Gold and Silver directions

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

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?

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

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

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

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

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.