While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
June 3, 2016
Fiat Lux
Featured Trade:
(JUNE 29 DUBLIN, IRELAND GLOBAL STRATEGY LUNCHEON),
(WHY WE DO PUT SPREADS),
(ALL I WANT TO DO IS RETIRE),
(THE TWELVE DAY YEAR)
Yesterday morning, I used the opening dip to come out of the SPY June, 2016 $212-$217 in-the-money vertical bear put spread at cost. This is being prompted by OPEC?s failure to reach a production ceiling once again.
The timing was fortuitous. An hour later, favorable inventory numbers delivered a 3% spike in Texas tea, dragging the stock market up along with it.
This allowed me to de-risk ahead of major market moving events:? the release of the May nonfarm payroll at 8:30 EST on Friday June 3, and the June 14 Fed interest rate decision.
This year, it?s all about risk control. Ignore it at you peril.
We had a nice profit in this position a week ago, before the dramatic short covering rally ensued.
Again, the hard earned lesson is to take the small profits as long as we are living in a 5% trading range. Pigs are getting slaughtered by the pen full.
This year, it seems like every market move is intended to cause maximum damage to hedge funds, regardless of the logic. From here, that means stocks could go up just enough to trigger another wave of stop loss buying, and then fail again.
A summer swoon is still in the cards, especially if the Fed raises rates in June.
Humans would be mad to buy stocks up here at the top of a two-year trading range, but machines don?t care. That is giving us our added upside volatility.
Either way, I?d rather watch from the sidelines for free. The algorithms will take advantage of the poor summer liquidity to whipsaw prices as much as they can, capturing as many pennies as possible.
If we do get an extreme move worth fading, I?ll re enter the trade. If not, then I?ll stay in cash awaiting another soft pitch.
A good rule of thumb in 2016 is to wait an extra day before strapping on a new position. Prices move more than you expect, even though it is not reflected in the Volatility Index (VIX).
The small profit we eked out of the SPY June, 2016 $212-$217 in-the-money vertical bear put spread offers a perfect illustration of why we execute put spreads.
We got the market and the timing wrong; yet,we still got out whole and lived to fight another day. When we executed this short position, the (SPY) was at $206.58.
Some 13 trading days later, the (SPY) rose 1.56% to $209.80, yet our put spread rose in value from $2.51 to $$2.55, making us $96. Some emails I received from followers indicated that they got executed as high as $2.61! All the money was made in time decay.
I love strategies that make money when you?re wrong!
The SPY June, 2016 $212-$217 in-the-money vertical bear put spread was a bet that the (SPY) would fall, move sideways, or rise modestly into the June 17 expiration. That?s exactly what we got.
Because this is a hedged option position, the minute-to minute price movement is small enough to enable readers to get in and out even accounting for transmission delays posed by the internet. You don?t need to live your life in front of a screen grasping for pennies.
You also have clearly defined risk. You can?t lose any more money than you put in. And if Armageddon hits, time value assures that you can always recover much of your investment.
I?m starting to wonder if the June 14 Fed meeting will be the last bout of volatility in the market that we see for a while. The doldrums are here for the summer, and the attractive trades in any asset class are few and far between.
I have always believed that if you don?t have a sense of humor, then you better get the hell out of this business. Below is a link to a YouTube video entitled ?All I Want to do is Retire? which covers the decline of the brokerage industry over the last 20 years.
The video is currently going viral, with 94,000 views so far, and was sent to me by a subscriber. Watch this during your next coffee break. The run time is five minutes. Sometimes the truth can be hard to swallow. Click here to view.
I have reported in the past on the value of the Friday-Monday effect, whereby the bulk of the year's performance can be had through buying the Friday close in the stock market and then selling the Monday close (click here for ?The Friday-Monday Effect Exposed?).
Well, I have discovered a further distillation of this phenomenon. During 2010, the S&P 500 rose by 143 points. Some 134 points of this was racked up on the first trading day of each month, some 12 days in total. That is 94% of the entire return for the year.
I can see where this is coming from. Many pension and mutual funds are completely devoid of any real trading expertise. So they rely on a 'dumb' dollar cost averaging models to commit funds. In a rising market, like we had for most of last year, this produces an ever rising average cost.
More than a few hedge funds have figured this out, front run these executions at the expense of the investors of the other institutions. And you wonder why the public has become so disenchanted with their financial advisors.
The possibilities boggle the mind. Imagine strolling into the office on the last trading day of each month and committing your entire capital line. You then spend the night hoping that a giant asteroid doesn't destroy the earth.
You return to your desk at the next day's close, unload everything, and take off on a 30-day vacation. Every month, you come back for a reprise. At the end of the year you top the performance leagues, and retire richer than Croesus.
It sounds like a nice 12 day work year to me!
Is It Time to Trade Yet?
?I think you?re begging to see a tectonic shift towards the dollar,? said Boris Schlossberg of BK Asset Management.
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price. This is your chance to ?look over? John Thomas? shoulder as he gives you unparalleled insight on major world financial trends BEFORE they happen. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
June 2, 2016
Fiat Lux
Featured Trade:
(JULY 7 DUBROVNIK, CROATIA GLOBAL STRATEGY LUNCHEON),
(A NOTE ON JUNE'S OPTIONS EXPIRATIONS),
(TESTIMONIAL)
We have two options position that are in-the-money and expire in 11 trading days, and I just want to explain to the newbies how to best maximize their profits.
These comprises:
the S&P 500 (SPY) June $212-$217 in-the-money vertical bear put spread with a cost of $4.51
the Japanese Currency ETF (FXY) June $91-$94 vertical bear put spread with a cost of $2.65
As long as the (SPY) closes at or below $212.00 on Friday, June 17, the position will expire worth $5.00 and you will achieve the maximum possible profit of 10.86%.
As long as the (FXY) closes at or below $91 on Friday, June 17, the position will expire worth $3.00 and you will achieve the maximum possible profit of 13.20%.
Better that a poke in the eye with a sharp stick, as they say.
In this case, the expiration process is very simple. You take your left hand, grab your right wrist, pull it behind your neck and pat yourself on the back for a job well done.
Your broker (are they still called that?) will automatically use the long put to cover the short put, cancelling out the positions. The profit will be credited to your account on the following Monday, and the margin freed up.
Of course, I am watching these positions like a hawk, as always. If an unforeseen geopolitical event causes the (SPY) or the (FXY) to take off to the upside once again, such as Janet Yellen announces that there will never be another interest rate hike again, you should get the Trade Alert in seconds.
If the (SPY) expires slightly out-of-the-money, like at $214.10, then the situation may be more complicated, and can become a headache.
On the close, your short put position expires worthless, but your long put position is converted into a large, leveraged outright naked short position in the (SPY) with a net cost of? $217.49.
This position you do not want on pain of death, as the potential risk is huge and unlimited, and your broker probably would not allow it unless you put up a ton of new margin.
This is not what moneymaking is all about.
Professionals caught in this circumstance then buy a number of shares of (SPY) on expiration day equal to the short position they inherit with the expiring $217 put to hedge out their risk.
Then the long (SPY) stock position is cancelled out by the short (SPY) resulting from the exercised stock position, and on Monday both disappear from your statement. However, this can be dicey to execute going into the close.
So for individuals, I would recommend just selling the $214-$217 put spread outright in the market if it looks like this situation may develop and the (SPY) is going to close very close to the $214 strike, even if it as a loss.
The risk control is just too hard to handle.
There is another reason to come out early. Some brokers exercise the options in the spread into shares on expiration, and then hit you with a another commission on the sale of the shares.
So check with you broker to see how they handle options expirations.
To be forewarned is to be forearmed.
Keep in mind, also, that the liquidity in the options market disappears, and the spreads widen, when a security has only hours, or minutes until expiration. This is known in the trade as the ?expiration risk.?
One way or the other, I?m sure you?ll do OK, as long as I am looking over your shoulder, as I will be.
Well done, and on to the next trade.
