Weekly: More Red than Blue

William O'Neill, founder of Investors Business Daily marks up paper charts using a blue pen and a red pen. Anything he likes he marks blue, anything that he thinks is not so good he marks red. Blue a reason to buy, red a negative, but not necessarily bearish. My week was more red than blue, down a bit for the week. Mostly the misadventures were rebalancing moves in SKX. Mostly I did rebalancing moves, which means I sold another layer of options to adjust my net delta. I often skew bullish, but occasionally start out neutral, rarely bearish. It's been a bull market and the bull market is still intact.

 

For example, if start with a sold strangle (both puts and calls) as the stock moves down, the delta will go positive. I might rebalance by selling another layer of calls to reduce the delta. Same the other way if the stock is moving up, my original position goes delta negative (net short) so I might sell another layer of puts to rebalance back to neutral or net long.

Here are the trades for the modestly negative week:

(p = puts, c = calls, sell means sell-to-open, all are third week of expiration)

Fri Sell GME Jun 40 p @43.7 New long position in Game Stop. GME up after earnings. Chart gap is around 40.5.

Sell YUM Jun 98 c @90.7 Rebalance my position in Yum Brands as it declines.

Sell MRK Jun 58 p @60.9 Rebalance Merck. MRK higher on drug news. I sold 57.5/61.5 strangles so it is getting close.

Thu Sell SKX Jun 110 c @102.9 Rebalance my position in Sketchers as it declines. At this point, I have been making a mess, selling low, buying high. OMG! SKX up to 106.7 a few hours after I sell these calls. The calls are at over a 100% losss. I sell some SKX Jun 95 puts and 100 puts to rebalance. Some days it isn't worth turning on the computer. The initial sold strangle 95 puts, 115 calls is in the green. However, for now, the multiple rebalancing moves have gotten me into the red. Sheesh.

Sell EL Jul 82.5 p @88.2 Add to longs in Estee Lauder.

Wed Sell MRK Jul 55 p @59.6 Rebalance my position in Merck.

Sell JPM Jul 60 p @66.3 Rebalance my position in JP Morgan Chase.

Sell IWM Jun 116 p @124.6 Rebalance for Russell 2000

Sell DIS Jul 100 p @110.4 Add to longs in Disney

Tue Sell HON Jul 110 c @105.0 Rebalance my complicated position in Honeywell. HON has been a difficult stock for me most of 2015, but I am still up for the year on the ticker.

Sell IWM Jul 130 c @123.1 Rebalance short strangles on the Russell 2000 etf.

Sell JBLU Jun 21 c @19.6 Hedge my sold puts by selling calls on JetBlue.

Sell JPM Jul 70 c @65.5 Ditto on JP Morgan Chase bank, hedge sold puts by selling calls.

Sell MCK Jun 250 c @237.9 Rebalance the July strangles I sold on McKesson by selling June calls.

Sell MRK Jun 61.5 c @59.0 Hedge sold puts by selling calls on Merck.

Position Summary:

long BRKB CRM DE DIS EL GME HON IWM MCK

net long DATA FXI YUM

net neutral ACT ASH MRK SPY

net short JBLU SKX / short LOCO

Weekly: CRM LOCO MCK SKX YUM

The stock market has a relatively quiet pre-holiday week. As I often do for Memorial day, here is a link to Trace Adkins song "Arlington" (link). Take a moment to remember the sacrifices others have made for this country.

My trading week was punctuated by a loss in LOCO, new positions in CRM MCK YUM and more activity in SKX. Overall, it was a go no where week for me. 

Here are the trades:

(p = puts, c = calls, sell means sell-to-open, all are third week expiration)

Fri Sell BRKB Jul 135 p @144.9. I add to longs by opening a July position in Berkshire Hathaway.

Sell DE Jul 85 p @92.9 Add to longs in John Deere as it moves higher on earnings.

Thu Sell CRM Jun 65 p @73.6 New long position in Salesforce.com. Chart support at 66.

Wed Sell SKX Jun 110 c @103.6. I rebalance my position in Sketchers. So far my timing has been poor.

Cover (buy to close) LOCO Jun 23 p @22.2 El Pollo Loco continues to knife lower. I cover this leg for a 400% loss, basis the premium collected. A minute later I close one layer of sold calls.

Cover (buy to close) LOCO Jun 25 c @22.1. This leg goes out at a 43% gain. I am doing this to avoid the possibility of a double smack down, losing on both sides of a sold strangle, if the stock bounces quickly.

Sell YUM strangles: Jul 82.5 p / 110 c @95.4

I skew bullish selling July strangles on Yum Brands. YUM has had a good run up after their earnings. Selling strangles is a bet on a trading range, that the stock stays in between the two strikes of 82.5 and 110.

Sell SKX Jun 100 p @107.6 90 Rebalance the strangles I sold yesterday in Sketchers as it continues its run to the upside.

Tue Sell JPM Jul 60 p @67.0 Add to longs in JP Morgan Chase bank. Banks look to be a good group as interest rates are climbing.

Sell MCK strangles @243.0: Jul 230 p / 260 c

New position in McKesson. Selling strangles is a bet on a trading range. Breakout chart base at 230. I skew bullish for a new net long position.

Sell IWM Jul 112 p @124.9 Rebalance my position in the Russell 2000 by opening a July position.

Sell LOCO Jun 25 c @23.2 Rebalance short strangles in El Pollo Loco as it moves lower. I want to give it a bit more rope instead of covering my sold puts for a big loss, so I am reducing delta by selling another layer of calls.

Sell SKX strangles @105.8: Jun 95 p / 115 c

Sketchers higher on analyst comments. This new trade skews bearish.

Position Summary:

long BRKB DE DIS EL JBLU JPM

net neutral ACT DATA SKX

net long CRM HON IWM MCK YUM

net short FXI / short LOCO

* long means I sold puts, net long means I sold both puts and calls skewing bullish, net short same thing skewing bearish, short means I sold calls.

Are we there yet? 42-12 Grade B-

I count forty two winners, twelve losers for the May option cycle. Overall I was a bit too cautious on the stock market, closing some trades too early, not aggressive enough on the long side. The caution felt justified at the time, but cost me some profits with the stock market at record highs.

On summer car trips, kids sometimes ask "are we there yet?" No, we are not at a stock market top yet. As difficult as the market has been for many bulls, stock market bears continue to be the most frustrated group. Bond market bears got a biscuit this month, but the main course isn't on the plate yet either. Gold may be forming a bottom, but there are a lot of cross currents. 

As always, my market opinions tend to be about as good as flipping coins, so don't invest based on my opinions. In general, I find that market predictions are mostly for entertainment. I make money by managing risk (position sizing, limiting losses), not from predictions.

Some are looking the divergence of the transports (IYT vs SPY) vs. the broad market. Yes, this is a warning sign and means any advance is suspect, if that continues. Yes, valuations (Schiller PE10) are stretched. Yes, dividend yields are low. So caution is advised, but full bore bearishness is not warranted. Not until the yield curve inverts, not until price action confirms a down trend.

The 78% May win percentage (.78 = 42 / (42+12)) is in line with expected probabilities. Grade is B-, which I see as average. Again, for new readers, I tend to sell out of the money options with a 80% to 90% probability of profit, using the strike price as a stop. In the real world, this translates into about 80% winners. Profits tend to be small and steady. The losers can sometimes be large and sometimes can come in clumps if the market makes a big move. I took two big losses in HAR this month, my first real clunkers of 2015. GPRO CAT were some other small losers. Some closed winners include AMBA JWN KMX PANW STJ.

I keep watching bonds and gold but the option premiums and bid/ask spreads in GLD TLT GDX are not appealing at this time. Bonds (TLT) may be in the process of forming a head and shoulders top. Stocks continue to be valued at the high side. When the low interest rates are factored in, the valuations don't look as bad. 

I attend the local IBD CANSLIM meetup. The CANSLIM style focuses on high growth stocks with positive price momentum. Many of these IBD stocks are popping then flopping. There have also been some land mines (like HAR) with gap downs.

Weekly: no fanfare

Without much fanfare SPY makes a new closing high. Gold moved higher. However, the premium on GLD options seems too small to be selling puts, and the chart isn't decisive enough to be buying premium. Bonds had a huge relief rally on Friday. Option premiums and spreads on TLT give a poor risk/reward.

As for my week, I did some damage control in ASH HON LOCO, new positions in ACT DATA DE YUM. I made money, but again felt like I left a lot on the table. 
Here are the trades: (p = puts, c = calls, all are third week expiration, sell means sell-to-open).

Fri Sell LOCO Jun 29 c @24.9 El Pollo Loco down on earnings. I rebalance my short strangles. The sold puts are at 23. JWN also out with earnings and stock is holding.

Sell DE Jun 80 p @88.8 New long position in John Deere. DE down on analyst comments.

Cover (buy to close) STJ May 75 c @74.9 St. Jude Medical runs up to 75.1 in late trade. I cover my sold calls six minutes before the close, rather than risk another spike higher at the close.

Thu Cover (buy to close) HON Jun 105 c @106.3 I roll my calls up, buying back the 105s selling the 110s:

Sell HON Jun 110 c 50. The 105s are closed for a 300% loss. Despite the poor timing on so many of my Honeywell trades, I am up a tad for the year on HON.

Sell DATA strangles: Jun 100 p / Jun 130 c @112.8

New position in Tableau software, short strangles, skewing bullish. Again, a short strangle is a bet on a trading range.

Sell DIS Jun 100 p @109.8 Add to longs in Disney. I am selling way out of the money puts. Some like to think of this as placing a limit order at the strike price.

Wed Cover (buy to close) HON May 105 c @105.0. I take about a 25% loss as Honeywell crosses the strike price of these calls to the upside. I shake my head, as I follow my mechanical stop loss levels. HON has been a difficult stock for me for calendar 2015.

Sell HON Jun 95 p @105.0. A few minutes later I sell these Honeywell puts. I currently have half a position in shares, short Jun 105 calls, now short Jun 95 puts.

HON closes at 104.4. My trades this year with HON remind me of the Peanuts cartoon, with Lucy Van Pelt pulling away the football when Charlie Brown runs to kick it. Poor Charlie Brown never learns, never gets to kick the ball. Thankfully, I around break even for HON. As I sometimes write, if my "bad" trades are break even, it is going to be a good year.

Tue Sell ASH Jun 135 c @125.6 Ashland lower after a big investor says they sold their stake.

Sell ACT Jun 335 c @296.7. Actavis lower after yesterday's earnings pop. Another pop-and-flop. Grrr. I am short strangles now.

Mon Sell ACT Jun 260 p @302.7. New long position in Actavis. ACT gapping higher on earnings. I selling puts way out of the money because so many of these IBD (Investors Business Daily) kind of stocks have popped then dropped.

Sell YUM Jun 80 p @90.1. New long position in Yum Brands. Earnings were about three weeks ago. Chart base is 80. Not much premium on these way out of the money puts.

Sell MRK Jun 57.5 p @60.5. Add to longs in Merck. The earnings gap was around 58.

Position Summary:

net neutral ACT ASH IWM SPY

long BRKB DE DIS EL JBLU JPM MRK SKX YUM

net long DATA FXI HON LOCO

expired/closed AMBA APC CAT FB GPRO HAR JWN KMX PANW STJ UNH VRX XOM

Weekly: Hamster Wheel

In their monthly update, Schwab described the current stock market as a Hamster Wheel. It felt that way for me this week. Friday's big rally was like a bit of hamster kibble for my efforts. There was some good, some bad. Like many traders, the bad tends to stick in my mind. 

I made money, but felt like I left a lot on the table. I got chewed up and spit out by GPRO, and lost on one leg of JPM on the Friday rally. My defensive moves from last week were premature, overly cautious. Highlights include new longs in EL JBLU. 

Here are the trades from the Hamster Wheel week: (p = puts, c = calls, sell means sell-to-open, all are third week of expiration unless noted: Disney is a May week 5)

Fri Sell EL Jun 82.5 p @88.6. Add to longs in Estee Lauder. Chart base is around 83.

Cover (buy to close) JPM May 65 c @65.1. I close this leg on JP Morgan Chase bank for about a 75% loss as JPM crosses the strike price to the upside. By the time I type this up JPM drifts lower to 64.7, so not the best timing on the exit.

Sell IWM Jun 111 p @123.1 Rebalance my position in the Russell 2000 etf as it rallies.

Cover (buy to close) GPRO May 54 c @50.6. Close this leg on GoPro for about a 180% loss. I am waving the white flag. I mangled this trade. I was chewed up and spit out by the tape action, losing on both sold puts and calls.

Sell DIS MayW5 103 p @110.0. I sell some week-five puts on Disney. Tape action hasn't been great after good earnings, but it is a name worth buying on a pull back.

Sell JBLU Jun 19 p @21.8. New long position in JetBlue. Not much premium, because I am giving it some room.

Thu Sell SKX Jun 80 p @95.2. Add to longs in Sketchers.

Sell ASH Jun 115 p @129.6. Add to longs in Ashland.

Wed Sell EL Jun 80 p @86.3 New long position in Estee-Lauder. EL broke out from a chart base after a great earnings report. Anecdotally, these mid level names seem to be holding a bit better than the most popular stocks.

Sell HON Jun 105 c @101.1. Hedge my half position in Honeywell stock as it declines. HON has been a "problem ticker" most of 2015 for me.

Sell FXI Jun 56 c @49.9. Rebalance my complicated position in the China Large Cap etf.

Cover (buy to close) GPRO May 46.5 p @47.9. I take a 350% loss, basis premium collected, on this leg for GoPro. GPRO did bounce off the minor support at the chart gap around 47. However, the overall stock market is bleeding red with SPY - 2.0, so I am not in a mood to trade technical bounces so am taking my loss while it is still manageable in dollar terms. Low of the day was 46.50, same as the strike price. I am still short May 54 calls and May 58 calls.

Tue Sell IWM Jun 130 c @121.5. I hedge yesterday's put sale on the Russell 2000 by selling calls. My bullish idea has been met with lower prices.

Sell GPRO May 54 c @48.1 Rebalance my position in GoPro.

Sell SPY put backratios: 

Buy SPY Jul 190 p, Sell 2x SPY Jul 185 p @209.3

These backratios are for credit, net long delta, with the potential for a large profit on a decline to exactly 185 at July expiration. They protect against a 10% decline, though loses cascade on a drop below SPY 180 (about a 15% drop from here). If the market is up or flat, I keep the small credit.

Mon Sell IWM Jun 109 p @122.7. I often sell these Russell 2000 puts near the 10% probability line around the start of the month. A good, easy way to edge back in, after last week's beating. Marketwatch lead story this morning is about the stock market bubble popping, a good sign for bulls.

Sell JPM May 62 p @64.1 Rebalance my position in JP Morgan Chase bank. I was already short May 65 calls and June 60 puts on JPM.

Position Summary:

short CAT FB GPRO HAR UNH

net neutral AMBA FXI KMX PANW STJ

net long DIS IWM SPY

long APC ASH BRKB EL JBLU MRK SKX XOM

short means I sold calls

net neutral: short strangles or similar, delta near 0

net long: short strangles, with a bias to long
long typical means I sold puts

Weekly: Down Goes Frazier

I took some profits and experience a couple of bad losses. The losses dominated and it was a bad week. With the big boxing match on Saturday, Howard Cosell's famous call for Foreman-Frazier came to my mind.

https://www.youtube.com/watch?v=JZEIMQ42-oU (link)

Following the boxing analogy, I take a couple of body blows. HAR is the main culprit, gapping down on earnings. The worst part might be how badly I was chewed up and spit out, by the tape action. Either a trader takes losses or doesn't. Either uses stops or doesn't. With a financial bloody nose, I tread ever more cautiously. The huge rally on Friday adds to my frustration. 

All I can do is dust myself off, get up from the mat, clear my head, and get ready for whatever comes next.

The April 27 Barrons had an article about big money managers. Most of their wealthy clients are cautious. Many are pulling money out of the stock market. Again, this might be the most hated bull market I have ever seen. 78% of the advisors and clients expect a 10% stock market correction within 12 months. Rarely do markets accommodate the crowd. One scenario is a speculative phase, with a swift and sharp move up. A speculative phase would increase risk and reward. As always predictions are mostly for entertainment. Risk management is where I tend to make my money.

Here are the trades (p = puts, c = calls, sell means sell-to-open, all are third week expiration): 

Thu Disaster! Harmon Intl (makes car audio equipment) gaps lower on earnings. I bail out of my sold puts for huge losses:

Cover (buy to close) HAR May 125 p @124 About a 650% loss

Cover (buy to close) HAR May 120 p @122 About a 350% loss

I am still short HAR May 165 calls. OMG. I close both sold puts in the first ten minutes, not waiting for a bounce (or possibly more damage). Market for HAR is fast and wide. I use limit orders, closer to the ask than the bid. Rule #1 is to live to trade another day. While a 650% loss is painful, it comes with the style of selling options at the 10% probability line. The trader buying options with a 10% chance of profit is hoping for a 10x pay out. As the option seller, sometimes I have to pay off on the long shot. These two losses put a rather large dent in my profits for 2015. Mid-day update, wowsers, HAR back over 133 by mid-day. Grrr. These things happen.

Cover PANW May 145 p @151.0. I take a 100% loss in three days, on this leg for Palo Alto Networks (cyber security). After the shell shocker loss in HAR I am reducing risk. I don't like the tape action in PANW, and am short two other layers of puts.

Sell GPRO May 57.5 c @50.9. I hedge sold puts by selling calls on GoPro as it dips after the big up day.

Sell DIS May 118 c @109.3. Hedge sold puts in Disney by selling calls. Earnings due before options expire.

Cover (buy to close) FB May 75 p @79.4. I close this leg on Facebook for a 45% profit. FB breaks minor support at 80.

Wed I take some risk off the table by closing some positions in KORS UA UNH WHR:

Cover (buy to close) UA strangles May 75 p / May 90 c @79.5. I close the short strangle on Under Armor. UA broke 80 to the downside, so I am closing both legs for a tiny profit while I still can get out of the position with a plus sign. The puts are at a big loss, but the calls more than make up for that. For the summaries, I count each leg separately.

Cover (buy to close) KORS strangles May 60 p / May 67.5 c @61.5. Michael Kors giving up the ghost today, so I close this one for a 25% profit, basis premium collected. Same thinking here, to get out while I can get out with a profit. Both legs come in as small winners.

Cover (buy to close) UNH May 110 p @114.3. United Healthcare down hard after breaking the 50 day moving average. I am still short two layers of calls. I close this leg for about a 150% loss. Even if both calls come in safe, the overall position will still be slightly in the red.

Cover (buy to close) WHR May 165 p @179.4. Whirlpool earnings a day or two ago were poor. I sold way out of the money, so am able to book a 35% profit. Again, getting while I can get out green. WHR can be a fast moving stock and options bid/ask spreads sometimes are ridiculously wide, so the exit can be difficult.

Cover (buy to close) CAT May 89 c @87.7. I take a 400% loss on this leg on Caterpillar. Simple explanation is I made a mistake, bad trade, bad timing, bad loss. I decide to take my medicine instead of using the strike price as a stop level.

Sell GPRO May 46.5 p @53.4 New long position in GoPro. The gap is at 47 on the chart. These are near the 10% probability line that I prefer.

Tue Sell STJ May 75 c @71.9. Hedge sold puts by selling calls. St. Jude Medical is another pop higher on earnings, now flopping with no follow through.

Sell MRK May 58 p @60.1. New long position in Merck. MRK higher on earnings. On the chart, 58 is the gap.

Mon Sell PANW May 145 p @157.5. Rebalance my position in Palo Alto Networks as it continues higher.

Sell DIS May 103 p @110.3. Add to longs in Disney, which is higher on a strong opening for the new Avengers movie, Age of Ultron.