Monday, December 31, 2012

2012 year in review 101-27-3 grade B-

Overall modest gains, up 9.7% in my trading account. For closed trades, there were 101 winners, 27 losers, 3 breakeven trades for a 79% winning percentage. B- is my grade for the year. The letter grades are new for this year and I like the concept. 

While critics might say that 9% trails the gains in SPY, IWM and EEM, I trade more than stocks, and also go long and short. I'll take 9% year-in-year out, especially because I believe I am at a lower risk level than many other investors and traders.

Select ETFs:
SPY +13.5% TLT -0.1% GLD +6.6%
SLV +9.0% EEM +16.9% IWM 14.3%

Best trade of the year measured by the margin required, were short puts on EWG, the German stock ETF during the summer crisis time. Made 80% vs. my margin required. Other traders other brokers may have higher or lower margin requirements. Novices are going to tend to have higher requirements, advanced and pro traders often lower. Worst trade was short Iron Condors on AAPL Apple computer, lost like 500% basis the premium collected on the bad leg. Other 2012 winners were monthly rounds of selling puts on LGF Lions Gate, and BRKB Berkshire Hathaway, and some short strangles on IWM. Some other losers include GDX, ALXN, WFM, MMM. Other winners include GLD, XRT, AMZN, IBM.

The win percentage is about as expected. 79% winners would be extraordinary if I were doing straight coin-flip 50/50 up or down trades, but I often take trades at 80% probability or better.

Some notable events include: moving my retirement accounts to Schwab and attending a bunch of their free live presentations. Many are aimed at beginners, but I still managed to find some nugget in almost every presentation. I started going to some local stock market meetups. The local CANSLIM group is often interesting. It seems difficult to find stock market groups, so even though the momentum style favored by CANSLIM is not my strong suit, I find value in the occasional CANSLIM meeting. I don't advertise my blog at the meetup, nor do I talk much about my own picks, mostly I listen and try to learn something.

I continue to view online webinars presented by my other broker ThinkorSwim. In particular, their one-hour weekly market wrap up is something that I try to watch every week. Non-customers can register and view the wrap up for free. Some of the material is filler, some is same-old, same-old, especially for weekly viewers, but I almost always find something of value.

With classes, with presentations, with indicators, with methods and strategies, a few folks have unrealistic expectations, believing in some kind of holy grail. Nothing is 100%. Nothing. If something is 100%, it tends to stop working as soon as it gets found and published. The ThinkorSwim folks often remark, that they are looking at the pot odds (poker term), or that they have seen a lot of movies so have a good idea how this movie is going to end. That doesn't mean they don't get it wrong, but their experience gives them a better idea. Journaling is one way to avoid making the same mistakes over and over, and something I highly recommend.

During 2012 I ventured into some more exotic option trades. Naked strangles became routine, I did a single short Iron Condor (which turned into my biggest loser for the year). Delta neutral is another term and it means that a position makes money on time decay as long as the underlying remains in a range. Many pro traders use delta neutral strategies such as short Iron Condors and short straddles, and short strangles. For those that want to learn more about options, the CBOE link (Chicago Board of Options Exchange) is a good place to start learning.

I see that my first blog post from 2006 has sometimes been on the most popular list lately. Back then, I was mostly doing buy/writes and taking some small trading positions. I have learned so much by doing this blog and evolved so much during what is now close to seven years of blogging. Making my trades public makes me far less likely to do what some might characterize as “stupid trades.” I started in the stock market in August 1987, a few months before the 1987 stock market crash. That trial by fire has made me a relatively cautious trader. 

Again, let me restate, that I do this blog mostly for my own benefit. I also that hope that some others might learn from my trades and observations. Surprising as it may be to some, I have nothing to sell, nothing to advertise, nothing to gain from my blogging.

Friday, December 28, 2012

Buy XRT (sell puts)

Buy XRT via selling Jan 57 puts
XRT is the retail stock ETF. Chart support at 58. I wish I could say I bought the low of the day, but that virtually never happens, especially with orders placed before the open. 

I was surprised by the steep selloff. However, I am way underexposed due to my busy schedule. Hopefully, I will have more time to trade and blog.


Thursday, December 27, 2012

Buy APC (sell puts)

Buy APC via selling Jan 65 puts. Anadarko is the top holding in FRAK, an ETF play on oil fracking. I have played it before, and am coming back to it. 65 is chart support.


Friday, December 21, 2012

7-0 for December grade A-

Seven winners, zero losers for the December option cycle. All were small winners including a short strangle on IWM and short puts on BRKB, EWZ, LGF, TBT.

My schedule limited the time I could spend on the stock market. Going forward I have two small positions, short Jan IWM puts, and Mar LGF puts. I'll write a year in review a bit later in the year, as New Year's Day approaches.


Friday, December 07, 2012

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Mar 14 puts

For the first time in a long time I placed some good-til-cancelled orders to sell options. I placed them on Sunday, and LGF got filled today. I had second order to sell IWM Russell 2000 puts and a third to sell GLD puts. I cancelled the GLD order on the big drop morning.


Wednesday, November 28, 2012

Buy IWM (sell puts)

Buy IWM via selling Jan 70 puts
Placed an order before the open and got filled on the morning dip. By the end of the day, nicely in the green. I also entered a day order to sell TBT Jan 53 puts, but it expired without a fill. IWM is my first January position. With my busy schedule, I only have a few small December positions.

Net long IWM

Friday, November 16, 2012

2-0 for Nov grade B-, also buy EWZ (sell puts)

Two winners, zero losers for the November option cycle. I was on the sidelines for most of the month. The grade B- is on a curve because of difficult market conditions. The two winners were IWM Russell 2000 stock ETF and LGF Lions Gate Entertainment. I saw a lot of red ink on orders placed before the open on some of the big dipper down days. 

I also buy EWZ Brazil stock ETF via selling Dec 45 puts. More a gut trade than anything else. I finally get some green ink by the end of the day on one of these pre-market orders.

Net long IWM

Wednesday, November 14, 2012

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Dec 14 puts
Another whoops order entered before the open. Red ink follows as the market crumbles.

Net long IWM

Friday, November 09, 2012

Buy TBT (sell puts)

Buy TBT via selling Dec 53 puts. Another ouch entry with TBT taking a big hit today. TBT is the double inverse Treasury ETF. My order filled close to the open and moved deep in the red. Other positions also took on water, though LGF Lions Gate had a positive earnings surprise after the close.

The time change has mostly brought grief with my recent trades. These things happen. Hot streaks and cold streaks are part of life for almost all traders.

Net long IWM

Wednesday, November 07, 2012

Rebalance IWM (sell puts) "brilliant"

I had the “brilliant” idea to rebalance my IWM position back to delta positive by selling puts. I placed an order to sell IWM Dec 72 puts before the open and got filled shortly after the market open. Ouch. 

The bad news is some red ink on my positions, the good news is my huge cash position. LGF also has been going down, so those positions are taking on water as well.

I'd like to say that the stock market reaction is over done, but the other side of the argument is that the market is always right, don't argue with it.

Net long IWM

Monday, November 05, 2012

Buy LGF and BRKB (sell puts)

Buy LGF Lions Gate Entertainment via selling Nov 15 puts
Buy BRKB Berkshire Hathaway via selling Dec 77.5 puts
With the time change, I find some time to place some orders before the open. With virtually zero exposure in my trading account, I take some small positions. LGF hit an air pocket ahead of its earnings, but at below 15 I am a buyer. The story on Berkshire is the same as it has been for a while, a stock buyback at 10% above book value provides major support.

Net long IWM

Saturday, November 03, 2012

Dollar Cost Averaging vs. a Lump Sum

A Vanguard study (link1) is cited on Marketwatch (link2), saying that investing all at once gives better results over dollar cost averaging. The premise is a person inheriting a large sum of cash, or some other kind of windfall, such as selling a business, or winning a lottery. The edge for lump summing (investing all a once) tends to be measurable, though small.

It is worth thinking about. However, there are several caveats. The vast majority of stock market investors are not in that fortunate group making a decision about a large inheritance. Much more common are people making every day decisions with their every day savings. For example a person that has been in CDs for ten years and decides to plunge into the stock market, or bond market or gold market.

Those making "all in" or "all out" decisions tend to do poorly. While a few will do okay, many more will buy and sell at near the worst moments. This is how markets work, that at market tops there are a relative maximum number of buyers, at market bottoms a maximum number of sellers. A lot of those wrong-way buyers and sellers are small investors that feel the greed at the top and the fear at the bottom and act on it. NOTHING CAN CHANGE THAT. Markets make tops when a lot of people are buying, and bottom when a lot of people are selling. Those that think they can beat that, tend to be fooling themselves, or in an elite group with some special talent. Almost everyone making "all in" or "all out" decisions believes they are making a smart decision, but 80% to 90% are making terrible decisions.

So while the Vanguard study is interesting, it mostly applies to a person receiving a large sum out of the clear blue sky, not someone who is moving "all in" or "all out" because of news, or "just because." Another point is that dollar cost averaging can be a disastrous strategy during a prolonged bear market. Of course, no one thinks they are entering that territory when they start investing. Only in hindsight can we really say, that there was a 10 or 20 or 30 year long bear market in a certain asset class.

Another passive way to invest is to set an asset allocation and then rebalance as the various assets move up and down in value. This forces an investor to buy when prices are lower. The catch is that a person has to stick to their asset allocation. The permanent portfolio popularized by Harry Browne is one such approach (25% each to cash, bonds, stocks, gold). I am a fan of this approach. However, as always, there are no guarantees, but this kind of approach has done well for the past 30 years, with no need for bold decisions or market timing. Some will say that is because of the huge bull markets for gold and bonds and that is unlikely to be repeated. 

Another more common approach is a 50/50 stock and bond allocation, with a cash reserve of six months or a year that stays in cash. The big danger with this kind of approach are black swan events such as a change of government due to revolution or the loss of a major war, making all those paper assets virtually worthless. While the odds are low for any particular country in the short term, over the long term, these historic events do happen. Again, think back to 1900 and how many of the major powers (France, Germany, Russia, China, Japan and more) saw their governments fall and their bonds essentially go to zero before 1950. Equity investors did not do much better. Americans tend to ignore these kind of big risks because we have been blessed, but just like investment results, that is not guaranteed for the future.

My schedule continues to be too busy for much trading activity, and probably will be that way for the next two months. So I'll chime in when I can, but it won't be often.

Wednesday, October 24, 2012

Buy IWM sell puts & strangle

Buy IWM via selling puts and selling a strangle

Sell IWM Nov 74 puts
Sell IWM Dec 70/88 strangle (88 calls, 70 puts)

These filled in the morning. I take some small positions after many weeks of no trading. My only other trading position is short LGF Dec 11 puts. 

Why now? The stock almanac shows November to be a strong month. As always, seasonality is one of the weaker indicators. I have tons of free capital to deploy, and the recent selling squall is an opportunity to dip my little toe in the water. 

Net long IWM
long LGF

Friday, October 19, 2012

10-0 For October grade A-, also anniversary of the 87 crash

Ten winners, zero losers for the October option cycle. I've been so busy, that I didn't trade much, but these ten came home as winners. Why the A- because there was plenty of room for improvement and bigger profits.

One of my best percentage gains for the year was on EWG the German stock ETF. I sold puts months ago, and the return on margin required was like 80%. Most of the puts I sell are about six weeks out and return on margin required is usually in the single-digit percentage range. That's the good news, the bad news was that it was a very small position in dollar terms.

For oldtimers, the 25th anniversary of the 1987 stock market crash, saw another drop. I started trading a few months before the 1987 crash. I believe that those early days of trading have forever imprinted on me, and a big reason why I tend to be so cautious. Suzy Orman often talks about a person's earliest memory of money, and how that impacts them. The first few investments a person makes can also have a big impact, especially if the “end of the world” happens when a person is just getting in.

I wish I could say that I knew the stock market would recover, but virtually no one did. As with any crisis, there is no way of knowing where the bottom is. Back in 1987, it was near impossible to make any trades during that time because it was all done over the phone.

My schedule looks like it will remain very busy, so updates will tend to be sparse for a while.

Saturday, September 29, 2012

End of 3rd quarter

Year to date returns for some ETFs:
+14.7% SPY S&P 500
+ 2.4% TLT 20-year US Treasury
+13.1% GLD gold
+24.3% SLV silver
+ 8.9% EEM Emerging Markets
+13.1% IWM Russell 2000

Plus signs all around, with the bigger plus signs in metals and U.S. stocks. Sell-stocks-in-May started as a good idea this year, as the stock market moved lower, but the rally has moved past the April highs. Silver was one of the laggards in 2011, and treasuries a strong performer in 2011. In 2012, the roles are reversed with Treasuries barely positive and volatile silver a strong performer.

Regression to the mean is a powerful tendency in markets. The other side of that is the huge money can be made in trending markets by aggressive traders. Range traders and trend traders tend to be opposite styles. It is difficult to master both kinds of dances. To do one well, is enough to make decent money, as long as position size and risk management are strong. The latter two are vital no matter what kind of style, no matter what kind of vehicle.

Many successful traders believe that risk management and right sizing of positions are far more important than the kind of indicators used, or if a person is a trend follower, or a range trader.

I wish I had some bold predictions or insight into the markets. Unfortunately, I've had little time to look at or think about the markets, or to reinvest the money that was freed up at September option expiration. For now, I am content with my smallish low risk positions.

Friday, September 21, 2012

14-5-1 for September grade B-

Fourteen winners, five losers, one breakeven for the September option cycle with a grade of B-. Another positive month, though the gains were modest. Short strangles were a dangerous strategy this month and I covered the short calls at major losses. To offset those losses, there were gains on layers of shorts puts.

As I wrote, earlier some call buyers made 5x to 10x their money this month. No home runs for me, and the hedging reduced returns. Still, another month in the green is a positive, and I covered the losers before they became nasty.

Going forward, all I have are short put positions. Changes in my schedule mean less time for the stock market. I'll still update, but there may be delays. Also October is often a dangerous month in the markets, so I often am more cautious this time of year. The historical record of September as the worst stock market month, so far has been opposite, with big gains this month. My favored strategies of selling puts or strangles suffers when premiums are low like they are now.

ALL Allstate Insurance
BRKB Berkshire Hathway B

EWG German stock ETF
IWM Russell 2000 ETF
LGF Lions Gate Entertainment
XHB Housing stock ETF
XRT Retail stock ETF

Other winners for September include short puts on AMGN Amgen, ESRX Express Scripts.

Friday, September 14, 2012

Buy IWM (sell puts)

Buy IWM via selling Oct 79 puts @86.7
The Russell 2000 ETF made a new 52-week high. Resistance often becomes support, so that is 85. There are multiple minor support levels at 84, 81, 80. The massive Fed induced rally in stocks and gold was a surprise to me. Fortunately, I covered all my short calls before the news event.

Captain Obvious can say in hindsight that it would have been best to be long calls. Some of the calls I sold are up 5x to 10x in value in a few weeks, so call buyers hit home runs. Thank goodness I covered before the losses became financial ice bergs. It is ironic that just days after Barrons runs a column about short strangles (short both puts and calls) producing excellent returns, the strategy blows up with major losses for those that did not use stops. Even stops are sometimes of limited value on a fast moving news day.

Net neutral SPY

Wednesday, September 12, 2012

Heart: Fantasy Football lessons for investors

Long time readers know that I like sports analogies. Ross Heart at Minyanville has 15 traits and lessons that will help you  in fantasy football as well as investments:
1. Research 
2. Quick Decision-Making
3. Sentimental Picks
4. Spotting Value
5. Riding Winners 

The full list is at the Minyanville link .

I have been looking at the markets, but am not finding that much to be compelling. Some stocks of interest (besides the ones that I have positions in) include: BIIB KORS TRV

Friday, September 07, 2012

Sell KFT (cover short puts)

Cover short KFT Sep 39 puts @40.7
Kraft Foods gaps down on news. I bail out at a break even profit to avoid the uncertainty. Even though there is modest chart support at 40.

As of this writing, my short covering from yesterday looks like some good moves, especially with gold moving higher this morning.

Net neutral SPY

Thursday, September 06, 2012

Short covering: GLD IWM XRT

Cover short XRT Sep 63 calls @63.2
Cover short IWM Sep 85 calls @83.9
Cover short GLD Oct 177 calls @165.2

It is a similar situation to yesterday, I was short strangles on all these, and when the stocks moved higher, the short call side becomes a loser. I did not expect today's massive rally. For all three: Gold, the Russell 2000 ETF and the Retail ETF, there is a high probability that layers of short puts will offset the losses from these calls.

There is some discussion on taking losses in yesterday's post. To repeat some it: basically, there is no one way that works best for every trader, every situation. Using a stop loss, whether it be a mental stop, or an actual order can help limit losses in a trending, orderly market. If a market gaps on news, stops will have less value and may not work. In trading range markets, stops often get triggered and then the stock reverses, to the consternation of many traders. 

Some traders won't use stops. A few favor a style that doubles their positions when they start losing. There are a lot of ways to go. Some traders will initiate their positions at well known, well publicized stop loss levels. It is often a game within the game, for every buyer, there is a seller, and each has their reasons for making a move. 

Again, in a trending bull market, hedging strategies such as selling strangles, will lag behind buy-and-hold in terms of performance.
Net neutral SPY

Wednesday, September 05, 2012

Cover LGF short calls (and stop losses)

I cover my short LGF Sep 15 calls LGF@15.4
With Lions Gate in the money (over the strike price of 15) this leg of the short strangle is taking on water. I remain short multiple layers of short puts. I thought 15 would provide resistance. The loss is over 100% on this leg of the short strangle, which sounds alarming. However, it is a small dollar amount, and is offset by the probability of profits on the short puts.

/edit to add: LGF closes near unchanged, so at least for the moment it looks like a bad decision. Discussion on use of stops follows: When a position goes against a trader, that trader can choose to use stops or not. The overall market mood and direction are factors when I decide whether to close out a losing position. Some traders place actual stop orders, some use mental stops. 

Some traders will double down if a position goes against them. Obviously this only tends to work if initial position sizes are very small. There is no method that will always work. Stops can save a person from big losses during trending markets. However, in a trading range market, whipsaws are common, where a stop level is triggered and the price reverses. Stops may not work if there are big price gaps at the open or after a trading halt.

Net neutral GLD SPY
Net short IWM XRT

Friday, August 31, 2012

Buy ALL, rebalance GLD & LGF (sell puts)

Sell LGF Oct 13 puts and Oct 14 puts @14.8
I rebalance back to long by selling two layers of puts after the rally in Lions Gate pushes my position to net short. I was short Sep strangles (15 calls, 14 puts). There is resistance at 15, but this rally looks like it has a shot at breaking that.

I also sell Oct 33 puts on Allstate Insurance with ALL @37.1. Allstate broke out from a chart base at 35 at the end of July on a strong earnings report. The base makes for layers of support at 35 and 34, so 33 seems like a relatively safe strike to sell puts.

The Fed news makes for a volatile day in gold, which is now up, after tumbling immediately on the event. This pushes my short strangle to net short.
/edit to add: later in day I sold GLD Oct 150 puts @163.4 to rebalance my gold position back to neutral. The bad part of the layers of short gold puts is that they eat up a lot of working capital in terms of buying power. The positive is that I still have some dry powder. My broker likes me today, with this being my fourth trade of the day, a recent record, if not an all time one.

Net long GLD LGF XRT

Wednesday, August 29, 2012

Rebalance XRT (sell puts)

Sell XRT Oct 54 puts @61.4

I rebalance my retail ETF position back to delta positive. I was already short Sep strangles 63 calls, 57 puts and more layers of puts below that. Like I wrote yesterday, retail has been one of the strongest groups during this rally (home builders, medical and tech are some others). Chart support for XRT at 56 which is the bottom of the trading range, resistance at 63 which was the rally high.

Net long LGF XRT
Net neutral GLD SPY
Net short IWM

Tuesday, August 28, 2012

Buy XHB home builders (sell puts)

Buy XHB via selling Oct 21 puts @23.4. XHB is the home builders ETF. XHB broke out from a chart base at 21.8 and there is another layer of support at 21. Home builders have been one of the strongest sectors during this rally. Other strong sectors include retail, medical and tech (mostly Apple).

* I added a search box to the blog. It looks for blog content and links that I have posted. Blogger says I have over 1200 posts over the course of six years. So if nothing else it may be a useful search tool for me.

Net long LGF
Net neutral GLD SPY
Net short IWM XRT

Thursday, August 23, 2012

Rebalance GLD (sell puts)

Sell GLD Sep 151 puts @162.3
I am surprised by the strength in gold. The short strangle I recently sold (Oct 147 puts/Oct 177 calls) is underwater and taking on more water as gold rallies sharply. To move back close to net neutral I sell some Sep 151 puts. I do so reluctantly, thinking that gold is most likely to fade. Another factor is the hefty margin requirement because the underlying is high priced. On the other side, these puts only have about an 8% chance to come into the money by September expiration, and I have plenty of dry powder from the recent option expiration.

Another recent reluctant move, selling LGF Sep 14 puts to rebalance isn't working out too well, as Lions Gate is taking on water with the rest of the market.

Net long LGF
Net neutral GLD SPY
Net short IWM XRT

Tuesday, August 21, 2012

Sell GLD strangles and Buy BRKB (sell puts)

Buy BRKB via selling Oct 77.5 puts @85.6
Story remains the same on Berkshire, chart support and a stock buyback. I was already short Sep 77.5 puts.

I also sell strangles on gold this morning. I sell the Oct 147 puts, and Oct 177 calls for credit. Again, a short strangle is a bet on a trading range. GLD is breaking out this morning with GLD@159.0. However, there is resistance at higher prices.  Chart support is at 148 and resistance at 175. So while bullish, I am not wildly bullish. Like I wrote in an earlier post, gold has been getting some positive press with the Soros and Paulson buys.

This morning's stock market rally has nudged my IWM and XRT positions back to net short. LGF had a rough Monday, perhaps because of disappointing box office results for Expendables II, but is up today on strong DVD sales for Hunger Games. Anecdotally, some are reporting the DVD is sold out at some stores.

Net long LGF
Net neutral SPY
Net short IWM XRT

Monday, August 20, 2012

Ritholtz: Where has the retail investor gone?

Barry Ritholtz lists ten reasons at the Washington Post (link1). To summarize:
1 Secular cycle (long term cycle)
2 Psychology (investors are scared)
3 Risk on/risk off (Fed intervention)
4 Poor returns (self explanatory)
5 De-leveraging (paying down debt instead)

Five more reasons are at the link and I see it as a decent summary of reasons. In a separate article, high school students were surveyed and 75% believe the stock market is rigged against them.

Over at the Ritholz blog (link2), he makes an argument against the thesis of the book Stocks for the Long Term (1994), that over the long term stocks always outperform bonds.

Let me add two cents and say that what many long, long term investors ignore are systemic risks where government bonds and stocks go to near zero. This happens when governments fall, because they lost a major war, revolution, or the country breaks into pieces. While extraordinary events, they do tend to happen. Read some world history and count up major powers in the 20th century that suffered such events (China, France, Germany, Italy, Japan, Russia).

Only the United Kingdom and the United States were relatively free from these scars in the 20th century, and even they suffered major problems from winning the wars. The odds are much greater than the miniscule percentages that most Americans like to give them. Probably because Americans have never seen it happen here. This is a good case for having some physical gold, just in case.

Friday, August 17, 2012

6-1 for August grade B

For the August option cycle, I count six winners, one loser, and give myself an overall grade of B. The lone loser was one side of a LGF short strangle. Had I waited it out, it would have come in okay, though the drawdown would have been scary. Winners included short puts and calls on LGF and IWM. Seven is fewer closed trades than usual and that is due to my vacation. I added a new Philosophy page that has my grades at the bottom (link) and can also be accessed by the tab on the header, next to the word "Home." I also added a First Time Readers page (link2).

Going forward, I am still looking for a stock market trading range. LGF Lions Gate has the movie Expendables II opening today. Gold looks to be a bit too popular in the short term, what with articles citing big buys by George Soros and others. Bonds are perplexing. I outlined my long term view of a parabolic up move followed by a crash, but this doesn't help that much with the short term.

Net long LGF SPY
Net neutral IWM XRT

AMGN Amgen
BRKB Berkshire Hathaway
ESRX Express Scripts
EWG German stock ETF
IWM Russell 2000 ETF
KFT Kraft Foods
LGF Lions Gate Entertainment
SPY S&P 500 stock ETF
XRT retail stock ETF
* ETF = exchange traded fund

Rebalance XRT (sell puts)

Sell XRT Sep 57 puts @61.4
This move rebalances me to neutral on the Retail ETF. I was already short Sep 52 puts, Sep 54 puts, Sep 63 calls, and Aug 50 puts. I am surprised at the strength in the stock market. I am dancing closer to the flame with the narrowing of the short strangle (short 63 calls, short 57 puts and two more layers of short puts).

The bond market in the short term is confusing to me. I wrote about the possibility of parabolic move up in bonds on big news, followed by a crash. What does a trader or investor do with that? I am still processing, though my tendency is towards risk aversion.

Net long LGF SPY
Net neutral IWM XRT

Thursday, August 16, 2012

Sell IWM Sep 73 puts

Rebalance to neutral again as IWM keeps rallying. I was already short IWM Sep 67 puts, Sep 71 puts and Sep 85 calls, as well as an Aug strangle that looks to expire safe tomorrow. IWM is the Russell 2000 ETF.

Net long LGF SPY
Net neutral IWM
Net short XRT

Wednesday, August 15, 2012

Rebalance LGF (sell puts)

Sell LGF Sep 14 puts @14.3 I rebalance to long on Lions Gate by selling these puts. I was already short Aug 13 puts, Aug 16 calls, Sep 13 puts, Sep 15 calls. The rally had moved my position to net short. A spike in volume sometimes marks an intermediate top for LGF. While volume was on the high side yesterday, it wasn't as big a volume spike as some previous tops.

I feel uneasy about selling these puts. The short strangle is narrow at 14/15 (short Sep 14 puts, short Sep 15 calls). We will see how it works out. Lions Gate has the movie The Expendables II out this weekend.

Elsewhere Berkshire discloses some buys and sells:
sales: ir kft intc ups pg kft ge v
buys: psx nov via bk dva dtv wfc ibm
Because BRK is such a big and public player, their moves are news.

All my August positions look to be safe for expiration this Friday. My IWM and XRT positions are back to near neutral. Again, this happens as the prices move without me buying or selling.
 /edit to add: sold another layer of puts later in the day, LGF Dec 11 puts with LGF@14.5

Net long LGF SPY
Net neutral IWM XRT

Tuesday, August 14, 2012

Trade of the century--shorting the bond bubble

With no Olympics on TV, I feel like I have time to write. I had a recent conversation about bonds, and the words "trade of the century" came out. Eventually, being short U.S. bonds will be a huge winner (being long TBT is one way to be short bonds). The air already has come out in select European bond markets. For example, the Spanish ten-year bond went from 3% yield to 7% in about a year. I see the same eventually happening in the U.S.

Doing a search on "bond bubble 2012" turns up a lot of hits. A few interesting links:

brief thoughts from Peter Schiff link1

Jim Kochan quoted in Barrons link2

Allan Roth at CBS with alternatives link3

My thoughts are that the bears will eventually be right, but not quite yet. For investors and traders, technical analysis can be a useful tool. Stereotypical bubble markets have an exhaustion phase, that include a short sharp run up in prices before the bubble pops. This might be a 30% to 100% increase in a few months. Timing the exact top is near impossible, and a parabolic top, may or may not occur in bonds.

The Fed is a wildcard. QE1 and QE2 (quantitative easing) and the Twist have injected close to $3 Trillion USD into the bond market. Even in the gargantuan U.S. bond market, $3 trillion, makes a huge difference. The trickle down has spread to most other markets. Low interest rates affect option prices, CD yields, stock yields, real estate, gold.

When and if the U.S. bond bubble bursts there will likely be casualties in other markets. If the 10 year Treasury goes to 7% (which is about the average yield for the past 30 years), stock yields may well go to similar levels, carrying costs and opportunity costs for gold and real estate become that much higher, derivative decay for options and leveraged ETFs becomes that much steeper.

It seems like bond bears have been crying wolf for years now, and been wrong, wrong and wrong. Their time will come. One scenario is a war or economic crisis that is a catalyst for a parabolic rally before a crash. Again, in parabolic moves, trying to time the exact top tends to be a fools game.

For the short term, I remain positive on U.S. bonds until October. This seasonal bearish period is November until March. As always, seasonality is a weak indicator, and easily jumped (eg: if every "knows" that bonds turn in October, most will jump in September and start to ruin the indicator).

For the long term, I am looking for the parabolic phase. Because of the massive Fed intervention, we may or may not see a textbook bubble blow off top. If we don't, indicators such as the 200 day moving average on TLT might be useful tools.

Oldtimers remember the Internet bubble. Everyone and their brother knew that the stocks were over valued. However, many thought there was still time. Many traders that tried to short the high flying Internet stocks, lost money because as the irrational exuberance reached a fever pitch and the blow off top was much higher than most could imagine. Many bought the first steep drop in Internet stocks, thinking there was to be another rally, but got crushed. The U.S. bond market is many times bigger than the stock market, and if there is a bubble and a crash, the long term economic damage may be great.

For easier historical tracking:
TLT 125.49 SPY 140.77 BND 85.69 GLD 155.99 TBT 15.48

A footnote: I started a new blog for my piano playing, so the about me section now has that as the lead. I also took this time to revamp the layout and look.

Saturday, August 11, 2012

Late: Sell LGF calls

Late report from Friday:
Sell LGF Sep 15 calls @13.5
I lighten up on my LGF position by selling the Sep 15 calls. I am already short Aug 13 puts, Aug 16 calls, Sep 13 puts. Three months ago, the earnings report led to a rally to 15. I think with the mixed earnings report just out, that would be the best case.

Longer term, I still think Lions Gate is worth $20 or more. However, the short term upside is limited and that's the reason for selling calls.

Net long LGF SPY
Net short IWM XRT

Wednesday, August 08, 2012

Buy ESRX (sell puts)

Buy ESRX via selling Sep 52.5 puts @60.6
Express Scripts higher on earnings. Chart support at 55, but I am reluctant to sell the 55s, choosing the lower risk, lower reward of selling the 52.5s.

Elsewhere, movement and decay has pivoted my IWM and XRT positions to delta negative, or net short.

Net long LGF SPY
Net short IWM XRT

Tuesday, August 07, 2012

Buy AMGN (sell puts)

Buy AMGN via selling Sep 72.5 puts @82.2
Amgen had a good earnings report on 7/27. Strong chart support at 70, with minor support at 80 and 75.

As the August option cycle winds down, I remain underinvested because of the recent vacation.


Monday, August 06, 2012

Rebalance IWM & XRT (sell puts)

Sell XRT Sep 54 puts @59.9 to rebalance to delta positive. The move up in the retail ETF moved my short strangle position to net short, delta negative. Adding a second layer of short puts rebalances. I was already short XRT Sep 52 puts, Sep 63 calls.

Also sell IWM Sep 71 puts @79.4 to rebalance. Story is near the same. I was already short IWM Sep 67 puts, Sep 85 calls.


Friday, August 03, 2012

Buy KFT (sell puts)

Buy KFT via selling Sep 39 puts @40.6
Kraft up on earnings, 39 is yesterdays close. Some like to think of selling puts as placing a GTC order to buy a stock.


Thursday, August 02, 2012

Buy BRKB (sell puts)

Buy BRKB via selling Sep 77.5 puts @84.2
Story is the same as it has been all year, Berkshire has chart support and is doing a buy back. Chart base has moved up, so that 80 and 78 are decent support levels.


Wednesday, August 01, 2012

Sell IWM & XRT strangles

Sell XRT strangles @58.8 for credit
sell XRT Sep 63 calls and Sep 52 puts

XRT is the retail ETF. A short strangle is a bet on a trading range, and loses if there is a big move up or down. Recent top was 63 and there is a base of support at 52 to 54.

I also sell IWM strangles, selling Sep 85 calls and Sep 67 puts for credit with IWM@77.5. Again, this is a bet on a trading range, 83 and 85 are resistance, 72 and 70 are support. IWM is the Russell 2000 ETF.


Tuesday, July 31, 2012

Cover short LGF puts

Buy back short LGF Aug 14 puts @13.7
I am taking a beating on this leg of the short strangle, closing this leg with a big loss. However, if the Aug 16 call expires worthless as is likely, then the short strangle position nets out to near break even, and that one reason why I am closing this leg--to avoid turning what was a winning trade into a loser.

Lions Gate earnings due on 8/8, so I am taking some risk off as the position moves against me. I am still short Aug 13 puts, Aug 16 calls, Sep 13 puts, still net long LGF.

Net long LGF IWM SPY

Thursday, July 26, 2012

8-5-1 for July grade C+

I am late in reporting my July trading summary. I have 8 winners, 5 losers, 1 breakeven, I give myself a grade of C+. Biggest batch of winners were option trades on LGF Lions Gate. Biggest loser was a short put on WFM Whole Foods. Overall a modest profit for the month, but with that many losers, there is room for improvement. Because of travel, I closed some positions early.

Net long LGF IWM SPY

BRKB Berkshire Hathaway
EWG German stock ETF
XRT Retail ETF
LGF Lions Gate Entertainment
IWM Russell 2000 ETF

Monday, July 16, 2012

Close TLT short strangle

Close TLT short strangle TLT@130.4
I buy back Aug 115 puts and Aug 138 calls for a 28% net profit*. TLT US 20-year treasury ETF breaks June 1, 2012 high. Again, because of upcoming travel, I'm lowering my risk profile.

Net long LGF IWM SPY

* 28% net profit is basis the initial credit, return on capital much lower because of margin requirements

Saturday, July 14, 2012

Swenson Portfolio

Lecture six from the free Yale course has guest lecturer David Swenson (link to Yale). Swenson worked at Salomon Brothers and is credited for inventing the modern day swap. In plain English, a swap is a contract for exchanging currency at a set rate, with the exchange rate, the amount to be exchange and the length of time as parameters. The most common is Euros for US dollars. For example, a U.S. company might do a swap with a European company to agree to exchange $1 million USD for $1.23 million Euros every month for 60 months. Companies do these swaps to lock in costs, or profits.

Back to Swenson, in his lecture he talks about three main decisions for institutional portfolio managers:
1) asset allocation
2) market timing
3) security selection

Swenson's portolio, the Yale University endowment fund, has averaged about 16% since 1985, which is remarkably high.

Marketwatch has an individual's version of Swenson's portfolio (link2). It is basic index funds in unremarkable allocations.

Long time readers know that I am a fan of these Lazy Portfolio approaches for the vast majority of individuals. It is only those few that enjoy the activity, enjoy the study, or have a particular knack for stock picking or market timing that have any realistic chance to do better with trading as compared to these simple portfolios. Jack Bogle, founder of Vanguard is another widely cited advocate for the index approach (link3 to Boglehead Wiki). Another popular idea is the Permanent Portfolio (PERM is a single ticker solution with a 0.50% expense ratio) that allocates 25% each to bonds, cash, stocks, gold.

A stock market comment: I did close my LGF short puts at a bad time. The stock, and the overall market have bounced well off those lows. Had I filled my shopping list, I would have done very well for the day and a half. Getting whipsawed is a hazard of using stop losses, even mental stops. I am not a fan of actually leaving the stop orders on the books because they can be picked off. There will always be times when stops get taken out and then the stock reverses. The alternatives are to use wider stops, or not use them at. Each has its advantages and disadvantages, no one way will do best.

Thursday, July 12, 2012

Close LGF puts

Buy back short LGF Jul 14 puts @14.1
I cover one layer of my short LGF puts, these go out at net break even. I am still short multiple layers of puts and calls, still net long on Lions Gate Entertainment. I will be traveling next week. So don't want to dance that close to the flame during expiration week. I am not unsure of my computer access.

Stock market continues lower, today would make six red candle down days on IWM Russell 2000 ETF. I am tempted to double up on short IWM strangles. Also tempting is to sell puts on EWZ Brazil Fund, or sell vertical put spreads on IBM or UNP. The phrase that comes to mind is "let someone else be the hero." Meaning, let the more nimble traders try and call the turn and brag about buying the bottom.

Net long LGF IWM SPY
Net neutral TLT

Tuesday, July 10, 2012

Sell SPY put backratios

Sell SPY put backratios @133.8
buy Sep 123 puts
sell 2x Sep 118 puts for credit

These short put backratios are a net bullish strategy, with an explosive downside profit if the underlying closes between the strikes. My earlier IWM strangle sale was ill timed.

Whoosh goes the market to the downside. The down move pushes me to positive delta on IWM and SPY (net long).

Net long LGF IWM SPY
Net neutral TLT

Sell IWM strangles

Sell IWM strangles @80.6
Sell Aug 86 calls & Aug 73 puts for credit

Again, a short strangle is a bet on a trading range bound by the two strike prices. I am heavy in cash, light on positions, so added this near delta neutral position. As far as tactics, I place the order at the mid and it doesn't get filled until that price becomes the nat. Nat is the rough equivalent of selling at the bid for both options. Mid would be hoping that the bid/ask spread gets split down the middle.

Net long LGF
Net neutral IWM SPY TLT

Monday, July 09, 2012

Ritholtz: top 10 investor errors

Barry Ritholtz has a series on investor errors. They are aimed more at long term investors vs. traders, but they still may be of interest to my readers (link to #10).

1. Excess Fees
2. Reaching for Yield
3. You Are Your Own Worst Enemy
4. Asset Allocation vs Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Neglecting the Long Cycle
8. Cognitive Deficits
9. Past Performance vs Future Results
10. Not Getting What You Pay For

Errors 1, 3, 7, 8, 9 are also common with traders. #1 can occur when commissions, spreads, option decay eat up most of the profits. #3 is about emotions, which for 90% of traders lead to losses. #7 is focusing too much on the tree, not enough on the forest, though for traders there is a balance there. #8 might be characterized as not knowing what we don't know, or over estimating our own knowledge. #9 chasing what is currently hot, is especially common with novices, but experienced traders also get swept up in the madness of crowd.

Sunday, July 08, 2012

Goldilocks and the three beers

The Atlantic has an interesting article on pricing patterns and behavior (link).

People were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer. Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.

In short: We are all Goldilocks.

In his book Priceless, William Poundstone explains what happened when Williams-Sonoma added a $429 breadmaker next to their $279 model: Sales of the cheaper model doubled even though practically nobody bought the $429 machine. Lesson: If you can't sell a product, try putting something nearly identical, but twice as expensive, next to it. It'll make the first product look like a gotta-have-it bargain.

I've always been fascinated by pricing. How one store might sell the exact same item for double the price of what another store might charge. It is one reason I have always had an interest in the stock market. Part the shopping behavior is likely cultural. In the case of the three beers, the results might be very different in other countries, where buying the cheapest doesn't have the same stigma, or where buying the best brings even higher status.

Free online course: Yale Econ 252

Many universities now have free online courses. I just started Econ 252 on the Yale website:

The professor is the world famous Robert Schiller. I am not likely to do the homework and course reading so what I get from listening to the lectures may be of limited value. I understand that, but this kind of stuff tends to be more interesting to me, than much of what is on TV during the summer (and sometimes the winter too).

I took two economics courses in college and enjoyed them. Perhaps I missed my calling in terms of education. Oh well, like past stock trades, a person can't go back and re-choose their college courses and how much they applied themselves.

Here is a site with the top ten universities in terms of free online course material (link2). For some courses, a person must do the reading, the homework, perhaps the lab and write the papers, to really learn the material. Doing online auditing of the courses, without the papers, the exams, is a shallow substitute.

While I am here, I'll make a stock market comment. It was interesting on Friday to see a down VIX on a big down day. Typically VIX goes up when the market goes down. VIX is the volatility index (wiki link3).

The cliche phrase is that the tape doesn't lie. A lower VIX on a big down day means option sellers are betting that odds of a big down move in stocks is unlikely and were ponying up their money to sell volatility. Some are interpreting this as bullish, especially for the leading big cap stocks.

Friday, July 06, 2012

Sell LGF strangles

Sell LGF strangles LGF @14.8
Sell Aug 14 puts
Sell Aug 16 calls for credit

Sell strangles on Lions Gate, which is a bet that the stock stays in a trading range. So far 15 has been a brick wall for LGF. This adds slightly to my positive delta, so I remain modestly long on LGF.

I remain cautious. I am going to be traveling later in July, so am shying away from some trades for that reason. The stress from the markets isn't something to pack for vacation.

Net long LGF
Net neutral IWM SPY TLT

Tuesday, July 03, 2012

Declaration of Independence and the preamble to the Constitution

For July 4th, those with kids may consider reading out loud, or better yet, have them read some of what is below. Yes, these are difficult times for many Americans, and some are taking advantage. The U.S. remains the greatest country on Earth. There are many critics. However, it is good to keep the perspective, the grateful attitude, for the many great blessings, we as Americans enjoy.

Happy Independence Day.

from (link)
When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another ...

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government ...

... for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.

from (link)
We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.

Friday, June 29, 2012

2nd quarter wrap up

It is the end of the 2nd quarter of 2012. Summary year-to-date results follow:
SPY +8.4% S&P 500
IWM +7.9% Russell 2000
TLT +3.3% 20 Year U.S. Treasury
EEM +3.1% Emerging Markets
GLD +2.1% Gold
SLV -1.0% Silver

Boy, did I get whipsawed on Thursday. The move off the bottom was close to 5% in one day plus an hour. This kind of thing will happen. Covering WFM Whole Foods might have been a good move, the ALXN Alexion more feeling based. In hindsight, trading is real easy.

What can I learn from this? To wait for market closes, unless a pre-determined price level or percentage loss is broken. Sometimes waiting for two consecutive closes is done to avoid whipsaws. Of course, there will be specific times when any set strategy can be micro-tweaked to succeed or fail, in hindsight.

Because of the whipsaw action I stayed mostly away from the stock market today. Next week has the July 4th holiday during the middle of the week. Then later in July, I will be traveling and less likely to take on and keep positions.

Since I've been giving out letter grades, the grades have mostly in the letter C range. So it is no surprise that am now behind the returns of the top ETFs on the list. As always with options, could be better, could be worse. Comparisons to index performance can be an interesting measurement. However, option traders might be long or short, and I trade a lot more than SPY and IWM.

Thursday, June 28, 2012

Cover WFM & ALXN puts

Buy back short WFM puts @92.6
I take my loss on Whole Foods, buying back short Jul 87.5 puts. Stock is not acting well and my loss is about 130% basis the initial option premium.

Buy back short ALXN puts @96.4
I also buy back my short ALXN Aug 75 puts. The loss on Alexion Pharma is a more modest 15% basis the initial option premium.

Basically, I am taking some risk off the table, and in the process am taking some big losses. As always when taking losses, it is impossible to know the future. I don't have a good feeling for these two stocks and am exiting.

Net long LGF
Net neutral IWM SPY TLT

Wednesday, June 27, 2012

80/20 rule Pareto

I learned something new today, that the 80/20 rule comes from Italian economist and engineer Vilfredo Pareto (Wiki link)

The story starts with the observation that 20% of the pea pods in the garden, produce 80% of the peas. Pareto became curious and looked at other data. He found that 80% of the land was owned by 20% of the population in Italy. The Wikipedia link goes into the equations for the Pareto index.

Many have heard of the 80/20 rule, but many probably didn't know its origin. It can be used as a rule of thumb for so many estimates, many human endeavors. I have heard it said that in most volunteer organizations, 80% of the work is done by 20% of the volunteers. It might often be more skewed than that. Some use the 80/20 rule in making business decisions. This might result in focusing on the most productive 20% of employees, or 20% most valuable of customers.

Buy XRT (sell puts)

Buy XRT via selling Aug 50 puts @56.9
XRT is the retail ETF and is down a bit today. ORLY O'Reilly Auto stores said they will come in at the low end for the next quarter. Some other retailers such as M Macys were downgraded this morning. CMG Chipotle down hard on negative analyst comments.

Yesterday's entry on WFM Whole Foods is now in the red. Another recent long trade ALXN Alexion has the stock up, but premiums are also up, so I am still in the red on my short puts. The short straddle on TLT Treasury bond ETF is working well. It is a tough market. I'm sure a few traders have a hot hand, but it is likely a very few.

Net long LGF
Net neutral IWM SPY TLT

Tuesday, June 26, 2012

Buy WFM (sell puts)

Buy WFM via selling Jul 87.5 puts @96.7
Whole Foods Market had a breakout on May 3, then faded back to the base, likely taking out some stop loss orders with a 8% pullback from the breakout high. Now it has been making new highs. The strike price of 87.5 is below the 50 day moving average, and below minor support at the breakout day high of 90.

As for the overall stock market, I thought to myself that maybe we would only see two and a half down days and this mornings brief dip was that half. I still have a lot of dry powder.

Net neutral IWM SPY TLT

Monday, June 25, 2012

Sell TLT strangles

Sell TLT strangles TLT@126.7
Sell Aug 115 puts and Aug 138 calls
/edited for typo, Aug 138 calls sold

TLT is the 20 year U.S. Treasury ETF. Selling strangles is a bet on a trading range. There is a good base of support at 115, mild resistance at the recent highs of 130. Operation twist is still distorting the U.S. bond market.

Elsewhere, gold stabilized after I exited, but I had little way of knowing that. Today, I look at selling put backratios on SPY, but August premiums seem modest given the recent market volatility.

Net neutral IWM, SPY, TLT

Thursday, June 21, 2012

Cover GLD short strangles

Close GLD short strangles GLD@152.5
Buy back short GLD Jul 143 puts and GLD 166 calls for a modest profit, netting about 30% basis the initial premiums for the sold options. As usual, return on capital on sold options is much, much lower because of margin requirements.

Gold hit hard today. I don't have a good feel for this market so am getting out. Support at GLD 148 may hold, but if it doesn't my profit may be all gone by then. A short strangle is a bet on a trading range, with the expansion in volatility, it becomes a higher risk bet.

Goldman Sachs says to short the stock market. Is this another contrary signal? Maybe, but sometimes they do get it right. Besides this call is only for a 5% down move, so it is already 1/3 of the way there. I have been looking for three hard down days in the stock market, so if I get two more, I'll add some longs.

My IWM and SPY positions are near neutral at the moment. The delta changes with decay and as prices move.
Net neutral IWM, SPY

Wednesday, June 20, 2012

Rebalance LGF

Sell LGF Jul 14 puts LGF@14.7
I add some delta and some theta on Lions Gate. I expect it to be range bound. I am net long LGF.

Markets have had some wide swings on a Fed news day, though not much overall movement from yesterday.
Net long IWM, SPY
Net short GLD

Tuesday, June 19, 2012

More LGF (sell puts and calls)

Buy LGF via selling Aug 13 puts LGF@14.8
I cancel the order to sell strangles on Lions Gate, and decide to sell puts instead. The thought does enter my mind: will I be burned again? I did a similar cancel then replace and the stock moved lower. I am selling more puts because my delta is moving down as the stock moves up. I am already short Jul 12, Jul 13, Sep 13 puts. I see the 11 to 13 area as support, 16 as resistance.

This is my third trade of the day (earlier I sold puts on ALXN Alexion and BRKB Berkshire). Option traders often have free capital just after expiration. In my case when options that I sell short expire, buying power becomes available, and I am committing some of that capital to selling puts. Managing position size, margin requirements are vital concepts for option sellers.

/edit this post: turns out my fear came to be. I sold puts near the top. I am selling some Jul 15 calls with LGF @14.3 to rebalance my position. It isn't the original idea of selling strangles, but it is close. However, I got mushed by the intraday moves. LGF has been and continues to be a cruel mistress.

Net long IWM, LGF, SPY
Net short GLD

Buy ALXN and BRKB (sell puts)

Buy ALXN via selling Aug 75 puts @98.0
ALXN Alexion Pharmaceuticals breaking out from base pattern today. Support at 85, then 80. This is another CANSLIM kind of stock, with a high PE and fast growth.

I also sold BRKB Aug 70 puts @82.5. Story is the same on Berkshire, stock buyback and multiple chart support levels below. Not much premium on these puts, but with the ongoing buy back it seems like a low risk play.

I also placed an order to sell strangles on LGF Lions Gate LGF@14.6, sell Aug 13 puts and sell Aug 16 calls, but it is not filled yet. If filled, I would still be net long. Chart resistance at the old highs of 16.19.

Elsewhere, European stocks rallying today. The fear was so thick, it seemed an obvious play, though I only took the one small position in the German ETF EWG. Gold option premiums came in a little, pushing my short strangle into green numbers, but premiums are still relatively high because of possible Fed news on Wednesday.

Net long IWM, SPY
Net short GLD

Why indicators stop working

Mark Hulbert at Marketwatch writes about the 50 day moving average (link). In the bigger picture, there is this:

As I’ve written on prior occasions, something appears to have happened to moving-average trend-following systems in the early 1990s that left them far less able to beat the market.

In fact, according to Blake LeBaron, a Brandeis University finance professor who has extensively studied a number of different technical trading rules, moving averages of various lengths stopped working in the early 1990s, not only in the stock market but also in the foreign-exchange markets as well.

I can guess at "what happened." The Internet became more popular as did technical analysis packages, and then free websites offering charts. Pre-Internet, moving averages were the realm of a few that took the time and expense to have a data provider and a charting service. Once charts became popular, the most popular indicators became less valuable.

With all that I still look at the 50 and 200 day moving averages. Many others look at the 10, the 20, the 150 day. While the indicator is no longer gives a high probability chance of success, if it is widely followed, it can serve as resistance, support, and a whipsaw level. In human terms, I look because so many others are looking.

It is a cautionary tale about indicators that do work. If everyone starts using them, they tend to stop working. I cite this a lot when writing about seasonal indicators, because the calendar is easy to track, and easy to try and jump.

Saturday, June 16, 2012

Marketwatch: 20 questions for would-be traders

Paul Farrell at Marketwatch reposts his list of 20 questions for would be traders. I'll post the first five to give a flavor, the rest are at the link.

>> Yes or No:
1) You’ve tried more than one new investment strategy this year

2) Feel you’re buying and selling funds at the wrong time

3) Rarely open up to anybody for feedback about your losses

4) Subscribe to two or more newsletters, feel overwhelmed

5) Can count on one hand all the good laughs this week

I notice that there is precious little about market terminology, percentage of winners, risk management, trading strategy, trading systems. Seems like the majority of the questions are general lifestyle, perception of the markets, general psych questions.

Denise Shull often gives free webinars for my broker ThinkorSwim. Shull also does consulting with top traders for huge fees. One of her questions is "how well did you sleep last night?" Hmm. My recent fat finger mistake on GNC came after a late night out and not much sleep. Hmm, maybe there is something to that.

Changing the subject, today and tomorrow are rounds 3 and 4 of the U.S. Open Golf tournament. With a screen name of Tiger (and RedTiger on the PCGS forum), one would think I am a big Tiger Woods fan. While I do enjoy watching Tiger play golf on TV, I don't always root for him to win. I wonder how Shull or Farrell might interpret that in terms of trader psychology, eg: rooting for the favorite vs. rooting for a newcomer or old time underdog.

Friday, June 15, 2012

7-4 for June (grade C-)

Seven winners and four losers for the June cycle. I give myself a grade of C-. Grades since I've doing that are:
B for March
C for April
C for May
C- for June

I am not exactly lighting it up. Despite modest gains, I give myself a C- grade because the losers were some bad errors. These mistakes include today's fat finger mistake on GNC, the mishandling of the exit, and two sets of short calls on LGF sold on panic. Another problem area was GLD, with a poorly timed put sale, and then compounded by selling short calls. I haven't traded gold, silver or the miners well all year.

Some winners include a short strangle on IWM, and a short put backratio on SPY. These were some of my better trades. I legged out of the SPY position for about a 150% net profit basis the initial credit (return on capital is much lower because of margin requirements). I added another layer of short puts further out instead of selling the long puts. Had I sold those puts at the best time, the net profit was up to 400%. A lot of put owners ended up giving back most of their profits on the V-shaped rally. Overall, I was positioned pretty well for the moves in SPY and IWM.

I mangled my long LGF position. Keeping it simple as far as options, would have been much better. The glass half full side is that overall, I am in the green on Lions Gate. Considering that I have been mostly long, and sold my first puts on LGF when the stock was 14.4, then added another layer of short puts at 15.0, being ahead when the stock is a bit lower is a good thing (14.1 close).

Going forward I am short puts on BRKB, EWG and LGF, short strangles on GLD and IWM, and short put ratios on SPY. This nets out to the position summary below:
Net long IWM, SPY
Net short GLD

BRKB Berkshire Hathaway
EWG German stock ETF (been missing this one*)
GNC nutrition store
IWM Russell 2000 ETF
LGF Lions Gate Entertainment

Fat Finger mistake on GNC

Crap, I made a data entry error earlier today. I wanted to close my short GNC Jun 35 puts. Instead, I mistakenly entered an order to buy Jun 35 calls and got filled. Yikes.

To compound the mistake, GNC dropped rapidly from 35.0 when I entered the order to 34.0. Right now it is back to 35.0 and I am closing both ends of the position, for a break even profit after all is said and done. Mistakes happen. Thankfully this was a small dollar amount, but the mistake still cost me. If I had closed the position, it would have been more like a 50% gain instead of maybe 20% basis the initial credit. The bright side is that at least I am exiting with a net profit, but once I realized the mistake and saw the stock dropping it was like going down the rabbit hole. I'll post a monthly trading recap after the close.

As I type this up, looks like my exits were poorly timed, as GNC is rallying a bit into the close. Still, with the mind fog, exiting with even a modest profit is a victory of sorts.

Net long IWM, SPY
Net short GLD

Wednesday, June 13, 2012

Cover short LGF calls

Buy back short LGF Jun 13 calls LGF @13.6
Yesterday's close over 13.50 triggers my mental stop. Selling these calls on Lions Gate was a foolish entry, and I am taking my lumps at a huge percentage loss. I am still short Jun 13 puts, Jul 13 strangles (put & calls) Jul 12 puts, Sep 13 puts. I have a limit order to buy back the short Jul 13 calls too, but it hasn't filled yet. (edit: order was filled)

The tactic of selling LGF Sep puts to add more delta didn't work out because expiration is this Friday. Looking back, perhaps, a mental stop on a close over 13 for these short calls. Or better still would have been to avoid the panic on the technical selling. Best would have been to buy calls or LGF stock on the spike down. With the hindsight lens, the recent 17% two-day spike down may have been done to trigger some large stop-loss orders.

Speaking of selling calls, my recent sale of GLD calls isn't working too well either and I am now net short gold. That GLD call sale was right after Ben Bernanke's comments sent gold lower.

Net long IWM, SPY
Net short GLD

Monday, June 11, 2012

Rebalance LGF (sell puts)

Sell LGF Sep 13 puts LGF@13.3
I rebalance to about neutral on Lions Gate by selling September puts. My Jun 13 short straddles (short both a put and a call at 13) have turned into a problem, same with my short Jul 13 short straddles. It was a huge mistake to have sold the Jun 13 calls for next to nothing. The percentage loss on that single leg is ridiculous, even if the dollar amounts are small. LGF is into a resistance area, so I'll see if it comes back to 13 before this Friday's expiration.

As I type, the opening pop up in stocks from the Spain news is dissipating, but who knows where the market closes. Gold was up over night, but now is down. TLT opened lower but now is higher, so the bond folks may be looking for more shoes to drop. It would have been nice to time the recent V-shaped-bottom in stocks to perfection, but how many actually did that? Not me, is the most common honest answer.

Net long GLD,IWM, SPY
Net neutral LGF

Thursday, June 07, 2012

Rebalance GLD (sell calls) and buy SPY (close puts)

Sell GLD Jul 166 calls GLD@154.2
Yikes! Ben Bernanke's comments spike the gold rally. Chart resistance at 165 and 166. I rebalance, though am still net long (short Jul 143 puts, short Jun 146 puts). The French open tennis tournament is going on, and I feel like a tennis ball being served up. My mind tends to focus on the bad moves, though there have been some good moves such as EWG (German ETF) too. As I finish typing, GLD has moved up .4 to 154.6 so my timing continues to be questionable.

I also close out one leg of a short SPY put backratio, selling long SPY Jun 128 puts with SPY@132.8. This leg closes out at a loss, however, the offsetting short puts are at 123. This leaves me short Jun 120 puts, Jun 123 puts, Jul 110 puts, long Jul 115 puts for a net long position on SPY. Obviously, I would have done much better closing out the SPYs early in the week, instead, I sold some Jul 120s which wasn't as good a move.

Net long GLD,IWM, SPY

Wednesday, June 06, 2012

Rebalance LGF (sell puts)

Sell LGF 13 puts LGF@12.7
I rebalance to long on Lions Gate, as my short strangles move to near delta neutral. I have made a mess of my LGF positions. Thankfully the dollar amounts involved are small. The psychological capital expended is likely greater than the financial capital.

My earlier trades today are one up EWG, one down GLD. A lot of action on my part with three trades today, but so far, not much forward progress.

Net long IWM, LGF
Net short SPY

Buy GLD (sell puts)

Buy GLD via selling Jul 143 puts @158.8
Gold moving up today. Chart support at 148, and 144 is the 52-week low back in June 2011. I was already short Jun 146 puts which look to be safe.

Net long IWM, LGF
Net short SPY

Buy EWG (sell puts)

Buy EWG via selling Oct 17 puts @18.9
EWG is the German stock market ETF. Chart support at 17. Uncertainty is still high, but the strike plus the put premium gives about 16% downside protection.

The U.S. stock market and precious metals are up this morning. Treasuries are down. I am looking for another dip in stocks before the Greek election on June 17th.

Net long IWM
Net short SPY

Tuesday, June 05, 2012

Rebalance SPY (sell puts)

Sell SPY Jun 120 puts SPY@128.7
I add a few SPY deltas for June. I was already short a put backratio (short 2x Jun 123p/long 128p). I am still net short SPY for June. I still have quite a bit of dry powder. My broker is liking me today with these small premium trades generating commissions. My earlier LGF call sales are looking to be poorly timed as LGF is bouncing, and that is what often happens when rebalancing.

Net long IWM
Net short SPY

Rebalance LGF (sell calls)

Sell LGF Jun 13 calls and Jul 13 calls with LGF@11.7
I am already short LGF Jun 13 puts and Jul 12 puts for small premiums. Lions Gate had two steep down days on no news. Some think it was technical trading as the stock broke through the 50 day moving average and 100 day moving average. Frustrating would be a mild adjective for those that are long like me. I am still net long LGF and plan to roll the Jun 12 puts if I can get net some premium by doing the roll.

Net long IWM
Net short SPY

Friday, June 01, 2012

Buy GLD (sell puts)

Buy GLD via selling Jun 146 puts @156.6
I take a small position in gold for a small premium on today's pop up. Recent low was 148, so 146 gives me some room.

Stock market falling. I look at several things, but for now do nothing. I am not that nimble, and the next Greek election on June 17 will likely hang over the markets for the next two weeks. I still have a lot of dry powder, but don't see any need to get in when the water is so turbulent.

Using hindsight goggles, I wish I were more aggressive in being long bonds. It is hard thing to do when the long term fundamentals look so poor. Option traders often do better by ignoring those factors because emotion, sentiment, momentum tend to be much more relevant factors in the short term.

Net long IWM
Net short SPY