Monday, January 30, 2012

Buy TBT (sell puts)

Buy TBT via selling Feb 18 puts, TBT @18.3. U.S. Treasuries are up big today on Euro contagion fears. I am selling that rally (TBT is a double inverse bond ETF).

Elsewhere, AAPL finally seeing a rally after the big gap up after earnings day, my short vertical put spread is looking good.

Short GDX

* AMZN EEM close to delta zero

Sunday, January 29, 2012

Cash is Trash? Or is it?

Two meme's out there in this morning's round up. At MarketWatch Chuck Jaffe says "Cash is Trash" (link1). Roger Nusbaum at his blog cites the Barrons cover story "Don't Lose It" (link2).
many Gen Ys don't trust stocks and so have a high portion in cash
(Gen Y is born between 1976-1995 or 1988-2001 depending on who you ask)

Anecdotally, it is not just Gen Y's. I was having coffee with a friend talking stocks and a woman in her 60s felt the need to tell us "I think the stock market is rigged." Over on the PCGS coin forum, the precious metals folks often say the same (link3). I observe the Bogleheads on their forum (link4)continue to like Ibonds and TIPs that offer some inflation protection, and continue to "stay the course" on their base asset allocations.

Tops in the bond market continue to be called, though some bond bears threw in the towel on the recent Fed announcement of low interest rates until 2014. At some point the rubber band snaps, and interest rates rise dramatically. I thought bonds were topping a couple of years ago and am with that large crowd that was wrong.

Thankfully, I mostly traded bonds on sentiment not what my logical mind or gut was telling me and have traded bonds mostly from the long side during the last couple of years. I can't take credit for being aggressively long, considering TLT was the best performing major asset class for 2011 up 29%, but for the most part I avoided being short and down that 29%. My recent adventures in GDX puts point to how quick and large losses can be for an aggressive option trader on the wrong side of a move.

Some folks are moving towards riskier assets. I see the occasional mention of high yield or junk bonds (HYG, JNK). I see many more about high yielding stocks (VIG) even preferred stocks (PFF). Of course all these come with risk, and as long a person understands the risk they can go in with their eyes open.

It is a strange time, with basically zero interest rates for money markets, under 2% for 10 year Treasuries, TIPS at a negative yield. In the 2012 Barrons roundtable Bill Gross had this interesting quote about the physics of money going from Newton to Einstein as rates approach zero. If someone as smart and as expert as Gross got it wrong, and continues to struggle with these questions, far be it for me, to pontificate on the issues.

Like the rest of the world, it is a struggle, how much risk to take, how much yield to chase, when to think of leaving the party, because it seems a sure thing that the cops are coming to take away the punch bowl, it is just a matter of when. Like the way I tend to trade, the middle way, moderation, hedging is the course I tend to chart.

Friday, January 27, 2012

Schwab's Beginner class on Technical Analysis

I recently moved my retirement accounts to Schwab (trading account is still at ThinkorSwim). They have free seminars at the local offices. I recently attended a beginner's hour on Technical Analysis.

Topics include:
Dow theory
kinds of charts (line, bar, candle)
moving averages
support and resistance
time frames
popular pairings for moving averages (10,20) (20,50) (50,200)
moving average crossovers

With only 45 minutes, I could tell that the presenter is a bright person, with a lot of patience. There were about eight people in the class, several 70+ years old.

I believe all would-be traders would do well to learn at least the basics, and the one-hour class would be a decent intro. Disclaimer after disclaimer was issued, about how charts don't guarantee anything. There was some discussion on trading with the trend vs. trading counter-trend.

I came away with a decent outline of some topics to cover if I ever decide to do my own instructional material.

Buy SPY (sell puts)

Buy SPY via selling Feb 124 puts, SPY@132.0. I add another layer of short Feb puts. I am already short Feb 107 and Feb 113, as well as Mar 107. Hedged against this is are some long Mar 114 puts. With the rally, my SPY delta drifted to neutral. This latest move gets me back at delta positive. My thinking is that if the market was going to go down, today was a good day for it to happen, with some selling in the morning. There is chart congestion at the 124/125 level.

Short GDX

Wednesday, January 25, 2012

Buy AAPL (sell vertical put spread)

Buy AAPL via selling a vertical put spread
Buy Feb 410 puts
Sell Feb 420 puts
for a net credit, AAPL @447.2

If you follow the market at all, you already know about the blowout earnings news. Apple stock has been range bound. The Fed news did not do much for the stock. 420 is the previous close so would be a good entry point in the unlikely event that it declines that much.

Elsewhere, bonds, gold, and stocks are all higher on the Fed news. Interesting. I am getting killed on my GDX puts (owning GDX puts is a bearish bet on gold mining stocks). Gold miners are one of the strongest sectors today. Rally in SPY has moved me to delta neutral.

neutral SPY
Short GDX

Sunday, January 22, 2012

Pros and cons of leveraged ETFs

Some of the most popular ETFs (exchange traded funds) are the double and triple leveraged products. Some are drawn to them for the adrenaline rush, the excitement of big moves each day. Some might use them strategically in low doses.

Pros: leverage, IRA eligible, no margin calls, no expiration

Cons: leverage (if you are wrong), decay, expenses

Decay takes place because of trading expenses, and daily adjustments. Over the course of a year, decay and adjustments might eat 20% or so of the potential return. For example if SLV moves up 10% in a year, in theory AGQ would go +20%, but because of the decay it might be flat. That's just a guess, and would also depend on the daily moves in SLV. Bigger daily moves, mean bigger daily adjustments and more decay over the course of a year.

Someone buying and holding for a month or more might do better using straight margin and paying the margin interest. The decay tends to be higher on the leveraged ETFs vs. the margin interest rate. Margin isn't allowed in retirement accounts.

Someone taking a shot might also consider buying options. With options, a person can get much more than 2x or 3x leverage. The option has defined downside albeit 100% of the cost of the option. The cons of the option are that decay tends to be quicker and more costly on the option. No realistic person will want to bet 100% of their account on a single option play. Speaking from personal experience, when I get to be that sure of something, it is almost surely a big loser.

Someone mentioned the idea of a leveraged ETF that tried to double or triple the return of an index product over a full year instead of day to day. The straight version of that would be to buy on margin. There still would be the margin interest, but that is much less than the decay rate on the typical ETF. The downside to straight margin is the need to rebalance and buy more if it moves higher, and the possibility of margin calls on a spike lower.

The only leveraged ETF I tend to trade is TBT. The others tend to move too quick for my taste. However, as I always write, just because something isn't right for me, doesn't mean it isn't right for someone else.

Friday, January 20, 2012

3-0 for January

3 winners, no losers for trades closed during the January option cycle. I only had a few positions coming into the calendar year and all went out as small winners, and a small net positive for the account. Winners include short puts on BRKB, SPY and a covered call position in TBT.

I mismanaged the TBT position, turning the potential of a nice gain, into mostly a commission generator. The history is I got assigned TBT at December expiration at 18. I sold the Jan 20 calls, then rolled down to Jan 18 calls on a spike down in price, and now will be assigned and TBT gets called away at 18 (19.28 close).

Going forward, I am short puts on BRKB, EEM, I have a complicated position in SPY that edges net long, am short a vertical put spread on AMZN that is at a 90% profit and near delta zero, long puts on GDX.

Short GDX

Wednesday, January 18, 2012

Sell GDX (buy puts)

Short GDX via buying Mar 47 puts, GDX @53.1. GDX gold miner ETF has been an anemic performer. I am leaning bearish towards stocks and gold and this is a low percentage bet on a downdraft.

Short GDX

Nusbaum: Stock selection is 10% of the game

Roger Nusbaum writes about his investing approach (link) and how his style may not be useful for all readers. He has this nugget:

Stock selection, the studies conclude, only accounts for 10% of the eventual return. Top down would say it is more important to figure out to avoid France, own China and be correct about oil prices (just a random and abbreviated example).

Long time readers know that for the past couple of years I have mostly traded options on the major ETFs: SPY, TLT, TBT, GLD, GDX, EEM, IWM, mostly selling puts, but occasionally doing more complex trades. Once in a while I will venture into a stock, usually on news, sentiment and in the case of BRKB a stock buy back. Being long or short on the major asset classes, long or short volatility give me plenty to look at without going into individual stocks. Popular stocks such as AAPL have thousands of very smart people doing short term trading and sniping off a point here or there.

Another point from Nusbaum:
... investing is a pursuit where you can put in as much or as little time as you want ...

I do not sit in front of the screen all day, but am very far from a buy/hold/rebalance indexer (even though I admire the indexing approach and recommend it). I always tell people interested in the markets that there are a 1000 ways to make money, a key point is finding one that works for you. For novices, the inward looking psyche work is near as important as the market work. Again, keeping a trading journal (what this blog is), can be a powerful inward looking tool.

As for my approach, I like options. I like the complexity, the ability to hedge, the ability to bet on various probabilities. Most people I meet do not like the complexity, and find all the possible combinations overwhelming. I use a variety of indicators, charts, technicals, fundamentals, sentiment, seasonality. Some focus more on one area than another. I tend to look at it all and get a big picture view.

A side note: my most recent put sale (sell SPY Feb 113 puts) was like stepping into a pile of dog poo. It happens, but it isn't pleasant.

Tuesday, January 17, 2012

Buy SPY (sell puts)

Buy SPY via selling Feb 113 puts SPY @130.2. With SPY moving up, and my recent purchase of a vertical put, the Jan 119 short puts expiring, I was at a net short position on SPY. This moves me to slightly delta positive (slightly long). 113 is a congestion area on the SPY chart.


Sunday, January 15, 2012

Lake Wobegone effect (Ferri)

Rick Ferri writes about what is sometimes called the Lake Wobegone effect (link). The NPR radio show has a tag line "where all the children are above average" (wiki). For investors, Ferri believes that most have an inflated anecdotal view of their returns. On the Internet, I observe even worse, because the winners report what are often inflated returns, often in hindsight, and the losers rarely report anything. If a person only followed Internet reports, everyone would be above average.

No one likes to think they are below average, but in the investment world, when real world audits are done, most turn out to be below average. How does that work? Shouldn't half be below average, half be above average? It works that way because the top 5% or top 10% enjoy a disproportionate share of the profits. Some reasons why individuals tend to do poorly are chasing performance, and panicking at market bottoms.

Every major bull market sees that kind of pattern. An investment, or investment class in unloved, unpopular, and that is often the time the contrarians and the strict asset allocators buy. As the investment does better it becomes more popular. At every major market top, the fundamentals, the stories about reported profits create a buzz.

Saturday, January 14, 2012

Barrons: option sites

Barrons has a list of option sites (link).

Included are:


The January 14 post at Vixandmore has a list of the ten most popular posts on that blog (link). For the novices, VIX is short hand for volatility index, and a cornerstone used in pricing options. Some also use VIX as a sentiment indicator. Some use VIX readers to tell them which strategies to favor.

Friday, January 13, 2012

Buy BRKB (roll puts)

I add to BRKB longs via rolling my short puts, BRKB @77.3. I buy back short Jan 62.5 puts, sell Mar 67.5 puts. I am also short Feb 67.5 puts. My anecdotal observation is that BRKB puts tend to decay a bit earlier than index options. A narrow spread on the Mar puts encourages me to roll the position out instead of waiting until the Jan puts expire. Again, the reasoning is chart support and a stock buy back.

Net neutral SPY

Sell TBT, Short SPY

I lighten my position in TBT by rolling the calls down, TBT @18.0. I buy back the short Jan 20 calls, and sell the Jan 18 calls.

I also sell SPY using a vertical put spread SPY @128.4, buying the Mar 114 puts, selling the Mar 107 puts, moving me close to a net neutral position on SPY (short Jan 119 puts, Feb 107 puts, Mar 107 puts, and long Mar 114 puts). This put spread also serves to hedge my other short puts in AMZN, BRKB, EEM.

net neutral SPY

Saturday, January 07, 2012

Investment returns and trading styles

A recent thread on the Boglehead forum (passive indexers) surveys their investment returns for 2011 (link). Given that the stock market went basically no where, it is not surprising to see the bell in the curve dominated by 0% to 2.5%. Those indexers that did well were likely heavy in Treasury bonds or TIPS, those that did poorly likely heavy in Emerging Markets or Europe or Japan.

Elsewhere on the Internet, a person might read about fantastic returns, a few of which might even be true. I tend to think Bogleheads are more honest, more accurate in their reporting real world hindsight results than those on other forums. I reported that for 2011 I am slightly below the line for blog reported trades (less than a 1% loss).

On the other side of the spectrum is a 2012 investing thread on the PCGS coin forum (link2). The one week returns on page 5 of the thread, are better than the one year returns from the Bogleheads. Some folks, especially the inpatient, will point to that and say, "see it means I need to pick volatile, fast moving vehicles." Well, there is something to that, especially if a person is young with a high income and few responsibilities. There is also a wide gap between what people do in theoretical contests, or with a small trading account, vs. what happens to the bulk of their substantial assets (Boglehead way).

For those that are older, with more of an asset base, "gunslinging" or going "all in" with the bulk of assets, I see as a risky and foolish way to proceed, because there is less time to make up any losses. Many thrive on the adrenaline rush of being up or down 10% per month, and that excitement is another powerful lure, but it tends to come with a long term cost.

In the long term, only about 20% of active investors do better than indexers, often taking much more of their time, much more stress, and volatility in their results. In a self-esteem driven culture where most believe they are above average, it is what makes the markets turn. In the lower 80%, there is also a significant percentage that loses everything. The folks that get wiped out, tend not to report results, or respond to surveys, and tend to go for the riskiest most volatile vehicles. No one wants to believe that they will be in the lower 80%, but for average people, indexing is the low stress way, with an 80% chance of better returns to boot.

For those young people reading along, if a person has a talent, a knack, a passion for investments, the odds of being in the top 20% group tend to be greater. If a person is more driven by excitement, or ego, or other psychological factors, the odds tend to lower. Again, for short term trading, the first thing I tell people is the importance in finding your own trading style. For those just getting started, keeping a trading journal (which is what this blog is) is a powerful tool in finding what works for you, and what doesn't work.

Me, I tend to hate losing, and dislike taking any losses. So a style that generates a high percentage of winners, with a lower payout per win, tends to be a style that works best for me.

Friday, January 06, 2012

Buy SPY (sell puts)

Buy SPY via selling Feb 107 puts, SPY @127.5. I am already short SPY Jan 119 puts. The low of the recent chart pattern is 107. I am placing a bid to buy just below the low of the chart pattern and getting a small premium for doing so, about the same as the recent EEM put sale.


Thursday, January 05, 2012

Buy EEM (sell puts)

Buy EEM via selling Feb 33 puts, EEM @38.7. Chart support at 34, and 33 would be a new low.


Buy AMZN (sell vertical put spread)

Buy AMZN via selling a vertical put spread:
Sell Feb 140 puts
Buy Feb 130 puts
AMZN @175.4

I see a Marketwatch article with the headline: Amazon the next Netflix (link), and take a position. Selling a vertical gives a small credit and some crash protection, also doing the vertical lessens the margin requirement.

Tuesday, January 03, 2012

Buy BRKB and SPY (sell puts)

Buy SPY via selling Jan 119 puts, SPY @127.8. SPY 120 is the bottom of the recent range, with multiple minor short term support levels in that range. So I'm betting that support level will hold. Of course, with the big stock rally, this would have been a much better put sale a day early.

I also buy BRKB via selling Feb 67.5 puts with BRKB @77.8. The story is the same as the last times I have sold puts, chart support and a stock buyback.


Sell TBT (sell covered calls)

Sell TBT Jan 20 covered calls, TBT @18.6. This lowers my exposure to TBT the inverse bond ETF. I would be happy with an assignment at 20. I took delivery of TBT during Dec expiration at 18.