Friday, June 27, 2014

Weekly: The Fun House Mirror

The stock market has a dip down mid-week then comes back to near unchanged. I found some intereting quotes from Bill Miller (ex-Legg Mason), Investopedia link.

>> Bill Miller writes:
"I often remind our analysts that 100% of the information you have about a company represents the past, and 100% of a stock's valuation depends on the future."

"The market does reflect the available information, as the professors tell us. But just as the funhouse mirrors don't always accurately reflect your weight, the markets don't always accurately reflect that information. Usually they are too pessimistic when it's bad, and too optimistic when it's good."

As for my week, option expiration frees up some capital and I put some of it to work. Mostly, I open August positions in stocks I had already. One new long is Monsanto, which moved higher on news. Here is the recap

Fri Sell ASH Aug 95 puts @107.7. I open an August position in Ashland.
Sell VRX Jul 105 puts @127.7. I add to my long position in Valeant Pharma.

Sell MON Jul 120 puts @124.9. New long position in Monsanto. MON broke out earlier in the week from 122 on news. Decent chart support at the 120 level.

Wed I open August positions on Honeywell HON and Schlumberger SLB. I am already short July puts on both.

Sell HON Aug 85 puts @92.7. I step in to buy Honeywell on the third down day in a row.

Sell SLB Aug 97.5 puts @113.3. Schlumberger jumping on a better outlook.

Tue Sell SPY put backratios @194.7 consists of buying SPY Sep 178 puts, selling 2x SPY 173 puts for a net credit. This is delta positive trade (net bullish) with the possibility of a large profit on a decline to SPY 173. These backratios provide some downside protection on a modest decline, with the risk of large losses during a crash. If the market is up, I get to keep the small credit.

Mon Sell IWM Aug 105 puts @118.1. I rebalance my position in the Russell 2000 etf. I am still net short, but less so, after selling another batch of puts.

Sell JWN Aug 62.5 puts @67.7. Nordstroms downgraded this morning. I am a buyer and open an August position.

Sell AMGN Aug 100 puts @118.8. I open an August position in Amgen. Staying with one of my big winners for 2014.

Position summary:
net neutral DAL DIS GLD SPY
net short IWM

Saturday, June 21, 2014

34-5 Grade C+ underestimated the rallies

Thirty four winners, five losers for the June option cycle, grade C+. The rallies in gold and stocks were stronger than I anticipated. My trading account is up nicely for the month, but I lost some potential by selling calls and having to cover for big losses on the rally. 

As always, don't get excited by the high percentage of winners. I tend to take high probability trades where the profits are low. Those buying 10% chance of profit options are hoping for a 10-to-1 payout. I tend to take the other side, so the profits are tiny, the losses potentially large.

It is almost half way through the year. For calendar 2014, Amgen AMGN and Valeant Pharma VRX continue to be my two best trading stocks. The Russell 2000 IWM, Ashland ASH, Anadarko APC, Disney DIS, Gold GLD are some more winners. Losers for 2014 include: Gilead GILD, Boeing BA, Toyota TM, United Continental UAL.

Reviewing the signs of a stock market top (blog entry link1), none are present. The American Association Investors Intelligence (AAII) sentiment bullish reading is at 35%, dropping nine percent on a slight downturn last week (link2). Federal Express led the transports higher in a huge up week. Yield curve remains bullish. (An inverted yield curve, is the major warning sign of the bear, wiki link3.) While stock advisers are extremely bullish, the rank and file investors remain skittish, with many turning tail on a small decline. There was a recent article about stock ownership as a percentage of population being near record lows in the U.S.

The bearish argument includes valuations as measured by the Schiller PE10 or CAPE (ten year average of price earnings, wiki link4), record levels of merger activity, record levels of margin debt, some froth in certain sectors. The larger question is will there be time to get out when the bear comes? Odds are heavy on the yes side. There is almost always a warning shot correction, an oversold technical rally, before a big bear market occurs. The worst losses may tag those that buy that dip thinking it is finally their chance to get in, after missing most of the five year bull move.

The elephant remains the Fed and other central banks. While the Fed is tapering, the European central bank and Japan continue to pump money in. The bond market seems to have disconnected from forecasts and interest rates continue to be near record lows, despite open talk of short term rates going to 2% and then 4%. At some point the bond market prices this in. When will that be? Will it be an orderly exit? Or a mad rush? I don't know those answers. For timing, sentiment and charts tend to trump fundamentals. There have been so many calls of a bond market top, I side with the advice of "don't fire until you see the whites of their eyes." In other words, don't move the money (out of bonds, or to short the bond market), until there is clear evidence of rising rates.

As for gold, I am not that excited by the sharp rally this week. Short, sharp rallies often occur during bear markets. The strength in the gold mining stocks, GDX, is a positive, but it needs to continue for a while. Time and price are needed as evidence for the market to have turned. U-shaped chart bottoms tend to be rare, even though we did see a big one in 2009 in the stock market. I am not in any hurry to buy gold or silver. Whether an intermediate bottom has been found, only time will tell. At this point, I believe lower lows are likely. My money is still on a trading range for gold (short strangles, net neutral). Rising interest rates increase the costs of carrying gold.

Position summary:
net long DIS
net neutral DAL GLD SPY
net short IWM

Friday, June 20, 2014

Weekly: burning shorts

I did not expect the strong rally in gold, or the stock market. I took some losses on Thursday, otherwise a quiet week. This week's chart review of the S&P 100 only turns up four interesting charts: LLY LMT QCOM XOM

The trading summary is below and a monthly update will come in day or so.

Thu Three lumps of coal in my morning coffee, as I cover three short call positions for large percentage losses. As almost always, the percentages are eye popping, the dollar amounts relatively small. The margin requirements for selling naked calls and naked puts is substantial. I am reporting the loss percentages against the option premium collected, not the margin requirement. The glass full perspective is that my trading account is up for the week, and the month. Obviously I would be up more without these losses.

Rule #1 is live to trade another day. One way I do that is by taking losses before they snowball. Selling naked puts and calls is a financially dangerous game. The losses can go exponential. I tend to sell way out of the money options and close them out for losses if the strike price is crossed.

Cover short GLD Jul 128 calls @124.6. I cover short calls on gold for about a 200% loss. Gold rally getting uncomfortable, so I take my lumps and regroup.

Cover short IWM Jun 118 calls @118.1. The underlying crosses my strike price. The loss is about 400%. One could say it was a mistake to sell these calls for such a tiny premium. I take my lumps rather than rolling the dice on the next two days. I remain net short IWM, because I am short other calls.

Cover short APC Jun 110 calls @110.1. I take my third lump of coal for the morning, covering short calls on Anadarko Petroleum as it crosses my strike price of 110. It is another time to shake my head with a loss is about 200%, again, all three percentages are basis the option premium collected. The story here is unsubstantiated takeover rumors on Twitter helped drive APC higher and Iraq blew up again. Again, APC moves lower after I cover my calls. Not a good feeling, but these things happen. The cynical might say "they" drove it higher to take out the stops and then took it back down.

Tue Sell IWM Jul 108 puts @117.3. I rebalance my short strangles on the Russell 2000 etf. I add a bit of delta, but still am net short. The rally has been stronger than I thought it might be. Nearest short calls are June 118, which are too close for comfort

net long DIS
net neutral DAL GLD SPY
net short IWM

Saturday, June 14, 2014

Weekly: Wild fire in APC

The takeover rumor rally in APC Anadarko Petroleum causes me some pain. I was short strangles and the stock is near the short June 110 calls. I sold some July puts to hedge my position. Other highlights including covering short puts in BEAV BE Aerospace, hedging in DAL Delta Airlines. I rebalance in IWM the Russell 2000 etf and the move lower gets me to net neutral. 

The sentiment at AAII is getting to be a concern. Others cite a record high bullish reading among advisers at Investors Intelligence. Transports are moving lower. Interest rates have ticked up. So there are reason for concern. It isn't time to prepare for the big one, but a minor squall has been in the forecast for over a year now. Here is this week's recap:

Thu Sell DAL Jul 45 calls @38.4. Delta Airlines knifing lower. I hedge my short Jul 35 puts by selling some calls.

Wed Sell APC Jul 100 puts @108.0. Anadarko Petroleum up on takeover rumors. My short position in APC Jun 110 calls is deep in the red. I sell yet another layers of puts to reduce my negative delta, but my net position is short. It is a difficult situation. I weigh other choices such as buying back the calls and taking the loss, buying shares of stock to hedge the short call, or selling other puts at different strikes and expiration, before deciding.

Tue Sell GLD Jul 115 puts .25 @121.4. Gold showing signs of life with a small up day. I rebalance my short strangles back to net long. I am betting on a continuation of a narrow trading range between 115 and 128. In the big picture this is a narrow window, but in the short term gold is not moving.
Buy to cover BEAV Jun 90 puts .35 @93.9. BE Aerospace says it is splitting into two companies. I took my position on news that they were seeking strategic alternatives. The outcome was not a buy-out, so the stock drops. I get out with a small profit.

Sell SLB Jul 97.5 puts .30 @106.5. I open a July position in Schlumberger.

Sell IWM Jun 112 puts .22 @116.5. I rebalance my complicated position on the Russell 2000 etf. I am still net short. It doesn't want to go down.

Sell WFC Jul 49 puts .17 @52.5. I open a July position in Wells Fargo.

Position Summary:
net long APC DAL
net neutral AAPL GLD IWM SPY

Friday, June 06, 2014

Weekly: Monster truck rally

The stock market moves higher. Some point to the European Central Bank, others mention comments made by hedge fund superstar David Tepper. For me, being cautiously bullish was ok, but could have been much better. Being short strangles (puts and calls) caused me some consternation, as the short call positions went deeper into the red on each rally. Other highlights for the week include a new position in Walgreens WAG, and a renewed position in United Healthcare UNH. Here's the recap for my active week:

Fri Sell IWM Jul 106 puts 115.5 and Sell IWM Aug 103 puts 115.7. I continue to rebalance my short strangles in the Russell 2000 etf selling two more batches of puts. The strong rally has caught me net short. Again, the nearest short position are the IWM June 118 calls. IWM is getting uncomfortably close to my strike price.

Sell UNH Jul 72.5 puts @79.8. A new position in United Healthcare (was in earlier in the year, but let it lapse). UNH is doing a buyback.

Sell ASH Jul 95 puts 106.3. I open a July position as Ashland makes new highs.

Thu Sell WAG Jul 65 puts @73.4. Walgreens broke out yesterday on sales news. I take a new long position on todays minor pullback.

Sell IWM Jul 104 puts @114.5. I rebalance as the stock market shoots higher. The Russell 2000 etf up huge today. Even with this trade, I am still net short on my short strangles. Closest calls are the Jun 118. I am short and will need to cover the short calls if the IWM rally train continues.

Sell HON Jul 87.5 puts @95.3. Honeywell up today. I open a July position to add more long exposure.

Sell EWG Jul 30 puts @32.3. I add to longs in a German stock etf. European Central Bank does the predicted.

Wed Sell JWN Jul 62.5 puts @67.9. I open a July position in Nordstroms, which broke out from a base around the 62.5 strike price.

Sell IWM Aug 122 calls @111.5. I sell calls to pair with yesterday's short puts to make the August position a short strangle on the Russell 2000 etf. IWM bounces after I make this move, so the entry could have been better, either yesterday or later today.

Sell IWM Jul 99 puts @112.5. Ping pong, of the bad sort for me. I add some positive delta back to my position as the Russell 2000 rallies from the dip.

Tue Sell DAL Jul 35 puts 41.0. I open a July position in Delta Airlines.
Sell DIS strangles, I leg into short Disney strangles
Sell DIS Jul 77.5 puts @84.1 / Sell DIS Jul 90 calls @83.9

Sell IWM Aug 93 puts @112.0. I open an August position in the Russell 2000 etf.

Mon As the calendar flips to June, I open July positions in Amgen, Anadarko Petroleum, Berkshire Hathaway.
Sell BRKB Jul 120 puts @127.8.
Sell APC Jul 92.5 puts @102.7.
Sell AMGN Jul 100 puts 116.0.

Sell GLD Jul 128 calls 119.7. I rebalance my short strangles in gold by selling calls. The recent decline has increased my delta. This is another mechanical trade.

Position Summary:
net long APC
net neutral AAPL GLD SPY
net short IWM