2012 year in review 101-27-3 grade B-

Overall modest gains, up 9.7% in my trading account. For closed trades, there were 101 winners, 27 losers, 3 breakeven trades for a 79% winning percentage. B- is my grade for the year. The letter grades are new for this year and I like the concept. 

While critics might say that 9% trails the gains in SPY, IWM and EEM, I trade more than stocks, and also go long and short. I'll take 9% year-in-year out, especially because I believe I am at a lower risk level than many other investors and traders.

Select ETFs:

SPY +13.5% TLT -0.1% GLD +6.6%

SLV +9.0% EEM +16.9% IWM 14.3%

Best trade of the year measured by the margin required, were short puts on EWG, the German stock ETF during the summer crisis time. Made 80% vs. my margin required. Other traders other brokers may have higher or lower margin requirements. Novices are going to tend to have higher requirements, advanced and pro traders often lower. Worst trade was short Iron Condors on AAPL Apple computer, lost like 500% basis the premium collected on the bad leg. Other 2012 winners were monthly rounds of selling puts on LGF Lions Gate, and BRKB Berkshire Hathaway, and some short strangles on IWM. Some other losers include GDX, ALXN, WFM, MMM. Other winners include GLD, XRT, AMZN, IBM.

The win percentage is about as expected. 79% winners would be extraordinary if I were doing straight coin-flip 50/50 up or down trades, but I often take trades at 80% probability or better.

Some notable events include: moving my retirement accounts to Schwab and attending a bunch of their free live presentations. Many are aimed at beginners, but I still managed to find some nugget in almost every presentation. I started going to some local stock market meetups. The local CANSLIM group is often interesting. It seems difficult to find stock market groups, so even though the momentum style favored by CANSLIM is not my strong suit, I find value in the occasional CANSLIM meeting. I don't advertise my blog at the meetup, nor do I talk much about my own picks, mostly I listen and try to learn something.

I continue to view online webinars presented by my other broker ThinkorSwim. In particular, their one-hour weekly market wrap up is something that I try to watch every week. Non-customers can register and view the wrap up for free. Some of the material is filler, some is same-old, same-old, especially for weekly viewers, but I almost always find something of value.

With classes, with presentations, with indicators, with methods and strategies, a few folks have unrealistic expectations, believing in some kind of holy grail. Nothing is 100%. Nothing. If something is 100%, it tends to stop working as soon as it gets found and published. The ThinkorSwim folks often remark, that they are looking at the pot odds (poker term), or that they have seen a lot of movies so have a good idea how this movie is going to end. That doesn't mean they don't get it wrong, but their experience gives them a better idea. Journaling is one way to avoid making the same mistakes over and over, and something I highly recommend.

During 2012 I ventured into some more exotic option trades. Naked strangles became routine, I did a single short Iron Condor (which turned into my biggest loser for the year). Delta neutral is another term and it means that a position makes money on time decay as long as the underlying remains in a range. Many pro traders use delta neutral strategies such as short Iron Condors and short straddles, and short strangles. For those that want to learn more about options, the CBOE link (Chicago Board of Options Exchange) is a good place to start learning.

I see that my first blog post from 2006 has sometimes been on the most popular list lately. Back then, I was mostly doing buy/writes and taking some small trading positions. I have learned so much by doing this blog and evolved so much during what is now close to seven years of blogging. Making my trades public makes me far less likely to do what some might characterize as “stupid trades.” I started in the stock market in August 1987, a few months before the 1987 stock market crash. That trial by fire has made me a relatively cautious trader. 

Again, let me restate, that I do this blog mostly for my own benefit. I also that hope that some others might learn from my trades and observations. Surprising as it may be to some, I have nothing to sell, nothing to advertise, nothing to gain from my blogging.
 

Buy XRT (sell puts)

Buy XRT via selling Jan 57 puts

XRT is the retail stock ETF. Chart support at 58. I wish I could say I bought the low of the day, but that virtually never happens, especially with orders placed before the open. 

I was surprised by the steep selloff. However, I am way underexposed due to my busy schedule. Hopefully, I will have more time to trade and blog.

Long APC, IWM, LFG, XRT

Buy APC (sell puts)

Buy APC via selling Jan 65 puts. Anadarko is the top holding in FRAK, an ETF play on oil fracking. I have played it before, and am coming back to it. 65 is chart support.

Long APC, IWM, LFG

7-0 for December grade A-

Seven winners, zero losers for the December option cycle. All were small winners including a short strangle on IWM and short puts on BRKB, EWZ, LGF, TBT.

My schedule limited the time I could spend on the stock market. Going forward I have two small positions, short Jan IWM puts, and Mar LGF puts. I'll write a year in review a bit later in the year, as New Year's Day approaches.

Long IWM, LGF

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Mar 14 puts

For the first time in a long time I placed some good-til-cancelled orders to sell options. I placed them on Sunday, and LGF got filled today. I had second order to sell IWM Russell 2000 puts and a third to sell GLD puts. I cancelled the GLD order on the big drop morning.

Long BRKB, EWZ, LGF, TBT

Buy IWM (sell puts)

Buy IWM via selling Jan 70 puts

Placed an order before the open and got filled on the morning dip. By the end of the day, nicely in the green. I also entered a day order to sell TBT Jan 53 puts, but it expired without a fill. IWM is my first January position. With my busy schedule, I only have a few small December positions.

Long BRKB, EWZ, LGF, TBT

Net long IWM

2-0 for Nov grade B-, also buy EWZ (sell puts)

Two winners, zero losers for the November option cycle. I was on the sidelines for most of the month. The grade B- is on a curve because of difficult market conditions. The two winners were IWM Russell 2000 stock ETF and LGF Lions Gate Entertainment. I saw a lot of red ink on orders placed before the open on some of the big dipper down days. 

I also buy EWZ Brazil stock ETF via selling Dec 45 puts. More a gut trade than anything else. I finally get some green ink by the end of the day on one of these pre-market orders.

Long BRKB, EWZ, LGF, TBT

Net long IWM

Buy LGF (sell puts)

Buy LGF Lions Gate via selling Dec 14 puts

Another whoops order entered before the open. Red ink follows as the market crumbles.

Long BRKB, LGF, TBT

Net long IWM

Buy TBT (sell puts)

Buy TBT via selling Dec 53 puts. Another ouch entry with TBT taking a big hit today. TBT is the double inverse Treasury ETF. My order filled close to the open and moved deep in the red. Other positions also took on water, though LGF Lions Gate had a positive earnings surprise after the close.

The time change has mostly brought grief with my recent trades. These things happen. Hot streaks and cold streaks are part of life for almost all traders.

Long BRKB LGF TBT

Net long IWM

Rebalance IWM (sell puts) "brilliant"

I had the “brilliant” idea to rebalance my IWM position back to delta positive by selling puts. I placed an order to sell IWM Dec 72 puts before the open and got filled shortly after the market open. Ouch. 

The bad news is some red ink on my positions, the good news is my huge cash position. LGF also has been going down, so those positions are taking on water as well.

I'd like to say that the stock market reaction is over done, but the other side of the argument is that the market is always right, don't argue with it.

Long BRKB, LGF

Net long IWM

Buy LGF and BRKB (sell puts)

Buy LGF Lions Gate Entertainment via selling Nov 15 puts

Buy BRKB Berkshire Hathaway via selling Dec 77.5 puts

With the time change, I find some time to place some orders before the open. With virtually zero exposure in my trading account, I take some small positions. LGF hit an air pocket ahead of its earnings, but at below 15 I am a buyer. The story on Berkshire is the same as it has been for a while, a stock buyback at 10% above book value provides major support.

Long BRKB, LGF

Net long IWM

Dollar Cost Averaging vs. a Lump Sum

A Vanguard study (link1) is cited on Marketwatch (link2), saying that investing all at once gives better results over dollar cost averaging. The premise is a person inheriting a large sum of cash, or some other kind of windfall, such as selling a business, or winning a lottery. The edge for lump summing (investing all a once) tends to be measurable, though small.

It is worth thinking about. However, there are several caveats. The vast majority of stock market investors are not in that fortunate group making a decision about a large inheritance. Much more common are people making every day decisions with their every day savings. For example a person that has been in CDs for ten years and decides to plunge into the stock market, or bond market or gold market.

Those making "all in" or "all out" decisions tend to do poorly. While a few will do okay, many more will buy and sell at near the worst moments. This is how markets work, that at market tops there are a relative maximum number of buyers, at market bottoms a maximum number of sellers. A lot of those wrong-way buyers and sellers are small investors that feel the greed at the top and the fear at the bottom and act on it. NOTHING CAN CHANGE THAT. Markets make tops when a lot of people are buying, and bottom when a lot of people are selling. Those that think they can beat that, tend to be fooling themselves, or in an elite group with some special talent. Almost everyone making "all in" or "all out" decisions believes they are making a smart decision, but 80% to 90% are making terrible decisions.

So while the Vanguard study is interesting, it mostly applies to a person receiving a large sum out of the clear blue sky, not someone who is moving "all in" or "all out" because of news, or "just because." Another point is that dollar cost averaging can be a disastrous strategy during a prolonged bear market. Of course, no one thinks they are entering that territory when they start investing. Only in hindsight can we really say, that there was a 10 or 20 or 30 year long bear market in a certain asset class.

Another passive way to invest is to set an asset allocation and then rebalance as the various assets move up and down in value. This forces an investor to buy when prices are lower. The catch is that a person has to stick to their asset allocation. The permanent portfolio popularized by Harry Browne is one such approach (25% each to cash, bonds, stocks, gold). I am a fan of this approach. However, as always, there are no guarantees, but this kind of approach has done well for the past 30 years, with no need for bold decisions or market timing. Some will say that is because of the huge bull markets for gold and bonds and that is unlikely to be repeated. 

Another more common approach is a 50/50 stock and bond allocation, with a cash reserve of six months or a year that stays in cash. The big danger with this kind of approach are black swan events such as a change of government due to revolution or the loss of a major war, making all those paper assets virtually worthless. While the odds are low for any particular country in the short term, over the long term, these historic events do happen. Again, think back to 1900 and how many of the major powers (France, Germany, Russia, China, Japan and more) saw their governments fall and their bonds essentially go to zero before 1950. Equity investors did not do much better. Americans tend to ignore these kind of big risks because we have been blessed, but just like investment results, that is not guaranteed for the future.

My schedule continues to be too busy for much trading activity, and probably will be that way for the next two months. So I'll chime in when I can, but it won't be often.

Buy IWM sell puts & strangle

Buy IWM via selling puts and selling a strangle

Sell IWM Nov 74 puts

Sell IWM Dec 70/88 strangle (88 calls, 70 puts)

These filled in the morning. I take some small positions after many weeks of no trading. My only other trading position is short LGF Dec 11 puts. 

Why now? The stock almanac shows November to be a strong month. As always, seasonality is one of the weaker indicators. I have tons of free capital to deploy, and the recent selling squall is an opportunity to dip my little toe in the water. 

Net long IWM

long LGF

10-0 For October grade A-, also anniversary of the 87 crash

Ten winners, zero losers for the October option cycle. I've been so busy, that I didn't trade much, but these ten came home as winners. Why the A- because there was plenty of room for improvement and bigger profits.

One of my best percentage gains for the year was on EWG the German stock ETF. I sold puts months ago, and the return on margin required was like 80%. Most of the puts I sell are about six weeks out and return on margin required is usually in the single-digit percentage range. That's the good news, the bad news was that it was a very small position in dollar terms.

For oldtimers, the 25^th anniversary of the 1987 stock market crash, saw another drop. I started trading a few months before the 1987 crash. I believe that those early days of trading have forever imprinted on me, and a big reason why I tend to be so cautious. Suzy Orman often talks about a person's earliest memory of money, and how that impacts them. The first few investments a person makes can also have a big impact, especially if the “end of the world” happens when a person is just getting in.

I wish I could say that I knew the stock market would recover, but virtually no one did. As with any crisis, there is no way of knowing where the bottom is. Back in 1987, it was near impossible to make any trades during that time because it was all done over the phone.

My schedule looks like it will remain very busy, so updates will tend to be sparse for a while.

End of 3rd quarter

Year to date returns for some ETFs:
+14.7% SPY S&P 500
+ 2.4% TLT 20-year US Treasury
+13.1% GLD gold
+24.3% SLV silver
+ 8.9% EEM Emerging Markets
+13.1% IWM Russell 2000

Plus signs all around, with the bigger plus signs in metals and U.S. stocks. Sell-stocks-in-May started as a good idea this year, as the stock market moved lower, but the rally has moved past the April highs. Silver was one of the laggards in 2011, and treasuries a strong performer in 2011. In 2012, the roles are reversed with Treasuries barely positive and volatile silver a strong performer.

Regression to the mean is a powerful tendency in markets. The other side of that is the huge money can be made in trending markets by aggressive traders. Range traders and trend traders tend to be opposite styles. It is difficult to master both kinds of dances. To do one well, is enough to make decent money, as long as position size and risk management are strong. The latter two are vital no matter what kind of style, no matter what kind of vehicle.

Many successful traders believe that risk management and right sizing of positions are far more important than the kind of indicators used, or if a person is a trend follower, or a range trader.

I wish I had some bold predictions or insight into the markets. Unfortunately, I've had little time to look at or think about the markets, or to reinvest the money that was freed up at September option expiration. For now, I am content with my smallish low risk positions.

14-5-1 for September grade B-

Fourteen winners, five losers, one breakeven for the September option cycle with a grade of B-. Another positive month, though the gains were modest. Short strangles were a dangerous strategy this month and I covered the short calls at major losses. To offset those losses, there were gains on layers of shorts puts.

As I wrote, earlier some call buyers made 5x to 10x their money this month. No home runs for me, and the hedging reduced returns. Still, another month in the green is a positive, and I covered the losers before they became nasty.

Going forward, all I have are short put positions. Changes in my schedule mean less time for the stock market. I'll still update, but there may be delays. Also October is often a dangerous month in the markets, so I often am more cautious this time of year. The historical record of September as the worst stock market month, so far has been opposite, with big gains this month. My favored strategies of selling puts or strangles suffers when premiums are low like they are now.

Long ALL BRKB EWG GLD IWM LGF XHB XRT
ALL Allstate Insurance
BRKB Berkshire Hathway B
EWG German stock ETF
GLD Gold ETF
IWM Russell 2000 ETF
LGF Lions Gate Entertainment
XHB Housing stock ETF
XRT Retail stock ETF

Other winners for September include short puts on AMGN Amgen, ESRX Express Scripts.

Buy IWM (sell puts)

Buy IWM via selling Oct 79 puts @86.7

The Russell 2000 ETF made a new 52-week high. Resistance often becomes support, so that is 85. There are multiple minor support levels at 84, 81, 80. The massive Fed induced rally in stocks and gold was a surprise to me. Fortunately, I covered all my short calls before the news event.

Captain Obvious can say in hindsight that it would have been best to be long calls. Some of the calls I sold are up 5x to 10x in value in a few weeks, so call buyers hit home runs. Thank goodness I covered before the losses became financial ice bergs. It is ironic that just days after Barrons runs a column about short strangles (short both puts and calls) producing excellent returns, the strategy blows up with major losses for those that did not use stops. Even stops are sometimes of limited value on a fast moving news day.

Long AMGN BRKB ESRX EWG LGF XHB

Long GLD IWM XRT

Net neutral SPY

Heart: Fantasy Football lessons for investors

Long time readers know that I like sports analogies. Ross Heart at Minyanville has 15 traits and lessons that will help you  in fantasy football as well as investments:
1. Research 

2. Quick Decision-Making

3. Sentimental Picks
4. Spotting Value
5. Riding Winners 

The full list is at the Minyanville link .

>>

I have been looking at the markets, but am not finding that much to be compelling. Some stocks of interest (besides the ones that I have positions in) include: BIIB KORS TRV

Sell KFT (cover short puts)

Cover short KFT Sep 39 puts @40.7

Kraft Foods gaps down on news. I bail out at a break even profit to avoid the uncertainty. Even though there is modest chart support at 40.

As of this writing, my short covering from yesterday looks like some good moves, especially with gold moving higher this morning.

Long AMGN BRKB ESRX EWG LGF XHB

Long GLD IWM XRT

Net neutral SPY

Short covering: GLD IWM XRT

Cover short XRT Sep 63 calls @63.2

Cover short IWM Sep 85 calls @83.9

Cover short GLD Oct 177 calls @165.2

It is a similar situation to yesterday, I was short strangles on all these, and when the stocks moved higher, the short call side becomes a loser. I did not expect today's massive rally. For all three: Gold, the Russell 2000 ETF and the Retail ETF, there is a high probability that layers of short puts will offset the losses from these calls.

There is some discussion on taking losses in yesterday's post. To repeat some it: basically, there is no one way that works best for every trader, every situation. Using a stop loss, whether it be a mental stop, or an actual order can help limit losses in a trending, orderly market. If a market gaps on news, stops will have less value and may not work. In trading range markets, stops often get triggered and then the stock reverses, to the consternation of many traders. 

Some traders won't use stops. A few favor a style that doubles their positions when they start losing. There are a lot of ways to go. Some traders will initiate their positions at well known, well publicized stop loss levels. It is often a game within the game, for every buyer, there is a seller, and each has their reasons for making a move. 

Again, in a trending bull market, hedging strategies such as selling strangles, will lag behind buy-and-hold in terms of performance.
 

Long AMGN BRKB ESRX EWG KFT LGF XHB

Long GLD IWM XRT

Net neutral SPY