Aggressive strategies

A few weeks ago I wrote about defensive strategies (link). I thought a counter point about aggressive strategies might be useful to some readers. This isn't meant to be a market timing call, just an educational post.

Again, I'll start with buy-and-hold investors. Going 100% to equities, or whatever the max allocation where a person can still sleep at night is a common option. There is also buying stocks or ETFs on margin (borrowed money). For ETF investors, high beta stocks and higher beta ETFs (eg:IWM for Russell 2000) are other ways to increase upside potential.

Some aggressive traders gravitate towards momentum stocks, others seek stocks in an uptrend that are near the lower band of their recent up channel. Other timing tools are moving average crossovers or MACD (2 moving averages crossing over).

For option traders, the straight play is to buy calls. At the money calls provide plenty of leverage with about a 50% probability of making money. Out of the money calls can increase leverage, but the odds of success decline. I tend to favor vertical call spreads, buying calls and selling slightly further out of the money calls for the same month. Calendar call spreads (buying calls and selling the same strike in a closer in month) has lower time decay and less upside than verticals (calendar vs. vertical article at link2).

Leveraged ETFs are popular. There are double (SSO QLD RRY) and triple leveraged bull ETFs (see longer list at link3). These are not for me, as I tend to try and limit volatility and smooth out the ride. They may be suitable for younger, higher income, more aggressive investors (pros and cons of leveraged ETFs at link4).

With call option strategies, timing is as important as getting the price move correct. Call calendar spreads lessen the need of timing it exactly. Buying on margin or buying leverage bull ETFs are other ways to increase leverage and upside exposure.

Again, this isn't a market timing call, just a discussion of some aggressively bullish stock market strategies. Many other asset classes (TLT for bonds, GLD for gold) have the same kind of products available.

I can close with a quip. Some guy is talking to an aggressive trader and asks him what the secret is. The traders says "be bold and be right." The guy says "what if you are wrong?" Trader looks down, "you go down with the ship."

Sell SLV (cover short puts) & buy TLT (sell puts)

I buy back my SLV short Apr 29 puts with SLV@31.1

SLV (silver ETF) not acting well. I close my position after 14 days for a 32% profit basis the initial credit. Again, the return on capital is far lower than that 32% because it takes a lot more cash in the account to sell the puts than the price of the puts. Reported gains or losses are after commissions and fees.

Yesterday's loss on APC colors my decision. I decide to take a profit on SLV and take some risk off the table. The overall stock market has me skittish. My recent moves to sell puts on LGF (Lions Gate) aren't looking that smart either. Normally, today, the third down day in the stock market would be a good time to sell puts, but after about 45 trading days of mostly up, more time on the downside would be a normal reaction. Mostly the recent drop has erased the Bernanke induced pop.

/edit to add:
Buy TLT (sell puts) via selling May 104 puts with TLT@114.0

I initiate a small long position in the Treasury bond ETF. I missed the lows at TLT 110. I select puts that are 10 points out for a small premium.

Long AXP IBM LGF SPY TLT XRT
net long GLD IWM

Fold on APC (unwind strangle)

I fold on my APC position, buying back both ends of a short strangle APC@76.8:
cover short APC Apr 75 puts
cover short APC Apr 87.5 calls
I am now totally out of APC.

When I found APC, I thought Anadarko Petroleum was going to be one of my “milk cows” for the year with a steady stream of monthly or bi-monthly profits. Instead, I take about a 75% loss, using the premium from selling the options as the basis.

It hurts to cover short puts on a sharp down day. It can hurt a lot more if the short put options go into the money and downside delta explodes. There is minor chart support at current levels, and APC is oversold, but another 10% down to 70 would not be a shocker and turn an ugly trading loss into a monster loss. As almost always with my trades, percentage gains and losses on option trades can be eye-popping, but I tend to keep position sizes and dollar amounts small.

Long AXP IBM LGF SLV SPY XRT
net long GLD IWM

Buy more LGF (sell more puts)

Buy LGF via selling Apr 13 puts LGF@15.0
I add another layer of short LGF puts. Weekend box office topped estimates. “The Hunger Games” is only the first of three movies. Sequels tend to do even better than the first.

Elsewhere, stocks boom higher, as do precious metals, bonds get hit after Bernanke comments. My IWM position is moving towards delta neutral as the market rallies.

Long AXP IBM LGF SLV SPY XRT
net long APC GLD IWM

OT: Manzanar Fishing Club

This is an off topic post about a new movie "The Manzanar Fishing Club" (link). It is about Japanese that were sent to internment camps in the U.S. during World War II. A buddy of mine, Harold Payne (link2) wrote a song for the movie.

It is easy to forget how bad things can get. Many folks like to complain, and use extreme language for modern day conditions. However, compared to being sent to a prison camp without trial, without hearing, with all your possessions and property taken by the government, because your grandparents were born in another country, most modern day Americans have little to complain about. Obviously, during that time period, some in other countries had it even worse.

The movie might also give some the useful perspective that even during the darkest times, simple joys such as going fishing can give people enough hope to make it through to better days.

Buy LGF (sell puts)

Buy LGF via selling Apr 12 puts LGF@14.4
Lionsgate Entertainment is the studio with the movie “The Hunger Games” which is opening this weekend. There is a lot of buzz, with a record number of pre-sale tickets and 3 a.m. shows being added. The stock has been a sky rocket this year, with a minor pullback on analyst comments yesterday. There is minor support at 14. I pick 12 because it would be below the 50-day-moving-average, and that is a good place to buy rocket stocks on a pull back.

Elsewhere I am now delta positive on APC due to the down move in the stock. My IWM delta has moved up big time on the dip as well.

Long AXP IBM LGF SLV SPY XRT
net long APC GLD IWM

Goldman Sachs says sell bonds to buy stocks

A blog at the Wall Street Journal uses more colorful language (link).
>>
Goldman's chief global equity strategist, Peter Oppenheimer, unveils a whopper:

"The prospects for future returns in equities relative to bonds are as good as they've been in a generation."
>>

Readers know that I tend to be skeptical at table pounding all in, all out, all short, kind of moves, or best in a generation or worst in a generation language. I've been looking to take long positions in the bond market and this kind of headline confirms that it may be a good time to do that.

As always that Mark Twain quote applies, "it is difficult to make predictions, especially about the future."

Today was a painful day for my trading account. I decide to sit tight and wait. I am tempted to link to the Rolling Stones "Satisfaction" song because it was a frustrating day for many. Bears didn't get much satisfaction as many leading stocks (IBM, PCLN) went up or only went down a modest amount (AAPL). Bulls weren't happy as most stocks were down. Metal folks saw more losses in silver and gold. Bond bulls only saw a very modest bounce after some sharp down days. Not many happy campers on today's bus. I'm sure a few big winners will come out and gloat about their trades in hindsight, but they are only a few.

Sell APC (sell calls)

Sell APC via selling Apr 87.5 calls APC@81.0
Baker Hughes (BHI) down on news, bringing down the oil group. I have lost my bullish conviction towards APC (Anadarko Petroleum) and this balances me to a slightly short position. I was already short Apr 75 puts, so my position is now a short strangle. Chart point of 87.5 is the high of the March 9 island reversal day that occurred on news.

APC already to 81.3 (0.3 move against me) by the time I type this up, so my recent string of really bad intra-day timing continues.

Long AXP IBM SLV SPY XRT
net long GLD IWM
net short APC

Buy IWM (sell more puts)

Buy IWM via selling Apr 77 puts @83.8. This is the second adjustment of the day to my Russell 2000 ETF position. I choose 77 because there is minor support at the recent low of 78. I am tempted to use the header “Zombie Market,” as the bull move continues to lurch forward. At some point there will be a correction, even a bear market move, but for now the undead bull marches forward.

There are fundamental analysts such as John Hussman (CSMonitor link), seeing the market as dangerously overvalued. Trading options based on those kind of factors tends to be a losers game, because fundamentals are not a good tool to use for short term timing. I'm not saying Hussman is wrong, but with options, time can be just as important as price.

Long APC AXP IBM IWM SLV SPY XRT
net long GLD, IWM

Rebalance IWM

Sell IWM May 70 puts IWM@83.5
I buy some IWM delta by selling puts to rebalance my position in the Russell 2000 ETF, back to slightly delta positive. I was already short Apr 69 and 70 puts, 85 calls and long May 88 calls. This morning's move higher increased my negative delta.

Eeep, by the time it takes to type this up and post this, IWM falling back to 83.0, down 0.5 from time of trade. It happens, and it never feels good when it happens.

Long APC AXP IBM IWM SLV SPY XRT
net long GLD, IWM

NCAA bracket contests and the stock market

Many enter NCAA basketball bracket contests (There is a definition for those few that don't know what is at the link). I was thinking about some similarities between these contests and how the stock market works. There is "chalk" or favorites, there are upsets, or unexpected events.

Many office pools are won by someone with little knowledge of sports. Why is that? Shouldn't the experts be winning? That's where the stock market analogy comes in. Say there are 20 experts and 20 novices entered in an office pool. The 20 experts are often hearing the same analysis, the same dark horse picks, the same upsets and many will duplicate those picks. If they all did mostly that, then it would come down to a few minor coin-flip type picks and each of the 20 might have a 5% chance of winning, if they were the only ones playing.

Now take the 20 novices and their picks. Some might go by team colors, or good looking mascots, or colleges where they have friends, or other non-sports related methods. With 20 people, there are likely to be a wide variety of non-sports related ways to pick.

Now combine the two pools of 20, the 20 experts with mostly the same picks, and the 20 novices with widely different final four picks and the odds are strong in favor of a winner of the pool coming from the side of the novices. It is almost like a contest with 21 participants, with all the experts in a narrow band.

Again, back to the stock market. Over time, index investors (aka Bogleheads) tend to out perform 80% of active managers. In large part due to lower expenses. NCAA players that mostly stick to "chalk" are like the indexers, and are probably going to do better than most, but unlikely to be #1. Picking stocks isn't all about finding companies that are doing well or even will do well. That's part of the game, but popular stocks get bid up to high valuations. For stock pickers, picking what is going to become popular and being ahead of the curve is what leads to better performance. Like picking upsets, sometimes these will blow up before the company is proven. With the Internet, most everyone has access to similar news and information. A few do have insider info, or specialized industry knowledge, and that will give them an edge.

13 - 2 for March

The March option cycle was profitable. I give myself a grade of B for the month of trading. The ongoing theme is that hedging strategies tend to underperform buy-and-hold, and more aggressive long strategies. I stuck to my knitting which tends to be low risk, low reward hedging strategies, that look for high probability profits, not home runs. I took a big swing on buying puts on GDX and whiffed, but that was maybe a 20% probability trade going in. Another big swing was buying a vertical put spread on SPY back in January betting on a stock market decline and I also whiffed on that. On SPY, I pivoted to an overall long position and profited on other sold puts, but that swing and miss had a big impact.

The losers for March include those two big swing whiffs. I realized a gain on one leg of a GLD call calendar, but overall I am down on the overall gold position, including the damage control trade. Some of the damage control and adjustment trades worked out well, such as selling APC Mar 90 calls, which reduced overall risk and increased overall profit. One that is not so good at the moment, was selling IWM Apr 85 calls (IWM is the Russell 2000 ETF). Winners include short puts on APC, BRKB, IWM, MCD, SPY, some with layers, and short calls on APC.

For closed trades, I count 13 individual option winners, 2 losers. Netting out to a nice gain, but again, not as much as more aggressive bullish traders or buy-and-hold investors that were 100% in equities. A big positive is that I avoided the temptation to try call a top in the stock market and continually add to short positions. When a trader sometimes goes long, sometimes short, matching the 100% long performance can be difficult in a straight up market. The dangerous temptation is to become more aggressively bullish now, because it would have been a good thing to do a month ago, or two months ago. Calling market tops tends to be another low probability game.

Going forward I am short puts on APC AXP IWM SLV SPY XRT, short a put spread on IBM. I also have a diagonal call spread going on IWM so that nets out to short IWM. I have a GLD call diagonal that now nets out to slightly positive delta because of the movement and time decay. I mentioned that April to Novemeber tends to be a bullish time in the bond market, so I am looking to sell puts on TLT (Treasury bond ETF).

Long APC AXP IBM IWM
Long SLV SPY XRT
net long GLD
net short IWM

APC Anadarko Petroleum
AXP American Express
GLD Gold ETF
IBM International Business Machines
IWM Russell 2000 ETF
SLV Silver ETF
SPY S&P 500 ETF
XRT Retail sector ETF

Buy SLV (sell puts)

Buy SLV via selling Apr 29 puts, SLV@31.7
I choose the 29 strike because it is round number support at $30 for physical silver. Silver oversold and there was a dealer on the PCGS coin forum saying several customers were getting scared and bailing out (link).

I am tempted to short SPY in here, but remind myself that calling tops is an exciting game, but rarely profitable. A higher percentage play is to wait for a top and then short on a rally failure than to try to call the turn. A lot of traders want to be the hero, and call top on this massive rally. There are certainly signs of a top with recent Marketwatch articles with the theme that the market is going higher. The wording of the titles may not be exact, but the sentiment is:

“It's not too late to buy.”
“Stock market ready for lift off.”
“Stock market likely to go higher.”

With all that there are a thousand would-be hero bears that are all black and blue with losses from trying to call top in this stock market.

Action in the bond market is also of interest. The two day smash down caused some damage. The April to November period tends to be a good time to be long bonds. As always, seasonal indicators are down the list in terms of reliability and profitability, but are worth a look. In terms of options, I would be looking at weakness in bonds as an opportunity to sell puts on TLT (Treasury ETF).

My IWM position has pivoted from long, to neutral because of today's rally and expiring puts on Friday.

Long APC AXP IBM SLV SPY XRT
net neutral IWM
net short GLD
* long BRKB, MCD
* short GDX
* delta near zero on these expiring positions

Confirmation Bias and Indicator Hunting

Bill Luby at VixandMore coins a new term, Indicator Hunting (link). In plain English, it is looking for indicators to support a narrative. The person has already decided their bias and is only looking for supporting evidence and may ignore contrary evidence. Confirmation Bias is the tendency to mostly read information that confirms the narrative.

Both are dangerous mental traps. Losing objectivity and "falling in love" with a stock, an asset class, or the shorting of a stock or asset class can be an ego driven financial disaster. Some traders would rather be right than make money. Some on the Internet will never admit that they were ever wrong, always finding an indicator or an interpretation to weasel their argument that they were right. The cliche some use is "I wasn't wrong, I was early."

Option traders, especially buyers of options don't have that luxury because time and price are both factors. Option buyers need to get both time and price mostly correct. In trading range markets, time can be a bigger factor in options pricing than the small movements in price.

Cover APC short puts

I cover my short APC Mar 80 puts APC@83.7 for a 95% profit. APC isn't acting well. So while the chance of an assignment with only 2 days to go before expiration is small, so is the remaining time premium. This makes my expiration Friday an easier day at small cost. I am still short Mar 72.5 puts, Mar 90 calls, Apr 75 puts for a net long position.

While a 95% profit in 26 days sounds super exciting, the dollar amounts tend to be small and there is also margin cash involved in selling puts. At ThinkorSwim the margin is typically about 10% of the price of buying the underlying, plus some fudge factor. For selling APC Mar 80 puts, the margin starts at $800 per contract plus a bit. This compares to $8000 for buying 100 shares of APC at 80, so there is a potential of 10x leverage with selling short puts. It is more like 8 or 9 times leverage because of the fudge factor on the margin number.

This APC position was the only short option that was realistically at risk of assignment and even then it was at 5% or so. The rest of my short options look to be safe going into expiration this Friday.

Elsewhere AAPL looks like a tempting short, or at least short premium, but I feel like I am too slow moving a trader to be stepping in front of that popular train.

GLD getting smacked down again. Too late for my GDX Mar 45 puts. The good news is that I pivoted the GLD calendar spread from net long to net short after the last Bernanke rout so limited the overall damage.

Long AXP IBM IWM SPY XRT
net short APC, GLD
* long BRKB, MCD
* short GDX
* delta is near zero on these positions

Beaten down sectors: steel, coal

I did a value oriented screen using the Schwab software. Quite a few steel stocks, coal and auto retailers and suppliers all made an impression. Value investing is a different animal from short term options trading. Value investors often look for beaten down stocks. Slow accumulation, buying 1/4 or 1/3 a position at a time, tends to be a good way to go for value investing. Stop losses based on price are not a good tool, more useful is doubling positions on steep dips.

For value investors, sentiment can be a useful tool in calling turns. Examples are stocks beaten down on what might be temporary news such as the Toyota recall or the BP oil spill. Calendar tendencies can help in terms of timing of buys.

These days I tend to keep this blog steered to reporting my short term trading activity, and don't report any long term buys or sells, or asset allocation decisions.

As always, I do not make recommendations to buy or sell. A person always needs to do their own due diligence before investing real money.

Adjust IWM (2nd time today)

I buy IWM May 88 calls for the second IWM adjustment today IWM@82.1. The rally is moving up too fast for offsetting put sales to work vs. short Apr 85 calls. Each layer of sold short puts also requires another layer of committed margin cash. I was tempted to buy the Apr 87 or 88 calls, but going out to May at this point in the option cycle makes more sense in terms of time decay. This move protects me against a buying panic and moves me to net long IWM. There is chart resistance at 83 and 85. Again, the strength of this up move has surprised me and is costing me.

Long IBM IWM MCD SPY XRT
edit to add also: LONG AXP

net short APC, GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Adjust APC, IWM

Today's rise in APC on news of a deal with Algeria places me in an odd and uncomfortable position. I react by selling APC Apr 75 puts APC@86.7. This adds delta, but still showing delta negative for a net short position.

Early in the week, my short Mar 80 puts were the uncomfortable part, as APC declined to 81. Now with a rally to 86/87 those puts are near worthless but the Mar 90 calls I sold as damage control are now deep in the red. I could close out everything. My latest move hopes that resistance and support levels hold and APC stays in a range between 80 and 90 at least until next Friday.

I also sell IWM Apr 70 puts IWM@81.1. As IWM goes up my delta goes more and more negative. I adjust by adding some positive delta by selling puts, but still shows net short. Some of the these latest damage control moves are not working out like I expected. The strength of the bounce back has surprised me.

Long IBM IWM MCD SPY XRT
net short APC, GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Buy XRT (sell puts)

Buy XRT (retailer ETF) via adding another layer of short puts XRT Apr 54, XRT@59.9. I am already short XRT Apr 52 puts and Mar 53 puts. My thinking is any stock market decline will be contained around 10% and the 54s are 10% out of the money. Beta is about 1.0 for XRT.

Elsewhere, MCD (McDonalds) hits an air pocket. My short MCD Mar 92.5 puts still look to be safe. IWM (Russell 2000 ETF) continues higher, again my delta is showing slightly negative. Hmmm. For now I will sit tight on both of those.

The question in my mind: Is That It? Was that one day smash in the stock market all the correction we are likely to get? A few folks got nervous on the decline, while some others looked for stocks to buy.

Long APC IBM IWM MCD SPY XRT
net short GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Adjust IWM

I sell some IWM Mar 75 puts to adjust my position, IWM@79.5. I was already short Mar 70, Apr 69 puts and Apr 85 calls and the ThinkorSwim software was showing me as delta negative (net short). This minor adjustment puts me back to net long for now. Not much premium on these Mar 75 puts, and there is still a big employment report on Friday. IWM 75 is support as well as the 200-day moving average.

Long APC IBM IWM MCD SPY XRT
net short GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Damage Control on IWM

To state the obvious, selling IWM puts yesterday wasn't such a good move. I do damage control on yesterday's trade by selling IWM Apr 85 calls IWM@78.6. I am already short Apr 69 puts and Mar 70 puts. This lowers my overall delta. Resistance to the upside is at 83.

I was tempted to title a post earlier: I'm Melting, meaning this years modest profits are melting away like spring snow, or the witch from the Wizard of Oz.

Long APC IBM IWM MCD SPY XRT
net short GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Buy IWM (sell puts)

Buy IWM via selling Apr 69 puts, IWM@80.1
I am already short Mar 70 puts which look to be safe. There is the 50 day moving average as well as trendline support at 79. IWM has already declined a bit from its highs at 83. 79 would already be a 5% decline from the highs. There is more chart support at 75 and then 70.

Long APC IBM MCD SPY XRT
net short GLD
* long BRKB IWM
* short GDX
* delta is near zero on these positions

Damage control on APC

I sell APC 90 calls. I am already short 72.5 puts and 80 puts. Today's sharp decline on no news is scary. I am now short a skewed strangle, which is net long.

My GLD position is showing slightly negative delta, positive theta. I will edit the other post to reflect that.

Long APC IBM MCD SPY XRT
net short GLD
* long BRKB IWM
* short GDX
* delta is near zero on these positions

Defensive strategies

With many pundits anticipating a stock market correction, this is a timely topic. I attended a live presentation on the subject at a local traders group.

For buy and hold investors, the obvious and the easiest is to sell some, take 10%, 20%, 33%, 50% off the table, depending on the style involved. Asset allocators may lower their stock allocation and move some to gold, or bonds, or real estate. In taxable accounts some prefer to take a small position in inverse-ETFs such as SDS, to avoid the taxable event that comes with selling for a profit. Some might move money to low volatility stocks (SPLV is an ETF that only buys low volatility stocks) or defensive sectors such as utilities (XLU) or consumer staples (XLP) are other flavors.

For options, the obvious is to buy puts as insurance. Some sell calls to finance the put purchases, constructing a collar. Some just sell calls to give up some upside to get a tiny bit of downside offset. One of my favorites is selling put backratios for a net credit, though that only gives limited downside protection and actually increases exposure in a full crash. Selling a put backratio involves buying a put, and selling double the number of further out of the money puts. Another thing some are doing is selling their stocks and buying calls. This is near equivalent to buying puts for insurance, depending on the strikes and ratios selected.

Many of these stock market strategies involve a cost. Some choices give up some of the upside (covered calls), some cost an insurance premium (buying insurance puts).

Damage control on GLD

I do damage control on my GLD call calendar spread. I roll down the short Apr calls, buying back the short Apr 185 and selling the Apr 178 calls with GLD@166.2. This moves me to about delta neutral. I am still long the May 185 calls.
/edited 3-2: GLD position negative delta, so slightly short

I moved BRKB and IWM to the near delta zero area. I am short way out of the money March puts on these two. A steep decline might bring them into play, but I no longer benefit from up moves.

Long APC IBM MCD SPY XRT
Neutral GLD
/edited 3-2: net short GLD

* long BRKB IWM
* short GDX
* delta is near zero on these positions