End of 3rd quarter

Year to date returns for some ETFs:
+14.7% SPY S&P 500
+ 2.4% TLT 20-year US Treasury
+13.1% GLD gold
+24.3% SLV silver
+ 8.9% EEM Emerging Markets
+13.1% IWM Russell 2000

Plus signs all around, with the bigger plus signs in metals and U.S. stocks. Sell-stocks-in-May started as a good idea this year, as the stock market moved lower, but the rally has moved past the April highs. Silver was one of the laggards in 2011, and treasuries a strong performer in 2011. In 2012, the roles are reversed with Treasuries barely positive and volatile silver a strong performer.

Regression to the mean is a powerful tendency in markets. The other side of that is the huge money can be made in trending markets by aggressive traders. Range traders and trend traders tend to be opposite styles. It is difficult to master both kinds of dances. To do one well, is enough to make decent money, as long as position size and risk management are strong. The latter two are vital no matter what kind of style, no matter what kind of vehicle.

Many successful traders believe that risk management and right sizing of positions are far more important than the kind of indicators used, or if a person is a trend follower, or a range trader.

I wish I had some bold predictions or insight into the markets. Unfortunately, I've had little time to look at or think about the markets, or to reinvest the money that was freed up at September option expiration. For now, I am content with my smallish low risk positions.

14-5-1 for September grade B-

Fourteen winners, five losers, one breakeven for the September option cycle with a grade of B-. Another positive month, though the gains were modest. Short strangles were a dangerous strategy this month and I covered the short calls at major losses. To offset those losses, there were gains on layers of shorts puts.

As I wrote, earlier some call buyers made 5x to 10x their money this month. No home runs for me, and the hedging reduced returns. Still, another month in the green is a positive, and I covered the losers before they became nasty.

Going forward, all I have are short put positions. Changes in my schedule mean less time for the stock market. I'll still update, but there may be delays. Also October is often a dangerous month in the markets, so I often am more cautious this time of year. The historical record of September as the worst stock market month, so far has been opposite, with big gains this month. My favored strategies of selling puts or strangles suffers when premiums are low like they are now.

Long ALL BRKB EWG GLD IWM LGF XHB XRT
ALL Allstate Insurance
BRKB Berkshire Hathway B
EWG German stock ETF
GLD Gold ETF
IWM Russell 2000 ETF
LGF Lions Gate Entertainment
XHB Housing stock ETF
XRT Retail stock ETF

Other winners for September include short puts on AMGN Amgen, ESRX Express Scripts.

Buy IWM (sell puts)

Buy IWM via selling Oct 79 puts @86.7

The Russell 2000 ETF made a new 52-week high. Resistance often becomes support, so that is 85. There are multiple minor support levels at 84, 81, 80. The massive Fed induced rally in stocks and gold was a surprise to me. Fortunately, I covered all my short calls before the news event.

Captain Obvious can say in hindsight that it would have been best to be long calls. Some of the calls I sold are up 5x to 10x in value in a few weeks, so call buyers hit home runs. Thank goodness I covered before the losses became financial ice bergs. It is ironic that just days after Barrons runs a column about short strangles (short both puts and calls) producing excellent returns, the strategy blows up with major losses for those that did not use stops. Even stops are sometimes of limited value on a fast moving news day.

Long AMGN BRKB ESRX EWG LGF XHB

Long GLD IWM XRT

Net neutral SPY

Heart: Fantasy Football lessons for investors

Long time readers know that I like sports analogies. Ross Heart at Minyanville has 15 traits and lessons that will help you  in fantasy football as well as investments:
1. Research 

2. Quick Decision-Making

3. Sentimental Picks
4. Spotting Value
5. Riding Winners 

The full list is at the Minyanville link .

>>

I have been looking at the markets, but am not finding that much to be compelling. Some stocks of interest (besides the ones that I have positions in) include: BIIB KORS TRV

Sell KFT (cover short puts)

Cover short KFT Sep 39 puts @40.7

Kraft Foods gaps down on news. I bail out at a break even profit to avoid the uncertainty. Even though there is modest chart support at 40.

As of this writing, my short covering from yesterday looks like some good moves, especially with gold moving higher this morning.

Long AMGN BRKB ESRX EWG LGF XHB

Long GLD IWM XRT

Net neutral SPY

Short covering: GLD IWM XRT

Cover short XRT Sep 63 calls @63.2

Cover short IWM Sep 85 calls @83.9

Cover short GLD Oct 177 calls @165.2

It is a similar situation to yesterday, I was short strangles on all these, and when the stocks moved higher, the short call side becomes a loser. I did not expect today's massive rally. For all three: Gold, the Russell 2000 ETF and the Retail ETF, there is a high probability that layers of short puts will offset the losses from these calls.

There is some discussion on taking losses in yesterday's post. To repeat some it: basically, there is no one way that works best for every trader, every situation. Using a stop loss, whether it be a mental stop, or an actual order can help limit losses in a trending, orderly market. If a market gaps on news, stops will have less value and may not work. In trading range markets, stops often get triggered and then the stock reverses, to the consternation of many traders. 

Some traders won't use stops. A few favor a style that doubles their positions when they start losing. There are a lot of ways to go. Some traders will initiate their positions at well known, well publicized stop loss levels. It is often a game within the game, for every buyer, there is a seller, and each has their reasons for making a move. 

Again, in a trending bull market, hedging strategies such as selling strangles, will lag behind buy-and-hold in terms of performance.
 

Long AMGN BRKB ESRX EWG KFT LGF XHB

Long GLD IWM XRT

Net neutral SPY

Cover LGF short calls (and stop losses)

I cover my short LGF Sep 15 calls LGF@15.4

With Lions Gate in the money (over the strike price of 15) this leg of the short strangle is taking on water. I remain short multiple layers of short puts. I thought 15 would provide resistance. The loss is over 100% on this leg of the short strangle, which sounds alarming. However, it is a small dollar amount, and is offset by the probability of profits on the short puts.

/edit to add: LGF closes near unchanged, so at least for the moment it looks like a bad decision. Discussion on use of stops follows: When a position goes against a trader, that trader can choose to use stops or not. The overall market mood and direction are factors when I decide whether to close out a losing position. Some traders place actual stop orders, some use mental stops. 

Some traders will double down if a position goes against them. Obviously this only tends to work if initial position sizes are very small. There is no method that will always work. Stops can save a person from big losses during trending markets. However, in a trading range market, whipsaws are common, where a stop level is triggered and the price reverses. Stops may not work if there are big price gaps at the open or after a trading halt.

Long AMGN BRKB ESRX EWG KFT LGF XHB

Net neutral GLD SPY
Net short IWM XRT

Buy ALL, rebalance GLD & LGF (sell puts)

Sell LGF Oct 13 puts and Oct 14 puts @14.8

I rebalance back to long by selling two layers of puts after the rally in Lions Gate pushes my position to net short. I was short Sep strangles (15 calls, 14 puts). There is resistance at 15, but this rally looks like it has a shot at breaking that.

I also sell Oct 33 puts on Allstate Insurance with ALL @37.1. Allstate broke out from a chart base at 35 at the end of July on a strong earnings report. The base makes for layers of support at 35 and 34, so 33 seems like a relatively safe strike to sell puts.

The Fed news makes for a volatile day in gold, which is now up, after tumbling immediately on the event. This pushes my short strangle to net short.

/edit to add: later in day I sold GLD Oct 150 puts @163.4 to rebalance my gold position back to neutral. The bad part of the layers of short gold puts is that they eat up a lot of working capital in terms of buying power. The positive is that I still have some dry powder. My broker likes me today, with this being my fourth trade of the day, a recent record, if not an all time one.

Long AMGN BRKB ESRX EWG KFT XHB

Net long GLD LGF XRT

Rebalance XRT (sell puts)

Sell XRT Oct 54 puts @61.4

I rebalance my retail ETF position back to delta positive. I was already short Sep strangles 63 calls, 57 puts and more layers of puts below that. Like I wrote yesterday, retail has been one of the strongest groups during this rally (home builders, medical and tech are some others). Chart support for XRT at 56 which is the bottom of the trading range, resistance at 63 which was the rally high.

Long AMGN BRKB ESRX EWG KFT

Net long LGF XRT

Net neutral GLD SPY
Net short IWM

Buy XHB home builders (sell puts)

Buy XHB via selling Oct 21 puts @23.4. XHB is the home builders ETF. XHB broke out from a chart base at 21.8 and there is another layer of support at 21. Home builders have been one of the strongest sectors during this rally. Other strong sectors include retail, medical and tech (mostly Apple).

* I added a search box to the blog. It looks for blog content and links that I have posted. Blogger says I have over 1200 posts over the course of six years. So if nothing else it may be a useful search tool for me.

Long AMGN BRKB ESRX EWG KFT XHB

Net long LGF

Net neutral GLD SPY
Net short IWM XRT

Rebalance GLD (sell puts)

Sell GLD Sep 151 puts @162.3

I am surprised by the strength in gold. The short strangle I recently sold (Oct 147 puts/Oct 177 calls) is underwater and taking on more water as gold rallies sharply. To move back close to net neutral I sell some Sep 151 puts. I do so reluctantly, thinking that gold is most likely to fade. Another factor is the hefty margin requirement because the underlying is high priced. On the other side, these puts only have about an 8% chance to come into the money by September expiration, and I have plenty of dry powder from the recent option expiration.

Another recent reluctant move, selling LGF Sep 14 puts to rebalance isn't working out too well, as Lions Gate is taking on water with the rest of the market.

Long AMGN BRKB ESRX EWG KFT

Net long LGF

Net neutral GLD SPY
Net short IWM XRT

Sell GLD strangles and Buy BRKB (sell puts)

Buy BRKB via selling Oct 77.5 puts @85.6

Story remains the same on Berkshire, chart support and a stock buyback. I was already short Sep 77.5 puts.

I also sell strangles on gold this morning. I sell the Oct 147 puts, and Oct 177 calls for credit. Again, a short strangle is a bet on a trading range. GLD is breaking out this morning with GLD@159.0. However, there is resistance at higher prices.  Chart support is at 148 and resistance at 175. So while bullish, I am not wildly bullish. Like I wrote in an earlier post, gold has been getting some positive press with the Soros and Paulson buys.

This morning's stock market rally has nudged my IWM and XRT positions back to net short. LGF had a rough Monday, perhaps because of disappointing box office results for Expendables II, but is up today on strong DVD sales for Hunger Games. Anecdotally, some are reporting the DVD is sold out at some stores.

Long AMGN BRKB ESRX EWG KFT

Net long LGF

Net neutral SPY
Net short IWM XRT

Ritholtz: Where has the retail investor gone?

Barry Ritholtz lists ten reasons at the Washington Post (link1). To summarize:
1 Secular cycle (long term cycle)
2 Psychology (investors are scared)
3 Risk on/risk off (Fed intervention)
4 Poor returns (self explanatory)
5 De-leveraging (paying down debt instead)

Five more reasons are at the link and I see it as a decent summary of reasons. In a separate article, high school students were surveyed and 75% believe the stock market is rigged against them.

Over at the Ritholz blog (link2), he makes an argument against the thesis of the book Stocks for the Long Term (1994), that over the long term stocks always outperform bonds.

Let me add two cents and say that what many long, long term investors ignore are systemic risks where government bonds and stocks go to near zero. This happens when governments fall, because they lost a major war, revolution, or the country breaks into pieces. While extraordinary events, they do tend to happen. Read some world history and count up major powers in the 20th century that suffered such events (China, France, Germany, Italy, Japan, Russia).

Only the United Kingdom and the United States were relatively free from these scars in the 20th century, and even they suffered major problems from winning the wars. The odds are much greater than the miniscule percentages that most Americans like to give them. Probably because Americans have never seen it happen here. This is a good case for having some physical gold, just in case.

6-1 for August grade B

For the August option cycle, I count six winners, one loser, and give myself an overall grade of B. The lone loser was one side of a LGF short strangle. Had I waited it out, it would have come in okay, though the drawdown would have been scary. Winners included short puts and calls on LGF and IWM. Seven is fewer closed trades than usual and that is due to my vacation. I added a new Philosophy page that has my grades at the bottom (link) and can also be accessed by the tab on the header, next to the word "Home." I also added a First Time Readers page (link2).

Going forward, I am still looking for a stock market trading range. LGF Lions Gate has the movie Expendables II opening today. Gold looks to be a bit too popular in the short term, what with articles citing big buys by George Soros and others. Bonds are perplexing. I outlined my long term view of a parabolic up move followed by a crash, but this doesn't help that much with the short term.

Long AMGN BRKB ESRX EWG KFT

Net long LGF SPY

Net neutral IWM XRT

AMGN Amgen

BRKB Berkshire Hathaway

ESRX Express Scripts

EWG German stock ETF

IWM Russell 2000 ETF

KFT Kraft Foods

LGF Lions Gate Entertainment

SPY S&P 500 stock ETF

XRT retail stock ETF

* ETF = exchange traded fund

Rebalance XRT (sell puts)

Sell XRT Sep 57 puts @61.4

This move rebalances me to neutral on the Retail ETF. I was already short Sep 52 puts, Sep 54 puts, Sep 63 calls, and Aug 50 puts. I am surprised at the strength in the stock market. I am dancing closer to the flame with the narrowing of the short strangle (short 63 calls, short 57 puts and two more layers of short puts).

The bond market in the short term is confusing to me. I wrote about the possibility of parabolic move up in bonds on big news, followed by a crash. What does a trader or investor do with that? I am still processing, though my tendency is towards risk aversion.

Long AMGN BRKB ESRX EWG KFT

Net long LGF SPY

Net neutral IWM XRT

Sell IWM Sep 73 puts

Rebalance to neutral again as IWM keeps rallying. I was already short IWM Sep 67 puts, Sep 71 puts and Sep 85 calls, as well as an Aug strangle that looks to expire safe tomorrow. IWM is the Russell 2000 ETF.

Long AMGN BRKB ESRX EWG KFT

Net long LGF SPY

Net neutral IWM
Net short XRT

Rebalance LGF (sell puts)

Sell LGF Sep 14 puts @14.3 I rebalance to long on Lions Gate by selling these puts. I was already short Aug 13 puts, Aug 16 calls, Sep 13 puts, Sep 15 calls. The rally had moved my position to net short. A spike in volume sometimes marks an intermediate top for LGF. While volume was on the high side yesterday, it wasn't as big a volume spike as some previous tops.

I feel uneasy about selling these puts. The short strangle is narrow at 14/15 (short Sep 14 puts, short Sep 15 calls). We will see how it works out. Lions Gate has the movie The Expendables II out this weekend.

Elsewhere Berkshire discloses some buys and sells:
sales: ir kft intc ups pg kft ge v
buys: psx nov via bk dva dtv wfc ibm
Because BRK is such a big and public player, their moves are news.

All my August positions look to be safe for expiration this Friday. My IWM and XRT positions are back to near neutral. Again, this happens as the prices move without me buying or selling.
 /edit to add: sold another layer of puts later in the day, LGF Dec 11 puts with LGF@14.5

Long AMGN BRKB ESRX EWG KFT
Net long LGF SPY
Net neutral IWM XRT

Trade of the century--shorting the bond bubble

With no Olympics on TV, I feel like I have time to write. I had a recent conversation about bonds, and the words "trade of the century" came out. Eventually, being short U.S. bonds will be a huge winner (being long TBT is one way to be short bonds). The air already has come out in select European bond markets. For example, the Spanish ten-year bond went from 3% yield to 7% in about a year. I see the same eventually happening in the U.S.

Doing a search on "bond bubble 2012" turns up a lot of hits. A few interesting links:

brief thoughts from Peter Schiff link1

Jim Kochan quoted in Barrons link2

Allan Roth at CBS with alternatives link3

My thoughts are that the bears will eventually be right, but not quite yet. For investors and traders, technical analysis can be a useful tool. Stereotypical bubble markets have an exhaustion phase, that include a short sharp run up in prices before the bubble pops. This might be a 30% to 100% increase in a few months. Timing the exact top is near impossible, and a parabolic top, may or may not occur in bonds.

The Fed is a wildcard. QE1 and QE2 (quantitative easing) and the Twist have injected close to $3 Trillion USD into the bond market. Even in the gargantuan U.S. bond market, $3 trillion, makes a huge difference. The trickle down has spread to most other markets. Low interest rates affect option prices, CD yields, stock yields, real estate, gold.

When and if the U.S. bond bubble bursts there will likely be casualties in other markets. If the 10 year Treasury goes to 7% (which is about the average yield for the past 30 years), stock yields may well go to similar levels, carrying costs and opportunity costs for gold and real estate become that much higher, derivative decay for options and leveraged ETFs becomes that much steeper.

It seems like bond bears have been crying wolf for years now, and been wrong, wrong and wrong. Their time will come. One scenario is a war or economic crisis that is a catalyst for a parabolic rally before a crash. Again, in parabolic moves, trying to time the exact top tends to be a fools game.

For the short term, I remain positive on U.S. bonds until October. This seasonal bearish period is November until March. As always, seasonality is a weak indicator, and easily jumped (eg: if every "knows" that bonds turn in October, most will jump in September and start to ruin the indicator).

For the long term, I am looking for the parabolic phase. Because of the massive Fed intervention, we may or may not see a textbook bubble blow off top. If we don't, indicators such as the 200 day moving average on TLT might be useful tools.

Oldtimers remember the Internet bubble. Everyone and their brother knew that the stocks were over valued. However, many thought there was still time. Many traders that tried to short the high flying Internet stocks, lost money because as the irrational exuberance reached a fever pitch and the blow off top was much higher than most could imagine. Many bought the first steep drop in Internet stocks, thinking there was to be another rally, but got crushed. The U.S. bond market is many times bigger than the stock market, and if there is a bubble and a crash, the long term economic damage may be great.

For easier historical tracking:
TLT 125.49 SPY 140.77 BND 85.69 GLD 155.99 TBT 15.48

A footnote: I started a new blog for my piano playing, so the about me section now has that as the lead. I also took this time to revamp the layout and look.

Late: Sell LGF calls

Late report from Friday:
Sell LGF Sep 15 calls @13.5
I lighten up on my LGF position by selling the Sep 15 calls. I am already short Aug 13 puts, Aug 16 calls, Sep 13 puts. Three months ago, the earnings report led to a rally to 15. I think with the mixed earnings report just out, that would be the best case.

Longer term, I still think Lions Gate is worth $20 or more. However, the short term upside is limited and that's the reason for selling calls.

Long AMGN BRKB ESRX EWG KFT
Net long LGF SPY
Net short IWM XRT

Buy ESRX (sell puts)

Buy ESRX via selling Sep 52.5 puts @60.6
Express Scripts higher on earnings. Chart support at 55, but I am reluctant to sell the 55s, choosing the lower risk, lower reward of selling the 52.5s.

Elsewhere, movement and decay has pivoted my IWM and XRT positions to delta negative, or net short.

Long AMGN BRKB ESRX EWG KFT
Net long LGF SPY
Net short IWM XRT

Buy AMGN (sell puts)

Buy AMGN via selling Sep 72.5 puts @82.2
Amgen had a good earnings report on 7/27. Strong chart support at 70, with minor support at 80 and 75.

As the August option cycle winds down, I remain underinvested because of the recent vacation.

Long AMGN BRKB EWG KFT
Net long LGF IWM SPY XRT

Rebalance IWM & XRT (sell puts)

Sell XRT Sep 54 puts @59.9 to rebalance to delta positive. The move up in the retail ETF moved my short strangle position to net short, delta negative. Adding a second layer of short puts rebalances. I was already short XRT Sep 52 puts, Sep 63 calls.

Also sell IWM Sep 71 puts @79.4 to rebalance. Story is near the same. I was already short IWM Sep 67 puts, Sep 85 calls.

Long BRKB EWG KFT
Net long LGF IWM SPY XRT

Buy KFT (sell puts)

Buy KFT via selling Sep 39 puts @40.6
Kraft up on earnings, 39 is yesterdays close. Some like to think of selling puts as placing a GTC order to buy a stock.

Long BRKB EWG KFT
Net long LGF IWM SPY XRT

Buy BRKB (sell puts)

Buy BRKB via selling Sep 77.5 puts @84.2
Story is the same as it has been all year, Berkshire has chart support and is doing a buy back. Chart base has moved up, so that 80 and 78 are decent support levels.

Long BRKB EWG
Net long LGF IWM SPY XRT

Sell IWM & XRT strangles

Sell XRT strangles @58.8 for credit
sell XRT Sep 63 calls and Sep 52 puts

XRT is the retail ETF. A short strangle is a bet on a trading range, and loses if there is a big move up or down. Recent top was 63 and there is a base of support at 52 to 54.

I also sell IWM strangles, selling Sep 85 calls and Sep 67 puts for credit with IWM@77.5. Again, this is a bet on a trading range, 83 and 85 are resistance, 72 and 70 are support. IWM is the Russell 2000 ETF.

Long BRKB EWG
Net long LGF IWM SPY XRT

Cover short LGF puts

Buy back short LGF Aug 14 puts @13.7
I am taking a beating on this leg of the short strangle, closing this leg with a big loss. However, if the Aug 16 call expires worthless as is likely, then the short strangle position nets out to near break even, and that one reason why I am closing this leg--to avoid turning what was a winning trade into a loser.

Lions Gate earnings due on 8/8, so I am taking some risk off as the position moves against me. I am still short Aug 13 puts, Aug 16 calls, Sep 13 puts, still net long LGF.

Long BRKB EWG XRT
Net long LGF IWM SPY

8-5-1 for July grade C+

I am late in reporting my July trading summary. I have 8 winners, 5 losers, 1 breakeven, I give myself a grade of C+. Biggest batch of winners were option trades on LGF Lions Gate. Biggest loser was a short put on WFM Whole Foods. Overall a modest profit for the month, but with that many losers, there is room for improvement. Because of travel, I closed some positions early.

Long BRKB EWG XRT
Net long LGF IWM SPY

BRKB Berkshire Hathaway
EWG German stock ETF
XRT Retail ETF
LGF Lions Gate Entertainment
IWM Russell 2000 ETF
SPY S&P 500 ETF

Close TLT short strangle

Close TLT short strangle TLT@130.4
I buy back Aug 115 puts and Aug 138 calls for a 28% net profit*. TLT US 20-year treasury ETF breaks June 1, 2012 high. Again, because of upcoming travel, I'm lowering my risk profile.

Long BRKB EWG XRT
Net long LGF IWM SPY

* 28% net profit is basis the initial credit, return on capital much lower because of margin requirements

Swenson Portfolio

Lecture six from the free Yale course has guest lecturer David Swenson (link to Yale). Swenson worked at Salomon Brothers and is credited for inventing the modern day swap. In plain English, a swap is a contract for exchanging currency at a set rate, with the exchange rate, the amount to be exchange and the length of time as parameters. The most common is Euros for US dollars. For example, a U.S. company might do a swap with a European company to agree to exchange $1 million USD for $1.23 million Euros every month for 60 months. Companies do these swaps to lock in costs, or profits.

Back to Swenson, in his lecture he talks about three main decisions for institutional portfolio managers:
1) asset allocation
2) market timing
3) security selection

Swenson's portolio, the Yale University endowment fund, has averaged about 16% since 1985, which is remarkably high.

Marketwatch has an individual's version of Swenson's portfolio (link2). It is basic index funds in unremarkable allocations.

Long time readers know that I am a fan of these Lazy Portfolio approaches for the vast majority of individuals. It is only those few that enjoy the activity, enjoy the study, or have a particular knack for stock picking or market timing that have any realistic chance to do better with trading as compared to these simple portfolios. Jack Bogle, founder of Vanguard is another widely cited advocate for the index approach (link3 to Boglehead Wiki). Another popular idea is the Permanent Portfolio (PERM is a single ticker solution with a 0.50% expense ratio) that allocates 25% each to bonds, cash, stocks, gold.

A stock market comment: I did close my LGF short puts at a bad time. The stock, and the overall market have bounced well off those lows. Had I filled my shopping list, I would have done very well for the day and a half. Getting whipsawed is a hazard of using stop losses, even mental stops. I am not a fan of actually leaving the stop orders on the books because they can be picked off. There will always be times when stops get taken out and then the stock reverses. The alternatives are to use wider stops, or not use them at. Each has its advantages and disadvantages, no one way will do best.

Close LGF puts

Buy back short LGF Jul 14 puts @14.1
I cover one layer of my short LGF puts, these go out at net break even. I am still short multiple layers of puts and calls, still net long on Lions Gate Entertainment. I will be traveling next week. So don't want to dance that close to the flame during expiration week. I am not unsure of my computer access.

Stock market continues lower, today would make six red candle down days on IWM Russell 2000 ETF. I am tempted to double up on short IWM strangles. Also tempting is to sell puts on EWZ Brazil Fund, or sell vertical put spreads on IBM or UNP. The phrase that comes to mind is "let someone else be the hero." Meaning, let the more nimble traders try and call the turn and brag about buying the bottom.

Long BRKB EWG XRT
Net long LGF IWM SPY
Net neutral TLT

Sell SPY put backratios

Sell SPY put backratios @133.8
buy Sep 123 puts
sell 2x Sep 118 puts for credit

These short put backratios are a net bullish strategy, with an explosive downside profit if the underlying closes between the strikes. My earlier IWM strangle sale was ill timed.

Whoosh goes the market to the downside. The down move pushes me to positive delta on IWM and SPY (net long).

Long BRKB EWG XRT
Net long LGF IWM SPY
Net neutral TLT

Sell IWM strangles

Sell IWM strangles @80.6
Sell Aug 86 calls & Aug 73 puts for credit

Again, a short strangle is a bet on a trading range bound by the two strike prices. I am heavy in cash, light on positions, so added this near delta neutral position. As far as tactics, I place the order at the mid and it doesn't get filled until that price becomes the nat. Nat is the rough equivalent of selling at the bid for both options. Mid would be hoping that the bid/ask spread gets split down the middle.

Long BRKB EWG XRT
Net long LGF
Net neutral IWM SPY TLT

Ritholtz: top 10 investor errors

Barry Ritholtz has a series on investor errors. They are aimed more at long term investors vs. traders, but they still may be of interest to my readers (link to #10).

>>
1. Excess Fees
2. Reaching for Yield
3. You Are Your Own Worst Enemy
4. Asset Allocation vs Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Neglecting the Long Cycle
8. Cognitive Deficits
9. Past Performance vs Future Results
10. Not Getting What You Pay For
>>

Errors 1, 3, 7, 8, 9 are also common with traders. #1 can occur when commissions, spreads, option decay eat up most of the profits. #3 is about emotions, which for 90% of traders lead to losses. #7 is focusing too much on the tree, not enough on the forest, though for traders there is a balance there. #8 might be characterized as not knowing what we don't know, or over estimating our own knowledge. #9 chasing what is currently hot, is especially common with novices, but experienced traders also get swept up in the madness of crowd.

Goldilocks and the three beers

The Atlantic has an interesting article on pricing patterns and behavior (link).

>>
People were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer. Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.

Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.

In short: We are all Goldilocks.

In his book Priceless, William Poundstone explains what happened when Williams-Sonoma added a $429 breadmaker next to their $279 model: Sales of the cheaper model doubled even though practically nobody bought the $429 machine. Lesson: If you can't sell a product, try putting something nearly identical, but twice as expensive, next to it. It'll make the first product look like a gotta-have-it bargain.
>>

I've always been fascinated by pricing. How one store might sell the exact same item for double the price of what another store might charge. It is one reason I have always had an interest in the stock market. Part the shopping behavior is likely cultural. In the case of the three beers, the results might be very different in other countries, where buying the cheapest doesn't have the same stigma, or where buying the best brings even higher status.

Free online course: Yale Econ 252

Many universities now have free online courses. I just started Econ 252 on the Yale website:
http://oyc.yale.edu/economics/econ-252
link

The professor is the world famous Robert Schiller. I am not likely to do the homework and course reading so what I get from listening to the lectures may be of limited value. I understand that, but this kind of stuff tends to be more interesting to me, than much of what is on TV during the summer (and sometimes the winter too).

I took two economics courses in college and enjoyed them. Perhaps I missed my calling in terms of education. Oh well, like past stock trades, a person can't go back and re-choose their college courses and how much they applied themselves.

Here is a site with the top ten universities in terms of free online course material (link2). For some courses, a person must do the reading, the homework, perhaps the lab and write the papers, to really learn the material. Doing online auditing of the courses, without the papers, the exams, is a shallow substitute.

While I am here, I'll make a stock market comment. It was interesting on Friday to see a down VIX on a big down day. Typically VIX goes up when the market goes down. VIX is the volatility index (wiki link3).

The cliche phrase is that the tape doesn't lie. A lower VIX on a big down day means option sellers are betting that odds of a big down move in stocks is unlikely and were ponying up their money to sell volatility. Some are interpreting this as bullish, especially for the leading big cap stocks.

Sell LGF strangles

Sell LGF strangles LGF @14.8
Sell Aug 14 puts
Sell Aug 16 calls for credit

Sell strangles on Lions Gate, which is a bet that the stock stays in a trading range. So far 15 has been a brick wall for LGF. This adds slightly to my positive delta, so I remain modestly long on LGF.

I remain cautious. I am going to be traveling later in July, so am shying away from some trades for that reason. The stress from the markets isn't something to pack for vacation.

Long BRKB EWG XRT
Net long LGF
Net neutral IWM SPY TLT

Declaration of Independence and the preamble to the Constitution

For July 4th, those with kids may consider reading out loud, or better yet, have them read some of what is below. Yes, these are difficult times for many Americans, and some are taking advantage. The U.S. remains the greatest country on Earth. There are many critics. However, it is good to keep the perspective, the grateful attitude, for the many great blessings, we as Americans enjoy.

Happy Independence Day.

from
http://www.ushistory.org/Declaration/document/ (link)
>>
When in the Course of human events it becomes necessary for one people to dissolve the political bands which have connected them with another ...

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness. — That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, — That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government ...

... for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.
>>

from
http://www.ushistory.org/documents/constitution.htm (link)
>>
We the people of the United States, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and secure the blessings of liberty to ourselves and our posterity, do ordain and establish this Constitution for the United States of America.
>>

2nd quarter wrap up

It is the end of the 2nd quarter of 2012. Summary year-to-date results follow:
SPY +8.4% S&P 500
IWM +7.9% Russell 2000
TLT +3.3% 20 Year U.S. Treasury
EEM +3.1% Emerging Markets
GLD +2.1% Gold
SLV -1.0% Silver

Boy, did I get whipsawed on Thursday. The move off the bottom was close to 5% in one day plus an hour. This kind of thing will happen. Covering WFM Whole Foods might have been a good move, the ALXN Alexion more feeling based. In hindsight, trading is real easy.

What can I learn from this? To wait for market closes, unless a pre-determined price level or percentage loss is broken. Sometimes waiting for two consecutive closes is done to avoid whipsaws. Of course, there will be specific times when any set strategy can be micro-tweaked to succeed or fail, in hindsight.

Because of the whipsaw action I stayed mostly away from the stock market today. Next week has the July 4th holiday during the middle of the week. Then later in July, I will be traveling and less likely to take on and keep positions.

Since I've been giving out letter grades, the grades have mostly in the letter C range. So it is no surprise that am now behind the returns of the top ETFs on the list. As always with options, could be better, could be worse. Comparisons to index performance can be an interesting measurement. However, option traders might be long or short, and I trade a lot more than SPY and IWM.

Cover WFM & ALXN puts

Buy back short WFM puts @92.6
I take my loss on Whole Foods, buying back short Jul 87.5 puts. Stock is not acting well and my loss is about 130% basis the initial option premium.

Buy back short ALXN puts @96.4
I also buy back my short ALXN Aug 75 puts. The loss on Alexion Pharma is a more modest 15% basis the initial option premium.

Basically, I am taking some risk off the table, and in the process am taking some big losses. As always when taking losses, it is impossible to know the future. I don't have a good feeling for these two stocks and am exiting.

Long BRKB EWG XRT
Net long LGF
Net neutral IWM SPY TLT

80/20 rule Pareto

I learned something new today, that the 80/20 rule comes from Italian economist and engineer Vilfredo Pareto (Wiki link)

The story starts with the observation that 20% of the pea pods in the garden, produce 80% of the peas. Pareto became curious and looked at other data. He found that 80% of the land was owned by 20% of the population in Italy. The Wikipedia link goes into the equations for the Pareto index.

Many have heard of the 80/20 rule, but many probably didn't know its origin. It can be used as a rule of thumb for so many estimates, many human endeavors. I have heard it said that in most volunteer organizations, 80% of the work is done by 20% of the volunteers. It might often be more skewed than that. Some use the 80/20 rule in making business decisions. This might result in focusing on the most productive 20% of employees, or 20% most valuable of customers.

Buy XRT (sell puts)

Buy XRT via selling Aug 50 puts @56.9
XRT is the retail ETF and is down a bit today. ORLY O'Reilly Auto stores said they will come in at the low end for the next quarter. Some other retailers such as M Macys were downgraded this morning. CMG Chipotle down hard on negative analyst comments.

Yesterday's entry on WFM Whole Foods is now in the red. Another recent long trade ALXN Alexion has the stock up, but premiums are also up, so I am still in the red on my short puts. The short straddle on TLT Treasury bond ETF is working well. It is a tough market. I'm sure a few traders have a hot hand, but it is likely a very few.

Long ALXN BRKB EWG WFM XRT
Net long LGF
Net neutral IWM SPY TLT

Buy WFM (sell puts)

Buy WFM via selling Jul 87.5 puts @96.7
Whole Foods Market had a breakout on May 3, then faded back to the base, likely taking out some stop loss orders with a 8% pullback from the breakout high. Now it has been making new highs. The strike price of 87.5 is below the 50 day moving average, and below minor support at the breakout day high of 90.

As for the overall stock market, I thought to myself that maybe we would only see two and a half down days and this mornings brief dip was that half. I still have a lot of dry powder.

Long ALXN BRKB EWG LGF WFM
Net neutral IWM SPY TLT

Sell TLT strangles

Sell TLT strangles TLT@126.7
Sell Aug 115 puts and Aug 138 calls
/edited for typo, Aug 138 calls sold

TLT is the 20 year U.S. Treasury ETF. Selling strangles is a bet on a trading range. There is a good base of support at 115, mild resistance at the recent highs of 130. Operation twist is still distorting the U.S. bond market.

Elsewhere, gold stabilized after I exited, but I had little way of knowing that. Today, I look at selling put backratios on SPY, but August premiums seem modest given the recent market volatility.

Long ALXN, BRKB, EWG, LGF
Net neutral IWM, SPY, TLT

Cover GLD short strangles

Close GLD short strangles GLD@152.5
Buy back short GLD Jul 143 puts and GLD 166 calls for a modest profit, netting about 30% basis the initial premiums for the sold options. As usual, return on capital on sold options is much, much lower because of margin requirements.

Gold hit hard today. I don't have a good feel for this market so am getting out. Support at GLD 148 may hold, but if it doesn't my profit may be all gone by then. A short strangle is a bet on a trading range, with the expansion in volatility, it becomes a higher risk bet.

Goldman Sachs says to short the stock market. Is this another contrary signal? Maybe, but sometimes they do get it right. Besides this call is only for a 5% down move, so it is already 1/3 of the way there. I have been looking for three hard down days in the stock market, so if I get two more, I'll add some longs.

My IWM and SPY positions are near neutral at the moment. The delta changes with decay and as prices move.
Long ALXN, BRKB, EWG, LGF
Net neutral IWM, SPY

Rebalance LGF

Sell LGF Jul 14 puts LGF@14.7
I add some delta and some theta on Lions Gate. I expect it to be range bound. I am net long LGF.

Markets have had some wide swings on a Fed news day, though not much overall movement from yesterday.
Long ALXN, BRKB, EWG, LGF
Net long IWM, SPY
Net short GLD

More LGF (sell puts and calls)

Buy LGF via selling Aug 13 puts LGF@14.8
I cancel the order to sell strangles on Lions Gate, and decide to sell puts instead. The thought does enter my mind: will I be burned again? I did a similar cancel then replace and the stock moved lower. I am selling more puts because my delta is moving down as the stock moves up. I am already short Jul 12, Jul 13, Sep 13 puts. I see the 11 to 13 area as support, 16 as resistance.

This is my third trade of the day (earlier I sold puts on ALXN Alexion and BRKB Berkshire). Option traders often have free capital just after expiration. In my case when options that I sell short expire, buying power becomes available, and I am committing some of that capital to selling puts. Managing position size, margin requirements are vital concepts for option sellers.

/edit this post: turns out my fear came to be. I sold puts near the top. I am selling some Jul 15 calls with LGF @14.3 to rebalance my position. It isn't the original idea of selling strangles, but it is close. However, I got mushed by the intraday moves. LGF has been and continues to be a cruel mistress.

Long ALXN, BRKB, EWG
Net long IWM, LGF, SPY
Net short GLD

Buy ALXN and BRKB (sell puts)

Buy ALXN via selling Aug 75 puts @98.0
ALXN Alexion Pharmaceuticals breaking out from base pattern today. Support at 85, then 80. This is another CANSLIM kind of stock, with a high PE and fast growth.

I also sold BRKB Aug 70 puts @82.5. Story is the same on Berkshire, stock buyback and multiple chart support levels below. Not much premium on these puts, but with the ongoing buy back it seems like a low risk play.

I also placed an order to sell strangles on LGF Lions Gate LGF@14.6, sell Aug 13 puts and sell Aug 16 calls, but it is not filled yet. If filled, I would still be net long. Chart resistance at the old highs of 16.19.

Elsewhere, European stocks rallying today. The fear was so thick, it seemed an obvious play, though I only took the one small position in the German ETF EWG. Gold option premiums came in a little, pushing my short strangle into green numbers, but premiums are still relatively high because of possible Fed news on Wednesday.

Long ALXN, BRKB, EWG, LGF
Net long IWM, SPY
Net short GLD

Why indicators stop working

Mark Hulbert at Marketwatch writes about the 50 day moving average (link). In the bigger picture, there is this:

>>
As I’ve written on prior occasions, something appears to have happened to moving-average trend-following systems in the early 1990s that left them far less able to beat the market.

In fact, according to Blake LeBaron, a Brandeis University finance professor who has extensively studied a number of different technical trading rules, moving averages of various lengths stopped working in the early 1990s, not only in the stock market but also in the foreign-exchange markets as well.
>>

I can guess at "what happened." The Internet became more popular as did technical analysis packages, and then free websites offering charts. Pre-Internet, moving averages were the realm of a few that took the time and expense to have a data provider and a charting service. Once charts became popular, the most popular indicators became less valuable.

With all that I still look at the 50 and 200 day moving averages. Many others look at the 10, the 20, the 150 day. While the indicator is no longer gives a high probability chance of success, if it is widely followed, it can serve as resistance, support, and a whipsaw level. In human terms, I look because so many others are looking.

It is a cautionary tale about indicators that do work. If everyone starts using them, they tend to stop working. I cite this a lot when writing about seasonal indicators, because the calendar is easy to track, and easy to try and jump.

Marketwatch: 20 questions for would-be traders

Paul Farrell at Marketwatch reposts his list of 20 questions for would be traders. I'll post the first five to give a flavor, the rest are at the link.

>> Yes or No:
1) You’ve tried more than one new investment strategy this year

2) Feel you’re buying and selling funds at the wrong time

3) Rarely open up to anybody for feedback about your losses

4) Subscribe to two or more newsletters, feel overwhelmed

5) Can count on one hand all the good laughs this week
>>

I notice that there is precious little about market terminology, percentage of winners, risk management, trading strategy, trading systems. Seems like the majority of the questions are general lifestyle, perception of the markets, general psych questions.

Denise Shull often gives free webinars for my broker ThinkorSwim. Shull also does consulting with top traders for huge fees. One of her questions is "how well did you sleep last night?" Hmm. My recent fat finger mistake on GNC came after a late night out and not much sleep. Hmm, maybe there is something to that.

Changing the subject, today and tomorrow are rounds 3 and 4 of the U.S. Open Golf tournament. With a screen name of Tiger (and RedTiger on the PCGS forum), one would think I am a big Tiger Woods fan. While I do enjoy watching Tiger play golf on TV, I don't always root for him to win. I wonder how Shull or Farrell might interpret that in terms of trader psychology, eg: rooting for the favorite vs. rooting for a newcomer or old time underdog.

7-4 for June (grade C-)

Seven winners and four losers for the June cycle. I give myself a grade of C-. Grades since I've doing that are:
B for March
C for April
C for May
C- for June

I am not exactly lighting it up. Despite modest gains, I give myself a C- grade because the losers were some bad errors. These mistakes include today's fat finger mistake on GNC, the mishandling of the exit, and two sets of short calls on LGF sold on panic. Another problem area was GLD, with a poorly timed put sale, and then compounded by selling short calls. I haven't traded gold, silver or the miners well all year.

Some winners include a short strangle on IWM, and a short put backratio on SPY. These were some of my better trades. I legged out of the SPY position for about a 150% net profit basis the initial credit (return on capital is much lower because of margin requirements). I added another layer of short puts further out instead of selling the long puts. Had I sold those puts at the best time, the net profit was up to 400%. A lot of put owners ended up giving back most of their profits on the V-shaped rally. Overall, I was positioned pretty well for the moves in SPY and IWM.

I mangled my long LGF position. Keeping it simple as far as options, would have been much better. The glass half full side is that overall, I am in the green on Lions Gate. Considering that I have been mostly long, and sold my first puts on LGF when the stock was 14.4, then added another layer of short puts at 15.0, being ahead when the stock is a bit lower is a good thing (14.1 close).

Going forward I am short puts on BRKB, EWG and LGF, short strangles on GLD and IWM, and short put ratios on SPY. This nets out to the position summary below:
Long BRKB, EWG*, LGF
Net long IWM, SPY
Net short GLD

BRKB Berkshire Hathaway
EWG German stock ETF (been missing this one*)
GLD Gold ETF
GNC nutrition store
IWM Russell 2000 ETF
LGF Lions Gate Entertainment
SPY S&P 500 ETF

Fat Finger mistake on GNC

Crap, I made a data entry error earlier today. I wanted to close my short GNC Jun 35 puts. Instead, I mistakenly entered an order to buy Jun 35 calls and got filled. Yikes.

To compound the mistake, GNC dropped rapidly from 35.0 when I entered the order to 34.0. Right now it is back to 35.0 and I am closing both ends of the position, for a break even profit after all is said and done. Mistakes happen. Thankfully this was a small dollar amount, but the mistake still cost me. If I had closed the position, it would have been more like a 50% gain instead of maybe 20% basis the initial credit. The bright side is that at least I am exiting with a net profit, but once I realized the mistake and saw the stock dropping it was like going down the rabbit hole. I'll post a monthly trading recap after the close.

As I type this up, looks like my exits were poorly timed, as GNC is rallying a bit into the close. Still, with the mind fog, exiting with even a modest profit is a victory of sorts.

Long BRKB, LGF
Net long IWM, SPY
Net short GLD

Cover short LGF calls

Buy back short LGF Jun 13 calls LGF @13.6
Yesterday's close over 13.50 triggers my mental stop. Selling these calls on Lions Gate was a foolish entry, and I am taking my lumps at a huge percentage loss. I am still short Jun 13 puts, Jul 13 strangles (put & calls) Jul 12 puts, Sep 13 puts. I have a limit order to buy back the short Jul 13 calls too, but it hasn't filled yet. (edit: order was filled)

The tactic of selling LGF Sep puts to add more delta didn't work out because expiration is this Friday. Looking back, perhaps, a mental stop on a close over 13 for these short calls. Or better still would have been to avoid the panic on the technical selling. Best would have been to buy calls or LGF stock on the spike down. With the hindsight lens, the recent 17% two-day spike down may have been done to trigger some large stop-loss orders.

Speaking of selling calls, my recent sale of GLD calls isn't working too well either and I am now net short gold. That GLD call sale was right after Ben Bernanke's comments sent gold lower.

Long BRKB, GNC, LGF
Net long IWM, SPY
Net short GLD

Rebalance LGF (sell puts)

Sell LGF Sep 13 puts LGF@13.3
I rebalance to about neutral on Lions Gate by selling September puts. My Jun 13 short straddles (short both a put and a call at 13) have turned into a problem, same with my short Jul 13 short straddles. It was a huge mistake to have sold the Jun 13 calls for next to nothing. The percentage loss on that single leg is ridiculous, even if the dollar amounts are small. LGF is into a resistance area, so I'll see if it comes back to 13 before this Friday's expiration.

As I type, the opening pop up in stocks from the Spain news is dissipating, but who knows where the market closes. Gold was up over night, but now is down. TLT opened lower but now is higher, so the bond folks may be looking for more shoes to drop. It would have been nice to time the recent V-shaped-bottom in stocks to perfection, but how many actually did that? Not me, is the most common honest answer.

Long BRKB, GNC
Net long GLD,IWM, SPY
Net neutral LGF

Rebalance GLD (sell calls) and buy SPY (close puts)

Sell GLD Jul 166 calls GLD@154.2
Yikes! Ben Bernanke's comments spike the gold rally. Chart resistance at 165 and 166. I rebalance, though am still net long (short Jul 143 puts, short Jun 146 puts). The French open tennis tournament is going on, and I feel like a tennis ball being served up. My mind tends to focus on the bad moves, though there have been some good moves such as EWG (German ETF) too. As I finish typing, GLD has moved up .4 to 154.6 so my timing continues to be questionable.

I also close out one leg of a short SPY put backratio, selling long SPY Jun 128 puts with SPY@132.8. This leg closes out at a loss, however, the offsetting short puts are at 123. This leaves me short Jun 120 puts, Jun 123 puts, Jul 110 puts, long Jul 115 puts for a net long position on SPY. Obviously, I would have done much better closing out the SPYs early in the week, instead, I sold some Jul 120s which wasn't as good a move.

Long BRKB, GNC, LGF
Net long GLD,IWM, SPY

Rebalance LGF (sell puts)

Sell LGF 13 puts LGF@12.7
I rebalance to long on Lions Gate, as my short strangles move to near delta neutral. I have made a mess of my LGF positions. Thankfully the dollar amounts involved are small. The psychological capital expended is likely greater than the financial capital.

My earlier trades today are one up EWG, one down GLD. A lot of action on my part with three trades today, but so far, not much forward progress.

Long BRKB, GLD, GNC
Net long IWM, LGF
Net short SPY

Buy GLD (sell puts)

Buy GLD via selling Jul 143 puts @158.8
Gold moving up today. Chart support at 148, and 144 is the 52-week low back in June 2011. I was already short Jun 146 puts which look to be safe.

Long BRKB, GLD, GNC
Net long IWM, LGF
Net short SPY

Buy EWG (sell puts)

Buy EWG via selling Oct 17 puts @18.9
EWG is the German stock market ETF. Chart support at 17. Uncertainty is still high, but the strike plus the put premium gives about 16% downside protection.

The U.S. stock market and precious metals are up this morning. Treasuries are down. I am looking for another dip in stocks before the Greek election on June 17th.

Long BRKB, GLD, GNC, LGF
Net long IWM
Net short SPY

Rebalance SPY (sell puts)

Sell SPY Jun 120 puts SPY@128.7
I add a few SPY deltas for June. I was already short a put backratio (short 2x Jun 123p/long 128p). I am still net short SPY for June. I still have quite a bit of dry powder. My broker is liking me today with these small premium trades generating commissions. My earlier LGF call sales are looking to be poorly timed as LGF is bouncing, and that is what often happens when rebalancing.

Long BRKB, GLD, GNC, LGF
Net long IWM
Net short SPY

Rebalance LGF (sell calls)

Sell LGF Jun 13 calls and Jul 13 calls with LGF@11.7
I am already short LGF Jun 13 puts and Jul 12 puts for small premiums. Lions Gate had two steep down days on no news. Some think it was technical trading as the stock broke through the 50 day moving average and 100 day moving average. Frustrating would be a mild adjective for those that are long like me. I am still net long LGF and plan to roll the Jun 12 puts if I can get net some premium by doing the roll.

Long BRKB, GLD, GNC, LGF
Net long IWM
Net short SPY

Buy GLD (sell puts)

Buy GLD via selling Jun 146 puts @156.6
I take a small position in gold for a small premium on today's pop up. Recent low was 148, so 146 gives me some room.

Stock market falling. I look at several things, but for now do nothing. I am not that nimble, and the next Greek election on June 17 will likely hang over the markets for the next two weeks. I still have a lot of dry powder, but don't see any need to get in when the water is so turbulent.

Using hindsight goggles, I wish I were more aggressive in being long bonds. It is hard thing to do when the long term fundamentals look so poor. Option traders often do better by ignoring those factors because emotion, sentiment, momentum tend to be much more relevant factors in the short term.

Long BRKB, GLD, GNC, LGF
Net long IWM
Net short SPY

OT: Talk less, listen more

This is an off-topic post about listening. Jonathan Burton on Marketwatch has an interesting article (link). It sort of dove-tails with RQ or Risk Intelligence from a few days ago. In the article there are six "bad" types, we have all met the following types, hopefully we are not one of them:

>>
1. The Opinionator is always right and intimidates the speaker.

2. The Grouch makes people feel stupid, shutting off innovative and creative ideas.

3. The Preambler takes forever to get to the point, manipulating the agenda and effectively halting communication.

4. The Perseverator talks without saying anything. According to Ferrari: “You may feel that the two of you are having completely different conversations.”

5. The Answer Man wants to be the smartest guy in the room. He’s looking for a solution before the problem has even been identified.

6. The Pretender appears to hear what you’re saying, but acts as if the discussion never happened.
>>

WikiHow has a decent article on how to be a good listener (link2). Obviously, context and setting will steer a person. A business meeting is a far different from a friendly casual conversation, which is far different from an argument with a loved one. However, in all kinds of settings, bad habits can hurt a situation, and good habits can help. Passive aggressive behavior, pettiness, put downs, insults, temper can all turn a discussion into a heated argument.

In business settings, acting in a professional manner is always a sound choice. For friends and family, empathy is often best. Respect is always appreciated. I am not suggesting that a person be a door mat. There is a line there.

In business groups, sometimes the tool from the book, The Six Thinking Hats, is used to get people to be more open to new ideas (link3).

Buy LGF (sell puts)

Buy LGF via selling Jul 12 puts LGF@13.3
Lions Gate Entertainment earnings and conference call move the stock. The initial response to earnings is a plunge in after-hours trade. After the morning conference call, buyers step in and continue to support the stock. This trade adds a second layer of short puts, was already short Jun 13 puts.

My SPY position is now slightly delta negative, so I am net short. I placed an order to sell a strangle on MT ArcelorMittal, a big French steel company but did not get filled at the mid point.

Long BRKB, GNC, LGF
Net long IWM
Net short SPY

RQ or Risk Intelligence

Slate.com has an article (link) about Risk Intelligence which they term RQ (vs. IQ). The subtitle is: How Gamblers and Weather Forecasters access probabilities

For investors and traders, it can be just as important to understand what a person doesn't know as to have information. A false sense of confidence can lead to big losses. One quip that goes with that is "when in doubt, get out" or "when in doubt, sit it out."

The article has a secondary link to a free version of a RQ test. In more comprehensive testing, expert gamblers tend to have a high RQ. Kenny Rogers immortalized the sentiment in song lyrics in The Gambler (YouTube link2):
"You've got to know when to hold 'em
Know when to fold 'em
Know when to walk away
Know when to run."

The discussion also reminds me of the Ken Fischer Book "The Only Three Questions that Count." The three questions are:
(1) What do you believe that is actually false?
(2) How can I fathom what others find unfathomable? And,
(3) What the heck is my brain doing to blindside me now?

Overconfidence is the Achilles heel of many an intelligent person trying their hand at trading or investing. Often times a person is highly educated, and trained in some other discipline and think that their intelligence will be enough to do well in investments.

Another bad thing that can happen is beginner's luck. For beginner option traders, it often goes this way. The beginner buys low probability high risk options and makes money. Maybe they even repeat that, and get the idea that the game is easy. As most experienced option players know, there is no free lunch. Every trade has a probability of winning, the lower the probability, the higher the potential payout.

Option payouts tend to scale closely to the probability, so a 10% chance of profit often means the possibility of a 10-to-1 payout if the trade comes in. And the opposite, a 90% chance often means a person has to put up or risk $90 to win $10, but will win about 90% of the time. Of course, the broker takes their commission and the market maker their spread, so that deducts from the payouts.

Bonds and more

Most long term investors do better if they have some allocation to fixed income. Even 10% can mean a signficant difference if there is a stock market crash. An 80% stock/20% bond portfolio tends to do near as well as 100% in stocks with a much smoother ride, fewer down years, and more importantly fewer big down years. Many favor the cliche asset allocation of age in bonds (eg: age 25, 25% in bonds, age 40, 40% in bonds and so on).

ETF money flows show a lot of money flowing into fixed income. This is a brief survey of some choices. Dividend.com (link) is a good resource for payment dates, the most recent dividends, and the current yield for stocks and ETFs.

Correlation tracker (link2) is another useful tool for those looking for diversification. To use the correlation tracker enter two different symbols, for example TLT and SPY gives a correlation of -0.08, which is low. If I enter IWM and SPY, it gives a correlation of 0.93 which is high, so market movements in one will tend to echo in the other.

Starting at some of the least risky choices are short term bond ETFs such as BSV or SCHO. There are total bond market ETFs such as BND, SCHZ, LQD, especially appropriate for those that like to keep their investments simple.

There are high yield choices such as HYG and JNK. Vanguard recently closed one of their high yield mutual funds to new investors. This sometimes is an indicator that a sector is getting too popular.

For Treasuries, readers know I like to trade the options on TLT, and its double inverse TBT. For those that like to trade, there is also EDV which is a zero coupon bond ETF. EDV doesn't pay dividends and is extremely sensitive to changes in interest rates. There are leveraged ETFs, but watch the bid/ask spreads, the decay, the volume.

On the stock side, some popular dividend ETFs include VIG, SCHD. XLU is a utility ETF. PFF is a preferred stock ETF. Of course, a person could also select one or more of the many individual stocks that have a decent yield.

There are also municipal bonds for those that are in high tax brackets. More recent choices include Build American Bonds (BAB is one ETF), and Emerging Market bonds (PCY, EMB). There are also high yielding limited partnerships and REITs (IYR).

As always, standard disclaimers apply. Nothing I write on this blog is a recommendation to buy or to sell. A person needs to do their due diligence before investing money. Expense ratios, liquidity in terms of typical bid/ask spreads, daily volume of shares, yield, average duration, are all factors to consider.

Sell IWM (sell calls)

Sell IWM via selling Jul 85 calls @76.6

I am now short strangles (both puts and calls) on the Russell 2000 ETF. A short strangle is a bet on a trading range. There is not much premium in the 85 calls. I see 85 as big time resistance if there is a rally. I am still net long IWM.

I am tempted to short strangles on SLV too, but my trading history with silver is spotty at best.

Long BRKB, GNC, LGF
Net long IWM, SPY

Buy BRKB & IWM (sell puts)

Buy BRKB via selling Jul 70 puts @79.4
There is chart support, and Berkshire Hathaway has an ongoing buy back program that make a steep decline unlikely. BRKB has a beta of .51, so a 10% decline in the stock might mean a 20% market decline.

Buy IWM via selling Jul 61 puts IWM@76.1.
For the Russell 2000 ETF, 61 was the closing low in October 2011. It is also about a 20% decline from here.

I don't have a strong read on the various markets. The next Greek election on Sunday 6/15 may or may not be a market moving event, but it is a date to circle. After the May expiration, with so many positions expiring freeing up buying power, I put some capital to work.

Long BRKB, GNC, IWM, LGF
Net long SPY

Dealing with Mistakes--The Musicians Way

Three months ago, I began to learn how to play piano (keyboard). I've been reading the book The Musicians Way, and there is a chapter on dealing with mistakes. I see a lot of useful analogies to trading.

Some key points from the book:
* an error is not a failure
* there is no reason to be ashamed
* errors provide information

Five kinds of errors:
* lapses in focus or concentration
* minor inaccuracies (minor will vary depending on a persons skill level)
* bigger mistakes such as missed cues, omitting sections of music
* technical problems such as stubbing a finger or problems with equipment, sound or power
* memory lapses, perhaps the most feared by performing musicians

For traders, the same three
* a loss is not a failure (losing the entire account is a failure if it means game over).
* there is nothing to be ashamed of (everyone except liars and a few floor scalpers has losses)
* losses give you information

As for types of mistakes:
* lapses in focus or concentration
* minor errors such as missing a small part of a move, or hesitating when your indicators are giving you a strong signal.
* bigger errors such as giving in to emotions, or faulty analysis, or breaking of a person's trading rules.
* technical problems with computers, or perhaps illness or injury at a bad time.
* the most feared for traders might be unexpected news that moves the market against you.

For dealing with errors, in trading or music. Do not disparage yourself. Self talk is very important. If working with a group, do not disparage the group. Give up the idea of perfection. After a big push, such as a live musical performance, or a difficult period or extremely profitable period of trading, a break is a good thing. For musicians recording is an excellent tool. For traders, a trading journal is a method of recording. That's what this blog is, a public trading journal.

For music and trading, preparation, honing your skills, rest, exercise, are all important ingredients to success.

13-7-1 for May

I count 13 winners, 7 losers, 1 breakeven for the May option cycle, for a modest overall loss. My ship limps into the harbor with an Apple size hole in the hull, but with the mast intact.

The huge loser was the short put vertical spread on Apple initiated with the stock at 604 (closed at 530 today). The winners were all on the small side and were not enough to make up for the big loser. Some of the other losers were initiated two months ago, some were part of spreads and not really losers, just part of the strategy. It can become difficult to count a spread as a distinct trade because some spreads are legged into.

Overall I give myself a grade of C for this month, even with the modest loss for the month. I was cautious, but not cautious enough. As always with options, could have done better, could have done worse, aggressive bullish traders got slaughtered, aggressive bears did very well for this cycle.

I had a chance to get out of AAPL with a profit, same with another loser MMM. However, if I held until expiration, the losses on both would have been greater. I closed trades on GLD and LGF early, and both would have come in safe, but considering the market, it was a decent decision to take the profit and remove some risk.

Going forward I am short puts on GNC, LGF, short a strangle on IWM, short put backratios on SPY.

Long GNC, LGF
Net long IWM, SPY

GNC is the nutrition store
LGF Lions Gate Entertainment
IWM Russell 2000 ETF
SPY S&P 500 ETF

AAPL Apple computer
MMM 3M Corp
GLD Gold ETF

Sell SPY backratio

Sell SPY backratio
buy SPY Jul 115 puts SPY@129.9
sell 2x Jul 110 puts for a net credit

I like to sell these backratios when volatility is up. This is net bullish (delta positive), with the twist of a max profit if SPY drops to 110 at July expiration. Starts to lose money with a drop below 105. If SPY goes up or is neutral, I pocket the small premium.

I closed my at risk positions on Thursday, all the others look to come in okay with less than 10 minutes to go. I'll post a monthly recap after the close.

Long AMGN BRKB GNC LGF TLT
Net long AMZN IWM SPY

Disaster!

Scramble mode
Close out short MMM puts for a loss
close AAPL put vertical for huge loss
Close out GLD short puts for a small profit
MMM @84.9 AAPL @535 GLD @152.1

Disaster! I close three positions. AAPL was a huge -1300% percentage loss basis the initial premium. Fortunately, It is more like 1.1% of the price of underlying in dollar terms. Still a hard hit but hopefully recoverable. I bail on MMM in part because of the AAPL loss. I'd prefer not to have multiple huge losses in the same month. Same story with GLD, it looks like it will close out okay but don't want to risk another big loss.

As I type this up, looks like I got washed out in a wave of selling and the market is stabilizing and recovering. Phooey. Well, I will lick my wounds and regroup. The losses took out about 1/3 of the year's gains. That is often the way with option selling, small profits, big losses. A few minutes can make a big difference in profit/loss in a moving market. Today would be classified as a bad day.

Long AMGN BRKB GNC LGF TLT
Net long AMZN IWM SPY

Roll LGF short puts

Roll LGF short puts LGF@12.0
Buy back short May 13 puts
Sell short Jun 13 puts for credit

I roll my Lions Gate Entertainment puts forward. Stock has been flat for a month, so I collected a small premium from time decay on the closed position. LGF has been dead money since the Hunger Games movie release.

The two other options most in danger of possible assignment are GLD, MMM. Most others are looking relatively if the market is normal. Overall, the markets have been treacherous to try and navigate. Premiums on TLT options seem too small to make it worth selling those puts.

Long AMGN BRKB GNC LGF MMM TLT
Net long AAPL AMZN GLD IWM SPY

Money & Happiness and Experiences vs. Things

A blogger writes about money and happiness (link). For Americans, $75,000 in annual income is about where the correlation between income and happiness cuts off. Above that, people don't tend to be any happier on average. Below that, people tend to respond that they are happier as they move up.

There is another section about what kind of things to buy and not to buy. For me, an interesting one is:
>>
1. Buy experiences instead of things

Things get old. Things become ordinary. Things stay the same. Things wear out. Things are difficult to share. But experiences are totally unique; they shine like diamonds in your memory, often more brightly every year, and they can be shared forever. Whenever possible, spend money on experiences such as taking your family to Disney World, rather than things like a new television.
>>

As I kid, I always chose things. I thought buying experiences like an outing was a "waste of money." Some things have enormous time value, such as Lego bricks, or a train set, that can be set up in so many ways, played with in so many ways for an imaginative kid. I still go by that today, though I do value experiences a bit more than I used to. I would tend to think that savers tend more towards things, vs. experiences, but that is a total guess.

Even with the example given, it might depends on how much TV a family or a person watches. A person with an older TV, and that spends the average four hours of TV a day, might enjoy a new TV more than a one-time trip to Disney World. If the upgrade is only from say two years ago, then it wouldn't mean much.

As with a lot of choices, a healthy balanced approach is what I suggest. A person that never takes a trip, could do well to try some new things or new experiences and vice-versa. I don't think that there is one answer that is always correct. As with long term investing, a mix can be a good thing.

/edit to add: a few more thoughts on this subject. There are things that lead to experiences, such as musical instruments, or any collecting hobby where there are clubs, shows or events. There are experiences that may lead to life changes. There are similar experiences such as taking up dancing or singing that may lead to meeting many new people. For folks that never travel, a big trip has the potential to open up their mind and their life. Again, a person can go over board, buy too many things, or spend too much on entertainment and trips. There is always saving money and buying neither. Again, balance is often a good thing.

Rebalance IWM (sell calls)

Sell IWM Jun 85 calls IWM@79.2

I sold these and am reporting late. I am still net long IWM Russell 2000 ETF. Stock market has an ugly day.

Long AMGN BRKB GNC LGF MMM TLT
Net long AAPL AMZN GLD IWM SPY

Sell AAPL (sell call spread)

Sell AAPL via selling a call spread
Buy May 630 calls, stock @570
Sell May 620 calls for net credit

I do a minor repair on my Apple position. This change moves my safe zone to 545 to 620 (it was 650 on the upside). I am still net long. Apple has gone almost straight down since the pop up after earnings. There is some chart support at 565/555/545.

Today my screen is mostly red. Last Friday, it was almost all green. For option traders, things could almost always be better, always be worse. When things are going my way, I wish I had been more aggressive. When things fall apart like today, I am glad that I tend to be cautious. Of course being on basic market tendency (bull or bear or neutral) helps a lot.

LGF is my other big loser for the day. For now I am sitting tight because I have some room on many of my positions and my short SPY June put backratio gives modest downside protection if things get worse.

Long AMGN BRKB GNC LGF MMM TLT
Net long AAPL AMZN GLD IWM SPY

Sell LGF (cover puts)

Buy back short LGF May 12 puts
LGF Lions Gate at 11.9

This is the "Hunger Games" movie studio stock. I am still short LGF May 13 puts. I don't like the way it or the stock market is acting, and am taking some risk off. I get out of this set of puts with a break even profit (profit just a bit more than commissions). GNC drifted lower after my fill--tough market.

Long AMGN BRKB GNC LGF MMM TLT
Net long AAPL AMZN GLD IWM SPY

Buy GNC (sell puts)

Buy GNC via selling Jun 35 puts @38.8
GNC is the vitamin/nutrition store. It is a CANSLIM kind of stock that broke out on good earnings (Wikipedia link explaining CANSLIM). The breakout point is 35, so if assigned it would mean a pull back to the chart base.

Elsewhere, the move down in IWM has flipped my position back to delta positive, or net long. GLD having a bad day. AAPL found some buyers near the 50 day moving average.

Long AMGN BRKB GNC LGF MMM TLT
Net long AAPL AMZN GLD IWM SPY

Sell AAPL (sell vertical)

Sell AAPL vertical call spread @594
Buy AAPL May 660 calls
Sell AAPL May 650 calls

I now have an Iron Condor on AAPL which profits if the stock stays in the range 545 to 650. The all time high of 645 is resistance. I still net out to long on Apple, though a bit less so.

Long AMGN BRKB LGF MMM TLT
Net long AAPL AMZN GLD SPY
Net short IWM

Buy AAPL (sell vertical)

Buy AAPL via selling vertical spread
Buy May 535 puts AAPL @604.5
Sell May 545 puts for net credit

Apple drifting lower, 555 was the low on the day before earnings, so I see that as significant support. My thinking is similar to the AMZN trade earlier today, but I wanted to wait until a down day for Apple before doing it. A vertical helps with the margin requirement and limits max downside. Trade off is a smaller potential profit than selling puts naked.

Elsewhere, the rally in IWM Russell 2000 ETF has flipped my position to net short.

Long AMGN BRKB LGF MMM TLT
Net long AAPL AMZN GLD SPY
Net short IWM

Buy AMZN (sell vertical)

Buy AMZN via selling vertical put spread
Buy May 185 puts
Sell May 195 puts AMZN@224.7

Amazon.com gaps up on earnings. 195 is yesterday's close. Not much premium from this trade, but with the market rally premiums have been decreasing. I do a vertical to help with margin requirements and limit downside if there is a market crash on this high priced underlying. In exchange, I give up over half the premium from selling the 195s to buy the 185s.

Long AMGN AMZN BRKB LGF MMM TLT
Net long GLD IWM SPY

Bespoke survey: bearish on treasury bonds

Someone on the Vanguard forum posted a chart (link1) about an investment survey. Here is the thread (link2).

The only number that stands out is the percentage that are bearish on U.S. Treasuries. It is interesting that they are not near as bearish on U.S. corporate bonds or municipal bonds. The rest of the numbers aren't extreme enough to give a signal.

I looked up Bespoke Investment Group, didn't find all that much background, founded in 2007 by Paul Hickey and Justin Walters. Their pitch is custom "tailoring" of portfolios.

Bullish treasury plays would include buying TLT (20-year Treasury bond ETF) or EDV (zero coupon U.S. Treasury ETF).

Buy AMGN and IWM (sell puts)

Buy AMGN via selling May 65 puts @70.0
Amgen up on earnings. Chart support levels at 68, 66 and 65, then 60. The 52-week high of 70 is resistance. Not much premium from selling these puts, but the market is moving too much for me to have a high confidence level on a higher strike.

Buy IWM via selling Jun 70 puts @81.0
This is a rebalancing move to get back to net long IWM. I was already short May 70 and 72 puts, short May 85 calls, long May 88 calls.

Elsewhere, Apple earnings, Fed news, and many other companies reporting earnings are making for big moves. LGF Lions Gate has a relief rally after a four week nose grinding decline.

Long AMGN BRKB LGF MMM TLT
Net long GLD IWM SPY

Buy MMM (sell puts)

Buy MMM via selling May 85 puts @88.8
Minnesota Mining and Manufacturing up on earnings. Chart support at 85 and then 80.

Yesterday, I placed a limit order to sell puts on MCD McDonalds, but did not get filled.

Long BRKB, LGF, MMM, TLT
Net long GLD, IWM, SPY

Buy SPY (sell backratio)

Sell SPY backratio SPY@136.0
Buy Jun 128 puts
Sell 2x Jun 123 puts

This backratio is net bullish (delta positive) with a max profit at the lower strike of 123, sold for a net credit. I like selling backratios when volatility is up. A decline to 123 at June expiration is the best case scenario. A crash below SPY 118 means losses. If the stock market goes up or is neutral, I get to keep the small credit.

Long BRKB, LGF, TLT
Net long GLD, IWM, SPY

OT: $1000 prom nights and dinners

This is an off topic post. Making the rounds are reports that prom night spending now averages over $1000. To a frugal person, that is stunning, almost unbelievable. Even tougher to process is that low income households (between $20k and $30k per year) tend to spend more than the average. (link1 USA Today). High income families tend to spend less than the average.

Some can read into this, saying that is why the poor are poor, because they blow money on prom nights instead of saving or investing, or using the money to help start a small business. I can see the other side, that this is the one night where the low income kid gets to feel special and live like a wealthy person.

The second news item was the Titanic dinner for $12000 per table, coincidentally about the $1000 per person that prom folks are spending. (link2 Houston Culture). So even in what many see as tough economic times, some have money to spend.

Plenty of pundits advocate frugal living, getting out of debt, and saving more because the end of the financial world is coming. There is something to be said for the opposite, to spend and enjoy life while there are good times to be had. If indeed the sky falls, it usually comes with massive casualties (plague or war or revolution). There aren't many good times available when 25% of the population is dead or dying.

As always, I advocate a healthy balanced approach towards saving, spending and investing. I tend towards the frugal side, but can see the other side too. I don't think the sky is going to fall any time soon. The key word is balance. Find that balance.