On Sunday, a friend told me the story of another friend who lost all their money trading stock options. The loser was someone that hooked up with one of the ubiquitous option seminars. This particular seminar taught the strategy of buying option straddles (both a put and a call) ahead of earnings reports. Anyone that knows much about options, knows this can be a high risk strategy.
It is sad, however, I wasn't surprised at the outcome. I don't know if anyone tracks the graduates of these seminars, but I expect the percentage of winners to be lower than the percentage of winning traders that consistently buy options ahead of earnings reports. A few will win, and some that win will do spectacularly well. The odds are another matter.
Options can be used in a conservative, measured approach to reduce risk. Options can also be used to engage in high risk, all-or-nothing type of trades, hoping for a home run. Position size is a big deal when trading options, and many a novice gets way in over their head. Some like the person I heard about lose everything, their entire nest egg in a few months of trading. Be careful out there.
Monday, June 30, 2008
Saturday, June 28, 2008
Charts: USO, DIA and more
Oil is driving the markets. In the past, I have written about oil being the dog and gold being the tail. Now it seems all world markets are keying off what oil does. It is an amazing circumstance.
Here are links to some charts:
USO, DIA, SPY, IWM, EEM, GLD
USO (oil exchange traded fund) is in a strong trending market. Predicting a top is risky business and there are no signs of that. USO hasn't really gone parabolic, just slowly, steadily churning higher.
Speaking of parabolic, the GLD chart has that kind of potential. Gold has underperformed oil, if gold had kept up it would be more like $1400 now instead of $900.
DIA (Dow Jones Industrial Average) has broken the March lows. This is psychologically bad because many novice investors track the DJIA not the broader indexes. SPY (SP500) is close to a retest, just two or three points above the March lows. Like I said, I think there is a 50/50 chance the March lows will be broken. IWM (Russell 2000). IWM is showing relative strength vs. the bigger cap indices. EEM (emerging markets ETF) chart is similar to the IWM chart, holding above support.
Charts are charts, and aren't a guarantee of anything. The most troubling chart for the stock market is USO because the price of oil seems to be driving the stock market lower and there are no technical signs of a top in USO. Obviously when something has seen a decent run, there are often sharp corrections along the way. It is lower risk to wait for support and resistance to be established and trade off them, than to be the hero and call "top" or "bottom."
Here are links to some charts:
USO, DIA, SPY, IWM, EEM, GLD
USO (oil exchange traded fund) is in a strong trending market. Predicting a top is risky business and there are no signs of that. USO hasn't really gone parabolic, just slowly, steadily churning higher.
Speaking of parabolic, the GLD chart has that kind of potential. Gold has underperformed oil, if gold had kept up it would be more like $1400 now instead of $900.
DIA (Dow Jones Industrial Average) has broken the March lows. This is psychologically bad because many novice investors track the DJIA not the broader indexes. SPY (SP500) is close to a retest, just two or three points above the March lows. Like I said, I think there is a 50/50 chance the March lows will be broken. IWM (Russell 2000). IWM is showing relative strength vs. the bigger cap indices. EEM (emerging markets ETF) chart is similar to the IWM chart, holding above support.
Charts are charts, and aren't a guarantee of anything. The most troubling chart for the stock market is USO because the price of oil seems to be driving the stock market lower and there are no technical signs of a top in USO. Obviously when something has seen a decent run, there are often sharp corrections along the way. It is lower risk to wait for support and resistance to be established and trade off them, than to be the hero and call "top" or "bottom."
Thursday, June 26, 2008
Major market meltdown, GLD up big
What a surprise this is to me, what with the option premiums so high for the move that occurred today, SPY down big, GLD up big. Good thing I didn't bet big on that snippet of analysis that I posted a couple of days ago.
Some margin calls can be expected with a move like this, so further selling may occur in the weakest stocks. Traders short gold or oil may also face margin calls and be forced to cover. This is one reason not to try and call the bottom in stocks or top in oil. The other reason is what I have always written, that calling top or bottom can be entertaining, but usually isn't profitable. Very few traders have that magic touch of calling market turns, and I am not one of those few. I prefer to trade after the dust has settled or the news is out, and support and resistance has been established.
With the downside momentum, support for SPY at the March lows (~125 support vs. 128.3 close today) looks weak. The way things look now, I would not be a long term buyer at that price.
Positions: short RIMM hedged
Some margin calls can be expected with a move like this, so further selling may occur in the weakest stocks. Traders short gold or oil may also face margin calls and be forced to cover. This is one reason not to try and call the bottom in stocks or top in oil. The other reason is what I have always written, that calling top or bottom can be entertaining, but usually isn't profitable. Very few traders have that magic touch of calling market turns, and I am not one of those few. I prefer to trade after the dust has settled or the news is out, and support and resistance has been established.
With the downside momentum, support for SPY at the March lows (~125 support vs. 128.3 close today) looks weak. The way things look now, I would not be a long term buyer at that price.
Positions: short RIMM hedged
Short RIMM (sell calls)
Short RIMM via selling the Jul 155 calls
RIMM gaps down on earnings and outlook. The gap and prior high is resistance.
RIMM gaps down on earnings and outlook. The gap and prior high is resistance.
Monday, June 23, 2008
Sentiment and option pricing
On Friday I mentioned that puts are priced higher than equivalent calls on SPY. For example, today the SPY closed at 131.45.
Sep 120 put is bid 2.18, the Sep 110 bid 0.85
Sep 143 call is bid 1.21, the Sep 153 call 0.12
So the put 11 points out of the money costs almost twice as much as the call. The put twenty-one points out is six times as much as the call that far out. Six times! What does that mean? It means that option buyers and sellers are pricing in the probability of a big drop in stock by September, with minimal chance of a big rise.
Options on GLD show the opposite expectation. With GLD closing at 86.86
Sep 76 put is bid 0.65, the Sep 70 put is bid 0.20
Sep 97 call is bid 1.60, the Sep 103 call is bid 0.90
So option players on gold are much more willing to bet on a big rise than a big drop, the opposite of the pricing on SPY options.
The option premiums are a sentiment indicator, and odds favor the option buyers being wrong. Sometimes they beat the odds as no indicator is perfect. Given a choice, I would prefer to bet against a big decline in stocks, and/or a big jump in gold. When options premiums are so out of balance it favors those making bets on extreme moves being wrong again.
In normal times, premiums are about equal, with calls slightly more expensive than equivalent puts. Let's look at a third underlying: Research in Motion. RIMM has earnings out on Wednesday and the stock closed at 143.06
Jul 125 put bid is 2.74, Jul 115 put is 1.21
Jul 160 call bid is 3.30, Jul 170 call is 1.71
This shows slightly more people betting on a RIMM stock price rise than a drop. However, the premiums are not multiples of each other like the premiums on SPY and GLD, so there is no clear read on which way the option players are leaning.
Option pricing can indicate underlying sentiment. Sentiment tends to be more useful at market turns than in a trending market. My preference would be to bet against the option speculators, so that would translate into me being bullish on SPY and bearish on GLD. As always, what I write is not a recommendation to buy or sell, or investment advice. As always there are what I perceive to be low risk entry points, and high risk times to enter into a trade.
Sep 120 put is bid 2.18, the Sep 110 bid 0.85
Sep 143 call is bid 1.21, the Sep 153 call 0.12
So the put 11 points out of the money costs almost twice as much as the call. The put twenty-one points out is six times as much as the call that far out. Six times! What does that mean? It means that option buyers and sellers are pricing in the probability of a big drop in stock by September, with minimal chance of a big rise.
Options on GLD show the opposite expectation. With GLD closing at 86.86
Sep 76 put is bid 0.65, the Sep 70 put is bid 0.20
Sep 97 call is bid 1.60, the Sep 103 call is bid 0.90
So option players on gold are much more willing to bet on a big rise than a big drop, the opposite of the pricing on SPY options.
The option premiums are a sentiment indicator, and odds favor the option buyers being wrong. Sometimes they beat the odds as no indicator is perfect. Given a choice, I would prefer to bet against a big decline in stocks, and/or a big jump in gold. When options premiums are so out of balance it favors those making bets on extreme moves being wrong again.
In normal times, premiums are about equal, with calls slightly more expensive than equivalent puts. Let's look at a third underlying: Research in Motion. RIMM has earnings out on Wednesday and the stock closed at 143.06
Jul 125 put bid is 2.74, Jul 115 put is 1.21
Jul 160 call bid is 3.30, Jul 170 call is 1.71
This shows slightly more people betting on a RIMM stock price rise than a drop. However, the premiums are not multiples of each other like the premiums on SPY and GLD, so there is no clear read on which way the option players are leaning.
Option pricing can indicate underlying sentiment. Sentiment tends to be more useful at market turns than in a trending market. My preference would be to bet against the option speculators, so that would translate into me being bullish on SPY and bearish on GLD. As always, what I write is not a recommendation to buy or sell, or investment advice. As always there are what I perceive to be low risk entry points, and high risk times to enter into a trade.
Friday, June 20, 2008
5 out of 6 for June expiration
My option chickens all come in--all my short options expire worthless, so I get to keep my premiums. The one loser this month was Deere, and that would have been okay too, had I held until expiration.
The stock market has an ugly, ugly day. I am looking for more downside action before the end of the month. SPY seems drawn like a magnet to retest the March lows around 125 (current close 131.6), with what I see as a 50/50 chance that support will not hold this time. So the play is to buy puts, no? Maybe not, because the market is oversold, and out of the money put premiums are about triple the equivalent call premiums. This doesn't look like an easy play. I would prefer to bet against the put buyers that are bidding the options up so high, because they are usually wrong.
My options that just expired included index puts on SPY and IWM. The market didn't decline fast enough for those put buyers to make money. It wasn't even close. Despite a very bad stock market, I wasn't ever close to closing out those short puts. Time decay is the friend of the option seller.
The stock market has an ugly, ugly day. I am looking for more downside action before the end of the month. SPY seems drawn like a magnet to retest the March lows around 125 (current close 131.6), with what I see as a 50/50 chance that support will not hold this time. So the play is to buy puts, no? Maybe not, because the market is oversold, and out of the money put premiums are about triple the equivalent call premiums. This doesn't look like an easy play. I would prefer to bet against the put buyers that are bidding the options up so high, because they are usually wrong.
My options that just expired included index puts on SPY and IWM. The market didn't decline fast enough for those put buyers to make money. It wasn't even close. Despite a very bad stock market, I wasn't ever close to closing out those short puts. Time decay is the friend of the option seller.
Wednesday, June 18, 2008
Two (now three) doom and gloom articles
Two articles from Marketwatch, the first is Todd Harrison with "Recipe for a market meltdown" (link) and the second about stock fund managers moving to cash "Managers are the most negative in a decade" (link2).
I found a third forecast from the Royal Bank of Scotland (link3). This one makes the other two sound like the song "Happy Days."
>>
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
>>
Yikes!
For long term contrarian investors these are positive sign posts. For traders, caution remains the order of the day, as long as the primary trend is down.
Positions all options expiring Friday 6/20
hedged longs EWZ, IWM, SPY
hedged shorts SHLD, TSL
I found a third forecast from the Royal Bank of Scotland (link3). This one makes the other two sound like the song "Happy Days."
>>
The Royal Bank of Scotland has advised clients to brace for a full-fledged crash in global stock and credit markets over the next three months as inflation paralyses the major central banks.
>>
Yikes!
For long term contrarian investors these are positive sign posts. For traders, caution remains the order of the day, as long as the primary trend is down.
Positions all options expiring Friday 6/20
hedged longs EWZ, IWM, SPY
hedged shorts SHLD, TSL
Tuesday, June 17, 2008
130/30 trading fund JFT
The 130/30 strategy involves looking for the weakest 30% of stocks, shorting them, and taking that money to invest in the other 70%. A fund that does this is 130% long, 30% short. This strategy is used by some hedge funds (Marketwatch article). For the little guy that want this kind of play, JFT is a new exchange traded fund. The caveat is that it is low volume, so spreads may be high and the expense ratio is 0.95% per year.
Elsewhere, the stock market fizzles again today. The stock market almanac indicates weakness for the rest of June, and July tends to be a poor month for bulls as well.
Elsewhere, the stock market fizzles again today. The stock market almanac indicates weakness for the rest of June, and July tends to be a poor month for bulls as well.
Friday, June 13, 2008
Nusbaum: China close to a buy
Roger The Shanghai Composite has gone on another run down and closed today at 2868 down 53% from the peak last fall and down 45% YTD.
I've disclosed being out for a while now with the intention of going back in and I think the time for me to go back in is quite soon.
I've disclosed being out for a while now with the intention of going back in and I think the time for me to go back in is quite soon.
Thursday, June 12, 2008
Sell DE (buy back short puts)
Sell DE via buying back short Jun 72.5 puts
Floods in the Midwest may mean bad news for Deere tractor sales. Even though my puts are still well out of the money, I am taking my loss while it is are still small. Another down day like today and the loss starts to loom larger.
It's been a yucky market to be sure. It is disappointing to see the entire 150 point rally given back.
Positions:
Long EWZ, IWM, SPY
Short TSL, SHLD
Floods in the Midwest may mean bad news for Deere tractor sales. Even though my puts are still well out of the money, I am taking my loss while it is are still small. Another down day like today and the loss starts to loom larger.
It's been a yucky market to be sure. It is disappointing to see the entire 150 point rally given back.
Positions:
Long EWZ, IWM, SPY
Short TSL, SHLD
Tuesday, June 10, 2008
Buy DE (sell puts)
Buy DE via selling the Jun 72.5 puts
Deere has a $7 billion stock buy back fund, so the odds of a steep drop are extremely low, even lower than the theoretical 2.6% odds given by the ThinkorSwim analyzer. (ThinkorSwim is my broker and has their own trading software that includes a probability analyzer.)
Positions, all hedged, all June expiration
Long DE, EWZ, IWM, SPY
Short SHLD, TSL
Deere has a $7 billion stock buy back fund, so the odds of a steep drop are extremely low, even lower than the theoretical 2.6% odds given by the ThinkorSwim analyzer. (ThinkorSwim is my broker and has their own trading software that includes a probability analyzer.)
Positions, all hedged, all June expiration
Long DE, EWZ, IWM, SPY
Short SHLD, TSL
Buy SPY (sell puts)
Buy SPY via selling the Jun 127 puts
Stock market weak after Bernanke talks about inflation. Foreign stocks, especially China tumble on fiscal tightening.
Positions all hedged, all out of the money, expiration Friday is nine days out
long EWZ, IWM, SPY
short SHLD, TSL
Stock market weak after Bernanke talks about inflation. Foreign stocks, especially China tumble on fiscal tightening.
Positions all hedged, all out of the money, expiration Friday is nine days out
long EWZ, IWM, SPY
short SHLD, TSL
Monday, June 09, 2008
Futia on Magazine covers
Carl Futia mentions magazine covers in his blog (link) June 9th entry if you are reading this later.
Magazine covers can be a good sentiment indicator. The two covers are about oil, so it may be more bearish on oil, than bullish on stocks. When the stock market bear shows up on the cover, that is a stronger stock market indicator.
Magazine covers can be a good sentiment indicator. The two covers are about oil, so it may be more bearish on oil, than bullish on stocks. When the stock market bear shows up on the cover, that is a stronger stock market indicator.
Saturday, June 07, 2008
A dozen stocks: 50/200 dma
I review some charts looking for stocks above the 200 day moving average, and dipping to or one day below the 50 dma. Here are a dozen tickers that I found worth a closer look:
NKE CMI CHRW PCLN ITU SCHW
AZO APA CNI XLB FXM RIO
Keep in mind, that this is relative small list of stocks that I am looking at, so there would be many more symbols if running a similar screen on all listed stocks.
For my favored strategy of selling puts out of the money, the best: APA CMI PCLN
For long termers looking to buy XLB is the materials sector ETF (top ten stock holdings for XLB).
As always, this is not advice, or a recommendation to buy or sell. Cheers.
NKE CMI CHRW PCLN ITU SCHW
AZO APA CNI XLB FXM RIO
Keep in mind, that this is relative small list of stocks that I am looking at, so there would be many more symbols if running a similar screen on all listed stocks.
For my favored strategy of selling puts out of the money, the best: APA CMI PCLN
For long termers looking to buy XLB is the materials sector ETF (top ten stock holdings for XLB).
As always, this is not advice, or a recommendation to buy or sell. Cheers.
Friday, June 06, 2008
Easy come, easy go
Yikes! I didn't see today's drop coming. The employment report and tension between Israel and Iran make for a perfect storm for the bears. Oil leaps $11 to $139 per barrel. GLD follows.
As always, what next is the most important question to ask. If the stock market gaps down on Monday's open, that may be a time to add to longs. The Fed has its hands ties as far as more interest rate cuts. The Fed is partly responsible for the weak dollar and the surge in oil and commodities.
I tell myself to stay calm, that there will be opportunities in the carnage, cut losses and live to trade another day.
Long EWZ, IWM
Short SHLD, TSL
As always, what next is the most important question to ask. If the stock market gaps down on Monday's open, that may be a time to add to longs. The Fed has its hands ties as far as more interest rate cuts. The Fed is partly responsible for the weak dollar and the surge in oil and commodities.
I tell myself to stay calm, that there will be opportunities in the carnage, cut losses and live to trade another day.
Long EWZ, IWM
Short SHLD, TSL
Short TSL (sell calls)
Sell TSL Jun 55 calls
TSL down on earnings and outlook.
Positions all hedged
Long EWZ, IWM
Short SHLD, TSL
TSL down on earnings and outlook.
Positions all hedged
Long EWZ, IWM
Short SHLD, TSL
Thursday, June 05, 2008
Buy EWZ (sell puts)
Buy EWZ via selling the Jun 80 puts
Positions: long IWM, EWZ, short SHLD all hedged
Positions: long IWM, EWZ, short SHLD all hedged
Tuesday, June 03, 2008
one, two, three strikes?
Two down days this week so far. I am looking for a third to add long positions. If that third day doesn't
materialize, Friday may be the day.
GLD options started trading today. Happens to coincide with a bad day for oil and gold. I'm sure that some gold newsletters are going to write about their interpretation of events.
Positions: long IWM, short SHLD
materialize, Friday may be the day.
GLD options started trading today. Happens to coincide with a bad day for oil and gold. I'm sure that some gold newsletters are going to write about their interpretation of events.
Positions: long IWM, short SHLD
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