Month: February 2018

Politics, Social Issues, Attention Merchants, Emotions and Trading/Investing

 

Aloha and Greetings from the North Shore of Maui! I’ve decided to take the trading desk halfway across the Pacific Ocean to the Island of Maui! 

I come here several times a year. You could say it’s my home away from home. Originally, I started coming for the wind and the water. I started windsurfing in the 80’s and in the new century I’ve changed to kitesurfing. I hang out on a section of Kanaha Beach Park that’s called “Old Man’s”. When I first heard that term, I was insulted. But now I realize it’s accurate. There are a bunch of old men (and women!) there, and I’m one of them. 

When I’m over here I feel a bit removed from the drama happening on the Mainland. But, this could change with one missile warning! 

I think it’s a good idea to remind myself and the other two or three people that might read this that we trade and invest better when we keep our emotions in check. This is easy to say, hard to implement. 

But I think the best way to achieve this goal is to realize where the drama, anger and upheaval comes from.  

There is an industry that has a great deal of interest in making you feel scared and angry. When you are scared and angry you pay attention. It’s just plain survival. You have to be aware of threats in order to meet them effectively. 

This industry deals in attention, your attention specifically, and it wants as much as you are willing to give it.  

As this article on Vox states: there’s a war for your attention and you’re probably losing it.

For us, one of the main arms of this industry is CNBC. They are not nefarious, but they want you to watch them. Constantly. Their teases are not about how things are rocking along pretty well, but when the next 30% crash is coming in stocks, or bonds, or Bitcoin. 

Same with the other networks. Same with Facebook. 

On Twitter you see this in content providers posting more and more hyperbolic tweets. In fact, I think I will post this one with the tweet of how to spot the next 30% crash, just to see if I can get my viewership from 2 or 3 up to 5! 

So, don’t be scared. Don’t be angry. And don’t let your political beliefs guide your investment decisions. Great post on this by Barry Ritholz you can read here.  

Depending on your political leanings, its easy to be defensive or righteously indignant right now. That’s ok, but just don’t pay for it with losses in your investing capital.

$AAPL is the reason that this snap back may be for real.

One week ago, on February 8th, I stated that I was going to buy this dip. You can find a link to my blog post here. 

On the same day Karen Finerman on Fast Money gave a Fast Pitch touting AAPL, saying for that she was hitting the BUY Button. 

Yesterday, Warren Buffet, announced that AAPL is now Berkshires largest holding. More about that here. 

Today on Fast Money Halftime the traders were a little dumbfounded by the resurgence of the market, now basically covering 70% of the down draft that started a few weeks ago. 

They said that it was essentially a coin flip about whether or not we keep going back to all-time highs or retest the recent lows. My man, Josh Brown, said a pull back to recent lows under low volume would be healthier than a failed run at a new high. 

But I think that a surge higher is the more likely scenario and I think it will be because of AAPL. 

AAPL hit its all-time high on Jan 18 before slowly falling and was flat to down going into earnings and underperforming market. When SPY was peaking on Jan 26, AAPL was trading about where it is right now. AAPL did bump the day after earnings, but then tanked with the market down to 151 or so on or about Feb 9. This represented a 17% pull back for the stock. 

AAPL is the largest company in the world by market cap, and it represents the largest holding in SPY and QQQ. Buffetts unexpected, indirect, endorsement of the stock has really lit a fire under the name. 

So, although the rest of the market may pull back from here, AAPL has already had its round trip and, I believe, is unlikely to repeat. 

Although when I advocated BTMFD I did not specifically mention AAPL, Karen Finerman sure did, and her call was the right call.  

Sometimes you’re right for the wrong reasons, but it’s all part of the game. 

Options Basics, Calendar Call in $XOM

Today I am going to write a bit about Option Basics and then outline one of the trades I put on today. 

What are options? 

Pretty simple question, totally understandable.  

Options are contracts, agreements between parties. 

There are two basic options: 

  • Calls – a purchaser of a call option is buying the right to buy 100 shares of stock or ETF at a certain price (the strike price) at any time before a certain date (the expiration date) 
  • Puts – a purchaser of a put option is buying right to force the seller of the put to buy from the buyer 100 shares of a stock or ETF at a certain price (strike price) any time before a certain date (expiration date) 

Lets look at a real example, today is 2/13/2018 and lets look at a couple of Apple options, AAPL closed today at 164.34: 

  • AAPL Call – Let’s look at the March 16th Expiration call with a strike price of 165. Today this was selling around $445 
  • AAPL Put – Let’s again look at the March 16th Expiration, but this time the put. Unsurprisingly it’s a similar price, $475. Just a bit higher than the call but remember AAPL is 66 cents below 175 

If one bought a 100 shares of AAPL instead of the call, you would have to pay $16,434. If you did not sell any other calls to help offset the sales price of $445 AAPL would need to rise to 169.45 before March 16th.  

The advantage to the call is paying just a fraction of the cost of the stock to control 100 shares. If AAPL trades up to 200 by March you can make up to $3000 on each call. 

The other advantage is you only risk $445. If AAPL takes a big hit, down to 150 or so like it did last week you don’t lose $1,500. 

The disadvantage to the call is that owning the stock has no time limit. AAPL could trade right at $165 up until March 16th and then make a run to $200 in April. Unless you rolled the call up and out, you lose.  

Puts work the same way, but in reverse. Basically, you would buy them if you thought AAPL was going lower.  

In order for the put to pay off, AAPL would have to close at 160.25 or lower, on March 16th. 

Of course, these are not the only options that exist, even in AAPL. There are monthly expirations and many stocks and ETFs have weekly expirations. There are strike prices very far away from where the stock or ETF is currently trading. The two options I mentioned above are basically ‘at the money’. There are strike prices that are ‘in the money’ (lower strikes in calls and higher strikes in puts) and ‘out of the money’ (higher call strikes and lower put strikes). 

You can find these options on your broker’s site and are called an Option Chain. 

Tomorrow I’ll go a little further into this, why people might use calls or puts before we move on to spreads. 

 

Yesterday I wrote about a trade I put on in XOM. I opened a combination call spread pairing a calendar spread (one April 80 call paired with a March 80 call) and a credit spread (selling the same March 80 in the other spread and buying a March 82.5) 

If XOM stays at or below 80 on March expiration I will end up with an April 80 call for $24. 

Today for a while XOM opened just under 76 and made it to 76.7 before pulling back and closing at 76.3. 

So I decided to add another calendar spread to this trade buying one March 75 call for $302 and selling a weekly 75 expiring a week from this Friday (2/23) for $221. The net debit is $81, adding the $24 from yesterdays trade has me in this multi leg, multi date spread for $105. 

 

 

 

New Trade in $XOM, Option Basics – Call Calendar spread and Call Credit Spread.

So far, so good. Mr. Market picked up where it left off on Friday, further bolstering the view that this quick 10% down draft is a market correction and not the start of a Bear Market. SPY bounced off the 200-day moving average and throughout the day the VXX and UVXY pulled back. 

Today I’m gonna detail a new small position I opened in ExxonMobil otherwise known as XOM. 

Last Friday on Options Action, Carter Worth, the ChartMaster, made a pretty compelling case for opening a long position in XOM. He said it was overwhelmingly oversold and the risk is more to the upside than the downside. 

Mike Khouw recommended a call spread, specifically a debit call spread, buying one March 77.5 call and selling a March 82.5 call for a debit of $120. 

Today at the close this spread would have cost a bit more, about $130. 

I opened a combination spread (all numbers below will have included commissions): 

  1. I opened a call calendar spread. I bought an April 80 call for $151.40 and sold a March 80 call for $83.10 – this cost $68.30. This is a debit spread, it costs me money. It has no margin requirements, that is money does not need to be set aside for this trade.  
  1. I opened a call credit spread. I sold another March 80 call for $83.10 and bought a March 82.5 call for $38.80 – this results in a credit of $44.30 
  1. This trade resulted in 3 positions, 2 March calls and 1 April call. This trade resulted in a debit if $24 for each contract combination and requires $250 to be set aside. 

This is a VERY cheap way to get into a long position in XOM.  

Should XOM stay below $80 by March expiration, I will have a April 80 call that I paid $24 instead of $151.40. 

A bit more complicated, but much cheaper. 

My YTD performance and reviewing Options Action and Fast Money from 2/9/2018

$SPY $VXX $XOM $F $WMT 

In an earlier post, I shared my one-year performance in my two active trading accounts, one is a retirement account and the other is taxable. 

I call my retirement account my speculative account and I call my taxable account my less risky account. 

In the speculative account I trade large volumes of options. Fidelity loves me, even at $4.95/trade. I have about 25 names going. Last year I made about 75% in this account. 

In the less risky account I trade SPY and call and put options on SPY. Last year I made about 35% in this account. 

Here’s my YTD performance for these two accounts after this draw down: 

Speculative – down 7.37 % 

Less Risky – down 19.17% 

Ouch! Funny the difference, right? Is Less Ricky really less risky based on these numbers? 

BUT, remember volatility is WAY, WAY up which means the bid/ask spreads are much higher in options, particularly put options which greatly exaggerates these numbers.  

Also, I have/had a great deal of working calendar spreads in the speculative account which is the PERFECT thing to have on going into a volatility spike. On Friday a bunch of the short legs of the spreads went to 0, most of the credit spreads went to 0 too. I either rolled them up and out, or just held on to the longs over the weekend. 

Which brings me to yesterday’s Fast Money and Options Action. I’m feeling a bit nervous as I agree completely with the ChartMaster’s analysis. I think we have hit the 200-day moving average in the SPY and reversed. I don’t think we get back to all-time highs within two weeks, but maybe in the course of a month? 

As to the other trades mentioned: 

XOM – I have not stock or options in this name, but I agree it may be time to change that. Mike’s trade of the March16 77.5/82.5 call spread for $120 looks good to me. Monday I am going to look into following him into that trade or maybe set up a April/March calendar spread. Will post it here if I do. 

F – no recommendation from Mike, but ChartMaster thinks the chart is similar to XOM above. 

WMT – Dan takes this name on and recommends selling a put spread, the March 97.5/92.5 collecting about $150 each (risking $500). I actually like this too, the exaggerated volatility means you can get more for these credit spreads than before. Calendar put spreads would work here too. I may look into buying one April 97.5 put, buying one March 92.5 put and selling two March 97.5 puts. I think this is called a long calendar put butterfly. 

VXX – Mike talked about this on OA and the other guys on FM too. Suffice it to say most agree it will be difficult for this to hold this level and I couldn’t agree more. I’m not going to bore you with recapping my VXX trades (and UVXY and SVXY) but one week ago these names (all long now) used to be about 7.5% of my speculative account is now about 12% of the account. Probably why the account got hit the least.

Thank goodness for my moron trade!