ES channel breakout

Looks like that reverse head and shoulders worked for a trade today. I sold a 114/116 SPY call spread at the resistance line (1095) that didn't hold up. I will look to sell another if we near the upper resistance line at roughly 1150.

I didn't put on any positions, just practicing charting and following in the after hours. If this was the regular market session and this pattern formed I would probably buy a straddle and see if we got a breakout in either direction.

Legacy position close out

I closed out what I considered a legacy position today. I had been holding naked $12.50 strike puts on JPM since March 2009. Because they were more than $25 OTM I was hesitant to even pay a .05 for something that should expire worthless, but it was a constant psychological position that I no longer wanted to be in. The theoretical pricing calculator said the option should be worth nothing. The BxA was .14x.21. I paid .18 and got out. It's been difficult because I felt as if I was writing a check for $360 for something that is worth nothing and not looking at it as I've made a few thousand profit. But there are 8 more months until expiration and theoretically anything can happen. Beyond the psychological desire to end the position the remaining reward doesn't merit the risk. I certainly wouldn't put this position on today, which in essence means it doesn't make sense to keep it. I sold to open at $3.80 so leaving .18 on the board is still netting 95% of the maximum possible in (14/22) = 64% of the time.

I have one more of these legacy positions that I want to work my way out of. I don't have the patience to wait 8 months for time decay. I'm also wanting to clear the books and kind of start from scratch a few months from now once I'm done with the mentoring program and formulate/implement my portfolio strategy going forward. I want to start with a fresh round number and no old positions so that will make record keeping easier.

ES trade

Yesterday I was watching the ES in after hours and decided to short for a quick play/hedge. I went to bed short and no stop loss because if I woke up and we rallied strong I was willing to take this loss and then close out my three positions. I'd rather stay on the sidelines right now. I got lucky and made $500 but this really served a dual role of a hedge in case we crashed this morning before I could take positions off. I ended up only closing one position  for a $225 loss and decided to keep the other two on because their IV is up so high the BxA spread on the Jan 11' spreads I want to close out are too wide. I'm going to wait for IV to come in and some more passage of time before I attempt to take those off. This means I am gambling that a major market move down doesn't  happen and end up costing me more. I'm not saying it won't happen, I actually fear it enough that I'm looking to cut my risk there. The vertical lines I drew are my entry and exit points. I got up at 6am and decided to close it out when it looked like overnight decline had stopped and broke the trend-line.

May 2010 OPEX Results

Sitting down today to update my results for May was a mental positive to the upside. Once again my memory was only as good as my most recent trades. I was fixated on the quick loss I took on the ES trade, especially since right after being stopped out for a loss it hit my downside target. For the last week I've just been thinking about how I lost -$275 instead of making $1000. So reviewing the scoreboard every now and then and looking at the overall is helpful. I wouldn't say I forgot about the other trades, but I was surprised to see that some of them were only 18 calendar days ago. They truly feel much older as hours feel like days when you've got a losing position on the books sometimes. For the last week or so I had a mental tally going and all it contained was the GOOG naked call and a few small trades that were basically a wash. I thought I was under $1000 for the month but it was higher. I think this is because I had a MTM gain on (MO) for a while that I had mentally already been considering a gain as it was deep ITM and just waiting to get exercised. 

April 2010 OPEX Results

I never posted April OPEX results because I just didn't make the time and update my spreadsheet. The truth is I had a few plays and I knew it was roughly a break even month so I wasn't concerned with it. This is a working spreadsheet model that I'm trying to refine and keep simple. I'm still in the process of rebuilding all my past trades going back to July 2008 when I first started trading anything other than a covered call. In addition to keeping stats like winning/losing % and average gain/loss, I also want to keep track of how much commissions I'm paying versus the net profit, and try and find a return on risk measurement that makes sense. Right now I'm still only deploying a little bit of capital until I define my overall portfolio strategy in terms of position sizing, once that is established I need to keep track of monthly and total portfolio return or return on value at risk. I might have to keep two numbers, one being the actual return on risk for the month, and then keep track of how much risk I'm actually taken as a percentage of available capital. I don't know, still a lot of questions right now. My ultimate goal is to have more winners than losers, and have the average win larger than the average loss. I haven't established a real threshold yet like 60% winners or $500 average win, etc. Maybe in time I refine those goals. Right now I'm keeping things simple as I find my way in to an overall long-term strategy.

HV Mesa/Plateau

I wanted to share something I'm currently reading about in case you hadn't already learned about it. It's called a HV Mesa or Plateau. Since HV uses the last 30 day of actual movement, if you had a one day spike for some reason it will cause a huge movement in the HV chart, 30 days later when that event falls of the calculation for HV, the HV line drops just as proportionately. After reading about this I decided to look up ITMN as I know they had a few recent big one day moves. You can see the first mesa with the rise in stock price from their leaked information on drug trials, then it falls off 30 days later. Then you see the spike from the second announcement where they didn't pass the drug trials. Sometime in the next few weeks we'll see that HV line fall back as this event works its way out of the last 30 days in the calculation. I just thought it was good to understand what's driving the HV line sometimes before we go making any decisions on a potential play.

You can do a few things to try and get a better sense of the real HV disregarding the one day move. You can either take out that move with simple math, as in the picture below maybe you say that HV was running at about 60% and then after the one day big move it was steady again, so it's true HV disregarding an outlying event is still roughly 60%. Another thing you can do is play with shorter or long time period HVs which will either take out the recent event or smooth it out over time if using a longer-term time frame. Anyway, just wanted to share as obviously looking at this chart you would assume that with a 400% current HV that the stock is moving wildly every day, when in fact it's had two big moves and then relatively small intraday movement other than those two big moves.

7% of S&P 500 Stocks Above 50-Day Moving Averages

 

 

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7% of S&P 500 Stocks Above 50-Day Moving Averages

via Think BIG by Bespoke on 5/20/10

One day in early April, 93% of stocks in the S&P 500 were trading above their 50-day moving averages while 7% were below their 50-days.  Now the exact opposite is true -- 7% are above their 50-days, while 93% are below.  And just like the reading rarely stays above the 90% level for long, it also rarely stays below the 10% level.  As shown in the chart below, the indicator is currently at its lowest level since March 2009 when it hit 5%.  During the depths of the collapse in late 2008, the reading got down to zero percent.  At this point, investors have to decide whether or not they think things could get as bad as they did in late 2008.

 

 

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Managing Risk

The last paragraph is so true!

 

 

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Managing Risk

via Attitrade-Proactive Trading by Darren on 5/19/10

Over the years I've been fortunate enough to get to know thousands of market participants. Some are long-term investors others are scalping pennies per trade on thousands of shares while others manage millions of other people's money. The interesting theme I picked up on with nearly every one of them is that they each experienced panic and uncertainty at certain times in the market. Oftentimes, this panic stems from the inability to make sense of the market, to gain control of market participation.  Thoughts such as whether or not too much capital is at work or perhaps not enough or even whether or not to be in the market at all seemed to consume them.

This ambivalence can consume and debilitate even the best market participants. The uncertainty or self-doubt about market participation is common yet finding a solution is not. The greater the level of uncertainty felt the higher the odds are that risk is being misperceived. Here are some questions that I've asked to assess whether risk was real or perceived:

• What are your reactions, both physical and emotional, to a losing trade? A winning trade?
• Have you rationalized recent losses?
• Has your out-of-market homework/research fallen behind?
• Do you monitor your positions by dollars or percentages?
• Have you ever not taken a trade that made sense simply because you were burned before?
• Has the number of indicators you use to enter/manage/exit a position increased/decreased lately?
• Do you know the Beta of your portfolio?
• What would others say about you when asked about your risk management?

In a sense, managing risk involves managing the emotional side of trading so that the focus can be on the cognitive side of trading. As an example, if I'm concerned with the direction of the market because my traditional analysis methods are giving unclear signals then it probably doesn't make much sense for me to participate. My biases will impact the data, whether it's of a technical or fundamental nature, and lead to poor decisions. If I'm unable to clearly define what sectors are leading and which are lagging and, more importantly, why they are moving in the direction they are, then my risk is skewed. It's times like these that large losses can accrue as objectivity is clouded by subjectivity.

I've always used sleep as a gauge to help me know if I'm in-line with real risk. If I'm able to sleep at night and wake up excited to participate in the market then I know that the odds are good I'm managing my risk. If I'm unable to get a good night's sleep and lay awake wondering about positions I have on the odds are good that my risk management is off. Yea, I'm pretty simple.

 

 

 

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Interesting links

how-market-makers-buy-units-to-stay-in-business
I think that the first link is a very interesting strategy and something I would like to consider. To me this would had been a nice addition to the trade in ITMN. If I recall correctly the trade was long covered calls. So I think going out and buying really cheap puts or calls could had served well. I actually went back into the think or swim platform and looked at buying the $15 covered call which on 3/4 was going for 10.41 and buying the $35 calls that were going for 0.15 at the time. The stock was trading at 14.61. By 3/10 those way OTM calls that you purchased for 0.15 were worth 3.90 with the stock trading at 38.90. On this simulation I did a 100 covered call position and used about half of the premium collected to buy 10 calls. These calls that cost $150 now added $3,760.

I know I used the calls only because I remember what direction the stock finished and it was the easiest to illustrate. But I can see the power of the OTM "units" for buying puts on the downside as well. Or on stocks like ITMN maybe using all the premium collected to by OTM options on both sides. Anyways it got me thinking and I thought I would share.





how-option-time-premium-decays-over-the-weekend


Just thought this was interesting.

USO/IWO trade

I liked the IWO trade idea at first so I decided to analyze it further. I think the time frame used and patterns seen of chart drawing can be subjective. I'm using a lower support line than him. He never mentioned IV in his analysis and after I saw the current disparity I decided to do this trade but at a lower strike and using an exit point based on my TA. Below is my trade worksheet.

Trade Worksheet

Date:               5/18/10                       

Underlying:     USO

Trade Idea:     Sell June 32/30 put spread

Buy/Sell	Qty	Ticker	Month	Strike	Call/Put	Price	Under. Price
Sell	5	USO	June	32/30	Put Spread	.50	$33.50

Pre-Trade Analysis: 

This is more of a gut feel than anything as I feel selling in oil is a bit overdone. If oil finds a bottom near these levels in the next five weeks this play will yield its maximum return. IV is at a relative historical high so I favor selling the put spread rather than buying calls or a call spread. I’m attempting to profit from theta decay, reversion to the mean on IV, and a technical bounce on the underlying. On a technical basis I’m conflicted, depending on which time frame you look at there are different technicals present. I’m using a close below $31.50 as my stop loss as that would be another 6% drop from here and a breach of another long-term resistance from July 09’. This could confirm that my gut instinct is wrong and two recent support levels on the chart didn't hold. We just closed below recent support at $34.00 from October 09’ and Feb 10’. These price points are slightly different depending on if you’re using intraday or closing prices.

                       

What are known risks? Oil is in at least a short-term downtrend, general weakness in all commodity classes other than metals, recent general pessimism about strength of global recovery because of Europe.

Entry Point: Sell June 32/30 put spread for .50 with USO @ $33.50

                                   

Exit Point: Exit spread if USO closes below $31.50. This should be a rough loss of -$165. However, this is only an estimate as you have overnight and/or gap risk that you can’t get out at your desired exit point. Also, BxA spreads might be wider than normal if volatility is spiking. For these reasons I assume full risk on the trade of $750.

Risk: $750      Return: $250              RoR: 33%

      

Post-Trade Analysis:
After initiating this trade I decided to look at another angle. If my threshold for pain on the short put spread is roughly $170, I wanted to see what kind of comparative risk/return there would be had I just used the $170 to buy calls instead. Below is the analytics on this scenario, it assumes that if we have a bounce in the underlying that IV comes down to a more recent range of about 35%. At this new lower IV range and taking off a few days, even at a price of $36 the return is only about $173. And this would still leave you with another three weeks of theta risk. So assuming you are playing for the underlying to stop falling and/or bet a bounce, I would still favor selling puts here as opposed to buying calls. This analysis however should have been done before the trade and not after.

Update: On 5/25 I closed this trade out for a loss. I might have jumped the gun a little in that my original exit point was on a close under $31.50 and we haven't yet closed below that level. However, intraday we've traded below $31.00 and also a new 52 week low (see chart below). In the 7 days since this trade was initiated the global macro news has only gotten worse. As of today my gut feel was wrong, another technical level was broken, and I wouldn't put this trade on today. So I'm comfortable closing it out today for a $225 loss rather than possibly take the maximum $750 loss three and half weeks from now. 

Profit/Loss: I sold this spread for a .50 debit and closed it out for .95, net loss of (.45 x  5 contracts) = $225 plus commissions.

I think there is more downside!

As I mentioned yesterday at our meeting in Long Beach, I think that there is still some downside in this market. So I am going to buy some 114/110 SPY bear put spreads.

As you can see from above I am selling 5 put spreads @ 1.42. I am setting my stop to the 116-116.50 (grey area on chart below) . As this would represent a gap fill from last Thursdays gap down and would also have SPY retake the 20 period moving average on the 20 day 1 hour chart below.

I am risking about $163 if I were stopped out at 116.50 and maybe a little less as a move up to this point may bring volatility down. The max gain at $110 is $1290.

I sold the $110 as this is the area of the 200 day moving average witch I think could be the next target for the SPY ETF to head.

GOOG naked call close out

I was short 15 May GOOG $600 calls with entry points of .97 on 4/26 for the first 5 and .35 on 4/5 for the last 10 contracts. I closed them out today for .05. There is close to 0% chance this would have lost money with the stock at $505 and 8 trading days left. But for .05 it isn't worth the risk, and more importantly, it was tying up about $100,000 in margin for some reason. I tried to figure out the maintenance margin requirement on IBs site but wasn't able to find it. The calculations for a portfolio margin account are not stated clearly in words nor are there any mathematical calculations. I would rather have the 100K margin available for another opportunity then tie it up for another possible 15 x .05 = $75.

Total profit on the trade after commissions is $740 for 13 trading days. I can't exactly figure out the RoR because the maintenance margin number isn't anywhere close to the initial margin requirement. But assuming the rough figure of $100,000 the return is ($740/100K) = <>

BAC naked put close out

I had sold May $17 naked puts for .38 back on 4/30 when BAC was at about $18.25. At the time I just felt like owning at $16.62 was a good enough entry point for me so I was looking to sell puts and ready to take possession. I posted recently where I missed the opportunity to close them out at .18 the very next day, since then it's just drifted down in a fairly tight range. Theta decay made up for the downside move in the underlying so I was able to exit at .35 for about a push. Besides the chart working against me, I see that Morgan Stanley is now being investigated and I'm thinking to stay away from the financials in general until voting on the financial regulation bill is over because all the big banks were in to the same transactions. It makes more sense to play safer names like MO with a dividend rather than BAC at this point.

BRK-B update

Update

As far as wanting to get out today, it looks like I got extremely lucky by being patient and waiting for an opportunity. I exited at $78.70. When we deviated from today's trend on what looked like a spike I chose to get out. Who knows what will happen by expiration Friday next week, the beauty of it is that now I no longer care. I'm happy to take a small loss and be out rather than looking at the closing price and wishing I took the opportunity that presented itself today.

BRK-B Exit

I've been uncomfortable with this trade and been looking to exit at a level I'm comfortable with. I just got that moment. I closed out for a loss of .06 per share plus commission, somewhere in the area of a $40 total loss. It was a $2000 loss a few days ago so I'm happy. As I mentioned before, this was the last trade made before I had a trade worksheet made up. A post trade analysis showed I wanted no part of this trade for two reasons. The first is it doesn't pay a divided, so it didn't make sense that I tied up 13% of my total trade capital in a name like this. The second was the chart. It's trending down and I went long with no thesis behind why I thought this would reverse. So once again, glad to cut it for a small loss and consider it a learning lesson. I'm kind of happy in that using TA I decided to actually wait for a bounce up to resistance before I cut this position rather than taking a bigger loss earlier. And just in the time of this writing it looks like the stock is down close to 1% already. Wow, being available to actively trade sure does have its pluses and minuses.

An experiment in GE

I want to see how a strategy will play out and it will most likely be a multi-month expirement. What I want to do is look at put diagonals. I am looking to buy a put way out in expiration ATM. So for GE I am looking at the $17.50 put. Then I want to sell front month options against that purchased put. I realize that a few things could play out:

1) The puts I sold expire worthless and I can do it again month after month.

2) The puts expire in the money in which case I take delivery of the stock and start to write covered calls against the stock, which now gets me the same risk profile as a call spread (with a put, stock , an sold call).

3) The puts expire in the money and I could immediately turn around and exercise my right to sell with the purchased put. To me this is the least desirable alternative unless the stock has moved so much against me that it just makes sense to cut the trade with a maximum defined risk.

I am leaning towards trying to play it with scenario 1 and 2 in mind. But am open to the fact that the stock could potentially take a dump making it unappealing to continue forward with the strategy.

So lets take a closer look at what I am going to do:

So I am going to purchase the $17.50 put with Jan 2012 expiration which will give me plenty of time to see how this strategy plays out. This particular put is trading for 3.65. I am going to sell the front month May '10 $17 put which is currently trading for $0.18. This will put my overall cost basis at 3.47 for this diagonal.

I have chosen GE as the experiment stock as it is a name that I know and I think that it is less prone to huge moves which I think would not work well for this strategy. My thesis going into this trade is that this would work for more of a slow mover and not a momentum stock. But only time will tell.

I will post updates to the trade to the comments section of this post going forward.

Leg 1 = Buy 1 $17.50 Jan '12 put @ 3.65
Leg 2 = Sell 1 $17 May '10 put @ 0.18

New positions from Friday closed for 50% gains

I did not have time to post about the new put sales I made to take advantage of the huge increase in volatility, but I sold 1 put in each of the following names: GE, F, TSL, and MDR. Since Friday the VIX has gone from above 40 to around 27. So the volatility crush that I was expecting and trying to exploit came this morning as I was able to buy back all of the puts I sold at 50% or greater of the premium I collected.

To me this sale was just a no brainier and I did not fill compelled to do any fancy chart work and analysis. I knew the bet I wanted to make and just had to find the names I wanted to make it in. It obviously could had gone the other way and still can but I was able to exploit a volatility spike as I set out to do.

All in all it was only a gain of about $170.

Diagonal vs. Covered Call

I watched a video yesterday on Diagonals and saw the example of how its similar to, and therefore often an alternative to, writing a covered call. Instead of owning the stock long and selling a call for a traditional covered call, you buy an ITM call instead of being purely long the stock and still sell a covered call. The risk/reward trade off is you're paying some time premium for the ITM call, but limiting your downside risk to the debit paid for it as opposed to having potentially unlimited risk down to 0 of owning a stock.

There is another trade off to think about though if the stock pays a dividend as you wouldn't receive this owning an ITM call. I'm going to look at a covered call I'm interested in today and then put both that and a diagonal on in the paper trade account so I can follow along. I know I've talked about using real money even if it's only 1 contract to kind of force yourself along to learn, but I think going forward there is going to be several types of new ideas I want to try out and I don't want to use real money for all of them as I would expect to lose as I'm learning. If I can figure out how to use the ThinkBack function on TOS then I can maybe backtrack a recent covered call I closed out on (MO) to see how a calendar might have worked out instead. This learning process is going to be long and slow as it takes time for some things to sink in to the point where I'm very comfortable deciding what to use in certain situations. So I think I'll just continue to do what I have experience with and add new things as I feel comfortable. I'll post an analysis on this Diagonal vs Covered Call trade off after I think I have a solid handle on it.

Sentiment Indicators

I copied these from an IWO video so you might have already seen them. Before the recent crash I followed the logic on his thesis that HV was due to mean revert. Following these indicators is still a bit new to me so that's all I was doing, just following along. I'm pretty sure you mentioned the other to me recently about the number of stocks above their 50-day. I'll continue to follow along going forward and see if I want to incorporate these indicators going forward. What I like about them is they are obviously leading indicators that allow you to act ahead of time at a cheaper price, should you decide to act. Buying put protection now makes a lot less sense than had you tried to front run a possible mean reversion.

I've only got two trade ideas I'm interested in looking at on Monday. One is selling an OTM VIX call spread. I'll take the risk that we close under 40 by May expiration. The other is I'm going to price out some calendar spreads on a few stocks to also try and capitalize off the high volatility.

New short in ES

I shorted the ES in after hours at 1120. I put a buy to cover at 1100 which would be a $1000 gain because each point is worth $50 on the futures contract. I put a stop loss at 1125, so risking $250 to make $1000.

BOFI long 100 shares

A member of the IBD 100 which I go through every weekend. This list of is supposed to represent the 100 best companies by way of fundamental and technical ratings. As I have mentioned before I am trying to pair down my universe of stocks and am trying to use IBD for that. I am not fully committed to it yet, but most of the stocks on my watch list are members of the IBD 100.

Anyways as the market is pulling back I this stock has pulled back from its all time high made in the latest run higher of 19.27 down to about 15.60. When I first identified the stock I thought the stock was overbought and wanted to wait for a pull back to a more attractive level. The 50 day moving average was about $15 and I saw sum good support around $14, so I set my alert around this area and a week later it is know at what I consider an attractive price which offers great risk/reward.

I am buying a bit in front of the 50 day moving average as one thing I have learned over the last few months and especially more recently is that this entry and exit thing is more of an art than a science. I bought 100 shares @ 15.98. One thing to take notice on the chart is the increased volume that this stock has been attracting since last September. I do not normally look at stocks with volume under 1MM shares a day because of liquidity concerns, but I like the prospects of the growing volume and will look for this to continue. I bought stock as this equity does not trade options. I am placing my stop between 12-14 dollars. So the hard stop would be a breach of 12, and I will use discretion to either add a little if it trades between 12-14 or make the decision to exit. This will either give me a little more flexibility to let the position work or I am just opening up my risk for a larger loss. After being stopped out of so many positions the last few months I feel like I need a little more room to breath because I have watched many of the positions that get stopped out move just beyond my stop only to then reverse and move in the direction of my initial trade.

With the increased volume and nice uptrend I think this one can continue to make new highs after a bit of a rest and have an initial target of $20 and then higher. That initially puts my risk at 1:1, which for right now I am comfortable with as I think it will go higher than this.

IB Portfolio Analysis

Have you ever used this feature on IB? Its under "Analytics", then "Risk Navigator"

Monthly Goals for May

• Start mentoring with Dan Passarelli (started out slow but week 5 was a great learning week, lots to build on from here)
• Spend some time getting familiar with TOS analytics platform (definitely feel more comfortable but I've only scratched the surface of its power)
• Finish book on the Greeks, start new books on technical analysis (read Trading With The Greeks twice)
• Create trader filter worksheet (really happy with my progress here, I have a working template in place that I'm comfortable with)
• Try to get options trading group together in person and online (we had an in person meeting but there I would deem it a failure, only half the people showed up and there didn't seem to be a cohesive interest going forward, but we might have added one contributor to the blog this week)
• Work on updating trade tracker with past trades from last 18 months (didn't make a whole lot of process here, it's a very time consuming task)

Results for May are in Red

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• If I'm Making Money, Nothing Else Matters, Right? Wrong! Just because you are making money now, does not mean you are going to succeed. Learn more.

 

 

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