OptionPundit

Tag: option trading

  • What’s next for US Markets and OPNewsletter (Jul +4.0%)

    US markets suffered big losses last week. The DOW was down 3.3%, S&P 500 was down nearly 2.5%, Nasdaq was down nearly 1.5 %. This was OPNewsletter’s first week since we opened our July’08 portfolio and including commissions OPN’s is up+4% and x-commission it is up +5.8% for the July expiration cycle. We opened 5 mini-portfolios and all are positive in spite of major market falls in the week that just passed. And guess what, we haven’t made any adjustments so far to any portfolio. Excluding normal income trades, I also shared directional bonus trades like GLD (+68% my returns, OPN subscribers have multiple points), POT (+50% mine), RTN (+25%) and GS (which was closed for -30% intraday). If you would like to subscribe to OPNewsletter, pls sign-up for the waitlist here.

    Dow was down nearly 3.8% for the week and it closed below 12K, a key psychological support point from a chartist perspective. It is not very far from the March Low. All the 30 Dow Components closed in red yesterday. And to add more pain, the downward move cam on above average volume. Earlier it had touched 200Days moving average but since then it has follows a pattern one week up, next down, another up, next down and that has been the case for the past 7weeks. Where is it headed, it tough to make that call. It may see a bounce next week. RSI is just about to touch the oversold level from daily perspective. However, if you take a weekly perspective, the story is different. RSI is not even close to oversold area, simply saying that there is room for further fall and 11,670 may work as an interim support while DOW work out it’s oversold region.

    Other things that you may want to check out is that “Number of new lows” on NYSE are rising (though slowly), Number of stocks above 50days moving average or 200Days moving average are also declining slowly. These are not good signs and one needs to be really careful while interpreting these.

    I think we are about to see a correction in commodities (x-oil, as Oil is now determined by several factors) and it may be possible that once June is out, we’ll see a retracement in Energy sector as a whole. I may be wrong here but the sense that I am getting for these sectors is of “Top Heavy”.  I am positioned for DBA and DBC bearish strategies. But I am quite flexible in cutting losses the moment I see a further surge in the commodities. And other contrary thought is that we are probably just a few months away in seeing turn around in financial as well as Banking sector as a whole. May be, November. There is amazing resilience in the Transports, specially Rails. Energy (Oil, Oil Services), Coal and Mining has been trending up and up.

    International markets are also falling apart. Since the start of the year, India is down significantly, China is down nearly 50%, Japan’s Nikkei is down and so is London’s FTSE. RBS just warned for a 300 points drop in S&P500 in next 3months.

    So here we are, at the crossroads again. What to do next? Attached is a “sector rotation” chart from “StockCharts“. They have pretty good charts that you may want to check out. I think value is slowly emerging in Banks and Financial sectors, Commodities may offer short term pull back opportunity, Inflation is riding high so I’ll hide in gold, trains and shipping industry are doing good but if goods are not going to move then why will they run so watch out for world trading activities via Baltic Dry Index and consumer spending. If corporate earnings are not going to go high, I don’t see a reason for Tech to win either. No matter who is the next US president, govt spending needs to take place and therefore defense may offer another stable opportunity. Home and construction-they need to fix their foundation first before we can think of any castle above that.

    Whatever you choose, be careful and be protected as much as possible. I can’t think of any suggestion if a black swan event happens, but yeah, try protecting your hard money in case markets move in either direction by a combination of calls and puts and/or by having a right assett allocation mix so one’s effect nullifies the other. Oh by the way, you may also choose to join OPNewsletter if you are looking for just 5-7% per month.

    Profitable trading, OP

  • OPNewsletter (Jun’08) : Closed +11.1%

    An excellent month for OPNewsletter with double digit gains. OPNewsletter’s June 2008 was closed for +11.1%. This is nearly double of my own target of 5-7% per month. These returns excludes the bonus speculative trades on JOYG (+40%), RIG (Multiple Profit Points), GLD and CME (Multiple Profit Points-Shared for free with OP Readers), With this June’s closing OPNewsletter is up nearly 60% in the past 5months, i.e. nearly 9.9% compounded monthly that is nicely above even my own internal target of 5-7%. We usually assume US$10,000 as minimum investment and these can easily be scaled to $50, 000 or above. Considering market actions in the past 5months, this is a good and satisfactory returns.

    This month’s strategies included Iron Condor, Debit Spreads, Calendar spreads, Straight calls, Diagonal Spreads and credit spreads.

    I have opened two OPN Mini-portfolios for July expiration cycle and shall be opening 2-3more next week. If you want to sign-up for the newsletter, Pls read more about OPNewsletter here. If you would like to read customer testimonials pls read those here (Part-1, Part-2, Part-3, Part-4)

    A few more things about the Newsletter-

    1. OPN uses its Member’s fills for tracking (Not the newsletter suggested one)
    2. OPN uses maximum investment for calculating returns for the month, even though it was for 1day (For example- 10K portfolio, we used 6K for the month, but we used 1K more for one day, the whole portfolio returns are calculated using 7k as base)
    3. Starting May’08, OPN now factors commission in it performance tracking.

    Next week is going to be interesting week with Goldman Sachs (GS) and Morgan Stanley (MS) reporting earnings and setting tone for the financial sector. I may play these two and share my thoughts with OPNewsletter subscribers.

    Profitable trading, OP

  • Where is the Bull?

    Amongst all the bearishness in the market you might think there is none except one obvious answer OIL. There are many areas that are just moving up with their own share of correction along the up way.

    I have been mentioning my “Fantastic Four” for quite sometime. Even since my last post, in just less than two weeks POT is up >+10%, MOS is up >+20%, CF is also up >+10%, and MON >+5% after touching 52wk high. In fact, Intrepid Potash (IPI) touched 52wks high today (My post here). But keeping them is not easy and requires guts, well more than guts it is how well one hedges against any sharp corrections on the way up. A very simple and popular way will be buy puts and fund the cost by selling calls. For instance POT is currently $223, so you buy 220 puts and sell OOM calls to offset the cost of puts. I shall cover this in more details some other day.

    Another sector on the roll is coal. Check out the PCX, ANR, BTU, FDG, and ACI. Oil has its impact of alternative energy fuels as well. As Oil prices are climbing higher, all other energy resources are becoming cheaper relative to oil. One may argue why Rails are falling apart, but there is more to rails than just oil’s rise. But still it’s not a beaten down sector if you look at short term horizon of say 3months.

    Above are just two examples. You may find even more. However, as these are moving-up, the risk of their fall is also increasing. So be careful about your entry and exit points.

    Last point, the bull is on the downside as well. It’s all a matter of perspective. Almost similar strategies can be created for the downward move. However, the risk is higher. Our human brain in general is “bullish” so at the first moment of upward move (assuming I am bearish), I am more “panicked” than if I would if I were bullish and if there was a reversal.

    Have fun, Profitable trading, OP

  • OPN Subscribers’ Views: Part-4

    Thank you dear subscribers for your encouraging feedback. I published earlier OPN testimonials here (Part-1, Part-2 and Part-3). Your feedback especially after past two challenging month is rather much more important than it was when it was rather smoother sailing for OPNewsletter.

    Let starts with Wayne Hom from USA-

    The best thing about OP is that he puts his money where his mouth is. You know the guy is in it with you so he’s not some “sideline” know-it all without the accountability of feeling the pain. He’s making the trades and adjustments with you. I have seen newsletters and services where they put out the initial entry, give you the criteria for loss/profit exit, and then call it a day. You have no idea what their real rate of return is because they enter and exit at some “theoretical” point similar to back-testing approaches. It doesn’t consider the real emotions of trading, and the real issues most of us face of having day jobs. OP keeps the “official” book on the adjustments and closes, but he extends his hands out to help those of us who have “missed” the adjustment or close by a day or several days due to the constraints of real life. That is invaluable.

    I guess I would summarize by saying that OP is like a trading simulator simulating all the aspects of trading not just the identification of a trade and entry. You can follow along in real-time and ask questions and see what others are saying as the trades unfold. It doesn’t hurt that most of the times we make money in the process. And when those times occur when the trade goes against us, OP does his best to correct either this trade or offset in another trade so that we, including himself, come out ok. Most of the time, he pulls it off (though it still scares the heck out of me).

    Wayne Hom
    San Mateo, CA USA
    5 years of study, but only about 1 year of real trading

    Thanks Wayne. I am thankful for your feedback. Last two months were not easy. In fact one of the most difficult months during the life span of OPN and we managed to sail through it. Nice stress test for our strategies.

    I have been a regular visitor and an early forum member but joined the OPN only in April.
    I still consider myself an Options newbie as before joining OPN i was just using Straight Calls or Straight Puts based on my directional Analysis.

    If i were to summarise my experience with OPN in 3 words i would say : Transparency , Community and Learning

    Transparency : Complete openness about the Tracking. In fact the decision to take members fills accentuate the Transparency aspect and really appreciate you for that .Also, in many cases i can see OP assisting members who may be late for a fill as to what could be the best way/time to get the fills on different strikes.

    Community : I enjoy the Community experience a lot. The discussion on Fills brings a sense of friendly competition, the sharing of sentiments when PBR,Visa were going all over the place..all makes one feel a part of Community.

    Learning : These 2 months have made me read up a lot on Iron Condor, Calendar Spreads, Effect of Volatility..and i realize reading is one thing and trading and experiencing the things u read about is a totally different thing. I am glad that i used OPN as a first platform for Income Trading.It also makes me realize a few things about myself e.g, As a directional Trader why i made losses and how could i have avoided some of those losses…

    All in all ,i know these are just my initial baby steps in the world of Options, I look upon OPN as a long term continuous learning source…as i have miles to go before i sleep………….:)

    Name : Ajay Sunder
    Country : Singapore
    Investment Experience : Option newbie..less than one year Options Trading experience.Before joining OPN was limited to buying Straight Calls/Puts based on directional Analysis.

    Thanks Ajay. Looking forward to long association and being successful together.

    Nothing much has changed from my first thoughts. Few additional thing I learned since then are:

    1. Negotiate on prices when putting the trades.
    2. Better understanding on Pinning.
    3. Different ways of adjusting a trade
    4. Book recommended by you on Volatility was excellent.

    Further, making us think on catastrophe in the world and Mother’s day.
    Varun Balendra, USA

    Thanks Varun. I strongly believe that no matter what we do, we should give some time/resources to the society we live in and the companions, friends and families are what makes the life fulfilling. The success, without the success of those who matters, is not tasty.

    I like the consistency in monthly profits from your your service. Capital preservation is very important in investing and this service seeks to do that making sure that our hard earned money is preserved at all costs. Keep up the good work and the great consistency in making money month after month.

    Thanks again.
    Chik
    Singapore and investment experience 5 years.

    Thanks Chik. Yes, we are driving for consistent monthly income. And that’s why we don’t speculate and we don’t over allocate our hard earned capital.

    Thank you all. I shall remaining feedbacks later.

    Profitable trading, OP

  • Chicago Mercantile, A Short-Term Bullish Case

    Chicago Mercantile Exchange (CME) is hammered and hammered pretty badly. It took two years of bull run to reach the highest price ~$712 and only 5 months to come back to square one i.e. $375. Here I am presenting a short term bullish scenario.

    Before I dive into charting, let me share my thoughts about charts. Charts are visualization of random occurrences that are plotted and we, humans, find out patterns (How about this chart?). Even if there is none, we create one and over decades of stock market technical data, it is even much more easier. Any charting package will include at least,if not more, 50 different kind of indicators. I am not saying that Technical Analysis is useless but it has also become a self-fulfilling prophecy. As many follow “indicators” they start to work.

    So let’s put those “indicators” to work. Here is a chart of Chicago Mercantile Exchange (CME), there are several lines, bubbles, rectangle and other blah blah. It’s a weekly chart from the day CME was listed. You will notice 50weeks moving average provided strong support and it bounce back. Once it broke that support, bottom is the limit. Recently it was 200wks moving average that provided support when it announced to acquire Nymex (NMX), it kissed $400 and bounced. It ditched the 200wks average yesterday. One may wonder why then it danced for sometime between 450-460 support areas, because that is a Fibonacci confluence area. Now that also been taken out. What next, it beautifully touched exact $375 area which was a 38.2% retracement of expansion that started from $167 in April 2004.

    Now there may be other reasons and at least 100 more technical indicators pointing to opposite to what I am saying. I am biased that it is poised for a bounce. Though according to P&F charts, the next price objective is near $359 so it may very well touch that level too before bouncing in any meaningful way.

    How to play this? As you may see TA will open the possibility of one being wrong. So the chances of my being correct in short-term at best are 50/50. If trade option on CME, the options are expensive (abs $$) and theta may very well downplay the delta, if chosen via straight calls and straight puts. So credit spread or a debit spread may work out nicely. Other approach maybe a diagonal spread 400/410 (currently $3.85). The downside is half the cost than buying straight call.

    As usual, this is not a stock recommendation. Pls do your due diligence before making any investment decision.

    Profitable trading, OP