August 2008 Returns -39% (not as bad as it sounds)

August was a very strange month.  Normally August is a boring, low volume, slightly bearish month.  So that’s how I traded it this year and it turned out to be anything but boring or bearish.

Fortunately, I realized early that this time was different and I kept my trades smaller and got out of losers quicker.  So while the -39% sounds bad the actual dollars lost were small.

So what happened?  Well, all my income trades went against me and as well as a couple bearish trades I had on against DELL which came out with poor earnings.  However, tech kept on rallying dragging DELL up with it.  SPY moved higher past my ICs and BCSP.  SPY was just so strong that I was a deer in the headlights watching it.  I couldn’t believe how strong it was.

September is shaping up to be very good so hopefully it will erase August losses and then some.

July Returns: +44.25% 6 wins 1 loss

July more than made up for the lack luster May and June (although not bad just not great) thanks mostly to the two short Iron Butterflies I sold a couple of months ago in JEC and MON.  Both moved against me in the last 2 weeks as the market got jumpy but I followed my trading rules and got out at the right times locking in nice profits.

My other positons paid off nicely accept a BRPS in AMT which I was looking nice with until they got upgraded.  Oh well, not a bad loss.  The others were profitable nicely thanks mostly to selling my bread and butter spreads in SPY, WMT and a couple of new trades in NKE and PALM.

I’m doing well in refining my “1-3 swing for the fences” trading style.  I’ve been reading how many people suggest having at least one big trade for each three singles trades you put on.  That means taking on more risk than most trades but the reward is much larger than most trades.  It’s been working nicely and I’ve been doing it through selling high beta, high vol.  via Iron Butterfies.  This might change since IV is coming down to earth again.  I will find another vehicle if IV comes down too low.

June Returns: +9.33%

Wow what a rollercoaster ride this last expiry.   I had one big loser which dragged down my returns and was a winner up to about a week before expiry.   I had an IC  $30,40-50,60 June on for CPLA which I sold 3 months ago.  The stock did what I wanted for the first 2 months then it started to creep up to $50.  In the last 3 weeks it stayed in the low 50s for much of the time.

So what happened?   I didn’t follow one of my trading rules for ICs which is close them out at least 5 days ahead of expiry.   My plan was to close it out on Thrusday week which would have been correct.   However, on thurs the stock jumped to $54 and I felt it was on no news and it would fall back over a couple of days.  Also $54 was very close to break even so I wanted to try to regain a few more dollars back.

On Monday the stock drifted up again and I waited and on Tuesday in jumped to $58, very close to my max loss.  Gamma was killing me and thus too late to get out so I waited until Thursday morning and the stock moved back to 57 and I got out with a $4.60 loss.

The hard lesson here is I tied up a good chunk of margin for 3 months for this trade, had a profit all the way until the last week when I got slammed.  Had I followed my rules I would have gained a small amount instead of losing money.

I had a couple of other small losers but had a couple of very nice winners so overall a nearly 10% gain for the month is ok.

Time to move on and make some money.

May returns 5.89%

My returns for this month were positive but not stellar. However, the returns don’t tell the whole story mostly because I closed less than half of my open positions. I still have severel ICs, IBs, and Verticals open which will expire in June and July.

I closed a naked put position on PPD too early. Had I held out another 2 weeks I would have been up $3.00 on the 6.00 put. However I bought it back for $5.30 because of an artical I read that spooked me a bit. I’m still finding my way with naked put selling and even though I felt the trade was still good I allowed myself to be swayed by one negative article. I should have taken the article along with other ideas such as the technicals. The technicals were still good and the IV was still dropping making the position less risky than I was viewing it. Oh, well no one ever went broke taking a profit even if it is a small one.

My second area that pulled down returns was in the SPY ICs. The market got very strong for a week or so and got to around 94. My short Call strike was 91/92 so when the market pulled back to the the 91 area I started selling off the call side of the ICs. Unfortunately SPY never got low enough to make the calls break even or somewhat profitable. So I took a small loss on the SPY ICs.

The other drag was an BRCS on AAPL. I was right on this one but I didn’t stick it out long enough. I sold the 130/135 May BRCS with 18 days left and I did it the day after expiration with the feeling that it was overextended and all the good earnings news was baked in the stock. The stock stalled for several days around 125 but then the Nazz took off like a rocket taking APPL with it up to 132 over a couple of days. I held out for a few days but the Nazz remained strong and I felt I didn’t have enough time for the position to turn around so I took a 1.00 loss. Max loss on the position was 3.50. I felt it was the prudent thing to do. About 3 days after I closed out the stock fell to 128 and by expiration it was around 122. Oh well, the position could have just as easily ran to 140 as 122 and stuck me with a much bigger loss so I don’t regret getting out early.

Overall, the month wasn’t bad but I really felt like I never really had a good read on it’s direction. It was strong in the price department but volume was never strong and we only had pockets of leadership. That told me we should have been weaker than we really were. This market is still tough so a small gain is a good gain.

April Returns

April’s returns were very good because I’ve been selling a lot of premium.  My strategy for this crazy market I started back in January consists of selling premium using straddles, strangles, ICs, and naked puts.   Since I was selling premuim 3-4 months out things are just now starting to pay off.  Selling premium on range bound stocks has been very profitable for me.  I’ve got several more positions paying big dividends that will expire over the next few months.  I’m just sitting back collecting me some moola.

Closed: PBR BLCS +51.00%

This one worked out very nicely.  Oil has been strong for about 3 weeks sending all the oil stocks higher. I decided to close this one since it had run long past my long call and they will post ex their dividend next week.

Credit: 2.55   +51%

Closed: MSFT BLPS Apr 14/19 puts +65%

Closed this one out into the huge Nazz rally.  I’ve been waiting for this position to turn to the good since Jan and now it has.   I finally made a nice gain @1.04

ROI: 65%

Close: HBC -100%

Well, this one didn’t work out.  With the Fed and the Treasury doing all they did in the last week or so all the financials ran higher and never looked back.  I also got assigned on my short calls. but I chose to hang on since the risk profile didn’t change.

In looking back on this trade I should have closed the position when it looked like the Fed et, al. were making things happen that would make the financials rally longer term.  I could have closed for about a 1.50 loss as apposed to a 3.57 loss.   Not closing this position sooner was the difference in this month being in the black instead of down 9%.  Oh well, live and learn.

HBC: Got assigned on my BRCS

For the first time ever today I was assigned on all of my short Mar 22.50 HBC calls.  I was a bit surprised to see the email from TOS about it and immediately checked out my account.  Sure enough I was short a bunch of HBC stock.  I’ve heard that short calls are more likely to get assigned than puts and with the huge pop in the market yesterday I guess someone really wanted that stock.

So now what do I do?  The short answer is – nothing.  The position has the exact same risk profile as the BRCS.  The only difference is my margin takes a bigger hit because I am actually short the stock.  However, I still have the long Mar $25 calls which means until they expire next week my max loss is still the original $3.57.  However, my max gain is much larger now since the stock can become worth  a lot less than the original short option.

So even though my margin is reduced more than I want, there is only about 9 days left to expiry and HBC got knocked down 6% today even with the financials showing more strength.   So if it gets beat down more I stand to make so nice coin off this trade.

Close: ABX BRCS ROI: +26%

Bought the spread in at .10.  It’s down so much I wanted to take the profits and not be greedy.

ROI: 26%

Open: HPQ BLPS March 27.5/30

HPQ had nice earnings sending the stock higher and it’s was close to it’s 52 week low before it announced.  It hasn’t been below $27 in the past year so I think this is a good trade.   Also, there was huge call buying in the March 30 strike.  This seems very solid for me.  If it continues to work I may start trading HPQ in place of MSFT as my BnB tech trade.

The trade:  1.00 credit  1.50 risk

Open: ABX BRCS Mar 35/37.5

GOld has run up to $1000/ounce which is a double top and resistance.  The miners/gold producers are rolling over and while long term I believe gold will bestrong and the miners should follow, right now things are pullling back.  The MACD and STO are rolling over and it’s broken the 50MA down which means it’s going lower.

The trade is Credit .62 on 1.88 risk.  Not as good a risk reward as I would like but I’m keeping my position smaller than normal.

Close: HBC BRCS Feb 40/45 ROI +93%

HBC got hammered today along with the rest of the market and since there are 4 days until expiry I decided to buy back the short for .10 cents.  This trade worked out well and I’m thinking of putting it on again for March expiry since all the banks including the ones in Europe have started tocome out and say they need more money.   This one is going lower.  The only problem is do I wait and see if it gains a few dollars closer to $40 or do I just put on a BRCS 35/40?  I need to wait and see what the rest of the week brings.

Buy to CLose Feb 40 .10 debit

Open: USO Mar $27 Short Straddle with wings

Ah my new love, the short straddle.  I’ve become very fond of this strategy since I started playing with it a few months ago.  This will be my second real straddle trade although I’ve done several paper ones.

I’ve been watching oil through the lens of the USO for a while.  It’s become very predicatable and a not as volitle as it’s 65% IV  would suggest.  It’s pretty range bound between $25-33 and I think will stay that way for a while.  It’ still in a downward trend, mostly because I think because people think oil is broken.  I don’t think that but as long as others do the IV will stay high.  That gives me a chance to feast on that juicy premium.

The other reason I like this trade is I’m only risking 1.80 to make a potential 3.13 and I REALLY like that risk/reward.   My break evens are 23.60 and 30.19 which gives it some room to run.  I also think there is high risk that things could bolt up or down without much cause so I put on some wings for protection by buying the 22 put and the 32 call.  That pulls my BEPs in on each side about 1.50 and reduces my credit but it’s worth it in this case.  After all, I’m still learning this trade and I’m learning the USO so these wings are more like training wheels.   Also, my buying power reduction is half as much than it would be without them and I like that too.

The trade: Credit 3.13

Sell Open: USO Mar 27 call and put credit  4.43

Buy open: Mar 32 call debit .60

Buy open: Mar 22 put  debit .70

Close: CLF BLCS Apr 20/22.5 +37%

I decided to book the profits in this position for a couple of reasons.  One being it was trading @ $30 in the morning before the Tim Geitner spoke and I thought the market would likely sell off after he was finished.  I was correct.  It sold of hard.

The second being this stock along with others in it’s space have been showing strength lately in addition I believe the spread wasn’t positioned quite right – it need to be wider and the long leg deeper in the money.  So once the market is done selling off I may re-enter this trade albeit a little differently.

Had I positioned this one better, I could have bought some puts at the same strike as the short strike which would have the same affect as closing the position.  If I bought 1/2 as many puts as I had short contracts, I would have closed 50% of the position.  Or I could have bought the same number puts as longs and would be completely closed.

Why do this?  Well, for one I have over 2 months left on this trade which is a lot of time.  By buying the puts I can ride the stock down if it sells off, sell the puts for a profit and be right back in the trade with less cost.  Also, the bid/ask on the stock is a bit too wide making slippage a problem.   The stock sold off 11% from it’s $30 perch which could have yielded me a nice profit for the next day and I could have sold the puts and waited for the stock to run again – because I don’t think the thesis is over and it should run again soon.

Why not do it this way with the current trade?  Because the cost of the put exceeds the  initial cost of the spread which would put the position underwater if the stock doesn’t correct.  Ie. it’s not truly closing out the position because I would have to pay more for the put than I originally paid for the spread.

Close: Apr 20/22.5 BLCS for Credit 1.85

ROI: +37%

Close: MSFT BLPS and BCLS ROI:+9.5%

I’m closing out all my positions in MSFT during our current Nazz rally.  RIMM, AAPL, et al. are pulling up most big cap techs and this rally comes after MSFT’s earnings miss last week which sent the stock down into the 16’s and made my position down 40%.   In normal bull markets I would be more inclined to leave some or all of the position on to collect max profits but this market can turn on you in 5 minutes so the reward isn’t worth the risk right now.

I’ll capture a small profit so given that last week I thought I was in for a loss, I’ll take what I can get.  Again, this kind of prevent action is part of my new tightening of my money management rules.

Close: Feb 20/15 BCLS  3.35 credit

Close: Feb 17/18 BLPS .23 debit

Open: JEC Short Straddle Apr 40 w/insurance

I’ve been paper trading straddles for several months now and I feel I’ve learned enough to try one for real.   Jacobs Engineering looks range bound between $30 and $60 but hasn’t seen 30 since the big market selloff in November.

I’m buying an upside $60 call for .75 to protect me from a big rip higher.   I’m not going to buy any downside insurance because I my down BE is 29.50 and don’t see it breaking $30 any time soon.

I’ve got a lot of time to make this trade work and it’s got wide BEPs.  @29 and 50.  Stock is at $40 right now.   Historical IV on JEC is about 45 – it’s 75 right now.  I think IV will drift downward towards 45 again making the straddle more money.

The trade: Credit 10.63

Sell Open: Apr 40 call  5.95

Sell Open: Apr 40 put  5.45

Buy Open: Apr 60 Call .75

Close: HPC BRPS Mar 25/20

I made a mistake today.  Something I sort of knew not to do but never experienced before – I traded in the first 15 minutes after the market opened.  The financials got a boost today with Obama’s Bad Bank/Super TARP/Spend a trillion dollars BS plan.  I’m not going to get into why I don’t think this plan will do anything but make us more broke but the street loved the news and the financials all ran up.

So at 9:35  I looked at my HPC position.  I had a BRCS and a BRPS on.  I figured I might want to cover it for now until the dust settles.  I looked at the mark price on the Puts and it looked like I could buy the spread back for a $1.00 loss but I could sell the call spread for a $1.00 profit giving me a breakeven.  I liked it and entered the the two trades.  What I didn’t notice was the natural for the call spread was a $1.00 more than I thought it was and my Put spread order was filled for the $1.00 loss but the calls remained open.   With in a minute or so the spread jumped $1.15 higher as the MMs began to tighten up the bids/asks.

So right now the BRCS is still open – it never filled so I’m going to hold on to it for a while longer.  There is 3 weeks left I’m pretty sure HPC will move lower again soon.  It’s only about 1.25 ITM so I’m confident it will come back in.  I’ll watch it close and adjust if necessary.

Open: HBC BRPS Mar 09 25/30

The financials have sold off hard hard hard today.  My oopen BRCS I put on yesterday is already up 1.32 so I’m looking out the next month to buy a Put Spread.  With the puts so expensive I’m kind of using the BRCS to finance the Put spread.  I think the Bears will push the stock to the $25 range by March.   I can always sell another BRCS for March to collect even more premium.

We may get a bounce in the next couple of days but I think it will be short lived.  The Bears are pressing hard on the financial stocks and I see nothing to make them stop.  Even so my risk is limited with the spreads should I be wrong.

The Trade:  Debit 1.45

Buy Open: March 30 puts

Sell open March 25 puts

Open: HBC BRCS Feb 09 40/45

Note: I this order was filled yesterday (Monday).

I’ve watching this stocks options activities for a week now and the PUT action is incredible.  The big guys are buying huge volume of March puts ranging from 45 -25 strikes.   I’ve seen this action before in LEH, BSC, MER, STT, MS  and other financial over the last year.  It’s a precusor to a bear raid.

The bear raids in the financial stocks are VISCOUS!   Since I rarely short stock directly I will use a bear call spread.  I sold the spread when the stock was about 49.50.

The Trade:  Credit 2.15

Sell open: Feb 40

Buy open: Feb 45