SDS, SSO

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June 15, 2010

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

Posted by ReasonablyThinking under All Commentary, SDS, SSO, Stock purchases, bought to cover, Trade highlights | Tags: , |
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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.

 

May 25, 2010

Sold SSO puts 20100525

Posted by ReasonablyThinking under All Commentary, SDS, SSO, Stock sales, short sales, Trade History, Trade highlights | Tags: |
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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%
 

March 11, 2010

Bearish on the S&P 500, sold SDS put spread 20100311

Posted by ReasonablyThinking under SDS, SSO, Stock purchases, bought to cover, Trade History, Trade highlights | Tags: |
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Quote from John Hussman on Monday:

Many investment professionals have developed a habit of forming expectations based on nothing more than extrapolation of short-term trends in the data, even when those extrapolations are inconsistent with market history or well-established economic relationships.

Quote from Laszlo Birinyi on Thursday:

If the market is continually picking black, picking red is not necessarily a good idea.

>>>

I’m bearish on the stock market because I believe the US economy has the potential to encounter hardships in the near future, and valuations are too high.  Even though some advisors continue to play the momentum game (Birinyi above), I would like to believe that a little a leg work will be rewarded.

To execute this line of thinking, I sold three bull put spreads on SDS (-33+26 Sep10).  SDS performs 2x the daily direction of the S&P 500.  Since I believe that the S&P 500 will go down, SDS would then go up.

Dissecting the put spread…

Sold SDS 33 Sep10 P @ $4.22

Bought SDS 26 Sep10 P @ $0.74

Possible outcomes:

  • If the market falls only slightly by September, SDS will close at $33 or higher.  In this case, both options would expire worthless, and I would then keep the proceeds of today’s trade:  $1,028.97.  This is the difference between the sale of the $33 strike option ($4.22) and the purchase of the $26 strike option ($0.74) minus a commission.  (Remember that each option is worth 100 shares, and I sold 3 option contracts; $3.48*100*3-$15.03 = $1,028.97).  Even if the market tanks and SDS significantly increases, my maximum gain is $1,028.97.
  • Perhaps my thesis is wrong (the trade moves completely against me), and SDS falls below $26 in September.  I now owe the difference between the $33 strike that I sold and the $26 strike that I purchased ($700 for each spread, meaning a total of $2,100).  The $2,100 loss would be offset by the $1,028.07 already in hand, so my maximum loss is $1,071.93.
  • Now, let’s say that SDS ends up somewhere in between $26 and $33.  I could win or lose depending on where it ends up.  My Breakeven point is $33 – $3.48 = $29.52.  Now add a fraction to account for commissions to make the breakeven $29.57.  So above $29.57 I make money, below $29.57 I lose money.
 

February 2, 2010

The AM broker call: covered CYN; put SSO

Posted by ReasonablyThinking under All Commentary, CYN, SDS, SSO, Stock purchases, bought to cover, Trade History, Trade highlights | Tags: , |
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I know who it is before I even answer the phone.  At 9:40AM, the market has just opened, and I already know that at least one of my short positions has been covered…

“Hello?”

“Hi… this is [broker] calling to inform you that there was an SEC mandated forced buy of 1 share of CYN from you account…”

Seriously!  Seriously?  1 share?  You’re going to pawn me off one share so that my position is now 49 shares?  Who will want me to buy 49 shares from them?  Yuck.

So my 1 share was bought at $49.85.  I decided to cover the entire position later in the day at $49.55.  Seeing my thesis erode, I would liked to have covered in the high $40s, perhaps a dollar or so lower.  In review, the FDIC-Imperial deal to CYN was clearly a blow to my short position; the deal was instantly accretive to City National’s book value.  Further, I now recognize that I may not have had the right stock for the play–I wanted to profit from a fall in California banks, thinking all would suffer (which still might happen).  However, even though CYN is in a losing region, it is probably the best of a bad lot.  Whether or not this thesis eventually plays out is no longer worth my coin.  At this point, I take the loss and move on.

From a portfolio perspective, I wanted to keep a similar amount of negative exposure to replace the covering of CYN.  So, I purchased two put options on SSO (the double levered S&P500 ETF).  These were the June $44 contracts, at $8.00 each.

Even in a loss, I still keep score:

3-Aug CYN short 40 40.66  $   1,619.35
18-Nov CYN dividend 40 0.1  $        (4.00)
20-Nov CYN bought to cover 40 37.45  $  (1,505.00)
18-Dec CYN short 50 41.22  $   2,053.94
2-Feb CYN bought to cover 1  49.85  $       (56.85)
2-Feb CYN bought to cover 49  49.55  $  (2,434.98)
           $     (327.54)
 

December 17, 2009

Bought DBV; SDS update

Posted by ReasonablyThinking under All Commentary, SDS, SSO, Stock purchases, bought to cover, Trade History, Trade highlights | Tags: , |
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I purchased 50 shares of DBV this afternoon at $22.95.  From the prospectus:  “The Index is designed to reflect the return from investing on a 2:1 leveraged basis in long currency futures… with relatively high yielding interest rates and in short currency futures… with relatively low yielding interest rates.”

Reasonably thinking, I have been selling various positions all through 2H09, which has resulted in a large cash position.  Purchasing DBV is an attempt at putting some of that cash to work.  Given a steady investing thesis, I hope that I can pick up additional shares of DBV down the road.

Upcoming trade… the SDS put option I sold back in August comes due tomorrow; I will likely the have shares put to me.  (I will provide an update only if something changes).

Upcoming for the blog…  At the end of the year, I will document my 2009 performance (both new trades and personal account).  In my personal account*, I have beaten the market 10 of the past 11 rolling four quarters, however I do not expect to extend this streak since I have moved into cash to prepare for the next recession.

*I use rolling four quarter increments (a trailing twelve month internal rate of return) because it is the most applicable and accurate measurement.  This takes into perspective the timing of when cash moves into and out of an account.  This is the most logical way to measure a personal account since cash movements vary into and out of different accounts throughout the year.

 

December 1, 2009

Bought More SDS 20091201

Posted by ReasonablyThinking under All Commentary, SDS, SSO, Stock purchases, bought to cover, Trade History, Trade highlights
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Bought More SDS 20091201

I have been in this trade since late May and am down about $1.7k.  Yet, my thesis has remained strong, and I still believe the market continues to be overvalued.  With the S&P 500 at 1109, expected market returns are somewhere between 6.0-6.5% per year.  This fails to whet my appetite.  With the economic pressures of deleveraging, housing, and regulation setting the stage for The Next Recession, I’m definitely cutting against the grain.

The Trade:  Bought 50 more shares of SDS @35.64

New Cumulative SDS Position:  Long 100 shares; sold 1 Dec $46 put option

Tactically thinking, I generally move gradually in and out of positions.  This gives me multiple opportunities to reevaluate my investment thesis.  There are instances when this delayed maneuvering forgoes profit potential; however, it has saved me money contrasted to had I gone all in back in May.

(Should the market remain elevated, I may extend this commentary with an update to the Market Valuation article.  Or, if something in the upcoming unemployment data catches my eye, I may opine on that instead).

News item:  The business cards and refrigerator magnets have arrived!  They look great!  Let me know if anyone needs a good logo.  My design guy was great.

 

September 15, 2009

Bought SDS

Posted by ReasonablyThinking under SDS, SSO, Stock purchases, bought to cover, Trade History, Trade highlights
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I purchased 50 shares of SDS today at $40.90.  For those unfamiliar, SDS is an UltraShort ETF for the S&P 500.  So for every 1% that the market falls, SDS will rise twice as much (2%).  Contrarily, for every 1% the market rises, SDS will lose 2%.  By purchasing SDS, I believe the market will fall.

I currently believe that there are too many negative factors on the economy with a handful of catalysts that will occur before 2009 is over.  I intend on writing an economic page in the near future.  For now, most of my thoughts are echoed in both Hussman’s and Gross’s latest articles.

This purchase is part of the 2009 portfolio and will show up in the Performance page (along with other SDS related transactions) at the end of the quarter.

 

September 13, 2009

SDS option assigned, sold

Posted by ReasonablyThinking under All Commentary, SDS, SSO, Stock sales, short sales, Trade History, Trade highlights
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I had an SDS put option assigned to me, which was immediately sold by the broker. This doesn’t really surprise me as the expiration is next week.  This option was a position that I opened back in May, and it resulted in about a thousand dollar loss, for now.  Last month I took a similar position as this investment fell taking advantage of a lower price.

Recently, I have been considering increasing my position in SDS, either outright or purchasing call options.  Granted, with a poor economic environment ahead of us, I still believe the market is overvalued.  So, SDS is still a sensible play, but I may hedge my position relative to US Dollars (perhaps using Australian Dollars or gold).

 

August 13, 2009

Increased Exposure to SDS

Posted by ReasonablyThinking under All Commentary, SDS, SSO, Stock sales, short sales, Trade History, Trade highlights
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Increased Exposure to SDS

Trade:  I sold 1 $46 Dec Put on SDS yesterday, for $6.10.  (I was unable to post this yesterday as I had limited computer access).

Why:  The thesis still remains that the market is overvalued.  I also want to increase my short exposure as a percentage of my portfolio.

Tools:  This is a complicated trade, but one I’ve executed before.  SDS is a double inverse exchange traded fund.  So, SDS will rise by ~200% of a market decline; likewise, SDS will fall by ~200% of a market advance.  By selling a put, I essentially sold an insurance policy that SDS will fall (selling a market advance).

Reasonably Thinking:  I am betting that SDS will be greater than $46 come December expiration.  For this to happen, the market would only have to fall about 1.6% (to 996) over the next four months.

My breakeven (after commission and excluding time) is about SDS at $40.  Here, the market would have to rise 5.1% (to 1065).  Granted this is possible, but clearly a risk I’m willing to take.  At 1065, the market would have a P/E ratio north of 15 with an implied return of 6.6%.  I would not be a buyer.  Any lower of a return (6.6%) and I would consider paying down my car loan (6.25%) rather than investing money.

For the math conscious, the implied volatility on this option was just north of 50%.

I still owe 1 $60 Sep SDS Put; I am about $700 down on that position (taken in late May).  This new position should offset some of the loss.  In both instances, I still feel like I’m getting free money at the expense of time decay.  If the market continues its advance, I may consider buying SDS outright.