Total Pageviews

Tuesday, August 09, 2011

S&P and the aftermath. My options strategies

Well... bonds were UP, and the market itself was down. Gold is up like crazy and silver is down.

I can't think of a good reason for this behavior except.

THIS is why I am not a short term trader! lol. I would have shorted bonds and will be buying some more silver on the dip, here.

I think the IBs are using silver as a proxy short to try and put a cap on gold. Silver is a small small small market, even compared to gold. The big investment banks in bed with the Fed and Treasury have used massive silver shorting in the past to influence gold. I think they are trying that now, as there is a HUGE price divergence between silver and gold right now (gold is up 43 bux and silver down 75 cents), which means this time, the fish aren't biting. Silver and gold are "tied" to each other....... or have been in the past, so if you can make silver plunge, you can influence the price of gold... or at least they have been able to in the past. That pattern may be dissociating. This present action of gold being crazy up and silver down puts the gold to silver ratio at 45.71:1 .

I think that is a good spread trade at 50:1.

Till then. I am strapped in and enjoying the ride.

For the record, I am short a tiny group of August HL 8 puts, deeply in the money. I will probably roll them out to September or October puts, leaving them in the money and trying to catch some more money on the way back up. I am disappointed in Hecla. It was a blazing stock 4 years ago, but behaves poorly nowadays. I shorted the puts on a whim.

I am also disappointed in SLW, or silver wheaton. It is the darling of the big fund managers when it comes to silver........, which is the reason I don't like it. When Sammy S&P gets a margin call because Netflix or Proctor&Gamble is tanking, he sells everything. Since SLW is in his portfolio, he and all the other lemmings sell it, so that it is really TIED TO THE DOW on the down days. If I wanted to trade the market indexes I would just do spooz (SPZ, the symbol for the December S&P futures). Anyway, SLW has sold off almost 25% since I started looking at it. I actually sold some puts on it, but got out last Thursday with a little loss.

I am also short some Aug 2wk SLV 40 puts. I don't trust slv, but it is a small money paper play on silver...... or paper silver, if you will. I have had a REGULAR pattern of shorting the weekly expiration puts on slv. I have been picking the closest in expirations (ones with the most delta, therefore the fattest time premium), and shorting some of them. I had actually been shorting "up the ladder" on the recent run. Now the puts are back in the money on these short positions. I rolled the last weeklies out, having originally sold them for a dollar 89. I picked up 20 cents on the roll out to this week, so am sitting at + $2.29 premium per contract. Silver is jumping around like crazy, so these could be deeply in the money Friday, or they could be worthless. I am sitting tight. I really don't want to take assignment on them, so I will probably roll them. If they are DEEPLY in the money, I may roll out and down, which means I may have to go to September puts, or maybe even October, but I don't like that, as I like to hear the cash register ring each week. Even if it is just a little, so I probably will only roll out another week on the 40s.

Finally, I have been building up a large (large for me, anyway) position in the October SLV call spreads. I have mostly been buying October 47 calls. I picked up a substantive number of these at .15, but my average entry has been .72. I have been buying these on the dips. Then what I have tried to do is wait till there has been a rise back up (with silver, this is an easy wait, the dips and rises), and SELL THE NEXT STRIKES UP. That is, I am long a batch of 20 calls (I usually do these things 10-20 contracts at a time.... Mr. Timid here). So I am sitting on 20 October 47 calls at .72 a piece. This means that I am out about $1450 dollars on the trade. So I wait till the market rallies (has done so every time so far) and look to sell the October 48 or 49 calls. I actually try to do these at a "credit" or for more than I bought the original 47s. This has worked out quite well for me, as I am short a whole bunch of 49 calls at .85 average cost. This means several things to me. ONE, it protects my original out of pocket money. I now have NOTHING at risk. TWO, it actually puts a little change back in my pocket, as I now have .13 per contract, or in this case 260 dollars. If you do the math on this, it is actually a 16% ROE (return on equity), which is not too shabby. But that is not the best part. Those are the last aspects THREE. This gives me a "free trade" (see two above) where I have the opportunity to make 200 dollars per contract, or $4,000, if SLV finishes above 49 dollars in October AT NO RISK TO ME. All my money is off the table, and I am now playing with "house money" if you will. So, I have the opportunity, AT NO RISK TO ME, of increasing my 16% RISK LESS return to a 294% return ALSO RISK LESS. And now we hit the VERY BEST aspect of this. FIVE If you are still several months out (don't try this less than 45 days from option expiration, the collapsing option premium works against you). You can still do the same basic strategy. On the dips, you can BUY BACK YOUR SHORT CALLS. For example, on the last silver swoon, I bought back the 49 calls at 50 cents. For the purpose of this illustration, we will assume that 20 calls is all I have. I have actually been building this position 10 and 20 contracts at a time, since May, so I have a crapload of these, and am out no money, here. Lets say I bought 10 of them at 50 cents. That means I "gave up" my 260 point credit, plus another 230 dollars. I am now long 20 47 October calls, short 10 49 october calls, at a net cost to me of 230 dollars. HOWEVER, 4 days later, I sold BACK those Ten 49 calls at 90 cents. I am back to my original risk less position, having put another 400 dollars in my pocket, so that now my total return is 680 dollars net, or a 48% ROE, and I STILL HAVE THE OPPORTUNITY FOR THE $4,000 RETURN IF SLV FINISHES AT 49 OR BETTER IN OCTOBER.

You can use this basic strategy of what Natenberg called a "free trade" to generate LARGE positions if you start out early enough, and are patient with your trading, using charts and Fibonacci sequences to help you time your entries into the market. This strategy helps me "speculate" with other peoples money and lets me sleep at night.

No comments: