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  • Small caps enter correction zone [View news story]
    The 52 week low is just a day or so away-but not sure that has any significance. Obviously, you can take some gains from hedges, and/or begin to think about modest long positions. JAN 15, 2016 35 TNA PUTS can be sold for $500. I'm looking at 50 put for $1,100.
    Remember that you can hedge with TZA.
    Oct 1 06:16 PM | Likes Like |Link to Comment
  • Airline stocks slide after Ebola case reported in U.S. [View news story]
    When the first ebola news came out a few weeks ago, I added to my airline shorts. In fact, I even suggested to several people that some nefarious group would arrange to put an infected person on a major carrier-and buy a boatload of puts the day before. I was being a bit facetious, but if you look back at history, it doesn't take much to spook airline longs. And, when a huge amount of activity is machine traded, actual probability of a significant problem is simply not relevant. The good news (if you're long) is that the shorts will unload, and, once again, the carousel brings childish laughter.
    Once upon a time, flying was actually fun. That ended years ago, of course. When you ask? I'd say about the same time that the stewardess became a flight attendant, the food became stale, and the damn peanuts became subsidized by all kinds of add-on fees. The song says that 1969 was the 'best year of my life.' It wasn't too long after that I learned to short airlines and homebuilders. Been easy money for decades. Don't expect things to change.
    Oct 1 01:56 PM | 1 Like Like |Link to Comment
  • Housing┬áSales And Construction Show Slight Improvement To Stagnation [View article]
    I've studied real estate for over 30 years. And, professionally, I've headed an investment group that bought single-family, multi-family, office buildings, storage facilities, resort property, etc. I was also CEO of a hybrid REIT, which made short-term construction loans, and various other mortgage related loans/investments.
    There is 'something' beyond all the numbers, which reflects the gut level mood of society. I think this goes all the way back to early American history, and much has been written about "Manifest Destiny", the Oklahoma land run, rights of ranchers, disputes about cattle grazing, "a man's home is his castle," the constitutional requisite to be a property owner in order to vote-I can keep going for quite a while-but there is an almost instinctive, guttural nexus with replicating that childhood memory of visiting grandma at the farm, of planting flowers on our own unique parcel of the planet.
    As we slowly surrender that historical and psychological bond, we tend to grasp at 'good' news. Anyone over the age of 50 or so can recall the excitement of buying the first home-the feeling of 'we're off to a great future.' We strongly identified with Ward and June Cleaver-even those of us that camped out at Woodstock, and, for a brief time, tried to turn the channel to something that didn't really exist. That historical and unique opportunity has been stolen from too many. Perhaps the theft can be remedied in the not too distant future.
    There are tens of thousands of pages on this subject, so I've added nothing. That first shot of java tends to elicit knee-jerk observations.
    Oct 1 08:51 AM | Likes Like |Link to Comment
  • Party Like It's 2011 [View article]
    cross-as you note '...all too often, the stock does not continue up but simply returns...'-I agree with you, but how can we use that info?
    What typically happens to otm options is that value increases in a manner unique to option pricing. As the first order rate of change increases with the stock price 'delta', the second derivative 'gamma' creates a 'snap' or 'echo' reaction. I compare this to an echo because if I'm standing on one side of a canyon, and you're on the other, you might hear my yell, and incorrectly think I'm physically closer than reality. So, my perceived presence is something of an illusion. My echo will fade rather quickly.
    You can 'short' my echo, as it fails to correctly portray reality. This can be an 'embedded' GTC order, or used to counter an observed spike. You can study this action by observing option price ranges for a given time period. This has also been referred to as 'spike fishing'. In fact, one can do this with a simple covered call portfolio. How? Rather than automatically selling a call, wait for a couple of up-days, and then sell the call. In other words, player A might sell an ATM call for 1.00. Player B waits for a spike and sells an OTM call for the same premium. Yet, who is better off? B is better as his 'expected value' is higher. Part of that 'expected value' is found in the fact that the OTM option will (a) expire quicker, and (b) will have much lower probability of being assigned (or creating a rollover situation). A 'ladder' can also work for call buyers, but as noted, buying an option requires getting both direction and time correct. Another way to think about selling calls is to think about an inverted pyramid-sell one ATM option, sell two OTM next strike up, etc. I know this is a bit jumbled, but out of time-just something to think about to alleviate boredom.
    Sep 29 01:11 PM | Likes Like |Link to Comment
  • Party Like It's 2011 [View article]
    Calls seldom get exercised prior to expiration. Short puts are another story.
    However, if one's stock gets called away (as in a covered situation), then either one doesn't know how to rollover the position, or is content with taking the gain (in essence a contrived sale).
    I think if option call sellers would think in terms of basic finance, the understanding, and results would improve. For example, I view a rollout as just a 'lease extension' where I get more money for the consideration of same. So, a 'rollout' is nothing more than an extension. From a game theory perspective, the odds increasingly favor the nth extension. I would also note that two people can sell the exact same option, but with widely different results. Also, there is a linkage between averaging in the short calls and whether a rollout is even necessary. To some extent, there is an asymmetry between a simple martingale strategy and a rollout dynamic. Most option sellers will make a small foray, and will take fairly quick profits-if possible. If one misses the target initially, adding more positions (or 'climbing the ladder) takes advantage of both decay as expiration approaches, and simple mean reversion. By 'climbing the ladder' I refer to selling options that are out-of-the-money, but have enjoyed a gamma spike. In practice, if I sold an at-the-money option that runs against me, I can now look at the increased premium available to an assortment of OTM options. If a stock has spiked for some reason, the gamma echo (my term) will create an 'illusion of value' that will, in all probability, decrease.
    Sep 29 10:50 AM | Likes Like |Link to Comment
  • The Stock Market Machines Are Breaking Down [View article]
    Small caps are being unceremoniously 'dumped.' The most recent dumping transcends the last two panic attacks (all within a few months).
    The prior routs were just dip buying points. Yet, we're still not at 52 week lows.
    The inverse ETF, TZA, shows a 52 week high of 25 and change. It currently is below 17.
    Part of the rot isn't just selling or buying, but rather manipulating large blocks of small issues. If I had more time, I would try to connect some dots that I see-but it's a very elusive and highly sophisticated game. It has to resemble somewhat 'normal' patterns-hence the reversal Friday. But as someone noted above (thechaser), just watching the tick moves will prove to be quite intriguing.
    Sep 27 01:24 PM | Likes Like |Link to Comment
  • Yes Virginia, The Market Can Go Down - Part I [View article]
    In glancing at some comments, it appears that some of you have an interest in selling calls on specific small cap stocks. Here's a couple of problems with that idea:
    (1) low volume for shares and high bid-ask spreads for options; and,
    (2) small caps tend to sell-off at a faster and more furious pace.
    So, if you're trying to protect 100 shares of a small cap stock by selling one call-you're doing the equivalent of shooting a lion with a BB gun. And, there is the tendency to both buy back a short call too early, and/or sell a call after the damage has been done.
    Certainly call selling will mitigate (at least to a small extent), a swift down-draft. But, if you go back and look at small cap behavior over the past few months, and simulate call selling vs put buying, the results would favor buying puts. And, one could both sell a call and buy a put-or collar their positions.
    Another approach is to buy a percentage amount of TZA (or some other small cap inverse ETF)-using the inverse as a sort of 'perpetual put' that doesn't suffer from typical theta decay. A quick glance at the behavior of small caps will again show the efficacy of having this protection in play-and certainly one can average into this hedge, whereas selling a call or buying a put raises issues as to strikes and expiration dates. Furthermore, one can take staggered profits on an inverse ETF, while closing out an option position is an 'all or nothing' decision (unless large positions are in play).
    And, if one is so inclined, the gains made on the inverse can be utilized to increase the small cap holdings. The final result is that one now has a lower basis in the small cap long positions, which will allow more future flexibility. Remember that call selling is more productive where the stock basis is lower as there are many more choices. Finally, an additional thought is that one doesn't have to necessarily sell their inverse for a gain-it's possible to sell calls against it as well, thereby lowering the hedge basis. The "optimal" move is unique to each individual-but hopefully this will give you something to contemplate.
    If you're a trader, then you short the inverse ETF at the darkest hour (especially where the selling abatement and option expiration align). I noted in a stocktalk last Thursday that I was selling TZA calls. I'm sure most thought I was crazy, but I walked away with a big win Friday afternoon. So, there are many ways to skin the cat (I don't own any cats, and I only use this in a metaphorical sense-I also contribute to various humane societies and I'm sure some of that money goes to cats-so if you're a passionate cat owner don't take it the wrong way).
    Sep 27 12:39 PM | 2 Likes Like |Link to Comment
  • Why I Agree With (Some Of) Friedrich Hayek [View article]
    I would suggest that much of the article draws from these Popper essays:
    (1) Piecemeal Social Engineering (1944),
    (2)The paradoxes of Sovereignty (1945),
    (3) Marx's Theory of the State (1945).
    But aside from making any comment or rejoinder-which would take far too long-I encourage those not familiar with Popper to study his vast body of work. His background is both extraordinary and fascinating-few people can match his command of so much diverse subject matter.
    He was a student of mathematics, physics, philosophy and psychology. He is a great writer-but you might want to postpone reading "The Logic of Scientific Discovery" until you have plenty of 'quiet time.'
    Sep 24 06:50 PM | 1 Like Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]
    Yes-it all comes down to our own unique neural DNA-but also how we train our mind.
    As Kahneman notes in conclusion:
    "The central fact of our existence is that time is the ultimate finite resource, but the remembering self ignores that reality. The neglect of duration combined with the peak-end rule causes a bias that favors a short period of intense joy over a long period of moderate happiness. The mirror image of the same bias makes us fear a short period of intense but tolerable suffering more than we fear a much longer period of moderate pain....The remembering self's neglect of duration, its exaggerated emphasis on peaks and ends, and its susceptibility to hindsight combine to yield distorted reflections of our actual experience."
    Sep 23 09:56 AM | 1 Like Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]
    Well written!
    Sep 23 09:33 AM | Likes Like |Link to Comment
  • Small Caps Continue To Struggle [View article]
    There is massive selling of small caps. But, this creates opportunities in inverse ETFs, such as TZA. However, this activity does seem odd during a 'bull' cycle. Is it a harbinger of a much larger move to 'take the money and run' syndrome?
    Small caps have been very volatile all year, even when the S&P seemed quite, and volatility subdued.
    My bet at this point is more selling-as we know, selling begets selling.
    Sep 22 11:37 AM | Likes Like |Link to Comment
  • Anatomy Of A Market Bubble [View article]
    An alternative to buying puts would be to collar all or a portion of the portfolio. One doesn't have to totally mitigate the put cost (via selling calls), but it's possible to mix/match. And, strategies are not mutually exclusive. For example, one might look at longer-term 'disability' by using a LEAP collar that's designed to pay for itself, both by the inherent structure of the LEAPS, but also by shorter-term spreads, designed to work in tandem. The idea is to have catastrophic insurance (fully paid for), but to also design shorter-term games.
    I currently hold minimal shares, so I don't really worry about 'protecting' long positions. But, for those that have large equity holdings and might need to liquidate your holdings in the near-term, consider also a 'stock replacement' strategy. This is sometimes called 'synthetic replication'. This involves buying calls and selling puts in such a manner as to reproduce your existing/former holdings-but you pocket the cash. And, again, this replication can be risk adjusted. (For instance, you can leave the LEAP collar in place).
    Of course, very few people will pay any attention to this and will just continue to fret over the next bubble. And when the next 'crash' occurs, most will simply watch with varying degrees of consternation-if not desperation. The usual finger-pointing and headlines will play out, a cathartic drama will run its course, and the cycle of human behavior will resume its march.
    And the wise will once again note that there is nothing new under the sun.
    Sep 22 11:22 AM | 3 Likes Like |Link to Comment
  • Patiently Waiting For Mean Reversion [View article]
    Good point Dave re whipsaw results. Why would one wait until an auto crash to put on their seatbelt? A lot of people don't buy flood insurance because "...why we haven't had a flood in these here parts for 40 years-I ain't gonna waste my money on flood insurance..."
    In the markets, folks invariably wait for the wreck, and then they sell calls or buy puts. At that point, the odds likely favor doubling down-the exact opposite of what most people do.
    Long ago, I came up with what I called a "Simultaneous Solution Set"-too cumbersome to explain, but basically I added a certain percent of hedges on sunny days.
    Most people in the market would be terrible poker players-but that creates predictable outcomes, which increases the odds of gaming the behavior.
    Sep 18 12:37 PM | Likes Like |Link to Comment
  • Patiently Waiting For Mean Reversion [View article]
    I trade small caps, so this isn't news-except the 'inexplicable' part. But, I noticed several weeks ago that large funds were bailing on small caps. On the other hand, small caps have climbed the technician's hill at least twice in as many months-so that too is a bit of a novelty.
    Let's just go with this maxim: "it is what it is."
    Of course, if one could poll all those moving, say $50M chunks out of small caps, perhaps we might learn something. But, what we might learn is simply that they know that small caps are a volatile species, and that buying puts and then moving the market down would buy another yacht.
    And, then, of course, we can have our mean reversion-time to buy calls and watch TNA climb back to 86 or so.
    I wish I could give you a timeframe on all this-but wouldn't that be too easy?
    Sep 16 04:26 PM | Likes Like |Link to Comment
  • The Time For Caution Has Arrived [View article]
    Don't know if caution is the right frame of mind. I would say that we have a new opportunity zone. For example, layering in bear put spreads in this market can really goose returns. This worked great yesterday for momo stocks like TSLA, NFLX and one of my favorites BIDU.
    Now, if you're a one-dimensional player, and you want to tempt fate-go ahead. But, if the algos want to switch to a sell bias, then why not be prepared. Or, to keep it simple, sprinkle in some puts on an up day.
    Sep 16 03:54 PM | Likes Like |Link to Comment