Thursday, March 31, 2011

Ritholz: QE3 here already?

Barry Ritholz writes about the Bank of Japan, injecting the equivalent of QE3 into the system with its post earthquake intervention (link).

I express some of my thoughts about QE2 a couple of weeks ago, on the PCGS Precious Metals forum (link2).

I can't explain it [QE] in simple terms. It is not an easy topic. Intuitively, I know that printing money to buy Treasury bonds is a very dangerous game. It is a complicated game, where the players, don't have a good grasp of what kind of genie they have let loose on the land. I read a New York Times article about the team that does the actual buying and how and when they do it. Would it trouble you to know that the team consists of six 20 somethings? That the oldest person on the desk that does the daily buying of bonds and notes that will eventually total $700 billion is 29 years old? Well, it bothers me.

QE is playing with fire, and there is a chance that the house (the entire financial system) might burn to the ground. Again, one unintended brush fire from the policy is record food and commodity prices as well as recovery highs in the U. S. stock market. Food riots are starting to break out in the poorer countries. Is there cause and effect? Some would say no, but we won't know the history until it is written. If things go badly, historians may look back and blame QE and qe2 as the catalysts to massive starvation of hundreds of millions of poor people all over the world. That's the magnitude of the kind of fire they are playing with. If things go badly, QE might be viewed like the Treaty of Versailles (ending World War I) and the punitive reparations demanded which had a long term cost. When that war ended, very smart people sat down and wrote out the terms. It made logical sense to them.

Humans are capable of incredible financial folly. That you and others don't see a problem doesn't mean there isn't a problem. Quantitative easing is almost certain to have a long term cost. We don't know the price yet. Those in charge don't know the rules of the game. The rules of the game are being made up as we go. I see QE as a genie that has been let loose on the land, and the price wasn't negotiated when he was set free. The genie isn't going back into the bottle until his price is paid, and that price may be high, and there is the chance it may involve blood.


Wednesday, March 30, 2011

Kaeppel on Bond seasonality (and gold too)

Jay Kaeppel at Optionetics writes about seasonal trends for U. S. Treasuries (link). The short and sweet version is January thru April are the worst four months, and four single months May, June, August and November are the best months to own bonds. As always seasonality is only one indicator, and one of the less dependable ones and one that gets easily jumped (eg: if traders expect a strong May, they will jump the trade and move that up to mid-April).

In a dated article from 2009, Jeff Clark addresses the question "What is the best month to buy gold?," specifically gold miners (link2).

I am tempted to play this by shorting gold using a Jun/Jul calendar put spread, or vertical put spread out to July. My history is that I tend to be early with these urges, so may just sit on the idea until I get more clarity or see some actual downside action. As always, calling top (or bottom) tends to be a low probability game.

Buy TBT (sell puts)

Buy TBT via selling May 34 puts, TBT @36.7. I open a May position on this double-inverse bond ETF. I am already short TBT Apr 34 puts, and TLT May 86 puts. This makes for a short strangle on TLT, or a bet that bonds will stay in a range.

TBT/TLT = short strangle on TLT

Tuesday, March 29, 2011

Buy GDX (sell puts)

Buy GDX and SPY (sell puts)
Buy GDX via selling May 48 puts, GDX @58.7. The short April puts are near delta zero, so I open a May position to have continued exposure. Like the GLD puts I sold, these are way out, with a high probability of success.

I also layer on more SPY longs via selling SPY Apr 123 puts SPY @131.8. I figure if all the news couldn't get SPY much below 125, it will take a wallop to get it below 123 before April expiration. I am already short SPY puts for Apr 103, Apr 113, Apr 117, May 107.

These are low risk and low reward trades. My broker ThinkorSwim lets me do the trades with exchange minimum margins of about 10% of the underlying strike. I can't remember ever running out of buying power or even getting close. So while these can be risky trades at full margin, I don't go near using full leverage. For any new readers, I survived 2008 selling puts, so do occasionally cut and run and take my lumps.


Wolfinger on Emotional capital

I found a blog called "Options for Rookies," written by Mark Wolfinger. In the linked entry, there is a first hand account of a relatively new trader caught up in an churn of emotion.

The blog has entries on a lot of topics that I don't have the time or inclination to explain, such as basic option strategy and trading tactics. The author was an options market maker in the 1970s, but does try to bring ideas down to a basic level.

A lot of traders focus entirely on the account balance, the profit and loss. A big factor is the emotional state, the emotional capital, the wear and tear on a person's psyche. What a trader chooses to spend time and energy on will have a huge long term impact on the bottom line. Sometimes it is better to exit a trade, even if odds favor it working out, if the emotional capital expended is too much.

There is the old investor cliche, "sell down to the sleeping point," for investors that can't sleep at night because they worry about their investments. I don't have a witty equivalent for short term traders, perhaps conserve your time and energy, spend it wisely.

Monday, March 28, 2011

Buy TLT (sell puts)

Buy TLT via selling May 86 puts, TLT @92.4. Support at 88 and 87. In my mind, this is like placing a bid at 86, and getting paid if it doesn't fill, and being okay with it if it does fill.

TBT/TLT = short strangle on TLT

Saturday, March 26, 2011

Vanguard vs. the Matrix

Recently I've been reading the Vanguard forums (link1 and link2). The regulars there call themselves Bogleheads. A tribute to Vanguard founder Jack Bogle.

While much of the Internet is devoted to market timing and hot tips, a person will find none on that on planet Bogle-head. The language is different as is the attitude.

I was tempted to give this post the title, red pill or blue pill. The main character in the Matrix movie is given that choice. In the movie, the red pill leads to an escape from the Matrix. As a young person with their first decent job and some money to invest, you can take either pill. Let me randomly assign the red pill to Vanguard, this pill means you will likely be in the top 25% of U. S. investors in performance. However, what you give up is any excitement, action, and the possibility of a financial home run. With the prequisites of a high savings rate, frugal living, and a relative stable political environment (the U. S. still is on world maps) you will likely have a decent retirement.

Most people choose the blue pill, which means more excitement, more action, more frustration, and mostly lower performance. Yes, a tiny percentage will out do the other group. A tinier percentage will hit that home run (eg: loading the investment boat full of Apple, or Bershire, or Walmart at a good time in their curve).

I took the blue pill. Options might be described as the big blue pill with an exception for a few conservative strategies such as covered calls and collars. If you are reading this, you likely have chosen the blue pill. Well, I am can talk about the benefits of the red pill. It is what I suggest to young relatives that ask me about investments. Steady savings, no credit card debt, living under one's means, age appropriate asset allocation. Not many want to buy it, vs. if I had offered a hot penny stock tip. I certainly did not when I was 25. Still, for the average person that is interested in bottom line results, that doesn't want to spend a lot of time learning, or doesn't have the aptitude, the red pill, the Vanguard way, is the better way to go.

Friday, March 25, 2011

Buy EEM (sell puts)

Buy EEM via selling May 41 puts, IWM @47.4. EEM acting strong considering all the world news. My Aprils are near delta zero so I open a May position for continued exposure.


Buy GLD (sell puts)

Buy GLD via selling May 125 puts, GLD @139.7. I open a May position. I was tempted to move the strike to 127, but the 125s are a bit safer, give a bit more margin for error. The compromise is less premium.

(all short puts)

Thursday, March 24, 2011

Buy IWM (sell puts)

Buy IWM via selling May 69 puts, IWM @81.5. Yesterday's attempt to split the bid/ask on EEM puts wasn't the best move. Bid was 32 cents and I tried for 33 and did not get filled. Today they are bid 22 cents. It happens.


Wednesday, March 23, 2011

Buy SPY (sell long puts)

Buy SPY as I leg out of my vertical put spread, selling the SPY Apr 122 puts for a 65% loss. The vertical served its purpose, hedging the other short puts. SPY @129.8

Earlier, I placed an order to sell short some EEM May Apr 40 puts, but didn't get filled.


Buy SPY (sell puts)

Buy SPY via selling May 107 puts, SPY @129.4. I add May 107 to my pile of SPY puts (short Apr 103, 113, 117, long Apr 123 puts).


Friday, March 18, 2011

4-1 for March

Four winners, one loser for the March option cycle. A relief rally saved my bacon on my three short SPY puts, the fourth winner was a TBT short put. The big loser was a closed trade on an April XME short put. Overall, a sliver of profit, as the one loser was a big one and the four winners small ones.

Again, it serves to illustrate how difficult it is to buy way out puts and hold until expiration. Even, with the news events from Libya and Japan, and wild market action, none of the SPY puts ever came into the money and went to a 100% loss if held to expiration. That said, at the worst of the selling, the SPY March 123 put went to a possible profit of 250%, if a person timed the best exit. That's the lure, the big winner, the home run.

In 2008, some of short puts did go well into the money, so the lesson isn't to sell puts willy-nilly and never to use stops. However, it is an exceptional market that goes straight down. Again, a 10% correction in SPY is common, but 10% down in a single month tends to be an exceptionally bad month.

Going forward I am net long SPY, TBT, GLD, and GDX, mostly with short puts. Turns out that my decision to skip selling short gold puts this cycle was a mistake as gold and miners held up ok.

The NCAA basketball tournament is sometimes called the big dance. For that theme I link the Lee Ann Womack song "I Hope You Dance (youtube link). Enjoy.

Wednesday, March 16, 2011

The woodshed

Like a lot of longs, I got spanked today. I vaguely remember a financial book from the 1980s, the go-go days of the Nikkei when it was 40,000. It was about a financial market crash precipitated by a massive Japanese earthquake. I don't remember the title.

I am hoping that today's wild witching Wednesday action was related to option expiration this Friday. A few more days like this and I will be in trouble, because of all the layers of short SPY puts I have on. If the 123 price level holds for this option cycle, I can rest a lot easier. There is a minor shelf of support at SPY 125.

I was tempted to sell some SLV puts early this morning. Good thing I did not, as it too turned tail.

Monday, March 14, 2011

Buying or selling on the news

Some investors are taking a look at Japan, or Japanese equities thinking to buy or sell based on the news. It is difficult to predict such a fluid situation. Sentiment can be useful. If it seems like a "smart idea" to buy, it may not be. If others are actually moving in, again, it is likely not such a good move. Traders might look at the recent chart of BP (link).

In the case of BP, the bad news was not a buying opportunity, at least not on the day of the news. The bottom came about a month later as events got worse and worse. This doesn't mean it will be time to buy TM or EWJ a month from now. That would be too easy a lesson, and too far a reach for a conclusion. It does mean that things might be bad, a stock might be at support, but if more bad news comes out, there can be a lot more downside. The chart can be helpful. For example, the two day move down in TM (link2) might be approximately half the move, so another 6 or 7 points lower to 75 makes it a lot more interesting.

Those few buying today or Friday, might use up their dry powder quickly and if the markets drop another 10% or 20%, won't have much more to commit. While those selling, might have huge positions they wish to get out of.

As always, for relatively slow moving position traders like me, it is almost always better to wait and watch. The heroes and the nimble can try and time the exact bottom, slow moving traders almost never do. Yes, sometimes a person will miss the move, but that is always the case.

Friday, March 11, 2011

The quick and the dead

For those with relatives or friends in the earthquake zone, my prayers and good wishes for safe outcomes.

I have more ideas for trades today, but after the recent disaster of XME, I stay away. I have plenty of positions for April. A big loss can make a trader punch drunk. The temptation is to try and make it back as soon as possible. That works for a few traders, but it can also lead to a spiraling losses. For any novice traders reading along, I would suggest the safer path, of trading smaller or taking a break after a loss that stings.

During volatile markets like we have been experiencing, it would be nice to be a more nimble, quicker thinking, quicker moving trader. After over 20 years in the markets, there is always more to learn, but a big change in overall trading style is unlikely to come to pass. As I often write, I usually do better after the dust has settled and trade off the support and resistance levels that have been established.

Thursday, March 10, 2011

Sell XME (cover short puts)

I cover my short XME Apr 59 puts for a huge percentage loss, XME @67.0. My timing was close to the worst possible, resulting in a 180% loss on the notional value, holding for a week. I am taking my lumps and moving on. This was a “throw in trade” to me, hedging my other positions. Yeah, I was "thrown in" all right, thrown into the frying pan. Thankfully, the dollar amounts are small.


Anniversary talk

I started this blog in February 2006. So I can note five years of semi-regular posting.

There is some chatter about another anniversary, it is two years since SPY bottomed around 66. Back then, virtually no one thought the stock market would double in the next two years. I certainly did not. I quote a post below, and reading it back, the mention of Dow 3000 looks silly in hindsight, but I was not the only one. If I knew then, what today's prices would be, investing and trading would be real easy, it always is in hindsight. Trees don't grow to the sky, neither does a major economic power tend to wither and die overnight and go to zero. Here are a couple quotes from the depths of the lows:

From a March 3, 2009 post
"SPY Limbo, how low can it go?"
... the market is not historically cheap yet, not based on current earnings. SPY 300!? Dow 3000? That would not be a pretty picture and would likely coincide with a major economic depression. Let's hope things don't get that bad. The chart does project that low. SPY 600 is some support, but it is not major support on the long term chart, not really.


Though to my credit I did tell this story in my February 28, 2009 post
"Worst February since 1933"
I like to tell the story about when my dad first started investing. The stock market was near a top in 1967, it went sideways for a while before spiraling down in 1973/74.

After losing 60% to 70% of his money, dad wanted to sell all his stocks and mutual funds near the bottom. My mom, who had been against the entire idea of investing in the first place, told my dad that he was an idiot. That after a 70% decline it wasn't time to sell, that it was time to buy. My dad ended up doubling his monthly mutual fund purchases. In hindsight, we all know things did turn out okay, and increasing the stock allocation was a smart move.

As a footnote, the fall from the all time SPY high of 150 to 66 is about 56%.

The anniversary of the market lows is a reminder that reversion to the mean is a powerful theme for long term investors. In plain English it means if things are really bad, there is a tendency for things to get better, and if things are really good, they tend to fall back towards average. It tends to take a major historical event such as the loss of a major war, major famine, major plague, or revolution and fall of government, to destroy a major economy.

Monday, March 07, 2011

Frustrated Puddle duck

I am flummoxed and frustrated by the markets. Last week, I initiated four trades and all four are below the line after commissions. The image of the puddle duck comes to mind because it looks like he is floating effortless on top of the water while below his feet are churning for all they are worth. It seems a fitting metaphor for a lot of trading activity with nothing positive to show.

For now, I plan to let my positions sort themselves out and hope that support levels eventually hold, and that expiration comes without more shoes (or bombs) dropping.


Friday, March 04, 2011

Buy XME (sell puts)

Buy XME mining ETF via selling Apr 59 puts. 65 and 60 are support, XME @73.0. I consider lifting the long put in the SPY vertical put spread to go totally long SPY with short puts. Instead of doing that I buy into a strong sector and leave the long put in place.


Tuesday, March 01, 2011

Short SPY (buy vertical put spread)

I short SPY via buying a vertical put spread.
Buy Apr 122 p/ Sell Apr 117 p
SPY @ 131.0

I really stepped in it with my poorly timed put sales on Monday. Yikes! I am hedging my longs, though still net long SPY deltas. There are seven different options in the SPY web.

I thought I was back in rhythm with the markets, but got smacked down. Precious metals continue to run. I don't have a position in SLV, but I have a price target of 36 for the silver ETF.

/edit to add: As I tidy up my post, I see SPY rallying off its lows, so the put spread just entered is already taking on water. As the Shirelles' song goes, "Momma said there would be days like this" (Youtube link).