Weekly: Steamroller crushes option sellers (and da bears)

There is a popular analogy for strangle sellers, that it is like picking up nickels in front of a slow moving steamroller. Most of the of the time, the option seller gets the nickel. Once in a great while, there might be a slip and fall, a muscle cramp, or just inattention or too much boldness, and the steam roller flattens the person. 

Well, this week I got flattened as the monster stock market rally continued to roll forward, crushing some of my short call sides of strangles. Most notable was AMGN. I also did some fear based covering on Friday, near the top of the move on NKE and again on AMGN. All told, my account was down just a bit for the week. However, with yet another huge up week in the stock market, down just a tad, has me feeling like I've been through the ringer.

Being short calls was near the worst possible position to have during the last few weeks, and I have paid for it. On Friday I gave into some fear covering and covered near the worst levels of the move.

I can rationalize or hem and haw or take responsibility. What is done is done. All I can do is try and learn from the experience, the mistakes, and move forward. The glass half full perspective is that this is one of the worst trading periods in recent memory, and yet my account is only down a few percentage points from all time highs. 

One small highlight for the week is a new long position in WHR and some other recent longs going my way. Some low lights include covering calls on HON, YHOO, the already mentioned AMGN and NKE, and watching my once proud profits in GLD disappear and turn red. Thankfully GLD is a tiny position. Here are the ugly looking trades for the week:

Fri Another big up day for the stock market, another slightly down day for my trading account. While most others got some Halloween candy. I got some more lumps of coal :( 

Cover short NKE Nov 95 calls @93.4. I cover Nike calls near the worst levels. Fear based covering.

Cover short AMGN Nov 165 calls @163.4. Same for Amgen, covering calls near the highs of the entire move. Fear based covering.

Thu Sell AMGN Nov 152.5 puts @160.0. Yet, another damage control move on Amgen as the bull steamroller rolls forward. I try to sell some more November calls on GLD, but it keeps slipping lower so my limit order doesn't get filled. (Next day gold craters lower, yikes.)

Wed Buy AMGN stock sell Nov 165 calls @158.6. I place another limit order to close the short Nov 155 puts, still no fill. So I cancel that and do a buy/write to hedge my position. I add a lot more capital, and more risk in doing this.

Tue A truly painful day, as I chase AMGN higher all day with a buy to close limit order on my short calls. The spread is wide and I don't get filled as Amgen closes near the highs of the day. Another big loss is covering some short HON calls for a huge loss. Some traders use the analogy of picking up nickels in front of a steam roller for those that sell naked options. Well, today, I got flattened on some short calls. Overall, my account is only down a smidge, so I am over dramatizing, but the loss on the AMGN calls is approaching 2000% basis the premium collected. In other words, the call buyer has about a twenty times winner. Wow.

Cover short HON Nov 95 calls @45.2 1.69

Sell AMGN Nov 145 puts @155.0. I mitigate the disaster of the short calls by having layers of short puts.

Sell WHR Nov 155 puts @168.0. New long position in Whirlpool. WHR up on earnings.

Mon Cover short YHOO Nov 44 calls @44.4. Yahoo! keeps rising, and I cover for a big loss, about 800% basis the premium collected. I am still short Nov 48 calls, Nov 36 and Nov 39 puts.

Weekly: Up is Down, Mercury Retrograde

Stock market up big, best up week of 2014. My trading account is up only a little. Highlights of the week include a new long position in ILMN, covering short calls for a big loss in MMM. One of the worst feelings is seeing the stock market up big time and my account down. Friends that know about my stock market activity tend to assume that an up market means good times for everyone and down markets the opposite. Option traders know that isn't always the case.

Thursday was a big up day in the market, and a down day for my account, not much fun in that. Being short calls on a stock that gaps up on an earnings report is a bad feeling. HON, MMM, YHOO recently had good reports and I was short strangles on all. I covered MMM calls for a huge loss, and may eventually cover the others.

Someome mentioned that Mercury is coming out of retrograde today 10/25/14. I know that many readers are tuning out with the mention of astrology. It doesn't matter what a person uses, I am a fan of anything that works. Some very successful traders use astrological indicators. Mercury went retrograde on 10/4. My really bad streak of trading started 10/6 Monday, the first trading day after that. Coincidence? Probably, but I would have done much better sitting out most of the dance during this retrograde time period. The next retrograde period is January 21, 2015 to February 15, 2015.

I have already made a record number of trades for one month in calendar October. For the most part, the more I trades I made, the deeper the hole got. Thankfully, I tend to be a timid trader as opposed to a a super aggressive, all in, all out, double and double again, kind of options trader. A bold trader with a month full of bad trades can lose their entire account.

I personally know two traders that went completely belly up and no longer trade at all. Both thought they could trade for a living. Both were very smart guys, but the stock market is full of smart people. I know a third person that borrowed money from mom to meet a margin call, lost that, and had to eat bag lunches for years to pay mom back. In the options market, it is often one smart person betting against another smart person. The dumb ones tend to lose their lunch money in a short time period, then stop playing.

I attended the local monthly CANSLIM meetup. Attendance and energy level are steady. ILMN was mentioned at the meeting. This continues to be one of the most hated bull markets, with little excitement, little enthusiasm. One minor anecdote is that a couple of young relatives have opened up stock market accounts. Used to be that V-shaped chart formations were rare, but during the recent years, V-shaped charts are relatively common.

Enough of the stories and astrology for now, here are this week's retrograde trades in a booming up week for stocks:

Fri Sell VRX Nov 110 puts @128.3. Rebalance short strangles by selling another layer of puts on Valeant Pharma.

Sell TLT Nov 115 puts @120.2. Hedge my long Dec 110 puts in the Treasury ETF by selling these Novembers. Another poor intra-day move, as I sell the puts near the worst time of the day.

Thu The market is up big and my account down, so it is a crappy day for me. The culprit is 3M Corp which gaps higher on news. I cover short calls near the highs of the day, only to see it close near the strike price of the short calls. I continue to scramble to add longs as the market rallies, but my timing leaves much to be desired.

Cover short MMM Nov 145 calls @147.2 for a huge loss, about 600% basis the premium collected.

Sell UNP Nov 100 puts @111.2 Union Pacific Rail

Sell HON Nov 87.5 puts @93.4 Honeywell

Sell YHOO Nov 39 puts @42.8 Yahoo!

Sell AMGN Nov 133 puts @147.5 Amgen

Sell GLD Nov 134 calls @118.2. I also rebalance my net long position in gold as it declines.

Tue A rip your face off rally today in stocks. I scramble to add long delta as I caught flat footed after expiration. So much for taking a break from trading after the losing streak with seven fills today and three more that didn't fill. I take a new long position in ILMN Illumina on earnings. The rest are rebalancing on short strangles. I wrote down the prices at the time of the fills, but lost that scrap of paper before I could type them here.

Sell MMM Nov 128 puts 3M Corp

Sell FDX Nov 145 puts Federal Express

Sell DIS Nov 77.5 puts Disney

Sell IWM Nov 98 puts Russell 2000 ETF

Sell ASH Nov 95 puts Ashland

Sell NKE Nov 82.5 puts Nike

 

Sell ILMN Nov 155 puts. New long position Illumina, mentioned at the local CANSLIM meetup group.

Mon Sell HON Nov 80 puts @89.7. Rebalance short strangles on Honeywell.

Position Summary:

long ILMN UNH UNP

net long APC BRKB GLD IWM TLT

net short AMGN ASH DIS HON JWN NKE YHOO

net neutral FDX SPY UNH

27-13 for October Grade D

Strictly on profit/loss, the October option cycle would grade out at F. This was my worst month in some time with 27 winners and 13 losers. Most of my trades are 80% to 90% probability going in, so that ratio is poor. Some of my losers were whoppers, 1000% basis the premium collected. Put buyers made ten times their money, if they bought when I sold and covered when I covered. 

Overall, I give back about 60% of my modest profits for 2014. The reason for the D grade, is the curve of a difficult market. More than a few strangle sellers and put sellers suffered huge losses this month. Some may experienced margin calls.

As for me, I got a bit too enamored of the bullish calendar cycle, ignoring so many of the the other warning signs. I did take out some insurance against an October smash. Back on July 31, I bought an October put spread on SPY, buying SPY Oct 180 puts and selling the Oct 171 puts. Unfortunately, my timing and my strikes prices on this insurance purchase were a bit off and it expired worthless.

The good news is that I live to trade another day. Hopefully a bit wiser from the experience. I didn't panic. I kept moving. Unfortunately, a lot of my moves were wrong. Many traders trade less, trade smaller, or take a break after a losing streak. Sounds good to me, so I may be more selective the next couple of weeks. The emotional reponse might be revenge trading to try and make up for recent losses. Most traders end up digging a deeper hole with revenge trading. 

Weekly: Wild Whipsaw Washout

Wednesday's huge gap opening lower took out many of my mental stops. I closed many short puts for huge percentage losses, near the lows. For the week, I am down signficantly, though still up for the year. What's done is done. 

One reason I have this blog is to help me learn by writing about my trading. The main thing I might have done differently is wait a bit long on Wednesday before covering. I covered most of the puts in the first 15 minutes of trading (which turned out to be near the lows for many of those stocks). Waiting another 15 minutes to 30 minutes would have been so much better. Had I held on until expiration, I believe all of those losers came back above the strike price by expiration Friday. Big gaps like that rarely keep moving in the direction of the gap. I acted like a trading robot, closing so many positions in a short time period, as they touched on my mental stops.

The fantasy hindsight replay has me closing out all my long puts and doubling down on short puts at the bottom on Wednesday, but readers know that I am not such a bold trader. I tend to be a relatively slow moving options trader with a dislike for fast markets. I am not nimble, don't have good instincts. don't have a good gut. On the plus side, I am good with numbers, with odds, and am patient. My style of trading works towards my strengths. Many are bored by what I do. I always tell novices to find a style a method that works for you. There are a thousand ways to make money in the markets. Find one or two that work for you, that fit your personality.

The lowlights of the trading week include closing out short puts on AMGN BRKB HON FDX IBB MRK MSFT WFC, all for losses. I also sold some calls on Thursday, which wasn't the best move either. One bright spot was my GLD bull calendar, up about 60%. My TLT bear calendar is down about 75%. I initiate new longs in UNH UNP. It is a jelly side down kind of week (a piece of bread with jelly spread on one side seems to land jelly side down more often than not). Since the Alibaba IPO day market peak, about 60% of my modest profits for the year have been given back. I brush myself off and move ahead. Hopefully, I am a bit wiser from this recent turbulence. I'll post a monthly summary with more thoughts within a day. Here are this week's trades:

Thu Another big gap down this morning on the stock market, but near unchanged by the close. I don't do that much better with intra-day timing as I sell some calls to hedge some of my short puts.

Sell GLD Nov 128 calls @119.0. I was long a call calendar, and am selling the Novembers before the Oct 123 calls expire (hopefully worthless). I may get a bit more premium by selling now instead of on Monday after expiration.

Sell YHOO Nov 44 puts @37.6. Rebalance short strangles on Yahoo!, I am short the Nov 36 puts, Nov 48 calls, and some October options which hopefully expire safe.

Hedge short puts on Nordstroms, Nike and Disney by selling calls.

Sell JWM Nov 77.5 calls @67.4

Sell NKE Nov 95 calls @84.8

Sell DIS Nov 92.5 calls @81.3.

New long positions in United Healthcare and Union Pacific Railroad.

Sell UNH Nov 75 puts @85.4.

Sell UNP Nov puts @104.0.

Wed Disaster morning with SPY gapping down 3 full points. I cover any short puts that move into the money, closing six positions in the first 15 minutes for huge losses. It is not a time to be cute, not for someone like me, who isn't in front of the computer all day, and tends to be a slow moving position trader. I see it as time to survive. As the fills come in, SPY is bouncing off the lows, so I could have gotten out at better prices on most. 

 

C'est la vie. Obviously, I would have been better off holding on for 20 minutes or so. Some might criticize and say that I panicked. No, I followed my rules. Fast markets are not my friend. My account is still up a tiny bit for the year, with about 85% of the year's peak profits now gone (it was at 50% on Sunday!).

 

Cover MSFT Oct 43 puts @42.5. Microsoft gaps lower after Intel earnings. Loss is 800% basis the premium collected.

Cover MRK Oct 55 puts @54.8 220% loss

Cover AMGN Oct 130 puts @129.7 350% loss

Cover FDX Oct 150 puts @149.7 500% loss

Cover IBB Oct 250 puts @249.9 600% loss

Cover BRKB Oct 135 puts @134.9 240% loss

By the end of trading, it looks like Wednesday morning was a wash out low. Most of the positions I covered were up sharply off their low by the end of trading. Some were actually positive for the day (shakes head).

Sell VRX Nov 140 calls @114.8 .50. One final trade for wash out Wednesday, I hedge my short puts on Valeant Pharma by selling calls.

Tue Cover WFC Oct 50 puts @49.3. Another day, another loser. Wells Fargo bank earnings disappoint and the stock breaks support at 50, which is also my strike price. Loss is about 700% basis the premium collected. Despite this morning's stock market relief rally, I am following the mechanical rule of closing positions if they break the strike price. As I type this, WFC drifts higher, so I could have gotten out at a better price by waiting five minutes. It is an illusion that I can call highs and lows, and when stocks will turn on a dime.

Sell AMGN Nov 155 calls @133.7. I rebalance a net long position in Amgen by selling calls.

Sell HON Nov 95 calls @86.2. I hedge short puts by selling calls on Honeywell.

Sell MMM Nov 145 calls @135.2. Hedge short puts on 3M Corp by selling calls.

Mon Sell AMGN Nov 115 puts @136.6. I open a November position in Amgen. SPY has broken support at 190.5 so we will see what happens next.

Sell JWN Nov 60 puts @69.2. I open a November position in Nordstroms, as the stock market continues lower. AMGN another 2 points lower so I continue to do poorly on the short term timing.

Cover short HON Oct 87.5 puts @87.4. I take the loss on Honeywell at it crosses the strike price of my short puts. The loss is about 700% basis the premium collected. HON chart is a waterfall decline. Wow.

Sell BRKB Nov 150 calls @137.8. I rebalance my net long position in Berkshire Hathaway by selling calls.

Sell ASH Nov 110 calls @98.8. I hedge my short puts in Ashland by selling calls. Chart resistance at the 110 level.

Position summary:

long UNH UNP

net long APC ASH BRKB GLD IWM MMM SPY

net neutral AMGN DIS FDX JWN NKE VRX

short TLT / net short HON

closed or expired: IBB MRK MSFT SLB TTM WFC

Weekly: clock cleaned

I got my clock cleaned during the recent market decline. I lost about half my profits for calendar 2014 during the past few weeks. Keep in mind that I tend to be what some call a chicken trader, making small bets for small wins and losses. 

Risk and reward often go hand in hand with options. I didn't do much right, but I didn't panic, didn't trade emotionally, didn't try to get even. I still lost a lot. It seems like ages since Monday's up opening with SPY over 197 (close 190.52). One tiny pin point of light is my position in GLD is near break even. My foray into TLT has been a big loser.

Low lights of the week include a terrible one-day whipsaw in FDX, big losses in most positions, covering some short puts for 1000% percentage losses. Here are this week's trades:

Fri Cover short SLB 95 puts @93.4. Big ouch as Schlumberger continues lower. I cover these puts at about a 1000% loss (not a typo, a thousand percent basis the premium sold). Fast market means wide spreads on the exit. Rule #1 is to live to trade another day. Being short naked puts means the losses can spiral out of control in dollar terms once the strike price is crossed.

Cover short APC 90 puts @89.0. Ouch number two is Anadarko Petroleum, covered for another loss in the 1000% range.

Both SLB and APC are coming back a bit as I type so I may have covered on the low. What can a trader do? Either a trader takes losses or doesn't. For traders that take losses, there is always the chance that they get out near the worst possible time. It is the nature of stops, support/resistance trade that I favor.

At the open this morning, the decline has cost me about 40% of my modest profits for the year. It has been a painful time. While the losses are eye popping in terms of percentage of the premium collected, they are relatively small in dollar terms and in terms of the account.

Cover short IWM Oct 105 puts @104.9. Third loss makes an ugly trifecta for this morning. The loss on these Russell 2000 etfs is about 500% basis the premium collected. Similar deal, the underlying moves below the strike price of the short puts, so I am getting out. IWM ticks a bit higher after I get out. Grrr. The stock market is lower again, after some early short covering, but could change direction at any time. Some technicians are looking for support for SPY at the recent lows, which is about 1 point lower as I type.

Sell YHOO Nov 48 calls @40.1. I hedge my net long position in Yahoo! by selling some calls. I am short Nov 36 puts.

Thu Sell SLB Oct 103 calls @96.0. Rebalance short strangles in Schlumberger. I cover SLB Oct 115 calls and sell the 103s, rolling some of my short SLB calls down to reduce the delta. SLB threatening my short Oct 95 puts. To add to the mix there are earnings before expiration.

 

Wed Sell APC Nov 115 calls @92.2. Rebalance a net long position in Anadarko Petroleum. APC getting slammed today on news about a credit downgrade. I am short Oct 90 puts, Oct 120 calls, Nov 82.5 puts and deep in the red on the short puts.

Sell SPY Nov 204 calls @192.5. Minor rebalance to my net long position in the S&P 500 etf. 

Tue Crunch day as SPY falls 3 full points.

Cover FDX Oct 160 puts @157.7. I take a big loss on Federal Express. It's been a while since I slipped on a banana peel that badly. FDX seemingly broke out to the upside, but reversed within an hour and today's market weakness has it weaker still. One day loss is about 700% basis the premium collected. Ouch!

Sell SPY Backratio @194.7: Buy SPY Dec 180 puts

Sell 2x SPY Dec 175 puts

Not the best timing as SPY is down about 1.5 when I get filled on the way to a -3.0 close. Again, I like to do these put back ratios for a net credit making them a net long position, but with an explosive profit on a decline to the lower strike at expiration.

Mon Sell YHOO Nov 36 puts @41.3. Rebalance short Oct strangles in Yahoo! by selling November puts.

Sell BRKB Nov 130 puts @140.2. Add to net long position in Berkshire Hathaway by selling November puts.

Sell FDX Oct 160 puts @165. Rebalance short strangles on Federal Express by selling another layer of Oct puts.

WTF? Federal Express fades to negative for the day. My just sold puts are down over 100% in less than an hour. I sell Nov calls to hedge

Sell FDX Nov 175 calls @162.5 to hedge a net long position.

Position Summary:

long ASH HON JWN MMM MRK MSFT NKE WFC

net long AMGN APC BRKB DIS GLD IWM FDX SPY VRX YHOO

net short SLB TLT

Weekly: down again

Despite a strong Friday, stock market was down for the week. Gold was down hard and bonds had an up week. I rolled some puts on DIS down and out for a big percentage loss. I also sold some calls when the market was down, so not a very good week for me. My recent calendar spreads for gold (net long) and bonds (net short) have been going against me. Here are the trades:

Fri Sell ASH Nov 80 puts @102 .45. I open a November position in Ashland.

Thu Again, my intra day and short term timing is off as the market rallies off the lows.

Cover DIS Oct 87.5 puts @86.5. The loss on these short Disney puts is about 230% basis the premium collected. I roll down and out a few minutes later by selling the Nov 75 puts @86.2, but that premium is tiny compared to the loss. With the overall stock market acting so squirrelly, I am taking my loss DIS crosses the strike price of 87.5. This seems like a time to be safe, not extending chances. Just a month earlier, I felt a stronger bullish bias.

Sell IBB Oct 290 calls @268. I hedge my short puts on this biotech etf by selling calls.

Sell APC Oct 120 calls @97.5. Hedge my short puts in Anadarko by selling calls.

Wed Lots of red ink for me today. I add to longs as the market declines mid-day, prices are approximate. By the end of the day, the broad market is much lower, so not the best timing.

Sell APC Nov 82.5 puts @101, Anadarko Petroleum

Sell FDX Oct 170 calls @159, Federal Express

Sell FDX Nov 140 puts @159, Federal Express

Sell VRX Nov 95 puts @129, Valeant Pharma

Position Summary:

long ASH BRKB HON JWN MMM MRK MSFT NKE WFC

net long AMGN APC BRKB GLD IWM FDX SLB

net short SPY TLT VRX YHOO

net neutral DIS