A Boring Way to Make Consistent Profit from Trading

OEX Modified BWBs for May

2010-04-18T17:54:00.005+08:00

***Disclaimer***

Option activities for April 2010

2010-04-18T13:00:00.001+08:00

***Disclaimer***

In general, a very forgettable month by any standard. I don't blame myself if unforeseen events unfold but only for giving profits back due to my own foolish acts.

Summary of option activities for March 2010:

-- No trades for the first two weeks due to low volatility. The VIX went as low as 15.23. Basically low volatility affects the premium you pay or sell when you deal with options. In the $OEX context, it means the call and put strikes do not "open up" as well and it may difficult to get "even-money" for $10 or $15 spread with 4 weeks to go.

-- Traded the last two weeks.

-- Traded 20 contracts of 520-515-490 1:3:2 BWB

-- Traded 10 contracts of 525-520-490 1:3:2 BWB

-- Traded 20 contracts of 535-530-490/485 1:3:2 BWB

-- Offset the short call on C due to massive move upwards

-- Re-collar GS for a $5 move upwards

-- Bought back the GS 185 short call and sold the GS 175 call due to the SEC litigation

-- Total profit is $2,541 on options-related transactions (that excludes stocks and bonds)

-- dream

OEX May Positions

2010-04-13T23:53:00.003+08:00

***Disclaimer***

April Adjustments using Convoluted Spreads

2010-04-10T12:35:00.005+08:00

***Disclaimer***

Wow! Kind gesture from Random Walk Trading

2010-04-02T00:37:00.000+08:00

I came back from a fantastic dinner and a round of cigars with some brothers and I received this gift from Random Walk Trading:

Dear Mr. dream:

Greeting from Random Walk!.

We saw you online at the DTI webinar on Wednesday, March 10, 2010 when we presented " Broken Wings Butterflies", and saw that you were singing the praises of the BWB. We thank you very kindly for your love and support and since this was unsolicited we thought we would reward your loyalty by giving you the access to Webinar Semester 4's recorded link which you can have access to view until June 15th, 2010. We will also send you a copy of the accompanying text in the mail. Once again, thank you.

Please confirm your delivery address:

123 Good Class Bungalow

Sentosa Cove

Singapore

You will receive the access to Webinar Round 4 recorded link shortly.

Kind Regards,

Random Walk

This is a really a kind gesture from Random Walk. I was just giving an honest testimony on how much I've learned from the good education and the subsequent profits I've made trading their system. They appreciated the kind gesture and gave me access to a webinar recording worth $1,499. That is really nice of them. Thanks a bunch, Random Walk.

Triple screen? Who gives a shit?! How about some cigars instead?

2010-03-28T11:36:00.005+08:00

Life is too short to talk about the triple screen system. How about some cigars with Dr. Elder instead?

Shortly after his conference upon the invitation of SGX, I met him the next day for a private spike trade meeting.

We were supposed to meet at the lobby of Swissotel at 6:25 p.m. but I was late because of work commitment.

I arrived at 6:40 p.m. and had to find my way up to room 5959. Upon entering, Dr. Elder has already started the meeting with a group of fellow traders whom I have never met. There were three of them, two gentlemen from Singapore and one who flew all the way from India just to attend his conference and probably his intensive two-day advanced trading course that was coming up in a few days' time.

The gentleman from India was showing his notebook to Dr. Elder and explaining how he has begun tracking the NH_NL index for the India market. He is a very serious trader who came to the meeting armed to the teeth -- trading notebook, writing pad and of course his full attention. I suspect he probably have a voice recorder in his pocket somewhere. I came empty-handed, except for the camera to take some pictures. The other two gentlemen were more passive, listening and nodding most of the time.

Honestly, I could care less about all these heavy-duty stuff. I have already an excellent grip on the materials. I came for some fellowship with the man whose work I spent much time in the past studying about. It is like making your pilgrimage journey. I want to meet him in person and spend his time interacting with him as a fellow trader.

In short, Dr. Elder is a very serious trader. He went through pains to explain the importance of keeping a detail trading diary and even spent some time demonstrating the his AK-47 trading diary software. He wasn't there to sell anything but to share the characteristics of a good trader. "Show me a good trading diary and I'll show you a good trader.", he says. It is just like what my manager says, "Sales is 50% about discipline."

He took in suggestion about setting up private forum for traders within spiketrade as the current site has limited interaction. He was also gracious enough to share with us the new book that he is currently writing with Kerry.

We proceeded to dinner after an hour or of sharing and white wine.

During dinner, I asked him how he "jumped ship" many years ago when he was a medical doctor in Russia. He mentioned that in his book and I always wonder how he did it. He told me that he disliked the Russian system and did it when he was the ship doctor in South Africa. He planned the move some time back and kept himself very fit by exercising on-board the ship. When the chance came, he ran all the way into the American embassy to seek asylum.

Here we have a man who entered university at the age of 16 and graduated with a medical degree at a tender age of 21. He came to America practically with only his shirt on his back. He knew nothing also about trading and down the road he became the infamous Dr. Elder that we all know today.

Before the night was over, he gave me one of his favorite cigars -- the Leon Jimenes No. 4 after smoking one with me by the pool side. This man knows how to enjoy life. We should do too. After all, life is make up of different experiences so don't deprive yourself of the good things in life, especially when you can afford it. It is utterly dumb to do so.

The interaction with Dr. Elder left me only with one thought: if you have aptitude and characteristics of a successful person, you'll be successful no matter where you are and what you do. A lot of dudes read few financial guru books and think that they are on their way to financial freedom. That is really dumb. You'll still be that same old mediocre dude. Nothing will ever change.

-- dream

Using Options to Hedge your Stocks

2010-03-27T21:16:00.010+08:00

***Disclaimer***

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.
With no trades this week, I had a lot of time to catch up a couple on a couple of strategies that most beginners and traders know about, but either do not understand well, or apply them incorrectly.

Let me share a few thoughts on the following well-known as well as not-so-well-known strategies.

Covered Call

A covered call position consists of the following:

Long 100 Shares
Short 1 OTM Call

This is probably the first strategy that option beginners trade.

Premium received from sale of short call helps reduce the break-even price for the stock.

There is still unlimited risk to the downside if the stock price drops.

The position is similar to a naked (short) put option.

If the stock price does not reach the OTM call strike price by expiration, we get to keep the premium from the short call.

Married Put

Long 100 Shares
Long 1 ATM or slightly OTM Put

Buying a protective put for your stocks in your portfolio is one of the first options trades that beginners also execute.

Your stock is protected by the long put should the stock price drop.

You have to pay the premium for the put option. It can be expensive.

The break even of your position is higher because of the premium that you paid

If the stock price stays above the put option strike price, the put option will be worthless (you've lost the premium the you paid).

Most people view this as similar to having insurance on your house or car. We are insuring our stocks.

This position is similar to the long call option.

Standard Collar

Long 100 Shares
Short 1 OTM Call
Long 1 ATM or slightly OTM Put

The premium received from the sale of the OTM Call option are used to either fully or partially fund the purchase of the Long Put option.

The breakeven of your position is slightly higher if the cost of the long put option was not fully funded by the sale of the short OTM Call

This position is similar to a long call vertical spread also known as a Bull Call Spread

RWT Collar

Long 100 Shares of volatile stock (e.g. GOOG, BIDU)
Short 1 OTM Call
Long 1 OTM Put

The key for this strategy is the stock selection. The stock must move. The more it moves the better. We are not concerned about the direction of the move, as long as it moves.

Similar to the mechanics of the standard collar however there are strict rules on distance OTM of the long put and short call as well as steps to dynamically manage the position should the stock price rise, fall, or consolidate. In a nutshell:

1. If the Stock sells of (goes down in value), sell the Long OTM Put

2. Use the money to purchase more stock (similar to dollar cost averaging, but using the proceeds of the Long Put sale rather than your own capital)

3. Purchase more OTM puts to protect your increased stock holdings

4. Repeat if Stock Sells Off

5. If stock price increases in value by one strike increment, re-collar using higher strike prices for the Short OTM Calls and Long OTM Puts

6. If the stock price consolidates between the Call and Put strikes, your option positions will expire. If the purchase of the long put option is not fully funded by the sale of the short call option, then you will lose the difference between what you paid and what you sold. You will make a choice to either wait a couple of months for the stock to break out of the range or simply change to a more volatile stock.

Dream's Ratio Collar

Long 100 Shares of volatile stock (e.g. GOOG, BIDU, GS)
Short 1 OTM Call
Long 1 OTM Put
Short 2 Further OTM Put

Similar in mechanics as the RWT collar.

The sale of the 2 Further OTM Puts are used to offset the cost of the long put. This position is in fact a combination of the covered call plus short put ratio spread.

There will be a credit for the short call, as well as a credit for the short put ratio spread.

The credits reduce the break-even price for the stock.

If the stock consolidates between the Short Call and Long Put Strikes, We get to keep the credit!

This however still leaves the position with unlimited risk to the downside and will tie up substantial margin.

PRB Collar

Long 100 Shares of volatile stock (e.g. GOOG, BIDU)
Short 1 OTM Call
Short 1 ATM Put
Long 2 OTM Put

Similar in mechanics as the RWT collar.

The sale of the ATM Put is used to offset the cost of the long put. This position is in fact a combination of the covered call plus put ratio backspread (long put ratio spread).

Similar to dream's ratio collar, there will be a credit for the OTM Call and a credit for the put ratio backspread.

The credits reduce the break-even price for the stock.

If the stock consolidates between the Short Call and Short Put Strikes, We get to keep the credit!

With this position, the unlimited downside risk is eliminated, however the credit received for the put ratio backspread is substantially less than the credit received for the short put ratio spread in dream's ratio collar.

Which collar will perform better? Only time will tell!

-randomjaywalking

No trades this week...

2010-03-27T21:08:00.005+08:00

***Disclaimer***

OEX Weekly Historical Behaviour

2010-03-20T23:49:00.005+08:00

***Disclaimer***

OEX Monthly Historical Behaviour

2010-03-20T23:10:00.004+08:00

***Disclaimer***

OEX March Position Outcomes

2010-03-20T12:57:00.008+08:00

***Disclaimer***

Option activities for March 2010

2010-03-20T09:16:00.002+08:00

***Disclaimer***

Summary of option activities for March 2010:

-- started with 5 contracts each of 500/480 1:3 and 495/475 1:3; I bought some 450 strike put tails and turned them into 500/480/450 1:3:1 and 495/475/450 (closed it after market moves away from desired direction)

-- added 5 more contracts of 495/475 1:3 (closed it after market moves away from desired direction)

-- added 10 contracts of 495/485 1:3 (closed it after market moves away from desired direction)

-- added 15 contracts of 505/510/460 1:3:2 BWB (held it till expiration on 19th of March)

-- added 11 contracts of 510/505/470 1:3:2 BWB (held it till expiration on 19th of March)

-- roll out my GS covered calls from March 170 strike to July 180 strike for a $3.62 credit per contract

-- scratch my GS ratio spread 145/135 1:3 for even-money when I realized that GS took rocket fuel for lunch; as a result, I completely dropped my idea of making a collar.

-- took profit on the C short strangle and opened a new short strangle on C only to realize that C was with GS at the rocket fuel lunch. Therefore, I promptly sold the C $3 strike put for a profit and got ready to roll out my C $4 strike put to $5.

- total profit for ratio spread, BWB and others is about $5,300

I should put up my thoughts about the above in my next post as I think that it deserves a post on its own.

-- dream

OEX March Position Adjustments

2010-03-15T23:50:00.014+08:00

***Disclaimer***

Meet Dr. Elder tomorrow at SGX Academy

2010-03-13T08:42:00.006+08:00

Dr. Elder is in Singapore.

If you need help on a proper trading system, use the link below and sign up for the full-day session tomorrow and/or the two-day intensive course next week:

http://www.sgxacademy.com/

Don't be a cheapo and short-change yourself. Get a proper education. Most people are not willing to part with a few hundred dollars but are willing to lose thousands of dollars in the market. What kind of mentality is that? Isn't trading just like going to battle field? The market is not your father or your mother, you know!? You don't want to be caught under-equipped.

Many of us here (the contributors) follow his system, including his triple screen system and his "5 bullets to a clip". I have witnessed dramatic turnarounds in terms of their approaches to trading their respective markets. These days they speak confidence and conviction because they have a reliable system fall back on. Most importantly their trading records are showing healthy profits as well.

I was particularly impressed with one of the contributors who reviewed UOB, SGX and CDL last evening. I saw that he has even included the 2-day FI as part of his indicators (I've highlighted this only last week). He was clearly appreciating the beauty of the system and made an effort to fine-tune it.

I take credit for sharing this system with them but it is up to them to take it from there. It is about time to meet and hear from the man himself.

dream

Learnings from a veteran ex-floor trader...

2010-03-11T11:35:00.004+08:00

I am writing this post as a record of a conversation I had with a veteran ex-floor trader.

Apologies for the messy notes but the conversation drifted across many topics and I had one hour to get as much out of it as I could.

First subject was how to repair a trade that is going against you.

- If the price of whole BWB spread gets beyond your comfort zone, then it might be time to get out of the trade
- Put a dollar limit (e.g. $2) to buy the spread back as a stop loss
- 1:5:4 Difficult roll it out
- Don't push it out to the next month - what if it goes against you?

Adjustments I have at my disposal
a) close
b) change to a regular butterfly 1:2:1 505:515:525
c) Open new position 520/525/535 push the loss point at expiration further OTM but adds more risk (margin held)
d) change to 1:3:2 close 2 x 515/530

Refinements to the BWB entry rules

- Position long strike at expected move or at 5% OTM whichever is greater

- OEX moves 4-5% on average per month for the past 10 years
9% is the normally the garbage tail for the BWB

- 1:3:2 weekly trades! 1 week to go ONLY (is this OEX Weeklys?)
- 1:2:1 monthly are for the monthly trades!
- 4 weeks in advance

Long term technical analysis market outlook is required (random walk) not specific technical analysis

Measure of safety - take the expected move as the long strike if the EM is more than the 5% OTM strike

Typical returns of this floor trader is 5-10% return on margin held per month

- Conservative - long strike is at 5% or EM
- Aggressive - short strike is at the 5% or EM

Select Max width between long and short strikes for zero net debit or slight credit
Some people choose to shorten the widths between the strikes for larger credit
Widths between the strikes are impacted by the VIX (high volatility, wider between strikes)

EM for $OEX until March 19 2010

2010-03-07T17:06:00.001+08:00

The Expected Move (EM) to calculate how much the underlying will move until expiration.

EM = 1/2(UP*IV*Sqrt DUE) / Sqrt 252
UP = $520.45
IV = 17.11%
DUE (days) = 12
Sqrt DUE = 3.46
Sqrt 252 = 15.87
EM = $9.72

This means that 34% of the time, $OEX will move $9.72 in one direction. The other way to interpret this number is that 68% of the time, $OEX will stay within the range of $510.73 and $530.17.

This is the best way to push your luck over the long term if your position is threatened and need to "sweat it out".

Sweating it out...

2010-03-07T01:51:00.003+08:00

***Disclaimer***

Using options to get back to delta neutral - Options - Futures Magazine

2010-03-06T08:26:00.013+08:00

Using options to get back to delta neutral - Options - Futures Magazine

I posted the above article written by Alex Mendoza who is the chief options strategist with Random Walk. The ratios and Broken Wing Butterfly are some of the option trading techniques taught by them.

I have not attended any expensive option trading courses conducted by some self-proclaimed gurus but I have had the chance of reading a set of options trading books from one of the better courses. In general, I find them to be rather basic but most importantly, they do not teach you how to make money in a real trading situation. They will define what a "bull call spread" is, give a simple hypothetical example and teach you how to calculate the break-even, maximum profit and so on. They will typically cover the technique in 4 to 5 pages and quickly move on to the next. By the time you complete technique #6 on page 25, you would have forgotten the name of technique #1 on page 1.

Random Walk, on the other hand, teaches only techniques that that they find useful in actual trading environment. They do not cover all techniques available and leave you to draw your own conclusion. They will go into great details for the chosen techniques and leave nothing to your imagination. They have dedicated an entire book describing how to trade the ratio and Broken Wing Butterflies technique. A lot of pit option traders use a variation of this technique to earn a comfortable living. They give step-by-step instruction and it is clear and concise from the first page to the last. I feel like I have received a proper education and feel confident enough to know what to do in an actual trading situation.

On the down side, these textbooks from Random Walk are not cheap even though they are worth very cent of it. The first four textbooks cost me US$1,000. The good thing is that the funding came from the profit that I've made trading their techniques. I have my eyes set on the "Essentials DVD" also offered by Random Walk at a price tag of US$1,995:

• Vertical Spreads
• The Three-Leg Box
• Butterflies and Condors
• Broken Wing Butterflies
• Reverse Gamma Scalping
• The Iron Cockroach
• Portfolio Management
• Money Management
• Which Strategy to Use
• Stock Market Crashes
• The Five-Year Millionaire

Again, nothing is coming from my pocket. They will have come from my trading profit for this month.

$OEX charts

2010-03-02T22:15:00.004+08:00

The market has turned decidedly bullish late last week.

A slew of way-below-the-expectation data, ranging from consumer confidence, new home sales and unemployment claims gave the bears the initial edge but the bulls quickly took over. Last Friday, $OEX (S&P100) plunged to an intra-day low of $498.51 before closing near the high of $505.35. That itself is a very bullish intra-day reversal. The $OEX has plunged earlier in the session and the selling has dried up. It seems like the market is extremely comforted by the assurance that easy money will continued to be supplied. Every man and his dog knows that "the Fed Fund rates will be kept low for an extended period of time". The other contributing factor is obviously the bail out of Greece. I find that the gauging of sentiments is more important than the actual fundamental in question.

The re-testing of the $480 did not come at all, at least not for now. I re-looked at the weekly and on hindsight it is now obvious that the divergence on the weekly has not yet happened. For the bearish divergence to happen, the $530.74 level has to be breached with a more shallow histogram. $OEX is last traded at $510.33 and that is a lot of distance for the bulls to cover and therefore cannot be accomplished in a few days. If you look carefully, the bearish divergence on the daily is a pullback to the value zone on the weekly.

One of the problems I faced with the CBOE $OEX charts is the fact that it doesn't come with volume data. To solve that problem, I have to turn to the mini S&P500. I am using the ESH10. I found a nice divergence on the 2-day Force Index. This is an extremely powerful short term indicator. I expect $OEX to pullback to the value zone (between the red and yellow MA) soon.

That is why I have made this my bread and butter setup trade -- even if I'm totally wrong in my market direction, I still make decent money every month.

Weekly Outlook: March 1, 2010 - Optionetics Commentary

2010-03-01T19:25:00.004+08:00

Weekly Outlook: March 1, 2010 - Optionetics Commentary

I follow this commentary weekly to update myself on the happenings in the market I trade.

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Warren Buffett's Letter to Berkshire Shareholders for the year 2009

2010-03-01T18:23:00.003+08:00

2009ltr.pdf (application/pdf Object)

I thought this was an interesting read so I thought I would share it with you all.

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Options and such

2010-02-28T10:30:00.009+08:00

***Disclaimer***

Look at the row that says "Net P/L vs. movement". This is part of the "what if" analysis that finds out what happens to your position if the underlying makes an immediate moves +- 5 strikes. There will be a $2.55 "paper loss" if $OEX moves immediately to $480. Everything noted here is on a "per share basis". If you're trading 10 contracts, that will be $2,550 (10 contracts x 100 multiplier). That was my major area of discomfort even though I know that in reality, it is improbable to happen. We are asking S&P500 or S&P100 to drop close to 5% immediately which will not happen unless a catastrophe happened.

The greeks for the 1:2 ratio spreads, on the other hand, are well balanced. The two lower strikes that you sell usually offsets the strike that you buy. Nevertheless, I decided to put the trades on but reduced my positions to maximum of 5 contracts for each night.

By the end of the first trading week, the underlying $OEX hardly moved. It put in a high of 510.11 and a low of 498.51 and closed the week at 506.06. But the "hardly any movement" with time passed on has helped my ratio spread positions.

In general, when trading ratio spreads, time passes on without any underlying movement actually helps the trader gain "paper" profits. This is due to the normal distribution of the probably curve. The short strikes are further Out-of-the-money than the long strikes (which are Out-of-the-money). Therefore, as time moves toward expiration, the normal distribution of the probably curve "shrinks", as the FOTM short strikes have a lesser and lesser chance of having an intrinsic value at expiration.

You can look at the premium offered for the same strike but different month as an illustration:

$OEX March 10 500 strike is last traded at $6.00

$OEX April 10 500 strike is last traded at $10.60

This means that if you buy the $OEX 500 strike for $10.60 and one month elapses without any underlying movement, you can expect your $OEX 500 strike to be worth only $6.00.

Now, I need $OEX to start moving down for better profits over the next two weeks or so.

On C, I took profit on the short strangle position that I have on since 24th of December 2009. There was a combined $0.06 left to be made on that position and I decided that it is a waste of margin. I re-strangle C for June expiration.

on GS, I sold the March covered call at 170 strike and did a 1:2 ratio spread with strikes 145 and 135. I quickly dismantled it by selling away the 145 put when I realized that Congress threw out the "Volcker's rule". I will offset the 135 puts in the coming week.

Volcker Rule update

2010-02-24T16:50:00.001+08:00

WASHINGTON, Feb 23 (Reuters) - The Obama administration said on Tuesday it is still committed to the "Volcker rule" to ban risky trading by banks, although Congress looks increasingly unlikely to adopt the rule as proposed.

The White House's forceful support for the rule came after the Treasury Department said earlier in the day that it backed "mandatory limits" on banks trading for their own account.
President Barack Obama had originally framed the proposed Volcker rule on Jan. 21 as an outright ban, which stunned markets and complicated extended negotiations in Congress over legislation to tighten bank and capital market regulation.

"We're not walking away from and we're not watering down that proposal one bit," White House spokesman Robert Gibbs told reporters when asked about the outlook for the rule authored chiefly by White House economic adviser Paul Volcker.

"We're not walking away from what the president outlined on the Volcker rule," Gibbs said at a briefing.
As he spoke, the U.S. Senate Banking Committee continued negotiating long-awaited regulatory reform legislation. Release of a bipartisan bill by two key lawmakers had been expected this week, but lobbyists said it may wait until next week.

The committee is considering including a watered-down version of the Volcker rule in the bill, which will also propose new rules to protect financial consumers, rein in derivatives markets and tackle the "too big to fail" problem.

Financial services industry lobbyists said senators may add language to their bill from a bill approved in December by the House of Representatives.

The House bill would allow, but not require, regulators to restrict proprietary trading at firms judged to pose a risk to the stability of the financial system. Regulators could also order firms out of the hedge fund business under the Democratic House bill, which got no votes of support from Republicans.

Obama's January proposal was tougher. He proposed that banks "no longer be allowed to own, invest, or sponsor hedge funds, private equity funds, or proprietary trading operations for their own profit, unrelated to serving their customers."

The Volcker rule could affect as much as 10 percent of net revenues at Goldman Sachs , said a senior executive of the Wall Street giant earlier this month.

In response to questions about the administration's commitment to the proposal, the Treasury Department on Tuesday restated its position that simply allowing regulators to act to curb banks' proprietary trading was not enough.

"We believe that rather than merely authorize regulators to take action, we should impose mandatory limits on proprietary trading by banks and bank holding companies."
The statement, which was in keeping with testimony from a top Treasury official on Feb. 2, also reiterated the Treasury's support for "related restrictions on owning or sponsoring hedge funds or private equity funds, as well as on the concentration of liabilities in the financial system."

Former New York Federal Reserve official Ernest Patrikis, a foe of the Volcker rule, said the Treasury's language suggested a shift in the stance of the administration, which has still not released draft legislative language for the Volcker rule.

"They realize they are off track and that the original proposal was misdirected, too strong and ill-advised," said Patrikis, a specialist in bank regulatory issues at the law firm White and Case in New York.

Senate Banking Committee members are considering giving regulators the power to impose limits on a bank's proprietary trading only if the regulator thinks the bank's activities threaten its safety and soundness. The rules would apply only to banks with assets over $50 billion, the sources said.

HOUSE BILL CLOSELY SIMILAR
Those parameters align closely with the House bill. One of its chief authors, Representative Paul Kanjorski, chairman of the House Capital Markets Subcommittee, told reporters on Tuesday he would support keeping the "measured" language in the House bill or the White House's proposal.

Either way, he said, "I don't think that it hurts anybody except those who want to speculate very quickly. ... Let's be honest, some of these people just don't learn.

"When your dog just keeps wetting the carpet, there's only one thing to do, you've got to whack him on the nose to let him know that's not what he's supposed to do. Maybe the regulators have to whack the banks a little bit to make them respond."

The U.S. government reported on Tuesday that the number of "problem" U.S. banks jumped 27 percent during the fourth quarter of 2009 to 702, the highest level since 1993.

At the same time, the New York State comptroller reported that bonuses on Wall Street rose 17 percent last year to $20.3 billion even as the industry faced a public backlash over pay.

Average taxable bonuses on Wall Street rose to $123,850 in 2009. Compensation at Goldman Sachs, JPMorgan Chase & Co and Morgan Stanley rose 31 percent.

Separately, Senate Agriculture Committee Chairman Blanche Lincoln said on Tuesday the panel will unveil a draft bill in the next couple of weeks to crack down on over-the-counter derivatives, an area also addressed in the House-passed bill.

In another financial regulation issue, a senior Treasury official on Tuesday said at a conference that it is vital to set up a separate financial consumer watchdog agency.

Obama's proposed Consumer Financial Protection Agency is a major obstacle to bipartisan Senate agreement on reforms.

Michael Barr, the department's assistant secretary for financial institutions, said the Treasury was well aware that lobbyists were trying to "slow progress or weaken reform."

Updated OEX March Trades

2010-02-24T12:07:00.007+08:00

***Disclaimer***

Weekly Outlook: February 22, 2010 - Optionetics Commentary

2010-02-21T14:45:00.003+08:00

Weekly Outlook: February 22, 2010 - Optionetics Commentary

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Bank Profits Ready to Tumble, Stocks Set To Fall: Whitney - CNBC

2010-02-19T12:30:00.004+08:00

Bank Profits Ready to Tumble, Stocks Set To Fall: Whitney - CNBC

Meredith Whitney has the ability to move the markets. She is arguably the most respected analyst for GS and the financial markets. When she downgraded GS on 15th of October 2009, GS fell from $193.60 to the close last night at $155.73. The after market came tumbling down to $154.17 after Fed hikes the discount rates.

You may or may not agree with her assessment but she has built her credibility by correctly predicting the sub-prime back in 2007. If you have financial positions like me, remember to hedge them to profit from the downside.

OEX March Trades

2010-02-19T10:05:00.003+08:00

***Disclaimer***

Charts: $OEX

2010-02-14T13:29:00.007+08:00

February (front month) is drawing to a close with 5 more trading days left. It is about time to look at where $OEX is heading to so that we could take up new positions to capitalize on the market.

I have also updated the $OEX charts (both weekly and daily) and added comments so that you could see what has transpired since we last looked at it on 17 January 2010, what is the current state of affairs and make an educated guess where it is heading toward.

On the $OEX Weekly, I have previously written that the "the momentum seems to be zeroing out but I could not clearly identify a more shallow C formed. But it is nevertheless very suspicious looking. Picking a top can be a dangerous thing to do -- a wounded bull can still hurt you." On the $OEX daily, I said that the "$OEX daily is showing a clearer signal. Both the histogram and the MACD lines are diverging. Taking a look back at the weekly will conservatively put the price target at in the 490 region."

The suspicion that $OEX was running out of steam was quickly confirmed shortly after the last post was written. It promptly fell from an intra-day high of 530.38 on the 20th of January to close last Friday at 494.40. During that period of 28 days, it fell a total of 35.98 points or close to 6.8%. It put in a low of 481.80 intra-day the Friday before last but rallied close near the high of 491.34, leaving behind a bullish-hammer looking candlestick. However, the bullish hammer wasn't confirmed the following Monday. Over the last few days, the pricing action showed very feeble attempts to recover previous losses.

The weekly impulse is still red, therefore allowing trades only from the short side. It is currently just below its value zone (the area between the red and the yellow lines). On the $OEX daily, you could clearly see the bearish divergence being worked out. You could also see the the first higher-high, higher-low being put in for the short-term downtrend. Notice that the feeble attempts to rally in the past few days could not even reach the value zone on the daily. Also, note the power of the bear denoted by the depth of the histogram not seen in months.

In a nutshell, I continue to feel bearish on the market over the next 30 days or so. The bear is gaining weight and I am of the view that any rally attempts will be quickly thwarted. I also believe that the 480 support level will again be tested and be broken in the days or weeks to come. The 450 support level though should be safe in the next 30 days or so. The $OEX spreads that I'm putting up must subscribe to the above view for profit and downside protection.

Patty's Bull

2010-02-14T02:45:00.018+08:00

As the first blogger of this team blog to write a post in this new Lunar New Year, I wish my fellow team bloggers, the readers, followers and anyone who stumbled upon this blog -

恭喜发财!

Gong Hei Fatt Choi! Gong Xi Fa Cai!

And for the usual bull, here's me wishing that in the new year...

1. Obearma stop spewing bull. 7 months of bull run and 1 word from good ol' Barry about banks not able to do investments in future and the market goes into correction. Yeah Yeah... I know it was ripe for a correction but we already have 1 harbinger of bad news. So... Next time, just leave it to Benny ok?

2.Heli-Benny continue spewing bull. Did you guys see the effect he had when he made his speech on Thursday? The market dropped like a ton of bricks before he took his first sip of water! Then it slowly recovers throughout the day when people realize he wasn't gonna say something damaging. It is so predictable that in the future, I will consider shorting the market on any day he's gonna open his mouth on TV.

3. I be the sole Toto lottery winner on Monday so that I can move on and start writing a blog about financial freedom. However short the new blog will be, at least, it will come from the point of a person who really attained FF right? Anyway there will be another 10 mil draw 12 days later so you still have plenty of time to queue for that one.

4. This IR thingy better work out right. I know at least 3 guys who are betting their underwear that it will bring up property prices in the area because people need multi-million luxurious leasehold bungalows, facing some of the most polluted seas in the region, to stay in after a long night of gambling. Besides, having people walk around without underwear is not very nice.

5. Just in case #3 does not pan out, I hope my application for a new job as Shrek at Universal Studios is approved. My wife's been complaining about my farting. Alot. Both the farts and her complaints. And my bull. That I thought the best job in this world is to play Shrek who bullshit and fart all day at visitors and still get paid. I hope they don't mind me brown-ing the green Shrek suit.

Disclaimer : "Bullshit (also bullcrap, bullplop, bullbutter, horseshit) is a common American English expletive which may be shortened to the euphemism bull or the initialism B.S. In British English, "bollocks" is a comparable expletive, although bullshit is now commonly used in British English as well.

As with many expletives, it can be used as an interjection or as many other parts of speech, and can carry a wide variety of meanings. Most commonly, it is used in connection with incorrect, misleading, or false language and statements." - Wikipedia

dreamspeak -- 13 February 2010

2010-02-13T16:48:00.002+08:00

*** Notice: dreamspeak is a special feature in this blog where I get to speak whatever that comes to my mind. Having your own opinion certainly beats having no opinion at all. ***

I've never felt a trading month this long and there is another week more to go before option expiration. It is hard to believe but I already have had 24 transactions involving 147 individual options in the past three weeks.

It all started when Obama supported a new bill to Congress thereby limiting the amount of prop trading (or proprietary trading) and fund activities that entities with a bank charter can do. The "Volcker rule" is effectively saying, it is either the bank charter or these proprietary activities.

GS, which I have vested interest in, started plunging from an intra-day day high of $171 on its earnings day to $153.93 (closing price as of last night), effectively shaving 10%. I later learned that prop trading constitute about 10% of GS' revenue. Market is really efficient in pricing in the downside. I pulled out all the stops that I know to cut loss and/or to limit my exposure. When the dust settled, I was staring at a loss of US$4,155.

I had no qualms about cutting my losses short as capital preservation is the most important factor in trading. Shit happens and everything else is based on hindsight. But In the midst of this chaos, I did the right thing. I quickly switched gears to trading ratio spreads on $OEX or S&P100 using techniques that I've learned from my buddy, randomjaywalking.

It was as good as advertised and more. I have put on 3 trades for the "Front month" (February) and have since recovered all the losses plus a small profit of US$2k plus. Obviously, the small profit itself doesn't mean much. It is the potential and the repeatability of ratio spreads (or broken wing butterfly) that excites me. I can make a good profit on a monthly basis without the need to take unnecessary risk with naked calls and puts. If you follow the entry criteria carefully, this kind of setup works in almost all market conditions -- you make money if you're totally wrong in your market direction, you'll still make money if the underlying hardly move and you will make the most money if the underlying moves in your direction as predicted. Realistically, the only time that you'll lose money in this kind of setup is the occurrence of a 9/11 type of market crash. Obviously, you still have to do your part to monitor your trade and follow the exit criteria diligently.

Simply good stuff. Enough said.

Congratulations

2010-02-09T02:07:00.002+08:00

Congrats to dream for graduating :)

Patty's Picks (February 2009)

2010-01-31T22:37:00.002+08:00

As a way to better our TA, the authors of this blog each selects a sector within a bourse(s) and keep track of the stocks movements. For me, I am keeping watch on the developers, infrastructure and landlords listed on the Hong Kong Stock Exchange. I am also attempting to load up on gold producer stocks listed in NYSE.

From this month forth, on the Sunday preceding the first week of the month, I will be selecting a few stocks that I feel will have the best prospect for a trade on the long side. I may or may not trade them myself (limited resources!) so take them with a pinch of salt.

HKSE

Zhejiang Expressway Co (00576)
Agile Property (03383)
China Overseas Land & Investment Ltd (00688)
China Resources Land Ltd (01109)
Hopson Development Holdings (00754) *** Favorite ***
Kerry Properties (00683)
Shimao Property Holdings Ltd (00813) *** Favorite ***

At the end of the month I will post the results of each counter I picked, based on the first opening and last closing of the month, as a comment.

Disclaimer : This is purely for learning purposes and does not serve as a indication to buy or sell these stocks or any of their derivatives.

Options strategy: Broken wing butterfly - Options - Futures Magazine

2010-01-31T10:51:00.001+08:00

Options strategy: Broken wing butterfly - Options - Futures Magazine

Posted using ShareThis

Short Ratio & BWBs Spreads

2010-01-17T20:20:00.013+08:00

***Disclaimer***

Options involve risk and are not suitable for all investors. Prior to buying or selling an option, a person must receive a copy of Characteristics and Risks of Standardized Options (the "ODD"). Copies of the ODD are available from your broker, by calling 1-888-OPTIONS, or from The Options Clearing Corporation, One North Wacker Drive, Suite 500, Chicago, Illinois 60606. Any strategies discussed, including examples using actual securities and price data, are strictly for illustrative and educational purposes. In order to simplify the computations, commissions, fees, and margin interest and taxes have not bee in included in the examples used in this presentation. These costs will impact the outcome of all stock and options transactions and must be considered prior to entering into any transactions. Investors should consult their tax advisor about any potential tax consequences. No statement within this presentation should be construed as a recommendation to buy or sell a security or to provide investment advice.

I've spent the weekend learning these new strategies so I thought I would share what I have gathered so far and writing this post also helps crystallize the content in my head... it may be a bit confusing and I may have got it totally wrong so feel free to post comments, corrections :P

Short Ratio Put Spread

Market Outlook: Neutral to Bearish
Buy 1 Closer to the Money Put
Sell 2 Further Out of the Money Put

Broken Wing Butterfly (BWB) Put Spread Market Outlook: Neutral to Bearish
Buy 1 Closer to the Money Put
Sell 2 Further Out of the Money Put
Buy 1 Even Further Out of the Money Put (tail)

The difference with the BWB setup is we buy the last Put (tail) to firstly reduce our margin exposure (buying power effect) and protect our downside risk (remove the unlimited risk to this trade). It is optional to buy this Put (tail).

OEX Details
Target Price: $490 (thanks dream)
Expiry Month: March
OEX Last Price: $524.11

Example Setups

OEX Short Ratio Put Spread
Buy 1 490 Put
Sell 2 470 Put
Net Credit $1.00
Margin Held (depends on broker)

OEX BWB Put Spread
Buy 1 490 Put
Sell 2 470 Put
Buy 1 410 Put
Net Credit $0.10
Margin Held (depends on broker)

What we are looking for is the OEX to make a move down towards our 490 strike. The beauty of this example trade is that the OEX needs to move down a only couple of strike increments for the trade to make money. If we were totally wrong and the OEX moves higher by expiration and we have not adjusted the trade, the options will expire worthless, we get to keep the credit (less commissions) and the margin held will be returned.

If we were totally right on our market outlook and the OEX gapped down to below 470 we would start to incur losses. However since the OEX is an index, the probability of this happening is quite low (it would need to make a $50+ move down immediately based on some catastrophic event)

To illustrate this in pictures, here is a snapshot of what happens to the example trade should the OEX move up or down with price of the underlying being the only factor:

The last row is the Short Ratio spread price
(The prices were taken from the available mid spread prices on TOS platform)

The index is around the 525 price point so start there.

If we were wrong and the index goes UP $10, the short ratio spread will be trading for a credit of 90 cents (not bad). If we were wrong and the index goes UP $20 the short ratio spread will be trading for a credit of 80 cents and so on.

Looking at the P/L sheet, there is no price point of immediate loss within a $30 range of the OEX.

If we were right and and the index moves DOWN $10, the short ratio spread will be trading for a credit of $1.15. If it moves down $20, the short ratio spread will be trading for a credit of $1.30.
Not a bad return on a less than 4% move down!

What this shows is that the OEX does not need to reach our price target of $490, however it needs to move down to generate the profits on the trade. A home run will be OEX reaching below $490 but above $470 by expiration. Most likely we will have taken the profits by then.

For this interested in the trade risk graph, here is the BWB risk graph at expiration:

For the BWB example:
Max Profit at Expiration will be at 470 Strike
Max Loss at Expiration will be at 410 Strike (the loss will be unlimited to the downside on the Short Ratio Spread because we did not buy the last Put (tail)

Obviously there are a lot of strict mechanics in the entry and exit criteria but if followed correctly, it seems that this is an impressive strategy for anybody wanting to trade options.

Thanks for reading!
randomjaywalking

Margin Requirements for options (IB Reg T account)

2010-01-17T17:18:00.005+08:00

I had a discussion with Randomjaywalking about the margin requirement for U.S. options in general.

He uses thinkorswim and I use both Interactivebrokers (IB) and tradestation. We were discussing how much margin is being held in our accounts when we trade options. I have been using a margin account (IB Reg T account) in Interactivebrokers but I never knew how much margin is actually held. It seems like the actual mount of margin being held in my IB Reg T account is a lot lesser than what he described.

It turns out that the actual margin held depends on the types of option you trade and the formula is quite complex for IB. I just picked the naked short put as an example:

Initial margin = 100% * option market value + (20% * underlying market value - out of the money amount or 10% * underlying market value, whichever is greater) or $2.50 * multiplier * number of contracts, whichever is greater.

20% above is 15% for broad based index options. Short sale proceeds are applied to cash. Not allowed for IRA accounts.

So if GS is trading at $165 and you sell one contract of ATM option at $3, the initial margin held will be $3 + $3,300 = $6,300 and the subsequent margin will be another $6,300

The naked short put will have the same margin requirement as the the naked short call. A covered call or a vertical spread will have their individual margin requirements.

Charts: PowerShares QQQ Series 1 (ETF), $OEX

2010-01-17T00:04:00.002+08:00

As per your request.

QQQQ Weekly:

It is often referred to as the "Q's" or "Cubes" due to its unusual ticker symbol, the Nasdaq-100 Trust QQQQ is probably the best-known exchange-traded fund (ETF) in existence. The QQQQ ETF tracks with the Nasdaq-100 Trust Index, consisting of the top 100 companies traded on the NASDAQ exchange. The ETF's ten largest holdings accounted for nearly 50% of the QQQQ's value. The Nasdaq weekly has confirmed a divergence and a quick check with QQQQ confirms the same. Note that the MACD-H has already ticked down, completing the divergence. This is a massive divergence and look how shallow C is. The only way to trade this is on the short side.

QQQQ Daily:

The daily has also confirming a divergence couple of days back. QQQQ was not able to break new highs and the last few attempts were accompanied by sell downs the next day. The Nasdaq is the strongest of the three markets and it is not surprising to see that it gets heated up first. If one were to trade it from the short side, it is not unreasonable to expect a retrace to the 42.5 price level.

$OEX Weekly:

The S&P 100 Index ($OEX) is a market-capitalization weighted index consisting of 100 large blue chip stocks across various industries. Many fund managers use this index as a benchmark to measure the performance of large cap stocks overall. The market capitalization of the companies in the S&P 100 varies considerably, but in general large companies have a market cap greater than $5 billion dollars.

The charts of QQQQ ETF and the $OEX looks similar. But the QQQQ ETF chart is the more dangerous looking chart of the two. What will really bringing it down is probably the earnings report of GOOG in the coming week. It will either extend the run of the tech stocks or the put the nail in the coffin for the already shaky tech sector. Coming back to the $OEX, the momentum seems to be zeroing out and I do not clearly a more shallow C formed. But it is nevertheless very suspicious looking. Picking a top can be a dangerous thing to do -- a wounded bull can still hurt you.

$OEX daily

The $OEX daily is showing a clearer signal. both the histogram and the MACD lines are diverging. Taking a look back at the weekly will conservatively put the price target at in the 490 region.

I can't seem to find DJX.