Some updates to my portfolio

Hi there. Sorry for the big absence :) I got two more first coverage weekly sentiment reports and the last two were more bullish than bearish. In fact, they think the market is overbought but the bears are out of capital and/or cannot risk to bring it back to fair values. It also says that right now the market is going up based on emotions, so let it be! That is the same thing causing the tech boom in 2000.

It seems the market doesn't know where to go at this point and the volume is low and a bit bullish. But it is also very risky. So, caution is the key. With low volumes like this, it is a good time to make new positions such as strangles. Also with the time decay accelerating, selling out of the money put spreads on bullish stocks is a good strategy. I'll let you know about the trades I have done in just a moment.

To get some confidence about the stock I choose, I check:

1) Risk/reward ratio
2) Option liquidity
3) insider ownership (I check it from shortsqueeze.com)
4) insider purchases (either check it in yahoo or check the recent insider transactions through streetinsider.com)

The last two weeks were very successful ones for me testing the bullish put and call spreads. I did it first with MSFT with only 1 contract to give it a test before their earnings:

1) Sold MSFT 18 put for 60c and immediately bought MSFT 17 put for 30c/contract. For this simple trade you risk $70 for a maximum gain of $30. I was bullish on MSFT and saw it was down for a few days, so guessed even with a bad earnings report, it should already be priced in and it turned out right! The day after, I regretted why I didn't do more contracts :) Anyways, it was a sweet low risk deal with no stress. Both of the options are almost worthless now. So, I plan to let them expire (of course, if nothing major happens which I am not worried since I am hedged)

2) Bullish call spread on AUY: I wanted to have a gold investment apart from GDX, so chose this one. Bought AUY $7 call for 1.05 and sold AUY $8 call for 0.45. This trade risks $60 for a gain of $40.

3) Bullish put spread on FCX: Sold $36 put for around $1.23 and bought $35 put for $0.99. risk/reward is $76/$24. The reason for this choice was a recent insider buying of around $35 and good outlook after their report.

4) Bullish put spread on WMT: Sold 2 contracts of WMT $47.5 puts for around $1 and bought $45 puts for around $0.4. risk/reward is $190/$60/contract. WMT is a very good stock. It has performed well in recession, it pays good dividend, A LOT of insiders own it, and it was trading close to it 52 week low of $46.5 recently. So, I thought, it has to be a good trade, and I was rewarded in just the next day, again regretting why I didn't do more :)

5) Bullish put spread on VZ: After VZ report, despite them beating the expectations, I saw the stock going down, so I thought it was a good opportunity to do a put spread on that. I sold 4 $30 puts and bought 4 $26 calls at 60 and 30 cents. It did relatively well, but yesterday, I felt there is more weakness despite the market rally, so I closed it up with some gain. It was a good decision as $30 was too close.

The good thing about this approach is that you can manage it should you feel a weakness like what I did for VZ. There is no reason for stress anyways as the risk is limited.

Some other trades:

1) The MAR $25 calls are finally giving me some good gains I expected. I almost got disappointed about it and failed to average down when it was 5cents/contract. This morning it was trading at as high as 90c/contract! wow! I sold 1 of my two contracts at 35cents yesterday to preserve my initial investment should things reverse, and letting the other one run.

2) I frequently check the site thelion.com to get some extra hints on potential good stocks, so I also bought 1 contract of PDLI $7.5 June call option at 30c/contract. They have earnings release on May 7 and there is lots of time for the option to have profit.

3) With all the noise of stress test for banks next week, I decided to enter a strangle trade on BAC. I have seen BAC easily going up or down 30% in one day. I bought a $7.5 put and a $9 call each around $70 and let it go.

I am still looking for new trade ideas and stocks that can move big. Joe, I am looking at your MDR idea also. Cramer was bearish on MDR. Although I don't believe in him, but at least consider what he says, so I would wait till we get closer to the earnings to see if a strangle trade would make sense on it or not.

Let me know about your ideas. Thanks.

A much safer alternative to naked puts

I was thinking and thinking today about the correct naked puts I wrote, but didn't manage to keep them and exited with little profit. The reason as I said was the stress over "what if" the stock tanks and "what if" the market tanks? More professional traders hedge their puts by buying below strike puts of the same security (ex. sell $29 GDX puts, buy $28 GDX puts). This way, you can sleep like a baby and you know your loss is really limited. This is called a bullish put spread. We can also try bearish/bullish call/put spread, whichever we like. The other example is JAVA naked puts. I could have bought $4 puts to hedge my naked $5 puts and the profit would have been realized as early as today. It seems these kinds of ideas can give you more reward and can make you really relaxed. I am thinking about some and will let you know about some new trading ideas hopefully soon. Happy trading.

Good Deal Slipped :)

I kept being bullish on JAVA and triggering to buy July $9 options, however, my bid price didn't go through. In fact my bid price was 16c/contract, but I could buy it at at 1 cent more expensive. Today, it must be trading at $1/contract at least. Anyways, I missed the opportunity, but at least glad that my trade ideas have been good so far. Like I said before, there are always more chances. The point is "don't lose money". Let me know if you entered that trade :)

Some weekend ideas

I thought to post something for the weekend. There are some points making me a bit hesitant to write naked puts at this time. First of all, although the VIX index has dropped since one month ago, and although the media is saying things have stabilized, I think we are still at very scary times. It could be the matter of a few days that everything may become like hell again as we have seen before last year and early this year. The other serious thing for me in this uncertainty is my health. Selling naked puts can really make you sick if you think about it too much. Even if your portfolio is doing good, just the thought that your stock may tank tomorrow may eventually have some serious health consequences. The naked put writing however, can be a good idea on stocks that you want to own and put them in your RRSP or IRA. For that a covered all idea can also work but you have to keep doing it and you should have decent gains for long term.

My point is that when there is uncertainty, you usually "buy" insurance instead of selling it. For some stocks, buying long term options (say Jan 2010 options) is not that risky as things may change 10 times by then. The only point is to choose the stocks that can have big moves.

Example: You want to make a strangle position on AAPL. You don't have to buy the calls and puts all at once! With this volaile market, you most certainly can get a chance to buy the call at a sell off day and buy the puts at a rally day. It is off course an art and I would probably only buy 1 contract at each step. The other point is that the call and put don't have to be expiring the same month. If you have a feeling that AAPL is going to go up in May but may face troubles in July, you can focus on a May call option and a July put option. It is also best to choose the strike prices that you would think will be more possible to happen.

So my advice is now to take it easy and make small moves. Trades like the C option trade I did do happen every once in a while. If you can do one of them in a month, your portfoilo will still grow well. Just remember that buying May options at this time with the fast time decay is not generally recommended unless you have a good reason (for example earning coming, rumor, etc.).

One more thing I remembered if you are new to trading: There is a lot of manipulation going on specially now. Don't get fooled by future values before market open. There are some hedge fund managers who have a lot of money and can manipulate the futures (for example pumping the futures) and then use this opportunity to dump their stocks in early trading and vice versa. If the futures are up or down a bit (say less than 0.5%), it normally doesn't mean anything. However, if there is a big news and futures are up or down by 1-2% it is usually not manipulation. Normally the best time to make a trade is around 3-4pm EST.
One example of premarket manipulation was GDX on Thursday. It was 1% up premarket starting with a big dump at open and ending -5%! This feels like a criminal action but it is the reality. I know some daytraders who use this rule and do the opposite of the premarket or futures and take profits the same day. I do not like daytrading anyway, but these are good to know.

This week, I see two kinds of traders out there: bullish ones waiting for a pull back to load up and bearish ones waiting for a rally to short. It should be quite a battle depending on the news for GM and stress test propaganda!

Anyways, anybody has a bearish idea? I like to buy puts on a stock to be prepared in case market changes trend.

Almost all in Cash looking for small moves

Yesterday, GDX broke the resistance area around $32.9 and I decided to buy to close all my positions at 0.85c/contract. It gave a small gain of $30 at the end, although I was totally swimming against the direction. That is the beauty about selling naked puts. It still may be a good deal and with the time decay after option expiration today, that trade should have done fine but I thought if a sell off is underway, GDX will also be one of them as people will want to cash their gains, plus there are many people talking about gold at 800, and there is still no sign of inflation, etc. I would watch GDX again and may also consider buying call options on a good gold stock. Nevertheless, this experiement with GDX shows how useless sometimes it is to buy out of the money options. When I sold the GDX puts, GDX was trading around $34.5 for 0.9c/contract. When I bought them yesterday, GDX was around $32, with put options at 0.85c/contract!

Anyways, I am now mostly in cash with MAR options and CTIC. I may stay away from selling naked puts for a while until I find more clear directions. Instead, I am looking for buying options that can move.

I am now thinking of a trading idea for apple. The $150 May options are still attractive to me. I am still looking to pick one if there is a pullback. I still don't have a good bearish idea in mind. One way to hedge is with AAPL July $70 put options??

Serious Portfolio Adjustments!

After reading the weekly sentiment report and comparing it to the previous one, I got a bit scared about some parts of my portfolio, although they were all sort of safe small trades. I do try to time the market a bit as well, so I thought after the huge rally we have had and with sell side suggesting to go all in cash or trade short, I should make some serious change of strategy.

I bought to close both MSFT and JAVA naked puts as a precaution + sold all my C calls with a gain of 500% at 88c/contract. I am only left with MAR calls + CTIC + GDX naked puts. Now most of my focus would be on GDX naked puts as well as new trading ideas. I was trying to pick some AAPL options, but the price I was asking didn't hit. That could be good with INTC disappointing results tonight, since I may be able to enter it at a cheaper price. I was thinking of AAPL $150 May call options. I am not too certain if AAPL would have a surprising report as there are some investors writing bearish option spreads on AAPL. So, I either get a good price or no deal at all! The MAR $25 May calls were cheaper today, but my bid of 11c/contract didn't go through either. I still have my hopes high for JAVA. With the gain made on selling puts, I plan to buy May, or July $9 call options on JAVA. With the new sentiment report, I am definitely looking at a bearish trade idea. It could be a weak stock put option or a leveraged ETF put option such as ERX, FAS, SSO, etc. The only problem with these ETF options is that they are usually illiquid. The other point is to enter a trade on a rally day. Shorting a 3X ETF is also a good idea, provided that you don't get squeezed and you are willing to wait. I probably would stay away from that. If nothing, I am sitting on cash. The opportunity should still come. I'll keep you posted. Let me know if you have a good trading idea.

New Bearish Weeky Sentiment !

I got this new sentiment report this morning and to be honest got a bit panic! Sometimes panic is good :) since it can prevent a big drop in your portfolio. I will update you on the changes I made to my portfolio in another post. See the report below:

FIRST COVERAGE WEEKLY SENTIMENT (April 14, 2009)

First Coverage Market Sentiment: Bearish	First Coverage Index: 48.0	Weekly Change: -1.9%	Sell-Side Certainty: Positive
Bullish Industries (2)	Neutral Industries (4,-2)	Bearish Industries (4,+2)	Weekly Sentiment Change
	Basic Materials
		Consumer Goods (-)
	Consumer Services
		Financials	Bullish
Health Care
		Industrials (-)	Bearish
		Oil & Gas	Bearish (x2)
	Technology(-)		Bearish
Telecommunication (+)			Bullish
	Utilities

Sell-Side Believes It’s All Downhill from Here

Let’s get the obvious out of the way. The sell-side is no longer split. They are unified and are clearly telling their buy-side clients to either go short, get under-invested or, if possible, take their assets out of the market and get back into cash.

After a rise of over 25% since March 9, our data is finally clear in the fact that the sell-side does not feel like the earnings period is going to meet or exceed expectations and those left in the market are going to be left with a lot less than they might expect.

At the industry level, we still have two bullish industries (barely) but, more importantly, we also now have four industries that have slipped into the bearish sentiment range. What’s more, a comparison of those four create an eerily similar quartet as those that have been in the dog house and helped lead us down over the last six months with a mosaic of Financials, Consumer, Industrials and Energy all being on the outs.

For those who are desperately looking for something to buy and just can’t fight the urge, (And really, there are safer ways to get your kicks…including bungee jumping without a bungee and skydiving without a chute)…here are this week’s three most bullish securities:

1. Visa
2. Dollar Tree Stores
3. Wal-Mart

Staring at that list does paint a somewhat discouraging and yet probably fairly accurate picture of where Americans are shopping and how they are currently paying for their new frugal purchases.

Finally, an update pertaining to the latest analysis we’ve been running on sell-side sentiment. We’ve been gathering this data on a daily basis for over two years and are happy to say that the longer we go, the more impressive the track record of the ‘aggregate’ sell-side becomes in all types of market conditions. With a larger data set and more sophisticated tools to assist in the analysis, we also understand how to better utilize the data to help our readers gain an edge in understanding where this market is heading. Based on what we’re learning, over the next few weeks, there will be some changes in how the weekly information is presented, which we believe will be very helpful to everyone.

Until next week …