Friday, April 26, 2013

Crunch - cover AMZN after earnings

I buy back the short vertical put spread on AMZN for a small loss @254.5 down over 7% on the day. The loss is small in dollar terms, big in percentage terms, especially if I add in the four commissions. 

I don't like the way the stock is trading. Some talking heads were all positive on it, despite the poor tape action. If the over all market tone were better, I might have held on, but I recently wrote about a storm warning for the stock market. A big storm could capsize the AMZN boat. I took a chance, as we all do taking a position before earnings. I lost this time.

Net long APC SPY
Net short LEN

Thursday, April 25, 2013

Buy AMZN (sell vertical)

Buy AMZN via selling a vertical put spread
selling the May 235 puts, buying May 225 puts @272.9

There was a headline story on Yahoo about Amazon being ready for a pullback. It is always risky taking a position ahead of earnings, but if anything the chart looks bullish. The vertical spread caps any loss and helps with the margin requirement on a high priced stock. The trade off is the cost of the lower put.

Elsewhere, gold continues its bounce back. One scenario is a 1987 style crash, when the stock market went up six fold after its crash. I'm not predicting, just saying there is a chance. The rally in Lennar Homes makes me net short. For now I'll hold on to both sides of the short strangle (short May 43 calls, May 36 puts).

Net short LEN

Wednesday, April 24, 2013

Storm warning for the stock market

I see some red flags for the stock market. A couple of quantitative red flags are the Schiller PE10 (a ten-year rolling PE ratio), and the Value Line appreciation potential. Both indicate limited upside for the stock market. These two tend to be very slow moving and a bit early, but both have a good track record.

Another red flag was a bull on a pogo-stick on the cover of Barrons. Bulls on covers are a huge negative, and have marked more than a few market tops. There is also a bear on the cover, but the bear is confused and bewildered by the bull hopping over him.

I see these more as gale warning flags in the harbor. The storm is still out at sea, but it is on its way. However, like weather forecasts, the timing, the severity of the storm are difficult to pinpoint. 

One modest positive is the chatter amongst people I run into. At the investors meetup it was mostly a serious crowd, almost all market veterans. I got that feeling by the kind of questions asked and the stocks mentioned. At market tops, a lot of novices are wanting in. The meetup is advertised on the Internet, so a lot of people see it. Other folks still say crap like it is all a Fed induced stock bubble, or the stock market is fixed, and a person would be crazy to want to play the market. These tend not be things know-nothings say at market tops. At market tops, people want tips, they want to invest their tax refund or some other tiny amount, and may want me to help them get started.

Still, I am putting up some gale warning up. It doesn't mean it is time to duck and cover, but some caution, some storm preparation is a good thing. To use the boating analogy, it is not the time to be planning a deep sea fishing expedition. And as I always say, no indicator is 100%. 

Some like to wait for technical confirmation, for the market to actually turn down before acting. One popular indicator is the 200 day moving average. Another is looking for three consecutive down months of 2% or more. Sharp corrections are more indicative of a bull market, while a slow rolling over, often means the longer term trend has change. While I have not back tested for precious metals, the 2% up (or down) for three consecutive months might be useful for those markets as well to signal a change in the intermediate trend.

As an aside, old timers may remember the pre-Internet days, when the Value Line binder in the library was like a wizards tome. Only a few seemed to know about it, and how to read it and use it. Another book of spells, so to speak, was the small S&P paper stock guide that had one line of info for many of the stocks that Value Line did not cover (1700). I sound old, don't I. Now anybody can get much more up to date information on any of the many websites, often for free.

Tuesday, April 23, 2013

Apple, climax tops, over owned stocks

Barry Ritzholz writes about Apple (link) and uses three criteria for a stock being over loved:
Want a more objective measure of overowned/over-loved any stock is? Look for companies that have these 3 characteristics:
1) More than 90% institutional ownership;
2) More than 90% Buy or Strong Buy;
3) 1000% gain over the prior 3 years.

I attended an Investor's Business Daily CANSLIM meetup recently. There they use the term Climax top as a technical condition. They loosely define a climax top as occurring at least 18 weeks after a proper breakout from a base, with a quick additional 25% to 50% gain. Some use the adjective parabolic to describe the chart. Climax tops can also occur in commodities. The 1980 precious metals peak was an example. The more recent move to $49 in silver might also be loosely described as such.

Using either set of criteria, it can be difficult to time the exact top. However, it gets extremely risky to be long, when a stock becomes over owned, or when it goes parabolic. It is tricky to try and short it as well. Often times, better to wait until after the first break and short the rally attempt.

Friday, April 19, 2013

14-3 for April, grade C+

Fourteen winners, three losers for closed trades during the April option cycle. I give myself a grade of C+. The losers were some whoppers in terms of percentages. The SPY was up slightly during this time frame and my account down just a smidge.

This was an event filled month, with a crash in gold, a flash-crash on the German stock exchange, a terrorist attack in Boston. I got a bit too complacent. My defensive action during the Korean saber rattling did not work out, and resulted in two of the three losers.

The mini-crash in gold caught me by surprise. What is more surprising, in some ways, is that gold hasn't had those kind of moves before. Every other commodity has experienced it. Stock traders are taught to expect -10% down days about once every five years or so during normal markets. That a 10% down day in gold was categorized as such an unusual event is interesting and revealing to me.

Going forward I have more exposure than I would like. The market movements gave me a jolt, and I am a still out of balance.

A lot of folks are interested in gold. For now I want to steer clear and leave it to the more nimble traders. Again, V-bottoms tend to be rare, and by definition, only a very few buy at the low of a V-shaped chart bottom. I want to let the dust settle, and let the ducks line up in a more organized fashion. I may take a small position here or there, but gold is a muddled market.

Net long APC LEN SPY

Wednesday, April 17, 2013

Taking part of a loss (APC)

Sell APC (cover short puts)
Buy back 1/2 of my APC May 75 puts @79.3

I lighten up my long position on Anadarko Petroleum. Support is near, but I have way too much exposure. The loss is a rather stunning -78% or -350% depending on how one calculates, in percentage terms, but not so bad in dollar terms. Much of this year's profits are at risk as my delta is increasing with each move lower. I am still net long APC, but not quite as much. I do have some APC Apr 77.5 puts and they may come into play with another big down day.


Tuesday, April 16, 2013

Gold's 7-sigma move

Zero Hedge says gold had a 7-sigma move, or seven standard deviations. The math seems a bit off, but here is a blurb about 3-sigmas
>> In statistics, the 68–95–99.7 rule — or three-sigma rule, or empirical rule — states that for a normal distribution, nearly all values lie within 3 standard deviations of the mean.

About 68.27% of the values lie within 1 standard deviation of the mean. Similarly, about 95.45% of the values lie within 2 standard deviations of the mean. Nearly all (99.73%) of the values lie within 3 standard deviations of the mean.


and another about 6-sigmas.

Management uses Six Sigma as a technique to maximize the quality of its product. The goal is to achieve the least number of defects per unit of production. A Six Sigma process produces product 99.99966 percent of the time without errors or defects. This translates to 3.4 defects per million units produced.


A painful day for me to be sure, but it would have been much more painful had I sold some puts on gold like I thought about doing. Sometimes the tea leaves don't work out, even with an article in the NY Times and a high profile table pounding from Goldman, sometimes these indicators fail.

Many of us have gold to protect us from 7-sigma moves in the financial markets. As I sometimes write, it is the big four historic events that we insure against: Major war, revolution, famine, plague. These are the events that can topple governments, cause their currency to go to zero. In the absence of these events, it just doesn't happen to major powers. Minor powers are another thing.

Some cite the fall of Rome but that was ten generations from peak to fall, and there were a fair number of major plagues and famines during that period.

These big moves are big reasons why I favor being diversified, and am almost always cautious with reserves. I started trading in the summer of 1987 three months before the crash, so in the back of my mind, I know that these 50 year storms can happen. Gold has shown itself not to be immune. This storm started in gold, and the margin calls in that market helped weaken the stock market.

I am not a fan of fast markets. There is no need to rush in because V-shaped bottoms tend to be rare, and by definition only a very few can buy at the bottom on the V. Many more suffer financial harm, thinking there will be a V, when it is a waterfall decline. So I prefer to wait for the dust to settle, perhaps take a small or partial position with the plan to add more.

Friday, April 12, 2013

Cover TLSA short calls

Cover TSLA May 50 calls @45.0
Burned again! Like I said, the so-called defensive action I took, selling calls, has burned me on Boeing and now Telsa Motors. LEN isn't looking so good either. These things happen. I hate covering at a huge percentage loss, but I hate risking a bigger loss even more.

Adding to the gold sentiment is a New York Times article about how gold is losing its luster. Certainly after 12 up years and a move from $300 to $1900, gold is due for some down time. That said, I don't think this is the final top. Timing the moves is tricky. For those long term investors that are light on gold, this is a good time to add.
Net long KORS SPY
Net short APC LEN

Thursday, April 11, 2013

Rebalance APC, thoughts on GLD

Sell APC May 75 puts @87.0
I nudge my complex position in Andarko Petroleum closer to neutral.

Elsewhere gold was downgraded by Goldman Sachs. Unfortunately the GLD put option premiums are small, when factoring in the substantial margin requirements and the possibility of a big move. Buying calls might be the percentage play, but buying calls isn't something I like to do.
Net long KORS SPY
Net short APC LEN TSLA

Wednesday, April 10, 2013

Cover short BA calls

Cover short BA (buy back short calls) @88.4
This is a late report, I cover one leg of my short strangle on Boeing for a big percentage loss. BA and the rest of the stock market continue to move higher. By the close, BA backs off its highs, so this specific move was ill-timed. The reason I did it was so the overall April Boeing positions close the books for the month at about net neutral. The quick snap back is a hazard of using stops. The hazard of not using stops is a powerful move that results in a huge loss.

Most of the defensive action I took last week has turned out to be ill-timed. The zombie bull market as I call it, continues to lurch forward, sweeping away the bears, or the hedgers. My short strangles on APC, LEN and TSLA are now delta negative, meaning net short.

Net long KORS SPY
Net short APC LEN TSLA

Wednesday, April 03, 2013

Defensive action on APC BA LEN TSLA SPY

Sell APC via selling Apr 90 calls @83.5
Sell BA via selling May 92.5 calls @84.9
Sell LEN via selling May 43 calls @38.5
Sell TSLA via selling May 50 calls @40.8
Sell SPY backratios May 148/145 puts @155.7
buy May 148 puts, sell 2x May 145 puts

I got a bit too aggressive with my longs and am paying for it today. I take defensive action in Lennar Homes, Tesla Motors and the S&P 500 ETF. The backratio is delta positive (a bullish bet) with a large profit if SPY closes around 145 at May expiration. A decline below 142 causes losses. 

I stepped in the doo-doo with LEN and TSLA, and doing damage control by selling calls rather than closing the positions. The risk is a whipsaw because a steep rally can cause big losses on the short call portion of the short strangle.

This squall may be a passing shower, or it may be the start of something bigger. I move closer to delta neutral, but still have a bullish bias. Sharp, short corrections are what is to be expected during bull moves. However, calendar 2013 has been so placid, the uptrend so gentle, that it feels like a shock to have a sharp down day.


Monday, April 01, 2013

Buy TSLA Rebalance APC

Sell APC May 95 calls @86.5
I rebalance my position in Anadarko Petroleum. With a modest decline, my delta has increased. I am offsetting that by selling some calls. My position is short strangles (short both puts and calls) net long. So I am betting on a trading range, hopefully with an upward bias.

Later in the day, I sell some puts on TSLA Telsa Motors
Sell May 30 puts @44.0, the stock is up on news of better than expected sales and a break even quarter. Telsa is heavily shorted. The chart is supportive, though the range is wide. 33 is the bottom of the breakout channel. The spreads on the options can be wide, so I don't want to have to roll or close the position.

Net long APC KORS