Friday, June 28, 2013

Buy GLD and sell BA strangles

Buy GLD via selling Aug 91 puts @117.9
I dip my toe in the swirling gold waters. There is a blaring headline on Marketwatch about a -24% quarter for gold. On the other side is yet another missive about manipulation just below it. This is another worm trade, way out of the money, low risk, low reward. For these puts to come into play, it would take another -24% down move in the next seven weeks. It could happen, but the option odds are in the 5% range based on implied volatility, probably more like 1% based on historical volatility. 

Like all my trades this week, I don't really like this one either. I am holding my nose and deploying capital, because I don't want to sit mostly in cash through the upcoming July 4 holiday. Decay often works in favor of premium sellers during holiday weeks, especially if the markets are quiet.

So far this move looks miss-timed, as GLD is back to 117.4 dropping .5 during the time it takes me to type this up. (With the Boeing update, GLD is now up to 118.5. The market giveth and taketh.)

Later in the day, I sell some BA strangles @103.0
Sell Aug 87.5 puts and Aug 115 calls

Again, a short strangle is a bet on staying in a trading range.

Net long APC SPY

Thursday, June 27, 2013

Sell APC strangles and Buy BRKB

Buy BRKB via selling Aug 95 puts @113.2

I sell strangles on APC selling Aug 72.5 puts and 
Aug 110 calls @86.5.

The Berkshire Hathaway is another worm trade, very low premium, low risk, low reward. I continue to be cautious. I don't trust this rally. Liquidity remains scarce on some options, with wider spreads than I would like.

The spread narrows a bit for the moment on Anadarko Petroleum and I reach to sell the strangle. A short strangle is a bet on a trading range. 

I don't care that much for these two trades either. However, I am slowing deploying some of the capital from last Fridays option expiration.

Net long APC SPY

Wednesday, June 26, 2013

Buy IWM (sell puts)

Buy IWM via selling Aug 80 puts @96.3
IWM is the Russell 2000 ETF. I don't like this trade. However, with the recent option expiration, I am way underinvested. The folks at ShadowTrader (a live webcast on the ThinkorSwim platform) are talking about a 50% retracement. There isn't much out there. Liquidity is thin, with wide spreads on some other August options. The July 4 holiday is another factor for premium.

Gold remains a black hole. I am tempted to sell some way out August puts, but I would rather wait for GDX to show some strength before even doing that much. I am not selling my physical metal, and have avoided trading them. I am too slow moving a trader for fast moving markets. It is almost the same with bonds, it is moving too fast for me to train my sights.

Net long SPY

Sunday, June 23, 2013

CASH is king, TINA and other four letter words

On the right side one of the consistently most popular posts is Cash is Trash (link) from January 29, 2012. Well today is the day for cash. Cash is king once again. After years of zero returns, zero looks pretty good when everything else is down. While U.S. stocks are still up for calendar 2013, gold, bonds, emerging market stocks are all down big time. 

I just posted the year to date in my monthly summary:

SPY +11.7 S&P 500
IWM +13.8 Russell 2000
TLT -10.5 U.S. 20-year bond
EEM -15.7 Emerging markets
GLD -22.8 gold
SLV -34.0 silver

There is no alternative TINA is a big theme. Some say they are buying U.S. stocks because there is no where else to turn. I heard similar arguments from gold bulls for years now, during its 12 year run of up moves. Many of those precious metals bulls are now cursing the markets.

Readers know that I prefer hedged and balanced approaches. I am not an all in or all out kind of person. I prefer low risk, low return strategies. The current market illustrates some of the difficulties for the aggressive approach. Some of the smartest people, the hedge fund managers, have been underperforming the U.S. stock indices by being too clever. Certainly, my hedging approach has also lagged. I prefer a smoother ride than is possible with all in, all out, bet the farm techniques. Of course, a hot hand can rack up huge returns by betting it all, but over time, almost all hot hands turn cold. 

Risk management in terms of position sizing, cutting losses, money management tend to be better long term indicators of financial well being than a person's short term trading record. Too many mistake a bull or bear market for financial acumen, when it may be just luck that had the person on the right side of the market. 

Buy the dips works great during bull markets. As gold and silver folks are learning (again), buy the dips is the road to the poor house during a major bear market. So many bought silver on the way down, at $35 then $30 then $28, then $25, and now it is to $20. If this is where most of their assets are deployed, the losses are horrendous. For those on margin, the losses are life changing. I am sure a good percentage of futures accounts for precious metals bulls have been liquidated due to margin calls. Those aggressive people won't report their losses on the Internet. The older folks in the group, may never return to any market, the experience so sour, the losses so devastating.

It is a difficult time in the markets. At least it is for me. The number one priority is to live to trade another day. Despite my vast experience (started in 1987), I continue to learn, continue to improve and refine, and I can only do that if I survive to trade another day.

Friday, June 21, 2013

13-1 for June, grade B-, ETF report

Thirteen winners, one loser for the June option cycle, grade B-. The one loser was a leg of a backratio, so really no losers as that went out for a net credit. The stock market was modestly lower. I avoided the carnage for in bonds and gold, on the half empty side, I wasn't short those markets.

Worms are the theme of the month. Using the fishing analogy, the premiums I am collecting are so small they don't even qualify as small fish, more like digging for worms. However, 13 worms doesn't make much of a meal, so hopefully, better days are ahead. The most recent put sales of NSC and XOP are deep in the red, but those the July puts that I sold earlier on are in mostly in the black.

I keep tabs on a few ETFs, year to date:
SPY +11.7 S&P 500
IWM +13.8 Russell 2000
TLT -10.5 U.S. 20-year bond
EEM -15.7 Emerging markets
GLD -22.8 gold
SLV -34.0 silver

Sentiment in the metals is still mixed, same with bonds and stocks. There are too many bulls to be calling bottom. There is also the time factor, two weeks ago (June 7 post) I wrote about expecting four more weeks of downside chop in the stock market. So that would project two weeks from today or July 5th. The stock almanac indicates that next Wednesday 7/26 as a buy point, or at least a time to look at selling puts.
Net long SPY

Buy SPY (sell long puts)

Sell SPY Jun 157 puts @ 159.4
Time runs out on my puts as this is expiration day. These are part of the backratio. I am still short the 2x SPY Jun 154 puts. I sell these puts at a loss, but the other leg is at a profit. All my other short puts for June look to be safe.

It feels like a difficult market. In hindsight, yes, every move related to the Fed comments is so clear. Few have been able to time these short term moves precisely. I'm sure some have, and they will tell you about it, but it is an extremely small group in terms of percentages. Those that were on the wrong side of these moves won't tell you about it. 
Net long SPY

Tuesday, June 18, 2013

Buy NSC XOP (sell puts)

Buy NSC via selling Jul 67.5 puts @77.1
Buy XOP via selling Jul 53 puts @61.5
Norfolk Southern and the Oil Exploration ETF were on my chart review from a couple of weeks ago. More of my so-called worm trades, premiums so slim that the fishing analogy is digging for worms, not actually trying to catch fish.

In a market full of extended stocks, there don't seem to be a lot of good choices. The analogies are the cleanest shirt in a closet full of dirty shirts, or the dog with the least fleas when they all seem to have them. That said, premium buying bears have been skewered yet again, as the market is near flat for the past month.

Net long SPY

Sunday, June 16, 2013

Lessons from Dad: Happy Father's Day

Happy Father's Day to all the dads and grandpas out there. Chuck Jaffe at MarketWatch writes about lessons from his dad (link). 

From The Daily Word (link2):
Today I acknowledge the good that my father provided for me, the lessons he taught me, and the love he gave me. No one does everything perfectly all the time. Each father does the best he can with the knowledge and experience he has ...

In that spirit, let me say a prayer for my dad who is back in the hospital. 

My dad had a six-grade education, worked hard most of his life. Some investment lessons I learned from him include:

* it is better to be lucky than good. My dad was rather typical, wanting to buy at market tops, sell at market bottoms. However, he had some good fortune. He had a 401k plan, and the organizer had the smarts or luck to center it on Sequoia Fund, which is a Warren Buffett style mutual fund. My dad had nothing to do with the decision, but benefited enormously. The fund did about as well as Buffett has done over the years, which is spectacularly well.

* Another lesson is, no matter how little a person has, they can save. We hear it all the time and observe it all the time, people that live in debt or pay check to pay check. Dad never made much money, was always lower middle class. However, my dad and mom always found a way to save some for the future. It terrifies me when I read that about half the population saves virtually nothing.

* As for his own investments, dad picked some load funds, and like I said, wanted to buy at market tops and sell at market bottoms. My mom was the one that insisted otherwise and made him stick to the stock market through the horrendous bear market of 1973/74 when the market declined 70% from its highs.

* Perhaps not a direct lesson from dad, but it is important to find a balance in terms of saving and spending. Slow and steady worked out well for my dad. It remains to be seen whether it will work out for the next generation.

* Sometimes the best thing to do is nothing. One reason my dad did well financially is avoiding the potholes. There are fast talkers and slick companies pushing the investment of the day. Hucksters can be pushing anything, whether it be stocks, bonds, real estate or precious metals. There are scammers in all corners, so a healthy bit of cynicism goes a long way. Rarely does the hot investment of the day work out in the long term. My dad always almost said no, and that stubbornness and cynicism was a long term secret. Moving from place to place, usually means the worst of all worlds not the best, and then there are taxes and transaction costs. The latter often being substantial when chasing hot investments.

* We are not perfect. Some folks dream of perfect parents. In the markets, a lot of folks dream of buying the low and selling the high. Observing my dad and latter my own experience taught me that this doesn't happen in real life. Those on the Internet that claim to be consistently doing this, tend to be liars or only reporting a small fraction of their transactions, or are hindsight traders that only report after the fact. Virtually no one with an audited track record has this ability over the long haul. Sure there are hot hands, but hot hands turn cold. Sure there are those that consistently make money, but over time, it tends to be money management, risk management that are huge factors in that consistency, more so than market timing.

Let me close by publicly thanking my dad for all his lessons and everything else he has done for me. Thanks dad, and Happy Father's Day, and get well soon.

Friday, June 07, 2013

Storm watch update and buy XRT

Buy XRT via selling Jul 70 puts
XRT is the retailer ETF. Chart support at 70.

I put the stock market on storm watch on April 24, 2013 (link) when the SPY closed at 157.88. The reasons were two fundamental indicators, Schiller PE10 and Value Line appreciation potential, plus the sentiment indicator of a bull on the pogo stick appearing on the cover of Barrons. 

The SPY intraday top was on May 22 at 169.07. To the correction low, we have seen a 5% pull back. Does that satisfy the need for correction? No one knows for sure. However, I can talk about the Fibonacci retracements. In terms of price, it reached one Fib level. In terms of time, no, there are about four more weeks of downside chop for that. 

When price is uncertain, time is a good thing to look at. So many traders are focused on price points of support, resistance, and Fib retracements, that time analysis is ignored. For option traders, time is as important as price.

It does illustrate the difficulty of market timing using long term indicators. Even at the recent low, SPY was still above the point where I posted the warning. If I had gone all out, would I be going back all in now at a higher level? It is tricky and one reason I don't do that kind of all in, all out trading. I'm not that good, not that nimble.

Net long SPY

Thursday, June 06, 2013

SPY Backratio

Sell SPY Aug 140 puts x2
Buy SPY Aug 145 puts x1 SPY@160.7
I add some bullish exposure with a third short put backratio. The way I like to do them is for a net credit, delta positive, theta positive. While it is a net long position, there is a big profit on a decline to the 140 to 145 area.The stock market appears to be rolling over. 

These backratios profit on a modest decline, but there is the chance for huge losses if the market crashes.

I continue to avoid bonds TLT and gold GLD. I am not nimble enough to catch the small moves, and the risk reward still isn't compelling for selling option premium.

Net long SPY

Saturday, June 01, 2013

Chart review 6/1/13

I often do a weekend chart review of the S&P 100 stocks, looking for interesting charts. The volatile market motivates me to do it this morning. I believe this is the first time I have posted on the topic.

Here is a list of tickers that I find interesting for my favorite strategy of selling out of the money puts:
APC Anardarko Petroluem
CL  Colgate 
COST Costco
CVS drug store
DIS Disney
NKE Nike 
NSC Norfolk Southern railroad
PG  Proctor & Gamble
XOP Oil Exploration ETF

VT, world total stock market is at the 50-day moving average with a bullish chart formation. Many big name "safe" stocks such as CL, MCD show a free fall. Yield oriented stocks such as TIP, XLU, HYG, JNK are also in sharp decline. 

Is it time to shift gears? The U.S. market still had a gain for the month of May, so the bears may have had a good hour, but are still hurting overall. Gold GLD and bonds TLT are not giving a clear chart signal.

One theory of mine, is that some hedge funds sold the stock market in the last hour on Friday so that their May end of month report would look better. Most U.S. hedge funds have lagged the gains of the U.S. stock market for calendar 2013. An hour burst of selling makes their statements look that much better in comparison. If this theory has some truth, then there will be a snap back, and the selling flurry was window dressing.

As always, no one knows why, or the future. Humans look for explanations, when it is often just relatively normal market action. I often write about a three-strikes and out, for topping behavior. Friday's sell off can count as strike two. The decline eats into my buying power, so while I am conservatively positioned, I have deployed a good deal of capital on my so-called worm trades. Worms, in terms of the fishing analogy of catching big fish, medium or small fish. The option market premiums have been so slim that I have been digging for worms. It remains to be seen if the worms will be my undoing. The odds are still heavily on my side.

The other cliche that comes to mind is "never short a dull market." Well, this market isn't dull any more. Predictions tend to be more about entertainment than profits. I'll let the market tell me which way the wind blows. At the start of 2013, I thought it would it be a down year for the stock market. WRONG. However, I quickly adapted to the reality and did not allow my prediction to get in my way.