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  • Is It Time To Short The Home Builders? [View article]
    Peter, a lot of good points. For some reason, I was born to short homebuilders and airlines-but I generally use bear call spreads. A simple way to short homebuilders, with very minimal risk, is to sell spreads on ITB. I normally use 60 days, and sell two sets of calls against one OTM set. Obviously, I wait for a 'giddy' day and then strike.
    I'm currently on the 2d iteration of the 25/26 May 18 calls. I actually didn't think the short calls would trigger the second time, but it appeared that folks got so excited about BZH that the ITB ETF hit my target. Within minutes, the adrenalin rush subsided and it appears that the sands of time are working-just as theta mathematics would suggest.
    I confess, though, that I sometimes sell puts (a bullish play) but it takes a very concerted effort. I always remind myself that I've made a lot of money shorting homebuilders so taking a potential long position is in keeping with rationality.
    BTW, when I referenced two sets, I simply mean that I establish the initial position, and if the profit percentage is hit, I will re-set the hook. This will not always work, it depends on volatility during the time period. And, the OTM calls are almost always worthless anyway, so I just leave them in place-in case the opportunity arises. As I say, it did work this time. One more quick note: I set the initial profit parameter at 60% (which both covers the OTM cost and generates an acceptable profit margin). One might wonder why not just let the initial position expire worthless, as the total profit might be about the same as doing the two-step. The answer is that it's just risk management-in a bullish market. So, in some sense, pocketing the initial short calls secures a reasonable number, and hedges the second phase. Not to get too complicated, but the second round can only add to profit or subtract gains-it generally will not create a loss.
    May 6, 2013. 09:20 AM | 2 Likes Like |Link to Comment
  • LinkedIn Like Microsoft And Baidu - Watch Out Below [View article]
    Exactly-and when you peel the veneer back you find all sorts of relational issues that 'explain' the holdings. That so many attempt to 'rationalize' a 'price' is amusing. There is always a game behind the game.
    Yes, fundamentals make 'sense' at critical points, but often adjustments are made rather quickly. The solution in these cases is to trade spreads. For instance, I can sell a call spread against LNKD and use the credit to buy one or more puts. Or, one can take the opposite approach-or even combine the two. But, I would avoid a one-dimensional play as the odds are lousy irrespective of your point of view.
    May 5, 2013. 09:29 AM | 1 Like Like |Link to Comment
  • Signs The Housing Market Is Starting To Head South [View article]
    My real estate investments are commercial (mini-storage) and I don't claim to be an expert on residential.
    But, just in traveling around, it seems that higher rents in and around the major cities is prompting some to reconsider buying. In other cases, there does seem to be a shortage of inventory. That would seem somewhat surprising, but a lot of foreclosed/abandoned homes have fallen into disrepair. So, the passage of time and general neglect has resulted in eyesores rather than useful inventory. In Atlanta, median priced homes have firmed-larger ones still a tough proposition. Resort and retirement areas in Florida are really firming up.
    In years past, this would be nothing to write home about, and who knows if it's sustainable. Certainly rates can't be any lower, and it seems likely that any appreciable uptick in mortgage rates would negate the current demand.
    So, I think the case can be made that residential construction and re-sale activity, while a mere shadow of pre-2008 levels, is nonetheless improving and making at least some contribution to GDP. From the small business perspective, it is not clear whether family style construction businesses will derive any benefit, nor whether some small banks will be able to profit via construction loans. This may be the missing link in the 'recovery'-but, then again, this mess was a long-time fermenting, and the piper will continue to extract a toll for many years to come.
    May 4, 2013. 10:10 AM | 1 Like Like |Link to Comment
  • Risky Stocks In A Rising Market [View article]
    I've traded ACI for many years-so I've formed a 'bond' with the stock-something like a love-hate relationship.
    I trade an assortment of spreads re ACI (and WLT, ANR, BTU), so I make money irrespective of the price action. But, I was short the coal stocks during the time they were treated as poisonous snakes.
    My point though is that the algos tend to treat all stocks in a sector much the same. The exception relates to popular stocks that seem to have a unique situation, such as NFLX, LNKD, AAPL (mostly tech or media stocks).
    Even if one didn't know about algo trading, the simultaneous tic moves would raise red flags. It's not always a perfect correlation, but it takes a very specific news event to impact say, WLT, and not ACI or BTU.
    So, my observation is that while a forensic assessment may reveal some particular weakness (a)it is likely known by fund managers already, and (b)an extraordinary differentiation would have to arise to drive said stock down. I would also add that energy, materials and mining have already been taken out and shot.
    As evidence to support my opinion, just observe the price action for ACI yesterday. It had one of the biggest one day up moves in quite some time-probably since Romney made some reference to coal companies last Fall.
    Nonetheless, the information is still useful, as it definitely plays a role in trading spreads. What I like about trading spreads is that an element of protection is incorporated within the strategy. One example of a spread tactic that I'm using with ACI is to sell longer-dated put spreads (a bullish play), but pair it with shorter-term bear call spreads (a bearish play). So, within the relevant time period, if ACI declines (or does nothing), the call premium is booked. On the short put side, the accounting reveals that this position is likely running against you-BUT, this position is not booked-it's still in play. We can now implement another bear call position, and depending on the price action, we will book more premium, or roll out to another month, if the stock makes a sustained move up. If that happens, we will certainly be winning on our short put strategy.
    It would take several pages to go thru all the permutations, but the basic concept for this particular spread is 'net zero risk.' In short, a mini-max philosophy. Yet, it is likely to be profitable, and the amount of profit is a function of dynamic adjustments.
    This type of activity requires careful planning, and a tremendous amount of patience. And, at times, it seems like watching paint dry. It is a very incremental process, and several days may pass before any tweaking is needed. Also, in answering questions about spreads, one has to be cognizant of the fact that the out of the money option may temporarily wag the tail of the at the money piece. Indeed, early on the spread could be working perfectly, yet your 'net gain/loss' statement might show a 'loss' and create doubt in one's mind. The way to deal with that is to mentally create an "account receivable" to augment the typical retail trading platform dashboard.
    May 4, 2013. 09:39 AM | 1 Like Like |Link to Comment
  • Vertex Pharmaceuticals Beats Analyst Expectations, Yet Insiders Continue To Sell More Shares [View article]
    VRTX options very interesting. Shorting/selling the June 22 70 calls yesterday would have returned a tidy profit-as would buying the June 80 puts. One short 70 call would have netted 4.67, while buying the June 80 put would have added 2.90 to the winnings.
    May 3, 2013. 09:25 PM | Likes Like |Link to Comment
  • Why A Stock Market Bubble Is Forming Right Now [View article]
    I think we're in the midst of a great socio-economic 'experiment.' I use the term 'experiment' in a pseudo-scientific sense, in that central planning institutions have a working hypothesis based on a set of assumptions. These assumptions reflect historical observation, refined by models.
    Of course, part of the analysis suggests that operating mistakes were made by allowing the previous morphine drip to become addictive. But more of the same-indeed much higher doses were needed- to sustain the patient.
    But, is this not an ephemeral and elusive discussion? Witness the daily and incessant preoccupation with the Fed, ECB, BOJ, etc. And, how many words are devoted to the utter ineffectiveness of elected officials to 'do something.' The central banks proclaim that they can't do all the lifting. Why is there no fiscal counter-balance to the equation?
    But I suppose the real point of substance is the utter abdication of elected officials to a vast array of regulatory agencies. We proudly laud the Bill of Rights, while we simultaneously surrender it's heart and soul to the most extraordinary and extensive regulation in the history of the human race. And we shackle our future with a debt burden that is unimaginable. Note that since 1960, the federal budget has been either balanced or in surplus a mere five times. (And, yes some of the early years were small deficits).
    The only inference to be derived from this statistic is simply that the correlation between economic or business cycles and fiscal integrity i.e.. rational balances, is lacking. A big part of the problem is simple: the immediate need is to deal with today's known misery, and the future is an imagined, ambiguous point where prosperity rules and happiness is assured. But, an increasing amount of liquidity and debt are shifted to the future. Thus, we don't 'invest for' the future, we "borrow from' the future.
    But to add to the author's point about the management of liquidity, we want to sharpen our focus just a bit. If we accept that government regulation has proliferated, and importantly, now forms a web (perhaps tangled) such that financial decisions are manifestly impacted, our next observation is to note the rather rapid integration of said regulation with debt-financed consumption. The evidence is clear that federal regulators insisted that FNMA support the mortgage securitization debacle. Most folks would stop at that observation, as if the riddle had been solved. No-it's more insidious in that private markets were diluted, and, as usual, clarity and basic accounting didn't apply.
    There has to be a point where managing liquidity is held hostage to more than an economic cycle. That point in time will be determined by a stubborn economic suppression, which defies the liquidity antidote. That suppression will be revealed by continued high unemployment and stagnant opportunity.
    May 3, 2013. 09:45 AM | 13 Likes Like |Link to Comment
  • The Future Of Coal [View article]
    Thanks for taking the time to organize and express your thoughts. I know it's tedious and time-consuming.
    May 3, 2013. 07:48 AM | Likes Like |Link to Comment
  • Some Moves Are Consistent With Severe Leverage In The System [View article]
    Good point. It's not a matter of Joe selling an option to Frank (remember the Hardy boys). The better way to think about it is not the 'perfect competition' model, but a few entities operating a betting book, where risk can be "laid-off" as needed. Another analogy would be a large insurance company hedging it's total risk by reinsurance and underwriting. The debits will equal the credits, and order takers like Schwab, E-trade, etc take the bets and handle the accounting. The casinos behind the front-runners, makes it all possible.
    Leverage is two-fold with options, in that each option pushes around 100 shares. A $100,000 trading account will also get you $300,000 in margin-maybe more. Some traders have the basic margin plan, but augment it with credit facilities. And, if you're new to the game, and trading OPM, the adrenaline is quite extraordinary. Yes, the casino will delta hedge, and take all bets-collecting the bid-ask for their efforts. It calls into question whether one would rather be a rock star or just an unknown bookie.
    May 2, 2013. 08:55 PM | Likes Like |Link to Comment
  • The Future Of Coal [View article]
    One shouldn't blindly be long or short-as Jesse Livermore indicated, one shouldn't be wedded to one position or the other. The goal is to be on the RIGHT side-not the bull side or the bear side.
    I shorted coal stocks until a few weeks ago. Most of my short position was ACI-but I also shorted WLT to a lesser extent.
    I tend to agree that the easy money on the short side (as a one dimensional play). However, tactical short trading is very effective because long only funds are still hesitant about making a big move. If you watch the price action, you can discern the machines at work. This means that we are in a volatile pattern (not big swings) but tic moves are quite vibrant. One can make a lot of money selling calls and puts. These tic moves will not be recognized as opportunities for most, but if you go back and look at ACI, for example, and correlate the random moves, you can devise a gameable strategy. This is best done using options, where the leverage inherent in small moves is best utilized.
    Just to give a glimpse of my trading screen re ACI, I have October bull put spreads -6/+4; Jan. bull put spreads -5/+3, bull call spreads (different months +4/-6), and am short October calls/Jan calls(at a ratio in sync with the bullish positions). But, there is an almost infinite way to play the game, the idea is to MAKE THE MOST MONEY WITH THE LEAST AMOUNT OF RISK. Ultimately, it would suit me if ACI flat-lined because I would collect well over $100,000 in option premium. So, others can debate the great macro perspectives and offer their best analysis-but, I will make money come rain or shine. You can too-just think of this as a game and don't let biases get in your way.
    May 2, 2013. 08:19 PM | Likes Like |Link to Comment
  • Time To 'Lay Up' [View article]
    Like your golf analogy-watching someone play a round of golf is very revealing.
    I would add that the pros typically take one side out of play-in other words, they have a very predictable shot pattern (fade or draw). They also have a plan BEFORE they hit the first tee shot, which encompasses the pin position for the day, as well as fairway positions.
    What amateurs seldom practice is the short game. Over the course of a year, being able to get 'up and down' can determine whether a player remains in the elite 'top 125.' The pros have a variety of short game techniques, whereas the amateur generally has a one or two shot arsenal-he is not adept at playing different courses under different conditions.
    The pro seems to swing easy and hit 300 yard drives. The amateur lunges at the ball and his swing looks like some strange muscle contortion-and he is generally off balance.
    The amateur, beyond the physical differences, is quick to make excuses and blame any number of things for his 'off day.' The amateur may take a lesson, but doesn't really listen, and fails to understand proper mechanics.
    The golf analogy is substantially similar to the professional options trader, or elite hedge fund manager-he simply plays a game that is alien to the amateur. As the great Bobby Jones once remarked of Jack Nicklaus-"he plays a game of which I'm not familiar."
    May 2, 2013. 06:52 PM | Likes Like |Link to Comment
  • The Future Of Coal [View article]
    The critical issue, from a market perspective, is whether stock prices have bottomed, and what, if any, probability can be assigned to an increase thereof. The use of coal may diminish, but that is more than priced in. In fact, all known negatives and then some are represented in the stocks.
    It's interesting that both coal (representing 'old age' technology) and solar (representing 'new age'/green technology) have been decimated over the past several months.
    May 2, 2013. 07:00 AM | Likes Like |Link to Comment
  • Short-Selling Inverse Daily Leveraged Gold ETFs: An Alternative Long Play On (Paper) Gold [View article]
    Correction, the 'dueling' ratio backspreads might cancel each other, but that is not the reason to use them. Either ratio backspread might be an adjunct to another strategy, or a stand alone strategy. I didn't mean to indicate that the dominant use was to take advantage of theta. They are best used, as the author indicated, for an extreme vega or tau (my preference, as vega is not actually a Greek letter) situation. A mini-crash for instance would work for a put ratio backspread. An unanticipated merger or buyout would work for a call ratio backspread.
    May 1, 2013. 10:44 PM | 1 Like Like |Link to Comment
  • Short-Selling Inverse Daily Leveraged Gold ETFs: An Alternative Long Play On (Paper) Gold [View article]
    NUGT/DUST is another trading pair. If you sell call spreads on GLL/UGL or DUST/NUGT you end up with a 'de facto' iron condor-but you eliminate the put assignment risk-which always seems to be more of a nuisance than short call assignment.
    Of course, you can mix/match with any number of spreads. I'm currently short NUGT puts as part of an overall strategy.
    As far as put ratio backspreads, I suppose you could use both PRB and CRB to annihilate each other, but I personally haven't tried that one-yet. I also set FAS and FAZ bear call spreads in play, and wait for one or the other to bear fruit. I then wait for the other side to either capitulate (or I roll-out, or use as a hedge for a simple bull put spread to equal or exceed the premium or cost in play). Yesterday, for instance, I closed out the FAZ piece at a good profit, and today the FAS portion came substantially back-but not quite enough. One more down day should take care of business, but I have until May 18. I mention this only because the gold and silver inverse and regular ETFs are substantially similar. HOWEVER, it's a bit of a trick to catch the bid-ask at reasonable levels. I try to let someone else bite first.
    May 1, 2013. 10:35 PM | 1 Like Like |Link to Comment
  • The 'Retire Young' Portfolio: This Entertainment Giant Will Add Value [View article]
    The div yield is about the size of Jiminy Cricket:1.18. Why not consider selling the JAN 17 2015 PUT @ 8.25, which gets one in DIS at a BEP of 54.25. And/or use the put premium that gets credited to your account to buy the 62.50 CALL (again JAN 17 2015) for 7.65. If you want to hedge the short put, as other folks did today, buy the 35 PUT for .90. Your BEP is now 55.15, but even if Donald Duck throws a tantrum, you are capped at $2,0125 downside. But, if you think 20% share appreciation is not a mere wish upon a star, you will trounce Pluto and Goofy-who are just long the stock.
    Go get'em mousekateers. M-I-C (see you real soon) K-E-Y (why? because we like you!) M-O-U-S-E.
    May 1, 2013. 10:08 PM | Likes Like |Link to Comment
  • S&P 500 Likely To Correct To 1476 Or Less During 2013 [View article]
    Scenario planning with a reasonable take on the odds-very timely. I've noticed that the vix seems to have drawn a line in the sand-if the vix made a sound though, the previously muted background noise would now be a bit more intrusive.
    I think there is a predisposition for 7%, which means that a series of minor negatives will have more of an impact going forward, than say, a couple of weeks ago. Sometimes we can just whistle past the graveyard-other times the shadows are too frightening.
    May 1, 2013. 05:16 PM | 1 Like Like |Link to Comment
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