New Futures trade in RBOB

I have been pretty bearish on equities and oil related commodities for the past two weeks. The markets have seen a sizable pull with SPY testing 113 on 8/9 only to be rejected to trade lower, hitting an intra day low of 104.97, that is about a 7% move. The important level that people were watching for was the 104.5 to 105 level on the SPY. Once this level breaks the June low of 101.13 is game on. But today the market voted with its wallet and said it was not ready for this move just yet. I think the market has to digest this latest move before moving lower. The market is a bit oversold by my observation.

Trading in lockstep and even suffering steeper losses were Crude and RBOB. Crude has traded down 12 out of the last 14 sessions and RBOB down 12 of the last 15 sessions. Again I am sensing some overbought conditions. Although I remain bearish on most asset classes in the medium term, short term I am ready to take a low risk high reward trade to the upside in RBOB.

Being that I am playing a bit with fire, I am going to keep a tight stop on this one. In today's regular session RBOB traded as low as 1.8010 which in previous analysis I have identified as a potential support level due to the volume clustered around this price and the fact this level was supported in the last half of 2009. It is not a huge level, but I think coupled with the oversold conditions the setup looks good.

So today I bought 5 Oct RBOB contracts at 1.8145 and put in a GTC sell order at 1.7950 As you can see on the chart above I think there is a good chance that RBOB trades back up to around 1.885 where it gapped down from. I am risking 2cts to make 7cts. But the trade is not as simple as that.

In addition to the stop loss order I have out their I also placed another GTC order to sell 2 contracts at 183.50. At this point if these two contracts get taken I will move my stop up to break even on the remaining 3 contracts from 1.7950 to 1.8150. At the same time as moving up my stop loss to break even I will put in another order to sell the remaining 3 contracts at 1.8850.

Seeing as this contract trades in a multiple of 42,000 gallons per contract, if everything goes as planned I am looking to make a maximum $1,680 on the first two contracts and $8,820 on the other three for a total of $10,500. My risk is about 2cts a contract for a max loss of $4,200.

Risk/Reward :    1/2.5

First Trade in New Job!

Yesterday marked my first day of trading in the new position. For my first trade I sold an Iron Condor on RBOB

I sold 31.96/2.00/1.80/1.76 October Iron Condors. These options expire on 9-27-10, leaving about 35 days to expiration. I collected .0215 from the sale. The multiplier on the RBOB contract is 42,000 gallons. So I collected a total of $2,709 on a risk of $5,040, or 54% on risk.

I profit on this trade in the range of 1.7785-1.9815, a 20ct range.

I will keep you posted.

Gamma...Summarized!

Here is the 2nd of 4 series on the Greeks from Dan Passarelli's book:

Gamma is the second derivative of price or put another way is the first derivative of delta. It is the rate of change in delta for every $1 move in the price of the underlying.

Delta summarized

I am reading through Dan Passarelli's book for a second time now. I feel like I have a good understanding of the Greeks, but I want to internalize them and will do this in a series of posts. Below is visual diagram that I put together to help internalize Delta and how it changes in relation to time, volatility, and price.

This is the best and most effective visual that I can come up for the way my brain processes information. I want to have this diagram ingrained in my head like I do for the different strategies. Look for future posts in the coming weeks on Gamma, Theat, and Vega.

AUG OPEX Trading Results

This month's negatives are that I made one mistake that cost me $35, and was impatient and deviated from another trade for no apparent reason other than I was skittish that day. But I also ended up overall positive this month instead of negative because I didn't panic and close out my trades when the market moved against me, which is something I've done in the past. So, psychological victory along with monetary victory is good. I attribute the ability to sit on losing trades without panic to a combination of small position size, defined risk, and conviction in my initial trade ideas. Last month I felt I over traded and ended up losing money. This month I was really hands off and ended up doing well given the amount of risk taken. $1666 doesn't pay the bills, but I'm building towards a long-term goal which is to get consistent and confident, which will allow me to scale my plays up to a point where trading profits will cover the bills.

8-20-2010 Futures Techical Update!

Today is options expiration and as we left it yesterday we noted that there tends to be a postive slant in prices, but we did not say why. Markets tend to trade up on equity option expiration due to arbitrage funds covering short equity positions (i.e buying stock) as they close out their option hedges and roll to the next month. This does not however change my bearish stance as one day means nothing. All week I have been sending out updates and price targets to the downside with the wishy washy exception of /HO, which has the potential to be added to the bearish camp today.

Before I go into the futures update I want to talk about market themes and what drives prices. If we take a look back at the rally off of the March 2009 lows we will recall that it was all about the dollar, meaning if you could figure out what the dollar was doing you could figure out what equities and commodoties were going to do. The relationship was inverse to each other, we new if the dollar was down that equities and commodoties were going to trade up and vice a versa.

Then if you recall back a few month ago it was all about the Euro. This one did not last quite as long as the dollar theme but nonetheless it controlled market moves. Currently driving the market are bonds. Everywhere you turn people are talking about bonds. Here is what you need to know about bonds, they have an inverse relationship to equites (bonds go up equities go down). Just to give you an idea of how this relationship has played out equities put in their highs in April of this year and have since been selling off, while bonds but in their low in April and have since traded higher (see chart below).

TLT ETF (Tracks 20 year treasuries)

In my opinion bonds have moved ahead of equities and are indicating a bigger sell off to come. With further downside in equities and the strong correlation they have had with the oil complex this spells lower prices to come. This continued rally in bonds tells me that there is still fear and uncertainty in the market.

Now lets take a look at futures.

/RBOB

In the begining of the we identified the resistance level of 196-1.97 that has held and has been confirmed to resisitance. The trend is down and we have a current downside target around 1.81, based on its current projectory we could see this level as soon as Sep 1st. The smart trade here is short. I would look to get short between 1.94-1.96 using a stop of 1.97. This trade offers a nice risk reward of around 1-3 cts of risk for 11-13 cts of reward.

/HO

HO is currently traded below the 1.99 support level that we identified earlier in the week. As the rest of the market turns I am ready to through this one into the bearish basket with the rest of the junk. I think the higher probability and higher reward trade is on the downside here with 1.90 being the downside target.

/CL

 $76.6 ish is the new resistance level and 72.50 is still the downside target on Crude. We will reavaluate this one once we hit this target or market complexion changes.

What's driving the screen?

Asian and European markets have all sold off after the weak job numbers that were reported in the U.S yesterday. Domestic markets are off about 0.50%. This morning we are seeing some follow through selling from yesterdays sell off, but the day is still young. Futures are down across the board.

It is a light news day and the only catalyst to the upside is that it is options expiration day. But as it looks right now markets are poised to close lower by days end.

Overall risk is to the downside and shorts have a favorable risk/reward vs longs, but you have to pick you entries.

Its always Bonds, Bonds, Bonds...

Everyone is talking about bonds, what does this mean. Do bonds conintue higher? I continually think back the the presentation that Tom Sosnoff gave in June about contrarian thinking. As you all know I tried the short bond trade back in June but I decided that this trade was early. Since then the TLT which is an ETF that tracks 20 year treasury bonds as rallyed quiet a bit. Today it hit a high of 106.61.

Although I think the bigger money is going to be made on the short side of this trade, I do realize that this trade long has momentum behind it. But anyways I decided to go back and find the original post that I did on this idea back in June --> Prior TLT Post

In the prior post I put a chart together showing the historical for the 20 year rate over the last few years. At its low in 2008 the 20 year rate hit 2.86% today it closed at 3.66%. If you go to the Prior post and scroll down to the comment section you will notice that when I first posted this analysis the 20 year had a 4.05% rate and the ETF was trading somewhere around $97.50. In my analysis I looked at the average move in the move in the etf as a multiple of the move in the rate in absolute terms. What I found was that on average the etf moves 13 times that of the interest rate. On one of my comments on the original post I noted that based on this finding if we were to test the low rates reached in 2008 that this would put the value of the TLT at around $120. Based on the fact that we have about 80 basis points to go, using the same methodology that leaves us with a target to the upside of around 117.25 assuming we see 2.86% again.

A few posts ago I wanted to sell the 100/98 put spreads, essentially getting long but unfortetly this trade slipped through my fingers when TLT had a pretty monstoris move followed by yet another monsterous move. The closer we get to 117 the more I favor the opposite or contrarian play. I think the old saying is "the bigger they are the harder they fall", this trade seems to be getting a bit crowded and parabolic but I still don't think it is ready yet. I am going to be watching this one closely. Only I will probably favor options on the TBT as it is a double inverse of TLT.

Not sure when I will execute and how I will make the trade, but I am interested more and more each day this trades up. I don't think it stops going up until after September expiration as I think a fall in equities in the short term can give just enough juice to the upside.

I will be hawking this one!