July 31 - SP500 Commentary

I haven't posted in a while as I've been away on vacation. I'm glad I was on the sidelines as the position I had in mind would have been short the S&P.

However, the S&P has soared in the past weeks to 2009 all time highs as the market has been excited by good news and brushed bad news aside. Market sentiment now is that a bottom has been set and many are convinced (not without merit) that downside risk from here is known and measurable. So with optimism people have been coming in on dips in the market and these people will hold their positions through a downturn as their entry prices are low.

Let's take a look at the S&P500 with support lines:


The support lines at 875 have been very strong, and the 950 resistance proved to be minor in the recent rally. For my position, I would not get in at this point as I don't want to chase the market in a rally. I would look for a retest of the 950 level to see where it can go. I will look to get in if support is strong at that level.

I also post a chart of the S&P500 with Bollinger Band channels to show that even with the recent rally, we are within the volatility channels and there could still be upside from here.


I will look to post more commentaries in the coming week...

July 20 - SP update

Over the past week we've seen a sharp rebound off the 875 support level on average volume. Currently we're trading in a tight range between the 875 support and 950 resistance.

The market had been waiting to see what happens to CIT and this morning the news came out that CIT will be rescued. The S&P500 is already up in pre-market trading, but let's see how the day goes....



Volume is average, I would have expected an increase in volume. MACD is bullish as the moving averages have crossed to the upside. More will be revealed during the week.

July 17, 2009 - GOOG Put Spread (Post Analysis)

This entry serves as the after-game analysis of the trade I put in on July 3rd on a Google Put Spread strategy.

In after hours yesterday Google came out with their Q2 earnings results, reporting 3% revenue increases from the same quarter last year. The news wasn't taken well by the street and the stock closed about 3% lower at $430.25 which is way above the threshold for our options. As of today's close, our short positions in the 350s expires unexercised and we keep the income of $300 / base contract. Similarly our long position in the 360s expires worthless and we lose $175 for a net of $125 per base contract.

Note that the example is in base contracts. To increase profits (and also exposure), you increase the number of contracts, but it is very important to keep the 1:3 ratio of long to short for an effective spread.


I've gotten a lot of questions about why I would buy the 360 puts, while selling the 350s and not just sell the 350s if I thought Google would stay above 350. It is true that selling only the 350s alone would create more profits, but it would also create more risk. With giving up some of the profits upfront you can hedge your position in two ways:

1. Price:
If the earnings report was horrible and the stock tanked you would still be protected until the breakeven point at around $345. And even below that your losses would be partially offeset by the gain in the 360 puts you were holding.

2. Volatility:
Volatility can increase option pricing drastically. If the stock fluctuates with wild swings volatility will increase and so will the price of your options. If the volatility is accompanied by a drop in price then the put values may increase drastically. Just to give a sense of the change, if the price drops to $370 in a volatile market, your short options (which were sold for $1/share) can increase to $10/share. This creates a temporary loss 10 times your original premium. If you have sold a lot of contracts this can cause a large loss to your portfolio and increase your margin requirements (you need more money in your account to hold this position until expiry).

However, with your hedge in place, the increase in the price of the 360 put will offset some of the losses and take wild swings in profit and loss out of your portfolio.

Hedge funds are actually measured based on how volatile their portfolio is compared to market volatility.... does it swing wildly? or is it stable!

Stability and protection is worth giving up some profits.... especially in this market.

July 17, 2009 - Trading Essentials - part 2

Don't Overtrade

Overtrading is another important pitfall to avoid. Successful traders aren't constantly getting in and out of positions or putting on positions solely for the purpose of being in the market.

For new traders, trading is exciting and being in the market offers an excitement not unlike the action in casinos. And this is just another reason why the line between trading and gambling can get blurred for new traders. It is important to not trade for the excitement but only if a high probabilty opportunity is available.

Sometimes when the trading platform is open in front of you, the temptation to put on a trader or end a trade starts to build. It may even compel you to change your strategy mid-game or start moving your stops in order to "better" your trade. As I've suggested before, the best way to avoid trading with emotions is to stay out of any situation that may cause those emotions.

For this I would suggest not having your trading platform open all the time. Once you have put on your trades, close the application and monitor your trades via other reporting methods. I use Yahoo Finance. For approximately $100 / year you can get realtime data streamed through Yahoo Finance, which otherwise has a 20 minute delay. This allows me to monitor positions and pricing without being in a situation where I can jump in and out of trades on a whim.

Constantly having your platform open can cause you to overtrade. Besides putting you in an emtional situation, overtrading can rack up commissions for the broker, which may not seem much at first, but they quickly add up...... Trust me!

Happy trading...

July 14, 2009 - Trading Essentials - part 1

The markets have been choppy in the past week and trends are very short lived.
For a while I've wanted to post on some trading essentials for new traders as many of my recently graduated friends are just getting into trading and have opened online trading accounts. One important thing about trading is:

Don't trade an under capitalized account
One of the mistakes almost everyone makes starting out is to put a couple of thousand dollars they have saved up into a trading account in hopes of making stellar returns. Or even worse, they blur the lines between trading and investing for the long term.

It's very hard to trade with even as much as ten thousand dollars. First off you cannot buy too many shares of certain stocks. Secondly, and possibly most importantly, there isn't much room for losses.

It's a common misconception that all of a successful trader's positions should make money. In fact, this is farthest from the truth. Even a trader with a 50% error rate can make money. The hidden key to success is control, position sizing, and the ability to see a trade that is not working and cut losses and let winning trades work.

Now knowing that there will be losses along the way, your account has to be able to handle those losses and have enough capital left over to trade another day. To go further, your account would have to be able to weather a string of losses and still allow you to go on trading.

Even though I hate making a casino reference in a trading post, I think the following example is the best way to show how an undercapitalized account can be disastrous to a trader.
I've seen too many people at $25-minimum blackjack tables who come in with $100 or even $50 in hopes of making money. Almost all of these people soon find themselves bankrupt when a string of losses hits - and let's be realistic those strings will happen at some point. Then there is no more capital to go on. They cannot weather the storm long enough to bounce back. These players leave the table, having lost 100% of their capital and vow never to touch blackjack again because they "don't understand it."

The same mistake can be made with trading accounts. It is important to make sure to have enough capital to go on trading if the market turns against you and deals you a string of losses.

I've heard professionals say that realistically you need as much as a million dollars to start trading a personal account! To me that's not very feasible at this point. How much you want to fund your account is up to you, but my advice to all newer traders is: Do not trade an undercapitalized account. Keep money in a principal-protected security and trade a paper account to learn the tricks before putting your money to work.

Happy trading...

July 13, 2009 - SP500 at Critical Point

In the past 2 weeks we've seen some weakness in the S&P500 as it slid below its 50 day moving average, and it's hugging the 200day moving average down!

At the 875 level we have some support as it has been local support and a previous resistance level going back to February.




I am concerned that this support may not hold, as volume keeps declining. I think some big money has come into the market since the March lows, and since these new entrants got in at all time lows, they will be looking to hold through this downturn, if not too severe.

This week is option expiry and more earnings are coming out. Let's see how the week plays out...

July 6, 2009 - SP500 Bearish Head and Shoulder Pattern

This will be a quick update on the S&P500... there is a bearish head & shoulders pattern that has formed here. We tried to take out the 950 level, but were unsuccessful and couldn't come back to retest. The 50 day moving average is broken to the downside and a test of the 200 day moving average, which coincides with the local support level at 880, will tell more of the state of the market.


There are volume and MACD divergences which further indicate the bulls are running out of buying power and the bears are becoming stronger.

Let's begin the trading week....

July 3, 2009 - GOOG Put Spread

Yesterday I saw a trade I wanted to take on Google Inc (GOOG), but I did not want take a position in the stock as it is volatile and requires capital to hold in large quantities. I see support for Google at the 50day moving average, but I do not want to go long the stock as Google is known to move fast and it often gaps up or down before trading hours. So I am making a bullish play using put options, while trying to reduce my negative exposure as much as possible.


I want to give the stock enough room to even move down to its 200 day moving average if needed. In this spread strategy I use put options. I will buy higher strike puts and sell 3 times as many lower strike puts around the 200 day moving average. Let's use a single contract as a base to explain the process better. In this example, the prices for the options are the ones which I got (so they are real numbers).

I bought 1 JULY 360 contract for $1.75/share and sold 3 JULY 350 contracts for $1.00/share. Since each contract represents 100 shares, if the share price stays above $360 by July 17th then, I net $125 based on (300 * $1) - (100 * $1.75). If the share price ends between $350 and $360, then I net the $125 profit plus the difference between $360 and the share price. And if the share price should drop below $350 then I am exposed for losses. The break down is as follows:

Note: Yellow highlights indicate transition levels and Pink highlight indicates breakeven level.
The above calculations are based on a single base (long put) contract.

Premium - recieved up front
Naked PUT Risk - risk assocaited with selling the 350 Puts
Long PUT Value - value of the bought 360 Put
PNL - Profit and Loss is the sum of the above 3 parameters

I realize that Google's earnings are coming out July 16th, a day before the JULY options expire.
But my view remains that even with bad earnings, technically, we should stay above the 200 day moving average at $350.

July 2, 2009 - HNU update

This is a quick update on HNU.... I am watching it as it fluctuates today and if we finish the day below 5.40 I will close the position and wait on the sidelines.