Weekly: Oil crush

I hope all had a good Thanksgiving. Those long oil felt like turkeys. The sharp move down in oil hurt me. My position in Anadarko Petroleum moves deep into the red.


Fri Oil spikes lower on OPEC news. My short puts in APC get crushed. I sell calls in an effort to do damage control, but the horse is long gone from the barn.
Sell APC Dec 90 p @80.3
Sell APC Jan 97.5 p
I am short APC Dec 75 puts and APC Jan 77.5 puts. Yikes!


Tue I continue to put capital to work
Sell BBY Jan 32 p @38.5
Sell MMM Jan 145 p @158.1

Sell TLT Dec 118 p @120.9
Sell GLD Dec 122 c @115.2

Sell FDX strangles: FDX Jan 155 p @175.2
Sell FDX Jan 195 c

Sell WHR strangles: WHR Jan 160 p @184.7
Sell WHR Jan 210 c


Mon Option expiration frees up a lot of capital, and I use some of it. Most of these are adding to long positions.

Sell AMGN Dec 150 p @164.2
Sell VRX Dec 110 p @142.4

Sell APC Jan 77.5 p @92.4
Sell BRKB Jan 135 p @147.1

Sell IWM strangles @117.8: Jan 101 p / Jan 127 c

Position Summary:
long AMGN BBY BRKB DIS HON
long JWN MMM NKE UNH UNP VRX WHR YHOO
net long APC ASH IWM TLT WHR
net neutral FDX GLD SPY

39-8 for November Grade C

Modest profits for me, as I count 38 wins, 8 losses for the November cycle. Again, before anyone gets excited by the high win percentage, those tend to be the odds going in. I enter most trades with a 80% to 90% chance of a profit. The other side of high probability is that profits are small, and losses can be substantial. 

Traders buy options with a 10% chance of profit, hoping for a 10-to-1 payout or more. With the market moving straight up, many call buyers got rewarded. Call sellers like me got skewered. Fortunately, I am one to take my losses (vs. wait and hope or doubling down), so my losses were contained, though painful.

I covered the call side of many short strangles for losses: AMGN ASH HON SPY VRX YHOO. For some positions I resorted to buying stock because of wide spreads on the options. Buying stock means adding capital and risk, but helps with the bid/ask spread. Another cost is an extra level of commissions for assignment, when the stock gets called away.

Some strangles came in safe, but the percentage was not what I wanted. During these straight up moves, I tend to lag an all-in long strategy. There is no getting around this for hedgers. The alternative is to be directional, and my history with directional trades is poor. Two recent examples are in gold and bonds (GLD, TLT). I recently bought calendar spreads, taking a long position in gold, short bonds, both directions were wrong. Gold went down, bonds went up. For gold, I reverse the position so I am at a profit. The bond position is near worthless now.

What next? There remain many red flags for the stock market. QE in the U.S. is ending. Bullish sentiment is high. Valuations are near red line, though not nose-bleed bubble territory. Again, my directional predictions tend to be no better than coin flips. This is one reason that I hedge the way I do, because it is a way to make money in the market while being just okay on direction. The risk management side came into play this past month and saved my bacon. While some losses were huge percentage losers, overall I made money.

Weekly: Same crap, different week

There is saying in Spanish, same crap, different day. This week was more of the same for those with hedged positions. The bull marches forward, bears get crushed. My trades include: a new long position in BBY, roll some covered calls on ASH, buy VRX stock to cover short calls. 

Lest, I sound whiny, it was a profitable week and month for me, so overall there are positives. However, during these straight up moves, I lag an all-in long strategy.

 

Fri Cover short FDX Nov 175 calls @174.5. I cover mid-day, rather than waiting until the last minute and a potential dance with the devil. FDX closed below 175, so I would have been better off holding. However, Federal Express traded all over the place, with a high over 176.

Roll ASH short calls: Cover short ASH Nov 110 calls, sell ASH Dec 115 calls @113.25. I bought shares of Ashland to cover short calls because of the wide spreads on the options. I was happy to let the stock get called, but I could buy back the call for a decent price and sold December calls at a higher strike. This adds risk and capital.

VRX and AMGN are going to get called away tomorrow. I bought shares of both to cover short call positions. Again, I bought shares because the spreads on the options were so wide. In the case of Amgen, I tried limit orders several times only to watch it climb ever higher. Ouch.

Thu Sell BBY Dec 34 puts @37.8. New long position in retailer Best Buy, which is up on earnings news today.

Sell IWM Dec 105 puts @116.1. Add a bit to longs in the Russell 2000 etf.

Tue Buy VRX shares to cover short Nov 140 calls @141.58. I add a lot capital and take on a lot more risk by buying shares of Valeant Pharma.

Position Summary:

long AMGN APC BBY BRKB DIS FDX GLD HON

long JWN MMM NKE UNH UNP VRX WHR YHOO

net long ASH IWM

net neutral SPY

short TLT

expired ILMN

Weekly: return of the Zombie Bull

The Zombie Bull market continues to lurch forward. I am still paying for selling calls short about a month ago. This week is particularly frustrating because AMGN and ASH pull back from their highs after I bought shares to cover short calls. GLD bounces a bit. 

Some side notes are that the AAII sentiment (link) is near nose bleed levels. This week it is 58% bulls, 23% neutral, 19% bears, a danger sign for bulls, though they have been right for a while. The local CANSLIM meetup is disbanding because the most dedicated leader is moving on. Stock market meetups closing down, tend not to be the kind of thing that happens during bubble bull markets.

Fri I open December long positions in Nordstroms and Nike.

Sell JWN Dec 67.5 puts @75.1

Sell NKE Dec 87.5 puts @95.5

I cover a couple of options for a buck or two to free up that margin.

Cover short YHOO Nov 39 puts @51.2

Cover short NKE Nov 82.5 puts @95.1

Wed Cover short SPY Nov 204 calls @204.1. Another day, another short call covered for a huge percentage loss about 600% basis the premium collected. Phooey.

I open December long positions in Union Pacific railroad and Amgen

Sell UNP Dec 110 puts @120.2 .51

Sell AMGN Dec 145 puts @162.3 .45

Mon Buy ASH shares to hedge the short Nov 110 calls @110.77. Another busted short strangle, another scramble for damage control.

Cover FDX Nove 145 puts @171. I free up some buying power by covering these way out of the money puts. They are almost sure to expire worthless, but I am near the yellow line on buying power. I don't want to red line and face an unexpected and unwelcome margin call, especially with my current schedule with limited computer access.

Position Summary

long HON ILMN NKE UNH UNP WHR YHOO

net long AMGN APC ASH JWN

net short DIS FDX VRX

net neutral BRKB GLD IWM SPY TLT

Weekly: plowing ahead

After recent losses, I plow forward. This week, I rebalance several positions by selling December puts. I hit another bump in the road (or rock in the field) with another big loss on some short calls, this time on YHOO. ASH is also near the strike price of those short calls. GLD and some oil related stocks finally have a relief rally after some relentless selling. DIS earnings disappoint. Here are this week's trades:

Fri Cover short YHOO Nov 48 calls @48.2. Another big loss on short calls, about 600% basis the premium collected. The rally in Yahoo has been substantial since the BABA IPO. The call side of my short strangles got crushed.

Wed I open December positions in 3M Corp, Anadarko Petroleum, United Healthcare and Whirlpool.

Sell MMM Dec 145 puts @155.0

Sell APC Dec 75 puts @91.5

Sell UNH Dec 82.5 puts @95.5

Sell WHR Dec 150 puts @173.0

Tue I open December positions in Honeywell and Nordstroms.

Sell HON Dec 85 puts @95.1

Sell JWN Dec 62.5 puts @71.9

Mon A busy day, nine trades, mostly rebalancing trades on existing positions. I sell some December puts to offset some of the short November calls that may be threatened. I make too many trades to notate the prices of the underlyings. Most are done between 45 minutes and 1:15 after the open. These days I have limited computer access, and that time is one of my trading windows.

Sell ASH Dec 95 puts

Sell DIS Dec 82.5 puts

Sell FDX Dec 145 puts

Sell IWM strangles: Dec 127 calls / Dec 103 puts

Sell YHOO Dec 41 puts

Sell VRX Dec 110 puts

Sell BRKB Dec 130 puts

Position Summary:

long HON ILMN MMM NKE UNH UNP WHR YHOO

net long AMGN APC BRKB GLD IWM TLT VRX

net short ASH FDX HON JWN SPY

net neutral DIS GLD UNH

Seminar report: TDAmeritrade Marketdrive

I attend a day long stock market seminar sponsored by TD Ameritrade, CBOE and the CME. The presenters include Don Kaufman and John "The Geek" from ThinkorSwim, Tom Sosnoff from Tastytrade, education guys Russell Rhoades from CBOE and Pete Mulmat from CME.

Some might ask why attend a seminar when I've been trading for decades. Well, I am always open to learning something new, and I often get anecdotes about the mood of market participants. Also at this event there was a free lunch (Turkey sandwich and more).Unlike some similar events there was no hard sell, just a few minutes of information from CME and CBOE.

Don Kaufman leads off. He says the #1 reason beginners blow up their accounts is they trade too many contracts. Most people are going to be wrong some percentage of the time. Being wrong in options with a large position and the account gets blown up. Next is a discussion of theta neutral trades. The example given is TWTR vertical call spreads. With TWTR near $41.50, the $41/$42 call vertical prices out near the same 6 days out, a month out and three months out. I would have never guessed that. 

Kaufman says he is terrible at predicting market direction, but decent at risk management. The golden traders are good at both. The ones that lose all their money tend to be bad at both, risk management and direction. I am so-so on direction, a bit better at risk management.

Kaufman talks about his last trade on AAPL, a vertical call spread sold for a credit. He sold the 200/210 call spread with AAPL around 203 and watched it go to 243, maxxing out his loss. AAPL is now one of his "nemesis stocks," stocks that he no longer trades. I have a similar list, though after a year or more I might try again.

Kaufman says that most traders are either buyers of premium or sellers, that it is a rare trader that can be successful at both. I've never had much luck buying premium. I am only so-so at selling premium, but at least I make something. Kaufman is not big on back testing for finding strategies. He prefers looking at current pricing and extrapolating. For example, looking at the price of a January spread, and then a December, to perhaps get an idea of what the spread might price out at in a month with no price change.

Kaufman asks the 500 or so attendees, how many watch CNBC, only a very few hands go up. He says it is mostly noise now. He goes on to show the high correlation with SPY. 362 out 500 S&P stocks had an 80%+ correlation the past 10 days. This despite earnings season which some might think would create more dispersion.

The free lunch is decent (Turkey sandwich and more). After the end of the seminar, there is free beer and wine, and more snacks. During the break I notice a local guy and chat with him while we eat lunch. A third guy joins us. The first guy has mostly done stocks only, and very little with options. The third guy is three years in, and with the help of the many ThinkorSwim educational tools seems to know quite a bit. The catch is that brokers love option traders. The average option trader might be 10x as active as a stock trader and the commissions pile up for the broker. 
 
Russell Rhoades, CFA from the CBOE wrote a book called VIX. Not very many people talk to him during the breaks, so I don't get a good vibe from him. He does mention the launch of the new VXST (a nine-day VIX type instrument) and VXTYN a bond market volatility instrument.

The CME education guy, Pete Mulmat mostly focuses on how trading futures is much more capital efficient, because of the lower margin requirements. For example to buy or sell one /GC (gold 100 ounces), the opening margin is a mere $6600 or so to control about $120,000 worth of gold. Of course that 20x leverage can get a person in a lot of trouble. The recent tumble in gold would have wiped out all that equity for a long positon and resulted in a quick margin call if the full leverage was used.

The keynote speaker is Tom Sosnoff, founder of ThinkorSwim, now with Tastytrade and Dough.com. As always, Tom has an interesting perspective. He mentions lecturing 100 USC finance majors the night before. He came away disappointed that they seemed to know so little. 

One question for the finance majors was about the Friday market event. "What do you do" in response to the Bank of Japan news that they are selling yen to buy dollars? None of the USC students came up with a decent answer. Two people in the audience answer. One says he would buy the Nikkei. Another says he would buy yen. A third says to buy S&Ps. My gut response is "fade the move," which is what Tom Sosnoff did. He sold S&P sold Nasdaq and bought Euros. All three were green by the end of Friday. My observation is that it isn't always a good idea to fade the news, but in this instance it was the correct call.

Sosnoff presents a lot of evidence in favor of selling options, naked strangles. I remembered Don Kaufman's scold against back testing. I keep in mind that the last five years have been mostly good for option sellers. However, as my recent few weeks of trading have shown in a most painful way, the losses can be quite large from selling naked strangles, while the profits are capped at the premium collected.

I recall a similar seminar event a few years ago, where selling covered calls was the "in thing to do." Of course, the huge market rally made that only a so-so strategy going forward. Another big thing was selling iron condors relatively close in. Again, the big market rally would have made that strategy so-so going forward. So the caution is, that if they are telling 500 retail traders that selling strangles is a good idea, it might not work out so well going forward. This is from my perspective as someone that sells naked strangles quite often. 
 
There is more. There is a demonstration of Trade Architect, a new part of the TD Ameritrade website. A question on high frequency trading, and a lengthy answer. Some I am going to leave some out as this post is getting rather lengthy.