Taking profits in ZB

Staying true to yesterday's post IN THE MONEY TRADES: Managing ZB Position and closed out ZB today sooner than originally planned. I'm going to lighten my max exposure to 3 contracts from a previous of 5 until I see how things shake out. I'm willing to leave some potential profits on the board in exchange for peace of mind. I just entered with three shorts on Friday and by this morning I had already found myself watching the 1-minute bar charts where as I usually just watch the daily. I also set my alarm on Sunday to start watching at 3pm PST when the futures markets opened. That tells me I was too heavily invested in this trade from a psychological standpoint. So I'm happy to take some profits and lighten the risk exposure as well. I'm still short a FEB 122 Call and have orders to short the futures at 121'16 and 122. Update: Literally before I could even finish posting this trade my last order was filled to cover at 120'16. This also means I left $1,000 on the board from the (2) I closed out just 60 minutes ago at 121'00. That hurts, but again I found myself too heavily involved so I needed to step back and regroup.

Managing ZB Position

The events in the Middle East are potentially a game changer for trading ZB. For the last six weeks I've been methodically shorting at resistance and doing quite well. But this 119-122 consolidation range we've been in is the result of a sell off after bonds entered a short-term bubble. That bubble was predicated on fears of a double dip recession and financial institution instability in Europe which turned out to be short lived. Though I've been expecting to stay range bound with an eventual leg down, it is possible that new outside macro inputs will trump the technical picture. I have stayed true to my plan and scaled in to a maximum short position of 5 contracts http://inthemoneytrades.blogspot.com/2011/01/scaling-in-to-zb-shorts-as-planned.html#links. Below is the risk profile associated with what I previously believed was my worse case scenario. However, that was based on a continued consolidation range and slowly recovering world economies. If this Middle East thing turns in to a game changer then all bets are off.

As we learned many times in recent history from Long Term Capital Managment in 98', 9/11, and the 2008 Financial Crisis, all correlations go to 1.0 in the short-term. Take a look at Friday's 1-minute daily chart below of the ES and ZB on Friday. They are almost mirror images which is what you would expect. This is drastically different from their correlations over the last six weeks as the ES was slowly rising and ZB was tightly range bound. Here is why this is important to me, I might not wait until confirmation of a broken technical pattern to exit my ZB shorts for a loss. If we get a retracement of the equity market losses on Friday which also translates in to a reversal of ZB to the downside, I might exit my trades no matter where they are and head to the sidelines until further notice. Remember the May 6 Flash Crash was the harbinger of a much broader equity sell off over the next few months. I have zero idea what will happen going forward and won't even bother trying to predict, I'm simply going to be cautious and manage my risk as being short US Treasury futures and having unlimited risk is not where I want to be in a time of 1.0 correlations and Middle East instability. If the macro environment changes, then I need to be prepared to change as well.

New Trade: RMBS Short FEB 19 Puts

On Tuesday 1/25/11 near the close of trading I sold short (10) FEB 19 Puts for .40. Cost average/risk is $18.60. That's over 2% return (.40/18.60) for less than a month, and I have 9% downside protection (1.86/20.46) to my break even point. Unfortunately this wasn't on my radar a few days ago. I could have entered at essentially the same spot near $20.46 but with 3 more days theta and a higher IV. I'm still comfortable with my entry point, but being around at the right time has advantages. This is a name I've played in the past and feel comfortably taking a long position should it be put to me at $19. Earnings are tomorrow after the bell so there is risk associated with that. However, IV is pretty high at the moment near 50. I don't care if earnings are terrible and the stock plunges as I'm willing to own. The worse case scenario is the stock does plunge, IV collapses, and there aren't any attractive covered call scenarios available for MAR expiration. That is the risk I'm accepting.

5-day chart showing entry point

1-year chart showing channel range, break even point, and possible support level near $17.50

IV at the higher end of the range for last six months

Cashed Out ZB Trades

Today's FED announcement was just as planned, meaning rates are left unchanged and there wasn't any significant new language. Yet the bond market went nuts for 30 minutes after and traded in a full 1'00 range. I took the opportunity to close out the two short positions I put on yesterday. I captured 23/33 = 70% of the premium on the FEB1 Weekly in just 24 hours, with 9 days left until expiration that had to get closed out. I don't have the patience to wait 9 more days for another 10 ticks. And the short futures at 121'00 was automatically closed at 120'00 as that is where my GTC was set. As you can see from the picture below I have my orders set to scale back in to shorts at 121'00, 121'16, and 122'00. I might even double up on the 122'00 depending on what the action looks like at that time. I'm currently short one FEB 122 Call and still looking to scale in to a maximum short position of 5 contracts. Total take for these two trades is $1350.

Scaling in to ZB Shorts as planned

This morning I awoke to find my standing order to short ZB at 121'00 was triggered in the early hours. Unfortunately as the picture shows, my order to cover at 120'00 missed by two ticks. We then rallied almost two straight points in a few hours. That is a huge intra-day move for bonds. I am glad to see intra-day volatility still alive and I'm scaling in to a max short position of 5 contracts as planned. Beginning this week there are now weekly options available on ZB, so I dabbled in this a bit and sold the FEB1 123 strike call for '330 ($515). I've got a good-til-cancel order in to short another 2 contracts near the top of the trading range at 122'00 and if triggered this would leave me with short exposure to 5 contracts. I'm prepared to add to the short position if we break the range to the upside, but I would wait a while to see how it acts above 122'00, and what has changed in the macro environment to make the long bond yield head towards 4% again.

5-minute chart showing three entry points this week

Hourly chart of last few weeks entry/exit points

 Daily chart of 119-122 trading range

New Trade: Short ZB Calls

For anybody following my trades the last month in ZB this trade might seem counterintuitive as yesterday I shorted a call at the lower end of the 119-122 trading range. Here is my thinking: Shorting ZB for the last two months has been easy, nothing this good lasts forever and I've missed the last two entry points when I was out of town and chose to turn the markets off for a few days. The intra-day volatility has been amazing the last few weeks. Just using basic technical analysis and shorting near 122 has worked flawlessly and I've been paid several times http://bit.ly/fwdDFk, http://bit.ly/e3F3DH. Again, nothing is that easy and nothing this good lasts long. I'm concerned that volatility will dissipate, thus you have to wait longer to find entry points. Or worse, this thing breaks to the downside before it goes back up to test 122 and I get caught not having any short exposure. Since I'm willing to short up to 5 contracts at 122, I'm getting some short exposure here now by selling a FEB 122 Call for '520. That's $812 if it ends up expiring worthless. This way if volatility does die down or we break below the trading range, at least I get something before this gravy train ends and I'm forced to find my next meal.

JAN11 Options Expiration Results

So from a bottom line dollar standpoint alone I'm happy with the results this month. But I made a few mistakes and gambled and lost a few times as well. What I'm actually most proud of is the one loss this month because I stuck to my trading rule there and got out when my exit point was triggered. This trade would have ended up losing ($1,000) had I stayed in until expiration hoping that it would somehow work back to my favor, which is something I would have done in years past. What doesn't show up on the P/L is missed opportunities to re-enter the PFE long calls, and a short on ZB that both would have been winning trades. I also closed out two trades (NG and KMP short puts) early hoping to get a chance to re-enter but they didn't materialize. Total profit left on the table for those two early exits is about $860, missed trade opportunities total is about $1250. There is rarely such thing as a perfect month as I can always find something to get better at, and I just as easily could have lost money on re-entering those trades, we'll never know. So I take the good with the bad, continue to try and learn from my mistakes, and keep going forward.

Shorting HO crack spread (Short MarHO and Long MarCL)!

It has been a while since I have blogged about a position that I was taking at work. But today I find myself with a little extra time to blog about a trade that I noticed today that looked good to me on a contrarion play. With the Cold weather on the East coast /HO has been very strong and with the relative weakness in crude the Heating Oil Crack spread (HO contract *42 - CL Contract) has in the last two weeks run up from 14 to as high as $22.50 this afternoon.

Looking at the chart below the move looks very parabolic and this is confirmed by the 9 day RSI with a reading of 87.31:

Now the above chart does not explain the whole picture, we should also look at this on a seasonal basis historically. So the next chart below is shows the time frame from Jan to Feb:

In the above chart you are looking at how this crack has performed on a seasonal basis for the past 4 years. The dotted blue line is the average of all the years displayed, and the black line is the current year of this crackspread. On the seasonal it does not show todays move, but I have added some text to around where we are on this spread. See the first chart to see todays movement.

Although wheather is cold on the east coast I am not convinced that the recent move is sustainable. And from a contrarion perspective this is a great fade play. So today I shorted this crack spread with 5 lots at an average price of $21.76. I would love to sink my teeth into this one but I want to give it some room in case it continues to move higher.

To me there is about $1-$3 of upside risk with about $5-$10 of downside reward. If this did continue moving higher I am willing to get short up to 15 lots and would add around $23 and $25, but would stop out  at $25.50 and re-evaluate.

ZB Chart Update

I've been using the charts to short ZB since November and so far doing fantastic with no losing trades. Today gave me some clarification on the chart patterns I've been watching so I wanted to share my thinking for those that are following. I was correct back in mid December that the closing lows below 119 were the end of the downward channel that started at the highs near 135. I thought we were in for some sideways action and have been placing my bets accordingly. After a few days it appeared we were in a rough range from 119-122. But without a lot of data points I feel charting is very subjective. Until it plays itself out I wasn't sure if we were truly in a sideways consolidation range or if we were looking at a rising wedge. The gold colored line in the chart below was my possible rising wedge to watch. Since this technical pattern tends to resolve itself to the upside, I have been hesitant with my short position size. It's also why I was using short calls at times instead of the underlying futures contract. In case this broke to the upside I wanted a higher cost average on my shorts. On Tuesday 1/18 we bounced two ticks shy of the support line on the wedge, but there is no rule that says the wedge has to fully form before we get a break in direction, so again I was cautious until we got some further data points. Today we broke through the wedge on the downside and bounced right at horizontal support. So going forward I'm prepared to scale in to shorts between 121-122, with my max short exposure at 5 contracts.

Below is an hourly chart and spread sheet that show my exact entry and exit points for the JAN operations expiration cycle. My total take for this month trading ZB was about $4280. You can look up my past trade posts by searching "ZB" in the search box at the upper left corner of the screen. If you're trading ZB as well or have any questions/comments please drop me a line. If you want to follow along for the FEB options expiration cycle then either bookmark this blog or the Twitter link provided as I copy all trade posts there. http://twitter.com/#!/JasonAndrewHaas

ZB Short Calls Close Out

This is a late post as I was out of town and didn't have Internet access when the trade was closed out. On Wednesday 1/12/11 I closed my short JAN 123 ZB Calls for '080 each. Entry points were 1'140 and 0'510, cost average of 1'010, profit is $1758. I closed these out for a combination of reasons. The first is I locked in 89% of the profit with 10 days left until expiration so the remaining risk (unlimited) wasn't worth the potential remaining reward ($250). The second is that if I've been right about this being in a consolidation range as I previously posted here http://inthemoneytrades.blogspot.com/2011/01/bond-volatility-still-paying-off.html#links, then it makes more sense to short the underlying rather than wait for these calls to completely expire. The gains I locked in today took 13 and 24 days respectively to accrue on the two short Calls. Had I shorted the underlying contract instead, those gains could have been had in hours as my timing on both turned out to be right.

(KMP) Put Close Out

I was short the JAN 67.50 puts at .70 and just closed them out for .10. I could lock in (.60/.70) = 85% of the profits with two weeks left until expiration so I felt this was the prudent move to make. Besides locking in profits and taking 100% of future risk off the books, I'm hoping for a pull back within this 3-month trading range so I can sell FEB 67.50 puts. If this happens its essentially a roll of the trade. Current price for FEB 67.50 puts is roughly .50. So we'll see if I get a chance for a better entry sometime in the next two weeks before JAN expiration.

Something has got to give....using weekly options in QQQQ

Last week I posted about buying some puts on the QQQQ. We got a small downmove on the day before the holiday weeked, in which I took the opportunity to sell half of the 10 puts that I bought and sell 5 OTM puts to turn the position into a putspread to mitigate the effects of theta over the weekend. When I came into this week I no longer like the prospects of the 54/53 put spread finishing in the money and decided to close out the rest of the position for a small net loss of $20. But the more I look at the chart the more I think something has got to give. The RSI is overbought, the Bollinger bands are screaming overbought and we are heading into an important economic report tommorrow. The old saying goes buy the rumer sell the news. I think everyone is expecting the report to be a blow out. 

I really don't care what the report says, I just think the price action is overdone to the upside and tommorow might give traders an excuse to sell off into whatever news is released tomorrow.

With that said, since my timeframe is so short I decided to buy 10 56 puts using weekly options that expire tomorrow for 25cts. They are currently 8cts in the money, meaning I paid 17cts of time premium. And just for fun I bought 10 of the 55 puts as well for 4cts. I am taking a gamble with only 1 day for this thing to work, but I think it is worth it.

I will let you know how this plays out tommorow.

Bond Trading Range Still Working

After covering my short trade at my target zone on Monday, I was a bit late to short again at the upper end of resistance near 122'00 just a few hours later. I ended up shorting again anyway at 121'20. But I was a bit uncomfortable with this for two reasons. The first is that I was upset with myself for missing my desired entry point, the second was this was beginning to feel too easy. I was afraid I was going back to the well too often and was about to get bit. Shorting bonds the last two months has been a great ride. So I decided to shorten my exit point a bit and stay small with only one contract because I wanted to see how the charts shake out the next few days.

 My theory of being in a consolidation range has been accurate the last few weeks, but today was the day we should find out if the down trending channel was still intact. Very interesting to see bonds rally all through the electronic session up to resistance only to see a large seller unload once the pits open and there is people to suck up volume. Two hours later somebody unloaded again. In the last two days I've gone from being uncomfortable being short to worried that future entry points might not exist as bonds are down 2 full points today. Such is the life of a discretionary trader. I'm still short (2) 123 strike calls but those are possibly a few minutes away from being closed out early at my target price of 0'14.

Three-Day chart showing last two trades within the consolidation range

Recent consolidation range from the lows on 12/15

3-month down trending channel with consolidation range

Where do we go from here?

Welcome to 2011. Happy New Year to everyone. 

The Good
So I haven't had a lot of time to update and post to the blog lately with the holidays and life in general as I have twins on the way in May so life has been a little busy to say the least. To be honest the trades I've been doing aren't for the faint of heart and thus why I haven't been recommending them. I've continued to trade long the metals(SLV, GDX and other smaller miners) selling short calls along the way while I wait for the inevitable selloff that is sure to come as soon as every retail investor finishes throwing their money into the market in January. Everywhere I turn I hear gold and silver and pawn shops with the name in it. Do I believe we're at a top in the metals? Short term yes.....long term no.

The Bad
I have been very vocal in my skepticism of this market rally that we've been in for now WAAAAAY too long. As they say you can't fight the tape so you have to hold your nose and buy but I've been playing it conservatively and selling my upside with calls....which again won't make you rich but will help protect you when this crazy market corrects. The close in calls will increase while the far out calls will not move a lot. Ultimately I want the market to go down short term and I'll buy those calls back when it does. If it doesn't I'll roll them out to next month and wait on the correction. What you ask will cause the correction.....If I knew that I'd be rich and retired already but I can tell you it always happens when you're least expecting it.

Everything in the market is pointing to oversold, the talking heads on CNBC are overly bullish for 2011 and bullishness is rampant on the street. I personally think the straw that breaks the camels back will be the unraveling of commodities especially gold and silver. I am longterm bullish on the metals but they need to correct and really shake out the weak hands before we go up again and I think 2011 will be the year that no one makes any money in the metals relative to it's run over the last 7-8 years. Once this sell off starts other equities will follow as margin and risk is on currently and selling will beget selling.

The Ugly
As for the overall economy I think $3+ gasoline will start to hit peoples wallets and this will in fact slow down spending by the average consumer. Interest rates are on the rise thus choking off the up tick in the housing market that everyone was raving about this past week. Unemployment that went below 400k this past week will tick back up as no one files for unemployment during the holidays. China is raising rates and in fact if you look at their equity markets they are right in the middle for the worst performing markets for 2010 with the PIGS.

The Market
I took a quick look at the options activity on the S&P 500 and what I found is I do still believe we get to 1300 and I think we get there quickly....within a week or so.....but then I think we go nowhere. I don't think we'll get a huge sell off for more than 5-7%.....to begin with....then we go flat for a while before another leg down.

The market rarely gives you a chance to cash in your profits and hang out for the inevitable sell off like it's doing now. My advice take profits and or buy some puts and or sell some Jan/Feb calls against any long positions you have. If I'm right you'll thank me in a month, If I'm wrong you can buy them back as your underlying stock or options will continue to go up as well. This is no time to be play superman with your money.

Agree? Disagree? I'd love to hear your take.

When Technical Analysis Steals Your Lunch Money

Update to my NG trade. I am so grateful I wussed out and closed my short put in hopes of putting it back on again on a pullback. Looks like that worked out wonderfully. Although TA is a great tool, do not get comfortable and rely on it. I don't want to say I made a mistake on this trade because clearly that would be a retrospective comment, but I do want to point out that TA just like anything else, is only an input tool and not a system in of itself. If it were we would all just write a program to trade accordingly, life and trading isn't that easy. The truth is that basic TA has been working wonderfully for me on a few different asset classes the last two months over numerous trades. This time it didn't work but the ratio of hits vs misses is strongly in my favor so I'm going to stick with it as an input and deal with the minor frustration when it doesn't work.

Bond Volatility Still Paying Off

I was kind of unpleasantly surprised to see that a GTC order to short ZB at 122'00 was hit in the closing minutes of trading last Friday. Even though from a technical analysis point of entry I was OK with it obviously, as that is where I had set my order, I was uncomfortable with why bonds ran so big on the day when equities were flat and I couldn't find any news to justify the move. So this was a case of a GTC order benefiting me as if I were watching live I don't know that I would have pulled the trigger.

So over the weekend I reached another point of psychological trader breakthrough. I've been playing ZB short for a few months now and doing well, but I've been a little conservative and targeting exit points based on a desired dollar gain and not the chart. This makes littles sense as I was using the charts for entry points but ignoring them for exit points. So looking at the chart below I made a note to myself that 120'16 looked like the logical exit point, this would be a $1500 gain and normally I would target $1000 no matter where that happened to be on the chart. So I set my GTC there and woke up this morning to find it was hit. Most of the action took place in the electronic session. I entered the trade with 5 minutes to go on pit trading Friday, and was taken out of the trade within a few minutes of pit trading this morning. This is another case where had I been watching I'm pretty sure I would have pulled the trigger to exit earlier. I realize I need to get to the point where I can make the right decision whether I'm watching or not, but baby steps, I am actually making strides I'm happy about.

However, as happy as I am to start the year out right, I actually missed another shorting opportunity this morning at 122'00 again. That was actually the high tick so there is no guarantee my order would have been filled there. I'm still short (2) JAN 123 calls but I will look to get short the underlying again if my entry point is hit. Below are some other charts that show the trend I've been playing. I posted last week that I felt we were possibly in a consolidation phase for bonds after a pretty big sell off, so far the 1-month chart looks to be playing out this way and I've profited accordingly as we fluctuate between 118'16 and 123. Long-term I still think the 30-year yield goes back to north of 5%, that means there is still some good money to be made being short bonds. (I've actually got a second post coming about anticipated prices for ZB based on futures yields). But short-term, volatility in bonds is still present and there are so many possible catalysts that I'm going to be cautious and wait for entry points and use a combination of short calls and short futures contracts. The big move down has most likely already happened so I'm going to keep my short positions small until/unless we get a move above the down-trending channel. The hard part will be to have the courage to short when/if we get a geopolitical event that temporarily drives people back to the safety of bonds. I've got several possible known catalysts for this to occur, we'll see how I feel when/if they happen.