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Foreclosure Thursday – The Stealth Stimulus

US foreclosure filings will hit 3.9M in 2009, bringing the 3-year total to 10% of all US homes.

How is this "good" for the economy?  "It’s a stealth stimulus," says Christopher Thornberg of Beacon Economics, a consulting firm specializing in real estate and the California economy. "The quicker these people shed their debts, the faster the economy is going to heal and move forward again."  That’s right, bankrupt is the new rich in the USA as the 4.8M homes that are at lest 3 months behind on their mortgages (see map) are "saving" $5Bn a month in mortgage payments

Analysts at Deutsche Bank Securities expect 21 million U.S. households to end up owing more on their mortgages than their homes are worth by the end of 2010. If one in five of those households defaults, the losses to banks and investors could exceed $400 billion. As a proportion of the economy, that’s roughly equivalent to the losses suffered in the savings-and-loan debacle of the late 1980s and early 1990s.  Even the rich are playing the default game now.  More and more Americans are realizing there is no sense in paying a $7,000 monthly mortgage on a $1M mortgage with $100,000 in equity when they can walk away and buy a similar home for $500,000.  We’re talking about saving $3,500 a month for 30 years or $1.26M. 

As more and more people see their friends and neighbors "get rich" by walking away from bad home investments, this trend is likely to accellerate, not abate, unless housing prices rally back fast.  A recent study found that four out of five people believe defaulting on a mortgage is morally wrong if one can afford to pay it, but they also found that the people become 82% more likely to say they’ll default if they know someone else who defaulted.  Meanwhile, there is a massive game of chicken being played by the 4.8M people who have simply stopped payinig their mortgages and the banks who have no desire to take a huge loss to their books by actually taking over and selling the homes in this terrible market.

2 few bears

Investors meanwhile, can’t be bothered with abstract market undercurrents and the above chart shows that there haven’t been so few bears in the market since right before we began to crash in 2007 – Excellent!  What’s really funny is that, as the market has topped out the past month, the bulls have gone into a frenzy, wiping out all but the last 17% of the bears.  As one of the few remaining bears, I do have to tell you it’s lonely out here but we’re not perma-bears, just bearish since the S&P crossed 1,000 as we are long overdue for a correction and we’re likely to flip bullish again at 880

Speaking of levels – How good are we with our projections?  Yesterday morning I said we expected bounces to Dow 10,336, S&P 1,095, Nas 2,158, NYSE 7,095 and Russell 593 and we got Dow 10,337, S&P 1,095, Nas 2,183, NYSE 7,067 and Russell 598 - not bad for a morning prediction!  There was no way to predict the massive push on the Nasdaq that took them up 20 points in the last two house of trading.  Well, there is some way as we played for the stick save but that was a REALLY big one, very disproportionate to the other indexes.

That means today we’ll be looking to see if the Nasdaq can get back over our breakout level at 2,187 (see Monday’s level chart) and the Dow is already well over 10,250 so the focus will be on S&P 1,100, Russell 600 and NYSE 7,200.  We need ALL 5 of our indexes over in order to get more bullish but there is such a massive push on in the futures at the moment (8:20) that I think they are trying to gap us over before the open.  Remember also from yesterday’s post, denial is the 2nd phase of a market turndown – if we fail here, we move on to fear, and that can get ugly so we’ll be taking our levels very seriously. 

Copper, oil and gold are all still weak in overnight trading and silver looks like it’s going to be testing $17 again, which makes one wonder what the futures traders are getting so excited about.  The gang of 12 was on the march this morning with JPM raising their outlook for oil prices by 15% in 2010, Pimco buying Abu Dhabi bonds (signaling they don’t feel the Dubai crisis will spread even as far as their sponsor) and George Soros announcing that he’s sure the Greek government "will not be allowed to default on its debts, despite growing budgetary difficulties. There has to be pressure on Greece to put its house in order but I’m sure that Greece will not be allowed to default. The same applies to the U.K."  Well if a guy with Billions of dollars of investments in Greece and the UK tells us not to worry about those countries then why should we worry – he couldn’t possibly have an ulterior motive could he?  The same goes for Pimco, as this is not the first round of Abu Dhabi bonds they’ve ever bought but you wouldn’t guess they were just covering their assets from the way the MSM is reporting it. 

Someone had to step in and do something this morning as the Hang Seng failed to get back over 22,000 (falling 400 points from the open prior to a stick save in the final minutes) and the Nikkei fell 141 points, back to 9,862 – once again creating a huge and unusual gap between the Nikkei and the Dow.  This is great for us as we can reboot our EWJ play if the Dow does break up from here but, more likely, the Dow will follow the Nikkei down.  China’s fall is particularly disturbing as they went so far as to extend subsidies for autos and home appliances, which has been the entirety of global demand this year

Government support helped fuel a 42 percent jump in nationwide vehicle sales to 12.2 million in the year through November, putting China on course to surpass the U.S. as the world’s largest auto market. China’s full-year auto sales may be about 13 million, according to Booz & Co., which advises carmakers and investors in China.  China will extend subsidies for purchases of automobiles, appliances and farming equipment in rural areas, according to the statement, which didn’t give a time frame for the program. China will continue appliance trade-in subsidies beyond May 2010, when they had been set to expire. Subsidies for motorcycle purchases will be extended to the end of January 2013, the State Council said.

Over in Europe, despite assurances from Pimco and Soros and encouragement from JPM, all coincidentally coming at the open of their markets, the DAX has been rejected right at our 5,750 target (up 1.25%) and the FTSE has been rejected right at our 5,250 target (up .75%) so we’ll be watching those closely today.  Even the BOE chipped in this morning, announcing they will stick to its plan to buy as much as 200 billion pounds ($326 billion) in bonds.  The central bank also held the bank rate at a record low of 0.5 percent, according to a statement in London.  Of greater concern in Europe is an ECB document warning that: "The authorities in the Baltic states may not be able to prevent a renewed emergence of macro-economic imbalances and a repetition of the boom-bust cycle."  The boom-to-bust fate of the Baltic states has been exacerbated by euro-denominated borrowing since the countries joined the EU more than five years ago. That’s obliged central banks to stick more rigorously to their euro pegs or risk leaving households and businesses unable to service their debt.     

Jobless claims were up 17,000 this week to 474,000 but hey, it’s not 500,000 so yay, I guess…  Expert economists had been predicting 450,000 job losses but a 5% miss isn’t even worth mentioning compared to their usual screw-ups.  Tomorrow is a big data day with Import/Export Prices, November Retail Sales, Michigan Sentiment and Business Inventories so even if we do sustain this pre-market BS rally we’ll still be going short into the close as all 4 of those things could be a bummer.

Be careful out there!

 


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  1. cwan120

    Hi, Peter D,
    I just got my IRA account transferred to TOS, which gives me a lot more flexibility trading options.
    How do you suggest we sell options on SPX / RUT / etc. in IRA accounts?
    Thanks!

  2. alsos

    Phil
    Assuming the market moves higher today above key levels, what level on the RUT (above 600) would you suggest to use as a roll up of 61P to the Jan exp?

  3. ssdirk

    Peter – You are getting popular.  I currently have the RUT Jan 500/650 short strangle.  I think that we are range bound throught the end of the year and I want to add to my current position.  I am trying to decide if adding to the Jan strangle is more beneficial or starting months further out.  In comparing the RUT 500/650 short strangle P&L curves on TOS for Jan, Feb and Mar using the same # of contracts for each I find that 1) the portfolio buying power is basically the same 2) Delta is more negative with latter months 3) Theta increases with latter months 4) on 12/31 Max profit is higher with latter months and 5) on 12/31 breakeaven points are wider with latter months.  If I want to maximize profits on 12/31 why would I not choose the latter months to start a new position?  Thanks for your help.

  4. ssdirk

    Peter – after rereading my question and looking at the P&L’s again I think I answered my own question.  It looks basically to be a risk/reward scenario.  While the latter months may provide more max profits inside the breakeven points once outside of them the losses are more magnified.  Is this correct?

  5. jcmcn5

    Phil — those Dec 104 i shorted yesterday at 1.41 – now at a $1.  I’m crazy to not take that overnight but then there’s still nearly $1 of premium with a week to go? 

  6. jromeha

    I know we have a MASSIVE oversupply of NG and the industrial demand is practically nonexistent but with the weather lately we should have some sort of a drawdown. Do you believe that UNG (or another gas play) might be solid as a daytrade today?

  7. ssdirk

    GS and ZION both red.

  8. jcmcn5

    well, it looks like the 104′s only had about $0.50 of premium so I bought them back.  How can I not take $0.50 profit on $1.41 from yesterda’s close, right?  Now what?  We seem to be over the levels but for NYA.

  9. Phil

    Good morning!  

    Back to watching those upside levels of Dow 10,250 (but 10,400 has been more in line with the rest), S&P 1,000, Nas 2,187, NYSE 7,200 and Russell 600.  Right now the NYSE is holding us back and XLF $14.40 is very disturbing to rational thinking people but certainly not to buyers this morning. 

    I like the DIA $103 puts at .50 play this as a top at 10,450 but risky of course.

    Overall DIA stance is naked on the March $106 puts.

    We’re watching the FTSE at 5,250 and the DAX at 5,750 to see if there is real conviction to this move internationally and FXI makes a good upside play with the Jan $42s at $2.70 and we can sell the Dec $43s to cover, now $1.27 at $1.20 IF they start falling for a $1.43 calendar spread.  

    We’ll have to see how the volume plays out but all we have so far is a very low volume 150-point move since yesterday at 2pm

  10. alsos

    WFC breaking down thru key support at 26.  JPM just above key support at 41.  If the banks break the SP may follow.

  11. sarahd

    I sold the Dec 65 Calls naked for $1.20 yesterday.  They are up to $1.70 early today.  Would you suggest rolling up or to hang tight and see if they settle back down?

  12. sarahd

    That would be the AGU

  13. Phil

    RUT/Alsos – I would take advantage of rolling up to a higher put if that’s what you mean.  If you have a current put that’s being crushed though, I would wait to see if this move holds up for more than an hour so we can get a look at the volume.

    $104s/Jcm – Just put a .10 trailing stop on it and don’t over-think it.  You can always sell another one 10 seconds after you buy it back if you feel it was a mistake but the rule is "ALWAYS sell into the inititial excitement" which includes buying back things you sold, of course while Rule #2 is "When in doubt, sell half."   Rule #3 is "If you didn’t follow Rule #1 or Rule # 2 then why the hell are you even bothering to look for a Rule #3 when you never listen anyway."

    Gas/Jrom – Are you saying it’s going to be cold in the winter?  Wow, I bet nat gas traders never thought that was going to happen…  Nat gas trading is a joke, you may as well go to a casino and bet the wheel.  I play gas to be over $3 and under $9 and I don’t touch it in the middle.  The oversupply issue is huge but can be negated by any sort of weekly drawdown as NYMEX traders are desperate to get something going. 

    GS,ZION/SS – That’s a good enough indicator for me to go short! 

    AGU hit our DD target to short the $65 calls at $1.70 for a $1.35 avg short.

    .50/JCM – Nice discipline.  Now you can take that .50 and use it to roll up your March puts by $1 and then you can sell the $105 puts if you have to and have the same spread or, if all goes well, the Dow drops while you have a higer delta and then you can sell $103 puts later (when we sell ours).

  14. EricL

    Not too impressive so far: note that besides many banks, the REITs are also red.
     
    Has anyone else been hit with a lot of short call assignments this week? WMT, DIS, CMCSA, MCD for me, all were about one strike ITM. Pain in the @$$.

  15. doro165

    Good morning Phil,  my PGH shares were called away today. That has been a very nice dividend payer for the last 6 months. Looking to reboot the trade again. There isn’t much premium at the 7.50 strike in any month so would it be better to sell the Jul 10 for .55?

  16. raulsm

    Phil, there were 4,178,780 persons claiming EUC (Emergency Unemployment Compensation) benefits for the week ending Nov. 21 (vs 729,256 claimants in the comparable week in 2008). http://www.dol.gov/opa/media/press/eta/ui/current.htm

  17. ssdirk

    Eric – got one on PGH

  18. jcmcn5

    use it to roll up your March puts by $1
    Just so I’m clear on the ling, by "roll up" do I understand you to mean buy a higher strike price than the one I own, (106′s and 104′s) or roll up to a lower strike?

  19. morxlntway

    Eric – i am expecting one with KMP; i will hate to see it go, we been together a long time (for me). I will look forward to getting it back as soon as reasonably possible.

  20. chaps

    Phil:
     
    Reading over your "disaster plays" from yesterday, I notice that your verticals tend to be roughly 5 to 7 months out to cover a period that runs roughly through January. How do you tend to pick vertical time frames? You must have some base of experience on how verticals tend to pay out, relative to the period you’re covering, that orients you towards particular expiration months.

  21. pstas

    Phil,
    No, rule # 3 is see Rule #1.
    DIA – Made .60 on the 104′s. Thank you very much.
    So, we are looking to reload w/the 103′s later? What is your sell target?

  22. llorens

    Let’s see what the Timmy Drop is good for today.

  23. jomama

    Eric – yeah got assigned 20 contracts of walmart yesterday.

  24. morxlntway

    Eric again – that’s kind of what i was thinking abt yesterday re puts. Is there a percent above or below the strike price that you can be pretty sure you are going to get called or assigned so you know at that point it is time to act to avoid, if you dont want it to happen?

  25. jomama

    Went shopping yesterday – heavy markdowns (already) in many retail stores at Fashion Square Mall in Scottsdale.  So, i assume it must be worse elsewhere.  I was underwhelmed by the traffic at the mall.  Just one data point.

  26. EricL

    morx,
     
    I don’t think so. I think it has more to do with the amount of extrinsic on the option and the time remaining (if almost none or none, assignment probability goes up). For calls, there is also the issue of dividend dates which can lead to assignment. In each of those cases I was waiting for a pullback which never came (except MCD).

  27. ssdirk

    I would love to see oil below 70.

  28. EricL

    Must have been a draw in NG.

  29. RMM

    Phil: bullish or bearish ?
    DIA covers or not ?

  30. jomptien

    Phil,
    I have 100 shares of VZ @ 29.40. Sold 5 Jan 11 P @ 5.15. Thanks again. Question: Would you sell P + C on this in closer months, if so what strikes and months?
    Thanks

  31. jomptien

    Phil,
    I’m thinking of selling more C as it is a little toppy now. Agree?

  32. ssdirk

    JRW – are you playing TNA/TZA trades today?  Interested in your plays.

  33. Cap

    Jomama … I did a small amount of shopping at Macy’s … same thing; very promotional; every day advertising big sales w/ coupons; also not particularly crowded — this is the flagship store.
     
    Bought 2 nice dress shirts + 2 gifts for the kids; after sales and coupons it cost me $36.  Ridiculous !

  34. JRW III

    Looking a bit like last Thursday; if we’re still here at 2:00, I’m shorting.

  35. Phil

    So I’m looking over positions and I’m not so bearish as I want to cash in short puts I’ve sold so I guess I’m thinking we do hold around 10,200 through next week – just hopefully at the lower end of the 10,200 to 10,500 range.  We may not get a proper breakdown until January unless there is a huge catalyst.  Look how JPM negates oil, Soros negates UK and Greece in one press release and Pimco negates Dubai buy spending 0.001% of their funds on some bonds.  With 83% bullish sentiment, any idiocy is treated like great news.

    Nat gas was a better than expected -65Bcf and it jumped 10% on that news but it’s nothing like the 200Bcf draws we get in a real cold snap.

    PGH/Doro – Yes, you have to expect to be called away on them as that happens all the time with big dividend payers.  I like them at $9.19, selling July $7.50 calls for $1.85 and July $10 puts for $1.80 for net $5.54/7.77

    Emergency/Raul – Wow!! That’s why you can’t trust the damn headline numbers, they don’t take any of that stuff into account.

    Roll up/Jcm – Yes, I mean improve your position by rolling to a higher strike.  Our rule of thumb is to alway offer .45 for the next $1 and pay up to .50 when we have made some money and have an opportunity to improve. 

    Time frames/Chaps – Those are based on covering the time I consider most dangerous.  Once we get past Jan earnings without a dip, we may not be needing disaster protection.  By going out to April we have an excellent chance of holding 1/2 our value – even if the market does keep going higher.

    DIA/Pstas – I’m just watching and waiting right now.  Volume is just 52M at 10:45 so barely ahead of average but we are holding up well considering. 

    Assingments/Eric – That’s a lot, what broker?

    Dollar is coming back VERY fast.  Not affecting the market yet but all of last night’s shenanigans are being erased.  $1.47 to the Euro, $1.62 to the Pound and 88.35 Yen.  In now way, shape or form are gold and oil reflecting this and copper is holding 3.115 at the moment but we can fall back to $3 pretty fast

    FCX is a good short here.  $75 puts are .90 with a stop at .75, looking for $1.30+

  36. ssdirk

    The shopping stories make me want to DD on RTH.

  37. emcginley

    Phil any advice on…
    I Sold a PBR DEC09 48-50 Put spread
    I Sold a RIG DEC09 80-85 Put Spread

  38. Cap

    Phil / others — remember EMIS ?  Got some material positive news about their Phase III trial run by NVS today.
     
    Stock is starting to move.  All charts (intraday; daily; weekly; monthly) starting to look bullish …

  39. mrmocha

    Cap, I’m in EMIS from last summer at .75, been mostly underwater since then, please buy a bunch and get it over a buck for me. Thanks!

  40. Phil

    DIA/RMM – Still bearish, I’m not seeing justification for breakouts and the RUT is stubbornly not getting over 600 and the NYSE is hovering at 7,100 (where I considered readjusting our break point to) and the Nas isn’t getting over 2,200.  Until I see that hold for more than a few minutes, I’ll stay bearish.

    VZ/Jomp – Very nice!  I would either cover or take it off the table at the moment as that’s a big run.  You made $4 so, if you think you will miss out, you can just buy the 2012 $30/40 bull call spread for $3.50 and then you don’t have to mess around with covers and you can make another $6.50 while freeing up your cash for other things.  If you want, you can sell 1/2 Jan $34s for .50 against it, which may not seem like much but if you can collect .25 per long for 24 months, that’s $6 and you are up almost 100% before you even cash in the spread.

    C/Jomp – I would be very careful with them right now.  They are either going to do a dillutive offering that sends them back to $3 or less or they will NOT do a dillutive offering (or not too dillutive) and they will zoom up to $5.  I still like the 2011 $5s at .48 as the way to play it.  If you can sell the $7.50s on a pop at .28, it’s a very nice spread to ride out.

    Transports falling fast after big run-up.

    RTH having a silly run-up.  I still like the Jan $90 puts for $1 ahead of tomorrow’s sales reports.

  41. Cap

    Mocha; I got enuf thanks;  how about HK today ?
    Just sold my traders …

  42. Cap

    Let’s kill the REITs now; the financials too; and COF

  43. Peter D

    cwan/IRA accounts – unfortunately neither the short strangles nor buy/write work well in IRA account due to the 100% margin requirement.  So you’d need to use the Covered Calls on dividend stocks (least risky), Double Diagional (more risky), or Iron Condor (most risky).  Sorry, no magic bullet for IRA account.

  44. gel1

    I believe gold has pretty much completed its correction while on its bullish trajectory in a northward direction. The underlying reasons for its directional move up are still there and will not go away anytime soon. With deficits the name of the game (mostly in the US) then the next plateau for gold price will be 1500 – 1600 /oz.. My harem of gold-diggers are warming up in the bullpen, and will soon be called back into service. On this go around, I plan to put a heavier wieight on GLD and less on the miners, as the cost of mining goes up as the demand for gold increases, and the supply in the hands of the miners diminishes.The word on the street is: very few "gold bugs" liquidated their positions in this last correction, so the movement was really speculation which could mean this correction was just a glitch in the long term bull market in gold.

  45. pstas

    Anecdote from the trenches:
    I had an interesting converstation with a restarurant chain owner/operator the other night at a Christmas function. He and his family have been in the pizza/restaurant business for over 60 yrs. They own/franchise a couple of hundred stores in the Chicago metro market plus AZ; Vegas;and elsewhere.
    Currently sales volume is down 10-15%. This is new. Previously, the pizza business has been almost :"recession proof". They have motballed  expansion despite his bank aggressively offering financing. (These people have an excellent record and golden credit). The only deals they are doing are "vulture buys" where they pick up a closed location for a fraction/ hardball the landlord on the lease and minimally staff it ; and then  make some money on reduced volume. These deals are self-financed only- no additional debt.
    He lamented the current situation. "When I started out, I could open a simple carry-out joint for $5000. Now, it takes $300,000. How can a little guy get started today? These folks have been an entreprenurial/job creation dream machine. Their formula was to advance someone from driver to counter man to cook to manager then set them up (with financing in place) in a new location. Not anymore. He cites increased regulation (local codes have added substantially to build-out costs) ; minimum wages increases; ever increasing sales and property taxes as the tipping points. (The restaurant business is all about nickels and dimes and volume).
    I asked his opinion on the economic outlook. He is in standstill mode until next year to see if volumes pick up. He suspects that just as general retail is "over stored", there may be too many restaurants also. In fact they are seriously looking at their own "marginal" locations (recently opened thus higher costs). His opinion on the stimulus? Meaningless. Without volume increase, nothing will happen.
    His conclusion. The road to recovery is long, muddy and uphill.

     

  46. EricL

    Phil, Those assignments were with ToS.
     
    cwan
    As Peter says you can’t do short strangles in IRAs, but you certainly can do short iron condors. I sell iron condors on indexes in both my own IRA and the IRAs I manage. I usually leg into them. E.g., I sold SPY Jan 108/106 put verticals for .66 into the selling on Tuesday, then I sold the other side with Jan 112/114 call verticals for .80 this morning. That collected 1.46 against 2.00 gross margin for each one, so net margin of .54, which is also total risk on the trade. These work very very well if the indexes hold in this range (108-112) through opex. In fact, measured against net margin they will usually beat short strangle selling, unless you have portfolio margining.
     
    As Peter says there, is risk, but it’s not huge if you sell ‘close’ condors like these. If you’re worried about downside in a crash you can also buy cheap put verticals like Peter does, but of course you have less possible loss to worry about with these kinds of condors. So if you bought a put vertical that collected $400 on a major drop, you would cover almost 4/5s of the total loss on each 10 of the short condors without spending a lot on this ‘insurance’.

  47. Phil

    OIH $115s naked sell at $2.05, rolling to Jan $120s, now $2.65 if things don’t work out

  48. gel1

    I have been substantially increasing my position in TBT and hope it will be one of my best payoffs for next year. Notwithstanding Bernacke’s committment to keep the rates near zero, eventually the Fed will start to make conservative moves to raise rates, as inflation definitely is in our future. Now is the time to look for great opportunities to take advantage of currently inexpensive positions that will pay off big time as the rotation comes out of stocks and enters bond positions. The long term short treasuries is just one opportunity, among many, that I am considering, but I’m sure Phil has a basket of these type of plays. Eric might be another great source, as he has good handle on the dynamics of these moves.

  49. yodi

    Hi Phil
    Holding the GS dec spread 175p short sold for 8.26 now 10.72 170 long bought for 5.56 now 6.37 your suggestion please

  50. samz3700

    Phil -
    Rimm – thinking of trying to take advantage of the vol – do a buy write – with Jan. 65 calls for 5.10 – but also buying the Dec. 60 put – assuming the vol. is going to come way down after announcement on dec. 17 – but still getting protection if fails to meet expectations.
    Thoughts?

  51. pstas

    Gel/TBT- I have been looking for a good entry on this. My thought is that when/if we get a substantial correction, there will be a rush into Treasuries. Thus, a short term dip in TBT. Comment?

  52. alsos

    Phil, when you say FCX is a good short here, would that include a calendar 5% lower or are you just  thinking day trade.

  53. harip

    Phil,
    Your opinion about cvx march 75 puts vs 1/2 sell of jan 75 puts (probably at a better price)
    thanks

  54. EricL

    I don’t have a short treasury position right now, but I agree that it looks good for anyone willing to hold out for a long time if necessary, and like pstas I’d like to see a big scary drop in the stock markets to get in.
     
    Here’s a bond trader who has been posting his thoughts on trading treasuries; a lot of his calls over the last year have been pretty good (you have to get past all the Star Wars references):
     
    http://accruedint.blogspot.com/

  55. emcginley

    Phil any advice on…
    I Sold a PBR DEC09 48-50 Put spread
    I Sold a RIG DEC09 80-85 Put Spread

  56. Peter D

    ssdirk/RUT,
     
    You guys are getting better with questions where there are no definite answers.  Well, I can become less popular, which is a good thing, hihihi.  From the pure number perspective the Run Jan 500/650 strangle is $4.90, and the Feb 500/650 is $15.15, so you are correct that the Theta is higher for Feb.  The hidden factor in this comparison is that the Probability of Expiring outside of the 500 to 650 is higher for Feb than Jan, of course.  This means the profit value is higher, but the chance to get it is lower.  At some point in time in the next 2-3 weeks, these factors may be equal, then we’re in the Feb’s.  I should do this analysis, but don’t have the time.  I’d just have wider spread for Febs than Jan, i.e. RUT Feb 480/670 short strangle (currently at $9.45) or something similar to increase the Probability of Expiring within the wider range.  Well, you have forced me to look at Feb’s a couple of weeks earlier than I thought, but I’m not in a hurry to get into Feb’s as the VIX has dropped, which is usually the time that I pare back my positions, rather than adding them.

  57. Phil

    Short puts spreads/Emc – Hmm, that’s complicated.  Hard to advise without knowing entry prices.  I assume you sold the $50 puts and bought the $48 puts?  Why not just go long?  In general, when you are down 50% on a vertical spread you were probably very, very wrong and need to get out.  At this point the PBR $50/48 spread is $1.18 and if you are still bullish on PBR you can roll to the Jan $47.50/50 spread at $1.30 but if I were bullish on PBR (and I am so not), I would feel better about being long on the Jan $46/49 spread at $1.70, because PBR can fall to $47.70 before I lose a penny.   RIG is the same as I just sold the OIH calls but they are very bouncy and maybe you can roll them along to Jan and get lucky on an oil spike.

    EMIS/Cap – Damn, I forgot about them.  Didn’t notice they hit .68 again yesterday as I had been playing the .65-.75 channel for a while.  Can’t see chasing them at .84 but great call back when you pointed them out!

    Big dollar buying was into Europe’s close.  Now that they shut we’re moving back down.  FTSE finished just under 5,250 and DAX finished right on the 5,700 line after 2 attempts at 5,750 so still internationally bearish. 

    Gold/Gel – Well I hope so for you as you do seem determined to keep playing it.

    Pizza/Pstas – Good info from the ground floor, thanks!

    TOS/Eric – That’s interesting.  I don’t have many short calls this month but it hasn’t been a big issue in the past.  Is this a new thing you’re seeing? 

    RIMM over $65, ANOTHER 2.5% today – woo hoo!  Funny as I used to short the crap out of them at $130…

    TBT/Gel – Actually that’s the only one I bother to play as I feel they are the best risk/reward.

    GS/Yodi – Well it would have been nice if you’d stopped out the calls $2 ago (or the puts for that matter).  Not much to do other than roll them along.  The Jan $165 puts are $6.90 and the Apr $145 puts are $6 so lots of time to be right but if you have a position like this that isn’t working well and we get a spike (like now) that gets you back to even – why not just cash out and wait for a clearer opportunity?

    RIMM/Samz – I’m bullish on them above $60 but they should hit resistance at $67.50 and that’s what we need to watch.  There’s not much point to owning the stock as you can buy the 2011 $50s for $22.20 and sell the Jan $66.625s for $4.40 and the Jan $60 puts for $2.45 for net $15.35 on the $16.625 spread.  That gives you more wiggle room and the $6.85 you collect pays for you to roll down to the 2011 $40s and you can roll the Jan $60 puts to the June $45 puts, now $2 so it’s a pretty wide margin of error.

  58. Peter D

    Eric & cwan,
     
    Eric’s close to the money Iron Condor almost gave me a heart attack.  Hihihi.  I know what you mean by risking less and winning more interms of percentage, while lowering the chance of winning (expiring within the strikes).  You can do these spreads, but make sure that these are a fraction of the account as you’d loose it all if the short strikes are run over. 
     
    I mean to include the following link in the earlier post, for comparing short strangles, Iron Condors, and buy/write for reg-T accounts.  You can see if it fits in IRA accounts.
     
    http://www.philstockworld.com/2009/11/20/friday-dell-misses-is-goldman-sachs-stupid-or-evil/#comment-270495

  59. Phil

    Time Warner (TWX) -6.6% premarket as investors digest a post-AOL TWX. Analysts are already panning a standalone AOL, saying Time Warner managed to eliminate "a continual source of investor frustration." AOL -2.2% premarket to $23.15.

    Saving AMZN todayDavid Pogue and Walt Mossberg pan Barnes & Noble’s (BKS) Nook e-book reader, with the former calling it "slower than an anesthetized slug in winter." Pogue also notes that the Nook’s much-touted distinctions are fraught with footnotes. Mossberg called the Nook annoying, and said Kindle’s navigation system "runs circles around the Nook’s." Shares of BKS fell 2.7% Wednesday.

    Akeena Solar (AKNS) soars 64% after Lowe’s (LOW) announces it will begin selling the company’s "plug-and-play" solar panels, which it says is the first practical DIY solar solution. "The availability of solar panels in Lowe’s stores makes it easy for homeowners to go solar, and is a big step toward getting solar on every sunny rooftop," CEO Barry Cinnamon says.

    Quarterly Services Report: Sector revenue of $272B, -0.7% Q/Q and -3.5% Y//Y.

    Freddie Mac weekly mortage survey: 30-year fixed-rate mortgages rose to 4.81% from 4.71% last week.

    Holiday flyers expected down 2.5%, ATA says, noting the ongoing decline in travel is being driven by a fragile economy. "We are continuing to see fewer air travelers over the holidays, a trend that has been apparent throughout 2009."

    Two-thirds of Americans want the government to spend more money on job creation and tax the rich to pay the bill, according to a new poll by Bloomberg. While the public sees both unemployment and the deficit as a threat, anxiety over unemployment is higher: 8/10 respondents call unemployment a high risk to the economy, while 7/10 say the same about the deficit.  With 80% of the people worried about unemployment – how good can consumer sentiment really be?

    More debt reductions from households dragged outstanding debt (U.S. companies, households and governments) to its slowest-paced rise on record in the third quarter. Overall, debt increased at a 2.8% annualized rate to $34.6T. Government debt increased at 20.6% annualized; private-sector debt -2.6%.

    Ahead of today’s $13B 30-year bond auction (see calendar), the yield curve has widened to the biggest margin since 1992 – 368 basis points, which "should help entice investors and arbitrageurs to consider bidding for today’s supply against shorter issues on the curve," a strategist says.

    FCX/Alsos – Longer-term it depends on copper prices (and gold) but I was just going for the front-month puts as I think they have a week story and are up since yesterday on BS buying.  Longer-term, it’s very risky to short miners as you may as well short the commodities long-term, which is also very dangerous.

    CVX/Harip – I like that play but maybe wait on the sell with a selling stop if they make it over $78.50.

    Ah, finally we seem ready to roll over.  Come on roll over.. good market! 

  60. ssdirk

    Phil, any play on oil to test 70?

  61. ssdirk

    Phil, any play on oil to test 70?

  62. jromeha

    Phil, I know you think AMD is a garbage company, but how much further do you see it running? The stock has doubled over the past month with the INTC ruling, but last I checked it was still losing money EVERY quarter… I bought a position of Jan 9$ puts recently but was thinking of doubling down…

  63. Phil

    Whee, there goes copper, gapped below $3.10 to $3.085!

  64. Phil

    Whee, there goes oil, failing $70!

  65. RMM

    Phil: as I am not abl;e to watch/trade next week,
    I want no dec  positions short or long:
    the ones I have and I ask you where to go with them:
    KBR putter dec19,
    IHI caller dec50.
     
    Txs

  66. EricL

    Peter,
     
    I completely agree on position sizing. Also, all of these accounts have many other positions, including bear ones. And the older the IRA owner, the more cautious I am.
     
    One thing to remember is that unless we really drop hard (or soar very fast) with no bounce, there is little chance of losing the whole thing on these, since the ITM strikes will hold a fair bit of extrinsic until near the end (and I roll them out before the last week in any case). Also, you can lose 2 times out of 3 on spreads like these and still be ahead, even after counting in comission costs. How many times in a year would we have fast drops with no bounces? I think it’s unlikely that we’d have more than one or two, although if implied volatility goes up like it did last year, I would sell far fewer of these, and maybe none.

  67. 1020

    BAC could be going back to the14 area and C could be a fun ride, my bet is back to 3 first…..

  68. mrmocha

    Cap – still loving HK, I cover and uncover them once or twice a day if I’ve got the time, hardly a day goes by where they don’t move 2% one way or the other.

  69. cwan120

    Hi, Peter & Eric,
    I really appreciate the inputs  from both of you!
    Eric’s idea of legging into an iron condor plus buying verticals as insurance is interesting.  So, Eric, how long have you been playing this strategy?  What’s your experience on win/loss ratio and profit margin?
    Thanks!

  70. EricL

    cwan,
     
    That’s a good question about P/L that I don’t have an answer to because I didn’t keep track of them specifically. I sold some last year and they were losers and I gave up on them until this summer. The losses last year on these weren’t bad, but it was a nice example of how tough they are in a high volatility environment. As option traders have subsequently pointed out, despite the seemingly high VIX last year, it still tended to underprice the actual SPX volatility. Hence my comment above about not trading many/any if IV goes back up.
     
    This summer I started selling them again and they have worked, but I didn’t keep track of P/L. I can tell you that the December contracts were the first ones I sold in meaningful size in those accounts and they have been very successful; I’m now closing them in stages. So the P/L is certainly positive over the last 24 months, but it’s a small sample and not very representative.

  71. mrmocha

    Has anyone on this board coded against the OptionsXpress API?

  72. Phil

    Oil/SS – They should bounce off $70 so I don’t want to short them but I’m not feeling bullish on oil at all so it’s a stay away.  USO $36 puts are kind of fun at $1.10 for a quick play but the futures are too dangerous.

    AMD/Jrom – I want to clarify that I don’t think AMD is garbage.  I just think AMD is a joke that only exists so Intel can tell people they do have a competitor.  That does not mean that AMD won’t make sales, usually a bit less than 20% of Intel’s so if TXN and INTC say it will be a good year, AMD should do well too and I wouldn’t bet against them unless they were ridiculously high but I would also never bet a dime on them.  As to the making money thing, AMD never makes money and that didn’t stop people from buying them for $20 a share before so don’t assume they are run by logic now.  Some idiot like Cramer will do a price to sales comparison with INTC and determine that they are undervalued. 

    KBR/RMM – Those you can just roll out to the Jan $17.50 puts at .80 (1.5x would be even) or down to the March $17 puts if you don’t want to increase your exposure.  Either way it’s almost 10% progress for free.   IHI – you sold callers?  I hope that’s against a longer position but we’ve had a great run on them so I’d just roll them along to Jan $50s to keep the protection.   You can add a couple more longs if you think it’s too bearish but we started them at $40 and that’s a lot to protect now.

    AGU is starting to make a good day trade on these call sales.  With $1.35 avg on 2x we put a $1.35 stop on 1x now

  73. mrmocha

    Aclend, are you here today?  I made a note a while back that you were buying BEHL, do you still like them for LT hold?  They’re down 70% from where I started watching them, they’re truly a penny stock (.01) today…

  74. gel1

    Pstas/TBT
    The recent sales, by the government, of treasury bonds have been large in all expiration ranges. The reception has been suprisingly positive, as the demand is very strong. This strength is powered by the "flight to safety" which seems to work at the present in propping up an investment that I think is anything but safe. Just as soon as there is any indication the Fed will change their policy (albeit minimal) to raise rates, then the bonds will take a big dive in value. The holders of these bonds have a committment from the government to receive a meager interest rate for periods of up to 30 years. What a horrible investment, when one considers interest rates are surely headed upwards and not too distant in the future. One needs to take a brief look at the historical pattern that rates have followed. With todays dynamic of record deficits, inflation will soon raise its ugly head (this time with the worst hangover ever) and rates will will rise in tandem with the monumental rise in prices. This scenario has played out exactly the same way over and over for the past 100 years – much like the change of seasons. The only question is WHEN this event will be in full swing. I believe we will see signs of this directional change in the latter half of 2010, however as we approach this time frame, prudent investors will be phasing into investments such as TBT et al, in preparation for the outcome in bonds. I can’t believe someone would by a 30 year bond with a 3 +% interest rate, on a currency that is depreciating in value on a daily basis, and the prospects of interest rates soon to rise. I have also, today, expressed my bullish stance on gold. The sovereign foreign central banks have been the largest buyers of gold lately, and will continue to do so in the future, solely as a hedge against the massive US treasuries they hold. The dollar will continue to depreciate long term, so gold will contnue to be a buy for those looking to hedge their investments against this negativity.I will continue to scale into protective positions over the next 6 – 8 months as this scenario plays out. I am looking into positions in senior secured floating rate bonds that will do well when the rates go up.

  75. Phil

    The November jobs report may not be the only piece of good statistical news on the way. Wait until all those census workers start making their way into the data. But a drill down reveals deep, deep problems in the US labor market where unemployment averaged just 5.5 percent from 1989 through 2008.

    It seems those home equity "cushions" that Federal Reserve economists used to talk proudly about just a few years ago have all but vanished, giving rise to the new, far less pleasant reality of "negative equity" as captured at Google Trends and shown below (click HERE for full analysis):

    IMAGE

    Man they are just NOT going to let this market sell off.  We did get a nice .50 pop back in oil for no reason and that’s pulling XOM and CVX out of dive that was threatening the Dow. 

    There is no particular Dow leadership, pretty much everyone is up 1% with DIS up 3.5% and AA up 2.75%.  Only BA, BAC, JPM, KFT and XOM are red and all by a little. 

    1pm volume is just under 100M, very stickable but I think we already had the big stick for the day and now it’s just this BS support we’re seeing. 

    We’ll see how the 30-year auction goes next.

  76. jcmcn5

    phil — what’s holing up FCX and OIH if copper and oil futures are selling off?  I can’t see futures so I don’t know what’s gong on, but are they coming back — does that account for the resilience in these two?

  77. nolsrul

    Any thoughts on SRS for remainder of the day?

  78. jcmcn5

    disregard previous comment.  You answered it as I was posting the question.

  79. samz3700

    JCM -
    You can see futures on Bloomberg for free -
    http://www.bloomberg.com/markets/commodities/cfutures.html
    It’s delayed by 15 min. but better than nothing -

  80. EricL

    The market is getting support, but so is the dollar. It just got a big push back toward the day’s highs. So a nice little standoff here.

  81. Phil

    30-year was a DISASTER!!!  4.52% vs 4.4% expected.  Bid to cover a weak 2.45 on $13Bn and, as I mentioned this morning, they yield curve put this aution in a very favorable light.  TBT zooming once again – I love those guys!!!

  82. jcmcn5

    Samz — thanks

  83. jlui_tx

    Hi Phil, is it a good idea to buy/sell option on JPM?
    thanks

  84. Phil

    Holding up/Jcm – As I said in 12:57 comment, nothing but BS fake support.  No logic to it at all, which is why I haven’t changed positions despite the run up   Oops, now disregarded per your next comment!  8-)

    SRS/Nols – Other than scooping them up at $8 for a quickie, I only like them longer-term.  You can’t predict the moves as they seem to be able to boost CRE at will but I’ll keep playing $8 until that support breaks down. 

    JPM/Jlui – Too random for my taste.  There’s no way to know if they made money or not.   I would maybe short them if they re-test $47.50 and certainly buy around $27.50 but this is too in between. 

  85. roamer815

    GLD, SLV, USO, XLF all down and UUP up. What is driving and holding this market up today…. am I overlooking something?

  86. Phil

    Wow people are just so delusional.  The 30-year just popped 2.5% in a month and we have to sell that many 30-years next month and the month after and the month after that forever and ever until we pay off $13Tn in debt (assuming we don’t increase it).  That impacts home prices and corporate profits and the cost of money for banks and the carrying cost of commodies and the municipal bond market (and the last thing they need is to have to pay 8% interest) etc. etc.  It’s one thing to perpetually have your head in the sand and pretend interest rates will stay low forever but quite another to ignore the evidence that they can’t when it’s right in front of you

    The Treasury sells $13B in 30-year bonds at 4.52% (.pdf). Bid-to-cover ratio of 2.45 vs. a recent 2.58; indirect bidders take 40.2% vs. a recent 45%; direct bidders take 6.9%. Long-term Treasury yields picked up even more: the 30-year yield +0.08 to 4.49%; 10-year +0.06 to 3.49%; 5-year +0.06 to 2.21%; 2-year +0.04 to 0.79%.

    Driving/Roamer – Rising rates paid on dollar-denominated assets creates a demand for dollars.  People with existing low-interest notes (like those jerks at Pimco) have to liquidate them for dollars before they lose all their value, creating a demand for dollars.  Rising rates make the notes more attractive compared to riskier assets like stocks and commodities so bits of paper (or electrons on screens) and shiny bits of metal and black gooey liquid are exchanged for dollars, creating a demand for dollars.  More demand for dollars allows people who do have them to demand higher rates for those dollars, driving the cycle full circle. 

    Big 50-point gap below 10,380 for the Dow to fill.  Not too much volume to this sell-off so far so they can still turn it if they can dig up a catalyst. 

    Sector ETF strength: Internet– HHH +1.5%. Cons. Discretionary– XLY +1.5%. Retailers– RTH +1.35. Healthcare Providers– IHF +1.3%. Coal– KOL +1.1%. Utilities– XLU +1.1%.
    Sector ETF weakness: Gasoline– UGA -2.2%. Silver– SLV -1.8%. Oil– USO -1.4%. Commodities– DBC -1%. Solar– KWT -0.8%. Gold Miners– GDX -0.8%.

  87. samz3700

    I love this range for RUT!! afternoon drop and then late pop? 

  88. ajaytoo

    POT swinging sharply…opened at 124 and then down to 121.

  89. Phil

    ZION (our favorite canary) not doing too well. 

    Nas is refusing to give up ground.  Nas companies tend to have the most cash and borrow the least so a bit less affected by rates than capital intensive S&P companies. 

    Nonetheless, I’m still lookiing for the gap back down to 10,350. 

    SBUX crankin’ – we’ve been waiting for that one forever.  Funny time to do it…

    CNBC bashing the Nook, could they possible work harder for AMZN.

    RUT/Samz  – that is a good idea, we can play them for a pop just in case we reverse.  In the futures I guess we can use the 594 line as on/off for an upside momentum play.  IWM $59s at $1.40 are a good way to play too but a little trickier to get in and out of at that price

  90. Phil

    I offered DD on RTH Jan $90 puts in the $100KP but no takers at .95, maybe on this push up. 

    Sell the euro against the dollar in 2010, advises Bank of Tokyo-Mitsubishi UFJ. “There is an excessive degree of pessimism in the foreign-exchange market in regard to the dollar, which will change as U.S. growth begins to outperform unambiguously," the bank says, targeting $1.35 for the euro. Other calls: buy pesos against yen, and sell the pound against the dollar.

  91. ssdirk

    Eric – are you still in the GNW straddle?

  92. JRW III

    Phil / Russell
    Dont’t forget TNA or UWM as pop plays. I just made a little on TZA on the drop, out now.

  93. roamer815

    I understand as far as demand for the dollar….. but shouldn’t that trigger stock selling? I’m not understanding the catalyst for the gap up and holding. I’ve been under the assumption that a combination of the weak dollar, commodities, and (until about a month ago now) the financials have been driving this market up. If one of these were strong this up move would make more sense to me. But I don’t see power in any of those today. Is my thinking wrong or is there maybe something I don’t see that is responsible for the gap up and holding?

  94. oncmed

    Roamer,
    To paraphrase the great Benjamin Graham, ‘The markets are like a crazy Uncle, some days he want to sell you stuff at 1/2 price and on other days he wants to sell you stuff at twice  the price’ …..there is no rhyme or reason in the short term to market behavior. Most of the media just make up reasons for the markets movements post facto.

  95. gel1

    I bought a $165.00 lamp on Amazon last evening – my short Jan puts went up 25% today. I’ve doubled down and will buy a sofa tonight!

  96. Cap

    I missed that CNBC piece on AMZN Kindle BKS Nook.  I guess they trashed the Nook …

  97. judahbenhur

    Nook. Both the WSJ (Mossberg) and the NYT (Pogue) trashed the Nook as well.  Oh well, I really wanted to replace my Kindle with something that had better functionality and design.  If AAPL announces an ebook, game over for the Kindle. 

  98. Phil

    KO making new highs.

    RUT/JRW – I don’t like the ultras for tight momentum plays.  As I expect to be out by 600 and they have a lot of premium and huge spreads.  The futures have just .10 spreads and the IWMs trade in pennies.

    Stock selling/Roam – Yes, stocks are just another commodity people choose to buy over the dollar.  This is why I think this movement is totally fake.  It makes no sense, it’s very low volume and contrary to the news and data.  It’s all about the dollar though, they are over 76 butneed to break 77.50 before the bears really start capitulating.  Until then, bearish hope springs eternal and that’s good enough for commodity traders. 

    They jammed copper back over $3.11 now, crazy swings for something that usually move a couple of pennies a day.  $3.10 is big support from mid-November.

    AMZN/Gel – LOL!

    Note AMZN’s reaction to the Nook, down then up on relief that it doesn’t look so good.  The Apple product will probable really sock it to them and I kind of doubt it will get bad reviews so another short opportunity coming when that happens. 

    I am struggling to find an upside play I like in case we keep going up.  Really so little I like. 

    David Pogue Nook Article that went into the Times.   Here’s the video.

  99. morxlntway

    so out of FCX, right?

  100. jcmcn5

    stopped out of fcx at $0.75.  didn’t really want to, but then again, i have to learn to punt losses when small.  are rolling the oih short calls?

  101. Cap

    What a BS market; makes me ill …

  102. samz3700

    I went to B&N to try the Nook today – it hated it. I don’t currently own an E – reader.
    Plus they told me that if I pre-ordered could not get it until Jan. -
    Hell they just got the demo model in  the store on Monday – and this is on the Upper West Side of Manhattan – furtile  E-reader territory – wealthy women - I believe women are a majority of users -
    Seems to me they totally botched the roll out – not an original idea – wish I had shorted before all the negative press -
    FYI – for those CNBC bashers – Karen Finerman had a good idea - short B&N – long AMZN – this was several months ago at different levels- 
    Bring back Dylan Ratigan!! 

  103. Cap

    Phil … thanks for the video link re: the Kindle / Nook.
    I thought the video hile humorous, it was also a pretty lame hit job.
    For all the critiques of the Nook’s features; no commentary at all re: the Kindle’s shortcomings.
    At least the Nook does have lending book capabilities.  Whatever its limitations, with Kindle you have none.
    And so on.
     
    But whatever, other than being short AMZN, I have neither a nook nor a kindle, so don’t care all that much which is better.

  104. jomama

    samz – i have the second kindle and really like it – great for the hospital – really like browsing and getting books in a few minutes – also like reading the books on my iphone during brief periods of dead time.

  105. chaps

    Phil:
     
    I’ve got AMZN April short strangle 120 C/ 115 P from the old $100K. I’d rather be more aggressive in trying to work it off, even if it decreases my buying power. That position currently has about $14.19 in premium, which is about $3.55 a month (over the 4 months between now and April.)

  106. Phil

    Once again fighting the urge to short everything.  On the whole, I’m hoping we get back to 10,500 where I will short everything.  At 10,400, it just seems to easy for them to take things up. 

    FCX/Morx,Jcm - Stop is .75 and we’re not there yet.  You can’t set hard stops as they will get flushed almost every time.  Right now it’s .76/77 and I’d rather lose an extra nickel than be the first one out at .75.  It is not looking good with this run-up though but now I’m thinking I’d rather DD at .70 and re-set the stop at .60 off the avg .80 entry

    Cramer says don’t be negative on housing on the same day the 30-year jumps 2.5% – what a friggin’ genius!

  107. jcmcn5

    Am I being too stubbornly bearish?  I’ve mostly bearish bets on yet I look at a DOW chart and wonder what stops it from running to 11,000?  Bad Treasury auction? No problem.  Fake emplyment numbers?  Who cares?  Next wave of option arm resets about to hit.  Great news!  People will walk and have more spending money.

  108. stevenparker

    Roamer, the strength of the tie between the market and the dollar that has persisted a few months has been weakening recently IMHO.

  109. pstas

    Gel/TBT-  I agree with your premise. I am watching for a better entry. I think it will come in a bit. How are you playing this? Buying the underlying? Spread?

  110. EricL

    ss,
     
    No, I got out of GNW earlier this week. I paid .80 to get out, I think.

  111. EricL

    Market is moving in almost perfect inverse correlation to the dollar today. Compare a 1-minute chart of /DX and /ES.

  112. Phil

    Nook/Cap – Yes but Kindle was about 1/2 of AMZN’s profits last Q so it does matter from that regard. 

    AMZN/Chaps – I’m not sure what you mean by more aggressive.  It depends where you started but cosider selling Jan $135 calls, maybe 2x at $15 and cover slightly with maybe 1x of a 2011 $115/135 bull call spread at $10.50 so you are good to $140.  Figure if the 2x goes bust, even if AMZN drops $20, you should still have the value of $135/155 spread, which is $8 – certainly you won’t mind the $2 for $15 trade-off and you can do it again the next month.

    Stubborn/Jcm – You and me both!  I really looked and looked for bullish plays today and found nothing.  At some point you have to go with your gut.  Of course, we did the big cash out over the previous 2 weeks so this is more like taking pokes at shorts.  I think I said a couple of weeks ago that I’d rather drop to 80% cash and be 100% short on the 20% invested and that’s about where we are in the $100KP.  

    Dollar/Steve – the dollar has only bounced from 75 to 76 (1.5%) so not much of a test yet.  We’ll see what happens if we get a real move up. 

    RUT stopped out of course.

    TBT/Pstas – Easiest way to play is 2011 $45/55 bull call spread for $3.30 with a nice 200% profit on a pretty small move up and you’re alredy $3 in the money.  That can be offset with a 1/2 sale of the Jan $50s at .60 as you only need .30 a month to make it a free play.  You can also just sell July $44 puts for $2.10 as that (net $41.90) takes you back to just about our entry point (and of course they can be rolled down) and then you are in for net $1.20 on the $10 spread. 

    Treasury Budget (.pdf): November brought a deficit of $120.3B, the 14th straight monthly shortfall. It was a bit higher than a congressional estimate of $115B, and 3.9% lower than a year-ago deficit of $125.2B. Receipts were $133.6B; outlays were $253.9B.

    Economist Joseph Stiglitz calls for an unemployment Powell doctrine, urging "overwhelming force" be used to combat 10% joblessness. He says the February $787B spending package was too small and risks a vicious cycle of deceleration, and that banks aren’t restructuring home loans because they’re still allowed to carry them at face: "I call that marking to hope, not marking to market."

  113. dflam

    Hi Phil : Glad your’e feeling better.I went through passing a stone a yr ago. Hope I never have to do it again .
    I’m short AIB Feb. $5 Puts at $..80,now $1.35 and long TWM (Proshares USHRT RUS 2000)  April $30 calls at $4.12 ,now $2.60 I’m thinking of selling AIB May $5 puts for $1.70 but hesitant at the moment. OnTWM,,I’m  not sure what to do with it at this point. It’s a small hedge against the rest of my portifolio so I may keep it unless market goes long. Would appreciate your input.Thank you. 
    dflam 

  114. flyingman

    Phil,
    I’m looking at AAPL May bull call spreads.  Opinion?

  115. ephmen85

    SBUX  I’ve got a spread of +4 Jan 11 15, + 8 Jan 10 17.5 / – 12 Dec 21 Calls.   I’m making money on this move, but obiously would have preferred that my callers expired first.  Now that most of their premium disappeared I need to make an adjustment.   I’m thinking of taking some cash off the table by just buying back the callers and selling the Jan 09 calls and just sell against the 4 Jan 11s going forward.   I could roll them up, but figure I’d keep them deep ITM for now and do a 2X roll in case I get buried on my callers in the future.  What do you think?  Does SBUX have room to run or should I sell 1/2 into this pop.

  116. roamer815

    stevenparker, any ideas on why that might be?

  117. chaps

    Phil/AMZN:
     
    I have a loss of about $20 a share I’m trying to work off. I sold the April strangle for $28, it’s worth about $29.40 now and has about $14 in premium.
     
    By aggressive I meant spend more money (cash or buying power) to work off the loss sooner. (If you have the money, it might be a good use of your money, versus alternatives.) You were helping folks a few days ago who were having margin problems with AMZN. Versus those folks, I’m willing to DD, roll out and up (on calls), out and down (on puts) , whatever, to work off the loss faster, if that makes sense.

  118. flyingman

    Phi,  sorry that should have been July AAPL call spreads

  119. ephmen85

    Obviously, I meant selling the Jan 10 Calls and buying back the callers

  120. gel1

    Pstas/TBT
    I must drink my own Kool Aid, as I have a very hawkish position (only one at this point) on TBT. I sold 150 contracts on June 46 puts some time ago. Today the bond auction interest rate moved up a miniscule amount, and my TBT position jumped almost 20%. Think what the results would be if the rate jump was significant, which is surely in the cards after people discover what a scam this whole treasury bond thing is. I believe our government is populated with non-descript idiots, but on this scam, maybe I should re-evaluate. As far as future positions, which I’m sure I will add, I would defer to Phil, as his four dimensional plays are laced with more safety and balance.

  121. tchayipov

    Phil
    question about HOV
    I bot it @4.38 and sold Jan$5s calls and puts for 1.55
    now HOV at 3.64
    what is your recommendation to adjust (so far it is only a looser in my LTP portfolio)
    thanx

  122. sthompson

    Phil, I know it’s an ignorant questions, but I’m looking at the hazard plays you listed yesterday. For the DXD play, is the downside potential limited? I have the april 26 call for 4.90 and sold the 33 call for 1.95. What’s the most I lose in the event the market continues to climb to the moon or drop like a rock? I just need to know that the downside potential is limited to what I’ve already paid. I have an equal amount of contracts between the two.

  123. samz3700

    Phil – are you still naked?

  124. tchayipov

    Phil how you plan to be covered DIA overnight?

  125. Peter D

    SPX/RUT – As VIX continues to drop today and I’ve reached my 6% profit for December, I’m closing out 1/4 of my January positions, locking in the profit.  See, I’m still a bit greedy with holding on to the 3/4 of the positions.  Usually, if the market drops from here, VIX shoots up and I need to wait another 2 weeks to close out short strangles, so taking some off sounds good today.

  126. pstas

    Gel/TBT- nothing but respect to a guy who walks his talk. My finger would be itching to take it and run, especially in this market. I agree that our fearless leaders are challenged in many ways and the political imperative of holding down rates at all costs will over ride common sense. They don’t have much dry powder left and this "jobs initiative" is political window dressing at best providing minimal cover for the mid-term elections. It has no hope of doing any good but that will not prevent them from taking credit for any improvement.
    I put in orders for the Jan spread outlined by Phil above and hope to have the chance to scale in for more. Will see if it fills.

  127. Phil

    Thanks Dflam!  AIB is on track as long as you sincerely wanted to own it at $4.20 (which was the prior low) – I wouldn’t do anything with almost 3 months left.  RUT too is way out in April but there you paid premium, not sold it but I see the Apr $30s at $3.30 already, which shows how silly it is to worry about them on a spike.  I’d spend $2 to roll to the $25s, putting you $2.84 in the money and you can plan on selling the $30s if they fall below $3 to knock your basis down to $3.12 on the $5 spread.

    AAPL/Flying - I’d rather take them on a dip than now.  You have 2 earnings in between so they should hold value well but you must keep in mind with AAPL that if Steve Jobs is seen at a pharmacy buying kleenex, the stock can drop 10%.  Vertical spreads are not very flexible, you are really picking a target you will be kind of stuck with so let’s say you like the Apri $175/195 spread for $12.  You lose $12 if AAPL is at $175 and there’s no exit.  Meanwhile you can sell the Apr $175 puts for $8.25 and you don’t lose any money until AAPL is below $166.75 and even then you can roll them along.  You can offset margin by buying 2012 $115 puts for $10 if you have to but most brokers don’t really charge that much for naked put selling that far out of the money.  On TOS your net margin effect is $17 for the sold put vs $12 for the vertical but the naked put drops your b/e by $21.

    SBUX/Eph – I’d roll all 12 up to 2011 $20s and just roll the callers across the the Jan $21s for now (+.40).  That takes some cash off the table, buys time on the long and leaves you better covered.  If SBUX goes up higher, you can always add 4 more and roll callers to 1.5x $22.50s and if SBUX goes lower, you can roll yourself down with the money from the callers.

    AMZN/Chaps – Yes, I get that.  What I’m saying is the best way to "invest" is to buy back the Apr $125s at $20 and, instead, sell 2x the Jan $135s at $7.50 each.  So you are eating $5 (for now) but throwing the callers up to 100% premium and $10 higher into calls that expire in Jan rather than April.  You can make $15 in Jan and $15 in Feb and $15 in March if all goes well.   The way to work it off faster is to keep your caller out of position and in lots of premium so even a move up doesn’t do much for them. 

    July/Flying – Oh after all that!  Ah well, same advice really but I would sell the Apr puts and just plan to roll to July if Jobs is seen sneezing. 

    4D/Gel – Yet that damn Star Trek chess set baffles me!  8-)

    HOV/Tcha – Well you bought it for net $2.83/3.92 and they are at $3.61 so not too tragic.  You can still sell May $2.50 puts and calls for $1.70 which would drop your basis to $2.63/2.57 if things get worse so I’d bite the bullet and look to sell those $2.50 puts if they get to about .50+ on a test of the 200 dma at $3 but otherwise just see what happens.

    DXD/Sthom – You are limited to what you pay.  You can lose 100% of that if DXD goes below $26 and you ride it all the way out to April.  You own the $26 and just like any call, if it expires worthless you get nothing.  It’s not possible for your $26 call to expire worthless but your $33 caller is worth something, he’s in the same boat as you.  To the upside, over $33,  it’s not possible for your calls to not settle for $7 more than your caller, no matter how high it gets. 

    Naked/Samz – Yes but feeling self conscious about it after getting burned today. 

    DIA/Tcha – No, still naked and I’m going to roll up and DD if we get another stupid run-up.   Have to take the Dec $103 puts off the table though at .65 as it’s not worth the overnight risk

    RIMM still going up!

  128. ssdirk

    Peter – What % of your portfolio do you have to have in your strangles to produce a 6% return in a month?  Hope this question makes sense.

  129. jomptien

    Kustomz, You are right about real estate at least in FL. I lived in Daytona Beach for years but have been in Thailand for the past 6 but come back every year for 2 months or so. The other day I saw 4 units, 2 buildings (2units each- up and down), each apt 2/1 large lot, offstreet parking, 1/2 block from the beach. Nice property. Price $125K. I went to make an offer and it was under cotract for $90K! Unbelievable – I was a real estate investor form lat 70′s to early 2000′s and this is about the best deal I have seen. Thanks again for the contact in Palm Beach but did not have a chance to call him.

  130. chuaeu

    Phil/JCM,
    Count me in on not seeing bullish plays that make sense, even though I’ve been looking hard. Been a long time since portfolio’s been this unbalanced to the bear side, and this high in cash (>80%). Thinking that tomorrow’s data could prompt a nice sell-off, especially with the recent pressure on the dollar, and hoping that we’ll finally see some compelling opportunities to turn bullish.

  131. yodi

    Hi Phil pls let me get your suggestion below right
    AMZN/Chaps – I’m not sure what you mean by more aggressive.  It depends where you started but cosider selling Jan $135 calls, maybe 2x at $15 and cover slightly with maybe 1x of a 2011 $115/135 bull call spread at $10.50 so you are good to $140.  Figure if the 2x goes bust, even if AMZN drops $20, you should still have the value of $135/155 spread, which is $8 – certainly you won’t mind the $2 for $15 trade-off and you can do it again the next month.
    Sell two 135jan calls now somewhat 7.00 so two would be 14.00 buy  one 2011 115call and sell 135call spread  which is the value of the 135/155 = 8$   where does the 2$ for the 15 trade off comes in sorry but most of the moves are not clear to me. Thanks for an expl. 

  132. nolsrul

    Phil,
    Wanted to thank you for your advice "ALWAYS SELL INTO INITIAL EXCITEMENT."  Been preaching it to myself (and practicing it) and doing very, very well. 

  133. EricL

    Out of the EWZ short condors for a very nice gain. Brazil missed all analysts’ forecasts for economic expansion, and may be set for a larger tumble.

  134. jomptien

    Phil, Nice call on the 4 disaster plays from yesterday. I am positive on all 4 even though the mkt. is up. You da man.

  135. Grant

    pstas – I live in Downers Grove.  Were you referring to Giordano’s Pizza earlier?

  136. chaps

    Phil/AMZN:
     
    Got it on keeping the caller being out of position. If you’re willing to keep throwing money at the caller (which I am), is there any reason to be investing in the 2011 115/135 call spread for $10.50? It’s nice that it would make you $10 if AMZN finishes above $135 a year from now. But to "invest" to work off the $20 loss ASAP, isn’t it OK just to do a "Powell policy" on the calls?

  137. EricL

    By the way, Brazil’s market went up today on the disappointing GDP numbers (1% below estimates) because, of course, it means more loose monetary policy for them. Our markets are hardly the only insane ones.

  138. tchayipov

    HOV/Tcha – Well you bought it for net $2.83/3.92 and they are at $3.61 so not too tragic.  You can still sell May $2.50 puts and calls for $1.70 which would drop your basis to $2.63/2.57 if things get worse so I’d bite the bullet and look to sell those $2.50 puts if they get to about .50+ on a test of the 200 dma at $3 but otherwise just see what happens.
    Phil,
    do I understand correctly?
    if I roll calls and puts to 2.5s and will be called away in May for 2.5, the best case scenario I will still loose around 0.25
    and it is no any way to make it a winner unless I will roll them farther away later to get more premium?

  139. Peter D

    ssdirk – I think I answered that before.  I didn’t have to double down this month, so it was 70-80% cash for most of the month.  Portfolio Margin is the magic.  More than 1/2 of the 6% this month is due to my good luck where I rolled some short CALL down and the callers were toasted.  This is not normal that my below average trading skill gave me half of the target monthly profit.

  140. chaps

    Yodi:
     
    I believe Phil was saying if you take in $15 for selling 2x calls and invest x in the Leap at $10.50, and then AMZN falls substantially in the month (say, $20), you’ll keep the $15 from the callers and your Leap will have dropped by about $2. In other words, the Leap doesn’t fall that much because it’s expiration is a year out.
     
    I think the 135/155 is a typo. I believe he meant 115/135.

  141. ssdirk

    Peter -  I am still in the dark as to how portfolio margin works and helps.  Can you give me a quick and dirty explanation? Thanks.

  142. Phil

    Daytona/Jomp – That’s nuts!  It’s a great market for patient money, my real estate premise is to buy things that can be rented or sold to 2 people earning minimum wage – I still wouldn’t touch the high end.

    Bearish/Chuaeu – Isn’t it strange?   I look and I look (and I’m pretty good at this) and I can barely find anything that looks good to go higher from here. 

    AMZN/Yodi – The current price of the $115/135 spread is about $10.50 and that’s the cover to purchase.  What I was saying is that since the $135/155 spread is currently $8, then we can expect to lose $2 on the cover play if AMZN drops $20.  When you buy a cover to protect yourself, you damn well better know how much you will lose if the stock does what you think it will otherwise how will you even know if a move in the stock is good or bad for you?  When you have 2 and 3 and 4-part trades, it helps to take notes for the trade so you don’t lose track of what your intention was and what prices you targeted so you can get a handle on it before it starts going off track. 

    ALWAYS/Nol – I used to tell everyone to put a post-it on their trading monitor that had that written on it.  People still should – that’s kind of the problem with doing this for years – I sometimes forget to stress the basics.  That’s why it’s good when new people ask questions, even though I get snippy sometimes when I think I’m repeating myself over and over – there’s always someone who never heard it before…

    Brazil/Eric – Long live the EDZ too!  CNBC has a fluff piece on Brazil tonight, maybe we get a little rally to sell them into tomorrow.  

    Disaster plays/Jomp – Cool!  That’s the trick to insurance, buy things that are pretty durable, even when market goes against them.  What happens is down VIX hurts callers more than our deeper calls on the verticals.  On a really big run-up, you can sometimes add a call, perhaps going from 4/4 to 5/4 to take advantage of a pullback. 

    Not much of a stick into the close but good thing we killed the DIA puts.   They barely nudged the dollar down but copper held $3.115 with silver $17.40, oil at $70.50 and gold back at good old $1,132, about the only commodity that’s up on the day

    AMZN/Chaps – Well it depends how deep your pockets are.  I look at it as a $5 (becuase it’s a half) hedge that only costs me $1 if I win and that $5 gives me a free $10 of rolling to the next month.  If I do that each month for 5 months, I offset $50 worth of AMZN upside moves for $5 at risk.  That’s AMZN $185 before we run into trouble.  Just because you have money, doesn’t mean you should spend it.  Capital, like troops, should be deployed as necessary.  Don’t forget you are covered for a $10 roll up but if AMZN pops $20, your money will still be required…

    HOV/Tcha – Well you collect another .20 so you just lose .13 it looks like.  I’m not saying that’s the move you WANT to make, just to point out that that is your escape if you have to so as long as you can get $1.70 for those puts and calls, there’s no need to do anything.  My plan for that trade would be to intend to DD at $2 by selling the $2.50 puts for .50, that drops your net basis to $2.42 (if you get it put to you at $2.50) and that’s 30% down from here.   THEREFORE, I’m not going to worry at all UNTIL I sell the puts for .50 or better, THEN I will have to look at whether or not I think we’re going to recover off the dip.  If we never have a dip that let’s me sell the May $2.50 puts for .50, then what the heck am I worried about?  In Jan you have to make a rolling decision but not before unless the May puts fill.  If you do not want to add to the positon and don’t have faith it will come back – then just get out.  You should never be in a position you don’t believe in – it leads to many bad decisions.

    Very close Chaps – see above.  People always get confused when I show my work (ie. point to the spread that gives me the number I seem to be pulling out of my ass) but I want people to understand that you can see what your risk is just by looking at the same position from different strikes. 

  143. Peter D

    ssdirk/PM – see the link below
    http://www.thinkorswim.com/tos/displayPage.tos
     
    Basically, the highest margin on the downside for broadbased index is 8% versus 20% for Reg-T (2.5x less).  If the positions are further Out of the Money, the margin can be as little as 1-2%, versus 10-20% for Reg-T (10x less), since the risk is deemed to be a lot smaller when the shorts are way OTM.  So as balancenv observed, a 5% investment can return 5% profit if we are 15% OTM and the market is flat and never threaten the short strikes (margin does not increase).

  144. pstas

    Grant- no, not them but I must respect my "informant’s" confidentiality.

  145. jomptien

    China executes rogue trader, millions still missing



    Tue Dec 8, 6:29 am ET

    BEIJING (Reuters) – China on Tuesday executed a former securities trader for embezzlement, the first person in the industry to be put to death, but millions of yuan are still missing, a state newspaper said.
    Yang Yanming was sentenced to death in late 2005 and took the secret of the whereabouts of 65 million yuan ($9.52 million) of the misappropriated funds to his grave, the Beijing Evening News said.
    The report added that Yang was the first person working in China’s securities sector to be executed.
    "Preserve your moral integrity and don’t set too much store by business results," Yang told the newspaper before the sentence was carried out.
    He was the general manager of the Beijing securities trading department of the China Great Wall Trust and Investment Corp., which became Galaxy Securities, from 1997 to 2003.
    Conscious that the growing gap between rich and poor could generate resentment, China is battling corruption and stock trading abuses. It has used the death penalty as a deterrent in serious cases.
    ($1=6.828 Yuan)

  146. lynn2long

    Hi, I have a random q about tax. When you trade option esp sell premium, how do you report tax? is it treated like stock, with short term, long term gains and losses?
    I will check back later to see your feedback, I can only participate here couple days a wk.

  147. jromeha

    Jomptien – WOW. Not too often I can say that I am envious of the Chinese justice system, but I wish we had that here!

  148. judahbenhur

    Peter D, As you are beginning to exit your January strangles, I figured it doesn’t make sense for me to begin to enter one.  You will indicate when you’ve started entering February, I hope, for those of us SPX/RUT strangle newbies?

  149. CaFords

    Interesting volume on the MRK contracts today.  Over 700K contracts in DEC and well over 1M contracts in JAN10

  150. jomptien

    Jromeha, I don’t beleive in death penalty but some serious consequences should have been attached to these investment bankers as they caused more damage to the country than BinLaden did.

  151. cwan120

    Hi, Peter D,
    When you said 6% profit for December, did you mean 6% of deployed margin?  Or 6% of your whole portfolio?  You indicated earlier that you didn’t enter as many positions in December.  I am wondering if you achieved the same % profit of the whole portfolio with fewer positions in December.
     
    You are certainly popular these days.  I hope that Phil doesn’t get jealous!

  152. jromeha

    Im sure Phil’s not getting too jealous with the100′s or 1000′s of monthly paying subscribers he has… Of course he wouldnt have that many if he didn’t provide such great service. Phil, you da man!

  153. Peter D

    judah, I know it’s tough when I already made my money and exiting while others are trying to enter the January contracts.  We are roughly 1 week away from RUT/SPX/NDX expiration (1 day earlier than the rest), so it’s an in between period, where the January options doesn’t have as much premium to sell into as much as I like, while the Feb does have the risk of being blown out of the short strikes.  So if you are itching to enter, then go for the Feb with as wide cushion as possible.
     
    cwan, when I say profit, it’s almost always of the entire account, unless I quote the profit on the spreads.  6% profit of the portfolio has been achieved this month, due to my luck and the market flatlining for 5 weeks.  I didn’t have many December short options, but the January shorts gave me the profit for December!  We don’t have to wait until expiration to cash out the profits!
     
    Well, Phil knew about the potential (and risks) of this strategy instantly when I posted it, so he highlighted for others to see.

  154. judahbenhur

    Peter D, I’m a patient man. I can wait for the right time and entry points. I just wanted to know if you would give a heads up when you decide to make the Feb plays. Thanks again.

  155. chaps

    Phil/AMZN:
    re:
     
    Well it depends how deep your pockets are.  I look at it as a $5 (becuase it’s a half) hedge that only costs me $1 if I win and that $5 gives me a free $10 of rolling to the next month.  If I do that each month for 5 months, I offset $50 worth of AMZN upside moves for $5 at risk.  That’s AMZN $185 before we run into trouble.

     
    Sorry for being dense (can’t help it) but I don’t understand the upside of the 2011 115/135 Leap (when we lose.) Are we talking about selling only one leap no matter how long we go before we beat our caller, or selling a new leap every month when we haven’t beat our caller?
     
    I thought we were selling only one leap, which can make at most $5 (since it’s half, like you said) over the next year. If that’s the case, how are we getting all the way up to $185 on AMZN before getting into trouble?
     
    If it’s a new leap every month we lose, is it because the leap has a $20 spread, but it’s half ($10 is half of 20)?
     
    Tilt. Divide by zero. Doesn’t not compute, does not compute….:)

  156. balancenv

     Peter D,
    Indeed you and your SPX/RUT strategy is gaining popularity. Hope you can help some questions: 
    1. You often cite VIX is down so close positions and VIX is up and good for shorting strangles. I know the impact of VIX to option pricing and really enjoyed the ‘market up and my bearish portfolio up’ but it’s a complex issues due to theta, VIX (SPX specific) etc. 
    So let’s say today VIX is down today so I am delaying entering the Jan short strangle position, but then delaying means less premium due to theta. 
    I still can’t quite get your points of using VIX as the dominating factor for the SPX/RUT strangle play. Instead of going into the complex math, do you have a general guideline of VIX impact to the SPX premium? 
    2. I remembered you had a comment of "the SPX strangle has been good so far but may not be in the future". So my question is, under what conditions the SPX strangle will not work as well as your 6% per month goals. 
    I did a fairly mechanical (I know it will never be 100%) experiment using TOS’s thinkback function from March 09 onward as follows: 
    Use 100K as starting balance.
    Pick the Wed avg (of high/low) of SPX 5 weeks ahead of the next month expiration date (e.g. for May 15, it will be Apr 8), Set the strangle target to be -/+10%, and let it runs till expiration. Unfortunately TOS thinkback only has option pricing but not margin calculation so I am assuming 10 contracts will cost less than $20K under PM, and 20% of the cash. From May to Dec (even though it’s one week to go..), it is ALWAYS withing the +/- 10% and we don’t even have to do a thing and the overall gain is more than 6%. I know this is over-simplified simulation but still a good vote of confidence of the strategy. 
    In real life of course, we will be able to adjust the +/- 10% according to the current market conditions, and monitor the positions during each 5 weeks cycle. One thing I still need to work out is the ‘overlapping period’, like right now where the portfolio will hold both positions for the front and the next month. If the positions are sort of in the center, there should not be problems due to PM and high cash positions but there’s a high risk of margin call  if there’s a violent move during the overlapping period. 
    Of course your SPX spread for hedging will always be deployed for extreme downside protection. 
    If we do not go crazy on greed, and set wider (and safer) ranges, 4% a month, with compounding, will get you 60% annual return! !

  157. balancenv

     RE: IRA and strangle
    I put in, yesterday, 950/990/1190/1230 SPX for Jan, and 520/550/660/690 RUT for my IRA. 
    I think Jan premium is low for both VIX low now and much shorter trading days, 1/15 and lots of breaks in between..
    Feb is a much longer one (5 weeks from 1/15) and lots of unknown for the X’mas sales…

  158. kustomz

    China executes rogue trader….good thing our gov isnt run by a bunch of comm…..wait a minute

    jomptien, spent 6 hours last night with a realtor and an investor (lost lots of money), the stories i heard about the boom down here really boggles the mind and im very confident history will repeat itself. Certainly not to the degree that preceded but there are plenty of investors that feel once things stabilize we will return to growth. How long, who knows? I dont mind collecting 10% and in some cases more on my investment while i wait. Real Estate will become/is becoming a safer investment.

    Hope your investments/visit is going well. :-)

     

  159. Peter D

    balancenv, looks like you have comprehensively answered your second question!  For item 1, there is no generic answer here.  The phrase ‘market up and my bearish portfolio up’ is true again today!  My portfolios had Negative Position Delta and it went up, despite the underlying going up.  This means the VIX and Theta overcame the effects of Delta today.  I just know that it’s time to take profit off the table – this is an art, not science.  If the market drops 2% tomorrow, even if my Position Delta is negative, I’d likely lose some paper money because the VIX increase would overrule the Delta and Theta effects. 
     
    So when the market drops 5% in a few days, the PUT value that are 10-15% OTM, may be more than doubled, and the CALL may not go down much.  That’s a great time to sell additional strangles.  Again, if this happens 4-5 weeks to expiration, it usually the best time to sell, if it happens very close to expiration, then Theta decay takes over and we don’t get much value for the sell.  You are absolutely right by asking when would be the best timing for entry, trading off between VIX and Theta.  Unfortunately, there is not a silver bullet answer, just depending on VIX and where we are to expiration.  That’s why we have these blogs so that others can share their experience.
     
    Back to your 2nd question, I did an analysis for the SPY price movement in the past 15 years and arrived at the safe-ish 6% per month return.  If you take the closing price every month and see what are the up and down spikes for every 2 months period, you’ll see that we have 5% downswing on roughly 40% of the time, and 5% upswing approximately 40% of the time also.  So short strangles that are plus and minus 5% with 2 month to expiration will likely give you headache and panic 40% of the time (wait is that 80% of the time as you can hit both in a month?).  These are Probability of Touching.  The Probability of Expiring would be lower than the 40%.
     
    If we increase the strangle to plus and minus 10% the headache reduces to about 15% of the time, which is once every 6 months.  That’s why I said the honeymoon will not last forever.  For a 15% cushion on the downside, the Probability of touching decreased to 7.5% and probability of expiring 15% lower is about 3%, i.e. once every 33 months.  That’s cool as I’d loose once every 33 months, so I need to work out what the loss would be for that one time.  If it’s October 2008, that loss would be huge, thus we need to make adjustments!
     
    Now, you can go and do more research and let us know the outcome!

  160. ssdirk

    Peter et al – I am loving these discussions.  It’s making me think about these short strangles from many different angles which I think will pay dividends in the future.  My current RUT positions have a delta of -143 and a theta of 363.  So, disregarding vix for the moment, I can withstand a 0.43% move in the RUT before I am negatively affected (363/143=2.5 RUT points, 2.5 RUT points/595 RUT value = 0.43%).  Conversely, with a negative 1 point move down in the RUT tomorrow I can expect an increase of $506 in my P&L (143+363=506) with an increase of 143 for every point lower after that.  What I have not experienced yet is how a big move in the vix and the effects of vega will play into this.

  161. cwan120

    Hi, Peter, Did you play SPX / RUT strangles in October 2008, or anything close?  I’d be interested in hearing any real experiences.  Or, perhaps balancenv can do a simulation and see what would’ve happened.  Frankly, I’ve been worried about such big drops.  I think many of us agree that such a drop is just around the corner.  For example, Phil has been naked on his DIA mattress for 2 days.
     
    In fact, I’ve been selling more calls than puts, with the rationale that (a) selling calls is probably safer than selling puts in the next few weeks/months; (b) I can always leg in puts later when VIX goes up.

  162. cwan120

    For those who play Peter’s SPX strangles: With VIX down, the put verticals are cheaper.  You might want to buy some ahead of time.  As a reference, Peter suggested buying Jan 1040/1030 put verticals several weeks ago, costing about $2.10 or so.  I just bought some FEB 104/1030 put verticals for nearly the same price $2.20 yesterday (Thursday).

  163. cwan120

    Typo: I mean FEB 1040/1030

  164. Peter D

    ssdirk, the Theta number is per day.  So the spread can withstand 2.5 RUT points per day going against it.  The delta and Theta will also change for a different RUT value, so the best way is to plot out the P/L for X, 2X, 3X, and 4X days in TOS Analyze Tab.  X can be 1 to N number of days.

  165. Peter D

    cwan, for October crash, I was mostly in Calendar spreads, and some Iron Condors.  Calendar spreads weren’t bad as the longs kept some of their value and the Santa Clause rally last year actually helped it.  Iron Condors were a total loss, so I hardly used them again.  The good thing was that the Short Strangle strategy was borned (for me) in the November crash.  I noticed that I can sell short PUT naked 20% OTM and still make a 25% profit because the VIX was so high.  I could get in most stock at half price by selling PUT!  That’s 1/2 of already half priced stocks.  So I quickly did the research of historical data and converted to short strangles by January.  The strategy was well tested in the March crash and the big rally since then.  My portfolios shows anywhere between 105% to 135% profit for 2009, not bad for not being bullish all this time.  For 2010, I’m planning to be more conservative and have a large amount of cash ready to take advantage of any large downswing.
     
    For the Jan PUT vertical, the price is cheaper, but they hold their value quite well.  Remember that I bought 4x for $8.4 total, they are now $7 ($1.4 loss), while the short strangle of 940/1170 was sold for $9+ to finance the vertical, now is $5.9 ($3.1 gain).  So the hedge is paying for itself so far.

  166. Phil

    Good morning!

    We had some server troubles this morning but all fixed now (we hope).

    If our site is ever down, our backup for chat is:  http://seekingalpha.com/author/philip-davis/stocktalk

    Please make sure you go here and click on my picture where the word "Follow" is.  That will register you to follow my comments and you’ll see them net time you log in.  They should also then appear for you on Seeking Alpha’s main page

    It is very important to register now and bookmark Seeking Alpha as, obviously, when and if our server does go down – we won’t be able to tell you again until it’s back up.

    Once again the futures are flying (as of 3:45 am) so it’s going to be another interesting day.  I do like shorting the Dow futures here at 10,400 with a stop at 10,405.  Keep in mind it’s $5 per penny per contract so not for the feint of heart! 

    Have a great weekend,

    - Phil

  167. Phil

    Jealous/Jrom – Actually it was always my intention when starting the site to make it a community of great traders who help each other.  It’s sort of a Web 2.0 experiment in group-think, where we all discuss the market on a regular basis and identify trends we follow but, rather than rely on one or two analysts – we have 1,000 eyes on the market.  No matter how good someone is, you can’t see everything but, as a group, we are probably every bit as good at quickly pulling information together and analyzing market moving events as any investment house on the street. 

    AMZN/Chaps – It would be a new leap every month (that AMZN goes up, of course) so each time AMZN beats you to the point where the roll to the next month costs you money (AMZN would have to be $142+) you would have a very reasonable assumption that your first vertical will pay off.  Then you can roll the callers up $10 and take another vertical in case they do it again.  So you have your $10 leap that makes $10 ($5 per short) IF AMZN keep going up.  The only reason you would need a second vertical is if AMZN goes up at least $10 and the next time you need one is $155, $165, $175, $185 – maybe even higher depending on what you get paid for the rolls.  By the time you have to add your 3rd vertical, your first vertical is entirely in the money.  There are variations, you could always add one bottom leap for each $2 AMZN moves up so, by the time it hits a $10 move up you have doubled the leap position (assuming starting with 5) and given yourself a big upside delta that’s well in the money.  I was just trying to keep it simple…  8-)

    On those Futures puts, we hit 10,388 and that means the stop should be moved down to 10,395 – generally it’s the same "take the quarter" mantra of any day trades.  So back out now and back in if we get either a failure at 10,400 again or possibly back under 10,390 next time but you don’t want to mess around when you get a minor pullback and stand to blow your winnings.  It may not seem like much but you can make $25 per contract a dozen times doing this and maybe you get a nice breakdown and maybe you don’t but this way we give ourselves much more cushion

    Dollar back to yesterday’s low.  Copper is $3.14, silver $17.50, gold $1,140 but oil is still $71 so something is wrong with this picture. 

  168. Phil

    Reload short at 10,400 but I’m more worried now.

  169. Phil

    Lots of stimulus talk boosting the markets today:

    This one is ridiculous – Insurers get a capital boost – from a regulatory change, designed to let them temporarily count billions in future tax benefits as capital. Despite consumer-group protests, NAIC President Roger Sevigny says: "Insurance regulators have long understood the need for conservatism in insurer’s financial statements … This change recognizes that fact, but also recognizes that overconservatism can actually be detrimental to consumers."

    Moody’s Investors Service said it has no current plans to lower its top debt ratings on the U.S. and the U.K. after a report this week stated the sovereigns may “test the Aaa boundaries.”

    German chancellor Merkel said healthier members of the euro zone aren’t prepared to abandon Greece and other heavily indebted countries in the currency bloc.

    In a meeting with his counterparts from Germany’s 16 states, German Finance Minister Wolfgang Schäuble presented figures that put his government’s net debt requirement at €86 billion ($126.6 billion) for next year — more than twice the €37.5 billion predicted for this year. Government spending will rise 11% to €325.5 billion from €294.5 billion, according to a document seen by The Wall Street Journal.  There is "no alternative" to stimulating the economy and letting the deficit rise without cutting spending, the document said.

    South Korea’s central bank said it now expects the country’s economy to expand 4.6% next year, faster than the previous forecast of 3.6%.

    European Union leaders say government measures to stimulate the economy should stay in place until the “recovery is fully secured,” according to a draft of the conclusions at a Brussels summit that ends today.  “Forecasts suggest a weak recovery in 2010, followed by a return to stronger growth in 2011,” the draft statement by the government heads of the 27-nation EU shows. “But uncertainties and fragilities remain, while the employment and social situation is expected to deteriorate further in 2010,” according to the statement, due to be approved later today.  

    Europe’s Dow Jones Stoxx 600 Index advanced 0.7 percent to 245.68 as of 8:26 a.m. in London, trimming its weekly drop to 1.3 percent. The gauge has climbed 56 percent since March 9 as central banks cut interest rates to record lows and governments worldwide committed about $12 trillion to revive the economy. The measure is valued at about 55 times its companies’ reported earnings, near the highest level since 2003, data compiled by Bloomberg show.

    Green Shoot:  China’s industrial production rose 19.2 percent in November from a year earlier, exceeding the 18.2 percent estimated by economists. New lending grew month-on-month, the People’s Bank of China said today, while economists had forecast a decline.

    On the other hand:  India’s industrial production grew less than forecast, suggesting the central bank may wait for more signs of economic recovery before raising interest rates.  Output at factories, utilities and mines rose 10.3 percent in October from a year earlier after gaining a revised 9.6 percent in September, the statistics agency said in New Delhi today. That was less than the median 12 percent estimate in a Bloomberg News survey of 20 economists.

    Here’s a nice GDP chart to keep this sort of news in perspective.

    Reality check: China’s 4 trillion yuan ($586 billion) economic stimulus package is credited with cushioning the global economy, supporting demand for raw materials and creating more consumers from its big population.  Yet, among U.S. companies operating in China, just 10% say the package had a significant positive impact on their operations.  That may be among the reasons that a new survey finds that a chunk of U.S. companies expect to record a drop in revenue and losses for 2009 from their China operations, while most are signaling less enthusiasm for investment than they did a year ago and haven’t even considered making an acquisition in the country.

    So lots of fun this morning and the Nikkei flew up 2.5% (nice on the EWJ from yesterday’s post) but the Hang Seng dropped 200 points after lunch to blow what was a 450-point gain at the open and was stick-saved into the close to hold 21,000 (up 200).  The FTSE and DAX are up about 1% and both crossed their upside lines but everyone is expecting good November Retail Sales from us, which may be disappointing as may be our Michigan Sentiment report. 

  170. Phil

    Oh this is the article that had me in such a Scroogy mood this morning, despite the morning pump:

    Spanish holiday spending will drop 9.1 percent this season, according to Deloitte, more than the 6.3 percent decline forecast for western Europe. El Corte Ingles SA, the nation’s biggest department store operator, is advertising 70 percent discounts to lure shoppers.

    Shoppers may be skipping Christmas gifts and are likely to delay spending on any presents as long as possible, hoping for bigger discounts, said Miguel Angel Fraile, head of the Spanish Retailers Association. Spanish consumer prices fell from March to October, the first decline for 50 years. Even after prices rose in November, inflation remains below the euro-region average.

    People are going to buy more at the last minute, thinking that there will be better offers,” Fraile said. He estimates prices for some gifts are as much as 15 percent cheaper than a year ago.

    Foreign retailers like Carrefour SA are also having trouble. In Spain, the Paris-based retailer’s second-biggest market, it cut prices as much as 25 percent on 10,000 products per store this year, a spokesman said. This week, it offered 20 percent off toys. Carrefour’s same-store sales in Spain dropped twice as much in the third quarter as they did globally.

    Unemployment among people younger than 25, who account for 10 percent of the labor force, is more than 40 percent, posing a further risk to companies that focus on young fashion such as Hennes & Mauritz AB, or Inditex’s Bershka brand, said Francisco Ruiz, an analyst at Fortis Bank SA in Madrid.

    Debt built up during a decade-long real estate boom is also crimping households’ ability to spend. Mortgages, consumer credit and other loans account for 77 percent of Spanish GDP, compared with 51 percent in the euro region and 55 percent in Germany, according to European Central Bank data.

    There is nothing in this story about Spain that wouldn’t apply to us if things get just a tiny bit worse.  Why do we think our retail sales will be up when Europes are down 6.3%?

    Cramer was stampeding the sheeple INTO Retail last night.  He says everyone is too bearish even though I posted a chart above showing 83% of the people are bullish – that last 17% is really pissing him off I guess….

  171. Phil

    Finally getting a nice drop on the Dow Futures Shorts, now it’s all about setting the stops!  Down 20 already so 10 trailing stop or 1/2 at 10,385 and 1/2 at 10,392.

  172. ssdirk

    Peter – thanks for the tip on the TOS plotting of the P/L.  I also, for the first time, discovered that you can plot all of the greeks at different pricing of the underlying.  Do you know if when plotting the greeks the IV is factored in?  It seems as though it would have to be.  Also, I am wondering how the vix is factored in.  I think I will call TOS for this discussion.

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