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.

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.

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.

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.

TBT/TLT = short strangle on TLT

Monday, May 02, 2011

Buy SLV (sell puts)

Buy SLV via selling Jun 35 puts SLV @45.4. Support at 40 and 35. As I outlined in my previous post, I don't think there will be an immediate crash in silver. Volatility is at 59% on these puts, so anyone buying these for insurance is paying a hefty premium. I am willing to sell them that insurance, or to buy SLV if it falls to support at 35.

TBT/TLT = short strangle on TLT

Sunday, May 01, 2011

Saefong: Silver Mania

Myra Saefong has a Marketwatch article (link) entitled "Silver Mania may come to an abrupt end." A few quotes from the article:
Peter Grandich, a self-proclaimed former “raging bull” on silver from under the $10 level, is saying “sell all silver holdings.” ...

[Karnani] "...silver prices can crash to $25 next year."

Jeb Handwerger, editor of GoldStockTrades.com, in recent newsletters. “I am very concerned that silver may be overheating as the herd tries to force their way into this trade.”

[Ned Schmidt] “Silver is the ‘internet stocks’ of 2011”


With some long time permabulls in the group or chirping birds, it seems unlikely that silver will cooperate with a crash. To me, a more likely scenario is that silver forms a new base from $40 to $50 and spends some time in a trading range.

Let me add some more perspective. For many years, I've advocated dollar cost averaging into silver and gold for long term investors. This is no longer the case. With a possible bubble forming, DCA might be about the worst strategy to start now. It might be okay to continue, if a person has a big stack at lower prices. In a bubble, the rise is short and steep and the down trend long and relentless. DCA will put way too much money into buying during a long downtrend.

In contrast to silver, the gold chart still looks supportive. So for the investor with significant net worth and zero metals holdings, it still makes sense to buy a little and have some as insurance. To tilt heavily into the hot sector after having zero exposure is always a recipe for danger.

So what kinds of strategies make sense in a bubble? Not very many for long term stackers. Selling a bit with each price increase and reallocating into other asset classes is the rational plan. That presupposes that a person has a large allocation now and bought at much lower levels. Advanced option strategies such as vertical call spreads or put calendar spreads may work.

As always, we won't know if silver is a bubble until we see more price history. However, birds don't typically chirp such loud warnings at market tops. So if I had to vote, I would vote "no, not yet." With that, for a person with no holdings, better to steer clear, than to jump in to what is likely to be fast moving water.