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).