Sunday, November 24, 2013

Active-Trader - Ride of the Horseman

Welcome back, Active-Traders.

In my prior post 4 Horseman of Biotech I covered 4 top performers leading the back in the Biotech industry.   This past week, 3 of the 4 closed at new all-time highs on a raft of good news as follows:

Biogen IDEC (BIIB) gapped up huge on Friday on news that the European Medicines Agency approved their multiple sclerosis drug along with 10 years of regulatory exclusivity

Celgene (CELG) also gapped up but to a lesser extent when news from the same European regulator expressed a positive opinion on their treatment for pancreatic cancer paving the way for full approval later.

As for how I traded it, I went long some BIIB stock and call options when the stock broke out back on 10/28/2013.   Unfortunately, the stock only went south from that point and I had to close the options out at a loss.  I held onto the stock however, and added more plus added the weekly 240/245 PCS when it crossed 240 after bouncing off support after a pullback similar in magnitude as the prior pullback on the daily chart. That trade worked spectacularly well as shown the above chart and I'm still long the stock.  Its a classic case where the options fail but stocks succeed since they are much more forgiving.

As for other trading results, it was a rocky week, but turned out okay in the end.  Along these lines, I learned a few important things about the rhythm of trading weekly options and it goes like this:

  • Friday is a day for closing out positions which expire that day. Do not add new positions on Friday.
  • Monday is a NOT day for trading. Let the market declare itself.  Do not jump on any price moves, particularly in the early part of the day, as they will likely retrace or reverse later in the week
  • Tuesday - Thursday are the days to put on new positions which expire that Friday.  
  • Friday is a day for closing out positions put on Tuesday through Thursday.  Rinse and repeat.
What I have observed during weeks of options expiration is that there is always at least one day of heavy selling.  And since every week is now options expiration week, stocks that look great on the prior Friday and the following Monday almost always give you a better entry point later in the week. Once of John Carter's favorite strategies, is wait for the end of a day or 2 of heavy selling, then sell a spread 1 or 2 SD's away from the market.  At the time, it looks like a scary trade, and you are risking $4.50 to make 50 cents, but it almost always works out and becomes "free money" as JC would put it.

Things worked out for me on the long side the week because of good solid closing moves in the stocks I was trading, specifically, AAPL, MA and NFLX.   But at one point in the middle of the week, these put spreads were fully in the money against me.  Had I waited for better entry points, I could have had a much less stressful week and made just as much if not more money.

A few other developments:

- In an attempt to squash Small Account Syndrome, I have relocated some funds from E*Trade over to TradeStation where I will now have a full 100K account to trade.  I'm working on a trading methodology called The Ultimate Trading System which is a techno-fundamental combination of what I have been doing for years anyway but reduced to a set of fully-defined rules.

- I had a breakout week in my ThinkorSwim account and I have now earned over 9% year to date in that account which comes to just about 7.8% after commissions.  That exceeds what I have returned on the TradeStation accout over a 11 months of trading.  I have to be careful to not give back those profits and keep a clear head.

Overall my option trading has come a long way thus far in 2013 and I'm starting to learn the secrets of how to pull money out of the options market with some regularity.  The learning never stops in trading however, and perhaps that's one of the reasons why I enjoy it.

So wait for those entry points traders and for those of you celebrating, have a Happy Thanksgiving.

Sunday, November 17, 2013

Active-Trader - Breakfast in America

Welcome back, Active Traders and loyal blog readers.

Things are starting to look up in the good old US of A. Signs of a growing economy are starting to emerge reminiscent of Ronald Reagan's Morning in America political advertisement back in the 1984 campaign.  And much of successful trading and investing is born out of observing "general conditions" as noted by Edwin Lefevre in his classic "Reminiscences of a Stock Operator".

So here are my top 5 reasons why the economic conditions are improving.  You won't find this material anywhere else, so here goes.

5) Automobile Traffic on the rise

This one is purely anecdotal, but I have noticed that there are more cars on the road.  A Facebook friend commented the other day that it took her 2 hours and 20 minutes to drive from Manhattan to her home in suburban NY - a mere 17 miles.  Driving to work one morning, I noticed that there were a lot of cars on the road - and it was only 6:30 AM!  

The industry leading in traffic data collection in the US is Inrix.  I scoured the Inrix web site to see if I could find any hard data of increase in transit times, but came up empty.  I'm sure they have the data, but they are not giving it away for free.  Perhaps the underlying reason is number 4 ..

4) Gasoline Prices at 3 year lows

An excellent source of price data for gasoline is  This site collects observations from local residents and tells you where to find the cheapest gasoline in your area.  Its crowd sourcing meets the Internet meets cost savings, what an excellent combination

Anyway this chart shows that gas prices are the lowest they have been in 12 months and a longer terms chart shows that they are lower than they have been since the middle of 2010.  This has a huge impact on consumer behavior since it allows for more free cash flow and generally puts downward price pressure on all consumer goods.

Add to this the fact that cars are becoming more efficient, people have less need to drive due to telecommuting and US Energy production is at an all-time high.  Also use of electric cars is on the rise and I saw one study that running your car on electricity is the cost equivalent of paying $1 a gallon for gasoline. These factors should keep downward pressure on energy prices, at least for the short term.  

Finally, note that gasoline moves in an annual cycle and typically bottoms in January or  February and peaks in the summer months so don't expect prices to stay low indefinitely.

3) Budget Deficit is Shrinking

Remember the sequester?  These were the automatic across-the-board spending cuts which started in early 2013 as a result of lawmakers inability to make a budget deal.  They have now become the new normal. This article in Bloomberg news explains it well Budget Deficit in US Narrows in October.  Also, a 12-day government shutdown in the first half of October slashed government expenditures while revenues are on the increase.

2) The Affordable Care Act

Healthcare has been a mess in this country for many years.  Ever year costs and deductibles go up, and benefits go down.  The ACA is an attempt to correct this mess and I could do an entire blog post on this topic alone.

In some ways the ACA will be a drag on the economy and individuals. It will hit the lower income proportionally harder since they will now have less money for discretionary spending.  Sales of lottery tickets and cell-phone data plans will likely suffer  But as a result, more people will have coverage, and they will use that coverage.  They will go to the doctor, get tests, get prescription drugs and take better care of themselves.  And this will lower the pressure on hospital emergency rooms which by law are required to treat people regardless of their ability to pay.

Health care is estimated to be about 16% of the entire economy and I expect it will grow to about 20% as a result of the ACA.  That means more jobs for people in the Healthcare industry.  Not only that, people will live longer, be healthier, and the uninsured will be less of a drag on society.   Lesson from the state of Massachusetts (where a similar plan was enacted in 2006) shows that the ACA will not reduce costs. In fact it will increase costs for all involved, but people will receive better care, live longer and be more productive as a result.

1) Stock prices are at new all-time highs.

You know I am a big stock investor so this one comes as no surprise. This past week we had new all-time highs in the SP-500 and the Dow 30 on 3 of the 5 days.  This has a tremendous 'wealth effect' where people feel wealthier, and therefore they spend more money since they feel more secure about their financial future.  And much of this we owe to an incredibly accommodating federal reserve.

Time and time-again, the Federal Reserve has come to the rescue of the american economy and exercised its ability to create billions of dollars out of thin air.  You would think this would lead to weakening and eventual collapse of the currency, but it hasn't happened - not yet anyway.

One last word - this economy is hardly the 1950's or even the 1980's.   Unemployment remains stubbornly high and many young people can't get good enough jobs to move out on their own.   Incomes are down and I continue to make less each year from my regular job and I still don't make as much now as I did during the tech bubble back in the late 1990's. But on the positive side, my personal wealth is at new all-time highs due to saving and investing.

Have a great week ahead all.

Saturday, November 9, 2013

Active-Trader - Small Account Syndrome

Welcome back, Active Traders.

You may have heard of Small Town Syndrome, or Small Dog Syndrome or even Small Penis Syndrome.  Well today I am a going to introduce a term into the financial lexicon called Small Account Syndrome.

I would define Small Account Syndrome as an acute difficulty in growing a small account, even when you don't have similar problems growing large accounts.   And I am a walking, talking example of Small Account Syndrome because I'm having a decent (although not stellar) year in my large accounts returning in the 11-12% range.  Meanwhile, my small TradeStation account seems to struggle along and is up just a measly 2% for the year.

Now granted I'm not that great of a trader.  But I'm also not full-time and I try to trade along side my other responsibilities including a house, family and a full-time job.  If I were a full-time trader, I would expect a much higher rate of return commensurate with a full-time effort.   But that said, I've noticed some key psychology affects around small account that constrain their growth.

Before we get into that, let's me say that I have blown up a few accounts in my day.  I blew up a Forex account with FXCM prior to 2010, another Forex Account managed by Zulutrade documented here.  Also, I blew up several smaller Forex accounts documented right here on this blog.  Also, I blew up an Options Express Account a few years back.  All blow-ups did not results in a complete loss of funds, but loss of enough funds to realize it just wasn't working and that it was time to throw in the towel and close the account before doing any further damage.

So suffice it to say I have experience blowing up accounts to be an authority on the subject - and they are always small accounts. Since they are small means that I have never been wiped out so much to be knocked out of the game.  After all, survival is the key to successful investing - in other words stick around long enough to learn from your mistakes and you will eventually get it right!

Here are the key factors working against small accounts:

Need to be Right

As John Carter as pointed out, we are trained from a young age to strive for perfection.  In other words, be on time, pay attention in class, get good grades in school, get a good job etc.  I can relate to all of the above since I try my best in nearly everything - all the way down to separating my recycled items from regular trash and rinsing out the container.

And nowhere is the pressure greater to get it right than with a small account - particularly with that first trade. Its your inner teacher looking down on you and waving their finger and saying "don't screw it up!"

Watch the Basket

There are 2 philosophies of trading:

1) Don't put all your eggs in one basket and
2) Put all your eggs in one basket - and watch the basket.

With a small account, you can't put on too many trades.  This is even more of an issue with option spreads where your max profit exceeds your max loss.  For my typical spread which is $5 wide, I am making $170 and risking $330.   If I put on 5 of those, and 3 of 5 go bad, you are now down $650 on a 10K account or 6.5% which is not so easy to recover from.  Thus there is even more pressure to get it right.

And it all came to a head this past week in my Think or Swim account, newly funded with 10K and ready to trade. So here's what happened:

TSLA - 150/155 - 195/200 Iron Condor

This trade was put on Tuesday 11/5 just before the close.  Tesla stock was at 175 and the expected move was about $20. So I sold the 195/200 Call Credit Spread for a credit of $1 and the 150/155 Put Credit Spread for a credit of 0.85.  So I took in a credit of $185 for a max possible loss of $315.

I watched nervously after hours as the stock traded and it immediately came down just above my short strike at about 158 and bounced around until the end of the after hours session and came to a rest at about $155. The next morning it opened closer to $159 and I breathed a sigh of relief.   But that was short lived and the stock soon dropped through my short strike - and in no time at all was fully in the money against me at $150.

Later that day, its a relief rally and got up to as high as $154.45 and my hopes were renewed.  But that didn't last either and the stock rolled back over and headed south.  The next day it gapped down and trade as low as 140, then had a brief rally.  I knew this trade was toast and that the TSLA balloon had popped.  So I closed the 150/155 PCS for a debit of $470.

So here I was, on my very first trade in my new Think or Swim account, I lost $285 or about 2.8% of the account on my first trade!   This was not good news since my experience with accounts (and investments generally) is the best ones are winners right from the start and the ones that lose go into the hole soon after entry.

Well I had to redeem myself and was not going to let this account be a failure, particularly after all my years of trading and investing.   Here's what happened next.

PCLN 190/195 Call Credit Spread

This trade was put on prior to earnings on Thursday afternoon.  The stock had a large sell-off that day, trading from $1045 all the way down to about $1022 at the close.  The expected move was an incredible $60 so I added that to 1030 and came up with the 1090 strike.

I knew I had to go big or go home on this trade, I put in an order to sell 4 of the 190/195 Call Credit spreads at 1.10.  If the trade worked, it would net me $440 and more than make up for the loss on TSLA. I put in the order and waited and just prior to the close, I got filled on 3 of my 4 contracts and cancelled the remaining contracts.

This trade clearly exceeded by risk parameters - risking $4 to make $1.10 and doing it 3 times over.  I watched nervously for the action to unfold just after 4PM EST.

The after hours action in PCLN was insane, trading initially down to about $1000 then as low as $945 then as the news came out higher and up to as high as about $1070.   It closed the after hours session in the middle of the range at about $1039.

Friday brought more anxiety as the stock moved around trading as low as $1019, then started moving steadily higher.  In no time at all it was $1060 then trade as high as $1075 and I started to get nervous.  I watched prices for the spread fluctuate between 0.20, and 0.60 and I sat on my hands and resisted the urge to take a profit.  I learned from trading spreads that you have to stay cool and give them every chance to expire at max profit.  I watched PCLN very closely for most of the day Friday and finally started to relax around noon time.   The highest the stock could get was about $1077 and I let it expire worthless for max profit.

Bottom line after all that is, I made up my entire loss in TSLA and put the account up $45.  And I rescued the account from a losing week and put it into the positive which was an important psychological victory.  Also, I learned that its okay to have an opinion on earnings trade - you can put on just one side and you don't always have to put on a Condor.

I also had a few decent trades in my TradeStation account like the stock and options play in CMG shown above.

So for this week anyway, I snatched a small victory from the jaws of defeat.

Have a great weekend and get some rest.

Saturday, November 2, 2013

Active-Trader - The After Hours

Welcome Back Active Traders and Wealth Builders.

It was a wild and very active week and overall not a positive one with all of my accounts giving back some ground from recent highs.  My TradeStation account took a particular bruising.  So much happened that I need to go back on a trade-by-trade basis and see what worked and what did not. Much of the action was centered around earnings, so let's get to it.

Last Friday, I went out long a small amount of Biogen Idec stock (BIIB) on a Friday close into new all-time high territory in the low 250's.  I didn't realize that earnings were due Monday, so that was my first mistake. In any case, the stock opened up nicely on a good earnings report and I was up about 10 points early on and the stock trade as high as 262 early Monday.

BIIB Nov 16 245 Call

Later in the morning the stock pulled back and John Carter from the Simpler Options room put on a bullish trade, and I followed, buying the November Monthly 245 call at 14.70.  After being up briefly, the stock followed the general market lower.  The shares never recovered their highs and instead drifted steadily lower.  The pain continued and I ended up closing this contract for 6.30 later in the week.  This trade really hurt my account and I lost $840 on this trade.

I held onto the stock the whole time however, and I expect it to recover and eventually move out to new all-time highs.  In retrospect, it was not smart to buy this contract after earnings.  I expected continuation and did not get it.

AAPL Nov 1 495/500 - 560/565 Iron Condor

This was an earnings trade put on just prior to the close on Monday when earnings came out after hours for a credit of $195.  This stock acted perfectly and I closed out the put side (sold for a credit of $1.05) for a debit of $20 and the call side went out worthless which means I collected the entire $90 received.

FB Nov 1 49.5/50 Put Credit Spread

I put this trade on Tuesday ahead of earnings on Wednesday for a credit of 0.25.  Since its a 50 cents spread it was exactly a 1/1 Risk/Reward ratio. All the stock had to do was close above $50 for me to receive the entire credit.  After a wild ride later in the week, I ended up closing the spread for 0.20 taking a small profit.   See below for more on Facebook which was a wild ride for sure.

BIDU Nov 1 140/145 - 175/180 - Iron Condor

This was another earnings play put on Tuesday just before the close with earnings due after hours.  With the stock at $160 and an expected move of $13, I sold a put credit spread below for a credit of 1.10 and a call credit spread above for a credit of 0.85,  for a combined credit of $195.   The stock acted almost perfectly and I closed on the whole thing for a debit of $20 on Thursday so this trade worked out well.

LNKD Nov 1 220/225 - 275/280 - Iron Condor

This was another earnings play put on Tuesday just before the close with earnings due after.  With the stock at $242 and and expected move of $21,  I sold the above condor for a credit of $195.  The stock acted almost perfect until later in the week.  The 275/280 went out at max profit, but I close the 220/225 at a debit of 3.85.  So I took a loss of $190 on this trade.

FB Nov 1 43/45 - 55/57 - Iron Condor

This was an earnings play put on Wednesday afternoon with earnings due after hours.  With an expected move of $5 and the stock at about $50, I sold this spread for a total credit of 0.80.  Since it was a $2 wide spread, an 80 cent credit was well over 1/3 of the width of the spreads, so this trade met my criteria.  Since this was a low credit, I did 2 contracts.  After much gyration of FB stock, this trade went out max profit and I collected the entire $160.

And speaking of Facebook stock, it was a wild ride in after hours.  The results were good and the stock shot as high as $57.44 in the after hours.  I was feeling good since I was long 500 shares in my E*Trade account.  But after that, the stock went into a downward spiral and gave back the entire after hours move and actually traded as low as $47.25 later that day.

I don't ever recall seeing such a complete reversal of fortunes in after-hours trading.  FB traded much like an ill-liquid futures contract going all the way up and all the way back down.  I ended up closing my long stock on Friday at about $51.6 taking a 1.5 point profit on my $500 shares.

Finally, I re-loaded those same 500 shares and went out long once again on Friday at about $49.75.  I will unload them next week anywhere above $51.50 if I get the chance.  This is a traders market, and you have to take profits when you have them.

FSLR Nov 1 - 44/46 - 55/57 Iron Condor

This trade was put on prior to earnings on Thursday with the stock at about $50 and an expected move of  .60.  I got a credit of 0.38 on the put side but could not get a fill on the call side at about 0.35, which was clearly right smack in the middle of the bid/offer.  I finally got frustrated a put it in at the market and they filled me at 0.13 cents.  I did 2 contract, so I received a total credit of $100 for a max possible loss of $300.

Of course the stock shot higher and well above the upside strike.  I ended up taking close to a max loss on this trade closing out the 55/57 spread for a debit of 1.80 for a total loss of $260 on this trade.

SNDK Nov 1 68/70 Put Credit Spread

This $2 Put Credit spread was put on earlier in the week for a credit of 0.70 which was well within my plan. The stock spent much of the week above $70 but ended up sagging at the end of the week.  I closed it for 1.40 for a loss of $70.

BA Nov 1 129/130 Put Credit Spread

I put this trade on last Friday along with a small long position in BA stock.  The spread was for a credit of 0.30 (times 2 contracts).  The stock closed well above $130 so I collected the entire $60 profit on this trade.  I did the same trade on Friday and entered the 131/133 Put Credit spread for a credit of 0.75 which is well within my plan.

All told, I lost about $785 on the week in my TradeStation account.  Had I avoided the nasty loss in the directional trade in BIIB, I would have done pretty well with the earnings plays.  I clearly have some work to do before I learn out to safely and regularly pull money out of the options market, but I am learning.

Have a great weekend and get some rest.