Sell TBT (cover short puts)

Sell TBT by covering short puts (TBT Sep 30, TBT@30.4). TLT continues to explode higher, and I take a loss on the TBTs. It is a huge percentage loss, a small nominal loss. It is painful to cover in a fast moving volatile market. However, standing there in front of the train, hoping the train will stop can be more painful.

Stock market is selling off, and my SPY backratio is doing well.

Long BRKB, GLD, TLT
Short SPY

/edit to add: for now it looks like I covered close to the worst point of the day.

10-0-1 for August

Ten winners, zero losers, one breakeven for the August option cycle. I bet on a trading range, and for the most part, the range held. The bushel of winners I attribute to a little bit of luck, and picking strikes at chart support/resistance. All short puts:
BRKB Aug 60
IWM Aug 58, 60
SDS Aug 31
SPY Aug 84, 87, 95, 100
TBT Aug 30
TLT Aug 90, 92

Going forward, I have a SPY backratio which makes net short SPY, and a short strangle on TLT, net neutral.

Long BRKB, GLD, TLT*
Net short SPY
* TLT offset by TBT, net neutral TLT

Confirmation Bias

Random Roger (blog link) mentions an interview with Felix Zulauf (link2). I found the concept of "confirmation bias" to be interesting.

In plain English it means seeking out and reading only information that confirms a person's opinion. With the Internet, virtually any position can be confirmed with outside sources. There is a fine line in having enough conviction to take a market position, and being so stubborn that all evidence on the other side gets ignore.

When I was a beginner trader I remember reading or hearing something along the lines of this:
Q: "What is your secret to trading?"
A: "Be bold, and be right."

Q: "What happens if you are wrong?"
A: "You go down with the ship."

Obviously, this "gunslinger" approach, is a far cry from how I trade today.

Buy TLT (sell puts) sell IWM (cover short puts)

Buy TLT via selling Sep 98 puts, TLT @106.2. I double up on short puts as TLT continues to rally. I am also short TLT Sep 93 puts, and TBT Sep 30 puts.

Sell IWM covering short Aug 58 puts as a protective measure. There is about a 5% chance of IWM 58 with option expiration tomorrow. I am still short IWM Aug 60 puts with IWM @61.2.

Long BRKB, GLD, IWM, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net neutral TLT

Surfing analogies

I stumbled upon a trader's blog Tradersnarrative.com (link). As readers know I like analogies. Summer is a good time for surfing analogies. Here are a few "Lessons from Riding Different Kinds of Waves (link2)."

* Be patient, there will always be another wave along
* Some waves are deceptively weak and some deceptively strong
* Riptide and cross currents can be dangerous!
* Have a safety net in place but don’t take it for granted
* Timing is everything
* Location is everything
* Finding the sweet spot
* Conditions can change in the blink of an eye

Enjoy.

Buy TLT and GLD (sell puts)

Buy TLT via selling Sep 98 puts, TLT @104.2. This is a rebalancing trade on the short strangle. The initial position was short TBT Sep 30 puts and TLT Sep 93 puts. I am a bit stunned at how far and how fast U.S. Treasuries have moved up.

Buy GLD via selling Sep 109 puts, GLD @119.6. I am also a bit surprised at how strong GLD has been. I open a Sep position to continue to have a bit of exposure.

Long BRKB, GLD, IWM, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Whoosh

Wow, what a washout day for the stock market. With all my hedging, my overall trading positions were down just a tiny bit. If the stock market decline continues, I will take on some water.

I do have some downside protection in the SPY Sep backratio spread (short SPY 88 puts, long SPY 96 puts), but that may not be that useful if there is an air pocket decline before August option expiration on 8/20.

Today, I was tempted to sell some options for September. I remind myself that fast markets are not my friend. Oversold often becomes oversold-er, and I already have plenty of exposure for August expiration, and some positions are coming into range of assignment.

The Fed as Goldilocks

Bonds, stocks, gold all are up half an hour after the Fed statement. The Goldilocks comment is about the fable about being too big, too small, and then just right. Historically, it is unusual that all three markets can move up together.

We will see if I can get it "just right" and have all my August short options go off the board worthless (or at least closed for a profit).

Sentiment for bonds is getting touchier because comments and predictions for 2.5% or even 2.0% on the 10-year Treasury note are more numerous. At some point all the little fish that have piled their money into bonds will likely get burned badly. However, today is not that day, tomorrow isn't likely to be that day, and if I had to bet, a year from now we will still be waiting.

* Moments after posting, TLT (20 year bond ETF) went from being up a full point to down. So, wow, how quickly can a person become wrong when making statements.

Whipsaw:200 day moving avg

The 200 day moving average is a popular timing indicator. The last two SPY signals have resulted in whipsaws, causing losses for those using it for timing. Roger Nusbaum is one of many that use it, and those interested can read more about it on his blog (link).

Some timers go all in, or all out on the 200 dma indicator, and their portfolio whipsaw experience is much more extreme than the modest losses that Nusbaum has seen. This is a danger with any indicator, more so with popular ones. When a lot of people are looking at one indicator, it can become a trading point for some looking to game the system and trigger orders.

Personally, I was net short SPY deltas going into the employment report, so the steep one-day decline is okay with me as long as it doesn't extend into a much bigger washout. With today's decline, I am about delta neutral on SPY, so unchanged or modestly lower on SPY until August expiration would be about my best scenario.

Buy IWM (sell puts)

Buy IWM via selling Aug 60 puts, IWM@66.1 (edit: correction made on typo that read 61.1 should be 66.1). This yet another rebalancing trade using IWM to balance off a short SDS put. I am already short IWM Aug 58 puts. The massive stock market rally has my SDS position basically at the strike price of 31, and net short SPY delta.

I see my choices as variations of: sit tight, cover SDS and take the loss, rebalance back to delta neutral, or take half of the half and rebalance and stay net short SPY delta. I pick the last choice, still net short SPY, but not as much as before this latest trade.

Bonds via TLT continue to be weak. GLD is stabilizing.

Long BRKB, GLD, IWM, SPY*, TLT*
SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Cover short SPY puts

I cover my short on SPY Aug 95 puts for a decent profit, SPY@109.6. This reduces my exposure, leaving me short SPY Aug 100 puts, and Aug 87 puts, also short IWM 58 puts. I also have a SPY backratio for September.

Because of the two day stock market decline I am now net delta long SPY. I am a nervous long, because historically, August can be a volatile month, more so than July or September even. In hindsight, my IWM put sale yesterday was ill-timed as the bottom has dropped out of stocks.

Long BRKB, GLD, IWM, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Buy IWM (sell puts)

Buy IWM via selling Aug 58 puts, IWM@66.1. This is more rebalancing of the SPY strangle. I am using IWM as a SPY proxy because of the lower value per contract. I am still net short SPY deltas on the combo of SPY, SDS, IWM options but get closer to neutral.

Gold and bonds had a scary down day on Tuesday. For now I am holding on to those positions. One interpretation of recent price action is money flowing into SPY with the funds coming from TLT and GLD, as asset allocation funds, and hedge funds rebalance their portfolios.

Long BRKB, GLD, IWM, SPY*, TLT*
SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Nusbaum: Essentials for investing

Random Roger writes about Ten Essentials for investing (link). Nusbaum is experienced in managing other people's money for the long term. I find Nusbaum to be smart and wise, even when I may disagree with him. Wisdom is something that novice traders often lack, especially if the newcomer has early success.

Off the top of my head, here are concepts that can be helpful if not essential for traders:

* live to trade another day, with proper position sizing, and other risk management techniques such as stop-losses or hedging. Many novices jump in with both feet, and get carried out on their shields before they have a chance to find their sea legs.

* know yourself--there are a thousand successful ways to trade. Many traders will fail if they try to emulate a style that doesn't suit their personality, their time commitment, their lifestyle. If a person doesn't know themselves, the markets can be an expensive place to find out.

* hazard warning on headline news, pundits on TV, popular newsletters or blogs. While popular sources such as talking heads on TV do occasionally make good calls, there have been some horrible ones as well. The contrarian way is one successful way to trade (as is trend following), though a person needs to be careful because as the cliche goes: "everyone is now a contrarian," so sometimes the real contrary way to go is to follow the trend.

* A John Wooden-ism comes to mind: "don't confuse activity with achievement." Many novices fall into the indicator trap, looking at too many indicators and mostly get confused, rather than getting better and smarter. Many novices tend to overtrade, instead of waiting for a good pitch to hit, they swing at everything.

* markets are often a moving target. Once an indicator is published and popular, the indicator tends to lose effectiveness. If reading a particular book or using a particular indicator was the way to success, everyone would read the book, or use that indicator. If everyone has the same edge, no one has an edge over the other person.

That's it for now.

Crawford: "Will Capitalism survive?"

Peter Brimelow cites an Arch Crawford newsletter, highlighting dire predictions for the financial markets (link). For those unfamiliar with Crawford, he goes way back, having been trained as a technical analyst, Crawford uses astrology as his primary tool.

>>
"Astrologers call it the 'Cardinal Climax.' It is considered to be the most powerful and important planetary alignment of the modern era. Perhaps it heralds the beginning of the real 'Aquarian Age' or the end of the 'Mayan Calendar.' (After all, what's a few months in a 25,600-year cycle?) These energies actually maximize from July 30 through August 3. There have been 'shadows' preceding and will be echoes afterwards for quite some time."

Crawford adds: "This huge alignment will be followed by a Full Moon on the Fall Equinox and a Lunar Eclipse on the Winter Solstice. We expect the depth and scope of dislocations during this period to exceed anything we have ever witnessed, both in otherwise civilized interaction among nations, and likely our fill in natural disasters."

"We continue to recommend extreme caution and proper emergency measures such as extra food, water, medicines and cash over the next 24 months in particular. Do NOT wait any longer!!"
>>

The period starts today, and the last quoted paragraph extends the warning period for two full years. Crawford is reported to be 200% short [stocks].

Buy SPY (sell puts)

Buy SPY via selling SPY Aug 100 puts. More rebalancing of my short strangle, getting me close to net neutral on SPY, with SPY@110.5.

A few minutes later, I cover my short SPY Aug 84 puts for a nice profit to free up capital and in case there is a waterfall decline in the stock market . So for August I am currently short SPY Aug 87, Aug 95, Aug 100 puts, and short SDS Aug 31 puts.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net neutral SPY
TLT offset by TBT, net long TLT

Buy BRKB (sell puts)

Buy BRKB via selling Sep 60 puts. My short Aug 60 puts are nearing delta zero, so I add more puts to continue to have exposure.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Short Strangle on TLT (TLT/TBT)

Sell a strangle on TLT via selling TLT Sep 93 puts and TBT Sep 30 puts. I am skewing to the bullish side TLT@100.7. Sep to Dec is a seasonally good time for bonds.

Earnings season used to be a time when I did a lot of trading, but as readers can tell, I am mostly trading the options on ETFs now.

The stock market rally has pushed me to a net short position on SPY.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

7-0-1 for July cycle

Seven winners, one break even, zero losers for the July option cycle, another solid month.

The seven winners:
SPY Jul 66 put
TBT Jul 31 put
SDS Jul 30 put
TLT Jul 90 put
BRKB Jul 60 put
SPY Jul 92 put
SDS Aug 27 put

The one breakeven: SPY Jul 88 put

While the market did swing, it didn't move enough for the way out of the money option buyers to make money if they held until expiration.

Most of the winners expired without drama near delta zero. With the steep Friday sell off in stocks I am now net long SPY.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Buy SPY (sell puts)

Buy SPY via selling Aug 95 puts SPY @109.7. More rebalancing, as the stock rally rolls on. I am surprised at the strength of the rally, and that bonds and gold also rally.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net slightly short SPY
TLT offset by TBT, net long TLT

Barrons: "Beware of Bond Funds"

Another is what sometimes seems like an endless stream of warnings about a top in the bond market is featured in Barrons this week. The fundamental arguments are clear enough. However, when the pundits are warning people, the top is usually still a ways off.

An interesting play might be high yield such as HYG as the spread between "junk bonds" and Treasuries is historically high for the current level of defaults. There are three ways this might correct: defaults are going to go way up, Treasury yields will rise, the yield on the junk bonds will fall.

As always, the blog is mostly about trading, so longer term investments are only talked about in general terms.

"Invest like a millionaire"

From a Marketwatch article.

>>
According to the Capgemini and Merrill Lynch Global Wealth Management 2010 World Wealth Report, these high-net-worth individuals had, on average, 29% of their assets in stocks in 2009; 31% in bonds, and 17% in cash.

They also kept 18% in real estate, including commercial real estate, real estate investment trusts (REITs), residential real estate (excluding their primary residence), undeveloped property, farmland and the like, and 6% in alternative investments, such as structured products, hedge funds, derivatives, foreign currency, commodities, private equity, and venture capital.
>>

One caveat is that the survey is done by Merrill Lynch, so it is going to skew towards products they sell such as stocks and bonds. As I have always advocated since starting this blog, for the average investor (not trader), diversifying slowly into age appropriate assets is usually the best way to go.

Buy SPY (sell puts)

Buy SPY via selling SPY Aug 87 puts, SPY @106.8. I re-balance the short strangle back to delta neutral. As the market moves, the delta changes.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net neutral SPY
TLT offset by TBT, net long TLT

Cover short put SDS

Cover short SDS Aug 27 puts. I close out this position for a profit, just in case the strong SPY rally rolls past resistance. These puts might come back into play at SPY 120 or so. I am still short SDS Aug 31 puts and Jul 30 puts. Because of the rally and the way options move, I am slightly short SPY now.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net short SPY
TLT offset by TBT, net long TLT

Buy BRKB (sell puts)

Buy BRKB via selling Aug 60 puts BRKB@78.7. My Jul 60 puts are near delta zero.

Elsewhere, GLD has had a couple of hard down days. Looks like a shakeout, as the gold uptrend is still intact. As SPY rallies, I am close to delta neutral on SPY.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net neutral SPY
TLT offset by TBT, net long TLT

Buy SDS (sell puts)

Buy SDS via selling Aug 31 puts SDS@38.6. I expected a market rally on the employment report. The tiny bump up only lasted a short time. I get closer to delta neutral with this trade, but am still net long SPY.

I am already short SDS Jul 30 puts, SDS Aug 27 puts, both are close to delta zero. On the other side I am short SPY Jul 66 puts, Jul 92 puts, Aug 84 puts, as well as a SPY Sep 96/88 put backratio.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Half way into the year

Half way into the year:
GLD up about 14%
SPY down about 8%
TLT up about 11%

TLT is neck-and-neck with GLD after factoring in dividends.

Stock market technicals look terrible. SPY has broken support at 104, activating a head-and-shoulders top that projects to about the 87 level. The 50 day-moving average is about to cross under the 200 DMA. Some call this a "death cross," with that moniker, it is bearish indicator.

Sell SPY (cover short puts)

I cover my short SPY Jul 88 puts, SPY@104.1 for a breakeven profit. I am still short Jul 92 puts. I hate to do it, but in this fast declining market it makes some sense to reduce my exposure. There is a chance of a meltdown as support at SPY 104 has been tested so many times. Also a chance of a decent rally, but again in a fast market, it is a good idea to trade smaller and reduce risk.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Buy TLT (sell puts)

Buy TLT via selling Aug 92 puts TLT@100.4. Adding a layer on top of short Aug 90 puts.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

The Economist: World debt map & table

The Economist has a world debt map in this article. The U. K. and Japan are in red. In the table, the U. S. is listed 7th in terms of sustainability of debt.

Those worried about the massive U. S. deficits can see a hint of the future by watching how events unfold in Britain and Japan. While their situations are not exactly the same, the overall debt loads are higher than in the U. S. With Japan having already lost its AAA sovereign debt status.

Gold, bonds and stocks (SPY at least) all moved up on Friday. Gold and bonds moving up together are a conundrum. If there is inflation it will be terrible for long term bond holders. At some point, most observers expect opposite movements. However, for now both gold and bonds are rallying together.

U. S. bond owners are still at the party, still drinking from the punch bowl. Virtually every commentator and pundit is screaming that bonds have to fall, yields have to rise. So far that chorus has been dead wrong, as is often the case when everyone is on one side of the fence. Part of the explanation of why bonds continue to rally, is low CD yields at banks. Yield hungry consumers are moving out in time to get a bit of yield.

Again, at some point, bond owners are going to suffer losses, possibly big losses. The small fish public has been pouring money into bond funds, and ETFs. For now the party rolls on, but it is a good idea to stay near the exit, instead of near the punch bowl for another drink.

It reminds me of other market situations where commentators warn of a bubble or of imminent collapse two years or so ahead of a much higher top. No one knows the exact timing, but for now public commentator sentiment and the chart still favors the bullish side for bonds.

One aside about the debt map is that Russia, India, China, Brazil, all are in green, all having relatively low overall debt levels. If the future unfolds such that investments in countries with "dry financial powder" do best, these are some ETFs specializing in those countries: RSX, EPI, FXI, EWZ.

SPY Backratio

I take a shot with a complicated trade, a SPY Backratio, selling two Sep 88 puts for every Sep 96 put bought SPY @107.1. The strikes makes for a credit spread, with a huge max profit around SPY 88 at September expiration. If SPY drops below 80 it starts to lose money. At SPY in the low 90s there is a good profit. At SPY 100+ even with extreme up moves, I get to keep the tiny credit. It is close to a delta neutral trade, adding to SPY long exposure right now, but turning negative as time goes by.

Long BRKB, GLD, SPY*, TLT*
SPY offset by SDS, net long SPY
TLT offset by TBT, net long TLT

Buy GLD (sell puts)

Buy GLD via selling Aug 105 puts GLD @121.9. Layering on an August position on top of short Jul 100 puts. As has been the case for me in gold all year, another low risk, low reward trade.

Looks like I was at least a day early selling volatility on SPY, as VIX is up 2.5 to 29.6 today, and my short strangle is down about 20% on notional value. Support at SPY 108 broken, next stop may be 104/105.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Sell SPY strangle

Sell SPY strangle via selling SPY Aug 84 puts and SDS Aug 27 puts. SPY @109.80 after Fed announcement. I already am short SPY Jul strangle with short Jul 92 puts, and short SDS Jul 30 puts. I expect SPY to stay range bound. July tends to be a quiet stock market month, while August can get more volatile. That's one reason for selling so far out of the money.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Sell TLT strangle

Sell TLT strangle via selling the TLT Aug 90 puts and the TBT Aug 30 puts TLT@98.8. Effectively betting on a trading range for TLT until August. On prior strangles, I put the trades on separately, these trades were done at the bid a minute apart. I already am short a July strangle on TLT, short TLT Jul 90, TBT Jul 31 puts, again betting on a trading range for TLT.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

The Lake Wobegon effect

Paul Farrell at Marketwatch mentions the Lake Wobegon effect as it applies to the stock market (link).

>>
On Lake Wobegon "all the women are strong, all the men are good-looking and all the children are above average" says the great American satirist Garrison Keillor in his "Prairie Home Companion" world.
...
“63% of Americans consider themselves more intelligent than the average American, a statistical impossibility. In a different survey, 70% of Canadians said they considered themselves smarter than the average Canadian.” But when it comes to financial markets, its closer to 100% ...


I'd guess almost all the readers of my blog consider themselves above average in intelligence, and above average in investment acumen. While that may be true for small samples, by definition, most people are some what average.

The Lake Wobegon effect reinforces the illusion that more activity will generate more return. In the stock market the reality is the opposite, the average active small fish trader usually does worse than the static investor, that may do buy-and-hold or dollar-cost-averaging. On the Internet, the tendency is for big winners flaunting their stories, often filled with lies, the big losers are never heard from.

Here is a second Farrell article "The more you trade the less you earn" (link2).
>>
Behavioral finance researchers have studied the performance of stock market traders in both America and Asia. Interestingly, they discovered that traders in both countries under-perform the world’s broad markets by significant amounts. One study analyzed 66,400 accounts at a major Wall Street firm over a seven-year period. Another studied all the active traders on the Taiwan, China exchange.

In spite of the cultural differences, the results were virtually the same. Why? Due to the high transaction costs, taxes and bad decisions, the bottom line is simple: “The more you trade the less you earn.” In fact, about 80% of all day traders lose money. In researching the Americans, the study found that the active investors who turned over their portfolios 258% annually made less than 12% on their money. Passive investors who bought and held, with only 2% portfolio turnover, had average returns of roughly 18%, which is about fifty percent higher than the returns of the active investors. Still, investors believe they can “beat The Street,” simple because the Wall Street “Hype Machine” has programmed them to believe that myth.
>>

As for the stock market, the Monday morning rally failed. Support for SPY at 108 and then at 104. TLT may be breaking out to new highs. It is difficult to want to buy treasury bonds with yields so low, but the chart, and seasonality point to more strength in bonds.

6/18 OptionPlanet class

I attended an OptionPlanet class on "Complex Option Strategies." TD Ameritrade, InvestTools, ThinkorSwim are sponsors. I got some good bits from the class, more about features of the TOS trading platform than about options.

I sat next to a lawyer, real sharp guy. He had gone through one of the more expensive InvestTools education programs and was enthusiastic in his praise. That is a far cry from other stories I have heard and shared about some of the fly-by-night classes that talk about doubling your money every month in options, and "no-lose" strategies.

One take away I got was that if an option trader understands vertical spreads, and calendar spreads, that's all there is to know. All the more complex strategies, such as butterflies, Iron condors, are layers of verticals and calendars.

An informal stock market sentiment poll for the room of 300 advanced option traders, had about 35% bullish, 40% neutral, 15% bearish. As with all anecdotes, one anecdote, one room doesn't mean too much.

For all the dads out there, Happy Father's Day.

4-0 for June

Four winners zero losers for the June option cycle, a good month. The winners were all short puts TLT Jun 89 and Jun 84, SPY Jun 100, BRKB Jun 60. All four of these options were deep in the red at some point after entry.

The SPY Jun 100 puts had over a 1000% drawdown during the flash crash. This means that the buyer of the option had a ten-bagger, and had I closed the trade then I would have lost ten times the small premium collected. It serves to illustrate how difficult it can be to make money way out of the money options and holding until expiration. Even with all the news, these puts close out very safe during expiration week.

GLD continues to make new highs. The sentiment seems good for further gains. Unfortunately, I closed out one GLD trade for break even last cycle, and it would have come in very easily. I have little exposure as my short GLD Jul 100 puts are close to delta zero.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy SPY (sell puts)

Buy SPY via selling Jul 92 puts SPY @112.0. I rebalance my strangle as SPY rallies. I am already short SPY Jul 66 and Jul 88 puts, and short SDS Jul 30 puts. As SPY rallies, the strangle is getting out of balance, giving me a net short position via SDS. Selling another batch of SPY puts gets me closer to net neutral on SPY.

I am going to attend an OptionPlanet class on complex strategies in Marina Del Rey on Friday.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy BRKB (sell puts)

Buy BRKB via selling Jul 60 puts BRKB @75.4. I placed a limit order yesterday, but didn't get filled. With the market rally, I get a nickel lower per contract today than yesterday's bid. Some traders prefer to place limit orders between the bid/ask or to just take the bid. I am already short BRKB Jun 60 puts, and those will almost certainly go off the board this Friday.

Stock market rally is stronger than I thought it would be. Being short volatility via the short strangles is a good place to be. GLD is holding up better than I thought too, as are treasury bonds. I thought that a strong stock market rally would have drained some of the risk premium from gold and bonds related to the Greece and Euro news cycle.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Random Roger: "Two ways to be rich"

Random Roger the ETF guy, has this quotable line (link):
>>
There are two ways to be rich. One is having a lot of money and the other is having no overhead.
>>

The entry is about using debt and leverage to invest. While it certainly has made some folks rich, with real estate being exhibit A, it also has ruined some folks, again, most recently with real estate being the prime example.

Options can be used for leverage, however, as I have grown older and hopefully wiser, I tend to prefer low risk, low reward strategies. Once in a while I may take a flyer looking for the home run, most of those end up as losers.

Buy SPY (sell puts)

Buy SPY via selling Jul 88 puts SPY@108.5. This makes my July position equivalent to bracketing SPY at 88 and 118. Buying at 88, shorting at 118. The SPY 118 position is via short SDS Jul 30 puts. With these short strangle equivalents, I am betting that stocks and bonds are in for some range trade.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy TLT (sell puts)

Buy TLT via selling Jul 90 puts TLT@98.5. Bonds holding up well despite being overbought. Support at 91/90/89. I sold puts on TBT yesterday, so again the overall position is equivalent to being short puts and calls on TLT, betting on range trade. I am already short TLT Jun puts at 84 and 89 and those look to be in safe with time ticking down.

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy SDS (sell puts)

Buy SDS via selling Jul 30 puts SDS @36.3. The tape action on the stock market is looking ugly. I am short SPY puts and SDS puts, effectively a short strangle on SPY. Same with TLT, TBT, effectively a short strangle on bonds.

The SDS puts strike of 30 is equivalent to where the market broke in early May around SPY 118. So if I did get assigned on SDS it would be like shorting SPY around 118.

Meanwhile, GLD blasts higher, much to my surprise. Clive Maund has some interesting chart analysis on GLD, SLV, SPY at Kitco (link).

Long BRKB, GLD, SDS, SPY, TBT, TLT
SDS/SPY = short strangle on SPY
TBT/TLT = short strangle on TLT

Buy TBT (sell puts)

Buy TBT via selling Jul 31 puts TBT @38.8. If the stock market ever stabilizes, some of the risk premium that bonds got from all the news will recede. Support for TBT, an inverse bond ETF around 38.

Long BRKB, GLD, SPY, TBT, TLT

Headline: "pop goes the bond fund balloon"

Marketwatch has a lead headline with a cute cartoon about a possible bubble in bonds (link).

Retail investors have been pouring money into bond funds. The driving forces behind the stampede include: low CD rates and money market rates, and volatile equity markets.

Bonds have rallied on the news from Europe, so seem more vulnerable than a few weeks ago when TLT was 89/90.

Do CD rates have to start on up before folks will start fleeing bond funds, or will bonds be sold on anticipation of higher short term rates? Many pros are already either hedged or actively shorting based on fundamentals. When will the average investor make the move? I don't have a solid answer, but still believe as long as headlines and pundits warn of a bubble, the bubble isn't ready to deflate. The bubble is more likely to expand a bit more.

TLT and TBT were talked about during the ThinkorSwim market wrap. Anyone can listen, non-customers have to register. This week the TOS website link is having issues. Anyway, the anecdote is that one of the participants surveyed a room full of 400 people at a seminar. The question was "how many think interest rates are going higher?" Almost every hand went up. The second question, "how many have that position?" Only one hand went up. Now, the caveats are that this is anecdotal. The ThinkorSwim seminar participants mostly focus on options on stocks. So a person could justify either position based on the anecdote. Everyone is bearish on bonds, but only one trader is actually in the position.

Long BRKB, GLD, SPY, TLT

Thud

The stock market ends this holiday shortened week with a thud. Potential buyers don't like the jobs report. More problems in Europe, this time in Hungary bring in additional sellers. Gold and bonds rally today. I am tempted to sell some puts on TBT, but do not pull the trigger.

It is two weeks to June option expiration. My closest options to the strike price, are my short SPY 100 puts. SPY 104 is support. Getting an assignment and buying SPY at 100 wouldn't be the worst thing, but it certainly wasn't the plan when I sold the puts for a tiny premium before the decline began.

Long BRKB, GLD, SPY, TLT

May in review

SPY closed down about 8.3% month to month. GLD up about 3.4%, TLT a bit better, up about 3.6% (plus another 0.3% for the dividend). It remains to be seen whether GLD and TLT can continue to rally together.

Ned Davis is cited in a Barrons column (link) making an analogy to 1962. Back then the stock market fell about 23% over several months.

In the same article AAII sentiment is cited as 50% of individual investors surveyed as bearish. As long as sentiment is leaning that way, the odds of a major decline like we saw in 2008 remains small. Again, when so many people are looking for a decline, it is unlikely to appear.

To all the readers, have a nice holiday. For all the veterans, a heart felt thank you.

Long BRKB, GLD, SPY, TLT

VIX in plain English

Bill Luby at Vix and more explains in plain English what VIX readings mean in terms of daily moves.
http://vixandmore.blogspot.com/2010/05/rule-of-16-and-vix-of-40.html link
>>
Using the rule of 16 and the 1/3 trading days time frame, the following translations should be committed to memory:

* VIX of 16 – 1/3 of the time the SPX will have a daily change of at least 1%
* VIX of 32 – 1/3 of the time the SPX will have a daily change of at least 2%
* VIX of 48 – 1/3 of the time the SPX will have a daily change of at least 3%

Simple math allows us to do a linear interpolation. Today, with the VIX hovering around 40, options traders are expecting that the SPX will have daily change of 2.5% about 1/3 of the time.

Looking backward, as volatile as the market have been recently, only three days out of the past month have resulted in daily changes of 2.5% or more. In fact, for all of 2010, there have been only four days in which the SPX has been either up or down at least 2.5%.
>>

Long BRKB, GLD, SPY, TLT

Wild ride continues

Wow, another wild ride in the stock market today, with the SPY down 2.5% in the morning and then coming back to positive on the close. Again, fast markets tend not to be my friend. There is less money to be made after the dust settles, but for slow moving traders like me, it is the percentage play.

I am looked at selling puts on EFA (Europe/Asia ETF) and TBT (inverse treasuries), but didn't pull the trigger. If markets stabilize the little bond market bump up is likely to fade back to pre-Greece-crisis levels. XLE (energy ETF) is another thought. Selling BP puts is looking like a possible play with the company dominating the headlines.

Long BRKB, GLD, SPY, TLT

3-0-1 for May option cycle

For the May option cycle I closed out three winners, zero loser, one break even trade. The footnote is that I have some open trades that are currently deep in the red. The winners include two SPY May 96 puts and GLD May 92 puts. I closed out early some GLD Jun 97 puts at break even.

Looking back I can call it glass half-empty, or half-full. I survived without major damage. However, there were so many opportunities, and for the most part my timing was poor to horrendous. Even with my profitable trades, almost all could have been opened at 50% to 100% more in premium. My saving grace might have been keeping positions small, and my dislike for fast markets.

In one recent blog entry where I sold puts, I wrote that there will come a time when selling puts becomes the worst possible thing to do. Guess what? This month that came true. Volatility exploded as well so buying back any short puts became an amazingly expensive.

The good news going forward is that I am still in the game, with what I would call minimal damage to my account, and still have dry powder.

Long BRKB, GLD, SPY, TLT
all positions are short puts:
BRKB Jun 60
GLD Jul 100
SPY Jun 100 and Jul 66
TLT Jun 84 and Jun 89

Buy SPY (sell puts)

Buy SPY via selling Jul 66 puts, SPY @107.5. Market observers will note the SPY 66 level as the March 2008 lows. If we get back to there by July, basically the financial world has gone to heck. I am already short SPY Jun 100 puts.

Long BRKB, GLD, SPY, TLT

Sell GLD (cover short puts)

I reduce my GLD exposure by covering my GLD Jun 97 puts for a break even loss (about even on the trade but after commissions it is a loss).

Stock market is in melt down mode and margin calls may be spilling over into other markets. There was only about a 4% chance of the GLD puts coming into play, but I already sold GLD Jul 100 puts and feel overexposed. A full meltdown in gold would have done a lot of damage with the double position. I also have May 92 puts going off the board tomorrow.

There is never a good time for a trader to go cold. Sure I have had some major major drawdowns, however, I can take the total view, and that despite the recent swings am doing okay. I remind myself of rule #1, live to fight another day.

Long BRKB, GLD, SPY, TLT

Permanent Portfolio

This is a trading blog, however, I will sometimes write about long term money in general terms. I found an interesting discussion about a "permanent portfolio" at Random Rogers blog.

http://randomroger.blogspot.com/2010/05/etf-permanent-portfolio.html


>>
The original idea, I believe, came from Harry Browne in the 1970s allocating 25% each to gold, long term bonds, stocks and cash. Per Browne the mix should be able to weather anything that might come along.
>>

For those that know something about the markets, the temptation is strong to tinker with the allocations based on perceived valuations in each market, but in the comments that is often a way to decrease performance.

The fear is also noted in the comments, that it may stop working. As I noted 4/26/2010, a few posts back in "Everything seems risky" bonds, stocks and gold all look like they are vulnerable to steep declines. Historically, it is unlikely that all three classes crumble during the same time period and that is the strength of the idea.

I've been doing a short term trading version of the permanent portfolio by selling puts on GLD, SPY, TLT and continuing to have some exposure, no matter how overbought a particular market gets.

Long BRKB, GLD, SPY, TLT

Yo-yo market

Stocks, bonds, gold all had a relatively wide intraday range on Monday. Hulbert notes that stock newsletters bit hard on the recent sell off, going from near record bullish sentiment to bearish levels in a short period of time. This is good news for stock market bulls because it is difficult to have a big decline if everyone is anticipating a big decline.

May option expiration (this Friday) can't come soon enough, after the wild ride the markets have been on, with a corresponding increase in implied volatility.

Long BRKB, GLD, SPY, TLT

Buy GLD (sell puts)

Buy GLD via selling Jul 100 puts GLD @121.4. Yes, I am chasing, however, these puts are 20% out of the money, making for another low risk, low reward trade. Again, one way to think of the trade is being paid to place a lowball bid. In the unlikely event (5% chance) that GLD falls to 100 by July, I buy, if not I get a tiny premium.

As GLD moves up, the delta on my existing puts: short May 92, short Jun 97, are close to delta zero. Seasonally, June is one of the worst months for gold, so I may add to the July position if that unfolds.

Long BRKB, GLD, SPY, TLT

Buy BRKB (sell puts)

Buy BRKB via selling Jun 60 puts BRKB@77.7. Stock market has a massive relief rally at the open. Berkshire Hathaway puts showing 52% implied volatility, even as VIX collapses on the rally. One way of thinking of selling puts is being paid to place a bid on a stock. Margin requirements and draw downs are factors to be considered. ThinkorSwim software indicates 88%+ chance of puts expiring worthless.

Long BRKB, GLD, SPY, TLT

Buy TLT (sell puts)

Buy TLT via selling Jun 89 puts, TLT @96.3. Bonds have spiked up in price as the stock market falls. The put volatility for TLT is unusually high. 90 is a support area. I am already short TLT Jun 84 puts.

Yesterday's 998 point stock market decline is being blamed on someone entering a sell order for 16 billion instead of 16 million. Many of the trades from that time are being backed out. What a mess.

If someone was writing a spy novel, that kind of scheme would be a good ruse for manipulating the markets, especially with the knowledge that many of the trades will be backed out the next day. In the plot of the novel, it would be interesting to weave the story line about motivation. Straight cash would be a bit dull. A election in a major country adds to the intrigue. Perhaps I've read too many spy novels, but gosh, what a story it could make.

Long GLD, SPY, TLT

SPY support fails

Minor support for SPY at the 50 day moving average and the minor high at 115 are now broken. SPY 105 looms large on the intermediate chart. VIX now at 27, I said 29 might be a signal level, though that isn't any kind of exact science.

I am most concerned about my short Jun SPY 100 puts. I am holding, and thinking if I get exercised at that level, it is buying on a 20% pullback off the recovery highs from SPY 121. It is one way to rationalize what is now over a 200% notional value loss.

Long GLD, SPY, TLT

Three strikes for the bull?

Three strikes and yer out in baseball. Is the bull done for now? I'm thinking the stock market is in for some rough sledding, but the damage will be limited. A good many leading stocks and sectors are rolling over. However, the transports made a recent new recovery high, and that is one sign that the bull isn't done making noise.

Investment newsletter sentiment is near all time highs for bullishness, while the small time investors are still for the most part shunning stocks and still piling their money into bonds.

I am still in a low conviction mode. A mild stock market correction is what I expect, but it may be too shallow for slow moving position traders such as myself to make a profit on. Again, "fast markets are not my friend." I'll leave that to the more nimble traders that are at their trading screens all day (I am not).

Long GLD, SPY, TLT

Yikes

"Yikes" was uttered several times during a repeat of the CBS TV show "Big Bang Theory," on Monday night. It seems a good word for a day, when the stock market melts down -2.7% on SPY, while TLT and GLD are up big. All my short options, even TLT and GLD, went up in price because implied volatility shot up. VIX closes at 23.0.

There are some things that come to mind. First, is my now famous "don't do anything stupid." Second: "fast markets are not my friend."

From the bullish side, if looking at price, SPY 105 is support. If looking at time, two more hard down days might be a time to add some short term longs. If looking at sentiment VIX 29 might be a long entry for stocks.

From the short side, I already mentioned that May/June tends to be a seasonally weak time for the stock market. That the best time to go short is often on a rally failure (vs. trying to pick a top while the market is still moving up).

I've been trading and predicting poorly lately, so that makes this an especially bad time to take on more risk during a fast moving market. Those traders that are more nimble, with a hot hand, have lots of opportunities to look at.

Long GLD, SPY, TLT

"Everything seems risky"

I was talking about investments with a buddy at the local coffee shop and the subject phrase came up, "everything seems so risky." Stocks are up like a rocket, up 75% from last year's lows, 100% on RUT. Small investors are piling into bond funds like there is no tomorrow, while every other pundit is telling clients to avoid long term bonds, or even short them. Gold has had ten straight up years, has already quadrupled in price, and every major talk radio show has a big time gold sponsor.

It isn't always like this. There are times when folks are afraid of certain asset classes at the coffee shop and that asset class is beaten to heck and shunned.

I have used the phrase before "don't do anything stupid." I think that applies now. There is no need to be overly aggressive. As always, for the average investor, diversifying into age appropriate assets is almost always the best course. Do so gradually, buying and/or selling in small increments to reach the desired allocation. Those interested in low maintenance approaches can search on "lazy portfolio."

For traders, as always, this isn't an advice blog, it is an online trading journal, with occasional observation and commentary. Right now, virtually all the money is being made by bullish stock market traders. Only the most nimble bears can make money by "running between the rain drops" so they don't get wet.

Some day the bull party will end, the trend will change, but for today, the bull is still in charge. We are approaching a seasonally weaker period in the stock market for May/June and then for the entire summer.

Long GLD, SPY, TLT

When traders go cold, then what?

Traders can run hot and cold. When a trader is hot, everything seems easy, every trade seems to work moments after it is put on, every exit seems to be at a good time. When a trader runs cold, it is the opposite, trades considered but not taken do well, trades entered seem to go bad the minute the fill comes through.

Right now, I feel like I am running cold. The gold puts I sold the other week, went to -50% on the value within a day or two. This morning the SPY puts I just sold are at -50% from entry. Even though odds are that both are still highly likely to be winners if held to expiration, there was 50% more in premium to be made had I timed the entry points better.

Some things that traders do when cold are reduce position size, choose from less risky positions, and work through it. Some traders will take a break from the markets to clear their heads. Traders sometimes get "punch drunk" from taking too many shots to the head. Some get emotional and try to make up for losers by taking on more risk and like the punch drunk boxer in the ring this behavior can lead to getting knocked out.

Changing the subject to bonds, last night on Nightly Business Report there was another guest saying "stay away from long term bonds." This is the second one this month on the show, loudly and publicly saying that. When so many voices are doing so on business TV, odds of a bond rally are pretty good.

Long GLD, SPY, TLT

Buy SPY (sell puts)

Buy SPY via selling Jun 100 puts, SPY @120.8. Today's action looks like short covering. There is support at Friday's lows because short sellers piled in on the hard down day. I already am short SPY May 96 puts, but they are getting close to delta zero, as what I have called a "ridiculous rally" rolls on.

There will come a time that selling puts becomes the absolute worst thing to do. For the stock market, that time is more likely to be September/October than today.

Long GLD, SPY, TLT

4-1 for April, loss for the month

Four winners, one loser for the April option cycle. Winners were:
short SPY Apr 90 puts
short SPY Apr 101 puts
short GLD Apr 95 puts
short TLT Apr 86 puts
The loser was:
long SPY May 104 puts that was part of a vertical spread

Unfortunately, the loser was bigger than all the winners combined, giving me a modest loss for the month. It happens.

Remember what I said about active short term traders with 100% track records. Some are paper traders that don't even trade real money, some only report their winners, some are liars and charlatans.

The weekly ThinkorSwim market wrap (anyone can listen, just visit their site and register if you don't have an account) mentions some market leaders such as GS, EEM, ISRG and GOOG turning south. Some leaders such as AAPL are still holding relatively strong, and AAPL reports earnings next week.

This might be the start of a measurable stock market correction, but there is so much upside momentum, that the bulls are likely to fight. I'd add to SPY longs at SPY 105, and add to GLD longs at GLD 104. Of course, plans can change, depending on how and when they get there, and the news and sentiment background.

Long GLD, SPY, TLT

Buy TLT (sell puts)

Buy TLT via selling Jun 84 puts, TLT @89.84
Stock market lower, gold lower, bonds higher. My lone TLT position expires today. I sell the June puts to stay in. The GLD puts I sold the other day are down 50% on the notional value. I may double up, if GLD falls to 104. I am long SPY via being short May 96 puts, so they are way, way out of the money at the moment. If the stock market selling squall continues, as I think it will, another 3% to 5% down may be a decent entry for more short puts.

Some might think that the Goldman news came out on option expiration day for maximum impact on short term traders.

Long GLD, SPY, TLT

Buy GLD (sell puts)

Buy GLD via selling Jun 97 puts. My other options are near delta zero, so this keeps me in. It is another low risk, low reward trade. If GLD slides, I may double up or sell puts at a lower strike.

Long GLD, SPY, TLT
TLT expiring Friday 4/16

Same old, same gold?

Mostly the same old, same old for the stock market. This is the fifth straight up week. Implied volatility on options slides some more. Stock indices trade in a narrow range all week and end higher. Wash, rinse repeat, that is the same basic outline for this entire rally off the February lows.

Gold, on the other hand shows some spark. Some are seeing a breakout from a pennant. There is some overhead resistance at the old high. However, breakouts into resistance sometimes work out real well. I wasn't on this train when it left, so am reluctant to chase that train. Well, I did have what for me have become the usual low risk, low reward position of being short way out of the money puts. The delta is nearing zero so my GLD exposure is nearing zero.

TLT has provided some excitement. Again, so many in the popular media are saying bonds are going down, that the contrary play is to buy bonds, or sell the puts as I have. The implied volatility is relative low on the May TLT puts, so I am reluctant to sell a new batch. Those betting on a big decline in bonds are in a way betting on a strong rebound in the overall economy. I have a difficult time seeing that scenario, but lately my predictions have been bad and worse.

Long GLD, SPY, TLT

Cover short SPY (sell puts)

I sell my SPY May 104 puts for a 85% loss. It was part of a vertical put spread that I entered when SPY was at 112. SPY rallied, volatility declined, and that means a big loss on owned options.

I still have the other leg of the position, so am now long SPY.

Long GLD, SPY, TLT

Stocks move ahead during Q1

Stocks move ahead during March 2010 and the first quarter. Bonds slip to last in the 2010 derby, as measured from the 12/31/09 close (111.44, 107.31, 89.89):
SPY up about 5.2%
GLD up about 1.7%
TLT down about 0.4%

At the end of February, TLT was outperforming both gold and stocks, so things change.

For those readers that celebrate Passover and/or Easter, have a meaningful and joyous holiday.

Long GLD, TLT
neutral SPY

"Everyone" is selling puts

During the weekly ThinkorSwim market wrap up, they said that several times, that ThinkorSwim customers are selling puts in quantity. As most market veterans know when "everyone" is doing something, that can sometimes be a big red flag. As my readers know, selling puts has been my favored strategy for quite some time now. I don't like having so much company. I'd like to believe that ThinkorSwim customers are smarter than most other market participants, but there is danger in that kind of thinking.

Anyone can listen to the ThinkorSwim market recaps, whether they are a customer or not. Non-customers have to register. I would recommend it highly for those seeking an options oriented recap of weekly market action. ThinkorSwim is going to add another weekly session about trading psychology.

Long GLD, TLT
neutral SPY

Buy GLD (sell puts)

Buy GLD via selling May 92 puts. Way out of the money, as has been my recent pattern with GLD, so it is a low conviction buy. I am already short GLD Apr 95 puts.

The stock market is roaring back from its minor down day on the Portugal news. The rally is stunning. Bonds are acting terribly. My TLT position is now underwater. I may roll the short Apr puts to May, I doubt I'll double up on short puts like I am doing with gold. I am thinking to close out my long SPY May 104 puts when the delta gets to -5 or so, right now it is -7.9 with SPY at 118.

Long GLD, TLT
neutral SPY

Another day another rally

I am tempted to use the term ridiculous rally, because that is what it may seem like to stock market bears.

Momentum has a mind of its own. There has been so much of an upward bias, that even while it is weakening, it still prevails.

I am looking to sell some GLD and TLT puts for May expiration to add to the short April puts, but would like a decent dip to open the positions.

Long GLD, TLT
neutral SPY (four positions net neutral)

Buy SPY (sell puts)--now neutral

Buy SPY via selling May 96 puts. This gets me to about delta neutral after being slightly short. The position is four-headed, but the bottom line is close to neutral, benefiting from time decay.

The stock market was set up for a decline, but doesn't go down. Yes, it is extended to the upside, but the odds of a significant short term decline of 10% or more, seem slim.

For the 96 strike to come into play, would be about a 19% decline. It is difficult to see that. 10% stock market declines are common. However, 10% in a single month is an exceptionally bad month. Two -10% months in a row is the sign of a major bear market.

Long GLD, TLT
delta neutral SPY

3-0 for March option cycle

Three winners, zero losers for the March cycle. GLD, SPY, TLT puts all expire worthless. The SPY put was originally part of a vertical put spread. I made money on both legs of the spread for a total return of 60% on the initial investment. The small print is that because I legged out of the position, the margin requirement of holding just the short put was ten times the cost of the initial position.

Finally on Friday the stock market has some modest downside action. For stock market bears, the relentless and slow rally has been like water torture. Option premiums contracted and contracted. While a 3% or 5% down move might happen at any time, more than that will take a bigger foundation or a bigger event. Upward momentum still dominates the stock market and will take some time to dissipate.

There is a chance that the entire Friday event was related to options expiration.

Long GLD, TLT
slightly short SPY

Cash is trash day

Cash is trash for the day, as stocks, bonds, gold all move higher. I am surprised by the strength. Thankfully, I am not a stubborn trader. There are a fair number of stock investors that remain on the sidelines, now having missed the entire 70% up move from last year's lows. Worse, there are some stubborn folks that have been short, or keep shorting the stock market, and for the most part have kept losing money. Today's action doesn't look good for would be stock market bears, as the potential double top in SPY can now be said to have failed.

Today, I was tempted to add to gold longs, but told myself that a better entry point is coming soon. My recent SPY vertical put spread is down over 50% in value from the entry. Thankfully, I hedged with offsetting options. So the good news is that I haven't lost much on SPY positions during the last couple of weeks, the bad news is that I lost while all the bullish participants made money.

I wish I had some brilliant insight into what comes next, but I have been mostly ice cold as far as predictions. That said, all three of the March options that I am short look to expire worthless without any stress. This means another half-decent month as far as trading profits and losses on the monthly option ledger that closes this Friday.

Long GLD, TLT
ever slightly short SPY

Buy SPY (sell puts)

Buy SPY via selling the Apr 101 puts (SPY @115.3). The upside bias continues. This gets me to five open option positions on SPY and now is very slightly short.

Long TLT, GLD
slightly short SPY

A couple of anniversaries

It is a year ago that the stock market bottomed. SPY is up about 70% from the lows. It is also about ten years ago that the Nasdaq topped out (chart). In 1999 QQQ had just started and was all the rage as it doubled from 50 to 100. Today QQQQ is 46, who knows if and when it will ever get to 100 again. Glancing at the long term QQQQ chart, it looks extremely bearish for the intermediate term.

Another anniversary that I let slip is this blog's fourth anniversary. I started posting in February 2006. Posting publicly as I make my trades, has helped clarify my thinking. It helps me see what is working for me, and what isn't. I always tell people that there are a hundred ways to make in the stock market. The key is to find one that suits your particular personality.

With that in mind, some readers might find the blog to be boring. I don't post every day. I average maybe a trade a week, with occasional long periods of no trading. Lately most of the trades tend to be low risk, low reward trades. My "gunslinger" days are long since gone.

Happy anniversary, one and all. Cheers.

Long GLD, TLT
net short SPY

Wrong!

It never feels good to be on the wrong side of the market when news comes out. Being short SPY on this rally Friday is not a good feeling. Yes, the long puts are for May, so there is a lot of time, but a 35% haircut on the value of the position in a few days is not a lot of fun. Being long TLT was no picnic today either, as better than expected employment news often means bonds going down, yields going up.

As I have written before, be wary of any short term traders that claim 100% track records. Most likely they aren't trading real money in real time. More likely they are posting only winners in hindsight, or worse--have horrendous drawdowns that no live trader could withstand.

With infinite paper money, a paper trader can double down and keep doubling until the tide turns. In real life that kind of doubling is a recipe for losing everything. As I stated from the beginning of the blog (now more than three years), survival, living to see another day is priority one.

Long GLD, TLT
net short SPY

Buy TLT (sell puts)

Buy TLT via selling Apr 86 puts, TLT @ 91 even. The March puts that I am short are nearing delta zero, so I am opening up an April position. ThinkorSwim indicates a 12% chance of exercise on the TLT Apr 86 puts. As has been mostly the case, this is another low risk, low reward, high probability trade (88% chance if held until expiration).

Long GLD, TLT
net short SPY

Short SPY (vertical put spread)

Short SPY (@ 112.2) via a vertical put spread May 104/96. SPY near resistance. While SPY may well float higher, premiums are low on this calm morning. I figure the odds are good for a mood change back to bearish before May expiration.

bot SPY May 104 put
sld SPY May 96 put

Why those strikes? The 104 strike has a 50% chance of being touched before May expiration. Eight points wide is a good balance of risk/reward. Selling the 96 put reduces the cost and the time decay of just buying the put by a good 30%, yet still gives the overall position explosion potential if the market melts down.

Long GLD, TLT
net short SPY

Buy GLD (sell puts)

Buy GLD via selling April 95 puts, GLD @109.4. The March put position is nearing delta zero, so I am opening up an April position. This doesn't seem like a great entry, but time decay means there may not be a much better entry point in the time available.

Option traders need to look at both time and price. In general, option buyers need to get both time and price correct to make money.

Long GLD, SPY, TLT

Buy SPY (sell puts)

Buy SPY via selling April 90 puts, SPY @109.1. The delta on my March puts is getting close to zero. The big dip this morning is an opportunity to to get some elevated premium on April options. If I had to guess, I would guess SPY continues lower. However, for the 90 strike to come into play, stocks would fall another 18% by April, which would be full meltdown mode, and I don't see that.

Again, stock market declines of 10% are common. However, -10% in one month is an exceptionally bad month. Two such -10% months is a row would be even more exceptional. It seems like a relatively safe bet to take the other side.

Long GLD, TLT, SPY

Bears on the run

The stock market decline after the Consumer confidence number came in weak seemed too easy an opportunity to go short. The market had been up five days in a row and was near technical resistance. So what happens the next day? All those bears find themselves in a trap, and either have to cover and take their lumps, or hold on with losses.

GLD (chart) is showing a pattern of lower lows, lower highs--that is bearish.

TLT showing some strength, and is still outperforming both GLD and SPY since January 1. Who would have thunk that? For the most part, the news hasn't been surprising, just the usually chatter and reports. However, the sentiment on Treasury bonds was so bearish at the start of the year, that even though the news was about as expect (perhaps a bit worse for bonds with the Chinese government reducing their bond buys) all the fundamental information was already factored into the price.

Long GLD, SPY, TLT, though all options have decayed to the point that I am closer to flat than long on all three.

5-0 for February

Five winners, zero losers--a good month of trading for the February option cycle. It was certainly a rollercoaster ride, as every position was in the red for a time, many deeply in the red. The winning trades were short puts on GLD, SPY, TLT, TM, and a long put on SPY.

Yes, long premium worked out for a gain this time, even though the odds are against that result. I lucked out on the long SPY puts (part of a bearish SPY vertical put spread) as the market continued straight up after I sold the puts. The option value declined about 50% in three days, as the market rallied and time decay started to accelerate on the March option.

Toyota TM moved lower from 77 to 70 after I sold the put, but the margin of safety of selling the 65 strike, way out of the money, worked out. The drawdown was over 150%. Drawdown is the hypothetical exit at the worst point in the trade. It is extremely relevant for sellers of options because of potential margin calls.

The markets "dodged the meteor" when a surprise Fed rate hike rattled the overseas SP futures, but strong buyers stepped in and bought in New York. If the market was more fragile, that kind of news could bring -200 or -300 on the Dow on the day. Doing it on option expiration can make for a lot of impact on financial markets.

Long GLD, SPY, TLT for March expiration, all short puts

Upside bias

I've been busy with other things, and not spending so much time on the markets. There is a mostly upside bias. Some would say it is due to all the liquidity being pumped in by the Fed.

The bears have been hit hard lately. Later in the year, the tax law sunsets will loom larger. Taxes on dividends and capital gains are going back to the old higher rates. I don't know how much selling or reallocating this is going to cause, but it could add fuel to any equity declines in the fall.

Long GLD, SPY, TLT, TM
I have options on all of these expiring this Friday and all are safe, barring a meteor strike kind of event. I have already sold March options on GLD, SPY, TLT.

Happy Lunar New Year

Gung Hwa Fat Choy. It is the Year of the Tiger, the white Tiger at that. Yes, that is the genesis of the name of the blog, the year of the tiger.

Over at MarketWatch there is this bit (article):
>>
Turning to fortune tellers for the year ahead also offers limited comfort. Brokerage CLSA, in their annual light-hearted feng shui guide for investors, warn that Tiger years are typically marked by dramatic changes and even upheaval. Further, much like the tiger itself, the year will be energetic and powerful, but impulsive and risky.
>>

Cheers.

Long GLD, SPY, TLT, TM

Buy GLD (sell puts)

Buy GLD via selling Mar 91 puts, GLD around 106.50 at the time the order was filled. One person describes the trade this way, "you get paid to place bid." If the underlying goes down to the strike, you buy, if not you get the small premium. (I already sold Feb 92 GLD puts, and those are almost sure to go off the board.)

As for the stock market, it reminds me of the old saying about weather in the Midwest: "if you don't like the weather, wait a bit, it will change." Don't like the mood of the stock market, don't worry it will change. The market swings quickly from greed to fear and then back again.

Long GLD, TLT, TM, SPY

Buy SPY (close long put)

Buy SPY via selling the Mar 102 puts that I own, for a tiny profit, SPY at 107.05. Time decay is starting to accelerate. I entered this trade as part of a 102/94 vertical, and am still short the SPY Mar 94 put.

Yesterday's trade selling TLT puts was about as poorly timed as any. Soon after, TLT dropped on “saber rattling” by Chinese military officials saying that their government should sell some of their treasuries. It happens (SPY drifting lower as I type this up, too--I don't have much touch right now.)

I may sell a March GLD put soon, but would like a better entry point.

Long GLD, SPY, TLT, TM

Buy TLT (sell puts)

Buy TLT via selling Mar 86 puts, TLT at 91.50. I would have preferred to wait for TLT to decline under 90, but now am thinking the decline may come too late, to get much premium on March puts.

Remember the drumbeat at the beginning of the year that inflation was sure to rise, and bonds were sure to tank. So far it hasn't happened. Right now TLT is one of the better performing asset class long ETFs for calendar 2010.

Long TLT, GLD, TM
Short SPY

Weathering the storm

Reports are for a "snow" day in New York, so don't read too much from today's action. The ride has seen volatility rise. Overall, I still believe that the stock market trend is for lower lows. However, it is not going to be a straight down hill ski run. I am looking for an entry to roll the TLT short puts so that I continue to have exposure.

Long GLD, TLT, TM
Short SPY

SPY target 102.5, GLD 99

My chart reading gives targets of SPY 102.5, and GLD 99, TLT 89. As always, predictions can be entertaining, but the money tends to be made in managing the risk, with right sizing of positions, finding good entry points, and timely exits.

Wow, what a wild ride for most markets on Friday. Again, the exhortation is "don't do anything stupid, fast markets are not my friend." A reassuring thought is that sometimes option positions can be self managing, if the size remains small and the position is properly constructed.

My SPY position is:
short Feb 98 put
long Mar 102 put
short Mar 94 put
That boils down to net short SPY, but not by a lot. If the market decline continued to accelerate down, gamma would kick in and the position starts to reverse to net long SPY.

I'll state the obvious, options are not for everyone--there are a lot of variables.

Long GLD, TLT, TM
Short SPY

Bumpy ride

It sure has been a bumpy ride, especially in Toyota. I am holding my positions for now. I have a huge percentage loss in my TM short puts, though it is a relatively small dollar amount on a small position.

The stock market and gold are having their ups and downs as well.

Long TM, GLD, TLT
net short SPY

Doubling down with a "Texas" hedge

I haven't heard the term Texas hedge before. It is used in this Barron's article (link).

This is the context...
>> "I am thinking of selling Intel March 20 puts -- and as a hedge, selling an odd lot of the 17.50 puts as well," he said.

The natural question is: Why would someone bet that investors are too afraid and sell say five Intel March 20 puts and hedge with less than five March 17.50 puts? The likely answer is because he's willing to wager big that even if he misses out on the March 20 put trade, he'll make his money back.

"I love the Texas hedge," the trader said, referring to a position that increases risk even though a hedge is supposed to decrease risk.
>>

Market action has been surprising. After spending some time this past weekend looking at charts, I thought more downside stock market action was likely, not a big rally day. I also thought gold was in for more downside. I lucked out on getting in near the bottom on Toyota (TM), though as almost always it is a small bet.

Long TM, GLD, TLT
Net short SPY

Buy TM, short SPY

Buy TM via selling Feb 65 puts TM at 77.5
TM recall is all over the news. The stock is down about 10% over two days. It may go lower, but the worst of the news may be out. Support at 75 and then at 70.

Short SPY via buying a March 102/94 vertical put spread, buy the March 102 put, sell the 94, SPY at 109.0.

Long TM, GLD, TLT
Net short SPY

"Don't do anything stupid"

Lots of trades are tempting, then I remind myself that fast markets are not my friend, that I already have some exposure. The other voice tells me "don't do anything stupid." Yes, there are opportunities as markets are moving. The other side is that risk is escalating too.

The romantic view is buying the lows, selling the highs. The reality check is that scenario rarely happens for those trading real money in real time.

TM, NFLX are potential longs. I am tempted to do a SPY March bear spread to get net short SPY. For today the bearish SPY trade seems more of an emotional response than a well-thought out trade. On Tuesday, I placed an order for a SPY bear spread, but did not get filled, as the market moved lower.

Long SPY, GLD, TLT

Rally failure in stocks?

A few entries back I wrote about a possible rally failure in gold. Now it may be the time for the stock market. I'll repeat that calling top tends to be entertaining, not profitable. The higher percentage play tends to be to wait for a top to establish and short the rally failure, and that time may be here and now.

A 10% correction is normal and healthy. However, 10% down for SPY in a single month tends to be an exceptionally bad down month. So while a decline may be in the cards, I doubt it will be steep and sudden like the 2008/2009 bear market action. If there is to be an air pocket, it would be more likely later in the year (September/October).

I was tempted to double on my stock market position today, but an up day didn't provide a compelling entry point. I do see lower lows to be likely, but not a big immediate drop.

Long GLD, SPY, TLT

Buy GLD (sell puts)

Buy GLD via selling Feb 92 puts
I put my fishing line in the water on GLD as it nears minor support at 106. Stock market action is tempting as the sell off enters day three and VIX is racheting up.

I am taking on water on my existing SPY position and will hold. TLT is looking pretty good right now.

Long SPY, TLT, GLD

Ugly day for stocks and gold

The "sell the news" effect continues. Stocks such as IBM go down even on decent earnings, as are stocks with not so good reports such as CSX.

Right now I am telling myself "don't be the hero," wait for the dust to settle. The selling squall will likely pass, but that is never a certainty. I'm looking for an entry point in EEM and/or IWM on the long side, but again, will wait for the dust to settle. Fast markets with wide swings tend to be a dangerous place for relatively slow moving position traders like me.

Gold is looking weak in here. I tend to be long term bullish on gold, so didn't take the trade when I posted about a possible rally failure a few days back. GLD 99 would be a downside target if I were short.

Long SPY, TLT

1-0 for January

One winner, no losers for the January expiration cycle. The lone closed trade was selling SPY Jan 104 puts, a small minnow to be sure.

The headline for Friday is "worst day of 2010 so far." With headlines like that, it is likely that any decline will be modest because so many folks are cautious. It takes time to dissipate all the upside momentum in the chart.

Speaking of upside momentum, gold seems to have stalled for now. One scenario is another leg down taking GLD to 99. That would be the low range, the recent highs in gold are likely to provide resistance.

Long SPY, TLT

Good earnings from INTC

Good earnings news from tech bellwether INTC tonight. The stock isn't getting much of a boost in after-hours though, so it looks like most of the good news is already in the price.

My most recently entry was ill-timed. I could have gotten as much as 40% more premium on the SPY Feb 98 puts had I waited a day. As always, hindsight trading is easy, real time trading not so much. Once in a while a trader can get in a zone and seemingly have the Midas touch. The opposite seems more common, when every entry is greeted by a strong counter move, but that is likely my selective memory at work.

Long SPY, TLT

Buy SPY (sell puts)

Buy SPY via selling Feb 98 puts, SPY at 114.4

I kind of expect a mild sell off. However, these puts are at the 5% chance of expiring in the money, and I don't expect a steep sell off. Support for SPY at 103 and then 101.

I already have short SPY Jan 104 puts, but unless something like a major meteor strike happens those Januaries won't come into play.

I listened to the ThinkorSwim Friday market recap (if a person goes to their site and registers they can find the archives or listen to the next Friday recap). One nugget is that the VIX futures and options are already pricing in an expansion in volatility that often comes with a sell off. Another nugget was that some big tech stocks such as AMZN and GOOG are correcting, without their option volatility expanding. Another interesting bit is that many day traders and short term traders are trading from the short side, and haven't been making any money because the dips have been so shallow.

I can't draw any tradeable conclusions from all the above. Though, it seems to me to me that that odds of a big stock market sell off are tiny. That may happen much later in the year, but extremely unlikely in the near term.

Gold is up big today. Again, for those looking to short gold this is the kind of entry point to look for, after a dip then a rally still below resistance. That said, the long term trend remains up for gold.

Long SPY (2 positions), TLT