These past few months have been extremely difficult to trade.  The swings have been violent, and if you haven’t been on the right side of the moves, the draw downs can be staggering.  I’ve been fortunate and have been able to mitigate a lot of the nasty losses a market like this can bring about.

As you can see from the chart below, we have started to see daily volatility subside a bit and it looks like the indicators are beginning to point to a slight bullish bias. My personal belief, and that of my trading accounts positions, is that we are in for a Christmas rally.  Take a look at the chart…

S&P 500 - December 15 Daily Chart

You can see that the MACD is just about completely positive, and today’s close puts us just above the three DMA’s.  Give that, and the generally light holiday volume, I would not be suprised to see a slight drift up for the next few weeks.

This week in particular is going to be a harsh one.  With the two-day fed meeting, the possiblity of an auto bailout, options experation and a host of new bites… we are in for some serious movement.  That of course is compounded by low volume and the ability of the few big-boys left in town to do some serious market manipulation.  Just look at a daily chart for the /ES today to see what I’m talking about.

Anyhow, the holiday spirit is abounding and I’m thinking we drift higher.  My post a few days ago indicates that I’m heavy into 2x Bullish ETF options right now.  I’ve also hedged the papermoney account with a largish position short China as I firmly belive that we are going to be in for much more bad news come 2009.

Well look at that.  Senator Reid decided to make a few comments this evening and the futures market seems to have absolutely fallen apart.

Today I closed out the majority of my longs and went into the following positions in my personal account

January Calls on FXP(36.22 +0.21), SDS(32.48 +0.23), SRS(23.71 +0.32) and a QLD(58.08 -0.45) hedge. 

It looks like my QLD hedge is going to get absolutely killed in the open if this after hours activity continues.  848/850 on the SPX(1105.84 -0.29) is a key level, and the /ES futures have just crushed through that over night.  I would not be suprised if we open close to limit down if this continues over night.

The prospects for the United States economy are pretty bleak right now, a bankruptcy filing in the auto industry won’t help that out very much. Personaly, I think it is the right thing and the only way that these broken companies can become healthy.  This is just going to be a very painful experience.

From a trading perspective, on a weekly timeline 810 and 757 appear to be the big support points.  If we penetrate 757, look out below we may be going down into the 600’s quickly on the SPX. 

The key thing to think about in this sort of a market is that you must be able to adjust quickly.  I’ll post updates on what I do with these positions.  I’m going to take a look early tomorrow morning to see what the markets have done overnight.  If we go LIMIT DOWN again on the ES, I’ll likely have a few trailing stops put into place on these options to capture some of the profits that are likely to come when the market rockets down in the AM. 

Whatever…

Yes, today was a rough, rough day in the markets. No question about it. I’ve got a couple of things to talk about, so lets start with my current position on the Russell 2000- RUT(650.45 -0.31) – and why I’m not worried yet.

The economy is getting softer, that is a fact. The Russell 2000 is a bunch of small companies that are not nearly as globally connected as the big boys in the S&OP 500 or the Dow. When things get soft, the RUT tends to take it in the chin.

If you watch the charts of the SPX, DJI and RUT together you can see that the Russell typically moves a lot faster than the Dow or the S&OP 500 (see above). Over the past couple of months as volatility has jumped, you can also see that the RUT has moved even faster.

So, this morning we get a weak job number and the recession talkers are all ears. The market begins to drop and the RUT really takes it on the chin: recession = weakness in small companies. So, if the recession talks are in the wind, I’d expect the RUT to drop. This is why I’m not worried yet…

Today, the RSI on the RUT hit 23, anything below 30 is typically a signal of an oversold situation. 23 is really a sign that we should get a slight bounce next week. On Thursday the indicator was at 32, quickly working its way down – this drop was big… Watching the normal pattern of the RUT, I completely expect this bounce.

Anyhow, back to the trade. The RUT trade is at 670, about 50 points away from our current point in time. That is another 7% drop or so, I just don’t see it happening – at least not in the next 2 weeks!

So, since I’m still optimistic on my trades, lets talk about my optimism on the economy and why I think it is still good.

First off, the bad…

• Demand is down – homes are declining in value
• Job growth at 1% or less each year
• Interest rates are dropping rapidly

Now lets get to the good…

• After inflation, after tax income is up 2%
• August initial jobs were at -4K, revised +93K
  • This number gets revised every time
  • I’d expect that our current jobs number will come up quite a bit
• The vast majority of the reported job loss is in construction
  • DUH - housing is taking it on the chin, of course construction jobs are down.
• Q4 GDP likely to be 2.5->3% growth
• 5% unemployment rate – not to shabby

So, looking at all of this stuff what is going on? Well, the consumer is a little tight due to the housing market, and the economy is a little soft due to the gasoline(housing) being taken off of the fire. As a result of the softening housing market, a lot of construction workers are looking for jobs and the financial firms are having to write off sub-prime losses. However, the rest of the economy is in pretty good shape…

As the fed works this all out, it is in a really tough spot. Gold and oil are up, along with a bunch of other inflationary pressures. Ben and Co. need to make sure they get this right, the real risk here is … stagflation. Ouch.

If your not familiar with stagflation, basically it is low to no growth with rising inflation – bad news. Here is why this is a catch 22, taken from the wikipedia article on stagflation:

An important monetary mechanism to increase economic growth is by lowering interest rates, which reduces the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can increase economic activity, it can also result in increased inflation. The monetary mechanism to reduce inflation is by raising interest rates, which increases the cost for consumers to buy products on credit and businesses to borrow to expand production. While this can reduce inflation, it can also result in decreased economic activity.

So, lets just hope we don’t end up with this mess.

A key to avoiding this is a strong dollar policy. The problem with that is of course, as interest rates go lower, so does the dollar. As interest rates go up, economic activity slows and the dollar becomes stronger. So, if the fed needs to turbo charge the economy, it needs to drop rates – but by doing so may accelerate inflation to a point of big troubles.

Personally, I agree with former federal reserve bank governor Wayne Angell. The federal reserve and the government need to team up and put together a policy that will lead to a stronger dollar. In my opinion the best way to do this is to lower corporate taxes while dropping interest rates. This gives us the chance to fix the credit crisis while bringing up the dollar by bringing more business to the United States.

I don’t see any other way around it. If President Bush can step up to the plate and put a solid corporate tax policy reform in place, we can pull out of this without any major issues. It would be one of the greatest soft landings in history. Something to applaud.

I don’t think it will actually happen, but I can hope right? I’m sure the folks in the federal reserve and the treasury department are talking about it. I’m confident that they can figure it out.

Stay tuned, it’s going to be a fun ride! Oh yeah, grab my feed!

Well that was lack-luster. The DJI gave up over 220 points, the SPX dropped over 21, the RUT was down 12.48 and the NASDAQ gave away 42.65…

2007 ended with a bit of a flop and 2008 has started out the same way. It’s a little bit of a strange situation, oil hit $100 dollars today, gold is rocketing along with most other commodities, and the fed fund futures are pointing to a 20+% change of a 50 basis point at the end of January.

It’s a little bit of a cat and mouse deal here. The ISM numbers today point to weakness in the economy, however non-residential housing is up nicely. Overall, the economy is still growing, but the adjusted money supply is shrinking. Credit is tight, the fed is still dropping rates but the yield spread is still inverted. It’s just all upside down!

Here is an interesting quote from the FOMC minutes today:

Some members noted the risk of an unfavorable feedback loop in which credit market conditions restrained economic growth further, leading to additional tightening of credit; such an adverse development could require a substantial further easing of policy.

Just a few days ago I was saying that I think we will be cutting rates, a lot in the future. This statement from the fed seems to back that position. The real tricky thing here is that as rates get cut, the dollar is likely to continue to weaken. As the dollar weakens gold, oil and other dollar based commodities will rocket up in price. As oil goes up in price, so should inflation… It’s really a vicious cycle.

So what does all this mean to the options portfolio here at ryanbarr.com? Well, I wish I would have sold a bunch of bear call verticals about a week ago! I don’t think the January RUT position has any problems. The position is very well protected and has a solid 80 point or so cushion. 730 still remains a serious point of resistance and I think it could be tested shortly. We’ll see how it all comes together over the next few weeks.

Here is a one year chart for the RUT, take a look at the purple line and how the index tends to bounce right off of it.

The blue and purple bands are standard of deviation channels, purple is two std’s away and the blue is three away.

After you take a few minutes to look it over, you should see why I’m not too worried about things! Anyhow, if the bottom completely falls out and the Russell tanks 80 points in the next few weeks, then I’ll run to the hills and be quite upset that I didn’t exit last week. There is roughly a 3.7% chance that will happen – not to likely.

Good luck – trade smart!

2007 has come to a close. The Santa Claus rally didn’t really do much this year and we ended on a down note.

The RUT closed the year at $766.03 down ($5.73) for the day. All of the other major indexes shared similar performance for the lackluster close of the year.

Overall, 2007 was a pretty good year. We’ve seen volatility, measured by the VIX, come back and hopefully it will stay around for a while! Volatility makes for more time value in options, more time value means more premium which in turn should lead to more PROFITS!! Given all of that, personally, I’m happy that volatility is back.

Of course all of the major trading rules still apply. We still have to do proper analysis of the trades and ensure that he risk is appropriate for the reward. More premium in the option prices means that we should be able to move further way from the current price of the underlying when opening positions, creating more profitable trades. Not only can we move further away, it is very possible to make some great near term trades as well. The rules become very important. Trading by the rules means long term profits!

Going forward…

I’m still bullish on the overall market. I don’t think that we are through the end of the current credit crisis, and I expect that will continue to drag on stocks, especially in Q1 2008. However, I would be surprised if at the end of 2008 I’m not talking about what a great year it has been. The RUT, DJI, SPX, NASDAQ and all other major index’s, in my opinion, will see solid gains during 2008.

I’m not going to make a percentage prediction, however I do think it will be a bumpy ride to get there!

Wednesday January 2nd 2008 marks the first day of the 2008 trading year. It should be a fun day with the fed releasing the minutes from their December meeting. If inflation is a key theme to the minutes, it might mean a rough day in the market. Even with hawkish commentary from the fed, I think we have a few more rate cuts ahead. While I think it would be dangerous to get back to the 1% rates of the last few years, we need to get down a bit from the current rates to help clear up the lending and credit crisis.

Anyhow, I hope your 2007 was as good as ours! Good luck in 2008 and remember – Trade Smart!

Finally, back into the game of options trading for the year. I’ve spent enough time in my new role with my employer to be able to juggle travel, work, life and trading! It’s about time!

Last month I went ahead and dropped down a quick RUT position, it turned out very nicely, I’ve just rolled that forward into a September position for my personal portfolio as well. In the paper money portfolio, I opened a RUT and SPX position. Both were perfect as well! What a nice month. Here is the summary for the papermoney account.

• Topline Summary (For Educational Purposes Only) Not a Real $$$ Account – All trades simulated
• Opened May 16 2006
• Starting Cash Balance: $100,000
• Current Cash Balance: $122,894.30

Up 22.8% over the last 14 months!!!
Not to shabby for taking about 7 months off of trading and still making a smooth 22.8%

I’ll be looking to put down a couple more paper money trades over the next few days. I’ll post them when they are all finished.

Well, it has been quite some time since I have placed any trades. This year has been a hectic one with a new position in my company and many life changes.

I think the market is finally in a spot were I am comfortable putting my money on the line, as a result I threw out a few paper money positions. Today I opened the following two positions:

• RUT Jul 2007 760/750 890/900 Iron Condor
• Sold 25 Contracts for $ 2,475 Credit
• Risk ~ 15.5%

• SPX Jul 2007 1435/1430 1575/1580 Iron Condor
• Sold 25 Contracts for $ 2,425 Credit
• Risk ~ 8.7%

Both of them appear to be fairly conservative. The Russell position has the most upside risk and I’ll have to keep an eye out it. Currently the RUT is trading at around 830, with a high of 856.39. There is a possibility that it could break out to 890, I just don’t see it happening in the next 23 days.

Looking at all of the data out there, I’m pretty comfortable holding on for the next 9 days on both of the SPX and RUT positions that I’ve got open currently.

Based upon a quick analysis in the tools from thinkorswim, the SPX has about a 0.13% chance of expiring above 1430 and the RUT has about a 4.17% chance of expiring above 810. Both of those numbers are pretty good! I could lock in some profits on the RUT right now to take a bit of risk off the able, however I’m happy with a 40 point cushion.

As with last month, if I see a huge spike, I don’t have any problem changing my mind; I just don’t see that as necessary right now. I’ll post updates as needed.

Over the past few days I’ve been able to secure fills on two August positions. The first in an SPX Iron Condor and the second position was a result of two RUT Iron Condors. I’ll run down the positions here; however, they are also reflected in the portfolio section of the site.

SPX Iron Condor

• Sold 30 SPX August 1315/1325 1175/1165 Iron Condors @1.20
• Credit $3,600, Commission: ($189.95)
• Margin: $30,000
• ROI: 11.3%

RUT Iron Condor

• Sold 30 RUT August 740/750 600/590 Iron Condors @1.26
• Credit $3,780, Commission: ($189.95)
• Sold 30 RUT August 740/750 610/600 Iron Condors @1.27
• Credit $3,810, Commission: ($189.95)
• Final position is Unbalanced 60×740/750 Call Spread and 30×610/590 Put Spread – Iron Condor
• Margin: $60,000
• ROI: 12.11%

I’m still holding on a choppy but basically neutral to bullish market over the near term. These positions both appear to have great risk/reward characteristics and I’m confident that by the end of September we will be back into positive territory after the beating we took in June!

I did place a very similiar trade to the Russell position above in my personal account. I trade was opened using two Vertical Spreads as I was unable to get a live fill for the full Iron Condor.

July was a nice month. Apple reported great earnings and I was able to close the position opened earlier this month for a quick gain. Thursday late in the date I unrolled the RUT and SPX plays for next to nothing and I fully expect the MSH play to close completely profitable. The only play that doesn’t seem to be a great one is my quick play on Google for earnings… It appears that they beat estimates again but it just wasn’t enough.

Once the final numbers for tomorrow are out, I’ll update the position sheets and the account balance. I don’t quite think that I’ll be able to make back all of June’s losses this month, however by the end of August, we should be back in the money. It can be a roller coaster at times, but when you stick to it… the money rolls in.

Good luck – I’ll post updates tomorrow