12-3 for April

I count 12 winners 3 losers on individual option trades for the April option cycle. I give myself a gentleman's C grade for the month. Overall, my timing was poor, almost comically bad at times. A flat month usually means good times for option sellers, but some big blunders limited my profit. The bright side is another month in the green.

The three losers include a short strangle on APC Anadarko Petroleum, a short put on LGF Lions Gate, and one leg of a put spread on IBM. Winners include short puts on AXP, LGF, SPY, XRT, IWM, IBM, SLV, some with multiple layers of short puts, short calls on APC, IWM.

The big loser was about -330% on the recently rolled LGF Apr 13 puts which I initiated when the stock was 15.1 and rolled with the stock at 12. The short LGF Apr 12 puts got rolled at a profit. Some positions such as APC and SLV were closed early. The SLV puts would have expired worthless. The APCs would have been a lot worse had I stayed in.

Going forward I am short puts on BRKB, LGF, SPY, TLT, and have complicated positions on GLD and IWM that are net long.

Long LGF SPY TLT
net long GLD, IWM

AXP American Express
BRKB Berkshire Hathaway
IBM International Business Machines
IWM Russell 2000 ETF
LGF Lions Gate Entertainment
SLV Silver ETF
SPY S&P 500 ETF
TLT Treasury bond ETF
XRT Retail sector ETF

Roll LGF short puts (12s)

I roll my short LGF Apr 12 puts @12.0
Buy Apr 12 puts
Sell May 12 puts

This is my second tier of short Lions Gate puts, not a duplicate post. I rolled the 13s yesterday. The stock is hovering right at the strike price of 12. An assignment at ThinkorSwim is a higher commission rate than a roll.

Elsewhere, stocks have a positive tone on expiration Friday. I look for trades, but with premiums drying up, the risk doesn't seem to worth the small premiums offered.

Long LGF SPY TLT
net long GLD, IWM
expiring today AXP IBM XRT

Roll LGF short puts

I roll my short LGF Apr 13 puts @12.0
Buy Apr 13 puts
Sell May 13 puts

LGF (Lions Gate) has been a sinking ship for me. I am also short Apr 12 puts. I sold puts when the stock was 14 and 15, so the roll is at a loss. If need be, I will roll the short Apr 12 puts too. Longer term, this stock has some good movie properties, but so far it has been a big loser. Thankfully, the dollar amount is small, even if the loss percentage is huge (about -330% basis the premium of the sold puts).

The rest of my short puts and calls on other stocks and ETFs for April look to expire safely.

Long AXP IBM LGF SPY TLT XRT
net long GLD, IWM

Buy BRKB and SPY (sell puts)

Buy BRKB via selling May 72.5 puts @79.3
Buy SPY via selling May 122 puts @136.9

I sell puts on Berkshire Hathaway and the SP500 ETF. I skipped the April cycle for BRKB because that stock often dips down during tax time, which is now about over. I open a small position on SPY for May, the April 116 puts look to expire safely this Friday. I pick 122 because that is 20 points off the high. I see support at SPY 125. This tends to be a decent time in the option cycle to sell the next month out as so many roll their positions.

Elsewhere, LGF (Lions Gate) is now a significant drag as it is down again, despite decent box office results. SPY opens higher now lower. AAPL and PCLN finally correcting, Apple now down four days in a row. GLD not acting well. My GLD position is now delta positive, because of the move down.

Long AXP IBM LGF SPY TLT XRT
net long GLD, IWM

Rebalance GLD add more IWM

Buy GLD via selling May 150 puts @162.6
I was already short a call vertical spread (long GLD May 185, short May 173 calls) and losing money on that position. This move still has me net short gold, but reduces the negative delta. I see GLD 150 as major support.

I also buy IWM via selling May 72 puts @80.4.
I was already short layered puts and a vertical call spread. This adds to my net long position on Russell 2000. There is support at 75 and a lot of noise below that.

The other day (failed roll) I did move my order on selling IWM calls and that move of selling IWM May 85 calls isn't turning out too well either. For me, it feels like one bad move after another during the past few weeks.

Long AXP IBM LGF SPY TLT XRT
net long IWM
net short GLD

Cover short IWM calls, roll failed

I cover my short IWM Apr 85 calls (Russell 2000 ETF), and try to do a roll by selling the May 85 calls. However, by legging out and then entering a new trade, the market slips and I am left hanging. IWM is down another half point or so and even though I adjusted my roll order, it doesn't look good. It is frustrating, but it happens to all traders that try to leg into trades during fast moving markets. Sometimes it works in my favor, sometimes like today--crunch. I may adjust the price down again to try and get a fill later in the day.

The stock market is correcting, but two of the leading stocks AAPL (Apple) and PCLN (Priceline) haven't corrected much. Thus frustrating many of the would-be bears as so many traders try to call the top in these two big stocks. Hulbert cites a low reading on gold sentiment (usually bullish for gold), and that is troubling because I am short GLD delta. I remind myself, that 80% of the demand for physical is from Asia, and that if the stock market corrects, some may have to sell gold to meet their margin calls.

Bonds (TLT) are acting better and have entered a six month period where they tend to do better. LGF (Lions Gate) is nudging up a bit. I plan to roll my short puts if it looks like an assignment is likely. Same for the my short IWM Apr 77 puts, plan to roll to short May 75 puts if an assignment looks likely.

Long AXP IBM LGF SPY TLT XRT
net long IWM
net short GLD

Roll GLD calls (now short)

Buy back short GLD Apr 178 calls
Sell GLD May 173 calls

With this call roll, I am now short GLD by being short a vertical call spread. GLD@159.6 to .7 as I do two separate orders. I am now:
Long May 185 calls
Short May 173 calls

It's been a rough week or so of trading for me, with almost every recent move turning sour. I am trying to lay low and not add to the list.

Long AXP IBM LGF SPY TLT XRT
net long IWM
net short GLD

Aggressive strategies

A few weeks ago I wrote about defensive strategies (link). I thought a counter point about aggressive strategies might be useful to some readers. This isn't meant to be a market timing call, just an educational post.

Again, I'll start with buy-and-hold investors. Going 100% to equities, or whatever the max allocation where a person can still sleep at night is a common option. There is also buying stocks or ETFs on margin (borrowed money). For ETF investors, high beta stocks and higher beta ETFs (eg:IWM for Russell 2000) are other ways to increase upside potential.

Some aggressive traders gravitate towards momentum stocks, others seek stocks in an uptrend that are near the lower band of their recent up channel. Other timing tools are moving average crossovers or MACD (2 moving averages crossing over).

For option traders, the straight play is to buy calls. At the money calls provide plenty of leverage with about a 50% probability of making money. Out of the money calls can increase leverage, but the odds of success decline. I tend to favor vertical call spreads, buying calls and selling slightly further out of the money calls for the same month. Calendar call spreads (buying calls and selling the same strike in a closer in month) has lower time decay and less upside than verticals (calendar vs. vertical article at link2).

Leveraged ETFs are popular. There are double (SSO QLD RRY) and triple leveraged bull ETFs (see longer list at link3). These are not for me, as I tend to try and limit volatility and smooth out the ride. They may be suitable for younger, higher income, more aggressive investors (pros and cons of leveraged ETFs at link4).

With call option strategies, timing is as important as getting the price move correct. Call calendar spreads lessen the need of timing it exactly. Buying on margin or buying leverage bull ETFs are other ways to increase leverage and upside exposure.

Again, this isn't a market timing call, just a discussion of some aggressively bullish stock market strategies. Many other asset classes (TLT for bonds, GLD for gold) have the same kind of products available.

I can close with a quip. Some guy is talking to an aggressive trader and asks him what the secret is. The traders says "be bold and be right." The guy says "what if you are wrong?" Trader looks down, "you go down with the ship."

Sell SLV (cover short puts) & buy TLT (sell puts)

I buy back my SLV short Apr 29 puts with SLV@31.1

SLV (silver ETF) not acting well. I close my position after 14 days for a 32% profit basis the initial credit. Again, the return on capital is far lower than that 32% because it takes a lot more cash in the account to sell the puts than the price of the puts. Reported gains or losses are after commissions and fees.

Yesterday's loss on APC colors my decision. I decide to take a profit on SLV and take some risk off the table. The overall stock market has me skittish. My recent moves to sell puts on LGF (Lions Gate) aren't looking that smart either. Normally, today, the third down day in the stock market would be a good time to sell puts, but after about 45 trading days of mostly up, more time on the downside would be a normal reaction. Mostly the recent drop has erased the Bernanke induced pop.

/edit to add:
Buy TLT (sell puts) via selling May 104 puts with TLT@114.0

I initiate a small long position in the Treasury bond ETF. I missed the lows at TLT 110. I select puts that are 10 points out for a small premium.

Long AXP IBM LGF SPY TLT XRT
net long GLD IWM

Fold on APC (unwind strangle)

I fold on my APC position, buying back both ends of a short strangle APC@76.8:
cover short APC Apr 75 puts
cover short APC Apr 87.5 calls
I am now totally out of APC.

When I found APC, I thought Anadarko Petroleum was going to be one of my “milk cows” for the year with a steady stream of monthly or bi-monthly profits. Instead, I take about a 75% loss, using the premium from selling the options as the basis.

It hurts to cover short puts on a sharp down day. It can hurt a lot more if the short put options go into the money and downside delta explodes. There is minor chart support at current levels, and APC is oversold, but another 10% down to 70 would not be a shocker and turn an ugly trading loss into a monster loss. As almost always with my trades, percentage gains and losses on option trades can be eye-popping, but I tend to keep position sizes and dollar amounts small.

Long AXP IBM LGF SLV SPY XRT
net long GLD IWM

Buy more LGF (sell more puts)

Buy LGF via selling Apr 13 puts LGF@15.0
I add another layer of short LGF puts. Weekend box office topped estimates. “The Hunger Games” is only the first of three movies. Sequels tend to do even better than the first.

Elsewhere, stocks boom higher, as do precious metals, bonds get hit after Bernanke comments. My IWM position is moving towards delta neutral as the market rallies.

Long AXP IBM LGF SLV SPY XRT
net long APC GLD IWM

OT: Manzanar Fishing Club

This is an off topic post about a new movie "The Manzanar Fishing Club" (link). It is about Japanese that were sent to internment camps in the U.S. during World War II. A buddy of mine, Harold Payne (link2) wrote a song for the movie.

It is easy to forget how bad things can get. Many folks like to complain, and use extreme language for modern day conditions. However, compared to being sent to a prison camp without trial, without hearing, with all your possessions and property taken by the government, because your grandparents were born in another country, most modern day Americans have little to complain about. Obviously, during that time period, some in other countries had it even worse.

The movie might also give some the useful perspective that even during the darkest times, simple joys such as going fishing can give people enough hope to make it through to better days.

Buy LGF (sell puts)

Buy LGF via selling Apr 12 puts LGF@14.4
Lionsgate Entertainment is the studio with the movie “The Hunger Games” which is opening this weekend. There is a lot of buzz, with a record number of pre-sale tickets and 3 a.m. shows being added. The stock has been a sky rocket this year, with a minor pullback on analyst comments yesterday. There is minor support at 14. I pick 12 because it would be below the 50-day-moving-average, and that is a good place to buy rocket stocks on a pull back.

Elsewhere I am now delta positive on APC due to the down move in the stock. My IWM delta has moved up big time on the dip as well.

Long AXP IBM LGF SLV SPY XRT
net long APC GLD IWM

Goldman Sachs says sell bonds to buy stocks

A blog at the Wall Street Journal uses more colorful language (link).
>>
Goldman's chief global equity strategist, Peter Oppenheimer, unveils a whopper:

"The prospects for future returns in equities relative to bonds are as good as they've been in a generation."
>>

Readers know that I tend to be skeptical at table pounding all in, all out, all short, kind of moves, or best in a generation or worst in a generation language. I've been looking to take long positions in the bond market and this kind of headline confirms that it may be a good time to do that.

As always that Mark Twain quote applies, "it is difficult to make predictions, especially about the future."

Today was a painful day for my trading account. I decide to sit tight and wait. I am tempted to link to the Rolling Stones "Satisfaction" song because it was a frustrating day for many. Bears didn't get much satisfaction as many leading stocks (IBM, PCLN) went up or only went down a modest amount (AAPL). Bulls weren't happy as most stocks were down. Metal folks saw more losses in silver and gold. Bond bulls only saw a very modest bounce after some sharp down days. Not many happy campers on today's bus. I'm sure a few big winners will come out and gloat about their trades in hindsight, but they are only a few.

Sell APC (sell calls)

Sell APC via selling Apr 87.5 calls APC@81.0
Baker Hughes (BHI) down on news, bringing down the oil group. I have lost my bullish conviction towards APC (Anadarko Petroleum) and this balances me to a slightly short position. I was already short Apr 75 puts, so my position is now a short strangle. Chart point of 87.5 is the high of the March 9 island reversal day that occurred on news.

APC already to 81.3 (0.3 move against me) by the time I type this up, so my recent string of really bad intra-day timing continues.

Long AXP IBM SLV SPY XRT
net long GLD IWM
net short APC

Buy IWM (sell more puts)

Buy IWM via selling Apr 77 puts @83.8. This is the second adjustment of the day to my Russell 2000 ETF position. I choose 77 because there is minor support at the recent low of 78. I am tempted to use the header “Zombie Market,” as the bull move continues to lurch forward. At some point there will be a correction, even a bear market move, but for now the undead bull marches forward.

There are fundamental analysts such as John Hussman (CSMonitor link), seeing the market as dangerously overvalued. Trading options based on those kind of factors tends to be a losers game, because fundamentals are not a good tool to use for short term timing. I'm not saying Hussman is wrong, but with options, time can be just as important as price.

Long APC AXP IBM IWM SLV SPY XRT
net long GLD, IWM

Rebalance IWM

Sell IWM May 70 puts IWM@83.5
I buy some IWM delta by selling puts to rebalance my position in the Russell 2000 ETF, back to slightly delta positive. I was already short Apr 69 and 70 puts, 85 calls and long May 88 calls. This morning's move higher increased my negative delta.

Eeep, by the time it takes to type this up and post this, IWM falling back to 83.0, down 0.5 from time of trade. It happens, and it never feels good when it happens.

Long APC AXP IBM IWM SLV SPY XRT
net long GLD, IWM

NCAA bracket contests and the stock market

Many enter NCAA basketball bracket contests (There is a definition for those few that don't know what is at the link). I was thinking about some similarities between these contests and how the stock market works. There is "chalk" or favorites, there are upsets, or unexpected events.

Many office pools are won by someone with little knowledge of sports. Why is that? Shouldn't the experts be winning? That's where the stock market analogy comes in. Say there are 20 experts and 20 novices entered in an office pool. The 20 experts are often hearing the same analysis, the same dark horse picks, the same upsets and many will duplicate those picks. If they all did mostly that, then it would come down to a few minor coin-flip type picks and each of the 20 might have a 5% chance of winning, if they were the only ones playing.

Now take the 20 novices and their picks. Some might go by team colors, or good looking mascots, or colleges where they have friends, or other non-sports related methods. With 20 people, there are likely to be a wide variety of non-sports related ways to pick.

Now combine the two pools of 20, the 20 experts with mostly the same picks, and the 20 novices with widely different final four picks and the odds are strong in favor of a winner of the pool coming from the side of the novices. It is almost like a contest with 21 participants, with all the experts in a narrow band.

Again, back to the stock market. Over time, index investors (aka Bogleheads) tend to out perform 80% of active managers. In large part due to lower expenses. NCAA players that mostly stick to "chalk" are like the indexers, and are probably going to do better than most, but unlikely to be #1. Picking stocks isn't all about finding companies that are doing well or even will do well. That's part of the game, but popular stocks get bid up to high valuations. For stock pickers, picking what is going to become popular and being ahead of the curve is what leads to better performance. Like picking upsets, sometimes these will blow up before the company is proven. With the Internet, most everyone has access to similar news and information. A few do have insider info, or specialized industry knowledge, and that will give them an edge.

13 - 2 for March

The March option cycle was profitable. I give myself a grade of B for the month of trading. The ongoing theme is that hedging strategies tend to underperform buy-and-hold, and more aggressive long strategies. I stuck to my knitting which tends to be low risk, low reward hedging strategies, that look for high probability profits, not home runs. I took a big swing on buying puts on GDX and whiffed, but that was maybe a 20% probability trade going in. Another big swing was buying a vertical put spread on SPY back in January betting on a stock market decline and I also whiffed on that. On SPY, I pivoted to an overall long position and profited on other sold puts, but that swing and miss had a big impact.

The losers for March include those two big swing whiffs. I realized a gain on one leg of a GLD call calendar, but overall I am down on the overall gold position, including the damage control trade. Some of the damage control and adjustment trades worked out well, such as selling APC Mar 90 calls, which reduced overall risk and increased overall profit. One that is not so good at the moment, was selling IWM Apr 85 calls (IWM is the Russell 2000 ETF). Winners include short puts on APC, BRKB, IWM, MCD, SPY, some with layers, and short calls on APC.

For closed trades, I count 13 individual option winners, 2 losers. Netting out to a nice gain, but again, not as much as more aggressive bullish traders or buy-and-hold investors that were 100% in equities. A big positive is that I avoided the temptation to try call a top in the stock market and continually add to short positions. When a trader sometimes goes long, sometimes short, matching the 100% long performance can be difficult in a straight up market. The dangerous temptation is to become more aggressively bullish now, because it would have been a good thing to do a month ago, or two months ago. Calling market tops tends to be another low probability game.

Going forward I am short puts on APC AXP IWM SLV SPY XRT, short a put spread on IBM. I also have a diagonal call spread going on IWM so that nets out to short IWM. I have a GLD call diagonal that now nets out to slightly positive delta because of the movement and time decay. I mentioned that April to Novemeber tends to be a bullish time in the bond market, so I am looking to sell puts on TLT (Treasury bond ETF).

Long APC AXP IBM IWM
Long SLV SPY XRT
net long GLD
net short IWM

APC Anadarko Petroleum
AXP American Express
GLD Gold ETF
IBM International Business Machines
IWM Russell 2000 ETF
SLV Silver ETF
SPY S&P 500 ETF
XRT Retail sector ETF

Buy SLV (sell puts)

Buy SLV via selling Apr 29 puts, SLV@31.7
I choose the 29 strike because it is round number support at $30 for physical silver. Silver oversold and there was a dealer on the PCGS coin forum saying several customers were getting scared and bailing out (link).

I am tempted to short SPY in here, but remind myself that calling tops is an exciting game, but rarely profitable. A higher percentage play is to wait for a top and then short on a rally failure than to try to call the turn. A lot of traders want to be the hero, and call top on this massive rally. There are certainly signs of a top with recent Marketwatch articles with the theme that the market is going higher. The wording of the titles may not be exact, but the sentiment is:

“It's not too late to buy.”
“Stock market ready for lift off.”
“Stock market likely to go higher.”

With all that there are a thousand would-be hero bears that are all black and blue with losses from trying to call top in this stock market.

Action in the bond market is also of interest. The two day smash down caused some damage. The April to November period tends to be a good time to be long bonds. As always, seasonal indicators are down the list in terms of reliability and profitability, but are worth a look. In terms of options, I would be looking at weakness in bonds as an opportunity to sell puts on TLT (Treasury ETF).

My IWM position has pivoted from long, to neutral because of today's rally and expiring puts on Friday.

Long APC AXP IBM SLV SPY XRT
net neutral IWM
net short GLD
* long BRKB, MCD
* short GDX
* delta near zero on these expiring positions

Confirmation Bias and Indicator Hunting

Bill Luby at VixandMore coins a new term, Indicator Hunting (link). In plain English, it is looking for indicators to support a narrative. The person has already decided their bias and is only looking for supporting evidence and may ignore contrary evidence. Confirmation Bias is the tendency to mostly read information that confirms the narrative.

Both are dangerous mental traps. Losing objectivity and "falling in love" with a stock, an asset class, or the shorting of a stock or asset class can be an ego driven financial disaster. Some traders would rather be right than make money. Some on the Internet will never admit that they were ever wrong, always finding an indicator or an interpretation to weasel their argument that they were right. The cliche some use is "I wasn't wrong, I was early."

Option traders, especially buyers of options don't have that luxury because time and price are both factors. Option buyers need to get both time and price mostly correct. In trading range markets, time can be a bigger factor in options pricing than the small movements in price.

Cover APC short puts

I cover my short APC Mar 80 puts APC@83.7 for a 95% profit. APC isn't acting well. So while the chance of an assignment with only 2 days to go before expiration is small, so is the remaining time premium. This makes my expiration Friday an easier day at small cost. I am still short Mar 72.5 puts, Mar 90 calls, Apr 75 puts for a net long position.

While a 95% profit in 26 days sounds super exciting, the dollar amounts tend to be small and there is also margin cash involved in selling puts. At ThinkorSwim the margin is typically about 10% of the price of buying the underlying, plus some fudge factor. For selling APC Mar 80 puts, the margin starts at $800 per contract plus a bit. This compares to $8000 for buying 100 shares of APC at 80, so there is a potential of 10x leverage with selling short puts. It is more like 8 or 9 times leverage because of the fudge factor on the margin number.

This APC position was the only short option that was realistically at risk of assignment and even then it was at 5% or so. The rest of my short options look to be safe going into expiration this Friday.

Elsewhere AAPL looks like a tempting short, or at least short premium, but I feel like I am too slow moving a trader to be stepping in front of that popular train.

GLD getting smacked down again. Too late for my GDX Mar 45 puts. The good news is that I pivoted the GLD calendar spread from net long to net short after the last Bernanke rout so limited the overall damage.

Long AXP IBM IWM SPY XRT
net short APC, GLD
* long BRKB, MCD
* short GDX
* delta is near zero on these positions

Beaten down sectors: steel, coal

I did a value oriented screen using the Schwab software. Quite a few steel stocks, coal and auto retailers and suppliers all made an impression. Value investing is a different animal from short term options trading. Value investors often look for beaten down stocks. Slow accumulation, buying 1/4 or 1/3 a position at a time, tends to be a good way to go for value investing. Stop losses based on price are not a good tool, more useful is doubling positions on steep dips.

For value investors, sentiment can be a useful tool in calling turns. Examples are stocks beaten down on what might be temporary news such as the Toyota recall or the BP oil spill. Calendar tendencies can help in terms of timing of buys.

These days I tend to keep this blog steered to reporting my short term trading activity, and don't report any long term buys or sells, or asset allocation decisions.

As always, I do not make recommendations to buy or sell. A person always needs to do their own due diligence before investing real money.

Adjust IWM (2nd time today)

I buy IWM May 88 calls for the second IWM adjustment today IWM@82.1. The rally is moving up too fast for offsetting put sales to work vs. short Apr 85 calls. Each layer of sold short puts also requires another layer of committed margin cash. I was tempted to buy the Apr 87 or 88 calls, but going out to May at this point in the option cycle makes more sense in terms of time decay. This move protects me against a buying panic and moves me to net long IWM. There is chart resistance at 83 and 85. Again, the strength of this up move has surprised me and is costing me.

Long IBM IWM MCD SPY XRT
edit to add also: LONG AXP

net short APC, GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Adjust APC, IWM

Today's rise in APC on news of a deal with Algeria places me in an odd and uncomfortable position. I react by selling APC Apr 75 puts APC@86.7. This adds delta, but still showing delta negative for a net short position.

Early in the week, my short Mar 80 puts were the uncomfortable part, as APC declined to 81. Now with a rally to 86/87 those puts are near worthless but the Mar 90 calls I sold as damage control are now deep in the red. I could close out everything. My latest move hopes that resistance and support levels hold and APC stays in a range between 80 and 90 at least until next Friday.

I also sell IWM Apr 70 puts IWM@81.1. As IWM goes up my delta goes more and more negative. I adjust by adding some positive delta by selling puts, but still shows net short. Some of the these latest damage control moves are not working out like I expected. The strength of the bounce back has surprised me.

Long IBM IWM MCD SPY XRT
net short APC, GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Buy XRT (sell puts)

Buy XRT (retailer ETF) via adding another layer of short puts XRT Apr 54, XRT@59.9. I am already short XRT Apr 52 puts and Mar 53 puts. My thinking is any stock market decline will be contained around 10% and the 54s are 10% out of the money. Beta is about 1.0 for XRT.

Elsewhere, MCD (McDonalds) hits an air pocket. My short MCD Mar 92.5 puts still look to be safe. IWM (Russell 2000 ETF) continues higher, again my delta is showing slightly negative. Hmmm. For now I will sit tight on both of those.

The question in my mind: Is That It? Was that one day smash in the stock market all the correction we are likely to get? A few folks got nervous on the decline, while some others looked for stocks to buy.

Long APC IBM IWM MCD SPY XRT
net short GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Adjust IWM

I sell some IWM Mar 75 puts to adjust my position, IWM@79.5. I was already short Mar 70, Apr 69 puts and Apr 85 calls and the ThinkorSwim software was showing me as delta negative (net short). This minor adjustment puts me back to net long for now. Not much premium on these Mar 75 puts, and there is still a big employment report on Friday. IWM 75 is support as well as the 200-day moving average.

Long APC IBM IWM MCD SPY XRT
net short GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Damage Control on IWM

To state the obvious, selling IWM puts yesterday wasn't such a good move. I do damage control on yesterday's trade by selling IWM Apr 85 calls IWM@78.6. I am already short Apr 69 puts and Mar 70 puts. This lowers my overall delta. Resistance to the upside is at 83.

I was tempted to title a post earlier: I'm Melting, meaning this years modest profits are melting away like spring snow, or the witch from the Wizard of Oz.

Long APC IBM IWM MCD SPY XRT
net short GLD
* long BRKB
* short GDX
* delta is near zero on these positions

Buy IWM (sell puts)

Buy IWM via selling Apr 69 puts, IWM@80.1
I am already short Mar 70 puts which look to be safe. There is the 50 day moving average as well as trendline support at 79. IWM has already declined a bit from its highs at 83. 79 would already be a 5% decline from the highs. There is more chart support at 75 and then 70.

Long APC IBM MCD SPY XRT
net short GLD
* long BRKB IWM
* short GDX
* delta is near zero on these positions

Damage control on APC

I sell APC 90 calls. I am already short 72.5 puts and 80 puts. Today's sharp decline on no news is scary. I am now short a skewed strangle, which is net long.

My GLD position is showing slightly negative delta, positive theta. I will edit the other post to reflect that.

Long APC IBM MCD SPY XRT
net short GLD
* long BRKB IWM
* short GDX
* delta is near zero on these positions

Defensive strategies

With many pundits anticipating a stock market correction, this is a timely topic. I attended a live presentation on the subject at a local traders group.

For buy and hold investors, the obvious and the easiest is to sell some, take 10%, 20%, 33%, 50% off the table, depending on the style involved. Asset allocators may lower their stock allocation and move some to gold, or bonds, or real estate. In taxable accounts some prefer to take a small position in inverse-ETFs such as SDS, to avoid the taxable event that comes with selling for a profit. Some might move money to low volatility stocks (SPLV is an ETF that only buys low volatility stocks) or defensive sectors such as utilities (XLU) or consumer staples (XLP) are other flavors.

For options, the obvious is to buy puts as insurance. Some sell calls to finance the put purchases, constructing a collar. Some just sell calls to give up some upside to get a tiny bit of downside offset. One of my favorites is selling put backratios for a net credit, though that only gives limited downside protection and actually increases exposure in a full crash. Selling a put backratio involves buying a put, and selling double the number of further out of the money puts. Another thing some are doing is selling their stocks and buying calls. This is near equivalent to buying puts for insurance, depending on the strikes and ratios selected.

Many of these stock market strategies involve a cost. Some choices give up some of the upside (covered calls), some cost an insurance premium (buying insurance puts).

Damage control on GLD

I do damage control on my GLD call calendar spread. I roll down the short Apr calls, buying back the short Apr 185 and selling the Apr 178 calls with GLD@166.2. This moves me to about delta neutral. I am still long the May 185 calls.
/edited 3-2: GLD position negative delta, so slightly short

I moved BRKB and IWM to the near delta zero area. I am short way out of the money March puts on these two. A steep decline might bring them into play, but I no longer benefit from up moves.

Long APC IBM MCD SPY XRT
Neutral GLD
/edited 3-2: net short GLD

* long BRKB IWM
* short GDX
* delta is near zero on these positions

Buy XRT (sell puts)

Buy XRT via selling Apr 52 puts XRT@59.3
I open an April position, I am already short Mar 53 puts. Bernanke spooks the markets, in particular precious metals, and I am taking on water on my bullish GLD call calendar spread. My other positions are also taking on water big time. I am thinking this is a minor squall, a cloud burst that will pass quickly. Time will tell.

Long APC BRKB GLD IBM
Long IWM MCD SPY XRT
* short GDX
* delta is near zero on this position

Buy AXP (sell puts)

Buy AXP via selling Apr 47 puts AXP@53.6
I placed a limit order yesterday and didn't get filled. I took a worse price today. AXP made a new high a couple of days ago, breaking out from a base formation. AXP is one of Berkshire's long term core positions which endorses the fundamentals.

Elsewhere AAPL continues it run, and PCLN (Priceline) moved up sharply on earnings. I have been watching PCLN but the relatively wide spreads on the options kept me away. Add some more to the woulda, coulda, shoulda file. Stock market keeps moving higher. Silver has been the star of this year, now up 30% since 12/31/11.

A side note about the double leverage ETFs. I wrote about the negative of the decay effect. I did not mention that the leveraged ETFs stay at their full margin level. For example if silver starts at $30 and moves to $45, an investor on margin has to buy more to stay at full margin, but a position in AGQ stays at full double leverage all the time. Again, these move too fast for my temperament and trading style, but others are making huge money.

Long APC AXP BRKB GLD
Long IBM IWM MCD SPY XRT
* short GDX
* delta is near zero on this position

Buffett doesn't like bonds or gold

It shouldn't surprise anyone that Buffett doesn't like bonds or gold. Charles Sizemore at Marketwatch quotes three sections of the Berkshire Hathaway 2012 letter to shareholders (link).

>>
[bonds are] among the most dangerous of assets...
Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume. Right now bonds should come with a warning label.

... what motivates most gold purchasers is their belief that the ranks of the fearful will grow ...
... A gold bug has to sell it to someone even more scared and jaded than himself in order to see a profit.
>>

Buffett certainly would not be a fan of the permanent portfolio (25% each in cash equivalents, long bonds, stocks, gold, PERM is an ETF with that allocation). Buffett touches on farm land, and residential real estate, but comes back to his bread and butter, equity in productive companies with a moat that gives them pricing power.

Fahmy: On Mature Traders

Over at the Ritzholtz blog, Joe Fahmy on "5 Signs You’ve Matured as a Trader" (link).

The short version:
>>
1) Self reliance
2) Stop celebrating winners
3) Let trades come to you
4) Feel no need to brag
5) Loss management
>>

On #1 self reliance, I like to repeat an anecdote that may or may not be true, but it is instructive. It is about the great composer Mozart. A young man comes to a performance that Mozart is attending, and comes up after to talk to him. The young man asks "do you have any advice for me about composing my own music?" Mozart pauses and says, "yes, I suggest that you concentrate on simple pieces." The young man is startled, "simple pieces? But you were composing complete symphonies by the time you were 17 years old." Mozart calmly nods and says, "yes I was. I never asked anyone for advice about composing music either."

On #5 losses, few bloggers or Internet posters will freely write about their losses. I find that I tend to learn the most from the losers. From day one of this blog I have always owned up to my losers. This is how people tend to learn best, both the writer and the readers.

Often times on the Internet, I see folks asking others for advice. Often times it involves a great deal of money, and only the barest minimum information is given. An example might be: If you had $100,000 (or any other large amount) where would you invest it, or how much would you put into gold (or any other single asset class). These type of questions and answer sessions tend to have a negative value for all. The person asking usually doesn't have enough experience to discern good answers from bad answers, or sometimes even joke answers.

Stock picking contests also tend to be of dubious or negative value. The contests tend to reinforce lazy habits and poor risk management tactics. I am more interested in process than picks. The temptation for contest players is to pick the most volatile vehicles, often not suitable for long term investments, in the hopes of hitting a home run, but not caring if they lose because it isn't real money.

The Boglehead forum is a bit of an exception (link2), because they want all your personal information before folks are willing to answer in detail.

Buy SPY (sell puts)

Buy SPY via selling Apr 116 put SPY@137.1
I open a small position for April. Again, the temptation is to be more aggressive by selling closer to the money puts. With the stock market over bought it doesn't seem like the best time to be aggressive. The operating hypothesis remains no stock market crash for 2012.

Long APC BRKB GLD IBM
Long IWM MCD SPY XRT
* short GDX
* delta is near zero on this position

Buy IBM (sell vertical put spread)

Buy IBM via selling a vertical put spread IBM@197.7
Buy Apr 170 puts
Sell Apr 180 puts
for a small net credit

IBM breaking out from a small base. Support at 193 and then much more at 180. I am tempted to get more aggressive with higher strikes on the put spread, but the overextended general stock market is like a hanging sword ready to swoop and wash out over aggressive bulls.

Long APC BRKB GLD IBM
IWM MCD SPY XRT
* short GDX
* delta is near zero on this position

Buy GLD (call calendar spread)

Buy GLD via buying a call calendar spread GLD@172.6
Buy May 185 calls
Sell Apr 185 calls

This call calendar is a modestly bullish strategy, with modest time decay, and a net debit. Max profit is if GLD is at 185 (near the old high) at April expiration. Max loss is if gold goes down or stays where it is. Time decay is less than a vertical call spread, and much less than buying straight calls. Another negative is two commissions, two spreads each way, making it more costly and more difficult to exit the position.

Obviously, I was wrong on gold and GDX, but the GDX is now basically worthless because commissions are about equal to exit price.

Long APC BRKB GLD IWM MCD SPY XRT
* short GDX
* delta is near zero on this position

Game theory: diner's dilemma

Matthew Lynn at Marketwatch applies game theory to the Greek crisis (link). He first mentions a game of chicken and the diner's dilemma, which I had not heard of until today. Perhaps others have not either. One key point is that each diner doesn't really like the others, and tends to be selfish.

A group of real friends probably wouldn't try to do each other that way. The European union is a bunch of selfish countries that don't really like each other. Many have fought and killed each other, and those bad feelings remain.

>>
... the “diner’s dilemma.” Ten of us go out for dinner. We split the cost equally. Each of us decides to order the most expensive thing on the menu even though it is only marginally better than the cheapest — because once the extra cost is split 10 ways it is a trivial sum. But if all 10 of us make the same calculation, we end up ordering 10 of the most expensive dishes — and a far more expensive night out than any of us actually wanted.
>>

Another economic model is the real life problem of the commons. Back in old England, some parcels of land were set aside as common land. The common land was overgrazed, overused and abused, because each sheep herder would overgraze on the common land while preserving their private land.

Yet a third thing to think of is unintended consequences. Markets are not static. Punish or tax certain behaviors, and less of that occurs. Reward, bailout or subsidize certain behaviors and those behaviors tend to multiply. Politicians seem to have a very hard time with second order thinking, or perhaps do know and rely on voters being stupid enough not to think ahead. C'est la vie.

Another game I recently heard about was a crowded bar. In this game optimal is 60% occupancy. People must choose a few days ahead whether to go or not. If more than 60% choose to go, everyone will have a bad time, more than 70% and it will be terrible. If 60% or fewer go, everyone has a good time, less than 50% best time ever. The game theory sets up groups of people that have different algorithms for choosing. A small core group almost always will go. Some tend to go if they had a good time last week, some won't go if they had a bad time last week. Some ask their friends if it was crowded last week and rely on those reports.

Set up a simulation with those factors and the crowd will oscillate around an average of 60%, with many weeks over 70% and a miserable time for all, and many weeks under 50% and a wonderful time for those that went. The analogy to markets is for a particular investment. A good investment that gets too crowded may no longer be a good investment. People tell their friends, or learn from experience.

At one of the many talks at the local Schwab office that I've been attending, one of the presenters says it is always the same. After the stock market has a good up move, a good year, many clients come in and want to be more aggressive. After a down move, a bad year, the opposite, they want to be more conservative. It is close to the model of the crowded bar. When too many people are in it, bad times tend to follow. When a lot of investors leave, good times tend to be ahead.

Investment cycles are rarely as simple and short as one night events at a bar. So more complex models might be added. Some might track the attendance at the crowded bar and only go when there is a certain pattern, such as three crowded weeks in a row, or three sparse weeks in a row. In the stock market, this manifests in the form of those that move in and out based on price moving averages.

A long winded post, but game theory can be a useful way for market participants to do thought experiments to try and think about likely outcomes. Keep in mind, that top analysts are playing the same game, so it is not only trying to figure out what is likely to happen, but what others think is likely to happen, and staying in front of that curve. For example, the U.S. deficit and gold, best time to buy gold in recent memory was when the U.S. had a federal surplus back in 1999. The current trillion dollar deficits are factored into today's price which is up over 500% from the lows.

Investment philosophy in 10 words or less

Jason Zweig in a Wall Street Journal blog entry quotes many luminaries on their investment philosophy in 10 words or less (link1). Bogleheads on the Vanguard forum did theirs (link2).

The one that comes to mind first is:
Buy straw hats in winter.

But that doesn't really sum up what I do in terms of trading or investing, nor is it particularly accurate. Another cliche on my mind of late is:
Regression to the mean.
(bet with the odds, not against them)

Another one from the Graham/Dodd school:
Rule 1: don't lose money
Rule 2: don't lose money
Rule 3: don't lose money

For gunslingers that like to do all in, all out moves on leverage, their motto might be:
Be bold and be right.
(Q: What if you are not right?)
You go down with the ship.

One quip that goes with that one:
There are old traders, and bold traders, but no old bold traders.

6-0 for February

February was a good news, bad news kind of month. The good news is that for this option cycle there were six winners and no losers. The bad news is a big paper loss on long GDX puts, and with a strong trending market, many other trading and investing styles made more money. I was on the right side of being long stocks, short bonds. For stocks, aggressive long strategies were better than being timid like I was.

I avoided the wreckage that aggressive short sellers experienced when they shorted AAPL or the stock indexes. There was a funny tweet about that on one of the other sites. T-shirt design: I shorted 1000 shares of Apple and all I have left is this lousy T-shirt. It pays off big to be aggressive and right. Aggressive and wrong and it is ends up like my GDX position, down 90% in a few weeks, down 60% after a few days on news. Thankfully it is a small position.

This month's winners include short puts on BRKB EEM SPY TBT short put spreads on AAPL AMZN. I am deep in the red on long GDX March puts and am still in, with the current probability of profit in the 3% range. Even though I sold three layers of SPY February puts, I netted out to about neutral on SPY overall because I was long March 114 puts which I am still holding and are now at a huge percentage loss.

As for commentary, yes, the stock market is overbought. Yes, a correction is due. However, with the strong up trend, any topping action is likely to form a complex top, with head fakes and churning. Again, I am operating on a "no crash" in 2012 hypothesis. When price is uncertain, time may be a useful tool. For example, if the up move last 12 weeks, a correction may last for half of that or six weeks.

Long APC BRKB IWM MCD SPY XRT
* short GDX
* delta is near zero on this position

Buy APC (sell puts)

Buy APC via selling Mar 80 puts, APC @88.4. I am already short Mar 72.5 puts. 80 is about the breakout level and support.

In a strong uptrend, hedgers like me tend to underperform. So while it has been a positive month, aggressive traders, and buy-and-hold investors are doing much better than my relatively cautious approach. As for GDX, as soon I mentioned it, it popped higher and wiped out the put premium again.

Long APC BRKB IWM MCD SPY XRT
* long AAPL AMZN EEM
* short GDX
* delta is near zero on these positions

Buy MCD (sell puts)

Buy MCD McDonalds via selling Mar 92.5 puts, MCD @98.8. Chart support at 95. For calendar 2012 MCD has underperformed, though it had a great run up 2011. Some of the tech names are also interesting, but I have a difficult time when they are moving so quickly.

Elsewhere, the decline in GDX gold miners has brought my long Mar 45 puts back into play.

Long APC BRKB IWM MCD SPY XRT
Short GDX
* long AAPL AMZN EEM
* delta is near zero on these positions

AAPL smackdown and stray thoughts

AAPL got smacked today. It is witching Wednesday, the Wednesday before options expiration. The wild action might have been caused by some folks knowing where various stops might be and pushing the stock to run the stops. With a $500 billion market cap, manipulators only have so much juice, but Apple is also the most popular stock for option traders, and day traders.

Some other thoughts today: I mentioned watching a webinar about John Carter's TTM set of indicators, one of which is a scalper. Looking at various charts, the TTM scalper seemed to call market turns almost every time. Then I read what it actually is, and the balloon deflated. TTM scalper triggers after three periods of trend reversal, ThinkorSwim paints the trigger point back three days. That's why the indicator looks so great on the old charts, it is a hindsight indicator, flashing signals after three days, and then painting the chart three days back. The cliche about reading the manual comes to mind.

I attended another live Schwab seminar. One interesting anecdote from the presenter was that doctors and engineers tend to be his most difficult clients. They tend to be stubborn, and tend to think they know better. Interesting.

I am still operating on a "no crash" in 2012 premise. All my short February options look to be safely out of the money, even with today's minor dip.

6th anniversary and Sitting on my hands

Happy Sixth Anniversary for this blog. Cheers. I have learned so much from doing these public updates. I highly recommend the process of trade journaling. Really, it would be near my #1 tip for novice traders. Having a public trade journal makes me that much more accountable. A private one is fine enough, especially for those starting out.

As for the other subject, I remember someone teaching a kid how to play chess, and he told the kid to "sit on his hands." This physically reduced the temptation to make a quick move. It increased the chance that the kid would think before moving. I did the same thing today, sat and thought.

I've been spending some time this past week in the ThinkorSwim seminar archives, watching some of the recorded webinars from the past year or two about various technical indicators. John Carter's TTM based indicators, Pearson Pivots, and Bollinger Bands were each the subject of an hour long presentation. Some I found useful, some I did not. As I often write, something that works for me, may not work for you, and vice-versa. That's why I am big on process, not recommendations, not specific indicators, because every trader is a bit different.

Long time readers know that I have tended to favor simple charts. My old favorite was a 2-year candle chart with a 50 day and 200 day simple moving average, and volume and Momentum on the lower. That's it. Compared to most technicians that is a simple setup. I am looking at some of the indicators that I learned about. The temptation is to jump right in and start using them like I know how to use them. That's like the kid learning chess, just because I know how the pieces move, doesn't mean I know much more than that.

I was tempted, but will look for better entry points. PCLN was a rocket launch today, and it moved too quick for me. I wanted to take a bullish position via selling a vertical put spread. Readers know that I tend to be a slow moving position trader (vs. a fast reacting day trader) and that I tend not to do well in fast moving markets.

Today's market rally saw a slaughter of the bears. Big bold bears that have been shorting market leaders such as AAPL have been demolished by the up move and the decline in volatility. At some point the bears will cry uncle and it will be a good time to actually short. The cover of Barrons "Enter the Bull, Dow 15000" does flash a caution flag, but by itself isn't a sell signal.

Cover short TBT puts

I cover my short TBT Feb 18 puts, and place an order to sell the Mar 18 puts. TBT @19.8. Treasuries are moving lower on news from Greece. TBT is inverse so is moving higher. Seasonality is still negative for bonds until April (positive for TBT).

Elsewhere I wistfully look at the massive rally in AAPL and think about the possibilities. Had I gone long a vertical call spread instead of short the put spread, at my entry with AAPL at 447, it could have been a huge winner. Woulda, coulda, shoulda, is a bad town to live in. However, it can be instructive to learn from past experiences.

Long APC BRKB IWM SPY XRT
* long AAPL AMZN EEM
* short GDX
* delta is near zero on these positions

PERM Permanent portfolio ETF

Readers know that I am a fan of the Permanent Portfolio. A concept popularized by Harry Brown in the 1970s. The basic outline is 25% allocations to bonds, notes, stocks and gold. There is a new ETF symbol PERM (link to PDF Fact sheet). They do 5% silver and split their equity allotment into several categories. Management fee 0.49%.

For most people, I would prefer physical precious metals, but this fund does give an easier way for retirement investors.

As always, my posts are not a recommendation to buy or anything of the sort. I don't have any connection to the ETF or its promoters.

Buy SPY (sell puts)

Buy SPY via selling Mar 119 puts, SPY @134.7. I continue to add stock market exposure for March as February expiration is likely to dissolve many of my current longs. I was already long a vertical put spread: long SPY Mar 114 puts and short SPY Mar 107 puts. SPY 119 is below several support levels and chart congestion areas. Yes, a stock market correction is over due, but because so many people are looking for one, it means it is likely to be shallow and complex. Markets rarely give folks what they are looking for.

A stock market crash is extremely unlikely for 2012. This is an election year, and the powers that be are doing all they can to pump up the various markets, and keep liquidity in the system. 2008 was an aberration for an election year, and unlikely to be repeated. In 2008, the incumbent was not up for reelection. Selling way out of the money puts are basically bets against a crash. I tend to think that any declines will be contained at 10%, and 119 is more than 10% out of the money.

Long APC BRKB IWM SPY TBT XRT
* long AAPL AMZN EEM
* short GDX
* delta is near zero on these positions

Buy XRT (sell puts)

Buy XRT via selling Mar 53 puts, XRT @57.3 (Retailer ETF). Another beautiful break out from a base chart pattern, though it has run a bit already. 53 is the breakout level, so that makes me a buyer on a pull back. With so many positions approaching delta zero, I am adding some bullish stock market exposure for March. I am still hedged vs. a severe down move in the overall stock market with a vertical put spread on SPY (long Mar 114 puts, short Mar 107 puts).

Long APC BRKB IWM SPY TBT XRT
* long AAPL AMZN EEM
* short GDX
* delta is near zero on these positions

Buy APC (sell puts)

Buy APC via selling Mar 72.5 puts, APC @85.7. A beautiful break out from a flat base on earnings news. I am tempted to swing for the fences and buy a vertical call spread, but my logical mind tells me two things. First, that I have a poor history when trading energy related stocks. Second, I remind myself to “stick to my knitting,” meaning stay with what tends to work for me, which is low risk, low reward, high percentage trades such as selling puts below chart support levels.

As an aside, turns out that Vegas was on the losing side of the spread on the Super Bowl. Someone else mentioned that they more than made up for that on all the prop bets, such as the coin toss, the length of the national anthem. More than half the action on the Superbowl tends to be on these side bets.

Long APC BRKB IWM SPY TBT
* long AAPL AMZN EEM
* short GDX
* Delta is near zero on these positions.

Psychology of money

Over on the Boglehead (Vanguard) forum, there is a thread "How is Your Relationship with Money?" (link). The originator of the thread writes about how he was risk adverse staying mostly in cash, and unwilling to spend much. A lot of folks raised during hard times get similar habits.

A person's early childhood memories of money, the way their parents spent and saved, the messages a person got early in life make a strong imprint. Suzy Orman talks about this, and her first memory is her picking up a coin from the ground and her parent telling her to drop it, "it is dirty." So the message that imprinted was that money is dirty. It is easy to see how a person might develop unhealthy money habits when that is the message. (And Ms. Orman did, despite her recent successes, there was a lot of up and down in her financials.)

There is no right or wrong answer, but a healthy balanced approach to saving and spending, the middle road, is what I advocate. A miserly extreme isn't healthy, nor is the spend it now, buy everything on credit approach. I can tell stories on both extremes. I know a guy that was a millionaire many times over, but balked at paying $60 for new shoes. I know a person that was already deep in debt, and then decided to move to a bigger more expensive place to live and take on even more debt.

A young relative recently landed a very good job, good pay, good benefits, good job security. I suggested that saving 50% of income would be a good way to go. The person was thinking more in terms of 10% or 20%. 50% may sound ridiculously high to many, but considering the income and living expenses, it would still leave a good bit of money for luxuries, such as meals out, vacations, gadgets. Here's an optimistic way to think about it, if a young person can save 50%, and earn 10% on their investments, they could in theory retire with their current lifestyle after 10 years of working! A round number example: a person earns $100k, saves $50k per year, lives on $50k. After 10 years they have saved $500k and if earning 10%, they are now making $50k per year on their nest egg.

Yes, those numbers are quite optimistic in this age of low returns, and don't figure in taxes. 4% tends to be bandied about as the safe withdrawal rate from a big nest egg, but it wasn't always that low a number. The safe number is more like 2.5% for a young person looking to live another 80 or 100 years in good health. 3% is a traditional round number that many big endowments have used for 100 years. The other issue is that the young person may start a family and have much higher living expenses and responsibilities in a few years. Still, that nest egg would be nice to have in that event as well.

Another point is that in this economy, very few people are at a place where they can save half their income. I am dismayed to know that half the U.S. population doesn't save at all. Yes, there are some that can not save because of circumstances, but it isn't any where near half the population. Many that choose to spend buy gadgets or gifts, or take trips, or buy luxury food items.

Enough of the soap box talk against the spending culture. If you are reading this, you are likely one of the savers, the investors. Again, a balanced approach, a healthy relationship with money is the best place to be, and there is no right or wrong answer. Early childhood money memories, early investments experiences can imprint on a person. Be conscious about all of this. For would-be novice traders, I emphasize the psyche half of the equation. Each person is wired a bit different. So identifying what works for you, can be the biggest piece of the puzzle.

Vegas odds Superbowl

Kind of off topic, but not really. The line on the Superbowl is Patriots favored by 3 (or 2 1/2) depending on the casino. Most talking heads on TV are leaning Giants. They built all those big casinos because they are smart people that set good lines. A lot of betters, bet with their heart, on emotion.

To bring this back to the option market, option prices are similar to the betting lines. The market maker is trying to line up an equal number of bets on both sides and take the spread in between. There is a reason why certain options are priced the way they are. If the public comes in strong on a certain play, the public is more often than not, going to be wrong.

So much as I dislike the Patriots, given the betting pattern, the logical play would be to bet on them, because the public, the talking heads are mostly picking the Giants. Yes, sometimes the bookies do get it wrong, but the odds tend to favor betting with the bookie, not against them.

The stock market equivalent might be if the talking heads are all talking about how a certain play is a sure thing. It might be long or short a stock, or an asset class. I got into AMZN because of an article on Marketwatch saying it was the next Netflix, another crash and burn story. Even though the latest earnings report from Amazon may bring that to pass, given the chart, and the sentiment towards AMZN, the play I made (shorting a way out of the money vertical put spread) was a very high percentage move. Again, it doesn't always work, the crowd, the talking heads sometimes get it right, but I find it worth watching.

The opposite, someone aggressively buying options because of an article or a segment on TV tends to lead to losses. Someone is on the other side of those trades and winning most of the time. Like I opened with, they built those casinos by winning the majority of the bets.

Correlation Tracker

I rediscovered a "toy" today, a correlation tracker at:
http://www.sectorspdr.com/correlation/
link

Input two stock or ETF symbols and it gives a correlation between the two. For example enter VTI (total U.S. stock market) in the top slot and SMH (semi-conductor ETF) in the lower, then select one year, and the correlation is 0.94. This means a very high correlation (1.00 is the highest), and that a person might only be getting a -6% to +6% difference by trading SMH vs. VTI.

At first glance, that 6% seems small given how narrow and at times volatile the semi-conductor industry is. It can be an interesting tool or toy for those that enjoy playing with numbers and symbols. Option traders tend to like playing with numbers, that's one reason they choose to trade options. Enjoy.

Buy IWM (sell puts)

Buy IWM via selling Mar 70 puts IWM @80.6. There is a shelf of support at 75 and more at 70. Again, selling puts can be thought of as being paid to place a buy-limit order at the strike price. The golden cross on SPY (the 50-day-moving average crossing above the 200-day on the chart) is part of the bullish case (link).

Despite the list of longs below, I am not positioned for a strong bull move. As stocks rally, the delta decreases on short puts and many are near delta zero. I feel the urge to use more aggressively bullish strategies, but this is tempered by the bad results in the past when I get those feelings.

Long AAPL AMZN BRKB EEM IWM SPY TBT
Short GDX

AMZN disappoints

I rarely touch on fundamentals on this blog, so readers may be surprised that I sometimes put on that hat. Amazon.com's earnings report is disappointing. In particular the revenue number came in about a billion short of estimates at $17.4 billion. With a market cap of about $80b and growth slowing, that is bad news. There are any number of good places to read more in depth, including this article at Seeking Alpha (link).

I am short a vertical put spread, long Feb 130 puts, short Feb 140 puts. It is an uncomfortable feeling with the bad report. Fortunately, I have room even factoring in the 9% drop after hours to 177. I initiated the position at 175, so likely will be able to exit with a profit if I choose to unwind on Wed 2/1.

Longer term, AMZN doesn't become a value play buy until price-to-sales gets to 1.0, which would be at $48b market cap or about $100 a share. The 5-year chart shows support at 150 and 100 (link2).

Buy TBT (sell puts)

Buy TBT via selling Feb 18 puts, TBT @18.3. U.S. Treasuries are up big today on Euro contagion fears. I am selling that rally (TBT is a double inverse bond ETF).

Elsewhere, AAPL finally seeing a rally after the big gap up after earnings day, my short vertical put spread is looking good.

Long AAPL AMZN* BRKB EEM* SPY TBT
Short GDX

* AMZN EEM close to delta zero

Cash is Trash? Or is it?

Two meme's out there in this morning's round up. At MarketWatch Chuck Jaffe says "Cash is Trash" (link1). Roger Nusbaum at his blog cites the Barrons cover story "Don't Lose It" (link2).
>>
many Gen Ys don't trust stocks and so have a high portion in cash
>>
(Gen Y is born between 1976-1995 or 1988-2001 depending on who you ask)

Anecdotally, it is not just Gen Y's. I was having coffee with a friend talking stocks and a woman in her 60s felt the need to tell us "I think the stock market is rigged." Over on the PCGS coin forum, the precious metals folks often say the same (link3). I observe the Bogleheads on their forum (link4)continue to like Ibonds and TIPs that offer some inflation protection, and continue to "stay the course" on their base asset allocations.

Tops in the bond market continue to be called, though some bond bears threw in the towel on the recent Fed announcement of low interest rates until 2014. At some point the rubber band snaps, and interest rates rise dramatically. I thought bonds were topping a couple of years ago and am with that large crowd that was wrong.

Thankfully, I mostly traded bonds on sentiment not what my logical mind or gut was telling me and have traded bonds mostly from the long side during the last couple of years. I can't take credit for being aggressively long, considering TLT was the best performing major asset class for 2011 up 29%, but for the most part I avoided being short and down that 29%. My recent adventures in GDX puts point to how quick and large losses can be for an aggressive option trader on the wrong side of a move.

Some folks are moving towards riskier assets. I see the occasional mention of high yield or junk bonds (HYG, JNK). I see many more about high yielding stocks (VIG) even preferred stocks (PFF). Of course all these come with risk, and as long a person understands the risk they can go in with their eyes open.

It is a strange time, with basically zero interest rates for money markets, under 2% for 10 year Treasuries, TIPS at a negative yield. In the 2012 Barrons roundtable Bill Gross had this interesting quote about the physics of money going from Newton to Einstein as rates approach zero. If someone as smart and as expert as Gross got it wrong, and continues to struggle with these questions, far be it for me, to pontificate on the issues.

Like the rest of the world, it is a struggle, how much risk to take, how much yield to chase, when to think of leaving the party, because it seems a sure thing that the cops are coming to take away the punch bowl, it is just a matter of when. Like the way I tend to trade, the middle way, moderation, hedging is the course I tend to chart.

Schwab's Beginner class on Technical Analysis

I recently moved my retirement accounts to Schwab (trading account is still at ThinkorSwim). They have free seminars at the local offices. I recently attended a beginner's hour on Technical Analysis.

Topics include:
Dow theory
kinds of charts (line, bar, candle)
moving averages
support and resistance
trendlines
time frames
popular pairings for moving averages (10,20) (20,50) (50,200)
moving average crossovers

With only 45 minutes, I could tell that the presenter is a bright person, with a lot of patience. There were about eight people in the class, several 70+ years old.

I believe all would-be traders would do well to learn at least the basics, and the one-hour class would be a decent intro. Disclaimer after disclaimer was issued, about how charts don't guarantee anything. There was some discussion on trading with the trend vs. trading counter-trend.

I came away with a decent outline of some topics to cover if I ever decide to do my own instructional material.

Buy SPY (sell puts)

Buy SPY via selling Feb 124 puts, SPY@132.0. I add another layer of short Feb puts. I am already short Feb 107 and Feb 113, as well as Mar 107. Hedged against this is are some long Mar 114 puts. With the rally, my SPY delta drifted to neutral. This latest move gets me back at delta positive. My thinking is that if the market was going to go down, today was a good day for it to happen, with some selling in the morning. There is chart congestion at the 124/125 level.

Long AAPL AMZN BRKB EEM SPY
Short GDX

Buy AAPL (sell vertical put spread)

Buy AAPL via selling a vertical put spread
Buy Feb 410 puts
Sell Feb 420 puts
for a net credit, AAPL @447.2

If you follow the market at all, you already know about the blowout earnings news. Apple stock has been range bound. The Fed news did not do much for the stock. 420 is the previous close so would be a good entry point in the unlikely event that it declines that much.

Elsewhere, bonds, gold, and stocks are all higher on the Fed news. Interesting. I am getting killed on my GDX puts (owning GDX puts is a bearish bet on gold mining stocks). Gold miners are one of the strongest sectors today. Rally in SPY has moved me to delta neutral.

Long AAPL AMZN BRKB EEM
neutral SPY
Short GDX

Pros and cons of leveraged ETFs

Some of the most popular ETFs (exchange traded funds) are the double and triple leveraged products. Some are drawn to them for the adrenaline rush, the excitement of big moves each day. Some might use them strategically in low doses.

Pros: leverage, IRA eligible, no margin calls, no expiration

Cons: leverage (if you are wrong), decay, expenses

Decay takes place because of trading expenses, and daily adjustments. Over the course of a year, decay and adjustments might eat 20% or so of the potential return. For example if SLV moves up 10% in a year, in theory AGQ would go +20%, but because of the decay it might be flat. That's just a guess, and would also depend on the daily moves in SLV. Bigger daily moves, mean bigger daily adjustments and more decay over the course of a year.

Someone buying and holding for a month or more might do better using straight margin and paying the margin interest. The decay tends to be higher on the leveraged ETFs vs. the margin interest rate. Margin isn't allowed in retirement accounts.

Someone taking a shot might also consider buying options. With options, a person can get much more than 2x or 3x leverage. The option has defined downside albeit 100% of the cost of the option. The cons of the option are that decay tends to be quicker and more costly on the option. No realistic person will want to bet 100% of their account on a single option play. Speaking from personal experience, when I get to be that sure of something, it is almost surely a big loser.

Someone mentioned the idea of a leveraged ETF that tried to double or triple the return of an index product over a full year instead of day to day. The straight version of that would be to buy on margin. There still would be the margin interest, but that is much less than the decay rate on the typical ETF. The downside to straight margin is the need to rebalance and buy more if it moves higher, and the possibility of margin calls on a spike lower.

The only leveraged ETF I tend to trade is TBT. The others tend to move too quick for my taste. However, as I always write, just because something isn't right for me, doesn't mean it isn't right for someone else.

3-0 for January

3 winners, no losers for trades closed during the January option cycle. I only had a few positions coming into the calendar year and all went out as small winners, and a small net positive for the account. Winners include short puts on BRKB, SPY and a covered call position in TBT.

I mismanaged the TBT position, turning the potential of a nice gain, into mostly a commission generator. The history is I got assigned TBT at December expiration at 18. I sold the Jan 20 calls, then rolled down to Jan 18 calls on a spike down in price, and now will be assigned and TBT gets called away at 18 (19.28 close).

Going forward, I am short puts on BRKB, EEM, I have a complicated position in SPY that edges net long, am short a vertical put spread on AMZN that is at a 90% profit and near delta zero, long puts on GDX.

Long AMZN, BRKB, EEM, SPY
Short GDX

Sell GDX (buy puts)

Short GDX via buying Mar 47 puts, GDX @53.1. GDX gold miner ETF has been an anemic performer. I am leaning bearish towards stocks and gold and this is a low percentage bet on a downdraft.

Long AMZN, BRKB, EEM, SPY, TBT
Short GDX

Nusbaum: Stock selection is 10% of the game

Roger Nusbaum writes about his investing approach (link) and how his style may not be useful for all readers. He has this nugget:

>>
Stock selection, the studies conclude, only accounts for 10% of the eventual return. Top down would say it is more important to figure out to avoid France, own China and be correct about oil prices (just a random and abbreviated example).
>>

Long time readers know that for the past couple of years I have mostly traded options on the major ETFs: SPY, TLT, TBT, GLD, GDX, EEM, IWM, mostly selling puts, but occasionally doing more complex trades. Once in a while I will venture into a stock, usually on news, sentiment and in the case of BRKB a stock buy back. Being long or short on the major asset classes, long or short volatility give me plenty to look at without going into individual stocks. Popular stocks such as AAPL have thousands of very smart people doing short term trading and sniping off a point here or there.

Another point from Nusbaum:
>>
... investing is a pursuit where you can put in as much or as little time as you want ...
>>

I do not sit in front of the screen all day, but am very far from a buy/hold/rebalance indexer (even though I admire the indexing approach and recommend it). I always tell people interested in the markets that there are a 1000 ways to make money, a key point is finding one that works for you. For novices, the inward looking psyche work is near as important as the market work. Again, keeping a trading journal (what this blog is), can be a powerful inward looking tool.

As for my approach, I like options. I like the complexity, the ability to hedge, the ability to bet on various probabilities. Most people I meet do not like the complexity, and find all the possible combinations overwhelming. I use a variety of indicators, charts, technicals, fundamentals, sentiment, seasonality. Some focus more on one area than another. I tend to look at it all and get a big picture view.

A side note: my most recent put sale (sell SPY Feb 113 puts) was like stepping into a pile of dog poo. It happens, but it isn't pleasant.

Buy SPY (sell puts)

Buy SPY via selling Feb 113 puts SPY @130.2. With SPY moving up, and my recent purchase of a vertical put, the Jan 119 short puts expiring, I was at a net short position on SPY. This moves me to slightly delta positive (slightly long). 113 is a congestion area on the SPY chart.

Long AMZN, BRKB, EEM, SPY, TBT

Lake Wobegone effect (Ferri)

Rick Ferri writes about what is sometimes called the Lake Wobegone effect (link). The NPR radio show has a tag line "where all the children are above average" (wiki). For investors, Ferri believes that most have an inflated anecdotal view of their returns. On the Internet, I observe even worse, because the winners report what are often inflated returns, often in hindsight, and the losers rarely report anything. If a person only followed Internet reports, everyone would be above average.

No one likes to think they are below average, but in the investment world, when real world audits are done, most turn out to be below average. How does that work? Shouldn't half be below average, half be above average? It works that way because the top 5% or top 10% enjoy a disproportionate share of the profits. Some reasons why individuals tend to do poorly are chasing performance, and panicking at market bottoms.

Every major bull market sees that kind of pattern. An investment, or investment class in unloved, unpopular, and that is often the time the contrarians and the strict asset allocators buy. As the investment does better it becomes more popular. At every major market top, the fundamentals, the stories about reported profits create a buzz.

Barrons: option sites

Barrons has a list of option sites (link).

Included are:
http://optionseducation.org/
http://cboe.com/
http://schaeffersresearch.com/
http://mkmpartners.com/derivatives.html
http://vixandmore.blogspot.com/
http://dailyspeculations.com/wordpress/

Enjoy.

The January 14 post at Vixandmore has a list of the ten most popular posts on that blog (link). For the novices, VIX is short hand for volatility index, and a cornerstone used in pricing options. Some also use VIX as a sentiment indicator. Some use VIX readers to tell them which strategies to favor.

Buy BRKB (roll puts)

I add to BRKB longs via rolling my short puts, BRKB @77.3. I buy back short Jan 62.5 puts, sell Mar 67.5 puts. I am also short Feb 67.5 puts. My anecdotal observation is that BRKB puts tend to decay a bit earlier than index options. A narrow spread on the Mar puts encourages me to roll the position out instead of waiting until the Jan puts expire. Again, the reasoning is chart support and a stock buy back.

Long AMZN, BRKB, EEM, TBT
Net neutral SPY

Sell TBT, Short SPY

I lighten my position in TBT by rolling the calls down, TBT @18.0. I buy back the short Jan 20 calls, and sell the Jan 18 calls.

I also sell SPY using a vertical put spread SPY @128.4, buying the Mar 114 puts, selling the Mar 107 puts, moving me close to a net neutral position on SPY (short Jan 119 puts, Feb 107 puts, Mar 107 puts, and long Mar 114 puts). This put spread also serves to hedge my other short puts in AMZN, BRKB, EEM.

Long AMZN, BRKB, EEM, TBT
net neutral SPY

Investment returns and trading styles

A recent thread on the Boglehead forum (passive indexers) surveys their investment returns for 2011 (link). Given that the stock market went basically no where, it is not surprising to see the bell in the curve dominated by 0% to 2.5%. Those indexers that did well were likely heavy in Treasury bonds or TIPS, those that did poorly likely heavy in Emerging Markets or Europe or Japan.

Elsewhere on the Internet, a person might read about fantastic returns, a few of which might even be true. I tend to think Bogleheads are more honest, more accurate in their reporting real world hindsight results than those on other forums. I reported that for 2011 I am slightly below the line for blog reported trades (less than a 1% loss).

On the other side of the spectrum is a 2012 investing thread on the PCGS coin forum (link2). The one week returns on page 5 of the thread, are better than the one year returns from the Bogleheads. Some folks, especially the inpatient, will point to that and say, "see it means I need to pick volatile, fast moving vehicles." Well, there is something to that, especially if a person is young with a high income and few responsibilities. There is also a wide gap between what people do in theoretical contests, or with a small trading account, vs. what happens to the bulk of their substantial assets (Boglehead way).

For those that are older, with more of an asset base, "gunslinging" or going "all in" with the bulk of assets, I see as a risky and foolish way to proceed, because there is less time to make up any losses. Many thrive on the adrenaline rush of being up or down 10% per month, and that excitement is another powerful lure, but it tends to come with a long term cost.

In the long term, only about 20% of active investors do better than indexers, often taking much more of their time, much more stress, and volatility in their results. In a self-esteem driven culture where most believe they are above average, it is what makes the markets turn. In the lower 80%, there is also a significant percentage that loses everything. The folks that get wiped out, tend not to report results, or respond to surveys, and tend to go for the riskiest most volatile vehicles. No one wants to believe that they will be in the lower 80%, but for average people, indexing is the low stress way, with an 80% chance of better returns to boot.

For those young people reading along, if a person has a talent, a knack, a passion for investments, the odds of being in the top 20% group tend to be greater. If a person is more driven by excitement, or ego, or other psychological factors, the odds tend to lower. Again, for short term trading, the first thing I tell people is the importance in finding your own trading style. For those just getting started, keeping a trading journal (which is what this blog is) is a powerful tool in finding what works for you, and what doesn't work.

Me, I tend to hate losing, and dislike taking any losses. So a style that generates a high percentage of winners, with a lower payout per win, tends to be a style that works best for me.

Buy SPY (sell puts)

Buy SPY via selling Feb 107 puts, SPY @127.5. I am already short SPY Jan 119 puts. The low of the recent chart pattern is 107. I am placing a bid to buy just below the low of the chart pattern and getting a small premium for doing so, about the same as the recent EEM put sale.

Long AMZN, BRKB, EEM, SPY, TBT

Buy EEM (sell puts)

Buy EEM via selling Feb 33 puts, EEM @38.7. Chart support at 34, and 33 would be a new low.

Long AMZN, BRKB, EEM, SPY, TBT

Buy AMZN (sell vertical put spread)

Buy AMZN via selling a vertical put spread:
Sell Feb 140 puts
Buy Feb 130 puts
AMZN @175.4

I see a Marketwatch article with the headline: Amazon the next Netflix (link), and take a position. Selling a vertical gives a small credit and some crash protection, also doing the vertical lessens the margin requirement.
Long AMZN, BRKB, SPY, TBT

Buy BRKB and SPY (sell puts)

Buy SPY via selling Jan 119 puts, SPY @127.8. SPY 120 is the bottom of the recent range, with multiple minor short term support levels in that range. So I'm betting that support level will hold. Of course, with the big stock rally, this would have been a much better put sale a day early.

I also buy BRKB via selling Feb 67.5 puts with BRKB @77.8. The story is the same as the last times I have sold puts, chart support and a stock buyback.

Long BRKB, SPY, TBT

Sell TBT (sell covered calls)

Sell TBT Jan 20 covered calls, TBT @18.6. This lowers my exposure to TBT the inverse bond ETF. I would be happy with an assignment at 20. I took delivery of TBT during Dec expiration at 18.

Long BRKB, TBT

2011 at a glance

The year at a glance:
12/31/10 12/30/11 percent
SPY 125.75 125.5 -0.2%
TLT 94.12 121.25 28.8%
GLD 138.72 151.99 9.6%
SLV 30.18 26.94 -10.7%
EEM 47.64 37.94 -20.4%
IWM 78.25 73.75 -5.8%

The clear winner for 2011 is U.S. long treasuries. Clear loser is emerging market stocks. Gold held its own for its 11th straight up year. Silver managed a loss despite a run back up to near all time highs.

There were mini-crashes in silver, and stocks. I got caught in both, and a few big losing trades made break even for the year a decent result. I think I am down just a tad for blog posted option trades. It was a deep hole that I dug with some ill-timed put sales in SLV, SPY and IWM. I had some decent winners with some put backratios.

Jaffe: goals for 2012, and F-U-money

Chuck Jaffe at MarketWatch writes about his personal goals for 2012 (link). Included on this list are:

Taking care of myself first [health]

Reducing financial stress

I am big believer in balance, that money and finance are only one part of life.

As for #2, I sometimes talk about wealthy people not having to worry about their money. I no longer enjoy financial rollercoasters. Yes, options can be extremely volatile, but position size takes the edge off.

In conversation, I sometimes use the term F-U-money (yes, the expletive). It was a term I heard from President Ronald Reagan's Secretary of Treasury, Donald Regan. Regan talked about the president's close circle of advisers, and how he alone had enough money to really protect himself. Regan felt that he had enough money, that he could tell his boss F-U, even though his boss was the most powerful person in the world. If a person has enough money to tell their boss that, that in a nutshell is where the term comes from. And no, I don't have that much. It would be nice.

Swedroe: Indexing is a Rational strategy

Larry Swedroe (a passive index type of investor) makes the argument against investing based on news driven fundamentals (link).

>>
The reason is simple. If we know there are problems, the market surely also knows and that means the problems are already incorporated into prices. And why would you buy when things look safe, and thus valuations are high and thus expected returns are low, only to sell when risks show up, and thus valuations are low and expected returns are now high? That doesn’t seem like a rational strategy, yet it is exactly what most investors do, and it explains why they do so poorly, underperforming the very funds in which they invest.
>>

Many folks that I observe on the Internet do just that, investing in what WAS the best performer, which often turns into the worst performer going forward.

I like to look at fundamentals, technicals, sentiment, cycles and seasonality. Yes, there are successful investors that primarily focus on one kind of data, and mostly ignore the others. Yes, a person can become overwhelmed by amount of data as well. I tend towards simple in terms of analysis, but look at most indicators.

As I always tell others, finding your own style is perhaps the most important step in becoming a successful investor or trader. That successful style for you, may lean heavily towards one kind of data, or it may be a more holistic approach as I tend towards.

For the majority of average folks, the clearest path is the Swedroe approach, passive low cost indexing and asset allocation (the Boglehead way, link to forum). It has proven over time to beat 80% of other investors using every thing else. Of course it tends to give up the chance for grand slam home run investments, but only a very few have any realistic chance at those kind of results, and those few tend to have extreme talent, and/or extreme luck.

Obviously, as an active options trader, I stray far from the Boglehead way. For the vast majority of every day folks that don't have a burning passion for investments, I still believe that low cost indexing is the way to go.

OT: Like Christmas Morning

It is Christmas morning, and I am taking some time to post an off topic story. I went to church on Christmas Eve, and one part of the service included a short video. One of the members has a son serving in Afghanistan. The son is home for Christmas. Earlier in the year, the church members assembled and sent over a care package, with snack food, toiletries, some small toys, and other items in short supply over there.

The young soldier thanked the congregation for that act of kindness, saying whenever they get a package from home in Afghanistan, "it's like Christmas morning." Surprisingly, the small toys had a great impact. They weren't asked for, after all, these are men getting paid, who can afford many small toys. The soldier was able to re-gift the toys to the children of the village.

Now for the typical middle class American kid, a Hot Wheels car will generate a shrug or be ignored. For a third-world kid, it became a prize, something they have never seen before.

Investors are in the upper half in this country because half the U.S. population does not save money at all. American investors are typically better off than those in other countries. Sure, we as a group would like to have more money. That said, a story about a Hot Wheels car becoming a prized possession serves to give me more perspective.

We have so much to be grateful for, not the least, is having a son, a soldier (not my son, but someone in my church) home for Christmas. I also know that especially for some, giving can be difficult, even sneered at. The need seems so great, making any difference seems so unlikely. There are two points to the story, about being grateful for what we have, and that sometimes the unexpected, even a small gift, can sometimes brighten someone's day, and turn an otherwise ordinary day into Christmas morning.

Merry Christmas

Merry Christmas to all.

My TBT assignment was at first some bad luck, now some good luck. The market giveth and taketh. The assignment 6 cents in the money was a bit of bad luck, as was the down move on the Monday after expiration. The rally off that low, now makes it look like a stroke of good luck.

Long BRKB, TBT

4-0 for December (edited)

Four winners zero losers for the December option cycle. All winners were short puts, two for SPY, one in BRKB, one in TBT. The TBT actually closed in the money at 17.94, but as of this writing it looks like I didn't get assigned.

Going forwards, I only have one small position, short Jan BRKB puts.

I steered clear of the gold train wreck. I am still cautious, and see the latest bounce as more of a chance for bearish folks to get short than anything else. Long term, the gold uptrend is intact, but a lot of damage has been done in the short and intermediate term. Bullish seasonality alone is not enough to tempt me at this point.

/edit to add: crap, I did get assigned on TBT, and it is lower this Monday 12/19.

Last two days=year in a nutshell

The violent down move and then up move during the past two trading days is the year in a nutshell. A lot of movement, but not a lot of change in prices. At some point the market breaks out from the range, but for now it is range bound. The scalpers seems to be tightening the range.

My schedule allows less time than ever for following the markets. I have a few small positions expiring 12/16, and only one open position for January 2012. I have little appetite for additional risk given my time constraints.

Long BRKB, SPY, TBT

V bottom

The stock market just had another V-shaped bottom. Supposedly these are rare, but that makes two V's in the past few months.

I was not, and tend not to be nimble enough to make money during fast moving markets.

Some other writers are noting the big daily movements, but very little actual movement year-to-date, or month-to-month.

Overall, I believe 2011 has been a difficult often frustrating year for many traders, myself included. Like the broad stock market, I am oscillating just slight above and below the break even mark for my trading account.

I'm sure there will be some blaring claims by a few who did well, because there were some exceptional moves. I'm not so sure that those making those claims have that much of a repeatability factor. As always I read any claims, especially those that don't have an audited track record, with a large grain of salt.

Buy BRKB (sell puts)

Buy BRKB via selling Jan 62.5 puts, stock around 75. I open a January position, am already short Dec 62.5 puts. Logic is the same, chart support plus stock buyback.

Long BRKB, SPY, TBT

Thanksgiving

Radio host Dennis Prager often talks about gratitude being the number one attribute that correlates to happiness. It isn't money, nor status, nor fame, that brings happiness. Plenty of folks have an abundance of any or all of those and still feel empty inside.

Thanksgiving is the holiday of gratitude, a time to count your blessings, to appreciate what you have. Be grateful, bless what you have and it will tend to multiply.

Let me take this post to thank all the readers, especially those that have been reading for several years. May all have a blessed and safe holiday.

4-0 for November and Buy SPY

Four winners, zero losers for the November cycle. All are short puts: BRKB, TLT and two SPY layers.

On Friday early during the trading day, I got filled on a sale of short SPY Dec 102 puts (a bullish move, or at least a bet against a crash). I am already short SPY Dec 99 puts. Going forward I am still clear of GLD, short bonds, cautiously long on stocks.

Long BRKB, SPY, TBT

Buy TBT (sell puts)

Buy TBT (2x inverse bond ETF) via selling Dec 18 puts. With the news background, U.S. bonds are getting a bump up. TBT 18 marks about the top of the bond market rally, though there is the decay in the 2x inverse fund.

I don't have much insight on the stock market smash on Wednesday. Obviously, my most recent sale of SPY puts were at a bad time. Sell a lot of puts, like I do, and it happens. Hopefully, not that often, though.

Long BRKB, SPY, TBT, TLT

Buy SPY (sell puts)

Buy SPY via selling Dec 99 puts. I open a December SPY position, with a low risk, way out of the money sale of puts. Again, there are multiple support levels in between current prices and the strike price. It would take a lot to cut through all that support and there is Thanksgiving and Veterans Day coming up to slow trading and reduce volatility.

This is another order before the open that fills early in the trading day. I don't get near the best price of the day, but by the end of the day, I am in the green.

Long BRKB, SPY, TLT

Buy BRKB (sell puts)

Buy BRKB via selling Dec 62.5 puts. Same arguments as before, chart support and a stock-buyback make a steep decline unlikely. BRKB in the 77 range.

Gold had a huge rally day. I make a bearish post about GLD and wow.

Long BRKB, SPY, TLT

Trading without live quotes and a Bearish GLD chart

Most of the time, I place an order to sell at the bid, or buy at the ask, and most of the time get a fill within seconds. The last few weeks I haven't had access during market hours. This means placing orders before the open. Market orders on options often get the shaft at the open. So I am trying to guess a theoretical option price based on the opening bid and ask indications, and the possible low and high for the day.

Trading without a live bid/ask quote has made me more patient, even more cautious. I haven't tried any spread orders or backratios during this time period.

I can make a quick comment on the GLD chart, it looks about as bearish as I have seen it in recent memory. I remain long term bullish on gold, so am reluctant to short it. Those without that bullish gold bias might take a look at the short side. If I were to take a short position, my choices tend towards a bearish calendar put spread, or a bearish vertical put spread. I dislike straight buying of puts, though there are pluses and minuses to each choice.

Here is the 6 month chart for gold (GLD @170.8 Friday). The modest rally off support, moving into resistance on lower volume looks like a text-book example of a rally ready to fail.

Hulbert: bear market rally

Mark Hulbert on Marketwatch writes about sentiment during this recent rally (link).

>>The unfortunate conclusion is that the Oct. 4 lows are likely to be broken.
<<

Too many stock advisers have been buying into the rally. That is the conundrum of the markets, when too many folks are on one side, the majority often ends up being wrong, especially at the turns.

Buy SPY (sell puts)

I place a limit order before the open to sell SPY Nov 107 puts, and get filled right at the open. I have a hard time seeing a scenario that crashes the stock market below the recent lows before November expiration.

Long BRKB, SPY, TLT