The 29 days of February: Weekly transaction updates and month end summary

This week the ECB provided more liquidity to Europe by injecting another €529.5 billion ($712.4 billion) of loans to 800 banks in the second round of credit infusion.  The size of loans was slightly higher than the €489 billion ($657.9 billion) given out to 523 banks the first time on December 21st of last year.  It is imperative to watch when the effects of these injections wear off and more importantly watch the market at the end of Operation Twist that ends on June 30th here in the US.

I sold my Knightsbridge Tankers (VLCCF) this week and used the proceeds and some of my recent dividends to buy more Annaly Capital Management (NLY) in my IRA rollover account.  Knightsbridge was paying out more in dividends than they were earning in profits while borrowing money to do make up the difference.  This was unsustainable therefore out with that bad and in with the risky.

I also purchased some $3 September calls on Chimera Investment Corporation (CIM) this week.  This was a pure speculative based play.  Chimera is basically a mortgage REIT and that gives it a really high dividend of ~14% and this high dividend, due to option pricing theory, reduces the price of call options to nearly free.  I paid $.15/share for options that expire in September.  I could have bought this stock and collected the dividend 14% with significant downside risk.  With the options purchase I only risk $0.15/share while realistically have a chance of selling this options for potentially $0.50 – $1.50.  These are the types of “investments” that I look for to add to the portfolio.  I risk $0.15/share to potentially make $1.50/share giving me a very highly skewed risk/reward.

My RIG Dilemma, after looking at my Transocean (RIG) positions I now feel like this stock could potentially run north of $80 but I sold recently rolled my call spreads down from the long Jan ’13 $55/$70 call spread down to the $45/$60 spread for a cost of $1.75/share.  Now that investment has certainly paid off handsomely but as we have previously established, I am a greedy bastard.  The part that I am really kicking myself for is the $60/$70 call spread that I sold and only got $0.50 for selling that spread.  If I bought that $60/$70 spread back now it would cost $3.70/share.  If I just buy back the $60 call outright it is now $4.50/share.  If I am correct and RIG runs north of $80 that means my current positions makes no more money after passing $60/share.  I have a couple of way to increase the potential return of this position…

• Buy the $60 call back giving me unlimited upside but costing me $4.50/share
• Rolling the $60 call back up to $70 for a cost of $3.70/share but limiting my upside to $70
• Covering my Jan $60 with shorter dated $6o calls such as the Aug $60 for $2.50/share
• Roll my $40 puts up to help fund the calls: Jan $40/$45 raises $1.25 and $40/$50 gets me $3.00
• Wait for  a dip

I am not a fan of any of these ideas right now because of the cost and any increase in my aggressiveness would likely consume what little of my cash reserves that I have left.   If I had the money I would buy the share outright… This position will haunt me until I figure out what to do and how to pay for it.

My fixed price positions are in AAPL, AMLP, AUO, BCS, CHL, EEM, EWA, FXA, GS, HPT, IIF, IRE, IWM, LYG, MOO, MUX, NLY, PPLT, RIG, VNM with my major positions marked in bold (>2.5% of portfolio)

My options positions are in AAPL, BAC, BP, CIM, EEM, FCX, FXI, GLD, HDY, RIG, SDS, SHLD, TM with my major positions marked in bold (>2.5% of portfolio)

As of February 29th, the S&P 500 was up 9.2% this year with 4.3% of that gain occurring in February while my portfolio was up 27.6% YTD with 6.9% of that occurring in February.  This gives the portfolio an aggressive year-to-date beta of 3.0 times the S&P 500 but it was closer 1.6 times the market during the month of February.  My cash position is getting dangerously low at only 3.0% of the portfolio due to recent purchases and the margin reserve requirement is down to 10.2% due to my diminishing Vega coupled with Theta decay.

Still bullish but nervous…

I got back from vacation and had a chance to tune up the portfolio a bit this week.  I really didn’t change much and I am trying to decide whether the market is topping or just taking a pause before the next move higher?

I took a look at the technical analysis on Barchart this weekend and this is what I found.

http://www.barchart.com/snapopinion/etf/SPY

• S&P 500 ETF (SPY) +96%
• Australian Dollar ETF (FXA) +40%
• Bank of America (BAC) +56%
• BP (BP) +88%
• Transocean (RIG)  +72%
• Apple (AAPL) +80%
• India Fund (IIF) +56%
• Gold (GLD) +80%
• Platinum (PPLT) +80%
• CBOE Volatility index -96%

The technical indicators are still bullish and this gives me a little more confidence to stay long and the VIX (fear index) is negative.  What make me nervous is that some the indicators are fading a bit, still strong but getting a bit weaker.

Here is the dilemma, I have nearly a 30% gain for the year with only 2 months into the year while my goal is only 18%/year return.  Theoretically, I could call it a year and cash out and call it a great year.  The problem is that I still like the market and think it has another 10% upside to it.  With my current beta this could give me another 20-40% upside.  Yes, 30% is great but I am a greedy bastard and I don’t want to leave anything on the table and I would be even happier with at 50-70% gain for the year.  Would I stop then?  Probably not!  I probably won’t want to cash out until I start losing money and hopefully I get out without taking too big of a loss.  When you are playing with house money it is so much easier to be brave.

I have my escape plan laid out with my hand on the ejection lever but I just don’t think it’s time to eject yet.

As of Friday 2/24/12, the S&P 500 was up 9.1% so far this year and my portfolio was up 29.1% YTD.  This gives the portfolio an aggressive year-to-date beta of 3.2 times the S&P 500 but the beta has been tapering off recently and is closer to 1.9 times the market this month.  My cash position is at an acceptable 5.0% of the portfolio and the margin reserve requirement is down to 10.2% due to my recent relative conservatism., lower vol, and theta decay.

Back in the game again…

There is nothing like a week of skiing to give myself a little break from obsessing about Greek debt issues.  I highly recommend Taos to anyone who skis and hasn’t been there yet.   I also got a chance to hit Snowshoe this weekend in West Virginia.  Snowshoe has two runs on the western side that make it worthwhile and the advantage of only being 2.5 hours from my house.  I will be hitting these slopes more often to keep my skills up before my next trip out west.  I can only hope my Colorado trip in March is half as much fun as my two ski outings that I had this week…  Your liver pays dearly now for youthful magic moments, but rock on completely with some brand new components.

Now back to making some money so I can afford my rock ‘n’ roll lifestyle, I spent the day tuning up the portfolio and I tried to dump most of my more aggressive “defensive” options today.  I got out of about half of them before the values got away from me.  I need to use market orders when I just want to “get done”, being a dick for a tick has cost me some money today.  I will now be keeping my March call options on the “2X Inverse S&P 500 EFT (SDS)’ until they expire next month since they have become a value play and they are now too cheap to sell.  On the brighter side I was able get out of my calls on the Volatility Index (VXX) calls at a profit.

Gold:  I was getting nervous with my gold investments last week and had been watching the 5o day moving average to see if it would cross the 200 day moving average (death cross).  Luckily I was using this as my signal to sell the rest of my positions but the cross never occurred and I still have some investments in gold.  Gold looks stronger to me now but I am not adding to the position at this time.  I also like the Platinum/Gold spread.  Platinum has been cheaper than gold for the first time in at least 10 years while being much rarer metal.  It looks like the platinum may be returning to being the premium product once again.

Oil has me concerned at current levels; I am not sure how much many more price increases the economy can deal with before it affects the economy.  If we run up to $125ish it would force me to sell everything (except my oil related stocks).

Hyperdynamics:  I had a decent amount of speculative money invested in this oil exploration company. Basically they had enough money to drill one exploratory well and they completed the well but didn’t find oil in commercial quantities.  The results do show that they potentially may have commercial quantities of oil on part of their concessions but at this point they would need to take on a partner to continue exploring.  They would be negotiating with any partner from a weak position and any transaction would likely be extremely dilutive.  If the stock breaks below $1.oo I may pick some up but most likely I am licking my wounds and walking away from this one with a large loss.

Bank of America:  I am holding on to my April $10 calls for a little while longer. If it doesn’t make it  up to $9 soon it may be time to lick some more wounds.  My target is north of $12 by the end of the end of the year.

I still have my options on Toyota (TM) and I happy it has recovered.  I plan to hold the $80 calls until they expire in April.  My target is north of $95 on this one but oil may start hurting this one soon.  How long will the workers keep building them new ones?

As of Friday 2/17/12, the S&P 500 was up 8.7% so far this year and my portfolio was up 27.4% YTD.  This gives the portfolio an aggressive year-to-date beta of 3.1 times the S&P 500 but the beta has been tapering off recently and is closer to 1.8 times the market this month.  My cash position is at an acceptable 5.0% of the portfolio and the margin reserve requirement is down to 10.9% due to my recent relative conservatism.  Yeah, excess ain’t rebellion.

Going on Vacation

I’m going to New Mexico to ski for the next several days so I stayed up late last night looking at the charts.  I was prepared to purchase some more protection today so I could enjoy my vacation without checking the market every 10 minutes.  To my dismay the market was down sharply when I woke up, now this protection is going to be more expensive.  I am a day late and several thousand dollars short.  If today reverses itself today (unlikely) it is a sign that the market it seriously bullish.

I bought some more calls on the Leveraged inverse S&P 500 ETF (SDS).  In case of a complete disaster this should help.

I am cutting my gold position today, I don’t like the charts.   Long term I like gold but it is looking to be a little weak to me right now.  The trick is not to get attached to a theme, I love this store of wealth but the charts are saying something else.  I am doing something else…

I bought some April BAC $10 calls today.  Let’s just call these lottery tickets, I will be buying more…

My plan was to thin out the portfolio if Vix goes above 20, sell ½ if it goes above 22.5 all of it if it breaks 25…

2/9/12

It looks like selling some of my options earlier this week is turning out not to have been such a good idea.  Bank of America (BAC) is continuing to run and isn’t pulling back like I thought it might.  Since BAC ran up, I was able to buy the May $7/$6 1×2 put spread for flat (no cash spent).  This will make money for me if BAC falls anywhere between $7 and $5 in May with a maximum payout occurring at $6.  This will allow me to be a little more protection if I do do buy this stock sometime in the future.

In better news, I kept my options in Toyota (TM) and they went into the money this week.  This is a play in the recovery in Japan/Asia and auto recovery.

The portfolio will likely stop making gains on Apple (AAPL) with it getting near $500/share.  I sold  Jan ’13 $500 calls last year on this stock for $25 when I bought the shares for ~$385.   As AAPL goes up this options lose nearly as much as the shares gain.  This now has become a slow theta/tax play.  I will keep this stock (gain) until I have held it for one year and will sell the options (loss) the day before the one year anniversary.

The S&P 500 is up 7.7% so far this year and my portfolio is up 27.0% YTD.  This gives the portfolio a very aggressive beta of 3.5 times the S&P 500.  My cash position is 6.3% of the portfolio and the margin reserve requirement is down to 12.5% of the portfolio due to lower market volatility and my short options being further out of the money.  I expect my beta to start slipping as many short OOM Call strikes are getting nearer to the money, it may even get as low as 3 soon.  ;-)

Selling non-core options today

I went through my portfolio today and sold (purchased back shorts) most of my options that expire in February.  My portfolio was getting a little short on cash and I needed to raise a little bit.  I left most of my March positions in place.  This action will bring my cash up from ~3% to ~6% of the portfolio.

I also sold my Bank of America (BAC) today that I got in last month.  I will get back into BAC if it falls $.30-$.50 since I believe this stock is going north of $10.  I would like to have more in the market but alas being prudent with my cash positions is also important.

Calculating the ejection seat

I spent part of the weekend doing some defensive portfolio calculations.  Basically I wanted to know how much of the Ultra-Short S&P500 ETF (SDS) I should buy within each sub-portfolio to effectively neutralize that portfolio based on my calculated beta.  To simplify things I made the assumption that SDS has a Beta of 2.0 times the market (it’s closer to 1.9 over the last 3 years).   I derived the following equation “1-(2/beta+2)” as the proper amount of the portfolio to sell then using that money to buy SDS.  This calculation should theoretically negate most of the risk in the portfolio assuming the correlation stays in place during the decline, ignoring any portfolio Vega, and a slew of other influences.

For example, if you had a portfolio that had a beta of 1.0 you would sell 33% of the portfolio and use that money to buy SDS to approximate a beta near zero.   If the beta was 4 you would need to sell 67% of the portfolio and use the proceeds to buy SDS to minimize the risk of the portfolio.  I have added this equation to my spreadsheets that I use to track my portfolio performance so that I can have a ready battle plan if I ever need to “eject”.

Why not just sell everything if I wanted to negate risk?  The reasons are many, but some of the reasons are tax code regarding long term and short term gains treatment, liquidity, speed, dividends, etc.  This is an easy item to calculate and it is just a nice low cost item to have handy in the toolbox.

The S&P 500 is up 7.2% so far this year and my portfolio is up 25% YTD.  This gives the portfolio a very aggressive beta of 3.5 times the S&P 500.  My cash position is 4.0% of the portfolio and the margin reserve requirement is down to 12.9% of the portfolio.

 

Today was a good day to buy protection

I’m not sure why but I am getting nervous about a potential conflict between Iran and Israel.   A war would be the fastest way to cause a 20-30% drop in the stock market at this time.  The problem is, if you sold the entire portfolio every time there was an “issue” in the world you would never be invested.

So this is what I did today, it was a good day for the portfolio and I took half of  those gains and I bought some down-side protection.  I bought some March calls in the S&P 500 Inverse Levered 2x ETF (SDS) and I also bought some calls on the Short-Term S&P 500 Volatility Index ETF (VXX).  It may be a little counterintuitive but I bought call options on things that will go up if the market goes down.  I’ll admit it’s a convoluted to purchase of derivative of a derivative but the goal is to put very little money down with a huge offset if something were to horribly wrong.  It won’t be enough to protect me from large losses but it will help me sleep at night until I can get more aggressive in reducing risk in the portfolio.

Since I am short on cash I also sold my shares of Hyperdynamics (HDY) to fund these option purchases but this still leaves me with a dangerously low cash position of ~3.5% of the portfolio.

My plan if the market starts to come apart (in this order)

• Sell all my Australian dollar (FXA) since money will flow into the US dollar making FXA fall
• Sell my Platinum (PPLT) since this is primarily an industrial metal and the world demand would falter
• Buy  the 2X inverse S&P 500 ETF (SDS) from the proceeds of the previous two transactions
• Unwind all non-core long options positions
• Reduce all portfolio stock holding by 50%
• Buy short dated Put protection on core options positions
• Sell current short dated protective “put” options positions to fund previous strategy
• Reevaluate!!

End of January Summary!

The S&P 500 was up 4.6% in January and my portfolio was up 19.3% giving me a  respectable beta of 4.2 times the market.  My cash position ended the month at a dangerously low at 3.5% while my margin requirement was at a modest 14.1% of the portfolio.  Amazingly, I started the year off with nearly 50% cash and became fully invested within a few days of the new year.

My major positions are in AAPL, AMLP, AUO, BCS, CHL, EEM, EWA, FXA, GS, HDY, HPT, IIF, IRE, IWM, LYG, MOO, MUX, NLY, PPLT, RIG, VIV, VLCCF, and VNM.  I also have significant option positions in AAPL, AIG, BAC, BP, EEM, FCX, FXE, FXI, GLD, HDY, RIG, SHLD, and TM.

My top five holding are FXA (20%), APPL (8%), IIF (7%), HPT (6%), and IWM (5%) albeit over 60% of the portfolio gains were from the derivative positions and not my major holdings.