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.

http://www.ushistory.org/Declaration/document/ (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.

http://www.ushistory.org/documents/constitution.htm (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.