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.


  1. SDS math (SDS attempts to track inversely twice the daily movement of the S&P 500):

    2 years ago: S&P, 1301; SDS 63.87
    Friday close: S&P 1065; SDS 34.43

    S&P performance: -18.1%
    SDS performance: -46.1%

    Expected SDS performance (at 2X): -36.2%
    Loss attributed to 'decay': -9.8%
    SDS decay per year: -4.9%

    Expected value of SDS, if truly a 2X inverse fund long-term: 40.70, meaning 6.27 of additional loss was due only to decay.

  2. adding NAK (outright stock), or Feb11-7.50 calls with a current 0.55/0.75 bid/ask spread, to the watchlist. Also soliciting feedback on "Mini-miners" that could get big take-out offers going forward. These will especially be ones with good cash flow, low debt, and under-estimated reserves (NAK doesn't fit this bill, but looking to put together a watch-lit of ones that do fit).