Monday, February 28, 2011

Buy SPY (sell puts)

I buy SPY by layering on more short puts, selling Mar 123 and Apr 113 puts with SPY @133.0. This adds to my SPY longs. I already short Apr 103 puts, and Mar 106, 116 puts.


Saturday, February 26, 2011

"It's in the price" and calendar spreads

The stock market tends to be a discounting mechanism. Traders and investors are not only going by what is, but what they expect. Mark Hulbert wrote about the impact of a CEO's death, and more pointedly about Apple and Steve Jobs (link).

the stock market does an impressive job of discounting the consequences of developments that are coming down the pike. So when a CEO’s health is as fragile as Steve Jobs’, and when that fact is as widely known as is the case among Apple’s investors, the negative impact of his passing will — at least for the most part — have long since been reflected in the price of the company’s stock.

The game within the game is whether the news is fully discounted, usually it is not and there is a reaction on the news. However, as Hulbert's research points out, that reaction is often an over reaction. Readers know I sometimes like to buy stocks that are having headline making bad news (eg: Toyota when it was having all its recall problems.) I am also fond of buying on good earnings news and a decent looking chart, and buying ETFs on strength rather than weakness.

Changing the topic, on the Friday ThinkorSwim market wrap (anyone can listen, they just have to register at the website, highly recommended), a bearish calendar spread was mentioned. I never have done calendar spreads, and never quite understood the play. On Friday it was like lightbulb went off and I am coming to a much better understanding of when a person might use calendar spreads.

The basics are buying one option a few months out, and selling the same strike closer in. The buyer of the calendar spread profits if the market is near the strike price at the first expiration. A big move either way means a loss. In theory, downside and margin requirements are limited to the price of the spread. What can wreck that is if there is fast market and an early exercise on the short option.

Friday, February 25, 2011

Buy GDX and TBT (sell puts)

Buy TBT via selling Apr 34 puts, TBT @38.2. This opens an April position, adding to my short Mar 34 puts.

The three day bear raid has been beaten back. The puts I sold earlier this week are all now at a profit. As the Rolling Stones phrase it in their song "Paint it Black" (link) take that red door and paint it black (red being a loss, black being a profit).

/edit to add: Buy GDX via selling Apr 48 puts, GDX @58.7


Wednesday, February 23, 2011

Buy SPY (sell puts)

I add to my SPY longs via selling Apr 103 puts, SPY @130.7. I am already short SPY Mar 116 puts and Mar 105 puts. Basically, those buying the way out puts are betting on a stock market crash, or buying insurance against a crash. I am taking the other side.

My trades earlier today are under water as option premiums continue to climb and EEM moves lower. My timing could definitely have been better. I came into the cycle with minimal exposure and plan to continue to scale into positions.


Buy EEM and GLD (sell puts)

Buy GLD via selling Apr 122 puts, GLD @137.8. Another low risk, low reward, low conviction position. I let my Feb gold positions expire without opening up any new ones. Buy EEM via selling Apr 38 puts, EEM @45.1. EEM is near support, more support at 40.


Saturday, February 19, 2011

3-1 for February

Three small winners, one big loser for the February option cycle gets me to about break even for trading results for this cycle. The loser was the bearish vertical put spread on SPY. The winners were short puts on GDX, GLD, TBT. The gold puts were underwater a month ago, so I am relieved that they came in safe. However, when a market rallies, traders often wish they were more aggressively positioned.

Going forward I am short puts on SPY, TBT.

For some traders there is angst about the stock market. Stock market bears can not even get one day or one hour of sustained down movement. During the last 30% increase, there have only been 13 down days of 1% or more. That is unprecedented, never has a rally of that magnitude been punctuated by so few down days. Again, some point to the high frequency trading phenomenon, some point to Bernanke. Whatever the case, the bulls have been making money and bears have been losing.

Friday, February 18, 2011

Calling turns

It is difficult to call market turns. As I have often written, calling top (or bottom) tends to be a low percentage play.

The stock market rolls on, frustrating the crowd of smart folks expecting a correction or worse. I have been in the bear camp since the beginning of the year. Thankfully, I didn't bet heavily on my belief, as stock market bears have lost their shirts with what seems like an unstoppable, almost irrational rally.

It is not so important to figure out why. I have mentioned that QE2 may be distorting normal flows. That much of that newly printed money is finding its way to the stock market. That and near zero short term interest rates on money market funds and equivalents, means folks don't want to sit in cash. Cash is and has been trash.

Many readers know of the 1988 book "Market Wizards" (link). I remember the chapter with the legend Paul Tudor Jones and his knack for calling market turns. What I remember goes along the lines of he often takes several small losses before getting the timing right and making a bundle. The headline is that Jones called the turn, when it was try-fail, try-fail, try-succeed.

I am not so ingrained a bear that I am willing to keep shoveling money into bearish stock market bets. The percentage play tends to be to wait until a turn is verified, then short the reaction rally. That may be what we are seeing in gold. There is resistance at the highs. Gold is now overbought. With that, it is difficult to go bearish on gold when the long term uptrend is so strong.

I was extremely tempted to add some small positions yesterday. Then I remembered what I wrote on the blog about sitting, and how much sense it makes to sit. So again, I did nothing. That's one way the blog helps me. It makes me accountable to my own thinking. Sounds simple, but when that itch to get in comes, logical thinking sometimes goes out the window.

Wednesday, February 16, 2011

Ritholtz: books and lists

Barry Ritholz has a list of lists, as well as a list of books (link).

I haven't gone through all of the entries on the list. However, from one of his blog entries "The Zen of Trading," (link2) here are a couple of nuggets:
6. Take Responsibility: Many folks believe “the game is fixed.” To them, I say: get over it. Stop whining and take the proper responsibility for your trades, your losses and yourself. ...

That's one of the reasons I tend to spend so little time on conspiracy theories (precious metals market writers seem most prone to this). It is mostly a waste of time and energy to ponder for traders. Little fish won't ever know the whole truth. Best to do what you can or to avoid certain markets. Reading and writing about manipulation are mostly a waste of valuable time.

7. Constantly Improve: Investing is so competitive that you cannot afford to stand still. Investors should constantly seek to raise their skill level by learning as much as possible about the markets, the economy, trading technologies and various schools of investing thought. But whatever you read, you must do so with a keenly skeptical eye, while retaining an open mind (‘taint easy to do).

The markets are a moving target. Back-tested trading systems marketed to individuals tend to sell well. Unfortunately, the markets change, so what worked in the past may not keep working. These days, the big firms are constantly having their computers fine tune their algorithms, every day, every hour. The same holds for any number of other indicators.

All the markets still seem risky to me. Option premiums remain low, so the risk-reward for selling options doesn't look so good. Buying options for a directional move requires a high degree of confidence and conviction. I don't have that sense of clarity for any market. For now, I have a few small positions and am reluctant to put on more. Sitting is boring. Reading about sitting is even more boring. Better to be bored than to seek action and likely lose money to avoid the boredom.

Friday, February 11, 2011

Buy SPY (sell puts)

Buy SPY via selling Mar 116 puts, SPY @131.9. A low conviction add, I am already short Mar 105 puts and Feb 112 puts. With premiums down, selling options becomes less attractive. GLD and GDX options for March don't seem to offer enough premium for what I perceive as growing short term downside risk.


Monday, February 07, 2011

Unwinding the vertical

I unwind one leg of my SPY Vertical, sell SPY Feb 118 put for a 95% loss on this leg of the trade. I am still short the Feb 112 puts and Mar 105 puts, so I am now net long SPY. This was a disaster trade as I bet that SPY would go down and it rallied strongly. I limited the damage by selling Jan SPY puts which have already expired.


Everything seems risky

On last Friday's ThinkorSwim weekly market wrap, one of the participants said something to the effect: I wouldn't buy anything, not stocks, not bonds, not gold.

I am almost in the same camp, I have a few small positions, but nothing looks compelling. Unfortunately, cash brings next to nothing with many money market funds at zero or close to it. For bonds, TLT is approaching 88, which I think is decent support.

If reports are to believed, gold was manipulated higher mostly by one hedge fund (WSJ link). The unwinding of the position pushed gold lower, so it seems highly likely that putting it on, pushed gold higher. Given the reports (which may or may not be 100% truthful) that hedge fund may have accounted for a decent portion of the 29% up year for gold in 2010.

As for stocks, the rally rolls on. Some are concerned about high frequency trading. Many old-school techniques may now be failing as computers parse every possible pattern, every hour, every day, looking for tiny one cent or even half cent trades. Some say all the Fed money from QE2 is flowing into the stock market.

Sometimes the best thing for a trader to do is to sit and do nothing, as boring as that is. I am tempted to turn towards ever more exotic option trades. The logical mind, says it is better to keep it simple, wait for more clarity, better opportunity. Again, what worked last year may not work this year. With VIX at 16, selling option premium seems like an ever more dangerous game of chicken.

As for seasonality, Feb is a poor month for stocks. Bonds are due for a seasonal low in May. March tends to be a poor month for gold, with June and September often providing much better buying opportunities.

Tuesday, February 01, 2011

Nusbaum: The 4% rule

Random Roger writes more about the 4% rule (link1). In the comments section a FPA article is cited as another source (link2).

For those unfamiliar with the term, the 4% rule that retirees can only count on withdrawals of 4% each year. I have been familiar with this for a long time. I remember a conversation many, many years ago, when money markets and one-year CDs were yielding over 5%. I mentioned that endowment funds will only spend 3% of their capital each year.

Over time, with average market conditions 3% means the endowment can maintain its level of giving in terms of steady buying power. So if inflation ticks up, the returns are likely to be higher than 3%, but the level of spending has to go up to maintain the level of giving in real terms.