The Daily Swim

Skew that Double Calendar

2009-06-29T20:35:13Z

It seems to me that, for the short-term say 30- 60 days, the market is locked in between about 910 and 940 on the S&P 500. The bulls will use the 880 to 910 as support, and the bears will use the 940 to 960 as resistance, a nice range for us traders to make use of. Additionally the S&P 500 is sitting on its 30 day average of 92. Well if this is true things could be a bit like Palm Springs in the summer, slow and steady. In my opinion it would take something truly dramatic to blow through these levels. Maybe those "green shoots" turning into "brown weeds"? Lets look at imbedding a few strategies together with one click of the TOS platform and skew it to have a little downside protection just in case!

If you too think the above scenario is probable then you may consider using a Double calendar and then tweaking it to suit that scenario. To do this we need to "right click" on the July 91 strike, chose "Buy" go down to "Double Diagonal" over to "Double Calendar" and" left click". The system will automatically populate selling the July -91 call and Put (short straddle) and buy the Aug +91 call and put (long straddle). Ok last step, change the Aug +91 call to +94 call don't touch anything else! Like a young Dr. Frankenstein, look at what you have created "it's alive" the monster lives! The key to trading is that there are trade-offs between potential risk, the probability of profit and the potential profit. The potential risk in this trade is limited, limited to $436, that's your risk. I consider this a high probability trade because there is an approximately 66% probability SPY will close at July expiration inside its present standard deviation of roughly SPY 99- 85. This trade is profitable at July expiration between SPY 94.30-85.40 reflecting an ever so slight downward bias. Incidentally the YTD high for SPY is 96.11 and I don't believe we will test that in July and our downside breakeven price of SPY 85.40 is well below my support and at the very low end of the SPY standard deviation range for July. Presently the position represents almost 16 short deltas, that's what I would consider delta neutral and has a rich positive theta decay of $2.57, all good! Additionally if we factor in the "home run" scenario that SPY settles at 91 at July expiration and this position will produce a $320 profit! That's a 70% ROI (return on investment/risk) in a month all while having a defined risk of $436! I love trading!

thinkorswim, Inc. and its registered employee, _________, do not solicit or recommend any form of trading in the individual securities or their derivatives mentioned above. There are complexities (such as the effect of commissions for multi-legged strategies on profit potential) associated with certain options investment strategies that should be acknowledged prior to investing. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so.
The risk of loss in trading securities, options, futures and forex can be substantial. Customers must consider all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options. A copy can be requested from Scott Garland, Compliance Officer, at 773-435-3270 or at 600 W. Chicago Ave., #100, Chicago, IL 60654-2597 or by email at sgarland@thinkorswim.com. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the following risk disclosure before considering the trading of this product: Forex Risk Disclosure. thinkorswim is compensated through a portion of the forex dealing spread. Funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).

thinkorswim, Inc. is a wholly owned subsidiary of TD AMERITRADE Holding Corporation.

thinkorswim, Inc. Member SIPC FINRA NFA
2009 © TD AMERITRADE IP Company, Inc.

A Pullback for a Better (Entry Price) Tomorrow

2009-06-22T17:58:03Z

Over the past few months, these articles have discussed inflation and commodity pricing increases. Rises in commodity prices and currency pairs have certainly budded; however, now we are facing a potential pullback.

The potential pullback is based on the Morgan Stanley Commodity Related Equities Index (CRX). As shown in Figure 1, the CRX has been very bullish while commodity prices have risen. Commodity price increases line the pockets of companies that benefit from mining, processing, selling or are otherwise involved in commodities and represent economic health driven by commodity prices. The CRX trended up more than 50% from March lows before breaking trend this past week. When a consistent trend breaks, a correction that equals the size of the trend channel and a conjunction with Fibonacci levels usually follows.

The break in the CRX trend could see price dip to retest the 38% Fibonacci level, near 570, or further to the 50% Fibonacci level, near 540, without ending commodities' bullish sentiment (see Figure 1). If this pullback continues and bounces off a support level, as it appears it may, then commodity-sensitive currency pairs might see a similar pullback, which may signal an opportunity to enter into the long-term trend at a lower price and with better money management.

Although the pattern isn't identical to the CRX, the GBP/JPY pair has experienced a similar end to a bullish trend and may be showing signs of further potential pullback. The pair could form a head and shoulders pattern within the next four to five days, placing the pullback almost perfectly at support, near 151, within two weeks. If the pair reaches support near 151 and the CRX bounces off a support level at the same moment, this would further confirm the expectations of a continued bullish run. As shown in Figure 2, price is near 159, which is almost a perfect shoulder height if price rolls over. A break below 156 could see the pair reach the 151 level and if it does, there is a great shorting opportunity. However, if the longer trend and fundamentally based trade bounce off the bigger trend's support level, the probabilities of success may increase.

The short, or long-term bullish, position can be traded in the forex spot market or by properly combing futures, which in this instance, for the GBP/JPY pair, would be buying British pound futures (/6B) pair and selling yen futures (/6J).

Copyright 2009  Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

The security used in this example is used for illustrative purposes only. Investools is not recommending that you buy or sell this security. Past performance shown in examples may not be indicative of future performance.

Trading spot currency contracts can involve high risk and the significant loss of any funds invested. Spot currency contracts are highly leveraged. This means that significant losses can be created quickly and unexpectedly.

Options trading is generally more complex than stock trading and may not be suitable for some investors. Granting options and some other options strategies can result in the loss of more than the original amount invested. Before trading options a person should review the document Characteristics and Risks of Standardized Options, available from your broker or any exchange on which options are traded.

Baby Steps

2009-06-17T14:15:05Z

We here at thinkorswim officially became part of Ameritrade this past week. We are little guppies swimming in a much bigger pond and there is a great deal of excitement for most of us with the prospect of a larger customer base to assist in investment strategies. I bring this up because I believe this is the same sentiment many traders experience when they foray into new products like options or futures from the world of stocks. There is excitement, but of course a little trepidation as well. As long as we don't lean too far over our skis initially, we will absorb some knowledge and make some strides. But it is so important to resist the urge to get ahead of ourselves.

This is our ongoing lesson to the legions of folks who are taking control of their investments; baby steps, baby steps. You can always grow trading plans down the road, but it must come in a gradual manner and not in gulps or you could choke.

So on your first venture into options, start with one contract and get some familiarity and gains. It is very easy to trade up, but much harder to reduce size because you can get slapped down. The lesson is short and sweet, but it is a simple lesson everyone must heed.

Steve Quirk

thinkorswim, Inc. and its registered employee, Steve Quirk, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

thinkorswim, Inc. is a wholly owned subsidiary of TD AMERITRADE Holding Corporation.

The Key to Successful Trading is.......

2009-06-08T17:29:05Z

Recently I was watching CNBC and I heard a comment from Art Cashin on the floor of the NYSE which rang true for every successful trader. Art said, "I'm not always right, but I'm always consistent." Picking direction day after day can be one of the hardest things to do. The truth is no one knows what the market is going to do. Technical analysis can help, but once you think the market can't go down, it goes down, once you think it can't go up, it goes up! So how do you win the battle of consistency in an inconsistent market? Let's find out . . .
Iron Condor traders will be a good group to discuss for this example. Last year carried some of the most volatile markets an Iron Condor trader will ever experience. I know several traders who started the year making great money . . . then came September. Forget about the money people lost in September, more traders were destroyed psychological than what they actually lost in the market. So what happened the next month in October? People stopped trading the strategy and missed out on perhaps some of the better gains they would have experienced trading Iron Condors. Repeat after Art Cashin, "I'm not always right, but I'm always consistent."
So how do you create a consistent plan trading Iron Condors? The thinkorswim® software makes this really easy. 30 - 45 days before expiration on a liquid product index like the SPY, QQQQ, DIA, or IWM, sell an option with a probability of expiring at or near 30%. Probability of Expiring on the thinkorswim software tells you the probability of that strike expiring 1 penny in the money on expiration. When selling Iron Condors you don't want the option to expire in the money. With a 30% probability of expiring in the money, there is a 70% probability of the option expiring out of the money which is perfect for any Iron Condor. Sell the 30% probability of expiring on both the calls and puts, buy some insurance further out of the money and you have your Iron Condor. The below figure shows you what to look for on the thinkorswim software.

These are the type of consistent rules that a trader must come up with that allows them to be consistent no matter what the market is doing. It's also important to remember risk management when trading anything. Part of creating consistency is only losing what your comfortable losing. Keep things small and simple and that will put you on the path that Art Cashin and every other successful trader strives for. Consistency.
Trade well.
thinkorswim®: The risk of loss in trading securities, options, futures and forex can be substantial. Customers must consider all relevant risk factors, including their own personal financial situation, before trading. Options involve risk and are not suitable for all investors. See the Options Disclosure Document: Characteristics and Risks of Standardized Options. A copy can be requested from Scott Garland, Compliance Officer, at 773-435-3270 or at 600 W. Chicago Ave., #100, Chicago, IL 60654-2597 or by email at sgarland@thinkorswim.com. Trading foreign exchange on margin carries a high level of risk, as well as its own unique risk factors. Please read the following risk disclosure before considering the trading of this product: Forex Risk Disclosure. thinkorswim is compensated through a portion of the forex dealing spread. Funds deposited into an account with a broker-dealer for investment in any currency, or which are the proceeds of a currency position, or any currency in an account with a broker-dealer, are not protected by the Securities Investor Protection Corporation (SIPC).
thinkorswim®, Inc. and thinkorswim Advisors, Inc. are wholly owned subsidiaries of thinkorswim Holdings Inc., which is a wholly owned subsidiary of thinkorswim Group Inc.

thinkorswim, Inc. © 2001-2009 Member SIPC FINRA NFA

Dads Give Good Advice

2009-05-29T16:27:52Z

I remember once, years ago, as I was walking out the door...I had been talking with my dad, and he said to me, "Anthony," (my dad never calls me Tony) and I stopped turned and he said, "Be careful." And I never forgot that. And it comes back to me often: Be careful. That was very good advice. The fear gauge, VIX as it is known to the market, is hovering at a critical level that could indicate increased investor confidence about the stock market. VIX, which recently has been at 29, is about the same level it was when the SPY was over 120 and the SPX was north of 1200. Presently, both are at 90 and 903, respectively. The financial sector, which includes banks, brokers, insurance, and real estate, is a place to be careful. From its March 2009 low to May 2009 high, the S&P Financial Spider (XLF) is up by over 100%. By comparison, the S&P 500 Spider (SPY) is up approximately 35% during the same period. Most US banks- Goldman Sachs, Morgan Stanley, Citigroup, Regions Financial Corp., Fifth Third Bank, to name a few- have in fact been able to raise billions of dollars in the past few weeks by selling shares after a broad-based financial rally. So who is buying all these new shares? I believe they are hedge funds that were caught short and now they are using these deals to cover their shorts. Also, it might be institutional money managers who feel like they missed the bottom and are now chasing these stocks! I'm not chasing! Not me, I am considering a risk reward trade favoring a directional downward bias in XLF.

Presently with XLF at $11.72 you may consider buying the June 13-11 Put spread for $1.12 debit and help finance that debit with the purchase of the June/July Calendar spread for $0.30 debit. It's profitable anywhere below $11.95 at June expiration. Max loss is $142.00, max gain at 11 is $118.00 with a little more then a 60% probability of success.

Some say that the government helped put a floor under the financial sector with all these bailout moves and allowing banks access to cheap money. Hindsight will ultimately decide this, but "be careful." That is very good advice.

thinkorswim, Inc. and its registered employee, Tony Battista, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Down with the Dollar and Up with Inflation and Gold

2009-05-27T15:58:11Z

Over the past few months, the U.S. dollar experienced a significant sell-off. The dollar index hit one-year lows and has seen the most significant loss against commodity-based currencies, such as the Great Britain pound (GBP), Australian dollar (AUD), New Zealand dollar (NZD) and Canadian dollar (CAD). Recovery from the global economic crisis has not arrived, at least according to the past month's economic reports. Even though economic recovery isn't apparent yet, inflation concerns are creeping into central banks' commentary and influencing monetary policy.

The U.S. has been the most active in intervention and stimulus during these economic times, which means it has pumped the largest dollar amount into the global market. As this money hits the global market, the dollar will weaken further and inflation will become more and more of a probability. The past two months' price action is a strong indication of the impending inflation. Historically gold receives the strongest boost in times of inflation and the Australian dollar is the major currency most correlated to gold. By buying Australian dollars and selling U.S. dollars, an investor simultaneously capitalizes on the aussie's strength and the greenback's weakness.

If you haven't noticed there has been a similar strand of logic and focus on inflation and commodities in the previous three articles. This is because central bank monetary policy and inflation are long-term trends and cycles, providing ample time to find and set up trade opportunities based on fundamental and economic principles. Instead of looking at the GBP/CHF, as was the focus last month, this month's focus is on gold and the Australian dollar. During the past quarter, the Australian dollar experienced a significant rise against the U.S. dollar, finding strong support levels near 61 and 63 before rising more than 1,500 pips to 78 (see Figure 1). There has been some expectation that the dollar has been oversold in the past couple of weeks. This works out well because a trend line support level and the 61.8% Fibonacci level may coincide on a pullback near 75, providing a better risk-controlled entry as a trend bounce. If the pair bounces at 75, followed by completing the 100% Fibonacci retracement to 84 and a stop was placed below the 50% Fibonacci trend line, a better than 3-to-1 reward-to-risk ratio would be established. The pair could run well past 84 to last year high at 98 if inflation remains an ongoing concern.

Figure 1 -- AUD/USD Rising with the Potential of a Pullback to Trend and Fibonacci Support

The AUD/JPY pair has a similar price pattern. As discussed in last month's article, the pair reached the 73 resistance line and a possible run higher has now appeared. As shown in Figure 2, price is at the 50% Fibonacci level. A break above the 61.8% Fibonacci level with a stop below the 50% Fibonacci level will provide the better than 3-to-1 reward-to-risk ratio with a target of nearly 1,200 pips. This pair needs to move more before confirming such a trend, which makes the AUD/USD, mentioned above, a more near-term probability.

Figure 2 -- AUD/JPY Testing Support at the 50% Fibonacci Level in a Strong Uptrend

The above examples can be traded using the forex spot market or combing futures properly via futures by buying Australian dollar futures (/6A) for the AUD/USD pair and Australian dollar futures (/6A) and selling yen futures (/6J) for the AUD/JPY pair.

Copyright 2009 Investools Inc. All rights reserved. Terms of use apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law. Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client futures accounts or give futures trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

Bank Bonanza

2009-05-19T18:34:44Z

The eagerly awaited results of the stress tests for banks has been slowly leaking out and apparently needing roughly 34 billion dollars is a boon for the stock price of Bank of America. The bank was one of the 19 being tested which will apparently require additional capital and this news sent its stock price initially lower and then higher by 15%. This action moved the entire financial sector higher and propelled the broader market to new 2009 highs in many names and averages. The question which continues to abound is "Does this rally still have legs?" The answer seems to be a resounding yes.

The mystery to many traders is what is fueling this rally? Many traders believe the catalyst is the legions of investors who suffered significant losses in 2008 and hit the sidelines to wait out the turmoil. Now we have seen a significant leap of over 25% from the March lows and many are afraid they are missing the opportunity to recoup some of those losses. What makes that evident is folks generally like to get in on any dips and every time we have seen one in the last couple months they have been short lived. The buyers have not exhausted their buying power and until they do we are unlikely to see any significant pullback. Quite frankly, it would make it a much healthier rally if it was not linear. A mild pullback may help in lengthening the duration and intensity of the rally and guard against the sudden washout of a portion of it. All told, it makes me continue to look for opportunities for short-term trading profits and remain very cautious with respect to long-term opportunities. I still expect a pullback and realize that the longer we go on rallying the more dramatic it will be, but I am not fighting the cash flows.

The Dreaded "I" Word

2009-05-13T21:35:54Z

Nobody wants to talk about inflation. It is hard to imagine that in this economy inflation could be a concern. Deflation is still the hot topic of the day amongst the economists. Gary Shilling is becoming extremely popular again with his book, Deflation: How to Survive and Thrive in the Coming Wave of Deflation. By the way, this is a great read for anybody studying the history of the markets. While the broader picture and past economic data might suggest that inflation is still a long ways off, the current market prices are suggesting a different story. Since the markets are forward looking indicators, I will take my cue from them.

But what markets should you be looking at? The first signs of inflation will always creep up in the capital markets, namely the Treasuries. This is due to the inverse relationship between bond prices and interest rates. If you remember your Economics 101 class, you will recall that rampant government spending, extreme monetary easing, and massive deficits all eventually lead to higher interest rates and higher rates of inflation in the long run. You can't continue to print money without eventually affecting the long-term interest rates. For anyone who trades the short term, or is a swing trader, the charts don't lie. Let's take a look at the charts on the TLT, or Barclay's 20-year bond.

Significant support has been taken out at the $100.00 level. While the volume is weak, a shift from the relative safety of bonds as an investment play to more speculative bullish equity plays is occurring. The recent 30% rally in the equity market has to be a testament to renewed investor confidence. Last week's consumer confidence report also pointed to a shift out of Treasuries and back into equities. The chart above suggests the next level of significant support for the TLT won't occur until about $93.00, so there is still room to fall.

In addition to the capital markets, we can take clues from the commodities markets for signs of creeping inflation. Commodity prices, as an input price, will traditionally act as a harbinger for forecasting inflationary pressures. Below I have included charts for some of the commodity ETF's that I follow on a regular basis. Included are MOO (agricultural products) and OIH (oil services).

The MOO chart is very telling of an upward bias. There is strong upward momentum demonstrated with the flag pattern pushing through the $31.00 level which had acted as resistance three times before. There is an increase in volume during this trend signifying this rally could have some legs to it.

OIH demonstrates a nearly identical bullish pattern with resistance being penetrated at the $89.00, albeit with less of a volume spike. The markets are speaking, and it is up to us to take notice. If you missed the first leg of the inflation trade, don't worry. With any pullbacks to our new support levels, there will be time to add more.

thinkorswim, Inc. and its registered employee, Joe Mazzola, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

A Case for Commodities

2009-04-29T20:49:15Z

With the global economic crises continuing, central banks worldwide are attempting to stimulate growth and loosen credit through monetary policy. The monetary policies being used currently weaken each country's currency. Weakening currencies equates to lower purchasing power and, in turn, inflation. Inflation, by definition, is an increase in costs usually defined by the Consumer Price Index (CPI) and Purchasing Price Index (PPI). Although CPI and PPI vary by country, there is a core or commodity-based items in all CPI and PPI numbers including energy.

Because pressure on commodities to rise is growing and concern of global inflation is increasing, commodities and commodity-based currencies are attractive. For the purpose of this report, the Great Britain pound (GBP) and Australian aussie (AUD) represent the commodity currencies and the euro (EUR) and Japanese yen (JPY) are the two counter currencies.

The British pound has a historical correlation to oil prices. When oil prices and oil companies' prices rise, British Petroleum (BP) and the British pound follow suit. Last month's article discussed the GBP/CHF's potential bullish sentiment as it formed a wedge. The EUR/GBP has shown increased demand for the British pound and decreased demand for the euro, similar to what was expected on the GBP/CHF (see Figure 1). Over the past few weeks, price continued to edge lower and may continue in this direction if the fundamentals at play remain consistent. The pullback could find resistance near 90.75 and then fall further. If the pair breaks support near 87, the next support level is near 82.50 - a potential move of 825 pips. Not only is this a significant move, this pair's pips are currently worth $1.45 per mini contract, making the potential move worth $1,196.00.

Figure 1 -- EUR/GBP Moving Lower, Experiencing a Potential Pullback

The AUD/JPY pair has a similar scenario. If inflation is manifest in the markets, investors often run to gold first. Japan currently has the worst fundamentals in the world. Just two days ago, I was talking to a friend from Australia and he said we don't hear a lot of bad news out of Australia because there isn't any. He felt the economy and housing are stable and employment is solid. If all of this is true, then this pair's fundamentals should be bullish. As shown in Figure 2, price reflected this bullish sentiment with a significant sell-off back to support. If support holds and the trend continues, a move back to recent resistance near 73 would provide a 440-pip move. Both of these scenarios need commodities to remain stable or rise with recent trend lines holding.

Figure 2 -- AUD/JPY Testing Support in a Strong Uptrend

Both of the above can be traded using the forex spot market or combing futures properly via futures by buying the pound futures (/6B) and selling the euro futures (/6E) for the EUR/GBP pair and by buying Australian dollar futures (/6A) and selling yen futures (/6J) for the AUD/JPY pair.

The Hardest Thing About Trading Is...

2009-04-21T19:35:49Z

The Hardest Thing about Trading is . . .

So you sell a vertical spread, you sell a spread far out of the money above a near term resistance. Everything is on your side, price and probabilities. Then, without warning, the stock jumps right through resistance and through your short strike. You start sweating, your palms get clammy . . . and you say to yourself, among other things . . . "Now what do I do??!!!"

I firmly believe that it's easy to enter a trade but hard to manage it over time. If you have been trading in the market for 20 years or 20 days and whether it's long stock or a Double Diagonal, the statement holds true.

Below are four things to consider if a trade doesn't go your way:

1- Close it out and take the loss. Admit you're wrong, take the loss and move on. If you position size appropriately, plan for the worst as far as risk goes; this shouldn't be a big deal.

2- Hold on and play the probabilities. If you enter the trade as a High Probability trade and you position size correctly, just sit back relax and see what happens. Too often people exit trades early only to have the spread come right back into the profitability zone. Relax, kick your feet up and find a good ball game to watch!

3- Adjust with other trades or instruments. I posted an article here on the Daily Swim entitled "Why you Have to Love Being a Trader" (March 9th). In that post there are a few ideas of types of adjustments/hedges you can make. As you do adjust with another trade or instrument, follow these guidelines:

a. Adjust only 30 - 40% of your position so you don't lose on the original trade, and the new trade. The whole idea of adjusting is to reduce your risk, not to change a losing trade into a winning trade.
b. Would you enter the trade today independent of the trade you're adjusting against? If the answer is yes, proceed, if not consider something else.

4- Adjust the trade into a trade with a better chance of winning. This is the one that traders covet the most, taking a loser and turning it into a winner. This is also the hardest thing to do. Here are some questions to ask as you embark on turning a loser into a winner

a. Would I enter this new trade independent today of what I have on?
b. What kind of risk am I adding to the position?
c. Does it actually increase my probability of making money?

If you answer "yes" to any of the questions above, then go for it; if not, consider another option.

Trade Smart, Trade Profitable.

thinkorswim, Inc. does not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Neither Investools nor its educational subsidiaries nor any of their respective officers, personnel, representatives, agents or independent contractors are, in such capacities, licensed financial advisers, registered investment advisers or registered broker-dealers. Neither Investools nor such educational subsidiaries provide investment or financial advice or make investment recommendations, nor are they in the business of transacting trades, nor do they direct client commodity accounts or give commodity trading advice tailored to any particular client's situation. Nothing contained in this communication constitutes a solicitation, recommendation, promotion, endorsement or offer by Investools, or others described above, of any particular security, transaction or investment.

How Much Market Risk Does Your Portfolio Have?

2009-04-16T21:54:38Z

Most equity markets have had a 20+% gain in less then a month. You may have been left with, or accumulated, many stocks and/or options positions over the last year. You may have been holding on to these positions for sometime now, without knowing what your overall market risk is. How can you look at a portfolio of many different stock/option products and compare them to one product? Beta weight your portfolio my friends! Beta-weighted deltas simply let you compare the delta risk across different positions and with "one click" sum them to see the delta risk of your entire portfolio! For example, 100 shares of POT and 100 shares of GE each have a delta of 100, but you can't just add them together to get a portfolio delta of 200. You have to convert the deltas to beta-weighted deltas. The TOS platform will do that for you automatically, making it easier for you to evaluate your risk. As you can see in this account, we have a delta of -2135.12. We also have a positive theta of 547.28, so there are many option positions too!

To use this feature, click on the gray box next to the word "Beta Weighting NOT WEIGHTED" in the middle right hand corner of the Position Statement section of the Monitor page.

Then click on the small check box that says "Beta Weighting." You will see a blank box open up. You can put a symbol in there, such as SPX, and hit the enter button.

If you type in SPX to beta weight the deltas in terms of the SPX, you will see a beta weighted delta on this account of about -114. That means that theoretically, this total portfolio position would make or lose $114.00 if the SPX moved $1.00. What beta-weighted portfolio deltas let you do is see the risk of all your stock and option positions in terms of a single index. As you can see, this portfolio has a beta-weighted position of -113.98, significantly different from the -2135.12 non-weighted deltas. You may want to make sure that you entire portfolio does not exceed a certain delta parameter. For example, if you don't want your portfolio risk to exceed +/- 200 SPX deltas, or +/- 1000 QQQQ deltas, you can use the beta weighting tool to see your risk based on whatever index you want. The risk of this tool is that betas are not necessarily stable or absolute. That is, if a stock has a beta of 1.50, there is no guarantee that the stock will move 1.50 as much as the SPX over the next day, or week, or month. But for me it is the best indicator of your portfolio risk, allowing you to think about hedging or reducing positions if that risk exceeds what you are comfortable with. If you want to switch back to non-beta weighted deltas, just click on the blue arrow and uncheck "Beta Weighting." Happy trading!

Monkey-Fly

2009-04-13T18:58:07Z

Think outside the box... Most retail costumers buy butterfly's dirt cheap hand over fist trying to hit it big on these low cost trades. The real question most should inquire about is why are butterfly's so inexpensive?? They have very low probabilities of success!! The standard butterfly is simply "taking a shot" and should be utilized and viewed this way. So what now for the butterfly?? Do we abandon our long shot altogether?? Not likely. The butterfly can be used quite readily but we just need to tweak it to create some positive theta decay while taking a shot. A butterfly for a credit?? Enter the Monkey-fly (and yes we could not think of a better name for it, but we are amused). Take the traditional butterfly, seemingly harmless and easy to define the total risk. Step it up a notch and let us examine selling a vertical spread to finance the purchase of our butterfly. Take a look at the example below with the SPY trading at $82.65 we have created a define risk Monkey-fly with an embedded $1.00 wide vertical spread.

Ok so there is risk in the vertical spread we are embedding but as with any out of the money short vertical there is also a high probability of success along with a positive theta. Now let's break this Monkey-fly into its synthetic components. The butterfly component of the trade is long 1 x 84 calls, short 2 x May 85 calls, long 1 x May 86 calls. The embedded vertical spread is the May short 1 x May 86 calls and long 1 x May 87 calls. These two trades placed separately would result in 5 separate legs whereby increasing transaction costs. Combining the spreads has reduced the trade to 3 legs but as with all multi-legged spreads you must factor in the increased transaction costs associated with each trade. Furthermore, placing the Monkey-fly as one spread rather then legging also reduces "leg risk" in what has been an extremely volatile market. What it imperative to understand about this convoluted butterfly is again there is a vertical spread embedded and the trade carries risk. This Monkey-fly example with its embedded short call spread also carries with it negative deltas and therefore a bearish market sentiment.

Let's look at the facts: We have embedded a short May 86 call/87 call vertical for a +.35 credit. The spread is $1.00 wide vertical of which we have already received a +$0.35 credit therefore, the maximum potential risk in the trade is -$0.65. Our break-even point in the trade is the short May 86 calls plus the +$0.35 credit received or $86.35. (Remember we are embedding a short vertical spread therefore we are synthetically short the 86 call strike.) Maximum profit potential on the trade is achieved at or near expiration if the underlying SPY shares fall directly in the central 85 strike of the Monkey-fly. This would produce a $1.00 profit plus the +$0.35 credit received for placing the spread totaling +$1.35. The ideal landing spot for the SPY come May expiration is obviously $85.00 but if the SPY's fall anywhere under $86.00 we are still profitable. Based on currently May implied volatility there is approximately a 65% probability of the SPY's falling under $86.00 by May expiration. Stay tuned because there is more to come on embedding spreads to finance our trades.

thinkorswim, Inc. and its registered employee, Don Kaufman, do not solicit or recommend any form of trading in the individual stocks (or their derivatives) mentioned above. Please do careful, independent research before investing any money as well as weigh the possible consequences on your particular financial situation before doing so. The risk of loss may be substantial.

Let's Stick to a Plan

2009-04-09T20:23:47Z

This article is going is going to get a little more political than I generally care to go, but it will affect the market so it needs to be addressed. In times of turmoil, the ability of the government to implement sweeping changes becomes easier, as people are so eager to look for quick financial and political solutions. I understand that tighter regulation would have been- and will be- beneficial for the markets, but we need to be careful not to stifle the Industry. An early warning sign is the growing number of firms balking at the TALF and TARP moneys as they come to realize the growing number of strings attached. They just watched Rick Wagoner get shown the door for running a business unsuccessfully and not adhering to a budget (sound familiar, Congress??). They ask themselves, why him and not one of the many other CEO's whose firms contributed to the mess we are in? Wall Street Brass gets spared, but not Detroit? What if that changes? The one thing investors and traders hate more than bad news is uncertainty. We can deal with the bleak picture but it cannot be a moving picture. We need to establish a plan and stick with it so that firms can feel safe knowing they understand what the investing landscaping will look like. As it stands now folks are apprehensive in a number of ways. A better deal could be had shortly as the picture changes daily, or a worse deal could be coming so they don't want to get in. Traders will adjust and move forward; that's what we do. Just establish the plan and live with it. It doesn't and will not be perfect but what is?

A Techni-Fundamental GBP/CHF Scenario

2009-04-02T20:43:27Z

In most cases, I would argue strong fundamentals will be also seen in price action and therefore technical indicators. Therefore, saying techni-fundamental may be redundant but this article will describe the fundamental reason and look for technicals to provide the timing.

Beginning with the fundamentals, two weeks ago the Swiss National Bank (SNB) announced that they would be using "quantitative easing" to help the Swiss economy. Quantitative easing is the process of increasing money supply, in most cases, by simply printing un-backed currency. Quantitative easing could also be called, measured weakening. The increase of supply in a measurable and consistent way weakens the value of the currency while the intent is to relax tight credit and improve exports due to the weakened currency, all of which in theory stimulates economic growth.

A commonly known correlation exists between the British pound and oil. British Petroleum accounts for nearly 10% of the Gross Domestic Product (GDP) of Great Britain. When oil prices rise, in turn British Petroleum does better and consequently so does the GDP and economy of Great Britain. Oil has been rising over the past two months and with the concern of inflation looming, oil's assent could be more dramatic.

Combining both the potential of a stronger pound with higher oil prices and the potential of a weaker franc due to quantitative easing, the GBP/CHF trade has fundamentals supporting a bullish move.

The technicals, or timing, of the fundamentals is fairly straight forward. The pair has consolidated as the SNB announced their change in monetary policy. When the consolidation ends, price action could run for 1,500 pips and potentially more.

Though this is not a text book wedge, the price action has consolidated in a wedge-time pattern. When a wedge occurs, the breakout of the wedge usually runs the distance of the base of the wedge. The base of the wedge is often times calculated as the second bounce in the consolidation. The base here measures 1,500 pips. If the pair was to break above resistance in the next week, the target would be approximately 1.80 (see Figure 1). Our target price coincides with a previous, multi-year down trend as well, adding strength to the target as potential resistance. Additional confirmation can be obtained if the stochastics turns positive as the price action breaks through the resistance trend line. A support has been established near 1.5900. If a stop loss is placed near 1.5900 at the time of a breakout, the risk-to-reward of this set up is nearly 2.5 to 1.

Figure 1 -- Wedge Formation with a Target of 1,500 Pips.

If the breakout occurs, a stop could be trailed as price rose and as higher near term support levels were created. This trade could be exacted using the spot market or by using the futures by buying the pound futures (/6b) and selling the franc futures(/6s).

Does This Rally Have Legs?

2009-03-26T21:29:05Z

Have we moved too far too fast? It's tough to say in the short-term. Remember, however, that stocks are still 50% below their October 2007 highs. The S&P 500 is holding over 800, nearly 17% above its recent lows, while the VIX is routinely sniffing 40. If you do have some reservations about this recent rally, one option play to consider right now would be covered calls. With volatility still relatively high, playing covered calls on stocks you already own at this point makes sense, especially if your stocks have experienced recent rallies. Let this current level of implied volatility assist you in reducing your cost basis and generating income while still holding your stocks for potential long term gains. Take advantage of the rich premiums. You haven't missed the boat just yet on selling pricey options.

Let's take a look at a candidate that has experienced some substantial short term rallies and are prime candidates for employing covered calls:

AMZN

Fueled by strong earnings in January, AMZN has rallied these past two months from $50.00 up to $72.40, a nearly 50% gain in only two months. If you own the stock, you are pretty ecstatic with those short-term returns. But now what do you do? Think about selling calls against your long stock position at this point. AMZN has had recent difficulties settling above $75.00. If you recognize this, consider selling the April 75 calls; you can collect $2.94 of premium, or $294.00 for every 100 shares of stock of AMZN that you own. AMZN April implied volatility is still a whopping 63%. With the stock currently trading $72.40 per share, you collect 4.06% (2.94/72.40) over the next 22 days before April expiration from the sale of the call. If you currently own AMZN stock, the sale of the call for $2.94 provides protection if the stock sells down to $69.44 while allowing for price appreciation up to $75.00 in the stock.

There are many of stocks of late that have seen incredible rallies in their respective stock prices. Take your pick amongst the financials. Do your homework, and you can find a plethora of covered call opportunities in this market. Happy Trading and see you next time.