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