I decided to hedge off both the IWM and SPY condors today to ensure profitability should we get a substantial drop over the weekend.  Upside risk is negligible at this time, and quite frankly the hedge on IWM wasn’t really needed yet…- I’m simply playing it safe.

The trades are as follows:

• BOT 25 SPY 100 MAY 10 108 PUT @ 1.90
• BOT 50 IWM 100 MAY 10 59 PUT @ .59

The SPY hedge is a little late as my existing short strike on the SPY trade is 112, I should have hedged this off on Monday and Tuesday when I was working the rest of my real money accounts.  That was my mistake.  No worries though, these hedges will protect from downside risk, and worst case the SPY trade turns out to be a slight loser.  Also, the strike I used may have been a touch to close, a further OTM option would have provided possibly more protection due to a larger volume of contracts for the same outlay.

The IWM hedge is really to protect from a MAJOR market collapse in the next few days.  The short strikes are at 63 for this condor, so there isn’t a ton of risk here with the IWM currently at about 65.5 – however there is enough risk that I don’t want to be unprotected!  Time decay is going to start to pick up rapidly in the next week or so, so these hedges will be very short term.

My personal opinion is that we are going to see continued weakness in the market. There will likely be a rally in the next few trading days to consolidate the losses, however I would not be at all surprised to see the Dow, S&P and Nasdaq all down again next week and throughout the month. Greece is a power-keg that is ready to explode and the Euro zone is going to be in big trouble when/if that happens.  The old adage of sell in May and go away is really holding true!

From the WSJ:

Major banks have masked their risk levels in the past five quarters by temporarily lowering their debt just before reporting it to the public, according to data from the Federal Reserve Bank of New York.

A group of 18 banks—which includes Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. and Citigroup Inc.—understated the debt levels used to fund securities trades by lowering them an average of 42% at the end of each of the past five quarterly periods, the data show. The banks, which publicly release debt data each quarter, then boosted the debt levels in the middle of successive quarters.

After the carnage of Lehman and Bear is anyone surprised that major banks are doing everything in their power to manage their perceived risk?  This isn’t nearly as bad was what Lehman was doing, but 42% is a major shift, in fact that would be a material shift of risk in my mind.

Call me crazy, but wouldn’t it be prudent to actually manage the risk rather than attempt to hide it?

A few weeks ago I decided to tweak the papermoney portfolio again.  Rather than going for a bunch of option plays on index products, I wanted to simulate some “money management” via positional plays on individual equities and managing risk via index option plays as needed.  The goal with the portfolio is to earn roughly 2-4 percent a month and compound the gains throughout the year.

E-House Holdings

It looks like I was stopped out of E-House holdings today (EJ – chart on right).  This is a Chinese real estate firm that was (and remains) very interesting.  I purchased the shares a little too high, so I’ve paid for that mistake.  I am currently short 5 Calls @ 22.5 and I’m going to keep the calls as I’m a buyer if we can break out to above the 21/22 level and will cover those short calls very quickly with stock.

If you take a look at the chart, you can see that on a longer term basis, EJ is in no-mans land.  There is no good reason to buy here, however I am also a buyer again if we can break the 200 day EMA so I’m putting in an order to sell puts at @15  for a reasonable credit to possibly get put into the position.

Buy selling covered calls and shorting puts to buy stock I am constantly generating income in the portfolio.

A few days ago I wrote about my internal struggles in determining what is the best allocation of funds for my 401(k).  Well, I’ve gone back and forth, again and again trying to figure out the best move. The biggest constraint is simply the funds available in my 401(k).  I’m not horribly comfortable throwing 100% of my money in a single fund – I just don’t have a lot of options!

So, here is what I’ve decided to do.  Your comments are always welcomed!

• 75% of my 401(k) is now locked up in the Pimco Total Return Admin – PTRAX Fund.  The fund has performed well over its life, and should provide stable returns to the 401(k) during this upcoming period of what I believe will be market non-performance.
• 25% of my 401(k) is allocated across a series of different funds that have exposure to domestic and international stocks.

As with all projections mine are bound to be wrong.  Timing, size of the move, all of these things will be wrong in some respect.  I could be totally wrong and the market could take off like crazy!  Who knows.

Here is the brass tacks of my logic.  PTRAX has performed consistently since its inception.  It continually provides returns year over year.  If I am right and the market absolutely falls apart, it is possible that PTRAX will suffer some losses, but they should be very small compared to the overall stock market.  If I am totally wrong and the market rips up from here, well… I’ll still make money.  Sure, it will be a bit less than a fully setup stock portfolio, but it will still provide very nice returns overall.

That is pretty much it, should be interesting to see what happens.

If things begin to slide as I expect – you can be sure that I’ll be looking to throw even more money at PTRAX.  The other options I have are pretty much useless, so who knows.  If you are a seller of PTRAX, I have a large block buy coming in

Lately I’ve been pondering the best way to “manage” my money long term.  Specifically I’ve been mulling over different options for my company 401(k) and my other retirement accounts.

These accounts are of course longer term accounts that are earmarked for living expenses later in life.  As such, my goals with them are to have some stability in the fact there there will be money there, while earning as much as possible so that my family is well taken care of later in life.  Ideally, these accounts would grow to a size that enables my wife and I to retire comfortably while also providing future income for my children and down the generational tree.

So… The question becomes, what is the best way to manage this cash?

The bulk of the money is in a 401(k) account that has specific rules and regulations regarding deposits, withdrawals, transactions and investment vehicles.  Quite frankly, it is fairly limited in what can be done.  Hedging is out of the question, shorting is a no-no, individual issues are out of play, and there are only a dozen or so funds that can be used.

I don’t really plan on coming to an answer or recommendation on this post, I’m really just thinking out loud.  If you have some thoughts on the topic, I’d love to hear them!

Here are my thoughts and current concerns

I am not a money manager.  When I trade, I am a speculator.  Plain and simple.  I look for short to medium term (a few days) setups and I trade them.  This is not how you manage money longer term.

My overall market directional calls have been pretty solid for longer term plays.  Currently, I’m very concerned about the strong possibility of a long bear market, or at best, years and years of chop.  Given this, I don’t think there is much appreciation to be had from the stock market in terms of raw percentage gains.  I’m also a bit concerned about the possibility of a strong inflationary enviornment in the next three-seven years, if that happens, nominal prices will rise quickly and I’d like to protect my money from this increase.

If I am right directionally on the market and we move down, then having strong exposure to equities is not really the best place to be!  Given that I cannot hedge properly in these accounts, it is very difficult to insure my gains from possible collapse.  Without the ability to hedge, the only option that I can think of is to simply reduce my exposure.

With that line of thought, I took a look at my options.  Cash or bonds.  That is about it.  Cash is definatley out of the question for a large part of the portfolio – over the next 30 years I’m pretty sure about one thing, cash will lose value – period.  So, let’s talk about bonds.  Well, there are two options that are avaiable to me here, the best one is a fund that has returned about 7.25% over its life, and recently has returned about 5% a year.

Consistent returns, or playing the market…

Well, 5-7% a year isn’t horrible, but it isn’t going to rock my retirement world either! Let’s get one thing clear, I do not micromanage this account.  Nor do I want to.  I will make about 4 adjustments a year.  Primarily these will be total portfolio re -balance adjustments to line things up with future expectations.  If I don’t need to make any changes to my fund selection, I’ll just re-balance things to get back in line with my investment allocation.

So.. Given that I’m not going to try and time the market, and I am definatley not going to be trading this account; what is the best allocation method for the investments?

I could do something simple like a 50/50 split.  50% locked up in a reasonably stable vehicle like that bond fund, the other 50% spread out across an array of other vehicles matched against macro economic conditions, fund performance, management etc… This provides a nice way to protect gains when I rebalance, and it also protects capital if the market collapses.

There are hundreds of other options, each of which have plusses and minuses.  This post is getting wordy, so I’m going to call it quits for the moment, and I’ll revisit shortly.  If you have any thoughts, I’d love to hear them.

It’s been a while since my last post.  Lately, I’ve tweaked my methods to become more consistent in my profits.  Rather than throwing down positions that range from speculative options plays to futures scalping, I’ve focused in on a single market with a single system.

So far the results have been pretty good.  I’ve been tweaking things slightly to generate additional profits while minimizing losses all the while keeping it as simple as possible.  Curve fitting a system with tons of rules never works in the long run.

It’s been difficult to simply trust the system and follow the entries by the book.  That is of course until I look at the statistics from trading “by the book” vs. trading by my gut.  Funny enough, when I trade by the book, I do very well.  Once I start trading by my gut, I end up losing money.

Anyhow, make your rules and stick with them.  If your rules and your system are solid, you should do very well.

Well, it has been quite some time since my last post.  I haven’t dropped off the face of the planet, I’ve just been busy with school, work, family, golf, trading and working out.

This market has been really, really tough.  There have been times that my account has been a rocket ship, moving up with reckless abandon and then of course other times getting just flat out crushed.  I’ve really had to make some tweaks to how I trade in order to manage this market.

I’ve moved away from options, and exclusively to futures. I’m trading mainly on tick charts, very, very short term in and out scalps.  I have about 5 markets that I’m watching and I am trading one setup.  If I don’t find the setup when I scan the markets, I don’t trade them.  It takes mes about 30 seconds to scan the markets, and then I’m back to whatever I was doing before.

If I find my setup, I put in the limit order (or stop sell/buy) with an OCO bracket and go back to what I was doing.  My profitability has gone way up. The setups are clean, and trading these way keeps me out of the markets when they are not trending.  I had been trying to scalp channels, and choppy markets.  It was profitable, but also very costly when I was wrong.

Simple setups, difficult markets = profits.

The best part about these setups is that I can do the market scan so quickly that I am able to scan often with basically zero interuption to the rest of my day.

Possibly, and as a result I sold my papermoney calls on Friday.  I’m still holding the SKF and SPY puts. I’ve updated the papermoney tables with the trade.  Sorry for the weak analysis over the past week or so.  I’m swamped with babysitting our son, and keeping up with school work.  I’ll try to get some reasonable charts up on the site in a bit.  I could throw up charts with fibs and lines all over them, I’d just prefer to have some thoughtful analysis on them.

Good luck!

Who knows any more   It looks to me as though we are getting close to a very important cross roads here in the /NQ and /ES. I’ve jumped into a slew of SPY Calls to balance off the Puts that are open right now. The papermoney page is up to date.

The futures are up tonight and if we break higher, I’m going to start shorting puts against my JUN’s to capture some of the volatility we have right now. I don’t have any charts to offer tonight as I’m running short on time.  Class has started up again and I’ve been buried in Macro textbooks and statistical formulas.

For some good stuff, head over to The Slope of Hope, and Evil Speculator.  Both of those sites have some excellent analysis on what is happening right now.

I’m not going to comment… as you’ll see from the first line – they were speechless, so am I.

From Zero Hedge:

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

“AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria – rated at least AA- (if it fit these criteria all OK – as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction – wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks – the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent – these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were “we have never done as big or as profitable trades – ever“.

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks – effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities – run a chart from say last September to current of say S&P 500 and Itraxx – credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period.”

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman’s terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner’s (and thus the administration’s) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this “one time profit”, which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers’ money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

“This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility,” said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. “The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances.”

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So – in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of “market quotations may be difficult to obtain” is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough.This wholesale manipulation of markets, investors and taxpayers has gone on long enough.