OptionPundit

Category: Option Trading

  • Outperformance Continues at OPNewsletter

    When compared with broader markets, Feb was an excellent month for OPNewsletter coupled with a few good learnings (kinda reinforcement, been there done that, but forget that). Overall, OPNewsletter for Feb closed up +5.6% x-commissions and +2.6% including commissions. Capital preservtion and thus allocation was higher priority vs missing an opportunity.

    These results doesn’t include the speculative directional trade which were shared here (only OPN subscribers can see this thread) and here at my profile on InvesCafe (Free) which includes likes of RIMM +40%, V +7.8%, BIDU +5.2%, BAC +10% to +40%, ESI + 33%, SRS, STT, WHR, BTU, AXP, CAT, ISRG, BLK and many more. I opened multiple positions where some won some lost (due to inability to fill on time as I was away and didn’t want to autotrade). Hardly any of those missed the expectations except the VXX which I intentionally closed.

    Above all, this doesn’t include future opportunities via capital preservation due to early warnings. Hope you have been reading OptionPundit and thus were aware of the Bear Market Signal that was reconfirmed recently. And of course, at least one assett class probably would have been shining in your diversified portfolio.

    I have already started investing for March’09 portfolios. if you would to sign-up, pls click here.

    Cheers and profitable trading, OP

  • OPNewsletter (Feb’09) : +2.78% (X-commissions) and +0.1% (/w Comissions)

    Such is the bear market, it leaves no one. Those who thought that major price indexes had successfully tested the Nov’08 market lows and that move December onwards marked a new primary bull market, were taken by surprise and Jan closed on a negative note. Dow closing almost 9% down for the month and other indices almost in the same range. I have been saying this since Nov’07 and will repeat here again “In bear markets the winner is the one who loses the least” (it’s not my quote, I borrowed it from the net and don’t know who said this, but whoever did concluded it at best)..so stay very close. I also mentioned about the importance of 7,500 break for Dow that if that’s gone, just stay clear.

    Here we are, our OPNewsletter portfolio are at break even after commissions in its 1st week of opening in spite of a weak market. Saying it another way- +2.78% excluding commissions and +0.1% after commissions.This doesn’t include bonus trades like CAT and ISRG which I shared via real-time alert on InvesCafe, and entry/exit on OPN forum. I closed CAT directional trade for +25.5% and ISRG for +46.6%.

    We have invested 24.27% of capital. This is also a month I didn’t open a RUT iron condor as risk/reward wasn’t good.

    Trade carefully, trade profitably, OP

  • A Covered Call with Ultrashorts

    It is generally assumed, and rightfully so, that Ultrashorts SRF, SKF are not for everyone, those are highly volatile and average investors should stay away from those. However, I think, if managed properly, these can also be valuable tool to generate passive income.

    Firstly, let’s look at the 2 popular ultrashorts SKF, SRS. Attached charts are pictorial view of how volatile these stocks are. SKF (Ultrashort Financials) has a trading range of $100 to $300 and SRS (Ultrashort Real-Estate) from $50 to $250 and intraday movements are good enough to stir stomach muscles. As such general markets are speculative these days and on top of it ultrashort nature makes these even doubly volatile; and if you are doing options on it, that simply magnifies volatility exponentially.

    That’s where as an option trader, this volatility comes to my advantage. Here are a few things I need to assess EVERYTIME I am placing a trade-

    • Is this capital something I don’t need in foreseeable future (6-12months)?
    • What is the general market environment, Technical Analysis?
    • How much ATM option premium current environment is generating?
    • How long will it take for my stocks to become free?

    Let me take you through with a real covered call example that I placed on Jan 16th. The trade was opened purchasing SRS on average @ $61.15 and then I sold $60 Feb Calls for $10.85 average. This essentially resulted my effective price of $50.30. Since I am using portfolio margin facility, my cash outflow is almost half of $61.15 but let’s forget that for a moment.

    Attached Risk/Reward chart (approximate) show that this trade will be yielding nearly 17% for almost 4wks holding period assuming SRS remains over $60 (and based on last Friday’s prices). This trade will break-even at $50.30 below which I shall be making losses. Albeit, when It’s Feb’09 expiration, I can sell March’09 call ATM options as well (or earlier). However, the yield and subsequent losses will be determined at that point. What needs to be noticed is that in few month’s time, these stocks will be free to own. It is essentially like rental yield on a property that is bought for free.

    While this seems all good, there are watch-outs that one needs to be careful about.

    1. Risk premium is dependent on the prevailing Implied Volatility and the underlying price. It may take longer to recover investment in underlying.
    2. The risk/profile is only on expiration. Before expiration however, the sold call will still have time value and hence the losses might be more than what it might be on expiration day.
    3. Due to inherent characteristics of ultrashorts, the extreme movements can easily stir emotion. Hence it is beneficial to keep a risk management plan in place, in advance, all time.
    4. We are in the bearish markets and hence underlying are commanding high absolute price, but as the markets starts to calm, the absolute value will fall and it may happen that it never recovers to those high value.

    The same covered call can be done via naked put selling as well. I however like to combine the technical analysis to the option selling i.e. when SRS is about to turn up, I buy the stocks and sell the covered calls when stock might be turning downwards (the above case may or may not represent that). I can sell stocks and let the call value decrease and buy back stocks later. There are multiple ways this can be played.

    However, net-net, there are risks with ultrashorts and hence it is important to do proper due diligence and stress testing of your trade before you place one, in case you decide to follow. Above mentioned trade is for real and I may get out of the trade anytime depending upon risk/reward profile vis-a-vis other opportunity.

    You may want to explore it further to review if this is something you would like to add to your Option Trading Strategy toolbox. What do you think of this strategy? did you try this before? what kind of issues did you face?

    Profitable Trading, OP

  • Too Good To be True, But It’s true

    Fed has cut the discount rate by 50 basis points to 1.75%, ECB also cut benchmark rates by 50 basis points from 4.25% to 3.75%; and the futures are up, triple digit (as of this writing). Here is a snapshot of what happened today in the Asian markets so far-

    • Japan’s Nikkei falls 9.4 pct in biggest decline since 1987
    • Hong Kong’s Hang Seng is down 8% inspite of Hong Kong slashing interest rates by a full 100 bps.
    • Singapore’s STI closed down 6.6%
    • India dropped 2.4%
    • China 3.5%

    Let’s see what this latest “rescue” brings to the table. Here is a snapshot of past key posts at OP. I hope these posts were able to add value to your browsing time.

    I am glad we were able to handle the 1st storm of the season. We were in cash and you knew my stand, specially if you were OPN’s subscriber and were following this thread. We are in 100% cash and can ride the bull when it emerges.

    Deflation is a common word these days, but OP mentioned deflation when we were almost in thick of “inflation” fears, commodity prices rising and there was no end at sight.

    Bailout plan, a monster relief and in normal times it could have taken markets to moon, well that’s what really happened but I was suspicious of the rally and 2nd time around when it was almost sured to pass, I also hinted that it maybe “Buy in anticipation and Sell on new”.

    Though I have shared about a lot of “potential bankrupts” since I started sovering subprime in Feb/March of 2007, called out Lehman was potential bankrupt and shared my comments about subsequent rallies.

    I don’t like Citibank and I shared my disappointments and as well as bearishness on Citibank. I am still bearish on Citibank.

    Few months back I had written my technical analysis about the general markets, a simple technical analysis and shared few important support levels (10, 697 for Dow and 1,172 for S&P 500). Once those gone, we should clear the way for bears. And since these two leaders broke those supports these are almost in the free fall.

    Also I warned that there was more pain ahead and I sincerely wanted to be wrong, but unfortunately it turned out to be almost right. Dow is down almost 1500 points since then and tons of money has been poured into the financial systems.

    Besides all these, I also shared Put Diagonal strategy for the down market. If done properly, Put diagonals on DIA or SPY could have multiplied money several times due to record IV gains since then and delta gains due to short in nature.

    And I mentioned my forecast of 8,000 or lower for Dow, also two days ago on the forum. At that time it seemed like a foolish forecast, now it doesn’t see too far. It remains to be seen if it’s it in deed going to happen. I don’t want it to come true. That’s very painful journey.

    I hope these added valuable sights and were worth your time. Pls do share your feedback what do you think of posts here at OP. 

    Preserve capital, OP

  • A Terrible, and A Fantastic Week

    It was a terrible week for U.S. stocks and equally for almost every major stock markets worldwide. The Dow fell 157.47 points, or 1.5%, on Friday to close at 10,325.38, racking up a 7.3% drop for the week. The Nasdaq Composite Index fell 29.33 points, or 1.5%, on Friday to close at 1,947.39 and lost 10.8% for the week. The broader Standard & Poor’s 500 Index dropped 15.05 points, or 1.4%, on Friday, ending the day at 1,099.23. For the week, the index was down 9.4% for the week. But all this shouldn’t come as a major suprise to OPNewsletter subscribers especially those who were following this general market comments thread of OPN member’s only section. I also mentioned clearly that I wouldn’t trade for stock pinning for Sept expiration cycle. This is not a “praise myself” post, but to state clearly how we handled first hurrcane of the season, that has just passed.

    If I say this was the most volatile weeks since 1987 market crash, I think I wouldn’t be too far-off from reality. Too much of uncertainty, hopes and dreams surrounded the stock markets world-wide. Starting with the hope that bail-out package will be passed without issues; it was dashed to zero when markets were taken by surprise upon defeat of the bail-out plan, markets tanked on Monday, and the worst 1-day performance since 1987. Soon after there was revised hope that package will be passed and markets started to go back up, one of the best one day performances in past 5 years. Dow was up nearly 300points when bill was to be voted on Friday, I wrote to OPN subscribers at OP discussion forum to stay away from rally and also on my twitter account, that it might be “Buy in anticipation and Sell on news” event.

    For income trades, OPNewsletter stayed on the sidelines. We opened only one trade, a RUT iron condor that we officially closed for +9%, some might have had minor losses due to the fills that received during a very fast moving market that it was. For OPN, I invested only 8% of capital in that. Since I invest majority of my capital in income trades, I preferred and shared with OPN subscribers to stay in cash since mid September. Preservation of capital is of utmost importance to a trader or investor. Market environments were not such that I could leave the income trades on and not watch it. It required one to be nimble, closely monitor markets and always be “on”. Staying in cash proved to be a good strategy, we could sleep well while markets were gyrating.

    Though I had my own share of losses, it was a great week. Attached snapshot is just for few profitable trades. A fantastic week for those who played bearish on my fantastic fours (POT, MON, MOS and CF) as MOS missed the earnings and was punished by markets really ruthlessly. I also mentioned in the speculative sections of the forum when Apple (AAPL) was drowning below $100 watermarks due to rumors. I had been a net buyer of puts and sold some as market closed, but still in bearish position. WFC went down within minutes of S&P putting it on Credit Watch negative. It was a quick trade, generating +25% in less than 1hr time in a very volatile market environment. A bear call spread was also opened (37.5/35) Oct, which is also yielding +45% as of Friday close. Due to its highly speculative and directional nature I didn’t write on forum. Then was GE, VIX (+25%) and many more directional trades. Overall a great week for “directional/speculative” trader!

    Where are we now, as per my indicators, we are in for trouble ahead. But this is market which has defied several rules and indicators and therefore I would like to prepare for worst but hope for the best since most of the past major bull markets kicked-in during worst market sentiments.

    Preserve capital, stay cautious and be profitable,
    Profitable trading, OP

  • OPNewsletter Returns +6.2% in Sept’08

    In what could be summarized as tumultuous month for the US markets, full of volatility and extreme intradays moves and strong reversals, OPNewsletter Sept portfolios returned +6.2% including commissions. This beats my revised target of 5% including comissions (vs earlier 5-7% x-comissions). This surely wasn’t an easy month for an income trader but a portfolio approach and diversification helped me achieve positive results. I used up a max of 53% of overall capital during month and opened 5 portfolios-

    • GLD -16.67%
    • SPY barely break-even at +0.6%
    • EWZ +5.3%
    • DIA +23.57%
    • RUT +28.64%

    These doesn’t include directional alerts that I sent to OPNewsletter members (DBC +30% and GS +12%, and bearish alerts on POT, CF, MOS and MON). These were not part of OPN and hence these are not counted in the OPNewsletter tracking. And yeah, we have one for LEH as well, results of which we’ll come to know on Monday.

    We are in the process of Opening October portfolio as well as new openings for sign-ups. If you would like to join OPNewsletter, pls sign-up for the waitlist by clicking at “Buy Now” button on the rightmost siderbar at the top corner. If you would like to read subscriber’s testimonials, pls feel free to read here.

    Have fun and profitable trading, OP