Slope of Hope Blog Posts

Slope initially began as a blog, so this is where most of the website’s content resides. Here we have tens of thousands of posts dating back over a decade. These are listed in reverse chronological order. Click on any category icon below to see posts tagged with that particular subject, or click on a word in the category cloud on the right side of the screen for more specific choices.

Brilliant Mistake

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Anyone who trades really actively has probably had a time or two where they made a simple human error. They buy when they meant to short, or they sold 500 when they meant to sell 5,000. You know….dumb stuff.

I've made a handful of these errors in my lifetime, and the most awkward are those in which I make a mistake and made money at it (such as a time back in the late 80s when I meant to buy calls on 3Com but bought puts instead….and made good money when the stock plunged unexpectedly). It kind of makes you wonder!

I had kind of a funny experience like that yesterday with Valassis Communications (VCI). I came into the day short. The stock opened up a little firm, and I decided to tighten up my stop. Somehow I changed the stop from covering 1200 to covering 2200. The stop was triggered (red arrow), and – unbeknownst to me – I was suddenly long 1000 VCI.

I went about my day, but my spreadsheet wasn't reconciling, and I was trying to figure out the discrepency. I then saw I was long 1000 VCI, and I figured out what had happened. The curious thing is that there was a nice profit on the position. I sold it (green arrow), thanked my lucky stars, and then noticed a little later that the price was mushed right up against the broken wedge. So I re-shorted it (blue line), and today it fell nicely. I've subsequently covered.

So what would have been a single unprofitable trade turned out to be one unprofitable trade and two profitable ones, which more than made up the difference. I have no position in VCI at this point, since I figure my luck is probably out with this one!


Last Trading Day (by Springheel Jack)

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I wrote a post on the last day of March noting that the last trading day of the month has been a one-day bear market since March 2009, with a cumulative loss of 72 points since then. Here are the stats:

The short side is looking promising today, as the lower trendline of the rising wedge from the 1290s has broken down overnight. That's a pointer to what might be a significantly bearish day, as if the wedge turns into a channel then we could see a move down to 1330, though a retest of the big IHS neckline in the 1336-8 area looks more realistic:

I'm not getting excited yet though. The pinocchio down through the rising wedge lower trendline yesterday has set up a shorter term support trendline on ES. When that breaks the short side today will look a lot more interesting:

Copper is still testing support and failing to bounce there. Support's still holding though and even if copper resolves down here there are good odds for a spike back up to test triangle resistance first:

I don't know whether anyone shorted sugar on the basis of the chart I posted yesterday, but if anyone did they should be happy this morning. Sugar is nearing the key test to see whether it is in a falling wedge or declining channel. If that test is today then potential support is in the 22.6 area. If sugar breaks below there then the declining channel support trendline should be hit in the 19 – 19.3 area. That target could get a lot lower if that move down takes a few days as the trendline is declining very steeply:

My palladium trade is close to reaching the key initial target in the 791-3 area and I'll be cashing up there as we'll more than likely see some pullback from there. If it breaks the two trendlines there and clears 800 that would be extremely bullish and I'd be looking for a retest of the Feb highs in the 864 area. My ultimate target from the monthly chart is in the 900-950 area:

I haven't done a CADUSD chart in a while so I thought I'd post the CAD chart today. It has been lagging AUD lately but the weekly chart looks pretty bullish:

What I'm hoping to see today is a gap up, which the Gap Guy gives an 82% probability of closing, followed by a break of short term support on ES and then a decent retracement that retested the IHS neckline in the 1336-8 area. The stats for the first trading day of the month on Tuesday are very bullish (up 184 since April 2009) and the stats for the the second trading day of the month fairly bullish (up 72 since April 2009), so I'm leaning long for the first two days next week and the most likely day to see a neckline retest is definitely today. Looking at the stats for the first two trading days of the month, I see that if you'd gone long at the close of the previous day and then sold at the open on a gap down, and held until the end of each day on a flat or positive open, then you'd be up a cumulative 358 SPX points since April 2009. That's slightly more than half of all gains in this bull market on SPX which is frankly amazing. Helicopter Ben's speaking at 12.30 so we might see a spike up in precious metals and all non-US currencies then. 🙂

Speculative Options Buys

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Hey fellow Slopers,

With volatility continuing to hover near two-year lows, I’ve been spending more time looking for speculative option buys. I’ve been looking to place bullish and bearish bets, so I’ll have a better shot at making some money whatever direction the market takes in the next several months.

While doing this, I’ve been keeping in mind a few points Tim made in his book, “Chart Your Way to Profits.” On p.474, Tim offered a few common sense guidelines about speculative options buying:

  • Start small (since options often expire worthless).
  • Avoid out-of-the-money-options (instead, try to get ones with some intrinsic value)
  • Avoid nearby expiration dates (to avoid theta burn and give your position more time to work out)

I’ve been following each of those guidelines in my recent speculative options bets, and I’ve added a fourth one to boot:

  • buy options at a discount to model estimates of their fair market value.

For the bearish bets, I’ve been starting by scanning for relatively lightly-traded (average daily volume over the last month of 150k-200k shares or less), optionable stocks  that look weak technically and fundamentally. The idea behind looking for relatively thinly-traded stocks is that the options traded on them are more likely to be thinly-traded, which increases the chances that they might be inefficiently priced. Then I look for in-the-money puts on them several months out, and compare the current bid-ask prices for them with the estimated fair market value of them via the Black-Scholes model.

If I find one where the most recent bid is significantly below the Black-Scholes fair market value estimate, I’ll place a small limit order for it, with the limit price set at a 25%-30%+ discount to the fair market value estimate.

For the bullish bets, I’ve been doing the reverse: scanning for stocks that look strong technically and fundamentally, and looking for in-the-money calls priced below the Black-Scholes estimates of their fair market value.

After the close Wednesday, I placed 10 limit orders (5 for calls, 5 for puts) on options that met all the criteria above — if I’m lucky, I’ll get a fill on a few of them Thursday. More on those below, but first a quick clarification, since I’ve written about options in the context of hedging in recent posts: the trades for which I placed these limit orders are speculative directional bets, not hedges.

Hedging versus Betting

If I were hedging, I would enter the symbol of the stock or ETF I was looking to hedge in the “symbol” field of Portfolio Armor (available on the web and as an Apple iOS app), enter the number of shares in the “shares owned” field, and then enter the maximum decline I was willing to risk in the “threshold” field. Then Portfolio Armor would use its algorithm to scan for the optimal puts to give me that level of protection at the lowest cost.

On rare occasions (I’ve seen it happen once, so far) the optimal puts Portfolio Armor presents might be in-the-money; in most cases though, they will be out-of-the-money. Since I’m making directional bets in the cases below, though, and not hedging, I placed limit orders on in-the-money options that were close to the current prices of the underlying stocks. This makes sense for directional bets (when you are willing to pay more to reduce the odds against your bet) but would be sub-optimal in most cases for hedging (when you want to get a certain level of protection at the lowest possible cost).

I placed limit orders for in-the-money calls on these five stocks: AEG, SVN, SUP, ASMI, and COHR.

And limit orders for in-the-money puts on these five stocks: CPIX, LOJN, HIL, PNCL, and MDS.

To keep this post from getting too long, I’ll just highlight one of each of those orders below.

A Bearish Bet

Pinnacle Airlines Corp. (NASDAQ: PNCL) is a regional airline holding company that was once a top pick of hedge fund manager Mohnish Pabrai (I’m not sure if he still owns it).

According to Short Screen, PNCL has an Altman Z”-Score of 0.55 (Z”-Scores below 1.1 indicate financial distress).

PNCL closed at $5.40 on Wednesday, and the bid-ask on its $7.50 strike, December 2011 puts was $0.20-$4.70.  The Black-Scholes estimate of the fair market value of those puts was $2.32. I put in a small limit order at $1.60.

A Bullish Bet

Superior Industries International, Inc. is an auto parts supplier manufacturing aluminum wheels.

Short Screen shows an Altman Z-Score of 4.77 for SUP. Z-Scores of 3 and higher indicate financial strength (Short Screen automatically applies the five-term Z-Score to SUP, and not the four-term Z”-Score, because SUP is a manufacturing company, unlike PNCL).

SUP closed at $25.34 Wednesday, and the bid-ask spread on its $22.50 strike, October 2011 calls was $3.00-$4.40. The Black-Scholes estimate of the fair market value of those puts was $4.54. I put in a small limit order for them at $3.20.