Just to warn you up-front, this is not a trading post.
The bintgoddess and I returned from five days in Michigan just yesterday, both with pretty serious headcolds. This makes three colds for me in six weeks, which is just <sarcasm>really awesome</sarcasm>. I'm trying to remember the preceding year or two when I watched the bintgoddess get colds at normal intervals while I managed to fend them off without a sniffle. But bringing that memory forward over the ringing in my stuffed up ears is a little challenging at the moment. I just woke up from 11 hours of sleep punctuated by bizarre pseudo-fever dreams, and the bintgoddess sleeps on.
The worst part is that we're pretty sure we both picked this up on Sunday, and we saw friends and family Sunday, Monday, and Tuesday. I really hope we didn't pass it along to everyone else, but if the entire Detroit Metro Area fails to show up for work on Jan 3, 2011, you can blame us.
It was great to see many of our Detroit-area friends on this trip, and I have to say that the scheduling really worked out well. We managed to see everyone we had discussed visiting, and didn't feel like anyone got short-changed on time. We even laid some preliminary plans for going with another couple to Punkin' Chunkin' next year, which looks like a fantastic nerdy silly time. With its massive Discovery Channel coverage this year, I'm sure next year's PC will be booked to the gills.
With all the friends and family we visited, it was a pretty full trip. But there was still time to try to cope with four dogs and four people cooped up in a house. My coping method of choice was to disappear into my laptop, where I started learning about delivering rich web applications via Flash movies (SWFs). I'm working on a top secret project which I hope to deliver as a Facebook application, and I reckon Flash is probably the best way to make it a reality. Unwilling to pony up hundreds of dollars for Adobe's development environment, I started looking at other avenues.
The one that I settled on is OpenLaszlo, named for either a painter, or a cat who was named after the painter, it isn't completely clear. OpenLaszlo is an open-source language that is based on an interesting combination of XML and JavaScript, and lets you compile to either SWF (8 or 10), or to DHTML. There are a few things you can't do in DHTML like embed fonts, but I think Flash is a better solution for my particular problem anyway. OpenLaszlo's pedigree is impressive: H&R Block, Wal-Mart, and Pandora are all using OpenLaszlo to deliver rich content.
Over the break, I read through the QuickStart guide, and started digging my way through the Developer's Guide. I've gotten to Chapter 10 (of 57), and so far have built a little test application that doesn't really do anything useful, but lets me exercise what few skills I have managed to accumulate. You can check it out here if you're so inclined, but don't expect much. If you're a developer-type and interested in the OpenLaszlo code that made it happen, you can find that here. I added ".txt" onto the end of the file so that Firefox will just display it instead of trying to download it. As I keep working through the Dev Guide, I will from time to time post my progress up on markmccracken.net. I will probably not keep the source file up to date, though, unless someone asks me to.
30 December 2010
16 December 2010
Predestined for Failure
Old Business
As I have noted recently, I am running about two to three days behind posting my trading activity. There are a number of excuses for this, of course, and none of them all that valid. I have also lagged behind in reading the blogs of others, and this morning I read an excellent post from one of my favorite options bloggers, Mark Wolfinger. Unfortunately for my Iron Condor trade, I read it 11 days late.
In this post he discusses the correct strike-pricing for protective debit spread adjustments. He states several times that one should never buy farther OTM options than the iron condor itself, and that's exactly what I did. Over the next few months, I need to reflect on this and tweak my adjustment strategy. I'm hoping using this advice will help flatten out my returns, because I'm experiencing somewhat more volatility and stress than I would like, given the low income potential of this trade.
The AAII Sentiment Survey for 12/15/2010 still shows some very bullish investors out there, although slightly fewer than last week: 50% are bullish, down from 53% on 12/8/2010. As expected, this results in a continued no-position for CS|MACO, which doesn't participate in trends that are fueled by investor mania.
New Business
I bought some Research in Motion (RIMM) puts this morning at the last minute. I generally like to buy these a week or two before the earnings release, but I wasn't paying close attention and missed out. RIMM has always been one of my favorite shorts during earnings season, and I personally think that they have no future without a major retooling of their business. Nobody talks about "Crackberry" anymore, now it's Android this and Android that, with the occasional fan-boy crowing about iPhone coming to Verizon (still). I was expecting RIMM to admit a further reduction in its market share, disappoint on earnings numbers, and guide lower for next quarter. But that didn't happen, and when I left the office in disgust, RIMM was up 5%. So tomorrow I'll unload the put for a 50% loss and move on.
Another put position I entered today was Kinder Morgan Energy Partners (KMP). KMP owns and manages energy transportation and storage facilities in North America. It has a positive correlation to natural gas prices, but not a dramatically high one because its income is fee-based. Thus KMP's income fluctuates more with demand for natural gas than with natural gas itself. KMP has a big dividend yield: 6.3% So why short it? Oh let me count the ways:
1. Jim Cramer loves it, and he usually loves at the top and hates at the bottom.
2. They have a $22B market cap, revenue of $8B, $192M in cash, and $13B in debt. Debt is more than 50% of the market cap, and nearly 68x higher than cash reserves. That means they're using debt to finance their dividends.
3. Quarterly earnings have declined 10.8% since this time last year, to $1.25/share. Dividends are $4.44 per share, so they're also paying more in dividends than they're earning in profits.
4. They need to quadruple their profits in order to cover those dividends, but the highest praise that Cramer can come up with is that high dividend stocks are good in a rising interest rate environment. Yes, true. But that doesn't solve KMP's internal fiscal problems.
This stock needs to fall. I bought some March 2011 puts on it, and I'm working orders to buy some more on a rally. I don't know when it will fall or how far, but my puts are there to profit when it does.
Last but not least, I bought some calls on GLD (Gold ETF) today, expiring in March. If the current short-term sell-off continues, I'll buy some more. I'm looking for a GLD price above 150 by expiry. That would be a massive return on the call investment.
As I have noted recently, I am running about two to three days behind posting my trading activity. There are a number of excuses for this, of course, and none of them all that valid. I have also lagged behind in reading the blogs of others, and this morning I read an excellent post from one of my favorite options bloggers, Mark Wolfinger. Unfortunately for my Iron Condor trade, I read it 11 days late.
In this post he discusses the correct strike-pricing for protective debit spread adjustments. He states several times that one should never buy farther OTM options than the iron condor itself, and that's exactly what I did. Over the next few months, I need to reflect on this and tweak my adjustment strategy. I'm hoping using this advice will help flatten out my returns, because I'm experiencing somewhat more volatility and stress than I would like, given the low income potential of this trade.
The AAII Sentiment Survey for 12/15/2010 still shows some very bullish investors out there, although slightly fewer than last week: 50% are bullish, down from 53% on 12/8/2010. As expected, this results in a continued no-position for CS|MACO, which doesn't participate in trends that are fueled by investor mania.
New Business
I bought some Research in Motion (RIMM) puts this morning at the last minute. I generally like to buy these a week or two before the earnings release, but I wasn't paying close attention and missed out. RIMM has always been one of my favorite shorts during earnings season, and I personally think that they have no future without a major retooling of their business. Nobody talks about "Crackberry" anymore, now it's Android this and Android that, with the occasional fan-boy crowing about iPhone coming to Verizon (still). I was expecting RIMM to admit a further reduction in its market share, disappoint on earnings numbers, and guide lower for next quarter. But that didn't happen, and when I left the office in disgust, RIMM was up 5%. So tomorrow I'll unload the put for a 50% loss and move on.
Another put position I entered today was Kinder Morgan Energy Partners (KMP). KMP owns and manages energy transportation and storage facilities in North America. It has a positive correlation to natural gas prices, but not a dramatically high one because its income is fee-based. Thus KMP's income fluctuates more with demand for natural gas than with natural gas itself. KMP has a big dividend yield: 6.3% So why short it? Oh let me count the ways:
1. Jim Cramer loves it, and he usually loves at the top and hates at the bottom.
2. They have a $22B market cap, revenue of $8B, $192M in cash, and $13B in debt. Debt is more than 50% of the market cap, and nearly 68x higher than cash reserves. That means they're using debt to finance their dividends.
3. Quarterly earnings have declined 10.8% since this time last year, to $1.25/share. Dividends are $4.44 per share, so they're also paying more in dividends than they're earning in profits.
4. They need to quadruple their profits in order to cover those dividends, but the highest praise that Cramer can come up with is that high dividend stocks are good in a rising interest rate environment. Yes, true. But that doesn't solve KMP's internal fiscal problems.
This stock needs to fall. I bought some March 2011 puts on it, and I'm working orders to buy some more on a rally. I don't know when it will fall or how far, but my puts are there to profit when it does.
Last but not least, I bought some calls on GLD (Gold ETF) today, expiring in March. If the current short-term sell-off continues, I'll buy some more. I'm looking for a GLD price above 150 by expiry. That would be a massive return on the call investment.
15 December 2010
Now I Can Afford That Operation
The CiG trade, which bought Eurodollars on an entry signal a week ago, finally gave an exit signal on Monday at the close, so I exited the position by selling GEH1 at 99.59. That gives a $75 profit. Since I trade this in paperMoney, I wasn't paying a great deal of attention to how much I should trade, but this one really brought that home. The risk of one Eurodollar contract is not equal to the risk of one S&P contract - not even close - and the margin requirements reflect that. Eurodollars carry a margin requirement of $877.50 per contract, while S&P futures require $5625 per contract. In order to take the same amount of risk, I should be trading 6-7 Eurodollars for every contract of S&P I'm willing to commit margin for. If I had, this $75 profit would have been $450-525... very similar to the $500 I made on the S&P signal.
In other news, one of my Iron Condor exiting orders also filled on Monday, closing out my remaining 660/650 put spreads. This leaves my protective debit put spreads on with nothing to protect, and it also tilts the delta into the negative territory again: -20. With December expiry coming this weekend, and with implied volatility near its 52-week lows, it seems best to close this one out. I'm working orders to close the two call spreads - the original 810/820 and the kite-component 830/840, the naked long 820-call of the kite, and the protective 630/640 put debit spreads. Since my current position still has positive theta, though, I see no reason to rush things. Either way the market moves it will approach my exiting limit orders, so hopefully over the next week or two we'll get a little end-of-year waggle so I can squeeze out a few cents per contract on the way out. If not, I have a month before I have to make a final decision. Once theta goes negative, or if delta gets uglier, the pressure will be on to make that decision a bit sooner.
I've had a limit-sell order working on Microsoft for a few weeks now, and it filled today. I'm still a believer in the stock, but I bought quite a few shares of it when it was depressed, so I'm just rotating some capital out to bring my position value back down where I want it to be. Readers of my facebook notes will recall that I had 5 "units" of capital in Microsoft. This sell brings me back down to 5 units of capital in position value.
I'm expecting another increasingly bullish (for me that means bearish) sentiment survey this week, released tonight sometime. If that's true, CS|MACO will still stand by and watch the Fed Cheerleaders... er, I mean Stock Market... without getting involved itself.
In other news, one of my Iron Condor exiting orders also filled on Monday, closing out my remaining 660/650 put spreads. This leaves my protective debit put spreads on with nothing to protect, and it also tilts the delta into the negative territory again: -20. With December expiry coming this weekend, and with implied volatility near its 52-week lows, it seems best to close this one out. I'm working orders to close the two call spreads - the original 810/820 and the kite-component 830/840, the naked long 820-call of the kite, and the protective 630/640 put debit spreads. Since my current position still has positive theta, though, I see no reason to rush things. Either way the market moves it will approach my exiting limit orders, so hopefully over the next week or two we'll get a little end-of-year waggle so I can squeeze out a few cents per contract on the way out. If not, I have a month before I have to make a final decision. Once theta goes negative, or if delta gets uglier, the pressure will be on to make that decision a bit sooner.
I've had a limit-sell order working on Microsoft for a few weeks now, and it filled today. I'm still a believer in the stock, but I bought quite a few shares of it when it was depressed, so I'm just rotating some capital out to bring my position value back down where I want it to be. Readers of my facebook notes will recall that I had 5 "units" of capital in Microsoft. This sell brings me back down to 5 units of capital in position value.
I'm expecting another increasingly bullish (for me that means bearish) sentiment survey this week, released tonight sometime. If that's true, CS|MACO will still stand by and watch the Fed Cheerleaders... er, I mean Stock Market... without getting involved itself.
09 December 2010
Such a Slacker
I've been distracted most evenings lately from the four Xbox games I picked up during Black Friday madness, and so it has taken me even longer than usual to record thoughts, trades, and rambling nonsense. As if that weren't enough to eat up my attention, the Bintgoddess and I just received our HTC Incredibles we ordered through Amazon Wireless, and I at least have been spending more time than I should customizing and moving into my new phone. I had intended to switch from AT&T+iPhone to Verizon+Android when my contract ran out in August, but the Bintgoddess' pre-pay plan ran out of minutes, and we could save more money to switch us both to a family plan now, despite the early termination fee from AT&T. With nearly free phones (1 cent each from Amazon Wireless) and free 2-day shipping, the choice was pretty clear. And yes, Amazon did charge my credit card $0.02. Silliness.
Iron Condor
The January 2011 Iron Condor position has required some adjustment to keep it close to delta-neutral recently. Recall that I opened a 650/660/810/820 iron condor on Nov 8, and then adjusted it Nov 16 by buying a 630/640 put spread. Since we're into December, I'm now erring on the side of closing positions rather than opening them - but I'll still increase a position if it's the right thing to do for the risk or the greeks.
The stock market had been rallying pretty hard the last week or two - in fact, it has been rallying pretty hard ever since the day after I put on that downside protection. This is not a surprise - it's just how I roll: don't believe me? watch me play poker on Full Tilt sometime. But I digress. With the stock market rallying and delta going pretty negative, it was time for some upside protection.
First, I bought back about half of the 810/820 call spreads for 1.40: a very reasonable 10c loss. This moved the delta up about halfway to where it needed to be, but gamma was still pretty negative. Another up-move and the position would be in trouble again, so I beat the rush and put on a Wolfinger Kite Spread. Specifically, I bought back an extra 810 call for 3.70, and financed that by selling four 830/840 call spreads for 50c each. Not only did this bring delta to a nice manageable level and give me some much-needed upside protection, it also significantly improved my max-loss on the upside. Of course if MDW is reading this blog, he's probably seething that it isn't a perfect Kite Spread - I should have sold the 840/850s, or reduced the sales by 1 contract. Tough. I am convinced this was the right trade to make, whether it can rightfully be called a Kite or not.
The next day, I took advantage of another rally to buy back a few of the 660/650 put spreads for 45c. This lowered delta a bit again, but like the previous day's adjustment, it really helped out in the max-loss department. The total position now has a nice flat S-curve to it, and theta miraculously is still 13. So a sideways market for the next 30 days should net me about .25 per contract - that may not sound like much, but that's 2.5% margin-return on a monthly trade.
It's also about time to be looking for a February trade, but I'll learn my lesson from January and wait for volatility to come up a bit. Using paperMoney is nice, because I have so much fake margin in there that I can make trading decisions without having to be concerned about margin. If I want to put on February before taking off January, so be it. Doing that with real funds would take some very careful money management... or more money than I have.
CS|MACO
Still very bearish signals (53% are bullish as of last night, way too many for my taste) from investors, who happen to be right this time about the market as it sustains an uptrend, and bullish signals from the trend following MACO component. As a result, it still waits in (fake) cash.
CiG
Eurodollar futures (GEH1) gave a bullish entry signal on Tuesday, so I bought them at the stock market close for 99.56. Trading Eurodollar futures is similar to watching a bad horror movie: long periods of mind-numbing boredom punctuated by moments of pure terror. So far I'm in the boredom phase - two days after buying them, I'm up 3 ticks. W00t! No exit signal yet, so I wait.
Iron Condor
The January 2011 Iron Condor position has required some adjustment to keep it close to delta-neutral recently. Recall that I opened a 650/660/810/820 iron condor on Nov 8, and then adjusted it Nov 16 by buying a 630/640 put spread. Since we're into December, I'm now erring on the side of closing positions rather than opening them - but I'll still increase a position if it's the right thing to do for the risk or the greeks.
The stock market had been rallying pretty hard the last week or two - in fact, it has been rallying pretty hard ever since the day after I put on that downside protection. This is not a surprise - it's just how I roll: don't believe me? watch me play poker on Full Tilt sometime. But I digress. With the stock market rallying and delta going pretty negative, it was time for some upside protection.
First, I bought back about half of the 810/820 call spreads for 1.40: a very reasonable 10c loss. This moved the delta up about halfway to where it needed to be, but gamma was still pretty negative. Another up-move and the position would be in trouble again, so I beat the rush and put on a Wolfinger Kite Spread. Specifically, I bought back an extra 810 call for 3.70, and financed that by selling four 830/840 call spreads for 50c each. Not only did this bring delta to a nice manageable level and give me some much-needed upside protection, it also significantly improved my max-loss on the upside. Of course if MDW is reading this blog, he's probably seething that it isn't a perfect Kite Spread - I should have sold the 840/850s, or reduced the sales by 1 contract. Tough. I am convinced this was the right trade to make, whether it can rightfully be called a Kite or not.
The next day, I took advantage of another rally to buy back a few of the 660/650 put spreads for 45c. This lowered delta a bit again, but like the previous day's adjustment, it really helped out in the max-loss department. The total position now has a nice flat S-curve to it, and theta miraculously is still 13. So a sideways market for the next 30 days should net me about .25 per contract - that may not sound like much, but that's 2.5% margin-return on a monthly trade.
It's also about time to be looking for a February trade, but I'll learn my lesson from January and wait for volatility to come up a bit. Using paperMoney is nice, because I have so much fake margin in there that I can make trading decisions without having to be concerned about margin. If I want to put on February before taking off January, so be it. Doing that with real funds would take some very careful money management... or more money than I have.
CS|MACO
Still very bearish signals (53% are bullish as of last night, way too many for my taste) from investors, who happen to be right this time about the market as it sustains an uptrend, and bullish signals from the trend following MACO component. As a result, it still waits in (fake) cash.
CiG
Eurodollar futures (GEH1) gave a bullish entry signal on Tuesday, so I bought them at the stock market close for 99.56. Trading Eurodollar futures is similar to watching a bad horror movie: long periods of mind-numbing boredom punctuated by moments of pure terror. So far I'm in the boredom phase - two days after buying them, I'm up 3 ticks. W00t! No exit signal yet, so I wait.
05 December 2010
Happy 1975
It's 1975 this month in my "year a month" project, and my band list yields:
Black Sabbath: Sabotage
Deep Purple: Come Taste the Band
Rainbow: Ritchie Blackmore's Rainbow
The Who: The Who by Numbers
ZZ Top: Fandango!
This month is kind of a loser, though. Mid-way through last month I used the Sabbath album to round out free shipping on an unrelated Amazon purchase. The Deep Purple album just sucks, so I didn't get that one. I had high hopes for Rainbow, seeing as how it is the debut album for one of Ronnie James Dio's earliest projects (let us not speak of Elf). I was already familiar with Man on the Silver Mountain, and hoped the rest of the album would be just like it, but sadly no... didn't get that one either. The Who by Numbers is a bit of a step up from some of their early pop-filled discs, but not quite what I'm looking for; I may pick it up someday, but not today. Behind Blue Eyes is a big standout on this album, but of course we already have that one from the Greatest Hits album we picked up some years back.
Thank goodness for ZZ Top, or this month would be a complete bust. This early ZZ Top is right on the edge of my blues tolerance, but if I'm in the right mood it's perfect. I dig the live versions of a few of the songs at the end - they pulled out a few more stops live than they did in the studio. I've never seen them live, but I certainly would if the chance came along.
Maybe the nicest part is that I had a $5 Amazon MP3 credit sitting around, and that is coincidentally the price of this album.
Black Sabbath: Sabotage
Deep Purple: Come Taste the Band
Rainbow: Ritchie Blackmore's Rainbow
The Who: The Who by Numbers
ZZ Top: Fandango!
This month is kind of a loser, though. Mid-way through last month I used the Sabbath album to round out free shipping on an unrelated Amazon purchase. The Deep Purple album just sucks, so I didn't get that one. I had high hopes for Rainbow, seeing as how it is the debut album for one of Ronnie James Dio's earliest projects (let us not speak of Elf). I was already familiar with Man on the Silver Mountain, and hoped the rest of the album would be just like it, but sadly no... didn't get that one either. The Who by Numbers is a bit of a step up from some of their early pop-filled discs, but not quite what I'm looking for; I may pick it up someday, but not today. Behind Blue Eyes is a big standout on this album, but of course we already have that one from the Greatest Hits album we picked up some years back.
Thank goodness for ZZ Top, or this month would be a complete bust. This early ZZ Top is right on the edge of my blues tolerance, but if I'm in the right mood it's perfect. I dig the live versions of a few of the songs at the end - they pulled out a few more stops live than they did in the studio. I've never seen them live, but I certainly would if the chance came along.
Maybe the nicest part is that I had a $5 Amazon MP3 credit sitting around, and that is coincidentally the price of this album.
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