Archived Blog

Posted August 15, 2009 at 8:09 PM

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Posted August 15, 2009 at 8:07 PM

-The short put butterfly is a limited risk, limited reward strategy that is best implemented when volatility is relatively low in anticipation of increased volatility after entry.  The short puts reduces the cost of the trade but also decreases the reward.  The long puts are placed ATM and the short puts are equidistant from the long put strike with one short put above and the other below the long put strike price.

Posted August 15, 2009 at 8:04 PM

ECONOMIC REPORTS

MONDAY 8/17

Empire Manufacturing, Net Long-Term TIC Flows

TUESDAY 8/18

Building Permits, Core PPI, Housing Starts, PPI

WEDNESDAY 8/19

Crude Inventories

THURSDAY 8/20

Initial Claims, Leading Indicators, Philadelphia Fed

FRIDAY 8/21

Existing Home Sales

EARNINGS OF NOTE

MONDAY 8/17

LOW, TSL

TUESDAY 8/18

CAH, HPQ, HD, LZB, SKS, SOLF, TGT

WEDNESDAY 8/19

CYBX, DE, GYMB, HOTT, JDSU, NTAP, PERY, PVH

THURSDAY 8/20

FLWS, ARO, BKS, BRCD, FL, GME, GPS, HNZ, HIBB, HRL, JMBA, PSUN, ROST, CRM, SHLD, STP, BKE, PLCE, TTC

FRIDAY 8/21

ANN, SJM

Posted August 15, 2009 at 8:01 PM

Both the conversion and reversal are tools that the market maker uses to spread off risk.  It is a three legged position very similar to a collar.  Let's say that the market maker receives an order to buy 10 call contracts long ATM one year out for a $30 stock.  How is he going to hedge that.  Well first, he will take that other side of the 10 call order and short 10 calls ATM.  However, what is the risk in that position??  If the stock goes up, the market maker will be losing so he must hedge that position by buying 1000 shares of the stock at $30.  However, there is still risk in the position for the MM.  The risk is the stock goes down.  So, the MM must buy an ATM long put. 
What the MM has done is construct a riskless postion to hedge the 10 contract long call order.  The MM is guaranteed to receive a profit of $30,000 on the postion because of the hedge.  So one must figure out the present value of 30K today.  If you used 3%,  the present value would be $30,000/ 1.03 = $29,126.  If the market maker pays $29,126 and get back 30k in one year then the ROI is 3%.  This must happen in order to make this a risk free investment for the MM.  We already figured that the MM will pay 30k for 1000 shares of the stock and let's assume he paid another 3k for the 30 long put, his total cost is 33k.  We have already figured that the MM should pay $29,126 for the trade in order to make it a risk free trade, so by paying 33k, he would be overpaying by $3874.  So how does he make up for this shortfall?  He charges the retail trader approximately $3.87 for the long call (10 contracts x 3.87 = $3874).  The MM also makes his profit on the bid/ask spread.
So what we have is the MM spreading off the risk by using a conversion and adding in his profit margin with the bid/ask spread. 
A reversal is the exact same thing except it is the mirror image of the conversion.  Instead of the MM spreading off the risk of a long call, if he receives a long put order he would hedge with a short put, short stock and long call.

Posted August 8, 2009 at 11:04 PM

The DOW continued its trek up, closing higher week over week by 198 points.    The ascent has flattened and we could be forming a rounded top.  Fridays' action pulled back into the sideways trend that has been evident for the past four trading days.  Volume has been unremarkable.  Support resides at 9088, 9007,  8878, 8221 and 8087.  Look for upside targets at 9654 and 9794.

My upside projection from last weeks' blog for the SPX was 1007 and we settled at 1010 at the bell on Friday.  There was a confluence of indicators with a fibonacci level and a swing high from 11/4/2008 that is forming resistance.  We are currently overbought and looking for a pullback soon.  I don't believe it will be severe, but more of a general "shake out" before resuming higher.  Support is at 992, 969, 956, 944, 930 and 869.  The next upside target is 1044.

The COMPQ is currently in a Bull Flag and looks as though it wants to roll over.  If the index breaks below the low of this past Thursday, and it does it on volume, we may begin a more significant pullback.  RSI, Stochastics and MACD are all looking toppy.  Stay nimble and follow the market.

Posted August 8, 2009 at 11:03 PM

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Posted August 8, 2009 at 11:01 PM

The short call butterfly is a limited risk, limited reward strategy that is best implemented when volatility is relatively low in anticipation of increased volatility after entry.  The short calls reduces the cost of the trade but also decreases the reward.  The long calls are placed ATM and the short calls are equidistant from the long call strike with one short call above and the other below the long call strike.

Posted August 8, 2009 at 10:59 PM

EARNINGS OF NOTE

CPST, CEA, CLNE, DISH, SATS, FLR, MDR, NLS, PCLN

TUESDAY 8/11

BOBE, CREE, DNDN, FOSL, MBT

WEDNESDAY 8/12

BHP, JASO, LDK, LIZ, M, NTES

THURSDAY 8/13

BBI, BGG, DV, GNC, KSS, JWN, URBN, WMT

FRIDAY 8/14

ANF, JCP

Posted August 8, 2009 at 10:55 PM

The other day a car raced past me jutting in and out of traffic, tailgating and quickly changing lanes without signaling.  The driver was obviously stressed to the max, trying to get somewhere fast.

The interesting thing about this is that about 1 mile down the road at a stop light, I looked over to discover the same driver sitting right beside me.  He was pounding on his steering wheel and the only thing he had accomplished was putting other people and himself in danger through his wreckless driving and taking a hunk out of his own emotional state.

Do you trade like the stressed out driver jutting in and out of trades with unnecessary and wreckless adjustments trying to get ahead only to realize that your efforts were not fruitful.  So, the question is, are your frantic adjustments worth it?  Are you getting ahead?  The answer is, rarely do quick impulsive moves result in putting you ahead in the trading business.  Most of the time those types of decisions are not well thought out and result in losses.

The epilogue to this story is that such activity will also translate to a very stressful experience that will only contribute to more of the same behavior in the future.  So slow down and don't put yourself and others in harms way.  You will find yourself getting to your destination in one piece and with money in your pocket.  Best, Robin

Posted August 2, 2009 at 3:45 AM

The Market has been quite resilient and I am not ready so say that the run is over even though it is showing signs of slowing.  The DOW broke out of the Bull Flag on Thursday only to retrace at the close.  Friday saw a similar story as the Index rejected higher price levels.  Volume picked up on both of those days confirming that buyers are not participating in driving the price higher.  However, I’m long until I’m not.  I will need to see a definitive break to the downside before I change my outlook.  It is time to be a bit more cautious about the continuing upside until the Market decides what it wants to do.   Support resides at 9088 and 8878.  If the DOW hits those levels, I would make sure that my portfolio was delta neutral.  The critical level where I would change the directionality of my portfolio would be 8000.  

The SPX is the same story as the DOW.  Higher price levels were rejected late in the week.  The Index will probably move back into the recent flag.  If the SPX breaks down through the lower side of the flag at 966 on volume then that may be a sign that we are rolling over.  If that happens, look for 956 and 944 as downside targets.  The upside target remains at 1007.  

The COMPQ formed Shooting Star candlesticks on both Thursday and Friday.  That is a strong indication that upside momentum has begun to subside.  The question one must ask is the question many have been asking since early March, “Is this the beginning of a reversal?  The key to knowing whether it is merely a short term pullback or something more substantial is by watching how the Index reacts at predefined levels of support and whether there is participation in the move as reflected by volume.  I suppose that we will move back into the recent flag.  If we break through the lower side of the flag at 1938, then look for the COMPQ to retest 1905 and then 1880.  The upside targets are 2070 and 2319.

Posted August 2, 2009 at 3:42 AM

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Posted August 2, 2009 at 3:39 AM

The component legs of the position 1)  Long Call at strike 60 and 2) Short Put at 60.  Both of the options in the same expiration month.

The combined position is the synthetic equivelent to Long Stock.

Posted August 2, 2009 at 3:36 AM

Construction Spending, ISM Index, Auto Sales, Truck Sales

Personal Income, Personal Spending, Pending Home Sales

ADP Employment Change, Factory Orders, ISM Services, Crude Inventories

Initial Claims

Average Workweek,  Hourly Earnings, Nonfarm Payrolls, Unemployment Rate, Consumer Credit

APC, CTX, CHK, CLH, DUF, GLAD, HOLX, HUM, JRCC, L, MRO, PC, SNHY, TXRH, PFG, TSN

ADM, BGFV, SAM, CBOU, DHI, DENN, DTG, DUK, WOLF, JACK, KFT, LPX, MTEX, NKTR, ONXX, PZZA, SPG, BID, SWX, JOE, TM, UBS, VCLK, VNO, AUY

AGU, AFAM, BHI, BYD, CECO, CBEY, CSCO, DVN, FWLT, GRMN, INSP, IOC, MMC, MUR, OSUR, OC, MALL, RL, PRU, RRD, ALL

THURSDAY 8/6

BZH, NILE, EAT, CPKI, CSIQ, CROX, DLTR, GBE, HANS, KCP, MFC, NVDA, SLF, TRI, VRSN, WEN

RBS.L

Posted August 2, 2009 at 3:35 AM

Posted July 25, 2009 at 4:14 AM

In last week’s blog, I suggested that that the DOW could move up to 9088.  We finished 5 points higher than my projection at 9093.  The market has shown incredible resilience as the bulls refuse to relinquish momentum.  Support resides at 9088 and 8878 with the upside target at 9654.  There is nothing to suggest that the bullish move is over.  I have been long since early March and will remain so until the Market tells me otherwise.

The SPX finished the week at 979, above the 944 and 956 targets from last week, but short of 1007.  We will likely continue to challenge 1007 and then 1044.  The index looks strong and should continue its ascent.  Support resides at 956 and 944.

The COMPQ closed lower on Friday essentially due to poor earnings from MSFT and AMZN.  The index pulled nicely off of its lows to close right at it highs for the day.  I suspect that the lower close is to be expected after over two straight weeks of gains.  I view this as nothing more than a buying opportunity as the index continues its trek higher.   There is support at 1947 and 1880and the upside target is 1984 and 2070.

Posted July 25, 2009 at 4:12 AM

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Posted July 25, 2009 at 4:10 AM

This strategy is the mirror image of the ITM Call Diagonal Spread.  The position consists of two legs 1) a long ITM Put placed 6-8 months out (even LEAPS can be considered) and 2) sell an ATM or slightly OTM front month Put.  The strategy can produce monthly income from the sale of the front month option.  This is best used in a steadily and slightly bearish market.  If the front month Puts are sold strategically, one can proceed to reduce the cost basis of the back month ITM Put and play the longer term appreciation of the long Put.

Review the risk graph and you should gain understanding of the risk and reward of the strategy.  Best, Robin

Posted July 25, 2009 at 4:08 AM

ECONOMIC REPORTS

MONDAY 7/27

New Home Sales

TUESDAY 7/28

Consumer Confidence, S&P/Case-Shiller Home Price Index

WEDNESDAY 7/29

Durable Orders, Durable Orders - Ex Transportation, Crude Inventories, Fed Beige Book

THURSDAY 7/30

Initial Claims

FRIDAY 7/31

GDP - Adv, Core PCE, Chain Deflator - Adv, Employment Cost Index, Chicago PMI

EARNINGS OF NOTE

MONDAY 7/27

ANR, AMGN, BWLD, CALM, CF, GLW, HON, MTW, PCL, PPD, RSH, SOHU, TLAB, TZOO, VZ

TUESDAY 7/28

CRDN, CHKP, COH, COLM, DB, ELNK, HIT, JEC, MEE, MCK, NOV, PCAR, PNRA, PEET, TEVA, UA, UIS, X, USNA, VLO, VIA, WDR

WEDNESDAY 7/29

AET, AFL, AKAM, AMAG, ACAT, BWA, ELY, CBG, CERN, COP, DAI, ESRX, FSRV, GD, GLBC, GMCR, HIG, HES, HMC, JNY, LNC, MSO, NSANY, NUS, NTRI, PENN, Q, SNY, S, SYMC, TSO, TWX, V

THURSDAY 7/30

APA, BBW, CAB, CP, CI, CL, EK, ESLR, XOM, FARO, FSLR, FORR, BEN, GNW, GT, K, LVS, LVLT, MA, MET, MHK, MOT, NBL, OMX, OSK, PBI, REV, SNE, SWN, SHOO, STRA, TSM, DOW, TRV, DIS, WMI, WYNN, XEL

FRIDAY 7/31

CVX, DRYS, EGO, FUJI, ITT, WPO, WY

Posted July 25, 2009 at 4:05 AM

Stop losses can be very useful in preserving capital and cutting losers short.  It is critical to place the stop loss strategically.  If placed too tightly, the stock may move down and “pick off” your stop loss only to quickly move back up without you.  On the other hand, a stop loss placed too loosely can result in a large loss. 

So where do you place the stop loss?  The following is criteria that you may want to consider.

1)      Look for a confluence of indicators that can collectively confirm a support level (resistance if shorting the market)

2)      The indicators that you could consider are Trend Lines, Major Moving Averages, Fibonacci Levels, Chart Patterns, Candlestick Patterns, Bollinger Bands, Round Numbers, MACD,RSI and Stochastics.

3)      When a preponderance of evidence indicates that there is strong support/resistance at a certain level, then place the stop just below/above that area.  As covered in last week’s commentary, the stop loss margin will dictate the number of shares/options that you buy in order to keep your risk constant.

After the initial trade becomes successful and has not triggered the initial stop, then you should consider scaling out of a portion of the position at a defined percentage gain and placing a trailing stop on the balance of the trade.  We will discuss trailing stops next week.  Best, Robin

Posted July 18, 2009 at 5:51 AM

The DOW had a weak attempt to break to the downside on the Head and Shoulders and I was not convinced the move was for real as I had mentioned in last week’s blog.  As a result, we had five straight bullish days to finish the week 597 points higher.  We are approaching the swing high from 6/11 of 8878 and a lot of congestion from October 2008 through January 2009.  The next target, if we penetrate though the 6/11 level, will be 9088.  Support is located at 8592, 8221 and the swing low at 8087 from 7/8.  We finished the week with a spinning top which could be an indication that the recent move will begin to stall at this level.  We will need confirmation on that.

As indicated last week, I suggested that the upside target for the SPX would be 932 and we finished the week at 940.  We finished the week with a Long Legged Doji candle right at the congestion area from June and the swing high from 1/6.  The next upside target is 944, 956 and 1007 from 11/4/2008.  Support resides at 910, 889, 879 and 869.  We will probably move into a Bull Flag and trade sideways this coming week as the index sifts through earnings season to decide if it wants to continue up or not.

The COMPQ moved to the swing high from 6/11 at 1880 and formed a spinning top.  This may be indicative of slowing, but must be confirmed.  If the index sustains its momentum, the next target will be 1896 and then 1905.  We have support at 1880 and 1862 in addition to Wednesday’s low of 1824. If that fails, then 1793, 1778 and 1727 are targeted.  My sense is that we will rest a bit at this level and move into a Bull Flag before moving up.

 Week over week we were up big with the DOW posting a 597 point gain, the SPX up 61 and the COMPQ better by 131.