Thoughts…

Earlier this week I was looking at the charts and I am convinced we are headed toward 1450 on the S&P 500.  This gives us another 10% upside from where we are now.  Also this week the Fed announced they plan to extend the length of time that they will hold rates low until 2014.  These items make me bullish for commodities and most other investments due to the likely increase in the money supply coupled with recent ECB easing and the chart patterns.  Gold should start running on the Fed news but it looks to me that Platinum may start to outperform gold; I still am long gold and platinum and recently increased both these positions.

Once the Fed announced the extension of their policy, I purchased long options on BAC, GLD, and EEM.  Due to my net length in upside volatility, my beta has been increasing as more of the out of the money options I purchased go into the money or deeper in the money.

I am running low on cash and I’m not sure I have sufficient cash on hand to cover the increased margin requirements if there was a sudden price drop.  This may have the benefit of forcing me to sell on a sudden drop in the market.  I should not play with fire and should not reduce my cash any further.

The S&P 500 is up 5.7% so far 2012 and my portfolio is up 19.6% moving my beta up to a lofty 3.5 times the market. My cash is now uncomfortably low at 6.4% while my margin requirement is now at 14.1% of the portfolio.

Day of Tax Code Reflection…

So far the investment plan is working but this isn’t the time to get complacent or arrogant, it’s time to maximize the returns by making sure it is tax optimized.  With my recent gains, I decided to spend part of the weekend looking at the tax codes and my tax returns to see what type of capital losses carried forward I have so I can optimize my profit harvest strategies.   I have engaged in several transactions that occurred this year (2012), therefore to get long-term capital gains tax rate they would need to be sold after this time next year.  The problem is, as it stands now, the tax rates on capital gain rates (along with all other tax rates) go up next year.

The short-term capital gain rate goes from a max of 35% this year to potentially 39.6% along with the new 3.8% Obama Care tax on investments kicking in next year on top of my WV state tax of 6.5% (should I be moving to FL or TX?).  All this gives me a max short-term gain rate of 41.5% this year but potentially increasing to 49.9% starting in 2013.  Long term capital gain rates go from 15% this year to 20% next year on top of my state taxes and Obama Care tax.  This makes my total long-term gains rates jump from 21.5% to 30.3% next year.

Since I can control when I sell to lock in profits all these things needs to be taken into consideration since we are talking about a lowest rate of 21.5% for long-term gains taken this year vs. a potentially maximum tax rate of 49.9% short term gains taken next year.  Keep in mind that on a $10,000 gain this timing of the sale could mean the difference of paying $2,150 in taxes vs. $4,990  making a difference of $2,840 in my pocket depending on when I sale.

To add more dimensions to the tax considerations, I also have a fairly significant “capital loss carried forward” that will have significantly more value next year than this year.  The tax code will only allow you deduct $3,000 of investment losses against your other income.  The rest is “carried forward” to the next tax year to apply another $3,000 to normal income or offset new gains for the new tax year.  In my particular situation I was heavily invested in banking stock back in 2008 that gave me significant losses that I am still carrying forward to this day.  Now to add even more misery to misery, if you use up all the long-term gains the “losses carried forward” starts applying to your short-term gains but the short-term “losses carried forward” are almost twice a valuable as the long-term losses carried forward.   After checking my tax forms from last year, I found 80% of my “losses carried forward” are short-term gains and the other 20% are long-term gains.

With all that said, even with my significant gains this year it’s unlikely that I will be using up all my short-term capital losses this year.  My strategy is to make as much money as possible this year and try to take down all of my long-term losses carried forward.  Since my long-term trades involve options and most of those options are only available out through January 19th 2013.  For the next few months (until the Jan 2014 contracts come into play) any new long-term options strategies are unlikely so the existing strategies in place should be given considerable thought before harvesting these gains before they have reached the long-term capital gains date to maximize my reduction in long-term capital gains carried forward.

On a brighter note the S&P 500 is up 4.8% so far this year and my portfolio is up 14.7%.  This gives the portfolio a very aggressive beta of just over 3 times the S&P 500 including cash.  My cash position is down to 9.4% of the portfolio and the margin reserve requirement is down to 14.7% of the portfolio.

1/19/12 update

The S&P 500 is up 4.2% year to date with my portfolio up 11.5% giving me a beta of 2.7 including cash.  My “cash” position is down to 12% of the portfolio.

Looking at the pre-market it looks like Bank of America beat earnings and up another $.40 pushing the return on the option I bought two weeks ago to just over 300%. The options expire tomorrow so I need to decide if I want to buy the shares at $6.oo or just sell the options and take the gain.  I think BAC still has room to run but buying these shares would require me to use about half of my cash reserves so I am unlikely to exercise these options.  There is nothing wrong with booking a tidy profit.

Looking at the Aussie Dollar (FXA) today I think I see another potential wedge breakout pattern that could bring it back to near $1.10.  I plan to keep my eye on $AU.  I may go options shopping on this one today,  the $1.10 calls are looking cheap to me.

Hyperdynamics (HDY) has been a disappointment and 75% of my options in this name expire tomorrow.  This clearly isn’t working but I will pick up a few February options for one last go at it but then I plan to let everything else expire (worthless) in March. Time to start packing this one in.

Sears (SHLD) could run up to $45 but since I am short a Put spread in this name it’s not “printing” yet. It’s going to take time to make this one work but it should bag a nice 50% return with little risk.

I sold some of my gold options yesterday that are going to expire tomorrow. The options were in the money but didn’t want to burn the cash to exercise it so I just took the money. My gold position in now half of what it was earlier this week. The rest of my options expire next in January 2013.  I am holding onto my Platinum and will put more money into this metal over the coming months.

Rolling the Transocean (RIG) strikes down is staring to pay for itself. This was a good thing!

Let’s hope the good news continues…

Thinking about downside risks…

It has been a good  run so far this year and I expect it to continue but I think it is time to think about some downside protection.  With the market closed today I plan to take the day to think about “cheap” ways to buy insurance on my portfolio.

Central Banks are still providing liquidity and I believe the money that the ECB has already “provided” is still working its way into the system…

Other thoughts:

The Mexican Peso ETF  (FXM) with its 2.6% yield looks interesting here but I will wait until it breaks above $75.

1/12/12 Update

I wasn’t planning on doing much today but I had a few new ideas last night while sitting in my house during the rain.  While pondering my portfolio, I think I now have figured out how my broker’s margin reserve works for options and how to minimize my dead cash.  I should be able to get a better return on my cash that they are holding since I believe they will “hold” other things besides cash.  I think I can buy some Platinum (PPLT) with my margin credit, if  it doesn’t work then I am going to buy more Australian dollars since I know that does free up the “margin reserves”.

Second idea, earlier this week I wanted to do something with the Transocean (RIG) lasso (long the Jan ’13 $55/$70 call; short the $40 Jan ’13 put) that I own.  RIG has dropped a lot since I put it on but it seems to have stabilized.  A few days ago I was thinking I’ll just buy back the Jan 13 $70 call but last night I came up with better idea.  I could wait for RIG to come back to $55 or I can increase the odds of it paying off by rolling my strikes down.  So the plan is now selling the $55 call and buying a $45 call, this should cost me about $2.50/share to do.  Initially when I looked at it was more money than I wanted to spend but if I also buy back my $70 call and then sell the $60 strike this nets ~$.75/share.  It still sucks to spend $1.75/share on this but I have no money in the game and it’s way more likely that I will make $15/share if I spend the $1.75/share.  Even so, that still leave me with a potential $13.25/share and if RIG makes it back to $46.75 buy the end of this year I break even.  I like the odds better of spending $1.75 to start making money at $45 rather than hopping for $55 by Jan ’13.

It looks like it will be a good day since “risk on” seems to be strong in the pre-market.  Europe up a lot today and it should carry over to here to our markets.

After the open update: I am amazed with Bank of America and the options I bought this past Monday.  As of the open, it now is over $1.00 giving me a 200% gain in less than a week!  Oh why didn’t I do more…  Traders dilemma.  

I also closed my “Margin Credit” today by buying more Australian dollars and I also bought some Platinum (PPLT), gold is the poor man’s metal!

My “Cash” position is now ~15% down from ~20% at last week.   This change is due to portfolio growing and not cash being used.

Year to date performance…

I did a quick calculation today of my year to date performance.  So far this year has been good year with a 6.5% gain (including my large cash positions) and the S&P 500 only yielding a YTD performance of 2.9% (both using the Dec 30, 2011 closing prices).   This makes my beta over twice that of the S&P 500, this is fantastic when the market is going up but disastrous when going down.  In the words of a great market philosopher I know “spreads working”.

I expect a little give back today but that doesn’t mean I am overall bearish on the market.  The market does not go up in a straight line and so as long as we stay above 1250 on the S&P 500 I won’t get too worried.  Europe has effectively printed billions of dollars last month and that money needs to find homes, some of it will make its way to the stock market.  Also the 1% starts contributing to their 401(k)s again this month and most of this money will find its way into the stock market.

Tuesday 1/10/12

It looks like the market is up again today but I won’t be adding to my positions today.  I am eyeing Rio Tinto (RIO) but for now I am saving my cash for a pullback… I am down to 20% cash and that is low enough for a guy who has been running around 50%+ for 9 months.

I’m looking at the big gains in the market, I am happy with my Bank America options that I bought yesterday and it is up another $0.32/share today.  Who doesn’t like 100%+ return in 24 hours?  Now for the regrets that I didn’t  do more….

I attempted repurchase my short Jan 13 $70 Calls on Transocean (RIG) for under $.35 that I sold a few months ago for $2.45 but the options ran up with the market.  I still have 12 more months to get to my target and will try another day.

Portfolio update Monday 1/9/12

I bought some BAC $6 Jan 12 calls today (expire a week from Friday).  I doubled my Australian dollar position today and I also bought the Emerging Market ETF (EEM).

I also sold a Sears Holdings (SHLD) Jan 13 $20/$17.50 put spreads.  I got paid $1.20 to take on the risk that Sears does not drop below $20 by next year .  If Sears stays above $20 I make $1.20 but if it drops to $17.50 or more, I loose $1.30/share.

I also rolled my China ETF (FXI) Jan 13 $45 calls down to the $40 strike paying $1.25/share for the privilege.

I also quadruped my Barclay’s (BCS) and Goldman (GS) potions today from my small residual positions from pre-2008.

My Cash position in now at 20% and not likely to go down much from here.

Options purchase for this week…

I spent a good part of the weekend reviewing the charts and seeing several patterns emerge.  It looks to me that there is slightly greater than 50% chance that we may be ready to break out of the trading pattern on the S&P 500 that goes back to March of 2011.  The falling VIX index and pausing in the rise of the Treasury/Euro Dollar (TED) spread points to a breakout out to the upside. I also see a shorter term pattern form in financial services companies.

Assuming that may be getting a sudden breakout out to the upside, then factoring this in with the high beta of the banking sector and the January options expiring in less than two weeks.  All this is coinciding with a low implied volatility leading to the price of call on option on these instruments “cheap” considering risk vs. reward.

Therefore, this leads me to a short term strategy of buying January 2012 $6 calls on Bank of America.  These calls should be ~$0.30 and hope to sell these in two weeks for $0.75.

Filled @ $.30

Changes to my portfolio since my Q4 Report this week…

After writing my Quarterly Report I had a to do list and a commitment to write on trader wasteland at least once a week… So, I am going to take care of two birds with one stone.

My to do list in my report was

• Reduce my cash position
• Get 50% of my cash in Australian dollar EFT (FXA) or in Royal Bank of Canada (RY)
• Buy emerging markets (EEM), Brazil (EWZ), Australian ETF (EWA)
• Get exposure to drugs or health-care.  XLV and/or IBB
• Buy Russell 2000 Index (IWM
• Reduce my exposure to oil
• Get some exposure to a Master Limited Partnership in my IRA rollover.
• Find a small company to invest in that will be making inroad in oil hydraulic fracturing
• Buy China Mobile (CHM)
• Buy some Put protection (insurance) on the portfolio since the VIX is low

Item one, I did reduce my cash but after some consideration I have also decided to change the way I count my cash.  I previously counted as “cash reserves” held my broker for options positions as “cash”.  After much consideration I have decided that is actually not really cash since it committed capital and don’t have direct access to it.  I will also count my $AU positions as reserves as “cash”.  No matter how I count it, I did reduce the amount of cash I have this week and now sit at 26.7% cash and have another 19.5% of my money being held by my broker to support my options positions.

I now have 27% of my free cash in in Australian dollars, not because I bought $AU but because I spent my $US on stocks.  I will continue to work to get this up to 50%.

I did buy the Australian ETF (EWA) this week and will need to work on getting EEM and EWZ

I did not get any exposure to healthcare but I did reduce my exposure to oil by ridding myself of my BP puts shorts (at a nice profit) and selling all my Suncor (SU).  I used the money from Suncor (SU) and bought a MLP in my IRA.  I chose (AMLP) but may change that.  Also I bought China mobile.

The uncompleted items will be worked on over the next few weeks…

I am happier with my position now!!