Saturday, August 28, 2010

Some recent trading activity and thoughts - Last weekend of August, 2010

These are my current TBT and TLT positions:

1) 10 Sept-110c (these are meant to capture any further appreciation in treasuries should they still be mid-rocket-rise like Dec 2008, when TLT hit 122+).

2) 4 Jan11-100p (would anticipate rolling these to 105 if TLT should go over 115 this month)

3) 60 Sept 35 calls
4) 10 Sept 45 calls (old position that never got rolled down, not expected to make jack here)
5) 5 TBT Sept 40/33 put spread (short the 40 puts, long the 33 puts). This position used to be 10 contracts and I had to shrink it back. Looking to kill the trade off over the course of the month due to disliking short puts on leveraged funds (more on that below)

I also have two more TBT plays I would consider LEAPS (these suck because one of the epiphany's I've had recently is that long term investments in leveraged funds is a non-starter). I'm looking to close these on any near term bounce:
6) 10 Jan11-43c, and
7) 10 Jan12-75c

Suprisingly, should interest rates continue to fall, even after Friday's treasury pullback, I would only need TLT to reach ~113.50 in order to break even on the short term plays (considering also that much of the loss has been factored into the the rolls from August, hence the -$15k bitch-fest in a comment following my last post). So either, treasuries need to go way WAY up (TLT 115+, less preferable scenario), or follow Friday's march much lower (TBT 36+, more preferable scenario).

Another position I entered recently was 10 SDS Jan11-32p. This is a 2X leveraged fund that rises when the S&P500 drops. I am not necessarily bullish on the market, but have certainly noticed a trend in the price action of leveraged funds in general. EVERY THING ELSE BEING EQUAL, PUT OPTIONS ON LEVERAGED FUNDS ARE PREFEREBALE IN THE LONG RUN. This is simply due to the premium the fund must pay to remain properly leveraged. When the market falls in the short term I lose on SDS, but if it stagantes or rises slightly, the puts outperform the calls due to decay in the long term (even if the market drops a little this still works out).

I'm not going to try to dig it up now but last year I noticed something funny about two leveraged funds that were both 2x (or 3x) the US financial sector in opposite directions. OVER 2 YEARS THEY WERE BOTH DOWN, one about 60% and the other 90%. That is, if you had bought puts on both you would've been guaranteed a profit regardless of market direction. This type of 'free money' does still exist and needs to be exploited.


Here's a good twin set (original and Part 2 follow-up) blog article pair that lays out a case for American hyperinflation, with a particularly good execution mechanism that ultimately comes around to the following four conclusions:

1) A hyperinflationary event will happen, following the crash in Treasuries.
2) Commodities will be the go-to medium for value storage.
3) All asset classes will collapse in short order.
4) Most importantly—civil society will not collapse along with the dollar. Civil society will stumble about like a drunken sailor, but eventually right itself and carry on with a new normal.

Sunday, August 15, 2010

Forbes editorial

Adding some color to the announcement of QE2:

"I expect the coming doses of quantitative easing will finally spark adverse reactions, first in the dollar and later in the bond market. When a falling dollar forces consumer prices and long-term interest rates to rise, the Fed’s actions will be rendered impotent. The Open Markets Committee will have to make a horrific choice: fight inflation by tightening policy into a weakening economy, or fight recession by allowing inflation to burn out of control. I think it’s obvious that they will choose inflation, all the while pretending that it doesn’t exist."

My question is when?? TBT is killing me. Everyday, interest rates GO DOWN MORE! I'm bleeding tremendous losses and have exacerbated a chasing strategy that has hurt me in the past... the very point of which tracking decisions through a blog was originally intended to help cure.

This week I expect to make some changes. The key is to stay focused, to not panic, and take control instead of losing it.

Monday, August 2, 2010

Bubble forming in bonds

Even Forbes is getting in on it now:

“Have Americans ever been satisfied with earning a steady but low rate of return? What we have in American history is rolling from bubble to bubble, whether it’s stocks, real estate, commodities, emerging markets, time shares . . . when one bubble bursts they are moved to the next one.” Lee implies that the bubble currently forming is in bonds.