Friday, December 31, 2010

Buy SPY (sell puts)

Buy SPY via selling Jan 117 puts, SPY @125.7.

I also placed an order to short SPY via buying a vertical put spread, long Feb 118, short Feb 112, but it did not fill. I am thinking that there is likely to be a bit more pop to the upside in the stock market then a downturn. That said, if I could call every little wiggle in the markets, I wouldn't need to hedge or trade cautiously.

/edit to add: got a fill a few minutes after the close for the Feb put spread, making me net short SPY.

Short SPY

Buy GLD, GDX, TBT (sell puts)

Sell GDX Feb 49 puts and TBT Feb 33 puts with GDX @61.1 and TBT @37.4. As my open Jan positions approach delta zero, I open some Februarys.

/edit to add sale of GLD Feb 120 puts


Sunday, December 26, 2010

Jaffe: Investing goals

Chuck Jaffe has an insightful column about what investors should focus on (link).

most people are investing as if they are trying to make the most money, but what they want — and what they should be investing for — is the best life ...

I strongly agree with the above. I was talking to a long time friend about investments. My friend has a method of choosing stocks that works for him. It has served him well for a long time. Other people sometimes suggest new things for him to try, but I remind him, if it ain't broke don't fix it. If a person has found peace of mind and relative financial security using what they already know and understand, there is little reason to tinker all that much with a tried and true formula.

Sometimes I'll meet young (or old) gunslinger type traders that report huge gains in a short period of time. I sometimes may look wistfully at those returns, but realize that I am not a spring chicken and would be foolish to take on big risks because I am almost certainly in a different phase in life from where they are.

Readers know that I like the term "mental capital." That wear and tear on the psyche is sometimes not worth a bit more return. Drawdown is an important concept (the loss if a position is sold at the worst possible time during the cycle). Some others may crave excitement, but again, at my place in life, I am happy to be free of excessive focus on every percentage point of return. Slow nickels are fine. I dislike fast moving markets, so will often sit out those conditions until the dust settles.

Saturday, December 25, 2010

Merry Christmas

For all the readers that celebrate Christmas, a hearty wish for a merry one.

It has been a good year for trades reported on the blog. Sure, the glass half empty side is to think that I could have made more, especially with 20-20 hindsight, and taking on more risk.

For history buffs, there is a well known tendency for military generals to plan to fight the previous war. That is a danger in financial markets as well, to think that what worked last year is going to work in the coming year.

Merry Christmas to all. Cheers.

Sunday, December 19, 2010

Dogs of the Dow

Dogs of the Dow is an investment strategy that picks the highest yielding DOW 30 stocks. Current list is at this link. The strategy hit an iceberg when the then high yielding bank stocks blew up. My favorites on the current list are MCD and JNJ. As always, I am not offering investment advice, just offering an opinion.

Investment themes often go in cycles. What worked one year, stops working the next. What was a big loser sometimes turns around.

Readers know that I see the popular press mostly as a contrary indicator. When I see blaring headlines or talking heads on TV warning about the dangers of a certain asset class, it is often a low risk time to go long, or sell some puts because downside is limited. When there are headlines about huge profits, past, present, and future, it is often time to short or at least hedge.

I recently read an article in a local newspaper saying that U. S. tech stocks are going to remain strong, gold and emerging markets are high risk. If anything that kind of article makes me want lean the other way, long gold, long EEM, short tech stocks. As always, one article, one indicator doesn't mean too much, but when lots of popular pundits start saying the same thing, it is opportunity time.

Saturday, December 18, 2010

4-0 for December

Four winners, zero losers for the December option cycle. The four were short puts in GDX, GLD, SPY, TBT. All are tiny guppy-size morsels, but considering my busy schedule, it was a good way to go. Bigger fish usually involve more risk, and with little time to devote to the markets, risk is something to avoid.

I have three open positions for January, GDX, GLD, TBT, and all are on the positive side. I am looking at shorting SPY out to February with a bearish vertical put spread. Timing is tricky as the markets can be sleepy during holiday time, but sometimes they do move.


Monday, December 06, 2010

Buy GLD (sell puts)

Buy GLD via selling Jan 120 puts (GLD @138.5 or so). I open a January position.


Thursday, December 02, 2010

Buy GDX (sell puts)

Buy GDX via selling Jan 47 puts, GDX @60.9, opening a January position.


Friday, November 26, 2010

Buy TBT (sell puts)

Buy TBT via selling Jan 30 puts, TBT around 36.3. Like I wrote earlier, the trend in bonds has reversed and the percentage play now seems to be to sell bond rallies.

Stocks and gold fall, while treasury bonds rally. As I have been writing, my schedule is packed now, so trading and blogging are going to be on the light side.


Friday, November 19, 2010

10-0 for November

Eleven winners, zero losers for the November option cycle. It was a bumpy ride, but all the short options expired out of the money. All small fish, or tiny fish in the net, but no losers to spoil the month.

Winners include a Backratio on AAPL, and short put trades: 3 SPY, 2 GDX, 1 TLT, 1 TBT, 1 BRKB, 1 GLD.

Open positions for Dec are slightly positive at this point, which is something considering how volatile the markets have been.

all are short puts well out of the money

Saturday, November 13, 2010

Has the trend changed?

Has the trend changed? That is the question on many minds. It almost certainly has for long dated bonds (TLT). I would tend to vote "nay" on stocks (SPY) and gold (GLD) for now, but more evidence, more technical damage can flip those as well.

A market can be trending or in a range, if trending up, it can go to being in a range or trending down. Violent reversals, that look like the letter V or the letter A on the chart tend to be uncommon occurrences.

Sentiment is one of the most valuable indicators for trend changes. Right now, the anecdotal is that gold bulls are relatively complacent despite the violent swings. More downside seems likely, but until that occurs and major support is broken, I would vote that the trend is still up.

For stocks, it will be interesting to see how quickly people turn bearish on this dip. In all three markets (bonds, gold, stocks), it did seem to me that the period right after the election and Fed moves, looked like massive short covering and whipsaw kind of action. That kind of trade often unwinds.

My only Nov short option position that seems to be in real danger for expiration week is TLT, with the strike at 94 and the trade at 95.8. The rest of the chickens are almost certainly going to come in safe for another positive month for these low risk low reward trades. My open Dec positions are slightly in the red overall.

Again, I don't have much time, for trading or blogging with my current schedule, so if there are fewer updates, or late updates, that is the primary reason.

Tuesday, November 09, 2010

Buy GDX (sell puts)

Buy GDX via selling Dec 52 puts, GDX @63.4. I open a Dec position. It is tough to do with the overextended up move, but the benefit of selling puts is the flexibility.

I bought these early in the day, close to the top. Can you say "oops?" Or perhaps some more colorful words come to mind as I am down about 130% on a notional basis, though as almost always with these naked put trades, the dollar amount is small.

The catalyst seems to be an increase in margin requirements for silver contracts.


Sunday, November 07, 2010

Common mistakes

Marketwatch has an article "The 7 biggest mistakes fund investors make" (link). Some of them apply directly to traders, some not so much.

1. Chasing returns
2. Rear-view investing
3. Overreliance on rankings and ratings
4. Assuming you can buy and hold a fund forever
5. Failing to understand what the fund does, how it invests or what it buys
6. Letting emotions rule
7. Focus too much on a fund, and not enough on the portfolio

For traders, 1, 2, 3, 6, apply directly. Another might be focusing too much on picking winning trades, and not enough on risk management and right sizing of positions. Number 4, doesn't apply direct, but perhaps for trading, thinking that a single indicator will always keep working.

An extra hour for thinking

With the extra hour of the time change, I have some time to type up some market thoughts. The old IBM had signs at all their offices "THINK," though for some that extra hour may be used for "DRINK." Cheers.

The hunt for yield, or capital appreciation, has folks moving mountains of cash into stocks, precious metals. The long bonds have taken a hit, though the shorter durations such as 2-year notes are still at the highs.

The Fed's QE2 and how bonds have responded, reminds me of when the Bank of England decided to sell off some of their gold reserves back in 1999/2000. By announcing the size before selling, they got some of the worst gold prices ever. The open question is whether the Fed is getting a similar deal as it buys bonds and notes, by announcing how much and when it is going to buy? The trick part is that there may be a QE3 and 4, and as many sequels as some movie titles get. So shorting bonds (or being long bonds) can be a rollercoaster ride--it certainly was this past week.

I think precious metals still point higher. I haven't seen much excitement at the public level, that often comes at intermediate term tops. Mostly I see caution. Caution isn't abundant at major tops for any market, or if the cautious majority turn out to be correct, they turned cautious about 30% or so too early in terms of price.

Bonds are split. HYG (junk bond ETF) rallied this past week, while TLT (20 year Treasury ETF) got crushed in a wild week. Seems like being net short the 20-year is the percentage play now, which is a reversal of what I've been doing most of this year.

I think stocks are in for some turbulence, but a big market down move seems extremely unlikely. With option premiums moving lower and lower, selling premium becomes less rewarding. I am even contemplating some longshots (lower probability trades with a high potential pay out) on the short side, such as bearish vertical SPY put spreads out to January.

Friday, November 05, 2010

Thursday, November 04, 2010

Buy TBT (sell puts)

Buy TBT via selling Dec 30 puts was filled during day.


Buy SPY (sell puts)

Buy SPY via selling Dec 104 puts, SPY @121.2 to open a Dec position.

I haven't had much time for blogging or trading recently.


Saturday, October 30, 2010

Election priced in or not?

Tuesday is election day. The question for traders is whether the anticipated results are baked into current prices, or not.

Intrade tracks odds on the election (link) and many other events. Presently the lead item on the page is whether the Republicans will have a House majority. Right now the betting odds are 92% in favor, 8% against. So at least for the Intrade population, that result is 92% baked in.

The caveats are that Intrade bets are small and may not be indicative of the expectations of major stock, bond or gold market participants. Intrade is also likely to be all U.S. participants, while most markets are now global markets. Still, Intrade can indicate whether a result was "surprise" or not.

The election is like a major earnings report or economic data release. If the results are in line with expectations, there may be chatter about a whisper number or some part of the result that is more closely looked at.

Another thing to look at is VIX and option premiums. VIX may have a slight premium due to the election, but not a big one. So option players don't expect a big move either way from election day. I'd guess there is a bit of turbulence, next week, but not much more than that.

Monday, October 25, 2010

Buy TBT (sell puts)

Buy TBT via selling Nov 30 puts, TBT@ 33.2. Strong support at the lows around 30. I am already short TLT Nov 94 puts, so this makes the overall bond position a short strangle.

TBT/TLT equivalent to short strangle

Thursday, October 21, 2010

Fibonacci time and price

Most technicians use the key Fibonacci retracement ratios of 23.6%, 38.2%, 50%, 61.8% and 100%, when measuring price objectives. The reaction to a move is often a percentage retracement.

GLD has had a good run since 7/28. Like I said, virtually every technician is looking at the Fibonacci price levels. Not many use Fibonacci in regards to time. When price is uncertain, time can be a valuable tool. I see price as uncertain, because much of the gold rally was driven by the currency market.

Using 38% of the time of the recent gold rally takes us to about November 4th, for a projected long entry point.

Wednesday, October 20, 2010

Babak on the Golden Cross

The "death cross" got a lot of press this summer. Now that the opposite is happening, not so much. Over at Traders Narrative, Babak has an entry about the "golden cross" (link).

... it is important to remember that these patterns hold true on average - not every single time. Like seasonality or the presidential cycle, they hold powerful sway over the market but are never to be considered as a dictatorial mandate.

As well, according to a study done by Jason Goepfert, when we have similar back-to-back signals - that is reversing a “death cross” with a “golden cross” within a 3 month period. The results are lackluster, showing that within a year the S&P 500 index is slightly higher (+1.4%) with a 60% positive occurrence.

Sunday, October 17, 2010

4-0 for October

Four winners, no losers for the October option cycle. My cautiousness from September translated into only a few small fish coming in for this month. Winners were short puts in GLD, TLT, two for SPY.

The glass half full side is that I didn't sell strangles like I did in August, or go short--either move would have translated into losses. Instead, I took smaller and fewer long positions.

Going forward I have more positions with some dry powder. Gold is due for a correction any time now, but I think it will be contained. Same for stocks, overbought, extended, but any correction has numerous support levels under it.

Bonds are oversold, but that doesn't mean bonds won't continue lower. I may sell bonds (or sell puts on TBT) on rallies as there are now resistance at multiple levels higher. On the TLT chart 102, 104, 106, 108 are all resistance levels, with TLT at 100.5.

Backratio (net long) AAPL
Short puts (long) on BRKB, GDX, GLD, SPY, TLT

Thursday, October 14, 2010

Grant on QE (quantitative easing)

There is a a lot of market chatter about QE (quantitative easing). I suspect a good many novices read my blog. I found a couple of informative Youtube entries on QE. The first is from a year ago and tries to explain in as much plain English as possible (link1).

The second is a Bloomberg interview from about a week ago, with James Grant (link2).

Aggressive use of QE is almost sure to end badly. That said, estimating the time table, or which assets will move up or down and when is more difficult. Second level effects are likely to produce unexpected market moves, unexpected inefficiencies in various markets.

The Bank of Japan has been one of the most aggressive QE players. The conundrum is why the yen continues to appreciate when their government debt levels and monetary policy makes Japan one of the more likely countries to default on their government debt.

Wednesday, October 13, 2010

Buy GDX, SPY (sell puts)

I had technical trouble, so these trades are a few hours after the fact.

Buy SPY via selling Nov 104 puts, SPY@117.9. As the stock market rallies, the puts I am short provide less and less exposure, the delta goes down. I already am short Nov 91 and Nov 95 puts, as well as some Octobers.

Buy GDX via selling Nov 47 puts, GDX@58.5. GLD continues to run higher. I had a notion to short gold yesterday, but there hasn't been even one signficant break in the rally from the summer lows. The chart looks like “elephant tracks,” or big money flowing in. Don't stand in the way of the elephant.

Bonds (TLT) look weak and likely to get weaker. Treasuries are suffering the brunt of the decline. Corporate bonds (BND) and junk (HYG) are holding firm.


Friday, October 08, 2010

Backratio on AAPL

I initiate a backratio on AAPL using Nov 230/240 puts, selling two 230s for every 240 bought, AAPL @292.0. The backratio is a net long position, there is an explosive profit possibility on a measured decline.

The max profit is if AAPL lands on 230 at Nov expiration. Losses pile up if AAPL moves sharply lower and is below 220 in Nov. If AAPL is steady to higher, I pocket the tiny credit.


Buy GDX (sell puts)

Buy GDX via selling Nov 44 puts GDX@56.8. I initiate a small position in GDX to add a sliver to my gold exposure. For 44 to come into play, the entire rally from the summer lows would be given back.


Tuesday, October 05, 2010

Buy SPY (sell puts)

Buy SPY via selling Nov 95 puts, SPY @116.0. I add a bit more exposure.


Boom! Stocks, gold explode higher

Strong rallies this morning in gold and stocks as both move thru minor resistance. I am long both GLD and SPY, but my trading positions remain small. A coffee shop buddy often asks how my stocks are doing, and if I made any money. I often reply, yes, I am making a little, and it never seems to be enough :).

Yesterday, I took a long look at shorting AMZN and selling a put backratio on AAPL (net long position with an explosion on a measured decline).

As I have mentioned before, I am not a spring chicken any more, so my gunslinging trading days are over. Most of my trades tend to be low risk, low reward, high probability. I may still take an occasion shot on a small position, but as with all longshots only a few will tend to come in.

Friday, October 01, 2010

Mental capital and gold $3000

I stumbled around an old trading rules list. This one is on Dacharts, quoting 22 rules from Dennis Gartman circa 2005 (link). There are the standard and familiar rules that most traders have heard, but there is also #3 about mental capital.

Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. ...

Readers know that I am a fan of the concept. Sometimes I cut winners or losers because of the mental wear and tear that riding it out might cause. The most familiar manifestation might be the "sleeping point." During volatile markets, if a person can't sleep at night, sell enough or cover enough so that the risk doesn't keep a person up all night.

I can mention gold. It continues to make new highs. I had a conversation with some younger relatives. I mentioned gold continues to be strong, and one of them replied, "I heard gold was a bubble." This kind of talk is a huge positive for long term gold bulls such as myself. When young people that don't know much, are hearing that gold is bubble, it isn't true.

Just as all the bond market bubble talk makes me more bullish on bonds, gold bubble talk makes me more bullish on gold. To be sure, gold is extended and may correct at any time. However, longer term, I stick to my long standing belief (since 2005) that gold is headed for ~$3000 an ounce.

As for allocations, there is no one size fits all. So much depends on age, income, asset base, risk aversion, life situation, investment knowledge and history, that I never argue about allocations to various classes. There are plenty of other sites or articles that talk about allocations. I see it as highly personal because so much financial and psychological detail need to be provided to give an intelligent answer.

Tuesday, September 28, 2010

Buy SPY and GLD (sell puts)

Buy SPY via selling Nov 91 puts, SPY@114.4. I add to my long SPY position. Despite the market rally there is still quite a bit of skittishness in the option premiums.

Buy GLD via selling Nov 113 puts, GLD@127.7. Gold futures fighting through the $1300 round number level. Yes, it is extended. My Oct position is approaching delta zero, so opening a Nov position continues to give me a small exposure.


Friday, September 24, 2010

Buy SPY and TLT (sell puts)

Buy SPY via selling Oct 104 puts, SPY @114.2. I am already short SPY Oct 97 puts. There was an article on Barrons online suggesting the purchase of October SPY puts as portfolio protection. Buying short term puts is an expensive form of insurance, and when pundits make public suggestions to do so it is a sign of nervousness.

I also buy TLT via selling Nov 94 puts TLT@103.6.


Thursday, September 23, 2010

Buy BRKB (sell puts)

Buy BRKB via selling Nov 70 puts, BRKB @82.2. Chart support at 76 and then 70. I have an urge to open Nov positions on GLD, SPY, TLT, but think there will be a better time to sell options in a day or a few days.


Wednesday, September 22, 2010

Luby: Education of a Trader

Bill Luby at Vix and More (link) has an interesting entry about the education of traders, and his own journey.

As I see it, all traders are ultimately self-taught. There are no required classes, readings, homework assignments or even a syllabus with recommendations. Tests are administered on a daily basis, frequently with multiple tests on the same day. Worst of all, everyone is graded on an unfavorable curve in which there are more Fs than As.

Against this backdrop, education counts, but skill and experience count even more. An insatiable curiosity helps, as does a willingness to explore unfamiliar territory. Great trades, insights and strategies present themselves in somewhat random fashion and, as Louis Pasteur observed, “Chance favors the prepared mind.” ...

Readers of my blog that have been with me from the beginning (over three years ago) can see an evolution in the types of trades that I take on. Keeping some kind of trading journal can be instructive for review. It helps a person learn from the past. Often times I find it is the emotional state to be a key indication of a winning or losing trade.

As I've written a few times, there are a lot of ways to skin a cat, a thousand ways to make money in the markets. Finding a style that suits a person's personality is a key. Try to copy someone else, or fit into a style that isn't the real you, and it will twice as hard.

Friday, September 17, 2010

6-1 for September

Six winners, one loser for the September option cycle, for a small profit. BRKB, GLD, TLT, SPY all came in on the positive side, with multiple trades on TLT. The loser, short TBT puts, was relatively big and ate up all the profits from the offsetting TLT trades.

The glass half full view is that opinion wise, I was wrong on all three markets (bonds, gold, stocks), and still eeked out a positive month by sitting out most of the action.

I have three small positions going forward to October, short puts on GLD, SPY, TLT.


Thursday, September 16, 2010

Buy GLD, SPY, TLT (sell puts)

Buy GLD via selling Oct 115 puts, GLD @124.7. Buy TLT via selling Oct 95 puts, TLT @101.4

I get off the sidelines and open some small October positions. I may add SPY in a bit.

/edit to add: I went ahead on SPY selling SPY Oct 97 puts with SPY@112.6. Again, these are small positions just to keep some skin in the game for October.


Friday, September 10, 2010

A theory as to why bonds are down

I have a theory as to why the bond market is down so much this month. Historical seasonality tends to favor weaker stocks, stronger bonds. Tuition bills are one reason that so much liquidation goes on this time of year. Many small investors save to pay those college bills.

The theory is that now that small timers have piled so much money into bonds, and bond funds, the outflows are coming from there.

Wednesday, September 08, 2010

Still here

I'm still here, still watching, and for the most part, I'm still sitting this one out. A bit of good news is that ThinkorSwim has straightened out their software problems.

I mentioned my biases a few posts back, and for the most part they have been wrong. Stocks and gold have moved up, bonds have moved down. My exposure is minimal. I don't have any open October positions.

Wednesday, September 01, 2010

Missing the boat

The stock market is in full rally mode today, with the Dow up over 200 points. For the most part, I missed the boat. In theory, a trader could have been short, long, short, long and made a bundle during the past few week or so. Nimble is not a word I use to describe my trading style. Problems related to the ThinkorSwim software platform add to my cautiousness. For now, I am sticking to the TOS website, which is slow but it is at least working.

There are worse things than missing the boat. A trader might be on the wrong side of the market. A trader can compound missed opportunities with high risk trades after the low risk entry point has passed. In hindsight, it is easy enough to see all the press about September being the historically worst month for stocks, to conclude that the decline into the end of August would be a good time to buy. Trading is easy in hindsight.

Monday, August 30, 2010

Leg out of SPY Backratio

I leg out of the short SPY backratio. I cover two of the three legs:
cover short half the SPY 88 puts
sell SPY 96 puts
still short half the the SPY 88 puts
Netting a small but useful profit, though I had lot more profit at Friday's lows.

The ThinkorSwim software is extremely sluggish for me today, so I use the website to execute the trades. I don't know if the sluggishness is due to the new release, more TD Ameritrade customers using the server, or what, but I had a frustrating morning trying to enter these trades.

The analogies about surfing come to mind, about the staying on a beach with a lifeguard but not depending on the lifeguard. Sometimes there are problems related to computers or software or phones, that can have a negative impact on trading. These kind of glitches happen, often during the worst possible days.


Thursday, August 26, 2010

Risk aversion

The end of the week after expiration is often the time during the option cycle that I sell options. However, I am not in a mood to take on more risk. Covering TBT puts at a big percentage loss the other day, likely contributes to my skittishness. As I have said before, when things turn south, trading smaller, taking on less risk is often the best way to regain the mojo.

I am leaning bullish on bonds, bearish on stocks, bearish on gold. Seasonality points towards up for bonds, down for stocks, up for gold. That said, with all the cross currents, just about any move in any market wouldn't be a huge surprise to me.

There is a quite a bit of chatter about insurance against Black Swan type of events. Mostly about another big drop in the stock market, and the bubble in the bond market. While a big drop seems unlikely when people are talking about it, a scary but limited drop of 10% or 20% wouldn't surprise me.

Tuesday, August 24, 2010

Sell TBT (cover short puts)

Sell TBT by covering short puts (TBT Sep 30, TBT@30.4). TLT continues to explode higher, and I take a loss on the TBTs. It is a huge percentage loss, a small nominal loss. It is painful to cover in a fast moving volatile market. However, standing there in front of the train, hoping the train will stop can be more painful.

Stock market is selling off, and my SPY backratio is doing well.

Short SPY

/edit to add: for now it looks like I covered close to the worst point of the day.

Friday, August 20, 2010

10-0-1 for August

Ten winners, zero losers, one breakeven for the August option cycle. I bet on a trading range, and for the most part, the range held. The bushel of winners I attribute to a little bit of luck, and picking strikes at chart support/resistance. All short puts:
BRKB Aug 60
IWM Aug 58, 60
SDS Aug 31
SPY Aug 84, 87, 95, 100
TBT Aug 30
TLT Aug 90, 92

Going forward, I have a SPY backratio which makes net short SPY, and a short strangle on TLT, net neutral.

Net short SPY
* TLT offset by TBT, net neutral TLT

Thursday, August 19, 2010

Confirmation Bias

Random Roger (blog link) mentions an interview with Felix Zulauf (link2). I found the concept of "confirmation bias" to be interesting.

In plain English it means seeking out and reading only information that confirms a person's opinion. With the Internet, virtually any position can be confirmed with outside sources. There is a fine line in having enough conviction to take a market position, and being so stubborn that all evidence on the other side gets ignore.

When I was a beginner trader I remember reading or hearing something along the lines of this:
Q: "What is your secret to trading?"
A: "Be bold, and be right."

Q: "What happens if you are wrong?"
A: "You go down with the ship."

Obviously, this "gunslinger" approach, is a far cry from how I trade today.

Buy TLT (sell puts) sell IWM (cover short puts)

Buy TLT via selling Sep 98 puts, TLT @106.2. I double up on short puts as TLT continues to rally. I am also short TLT Sep 93 puts, and TBT Sep 30 puts.

Sell IWM covering short Aug 58 puts as a protective measure. There is about a 5% chance of IWM 58 with option expiration tomorrow. I am still short IWM Aug 60 puts with IWM @61.2.

SPY offset by SDS, net long SPY
TLT offset by TBT, net neutral TLT

Tuesday, August 17, 2010

Surfing analogies

I stumbled upon a trader's blog (link). As readers know I like analogies. Summer is a good time for surfing analogies. Here are a few "Lessons from Riding Different Kinds of Waves (link2)."

* Be patient, there will always be another wave along
* Some waves are deceptively weak and some deceptively strong
* Riptide and cross currents can be dangerous!
* Have a safety net in place but don’t take it for granted
* Timing is everything
* Location is everything
* Finding the sweet spot
* Conditions can change in the blink of an eye


Monday, August 16, 2010

Buy TLT and GLD (sell puts)

Buy TLT via selling Sep 98 puts, TLT @104.2. This is a rebalancing trade on the short strangle. The initial position was short TBT Sep 30 puts and TLT Sep 93 puts. I am a bit stunned at how far and how fast U.S. Treasuries have moved up.

Buy GLD via selling Sep 109 puts, GLD @119.6. I am also a bit surprised at how strong GLD has been. I open a Sep position to continue to have a bit of exposure.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Wednesday, August 11, 2010


Wow, what a washout day for the stock market. With all my hedging, my overall trading positions were down just a tiny bit. If the stock market decline continues, I will take on some water.

I do have some downside protection in the SPY Sep backratio spread (short SPY 88 puts, long SPY 96 puts), but that may not be that useful if there is an air pocket decline before August option expiration on 8/20.

Today, I was tempted to sell some options for September. I remind myself that fast markets are not my friend. Oversold often becomes oversold-er, and I already have plenty of exposure for August expiration, and some positions are coming into range of assignment.

Tuesday, August 10, 2010

The Fed as Goldilocks

Bonds, stocks, gold all are up half an hour after the Fed statement. The Goldilocks comment is about the fable about being too big, too small, and then just right. Historically, it is unusual that all three markets can move up together.

We will see if I can get it "just right" and have all my August short options go off the board worthless (or at least closed for a profit).

Sentiment for bonds is getting touchier because comments and predictions for 2.5% or even 2.0% on the 10-year Treasury note are more numerous. At some point all the little fish that have piled their money into bonds will likely get burned badly. However, today is not that day, tomorrow isn't likely to be that day, and if I had to bet, a year from now we will still be waiting.

* Moments after posting, TLT (20 year bond ETF) went from being up a full point to down. So, wow, how quickly can a person become wrong when making statements.

Friday, August 06, 2010

Whipsaw:200 day moving avg

The 200 day moving average is a popular timing indicator. The last two SPY signals have resulted in whipsaws, causing losses for those using it for timing. Roger Nusbaum is one of many that use it, and those interested can read more about it on his blog (link).

Some timers go all in, or all out on the 200 dma indicator, and their portfolio whipsaw experience is much more extreme than the modest losses that Nusbaum has seen. This is a danger with any indicator, more so with popular ones. When a lot of people are looking at one indicator, it can become a trading point for some looking to game the system and trigger orders.

Personally, I was net short SPY deltas going into the employment report, so the steep one-day decline is okay with me as long as it doesn't extend into a much bigger washout. With today's decline, I am about delta neutral on SPY, so unchanged or modestly lower on SPY until August expiration would be about my best scenario.

Monday, August 02, 2010

Buy IWM (sell puts)

Buy IWM via selling Aug 60 puts, IWM@66.1 (edit: correction made on typo that read 61.1 should be 66.1). This yet another rebalancing trade using IWM to balance off a short SDS put. I am already short IWM Aug 58 puts. The massive stock market rally has my SDS position basically at the strike price of 31, and net short SPY delta.

I see my choices as variations of: sit tight, cover SDS and take the loss, rebalance back to delta neutral, or take half of the half and rebalance and stay net short SPY delta. I pick the last choice, still net short SPY, but not as much as before this latest trade.

Bonds via TLT continue to be weak. GLD is stabilizing.

SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Thursday, July 29, 2010

Cover short SPY puts

I cover my short on SPY Aug 95 puts for a decent profit, SPY@109.6. This reduces my exposure, leaving me short SPY Aug 100 puts, and Aug 87 puts, also short IWM 58 puts. I also have a SPY backratio for September.

Because of the two day stock market decline I am now net delta long SPY. I am a nervous long, because historically, August can be a volatile month, more so than July or September even. In hindsight, my IWM put sale yesterday was ill-timed as the bottom has dropped out of stocks.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Wednesday, July 28, 2010

Buy IWM (sell puts)

Buy IWM via selling Aug 58 puts, IWM@66.1. This is more rebalancing of the SPY strangle. I am using IWM as a SPY proxy because of the lower value per contract. I am still net short SPY deltas on the combo of SPY, SDS, IWM options but get closer to neutral.

Gold and bonds had a scary down day on Tuesday. For now I am holding on to those positions. One interpretation of recent price action is money flowing into SPY with the funds coming from TLT and GLD, as asset allocation funds, and hedge funds rebalance their portfolios.

SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Monday, July 26, 2010

Nusbaum: Essentials for investing

Random Roger writes about Ten Essentials for investing (link). Nusbaum is experienced in managing other people's money for the long term. I find Nusbaum to be smart and wise, even when I may disagree with him. Wisdom is something that novice traders often lack, especially if the newcomer has early success.

Off the top of my head, here are concepts that can be helpful if not essential for traders:

* live to trade another day, with proper position sizing, and other risk management techniques such as stop-losses or hedging. Many novices jump in with both feet, and get carried out on their shields before they have a chance to find their sea legs.

* know yourself--there are a thousand successful ways to trade. Many traders will fail if they try to emulate a style that doesn't suit their personality, their time commitment, their lifestyle. If a person doesn't know themselves, the markets can be an expensive place to find out.

* hazard warning on headline news, pundits on TV, popular newsletters or blogs. While popular sources such as talking heads on TV do occasionally make good calls, there have been some horrible ones as well. The contrarian way is one successful way to trade (as is trend following), though a person needs to be careful because as the cliche goes: "everyone is now a contrarian," so sometimes the real contrary way to go is to follow the trend.

* A John Wooden-ism comes to mind: "don't confuse activity with achievement." Many novices fall into the indicator trap, looking at too many indicators and mostly get confused, rather than getting better and smarter. Many novices tend to overtrade, instead of waiting for a good pitch to hit, they swing at everything.

* markets are often a moving target. Once an indicator is published and popular, the indicator tends to lose effectiveness. If reading a particular book or using a particular indicator was the way to success, everyone would read the book, or use that indicator. If everyone has the same edge, no one has an edge over the other person.

That's it for now.

Crawford: "Will Capitalism survive?"

Peter Brimelow cites an Arch Crawford newsletter, highlighting dire predictions for the financial markets (link). For those unfamiliar with Crawford, he goes way back, having been trained as a technical analyst, Crawford uses astrology as his primary tool.

"Astrologers call it the 'Cardinal Climax.' It is considered to be the most powerful and important planetary alignment of the modern era. Perhaps it heralds the beginning of the real 'Aquarian Age' or the end of the 'Mayan Calendar.' (After all, what's a few months in a 25,600-year cycle?) These energies actually maximize from July 30 through August 3. There have been 'shadows' preceding and will be echoes afterwards for quite some time."

Crawford adds: "This huge alignment will be followed by a Full Moon on the Fall Equinox and a Lunar Eclipse on the Winter Solstice. We expect the depth and scope of dislocations during this period to exceed anything we have ever witnessed, both in otherwise civilized interaction among nations, and likely our fill in natural disasters."

"We continue to recommend extreme caution and proper emergency measures such as extra food, water, medicines and cash over the next 24 months in particular. Do NOT wait any longer!!"

The period starts today, and the last quoted paragraph extends the warning period for two full years. Crawford is reported to be 200% short [stocks].

Friday, July 23, 2010

Buy SPY (sell puts)

Buy SPY via selling SPY Aug 100 puts. More rebalancing of my short strangle, getting me close to net neutral on SPY, with SPY@110.5.

A few minutes later, I cover my short SPY Aug 84 puts for a nice profit to free up capital and in case there is a waterfall decline in the stock market . So for August I am currently short SPY Aug 87, Aug 95, Aug 100 puts, and short SDS Aug 31 puts.

SPY offset by SDS, net neutral SPY
TLT offset by TBT, net long TLT

Buy BRKB (sell puts)

Buy BRKB via selling Sep 60 puts. My short Aug 60 puts are nearing delta zero, so I add more puts to continue to have exposure.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Short Strangle on TLT (TLT/TBT)

Sell a strangle on TLT via selling TLT Sep 93 puts and TBT Sep 30 puts. I am skewing to the bullish side TLT@100.7. Sep to Dec is a seasonally good time for bonds.

Earnings season used to be a time when I did a lot of trading, but as readers can tell, I am mostly trading the options on ETFs now.

The stock market rally has pushed me to a net short position on SPY.

SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Friday, July 16, 2010

7-0-1 for July cycle

Seven winners, one break even, zero losers for the July option cycle, another solid month.

The seven winners:
SPY Jul 66 put
TBT Jul 31 put
SDS Jul 30 put
TLT Jul 90 put
BRKB Jul 60 put
SPY Jul 92 put
SDS Aug 27 put

The one breakeven: SPY Jul 88 put

While the market did swing, it didn't move enough for the way out of the money option buyers to make money if they held until expiration.

Most of the winners expired without drama near delta zero. With the steep Friday sell off in stocks I am now net long SPY.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Wednesday, July 14, 2010

Buy SPY (sell puts)

Buy SPY via selling Aug 95 puts SPY @109.7. More rebalancing, as the stock rally rolls on. I am surprised at the strength of the rally, and that bonds and gold also rally.

SPY offset by SDS, net slightly short SPY
TLT offset by TBT, net long TLT

Sunday, July 11, 2010

Barrons: "Beware of Bond Funds"

Another is what sometimes seems like an endless stream of warnings about a top in the bond market is featured in Barrons this week. The fundamental arguments are clear enough. However, when the pundits are warning people, the top is usually still a ways off.

An interesting play might be high yield such as HYG as the spread between "junk bonds" and Treasuries is historically high for the current level of defaults. There are three ways this might correct: defaults are going to go way up, Treasury yields will rise, the yield on the junk bonds will fall.

As always, the blog is mostly about trading, so longer term investments are only talked about in general terms.

Thursday, July 08, 2010

"Invest like a millionaire"

From a Marketwatch article.

According to the Capgemini and Merrill Lynch Global Wealth Management 2010 World Wealth Report, these high-net-worth individuals had, on average, 29% of their assets in stocks in 2009; 31% in bonds, and 17% in cash.

They also kept 18% in real estate, including commercial real estate, real estate investment trusts (REITs), residential real estate (excluding their primary residence), undeveloped property, farmland and the like, and 6% in alternative investments, such as structured products, hedge funds, derivatives, foreign currency, commodities, private equity, and venture capital.

One caveat is that the survey is done by Merrill Lynch, so it is going to skew towards products they sell such as stocks and bonds. As I have always advocated since starting this blog, for the average investor (not trader), diversifying slowly into age appropriate assets is usually the best way to go.

Buy SPY (sell puts)

Buy SPY via selling SPY Aug 87 puts, SPY @106.8. I re-balance the short strangle back to delta neutral. As the market moves, the delta changes.

SPY offset by SDS, net neutral SPY
TLT offset by TBT, net long TLT

Wednesday, July 07, 2010

Cover short put SDS

Cover short SDS Aug 27 puts. I close out this position for a profit, just in case the strong SPY rally rolls past resistance. These puts might come back into play at SPY 120 or so. I am still short SDS Aug 31 puts and Jul 30 puts. Because of the rally and the way options move, I am slightly short SPY now.

SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Buy BRKB (sell puts)

Buy BRKB via selling Aug 60 puts BRKB@78.7. My Jul 60 puts are near delta zero.

Elsewhere, GLD has had a couple of hard down days. Looks like a shakeout, as the gold uptrend is still intact. As SPY rallies, I am close to delta neutral on SPY.

SPY offset by SDS, net neutral SPY
TLT offset by TBT, net long TLT

Friday, July 02, 2010

Buy SDS (sell puts)

Buy SDS via selling Aug 31 puts SDS@38.6. I expected a market rally on the employment report. The tiny bump up only lasted a short time. I get closer to delta neutral with this trade, but am still net long SPY.

I am already short SDS Jul 30 puts, SDS Aug 27 puts, both are close to delta zero. On the other side I am short SPY Jul 66 puts, Jul 92 puts, Aug 84 puts, as well as a SPY Sep 96/88 put backratio.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Thursday, July 01, 2010

Half way into the year

Half way into the year:
GLD up about 14%
SPY down about 8%
TLT up about 11%

TLT is neck-and-neck with GLD after factoring in dividends.

Stock market technicals look terrible. SPY has broken support at 104, activating a head-and-shoulders top that projects to about the 87 level. The 50 day-moving average is about to cross under the 200 DMA. Some call this a "death cross," with that moniker, it is bearish indicator.

Tuesday, June 29, 2010

Sell SPY (cover short puts)

I cover my short SPY Jul 88 puts, SPY@104.1 for a breakeven profit. I am still short Jul 92 puts. I hate to do it, but in this fast declining market it makes some sense to reduce my exposure. There is a chance of a meltdown as support at SPY 104 has been tested so many times. Also a chance of a decent rally, but again in a fast market, it is a good idea to trade smaller and reduce risk.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Buy TLT (sell puts)

Buy TLT via selling Aug 92 puts TLT@100.4. Adding a layer on top of short Aug 90 puts.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Saturday, June 26, 2010

The Economist: World debt map & table

The Economist has a world debt map in this article. The U. K. and Japan are in red. In the table, the U. S. is listed 7th in terms of sustainability of debt.

Those worried about the massive U. S. deficits can see a hint of the future by watching how events unfold in Britain and Japan. While their situations are not exactly the same, the overall debt loads are higher than in the U. S. With Japan having already lost its AAA sovereign debt status.

Gold, bonds and stocks (SPY at least) all moved up on Friday. Gold and bonds moving up together are a conundrum. If there is inflation it will be terrible for long term bond holders. At some point, most observers expect opposite movements. However, for now both gold and bonds are rallying together.

U. S. bond owners are still at the party, still drinking from the punch bowl. Virtually every commentator and pundit is screaming that bonds have to fall, yields have to rise. So far that chorus has been dead wrong, as is often the case when everyone is on one side of the fence. Part of the explanation of why bonds continue to rally, is low CD yields at banks. Yield hungry consumers are moving out in time to get a bit of yield.

Again, at some point, bond owners are going to suffer losses, possibly big losses. The small fish public has been pouring money into bond funds, and ETFs. For now the party rolls on, but it is a good idea to stay near the exit, instead of near the punch bowl for another drink.

It reminds me of other market situations where commentators warn of a bubble or of imminent collapse two years or so ahead of a much higher top. No one knows the exact timing, but for now public commentator sentiment and the chart still favors the bullish side for bonds.

One aside about the debt map is that Russia, India, China, Brazil, all are in green, all having relatively low overall debt levels. If the future unfolds such that investments in countries with "dry financial powder" do best, these are some ETFs specializing in those countries: RSX, EPI, FXI, EWZ.

Friday, June 25, 2010

SPY Backratio

I take a shot with a complicated trade, a SPY Backratio, selling two Sep 88 puts for every Sep 96 put bought SPY @107.1. The strikes makes for a credit spread, with a huge max profit around SPY 88 at September expiration. If SPY drops below 80 it starts to lose money. At SPY in the low 90s there is a good profit. At SPY 100+ even with extreme up moves, I get to keep the tiny credit. It is close to a delta neutral trade, adding to SPY long exposure right now, but turning negative as time goes by.

SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Thursday, June 24, 2010

Buy GLD (sell puts)

Buy GLD via selling Aug 105 puts GLD @121.9. Layering on an August position on top of short Jul 100 puts. As has been the case for me in gold all year, another low risk, low reward trade.

Looks like I was at least a day early selling volatility on SPY, as VIX is up 2.5 to 29.6 today, and my short strangle is down about 20% on notional value. Support at SPY 108 broken, next stop may be 104/105.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Wednesday, June 23, 2010

Sell SPY strangle

Sell SPY strangle via selling SPY Aug 84 puts and SDS Aug 27 puts. SPY @109.80 after Fed announcement. I already am short SPY Jul strangle with short Jul 92 puts, and short SDS Jul 30 puts. I expect SPY to stay range bound. July tends to be a quiet stock market month, while August can get more volatile. That's one reason for selling so far out of the money.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Sell TLT strangle

Sell TLT strangle via selling the TLT Aug 90 puts and the TBT Aug 30 puts TLT@98.8. Effectively betting on a trading range for TLT until August. On prior strangles, I put the trades on separately, these trades were done at the bid a minute apart. I already am short a July strangle on TLT, short TLT Jul 90, TBT Jul 31 puts, again betting on a trading range for TLT.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Tuesday, June 22, 2010

The Lake Wobegon effect

Paul Farrell at Marketwatch mentions the Lake Wobegon effect as it applies to the stock market (link).

On Lake Wobegon "all the women are strong, all the men are good-looking and all the children are above average" says the great American satirist Garrison Keillor in his "Prairie Home Companion" world.
“63% of Americans consider themselves more intelligent than the average American, a statistical impossibility. In a different survey, 70% of Canadians said they considered themselves smarter than the average Canadian.” But when it comes to financial markets, its closer to 100% ...

I'd guess almost all the readers of my blog consider themselves above average in intelligence, and above average in investment acumen. While that may be true for small samples, by definition, most people are some what average.

The Lake Wobegon effect reinforces the illusion that more activity will generate more return. In the stock market the reality is the opposite, the average active small fish trader usually does worse than the static investor, that may do buy-and-hold or dollar-cost-averaging. On the Internet, the tendency is for big winners flaunting their stories, often filled with lies, the big losers are never heard from.

Here is a second Farrell article "The more you trade the less you earn" (link2).
Behavioral finance researchers have studied the performance of stock market traders in both America and Asia. Interestingly, they discovered that traders in both countries under-perform the world’s broad markets by significant amounts. One study analyzed 66,400 accounts at a major Wall Street firm over a seven-year period. Another studied all the active traders on the Taiwan, China exchange.

In spite of the cultural differences, the results were virtually the same. Why? Due to the high transaction costs, taxes and bad decisions, the bottom line is simple: “The more you trade the less you earn.” In fact, about 80% of all day traders lose money. In researching the Americans, the study found that the active investors who turned over their portfolios 258% annually made less than 12% on their money. Passive investors who bought and held, with only 2% portfolio turnover, had average returns of roughly 18%, which is about fifty percent higher than the returns of the active investors. Still, investors believe they can “beat The Street,” simple because the Wall Street “Hype Machine” has programmed them to believe that myth.


As for the stock market, the Monday morning rally failed. Support for SPY at 108 and then at 104. TLT may be breaking out to new highs. It is difficult to want to buy treasury bonds with yields so low, but the chart, and seasonality point to more strength in bonds.

Saturday, June 19, 2010

6/18 OptionPlanet class

I attended an OptionPlanet class on "Complex Option Strategies." TD Ameritrade, InvestTools, ThinkorSwim are sponsors. I got some good bits from the class, more about features of the TOS trading platform than about options.

I sat next to a lawyer, real sharp guy. He had gone through one of the more expensive InvestTools education programs and was enthusiastic in his praise. That is a far cry from other stories I have heard and shared about some of the fly-by-night classes that talk about doubling your money every month in options, and "no-lose" strategies.

One take away I got was that if an option trader understands vertical spreads, and calendar spreads, that's all there is to know. All the more complex strategies, such as butterflies, Iron condors, are layers of verticals and calendars.

An informal stock market sentiment poll for the room of 300 advanced option traders, had about 35% bullish, 40% neutral, 15% bearish. As with all anecdotes, one anecdote, one room doesn't mean too much.

For all the dads out there, Happy Father's Day.

Friday, June 18, 2010

4-0 for June

Four winners zero losers for the June option cycle, a good month. The winners were all short puts TLT Jun 89 and Jun 84, SPY Jun 100, BRKB Jun 60. All four of these options were deep in the red at some point after entry.

The SPY Jun 100 puts had over a 1000% drawdown during the flash crash. This means that the buyer of the option had a ten-bagger, and had I closed the trade then I would have lost ten times the small premium collected. It serves to illustrate how difficult it can be to make money way out of the money options and holding until expiration. Even with all the news, these puts close out very safe during expiration week.

GLD continues to make new highs. The sentiment seems good for further gains. Unfortunately, I closed out one GLD trade for break even last cycle, and it would have come in very easily. I have little exposure as my short GLD Jul 100 puts are close to delta zero.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Tuesday, June 15, 2010

Buy SPY (sell puts)

Buy SPY via selling Jul 92 puts SPY @112.0. I rebalance my strangle as SPY rallies. I am already short SPY Jul 66 and Jul 88 puts, and short SDS Jul 30 puts. As SPY rallies, the strangle is getting out of balance, giving me a net short position via SDS. Selling another batch of SPY puts gets me closer to net neutral on SPY.

I am going to attend an OptionPlanet class on complex strategies in Marina Del Rey on Friday.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy BRKB (sell puts)

Buy BRKB via selling Jul 60 puts BRKB @75.4. I placed a limit order yesterday, but didn't get filled. With the market rally, I get a nickel lower per contract today than yesterday's bid. Some traders prefer to place limit orders between the bid/ask or to just take the bid. I am already short BRKB Jun 60 puts, and those will almost certainly go off the board this Friday.

Stock market rally is stronger than I thought it would be. Being short volatility via the short strangles is a good place to be. GLD is holding up better than I thought too, as are treasury bonds. I thought that a strong stock market rally would have drained some of the risk premium from gold and bonds related to the Greece and Euro news cycle.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Monday, June 14, 2010

Random Roger: "Two ways to be rich"

Random Roger the ETF guy, has this quotable line (link):
There are two ways to be rich. One is having a lot of money and the other is having no overhead.

The entry is about using debt and leverage to invest. While it certainly has made some folks rich, with real estate being exhibit A, it also has ruined some folks, again, most recently with real estate being the prime example.

Options can be used for leverage, however, as I have grown older and hopefully wiser, I tend to prefer low risk, low reward strategies. Once in a while I may take a flyer looking for the home run, most of those end up as losers.

Friday, June 11, 2010

Buy SPY (sell puts)

Buy SPY via selling Jul 88 puts SPY@108.5. This makes my July position equivalent to bracketing SPY at 88 and 118. Buying at 88, shorting at 118. The SPY 118 position is via short SDS Jul 30 puts. With these short strangle equivalents, I am betting that stocks and bonds are in for some range trade.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Tuesday, June 08, 2010

Buy TLT (sell puts)

Buy TLT via selling Jul 90 puts TLT@98.5. Bonds holding up well despite being overbought. Support at 91/90/89. I sold puts on TBT yesterday, so again the overall position is equivalent to being short puts and calls on TLT, betting on range trade. I am already short TLT Jun puts at 84 and 89 and those look to be in safe with time ticking down.

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Monday, June 07, 2010

Buy SDS (sell puts)

Buy SDS via selling Jul 30 puts SDS @36.3. The tape action on the stock market is looking ugly. I am short SPY puts and SDS puts, effectively a short strangle on SPY. Same with TLT, TBT, effectively a short strangle on bonds.

The SDS puts strike of 30 is equivalent to where the market broke in early May around SPY 118. So if I did get assigned on SDS it would be like shorting SPY around 118.

Meanwhile, GLD blasts higher, much to my surprise. Clive Maund has some interesting chart analysis on GLD, SLV, SPY at Kitco (link).

SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy TBT (sell puts)

Buy TBT via selling Jul 31 puts TBT @38.8. If the stock market ever stabilizes, some of the risk premium that bonds got from all the news will recede. Support for TBT, an inverse bond ETF around 38.


Saturday, June 05, 2010

Headline: "pop goes the bond fund balloon"

Marketwatch has a lead headline with a cute cartoon about a possible bubble in bonds (link).

Retail investors have been pouring money into bond funds. The driving forces behind the stampede include: low CD rates and money market rates, and volatile equity markets.

Bonds have rallied on the news from Europe, so seem more vulnerable than a few weeks ago when TLT was 89/90.

Do CD rates have to start on up before folks will start fleeing bond funds, or will bonds be sold on anticipation of higher short term rates? Many pros are already either hedged or actively shorting based on fundamentals. When will the average investor make the move? I don't have a solid answer, but still believe as long as headlines and pundits warn of a bubble, the bubble isn't ready to deflate. The bubble is more likely to expand a bit more.

TLT and TBT were talked about during the ThinkorSwim market wrap. Anyone can listen, non-customers have to register. This week the TOS website link is having issues. Anyway, the anecdote is that one of the participants surveyed a room full of 400 people at a seminar. The question was "how many think interest rates are going higher?" Almost every hand went up. The second question, "how many have that position?" Only one hand went up. Now, the caveats are that this is anecdotal. The ThinkorSwim seminar participants mostly focus on options on stocks. So a person could justify either position based on the anecdote. Everyone is bearish on bonds, but only one trader is actually in the position.


Friday, June 04, 2010


The stock market ends this holiday shortened week with a thud. Potential buyers don't like the jobs report. More problems in Europe, this time in Hungary bring in additional sellers. Gold and bonds rally today. I am tempted to sell some puts on TBT, but do not pull the trigger.

It is two weeks to June option expiration. My closest options to the strike price, are my short SPY 100 puts. SPY 104 is support. Getting an assignment and buying SPY at 100 wouldn't be the worst thing, but it certainly wasn't the plan when I sold the puts for a tiny premium before the decline began.


Saturday, May 29, 2010

May in review

SPY closed down about 8.3% month to month. GLD up about 3.4%, TLT a bit better, up about 3.6% (plus another 0.3% for the dividend). It remains to be seen whether GLD and TLT can continue to rally together.

Ned Davis is cited in a Barrons column (link) making an analogy to 1962. Back then the stock market fell about 23% over several months.

In the same article AAII sentiment is cited as 50% of individual investors surveyed as bearish. As long as sentiment is leaning that way, the odds of a major decline like we saw in 2008 remains small. Again, when so many people are looking for a decline, it is unlikely to appear.

To all the readers, have a nice holiday. For all the veterans, a heart felt thank you.


Thursday, May 27, 2010

VIX in plain English

Bill Luby at Vix and more explains in plain English what VIX readings mean in terms of daily moves. link
Using the rule of 16 and the 1/3 trading days time frame, the following translations should be committed to memory:

* VIX of 16 – 1/3 of the time the SPX will have a daily change of at least 1%
* VIX of 32 – 1/3 of the time the SPX will have a daily change of at least 2%
* VIX of 48 – 1/3 of the time the SPX will have a daily change of at least 3%

Simple math allows us to do a linear interpolation. Today, with the VIX hovering around 40, options traders are expecting that the SPX will have daily change of 2.5% about 1/3 of the time.

Looking backward, as volatile as the market have been recently, only three days out of the past month have resulted in daily changes of 2.5% or more. In fact, for all of 2010, there have been only four days in which the SPX has been either up or down at least 2.5%.


Tuesday, May 25, 2010

Wild ride continues

Wow, another wild ride in the stock market today, with the SPY down 2.5% in the morning and then coming back to positive on the close. Again, fast markets tend not to be my friend. There is less money to be made after the dust settles, but for slow moving traders like me, it is the percentage play.

I am looked at selling puts on EFA (Europe/Asia ETF) and TBT (inverse treasuries), but didn't pull the trigger. If markets stabilize the little bond market bump up is likely to fade back to pre-Greece-crisis levels. XLE (energy ETF) is another thought. Selling BP puts is looking like a possible play with the company dominating the headlines.


Saturday, May 22, 2010

3-0-1 for May option cycle

For the May option cycle I closed out three winners, zero loser, one break even trade. The footnote is that I have some open trades that are currently deep in the red. The winners include two SPY May 96 puts and GLD May 92 puts. I closed out early some GLD Jun 97 puts at break even.

Looking back I can call it glass half-empty, or half-full. I survived without major damage. However, there were so many opportunities, and for the most part my timing was poor to horrendous. Even with my profitable trades, almost all could have been opened at 50% to 100% more in premium. My saving grace might have been keeping positions small, and my dislike for fast markets.

In one recent blog entry where I sold puts, I wrote that there will come a time when selling puts becomes the worst possible thing to do. Guess what? This month that came true. Volatility exploded as well so buying back any short puts became an amazingly expensive.

The good news going forward is that I am still in the game, with what I would call minimal damage to my account, and still have dry powder.

all positions are short puts:
BRKB Jun 60
GLD Jul 100
SPY Jun 100 and Jul 66
TLT Jun 84 and Jun 89

Friday, May 21, 2010

Buy SPY (sell puts)

Buy SPY via selling Jul 66 puts, SPY @107.5. Market observers will note the SPY 66 level as the March 2008 lows. If we get back to there by July, basically the financial world has gone to heck. I am already short SPY Jun 100 puts.


Thursday, May 20, 2010

Sell GLD (cover short puts)

I reduce my GLD exposure by covering my GLD Jun 97 puts for a break even loss (about even on the trade but after commissions it is a loss).

Stock market is in melt down mode and margin calls may be spilling over into other markets. There was only about a 4% chance of the GLD puts coming into play, but I already sold GLD Jul 100 puts and feel overexposed. A full meltdown in gold would have done a lot of damage with the double position. I also have May 92 puts going off the board tomorrow.

There is never a good time for a trader to go cold. Sure I have had some major major drawdowns, however, I can take the total view, and that despite the recent swings am doing okay. I remind myself of rule #1, live to fight another day.


Tuesday, May 18, 2010

Permanent Portfolio

This is a trading blog, however, I will sometimes write about long term money in general terms. I found an interesting discussion about a "permanent portfolio" at Random Rogers blog.

The original idea, I believe, came from Harry Browne in the 1970s allocating 25% each to gold, long term bonds, stocks and cash. Per Browne the mix should be able to weather anything that might come along.

For those that know something about the markets, the temptation is strong to tinker with the allocations based on perceived valuations in each market, but in the comments that is often a way to decrease performance.

The fear is also noted in the comments, that it may stop working. As I noted 4/26/2010, a few posts back in "Everything seems risky" bonds, stocks and gold all look like they are vulnerable to steep declines. Historically, it is unlikely that all three classes crumble during the same time period and that is the strength of the idea.

I've been doing a short term trading version of the permanent portfolio by selling puts on GLD, SPY, TLT and continuing to have some exposure, no matter how overbought a particular market gets.


Monday, May 17, 2010

Yo-yo market

Stocks, bonds, gold all had a relatively wide intraday range on Monday. Hulbert notes that stock newsletters bit hard on the recent sell off, going from near record bullish sentiment to bearish levels in a short period of time. This is good news for stock market bulls because it is difficult to have a big decline if everyone is anticipating a big decline.

May option expiration (this Friday) can't come soon enough, after the wild ride the markets have been on, with a corresponding increase in implied volatility.


Wednesday, May 12, 2010

Buy GLD (sell puts)

Buy GLD via selling Jul 100 puts GLD @121.4. Yes, I am chasing, however, these puts are 20% out of the money, making for another low risk, low reward trade. Again, one way to think of the trade is being paid to place a lowball bid. In the unlikely event (5% chance) that GLD falls to 100 by July, I buy, if not I get a tiny premium.

As GLD moves up, the delta on my existing puts: short May 92, short Jun 97, are close to delta zero. Seasonally, June is one of the worst months for gold, so I may add to the July position if that unfolds.


Monday, May 10, 2010

Buy BRKB (sell puts)

Buy BRKB via selling Jun 60 puts BRKB@77.7. Stock market has a massive relief rally at the open. Berkshire Hathaway puts showing 52% implied volatility, even as VIX collapses on the rally. One way of thinking of selling puts is being paid to place a bid on a stock. Margin requirements and draw downs are factors to be considered. ThinkorSwim software indicates 88%+ chance of puts expiring worthless.


Friday, May 07, 2010

Buy TLT (sell puts)

Buy TLT via selling Jun 89 puts, TLT @96.3. Bonds have spiked up in price as the stock market falls. The put volatility for TLT is unusually high. 90 is a support area. I am already short TLT Jun 84 puts.

Yesterday's 998 point stock market decline is being blamed on someone entering a sell order for 16 billion instead of 16 million. Many of the trades from that time are being backed out. What a mess.

If someone was writing a spy novel, that kind of scheme would be a good ruse for manipulating the markets, especially with the knowledge that many of the trades will be backed out the next day. In the plot of the novel, it would be interesting to weave the story line about motivation. Straight cash would be a bit dull. A election in a major country adds to the intrigue. Perhaps I've read too many spy novels, but gosh, what a story it could make.


Thursday, May 06, 2010

SPY support fails

Minor support for SPY at the 50 day moving average and the minor high at 115 are now broken. SPY 105 looms large on the intermediate chart. VIX now at 27, I said 29 might be a signal level, though that isn't any kind of exact science.

I am most concerned about my short Jun SPY 100 puts. I am holding, and thinking if I get exercised at that level, it is buying on a 20% pullback off the recovery highs from SPY 121. It is one way to rationalize what is now over a 200% notional value loss.


Saturday, May 01, 2010

Three strikes for the bull?

Three strikes and yer out in baseball. Is the bull done for now? I'm thinking the stock market is in for some rough sledding, but the damage will be limited. A good many leading stocks and sectors are rolling over. However, the transports made a recent new recovery high, and that is one sign that the bull isn't done making noise.

Investment newsletter sentiment is near all time highs for bullishness, while the small time investors are still for the most part shunning stocks and still piling their money into bonds.

I am still in a low conviction mode. A mild stock market correction is what I expect, but it may be too shallow for slow moving position traders such as myself to make a profit on. Again, "fast markets are not my friend." I'll leave that to the more nimble traders that are at their trading screens all day (I am not).


Tuesday, April 27, 2010


"Yikes" was uttered several times during a repeat of the CBS TV show "Big Bang Theory," on Monday night. It seems a good word for a day, when the stock market melts down -2.7% on SPY, while TLT and GLD are up big. All my short options, even TLT and GLD, went up in price because implied volatility shot up. VIX closes at 23.0.

There are some things that come to mind. First, is my now famous "don't do anything stupid." Second: "fast markets are not my friend."

From the bullish side, if looking at price, SPY 105 is support. If looking at time, two more hard down days might be a time to add some short term longs. If looking at sentiment VIX 29 might be a long entry for stocks.

From the short side, I already mentioned that May/June tends to be a seasonally weak time for the stock market. That the best time to go short is often on a rally failure (vs. trying to pick a top while the market is still moving up).

I've been trading and predicting poorly lately, so that makes this an especially bad time to take on more risk during a fast moving market. Those traders that are more nimble, with a hot hand, have lots of opportunities to look at.


Monday, April 26, 2010

"Everything seems risky"

I was talking about investments with a buddy at the local coffee shop and the subject phrase came up, "everything seems so risky." Stocks are up like a rocket, up 75% from last year's lows, 100% on RUT. Small investors are piling into bond funds like there is no tomorrow, while every other pundit is telling clients to avoid long term bonds, or even short them. Gold has had ten straight up years, has already quadrupled in price, and every major talk radio show has a big time gold sponsor.

It isn't always like this. There are times when folks are afraid of certain asset classes at the coffee shop and that asset class is beaten to heck and shunned.

I have used the phrase before "don't do anything stupid." I think that applies now. There is no need to be overly aggressive. As always, for the average investor, diversifying into age appropriate assets is almost always the best course. Do so gradually, buying and/or selling in small increments to reach the desired allocation. Those interested in low maintenance approaches can search on "lazy portfolio."

For traders, as always, this isn't an advice blog, it is an online trading journal, with occasional observation and commentary. Right now, virtually all the money is being made by bullish stock market traders. Only the most nimble bears can make money by "running between the rain drops" so they don't get wet.

Some day the bull party will end, the trend will change, but for today, the bull is still in charge. We are approaching a seasonally weaker period in the stock market for May/June and then for the entire summer.


Thursday, April 22, 2010

When traders go cold, then what?

Traders can run hot and cold. When a trader is hot, everything seems easy, every trade seems to work moments after it is put on, every exit seems to be at a good time. When a trader runs cold, it is the opposite, trades considered but not taken do well, trades entered seem to go bad the minute the fill comes through.

Right now, I feel like I am running cold. The gold puts I sold the other week, went to -50% on the value within a day or two. This morning the SPY puts I just sold are at -50% from entry. Even though odds are that both are still highly likely to be winners if held to expiration, there was 50% more in premium to be made had I timed the entry points better.

Some things that traders do when cold are reduce position size, choose from less risky positions, and work through it. Some traders will take a break from the markets to clear their heads. Traders sometimes get "punch drunk" from taking too many shots to the head. Some get emotional and try to make up for losers by taking on more risk and like the punch drunk boxer in the ring this behavior can lead to getting knocked out.

Changing the subject to bonds, last night on Nightly Business Report there was another guest saying "stay away from long term bonds." This is the second one this month on the show, loudly and publicly saying that. When so many voices are doing so on business TV, odds of a bond rally are pretty good.


Tuesday, April 20, 2010

Buy SPY (sell puts)

Buy SPY via selling Jun 100 puts, SPY @120.8. Today's action looks like short covering. There is support at Friday's lows because short sellers piled in on the hard down day. I already am short SPY May 96 puts, but they are getting close to delta zero, as what I have called a "ridiculous rally" rolls on.

There will come a time that selling puts becomes the absolute worst thing to do. For the stock market, that time is more likely to be September/October than today.


Saturday, April 17, 2010

4-1 for April, loss for the month

Four winners, one loser for the April option cycle. Winners were:
short SPY Apr 90 puts
short SPY Apr 101 puts
short GLD Apr 95 puts
short TLT Apr 86 puts
The loser was:
long SPY May 104 puts that was part of a vertical spread

Unfortunately, the loser was bigger than all the winners combined, giving me a modest loss for the month. It happens.

Remember what I said about active short term traders with 100% track records. Some are paper traders that don't even trade real money, some only report their winners, some are liars and charlatans.

The weekly ThinkorSwim market wrap (anyone can listen, just visit their site and register if you don't have an account) mentions some market leaders such as GS, EEM, ISRG and GOOG turning south. Some leaders such as AAPL are still holding relatively strong, and AAPL reports earnings next week.

This might be the start of a measurable stock market correction, but there is so much upside momentum, that the bulls are likely to fight. I'd add to SPY longs at SPY 105, and add to GLD longs at GLD 104. Of course, plans can change, depending on how and when they get there, and the news and sentiment background.


Friday, April 16, 2010

Buy TLT (sell puts)

Buy TLT via selling Jun 84 puts, TLT @89.84
Stock market lower, gold lower, bonds higher. My lone TLT position expires today. I sell the June puts to stay in. The GLD puts I sold the other day are down 50% on the notional value. I may double up, if GLD falls to 104. I am long SPY via being short May 96 puts, so they are way, way out of the money at the moment. If the stock market selling squall continues, as I think it will, another 3% to 5% down may be a decent entry for more short puts.

Some might think that the Goldman news came out on option expiration day for maximum impact on short term traders.


Wednesday, April 14, 2010

Buy GLD (sell puts)

Buy GLD via selling Jun 97 puts. My other options are near delta zero, so this keeps me in. It is another low risk, low reward trade. If GLD slides, I may double up or sell puts at a lower strike.

TLT expiring Friday 4/16

Saturday, April 10, 2010

Same old, same gold?

Mostly the same old, same old for the stock market. This is the fifth straight up week. Implied volatility on options slides some more. Stock indices trade in a narrow range all week and end higher. Wash, rinse repeat, that is the same basic outline for this entire rally off the February lows.

Gold, on the other hand shows some spark. Some are seeing a breakout from a pennant. There is some overhead resistance at the old high. However, breakouts into resistance sometimes work out real well. I wasn't on this train when it left, so am reluctant to chase that train. Well, I did have what for me have become the usual low risk, low reward position of being short way out of the money puts. The delta is nearing zero so my GLD exposure is nearing zero.

TLT has provided some excitement. Again, so many in the popular media are saying bonds are going down, that the contrary play is to buy bonds, or sell the puts as I have. The implied volatility is relative low on the May TLT puts, so I am reluctant to sell a new batch. Those betting on a big decline in bonds are in a way betting on a strong rebound in the overall economy. I have a difficult time seeing that scenario, but lately my predictions have been bad and worse.


Tuesday, April 06, 2010

Cover short SPY (sell puts)

I sell my SPY May 104 puts for a 85% loss. It was part of a vertical put spread that I entered when SPY was at 112. SPY rallied, volatility declined, and that means a big loss on owned options.

I still have the other leg of the position, so am now long SPY.


Wednesday, March 31, 2010

Stocks move ahead during Q1

Stocks move ahead during March 2010 and the first quarter. Bonds slip to last in the 2010 derby, as measured from the 12/31/09 close (111.44, 107.31, 89.89):
SPY up about 5.2%
GLD up about 1.7%
TLT down about 0.4%

At the end of February, TLT was outperforming both gold and stocks, so things change.

For those readers that celebrate Passover and/or Easter, have a meaningful and joyous holiday.

neutral SPY

Sunday, March 28, 2010

"Everyone" is selling puts

During the weekly ThinkorSwim market wrap up, they said that several times, that ThinkorSwim customers are selling puts in quantity. As most market veterans know when "everyone" is doing something, that can sometimes be a big red flag. As my readers know, selling puts has been my favored strategy for quite some time now. I don't like having so much company. I'd like to believe that ThinkorSwim customers are smarter than most other market participants, but there is danger in that kind of thinking.

Anyone can listen to the ThinkorSwim market recaps, whether they are a customer or not. Non-customers have to register. I would recommend it highly for those seeking an options oriented recap of weekly market action. ThinkorSwim is going to add another weekly session about trading psychology.

neutral SPY

Thursday, March 25, 2010

Buy GLD (sell puts)

Buy GLD via selling May 92 puts. Way out of the money, as has been my recent pattern with GLD, so it is a low conviction buy. I am already short GLD Apr 95 puts.

The stock market is roaring back from its minor down day on the Portugal news. The rally is stunning. Bonds are acting terribly. My TLT position is now underwater. I may roll the short Apr puts to May, I doubt I'll double up on short puts like I am doing with gold. I am thinking to close out my long SPY May 104 puts when the delta gets to -5 or so, right now it is -7.9 with SPY at 118.

neutral SPY

Tuesday, March 23, 2010

Another day another rally

I am tempted to use the term ridiculous rally, because that is what it may seem like to stock market bears.

Momentum has a mind of its own. There has been so much of an upward bias, that even while it is weakening, it still prevails.

I am looking to sell some GLD and TLT puts for May expiration to add to the short April puts, but would like a decent dip to open the positions.

neutral SPY (four positions net neutral)

Monday, March 22, 2010

Buy SPY (sell puts)--now neutral

Buy SPY via selling May 96 puts. This gets me to about delta neutral after being slightly short. The position is four-headed, but the bottom line is close to neutral, benefiting from time decay.

The stock market was set up for a decline, but doesn't go down. Yes, it is extended to the upside, but the odds of a significant short term decline of 10% or more, seem slim.

For the 96 strike to come into play, would be about a 19% decline. It is difficult to see that. 10% stock market declines are common. However, 10% in a single month is an exceptionally bad month. Two -10% months in a row is the sign of a major bear market.

delta neutral SPY

Saturday, March 20, 2010

3-0 for March option cycle

Three winners, zero losers for the March cycle. GLD, SPY, TLT puts all expire worthless. The SPY put was originally part of a vertical put spread. I made money on both legs of the spread for a total return of 60% on the initial investment. The small print is that because I legged out of the position, the margin requirement of holding just the short put was ten times the cost of the initial position.

Finally on Friday the stock market has some modest downside action. For stock market bears, the relentless and slow rally has been like water torture. Option premiums contracted and contracted. While a 3% or 5% down move might happen at any time, more than that will take a bigger foundation or a bigger event. Upward momentum still dominates the stock market and will take some time to dissipate.

There is a chance that the entire Friday event was related to options expiration.

slightly short SPY

Tuesday, March 16, 2010

Cash is trash day

Cash is trash for the day, as stocks, bonds, gold all move higher. I am surprised by the strength. Thankfully, I am not a stubborn trader. There are a fair number of stock investors that remain on the sidelines, now having missed the entire 70% up move from last year's lows. Worse, there are some stubborn folks that have been short, or keep shorting the stock market, and for the most part have kept losing money. Today's action doesn't look good for would be stock market bears, as the potential double top in SPY can now be said to have failed.

Today, I was tempted to add to gold longs, but told myself that a better entry point is coming soon. My recent SPY vertical put spread is down over 50% in value from the entry. Thankfully, I hedged with offsetting options. So the good news is that I haven't lost much on SPY positions during the last couple of weeks, the bad news is that I lost while all the bullish participants made money.

I wish I had some brilliant insight into what comes next, but I have been mostly ice cold as far as predictions. That said, all three of the March options that I am short look to expire worthless without any stress. This means another half-decent month as far as trading profits and losses on the monthly option ledger that closes this Friday.

ever slightly short SPY

Thursday, March 11, 2010

Buy SPY (sell puts)

Buy SPY via selling the Apr 101 puts (SPY @115.3). The upside bias continues. This gets me to five open option positions on SPY and now is very slightly short.

slightly short SPY

Monday, March 08, 2010

A couple of anniversaries

It is a year ago that the stock market bottomed. SPY is up about 70% from the lows. It is also about ten years ago that the Nasdaq topped out (chart). In 1999 QQQ had just started and was all the rage as it doubled from 50 to 100. Today QQQQ is 46, who knows if and when it will ever get to 100 again. Glancing at the long term QQQQ chart, it looks extremely bearish for the intermediate term.

Another anniversary that I let slip is this blog's fourth anniversary. I started posting in February 2006. Posting publicly as I make my trades, has helped clarify my thinking. It helps me see what is working for me, and what isn't. I always tell people that there are a hundred ways to make in the stock market. The key is to find one that suits your particular personality.

With that in mind, some readers might find the blog to be boring. I don't post every day. I average maybe a trade a week, with occasional long periods of no trading. Lately most of the trades tend to be low risk, low reward trades. My "gunslinger" days are long since gone.

Happy anniversary, one and all. Cheers.

net short SPY

Friday, March 05, 2010


It never feels good to be on the wrong side of the market when news comes out. Being short SPY on this rally Friday is not a good feeling. Yes, the long puts are for May, so there is a lot of time, but a 35% haircut on the value of the position in a few days is not a lot of fun. Being long TLT was no picnic today either, as better than expected employment news often means bonds going down, yields going up.

As I have written before, be wary of any short term traders that claim 100% track records. Most likely they aren't trading real money in real time. More likely they are posting only winners in hindsight, or worse--have horrendous drawdowns that no live trader could withstand.

With infinite paper money, a paper trader can double down and keep doubling until the tide turns. In real life that kind of doubling is a recipe for losing everything. As I stated from the beginning of the blog (now more than three years), survival, living to see another day is priority one.

net short SPY

Wednesday, March 03, 2010

Buy TLT (sell puts)

Buy TLT via selling Apr 86 puts, TLT @ 91 even. The March puts that I am short are nearing delta zero, so I am opening up an April position. ThinkorSwim indicates a 12% chance of exercise on the TLT Apr 86 puts. As has been mostly the case, this is another low risk, low reward, high probability trade (88% chance if held until expiration).

net short SPY

Tuesday, March 02, 2010

Short SPY (vertical put spread)

Short SPY (@ 112.2) via a vertical put spread May 104/96. SPY near resistance. While SPY may well float higher, premiums are low on this calm morning. I figure the odds are good for a mood change back to bearish before May expiration.

bot SPY May 104 put
sld SPY May 96 put

Why those strikes? The 104 strike has a 50% chance of being touched before May expiration. Eight points wide is a good balance of risk/reward. Selling the 96 put reduces the cost and the time decay of just buying the put by a good 30%, yet still gives the overall position explosion potential if the market melts down.

net short SPY

Friday, February 26, 2010

Buy GLD (sell puts)

Buy GLD via selling April 95 puts, GLD @109.4. The March put position is nearing delta zero, so I am opening up an April position. This doesn't seem like a great entry, but time decay means there may not be a much better entry point in the time available.

Option traders need to look at both time and price. In general, option buyers need to get both time and price correct to make money.


Thursday, February 25, 2010

Buy SPY (sell puts)

Buy SPY via selling April 90 puts, SPY @109.1. The delta on my March puts is getting close to zero. The big dip this morning is an opportunity to to get some elevated premium on April options. If I had to guess, I would guess SPY continues lower. However, for the 90 strike to come into play, stocks would fall another 18% by April, which would be full meltdown mode, and I don't see that.

Again, stock market declines of 10% are common. However, -10% in one month is an exceptionally bad month. Two such -10% months is a row would be even more exceptional. It seems like a relatively safe bet to take the other side.


Wednesday, February 24, 2010

Bears on the run

The stock market decline after the Consumer confidence number came in weak seemed too easy an opportunity to go short. The market had been up five days in a row and was near technical resistance. So what happens the next day? All those bears find themselves in a trap, and either have to cover and take their lumps, or hold on with losses.

GLD (chart) is showing a pattern of lower lows, lower highs--that is bearish.

TLT showing some strength, and is still outperforming both GLD and SPY since January 1. Who would have thunk that? For the most part, the news hasn't been surprising, just the usually chatter and reports. However, the sentiment on Treasury bonds was so bearish at the start of the year, that even though the news was about as expect (perhaps a bit worse for bonds with the Chinese government reducing their bond buys) all the fundamental information was already factored into the price.

Long GLD, SPY, TLT, though all options have decayed to the point that I am closer to flat than long on all three.

Saturday, February 20, 2010

5-0 for February

Five winners, zero losers--a good month of trading for the February option cycle. It was certainly a rollercoaster ride, as every position was in the red for a time, many deeply in the red. The winning trades were short puts on GLD, SPY, TLT, TM, and a long put on SPY.

Yes, long premium worked out for a gain this time, even though the odds are against that result. I lucked out on the long SPY puts (part of a bearish SPY vertical put spread) as the market continued straight up after I sold the puts. The option value declined about 50% in three days, as the market rallied and time decay started to accelerate on the March option.

Toyota TM moved lower from 77 to 70 after I sold the put, but the margin of safety of selling the 65 strike, way out of the money, worked out. The drawdown was over 150%. Drawdown is the hypothetical exit at the worst point in the trade. It is extremely relevant for sellers of options because of potential margin calls.

The markets "dodged the meteor" when a surprise Fed rate hike rattled the overseas SP futures, but strong buyers stepped in and bought in New York. If the market was more fragile, that kind of news could bring -200 or -300 on the Dow on the day. Doing it on option expiration can make for a lot of impact on financial markets.

Long GLD, SPY, TLT for March expiration, all short puts

Thursday, February 18, 2010

Upside bias

I've been busy with other things, and not spending so much time on the markets. There is a mostly upside bias. Some would say it is due to all the liquidity being pumped in by the Fed.

The bears have been hit hard lately. Later in the year, the tax law sunsets will loom larger. Taxes on dividends and capital gains are going back to the old higher rates. I don't know how much selling or reallocating this is going to cause, but it could add fuel to any equity declines in the fall.

I have options on all of these expiring this Friday and all are safe, barring a meteor strike kind of event. I have already sold March options on GLD, SPY, TLT.

Monday, February 15, 2010

Happy Lunar New Year

Gung Hwa Fat Choy. It is the Year of the Tiger, the white Tiger at that. Yes, that is the genesis of the name of the blog, the year of the tiger.

Over at MarketWatch there is this bit (article):
Turning to fortune tellers for the year ahead also offers limited comfort. Brokerage CLSA, in their annual light-hearted feng shui guide for investors, warn that Tiger years are typically marked by dramatic changes and even upheaval. Further, much like the tiger itself, the year will be energetic and powerful, but impulsive and risky.



Friday, February 12, 2010

Buy GLD (sell puts)

Buy GLD via selling Mar 91 puts, GLD around 106.50 at the time the order was filled. One person describes the trade this way, "you get paid to place bid." If the underlying goes down to the strike, you buy, if not you get the small premium. (I already sold Feb 92 GLD puts, and those are almost sure to go off the board.)

As for the stock market, it reminds me of the old saying about weather in the Midwest: "if you don't like the weather, wait a bit, it will change." Don't like the mood of the stock market, don't worry it will change. The market swings quickly from greed to fear and then back again.


Thursday, February 11, 2010

Buy SPY (close long put)

Buy SPY via selling the Mar 102 puts that I own, for a tiny profit, SPY at 107.05. Time decay is starting to accelerate. I entered this trade as part of a 102/94 vertical, and am still short the SPY Mar 94 put.

Yesterday's trade selling TLT puts was about as poorly timed as any. Soon after, TLT dropped on “saber rattling” by Chinese military officials saying that their government should sell some of their treasuries. It happens (SPY drifting lower as I type this up, too--I don't have much touch right now.)

I may sell a March GLD put soon, but would like a better entry point.


Wednesday, February 10, 2010

Buy TLT (sell puts)

Buy TLT via selling Mar 86 puts, TLT at 91.50. I would have preferred to wait for TLT to decline under 90, but now am thinking the decline may come too late, to get much premium on March puts.

Remember the drumbeat at the beginning of the year that inflation was sure to rise, and bonds were sure to tank. So far it hasn't happened. Right now TLT is one of the better performing asset class long ETFs for calendar 2010.

Short SPY

Weathering the storm

Reports are for a "snow" day in New York, so don't read too much from today's action. The ride has seen volatility rise. Overall, I still believe that the stock market trend is for lower lows. However, it is not going to be a straight down hill ski run. I am looking for an entry to roll the TLT short puts so that I continue to have exposure.

Short SPY

Saturday, February 06, 2010

SPY target 102.5, GLD 99

My chart reading gives targets of SPY 102.5, and GLD 99, TLT 89. As always, predictions can be entertaining, but the money tends to be made in managing the risk, with right sizing of positions, finding good entry points, and timely exits.

Wow, what a wild ride for most markets on Friday. Again, the exhortation is "don't do anything stupid, fast markets are not my friend." A reassuring thought is that sometimes option positions can be self managing, if the size remains small and the position is properly constructed.

My SPY position is:
short Feb 98 put
long Mar 102 put
short Mar 94 put
That boils down to net short SPY, but not by a lot. If the market decline continued to accelerate down, gamma would kick in and the position starts to reverse to net long SPY.

I'll state the obvious, options are not for everyone--there are a lot of variables.

Short SPY

Thursday, February 04, 2010

Bumpy ride

It sure has been a bumpy ride, especially in Toyota. I am holding my positions for now. I have a huge percentage loss in my TM short puts, though it is a relatively small dollar amount on a small position.

The stock market and gold are having their ups and downs as well.

net short SPY

Monday, February 01, 2010

Doubling down with a "Texas" hedge

I haven't heard the term Texas hedge before. It is used in this Barron's article (link).

This is the context...
>> "I am thinking of selling Intel March 20 puts -- and as a hedge, selling an odd lot of the 17.50 puts as well," he said.

The natural question is: Why would someone bet that investors are too afraid and sell say five Intel March 20 puts and hedge with less than five March 17.50 puts? The likely answer is because he's willing to wager big that even if he misses out on the March 20 put trade, he'll make his money back.

"I love the Texas hedge," the trader said, referring to a position that increases risk even though a hedge is supposed to decrease risk.


Market action has been surprising. After spending some time this past weekend looking at charts, I thought more downside stock market action was likely, not a big rally day. I also thought gold was in for more downside. I lucked out on getting in near the bottom on Toyota (TM), though as almost always it is a small bet.

Net short SPY