Friday, January 15, 2010

Insurance Please...

I am very please with today. The move down was strong and deep. The double top on the ES futures played well and I think there is much more of it to come. I profited from the my ES short contracts, the put options that I sold short which have now expired, and I took some profits on a small long position I held in SWKS at yesterdays highs. I had more than a hunch that today would go they way it did.

Better news is that I bought some insurance on the cheap. My QQQQ short position is now insured with March $46 calls. I already own $45 puts that are currently in the green (which I purchased at the last QQQQ reaction high). I simultaneously sold some $44 March puts to offset the cost of my insurance. At this point, my loss potential is fixed to a very small amount through March, but my reward for a break below $45 is officially unlimited in the same time period. This was a very fine peice of financial engineering and timing. A big relief!

I did something very similar with the DIA yesterday and today. Yesterday, I purchased a substantial number of March $105 puts. Double the number when compared to my short equities position. Today I sold half that position for a nice profit - leaving the other half to take the place of my short equities when the time is right. I also did a complex spread which includes insurance on 40% of my short positions at $106 offset by the sale of an equal number of March $97 puts and the sale of my prior DIA March $102 puts. In the end, I have 40% of my insurance in place and twice the short potential with half the risk. I will look to insure at lower and lower targets as this develops.

I made no moves on my SPY holdings as it seems clearer to me that SPX has more downside to come. I will make my moves once we make our way down towards the 1120 range. The insurance will be cheaper and the premiums on any put sales will be higher.

This weekend will involve more serious technical studies - I hope the this time we'll get our correction.

Cheers!

16 comments:

Attitude928 said...

I'm still getting some downward signals for Tuesday.

David O said...

Hey Attitude,

I agree.

Also, whenever you see new issues or splits like the Baby-Berkshire Split - you know there is a scramble to suck up any and all cash before the crash!

This combined with recent FED posturing and the sell into the news of the past day is really starting to set the current market conditions into a corrective mode.

We'll see soon enough if a major trend change is underway.

Cheers!

David O said...

Also, we have scandals surfacing now - like the J&J Kickback Story".

Remember, a correction needs the right conditions to get it going. First, the availability of cash must begin to shrink and the cost of money must go up. The FED has already started on that front and I expect more action soon.

Second, populist pressure on the administration must rise to disruptive levels - such as calling for Geitner's head or levying fees on the bad banks.

Third, corporate/accounting scandals will begin to dominate the headlines, such as J&J.

Fourth, we may see a major country defaulting such as Dubai, Portugal, Italy, Ireland, Greece, or Spain.

I won't speak of the other possibility as no speculation should be made on the loss of lives.

The market is an interesting animal - reflecting all things way in advance.

Let's see it play out.

payline said...

I am with you guys , that corrective end of the day leg may have more upside , but we should head to the downside when its over
It could be A of ABC or it could be all of ABC.

Note we bounced off the longer term trendline twice today .
At some point the dip buyers will get creamed , that will be a major change.

a close under 1130 would be a nice move.

My best

nicasurfer said...

Nice moves Dave. Looks like yougot our mojo back. Love your blog!!

David O said...

Thanks NicaSurfer,

I am pleased with the decisions. I'm studying the Indexes this weekend to see if I can better predict the swings going forward.

Have a good weekend!

Cheers.

Anonymous said...

David,

Thanks for your blog. I found it as a result of following Henrique's blog some time ago. I like your honesty and your TA is both to-the-point and uncomplicated for a beginner to comprehend!

Best wishes to you.

CBS said...

David, What do you think of this analysis? I value your opinion on these kind of thoughts.

First, a comment on OPEX and how max pain is misunderstood by retail traders. Once in awhile on message boards, somone arrives with an amazing revelation that max pain is set up in order for MMs to screw over retail traders as the key driver. This is true and shall remain in place, and by the way volume is higher on OPEX, and the daily candle seen is not your trigger for market direction without confirmation follow-through in that timeframe. In general, max pain is almost dismissed as an urban legend that may work and may not, since the results of it by sectors is suspect at best, at least on the surface. The overall benefit of MMs is what drives OPEX action.
You may have noticed today that any position not under accumulation by institutions today hit its max pain, while anything under accumulation did not, but reversed trend with obvious impulsive waves after the crap positions hit max pain - the SPX bottom on OPEX is not determined by the max pain hit off every possible position, it is derived off the crap that no one in their right mind is long based off institutional action. If SPX's bottom was based off every possible max pain calculation by puts and calls across all stocks market wide, it would be easy to project it, and game it accordingly.
A prime example is GS. Everyone has been running away from this like a scalded dog ever since its past earnings. Something came out behind closed doors after last quarter's earnings that had people bail. Maybe their HFT had a snafu, maybe they need to under-report based on Obama tax laws, in any event, people are on the run from it. Yet they had to not allow it to melt down today due to its influence, so it was a hybrid of the OPEX gaming model today.
Anyone who is successful accumulates counter trend to retail (like MMs hitting hard in accumulation postions after the crap stocks hit max pain creating flat or consolition phases in favored positions around 3pm EST), under a different timeframe than what retail trades to.

Back to the range of SPX going forward. I posted several weeks ago that the model set up naturally entails consolidation levels for SPX, along with uptrending sectors in favor that ramp while the others degrade of consolidate.
I think I have made it clear that I am not in awe of GS, and their HFT trading model, which is pretty easy to game - they are restricted by maintaining upside without meltdown, which is like shooting fish in a barrel for anyone with T/A knowledge. The very fact they need to maintain upside forces their hand on market direction and technicals. It either goes up, consolidates, or retraces only to a level to allow more upside off previous waves.
The consolidation is triggered like any position off extended technicals, which is where we are now. Prior to this current upswing, they put in a strange varying range consolidation pattern, that is not by random, it controls our ranges going forward and is key from a T/A standpoint to allow possible "outs", similar to never hitting measured moves through the uptrend, which has been the standard since the V bottom. There is a "false bottom" that they have hit at 1128/1130 a couple times at the top of the consolidation range that is fragmented, keep in mind that is not really the true SPX support level. They will use the real one for a 2 wave down screw over in order to enact the higher 1158 and 1170 targets, similar to the move last July, where they had to stutter-step the SPX ranges with more downside off a "failed" reveral pattern to allow upward trend continuation. The 2-wave down will not occur on the first cycle in consolidation, the false range needs to be established first to prop it.
I am travelling next week, so will probably not be trading, but keep the overall perspective of the ponzi in mind.

CBS said...

By the way, it is not my own, it is from another blog that I read.

David O said...

Hey CBS,

My quick thoughts on the mm/specialist and OPEX...

True, there are market makers for every stock and so called specialist manipulators of price for the benefit of pools and syndicates. Let's say that these folks are simple the mm. This is normal in any market and it is important to follow the trend in a stock to understand where the mm is within their process. OPEX plays an important role for the mm as they are often compensated for their performance in the form of call options. Say there is a stock trading at $40 and a pool of investors looking to distribute a large number of shares somewhere in the $45 to $50 range. It is the mm who makes this happen and he may be compensated with what amounts to a number of call options at $44, $46, $48, $50, $52, $54 and so on. The mm is also armed with cash. Using his cash, he creates intitial demand by buying up shares driving the price up above his option strike prices. But he also sells shares short on balance at reaction highs to limit the run to a believable pace. He sells short because he has an option at lower strike price to insure him. Further, the accumulated short positions give him the ammunition to support the price and prevent it from declining below his current strike price. He does this by covering (with a nice profit) – which is in fact buying as perceived by other market participants. The mm will do this over and over – making very good money along both ways and achieving his goal of moving the price higher at just the right level of volatility. So, depending on what the market maker is holding (in terms of current strike price, short shares on hand, and cash) he may in fact need the price of an issue to strike at a specific level on OPEX – forcing folks to assign shares in higher or lower volumes depending on his process and needs. His desire is not necessarily max pain - for options to expire without value is, in my estimation, secondary to the primary needs of the mm to either build prices higher or create his market for distribution of shares. Remember, the distribution of shares on behalf of the pool is happening at all times – but mostly it occurs through the top and down the price ladder. Hence, the volumes on down swings will become very important to watch.

Cheers!

David O said...

GS Comments:


With respect to GS and all financials for that matter, the mission was already accomplished. There was a mandate for the financial institutions to both raise capital and pay back the TARP. To do this, they had to run their share prices as high as possible and offer new issues. Done. The remaining interest in these shares is waning as the market segment is no longer propped the same way.

Further, there is a growing consensus that this year the iBank arms of these firms are not going to do well year over year, interest rates will be hiked, and there will be continuing credit issues in consumer, commercial, and government markets. The banks will not see stellar growth this year and big money knows it and already made their $ anyway. It is the average participant that is going to get burned.

I'm tracking the RIFIN, XLF and some specific banking stocks to see if there is a second wind to financial stocks this year. I think not - but...

David O said...

With respect to technicals this year...

I’m not so sure that the GS HFT model is so easy to game. I have been doing this for a long time and the TA has been very tough at times and yet so plain at others. The fact remains that investors have done very well this year while speculators have had mixed performance. I for one did not fair well this year. In fact I did better the first half than I did in the second half. The key for the speculator is to recognize first and foremost the direction of the market followed by its general conditions. If these two remain aligned, trade in the direction of the prevailing trend. That is where I failed, and many others failed as well. The trend has been up, consolidate, up consolidate, and up again. That has been obvious, too obvious in fact when compared to the fundamental concerns that many of us have. However, I underestimated the most important market condition – availability of cash. The fact is that cash has been made available to banks for free – who in turn have not made it available to the street. Never did I think that the cash made available to the banks would be used purely for market manipulation. I just didn’t make sense to me and I did not think this administration would allow it as they have. Shame on me, I have paid my tuition and now I wait as I see a change in those conditions developing and I intend to pursue with full force.

I can not yet comment on the 2 wave down screw – other than to say that we have seen that a couple of times in this rally. It is a fairly common pattern in a rising market. It is simply the reversal of a minor correction within the major trend. I can make money off of it, so I hope it happens!

Look for some charts later this weekend, and thanks for posting everyone.

Paulus said...

Are there any facts known about the %'s of equities/options/etc held by the different market participants?
Being mm/hedge/retail/sovereign/pension etc.
In other words what is the influence of the public/day traders/small investors on the markets as a whole, and vice versa?

kpack said...

buying a put and then selling puts and buying calls is equivalent to buying a call, right? selling puts and buying calls is basically equivalent to going long. I dunno, I think we are due a sell off.

kpack said...

buying a put and then selling puts and buying calls is equivalent to buying a call, right? selling puts and buying calls is basically equivalent to going long. I dunno, I think we are due a sell off.

David O said...

Hey Kerry,

There are endless combinations of call and put spreads. The configurations involve buying and selling at different strikes and expirations, to achieve any number of objectives. Sometimes we seek insurance, sometimes we seek repair, other times enhancement, and finally we may seek income. My primary goal is insurance against further erosion while we wait for this correction to begin.

Cheers.