SPY Backratio

Sell SPY Aug 140 puts x2

Buy SPY Aug 145 puts x1 SPY@160.7

I add some bullish exposure with a third short put backratio. The way I like to do them is for a net credit, delta positive, theta positive. While it is a net long position, there is a big profit on a decline to the 140 to 145 area.The stock market appears to be rolling over. 

These backratios profit on a modest decline, but there is the chance for huge losses if the market crashes.

I continue to avoid bonds TLT and gold GLD. I am not nimble enough to catch the small moves, and the risk reward still isn't compelling for selling option premium.

Long APC BA BRKB HOT IWM KORS LGF NTAP PG SBUX

Net long SPY

Chart review 6/1/13

I often do a weekend chart review of the S&P 100 stocks, looking for interesting charts. The volatile market motivates me to do it this morning. I believe this is the first time I have posted on the topic.

Here is a list of tickers that I find interesting for my favorite strategy of selling out of the money puts:
APC Anardarko Petroluem
CL  Colgate 
COST Costco
CVS drug store
DIS Disney
NKE Nike 
NSC Norfolk Southern railroad
PG  Proctor & Gamble
XOP Oil Exploration ETF
 
VT, world total stock market is at the 50-day moving average with a bullish chart formation. Many big name "safe" stocks such as CL, MCD show a free fall. Yield oriented stocks such as TIP, XLU, HYG, JNK are also in sharp decline. 

Is it time to shift gears? The U.S. market still had a gain for the month of May, so the bears may have had a good hour, but are still hurting overall. Gold GLD and bonds TLT are not giving a clear chart signal.

One theory of mine, is that some hedge funds sold the stock market in the last hour on Friday so that their May end of month report would look better. Most U.S. hedge funds have lagged the gains of the U.S. stock market for calendar 2013. An hour burst of selling makes their statements look that much better in comparison. If this theory has some truth, then there will be a snap back, and the selling flurry was window dressing.

As always, no one knows why, or the future. Humans look for explanations, when it is often just relatively normal market action. I often write about a three-strikes and out, for topping behavior. Friday's sell off can count as strike two. The decline eats into my buying power, so while I am conservatively positioned, I have deployed a good deal of capital on my so-called worm trades. Worms, in terms of the fishing analogy of catching big fish, medium or small fish. The option market premiums have been so slim that I have been digging for worms. It remains to be seen if the worms will be my undoing. The odds are still heavily on my side.

The other cliche that comes to mind is "never short a dull market." Well, this market isn't dull any more. Predictions tend to be more about entertainment than profits. I'll let the market tell me which way the wind blows. At the start of 2013, I thought it would it be a down year for the stock market. WRONG. However, I quickly adapted to the reality and did not allow my prediction to get in my way.

Buy KORS LGF (sell puts)

Buy KORS via selling Jun 55 puts @65.0

Buy LGF via selling Jul 25 puts @30.0

Luxury goods maker and seller Kors had earnings the other day, and Lions Gate Entertainment today. These are more of my so-called worm trades, puts way out of the money, sold for tiny premiums. I missed a better entry on LGF as the stock rallied up before my order went through, even though I was on the bid. For both of these, I would consider doubling down if they dip, depending on what causes a dip.

Long APC BA BRKB HOT IWM KORS LGF NTAP PG SBUX

Net long SPY

Buy PG (sell puts)

Buy PG via selling Jul 67.5 puts @79.2

I open a July position in Proctor and Gamble. Chart support at 70. Yesterday's put sales on BA and IWM were poorly timed, but I have a lot of cushion. 

Overall, I am still under invested. I have some SPY backratios that will help in a 5% to 10% correction, and hurt in the case of a full crash.

Long APC BA BRKB HOT IWM LGF NTAP PG SBUX

Net long SPY

Buy BA IWM (sell puts)

Buy IWM via selling Jul 85 puts @99.6

Chasing markets isn't my favorite move. However, these puts are way out, and I have capital to deploy. As has been my recent pattern the sold puts are further out than usual. This means a smaller premium, with a higher probability of success. Some of the premiums are so small the fishing analogy is down to eating the worms.

Later in the day, I sell some BA Jul 85 puts @100.8. Story is similar. Boeing in an uptrend. Chart support at 89 and 85.

I am tempted to sell puts on TLT the bond ETF, but the distortions in the bond market make it difficult to read. Same with gold. Central banks and other big players are distorting the markets and they aren't motivated the same way as other traders.

Long APC BA BRKB HOT IWM LGF NTAP PG SBUX

Net long SPY

Lifestyle creep-why the rich don't feel rich

There is an article on Yahoo (link) about a top 1% income earner that doesn't feel rich. I've seen another quote from the 19th century about a man that has an income of 20 pounds per year and expenses of 19 that feels well to do. Readers know that I am an advocate of living under your means. Luxuries are fine as long as they are conscious choices.

I remember when the show Lifestyles of the Rich and Famous started. I think that show and similar shows did a lot for lifestyle creep. It used to be that a $100,000 or $200,000 car was all that, and a $5,000 watch, an expensive one. Now the luxury companies have gotten word and have upped the ante. There are now super cars that cost seven figures and another $50k or $100k a year to insure and maintain them. There are watches that costs the same. No wonder the one-percenter doesn't feel rich, they can't buy into the lifestyle of the one-percent of the one-percent.

Even at the very top, billionaire Mark Cuban considered buying the baseball team, the Los Angeles Dodgers and the price tag was too high. In the art world, not so famous pieces are sometimes fetching astronomical prices at auction.

For average folks, the word balance is a good one, a balance between saving and spending. Misers tend to be unhappy people. At the other end, those that stretch their lifestyles to spend 100% or more of their income often feel worried and stressed. These extremes are not good things. The miser doesn't enjoy their money. The spender that lives on the edge feels a lot of stress when an unexpected bill comes up or there are rumors of layoffs. A healthy balance, making conscious choices about where the money goes, about the kind of life you really want, are what I suggest. A healthy dose of charitable giving and/or giving of time is another component for a grateful and healthy life.

Finally, for Memorial Day, here is Trace Adkins' Arlington on Youtube (link2). Remember and honor those that gave their lives.

Buy APC (sell puts)

Buy APC via selling Jul 75 puts @88.2

I open a July position in Anadarko Petroleum. A decline to 75 would wipe out all of the gain for calendar 2013. APC has been my biggest winner for the year.

Some of my earlier put sales for this month are taking on water. However, most are still out of the money. It remains to be seen how bumpy the ride will be. I came in with a lot of dry powder and am deploying some.

Long APC BA BRKB HOT IWM LGF NTAP PG SBUX

Net long SPY

Buy BRKB and SPY Backratio

Buy BRKB via selling Jul 100 puts @110.9

Buy Bershire Hathaway on this minor decline.

 

I layer another put backration on SPY @165.2

selling 2x Jul 148 puts

buying 1x Jul 151 puts

I like to do the backratio as net bullish. It has an explosive profit on a decline to 148 at expiration. Large losses occur on a decline below 145. No move or a move up lets me keep the tiny credit.

I have had the stock market on storm watch for some time now. Is this two day hiccup a passing shower, or the start of monsoon season, or something in between?

Long APC BA BRKB HOT IWM LGF NTAP PG SBUX

Net long SPY

Buy NTAP (sell puts)

Buy NTAP via selling Jun 35 puts @38.3
Network Appliance gapping higher after earnings and a dividend. Chart support at the gap and at 36.

Long APC BA BRKB HOT IWM LGF NTAP PG SBUX
Net long SPY

Buy IWM via selling Jun 90 puts @99.2

I add a layer of short IWM puts. Chart support at 90. This is like putting in a bid at the 90 level, which is a 10% pullback. If it doesn't go there, I collect a tiny premium. It is tough to find ideas with premiums low, the holiday next Monday, many stocks over bought and extended.

Long APC BA BRKB HOT IWM LGF PG SBUX

Net long SPY

12-3 for May, grade C+

I count 12 winners, 3 losers for closed option trades during the May option cycle. The losers include AMZN, SPY, LEN. It is a coulda-woulda-shoulda kind of month. Call buyers hit mammoth home runs and hedgers like me fell further behind the roaring bull market in stocks. Both Boeing and Telsa were mammoth home runs for the call buyers. I wasn't a call buyer, I was a seller, and took losses on the calls I sold on BA, LEN, TSLA. Only Lennar Homes counts for this cycle because I closed the other trades last month. 

Some like to paper over their losses. Some never seem to report any losses. Beware of anyone that never loses, the vast majority of the 100% winner on the Internet are liars or paper traders that don't even have any money at stake. I tend to be hard on myself and thus the grade of C plus even though in dollar gains this is by best month of the year.

I can be thankful that I avoided trading gold or silver, or bonds, as those markets were treacherous this month.

Going forward, I have have smallish short put positions, less than usual. Like I have been saying the stock market is on red flag warning. There is the Schiller PE10, the Value Line Appreciation estimate, a bull on the pogo stick on the cover of Barrons are the main factors. On the bullish side, is that there is no chatter at the coffee house or at church about the stock market. More people seem interested in gold than the stock market. Again, this points to more pain for gold bulls.

Again for gold, averaging down during a major bear market is the road to the poor house. Gold has had 12 straight up years. If this is a down year, it may be the first of several.

Buy HOT SBUX (sell puts) SPY backratio

Buy HOT via selling Jun 60 puts @66.7

Buy SBUX via selling Jun 57.5 puts @63.8
Buy SPY via selling Jun 153/156 put backratio @166.0

I add longs for Starwood Hotels HOT and Starbucks coffee SBUX. Again, the puts I am selling are far out of the money and the premiums are tiny. I am way underinvested, have been for most of the month. These put sales are part of the scaling in process. I was hoping for more of a pullback for a better entry, but option expiration is tomorrow. I have been sitting on a lot of buying power, and have a slew of short option positions will expire tomorrow, that will free up yet more capital.

The SPY backratio consists of selling two Jun 153 puts for every one Jun 156 put bought. It nets out to slightly bullish at about break even. There is a big profit on a decline to the 153 to 156 range. Losses get large if the decline is below 150.

So while I continue to have a red flag warning up for the stock market, I don't want to sit with zero long exposure as the zombie bull rally rolls forward. I think of it as having about half or one-third the exposure I might have if I were full on bullish on the stock market. The SPY backratio gives some modest protection against a normal correction.

Elsewhere, gold is drifting back to its recent lows. Bonds have an uptick after a week of selling. If I were to anything in these two markets, it would be a long bond position.

Long BA BRKB HOT IWM LGF PG SBUX

Net long APC SPY
expiring LEN TSLA WFC

Cover LEN short calls (ouch)

I cover my short LEN May 43 calls @43.9

Lennar Homes is breaking out to new highs, and XHB the home builder ETF is also trending higher. As always when being stopped out, there is a chance of a whipsaw. This is the last card from three sets of calls I sold on the dip back a few weeks ago. Like the other two short call trades, LEN was a big loser. 

The others were Boeing BA and Telsa Motors TSLA. Had I stuck to my guns on those, I would be looking at huge losses because the rally has rolled on. Today is a bad day to be short as the stock market rally picks up speed.

Long BA BRKB IWM LEN LGF PG WFC TSLA

Net long APC SPY

Buy BA PG (sell puts)

Buy BA via selling Jun 82.5 puts @95.0

Buy PG via selling Jun 70 puts @78.9

I add June positions for Boeing and Proctor and Gamble, as I continue to scale into a few June longs. Again, I am way out of the money on these put sales and the premiums are tiny. What I call the zombie bull continues to lurch forward. I have also seen the phrase, the most hated rally of all time. 

 

Small investors are adding to longs, but are still under invested in stocks. Money managers, especially hedge fund managers are way behind for calendar 2013 and are in a pickle. Buy the rally and perhaps get trapped at a top, continue to avoid stocks and the performance gap is getting wider with each passing month.

Elsewhere, my short strangle (short puts and calls) on LEN Lennar Homes is now in the money and causing me distress. For now I am staying.

Long BA BRKB IWM LGF PG WFC TSLA

Net long APC SPY

Net short LEN

Buy APC (sell puts)

Buy APC via selling Jun 72.5 puts @86.3

I open a tiny long position for June in Anadarko Petroleum. APC has been my biggest winner this year. This is yet another low risk, low reward trade, a little further out of the money than usual due to my red flag warning on the stock market.

Telsa Motors has had an amazing rocket move up, burning the many shorts in TSLA. For a brief time I was short May 50 calls. Had I stayed with that position it would have been an epic 100x loser. The other side, is that someone had the chance to make 100x on their money in a few weeks. Jackpot results are why people buy calls. However, like big slot machine jackpots, the math works out so that all the losers pay for the big winners with plenty extra to build and staff the huge casinos.

In precious metals, I continue to believe that those buying physical at the high premiums being asked for by dealers are unlikely to make much money. Silver buyers need about a 35% up move in the spot to get to about break even. Yikes. 

Averaging down in a strong bear market is the road to the poor house. It will only be in hindsight that we will be able to tell if the precious metal bear is Ursa Minor or Ursa Major. If major, then it might be more than a decade before those buying today will get a chance to get out even. As always I am talking about paying retail prices. The dealers are making money on the spread, the retail buyers paying that money.

Long BA BRKB IWM LGF PG WFC TSLA

Net long APC SPY

Net short LEN

Buy BRKB IWM (sell puts)

Buy BRKB via selling Jun 97.5 puts @110.4

Buy IWM via selling Jun 85 puts @96.1

I take tiny June positions in Berkshire and the Russell 2000 ETF. Both are way out of the money and the premiums are tiny. I am doing it because I have virtually no exposure. 

These are even more conservative than my usual low risk, low reward put sales. I remain skittish, but don't want to sit entirely out. I plan to add a few more positions for June, but it will fewer positions that I have been doing because I still have the stock market on storm watch.

APC Anadarko Petroleum came out with good earnings yesterday, and sold off on a reversal day. I paln to do something with APC for June, but am waiting for a better entry. The May APC option sales are looking good for now.

Long BA BRKB IWM LGF PG WFC TSLA

Net long SPY

Net short APC LEN

Worst feeling, short in an up market

One of the worst feelings is to be short stocks when the market is moving up strong. At this week's ThinkorSwim recap, one of the participants was short and losing. Most folks assume that a person involved in the stock market makes money when the market moves up. So it becomes ever more awkward when making casual conversation and saying nothing or trying to explain why it isn't working out.

That said, I am not short, I am still net long. The other possible subject line was "Sitting out the Dance." I did open one tiny position for June in LGF, but for now, that is it for June. Like most hedgers, I am lagging behind the stock indices in terms of performance for 2013. I have a list, and will continue to consider some low risk, low reward positions. The stock market feels so weird, I don't see it as a time to be aggressive, long or short. The call buyers have done very well lately, but it hard to say when the rug will be pulled from them. Same with bonds and gold, the markets feel so weird, it is not a time to be aggressive long or short.

Meanwhile, in Omaha, Berkshire is having its annual shareholder weekend. Some describe it as a Woodstock for stock market geeks. I've never been. Here is a link to the Wall Street Journal's blog about the questions segment: link

I know some of the readers are interested in gold and silver. For now, short feels like the percentage play. Buyers of physical silver may need a huge rally just to get break even. I remember buying some 90% when silver was around $32, and paying 22x and 23x. It is tough to find 90% at 19x or 20x, which is about where dealers will buy it, if and when silver goes back to $32. This is not a good percentage play, no matter what emotion is involved. The exception is for those that can get the dealer's side of the spread. Dealers tend to win as long as the game keeps going.

As always, I prefer to move slowly into stable markets. Fast markets are not my friend. During fast markets spreads widen and small fish get gobbled up by the bigger fish with staying power. The small fish are often best off seeking shelter to avoid being the food. For the slow moving traders like me, sometimes the smart move is to sit tight. I'll leave the magician's tricks and heroics for the more nimble.

Crunch - cover AMZN after earnings

I buy back the short vertical put spread on AMZN for a small loss @254.5 down over 7% on the day. The loss is small in dollar terms, big in percentage terms, especially if I add in the four commissions. 

I don't like the way the stock is trading. Some talking heads were all positive on it, despite the poor tape action. If the over all market tone were better, I might have held on, but I recently wrote about a storm warning for the stock market. A big storm could capsize the AMZN boat. I took a chance, as we all do taking a position before earnings. I lost this time.

Long BA LGF PG WFC TSLA

Net long APC SPY

Net short LEN

Buy AMZN (sell vertical)

Buy AMZN via selling a vertical put spread

selling the May 235 puts, buying May 225 puts @272.9

There was a headline story on Yahoo about Amazon being ready for a pullback. It is always risky taking a position ahead of earnings, but if anything the chart looks bullish. The vertical spread caps any loss and helps with the margin requirement on a high priced stock. The trade off is the cost of the lower put.

Elsewhere, gold continues its bounce back. One scenario is a 1987 style crash, when the stock market went up six fold after its crash. I'm not predicting, just saying there is a chance. The rally in Lennar Homes makes me net short. For now I'll hold on to both sides of the short strangle (short May 43 calls, May 36 puts).

Long BA LGF PG WFC TSLA

Net long AMZN APC SPY

Net short LEN

Storm warning for the stock market

I see some red flags for the stock market. A couple of quantitative red flags are the Schiller PE10 (a ten-year rolling PE ratio), and the Value Line appreciation potential. Both indicate limited upside for the stock market. These two tend to be very slow moving and a bit early, but both have a good track record.

Another red flag was a bull on a pogo-stick on the cover of Barrons. Bulls on covers are a huge negative, and have marked more than a few market tops. There is also a bear on the cover, but the bear is confused and bewildered by the bull hopping over him.

I see these more as gale warning flags in the harbor. The storm is still out at sea, but it is on its way. However, like weather forecasts, the timing, the severity of the storm are difficult to pinpoint. 

One modest positive is the chatter amongst people I run into. At the investors meetup it was mostly a serious crowd, almost all market veterans. I got that feeling by the kind of questions asked and the stocks mentioned. At market tops, a lot of novices are wanting in. The meetup is advertised on the Internet, so a lot of people see it. Other folks still say crap like it is all a Fed induced stock bubble, or the stock market is fixed, and a person would be crazy to want to play the market. These tend not be things know-nothings say at market tops. At market tops, people want tips, they want to invest their tax refund or some other tiny amount, and may want me to help them get started.

Still, I am putting up some gale warning up. It doesn't mean it is time to duck and cover, but some caution, some storm preparation is a good thing. To use the boating analogy, it is not the time to be planning a deep sea fishing expedition. And as I always say, no indicator is 100%. 

Some like to wait for technical confirmation, for the market to actually turn down before acting. One popular indicator is the 200 day moving average. Another is looking for three consecutive down months of 2% or more. Sharp corrections are more indicative of a bull market, while a slow rolling over, often means the longer term trend has change. While I have not back tested for precious metals, the 2% up (or down) for three consecutive months might be useful for those markets as well to signal a change in the intermediate trend.

As an aside, old timers may remember the pre-Internet days, when the Value Line binder in the library was like a wizards tome. Only a few seemed to know about it, and how to read it and use it. Another book of spells, so to speak, was the small S&P paper stock guide that had one line of info for many of the stocks that Value Line did not cover (1700). I sound old, don't I. Now anybody can get much more up to date information on any of the many websites, often for free.

Apple, climax tops, over owned stocks

Barry Ritzholz writes about Apple (link) and uses three criteria for a stock being over loved:
>>
Want a more objective measure of overowned/over-loved any stock is? Look for companies that have these 3 characteristics:

1) More than 90% institutional ownership;
2) More than 90% Buy or Strong Buy;
3) 1000% gain over the prior 3 years.

 >>

I attended an Investor's Business Daily CANSLIM meetup recently. There they use the term Climax top as a technical condition. They loosely define a climax top as occurring at least 18 weeks after a proper breakout from a base, with a quick additional 25% to 50% gain. Some use the adjective parabolic to describe the chart. Climax tops can also occur in commodities. The 1980 precious metals peak was an example. The more recent move to $49 in silver might also be loosely described as such.

Using either set of criteria, it can be difficult to time the exact top. However, it gets extremely risky to be long, when a stock becomes over owned, or when it goes parabolic. It is tricky to try and short it as well. Often times, better to wait until after the first break and short the rally attempt.

14-3 for April, grade C+

Fourteen winners, three losers for closed trades during the April option cycle. I give myself a grade of C+. The losers were some whoppers in terms of percentages. The SPY was up slightly during this time frame and my account down just a smidge.

This was an event filled month, with a crash in gold, a flash-crash on the German stock exchange, a terrorist attack in Boston. I got a bit too complacent. My defensive action during the Korean saber rattling did not work out, and resulted in two of the three losers.

The mini-crash in gold caught me by surprise. What is more surprising, in some ways, is that gold hasn't had those kind of moves before. Every other commodity has experienced it. Stock traders are taught to expect -10% down days about once every five years or so during normal markets. That a 10% down day in gold was categorized as such an unusual event is interesting and revealing to me.

Going forward I have more exposure than I would like. The market movements gave me a jolt, and I am a still out of balance.

A lot of folks are interested in gold. For now I want to steer clear and leave it to the more nimble traders. Again, V-bottoms tend to be rare, and by definition, only a very few buy at the low of a V-shaped chart bottom. I want to let the dust settle, and let the ducks line up in a more organized fashion. I may take a small position here or there, but gold is a muddled market.

Long BA LGF PG WFC TSLA

Net long APC LEN SPY

Taking part of a loss (APC)

Sell APC (cover short puts)

Buy back 1/2 of my APC May 75 puts @79.3

I lighten up my long position on Anadarko Petroleum. Support is near, but I have way too much exposure. The loss is a rather stunning -78% or -350% depending on how one calculates, in percentage terms, but not so bad in dollar terms. Much of this year's profits are at risk as my delta is increasing with each move lower. I am still net long APC, but not quite as much. I do have some APC Apr 77.5 puts and they may come into play with another big down day.

Long BA BRKB IWM LGF PG WFC TSLA

Net long APC KORS LEN SPY

Gold's 7-sigma move

Zero Hedge says gold had a 7-sigma move, or seven standard deviations. The math seems a bit off, but here is a blurb about 3-sigmas
>> In statistics, the 68–95–99.7 rule — or three-sigma rule, or empirical rule — states that for a normal distribution, nearly all values lie within 3 standard deviations of the mean.

About 68.27% of the values lie within 1 standard deviation of the mean. Similarly, about 95.45% of the values lie within 2 standard deviations of the mean. Nearly all (99.73%) of the values lie within 3 standard deviations of the mean.
>>

and another about 6-sigmas.
>>
Management uses Six Sigma as a technique to maximize the quality of its product. The goal is to achieve the least number of defects per unit of production. A Six Sigma process produces product 99.99966 percent of the time without errors or defects. This translates to 3.4 defects per million units produced.

>>

A painful day for me to be sure, but it would have been much more painful had I sold some puts on gold like I thought about doing. Sometimes the tea leaves don't work out, even with an article in the NY Times and a high profile table pounding from Goldman, sometimes these indicators fail.

Many of us have gold to protect us from 7-sigma moves in the financial markets. As I sometimes write, it is the big four historic events that we insure against: Major war, revolution, famine, plague. These are the events that can topple governments, cause their currency to go to zero. In the absence of these events, it just doesn't happen to major powers. Minor powers are another thing.

Some cite the fall of Rome but that was ten generations from peak to fall, and there were a fair number of major plagues and famines during that period.

These big moves are big reasons why I favor being diversified, and am almost always cautious with reserves. I started trading in the summer of 1987 three months before the crash, so in the back of my mind, I know that these 50 year storms can happen. Gold has shown itself not to be immune. This storm started in gold, and the margin calls in that market helped weaken the stock market.

I am not a fan of fast markets. There is no need to rush in because V-shaped bottoms tend to be rare, and by definition only a very few can buy at the bottom on the V. Many more suffer financial harm, thinking there will be a V, when it is a waterfall decline. So I prefer to wait for the dust to settle, perhaps take a small or partial position with the plan to add more.

Cover TLSA short calls

Cover TSLA May 50 calls @45.0

Burned again! Like I said, the so-called defensive action I took, selling calls, has burned me on Boeing and now Telsa Motors. LEN isn't looking so good either. These things happen. I hate covering at a huge percentage loss, but I hate risking a bigger loss even more.

Adding to the gold sentiment is a New York Times article about how gold is losing its luster. Certainly after 12 up years and a move from $300 to $1900, gold is due for some down time. That said, I don't think this is the final top. Timing the moves is tricky. For those long term investors that are light on gold, this is a good time to add.

Long BA BRKB IWM LGF PG WFC TSLA

Net long KORS SPY

Net short APC LEN

Rebalance APC, thoughts on GLD

Sell APC May 75 puts @87.0

I nudge my complex position in Andarko Petroleum closer to neutral.

Elsewhere gold was downgraded by Goldman Sachs. Unfortunately the GLD put option premiums are small, when factoring in the substantial margin requirements and the possibility of a big move. Buying calls might be the percentage play, but buying calls isn't something I like to do.

 

Long BA BRKB IWM LGF PG WFC

Net long KORS SPY

Net short APC LEN TSLA

Cover short BA calls

Cover short BA (buy back short calls) @88.4

This is a late report, I cover one leg of my short strangle on Boeing for a big percentage loss. BA and the rest of the stock market continue to move higher. By the close, BA backs off its highs, so this specific move was ill-timed. The reason I did it was so the overall April Boeing positions close the books for the month at about net neutral. The quick snap back is a hazard of using stops. The hazard of not using stops is a powerful move that results in a huge loss.

Most of the defensive action I took last week has turned out to be ill-timed. The zombie bull market as I call it, continues to lurch forward, sweeping away the bears, or the hedgers. My short strangles on APC, LEN and TSLA are now delta negative, meaning net short.

Long BA BRKB IWM LGF PG WFC

Net long KORS SPY

Net short APC LEN TSLA

Defensive action on APC BA LEN TSLA SPY

Sell APC via selling Apr 90 calls @83.5
Sell BA via selling May 92.5 calls @84.9
Sell LEN via selling May 43 calls @38.5

Sell TSLA via selling May 50 calls @40.8

Sell SPY backratios May 148/145 puts @155.7

buy May 148 puts, sell 2x May 145 puts

I got a bit too aggressive with my longs and am paying for it today. I take defensive action in Lennar Homes, Tesla Motors and the S&P 500 ETF. The backratio is delta positive (a bullish bet) with a large profit if SPY closes around 145 at May expiration. A decline below 142 causes losses. 

I stepped in the doo-doo with LEN and TSLA, and doing damage control by selling calls rather than closing the positions. The risk is a whipsaw because a steep rally can cause big losses on the short call portion of the short strangle.

This squall may be a passing shower, or it may be the start of something bigger. I move closer to delta neutral, but still have a bullish bias. Sharp, short corrections are what is to be expected during bull moves. However, calendar 2013 has been so placid, the uptrend so gentle, that it feels like a shock to have a sharp down day.

 

Long BA BRKB IWM LGF PG WFC

Net long APC LEN KORS SPY TSLA

Buy TSLA Rebalance APC

Sell APC May 95 calls @86.5

I rebalance my position in Anadarko Petroleum. With a modest decline, my delta has increased. I am offsetting that by selling some calls. My position is short strangles (short both puts and calls) net long. So I am betting on a trading range, hopefully with an upward bias.

Later in the day, I sell some puts on TSLA Telsa Motors

Sell May 30 puts @44.0, the stock is up on news of better than expected sales and a break even quarter. Telsa is heavily shorted. The chart is supportive, though the range is wide. 33 is the bottom of the breakout channel. The spreads on the options can be wide, so I don't want to have to roll or close the position.

Long BA BRKB IWM LEN LGF PG SPY TSLA WFC

Net long APC KORS

First quarter perspective

For the first quarter some of the ETFs:
+12.0% Russell 2000 IWM
+10.0% S&P 500 SPY
- 2.8%   20-year US Treasury TLT -2.8
- 3.6%   Emerging Markets EEM
- 4.7%   Gold GLD
- 6.6%   Silver SLV

Three more quarters of the same would mean +40% to +50% for the stock market, so odds are against that. Same for silver, three more quarters like this one and it is down 30% for the year, unlikely. (None of the above factors in the modest dividends.)

That said, I am not with the crows cawing about an imminent stock market correction, or the true believers saying this is a great time to be buying precious metals. The stock market advance is almost sure to reach more new highs. Metals haven't shown any real signs of a bottom, especially on headline sentiment and chatter.

As almost always, when the stock market goes straight up, my accounts tend to lag. I was on the right side of the market, mostly long, but because I hedge, because I trade long and short, because I sometimes trade bonds, or metals, I tend to lag behind. It goes with the territory. I had a good quarter, but not as good as the top ETFs (or as poor as the bottom of the list).

I recently had breakfast with a young relative and I talked about this tendency to be cautious. I prefer that my account go up slow and steady, with a high percentage of winners. I have little stomach for losers. Some trading styles are taught with 1/3 winners, 2/3 losers, but the winners are big home runs so the overall picture is profitable. I don't have a personality that can stomach so many losers. I am also a relatively slow moving trader, so vehicles such as the triple leveraged ETFs are not for me. Weekly options are not either. I'm not a big fan of the new 10 options either.

"Stick to my knitting," do what I am relatively good at. If I see something really good, maybe take a shot here or there, but it has been a long time since I have done that even. Certainly on big movers such as LGF Lions Gate Entertainment which is up about 50% since December 2012 (and 400% from 2011 when it was 6), more aggressive strategies would have reaped huge rewards. 

I am always learning. One reason I go to the Canslim meetings is to try and adapt parts of that home run swinging strategy to my relatively cautious trading style.

I hope all my readers had a good quarter, and continue on to have a good rest of the year. Cheers.

Buy BA PG (sell puts)

Buy PG via selling May 70 puts @77.1

Proctor and Gamble looks to be basing again, the previous base at 70 is support.

Buy BA via selling May 75 puts @85.8

Boeing popped higher on news of a successful test flight for the 787. It has a massive three-year-long base at 70 to 75. 

Both trades are low risk, low reward, high probability trades. One consideration is that the sell in May calendar effect may start to kick in by the May expiration.

Long BA BRKB IWM LEN LGF PG SPY WFC

Net long APC KORS

Buy APC LGF LEN WFC (sell puts)

Buy LGF (sell puts)

Buy LGF via selling May 21 puts @23.8

Lions Gate Entertainment continues its epic run up. I am reluctant to chase it, but am willing to take this low risk low reward position.

Buy LEN via selling May 36 puts @41.6

Lennar Homes had a good earnings report and then gave back its gain on that report. Support at 36.

Buy WFC via selling May 34 puts @37.2

Wells Fargo Bank has one of the cleanest balance sheets of major U.S. based banks. However it got hit with the other banks over Cyprus. Chart support at 34/35.

These are the best longs I could find. I still think it is too early to play the short side. There was blaring headline on the Marketwatch site predicting SP&500 1400, which would be 10% lower. It is always easy to sell fear. However, market tops are much more likely when the headline features a bull and a prediction of another easy 10% or more upside, rather than a sharp correction.

Later in the day, I sell some APC May 77.5 puts @88.9 to rebalance my complicated position in Anardarko Petroleum back to net long.

Long BA BRKB IWM LEN LGF PG SPY WFC

Net long APC KORS

Buy NKE SPY APC (sell puts, strangles)

Buy NKE via selling Apr 55 puts @59.7

Nike higher on earnings. Chart pattern is a text book breakout from a cup-and-handle base formation. Support is at the base at 55. If it drifts down to the base, the plan is to roll out or perhaps even double the position.

Buy SPY via selling Apr 145 puts @155.3

I add to my tiny long position in the S&P 500 ETF. SPY has about an 8% chance of being below 145 at April expiration. Yes, there is the Monday Cyrus decision, but waiting until after that may mean smaller premiums. So I add a bit today, and may add more if it the market moves lower.

Buy APC via selling strangles: 

May 75 puts, May 100 calls @86.9

A short strangle is a bet on a trading range. These strikes add to my net long position. My interest in Anadarko Petroleum is mostly because it is the biggest component of the oil fracking etf. There is chart resistance right here at 87/88 and support at 77 and 75.

Why all this activity today? I am flush with cash from 14 positions expiring last week. With Monday and possible Cyprus news, even though there is a rally today, premiums may go down after the news comes out. There is always the risk of some explosive news, and I still have plenty of dry powder after opening four positions.

Long BA BRKB IWM LGF PG SPY

Net long APC KORS

Rebalance APC (sell puts)

Sell Apr APC 77.5 puts @86.9

I rebalance my Anadarko Petroleum position back to net long. APC is up on news of oil from a well in the Gulf of Mexico. Oops, even before I can type all of this APC has dipped to 86.2, so a poor entry.

The news dominating the stock market is from Cyprus. There is also possible Fed news today. April is a long period option month, because the third Friday comes a bit later in the month. There are quite a few companies that will report earnings before April expiration. All of these factors mean there is no hurry to sell premium. I am watching and waiting. The other shoe might be some bank runs on rumors in other Euro countries.

Cyprus is too small to mean anything, but if one of the bigger countries destabilizes it can be trouble. Confidence is a fragile thing. The drum beat of fear is strong. It almost seems like that is what is desired to scare people as much as possible. Don't give in to fear. Act rationally, look at possibilities and probabilities, Don't invest on the 1% or less chance. I prefer to play the 80% or 90% chance and get the small rewards.

Long BA BRKB IWM LGF PG SPY

Net long APC KORS

14-0 for March, grade A-

Fourteen winners, zero losers for the March option cycle. When the stock market goes straight up, I will tend to underperform. I am glad for the many small profits. BA and LGF had strong run ups. My short strangles (selling the calls and the puts) all worked out.

So why the A- and not A or A+? Because I lagged the indexes, and because there were opportunities for some home runs in Boeing and Lions Gate that I did not take advantage of. I have been trading LGF for a full year now, was still reluctant to play this rally even in a small way. The secure thought is that if I can keep grading out at A-, it is going to be a fine year.

I am getting slightly better at profiting during extended bull moves. I am letting go of the idea of getting in at the low tick and am happy if I am in on a decent day or within a day or two. 

Long BA BRKB IWM LGF PG SPY

Net neutral APC KORS

Sell KORS strangles

Sell KORS strangles Apr 50 puts, Apr 67.5 calls @58.0

A short strangle is a bet that a stock stays in a trading range. For Michael Kors there is chart support at 55 and lower, and resistance at the price of the recent secondary offering 61, and the recent high at 65.

The zombie bull takes the Dow to its 10th straight record high. It is a nervous ride as the zombie is not to be trusted. A correction is sure to happen, but timing the in and out is not easy. Higher highs are a virtual certainty when there is this kind of sustained strength and that remains the percentage play. The coffee shop comments from two different people with bearish views on the stock market, mentioned in earlier posts, also point to higher highs. I don't know anyone that is a giddy, caution-to-the-wind bull. The kind that are everywhere when major market tops occur.

April gets us to a the seasonally strong six months for bonds. Option premiums continue to be low almost across the board, so pickings are relatively slim for option sellers.

There was an article on Yahoo about gold crashing to $1000. That is constructive for gold bulls, but not worth hanging a hat on without more indicators to back it. I haven't seen any gold permabulls that have thrown in the towel, or that have sold most of their gold to buy stocks and chase performance.

Long BA BRKB IWM LGF PG SPY

Net neutral APC KORS

expiring longs MON QCOM

Joyless bulls and adds for BA SPY (sell puts)

I add to my long position by selling BA Apr 72.5 puts @81.7

Boeing breaking out to new highs from a year-long chart base. There are multiple chart support levels. The calendar indicates a good chance for a sharp and quick stock market pullback in late March. Boeing is the kind of stock I would like to get more of on such a pullback.

I also add SPY longs via selling SPY Apr 140 puts @154.9. The gap at 142 to 144, I see as strong chart support.

I had coffee with some friends and one of them talked about a stock market bubble with no fundamentals to back it. Yesterday, I talked to another friend. He has been invested in various individual stocks all his adult life. This second friend talked about selling all his stocks, moving to cash and staying there. These kind of stories are not signs of a market top. A short pullback is in the seasonal cards, but it will likely be met by buyers. There was a talking head from a discount brokerage on TV, saying that customer accounts are still heavy in cash. 

Separately, there are reports of investors buying stuff like SPLV, a low volatility index ETF that declines less when the market goes down. While all these anecdotes are not data, they do influence my decision making.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net neutral APC KORS

Gold cup half full or half empty?

With the Dow making a new all time record high a couple of notes on gold. On ZeroHedge they show a graph of gold vs. the Dow from the last high in 2007 (link1). It would be even more dramatic going to the older high in 2000, when gold was in the $400 range. Basically during these 13 years, those buying SPY at the highs have nothing but the modest dividends, and gold investors are up 300% ($400 to $1600 in round numbers).

The gold half empty case is mentioned on some stock market shows, that during the past 14 months gold is flat. For calendar 2013, gold is down. From the lows of 2008/2009 gold is up, but has underperformed the broad stock market from its lows. So gold vs. the S&P 500 can show what a person wants it to show, depending on the time frame chosen.

The hindsight trader can claim to have bought the lows, got out at each high, for each asset. Of course most reporting that they did this are liars, and I wouldn't believe them unless they had a real time audited account and no dummy accounts (like playing multiple March madness sheets picking so many possible winners, that one sheet is almost sure to have the winner). No one is that smooth that smart to be in the best asset every year, and get in at the lows and out at the highs, at least no one I have ever met.

The more important questions are what next. I already posted an idea for the stock market of early 2014 being a high, using the cycle time between the two previous tops instead of price. Time is just as important as price for option traders. For gold, I would like GDX, the gold miner ETF to make higher highs to confirm a turn in GLD. For now, any rallies in GLD are suspect. 

The big fundamentals for GLD are the Asian economies, because they drive 70%+ of the demand for physical. Some will argue about currencies, but the bottom line demand for physical is what ultimately is the long term driver. Some will point to record gold buying by central banks. I see this more as a negative in the long term. The bottom in gold was when the Bank of England clumsily sold their gold holdings at below $300 per ounce. Now that central banks are buying, it is more likely indicative of a longer term top than a bottom.

Some like to say the Fed is pumping up the stock market. However, the Fed pump is likely helping bonds, stocks, and gold. If Treasuries were yielding 5% or 7%, the opportunity cost of owning gold goes up dramatically.

On this trading blog, I have mostly avoided gold for the past year. With my bullish bias towards gold, it has been the right call. There have been better opportunities else where. That isn't to say that gold has no place in a long term investment portfolio, but trading and investing are different hats. For trading, I much prefer tailwinds and a high probability of profits, and that hasn't been happening in gold.

To recap, rallies in gold are suspect until the gold miner index GDX can start trending up. The back of envelope stock market top is scheduled for early 2014. Readers know that I view predictions as entertainment, so keep that in mind when reading my missives. The money is made with correct position sizing and risk management, predictions are less important.

Sell APC strangles and the zombie bull

Sell APC strangles Apr 75 puts, Apr 95 calls @82.5

I rebalance my position in Anadarko Petroleum to about neutral. I have a complicated position with several layers of short puts and calls.

The stock market continues what I like to call a zombie bull advance. Seems like virtually nothing can stop the market from lurching forward. At some point it comes back, but when? As I often write, calling tops and bottoms is more for entertainment than for real life traders.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net neutral APC KORS

Buy IWM (sell puts)

Buy IWM via selling Apr 80 puts @90.8

IWM is the Russell 2000 ETF. I open a fifth position for April. Again, it is low risk, low reward. March and April can be tricky months, so I am even a bit more cautious than my usual careful self. Chart support that beginning of the year gap up at 84. More than a few stocks will report earnings before April expiration, so I am reluctant to sell puts this early.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

Buy BA, PG (sell puts)

Buy PG via selling Apr 67.5 puts @76.8

I was already short Mar 70 puts. This is my third position for April, which I see as a low number. Chart support at the 50 day moving average at 72, and at the base of 70. Proctor and Gamble is sometimes labeled as a defensive stock. However, its options are trading at 25% implied volatility vs. about 19% for SPY. 

 

Buy BA via selling Apr 67.5 puts @76.9. I still like Boeing, am already short Mar 70 puts. Chart support at 70, one strike lower gives me a margin for error. These two moves give me four open positions for April, 14 open for March. March is another short time month for options because the month starts on a Friday.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

Rebalance APC (sell calls)

I rebalance my complicated position on Anadarko Petroleum by selling Mar 87.5 calls @78.7. I was already short Mar 90 calls, Mar 75 puts, Mar 67.5 puts x2. As APC moved toward the 75 strike price, my positive delta (bullish bets) increased. The recent highs at 85 are chart resistance.

The markets are too fast for my tastes. I am not in front of a screen all day, and I tend to plod along, more like a turtle. Yes, there are opportunities for the nimble, but I am not in that group of the more nimble traders that can take advantage of these day-to-day moves.

My most recent moves last Friday were akin to slipping on a banana peel. Oops and ouch. A lot of ideas cross my mind. ThinkorSwim (my broker) seems sluggish this week. The volatile markets might be a factor. 

 

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

Spano: Fear of Missing Out

Kirk Spano at Marketwatch (link) has an article about the fear of missing out. Some symptoms are checking your account much more frequently, considering much more volatile stocks or instruments. After a 150% rally off the stock market lows in March 2009 (in round numbers SPY 67 to 150), and a strong start to 2013, more and more folks are infected.

That said, some other talking head on TV pointed out that virtually no one at the coffee shop is bragging about their stock market profits or talking about their high flying winners. So it hasn't reached epic proportions that might signal a major top.

Again, I find that anecdotal stories can be powerful sentiment indicators. At the March 2009 lows, someone told me they were selling all their stocks, the exact week of the lows. At the height of the Internet bubble one of the little old ladies at church bragged to me about opening up a brokerage account for the first time in her life. During the run up in silver when it went from $14 to $49, several novices seemed to think they could not lose by being long silver.

Of course, it is easy in hindsight to see these turning points. It is not so easy in real time. It is sometimes difficult to distinguish a smart player from the classic dumb money, and rarely do they signal the exact market turn. At market tops there are a relative maximum number of buyers, at market bottoms the opposite, a relative maximum number of sellers. Nothing can change that, it is how markets work.

There are thing an investor can do to guard against the disaster moves. Avoid the all in, all out mentality. I tried very hard to tell the person that wanted to sell at the 2009 lows to scale out, to sell 20% now and then maybe another 20% in a few months. But they were too scared to consider anything other than their fear. At market tops, the opposite, there are a hundred reasons (usually all fundamentals) about why whatever they are buying will continue to go up.

Scaling in, scaling out is a reasonable strategy. I came into 2013 way underinvested in my trading account. I scaled in, day by day adding one position at a time. This way, if the market did turn, I had a variety of prices.

Another thing is to look at the chart. Runaway markets often form a parabolic blow off top. Markets don't always peak like that, but when a chart looks like a rocket taking off, ala silver running to $49, the risk for longs (and shorts for that matter) is high.

A person can learn by listening, by watching. Not the talking heads on TV which is 80% noise, but ordinary people that have always invested in something or always avoided something. When those folks move and want to talk about it, it might be useful information.

Buy BRKB LGF SPY (sell puts) hedge KORS

Buy BRKB via selling Apr 90 puts @100.7

Berkshire Hathaway has a chart base at 90, which is also where it broke out at the start of the year.

Buy SPY via selling Mar 142 puts @151.4

SPY is the S&P 500 ETF, the first ETF, and still the biggest. There is a gap at 142 to 145, again from the start of calendar 2013. I believe 145 will be support, and 142 gives me an extra margin of safety.

Buy LGF via selling Apr 19 puts @20.6

I also add to my longs in Lions Gate Entertainment by selling Apr 19 puts. Chart continues to look constructive to me, with a shelf of support at 19.2.

Sell KORS via selling Mar 65 calls @59.3
Michael Kors priced a secondary offering at 61.5 and that put pressure on the stock. The principle is also selling some of his shares. The recent high was 65.1. I am already short KORS Mar 55 puts.

All three put sales are low risk, low reward trades. The call sale, a hedge. I am putting some money to work from the 11 positions that expired last week. I am a bit skittish about the stock market because February and March have often seen quick and fast drops. 

Elsewhere, bonds and gold charts have broken down. The weak seasonality for bonds extends to April. Gold doesn't look good, but I am reluctant to trade it from the short side. $1500 on physical gold may provide round number support. Volatility has perked up a little bit.

Long BA BRKB IWM LGF MON PG QCOM SPY

Net long APC KORS

10-1 for February, A- grade

Ten winners, one loser for the February option cycle, I Ten winners, one loser for the February option cycle. I give myself an A- for the month.
 

A bit of luck, and a bit of skill, yield a lot of small winners. The one loser was part of a vertical spread on AMZN, so really there were no losers. Even the worst entry of selling puts on Boeing (BA) before the 787 grounding news worked out, with me making money on both sides of the short strangle (selling puts and calls). I didn't take many risks, so the winners were all small fish. I was a bit lucky especially on AMZN.

The tight and narrow advance looks like big money scaling in. It won't last forever, but while it does last, shorts, especially option buying shorts are being punished. Eventually, the trend breaks, the elephants stall or turn and run. Worst case is that the elephants stampede, and then the stock market bulls get their turn at being punished.

 

Long BA IWM LGF KORS MON PG QCOM

Net long APC

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Mar 19 puts @20.0

I was already short Mar 14 puts. I interpret the short term action as constructive. There is a shelf of short term support at 19.2. I mentioned the Lions Gate earnings report in Tuesday's post. 

I believe the best is yet to come for LGF. For years, this company had losses, so no matter how strong the franchises were, most money managers would not, could not buy. Two quarters of earnings, with upside surprises, may bring in more institutional support. Yes, LGF has had a good run, so there is risk in going long at this time. A SeekingAlpha write up said to wait for a pullback to 19, so there are some small fish likely waiting to get in at that price.

Long BA IWM LGF KORS MON PG QCOM

Net long APC

Expiring this Friday AMZN EBAY GPS LEN TBT

Buy KORS (sell puts) and LGF earnings

Buy KORS via selling March 55 puts @62.6

Luxury goods maker Michael Kors gaps up on earnings. Chart support at 57 and 55.

Elsewhere LGF Lions Gate Entertainment has good earnings. LGF ran up into the report and is drifting lower for the day. The breakout base is at 16, so there is some air in the stock at the 19 range. I am looking at the options, but nothing is compelling. Going out to June means waiting through another earnings report. I may wait until next week when April options become available.

Long BA IWM LGF KORS MON PG QCOM

Net long APC

Expiring this Friday AMZN EBAY GPS LEN TBT

Buy APC BA MON (sell puts)

I sell puts on three stocks: Anadarko Petroleum, Boeing, Monsanto. I already had positions in all three.

Buy BA via selling Mar 70 puts @76.5

Boeing moving up today. The 787 grounding news could not move the stock below 73. I was already short BA Feb strangles, 67.5 puts and Feb 80 calls. There are multiple chart support levels, 70 looks like solid support.

Buy APC via selling Mar 75 puts @82.4

I rebalance my APC Anadarko Petroleum position to bullish. APC moving up after earnings. I was already short strangles, Mar 90 calls, Mar 67.5 puts and Feb 70 puts.

Buy MON via selling Mar 92.5 puts @101.9

I sell Mar 92.5 puts on Monsanto. I was already short Feb 90 puts. Chart support at the 50-day moving average and the gap up, both around 95/96.

Long EBAY GPS IWM LEN LGF MON PG QCOM TBT

Net long AMZN APC BA

Ground hog sees another year of bull, top in 2014

The subject line is an attempt at humor as I type this up on Ground Hog day 2013. During a recent ThinkorSwim webinar (Swim Lessons Thursday January 31, 2012) they spent a lot of time on the long term SPY chart. Here is a link to a similar Yahoo chart.

A lot of traders are focused on the potential of a triple top, and the price for SPY 157 or so. What caught my eye is the time frame. If the next market top is the same distance in time as the others, that gives another year of bull market with a possible top in early 2014. That fits in with the shifting sands of stock market sentiment.

While there are a few headlines trumpeting Dow 14000 and the best January since 1989, there were also articles featuring doom-and-gloomers such as Marc Faber calling for a 20% smash, and another less famous pundit calling for a 50% waterfall decline. These tend not to be the kind of articles featured at long time market tops.

So many seem to be focused on the price level of the two prior peaks, I don't think it will matter that much. Not many seem to be focused on the cycle length.

During the ThinkorSwim weekly market wrap up, one presenter lamented that low volatility grinds higher was one of the worst kinds of markets for his style of trading. It is increasingly difficult for option premium sellers to find good risk/reward situations.