanke had actually started acting on his talk, that would be different.

In hindsight, those GLD vertical spreads that I was in, would have been monster winners had I held until today. What is the cliche? Bulls and bears make money, pigs get slaughtered. Add to that, chickens eat chicken feed. As readers know, I tend to have a low tolerance for pain (losses). While that cautious nature served me well through the waterfall declines of last year, it often means chicken feed profits when the bull is running.

Positions long SPY expiring this Friday
long GLD two positions for November

Thursday, October 08, 2009

Buy GLD (sell puts)

Buy GLD via selling Nov 92 puts
I double up my GLD position, buying strength, GLD @103.77. I am not bold enough (or stupid enough) to go aggressively long, only willing to be a strong buyer on a sharp pullback to support. There is a chance that GLD is taking off on a big up move. The caveats are that the media is warming up to gold, and much of the recent move was rumor based and dollar related.

Long SPY, GLD (2 positions)

Wednesday, October 07, 2009

Option Industry Council class notes

I attended another free option class. If you might want to take a class, you can find a list of upcoming classes at the Options Industry Council link. If there are no classes in your area, they have podcasts and other training materials.

The presenter opened with some comments about the paid TV option classes and how those classes have given options a bad name. The OIC is hosting these classes to combat some of that bad information. In the fly-by-night classes, students are often taught one or two specific strategies and told that they are going to makes lots of money very easily.

Readers might recall one sad story (link to June 2008 story) I told on this blog about a man I met who had gone through one of the "bad" classes. He paid a lot of money for the class plus one-on-one coaching. He did fine with the paper trading. The caveat is that the paper trading programs are sometimes set up to give better than real world results. He lost all his money within a few months of starting to trade real money. The strategy taught at the particular class was buying straddles ahead of earnings reports.

I got an update on the man this past week. After losing his life's savings in the options market and the class tuition, and losing his white collar high paying professional job, he is now living in a run down mobile home park in the middle of no-where just barely surviving. Sad to say, but I imagine more than a few folks that sign up for the TV classes and coaching meet a similar fate. He was an intelligent educated man, but that didn't protect him from the promise of free money.

On to my OIC class notes from the Intermediate Class:
* many folks do covered calls because of high premium, not because they like the stock--big mistake, only do covered calls on stocks you want to own.
* for novices, the best place to start is at-the-money.
* best measure of volatility is implied volatility of the traded options (as opposed to historical vol).

* every crash is different, the next one will be too.
* debit spreads tend to be slightly better than credit spreads, but often only by 1% or 2%.
* option assignments are random.

* option market makers have to honor their bid/ask, however, in the time it takes for an order to get to the exchange the market sometimes moves.
* most of the time simple is better, a lot of traders crave complexity thinking the more complex the trade the better it is going to be--not true.
* presenter advocates scaling in and scaling out of positions vs. "all in" or "all out" trading.

* when things go wrong he blames his dog

Positions
Long GLD SPY via short puts

Tuesday, October 06, 2009

Buy GLD (sell puts)

Buy GLD via selling Nov 91 puts, GLD at 101.30, up on rumors about oil trade moving away from dollars. Rumors are denied by major oil producers, but gold still soars. Strike price of 91 is below the support level at 92.

Mark Hulbert over at Marketwatch cites sentiment of gold timer newsletters (link). The timer reading was before the two big up days, still, it means a significant decline in gold is unlikely, which is a good setup for selling puts way out of the money.
>>
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold market timing newsletters tracked by the Hulbert Financial Digest. Its latest value is a quite-low 18%.

Three weeks ago, in contrast, the HGNSI stood at 39.5%. In other words, in the wake of a close-to-zero net change in gold's price, the average gold timer has cut his recommended exposure level in half.
...

The HGNSI's current level of just 18% is amazing from another perspective as well: Even though gold is within a few dollars of a record, all-time high, the average gold timer is mostly in cash. Clearly, there is no irrational exuberance in the gold pits.
>>

Long GLD, SPY

Monday, October 05, 2009

No guts no glory

Wearing 20/20 hindsight goggles, Friday's 10/2/09 open was a short term low for stocks and a decent buying opportunity for GLD. I was looking for another full point lower on SPY to 101 (vs. the low around 102) and a deeper dip in GLD to the 50 day moving average, instead of the 20 dma.

I missed both moves. At the moment, I am tempted to do a small GLD position, but it is near resistance at the recent high, and the move in gold today is mostly due to dollar weakness.

Long SPY

Thursday, October 01, 2009

Stock market melt down

October started off with a 200 point drop in the DOW and similar losses in the other averages. Obviously, my most recent trade, selling a SPY put was ill-timed. I was writing about going short. Now that I am a tiny bit long it muddies that thinking.

My current plan is to double up long if we get another hard down day or two. Friday's employment report may provide an opportunity. I am thinking that chart support levels will hold--we'll see.

Long SPY