Buy SPY (sell puts)

Buy SPY via selling April 90 puts, SPY @109.1. The delta on my March puts is getting close to zero. The big dip this morning is an opportunity to to get some elevated premium on April options. If I had to guess, I would guess SPY continues lower. However, for the 90 strike to come into play, stocks would fall another 18% by April, which would be full meltdown mode, and I don't see that.

Again, stock market declines of 10% are common. However, -10% in one month is an exceptionally bad month. Two such -10% months is a row would be even more exceptional. It seems like a relatively safe bet to take the other side.

Long GLD, TLT, SPY

Bears on the run

The stock market decline after the Consumer confidence number came in weak seemed too easy an opportunity to go short. The market had been up five days in a row and was near technical resistance. So what happens the next day? All those bears find themselves in a trap, and either have to cover and take their lumps, or hold on with losses.

GLD (chart) is showing a pattern of lower lows, lower highs--that is bearish.

TLT showing some strength, and is still outperforming both GLD and SPY since January 1. Who would have thunk that? For the most part, the news hasn't been surprising, just the usually chatter and reports. However, the sentiment on Treasury bonds was so bearish at the start of the year, that even though the news was about as expect (perhaps a bit worse for bonds with the Chinese government reducing their bond buys) all the fundamental information was already factored into the price.

Long GLD, SPY, TLT, though all options have decayed to the point that I am closer to flat than long on all three.

5-0 for February

Five winners, zero losers--a good month of trading for the February option cycle. It was certainly a rollercoaster ride, as every position was in the red for a time, many deeply in the red. The winning trades were short puts on GLD, SPY, TLT, TM, and a long put on SPY.

Yes, long premium worked out for a gain this time, even though the odds are against that result. I lucked out on the long SPY puts (part of a bearish SPY vertical put spread) as the market continued straight up after I sold the puts. The option value declined about 50% in three days, as the market rallied and time decay started to accelerate on the March option.

Toyota TM moved lower from 77 to 70 after I sold the put, but the margin of safety of selling the 65 strike, way out of the money, worked out. The drawdown was over 150%. Drawdown is the hypothetical exit at the worst point in the trade. It is extremely relevant for sellers of options because of potential margin calls.

The markets "dodged the meteor" when a surprise Fed rate hike rattled the overseas SP futures, but strong buyers stepped in and bought in New York. If the market was more fragile, that kind of news could bring -200 or -300 on the Dow on the day. Doing it on option expiration can make for a lot of impact on financial markets.

Long GLD, SPY, TLT for March expiration, all short puts

Upside bias

I've been busy with other things, and not spending so much time on the markets. There is a mostly upside bias. Some would say it is due to all the liquidity being pumped in by the Fed.

The bears have been hit hard lately. Later in the year, the tax law sunsets will loom larger. Taxes on dividends and capital gains are going back to the old higher rates. I don't know how much selling or reallocating this is going to cause, but it could add fuel to any equity declines in the fall.

Long GLD, SPY, TLT, TM
I have options on all of these expiring this Friday and all are safe, barring a meteor strike kind of event. I have already sold March options on GLD, SPY, TLT.

Happy Lunar New Year

Gung Hwa Fat Choy. It is the Year of the Tiger, the white Tiger at that. Yes, that is the genesis of the name of the blog, the year of the tiger.

Over at MarketWatch there is this bit (article):
>>
Turning to fortune tellers for the year ahead also offers limited comfort. Brokerage CLSA, in their annual light-hearted feng shui guide for investors, warn that Tiger years are typically marked by dramatic changes and even upheaval. Further, much like the tiger itself, the year will be energetic and powerful, but impulsive and risky.
>>

Cheers.

Long GLD, SPY, TLT, TM

Buy GLD (sell puts)

Buy GLD via selling Mar 91 puts, GLD around 106.50 at the time the order was filled. One person describes the trade this way, "you get paid to place bid." If the underlying goes down to the strike, you buy, if not you get the small premium. (I already sold Feb 92 GLD puts, and those are almost sure to go off the board.)

As for the stock market, it reminds me of the old saying about weather in the Midwest: "if you don't like the weather, wait a bit, it will change." Don't like the mood of the stock market, don't worry it will change. The market swings quickly from greed to fear and then back again.

Long GLD, TLT, TM, SPY

Buy SPY (close long put)

Buy SPY via selling the Mar 102 puts that I own, for a tiny profit, SPY at 107.05. Time decay is starting to accelerate. I entered this trade as part of a 102/94 vertical, and am still short the SPY Mar 94 put.

Yesterday's trade selling TLT puts was about as poorly timed as any. Soon after, TLT dropped on “saber rattling” by Chinese military officials saying that their government should sell some of their treasuries. It happens (SPY drifting lower as I type this up, too--I don't have much touch right now.)

I may sell a March GLD put soon, but would like a better entry point.

Long GLD, SPY, TLT, TM

Buy TLT (sell puts)

Buy TLT via selling Mar 86 puts, TLT at 91.50. I would have preferred to wait for TLT to decline under 90, but now am thinking the decline may come too late, to get much premium on March puts.

Remember the drumbeat at the beginning of the year that inflation was sure to rise, and bonds were sure to tank. So far it hasn't happened. Right now TLT is one of the better performing asset class long ETFs for calendar 2010.

Long TLT, GLD, TM
Short SPY

Weathering the storm

Reports are for a "snow" day in New York, so don't read too much from today's action. The ride has seen volatility rise. Overall, I still believe that the stock market trend is for lower lows. However, it is not going to be a straight down hill ski run. I am looking for an entry to roll the TLT short puts so that I continue to have exposure.

Long GLD, TLT, TM
Short SPY

SPY target 102.5, GLD 99

My chart reading gives targets of SPY 102.5, and GLD 99, TLT 89. As always, predictions can be entertaining, but the money tends to be made in managing the risk, with right sizing of positions, finding good entry points, and timely exits.

Wow, what a wild ride for most markets on Friday. Again, the exhortation is "don't do anything stupid, fast markets are not my friend." A reassuring thought is that sometimes option positions can be self managing, if the size remains small and the position is properly constructed.

My SPY position is:
short Feb 98 put
long Mar 102 put
short Mar 94 put
That boils down to net short SPY, but not by a lot. If the market decline continued to accelerate down, gamma would kick in and the position starts to reverse to net long SPY.

I'll state the obvious, options are not for everyone--there are a lot of variables.

Long GLD, TLT, TM
Short SPY

Bumpy ride

It sure has been a bumpy ride, especially in Toyota. I am holding my positions for now. I have a huge percentage loss in my TM short puts, though it is a relatively small dollar amount on a small position.

The stock market and gold are having their ups and downs as well.

Long TM, GLD, TLT
net short SPY

Doubling down with a "Texas" hedge

I haven't heard the term Texas hedge before. It is used in this Barron's article (link).

This is the context...
>> "I am thinking of selling Intel March 20 puts -- and as a hedge, selling an odd lot of the 17.50 puts as well," he said.

The natural question is: Why would someone bet that investors are too afraid and sell say five Intel March 20 puts and hedge with less than five March 17.50 puts? The likely answer is because he's willing to wager big that even if he misses out on the March 20 put trade, he'll make his money back.

"I love the Texas hedge," the trader said, referring to a position that increases risk even though a hedge is supposed to decrease risk.
>>

Market action has been surprising. After spending some time this past weekend looking at charts, I thought more downside stock market action was likely, not a big rally day. I also thought gold was in for more downside. I lucked out on getting in near the bottom on Toyota (TM), though as almost always it is a small bet.

Long TM, GLD, TLT
Net short SPY

Buy TM, short SPY

Buy TM via selling Feb 65 puts TM at 77.5
TM recall is all over the news. The stock is down about 10% over two days. It may go lower, but the worst of the news may be out. Support at 75 and then at 70.

Short SPY via buying a March 102/94 vertical put spread, buy the March 102 put, sell the 94, SPY at 109.0.

Long TM, GLD, TLT
Net short SPY

"Don't do anything stupid"

Lots of trades are tempting, then I remind myself that fast markets are not my friend, that I already have some exposure. The other voice tells me "don't do anything stupid." Yes, there are opportunities as markets are moving. The other side is that risk is escalating too.

The romantic view is buying the lows, selling the highs. The reality check is that scenario rarely happens for those trading real money in real time.

TM, NFLX are potential longs. I am tempted to do a SPY March bear spread to get net short SPY. For today the bearish SPY trade seems more of an emotional response than a well-thought out trade. On Tuesday, I placed an order for a SPY bear spread, but did not get filled, as the market moved lower.

Long SPY, GLD, TLT

Rally failure in stocks?

A few entries back I wrote about a possible rally failure in gold. Now it may be the time for the stock market. I'll repeat that calling top tends to be entertaining, not profitable. The higher percentage play tends to be to wait for a top to establish and short the rally failure, and that time may be here and now.

A 10% correction is normal and healthy. However, 10% down for SPY in a single month tends to be an exceptionally bad down month. So while a decline may be in the cards, I doubt it will be steep and sudden like the 2008/2009 bear market action. If there is to be an air pocket, it would be more likely later in the year (September/October).

I was tempted to double on my stock market position today, but an up day didn't provide a compelling entry point. I do see lower lows to be likely, but not a big immediate drop.

Long GLD, SPY, TLT

Buy GLD (sell puts)

Buy GLD via selling Feb 92 puts
I put my fishing line in the water on GLD as it nears minor support at 106. Stock market action is tempting as the sell off enters day three and VIX is racheting up.

I am taking on water on my existing SPY position and will hold. TLT is looking pretty good right now.

Long SPY, TLT, GLD

Ugly day for stocks and gold

The "sell the news" effect continues. Stocks such as IBM go down even on decent earnings, as are stocks with not so good reports such as CSX.

Right now I am telling myself "don't be the hero," wait for the dust to settle. The selling squall will likely pass, but that is never a certainty. I'm looking for an entry point in EEM and/or IWM on the long side, but again, will wait for the dust to settle. Fast markets with wide swings tend to be a dangerous place for relatively slow moving position traders like me.

Gold is looking weak in here. I tend to be long term bullish on gold, so didn't take the trade when I posted about a possible rally failure a few days back. GLD 99 would be a downside target if I were short.

Long SPY, TLT

1-0 for January

One winner, no losers for the January expiration cycle. The lone closed trade was selling SPY Jan 104 puts, a small minnow to be sure.

The headline for Friday is "worst day of 2010 so far." With headlines like that, it is likely that any decline will be modest because so many folks are cautious. It takes time to dissipate all the upside momentum in the chart.

Speaking of upside momentum, gold seems to have stalled for now. One scenario is another leg down taking GLD to 99. That would be the low range, the recent highs in gold are likely to provide resistance.

Long SPY, TLT

Good earnings from INTC

Good earnings news from tech bellwether INTC tonight. The stock isn't getting much of a boost in after-hours though, so it looks like most of the good news is already in the price.

My most recently entry was ill-timed. I could have gotten as much as 40% more premium on the SPY Feb 98 puts had I waited a day. As always, hindsight trading is easy, real time trading not so much. Once in a while a trader can get in a zone and seemingly have the Midas touch. The opposite seems more common, when every entry is greeted by a strong counter move, but that is likely my selective memory at work.

Long SPY, TLT

Buy SPY (sell puts)

Buy SPY via selling Feb 98 puts, SPY at 114.4

I kind of expect a mild sell off. However, these puts are at the 5% chance of expiring in the money, and I don't expect a steep sell off. Support for SPY at 103 and then 101.

I already have short SPY Jan 104 puts, but unless something like a major meteor strike happens those Januaries won't come into play.

I listened to the ThinkorSwim Friday market recap (if a person goes to their site and registers they can find the archives or listen to the next Friday recap). One nugget is that the VIX futures and options are already pricing in an expansion in volatility that often comes with a sell off. Another nugget was that some big tech stocks such as AMZN and GOOG are correcting, without their option volatility expanding. Another interesting bit is that many day traders and short term traders are trading from the short side, and haven't been making any money because the dips have been so shallow.

I can't draw any tradeable conclusions from all the above. Though, it seems to me to me that that odds of a big stock market sell off are tiny. That may happen much later in the year, but extremely unlikely in the near term.

Gold is up big today. Again, for those looking to short gold this is the kind of entry point to look for, after a dip then a rally still below resistance. That said, the long term trend remains up for gold.

Long SPY (2 positions), TLT

Risk management

I often write that predictions are mostly for entertainment value, and that risk management and money management are much more important.

For traders, risk management involves right sizing of positions, entry points and exits. Let's take an extreme example to make a clear point. Say there is a hypothetical trade that will win 90% of the time and generate a 20% gain on each win, and 10% of the time it will lose 100%. If a hypothetical trader bets his/her entire account on each trade, eventually they are sure to lose everything when that 10% chance comes up. Instead of betting everything, if the trader bets 10% of their account value each time, they will have nine winners of 20% each, and one loser at 100%. Overall this is a 80% gain on the size of one position or 8% of the entire account value (9 x 20 - 100 = 80).

Also important for traders is the concept of draw down--what is the lowest point the trade is at? This is doubly important for those like me, selling options, because margin calls can come into play. What good is a hypothetical winner at expiration if a forced margin call takes out the position before that winner comes in?

For long term investors, Random Roger occasionally writes about active management vs. indexing, and performance at his blog (link). In a similar hypothetical, say the overall market is up 10% for five years and then down 30% one year. The active manager may be said to under perform if he/she only gains 8% in the up years, and is down 8% during the down year. After all he has underperformed the index for five years, and only outperformed one year. However, the bottom line result can be a different story, depending on how much the under performance is, and how much the losses are mitigated.

Virtually all of you reading this are active money managers. The opposite is passive management with all money in various index funds.

Long SPY, TLT

The non-event event

Some months the employment number sends markets reeling and/or soaring. This wasn't one of those months. So much for "fireworks." Maybe one firecracker was all there was. Gold had a wide range today.

A few stocks are looking interesting from the long side: CMI, UPS, CSX, SHLD. With the overall stock market extended to the upside, buying breakouts on individual stocks is risky. The "M" in CANSLIM (William O'Neil's system) is for market, and can be the most important component.

I tried to roll my short SPY Jan 104 puts to February 102 puts, but didn't get a fill, then the market firmed up, moving it away from the limit order price.

Long SPY, TLT

Rally failure in gold?

If I were looking for a time and place to short gold, this would be a reasonable entry. So many gold bears tried to time the top and so many got broken by the steamroller rally. Like I have always written on this blog the percentage play tends to be shorting the rally failure after a top is in place. That way a trader might have resistance working for them.

With all that, the gold bull is still intact (chart), still above the 200 day-moving-average. Any shorting would be for the nimble trader, not for the long term gold investor.

Friday's employment report may produce some fireworks. Expectations are running high as evidenced by the stock market moving to new recovery highs into the report.

VIX (chart2) has been moving steadily down, down, down to a point of complacency. However, actual volatility is still coming in below the implied numbers. This means that selling premium still has been working. At some point this will reverse, but like calling the top of a rally, trading counter trend is not an easy game to make money at.

Long SPY, TLT

Buy SPY (sell puts)

Buy SPY via selling Jan 104 puts on the first trading day of the year. SPY around 112.50. Lots of short covering going on at the open. This likely means a good bit of buying support at slightly levels for those that aren't covering now.

Long TLT, SPY

2009 rewarded risk taking

From junk bonds to speculative stocks to emerging markets, all were big winners in 2009. Sure the ride was a wild one with many declining steeply into the March lows, but the ride up was more than spectacular. 2009 was also one of the worst in recent memory for Treasury bonds, so risk was rewarded, caution punished.

Readers know that I tend towards the cautious side, so I didn't have a banner year. Sure I have some profits, more so in my long term positions, than in the trades reported in the blog. The blog trades show modest gains. The accounting to separate the short term trades and the longer term investments is a bit muddled this year, so I don't have a readily available bottom line number for the blog trades. Some bloggers might be tempted to skew the results by solely reporting the huge percentage winners on small dollar option trades.

Happy New Year to all the readers. My schedule is opening up so I will return to more frequent blogging and trading. Perhaps three or four updates a week is what might be expected. Cheers.

Long TLT

Buy TLT (sell puts)

Buy TLT via selling Feb 85 puts TLT around 89.40

Sentiment is mostly to the bearish side on Treasuries. Chart support at the recent low at 87.5.

Long TLT

Survey says...

Two surveys are giving mixed signals. The newsletter survey, Investor's Intelligence is at 15% bears (link). If that was all there was, that would be a big time sell signal. Part two of the story is that the individual investor survey AAII, is neutral with a near equal percentage of bulls and bears (link2).

Individual investors have been steadily selling their stocks and stock funds into the rally. Newsletter bears have gone into hibernation. It may be worth taking a shot at the short side, because of the low percentage of bears on the newsletter survey. However, it is likely any correction will be short and sweet because so many individuals have piled up cash expecting a pullback.

As always, sentiment is just one indicator, and no indicator is 100%.

No trading positions

Barrons: Lessons learned, and to be learned

Barrons has an article looking back at the 2009 markets in review, that ends with a peek forward (link).

One reason for me to do this blog is as a public trading journal. Journals are an excellent way to put trading plans down, and then look back to see if the plan was followed. They are a good way to see what kind of thinking causes losers, and the winners too. Most folks learn more from their losers.

Lately, I haven't had time for trading, or looking back, or looking forward. Perhaps this year end period of quiet trading may be a good time for financial reflection. Reflection is very different from prediction. Reflection for traders is about refining the process of selecting, entering, stops, and exits. Prediction is often times more for entertainment or for those with something to sell such as stocks, or other securities, or perhaps a subscription to a newsletter, or a hotline service.

Readers know that I'm not selling anything and hopefully also know that I will shoot straight with them.

No trading positions

1-0 for December

One winner, no losers for the December option cycle. The SPY Dec 99 put expires and I pocket the small premium.

No positions

Shake that gold tree

Gold bulls remain mostly confident and defiant after two weeks of losses. This isn't good news for bulls. It means the odds favor lower prices.

What might be the best scenario for long term gold bulls is an even harder shake out that gets some of newsletter/hotline types to jump off the bandwagon. When the wagon has so many folks on board it is difficult to move higher, even more difficult to make new highs.

Sometimes the secular trend is so strong that the majority can be right and stay right for an extended period of time. That said, sentiment can be a powerful indicator, one of the best for calling turns.

Long SPY (expiring 12/18)

Barrons on GLD option skew

Barrons has an article about GLD options (link)

>>
For the first time in recent months, the puts on SPDR Gold Shares (ticker: GLD) -- the exchange-traded fund that everyone uses as the primary proxy for the commodity -- are becoming more expensive relative to calls. Such a change would be practically invisible to most investors, but sophisticated investors and professional traders watch them closely. Why? Changes in "skew," which is the difference between the volatility of out-of-the-money puts and calls, is often the canary in...the gold mine.

>>

I am watching GLD, and TLT. I don't have enough time to look at most individual stocks.

Long SPY
(* There was a SPAMMER on the Tuesday SPY buy post, that I couldn't figure out to delete, so I deleted the entire post. Sold DEC 99 SPY puts.)

Happy Thanksgiving

A happy Thanksgiving to all the readers.

Gold continues to run, SPY continues to be strong, dollar is weak.

Adam Warner mentions that GLD option premiums are high (link). GLD options usually have the opposite skew of SPY options. GLD out of the money calls tend to have a higher implied volatility than the otm puts. SPY skews the other way.

With VIX going lower and lower, I am tempted to take a shot at the short side with a January SPY bear put spread. For now it is just an idea.

As for GLD, it continues to power higher. Though sentiment and technicals make it a high risk trade for both bulls and bears. However, the trend remains unmistakeably bullish.

No trading positions

2-1-1 for November expiration

Two winners, one loser, one break even trade for the November cycle. Unfortunately, the winners were small fish in SPY and GLD, and the loser a bigger fish, AAPL, another GLD trade was closed near break even.

My prediction of gold $1150 by December came a few weeks early. GLD still looks higher. SPY looks higher too, despite a bit of selling this week.

Barrons has an interesting article about record low 2-year Treasury yields (link). What this means for other markets isn't so easy. The straight answer is that low rates are a positive for stocks. The inverted yield curve is when it becomes dangerous for stocks. As for gold, the cost of carry is low, but it also means low inflation expectations.

Blogging and trading will remain light for November and December. Good luck to all the readers.

No positions

Cliches for the week

"A trend continues until it ends."

"Just because two markets are correlated it doesn't mean they will be correlated each and every day."

As plain as these cliches are, this week another legion of traders continued to try and time the tops in SPY and GLD. So many aren't even tracking the "lead dog," the US dollar. So many traders continue to lose money on open positions or have their stops run. Some folks are just stubborn and want to bask in the thrill of calling "top."

As have writing from the beginning of this blog now over three years ago, calling top is an entertaining game, but tends to be a low percentage play. For the majority of traders, it is a money losing game. I ain't saying that I'm all that, because readers can see the track record and see that I'm not. However, at least I get this part.

Long GLD, SPY both expiring 11/20/09

Veterans day song: Arlington

Here is a YouTube link to Trace Adkins song "Arlington."

This week: SPY up, record high for GLD

This week gold futures touched a new record high $1100. The stock market went up about 3%. I mostly sat this one out.

Looking back, it is a bit stomach turning to have sold near the lows both for AAPL and GLD. It is more stomach turning to let a single trade turn into an account buster. Stubborn I am not. The other side? Well, that may be accurate.

At least for this week, congrats to the longs. Enjoy.

Looking ahead, for gold, the path of least resistance remains higher. $1150 by December was the initial target from the $950 breakout, and that looks to be another good call given months ago here on this blog. SPY 1100 looks to be resistance. I waver on whether it is strong resistance or just another minor local high on the long rally road that began in March. It may be worth a shot at the short side of SPY as the rally nears 110. As always, only in hindsight will we be able to say for sure.

As I wrote earlier, I'll have less time for blogging and trading during November and December. I will still chime in when time permits. Hopefully I will offer up some more good calls, such as calling the SPY top at 110 to the exact day, and the breakout for gold from $950.

Long SPY, GLD

Buy SPY (sell puts)

Buy SPY via selling Nov 86 puts, SPY @103.7. Stock market could move lower, but 86 is below several support levels, so to get to SPY 86 would take a major crash.

Long SPY, GLD

Barrons: Appetite for risk

Some interesting stuff over at Barrons about the appetite for risk (link).

>>
This UBS gauge combines equity- and currency-volatility measures; credit spreads; and investor preferences for higher-risk geographic regions, like emerging markets, and stock sectors, like cyclicals.

... by late October, the fear of being out of the market had replaced the fear of being in the market

... readings [on the UBS indicator] higher than 1.3 points above the mean, suggesting high risk appetite, have given its best sell signals. Since 1992, equity returns 12 months from such a reading are just 1% on average. In 2009, the figure began moving above 1.3 in September and hit 1.56 on Oct. 23, the latest data available and the highest point since March 2000.
>>

This is a red flag for stock market bulls, though up 1% for the next 12 months would not be so bad after what the market has been through.

Changing the subject, my schedule is changing, and I will have a little less time for trading and blogging for the next two months. If there aren't as many blog updates or trades, the schedule change is one reason why. It is also a contributing factor to closing the AAPL trade instead of holding on.

Long GLD

Sell AAPL (cover short puts) - expensive lesson in Greek

Sell AAPL via covering short Nov 170 puts, stock around 190.1. This was one of my worst trades of the year, over a 200% loss on the value of the option, though still a modest loss in dollars.

I am tempted to hold on, but obviously I made a mistake entering the trade. Best to eat the mistake before it eats me. There is always the chance that AAPL finds support here at 190, but an acceleration to the downside could turn a bad trade into an account devastating catastrophe.

This trade was an expensive and painful lesson in theoretical pricing and option Greeks. Implied volatility didn't move lower after the earnings report, like it has in prior quarters. Delta never did kick in on the rally to 206. Theta (time decay) kept showing a big number every day, but never helped much either as volatility picked up. Ouch. This article at option trading pedia has basic definitions of the option greeks (link).

Long GLD

For every buyer there is a seller

This weeks stock market action brings that old cliche to mind: "for every buyer there is a seller." Two of the bloggers that I read were on opposite sides, the VIX guy was buying the dip (link1), the momentum guy shorting the same market move (link2).

Add the GDP report that came out first thing Thursday, and it was a spicy mix. In this case, the news broke well for the bulls, and poorly for the bears. Next time it might be the opposite and result in a 200 point down day instead of 200 points up.

Personally, my style tends to be to wait until the news is already out and then to trade off support and resistance levels once the dust has settled. I'll look at moving averages, chart formations, sentiment indicators such as VIX, seasonal tendencies, and news.

Changing the subject, it looks like I may have covered my short GLD puts near a low. That kind of event is a necessary consequence of a trading style that cuts losses. It would be terrific to always be right and never have to take a loss, but that is an unrealistic pipe dream for a position trader.

Long AAPL, GLD

Sell GLD (cover short puts)

I lighten up on GLD by buying back one of my short puts, GLD Nov 91, for a break even profit. I follow my rule “never let a profit turn into a loss.” The remaining short put is GLD Nov 92 and that is now at a small loss after commissions. Probability for the remaining position is 7% chance of a loss if held until November expiration.

AAPL continues to fade, support at 190 (currently 193, I sold the put at 200). AAPL has been a frustrating trade so far, because time decay (theta) and delta never did kick in for me like I expected it would and the theoretical pricing model indicated after the earnings announcement.

Long AAPL, GLD

Wind ebbing from the gold sail

Mark Hulbert via a Nadler article at Kitco (link)

>>
...from the viewpoint of contrarian analysis, gold no longer had strong sentiment winds blowing in its sails.

... the easiest money in gold's rally is now behind us." Ominously, gold timers on average are no less bullish today than they were in mid-October, despite the recent hiccups. The average recommended gold-market exposure among a subset of short-term, gold-timing advisers currently stands at 53.8%, unchanged from where it was on Oct. 15.

That exposure level is right in line with where gold exposure stood on each of the previous occasions over the last two years in which gold's rally failed.
>>

The low bullish readings on gold timer sentiment is one reason I took long positions in GLD, so it is worth noting. As always, sentiment is one indicator out of many to consider.

Long AAPL, GLD (2)

Is this the correction?

Is this the much anticipated correction that so many traders have been waiting for? I lucked out by mentioning the "time is up" top of Wednesday (10/21/09), last week at SPY 110, nailing it to the exact day.

I didn't take the trade because I don't like playing the "call the top" game and in my trading history, the odds of success tend to be low. My view did caution me in to having equity few longs, and those few are way, way out of the money (the 5% probability of losing trades).

Okay, what next? I see a possible decline to SPY 102 and then a relief rally. Depending on what that rally looks like, it might be the high probability short on the rally failure that I have been writing about.

I am taking on some water on the underlying for AAPL and GLD, but those option trades are still in the 5% chance of losing, so I will hold for now. I may roll one of the GLD positions to Dec.

Long AAPL, GLD (2)

A strange Friday

Friday was a strange market day. AMZN and MSFT post blowout upside earnings, and the stock market initially opens a bit higher. Stock market turns tail and ends up with the Dow down over 100 points, yet AMZN powers higher to close near the highs for the day. Some might say this is short covering.

The US dollar has been the lead dog in this market and a dollar rally is cited as causing some of the movements in other markets (stocks, bonds, commodities).

There are lots of stocks moving on earnings. Unfortunately, on many of them the options are not worth much, or the spreads are too wide.

Long AAPL, GLD (2)

1938 all over again?

Author of the iconic book "Options as a Strategic Investment," Larry McMillan on a ThinkorSwim chat talks about the 1938 analogy for the current stock market. If the pattern holds, the top is one month to four months out, and that will be followed with a slow moving, grinding slide down back to the March 2009 lows that will take two years or more.

For the readers that never heard of McMillan, that book is often THE book that option traders cut their teeth on.

As for the stock market, I had a strong urge to short SPY during morning weakness. Good thing I didn't follow that impulse, as the market came back with a roaring rally into the close. A blowout upside earnings report from AMZN after the close likely means a higher open. As for potential longs, PNC and FCX looked promising, but I didn't pull the trigger on selling out of the money puts on those.

Long AAPL, GLD (2)

Buy AAPL (sell puts)

Sell AAPL Nov 170 puts
AAPL higher on earnings, sell the 5% probability puts, stock around 200.3

Long AAPL, GLD (2)

memories: October 19, 1987

I started trading in the summer of 1987. A few months later, the bottom fell out and the market crashed. I had sold some longs and bought some puts before that Monday so basically broke even on the day of the 522 point crash. It was the decline in the week before the crash where I lost most of my money in that move.

The 1987 crash was worse than the recent 2008/2009 bear market. In 1987, all trades were over the telephone. No one could get through, busy, busy, busy. If a person got through, the clerks couldn't give a real price, because the bid and ask was moving so quickly. Market orders often got filled way off the last trade. Some got out anyway, with horrible fills that sometimes cost them an extra 10% on top of the 40% market decline.

In 1987, I thought the financial world was going to end and that the U. S. was in for another great depression.

Fast forward 22 years, and still I tend to be cautious, often overly cautious. Caution allows me to survive severe markets like we experienced last year. At times, caution has hindered me as well. As Popeye might say, "I am what I am," best to find trades that fit my cautious style and profit where I can.

Changing the subject, the stock market booms ahead. AAPL reports blow out earnings. Is there a top out there? Certainly there is. When will it occur? To be sarcastic, I called for a top seven weeks ago in late August at SPY 105 (now 109 and moving higher). To be less sarcastic, time may be up on Wednesday of this week. A blowoff market top with a glamor name like AAPL leading would be a classic top for an intermediate move.

Even if there is a correction, 15% down might be all that is in the cards. More than that would likely require a shift in sentiment, with a lot more little fish in the stock market net. Most of the little fish have been putting their money into bonds, not stocks.

Long GLD (2)

2-1 for October

Two winners, one loser for October option cycle. The loser was a vertical call spread on GLD Oct 99/104. The winners were short puts on GLD and SPY.

Stock market is resilence. A simple time cycle analysis would bring in a top middle of next week. I was tempted to do a bearish vertical put spread on SPY Dec 98/103, but thought better of it.

I haven't done much during this current round of earnings. Options premiums are lower than previous earnings cycles. Even with lower premiums, the anecdotal view is that straddle buyers ahead of earnings are losers.

Still long GLD two positions for Nov

Dow 10,000

Dow tops 10,000 for the first time since the crisis. If I were an aggressive trader, it might be a time to short stocks. I'll repeat my refrain on tops and bottoms. It is highly entertaining to make those kind of calls, but rarely profitable. The percentage play is to wait for a top to form and then short the rally failure. Same for bottoms.

GLD doesn't move higher even though the dollar slides. This may be due to options related trade on Witching Wednesday before expiration.

Long SPY, GLD (2 positions)

Luby's option book list, Time magazine on 401k's

Bill Luby at Vix and More has a suggested book list for options (Amazon link). I mostly learned about options from the school of hard knocks.

Roger Nusbaum talks about the Time magazine cover about the problems with 401k's (link).

As for the markets, the moves from jawboning by Fed chief Bernanke are being reversed today, as is usually the case. Now, if Bernanke had actually started acting on his talk, that would be different.

In hindsight, those GLD vertical spreads that I was in, would have been monster winners had I held until today. What is the cliche? Bulls and bears make money, pigs get slaughtered. Add to that, chickens eat chicken feed. As readers know, I tend to have a low tolerance for pain (losses). While that cautious nature served me well through the waterfall declines of last year, it often means chicken feed profits when the bull is running.

Positions long SPY expiring this Friday
long GLD two positions for November

Buy GLD (sell puts)

Buy GLD via selling Nov 92 puts
I double up my GLD position, buying strength, GLD @103.77. I am not bold enough (or stupid enough) to go aggressively long, only willing to be a strong buyer on a sharp pullback to support. There is a chance that GLD is taking off on a big up move. The caveats are that the media is warming up to gold, and much of the recent move was rumor based and dollar related.

Long SPY, GLD (2 positions)

Option Industry Council class notes

I attended another free option class. If you might want to take a class, you can find a list of upcoming classes at the Options Industry Council link. If there are no classes in your area, they have podcasts and other training materials.

The presenter opened with some comments about the paid TV option classes and how those classes have given options a bad name. The OIC is hosting these classes to combat some of that bad information. In the fly-by-night classes, students are often taught one or two specific strategies and told that they are going to makes lots of money very easily.

Readers might recall one sad story (link to June 2008 story) I told on this blog about a man I met who had gone through one of the "bad" classes. He paid a lot of money for the class plus one-on-one coaching. He did fine with the paper trading. The caveat is that the paper trading programs are sometimes set up to give better than real world results. He lost all his money within a few months of starting to trade real money. The strategy taught at the particular class was buying straddles ahead of earnings reports.

I got an update on the man this past week. After losing his life's savings in the options market and the class tuition, and losing his white collar high paying professional job, he is now living in a run down mobile home park in the middle of no-where just barely surviving. Sad to say, but I imagine more than a few folks that sign up for the TV classes and coaching meet a similar fate. He was an intelligent educated man, but that didn't protect him from the promise of free money.

On to my OIC class notes from the Intermediate Class:
* many folks do covered calls because of high premium, not because they like the stock--big mistake, only do covered calls on stocks you want to own.
* for novices, the best place to start is at-the-money.
* best measure of volatility is implied volatility of the traded options (as opposed to historical vol).

* every crash is different, the next one will be too.
* debit spreads tend to be slightly better than credit spreads, but often only by 1% or 2%.
* option assignments are random.

* option market makers have to honor their bid/ask, however, in the time it takes for an order to get to the exchange the market sometimes moves.
* most of the time simple is better, a lot of traders crave complexity thinking the more complex the trade the better it is going to be--not true.
* presenter advocates scaling in and scaling out of positions vs. "all in" or "all out" trading.

* when things go wrong he blames his dog

Positions
Long GLD SPY via short puts

Buy GLD (sell puts)

Buy GLD via selling Nov 91 puts, GLD at 101.30, up on rumors about oil trade moving away from dollars. Rumors are denied by major oil producers, but gold still soars. Strike price of 91 is below the support level at 92.

Mark Hulbert over at Marketwatch cites sentiment of gold timer newsletters (link). The timer reading was before the two big up days, still, it means a significant decline in gold is unlikely, which is a good setup for selling puts way out of the money.
>>
Consider the Hulbert Gold Newsletter Sentiment Index (HGNSI), which reflects the average recommended gold market exposure among a subset of short-term gold market timing newsletters tracked by the Hulbert Financial Digest. Its latest value is a quite-low 18%.

Three weeks ago, in contrast, the HGNSI stood at 39.5%. In other words, in the wake of a close-to-zero net change in gold's price, the average gold timer has cut his recommended exposure level in half.
...

The HGNSI's current level of just 18% is amazing from another perspective as well: Even though gold is within a few dollars of a record, all-time high, the average gold timer is mostly in cash. Clearly, there is no irrational exuberance in the gold pits.
>>

Long GLD, SPY

No guts no glory

Wearing 20/20 hindsight goggles, Friday's 10/2/09 open was a short term low for stocks and a decent buying opportunity for GLD. I was looking for another full point lower on SPY to 101 (vs. the low around 102) and a deeper dip in GLD to the 50 day moving average, instead of the 20 dma.

I missed both moves. At the moment, I am tempted to do a small GLD position, but it is near resistance at the recent high, and the move in gold today is mostly due to dollar weakness.

Long SPY

Stock market melt down

October started off with a 200 point drop in the DOW and similar losses in the other averages. Obviously, my most recent trade, selling a SPY put was ill-timed. I was writing about going short. Now that I am a tiny bit long it muddies that thinking.

My current plan is to double up long if we get another hard down day or two. Friday's employment report may provide an opportunity. I am thinking that chart support levels will hold--we'll see.

Long SPY

3rd quarter ends with a bang

Wow, what a wild ride today. I want to attribute some of the wide moves to end of quarter window dressing, but can't back that up with facts and figures.

Gold has a huge $15 up day, seemingly mostly on the back of weakness in the dollar. I am tempted to get back in GLD, buying strength and selling weakness as I often do.

This is the best quarter for the stock market since 1998.

Long SPY

Buy SPY (sell puts)

Buy SPY via selling Oct 96 puts SPY at 106.40

Change of plans. More than a few stock market timers sold the tiny dip, so the odds of this becoming a serious correction seem slim. Here is the Mark Hulbert article at Marketwatch (link).

Puts are 10% out of the money, so worst case would be an exercise where I buy the hard dip.

Long SPY

More on gold seasonality

Here is another chart with 35 years of seaonality data (chart) at Kevins Market blog (link).

By time the short term low for gold projects into late October, even early November. By price, it is maybe $20 lower from current levels. Interesting. The 50 day moving average may also provide support, about $20 lower from here.

Stock market has a big rally to celebrate Yom Kippur. I have a notion to take a shot at the short side, but it is only a notion.

Flat-no positions

Sell GLD

Sell GLD via buying back short Oct 94 puts

Sound the diving alarm, GLD going down fast. I bail out of the short puts for a decent profit. I warned about 9/24 expiration day for options on futures. I didn't expect this. I entered a limit order to get out of the vertical call spread on GLD Oct 99/104 for a loss, but so far it is not filled because the decline was so fast.

So still long one GLD position with a limit order to get out.

/edit to add: the second order got filled about half an hour later, so I am out for a 40% loss. The short put was about a 40% gain, but a smaller dollar amount, so a modest loss between the two trades.

Flat no positions

9/22 W.D. Gann day

There is an entertaining article about 9/22 over at Barrons (link).

>>
GANN DAY! It doesn't appear on any calendar, but Sept. 22 is known among aficionados of various and arcane market indicators as the day pinpointed by the late technical analyst, W. D. Gann, when markets are more likely to reverse than any other day of the year.

For some reason, stocks, commodities and currencies have a curious tendency to make major tops or bottoms on this day ...
>>

Long GLD (2 positions)

3-0 for September, bull sighting

Three winners, zero losers for the September option cycle. The winners were short puts on IWM, and GDX, long vertical call spread on GLD.

In the weekend edition of the Wall Street Journal there is a graphic of a bear morphing into a bull, with a lengthy article from James Grant about how strong the recovery is going to be. Interesting to say the least, for those that have heard or read Mr. Grant's opinions before. To me, this is yet another reason for stock market bulls to be cautious.

Most of the sideline money is pouring into bonds, not stocks, so it may be that stocks have more room to run, even after a six month 55% rally without a meaningful correction, even as overbought as they are. Wow.

As always, for long term money, age appropriate asset allocation, reached with gradual and modest moves is the way to go. All-in or all-out moves, and betting the ranch, is the kind of stuff for 25 to 30 year olds with a good career and the likelihood of an ever increasing income. For the rest, it is rarely ever a good idea to go all-in or move all-out in one fell swoop. The odds of those kind of decisions being smart ones are exceedingly small.

Long GLD (2 positions)

Pushing the envelope

Bill Luby has an interesting article about exposure to new ideas (link).

>>
Keep pushing the envelope and don’t worry if new pathways look chaotic at first. The more you get out of your comfort zone, the more that zone begins to widen and the better you will be at recognizing important patterns and opportunities across that zone.
>>

I am almost in the other camp, that amateurs especially tend to try too many ideas, too many systems and fail at all of them. The phrase "stick to your knitting," comes to mind. Meaning, find what works for you, and stick to that until it stops working. That doesn't mean a person stops learning. It does mean that it is difficult for a person to change their basic personality or trading style.

If a person hasn't found a style yet, that is where trading journals can be of value. Log each trade, the reasoning behind getting in and getting out. Every now and again, look back at the logged trades. Identify the characteristics of the successful trades vs. the stupid trades, to help find a style that works for you.

As for the markets, GLD is settling back to 99.0 where I initiated the vertical call spread. One theory is that Wednesday's spike up in GLD was in part due to equity options expiring today. Lately, Wednesday before expiration is the day a lot of options get rolled over, causing wider swings.

Another day to mark on the calendar is September 24th when options on futures expire. The futures drive GLD, not the other way around. Usually option expiration moves fade, and are more like hiccups than anything else. Only the most nimble might try and trade these smallish moves, and that would tend to exclude folks like me.

Long GDX*, GLD (2)
*GDX expiring today

A tale of three options

My GLD position is:
short Oct 94 put
long Oct 99 call
short Oct 104 call

The 94 put is equivalent to a covered call position, long GLD, short the 94 call.

I entered the 99/104 vertical call spread when GLD was around 99.0. With a few days of time decay and a one point up move in GLD, the 94 call is up a good percentage, the 99 call is up a tiny bit, the 104 call down a smidge. Again, reinforcing the concepts that time decay works against the option buyer, that buying way out of the money options can be a tough game to make money at.

I mentioned the possibility of a short SPY position. I remind myself that calling top (or bottom) can be entertaining, but rarely profitable. The odds go up after a top is in place and to short the rally failure.

As for gold, looks like a three month bullish period with an upside target of $1150, 20% above the breakout point. Keep in mind that while September is the best month for gold, October tends to be flat to down, and on average October is the worst month for owning gold stocks. As always, the disclaimer is that I find seasonal patterns tend to be among the least reliable of indicators.

Long GDX, GLD (2)

Sell Rosh Hashanah

Back in the 1920s, the saying was the opposite, to buy Rosh Hashanah, and sell Yom Kippur. Like a lot of calendar trends, once it becomes widely known, it shifts. Since 2000, the average period between the two holidays is down 0.4%, with seven out of eight losers. Rosh Hashanah is this weekend.

SPY has reached the price target of 105. It doesn't look like a great short in here, but I may take a small shot on the short side. The up move in stocks has been a bulldozer, sweeping everything aside.

Long GDX*, GLD (2)
*GDX expiring this Friday

Buy GLD (vertical call spread)

Buy GLD via a vertical call spread Oct 99/104, GLD around 99.0 when filled.
long the Oct 99 call, short the Oct 104

This is five wide vertical so the cost is lower than a ten wide. ThinkorSwim software shows 50% chance of 103 being touched and that would be the first upside target. I do not see a need for a stop-loss on a vertical call spread.

Readers know that my trading style tends to be that of a "singles hitter," mostly low risk, low reward trades, as opposed to a "home run slugger" that takes on big risk for big rewards. This breakout in GLD is testing me. Greed and fear flow freely on these intraday moves. I remind myself that the trend is up, and the old cliche, the trend is my friend. That big moves tend to be rare, only time will tell if this is a big move, and that to take a shot at some bigger profits when my indicators are lined up.

Long GDX, GLD (2 positions)

Buy GLD (sell puts)

Buy GLD via selling Oct 94 puts, stock at 97.28
This is more my cup of tea, selling options. Compare to the vertical call spread, selling puts has less upside, more downside, but time decay works in my favor. GLD acting relatively well. 94 is the break out point, and support.

Long GDX, GLD

Sell GLD (sell vertical call spread)

Sell GLD via unwinding the vertical spread, selling the Oct 95 call, buying back short Oct 105 call.

They turned up the heat, and I got out, when GLD broke support at 97.

A 40% profit is nothing to sneeze about, but remember my comments about taking “small” profits on long option positions. I had trouble with my Internet access today, and that added to my concerns. Another down day for GLD and all my profit might have melted away. The psychological damage of letting a decent winner turn into a loser, is something I like to avoid.

Yet another factor is that sentiment seems to have gotten a bit more bubbly over at Kitco Commentary (link).

Overall, I didn't stick to my plan of using the time stop. I could have held on a bit longer to GLD 96.30 or so and still eeked out a tiny profit, but I chose not to cut it so thin.

Long GDX

Gold $1000, now what?

Gold futures broke $1000. Now what? Well, I already wrote that a time stop for the GLD trade set to Friday 9/18 seems like the best move. My first price target would be GLD 102/103 and I would be tempted to roll up as a good deal of the potential profit from the 95/105 vertical call spread would be achieved by that price. To stay long, would require action.

Peter Brimelow at Marketwatch writes that gold timer sentiment remains tepid (link).

Breakouts into resistance like this one are often the best moves. An average move from a breakout is 20% or about $1150. With sentiment the way it is, I would guess that this will be more than an average move. As always, no advice given here, sometimes the odds are good, but the trade doesn't work out.

Long GLD, GDX

Time stops vs. price stops

The employment report turned out to be a non-event. I did place a early morning order to sell puts on SPY, but got cold feet, and canceled the order. Too bad because it would have been a good trade for the day, as SPY rallied strong after a flat morning.

Anyway back to the subject line, time stops. I am thinking to let my GLD vertical call spread run until Friday 9/18, and then see how it looks. This is using a "time stop" as opposed to the much more common price stop loss. Another commonly used stop is a trailing price stop, to get out if the trade reverses by a certain amount off the high.

The reason for the time stop, is that I think that the action in GLD might get wild and wooly and my usual impulse is to cash in for a small profit, or get whipsawed out (like the last time GLD broke out and went from 70 to 103). The problem with settling for small profits when buying options, is that 66% or more of the trades will tend to be losers. So the 33% winners have to be big winners to make up for the low percentage. I can also use the time stop, because on a vertical spread, the risk is defined, no matter how badly GLD does. Let me caution that a trader will not last long using time stops when risk is unlimited and leveraged (eg: trading futures on full margin).

As for the math of option profits, for example, if a person doubles their money 33% of the time, and loses everything the other 67% of the time, they will lose overall. Basically the person puts up 3 dollars and only wins 2 back. The math is why I usually prefer to sell options and have the odds and time decay work for me, instead of buying options. If a person loses that often, the winners need to be 200% profits to break even.

I signed up for another option seminar. This one by optionseducation.org (link). They also have online tutorials. I am sure some readers have a difficult time understanding some of the option talk. There are a lot of variables. I have always liked options, the complexity suits my mind. I would guess that maybe 5% to 10% of investors have a mind that likes options. I've met any number of investors that can deal with the rest of it, the financial reports, doing research, but are totally bewildered by options. There are not for everyone.

Have a good weekend.

Long GLD, GDX

Buy GDX (sell puts)

Buy GDX via selling the Sep 38 puts, stock at 44.14. Strike price of 38 is the breakout point. Some may question why I am increasing my gold position, instead of hedging my profit. This move looks the real McCoy. Seasonality, sentiment, technical, fundamental indicators are all lined up to the bullish side. Of course that doesn't guarantee a winning trade, but a trader sometimes might wait for months or years for everything to line up like this. When that time comes, take a shot.

Long GLD, GDX

Buy GLD (vertical call spread)

Buy GLD via buying a vertical call spread

Spread consists of: Long Oct 95 call, short Oct 105 call, with GLD around 94.69

GLD moving up, nice looking pennant, moving up through resistance, textbook chart. I'm doing a vertical spread to protect against downside. Pennants sometimes break to the downside. Selling the 105 call helps a bit with cost and time decay on the October options, while giving up the upside if GLD goes higher than 105.

Long GLD

Market needs a hero

Today's market action brings to mind the Bonnie Tyler song "I Need A Hero" (youtube link).

Readers know that I am more likely to wait for the dust to settle then to initiate trades in a fast moving market. So on days like today, someone else can try to be the hero.

There is an employment report this Friday. If the sell off continues into anticipation of that report, that might be a good place to take a stab at the long side.

I am still processing some of the information on option strategies from the Saturday seminar. I have thoughts about doing bear vertical put spreads out to December. I wrote about the worst ever September being a 12% decline. Looking three months out, instead of one month, the average decline from summer high to fourth quarter low is 9.8%.

For now, I am standing aside.

Flat

Adventures of Captain "One-Lot"

More from the Saturday ThinkorSwim seminar...

Captain One Lot is a not-so-nice nickname, for traders that do complicated option strategies on one lots (one option per leg). I am thinking it might come from the OEX pit days.

In the seminar, Don Kaufman outlines iron condors with his preferences, 2 dollars wide, 66% chance of success, 4 to 10 weeks out, five lot size (five options per leg). He goes on to add, that you probably can't make money doing one-lots because of commissions.

The commissions would be about $12 for a trade that best case grosses $65 and usually has to be taken off. So do the math, $65 - $12 - $12 = $41, equals not much profit, considering 33% of the time a person is likely to lose $135. Win $41 twice and lose $135 once, over and over again, and it is like selling rolls of nickels for $1.30 and making it up on the volume.

So what is Captain One-Lot to do? The initial reaction is to forget about the Iron Condors. The next thing to think about is increasing the size (which is a bad idea for most traders). Another idea is to widen the spread, and/or go out further in time. Look for the same 66% chance of success, increase the credit to the account so the commissions become more manageable.

Going to 5 dollars wide, perhaps 12 to 16 weeks out, with a credit of $170 per unit, and $12 commission increases the chances of actually making money. Yes, the dollar risk is greater, now up to $330 loss per unit. However, this is NOT the same as tripling up on size. At first glance it might appear that way, however, in the black swan scenarios of early exercise and assignment, a trader still only has one unit, one manageable SPY lot to deal with. The black swans are what one worries about.

Again, why iron condors? It is non-directional or delta neutral. Time decays works for you, you make the most money if the stock doesn't move at all. The risk is defined and limited. It is capital efficient, put up $330 to potentially make $170 on a high winning percentage trade. Compare that to what I often do, out of the money, naked puts. I might put up $620 to make $15 on a $60 stock, with more risk if the stock drops. A buy-write person might put up $5800 to make $150, with the entire $5800 at risk if the stock drops to zero. So the potential return on capital on the iron condor, with defined and limited risk, is a powerful lure to the professional trader and one reason it is such a popular strategy.

ThinkorSwim seminar notes

I attended a free ThinkorSwim seminar in Los Angeles today. A few notes:

* The word on the street is that most pros are short. When instructor Don Kaufman was asked at break time, when he thinks the market is going down, Kaufman quipped "six weeks ago."

* ThinkorSwim preaches defined risk, and having time decay working in your favor. For covered calls, the calls are sold with 4 to 10 weeks of time at deltas of 30% to 40%. Roll the call position with 4 to 10 days left.

* A good deal of time spent on Iron Condors, a delta neutral strategy where time is on your side. For SPY Kaufman prefers two dollars wide, again with a 66% chance of success. If this kind of option talk is all Greek to you, you probably aren't authorized to do these option spreads (you have to request that level of trading).

* Options on widely traded liquid stocks such as SPY are almost always priced correctly. The big firms have computer programs that sniff out mispricing and will quickly put prices back into line when the programs find an opening.

* Next on the horizon for ThinkorSwim customers is Prodigio, software that will automatically place real money orders based on user selected criteria. The user can set up a trading system, it can be simple or extremely complicated, and then lets the program run the money. It is kind of scary to think about that kind of future, but it is coming soon to a computer near you.

Barrons on lower CD rates

From a Barrons column titled "Deflation also hits investors." (link).

>>
Consider a widow left with $500,000. She might have earned $20,000 from 4% certificates of deposit issued last year by troubled (but federally insured) banks. When they mature, she'll be lucky to get 1%. That translates to a $15,000 income cut, which likely translates to some serious belt-tightening.

At a 4% yield, she could have drawn down her nest egg by $35,375 a year for 20 years. At a 1% yield, her annual draw would have to shrink by nearly $8,000 a year, to $27,433. If she maintained her $35,000 rate of withdrawal, her nest egg would be depleted five years earlier if she earned 1% instead of 4%.

The impact isn't restricted to retirees. ...
>>

If you are reading this blog, odds are that you are sophisticated enough to find alternatives to bank CDs. The article covers some of them, and still reaches the conclusion that "there's no easy way out." If a person goes for more risk, they are risking principal. If they go for longer maturities, there is the rate change risk, inflation risk. If they stay in short term, safe investments, the yield is next to nothing.

A large group of Americans do have the bulk of their money in bank CDs. The economic effects of the lower yields, lower retirement income, are going to be felt. Folks that depend on interest income have a lot less to spend. A lot of those folks give some of their money across the generations, so it has a wide ripple effect.

As for the stock market, I got shaken out of IWM by the intra-day sell off. Flat isn't the worst place to be. It gives a person a perspective, and a clarity that often can get clouded when a person has open trading positions.

Flat

Sell IWM (buy back puts)

Buy back IWM Sep quarter 47 puts, stock around 57.47.
One of my rules is: “Never let a profit turn into a loss.” So, I am taking my small profit and running from today's decline.

Readers might say that there are times I have bent the rule, this time I am sticking to it.

Flat

Investors Intelligence, bears below 20%

In a Marketwatch article there is this:

>>
The Investors Intelligence Advisors Sentiment index, which gauges the stock advice of about 150 newsletters and other paid market-advice outlets, said the portion of positive stock advisers jumped to 51.6% in the past week, the highest since December 2007.

Bears fell to 19.8%, the first time since October 2007 that the percentage fell below 20%. ...
>>

Sentiment tends to be one of the better indicators at calling turns. I still tend to think any stock market decline, or at least the first leg of any decline, will be relatively mild.

Long IWM

Market looks tired

The stock market rally looks tired. I think it is still too early to be actively shorting. The higher percentage play tends to be to wait for a top to show itself and then short the first reaction rally after that top. There isn't a top yet, much less a rally failure off the top. While a lucky few traders will short at that exact top of this rally, I am unlikely to be in that group.

With all that, I think it is a reasonable time to take some profits, or take some money off the table for the intermediate and long term.

If I had to guess, there is a still a bit of gas in the tank to propel the stock market higher, but not by much. So the bottom line: short term flat to higher, intermediate term flat to down, longer term looks less promising.

Long IWM

6-0 for August

Six winners, zero losers for the August option cycle. I was bullish, but no where near as bullish as the actual stock market action. I was actually hoping for a bit more downside action so I could add more longs at better prices.

My trades for the August expiration cycle were all low risk, low reward trades. I had several guppy size profits, one even a baby guppy, and a couple of minnows.

6-0 is my best month of the year, so I'll take it. The winners were: CELG, INTC, IWM, XLE, MTB, AMGN. I spoke to a buddy of mine about my cautious trading, and he told me to "keep pecking away." It is better to have small winners than some possible alternatives.

Cheers.

Long IWM September quarter

Buy IWM (sell puts)

Sell Sep Q 47 puts, stock around 56.13
I already have a position in IWM. My August option positions are close to delta zero, meaning that if the rally continues, I have zero participation. I sell the September quarterly put that expires last day of September, at the chart support strike of 47.

If the IWM Russell 2000 falls below the strike by end of September by that time, I would take delivery and go long the stock. Like I wrote in an early entry, even if September 2009 is one of the worst Septembers ever, that would be a 12% decline. With IWM at 56, a 12% decline would only get us to 50.

Long INTC, IWM, XLE, MTB, AMGN
all expiring this Friday

Long IWM September quarterly option

Three bears: Value Line, Crawford, Eliades

Three more bears are sighted over at Marketwatch. Bear #1 is Value Line (link1). The other two are Arch Crawford and Peter Eliades quoted in this article (link2).

For now, I am steady on the wheel, hopefully safe into harbor this Friday expiration. For now, I think any decline will be modest (5% to 12%) and may be an opportunity to go long, or add to longs. As always, predictions can be entertaining, but the trading money is made by making and executing trading plans, right sizing of positions, managing the risk.

Long INTC, IWM, XLE, MTB, AMGN
all expiring this Friday

September is the worst month...

Kate Gibson at Marketwatch quotes Art Hogan at Jeffries & Co. with five reasons to be cautious (link).

>>
1) September is historically the worst month...
2) The market has had a significant run up from its March 9 lows, up about 50%...
3) Insider selling...
4) Short interest is winding down...
5) The consumer in general...
>>

The more I read and hear about all the reasons for the stock market to go down, the lower the odds of a significant down turn. Let's take #1 on the list, September is the worst month. If every trader knows that and trades on it, most will jump the line and sell in August. Because of that, I see a quick and sharp sell off as a buying opportunity, SPY 95 would be a decent entry.

The reason seasonal indicators are not that reliable is because once they become widely known and proven by statistical backtesting, traders will jump the trade and mitigate the effect. If every trader and their brother is looking for a smash down in September, the event becomes less likely to happen, and mid to late August become more vulnerable.

The stock almanac gives these nuggets:
* average September is -0.7%
* worst September -11.9% in 1974
If we get an average September it would add up to be like the Friday we just had, Dow down about 70 points, SPY down 0.7, for the month. Even if we get another worst ever month, if we start here, SPY moves from 99 to 87, Dow 9300 down to 8200. Lower numbers than that would be a once in a lifetime kind of event. That doesn't mean it can't happen, but the odds are low, and readers know that I like to bet with the odds in my favor.

Sell CELG (cover short puts)

Sell CELG via buying back short puts to close
Buy CELG Aug 47 puts (to close)

CELG was down a tad early in the day, and I placed the order then. Got filled just before the close, with the updraft for a teeny tiny profit. I reduce my possible long exposure if by some chance the stock market breaks down completely next week. I don't see that happening, but that doesn't mean it can't happen.

Long INTC, IWM, XLE, MTB, AMGN

Prechter: March lows will be broken

Robert Prechter of Elliot Wave International is making the rounds with a prediction that the bear will be back and the stock market will take out the March 2009 lows (Yahoo link).

For those who are not familiar with the name, Prechter became famous for some similarly bold stock market calls in the 1980s. Back then he was named timer of the year twice. I am seeing mixed information about Prechter's current record. Wikipedia is saying it is poor, but I remember reading a more reliable link (anyone can edit Wikipedia entries) saying the recent record was quite good, but can't find that now.

Anyway, it is a big name, a person with experience giving his opinion.

Fed just announced, no change in policy, as expected. For now, I am mostly looking to sit tight, hold on to my open positions until expiration on the 21st.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Don't worry, be happy

The lead article on Marketwatch is "Rally Too Much Too Soon?" (link). With that kind of lead after a 113 point Dow up day, I think of that old song "Don't Worry Be Happy" (YouTube link).

Those that are most unhappy are the bad news bears, or those that keep calling "top." Like I have always written, calling top (or bottom) can be a fun game, but it is rarely profitable. Unlikely as it may seem, I still believe that there is a large group that missed the entire rally off the lows, and didn't get back in on the recent modest pullback.

Of course there is a top out there, however, just going on headlines, it isn't here yet, the market rarely complies like that. It is like a Catch-22, we can't get a top, if people keep calling top. If pundits stop calling top, we might get a top.

With all that, in earlier blog entries, I mentioned SPY 105 (currently 101.2) and late August as a possible price and time. Expiration Friday is August 21, the stock almanac says that the last week in August can be a doozy on the downside, and that September and October can be volatile as well. So as the time gets closer, I will be on my toes, even though for now, I believe we have about two more weeks for the Bobby Mcferrin song.

Kahn: correction is near

Michael Kahn writing for Barrons, points out two sentiment indicators that may mean the much anticipated correction is near (link).

>>
Last week, the American Association of Individual Investors survey reported that 48% of their members polled were bullish while only 31% were bearish. Historically, the average bullish and bearish readings are 39% and 30%, respectively, so this does present a somewhat unusual optimism on stocks.
>>

Add to that a major stock analyst calling for another 10% up, and that is another piece of the puzzle in place. With all that, the rally isn't going to go without a fight. There is enough steam built up to mitigate any immediate sharp downturn. Resistance often becomes support, so I expect SPY 95 to offer support on the way down.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Romantic notion of selling at the top

Bears get rolled again, as the stock market keeps rolling onward and upward. Many traders, more so novices, but many veterans as well, have this romantic notion that he/she can call the exact top and get out at that perfect time.

Readers know that calling the top, or the bottom is something only a few successfully do, at least those that trade real money. Armchair pundits and paper traders often seem to nail the exact top or bottom. In hindsight, the game is easy, in real time, only a few even try to do it. Most are content with 80% of the move, or to scalp for a few dollars where they can.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Luby: Line in the Sand

Bill Luby at Vix and More (link) writes about the "line in the sand" for the bears at 1000 for the SP500 futures. (SPY is the ETF that is close to the SPX futures and is the one I typically trade.)

>> Bill Luby wrote:
Sooner or later, the bulls will run out of steam, the bears will get tired of retreating and we will have some semblance of a top. With SPX 1000 just around the corner, tomorrow the last trading day of the month and a number of overbought signals being pushed to extremes, today or tomorrow looks like a good place for any bears left alive to make their stand.
>>

It reminds me of a story, I believe it is from the first "Market Wizards" book. Anyway, the story is about a commodities trader who is has been heavily long a certain commodity for several weeks. Another trader asks "where is it going?" To make it relevant to the current setup, the answer would be "SPX is going to 1000." Where is it now? SPX 992.

Upon thinking a moment about that setup, the trader liquidated most of the long position. Sometimes it is that clear, if a person stops to think that the target price is less than 1% away. For position traders that are straight up long, there is little need to squeeze out the last percentage point. For hedgers, option traders, the math and analysis can get much more complex.

Long INTC, IWM, XLE, MTB, CELG, AMGN

Buy AMGN (sell puts)

Buy AMGN via selling Aug 50 puts, stock at 62.65. Amgen was up on earnings yesterday. Support at 57 gap. In an odd twist, put premiums increase this morning, despite a slight bump up in the stock. Might be due to some option broker recommending some of those options, or spreads using those strikes.

Stock market had a relatively sleepy Monday and Tuesday. Bias is still to the upside. There is so much upward momentum, it will take more time, or more news to roll it over. For the intermediate term investor, I am thinking late August may be a time to lighten up. Again, these are just idle thoughts, not intended to be advice.

Long INTC, IWM, XLE, MTB, CELG, AMGN

What if you've made your nut?

In a comment to a Roger Nusbaum blog entry, someone poses that question (link).

>>Anonymous said in a comment...
In many ways, what you're exploring here Roger also applies to retirees who have already made their nut, regardless of whether they enjoyed a triple along the way or not. Risk adjusted return is critical for us, which generally translates into a safe income stream with some growth to cover inflation.
>>

The stock market went up 4% this past week, 11% for two weeks. If it kept going up 11% every two weeks, it would about quadruple in 28 weeks (14 weeks would be a double, another 14 weeks, another double). Let's say that scenario is unlikely. However, it does demonstrate how powerful rallies can be and gets to the point of Roger's column and musings.

This is a trading blog, and I report my short term trades. I talk about my long term investments tangentially. Every person's situation, risk tolerance, is going to be different.

Upside target SPY 105

The market had several good reasons to go down today, disappointing results from AMZN, MSFT, lower consumer confidence readings. Instead, buyers came in, and the broad market closed modestly higher. If the stock market was ready to go down, -200 on the Dow would not have been surprising given the news.

There is a gap on the SPY chart around 105 back in October 2008 (one year chart). This looks to be a decent exit point for those investors wary of the rally and wanting to lighten up.

Long CELG, INTC, IWM*, MTB, XLE*
* IWM and XLE positions are near delta zero, meaning that moves in the underlying currently have near zero effect on the price of the options because they have moved so far away from the strike prices.

Buy CELG (sell puts)

Buy CELG via selling Aug 47 puts
Celgene higher on earnings and full year projection. Support at 47.5, stock at 54.75.

Stock market rally booms ahead. For Elliot wave folks it looks like a fifth wave up from the March lows. After that is anyone's guess, but the old clichés about don't fight the Fed, don't fight the tape comes to mind. Fed continues to accommodate, tape is strong. A third cliché might be: don't fight earnings.

If earnings are up (above consensus estimates and whisper numbers), stocks tend to go up. So far, there have been a lot of high profile upside earnings surprises, and comparatively few misses.

Long INTC, IWM, XLE, MTB, CELG

The rally keeps rolling

The Nasdaq has its 10th up day in a row, the longest such streak in 12 years. SPY rolls up its sixth winner, and reaches another new high for 2009 (marketwatch article).

Earnings have been the story, or non-story. There have been some noteworthy winners such as INTC, IBM, CAT. The misses have been mostly mild. I am of the school of earnings, that long term, earnings are the primary driver for stock prices. This quarter, for the most part, earnings have been good. There have been isolated misses such as LMT (down 7 today on earnings), and a mild decline for GOOG.

My new position in M & T Bank gets off to a poor start. I attribute the decline to lackluster results at STT. In the worst case, an exercise if MTB falls below 45, it isn't a bad stock to own.

Yes, readers may notice that this is different talk than last year when I cut my losses ruthlessly. The new talk is about doubling down (INTC), and taking delivery in stock if the strike gets hit (MTB). Why is that? First, the market is acting a lot better than it was a year ago. SPY remains well above the 200 dma, so that means the long term trend for now is up. Support levels seem to actually provide support. Last year, support levels, were often the best place to initiate short positions as others stepped in to buy.

A second reason is that overall, I remain underinvested in stocks, despite the four tiny long positions (below). Adding on weakness would be a way to get more money working.

With all that, August and September can be treacherous months for the stock market. This year, I think it will be September/October that brings back some of the rollercoaster down drafts. I think August might see a lot more of these slow moving summer vacation trading days.

As readers know, I am not big on predictions. While they can be fun, I see predictions mostly as entertainment. The money is made by making and executing trading plans, right sizing of positions, managing risk. I post my actual trades a few minutes after I get the fills. That info is more substantial than any predictions that I may make.

Long INTC, IWM, XLE, MTB

Buy MTB (sell puts)

Buy MTB via selling Aug 45 puts
Buffalo headquartered M & T Bank moves higher on earnings, support at 45 (chart). Puts are now 11 points out with the stock at 56.30.

Long INTC, IWM, XLE, MTB

1-0 for July expiration cycle

The record is 1 winner, zero losers for the July cycle. I also have some open trades (IWM, XLE, INTC for August). I remain up a tiny bit for the year (less than 1% based on the capital available in the account).

The week is wild up 7% week for SPY. Who knew? Certainly not me. It makes me wish I was wildly bullish. I could not get bullish fast enough, and stuck to my knitting of low risk, low reward types of positions. All I have in my take-home fishing bucket is the one little guppy trade, TM Toyota for the month of July.

Long IWM, XLE, INTC for August

Buy INTC (sell puts)

Buy INTC via selling Aug 16 puts, stock at 18.01

INTC higher on earnings and guidance. Plan is to double down if the stock fills the gap (chart) at 17, depending on how it gets there.

Stock market is punishing the bears today. There are lots of them are prowling. So far SPY has held the 200 day-moving-average (chart2), I confess I thought a whipsaw lower was much more likely.

Meanwhile, the "chickens" are running from Treasury bonds, with a second big down day in a row. Bonds yields are getting closer to the targets some pundits have been predicting.

Long TM for July
Long IWM, XLE, INTC for August

Pins, round numbers and magnets

With option expiration this Friday, Bill Luby at Vix and More has an article about how round numbers act as magnets and how to trade that tendency (link). A pin is when a stock closes at an option strike price on expiration Friday. Example: IBM closes right at 100 causing all the calls and puts at that strike to expire worthless.

>>
Rather than look as round numbers as potential areas of enhanced support or resistance, I like to think of them has having a strong attractive power, almost as if they are large magnets. In some indices and stocks, prices tend to linger near round numbers for longer periods than a random distribution would suggest.

One way to take advantage of the attractive tendencies of round numbers is to sell options at or near that strike. Straddles, strangles, butterflies and iron condors would certainly be appropriate choices, but I have personal preference for strangles, with their wide maximum profit zone and simple construction/position management.
>>

Quiet market today, the dog days of summer are upon us, with many traders taking vacation. Volatility, and option premiums are down.

Long TM, IWM, XLE

Buy XLE (sell puts)

Buy XLE via selling Aug 35 puts

XLE down to support around 45, puts are way out. It is a way to get a tiny bit more bullish exposure, without chasing the overall market rally. ThinkorSwim analyzer software says 2.2% chance of moving below 35 before August expiration.

I had a strong intuitive feeling to sell SPY puts or BA puts this morning, but I ignored it, and then the market popped up. Most of the time those intuitive feeling trades get me in trouble.

Long TM expiring this week
Long IWM, XLE for August

Tbond game of chicken

The majority of bond market pundits predict higher yields by the end of the year, and yet yields on bonds fell for the fifth week in a row. It is like a game of chicken where most believe prices will end up lower, but week after week bond prices continue to climb as yields continue to slide. Meanwhile, stocks experienced their fourth losing week in a row. Oil and gold are also at minor lows.

This Reuters article touches on some of the points (link).
>>
[ten year treasury yielded touched] 3.261, the lowest since May 21 ...

A Bloomberg survey of banks and securities companies projects the yield will be 3.61 percent by year-end ...
>>

Mark Hulbert makes a strong argument that longer term, yields will be higher and bond prices lower, in this Barrons article (link2).

The open question is why are bond prices moving higher, when longer term most think they are going lower? The obvious answer is that most believe that short term, bonds will move higher, and that they will be smart and nimble enough to sell their bonds before the fundamentals take hold.

Long TM, IWM

Buy IWM (sell puts)

Buy IWM via selling Aug 39 puts, stock at 48.21, support at 47.50. IWM is a smaller dollar amount than SPY. Calendar tends to be weak. At a strike nine points and 20%+ lower from here, it would be a buy-on-weakness in the worst case scenario of IWM declining 20% by August expiration.

Long IWM, TM