Friday, April 29, 2011

Buy SPY (sell puts)

Buy SPY via selling Jun 124 puts, SPY @136.0. Support at 134, 130, 125. I add another layer of short puts. I have a Jul 115/120 put vertical as a protective hedge against layers of short puts. This translates to a bullish bets in May and Jun, with a protective hedge out to Jul.

TBT/TLT = short strangle on TLT

Buy GLD (Thu order filled)

Yesterday's order for a GLD call calendar spread Jun/Jul 160 calls filled with GLD around 149.0.

I buy the Jul 160 calls sell the Jun 160 calls. As review, this is a mildly bullish bet, with a max profit if GLD reaches 160 at Jun expiration. The trade has positive theta, so time decay works for me. If GLD falls, it losses, and also if GLD goes rapidly to 165, the trade also flips to a loser. Advantages over buying straight calls are lower cost, positive theta. Negatives are the two commissions and bid/ask spreads each way, less upside than buying straight calls, and trade flips to negative if GLD sky rockets.

TBT/TLT = short strangle on TLT

Thursday, April 28, 2011

Buy EEM (sell puts)

Buy EEM via selling Jun 44 puts, EEM @49.7. I open a Jun position, 44 is support.

Separately, I place an order for a GLD call calendar spread Jun/Jul 160, at the mid price which means the market has to come back a bit for me to get filled. I was fortunate to get filled on Wednesday, exiting the other GLD calendar. The max profit is at the strike (which was 147) and the position starts to lose as price moves up above that.

TBT/TLT = short strangle on TLT

Wednesday, April 27, 2011

Sell GLD (sell call calendar spread)

Sell GLD by selling my May/Jun 147 call calendar spread, GLD @147.8 when trade filled. I net a 45% profit after spreads and commissions. As usual, while the percentage gain is impressive, the dollar amount is small. As GLD moves above the strike price, the spread starts to decrease in value. Each part, the May 147 call, the Jun 147 call and the calendar all went up.

The calendar has the advantages of positive theta (time decay works for me) and lower cost and a smoother ride vs. buying straight calls. A negative for calendars is two bid/ask spreads, two commissions each way. If there were no commissions, no bid/ask spreads, like paper traders might report, or some option training programs permit, the profit might have been more like 65% instead of 45% on the exact same trade.

I am still long GLD via being short some May and Jun puts.

TBT/TLT = short strangle on TLT

Tuesday, April 26, 2011

Silver: time and price

Silver futures /SI on ThinkorSwim neared the sun at $50 yesterday and fell back. Many are trying to predict how low it will go on this first pullback. I often write that when price is uncertain, look at time. On the /SI chart, the futures made a run towards $30 on 11/9/10 and fell back for five days.

It took two more runs at $30 to break through. The second run at 12/6 took out the level, but again fell back for a period of consolidation. The third try 12/31 went a little high, but actually resulted in a longer and deeper correction of three weeks.

With so many looking at price levels, time may be as good an indicator here. Next Monday 5/2/11 is five days, and may see a first bottoming attempt for silver.

Looks like I would have been done better waiting on my GDX and GLD puts sales from yesterday. I haven't hit too many trades solidly square lately.

Monday, April 25, 2011

Buy GDX and GLD (sell puts)

Buy GDX via selling Jun 51 puts, GDX @61.3. I open a Jun position. The low for calendar 2011 is 52, so a move to the strike would mean the entire year's gain is given up. Another low risk, low reward, bullish bet. Volatility on SPY is way down, but still about 37% on these way out puts.

/edit to add: I also buy GLD via selling Jun 134 puts, GLD @147.2. Support at the breakout level of 139 and the dip at 135. I also have a lot of thoughts about SLV, but it is moving too fast for me.

TBT/TLT = short strangle on TLT

Sunday, April 24, 2011

Change in fashion

I find an interesting discussion on the Vanguard forum about changes in suggested asset allocation (link).

From that discussion:
... evidence of faddishness and trendiness in investment advice. In 1989, we were being told that retirees should have 0-20% in stocks, 50% bonds, and 30%-50% cash. Today, Vanguard Target Retirement 2010 would put someone at retirement in 47.53% stocks, 51.94% bonds, and a whopping 0.53% short-term reserves ...

This is normal human behavior. Every age will have investment cliches that may or may not be sound. Way back in the 19th century, the advice was to "never sell consuls [British bonds with no expiration date]," then World War I and II happened and the sun set on the Empire and the bonds weren't so good to have any more. Things change.

More recently there has been a lot more recommendations towards international investments, mostly stocks, but now international bonds are coming into fashion. Even more in the news is the current run for silver and gold. Will the Bogle-heads ever acknowledge metals? Probably not any time soon, however, the permanent portfolio folks have, and do, and it is similar approach though with a 25% weighting to gold (link to gyroscopic investment forum).

Wouldn't it be great to know what the gurus will be recommending in 2030? Odds are that it will be widely different from what is in fashion now, just as the allocations changed so much from 1989 to 2011.

Thursday, April 21, 2011

Buy SPY (sell puts)

Buy SPY via selling Jun 119 puts, SPY @133.8. I open a June position on SPY. I am already short several layers of May puts (bullish bets) and have a Jul vertical put spread (bearish bet) as a hedge. SPY looks like it wants to spend some time basing at the recent highs. Support at 130 and 125.

GLD nearing my target of 147. I may let it drift a bit higher before exiting my calendar spread, because time decay is in my favor as I am short the May 147 calls, and long the Jun 147 calls.

Bonds have been volatile this week due to the S&P outlook. I still think a range is the most likely scenario and have positioned myself accordingly.

TBT/TLT = short strangle on TLT

Wednesday, April 20, 2011

The race against yourself

A guy on the radio talks about the race against yourself. It is a totally different context than trading, but it is a worthy topic. Another similar title that I've been thinking about is the "fear of missing out."

In trading, there is almost always someone who has a higher rate of return over any given period. With every monthly summary, I can point to trades not taken, or gotten out of too early, or slightly better timing that would have yielded huge gains. That is the nature of options when a doubling or tripling in a week, can be common.

Risk and reward often go hand in hand. The fear of missing out, is another phrase to describe greed. When a stock or ETF rockets higher, or lower for that matter, a lot of folks will want in, due to greed. When to chase the rocket, and when not to, tends to be clear in hindsight. In real time, those kinds of decisions might be determined by trading style or trading system, and/or by years of market experience.

Some traders do well following trend, others do better trading counter-trend. That's part of the race against yourself, that inner game of knowing yourself and knowing what kind of style, what kind of system might work best for you. Personality, risk tolerance, pain tolerance, available capital, are all factors into trading style. A good or poor memory, attention to detail, ability to pull the trigger, quick thinking vs. slow analytics and seeing the bigger picture are some more factors.

Especially for novice traders, a trading journal can be an extremely valuable tool. That's one reason I do this blog, it is a public trading journal with a record of my short term trades. If a novice trader writes about every trade, and then takes time to look back, they will start to see what kind of trades work for them. Over time a trader will develop a style that fits them, that works for them.

Some folks, aye, most folks would do better taking the other pill, and go with low cost indexing, the Vanguard way, and forget about trading. Just as options are not for everyone, position trading is not for everyone either. Day trading is for an even more select group, especially as the skill required and capital required grow ever greater as computerized "Watsons" dominate the day trade with an average holding time of 13 seconds and profits that might average 1/8 of a cent per share.

Long time readers know that I like to use baseball analogies, that I see my trading style like that of a singles hitter, striving for a high batting average, with few home runs. Bunt singles are a fine thing for me, but beyond boring for big home run hitters. For the race against yourself, golf might be the best sports analogy. While a person might compete against others, a golfer has to focus on that inner game, and keep a calm and clear mind to succeed at golf.

Friday, April 15, 2011

7-1 for April

Seven winners, one loser for closed trades during the April option cycle. The one loser was a bearish vertical put on SPY. By legging out of the trade, the overall loss was small. The winners include 3 other short puts on SPY, and short puts on GDX, GLD, EEM, TBT. All the short puts expire worthless, so the gain is 100% on the trade amount. The return based on margin required is in the 2% range for most of the short puts.

The good news is April is my best trading month of the year so far. That is faint praise because while I made profits every month, the pickings from Jan to Mar were meager.

Some new readers might ask why I bother selling way out of the money puts for small premiums. The answer is: the high probability of success, and continued heavy skew on puts making them trade for more than historical volatility would indicate. In plain English it is a slow nickels strategy, vs. fast dollars directional gunslinging. Some think of it as being paid to put in a bid at or below support. If there is an immediate sharp drop, the put seller is assigned and buys the underlying.

Yes, if a trader goes to full leverage and sells naked puts on exchange minimum margins it can become a highly leveraged, risky strategy. That is not my style, I tend to move slowly, do layers of different strikes, different months, hedge by buying an occasional option or vertical. If the market turns turbulent, I will use stop-losses. I also may occasionally take a shot on a low probability high reward trades.

Buy TLT/TBT (sell strangle)

Buy TLT via selling Jun 85 puts TLT @92.6. I am buying the bond rally. As I mentioned before May/Jun are two of the best months for bond seasonality. I am already short TLT May 86 puts. I also sell Jun TBT 33 puts with TBT @36.7 to make the position equivalent to a short strangle on TLT or a bet that bonds stay in a range.

TBT/TLT = short strangle on TLT

Wednesday, April 13, 2011

Buy SPY (sell puts)

Buy SPY via selling May 119 puts SPY @131.7. I add another layer of short puts. SPY down five days in a row, finding some support at the 50 day moving average. I also expect tax refunds to continue to flow into the market. I am already short May 107 and May 117 SPY puts, and have some more SPY positions, netting to slightly long SPY. Support at 125, 123, 120 and 118.

TBT/TLT = short strangle on TLT

Monday, April 11, 2011

$1 million in SLV put options?

Making the rounds is a story about a large put option purchase on SLV (link).

A trader’s almost $1 million bet that an exchange-traded fund tracking silver will decline by July was today’s biggest single options trade on U.S. exchanges as futures on the metal reached a 31-year high.

The 100,000 puts, or options to sell 100 shares each of the iShares Silver Trust (SLV) at $25 by July, changed hands at the ask price of about 10 cents and exceeded the open interest of 6,054 outstanding contracts before today, indicating that a buyer of a new bearish position initiated the transaction.


There is a chance that this is the whole story, but unlikely. Option traders prefer complexity, and often hedge one position against another. I'd put the odds at 95% that this is the case here, that the reported trade is part of a more complex strategy. My most likely guess would be a collar, financing the purchase of the puts by selling out of the money calls, while being long the underlying. A collar is a conservative bullish position with limited upside and crash protection, not a bearish bet.

Elsewhere in the news, PIMCO is reported to be shorting U. S. Treasuries (link2), and Goldman Sachs is reported to be telling clients to get out of oil (link3). I doubt that these stories are revealing all.

The old spy cliche comes to mind: "trust no one," especially news headlines, especially when they are about options.

Saturday, April 09, 2011

Options 201: calendars vs. verticals

I am liking spreads more and more. Spreads typically involve two options. A vertical is the same type of option, same month, buying one strike and selling a different strike. A calendar involves the same type of option, different month, same strike, buying one month, selling a different month.

Lets look a bit closer at verticals, vs. calendars, vs. buying straight stock, vs. buying straight calls.

The purest play is just buying the underlying stock or ETF. Delta is 1, theta is not an issue. Downside is to zero.

Buying calls at the money, the delta is .5, theta is negative, especially for front month calls. Profit potential is high. Downside is the price of the option or 100%, but the option cost a small fraction of the underlying. If the stock stagnates, you lose money every day due to time decay.

The vertical has slower time decay than just buying the lower strike call. The trade off is less upside, max profit is the width of the vertical or the difference between the two strikes. The cost can be much lower than just buying straight calls.

The calendar has little to no time decay. Depending on the options chosen, theta may start out positive. The max profit price target is right at the strike, vs. way past the upper strike for the vertical, or buying one call option. The downside is that the max profit is lower than a same cost vertical, and if the underlying jumps quickly, the calendar becomes a loser.

So most bullish is just buying the underlying stock, but this isn't capital efficent as there isn't any leverage. Buying calls limits downside, and has rapid time decay. Buying a vertical call spread is cheaper than buying calls, and slows the decay. Buying a calendar means no time decay (though it varies based on options selected), and pushes the max profit zone to a closer price target, has less max profit than the vertical and also turns into a loser if the price jumps way past the strike quickly.

For example, I recently bought:
GLD calendar May/Jun 147 calls
Selling GLD May 147 calls
buying GLD Jun 147 calls

Another choice might have been
GLD vertical Jun 147/152 calls
buying Jun 147 calls
selling Jun 152 calls

Other bullish choices might be just to buy straight calls, or straight stock, or my other favorite, selling puts. For each choice there is a trade off, in terms of time decay, and cost vs. max profit and profit zone. The good news if that a person understands verticals and calendars, there is nothing more to learn. The more complex strategies are layers or combos of those.

/edited: correction made, calendars are actually positive theta benefitting from time decay, also added a link below to some free options videos, though registration is required. Option Industry Council webcasts on option basics and strategies

Tuesday, April 05, 2011

Buy GLD (calendar call spread)

Buy GLD May/Jun 147 calendar call spread
GLD @141.7 new all time highs today.

GLD breaks out from a base. My target is 147, which would correspond to $1500 for physical spot. Profit range on the calendar spread is 4 points around 147, or 143 to 151. So it bullish, but only mildly bullish. Time is a factor too, May expiration would be the best time to land on 147. Decay eats away if GLD stagnates here.

A calendar spread consists of buying the out month, and selling the earlier month.
Buy GLD Jun 147 calls
Sell GLD May 147 calls

TBT/TLT = short strangle on TLT

Hui: chasing premium

Cam Hui writes about the risk of chasing high option premiums when doing buy-writes (link). Similar caveats apply to those chasing high yielding stocks.

the lure of free money brings out the worst in people. I think that one key area of that is the seeking of yield.

I've been burned more than a few times chasing premiums. The most memorable was one time I escaped, and that was the weekend before Lehman. The stock was trading in the 30s, and front month LEH 10 puts still had decent premium. I figured it was "free money," I mean Lehman wasn't going to go from 30 to 10 over one weekend? Well, it went to about 3 the next week. It was a valuable lesson, and that particular one didn't even cost me anything.

Sometimes the market knows more than is being revealed. The closest thing to a free lunch might occur when Barrons or some brokerage house recommends a specific option trade at specific strikes. A bunch of newbies see that and get in, and pay up. Get on the other side and it is typically only a few bucks of extra premium, but it is often enough to buy that happy meal.

Monday, April 04, 2011

More on permanent portfolio

The concept of a permanent portfolio was popularized by Harry Browne. Here's another person's allocation for a permanent portfolio (link).

If I were asked, I would tend to favor something simpler for average folks. The simple Simon version is 25% each in stocks, bonds, gold, money markets or CDs, and rebalance using bands or once a year. If using ETFs 25% to VTI (Vanguard Total Stock Market) or perhaps split some to VXUS (Vanguard Total International), BND (total bond market), GLD (or PHYS), SHY or just money in the account. Simple is often better for long term investors.

Even simpler might be 50/50 VTI/BND for the investment account, some CDs and some physical gold. Again rebalancing one a year or with bands (a large market move in one or more sectors triggers a rebalance). Rebalancing is easiest if done with new money coming in, as that doesn't require selling and the taxable event in taxable accounts.

The one linked tends towards to lean towards what is hot right now, and anti-dollar themes. To illustrate the point about tilting towards the news and what is hot, I can use the example of gold. One of the best times to load up on gold was in 1999, when gold was $300 and most saw as "dead money" after a decade of poor performance. The U.S. had a Federal budget surplus, employment was near the theoretical "full employment." Stocks were doing so well, that many baby boomers were counting their chickens for an early retirement. Someone tilting then may have underweighted gold and overweighted tech stocks, and would have done poorly because of that tilt.

Saturday, April 02, 2011

1st quarter review

For the first quarter (12/31 close to 3/31)
SPY +5.4%
TLT -2.1%
GLD +0.8%

SLV +21.8%
EEM +2.2%
IWM +7.6%

So again risk was rewarded with the more volatile IWM (Russell 2000) and SLV (silver) outperforming. Treasuries (TLT) were down, Emerging markets (EEM) trailed.

For stock traders the previous SPY top just a bit higher is a line in the sand for the bears. How many will cover if that is broken with conviction? How many are positioning short with the top only a point or so away (6 month chart). Support at 125, 123 and then 118 and that's why I am using those strikes to sell puts around and below.

For TLT support at 88/87 (two year chart). Observant readers might see that I recently sold TLT puts for the first time all year, after focusing exclusively on TBT (inverse bonds). I did so because of chart support, sentiment and seasonality.

The two year GLD chart (link3) is forming a base at the highs. The gold chart looks more exciting on the 6-month view, but the previous long base at 120 just below, the current basing behavior is not as exciting. We may get a bit of pop breaking out from this base, but there is not a lot of fuel, at least not yet.

Friday, April 01, 2011

More Layers for SPY

I add more layers to my SPY position. I buy a Jul 120/115 vertical put spread (a bearish bet), and I sell short May 117 puts (bullish bet). SPY @133.0 to 133.1 when these trades are legged into. It is net debit for the three new positions, slightly delta positive SPY, close to theta (time decay) neutral to May. Adding these layers doesn't change my net position of being long SPY, but does give me some measure of SPY downside protection out to July.

TBT/TLT = short strangle on TLT