Indexes at 2 year lows, GM at a 50 something year low, oil over $140 a barrel. And what did I do yesterday?

It's definitely not for everyone's taste, but I managed to pick up some long term holdings during yesterday's bloodbath. I know it's the right time for me to buy because it's so damn difficult to pull the trigger. After I got the first couple out of the way, the rest went down easy. This is the hardest part of the "buy low, sell high" advice. What if it goes lower? What if it crashes? Simple answer is to really get some more. A crash would make my day because I've got lots of dry powder to really load up. Saying it is one thing, doing it quite another (to borrow a lot of tired clichés today). You know the statistics, the market will give positive returns over time, the bigger the dip, the bigger the reward … but you still hesitate. It's hard, but that's how I know it's time to buy … at least for me.

And to show you how flaky I can be ... last week I complained about the volume and spreads on the PBP (covered call ETF from PowerShares), only to pick some up yesterday for the first time.  The spread was actually reasonable which is surprising during a day like yesterday.

Just a quick observation today.

• Sliding Home Prices Will Doom the Baby Boomers
• Home Prices Could Drop Another 10% (by the way, home prices could drop 50%, how worthless is that headline?)
• Home Prices Fall 15.3% This Year
• Schiller Index Shows Housing Prices Fell in All 20 Cities.

phg and I have been going back and forth on the GE short puts article.  He ended with a major point that I thought worthy of an article.  The comment I'm referring to reads:

This is a huge point and one that took me awhile to understand, only I mean this in the opposite direction.  When I looked at selling options unhedged years ago, it was strictly a numbers thing.  R/R seemed a little too much on the risk side for my tastes.  Until one day when I was listening to an options report on CBOE TV and someone stated that they were going to sell the put on XYZ because they think it would be great to own at the strike price they're selling at.  This is when it clicked that just because I'm assigned, doesn't make it the end of the road (i.e. cash settled as phg demonstrates).  You now hold an asset at a better price than when you sold the put.  If your attitude has changed about the asset, you should've bought the put back before it was assigned.  So in other words, being assigned shouldn't be such a bad day if you're selling against an asset you would like to own.

phg clearly knew what he was up against here and did a credit spread instead of an unhedged put.

When it rains it pours, apparently.  The sharp drop in price and sharp increase in volatility made the July 25 puts on GE just too good to pass up.  The attitude and action is the same as the MSFT puts.  Here is a company that isn't going anywhere both physically and as far as price goes.  They've been stuck in a range for 5+ years.  The high end of the range is 40, the low end is 30.  It's broken below $30.00 and I picked up some puts for $0.31 apiece (GE was trading at around 28.70 at the time).  This is just over a 1% return in a month should the puts expire worthless.  Should GE close below $25 on July 18th, I'll own a huge, growing company at multi-year lows.

One of my old favorites to play is MSFT.  This thing has been range bound for so many years that I can't help myself.  I don't think MSFT as a company is going anywhere and I wouldn't mind owning the stock on a dip.  Last week I picked up some more short puts after a couple of 100+ point down days on the Dow.  The implied volatility was at the high end of the range and short term chart looked pretty oversold.  When MSFT was around 27.30, I sold some July 25 puts.  This strike is a little close for comfort, but I feel the market will rebound in the short term and give me some breathing room.  And the worst case is that I own some MSFT for less than $25 a share.  This is at the lower end of MSFT's long term range.

So my thoughts here is that this should be a relatively smooth trade, with one exception.  MSFT reports earnings on July 17th after the market closes.   This is one lousy day before the options expire.  MSFT earnings reports, like most stocks, have the ability to move the price dramatically.  Depending on where the stock is around earnings will have big impact on the type of move I make.  Naturally, if there is a nickel left or less in premium, I'll close the position.  That level of risk is not worth the reward at that point.  In fact, I may look to close the position out when the premium is less than a nickel per contract anyhow.

In the mind of a trader the first thing that is usually analyzed is risk.  What happens if the trade moves against me?  Where do I sit if the asset moves away 10%, 20%, 50%?  The second piece dissected should be reward.  I know a lot of us count on our income to make the mortgage payment.  But what happens if that "underlying" decreases 10, 20, 50, or 100%.

Back in 1999 when I bought my home I was absolutely floored at the amount the lender qualified me for.  Sure, I had good credit and a decent income, but if I would've purchased a home with the approval amount, I would have no cushion at all.  This amount made me immediately start number crunching and after I realized how ridiculous it was, I came up with the number I felt I could handle in good times and bad (it was less than half of the lenders number).  So as I look at the news and see that Ed McMahon stands to lose his multi-million dollar home, I start to wonder, who's the fool here?  I don't mean this about Ed in particular, although it's certainly applicable, but the question posed casts a wide net covering borrowers and lenders.  If I were a bank, I would not have extended the amount of money to me that they did.  And as I stated above, as a borrower, I knew that borrowing that amount of money would put me in a very risky situation.  A prolonged illness, a layoff, a salary cut, or any other situation that choked income for a month or two would've put me in a bad situation in a hurry.  Investors and traders talk about risking their trading accounts or retirement funds, but what's riskier than gambling with your home?  Also, I was glad to hear Ed say what do you expect when you "spend more money than you make".  At least he's not trying to blame the economy, the president or the federal reserve.

So what were the lenders thinking in this situation?  They should know by now that bad things happen to good, payment making people from time to time.  Why would they accept this level of risk for a relatively low return?  I understand it's a numbers game, but even if a sector of the economy tanks, that's a lot of people unable to make payments, and apparently such a small fraction is taking these big institutions out.  Who does risk analysis here and are the shareholders of these institutions so fixated on reward that they completely ignored risk?

I have a limit order to pick up some PFE today.  The limit order was placed immediately at the open for $18.00.  PFE gapped up a little bit this morning and opened around $18.10.  I glanced at my delayed ticker which I have opened when I don't have IB cooking and saw a low of $17.96 posted.  Oh good, I got filled.  So I fired up IB to see my fill only to find the order still sticking out there.  Surely my little order would've been gobbled up with a low print of $17.96.  I checked a chart on IB and never did the line go lower than $18.03.

I've seen this happen before and sometimes it will stick and sometimes it gets corrected, sometimes days later.  The point to make here is that no matter what trading system you create, you're always susceptible to bad prints in back testing and even real time.  If my system posts a fill tomorrow, then my system is now out of sync with reality.  This is bad.

It's important to try and assess how bad this data problem will be.  I've been trading this system for quite some time and it happens to me once a month or so.  It's not enough to be bothered with, but is incredibly annoying.  For those that trade at a higher frequency, I expect this would be more prevalent.

And as usual, I don't recommend PFE.  Never follow anything I do.  This is for educational and analysis purposes only.

As demonstrated over the last few months, I've been dipping my toe into the short put waters.  I've been trading options for years.  I probably followed the progression of most.  Long puts and calls (had theta chew me alive), spreads, complicated spreads, naked options.  I rarely buy puts and calls on there own, in fact, I can't remember the last time I did.  Most of the time, I'm still buying directional spreads.  I usually have an opinion regarding where something is heading.  I typically exchange "unlimited" profit potential for higher probability of profit and a defined dollar risk.

One thing that has always scared me about selling options (not in spreads) is the unlimited downside potential.  What clicked for me one day is that I realized that I didn't believe realistically in a put/call "unlimited" profit potential, so why do I believe so firmly in a sellers unlimited downside.  Allow me to clarify this a bit, yes, the unlimited aspect is mathematically possible, but highly improbable to say the least.  Sure, I could've sold options on Enron, Worldcom, etc ... but I could've just as easily purchased stock and exposed myself to the same risk.  This turning point in my thinking allowed me to add a new tool to my toolbox.  However, like most tools, it's applicable for the job it was designed for.  I'm not about to start selling puts on Ford, GM or any other company that I wouldn't want to own.  So the first question I ask myself is "Would I buy this stock?".  If the answer is no, which often time it is, but I still feel strongly about a speculative play, I'll go with a spread.  That opens up a whole other set of questions, but we'll save that for another article.  But if the answer is yes, why not start making money on a stock that I would like to own today.  It's nearly a win/win in that you can either collect the premium at a profit or you can own the stock you liked at a substantially lower price.

A bit of a rant this morning.  I keep checking out Google Finance, but truth be told, it is so damn buggy I don't think I can use it.  I'll keep trying.  The kicker for me is that every morning, the Dow quotes are off.  They don't reset them until some point mid-morning.  So the current price is yesterday's change + today's change.  I've also run across just plain incorrect quotes, or quotes on major ETFs that aren't updated for days.  We also got bit when we included a plugin for Google Finance in RightEdge.  Folks were getting back incorrect data or no data at all.  I understand things take time to work out, but this has been going on for years and with the virtually limitless resources at Google, I had hoped that this sort of stuff would be worked out by now.

So now they've put out a stock screener.  I like to screen on some basic fundies for my option plays.  So I started adding criteria, nothing too fancy, just a beta and volume screen.  The beta was 0 to 1 and the average volume was 1 million and up.  It returned 1 result (SPY).  I would hardly consider this an odd screen.

Thankfully with Yahoo off the table at the present moment, we can still use a fairly rock solid service for quick quotes and charts.  Naturally, when play time is over and it's time to get to work, I use my Interactive Brokers account and RightEdge.

Received a friendly message from the CBOE this morning to let me know that GLD options began trading.  The strike price intervals are $1 and the inital contracts are between $75 and $100.  The only bit of information that wasn't unveiled in the press release is whether or not the spreads will be in nickel or penny increments.  If I had to guess, it will be pennies, but I know there is a lot of unhappiness at CBOE over these penny increments, so we'll see.  The options are available to IB customers, so I'll check when the market opens and report back.

In the meantime, here are links to the press release and contract spec.

Press Release

Contract Spec