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.

A Missed Opportunity (by Dave Pinsen)

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In a post here last week (Revisiting a Losing Market-Neutral Trade), I mentioned a market neutral trade where I got stopped out of the short side for a loss. I got stopped out of the short side of a more recent market neutral trade (Short TRGL, Long IMO) for a gain, but I missed an opportunity in not buying puts on TRGL after getting stopped out.

TRGL versus IMO

The chart below shows the performance of TRGL and IMO from when I entered the trade on 3/31/2011 until when I exited on 4/21/2011. I started out with 24% trailing stops on both sides of this trade, but as I noted on Short Screen at the time, I tightened those trailing stops on both sides (to 8%) on 4/19. So I got stopped out of TRGL early on 4/21 — at $7.58, instead of $8.85, which is where it closed that day. Once I got stopped out of TRGL, I sold my long position in IMO. Overall, it wasn't a bad trade: I made 3% on the long side and 30% on the short side, for a combined return of 16.5% on the combined trade.

IMO, TRGL

Why TRGL popped on 4/21

The company, an oil & gas E&P with its operations in the Paris Basin, had been under a cloud as the French government considered banning shale exploration for environmental reasons. On 4/21, the company commented on an interim report about shale exploration by a French government agency, but there was nothing conclusive about that report; the pop on 4/21 looks like it was a simply a short squeeze.

Performance of TRGL from 4/21 until this week

The chart below shows how TRGL shares have done since I got stopped out on 4/21.

  TRGL

Why this was a missed opportunity

Because the bearish case against TRGL hadn't materially changed on 4/21, so I should have taken advantage of the bounce and bought in-the-money puts on it then. I didn't think of that at the time.

Buying puts on a stock after getting stopped out of a short position

The odd thing is that I did do that when I got stopped out of the short side of another market neutral trade (Short JOE, Long GTY) for a loss earlier this year. Since I thought the bearish case against JOE remained intact, I bought long-dated, in-the-money puts on it (which I'm still holding). It's something I'll consider going forward when I get stopped out for gains as well.

A reminder about hedging versus betting

Those puts on JOE were a speculative bet against  the stock; because of that, I bought in the money puts on it, consistent with Tim's guidelines about buying options in Chart Your Way to Profits. 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).

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.

My most recent market neutral trade

I entered another market neutral trade last Friday, long ALB, short ADES. More details on that at the link.

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.

CYWTP Blowout Christmas Extravaganza

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A Hermes handbag. A Tesla sports car. Chart Your Way to Profits.

All of these are on Christmas wish lists around the country, yet for many, their price makes them out of reach.

I, for one, intend to make a difference. On that last item – the book – I am doing a today-only offer of $50 for delivery by Christmas Eve for residents of the United States. That is one-third off the regular price, and I will happily sign the book to the trader of your choice.

Read about the book here, and if you want to pursue this once-in-a-lunchtime opportunity, send $50 via PayPal today to trader.tim.knight@gmail.com – – there's no other book in the world about ProphetCharts, and even if there were, the author's hair wouldn't be as full and lustrous as my own.

1221-book

Review of Griftopia

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Please Note: since Matt Taibbi tends to write with an R-Rated word processor, some of the quotations from the book are on the blue side. Please wear your special Provo Goggles when reading this post.

Last night, I finished reading Matt Taibbi's Griftopia (which is on Amazon here), and I enjoyed it. However, I wasn't knocked off my feet by it for reasons I shall cite in a moment.

To give you a flavor of the book, I will type in a few excerpts:

Politics: "If you want to understand why American is such a paradise for high-class thieves, just look at the way a manufactured movement like the Tea Party corrals and neutralizes public anger that otherwise should be sending pitchforks in the direction of downtown Manhattan….That's why it's so brilliant for the Tea Party to put forward as its leaders some of the most egregiously stupid morons on our great green earth….the Tea Party has made anti-intellectualism itself a rallying cry…..What they are, and they don't realize it, is an anachronism. They're fighting a 1960 battle in a world run by twenty-first-century crooks."

Government: "There are really two Americas, one for the grifter class, and one for everybody else. In everybody-else land, the world is small businesses and wage-warning employees, the government is something to be avoided, an overwhelming, all-powerful entity whose attentions usually presage some kind of financial setback, if not complete ruin. In the grifter world, however, government, is a slavish lapdog that the financial companies that will be the major players in this book use as a tool for making money……the new America, instead, is fast becoming a vast ghetto in which all of which us, conservatives and progressives, are being bled dry by a relatively tiny oligarchy of extremely clever financial criminals and their castrato henchmen in government, whose main job is to be good actors on TV and put on a good show."

Greenspan: "Former Federal Reserve chief Alan Greenspan is that one-in-a-billion asshole who made America the dissembling mess that it is today. If his achievements were reversed, if this gnomish bug-eyed party crasher had managed to convert his weird social hang-ups into positive accomplishments, then today we'd be calling his career one of the greatest political fairy tales ever witnessed, an unlikeliest of ugly ducklings who through sheer pluck, cunning, and determination made it to the top and changed the world forever….[instead he] jacked himself off to the attentions of Wall Street for twenty consecutive years – in the process laying the foundation for a generation of orgiastic greed and overconsumption and turning the Federal Reserve into a permanent bailout mechanism for the super-rich." (note: there is an entire chapter devoted to Greenspan whose title, The Biggest Asshole in the Universe, tips you off as to Taibbi's disposition).

Mortgage Fiasco: "In this world, everybody kept up the con practically until they were in cuffs. It made financial sense to do so: the money was so big that it was cost-efficient (from a personal standpoint) for executives to chase massive short-term gains, no matter how ill-gotten, even knowing that the game would eventually be up. Because you got to keep the money either way, why not?"

Goldman: "One of the keys to talking to sources about any subject is clicking with their sense of humor, and I was noticing that with a lot of financial people I was calling, I was missing laugh cues whenever anyone mentioned the investment bank Goldman Sachs. No one ever just referenced 'Goldman'; they would say 'those motherfuckers' or 'those cocksuckers' or 'those motherfucking cocksucking assholes at Goldman Sachs.' It was a name spoken with such contempt that you could almost hear people holding the phone away from their faces as they talked, the way you do with the baggie you have to pick up after curbing your dog on the streets of New York."

Taibbi makes me look positively doe-eyed and optimistic. In any case, the first couple of chapters of the book are just terrific, but a good half of the book struck me as pissed-off filler about the health care system and commodities deregulation. On a scale of 1 to 10, I'd give the book about an 8, and I wanted to take the time to share with you some morsels so you could judge for yourself.

1111-Griftopia