Downgrade Portfolio Update

As discussed in previous posts, CCI established 7 trading positions in the past week around the S&P downgrade of the US.  The plan/hope is that it will prove profitable over the mid-term to have bought at such a fearful time (or at least that is the theory!).   The google document at the link below will track these 7 trades.
 Downgrade portfolio


A few highlights/lowlights from this week.

• The naked put sale of the Japanese ETF expired worthless, thereby generating the small amount of income as planned. 
• With Waste Management closing Friday's trading at $29.40, the naked put sale was assigned and we are the proud owner of a lot of  Waste Management shares at an effective cost of $29.30.  Not in a rush to get rid of this stock as it is now paying a 4.6% dividend, but if option volatility remains high we will likely look to write a covered call against this position to try to add to the income stream.
• Most of the other positions are not too changed despite all the noise of the week except for the Bank of New York which is down.  Still believe that this somewhat unique bank stock is caught in the down draft of more traditional banks that have with a more risky position in the industry, but as of now this is a loser.

 Updates on these 7 positions will come out periodically. There are several other established trades that took a beating this week.  CCI will be sorting through the damage and determining next steps on these trades over the next several days.

Risk Reversal on Materials ETF - xlb

Stocks plunged again today.  That provided the "opportunity" to establish the risk reversal options based position in the materials ETF (xlb) that was originally described in  Friday's Shopping List article

At the time of the trade XLB was trading at around $32.9.  Sold 2 lots of the  Dec. $31 puts and bought the $34 calls for zero out of pocket costs after commission.  CCI will be long the xlb if it falls below $31(5.8% more down)  or if the etf trades over $34 (up about 3.3%) on the December expiration.

Scenarios
Below $31 - We miss out on the first 5.8% loss but after that lose dollar for dollar on any further drop.  (i.e. this position looses less than buying the etf today).
Above $34 - We miss out on the first 3.3% of gain but after that gain dollar for dollar on any further rise (i.e. this position makes less than buying the etf today.)
The idea of sacrificing 3+ % of the gain to avoid nearly 6% of the loss seems like a good risk reward.  Also option implied volatility is high if it comes down there might be trading opportunities around this position

MMM - Time to trade this stock again

MMM is a dow jones index component and blue chip company.  It has been beaten down by the overall market drop, concerns about a slowing global economy and earnings announcement that "only" reaffirmed this years EPS estimate of $6.10 to $6:25.    CCI's opinion is that MMM's management likes to be conservative and under promise and over deliver, so I take this conservative guidance as business as usual for MMM.  CCI has successfully traded around this stock in the past as documented in this blog.

Given the stock has fallen from near $100 to $80, it seems like a good time to consider re-establishing a trading a position in this stock.   Given option volatility remains elevated, and we are comfortable owning the stock at this level, today I sold one lot of Aug $80 puts for $.55 after commission.  Two scenarios

• If MMM stays over $80 this week, CCI will make .6 % in three days and reconsider entering a trade in the stock.  A very modest gain, but these days that small amount of income seems like a lot. If you believe standard option math theory this scenario is 2:1 more likely to happen than the next scenario. However,  an investor should not enter this trade if they are not comfortably owning this stock.
• MMM falls below $80 this week.  CCI will own one lot at about $79.45 and look to trade around that position.  Likely by selling both a put to potentially acquire a second lot at a lower price and also sell a covered call against this lot.  These two option sales would generate a decent amount of income supported by the blue-chip nature of the company, 

Shorting speeches by politicans

With expectations running high for a meeting of the French and German presidents, CCI took the view that political speeches are most likely to disappoint.  Hence at the close of trading Monday bought the double short Europe etf (EPV)as a short-term hedge against Monday's market gains.   Last night it seemed both camps were already managing down expecations for the meeting. Then German GDP did not meet expectations, and European markets fell.

Sold it first thing Tuesday morning for a 3.5% gain. 

9-0-4 playing the double shorts this year.

Cisco - $17 ...no $16...no $15...no $16...no $15...no $14..no $15..no $16

Cisco reported good earnings late last week.  Surprisingly to me it shot up from $14 to $16 like a rocket.

Looks like that $15 covered call with high volatility was not the right play as there would have been lots of better exits than that call.   CCI let one lot of stock get called away via this call.  This lot lost nearly 4%.  The market was down about 8% during the same period, and good thing we sold the $15 calls vs just selling last week or it would have been much worse. (how's that for a nice rationalization?...lol).  


CCI bought back the other lot of last Friday's calls late Friday. Hence I'm  still long one lot of $17 Jan calls.   Will be looking for a little better price to sell this lot and exit that trade as it still seems the the market pullback means there are better places to deploy this capital.

Friday's shopping trip

Friday's market did not have near the volatility of the earlier in the week and was positive on the day.   That was not exactly the conditions I had in mind when I created the shopping list document in the following article.

fridays shopping list

However, some specific conditions still presented themselves to enter two of the  three potential Etf plays. described in more detail in the article.  Here are the trades made on Friday

• Materials ETF XLB - risk reversal .  XLB never really pulled back on Friday and conditions never seemed right to enter. So nothing was done, but we will continue to monitor for possible entry next week.
• Japanese ETF EXJ - put selling.  Somehow got an order processed to sell the Aug $9 puts for $.08.  The etf closed around $9.80. So if the Japanese stocks fall 8+% next week.  I own it.  If it does not fall 8% we make about .9% in a little more than a week.  (or about the income from a 5 year treasury for a year).  By the end of the day, the option was barely trading, so this opportunity is no longer available.  
• Utility ETF XLU - coverd calls.  The xlu did pull back a little and this trade was entered.  Stock was purchased at $31.73 and Jan $32 calls sold for $1.24. (about 4%). That is a net cost of $30.49.  If this etf trades flat for the rest of the year we can make the 4% option premium, plus about 2% in dividends.  The portfolio does not start loosing money on this trade until under $30.

We will track these trades and hte ones from S&P downgrade Monday as a group

Ho Hum

Per yesterday's post, CCI felt that money might come off the table and drive the market down this afternoon. I put my money where my mouth was and day traded the double short financials (skf) this afternoon.

Skimmed off a 1% gain in a short period of time as the market (particularly financial stocks) sold off from the days high. CCI is now 8-0-4 this year when deploying this hedging strategy. 

In a really weird, convoluted way, I'm now almost hoping for a loss in this strategy soon because that would mean the market is moving up.  It really is not this "easy".

Down, Up, Down, Up - A Shopping List of ETFS and their options for Friday?

Let's see
Monday down, Tuesday up, Wednesday down, Thursday up....hmmm...what's next?

Let me use my binary, asset allocation, forecasting tool to try to predict tomorrow's direction...heads its up, tails its down.

Wait! Better yet I'll use my proprietary,  oscillation, simulation, modeling tool to perform an in-depth pattern analysis ....hang on....calculating.....oh no....it seems to indicate ..... down again.

OK...enough with the attempt at sarcasm/humor.

But...........while no one can be sure what Friday will bring, there is obviously some real probability of a down or weak day on Friday.  Especially since there seems like some chance that fast money may take their money off the table and head to the Hamptons for the weekend (or may this week it is more like the fast European money coming off the table so they can go to the Riviera).  In any event, it seem prudent for an individual investor to have a game plan in the event of Friday market weakness.   Do nothing, move to the sidelines, accumulate?

In the event of a weak day CCI will likely try to accumulate some positions and has created a list of a few potential, conservative, trades using etfs and their options.  A more in depth article describing the rationale for these trades should be posted at Seeking Alpha Articles by CCI in the morning, but in summary they are

• January at-the money covered calls on the Utility Sector etf (xlu)
• December $32/$35 risk reversal in the Materials Sector etf (xlb)
• Aug or Sept $9 naked put selling in the Japanese ETF (ewj) to try to generate some income.

Hopefully the market will rally again on Friday. In that event this list can be put on hold, and an early happy hour can begin.  If the market weakens into the weekend, CCI will try to enter these positions and track them as part of the downgrade portfolio started earlier this week.

Downward Momentum - If you can not beat'em then join'em

Another terrible day in the markets.  

Rumors about the state of French banks seemed to be in the "news" today.  I have no  insight into the French banking system.  They probably have some issues.  However, my inner conspiracy theory radar sure had the feeling that someone was positioned short on French banks, and knew it would not take too much noise to make the the already nervous world to get even more nervous about these banks.  

Who knows the real story but ....if you can't beat' em ...join' em.

CCI thought about trying to short some specific European banks, but took the easy approach and day traded the double short Europe ETF (EPV) today.  Skimmed off a modest  2+% profit    Once again a small hedge to the overall portfolio, but these days any gain feels good.  

7-0-4 with this hedging strategy YTD.  

Downgrade Portfolio

After S&P announced its US downgrade Friday it seemed highly probably that the markets would be volatile early this week.  I guess down 6.6 % on Monday up 4.7% on Tues can be described as "volatile" (rational would not be a word I would use).  During the relative calm of Sunday night CCI took the time to identify a few positions that might be worthwhile to trade in the upcoming volatility.  The rationale for four potential trades were documented at an article posted here at "options for downgrade monday" at seeking alpha.

Positions in these four relatively diverse selections were established in the last two days and are will be followed here on this blog under the tag of downgrade portfolio.

Ford (F) - Bought a lot of stock at $10.18 on Monday. As the stock rebounded this morning and volatility stayed high sold the $11 Oct calls against the position for $.68.   The stock closed Tuesday at $10.96.  Being fortunate enough to buy at $10.18 means there was already lots of opportunity to make money,  However, as it sits now, CCI is long the position at a break even point of about $9.50 (down 13+% from here) and the stock has a reasonable chance of being called away at an effective price of $11.68 (gain of 14+%).  CCI will look for good risk/reward points to exit the trade if/when option volatility falls.

Bank of New York (BK) - Bought at $22.77.  Closed Tuesday still down at $21.11.  Will be looking to write a covered call against the position if it moves up.

Waste Management (WM) - Sold Aug $30 puts for $.70.  Closed Tuesday at $29.40.   Would not be upset if this stock is put to us at a break even point of $29.30.  Would collect the 4.5% dividend and wait for awhile.

Health Care ETF (XLV) - Sold Jan 12 $29 puts for $1.73 based on the high volatility on Monday. Worse case we are long blue chip heath companies at about $27.27.  That is about 13% less than Tuesday's close of $31.28. The specific options were down to $1.24.  If/when volatility comes down,  we will be looking for an opportunity to add more legs to the trade possibly by using the proceeds of this put sale to buy an upside call.