Archive for July, 2009

Benny Moten sings the rally

July 28, 2009

The true genius of Kansas City blues, which later became the inspiration for the popular music we are all fond of listening to. This rally is a blues-driven tribute to Benny and his group of cohorts who reside in our history and spark our imagination.

FAS and FAZ dual covered call trade closed

July 17, 2009

After playing around with this multi-dimensional derivative on derivative trade, I have closed it for a net loss of $0.06. My habit of buying back short options for a nickel is what kept this trade from being a winner. As in a total of $0.19.

What’s curious is that the credit taken in for short calls almost made up for the inherent price decay of the triple-leveraged financial ETFs. On a theoretical basis, the decay of OTM calls and the price of the ETF are almost identical.

I received $5.23 of credit during the 3-month experiment. We need to take away from that total the purchase of short calls for a nickel when they became available and my purchase of the FAS in-the-money call Friday afternoon. This totaled a debit of $0.75 against credit received for a grand total of $4.48 net credit.

I needed to buy back my ITM short FAS call expiration Friday afternoon to close the trade because it was ITM and I would have gotten my long stock called away anyway. I just avoided exercise fees and put this experiment in the books a few hours early. I paid $0.50 to buy back the ITM FAS call, the first time in three months I was faced with a short call being ITM.

The price I paid for long FAS and FAZ, and the price I received for their sale totaled a debit of $4.54. Even though these ETF are inverse each other, the purchase of both simultaneously is not a perfect hedge. In fact, it’s not even close. After three months and accounting for the reverse split, the decay was a stunning 25%. That’s not annualized.

About the only way to play these products is on a day trading basis, or maybe short them. Both of them. You’ll need to have some sort of Black Swan hedge in place, but I’ll let you figure that one out.

This brave new world of trading in which we can ‘invest’ in triple short ‘stocks’ in our IRA is quite interesting. Going long these ETFs makes about as much sense as being long OTM calls. But those regulating our retirement investments deem both these products suitable. Let’s not let the public short stocks in their retirement accounts though. That would be risky, you see.

RUT Iron Condor for August

July 2, 2009

Bulls and bears are on summer vacation. But they left their children behind to keep the market humming along during their well-deserved break. So as the cubs and calves fight it out, I expect much ado about nothing. Enough so to put on an Iron Condor in RUT, the European-style, cash-settled index that tracks the Russell 2000 small caps.

I’m not playing it safe on this one, but I don’t expect to carry it through to expiration. I’ve chosen the 20 delta at the short strikes, which is almost a coin flip in terms of probabilities. I’ve also taken this trade with a little too much time to expiration. Normally, I will take an Iron Condor with a max of 48 days to expiration, but this time I’m playing the summer holiday and hoping to steal some extra theta.

The strikes on the put side vertical are 450/460. On the call side vertical they’re at 560/570. Credit received is $3.15.

The general idea is to take this trade off when price action threatens the short strike. And hopefully I’ve eroded the short strikes enough to get a profit from the trade.