What caused the Financial Crisis...in lamen terms please?

Derivative Markets
Yep, this makes it pretty clear.
An Easily Understandable Explanation of Derivative Markets:

Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later.

She keeps track of the drinks consumed on a ledger (thereby granting the customers loans)..
Word gets around about Heidi's "drink now, pay later" marketing strategy and, as a result, increasing numbers of customers flood into Heidi's bar. Soon she has the largest sales volume for any bar in Detroit .

By providing her customers freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for wine and beer, the most consumed beverages. Consequently, Heidi's gross sales volume increases massively..

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and Increases Heidi's borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank's corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don't really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.

Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation's leading brokerage houses. One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi's bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALKIBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi's bar had granted her generous payment extensions and had invested their firms' pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds.. Her wine supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations, her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government. The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-drinkers.

Now…. do you understand?

CNBC: "This Market Continues To Be Propped Up By Government Intervention And Manipulation"

Just caught this on another blog:

Most basic principle to profitable trading...

ONE GOOD TRADE:

I think as traders we all get excited when we are doing well. And I think it is easy for profits to cloud your ability to judge your true risk when entering new positions. What do I mean? Well for example with my own trading, the last 5 months or so have been very profitable for me (up 35% ytd in my portfolio, annualized it is a 84% return). I think sometimes as traders we get so caught up on the bottom line or performance number that we forget the basics until the market humbles us again (FCX was a great example of such a trade for me this month). We start to feel invincible as we make more money and our performance number increases that we start to make less attractive risk vs reward trades. I think that the biggest misconception that traders have is that they feel that they always have to be in a position or else they will miss out on profits, when the opposite is true. As traders we need to be able to sit on our hands when we don't really see any good trades for us. This doesn't mean however that all of the trades that we are convinced will make money will but in this game of probabilities if we only choose to trade really good setups (different for every trader) in the end we will be profitable.

I alluded earlier about forgetting what the basic goal in trading should be and that is "One Good Trade". Every time you make a good trade, you should make one good trade, followed by one good trade... It is all to easy to get overly excited and just start putting on positions to put on positions. I think we have all experienced what I have just discussed. It is something to think about.

With that said, I have taken a step back to get my bearings again to focus on the one good trade.

Time to buy REIT's?

Looking at this real estate play that's sitting on what looks like solid support around $31 below it's 200 SMA with a tight stop loss. If the stop pulls back closer to support I will look to make a small entry probably about 100 shares.

Time to dip my toes on D

Decided to pull the trigger on D. Bought 100 shares at $32.6. The stock has still been trending upward and this morning's pullback on the jobless claims provided a nice opportunity to buy near the 20 MDA support. Hopefully the Congressional dog and pony show won't have any unexpected events and we can continue trading in the channel into Friday.

Getting flogged hard

That gamble and subsequent mismanaging of my VLO position is crushing me. Last Thursday I didn't buy back my options because I was still having to pay .10 time premium. I figured screw that. I'll just let them get exercised and then sell back and pay 0 time premium. On Friday I wasn't around to buy that position back at a small gain. Over the weekend I looked at Friday's prices and figured I would just get out on Monday morning for a small loss if not break even. We opened lower and have gone lower ever since. I'm now down $1500. Complete mismanagement. I either need to be in this game full time or not. Part time leaves me open to pitfalls like this. Six more months of school and I can turn my attention to this full time. Moral of this story, don't be me.

Is 880 a solid support?

Let's see. Stock on my watchlist: MRVL bounced off 20MDA which has been consistent support and looking to buy maybe at the midday low if it comes back to around $11.5 and holds firm with a stop loss just below $11.

Overall the here is now is the only thing that's relevant and there is no clarity that I can forsee with any certainty beyond that.

June expiration

Here is how June closed out for me.

VLO short (10) $18 puts @ .52. Was assigned, cost average of $17.48. Stock closed at $17.19 so roughly a -$300 loss so far. I haven't decided if I'm going to just sell the stock on Monday for a loss or keep it and sell a covered call. I had to leave the house at 6am on Friday to catch a plane and didn't have Internet access. This position could have been closed out for a gain for most of the day. I had a GTC all day Thursday but it didn't get hit.

SLV short (10) $15 puts @.40. Was assigned, cost average of $14.60. Stock closed at $13.99 so roughly a -$610 loss so far. I intend to keep this as a long-term position and write calls each month.

JPM short (10) $37.50 calls @ .37. Expired worthless for a $363 gain after commissions.

JPM short 910) $31 puts @ .55. Expired worthless for a $547 gain after commissions.

The four naked positions above equal roughly zero as of closing prices, but now I've got additional ongoing risk being long the stock.

TBT I originally did a buy/write with 300 shares on 1/8/09. I paid $42.05 and sold June 09 $50 calls for $3.70. Cost average of $38.35. I was exercised at $50 for a $3495 gain (30% gain but a holding period of 160 days.)

USO I originally did a buy/write with 400 shares on 5/15/09. I paid $32.15 and sold June 09 $32 calls for $1.80. Cost average of $30.35. I was exercised a week ago before expiration for a $660 gain (5.4% gain for 1 month.)

Summary, all the naked bullshit just caused a lot of stress and made nothing. I've basically swapped out long positions in TBT and USO for SLV and VLO. The rough gain is $4155 for this month, however the majority of that was the $3495 on TBT that was really accrued over a 5-6 month window. Especiallly for positions like this that tend to skew the returns for a single month, it's tough to guage what my monthly average is. I just keep a master spreadsheet of total gains and then break it down by weekly, monthtly, and yearly returns. In time hopefully the numbers get smoothed out and will let me make some comparisons.

I love Dr. Doom

Here's the headline: Hyperinflation Could Hit US In 5-10 Years: Dr. Doom

Click here to see clip.

Hit stop on all positions

I closed out my positions on FCX and DRYS for a loss, and I closed out USO for a gain. I am still holding SLV and GE.

Time to re-evaluate. Market is taking out big technical levels. We will see if SPY's break 900.

TBT I'm long

Today I took on a new long position in the TBT the ultra 20-year treasuries. My position is 1oo shares at 54.20. This one was a falling knife and I should have waited until it was firmly in the butcher block. My thesis is more forward long term looking believing that interest rates and yields cannot stay this historically low while the government inflates our way to failure and has to exercise financial discipline to rain back in the money supply... I'm betting that the BRIC nations will continue to waive their sabers calling for a more diversified stable world currency volatility and a falling dollar should naturally be the end result. I will probably pick up some long dated calls to add to my position.

The return of volatility

The VIX spiked up today above 30 signaling the return of the cyclical nature of volatility.

Let's see what happens if at the end of today... if the bulls have enough conviction to mount a reversal or if they back away.

UNG is working strong today.

VLO, XLE

VLO did a secondary offering last week to raise cash. They gave a huge discount at the time and sold 40M shares at $18 when the price was at $22.50, that's a 20% discount so needless to say they didn't have trouble finding buyers. Here is my play, assuming that $18 will be defended by the large institutional buyers at the $18 price, and looking at the stagnant chart since the offering on June 3, I sold June $18 puts for .51. If I had to take posession of these I would and immediately turn around and possibly sell a July $17.50 covered call. I sold 10 contracts. So I'm either going to steal $500 or have to pony up $17,500 and then sell calls, but I'm not afraid of this position.

My second trade is similar to my past call spreads. This is an Jan 10' XLE call spread funded with naked puts. I bought the $55 calls for $5.05, sold the $65 calls for $1.78, and sold the $45 puts for an average of $3.20. What I did here was sold half for Jan 10' and half for March 10'. I did this to make the trade a net zero out of pocket. With the stock at $53.50 I have 15% downside protection until the $45 puts start moving against me.

Kick myself in the ass day

I closed out my X call spread at $29, today it hits $40. I have June $50 covered calls sold on TBT and today its at $58. In this case, doing nothing and just sitting long would have made me more money than actively trading. I'm getting tired of not being able to acurately predict the future. I'm working on that.

Market gapping up today...Key levels on S&P

Market futures are up pretty big this morning indicating a nice gap open. Key level on the S&P to break out of its recent range is 950 on the upside and 930 on the downside. There is a lot of economic data out today, so depending on how this goes today could be a strong move to the upside if S&P can have a significant move above 950.

New position in FCX

I sold 10 put contracts at the $50 strike for Jun 09 expiry @0.28 and 10 put contracts at $49 for Jun 09 expiry @$0.21. Looking at the 20 day chart 2 hour periods: It crossed its 50 day moving average with a significant up move. It really hasn't looked back since besides normal retracements for each move higher. What was really crucial is when it came down with light volume and bounced off of the 50 day moving average to continue higher. See the chart below:

There are only 11 days until expiration and I fill comfortable with this position. I will re-evaluate if FCX breaches its 50 day moving average.

JPM

I screwed myself buying back the JPM naked $40 calls last week. Unless we get a big bounce soon I won't get a chance to put that play back on. Since the time decay starts to evaporate fast here, I'm thinking of selling naked $37.50's. If this play turns out to be a loss I would probably buy them back next Friday and move the strike price up to $40 and out to July. I don't have anything else I'm really watching right now. Pretty soon we should start hearing some whisper numbers on how Q2 was for companies and then start seeing some more action in the markets.

I'm out TCK

Guess no one's really active in this seesaw market. 2 new updates:

TCK $12.5 Jan. 10: Sold out at $7.1 bought at $3.6 about 3-4 weeks ago. That's about a 97% profit. I wanted to lock in profits like a pig not a hog. I have a feeling this one like FEED & ANDE is going higher and I will keep this one on my Watchlist screen.

EEE: Got stopped out at .98¢ this morning. I picked up this energy play at $1.03. The trend is in jeopardy of breaking to the downside.

Thanks.

I was in the library all day, just saw the charts for today. Any particular reason for the last hour spike? It's almost completely vertical.

Sold out of my ANDE calls

TGIF,

I sold out of my ANDE Dec 09 $30 calls today at $4.5. I believe (not sure) that I picked these up at $ 2.6 a couple of weeks ago (I think...). The calls were up close to 73%. My plan was to sell when the stock approached $30. I am still bullish on ANDE in the long-run but wanted to lock in some profits today. I will continue to watch this hot stock... I'm watching the SP-500 chart to see if we can break the 200MA . Today's action looks like the market's conflicted... with the bulls taking charge we'll see if we can finish strongly or if people will be taking profits into the weekend.

Sounds good Jason. Hey Dominic this is sent from blackberry I'm going to test to see how functional this is as a posting tool

Hey guys, unless there is any objection I'm going to delete the Facebook options page we had. I think it's clear this forum works better functionally and has elicited more user action already.

Natural Gas

I took on 2 plays on Nat Gas . Yesterday I bought 2000 shares of NGAS at $2.4 yesterday for an account I manage. Before the market closed I picked up 3 UNG calls for $2.7 for another account. It appears that the bottom that was put in at the end of April was not tested/violated and the higher low of 13.29 (some would say a double bottom) acted as new support. I'm betting that this trend will be confirmed and that natural gas moves up as other energies (i.e. oil and coal) become expensive and fulfill their potential. Either way I think nat gas is attractive long-term at these levels.

Major Currency Crash up ahead?

Ummm... interesting perspective probably worst case scenario:

Email Notification of Posts and Comments

Hello All,

I have been trying to find out all of the features of this blogger. I recently changed settings so that all members will reciev email notification of new posts. Before today if you wanted email notification of new comments you needed to leave a comment and check the box to follow the comment string. But I have just adjusted another setting so that now you should recieve an automatic email notification with new posts and new comments.

JPM confirmation

Yesturday I updated my JPM play with a chart and a little more detail on the important levels. Recall the $34 support level. It was breached but on very light volume. I consider this to just be a shake out as it returned to the $34 support level on solid volume before the end of the trading day. This morning JPM has seen a nice move off of this support level to $35. Intraday it looks to be putting in new support at $35. See the chart below.

On the next chart looking at the 10 day 1 hour chart JPM is putting in a bull flag. This could set up for a nice move higher. On the chart it looks like it could lead to a point and a half gain from $35 to $36.5 ish.

Going higher? Futures point to a more upside

The market's ability to cut its losses in the final hour of trading and this morning's semi-positive jobs report point to a positive trading day. The markets are all still making higher highs and higher lows so until proven otherwise it looks like we are pushing forward. As long as people continue to anxiously wait for a pullback stocks could head higher.

Some stocks on my radar are: FCX (again the stock fell down yesterday would have been a great buy opportunity but may not continue the pullback)and possibly some bio-pharma and healthcare picks... Probably won't add any new positions today unless we have some sort of mild pullback that doesn't violate any supports.

Deleting Posts

I have been on a fury of posts today, this is probably going to be my last one. But I did find out how to delete posts if you need to. When you choose the New Post option, the page that it takes you to has three options: Create, Edit posts, comment moderation. If you click on edit posts it lists all the posts like emails and you can shoose to delete a mistake post.

I only ask that you do not delete anyone elses posts.

Thanks

3X ETF's (Treasuries)

Direxion recently launced a few new ETF's that track the Treasuries: TYD, TMF, TYO, TMV. They are also the company that launched the FAS and FAZ, the popular ETF's among many intraday traders. I too have made plays on these ETF's and made some good returns. But they are mostly geared towards the intraday trader, which will be more relevent in my new venture with SMB capital. But I bring up the ETF's for treasuries because as interest rates become the primary discussion in the market because of inflation and the fed tightning up monetary policy these ETF's will definatly be in play. So I think it will be beneficial to keep these on the radar. They are not very popular yet but the volume on these 3X etf's seems to grow pretty quickly.

Major indexes cross 200 day moving average

In recent days there has been a lot of chatter about the indexes crossing thier 200 day moving averages. Technicians believe that there is much less resitance going up further then there is for a significant down move as the charts stand. As I am not soley a techincal trader, I will not make my trading decisions based only on these techincal signals. But I will remain aware of the signals when cosidering a play.

The biggest thing I am looking at right now is how big the retracement should be from the 400 point up move on the dow we saw since last Thursday. I would be comftorble with a 50% retracement before we continue higher. I suspect that we may enter a trading range soon, but this is pure speculation. If we do retrace more than the 50% I my become more nervouse for a bigger down move, as this would take us back below the 200 day moving average.

I guess we will see.

Been away... but a few new plays C & NGAS.

Been busing with closing escrow this week but managed to buy back my remaining 2 C calls at an even larger ROI about 56%. Today I initiated a new position of 2000 shares in Natural Gas with NGAS at $2.40. I'm attracted to this beaten down sector and have been stalking this stock for awhile now... look like's this could be potentially in a volatility squeeze right around the 20MA support. Another stock I'm looking to grab is EEE looks like another volatility squeeze play.

JPM Play

Until my recent conversation with Jason the other day, I will admit that JPM was not on my radar. I have actually steered clear of the financials for some time. But I have today made a play on JPM. I sold 10 put contracts at the $30 strike for $.36 with Jun 09 expiry. Looking at the chart JPM has put in support at the $34 level with the next level at $32. I will re-evaluate this position if it breaches $33. But with 17 days until experation I feel confident with this play.

Update: So As the day progressed today JPM entered into a intraday downtrend around 12:00 Eastern time on the chart. But take note of the light volume, and it was not until the 20 minutes into the last hour of trading that it breached support at the $34 level to trade all the way down to $33.65. The second half hour of trading was more important, as you look at the chart towards the end of the day, take note of the increase in volume to bring JPM back to its $34 support level. Lastly and I think this is important look at the last volume bar where JPM traded almost 3MM shares around $34, so there are obvious buyers at this level.

Sliver Play

Silver is down today, and I decided to make my play by selling 10 put contracts at eht $14 strike with Jul 09 expiry for $0.30 a contract. I do not plan to be exercised but if I do that would give me a purchase price of $13.70 per share and from there I would revert to a covered call strategy. As I discussed in the ealier post about silver, I do not see a lot of downside on this play and feel really confident that Silver will not go to zero.

I also sold another 10 short contracts at the same strike price but with Jan 10 expiration for $1.30. My plan is to buy this back at about a $1.

Test

  I've never used this site so not quite sure how it works yet. A few days ago I posted that I sold naked $40 JPM calls for June for .53, I just bought them back for .30. JPM seems to be in a trading range so until that is broken I'll just continue to play it. I put the order back on to sell again at .50. It's always a little psychologically difficult to buy back time value when the stock is $5 away from your strike price with only a little over two weeks left until expiration. I'm not quite sure why the stock opened down $1.50 today, maybe because they were out raising more equity to pay back TARP.

  I also bought back the 5 Jan 2011 $22.50 calls I had sold a week ago. I wasn't comfortable having 15 long calls and 20 short calls in that spread trade. Just some free advice, the stock moved down $2 and I was only able to capture $1 of profit. This is because the bid/ask spread is so wide on the far out expiration months. So yes I made $500, but it would have been $1000 if I was just using the stock instead of the options. Going forward I'm not going to screw with it. 

Test post

I changed a setting on the blog to see if it would send out an email notification when a new post has been made. We will see.

Dominic

Useful links...

I posted these on my other blog, I thought that you guys may find these useful:

http://traderfeed.blogspot.com/ --> This blog is run by Dr. Steenbarger, he is a trader and phychologist. I reccomend his book "The daily tradingcoach"

http://www.smbtraining.com/blog/ --> This one was to be expected. Very relevent to the intraday trader.

http://blog.t3live.com/ --> Another prominant prop shop on the street.I also reccomend that you check out sfomag.com, they offer a free 1 year subscription. Sign up because there are some really good articles.

http://www.ONN.tv --> Very useful for options traders.

Comments on the blog..

Hey Guys...I am currently trying to figure out how to have the comments for each post show directly under the post so that you do not have to click on the post to see the comments. In the mean time you do have the option on a per post basis to subscribe to comments, so that you know when ever there is a new comment to a post. If either of you have any expierence with blogs and no how to show the comments on the home page of the blog please let me know.

Thanks

I could not help myself...

It is very difficult for me to stay out of the market. As I just wrote my last post I said that I would be pretty inactive with positions for the next few months. But then I put on a position in USO and DRYS. Let me explain.

1) I sold 10 short $7.50 puts on DRYS with Jun 09 expiry for $0.55. Break even on this is $6.95. I put this position on because looking at the Dry Baltic index it is up over 400% from its December low of 666. The outlook for the dry shippers is much better. I basically saw DRYS on my watchlist was down on today and this signaled a good opportunity to put this trade on.

2) I also sold 10 short $34 puts on USO for $0.35 a contract at Jun 09 expiry. Oil is strong and I don't see that chaning going into summer and hurricane season. USO is currently trading at $37.30. Working in the oil industry I need to have a least one position tied to oil right?

I continue to look for my play on Silver, but I would like to see a pull back.

Until next time.

Taking Profits Today...

You know what they say " Buy the pull backs, sell the ralley"

I am closing the following positions:

1) 10 short puts on RIMM @ $60 strike Sep 09 expiry. Sold at $3.10 and bought back at $2.17 for a 30% gain.

2) 10 short puts on MSFT @ $17 strike Octt 09 expiry. Sold at $0.58 and bought back at $0.50 for a 13.79% gain.

3) 10 short puts on AA @ $7.5 strike Oct 09 expiry. Sold at $0.67 NS bought back at $0.56 for a 16.41% gain.

I continue to hold my 10 short puts on GE at the $11 strike with Sep 09 expiry. I am up about 62% on this position so far. I am going to take this one all the way to the bank. I sold them orignally for $1.56 per contract and they are currently trading at $0.59 per contract. This is my only position open. I will be very limited on positions I add to my account over the next few months as I finish the training for SMB capital.