Wednesday, February 29, 2012

Buy XRT (sell puts)

Buy XRT via selling Apr 52 puts XRT@59.3
I open an April position, I am already short Mar 53 puts. Bernanke spooks the markets, in particular precious metals, and I am taking on water on my bullish GLD call calendar spread. My other positions are also taking on water big time. I am thinking this is a minor squall, a cloud burst that will pass quickly. Time will tell.

* short GDX
* delta is near zero on this position

Buy AXP (sell puts)

Buy AXP via selling Apr 47 puts AXP@53.6
I placed a limit order yesterday and didn't get filled. I took a worse price today. AXP made a new high a couple of days ago, breaking out from a base formation. AXP is one of Berkshire's long term core positions which endorses the fundamentals.

Elsewhere AAPL continues it run, and PCLN (Priceline) moved up sharply on earnings. I have been watching PCLN but the relatively wide spreads on the options kept me away. Add some more to the woulda, coulda, shoulda file. Stock market keeps moving higher. Silver has been the star of this year, now up 30% since 12/31/11.

A side note about the double leverage ETFs. I wrote about the negative of the decay effect. I did not mention that the leveraged ETFs stay at their full margin level. For example if silver starts at $30 and moves to $45, an investor on margin has to buy more to stay at full margin, but a position in AGQ stays at full double leverage all the time. Again, these move too fast for my temperament and trading style, but others are making huge money.

* short GDX
* delta is near zero on this position

Tuesday, February 28, 2012

Buffett doesn't like bonds or gold

It shouldn't surprise anyone that Buffett doesn't like bonds or gold. Charles Sizemore at Marketwatch quotes three sections of the Berkshire Hathaway 2012 letter to shareholders (link).

[bonds are] among the most dangerous of assets...
Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

... what motivates most gold purchasers is their belief that the ranks of the fearful will grow ...
... A gold bug has to sell it to someone even more scared and jaded than himself in order to see a profit.

Buffett certainly would not be a fan of the permanent portfolio (25% each in cash equivalents, long bonds, stocks, gold, PERM is an ETF with that allocation). Buffett touches on farm land, and residential real estate, but comes back to his bread and butter, equity in productive companies with a moat that gives them pricing power.

Fahmy: On Mature Traders

Over at the Ritzholtz blog, Joe Fahmy on "5 Signs You’ve Matured as a Trader" (link).

The short version:
1) Self reliance
2) Stop celebrating winners
3) Let trades come to you
4) Feel no need to brag
5) Loss management

On #1 self reliance, I like to repeat an anecdote that may or may not be true, but it is instructive. It is about the great composer Mozart. A young man comes to a performance that Mozart is attending, and comes up after to talk to him. The young man asks "do you have any advice for me about composing my own music?" Mozart pauses and says, "yes, I suggest that you concentrate on simple pieces." The young man is startled, "simple pieces? But you were composing complete symphonies by the time you were 17 years old." Mozart calmly nods and says, "yes I was. I never asked anyone for advice about composing music either."

On #5 losses, few bloggers or Internet posters will freely write about their losses. I find that I tend to learn the most from the losers. From day one of this blog I have always owned up to my losers. This is how people tend to learn best, both the writer and the readers.

Often times on the Internet, I see folks asking others for advice. Often times it involves a great deal of money, and only the barest minimum information is given. An example might be: If you had $100,000 (or any other large amount) where would you invest it, or how much would you put into gold (or any other single asset class). These type of questions and answer sessions tend to have a negative value for all. The person asking usually doesn't have enough experience to discern good answers from bad answers, or sometimes even joke answers.

Stock picking contests also tend to be of dubious or negative value. The contests tend to reinforce lazy habits and poor risk management tactics. I am more interested in process than picks. The temptation for contest players is to pick the most volatile vehicles, often not suitable for long term investments, in the hopes of hitting a home run, but not caring if they lose because it isn't real money.

The Boglehead forum is a bit of an exception (link2), because they want all your personal information before folks are willing to answer in detail.

Monday, February 27, 2012

Buy SPY (sell puts)

Buy SPY via selling Apr 116 put SPY@137.1
I open a small position for April. Again, the temptation is to be more aggressive by selling closer to the money puts. With the stock market over bought it doesn't seem like the best time to be aggressive. The operating hypothesis remains no stock market crash for 2012.

* short GDX
* delta is near zero on this position

Thursday, February 23, 2012

Buy IBM (sell vertical put spread)

Buy IBM via selling a vertical put spread IBM@197.7
Buy Apr 170 puts
Sell Apr 180 puts
for a small net credit

IBM breaking out from a small base. Support at 193 and then much more at 180. I am tempted to get more aggressive with higher strikes on the put spread, but the overextended general stock market is like a hanging sword ready to swoop and wash out over aggressive bulls.

* short GDX
* delta is near zero on this position

Wednesday, February 22, 2012

Buy GLD (call calendar spread)

Buy GLD via buying a call calendar spread GLD@172.6
Buy May 185 calls
Sell Apr 185 calls

This call calendar is a modestly bullish strategy, with modest time decay, and a net debit. Max profit is if GLD is at 185 (near the old high) at April expiration. Max loss is if gold goes down or stays where it is. Time decay is less than a vertical call spread, and much less than buying straight calls. Another negative is two commissions, two spreads each way, making it more costly and more difficult to exit the position.

Obviously, I was wrong on gold and GDX, but the GDX is now basically worthless because commissions are about equal to exit price.

* short GDX
* delta is near zero on this position

Game theory: diner's dilemma

Matthew Lynn at Marketwatch applies game theory to the Greek crisis (link). He first mentions a game of chicken and the diner's dilemma, which I had not heard of until today. Perhaps others have not either. One key point is that each diner doesn't really like the others, and tends to be selfish.

A group of real friends probably wouldn't try to do each other that way. The European union is a bunch of selfish countries that don't really like each other. Many have fought and killed each other, and those bad feelings remain.

... the “diner’s dilemma.” Ten of us go out for dinner. We split the cost equally. Each of us decides to order the most expensive thing on the menu even though it is only marginally better than the cheapest — because once the extra cost is split 10 ways it is a trivial sum. But if all 10 of us make the same calculation, we end up ordering 10 of the most expensive dishes — and a far more expensive night out than any of us actually wanted.

Another economic model is the real life problem of the commons. Back in old England, some parcels of land were set aside as common land. The common land was overgrazed, overused and abused, because each sheep herder would overgraze on the common land while preserving their private land.

Yet a third thing to think of is unintended consequences. Markets are not static. Punish or tax certain behaviors, and less of that occurs. Reward, bailout or subsidize certain behaviors and those behaviors tend to multiply. Politicians seem to have a very hard time with second order thinking, or perhaps do know and rely on voters being stupid enough not to think ahead. C'est la vie.

Another game I recently heard about was a crowded bar. In this game optimal is 60% occupancy. People must choose a few days ahead whether to go or not. If more than 60% choose to go, everyone will have a bad time, more than 70% and it will be terrible. If 60% or fewer go, everyone has a good time, less than 50% best time ever. The game theory sets up groups of people that have different algorithms for choosing. A small core group almost always will go. Some tend to go if they had a good time last week, some won't go if they had a bad time last week. Some ask their friends if it was crowded last week and rely on those reports.

Set up a simulation with those factors and the crowd will oscillate around an average of 60%, with many weeks over 70% and a miserable time for all, and many weeks under 50% and a wonderful time for those that went. The analogy to markets is for a particular investment. A good investment that gets too crowded may no longer be a good investment. People tell their friends, or learn from experience.

At one of the many talks at the local Schwab office that I've been attending, one of the presenters says it is always the same. After the stock market has a good up move, a good year, many clients come in and want to be more aggressive. After a down move, a bad year, the opposite, they want to be more conservative. It is close to the model of the crowded bar. When too many people are in it, bad times tend to follow. When a lot of investors leave, good times tend to be ahead.

Investment cycles are rarely as simple and short as one night events at a bar. So more complex models might be added. Some might track the attendance at the crowded bar and only go when there is a certain pattern, such as three crowded weeks in a row, or three sparse weeks in a row. In the stock market, this manifests in the form of those that move in and out based on price moving averages.

A long winded post, but game theory can be a useful way for market participants to do thought experiments to try and think about likely outcomes. Keep in mind, that top analysts are playing the same game, so it is not only trying to figure out what is likely to happen, but what others think is likely to happen, and staying in front of that curve. For example, the U.S. deficit and gold, best time to buy gold in recent memory was when the U.S. had a federal surplus back in 1999. The current trillion dollar deficits are factored into today's price which is up over 500% from the lows.

Saturday, February 18, 2012

Investment philosophy in 10 words or less

Jason Zweig in a Wall Street Journal blog entry quotes many luminaries on their investment philosophy in 10 words or less (link1). Bogleheads on the Vanguard forum did theirs (link2).

The one that comes to mind first is:
Buy straw hats in winter.

But that doesn't really sum up what I do in terms of trading or investing, nor is it particularly accurate. Another cliche on my mind of late is:
Regression to the mean.
(bet with the odds, not against them)

Another one from the Graham/Dodd school:
Rule 1: don't lose money
Rule 2: don't lose money
Rule 3: don't lose money

For gunslingers that like to do all in, all out moves on leverage, their motto might be:
Be bold and be right.
(Q: What if you are not right?)
You go down with the ship.

One quip that goes with that one:
There are old traders, and bold traders, but no old bold traders.

Friday, February 17, 2012

6-0 for February

February was a good news, bad news kind of month. The good news is that for this option cycle there were six winners and no losers. The bad news is a big paper loss on long GDX puts, and with a strong trending market, many other trading and investing styles made more money. I was on the right side of being long stocks, short bonds. For stocks, aggressive long strategies were better than being timid like I was.

I avoided the wreckage that aggressive short sellers experienced when they shorted AAPL or the stock indexes. There was a funny tweet about that on one of the other sites. T-shirt design: I shorted 1000 shares of Apple and all I have left is this lousy T-shirt. It pays off big to be aggressive and right. Aggressive and wrong and it is ends up like my GDX position, down 90% in a few weeks, down 60% after a few days on news. Thankfully it is a small position.

This month's winners include short puts on BRKB EEM SPY TBT short put spreads on AAPL AMZN. I am deep in the red on long GDX March puts and am still in, with the current probability of profit in the 3% range. Even though I sold three layers of SPY February puts, I netted out to about neutral on SPY overall because I was long March 114 puts which I am still holding and are now at a huge percentage loss.

As for commentary, yes, the stock market is overbought. Yes, a correction is due. However, with the strong up trend, any topping action is likely to form a complex top, with head fakes and churning. Again, I am operating on a "no crash" in 2012 hypothesis. When price is uncertain, time may be a useful tool. For example, if the up move last 12 weeks, a correction may last for half of that or six weeks.

* short GDX
* delta is near zero on this position

Buy APC (sell puts)

Buy APC via selling Mar 80 puts, APC @88.4. I am already short Mar 72.5 puts. 80 is about the breakout level and support.

In a strong uptrend, hedgers like me tend to underperform. So while it has been a positive month, aggressive traders, and buy-and-hold investors are doing much better than my relatively cautious approach. As for GDX, as soon I mentioned it, it popped higher and wiped out the put premium again.

* short GDX
* delta is near zero on these positions

Thursday, February 16, 2012

Buy MCD (sell puts)

Buy MCD McDonalds via selling Mar 92.5 puts, MCD @98.8. Chart support at 95. For calendar 2012 MCD has underperformed, though it had a great run up 2011. Some of the tech names are also interesting, but I have a difficult time when they are moving so quickly.

Elsewhere, the decline in GDX gold miners has brought my long Mar 45 puts back into play.

Short GDX
* delta is near zero on these positions

Wednesday, February 15, 2012

AAPL smackdown and stray thoughts

AAPL got smacked today. It is witching Wednesday, the Wednesday before options expiration. The wild action might have been caused by some folks knowing where various stops might be and pushing the stock to run the stops. With a $500 billion market cap, manipulators only have so much juice, but Apple is also the most popular stock for option traders, and day traders.

Some other thoughts today: I mentioned watching a webinar about John Carter's TTM set of indicators, one of which is a scalper. Looking at various charts, the TTM scalper seemed to call market turns almost every time. Then I read what it actually is, and the balloon deflated. TTM scalper triggers after three periods of trend reversal, ThinkorSwim paints the trigger point back three days. That's why the indicator looks so great on the old charts, it is a hindsight indicator, flashing signals after three days, and then painting the chart three days back. The cliche about reading the manual comes to mind.

I attended another live Schwab seminar. One interesting anecdote from the presenter was that doctors and engineers tend to be his most difficult clients. They tend to be stubborn, and tend to think they know better. Interesting.

I am still operating on a "no crash" in 2012 premise. All my short February options look to be safely out of the money, even with today's minor dip.

Monday, February 13, 2012

6th anniversary and Sitting on my hands

Happy Sixth Anniversary for this blog. Cheers. I have learned so much from doing these public updates. I highly recommend the process of trade journaling. Really, it would be near my #1 tip for novice traders. Having a public trade journal makes me that much more accountable. A private one is fine enough, especially for those starting out.

As for the other subject, I remember someone teaching a kid how to play chess, and he told the kid to "sit on his hands." This physically reduced the temptation to make a quick move. It increased the chance that the kid would think before moving. I did the same thing today, sat and thought.

I've been spending some time this past week in the ThinkorSwim seminar archives, watching some of the recorded webinars from the past year or two about various technical indicators. John Carter's TTM based indicators, Pearson Pivots, and Bollinger Bands were each the subject of an hour long presentation. Some I found useful, some I did not. As I often write, something that works for me, may not work for you, and vice-versa. That's why I am big on process, not recommendations, not specific indicators, because every trader is a bit different.

Long time readers know that I have tended to favor simple charts. My old favorite was a 2-year candle chart with a 50 day and 200 day simple moving average, and volume and Momentum on the lower. That's it. Compared to most technicians that is a simple setup. I am looking at some of the indicators that I learned about. The temptation is to jump right in and start using them like I know how to use them. That's like the kid learning chess, just because I know how the pieces move, doesn't mean I know much more than that.

I was tempted, but will look for better entry points. PCLN was a rocket launch today, and it moved too quick for me. I wanted to take a bullish position via selling a vertical put spread. Readers know that I tend to be a slow moving position trader (vs. a fast reacting day trader) and that I tend not to do well in fast moving markets.

Today's market rally saw a slaughter of the bears. Big bold bears that have been shorting market leaders such as AAPL have been demolished by the up move and the decline in volatility. At some point the bears will cry uncle and it will be a good time to actually short. The cover of Barrons "Enter the Bull, Dow 15000" does flash a caution flag, but by itself isn't a sell signal.

Thursday, February 09, 2012

Cover short TBT puts

I cover my short TBT Feb 18 puts, and place an order to sell the Mar 18 puts. TBT @19.8. Treasuries are moving lower on news from Greece. TBT is inverse so is moving higher. Seasonality is still negative for bonds until April (positive for TBT).

Elsewhere I wistfully look at the massive rally in AAPL and think about the possibilities. Had I gone long a vertical call spread instead of short the put spread, at my entry with AAPL at 447, it could have been a huge winner. Woulda, coulda, shoulda, is a bad town to live in. However, it can be instructive to learn from past experiences.

* short GDX
* delta is near zero on these positions

PERM Permanent portfolio ETF

Readers know that I am a fan of the Permanent Portfolio. A concept popularized by Harry Brown in the 1970s. The basic outline is 25% allocations to bonds, notes, stocks and gold. There is a new ETF symbol PERM (link to PDF Fact sheet). They do 5% silver and split their equity allotment into several categories. Management fee 0.49%.

For most people, I would prefer physical precious metals, but this fund does give an easier way for retirement investors.

As always, my posts are not a recommendation to buy or anything of the sort. I don't have any connection to the ETF or its promoters.

Wednesday, February 08, 2012

Buy SPY (sell puts)

Buy SPY via selling Mar 119 puts, SPY @134.7. I continue to add stock market exposure for March as February expiration is likely to dissolve many of my current longs. I was already long a vertical put spread: long SPY Mar 114 puts and short SPY Mar 107 puts. SPY 119 is below several support levels and chart congestion areas. Yes, a stock market correction is over due, but because so many people are looking for one, it means it is likely to be shallow and complex. Markets rarely give folks what they are looking for.

A stock market crash is extremely unlikely for 2012. This is an election year, and the powers that be are doing all they can to pump up the various markets, and keep liquidity in the system. 2008 was an aberration for an election year, and unlikely to be repeated. In 2008, the incumbent was not up for reelection. Selling way out of the money puts are basically bets against a crash. I tend to think that any declines will be contained at 10%, and 119 is more than 10% out of the money.

* short GDX
* delta is near zero on these positions

Tuesday, February 07, 2012

Buy XRT (sell puts)

Buy XRT via selling Mar 53 puts, XRT @57.3 (Retailer ETF). Another beautiful break out from a base chart pattern, though it has run a bit already. 53 is the breakout level, so that makes me a buyer on a pull back. With so many positions approaching delta zero, I am adding some bullish stock market exposure for March. I am still hedged vs. a severe down move in the overall stock market with a vertical put spread on SPY (long Mar 114 puts, short Mar 107 puts).

* short GDX
* delta is near zero on these positions

Buy APC (sell puts)

Buy APC via selling Mar 72.5 puts, APC @85.7. A beautiful break out from a flat base on earnings news. I am tempted to swing for the fences and buy a vertical call spread, but my logical mind tells me two things. First, that I have a poor history when trading energy related stocks. Second, I remind myself to “stick to my knitting,” meaning stay with what tends to work for me, which is low risk, low reward, high percentage trades such as selling puts below chart support levels.

As an aside, turns out that Vegas was on the losing side of the spread on the Super Bowl. Someone else mentioned that they more than made up for that on all the prop bets, such as the coin toss, the length of the national anthem. More than half the action on the Superbowl tends to be on these side bets.

* short GDX
* Delta is near zero on these positions.

Friday, February 03, 2012

Psychology of money

Over on the Boglehead (Vanguard) forum, there is a thread "How is Your Relationship with Money?" (link). The originator of the thread writes about how he was risk adverse staying mostly in cash, and unwilling to spend much. A lot of folks raised during hard times get similar habits.

A person's early childhood memories of money, the way their parents spent and saved, the messages a person got early in life make a strong imprint. Suzy Orman talks about this, and her first memory is her picking up a coin from the ground and her parent telling her to drop it, "it is dirty." So the message that imprinted was that money is dirty. It is easy to see how a person might develop unhealthy money habits when that is the message. (And Ms. Orman did, despite her recent successes, there was a lot of up and down in her financials.)

There is no right or wrong answer, but a healthy balanced approach to saving and spending, the middle road, is what I advocate. A miserly extreme isn't healthy, nor is the spend it now, buy everything on credit approach. I can tell stories on both extremes. I know a guy that was a millionaire many times over, but balked at paying $60 for new shoes. I know a person that was already deep in debt, and then decided to move to a bigger more expensive place to live and take on even more debt.

A young relative recently landed a very good job, good pay, good benefits, good job security. I suggested that saving 50% of income would be a good way to go. The person was thinking more in terms of 10% or 20%. 50% may sound ridiculously high to many, but considering the income and living expenses, it would still leave a good bit of money for luxuries, such as meals out, vacations, gadgets. Here's an optimistic way to think about it, if a young person can save 50%, and earn 10% on their investments, they could in theory retire with their current lifestyle after 10 years of working! A round number example: a person earns $100k, saves $50k per year, lives on $50k. After 10 years they have saved $500k and if earning 10%, they are now making $50k per year on their nest egg.

Yes, those numbers are quite optimistic in this age of low returns, and don't figure in taxes. 4% tends to be bandied about as the safe withdrawal rate from a big nest egg, but it wasn't always that low a number. The safe number is more like 2.5% for a young person looking to live another 80 or 100 years in good health. 3% is a traditional round number that many big endowments have used for 100 years. The other issue is that the young person may start a family and have much higher living expenses and responsibilities in a few years. Still, that nest egg would be nice to have in that event as well.

Another point is that in this economy, very few people are at a place where they can save half their income. I am dismayed to know that half the U.S. population doesn't save at all. Yes, there are some that can not save because of circumstances, but it isn't any where near half the population. Many that choose to spend buy gadgets or gifts, or take trips, or buy luxury food items.

Enough of the soap box talk against the spending culture. If you are reading this, you are likely one of the savers, the investors. Again, a balanced approach, a healthy relationship with money is the best place to be, and there is no right or wrong answer. Early childhood money memories, early investments experiences can imprint on a person. Be conscious about all of this. For would-be novice traders, I emphasize the psyche half of the equation. Each person is wired a bit different. So identifying what works for you, can be the biggest piece of the puzzle.

Thursday, February 02, 2012

Vegas odds Superbowl

Kind of off topic, but not really. The line on the Superbowl is Patriots favored by 3 (or 2 1/2) depending on the casino. Most talking heads on TV are leaning Giants. They built all those big casinos because they are smart people that set good lines. A lot of betters, bet with their heart, on emotion.

To bring this back to the option market, option prices are similar to the betting lines. The market maker is trying to line up an equal number of bets on both sides and take the spread in between. There is a reason why certain options are priced the way they are. If the public comes in strong on a certain play, the public is more often than not, going to be wrong.

So much as I dislike the Patriots, given the betting pattern, the logical play would be to bet on them, because the public, the talking heads are mostly picking the Giants. Yes, sometimes the bookies do get it wrong, but the odds tend to favor betting with the bookie, not against them.

The stock market equivalent might be if the talking heads are all talking about how a certain play is a sure thing. It might be long or short a stock, or an asset class. I got into AMZN because of an article on Marketwatch saying it was the next Netflix, another crash and burn story. Even though the latest earnings report from Amazon may bring that to pass, given the chart, and the sentiment towards AMZN, the play I made (shorting a way out of the money vertical put spread) was a very high percentage move. Again, it doesn't always work, the crowd, the talking heads sometimes get it right, but I find it worth watching.

The opposite, someone aggressively buying options because of an article or a segment on TV tends to lead to losses. Someone is on the other side of those trades and winning most of the time. Like I opened with, they built those casinos by winning the majority of the bets.

Wednesday, February 01, 2012

Correlation Tracker

I rediscovered a "toy" today, a correlation tracker at:

Input two stock or ETF symbols and it gives a correlation between the two. For example enter VTI (total U.S. stock market) in the top slot and SMH (semi-conductor ETF) in the lower, then select one year, and the correlation is 0.94. This means a very high correlation (1.00 is the highest), and that a person might only be getting a -6% to +6% difference by trading SMH vs. VTI.

At first glance, that 6% seems small given how narrow and at times volatile the semi-conductor industry is. It can be an interesting tool or toy for those that enjoy playing with numbers and symbols. Option traders tend to like playing with numbers, that's one reason they choose to trade options. Enjoy.

Buy IWM (sell puts)

Buy IWM via selling Mar 70 puts IWM @80.6. There is a shelf of support at 75 and more at 70. Again, selling puts can be thought of as being paid to place a buy-limit order at the strike price. The golden cross on SPY (the 50-day-moving average crossing above the 200-day on the chart) is part of the bullish case (link).

Despite the list of longs below, I am not positioned for a strong bull move. As stocks rally, the delta decreases on short puts and many are near delta zero. I feel the urge to use more aggressively bullish strategies, but this is tempered by the bad results in the past when I get those feelings.

Short GDX

AMZN disappoints

I rarely touch on fundamentals on this blog, so readers may be surprised that I sometimes put on that hat.'s earnings report is disappointing. In particular the revenue number came in about a billion short of estimates at $17.4 billion. With a market cap of about $80b and growth slowing, that is bad news. There are any number of good places to read more in depth, including this article at Seeking Alpha (link).

I am short a vertical put spread, long Feb 130 puts, short Feb 140 puts. It is an uncomfortable feeling with the bad report. Fortunately, I have room even factoring in the 9% drop after hours to 177. I initiated the position at 175, so likely will be able to exit with a profit if I choose to unwind on Wed 2/1.

Longer term, AMZN doesn't become a value play buy until price-to-sales gets to 1.0, which would be at $48b market cap or about $100 a share. The 5-year chart shows support at 150 and 100 (link2).