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

OT: Talk less, listen more

This is an off-topic post about listening. Jonathan Burton on Marketwatch has an interesting article (link). It sort of dove-tails with RQ or Risk Intelligence from a few days ago. In the article there are six "bad" types, we have all met the following types, hopefully we are not one of them:

1. The Opinionator is always right and intimidates the speaker.

2. The Grouch makes people feel stupid, shutting off innovative and creative ideas.

3. The Preambler takes forever to get to the point, manipulating the agenda and effectively halting communication.

4. The Perseverator talks without saying anything. According to Ferrari: “You may feel that the two of you are having completely different conversations.”

5. The Answer Man wants to be the smartest guy in the room. He’s looking for a solution before the problem has even been identified.

6. The Pretender appears to hear what you’re saying, but acts as if the discussion never happened.

WikiHow has a decent article on how to be a good listener (link2). Obviously, context and setting will steer a person. A business meeting is a far different from a friendly casual conversation, which is far different from an argument with a loved one. However, in all kinds of settings, bad habits can hurt a situation, and good habits can help. Passive aggressive behavior, pettiness, put downs, insults, temper can all turn a discussion into a heated argument.

In business settings, acting in a professional manner is always a sound choice. For friends and family, empathy is often best. Respect is always appreciated. I am not suggesting that a person be a door mat. There is a line there.

In business groups, sometimes the tool from the book, The Six Thinking Hats, is used to get people to be more open to new ideas (link3).