Peter D - Confessions of the PSW Strangler

by Phil - February 3rd, 2010 4:49 am

Peter D has a long-running and very successful system of selling premiums on a regular basis that’s well worth learning.

Investors selling a short strangle are expecting the underlying stock to not move much in either direction. The strategy is accomplished by selling a call option at a higher price than the current stock or ETF price and by selling a put option at a lower price than the current stock or ETF price. Both of the options will have the same expiration month. The investor in a short strangle benefits from the underlying moving within the spread between the call strike and the put strike.

There are two reasons we like this strategy a lot at PSW:

1) It’s boring!  Unless the market is MUCH more volatile than normal, taking sensible, NON-GREEDY, out-of-the-money short option positions is a fairly market-neutral way to place our bets.  While the risk/reward ratio may seem inverted, statistically it’s a winning play over time.

2)  It’s perfect for our "be the house, not the sucker" philosophy of trading.  We are always looking to SELL volatility. The idea behind this trade is that front-month volatility is relatively expensive compared to historical long-term volatility and we take advantage of selling a very high cumulative volatility over the course of the year.  

We recently ran a collection of comments following through on some trades over time and quite a while ago Sage wrote an article relating about using short strangles on longer-term stock plays, which provides some additional ideas on how to apply this strategy.  Peter has been kind enough to provide us with a definitive guide to help set you on the road to a successful career as a strangler.  The following is a collection of posts (make sure you use the links) on Short Strangles and the Crazy plays on the indices (SPX, RUT, NDX, etc.):
 
1- The Crazy play consists of a Short Strangle and a protective long put vertical. These plays are mainly for Portfolio Margin accounts, with balance greater than $125,000, preferably over $200k as the margin can swing wildly.  

2- Very rough comparison among Short Strangle, Iron Condor, Buy/Write and straight stock purchase. Note the rolling tips in the second to last paragraph.
 
3- VIX, the effects of.
 
4- Possible adjustments of the Crazy Play.
  
Additional discussion on doubling down.
   
5- Figuring out the margin requirement for short strangle using Thinkorswim Analyze Tab.
 
6- Setting up February 2010 spreads on Jan 4th.
 
7- Thoughts on Delta movement with respect to the underlying.
 
8- Selling into a VIX excitement,…

Tags: NDX, Option Trading Strategies, Options Education, RUT, Short Strangle Strategy, Short Strangles, SPX, VIX

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Is The Stock Market Top In?

by Chart School - January 19th, 2010 4:29 am

Is The Stock Market Top In? or Could This Be The Last Chance To Buy Stocks At Support?

Is The Stock Market Top In?

Courtesy of Charles Hugh Smith, Of Two Minds

Is this the top of the global equity rally which has run up for 10 months? A case can be made for "yes."

Is the top in on global stock markets? The case can certainly be made on a technical basis. In one of our private email exchanges, correspondent B.C. mentioned a possible turning point in the stock market around the third or fourth week of January. Curious about the timing, I asked if he could provide some context for that possibility. Here are his comments: 

As for the "potential" cycle turn date, it is based on the Elliott Wave (EW) Fibonacci 61.8% scaling of the decline from Oct. ‘07. But, as you well know, EW works "when it works" (selection bias or effect and post facto rationalizations); and, if it does operate at some deep structural level, there is the ongoing challenge to discern in real time the relevant scale within which a phenomenon is (or is not) occurring.

The Jan. timing also fits within the time-price self-similarity of the Nikkei in late ‘99 to early ‘00 and the SPX in 1939, which could extend with an ongoing topping pattern to the SPX 1220s-40s into Feb.-Mar. in terms of an idealized time-price symmetry; and (2) the tendency for stock prices to peak early in the second year of a presidential term during secular bear markets and decline for the year on average.

Were the pattern to fit generally with the EW scaling, we are completing a "b of C" within a larger secular descending triangle pattern, and we will see a C-wave decline of 3 waves into ‘13-’14.

The bullish sentiment is rather consistent with a B or 2 wave, particularly today in that it is the general consensus of the Wall Street/DC establishment and at least a significant plurality of the "investor class" that the Fed saved the day; "reforms" are being implemented to prevent a repeat of the serial crises; the "worst is over"; and the economy is "recovering" and at no risk of a relapse. I see the structural effects of Peak Oil on the price of oil, debt service, and consumer spending creating a persistent risk of a double dip and a continuing deceleration of trend real GDP growth from…

Tags: Dollar, elliott wave, GDP, Gold, SPX, Stock Market

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Manic Monday - Stuffing the Futures for Thanksgiving

by Phil - November 23rd, 2009 8:22 am

I noted in the Weekend Wrap-Up that 90% of our gains have come in one day each week.

I also pointed out that a vast majority of those gains occur in very thinly-traded futures, where unregulated (or jokingly regulated) traders can trade a few thousand index shares and move the US market values by Trillions of dollars.  That’s why you often see the title "Just Another Manic Monday" starting my weeks, because it is often manic (as in upbeat for irrational reasons) and, as noted by Trader Mark in his post last night - it’s pretty darned ordinary at this point.  In fact, anything less than a 1.28% gain on a Monday is below average.  

So we are going to be back to testing our breakout levels early in the week and the volume should be low enough to allow a run back to last week’s highs.  International traders took advantage of the Nikkei being closed and used the low Asian trading volume to make a statement on the Hang Seng, driving that market up over 200 points after lunch, improving on a 175-point gapped up open that has been flatlining until that final 90 minutes.  It was another commodity-led rally as the dollar dove back to 88.5 Yen and right back to $1.4975 to the Euro (where we shorted the Euro last week) and $1.66 to the Pound.  This led gold to fresh highs at $1,167 and copper touched $3.20 along with oil getting back to $78.50 - all tempting shorts but we’re happy to watch this nonsense from the sidelines after getting a bit more cashy ahead of the holiday. 

The big market-moving news in Asia was a rumor that a researcher under China’s State Council reportedly said the Chinese economy was likely to expand more than 10% in the fourth quarter.  That’s all it takes, you know - I know a guy who knows a guy who heard a guy who works in China said things are good there and BOOM - the Dow gains 100 points.  Forget the fact that a 10% gain in China’s entire economy is just $400Bn US Dollars - see this excellent NYTimes China/US compariston chart to get a better picture of how the two nations stack up and also please read the excellent article from Marshall Auerback this weekend, "Should America Kowtow to China?" to get a great perspecitve on the money game. 

"The market still has upward momentum as there’s expectation that Beijing won’t likely launch any monetary tightening measures by the year end,"…

Tags: CHINA, DIA, Dollar, EWJ, SPX

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Jobless Thursday - Get Ready for the Next Million Layoffs

by Phil - November 12th, 2009 8:21 am

"California tumbles into the sea."

Yes, Steely Dan predicted it in 1973, when Ronald Reagan was still Governor but we thought they were talking about earthquakes at the time.  This year it’s clearly California’s 49.3% budget gap and 16.2% drop in state revenue that has them leading a list of lemming states to their doom.  Over 1M state and municipal employees may be getting their last checks this Christmas as 9 states face budget issues on par with California.

According to The Atlantic:  Nine more states are "barreling toward an economic disaster" according to a new Pew poll that sees deep service cuts and temporary tax hikes to avoid fiscal calamity. Some of these states will be familiar to Atlantic Business readers. I’ve been leading the funeral cry for the united states of MichiCaliFlAriVada (that’s Michigan, California, Florida, Arizona and Nevada), and all five states are on Pew’s list. Rounding out the ten are Illinois, New Jersey, Oregon, Rhode Island and Wisconsin. Here’s the graph from the Pew Center on the States:
 

This horrible news only underscores the fact that even though 70% of stimulus spending has gone to fill in Medicaid and state budget holes, our states are still in dire straits because state tax revenue is collapsing across the country.  Unlike the federal government, states cannot run deficits, which means cascading revenue becomes cascading services and many, many cut state jobs. For those who resist another state bailout-type stimulus bill, they must recognize what that entails: hundreds of thousands of state employees joining the ranks of unemployment, and unemployment benefits. Q3 was great, but this thing isn’t close to being over.  The Center on Budget and Policy Priorities reports that states could cut almost a Million jobs without US aid because of budget shortfalls.

A Million jobs!?!  That can’t be good, right?  Of course, as Jim Cramer told us on Friday: "The bears were right, unemployment is awful but no one seems to care."  So far this week, Jim is right and I am wrong - we’ve gone up another 100 points since I made my top of the market call on Monday night so I tip my cap to Jim, who seems to be able to switch off his brain and go with the flow a lot better than I can.  My call yesterday morning, was to take advantage of the futures pop at…

Tags: CHINA, Cramer, DIA, FCX, FXP, retail sales, SPX, unemployment

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VIX Goes From Overbought To Oversold In 5 Days

by ilene - November 10th, 2009 4:54 am

VIX Goes From Overbought To Oversold In 5 Days

Courtesy of Rob Hanna at Quantifiable Edges

The VIX has moved from overbought to oversold quite quickly this past week (based on its stretch above and below the 10-day average). This brings up the question of whether the now “oversold” VIX is suggesting a selloff for the S&P. I took a look at similar past situations.
 

[click on table to enlarge]

Results have been inconsistent but risk/reward has generally favored more upside over the coming weeks. This would seem to make sense since what you’re typically looking at in the SPX with the above setup is a strong rebound from a sharp decline during a long-term uptrend.

I am seeing some signs the market is nearing a pullback. The VIX action is not one of those signs.

Tags: pullback, SPX, Stock Market, VIX

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Mad Hedge Fund Trader’s Global Market Comments

by ilene - September 30th, 2009 7:53 pm

Here’s a MadHedge post originally written last Wednesday when the market all at once started dropping after the Fed’s statement. - Ilene

Mad Hedge Fund Trader’s Global Market Comments

September 28, 2009 

Courtesy of the Mad Hedge Fund Trader

Featured Trades: (SPX), (AONE), (IRDM)
 
1) Wow! Risk reversals can be such a bitch! It was like someone flipped a switch at precisely 3:30 p.m. in New York, and suddenly the rally was over. The sell recommendations from market timers poured out like confetti at a New York ticker tape parade. The pundits, talking heads, and faux financial reporters offered many possible explanations. Was it the disappointing housing data, a waffling Fed statement, end Q3 profit taking, or the autumnal equinox? Perhaps it was the Business Week cover the saying the market would continue going up. The harsh reality is that the market fell simply because of its own sheer weight. PE multiples of 20 in the face of flat revenue growth, tightfisted banks, a catatonic consumer, imploding commercial real estate market, an approaching tsunami of new home foreclosures, and a whole raft of government stimulus programs about to expire, is not exactly a springboard for even high prices. What is fascinating is how all global risk assets fell in unison, from gold, to stocks, to private debt, to currencies, as I have long predicted. The only place to hide is cash. The market may take another run at the highs before year end. But the burden of proof has shifted from the bears to the bulls.

 

2) The spectacular debut of the IPO for A123 Systems (AONE), a maker of  high powered, quick recharging lithium ion phosphate batteries using advanced nanophoshate technology, put a great shining  spotlight on a sector I have been harping about all year (search my data base for “Butch Cassidy” by clicking here ). The initial price talk was at $8, the IPO came out at $13.50, and the first day of trading took it up to a meteoric 43% to $19.20 on the first day! I had a flashback to the dot.com boom. Where are the gold flecks on the sushi, my free IPO hat, and the vodka luge? The fact is that this is an industry that is going to be huge in the next 20 years. The market for lithium ion batteries, which offer a 4X improvement over ferrous oxide predecessors in energy stored per unit of weight, is…

Tags: AONE, bears, Bulls, Chile’s Sociedad Quimica Y Minera (SQM), Fed statement, IRDM, Mad Hedge Fund Trader, SPX, Stock Market

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Friday Market Follies - Up, Up and Away?

by Phil - September 11th, 2009 8:27 am

And away we go!

We have finally broken through all of our breakout levels and no one is more surprised than I am to see this coming without a pullback (perhaps David Fry - see chart on right).  We will, of course, remain cautious through the weekend but we’re already preparing to throw caution to the wind (sort of) as I’ve posted a primer for our Buy/Write Strategy, so we can start picking up the stocks we want at roughly 15-20% discounts.  This is why we can afford to be patient as we wait for our breakout levels - WE DON’T MISS ANYTHING!  At PSW, we can STILL buy BAC for $14.41 (16% off) and C for $3.43 (27% off) and PARD for $3.79 (51% off) and now that we have made our tops, we feel a lot more comfortable working in at those prices than we would have when the market was 20% lower in early July.

Hopefully that floor holds (Dow 8,000).  We’re looking good so far as our breakout levels have been Dow 9,600, S&P 1,030, Nasdaq 2,038, NYSE 6,700 and Russell 577 and now they form a floor we will be able to watch so we’ll know when to be worried that the rally is running out of steam. 

We are also well-protected with our disaster hedges from the Aug 24th post and, if you don’t have any - it’s still a good idea to get some (and cheaper now too!).  Only 2 33% (off the top) levels remain and that’s 1,056 on the S&P and 6,959 on the NYSE and we will be officially raising our mid-point from Dow 8,650 to 9,500 if we can take those out and hold them for a day or two, which will make 9,000 our new expected floor on the Dow and that means we should be buying here!  There’s no point in having watch levels if we don’t act on them.  

The dollar continues to fall and that’s supporting oil and gold but not the Nikkei, who fell 100 points off their open and finished down .666% for the day as the dollar failed to hold 91 Yen against the world’s mightiest currency.  Even a 50-point "stick save" into the Nikkei close couldn’t paint a positive close for the day.  A 100-point boost into the close was enough to give the Hang Seng a 91 point gain on the day, capping off a 700-point week (3.5%) and exactly 10% off the September 2nd low at 19,500, matching the Aug 4th…

Tags: BHP, crude oil, DBA, DIA, OIH, SPX, SPY, TOT, XHB, XLB, XLE, XLF

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Dave’s Daily

by Chart School - August 31st, 2009 10:00 pm

Tags: Dave Fry's ETF Digest, Shanghai CSI 300 Index, SPX

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A Massive Chart Dump - P2 Analysis Wrap-Up

by Chart School - August 30th, 2009 9:40 pm

A Massive Chart Dump - P2 Analysis Wrap-Up

Courtesy of Binve at Market Thoughts and Analysis

…. And by "Chart Dump", I don’t mean all these charts belong in the toilet

So like I said on Friday, I wish Primary 2 was done, I *want* Primary 2 to be done. I just don’t think it is done. But I do think it is very close to being done, next week looks very likely for the top.

But the whole point of this post is to look at a whole host of indices, sectors, asset classes, and sentiment indicators to show that there are some very substantial divergences taking place. Some of the "leader indices" show that they have already potentially topped (are not making higher highs with the broader markets). The Dollar and the VIX may have already bottomed. Volume is drying up (or at least substantially declining) in most of the indicies. In short a lot of the signs that we expect to see with Primary Wave 2 have occurred, and things are more or less "on track" for a large trend change in equities.

The other reason for this massive update this weekend is that our first born child is due any day now, and my blogging and chart updates will drop off dramatically next month. binve’s life is about to get a lot more interesting.

This post contains a lot of charts that I show often, but every chart is completely updated with new annotations and analysis. I believe it is a useful post and tells the picture of the markets from a macro view. Enjoy!

The Primary Wave 2 Checklist

There are several signals that we should see that help to let us know we are at the end of Primary Wave 2. There are some characteristics that Elliott (and then Frost and Prechter later) put forth that would describe some of the technical, fundamental and sentiment aspects of Wave 2. Here are some of those (modified to be bullish, as this Wave 2 is bullish):

From EWP: “Second Waves often retrace so much of Wave one that most of the losses endured are gained back by the time it ends. At this point investors are thoroughly convinced that the bull market is here to stay. Second waves typically end on very low volume and volatility.”

Additionally, bullishness sentiment returns, and is often as high as it was at the peak, despite the technical long term…

Tags: asian markets, chart analysis, Dollar, Elliott Waves, Equities, low volume, Primary Wave 2, SPX, VIX

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The Long View

by Chart School - August 27th, 2009 4:45 pm

The Long View

Courtesy of Binve at Market Thoughts and Analysis

I have written several posts the past several months talking about the long term. As most of these posts talked about problems in the economy, outlooks of future weakness, and the serious issues with our nation’s monetary policy, I have a decidedly bearish forecast on most asset classes for the next several years. And since many of these observations have taken place in a fairly spectacular bear market rally, I have been labeled a perma-bear and been somewhat ignored. No worries, that is not new territory for me

But as we start closing in on the end of the bear market rally (Primary Wave 2), I want to rehash some of these issues. Undoubtedly I will be labeled by even more people as a perma-bear, because every government economist is declaring "end of the recession" and analysts are all declaring "new bull market".

But I assure you I am not, in fact I would rather be long. I went long big time at 700 on the SPX. I did cash out of them far too early, and went short far too early, but that is because when I look at the economy I do not see strength. Not now, and certainly not for the future. I try to be honest with myself with my analysis, both fundamentally and technically. I am not a bear for the sake of being a bear. I try to be as realistic as I can be. Sometimes that means I get things wrong (and yes, being too early is wrong in my book), and that’s fine. Just part of the game. But these are my honest opinions.

Fundamentals

There are still so many long term issues that have not been dealt with. The economy is still structurally the same (70% consumer spending) and besides a lot of optimistic rhetoric, none of the problems that got us into this mess have been fixed. There have been a lot of band-aids applied. And even to an open festering wound a band-aid will apply some "relative" amount of relief (vs. doing nothing) in the *very short term*. But if you have a severed carotid artery and you put on a band-aid, it will soak up excess blood for a couple of seconds, before that band-aid becomes saturated and is no longer effective. The stimulus has stopped the free fall in…

Tags: bearish, consumer spending, earnings, Economy, fundamentals, Gold, Oil, secular bear market, SPX, stock markets, valuation

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