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.

Long BRKB, GLD, SPY*, TLT*
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.

Long BRKB, GLD, SPY*, TLT*
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.

Long BRKB, GLD, SPY*, TLT*
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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SDS, SPY, TBT, 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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SDS, SPY, TBT, TLT
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).

Long BRKB, GLD, SDS, SPY, TBT, TLT
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.

Long BRKB, GLD, SPY, TBT, TLT

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.

Long BRKB, GLD, SPY, TLT

Friday, June 04, 2010

Thud

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.

Long BRKB, GLD, SPY, TLT