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.

Now What? (by Leaf_West)

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Small caps are market leaders in the bigger trends typically, so if we want to assess where we are and where we are going, let's take a look at the Russell 2000 ETF (IWM).

IWM_May5, 2011_60min

Shorter term view is that we bounced right off of some important GANN support levels on the 60min chart.  The stochastic indicator looks like it could allow a continuation in the bounce.  eSignal has a trend confirmation feature in their GET software … the trading rules are to short this confirmed downtrend when the stochastic indicator breaks above the 75 level and you get signal/trigger candles.


IWM_May5, 2011_Daily

The daily chart believe it or not is still in a confirmed uptrend … 20EMA is above the 50EMA and price bounced exactly of the 50EMA this morning at $82.42.  The Ascending Triangle for the IWM actually fits more perfectly than the one I was using on the SPY last week.  If you study Ascending Triangles the "E" leg down is very scary and people get cold feet and the weak hands bail as they see a "failure" at busting higher at the end of "D".

Prepared traders actually step in at the 'E" intersection and buy.  The theory is that if the pattern fails a tight stop will keep you out of real trouble and if it works out, those weaker hands will come back to the market and help boost your profits in the days to come.

If the Pattern is going to fail it will be with a "truncated" move off of the "E" intersection.  Typically that truncation will happen before price gets 50% of the way back to the other/upper trendline … that level in this case is $84.615.

The trigger point for conservative traders is the close under today's low which at this writing is that $82.42 50EMA level.

Cheers … Leaf_West

Hedging Update (by Dave Pinsen)

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In the table below, I've updated the costs (as of Wednesday's close) of hedging the Dow-, NASDAQ 100-, and S&P 500-tracking ETFs against greater-than-20% declines over the next several months, using the optimal puts, along with the costs of similarly hedging a handful of their most widely-traded components. As with the last hedging update post, I included five precious metals ETFs to the table as well. First, though, a quick update on a couple of speculative options bets, and a reminder of why I'm using ITM puts for directional bets and optimal puts for hedging purposes.

Two more speculative options bets

On Wednesday, I got a fill on ITM October calls on Superior Industries (SUP) and ITM December calls on ASM International, NV (ASMI) (I had entered limit orders for several bullish and bearish bets, but those two calls are the ones that I got filled on). Same M.O. with these as I described with COHR earlier this week: using the guidelines Tim mentioned in his book Chart Your Way To Profits, plus the additional guideline of buying options at a ~20%+ discount to model estimates of their fair market value. I mentioned both options buys on Short Screen during the day Wednesday.

Hedging versus betting

To find the optimal puts for hedging, I enter the symbol of the stock or ETF I'm 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'm willing to risk in the “threshold” field. Then Portfolio Armor uses its algorithm to scan for the optimal puts to provide 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, however, they will be out-of-the-money. Since I was making directional bets in the cases above, though, and not hedging, I bought slightly in-the-money options. That 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).

Chosing a threshold

When using Portfolio Armor, you can enter any percentage you want in the threshold field (though the larger the percentage you enter, the more likely there will be optimal puts available for that level of protection). As I've mentioned before, the threshold I usually use when I hedge is 20% (i.e., I want protection against any decline worse than that). The idea for a 20% threshold came from a comment fund manager (and Stanford finance Ph.D.) John Hussman made in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market

Essentially, 20% is a large enough threshold that it reduces the cost of hedging but not so large that it precludes a recovery. So 20% is the threshold I've used in the table below.

Times to expiration

In his research, the finance academic who developed Portfolio Armor's algorithm found that options with approximately six months to expiration (which today would be the ones expiring in November) tend to offer the best combination of liquidity and cost, so those are the put options for which Portfolio Armor's algorithm aims. When puts with about six months to expiration are not available, Portfolio Armor searches for slightly longer or shorter times to expiration.

A difference in the table this time

Note that, unlike in the table last time, when the hedging costs of the index ETFs QQQ, SPY, and DIA were based on optimal puts expiring in October, this time they are based on optimal puts expiring in December (December 29th, to be exact, in the case of DIA and QQQ, so that's almost 8 months of insurance from today). All things equal, options with expirations further out generally cost more.




Cost of Protection (as % of Position value)

Widely-Traded Stocks





Cisco Systems









Bank of America












Wells Fargo








Major Index ETFs


PowerShares QQQ Trust



SPDR S&P 500



SPDR Dow Jones Industrial Average


Precious Metals ETFs


SPDR Gold Trust



iShares Silver Trust



PowerShares DB Precious Metals



ETFS Physical Swiss Gold Shares



ETFS Physical Silver Shares


*Based on optimal puts expiring in October, 2011

**Based on optimal puts expiring in November, 2011

***Based on optimal puts expiring in December, 2011

Disclosure: I'm holding some puts on DIA, and some calls on SUP, ASMI, and COHR.

Aero Goes Postal

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My best-performing short today was Aeropostale (ARO), which I've been building a position in for a little while now. It's down over 15% today, and although I've covered the position for the moment, I'd be very interested in re-shorting this on any bounceback. I think that, over the long term, it's going to head closer and closer to $zero.


SPECIAL NOTE – Sometimes I complain that there's not much in the hopper. This is currently not the case. There are probably ten posts waiting in the wings, and more to come. They are going to get increasingly stale, but unfortunately, I'm quite busy this afternoon, so you could be stuck with this post for a bit. When I do manage to issue new posts, I probably won't be able to say NEW POST, so you'll have to rely on your wits (and other Slopers) to figure it out. Be strong.