Bunch o' Updates

11-month Portfolio Performance:

I'd like to say my option selling portfolio is up 90+%, because that's what it would be without my cotton trade. Instead, I'm back down to 80%. My cotton trade has caused a 6% portfolio loss, which appears as a 10% drop in my overall percentage gain. (simple example: If you turn $100 into $200 -- a 100% gain, and then you get a 5% loss on that $200, your account value is now $190. So your 100% gain now is only a 90% gain -- a 10% difference. This is because the 5% loss is on the current value, which was 2x the original value, and that equals a 10% drop based on the original value).

Cotton Update:

Yesterday, Dec cotton futures moved the daily limit of 4 cents, rising from 99.93 cents to 103.93. My 120 cent calls, which I sold for 0.60 cents each, ended up at 1.80, 3x the premium I paid, so I planned to exit my trade today.

Today, cotton continued it's rise, at one point going over 106 cents. The 120 calls traded at 2.00. I put in a buy order at 1.80 to exit. The price seemed to be stabilizing so I thought this was a fair price. Did I mention that you're flying blind when trading cotton options on OptionsXPress? They're pit-traded (not electronic), so price updates are slow and you don't see any bid/ask, so you don't know what the "going price" is. Oh, and the options only trade from like 5:15am to 10:15am PST, which makes for interesting trading :)

To attempt to get more visibility into prices by seeing what trades might have occurred that OptionsXpress isn't showing, I checked out the cotton info on TradingCharts (http://futures.tradingcharts.com/marketquotes/CT.html) which I believe shows option trades from the electronic exchange. About an hour before the options closing time, I noticed they showed a trade at 1.50 for the 120 calls. I wanted to modify my order from 1.80 to 1.50, not knowing if it was already too late. I did a "Cancel order", planning to put in the new trade after I was sure my existing order was cancelled. I wasn't sure if maybe my 1.80 order had already been filled and just not reported back to me due to the slow response on pit-traded contracts. But also due to this slow response, now my order was stuck in a "pending cancel" and stayed there until close. I'm just rambling now, but bah, it was frustrating.

Now I'm not sure what to do as the futures price has been dropping all evening, now back down to the 102 range. I still think I want to exit, since this is a dangerous trade. The news is non-stop bullish for cotton. My other option is to buy an equal number of, say, 125 calls to hedge myself -- limiting my losses if cotton goes above 120, but possibly being a cheaper alternative to outright exiting my current trade.

Sugar:

On Sep.24 I sold some Jan Sugar calls (74 days to expiry) at 35 cent strike price, while sugar futures rose to 25 cents. News for sugar is bullish (more bad weather, poor crops, etc.), and people are calling for 30 cent sugar, but they're also saying that it would be tough to break through that barrier. Furthermore, the Feb,2011 futures contract is a full cent lower than the Oct,2010 contract, and each further-out contract is lower than the previous. So just like last year, the futures tell the story that investors expect the price to drop, even if there is a temporary surge in prices. We'll have to wait and see if this trade will prove itself to be a mistake like my cotton one :)

Other News:

Gold has now surpassed $1300. This is great, as most of my other investments are gold-related -- and will continue to be. There's nothing else worthwhile to be invested in. Onward to $1600! ... oh, but not until my 1500 calls I'm selling have expired :)

Option Selling Part 5 - Strangles, SPAN Margin

The Canadian dollar is currently around 94 cents to the US dollar. With the weak U.S. dollar, Canada's stronger economy, news such as Russia diversifying into Canadian dollars, I think the fundamentals are strong for the CAD, and I'm very certain it will stay over 82 cents over the next couple of months.

I can (and did) sell 2 March puts (about 100 days to expiry) at a strike price of 82 cents. I received $640 for this sale, and it required $1200 margin. This means I will make about 50% in 100 days on this trade if the CAD/USD exchange rate stays over 82 cents.

Now, I also think the CAD price will be kept in check and will not skyrocket to $1.10 in a short period of time. With the US dollar so beaten down, there may even be a short-term US dollar rally here. I am able to sell 2 March calls at a strike price of $1.06 for a $560 premium. By itself, this trade would normally require around $1100 margin. So we can guess our total return and margin requirements are as follows:

Trade                                Premium     Margin

----------------------------------------------

Sell 2  0.82 March Puts         $640      $1200

Sell 2  1.06 March Calls         $560      $1100

Total:                                  $1100      $2300      
$1100/$2300 = 48% ROI.

However, this is not what really happens. In futures trading, margin requirements are calculated using a special algorithm called SPAN margin. The algorithm is a secret (you have to pay $1000 or something to even buy a program that will calculate it for you, although your broker has the program and will calculate it for you). All you need to know is that it calculates a 1-day risk value on your entire portfolio covering 16 different scenarios.

If you look at our trade above and really think about it, we didn't add much risk by adding the 2nd trade. If the CAD moves significantly in one direction, the losses in the one option will be partially, if not mostly, covered by the gains in the other option. E.g. if the CAD goes to 98 cents, the 1.06 calls may double in value (+$560), but the puts will then also drop to maybe $200 (-$440), so we've effectively hedged our position pretty well. The SPAN calculation recognizes this since it analyzes our whole portfolio, and thus only requires an extra $500 margin for adding the 2nd trade instead of a full $1100 if the trade were by itself.

With SPAN margin, our trade actually looks like this:

Trade                                Premium     Margin

----------------------------------------------

Sell 2  0.82 March Puts         $640      $1200

Sell 2  1.06 March Calls         $560      $500

Total:                                  $1100      $1700      
$1100/$1700 = 65% ROI.

A trade like this where you both sell a put and sell a call in the same expiration month is known as a Short Option Strangle, which I'll just call a Strangle from here on (because we're always "short" by being sellers of options).

I love strangles because you simultaneously increase your ROI while lowering your risk, which is totally counterintuitive -- normally to increase your ROI you have to take on more risk.

You could argue that you are taking on some more risk with a strangle, because a major market move in either direction is now bad for you, whereas with a single position, the market has to move in a specific direction to affect you negatively. However, I believe this type of risk is more than offset by the hedging nature of the trade.

In fact, if you follow a strict rule of exiting both trades and repositioning the strangle if one of the option's value doubles, you almost can't lose money. As I described earlier, if the CAD moved up to 0.98 and the call option doubled, you could probably exit the trade for less than a $200 loss. You could then place a new strangle at a higher price range, say 86 cents and $1.10, again for a total $1100 premium. Even if you had to reposition your trades like this 5 times until you were finally successful, you'd still break even in the end!

I try to do strangles whenever it makes sense. However, when the sentiment on a commodity is really bullish or bearish, it can be too difficult to do a low risk strangle. Right now, many commodities have a lot of bullish sentiment, and so the puts are practically worthless until you get to the strikes that are quite close to the current price -- too close for our comfort as far out-of-the-money option sellers.

Natural Gas - Final Trade Update

I am now out of Natural Gas, and I actually ended up making a small profit in the end.

I closed out my December contract at $4.84 today (which I had went short on at $5.00) for a $400 gain. Combining that with my November contract that I lost $150 on, my final outcome of my natural gas trades was a very small profit of about +$220 after commissions.

The warmer weather and maxed out natural gas reserves has caused natural gas to finally come down as expected. That cold snap in October combined with other factors that caused the price to rise sure had me scared for a while -- as I mentioned, I was down almost $4000 at one point. But the fundamentals prevailed in the end.

There is still weakness in natural gas for the short-term, but it is too risky to bet on this now with winter approaching. And besides, I am moving on to bigger and better things...

NG trade

Natural gas continued its climb the first couple of days last week, with November futures reaching over 5.30 and the December futures reaching over 6.00. At those prices my contracts were down $1400 and $2500 respectfully. Finally prices began descending Wed, Thurs, and Fri.

On Friday, my November contract almost touched my break-even price of 4.75. With only Monday and Tuesday left before expiry, I decided to sell at the end of Friday at 4.81, for a small loss of $150. I didn't want to risk holding over the weekend, just in case prices went up. (Remember, even a 0.20 rise would be a $500 loss).

Today (Monday), prices continued their decline with quite a large drop. November closed down 27 cents at around 4.50, with 1 trading day left. So if I had held on just one more day, I could've turned a $500+ profit. Oh well, things could have gone much worse, so I'm happy getting out when I did, considering where things were at just a week ago.

The drop was nice because now my December contract is down to 5.20. I had planned on taking a large loss on it, but who knows, it might actually go under $5.

Anyway, after this trade, I think I'm done with trading pure futures. Too risky and too stressful. I know, I know, I only made 1 trade. And I'm glad it didn't go exactly as planned, or else I may have fooled myself into thinking it was easy money. But all is not for naught! The setting up of my OptionsXpress account was all part of a larger plan to eventually reach my trading destiny, which I am now ready for... and I'll leave that for my next post.

Birthday trade

Today I sold 1 e-mini November natural gas contract (QGX9) at 4.75.

It was up 23 cents from yesterday's close. I really can't see this rally having much more steam. I've read that the rise is due to a combination of short sellers getting out and people being more optimistic about the economy (an improving economy will boost demand in NG). That's all fine and dandy, but the reality is:

- Natural gas inventories are going to reach record highs - they'll increase until mid-October.

- Weather/Temperature has been very favorable.

- There have been no hurricanes.

- There has been no sign of increase in demand yet.

So yes, sure, NG demand will pickup at some point, but for the next month there is no justification for the spot price to keep going up. I'm still reading analysts predictions of NG falling below $3 in October, mainly citing the inventory levels and favorable weather (meaning no big increase in demand).

Current spot price is either 3.44 or 3.59. The site that shows 3.44 showed yesterday's close at 3.37. That would mean it only increased 7 cents today, while the futures all increased about 25 cents, which seems strange, so I'm wondering if the 3.59 number is more accurate. I don't know what its previous day's number was though. I still have to find a site with spot prices I can trust. Either way, I have anywhere from a $1.16 to $1.31 buffer, with 34 days left till expiry. I feel very safe in this trade. In 4 trading days the Nov contract will become the near-month contract, as the Oct one expires on Sep.28th. It will be interesting to see the behaviour of the Nov contract when that happens.

The weekly inventory numbers will be released tomorrow morning. As long as the inventory increase isn't way lower than expected, I think NG will drop quite a bit in the coming days. But who knows, because right now the rally is against me.

NG trade

I entered my first futures trade today! I sold 1 e-mini December futures contract at $5. That contract is QGZ9 if you're curious (QG = natural gas e-mini, Z = december, 9 = 2009). Current spot price was around $3, Oct contract (which expires in about 9 days) was 3.20, Nov was 4.35. The Dec. contract ended up at 5.07 the last I checked.

This trade requires about $1300 margin, and for every $1 move in the contract price, I lose/gain $2500. With futures, you need to be aware that the required margin value doesn't change over time, but your Futures Buying Power does, and this is what determines whether you get a margin call (i.e. are forced to liquidate or add more money into your account).

Futures Buying Power = (Total account value (cash and futures positions) - sum of margin requirements for your open trades). So say you start with $10,000. Your account value and futures buying power are both $10,000. If you buy/sell 1 e-mini NG contract, your account value is still $10,000, but your Futures Buying Power is now reduced to $8700 ($10,000 - $1300 margin requirement). If the trade moves against you by $1, that's a $2500 move, so that means your total account value will be $7500 and your futures buying power will be $6200 ($7500 account value - $1300 margin). This trade would have to move about $3.50 against you for you to get a margin call -- i.e. the point when your account value drops to $1300 and your futures buying power is $0.

Here are some things I learned:

• I was wrong about futures trading 24/7. They usually stop trading at 5:15pm on Friday and resume at 6:00pm on Sunday. They trade from 6:00pm to 5:15 every weekday. However, hardly anyone seems to trade in the evenings, or even that much in the afternoon. So basically it ends up being not much different than stock-trading hours.
• The e-mini contracts have waaay lower volume than their corresponding regular contracts, and the spreads are horrible. E.g. when a regular NG contract is at $5.00, the corresponding e-mini contract might have a bid of $4.95 and an ask of $5.05, and a single trade won't happen for 10 minutes.
• Because of the bad spread, when an e-mini trade does occur, the trade price is usually 2-3 cents lower than what the latest trade of the regular contract was at. E.g. When my order at $5.00 went through, I could've gotten a normal-sized contract at $5.03 at that moment.

It might have been better to buy the Nov contract, since it will drop more within the next month than a later contract, assuming spot price stays the same or goes lower, but I thought I'd give myself a little more time in case their is a temporary spike here. I'm tempted to sell another contract, for a total of 2, but I should probably play it safe on my first trade.

I am hoping for NG to drop in the coming weeks (obviously) and to sell my contract at $4 for a $2500 gain.

Here's another interesting article:
http://www.zerohedge.com/article/why-has-natural-gas-spiked-60-labor-day

Trade Update: DXO

I mentioned that I sold most of my DXO a couple of weeks ago. I was planning to hold onto the remaining amount (about 20%) for a while, but lo and behold, Deutsche Bank decided to shut down DXO due to concerns over new regulatory restrictions imposed on the futures exchange. There is some info about this here:

-http://www.dailymarkets.com/stocks/2009/09/09/why-did-the-double-leveraged-oil-etn-dxo-close/

-http://247wallst.com/2009/09/01/the-death-of-an-energy-etf-dxo/

They are supposedly redeeming the notes at today's closing value, but just to be safe, I sold yesterday at 4.37, since there was nice spike in the price anyway. That was about my break-even price.

I'm just glad this happened now after I was able to sell at a profit, and not when I was temporarily down 50%!

On another note, my futures trading account with OptionsXpress.ca is finally all setup! Too bad I didn't set this up sooner -- I'm up $5000 in my virtual trading (I was able to sell Dec Natural Gas at 5.09, and it's now at about 4.60). I'm going to wait to see what happens tomorrow because as I feared, NG dropped pretty far before my account got setup, and now a rebound has finally begun. The spot price was down as low as 1.83 and just jumped up to around 2.45 in 2 days. The Dec contract got down to 4.30 and rebounded to 4.70.

I don't want to sell into a rally, so I'm going to wait until there is a down day. BTW, there are a whole bunch of comments on my last post that talk about the risk involved here.

Trade Update - DXO, DIG, FAZ

It's been a long time since I've updated this blog, but I actually haven't done any trades until recently anyway.

Yesterday I sold most of my DXO at $4.85 and the rest of my DIG at at $30.24.

Oil is up to $74 and I decided to get out. I made about 15% on the DXO trade - not very much, but I had a LOT of money in that trade.

I'm a little disappointed. I said that holding DXO would be an easy 100% gain, and it should've been (DXO went below $2 a couple of times and is now about $4.85). I bought too much too early on the way down and had no more money left to buy when it was really low. Even with not timing it well, I still actually made about 30%, if we're just talking in US dollars. What really hurt me was the change in exchange rate. Most of my DXO was bought when the Canadian Dollar was at a low $0.78 to the US dollar, and now it's at $0.93. So I "lost" over 10% in gains due to the Canadian dollar skyrocketing. Due to "the constant leverage trap" with leveraged ETFs/ETNs, DXO did not perform as well as it could have if it didn't drop so low at the beginning. It also switched over to using the July 2010 futures contract as its basis, which has way more premium built in to it, meaning it wouldn't perform as well as near-term contracts assuming oil only moves up slowly.

So why'd I get out? Oil recovered nicely to $75 as expected, but I don't see reason for it to go much higher right now. The economy still sucks and the markets are irrationally optimistic -- the markets have been in a huge extended rally, so I thought I would get out while things are good before the next "storm" hits. I'm not saying oil won't keep going up. I just don't want to bet on it doing so. I think Oil will do really well long-term, but short-term, I'm too scared and so I'm taking my profits. I would consider re-entering if oil drops to $60.

FAZ - let's not even mention that. Worst trade ever. I'm still holding some of it which is pretty much worthless right now. Again, FAZ/FAS are only for day traders. They both lose money over the long term and are too volatile for non-day-traders to be playing. Luckily I didn't put much money into that, so my gains on DXO still far exceeded those loses.

On DIG, I believe I made just a couple of percent on the last 1/3 of my position that I sold. So I've averaged about a 25% gain on my full DIG position.

What's next? I'll save that for my next post.

Trade Update - Citi

Markets were up again today, but Citi did not outperform the rest of the market like I had hoped. I would've done much better if I had just held onto UYG. As I mentioned, I don't want to be holding Citi long (too risky, even if it could easily go over $2), so I just sold it off near the close today for about a 15% gain.

Trades:
Sold Citigroup at 1.63 (bought at 1.42) for a 15% gain in 3 days.

Trade Update - C

I bought some Citigroup near the close at 1.42. I know, I know... I tell everyone I'd never buy any banks, and then I go and buy Citi on a day that it's already skyrocketed up 35% :-)

I'm betting on another +30% day for it tomorrow, however unlikely that might be. The reason it's up is because of news from their CEO that they were actually profitable for the 1st two months of 2009. Because the stock price has been completely trashed up until now, and now there's finally a bit of good news, I'm expecting more people to jump on board tomorrow. Even if it pulls back tomorrow, I think I'll hold on for a couple of days before selling. We may be in a short-term market rally here, and I think Citi will recover to the $2 range. I'm not holding for more than a few days though.

Trade Update - FAS

Sorry, I'm behind on blogging... So as you know I bought a puny amount of FAS at $12.55. It's probably a good thing my mistake happened, since FAS has since plummeted.

When I realized my mistake, I removed my stop, because I didn't want to pay commissions on such a small trade... I didn't really care what happened with it.

Then yesterday with the markets way down in the morning, I bought a proper amount of FAS at $10.01. I set a stop at $8.50 (for a max 15% loss). I thought this was a steal of a deal and was expecting a rally since it was Obama's inaugaration day. But FAS easily hit my stop and plummeted to $7.60, and incredible 40% drop from the previous day's close! It's still hard to believe these 3x ETFs... 40% in one day -- amazing.

Anyway, so I'm feeling pretty crappy about that trade, but still felt there's got to be a rebound here with such large drops. So today, with the markets up, I waited for the first sign of a rally in the afternoon, and I bought in again, getting in around $8.50 -- basically where I previously exited. It was a pretty bad price since it was much lower earlier in the day. But the rally was strong to the close, and FAS finished at 9.90.

It's nice it finished so strong, so that now I can put a stop just above my entry point and not lose any more.

Man, I think it's a little too stressful to trade FAS/FAZ -- you practically need to be a day trader.

Trade Update - FAS

Okay, I'm stupid...

I planned to buy FAS (3x bull financials) to catch a short rebound, since the markets have been mostly down the last 5 days in a row including being down sharply (3%) this morning.

I bought almost perfectly at the bottom at 12.55 before lunch and it immediately shot up to $15.00 before I realized my mistake: I was in such a hurry, I entered 1/10th the number of shares I meant to (because I was used to buying SKF which is in the $100's, not the $10's), so I ended up hardly owning anything. I can't make enough on this to even cover the commissions now, so I'm not sure what to do. I'll probably just wait till tomorrow to see. I think it's too risky to buy right now. If the markets drop again, I'll try to get into it again in the $12 range, this time with a proper number of shares, but I'm probably too late. Bah - so much for my perfect trade.

Lesson: Always review the trade confirmation page to make sure the total order amount makes sense before you click OK.

Trade Update - SKF

I stuck with the plan and sold my SKF today at 138.10 (bought at 106), for a nice 30% gain in about 5 weeks.

SKF

I bought some SKF (2x inverse financials) yesterday at $106.00.

Here's what the 3-month chart looks like:

There's still no good news in sight, so I see no reason for a continued rally in the financials or the rest of the market. (You never know though, because at some point here, probably early next year, people will become optimistic and start investing again. This may happen with Obama coming into power and people just generally thinking we must be near a bottom.)

I still expect more bad news in December and even just looking at the chart from a technical perspective, this trade looks like a good risk/reward trade. I mean, SKF went from $280 to $100 here in less than a month, so I think the odds of a bounce are good. I hope to sell around $140.

Trade Update - UYG, SSO

The markets were up again, so I sold my UYG for a very nice 30% gain in 1 week. While that sounds sweet, I had such a small amount invested in it that it really didn't do much for my portfolio.

SSO finally climbed back up to my purchase price, and I exited my position. At one point on Friday I was down a whopping 40% on this trade, and that scared me enough to get out while I could today without a loss. I can't tell which way the markets are going to go. Is this just the beginning of a much larger rally? I'm too chicken to take any chances, especially after having being down so much, and now with the markets being up 4 days in a row. So I'm happy to get out now even if it continues to rally.

Trades (Nov.26):
Sold UYG @ 6.00 (bought on Nov.19 @ 4.62), a 30% gain.
Sold SSO @ 5.80 (bought on Nov.12 @ 5.65), a 2% gain.

P.S. I should note that with the current crazy commissions I'm paying, you can usually subtract about 5% off the posted trade gains to arrive at what I really made. E.g. I actually took a very small loss on the SSO trade. The variations in the CAD/USD exchange rate over the length of a trade also affects what I really make on these ETFs that trade on the american exchanges.

Trade Update - SSO

Yesterday I bought some SSO (2x S&P500) at 25.65. Why? The S&P was around 870, almost at the lowest point it had reached in recent times back on Oct.27. There has been a lot of recent market negativity and continued bleak news reports, but it was the 3rd day in a row of quite significant market losses. With that alone I thought/hoped it was due for a short-term bounce, possibly before the end of the day. Also, I noticed theMarketSpeculator was buying too, which gave me some confidence.

Well, it continued dropping yesterday after I bought. Then the markets dropped more today -- at one point I was down 10% on the trade. But the markets took off like crazy out of nowhere at 1 pm and finished up a whopping 6%. DOW ended +550 at 8835, the 3rd largest 1 day point gain. What's crazy is that from 1pm to the 4:30 close the Dow gained almost 1000 points from it's midday low! Talk about volatility. Within that time frame my SSO holding went from being -10% to +9% ($28.10 close)-- almost a 20% swing in 3 hours. crazy.

Side note: I never know where I should place stops. I didn't place a stop on this trade and I'm glad I didn't. If I had placed one at say 10% below my entry, or at a support level around $24, I would've been stopped out at the lowest point today right before it took off.

I may place a stop now around break-even, and don't know when I'll sell.

Trades:

Nov.12,2008 - bought SSO @ 25.65

P.S. Google Finance links are now broken for many ProShares ETFs that moved to another exchange. Yahoo Finance works. Hopefully Google will fix it soon.

Trade Update - DIG

Guess I didn't need to worry. Sold a lot of my DIG off today at $36 and $37 today, for about a 37% gain on those trades!

Trades:
Account 1: sold all the DIG bought at 26.07 for $36.02 (+38%). So I need to start looking at what to buy next.

Account 2: sold another 1/3 of DIG (bought at 27.20) for $37.00 (+36%). I'll probably hold onto the remaining 1/3 longer term, maybe selling off around $50.

Trade Update - DIG

Monday was a bad day, with DIG down 10%, but today (Tuesday) the markets took off in the last 2 hours of the trading day, with the DOW having it's 2nd biggest point gain ever -- 889 points, almost 11%. DIG followed suit, although 2x the gain of course, closing up almost 22% at 30.10. I decided I would take some profits near the end of the day. Since it was skyrocketing towards the close, I just waited and waited until the final 2 minutes, before finally selling my portion at 30.27, pretty much the day's high.

If DIG continues to rise, I'll probably look to sell at least 1/2 around $36, and the remainder at $40+, if it looks like it will get that high.

Trade Status:
Sold 1/3 of the DIG I recently purchased at 27.20, sold at 30.27 (+11% gain).
Note: Still also holding the original DIG I bought in another account at 26.07.

Trade Update - DIG

With the cash from selling SSO, I loaded up on a lot more DIG today at 27.20. Oil is sitting around $68. This is somewhat of a gamble if I'm not willing to hold long-term, because it could move way down tomorrow depending on what OPEC does tonight. But again, the potential short-term upside is huge too.

Edit: DIG shot up 10% at the end of the day, closing at 30.00, on expectations of OPEC's cut. Let's just hope this isn't "buy on rumour, sell on news".

Trade Update: SSO, DIG

The market plummeted today, and energy and gold stocks got hit the worst. I got stopped out of the rest of my SSO at 29.02 today, which was right around my break-even, for an average of +7% on that trade. I never did end up placing a stop on DIG like I said I would to lock in 30% gains, and now it's only about 3% above where I bought.... oh well. Stops are great, and I really should start using them on all my trades since I can't pay attention to the markets throughout the day, and even if I could, I have a tendency to not be able to force myself to sell :)

I have no idea what's going to happen tommorrow, but I'll probably hold on to DIG even if it drops more, because I don't have too much in it, and I believe the upside potential to be huge.

Trade Status:
SSO - stopped out of the rest at breakeven, with first half +15% = +7% average gain over 5 days.
DIG - holding on...