OptionPundit

Category: Option Trading

  • OPNewsletter Oct’09 +11.3%, Nov’09 +5.4% (Open)

    Another excellent month for OPNewsletter. Oct’09 was 19th positive month out of past 20 months since I re-opened OPNewsletter in Jan 2008; a period that includes what is termed as one of the most fearsome bear markets of all time. All the 5 portfolios made money. Overall, we invested a maximum of 88.7% of capital and our gains were +11.3% (x-commission) and +9.48% including commissions. One of the highlight for this month was another profitable month for RUT Iron Condor (OPNewsletter hasn’t lost a single RUT Iron Condor since its re-opening in Jan’08). The Oct’09 portfolio included a mix of option trading strategies e.g. Iron Condor, Calendars, Double Diagonal, Credit spreads, etc.

    Nov’09 is off to a good start. We opened 3 portfolios, invested 63.37% of assumed 10K portfolio. As of Friday close, with a maximum investment of +63.37% and we are up +5.5% x-commissions and +4.4% including commissions. Details of key portfolio, action plans can be found on member’s only section of the OPNewseletter forum.

    The above result doesn’t include results from speculative trades.

    If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the waitlist as OPNewsletter subscription is open via invitation only.

    Profitable Trading, OP

  • OPNewsletter (Oct’09) Up +9.5%

    88.7% capital invested, no major adjustment needed, all but one portfolios made money and closed, 1 portfolio still open (down -2.9%), OPNewsletter delivered +9.58% x -commissions and +7.8% including commissions. As good as it gets. We are starting to look out and analyze opportunities for November 2009 income portfolio. If you are not an OPNewsletter member and would like to join, pls sign-up for the waitlist here.

    These results don’t include returns from speculative trades i.e. bonus alerts.  I shared trade ideas on GOOG and GLD. While GOOG trade required adjustment as GOOG quickly bounced from 480s  (I didn’t close the trade), GLD trade is working excellent.

    Gold is decidedly above $1,000 while USD is continuing to weaken.  For the stock markets, while a debate is going on between the Bulls and Bears, there don’t seem to be a clear technical sign for any major top. Personally, I don’t belong to the Bulls camp but I am not short this market either.

    Looking forward to an action packed earning’s week. I am likely to play a few counters for earning related moves. Stay in touch.

    Profitable Trading, OP

  • How to Play Gold, Market Crash

    Since I last shared BYDDF, the stock is up +40%. After a sharp run in a very short span, it is now overbought and may take a breather around $7.5-$7.7 level ($6.3 if the pause is a bit more stretched) before a new surge begins.

    What if there is a market crash? as we are approaching October, this subject is becoming more and more glamorous. If you want to play this low probability event, remember to check out SPX and VIX trade idea (Free). Pls note those trades are “what if” trades meant for a bearish scenario, these are currently losing money as market continues to advance. Those trades are now selling for almost half the price vs. when I opened those (I still own those). In fact similar trades or better ones can now be opened for a better price.

    The other story of the past week is GOLD. It has been a week since gold crossed key $1,000 mark and it has managed to stay above $1,000. We’ll find out next week if $1,000 will be new support level for the major bull leg or is it going to be a new market top which might coincide with a US$ strength triggering a market meltdown.

    Here is an idea on how to play GOLD’s move via GLD, an ETF by SPDR gold trust .

    Before you proceed to read the trade, pls note this trade is for the Gold Bulls (but not a very aggressive one). If you are bearish on Gold then DON’T follow this trade.

    Option Trading Strategy – An OOM Iron Fly coupled with an ATM Calendar spread. This allows benefits of a cheap OOM fly (up move) and Calendar (range bound action).

    Specifics for the trade-

    1. Sell to open a GLD 105/110 Oct Bear Call spread AND 105/100 Bull Put spread (This is similar to a 100/105/100 butterfly). I like to get credit upfront and hence opening Iron Fly. This Iron Fly can be done for $4.24 credit, as of Friday close.
    2. Buy to open a GLD Oct/Dec 100 Put Calendar
    An Speculative Trade for Gold
    A Speculative Trade for Gold

    For this trade to make money, GLD has to stay above $98.28 by Oct expiration and IV to not fall significantly as otherwise Calendar will be losing money. If however, by Oct expiration GLD stays anywhere around $105, the trade has potential to yield above 50%.

    Analysts are divided on Gold’s prices. Currently there are as many bears as bulls. One group thinks that gold is forming a major top and another group thinks that $1,000 will soon be the floor for gold’s major upward move. I belong to the 2nd one with one exceptional scenario and that is, a short squeeze on US$. As US$ has now replaced JPY as favorite for carry trade, almost whole world is bearish on USD. What if USD strengthen? there will be a short covering driving a hard squeeze on US$.

    Whether or not it can stay above $1,000 it is yet to be seen. And hence I chose that level as my lower break even. Due to unpredictability, I also termed this trade as “speculative trade”. If you do decide to follow this trade, pls ensure that you spend only the money you are willing to lose. As a general risk/money management guideline, I shall not invest more than 1-2% of capital in a single speculative trade.

    Interesting week ahead.

    Profitable Trading, OP

  • OPNewsletter Sep’09 +11.75%, Oct’09 (Opening Soon)

    83% capital invested, no major adjustment needed, almost 1/3 the number of contracts vs previous month, all the portfolios made money, OPNewsletter delivered +11.75% x -commissions and +10.43% including commissions. As good as it gets. We are starting to look out and analyze opportunities for October 2009 income portfolio. If you are not an OPNewsletter member and would like to join, pls sign-up for the waitlist here.

    Another free trade idea (BYDDF) is up over +25% since I posted here.

    A lot is going in the markets these days, but above all, I think a worth watching action is that of GOLD. Yesterday it crossed above 1,000 mark just to close below that level. Well, somehow, someone doesn’t want it above $1,000. Even though Dec’09 futures traded as high as $1009.7, it closed below $1,000 at $997.

    Dollar broke the support at $77.5 (USD index) to close at $77.26, not too far off though. It will be interesting to see how far it has to go before it reaches it earlier bottom support $71-72 area especially when reserve currency status is on shaky grounds. Read more- UN wants a new global currency.

    UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises.

    It added that the present system, under which the dollar acts as the world’s reserve currency , should be subject to a wholesale reconsideration.

    I think next few weeks are going to be interesting especially this upcoming earning season has to deliver. It’s time to see whether or not the “green shoots” have grown bigger or did it turn into “Yellow weeds”; the economy has to prove this particularly if the “six month” hypothesis has any truth to it (that markets turns higher 6 months earlier than broader economy does).

    An interesting period ahead.

    Profitable Trading, OP

  • The “New Normal” vs. “V-Shape” Recovery

    There are two contrary view points in the markets these days. One talks about “new Normal” where the GDP growths will be more of 2% or less vs. 5% as was used in most of the macro or micro economic models of the past. The “New Normal” term was coined by Mohamad El-Erian of PIMCO where his shared that unemployment and record wealth destruction will keep growth at 2 percent or less for years (You may read more here)

    The New Normal by Mohd El-Erian
    The New Normal by Mohd El-Erian

    Here is what Bill Gross shares as investment conclusion for the coming years in his latest outlook titled “Investment Potions”-

    “ A 3% nominal GDP “new normal” means lower profit growth, permanently higher unemployment, capped consumer spending growth rates and an increasing involvement of the government sector, which substantially changes the character of the American capitalistic model. High risk bonds, commercial real estate, and even lower quality municipal bonds may suffer more than cyclical defaults if not government supported. Stock P/Es will rest at lower historical norms, and higher stock prices will ultimately depend on tangible earnings growth in the form of increased dividends, not green shoots hope. An investor should remember that a journey to 3% nominal GDP means default/haircuts for assets on the upper end of the risk spectrum, as well as extremely low yielding returns for government and government-guaranteed assets at the bottom end. There is no investment potion for this new environment other than steady income-producing bond and equity investments in companies with strong balance sheets and high dividend yields, as well as selectively chosen emerging market commitments where nominal GDP growth prospects are tilted upward as opposed to gravitating to new lower norms. Madame Rue has met her match.”

    Which essentially means that we are to observe slow growth period ahead. John Hussman also think similar ways. In his latest report “Growth in “potential GDP” shows limited potential”.

    However, then there are bullish arguments who argues that instead of a so-called New Normal of subdued growth, the U.S. may be heading for a robust recovery. The worst recession since the 1930s has created a reservoir of demand that will buoy the economy, say a growing number of economists led by James Glassman at JPMorgan Chase & Co., former Federal Reserve Governor Laurence Meyer and Stephen Stanley at RBS Securities Inc.

    By reading newspapers or magazines one can make case of either one. Whatever be the case, that will be proven only in the “hindsight”. However, one thing looks highly probable, economy has to show progress by delivering hard facts else the path of least resistance is down. I think a lot of good news has already been factored into the 50% advance we have seen since March lows.

    As I shared earlier, “Bull or Bear” market is always in the hindsight. And therefore “I would rather change my opinion than to lose money”. Being cautious is fine but don’t make it a matter of ego.  Mr. Market has humbled many time and again since “trading/Investing” began. What’s more important is whether or not you made money (hindsight) in the “move forward” which you needed to decide in “real-time”…and it keeps on repeating.

    On Aug 6th, I suggested to look out for 9,425-9,450 level for Dow. It has been trying to make a push to go past, but it hasn’t been able to close above that level yet .

    We have started opening the September portfolio for OPNewsletter and we are well positioned for either direction. If you would like to join OPNewsletter, pls click here to sign-up for the waitlist.

    Trade carefully, Trade Profitably

  • OPNewsletter (Jul’09) + 2.64% (Open)

    DJI Market techincals Jun 28 09Overall an interesting week that it was, but I think there is more to come. On a weekly basis, it appears as if MACD and RSI are about to register sell signals. Mr. Market can go whichever direction it wants to, but hey, at the end of the day, this is all about probability. And as I interpret the current market data, the probability of markets going lower are higher vs probability of its rallying higher. Oh well, maybe that I am the only one still standing and claiming that it is bear market rally. The jury is still out there and soon we shall know what lies ahead as companies starts to announce earnings, and window dressing comes to a completion. Hedge funds who participated since March lows are up and probably have booked bonuses for the year.

    For overall OPNewsletter, we increased investment from 38.7% to 43.3% (for an assumed 10K capital). We are up +2.64% x-commissions and +0.68% including commissions. I usually aim for +60% capital deployment but overriding philosophy here is “preservation of capital is more important than missing a potential investment opportunity”. According to Lowry’s statistics, as I interpret, in spite of a very little change in the Friday close, the markets internals almost gave back whatever it gained during Thursday’s rally. It is a very interesting market; It is seems very different on the surface vs. what lies beneath.

    As I shared earlier, market internals are deteriorating day by day. I don’t know when will the tide turn upside down. If you have a long stock portfolio, you may want to erect defense lines while the IVs are lower and defense will be cheaper. For stocks, there is no harm in reducing the gains in order to protect and preserve capital. I’ll reinforce what I often say- Making money is not difficult, preserving it is.

    Let the week begin, there is more economic data this week

    Profitable Trading, OP