Howard Gold: have investors learned anything?

A while back I attended some live seminars at the local Charles Schwab office. The broker said it is always the same: market goes down, people come into the office wanting to get more defensive. Market goes up, almost everyone wants to be more aggressive.

A recent article by Howard Gold at Marketwatch (link) echoes this. The article also cites this:

>>

Extensive research using data from millions of trading accounts found that 99% — that's no typo — of active traders lost money ...

>>

This isn't to say that a top is imminent. There continue to be cries of wolf, telling people to prepare for a 1929 style crash (link2).

Readers can see that my trading activity has increased. Am I what the study says is an "active trader?" Hmmm. Sometimes less is more.

As always for the average person that doesn't thrive on learning about the markets and trading, some kind of exchange traded fund or mutual fund strategy is what will work out best. The Vanguard forum (aka Boglehead forum) on the sidebar (link3) is where those folks hang out. The philosophy is simple: live under your means, save a lot, set an age and risk appropriate asset allocation, stick with it. 

Buy, hold, rebalance, means a person is always buying low, selling high. However, they never go all in, or all out, just modest small changes. Again, for average folks this is the best road. For folks that have no idea what asset allocation, 50/50 isn't the worst idea, 50% total stock market, 50% total bond market. Those with a bent towards precious metals perhaps 50/40/5, with 5% in physical gold.

Keep in mind, that the Bogleheads advocate a cash reserve of about six months in living expenses for minor emergencies (car breaking down, new roof for house, dental work, the list is long). For middle class people ramping up, that cash will skew the allocation for more like 40/40/20, 20% cash (40% in stocks and bonds).

39 - 9 - 2 for February, grade C

Thirty-nine winners, nine losers, two breakeven trades for the February option cycle. It was a wild trading month that included a 300 point down day for the Dow and a snapback rally to get the overall market to about unchanged for the year. My trading account is close to unchanged as well. I am at slight paper gain that is less than the commissions. At least the broker (ThinkorSwim) is happy.

It was a trading month with many opportunities, some blunders, and some good trades. The losing tickers include: Boeing BA, Toyota TM, the retail etf XRT, Michael Kors KORS, oil production etf XOP. Winners include Amgen AMGN, Valeant Pharma VRX, Goldman Sachs GS, Russell 2000 etf IWM, and the gold etf GLD.

Mostly it was about treading water. With the big smash I went into survival mode and closed out several positions. The account draw down was about 2% at the lows. Most I view view as rational decision making. Only a couple I see as blunders, such as closing out Toyota and selling some calls on Kors.

Going forward, gold and treasury (GLD and TLT) option premiums are so low that is hard to justify selling premium. I got a little too fine with some of my delta adjustments. As long time readers might observe, I increased my trading activity. For now, that increase in activity hasn't brought about better results. It isn't 2013 (big up year) any more, but I doubt it is 2008 (a big down year) either.

Position summary:

net long BRKB IWM KORS SPY TLT

net neutral AMGN

long DIS GILD HON NSC VRX

Weekly: rally keeps rolling

The stock market and gold rallies keep rolling. Here is a recap of my trades:

Thu Sell IWM Mar 106 puts rebalance again @115.3. I rebalance a second time for the Russell 2000 ETF.

Tue Sell IWM Mar 104 puts rebalance @114.8. I rebalance my short strangle.

Sell NSC Mar 82.5 puts new long position @91.2. A open a low risk, low reward position in railroad Norfolk Southern. I often refer to these as worm trades, fish so small, it isn't about fishing, but more about digging for worms.

Position summary:

net short AMBA BA BRKB TLT XRT XOP

net long ASH GLD GS IWM KORS OXY SPY

net neutral AMGN

long DAL DIS GILD HON LGF MRK NSC PG WFC

I'll clean out these expiring options after I post my monthly recap, which will be a bit later.

expired AMBA BA XRT XOP, ASH GLD GS, OXY, DAL LGF MRK PG WFC

Weekly: bounce back rally

The rallies in the stock market and precious metals are strong. I have an up week, though I wish for more. Haha. Happy V-day to all. Here's a recap of my trading week:

Fri sell IWM strangles @113.9, sell Mar 100 puts and sell Mar 120 calls. A short strangle is a bet on a trading range.

Sell GILD Mar 70 puts @81.0. I initiate a small long position in Gilead Sciences mostly based on the chart, and seeing GILD on the losers list.

Thu sell AMGN Feb 110 puts rebalance @123.7. I rebalance my Amgen position back to net long by selling puts. As for the overall stock market, the rally is a wonder to behold.

Wed sell VRX Mar 100 puts @140.6. I add to longs on Valeant Pharma. The reason for 40 points out of the money is that option has 90% probability for profit, on this volatile stock. Earnings are coming up, and in hindsight, the premium expands further, so waiting a couple of days to sell these would have been better.

Sell KORS Mar 82.5 puts @96.0. I add to my long complicated long position in Michael Kors. Again, I choose the 90% probability option to sell. The ThinkorSwim platform has this information. For those on platforms without this information, the delta gives a decent approximation for probability. For example, a delta of .10 means about a 10% chance for that option to expire in the money.

Tue cover short BRKB Mar 115 calls rebalance @113.7. This is another painful covering of short calls at a big loss, during this rip-the-face off the bears stock market rally.

Sell SPY Mar 168 puts @182.3. I close out a leg of my March put backratio. I am taking on more risk and using up more margin, but the odds are about 11% of a decline below 168 before March expiration.

Mon cover short BRKB Feb 115 calls rebalance @112.6. Berkshire Hathaway continues to bounce. I cover short calls to rebalance my complicated position back to near neutral.

Cover short KORS Feb 110 calls rebalance @95.6. Michael Kors is running higher, I cover some short calls to rebalance back to a long position. Should have never sold these calls (shakes head). A few minutes later and it looks like a head fake on both these as KORS fades below 95, and BRKB back to negative.

Sell HON Mar 82.5 puts @92.6. Honeywell came up during my weekend chart review of the stocks in the SP100. I open a small position with a worm trade (low risk, tiny premium collected).

Sell DIS Mar 70 puts @77.0. I double up on my long position in Disney as it moves to new highs.

Position Summary

net short AMBA BA BRKB TLT XRT XOP

net long ASH GLD GS IWM KORS OXY SPY

net neutral AMGN

long DAL DIS GILD HON LGF MRK PG TM WFC

Weekly: wide swings

I did okay during this extremely volatile week. For those not following the action closely, Monday the stock market tumbled, only to see it recover all those losses and end higher for the week. Thursday and Friday completely routed the bears. As always with options, could have been better, could have been worse. A few trades look stupid, so there is a lot of room for improvement. Here's a recap:

Fri Sell BRKB Mar 105 puts rebalance @111.4

Berkshire Hathaway continues to bounce back, and I add more deltas to my complex position via selling another round of puts.

Sell KORS Mar 80 puts rebalance @93.5

Michael Kors rallies a bit and add delta to my complicated position.

Thu Sell DIS Mar 67.5 puts @75.8

I open a new long position in Disney. DIS up on earnings.

Sell to close SPY Feb 169 puts @176.5

These puts are down to about a 15% chance of coming into the money. They are part of a put backratio (still short 2x Feb 166 puts), so I add to my risk and eat up some margin too.

Sell BRKB Mar 100 puts rebalance @110.0

I add some long delta to a complicated Berkshire Hathaway position, rebalancing as the stock rallies.

Wed Sell BRKB Mar 115 calls to rebalance @108.5

I reduce the delta on my long position on Berkshire Hathaway

Sell KORS Feb 100 calls to offset @89.6

Sell some way out of the money calls on KORS for a tiny premium. The frustrating thing is that if I had just sat through the turbulent morning yesterday, I would be in an okay position. Instead, I locked in a loss, and am at the risk of more losses by being long stock. Ah well, if I knew every wiggle on the chart ahead of time, I would be rich beyond Midas.

Cover short AMBA Feb 24 puts @.55 @26.6

Ambarella falling fast. I cover the short put leg of the strangle so the entire trade doesn't turn into yet another loser. This leg is at a tiny loss, but it is offset by the premium from selling Feb 42 calls.

Sell KORS Feb 80 puts rebalance @.20 @91.4

KORS rebounds off the lows, I rebalance for the second time today

Tue Buy KORS stock to compensate for being short Feb 90 calls @92.5

I am short calls going into earnings and Michael Kors shoots the moon and gaps up to over 92. Yikes. The options trade at a wide spread, so I decide to cover by buying the stock, capping the loss at $2.50 per contract. However, there is the risk is that it fades the gap and goes below 90. I didn't want to dilly-dally in case it gaps higher and keeps going. It is an uncomfortable position to be in. It is already fading as I type to below 91.0. These kind of situations remind me why I don't do well in fast markets, don't do well day trading. My streak of red continues as KORS closes under 90 for the day.

Mon Cover BRKB Feb 110 puts @113.3

cover TM Feb 110 puts @1.88 @112.2

I take two more big losses on Toyota and Berkshire as the stock market careens lower. I didn't want to risk being short puts on Toyota going into earnings. Earnings came out pretty good, so this was a bad one.

net short AMBA BA BRKB TLT XRT XOP

net long ASH GLD GS IWM KORS OXY SPY

net neutral AMGN

long DAL DIS LGF MRK PG TM WFC

Weekly: more pain, big losses

It is another painful week for my trading account, as the down trend and the whippy action continues. I close some trades for big losses. This was the worst down month since February 2009. Here is a trading recap:

Fri close TLT Mar 108 calls @108.3 stop-loss

Close BA Feb 125 puts @124.0 stop-loss

Both Boeing and the U.S. Treasury ETF moved enough that my short strangles went deep into the red. Both crossed the strike price, which get me out. My intra-day timing was poor, because I could have gotten out at much better prices. However, no one knows that for sure. Sometimes a trending move just keeps going.

Wed sell BA Feb 140 calls to rebalance the strangle. This was washed away by the continuing down trend in Boeing.

Sell AMGN Mar 135 calls @120.5 to hedge after earnings

Sell BRKB Feb 115 calls @111.3 to hedge, to reduce my delta. I am trying to thread the needle here.

Tue Sell KORS Feb 67.5 puts @81.2 rebalance

Mon sell GS Feb 180 calls @.28 @165.7 rebalance

cover short XRT Feb 80 puts @1.63 @79.9 stop-loss

cover short XOP Feb 64 puts @1.49 @64.8 stop-loss

net short BA TLT XRT XOP

net long ASH BRKB GLD GS IWM KORS OXY SPY

net neutral AMBA AMGN

long DAL LGF MRK PG TM WFC

A visit with Top Gun Dave Whitmer

Dave Whitmer visited the local CANSLIM group. Here are a few notes. Mr. Whitmer was a Navy fighter pilot, a Top Gun as depicted in the movie. He worked for the discount broker Schwab for several years. In 2000 he started using the CANSLIM method and is mentioned in the new book by Amy Smith.

Whitmer was at the first meeting of this particular Investors Business Daily sponsored group. As was IBD founder William O'Neill. When he worked for Schwab he witnessed the Internet bubble from the broker side. When the stocks were going up, people lined up to get in the office, first thing in the morning. When the bubble popped, their greed turned into fear and many clients experienced huge financial losses.

Whitmer now trades stocks full time, for his own account. He uses the IBD newspaper as well as some of the premium products such as MarketSmith. He brought along several books, How to Trade in Stocks by Jesse Livermore (1940), How I made $2,000,000 in the stock market by Nicholas Darvas (1986). On page 49 of the Livermore book I found this highlighted:

>> If you make your discovery, trade your own way, exercise patience, watch for danger signals, you will develop a proper trend of thinking. <<

Even though Whitmer follows the CANSLIM methodology, he still has to think for himself. I always tell people that there a lot ways to make money in the stock market. It is vital to find a method that works for you. Something that works for me, may not work for you, and vice-versa. Style, personality, risk-tolerance are all big factors.

Whitmer talks about some of his biggest winners from 2013. These include Facebook and LinkedIn, each a 49% winner. QIHU and NETS are two more big winners. In the Amy Smith book, How to Make Money in Stocks Success Stories, Hansen beverage which became Monster is one of the big winners there.

From his days at Schwab, Mr. Whitmer met a lot of clients who were successful in one area and thought they could be successful in the stock market. Many of them turned out to be terrible at the stock market and the bursting of the Internet bubble ruined some of them.

Some things that I took note of, were Mr. Whitmer's daily routine. His military training, likely included many checklists, and the CANSLIM method uses a lot of checklists. He describes himself as a jack rabbit, quick to take profits, quick to take losses. He doesn't like to trade during the open, which he describes as amateur hour. He does check the market through out the day. For those familiar with the CANSLIM method, he prefers first stage bases.

The session closed with a review of stocks from the audience (about 25 people). The list is not that important. I did not see many new people. Some commentators talk about a stock market bubble. If this were a big time stock market bubble, there might have been 100 people in attendance, instead of 25.

A quick comment on the market dip. I took two losses on Monday, closing out short puts on XRT and XOP near the lows of the day. Painful yes, especially gauling to have both stop and reverse higher after I got out. It happens. Either a person takes losses, or doesn't. Other styles may involve doubling down, or going down with the ship. Readers know that at many levels, I prefer low risk, and have a low tolerance for losing. These personality traits are not going to change. I go to the CANSLIM group, because stock market groups are rare, because I can occasionally get a good read on sentiment from the group. I might occasionally find a new stock or industry idea.

It is mostly smart people that do the stock market. Half the population doesn't even save any money so they can't do it. Others are mystified or scared by the stock market. CANSLIM isn't any be all and end all, but especially for novices, it is a very good first system to learn because it looks at fundamentals as well as technicals. CANSLIM is also a system to identify potential home runs and that is one thing I could still use a lot of work on, even after 27 years in the markets.

Okay enough for now. I'll post those losing trades and any others in a weekly recap.

Weekly recap: ouch that hurt

A trending market is bad for hedgers. This week had five down days, and my account balance moved lower. Many of the trades I added performed poorly, or did not help much against the strong downtrend:

Fri buy SPY vertical put debit spread @180.3 @2.00 @1.07

buy SPY Apr 169 puts, sell SPY Apr 161 puts. This gives some modest protection against a stock market free fall.

Sell AMGN Feb 130 calls @120.3, hedge

The AMGN breakout turned into a fake out. I hedge my short puts by selling calls.

==

Thu sell SPY backratio buy Mar 168 puts sell 2x Mar 165 puts @183.0 for a credit

Sell BRKB Feb 120 calls to hedge @114.0

Sell BRKB Mar 120 calls to hedge @113.8

==

Wed sell XOP Feb 64 puts @68.8 rebalance

Sell AMGN Mar 105 puts @123.6 adding longs on a breakout

==

Tue Sell VRX Feb 110 puts @137.4

==

Position summary:

net short TLT

net long AMBA AMGN ASH BA GS IWM

net long KORS BRKB GLD OXY SPY XOP XRT

long DAL LGF MRK PG TM WFC

12-2 for January grade B-

Twelve winners, two losers for the January cycle, grade B-. The losers were the call side of a short strangle on GLD, and part of a short put backratio on SPY. Both were offset by other trades on the same underlying.
 

My theme for the year is trading ranges for all. I am doing more trades, and doing weekly reports, instead of day of trade reporting. Because I am doing so many more trades, it is a much larger chore to track and record each trade.

As always, before folks get excited about the high win percentage, keep in mind that most are high probability, low profit trades. A high percentage of winners is expected, but the profits tend to be quite small on each trade. An analogy is 10-to-1 long shots at the horse track. The person betting with a 10% chance hopes for the 10x payoff. The other side wins 90% of the time, but the payoff is tiny.

The stock market feels frothier, with big movers such as the Colorado marijuana stocks, and air pockets like Best Buy which reported only a slight decrease in sales. The AAII sentiment (link) is still okay at 39% bulls. A fundamental analysis sent out from Schwab has valuation in the middle range. So the market is in a okay place, though a +10 or -10 year is my expecation, with the bias towards the plus. The little old ladies at church are still afraid of the stock market. After the washout in 2008/2009, that skittishness might last another decade or more.

Weekly update: a lot of hedging

I sold a bunch of calls on Monday's dip. Some came back to bite me, others did well. I took a loss on some short GLD calls. Resistance held by the end of the week, but I took my 100% loss (basis option premium) instead of riding it out. There were a lot of big movers, such as MDBX, BBY, ICPT, but for the most part those rabbits are too fast for this tiger. I did take a small position in VRX and AMBA. VRX came in safe, and AMBA is working well for me so far. I'll post a monthly recap tomorrow.

net neutral AMBA ASH BA GS IWM KORS TLT XOP

net long BRKB GLD OXY SPY XRT

long AMGN DAL IYR LGF MRK PG TM WFC 

Trades:

1/17/14 Fri

sell TLT Feb 102 puts @.32 @105.2

1/16/14 Thu

sell ASH Feb 125 calls @99.8

sell GS Feb 190 calls @177.1

sell BRKB Mar 125 calls @.33 @115.2

1/15/14 Wed

sell AMBA Feb 42 calls @32.7

sell BRKB Feb 110 puts @115.6

sell PG Feb 72.5 puts @.17 @80.7

sell TM Feb 110 puts @.52 @119.6

==

1/13/14 Mon

Sell MRK Feb 48 puts @51.7

sell XOP Feb 71 calls @65.2

sell XRT Feb 89 calls @84.0

cover short GLD Jan 122 calls @121.0

sell UNH Feb 82.5 calls @74.3

sell SPY backratio: buy SPY 169 puts, sell 2x SPY 166 puts  @182.7

sell OXY Feb 105 calls @92.0

sell KORS Feb 90 calls @77.2

I cover the short Jan calls for gold at a big loss. I hedge my short puts on many other stocks by selling calls, coverting the positions to short strangles. I sell SPY put ratios as a further hedge.

Weekly recap for 1/10/14 lots of trades

I've been a busy bee this week. Lots and lots of trades. In summary, I took a flyer on AMBA and VRX, rebalanced my short strangles on GLD and TLT, added some worm trades on AMGN, ASH, DAL, GS, KORS, UNH.

Long AMBA AMGN ASH BA BRKB DAL DD GS 

Long LGF IYR KORS OXY TM UNH VRX XOP XRT

Net long IWM SPY

Net neutral GLD TLT

Times are Pacific time, price is on the underlying when the trade filled.

1/10/14 Fri

6:53 sell GLD Feb 108 puts @119.9

7:10 sell TLT Mar 98 puts 104.1

==

1/9/14 Thu

9:24 sell ASH Feb 85 puts @99.2

9:25 sell GS Feb 155 puts @177.1

9:59 sell BA Feb 125 puts @142.4

10:00 sell BA Feb 155 calls @142.4

==

1/8/14 Wed

6:58 sell AMGN Feb 100 puts @115.9

6:59 sell UNH Feb 67.5 puts @76.1

7:11 sell XOP Feb 58 puts @66.9

7:14 sell XRT Feb 80 puts @86.5

9:29 sell VRX Jan 115 puts @127.3

11:19 sell AMBA Feb 24 puts @30.9

11:26 sell GLD Jan 122 calls @117.9

==

1/7/14 Tue

11:54 sell DD Feb 55 puts @62.24

12:10 sell KORS Feb 65 puts @78.9

==

1/6/14 Mon

6:47 Sell GLD Jan 114 puts @119.6

8:02 sell WFC Feb 42 puts @45.5

==

Sell strangles GLD, IWM, TLT

I sell strangles on three ETFs, GLD gold, IWM Russell 2000, and TLT 20-year bonds. Again, selling strangles is a bet on a trading range. I saw a bunch of gold ingots on the front page of Marketwatch. That isn't a great sign for gold.

Long BA BRKB IYR TM XOP XRT

Net long IWM SPY

Net neutral GLD TLT

Net short APC

2013 year in review, grade B-

For calendar 2013 my trading account is up a bit more than +14%, which sounds good until a person looks at +30% for SPY (S&P 500) and +37% for IWM (Russell 2000). Long bonds (TLT) were down -16% and gold down even more (GLD) -28%. For someone that might trade all three asset classes, +14% might be considered a decent year. Overall, I give myself a B- for 160 winners and 20 losers. Before new readers get too excited about the high win percentage, understand that I mostly do high probability trades that pay very little. The person buying options with a 10% chance of winning are hoping for 10-to-1 payouts. I am getting the other side, the 1 side for perhaps risking the 10. It isn't exciting, but it does add up.

I was mostly wrong about my expectations for 2013. I was bearish on U.S. stocks, neutral on bonds, bullish on gold. I was wrong on stocks and gold. Bonds were down big as measured by long treasuries, however, the total bond market ETFs were only down about 2% after dividends. Here are a few ETFs that I track:

IWM +36.8% Russell 2000

SPY +29.7% S&P 500

EEM  -5.8% Emerging Markets

TLT -15.9% 20-year U.S. treasury

GLD -28.3% gold

SLV -36.3% silver

I pivoted to bullish on stocks, in part, because of two anecdotes. Two people that I know were both extremely bearish on the U.S. stock market early in the year. The first guy is a lifelong stock investor, who wanted to sell everything and move to cash. What!? Why would someone that has owned stocks all their adult life want to do that. The one word answer: fear. The longer answer, media scare tactics and zeitgeist (mood of the market). 

The second person, retired, with a huge net worth wanted to play very safe and mostly avoided the stock market, calling it a bubble. There were many times I held my nose and bought, despite agreeing with their logical and bearish arguments. In late April 2013, I posted a storm warning on this blog for the U.S. stock market, based on long term valuations and sentiment (link). The red flags are still flying. However, just like long term weather forecasts, there may be a lot of sunny days before the next big storm.

In 2013, I had a lot of small winners. APC Anadarko Petroleum, BRKB Berkshire Hathaway, LGF Lions Gate Entertainment as well as the ETFs SPY S&P 500, and IWM Russell 2000, were traded over and over again. Another constant was heavy use of the terms: worms and small fish. These terms are slang for high probability trades that generate tiny profits. 

Again, readers should not be excited at the high win percentages each month or for the year. The odds going in are 80% to 90%, and the payoffs are scaled accordingly. Using a fishing analogy, I spent a lot of time on shore digging for worms, or in the wading pools gathering bait fish instead of going out to the deep ocean looking for Marlins. With the stock market up about 30%, aggressive bulls did much better than me, the cautious hedger. That said, for the most part, I avoided the pits of staying in cash, or trying to short the stock market, and the virtual black holes of being strong and long in gold or 20-year bonds.

Ironically, one of the best winners in terms of return on capital was selling puts on GDX (gold miners ETF). I took the trade when a Yahoo columnist wrote that it would be in the worst 1% of stocks for the next few months. Even though GDX had a horrible year, it held its own during those few months and the puts expired worthless for about a 30% return on capital.Unfortunately, it was for a very small dollar amount.

The worst percentage loser came at the end of the year, when a court decision went against APC Anadarko Petroleum and the stock tumbled. Fortunately, even an eye-popping 900% loss (basis the option premium collected), the small position size meant only a modest dollar loss. Some other losers include short strangles on LGF Lions Gate, and their movie Enders Game disappointed, and Catching Fire only did about as expected. There was also the literal catching on fire of two Boeing airplanes when I was short puts on BA. I often tempered my bullishness by selling calls. Being short calls during a up 30% year isn't so good. I was short calls on TSLA Tesla Motors during one of its big up moves and covered for a modest loss. Option traders can always play what if. Some Tesla call buyers made 5000%, or 50x their money in a few weeks. The home runs are why small fish traders buy options. The options are like lottery tickets, a few come in, but overall the house wins.

For 2014, my "sure to go wrong predictions" are +5% for U.S. stocks, +3% for bonds, -5% for gold. As always, predictions are mostly for entertainment (and for selling subscriptions or books). Keep in mind, that I was wrong, wrong, and wrong for my 2013 expectations. However, given what I believe is the semi-random nature of the prediction game, maybe my turn in the sun will come in 2014 and I will double my readership. In any case, the money is made trading, where risk management is just as important as market calls. Even if a person is as wrong as I was in 2013, if they are open to what the market is telling them, that person can have a decent year.

So Happy New Year and thank you to all my long time readers. I know this blog isn't as exciting as most. I don't swing for home runs. I tend to stay away from the most popular stocks. I do tend to have a huge percentage of winners, but it isn't due to hindsight trading or bogus paper trading like many others on the Internet engage in. The trades tend to be high probability trades at entry (the other side of these trades is the tiny worm sized profits). I don't go into politics or conspiracy theories, which is what seems to attract the huge page views on some other blogs. I see 99.9% of the political and conspiracy theory discussions as a waste of precious time and energy for traders.

This blog is as much for me as it is for the readers. I recommend that all traders keep a trading journal. It doesn't have to be public, like this one is. Keeping a journal is sure to improve your trading, your processes, your objectivity. I feel like my trading has advanced leaps and bounds by sharing my journey, as I enter my eighth year of blogging, and my 27th year of trading.

May 2014 be the best year ever. Cheers!

Weekly recap: sell puts on BRKB and V

My schedule is going to get better for blogging. However, I am toying with the idea of weekly updates, instead of reporting each trade in near real time. This week I held my nose and sold puts on V Visa and BRKB Berkshire Hathway. Yes, the stock market is extended on the upside, but what is a person to do? Keep waiting? Hedge? I choose to hold my nose and buy a little.

Again for the new readers, selling puts means I am bullish on a stock. Selling out of the money puts is a low risk, low reward, high probability strategy. Again, do not be excited by the high percentage of winners. Those are the approximate odds of profit going in. The person buying the puts is hoping for a 5-to-1 or 10-to-1 payoff, with a small chance of getting paid. I am taking the opposite side, selling the put with a 80% to 90% of winning, but getting paid very little for taking that side of the trade.

Long BA BRKB IWM IYR TM V XOP XRT

Net long SPY

Net short APC

16-3 for December, grade C-

16 winners, 3 losers for the December option cycle. Unfortunately, all 3 losers were painful, with the worst at about 900% basis the premium collected. I apologize taht I didn't report all the trades on the blose. 

As almost always with options, could have been better, could have been worse. I reported closing out my short puts on LGF, and I would have had a 100% gain instead of a -175% loss had I held on. On the other side, I close some Dec 85 APC puts while the stock was around 84.5. Had I held on, that loss would have snowballed. I close my short Dec 80 puts while the stock was near its lows near 75 for about a 900% loss basis the initial premium. It wasn't a good month.

As I often write, fast markets are not my friend. While other more nimble traders thrive on fast moving prices, my trading often suffers. My trading account was down just a tad (less than 1%) for the month. Given all circumstances, I was tempted to bump up my grade. Closing each loser was a rational decision. However, with the stock market at record highs, and my account down for the month, there is only so much rationalizing I can justify. Unlike some others on the Internet, I do report my losers as well as my winners.

Going forward:

Long BA BRKB GDX IWM IYR TM XOP XRT

Net long SPY

Net short APC

Cover short LGF puts (ouch)

I covered my short Dec 30 puts for a huge percentage loss (-350% basis the premium). I played with fire and got burned, staying too long at the Lions Gate bull party. As always, there is the chance that this is the bottom. 

However, the loss is already more than I typically want to take. It is the big risk of selling puts, a quick dive in the stock price. I sold these puts when the stock was about 35. I am still short Dec 39 and Dec 43 calls, but the premium from those do not balance out the huge hit I took on the put side of the short strangle. These things happen.

Long BA BRKB GDX GILD IWM IYR

Long KORS M NSC WHR TM XOP XRT

Net long APC

Net short LGF

The Sound of Music and gold

I watched the recent live performance of The Sound of Music on TV. The investment angle that came to mind is all those that are preparing to hunker down, with ammo, food and water stockpiles. About half the time, it is like the movie, there is a very short time to leave. The family or person fleeing often has to go with what they can carry. Any financial assets, such as stocks, bonds, deeds to real estate, may or may not have any value. Many assets get frozen during emergency times.

That's where a bit of gold and a bit of silver can be helpful. If the fleeing family has a few rolls of gold and/or silver coins, that might be enough to buy passage, or bribes, or food or lodging during extreme times. Paper money, checks, other forms of payment may not be as useful during turbulent times. I'll not overlook the value of friends (the nuns helped them escape, the young man decided not to turn in his girlfriend) and faith. I believe that faith is more valuable than gold during the worst of times.

As much as I am fan of the Vanguard Way, the Boglehead Way, historic events are times when having some physical assets may come in handy. No paper asset allocation can be sure to withstand the storms of war, or revolution. Of course, physical assets too have their flaws. They can be stolen, or confiscated, or paint a target on the person with those assets if word gets around. Say, there are a thousand refugees arriving in a foreign town. A couple of those families are flashing gold and silver. Word gets around. Muggings or worse may be in store for those paying in metal.

Some may say I am being alarmist. To that I say: read some history. Look at the great powers in 1900 and how many experienced major events by 1950. How many stocks, bonds, deeds to real estate in those nations, became essentially worthless? Americans like to cite their own financial history, but in so many other major powers, the financial reset button got hit. Only in England, among the financial powers in 1900, was there a relatively stable financial market. Japan, China, Russia, France, Italy, Germany, all saw huge disruptions in their stock and bond markets. This is where the Boglehead philosophy of stocks and bonds can fail. 

Let's just put it in round numbers, with the U.K. and U.S. having stable markets, the rest of the major financial powers unstable (Switzerland is not a major power). So 2 out of 8 is 25%, 25% chance of stable markets during that 50 year span. Stable is a euphemism because it includes the Great Depression and a 90% drop in U.S. equities. This is why I have always been an advocate of having some physical assets. Again, nothing, absolutely nothing is foolproof and anything done the wrong way, can be more trouble than it is worth. Still...

Hulbert on: seeing bunnies in cloud formations

Mark Hulbert has an article at Marketwatch (link) with this eye-catching quote:
Leinweber views charts such as this one as an example of a potentially dangerous practice known as “data mining”— endlessly analyzing a database until you “discover” a pattern. The result of this practice is “the analytical equivalent of finding bunnies in the clouds

Traders, analysts, talking heads do it all the time. They might use it for forecasts, to "prove" manipulation, mostly for selling and promotion. What it often boils down to is seeing bunnies in clouds. Some may say that I am doing similar, and in part that is true. I see what I believe are repeated patterns and trade based off them.

The catch with the charts in the article are that the scales are not similar. The 1929 chart has the market booming from 200 to 350 a 75% up move on the part of the chart shown. Yes, the current stock market rally has moved up that much and more off the lows, but the part that is supposed to match is a much more modest move.

Buy BA BRKB TM, sell APC strangles

An abbreviated update:

Sell puts on BRKB, TM, BA,

again selling puts is bullish move

Sell strangles on APC,

again, selling strangles is a bet on a trading range

Long BA BRKB GDX GILD IWM IYR

Long KORS M NSC WHR TM XOP XRT

Net long APC, LGF

Fearful rookie getting back in

I've been away. I did one small trade, selling BRKB puts.

There is a recent post on the Boglehead (Vanguard) forum about missing out on the bull move (link).
>>
I did not participate in the market rally of the past 4 years due to fear...
>>
 
Like I sometimes write, on the Internet almost everyone that reports is a winner. The losers tend to slink away in silence. For the most part, market timing is a losing game. Most individual investors do poorly. The post linked is not a good sign for the stock market bulls, but by itself doesn't mean much.

Still, I have found that anecdotes are useful. When silver was topping, there were many posts from novices thinking it was a sure thing, a sure win, when silver is among the most volatile of vehicles.

There was an appearance at a stock market group of a recent finance degree graduate who wanted to tell all of the market veterans there that gold was the only sound investment. That hyperinflation was the only possible outcome. When novices and rookies some how have that in their heads, the odds of that happening are near zero. Yes, there may be a rookie out there that lucks into a correct call. Some even have a string of correct calls and make decent money trading.

Readers know that I like to have the odds in my favor, so the 1-in-1000 chance that a rookie or novice gets it right is not my kind of play. Better to take the 99.9% odds.

I came into this year (calendar 2013) with a bearish outlook. One thing that turned me around was anecdotes from several people that were extremely afraid of the stock market.

Updates may or may not be forthcoming. By January 2014, I should be back to a more regular schedule. In the interim, I can not say.

Thank you to all the readers, especially the few that may have been with me for the years I have been blogging.

16-1 for November, also roll XOP XRT put sales

Sixteen winners, one loser for the November cycle. Again, before new readers get too excited, almost all of these were high probability, low reward trades. The trader taking the other side was hoping for a 10-to-1 payoff for buying such risky options.
 

I have another positive month. It may seem like child's play to trade a mostly up market. However it is tempting to out think the room and try to be the hero and call the top.

I also sell puts on XOP XRT.

Sell XOP Dec 60 puts

Sell XRT Dec 81 puts

This is the Oil Exploration ETF (XOP) and the Retail ETF (XRT). Both trades are way out of the money, very low reward, high probability of success (aka as worm trades).

Going forward I am:

Long BA BRKB GDX GILD IWM IYR

Long KORS M NSC WHR TM XOP XRT

Net long APC

Net neutral LGF

Buy M (sell puts)

Buy M via selling Dec 45 puts

Macy's up on earnings. Yes, another worm trade. As option expiration approaches, I am putting some capital to work.

Long AMGN BA BRKB FDX GDX GILD IWM IYR

Long KORS M NKE NSC WHR TM XOP XRT

Net long APC GLD LGF SPY

Buy GILD (sell puts)

Buy GILD via selling Dec 55 puts

Gilead Science is a drug company. GILD has had a good run, and 55 is way out of the money, making this yet another worm trade.

Long AMGN BA BRKB FDX GDX GILD IWM IYR

Long KORS NKE NSC WHR TM XOP XRT

Net long APC GLD LGF SPY

Rebalance APC LGF (sell calls)

Sell APC Dec 100 calls

Sell LGF Dec 39 calls

As the stock market moves lower, the short strangles take on more delta and lose money. I rebalance closer to neutral, though am still net long both Anardarko and LionsGate. Overall, lots of red minus signs for my trading account.

Long AMGN BA BRKB FDX GDX IWM IYR

Long KORS NKE NSC WHR TM XOP XRT

Net long APC GLD LGF SPY

Buy KORS & TM, sell APC strangles

Buy KORS via selling Dec 60 puts

Buy TM via selling Dec 115 puts

Sell APC strangles: Dec 85 puts/Dec 105 calls

Some late reports from me. Michael Kors is the luxury goods maker, TM is Toyota Motors, APC Anadarko Petroleum.

Long AMGN BA BRKB FDX GDX IWM IYR

Long KORS NKE NSC WHR TM XOP XRT

Net long APC GLD LGF SPY

Fear of missing out: Marketwatch article

Fear and greed are what tends to drive the markets. Fear of missing out is one of the more common forms. Kirk Spano at Marketwatch has an article about so-called panic buying (link), or the fear of missing out. Performance chasing is another word for it.

Those that only listen to those bragging about profits, might think that market timing is easy because 90% of the reports on the Internet and in person, seem to come from winners. Keep in mind, that the reportage comes from a self-selective group, where the losers tend to be silent. The saddest cases are those that lose everything and never want to speak about the markets again. You rarely hear about the losers on Internet brag boards.

As always, this kind of article is a red flag. However, by itself it is not actionable. A person can continue to watch for other signs and stay alert. It is a not a low risk time to be buying stocks. The bear visits all markets. Trying to time market tops tends to be a difficult, low probability game. Readers know that I tend to favor high probability trades.

85/15 the Taleb Portfolio

Roger Nusbaum has a blog entry about the Taleb Portfolio (link). Basically, it is keeping 85% to 90% very safe and taking big risks with the rest. In a recent study, 85% in CDs or cash equivalents, and 15% in triple-leveraged ETFs was a winning mix. The caveats as always, are that this is backwards looking. What worked last time may fail the next time.


/edit to add: stable markets would be a time when the 85/15 would under perform standard buy-and-hold. For example, if the stock market (or other market is someone is trading gold or bonds) is up say 5%, a triple-leveraged ETF would likely be down 10% to 15% for the year because of decay and costs, while the average ETF might be up 4.7% (after modest costs). Some might chirp that the interest earned from the CD or Treasury bills might make up for that. However, keep in mind, that if interest rates go up, the decay and carrying costs for the leveraged ETFs will tend to go up as well.

As a fan of process, I find ideas interesting. That said, I am a relatively old dog in the markets (I started trading in 1987), and never have been a big fan of the leveraged ETFs. Others find them useful. Leveraged ETFs are a way to avoid margin calls while using margin and a way to use leverage in retirement accounts.

As I always say, there are a thousand different ways to make money in the markets. Find one (or two or more) that work for you, that match your personality, your strengths. What works for another person may not work for me and vice-versa.

Sell LGF strangles

Sell LGF Dec 30 puts

Sell LGF Dec 42 calls

LionsGate Entertainment has Enders Game opening this weekend and Catching Fire on 11/22, so this a roll of the dice. A short strangle is a bet on a trading range. With the movie releases, option volatility is up.

Long AMGN APC BA BRKB FDX GDX IWM IYR

Long KORS NKE NSC WHR XOP XRT

Net long GLD LGF SPY

/edit to add: Early report is $28 million for the opening weekend for Enders Game. One estimate was $25 to $30 million, so right in the range is what a strangle seller hopes for. We will see if the stock moves on the news. 

Again a reminder, that I will be reporting trades way after the close for the next two months because of limited computer access.