Thursday, January 29, 2015

Time to let it shine! GLD

Good morning traders!,

Over the last year as the US Dollar began it's massive run, the myriad of Gold related products has been generally out of favor as the performance of these products has been poor. 2015 is a year of change. There are rotations in many asset classes, and price extremes in a few. One of the things I have noticed on my own charts is how well Gold has been performing in 2015.

Above is a simple chart showing the relative performance this year of the GLD ETF versus the S&P 500 index. With the SPX down about 3% and GLD up about 5% I have hatched a plan for long exposure to gold upside with limited risk to the downside.

Back on 15 January, I noticed a large increase in GLD trading volume on the breakout of the 120 level, which was also the level of the 200 day SMA. Obviously charts don't guarantee anything, but every once in awhile I like to think that I see a bread crumb or two left by a group of traders or institutions that move a whole lot more money than I do. After that 120 breakout to the upside, momentum drove the GLD to 125. I was tempted to chase (unfortunately I always am), but this time I figured that GLD would roll back a little and give me the entry I was looking for. Today it has.

So here's how I'm exposing myself to GLD upside for 6 months above the 122 level:

The easiest way to explain this is by saying I sold a put credit spread lower the cost of a long call. I sold the 122/112 Sep '15 GLD put spread to buy the Sep '15 122 call, all for $3.05 net debit. So, I have unlimited (theoretically) profits to the upside, but I'll probably put a limit order to sell at $20.00 and check on it in a couple of months. My max risk at expiration is $13.05, which is the distance of the put spread plus the net debit for the upside call. My near term risk is contained somewhat by the premium contained in the structure of the spread.

I'm giving myself a lot of time to be right on this one. What I'm looking for is a breakout above the 125 level, and hopefully a higher high around 135 or 140 on sustained momentum. If January is any indication of how gold will perform in 2015 as the US dollar rises, I think I will be find.

Happy to join all of you gold bugs in 2015.

I will update this trade here and on Twitter @B50cal1978

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Good Luck Trading!


Tuesday, January 27, 2015

Currency Headwinds. SPX

Good Morning Traders,

After 2013 and 2014, I developed a sense of the market that served me well in that environment. 2015 is whole new ball game. I'm finding myself having to unwind a couple of positions in assets that in this environment, I want no part of. I also find that I am a little too short volatility for the current environment.

Some of the latest earnings reports for companies that are sensitive to slowing world economies and lower energy prices have reported major currency headwinds, and some have revised down earnings estimates for the whole of 2015. As good as Apple is, I don't think that one name can float a ship that may be taking on a little bit of water moving forward.

VIX generally averaged about 14 in 2014, now that average is higher. I am planning to hedge my short term exposure to VIX by entering an OTM put butterfly in the SPX. The debit I am incurring to hedge my short VIX is about 25% of that position. The OTM butterfly also has a chance to fully balance the VIX position if I can get 300% of the initial debit.

My Butterfly is 100 points wide, so I have a pretty large potential profit area  to the down side. I am buying one Feb 2025 put, selling two of the 1975's and buying one of the 1925's. The first long strike of the Butterfly is near current prices, and the short strikes are centered on the 200 day SMA which I believe price action may be seeking.

I was filled at a $6.50 net debit, and I put in a limit order for a 19.5 credit, but I will close on a touch of 1975 no matter the price.

I will update this trade here and on Twitter @B50cal1978

Leave questions or comments! I enjoy a good conversation.

Good luck trading!

Friday, January 23, 2015

Swiss Franc Fallout. FXCM Risk Reversal

Good Morning Traders,

The Swiss Nation Bank (SNB) threw the world for a loop the other day when they took off their Euro Currency peg. There were many individual investors that were completely wiped out due to the way that Forex leverage works in the retail market. Forex leverage for retail trading is often as high as 50:1, meaning that you can move a notional value of $10000 buy putting up just $200 in margin. Pretty dangerous if you're involved in currencies that are artificially pegged to other currencies that are manipulated. Wow.

Anyway, other entities that were damaged by the SNB were Forex brokers that serviced those retail customers. One of these was my own Forex Broker FXCM. When I first began trading currencies, I went with FXCM because of all of their educational content, and their focus on conservative capital management and risk controls. It seems that they practice what they preach. While many Forex brokers around the world were instantly insolvent, FXCM was able to secure a cash lifeline and continue operations as normal, albeit with significantly more debt than they had before.

So what happens to the common stock of a company that takes a $200 million loss in one day? The stock trades down to $1.28 a share in two days. What happens to the same stock when the company is not insolvent? The share value doubles in two days.

While I believe that the shares are pretty accurately priced given the damage to the company, I am also confident that management will continue to operate in a profitable way, and that the financial health of the company will increase as time goes on. I want to be long FXCM.

Based on the recent acute decline in prices of FXCM common stock, The puts have a ton of premium that I want to take advantage of. I was delighted to find that FXCM has options trading out to August of 2015 from 1 to 5 dollar strikes and higher, and the open interest and volume are making for very tight spreads.

As a replacement for going long common stock, I intend to go long FXCM using a spread called a risk reversal. Obviously I intend to profit from this trade sooner than August, but I often use duration as risk management tool. Even if I get put the stock for $2.50, my thesis isn't going to change long term, and the price of the stock is so low, I can't loose much as this is a small position in my portfolio. I just want to take advantage of a perceived opportunity.

I am selling the August '15 $2.50 puts to pay for August '15 $5 calls. I am looking for $.25 net credit per contract. My max loss is the same $2.50 that I could be put for each contract at or before August expiration. There is no cash outlay for this trade, only the margin covering the cost of the short puts.

I will update this trade here and on twitter @B50cal1978

Please drop any comments or questions you may have, as I love a good conversation.

Good luck trading!


Sunday, January 18, 2015

Aren't Bonds Supposed to Yield Something? TLT

Good Morning Traders,

Over the last couple of months I have been keeping an eye on TLT, the 20+ year bond ETF made to track the face value price of bonds in that particular index. The index, by virtue of trading on the price of the bonds is inverse to the direction of the yield percentage of the bond index.

I had originally been following TLT in an effort to find the best place to enter with the trend to the up side as bond yields to continued to fall. I was intending to place something like a covered call, but by using options, and going out 2 or 3 months. Now, after this parabolic run, I see more risk to the downside than to the upside as far as TLT price is concerned, and I want to play it for a short term pullback.

I wanted to get a lot of profit potential for not a lot of margin put up, so I did a back spread whereby I sold the TLT Feb '20 2015 130 calls, and bought the 135 and 141 calls in equal amounts. Most back spreads are 2 to 1 strikes bought to strikes sold. The reason that I spread the ratio to the upside is to reduce the total risk and thus the margin required for the trade. My breakeven at expiration is 131.86. My max credit on the trade is $1.86 per contract, and the max loss is $3.13.

I plan to close the trade at 50% of max profit or about $.95 per contract. As I type, this price level is 128.45, and will climb a little closer to the 130 level each day due to theta, or depreciation that will occur because of the passage of time. With any luck, I plan to be out of the trade in 7 to 10 days.

I will update here and on Twitter @B50cal1978

Follow my blog if you enjoy the content. As always drop any comments, or questions you may have. Let me know what you think of the trades, strategies and anything else that I can do to make the Small Time Trading blog better.

Good Luck to everybody in the coming week!

Monday, January 12, 2015

Would you like some Guacamole with that? CMG

Good morning traders,

While most of my trading is done on index options, every so often I find a stock that piques my interest in which to place a trade. Chipotle (CMG) caught my eye late last week as the implied volatility for at the money options exceeded 40% for the February 18 2015 normal monthly expiration cycle. With Chipotle this is usually the case in the couple of weeks before earnings.

Above chart shows how the current implied volatility stacks up with 6 month historical volatility. While the volatility could still rise, I believe the options are priced by the market makers for movements relating to the upcoming earnings report, and that 40 to 45% is what we'll see until the report is released.

On Friday, 9 Jan 2015 I was filled at $5.85 net credit for the 825/875 call, 600/550 put Iron Condor for Feb 18 2015 expiration in CMG.

From trading CMG in the past, I've seen that after spikes or drops in price action that CMG's price seems to chop for little while until the next big event. For me, I see the next big event as the February earnings report that takes place on 3 February 2015.

Some will ask, "Aren't you afraid of the gap up or down when earnings are released?!"

This I will answer a resounding "Not at all."

Here's how I'm building my burrito:

I intend to close the trade at 50% of max profit or $275. The Analyze tab pic above has been fast forwarded the 3rd of Feb. Just due to Theta,  and with volatility staying in the region of 40 to 45%, CMG can be any where between the price levels of 665 or 750 to achieve this. At any time I can pull $275 out of the trade, it will be closed by limit order. On Monday, 2 Feb 2015, I will be closing the trade regardless of position to avoid the earnings gap. Yes, I'll have Guacamole with that.

I will update this trade here and on Twitter @B50cal1978

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As always, Good Luck!