Election day analysis

Below is how the S&P500 reacts to the elction day over the last three elections. The 2 day before election day is at "1" and then the movement is indexed to it. e.g. if election is on 11/7/2000, then day one is the closing price of 11/6/2000.

The day before election is always a very quite one - need to remember - i.e. from 11/2/2012 to 11/5/2012 the market change is small - ths has been true for the past three ones

The day of the election (before the election) i.e. 11/5/2012 to 11/6/2012, there is some change  -2% in 2000, 1% in 2004 and -4% in 2008, looks like 1.5% in 2012 (day not closed yet)

Post election, there is more movement, i.e. movement from 11/6/2012 to 11/7/2012. -2% in 2000, 1.5% in 2004, -5% in 2008 and we dont know yet for 2012

Thus, I will close my position today as there may be a major movement tomorrow.

Have to start earlier Friday

Sustained big losses today - $1200. Should have only lost $400-500 but made a few mistakes...

Mistake 1: I waited till the later part of the day to close out my old positions and open new ones. Have to start early when there is more chances to fill out on orders

Mistake 2: Opened orders on new positions before closing old ones. The market moved in the wrong direction in between and exacerbated the losses. Need to close all old positions before opening new ones

Recommendations and Performance

On a great suggestion from a friend, I will be aggregating all my recommendations and their performance till now. Below excel shows that:

Long NOK

I am long NOK today. I think the stock is oversold and will bounce back in the next few days. It also took additional beating due to the market being down today.

I havent engaged in my strategy this week and stayin in all cash on that front. GDP data and consumer confidence data will be released. Such major events could cause big movements, especially on the positive side, which is the worst outcome for my strategy. So no updates on that. Sitting at around $4k gains or 30%.

Week 10

Stock assessment:

Market is down 1.5% as of mid-day due to weak factory data. Tech stocks however, are mixed. FB has found a solid bottom, while AAPL remains resilient. This is a good time for a short term AAPL strategy, as it will rebound on any good news.

However, I would stay away from the market next week as GDP and Consumer confidence data gets released. Market may move direction-ally and I wouldnt want to be on the wrong side of it. However, AAPL in these situations is great as it is usually thought to be delinked with the US economy and behaves independently of it.

Spread strategy:

I closed out my positions today. There was a major upswing due to high vol and didnt make sense going into Friday to see full gains. I have made 20% gains this week on the money in market and about 10% on the total portfolio (I kept half portfolio in cash). Here are the charts:

End of Week 9

Spread Strategy:

I am at $3,000 on a $12,500 base. Since I added money to the account going from $5,000 to $12,500, I need a different measure of performance. I have taken IRR as that is the industry standard when new money gets added, and also gets done in my venture capital industry. The IRR I will calculate is on a daily basis and my target is to get to 0.7% as my strategy clocks out on that long term (after transaction costs and bid-ask slippages). I am at 0.58% today. Below graph is just the portfolio value versus the input money. Next one is the evolution of the daily IRR:

Ex-dividend date

So on my vacations in Detroit, I got this serious sounding VM from Optionshouse. SPY was going ex-dividend the next day and my option positions were in trouble. I had 90 minutes before market close and I was on a cruise ship away from the shore with intermittent cell connection.

What happens on an ex-dividend date: Stock falls by the amount of the dividend, calls on the stock fall by the same amount, puts rise. However, if you own the stock, you get the dividend and stock falls by the dividend amount - so net nothing happens to you. If you own the call option, it falls by an amount while you do not get any dividend. The call option is an option to acquire the stock (and not any dividends). Thus, being long on calls means you loose major value on the ex-dividend date.

Thus, I had to get to the shore and call my broker. I did so around 30 minutes before market close on Thursday. Closed all my positions at market price (which means I lost major money there) and came out in cash overall.

This week has been great for me, apart from some value lost in the close. I am up around $2,900 - will put up the graphs tomorrow, when I start a new spread.

Market assessment:

FB, ZNGA are both up. My bottom call was right and I will close out tomorrow when the Greece new further lifts these stocks. AAPL options are also dark green by now. Maybe time to sell, but not sure now.

Tech stock assessment:

ZNGA fell some more due to a bad analyst report. I am calling bottom on this one. Long $5K on it.

AAPL is strong though did not outperform the market. But that is expected. On bad days, investors rush to AAPL and on good days, they speculate on other stocks. I still dont have a fool-proof strategy to capitalize on this action, but this will be temporary as long as their is market uncertainty. I am still long AAPL options.

FB is coming off the bottom. The bad ZNGA news did not deter the stock - that is a very bullish signal. I will think of going long tomorrow.

Spread strategy:

It is working. Another 6% gains today (on a base of $12,500). I am now up 8.7% since the start but still haven't reached my "highs". Don't have any views on the market tomorrow, but the bullish sentiment might continue which will be great for for strategy.

Market Assessment:

While the Asian stocks rallied, US did not and lost value. VIX is high again and hitting the 25 mark. AAPL is staying above market for a while and is ready for a robust rise up to the earnings. It beats markets almost all days. FB is rising from the ashes. Good time to buy. Will also add ZNGA to my analysis now. The stock is down 8% today and while FB seems to have bottomed out, ZNGA hasnt. While their fortunes are linked, in the short term, they are not. I will be long ZNGA in the next few days. A decent pop from $5ish to 7ish can be expected, once FB starts to stabilize (which it has already done).

Strategy:

Last week, was the most brutal of them all. Stocks rose irrationally and wiped out all of my gains and pushed me into loss territory. There was no mercy and even closing positions was tough given the high vol (of option prices) June 6th and 7th I lose 12% and 10% respectively. Today was the best day till day as I made 13% in a day and back in positive. Now my base is $12,500 and I currently stand at $12,747, a measly 2% gain. Note that the highest I went was 40% gains on a base of $5,000. Have to be patient here. I have also reduced the riskiness of my strategy, so hopefully, losses from now will be lower. 

6/6/12

Market assessment:

I brought AAPL options today. With the iPhone launch and 2Q earnings coming up, I expect upward movement. I am long $580 August calls. FB also jumped today. Morgan Stanley started shorts on FB stock. That should put more downward pressure on the stock. I am still not playing in FB options as they are not that liquid and bid-ask spreads will kill any short term strategy.

Spread trade strategy:

Market moved 2% today and I lost a bunch of money. Overall, I am still positive, but today was one of those days that I would like to learn to avoid. My strategy only works if the market doesn't move much. I am predicting some downward movement tomorrow where I recoup some of my losses.

6/5/12

Options strategy:

Put in the maximum exposure that i have had till now. Around $7000 in the market. Closed around $30 down. Now that i am getting commissions charged, i paid $60 in commissions to set up the trade. Now i need really good performance as 2% will be lost every week on commissions itself. I will be transferring more money to the account soon so that the commissions (which are more like fixed costs) become a smaller and smaller percentage of the returns.

Market assessment:

Markets rose from a belly flop last month. I am sure you must have heard "sell in may and go away" ... many people seem to have done that. AAPL was down while the market was up. I think i should have brought AAPL options today while they were cheap. I will try again tomorrow. It is a nice play right now with VIX high but not very high.

FB continues to fall. There will be buying at $24 for me. Maybe sell puts at $15 as I dont think it will go down that much in the short run. The next earnings will be key and FB-VIX will rise. It may make sense to go long on properly designed FB options, with less delta and high vega.

Hold on strategy and market assessments

My strategy works for VIX<25. VIX passed that level on Friday, so no more trading for me till VIX goes back below 25.

Till then, I will publish some market commentary and see how that works:

Today AAPL beat the market in daily performance while Facebook suffered more than the market. There is a bottom coming up on Facebook, at which there will be a major buying pressure. I think the bottom is around $24-25 where most of the research analysts are predicting the intrinsic value of the stock.

There is also a strategy on AAPL options in the short run. There will be a run up in AAPL stock upto its next earnings in July. Options are the cheapest way to play there. If the market does not fall down further tomorrow, I will open some long call positions on AAPL expiring in August, after the earnings.

End of Week 7

I ended this week today on Thursday. This was a good week and I wished I could have let the profits run. However, my CFA is on Saturday and dont want too much movement on the portfolio on Friday as I want to relax. The other reason I closed today, was that the portfolio touched $7,000 or 40% returns today. A nice round, auspicious number to close at.

Additionally, now my account is no longer eligible for free trades. I had 100 free trades for 2 months. I used only 63, but the two months are up so high commissions from now. I will be increasing the amount of money I work with so that the commissions are a smaller percentage of profits. If all my current trades were commissioned, I would be sitting on $6,100 instead of $7,000. This strategy is heavy on trades and commissions and thus, I need atleast three times the money so that the commissions are around 1/6th of profits rather than 1/2 of profits.

Here is the graph with the SPY till now:

Next are some stats with the SPY as the benchmark:

Also below is the return histogram - red being SPY daily returns and blue being Portfolio daily returns:

Adios till 6/8 then.

Week 7:Day 2

Best Day till now: 9.1% gains in a day. While stocks moved down 1.47%, since they had moved up 1.2% yesterday, it was a blessing in disguise. These are the days that the strategy works for. Over the past 5 days - there was a 3 day weekend, stocks did not much much (over five days) and volatility increase around 15%. All the good ingredients for a massive rise. I am still inside the top and bottom limits for the trade for this week, so unless there is another bad day tomorrow (highly unlikely unless there is some bad news from Spain/Greece, which is not already built in), I should be able to hold on to these gains. Closed at $6,885.59 today, highest till now.

Week 7: Day 1

Markets jumped today - 1.21%. Usually these kind of jumps are not the best for my portfolio, but still managed to keep some value. Mostly because I got the long time decay of the long weekend. My hunch is that the markets will dive or stay stable tomorrow, moving the vol a bit higher. Should provide more gains. FB and ZNGA were in news today. Options started trading on FB and stock went lower still. Most options traders are predicting $25/share by mid-July. I am not trading FB, as shares are costly to short...

End of Week 6

Great week. The SPY did not move much despite the Greek fiasco, and the strategy gained a lot - around 16%. Covered up the average performance from last week. There was one adjustment I had to make, which propped up the value somewhat. Ended this week at $6,423 and rolled over to next week.

On Thursday, I was already up 14%, so I decided to reduce market exposure. Thus I gained only around 2% despite a favorable market move. Had I not decreased exposure, the gain would have been around 4%. But that is the price you pay for downside protection.

I have also reduced my exposure to the market for next week. A few things to test out - (a) effect of the long weekend - there will be major time decay but my guess is that there wouldn't be much directional movement - unless the other markets move too much or something surprising happens over the weekend. I hope the European bureaucracy enjoys the weekend instead of trying to resolve the crises :)

Below is the performance chart for the 6 weeks:

Week 5

One of those brutal weeks. SPY went down 4%. Any such major movements are bad from the strategy. I was also traveling so couldnt keep a good eye, though made many adjustments. I was down 1% only thanks to elevated volatility. I went up to $6000 (20% gain) on Tuesday last week, but couldnt hold on to those gains in the wake of falling markets.

Closed the week at $5,607.02. Below is the strategy returns versus the market proxy (SPY).

End of Week 4

I ended at $5,670.18 today. Most of the losses of the week were recouped and overall, a positive week.

Week 4:Day 4

Rolled over to new options on Thursday. Current strategy was becoming too volatile with the European problems. So moved to new spreads. Closed at $5,643.99.

Week 4, Day 3

I recouped some of the losses from yesterday. Kept on removing topline protection as I need more bottomline protection now. The Spanish recession and other developments in Greece continue to weigh in on the market. I am at $5,394.14 today. If the markets stabilize tomorrow, I may still get to a week to week gain, albeit a very small one. If markets fall tomorrow, which I think shouldnt happen as there have been 4 down and 2 flat days in the past 6 days. I think the market will cling on to any good news tomorrow and rise. 

Week 4: Day 2

So the big down day has finally come. The Spanish recession weighted heavily on the market and I reached my 40% stop loss figure. So I had to liquidate some of my top line protection. Ended the day at $5,144.27. Yes, that is a 12.5% loss in a day. That is this strategy, I am afraid. Huge losses and major gains are a part of the game. Good thing I can sit on them now, a similar loss a few years ago, would have ruined my day - not today :)

Lesson learnt: If there is an impending doom and gloom scenario, decrease exposure to the market. Lock in some gains. 

Week 4, Day 1

The Spanish recession is still weighing on the market. SPY was up 0.1%. These are the best days for my strategy - high volatility and low movement. I removed some upward protection from the strategy. So unless the market moves up radically, I should be ok. Obviously, it should move down radically either. That is the whole point. Anyways, closed at $5,878.95 today.

End of Week 3

Barely positive week - 1% up. Not good.

My decision to roll on Thursday instead of Friday was accurate. But Spain had to go in recession and mess up my calculations. Still the portfolio is standing still at around $5,474.48. Comforting fact is that, the strategy has preserved value in the "worst week of 2012".

More scary part is that the heavy options trading that was done on Monday betting that SPY will close below 138 has reaped profits to those who made the bet. This smacks of insider trading. The news of Spain's recession must have leaked and people opened options positions on Monday which were expiring on Friday. Scary stuff happens every week in the market.

My guess is that Monday will be a positive day and hence I havent made much changes in the positions - though I removed some top-side protection. No chance that the market will go above this weeks highs of 141.48. In fact, I should come up with a strategy to capitalize on that. Maybe sell some calls at 141 and buy others at 143.

Below are the strategy returns for 3 weeks.

Killer bid-ask spreads

Given my position was not exactly where I wanted it to be - SPY was 139.75 instead of 140.75, I decided to roll out my options on Thursday instead of Friday. Also, I have a busy morning on Friday in the city so I may not have gotten the chance to execute my trades. I checked the option liquidity and it seemed high. One of the legs - 137 had really high bid ask spreads of around 3%. Others looked liquid at 0.5% bid ask spreads. (Reminder to self - establish measures of spread liquidity). Anyways, I rolled my positions and also tried a new set of positions, which arguably should not increase the risk but keep transaction costs down (Reminder to self - need detailed analysis of that). This position is equivalent to over/under weighting the options so that the risk reward ratio can be achieved with smaller number of transactions.

Also, I increased my options open positions from around 10 each to around 25 each. While this is little difference on money in the market (which is still around $3,500), it does waste money in bid ask spreads and later on in transaction costs as well. Imaging buying 1 share at $1,000 instead of 1,000 shares at $1. Not that extreme, but still. So I did three different things this time: (a) traded on Thu, (b) traded in high bid ask spread situations, (c) increased option position exposure.

The bid ask spreads killed me - around $100 lost in there. I am hoping the gain in the strategy offsets that, otherwise I will have a loosing week this week. As of this writing, things seem to have changed (Reminder- analyse why?). I am only down $30 after executing all those inefficient transactions. Not bad!

One thing I noticed is that when you have 25/30 options out there, each tick movement in the price is worth 0.01*100*25 = $25 and thus positions can wildly fluctuate even on small movements. My hope is that the movements are in my favor!

Second thing I noticed: It takes around 1 hour to execute trades. Thus, 1 hour per week, unless I come up with some smart trade execution strategies (Reminder to self: do that!)

Mid Week 3

This news yesterday got me thinking.

http://blogs.wsj.com/marketbeat/2012/05/01/options-traders-cast-cold-eye-on-stock-rally/

Options traders, the smart money, has bet on the downside. That too by the end of the week. There are these substantial bets that were being discussed. I had two choices yesterday: (a) take a similar stance on my positions - and create a heavier downside protection (or remove upside gains), (b) do nothing.

I decided on (b) as my original strategy entails no changes to the portfolio unless it looses 40% of its value. I am also trying to optimize this decision - 40% seems just too large. The jobs report as was speculated yesterday, was bad but the stocks did not move too much lower. While SPY started low, iut has gained back most of its gains since the morning and is at -0.29% while the NASDAQ is in green.

There are two more major reports in the next two days and they could hurl the market downwards. I still think it will hang around these levels till the end. My strategy makes most money if SPY closes around 140.75. Portfolio at $5,622.73.

End of Week 2

I ended week 2 at $5,406.06. Thursday and Friday were both loss days. The loss on Friday was exacerbated by the major bid-ask spreads that I had to pay for starting the Week 3 spread. Lesson learnt - start at least one hour before market close.

Also the ordering of the trades has to be structured so that each trade has sufficient buying power. In one of the trades, I did not have enough buying power as there were more open positions in $ terms than closed. So the order has to be (a) execute open trades, (b) create new trades. Each trade needs around 15 minutes for execution, so total with calculations I need around an hour.

Also, this is the plot of the daily market value of the trades for the past two weeks (baseline as before is $5,000):

Week 2: Day 3

Trade 1 analysis: 

Apple beat its earnings handsomely. The bull put spread from yesterday would have earned 5% in a day. Pity I couldn't do it.

Ongoing spread trade:


The spread trade is moving on handsomely, with daily gain of $370 and total value of $5,601. It is at the center of the 139 mark that I set for SPY. If it stays there for another two days, more profits can be expected. However, it is bound to move lower after 2 days of gain. There in will come the downside protection. Lets see how that goes.

Week 2: Day 2

Week 2 Day 2: 

Trade 1:

An attractive bull put spread on Apple is out there, before they release earnings today after close. Unfortunately, I cannot invest because I did some pattern day trades a few weeks ago and I have to get that sorted out - it takes 2 biz days. The trade is as follows: Buy May 460 Puts and Sell May 470 Puts. You make 8% in a month if Apply stays above 470 during that period. Regardless of what Apple earnings are today, it stands to reason that it will not go below 470 in the next month. In addition, there is a vol crush that is accompanied with the earnings. Out of the 8%, 3-4% will be made today itself. There will be more Apple earnings later on.

Ongoing spread trade:

My prediction of SPY closing higher was right. But it didnt close as high as I would have hoped. Anyways, any upward or sideways movement is good for the calender spread. The position is now worth  $5,296 up $147 from yesterday, when it was $5,119. Yes, the numbers dont add up. This is so because the spread gains value each day (option value time decay), which does not get accounted by the broker. This time the automatic gain is around $30. Should be more around closing and if SPY settles around 138.5

Week 2 Day 1

Close of last week: $5,263
Somewhat different as the SPY options market closes 15 minutes after the main market and thus the prices change a bit as bid ask spreads widen.

Day 1: Beauty of downside protection:

S&P fell 0.8% and went outside my protection range of 137 to 141. However, given the additional downside protection I had on my spread trade (due to higher weight and higher volatility), I lost only around $150, which I hope to recoup in the coming days. Any movement to the north will take me into positive territory very quickly. Ended the day at $5,119. I expect a positive day tomorrow.

First trade closed, next opened

The first SPY trade closed today on Friday. I have moved it forward one week. SPY did not end exactly where I would have liked it to be, but still a good portion of yesterday's gains were locked in. At the end of first trade, I am at $234 positive. It went as high as $417 yesterday and as low as -$200. Volatility of returns is high but the hope is that the positive trend continues.

I have increased the contracts from 8,6,6 to 8,8,10, though cash in has decreased. While the portfolio is worth $5,000 at start, only about $2,500 is at work now, rest is cash.

Option analysis

Yesterday I conducted an analysis of option volatility and bid ask spreads as the day comes to a close. This is around 4pm EST. Also, this is not the expiry of options but just as the day closes. This was done to ascertain the right time to close out option positions based on optimal vol levels and bid ask spreads.

I took 3 short dated options around ATM. Thus when S&P was at 138, I took options expiring in 3 days with strikes of 135, 137 and 139. I also took the next dated options expiring in 23 days with the same strike prices. These are also the current options spreads that I am in. Below is how the vol behaves in the last 20 minutes - 1 mins increment for the first 15 minutes and then 30 second increments.

139L is the long dated option which I am long. 139S is the short dated option which I am short. Note that the longer dated option vol does not move much during the last 20 minutes, which the short dated option vol is quite "volatile". Also short date option vol decreases in the last 30 seconds, which suggests a good time to cover. However, that may also increase the risk of not completing the transaction. Overall, no useful indications of ideal trade time. Which means I can close out of positions anywhere in the last 20 minutes as far as vol is concerned. Also shown are the bid ask spreads of the same options

Note that the bid ask spreads of the short dated options are much larger that the long dated options. They widen at close which is expected. There is a time around 5 minutes before close that the spreads contract. This may just be an anomaly but indicates a good window for closing out positions. This needs to be investigated further. Apart from above observations, nothing major comes to attention.

First trade in

Amen!

Optionshouse slow

Optionshouse is slow. I put in a request for a margin trading account last week and it is still "processing". Hopefully, it will be done by Friday so I can make my first spread trade.

Spread trades on the SPY

Tomorrow once I have my account funded in Optionshouse, I will start making some spread trades on the SPY. I will use this blog to document my strategies and how they do...