Innovestor's trading blog

Europe Insult Diplomacy

2011-11-07T10:25:00.001-08:00

Gold and Silver Updates

2011-11-07T10:20:00.000-08:00

I am increasing my bullish bias on gold.

Fundamentally, the big picture points to a continuous devaluation of currencies.

Europe needs the EFSF to bailout weak nations in the Euro Zone. Japan intervened the yen to fight against the dollar. The Swiss decided to peg the Franc to the Euro, which is to me a big mistake.

IMF said that there are no resource barriers to solve the Euro crisis. In another word, more money supply and bailouts.

There are increased currency wars and bailouts and thus more money dropping from helicopter.

The fundamental of gold is not being recognized yet by the main stream media and the hedge funds.

Instead it is currently being sold because of liquidity squeeze as hedge fund redemption increased and tighter short term credits because of debacle of MF Global and the European banks.

All of these happenings virtually guarantee that gold will have a bigger role as we move forward. Gold will be the last store of value standing when everything gets wrung out with the euro and then the dollar. Focus is now on the euro but at some time focus will shift to the dollar. We had a spirited gold rally after ECB cut the rate as this was recognition that there would be more money printing. Ultimate reason for holding gold is because of the large amounts of paper printing….eventually there will be so many adjustments and so much pain that someone will want something like gold.

What is not recognized now is gold has no counter party risk. It cannot be created arbitrarily. It has historic intrinsic monetary value. It is a matter of time that it will be recognized.

The negative outlook presents opportunities for precious metal investors.

I am particularly interested in adding to my mining shares. There is a substantial disconnect has developed between the price of gold and the mining companies. Over the last 3 weeks, I have added some juniors and they are doing very well. The disparity on real valuation and market value is so high that it is a rare opportunity that only comes once every few years.

I may have to wait 6-12 months maximum. In between, I may see another violent corrections although gold price movement is positive now but there are no definite signs clear up trend yet.

What are my strategies now?

I am holding on to a core position of gold and gold mining shares which I will not sell. These positions are hedged. Cost is being reduced through short options and dynamic collar strategies. I have plenty of cash to patiently wait for the right timing.

Besides I am doing the following:

Compile a list of seniors to add on any weakness – a capitulative bottom followed by a clear reversal. These companies need to fulfill the following criterion:

i. Good cash flow and margins

ii. Good organic growth without acquisition

iii. Efficient production cost

A list of junior and exploration companies with the following criterion:

Confirm reserve with huge growth potentials
Cash to ride through any credit squeeze
Potential to be acquired
Some companies at advanced exploratory stage and positive preliminary economic assessment with potential for strong valuation growth.

Some of the companies in my portfolio are discussed in my blog posted today. I am still doing my research to gather a group of companies. The companies that I have accumulated over the last 3 weeks are:

NAK
SQI
TMM ( Listed in Canada)
NSU
TGB
SVM
SWC
SQI ( Listed in Canada )

For the time being, it is my beliefs that companies that I have added the last 2 weeks have the potential to high 80% profit if there is a Santa Claus rally. If there is a major breakdown in the Euro zone, they may another major run down for gold and silver. This negative break down will be fast and may last 2-3 months. This will be a good time adding shares by selling puts and using the profit to accumulate shares.

I will also sell half my shares if the target of 100% is reached by the end of the year giving my other half a risk free ride.

In summary, the fundamentals look better every day but the technical signals are not convincing and may even break down. Gold at 1800-1840 will be a very important test for resistance. Price can lag the fundamental for a period of time. So I have to wait for technical signals before going really bullish. Meanwhile, I am trying to maximize the trading range to reduce cost by selling options.

Going for the big profit.

2011-11-07T10:08:00.000-08:00

In my trading history, I had missed some profits big time because I was unable to hold on my fundamental convictions.

I was very bullish on BIDU and APPLE at least 6 years ago. I bought the stock and traded in and out 2-3 times for a 30-40% profits with a holding period of 4-6 weeks and thought I was a hero making big gains. At least it was >100% ROI.

AAPL had gone from $40 when I first bought to $400 now and BIDU has gone from $90 when I bought the stock to >$1300 ( before split ). I missed some really big runs. At least I was able to hold SLW from around $3 sold half of positions only when it was above $40.

Currently, I am giving a lot of thoughts on how to manage for maximum profit on selected trades. 50% of my trades are still short to mid-term swing strategies when I take profit once it hit my target of >30% ROI annual. These are certainly opportunities where taking profit is a sound practice. It should be done regularly for majority of positions meant for a short to medium trade. These are very profitable, consistent trades

But the big money is also made from a minority of trades ( about 30% ) I need to hold longer term. Trades can be divided into short term swing trades, long term income trades ( stocks which are stable and has high dividends, and long term trades with huge potentials.

The big profits are usually made in the longer term trade. I refrain from day trading. I identified the disadvantages of day trading are:

- short term trades are more random and thus more vulnerable to whipsaw. I deal with the short term volatility with collar trades. It works best in volatile environment. It allows time for the trade to work. I consider this the best tool to fight the HFT and computer algorithm trading. It takes the emotions out of the trade.

- I loss my edge on fundamentals and hedging

I am trying to maintain a list of stocks that give me the big runs. However, it is a very difficult task. It is not easy on the emotions. It needs fortitude and convictions on the fundamentals. Very few people are able to capture the full extend of the trade.

Look at 2 examples of AAPL and SLW.

A correction can be as high as 61.8% from the top. This is a common retracement level. During 2003, AAPL dropped 82% from the top. This was not a normal correction and was influenced by fundamental events. Apple was on the verge of bankruptcy. It was the return of Steve Job that made the historic turnaround.

What are the steps for trading these high profit potential companies?

Identify the companies with overwhelming long term fundamentals. Focus on the big issues rather than the annoyance. The best thing is to be able to identify the stock at the beginning stage. Many times, you only catch it when it is 1/3 of the way. It can be identified only when the stocks have already started the race. In the beginning, there will be high volatility which the task more challenging. This is something that has to be dealt with.

Note that the same fundamental can be applied similarly for stocks that are at the beginning of a decline. The clearest signs are when the stock is totally over valued with little fundamentals, potential of accounting frauds and obsolete business models. You know that the business model will never justify the PE or Price / sales ratios. Factors driving the stock price are purely momentum, euphoria and greed. When the bubble burst, it can give huge returns. I remembered during the dot.com bubble, I scanned the market and identify 5 stocks that trades with >1000 PE and >500X market cap/sales. I shorted all of them. Initially, I lost some money but when the bubble burst, it was extremely profitable.

It is usually a very tough ride with the high volatility. Option strategies have helped me cushion the volatility and thus control the emotions of fear and greed.

Read the technical signals. Here are some simple but not perfect steps:

Look at longer term chart to identify the trend lines
Take note of the retracement. 50 and 61.% are common retracement level and seldom it goes above 78.6%
Observe the volume transactions
Decide the directions of the trends. For these I use Moving Average channels, MACD and overall trend and patterns to make a decision.
Look for major breakout with volume.

Use a longer time frame to determine the trend and a shorter time frame to enter the trade. In this case with options, I use weekly charts to determine the longer term trend directions and daily charts to enter the trade. It gives excellent information on the trend for trading use options with monthly expiry. In between, I use daily and hourly to do some trading keeping the core position ( 50%) on the longer term trend. Think longer term all the time for the options to work. Short term volatility will kill the options. Some short term trades may be initiated but it should be managed as swing trading opportunities only.

Never fight against the longer term trend.

I will explain more when it comes to actual examples used.

Once the stock is identified, I intend to keep it long term. Following are list of things I do:

For breakout, roll the SC. Let the winner run. The signal must be clear. Do not do it prematurely. It is never too late. Wait for the set up and clear trigger signal.

MACD positive
MA channel positive
Volume increases
Trendline positive
Break out from a period consolidation
Positive patterns – head and should, double bottom, bull flag, cup and handle

If there is short to mid term bearish breakdown, preserve the trades and go short term negative. Collar the trade by ensuring that there is a put and a SC. Bring the SC nearer ITM and out in time if it is really negative. It is a risky move as it turns the trade negatively biased. There is a high probability of being whip-sawed – having to take out or roll the SC for a loss if you want to keep the trade.

Alternatively, I prefer to sell a longer term OTM SC and keep the put. When the stock stabilizes, I will cash out the puts and add shares to the stock and protecting it with another put if necessary. Buy a ATM or slightly OTM to protect if still not sure. May have to dollar average 2-3 times before you realize profit for the overall trade.

When the stock is trading in a range, sell an OTM call when the stock hits resistance and an OTM put when the stock hits support. This will reduce the cost while you wait for the longer term trend.

If you decide to go negative short to mid term, you are betting against your longer term bullish fundamental convictions. The objective here is to keep investing until the trend is on your side. Use SC, SP and dollar averaging to reduce you cost.

Do not allow the loss to exceed 15% for the overall trade. If so, get out and then decide later. If discipline is exercise on adding puts and SC, you should not hit the stop loss limit easily.

When the trend is positive, take out the SC and even the puts and let the winner run. When volatility is high, you can add a SP to reduce the cost of the puts. The put can be removed once the bullish trend is clear.

When facing resistance, add an OTM SC. Do not allow the SC to be assigned. Take it out when the trend is clearly bullish. If not sure, just roll it up.

When the stock breaks a weekly trend line and indicators go bearish, add a put.

The steps are not easy to implement. It takes a lot of practice and experience. Focus on keeping to the plan.

If fundamentals change, get out for a loss. If it is properly done, the loss should not be more than 10%. But if done right, the profit will be a few hundred percent.

Lets analyze a few stocks based on the above ideas:

AAPL

AAPL had many minor corrections. As long as the weekly price does not fall below the MA channel, no puts are needed.
Use an OTM SC. Points (D) shows that you may need to roll the SC twice before getting a profit.
If the plan if followed, a put would be added in 2^nd half 2008 correction and dollar average on beginning 2009
During early 2009, there was a nice consolidation and breakout with volume. It was a clear classical signal. Price clearly broke above MA channels with MACD turning positive and high volume.

Common Fib retracement level for AAPL is around 61.8%

SLW

From the breakout of support at 15, the fib retracement is 61.8%. There is a probability of breaking down to 78.6% level as currently the pattern looks very similar to the pattern in A when it happened in 2008. So although I like SLW, I stay very cautious until I see a clearer breakout. For this to happen, I like to see the MACD cuts positive ( better with volume ).
I will trade slightly positive based on a collar with SCs at 40-45. If it breaks down below 30, a put will be warranted until it breaks above 30 again proving that it is a head fake. If not, the trend can easily accelerated down to 20.
In 2008, I bought SLW at the highs of $16 and cut loss when it fell below $15. I bought a lot when it went down to below $3 and finally showed signs of turning around. II bought a whole bunch of shares at <$3. It is one of the best trades I made for the last 2 years.
The important break came in Q 3 of 2009 when it broke 19 ending a 3 years price consolidation. I added to my shares.
Currently, I have taken profit on SLW and holding on to 50% of my normal position size. I am cautiously technically but very bullish fundamentally. Short to medium term, gold and silver may still experience 1-2 breakdowns. If macro economic fundamentals turn really negative, liquidity squeeze will force hedge funds and bank to sell silver and gold. Junior companies will find it difficult to get funding. If it does, I will be following my plan of adding puts, selling it later, adding shares and adding to my position size. I will control my loss to less than 10% for the overall trade at any time. Upon breaking up, I will certainly let the profit run by removing the SC, adding SP and eventually removing the long puts. For the time being the technical signals are not there yet but fundamentals are overwhelming positive.

There are signs on the daily that SLW is positive. But it is not confirmed on the weekly. To get a clear bullish signal, it must first break 35 and then 40, which is a formidable resistance. If it does, we are off to the races. Meanwhile, I will trade based on a trading range between 30 and 40 with a slightly bullish bias.

FCX

It shows very clear and similar signals on a bullish reversal on 3 occasions on A, B, and C. Each signal comes with a positive break above MA channel, high volume and positive MACD crossover.

Fundamentally, I like this stock. Compared to 2008, it has enough cash now to ride through any credit squeeze. It is producing copper at 1/3 the price of market thus able to cushion any drastic drop in copper price.

Currently, my CC for FCX is ITM. I have added an 2X OTM naked put to collect more shares. If assigned, I will convert it to CC or collar depending on the market condition.

GDX

· It had a nice run from 2008 and is now trading at the long term support of 55.

· It is now trading in a range between 55 and 65 more than a year. If it breaks above 65, I will be very bullish.

· Strategies now is to maintain hedges either with married put or CC. Personally I prefer covered call but if it drops below 55, I will add a put to make it a collar

If my CC is called out because the stock is ramping up quickly above 65, it will be very bullish. I may have to initiate a new trade with a married put, or call calendar, or just stocks or call. If it breaks 65 and fails like last time when the stock rose to 66.98, I may have to collar the stock again.

SWC

· This is a play on platinum and palladium. I have traded this counter for 4 years.

· Recently, the stock dropped from a high of 25.2 to 7.5. The collar strategies were used. I suffered minor losses. SC were rolled down a couple of times. Finally, sold my puts and added to my position at around 8.0.

· Company is a little tight on cash after making a new acquisition on Peregrine recently.

· The resistance is now around $14-15. If breaks, it will double to above $25 again.

· Daily chart is already very positive but weekly has yet to confirm. So I maintain a DEC 15 SC. May need to roll down SC short calls if breaks down, add a put if weekly confirms a break down below the MA channel.

Cost average again when it reaches a new low and issue a reversal signal. Do not cost average if there are no reversal signals. It can go down even to 2008 low at 2.5. But that will present an opportunity to buy more shares on condition that the company do not face a liquidity squeeze.
Misc junior metal companies: NAK, NSU, TGB and SVM

These are companies in my portfolio waiting for the big move. Options premium are huge because of the volatility.

NAK – a wealthy businessman tried to block the development with the residence of Lake and Peninsula Borough.. It is suspected he wants to protect his fishing and hunting activities. I do not think he will win the fight on Pebble mines with the Alaskan government. Pebble has the biggest deposits of copper in the world. There are also rare earth and gold deposits. It has long been a target of acquisition. Read http://www.washingtonpost.com/national/state-of-alaska-seeks-to-invalidate-borough-voters-initiative-aimed-at-gold-copper-mine/2011/10/28/gIQACHqNQM_story.html and http://www.alaskadispatch.com/article/pebble-mine-debate-unleashes-lies-hype-and-hyperbole

NSU – the UN is putting up a vote to sanction Eritrea because of a small nation Gabon putting tendering the motion. I do not believe it will be done because to have it passed, you need unanimous votes. China will not agree. I am adding to my shares of NSU. I do not think the sanction will be passed. I added to the shares at 4.65.So far, the rumours have subsided

TGB – Environmentalists block the development of this huge mind in BC. It was blocked last year in a review by the Central Government in Ottawa, Canada. Expect an appeal and project will be reviewed again. It has world class copper, gold, molybdenum and niobium deposits. It is a very attractive candidate for acquisition.

SVM : received anonymous letter on accounting fraud. When it had been cleared, I bought the shares at around $7.3 in October.

I expect the bearish trend will resume beginning next year. At the height of maximum bearishness, I believe there will be plenty of opportunities to pick up shares. Potential candidates include uranium mining companies and basically companies which will be beaten down but has great fundamentals.

Using Ratio Back Spread

2011-11-07T07:58:00.000-08:00

I have entered many ratio back spreads over the last 3-4 weeks and all of the trades are positive.

This is done to increase the theta gains especially for near term short options. Basically, the delta is neutralized against the Long options or stock and the theta gain is doubled.

Some guidelines:

Increase 2 x Short term short options help to pay the long option or stock. Sometimes, to be safe, use 1.5X instead of 2X
The shorts should be OTM preferably about 2 strikes down to prevent it from going ITM.
Do not use time frame longer than 1 month as it is difficult to predict actions of the stocks. Weekly options are best for this purpose
Do not use it when there is earning announcement and anticipation of a major volatility event.

Taking the example of a calendar option spread ( Long term Long option + 2X short term short options ), my observations over many trades are:

· When the trend is against long option, the short option gain is able to offset the loss on long option

· When the trend is in the direction of the long option, the gain in the long option is higher than the short option because of higher delta.

· Note that in many cases that the trade makes money when the trend is up or down as long as it does not move too violently.

· Even if the trend moves violently, it is not difficult to adjust the shorts by rolling it down or putting additional protection. There is enough time to do the adjustment. Volatility in the last few weeks are high enough to verify the trades

· When the shorts go slightly ITM, the trade will still make money. But it goes ITM, it is a signal to be ready to close the trade, make the secondary exit or adjustment to protect the trade. I do not act on the day when it goes ITM but will initiate my SE once the overall trade turns negative.

I have used these strategies for the following trades

SPY Nov 120 / Oct 119 put calendar : broke even despite entering the put on a totally wrong timing. The trade was entered when SPY was at support at 120!

RIMM – Nov 23 / Oct 21 ( 2x ) put – rolled to Oct 20 SP and rolled to Nov 19 SP. Trade is making money

IMAX – selling double the puts to pay for the put protection on the stock

FXE – a put calendar Jan 140 / 135 (1.5X ) bought on 10/28. With all the swings in volatility , the trade is behaving very well. When FXE is up, the gain in the short is higher than the put. When FXE is down, the gain in the long is higher than the shorts.

I have done similar trades for GE, POT, FCX, EUO,APOL ( bear call calendar) – all of them with positive results.

There is an alternative use for the 2 X options. On 2 occasions I used 2 X short term long OTM options to protect any potential big moves in stock before an earning events. It is reasonably cheap that if the trade is in my direction, the trade can still make a profit with this cheap insurance.

The key learning is that using double short option, short term OTM can protect a long trade and help to reduce the cost. The short options theta gains will offset any loss on the long put and the long put gain will normally cover the loss of delta in the short options. It is best used when stock are traded in a range. Nevertheless, the trade can tolerate slightly wider range but not a complete break down or breaking up of price.

There are some risks involved but it is very manageable if the trades are placed OTM. It can take some volatility but still the trade should not be placed before earnings or any anticipated big movement or events.

VXX - volatility trade one more time (Updated - Sept 27)

2011-09-26T22:19:00.000-07:00

( This is the third time I am trying to catch the top of the volatility the last 2 months.

The way I did it the last time was to short the stock and sell a put against it.

It is a trade with minimum risk and reasonable profitable - making about 2-4% in 4-8 days.

The reason for this kind of profit is the high volatility.

I did another one of these trades today.

Trade:

STO 500 shares of VXX = 49.4
STO Sept 51 SP = 3.16

This is ITM covered put trade.

Stock can go up to 52.46 at the end of this week before losing money.

Technically, the trade is peaking and that is where I entered the short trade.

ROI = 3.15 % in 5 days

Update - Sept 27th

This is meant to be a very short term trade.

Since I got 75% of the targeted profit in 1 day, I decide to close the trade instead of waiting another 4 days.

BTC 500 shares 46.4
BTC Sept 51 SP for 5.05

Gold updates

2011-09-23T21:41:00.000-07:00

There was a huge correction in gold for the last 2 days. It dropped about 18%. I kind of expected in as mentioned in my last update on September 8th.

But I was caught by surprise that gold and silver miners are brought down together with stocks.

I suffered some damage on my portfolio despite the fact that it is heavily hedged. I also have shorts for 12 positions for other stocks on the general market but my gold portfolio suffered.

So where do we go from here?

In this post, I shall revisit the fundamentals and list down my strategies to deal with this downfall.

For the time being, I am knock down but not knock out.

Most of my positions are hedged except for junior miners which had been hit hard. I even cut back some positions today but add more PHYS – which is for physical gold and silver.

Fundamentals.

I trade mainly on fundamentals. I use options only for hedging and technical for short term entry and exits.

To me the fundamentals have not changed. Lets do the analysis by asking a few questions.

1. Have the countries around the world stopped printing money?

How will Europe and the world deal with the current crisis? The direction is clearly to print more money.

Greece default is probably built into the market. But what about Italy, Spain and Portugal. Germany is the only nation in European Union that has a sound balance sheet but can it sustain the all the EU countries?

The Fed did an operational twist in the market this week. Instead it turns out to be a hurricane in the market. DOW dropped more 300 points for 2 consecutive days!

For those that expected QE 3, this is some kind of QE 3 – the attempt to keep interest rates low and close to zero.

Here is an interesting chart from Casey Research.

To keep interest rates low from 2009 to 2010, it took $2T. With extrapolation, it will take another $2T to be in line with the FED ‘s objectives of maintaining interest rates close to zero.

Money supply is and will continue to increase.

As worldwide monetary supply increases, paper currencies lose value. There must something that maintains its value. The monetary base took over 200 years to rise to 800 billion dollars. Between 2008 and 2011, it rose from 800- 2.7 T. This guarantee that gold and silver will remain in a bull market fundamentally for years to come.

There is a debate that whether gold is money. Roubini, Bernanke and Buffet have publicly declared that gold is not money.

Aristotle defined five reasons why gold is money in the fourth century BC (which may only have been the first time it was put down on paper). Those five reasons are as valid today as they were then. A good form of money must be: durable, divisible, consistent, convenient, and have value in and of itself.

Gold has been used as money for millennia. If there is a crisis, people still flock to gold

Although the days of getting back to gold back currency is slim but it will always be a reference to real value of economic power – directly or indirectly

Bottomline: Gold cannot be created from thin air. It has limited supply.

Currency wars have intensified. The last of safe Haven currency is gone this week as the Swiss pegged their currency to the Euro.

2. Is Gold in a bubble?

There are many analysts that predict that gold is in a bubble. Lets examine whether gold is in a bubble.

What constitute a bubble? There is wild euphoria. Fundamentals are totally misaligned with the price. During the dot.com bubble, P/E of more than 500, and price to sales of more than 300 were common.

It seems to me now that a lot of people are talking about gold but not many people are buying. In a room of traders, it is normal to find only a few has invested in gold.

The number of analysts that are bearish for gold still outnumber the number of them that are bullish.

In a bubble, the typical stock market trader believed stocks were headed much, much higher — and, therefore, that any pullback should be used to buy more. In today’s gold market, in contrast, there is a remarkable level of skittishness in the gold-timer community. That is not the typical sentiment hallmark of a top of a bubble.

Gold was thought to be a bubble at 800 and then 1000, 1500 and now almost 1900.

Technically, it is overbought. Price has gone parabolic. A correction is needed. But it is not a bubble.

a. If you compare gold to various assets and the NASDAQ on the price peak in a bubble. gold has a lot to catch up.

b. Gold is not even a mainstream investment. As a percentage, it is held in small amount by most pension and hedge funds. For hedge funds, it is only 1%. It is not a dominant investment now.

Eventually, gold will be in a bubble. I want to be in that bubble. It will be a maniac phase whether junior miners can go up 1000%. I want to be positioned for that day.

c. Gold reserve as a percent of monetary base is only 20%. In 1980, it is was 120%. 20% is close to a low.

What does it tells me that gold is in a bubble. Basically the reverse of all the above. Somehow, I like to see the monetary problems are magically solved. Also, suddenly all the deficits somehow disappeared and there are definite solutions to the European sovereign debt crisis.

3. Supply and demand.

a. To put in perspective, there is very limited amount of physical gold available. It is said that there is enough gold only to fill an Olympic size swimming pool. There is also a lack of major discoveries.

b. Demand for gold is now higher from China and India than the Western world mainly USA and Europe.

The eastern hemisphere has a cultural affinity to gold. With increase income and growing middle class, gold purchase has increased substantially. There is more affordability.

In a price drop like today, there were massive buying of physical silver. Sprout assets management has announced that they are out of physical silver for sale. Check with many dealers, they will verify that there are massive buying on physicals especially for silver. When price drops, many sophisticated investors are buying more.

There is clearly a shortage of supply right now.

Seasonal factors favor gold. We have the Ramadan, the Indian New Year, Christmas and Chinese New year coming in the next 5 months.It will bought as gifts for the festivals.

Gold can be divided into the fear trade, the luxury trade and currency confidence trade.

When investors buy gold because of fall of Europe, it is a fear trade.

When investors buy gold because of fiscal policy ( increase spending and social programs ) and money policies ( increase monetary supply), it is currency confidence trade.

When investors buy gold jewellery for seasonal gifts, it is luxury trade. The luxury trade is sizeable compare to total demand. In 2010, it was 50% of demand. There are no signs that it will be lower this year looking at the way gold is being bought in China and India. Despite the 25% increase in price, demand has increase 7.5%.

It is also interest to note that when market goes up and gold goes up, it is currency confidence trade. Investors are afraid of inflation, assets dilution and currency devaluation.

When market goes down and gold goes up, it is fear trade. It is usually the results of a potential sovereign debt crisis or major banks failure.

What happens when markets goes down and gold goes down? It is a correction and a manipulated trade.

C. Low interest rate favors gold

d. Resolution to the current debt situation and deficit.

Europe, Japan and USA are all in debt situation that will not be easily resolved.

They are all living in borrowed time. The “End Game” ( John Mauldin ) is going to be ugly

I came upon an interesting comparing US deficit situation to a typical household budget.

The market has priced in a default in Greece. Probability is 90%. There is also no solution for US debt or debt for Italy, Portugal, Japan and Spain.

History tells that before settling the deficit, it will devalue its currency before it cuts its deficit.

Upon devaluation, gold price will explode.

Gold Miners

I like to add a few comments on gold miners.

It has followed the decline of gold today. Frankly it was disappointing for me. I expected it to go up. But it was dragged down by the price of gold and the general market conditions.

There are plenty of fundamental reasons to be more bullish on gold miners than gold. There is usually a lag for gold miners to catch up with gold.

I still like gold miners main because they are cheap on valuation. Cash flow and margins are improving rapidly.

During the 1979 to 1980 gold mania, gold producers lagged the metal for 2 full years. From 1977 to 1978, gold rose 58.4%, gold stocks only up 11.7%.

Today, gold is up YTD about 15%, and gold stock has risen only 3%.

After a 10-year bull market, good managers have finally returned to the mining sector.

Top mining companies are finally generating dramatically higher profit margins. Free cash flow is now "gushing" and will double in the next year as huge capital investments by the majors pay off.

Expect enormous consolidation as gold mining majors start buying up smaller producers, at startling premiums to current market prices.

New discoveries are expected as 10 years of new exploration is paying off, and the gains accruing to successful exploration efforts can be explosive.

I still keep 2 position size of junior gold miners. There are minimum trading activities. I re balance every 6 months or when needed. I expect when the action starts, these are going to make me the most money. Already, I went through 1 round in 2009 where I made hundreds of percent from different junior miners. Over the average, my annual return for this group is more than 30%.

Technical

So why does gold and silver corrects so violently the last 2 day.

First, investors were expecting QE 3 and it is not obvious with the Fed announcement.It is just a change on the balance sheet.

There is a margin hike today for gold and silver effective September 25^th – Monday. This reinforces my belief that these precious metals are indeed intentional suppressed and manipulated. Why hike the margin when it is falling? The objective is to drive it lower.

Also, gold has gone parabolic short term and some form of regular retracement is both normal and healthy. It happened when it was at 630 in middle 2005. 950 in Q1 2007, 1178 in beginning 2009 and now as it was on verge of exploding upwards.

Retracement can be up to 50% and even 61.8%.

For Silver, a fall to $30 represents a retracement of 50% on a monthly chart. This is the level it may stop. If not it will move to 61.8% which is around $25. The maximum I expect it will go down is to 78.6% which is around $18. Thus technically, I am bearish until it change to align with the bullish fundamentals. It has to hold $31.

At each point, I will add to the positions but will not release the hedge until it is clearly bullish again. Meanwhile there are good trading opportunities even if it continues to fall.

Notice that the correction can be violent but it is also exuberant when it goes up. That’s why the observation of the fib retracement level is important.

Strategy

Since technically, it is bearish, I will be very cautious now with my trades until the technical situation change.

At each retracement level, I will add to my positions with covered calls and then collar once it breaks the support. Continue to add monthly SCs, Only when gold is clearly bullish, I will take off every hedge and let it run. I did in the last quarter of 2009.

Add on position at each retracement level with reversal signals. Some reversal signals at the retracement level are:;

A turn on the momentum indicators at the hourly chart.
A V – shape reversal with a candlestick morning star.
A head and shoulder at the hourly
Consolidation and break up i.e. a bull flag

Once the weekly turns negative and breaks support, add in the puts.

My positions will be increased each time it goes down. Do not add until they are definite signs of bottom and reversal. This current situation could go a bit longer and price can still go further down. But I maintain the confidence it will turn around.

The maximum is 2 X position size. From time to time, some stocks will be called out. It is a good thing as it will be profitable. I will add positions when the buy signals kick in on my system again.

Thinking back, I am experiencing the same kind of feelings during the last 4 corrections. Each time, there are intense emotions and fears. Every instead since the last 6 years, it ended up with gold going a lot higher. So maintain your faith in the metal.

The best thing now is to trade with a collar until the technical situation change.

It is the fundamental belief that bull rage will eventually come. Just like stock when it drops, it takes the elevator down. Here if it goes up, it will shoot up like a rocket as seen with the breakout in early 2009.

Longer term, the trend has been up since 2005 and will continue to be up. I have put forth the arguments above that gold is not in a bubble.

Once the weekly chart reversed and turn positive together with momentum indicators, I will run with charts again.

My investment style is based on fundamentals. The profits are huge. I did with with the dot.com bubble and housing bubble shorting it. It was no easy feat. Now it is safer managing with collars.

Maintain the bullish bias as long as fundamentals have not changed. Currently it is overwhelming positive. But many times price direction can go in reverse to fundamentals for an extended period of time.

Once it breaks up, there is a lot of money to be made.

Why I am not a day trader?

2011-09-21T11:20:00.000-07:00

Technical systems do work for short time frame as long as it is applied consistently. Therefore it works also for a day trader. For swing trades, I use a weekly, daily and hourly time frames. If I were to day trade, it can be easily changed to daily, hourly and 15 minutes.

So it can be lucrative to be a day trader. Once in a while, you hear someone who is successful although I am not sure on the longer term performance. It seems tempting and lucrative. One can make all the gains and close it by the end of the day without worrying about your portfolio overnight.

But only a very small minority of day traders succeed. The successful ones normally do quite well. But to get super rich, I have not seen any over longer term. On the other hand, I have seen too many end up losing everything. Big money are made over trades held longer term with clear understanding of the underlying fundamentals. Just imagine if you had bought MSFT, WMT, AAPL, Gold and BIDU in the early days and held it over time or even just trade it with a consistent positive bias over time.

A great example of day traders is the computer algorithms used by big banks with teams of highly sophisticated programmers, mathematicians and super computers. They trade by nano seconds. They have a special internet pipe to the exchange which allows them to do execute trades with such speed. They are able to front run a lot of traders by having visibility to all the trades that are submitted. The computer is able to gage the psychology of the market and trading in the specific directions.The successful rate is more than 90%.

So who am I to fight these computers? Constantly I am thinking of how to gain an edge over them – at least not the computer but with the crowd that were victimized by the computers. Most of these are very short term traders.

I cannot be a day trader.

First it does not fit my personality. Day trades made are strictly technical. You need to get in and get out. Strict stop loss must be executed. It works strictly on probabilities. A good video gamer may be good for the job!

More important I lose my edge in trading the market. My main competitive advantages are that I understand the longer term fundamentals and I use options to hedge increasing the probability of success. With day trades, all these competitive advantages are no longer valid.

One minor disadvantage is that with a lot of trades, commission can become an important factor although we are paying dirt cheap with on line brokers.

Also, it is my belief that the shorter the time frame, the more random the price behavior and it is more susceptible to manipulation by big money. The probability of being whipsawed is very high. Big profits are always made by holding longer term.

I do not think my technical system is robust enough to handle day trades strictly. I have mentioned my system allows for more than 50% accuracy. But with fundamental and option hedges I increase my probability to winning to 80% as long as I follow my plan. My technical system also works for longer term trades.

Day trading can be emotionally stressful and addictive. I have seen day traders skipping lunch, get emotionally charged and losing weight. It has a similar effect like drugs. It looks great short term but long term you suffer from stress, hallucination, withdrawal and all kind of side effects.

One of my key trading objective has been to do the opposite. I am trying to reduce the number of trades.I have different accounts for longer term and short term trades. I have verified in my account over 15 years that the account that I trade less frequently are the one that makes consistent and good profits. It seems that short term trading only fulfill the gambling instinct inside me and it is not always profitable.

Today, Bernanke is supposed to make an important announcement. I decided I am not going to be reactive to whatever the outcome. Many traders are anxiously waiting for the outcome and ready to jump. Whatever happens, I should be able to adjust my portfolio to longer-term profitability observing the reaction from the market after the announcement. I make sure I do not switch on to CNBC. I will trade what I see. There is minimum stress!

Trading process - a technical perspective

2011-09-18T22:02:00.000-07:00

Introduction

I am adding additional detail to the post of “my trading process”. It is a significant post as I am sharing more details of my thought processes using actual trades this week.

It shows my decision process of entering a trade aligning technical with fundamentals with efforts to arrest the volatility and uncertainty of the environment.

Technical analysis has been disputed as some kind of black magic by some fundamentalist.

It is certainly not a science. But it does help to tell the short term psychological and sentiments with volumes, price movements and money flow. It is an important tool at least for my investment style.

It is not a perfect system. Many times, most reasonable technical system will work although I am not a fan of black box with mechanical process and using computer algorithms to automatically execute trade.

Discipline is key part of the system. Most system will work at least 50%. If you combine it with fundamentals and options hedging, you increase the probability of winning in a trade to 70-80%. That is also the reason I believe it is hard to be a very short term trader or day trade as you can factor in the edge you add to the trades with fundamentals and options.

No system that produce 100% or even 90% consistent success. There is a huge element of probability build into every trading process. Key is to identify information that is relevant and make decisions base of knowledge ( technical, fundamentals, sentiments ) and experience.

Premise

Below are some key premises to the trading process:

Fundamental is key to long term direction of the stock
Shorter term, the direction is influenced by market sentiments, crowd psychology and thus technical indicators is a necessary tool for entry and exit.
The process is kept as simple as possible. There is no need to extended and highly complicated analytical tools. Most simple indicators widely available in the market will do the job nicely. The main task is to use them logically for the decision process
Market swings to overbought and oversold. It gets extended inevitably from time to time. Efforts are expended to identify these tops and bottoms and ride on the swing. Having said that it is not fruitful effort to try to catch the ultimate top and bottoms
Market swings has an uncanny conformation to certain wave patterns. Fibonacci Retracement ( Fib Ret ) is my favorite. It works pretty consistent. But I find Elliot Wave too subjective and thus use it only sparingly. I will elaborate on this with examples later.
My key objective of the trade are:

- Maximize gains or risk to reward ratio

- Attempt to ride on the short to medium term swing as much as possible. At the same time, I want to stay on position that I am very bullish fundamentally without missing the big gains.

- Minimize loss with risk control using options, good entry

- Enhance the probability edge with options and fundamental background for the trade

Always trade with a plan. Many traders enter trades in reaction to a news, rumors or comments from friends and analysis resulting in over trading. Do not force into a trade rather wait for a trade to come to you. There must be technical and fundamental basis for entry the trade. Profit targets and time frame are identified. Primary exit and secondary exit are set. Also, it takes a lot of psychological and emotional fortitude or discipline to ensure that you execute the secondary exit. SE is a form of defense and risk control.
Trade in the direction of the trend. The trend is your friend. Trade what you see. Often the fundamental and technical can be totally misaligned.

Primary Technical Tools

Listed below are some primary tools used in the technical analysis:

For Trend and momentum directions

- Moving averages : I use 20, 50 and 200 MA

- Momentum indicators

o slow stochastic

o RSI

o MACD

o Volume

- Candlesticks for directions and most often for reversal signals

- Multiple time frame

Pattern Analysis

- Fibonacci Retracement / Elliot wave

- Classical patterns : saucer, head and shoulder ( or reverse ), double top, bull and bear flag

- Support / resistance

- Trend lines
- Decide whether the trade is in a continuation, reversal or consolidation phase.

Options

- Implied volatility

- Spreads and open interest

- Call / put and put /Call ratios

Most of these indicators are built into my charts. I have a weekly, daily and hour charts for comparison. I shall show how all the tools are used for the decision process using examples from this week trades in a logical and systematic fashion.

As with all traders, there will be mistakes. There will also be losses. Constant attempts are made to ensure losses are kept small. This is a very important part of the trading process. At the same time, I try to let winners run. Using options helps greatly in the risk control processes. It also helps to cushion the volatility.

This could be one way to deal to with all the big computer algorithm high frequency trade (HFT). Using a longer time frames and options to cushion the volatility. Day traders are especially vulnerable to the short term big swings which is becoming more frequent because of HFT.

Order of analysis

Determine the fundamental basis for the trade. Align it with the overall market directions. If the overall market is bullish, I will be more bullish bias on trades and vice versa. Fundamental will be the key driver of the direction of a trade LONG term. I have seen it too many times during the Asian crisis, dot.com bubble, credit crisis in 2008 and currently the sovereign debt crisis. It will pay off big time.

If you were able also to latch on the fundamental of such as AAPL, BIDU and Gold, you will be rewarded multiple folds.

Often you may be right fundamentally, the stock can go against you up to 50%, 61.8% and 78.6%. I will elaborate on this later in some examples. The key is to identify the reversal at the right time frame.

Trade in the fundamental direction will yield a much higher reward. It gives a very important edge.

Once the fundamental direction is determined, start the technical analysis. Move on with the next order of analysis

Determine the Trend

Use multiple time frames to determine the trend. Examples

i. If the weekly is bullish, it means the stock will be up for a few week.

ii. If weekly bullish and oversold, a longer term top is near. Daily calls for direction over the next few days and hourly for the direction in the next few hours.

iii. If the stock is in the overbought or sold, there will be limited upside an downside to the price

iv. Trade in the direction of the longer time frame. Align the short time frame with the longer time frame. If it is weekly bullish, enter the trade upon a daily bullish reversal.

Use trend lines / support and resistance

i. Draw the trend lines.

ii. Identify another cycles of ups and downs in times of time if any.

iii. Draw the support and resistance lines

iv. Determine current direction is an impulse move ( strong direction ) or just a corrective move ( a relief rally or temporary correction). In other words, determine where it is in a continuation, reversal or consolidation phase.

Identify the pattern

- Pattern analysis is used to identify the phase of the trend. Commonly used technique to do this is Elliot wave. But I feel that it is too subjective. Often, when it is wrong, Elliot Wave technicians will explain it with wave extension, complex wave, irregular waves! I am usually confused. Probably, I am not an expert in this area.

- I have seen Bob Prechter, a major practitioner of Elliot wave has been wrong for so many years. If you follow Bob in 2000, where he forecasted gold to go down, a period of deflationary pressure, civil riots and a depression, you would have missed the run on the stock market from 2002 to 2006. You may say he is too early but he clearly expected the events to happen in 2003-2006 which happen to be a mini boom because of Greenspan loose monetary policies.

- However, there are uses for Elliot wave at times although it is subjective. Just do not try to be too precise and wait for confirmation. I use Elliot wave simple to determine whether current phase is impulse or corrective. Also, I can roughly use it to determine a potential top or bottom. Roughly, I try to determine whether it is wave 1-5 or A-C.

- Classical patterns can be also used to decide whether there is a possible breakdown or reversal. It is important to note that classical patterns always need confirmation. Also, this can be subjective but it is certainly clearer than Elliot Waves. Example: a head and shoulder is not valid until its neckline is broken. Often it is a still a lagging signal.

- Momentum indicators ( Stochastics, MACD and RSI ) will give confirmation on the patterns whether there is a breakout, a change of trends. Keep in mind that momentum indicators are very short term. It is used only in line once the trend and patterns are established.

- The combination of classical patterns with Fibonacci retracement, candlesticks reversals signals, multiple time frame, momemtum indicators and a “subjective” view of Elliot wave will give me a powerful idea of potential reversals. It will be even better if there is volume confirmation.

At this stage, it sounds mumbo jumbo. I hope it will be cleaerr once I give examples of some of the trades I made this week. Also, I believe that over time with more examples I will be able to improve and be clearer on the process.

From the above process, I construct a portfolio of longs and shorts from my watch list. It depends on the market sentiments. If it is bearish bias the longs will overweigh shorts. The reverse will apply if the overall market is bullish bias. Bias of the market is determined from the analysis of the broad indices. Currently, the QQQ has broken its short term bearish trends and thus it is time to add more longs to technology counters.

Options are used to hedge the trades. Bullish trades are hedged bycovered calls and dynamic collars. Bearish trades are hedged by synthetic puts,covered puts and reversed collars.

Stocks are entered on an individual basis based on their directions, fundamentals and relative strengths to the index. It is interesting to note that even in bull market there are always stock that can be shorted. Also, in a bearish market there are bullish trades.

Presto! You have now a hedged and diversified portfolio. To me, this is superior to many of the diversification processes generally taught and also hedging using SPX puts, or inverse ETFs. The only set back is that this requires some maintenance.

Practical Applications

I am going to give a few examples using some of my actual trades executed in the last 2 weeks. I entered a number of trades. Only 1 of them needs adjustment so far. I will go into details a few including the one that I need adjustment and exercise my secondary exit.

STD

Fundamental: Europe is in a crisis. Problem in Greece is not going to be easily resolved in the near future. Problems should continue to escalate until some real change has incurred not just politician coming out to reassure the market.

This crisis is dangerously similar to 2008 where Lehman’s CEO and Bernanke came out to reassure the market that everything was fine. The market collapsed a few weeks later.

Technical: Stock has dropped almost 30% in about one month and rallied from $7.15 to 8.26 in 4-5 days. I expect this rally to be short lived.

How do I watch out for the reversal?

First price hit the upper channel resistance on the daily chart. Although the MACD and RSI are showing signs of positive turn, the overall directions of all the oscillators ( MACD, STO and RSI ) are down

More important, is the hourly chart. When it hits the retracement of 50%, I started to watch it very closely. When the MACD, RSI and STO turned negative I initiated the trade.

Trend – it is down. Weekly oscillator is definitely down with no signs of recovery.
Daily timeframe : it is bearish as long as it is not breaking the channel
Hourly: At 50% retracement, it is a common Fibonacci retracement level. Sometimes it goes to 61.8% and 78.6% maximum. At 50% the oscillator turn, the trade was initiated. It was actually executed when I was exercising in the gym. When I was back, I was actually losing a little money. Immediately, I initiated the SP option.

Trade:

Sell 1000 STD at 8.2

Sell Dec 7 SP at 0.65.

PE : Let the Dec 7 SP goes ITM and be assigned. ROI : 22.4 % for 3 months.

SE: If stock goes above 9, bull a long call and roll up the SP to 8.

So far the trade is going in my favor. I could be wrong. Over the weekend there is the European Ministerial meetings. They may come out with a huge bold bailout for Greece and all the countries in trouble. But the probability of a long term solution is low. If I am wrong, I will exercise my secondary exit and will continue to manage the trade to lower profitability or a slight loss. This will be illustrated with my trade on CRM

Earlier in the week when the European banks were falling, a trader in Vancouver asked whether I should add to my shorts. I told him to wait although I was bearish as it was greatly oversold.On Friday, I added on to my shorts.

CRM

With the depressing market recently, I am targeting many of the stocks with very high market valuation. These will be the stocks that will fall most in a bear market. NFLX is already one of the victims. So I shorted, LNKD, PCLN, GMCR and CRM. I am negative on all of them because of the high valuation. I cannot understand how LNKD can have a PE of over 1200 and a coffee shop seller has a PE of over 105. These are bubbles that will burst on a negative turn on the market

On Tuesday, everything seems to be falling apart. CRM hourly shows signs of breaking down.

Price on daily chart seems to be hitting resistance.

The signals I ignored on the weekly was MACD and STO were very positive. Weekly charts were negative.

On Tuesday, Sept 13^th I shorted CRM at 124.

Also, sell a Oct 115 SP at 5,12.

My primary exit is to let the SP be assigned.

My SE is to add a short call when it hits 128 and show signs of breaking up.

On Sept 15, when CRM hits 129, I exercised my SE. QQQ turned short-term positive too on Wednesday.

I bought a Nov 135 C and roll the Oct 115 SP to Oct 120 SP reducing the cost of my short.

Longer term, this trade is still very manageable. It is my belief that I will exit the trade with a small profit or just a minor loss. Currently, the stock is very much over bought. It will probably go up to 140 and I shall monitor the overall market to see if it turns long term positive. If so, I will need to reverse my bias for this position from negative to positive. This can be accomplished safely through just adjusting the options.

All the other shorts are doing fine. You can see the PCLN, GMCR and LNKD are showing negative technical signs - hitting resistance, negative on daily and hourly, etc. Unless the market sentiment changes substantially positive, I should make money from all these trades.

Bullish trades

I bought HD, SINA, AAPL, BMC and AMZN in the middle of the week as the Nasdaq turned positive. I shall not elaborate on all these trades. Try going through the charts on the multiple time frames, patterns, and trend lines, you should be able to get similar results. The SE should be easily determined.

Also, I bought quite a few shares on the miners on Thursday - GDX, AUY and GG. Also on Thursday I rolled my calls on SLW which went ITM. The decision was made by a very consistent process. It was a very interesting signal which I shall elaborate when I have time.

So far, no adjustment needs. I should be able to end positively on all these positions.

Concluding remarks

I will continue to illustrate these further using the same technical methodology and trading process when I enter the trades on the blog.

It is getting late now on Sunday now. I guess I need to retire now to get ready for an interesting day tomorrow.

Gold - finally the correction

2011-09-08T07:59:00.000-07:00

Although I am very bullish, I have been expecting a correction for gold.

Finally, the correction came today after a dramatic action by the Swiss National Bank to foolishly peg its currency to the Euro. Officially the currency war has began.

Such action should benefit gold but it went down. The main reason is SNB also sell gold at the same time. Central banks are controlling the debasement of currency and the rise in gold.

So when do I add to my gold holding? I have already 1 position size of gold in my portfolio. I have liquidate the rest waiting a correction accumulate again since I am very bullish on the fundamentals.

The correction should continue for a few more days. Some more triggers may push gold down.

It is now in a small consolidation. If it breaks above the all time high, it will be bullish. If it breaks below 1780, it can go down hard to 1700 or even 1600. Even if it moves to 1450 which I expect to be the maximum, I will load up the truck. Probability is low. All the arguments that gold is in a bubble sound silly. Gold can correct violently but it is no where near a bubble. It will be there some day but not now.

Normally, I do not try to catch a falling knife especially for gold. It can fall hard before recovering and accelerate upwards to all time high.I will wait for some signs of bottom. It could be a quick capitulation down and then recover, a candlestick reversal, or another other short term bottoming patterns.

Probability is that it will go down short term unless European crisis really explodes - Greece default, Italy loses control etc. This is one time that fundamentals will trump technical. In all my technical analysis, gold has to come down. But any fundamental event may send it to the moon!

Trading the week ahead

2011-09-05T20:03:00.000-07:00

It is interesting to read what I wrote in September last year. There were plenty of bearish news, threats of double dips recession. Companies started to warn about results, slashed forecast and missed expectations. Technically, there was the warning of Hindenburg Omen. SPY dropped below 1100 at the end of August. It was gloomy.

We are seeing the same situation now.

- New York Fed index fell to -7.7, the second lowest since November 2010
- New home sales fell for third month in a row while existing home sales dropped 3.5 percent. Purchase mortgage application volume plunged to lowest since Dec 1996
- ECR ( Econonic Cycle Research Institute ) leading index just slipped below the zero line. At -2.1, its growth rate is the lowest in nine months.
- GDP growth in the second quarter was slashed to a meager 1 % from 1.3 %.
- The non farm payroll in Friday showed zero job creation which is very negative.

Despite the dismal data and technical indicators, I turned bullish on September 2010 as you can read from the posting.

Over the weekend, I saw a comparison of 2010 versus 2010.
Stock market could go up from here.

The trigger point was QE 2 which send stock up another 12% by the end of the year.

Will the stock market history repeat? Will it go up again after Jackson Hole meeting on September 20th and 21st?

However, I am more bearish this time for a number of reasons:

Most important, there was a clear support at 1100 and it bounced from there. But currently, the price trend is negative. We have clearly broken the 200 MA and the long term trend. Shorter price actions are very weak. If August 9th low is taken out this week, I bet we will an acceleration down.

In July this year, we have an opportunity to break up from support but it failed and moved right down. Although, there was some consolidation patterns in August, it points to a corrective rally in a downtrend. High probability is that the July pattern will repeat and break down especially if August 9th low is decisively taken off.

It seems that it is now all about Europe. Greece continues to be a problem. Bond yields went up to unbelievable level during the weekend pointing to a default. A few countries in Europe has to stop trading for financials.

Economic results are worst this time. GDP of most countries are down globally. This includes Hong Kong, China, France, Germany, and USA.

Besides European problems, we have the US credit downgrade and the Japanese earthquake,

The spread between the LIBOR and short-term Treasuries of 3 months has gone to a 13 month high. The 2 year swap spread ( difference between the 2 year swap and the 2 year Treasury yield ) has hit its highest since July. This was the similar situation during the same time in 2008 that shows that banks would rather lend to Uncle Sam than each other. Also, banks are getting nervous about the ability of their derivatives counterparts to make good on their promises

Junk Bond market suffered its worst collapse sine Nov 2008. Investors took out $2.1 billion from junk funds in one day in early August, the most in the history of the industry. Investors are fleeing risks!

Financial stocks are imploding across the board - exhibiting similar patterns in 2008.

There is also the constitution challenge by the German Court on the European countries bailout on Sept 7th. They may not win but it points to the fragility of the efforts of the European bailout. European banks are falling fast - very similar to what happened in 2008.

My bet is that the trend is down and we could see a very ugly September and October.

It is impossible to be completely correct. I will trade in the direction of the trend. If Aug 9th low holds and indices bounce up convincingly, it is probably because of additional stimulus by the Fed after their Jackson Hole meeting. This could cause a similar rallies like 2010. But the market price actions has to support the move.

If it happens, I will certainly adjust my positions.

Finally, gold is looking very strong now. I will wait to see how it test the $2000 level. It is at parabolic level now. The rise is almost vertical.

The question is that if the market collapse, will gold stocks and gold fall like what happened in 2008. It does not look similar this time. In 2008, it was a liquidity squeeze. Now it is a flight to safety.

I will not be surprised at all if there is another margin hike and price comes down again. Normally, I do not not add positions on this kind of ascension on the price. There should be a correction - even a substantial one but it will be short and sharp. I will certainly add if a correction materializes, I will add to my core position. This is one clear case when technically the chart looks like topping short term but fundamentally, the bullish factors remain. Long term I am still very bullish on the precious metal.

My most common mistakes

2011-08-31T20:56:00.000-07:00

Retrospectively, I try to list down some of the most common mistakes in my trading process especially after a difficult 3 months from May to Mid August. Despite my years of trading experience, I still fall into these traps. I have to remain vigilant to ensure that I avoid these mistakes.

Trade without a plan

This is starting a trade without waiting for the right opportunity and entry signals. It is always better to wait for a trade to come to you than to force yourself to make a trade.

A good plan will have fundamentals aligned with technical indicators and clear entry signals.

You need only to trade when there is a high probability trade with minimum risks

Do not follow your plan

There is a plan but you failed to follow it especially the secondary exit. Many times, it is counter intuition and against your belief. A secondary exit implies that you are wrong and you cannot accept it.

This can be a very expensive mistake.Most big losses are incurred because of a failure to follow the plan.

Over trade.

I try not to spend too much time on the market when it is on.If I stay to watch the market tick by tick, I am almost for certainty make some mistakes.

My typical schedule is I wake up 1 hour before the market opens. I review the news, any reports that come in and my portfolio. I get a feel of what my expectation for the day will be like.

When the market opens , I watch it for a about 1-2 hours. After that, I am off for a tennis game, the gym or do some errands. I am normally back 1.5 hours before the market close.

In the afternoon, I spend a 3-4 hours reading up, listening to reports, participate in chats, going through my portfolio trying to anticipate any change in trading conditions and record all my trades in details. Yes, once in a while I sit down to write my blog.

The common mistake is to over trade or become a trading junkie. It can be very expensive mistake.

I have 3 separate trading accounts and 1 paper trading account. Interestingly, the account which I am least active has the best performance. This result has been verified for many years!

So remember, trade for profit, not for activity; trade for points, not for ticks.

Overview of my trading process

2011-08-31T20:52:00.000-07:00

I am attempting to do an overview of my trading process. Most of the ideas are scattered on postings made during the last three years.

This is an effort to organize it properly for those who are interested to have a deeper idea of the whole trading process.

How do I choose a stock?

This write-up gives an idea of my watch list, some of the reading materials, favorite websites to keep up with what is going on in the market. There is definitely no lack of ideas floating around.

When I found a suitable stock for trading, I will move it either to my bullish or bearish list.

Trading methodology

http://zpring.blogspot.com/2009/01/my-personal-trading-methology.html

http://zpring.blogspot.com/2009/02/investor-or-trader.html

http://zpring.blogspot.com/2011/01/my-trading-process.html

In summary, I am an investor. But I am not a buy and hold investor. I trade. I align market sentiments and technical indicators with the fundamentals. Technical are used to confirm my beliefs on the fundamentals of a company.

An entry signal is given if the fundamental and technical indicators are in alignment, I will decide on various strategies.

From here, options are used to hedge my trade.

Strategies

The strategies used are very straightforward and simple.

If the market is bullish, I will start with the stock, or stock with put ( married put ) or stock with a short call ( Covered call ). From here I manage the trade as the market changes. It is like a game of chess. You adjust your positions to win. It is written in this post.

The reverse is done if I am bearish. I have also articulate the approach quite clear in this write-up.

About 10% of my trades are pure options play. My favorites are credit trades ( verticals ) , Calendar and straddle / strangle. Normally, I will wait patiently before entering a pure option trade as it requires a lot more maintenance and good timing. Because of my cautious approach, I am 90% successful on most pure options trade. The secret is to wait for the trade to come and forcing myself to do a trade.

In a posting, I have also written some rules for entering a credit trade.

Many times, there are opportunities to do a very short term trading to capitalize on volatility crush. Usually, most of the trades go well. But I have to wait for the right opportunity or timing to come along.

Technical indicators

Some of my regular indicators used are:

Multiple timeframe – weekly, daily and hourly.
Support / Resistance
Trend channel
Patterns – Fib retracement / Fib Fans
Price actions – candles ( favourites : evening and morning stars )
MACD / STO / RSI

I start with the multiple timeframes, trend channels and support/resistance to determine a stock.

I use Fibonacci Retracement, candlesticks and price patterns to determine the change in trend.

Finally, MACD. STO, and RSI are used only to confirm the directions.

Managing Risks

A key component of my trading is the risk control. Without risk control it nullifies the whole system. It is the Holy Grail of the trading process.

I have 2 write-ups on the risk management process.

http://zpring.blogspot.com/2010_09_01_archive.html

http://zpring.blogspot.com/2010/10/managing-risk-part-ii-set-clear-rules.html

After all trading to a large extent is a game of probability although there is also a substantial part of it are determined by proper understandings of the fundamentals.

In this blog, you get a good idea of the whole trading process. I have to admit that many parts are not written with a lot of details or clarity. However, there are lot of real trade examples. One day, when I decide to write a book, all the ideas will be expanded with details.

Meanwhile, enjoy the blog free of charge.

Two interesting charts on gold and silver

2011-08-31T20:33:00.000-07:00

Latest views on Gold and Silver

2011-08-29T17:39:00.000-07:00

I have written at least 3 times on my views on Gold and Silver over the last 2 years.

http://zpring.blogspot.com/2009/12/why-i-am-still-bullish-on-gold.html
http://zpring.blogspot.com/2010/11/gold-and-silver-its-direction.html
http://zpring.blogspot.com/2011/04/gold-and-silver.html

Below is my latest updates on my favorite sector for the last 5 years.

I remain bullish but believe that current price is parabolic and may undergo a correction to 1650 or at the maximum 1500.

However, it really depends on the economic news in the world especially from Europe. Currently, the economy is extremely fragile. While the credit squeeze is not like 2008 but the situation could explode into something more serious. Instead of mortgage default, it is now potential sovereign debt default.

I do not see any improvements in Greece. Bond yields continue to climb. The ECU is trying its best to mend the situation. Today there is the announcement of big Greek mergers - Eurobank and Alpha bank. The combination would create Greece's largest lender, with assets of €150B, but a market cap of just €2B. EU and Greek officials have pressed for such alliances, believing pairing struggling entities can create one strong institution.

But does it solve the problem. The answer is clearly no. There is no fundamental improvements

Italy, Portugal, Ireland and Spain continues to be fragile and on life support. In my weekend update, I stated that a default of Italy will be equivalent to Lehman's default in 2008 or bigger.

GDP data for France, Germany, Hong Kong,China and USA released in the past 2 weeks were weak. France is on the verge of being downgraded.

Politically, there was little support for Germany to continue to buy ECB bond. Survey results show that 4 out of 5 is against the idea. If there is an election, Merkel will be out.Just received the following report from the Telegraph ( Aug 29) " German Chancellor Angela Merkel no longer has enough coalition votes in the Bundestag to secure backing for Europe's revamped rescue machinery, threatening a constitutional crisis in Germany and a fresh eruption of the euro debt saga

Seething discontent in Germany over Europe's debt crisis has spread to all the key institutions.

So there will be a continuation of money printing, bailout and desperate measures of bailing banks and sovereign debts. No way this is going to end soon. It is a wicked spiral. Countries are forced to take austerity measures hindering growth, greater unemployment, bigger interest and debts.

So, gold is the ultimate currency now. Gold went up the last few weeks because it was a "fear" trade. It was flight for safety. Gold went up with the market because it was a "currency" trade. As money gets devalued through stimulus, increased money supply, money printing and bailout, gold goes up.

However gold is a manipulated market. There are commercial traders and large speculators. It goes through wild swings and huge volatility.

Although over the long term, the trend is up but in the short term, I suspect there may be one more leg down to $1700 or even $1600. But it will bounce back fast. Fundamental conditions support it.

There are talks of gold being in the bubble. Examining the bubble of various sectors and market, gold is still far from being a bubble. But probability is that it should correct.

Seasonally, it is going to be positive for gold. For the last few years, gold goes up after labor day. Thus if gold goes down this week, I will add to my holding

New shorts of commercials drop last week from 249 K to 240K. Net shorts of large speculators were also down. These are short term positives. I suspect the commercials are reducing their huge short positions now.

So gold is NOT in a bubble. If it is in a bubble, it will be verified by weak fundamentals and over euphoria. Jim Cramer mentioned that the typical holding of gold is 5% of total portfolio but not it is about 1.5% of total portfolio.

So the only reason for gold to be down will be some fear and manipulation done by speculators and commercials.

Mining Shares

In this blog, I had commented on some of my favorite mining stocks and also on how I managed the juniors.

http://zpring.blogspot.com/2010/03/my-favourite-precious-metal-stock-slw.html

http://zpring.blogspot.com/2010/03/trading-junior-stocks-and-small-caps.html

http://zpring.blogspot.com/2011/02/my-favourite-gold-stock.html

Whatever, I had written is still valid and more so now.

With the rise in gold price, mining shares is at historic cheap valuation.

Over a period of nearly 20 years, BMO’s group of global gold stocks has never been this

inexpensive. Only twice—during the Tech bubble in 2000 and the financial crisis of 2008—has

the internal rate of return compared so closely with the price of gold bullion.

RBC says gold companies currently have margins that are at record highs and it believes margins could be approximately $1,200 an ounce for the next 12 to 24 months. This is substantially higher than the 10-year average of $320 an ounce. Comparatively, many current projects were economically sound at $700-$1,000 per ounce gold prices, creating $300-500 an ounce margins.

Right now, BMO calculates the total cost to produce an ounce of gold at roughly $900 an ounce, while the company can turn around and sell that ounce for upwards of $1,400. This puts margins near 40 percent, roughly twice what they were in 2007 and four times higher than in 2000.

I believe gold mining shares are now valued at gold price of around $1200.

From a historical perspective, gold miners also lagged gold price in 1973 and 1980 by about a year. After that it charged up despite the crashing market. Investors have to believe whether the current high price of gold is for real. As a results the miners are undervalued.

Besides GG and SLW, my new favorites for gold stocks are AUY, NGD and RGLD

Also price actions in mining shares are positive. It looks like going for a breakout in a reverse head and shoulder pattern after more than 6 months of consolidation. Also, the 50 MA is cutting the 200 MA soon. Upon confirmation, I will move to increase my holdings of mining shares providing gold held to its strength.,

Finally, just a warning. Although I do not see a breakdown of the trend in gold soon, I am not a gold bug. It will go down one day.

Throughout a fantastic decade-long advance that saw the metal easily outperform gold’s almost 25-fold price increase into 1980, silver bulls loudly and repeatedly trumpeted the fact that consumption – for coinage and industrial use – annually outstripped total supply by a wide margin. After January 21, 1980 silver lost $10 in a day from a still-standing all-time high in excess of $50/oz. By late March the price had crashed to $10.80 on the way to a final low of $3.50 in the early 1990s. Only this year did silver again make a run at the $50 level.

History will repeat for gold and silver. But I do not believe the time is here yet - not even in the distant future. Gold could see $3000 or even $5000. The world will be in a big mess if it gets to these prices. My projection is gold will be at least $2000 before the end of this quarter. Until it shows signs of bubble like the dot.com in 2000 and housing prices in 2007, I will be holding on to my positive bias on gold.

Bull Call Calendar - SPY

2011-08-24T22:03:00.000-07:00

I put in a call calendar today.

While there are people who has been very successful with calendars, I am not one of them.

But calendar does yield greater profit potential in a shorter time frame. Also, calendar with timing adjustments is less risk and when the market is stagnant, calendar can be profitable too.

I decided to enter a call calendar. I am leaning slightly bullish short term for 2 reasons:

1. The market decline has gone parabolic and the index is showing some signs of bottoming process on the price action. There is a double bottom formed and some consolidation.

2. The index has reached a correction of 78.6% since its decline. Most correction ends at least temporarily at 78.6 %. The probability is high here supported by some price patterns.

Trade

I entered the trade in the first hour of the morning when the index confirmed my expectation. If the index was not up this morning, I would have refrained from putting in the trade

BTO Oct 116 call at 5.65
STO Aug 26 ( weekly ) 118 call at 0.95

NPD = 0.17 when I entered the trade. It was not 0.2 which would be ideal. But considering this is a weekly, I will benefit from the accelerated theta decay.

% of SC credit / Long call = 16.8%. This is a pretty good credit considering that I need only wait for 4 days!

PE : Get out at target of 20%.
If market is bullish, I may just let the trade run and add another SC

SE: Roll the SC to down and out or even reversed the trade if the index drops below 113 which is deemed to be a very important support. I will go bearish.

If the market goes very bullish above 120, I will roll the SC up and out for a credit.

Looking at the analytic profile, if it trade between 115 and 122, I will be making money for this trade.

Update: Aug 26th 2011

Today is the expiration of the weekly short call.

In the morning, the trade had reached my target of 20% ROI.

But I decided to wait till 3 pm to close the trade. It was interesting watching the volatility crash and the theta accelerating during the last few hours. It was trying to pin at 118.

Finally, I closed the trade at with an additional 9% profit from the target because of the accelerated theta decay and volatility crash.

STC Oct 116 c at 6.17
BTC Aug 26th C at .13

Total profit = $1306 or 29% ROI in 4 days.

SLV - married put

2011-08-15T17:16:00.000-07:00

As I had written during the weekend, I am very bullish on silver. I expect it to be in the triple digit eventually. However, the metal could see a correction to 30 and even 28.

Currently it is trading in a nice channel with 41.5 as resistance and 36 as support.

Trade:

BTO 500 shares = 38.4
BTO Sept 37 P = 1.39

PE: Let the stock run

If ETF crosses 40 - add a 35 Sept SP to make it a put calendar below.
If price held at 40-41 and show some short term reversal, add a near term SC - 1 or 2 strikes OTM

SE: I intend to trade this bullishly longer term. So if the price drops below 36 - roll the SP down. If it goes bearish, I will take profit on the Put when it is close to expiration and buy a lower strike longer term put while adding more shares. Alternatively, I can let the SP be assigned with shares.

I have purchased only 500 shares. I am prepared to buy more if there is a correction to around 30.

Longer term, I expect to make at least 50% in 6 months.

Update - August 17th.

SLV does not seems to move as fast I as expected.

I added a Sept 40 SC to make it a collar at 1.43

EDMC - a short trade

2011-08-14T17:50:00.000-07:00

I have been shorting the education sector successfully a few times over the last 12 months. I shorted APOL and covered. Recently, I shorted it again. The entire sector turns negative again when DV announced its results showing a drastic slow down in students enrollment.

The education sector belongs to what I called the "fraud" category when it comes to candidates for shorts. Other could be a poor or obsolete business model and blalance sheet that is too highly leverage especially current possible credit squeeze.

EDMC is a new candidate identified for a short trade.

While you could make essentially the same arguments against the enter for-profit education sector, EDMC seems to stand out.Its employees are its accusers.

Recently, there is a lawsuit against the company that alleges false statements to qualify for the Pell program totaling $11 billion. Additionally, the lawsuits alleges the company structured its compensation program for recruiters based on the number of new students enrolled, which if true, would make the company ineligible for the PELL program. The accusations were filed by two ex employees.

Trade

If EDMC trades below $17.7 on Monday, I will enter a bearish trade. I will post separately on the trade. If not I will wait for it to show some reversal signals like a candle stick reversal or the stock hitting some resistance.

If it moves up on Monday, it is not time to enter the trade.

Update: Aug 15 2011 - Monday

EDMC moved down today. According to plan, I enter the trade:

STO 1000 shares 17.35
STO Sept 12.5 SP .75

This is a synthetic put.
PE: Let the short SP be assigned for a profit of 35% by september expiration.
If very bearish, may decide to roll the put down

SE: If stock moves above 18 - either add 18 call > 45 days or get out of the trade.

Update August 18th

I was notified by my broker that I have to buy back my stock as they could not borrow security to short the counter.

BTC 1000 shares @ 16.339
BTC Sept 12.5 SP @ .7

Profit = $1351 for 1500 shares or 5.23 % for a 3 days trade.

Taking profit regularly

2011-08-14T17:36:00.000-07:00

Market is unpredictable.

It does not always move with fundamentals. It was John Maynard Keynes that said “The market can remain irrational longer than you are solvent”.

I have found that it is useful to take profit regularly although I maintain a fundamental bias for the trade whether it is bullish or bearish.

Yes, there are trades every year that I let the profit run and closed the trades with a few 100% gains. But this has been difficult. It must apply only a minority of positions where I have clear certainty and some luck. It also takes a much longer time. If I add up all the short term trades, I will probably achieve the same results.

So I have been taking profit more regularly. When a trade hits a >30% ROI, I should seriously consider closing the trade and start a new one.

Overall swing trading seems to be more profitable. I have known traders who trade more than 100 trades a year without losing a single trade. Besides the ability to gage the momentum accurately, the key is to keep the gains to a very modest level. Also, when there are losses, the focus is on how to get back to profitability or just cut loss and get out.

There are few positions like gold and silver where I keep 30% as a core position which I will not let go unless fundamental begin to change. I trade the remainder.

Misc. Trades

2011-08-14T17:32:00.000-07:00

I entered a number of trades last week. Many of them are for a short term ride but some for ownership. Some trades are entered to take advantage of the volatility.

All the trades entered assume that the market is going to be bullish for the next few days or even a few weeks.To enter trades with market condition as last week, it is imperative that secondary exit are clearly defined and promptly executed.

As long as the stock reverses close to last week low, a put will be added to the covered call. To make sure that it catches my attention, I have added alarm to the stock to alert me. If the stock continues its bearishness and exhibits an acceleration to the down side, I will roll down the SC and it will turn the whole trade into a bearish trade with a negative net position delta.

WYNN - a momentum play

BTO 200 stock at 144.2
STO August 145 SC 4

PE = 3.33 percent in 5 days by Aug option expiration
SE= add LP ATM and longer term SC if trade goes close of below 135

Update: Closed the trade on August 17th booking a profit of 708.92 or 2.5%.

I noticed that momentum has changed. I have made about 80% of the maximum profit in 5 days. I am not going to wait . So I got out. It was a good decision as the stock feel to 136 today. If I have not exited I would have to continue to add SC or collar it and wait for it to be profitable.

VXX - a volatility play

STO 1000 shares at 33.39 on Aug 8th
STO Aug 34 SP at 3.3

This is >10% premium for a slightly OTM synthetic put. Because of the the volatility and thus the fear in the market, the put premium is extremely high.

It is meant to be a very short term trade.

I closed the trade on Friday August 12 with

BTC 1000 shares at 32.9
BTC Aug 34 SP at 5

This is 3.38% profit in 4 days with minimum risk.

AAPL - a value play

I have been waiting to buy AAPL again. I decided not to wait. I am willing to hold on to the shares.

BTO on August 8th 100 shares at 365
STO Jan 390 SC = 24.65

PE : Let the SC goes in ITM and profit of 13.6% in 4 months.

I decided to add a protective put on Friday because of the uncertain market. It may be too early but I believe I will need the put at least through October.

BTO Oct 360 P = 18.35

SE: if bearish, roll the SC down once APPL hits below 355 at the same month or further. Sell the LP once the bottom is almost established.

Update: I got out of the trade on August 12th with a profit of 1.5% in 4 days.

IOC - a natural gas play

I am bullish on natural gas longer term. When IOC dropped to around 50 on August 10 establishing a double bottom, I decided to get in with a collar.

BTO 500 shares at 51 - on Aug 10
STO Dec 57.5 SC for 4.05
BTO Sept 50 P for 4.05

IOC reported results on August 11th and it was positive. I added a August 50 SP for 0.8 establishing a put calendar.

PE: Let the SC goes ITM or called out by Dec for 18.5%.
My profit will be a little higher if I can manage the put side better by selling another SP for sept or getting rid of the put if the stock goes bullish.

SE: Roll down the SC if the stock drops below 50.
Also, consider rolling down the Aug 50 SP if it accelerates down next week before option expiration.

Update on August 18th.
o Sold a August 50 SP on August 11th to make it a bear put calendar.

o The stock continue to shoot up and the Dec 57.5 SC was ITM. There was a huge correction today. So I sold another Sept 45 SP to reduce the cost of my protective put.

VZ - dividend play

VZ is a fundamentally sound company. It pays a good dividend.

Technically the stock has hit a very strong support.

BTO 1000 shares = 34.01
STO Jan 35 SC = 1.54

PE = SC goes ITM and stock called by Jan for profit of 7.4 % excluding dividend gains.

SE = add an ATM put if stock goes below 33. Roll the SC down if the stock continues to go down and any signs of acceleration.

I entered quite a few trades last week. I was not afraid because I know I am ready to turn this into a neutral or bearish bias trade once the trend changes.

The volatility is so high and thus it was good time to capture premium on some good fundamental stocks especially when it is deemed to have reached important support.

Historic Volatility - A Market Review

2011-08-14T15:07:00.000-07:00

This is going to be a long post and it is definitely one of the more important postings I have made so far.

In view of the historic volatility experienced last week, I will be adding a number of postings this weekend.

It is important that I crystallized my thinking and strategies via writing on the blog. It helps others but most important it helps me!

Technical Review

I like to start with an overall technical review of the market.

Technically, the market has decisively turned bearish. A lot of technical damage has been done. Volatility was very high. VIX reached the mid 40s last week and I shorted VXX for a quick trade to make use of the volatility. I will discuss this trade in a separate post.

The market did find some support last week. The price actions of last week points to a short term bottoming, consolidation in the last few days and the indices moving higher.

The DOW indices show similar patterns. However, the NASDAQ or QQQ clearly shows a bottoming process but hitting resistance. If it can break 53.6 next week, it should be short term bullish.

I opened some covered call trades on Friday rebound for WYNN – which has high momentum. But I must be willing to add puts or get out if turn bearish if it fails in this rally.

There are a number of possible future scenarios for the current situation. Usually, the market will test the low last week again. If hold, it will probably be bullish for the rest of the year. If not, the bearish trend will accelerate. Any accelerated downturn will be most probably triggered by some major economic event like a default in Italy, downgrade for France indicating the European contagion goes out of control.

I will show more details of this in my trade on a separate posting for WYNN. As a matter of fact, I opened a number of bullish trades last week which I will discussed separately. Prompt execution of secondary exits become extremely critical that I set alarm on each trade on my trading platform.

NYSE Advance Decline Index

The NYSE cumulative A/D index looks like a double top. It is a little overextended short term but it could go up, hit resistance and come down or just come down straight in the next 2-3 weeks

Fibonacci Retracement

The S&P 500 has already pierced the 38.2% retracement level, which was 1,238. The next key is 50% which implies 1,200 — almost where we are now. A complete reversal, which is 61.8%, points to very critical technical support around the 1,162 area. This is a point where the indices will usually hold for a while.
Technically, we could see downside pressure.

The Bullish Case

So far earnings has been strong. 75% of companies reported earning beat their estimates - many of them includes top line revenue and bottom line earnings.

Corporation are holding >$1.4 trillion of cash. Companies are cash rich.

The Conference Board issues a LEADING indicator which comprises of manufacturing weekly hours, claims for unemployment, manufacturer's new orders, supplier deliveries, new orders of nondefense capital goods, building permits, stock prices, money supply, interest rate spreads, and an index of consumer expectations.

Overall the LEI is still climbing. There are no signs of a recession.

Industrial Production if flat and it shows economy steady so far. But it can change quickly

One of the common complaints is that with QE 2, banks are not lending. They are keeping it to strength their balance sheet. But the date recently shows that lending is on the increase. Although with the recent events, banks may slow down their lending.

Consumer sentiments are still overall positive.

Jobless claims are in the positive direction.

Bearish Case

Debt

In 2008, it was a mortgage crisis. In 2011, it looks like it will be the sovereign debt crisis. It will be more severe than 2008.

Fundamentally the 2 years’ rally is build on straws and not bricks. It is mainly driven by big liquidity provided by the FED.

USA credit rating was downgraded last week. To finance USA debt, you need about $7 Trillion and that is 50% of GDP.

In Europe, the 90 largest banks must finance $5.4 to 7 Trillion in the next 24 months. If you include the sovereign debt, it is another $1.5-$2 Trillion. So a tip over like a downgrade of France credit rating will immediately create a domino similar to 2008 mortgage crisis.

So far, some optimism was in Europe with the creation of European Financial Security Fund ( EFSF ) which will be able to provide funding for Greece, Spain, Portugal and even Italy till 2013 although this Germany unprecedented economic power and control over Europe without going through a war. The EFSF no longer works as planned since the facility’s AAA rating is critically dependant on France and Germany obviously maintaining their pristine rankings. French banks will almost certainly be downgraded, following which other European banks will face the same destiny. Such a scenario has the potential to cause calamity across Europe. The 90 European banks which recently went through the (so-called) stress test organized by the European Banking Authority need to roll a total of €5.4 trillion1 (!) of debt over the next 24 months.

Also does Italy deserve a A+ rating now? How can France be higher credit rating than USA now?

When the subprime crisis started, we were told by numerous authorities (including Ben Bernanke) that the problems would be "contained." But by 2006 it was clear to anyone who studied the toxic instruments that the losses would be in the hundreds of billions. I estimated $400 billion, which just goes to show that I'm an optimist. That crisis spread to banks all over Europe and then back to the US

Eerily, this is so similar to 2008 when Lehman Brothers fall. It triggers the start of the crisis. Similar, if Italy falls or France receive a downgrade, it will definitely accelerate the decline of the overall market and causes a collapse. The probability is still frighteningly high.

The whole world is printing money including China and Japan. It is a matter of time we reach the end game. When it comes, it will be sudden and shocking. It will come with a big bang! I watched an excerpt from youtube on the Movie “Rollover” made in 1981. All the seemingly exaggerated situation could very well be real if the situation is out of control. For the time being, the probability of this happening is still low in the short term.

Price action is positive ended last week. Indications are the market will move higher. But there are lingering questions in my mind:

Has the U.S. suddenly gotten it's budget balanced?

1. The failed auction last week by the Treasury was a BAD sign. Bonds fell. It is a sign of loss of confidence despite the government and many analysts trying to run down S&P for downgrading USA. China bought more treasury recently despite their complaints. They have no choice. But other holders of treasury are selling.

2. Are Italy and Spain suddenly solvent? Italy's debt-to-GDP is still 118%, isn't it? It's still going to take upwards of $3T euro to "bail them out".

3. Last I checked, several big, European banks are teetering on the edge of insolvency due to their government bond and CDS exposure. Has this changed?

4. In the U.S., Bank of America is insolvent due to a terrible book of mortgages and an even more awful book of CDS exposure. Is that even fixable?

Economic

Although 75% of companies reported earnings so far beat their estimates. Even the revenue increased. We need to remember this is a lagging indicator. . According to research cited in the FT, nearly 70% of the few (76) that have provided guidance have reduced it, and in the most cyclical names as well (Tyco, Illinois Tool Works, Netflix, Texas Instruments). David Rosenberg also cited this in his latest economic report.
Q2 earnings season had been stellar, but the lack of guidance —two-thirds of reporting companies did not provide any — points to reduced visibility.

There was a string of lower economic indicators. GDP has dropped below 2%. It is noted that every time GDP dropped below 2% - a recession followed.

In his speech on Tuesday Fed Chairman Bernanke points to a difficult times ahead thus will maintain zero interest rates till 2013. I speculate that it must be really quite bad for him to admit that and extend a zero interest environment to stimulate the economy or force investors to move funds to stock instead of treasury.

The ‘six-month outlook’ subindex sagged 20% to 31.7, undercutting the December 2007 low (the first month of the last recession). Nearly 30% of respondents reported having someone in their household who is unemployed —the highest ever and well above July’s 24% showing. This was the weakest reading on record, going back to 2001. This is grim. Fully 45% of folks with just a high-school diploma cannot find a full-time job, and that metric is disturbingly elevated at 25% for college grads.

Consumer credit soared $15.5 billion in June, three times as much as projected and the biggest monthly gain since August 2007. That this was the same month that consumer confidence slid to an eight-month low strongly suggests that credit was not being tapped for spending as much as to meet the unpaid bills. During the last 3 recessions, it began with similar high consumer credit and subsequent defaults.

OECD leading indicator fell to 102.2 in June — the lowest since November 2010 — from 102.5 and is down now for three months running and the declines were broad based across the G7 and emerging Asia.
Friday, we saw German industrial production decline 1.1% Italy showed 0.6% slide. The reserve Bank of Australia cut 2011 growth outlook to 2% from 3.5%. China industrial production was weaker than expected and Indian car sales fell 15.8%.

Yes, we receive a good employment report that results in a rally of >500 points in an oversold market. But is it really that good. To me it is like getting “D” instead of “F” for the report.

Seeing all these, are we still expecting a year end rally? It looks like it is no longer a replay of mid 2010. The global economy is slowing down much faster and problems surrounding sovereign debt are far more acute.
The next hope is QE 3. Will it really help? It has failed twice! Also, does the FED has the ammunition now politically and financially.

GOLD and SILVER

I have been a gold and silver bull for many years. There are no reasons for me to change my views until the sovereign risks and currency printing points to some possible slow down and solution.

Gold hit new high last week and corrected about 80 points. With the low COT commitments or shorts by the commercials, there is high probability that this correction will be shallow. I should be adding to my gold positions with this correction.

During the 2008 crisis, I was caught with gold dropping 30% and gold stocks dropping more than 50%. I got out of 40% and held on to the rest. My portfolio was down 30% by the October of 2008. However, I added to my positions by beginning of 2010 and many positions were closed with >100% gains at the end of 2009. By end of 2008, my portfolio broke even.

Similar scenario can happen this time. Except I hope to be more nimble to be able to get in and out. I have to admit it is a very difficult game especially with juniors where there are no options available for me to hedge. My strategies remains the same as I wrote previously in my blog for trading junior stocks.

Gold miners are extremely cheap but it could get cheaper if there is a credit crisis and liquidity squeeze. Longer term, there is no doubt in my mind, gold miners will get much higher. The question now is whether any liquidity crisis will drive all the gold miners a lot lower.

Situation is a little different this time. Gold continues to rally. In 2008, gold fell 30%. It may still fall. If it does, it will be a great time for me to add to my positions again.

If I see some acceleration in the crisis, I will probably cut my gold miners positions by 50% or more and waiting to get back again when the situation is stabilized. Where there is panic, gold miners ( especially juniors ) falls fast.

Having said this, it may not happen this time as gold has exhibited a lot of strength so far. As long as gold does not turn bearish and breaks the trending channel, I will keep the miners.

Silver is looking interesting after the recent correction. There is little doubt in my mind silver will go a lot higher – more than what many people can imagine. It can easily move to triple digit price. But it may drop from current $30 to even $30 or $25. If that happens, I will definitely load up.

I am actually looking to add on my silver position next week with some hedges. If it goes up, I will add to my positions. If it goes down, I will increase the hedge until it stabilize and double my positions.

Fundamental factors are very solid. But the volatility make it very difficult to trade. Retrospectively, if I had held on to my gold and silver, I would have made a lot more money. I had held on to my core positions of silver and gold in the last 4 years and it has made me >300%. I wish that I had not been an active traders for these positions. But this is part of my risk control.

Concluding Remarks

Obviously, I am more bearish than bullish.

Last week’s rally actually gave me some glimpse of hope. It must have follow through. It will come down but must hold and be followed by some strong upside with reports of stability of Europe financial situations without breaking its low.

If it breaks the low, the downside will certainly be speedy and brutal.

Although data are overwhelming bearish for me, I still ride the trend last week. I bought AAPL, WYNN, TQNT, IOC and VZ – all covered calls positions. I will be converted some to collars ( like AAPL ) or just take profits if there are signs of bearish. I will add more puts to turn this positions in a neutral or bearish once there are technical and sentimental signals that points to an accelerated downtrend.

What I am trying to do is more difficult than it seems. The market is very unpredictable. So, all my strategies are based on probabilities but with an anchor on longer term fundamentals and guidance from short term technical indicators and sentiments.

Because of my bearish bias, I will certainly add on to my shorts using strategies that I wrote earlier. I will look for segments and companies with weaker fundamentals. I look for companies with high debt,
questionable accounting practices, weak fundamentals and in an accelerated downturn, even high flyers with huge P/Es like LNKD, NFLX and CRM should be shorted. For the latter, it should be done only if the downside acceleration is triggered. For now, the financials and “for profit “ education sectors look like good shorts. I should be posting some of bearish bias trades next week

There is still a probability that market can turn bullish after the severe downturn recently. Will it be a repeat of August 2010 where there were so much negative sentiments? I also remembered the Hindenburg Omen which predicted the market would fall apart. The market went on to a strong rally with the announcement of QE 2. I made a lot of money by the end of the year.

Will it repeat like last year? My gut feel is that this time that the market will fall. I will let the market tell me what to do.

BKS - a "sure win" trade?

2011-06-07T16:34:00.000-07:00

BKS was on a steady decline owing to competition from Amazon. It was making its model obsolete.
Short interest was very high.

When Liberty Media Corporation announced a cash offer to purchase BKS for $17 on May 19th, the stock shot up from $14 to $18 and climb up to a peak of $20 the next few days.

It was very obvious that this was a panic short covering.

I initiated the following trade:

Sell short 1000 shares at 19. BTO Oct 17 SP for 0.95

The idea is the company was offered a price of $17/- So I am selling a put or an obligation to buy the shares at $17/- for a premium of 95 cents.

At the same time, I expect the price the shares to drop from $19 top $17 over the next few months when the deal is concluded.

As a result I will make $2.95 or 15% when the deal is closed.

I do not expect BKS to go above $20. If for some reasons, it goes up above $20/- I may close the trade with minimal loss.

This is simply too good to be true. If the deal falls through, I expect BKS to fall. If the deal is concluded, I will also make $2.95.

Lets wait to see if I am right.

Inflation - updates

2011-04-11T22:23:00.000-07:00

I raised the issue of inflation previously in December 2010 on my blog. Are you convinced? If not, the following arguments should firmly put you into the inflation camp.

Now it is getting more obvious. Inflation fear is getting onto to mainstream press. Gold and silver are at historic highs. Oil hits >$110 although it fell back today after the IMF downgraded economic growth in US and Japan.

Bernanke of US Fed is the only one now that believes that there is no inflation.

Europe raises interest rates despite all the needs to bailout Portugal, Ireland, Greece and possibly Italy and Spain. Canadian rates are strengthening.

Bill Gross announced that he sold off ALL treasuries. Today, I also read that Gross is net short on US treasuries.

In almost every part of the world, government are fighting inflation.

- Singapore consumer inflation hit 5% in Feb. Food, fuel, commodity and property prices showed the fastest price increases.

- Inflation in Indonesia is 6.6%. That is taking consideration of government subsidy on food and fuel. Without it is a lot higher.

- South Korea's inflation is 4.7% - a 29 month high. It is announced that fighting inflation is first priority.

- Inflation in Vietnam is expected to reach 13.3%

- India experienced the high inflation rates of 8.3% in Feb 2011

- In China, the consumer price index rose by 4. Last week, the Peoples Bank of China

raised interest rates by 25 basis points, the fourth time in six months and second

time in 2011.

China’s imports in March rose 27.3% from a year earlier, up from February’s 19.4% rise. For the quarter, China registered adeficit of $1.02 billion. This is pretty big news.

Looking at the private sectors,

o Walmart CEO came out and warned seriously about inflation

o Hershey announced that it will raise prices of its candy products by 9.7% to cover rising material cost, fuel and transportation.

o Starbuck raised the price of its package coffee products by 12%. Coffee price has nearly doubled in the last year.

o Nike announced that it will raise the price of its shoes by average of 5.2%

o Kraft Food is serving smaller portions and reducing serving sizes to respond to rising costs. It is similar to increasing the price by 8.3%

The Consumer Price Index rose at an annualized rate of 2.1% in February (the most-recent statistics available), according to the Bureau of Labor Statistics.

Fresh vegetables and meats rose the fastest, and dairy products are at their highest level since 2008. Fruit is up 10.6%; pork up 9.9%; ground beef up 9.9%; and potatoes up 5.9%.

The short-term picture looks ever more worrisome. The annual rate of price change for the six months ended in February was 3.9%. Using the last three months, the annual rate of change is 5.6%.

Conditions will get even worse now that oil has crossed the $100 threshold and looks to stay high — if not move higher — because of Middle East unrest.

The national average for a gallon of gasoline hit $3.61, but it’s even higher in some parts of the United States, according to AAA. Gasoline prices in California, for example, hit an average of $4.04 last week.

Gas prices are roughly $1 a gallon higher than they were a year ago, and since the average American family uses about 1,200 gallons of gasoline a year, that’s an extra $1,200 a year out of their pockets and a major hit to household budgets.

One baffling event is that consumer stocks are still up. BBBY announced excellent results. Retails are surprisingly strong! Honestly, I cannot explain. Possible reason is that people are making money from the stock market and start spending again!

One thing that is not rising is housing price. On the whole, people are poorer in assets and they have to pay more for necessities like food and gas. Despite low interest rates, both new and existing home sales continue to fall. This is for a number of reasons. The market is well aware of the foreclosure overhang in the market and recent reports suggest that 27% of homes in the US are now underwater (the homeowner owes more on their home than it is worth). Banks are holding onto significant foreclosure reserves, and either are unwilling to sell them as they look for better market conditions, or else they cannot sell them because the paperwork is not in order.

So it is a double whammy. People are poorer because of lower housing price and have to pay more for their daily necessity.

Still not convinced? Inflation rate is actually around 10% if you the methodology used during former Fed Chairman, Paul Volcker. Read this in CNBC yesterday.,

Gold and Silver

2011-04-11T22:06:00.000-07:00

I had given various updates and analysis of the stocks I trade relating to gold and silver.

The last update was given on Dec 2010. It was a rather comprehensive essay on why I am bullish on gold and silver. Also given in this blog was two of the favorite stock for gold and silver. Both Goldcorp and Silver Wheaton have done extremely well.

With gold and silver rising to historic level, are we hitting a bubble? Am I still bullish?

Lets examine some of the the macro perspective:

1. Inflation

Inflation is becoming more obvious now. I will be writing an extensive update on inflation in my next post. Inflation is good for the precious metal. It is a fantastic hedge against inflation.

2. Debt and deficit.

Listed top reason for the rise of gold in my previous update is the devaluation of the dollar, increasing debt and widening deficit.

Debt to GDP is now 3.8 times GDP. This is equal $180,000 in debt for every man. There is no way US can repay the debt.

The only way to get out of this debt is the devaluation of the dollar. Gold price will rise as the dollar decline.

Recently, Bill Gross of PIMCO - manager of the world biggest bond fund sold all treasury and went short against it.

He is even more pessimistic. He said recently that the US true debt is $75T, which is 500% of GDP ( includes unfunded liability medicare, pension etc ). Interest alone is equal to the full budget of the country. It is like a man has so much debt that his entire salary cannot service even service the interest payment. Technically, US is bankrupt.

o Technical picture

Technically, gold and silver had broken out last week after a period of consolidation and multiple tops for the last 3 months. Today, we witnessed some profit taking. But gold should meet support at 1440 and silver at 39. If held at this level, I plan to add to my positions. I see gold above 1500 and silver above 50 in a short term if the supports hold verifying that it is not a fake breakout.

o Dollar is breaking down

The dollar is at a very dangerous level now. If broken down below 75, it will accelerate down quickly to 72. Gold will continue to rise exponentially.

o Investing public and funds holding gold still small.

The big question is whether gold is a bubble. Yes, there is more public awareness now but it is far from being a bubble.

Gold as a percent of financial asset is increasing but still far from historical levels.

Despite rising from under $1,000 an ounce to over $1,420 over the past six months, that represents only a 0.7 standard deviation move for gold prices, according to Credit Suisse (CS). The average standard deviation move of other bubbles—Japanese equities in 1986, the tech boom in 1999, the GSCI in 2005 and gold in 1979—is 5.3. Gold’s 180 percent move in 1979 represented a 10.3 standard deviation move, more than 14 times the magnitude we see today.

Eric Sprott recently did a fascinating presentation explaining how underowned gold is as an asset class. Sprott wrote that despite a 30 percent increase in gold holdings during 2010, gold ownership as a percentage of global financial assets has only risen to 0.7 percent. That’s a big increase from the 0.2 percent level in 2002, but Sprott points out that it’s misleading because the majority of that increase was fueled by gold appreciation, not increased level of investment.

Also reported by Dr Marc Faber is that percent of gold to pension fund is still minimal.

Silver was down today mainly because one trader made a huge bet of $1m on options that it will drop 37%. Thus no reason to panic for the drop today.

In closing, I like to add a quote from Alan Greenspan. He is the father of the bubble in the US. But there was an interesting quote from him:

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value... The financial policy of the welfare state requires there be no way for the owners of wealth to protect themselves.

Gold is a good hedge for inflation and devaluation of paper currency

Fundamentals has not changed. It has actually got stronger by the month.

April Updates

2011-04-11T21:36:00.000-07:00

I have taken a break in the month of March from writing on the blog. I went for a spring break on a cruise to West Caribbean. It was a wonderful time with the family but that is no excuse for not writing. I was away only for 10 days.

I alluded to some expectations on the market before I left. I awaited a correction of 10%. I waited in Jan, Feb and March, and it did not come again! I had accumulated more than 50% cash. I hedge all my positions before I left for my holidays.

The market continued to go climb the wall of worry and goes up. Despite all the negative events in Libya, Egypt, Middle East tension and unrest, earthquake in Japan, escalating risk of debt situation in Europe and high price of oil, the market continues its ascension with no fear.

I am now leaning to the direction that the market will continue to be bullish for a while. There is so much liquidity. Merger and acquisition happens on a weekly basis.

On the other hand, the dollar has hit its very important support level at 75. It continues to exhibit weakness. If this support is broken, it can go down quickly to 72. The weakness of the dollars is also positive for stock and commodities. As the dollar is being destroyed, assets price goes up ( except housing ). The winners are gold, commodities and stocks that has good exposure outside US.

Gold and silver broke all time historic highs. It was a surprise to me. I expected it to continue to go up but not at this pace without a meaningful correction.

Thus, I am again leaning bullish again. I want a confirmation from the earnings the start of the earnings week. If it is positive, I can expect the market to continue to climb for the next 4-6 weeks. I can delay the expectation for a correction.

My portfolio is still positive but it was a slight disappointment for me. Upon reflection, it is prudent for me to hedge in view of all the negative events that happened in March. The market has proven to be very resilient.

With such a rise in the precious metals, I should have been riding happily on the trend. I did not although I enjoyed some gains.

Also, as most of my positions are in USD and my account is based on Canadian dollars, I suffer some losses. These losses are higher than the gains on my stocks in USD.

Anyway, the opportunities will be there again. Just need to stay on my system and continue to trade with discipline and risk control.

Strangle / Stradd;e with Collar - Part II - NVDA and RIMM

2011-02-21T21:42:00.000-08:00

This is a continuation of the post on Straddle / Strangle - from a "vegas" to a high probability "safe" trade.

I did 2 more trades - NVDA and RIMM. Both were pending earnings results. NVDA has announced and RIMM will announcing on 3/24 after market closes.

Keep in mind this is a high capital, low return, short time frame and high probability trade. It is meant to be closed after the event.

As long as I reach my target of annualized return of more than 50%, I may decide to close the trade.

1. NVDA

The trade was placed on 2/14 - 2 days before earnings.

I was debating on buying longer term put or a very short term put which expired in February 2 days after the earnings.

The problem with short term put is that the theta decay will instantly kill the trade without possibility of any adjustments. However, if the stock moves, it will probably yield better results because of the gamma or delta change.

There was a lot of excitement on NVDA. It was expected to move. It can be up or down. This is an ideal stock for such a trade.

Following was the Trade Structure opened on Feb 14th.

BTO 1000 stock = 23.16
BTO 10 Feb 23 C = 1.09
BTO 20 Feb 23 P = .94. ( Volatility is very high and option price was expensive )
STO 10 Jan 2012 25 SC = 3.5

Cost Basis = 26.1

Results were announced after market closed on Feb 16th. Pre-market shows that the price dropped slightly. There was not a lot of firework.

The market opened on Feb 17th with the stock dropping 2% in the first 15 minutes. My long puts and calls suffered high volatility crush. Since the stock did not move substantially, I was losing money. The first thing I did was to sell my puts and take the loss.

In about 2 hours, the stock price reversed and started to move up. The LC turned positive. The stock is making money. The trade turned profitable.

I had to decide whether to let the stock run or close the trade breaking even or enter a covered call.

The decided on a NTM covered call.

STC Feb 23 P = 0.41
STC Feb 23 C = 2.46
BTC Jan 25 SC = 5.05
STO March 24 SC = 1.45

Cost = 23.42

The Stock closed on Friday at 25.63

The CC is ITM now. As long as it stays above 24, I will be profitable with a annual ROI of about 30%.

On hindsight, I closed the legs of the trade too early. I should have let it run. It closed the on Feb 17th with a 10% gain. The trade would have exceeded my objective of 50% Annual ROI.

2. RIMM

RIMM is expected to announce earnings on March 24th - one day before March option expiration.

Trade placed on Feb 14

BTO Stock = 66.3
BTO March 65 P =2.04
BTO March 67.5 C = 2.12
STO Jan 2012 72.5 SC = 6.7

Cost Basis = 65.8

I was planning to close the trade after earnings.

But RIMM prices shot up over the next 2 days. I reached my target objective. I closed the trade.

STC stock = 69.3
BTC Jan 2012 72.5 SC = 8.35
STC March 67.5 C = 3.6
STC March 65 P = 1.01

Cost = 66.57

Return = 2.28% in 2 days or about 60% ROI.

This is a case that I did not wait for earnings. I can always place another trade before earnings. I did that for FSLR by placing a trade after taking profit 2 days on the trade. Currently, I am waiting for movement as they will be announcing earning results this week. I will report the results

This trade strategy has been all profitable so far.. While waiting for the big move on the stock, the profit / loss did not fluctuate a lot. It was pretty neutral. Once there was movement on either side, it made money. In some of the instances, I decided to take profit first as long as the objective of 50% annual ROI is reached.

US Economy - Turnaround?

2011-02-15T15:25:00.001-08:00

Straddle / Strangle – from a "vegas" to a high probability "safe" trade.

2011-02-12T19:06:00.000-08:00

A straddle / Strangle is used when there is a fixed event that will move the stock up or down. The regular event is the earning announcement. It occurs every quarter. Other big movers are drugs awaiting FDA approval or a new product introduction, a big political event or pending merger or acquisition.

If the stock does not move after the event, the trade will lose money on this trade. It is an expensive trade. Besides suffering from time decay, your trade is negatively affected by the volatility crush after the event. Normally, IV will be high just before you enter the trade. Volatility crush will kill the trade without mercy. If you are wrong, you can lose up to 80% of the value. But if you are right, the upside is unlimited.

It is classified as a "vegas" trade. It is a more or less like a bet on a lottery.

But it does not have to be this way. Trade will lose a little money if the trend remains stagnant. Most of the time it can end with a profit with some minor adjustments.

The example given will show how to have high probability of winning in all directions.

It is done by cushioning the volatility. The time decay is minimized by acting quickly to close or adjust the trade once the results of the event is known.

The trade consists of a strangle and a collar.

Similar to on of the criteria of choosing a trade for strangle / straddle, you want a high volatility stock that will move after an event.

FSLR is used as a case study below.

Background

FSLR is poised to announce earnings at the end of the month. Almost without fail, the stock moves after earnings.The stock will also move even before the earnings.

With the big run in the last few weeks, there is even a higher probability that the stock will move markedly after the earnings call.

Short ratio is currently very high at 30.37%.

Personally, I am not convinced of the competitive edge in the stock. The main competitive edge is the subsidy from the German government. This is not a sustainable edge. Their technology and cost positions are falling behind.

But again, I am not arguing with the fundamentals. Technically, the stock is moving bullish. Thus, I expect some big moves before or after earnings as emotions are running high. IV is above average.

Trade:

Trade was entered on Feb 10^th

- BTO 5 FSLR = 155.79

- STO 5 Jan 12 165 = 19.75

- BTO 10 Feb 155 put = 3.55 ( very short term put. Can also use March 155 )

- STO March 155 Call = 9.9

Cost = 153.04 ( 155.79-19.75+3.55*2+9.9)

The trade will make money if it is bullish or bearish. Anything about >5 % the trade will be profitable. The decision can be to close the trade and take profit or convert the trade to a CC if still bullish on the direction.

You can also close one leg of the Call or Put to maximize the unlimited potential if the trend justify.

In the even of a low probability that the stock does not move after the earning call, you can always close all the legs and Roll down the LEAP SC to make it a short term covered call. You should be able to regain all the small losses and make some small profit. For these adjustments, you do the following:

       - Sell the puts and take some loss
       - Sell the LC and take some loss
       - Roll the LEAP SC down to a nearer strike and take some profit. Add a 1 to 2 months expiration
         ATM, ITM or NTM SC to create a new Covered call.

You now have a covered call. You can manage it to profitability with relative ease over time.

Closing the trade

FSLR went up > 6% to a high of 167.4 the next day.

I can hold the stock and wait till earnings are announced.

But I decide to close the trade and take profit although I believe it will make more money if I am right after earnings.. But I decide to be conservative and take the profit first. I have similar trades on NVDA and RIMM waiting for results.

STC Stock = 166.816 Profit = 11.02

STC March 155 C = 17.22 Profit = 7.32

BTC Jan 2012 165 SC = 27.25 Loss = -7.5

STC Feb 155 P = .99 Loss = -5..12 ( 2 puts )

Net Profit = 5.12 or 3.74 % for 1 day

This is nice gain given the short duration and a relatively safe trade.

( Credit to Greg Jensen of Option Animals for teaching me this trade ).

Holy Grail? Foolproof indicator? Highly Accurate Algorithm?

2011-02-12T09:41:00.000-08:00

Very often, I am proposed with some special system, an algorithm, a foolproof indicator or a formula that guarantee you to win in the market. The offers can come from a small quick money making outfits but also some respectable analyst and financial institution with real mathematicians and scientists working on the system.

I received the following write up from Jeff Clark on Feb 8^th and thought it is fun to post an excerpt:

“

The Final Piece of the Puzzle

By Jeff Clark
Tuesday, February 8, 2011

Everything is in place now.

For the past couple months, I've been harping about the potential for a bearish move in the market. Sentiment indicators, summation indexes, bullish percent indexes… all the technical indicators are warning of a swift and severe correction. The market doesn't care. It just keeps marching higher.

The high-frequency trading desks, the algorithmic computer programs, and the Bernanke printing press have overpowered the technical indicators and – like Atlas propping the world up on his shoulders – kept a persistent bullish bid beneath the market. The new high list keeps growing. Expensive stocks keep getting more expensive.

Every day I warn investors of the potential risks in the market. And every day I start the morning by washing the egg off my face. Why worry about risks when there are such large gains to be made? "It's a new world," the market says. "Either get on board or get out of my way."

So yesterday I sat at my desk, banging my forehead on my keyboard and wondering what else has to happen before the market corrects. What other indicator has to reach a ridiculously extreme level and warn of the impending doom before stocks finally take a breather? This was 9:41 in the morning, Pacific Standard Time (PST).

At 9:42, the phone rang and the final piece of the puzzle fell into place.

"Hi Jeff," the voice said, "It's your mom. Just wanted to get your opinion on the stock market. We're sitting in cash right now, earning 0%. And we're thinking about buying some stocks."

Get out of the market while you can, folks. The "Mother Indicator" has just issued a sell signal.

Mom is the perfect example of a public investor. She doesn't pay much attention to the financial markets. So if she's aware of a trend, or has an inkling to put money somewhere, you can bet the idea has gone mainstream. And she has a near-perfect track record as a contrary indicator.

Signals from the Mother Indicator don't occur often – perhaps just once every two or three years. They are, however, remarkably accurate… And they always seem to occur within days of important turning points. For example, I first acted on this signal in early February 1994. Stocks had been on a terrific run – up 20% in about eight months. The Fed was easing, so interest rates on CDs and money market funds had been falling. Mom was looking to get a bit more bang for her buck. And for the first time since August 1987, she wanted to buy stocks.”

Without fail, most of these systems fail eventually. Perhaps the exception is the prevailing proprietary high frequency (HFT) trading desks of major financial institutions that trades in nano seconds using powerful computers and high speed linkage to the Exchange. Great successes are reported for these systems. It is estimated that up to 56% % of trades are generated by these High Frequency Trades (HFT). So, it is very difficult for trader traders to beat these systems.

However, I remain sceptical. I believe any mechanical system will fail over time. The market is an emotional creature. It is difficult to use mechanical logic to reason with emotions.

It is wise to treat the market as totally unpredictable, at least short term. It seems to suffer from some bi-polar personality disorder, which varies from extreme happiness to deep depression. It can remain irrational longer than you can remain solvent.

Therefore, there are no secret formula or holy grail.

There is no easy path.

Trading is very much a probability game.

I have my fundamentals. I have my technical systems. But at best it gives me slightly more than 50% probability of winning. Although, longer term the fundamentals if done correctly will work in my direction but it could take a long time!

One great example is to look at Wal-Mart. Over the last decade Wal-Mart's earnings almost tripled from $1.25 per share to $3.42, growing at an impressive rate of 11.8 percent a year. This doesn't look like a stagnant, failing company; in fact, it's quite an impressive performance for a company whose sales are approaching half a trillion dollars. However, its stock chart led you to believe otherwise. The PE declined from 45 to 13.7, or about 12.4 percent a year. The stock has not gone anywhere.

Does that mean that the market is totally random? There are number of academics and books write to prove that we cannot time the market. They favour diversification, segment rotation and rebalance of portfolio to make steady gains. It is believed that the market is random and thus no one can beat the market.

Personally, I believe we can beat the market. I had done it for many years. The important thing is to understand the fundamental dynamics, emotions and irrationality. Market always over extended itself because of emotions. While being confident, we maintain with humility a healthy respect for the market.

How do I deal with the uncertainty?

To begin, I acknowledge that I cannot predict the market with certainty. I am rightly only slightly more than 50% of the time.

So risk control is my Holy Grail. I diversify, keep disciplined position size, rebalance once in while, conduct segment rotations and I hedge.

Successful traders hedge their risk. Primarily, I use options to hedge. It is the third leg of my trading process. The whole process is like playing chess with the market. Various adjustments are made in a trade structure until it is closed.

Using options properly has the wonderful effect of taming the volatility giving control over greed and fear. On the other hand, using options for the purpose of leveraging in a directional trade has the opposite effects.

I will not be afraid to buy into breakout or a change of trend as long as I have considered all the downside risks.

This is the system I believe I will beat the market both short and longer term.

Possible events that derail the market

2011-02-06T20:27:00.000-08:00

The DOW closed conclusively above 12000 and stayed there for a few days. If it can maintain this level, this market should be bullish over the next few weeks.

Many people, including me, is expecting a correction but it never came in January. It may not come in Feb.

This is the important lesson of trading. Never trade on what you feel but on what you see. Whether it is price actions or earnings, they are pointing to a bull market. I will trade on it as long as the direction maintains. I know my system will capture the downturn when it comes. Fundamentally, it is hard for me to believe that it is so bullish. But I see is what it is. Do not argue with the trend.

I expect some kind of drastic event that will derail the market. Here are some possibilities

Ten year treasury bond spikes to 5% and money gets expensive
Crude oil soars to >$130 in a short period of time because of fear of crisis in the middle east
Ireland default and sends a domino throughout the Euro Union
Stock prices continue to rise and the FED decides to end quantitative easing

All these events could happen. One event will trigger another. When it happens, it is usually fast as investors run for cover.

I still expect a 10% correction. It will happen. It should be within the next 4-5 weeks. I am watching it closely and remain extremely cautious as I continue to trade bullish going forward.

My Favourite Gold Stock

2011-02-06T20:23:00.000-08:00

I discussed previously on my favourite silver stock last year, SLW.Besides GDX, there is one stock I have traded for the last 5 years. The stock is Gold Corp or Symbol: GG

So far the gold miners are still lagging behind the rise in gold prices. But cash flow are improving and so is profit margin as the price of gold goes up.Big miners are value play opportunity now. Companies should do very well as they report earnings during the next 1-2 months. The high price of gold favors their performance. Cost are kept relatively stable. Margins, cash flow and earnings have expanded. The market has not fully price in the margin expansion. Thus positive surprises can be expected.

Most big caps on gold moves in tandem with gold price. I expect that some will outperform the other once gold price break up again. I expect this to happen some time this year.

GG remains my favourite for many reasons:

Comparing, Goldcorp, NewMont and Barrick, I like Gold Corp.

Stock Estimated Estimated Percent Change

2010 Earnings 2011 earnings

GoldCorp $1.4b $2.5b +86%

Newmont $1.7b $2.0b +20%

Barrick $2.8 b $4.0 b +42%

Data from Bloomberg

As you can see, there is one clear winner. Goldcorp's net earnings will rise 86% from 2010's estimated net earnings. Barrick Gold's net will rise 42% in that scenario, while Newmont's nudges up 20%.

It turns out, Goldcorp is the cheapest among the three as well.

Here is another comparison:

Stock P/E est. 2010 earnings P/E est 2011 earnings

GoldCorp 24.2 13

Newmont 18.6 15.5

Barrick 19.4 13.7

At more than 24 times last year's earnings, Goldcorp may look expensive. But using my numbers for 2011, it's a great deal.

There's no guarantee gold will remain at $1347.5.There is still a probability it could sink to $1,200. It could also skyrocket to $1,800. But the big, long-term trend here is up… and if it continues, big gold miners are going to start rolling in profits. And the best deal in "big gold" is Goldcorp.

Gold Miner	PE Ratio at $1,350 per oz.	PE Ratio at $1,200 per oz.
Goldcorp	10.8	13.6
Newmont Mining	13.5	29.7
Barrick Gold	11.6	19.1

If you lower the gold price, they all get more expensive. But take a look at Goldcorp. Even if gold falls another $150 per ounce, it's still a great deal.

Credit Trades

2011-02-02T22:38:00.000-08:00

This post will discuss credit trades. I will use bull put as an example but the discussion equally applies to a bear call.

Bull puts can be very profitable. The probability of winning is also very high. Often it is > 80% success probability if you structure it correctly.

However, if there is a down turn, it is usually fast and furious. You can lose 90% of the profits of your last 10 trades just with 1-2 trades!

It has been perplexing to me. I am finding some ways I can manage to profit consistently without suffering big loss once in a while

The usual strategies for bull put is usually as follows:

- enter the trade 1 or 2 strikes OTM when a bullish signal is given. It could be a breakout, a successful test of support or a bullish candle formation.

- Make sure the company is fundamentally sound

- If the direction goes against you, you are ready to assume ownership through the SP and roll the LP out and in for longer term protection. Upon assignment, add a SC and manage it forward as a collar until you are profitable.

The above are great strategies but it does have 2 problems.

First, you need capital to assume ownership. So you cannot increase the size of the puts as it will take too big a capital outlay if the size is too big.

Also, when the stock falls, normally it is going to continue to a while. Thus, it takes patience and time to nurture the converted collar to health again. It is certainly possible if fundamentally it is a good company but it takes time and effort.

I like to explore a pure trading strategy to manage bull put. This means that I am out if I am wrong. I am prepared to take some loss if the direction goes against me.

Strategies

Always enter as a bull put and not a naked put. The protection is always worth the insurance and it does not cost much.
Place the protective put at the below next support.Do not enter a bull put on the month of earnings announcement or anticipation of fundamental event mover of the stock. The IV may destroy your position.
The trade is executed with the issue of bullish signals. If possible let it aligns with the overall market trend. If the market is bullish, there should have less hesitation to enter bull puts
Determine on the exit point. Consider taking profit once the position reaches 80% of ROR. If the trade is really far OTM and the stock or market has no signs of resistance, you may target to keep 100% of the credit. Remember that this is only a small additional bonus. Do not be greedy. With any uncertainty, get out.
When the trade goes against you immediately, consider adjusting.. If it is clearly bearish, the trade can be converted to a bear put. I prefer to get out most of the time with a loss.
When it reverses and a bear signal is given, get out. You may lose some money or even make a profit if the reversal is not too serious. The question is what are the bull and bear signals? If depends on your technical system. It really does not matter. Many people can use very sophisticated algorithm and program but I believe a simple system will work just fine with around 60-70% accuracies. I have tested some technical algorithm and the results are not far away.It is important that you stick to the signals used for the trades to maintain consistency. My technical signal is a combination of support, resistance, MACD and candlesticks. For some trades, I draw Fibonacci retracement lines to gage the support and resistant. For others, a simple trend line will suffice. Any break up or break down above or below these lines from the candlestick will give me the signal. The MACD acts as a confirmation to my decision. It is a very simple system but gives me at least 60% accuracy.
When the SP goes ITM or NTM, an alarm should ring. Never allow the SP to go ITM. If it is NTM, review the position. If the stock drops because of the overall market, wait for until the week before expiration before exiting. The theta of the SP will be working positively for the position. My experience is that SP ITM is the one that gives led me to some of the big losses. The tendency is to hope that it will recover but if it continues to go against the position, it is the route to no recovery.

I intend to try out the system. I will also update this post of any new observations or results

Encana Covered Call converted to collar

2011-02-02T22:23:00.000-08:00

Natural gas has dropped a lot over the last 2 years and seems to show signs of bottoming over the last few weeks.

There is still abundant supply and a glut in the market but it will not continue that way forever. There will be new applications. Oil and coal price has gone up and the cold winter also contributed to the stabilization of price of Natural Gas.

The price may be at historic lows today but we can sure it will rise again at some point.

The way to start watching a bear market is when it gets from bad to less bad.

The simple fact today is natural gas it is the cheapest source of CLEAN energy in North America today. Eventually, the utility of natural gas and its low cost will create demand. If the price of natural gas heads up from $4 to $6 or $8 in the coming years, these assets will skyrocket in value.

Thus I am investing in one of my favourite stock, Encana, Symbol: ECA.

Background

Encana has a market cap of about $23billion. According to SEC filings, it has 19.5 trillion cubic feet of natural gas reserves.

Encana has 23,100 producing wells. It also has an inventory of 35,000 drilling locations.That's enough inventory to drill 1,500 wells a year for more than 20 years... without doing any exploration at all.

Below is a comparison of Encana verses its peers

Company Market Cap Price to Book Price to Cash flow PE

Encana $23b 1.24 7.44 13

Tailsman $23b 2.04 6.47 34.3

Husky $23b 1.55 9.31 18.8

Chesapeake $17.3 1.57 3.22 19.2

The key risk is the price of Natural Gas. It could go down further. The assumption is that the bottom is near.

During the worst period, Encana fell to a low of $19.21 – roughly 38% lower than today’s price. Even then, it reported a $1.9 B profit. The company paid 86¢ per share in 2009 and 2010 – two terrible years for natural gas producers. The company's production fell, its cash flow fell, and its earnings fell. But management remained conservative through the good years. It was prepared to pay its dividends even in the worst of times.

In 2010, the company bought 2% of its shares at an average price of $32.42 per share.

This is a safe and solid company.

Trades

I bought a covered call on January 12^th 2011.

All the buy signals were triggered.

BTO 1000 shares $ 29

STO Feb 30 SC $2.1

Cost Basis = 26.9

The stock went straight up after that and my SC went ITM

The company is scheduled to report earnings on 2/11

So I made the following adjustments:

1. Added a short term protection put on Jan 27th BTO Feb 33 P 1.25. New CB = 28.4

2. In order not be called out if there are good earnings, I rolled the Feb 30 SC to March 35 SC

The put is supposed to carried me through earnings.

If result is good, I can convert it to a bull put or just sell the put.

If negative results, I will roll the put to a longer period near expiration and roll the SC down and in – taking some profit from the current SC.

It is my intention to hold on to this stock longer term. My target is a >50% gain this year.

Currently, short term trend is down. The stock is overbought. Company is releasing earnings on Feb 10^th.

For a new trade, a married put is a good idea. After earnings, if the results is good, take out the put and convert the stock into a covered call. If the market reaction is negative, add a NTM SC and roll out the put to give additional protection when it is near expiration.

Observations on the market

2011-02-02T22:05:00.000-08:00

There are some interesting observations on the market.

With the downgrade of Japan, the yen actually went up and gold went down. Japan debt to GDP ratio is 200%. This level is second only to Zimbabwe and yet the market considers Japan a SAFE HAVEN to mitigate the risk of the unrest in Egypt when the market went down last Friday.

Sovereign debt in Europe continues. While there are all kinds of attempts to find solutions,

sovereign debt continues to be a problem. There are no improvements in the situation in Ireland and Portugal. Italy looks increasingly vulnerable. There is high still high probability that Ireland may default.The public has forgotten that these problems are still lurking in the background and will suddenly surface again.

USA deficit got worst with a report last week. At the Davos meeting this week, there was a proposal of US$100T credit ( or shall we say debt ) to support the growth of world economies. Thus, money printing rolls on globally. We had QE II and QE III is coming. There is no clear exit strategies for the Fed. Letting go a down slope while skiing is easy but the trouble is knowing how to stop.

Every time bond price dropped, it is supported by the next day. There is no secret of the Fed manipulation. Actually, the Fed is pretty open about it. They went in to buy more bonds. The question is how long it can continue.

In view of all these factors, gold price had a big correction this week in January until on Friday, it reversed up together with the dollar and oil because of the Egyptian unrest.

Over the last few weeks, there were talks of gold being a standard. The president of World Bank mentioned about a gold standard although he denied it later. Next came a surprise. Fed Governor Hoenig shocked many observers when he stated, “The gold standard is a very legitimate monetary system...We're not going to have fewer crises necessarily. You will have a longer period of price stability or price level stability, but I don't know that you'll have lower unemployment, I don't know that you'll have fewer bank failures.” For this to come out from a team member of the Fed reserve, it is an important timing. Finally, a comment made by Allan Greenspan in 1997 was revived on the Internet. Greenspan was the cause of this big bubble and money printing exercise. Apparently, his views as a good economist and his actions as a politician or civil servant is widely divergent. For gold to become some form of standard is a remote probability but it is interesting that it is being discussed more frequently.

Finally, food commodities continue to rise. During end January, it had a false break down but went straight up causing short traders to run for cover. High prices of food have started to cause instability in countries. There are riots not only in Tunisia and Egypt which finally caught the media on Friday. Other hot spots include Yemen and Jordan where unrest are starting to appear.

We are certainly threading on dangerous ground. While it is important that inflation needs to be tamed at the early stage. But what is happening is the the opposite. We are adding fuel to the fire denying that it has started.

While the money-printing-induced high we're currently on may feel fun today, the unavoidable inflationary smackdown we'll experience tomorrow most certainly will not.

Well, the market rallied back on Monday. It is still very bullish. I have to agree to the adage “don’t fight the FED" and " the Trend is your friend”. All talking heads on CNBC are bullish now. But one question: “ If the economy is so good, why the need for quantitative easing?”

Update revised performance result

2011-01-22T22:39:00.000-08:00

I have revised my results after the Nov and Dec results came in after my last report.

Market Updates

2011-01-22T22:33:00.000-08:00

I apologize that that I have not written for about 2 weeks.

Meanwhile, a lot has happened in the precious metal market. I had written on Jan 5th 201 comments that I had gone short term bearish and thus collaring all my holdings in precious metals.

This short-term correction could last a few weeks to a maximum of 2 months. Gold can bottom at 1320 to 13230 and if it does not hold, it can drop to 1270.

My best bet now is that there may be a short-term rally. But the intermediate term is still down. Thus upon this rally, I am maintaining my put and rolling down my SC taking some profit and at the same time adding more protection for another month.

The overall market is getting nervous this week. Because the expectations are so high, any slight miss on earnings or revenue or any bad news, the stock can take a beating. Examples of these are CREE and FFIV. Also, for GOOG and APPLE, the stocks fell after delivering extremely stellar results because of news of their CEOs leaving the job. The market is clearly look for reasons to sell off.

As I said, after going up so much since August 2010, there WILL be a correction.

I got out of 90% of my junior minors and 50% of my precious metal big caps at the beginning of this year. It was a great move but it was not entirely that I foresaw the correction so clearly but because by coincident I was moving my old account to a new account. For the remaining of the big caps, it is now fully collared.

Be patient. The fundamentals are still overwhelmingly sound. Upon bottoming, the upside could be explosive this year. It is my belief that both gold and silver will reach new high in 2011. I am looking forward to get back in the game of PM again but not before a bullish signal is given

A few updates on my trades. I closed my double diagonals trades. I make some money all the trade but it is too slow for my style. Also, the WMT trade was assigned twice when it goes ITM. Apparently, someone is watching WMT very closely to take assignment of options that went ITM just before expiration or just before dividends.

For AEP, I got out with a profit. I did a very bearish write-up. But recently, there are some developments and merger that make the utility segment bullish. Technically, AEP is issuing a bullish signal. But because I am not convinced on the fundamentals financially, I am not getting into this trade.

XEC continues to perform strongly. I got onto the trade twice with a covered call. Unfortunately, I got out and did not get back to a new trade again. I am waiting for the right opportunity to get back again. The overall oil segment is still bullish.

The BYD trade is not doing well. I still believe in the long term fundamentals. Although the stock has dropped 25% since I bought but I am losing only 7% because of my hedge. My cost position is greatly reduced. I am waiting for the right opportunity to average up on my shares.

Through this period, I have collected many thoughts on my trading process. I had written it here in a separate posting. In addition, there are some trades, which I will post this week.

Watch out for the new posts.

My Trading Process

2011-01-22T22:27:00.000-08:00

"Money itself isn't lost or made - it is the transfer from one perception to another: - Gordon Gekko in Wall Street 1

My trading process is relatively simple. It consists of a few major steps.

Determining the fundamentals
Align the Technical with the fundamental
Decision on the trade structure defining the hedge and exit points.

I outlined my trading methodology in Jan 2009 and subsequently added options to my strategies in October same year.

Over the time there various models written on how the processes were deployed.

After the above analysis, I need to make a decision entering the trade.

Let me discuss the above process in greater details.

Fundamentals

Deciding on the fundamentals is basically examining the drivers for the stock. It could be positive or negative. Normally, I keep a certain percentage of my trade in negatively bias trade as a hedge.

The process filters down from the macro economic environment, to the industry drivers and to the individual company’s management, product, earnings, debt, cash and growth. In many of my blogs, I have outlined the process and thus I am not going to elaborate here again. Many times it can be a very specific fundamental opportunity and it is best discussed with specific stock.

Technical

Many times I was asked whether technical trumps fundamental or vice versa. I am firmly on the camp that fundamental trumps technical. Technical basically measures the short term investor sentiments through the price actions. Psychology and emotions are a major part of trading. More often, psychology is more important than maths, perception is more important than reality.

Technical analysis is an art. I consider a good technical system if it gives me 70% accuracies. Also, it can only predict short term directions. On the other hand, if the fundamental analysis is correct, given enough time, the stock will align with the analysis.

So while I love the fundamentals, I will wait for the technical to agree before I enter a trade.

So what are the technical indicators?

The key strategy is to stick to the primary trend. The trend is your friend. Ride the trend as far as you can but never hesitate to execute additional protection once it breaks the primary trend. A simple way to see the trend is to draw a straight line on a few points during the last few months and determine whether it is sloping up or down. Sloping up means bullish trend and sloping down bearish trend.

I can say that any reasonable system will work fine. There is no need for too many indicators or a complex system.

I use a combination of MA, slow STOCH, MACD and William %. These are lagging indicators. More important are the leading indicators – price actions, patterns, support / resistance and candle stick for short term movements.The leading signals will give the initial signals and often confirmed by the lagging signals.

It is easier said than done to follow the trend. Often it means buying when it goes up and selling when it goes down. It is counter intuitive.I understand the need to buy low and sell high. Most of us are tuned to try to buy on dips But sometimes the dip never come and we missed the train totally. Striking a bargain has its role but once the trend is clear, jump onto it. The market has a way to leave you behind.

Many times the reality is different from your perception. It was said that the irrationality can last longer than you remaining solvent. So many times it is totally contrary to the fundamentals.

I saw the whole housing bubble a full 2 years before it collapses. I short FNM, FAE, DHI and all kinds of housing stocks. I took losses a couple of times until the big collapse finally came. I finally got to take the ride. Even then, I got out too early.

We are undergoing a gold correction now. I see gold bulls complaining "it ann't fair, it can't continue; the fundamentals are too strong for this to happen etc" . But it is what is is. I got out of 90% of my juniors and collared everything on Jan 5. I protected most of my gains. You can be sure I am getting back again but not until my system tells me to go ahead. It will not be too late.

Another factor is that we tend to second-guess our technical analysis. Once you have determined your system, stick to it. You have to trade almost mechanistically. You will be wrong at least 20% of the time.

But the key to make money is to know when to lose money. I had said that risk control is the holy grail of trading. If you control your risks, the profit will take care of itself.

3. Decision on trade structure: defining the hedge and exit points

First step is to take action. Do not expect to be right all the time. Once the fundamental and technical aligns, make a decision and execute the trade. If you expect to be right all the time to make the trade, you will be right eventually but you will miss the trade.

My favorite structures are:

Most often, I start with a covered call or married put and moving to a collar when needed. Less often, I may start with a collar. There are times I start with just the stock.
On the negative bias trades, I may start with a covered put ( short stock + short put ) or a synthetic put ( short stock + long call ) and moving to a reversed collar when needed.

Most people knows how to trade bullish but seldom short the market. For me, I keep a certain percentage of short trades as a hedge to my overall portfolio.

The above covers 80% of my trade structure.

For the other 20%, I venture on Calendars, bull puts and even straddle and strangle. These are more speculative trades.

I seldom use double diagonals, Iron Condors or Iron Butterfly as a trade. But sometimes during the adjustment process, the whole structure evolves into such trades.

Adjustments;

This is the interesting part. Like technical, it is an art but there are certain principles that I follow.

a. First, do not adjust when the trade is working. You will over trade if you do.

When the trade goes wrong, the adjustment process kicks in.

I use options for adjustments and hedge. Many people use options to leverage. Contrary to common practice, I use options primarily for adjustments and hedge.

b. Determine the DNA of the stock. Is it a volatile stock? Does it gaps often? What is its possible directions and potentials? Has it got dividends? From here you get an idea on what kind of trade structure to use and determine the primary exit ( if you are right ) and secondary exit ( if you are wrong ).

c. Below are situations I make adjustments. I am using example of a positive bias trade. Similar principles can be used for negatively bias trade.

- Do not place a short call in front of earnings. You may limit the profit. If you need to place a short call in front of earnings, make it OTM and longer term. Following the same principle, I will convert a covered call into a married put just before earnings by buying back the short call and adding a protective put

- When the stock is reaching resistance or showing signs of resistance, add a short call.

- If you are not sure of the resistance but feel that the trend is slowing down, add a OTM short call and probably longer term

Adding puts

Adding put is a difficult decision. I have to confess that I lose money on my puts 70% of the time. It is a necessary evil and insurance to control my risk. I am losing money to make money.

I add puts when:

i. It breaches support and primary trend. Often, if it breaks down, it will break down further and FAST.

ii. In front of earnings, add a protective put especially for volatile stock. It is not worth the risk without the protection. If the protection is just to go through the earnings, I will add a short term put and take it out after the earnings. Normally, I add a ATM put. But if I am not so bearish, I may add an OTM put.

iii. Protect my profit. If the stock has gone up considerably and I have made good money, it is often prudent to add a protective put if you want to continue to ride the trend but not sure it will pull back. A stock that has gone parabolic will pull back aggressive. Thus it important to implement the protection. If you intend to get out, an ITM SC may also do the same job.

Often if the trade continues to be bearish, maintain the put until near expiration date. Because the long put is deeply ITM, it will have a high delta and low extrinsic. So there is less worry about theta decay. You can put in additional protection only when it is near expiration.

You can sometimes reduce the cost of the protective put by:

i. adding a front month short put to the long put making it a bear put calendar. Once it is confirmed bullish, remove the long put. You will still lose money but compensated by the short put

ii. convert the long put into a bull put by add a short put at a higher strike price. You do this adjustment only if the trend is clearly bullish.

I have to say that adding put is a critical task. You will have no regrets if you go through a situation like 2008 again. Warrant Buffet had said about successful trading. “ Rule no. 1 – do not lose money. Rule no. 2 – see rule no. 1”

If it shows support, remove the put or sell a SP below to reduce cost. Eventually, when the trend clearly reverses, take out the put.

Keep your hedge – unless the trend is so clear. Even so, more often, just apply a small OTM short options in case you are wrong, you have time to adjust it down.

Taking losses

I take small losses. If you look at my trades, 20% are losses. When I decide to take smaller losses, the percentage of losses will increase to 30%.

There are times I adjust to the stage that I make money. But sometimes it is not worth the effort especially when the fundamentals have changed. I can still make money. But it requires a lot of effort and time. It may take many months. The capital may be gainfully deployed on other trades.

Also, when I feel that adjustment process is out of control and it is difficult for me to recover, I rather take losses, get out and enter the trade again.

Summary

My key objective is the “catch and latch” to ride onto a trend using the various options to turn volatility and time to my favor. It is not an easy task. You can do it with a clear and discipline system. As any surfer knows, it takes skills and experience. Beneath the wave, there are coral reefs that could kill you. While surfing, at least you must determine the directions based on the long term fundamentals and short term technical indicators.

It is difficult to do it with pure directional trades without options. You need to maintain the balance while the wave are going up and down. Options act as stabilizer during the process. My experience is that without options, the market will whipsaw on you until you are confused.

The core of my profit will come from the ability to ride the trend. But also, in a stagnant trend, I will make money. I will only lose money if the trade goes seriously wrong in the other direction. Even in this case, the losses are limited by the options.

I wish I could be right all the time. But this is not the case. In my trade analysis last year, I was 80% right. I suspect that I will have 10% more losses this year as I reduce the percentage loss on my trades.

Word of Wisdom for Trading

2011-01-02T22:31:00.000-08:00

Happy New Year!

Below are are some wise thoughts for the New Year. It is gathered from common wisdom by various traders. Keep it in your thoughts regularly and you will find it helpful

My definition of wisdom is the ability the deal with complex situation and successfully overcome it. It is not a moral decision of right or wrong but the ability to recognize the reality of it. On the reverse, a fool is defined as someone who is out of touch with reality. A fool can become mad and insanity is defined as doing the same thing again and again but expecting different results. So do not become a fool or worse be a lunatic. Be a man of wisdom.

• Portfolios heavy with under performing stocks rarely outperform the stock market!
• There is nothing new on Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again, mostly due to human nature.
• Sell when you can, not when you have to.
• Bulls make money, bears make money, and “pigs” get slaughtered.
• We can’t control the stock market. The very best we can do is to try to understand what the stock market is trying to tell us.
• Understanding mass psychology is just as important as understanding fundamentals and economics.
• Learn to take losses quickly, don’t expect to be right all the time, and learn from your mistakes.
• Don’t think you can consistently buy at the bottom or sell at the top. This can rarely be consistently done.
• When trading, remain objective. Don’t have a preconceived idea or prejudice. Said another way, “the great names in Trading all have the same trait: An ability to shift on a dime when the shifting time comes.”
• Any dead fish can go with the flow. Yet, it takes a strong fish to swim against the flow. In other words, what seems “hard” at the time is usually, over time, right.
• Even the best looking chart can fall apart for no apparent reason. Thus, never fall in love with a position but instead remain vigilant in managing risk and expectations.
• When trading, if a stock doesn’t perform as expected within a short time period, either close it out or tighten your stop-loss point.
• As long as a stock is acting right and the market is “in-gear,” don’t be in a hurry to take a profit on the whole positions. Scale out instead.
• Never let a profitable trade turn into a loss, and never let an initial trading position turn into a long-term one because it is at a loss.
• Don’t buy a stock simply because it has had a big decline from its high and is now a “better value;” wait for the market to recognize “value” first.
• Don’t average trading losses, meaning don’t put “good” money after “bad.” Adding to a losing position will lead to ruin. Ask the Nobel Laureates of Long-Term Capital Management.
• Human emotion is a big enemy of the average investor and trader. Be patient and unemotional. There are periods where traders don’t need to trade.
• Wishful thinking can be detrimental to your financial wealth. HOPE is a four letter word in the world of trading.
• Don’t make investment or trading decisions based on tips. Tips are something you leave for good service.
• Where there is smoke, there is fire, or there is never just one cockroach: In other words, bad news is usually not a one-time event, more usually follows.
• Realize that a loss in the stock market is part of the investment process. The key is not letting it turn into a big one as this could devastate a portfolio.
• Said another way, “It’s not the ones that you sell that keep going up that matter. It’s the one that you don’t sell that keeps going down that does.”
• Your odds of success improve when you buy stocks when the technical pattern confirms the fundamental opinion.
• As many participants have come to realize from 1999 to 2010, during which the S&P 500 has made no upside progress, you can lose money even in the “best companies” if your timing is wrong. Yet, if the technical pattern dictates, you can make money on a short-term basis even in stocks that have a “mixed” fundamental opinion.
• To the best of your ability, try to keep your priorities in line. Don’t let the “greed factor” that Wall Street can generate outweigh other just as important areas of your life. Balance the physical, mental, spiritual, relational, and financial needs of life.
• Technical analysis is a windsock, not a crystal ball. It is a skill that improves with experience and study. Always be a student, there is always someone smarter than you!

And very important commandment, "Thous shall not trade against the trend"

Cystall Ball for 2011

2011-01-02T22:05:00.001-08:00

Putting up a crystal ball for the future is a risky thing. Nevertheless, it is a good exercise to mull over all the various factors that will affect the market for next year, set a direction and develop a trading plan from a high level perspective.

I believe I will be 70-80% correct in my forecast. But if I am 50% right on the forecast, it will be considered an achievement taking account into the all changes and dynamism on the market. At 50%, I will make money considering the factor majority of my trades are hedged. In addition, there are risk control actions that will limit my loss when I am wrong.

Despite the conviction I have on the directions of gold, stocks, currency, commodities or even the economy, there is no such thing as buy and hold position. I am a trader. If fundamentals and technical change, I reverse my trades. There must be no preconceived ideas or prejudice.

My key trading strategy is to “catch and latch” to the trend. A variety of techniques are explained in the various parts of my blog. These are tools I had used successfully and will continue to deploy it on my trades.

So lets start with examining the bulls and bears argument for the market in 2011.

Bullish View

· Current yield curve is very positive for banks. The financial sector should continue to outperform

· Earnings momentum is strong and will probably positively drive the market for another quarter or two. There are so far no signs of slowing down

· Corporations have plenty of cash on their balance sheet. Thus, M & A activities should continue into 2011 which is positive for the market. With the high cash level, dividend will increase and there will be more buy back of stocks.

· One of the factors for the bullish market in 2010 is continued boom in technology sector. Internet infrastructure is undergoing a major overhaul with increased applications of media streaming, cloud computing, e-commerce and smart phones applications. Corporation will be forced to upgrade their infrastructure. Technological companies and its users will continue to outperform. In 2011 we have seem astronomical rise in stocks like Apple, Netflix, Priceline, Amazon, VM Ware and Akamai. The excitement in the technology segment will continue.

· While unemployment remains high, it is showing signs of improvement. The huge stimulus by the Fed is taking effort. Besides keeping interest rates low, hopefully it is driving corporation to hire.

· US stocks will trade higher despite the economic conditions and rising interest rates. Corporate profits will be maintained as cost-cutting measures and lack of spending allow businesses to maintain reasonable profitability. There are few other places to put capital to work. Asset inflation will cause price of fundamentally sound stocks to go up.

· Valuation is still reasonable. It is trading at 13.6 X forward four quarters. This is moderately cheap although it can easily go cheaper.

· ISM index is the big surprise. It was the highest in 20 years!

. 2010 ended with consumer sales went up. How consumers manage to spend more with more mortgage default and unemployment remains a puzzle to me. However, one must not forget that 30% of the consumers are responsible for the sales. These are people that probably do well in the recent bull of the stock market. However, there are signs of strains:

Walmart is 10% of US retail sales, has 150 million customers, and its stock it is down 6 consecutive quarters;
Sears is the largest department store in America: "their stock is terrible"
Best Buy had a huge earnings miss
Toys'R'Us loss increased last quarter
A&P filed bankruptcy
Loehmann's filed bankruptcy
Charming Shoppes is going to close 100 stores
TJMaxx just liquidated AJ Right

Bearish View

· One of the biggest threats is that Europe will implode. It is almost inevitable that one of the countries like Ireland, Greece or Spain will default. If one of the countries decides to default, it will cause a domino of negative effects possibly causing the Euro to collapse. The situation is still very ugly. There are no signs of a good solution. So far, actions are mere band-aids. There will be continued effort of bailout through printing of money otherwise also known as quantitative easing, as they do not have the funds to support. Undercurrent for bailout is losing steam but the need is rising. Very visible recently is the collapse of the Ireland and Greece. Increasing there are reports of stress in Italy and Spain. In the Telegraph, there is a report of Italy's debt reaching the red alert. Keep in mind is that Italy and Spain have economies that are over 10 times the size of Ireland and Greece. Both these nations are under tremendous stress. A bailout of Italy or Spain will spell the beginning of the end for the euro. No way can Germany support a bailout of either country.

· Another big negative is the US Budget deficit and debt. It is a problem for many years but will continue to haunt the economy. The figure is accelerating. The latest count is the debt is US$14 trillion. It is translated to $680,000 per household. US is bankrupt. There is no way they can repay the debt. The only foreseeable solution is for US to devalue its currency selectively without causing geopolitical chaos. That is the reason asset prices and commodity will continue to go up.

· Probability is Bernanke and the Fed will launch QE3/4 in response to the housing and municipality crisis, as well as to ward off the potential sell-off in the financial markets. The “audit the Fed” talk heats up and this becomes Bernanke’s last stand. However, the economy is saved by the thought that it “needs to get worse before it gets better” and that the “extend and pretend” policies of 2010/early 2011 are finished. Each successive bailout will produce smaller and smaller effects until systemic risk hits all at once. The world’s central banks are in fact powerless to stop systemic risk once contagion hits.

· There are arguments on deflation and inflation. Arguably, housing price goes down and high unemployment will keep prices down. I know when I travel, I am paying the same price or lower for airfares and hotels compared to what it was 20 years ago. But commodities, gas, and even tuition fees for colleges have gone up. My bet is on inflation. When it comes, it will surprise the Fed chairman who is confident to control it within “15 minutes” as he claimed during the 60 minutes interview. It is too simplistic and obviously he is lying.

· Potentially, the bubble in China housing market is worrying. It has all the signs and symptoms of US housing market in 2007. The only difference is China has a huge surplus that could help to control the crisis when it hits. Also, they are taking pre-emptive actions by restricting credits with regular interest hikes and setting new regulations to defuse wild speculations. Nevertheless, the crisis will hit. But question is how severely it will affect China. My bet is that China will be able to contain the crisis and recover. Also, it may take a little longer for the crisis to hit. The situation is certainly better that what is happening in Europe.

We must not forget there are many toxic assets, “market to market” collaterals at banks, assets at Fannie and Freddie that are not recognized. These are ticking nuclear bombs for the financial sector. Foreclosure is still an issue not resolved. Housing price is still going down. Thus despite the yield curve today, I am staying away from the financials with a 10 feet pole. I have been wrong so far. But I will be right some day..

Summary

My bold forecast is that market is over extended. There will be a correction within 10 weeks of magnitude of up to 10%. Sentiments are far too bullish. It is at the most extreme levels since 1965 and 1958. We were in a similar situation at the end of 2010. The market went into a correction lasting a few weeks. A similar scenario may happen this year. Probability is that market will again rebound after the correction and do pretty well baring any external crisis kicking in like default of one of the countries in Europe, China housing bubble burst and one of the municipalities in US default and declare bankrupt.

Commodities will continue to do well. I will continue to be bullish for gold and silver. I will add coal, palladium, oil, and agriculture into my list. All these commodities are very over extended. But as with all bull market, it can continue for a while. But it also can undergoes a correction before it goes up. Thus, the ability to trade will give one an edge.

Many times, the market can be totally illogical for an extended period of time, I will keep in mind not to get emotional over the issues but understand that the fundamentals will catch up. The market has gone considerably in 2010 especially from September to Dec. The Dow Jones Industrials rose 11%, a second straight year of double-digit upside. he S&P 500 rose 13%, also the second straight year and the first time recording back-to-back double-digit gains since 2003-2004. Let the “don’t worry be happy” sentiment moves on. I am certainly watching for a reversal anytime especially a quick correction before moving up again.

Although the VIX index is low now, volatility will be high again. It is the new paradigm. There will be increased uncertainty

US$ will be down. I watched CNBC on Friday on the interview with Peter Schiff. I cannot understand how they argued that US$ will be up. It is up against the Euro but down against most major currencies It may get a bounce again if Europe crisis worsen. But, in the long term trend is down as with what is going on the past decade.

I am on the inflation camp. So I am betting interest rates will go UP. I will continue to be bullish on TBT. I have been totally wrong on TBT in 2010. Currently, I am collared on TBT and still positive on my trade. I am betting it will give me double digit gains.

Gold and Silver directions

2010-12-29T21:26:00.000-08:00

It looks like gold has another bullish leg to go.

The last 2 days are very bullish especially during this time at the end of the year. Volume are decent. These are days of quiet year end holiday trading where average volumes are using very small. Usually at this time of the year, there are profit taking especially after a year of stellar gains.

If it breaks out the previous high, it should go to the next resistance at 1470. Elliot Wave analysis points to the beginning of new wave 1 or a new bullish cycle. It will have to go through another wave 123 and a b c for this cycle.

Below is another analysis using Andrew's pitchfork which supplement the above. It should gold bouncing nicely from the upper channel of the fork. It was working fine for the last few months.

Many of the upside are short covering on Tuesday especially for silver.

Most of my positions are naked right now. I may add in some OTM short calls tomorrow before going for the long weekend. There are no signs of deceleration of the bullish trend but to be conservative, I should add some hedge to all the trades.

My account should end up another very good year in 2010.

With all the bullishness around, any bad news will send the price for a correction of up to 10%. This applies not only for gold and silver but also for the general market.

The bullish sentiments on the second half of 2010 is simply incredible. Normally, I would have gone to at least 50% cash with such sentiments. But with options hedging, I am still 80% invested. Also, I have another 25% with bearish positions of covered puts and synthetic puts. It acts as a hedge for my whole portfolio.

Precious metal positions

2010-12-18T17:34:00.000-08:00

All my SP and SC expired for December.

Most of my silver positions are running naked.

If the price goes up on Monday, I will be running naked until it hits a resistance and I will add a SC.

If it goes down on Monday, I will be initiating a collar for all the positions i.e. selling a SC 2 strikes up with 2-3 months timeframe and > 45 days ATM put.

Once the stock reaches a support level, I will add a SP, roll down the SC. If the support is right, I will let go the LP.

This process will continue until the metal finds a direction. If bullish, it will be running naked again.

This will give you an idea of how I trade my positions dynamically in a collar.

These are not for beginners. For those who are not sure, just keep the collar and protect yourself. You will still make good money if the stock continues to go up.

If there are signs of a parabolic breakup, take out the SC for a loss and let it run with a married put ( stock + LP).

Where is inflation?

2010-12-06T19:02:00.000-08:00

There is a huge ongoing debate of inflation versus deflation.

The question to ask is where do we see inflation. Do we experience it now?

The answer is below:

Oil is at $89 a barrel, up 21% in the last year.
Gold is trading at $1,413, up 23% in the last year.
Silver is trading at $30, up 66% in the last year.
Copper is trading at 4 per pound, up 26% in the last year.
Corn is trading at 573 a bushel, up 49% in the last year.
Soybeans are trading at 1,300 a bushel, up 23% in the last year.
Wheat is trading at 779 a bushel, up 41% in the last year.
Pork is trading at 104 a pound, up 23% in the last year.
Beef is trading at 106 a pound, up 28% in the last year.
Cotton is trading at 130 per pound, up 78% in the last year.
Sugar is trading at 29 per pound, up 32% in the last year.
Coffee is trading at 205 per pound, up 40% in the last year.

If this is not inflation, what is it?

Another short term income trade - ITM CC FSLR

2010-12-02T16:09:00.000-08:00

Today, I entered another short term ITM covered call for FSLR.

FSLR is volatile stock and is great for trading. It has been beaten down in the month of Nov.

Fundamentally, I am not a fan of FSLR. I believe its operating margins are under pressure and its technology is losing its edge compared to the competitors.

But the stock has been greatly oversold. On end of November it formed a base and issued a positive signal yesterday. Today, the positive signal is confirmed.

I do not want to be over optimistic. The rise of the stock is also driven by the bullish reversal of the overall market the last 2 days. This rally has the potential to go on for another 2-3 weeks until options expiry date.

For this trade, I initiated an ITM covered call:

Buy shares of FSLR at 129.15
STO Dec 125 SC at 7.2
Cost : 121.95
Extrinsic value = 3.05 or which gives me a 2.4% ROI for 15 days which gives me an annual ROI of >57%

It is a safe short term trade yet with high return. Like ISRG, I am deploying the spare cash I have in my account.

Do not despise these 2-3% gains per month. It adds up nicely every month. Normally, I do a lot of these trades in the last 3 weeks of expiration of the month when the theta decay accelerates.

PE: Let the shares be called out by expiration. As long as the stock stays above 125 by expiration, I will be making money.

SE: If the stock falls below 122, I may add a SP or adjust the call down or just close the trade for a small loss. It all depends on the price actions and the overall market trend over the next 15 days.

Normally,if it goes down violently I will most probably add a put to collar it and continue to add SC until the trade makes money. But there are times, that I may just close the trade because I know fundamentally it has broken down.

If the stock falls without fundamental break down or the market turns bearish before Dec expiration, I will be forced either to roll the SC down first and then add a protective put.

Making my spare cash work for this month - ITM CC

2010-11-30T16:44:00.000-08:00

I initiated an ITM covered call for ISRG today.

The shares has been falling for the last 3 months. It looks like it found support today. Looking at the weekly chart, it is a support level in 2007.

I am not optimistic about the market but I believe it will not fall like a stone before the end of the year.

So I initiated an ITM covered call

Buy shares at 253.55
STO Dec 250 SC at 9.5
Cost = 244.05

This will give me 2.35% return for the month. Not bad for a short term and relatively safe trade. I believe this is better than just leaving the cash idle. I have good safety net for 2.35% return or ROI annual 28.13%. Not too shabby.

Primary Exit : Let the shares be called out
SE: If shares fall below 249, add a protective put to collar the trade and manage it longer term.

Riding the winners and cutting the loser

2010-11-29T18:58:00.000-08:00

This is an important rule in trading. In my earlier post, I mentioned about my experience of how I was shaken out from my trades in Bidu, AAPL, and AMZN the last few years.

A rising trend can be like riding a wild bull in a rodeo. You can be hurt if you do not know how to fall. But the real success is when you are able ride the bull as long as possible. I said that one of the keys to superior performance is to be able to ride the bull longer. This is the only way to achieve vastly superior returns. You will never have a multiple fold winners if you sell early.

Most people find it hard to follow the rules of let your winners ride and never allow a small loss to turn into a big one. As soon as they see a little profit, they sell. When they are losing money, they hope and hold. This is the exact opposite of what you should do. It is against your natural instinct.

But it is important to know when to get out. My personal red alert is when the loss climbs above 10%. The maximum I am willing to keep a losing position is 20%.

In a volatile market, you can be whip sawed at 20% easily. Fortunately, with consistent option hedging techniques you can contain it within this level. If it gets above this level, I know I am out of control with the trade structure.

The important thing is never let a small loss turn into a big one. You do not want to be seriously hurt that you are out of actions. You want to be able to get back on the ride again.

Potental Loss       Amount to recover
-10%                  11%
-20%                  25%
-30%                  43%
-40%                  67%
-50%                  100%
-60%                  150%
-70%                  233%
-80%                  400%
-90%                 900%

Note that at -10%, you need only to recover 11% to break even. If you lose 50%, it will take 100% to recover. It is almost impossible to recover if you lose 90%.

One of the secrets is to keep the trade hedged. Let go the hedge only when the trend is very clear. If you are not sure, keep the hedge.

Watch List

2010-11-28T18:31:00.000-08:00

I have a watch list. The watch list is categorized into the following

1. Stocks for trading
2. Growth stocks
3. Precious metals stocks
4. Oil, gas and agriculture stocks
5. Candidates for short sells
6. Highly speculative stocks

My list is a little different from others. I love growth stocks. I indulge in speculative plays as in no.6. These can be juniors or under $10 stock which has illiquid or no options. Fundamentals are key to these counters. Keep an eye on when to cut loss. Also keep the position size small. Every year, I will have a few multi baggers from this list.

Also, I short stocks regularly. It is one of my key income. I do not share the list freely because there are lots of fundamentals and technical ideas behind each stock and it is not possible to trade just from the list. It is better that a trader develop his own favorite list.

I do not do scanning but rather read widely, do a lot of research by participating in discussions, chats, and interviews with people in the industry. I used to subscribe to StockFinder software and data stream. They are one of the best in breed for scanning. But I do not find it helpful for me. I prefer to dig deep into a company's fundamentals and understand a company well if I am trading it.

For example, this weekend I manage to meet up with a successful entrepreneur of a up and coming company in the internet segment. I got myself updated on the industry with developments at CSCO, SKYPE, IBM, JDSU, cloud computing and VOIP, AAPL and MSFT. I asked questions like why CSCO is giving such a gloomy forecast and yet NFLX and CRM are performing like the dot.com bubble era. It was an interesting discussion but it is not my intention to discuss the details here.

But it was such discussion periodically that I update my watch list. It is done almost every week.

Also, I do a technical analysis evaluation every 1-2 days and change the list. It takes less than an hour for me to go to through the list and form a mental picture of the short term directions.

This list will form the basis of my investment priorities for next week.

Comedy Break

2010-11-26T09:18:00.000-08:00