OptionPundit

Category: Option Trading

  • What a Week and What’s Next?

    Another horrible week on the Wall Street.  A 90% down day, followed by 90% up day, and ending the week with another 90% down day. The 20 days average true range (ATR) for Dow has moved from nearly 100 points a month ago to nearly 250 points now. For OPNewsletter, we were trading light in terms of invested capital and still came out with solid results. Just to give you a perspective about market action last month, May 2010 was the worst May in last 70 years!!

    OPNewsletter‘s June Income portfolio went up +14% on a capital investment of 31.62%, excluding speculative trades. Which essentially means, we closed up 4.4% on the overall $10K portfolio, significantly outperforming broader markets while avoiding panics/stress/loss of capital.

    Past few weeks have provided plenty of reasons for bears to resurface e.g  Bejing property market slumped 70% vs previous month, BP’s Oil Spill, Europe’s crisis, AIA’s rejection of  PRU’s deal, Unemployment number and many more. There are bearish forecast that Dow is doomed based on “various” wave counts and targets being shared as low as sub 1,000 for Dow. Over the past week, the newspapers, internet media, blogs, many financial “celebrities” are just so bearish that it can scare the hell out of anyone.

    But here is the bottomline, the way I think, before any “hard rain” drops, Dow and S&P needs to violate Feb low on a strong volume. So read whatever you like, but take it with a pinch (in fact lot of pinch) of salt. There is no doubt that macroeconomic environment looks uncertain, but guess what, we don’t need to rely on mainstream media to tell us that, various volatility indices like VIX, RVX are already telling us.

    I would like to re-state what I have been mentioning on the OPDiscussion forum.  Though we have escaped past crashes (the 2008/09 meltdown, Jan/Feb’10 and The latest one) so far, it doesn’t mean we can always avoid the next one. No one can do that all the time. So always, pls always be on guard for your capital with or without OP. I have learned this time and again that in this business, preservation is more important than “potential” opportunity. Complacency has no place.

    For OPNewsletter July’10, we have invested only 5.5% of capital as just held on to investing any additional capital before Friday’s meltdown. Let’s see what Monday brings and we’ll invest accordingly. Here is a latest testimonial from the OPN Member.

    As you know, I was a member for about 5 months last year and then rejoined recently. I first subscribed to OPN in April 2009 and this was the first time I was exposed to all those income strategies (condors, calendars etc.) I was naïve to think that I could start making money from those strategies after 3-4 months even with OP guidance. As OP says, trading is a business and as with any business there is a learning curve, then next is to gain edge while continuously improving.

    After canceling in September 2009 I tried few other newsletters and some trading on my own. I came into conclusion that in terms of consistency, risk management, educational value and comprehensive solution there is no service that comes even close to OPN.

    So far, the experience is excellent. OPN provides comprehensive trading solution and not just one or two condors like most other newsletters. Risk management and capital preservation are the most important things. The results are based on actual fills, although in many cases more experienced members get better fills, but overall I think the results should be achievable. I would highly recommend OPN to my friends, actually I already referred at least 4-5 people to OPN.

    Kim Klaiman
    Toronto, Canada
    7 years investment experience, 2-3 years with options.

    Thank you for your kind words Kim. I appreciate your feedback and I hope OPNewsletter continue to meet your expectations.

    Pls click here to read more customer testimonials. 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.

    Trade carefully, Trade Profitably, OP

  • OPNewsletter May 2010, +11.6% (Open)

    A painful week for worldwide stock markets. I think most are happy that it’s over and a new week has begun with a solid tone!!  On last Thursday, Dow suffered the largest point drop in a single day in its entire history. For OPNewsletter May 2010 , we are up +11.6% with 2 weeks to go. These results don’t include gains on 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).

    Here are some of the key highlights of OPNewsletter commitment over the past week-

    1. Almost 3,000 words written in OPNewsletter Member’s only section of the forum, on Friday alone (with key insights and tips)
    2. A rigorous follow-up with the senior management of one of top US brokerage firms to help find causes for platform failure and tips to reduce it in future
    3. Tons of e-mails replies,
    4. Provided suggestion for personal portfolios to some of the very old members (there is no additional $$ charge)
    5. Risk adjustment plans on almost all type of ‘what if scenarios” (of course there will still be few left)
    6. Provided significant protection plans for the May NDX condors at a time when NDX moved almost 250 points in a week (as much as preceding 2months’ equivalent move) and still come out profitable
    7. A lot of money making opportunities, when Mr Markets almost danced to OP’s tunes (Recall 10,700 and 10,300 points of Dow, just review my general market comments, tweet streams and past 10 posts on the OptionPundit blog).
    8. Above all, early warnings from as early as April 15th which on one hand saved losses from potentially going long, and for OPN we didn’t open new portfolios. The appreciation of early warning is always in the hindsight. The true power of this was observed in Sept’08 (it’s been almost 2 years and many traders are still rebuilding capital lost). I shall write more about this later.
    9. And by Friday, I also positioned OPN members for positive deltas especially on the MNX.

    I don’t know how many of you could really take benefit from all this, but this was one of the fantastic panic sell-off when almost $1trillion has been wiped out from the Markets and we could still do well. Every individual has his/ her tolerance for risk and greed, but it was a time when one equipped with the above information beforehand could have really make a lot of money.

    All the above efforts required huge time commitment (especially during the time when pain was reigning almost everywhere) and it limited my opportunities to personally benefit. In fact during this time, my personal portfolio took a hit but I was able to ride some on Friday and then positioned myself for a deeply positive Monday (2x SPX) (For reasons I shall share later in a separate post, so look out for the new post) and I hope to be net positive by coming week itself.

    Albeit, if nothing else, at least, with this note, I would like to take this opportunity to highlight the commitment OPN has for its members. This is also one of the reasons why OPN has limited number of subscribers. I sincerely appreciate the positive feedback that you send time to time. Pls continue to share your thoughts/feedback as it works as a fuel that needs to be refilled especially during such times.

    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.

    Should you have any questions, pls let me know,

    Warm regards, OP

  • Goldman Sachs (GS)- A Potentially Profitable Opportunity

    Goldman Sachs (GS) is down $40 since April 16th; How much more it has to lose? Anybody’s guess is probably better than mine. Regardless of whatever I think, I guess they are too big, powerful and connected to go under.

    With that bullish bias, here is a trade idea that potentially can deliver excellent results on upside. But wait a min, what if I am wrong? It can still make some gains on downside as long as GS is either above $159.4 or below $130.6 by June expiration. Pls don’t read any further if you think GS will remain in between these strikes by June expiration and/or if you can’t adjust the trade for risk/profits beforehand.

    Before you read further, I suggest reading about backspread so you are familiar with this wonderful strategy.

    (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 via invitation only)

    (more…)

  • What Exactly is Option Trading?

    A Fascinating Friday ! That’s how I can think about Market’s action on Friday. Option trading is not only about attending a seminar, do some paper trades, get some winning trades and the stage is set. It is also about constantly evolving your own trading style and continue to sharpen your saw. With this post I hope you pick up one or two important nuggets that might add value to your trading style, so pls just relax and continue to read.

    First a simple one VIX– I mentioned on April 15, that I was not convinced of rally when markets are overbought for 6 continuous weeks; and shared my bias for bearish stand via $VIX bullish spreads.  Those OPN Members who followed it generated about +28.5% returns for 2 days holding. It could have been done with straight calls, but I wanted to minimize risk exposure without compromising delta.

    The King of Earnings- Google (GOOG)
    It was once in 6 months (if not 3) type event i.e. earning announcement just before Option Expiration. Those who have been with OPNewsletter for past 3 years, or at least have been reading OptionPundit blog, know how much I love trading Google.

    To begin with, I shared 4 different types of trades that could have been done on Google. Nothing much has changed Feb’07. However, this time, for OPNewsletter members I used one of my high yield/low risk/technical/intuition based strategy, Double Butterfly. We opened Google 540/550/560 Put Butterfly and 600/610/620 Call butterfly; for roughly $1.40 to $1.70 price combined.

    Google opened at $568 thus panicking some members, as it means 100% “potential loss” on this speculative trade. Based on “what if” scenarios I shared before markets opened, few members could still get out of the trade in “style” for break even or minor gains/loss even though Google was still out of our profit zone.

    But guess what, Google was pinned at $550, those who held till close, yielding almost +588% gains!!!

    But that’s not the end of the story, I traded Google almost live (though not recommended to members). I kept on switching between Calls and puts, resulting into +46% gains (bearish), then +21% (Bullish), then +95% (bearish), then +54.6%, (Bullish) then -12% loss (Bullish). Those who were following the thread live and could trade speculative (though not intended), could have still converted $1 into $10 by the end of the day!

    Google again, 95% gains; again out, i need to see if it can hold $560, if not, next may be $557…i am sharing almost real time to share how quickly i am changing my opinions….pls note, at one time, i have only one direction either bearish or bullish..i am not mixing two..(i have already close the 550 puts (i further broke the Bull put spread into individual options leg and purchased the short 550 puts, and still kept the 540 puts)

    added later, by the time i finished my msg, google was already below $556 and those puts were already quadrupled.

    Here is the screenshot of key trades I mentioned above-

    Google Intraday Transactions

    We didn’t even touch on Google Stock pinning as otherwise it would have just too much of trading to handle for a single trading day. Here are some excellent reads for OPNewsletter members on how to successfully play stock pinning, especially on Google. I also run a separate experiment (income trading strategy) with Google for following set of conditions – 1) Expiration week, 2) Earnings in that week but before expiration day; the gains were +18% within a few days even though google moved significantly against the “market neutral” strategy, before the earning day. I shall share this in another post.

    Here is another example of ISRG–

    Another stock I am looking at is ISRG, I had expected it to move about $20-$25, but it hasn’t…I don’t know if it will if drops below $372…I didn’t share it yesterday (i mentioned my bias on twitter though– http://twitter.com/OptionPundit/status/12171040022 ) as the options are not very liquid.

    ISRG closed at $360.39!! I am not mentioning Goldman Sachs (GS).

    Now the key points, why am I sharing all this? Recall back in early 2008 I shared on key factors that contributed to a record year (till then) for OptionPundit. Here are some additional thoughts.

    The Formula for Long Term Success
    Speculative trades should only be done with what you can feel comfortable losing, I must add, losing 100%. This is not income trading which many OPNewsletter members trade with over $100,000 and anything x 0=0

    This is a high risk/high yield scenario. The formula of long term success is

    Long Term Success = (Profit $$ x Winning Trades) > (Loss $$ x Losing Trades)

    Don’t be stubborn with your opinion–
    One shouldn’t marry to a single opinion. Markets can humble anyone, anytime and it has demonstrated time and again. No one will always be right else there won’t be a trading market. Keep agility and flexibility as your competitive advantage. Remember, the end goal is not to be right rather it is to make money. I encourage OPNMembers to re-read the whole speculative thread (May 2010) how often I changed my opinion between bullish and bearish, the same day, often in less than 30mins.

    Trade with a plan and be nimble
    I didn’t send alerts for these Google trades for OPNewsletter Members, only demonstration. I don’t put stop loss on the screen as I don’t want it to be shown to brokers. I keep a mental stop loss and write it down and close it. Why am I sharing this? Because one may say, with “hindsight bias”, that there was no need to trade so much, you would have made a 1000% gains (10times) if you just held those 560 puts till expiration; I was not in for a 1000% gains, I was trading and time value was against me, and I was just following my trading plan.

    Option Trading is both Art and Math
    The twin butterfly we opened would have been a 100% loss if Google were to close above $560. But breaking the flies into vertical spread, then finally into singles achieved great result for even those who panicked and wanted to get out to collect “whatever” was left. Options are very versatile, so just don’t 100% loss. Create “what if” scenarios for if it goes up, goes down or move sideways. No one is much more in touch with your trades as you are and hence prepare in advance yourself and don’t just panic. Panic never helps, it about keeping the big picture mind and bringing that to trading world. Trading is equally tough like any other business, if not more.

    Here are some additional thoughts on how to become a more profitable trader.

    More trades to come. There are more companies announcing earnings in next few weeks so stay Tuned,

    Profitable trading, OP

  • OPNewsletter April (Open) +9.8%, May (Open) +2.6%

    Though we shifted our option trading strategy in way so that more trading alerts can be sent during “pre and post market hours” vs during market hours to allow even working professionals to benefit, OPNewsletter is still not about “make money” in 5min per day. It still requires one to think and act vs let robots do it for them (at least to begin with). There are no short cuts for making money, consistently. Making money is a hard work and requires one to be patient and to learn and continuously sharpen the craft. OPNewsletter April portfolios are up +9.8% while May portfolios are up +2.6% (both are still opened). If you are not an OPNewsletter member and would like to sign-up, pls click here to sign-up for the wait list as OPNewsletter subscription is open via invitation only.

    Let me use an analogy on why I say making money requires discipline and hard work especially for new traders-

    Before one get to a earn say $5-$7k/month; an engineer need to go through 4 years of professional education including one or two summer projects before he is allowed to be even called an Engineer Trainee. Medical professional is required even much more rigorous training before one is allowed to even touch knives for first surgery. Then why do people think trading is any different if it were to give you $5-7k/month to start? It’s because the “barriers to entry” are almost nothing; give a call to a broker, he can do the paper work for you, set you up with an electronic trading account, help you personally to transfer funds and all set and most novice traders can enticed by the marketing sales pitch that you sign-up for blah/blah and you can make money in 5mins/day. It doesn’t take long before one starts to realize that trading is not easy as it seems on the surface (sadly after either account is wiped out or suffered a major loss) . Making big %  may be fine for small capital account, but when it comes to large capital accounts, it is a completely different game. (How large are the investments via OPNewsletter Portfolio?)

    Let me ask a question, assume you make $10k/month; assume a good job with perfect work life balance; assume you work for 40hrs/week, 4 wk/month, that’s 160hrs/month, and this your monthly profit before tax. Have you spent 160hrs before investing $10K in that “idea/hot tip”? If not, why do you expect results to be different assuming you are not a professional trader/investor and are not equipped with “investment/trading” training?

    More on this later. Let me comeback to OPNewsletter performance.

    One of the ways I manage OPNewsletter is through capital allocation. I use US$10 K as the model portfolio (I invest my real money in those portfolios, and then in some more) which I then allocate across multiple portfolios, multiple option trading strategies to diversify the risk.

    We invested a maximum of 88.15% of $10k this month; and April portfolio is up +9.8% as of Thursday close. I use maximum capital employed as a base for calculating results even though the cash is available through closure of some portfolio; thus my results are conservative. As of Thursday close, we have 28.93% cash from April portfolio; and 95% of this (~27.6% of 10K) is invested for May portfolio which is also up +2.6%; Net, we have 1.26% cash available from $10K and have both April as well as May income portfolios both of which are up as of Thursday close. Option Trading strategies used were Double Diagonal, Iron Condor, Iron Fly, Butterfly Spreads, Credit spreads, Calendar spreads, Vertical spreads and some more.

    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.

    We closed some April portfolios and then reinvested the cash into other portfolios for the same month or for the next month thus effectively multiplying returns on our money. To share an example, we opened FDX income portfolio with 9.5% of $10K capital; the portfolio was closed for +27% gains, part of the cash thus generated was redeployed for opening an Iron Condor for Russell 2000 (RUT) for May 2010.

    We had earlier opened Iron Fly of Nike (NKE), ATM butterfly on Pepsi (PEP) which resulted into +24% gains and +62.3% gains respectively and the cash thus generated was used for placing a hedge for our April NDX Iron Condor. The Hedge was placed on Thursday before market close to protect our portfolio against any sharp move might result from unemployment report. Thus by effectively managing the hedge, we are fine (short term) regardless how much NDX moves on Monday.

    To put things into a different perspective, if you were to go for a seminar/workshop to just learn how to trade Iron condor (and some other strategies we use) and how to protect those (theoretically), that learning itself is worth several month’s (if not years) OPN subscription fee.

    Portfolio insurance (aka Hedging) costs money (reduces returns) but that’s always in the hindsight. Just like insurance, you do it to safeguard against any disaster. You spend this money for the things you don’t want to happen.

    Our first hedge was against any sharp downward move that were to happen due to Health care bill being either approved or disapproved. Markets didn’t react thus we lost some money on that, but then we converted into a bullish spread and reduced the hedging expense. We could have still kept it till April expiration and completely eliminate the expense, but I chose to close it to redeploy the capital to open other portfolios for a better risk/reward ratio.

    Our 2nd hedge was against our Nike (NKE) income Iron Fly. This hedge cost us about 19% of the NKE income portfolio; but we still netted with a +24% return on portfolio. Excluding the hedge, the returns would have been above +42%. The portfolio still had potential to double the gains, but I decided to take it off before the unemployment report; when trading is a business, operating discipline is important and one needs to follow a plan to make money consistently. Speculation is fine but that has a separate place and completely different game.

    Not all the portfolios are winners. There are losing ones as well and the returns are net of winner and losers. In order to make money consistently one has to keep in mind that Profit Volume (=Winning Occurrence X $$ profit) should be greater than Losing Volume (=Losing Occurrence X $$ loss).

    I don’t count speculative trade’s returns into monthly returns. Even though we had >75% winners and sometimes fairly large returns than losers, the result probabilities before placing the trade don’t favor investing large amount of capital (more spec updates here)

    So far for the month of April, we have 100% success rate on speculative trades. Our BIDU bearish trade resulted into +17.6% gains for two days holding, SLGN (shared it for free) resulted into +26.9% gains for two days holding and we just opened a straddle on WMB.

    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 (Apr’10) +4.86% (Open)

    US Markets continued its uninterrupted uptrend. The Dow has surged for two months with very few setbacks and has advanced 17 out of the last 21 trading days; that’s an amazing performance. A pull back is necessary to release short term overbought conditions. And if I were to say that markets are now vulnerable for any pull back anytime, that won’t be an exaggeration.

    For OPNewsletter April portfolio, we have invested 88.15% of capital and we are up +4.86% in the first week. Starting this month, I have started to focus more on “end of the day trading” i.e. trading alerts are being sent either pre-market or post market hours. Though it would not completely possible to avoid to sending any alerts during the market hours (especially during last two week of options expiration), so far, at least, we have been able to achieve this.

    This month’s portfolio is a nice balance between several type of income trading strategies. We carried forward two portfolios from Mar and opened 7 new portfolios across various types of industries. Our income strategies include Double Diagonal spread, Calendar spread, Iron Fly, Butterfly Spreads, Reverse Butterfly spread, iron Condor as well as vertical spreads.

    On the speculative strategy front, we shorted BIDU on Mar 24th, and we were nicely rewarded as BIDU dropped over $25 in 2 days. Those who played it via vertical debit spread, generated over +15%.

    There is a lot on the economic front this week. Personal Income and Outlays will set the tone today; consumer confidence and S&P Case-Shiller tomorrow, ADP Employment data on Wednesday, followed by a busy Thursday that will see Motor Vehicles sales report, Jobless claims, ISM Manufacturing index and construction spending. An employment report could bring a complete turnaround on Friday.

    Trade carefully, Trade profitably, OP