BHP launched a hostile bid for POT today for $130 / share
POT's Board of directors rejected the offer.
The stock shot up to $145 pre market and is staying at around 142.28 now.
I decided to sell a DEC short call at 150 for 6.5 credit
My rational:
- Board of Directors of POT is just being greedy and afraid of losing their jobs. BHP's offer is a reasonable offer at a premium of 16% above Monday closing price. Now the stock has shot up much after rejecting the offer.
- It is unlikely that BHP or any other players are to increase the bid. If they do, it will not be >150.
So by selling a longer term call at 150, I am betting that the price will settle around 130 or lower. If the deal is closed, I will make good money from the 3 months' premium.
If the deal is not closed, it is unlikely Potash will go above 150 in the next 3 months.
Also, volatility is very high. So I will also have some edge when the volatility collapse with the SC.
Secondary Exit: This is a vegas trade. I calculate my probability of winning is 3:1. If the stock continues to go higher the next few days and sign of resilience, I may just get out of the trade and take a small loss.
Tuesday, August 17, 2010
Monday, August 16, 2010
Learning options the proper way
For those who are reading this blog and wonder how to learn options, below are some tips:
There are many option programs in the market. Many of them are selling like time share condos or multi level marketing products making unrealistic promises and expectations.
The best way is to choose a program that teaches clearly the underlying principles behind options and how you trade. it. These principles which can be very powerful if you use it properly. If used wrongly, options can be dangerous.
Many of options programs offered in market appeal to greed, often directional in nature, and tempting students to use options to make quick profit.They will fail eventually. It is highly dangerous. Some uses their own software to predict the market. It seldom work. The market is too complex. Only way to learn is to understand the basic fundamental principles thoroughly and then trade according to your risk profile and personality. There are no short cuts. It takes focused effort and determination.
On the other hand, it is not so difficult. Any person with a basic understanding of elementary algebra and intelligence should be able to acquire the skills. More important is the discipline and humility to admit that Mr Market is a complex animal often unpredictable. We need to build clear edge when trading the market. Proper option strategies acknowledge that the importance to control your emotions ( greed and fear ) is as important, or often more important that getting the direction right. A good part of it is a game of probability although fundamentals are important longer term. In summary, success in trading is the combination of fundamentals, sentiments ( measured by technical analysis ) and the ability to control your feelings.
Choose a course that allow you effective interaction with the coaches and students for a period of 6 months to one year while you learn the different strategies of using options. You cannot learn options in a 3 days course. You can learn the principles and fundamentals but not acquiring the skills.
It is better if the coaches have different styles of trading but using the same underlying principles when they trade. Ask if the coaches use real account and trades over time. They must be clear ways to verify their performance over time. Do not trust their testimonials or promises. Set the objectives of the skills you need to acquire and see if the course provide the training.
Do not trust the money back guarantee. I know of a reputable Option Training organization that promises money back warranty if you fail to make money on the market. But when it comes to refund, it is not easy. The conditions are stringent. You can read some of the lawsuits and review on the Internet. It is nice nowadays that many organization cannot hide their questionable practice because information is transparent and instant on the net.
With a real portfolio ( even if it is paper trading), you can see all the various mistakes they made trying to predict the market. If they can be wrong 50% of the time and yet made money, then it is verified they know how to use options to safely hedge their positions, repair their trades and balance their portfolios.
As far as I know there are not many options training organization that provides this level of education and transparency. If there are courses that offer this level of education, it probably cost a lot.
Through the course, you need to develop your own style of trading using the same underlying principles. The important thing is that you have to develop your own trading style in alignment to your personality, time availability, habits and risk profile. The style will allow you to trade in the zone where you can confident and consistent in your performance. It will remove fear, greed and turn market volatility to your advantage
"Stop loss" is tool traders use to preserve capital. It is a necessary evil. It can drive you crazy emotionally because often the market will whipsaw on you.. Also, it does not protect you if there is a flash crash like the one experienced at the beginning of May this year.
Once you learn to use options, You can stop using "stop loss". You can make money not only when you are directionally right but also when the trend is stagnant or slightly bullish or bearish. You can also make money when you are wrong if you know how to repair the trades. Indeed, you need to right only about 50% to make money provided you keep to the discipline of hedging. You take care of the risk and the profit will take care of itself.
I traveled for 3 months this summer with little time to monitor the market and at times no access to the internet. I was not fearful what the market will do to my portfolio. I know how to protect my positions. When I came back, my portfolio was positive despite a huge loss in May and June at the market.
Some may think that this is too good to be true. Be not mistaken, it involves hard work, commitment, real motivation and time. It is not a black box system or
software or market prediction or stock picking tool. It is trading based on sound principles. Proper option trading instill good discipline - a major factor to success.
There are many option programs in the market. Many of them are selling like time share condos or multi level marketing products making unrealistic promises and expectations.
The best way is to choose a program that teaches clearly the underlying principles behind options and how you trade. it. These principles which can be very powerful if you use it properly. If used wrongly, options can be dangerous.
Many of options programs offered in market appeal to greed, often directional in nature, and tempting students to use options to make quick profit.They will fail eventually. It is highly dangerous. Some uses their own software to predict the market. It seldom work. The market is too complex. Only way to learn is to understand the basic fundamental principles thoroughly and then trade according to your risk profile and personality. There are no short cuts. It takes focused effort and determination.
On the other hand, it is not so difficult. Any person with a basic understanding of elementary algebra and intelligence should be able to acquire the skills. More important is the discipline and humility to admit that Mr Market is a complex animal often unpredictable. We need to build clear edge when trading the market. Proper option strategies acknowledge that the importance to control your emotions ( greed and fear ) is as important, or often more important that getting the direction right. A good part of it is a game of probability although fundamentals are important longer term. In summary, success in trading is the combination of fundamentals, sentiments ( measured by technical analysis ) and the ability to control your feelings.
Choose a course that allow you effective interaction with the coaches and students for a period of 6 months to one year while you learn the different strategies of using options. You cannot learn options in a 3 days course. You can learn the principles and fundamentals but not acquiring the skills.
It is better if the coaches have different styles of trading but using the same underlying principles when they trade. Ask if the coaches use real account and trades over time. They must be clear ways to verify their performance over time. Do not trust their testimonials or promises. Set the objectives of the skills you need to acquire and see if the course provide the training.
Do not trust the money back guarantee. I know of a reputable Option Training organization that promises money back warranty if you fail to make money on the market. But when it comes to refund, it is not easy. The conditions are stringent. You can read some of the lawsuits and review on the Internet. It is nice nowadays that many organization cannot hide their questionable practice because information is transparent and instant on the net.
With a real portfolio ( even if it is paper trading), you can see all the various mistakes they made trying to predict the market. If they can be wrong 50% of the time and yet made money, then it is verified they know how to use options to safely hedge their positions, repair their trades and balance their portfolios.
As far as I know there are not many options training organization that provides this level of education and transparency. If there are courses that offer this level of education, it probably cost a lot.
Through the course, you need to develop your own style of trading using the same underlying principles. The important thing is that you have to develop your own trading style in alignment to your personality, time availability, habits and risk profile. The style will allow you to trade in the zone where you can confident and consistent in your performance. It will remove fear, greed and turn market volatility to your advantage
"Stop loss" is tool traders use to preserve capital. It is a necessary evil. It can drive you crazy emotionally because often the market will whipsaw on you.. Also, it does not protect you if there is a flash crash like the one experienced at the beginning of May this year.
Once you learn to use options, You can stop using "stop loss". You can make money not only when you are directionally right but also when the trend is stagnant or slightly bullish or bearish. You can also make money when you are wrong if you know how to repair the trades. Indeed, you need to right only about 50% to make money provided you keep to the discipline of hedging. You take care of the risk and the profit will take care of itself.
I traveled for 3 months this summer with little time to monitor the market and at times no access to the internet. I was not fearful what the market will do to my portfolio. I know how to protect my positions. When I came back, my portfolio was positive despite a huge loss in May and June at the market.
Some may think that this is too good to be true. Be not mistaken, it involves hard work, commitment, real motivation and time. It is not a black box system or
software or market prediction or stock picking tool. It is trading based on sound principles. Proper option trading instill good discipline - a major factor to success.
Shorting the market
Not many traders or investors understand know how to short the market.
Many consider it unpatriotic and most of them are fearful
It is considered to be something for experienced traders only.
As a trader and investor, I do not see why we should not short the market. Based on my system, I go long and short based on what I see on the fundamental, technical and sentimental factors.
From 1983 to 2006, which was mainly a bull market, 65% of companies underperformed and 32% outperformed the market. 25% of stocks account for 100% of index return. That's mean there are 3 out 4 stocks are short candidates.
Also, adding negative bias is a good hedge to your portfolio.
If you use covered calls and collars for bullish bias trades, why not use synthetic puts and reversed collars for negative bias trade.
Actually, I made a lot of money from shorting the market during the Asian Crisis in the 1990s and the dot.com bust. I missed the mother of all bears in 2008 but finally caught up by the end of that year.
Let me explain what are the mechanism I use to short the market
First, you need to understand the risks. It has unlimited downside and limited upside. Even if the stock goes to zero, you made at the most 100%. I did short a few stocks during the dot.com bust until the broker called to ask me to buy back the shares. The companies were bankrupt. But if you are wrong, there is unlimited lost. This is probably the fear of most investors when shorting stock.
The key is risk control. I always had a stop loss for my shorts. You have to be very disciplined. If you are wrong get out. The market can over extend itself for a while. Nowadays, I use options and not "stop loss". I will explain on the mechanism of the trade.
A person holding the stock will have to pay for the dividends when it is due. So normally, I will not short high dividend stocks unless I am very negative on its underlying fundamentals and technical outlook.
Downside cycle is usually, fast strong and violent. It is usually faster than stock rising on a bull trend. Thus, money can be made very fast if you are right.
Always be prepared for a short squeeze especially after a huge downturn with high volume. Once you made some quick money, I normally advise that you put a floor to the profit by selling some puts.
I always avoid shorting stock that has a high short interest. The squeeze can be tremendous.
Remember that stock can remain irrational longer than you can remain liquid. So get out when you are wrong and choose a right timing to get back if you still believe that you are right eventually.
How to start?
First look for stocks that are fundamentally weak. Examples - lost market position, high debt, low intrinsic value, losing market share,legal problems, declining profit etc. In this blog I have examples of short trades like Palm, AIG, GE, LVS, DHI. I had made money on all the shorts except for GE. LVS is a recent trade. I have also shorted stocks like GCI, F, CPLA and STX on my portfolio which is not on the blog.
Personally, I am still shorting GE. I am convinced that the fundamentals are overwhelmingly weak. It will take time for me to be right. On my portfolio, despite the fact I was slightly wrong on the trend, I am making a little money on GE and still holding on to bearish positions.
Usually, I start with a covered put ( Short stock + short put OTM) or reversed covered call. Following are some conditions:
o The stock is fundamentally weak
o It has been over extended by a bull market and is hitting resistance.
o Overall market is also hitting resistance
o Wait for a confirmation of a bearish breakdown. Usually, it could be a DOJI at the resistance,a hangman, a bearish engulfment, on the candlestick, MACD and Stochastics turning down, and a drop from a longer term descending channel.
If I am right on the trade, I will normally roll the SP down out. Sometimes, if the trend is clear, just take out the short put but be prepared to add a SP once the market seems to hit some support.
Do not add the SP too fast. Wait for stock to clearly show some support. Sometimes it is better to just get out. As for Palm, I shorted the stocks at 16, adjusted the SP at least 3 times ( with 1 credit and 2 debits ) before I got out at 8. It was still too early but good enough for more than 100% gain in 4-5months.
If I feel that longer term the stock is still weak and poised for further downside, I can add an OTM protective Call to make it a reversed collar. Often it is better to get out if I am wrong and reenter the trade again ( just like GE). But sometimes, it is also good to reverse collar the position. ( short stock, SP and protective LC ).
Many consider it unpatriotic and most of them are fearful
It is considered to be something for experienced traders only.
As a trader and investor, I do not see why we should not short the market. Based on my system, I go long and short based on what I see on the fundamental, technical and sentimental factors.
From 1983 to 2006, which was mainly a bull market, 65% of companies underperformed and 32% outperformed the market. 25% of stocks account for 100% of index return. That's mean there are 3 out 4 stocks are short candidates.
Also, adding negative bias is a good hedge to your portfolio.
If you use covered calls and collars for bullish bias trades, why not use synthetic puts and reversed collars for negative bias trade.
Actually, I made a lot of money from shorting the market during the Asian Crisis in the 1990s and the dot.com bust. I missed the mother of all bears in 2008 but finally caught up by the end of that year.
Let me explain what are the mechanism I use to short the market
First, you need to understand the risks. It has unlimited downside and limited upside. Even if the stock goes to zero, you made at the most 100%. I did short a few stocks during the dot.com bust until the broker called to ask me to buy back the shares. The companies were bankrupt. But if you are wrong, there is unlimited lost. This is probably the fear of most investors when shorting stock.
The key is risk control. I always had a stop loss for my shorts. You have to be very disciplined. If you are wrong get out. The market can over extend itself for a while. Nowadays, I use options and not "stop loss". I will explain on the mechanism of the trade.
A person holding the stock will have to pay for the dividends when it is due. So normally, I will not short high dividend stocks unless I am very negative on its underlying fundamentals and technical outlook.
Downside cycle is usually, fast strong and violent. It is usually faster than stock rising on a bull trend. Thus, money can be made very fast if you are right.
Always be prepared for a short squeeze especially after a huge downturn with high volume. Once you made some quick money, I normally advise that you put a floor to the profit by selling some puts.
I always avoid shorting stock that has a high short interest. The squeeze can be tremendous.
Remember that stock can remain irrational longer than you can remain liquid. So get out when you are wrong and choose a right timing to get back if you still believe that you are right eventually.
How to start?
First look for stocks that are fundamentally weak. Examples - lost market position, high debt, low intrinsic value, losing market share,legal problems, declining profit etc. In this blog I have examples of short trades like Palm, AIG, GE, LVS, DHI. I had made money on all the shorts except for GE. LVS is a recent trade. I have also shorted stocks like GCI, F, CPLA and STX on my portfolio which is not on the blog.
Personally, I am still shorting GE. I am convinced that the fundamentals are overwhelmingly weak. It will take time for me to be right. On my portfolio, despite the fact I was slightly wrong on the trend, I am making a little money on GE and still holding on to bearish positions.
Usually, I start with a covered put ( Short stock + short put OTM) or reversed covered call. Following are some conditions:
o The stock is fundamentally weak
o It has been over extended by a bull market and is hitting resistance.
o Overall market is also hitting resistance
o Wait for a confirmation of a bearish breakdown. Usually, it could be a DOJI at the resistance,a hangman, a bearish engulfment, on the candlestick, MACD and Stochastics turning down, and a drop from a longer term descending channel.
If I am right on the trade, I will normally roll the SP down out. Sometimes, if the trend is clear, just take out the short put but be prepared to add a SP once the market seems to hit some support.
Do not add the SP too fast. Wait for stock to clearly show some support. Sometimes it is better to just get out. As for Palm, I shorted the stocks at 16, adjusted the SP at least 3 times ( with 1 credit and 2 debits ) before I got out at 8. It was still too early but good enough for more than 100% gain in 4-5months.
If I feel that longer term the stock is still weak and poised for further downside, I can add an OTM protective Call to make it a reversed collar. Often it is better to get out if I am wrong and reenter the trade again ( just like GE). But sometimes, it is also good to reverse collar the position. ( short stock, SP and protective LC ).
XEC -Covered Call
Fundamentals:
XEC is an investment capitalizing on the stricter off shore regulation and potential rise in oil price over the longer term.
The world has focused on BP and the oil spill on the Gulf of Mexico. Off shore drillers faced tougher and stricter safety regulations. Permits are more difficult to get.
I am bullish on XEC for a number of reasons:
o It is an on shore driller not an offshore driller.
o It is domestic USA. The key property is a 94000 acres west of Oklahoma which is part of Cana-Woodford natural gas shale. It will be insulated from any political problems.
o There is a risk of war starting in Iran as they proceed to fuel their uranium enrichment plant with the help from Russia. If that happen, oil prices will spike.
o Last 3 quarters earnings were stellar. Last quarter earnings tripled its second-quarter earnings on a 71 percent revenue boost. For the quarter that ended June 30, the Denver oil and gas company (NYSE: XEC) posted net income of $124.6 million, or $1.46 per diluted share, up from $38.8 million, or 46 cents a share, in the same months of 2009. First quarter earnings rocked from $0.09 a share a year ago to $2
o Earnings were higher mainly due to successful exploration and resulting increased production. Expect earnings to double or even triple for the next 2 years.
Technicals:
XEC has corrected in the last 2 months.
There is bullish price actions and bouncing from support ( see charts )
Trade:
Buy 500 stock at 68.74
STO Sept 70 SC at 2.6
Cost : 66.74
Profit : (70-68.74)+2.6 = 3.86 or 5.6 % in five weeks.
Primary Exit: Stock went above 70 and shorts called out on expiration.
Secondary Exit:
If stock goes below 66.74, roll the SC to ITM.
If trend downward is strong, add a Put and collar the trade while rolling the SC down or out.
Thursday, August 12, 2010
New Trade LVS - reversed collar
I have done many reversed collar over the past 3 weeks. All of them were profitable.
Today, I initiated another reversed collar and it serves as an example on how I trade on bearish bias.
I shorted LVS today at 28.3. At the same time I sell a Sept 28 SP at 1.65.( slight OTM ). This is a synthetic put. It is the reverse of a covered call.
Normally, I start most of the time with a synthetic put or sometimes a straight short on the stock before adding the SP once it hits support. I will add protective call if it it reaches close to my cost, making it a reversed collar. I will do this only if I believe the longer term direction is still down. If not, I will take a minimum loss.
My cost position is 28.3+ 1.65 = 29.95. That means that the stock has to go above 29.95 on expiration September before I lose money.
PE: My return of the trade over 5 weeks is: 6.9 %.
Looking at the chart, the stock hits an all time high of 29.5 on 8/5 and finish lower on close with a DOJI. The next few days, the stock was testing the upper channel resistance. On Wednesday, with the general market decline, the stock went down 26.96 confirming the downside direction of the stock.
However, today there was an analyst upgrade based on projection that the Marina
Sands project in Singapore will be profitable. LVS went up more than 5%. For me, this is a wonderful opportunity to short the stock. I expect the stock to go down over the next few weeks with the technical damage done on Wednesday. It should be stagnant or down in the next 3-5 weeks.
SE: if the stock hits above 29.5 and Wednesday decline proves to be a blip and the bull continues into end of this month, I will close the trade with a some loss.
Wednesday, August 11, 2010
TBT
This is one trade that is not going well for me.
It is one of the few trades I am holding on to a losing position.
My long term conviction is that TBT will be up.
Currently, the trend is against me. I continue to sell OTM SCs to reduce cost although it is not enough to cover my cost.
My position is clear. It is a matter of time, bond prices will collapse. I was asked what is the next "black swan" event 1 week ago in a chat. I replied it will be the downgrade of US sovereign debt position and the devaluation of the dollar. The world will lose confidence on US treasuries and dollars.
If it happens, it will be swift and unexpected.
So I am maintaining my TBT long position. Be patient and I will be rewarded.
It is one of the few trades I am holding on to a losing position.
My long term conviction is that TBT will be up.
Currently, the trend is against me. I continue to sell OTM SCs to reduce cost although it is not enough to cover my cost.
My position is clear. It is a matter of time, bond prices will collapse. I was asked what is the next "black swan" event 1 week ago in a chat. I replied it will be the downgrade of US sovereign debt position and the devaluation of the dollar. The world will lose confidence on US treasuries and dollars.
If it happens, it will be swift and unexpected.
So I am maintaining my TBT long position. Be patient and I will be rewarded.
Misc updates and use of PUTs
I am back after 3 months of low key activity on the market.
For Wall Street, summer is time to sell and go away. For me, summer is to activate protection on my positions so that it can survive with minimum market monitoring.
The key is not how much I can make but how much I can lose.
So, this leads me to the idea of using puts.
Practically, I collared most of my stock positions before I left for my long trips. If it is not collared, it is an ITM covered call. I even had some reversed collars. Interestingly, I made money on most of my reversed collars. Today's decline amplified the profits on my bearish trades. I had put calender on F, short positions on GCI, GE, STX, BP and AMD. (covered by short puts - reversed of covered calls). All the positions are making money.
I survived the May flash crash followed by another 6 weeks of market downturn. At the beginning of July, I was back for a brief 1 week, I initiated a series of ITM covered calls for August. Looks like 100% of them will do well giving me from 5-7% monthly returns. After today's decline, Some positions moves from ITM to ATM. If the market stays stagnant or slightly bearish over the next 10 days into expiration, I should be making money too.
Overall, my portfolio is slightly above the time I left and the market has gone down about 8%. Actually, this vindicates the power of using options instruments properly in my trades.
Gold and Silver continues to perform strongly. Because of my trips, I collared my positions and thus lost some money on my puts.
Gold exhibits resilience. Long term trend definitely up. Sounds arrogant but this is one few areas I am sure. But traders may bring it down to 1160 before going to record high before the end of this year. The price action is actually not impressive pointing to a short term correction before going up. With all the bullish news of India and China relaxing their gold trading policies and Feb pumping more money into treasuries (which is totally ridiculous and criminal ), the rise in gold price has been anemic. Maintain your gold position but make sure you have a OTM SC. If go down, be prepared to add with SP or more shares.
A key learning here is that if you are collared on a bullish position, make sure that you know when you remove the puts or reduce the time decay via another short put below the strike of the long put. In another word, convert the put to a calendar.
I did not do that and thus time decay ate my profits. Overall, I made money from my stock positions and short calls. But I could have made a lot more. Always consider a diagonal calendar for your puts position when appropriate and get out the long put at the right time. Put is a money losing asset over time if the stock stays stagnant or up.
In normal active market monitoring conditions, I would not have added puts on positions with bullish bias. I will be just rolling the calls down and out to protect my stock unless the whole position turns clearly negative. To be clearly negative, it has to violate the support and the channel plus clear indications from fundamentals and my other shorter term momentum signals. A put, in another word is a weapon of last resort. But it is a necessary weapon and you must be ready to use it when needed or you may not survive.
In other cases, I buy puts when there are much complacency and stocks are hitting resistance. Puts are cheap protection. I will buy an OTM put before earnings, a major resistance or market complacency. If the market continues to shoot up, it is just a piece of insurance I am buying. I will close the put. I lose some money for protection but make money on the overall trade. Normally, I will sell the put once the uncertainty is over. Example: the market breaks out after a good earnings announcement or positive reception to a new product or model or overcome a major resistance.
The double diagonal on WMT continues to work. It is a risk free trade now. I have recovered all the extrinsic values of my LEAP strangle. However, it is not as easy as I thought. Today, my SC on WMT was exercised by someone. I had to cover my shorts and open another OTM short call. I lose some of my profits on this trade. It is a lesson to be learned. Never allowed a SC to be too deep ITM.
Allow never allow the shorts to go ITM before expiration. Ideally roll it just before options expiration. But in the case of my SC being exercised today, it is better to roll if it gets a little too deep in the money. In June my SP went ITM and the market turns around and I end up make some money. If my SC is not exercised today, I would have the same situation. Unfortunately, someone decides to take the obligations on my shorts such that I cannot maximize my time decay. It is a great lesson to learn.
I am still holding to my position for Sprint (S). I got out and took profit. After 2 weeks, I initiated another covered call again. Sprint is doing well. If it goes to $4, I will add shares. Similarly, I did for TQNT. I took profit on my covered call and initiated a new OTM CC when it went down. It should work fine and gives me another >10% over the next 2 months.
I will initiate detail new positions on the blog. Watch out for new trades over the next 2 weeks.
For Wall Street, summer is time to sell and go away. For me, summer is to activate protection on my positions so that it can survive with minimum market monitoring.
The key is not how much I can make but how much I can lose.
So, this leads me to the idea of using puts.
Practically, I collared most of my stock positions before I left for my long trips. If it is not collared, it is an ITM covered call. I even had some reversed collars. Interestingly, I made money on most of my reversed collars. Today's decline amplified the profits on my bearish trades. I had put calender on F, short positions on GCI, GE, STX, BP and AMD. (covered by short puts - reversed of covered calls). All the positions are making money.
I survived the May flash crash followed by another 6 weeks of market downturn. At the beginning of July, I was back for a brief 1 week, I initiated a series of ITM covered calls for August. Looks like 100% of them will do well giving me from 5-7% monthly returns. After today's decline, Some positions moves from ITM to ATM. If the market stays stagnant or slightly bearish over the next 10 days into expiration, I should be making money too.
Overall, my portfolio is slightly above the time I left and the market has gone down about 8%. Actually, this vindicates the power of using options instruments properly in my trades.
Gold and Silver continues to perform strongly. Because of my trips, I collared my positions and thus lost some money on my puts.
Gold exhibits resilience. Long term trend definitely up. Sounds arrogant but this is one few areas I am sure. But traders may bring it down to 1160 before going to record high before the end of this year. The price action is actually not impressive pointing to a short term correction before going up. With all the bullish news of India and China relaxing their gold trading policies and Feb pumping more money into treasuries (which is totally ridiculous and criminal ), the rise in gold price has been anemic. Maintain your gold position but make sure you have a OTM SC. If go down, be prepared to add with SP or more shares.
A key learning here is that if you are collared on a bullish position, make sure that you know when you remove the puts or reduce the time decay via another short put below the strike of the long put. In another word, convert the put to a calendar.
I did not do that and thus time decay ate my profits. Overall, I made money from my stock positions and short calls. But I could have made a lot more. Always consider a diagonal calendar for your puts position when appropriate and get out the long put at the right time. Put is a money losing asset over time if the stock stays stagnant or up.
In normal active market monitoring conditions, I would not have added puts on positions with bullish bias. I will be just rolling the calls down and out to protect my stock unless the whole position turns clearly negative. To be clearly negative, it has to violate the support and the channel plus clear indications from fundamentals and my other shorter term momentum signals. A put, in another word is a weapon of last resort. But it is a necessary weapon and you must be ready to use it when needed or you may not survive.
In other cases, I buy puts when there are much complacency and stocks are hitting resistance. Puts are cheap protection. I will buy an OTM put before earnings, a major resistance or market complacency. If the market continues to shoot up, it is just a piece of insurance I am buying. I will close the put. I lose some money for protection but make money on the overall trade. Normally, I will sell the put once the uncertainty is over. Example: the market breaks out after a good earnings announcement or positive reception to a new product or model or overcome a major resistance.
The double diagonal on WMT continues to work. It is a risk free trade now. I have recovered all the extrinsic values of my LEAP strangle. However, it is not as easy as I thought. Today, my SC on WMT was exercised by someone. I had to cover my shorts and open another OTM short call. I lose some of my profits on this trade. It is a lesson to be learned. Never allowed a SC to be too deep ITM.
Allow never allow the shorts to go ITM before expiration. Ideally roll it just before options expiration. But in the case of my SC being exercised today, it is better to roll if it gets a little too deep in the money. In June my SP went ITM and the market turns around and I end up make some money. If my SC is not exercised today, I would have the same situation. Unfortunately, someone decides to take the obligations on my shorts such that I cannot maximize my time decay. It is a great lesson to learn.
I am still holding to my position for Sprint (S). I got out and took profit. After 2 weeks, I initiated another covered call again. Sprint is doing well. If it goes to $4, I will add shares. Similarly, I did for TQNT. I took profit on my covered call and initiated a new OTM CC when it went down. It should work fine and gives me another >10% over the next 2 months.
I will initiate detail new positions on the blog. Watch out for new trades over the next 2 weeks.
Sunday, August 8, 2010
Market Price actions
Instead of putting my reply to Joseph on the comments page, I think the reply deserves a posting by itself.
Joseph, it was nice hearing from you.
I was on vacation for more than 2 months in Europe and USA. Also, traveling a lot the month prior to that. I went to Singapore and also to the Orlando OA Summit. I was on low key actions for more than 3 months.
I will be writing again since I am back and more or less settle down for the next few months.
To me the underlying internal price actions are strong in the market. This is probably driven by the fall of US dollars and good earnings. Much of the earnings are driven by growth in Asia. China looks hot.
Nevertheless, the underlying fundamentals are terrible. Besides all the negative data stated in my previous posts, we have potential risks of Europe Sovereign Crisis erupting again. Italy, Spain and Portugal are all in dire state. Employment figures were terrible. Fed is talking about further quantitative easing. Liberal Government trying to get Freddie and Fannie to forgive more debt.
I think there will be a top soon. Looking at Friday's action, the market may have more steam for 1-2 weeks. ITM Covered calls for August will work fine but for positions that are making money, I am adding cheap puts this month anticipating any downturns. I will share my experience on using puts in a new posts especially after a long period of vacation and low level access to the market. I will also give an updates to all my previous positions. So far, so good - thank God!
Longer term, the market can still be bullish as earnings are good although fundamental economics conditions are bad. But a correction is certainly imminent. Whether it is a free fall or another 5 to 10% sending the DOW to 9800 is still a question. My expectation is that it will be a correction. A lower dollar will raise the asset prices of stock especially those with good exposure to business in Asia. Thus, market may continue to rise and the US$ continue to fall.
One thing I am sure. I am not giving up my positions on gold and silver. These metals are overbought now. There may be one further dip and then resumes to all time high before the end of this year. Nice trend to sell OTM calls to protect and definitely sell puts when it dips and hit support again.
Joseph, it was nice hearing from you.
I was on vacation for more than 2 months in Europe and USA. Also, traveling a lot the month prior to that. I went to Singapore and also to the Orlando OA Summit. I was on low key actions for more than 3 months.
I will be writing again since I am back and more or less settle down for the next few months.
To me the underlying internal price actions are strong in the market. This is probably driven by the fall of US dollars and good earnings. Much of the earnings are driven by growth in Asia. China looks hot.
Nevertheless, the underlying fundamentals are terrible. Besides all the negative data stated in my previous posts, we have potential risks of Europe Sovereign Crisis erupting again. Italy, Spain and Portugal are all in dire state. Employment figures were terrible. Fed is talking about further quantitative easing. Liberal Government trying to get Freddie and Fannie to forgive more debt.
I think there will be a top soon. Looking at Friday's action, the market may have more steam for 1-2 weeks. ITM Covered calls for August will work fine but for positions that are making money, I am adding cheap puts this month anticipating any downturns. I will share my experience on using puts in a new posts especially after a long period of vacation and low level access to the market. I will also give an updates to all my previous positions. So far, so good - thank God!
Longer term, the market can still be bullish as earnings are good although fundamental economics conditions are bad. But a correction is certainly imminent. Whether it is a free fall or another 5 to 10% sending the DOW to 9800 is still a question. My expectation is that it will be a correction. A lower dollar will raise the asset prices of stock especially those with good exposure to business in Asia. Thus, market may continue to rise and the US$ continue to fall.
One thing I am sure. I am not giving up my positions on gold and silver. These metals are overbought now. There may be one further dip and then resumes to all time high before the end of this year. Nice trend to sell OTM calls to protect and definitely sell puts when it dips and hit support again.
Friday, August 6, 2010
Posting ahead of Employment Report
There is the important announcement of employment report on Friday. Everyone is very positive. In a community chat, I saw lots of optimism. All betting that it will be a positive number.
I look at the whole scenario and decided to post the following on Thurs:
I will bet that the unemployment numbers are up.
Stocks were hitting their resistance. It has been a great July with the market up more than 10%. VIX is reaching support around 22. Lots of complacency and optimism with no fear. Any bad news should send the market down.
Predicting the market is a risky business. If I can get more than 50% right, I congratulate myself. I will be making money because of my hedge with options.
On the fundamental side:
1. Conference Board Confidentce Index dropped to the lowest reading in 4 months of 50.4.
2.Empire Manufacturing Index of New Area activity plummeted to a 19 months low of 5.1
3. Philadelphia Fed Manufacturing Index dropped to 11 month low of 5.1 in Jul y
4. Long term unemployment (6 months or more out of work ) is 2x as bad as the worst recession since 1948 and getting worse.
5. Fed are talking of quantitative easing and keeping interest rates low
6. Baltic Dry Index dropped for 36 straight days - the longest streak since 1995
7. ECRI weekly leading index falling out of bed hitting a -10.7 - worst in 14 months. Each time it hits <-10 a recession follows without fail.
8. So far this year 103 more banks had failed added to the 148 that failed last year. Banks are reporting a 7 percent decrease
Considering the above, how to stay positive. I am hedging all my long positions and increasing my shorts.
I am not overly pessimistic. At least, I know the earnings are good and Asia is doing well. But with the high expectations, SPY facing resistance and complacency, I fully expect stock to correct short term with the DOW going below 10,000. Longer term after this correction, the stock market should resume its climb.
I look at the whole scenario and decided to post the following on Thurs:
I will bet that the unemployment numbers are up.
Stocks were hitting their resistance. It has been a great July with the market up more than 10%. VIX is reaching support around 22. Lots of complacency and optimism with no fear. Any bad news should send the market down.
Predicting the market is a risky business. If I can get more than 50% right, I congratulate myself. I will be making money because of my hedge with options.
On the fundamental side:
1. Conference Board Confidentce Index dropped to the lowest reading in 4 months of 50.4.
2.Empire Manufacturing Index of New Area activity plummeted to a 19 months low of 5.1
3. Philadelphia Fed Manufacturing Index dropped to 11 month low of 5.1 in Jul y
4. Long term unemployment (6 months or more out of work ) is 2x as bad as the worst recession since 1948 and getting worse.
5. Fed are talking of quantitative easing and keeping interest rates low
6. Baltic Dry Index dropped for 36 straight days - the longest streak since 1995
7. ECRI weekly leading index falling out of bed hitting a -10.7 - worst in 14 months. Each time it hits <-10 a recession follows without fail.
8. So far this year 103 more banks had failed added to the 148 that failed last year. Banks are reporting a 7 percent decrease
Considering the above, how to stay positive. I am hedging all my long positions and increasing my shorts.
I am not overly pessimistic. At least, I know the earnings are good and Asia is doing well. But with the high expectations, SPY facing resistance and complacency, I fully expect stock to correct short term with the DOW going below 10,000. Longer term after this correction, the stock market should resume its climb.
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