Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!

Navigating the Stock Market – Isn’t it Ironic?

"It's like rain on your wedding day
It's a free ride when you've already paid
It's the good advice that you just didn't take
Who would've thought … it figures"

Alanis Morissette

It's been a very bearish two weeks for me and the last few days in particular I started to get the feeling the party was over, at least for the short haul, as I didn't like the look of the last leg of our rally to 14,000 and I especially did not like the look of the first few days of this week.  As I said on Monday: "That was the least exciting 90 points we ever gained."

Barry Ritholtz published a great cartoon that summarized yesterdays action quite nicely:


While we are not entirely immune to this sort of behavior on the member site (yesterday, for example, we decided to do shots every time the Dow crossed 13,400 in either direction, leading to 6 shots between 2:15 and 3:00!), we do try to keep a level (if not sober) head about this nonsense.

If you've been keeping up with us this week, you know we loved yesterday's action.  Despite the fact that we wish the market would recover, we always keep our post-it firmly affixed to our monitor which reads "It is NOT my job to save the market" which kept most of us from hitting the buy button during the 4 "recoveries" we got in the past 48 hours.

The members were certainly pleased:

biodieselchris – Posted July 27, 2007 at 12:37 pm | Permalink

"Phil I’m up 28.2% over 2 days and you can FP that number if you want, I blew away the other guy you quoted last night by 2X, much thanks to PSW!"

jeddah62 – Posted July 27, 2007 at 3:00 pm | Permalink

"Phil, really looking forward to more emphasis on the LTP! For the most part, my spread positions have been pretty good but I keep getting dinged on swing trading and now have to stop it. I’m one of those who needs a good working port like the LTP that doesn’t require constant attention all day long. I stupidly left 3 long leaps uncovered for just a bit trying to leg into a spread and got caught in this downdraft. Overall my port is down about 10% since I’ve started trading spreads/options 4 months ago. not sure if this is good/bad for this kind of market, but I do know not having PSW, I would have been in much worse shape."

k1 – Posted July 27, 2007 at 3:02 pm | Permalink 

"I’ve been participating in this list for less than a month, but yesterday’s big drop finally turned on the lightbulb for me. I get what Phil’s talking about with hedging, I get what Sage explains with changing trade structures to rescue bad situations, and I get how the LTP is the right way to go for me. I’m starting to figure out how to trade my virtual portfolio (as the man said, making a living, not trying to make a killing).  Yesterday brought a huge load of cognitive dissonance for me, but it yielded a huge gain in understanding. I can’t tell you all how much I appreciate this community, and look forward to the future."

chubby – Posted July 27, 2007 at 4:27 pm | Permalink

"Phil – once again (two days in a row)…thank you! Not only managed to obey the first rule and not lose money, but also both days ended up putting a little change in my pocket…"

Highlander – Posted July 27, 2007 at 6:25 pm | Permalink 

"I am completely new to options trading and have already learned a lot from you but i need help on understanding today’s dynamics. i am long 30 contracts of aapl jan ‘09 $140’s and have shoted against them the aapl aug 150’s which position i took just before aapl earnings. it was a modified (slightly more bullish) position than your reccommended one of shorting against the aug $140’s.  Today aapl stock is pushed down with the rest of the market with the dow off 208 and nasdaq off another 37 but yet both my options positions (long and short) increased in value to the tune of almost $2,900.00!! i don’t fully understand it but it feels great! 

I am almost ready to give up owning real stock at all. the mind set of options trading that you teach just blows me away and i hope you keep it up in the future.  Any bright guy can be a hedge fund manager nowadays but someone truly dedicated to teaching the options trading art (investing really) to others realtime interactively day after dayis rare indeed, as opposed just talking about as it as does cramer. let cramer have his cnbc podium, the day will come when you will own the web forum!!! "

BillP – Posted July 27, 2007 at 6:32 pm | Permalink

"Highlander – you keep giving Phil compliments like that and he’s gonna raise our fees! Stop it!  "

mike p – Posted July 27, 2007 at 10:24 pm | Permalink

"Phil and all, It sure is nice to be 98% in cash, especially after taking gains from AAPL…..    thanks,mike"

While a little self-promotion is always good for a newsletter writer (and thanks to all for letting us know we are really helping!), it's also very fulfilling because Happy, Zman, Option Sage, Jared and I have a goal of making this the best EDUCATIONAL investing site on the web, not just another stock picker's newsletter or (heaven forbid) "market analysis" site. 

Sure we do all those things, it's very easy to jump up and down and say BUYBUYBUY or SELLSELLSELL like a chimpanzee on crystal meth, but we prefer to work as a TEAM.  Our mission statement (all orgainzations need mission statements) is: "High Finance for Real People – Fun and Profits!" and we try to remember that as we do our best to navigate the difficult waters of the market, even when we have class 5 day like yesterday.


In that spirit of teamwork I want to make it very VERY clear that I'm just the guy steering the boat.  In addition to the regular contributions from Happy Trading, Option Sage and Zman, we have a PHENOMINAL group of contributors who make what we do every day possible and, while we greatly appreciate all the good things people have been saying about us, we would like to thank all of our excellent contributing members for what has clearly been the most exciting AND most profitable week we've had to date!

How did we steer our boat yesterday?

As I mentioned in the previous post, I had pretty mixed feelings going into the morning.  We had a huge recovery Thursday afternoon that I attributed to market manipulation by the fabled "Plunge Protection Team", key members of which decided to go on TV in the morning and THAT was the main reason we covered the upside on Thursday afternoon (at the dead bottom too – pat, pat) as, mythical or not, we DO NOT bet against the PPT!

PPT or no, what I said to the members on Wednesday morning (and repeated in that day's wrap-up) applied equally on Friday: "Nothing has really changed" and it was unlikely that a few kind, and empty, words from our Secretary of the Treasury was going to be able to really turn the markets but, since stranger things happen pretty much every day lately, we did find it prudent to hedge heavily when the market hit 13,350 on Thursday.  Even as we added covers Thursday at 3:31 I said: "Be careful here as Paulson said subprime is contained and added 120 pts to the Dow, all evidence is to the contrary and they slapped curbs on the NYSE to lock in those gains so I’m not too sure this is real right now. It’s all about tomorrow but I’ll reestablish a neutral stance for tonight with my Qs and the DIA calls against the DIA $135 puts, now $2.78, the rest are off the table."

 My morning post was properly entitled "Freaky Friday" and ended with the statement: "The dollar already pulled back off Paulson’s pump while gold is expected to retest the dreaded $666 mark this morning.  Dollar down and gold up = bad economy as will rising rates in a down market so there’s lot’s to look out for today was we head into the weekend very much in cash!Rates did go up a quarter of a point while gold tested and was rejected from $666 but the dollar ran into a nice little squeeze that drove it all the way back to 81.

Although I was not 100% committed in the morning post we took decisive action, immediately selling our open CROX calls and rolling up the covered play in our $10KP right at the open and by 9:46 I said: "In general – remember what I said yesterday about trading curbs leaving a lot of sell orders backed up at the brokerages. If we don’t get off to a good start then those orders will be reupped today so we let the DIA and Q calls die and don’t take the puts off the table until we break positive. Until we get back to 13,600 nothing we see will be more than a minor bounce.  CVX is going down on those earnings so what does that tell you?"

  • 10:05: "The pending summit is holding up the markets but I’m very, very glad to have worked into what is effectively a Dow strangle. If we start to take off I will DD on my QQQQ $49s, now .86.  Totally ignore the BS price of oil, watch SU to see if crude is going up. They couldn’t possibly be in a better position with record high oil and very low nat gas (they use it to power their process). If they can’t do well now the whole sector is doomed. CVX too, how can they not be positive?"

We did pick up some protective calls on XOM and SLB rather than panicking out of our oil puts as the sector spiked for what I thought was no good reason.

  • "1/2 out of (index) puts, will DD on whichever layer we stop at that’s nearest the money."
  • 10:15: "Here we go folks! Paulson says BUYBUYBUY!!!"
  • 10:19: "YHOO is going up so you know they are just throwing money into pretty much anything!"
  • 10:32: "QQQQ calls and 1/2 out of DIA puts! I had a progression of DIA puts I laid out earlier and now I’ve taken half of that off the table (the other half will now come off at another .25) and I will DD (or rebuy in full as the case may be) when upside momentum slows in the strike that is closest to the money at $2 in August and $3 in September to cover what I hope are gains to the plus side. At that time I put tight stops or half out of the calls."
  • 10:32: "I’m still very skeptical and will be rebuying DIA $135s, even though they are $2.35 rather than the $134s if we turn red here. As I said earlier – I just don’t know and cash is by far the best way to go today as no fundamentals have changed (there goes SHLD again!) so this is all a matter of perception."
  • 10:32: "I’m watching XOM breaking below $87 as a significant issue if that happens but I really have to go with my gut here as I put myself in the seat of a shameless market manipulator and this would be my game plan. Why bother having that very unique summit if you’re not going to follow it up with a rally. It would be a disaster to close the market down after the whole economic cabinet and the President try to reassure us…"
  • 10:38: "Pisani says calm is good and he’s right but I would be very concerned if we go red at all for any length of time."
  • 10:43: "AAPL – getting ready to lighten up on open calls (don’t want to cover as they may pop but if we are failing here this can turn ugly)."

At this point (13,470) I was still waffling and buying some index calls on the way down but our goal was to go 80% cash minimum into the weekend with a strangle on the indices so that a 200 point swing either way would give us a good payoff – we just didn't think is would happen by the afternoon!

  • 10:53 (we broke sharply below 13,450): "Ouch – real vote of no confidence for our economic team – all those pent up orders coming in fast.  Stopped out of oil calls, heading to more cash. If the market rallies now I will miss it as I’m going way more bearish including DIA $134 puts, now $2.38 XXX Stopping out of all to cash!!!"
  • 10:56: " I love the way CNBC calls sellers "lemmings" on a 100 point drop but on a 2,000 point run up they are called “smart investors.” 
  • 11:05: "Don’t forget how much BA and IBM are boosting the Dow since their $100 price gives them significant leverage. MMM is another $90 Dow component having a big day which makes me very surprised they are letting XOM go as it’s usually an easy one to stir up."
  • 11:20: "BP, TOT, RDS.a all looking bad so Europeans are getting out of oil. Since they have all the money it’s going to be pretty darn hard for US investors to keep these things up by themselves. HES finally heading deep south. The market still can’t fight an energy sector sell-off and the brokers still have too much money in commodities so let’s keep an eye on HES, SU, SUN, and PTR (Buffett just cut back!).
  • 11:20: I’m pre-rolling PTR to the $145puts at $3 in case the Buffett news catches on but it’s a small reduction and he’s way ahead so this is more about me taking a double off the table on the $150 puts.
  • 11:46: "*The RIMM bear takes a bow*"
  • 12:03: "DIA – no I’m out of the call business, like I said earlier – if that “Summit” of the PPT couldn’t get the markets going then we have a real crisis of confidence and while they keep saying 65% of the S&P is beating expectations, the expectations were for a terrible quarter so BIG FRIGGIN’ DEAL!"
  • 12:03: "VIX taking off again and I will remind you to either take uncovered leaps off the table (LTP too) or cover them because once that V goes away you will suddenly find your contracts are worth about 10% less than you thought. When in doubt sell half absolutely applies here but I don’t have too many doubts about wanting to be well protected in this mess. Let my leaps by surprised by a sudden rebound forcing me to roll up my callers and take a small hit for one of my remaining 18 months – that should be the problem I have on Monday!"

We hoped we had found a bottom in the markets at lunchtime but I warned: "PTR selling off a bit. If BA turns down we could be good for another 100 points down pretty fast. IBM holding out too, very stubborn stocks we love in the LTP!"

  • 12:41"Long-term plays. The only reason we haven’t made many lately is because there weren’t any good deals. Now that we are getting a pullback and possibly falling back into a trading range, focus will shift back to the LTP. For those of you who haven’t been with us for a full year, we go where the money is and USUALLY we are weighted 75% LTP and 25% STP from a virtual portfolio standpoint and the STP is just for fun opportunities that come along.
  • "In a “normal” month in a “normal” market, we are thrilled to make 20% and my goal of the LTP is to make 50% for the year. It may not be as sexy but it sure beats losing money like over 50% of the mutual funds do in a flat market so do not be surprised if our strategies shift considerably away from short trades in the fall."
  • 1:50: "VIX – that’s what I’m talking about. If you still have a lot of open contracts you are not as rich as you think you are, when the VIX pops so will your premiums! CASH CASH CASH, especially if the dollar is bouncing… "

At 2:09 I cautioned against getting too excited about the "recovery" saying: "Don’t forget Europe sold back to their lows at the close!!!!" and a little later, at 2:47, I was highly skeptical of CNBC's special guest and the mini "rally" that ensued: "Here comes the Cramer mega pump! He just yesterday said this is no time to be in the markets and now he’s out with a BUYBUYBUY! Says we will close up and amazingly money starts flowing in as he speaks.   Oil looks finished at $77 – sick! "  I was done at 3:17 as I had to go to a meeting so I covered the upside and left the puts on the table, protecting gains that got even more spectacular while I was away as the market took it's final plunge at 3:30.

To summarize, there's nothing wrong with a nice, healthy dip if you plan ahead and are ready for it – it may even be the best part of the trip, as it was for us this week.  Of course, only a fool goes downriver without a life preserver and headgear and that's exactly what we try to teach over at PSW – riding the rapids of the markets can be the most exciting thing we do in our lives – but you need be able to look out for obstacles ahead and have the team ready to change course at a moment's notice, no matter how well you think you know the waters.

As I said before, mine were only some of the 303 comments made on Friday's post (a slow day!) as there is never a shortage of trade ideas at PSW.  By keeping our oars in the water and just a little navigation from me as I do my best to spot the dangers that may lie ahead, we accomplish amazing things on a daily basis by contributing as a team and I am very proud of the work we are doing here!

Thanks to one and all for a fantastic week – it's been an absolute pleasure taking this ride with you and I can't wait to see what's around the next bend in the river!

Have a great weekend,

- Phil


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    Click here to see some testimonials from our members!

  1. Tom2oc just posted an analysis of the current market.

  2. Phil,
    Against your DIA 135 puts – Do you use equal number of calls and also what strike do you recommend?

  3. Phil,
    I am new to this site so please forgive my basic questions – I have held them off all week since I did not want to disturb you from your normal market activities. So here are my questions:
    1. Your instructions for new subscribers tell us to choose the type of portfolio as the first step. However I noticed in your last weekend wrap up posting on Fri indicates that your profits have been hedged in the short time portfolio. How do you protect gains in the LTP or do your hedges cover for both STP & LTP gains?
    2. What is the best way for a new subscriber to use your service to get the most out of it –
    e.g. (A) Buy all your past positions that are currently below/near your cost and then phase in your recommendations as they come in.
    (B) Buy new recommendations as they come in without going into any existing trades.
    (C) Any other method.
    4. I did not see any LTP recommendations this week – did I miss something or did you not make any changes to LTP?
    5. Can you please fill in the Transaction Dates in the LTP portfolio? – they seem to be missing this week.
    6. What is the difference between Preroll & a Roll?
    7. What is an mo trade?
    8. I got some understanding of the mattress play from your brief explanation this week – can you please discuss/explain it more fully tomorrow as you had said?

  4. Phil,

    Thoughts on a VIX put calendar..

    Perhaps buy the May8 22.5 P @ 5.6 and sell the Sep 20 P @ 3 against them? Net in 2.6..

    I’d have to hold it 30 days per my day job.. Thus no Aug for me..


  5. Hi, Phil--

    Hope you’re enjoying the weekend.

    You asked me to remind you about discussing the best sort of mattress plays for those of us with accounts that only allow for three daytrades in a five-day period. I’ll be gone most of tomorrow, but will eagerly read any thoughts you have on this before Monday morning.

    Thanks a bunch.

  6. Hi Cumaske -

    Id strongly suggest that you take a look at the ‘strategy’ section, which should answer many of your questions.
    After that the ‘education’ section is top-notch and a must-read.

    As far as the long-term portfolio, there has been nothing buyable for it – although that is changing now, as the market corrects.

    Phil uses his mattress puts as layers of protection/hedge. These augment the short calls he has as cover for his longs. Im not sure how he accounts for the mattress plays across portfolios.

    I hope that answers some of yiour questions – im just a member here — have been for a couple of months. It has been a great learning experience and there are top-notch folks all over the place to learn from here.

    If I had any advice for you (newbie to newbie), it would be to read alot. Read this site, Happy Trading’s Site, and Zmanns site. Follow the daily blogs as theres a wealth of information there.

    Take it nice and slow, dont jump into anything you dont understand, and follow the daily blogs as much as you can.

    Have fun !

  7. Phil & Others..

    Scratch my above VIX thought.. well, maybe not, but I’m not about to step into the VIX pool before watching it a bunch more.. VIX options don’t track like standard equity options:


  8. Hi djczing,
    Great advice – THANKS a bunch.
    You are absolutely right – I have learnt a lot and am amazed at the results.
    I will follow your advice and try to pick up knowledge from the resources you mentioned.
    THANKS again for taking time to help me out.

  9. One of the tools I use to learn this profession is to publicly post both my successes and failures. I do this not to gloat when successes occur nor to whine or blame when failures occur; but because my learning and retention skills increase when writing/typing thought processes, hypothesis reached or outcomes vs. trying to implant actions/results into my memory bank for later recall. Also, I hope a person or two may learn from my actions, either the positive or negative, and results. Possibly, they might modify their own actions to either obtain the positive and restrain from the negaive activity that may explain the specific outcomes in my trading experiences.

    Revelation of a major weakness of mine: I have an issue with not getting out of trades that are dropping and this statement describes the inherent weakness I have to overcome.

    It is critical to understand that the inability to cut losses is not, at its core, a trading problem. It is something in the personality of the trader that does not want to admit a mistake and sends him or her into an endless search for every possible reason to stay in a trade when it is clearly not working. It is something in the hardwired mechanisms of the trading brain that has not been trained to execute without hesitation. The issue here is that I broke my own rules and ended up in a downward spiral. I have set my trading rules and if something goes wrong, who is to blame? I will not succeed as a trader if I am unable to get up, walk to the mirror, look in the mirror and say “I made a mistake. I did it. I did not execute my strategy. It is my fault.”

    Very scary self discovery for me which is a part of my personna and is a part of my 40+ year mindset. Prognosis for overnight change? Slim to none. Methodology needed to restrict this mindset from ruling must be to enter only those trades in which I do have some knowledge of underlying company and/or sector. Also, could provide a basis for recoginizing, although, I may be right, the market as a whole has decided the timing of my decision is NOT right and I should exit the trade. Perfect example is the large losses I obtained in the Homebuilders in Nov and Dec of 2006. There was no reason for their continued price ascention so I continually bought puts that expired worthless. Timing was wrong, hypothesis was correct. (Also at that point in my trading career I had no concept of rolling positions) Lesson learned? Screaming “Halt” at a stampede of people in a riot won’t make them stop, and you will be trampled. Get out of the way by rolling at an early point in the trade or blame the market for stupidiy and get out of the trade entirely, but at an acceptable loss %. Having the market be wrong and not losing money is better than being right (just not right now), but penniless.

    Current examples of stubborn or improper loss cutting behavior; EDU, IMB, SMH, DNDN, MICC and AMD.

    EDU I turned a blind eye to my knowledge as an accountant and research that the Co. had disturbing financial issues. This time I was right, but followed the herd. Didn’t exit at personal stop levels.

    IMB, went against my negative hypothesis for the sector as a whole, sold the Puts I had and bought Calls! Need to guard against becoming a lemming. There are only 10K other trades to consider!! Didn’t exit at personal stop levels.

    SMH, needed to consider that my hypothesis may be correct, but timing is wrong with regards to the chip sector. Pullback before sharp increase has occurred in second half of every 4 years going back to 1991. Bought AUG calls resulting in a limited time period for pullback to end. Became stubborn and instead of rolling to Nov kept buying more with justification of lowering basis for future price increase. Now fighting internal battle of waiting for price decline to cease to roll or to roll now and be patient for the projected price increase to occur. Liquidity in account sometimes an issue also.

    MICC, trade I should not ever had entered. Don’t know Co. or sector. Lemming trade again. Sharp decrease in price occurred, but if I had some personal knowledge and/or had done some dd, might have prevented the large % loss I currently own.

    AMD, got fortunate and the market agreed with my financial hypothesis regarding its finances, but only after incurring a paper loss of over 40%. Sold for 52% pi, but as above indicates the positive result occurred only 20%.

    Positive results can be ultimately negative for me. My positive returns in AAPL (mostly) and WFR in July were sufficient enough to bring my year to date portfolio ROI from a -40% to +5%! However, these returns were part of the 20% discussed under AMD. If they had been part of the 80% that lose, I would literally not be trading today. However, in my defense, these were/are two Co’s I have studied, researched and understand the sectors to which they belong. Hence, my conclusion stated above to overcome my inherent stubborn foundation when it comes to trading must include trading only those Co’s I know (or at least know better than another Co. I just throw money at).

    Bottom line: KNOW the trade (before, during and after)!!!

  10. Mattress plays and trading limits for small accounts

    As thedraz mentions, there’s a couple of problems with rapid trading with a small account.

    First, if the account is under $25K, too many day-trades cause the account to be flagged as a “pattern day trader”. If you get that tag, then you must maintain 25K in your account or you must provide cash-on-hand for same-day trades.

    The second limit happens if you have a cash account. You are limited to trades amounting to cash-on-hand at the start of the trading day, since it takes a day or two for funds from sell trades to be cleared for trading. So even if you are careful and avoid day-trades of the same stock/option you can run into the trading limit if you don’t have margin.

    I ran into the cash limit on Friday while making a series of DIA put trades according to the mattress strategy. As it turned out, I did not need to keep buying, the 132 & 133 puts I had after the third round of rolls more than hedged my account, so when the day was done I actually ended up green, even though I stopped trading when the Dow was down about 100.

    So my mattress play yesterday worked out okay by accident. But how could the strategy be adjusted to trade less and still work according to plan?

  11. Karm – im sure everyone appreciates your trade musings for what they are – a learning experience to share.

    My ride so far has been of a more boring sort, but instructive and damn forgiving.

    Ive built a $100k portfolio with just a little stock, but mostly calendar spreads of various shapes and sizes, on indexes, ETFs (ughhh dont ask), regular stocks and my favorite horse, and big-time bread-winner 2 months in a row, the OIH.

    THis last week was the first stress-test of the portfolio, of course, as I decided id just build it at the top of the market.
    Last month a smaller version yielded about 2% return (and was handled by a raving lunatic I think) – so this month I thought well bigger is better, and so far things are going along with the models. This past week, right or wrong I was letting my long calls delta down while following the market down with the covers, always providing a 2-3% sweet spot for a reversal to the upside. I also had puts, but not as much as id like.

    By the way im about 35% cash right now and was feelin nekkid as heck until I really sat down tonight and adjusted everything so it was rigth in my portfolio tracker. Im sitting on about a 5% loss right now, but everything remaining equal, my model tells me Ill have made that up, plus about 3-4% at expiration. Thats after oih broke through the b bottom side of the fence I put it in between 180 and 190.

    Looking further at the models, each one of my positions shows a bulge whose biggest expansion is in a market thats 2-4% up from here. Just about perfect, and the product of following the market down with short calls — the commissions were hell (time to switch to tradestation), but looking at the stance of the broad portfolio all togther is revealing and heartenning. I figure I have some good cusion to help me deal with my vega situation now. Yesterday I was just plain too scared to tally it all up. Note to self – better to overdo the puts on teh downside than to under-do them, at least if you overdo them and your timing is decent, your extra take from teh puts will make up for an untennable vega situation when the volatilities deflate again.

    My portfolio vega sits at about 1.5% of cap at risk — every 1% loss in VIX loses about 1.5% from my portfolio. Im making the broad assumption that any position im holding will have volatility deflation that will be almost 1:1 correlation with VIX across the board — thats about worst case I think, with the VIX having about 10 points of air underneath it, figure VIX 13-15 is very reachable (?)).

    Given those broad portfolio vega numbers I want to mitigate my vega risk down to .5% of CAR at most. Ill want to do that while maintaining as close to the same profit picture (at expiration) as I have now.

    So, Im going to wanna reduce my vega markedly, and probably gonna wanna end up with at least a slightly positive delta because if VIX drops hard itll be when the market turns up. I wont wanna get too positive in my delta because the main goal at this point will be to reduce vega risk, and playing the market to turn up hard just wouldnt be prudent – it could reverse and clown around in a range of large ups and downs. I might wanna be closer to a neutral delta, or just a bit positive.

    How im gonna do it I think has been decided. I have some long calls that need to be repositionned – the poor things have taken a beating, and I suppose I should have acted on themm sooner – its nice having em delta’d down at the moment, but to come more towards a neutral vega stance im gonna bring em back towards the money, and try to spend as little doing so as possible – which means Ill have to move em up in time. Getting the long and short calls closer together in time and in strike should even out my vega to something hopefully more manageable, adn at the same time reposition the calls so theyre in a better place to take advantage of a rebound or a flattenning out market.

    Ok – the key is 1.3% to .5% vega adjustment. Ill post what I come up with if anyones interested. The bottom line is that I like where this gravy train sits and its potential (even though the loss right now seems a bit eye-popping). Im gonna ride this thing — unless Phil tells me im a fool and to just run away of course !

    And if youve gotten this far, congrats. Its late, I put in a good 14 hours at my real job today, and then couldnt rest until I got a chance to look at my situation and assess. It appears to be much better than Id first feared — but timing will be pretty important in the coming week.

    Heres what I really wanna do – build a volatility bucket. Make it so you can slide it under your position and catch every drop of volatility that gets wrung out of your position in the bucket. Call it a vega drain or something.
    Maybe opposing ATM bull put spread and bear call spread ? you could probly neutralize its delta that way. Hmmm…
    I must be a meandering fool thinking of options in 3d.

    My meander is done. Yall have a good night. errr… morning.

  12. Would be interested to hear your theory on how to reduce Vega in your port, and with the volatility calculations you utilize. I thought vega was the % movement of the underlying stock with a 1% + or – change in VIX. My only thought would be to acquire beta neutral stocks to reduce the overall vega in a port or individual stock. Unfortunately, stocks with a close to zero beta don’t seem to provide much appreciation or depreciation which might make them good candidates for a condor, gotta watch commission fees on these though (depending on which broker you use) and can also require a great deal of margin to be available/accessible. Not sure, but is this the best of the “greeks” to concentrate monitoring and manipulation in order to maximize an option or portfolio’s gain?

  13. karmcon,

    Thanks for the above post at 12:17 am concerning your decision making abilities…and your downfalls.

    I can identify with the problem and have learned more about myself from your trading stories than I have from any other post in a long time. My wife and I have been reviewing all our trades year to date…and just had the same discussion.

    Your input is invaluable. Thanks again and have a great day…

  14. Karm, your self-analysis is great. I, for one, appreciate hearing that I’m not the only one slapping myself for some of the idiotic things I’ve done. I’ve been where you are and then I’ve been on the other side. The side where I would get out of every trade as soon as it was down 20% or so. I’ve missed a lot of upside gains by doing that. I’m still trying to find the right balance. Right now I’m working on establishing my LTP with quality equities that, in my opinion, have a better than even chance of appreciating. I’m limiting my short term moves to a few choice picks every now and then and using the DIAs to take advantage of overall market movements and to protect my LTP somewhat in a downturn. I’ve been at this with a smaller portfolio for about 10 months or so and after some substantial gains and substantial losses, I’m just about even. But I had to work hard to get back to that point. This has been a learning experience for me and an experiment to this point. I’m about to begin trading in my IRA which is substantially larger than my present trading account and before I did that I wanted to make sure I had an idea, and the psychological makeup, to make this work. I think I’m getting there, but I continue to perform a self-analysis to see where I can improve my personal strategies, and everyone has to develop the style and strategies that work for him.

    The funny thing is I started doing some paper trading at my broker and assumed I had an account the size of my IRA. Started that about a month ago and turned an initial investment of 100k into 177K! But I’m not fooling myself into believing that I would do that with real money. Too many psychological barriers (fear mostly) to be able to do that. I remember somebody telling the story of some very successful wall street traders who decided to quit wall street and just trade for themselves. They ended up losing their shirts. It’s a whole different story when its your own money you’re trading with.

    I hope all this self-analysis helps the new folks around here. Be patient, be conservative, and stay in the game. I’m not a dumb guy and after 10 months or so, I see I still have a lot to learn. But PSW makes this process so much easier!

  15. Zman’s Energy Brain Weekly Wrap post up! Thoughts on natural gas and the now super mongo massive short position there, a tally of the week’s movements and our closed oil and gas positions for last week:

    average closed call up: 68%,
    averaged closed put up 84%

  16. LULU, LULUV ipo has nice pop

    Lululemon Athletica Inc. shares soared about 53 per cent in debut trading in New York and Toronto

    in full:

  17. Cameco story bits n’ pieces, good detailed article that came out on Saturday thats well worth reading

    full story:

    These should be the best of times for the world’s largest uranium producer. But the so-called “nuclear renaissance” is threatening to become a dark age for Cameco. According to several Bay Street sources, some investors have begun musing about a need for management changes at the former Crown corporation.

    While the contamination at Port Hope and a recent shocking production cut at Cameco’s 53-per-cent owned gold subsidiary Centerra Gold Inc. (which said last week that output from its Kumtor Gold mine in Kyrgyzstan will drop by a third this year), cannot be linked directly to the CEO, the ignominies are happening on his watch.

    The sandstone that surrounds the ore is saturated, creating immense water pressure. Chipping away at the ore is not unlike mining near the wall of a submarine. Penetrating the sandstone can have disastrous results.
    “It’s like tickling the bear’s ass,” the mine manager said.

    In the first quarter of 2007, Cameco realized an average price of just $24 (U.S.) per pound. If uranium spot prices average $100 (U.S.) a pound this year, Cameco expects to realize an average price of $39.75 per pound for the rest of the year. At the same average spot price, Cameco expects to realize a selling price of $58.25 in 2008 but only $48 per pound in 2009.

  18. I am a new subscriber to this site.
    Can someone explain what mo play & preroll mean or point me in the proper direction to read more about them?

  19. Cman – Mo = momentum play.. i.e. buy something that’s moving, and keep very tight stops on it to prevent losses & lock in gains once/if it moves far enough

    preroll – rolling before expiry.. can be done for many reasons..

  20. Wang’s World
    new posts up!!

  21. fotoaddict,
    THANKS for your time & explanation.

  22. I’m long AAPL Oct 120 calls with a nice gain (I picked these up back in June.)

    I think AAPL still has of room to run in Sept/Oct, but is vulnerable to a pullback in Aug and I’m thinking about different strategies since I don’t want to close out my postion yet and would like to protect it some. I’ve seen comments about selling Aug OTM calls against Oct ITM calls, but I was wondering if it would make sense to use the proceeds from the calls to buy puts.

    For example, you could sell Aug 155 calls @ 2.05 and buy Aug 135 puts at 2.05. The prices are from Friday’s close and I would probably try to sell the calls on a surge into the upper 140s and possibly pickup enough premium to get the 140 puts intead of the 135 puts.

    Thanks in advance for your thoughts. I’ve already learned so much from reading the daily comments and I’m ready to start trying some of the new LTP calendar spreads.

  23. Asia Markets – Nikkei 225 down 1%

    Asian stock markets extended declines in the morning session Monday following further losses on Wall Street, as investors fretted about the health of the U.S. economy amid worries about the fallout from the subprime mortgage market.

    Investors fear losses in the subprime sector may spill over into the broader U.S. economy, Asia’s top export market, and increasing deterioration in credit markets would hurt chances for more corporate buyouts and dry up funding.

    Tokyo’s Nikkei 225 Average was down over 1%, further pressured by a crushing defeat in an upper house elections for Japanese Prime Minister Shinzo Abe’s ruling coalition.

  24. From RBC july27 :

    Potash Corporation (NYSE: POT; 78.37; TSX: POT)
    Risk Qualifier:
    Price Target:
    Average Risk
    Yes, It Can Continue to Grow!
    • Support for Further Potash Price Increases. We believe the implementation
    of additional potash price increases will lead to a higher valuation for
    PotashCorp. Based on our fundamental outlook, we expect potash
    supply/demand fundamentals to remain very favourable through our forecast
    period. Due to tight supply, PotashCorp is currently allocating product to its
    potash customers based on available supply. Given the tight market conditions,
    we expect potash prices to continue to increase in 2008 and 2009.
    • 2008 Chinese Potash Negotiations Could Conclude Early With Significant
    Price Increase. During its conference call, management suggested that
    Chinese potash price negotiations could conclude before the end of 2007 with a
    substantial price increase for 2008. We believe this is a reasonable outcome
    given delivered potash prices in China are significantly lower than in the rest of
    the world where prices continue to rise.

  25. CGS & liquidity

    from RBC: Cadbury Schweppes (CSG) officially said it has halted the sale of its US division that makes Snapple because of worries that
    potential buyers would have trouble getting funding. CSG shares dropped 4% at market open in Europe on Friday.

  26. Rebound likely in 5-10 days?
    I found this article on the VIX spike we just had from

    Saturday, July 28, 2007
    VIX Spikes to 24.17, VWSI at -10

    Thanks to an unusual 1.20 surge from 4:00 – 4:15, the VIX managed to spike all the way up to a 24.17 close on Friday, ending the week up 7.22 or 42.6%. In dollars and percentage terms, this is the type of VIX weekly move that you would expect to see only a couple of time per decade, yet this week’s action does not quite match that of five months ago, when the VIX jumped 7.99 points on a much smaller base and logged a 75.2% gain for the week.

    Several readers have asked what these extreme VWSI readings mean. In a nutshell, they mean that a short-term (i.e., 5-10 trading days) VIX mean reversion move is highly likely and tradeable. While this also means that the broader markets will likely move in the opposite direction of a mean-reverting VIX, I tend to focus on the VIX play rather than the broader markets play – at least so far – in this blog.

  27. Some tidbits from here and there ….

    A relatively simple review of the S&P 500 earnings since 2002.
    In 2002, the S&P 500 earned $46.04. Of that amount, $14.35 was from energy and materials, about 31%
    In 2006, the S&P earned $87.72. Of that amount, $58.87 was from energy and materials, about 67%
    If the energy and materials sector earnings are “normalized” at a reasonable growth rate, that sector of the market instead of contributing the $58.87 in earnings really should have contributed about $25. In other words, because of the huge run up in commodity prices, the earnings of the S&P 500 on a running basis may be overstated by as much as $30.
    Stated another way, the P/E of the S&P is understated by a considerable amount. Against normalized earnings, the S&P 500 P/E is 23.5, versus the long run average of 15.5 (since 1933) or 17.4 since 1970.

    To add the the carnage Monday is the news late Friday that AHM will not be able to pay their dividend after all. The stock went ex dividend, the “payable to holders as of” date passed and it was scheduled to be payed on Friday. The brokers paid this dividend and charged shorts Friday but now AHM says they don’t have the money due to margin calls. This kind of action can really spook the market imo, if dividends are no longer guaranteed after the “payable as of” date.


    Pullbacks separate the wheat from the chaff, and one useful feature of this correction is that it started during earnings season. Companies that beat estimates are holding up better than the broader market, and the fresh earnings data is useful in preparing high-quality watchlists. No single investing strategy works for everyone, but stocks that pull back the least are typically the ones first out of the gate when the selling stops. Historically, they also run the farthest.
    The week’s best performers? Biotech, down 1.8%, followed by the NDX, down 3.9%.
    Also, it’s useful to track which stocks closed higher on a week like this. It’s a great set of stocks with which to start a new watchlist.
    — On the NDX, 13 stocks closed higher on the week: AAPL, AMAT, AMLN, AMZN, BIIB, BMET, CELG, CHKP, GRMN, GENZ, ISRG, TLAB, VRTX, WYNN.
    — On the OEX, 6 stocks closed higher on the week : CL, IBM, MRK, PEP, PG, T
    — On the MID, 23 stocks closed higher on the week: ADVS, AJG, BEC, BRL, BRO, BSG, CCMP, CVD, DCI, EXBD, FFIV, GGG, GPRO, MFE, PAS, PLT, RFMD, ROL, RSG, VARI, WOOF, WPO


  28. “Samsung has developed the world’s first LCD panel using the next-generation video interface” DisplayPort, sanctioned by VESA (the Video Electronics Standards Association). DisplayPort will serve as a
    replacement for DVI, LVDS and eventually VGA. By using a transmission speed more than double that of today’s interfaces, Samsung’s new LCD only requires a single DisplayPort interface, instead of the two DVI (Digital Visual Interface) ports now used. The speed enables 2560×1600 resolution without any color smear.”

    Non technical synopsis: less heat, less energy consumption, better computer monitor clarity and color and a new standard replacing the 2 yr old standard (DVI). :grin: Samsung partnered with Genesis Microchip (GNSS) to utilize their technology in producing a 30″ panel which is estimated to go into mass production in the 2nd qtr of 2008 (Don’t forget another Co. that could benefit from all those 30″ panels (GLW – Corning)).

    Took a quick look at GNSS, unprofitable, stock price flux between $7-14, short ratio of 11+%, but worth a LT stock hold potential? Maybe, but prob won’t miss much in the next 3 mos, so am putting on the backburner.

  29. mike p,

    Thanks for VIX comments. Prior PSW T/A pro also forecasting a bump up next week but qualified that the bump may end up being a dead cat bounce. DJI Closing under 13200 is his head for the hills last broken support signal. How low the market might go He did not say. Remember a 10$ correction from 14K is 12,600 which might make some pucker, but could be the medicine the market/Us require for the LT. Tom had/has developed his own “vix” tool which although seemed improbable of being correct on a high statistical basis, was a very telling tool. Tom is/was a very unique dude. I miss his “GOAX Rules!!” conclusion and “GD WS Crooks!” occasional tirade. :cool:


    Good thinking points. Notice how few stocks closed at new highs? As Phil has been stating (warning?) the new stock price lows are at an alarmingly high level. Wouldn’t take much for the dam to break?

  30. Well I have the best prospect for a vega drain/IV bucket. Just let your portfolio wring its IV out into something like this (?):

    +10 SPY Sept 152 Call @ 2.25
    -10 SPY Dec 147 Call @ 6.80

    +20 SPY Sept 140 Put @ 3.30
    -20 SPY Dec 145 Put @5.90

    If I read Etrades margins right, theres no apparent rule or margin penalty for selling the long term contracts and buying the shorter term. In fact, I only took the short contracts out to december when theoretically theres no reason you cant take them out further (that I can see – whats the catch here ?) and get more short vega benefit. I decided to keep the options conservative thought.

    The profit graph looks very nice here. There is practically no risk short-term as delta is flat to up on the downside, and flat to up on the upside. The December optioons are sold because the further out you go in options with resect to time, the more volatility will have an effect on the option price – in other words, the more (in this case short) vega value the long-dated contracts are.

    The vega ‘sink’ starts out at -475 (at spy 145) and is a very gentle upslope to the upside, and a steeper slope to the downside. This thing will give you at least 450 points of vega protection between SPY 138 and SPY 155.

    At september expiration theres no risk – a tiny loss below 139 and gain from there up. The 2:1 ratio on teh opposing positions gives you the flatter delta across the wider price range. a 1:1 ratio would give you a gentle (but not too bad) downslope in delta as SPY price goes up (we wanted flat to slight up slope).

    In any case, theres the rough sketch – please shoot holes in it – PLEASE. Yes the spreads on the options make me wanna look for options that correlate well sith the S&P volatility – - No I dont like the apparent $15k in margin requirement. But the profit picture looks benign as heck, and this provides the means to create 1 or 2 of these IV buckets under probly my 2 most Vega-positive positions, and just overdo the buckets to account for the vegas of my other (more minor) positions.

    Where you pay for this nirvanna is in theta – this position costs about $65 a day to have on – but when the market turns the volatility will drop pretty fast – and you probably only wanna have thing on for as long as you have to.

    to do: find underlying with mroe tennable bid/ask spread
    Correlate IV/HV of all positions as closely as possible to intended bucket IV/HV

    Ok.. so I was gonna take a sick day and get this done and get prep’d for tomorrow. INstead I slogged through a 14 hour day from hades and only got to give a quick shot at finding a place to dump vega. Lemme know what you think – and/ or tune on this thing.

    Sage or Phil or anyone experienced wth any unseen risk here please feel free to shoot me down ! Its how I learn !

    Ill have to put lipstick on it all probly tomorrow morning after some rest and before the market opens. Nothing like waiting til the last minute.

  31. Karm -

    Vega has always been my nemesis. Its also probably the most inflluential option greek right behind delta.

    Its a measure of how much the price of the option will fluctuate given a 1% change in the volatility of the underlying (or the implied volatiliy, which is actually more relevant than HV for our purposes).

    IV is expressed in good ole dollars. IV x 100 x #of contracts = amount, in dollars your option (or position) price will change with a 1% change in IV.

    My method of calculating my portfolio IV is simple and crude – add up each position IV. Its somewhat relevant in this situation because when the market dumps like it dumped, not only do stock price correlations come more towards 1, but volatilities do also – so I can get a rough guesstimate of how a positive turn in the market is gonna effect my position. I am going to go through each position and make a good guess on how far I think IV can fall and adjust my vega-hedge needs accordingly.

  32. Sorry Karm – in that equation its Vega x 100 x #of contracts …

  33. Karm-

    just looking at the daily chart I would say that if the Dow ends the day below 13250 we’re in deep trouble…

  34. Qualcomm reportedly growing orders at foundries