Reasonably Thinking » Trade History

Bank earnings allow profit taking on FAS 20100716

ReasonablyThinking — Sat, 17 Jul 2010 01:16:47 +0000

The three big banks, JPMorgan Chase JPM, Bank of America BAC, and Citigroup C, reported quarterly earnings late this week. On the surface, earnings seemed acceptable, yet revenue disappointed. This implied gains from cutting costs–not expanding the core business–something the market did not take favorably. This influence, combined with unhappy earnings from Google GOOG and poor consumer sentiment, sent the market falling today.

(Image from MarketWatch)

As a result, the FAS bull market exchange traded fund sunk 12.2%. With the decline, I was happy to take profits. I sold my 1 put option, purchased Tuesday, for $11.30, netting me a proft of $210.06.

I still maintain a short position in UYG since I believe the long term trajectory for banks is treacherous.

Took profits on Freddie Mac puts 20100716

ReasonablyThinking — Sat, 17 Jul 2010 00:02:41 +0000

With options expiration taking place today, I decided to trade out of my Freddie Mac FMCC position and take profits. Ideally, I would have liked to convert the options into a short position, however the number of shares available to short was unlikely to suffice conversion. The risk was had I converted, I could have faced an automatic cover at Monday morning’s market price. Given that FMCC had a twenty-five cent bid-ask spread, this was not a risk I was willing to take. Twenty-five cents becomes a sizable spread when trading 12 contracts that represent 100 shares each ($0.25 x 12 x 100 = $300).

The trade: I sold 10 contracts at $0.62 and 2 contracts at $0.61. These 12 contracts were originally purchased back in February for $0.16 each, netting me a pre-tax profit of $501.77.

ITB roll completed 20100715

ReasonablyThinking — Fri, 16 Jul 2010 00:42:52 +0000

To complete my options roll (from Tuesday), I sold my 6 ITB put options today at $6.10 each. Keeping track of all housing trades (starting February 2009), I have a gain of $928. Currently, I still own 9 put contracts (green highlights), worth $5,720. In simpler terms, I have a position currently worth $5.7k betting that the stock prices of homebuilder companies will fall.

For the thesis behind this trade, please read Housing, Economy, Banks–A Three Legged Stool With Three Broken Legs.

Also, an update on the Freddie Mac (FMCC) put options… After speaking with my broker today, I realized that my best play may be to convert the options into a short position. The stock has recently been trading between thirty to forty cents per share. Frankly, I can’t see how anyone on the other side of the trade would be investing; it would be more like gambling. In my opinion, the equity is worthless.

Initiated financial short exposure; roll options 20100713

ReasonablyThinking — Wed, 14 Jul 2010 01:55:49 +0000

With option expiration scheduled to take place on Friday, I must be prepared. Two of my positions that are set to expire are my Freddie Mac (FMCC) puts and housing (ITB) puts, both of which are in the money. My intent is to exit the Freddie Mac position, since the stock is trading over the counter, and to roll the housing position. To roll the housing position, I simply need to purchase put options for some time in the future and sell/convert my current puts (that expire Friday). To initiate this strategy, I purchased 7 ITB put options today, with an expiration of January 2011, for $5.90 each. I will obviously exit my 6 July ITB puts before the week’s end.

Independent from the above, I decided to increase my short exposure to financial companies. In the long term, I foresee a subdued economy where bank loan losses increase. As such, I shorted 25 shares of the financial exchange traded fund UYG at $57.60. In addition, I believe provisions for loan losses (funds set aside for loan losses) are currently too small; an increase in quarterly provisions could stymie bank profits. Furthermore, it is possible that European credit concerns throughout the second quarter reduced lending, which could hinder quarterly revenue. Therefore, I purchased an August put option, with a strike of $32, on the financial bull exchange traded fund FAS for $8.90.

So, the UYG is the bearish long term play; FAS is the bearish short term play. JPM reports its quarterly earnings on Thursday; BAC and C report their quarterly earnings on Friday.

You can read more about my perspective on housing, banks, and the economy by reading my latest opinion piece: Housing, Economy, Banks–A Three Legged Stool With Three Broken Legs.

Took some ITB profits, sold puts 20100622

ReasonablyThinking — Tue, 22 Jun 2010 23:58:19 +0000

With a small market decline today, along with weak housing data, I decided to take some profits on my July ITB 17.50 puts. I sold 2 of them for $5.60 each.

I still believe housing pain is yet to come as I continue to hold eight more put options on ITB. Below is my trade history of ITB since I first established a negative position in February 2009. The two red boxes highlight the culmination of today’s trade while the green shaded cells are the put options that I still hold.

While I haven’t played this as tactfully as I would have liked, I am managing to eek out nice gains. The thesis remains sound, and I continue to believe that my positions against homebuilders will payoff.

The market’s up, time to sell: initiated SSO short 20100615

ReasonablyThinking — Tue, 15 Jun 2010 22:45:38 +0000

With the market increase over the past week and a half, I decided to add a negative position. I shorted 50 shares of SSO at $37.15.

A continuing theme I have opined about since October, is that the economy is on shaky ground. Further, nothing in the private sector has convincingly driven growth—a theme highlighted by John Hussman yesterday in his Weekly Comment. At this stage of the game, I refuse to believe that any published GDP is a sign of relief unless it is concurrently free from federal deficit spending. In my eyes, taking on debt to increase assets fails to address the negative equity problem.

Independent from the economy, I still believe the market is overvalued, and this trade is a direct play on that theory.

As for executing the trade, and given the nature of how ultra leveraged ETFs work, I would rather short the ultra long (SSO) than long the ultra short (SDS). Yes, there is always a risk of a broker forcing me to cover in a squeeze, but the long positions are also susceptible to sudden price drops.

To hit the rewind button, I originally bought the June $44 put for $8 on 2/2/10 and sold it on 5/25/10 for $10.20, netting me a gain of $420.96. Today it is only worth $6.15. Clearly this is an example of buying low, selling high, and essentially buying low again.

Added commodities exposure 20100604

ReasonablyThinking — Sat, 05 Jun 2010 04:04:26 +0000

With the market decline today, I decided to increase my DBC position from 50 to 100 shares (purchased at $21.50). My commodities allocation is still lower than I would like, so I may add to this position down the road. Specifically, oil looks interesting if I could purchase it (USL) a little cheaper.

Sold USL 20100527

ReasonablyThinking — Fri, 28 May 2010 00:01:29 +0000

On Thursday, when I bought USL, the intention of the purchase was an investment to be held for months. However, since the price moved quickly in my favor, I decided to take profits here.

(image from Google Finance)

The headlines attributed to today’s broader market rally–and by association a rally in oil–was China’s proclamation to continue holding (and not to sell) European debt holdings. With one major player keeping steady, the markets rallied. Although I view this as noise, the past few days have offered opportunities to enter/exit long term positions. With regard to oil, I would still consider recycling this trade down the road, and I would like to have more commodities exposure.

Keeping score:

20-May	USL	bought	50	35.1	$ (1,762.00)
27-May	USL	sold	50	37.2	$ 1,852.96
					$ 90.96	5.2%

Sold SSO puts 20100525

ReasonablyThinking — Tue, 25 May 2010 23:51:19 +0000

With the recent drop in the market over the past month, I decided to take profits on my SSO puts (a trade that bet on the market falling). This trade also makes sense since the options expire next month–I would have been forced to act in June had I held onto the position.

As you can see below, I was behind on this trade through all of March and April. Yet, I still managed a nice gain here. The opposite side of the trade was ahead for two months and ended up with a loss. Given the choice of the two, I’ll happily trail behind for a bit if I believe the trade will work in my favor. (The graph is of SSO, the security that the put option is derived from; the arrow is my entry point on 2/2/10, when SSO traded at about $37).

(image from Google Finance)

Even after exiting this downward position, I still maintain a substantial market short position. Further, if the market was to rally from here, I would consider recylcing this trade.

Keeping score:

2-Feb	SSO Jun$44	buy put	2	8	$ (1,609.50)
25-May	SSO Jun$44	sold put	2	10.2	$ 2,030.46
					$ 420.96	26.2%

Bought Oil 2010.05.20

ReasonablyThinking — Fri, 21 May 2010 02:16:37 +0000

I purchased 50 shares of USL (US 12 month oil futures) today, at $35.10 per share. USL is an exchange traded fund that mimics the price of oil. Generally speaking, if oil prices rise, USL will also rise.

Reasonably thinking, oil has been on a slide this month, falling from nearly $90 per barrel to under $70 per barrel. As for safe havens, oil has decoupled from gold over the past month. This is mainly attributable eurozone fears and perhaps decreasing Chinese demand for commodities. In fact, many of the metals (copper, nickel, etc.) have fallen along with oil this month, yet gold has managed to hold its own. Additional worries and decreased consumption could easily push oil (and metals) lower. This is the risk I’m bearing in this trade. (Side note: exiting my copper position in March turned out to be a shrewd manuever).

Gold decouples from Oil in May

(image from Google Finance)

Metals fall with Oil in May, Gold remains steady

(image from Google Finance)

My first thesis to this trade is that I still believe geopolitical tensions in the Middle East (Israel-Iran) could cause a supply shock in oil, sending prices higher. A second idea is that the Deepwater Horizon spill in the Gulf could prompt congress to pass restrictive legislation onto the oil industry; discussion plans for new wells have already been scrapped since the incident. A final argument is that I would rather own something tangible rather than a currency right now; it may be easy to argue against the euro, but other currencies are similarly susceptible to declines.

As for my portfolio, this will increase my allocation to commodities, which was previously below my goal of 10%. My portfolio allocation goals can be seen at the conclusion of my 1Q10 Performance.