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.

Whipsaw Market (by Springheel Jack)

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Well volatility is back and this whipsaw market has been confusing many of us, including most definitely me, though I've still been calling the turns pretty well. To add some clarity I've discarded all my usual trendlines and charted up various indices from scratch this morning on another computer. What I'm seeing from that is pretty interesting.

On the ES chart I can see no reason yet to think that the bullish trend up from March is in any trouble. Given the length and power of this move up from last July, and the fact that the obvious topping area for this move was always going to near the end of QE2 in June/July, I'm inclined to give the bull trend the benefit of the doubt until demonstrated otherwise. We're not there yet. The touch of rising support from the March low on ES yesterday wasn't perfect, but it was close, and this is a gently narrowing rising wedge, or ending diagonal in EW speak, which would be normal for a final stage move in a big wave up. The wedge has three touches on either side and is therefore fully formed, but it hasn't broken down yet, and the upper trendline target would be in the 1390-1400 area if immediate resistance is broken:

110513_ES_60min_Rising_Wedge
NQ has been divergently bullish on this latest retracement, and I'd generally read that as bullish for equities as a whole. I can't think of any good reason not to read it that way here as well. A strong support trendline has been established at the recent lows and NQ is now testing overhead resistance again:

110513_NQ_60min_Trendlines
I'm not as happy with my trendlines on TF, but support has been established and the overhead resistance trendline looks solid with the exception of the small overthrow in late February:

110513_TF_60min_Trendlines
The direction of bonds is very important for equities, and I've had another careful look at the setup there. What I'm seeing is that there is a declining channel from the high last August that isn't yet broken. The current retracement to test channel resistance is also in a perfect gently rising channel, and the next obvious move is down, which would be supportive of equities here:

  110513_ZB_Daily_Declining_Channel
The overall direction of USD isn't as important to equities as bonds. Equities and USD rallied strongly together from December 2009 through to the equities top at the end of April 2010. EURUSD (55% of the USD index) may have made an important interim top here, in which case I'd expect a move to rising support in the 1.35-6 area. Looking at the weekly chart though, there's still a good case that this recent move down has just been a retest of broken declining resistance from the 2008 high. If EURUSD can close below that trendline on a weekly basis, there will be a good case for a bigger move down towards support:

110513_EURUSD_Weekly_15_Year_Trendlines
I've also been having a fresh look at the oil chart. I've been calling the turns on oil very well in recent weeks, calling a top at 113.50 with a target at 96, then a bounce to 106 that only made it to 104.50, and a return to 96 which we say again yesterday. What now though? Looking at the weekly ten year chart this latest retracement may simply have been a retest of broken resistance. If that trendline is breached then I'd expect a move back to support in the mid-80s, with an expectation that support there should hold. Apologies for the strange candles in 2009 caused by bad data from my futures people:

110513_CL_Daily_Ten_Year_Chart
We're all watching the show with great interest on silver, but for overall precious metals direction I tend to use the more staid gold charts, which are easier to chart with tradeable trendlines. The best timeframe to take at the moment on gold is the six month daily chart I think, and the beautiful broadening ascending wedge from the January lows. That could break down at any time and that break would be bearish, but the current uptrend is intact until that wedge breaks down and I won't be getting excited about the short side on PMs until then:

110513_Gold_Daily_BA_Wedge
In the short term equities are hitting resistance this morning and I'm expecting a dip that I'll be buying. Until the lows this week are broken, JBTFD is still the higher probability trade in my view.

Blogger is down this morning so this is not posted at my blog today and I'm seriously considering switching my blog to WordPress.

Another Two Speculative Options Bets

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In previous posts, I've mentioned a few guidelines I've been keeping in mind when making speculative options buys (the first three of which are mentioned in Tim's book, Chart Your Way to Profits):

  • + 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 positions more time to work out).
  • + Buy options at a discount to model estimates of their fair market value.

I've been making bullish and bearish bets to increase the chances that some bets will make money whatever direction the market takes over the next several months. I've also been trying to take advantage of relatively low volatility when buying options (though if volatility keeps ticking up, I may start to hold off on making new speculative options buys).

On Tuesday night I placed limit orders for several small bullish and bearish bets. I got a fill on a two of them during the day Wednesday, calls on IXYS and puts on OMER. More on those below. First, a recap of my modus operandi here, and a reminder about the difference between speculative options buying and hedging.

Looking for Speculative Options Bets

For the bearish bets, I’ve been starting by scanning for relatively lightly-traded (average daily volume over the last month of < 200k-225k shares), 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 ~20%+ 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.

Prior to today, I used this M.O. to purchase puts on JOE, NAK, MOTR, TNDM; and calls on HMC, HIT, COHR, SUP, and ASMI. I noted these purchases at the time on the Short Screen message boards.

Hedging vs. 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 as a web app 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 however they will be out-of-the-money. Since I’m making a directional bet in the cases below, though, and not hedging, I bought slightly in-the-money options. 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).

A Bullish Bet

IXYS Corporation (IXYS) is a an integrated semiconductor company. 

IXYS has a PEG Ratio of 0.29, based on analysts' estimates of its earnings over the next five years.

IXYS Chart

As of Tuesday's close, the Black-Scholes estimate of the fair market value of IXYS's $15 strike, October calls was $2.23. I bought them for $1.80 Wednesday (the B-S estimate of their fair market value dropped to $1.97 after Wednesday's drop in price of the underlying).

A Bearish Bet

Omeros Corporation (OMER) is a clinical-stage biopharmaceutical company. These are the kinds of stocks I generally prefer to bet against with puts rather than by shorting them, because they can spike on news of an FDA approval, or a partnership deal with a big pharma company.

OMER has a PEG ratio of -0.4 based on analysts' estimates of its (negative, expected) earnings over the next five years.

OMER Chart

As  of Tuesday's close, the Black-Scholes estimate of the fair market value of the $7.50 strike, November puts on OMER was $3.50. I bought them at $2.85 Wednesday (the B-S estimate of their fair market value rose slightly to $3.57 after the drop in the underllying Wednesday).