Wednesday, April 30, 2014

The Biggest Losers (personal stories)

The recent post about The Fly and his big trading losses has me thinking about some of the biggest losers that I've known personally. Because there are personal stories, these are small time losses compared to the stories in books or online, but for each person they were life shattering.

I'll obscure some of the details, because I don't have permission to retell these tales and my purpose is to educate and illuminate, not embarrass or make fun of.

First story: The first guy invested all his money in a tech company. The company had a new product that was expected to be a big seller. He went all in on their stock, fully margined. The new product flopped, the stock fell and there was a margin call. The guy borrowed money from his mom to meet the margin call. The stock kept falling. Eventually it was near a total loss. The guy lost most of his money, and owed his mom money as well.

Second story: This guy decided to try his hand at day trading. At the time I was communicating with him, I already had over 10 years experience in the markets and he was relatively new. He had some early successes and decided that the game was easy. He quit his stable high paying job. There were some wins and losses, then a streak of losses. He lost 80% of his stake in his first year, and changed tactics and strategy. He made almost all the money back, an incredible 400% up from the bottom. However, he kept rolling dice using plunger tactics, poor money management, poor risk management and eventually his account went back to the lows. This experience scarred him for life. He became depressed. He no longer wants to hear about the stock market, much less try to trade. One red flag to me, was that he wanted to give me advice, even though I had many more years experience than him. He was a very smart guy. All three guys I write about in this post were smart, not genius level, but well above average. What they all turned out to lack was financial wisdom.

Story three: this guy took what I consider to be a fly-by-night course on trading options. The firm charged a ton of money for lessons and private coaching. There was a paper-trading platform for them to learn on. I suspect that this platform didn't simulate live trading, and gave the beginners a false sense of the markets. I don't know it for a fact, but it would help their marketing, to make trading seem easier than it is in real life. There are subtle ways to do this that a beginner may not even notice, such as filling orders at favorable prices. All three stories are sad, but this might be the saddest because this third guy was the oldest of the three. He bet his life savings on the questionable tactics taught by the trading course. It only took a couple of months of live trading for the account to get near zero.

In summary, the first story, going all in on margin, then borrowing money from mom to meet the margin call. Second story, day trading with poor risk management, a big ego, and a plunger mentality. Third story: a fly-by-night trading course, teaching high risk option strategies to novice traders, likely an unrealistic paper trading platform to practice on, and terrible risk management. Again, all three were smart guys. Wisdom? Not so much. Risk management? Non-existent. The first guy eventually turned his financial life around, because he made his mistake while he was relatively young. The other two met sadder fates.

For new readers, trading may seem easy because so many on the Internet write about their winners. Heck, "trading" is easy if all a person ever does is paper trade on a fake platform, or hindsight trade after the fact. Yes, there are a few people that are exceptional traders, but I have never met any of them in person. I have only read about them in books. Or perhaps I have met a few, but they don't brag about their wizardry, so they appear to be just another average and humble trader. The wealthiest people I know personally got it through stock options, equity in businesses, and real estate (on margin).

Monday, April 28, 2014

Rare event: public mea culpa from The Fly

It is a rare thing to see. The Fly, a popular stock market blogger, and money manager, admits to big losses and says he is out. (link1 and link2).

>> from Business Insider:
You can be sure there are many more folks out there in the market like him [the Fly], who have been clobbered in recent weeks. The vast majority of them won't be nearly as blunt.

>> from flyblog
My year to date losses were stopped out at about -32%, that’s another -13% for this week alone. Clearly, the beta was too high. It’s obvious that I should have sold long ago. Yes, I should have done a million things differently. I’ve managed around each and every market crises almost without flaw, until now. We all have our comeuppance, at some time or another. Today I got mines.

I repost the story about the Fly, because there are so few that honestly report their losses, and so many that lie about their winners. My Monday wasn't so good either, so perhaps misery loves company. I'll post my details in my weekly update. 

In one of my more popular posts, Two of the Hardest Things to learn (link3), this is one of them, coming to grips with losses, admitting you are wrong. I am no where near as aggressive (or successful) as the Fly. However, it is important to repeat the point that money management in terms of right sizing of positions, cutting losses, is at least as important as making market calls. 

Those that are always going all in, will almost certainly eventually lose enough times in a row to ruin their financial lives. Most will not be heard from. The losers tend to slink away quietly.

Friday, April 25, 2014

Weekly: If I only had a brain

A bit of humor for this choppy market: the Wizard of Oz scare crow song, "If I only had a brain" comes to mind (youtube link). I made a few trades this week and most are in the red by Friday's close. Overall, it is a week of mild losses for me. With so many earnings reports, I observe a lot of failed break outs and reversals. I kept telling myself to be more patient, but I bit on some and now have more losers.

Highlights include selling strangles on GLD, new tiny position in HOG, some red ink in UAL.

Fri Sell IWM Jun 122 calls @111.4. I rebalance my short strangles on the Russell 2000 etf by selling calls. Stock market is down hard today.

Thu Sell APC Jun 85 puts @100.6. Rebalance my short strangle to net long on Anadarko Petroleum.
Sell UAL May 49 calls @41.9. United Continental down hard on earnings news. I hedge my short puts by selling some calls.

Wed Sell AMGN May 125 calls @112.5. Amgen moves lower on earnings. I sell some calls to hedge my short put position.
Sell BA May 120 puts @130.2. Boeing higher on earnings. The lower end of the recent range is 121.

Tue Sell IWM Jun 95 puts @.28 @113.7. I open a June position in IWM the Russell 2000 etf.
Sell IWM May 104 puts @114.7. A bit later I rebalance by selling my fifth layer of May IWM puts.
Sell HOG May 65 puts @72.6. Harley Davidson up on earnings. Chart is a beautiful break out from a base pattern.
Sell KORS May 82.5 puts @93.6, I rebalance my short strangle to neutral as Michael Kors keeps moving up.
Sell BRKB Jun 115 puts @127.3. I open a June position in Berkshire Hathaway.

Mon Sell KORS May 77.5 puts @90.7. Rebalance my short strangle in Michael Kors by selling more puts so I am again net long.
Sell GILD May 57.5 puts @71.7. Hedge my short calls by selling puts on Gilead Sciences.

Sell GLD strangles @124.2 with a bull bias. Sell GLD Jun 111 puts / Sell GLD Jun 138 calls. Again, a short strangle is a bet on a trading range. I skew a bit to the bull side.


Position summary:



net neutral GILD SPY

Friday, April 18, 2014

38-5 for April, calling the top?

38 Winners 5 losers for the April option cycle. Grade B-. Most profitable month of 2014. Stock market was choppy. Winners include AMGN, IWM, VRX. I sold nine layers of IWM options, five layers of puts, four layers of calls, on the Russell 2000 etf and all came in safe. I took big losses in GILD, UAL, UNH. Had I held on to my losers, it would have worked out, but the draw downs were deep. The bears had one week in the sun, but for the most part, the bears got slaughtered during expiration week.

My profits for the year inch ahead of commissions paid. Any green during this difficult year is welcome, so I'll take it. As always, before any readers get excited by the high win percentage (38-5), those are the approximate odds going in. I tend to sell options that have about a 10% to 20% chance of coming into the money, so 80% to 90% of the time I win. However, some of the losses can be for huge percentages--that's why speculators buy those options, hoping for a 5-to-1 or 10-to-1 payout.

About market tops, it was about a year ago that I posted a Storm Warning for the stock market based on valuations (link). The stock market is up over 20% since that warning, again demonstrating the cliche that valuation tends to be a poor tool for calling market turns. More useful indicators include chart patterns and sentiment. Both charts and sentiment say there remains a good chance for many more sunny days to come. 

The terrible bear market of 2008 has scarred a generation of investors. So much so, that there is still a large group that has never come back to the stock market. The recent buzz about high-frequency trading doesn't inspire confidence either. I often hear chatter from various folks, along the lines of: the stock market is rigged and that they want no part of it. Does a major top have to come with frothy sentiment? No, no indicator is 100%. In any case, a major top is unlikely without a major correction in the 10% to 20% range before the big bear shows its claws.

As I have often written, calling top is a low percentage game. The higher percentage is waiting for a top, and shorting the rally failure. It isn't so easy to do this easier, but the odds are better than calling top. There have been a rash of articles and chatter about a replay of 1929, or 2008 or 1987. Investors still tend towards the cautious side (I almost always tend towards caution). Crashes rarely happen when so many are cautious, and so few are giddy.

The Fed wouldn't let a full on crash occur without major intervention. The Fed has distorted most markets, most especially the bond market with quantitative easing. What is surprising to many is that bonds are the best major asset class for 2014. 

The old cliche is "two steps and stumble," meaning two Fed interest rate hikes then a stock market decline. The earliest Fed tightening guess is late this year. However, the new Fed chief Yellen hinted at 2016 or later for a hike in Fed rates. Again, nothing is written in stone. At some point, I still believe that being short U.S. bonds will be the trade of the century. However, the timing is up in the air. Again, sentiment and charts may be helpful for timing.

As for gold, the upward bias of 2014 continues. My recent small trade in gold is still open and so far is right down the wide middle for profit. Again, I tend to like to sell options and the premiums on options on gold and bonds are tiny, and the margin requirements steep. This makes it hard to justify selling premium on GLD or TLT or similar.

Position summary:
short GILD

Thursday, April 17, 2014

Weekly: relief rally, best week of the year

A huge relief rally off the Tuesday lows translates into the most profitable week of the year for my trading account. I make three trades, May positions for AMGN Amgen and VRX Valeant and yet another blot on the record, closing out a big loss in UNH United Healthcare on their poor earnings report. My profits for the year have inched ahead of the commissions paid. Here are the three trades:

Thu Sell VRX May 95 puts @120.9. Sell AMGN May 100 puts @115.6. I open May positions on Valeant Pharma and Amgen. Implied volatility on both are high because earnings will come out before May expiration. Again, I choose the 90%+ probability of profit puts to sell. Valeant and Amgen are two of my best trading stocks for 2014.

Buy to cover UNH May 72.5 puts @73.9. United Healthcare gaps lower on earnings and breaks minor support at 75. I get out in the morning for a big loss, about 300% basis the option premium collected. There was a downgrade yesterday. Thankfully I didn't follow my notion to add to my long position on yesterday's downgrade. Intra-day timing is poor as I cover a few ticks from the low of the morning, By the close, UNH moves up over the 75 support level. Grrr.

Fast markets are not my friend and one reason why I trade the way I do. I trade cautiously, with the odds in my favor, often risking big losses for small gains, with a high percentage of winners. Once in a while, things go wrong. When that happens I tend to take my lumps and live to trade another day instead of risking account crippling losses. It is risky enough selling naked options, even more so to do it with a "let it ride" or "go down with the ship" trading plan when the chips are down. 

Every position trader has hot and cold streaks. A trader that lets losers go exponential is likely to eventually have a cold streak bad enough to destroy the account. A bad cold streak can mean game over, no more trading for you. Rarely does a person hear "game over" stories on the Internet, especially among the hindsight traders and paper traders that enjoy bragging about their wins but never seem to report a single loss in public. Many are doing coin flip probability kind of trades (50/50 up or down) so it is almost certain that over the long term the win percentage is no better than 60% even for the best of the bunch. (60% is considered exceptionally good over the long term for pro sports handicappers).
I'll post a monthly report for the April expiration cycle a bit later. For that observe the holiday, have a meaningful and joyful Good Friday, Easter and/or Passover.

Position summary:
short GILD
expired: BA WDC SLB

Friday, April 11, 2014

Weekly: bear week

The wild ride continues, the market gets even more volatile during this bearish week. I take some more losses. Expiration is Thursday next week because of the Good Friday market holiday. I closed all my in-the-money April short options, now hoping the rest come in on my side, with many getting close to their strikes.

Thu Buy to cover GILD May 60 puts @66.1. Gilead Sciences plummets lower. I take another big loss, about 300% basis the option premium collected. News is that Merck has competing Hepatitus C drug passing Phase II trials. I am still short Apr 62.5 puts and some calls. The entire GILD experience has been a house of horrors. Trade long enough and you will experience these kind of things. Hopefully, have enough winners to compensate.

Wed Buy to cover UAL Apr 43 puts @42.7. A painful loss on one of these worms. United Continental breaks the shelf of support at 43 on heavy volume, so I cover for a 600% percentage loss. As always the dollar amount is small. Some of my Monday hedging moves are also deep in the red. Again, if I could call every top and bottom, I would have no need to be timid, no need to hedge. However, as this 600% percentage loss (basis the option premium collected) in a week shows, an option trader can get in a lot of trouble real quick if wrong. Update a few hours later: Grrr, looks like another whipsaw, another taking out of stop-loss orders as UAL rebounds to even and then booms higher on Fed speak. C'est la vie (such is life), though it is extremely frustrating.

Sell ASH May 85 puts @97.7. Rebalance my position in Ashland, as it moves higher. Selling calls on Monday has the makings of a big mistake. We'll see if the uptrend continues.

Mon The bumpy stock market ride continues, with an early spike lower, a brief fake out rally, then new lows and more selling and signficant losses for me. I sell multiple layers of calls to hedge some of my short put positions. I am on a mechanical plan, to close any short options on a break of the strike price. Some are getting very close, some still have room.

Sell KORS Apr 95 calls @87.1. / Sell KORS May 100 calls @86.7. Michael Kors down again, no news that I can see. I hedge my short puts by selling two layers of calls. The decline has been painful. I will close some short puts on a close below 85 the rest below 80.

Sell IWM Apr 118 calls @113.0. / Sell IWM May 121 calls @112.9. Rebalance a bit by selling two layers of calls on the Russell 2000. April 109s are the nearest puts. April and May 121s are the nearest calls.

Sell ASH Apr 100 calls @93.9 / Sell ASH May 110 calls @93.9. Sell two layers of calls on Ashland to hedge short puts.
Sell DIS May 90 calls @80.1. Same idea, hedging short puts by selling calls.
Sell APC May 110 calls @97.5. Ditto, hedging short puts by selling calls,
Sell VRX Apr 140 calls @119.5. Ditto, hedging short puts by selling calls.
Sell AMGN Apr 125 calls @117.8. Ditto, hedging short puts by selling calls.

Position summary:

Friday, April 04, 2014

Weekly: Vomit Comet market

Astronauts train for zero gravity by flying in a modified aircraft that goes up and then zooms down to simulate zero gravity for a minute or so. The stock market followed that kind of flight path this week.

I added longs in APC Anadarko Petroleum and WDC Western Digital. APC is an old friend. I also opened several May positions and most are in the red. Early in the week, it seemed like there was rotation out of bonds into stocks and that reversed on Friday. Continuing down this week are some of the big name winners of this bull market. Google, Amazon, Netflix, some big biotech names, all peaked two or three weeks ago.

Fri A frantic Friday, with a higher open, then a knife down in some stocks.
Sell APC May 87.5 puts @102.1. Add to longs as Anadarko climbs even more.
Sell ASH May 85 puts @98.7. Open a May position in Ashland.
Sell IWM May 123 calls @114.3. Rebalance my net long position in the Russell 2000 ETF.

Thu Sell APC May 85 puts @99.2. Anadarko Petroleum up big on news of a settlement. 85 is the breakout point. I traded APC extensively in 2013, but have stayed away from it this year because of the law suit.

Wed Sell UAL Apr 43 puts @47.8. I rebalance as United Continental moves higher. Another point higher and I will cover my short Apr 50 calls for a loss.

Tue A busy day, eight trades. Let's hope I am not the April Fool.
Sell UAL May 38 puts @46.3. Sell May puts to rebalance my position in United Continental. I am short April strangles.
Buy to cover GILD Apr 80 calls @73.2. I cover these short calls while there is still a small profit, in part to avoid the possibility of losing big on both ends of the short strangle. It is galling enough to have covered short puts near the lows. It would be worse to get crunched on both sides if there is a monster rally.

Sell DIS May 70 puts @81.0. Add to longs in Disney.
Sell UNH May 72.5 puts @81.7. Open a May position in United Healthcare.

Sell MRK May 50 puts @56.1. Open a May position in Merck.
Sell KORS May 80 puts @94.6. Open a May position in Michael Kors.

Sell WDC Apr 82.5 puts @93.0. New long position, Western Digital making new highs. 82.5 is the bottom of the trading range.

Sell IWM May 101 puts @117.1. I add a fourth layer of May short puts for the Russell 2000 to rebalance back to net long.

Most of these eight Tuesday trades are more worm trades. (Fishing analogy of digging for worms instead of fishing.) While April tends to be a good month, May is often not.

Mon Sell IWM Apr 109 puts @.30 @116.5 rebalance. I sell puts to rebalance my position in the Russell 2000 ETF.

Sell GILD Apr 62.5 puts @.30 @70.7 rebalance. Same for Gilead Sciences. In hindsight, Friday might have been the bottom, about where I closed my Apr 70 puts. These things happen. Either a person uses stops and takes losses or they don't. The alternatives are to "go down with the ship" or perhaps even double down. Selling way out of the money naked options, means the odds of losing are low, but there is the potential for huge losses. Again, a popular analogy is picking up nickels in front of a moving. The profits are tiny, with the risk of getting flattened if something unusual happens. It is still painful to lose.

Position summary: