AKAM close out

I kind of lost my will to be in this position. Besides breaking its uptrending channel and making a series of lower highs, it doesn't pay a dividend. So arguably I should have only been in it using a spread and not cash secured puts as I really wouldn't want to own. It's a bit too volatile for me. I sold to open at .45 and just closed out for .27. That's only $165 after commish and not the $400 I was hoping for. But not bad considering I got short Wednesday at the close. 

SPY Weekly Trade

Heading in to the week I was short-term bullish, but since I already had bullish exposure via naked puts on MCD, AKAM, PM, and naked calls on VXX, I was content to just sit on what I had and not take on any more bullish exposure. It turns out the market doesn't care what I think and when SPY failed exactly at the trend line today I waited a bit to see if that held. I ended up shorting (20) SPY 110 Weeklys at .10. The odds of finishing ITM were less than 10% and return on BP is (200/9000) = 2.2% for 4.5 trading days. I'll take that risk. We would need a greater than 4% move before I start to incur losses. If that happened I would look to roll the trade and sell more OTM SPY calls or maybe even a weekly call spread for next week. We've been in a down trend channel all day since hitting the longer term downtrend.

Trade Update 9/2/10

I've most likely got my hand caught in the cookie jar here. Though these weekly options that expire in less than 24 hours are still .50 OTM, the trend up is currently squarely against me at the moment. I don't however want to close out early and pay for something that will be worth nothing literally in 22 hours. So this is going to be a last half-hour decision if these are ATM or ITM. If ITM, it will depend on by how much. My preference would be to roll them out a week and up another strike to 111. Depending on what prices are at the time of decision, I might also walk them out two weeks and two strikes to normal SEP OPEX at 112. If I had to take on a short position I would feel  much more comfortable shorting near the top of this range. If the range broke above 113 I would most likely have to stop playing this game and take a loss. Below are the option chains for the week that expires tomorrow, next week, and the SEP OPEX. As long as we don't finish at 110.50 or higher tomorrow, I'm comfortable with my options of walking these out. If tomorrow is a big up day I might be stock with a short position, we will see. The good news is I dealt with this same situation last month so this time it's not screwing with my head nearly as much. 

Trade Update 9/3/10

Today has been a wild ride as there were times this trade was very negative, and times it was set to expire worthless or slightly profitable. My preference would have been to take a small loss and end it, but I wasn't afforded that luxury. At 110.30 I rolled half this position out to next week and up two strikes from 110 to 112. This was a break even transaction so I bought myself some time and some upside. I'm much more comfortable being short at 112 than 110. However, I bit off more than I was comfortable with once the position did get in trouble, so I cut my size in half and took a loss on the other half. I paid .82 to close these out when SPY was at 110.77 roughly. The trend was up all day since retracing half of the gap open. The opportunities for walking this trade out to next week got less attractive the higher SPY went. So I've booked a loss of -720. Certainly not happy about it but it's not a game changer. It will just dent my monthly gain down to something not so attractive. And I've still got risk out there on this with 10 short at 112. This was my first foray in to weekly options and it was something I had been wanting to dabble in. I already know that had these expired worthless I would have done it again, and again, until I got burned. So in a way getting burned big enough to hurt and slap myself on the wrist was good. 

There is also another learning experience. Part of the reason I wasn't afraid to short weekly options was I felt my prior experience being short and looking for ways to managed the position and later analysis of that trade, had somehow better prepared me for when it happened again. So yes I can completely hedge this trade with getting long the ES, however, that also comes with additional risk. Check out the chart below. This morning I was left having to gamble on if I should do a preemptive move and buy ES to hedge before the unemployment number came out. I felt this was foolish as I have zero idea what the numbers would be or how the market would react to it. And once they were announced there was no longer time to hedge and we jumped 10 points which effectively took the SPY from 109.50 to 110.50, from .50 OTM to .50 ITM. So lesson learned, on this particular type of short trade the risk isn't worth the reward as once it becomes an actively managed position with hedging it also comes with additional risk. I should stick with defined risk/reward trades as this fits my personality style more. I can always size up or down and make that defined risk/reward large or small to fit my appetite for risk.

Long interest rates for September via TBT

Again I am keeping my positions very small but managable. After the rally in equities that happened on Friday we saw a huge selloff on the TLT. Today the markets are giving back some of those gains and we are getting a pop in the TBT which is a double inverse of TLT.

This morning I sold 1 Sep '10 $30 put at $0.72, which at initiation TOS is showing a 38% chance of expiring ITM. The breakeven on this is 29.28 with the lows put in last week at 29.77, I will re-evaluate if these lows are broken.

Market Wrap Up/Weekly Preview

Today I decided to put down in writing the culmination of the weekly information inputs I use to try and judge what is going on, and how to try to profit from it. I have to say this experience was similar to writing out formal trade ideas for the blog in that not only was it a good learning experience, but I also enjoyed it. I typically kind of make mental notes of things during the week and once the markets are closed over the weekend I am able to piece things together and then look for opportunities accordingly. I like the written document and will experiment with it going forward. I want a full disclaimer in that most of what is below is not original content and not intended to be so, but rather its my way of aggregating much of the data/info I come across during the week in an attempt to make some useful sense of it.

Weekly Wrap-Up Report

Week ending 8/27/10

Indexes: DOW finished down for a third straight week, a Friday rally left it above the psychologically important 10,000 level, but certainly not looking like its in a position of strength. It has some downside to about 9760 before it would test its support line. SPX bounced convincingly off its support once again at 1040. As you would expect this also correlated with a pull back in VIX and sell off in bonds. It’s yet to be seen if this is just a technical bounce, small relief rally, or confirmation that we’re still range bound.

Technicals: see charts above.

Volatility: Remains range bound from 22-28, with a strong move towards its lower range as the markets rallied on Friday. A break below 20 and I would be looking to either get long VOL or perhaps just sell OTM puts betting against continued complacency.

Correlations: During times of crisis or just short-term spikes in volatility we often see stock correlation heading towards 1.0. However, short-term spikes aside, correlations look to be in a long-term uptrending channel starting sometime in the mid 90’s. Historically when this indicator is below 50% you’ve got a better market to pick individual stocks. Conventional wisdom suggests this increasing correlation is primarily due to culprits such as the prevalence of ETFs (which tends to make large basket of stocks all move in one direction), and lower commissions/easy/quick access to market liquidation. The important point to me is that individual stock picking is becoming tougher, meaning that market timing becomes all the more important. Buy and hold seems to be dead and trading ranges seems to be in if you’re looking for profits. While the recent decline in the number of hedge funds can partially be blamed on deleveraging and the financial crisis, I can also make an argument that increasing high correlation makes their traditional model of heavy research and precise stock picking a bit outdated.

Sentiment: See below

Equities: In addition to favorable technicals for short-term bullishness, the percentage of stocks above their 50DMA is at the lower end of its range for the last 12 months, and sentiment is near the March 09 market lows. These are all indicators that I would be short-term bullish. 

Bonds: The yield curve has been slowly flattening during the time the general equities market have remained range bound. The prevailing theory is that there will be little growth and possibly even deflation, thus even these historically small yields could potentially be a great overall return should we face deflation. Friday saw a large one-day widening of yield curves, which his highly correlated to the one-day bullish reversal we saw in equities. The two and 10-year yields recently hit all time lows, surpassing the 08/09 financial crisis when people flocked so heavily to treasuries. In a relatively stable period of volatility, bond yields are either an opportunity or great cause for concern.

Commodities/Currencies: I do not have enough experience in these areas to incorporate anything in to this report. This is an area I need and plan to educate myself further in as I am starting to understand their overall importance due to market interconnectedness. However, the chart below shows that even a basket of commodities as an asset class is also trading in high correlations lately. This is not consistent with historical norms.

Macro News: GDP revised down from 2.4% to 1.6%, but better than the expected 1.3%. This is kind of in line with what equities seem to be signaling, which is that things are bad, but maybe not horrible. The question remains unanswered as to how much of this recent growth is synthetic via stimulus or authentic via natural demand.

Fed: Stands ready to accommodate further in a yet unspecified manner. Regardless of your political stance on this happening, this could be viewed as bullish since equities stand to gain from more interference. This could also be viewed as bearish since its obvious that the economy seems in need of some help. Rates to stay at 0% indefinitely.

Politics: Part of this range bound market might be due to investors waiting to see the outcome of November midterm elections. A Republican victory in the House or Senate would most likely lead to the extension of the Bush tax cuts on dividends and capital gains. This would most likely be bullish for stocks. If the Democrats hold both houses of Congress this would most likely be bearish for stocks as the street seems to think Obama is not business friendly and would not feel compelled to extend the Bush tax cuts.


M&A Activity: Whether it’s the HP/Intel bidding war or the 30% bid up on Potash, it looks like cash rich balance sheets are trying to find growth externally since internal demand growth prospects are very suspect. The key to both these deals is the street seems to think that both are priced too high, with the only winners being the people who own stock of the companies being acquired. If we start to see more of this activity, then we’ll know corporate America genuinely does not see authentic demand in the near future. Taken in context of this week alone there is nothing to glean here. 

Market Preview for Week 8/30/10 – 9/3/10

Looking to see if bullish engulfing candle that materialized last Friday on most indexes receives confirmation. The market has seen nothing but terrible news with the only bright spots being that initial unemployment claims were not as bad as feared but still not good either, GDP revised downward but again not as bad as feared, and getting a bounce at a technical level. My point is that there is more than ample news for the market to sell off but it has yet to do so, and it’s still within the last five month trading range of SPX 1040-1130. The risk/reward at the moment favors getting a bit bullish for the short-term. I have already sold OTM puts on selected names and I would look to sell OTM call spreads should this bounce take us towards the trading range highs. I look to remain largely in cash while taking selective shots where I see opportunity, while waiting for a more definitive time to increase my exposure in either direction.

CBOE Implied Correlation Index

I had never heard of the CBOE Implied Correlation Index before. It looks like its been out for a little over a year. It's something I plan to keep an eye on and use in my basket of inputs to try and gage market conditions.

Cut and Paste from CBOE below

The CBOE S&P 500^® Implied Correlation Index

The CBOE S&P 500 Implied Correlation Index is the first widely disseminated, market-based estimate of the average correlation of the stocks that comprise the S&P 500 Index (SPX). Using SPX options prices, together with the prices of options on the 50 largest stocks in the S&P 500 Index, the CBOE S&P 500 Implied Correlation Index offers insight into the relative cost of SPX options compared to the price of options on individual stocks that comprise the S&P 500.

• CBOE began disseminating daily values for the CBOE S&P 500 Implied Correlation Index in July 2009, with historical values back to 2007.
• CBOE calculates and disseminates two indexes tied to two different maturities, usually one year and two years out. The index values are published every 15 seconds throughout the trading day.
• Both are measures of the expected average correlation of price returns of S&P 500 Index components, implied through SPX option prices and prices of single-stock options on the 50 largest components of the SPX.
• Ticker symbols JCJ, KCJ and ICJ:
  • JCJ - calculated through Nov 2010 expiration, using Dec 2010 SPX options and Jan 2011 equity LEAPS options
  • KCJ - calculated through Nov 2011 expiration, using Dec 2011 SPX options and Jan 2012 equity LEAPS options
  • ICJ - will be added in Nov 2010 using Dec 2012 SPX options and Jan 2013 equity LEAPS

The CBOE S&P 500 Implied Correlation Index may be used to provide trading signals for a strategy known as volatility dispersion (or correlation) trading. For example, a long volatility dispersion trade is characterized by selling at-the-money index option straddles and purchasing at-the-money straddles in options on index components. One interpretation of this strategy is that when implied correlation is high, index option premiums are rich relative to single-stock options. Therefore, it may be profitable to sell the rich index options and buy the relatively inexpensive equity options.

"One of the perceived benefits of owning a portfolio of stocks is diversification related to the correlation between stocks. While less correlation between stocks in a portfolio typically leads to greater diversification, the correlation between stocks is constantly changing, and in times of market stress the correlation increases as stock prices tend to move together. As a result, the diversification benefits of a portfolio of stocks may be less than initially anticipated."
--- Joe Levin, CBOE Vice President of Research and Product Development

Bullish Engulfing Candle? I have no opinion

Income trades for September

On Wednesday with the SPX approaching the lower end of the recent range near 1040, I decided to get cautiously bullish by selling some OTM puts on names I would like to own on a pullback, assuming the pullback doesn't turn in to a crash. I also sold some upside calls on VXX as without another new shoe to drop in the next three weeks (which absolutely can happen) this too is a pretty conservative gamble. I was just looking to put on what I consider to be some low risk trades to generate some income while I have my mind on a job search here in Chicago. The  plan is to continue bringing in something to contribute towards expenses while I find a job and the get more aggressive deploying capital once I'm comfortable psychologically.

Below are the trades and charts, best case scenario on these is roughly $1100 assuming setting GTCs at .05 and commissions. Worse case scenarios are theoretically unlimited. I'm also scalping the ES for peanuts when I'm bored and have a few victories this week. Initial BP used for all is about $12,500, but I consider these cash secured puts which is a commitment to use $155,500 on the three puts, and unlimited on the VXX calls should we crash.

Sold (10) AKAM 40 puts at .45
Sold (10) MCD 67.50 puts at .25
Sold (10) PM 48 puts at. 31
Sold (10) VXX calls at .26