Interesting ES retracement chart

I've yet to buy in to or incorporate Fibonacci lines in to my trading, but this chart is pretty hard to explain away as random. For someone that does trade technically using this indicator they've done really well the last few days.

(RMBS) Doubling Down on my short 25 strike calls

The stock is down $2 since I sold naked calls last Friday and I was just able to double down on my short call position for one penny less than my original entry. I got .30 on 2/18 and got .29 today. The reason this is possible is the three day sell off put fear in to put buyers and they drove implied volatility up from 49% to 65%. Since put/call parity means IV is distributed almost evenly, even though its the put buyers who are driving up IV, the calls benefit from an increase in price as well. I will gladly take this gift. Here is a link to the original trade last Friday 2/18/11. http://bit.ly/gSjqLH And here is a link to Put/Call parity in case this is a concept you would like more information on. http://bit.ly/dPO2s3

I also deleted my technical analysis drawings today and started from scratch. I like to do this from time to time to make sure I'm operating under a just set of assumptions. I found something interesting. In the updated chart you'll notice I added a new set of lines in purple that the original chart did not have. This is exactly why I like to update charts from scratch every now and then. To me there is an obvious short-term trend in gold within an even longer trending channel in purple. Today the stock reacted perfectly to both as the first possible support line that did not hold on yesterday's selling, is now acting as support. My point is that at the moment this stock is trading very strongly on technicals and I'm going to try and trade around this theme. This combined with the dramatically increased IV led me to feel comfortable to double down on my short calls. And of course if RMBS gets a buy out bid in the next few weeks then I'm an idiot, that is the known risk I'm taking.

Implied Volatility chart as of 2/18/11

Implied Volatility chart as of 2/24/11

Original Chart from trade on 2/18/11

Updated Chart as of 2/24/11

Intra-day Chart where previous support acted as resistance three times.

New Trade: Selling (RMBS) MAR 25 Naked Calls

Trade Update 2/22/11: I sold 18 strike puts today for .28, which now leaves me short an 18/25 strangle at .58. The original call sale and trade idea as well as updated charts are below.

The short FEB 19 puts expired worthless today. IN THE MONEY TRADES: New Trade: RMBS Short FEB 19 Puts And earlier today I decided to short the MAR 25 calls for .30 and here is why:

• IV is elevated again in the low 50's (favors selling premium rather than buying)
• HV has been flat at under 20% since October. Which means the IV bid has been wrong the last four months and speculators haven't been getting paid.
• We failed at resistance this morning at roughly $22.00
• There is a second possible resistance line above near $23.50
• Third possible resistance line at 52-week high of $25.50. Keep in mind that was an intra-day high and the largest closing high the last 12 months is $25.03, which is under our break-even point of $25.30. 
• Getting to $25 from here in four weeks looks like a stretch. In fact, the largest gain between options cycles in the last 12 months is just 7.19%. That means we can double the largest move seen in the last year and still have these calls expire worthless. If you want to throw in the largest percentage move intra-month, that's only 11.1%. Getting to $25 from here is a 15% move (25-21.70)/(21.70), so I really think you're getting paid more than a fair price to sell premium here.
• Earnings aren't until April so shouldn't be any upside surprises for March expiration. Stocks don't crash to the upside, a takeover rumor is my worst known fear here.

But let's be honest here, literally anything can happen and this is a trade that initially carries unlimited risk. The credit from a spread sale just wasn't attractive to me so I went with naked calls instead. If we take a run at $25 in a short quick manner then I would expect IV to increase even further, so I could roll out to another month and higher strike if I'm worried. If we continue to fail at resistance and pull back I will possibly either take the trade down early for a small profit in exchange for zero future risk, or limit and define my risk by purchasing the 26 strike calls and rolling in to a 25/26 call spread. I will also consider selling 19 strike puts again on a pullback which would mean I roll in to a 19/25 short strangle. If anyone has any questions or comments feel free to contact me.

2/22/11 Trade entry on put sale. Filled at 20.81 for .28

Updated Chart after selling puts. Break-even points are now essentially at 52-week Hi/Low levels. There are three possible resistance lines above current price, and three possible support lines below.

FEB 2011 Options Expiration Results

While I'm happy with the realized gains of $4800 for FEB, I'm also currently sitting on MTM losses of ($3018) that were from trades initiated this month. So things need to be kept in perspective. I'm also happy to be closing in on $100,000 of total gains since I abandoned the buy-and-hold mentality of long-term investing in exchange for active trading in late 2008. Even though the historical average monthly income of $3,100 per month during this time is currently barely enough to justify trading my account for a living, there is comfort in knowing that until recently I've been very conservative and haven't used even half of my available trading capital. You can actually see from my average monthly income chart below where I started out with a bang shorting the markets during the financial crisis, where I took my losses when I abandoned my legacy buy-and-hold positions, where I targeted $2,000 a month during 18-months of MBA school, and where my average has slowly been increasing since then as I decided to scale up a bit and actually attempt to trade for a living. The bottom line is I'm getting better, having fun, building my confidence, and have now proven to myself that I can be a consistently profitable trader. I'm going to continue to slowly scale up my trade size and reevaluate everything in June. If all is still going well then I'll probably be looking to go out and recruit capital and build for the long-term.

FEB 2011 Options Expiration Results

Current MTM Losses heading in to MAR 2011 Options Cycle

Updated Historical Trading Results

Average Monthly Profit Chart

Shorting ZB again

Below is the original trade post on 2/15, scroll down to "Trade Update" on 2/23.

After successfully shorting ZB numerous times during the recent 119-122 trading range, I wanted to take a break after it broke support near 119 to see how it acted. I had a rough target of 119'05 drawn that has historically been  major resistance over the last two years. And as you would expect it became support on the way down after the bond bubble burst. We've now stopped almost exactly on target three times over the last few days as it tests former support near 119. I'm still short 5 FEB ZB calls that expire on Friday so I can't get crazy with size here. But I am comfortable dipping a toe in and more than happy to short with larger size in the low 120's if we break 119 to the upside.

Though there are numerous forces pushing bond prices down in the medium and long run, there is also always short-term risk to the upside if equities finally roll over, the middle east comes unhinged, or any other random event that causes people to seek safety until they can figure out what's going on. That said, I expect the new range to be roughly 115-119 for a while and will trade accordingly. A look at the two year chart shows numerous support and resistance at these levels. The last time we broke 119 to the upside from below was the May 6 Flash Crash on our way to a Eurozone financial crisis that ultimately culminated in the bond bubble. So barring something significant new to the equation, I'm comfortably shorting near 119 until proven otherwise. If we break 119 in a significant or sustained way without new news, then I will have to admit my trading idea is wrong and then reevaluate.

5-Day Chart with entry point

3-Month Chart showing recent 119-122 range and maybe new resistance at 119

2-Year Chart (Multiple Technical Analysis points of reference here to trade from)

Trade Update 2/23/11:

Unfortunately I've taken my first loss on trading bonds. The basic technical analysis I've used and served me so well since October was trumped by geopolitics. The bond bubble and rising international interest rate story didn't disappear, but it is understandably being temporarily trumped by uncertainty. And to be fair bonds were oversold so a bounce isn't surprising. I can also argue that I didn't wait for confirmation of rejection at the 119 level and chose to dip a toe in early with one contract. A second error I made on this trade was assuming/wishing that I would be out of it by the time I had to roll the futures contract. In the last four months of trading bonds my average holding period was less than 3 days, so with 8 trading days left on the MAR contract at the time of trade initiation I wasn't worried about having to roll. Well that turned out to be a trade changer for me because the new front month contract (JUN) is 1'16 points lower than (MAR). At initiation I was more than happy to add to my short position on this trade, that's why my initial size was just one contract, but I'm not interested in adding to it at the current price of the front month contract. So what I did do was roll the one contract and sell some OTM calls at the 122 strike. So some lessons learned here but the bottom line is I booked a loss of ($2400) on the MAR contract and I'm now short the JUN at 119'24. If the new front month contract was similar than I would just consider this a roll out and only paying a few bucks in commissions to do so, but because of the price disparity this has to be viewed as one losing trade and initiation of another.

Trade entry and exit

 Prices of MAR and JUN contracts when I had to roll to the next month

Market Profile-->TOS Monkey Bars

It is not often that I find a new tool that I am super excited to add to my tool box. But recently TOS released what they refer to as Monkey Bars. Monkey bars are based off the principles of Market Profile, which was origanally developed by J. Peter Steedlmayer in the 1980's in conjunction with the Chicago board of trade. Back when futures were not global, market profile was a way to tag where prices went off in each 30 minutes of the day. In short they basically used letters for each period and by the end of the trading session you would have a distribution of prices for that trading session. But as the session went on you could start to see what Peter deemed the "fair price" or the mean that all the other trades would trade above and below, think of a normal distribution. The basic idea is that as the session developed you would be able to identify TPO's (time price opportunities) where unfair prices would become obvious, trades that were out of the value area (where 70% of the volume had gone off). And basically depending on your motives in the market you could take advantage of opportunities using Market Profile. Although market profile is not a trading system, its principles and visual representation are a great way to view the markets in my opinion and very intuitive. Before this I had been convinced that candle stick charts were the best way to view price action or the "auction process" until watching the brief demo of Monkey Bars the other day. I have started to read the 346 page PDF that is on the CME website for free on the original principles behind Market profile. You can find a brief explanation of market profile and the PDF at the following link: http://www.cmegroup.com/education/interactive/marketprofile/

 Now onto Monkey Bars. TOS and their genius programers developed their version of market profile based on the original concepts with some modifications to adjust for a market that is now open almost 24 hours a day. The original market profile used letters to distinguish a change in period, where monkey bars uses 0-9 and then a color coating scheme with 10 different colors. Lets take a look at a few basic Monkey bar charts the most closely resemble the original market profile concept.

Crude:

Chart specifics:
1) First trade of the session is highlighted with a orange rectangle.
2) Color represent the following trade sessions: Purple (After hours of main US session), Blue (Asian 
    Session), Pink or flesh color (European session), Grey and Yellow (US session).
3) The solid Yellowish bar represents the "Fair value" or mean. This is what TOS refers to as the Monkey
     bar as price likes to hang around this area. Also refered to as the point of control. Think mean reversion.
4) Highlighted grey/black section represents the value area. TOS refers to this section as the play ground.
    This is where 70% of the trades are taking placed based on volume.
5) Trades outside the value area are considered unfair.
6) The little Orange triangle represents where the last trade took place for that session.


 The above chart is 30 minute chart showing the last 5 sessions of the March crude contract. Now focusing on Fridays price action for a moment...notice how during the US session (grey) that period 6 and 7 were testing for a bottom around $85.10. Then period 8 shows us that the sellers have been exausted and crude begins to trade up as buyers come in to correct the "unfair price". Depending on your time frame this would had been a good place to buy with little risk to the downside. Now there is much more explanation for this but to much for me to explain in this posting. If you you want to know more, you will have to read up on this and/or attend the TOS seminars.

Monkey Bars Extended:

 Now this is where the genius of TOS really came in. They programed it so that if you wanted to you could see the market profile in the form of a bar chart while leaving the value area and point of control on the chart. Also what had never been done before is the ability to overlay studies like the volume study that I have in the above chart as well as all the other studies you might normally look at like moving averages, bollinger bands, etc.

 Take some time to compare the two charts, they have the same information, they are just laid out differently. For me studying the second chart allowed me to better understand and look at the first chart.

Anyways that is all the time I have right now to talk about this. But please feel free to ask questions or make comments. I just wanted to put this out there for anyone who may be interested. Like I mentioned at the begining of this post, I am very excited about this new tool. Yet I still have a lot to learn about it, but I feel like I have a pretty solid understanding of the basic principles behind market profile and therefore TOS monkey bars.

Good Luck Trading!!!

P.S.

Here is a great book you can check out to better understand monkey bars and the market profile:

VXX: Closing Out Naked Calls

On Monday 1/31 I was waiting to see how the markets opened and how they reacted to the weekend news in Egypt that riled the markets the previous Friday. If there was no initial follow through of fear then I was prepared to short the VXX via short calls. I picked a pretty far OTM strike in case I was wrong and gave myself some room. I sold to open the $40 strike calls at .42 and closed out today for .03. I captured 93% of the profit in 8 days so I decided the risk/reward of holding another 11 days for .03 made no sense. On to the next trade. It's a relatively small pick up with a net of $382 after commish, but risk was relatively low as well.

So you're thinking the market is a can't lose proposition ehh? Think again.

Turn on the TV, open the Paper let's party like it's 1999.

The Good and what's working now.

So here we are Feb 3rd 2011 and the market has continued it's crazy strange fed induced run. The big play has been to buy the dips and to be honest until this stops we continue to go up. I've been playing long call spreads on the several sectors, coal(JOYG, PUDA, WLT), chips(ARMH, TQNT, SWKS) and have been buying long term leaps on SLW and AGQ(3x index on silver). 

The metals:

I was dead on with the sell off in the silver/gold trade I wrote about back on the 1st of January and had you put on some short trades you would have made more money going down than going up. Now it's time to start getting back into the SLV and SLW trade. Do I think these will rocket up....no I think they go sideways to up as the weak hands have been shaken out and it's those of us that understand contrary to the publicly released CPI report by our beloved government that inflation is skyrocketing. Build a position in the SLW where there simple business model is pay no more than $4 an ounce for silver to all the miners that are mining other metals and well as long as silver stays above say $6 it's really a no brainer. 

The Chips:

I like QCOM here and if you can pick up INTC under 20 I like it with a long call leap spread. Also if you're into a little risk which I think we all are else we wouldn't trade options, take a look at MU. There business has been boring on DRAM but recently they've changed their business model and are now competing with SNDK in the exploding flash memory business. This stock is dirt cheap and the downside is practically nill since none of the analyst know how to grade this company yet on it's new business while DRAM prices go nowhere. This could be a 5 bagger in a few years for sure as the reports coming out say their flash memory is better technology than SNDK. If you are unfamiliar with flash memory then you should read up on this as every mobile device, phone, tablet etc uses these. I also like SNDK.

The Bad

Repeated from my last entry on Jan 1st....."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." 

I still feel the same way as repeated up above. I have been taking a longer term approach to the Chip sector with long call leap spreads but everything else I'm keeping tight call spreads against until the shakeout comes.

I repeat this thought again from my last post as nothing has changed, "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.

The Ugly

The situation in Egypt is only the beginning overseas as far as I'm concerned and will ultimately lead to more inflation thus the need to buy Oil, Gold and Silver. I like the AG stocks as well and am playing MOS for the fertilizer space but like CF, IPI and AGU as well. 

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. 

The REALLY UGLY:

Interest rates are on the rise and finished at a 10 month high yesterday to 4.64%. History says if the 30 year Treasury gets over 4.9% watch out below for the equity market. What this means is at that rate everyone that rushed into the market to buy long term bonds in the past year is now under water and this includes mom and pop that rushed in to buy these last August. This also includes China and Japan which bought and worst yet and you'[re going to love this our gold on United States of America Federal Reserve. 

Let me let you take that in for a moment and catch your breath. Yes folks while our government is running huge trillion dollar deficits your Federal Reserve was borrowing money through quantitative easing so it could buy treasuries. So now the Fed is losing money on the borrowed money. Sort of like taking a cash advance to go to Vegas or to play the ponies. You know you're going to lose it but figured its for entertainment. Well guess what this is your children and their children's future the Fed is gambling with here. Borrowing money to purchase bad investments is never a path to prosperity. 

Jobless claims fall down to 42k to 415k today and that's supposed to make us feel good. Give me a break most of America has been under snow for the past 2 weeks....who is going to get out and look for a job or file unemployment in a foot of snow. Don't believe these numbers. Yes the job market is getting a little better but we need to post 200k net new jobs every report just to keep up with population and graduation rate growth. We would need to do that for 3 years every month in order to get back to where we were in 2007. Don't believe the hype and think for yourself. 

The Market

I said back on Jan 1st, the following, "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."

This still stands today as we've passed 1300 and Dow 12000. These numbers mean nothing except the media will throw them all over the place, suck the last mom and pop into the market and then and I say again keep an eye on the 30 yr., the gauntlet will drop and hand all those late to the party their heads. Everyone is expecting a 5-7% drop but I have a feeling when this party starts people(mom and pop retail investor) will start buying at that 5% drop and we will go down from there as the smart money bets against the dumb money. I mean no disrespect to anyone in saying dumb money it's just those that follow the media are the herd and considered dumb money.

What to do and what to watch.

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.

1) Watch the 30 yr for that break above 4.9% thats your signal to get out of the equity market no matter what anyone tells you. History is on your side.

2) Keep an eye on overspill violence that might and could affect the passage of dry bulk items to Europe if the Suez Canal gets delayed or closed due to Middle East issues.

3) Keep an eye on oil, it could explode to 120 a barrel if number 2 happens. 

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