Friday, January 31, 2014

Weekly: more pain, big losses

It is another painful week for my trading account, as the down trend and the whippy action continues. I close some trades for big losses. This was the worst down month since February 2009. Here is a trading recap:
Fri close TLT Mar 108 calls @108.3 stop-loss
Close BA Feb 125 puts @124.0 stop-loss
Both Boeing and the U.S. Treasury ETF moved enough that my short strangles went deep into the red. Both crossed the strike price, which get me out. My intra-day timing was poor, because I could have gotten out at much better prices. However, no one knows that for sure. Sometimes a trending move just keeps going.

Wed sell BA Feb 140 calls to rebalance the strangle. This was washed away by the continuing down trend in Boeing.
Sell AMGN Mar 135 calls @120.5 to hedge after earnings
Sell BRKB Feb 115 calls @111.3 to hedge, to reduce my delta. I am trying to thread the needle here.

Tue Sell KORS Feb 67.5 puts @81.2 rebalance

Mon sell GS Feb 180 calls @.28 @165.7 rebalance
cover short XRT Feb 80 puts @1.63 @79.9 stop-loss
cover short XOP Feb 64 puts @1.49 @64.8 stop-loss

net short BA TLT XRT XOP
net neutral AMBA AMGN

Tuesday, January 28, 2014

A visit with Top Gun Dave Whitmer

Dave Whitmer visited the local CANSLIM group. Here are a few notes. Mr. Whitmer was a Navy fighter pilot, a Top Gun as depicted in the movie. He worked for the discount broker Schwab for several years. In 2000 he started using the CANSLIM method and is mentioned in the new book by Amy Smith.

Whitmer was at the first meeting of this particular Investors Business Daily sponsored group. As was IBD founder William O'Neill. When he worked for Schwab he witnessed the Internet bubble from the broker side. When the stocks were going up, people lined up to get in the office, first thing in the morning. When the bubble popped, their greed turned into fear and many clients experienced huge financial losses.

Whitmer now trades stocks full time, for his own account. He uses the IBD newspaper as well as some of the premium products such as MarketSmith. He brought along several books, How to Trade in Stocks by Jesse Livermore (1940), How I made $2,000,000 in the stock market by Nicholas Darvas (1986). On page 49 of the Livermore book I found this highlighted:
>> If you make your discovery, trade your own way, exercise patience, watch for danger signals, you will develop a proper trend of thinking. <<

Even though Whitmer follows the CANSLIM methodology, he still has to think for himself. I always tell people that there a lot ways to make money in the stock market. It is vital to find a method that works for you. Something that works for me, may not work for you, and vice-versa. Style, personality, risk-tolerance are all big factors.

Whitmer talks about some of his biggest winners from 2013. These include Facebook and LinkedIn, each a 49% winner. QIHU and NETS are two more big winners. In the Amy Smith book, How to Make Money in Stocks Success Stories, Hansen beverage which became Monster is one of the big winners there.

From his days at Schwab, Mr. Whitmer met a lot of clients who were successful in one area and thought they could be successful in the stock market. Many of them turned out to be terrible at the stock market and the bursting of the Internet bubble ruined some of them.

Some things that I took note of, were Mr. Whitmer's daily routine. His military training, likely included many checklists, and the CANSLIM method uses a lot of checklists. He describes himself as a jack rabbit, quick to take profits, quick to take losses. He doesn't like to trade during the open, which he describes as amateur hour. He does check the market through out the day. For those familiar with the CANSLIM method, he prefers first stage bases.

The session closed with a review of stocks from the audience (about 25 people). The list is not that important. I did not see many new people. Some commentators talk about a stock market bubble. If this were a big time stock market bubble, there might have been 100 people in attendance, instead of 25.

A quick comment on the market dip. I took two losses on Monday, closing out short puts on XRT and XOP near the lows of the day. Painful yes, especially gauling to have both stop and reverse higher after I got out. It happens. Either a person takes losses, or doesn't. Other styles may involve doubling down, or going down with the ship. Readers know that at many levels, I prefer low risk, and have a low tolerance for losing. These personality traits are not going to change. I go to the CANSLIM group, because stock market groups are rare, because I can occasionally get a good read on sentiment from the group. I might occasionally find a new stock or industry idea.

It is mostly smart people that do the stock market. Half the population doesn't even save any money so they can't do it. Others are mystified or scared by the stock market. CANSLIM isn't any be all and end all, but especially for novices, it is a very good first system to learn because it looks at fundamentals as well as technicals. CANSLIM is also a system to identify potential home runs and that is one thing I could still use a lot of work on, even after 27 years in the markets.

Okay enough for now. I'll post those losing trades and any others in a weekly recap.

Friday, January 24, 2014

Weekly recap: ouch that hurt

A trending market is bad for hedgers. This week had five down days, and my account balance moved lower. Many of the trades I added performed poorly, or did not help much against the strong downtrend:

Fri buy SPY vertical put debit spread @180.3 @2.00 @1.07
buy SPY Apr 169 puts, sell SPY Apr 161 puts. This gives some modest protection against a stock market free fall.

Sell AMGN Feb 130 calls @120.3, hedge
The AMGN breakout turned into a fake out. I hedge my short puts by selling calls.
Thu sell SPY backratio buy Mar 168 puts sell 2x Mar 165 puts @183.0 for a credit

Sell BRKB Feb 120 calls to hedge @114.0
Sell BRKB Mar 120 calls to hedge @113.8
Wed sell XOP Feb 64 puts @68.8 rebalance
Sell AMGN Mar 105 puts @123.6 adding longs on a breakout
Tue Sell VRX Feb 110 puts @137.4
Position summary:
net short TLT

Saturday, January 18, 2014

12-2 for January grade B-

Twelve winners, two losers for the January cycle, grade B-. The losers were the call side of a short strangle on GLD, and part of a short put backratio on SPY. Both were offset by other trades on the same underlying.
My theme for the year is trading ranges for all. I am doing more trades, and doing weekly reports, instead of day of trade reporting. Because I am doing so many more trades, it is a much larger chore to track and record each trade.

As always, before folks get excited about the high win percentage, keep in mind that most are high probability, low profit trades. A high percentage of winners is expected, but the profits tend to be quite small on each trade. An analogy is 10-to-1 long shots at the horse track. The person betting with a 10% chance hopes for the 10x payoff. The other side wins 90% of the time, but the payoff is tiny.

The stock market feels frothier, with big movers such as the Colorado marijuana stocks, and air pockets like Best Buy which reported only a slight decrease in sales. The AAII sentiment (link) is still okay at 39% bulls. A fundamental analysis sent out from Schwab has valuation in the middle range. So the market is in a okay place, though a +10 or -10 year is my expecation, with the bias towards the plus. The little old ladies at church are still afraid of the stock market. After the washout in 2008/2009, that skittishness might last another decade or more.

Friday, January 17, 2014

Weekly update: a lot of hedging

I sold a bunch of calls on Monday's dip. Some came back to bite me, others did well. I took a loss on some short GLD calls. Resistance held by the end of the week, but I took my 100% loss (basis option premium) instead of riding it out. There were a lot of big movers, such as MDBX, BBY, ICPT, but for the most part those rabbits are too fast for this tiger. I did take a small position in VRX and AMBA. VRX came in safe, and AMBA is working well for me so far. I'll post a monthly recap tomorrow.


1/17/14 Fri
sell TLT Feb 102 puts @.32 @105.2

1/16/14 Thu
sell ASH Feb 125 calls @99.8
sell GS Feb 190 calls @177.1
sell BRKB Mar 125 calls @.33 @115.2

1/15/14 Wed
sell AMBA Feb 42 calls @32.7
sell BRKB Feb 110 puts @115.6
sell PG Feb 72.5 puts @.17 @80.7
sell TM Feb 110 puts @.52 @119.6
1/13/14 Mon
Sell MRK Feb 48 puts @51.7
sell XOP Feb 71 calls @65.2
sell XRT Feb 89 calls @84.0
cover short GLD Jan 122 calls @121.0
sell UNH Feb 82.5 calls @74.3
sell SPY backratio: buy SPY 169 puts, sell 2x SPY 166 puts  @182.7
sell OXY Feb 105 calls @92.0
sell KORS Feb 90 calls @77.2
I cover the short Jan calls for gold at a big loss. I hedge my short puts on many other stocks by selling calls, coverting the positions to short strangles. I sell SPY put ratios as a further hedge.

Friday, January 10, 2014

Weekly recap for 1/10/14 lots of trades

I've been a busy bee this week. Lots and lots of trades. In summary, I took a flyer on AMBA and VRX, rebalanced my short strangles on GLD and TLT, added some worm trades on AMGN, ASH, DAL, GS, KORS, UNH.

Net long IWM SPY
Net neutral GLD TLT

Times are Pacific time, price is on the underlying when the trade filled.

1/10/14 Fri
6:53 sell GLD Feb 108 puts @119.9
7:10 sell TLT Mar 98 puts 104.1
1/9/14 Thu
9:24 sell ASH Feb 85 puts @99.2
9:25 sell GS Feb 155 puts @177.1
9:59 sell BA Feb 125 puts @142.4
10:00 sell BA Feb 155 calls @142.4
1/8/14 Wed
6:58 sell AMGN Feb 100 puts @115.9
6:59 sell UNH Feb 67.5 puts @76.1
7:11 sell XOP Feb 58 puts @66.9
7:14 sell XRT Feb 80 puts @86.5
9:29 sell VRX Jan 115 puts @127.3
11:19 sell AMBA Feb 24 puts @30.9
11:26 sell GLD Jan 122 calls @117.9
1/7/14 Tue
11:54 sell DD Feb 55 puts @62.24
12:10 sell KORS Feb 65 puts @78.9
1/6/14 Mon
6:47 Sell GLD Jan 114 puts @119.6
8:02 sell WFC Feb 42 puts @45.5

Thursday, January 02, 2014

Sell strangles GLD, IWM, TLT

I sell strangles on three ETFs, GLD gold, IWM Russell 2000, and TLT 20-year bonds. Again, selling strangles is a bet on a trading range. I saw a bunch of gold ingots on the front page of Marketwatch. That isn't a great sign for gold.

Net long IWM SPY
Net neutral GLD TLT
Net short APC

Wednesday, January 01, 2014

2013 year in review, grade B-

For calendar 2013 my trading account is up a bit more than +14%, which sounds good until a person looks at +30% for SPY (S&P 500) and +37% for IWM (Russell 2000). Long bonds (TLT) were down -16% and gold down even more (GLD) -28%. For someone that might trade all three asset classes, +14% might be considered a decent year. Overall, I give myself a B- for 160 winners and 20 losers. Before new readers get too excited about the high win percentage, understand that I mostly do high probability trades that pay very little. The person buying options with a 10% chance of winning are hoping for 10-to-1 payouts. I am getting the other side, the 1 side for perhaps risking the 10. It isn't exciting, but it does add up.

I was mostly wrong about my expectations for 2013. I was bearish on U.S. stocks, neutral on bonds, bullish on gold. I was wrong on stocks and gold. Bonds were down big as measured by long treasuries, however, the total bond market ETFs were only down about 2% after dividends. Here are a few ETFs that I track:
IWM +36.8% Russell 2000
SPY +29.7% S&P 500
EEM  -5.8% Emerging Markets
TLT -15.9% 20-year U.S. treasury
GLD -28.3% gold
SLV -36.3% silver

I pivoted to bullish on stocks, in part, because of two anecdotes. Two people that I know were both extremely bearish on the U.S. stock market early in the year. The first guy is a lifelong stock investor, who wanted to sell everything and move to cash. What!? Why would someone that has owned stocks all their adult life want to do that. The one word answer: fear. The longer answer, media scare tactics and zeitgeist (mood of the market). 

The second person, retired, with a huge net worth wanted to play very safe and mostly avoided the stock market, calling it a bubble. There were many times I held my nose and bought, despite agreeing with their logical and bearish arguments. In late April 2013, I posted a storm warning on this blog for the U.S. stock market, based on long term valuations and sentiment (link). The red flags are still flying. However, just like long term weather forecasts, there may be a lot of sunny days before the next big storm.

In 2013, I had a lot of small winners. APC Anadarko Petroleum, BRKB Berkshire Hathaway, LGF Lions Gate Entertainment as well as the ETFs SPY S&P 500, and IWM Russell 2000, were traded over and over again. Another constant was heavy use of the terms: worms and small fish. These terms are slang for high probability trades that generate tiny profits. 

Again, readers should not be excited at the high win percentages each month or for the year. The odds going in are 80% to 90%, and the payoffs are scaled accordingly. Using a fishing analogy, I spent a lot of time on shore digging for worms, or in the wading pools gathering bait fish instead of going out to the deep ocean looking for Marlins. With the stock market up about 30%, aggressive bulls did much better than me, the cautious hedger. That said, for the most part, I avoided the pits of staying in cash, or trying to short the stock market, and the virtual black holes of being strong and long in gold or 20-year bonds.

Ironically, one of the best winners in terms of return on capital was selling puts on GDX (gold miners ETF). I took the trade when a Yahoo columnist wrote that it would be in the worst 1% of stocks for the next few months. Even though GDX had a horrible year, it held its own during those few months and the puts expired worthless for about a 30% return on capital.Unfortunately, it was for a very small dollar amount.

The worst percentage loser came at the end of the year, when a court decision went against APC Anadarko Petroleum and the stock tumbled. Fortunately, even an eye-popping 900% loss (basis the option premium collected), the small position size meant only a modest dollar loss. Some other losers include short strangles on LGF Lions Gate, and their movie Enders Game disappointed, and Catching Fire only did about as expected. There was also the literal catching on fire of two Boeing airplanes when I was short puts on BA. I often tempered my bullishness by selling calls. Being short calls during a up 30% year isn't so good. I was short calls on TSLA Tesla Motors during one of its big up moves and covered for a modest loss. Option traders can always play what if. Some Tesla call buyers made 5000%, or 50x their money in a few weeks. The home runs are why small fish traders buy options. The options are like lottery tickets, a few come in, but overall the house wins.

For 2014, my "sure to go wrong predictions" are +5% for U.S. stocks, +3% for bonds, -5% for gold. As always, predictions are mostly for entertainment (and for selling subscriptions or books). Keep in mind, that I was wrong, wrong, and wrong for my 2013 expectations. However, given what I believe is the semi-random nature of the prediction game, maybe my turn in the sun will come in 2014 and I will double my readership. In any case, the money is made trading, where risk management is just as important as market calls. Even if a person is as wrong as I was in 2013, if they are open to what the market is telling them, that person can have a decent year.

So Happy New Year and thank you to all my long time readers. I know this blog isn't as exciting as most. I don't swing for home runs. I tend to stay away from the most popular stocks. I do tend to have a huge percentage of winners, but it isn't due to hindsight trading or bogus paper trading like many others on the Internet engage in. The trades tend to be high probability trades at entry (the other side of these trades is the tiny worm sized profits). I don't go into politics or conspiracy theories, which is what seems to attract the huge page views on some other blogs. I see 99.9% of the political and conspiracy theory discussions as a waste of precious time and energy for traders.

This blog is as much for me as it is for the readers. I recommend that all traders keep a trading journal. It doesn't have to be public, like this one is. Keeping a journal is sure to improve your trading, your processes, your objectivity. I feel like my trading has advanced leaps and bounds by sharing my journey, as I enter my eighth year of blogging, and my 27th year of trading.

May 2014 be the best year ever. Cheers!