Wednesday, December 31, 2014

Year in Review: Nothing to brag about grade C+

I made money in 2014, but it is nothing to brag about. In round numbers, my trading account is up about 7%. For blog reported closed trades, I count 390 winners and 69 losers, which is about an 85% win percentage. Before anyone gets excited by the 85% win percentage, those are about the odds going in. 

Understand that the payouts scale to the odds. The person buying the 15% chance of profit option is hoping for a 7-to-1 payout when they win. Why else would someone buy an option with only a 15% chance of profit? I give myself a C+ grade for the year which to most people is a meh grade. With SPY up about 11% and VTI about the same. I trailed those big indexes. However, IWM (the Russell 2000) was up less than 4%, and gold, silver and emerging markets all went down for the year. On the other side, bonds, utilities, and REITs all had big up years.

Some of my most profitable trading tickers include:

Some of my worst include:

Biotech shows on both lists. APC was on the winners list until the spike down in oil prices flipped it over. SPY is up about 12% from the October lows, which is about the same as the gain for entire year. A few nimble traders rode the waves and made money on the down move and the rally. Some slower moving traders got caught in the turbulence, I lost money during the sharp moves. Only a few of those losses would I describe as stupid, but for an experienced trader, that is a few too many.

I loosely track a few ETFs, in round numbers, here are the best to worst for 2014:

TLT +24% (20 year treasury bonds)
SPY +11% (S&P 500)
IWM + 4% (Russell 2000)
GLD - 2% (Gold)
EEM - 6% (Emerging Markets)
SLV -20% (Silver)

Long term treasury bonds surprise as the best performing major asset class in 2014 with TLT up 24% for the year. Who predicted that? Especially as Fed bond buying ended right on schedule. Utilities and Real Estate Investment Trusts (REITs) were other big beneficiaries of the rally in bonds, with XLU and IYR up near the same amount.Silver craters down again, after a big down year in 2013 as well. Averaging down into a major bear market can be the road to the poor house.

I often write that predictions are mostly for entertainment. So just for fun, lets glance at that crystal ball. There are cross currents for the stock market. Seasonal factors such as the 10-year cycle, the 4-year presidential cycle point to a strong year, up 28% in year 5 of a decade is average. On the other side, valuation measures such as CAPE (aka as PE 10, the ten year price-earnings of the market), and market dividend yield, point to over valuation. I posted about the warning signs of a top before (link). I'll continue to remind myself of those, because a top is inevitable. However, ten tops tend to be predicted for every top that occurs. 
On the anecdotal side, there is a tiny bit more exuberance, as two young relatives opened accounts and bought a few shares. Neither is going "all in" or thinking about trading full time, but still it is a minor negative. I mentioned that one of the local CANSLIM meetup groups closed down. I see this as a minor positive. Stock market meetups would be booming, not closing down, if this was a popular market bubble ala 1999/2000. Instead, it remains a tough task to find intelligent casual conversation about the stock market. I still often hear people saying "the stock market is fixed. I don't trust the stock market." So this remains one of the most hated bull markets ever, up about 200% of the SPY 666 lows.

My plan is to listen to the market, instead of having a set in stone prediction. In May 2014, I wrote a post "Tea Leaves for a Market Top" (link) and continue to watch for those signs (transports lagging, inverted yield curve, magazine cover sentiment). Over my many years in the market, I observe that my predictions tend to be no better than coin flips. In other words, I don't make money on my predictions. I am bit better at risk management and that's where I see the profits coming form. Each trader has biases. Old timers have history. Hopefully, I can translate my vast experience into wisdom instead of bias.

Let me close with a toast: Here's to 2015 being the best year ever! Cheers!

Saturday, December 27, 2014

Weekly: Merry Christmas and Happy New Year

I trust all had a good holiday. A quick update for a quiet holiday up week.
Wed I ping-pong on AMGN, in a wrong-way fashion, and rebalance again.
Sell AMGN Jan 148 p
Sell IWM Feb 106 p

Tue I rebalance short strangles in Amgen and Honeywell. I hedge my neutral position in SPY.
Sell SPY Feb 220 c
Sell HON Feb 92.5 p
Sell AMGN 175 c

Mon I rebalance my position in Federal Express by selling puts
Sell FDX Jan 165 p .58

I didn't check my deltas so won't post a new position summary. Next week may be even quieter for me, so HAPPY NEW YEAR to all the readers. May you have the best year ever!

I'll post a year in review at some point. There was some good, some bad, some ugly. 

Saturday, December 20, 2014

Weekly: Playing with fire, getting burned

Selling options with only a short time until expiration is playing with fire. This week, I get burned by selling some calls for this cycle. Calls on WHR, UNP, AMGN all became big time losers. Whirlpool was the worst, and I took a 2500% percentage loss basis the option premium collected. 

As almost always, my positions are small dollar amounts. I also had enough offsetting options expire worthless so the week was profitable. It is still painful to have a firecracker blown up in your hand, so to speak, though.

Here are the trades:
p = puts / c = calls, all are the monthly third week of expiration options.

Sat Assignments on calls in ASH at 115 and WHR at 185. Ashland was a nice, though small profit. Whirlpool a mind-numbing, shell-shocking loss.

Fri New long position in KMX, up on earnings. 
Sell KMX Jan 60 p

Thu Ouch! I get burned by the monster two-day rally. Selling short term calls is playing with fire, and an entire finale rack went off in my face (a finale rack is the big ending of a major fireworks show). The percentage loss on the short WHR calls is about 2500%, on the UNP and AMGN about 300%, in two or three days!!! Now don't get the wrong impression, my trading account is up big during the past two days, but would have been up even more had I not played with fire.

Buy WHR shares @190.98 to cover short calls. I bite the bullet instead of trying to finesse for a better price. As it turns out I am on the bad side of the price curve, but with such a shell-shocking percentage loss (2500%), rational logic is difficult to discern.

Cover short AMGN Dec 167.5 calls
Cover short UNP Dec 118 calls
Sell IWM Jan 108 puts
Wed Sell FDX Jan 180 c

Tue Sell WHR Dec 185 c

Mon Sell IWM strangles:
Sell IWM Feb 126 c
Sell IWM Feb 92 p

Sell AMGN Dec 167.5 c
Sell JWN Jan 82.5 c

Sell NKE Jan 105 c
Sell UNP Dec 118 c 

Position Summary
net long NKE SPY
net neutral AMGN APC WHR YHOO
net short BBY FDX IWM JWN
expired GLD TLT
assignments on ASH 115 calls, WHR 185 calls, both covered by stock purchases

Saturday, December 13, 2014

Weekly: Baby swans and pipers

I see the recent market action as a "baby swan event." There are so-called black swans which are rare. Swans live for 10 to 20 years and mate after age four. So the baby swan is something that might happen every four or five years. The sharp decline in oil is that kind of event--not an every day event, but not a black swan which I see more as a once every 20 or 30 year event. Hence, my tag "baby swan," the kind of thing that might happen every five years or so.

During volatile markets I sometimes wish I were a more nimble trader, with better instincts as to directional movements. As is, I am slow moving. My directional predictions tend to be no better than coin flips. As is, this week was painful, with a lot of red ink. I close two layers of short puts on APC for huge percentage losses. I layered some SPY put backratios to hedge. I added to longs on Monday. Trades are below:

Fri Cover short APC Dec 75 p @74.3. for about a 600% loss basis the premium collected. I pay the piper his/her second installment on Anadarko, the first is below. Wow!

Wed I layer a second SPY put Backratio
Buy SPY Feb 183 p
Sell 2x SPY Feb 178 p

Tue I hedge by selling a SPY put backratio:
Buy SPY Jan 188 p
Sell 2x SPY Jan 184 p
Again, these are bullish positions but have an explosive profit with a decline to the lower strike. If there is a crash, they start to lose big time below SPY M180.

Mon I pay the piper today in APC taking a big loss coverin some short puts. I roll down to a much lower strike, and that new position is deep in the red before the day is over. Other than taking my lumps in oil, I add to longs in ILMN, DIS, rebalance WHR.

Sell ILMN Jan 155 p @190.0
Sell DIS Jan 85 p @94.0
Sell WHR Jan 165 p @188.0
Cover short APC Jan 77.5 p @77.2
roll down by selling APC Jan 60 p

Position summary:
net neutral APC GLD TLT

Saturday, December 06, 2014

Weekly: calm after the storms

Relative calm returns to the markets, as the zombie bull continues to lurch slowly forward. Highlights include a new long position in MSFT, adding to longs in many existing positions, and hedging my position in BBY.

Fri I hedge my long position in Best Buy by selling calls. I add to longs in Union Pacific Railroad and United Healthcare.

Sell BBY Jan 42 c @35.5
Sell UNP Jan 105 p @119.3
Sell UNH Jan 92.5 p @99.8

Wed Add to longs in Nike, Sell strangles in Amgen:
Sell AMGN 190 c @167.5
Sell AMGN 145 p @167.5
Sell NKE Jan 87.5 p @98.0

Tue New long position in Microsoft and add to longs Federal Express and Nordstroms.
Sell FDX Jan 160 p @180.5
Sell JWN Jan 67.5 p @75.3
Sell MSFT Jan 44 p @48.4

Mon I open January positions on some of my existing longs
Sell HON Jan 87.5 p @97.5
Sell NKE Jan 87.5 p @97.8
Sell YHOO Jan 44 p @50.2
Sell ASH Jan 105 p @116.2
Sell ILMN Dec 172.5 p @189

Position Summary:
net neutral AMGN FDX GLD IWM SPY