Disclaimer: The information found on this site is meant for educational and informational purposes only. Nothing on this site should be construed as a recommendation or solicitation to buy or sell derivatives or securities or to trade any particular strategy. Trading of derivatives or securities has large potential risk and you must be aware of and accept all the risks. Past performance of any trading system or methodology is not necessarily indicative of future results. No representation is being made that any account will or is likely to achieve performance results similar to those discussed on this website. Hypothetical or simulated performance results have certain limitations and do not represent actual trading.

Friday, July 30, 2010

Bearish on TLT, Buy Dec 100/93 1x2 Put Spread

-I think money will start to come out of long-term bonds due to many reasons. First, recent decline in credit default swap prices, decline in gold prices, rise in European Stock prices, Stabilization in U.S. stock prices, decline in U.S. Dollar all point to investors fears of double-dip recession continuing to subside. Second, commodities prices have also been rising of late. Wheat, corn, coffee, orange juice, copper, natural gas, etc. are all higher since May. If these trends continue, higher commodities prices could put pressure on cost inflation in coming months.
-Of course, future economic outlook is highly uncertain and even the FED seems to be concerned about of risk of deflation more so than inflation. This has to date supported bond prices. Although stronger July Chicago PMI numbers today turned the stock market around from earlier losses, bond investors are gonna wait to see more convincing signs of economic strength before they start to take money out.
-August/September PPI and CPI and upcoming jobs data would likely be the key indicators, but I believe the risks of bond prices as reflected by TLT are to the downside. I would recommend buying the Dec 100/93 1x2 put spread for $1.55.

Monday, July 26, 2010

Market Comment, Valuation & Stock Picking

-Fears of double-dip recession are subsiding quickly. Earnings announcement, management outlook and recent economic news are reassuring investors that the global economy would not be as weak as investors had feared.
-What I am seeing in the markets are low Price to Earnings multiple (PE) stocks with growth potential or improving outlook, especially those levered to global growth, are being bought, while stocks that disappointed expectations and have high PEs are being sold. GE is a good example of the former, AMZN and NFLX are good examples of the latter.

Starwood Hotels (HOT) Options Strategy, Bullish Butterfly

-Recommendation, buy AUG 48/50/52.5 1x2x1 butterfly call spread- buy 1x Aug48 calls $2.2, Sell 2x Aug 50 calls for $1.1 and buy Aug 52.5 calls for $0.40- net purchase $0.4. Maximum loss is $0.95 for each spread if stock goes to $52.5 or above by August Expiration or $0.45 loss if stock falls below $48. Current stock price is $48.50.
-Starwood Hotels announced strong earnings last Thursday, raising their 2010 earnings outlook. They are benefitting from strong growth in Asia and Latin America. While concerns remain on overall health of the U.S. and European economies, investors are putting less likelihood of a significant global economic slowdown, and have been buying stocks levered to international growth again. In this market environment, I would expect HOT to rise steadily to around $50 in the next few weeks.

Wednesday, July 21, 2010

PRAA Stock Price Falling After FTC Report

- On July 12, FTC Issues Report on Reforming Debt Collection Litigation and Arbitration; Recommends Steps to Protect Consumers and Repair a Broken System (http://www.ftc.gov/opa/index.shtml).
Legislators pledge to fix state's 'broken' debt collection system (http://www.startribune.com/investigators/98380794.html) in Minnesota. Massachusetts Senate passes debt collection measure (http://www.boston.com/business/personalfinance/articles/2010/07/21/senate_passes_debt_collection_measure/). More and more states are likely to introduce legislation giving consumers more protection against debt collectors.

-The uncertainty and likely negative environment for Portfolio Recovery Associates Inc. (PRAA) is causing it's stock price to drop, and I believe it will continue to do so until support area of around $50. Unfortunately, the spread on options prices in PRAA is too wide and illiquid to put on a meaningful position. I would recommend looking for opportunities to short the stock on any strength.

Monday, July 19, 2010

Results of Relative Volatility and P&F Trend Indicator Simulation

-I began two simulations few weeks ago using two of my indicators on TEMA chart. First, on June 29, I compared the value of the Estimated Future Volatility (EFV) indicator against the 30-day weighted implied volatility numbers for each stock that has options trading at penny increments. I picked out 10 stocks out of the top 40 whose implied volatility seemed low relative to the EFV indicator's value and 10 stocks out of the bottom 40 whose implied volatility seemed high relative to the EFV indicator's value. The logic behind this simulation was to see if the value of the EFV indicator could be used to systematically select stocks whose options prices were "overvalued" and thus should be sold or "undervalued" and thus should be bought-as part of a Volatility Arbitrage.
-Second, on June 30, I picked stocks whose P&F Trend Indicator changed from 1 to -1 or vice versa and bought the At-The-Money options, while at the same time selling an equal dollar amount of ATM options on an index (options on SPY in this instance). This is a variation of a strategy known as Dispersion, which typically consists of short selling options on a stock index while simultaneously buying options on the component stocks. Here, we are buying only options on stocks that shows a change in P&F Trend indicator. The P&F Trend indicator changes when a stock price moves a certain amount counter to the previous direction (often an established trend). The assumption is that regardless of whether the countertrend buying/selling power succeeds or fails to reversing the established trend, enough energy has been built up to move the stock one way or the other, relative to the overall market.
-Before I discuss the results of the two simulations, I would just like to say that any observations I draw would be based on just these two simulations and that more and better simulations would need to be conducted before I could come up with definitive "conclusions". Furthermore, I am limited in resources and time to design and test more complex and detailed simulations.
-Results from Relative Volatility Simulation: I was disappointed that the simulation did not result in profits. In the first portfolio, I bought and sold ATM straddle/strangle for a net credit of $34 and ended on July expiration date with a net debit of $943. In the second portfolio, I bought and sold ATM call and put spreads for a net credit of $78 and ended on July expiration date with net debit of $1006. Trying to reduce the overall exposure risk by buying/selling option spreads actually resulted in higher losses
-Results from P&F Trend Indicator Simulation: I was encouraged that the simulation of portfolio 1 resulted in profits from net debit of $150 to net credit of $2,386. However, when I bought and sold ATM call and put speads in portfolio 2, it went from net credit of $130 to net debit of $454. Once again, what appeared to be a less risky portfolio performed worse.
-Observations from both simulations: Based on my past experiences and other testing done on the P&F Trend Indicator, I am encouraged to find that this simulation also supported my view that there is potential for profitable trading strategies, in this case buying ATM options of stocks while selling ATM options of SPY (a variation of Dispersion Strategy), whenever the P&F Trend Indicator changes on any given stock. However, more testing would be required on the EFV indicator. First of all, the design of the simulation was not ideal for evaluating the EFV indicator. In volatility Arbitrage, delta is systematically maintained neutral, therefore actual realized intraday volatility and changes in implied volatility during the period of simulation would be the determining factors as to the profit potential of the EFV Indicator, rather than what the closing price of the underlying was at a given period after the start of the simulation. Second, the EFV indicator was optimized using SPY historical prices and therefore might not be very effective when translated to other stocks.

Thursday, July 15, 2010

Deckers Outdoor Corp. (DECK) Also Looking Weak, Amphenol Corp (APH) Looking Relatively Strong

-Following the pattern of previously strong stocks (strong YTD performers) starting to breakdown, Deckers Outdoors Corp. (DECK) stock is in danger of breaking below its long established bull trend. Two days ago, I noted SKX as being vulnerable to a breakdown. The stock is down a further 8% last 2 days.

-DECK is another footwear company, seller of famous UGG brand. Overall Retail Sales numbers have been weaker than expected the past two months and recent economic indicators are definitely pointing to momentum loss in domestic economy's growth. As economy comes out of recession, consumers buy premium shoes on pent up demand and to feel good about themselves. But as consumers' disposable income remains weak, they can't justify buying $100+ shoes. DECK stock has also benefitted from UGG shoes having been one of the hottest consumer trend products the past few years. I would bet that UGGs would no longer be a must have product this winter in the U.S. Furthermore, production costs in China probably increased due to currency appreciation and higher labor cost.
-DECK is set to announce earnings on July 22. The implied volatility on Aug options are high. I would recommend buying Sep 45/35 put spread for $2.90 or selling the Aug 45/50 call spread for $1.90.
-I would offset the bearish outlook of DECK buy putting on a bullish position in APH, a global maker of electrical connectors and interconnect systems, by selling the Aug 40/35 put spread for $0.70 or buying the Aug 40/45 call spread for $2.80 as part of long/short strategy.

Tuesday, July 13, 2010

Skechers USA Inc. (SKX) Earnings Play

-Skechers (SKX) earnings announcement is expected on July 22, after market close. This high flying stock is down 20% from its June 21 intraday high of $44.90, while the S&P600 Small Cap Index is down only 5% for the same period.
- I could think of two reasons why SKX has shown relative weakness over the past few weeks. 1) Fund managers have been taking profits on high flying stocks and buying value stocks that have underperformed. Apple stock is the leading example of this, down over 10% since June 21, while SPY is down around 5%. 2) Investors are concerned about fundamentals of SKX and whether the momentum and buzz around "Shape-up" fitness shoes would disappoint expectations.
-Considering these two factors, technical analysis of SKX stock, and high implied volatility, I would recommend buying the Aug 35/30/25 butterfly for combined $1.20 or lower (this spread can be done at current bids/offers). This spread would make money if stock price falls to near $30 if fundamentals do not support a high stock price, but not lose much if stock price remains at current levels or rise slowly after earnings announcement.

Monday, July 12, 2010

Expecting Newmont Mining Corp (NEM) to Move.

-Last week, I wrote about the weak technical outlook of GLD. Currently, GLD is trading $117.38, pretty much unchanged from last week, although the Aug 115/105 put spread is now worth $1.55, down from $2.13. I still feel that Gold prices are poised to move down because stock and bond markets are signaling that global investors are starting to get more comfortable with risk trades.
-Another stock I feel that has potential to move is Newmont Mining Corp. (NEM). Other large gold mining companies like ABX, GG, & AU are down 8-12% on average from their most recent highs. Gold fund GLD, itself is down over 5%. NEM, on the otherhand, hit a new intraday high last Friday of $63.38 and is down only 4% from this price at the moment. I do not know why NEM has shown such relative strength to not only price of gold, but also all other gold mining companies.
- My trading idea is that NEM stock price will catch up to other gold stocks' performance so I could consider a few strategies. 1) buy Gold miner fund GDX and sell NEM in stock of equal transaction amount as a long/short trade; 2) Buy NEM 3 August 62.5 straddle & sell 4 GDX 51 straddle, or 3) Buy Aug 60.0/55.0 put spread for $1.54 or less if you are short-term bearish on Gold prices like I am. I am recommending strategy #3.

Thursday, July 8, 2010

SPY, TBT, TLT & Double-Dip Recession Fears.

-The overall stock market rebounded strongly yesterday. This could simply be a technical rebound from way oversold levels. Fears of a double-dip recession (combination from fears of Chinese economic hardlanding, European sovereign debt default, & U.S. economic slowdown from weak housing, weak job market, & BP oil spill) have dominated the capital markets for the past several weeks. The decline in stock prices and rise in bond prices have reflected this.
-SPY (S&P Depository Receipts) is an ETF that mirrors the S&P500 index on a 1/10 scale. TLT (iShares Lehman 20+ Year Treasury Bond) is an ETF that effectively mirrors the price & yield performance of the Barclays Capital 20+ Year U.S. Treasury Bond index because the ETF holds actual treasury bonds. TBT (UltraShort Lehman 20+ Treasury ProShares) is an ETF that should have similar daily return characteristics as twice or 200% the inverse of the daily performance of the Barclays Capital 20+ Year U.S. Treasury Bond index.
-Simply put, double-dip recession fears has caused money to come out of stocks and into bonds making the SPY fall, TLT rise, and TBT fall (remember, inverse direction of bond prices). I have drawn the established trend lines in the charts of all three. Technically speaking, as long as prices in SPY, TLT, & TBT move within the established trends, I am gonna assume double-dip recession fears maintain its grip on the markets. But if prices break out of this trend, I would look to put on trade following the breakout. Personally, I believe the bond market has priced in the possibility of a double-dip recession more so than the stock markets. If double-dip fears subside, betting on a fall of TLT or rise of TBT would be a good bet.
-Currently, resistance levels on SPY are 107.5 & 110.0, in TLT 98.80 & 95.0 and in TBT 37.60 & 42.50.

Tuesday, July 6, 2010

Gold Looks Vulnerable, bearish on GLD

- Gold prices, as represented by SPDR Gold Shares (GLD), looks as though it has topped for the short-term. The reverse relationship of GLD rising while overall markets falling seems to have broken down on 7/1. Although, GLD is down 1.86 to 116.64 while SPY is up 1.72 to 103.92, I would expect GLD to keep falling despite what overall market does.

- The P&F Trend indicators has changed to -1, and Estimated Future Volatility has been rising. I also looked at the weekly chart on GLD from stockscharts http://stockcharts.com/h-sc/ui?s=GLD&p=W&b=5&g=0&id=p88660858515 and I see MACD divergence, where GLD prices hit new highs last month, but the MACD indicator failed to do so & MACD has crossed below it's moving average last week.

- August options on GLD are cheap with implied volatility at 22, while my EFV is at 27.25 as of Friday's close. I expect GLD to decline to test its MA support around 114.5 - 115.25, and fall at a quicker pace should this support area fail. First price target is 105 within the next 6 weeks.

-I recommend buying the August 115/105 put spread for $2.13 or better, GLD is now $116.70.