This is the reason that I do not like Iron Condors. Having been around for 30 plus years trading, you get months like June happen more than you care to remember. If you are in an Iron Condor at the time you lose more on the side that gets in the money than you can compensate by selling the other side.
Iron Condors like any other product has its advantages and disadvantages.
The pluses for an Iron condor is that you can trade these in sideways markets and collect premiums. However, we all know sideways markets tend to not give much premiums because the guy on the other side knows the market is going nowhere and the odds of the option being in the money at ex date are nill. So no premiums.
The negatives are that most get caught up in the premiums just when the market is heating up because once again the trader on the other side knows the odds are now on his side to be in the money so he is willing to pay the premiums.
Iron condors are best traded just after massive market gyrations. Problem is that I for one do not know when the gyration is over or just a fade. I have 100% clarity looking back. Just like everyone and their dog will have perfect clarity looking back on these years and what was and what could have etc. but right now in the moment you cannot even get the gov to admit a recession. Sure they will in about 18 months...
I will get off my soap box....
Saturday, June 28, 2008
Thursday, June 26, 2008
Bonds and stock correlation
I tried to put the charts for this on the blog but I am not the best techno geek.
If you look at the CRB (commodities) CRB Chart they topped out at 325 in '81 and slide down to about 180 by 2001
30year bonds were at 48 in '82 the start of the equity market and topped out last year at 120 Bonds chart
Now were are seeing the CRB on a tear with the equities getting soft and bonds getting soft. So you can see the correlation.
While you get days like today when the market is dropping hard and the masses look to perceived safety by running for bonds, the long term correlation is there to be seen.
If you look at the CRB (commodities) CRB Chart they topped out at 325 in '81 and slide down to about 180 by 2001
30year bonds were at 48 in '82 the start of the equity market and topped out last year at 120 Bonds chart
Now were are seeing the CRB on a tear with the equities getting soft and bonds getting soft. So you can see the correlation.
While you get days like today when the market is dropping hard and the masses look to perceived safety by running for bonds, the long term correlation is there to be seen.
Wednesday, June 25, 2008
Housing tanks again
It is getting more and more likely that we are headed into far deeper trouble than most are letting on.
New homes drop this does not bode well.
Anyone not realizing the significant factor that Real Estate plays on our economy has a rude awaking coming. It is probably too late to short the housing sector but not the bonds. Those are next.
For those that do not understand the significance of MBIA et al being downgraded need to read up on this. Municipalities relied on these guys to offer assurances to investors that the muni's would be investment grade. Now that they cannot perform themselves being lowered credit, the muni's are at risk of defaulting or at least many percentage points higher for gov entities to make payments. On top of a tax base shrinking both receipts and property taxes.
Not looking good at all IMHO!
New homes drop this does not bode well.
Anyone not realizing the significant factor that Real Estate plays on our economy has a rude awaking coming. It is probably too late to short the housing sector but not the bonds. Those are next.
For those that do not understand the significance of MBIA et al being downgraded need to read up on this. Municipalities relied on these guys to offer assurances to investors that the muni's would be investment grade. Now that they cannot perform themselves being lowered credit, the muni's are at risk of defaulting or at least many percentage points higher for gov entities to make payments. On top of a tax base shrinking both receipts and property taxes.
Not looking good at all IMHO!
Sunday, June 22, 2008
Citigroup Lay off
The definition of a recession "your neighbor is laid off" definition of a depression "You are laid off" Seriously the "gov." definition (this is on test by the way) Recession 2 consecutive quarters of negative growth. Depression 6 consecutive quarters of negative growth.
The financial sector keep cracking. So who cares? If they have to contract to shore up balance sheets, then there is no lending and no lending means no expansion.
Now the gov will twist and manipulate the numbers so it will not look like a recession until you get smacked up the side of the head and say wow we are in a recession. The numbers will be too late after the adjusted for....
What we do know is that supply of grains and metals and oil and just about everything produced in is less than the demand. We also know that the feds will pump more and more money into the economy to try and avoid the inevitable.
So what are traders to do? Play the inflation card. Long natural resources and short bonds.
The financial sector keep cracking. So who cares? If they have to contract to shore up balance sheets, then there is no lending and no lending means no expansion.
Now the gov will twist and manipulate the numbers so it will not look like a recession until you get smacked up the side of the head and say wow we are in a recession. The numbers will be too late after the adjusted for....
What we do know is that supply of grains and metals and oil and just about everything produced in is less than the demand. We also know that the feds will pump more and more money into the economy to try and avoid the inevitable.
So what are traders to do? Play the inflation card. Long natural resources and short bonds.
Thursday, June 19, 2008
Inflation
It is here and it is not fooling the consumer anymore.
Contrary to the manipulated government stats, inflation is roaring ahead full speed with no end in sight for a long time.
There is really only a few ways to stay ahead of inflation. Going long tangibles or going short intangibles. Pretty simple. The problem being that if you go long or short these tangibles, you will keep up with inflation.
In other words if you buy wheat and store it, next year you can use the wheat to bake a loaf of bread and it will not cost you any more since wheat will keep up with inflation.
So the only way to prosper and gain wealth is to leverage the wheat. Say buying from a farmer to deliver the wheat to you in 6 months at a price you both agree on and then put a down payment on this. (much like the housing market) We have just created a futures contract (deliver on a future date)
What happens to most traders is they either are too conservative and do not stay ahead of the inflation, or get too far leveraged that any small correction and they cant meet their obligations and have to sell out at a loss.
ETF's have now solved this and as we all know, we love to use options to trade these thereby gaining more than enough leverage to not only stay ahead of inflation, but to gain wealth as well.
Contrary to the manipulated government stats, inflation is roaring ahead full speed with no end in sight for a long time.
There is really only a few ways to stay ahead of inflation. Going long tangibles or going short intangibles. Pretty simple. The problem being that if you go long or short these tangibles, you will keep up with inflation.
In other words if you buy wheat and store it, next year you can use the wheat to bake a loaf of bread and it will not cost you any more since wheat will keep up with inflation.
So the only way to prosper and gain wealth is to leverage the wheat. Say buying from a farmer to deliver the wheat to you in 6 months at a price you both agree on and then put a down payment on this. (much like the housing market) We have just created a futures contract (deliver on a future date)
What happens to most traders is they either are too conservative and do not stay ahead of the inflation, or get too far leveraged that any small correction and they cant meet their obligations and have to sell out at a loss.
ETF's have now solved this and as we all know, we love to use options to trade these thereby gaining more than enough leverage to not only stay ahead of inflation, but to gain wealth as well.
Sunday, June 15, 2008
Options 10/6 rule
While this was printed almost 10 years ago, it is still valid in today’s market. Simply stated, 10 percent away from the current price and 6 months out .
That is it in a nutshell, but to implement this we need to understand a few things. This is the important part. Miss this and you might as well not trade this way.
1) Do not try these on individual stock you will understand the reasoning for this after we talk about rule 2
2) Know where the underlying has been sounds good so far.
What you have here is a high probability trade. If we look to history we see that a normal market in equities rises typically not more than 10% in any given time. So we have run ups and then consolidation.
That is where the sell in May and go away mantra came from. The markets most movements tended to be in the periods from Nov. to April. So year over year while the net for the year is about 8% (yes we are talking more than the gaga years as history) So now that we know what is typical, when we see a market move that far in a short time frame, we have good probability that the market is prone to stall if not go down.
Knowing this we can now go up 10% from the current price and sell a spread. Now we all know that going that far out of the money will not generate enough premium for the credit to make it worth our time. So we go out 6 months to collect enough premium to make it worth out while.
If you did nothing more than sell these spreads every May you would come out with a very good return.
Bear in mind (pun intended) that this works for the down side as well, in other words when we have a market correction of 20%-30% we can have great expectations that the market will rally from here. So a credit strategy 10% below the current price will accomplish the same effect.
If you are looking to enhance a portfolio of conservative investments, you may want to look to an idea like this. It should not take more than 5% of a portfolio to gain the extra 5%-10% gain you are looking for.
This will take some practice and should be tried with a Virtual account. Many of the topics we discuss are not intended to be used solely but are meant to be used to put your portfolio over the top and stay ahead of inflation.
Make sure you feel confident in this by trading virtual before you try it with real money. CBOE.com has a virtual trading platform on their site.
That is it in a nutshell, but to implement this we need to understand a few things. This is the important part. Miss this and you might as well not trade this way.
1) Do not try these on individual stock you will understand the reasoning for this after we talk about rule 2
2) Know where the underlying has been sounds good so far.
What you have here is a high probability trade. If we look to history we see that a normal market in equities rises typically not more than 10% in any given time. So we have run ups and then consolidation.
That is where the sell in May and go away mantra came from. The markets most movements tended to be in the periods from Nov. to April. So year over year while the net for the year is about 8% (yes we are talking more than the gaga years as history) So now that we know what is typical, when we see a market move that far in a short time frame, we have good probability that the market is prone to stall if not go down.
Knowing this we can now go up 10% from the current price and sell a spread. Now we all know that going that far out of the money will not generate enough premium for the credit to make it worth our time. So we go out 6 months to collect enough premium to make it worth out while.
If you did nothing more than sell these spreads every May you would come out with a very good return.
Bear in mind (pun intended) that this works for the down side as well, in other words when we have a market correction of 20%-30% we can have great expectations that the market will rally from here. So a credit strategy 10% below the current price will accomplish the same effect.
If you are looking to enhance a portfolio of conservative investments, you may want to look to an idea like this. It should not take more than 5% of a portfolio to gain the extra 5%-10% gain you are looking for.
This will take some practice and should be tried with a Virtual account. Many of the topics we discuss are not intended to be used solely but are meant to be used to put your portfolio over the top and stay ahead of inflation.
Make sure you feel confident in this by trading virtual before you try it with real money. CBOE.com has a virtual trading platform on their site.
Thursday, June 12, 2008
Double Calendars
I bring this up only because I hear much radio ads with Investools. One of the lines is double calendars. This is probably because of the need for something new.
Basically you are selling the front months strangle and buying far months a strangle. That's it...not worth paying big bucks to learn.
What you are doing is in essence selling strangles without the large margin required because they are covered by the far month longs you have. Allowing for several chances to sell these before the far month is reached.
Are they worth it? That depends on two factors. 1) The underlying is range bound meaning it is trading between a high and a low so that neither side gets assigned. 2) There is much volatility. This tends to inflate the front months more and you get more premiums.
Would I trade these? Not really. The charge for 4 trades in my humble opinion negates any real advantages. Particularly since we know that range bound stocks have a tendency to not attract option players.
Always remember that it takes someone on the other side to take your trade. If you expect a range bound stock, so does the other trader. The premiums typically will not be there. Now as we are taking about this, we are in wild times so you just may come out ahead doing one of these now, but these are not usual times. Place some virtual trades and see if you like this strategy.
A friend once called these several sided complex strategies "alligator spreads" because they end up biting you.
What do I know....
Basically you are selling the front months strangle and buying far months a strangle. That's it...not worth paying big bucks to learn.
What you are doing is in essence selling strangles without the large margin required because they are covered by the far month longs you have. Allowing for several chances to sell these before the far month is reached.
Are they worth it? That depends on two factors. 1) The underlying is range bound meaning it is trading between a high and a low so that neither side gets assigned. 2) There is much volatility. This tends to inflate the front months more and you get more premiums.
Would I trade these? Not really. The charge for 4 trades in my humble opinion negates any real advantages. Particularly since we know that range bound stocks have a tendency to not attract option players.
Always remember that it takes someone on the other side to take your trade. If you expect a range bound stock, so does the other trader. The premiums typically will not be there. Now as we are taking about this, we are in wild times so you just may come out ahead doing one of these now, but these are not usual times. Place some virtual trades and see if you like this strategy.
A friend once called these several sided complex strategies "alligator spreads" because they end up biting you.
What do I know....
Tuesday, June 10, 2008
Today's Action
While the long awaited decline in oil prices may or may not be here, it certainly has my attention. after getting in long around 69 '09 and short 71. it has been a very straight up move. Yes I would have definitely made more if I had the straight call, but hind sight is always 100%.
Gold has come back, oil, much of the natural resources, yet grains moved up today.
So our long gold position made back in Nov of last year is once again back in the money on the options. I have more than doubled my money on this trade, so don't tell me calendars don't work....I digress.
We are looking for the banking sector to become very weak and the feds having no choice to raise rates. This leaves bonds in terrible shape going forward. CD's will lose out since the rates are locked in as they raise, the best way for a secure way to trade this is money markets. Try to get treasury ones if you can.
So we are still short bonds, long natural resources ( you have a better buying opportunity now) long grains and short the dollar (which we are getting killed on)
Those interested, drop me a note to subscribe to a (hopefully) weekly newsletter via email. dc@dcadvisors.net
Subject line subscribe.
Gold has come back, oil, much of the natural resources, yet grains moved up today.
So our long gold position made back in Nov of last year is once again back in the money on the options. I have more than doubled my money on this trade, so don't tell me calendars don't work....I digress.
We are looking for the banking sector to become very weak and the feds having no choice to raise rates. This leaves bonds in terrible shape going forward. CD's will lose out since the rates are locked in as they raise, the best way for a secure way to trade this is money markets. Try to get treasury ones if you can.
So we are still short bonds, long natural resources ( you have a better buying opportunity now) long grains and short the dollar (which we are getting killed on)
Those interested, drop me a note to subscribe to a (hopefully) weekly newsletter via email. dc@dcadvisors.net
Subject line subscribe.
Friday, June 6, 2008
Selling Put strategies
Last night in the webinar the question was brought up about selling puts. I have discussed this on the blog before (see the archives) but this should be another good time to discuss this. In fact I was about to post an article about this this weekend at ezine.com So I will just copy here and paste it there.
Puts as we should know give the owner the right to sell a particular underlying (stock, ETF etc.) at a given price. Example, July 20 put give the holder (owner) of this option the right to sell this stock at 20 before the 3rd week of July.
This also obligates the seller of this put to buy this from the put owner at the given price. In our example, the seller of this put is not obligated to buy the shares at 20 if assigned. There is always another side to a trade.
Now to do all of this, there is a premium involved. Much like insurance (in fact this is what options are is passing on risk to someone else) so if I want to own the right to sell at 20 by July, then I have to agree upon a premium to pay for this right. The trade grating this right is taking the premium to allow this. (again much like you car insurance, they take your premium each month for you to have the right to present claims in the event of an accident)
Now that we have the basics behind us, let's look to a few neat strategies.
Now if I expect a stock to go down, I can buy the put and sell the shares to some one at 20 and then buy back the shares some time in the future at a lower price (selling higher and buying lower)
The premium for this would be less than margin for the (20x100=2000/50%)
Now if we want to own a stock and we sell a put, there are 2 things that can happen. The stock rises above 20 in which case we will not exercise the option and just walk away with the total premium we collected, or the stock drops and we get assigned, so we own the stock for less than we could have bought at the current market, because we now own it for 20 less the premiums we received.
Now here is where most that teach this or use this strategy give it a disservice.
You do not have to get assigned just because the stock drops. We have what is called time value.... as long as there is time value we will usually not get assigned. so we can now buy back the options we sold for a loss, then sell the next month for a gain (this is called rolling out). we can do this month after month until re get the shares fro free or the stock ends up above 20.
If we do this strategy on say Ford (F) which is at 6.27 as I write this. So by selling the July 6 put. for .39 cents. we are now obligated to own ford for 5.61 (6 strike less the .39 premium. to do this we would need in our account around 300 dollars (yes this would be a margin trade so you may want the entire 600 set aside for conservative traders) That is over 10% return less than 6 weeks.
Now if Ford drops below 6 the put premium will go up so we will be losing on our July put. However, we can now roll to Aug. (unfortunately for our example Aug is not trading for 2 more weeks) But if we look at today's pricing of July/Sep we can get the idea of rolling out. The spread between July /Sep is about .30 (we buy back July for .39 and sell Sep for .68
If Ford stays where it is at for 10 months, we have a free trade (.30x10=300-300 margin).
Don't get flustered it takes time to grasp this. but it is fun to do. The single most important underlying factor to this trade is that ford will be around for 10 months. Countrywide would be an even better example given the fact that B of A has the Green light to acquire them. Look at the return on this one. 5.00 strike sell for .41 (on a margins account of say 250.00 in the account to bring in 41.00 for less than 6 weeks is better than a poke in the eye......
Puts as we should know give the owner the right to sell a particular underlying (stock, ETF etc.) at a given price. Example, July 20 put give the holder (owner) of this option the right to sell this stock at 20 before the 3rd week of July.
This also obligates the seller of this put to buy this from the put owner at the given price. In our example, the seller of this put is not obligated to buy the shares at 20 if assigned. There is always another side to a trade.
Now to do all of this, there is a premium involved. Much like insurance (in fact this is what options are is passing on risk to someone else) so if I want to own the right to sell at 20 by July, then I have to agree upon a premium to pay for this right. The trade grating this right is taking the premium to allow this. (again much like you car insurance, they take your premium each month for you to have the right to present claims in the event of an accident)
Now that we have the basics behind us, let's look to a few neat strategies.
Now if I expect a stock to go down, I can buy the put and sell the shares to some one at 20 and then buy back the shares some time in the future at a lower price (selling higher and buying lower)
The premium for this would be less than margin for the (20x100=2000/50%)
Now if we want to own a stock and we sell a put, there are 2 things that can happen. The stock rises above 20 in which case we will not exercise the option and just walk away with the total premium we collected, or the stock drops and we get assigned, so we own the stock for less than we could have bought at the current market, because we now own it for 20 less the premiums we received.
Now here is where most that teach this or use this strategy give it a disservice.
You do not have to get assigned just because the stock drops. We have what is called time value.... as long as there is time value we will usually not get assigned. so we can now buy back the options we sold for a loss, then sell the next month for a gain (this is called rolling out). we can do this month after month until re get the shares fro free or the stock ends up above 20.
If we do this strategy on say Ford (F) which is at 6.27 as I write this. So by selling the July 6 put. for .39 cents. we are now obligated to own ford for 5.61 (6 strike less the .39 premium. to do this we would need in our account around 300 dollars (yes this would be a margin trade so you may want the entire 600 set aside for conservative traders) That is over 10% return less than 6 weeks.
Now if Ford drops below 6 the put premium will go up so we will be losing on our July put. However, we can now roll to Aug. (unfortunately for our example Aug is not trading for 2 more weeks) But if we look at today's pricing of July/Sep we can get the idea of rolling out. The spread between July /Sep is about .30 (we buy back July for .39 and sell Sep for .68
If Ford stays where it is at for 10 months, we have a free trade (.30x10=300-300 margin).
Don't get flustered it takes time to grasp this. but it is fun to do. The single most important underlying factor to this trade is that ford will be around for 10 months. Countrywide would be an even better example given the fact that B of A has the Green light to acquire them. Look at the return on this one. 5.00 strike sell for .41 (on a margins account of say 250.00 in the account to bring in 41.00 for less than 6 weeks is better than a poke in the eye......
Thursday, June 5, 2008
Interesting play
If anyone is a fan of India's growth potential, here is a play that you will want to virtual trade (IMHO...in my humble opinion)
EPI...Long the Jan '09 22 call and get this, the July has 22.50. So by selling this July we now have a .50 upside with out doing anything. I placed this for a debit of 1.80 lets see if some one on the other side takes it.
I will discuss this more tonight in the webinar for those "inquiring minds"
On a much serious side here. CNN reports of a 67 SS recipient that is living out of her car with her two dogs because of layoffs. I cannot help the entire world, but if I can help a few to understand the world of finance and they in turn show others, maybe we can change things.
Tell a friend about what we do here you wouldn't want them to end up like this lady...
EPI...Long the Jan '09 22 call and get this, the July has 22.50. So by selling this July we now have a .50 upside with out doing anything. I placed this for a debit of 1.80 lets see if some one on the other side takes it.
I will discuss this more tonight in the webinar for those "inquiring minds"
On a much serious side here. CNN reports of a 67 SS recipient that is living out of her car with her two dogs because of layoffs. I cannot help the entire world, but if I can help a few to understand the world of finance and they in turn show others, maybe we can change things.
Tell a friend about what we do here you wouldn't want them to end up like this lady...
Wednesday, June 4, 2008
Now comes stories of Crop Problems
More demand and less plantings makes for a great shortage of grains. If you have not looked, you may want to research DBA. An agri ETF. While my significant other complains about the prices of everything going up (unless you believe the CPI numbers, if you do we need to talk about prime Real Estate I have)
I explain to her that this pain is in reality our gain. More at the market means a very healthy bullish trend to leverage gains on.
Take advantage here. It is not always so easy to know and see and follow a trend.
Seriously here folks.....Stocks are not any higher than 9 years ago.....Real Estate is imploding all around....Bonds are showing great weakness and contrary to what is taught out there, bonds typically follow equities...CD's are at pitiful 1-2%....
As most are watching there retirements drop in value either real or in purchasing power, you are lucky enough to understand and profit from this. Many more will fall behind, but that does not mean you have too. This is a great opportunity. Many new fortunes will come out of this and it may as well be yours.
Tell a friend
I explain to her that this pain is in reality our gain. More at the market means a very healthy bullish trend to leverage gains on.
Take advantage here. It is not always so easy to know and see and follow a trend.
Seriously here folks.....Stocks are not any higher than 9 years ago.....Real Estate is imploding all around....Bonds are showing great weakness and contrary to what is taught out there, bonds typically follow equities...CD's are at pitiful 1-2%....
As most are watching there retirements drop in value either real or in purchasing power, you are lucky enough to understand and profit from this. Many more will fall behind, but that does not mean you have too. This is a great opportunity. Many new fortunes will come out of this and it may as well be yours.
Tell a friend
Monday, June 2, 2008
Banking problems
Just when you thought it was safe to buy into the banking sector. Not really if you have followed any of my rantings, we are staying away from this sector.
Bad news a plenty here folks. Another bank goes insolvent. This makes so far this year as many as all of last year.
Batten down the hatches. This goes for life insurance as well. Although states have what is called a re-insurance fund where any carrier that wants to place business in that state is required to take on the burdens so to speak of carriers that go insolvent.
While I feel safe with carriers given the track records, it does not mean that there wont be some times to wonder.
Why this on an options blog? Because many of the insurance companies are stock companies and as such you can trade the stock. So lets say for example that my retirement is in XYZ insurance, you can now hedge against this. Buy some puts.
Tell your friends
Bad news a plenty here folks. Another bank goes insolvent. This makes so far this year as many as all of last year.
Batten down the hatches. This goes for life insurance as well. Although states have what is called a re-insurance fund where any carrier that wants to place business in that state is required to take on the burdens so to speak of carriers that go insolvent.
While I feel safe with carriers given the track records, it does not mean that there wont be some times to wonder.
Why this on an options blog? Because many of the insurance companies are stock companies and as such you can trade the stock. So lets say for example that my retirement is in XYZ insurance, you can now hedge against this. Buy some puts.
Tell your friends
Sunday, June 1, 2008
Make Money when others don't
Selling puts....
Yes that is right. By selling puts we can own shares for far less than current market. If wanted nothing more than to buy your favorite stock for 10% or more savings, this is the strategy for you. If you want to simply trade to make money this can work too.
Take a stock that you wont mind owning and in fact thinking about buying, and sell a put. Take for example a 30 dollar stock, this would cost you 3000 to own. Now if the stock goes up up and away, then we lost out on an opportunity. If the stock drops down and we get assigned, then we own the stock for less because we generated premium from the original sale of the put.
Now here is the fun part, if you buy back the out before you get assigned and sell the next month, then you can do this a few times and maybe even end up owning the shares for free.
Give it a virtual try and see
Tell a friend.
Yes that is right. By selling puts we can own shares for far less than current market. If wanted nothing more than to buy your favorite stock for 10% or more savings, this is the strategy for you. If you want to simply trade to make money this can work too.
Take a stock that you wont mind owning and in fact thinking about buying, and sell a put. Take for example a 30 dollar stock, this would cost you 3000 to own. Now if the stock goes up up and away, then we lost out on an opportunity. If the stock drops down and we get assigned, then we own the stock for less because we generated premium from the original sale of the put.
Now here is the fun part, if you buy back the out before you get assigned and sell the next month, then you can do this a few times and maybe even end up owning the shares for free.
Give it a virtual try and see
Tell a friend.
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