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!

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.

Well, it appears that the bulls have pushed the tape high enough to do some short term technical damage to the tape.  It looks like we are headed towards the 1100 mark on the SPX(1344.90 +19.36) and possibly a bit higher.  I don’t see any reason to allow my puts to continue to lose value as we climb higher and time expires.  I’ll take advantage of the higher prices when we get up there and load up again.

I’ll do some cleanup of the papermoney account over the weekend so I’m sure there will be some slippage, and this weeks puts are going to put a slight damper on things.  No problems though.  I’m still trading /ZC and making money so I’m building up the war chest for the right down.

Let this be a lesson to you - Don’t remove your stops...

Here is a picture of one of the charts I actually look at during the course of a day.  I woke up this morning to find out that the /ES has taken a nice hike upwards into the 765 zone, and I remained short through the entire hike.

Now, don’t get me wrong here.  I’m still in the /ES short play, and I’ll remain in this play for a while.  However, I removed my stops at 655 last night, because I was afraid of getting “stopped out” by the little bots that seem to sweep the /ES overnight.

That was just foolish.

It was foolish because the charts clearly show that the 664 range would be another point of consolidation if we break out.  The highs from this past week were right around the 655 range and that was a nice easy stop.  Rather than having another 9 points or so to knock down gains on the /ES, I’ll instead be recovering from the overnight swing throughout the day.

Overall, it isn’t a big deal.  I was just an example of poor position management.  I foolishly pulled my stops, and now rather than enjoy a profitable short position during the trading day today, I’ll watch the losses shrink.

Of course, this all depends on your time frame as well.  There are plenty of folks out there with very, very wide stops.  A particular blogger comes to mind who holds positiions into losses that I simply will not tolerate.  My futures trades are pretty much short term swing plays.  A day or two at the most, infact most are closed in a matter of hours lately.  As a result, my stop mangement must be appropraite for my style.

Daily action on the ES Today

Leaving /ES points on the table, and then throwing them away

Well, well, well.  It was nice to get in and out of an overnight profit, but my goodness did I give away the farm in potential gains.  Take a look at the image on the right, what a waste of possible profits…

I got a little frustrated in the morning after watching the run up overnight and into the open.  I didn’t participate in the big move and then tried to short into it.  Well, that trade was stopped out, and then I entered into two quick turn around winners.

Overall, I think I tried to chase a missed opportunity.  Not the best performance.  I was very busy today at the office so I didn’t have a chance to do proper analysis, and ended up getting a little to emotional with these trades.  A much better idea would have been to leave my initial stop in, then let this thing run.

The profits that I flushed down the toilet today were just tragic.  Tragic.

I’m still pretty new to the /ES, so learning how to trade it is taking a bit of time.  The liquidity is just amazing, and the market is moving so fast right now that it is a great time to learn in real time. Remember, I have a full time job, so I can’t stare at a trading screen all day.  I get a few looks at the market here and there, but that is about it.

What is happening in SKF land?

Take a quick look at the past 10 days of XLF action

This afternoon I took 10 contracts of SKF(46.76 -2.36) off the table, capturing back the initial investment, locking in a modest profit and having a few contracts ready to ride out the fall.

Lets take a moment to look at two charts to see why I did this.  The first one is off to the left here, it is a picture of the recent price action in the XLF.  You can see pretty clearly that the XLF has moved down steadily for the past week or so.  Then today, this bad boy just went up like a rocket-ship.

Why is all of this important?  Well, the XLF is the basis for SKF.  SKF moves 2x the inverse of XLF, on a percentage basis.  The percentage part is what is key here.  As SKF (or any 2x etf) gets to a nominally high level, they will naturally collapse.  10% of 200 is 20, whereas 10% of 20 is only 2.

With today’s jump up in XLF, the SKF dropped a full 62 points!  Yup, 62 points.  That means that the value of the Puts we purchased on Monday jumped through the roof.  SKF is still high enough (at 186) to jump up quickly if the XLF were to fall off again, which may be in the cards tomorrow.

Here is a chart of the SKF for the past 10 days

Divert your eyes now off to the right again.  This is the price action of the SKF over the past few days.  Today was a nice collapse, and I think we will see a follow through in the next few days.

I have highlighted my target range for this leg down of SKF, based on compression of the 2x ETF.  XLF has a pretty good chance of moving up to a 61.8% retracement, which would add additional pressure to SKF. Even better, a slight pull back in XLF followed by a sharp rally would really put the pressure on.

I’ll keep a close eye on the price action in both SKF and XLF over the next few days to work a profitable exit on the remaining puts.  I’ll also be closing out my perosnal position on SKF when I close down the papermoney trade.

Here is our support…

A little messy, but it appears there is support around 670 on the /ES

As you can see from the chart, the support at 670 is pretty messy, but it seems like we have a pretty good base of resistance building up in that area.  On Friday afternoon we pierced down into the 665 range, but we didn’t get much farther then that.

The 670 level is further backed up a proprietary retracement level calculation that I use on the SPX(1344.90 +19.36).  These retracements are awesome, I’d suggest you take a look at them – here.

So, a bounce off of the 670 level seems like a good play from an odds perspective.  You can see my fib lines drawn on the chart to the left.  There is a much better view of them down in the next chart, zoomed in with a bit of commentary.

This is the setup for the ES Trade. Recent price action and the targets.

The Trade Setup

As you can see from the chart on the right, this trade is setup nicely based on the fibs.  My entry was a little late at 676.75, however I think there is a good amount of upside room here.

As with the trade from last night, I have my stop into the system and my trailing stop is setup to maximize profits, while minimizing losses.  I’m still fairly new to trading the /ES so I don’t have a ton of confidence in leaving these open overnight without an entry in to close for a profit.

If you’re wondering, I actually use TOS charts for my normal trading platform as the Time and Sales data and Active Trader is awesome.  I also have a few ThinkScript indicators included in my platform.  I bust out prophet charts for the web as I think they are much nicer looking charting package and they are just pretty darn cool.  If TOS charts didn’t integrate so nicely, I’d be a complete prophet fanatic.

This morning, just after the opening bell I was filled on my initial 8 SKF(46.76 -2.36) PUT contracts.  This trade was already nicely into the money for the morning, so I legged into an additional 5 contracts, and have an order out for another 10 if the market turns mid-day today.

The current position is long 13 SKF April 140 Puts.  As I type this, the position is up $2,295.00 in profits already.  That isn’t too shabby considering that I have about $14,000 invested with these puts.  The April contract has open interest of about 2,050 so owning 13 of these is well within reasonable levels.

Target on this remains an SKF drop to around the 150 or so levels in the very near term.  I’ll continue to evaluate the performance of SKF during the trade to get an profitable exit.

I have a similiar trade on in my personal account.

ES Retracement Likely - March 8th 2008 10:50 PM CST

I’ve gone short the /ES in my personal account for an overnight scalp.  I’m heading off to bed in a few minutes here and figured that I’d post my thoughts on why I’m in this trade.  The /ES has continued to collapse after recent upticks on a short time period.  Based on the run-up from at the close on Friday, I think this is a great short opportunity.  You can seem the chart to the right.

This seems to be a pretty straight forward trade.  I’m using an OCO order with trade triggers to stop out above the highs from Friday afternoon and a I’m using a +2.5 point trailing stop that will trigger just above the 50% retracement to get out.  If we continue to slide down after hours, the trailing stop should be wide enough to capture a bit of wiggle.

That’s it for the night.  I’m not going to get into this scalp on the papermoney account, I haven’t decided yet if I’ll be doing much short term futures trading in that account.

What a day, what a day.  The cyclical bear market is confirmed.

The slow grind in major indecies today was just astounding to watch.  It was this amazinginly orderly destruction of wealth that just slid down all day long.  Unreal.

Anyhow, I did pretty darn well today.  As I type this the papermoney account is sitting nicely with $211,325 in cash, close to a 33% return this year alone.  This afternoon I closed down the SPY(134.54 +1.86) and FXP(22.06 -0.68) positions, and have entered a buy order to purchase 50 SPY(134.54 +1.86) March 75 Calls.

Yes, you read that right.  I am getting ready to get long.  This may come back to kick my butt, and if we break under the 73 level on the SPY I’ll kill this trade and take my lumps.  However, we have closed down six days in a row now and the odds are strongly in favor of a relief rally.

Don’t get me wrong, the market is still going to grind retirement acocunts into hamburger over the next two years.  Wave 5 of and EWT cycle is ugly, and this is it.  We are in the big bear, and it will take a while for this bad boy to destroy massive amounts of wealth.

If you can, get short, hedge and get protected.  My 401(k) is getting killed, my investment options – all but one are down 30-40% over the last 12 months.  How can you have a balanced portfolio when you cannot buy any insurance?  No puts, no short funds, nothing to actually hedge aginast the market.

Oh well, the good news is that my personal account is on the rise.  I am not offsetting the massive losses in the 401(k) yet, but if I am able to keep only 1/3 of the rate of return I’ve been pulling down this year it will be a very, very good year.

All of my FXP(22.06 -0.68) positions have been closed.  They had very healthy returns and I’m thinking we are in for a bear trap right now.  I’m getting ready to hedge all SPY(134.54 +1.86) positions as well.