Friday, December 27, 2013

Weekly recap: sell puts on BRKB and V

My schedule is going to get better for blogging. However, I am toying with the idea of weekly updates, instead of reporting each trade in near real time. This week I held my nose and sold puts on V Visa and BRKB Berkshire Hathway. Yes, the stock market is extended on the upside, but what is a person to do? Keep waiting? Hedge? I choose to hold my nose and buy a little.

Again for the new readers, selling puts means I am bullish on a stock. Selling out of the money puts is a low risk, low reward, high probability strategy. Again, do not be excited by the high percentage of winners. Those are the approximate odds of profit going in. The person buying the puts is hoping for a 5-to-1 or 10-to-1 payoff, with a small chance of getting paid. I am taking the opposite side, selling the put with a 80% to 90% of winning, but getting paid very little for taking that side of the trade.
Net long SPY
Net short APC

Friday, December 20, 2013

16-3 for December, grade C-

16 winners, 3 losers for the December option cycle. Unfortunately, all 3 losers were painful, with the worst at about 900% basis the premium collected. I apologize taht I didn't report all the trades on the blose. 
As almost always with options, could have been better, could have been worse. I reported closing out my short puts on LGF, and I would have had a 100% gain instead of a -175% loss had I held on. On the other side, I close some Dec 85 APC puts while the stock was around 84.5. Had I held on, that loss would have snowballed. I close my short Dec 80 puts while the stock was near its lows near 75 for about a 900% loss basis the initial premium. It wasn't a good month.

As I often write, fast markets are not my friend. While other more nimble traders thrive on fast moving prices, my trading often suffers. My trading account was down just a tad (less than 1%) for the month. Given all circumstances, I was tempted to bump up my grade. Closing each loser was a rational decision. However, with the stock market at record highs, and my account down for the month, there is only so much rationalizing I can justify. Unlike some others on the Internet, I do report my losers as well as my winners.

Going forward:
Net long SPY
Net short APC

Monday, December 09, 2013

Cover short LGF puts (ouch)

I covered my short Dec 30 puts for a huge percentage loss (-350% basis the premium). I played with fire and got burned, staying too long at the Lions Gate bull party. As always, there is the chance that this is the bottom. 

However, the loss is already more than I typically want to take. It is the big risk of selling puts, a quick dive in the stock price. I sold these puts when the stock was about 35. I am still short Dec 39 and Dec 43 calls, but the premium from those do not balance out the huge hit I took on the put side of the short strangle. These things happen.

Net long APC
Net short LGF

Sunday, December 08, 2013

The Sound of Music and gold

I watched the recent live performance of The Sound of Music on TV. The investment angle that came to mind is all those that are preparing to hunker down, with ammo, food and water stockpiles. About half the time, it is like the movie, there is a very short time to leave. The family or person fleeing often has to go with what they can carry. Any financial assets, such as stocks, bonds, deeds to real estate, may or may not have any value. Many assets get frozen during emergency times.

That's where a bit of gold and a bit of silver can be helpful. If the fleeing family has a few rolls of gold and/or silver coins, that might be enough to buy passage, or bribes, or food or lodging during extreme times. Paper money, checks, other forms of payment may not be as useful during turbulent times. I'll not overlook the value of friends (the nuns helped them escape, the young man decided not to turn in his girlfriend) and faith. I believe that faith is more valuable than gold during the worst of times.

As much as I am fan of the Vanguard Way, the Boglehead Way, historic events are times when having some physical assets may come in handy. No paper asset allocation can be sure to withstand the storms of war, or revolution. Of course, physical assets too have their flaws. They can be stolen, or confiscated, or paint a target on the person with those assets if word gets around. Say, there are a thousand refugees arriving in a foreign town. A couple of those families are flashing gold and silver. Word gets around. Muggings or worse may be in store for those paying in metal.

Some may say I am being alarmist. To that I say: read some history. Look at the great powers in 1900 and how many experienced major events by 1950. How many stocks, bonds, deeds to real estate in those nations, became essentially worthless? Americans like to cite their own financial history, but in so many other major powers, the financial reset button got hit. Only in England, among the financial powers in 1900, was there a relatively stable financial market. Japan, China, Russia, France, Italy, Germany, all saw huge disruptions in their stock and bond markets. This is where the Boglehead philosophy of stocks and bonds can fail. 

Let's just put it in round numbers, with the U.K. and U.S. having stable markets, the rest of the major financial powers unstable (Switzerland is not a major power). So 2 out of 8 is 25%, 25% chance of stable markets during that 50 year span. Stable is a euphemism because it includes the Great Depression and a 90% drop in U.S. equities. This is why I have always been an advocate of having some physical assets. Again, nothing, absolutely nothing is foolproof and anything done the wrong way, can be more trouble than it is worth. Still...

Hulbert on: seeing bunnies in cloud formations

Mark Hulbert has an article at Marketwatch (link) with this eye-catching quote:
Leinweber views charts such as this one as an example of a potentially dangerous practice known as “data mining”— endlessly analyzing a database until you “discover” a pattern. The result of this practice is “the analytical equivalent of finding bunnies in the clouds

Traders, analysts, talking heads do it all the time. They might use it for forecasts, to "prove" manipulation, mostly for selling and promotion. What it often boils down to is seeing bunnies in clouds. Some may say that I am doing similar, and in part that is true. I see what I believe are repeated patterns and trade based off them.

The catch with the charts in the article are that the scales are not similar. The 1929 chart has the market booming from 200 to 350 a 75% up move on the part of the chart shown. Yes, the current stock market rally has moved up that much and more off the lows, but the part that is supposed to match is a much more modest move.

Wednesday, December 04, 2013

Buy BA BRKB TM, sell APC strangles

An abbreviated update:
Sell puts on BRKB, TM, BA,
again selling puts is bullish move

Sell strangles on APC,
again, selling strangles is a bet on a trading range

Net long APC, LGF

Sunday, December 01, 2013

Fearful rookie getting back in

I've been away. I did one small trade, selling BRKB puts.

There is a recent post on the Boglehead (Vanguard) forum about missing out on the bull move (link).
I did not participate in the market rally of the past 4 years due to fear...

Like I sometimes write, on the Internet almost everyone that reports is a winner. The losers tend to slink away in silence. For the most part, market timing is a losing game. Most individual investors do poorly. The post linked is not a good sign for the stock market bulls, but by itself doesn't mean much.

Still, I have found that anecdotes are useful. When silver was topping, there were many posts from novices thinking it was a sure thing, a sure win, when silver is among the most volatile of vehicles.

There was an appearance at a stock market group of a recent finance degree graduate who wanted to tell all of the market veterans there that gold was the only sound investment. That hyperinflation was the only possible outcome. When novices and rookies some how have that in their heads, the odds of that happening are near zero. Yes, there may be a rookie out there that lucks into a correct call. Some even have a string of correct calls and make decent money trading.

Readers know that I like to have the odds in my favor, so the 1-in-1000 chance that a rookie or novice gets it right is not my kind of play. Better to take the 99.9% odds.

I came into this year (calendar 2013) with a bearish outlook. One thing that turned me around was anecdotes from several people that were extremely afraid of the stock market.

Updates may or may not be forthcoming. By January 2014, I should be back to a more regular schedule. In the interim, I can not say.

Thank you to all the readers, especially the few that may have been with me for the years I have been blogging.