Sunday, May 23, 2010

May 23 - Irrational Market vs.The Illiquid Trader

Well the latest trade was one for the books... I've never really appreciated the famous quote that "the markets can remain irrational far longer than a trader can remain liquid!"

I experienced this first hand with my short position in BIDU call options. Everything pointed to a ridiculous up trend that could not continue, however, it did for far longer than I expected only to break down after a major margin call essentially forcing me to cover my short positions.

This burns a little but life goes on. I will stop short term trading for a period of time to make sure I am not trapped in the "gambler" mentality. This is when a gambler will try to recover losses in the next bets and usually ends up betting larger and riskier than before and eventually busts!

Process is important here and I have to keep a clear head to make sure my other positions don't suffer. So I may not post trades on here as often, because I am not making any trades. However, as I read more about behavioural investing, with every page I learn more about the role of personal and market psychology on trading and investing as a whole.

I will continue to post on what I learn and what I think will be most significant.

Thursday, May 6, 2010

May 6 - BIDU Follow up

A quick update on BIDU, after the massive gap up following the earnings call, the stock has come down a little and stabilized. However, after a decrease in implied volatility, it has jumped again as more uncertainties loom in the near future.



China is tightening its fiscal policy to cool the housing market and prevent a bubble, this will in the long-run cool down the Chinese stock market, but my trade is very near-term and this doesn't effect me much - although its not completely irrelevant.

Note worth is also how Jim Cramer is pushing BIDU at these levels. He obviously knows of the impact he has on the retail investors and with the 10-for-1 split in BIDU stock coming up on May 12th, he is looking to push this on retail investors and now it looks cheaper to own the stock.

A stock split doesn't change anything about the underlying, it just divides the current BIDU pie into more slices. BUT the majority of the time, a split has a rallying effect on the stock right after the split, this may push up the stock closer to my short call strike price of $800... which will be $80/share after split!!!

I'm watching this stock closely and following it day by day.

More posts to come.

Saturday, May 1, 2010

May 1 - More Fall Out From Credit Suisse's Moronic Move

Hi all, in the past couple of trading days I've been doing some more research and can't help but find collective outrage at the stupidity of Wallace Cheung, the analyst at Credit Suisse, who downgraded BIDU to "underperform" a day before stellar earnings.

From Motley Fool, in a article titled, "This week's 5 Dumbest Moves":
This week's bonehead analyst move goes to Credit Suisse's Wallace Cheung, who downgraded Baidu (Nasdaq: BIDU) shares on Monday, just two days before China's leading search engine was scheduled to post its quarterly financials.

Why would an analyst come down on a company with improving fundamentals, after it had obliterated Wall Street's profit targets in each of the three previous quarters?

In response to the article, a comment that couldn't express my views more reads:

Thank you for calling out Credit Suisse and Wallace Cheung for that ridiculous downgrade of Baidu. Everyone is upset with banks and want them held responsible for questionable activity, I think these analysts and research firms should be under the same scrutiny.

Furthermore, here is a line from yours truly posted on the StreetInsider.com's article on the downgrade:
I would love to know what kind of game Credit Suisse is playing, downgrading a stock a day before the earnings call.... which now in hind sight happened to be the driver of a $100 gap up the day after !!!! Either your analysts are really lost OR you had other motives!!!! Were your traders buying all along on the "downgrade" news, eh Credit Suisse?

On a lighter note, BIDU was down $21 on Friday trading bringing the price to $689, and the price of the 800 JUN calls hovering around $8/share ....... about a $4/share paper loss for me. BUT I intend to hold the position.

Thursday, April 29, 2010

April 29 - Live to Die Another Day

6:30am
wake up, the sun is still down, some rays are trying to break thru

6:35am
reach for the laptop, turning it on seems like it took forever

6:37am
www.finance.yahoo.com .... ticker: BIDU

6:37:30am
FUCK! pre-market has started BIDU is up $98.12 from last close (a whopping 15%)!
Spend some time reading the news releases (I had listened to their call last night- stellar results)
Everything surprised The Street..... and why shouldn't it, they're a bunch of MORONS
Just a day before the earnings Credit Suisse had downgraded the stock setting everyone up for a fantastic surprise!

7:00am
The Alarm goes off! I hate hearing that sound after I'm already awake!

7:20am
Go to the desk and bring up the trading account! I'm not gonna like what I see!!!
Half wishing I wouldn't see the RED, half expecting that I would!

....NEGATIVE EXCESS LIQUIDITY! ........ in English, "Hey you, I see you like under-estimating risk, we don't like taking on your risk for you.... put in more money!"

8:00am
Call brokerage. Thank God for another human being on the other side, not an automated "If you would like to wait another 500 minutes, Press 1"....
Guy tells me money has to be wired before 9:30am.

8:15am
Call Bank. Thank God for 24/7 service!
"Sorry sir, we can't do a wire over the telephone," says some mellow dude, "You have to go into a branch!"

"I see a branch across the street, at XXX Yonge street! Can I go there?" I say, thinking problems are almost solved.

"Sure, it opens at 9:30!".......... Great!!!! I will be six feet under by then!

8:30am
Send my account manager an urgent email.... No Response....
Call her desk repeatedly..... HURRA.... She picks up!
Explain the situation, Initiate the transfer by email.

8:50am
Call brokerage. "Money is underway!"
Brokerage, "We don't have it, send a confirmation by fax!" .......... WHO STILL USES FAX?

9:00am
Email account manager..... "I need a confirmation emailed to me, I need to send it to the brokerage"

9:20am
Still no response.
Call her repeatedly!
She picks up!....... "We're almost done!"

9:28am
Money still not in the account!
"We're almost done!"

9:29am
"OK!"

9:29:30am
Send confirmation to Brokerage.

9:29:59am
FUNDS ARE IN!

..... take first breath since 8am!

9:30am
Off to the races, BIDU opens high, Options are bid up...... expected!
After 10 minutes, prices are stable again, and liquidity is restored!

LESSONS LEARNED...... coming soon!

April 29 - To the edge of oblivion and back

What a mess! If BIDU posted any better results I would bet they were faking! Everything was stellar... they beat on EVERYTHING!

Yesterday was dooms day as I anticipated what the $90/share jump in their prices will do to my account this morning. I was right, sure enough this morning the big bad red sign on my account told me that if I don't post collateral the account will be liquidated!

How can I allow them to liquidate the BIDU positions when they are still $90 out of the money!!!! After a hectic morning, the funds were wired from my bank to the account to cover the margin!

As I suspected the option prices had been bid up to about $15 this morning! With the extra liquidity now I am ready to manage these positions without some brokerage selling everything to cover their own ass!

I will post more as we go.... stay tuned!

Wednesday, April 28, 2010

April 28 - BIDU follow up

BIDU reported stellar results..... Credit Suisse, I would love to know what you're traders were up to yesterday when you downgraded the stock!!!!

Stock is up to $710 in after-market trading and according to my option modeller, this increases the prices of the calls I'm short to $15 a piece - increasing my required margin for holding these to unpredicted levels.

I will look to pre-market tomorrow to see if I should liquidate these and take a loss or if I can ride it out.

Tuesday, April 27, 2010

April 27 - Interesting action by Credit Suisse (BIDU)

This morning BIDU was downgraded by Credit Suisse from 'Neutral' to 'Underperform'. Traders responded by selling, and the stock price currently stands at $628, down about 2% on the day.

This downgrade comes at a very interesting time - right before the earnings call tomorrow. Do they know something?? Assuming they do know exactly what's going to happen on tomorrow's call... are they downgrading to depress prices so their traders can buy before the prices jump tomorrow?? OR are they trying to get ahead a disappointing call for an "I told you so" kinda thing??

As for my position, the JUN 800 calls are trading at $2.20, which gives me about $1.80/share of paper gains. Realistically these calls should be trading a lot lower than $2.20 given that they expire in less than 8 weeks and they are still $170 (27%) out of the money, BUT the implied volatility associated with the earnings call coming up tomorrow is keeping option prices inflated.

Once the earnings call is over, the volatility will decrease and prices will come down (given that the stock price doesn't jump up huge). I will be watching this closely.


Now it's just a waiting game until tomorrow's call after market closes
.

Monday, April 26, 2010

April 26 - Why Trading

I'm still waiting for more developments on the BIDU trade, so I thought in the meanwhile I would post on why I like trading as a business.

Trading is a Scalable Business
It is important to have a scalable business to make money. Now what do I mean by scalable?!
Essentially a business that you can expand quickly and without adding too much costs; to gain more money from relatively the same costs. I'll give you an example of what business isn't scalable and what is.

A bakery shop is an un-scalable business. If a baker has a shop that makes and sells 100 cakes a day, that's its capacity. It has employees, equipment, and raw materials to handle that amount of cake making. If the business starts growing and the demand is now 1000 cakes a day, the baker has to hire more employees and buy more equipment and raw materials. The costs go up with more sales.

Microsoft on the other hand, runs a scalable business! Let's take the Windows OS for example. Considerable costs go into making the first copy of the new Windows 7; when it is complete, the profits are scalable. The amount of sales or demand for the product has nothing to do with the costs of making the product - cost will remain relatively constant no matter what the sales. So with the same costs, the business has the potential to make way more money! It all depends on how good the product is and the company is at marketing it.

Trading is a scalable business! The BUY/SELL/HOLD decisions are the same whether you have bought 100 share or 10,000 shares. You have the potential to make more money given your decisions are the correct ones. Your costs (time and effort of research and set up costs) will remain relatively stable, no matter how much money you put into the idea.


Profits Are Directly and Simply Measured
This is another reason why I like the trading business... It is not like working in a corporate culture, where the sum of everyone's efforts drives revenue. Your time, efforts, and efficiancy is direcly measured by how well you did at the end of the day! You can't blame the BOSS for your low income or bonus, and you don't dish out the fruit of your efforts to useless executives. You eat what you kill! Your profits (and losses) are 100% the fruit of your efforts and go into your pocket!

Wednesday, April 21, 2010

April 21 - Portfolio Control - Part 3

The topic of today's blog is not so much portfolio control as it is self control!

No one else knows better than you!
If you haven't already, you'll find out soon that when it comes down to talking about the market, especially stocks, everyone is an expert.... everyone has an opinion that they are more than willing to feed you.

Some will tell you that they think the market is going for a crash, some will tell you its going through the roof, some will give you stock tips and 100 reasons why its sure to make you money. The sad part is that the human mind with all its complexities is a vulnerable emotional mushy machine! Add the potential for making money into the future and you have a potential for disaster. When it comes to trading, you are the only one who knows best. Take it from a guy who's made all the mistakes there is to make when he started out trading.

There are people who know what they are talking about and their views will be profitable, but more than 80% of time they will lose you money. What is worst is not that you lost money, but that you let someone influence you and didn't make the decision on your own.

So, stay away from stock tips.
Or at least do your own research on what you've heard.

As a side note, what I've found to be very interesting is that people's advice is governed by their own confirmation behavior. This is a very strong human emotion. The people who will tell you the market is going up, have accumulated long positions. The ones that will tell you the market is going down, have short positions. Their advice is their own rationalization of their positions.

Monday, April 19, 2010

April 19 - BIDU Follow up

Well the time has come and finally the trend is broken!!!

On March 25th I posted that I deemed BIDU to be over-bought and in an unsustainable uptrend. As mentioned on the post I sold several JUN 2010 calls with an 800 strike for $4 premium per share ($400/contract). After a period of time where the prices still kept increasing on the uptrend line the break came on Friday after the market reacted to the negative news on Goldman Sachs. As of right now the stock has declined another $29 (4.6%) and it's only mid-day. The call options are trading at $1.55/share.

I will not buy them back yet as I think this dip will be followed by further downside. Even if the downside is not material it has delayed the uptrend enough that $800/share by June expiry is still far away. I'm looking to either let them expire or buy back at close to zero to close the position.

Thursday, April 15, 2010

April 15 - GOOG Trade Closed

Finally today I close the Google trade which was initiated on February 12, 2010 (click here for the post). I had sold June 2010 PUTS on GOOG for the strike price of $450 for a premium of $9/share or equivalently $900/contract.

Since then Google shares have traded up and the puts have lost value. So today I feel is best for buying them back as Google will report earnings after market closes today. Even with a disappointing report today, I don't think that the shares will tumble to $450, but by closing today I will take out some volatility out of my account and free up margin to take on other positions.

Today the puts which were sold for $9/share were bought back at $0.85/share - more than an $8 gain for a 2 month holding period.

Tuesday, April 6, 2010

April 6 - Portfolio Control - Part 2

Hi all... hope you've had a great Easter long weekend.... I know I did!

I've had a lot of great feedback from the last "Portfolio Control" post. Hopefully you've all had time to think about how important position sizing is to your trading and trading account. It is actually considered to be one of the main pillars of trading. There are more, some of which I will discuss in this post.

Don't Let a Trade Become an Investment
One rookie mistake that I must admit I'm very guilty of committing is rationalizing your trade as an investment when it doesn't work out. Let's say that you bought some shares in Advanced Micro Devices (AMD) because you thought it was a good short-term trade, but it didn't go your way and the stock fell. If you've had a predetermined stop-loss price it should remain there and you should get out when and if its hit. But what many beginner traders do is that they rationalize that AMD is a good company anyway and bound to go up eventually so maybe I will keep this for the long term.... it will go up.

This will ruin your account in the long-term, because its not good trading. Those positions pile up in your account, you lose track and they may very well end up going the way you want, but all the same they might go against you more and more everyday. When you finally close it, it will have eaten into way too much of your hard earned profits.

A very important trading rule, and one that I still need to remind myself from time to time is NOT to let a trade become an "investment."

Wednesday, March 31, 2010

March 29 - Portfolio Control

Whenever someone hears of my trading the first question they ask is..... "what's a good stock for me to trade?"

A lot of people see trading as the buying and selling of stocks; pick the right stock and you make money. In fact there is much more involved... so much more!

Picking the right stock/option/commodity to trade is not even half the battle. Aside from the main buying and selling side of trading, there is another part..... not as sexy as the thrill of buying and selling and seeing the profit appear in your account, but this hidden side of trading makes sure that your account doesn't get out of control and that the money stays in your account.

This other hidden side is the portfolio control. It consists of many things, one of which is position sizing. This means if you have $100k in your account, you don't put $70k into a Google trade just because you think it will go your way. The risk on any trade should be in the range of 1-3% of your total account. This assures that if the market should go against you, and the trade ends up in a loss it does not put a big dent in your account (or ego) and you can go on again.

Based on this risk limit, you can size your positions. There are many different ways to calculate position sizing. I will discuss one here. The formula for the number of shares you want to buy is:

# of shares = risk $ / (swing price average/2)

, where,

# of shares - is rounded down to nearest 100 shares
risk $ - is your amount of cash at risk (for a 3% risk in a $100k account, this is $3,000)
swing price average - is the approximate swing in price you expect from the stock

The swing price average depends on what kind of trader you are and what kind of trade you're taking, if you plan to close out position within the day, the week, or possible hold for a long trade.

Let's say that you want to go long on AAPL, and let's also say that this is not a day trade and you've spotted a longer term-trade that you expect to work out in the range of a couple of weeks. To determine the average daily swing that you should think about, you want to calculate the 2-week or 14-day Average True Range of that stock. Stockcharts calculates and plots this for you.


The 14-day ATR is around $4, which indicates an average daily movement of $4/day. The ATR is not constant, it chances as the daily prices become more or less volatile. You can see that back in early February the range was as $6. During the volatile days of 2008/09 this range had gone up to $15/day. But it is a good measure of recent prices changes.
1
Based on this information, a good position size would be:

size = $3000 / ($4 * 2) = 375

since we don't want to buy in odd lots, we round this down to 300 shares. This ensures that your position can endure the ups and downs associated with normal daily volatility within this stock and you don't hit your risk limit prematurely. Be careful of news heavy days, for a short-term position the ATR may not be a good judge of what a price swing may look like on a news heavy day.... for example AAPL could move way more than $4 on a news heavy day like earning release day.

More on portfolio control to come....

Thursday, March 25, 2010

March 25 - BIDU BIDU BIDU

Wow, this is just incredible. BIDU is up almost 6 fold since its bottom early 2009 at around $100. The long-term weekly chart is shown here:

This has gone from a buy to crazy panic buying frenzy! I don't like how fast it's going up, it's unsustainable!

I'm looking for downside here, but I can't tell when the downturn will begin and that makes buying puts a little harder. One thing is for sure that once this bubble bursts (in the short-term) there will be down side, and it will come fast! Below is the daily chart:

I'm going to start selling calls here for JUN 800 level. Today I sold some for $4.00/share or $400 per contract. I expect that this stock may climb more as more bad news about Google's battle with the Chinese Government hits the wires. So I expect to sell more calls at a higher level.

I expect that the uptrend will break to the downside with the slightest favorable news for Google. More on this soon...

Monday, March 22, 2010

March 22 - USD.CAD Closing Trade

This morning I am closing the USD.CAD trade almost at 1.0240 at a small loss. The break below the recent supports shows me that this trade is not working anymore the way I originally intended it to. An easy break of the support makes it easy for it to be broken again and shows that there is no longer a hard support there at around 1.0200. Here is as the chart looks right now:

Friday, March 19, 2010

March 19 - BIDU Trade Setup

BIDU, the Chinese search engine, has been benefiting much from the rumors that Google may close operations in China. According to an analysts estimates, this means 30% more business for BIDU which is certainly sizable. On all this BIDU's price has increased dramatically. Let's look at the one year plot on a daily chart with trend lines. I've also plotted volume and option volume for puts and calls. We can see the spikes in option volume.



The channel is visible and the break-out above it. Good rumors always drive up a stock's price, but the news release may disappoint. I don't think Google will just leave all operations in China and deprive itself of huge revenues associated with the Chinese operation, but then again.... This is Google! Will they put morals before revenues? We will see on Monday!

For now I see a huge run-up in BIDU and am thinking about a short position incase the news isn't as good as expected. I will obviously never short the stock as the risk is HUGE! I'm looking to buy puts for limited down side exposure. I've put in a bid for the JUN 340 puts for $1.35/share. If BIDU should skyrocket from Monday's news I will lose my premium which is $135 for every contract, the price of the contract will look as the plot below, depending on the price of the underlying (BIDU stock):


The returns are exponential if the prediction is correct. If BIDU should continue to go up then the price of the contract will move towards zero. I should mention that I do not wish to hold these until June, this is a leverage play. If BIDU goes down fast, the options will increase quickly and I can sell at a high premium (as seen in the plot). I don't expect that the stock price will go to $340. But anything below $500 will get a nice return.

March 19 - GOOG and USD.CAD Follow-up

The Google trade is still on and I'm still short the JUN 450 puts. The price on these contracts have been stable around the $3.50 - $4.50 range - the erosion in the time value of the contracts has been balanced by the added volatility coming from the decision on whether Google will close its operations in China. I may look to close the position here to lock in profits as the decision of Google will come out Monday.

The USD.CAD trade has gone against me so far, with the ratio around 1.01 this morning. If there is a bounce towards the 1.02 area I may look to close the position at break-even. Watching this closely.

Tuesday, March 16, 2010

March 16 - Life and Trading Lessons from BLACKBERRY POKER!!!!!

This post might seem a little "out there" at first, but read on, there is a serious lesson about life and trading in here!

The Game:
I've been playing around with the poker app on my blackberry and recently I've been playing it more often - whenever I have some time to waste; on the subway, waiting at the doctors office, etc.
For those not familiar with the poker app, it's just a computerized no-limit texas holdem poker with 5 players where you start the app with $500 in the bank and play others with the same amount in their starting bankroll. If you keep winning and taking other people's money then you keep going to the higher stakes tables where the blinds go up and people have more money. If at any point lose all your money or go "all-in" and lose then you're OUT! You must restart the game and start with $500 again playing people with the same bankroll.

I should also mention that as other people go all in and lose, they are replaced with new players with a starting bankroll; so the money staying at the table keeps growing.

The Pattern:
At first you keep betting, you may win a couple of hands and lose a couple, but almost everyone has the same amount of money and if you go ALL-IN on a perceived good hand and someone is better then you lose everything and must start again. So you can imagine that at the beginning you will be OUT many times and must start over before building a big enough bankroll which is significantly higher than the other player. This way you can go ALL-IN more often and take bigger risks because even if you lose the hand you have enough to keep going.

Eventually after having gone bankrupt and having to restart I built a huge bank roll...... about $1 million!!! At this point, I dominate. Even if I'm not playing well and lose many hands I can recover by winning big on one large hand and keep going and eventually through enough hands I bankrupt all the other players and win with a massive bankroll.

The Trading Lesson - Capital is King
The dynamics of the game were very different when I had just $500 and to when I had $1 million. This is directly analogous to trading, if you start under capitalized you cannot take risks, and without risk there is no major return. But if you take major risks you may lose all your capital upfront and go bankrupt. But unlike blackberry poker, starting up again may not be so easy as it requires more hard-earned money, not to mention that the discouragement from the last loss effects your decisions!

In the poker game I went bankrupt over 30 times and had to start again with $500 before getting big enough to take more risks and work my way to $1 million. BUT when I had the big bankroll, I didn't have to play as skillfully as I had before, and I could risk more, which ultimately led to more money. It is the same in trading! It is very discouraging at first, especially if you start with little capital. That is why my advice is NOT to start under-capitalized. With an under capitalized account, if you can't take risks. With risk comes return, but also possibility of loss and your account should be able to handle a big string of losses should it occur. That is why.... Capital is KING!!!

As a side thought, with $500 in your pocket would you sit at a poker table where there were 2 players with $1 million bankroll and 3 others with $5 million??? The trading game is the same as the poker table, but you cannot see the other plays or their chips!! Institutional players have virtually UNLIMITED funds compared to small retail accounts. The barriers to getting ahead are high!!! This is not to discourage you, but to shed some light on the situation so we can play smarter.


The Life Lesson - Why the Rich Get Richer
As I pondered the trading lesson, I noticed the bigger lesson in life... "Why do the rich get richer?" Well there are many reasons, but without getting into all of them I think the same principle is at work here. With bigger money comes the ability to take bigger risks. Many big investors make big mistakes but still come out on top.... Look at Donald Trump!! This is because enough capital is there to risk many times over and the losses don't put a big dent in their overall investment capital. Eventually the right risk will earn a return many times higher than the sum of all the previous losses.

With this I leave you with some food for thought
If you had $100k how would you play it? Safe? Risky? Diversified???
Think about this: if you had the chance to invest $10,000 into 10 securities that were risky and each independently could give you 10 times your money or zero. Would go with this? Or think of it as gambling and choose a mutual fund with gradual long-term minimal returns?

Monday, March 15, 2010

March 15 - AAPL Post Trade

Well that was a fast one... Capturing over a $4 move to the downside in a couple of hours was great, but it wouldn't have been so fast if it wasn't for general market weakness helping it along.

Even though I think that there is more potential downside here I realize that some news heavy days are ahead for AAPL. The release of the iPad on April 3rd and the anticipation and hype may drive up the prices again. And I don't want to be caught on a short position, if they announce stellar sales results pre-market and the stock skyrockets before opening bell.

So I have closed out the position at $220.89 today, for a total of $4.12 / share.

March 15 - AAPL Trade

Quick update here.... My Apple trade was taken this morning and a short position was initiated at $225.01 / share....

March 12 - AAPL Trade Watch

Hi Everyone.... here we go again with a local price bubble....
Many of you who have been reading my comments regularly know that I've been watching Google and Apple for a contrarian counter-trend trade as my thought was that they were over-bought. Over the past month, I pulled the trigger on Google by selling calls on Jan 7th. Soon after Google had a correction and is now in the stable stage. AAPL however, seems to be making new highs everyday.

I see a panic-buying pattern emerging here which as a contrarian short-term trader I want to play against. Below is the daily plot of AAPL with my trendlines:


The indications for local bubble are all here. AAPL is making new highs fast on lower volume, the 14 day RSI indicator is in over-bought position, and the MACD has started to tick down. Furthermore, for the past couple of days we've had small candle sticks at the top trading at a tight range.

I will look to short the stock or buy puts. Shorting will give me better mobility in and out of the stock should it turn against me. The reason I will short the stock or buy puts versus selling calls is because the potential for profits for selling calls is limited to the premium while the upside is virtually unknown; if the stock skyrockets, I'm on the hook as far up as it goes, similar to shorting the stock... so why not just short it and maximize potential profits.

Tuesday, March 9, 2010

March 9 - USD.CAD Trade Setup

Of the currency markets I've been looking at the USD/CAD patterns. Following the volatile swings of currencies in 2008 and early 2009, it has come into a calmer trading range. Below is a 1 year plot of the USD/CAD currency exchange:


In this recent trading range we have a resistance level at around 1.075 and support around the 1.025 level. With USD and CAD trading near parity, there are a lot of fundementalists who beleive that CAD is still undervalued to the USD and that it will once again trade higher than the USD - in the long run.

This, however, is not a blog dedicated to long-run fundementalists. Short-term swings are what I'm interested in!

With the tripple bottom pattern set up here at the support level, I look to enter into a trade long USD against CAD. I will enter into half my intended position today and look for further confirmation for the other half.

In this scenario, as with any breakout scenario, there may be a false breakout before coming the trends go back to their original patterns. A good trader will always keep that in mind when trading breakouts or against them. Here I am looking for price action to stay within the band and stay in range.

Wednesday, March 3, 2010

March 3 - Google Trade Followup

Following the Google trade posted on February 12, the stock has been range bound between $520 and $550. The 50 day simple moving average is trending down at around $565 while the 200 day moving average is up trending and currently around $505. The price is moving towards a squeeze by both the moving averages from above and below.

The RSI is rising from over-sold and crossing the 50 mark which is bullish (in the short-term). The action on this stock has settled and the volatility has decreased as the 14 day Average True Range (ATR) is now down to around $10.


On February 12th we put in a trade to sell an amount of naked puts on Google at $450 level for $9 premium/share ($900 per contract). As of today's close, these contracts are trading at around $4.00 / share. This creates a paper profit of $5/share or $500 per contract. These are still unrealized profits as I intend to hold on to the positions a while longer.

If the price breaks above the current channel I will keep the contracts longer so I can buy them back cheaper for more profit, if we break the lower support of the channel, I may re-assess the position depending on timing.

Tuesday, March 2, 2010

March 2 - Follower Mentality

Hi All... I saw this caricature depicting a simple truth in the markets and wanted to share it.... Enjoy!


Friday, February 12, 2010

Feb 12 - Google Trade

Following the close of the Google short position, I'm thinking that now is a good time to slowly get into a long position. Again I am not talking about buying the stock outright as it may prove to be volatile in the short-term. I want to use the volatility to my advantage.

With the recent volatility and downside threat in the market, people will look to take insurance against their long positions by buying puts. This has caused some increase in the value of the puts in some stocks that had been over-bought. Let's look at a daily plot of GOOG:


Google has already had its pullback and I don't see it going down in a large move. The downtrend is broken with as Google stays within a trading range. MACD is trending up with the faster line crossing the slower to the upside. RSI is indicating an over-sold position in the short-term. Volume indicates that aggresive selling has slowed.

I have a position in mind and today I entered into 1/3 of the total position I would like to acumulate, which is short 450 PUTs for JUN 2010 for the premium of $9/share. In the coming days I will look to add to it.

Given the volatility of the market and the posibility of a downturn in the broad markets, I have decided to buy some insurance for this position with buying 450 PUTS for MAR 2010 for $1.30/share. The value of these long puts will increase faster than the value of the JUN puts if the stock should go down from there.

Wednesday, January 27, 2010

January 27 - Market Commentary

With the recent slide in the market and headlines like "Is this the end of the Sucker's rally?!", people are wondering what happens now. I've been a long time advocate that this market has gone up too far too fast and needs a correction, but I am not predicting a crash in the scale of what we saw in late 2008 and early 2009.

Below is the daily chart of the S&P500, with RSI and MACD indicators:

Right now the decline is within the uptrend channel and has the same characteristics as the recent corrections within the channel. We are now seeing some support at the trend line with MACD ticking upward while RSI is below 50 indicating an over-sold position and a possible buying opportunity. I am not too bearish on S&P at this level, but will look to see if it will break the channel or bounce off of it.

I will look to initiate a long position, by buying shares instead of selling puts as I think the upside is stronger. I am considering SPY (S&P DEP Receipts) or SSO (Ultra S&P500 ProShares).
This will be a longer term trade and I will look to position myself for possible downturns.

Jan 27 - Google Follow up

So only 20 days after the Google trade I posted (January 7 - GOOG Trade) it has become profitable enough to close the position. Following the huge run-up in Google's stock leading to steep uptrend lines the stock made a rather fast turn-around to the downside.

Of course I am not saying that this is the beginning of a downtrend for Google, but merely a correction - which happened to make some good money for counter trend traders.


The short position in Google calls, initiated on Jan 7th @ $3.30/share was closed today at $0.05/share for a profit of $325 per contract excluding commissions.... not bad for a position held only for 20 days with no cash capital put up for the trade (margin excluded).

Thursday, January 7, 2010

January 7 - GOOG Trade

Here comes the Google trade I've been watching for. After a huge run up, yesterday the runaway trend to the upside tested the uptrend line with a $16 loss. This morning there was no steam for the upside and the price moved below the trend line, effectively signaling a potential break in the uptrend and a correction downward.


How deep this correction will be or if it will be sustained at all is hard to tell right now, but I have gotten myself into a short position by selling FEB 700 call contracts for $3.30/share. I will profit from 3 different scenarios: 1) If the stock moves down, 2) if the stock stays stable and in range, and 3) if the stock moves up slowly, but too slowly to reach $700/share by the third week of February.

I realize that Google's earnings will come out before that, so I will try to trade out of this before expiry if it goes against me.