Friday, December 30, 2011

2011 at a glance

The year at a glance:
12/31/10 12/30/11 percent
SPY 125.75 125.5 -0.2%
TLT 94.12 121.25 28.8%
GLD 138.72 151.99 9.6%
SLV 30.18 26.94 -10.7%
EEM 47.64 37.94 -20.4%
IWM 78.25 73.75 -5.8%

The clear winner for 2011 is U.S. long treasuries. Clear loser is emerging market stocks. Gold held its own for its 11th straight up year. Silver managed a loss despite a run back up to near all time highs.

There were mini-crashes in silver, and stocks. I got caught in both, and a few big losing trades made break even for the year a decent result. I think I am down just a tad for blog posted option trades. It was a deep hole that I dug with some ill-timed put sales in SLV, SPY and IWM. I had some decent winners with some put backratios.

Thursday, December 29, 2011

Jaffe: goals for 2012, and F-U-money

Chuck Jaffe at MarketWatch writes about his personal goals for 2012 (link). Included on this list are:

Taking care of myself first [health]

Reducing financial stress

I am big believer in balance, that money and finance are only one part of life.

As for #2, I sometimes talk about wealthy people not having to worry about their money. I no longer enjoy financial rollercoasters. Yes, options can be extremely volatile, but position size takes the edge off.

In conversation, I sometimes use the term F-U-money (yes, the expletive). It was a term I heard from President Ronald Reagan's Secretary of Treasury, Donald Regan. Regan talked about the president's close circle of advisers, and how he alone had enough money to really protect himself. Regan felt that he had enough money, that he could tell his boss F-U, even though his boss was the most powerful person in the world. If a person has enough money to tell their boss that, that in a nutshell is where the term comes from. And no, I don't have that much. It would be nice.

Monday, December 26, 2011

Swedroe: Indexing is a Rational strategy

Larry Swedroe (a passive index type of investor) makes the argument against investing based on news driven fundamentals (link).

>>
The reason is simple. If we know there are problems, the market surely also knows and that means the problems are already incorporated into prices. And why would you buy when things look safe, and thus valuations are high and thus expected returns are low, only to sell when risks show up, and thus valuations are low and expected returns are now high? That doesn’t seem like a rational strategy, yet it is exactly what most investors do, and it explains why they do so poorly, underperforming the very funds in which they invest.
>>

Many folks that I observe on the Internet do just that, investing in what WAS the best performer, which often turns into the worst performer going forward.

I like to look at fundamentals, technicals, sentiment, cycles and seasonality. Yes, there are successful investors that primarily focus on one kind of data, and mostly ignore the others. Yes, a person can become overwhelmed by amount of data as well. I tend towards simple in terms of analysis, but look at most indicators.

As I always tell others, finding your own style is perhaps the most important step in becoming a successful investor or trader. That successful style for you, may lean heavily towards one kind of data, or it may be a more holistic approach as I tend towards.

For the majority of average folks, the clearest path is the Swedroe approach, passive low cost indexing and asset allocation (the Boglehead way, link to forum). It has proven over time to beat 80% of other investors using every thing else. Of course it tends to give up the chance for grand slam home run investments, but only a very few have any realistic chance at those kind of results, and those few tend to have extreme talent, and/or extreme luck.

Obviously, as an active options trader, I stray far from the Boglehead way. For the vast majority of every day folks that don't have a burning passion for investments, I still believe that low cost indexing is the way to go.

Sunday, December 25, 2011

OT: Like Christmas Morning

It is Christmas morning, and I am taking some time to post an off topic story. I went to church on Christmas Eve, and one part of the service included a short video. One of the members has a son serving in Afghanistan. The son is home for Christmas. Earlier in the year, the church members assembled and sent over a care package, with snack food, toiletries, some small toys, and other items in short supply over there.

The young soldier thanked the congregation for that act of kindness, saying whenever they get a package from home in Afghanistan, "it's like Christmas morning." Surprisingly, the small toys had a great impact. They weren't asked for, after all, these are men getting paid, who can afford many small toys. The soldier was able to re-gift the toys to the children of the village.

Now for the typical middle class American kid, a Hot Wheels car will generate a shrug or be ignored. For a third-world kid, it became a prize, something they have never seen before.

Investors are in the upper half in this country because half the U.S. population does not save money at all. American investors are typically better off than those in other countries. Sure, we as a group would like to have more money. That said, a story about a Hot Wheels car becoming a prized possession serves to give me more perspective.

We have so much to be grateful for, not the least, is having a son, a soldier (not my son, but someone in my church) home for Christmas. I also know that especially for some, giving can be difficult, even sneered at. The need seems so great, making any difference seems so unlikely. There are two points to the story, about being grateful for what we have, and that sometimes the unexpected, even a small gift, can sometimes brighten someone's day, and turn an otherwise ordinary day into Christmas morning.

Saturday, December 24, 2011

Merry Christmas

Merry Christmas to all.

My TBT assignment was at first some bad luck, now some good luck. The market giveth and taketh. The assignment 6 cents in the money was a bit of bad luck, as was the down move on the Monday after expiration. The rally off that low, now makes it look like a stroke of good luck.

Long BRKB, TBT

Saturday, December 17, 2011

4-0 for December (edited)

Four winners zero losers for the December option cycle. All winners were short puts, two for SPY, one in BRKB, one in TBT. The TBT actually closed in the money at 17.94, but as of this writing it looks like I didn't get assigned.

Going forwards, I only have one small position, short Jan BRKB puts.

I steered clear of the gold train wreck. I am still cautious, and see the latest bounce as more of a chance for bearish folks to get short than anything else. Long term, the gold uptrend is intact, but a lot of damage has been done in the short and intermediate term. Bullish seasonality alone is not enough to tempt me at this point.

/edit to add: crap, I did get assigned on TBT, and it is lower this Monday 12/19.

Saturday, December 10, 2011

Last two days=year in a nutshell

The violent down move and then up move during the past two trading days is the year in a nutshell. A lot of movement, but not a lot of change in prices. At some point the market breaks out from the range, but for now it is range bound. The scalpers seems to be tightening the range.

My schedule allows less time than ever for following the markets. I have a few small positions expiring 12/16, and only one open position for January 2012. I have little appetite for additional risk given my time constraints.

Long BRKB, SPY, TBT

Saturday, December 03, 2011

V bottom

The stock market just had another V-shaped bottom. Supposedly these are rare, but that makes two V's in the past few months.

I was not, and tend not to be nimble enough to make money during fast moving markets.

Some other writers are noting the big daily movements, but very little actual movement year-to-date, or month-to-month.

Overall, I believe 2011 has been a difficult often frustrating year for many traders, myself included. Like the broad stock market, I am oscillating just slight above and below the break even mark for my trading account.

I'm sure there will be some blaring claims by a few who did well, because there were some exceptional moves. I'm not so sure that those making those claims have that much of a repeatability factor. As always I read any claims, especially those that don't have an audited track record, with a large grain of salt.

Tuesday, November 29, 2011

Buy BRKB (sell puts)

Buy BRKB via selling Jan 62.5 puts, stock around 75. I open a January position, am already short Dec 62.5 puts. Logic is the same, chart support plus stock buyback.

Long BRKB, SPY, TBT

Wednesday, November 23, 2011

Thanksgiving

Radio host Dennis Prager often talks about gratitude being the number one attribute that correlates to happiness. It isn't money, nor status, nor fame, that brings happiness. Plenty of folks have an abundance of any or all of those and still feel empty inside.

Thanksgiving is the holiday of gratitude, a time to count your blessings, to appreciate what you have. Be grateful, bless what you have and it will tend to multiply.

Let me take this post to thank all the readers, especially those that have been reading for several years. May all have a blessed and safe holiday.

Saturday, November 19, 2011

4-0 for November and Buy SPY

Four winners, zero losers for the November cycle. All are short puts: BRKB, TLT and two SPY layers.

On Friday early during the trading day, I got filled on a sale of short SPY Dec 102 puts (a bullish move, or at least a bet against a crash). I am already short SPY Dec 99 puts. Going forward I am still clear of GLD, short bonds, cautiously long on stocks.

Long BRKB, SPY, TBT

Friday, November 11, 2011

Buy TBT (sell puts)

Buy TBT (2x inverse bond ETF) via selling Dec 18 puts. With the news background, U.S. bonds are getting a bump up. TBT 18 marks about the top of the bond market rally, though there is the decay in the 2x inverse fund.

I don't have much insight on the stock market smash on Wednesday. Obviously, my most recent sale of SPY puts were at a bad time. Sell a lot of puts, like I do, and it happens. Hopefully, not that often, though.

Long BRKB, SPY, TBT, TLT

Tuesday, November 08, 2011

Buy SPY (sell puts)

Buy SPY via selling Dec 99 puts. I open a December SPY position, with a low risk, way out of the money sale of puts. Again, there are multiple support levels in between current prices and the strike price. It would take a lot to cut through all that support and there is Thanksgiving and Veterans Day coming up to slow trading and reduce volatility.

This is another order before the open that fills early in the trading day. I don't get near the best price of the day, but by the end of the day, I am in the green.

Long BRKB, SPY, TLT

Monday, November 07, 2011

Buy BRKB (sell puts)

Buy BRKB via selling Dec 62.5 puts. Same arguments as before, chart support and a stock-buyback make a steep decline unlikely. BRKB in the 77 range.

Gold had a huge rally day. I make a bearish post about GLD and wow.

Long BRKB, SPY, TLT

Sunday, November 06, 2011

Trading without live quotes and a Bearish GLD chart

Most of the time, I place an order to sell at the bid, or buy at the ask, and most of the time get a fill within seconds. The last few weeks I haven't had access during market hours. This means placing orders before the open. Market orders on options often get the shaft at the open. So I am trying to guess a theoretical option price based on the opening bid and ask indications, and the possible low and high for the day.

Trading without a live bid/ask quote has made me more patient, even more cautious. I haven't tried any spread orders or backratios during this time period.

I can make a quick comment on the GLD chart, it looks about as bearish as I have seen it in recent memory. I remain long term bullish on gold, so am reluctant to short it. Those without that bullish gold bias might take a look at the short side. If I were to take a short position, my choices tend towards a bearish calendar put spread, or a bearish vertical put spread. I dislike straight buying of puts, though there are pluses and minuses to each choice.

Here is the 6 month chart for gold (GLD @170.8 Friday). The modest rally off support, moving into resistance on lower volume looks like a text-book example of a rally ready to fail.

Friday, November 04, 2011

Hulbert: bear market rally

Mark Hulbert on Marketwatch writes about sentiment during this recent rally (link).

>>The unfortunate conclusion is that the Oct. 4 lows are likely to be broken.
<<

Too many stock advisers have been buying into the rally. That is the conundrum of the markets, when too many folks are on one side, the majority often ends up being wrong, especially at the turns.

Wednesday, November 02, 2011

Buy SPY (sell puts)

I place a limit order before the open to sell SPY Nov 107 puts, and get filled right at the open. I have a hard time seeing a scenario that crashes the stock market below the recent lows before November expiration.

Long BRKB, SPY, TLT

Saturday, October 29, 2011

Trick or Treat? (ot: tablet post too)

I haven't been posting much. I was under-invested during this record rally in the stock market. The broad SPY is up about 20% off its lows at 107 in just a few weeks. Many traders missed the bull boat. That huge wall of worry was scaled and the market moved up. Some that missed out are writing angry missives about how it is a trick, that the fundamentals haven't changed. Well, how much did they change to drive the market down to 107?

I also missed this 5% gold rally off the lows, and 9% bond market move lower. I've been writing about October/November as the time to turn bearish on bonds. Looks like I waited too long to pull the trigger on establishing bearish positions (eg: long TBT or short TLT).

I am going to stray into an off topic subject, the buying of gadgets. There is a Best Buy commercial where a guy buys a 3D TV and then see's an ad for a 4D version. So it is with my new tablet, it is Android 3.2 and they just announced version 4.0. A person can always wait. My original plan was to buy one in September, but nothing offered for sale then was compelling enough for me to buy.

My new tablet is an Archos 80 G9 with an 8" screen. It feels like a steep learning curve for Android coming from Windows. Many times I throw up my hands trying to do what seem to me the simplest of things, or irritating bugs. No mouse, no keyboard, make for a very different interface. The main reasons I choose the Archos, are the 8" screen is about the perfect size for me, and the expandability. The 7" tablets are about 40% smaller in square inches, and the Ipads and other 10" tablets are about 30% larger. I made paper cut outs of each size of tablet, and the middle at 8" is the right zone for me. The Archos takes micro SD cards for more memory, and offered 3G expansion with a USB plug in. Unfortunately, I learned too late, that the 3G for the Archos only works in Europe and there are no current plans to have one for the U.S.

Tuesday, October 25, 2011

AMZN NFLX two horses down

Two of the glamor stocks of this bull market, Amazon AMZN and Netflix NFLX suffered huge declines today. NFLX has been limping along for months now. AMZN was near all time highs.

Amazon saw sales up big. The new Kindle Fire is rumored to cost $10 more than they are selling it for. Estimates are for five million of the units to ship before year end. That's $100 million in sales, causing an immediate net loss of $5 million to the bottom line.

Long term, it will help the company, but the stock was apparently priced too perfection and suffered. I was tempted to sell the Nov 180 puts this morning, thank goodness I did not.

I missed this big rally in gold.

Long BRKB, SPY, TLT

Friday, October 21, 2011

7-1 for October

Seven winners, one loser for the October option cycle. Winners include short puts on GLD, PFF, SPY, TLT (2 strikes) and separate short put backratios on GLD, and SPY. Loser was a SPY vertical put spread. I legged out of the backratios and verticals, so that added more risk. The backratios came in strong, 200% profit on the SPY, 400% on the GLD, basis the initial credit. Before folks get too excited, the margin requirements are a lot bigger than the credit so actual percentage gains on margin put up are not so exciting looking. Still, some good gains.

I am short puts on BRKB, SPY, TLT going forward. For the first time in a long time I don't have a GLD position. I danced close to the flame this cycle, as GLD was in my zone of 154 to 159. I did well to get out with 400%.

Long BRKB, SPY, TLT

Tuesday, October 18, 2011

Buy SPY (sell puts)

Buy SPY via selling Nov 99 puts. Another order before the open, another fill on the opening dip. Today I had better luck as the market rallied off the lows.

GLD gave me a bit of a scare with a big dip early, before rallying. I am still short Oct 154 puts and the low was in the 158 range. I don't have any November positions on GLD yet. I am skittish. It does not seem to be acting well.

Long BRKB, GLD, PFF, SPY, TLT

Monday, October 17, 2011

Buy BRKB (sell puts)

I place an order to sell BRKB Nov 62.5 puts before the open and it gets filled as the market declines. Unfortunately, the market kept declining. I am light on Nov positions so may add more stock market longs if today's steep decline continues.

BRKB has a buy-back as support.

Long BRKB, GLD, PFF, SPY, TLT

Friday, October 14, 2011

Unwind GLD (sell)

I sell my long GLD Oct 159 puts. This was part of a short put backratio. I am still short 2x GLD Oct 154 puts. I think GLD is headed a bit lower, but time is close to up with one week remaining until expiration to get below 159.

Long GLD, PFF, SPY, TLT

Tuesday, October 11, 2011

More SPY (buy)

I sell the last of my long SPY puts, the Oct 109 puts that were part of a short backratio 109/104. I remain short batches of SPY puts at much lower strikes 104, 95, 89.

My GLD short put backratio 159/154 is now slight negative delta. Max profit is at 154 on October 21, below 149 and I start taking on water.

Long PFF, SPY, TLT
Neutral GLD

Friday, October 07, 2011

Financial fasting

An off topic post for the weekend. A friend had this book, "The Power to Prosper," by Michelle Singletary. It lays out a 21-day financial fast and I quickly skimmed through it. Be warned that Singletary takes a religious approach, so it may not be for everyone. I won't link it so folks know that I am not getting any kind of kick back or referral fee.

I advocate a healthy, balanced approach to life. Like food fasting, too long or severe a financial fast can do more harm than good. However, like food, the vast majority of Americans could do a bit of financial fasting to reach a more healthy and balanced place in life. The person with the book, said she has done the fast several times after owning the book for a year. Overall, she had extremely positive things to say about the book, and the fasting program.

Other things I tend to advocate include a high savings rate, living below one's means, and being mindful of where a person spends their money. I tend to be a frugal person, and still found many suggestions in the financial fasting program that would be difficult to give up. For example, window shopping, even online window shopping, eating out at all, even cups of coffee, even if the guest of someone else, the giving of gifts and/or greeting cards that cost any money, are some things to give up during the financial fast. I would have a tough time with all those that I listed. One goal is to move away from linking spending or gift giving to happiness and fulfillment and friendships.

More than a few people say that government deficits are primarily a spending problem. I observe this with individuals as well, that focusing on their spending, their lifestyle, can bring a person to a healthier financial place.

One reason that wealth gets concentrated in such a low percentage of the population, is that about half the population spends all the money they make, no matter how much they make. Many go beyond that, and borrow and carry credit card balances and pay an extra 20% for the pleasure of consuming a few months earlier.

I like to do the opposite, do what now seems very old-fashioned, saving up before spending. I do the same with food, I plan to lose some weight ahead of the holidays, so I won't feel as guilty indulging during.

Thursday, October 06, 2011

Unwind SPY (buy)

Sell SPY Oct 100 puts, this locks at least a minor loss on the 100/95 vertical put spread. I see little chance that SPY breaks 100 before Oct 21. I flipped to net negative delta (short SPY) because of the way the options moved. This unwinding move brings me back to slight positive SPY delta.

Long GLD, PFF, SPY, TLT

Monday, October 03, 2011

Ritholtz: 5 down months, then what?

Barry Ritholz has an interesting look at what happens to the stock market after five down months in a row (link). This time might be the worst of the worst, but even then -40% after a year is about the worse. For two months out, another -9% is the worst historical case and that was in 1974, one of the worst bear markets ever.

As I often write, corrections, bear markets do happen, however, it is rare where they go straight down.

Even with the data, I certainly wouldn't bet the farm on another -9% and SPY 100 holding. SPY is at the 110 support level right now. So many other markets have broken down, SPY may break down as well. Still, the data is intriguing and I may take a flyer on some new SPY short put backratios (hedged positions that are net long but with an explosive profit at lower price targets).

Saturday, October 01, 2011

3rd quarter ends, Amazon Kindle Fire

The 3rd quarter ends with a thud for stocks worldwide. Down about 14% for U.S. stocks (SPY), down about 17% in Europe, 25% for Germany. Gold (GLD) up about 9% for the quarter, U.S. Treasuries soared up with TLT up about 25%, despite the S&P rating down grade.

I am very interested in the new Kindle Fire tablet announced by Amazon, and may purchase one. As for AMZN stock, with a valuation already over $100 billion, that particular tree won't grow to the sky. Apple and ExxonMobil at around $350 billion in market cap are the biggest companies, and can be thought of as a kind of an inhibitor as to how big companies can get. Once companies get that big, they make a lot of enemies, and growth becomes more difficult. Even maintaining streams of revenue can be difficult. So while I think the Kindle Fire is going to be a big seller for AMZN, it is difficult for a big company to have explosive growth.

I was in a decent position for this past week. My max profit is at 154 for GLD (currently 158) and 104 for SPY (currently 113) at October expiration. Bonds are about the only thing going up and I am making some bits of money from being short TLT puts. Of course, it could be better, and the GLD position has seen a huge drawdown as there is still a lot of time premium on my short puts.

For readers wondering why I am posting less, and trading less, it is a matter of time, schedules and priorities. Right now trading and posting are on the back burner and will likely stay there for some time.

Sunday, September 25, 2011

Storytime: Coleco, RIMM, and Silver

I have some time this morning and a story comes to mind. When I was a young cub, I worked with another young man who invested all his money in Coleco. Old timers might remember the Coleco Adam, a highly hyped computer in the 1980s that was supposed to be the next big thing. Other computers from that era include the Commodore 64, Atari 800, Apple II. My buddy was so sure of this that he bought Coleco stock at full margin.

The stock cracked, and to meet the margin call, the guy borrowed money from his mom. Eventually Coleco went belly up and all the money was lost, 100% of the invested money, plus the loan from mom. My buddy had to eat bag lunches for years to pay that loan back.

Fast forward to more recent history and Research in Motion RIMM. Similar events seem to be unfolding, and the best hope might be a buy out. The core business of Blackberries is fading and the company no longer seems to have ability to compete against Apple, Google, Microsoft and others.

I threw silver into the subject line because that market has that feel to it. Too many little fish are in the net at higher prices. The bulls I see remain defiant and confident in the face of a full blown crash. That kind of sentiment tends to mean that more pain. Obviously silver won't go to zero, like Coleco did, or RIMM might, but a lot more pain may be in store for all those unrepentant bulls. Silver is a tiny cap market so is subject to wild swings and more prone to manipulation than other markets.

Saturday, September 24, 2011

Song of the day: Whipping post

The Allman Brothers classic "Whipping Post" fits the mood of this market (link). Some markets have broken down such as silver (SLV), emerging markets (EEM), China (FXI). Others are hanging on, such as gold (GLD), stocks (SPY), support levels are not yet broken. Bonds (TLT) got a huge boost from the new Fed Twist of selling short term notes and buying long term bonds.

It is scary times to be sure. I don't feel any great need or desire to be the hero. I am concerned about my gold position. GLD 150 is the line in the sand, if that doesn't hold, I could be in some trouble, with my short 159/154 put backratio (long 1x GLD Oct 159 puts for every 2x short GLD Oct 154 puts). Max profit is GLD 154 at expiration. One problem is that the drawdown is enormous at 154 if we get there immediately.

Monday, September 19, 2011

Non-event events, is Greece next?

The one sentence cliche version of this post is "buy the rumor sell the news."

Some recent non-event events were the S&P downgrade of the U.S. rating, the resignation of Apple CEO Steve Jobs. To make it more clear, the possibility of these events happening were brought up for many years, as big reasons to avoid certain markets. In the case of the U.S. debt rating, avoiding long term treasuries, and avoiding AAPL for Jobs. To the consternation of bears everywhere when the news broke, both times mostly out of a clear blue sky with little warning, the market reaction lasted for a few hours, perhaps a day. After that powerful bull rallies rolled forth.

Many fear the possibility of default in Greece. One difference, is a default would be widely telegraphed, compared to the S&P downgrade, or the Steve Jobs retirement. Could Greece be a third news event that has markets react opposite to what bearish traders hope for? We won't know until the event actually occurs, but be prepared for that that possibility. Sometimes a news event is a non-event.

Wild markets today. I am surprised at the rally off the lows for stocks (SPY).

Friday, September 16, 2011

7-0 for September

I count seven winners, zero losers for the September cycle. A welcome positive month after some big losing months. The modest gains are not close to overcoming the monster losses I took earlier.

Best trade was a short SPY put backratio (short two Sep 105 puts, long one Sep 110 put). I closed two legs for a profit on 9/6 "Unwinding SPY positions", and the third short leg expired worthless. The bottom line is about a 300% profit, basis the initial credit. I also had short put winners in GLD, TLT, EWZ.

Going forward, I have complex positions in GLD, SPY, long delta, short theta. Short puts in PFF and layered short puts in TLT. Net long all those symbols, but delta is small, so exposure is small. I'll have less time for trading and blogging for a while, but I will continue as time permits.

Thursday, September 15, 2011

Buy TLT (sell puts)

Buy TLT via selling Nov 96 puts TLT@111.7
I used a limit order and it went through early today. My posting of trades may be delayed and sporadic for a while, but I will keep posting when time permits. I remain bullish on bonds for a bit longer.

I don't have any great insights on the markets. I am glad I am long SPY delta, and short theta, the bearish stock market bets have been demolished during this rally. SPY 125 may provide some upside resistance. GLD looks it wants to continue to drift lower, which is fine with me as long as support levels hold. Max profit for me is GLD 154 at Oct expiration.

Long GLD, PFF, SPY, TLT

Tuesday, September 13, 2011

Buy SPY (sell puts)

Buy SPY via selling Sep 109 puts, SPY@116.8. I am thinking support at 114, 112 and 110 are big hurdles for bears to over come.

Long GLD, PFF, SPY, TLT

Sunday, September 11, 2011

Jack Bogle interview

Here is a link to a 20 minute Jack Bogle interview (Marketwatch link). For those who don't know, Jack Bogle is the founder of Vanguard, and the lead advocate for indexing.

For the gold crowd, Bogle makes a few comments about gold starting at about the 17 minute mark in the video.

I doubt the interview will convince any indexer skeptics to become indexers. Much more compelling than the interview is performance and historical data. Indexers tend to outperform 80% of actively managed money. The primary reasons are that index and rebalance, buys when asset classes are cheap, and that indexers tend to have lower transaction and tax costs than active management. There may be short time periods where active managers outperform, and there will always be about 5% of active money that does extremely well. Indexers tend to avoid over investing in hot sectors, or hot asset classes, which is what many active managers and individual investors tend to do. Chasing what is hot, tends to lead to poor long term performance.

Here is a link to a discussion on the video at the Boglehead forum (link2).

Saturday, September 10, 2011

Instapundit: Disaster Prep

The recent blackout in San Diego and Hurricane Irene have brought attention to disaster preparedness. Instapundit dug up an old post (link). Popular Mechanics has a lengthy article on the subject (link2). For those that prefer lists, Popular Mechanics has a checklist in PDF format (link3).

The stock market has been imitating a yo-yo. Up and down. It has been a wild ride. The tiny group that has been on the right side of these moves has made huge money. The larger group that have been on the wrong side have lost. For now I am sitting tight. For stocks I still lean a bit bullish, but that means little, because I've been wrong so many times lately, and my account balance reflects that.

Tuesday, September 06, 2011

Unwind SPY positions

I unwind two legs of the SPY Sep backratio with SPY@116.6
I sell the long SPY Sep 110 puts, cover 1/2 the short the Sep 105 puts. Making this move adds to my SPY bullish delta. I am still short 1/2 the Sep 105 puts with no protection for Sep. Stock market rallies steadily from the opening smash down low.

Long GLD, PFF, SPY, TLT

Monday, September 05, 2011

Waterfall decline in Germany and market roundup

EWG is the Germany ETF (5-year chart) and is down 5% in Monday trade. There is minor support at 18, and then it may be back to the March 2009 lows of 13 or another 30% down. SP futures (link2) showing -29 to 1140 (SPY 114), and Dow futures -218 this morning. Overnight readings sometimes get better, sometimes worse by the time New York opens up.

I would not jump in the German waterfall on the long or short side. Fast markets are not for me. There is almost certainly much more news to come, as the Euro debt crisis and now a German leadership crisis is unfolding. German is one of the few strong economies left in the Euro currency union. If it pulls out, the Euro folds, or become unrecognizable. There is no stomach for giving more money to their financially distressed neighbors. The German decision to shutter all their nuclear plants I see as a strike against them. I see it as an emotional decision that will make German companies less competitive, due to higher energy costs. The decision also illustrates how emotion driven German voters can be.

A quick chart round up shows GLD making new highs, TLT new highs, SPY still above the recent 110 lows. Asset reallocation may have been part of this recent stock rally, with folks selling bonds and putting that money into stocks. There is unlikely to a second round of that unless bonds make new highs. One catalyst for the latest bond rally, is money fleeing Europe. Gold also benefits as money flows out of the Euro.

As for U.S. stock investors, I see more than a few articles about how staying put was the right move in 2008/2009. Keep in mind that top to bottom that was over a 50% decline, and we are down less than 20% off the recent highs at SPY 118 (137 was the high, 5-year SPY chart). My trading focus is the support area at SPY 105.

Another open question is whether $2000 gold means anything. I am undecided on that one. The recent $200 tumble may have been that reaction already. Shorts may have stops just above $2000, and there seem to be a lot of shorts in this gold market.

Bonds, I still have a bullish trading bias, despite what seem to be absurdly low long term rates. As I wrote before, I may start to look at trading the bear side of bonds (TBT) in the Oct/Nov time frame.

As for the President's upcoming speech, I'm not expecting much. Said to say, the current chief has a reverse-Midas touch. Most everything he touches turns to ashes. Latest in the news was a solar plant the President visited in 2009, going bankrupt (link4). It cost the U.S. government over $500 million in loan guarantees for 1100 jobs that lasted about 18 months.

Thursday, September 01, 2011

Buy TLT (sell puts)

Buy TLT via selling Oct 95 puts TLT@107.6

Option cycle is moving towards decay with Labor Day coming up. As I wrote, I see little chance that the Fed will let interest rates boom higher. I am already short some Sep puts and Oct 92 puts on TLT. Just like my most recent trade, by the time I type this up, it is moving against me, with TLT now at 106.7 on news. Woof.

Long GLD, PFF, SPY, TLT

Wednesday, August 31, 2011

Gross admits he was wrong on bonds

All over the news is an admission by Pimco bond king Bill Gross that he was wrong to be bearish on U.S. Treasury bonds (CNN article link).

>>

Gross, who manages the world's biggest bond fund, is now admitting that he struck out. ...

Pimco ... slashed its exposure to U.S. government debt to zero in February ...

The 10-year yield stood at a lofty 3.75% in February. Less than two weeks ago, the yield on the 10-year note touched a record low below 2%, and it now stands at 2.17%.

>>

Even the best of the best make bad calls. It is refreshing to see a straight out admission of that instead of double speak or excuses, or rationalizing about being right just early. No matter how a person parses it, 3.75% to 2.17% is a huge bull move, and anyone that was bearish was wrong, wrong, and more wrong.

Readers know that I write openly about my losers. Most traders tend to learn more from their losses, so journaling about them, trying to dissect what went wrong can often be a useful exercise. For Bill Gross, I point to the massive efforts of the Fed and its allies to keep rates low. $2 trillion in quantitative easing buys a lot of bonds. The Fed still has a sword pointed at bond market bears even though there has not been an official announcement for QE3. I see little chance that the Fed will let interest rates explode to the upside.

As I've written in other posts, the Fed will eventually run out of ammo, because the bond market will stop responding, or take more and more money to manipulate it. That time isn't now, or even close. The lid is still on the pot.

The bond market is so vast and huge, I believe it will take a while to boil over. I may start tilting bearish on bonds on a trading basis in Oct/Nov, but still think the Fed will pull levers to keep rates relatively low, and that the bond market crash is still years out. It will take a lot to kill off a 31 year long bull market, but when it goes it may be something to behold.

Tuesday, August 30, 2011

Buy SPY (sell puts)

Buy SPY via selling Oct 89 puts SPY@120.9
The rally has decreased my overall SPY delta. I sell some way out puts to add some delta back in. VIX is lower than it was, but there is still decent premium on puts that are 31 points out. Even though I think lower lows are likely, I see a 25% decline by October expiration as unlikely. By the time I get the fill, and type this entry up SPY is another .8 lower to 120.1, I hate it when that happens.

Long GLD, PFF, SPY, TLT

Saturday, August 27, 2011

ETFs % from 52-week high

We'll see if this formats okay, a table with some popular ETFs and how far they are off their 52-week highs. List is selective and ignores any dividends.

14% SPY SP500
4% GLD Gold
16% SLV Silver
3% TLT 20-year US Treas
13% IYR US Real Estate ETF
1% BND US Total Bond
8% HYG US high yield bonds

18% VEU Total World Stock market
20% EEM Emerging markets
18% EWJ Japan
23% FXI China top 25
17% EWA Australia
17% EWC Canada
25% EWZ Brazil
30% EWG Germany

Germany is the weakest major country ETF, despite still having one of the stronger economies. I'm not sure what conclusions to draw, I just wanted to do a quick look at what is down the most from the highs.

Friday, August 26, 2011

Gallup: Gold #1

A recent Gallup poll ranks gold number one in terms of long term investments (link).

>>
Thirty-four percent of Americans say gold is the best long-term investment ... Real estate (19%) and stocks (17%) are distant second choices.
>>

This is the first time gold was included in this Gallup survey which says something by itself. Without other surveys to give context it is one data point. However, it does show that the gold bandwagon is filling up. Gold was at record highs during the week of the survey. Gold was ranked #1 by every income group, and every age group, Republicans, Democrats and Independents.

/edit to add a link to a discussion of this poll on the PCGS Precious Metals forum (link). For those not familiar, PCGS is a coin grading company that hosts a coin collecting forum with a subcategory for precious metals.

Thursday, August 25, 2011

Brown: Rules for Surviving a Crash

Barry Ritholtz posts Josh Brown's 10 Rules for Surviving a Crash on his blog (link). Lots of good stuff, these three are a sampling:
>>
5. Make sacrifices by reducing stock exposure by beta and volatility. This is my iron-clad rule.

8. Abandon any hope or intention of catching the bottom. You won’t and it is unnecessary.

10. Stop being a know-it-all and shut up. If you are telling people a price or a support line where the selling will end, you are only kidding yourself.
>>

Certainly timely with the action in gold this week. My latest trade of short put backratios has gotten slaughtered. The "good news" is that it brings GLD closer to my max profit line of 154 at October expiration, but the position is deep in the red if I get out today.

Monday, August 22, 2011

Buy GLD (sell put backratios)

Buy GLD via selling Oct put backratios with GLD@184.1. Sell two Oct 154 puts for every one Oct 159 put bought. Selling these put backratios is net delta positive, so are bullish bets. The twist is an explosive max profit if GLD is at 154 at October expiration.

Stock market is all over the place. Some technicians are saying SPY 107 is support, with the potential of a double/triple bottom, but I see that price level as minor support. Lower lows and support at 105/104 seems more likely and where my short SPY put backratios are placed.

Long GLD, PFF, SPY, TLT

Friday, August 19, 2011

4-6 for August, disastrous month

Four small winners, six losers including four monster hits, and two big losers, makes for a terrible month of trading. Selling naked puts was the wrong place to be this month. I survived the flash crash last year, and the carnage in 2008, and survived this, but each time took some hits. GLD went up 20%, and SPY went down 20%, however when selling puts, the winning trade only yields 100% profit, while the loser might be a 2000% loser.

The losses did major damage. I don't like to talk about overall account percentages or specific dollar amounts, because those tend be correlated with risk appetite and how much capital is available. I will categorize the losses as significant and painful, though not crippling--I am still in the game.

The other analogy that comes to mind is putting lipstick on a pig. No matter how a person tries to pretty up the pig, there is only so much improvement to be done with makeup. The losses are closed trades and now done with. I think it would be a mistake to try to get it all back in a few trades. Revenge trades usually result in more losses and make a bad situation worse.

Going forward, I have two short put backratios on SPY, and a long vertical put spread. This adds up to a positive SPY delta, positive theta, and a breakeven point to the downside of 95. Best case would be a SPY close right at 105 for September expiration, and then a close at 104 for October. If SPY rallies, I would profit from here. I am short some puts on GLD and TLT, but because of the rallies, the delta is small. I am reluctant to sell more puts on GLD because the run up has left little support below. A steep correction in gold would surprise no one, but so far those betting on that event have been big losers.

Thursday, August 18, 2011

Short SPY (buy vertical put spread)

I short SPY via buying a vertical put spread, buying Oct 100 puts, selling Oct 95s with SPY@114.8

My Sep and Oct short put backratios give protection down to 100 on SPY. The vertical is a way to cover downside to SPY 95. I am still net long SPY delta, but now less so.

Long GLD, PFF, SPY, TLT

Cover short EWZ puts

I continue to take risk off the table by covering short EWZ Sep 44 puts with EWZ@60.0 (covered some short SPY puts earlier this morning). EWZ is a Brazil ETF. I net a 31% profit on the dollar amount of the options. Market is moving, and while I doubt these options will come into play, I am reducing risk.

Long GLD, PFF, SPY, TLT

Cover short SPY puts, sell BRKB calls

This goes under the category “what was I thinking?” I wrote that I expected lower lows and yet sold puts? I decided to “limit” the loss to about 170% on the price of the option, instead of risking another huge monster percentage loser (which I've had four of this cycle already). I start with a limit order with SPY@116.2 and market continues lower so I get out with a market order with SPY@116.0. Ouch.

I also sell BRKB Aug 77.5 long calls for a 96% loss, before it goes out worthless tomorrow. BRKB@70.4 with slim chance of going up 7 points by Friday's close. The market is a cruel mistress.

Long GLD, EWZ, PFF, SPY, TLT

Wednesday, August 17, 2011

Buy SPY (sell puts)

Buy SPY via selling Sep 94 puts with SPY@121.0

This morning stocks, bonds and gold are all up, possibly due to the Wednesday before option expiration. The more cynical might say it is the PPT (plunge protection team) propping up prices. Despite the relief rally, the way out SPY puts are near 50% volatility. While I expect lower lows, I expect support at SPY 105 to be significant.

My broker ThinkorSwim did a clearing firm transition due to the merger with TDAmeritrade, and it is causing headaches. Mostly I've been very happy with TOS, but these few days have not been pleasant.

Long EWZ, GLD, PFF, SPY, TLT

Tuesday, August 16, 2011

Buy TLT (sell puts)

Buy TLT via selling Oct 92 puts with TLT@106.1

I open an October position on TLT. It is similar to the gold situation, as TLT has rallied my delta declines. TLT is overbought so I am selling way out of the money puts.

Long EWZ, GLD, PFF, SPY, TLT

Monday, August 15, 2011

Buy GLD (sell puts)

Buy GLD via selling Oct 143 puts with GLD@171.0. As gold has rallied, my delta on the short puts gets smaller and smaller. I open a small October position. GLD is a bit overbought in here, so I am going way out of the money on the puts.

As for the stock market, these few days feel like the eye of the hurricane, with more volatility on the other side.

Long EWZ, GLD, PFF, SPY, TLT

Sunday, August 14, 2011

Betting on the end of the financial world

Some option buyers are placing bets on the end of the financial world. I cite the way out of the money September calls on TLT and VXX. The Sep calls on TLT (20 year Treasury fund) and VXX (Volatility fund) have value even 20 points out of the money. It would take something like a 10% down day in the Dow to bring those way out calls into play. With that, I am reluctant to sell those calls. Most times I have thought to myself, "that's free money," when looking at selling certain options, there was something I wasn't seeing that the option buyer did know or see.

The other factor might be that those buying these way out calls are using them as part of a more complex strategy. Only rarely are way out calls bought in quantity as a pure speculative play. Mostly they are offset with other options, or futures, or equities.

As for the stock market, I expect lower lows, testing 105 on SPY (118.1 today), though hopefully not immediately. As for bonds, tougher to call because of all the Fed games and manipulations. Gold might see some more short covering, and a retest of the recent highs might be a place to take a shot at the short side.

Friday, August 12, 2011

Buy EWZ (sell puts)

Buy EWZ Brazil fund via selling Sep 44 puts with EWZ@61.2.

I add to equity longs. My thinking is that many are looking to buy safe stocks, and EWZ is near the opposite end of the spectrum.

Long EWZ, GLD, PFF, SPY, TLT

Constant Proportion CPPI investment strategy

I saw a mention of Constant Proportion as an investment strategy on the Vanguard forum (link1). To be honest, I had never heard of it, and never met anyone that said they used it. It still isn't all that clear in my mind, but this lengthy PDF paper written by Perold and Sharpe at link2 has more on it, starting on page 6, along with profit/loss graphs. Some other references that I haven't linked refer to using derivatives to implement CPPI.

To cut to the short and sweet: CPPI buys on strength, sells on weakness. It tends to do well in strong bull markets, not so good in flat range bound markets, and offers downside protection in severe bear markets. The much more popular constant mix strategy of rebalancing will do better in a flat market, not as well in a strong bull or strong bear market. Rebalancing also fails if assets approach near zero value in a melt down scenario (think Germany or Japan in 1944/1945 or CSA bonds and currency in 1864/1865). Even in a milder downturn like Japan 1990 until 2011, CPPI would have done better than the constant mix.

Some other very popular strategies are buy-and-hold, which is self explanatory, and dollar-cost-averaging, which is buying a set dollar amount every week or every month. I am a fan of DCA, even though there are studies that show it isn't the best way to invest. The main reason is that it smooths out the emotions. It is difficult for most folks to go from 0% invested to 100% invested. The daily swings are too much for most to take, and they will bail on their plan. DCA is easier on the emotions, so most folks are more likely to stick to the plan.

Well I learned something new, though I don't have an in depth understanding of it.

Thursday, August 11, 2011

Buy PFF (sell puts)

Buy PFF via selling Oct 30 puts with PFF@36.7

I view this as putting in a bid for the preferred stock ETF at 30. If I get assigned fine, if not I get a small premium. The spreads are wide on the PFF options, so the options aren't suitable for short term trading.

Long GLD, PFF, SPY, TLT

Buy SPY (sell puts)

Buy SPY via selling SPY Aug 102 puts with
SPY@116.6

I add some more SPY delta as my short backratios move down in delta. I have misplayed these last couple of weeks badly, we will see if that continues. So far, yes, as SPY is now 116.2 and falling as I type this up.

GLD and TLT tumbling today, but I have considerable room on my short puts after the recent run ups.

Long GLD, SPY, TLT

Wednesday, August 10, 2011

Dylan: Shelter from the Storm

Song of the day is Bob Dylan's iconic "Shelter from the Storm" (youtube link). Trade ideas continue to buzz in my head, but it is probably best to hide out in the bunker for a bit while my head clears from four huge losses.

What went wrong? Being long and wrong in the face of a mini-crash is a good way to lose money. Being short naked puts while volatility explodes is a way to lose tons of money. The other meme in my head, is that I never much enjoyed rollercoasters.

Monday, August 08, 2011

Cover short puts SPY

More financial carnage, as I cover more short SPY puts, Aug 112 puts, and Sep 113 puts with SPY@113.7. The percentage losses are -1800% and -2500% on the dollar value of the options. I have too much risk on the table, and with short puts, my delta increases as the market declines. Yes, 113 is a support level for SPY, but tape action is bearish. I hate to cover, but it is the rational choice. I still am long SPY delta with two short backratios, one for Sep, and one for Oct.

I don't feel very smart today, and my recent monster losses reflect that feeling.

Long GLD, SPY, TLT

Saturday, August 06, 2011

SP debt downgrade = Sat morning rant

Looks like the news is an ugly potion across the Internet, so I'll take my turn with the ugly stick. I rarely go political on this blog, so I'll temper my comments, but geez Louise, reading some of it, is enough to boil blood.

I see the downgrade as bringing a true U.S. austerity budget closer. The Greeks had time to make rational conscious choices, now the markets are forcing changes upon them. (Link1 is to grim article in the UK Guardian about Greece). Keep in mind that these massive cuts in spending were passed by far left Socialists in Greece, so coming soon to a budget near you:
>>
salaries of civil servants are slashed by up to 30% within a few months, as happened last year, and over 20% of public-sector workers face unemployment within the next four years – plus whole swathes of national assets are to be privatised before Christmas, with more job losses doubtless to follow ...
>>

Meanwhile in the U.S. there is nary a mention of cutting massive Federal salaries. Link2 is a USA Today article about the growing pay gap.
>>
Federal civil servants earned average pay and benefits of $123,049 in 2009 while private workers made $61,051 in total compensation ...

>>
There was no mention of across-the-board salary cuts during recent budget negotiations. Why can't even a modest 3% rollback in Federal salaries and benefits be proposed even? Why? Because Congressional staffers are all Federal employees? Probably. So sad.

Link3 is a news bit about Socialist Italy pledging to balance its budget.
>>
Italy pledged on Friday [8/5/2011] to work swiftly for a constitutional amendment requiring the government to balance its budget ... with the possibility of reaching a balanced budget by 2013 ...
>>
If Socialist Italy can get there, with massive cuts in government spending, why is there no political will in the U.S. to move that way? Not enough pain? Too many pigs feeding at the Federal trough. Too many droids in the media spinning their narratives? All the above.

Link4 is a scary report from TaxProf citing IRS sources about U.S. incomes. These are compiled using stats from tax returns, and show a 15% decline in reported income.
>>
U.S. incomes plummeted again in 2009, with total income down 15.2% in real terms since 2007, new tax data showed on Wednesday. The data showed an alarming drop in the number of taxpayers reporting any earnings from a job -- down by nearly 4.2 million from 2007 -- meaning every 33rd household that had work in 2007 had no work in 2009.
>>
The pay gap cited in the USA Today article in link2 is worse than reported. Private sector workers have seen a 15% drop in average real wage income. Most of the drop is because of fewer private sector workers, and many more that were forced into lower paying jobs. Yet, there is not even a proposal for modest cuts in Federal compensation, which now averages over $123k per employee. Average. Are you kidding me?

There was one more article that I wanted to link, but I can't find it. The gist of the article was about the PE ratio for U.S. stocks, and how it is in line with historical averages. However, the ratio of average U.S. wages vs. stock prices, is near historic lows. The theory is is that something has to give. Consumers get their money from wages. If private sector wages are careening lower as the TaxProf article indicates, earnings will eventually follow because consumers have no money to spend.

As for market reactions, I always come back to the bond market. It is the biggest market and often drives the bus. Unfortunately all the QE (quantitative easing) programs have distorted the bond market the most. Even though QE2 is over, the threat of QE3 still keeps yields artificially low, with the U.S. ten year bond well below 3%. I see it going back to a historic average of 7% at some point, but when the Fed is burning trillions to keep yields low, the time table is uncertain.

Enough of my rants. I'll pass the ugly stick back over to the many political threads and forums all over the Internet. It is ugly out there. Keep your cool. Again, rule #1 is that no one wins an argument on the Internet. Arguing about politics [or religion] with someone with different assumptions and a different world view is a big waste of time. It can ruin friendships, and creates ill-will. People can't agree on basic assumptions, so their arguments spiral out in circles from there. No one ever agrees after a heated political thread, not that I have seen. Mostly they serve to bring out the ugly in people.

What Bogleheads may be missing

There is a lengthy thread on one of the Vanguard forums asking what may be missing from Jack Bogle's investment approach. For those that are not familiar, the philosophy in a nutshell, is to pick an age appropriate asset allocation, and then to use passive index funds, and rebalance as assets move up and down in value. Age as a percentage in bonds, the rest in U.S. and world stocks is a common asset allocation. For example a 30 year old might choose to have 30% in bonds (split between BND and TIP), maybe 45% in U.S. stocks (VTI), and 25% in world stocks (VEU). Add in a healthy cash reserve for emergencies.

Let me say, that I am a fan of the Vanguard approach of passive indexing. Experience shows that over the long haul, indexers will beat 80% of active investors. Future results are likely to be similar because of human nature. Indexing and disciplined rebalancing forces a person to buy assets when they are cheap, when they go on sale, when no one wants them. Human nature is to chase performance, so tends to buy what is hot.

The Bogleheads aren't "missing" anything. However, they do use certain postulates that may be faulty. The first and foremost is the long term stability of the U.S. government. While many may cry that this is doom and gloom talk, let's look back 100 years. Go back to 1911, and buy the bonds of all sovereign nations issuing government bonds. How many paid interest continually and could be rolled over until today? Maybe 5 countries out of 50 issuers? How many at some point in the cycle went to zero, or near zero? Almost all of them. Certainly Germany, Japan, Russia, China among major powers all had bonds and domestic stocks go near zero during that century when major historic events such as losing a major war, or revolution occurred. The UK, Canada, Australia, Switzerland and the U.S. were among the very small long term stable group. Off hand, I can't name any more than that five.

The open question is will the U.S. be in that small and lucky group in the next century. Most Americans and most all Bogleheads of course assume yes, mostly because they have never seen their government fall, but the odds are far from 100%. That is the biggest thing the Bogleheads may be missing. Events such as major wars, major famine or plague, revolution or coup, do happen. Those kinds of catalysts can mean a repudiation of the U.S. debt, and a currency that goes to zero. When that happens, U.S. equities, and even U.S. traded ETFs that hold world stocks may not have any value because there is no exchange to trade at for U.S. citizens or trade at bizarre discounts. In war time, or times of revolution, assets get frozen, assets get seized.

I don't want to bring this up in their forum, because they won't get it and will mostly just get mad. Arguing is one of the least productive activities, and rule #1 is that no one wins an argument on the Internet.

Overall, I find the majority of Americans to be a myopic bunch and most will assume that because their government has never fallen, that it can't--that is faulty thinking. The odds will depend on how far out the timeline is extended. The U.S. experience of stable governments, peaceful transitions of power, is more the exception than the rule. Governments fall, countries erase their debts, equities and currencies go to zero. Whether they will happen in the U.S. is an open question, not a postulate that can be depended on to be 100% true.

This is one reason I would tend to favor an asset allocation like the Permanent Portfolio (25% each in cash, bonds, stocks, gold), which includes 25% in physical gold. In an all out war, or revolution scenario, sometimes leaving the country is the best option. Physical gold might be one of the few assets that can be gotten out, or get a person or family out to start life over.

I feel no need to debate the point, or convince anyone. Folks can read up on their own world history and figure out their own odds of the U.S. government making it another 100 years or how ever far they want to extend the timeline. Every decade a few governments fall. Every century, the vast majority do, or at least restructure their debt and currency so that bondholders and paper money holders get the shaft.

Friday, August 05, 2011

Cover short puts (IWM, SPY)

Buy back IWM Aug 75 puts with IWM@72.0
Buy back SPY Aug 117 puts SPY@120.1

Stock market turns lower after a pop up at the open. I am reducing risk, and taking some huge losses on those positions. As I type, markets careen lower for a minute or two and now are stabilizing at lower levels. On the edit for typos, stocks are moving up off the lows. Seems like too many brave heroes are stepping into the breach, and that usually means lower.

As for yesterday's plan, it reminds me of boxer Mike Tyson saying “everyone has a plan, until they get hit in the face.” Ouch. -1600% on the IWM and -900% on the SPY puts, on the dollar value of the options. Writing naked puts can be a risky strategy, and when markets go straight down fast and volatility explodes higher, losses like that happen. Hopefully, I don't have many more of those as open positions, but I do still have some exposure. Taking those two losses doesn't mean the losing is done.

Thankfully, I had less than average exposure at the time of this tumble and didn't buy heavily into the debt ceiling rally, and didn't keep selling puts when SPY touched the 125 support level. So while the losses are terrible, traders that came in long two weeks ago and kept doubling down took a lot bigger hit, with aggressive put sellers likely getting margin calls. Of course, a few were short and made a ton, so overall the glass is three-quarters empty, but it could have been a cup of poison too.

Long GLD, SPY, TLT

Thursday, August 04, 2011

Worst day ever

I believe that today was my worst day ever since I starting blogging in February 2006 as the stock market melts down and the Dow is down over 500 points. I am tempted to say "the pain, the pain," as a parody on the old Fantasy Island TV series where Tattoo opens the show with "the plane, the plane," when the guests are arriving.

It is kind of bizarro Fantasy Island, more like nightmare island. What I kept telling myself today was "stop digging." Most of my recent moves have just made the hole I am now in, deeper. I had some "brilliant" ideas for trades today, but resisted.

My current plan is to wait it out. Roll out to further months any short puts that are going to be expiring in the money. My short IWM Aug 75 puts are already deep in the money, and another day like today, and the SPY Aug 117 puts and even the Aug 112 puts are threatened.

SPY broke support at 125 and now projects to 113. This target is by taking the width of the range and subtracting that from the breakdown point (137-125 = 12 points wide, 125-12 = 113 SPY target).

With all that, and despite today's losses, I still have a good bit of dry powder, but am reluctant to take on any more risk. Fast markets are not my friend.

Wednesday, August 03, 2011

Buy BRKB (buy calls)

Buy BRKB via buying Aug 77.5 calls with
BRKB@74.0

A departure for me, buying calls. Berkshire Hathaway earnings come out after the close on Friday, and stock is near support. I am buying the 13% chance 77.5 calls because if earnings are bad, the higher priced, higher probability 75 strike calls are likely to go out worthless.

Long BRKB, GLD, IWM, SPY, TLT

Buy SPY (sell backratio)

Buy SPY via selling a backratio with
SPY@124.7 -0.80 for the day

Sell twice as many lower strike puts, for every put bought
Sell 2x SPY Oct 104 puts
Buy 1x SPY Oct 109 puts

This adds a bit of SPY delta, while also getting some downside buffering. The short backratio is an odd duck in that it is delta positive (a bullish bet) but has a max profit if SPY closes at 104 at October expiration. I like this trade when volatility is high.

Long IWM, GLD, TLT, SPY

Tuesday, August 02, 2011

Buy GLD, TLT (sell puts)

Buy GLD via selling Sep 143 puts with GLD@160.7
Buy TLT via selling Sep 92 puts with TLT@100.9

These moves can be characterized as a rebalancing, to add more delta in bonds and gold. My delta for stocks is increasing as the market declines. The closest short puts in danger are IWM Aug 75 puts, with IWM now at 77.7. My current thinking is to roll those puts down and out if they come into the money.

Long GLD, IWM, SPY, TLT

Hulbert: VIX as a timing tool

Mark Hulbert has a Marketwatch article (link) about using VIX to time the stock market.

>>
Consider a hypothetical portfolio that switched in and out of the Wilshire 5000 index according to whether the VIX was above or below 20 — investing in the market on a given day if the VIX closed the previous session below that level, and otherwise staying in cash. This portfolio would have produced an 8.9% annualized return since 1990, when the CBOE’s data for the VIX commence, in contrast to 8.5% for buying and holding. (I chose 20 as the threshold level for illustration purposes only; it is not far from VIX’s median level over the last two decades.)
>>

As always, backtesting and curve fitting is easier when a person knows what has already happened. Sidestepping much of the 2008 decline is where this timing tool likely makes the bulk of its advantage. Still, it is another possible tool to use, like the 200 day simple moving average, one that has proven to be useful.

An interesting strategy going forward would be to do the opposite, buy on the sell signals given by VIX 20 or the 200 DMA crossovers. Why would anyone do that? Because when an indicator becomes too popular, gets a lot of press, it often starts to fail. I'm not saying I'm going to do that, but it is worth a thought. From the late night bull session a few nights ago, my young relative mentioned he watched the financial news much of the day. I told him that its best use might to use it as a contrary indicator when certain commentators "guaranteed" certain outcomes, to go opposite.

Sunday, July 31, 2011

Late night bull session

I was talking with a young relative late into the evening. Some of my big picture long term ramblings:
* U.S. Bond market headed for a bubble
* Gold market is not yet in a bubble
* Stocks will likely benefit from inflation
* Real estate will eventually benefit from inflation

First the bonds. I often write that calling tops tends to be a low percentage play. It is so here. So many keep calling for a crash in bonds, a spike in yields, it is unlikely to happen soon. This past week, even the possibility of a debt ceiling impasse did not nudge yields significantly higher. On Friday, yields actually spiked lower as bonds roared ahead. The Fed keeps propping up U. S. bonds and has a lot of bullets left. They have fired off QE1, QE2 and could do that at least four more times before the jig is up, and it might be more than four. If I had to guess, the spike up in yields is six years out, but that is just a guess. Still, I would not buy and forget long term bonds at what I see as record low Fed manipulated yields.

Next gold, not yet to the bubble stage. Yes, eleven straight up years is a concern, record highs are a concern. Still, sentiment is not frothy enough to be calling long term top. I believe most of the demand is from Asia, and their economies continue to grow. Demand for gold will grow with those economies. If and when gold goes parabolic again, it will be trickier. Sentiment remains one of the best indicators for turning points. Gold will eventually be turned back by high interest rates, but someone else pointed out that there is often a two or three year lag before the start of rates rising and gold turning back.

Third, stocks can do well in an inflationary environment. Higher interest rates will be a head wind, and make for a bumpy ride, but both the top line of revenue and bottom line of profits will increase as prices increase. Over a long time frame that will increase the stock price and dividends will increase.

Fourth, real estate will eventually be a buy, but a spike in mortgage rates can cause a crash in prices. If and when 30 year mortgages go back to 8% or 10%, real estate values could tumble an additional 33%. There are some cash buyers, but the vast middle of the market still gets and needs a mortgage. Another potential wildcard is the reduction of the mortgage interest deduction. This is being openly talked about and could be a knife to the belly of a weak market. Longer term, real estate will benefit from inflation, but if the first prediction about bonds comes true, it will not be a smooth ride.

As always, these are my thoughts, don't take what I write as advice, as it is not meant to be. I am another small fish in a big ocean.

/edit to change:
* U.S. Bond market is in a bubble
* U.S. Bond market headed for a bubble

Saturday, July 30, 2011

Nusbaum: 200 DMA & bear market?

Roger Nusbaum writes about the 200 day simple moving average and the possibility of a new bear market (link).

>>
As far as a "new" bear market, I believe the 200 DMA will tell us the answer, what is more important than guessing correctly is (also repeated for emphasis) having some sort of objective strategy for defensive action ...
>>

If market timing were so fool-proof as one indicator, we'd all be rich. (Or more likely the indicator would stop working.) Nusbaum is an advocate of gradual moves, as am I. When average folks make rash, all-in or all-out decisions, they tend to be bad decisions, often near the worst possible time.

As for trading the news, I am reluctant to take on much more risk, even if I may anticipate certain markets to react a certain way. I am a bit stunned that TLT had a monster up day given the news background.

I tend to believe that U. S. Treasury bonds are near an all time bubble top. The Fed manipulation, investor sentiment, the all time low low short term yields are all elements. However, as always trying to time a top tends to be a low percentage play, and markets can remain irrational far longer than a bear can remain solvent.

As for gold, even with record highs, I am not seeing the sentiment signs of a bubble. Skeptics remain skeptical. Small timers occasionally buy here and there, but are not lining up to buy with their credit cards. Folks rarely mention gold in casual conversation, and if mentioned, their eyes still tend to glaze over, instead of their ears perking up. Now, we may not get a bubble top. Bull markets don't always end with a moon shot.

Thursday, July 28, 2011

Everything I know...

I talked to a young man today, and gave him a one hour version of everything I know and have learned during my 24 years of option trading. Here are some of the topics covered:

* The importance of finding your own style. What works for me, may not work for someone else. For novices, keeping a trade journal (that's what this blog is) can be a good way to find what works.

* What I do: I mostly sell puts on ETFs (SPY, TLT, GLD) and to a lesser extent (IWM, EEM, TBT). I tend to be delta positive, theta positive and aim for about 90% probability of winning. If the market is unchanged every day that is a good result because I am theta positive, meaning I benefit from time decay. Overall, this translates into about 80% winners because of stops and the occasional shots at the long or short side.

* What I term shots are lower percentage trades. I tend to favor vertical spreads or calendar spreads to lower the costs and increase the probabilities, and decrease the time decay.

* More: for technical analysis I tend to keep things simple. I mostly use a 1-year candlestick chart, with a 50 day simple moving average and a 200 day SMA, and in the lower box a momentum indicator such as RSI. I tend to look for support levels and look to sell puts at a strike price below support.

* I am a relatively slow moving trader, so I tend to avoid fast markets and the most popular stocks.

Some more links
Option greeks (link1)

More on verticals vs. calendars (link2) (scroll down to the April 09, 2011 entry labeled: Options 201: calendars vs. verticals .

ThinkorSwim (my broker, do your own search) they host a weekly market wrap up every Friday afternoon 4:30 eastern time, and it is open to anyone who registers to listen.

Wednesday, July 27, 2011

Ferri: Invest like a Marine

Rick Ferri has an interesting perspective with his article (link).

>>
I had several other sobering conversations with squadron buddies about how they were investing their retirement money. All in all, it’s a mess. That sixth sense they had for staying alive while flying didn’t transcend well into the investment arena. I cringed with every story they told. These guys lost money day trading, in stock options, commodities, hedge funds — you name it. One couple was even swindled by Bernard Madoff himself.
>>

Often times accomplished men think that investing will be easy for them because they are top notch in another field. The above is another anecdote in the quilt of evidence. Ferri is an advocate of the Vanguard/Bogle philosophy.

As for the markets, I am mildly surprised with the recent market action. My most recent option sales are deep in the red. For now, I am going to sit, watch, and wait.

Saturday, July 23, 2011

Vanguard on tax efficient placement

The Vanguard folks have a good article about placement of various assets for tax efficiency (link). It tends to be of more interest to slow and steady long term investors vs. rapid-fire traders or all-or-nothing plungers.

Where might precious metals fit in? For ETFs like GLD and SLV, they are tax inefficient and would preferably go in tax deferred or tax exempt accounts. For physical metal, I would tend to say in taxable accounts even though the tax rate for those honestly reporting is often at the 28% collectibles rate. The additional paper work to hold physical metals in retirement accounts is a negative. Even though I am an options trader, I often prefer simple, and less paperwork, less tracking is a good thing.

Friday, July 22, 2011

Buy GLD, SPY, TLT (sell puts)

Buy TLT via selling Sep 87 puts, TLT @95.9
Buy GLD via selling Sep 139 puts, @156.0.
Buy SPY via selling Sep 113 puts, @134.6

I open some September positions which feels wrong because of recent run ups in GLD and SPY and the looming issues regarding the budget for TLT. I hold my nose and take some small low risk, low reward positions.

Long GLD, IWM, SPY, TLT

Monday, July 18, 2011

Italian bond, Japan & the U. S.

In the news is the 10-year Italian government bond yield touching 6.0%. Here is a link to a site with a chart (link).

>>
From 1993 until 2011 Italy's Government Bond Yield for 10 Year Notes averaged 5.94 percent reaching an historical high of 13.75 percent in March of 1995 and a record low of 3.22 percent in September of 2005.
>>

I believe that the recent massive interventions in the market have kept certain yields artificially low. In the U. S. it was QE1 and QE2, in Japan it has been going on for over 20 years.

For the Japanese perspective here is that link2.

Here is the same site's entry for the U. S. (link3).
>>
The United States' Government Bond Yield for 10 Year Notes declined 9 basis points during the last 12 months. From 1971 until 2011 The United States' Government Bond Yield for 10 Year Notes averaged 7.17 percent reaching an historical high of 15.84 percent in September of 1981 and a record low of 2.05 percent in December of 2008.
>>

A big question for American investors is whether the U. S. bond market will go more the way of Italy or Japan. Again, the Japanese central bank has been doing similar policies for far longer than the U. S. Fed, and their government debt situation and demographic rooted problems even more intractable.

If the U.S. ten year moves in a short time period to an historically average 7.0 yield from the current under 3% yield, it will be a bloodbath for current bond holders, and likely almost as bad in the U. S. stock investors. Some may see this as alarmist, but Italian bonds went from 4.0% to their historical average of 6.0% in less than a year. So I wouldn't even classify that kind of move as a Black Swan event, it would be normal and expected market action during a bear market for bonds. What we have now in the U.S., historically low yields, that some believe is in large part due to massive government distortion of markets, is more of an exceptional kind of event.

This may seem an odd topic for a trading blog on a day when the Dow is making a big move down, but it is what is on my mind. For now I am planning to sit tight and see were the dust settles before making any moves. Fast markets are not my friend. Often the best move for me is to do nothing. Fast market days tend to be better for day traders vs. me, the relatively slow moving position trader.

Friday, July 15, 2011

4-1 for July

It is a muddled picture for this option cycle because some positions were initiated as part of a spread. Anyway, six options expire worthless, one of them a long option. So the overall picture, counting spread trades as a single entity, might be characterized as four winners, one loser.

GLD turned into a frustrating trade. I bought a Jun/Jul 160 call calendar way back when. After the Jun 160 call expired worthless, I sold the Jul 161 call, turning it into a vertical. GLD did rally but not enough for this to turn profitable.

Going forward, I am short August puts on GLD, IWM, SPY, TLT, and also am short a SPY Sep 105/110 put backratio spread. Historically, August sometimes is a volatile month, so positions remain small.

Tuesday, July 12, 2011

Buy SPY (sell puts)

Buy SPY via selling Aug 112 puts, SPY @132.00. I add another layer of short puts, further out. I am already short Aug 117 puts.

Long GLD, IWM, SPY, TLT

Nusbaum: Safety First and baby ducks

Roger Nusbaum quoting James Stack (link) in his blog entry "Cash is Not Trash."
>>
Stack calls his method Safety First. If this is new to you, the big idea is that over the long term you can outperform the market by avoiding the full consequence of large market declines. In the past I've referred to John Serrapere's strategy of 75/50 which is trying to capture 75% of the upside with only half of the downside
>>

This kind of stuff is more for long term investors interested in doing some kind of active protection management. It isn't for everyone. Cash is a good cushion to have, even when many money market funds are paying zero. As for specifics, Nusbaum uses the popular and simple 200 day moving average as a timing mechanism to slightly reduce equity exposure.

I want to mention the "baby duck" syndrome for traders as well. A baby duck will attach itself to the first thing it sees regularly as the mother duck. Similarly, many traders get imprinted by the first markets they experience. I started trading in the summer of 1987, a few months before the 1987 crash. That searing experience has stayed with me, so I remain ever vigilant and cautious, and tend to keep a decent amount of cash or equivalents as a cushion.

Going further with the baby duck theme, a person's first experiences with money and spending also can imprint upon them. Suzy Orman talks about this and how it can effect a person's lifelong attitudes towards money. Think back to your first memories of money, finding a coin in the dirt (Suzy's experience), or spending to buy candy or being given an allowance. The energy from those early experiences and what was said to us, often shape the long term attitudes towards money. Whether it is scarce or not, whether it is meant to be spent freely, or hoarded, or treated with respect.

Friday, July 08, 2011

Buy IWM (sell puts)

Buy IWM via selling Aug 75 puts, IWM @84.8. I open an August position in short IWM puts, adding modestly to stock market delta long. I've been looking for a one or two day smash down in the stock market. August often is a more volatile month, but I have some margin for error by selling puts so far out of the money.

Long GLD, IWM, SPY, TLT

Wednesday, July 06, 2011

Buy GLD, SPY, TLT (sell puts)

Buy GLD via selling Aug 137 puts, GLD @149.1
Buy SPY via selling Aug 117 puts, SPY @134.0
Buy TLT via selling Aug 88 puts, TLT @94.2

I open some August positions though I remain skittish about all markets.

Long GLD, IWM, SPY, TLT

Tuesday, July 05, 2011

Another "permanent portfolio"

Carlton Chin has another version of a so-called permanent portfolio (link). The concept was popularized decades ago by Harry Browne. The original was 25% cash, 25% bonds, 25% stocks, 25% gold, rebalancing maybe once a year as asset prices move up and down.

Chin adds some in vogue wrinkles such as REITs and international exposure, and substitutes a broader commodity fund for gold.

I am a fan of the concept of permanent portfolios. I see a lot of plungers betting heavily on the latest hot market, and eventually get left without a chair when the music stops. They tend to have the belief that they will get out before that happens. Rarely does that happen. Those that can some what consistently call tops in major markets tend to be very wealthy, and only maybe 5% to 10% get their calls correct. Mostly top callers are too early, with 10 tops called for every top that occurs.

Thursday, June 30, 2011

Missing the rally boat

For the most part, I missed this week's rally in SPY. I did not pull the trigger, often thinking that there would be some give back to this rally. Another factor, is that August sometimes spawns big moves. I don't have any open August positions. I may take on some smallish positions, but for the most part, am content to sit this one out.

QE2 is supposed to end today, and the bond ETF TLT has been falling the last few days. It is difficult for me to gauge the action, because the market is distorted by the intervention and traders jockeying for position knowing that the buy program is ending.

Saturday, June 25, 2011

Barrons "worlds most crowded trade"

... Investors began to unwind what might be the world's most crowded trade—short the U.S. dollar and buy commodities

The above quote is from a Steven Sears Barrons article "Reversing the QE2 Trade" (link). If the link is expired try searching on the article title, June 25, 2011.

The rapid two day smash in GLD might be part of that unwinding. Sears focuses more on oil and currencies in his article than metals.

It is sometimes difficult to tell where the crowd really is, and the second and third level observations. Treasuries as tracked by TLT certainly have the look of a crowd. Then again it might be more of a tug-o-war with shorts establishing positions while QE2 is winding down.

Friday, June 24, 2011

SPY Backratio

I sell some SPY Backratios, Sep 105/110 puts, SPY @126.80, selling two 105s for every 110 that I buy. Overall, it is net delta positive, meaning a bullish bet, with some twists such as a max profit with SPY @105 at Sep expiration, another breakeven point at below 100. I get a small credit, and it is theta positive, meaning it benefits from time decay.

Here is a YouTube link to the Beach Boys singing their song "Wipeout" (link). It is symbolic for my GLD calendar call spread.

Long GLD, IWM, SPY

Friday, June 17, 2011

4-1-1 for June

Four winners, one loser, one break even for the June option cycle. The winners include: tWo short SPY puts, short EEM and GLD puts, all expiring worthless, so I pocket 100% of the modest option premium.

The strangle on TBT/TLT that broke even, counting two winning short TLT puts expiring, against one covered TBT put at a loss. One loser was the lifted long leg of the SPY Jul 115/120 vertical put spread. The timing on that exit was terrible as the sold put more than doubled after lifting that leg.

Also in GLD, the Jun leg of the GLD calendar 160 call spread expired. I sold a GLD Jul 161 call to turn it into a 1-point-wide vertical call spread. That caps the profit at 1 point, which is decent given a cost basis of the position of 1/3 of that.

It felt like a very frustrating month, despite a modest profit, because many times it seemed like I entered or exited trades at near the worst levels.

Long GLD, IWM, SPY

Buy SPY (sell puts)

Buy SPY via selling Jul 110 puts, SPY @127.8. I am already short SPY Jul 115 puts. Looks like my short Jun puts are coming in okay, so I replace some of that delta with this layer of way out puts.

Long EEM, GLD, IWM, SPY, TLT
with EEM and TLT expiring today

Monday, June 13, 2011

Buy IWM (sell puts)

Buy IWM via selling Jul 69 puts, IWM @78.6. Another low risk, low reward, high probability put sale. IWM at support.

Long EEM, GLD, IWM, SPY, TLT

Saturday, June 11, 2011

Hall of mirrors

As summer nears, carnivals travel the country. One of the attractions is a "fun house," often with a hall of mirrors that distorts images and causes confusion. Right now, QE2 (quantitative easing) is causing distortions in the market.

As is often the case, the straight line analysis is only sometimes useful, as players try to guess what others are doing. With the purchase of $700 billion in Treasury bonds and notes winding down, many believe that interest rates are going to rise. However, if enough players are positioning that way, the second order impact may be something different.

Some believe that QE2 has been what has been propping up the stock and commodity markets, and when it ends, those markets will turn lower. It may play out that way, but again, in the Hall of Mirrors, not all is as it seems.

I have a few modest positions and a lot of dry powder. I don't particularly care for the distortions of the Hall of Mirrors, the in-person carnival kind, or the financial market Fed QE2 kind.

Wednesday, June 08, 2011

Sell GLD (sell calls)

Sell GLD via selling Jul 161 calls, GLD @149.8. This adds a layer of complication to a Jun/Jul 160 call calendar spread. I am long Jul 160 calls, short Jun 160s and short Jul 161s, and short Jul 138 puts and Jun 134 puts. Net long GLD, but this move reduces my exposure.

Long EEM, GLD, SPY, TLT

Monday, June 06, 2011

Buy GLD (sell puts)

I open a July position on short GLD puts. I am also long Jun/Jul 160 calendar spread calls and short Jun 134 puts.

Long EEM, GLD, SPY, TLT *
* I mistakenly left GDX and IWM on some previous lists. Those positions expired with May expiration.

Friday, June 03, 2011

Cold streak

Song for the day is "Cold Day in July" performed by Carrie Underwood (YouTube link). Yeah, I know it is still June.

Anyway, I've been laying low, because it feels like I am out of step with most of the markets. Combine that with some recently closed trades where the timing seemed atrocious, and I have been reluctant to initiate new positions.

All traders go through cold streaks and I seem to be in one now. I am working through it by trading less, reducing risk, and paying less attention to the markets.

Wednesday, June 01, 2011

Sell TBT (buy back short puts)

Sell TBT via covering short Jun 33 puts, TBT @32.8. The short strangle blew up as TLT went on a strong trending bull rally (TBT is the inverse of TLT). I take a 180% loss on the value of the sold options. I remain short two TLT puts on the other side of the strangle and that would offset this loss, if they both expire worthless.

Long EEM, GDX, GLD, IWM, SPY, TLT

Tuesday, May 31, 2011

Buy SPY (sell put)

Buy SPY via selling Jul 120 puts, SPY @134.3. I leg out of the long end of my SPY Jul vertical put spread, selling the Jul 120 puts. I remain short Jul 115 puts. I take a large loss on this leg of the vertical, but it has served its purpose as a hedge for many other short put positions.

Long EEM, GDX, GLD, IWM, SPY
TBT/TLT = short strangle on TLT

Wednesday, May 25, 2011

Las Vegas is built on the rule...

Listening to sports talk radio this morning and I hear this "Las Vegas is built on the rule, not the aberration." Readers know I like the odds in my favor. Other traders may do fine with a relative low percentage of winners, and big winners. A common trading methodology is to aim for 1/3 winners, but make them big, and 2/3 losers keeping them small. My loss averse personality can't stick to and follow that kind of plan. As I often write, it is vital to find a trading style that fits your particular personality. For novice traders that's where journaling (like this blog) can be a powerful tool.

I lot of traders and investors think they are the aberration. Whether it means putting all their eggs into one basket, one asset class, or buying low percentage option plays, they are convinced that they will be that aberration that beats the odds. Yes, a few do beat the odds, but most do not, and that's how Vegas builds and supports those billion dollar casinos.

There is little point in arguing or trying to talk sense into someone that is sure they are the aberration. It is sometimes like trying to convert someone to another religion. That ain't going to happen with logic and sense. It will take more than that. If a person has the track record to back their belief, it is one thing. For others, it might be a lesson they have to learn on their own. Some never learn the lesson, and continually lose money in the latest and greatest aberration.

Tuesday, May 24, 2011

Bob Dylan's 70th bday

One of my hobbies is songwriting. Bob Dylan is perhaps the most influential songwriter of the century. Here are a couple of lists of his top songs (link1 and link2). Many of Dylan's songs became top hits when performed by other artists.

As for the markets, they continue to frustrate. In hindsight, I would have been better off holding all three positions where I recently cut the losses. This happens and is an average event, though hopefully not that frequent an event. I tend to have a low tolerance for losses, so I remind myself to limit exposure after taking some big losses. I'll be back, but it is often best to take it slow after taking some big hits.

Friday, May 20, 2011

9-3 for May w/ some big losers

Nine winners, three losers for the May option cycle. Unfortunately, the three losers included two big hits in GDX and TBT and a monster loss in SLV. Winners include a GLD call calendar, and short puts on GDX, TLT, three SPY puts, EEM and IWM.

Overall it nets to a sizeable but manageable loss. This is my worst month of 2011 and the first month in the red. I went into survival mode after taking the big hit on SLV and closed out some other trades that I might have held on, had I not been knocked silly by the 880% loss in SLV (that's on the value of the sold put).

Going forward, I have a GLD call calendar, GLD short puts, SPY short puts hedged with a vertical put spread, TLT/TBT which translates to a short strangle, short puts on EEM.

Tuesday, May 17, 2011

Sell TBT (buy back short puts)

Sell TBT via covering short May 34 puts, TBT @33.4. The bleeding continues, as this is my third big loss for this cycle. This one is 200% on value of the option. I remain short TBT Jun 33 puts and they are deep in the red. The other half of the trade, short TLT puts are green, but have not made up for the losses. This is the risk of selling strangles, that a large directional move breaks the trading range.

Long EEM, GDX, GLD, IWM, SPY
TBT/TLT = short strangle on TLT

Thursday, May 12, 2011

Sell SLV and GDX (buy back short puts)

I sell SLV buying back my short Jun 35 puts, SLV @32.1. I take a large dose of medicine, possibly the worst trade in the four years that I've been blogging. The 880% loss on the value of the option, wipes out months of many small profits from selling puts. This is the risk of the strategy, that something blows up and I watch it go. This biggest mistake was on the entry, where greed and the high premiums lured me in. The minor recovery rally was an opportunity to get out with a large loss instead of a monster hit I am taking now. As I type this up, it looks like I picked a bad time as SLV has recovered a bit to 32.4, but that too happens if a person cuts losses.

I also sell GDX buying back my short Jun 51 puts with GDX @54.2 for a 250% loss on the value of the option.

I had more risk on the table than I would like and needed to cut back. It is painful to take some huge losses, but better that than to “go down with the ship” and see the entire account become threatened.

Long EEM, GDX, GLD, IWM, SPY
TBT/TLT = short strangle on TLT

Wednesday, May 11, 2011

Gold timers and retirement savers

I haven't blogged in a couple of days. I have two separate items today. First is Hulbert on Marketwatch reporting low bullishness among gold timers (link).
>>
... the average recommended gold market exposure among a subset of the gold market timers tracked by the Hulbert Financial Digest (as measured by the Hulbert Gold Newsletter Sentiment Index, or HGNSI). Just a week ago this average stood at 73.7%, one of the highest readings for this index in several years.

Today, in contrast, it stands at just 7.0%. ...

>>
This is good news for gold bulls. With such a low level of exposure, another steep decline in gold is less likely. So despite today's give back, I remain bullish on gold and am holding my positions (May and Jun short puts and a Jun/Jul call calendar spread).

In a separate article about retirement savings, few are optimistic about having enough money to retire (link2).
>>
70% of those surveyed said they are not where they need to be in terms of saving for retirement
>>
With money market funds and CDs at record low yields, few feel comfortable about their nest eggs. When yields were 3% to 5% on the guaranteed instruments, the sentiment was better. It is a difficult environment, because many feel that bonds are headed lower, stocks are overvalued and precious metals are in a bubble. Only a few might hold all three beliefs, but many folks seem to express at least one of these concerns. There is certainly a case to be made for all three.

They are valid concerns. However with "cash" yields so low, it is a difficult course to chart. The game of chasing yields, with high yielding stocks, long term bonds, junk bonds, is loaded with risk. This blog is about my short term trades. I only write about the long term in general terms here. There are other places such as the Vanguard forums where folks can get detailed comments on questions about asset allocation (link3). Though be prepared to reveal a good deal of personal information to get meaningful comments.

Saturday, May 07, 2011

Does anyone pick stocks any more?

Today is the day of the Kentucky Derby. Back in the day, horse racing was a popular middle class sport. Boxing has experienced a similar decline in popularity. So has stock picking. When I was new to the stock market in 1987, it seemed a popular past time for young educated men.

Readers of this blog can observe a change here. I rarely venture into individual stocks any more. One huge reason is that in options, the spreads on the big indexes such as SPY, GLD, tends to be penny-wide or at most a few cents wide. On a few stocks that is also true, but it is a very short list. On many popular stocks, the bid/ask spread might be ten cents. Over time that adds a lot of friction and reduces returns. Especially as I venture more into spreads where it may take four transactions to complete a trade, an extra ten cents adds up over the course of a year.

As an aside, I was having breakfast with a stock picking buddy and another stranger over heard the conversation. The woman said, "I think the stock market is fixed." That is a popular feeling out there, and in some ways accurate.

Speaking of fixed, I posted a poll on the PCGS precious metals forum, asking when silver will see $50 again (link). After 80 or so responses, about half expect $50 to come before 2011 ends. Another 35% expect it within three years. As I wrote on that thread, that is disappointing after a down 38% week. More pain in the form of lower prices may be needed to dampen the enthusiasm.

Compare this to the mood at the March 2009 bottom in the stock market. Many pundits, me included thought that 3000 Dow might be in the cards. That is the kind of mood at major bottoms, not a calm optimism about the long term up trend. That said, a good many pundits called the top at $50, so who knows. I would be more optimistic, if there were more pessimists. It is a conundrum of the markets.

Friday, May 06, 2011

Is SLV done or is it 1987?

Is the bull market over in silver? Is it now doomed to see decades of decline with only failing rallies? Or is this week in silver more like the 1987 crash in the stock market, with SLV ready to recover and eventually make new highs?

I vote for the latter, that new highs for silver are out there, though it will likely take a while. It took two years for the 1987 stock market to make up that 40% lost during the crash month. It may be similar for silver. A one week 38% smack down on rising margin requirements isn't how long term bull markets typically make their final tops. I don't see a V-shaped recovery, so it isn't time to load the boat on silver. A lot of technical damage has been done to the silver chart, so I expect a lot more backing and filling. Indeed, SLV may have to go below 30 before making a short term low.

As always, no one knows the future, I am giving an opinion, and as always, I've been wrong before (like yesterday when my trading account saw its worse day of the year).

The gold chart still looks constructive, with a decent base for GLD at 140. Textbook would be a pullback to the 50 day moving average and then new highs. It is rare to get textbook charts in real time though.

Thursday, May 05, 2011

Market melt down

Ouch! This is my worst day in many moons. SLV, GLD, GDX lead the losers, but almost all my positions took on heavy water.

For now I am holding on to all my positions. I may roll out the short TBT May 34 puts, same with some of the other puts for June, if they are come into the money.

I out thought the room. I posted those warnings on Sunday about silver, and thought with that with so many warnings, there was little chance of a melt down. Sometimes the pundits get it right, and those that like to fade them get punished. Ouch.

Wednesday, May 04, 2011

Buy TLT (sell puts)

Buy TLT via selling Jun 89 puts, TLT @94.4. This is a rebalancing trade for the TBT/TLT strangle. The most immediate concern is that I am short TBT May 34 puts and they are close to the strike with TBT @34.9. TLT is at resistance, but this morning is breaking through. While I am underwater on my TBT positions, the profits from the TLT more than compensate, so the short strangles are net positive overall. I am already short TLT May 86 puts and Jun 85 puts.

Elsewhere, I stepped into an air pocket on SLV on Monday. The high premium lured me in and I am paying for it. I am down 120% on the value of the option in two days. Fortunately, as almost always the dollar amounts are small.

Long EEM, GDX, GLD, IWM, SLV, SPY
TBT/TLT = short strangle on TLT