A bit of a rant this morning ...

I've been trumpeting this since the fed start reducing rates by leaps and bounds.  I really don't do "I told you so's" much and I'll try to keep away from that tone, but the cuts are finally being understood by the lame stream media.  Or maybe they simply have run out of things to point the finger at for the "high" price of oil.  Personally, I don't think the price of oil is high enough, but that's a different discussion for a different day.  So now the new and fashionable scapegoat of high oil prices is the fed cutting rates.  You see, apparently inflation is up 100% in this country because that's accounting for nearly all of the increase in the price of oil.  Oh yes, I've heard that the price of oil might be up 10% or so in the last 12 months if it wasn't for the cheapening dollar.

You see, oil is traded in dollars.  Just like an American car is traded in dollars.  Because one country's currency appreciates or depreciates, that typically does not change the price of the good or service dramatically, domestically.  This is one of the benefits of a weak currency if you're a big exporter.  To your overseas customers, the price is getting lower and they're more inclined to buy your product "cheaper".  However, to citizens, the price seems about the same.  If oil were traded in Euros, I could see this argument holding water.  But it's not, so this is simply another ignorant take on the subject.  I don't know how the truth of the matter is so hard to grasp.  It's not Bush, it's not the "greedy oil companies", it's not the devalued dollar, it's simply demand.  Massive economies are coming online and developing economies are becoming developed.

But back on point.  I do agree that the weakening dollar is bad.  I half enjoy that this misdirected accusation is happening because maybe some accountability will be demanded from our reckless fed.

An interesting, lengthy article regarding equal weighting vs. cap weighting.  As you probably know, indexes are typically weighted by market cap.  A few years ago, there was an idea to create an index and weight it equally across sectors.  This was met with resistance because it seemed like a lot of transaction cost to keep the weighting proper.  However, backtesting proved that the idea had merit and off it went.

The article I'm referring to can be found here.  It's titled "Equal Weight Indexing: Five Years Later".  But the bottom line here is if you bought RSP (Rydex S&P Equal Weight ETF) and SPY at the inception of RSP, what ETF did better?

As you can see, since inception, the equal weight portfolio has outperformed the cap weight.  But wait a second, 2003 marked the beginning of the last bull market, so how did we handle a down turn?  I took the same chart and shortened the time frame to 6 months (October 29th 2007 - present day).  This should encompass our recent "bear" (cough!) market.  The performance was about even.  I sliced it a few more ways and the only losing period I could find was 1 year and that's April 2007-April 2008 where the RSP was down 9% and the SPY was only down 6%.

The next measurement I was curious about was beta.  For longer term holdings, I'm interested in low beta, as I get my higher betas through speculative plays.  The beta registers at 0.9 (and of course, the SPY beta is 1.0).  So for lower beta, you're usually outperforming the S&P 500.  The yield on the SPY is a bit higher 2.11% vs. the RSP at 1.58%.

The great thing about all of these new ETFs being introduced over the last couple of years is that we finally get to see the various theories in action.  Five years is a good enough track record for me to consider dipping a toe in and mixing it in with a cap weighted ETF or two.  Many more of the concept ETFs that don't die in the next 5 years will be worth the same analysis.

All fed days are usually interesting days.  Actually, they're quite boring until the announcement and then all hell breaks loose.  Two things I find particularly interesting about tomorrow.  First, it's the end of the month which is typically a bit more volatile than most days in the month.  But more importantly, as I mentioned on Sunday, the sentiment among folks seems to be turning a bit.  The news is still overwhelmingly negative, but I'm seeing some people pulling back on that attitude.  This is probably measured pretty well given that the major averages are at the top end of their ranges.  So with all that, it will see if the money is behind the move.  Since the fed decision typically creates volatility are we going to break through the top of the range (i.e. breakout) or come crashing down?  Neither one would surprise me, but no movement at all would leave me thoroughly confused.  I'd define no move as < 1% in either direction on the Dow.

The VIX closed quietly below 20.  I say quiet because I didn't even hear some of my option trader buddies and blogs that I frequent mention it.  I like to visit the VIX once a week at a minimum.  I think it gives us a good picture of where we're at and what the market has priced in.  So a reading below 20 is a relatively calm reading as of late.  This is the first close below 20 since our Santa Claus rally, well, just before Christmas of last year.  The chart above paints the picture nicely (click the thumbnail to enlarge).  Also the market articles I've been reading this weekend have gone from nearly 100% negative to probably 90% negative.  I would say in a full fledged bull market, the articles are probably 60% negative.

So what I'm getting at is that this rally has short term potential.  How long and how far, I haven't a clue, but the market internals and sentiment seem to swinging back to bullish for now.  When the VIX is around 20, I start paying more attention because this is a pivotal reading.  If you're a believer in this market for the short term, I'd sell volatility on spikes over 20 and get long vol on readings under 20.  This may have a slight change when evaluating new positions.  We'll see.

I'm out of my short GE puts.  I sold them at .40 after the earnings report and bought them back for a nickel.  It's a trade that worked perfectly.  But what if it didn't?  Worst case, I would've been assigned GE @ 30 less the premium collected which gives me a final cost basis of 29.60.  Since GE is a quality stock that I wouldn't mind holding, I would have likely began selling calls.

The next leg down on GE, I'll look to sell some more puts.  I'm eyeballing the June puts which are trading around 0.24 as I write this.  I'd like to see them around 0.30 before I jump in.  A spike in volatility would also be welcomed.

One of the most requested features in RightEdge has been the ability to run two completely separate trading systems at the same time.  We were a little confused by this request at first.  Why would you want seemingly separate operations happening in the same "space" if you will.  The answer here is that while these systems may be doing entirely different things (example, one trades pork belly options, the other Russian stocks), one would like to ask the other how it's doing.  More specifically, one system might like to know what the other system's exposure or drawdown reading is before going all in on Dung Beetle futures.

There is now a system in place that begins to accommodate this.  It is appropriately named "Multiple Systems" and can be downloaded from the Trading Systems section on the RightEdge website.  Or I have a shortcut for you here.

I bring this up on the blog for a couple of reasons.  One to draw attention to it for those who been requesting it.  But more importantly, we feel there may be more desired uses for this than the one stated above.  Certainly feel free to reply on the blog, but there is also an open thread on the RightEdge Forums regarding the Multiple Systems question.

The move to the upside has been rather dramatic lately.  I've spoke of the "boring" range we've been in over the last several months.  Well, from the looks of it, everything is right with the world again and we're off to the races.  If you didn't detect the sarcasm in that last statement, let me just say that I'm skeptical that this upward surge is going to last much longer.  I'm a contrarian by nature and have been selling puts and buying ETFs over the last couple of months believing that we were a bit oversold.  Some of them are showing decent profits at this point.

If there's any weak point in my trading ability, it's calling tops and bottoms.  I'm often too early or too late or just plain wrong.  So how do I protect a bit of these profits without selling (in case we go to the moon) and without giving back too much as "insurance"?  In my case, I'm putting on a relatively cheap hedge in the form of a bearish calendar spread.  Why?  If you look at a chart of the QQQQ with some bands around it, it's clear that no matter what your parameters are, we're at the top of a range.  If you pull up a chart of the VXN (Nasdaq volatility), you'll see that we're at the bottom of a range.  I have mean regression tendencies (although the missus might say I just have plain main tendencies).  So my trade criteria are as follows:

I had a few minutes to take a look at things during today's rally.  As you've heard, I've sold some GE puts @ 0.40 last week after earnings.  Implied volatility (vega), as it does typically after the earnings report began deflating, but was still fairly high throughout the day.  The price of GE when I was filled was right around $32.50.  Today, GE closed @ 32.23 which is still about 1% off from the spot when I was filled.  However, the puts are now trading at 0.30ish.  So how am I ahead when the price is down?  IV, of course.  It goes both ways though, if GE continued to plummet, it's likely the IV would've continued to go up and my loss would've been amplified.

This is one of the more confusing aspects with options.  Since IV is typically range bound, one can speculate (and by buying or selling an option you are speculating) the direction of IV.  When selling an option you're short vega.  You're expecting the IV to fall so that you can "cover" your short vega at a lower reading.  When buying an option you're long vega.  Think of it the other way, if I had purchased the 0.40 put, the underlying moved in my direction, but I'd still be showing a loss.  This is a common source of confusion.

The important thing to consider is when an option moves, know that you can explain why.  If you can't, hit the books.  Unfortunately, many option subscription type services are always long puts or calls.  They simply see it as leverage to amplify the move of the underlying.  This is only 1/3 of the picture.  Vega and theta are the other two thirds.  Understand how movements in delta, vega and theta can really change your overall position.

GE has been hoarding the news this weekend after it missed badly and unexpectedly.  The latter of the two is probably what punished the stock the most.  As I've stated before, I run different types of strategies all within the same account.  Some are efficient frontier, modern portfolio theory type stuff with ETFs, some are highly speculative and volatile and my most recent addition is the put selling aspect of the portfolio.  The objective for this side of the portfolio is to try and return as much as possible while limiting loss.  Well duh, who doesn't want that?  But let me explain further.  Most portfolios are designed solely around return.  If you look at the numbers for a mutual fund or ETF, it's always measured in return with or without yield.  It's usually difficult to find any type of risk type numbers, such as standard deviation.  It's a shame, because I think this is what has people watching for the falling sky.  Anyone over the age of 30 should know that they ain't seen nothing yet.

So back to my objective of maximum return, little risk.  GE has been stuck in a range for nearly a decade.  It's dividend yield is a reasonably good 4%.  They are obviously a well diversified business being a conglomerate.  I don't think that GE is going anywhere anytime soon.  And I mean that on both the upside and downside.  Wouldn't surprise me to see it in the 30 range for years to come.  With that said, it makes sense to own GE in the low vol side of your portfolio.  You're not going to make a killing, but you could make a very reasonable return between call selling and dividends.

As usual, I don't own GE (I'm short puts), I don't recommend GE to anyone.  Do your own homework, make your own decisions, don't follow me.  I'm terrible at it.

PowerShares has entered the active ETF market by releasing four new products on Friday.  The offering is a lot more interesting than the Bear Stearns release just a couple of weeks ago, or at least two of the four are.  The two that pique my interest are PQY and PQZ which are allegedly "quant" funds.  Both hold Nasdaq stocks.  For PQY they apply a proprietary methodology on the largest companies based on market cap.  This prunes it down to 50 holdings.  PQZ has a similar approach, however, it does not have the market cap constraint.  Sounds like some wild volatility is in store for PQZ.

So why do I find these interesting?  Well, the last thing I'm going to do w/ any of them is buy them, especially with no track record.  Although I'm skeptical that any public type fund (mutual, ETF or otherwise) can maintain an edge for an extended period, actively managed or not, the really nifty thing here is that we'll have something to compare against the benchmark.  It's nice to have something where supposedly someone or some company who really knows the something that us unwashed don't.  Now we can see if it holds water.

What would be really interesting is a Cramer ETF that he managed based on his show recommendations.  I'm sure that would put some substance behind all of the noise.  One can only dream.

I came across a comment today that puts selling options into perspective a bit, or at least will help one determine if selling options is for you.  This came from a sound mind in a place where selling covered calls had truly been hyped as a near "risk free" way to turn a profit.  As you know, that's far from the truth.  Every strategy contains risk at some level.  But understanding and mitigating risk is your job.  It boils down to this.  Never sell cash secured puts on something you don't want to own and never sell calls against something you don't want to sell.

It's really as easy as that, but let's think about it for a second.  Since covered calls are popular among the masses, I'll use that for starters. Let's say you own 100 shares of XYZ at a cost basis of $50.  Obviously at some point you bought XYZ for numerous compelling reasons and hours or days of due diligence.  You immediately sell a call at the $55 strike.  All of a sudden XYZ runs up to $60 and your stock is called away.  How is that going to make you feel?  First, your speculation was correct and XYZ had a nice run up.  You made 10% on the deal but could've done a lot better had you not sold the call.  Second, your stock is now potentially overpriced.  When do you get back in?  This should feel like risk to you since you've essentially given up profit.  The second area of risk on a covered call is that the stock price plummets.  Let's say XYZ goes down to $30.  The measly $50 credit you received does not offset that pain much.  You can likely continue to sell calls to hopefully make up some ground, but your risk is still the stock going to $0.  This hardly feels risk free to me.

A bit of a plug for today's post.

So, we've changed our versioning scheme just a bit.  I had the rough vision based on working with a lot of customers and potential customers.  The vote was nearly unanimous, they want features faster.  The rest of the crew helped refine the idea and now here we are with "editions".  Also, like most development shops, we have a feature set  defined and then we start spec'ing our feature set and come up with a timeline for delivery.  More often than not, our customers come up with some compelling ideas that shift the development cycle.  We want to be dynamic and flexible enough to accommodate these ideas and instead of holding up releases, we'd rather deliver more than expected.

This was probably a long winded way of saying the new version of RightEdge is out.

We've reset the trial clock, so if you've evaluated RightEdge before and the trial expired, you get another free 30 days.  Download the RightEdge trial here.  (Note: Free account required)

Today's move up is juicy.  My original $25 April MSFT short put was trading at a nickel, so I bought it back and I'm now flat on MSFT.  It will be interesting to see if we're breaking out from here.  I sold this early because holding out for a nickel seemed like too much risk for too little reward.  Plus I feel like we're at the top end of the range and due for a pullback.  If we get the pullback, I may wade back into the short put waters.

I had to shut down my live trading for today.  It wasn't up to my expectations, so back to the drawing board.