Thursday, May 31, 2012

Buy LGF (sell puts)

Buy LGF via selling Jul 12 puts LGF@13.3
Lions Gate Entertainment earnings and conference call move the stock. The initial response to earnings is a plunge in after-hours trade. After the morning conference call, buyers step in and continue to support the stock. This trade adds a second layer of short puts, was already short Jun 13 puts.

My SPY position is now slightly delta negative, so I am net short. I placed an order to sell a strangle on MT ArcelorMittal, a big French steel company but did not get filled at the mid point.

Net long IWM
Net short SPY

Monday, May 28, 2012

RQ or Risk Intelligence has an article (link) about Risk Intelligence which they term RQ (vs. IQ). The subtitle is: How Gamblers and Weather Forecasters access probabilities

For investors and traders, it can be just as important to understand what a person doesn't know as to have information. A false sense of confidence can lead to big losses. One quip that goes with that is "when in doubt, get out" or "when in doubt, sit it out."

The article has a secondary link to a free version of a RQ test. In more comprehensive testing, expert gamblers tend to have a high RQ. Kenny Rogers immortalized the sentiment in song lyrics in The Gambler (YouTube link2):
"You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
Know when to run."

The discussion also reminds me of the Ken Fischer Book "The Only Three Questions that Count." The three questions are:
(1) What do you believe that is actually false?
(2) How can I fathom what others find unfathomable? And,
(3) What the heck is my brain doing to blindside me now?

Overconfidence is the Achilles heel of many an intelligent person trying their hand at trading or investing. Often times a person is highly educated, and trained in some other discipline and think that their intelligence will be enough to do well in investments.

Another bad thing that can happen is beginner's luck. For beginner option traders, it often goes this way. The beginner buys low probability high risk options and makes money. Maybe they even repeat that, and get the idea that the game is easy. As most experienced option players know, there is no free lunch. Every trade has a probability of winning, the lower the probability, the higher the potential payout.

Option payouts tend to scale closely to the probability, so a 10% chance of profit often means the possibility of a 10-to-1 payout if the trade comes in. And the opposite, a 90% chance often means a person has to put up or risk $90 to win $10, but will win about 90% of the time. Of course, the broker takes their commission and the market maker their spread, so that deducts from the payouts.

Friday, May 25, 2012

Bonds and more

Most long term investors do better if they have some allocation to fixed income. Even 10% can mean a signficant difference if there is a stock market crash. An 80% stock/20% bond portfolio tends to do near as well as 100% in stocks with a much smoother ride, fewer down years, and more importantly fewer big down years. Many favor the cliche asset allocation of age in bonds (eg: age 25, 25% in bonds, age 40, 40% in bonds and so on).

ETF money flows show a lot of money flowing into fixed income. This is a brief survey of some choices. (link) is a good resource for payment dates, the most recent dividends, and the current yield for stocks and ETFs.

Correlation tracker (link2) is another useful tool for those looking for diversification. To use the correlation tracker enter two different symbols, for example TLT and SPY gives a correlation of -0.08, which is low. If I enter IWM and SPY, it gives a correlation of 0.93 which is high, so market movements in one will tend to echo in the other.

Starting at some of the least risky choices are short term bond ETFs such as BSV or SCHO. There are total bond market ETFs such as BND, SCHZ, LQD, especially appropriate for those that like to keep their investments simple.

There are high yield choices such as HYG and JNK. Vanguard recently closed one of their high yield mutual funds to new investors. This sometimes is an indicator that a sector is getting too popular.

For Treasuries, readers know I like to trade the options on TLT, and its double inverse TBT. For those that like to trade, there is also EDV which is a zero coupon bond ETF. EDV doesn't pay dividends and is extremely sensitive to changes in interest rates. There are leveraged ETFs, but watch the bid/ask spreads, the decay, the volume.

On the stock side, some popular dividend ETFs include VIG, SCHD. XLU is a utility ETF. PFF is a preferred stock ETF. Of course, a person could also select one or more of the many individual stocks that have a decent yield.

There are also municipal bonds for those that are in high tax brackets. More recent choices include Build American Bonds (BAB is one ETF), and Emerging Market bonds (PCY, EMB). There are also high yielding limited partnerships and REITs (IYR).

As always, standard disclaimers apply. Nothing I write on this blog is a recommendation to buy or to sell. A person needs to do their due diligence before investing money. Expense ratios, liquidity in terms of typical bid/ask spreads, daily volume of shares, yield, average duration, are all factors to consider.

Sell IWM (sell calls)

Sell IWM via selling Jul 85 calls @76.6

I am now short strangles (both puts and calls) on the Russell 2000 ETF. A short strangle is a bet on a trading range. There is not much premium in the 85 calls. I see 85 as big time resistance if there is a rally. I am still net long IWM.

I am tempted to short strangles on SLV too, but my trading history with silver is spotty at best.

Net long IWM, SPY

Thursday, May 24, 2012

Buy BRKB & IWM (sell puts)

Buy BRKB via selling Jul 70 puts @79.4
There is chart support, and Berkshire Hathaway has an ongoing buy back program that make a steep decline unlikely. BRKB has a beta of .51, so a 10% decline in the stock might mean a 20% market decline.

Buy IWM via selling Jul 61 puts IWM@76.1.
For the Russell 2000 ETF, 61 was the closing low in October 2011. It is also about a 20% decline from here.

I don't have a strong read on the various markets. The next Greek election on Sunday 6/15 may or may not be a market moving event, but it is a date to circle. After the May expiration, with so many positions expiring freeing up buying power, I put some capital to work.

Net long SPY

Monday, May 21, 2012

Dealing with Mistakes--The Musicians Way

Three months ago, I began to learn how to play piano (keyboard). I've been reading the book The Musicians Way, and there is a chapter on dealing with mistakes. I see a lot of useful analogies to trading.

Some key points from the book:
* an error is not a failure
* there is no reason to be ashamed
* errors provide information

Five kinds of errors:
* lapses in focus or concentration
* minor inaccuracies (minor will vary depending on a persons skill level)
* bigger mistakes such as missed cues, omitting sections of music
* technical problems such as stubbing a finger or problems with equipment, sound or power
* memory lapses, perhaps the most feared by performing musicians

For traders, the same three
* a loss is not a failure (losing the entire account is a failure if it means game over).
* there is nothing to be ashamed of (everyone except liars and a few floor scalpers has losses)
* losses give you information

As for types of mistakes:
* lapses in focus or concentration
* minor errors such as missing a small part of a move, or hesitating when your indicators are giving you a strong signal.
* bigger errors such as giving in to emotions, or faulty analysis, or breaking of a person's trading rules.
* technical problems with computers, or perhaps illness or injury at a bad time.
* the most feared for traders might be unexpected news that moves the market against you.

For dealing with errors, in trading or music. Do not disparage yourself. Self talk is very important. If working with a group, do not disparage the group. Give up the idea of perfection. After a big push, such as a live musical performance, or a difficult period or extremely profitable period of trading, a break is a good thing. For musicians recording is an excellent tool. For traders, a trading journal is a method of recording. That's what this blog is, a public trading journal.

For music and trading, preparation, honing your skills, rest, exercise, are all important ingredients to success.

Friday, May 18, 2012

13-7-1 for May

I count 13 winners, 7 losers, 1 breakeven for the May option cycle, for a modest overall loss. My ship limps into the harbor with an Apple size hole in the hull, but with the mast intact.

The huge loser was the short put vertical spread on Apple initiated with the stock at 604 (closed at 530 today). The winners were all on the small side and were not enough to make up for the big loser. Some of the other losers were initiated two months ago, some were part of spreads and not really losers, just part of the strategy. It can become difficult to count a spread as a distinct trade because some spreads are legged into.

Overall I give myself a grade of C for this month, even with the modest loss for the month. I was cautious, but not cautious enough. As always with options, could have done better, could have done worse, aggressive bullish traders got slaughtered, aggressive bears did very well for this cycle.

I had a chance to get out of AAPL with a profit, same with another loser MMM. However, if I held until expiration, the losses on both would have been greater. I closed trades on GLD and LGF early, and both would have come in safe, but considering the market, it was a decent decision to take the profit and remove some risk.

Going forward I am short puts on GNC, LGF, short a strangle on IWM, short put backratios on SPY.

Net long IWM, SPY

GNC is the nutrition store
LGF Lions Gate Entertainment
IWM Russell 2000 ETF

AAPL Apple computer
MMM 3M Corp

Sell SPY backratio

Sell SPY backratio
buy SPY Jul 115 puts SPY@129.9
sell 2x Jul 110 puts for a net credit

I like to sell these backratios when volatility is up. This is net bullish (delta positive), with the twist of a max profit if SPY drops to 110 at July expiration. Starts to lose money with a drop below 105. If SPY goes up or is neutral, I pocket the small premium.

I closed my at risk positions on Thursday, all the others look to come in okay with less than 10 minutes to go. I'll post a monthly recap after the close.


Thursday, May 17, 2012


Scramble mode
Close out short MMM puts for a loss
close AAPL put vertical for huge loss
Close out GLD short puts for a small profit
MMM @84.9 AAPL @535 GLD @152.1

Disaster! I close three positions. AAPL was a huge -1300% percentage loss basis the initial premium. Fortunately, It is more like 1.1% of the price of underlying in dollar terms. Still a hard hit but hopefully recoverable. I bail on MMM in part because of the AAPL loss. I'd prefer not to have multiple huge losses in the same month. Same story with GLD, it looks like it will close out okay but don't want to risk another big loss.

As I type this up, looks like I got washed out in a wave of selling and the market is stabilizing and recovering. Phooey. Well, I will lick my wounds and regroup. The losses took out about 1/3 of the year's gains. That is often the way with option selling, small profits, big losses. A few minutes can make a big difference in profit/loss in a moving market. Today would be classified as a bad day.


Tuesday, May 15, 2012

Roll LGF short puts

Roll LGF short puts LGF@12.0
Buy back short May 13 puts
Sell short Jun 13 puts for credit

I roll my Lions Gate Entertainment puts forward. Stock has been flat for a month, so I collected a small premium from time decay on the closed position. LGF has been dead money since the Hunger Games movie release.

The two other options most in danger of possible assignment are GLD, MMM. Most others are looking relatively if the market is normal. Overall, the markets have been treacherous to try and navigate. Premiums on TLT options seem too small to make it worth selling those puts.


Monday, May 07, 2012

Money & Happiness and Experiences vs. Things

A blogger writes about money and happiness (link). For Americans, $75,000 in annual income is about where the correlation between income and happiness cuts off. Above that, people don't tend to be any happier on average. Below that, people tend to respond that they are happier as they move up.

There is another section about what kind of things to buy and not to buy. For me, an interesting one is:
1. Buy experiences instead of things

Things get old. Things become ordinary. Things stay the same. Things wear out. Things are difficult to share. But experiences are totally unique; they shine like diamonds in your memory, often more brightly every year, and they can be shared forever. Whenever possible, spend money on experiences such as taking your family to Disney World, rather than things like a new television.

As I kid, I always chose things. I thought buying experiences like an outing was a "waste of money." Some things have enormous time value, such as Lego bricks, or a train set, that can be set up in so many ways, played with in so many ways for an imaginative kid. I still go by that today, though I do value experiences a bit more than I used to. I would tend to think that savers tend more towards things, vs. experiences, but that is a total guess.

Even with the example given, it might depends on how much TV a family or a person watches. A person with an older TV, and that spends the average four hours of TV a day, might enjoy a new TV more than a one-time trip to Disney World. If the upgrade is only from say two years ago, then it wouldn't mean much.

As with a lot of choices, a healthy balanced approach is what I suggest. A person that never takes a trip, could do well to try some new things or new experiences and vice-versa. I don't think that there is one answer that is always correct. As with long term investing, a mix can be a good thing.

/edit to add: a few more thoughts on this subject. There are things that lead to experiences, such as musical instruments, or any collecting hobby where there are clubs, shows or events. There are experiences that may lead to life changes. There are similar experiences such as taking up dancing or singing that may lead to meeting many new people. For folks that never travel, a big trip has the potential to open up their mind and their life. Again, a person can go over board, buy too many things, or spend too much on entertainment and trips. There is always saving money and buying neither. Again, balance is often a good thing.

Friday, May 04, 2012

Rebalance IWM (sell calls)

Sell IWM Jun 85 calls IWM@79.2

I sold these and am reporting late. I am still net long IWM Russell 2000 ETF. Stock market has an ugly day.


Sell AAPL (sell call spread)

Sell AAPL via selling a call spread
Buy May 630 calls, stock @570
Sell May 620 calls for net credit

I do a minor repair on my Apple position. This change moves my safe zone to 545 to 620 (it was 650 on the upside). I am still net long. Apple has gone almost straight down since the pop up after earnings. There is some chart support at 565/555/545.

Today my screen is mostly red. Last Friday, it was almost all green. For option traders, things could almost always be better, always be worse. When things are going my way, I wish I had been more aggressive. When things fall apart like today, I am glad that I tend to be cautious. Of course being on basic market tendency (bull or bear or neutral) helps a lot.

LGF is my other big loser for the day. For now I am sitting tight because I have some room on many of my positions and my short SPY June put backratio gives modest downside protection if things get worse.


Thursday, May 03, 2012

Sell LGF (cover puts)

Buy back short LGF May 12 puts
LGF Lions Gate at 11.9

This is the "Hunger Games" movie studio stock. I am still short LGF May 13 puts. I don't like the way it or the stock market is acting, and am taking some risk off. I get out of this set of puts with a break even profit (profit just a bit more than commissions). GNC drifted lower after my fill--tough market.


Buy GNC (sell puts)

Buy GNC via selling Jun 35 puts @38.8
GNC is the vitamin/nutrition store. It is a CANSLIM kind of stock that broke out on good earnings (Wikipedia link explaining CANSLIM). The breakout point is 35, so if assigned it would mean a pull back to the chart base.

Elsewhere, the move down in IWM has flipped my position back to delta positive, or net long. GLD having a bad day. AAPL found some buyers near the 50 day moving average.


Tuesday, May 01, 2012

Sell AAPL (sell vertical)

Sell AAPL vertical call spread @594
Buy AAPL May 660 calls
Sell AAPL May 650 calls

I now have an Iron Condor on AAPL which profits if the stock stays in the range 545 to 650. The all time high of 645 is resistance. I still net out to long on Apple, though a bit less so.

Net short IWM