Another learning experience

Below is the risk profile of my SPY directional/hedge that was put on 6-22-10 for a debit of -420. I thought the range of SPX would be between 900-1040 and was just trying to devise a play to profit from that. I ended up buying the (10) 104 puts, selling (10) 95 puts, and then selling (6) 101 puts. I was trying to create something like a butterfly with little out of pocket expense in case I'm wrong, but a chance to win big if I'm right in that range. However, I was willing to give up a lot more on the back end in exchange for a little less of an initial debit as I would close the trade out early for a smaller gain rather than possible take large losses on the backside. So I just screwed around with the risk analysis and came up with the first image below.

Now look at the second image, using the same strikes and prices, a simple 104/95 back ratio would have been an initial debit of -550 instead of -420, but look at the possible reward scenario. Both plays have roughly the same breakeven points but the back ratio is potentially much more profitable at +8400 instead of $5000. Even using the expected average gain would be $5000 on the back ratio and $3000 on my trade. This is nothing more than my lack of education as I've never used a back spread before and therefore didn't have this risk/reward scenario already in  my head. But clearly an initial debit of -550 versus -420 was warranted in this case. It's great that I'm learning from mistakes, however, I'm probably a little ahead of myself and should probably lower my trading size for a while back to 5-10 contracts as this is really a rookie mistake in my opinion. I just have just yet to put in the time to learn some of the basics.

SPY Position update

Here is an updated risk profile/profit graph of what I have left of the SPY position that I started building and trading around 2 weeks ago.

So I am nicely positioned for this sell off and what I think will be a continued sell-off. We breached the all important 1040 level on the S&P 500. I have a target of 100 for the next stop lower. At expiration this is where I make my maximum profit of $2,000 unless we really sell off hard then I make that or more below $94. But I don't see that happening before July Expiration. I think that 100 is a reasonable target, and if I think it will take 2 weeks it will probably happen this week as the down moves just always seem to happen much faster than I anticipate.

This is basically all I have left on.

NOT IMPRESSIVE RALLY AT ALL -- My Four Tier Shorting Strategy

I think is is a little bearish, how about you? But I think it makes sense.

 

 

Sent to you by Dominic via Google Reader:

 

 

NOT IMPRESSIVE RALLY AT ALL -- My Four Tier Shorting Strategy

via T3Live Blog by Brandon Rowley on 6/28/10

By: Scott Redler  

This Head and Shoulders Pattern is almost complete. Question is how do you make money? What I recommend is a four tier approach if you have the pain tolerance, this is what I would do.

I shorted Tier one today by buying the July 105 and July 102 puts and the August 105 and August 102 puts-

Example- If you want to risk $100,000:

This is the tier one entry in the 1070-1075 area.
You buy July 105 and July 102 puts and August 105-102 puts tier one $25,000 (this gives you two months)

If the market does bounce back to 1090-1100 into the Job's Report or Quarter's end you buy Tier #2 Puts–
The July 105, 102, and August 105, 102 puts ($25,000).

Above is your "anticipation of the break" that is sometime risky. You're not waiting for Market Confirmation just putting money into the strategy.

If the market does not get back to the 1090-1100 area, then you add your second tier ($25,000) at the 1065 area.

If we do reach 1090 and you are able to add your second tier, then you will add your Third tier ($25,000) below 1065.

Last Tier would be when Neckline breaks and the day we close below 1040 to complete your investment into a Core Short!

This last tier will either be a single or double based on if the market was able to bounce to 1090-1100. You will add two tiers ($50,000) the day we close below 1040, if we never make it back to 1090-1100.

This will get you some prices as you sell a bounce, and then when the Pattern confirms and position into the momentum Down Move.

If you want to invest $20,000 in these puts you do same strategies but in $5,000 increments

If you have a lot of Buying power you can do the same strategy shorting the actual SPY.

Use this approach with the method you feel most confident with..

I'm using the July and August puts to get some more time. If we get this break in the market, it should happen during this time period.

IF we don't break the Neckline, you will only have half involved that you anticipated with the strategy, but never got fully involved because the market did not confirm the thesis.

I started with Tier one today in my swing accounts. I will also trade intraday based on the price action. By having this strategy the edge will be off, if this break down happens in a way that's not conducive for cash flow trading.

Banks almost gave back more than half of Friday's move. That shouldn't have happened. Also technical damage is adding up across the board.

I Give this Strategy 70% chance of working.

 

 

Things you can do from here:

• Subscribe to T3Live Blog using Google Reader
• Get started using Google Reader to easily keep up with all your favorite sites

 

 

Portfolio Mgmt

Here are some of the rough guidelines that I'm working off of right now. No more than 50% maintenance margin. This gives me plenty of room to manage around volatile moves in my positions and plenty of additional buying power. So obviously the goal is to make a decent return off the whole portfolio but only normally using 50% of the buying power. I don't exactly have a monthly or yearly percentage return target right now. I'm kind of just trying to focus on individual good trade set ups. For the time being I'm sticking with a risk limit of 1% of trading capital per position on defined risk trades. On undefined trades like naked calls I will have to have stated exit points that should correlate to a maximum loss of 1% of capital as well. I have set a total risk threshold of 5% loss of capital in any one month, and no more than 10 positions at a time. This means that should I have 10 positions that they can't all be the same direction as that would possibly allow for a 10% loss. A worse case scenario should be that all five of any one direction move so quickly that I can't exit, repair, roll, etc. And even this worse case scenario of a total 5% loss in 5 different names shouldn't happen as if this were to occur, the opposing directional plays should make some profit. Below are the quantity of my current directional positions. This is roughly the type of construction I'm going to seek out each month as I continue to learn overall portfolio mgmt skills and see what kind of adjustments I need to make. To be honest, right now with so many defined risk trades and the undefined ones having stated exit points, I'm not too concerned with greek mgmt.

Bearish (4)
Bullish (3)
Neutral (2)

New Position: BAC

I sold July $14 puts for .14. This is similar to my VZ play in that I'm willing to own this name at this price so there is no exit point, I will take possession and write covered calls. There are two possible resistance lines on this chart, but I am ok with ownership so I'll root for to expire worthless but not cry if it doesn't.

New Position: TLT

I bought the August 100/101 call spread for .395. This is in contrast to my July 101/102 short call spread. I am currently looking to walk that call spread out for a few pennies, or even close it out entirely for a small loss as I'm more bearish now than when I put that trade on. My general feeling is that as earnings roll in starting in July, that no matter what actual earnings are, the guidance will not be what current projections are and thus earnings need to be restated for equities going forward. I think bond yields will continue to go lower until we get reconfirmation that GDP growth actually exists. It's also possible that the correction in equities and run in bonds has already properly discounted this scenario. So, in case I'm wrong, I also sold August 93 puts for .45. So this is a small net credit trade that carries risk below 93. For this to occur earnings and guidance would have to be great in order to get stocks to rally and bonds to sell off. I just don't see this so I put my money where my mouth is. I'll have to manage my risk to the downside should this start to occur because I would not be interested in taking possession  of this instrument.

Here is the combined diagram with call spread and short puts. I've also included the IV screen shot. TLT actually sees an increase in IV as the underlying price increases, this is similar to how gold IV reacts for the obvious reasons. This is another reason why I wanted to own the call spread rather than be short it. You can match up the dates on the chart for spikes in TLT and the spikes in IV.

New Trade: VZ

I sold July $27 puts for .15. I am willing to take possession at this quantity and price and write covered calls and pick up dividends so there is no planned exit to this trade.

AKAM additional position

I previously sold the July 40/39 put spread for .14 with the intent to close if it breaks its support line. Today I sold naked $50 calls for .30. I would possibly close this position as well if we broke resistance to the upside. So this is a long call away from being an iron condor. I am going to continue using the TOS risk analysis screen shots, but most trades will be done at IB until further notice. If we hit either side of the channel I'll probably close out the opposite side of the trade. I'll be quick to curtail losses in some trades as I've already got some nice gains in others.

Update: This position crashed hard today closing literally on the support line. As of closing price it is close to my 1% of capital loss risk threshold per trade at about -1500. I would hate to close this out for a big loss when it's still above the naked strike. Today's price was down 8.68% and the SPX was 3.25%, that would mean AKAM has a beta today of (8.68/3.25) = 2.67. It's listed beta is .93. According to the risk profile I have another $1.50 to the downside on this stock until it reaches my risk threshold. It's up a bit in after hours but that means little. If we open down strong I'll be forced to close it out. It's 50-DMA is slightly above this threshold area at about $40, so if it breaks that as well as the support line on the chart I should use those as reasons to cut the trade. Below is the current chart and risk analysis of the spread trade versus just selling naked puts which was my original intention. The point I want to show is that the spread reduced risk and is allowing me to stay in this trade longer. Had I just used  naked puts the risk threshold would already be violated at -2200. 


Theoretically, let's say the stock does hold this resistance line, and ends up either expiring worthless or maybe trading sideways a few days and allowing me to get out with a much smaller loss. I'm not making any predictions, just pointing out that the spread at least is currently giving me the option of staying in a bit longer and potentially not having to take a maximum loss. I think in most cases you should use spreads to reduce risk and buying power, regardless of how this trade turns out it's been a good learning trade for me. 

Current Chart

Current Risk Profile of spread

Alternate profile had I used naked puts and no spread

BRK-B idea

I was in this name a few weeks back and got out for a small loss. But it was still on my radar and I saw an opportunity I might want to play. I've put a day order in to short the $85 calls. Unfortunately the stock pulled back today from the weekend prices I scouted the trade out at. I would close the trade out for a loss if it hit a new high, depending on how much time was left. That just looks like an extremely steep incline that I don't feel is sustainable. I haven't researched this fully yet, I heard something about a Russell 2000 re-balancing having something to do with this price action.

F chart

Interesting chart action as it touched support exactly today. I had sold puts, but maybe I should have been buying calls as it hits support. You get positive gamma if you buy the call but negative gamma on the short put sale. If there is truly a bounce you should profit more on the long call than the short put, probably should buy an OTM 25-30 delta call too. I'm going to look at those prices now and follow this.

Sold a little premium on this bounce...

As I mentioned in an earlier post I have positioned my portfolio to profit on the downside, which leaves me a little exposed to the upside move. But I think that the market is weak and will continue to be weak. I also think that 105 on the SPY will happen very quickly and if this level is broken which I think it will break, then I think it is possible that we see SPY 100 rather quickly. Where it goes from here I am not sure. But I think that this will be a huge phycological level. I am not sure about the head and shoulders pattern playing out or not but I do see the market going lower. With that said I have used this intraday bounce to sell some premium on some names I have been watching.

I sold 3 July '10 $155/$160 Call spreads on CMG @ $1, Notice the rounded top and bear flag formation coupled with a weak market. At initiation the 155 strike has a 25% of expirying ITM.

I also sold 1 July '10 370/390 Call spread on ISRG @ $1, Also weak and below the 50 day MA with the 370 at a 9% of expirying ITM:

This leaves me short about 260 SPY deltas on a beta wheighted basis and a positive theta of 30 a day. My goal is going to try to close these out by next Friday/following Monday. I am trying to exploit the 11 days of time value that will be wiped away from these options in the next 5.1 trading sessions. But also keeping the plays in line with my current bearish thesis.

11 days of theta in 6 trading days

One thing for anyone trying to collect on theta should realize is that by next friday which is 6 trading days away, 11 days of theta will be priced out of options.

Decidedly Bearish

I have slanted my spy portfolio to be bearish. I have taken off a lot of inventory the last few days. I am now positioned to profit in a move lower. I really think there is a high possibility that we go and break through the 1040 level on the S&P 500 which I thinks bring us down to 1000 level rather quickly. Again I will be ready to sell some more premium on a move to the upside.

 

 

Sent to you by Dominic via Google Reader:

 

 

Decidedly Bearish

via Think BIG by Bespoke on 6/25/10

Yesterday we polled readers on which way they thought the S&P 500 was headed in the near term.  The results show that investors (at least ones that read Think B.I.G.) are decidedly bearish.  As shown below, 65% of respondents said the S&P 500 would go on to make a new correction low before making a post-correction high.  This is about as bearish as polls that we have done get, and it just shows how negative sentiment has gotten recently.

 

 

Things you can do from here:

• Subscribe to Think BIG using Google Reader
• Get started using Google Reader to easily keep up with all your favorite sites

 

 

EARLY LOOK: Squirming Bulls

Some macro views...

 

 

Sent to you by Dominic via Google Reader:

 

 

EARLY LOOK: Squirming Bulls

via Hedgeye Blog by keith on 6/24/10

"When you're finished changing, you're finished."
-Benjamin Franklin

My citing a Thomas Jefferson quote yesterday certainly stirred the pot. I haven't had that many responses to an Early Look note since I took the other side of Barton Biggs (on May 27, 2010 after Biggs suggested that the Thunder Bay Bear was going to "squirm"). I appreciate all the feedback.

After getting plugged chasing a made for Manic TV CNBC "China" rally on Monday morning, and then seeing the SP500 close down for 3 consecutive days, the bulls are the ones doing the squirming now. The US stock market hasn't had 3 consecutive up days since April.

Jefferson, like most politicians, was a professional storyteller, prone to hypocrisy, and subject to squirming. We know that markets don't lie; politicians do. What we don't know is why the Modern Day Roman Empire that is America's financial system continues to believe that the rest of the world isn't watching?

From a financial forecasting perspective, the Fiat Fools in Washington have proven that they are finished changing. So, in this brave new political era where the President of the United States is telling stories about "holding people accountable", we're going to tag along Benjamin Franklin's aforementioned quote and assume the current US monetary policy experiment is "finished."

Sadly, in what has become a proactively predictable statement of politically conflicted US Federal Reserve policy, in yesterday's FOMC statement Ben Bernanke opted to pander to the political wind that has amplified both the volatility of markets and the cyclicality of growth since he took his lead from Alan Greenspan.

Our advice yesterday (for the US government to become Rigorously Frugal) was born out of the respect we have for both the cost and access to capital. Promising a "risk free" rate of return of ZERO percent to both domestic and foreign investors will not inspire investment. We live in an interconnected world where capital seeks yield. Ask the Brazilians and Chinese what they think about that…

Whatever you do, don't ask Ben Bernanke and his Troubadour of the Willfully Blind at the Federal Reserve for an economic forecast. If he didn't see economic growth and inflation in the last 12 months he's definitely not going to see it now. Like a broken clock, he'll eventually get it right – the double dip we are forecasting for both the US economy and US housing will be here come Q4. By then, Bernanke will be formally cutting his economic forecasts.

As a reminder, Bernanke's forecasts on US economic growth are about as far out in the stratosphere of nod as we have seen in some time. That said, given his outlook, he should have the Fed Funds Rate at least 100 basis points higher than where it stands today (he is looking for upwards of 4% GDP growth in the US in 2011). So it's time he either raises rates in line with his forecast or just takes a chainsaw to his forecasts.

Let's think about those two options for a second:

1. Raising Rates – since he couldn't raise them when he should have, now he won't be able to cut them when he needs to. The yield on 2-year US Treasuries is hitting all time lows this morning of 0.64%. If one of the brave economists in Washington wants to tell me a story about how the US Treasury market is forecasting anything other than a double dip, please send me an email.

2. Cutting Forecasts – since Bernanke's forecasts are turning into THE lagging global economic indicator, it is very probable that he cuts his economic forecasts in the coming quarters. By the time he does that, most of the Squirming Bulls are going to be looking back in the rear-view mirror at a US "growth and earnings" story that slowed (most recent sales updates from BBY, TOL, FDX, BBBY, etc are on the tape – they weren't good).

If you are finished learning, you're definitely finished thinking. How does Heli-Ben think about the interconnectedness of global markets? Where does the most relevant mathematical consideration since relativity (chaos/complexity theory) fit within his forecasting model? Do real-time market moves register on his radar or is he still busy marking-his-estimates-to-the-broken-Greenspan-model?

Don't ask Timmy Geithner for a bone on these answers either – he'll be the first to tell you that he is "not an economist." He's simply a professional politician advising the President of the United States on global economic matters.

Since the Chinese signaled that they'll continue to wear the pants in this Global Creditor/Debtor relationship earlier this week, we have seen the three pillars of US economic growth hopes crumble: Industrials, Financials, and Consumer Discretionary (XLI, XLF, and XLY are the ETFs).

After holding their breath barely below this bear market's water for the last 3 weeks, these 3 critical sectors (XLI, XLF, and XLY) in our S&P Sector Risk Management Model have broken on both an immediate term TRADE and intermediate term TREND perspective. These are called leading indicators, Mr. Bernanke. If you want some help, please send us an email at sales@hedgeye.com.

Other than collapsing US bond yields and US stock prices, what other global macro leading indicators have us forecasting double dips in both US housing and US economic growth?

1. Chinese equities are down -21.7% YTD and have closed down the last 2 days

2. Dr. Copper (a proxy for Chinese demand and US Industrial growth) remains broken from a long term TAIL perspective

3. European equities continue to sell off this morning after rallying to lower-long-term highs in the last 2 weeks

Now if you don't believe in the interconnectivity of global markets, complexity theory, or that the US growth engine isn't tied to both, you won't believe any of my storytelling this morning. If you're finished reading, you're not finished figuring this out yet.

My immediate term support and resistance levels for the SP500 are now 1081 and 1105 respectively. I sold 1/2 of our position in TIPs in the Hedgeye Asset Allocation Model yesterday, taking our allocation to Bonds back down to 6% from 9%, because a negative growth outlook is deflationary, in theory. Our allocation to cash bumped back up to 64% from 61% day-over-day.

Best of luck out there today,
KM

 

 

Things you can do from here:

• Subscribe to Hedgeye Blog using Google Reader
• Get started using Google Reader to easily keep up with all your favorite sites

 

 

Macro Market Thoughts

This guys is just been on fire since 2007. I can't help but listen.

 

 

Sent to you by Dominic via Google Reader:

 

 

Macro Market Thoughts

via T3Live Blog by Brandon Rowley on 6/24/10

By: Scott Redler  

WE are market Timers and our Mantra Has been to TRADE THIS MARKET BOTH LONG AND SHORT

In January the Uptrend broke and it lead to a 9% correction off the highs. In early May the same type of Uptrend broke leading to a 13%-15% correction. If you followed the rules and sold correctly, you had the luxury of testing longs into Major support 1040-1050. If you chased the market at the highs and "bought excitement" you probably capitulated your longs into the emotion of the correction.

The February 5th Reversal lead to a move to new highs. The same Type of Reversal pattern happened on June 6th.
We put a scenario on the table that the rally could lead to a Head and Shoulders Top pattern on June 6th. You measure it along the way. The big area we said to watch will be 1120-1140 to see if it Creates a "Right Shoulder" or does'nt. My eye of the storm theory.

Monday June 21st the market powered to the "Resistance Area" (1120-1140) and we sold our longs into the excitement.
Our "Go To Stocks" all made the most impressive moves, with some Laggards even playing a bit of catch up.

Last Thursday into Friday June 10th-11th was the time to Enter longs, this is when we talked about the Tech sector getting ready to show some momentum. (went over this on CNBC with Larry Kudlow as well). Monday June 21st was your day to lighten up as most on T.V got excited.

Market hit the 50% Retracement Level and sold off hard at 1131—this was time to take some profits as we sold into the Excitement of the China Currency News

This should mark the Top of the "Right Shoulder" of the Head And shoulders Formation I've been isolating since the rally began from the 1040-1050 area.

In the past few weeks we've now seen a Very Poor Job #-- Retail Sales are very soft—Housing is not getting better.
The U.S picture is showing signs of a soft patch-double dip. I do feel the July earnings picture will be Lack Luster
Europe problems still not solved
Koreas still a problem
Israel and the Middle east

On a Micro level we could see an oversold bounce here around 1070-1075. BUT for Investors. I think you will get a better entry in the stock market around 940-980 on the S&P and 9200-9500 on the Dow- This should take place in some point later this Summer. That is the measured move of the bearish technical pattern I've been isolating for weeks.

In Real Life Terms- As a professional trader I will test small longs around here the next day or so. But I have money I want to start a 529 account for my sons College education. I will make the lump sum deposit around 950 at some point next month or so, and then it should do well if I add $150-$200 a month till he goes to college. He's only 20 months old. If you are a baby boomer with a lump sum, I'd say keep in the bank and protect it to live your life

We will get confirmation of this if the Neckline of heavy support breaks at 1040-1050

 

 

Things you can do from here:

• Subscribe to T3Live Blog using Google Reader
• Get started using Google Reader to easily keep up with all your favorite sites

 

 

TLT chart

For the next three weeks I'm actually liking the put spread sale better. This is looking like a gold chart, which makes sense I guess as the flight to safety is usually to gold and US treasuries.

F

Taking a low risk play on this name. I charted this one a few days ago and tentatively planned to sell some puts if it continued down further. We've got two trend lines and the 200MA all at the same place. A break below these three and I'll exit for a loss. I sold naked $10 puts for .18

AKAM naked put sale

This is the one other trade I had on my radar for today. I'm looking at selling either the naked $40 puts, or the 40/39 put spread. Setting the risk at 1% of trading capital near the break point of the trend line near $40 for either scenario leaves me with a $540 net on the naked $40's, or $480-540 on the spread (depending on if I get filled at .10 or .11). The buying power needed is three times as much for the nakeds and obviously leaves you with extreme risk, so I think I just talked myself in to doing the spread. Initially I thought .10 reward for .90 risk and 100 contracts vs. 15 didn't make any sense, but now that I've done the math this makes even more sense, especially if I can get filled at .11. (Update: After my initial write up I took a look at IV. It is relatively low right now to its recent past, so what I did was increased IV by 12 up to its recent past of 55. I'm assuming that a break of that $40 trend line would coincide with a rising IV. Looking at the two alternatives again after increasing IV, the nakeds leave me with a loss of 1.5% of capital at the $40 break and the spread is still at 1% because you have less delta exposure with the spread. So even if I can only get filled at .10 I'm going to go with the spread.)

The light blue lines are copies of the worst down moves the stock has seen in the last six months. It looks like I would need slightly move than steeper drop than any recent history just to touch the uptrend line tomorrow. Earnings are not due until after July OPEX.  I'm going to look for 1-2 more trades to put on because otherwise the $500 I paid for the SPY put spread as directional bet/hedge doesn't make a whole lot of sense. I think I need to shoot for selling at least $2000 of premium on other trades to be giving up $500 on that SPY bet.