Tuesday, June 30, 2009

Fisted By PALM

Even with the contraction of IV on the short palm position(20% contraction day after earnings) my closest strike of 15 ended up significantly in the money. This was an extremely frustrating day, the stock pulled back which I waited for and expected and I entered my order at 14.90, which was the exact low for the day. I was apparently 20 seconds too late as I never got filled on my limit and the stock basically rebounded and went up all day long. In hindsight, the best thing to do would have been to sell a strangle choosing a decent range I think the stock will stay between so I can have more of a hedge in case of an extreme move.

I was asked why I would have taken any position at all ahead of such a significant announcement. The reason is because I have the IV contraction on my side helping limit a loss and I essentially have a 75% of making money. There are 5 scenarios that can essentially can take place after earnings. Palm goes up a little, goes down a little, does nothing, goes down a lot or goes up a lot. On 4/5 of those scenarios I should lose very little and likely make money. Unfortunately for me this time it did what hurt the most; go up a lot. Selling a strangle would have been better because I have IV contraction working in my favor on both positions and money lost in one direction would be more offset by the money gained from the opposing short position. The interesting thing to note is that I used to go long options ahead of earnings, which now seems fairly stupid to me because you essentially only have that 1/5 chance of making money because as a long you have so much working against you.

Palm sold back off a bit yesterday so I took the opportunity to close my ITM position at a loss, which was better than two days ago but not as good as if I had been filled when I wanted to originally. Oh well, I have learned something new and must move on and be glad I am out of my loss. I am holding my further OTM short call positions since they still have a decent chance of finishing for a profit and it will help make up the loss, I'll essentially break even. If it continues to strengthen I'll look to close those as well. This was another scenario where I took too large of a loss, which is exactly what I don't want to do and can't do if I want to keep going. I have been on kind of a bad streak lately so I am trying to be patient but it is also making me a little timid in taking more risk. I am over 30% off my highs which I don't like, I'd rather keep my drawdown to a minimum.

Total Return for 2009: 134%

Thursday, June 25, 2009

This Will Hurt

An overall confusing day, jobless numbers are worse than expected yet we rally? PALM issues no guidance besides a break even cash flow mid 2010, no sales figures and the stock rallies 15% afterhours?

The overall markte move was likely due to year end positioning. The palm dilemma is more concerning, it was a better than expected quarter but the company is by no means profitable or even doing that well. Apparently the market is discounting a profit for 2011... Either way one of my OTM positions will now be ITM and I will be suffering a nice loss depending on how much volatility contracts tomorrow. This will also signal an all time high for the year and I think for the past two years. I will attempt to exit at an opportune time tomorrow on a pull back. If for some reason it pulls back significantly below 15 I may let the day unfold and see where it goes but for right now a pull back to 15 would be a welcome event. Up 300% and still people are piling in, that is fairly strong and hard to argue with. My other OTM positions will be held unless I feel they are in danger as well. Too bad I didn't go with my original idea of selling a strangle, oh well. Always next time.

Total Return for 2009: 147%

Wednesday, June 24, 2009

What's Next?

So after my last post, that Friday I took a position for a snap back rally as a day trade buying calls on the SPY. I was looking for a move up to about 92.30. I sat in the position as it flucuated between a gain and loss for a while. It moved up looking to break out but got rejected at the 91.70 level all the way back down to 91.50 fairly hard. This once again moved me from a profit to a loss and it looked like it was breaking down, so I exited not wanting to take more losses after yesterday's loss. Of course, literally 2 mins later it reverses higher and breaks out just like I was expecting and runs the entire move I wanted in probably 10 mins. I would have made up my entire days loss yesterday with that trade. After that happened I decided to not look at my computer anymore because I would have broken it. That is the most frustrating thing, It was good to not take a loss but my emotion from losing yesterday made me cut the loss too fast and not allow it time to work out.

Moving on to this week, I avoided the large down day on Monday being flat. Many stocks broke their trends on monday and we finished below 900 on the S&P. Only a couple finished at their support levels but I was not brave enough to go long as it seems like this could be a turning point in the markets with some further downside. I don't think we retest the lows by any means, but I can't say for sure obviously. I think We likely get to 875 and possibly 850, hopefully stabilize and then move higher from there. Many stocks have already taken 30% haircuts from their highs so they have to look decently attractive to the Bulls.

I only have one position and it is short OTM calls on PALM. Not that I dislike palm, I just feel that there is an edge to selling calls ahead of earnings vs. owning them or doing nothing. The expected volatility was 119% 2 days ago, now it is 110%. I am currently break even on the position. The stock has run from 3 dollars to 15 dollars at it's high. Obviously people can stay irrational longer than I can hold a loss but that seems excessive and I feel favors a sell the news type event. Analysts are still expecting a loss of .74 next year which is good in terms of growth being less negative but still not a "healthy" company. We will see what happens after they report on the 25th, I chose my positions so that if they become in the money it will signal a new high which would point to more upside and an exit for me. Again, after such a huge run another 20-40% move is possible but seems less likely especially if sentiment is turning.

Durable goods just came in better than expected by quite a bit which has sent futures up to the 900 level. I think this is a time where shorting could be difficult because of the constant expectation of recovery at some point and we may not get consistent bearish data enough to really knock the market down. I would prefer a pull back to 850 then get long for an intermediate term basis. The only thing that may help bring things back to reasonable levels is if earnings are not as good as expected so people won't pay as high of mulitples as before. We shall see though.

Total Return for 2009: 148%

Thursday, June 18, 2009

Opposite Day

Apparently my account thought it should fall apart yesterday and go in the opposite directions I want. I feel like yesterday was the options expiration shenanigans we normally see because as we were breaking below 900 the VIX was down, people were likely bailing out of their calls(like me) and the market makers were buying them back and making a killing.

Absolutely nothing worked yesterday, when we were flat, all my calls were down and all my puts were up. I basically got frustrated and threw in the towel because obviously my positions were not working and at the time it looked like we could continue downward and I didn't want to lose more money. Of course I got out, after the first hour as I tried to let the BS subside but even having a bit of patience I was the one capitulating only to see things reverse as I was hoping they might to begin with.

In the end my exit earlier in the day didn't really matter as I calculated it saved me a whole 20 dollars instead of selling at the close. The reason I feel like it is partial manipulation is you saw most stocks break below support and then finish back at them. If I had hard stops on all my positions I essentially would have been taken out of all my longs and stayed in my puts only to see them lose money too. By exiting everything I basically locked in my put gains and call losses so I had no more exposure. I have seen my account slide 20% over the past couple weeks so something is not right. I will step back and wait until next week to initiate some new positions that present themselves and look to take a day trade or two with front month contracts if things look good.

I discovered again that I seem to be off at trading FOREX which is odd cause it should be like any other trading vehicle, it is essentially just that I have less confidence doing it. I traded the AUD/USD, hopped in only to see it break down to new lows, so when it makes a new low(and at that point was breaking support on a long term chart) I cut my loss being disciplined only again to see it completely reverse higher by days end. There will be more opportunities but I seem to be a little too impatient with currency right now.

The problem with stopping out of my positions that technically held support so far is that I still like them long term so the dilemma comes as to when should I get back in? The good news is that this now allows me to roll my contracts to some longer dated paper. I just need patience, that will solve my problems.

Total Return for 2009: 148%

Tuesday, June 16, 2009

Slow Bleed

A snapback rally did not materialize today as we had some weak data come out that kept the sell off going. The S&P probed down to 906 before finishing at 912. WFR continues to confuse and piss me off. It trades strong yesterday then falls apart today and was definitely the relative weakness position today but finished at support so I haven't cut it loose yet. I did get rid of ANR and put in an order to sell my DSX calls as well but did not get filled. My puts on RTH and XLY worked out nicely today and helped offset the WFR move. Overall I ended down slightly over 1%, essentially in line with the S&P. I would rather be making money even on down days but I'll take some small losses over large ones.

Short term we are starting to get oversold with the McClellan Oscillator at -80, the most extreme reading was -120 back in March. The ideal situation in my opinion would be a gap down tomorrow at the open that I can buy into because we will gap down and hit that oversold level likely triggering some buy programs. I also think that there will be some buying to help volatility collapse back down going into expiration and helping all the puts that were likely sold recently lose value. I am sure we won't gap down because that is what I would like and likely others would like so we'll prob gap up.

The 900 level will likely serve as a support level for the S&P as it is a round number and most will be watching it. I will possibly look to take a day trade or two tomorrow depending on how the day feels. If we rally significantly I will then look to take off some more of my long positions assuming we finish under 930. If we gap down I will look to take off some put positions in hopes of the snap back. Overall I feel like I've been inefficient lately and my positions have been out of sync and that can be seen in the losses as of late and obviously from my long bias. Of course I can't be too hard on myself since we just broke down but I was a little loose with my stops which is never a good idea.

There haven't been a massive amount of breakdowns occuring on an individual chart basis but the financials and some others are definitely showing some weakness here. This could be the larger pull back everyone wants but it will all depend on if we continue to get bearish data. All I know is I don't want to see my account deteriorate much further.

Total Return for 2009: 153%

Monday, June 15, 2009

Down We Go

Friday was one of those very annoying days where initially almost all my positions were working. My puts were making money and my calls were making money or had smaller losses. I walk away thinking I don't need to really monitor things and hope to come back to more profits but instead I come back and all my profits are gone and I have decent losses in their place. This can happen when you have diversified and therefore somewhat uncorrelated positions. Generally you want your relative strength and weakness candidates to work in your favor but it can't always be the case.

Today I would consider more positive, in that I managed to have a small loss on a fairly large down day. Usually the leverage afforded by options can cut both ways so up moves and down moves are multiples of the index. Today I actually had only slightly more than a 1% loss with the S&P down over 2%. This is how I'd like things to work all the time while being long biased. My WFR position actually made money which I found very surprising given that oil was pulling back and materials stocks were getting hammered. Hopefully if we see a bounce tomorrow WFR will be an outperformer. That divergence allowed my put positions to help equal out my other long positions. ANR is currently stuck in a range from 27-30 and CHK is stuck between 22-25. Natural Gas actually had a huge day which I am hoping will be bullish for CHK which has been my thesis all along. As soon as we start to get an uptick in NG I am hoping the linked equities will catch a significant bid.

On a broader perspective, we finally broke that channel of prices from 930-950 on the S&P and we got that large down move I was talking about. This means that if we rally from here it will be smart to lighten long positions or get into lower risk short positions. Until we break back above 930, the direction seems to be downwards. I am really wondering how low we can actually go as I have said before that there are a lot of people now waiting to get in that didn't initally so it may be hard to break below 900.

For the first time this year I have moved money back into my FOREX account as it looks like there could be some significant outperformance in those areas compared to equities in the short term and possibly longer term. The problem I face is not getting over leveraged one way because a weak dollar/recovering economy will lend a bid to commodities, materials and currencies so being long the Euro is essentially the same as being long oil and commodities. Ultimately though I honestly think the biggest outperformance will be in these areas and in the longer term the risk of losing money is very slim. Once we actually do see the economy recover, real demand will come back, along with inflation so you have two factors working in your favor rather than against you.

At that point we must be mindful of where the turn comes of what is bullish and what is bearish. Just like before oil at 100 was bullish until it started to get to 120 and then it started to be bad for stocks. The same could become true with equities and interest rates and further down the line equities and oil again. At this point I know the apparent short term direction but nothing is really hitting me like "this is easy money". I feel like the dry shippers are really lagging the Baltic Index but obviously if people don't agree with me then there isn't an inefficieny to exploit. Those too will likely depend on actual recovery in the global economy for a sustained move but once it gets going it could be a great trend to ride.

Total Return for 2009: 154%

Thursday, June 11, 2009

Rejected Again

The S&P once again tested the 950 level and could not break much above it let alone finish above it. This is the third time this has happened. I have heard the opinion that 950 on the S&P has no real significance in terms of technicals and here is my take on it:

What creates support and resistance levels to begin with? Psychology of the market place creating excess supply or excess demand at levels it deems appropriate. We should know by now that people like round numbers and gravitate towards them, it happens on an intraday one minute time frame as well as broad market. Is there any reason 950 should serve as resistance? Not necessarily, but if people pay attention to it, then it matters. It is the same reason fibonacci lines sometimes work. There is no reason in my mind for fibonacci's to work other than once people pay attention to them they become a self fulfilling prophecy (general trading rules may play a role as well but that's a story for a different day). So, 950 could be a target for longs to sell, a target for shorts to sell, a level where fundamentals are now suddenly not inline with prices and P/E's are too expensive. I don't really care the reason, all I notice is that the price action around that level is being paid attention to. The other interesting thing is that we have been in a range from 930 to 950 for almost a week now, which generally means a break is coming in one direction or the other and once it does it could be a big move in a single day and determine our direction for the next couple weeks. If we break to the upside I'll scale out of the puts and get a little longer, if we break down I'll get bearish biased for the time being.

There was an odd divergence today with Solar stocks lagging as oil was hitting new highs which has me concerned about my WFR position but also the energy/commodities plays in general. My guess is we hit a temporary top in oil at 75 dollars which could be a head wind for materials and energy. Natural gas finally had a lower than expected build and I would like to see that continue and that could be the next good trend to ride. WFR was the only real laggard today which kept my account down. I did notice Visa appearing to break its uptrend finally after a false break out which could be a good put opportunity. Since the market remains unconvinced on a direction so do I and I will continue to sit on my hands until it makes up its mind.

With a week left until expiration I may look to sell some premium going into the weekend depending on what happens on Friday. My only short option position on NVAX is annoying because it is traded by largely uneducated speculators in my opinion which means as unrealistic as I thought hitting 5 dollars was when it was 1.80, it just may happen.

Total Return for 2009: 158%

Wednesday, June 10, 2009

Progress Resumes

The past couple days have been positive in terms of account appreciation and getting back on track position wise. On tuesday, oil and consequently the USO was acting fairly strong and I had already seen my puts on the USO turn from a decent profit to a small loss on the gap overnight so I decided to cut those loose and keep it at a small loss. That proved to be a smart play because not only did it finish higher yesterday but also moved much higher today as well.

Again I saw an annoying side effect of owning options, volatility decay. The RTH and XLY were down most of yesterday yet my puts lost money thanks to the drop in the implied volatility. Tuesday I had mostly mixed winners and losers except for one big winner which made up for the rest, which is exactly what I want to see if I can't get a better directional move. The same thing happened today with a slightly smaller winner making up for mostly a lack of direction.

I am positioned long commodities essentially and short retail, however I am starting to get slightly concerned with the overall market. I have been thinking we would go down for a while now but have acted bullish lately, especially oil. However, the SPX has gapped up or gone above 950 now twice and been rejected quickly both times. If we test it a third time and don't break it I think it points to downside. The catalyst I think will be the elevated 10 year rates becoming a head wind to equities along with higher oil and gas prices temporarily slowing their consumption(although we have yet to see that). I will stay bullished bias until things change, we have some important data coming out tomorrow with retail sales and jobless claims. My RTH put position could put a hurt on me if things come out better than expected but hopefully jobless claims will be tame as well and my other positions will make up for it as has been the case the past couple days. Slowly but surely I am trying to climb back to old levels to make new highs I just have to be patient and smart.

Total Return for 2009: 156%

Monday, June 8, 2009

Failed Breakout

So since I have last posted I finally took my Level 1 CFA exam and have that out of the way, and while I feel better than last time I still don't feel great about it which is annoying and now it's a waiting game.

In hindsight the best thing to do after I essentially sold all of my positions was to stay in cash for the last week before the test. When we had the opportunity to sell off and didn't I took this as a bullish sign and decided to get back into some long positions in anticipation of the next leg upward above 950 towards 975 and likely the 1000 level. I basically got in a day too early, ALL of the positions I got into came down to much lower risk support levels and entry points. Obviously I can't predict this but patience would have served me well. Balance would have served me better as well because it was the first time I have been completely long with no offsetting hedges which made the moves much more painful. This is exactly the position I don't want to get into where I have large down moves and smaller up moves, you want the opposite to be true. Obviously I can recover from this, it hurts mentally more than monetarily but again I seem to have a hard time getting away from a certain level in my account. It could just be coincidence but since we have essentially done nothing for the past month and I haven't seen my account do much either that likely forced me to be impatient and take risk at a bad time. I have since offset my calls with puts and am still long biased but today they weren't much help.

I still feel that the market is overall wanting to move higher because we have the psychology of the market in that direction. Those who trade trends are thinking that they should buy dips until it breaks and with a seeming majority eventually expecting a recovery people don't want to be late to the party especially if they are already 30% late. In reality there are some signs of stabilization and the jobless claims number was much better than expected even though unemployment is already close to the projected high for the whole year and we are only half way through. The odd and frustrating disconnect in one position in particular are the dry bulk shippers. The baltic dry index is at new highs, significantly higher than a month ago, yet the dry shippers are not at new highs. I was hoping to exploit this inefficiency for a gain but it has gone in the opposite direction so far.

The ending result was I had a breakout in my account to new high returns of 169% but have since fallen back down to 150%. That is too much volatility for my liking. I used to like seeing large moves but realistically making steady upward progress is much better and suffering large drawdowns is not the way to do that. The market still seems to be unsure on which way it wants to go. Now that I can once again devote my full attention to the market I will look to regain my performance using the same strategies that have worked all year. Position sizing, balance and patience.

Total Return for 2009: 150%