Hedging Options

Alive

2006-04-04T15:30:00.000-07:00

Yes, after a 7 month hiatus I am alive. I, basically, stopped trading for that time, but have started again. The chart above is of IBM. I'm long a bunch of the April 85 calls.

This market is kind of weird right here so i don't know what to make of it. It wouldn't surprise me if we get some sort of blow off rally this month and then hit summer doldrums. You know the whole sell in May thing.

AMZN

2005-08-22T14:38:00.000-07:00

The internet stocks were very week today, namely EBAY, YHOO and to a lesser extent GOOG. However, AMZN was able to finish the day in positive territory. I was a bit perturbed to see the stock was down badly at one point after I had waken up from a nap, but it came back. I'm leaning long in the stock right here. The averages, though, don't seem to want to go any where.

TXN

2005-08-15T11:41:00.000-07:00

Every time I've tried to turn my TXN position into a front spread, the thing has run away from. It kind of pisses me off.

2005-08-14T17:29:00.000-07:00

It's kind of hard to tell, but AMZN seems to have brokern a support level of 44.5 if you could even call it one. I covered a ten lot of calls on Friday which leaves me a little long coming into Monday.

2005-08-14T17:07:00.000-07:00

A very unimpressive day was turned in by TXN. It went from a new closing high to nearly a point selloff. I guess the downgrade of the chip sector by the GS analyst spooked investors. The stock was heavy all day with some large sellers out there. I dumped all of my long deltas and few extra. The stock looks to continue working lower this week. It may breech its recent lows.

2005-08-11T19:45:00.000-07:00

Here's the EOD position and P&L. Notice I put on a 1x3 in Dell for earnings, that's gonna cause a little pain tomorrow.

Dell

2005-08-10T19:10:00.000-07:00

I'm looking at Dell tonight for possibly an earnings trade tomorrow. The implied volatilities are looking advantageous with Aug in the mid to high 30's and Sep in the low 20's. Also, the earnings may come in strong so I'm looking at something that may try and capture a pop higher on Friday. Right now, a Aug 40/Sep 42 2x5 ratio spread looks good. There is minimal downside with the possibility of a homerun on 10% move higher. IVs look to implode to less than 20.

2005-08-10T17:42:00.000-07:00

Here is end of day P&L and position. I sold a 15 lot of the AMZN 42 calls. I was long deltas and needed to hedge them. Otherwise, I didn't do anything else as I went to the Dodger game last night and stayed at friend's house in L.A.

2005-08-09T07:01:00.000-07:00

The early morning P&L demonstrate the danger of soft deltas. I came in this morning long about 1000 deltas in AMZN. However, with the stock up .60, my profit so far this morning is only $20.

AMZN

2005-08-08T13:39:00.000-07:00

You can see my position in AMZN immediately below this post. It took a hell of a lot of pain to get the position looking the way it is right now. Basically, my risk profile looks like a butterfly with a few extra calls to the upside to give it curvature. Today, I bought in a 20 lot of calls as the stock was rippin on an overall down day. It probably should have been half that number as it leans me a little too long. I needed to cover some short deltas as I'm fairly short gamma right here and I want to trade this tight. If the market can stage a rally right here though this should payoff.

My logic for the position is that I wanted to be short premium for the Aug expiration. This allows for me to control my risk, but yet participate in a potentially slow couple of weeks.

2005-08-08T13:30:00.000-07:00

Here is my position at the close of today. My trades for the day were to scalp 2000 of TXN for .10, sell 10 of SYMC 22 puts and buy 20 of AMZN 45 calls for 1.35.

Alive

2005-08-08T11:03:00.000-07:00

Well, after a horrendous week and a half, I'm sill going. The AMZN almost blew out the account. Everytime I tried to adjust the position or cover, the stock ran away from me and I basically got fucked every time. After a lot of bloddletting, all three of my main positions are exactly where I want them to be. That is they are very tradeable and don't have that much risk one way or another. Theoretically, it should be possible to have on any position and just adjust it incrementally with no loss. However, I know my trading style is more inclined to working with certain types of positions. My positions are all just one small trade away from being flat. This leave any potential loss small while leaving an opportunity to make money going forward. I will write each up today.

SYMC

2005-07-29T11:30:00.000-07:00

For as bad as the AMZN debacle has been, I'm actually really happy with my trading. SYMC is a perfect example. I built my model, developed a position which I tested in it and did exactly what it told me I should do. My estimations of IV post earnings have been good. As a result, each of my earnings plays with the exception of AMZN has been profitable. SYMC has made exactly the amount of money I thought it would. In addition, I'm able to trade stock and close down positions for a profit afterwards.

TXN

2005-07-28T12:47:00.000-07:00

I never posted the results of the TXN trade. It turned out pretty well considering I was short twice as many 32 as I wanted to be. I covered the extra ones for only a .05 cent loss. Right now, I'm long gamma afterbuying back in the remainder of that line. I've scalped some stock small for some profit. I probably didn't sell enough stock the other however as the little selloff in the stock caused a small loss yesterday.

AMZN. SYMC

2005-07-28T12:20:00.000-07:00

Well, I kept missing opportunities to cover my exposure and the stock hasn't really downticked. Finally this afternoon, I covered my remaining short deltas. Now, I'm long premium/gamma. This is precisely the type of situation that I like to trade it. Something has changed in the stock and I expect a lot more volatility.

I put on an earnings play in SYMC. I bought 50 of the Oct 25 calls, 20 of the Oct 22 puts, sold 10 of the Aug 22 calls, ten of the 22 puts and sill sell 34 of the 25 calls. This position should be profitable over a wide range of stock prices. I anticipate a fall of Aug IV from 40 to 30 and a 2 point drop in OCT, 34 to 32. I couldn't really find a good position until I raised the IV post earnings from 30 to 32. However, I think this number is probably more reasonable.

Edit: I sold 40 of the Aug 25 calls, I made sure I cancelled my outstanding order this time.

AMZN

2005-07-27T11:42:00.000-07:00

I would be lying if I said I wasn't pretty fuckin pissed off at that company right now. Could it have killed them to wait until 1:03.

AMZN

2005-07-26T13:22:00.000-07:00

Well, Amazon released their earnings before the option market closed. I was legged out on my earnings play and had a loss on the day. Once again though, I'm short extra option that I didn't want to be. The rise took out some open orders that I had out far away from the market. The stock was very weak into the close so I didn't think much of it. However, I'm fine and still profitable up to 41. At 42, it starts to lose money.

Cover

2005-07-26T06:40:00.000-07:00

I covered the fuck up this morning for only .10 loss. I bought an additional 22 of theose Aug 32 calls as well. Sold short 500 32.15.

AMZN

2005-07-25T21:01:00.000-07:00

Amazon really looks good for tomorrow. The front month is at a 42 vol while Oct is about a 35. My target vol implosion is 28 for Aug and 30 for Sep. I'll have to run a lot more tests, but right now an ideal position would be to sell 1 Aug atm straddle, buy two Sep 35/37 strangles and sell 1 Aug 32/42 strangles. There is nice profit between 35 and 40, but never goes negative at extremes beyond those points.

MERQ

2005-07-25T20:49:00.000-07:00

It doesn't look like there is going to be an earnings play in this stock. The company has already lowered their guidance for the quarter a few weeks ago. I may look at selling the time spread. How they guide for the future may move the stock. This is something I'll have to do some research tonight on. As far as IVs go, they look to be at 30 across the board with a relatively flat skew.

Also, I don't like to hope on stocks, but if this TXN can come down a little from where it traded after hours I'll be in good shape. It turns into a loss exactly right here at 32.30, but it is even more profitable than without the mess up at 31.5.

First Fuck-up

2005-07-25T14:44:00.000-07:00

Well, I just realized that the software crash at the end of the day just cost me money. An order I had out there and tried to cancel was filled and TXN is up 1.5 afterhours. That's gonna hurt, bye bye profit.

Earnings

2005-07-25T13:44:00.000-07:00

TXN earnings look to be pretty good. I'm in good shape if it can pop a point or two. NFLX easily beat their estimates. The stocks up more than 2 points after hours. It will probably cause a small loss in the morning.

Software

2005-07-25T13:06:00.000-07:00

Not a very impressive day on the software front. First off, Kawabunga seems to want to use a date two months into the future to calculate theoreticals. So, I don't really have a good feel for what my deltas are. Although, I modeled my position on a P&L basis and it looks good for a wide range of prices. Second, the network went down at the end of the day. I was unable to buy that last 10 lot of puts I wanted to.

NFLX has earnings coming out after the close. I put on a Aug 15/17/20 put fly.

TXN

2005-07-25T12:15:00.000-07:00

I finally got the new account up an running. My game plan was a little altered as Sep vol popped a few points today. I shifted to Oct to pick up some long premium. My position going into earnings looks like this:

-20 Aug 30c
-15 Aug 30p
-30 Aug 32.5c
20 Sep 30p
20 Oct 30c
30 Oct 32.5c

The Oct was the cheapest of the front three months and may not come in at all giving the P&L an added bonus. Up or down two points, the position makes from $100 to $1,000. There is a risk of a loss if the stock gaps down 3 points. I may pick up an extra 10 lot of Oct puts, probably the 27.5.

Programming

2005-07-24T20:08:00.000-07:00

I think rather than randomly generating 10,000 positions and testing to see which one is profitable, it might be better to generate a file of realistic positions and use that. There are some that look fantastic P&L wise, but all that would be gone from slippage alone. Besides the fact, it takes about 15 minutes to run, definitely not something I could run on the fly.

Edit: I take this back somewhat, this is producing interesting results. I just needed to make a few tweeks.

2005-07-24T18:30:00.000-07:00

To continue from the previous post, this the P&L that I talked about yesterday. In this position, I sold 1 Aug atm straddles, sold 1 Aug 27/32 strangle and bought 2 Sep atm straddles. The P&L seems a little more smoother given stock prices that I find realistic post earnings. At the very least, I got more of my Matlab program done to make this analysis much easier. Now, all I have to do is write function that will search on its own for the most profitable position given what I expect IVs to be the next day.

2005-07-24T18:26:00.000-07:00

This is what the P&L would look like in TXN if I sold 1 aug atm straddle, sold 1 Aug 32 call and bought 2 Sep 27/32 strangles. It doesn't look too bad unless the stock rallies above 32.

TXN

2005-07-23T18:22:00.000-07:00

TXN is presenting a bit of a challenge to model a profitable position, however I think I worked it out. The typical plan of buy two next month out strangles and selling 1 atm front month straddle doesn't quite work. This is partially do to the fact strikes are spread far apart percentage wise and the low volatility. Right now the Aug has a 30 IV while Sep is 25. I'm modelling that the Aug will drop to 22 and Sep to 23 post earnings. It looks like the best play is to sell the ATM straddle and the 27/32 strangle in the front month and hedge this by buying 2 atm Sep straddles. This works unless there is an extremely large move, like 20%.

MERQ

2005-07-23T17:56:00.000-07:00

MERQ reports earnings next week. I'm looking at Ivolatility.com and don't see anything yet that looks like a promising position. The IV is pretty flat hovering around 30 for both Aug and Sep. I may be tempted to just buy the Sep wings on Monday and hope for a vol explosion in the front month. They had already come out and said that they weren't going to meet estimates. However, this stock can move so a 30 vol maybe cheap right here never the less.

Market Models

2005-07-23T17:52:00.000-07:00

I wanted to highly recommend a book I ordered in May, but have only recently began to work through. Carol Alexander's Market Models covers a ton info on various ways to analyze volatility. It is more applied than you would find in most textbooks using real world problems to help explain stuff.

EOD

2005-07-21T15:28:00.000-07:00

No trading today as I wait for access to my new account. There is a possibility that I may be able to trade tomorrow as the money will be in the account. Of course, a stumbling block to executing anything is not having any software to use. More than likley it will be Monday before I trade anything. I would have had a nice week with my earnings plays, but you can't look at it that way. My EBAY position did blow up on me though.

Look this weekend for a preview of MERQ, TXN and MERQ. I haven't looked at them yet, but I imagine that the earnings play will be applicabale.

Also, I took a demo of Tradespeed again today. They have some nice features in their platform, though it is missing a few thing I would like. They seem to have put a lot of effort in their option analysis component. I notice their are some searches coming into this blog looking for some info on it. I'll post screenshots in a few weeks when I start using it. In the mean time, I'll be using Kawabunga.

Small Trades

2005-07-20T07:24:00.000-07:00

I covered the short portion of the YHOO diagonal this morning and am offering out the long. In EBAY, I'm repeating the same position, short 5 of the Aug 35 calls and long 5 of the Sep 37.5 calls for a .50 credit.

YHOO

2005-07-20T07:09:00.000-07:00

It doesn't intuitive that IVs could come in even though the stock has dopped four points from yesterday, yet they did. I will admit that even though I have traded earnings play on the floor and now off, the process can make me a little unsettled. It almost seems like a matter of faith. Anyways, my back of the envelope estimation is that my position would have brought in a buck. Times that by twenty and you get about 2k. That would have been a nice day's work for little risk.

QCOM

2005-07-19T21:31:00.000-07:00

Qualcomm is the last stock I'm going to look at tomorrow to possibly trade. The front month looks to be at around a 25 IV and Sep about 22. Part of the problem with some of these trades is that they are near their lows for IV with QCOM being no different. This makes it difficult to anticipate what kind of drop the front month may have. Putting on the now standard earnings play, I would need a drop to the lowest levels of IV QCOM has seen. However, earnings not withstanding, the very position looks attractive to me. So, earnings or not, I would still put on the same position. Wings are just so cheap right now. I just wish that the pub I go to for lunch had wings specials like this. If the account isn't ready tomorrow, I think I'll still paper trade these positions.

FFIV

2005-07-19T20:55:00.000-07:00

FFIV is a little more interesting as the IVs are relatively flat across months. There appears to be no pre-earnings pop. I'm think about selling the time spread here. The floor in IV seems to be around 40 with IV just a point or two above that. This stock can move and could be profitable with just a point either way if IVs drop a point or two as well. Maybe adding in long 2 Oct 55 calls and selling 1 of the Aug 45s to provide a kicker might just make this work. Oh, it looks even better if I sell a Aug 55. Don't forget that I can trade stock now and this won't begin to hurt until it moves up 10%.

Ebay

2005-07-19T20:32:00.000-07:00

I'm running my earning play through Matlab tonight for EBAY which reports earnings tomorrow. It doesn't look so hot unless I short some naked calls to the upside. The vol differential between Aug and Sep seems to be about 3 points. By eyeball estimation, it doesn't appear to be enough which is confirmed by running it through a various scenarios. The problem is that it is hard to justify Aug dropping much below a 30 IV. If the account is given a go in the morning, and that is a big if, I'll rerun it later in the day to see if there is a late day pop in vol. I'm to check of FFIV.

GRRRRRR!!!!!!

2005-07-19T14:11:00.000-07:00

Well, YHOO is down 4 points from the close after their earnings don't impress. I would have had the perfect position on for where the stock is trading right now. My plan was to sell the Aug 37 straddle 1 time, buy 2 of the Sep 35/40 strangle and sell 1 of the Aug 40 call. My plan was to do this 20 times which would have brought in $2500 in morning most likely if the vol came in as planned. Oh well, I should have wired the money instead of sending a check. At least I have a 5 times diagonal which will bring a few hundred dollars.

The above position is the basic template that I have found works for earnings. It is based on the front month trading at a premium to the back months. The short front month vol should come in more than the back month by a difference that the position is profitable.

No Trading Today

2005-07-19T12:01:00.000-07:00

My funds still have yet to make it into my new account so no trading today. My 5 lot spread in my IB account has a small loss as YHOO rallies before earnings.

Scenario Testing

2005-07-18T23:37:00.000-07:00

When my computer crashed last week, I lost all of my Matlab files that I had written over the last few months. There were some very practical code in there such as a trading calender that I had written to calculate the total number of days the markets open between expiration. There was also some inefficient code as well. It is for the best that I we wrote much it anyways and that includes what I wrote to test scenarios. The previous one wasn't very efficient and I had added a bynch of useless stuff.

Tonight, I rewrote a basic scenario tester to test earnings plays. It showed the same conlcusion I came to last April. That is you need both sides to make a consistent profit. In other words, you need a position in both calls and puts or up and down. Otherwise, the position is just gambling which is fine, but not part of my core strategy.

I just got through looking at GOOG and it looks like there can be a decent trade put on for earnings. The front month looks to at around a 43.5 IV while Sep is at 39. I figure a target IV for post-earnings is 35 in the front and 37 in Sep. with possibly 39 in both. Obviously, the worse case is something along the lines of unchanged or even an increase in front month IV. A position being profitable is predicated on front month IV opening at or below the Sep. However, Sep can't fall more than a few points.

The ideal position is a ration of selling 1 front month atm and buy 2 otm Sep, espically on the put side. I tested this with a 2x3 on the upside. The result look good and should be profitable with the IVs mentioned above. I'm going to test YHOO although it doesn't look like I'll be able to trade it in the new account tommorrow.

Small Trade

2005-07-18T15:05:00.000-07:00

I put on a small trade in my IB account. It consists of the Aug/Sep 37.5/40 diaganol, 5 times. Other than that, I'm waiting for my account at my new firm to get activated.

Edge

2005-07-15T17:22:00.000-07:00

I think my psychiatrist for ADD actually likes to see me because I'm an easy person to deal with. I just want to be able to keep my apartment clean and get my homework done. Some of the stuff I hear in his office is far worse than anything I'll ever have to deal with. With trading, he has turned into a coach of sorts. Now, he has no clue about what I actually do in the market, but he can push my buttons in a lot of other ways that help me to focus.

I bring this up because the discussion of edge came up the other day when I saw him, The whole discuussion originated around why do I do stupid things. More to the point, is there anything I do well? What's my edge? The answer to that question is that I trade volatility well. I recognise various levels of it and can see ways to take advantage of opportunities. It's when my trading deviates from this that I run into problems. It's not that I can't trade other things, but this where I do my best. The TXN trade today is a good example. Sure, I made money on it, but should I look to do more trades like it? I'm not really sure. It was an obvious trade, but how do you tell those from the gambling ones and the obvious easy money? The stock did close somewhat higher than where I closed it out.

I have to ask myself though "should I have made the trade." The answer is probably yes because it was successful. All I have to now is replicate the winners and ditch the losers. The good thing is that I know the difference, but resisting the desire to gamble is tough.

Even though he doesn't know much of the mechanics of what I trade, having the coach there is good. I feel more confident that I will stick to what my edge is and avoid those dissappointing trades. He says that with the meds and coaching, I'm more or less rewiring my brain. I guess I can sense that to an extent.

I thought of writing this because of this post.

Talk About Bitter

2005-07-15T12:47:00.000-07:00

How Bitter does Barry Ritholtz sound in today's RM.com? I spent the mid to late nineties doing exactly what he does in the article, finding a few data points to reinforce my world view. I think I'll write something longer over the weekend about why you should avoid doing so and about how wrong he is overall. In the mean time, I'm going to celebrate a decent week and the bull market by grabbing lunch and a beer.

Low

2005-07-15T09:30:00.000-07:00

It doesn't look like there is going to be much to do out there for the rest of the day. I thought going over a trade I discussed with somebody to help fill the boredom. As the title suggest, the stock was Lowes.

Long premium/volatility trading can be difficult. You basically have to buy vol cheaper than what the stock ends up trading at. Volatility is a market unto itself and while sometimes you find opportunities like I did a few weeks ago in CSCO, typically it reflects the volatility of the stock. Therefore the trick is to either trade deltas as part of the strategy, which I have been doing, or anticipate that the vol of the underlying will change.

The question remains how do you know that the vol will change? One of the best places to look is for stocks that are breaking out above resistance. This is what happened with LOW the other day. It had broken out of its range and had an IV at the low end of historical average, prime candidate for a backspread if the ever was one. We went over many alternatives, but the ones that stood out were the Aug 60/65 1x5 and the Aug 60, Oct 70 1x8. The Aug 60s calls were 1.80/1.90, the Aug 65s .25/.30 and the Oct 70s .15/.20. Note, both of these positions are for a net credit just in case it broke back down.

I thought both of these were interesting, but ultimately decided that the latter of the two was better. My fear was that since this a retailer and has lower vol than I normally trade that the stock could slowly inch up to the long strike. This turns out to have been wrong as the stock rallied more than three points from where this was discussed. Also too, I'm generally wary of buying front month otm call premium as a stock is moving up. Vol typically comes and doesn't expand. Remember, this is a play that the stock vol will be greater than what you bought. Also, these aren't positions you hedge delta neutral everyday. A little patience is in order as you wait for the position to work itself out.

The big difference between the two is that the Aug/Oct gives you more room to maneuver. As the stock rallies, you have more bullets with which to adjust or take advantage of changing events. That is you could sell some the Aug 65s to collect the premium. Also too, you have two extra months of a very cheap wing that you could put on more positions after Aug come off. Wings are very cheap right now partially because of summer but also because they aren't in demand. This can be repeated for the next two months, each time collecting front month premium.

I would have loved to have to put this position on, but like I said previously I'm moving to a new firm next week. There may still be some opportunity in the Aug 65/Oct 70 1x2. I'll have to wait and see when I'm up and running.

The Week Ahead

2005-07-15T07:45:00.000-07:00

First off, I covered my TXN short, but mostly I want to talk about the next few weeks. I move to my firm next week. For those of you who don't know, I'm joining an LLC so as to get market maker haircut. This is when your required margin is based on the risk in a position rather than some set percentage of strike or differences between them. This way I'll be able to trade more stock to hedge my risk. In addition, I'll be able to put on more positions in a broader range of stocks. A limiting factor right now is that once I put on a position I'm married to it until it works itself out or I pay alot of money to take it off. Next week, I can just close down my risk by making a trade or two to reduce my haircut to a nominal amount then I can move on.

So, next week earnings kicks into high gear. My plan is going to be similar to how I traded the last earnings cycle, buy back month wings and sell front month premium. I was originally doing this trade on one side but wasn't getting the results I wanting. It was until doing both side that it started to look better. In addition, I can trade stock after hours so as to limit my gap risk the next day. My positions will be a little bigger with quite possibly more naked exposure. I have a lot of programming to do over the weekend. This has been put on hold lately as I had been trading more directly, but I'm returning to the basics and will trade volatility.

Morning

2005-07-15T06:52:00.000-07:00

I shorted some TXN calls this morning after the stock opened down this morning. The stock had been acting a little heavy yesterday although it was still up.

The Industrial Production and Capacity Utilization number came out this morning. I think I'm going to have to follow this a little more closely by setting up my own running spreedsheat of the numbers. It seems to be a mixed bag at this point with the semi number seemingly lower than I remember. The PPI number this morning was a lower than expected. Some people have a hard time believing that inflation is contained. Some sector's prices rise others go down.

2005-07-14T14:29:00.000-07:00

While TXN managed to close higher on the day, it was only because of the late day rally. I got stopped out on my calls when it broke below 30.70 briefly. The stocked felt heavy.

Today's Trades

2005-07-14T11:50:00.000-07:00

I covered the rest of my Merq calls this morning. The stock is having a nice rebound rally and probably won't reverse. I stopped out of my TXN by selling out the calls.

Being options trader is little different than most market participants. The range of stocks that I can effectively trade is limited. Today, I would really have no clue that breadth is so poor. All the stocks on my page are green with the exception of CSCO. It's not that I couldn't venture out and trade smaller stocks, but I'm limited by poor liquidity and the wider bid/ask spreads that occur more frequently in them.

Midday

2005-07-14T09:15:00.000-07:00

CSCO was rejected at the 20 dollar level at the open and actually sold off somewhat hard. It may mount another challenge, but it doesn't look like it is likely to succeed. On a positive note, it looks like my computer crash wasn't so bad. It took some effort, but I was finally able to get it up and running. I originally thought there was an unsolvable hardware conflict, but it looks like all I needed to do was reformat the hard drive.

MERQ

2005-07-13T22:48:00.000-07:00

I forgot to mention today that when MERQ broke through 38 I covered 15 of my calls for .80. I think I may have to cover the balance in the morning.

Afterhours

2005-07-13T14:27:00.000-07:00

The AMD news will probably light a fire under the semi stocks in the morning. The industry must be good shape if that company can make money afterall. TXN is trading up in afterhours and CSCO is popping its ahead above 20. It all boils down to the CPI number tommorrow. I expect a weak showing by inflation and definitely be surpise if it exceeds estimate. I'm a seller of inflation right here.

Almost EOD

2005-07-13T12:50:00.000-07:00

It's looking tough for CSCO to break through 20 as there are about 150,000 open interest in the calls. That's roughly 7.5 million share that need to be sold. TXN has nicely consolodated its recent gains and maybe headed higher. The inflation numbers over the next few days look to be important. They maybe the catalyst for the S&P 500 to break out. I'm continuing to hold to my game plan and will reevaluate tommorrow.

Computer Crash

2005-07-13T08:25:00.000-07:00

Well, it looks like my desktop is dead. I think I'll do a big upgrade rather than try and figure out what's wrong. I'm interested in one of thos AMD X2s. It should help my productivity as I'm a huge multi-tasker. Also, I'll need a new video card and motherboard, but other than that I should be fine with the other innards.

As far as the market goes, CSCO continues to flirt with 20 while TXN consolidates above 30. I could use a nice rally to help pay my new pc. One other thing, every trader needs some sort of backup or at least a plan. I have a laptop that I'm writing this on plus I have the school's computer lab. I have had my internet go down and have run up to campus to catch the last few hours of trading.

EOD

2005-07-12T13:03:00.000-07:00

Overall not a bad day, though the close was a bit disappointing. CSCO is poised to strike at the 20 strike if it's so inclined. However, there is a larger open interest there which may preclude it from doing so. I would imagine a large number of thos calls are held by marketmakers who sell tons of stock each time it approaches it.

In TXN, it was as good a day as one would expect given the recent run up in price. It close .06 lower. Tommorrow is evaluation day on bothe these stocks. To continue to hold my positions, I want to see good action.

CSCO

2005-07-12T10:35:00.000-07:00

Looks like Alcatel is going to bail out Cramer. According to RM.Com's Cody willard, they reported a strong quarter with good demand. CSCO is a few pennies short of the Jimmy's call. In my other positions, I took a small profit in TXN in this morning. Also, MERQ is right at my sweet spot for my butterfly.

2005-07-11T15:10:00.000-07:00

TXN moved above 30 today on some really nice volume. It will probably take a breather the next couple of days, but the SPX is right at resistance and may just drive it higher if it breaks out. Also, the SOX had been lagging the SMH in breaking out. Today, it played catch up and is also poised right at resistance. This could be a very wild week.

RM.Com

2005-07-11T08:43:00.000-07:00

My subscription to RealMoney.Com is up for renewel today. I have decided I will only renew it if CSCO is above by expiration the price when Cramer called the big tech rally. That would be around 19.80. Although, I should note that I had the position on before he made the call.

2005-07-11T08:40:00.000-07:00

This about as powerfull a rally as you'll get. We had a nice gap up open after seemingly breaking out on Friday. This bodes well for a continuation. I would be really excited if the SPX can breakout as well. That is a major stumbling block and will force me to keep my stops close.

Expiration Week Game Plan

2005-07-10T20:37:00.000-07:00

Earlier I had mentioned that we could see a blowoff rally this week, it's important to note that these can be quite wild at times. I'm thinking back to some of the summer rallies during the bull market in the 90's. These seemed quite irrational at times. I specifically remember some monster moves in MSFT in the run up to their earnings announcement. What may hold us back if this is a blowoff rally is that many of these tech companies don't report until after this week.

One company that does report is IBM. The 80 calls have decent open interest of 50,000. If we move through that strike, people could come back in to cover their short calls shooting the stock even higher. I'm not sure what the expectations are for the companies earnings although I may start to trade it again after I move. Last April, if you recall, they reported a shortfall and caused the market to drop.

If we do move higher, I'll wait till Wednesday to hedge. My decision to be a little patient is based on the magnitude of these past rallies. Here's the game plan for the week: In TXN, I'll be patient and see if it can rally through 30. If it does, I'll take some small profits here and there, but I'll use a trailing stop for the bulk of it. In CSCO, I'll take off the hedge that wasn't and see if we can get a rally. My calls are worthless right here anyways and I was trying to game it by keeping my short call. The stock did look weak, but the market had other ideas. If the Naz is breaking out it will participate and maybe I can salvage something. In MERQ, I have on a fly. The stock still acted weak even during the rallies last week. As long as it stay betweem 37 and 38, I'll leave it alone. If it breaks either side, I'll cover half of that side.

That's the game plan. It is important that I stick to this and not get sidetracked by the noise. I'll reevaluate on an ongoing basis and maybe add a few plays if warranted.

2005-07-10T18:43:00.000-07:00

The Kospi continues to push higher. It seems we are in some sort of global rally mode right now.

2005-07-10T17:00:00.000-07:00

This SMH chart is impressive. It looks like it just hit a 52 week high on Friday.

2005-07-10T16:57:00.000-07:00

The QQQQ chart is less impressive the Nasdaq. It has some work to do to get caught up. I guess this bodes poorly for the big cap tech names. MSFT and CSCO are still below the Cramer rally call. Although I'm tempted to pick upa few of the former's calls.

2005-07-10T16:17:00.000-07:00

I really hate Sunday nights, but I do get a lot work done in preparation for the week ahead. The above chart is, obviously, the NASDAQ. It will be interesting if this is a real breakout. This week could be explosive as we have an expiration this Friday. Of course, many options positions were put on lower or when the May rally petered out. A move higher from here could cause people to come in to cover those and thuis drive us even higher. I had been anticipating this possible action, but I got caught up in the crap of the last month.

ADD

2005-07-09T16:09:00.000-07:00

I think I took too much of my ADD drugs today because I feel especially focused and have a desire to work. I suppose I should reflect on this week and what right and wrong from more than just a P&L perspective.

Thinking back on it, why did I lose money exactly? I trace back to a few things. One is that I let the Cramer pop get to me. Rather, I let a bunch of profits go and was pissed about it. That led me to make some poor decisions as I tried to over compensate. Second, I let go of some of my hedges rather than just stepping back and closing down positions. A golden rule should be that when in doubt close down. Instead, I allowed myself to get whipsawed in hedging of CSCO. If I find myself doing the same thing I should just give up and move on. Now the terrorist attacks kind of messed up the whole trade, but I still should have been more prudent.

I think what it all boils down to is that I need to get back to what I do best, trade volatility. This means that all positions should be properly hedged. When I do this, I rarely lose money. Too an extent, it is irrational for me to do otherwise for precisely this reason. Why should I allow myself to get whipsawed trying to capture .20 moves when I have a plan that will make money. Up until the last week, I made money this month without even trying. I should replicate what works and avoid what has consistently lost me money.

In a not unrelated item, I drank 3 times this week. Once was the fourth, the other was Thursday and Friday. I think this should be limited to a once a week relaxation time off. I made a poor decision on Tuesday morning after sleeping for about 1 hour the night before. In addition, I legged myself into a disaster yesterday. I don't need alcohol in my system from the previous night when trading.

Ultimately, I sense myself drifting back into a familiar pattern. I start off trading strong. I effortlessly make money, then the fade starts to happen. Normally, I would quit right know and take my profits on a little vacation. Rather than do that I think I'm going to try and fight through this thing. One of these days I have to confront what drives some of my self-destructive trading patterns. I think the ADD drugs have helped a little. I'm not ignoring my problem. I'm not sleeping in or just not dealing. However, I have to find a way to avoid those trades. I know I'm making them when I do, but what the hell goes through my mind I have no idea.

Clarification

2005-07-09T15:49:00.000-07:00

Yesterday, I posted that I suck without explaining what happened. I was going to leg out of my TXN 25/27 call spread. I had bought some of the 30s to help me with this as they also seemed cheap. I then proceeded to sell out of my 27 calls, but before I could buy back in the 25s the market rallied huge. I was somewhat pissed over the whole thing so I started drinking beer as soon as the clock struck noon.

I'm now the proud owner of 60 of the 30 calls. Maybe we'll continue to rally as the market made a new high for the NASDAQ. My CSCO hedge hurt me a little as the 20 calls aren't very much help. I knew it when I sold the 17s, but I was bearish on the stock. I didn't cover my hedge.

My MERQ position is working beautifully as the stock is right at my short strike. The possition hos sort of morphed into a butterfly. It will be white knuckles this week watching this thing bounce around.

To round up the week, it was shitty.

I Suck

2005-07-08T13:14:00.000-07:00

That's really all I have to say about today. I legged my self on something just as the market made a large leg up.

Thursday

2005-07-07T12:32:00.000-07:00

I scalped a few NQ futures today for a couple points of profit. Also, I put back out some of CSCO short calls I covered yesterday. I did this at today's highs so it wasn't a Castanza moment, to borrow a phrase from QuantTrader. We'll see if it rallies from here. Also, I sold some of th MERQ 37 puts for .70. These were taken by a large order that lifted the bid. I'm not sure if it was a cover, whether someone is buying puts and buy stock or they are just getting short. The stock hasn't participated in the rally above even on the day. There seems to be continued unloading of stock.

Also, One reason I sold those CSCO calls back out was the warning by IDTI. Appearantly, CSCO does a lot of business with them.

2005-07-06T11:35:00.000-07:00

I'm sure most you already know this, but it looks as if this a new high. I covered my CSCO hedge this morning. The stock has bounced along with JNPR.

2005-07-05T17:58:00.000-07:00

CSCO closed lower on the day which was one of my few bright spots. Of course, TXN was up nearly $1 today, a day after I sold out my long deltas to get neutral. MERQ was down small overall. I bought back in my short 40 calls and sold the 37.5 calls. In addition, I sold a few of the 37 put spreads.

2005-07-05T04:49:00.000-07:00

MERQ warned this morning. It looks like the market did a pretty good job anticipating this.

2005-07-01T10:06:00.000-07:00

I will add even more. This chart bugged this morning and when it broke 28, that was my stop area.

2005-07-01T10:01:00.000-07:00

I should add that a few things bother me. One, is that the Fed hasn't signaled that they may be pausing any time soon. Another is that JNPR has been very week. This bodes poorly for CSCO obviously. Lastly, PLMO earnings seemed good yet the stock didn't hold the gap and is now down. The tone isn't there for a rally so I'm playing safe.

Delta Neutral

2005-07-01T09:57:00.000-07:00

In both CSCO and TXN, I sold the itm calls to get both positions to delta neutral. I have no idea where this market is going. I figure its best at this point to not try to game it. If I had been trading this way for the last week, I would have made some nice money. However, that is hindsight and there reasons to think TXN may be moving higher. I have a profit in TXN and a small loss in CSCO.

Yawn

2005-07-01T08:39:00.000-07:00

A fairly quiet morning so far, however the indexes couldn't hold their early gains. I'm somewhat surprised by this as Europe continues to make new highs.

2005-06-30T22:10:00.000-07:00

I always thought there was some sort of correlation between the Nasdaq and employment.

2005-06-30T17:16:00.000-07:00

It looks like the Kospi may be set to breakout above 1000. I can't really tell if it's an all time high or not as Yahoo data only goes back to late 97.

2005-06-30T16:29:00.000-07:00

Despite my earlier cautionary comments on the broad market, I look at this chart and don't really see anything which would make me bearish.

2005-06-30T16:24:00.000-07:00

TXN seems to be coming to some sort of loggerhead right here. A week market may change this but the momentum has been towards the long side and I see no reason to chnage that view at the individual stock level. However, like I said before, this market is very weak right here and the Fed isn't helping.

The Fed

2005-06-30T12:54:00.000-07:00

I think the Fed just killed the possibility of any significant rally going forward. As the saying goes, don't fight the Fed. They seem intent on driving short term interest rates higher. Of course, this raises the possibility of an inverted yield curve which would have very bad implications for the economy and the market. My expectation for inflation are quite low as their policy is much tighter than the 3.25 rate would imply. Money supply growth is minimal and doesn't support a any sort of inflationary environment. I'll look to sell into any rally going forward.

Edit: I posted some further thoughts on this over at T&B on the similarities between now and a decade ago.

Morning Update

2005-06-28T08:42:00.000-07:00

I'm not really doing anything this morning on option side. TXN is strong this morning while CSCO is just keeping pace with the market. The networkers don't appear to want to outperform the market as JNPR is down today. My MERQ position is working nicely as it hovers near unchanged on the day. This is just a bide my time trade until those 40 calls go to a dime or I just hope it doesn't cross the 40 at expiration.

I did this morning make a trade at Tradesports by selling some contracts for the Consumer Confidence number. I sold the 106 and 108s anticipating that oil might have a dampening effect. Like the rest of the market, I was a bit surprised at the 105.8 number. My short contracts expired worthless but it was close. Overall, I would say that unless the Fed decides to kill the economy, we seem to be entering a sweet spot, low inflation going forward with decent growth. Bill Gross was out this morning saying we could be headed towards a recession. There are warning signs, but I don't think we are the yet. The ISM is approaching the 50 level, so we'll probably know more on Friday.

EOD

2005-06-27T18:39:00.000-07:00

Well, it looks like sports trading is better than my option trading. Of course, it helps to be riding a hot team like the Angels. As far as the market goes, both TXN and CSCO were week today. I bought in some more of the CSCO 17 calls.

Digital Options

2005-06-26T08:09:00.000-07:00

As I mentioned in my previous post, I opened an account with Tradesports yesterday. The contracts are more or less digital options, that is they pay off 0 or 100 if conditions are reached. I didn't really intend to bet on baseball when doing this, but rather to place trades on economic numbers and other financial products. However, I won last night and I'll take it.

Tradesports

2005-06-25T12:08:00.000-07:00

It's not that I'm addicted to trading, but I just open a Tradesports account and funded it. I had been meaning to do so for a while, but finanlly got off my ass and did something about it. I've got a few orders out there on the Angels vs. Dodgers game tonight.

2005-06-24T11:57:00.000-07:00

Wow, we've had a nice 300 point DOW move down this week. Nice!

More Thoughts

2005-06-24T11:30:00.000-07:00

As I mentioned earlier, I do have ADD which is why you get multiple posts instead of just one. To conitnue on my stream of thought, I will have to say though that this isn't going according my plan that I thought through in May. My original thought was theat we would rally in May, take a break in June and top out with another rally in July. I would have thought that we would be starting the rally by now, but I guess oil doesn't agree.

I bought in a few of the CSCO July 17 calls a few minutes ago.

2005-06-24T11:24:00.000-07:00

Continuing from the previous post, I can't say I'm too bearish at this point in time. I look at this chart and don't really see us return to the Arpril lows. Of course, I said that last month only to have one of my stocks tank. I think more than anything this is a pullback after failing to crack resistance. The CSCO does perplex me a bit as normally the vol levels that it was trading at and the stock action indicated to me it was breaking out. At least I'm hedge though.

2005-06-24T11:18:00.000-07:00

I get the feeling that oil won't go down until the equity markets start ignoring it. The nice thing about being hedged is that you don't really lose money when the market goes against you. Merq is down nicely which means my backspread is working. Also, TXN was flirting with positive territory this morning. CSCO received some negative news according to Cramer this morning when Selctron said the networking business isn't doing so hot. Ah yes, the Cramer curse!

Lousy Day

2005-06-23T13:03:00.000-07:00

With both TXN and CSCO getting a bump from Cramer in the early, it seemed today would be a good day. However, I was somewhat skeptical when I noticed that the SPX and INDU didn't really rally along with the Nasdaq. In addition, the selloff in GE, as I said earlier, had been mystifying me. I think we can now say that we have seen a long overdo sharp selloff. Although, I'm not sure if this can be construed as bullish or bearish. It seams unlikely that we can rally much from here with oil at $60 a barrel. In the bullish camp is the fact that fundamentals, at this point at least, make the market slightly undervalued.

I really wanted to let my positions run before hedging some more. All the profit from earlier in the day are gone. I still think there is some upside to both TXN and CSCO. We'll just call it the Cramer Curse.

2005-06-23T10:04:00.000-07:00

Here's another reason we're stalled right here, the SPX is right at resitance as well. A rally above this point would take us to a 52 week high.

2005-06-23T07:03:00.000-07:00

Can we rally without GE? The stock's down again this morning along with some news about a restructuring plan. I'm not sure we can. If the Nasdaq is to break out, the broad market should join in.

Vol Implosion

2005-06-22T20:46:00.000-07:00

Quant Trader picked up on my post about the abnormally low IV in CSCO. I had noticed over the weekend while talking to my brother about CSCO that the July premiums seemed somewhat small. I recommended that he put on the position that I have now rather than just sell puts as he normally does.

I left a comment at the end of Quant Trader's post saying how I interpret this to be bullish. This is probably counterintuitive for most people since what we constantly read or hear about is how a low VIX is a signal for possible weakness ahead. However, sometimes rallies are precipitated by vol implosions. The mechanism is in itself a contrarian indicator. People don't anticipate that a stock will rally so they sell calls as part of a covered call position. Or, they buy stock and sell the covered call. You can see this when a lot calls get sold on the bid yet the stock inches up. This is, I believe, what was happening the last few days in CSCO. The last time I saw this happening in CSCO, the stock was at 14.25 on its much higher.

So, this is why the IV can get abnormally low, because there are a ton of call sellers out there. There is no need for marketmakers to step up since people are blindly selling to them. Besides that, the open interest in the July 20 call option is 117,000, they probably have enough of them. So, if it can break through that strike, the stock could run. I interpret the open interest plus the abnormally low IV to be bullish.

Cramer Goes Positive on Tech

2005-06-22T14:18:00.000-07:00

I don't know if this is good or bad, but James Cramer just put up an article saying to buy tech namely CSCO and MSFT:

Enough with the tech complacency already. How do I do it? How do I tell you that the tech rally that's coming is going to be big, bigger than you think, because of some major, major changes that have occurred? How do I wake you up?

I think I do it by changing my mind on a couple of stocks that I have hated, just hated, beyond what may have made sense:

That's right, I'm going positive on Microsoft (MSFT:Nasdaq - commentary - research) and Cisco (CSCO:Nasdaq - commentary - research).

Not because they are necessarily the best. I believe that Intel's (INTC:Nasdaq - commentary - research) better. I believe that Motorola's (MOT:NYSE - commentary - research) better. Heck, you know I believe Lucent's (LU:NYSE - commentary - research) terrific.

But by going out positive on these two laggards, these two cryogenically frozen stocks, I am hoping I can thaw your mind into understanding that we are in for something big in tech, and I need to get you thinking tech as much as you are thinking oil.

And I was dead right on oil.

It kind makes me want to sell my holdings. LOL. However, with my subscription up next month for RealMoney.com, this may be his gift if I renew. I assume that he's talking to people who expect these stocks to outperform. He also mentions in the article TXN which I have a position in. The stock was very strong today barely downticking even when the futures sold off. Also, it did end up closing at a 52 week high, another bullish sign. CSCO has some work to do as 20 is major resistance. In both these stocks, we could see a good two point move from here. For TXN that would be up to about 30 and CSCO would be to 22.

2005-06-22T12:04:00.000-07:00

TXN is set to close at a 52 week high. CSCO needs the Nasdaq to breakout if it's going to rise above resistance at 20. Where is the market going? Frankly, I don't have a clue.

CSCO

2005-06-21T09:21:00.000-07:00

Unbelievably, CSCO atm July 20 calls are at a 15 IV. I just bought another ten lot and sold the 17 calls against them.

Post Expiration Monday

2005-06-20T15:47:00.000-07:00

Well, with Monday and June painfully out of the way, I can now go back to trading the way I should have last month. Volatility is pretty darn low right now. This is an excellent opportunity to load up. Normally, I would be hesitant since we have a holiday this month, however, some vols are just too low. Today, I bought some CSCO the July 20 calls for .20. These aren't out of the money, but rather 20 is huge resistance in the stock. I sold some 17.5c against them.

Also, I augmented some of my TXN July 27c calls. Vol was lower in this stock too today. The stock was up strongly today, so I'm leaning a little long after selling some 25 calls against them.

Back to MERQ, I put on a 1X2. Sold 15 of the 40 calls and bought 34 of 42 calls.

2005-06-17T10:01:00.000-07:00

I don't own a car so the rise in oil prices don't really affect me directly, but man, this thing hasn't stopped going up this week.

Anal Fissure

2005-06-17T09:45:00.000-07:00

Well, the MERQ caused some serious damage and as the title of this posts it hurts. I think the idea of buying calls and selling put spreads to pay it has come and gone. Time to go back to tried and true strategies.

One idea that I've been working on with another trader is to sell the atm straddle in the front month and buy the outer month(or the next month out wings) at a ratio. We've been playing around with this idea for a few days now and it seems to work. I had come up with the idea back during April earnings after not getting the returns I hoped for on trades. I realized that I needed two sides to make it work plus the front month wings were killing me.

The ratio of the spread really depends on what you think is going to happen and one's risk profile. The advantage in this position is that the front month decays a heck of a lot faster than the back month. Also, if you get a large move, you have bullets to sell. These are the kicker that ultimately makes it profitable in wide range. Otherwise, you have a risk hole at the 2 long strikes. However, it opens you up to a loss if it keeps going.

For a trading idea, LEN looks to have an interesting skew with otm calls some 10+ points cheaper in the IVs. I guess there is earnings coming out so the best idea now would be to buy the Aug 70c and sell July 60 on a 3 to 1 ratio. It's a net credit and leaves one with the ability to sell some July 65 c if IVs get pumped some more.

2005-06-13T11:24:00.000-07:00

One gets the feeling that the equity markets aren't liking this rally in oil. It is up over two dollars as I type.

MERQ

2005-06-13T06:42:00.000-07:00

MERQ has been downgraded this morning by Morgan Stanley. This doesn't exactly surprise me, but does make me a little pissed.

The Week Ahead

2005-06-12T18:07:00.000-07:00

It looks as though this will be a big week ahead as not only is this expiration week, but also some important economic numbers come out. Tuesday and Wednesday look to be the days to get up early for the numbers announcement with the PPI on the former and CPI along with Industrial Production/Capacity Utilization on the latter. I have mentioned that I like to look at the Capacity Utilization to gauge how well a sector is doing, in this case the tech/semi area. The semis saw an up tick last month after seemingly bottoming last fall. With TXN and Intel reporting strong mid-quarter updates last week, I expect this to continue upwards. Intel said that its chipset plants were running above 100% capacity.

Looking back on Friday quickly, I traded some Nasdaq futures for the first time in a while. I typically suck at this, but I picked up a few tricks in the last two months. I really like the fast/slow stochastic indicator and I incorporated this into watching a basket of stocks. I made about 5 trades and made a couple of hundred bucks on the day.

In addition, I bought in a 20 lot of the TXN Jun 25 c for 2.35. The trade was a little bit early on the selloff as it went down another .20 from there. So, I'm leaning fairly long right here and the stock made a nice recovery to close the day on Friday. I expect the market to stablize this week as the expiration volatility should have been last week. Obviously, the economic numbers could throw this completely off.

Lastly, MERQ is presenting tommorrow at a Goldman Conference. I don't expect anything important to come out, but it could see a pop. The stock was up on Friday even during the Nasdaq decline. It has had some high volatility days the last week on good volume. Seemingly, it can't decide where to go. I would just be happy if my 42.50 puts expire worthless.

Mercury Upgrade

2005-06-09T22:46:00.000-07:00

It appears that MERQ was upgraded yet again, this time by B of A Securities. For as often as this company has been upgraded in the last month it certainly isn't acting well. Makes you think that perhaps there is more downside. Although late yesterday and today, you could see a change in the way the stock was acting.

They also put it on their Small/Midcap Fresh Money List. In their research report, I found this note on a convertible I was wondering about:

Contingent convertible goes from being an overhang to a $5 per share asset on
the balance sheet. In 2003, Mercury effectively put a ceiling on its stock price due
to its contingent convertible bond that would dilute the current shareholders by 10%
if the stock traded above $56.86 for 20 consecutive days. However, after a dip in the
stock price last summer, Mercury bought back approximately 9.7 million shares of
stock for $332 million, which effectively eliminated the dilution from the convert
and neutralized the overhang on the shares. Therefore, the important point to note
is that because the convert is now already embedded within the outstanding
diluted shares, we believe that investors should treat the convert as equity,
which effectively adds $5 per share to the net cash balance. Alternatively, if
Mercury shares were under the conversion price of $51.69 in May 2008, the
company could pay down the convertible, which would effectively lower the total
share count by 10% and increase EPS by the same amount. The bottom line is that
we believe the 2008 convertible has transitioned from being an overhang to an
underappreciated asset.

Maybe some of my calls won't expire worthless after all. Hopefully, some of my short puts will.