Trading Tips

Nice article shared from Joe Ross.

Trading Tips

GOOG (2011/04)

GOOG's earning will announce after tomorrow market close, and April option expiring date is 15 April, the day after tomorrow. Hence GOOG is one of the best candidate for traders to bet on earning call. Another attractive point is, GOOG always spike after earning announcement. GOOG spiked up 40 dollar during Oct 2010 earning, spiked down 30 dollar during Jan 2011 earning.

Here is the option price for GOOG during 13 April 2011, 11.50pm, @ 576.89.

Call Put

575 14.40 575 12.60

580 11.90 570 10.20

585 9.80 565 8.20

590 8.00 560 6.50

595 6.90 555 5.10

600 5.00 550 4.00

Will keep track of the price tomorrow.

Here is the option price for GOOG during 14 April 2011, 4.00pm, @ 578.51.

Call Put

575 15.80 575 12.00

580 11.80 570 10.00

585 10.30 565 7.50

590 8.00 560 5.90

595 6.70 555 5.00

600 4.90 550 3.30

Strategy

LONG strangle, with price 15/20 dollar from current price.

Result

GOOG slump 5% after result.

GOOG 540.27, at 11.15pm, and below is it's option price at that moment.

Call Put

575 0 575 37.80

580 0 570 32.00

585 0 565 27.30

590 0 560 22.90

595 0 555 18.20

600 0 550 13.20

% If follow the strategy, by LONG 15/20 dollar away strangle, 595c/555p pair, the profit will be (18.20 - (6.70 + 5.50)) = 6.00.

Suitable pair for Carry Trade

Below is a list for suitable Carry Trade currency pair, with positive yield. Assume all trade size is 10,000, with leverage 50:1. Price base on market price on 11 April 2011. All the interest calculation is base on OANDA brokerage rate.

AUD/JPY, LONG (89.178)
Deposit required = 264.98 SGD
Interest / day = 1.41 SGD
1 pips = 1.49 SGD
Spread = 2.1 pips

AUD/USD, LONG (1.05416)
Deposit required = 265.04 SGD
Interest / day = 1.38 SGD
1 pips = 1.26 SGD
Spread = 1.4 pips

EUR/USD, LONG (1.44278)
Deposit required = 362.79 SGD
Interest / day = 0.15 SGD
1 pips = 1.26 SGD

EUR/GBP, LONG (0.88107)
Deposit required = 362.87 SGD
Interest / day = 0.07 SGD
1 pips = 2.06 SGD
Spread = 1.2 pips

EUR/AUD, SHORT (1.36932)
Deposit required = 362.87 SGD
Interest / day = 1.49 SGD
1 pips = 1.32 SGD
Spread = 2.4 pips

Seems like most of the positive yield is highly related with AUD, certainly, with AUD interest rate = 4.75% now.

Carry Trade

What is Carry Trade?
In short, Currency Carry Trade is a strategy where a trader buy a currency with higher interest rate, while selling another currency with lower interest rate. The trader will gain some interest from the differences between 2 currency.

Can it be substantial?
Yes. Let's say AUD/USD conversion rate is 1:1. You borrow 10000 USD from brokerage/bank, and buy 10000 AUD. AUD interest rate = 4.75% annually, and USD interest rate is 0.25% annually. After 1 year, if AUD/USD conversion rate is still 1:1, then you will get 475 AUD from interest, while paying 25 USD to brokerage/bank, making you have a net income of 475-25 == 450. 450 / 10000, only 4.5% return annually, not very attractive, which can easily being beat by ETF and other hedge fund. But almost all currency broker house provide leverage, from 50:1 up to 200:1. Let's take medium, leverage = 100:1, which means u can deposit USD 100 into your account, and holding a LONG 10000 AUD/USD position. Let's says after 1 year the conversion rate didn't change, you will have USD 450 for this carry trade. 450 / 100 = 450%. Awesome right? But please take currency fluctuation risk into consideration. If after one year, AUD/USD conversion rate drop to 0.97:1.00, by holding such position, actually you only earn 450 - 300 = 150, which is 450 from interest income and 300 from currency lost. Needless to say if AUD/USD drop to 0.90:1.00, which actually you lost 550 (450-1000). Of course if the conversion gain, let's say AUD/USD = 1.10:1.00, you will have double income, 1000 from currency gain and 450 from interest.

Strategy
For this case, we ignore short-term currency fluctuation, and only focus on interest income and long-term trend. With FED crazily printing USD to save US economy, everyone would agree that for long-term, USD is going down for a very solid reason. With all the hot money around the world, the commodity (Gold,silver,metal) price will shoot up. And AUD is well-known as commodity currency. So, for long term, high possibility AUD/USD pair will be up trend.

Current position
With 3000 SGD in the account, I am holding 10000 AUD/USD pair, with price around 0.9700. Earning around 1.3SGD interest pay day, by excluding currency fluctuation factor, I would make 1.3*365 = 474 SGD after a year, which is around 474/3000 = 15.6% annually. I am using Oanda as my currency broker house, which allowed leverage until 50:1. So by this position, (LONG 10000 AUD/USD), it only cost me around 270 SGD as deposit. I can always add up my AUD/USD position when AUD/USD pair drop.

Potential Risk
1. US hike interest rate. This will kill off some of the profit from carry trade, since the interest different between 2 pair is narrowed. This is unlikely to happen in short term, since US economy is just start picking up, FED would not like to kill off this bubble so soon.

2. AUS reduce interest rate. This is unlikely to happen too, since the inflation pressure at AUS is high. Unless, AUS hit by a major natural disaster, such as earth quake, flood, tornado, etc, which force the AUS to reduce interest rate to boost the economic, just like what New Zealand had done recently, after NZ hit by major earth quake at Christchurch.

3. Commodity price collapse. Unlikely to happen in short term, since all the hot money have no where else to go to.

2010/Q2 RIMM

RIMM is a good quote to trade strangle on earning, due to it's nature of price gaping when earning released.

2010/06/24 After market : 2010/Q2 report. 1.38(1.34).

Although it's earning beat forecast, but revenue missed. Market quickly react and gap down 5%.
Here is the option table before, day open, day close on 2010/06/25.
Straddle result.
And this is the day open/ day close data.

As we can see, how big the impact of implied volatility reduce before and after earning release, hurt straddle.

Another strategy, which gain profit from the reduction of implied volatility from the day open to day close. Only 52.5 pair earn, because RIMM price drop another 5% after the market open.

Bullet proof strategy??

Let say SPY is trading at 109.27 now, and here is the price of its option chain.

		Strike Price
5.15	5.29	107	3.45	3.46
4.47	4.61	108	3.81	3.91
3.81	3.95	109	4.2	4.29
3.25	3.3	110	4.58	4.74

Lets assume this.
Long 1 107c, Short 107p = (5.29-3.45) = 1.84, similar to i buy 100 SPY @ (107+1.84).
Short 100 SPY @ 109.27
Profit = 109.27 -108.84 = 0.43

	107c @ 5.29	107p @ 3.45	SPY 109.27
100	-5.29	-3.55	9.27	0.43
105	-5.29	1.45	4.27	0.43
110	-2.29	3.45	-0.73	0.43
115	2.71	3.45	-5.73	0.43

So there are confirm profit 0.43.

But is it worth?
Let's calculate cost. Commision fees excluded.
Cost = Long 107c, Short 107p = 184.00
Short 100 SPY @ 109.27 = -10927.
Profit = 43.
Sound like we are using (10927+184) just to earn 43, which is 0.387% in 30 days, or 4.64% per anuum.

How if commision included?

While open the position,
Long/Short = 10+(0.75*2) = 11.50
Short SPY = 10
Total = 21.50

While close the position, there might be 3 scenario, (i) Stock price < price ="="> strike price.
Let's ignore scenario (ii), it is very unlikely to happen.
Scenario (i) and (iii) will have same cost, which is
one option expired worthless, one being assigned. = 20
Close SPY = 10.
Total cost = 30.

Total cost = 30 + 21.50 = 51.50.
Profit = (43-51.50) = -8.50.

So this does not work for 1 option, but what if 10?
Total cost = (25+10) + (20+10) = 65
Profit = (430-65) = 365

Return for the trade in %.
365/(1840+109270) = 0.32%, or 3.94% per annum.

3.94% per annum?
Sound like is the rate we can get if we put the money in the bank. Then why should we make our so difficult to trade on this, sort of 0% return trade?

As far as I knew, if we short a stock, we no need to pay for full amount. It just need 500 for each 100 stock you short. So actual cost u needed to open the trade is actually, 1840+5000 = 6840.
After Math, it would be 5.33%, or 64% per annum.

Wow, 64%........

Will we got margin call if the stock spike?
Nope. We will got margin call, when the account value is less than the amount we risk.
When the stock spike, although the value of stock is depreciating, but the value of call option is appreciate. It will offset the difference, and make your account value unchanged.

What's next?
With the bid/ask spread closer when the market open, the return would be more attractive.
The next thing I would like to confirm is, whether this strategy can be placed on real trade. I got to wait until Monday to do this. Let's see how.

2010/04/05 GOOG earning

Trade Straddle and Strangle on GOOG.
Not sure will be profitable after to night earning announce.

GOOG 6.60(Briefing) ???(Actual)

2010/04/05 11:35pm
GOOG 596.50 (up 7.50)

						Cost
590c	16.6		610p	20.8		37.4
600c	11.4		600p	15		26.4
610c	7.1		590p	10		17.1
620c	4.2		580p	6.3		10.5
630c	2.45		570p	3.5		5.95
640c	1.3		560p	1.8		3.1
650c	0.7		550p	0.85		1.55

Let see what happen tomorrow.

2010/04/16 9.41pm
GOOG 567.00 (-30)
Earn 21% on straddle.

2009/08/12 CADX

Thanks Lion for sharing.
2009/08/12 10.30pm :Buy 11.01
2009/08/14 11.00pm : SL 10.60.

-1R.

10.60,11.01,11.42,11.83,12.24,12.65,13.06,13.47,13.88,14.29,14.7,15.11

Stop Lost, PCX

Every experience trader knew how important a stop lost point meant to them. A stop lost ensure you to have sufficient capital to fight back your loses, and not let your capital faded with a terrible trade. But in reality, it is very hard to execute it. Let's take an example.
When it fall below neck, which is around 8.40, it is a nice short opportunity. But when you see the stock price drop almost 20% with only 2 days, it is not a good idea to short it anymore, especially market is in intermediate bull trend, so we might wait. And here we miss the chance.
I post the URL for PCX at the top of this post, let's see what happen next.

Exp In Investing?

Experience is important in trading/investing? The longer time u inside the investing world, the higher probability for you to success? I would say, certainly no, not at all.

When I start full invest after I work on 2006, I always ask myself, can I escape from the next financial crisis, since I already knew it too much during Asian Financial Crisis on 1997. The answer is no, although I earn some during 2007 bull, but almost all my money are inside Malaysia stock market now. Although I have good confident they won't go bankrupt, and is a good company, but seeing -40-50% in the paper lost is not a good feeling.

Can I pick a good buying point when crisis come? Seems like I failed again. I bought too early, when the 2008 subprime financial crisis start to burst, and certainly, I get burst also. Money and confident lost, when the market is panic, I am like the others. And miss the strongest rebound ever, from 9 March, 30% rebound from the bottom, and i din pick up any.

The most upset thing in trading, is not stock price down, is when the market up, and u are not in the boat. It really killed. Nothing to do now, just trying on paper trade, and wait patiently. Still a bit bearish about the market, at least not the bullish. I must earn back all my money in US, then I can consider pump in more into there.

Again, position sizing is important. I bet too big previously, which killed me when I missed once. And is a bit hard to recover, when ur capital and confident hurt. Thanks Tze, for keep on reminding me about position sizing. Thanks Lion, for accompany me on paper trade, your blog is awesome.

What is the most important in trading/investing, is discpline, determination, confident. Not how long u are in it. Some people, no matter how long they play dota, they are still NOOB, same in trading. We must learn from it.

Gambler and Player

Just finish read a book, "My professional poker player". The book is about profile of some well known professional poker player, such as Doyle Brunson, Johnny Chan, Stu Ungar, etc.... The book bring out a good point, since casino is always having edge, and if someone have no reason to not gambler, why he choose a game which himself does not have edge? Why not he choose poker, which it seems fair to every participant, the only diff is only pro's and noob.

Let's me explain what my title exactly wanna bring out. Gambler, 赌徒，is someone, who gamble for fun, base on his luck. Sometimes, he might win, sometimes no. And the most important thing is, he himself do not know what is the reason he win or lose. Player, 玩家，is someone, who gamble, and gamble for their living. They are caution, not gamble base on emotion, but gamble for win, win the money for their living. They analyze, observe, calculate, counting card, trying their best to find an edge compare with others. They have good money management, cutting lose when chances of winning is low, double their bet while chance is high, acting, traping people to pour their money into them.

If you have chance to watch movie "Rounder", star by Mat Damon, a movie about a professional poker player. There is a scene, saying Mat Damon playing with Johnny Chan, and that guy, is the real Johnny Chan, 9 time world champion on Poker.

After reading this book, I think trading is also like gambling, but we can choose to be gambler or player. Trade for living is never easy, it is just as hard as gamble for living. It need smart mind, high discipline, well money management, etc. But I am so glad, seeing a frieng of mine, is moving toward it. He really have the discipline, and passion about trading. Go ahead, Lion. We can be a player in someday.

Rule must followed

This is the rule which I will follow in my future trading. Pay for these lessons on 2008. Most of the trade turn up into big lost, due to I do not apply these rules.

1. Use stop lost. Must think of the cost of lost, before thinking of how much can earn.
2. Never counter trend. Trying to pick up at bottom is dangerous, because we never know where is the bottom.
3. Be confident, follow your plan. Don't ever being defeat by our greed and fear.

This is the 2 lessons I learn from my trading fault. Everyone know that, but once you wish to apply, it is damn hard.

Good Bye 2008

Really have a bad year on 2008, which I should not have. Let's conclude 2008 my US stock journey.

Early 2008, start setting up Bear Call Spread on SPY, which give me 10-20% each month. However, I do buy some options, which wipe out my profit slowly.

My option strategy vary in whole year. At first, I do screen base on STS. Earn and lost, earn and lost, end up lost a bit. A big lost occur during I trade MRO, due to did not cut lost. Then I change the strategy to guessing earning call. I really have no talent on this strategy, end up mostly lost trade. Earn more than 150% at MUR, and 450% at NOV. But all my earning lost in DRYS, which end up worthless.

My portfolio almost empty at this point, pump in fresh money. Again same, earn on credit spread, lost in normal options. Market drop after Lehman brother fail, drop for 7 days consecusly, and I jump in on 3rd day, buy AIG, C and DRYS.

C nearly collapse on Nov, which drag my money in more. I write C put options. After rebounding with US government injection, I decide to pull out all, to avoid putting too much of my portfolio into risk.

Conclude result for 2008, lost 41% of my portfolio. No more any open position.

NTES Trade Update

NTES, (2008/12/12 post)

Short : 19.40
Buy to cover : 20.64

Lost : (1.24)

So volatile market, which make NTES move again what I predicted previously, hit my stop lost point 20.60. The trade trigger and I BTC at 20.63, lost 1.24.

Unexpected FED cut the interest rate to near Zero, make the market start turn from down trend and move toward short term bull. Personally, I am still bear about current market. Will look for nice short trade set up.

2008/12/12 SPY

No one can anticipate that the auto bailout plan, will die in Senate, although already been passed in Congress. And now, the White House step in to prevent a collapse on auto sector. Until the time I wrote this post, the White House still haven't come out any plan on the replacement bailout plan, but it just promise it will do so, the bailout.

And on 2008/12/12, SPY experienced a perfect swing, which it up nearly 5% if compare to session low, making the chart become more unpredictable. If you look at the chart, SPY still haven't break the major trend line, but it formed an uptrend line from 2008/11/20 low. But the MACD showed positive divergence, so it would more likely to be uptrend. But all still depend on the unpredicted news, such as GS, MS report on next week, and the most importantly, the auto bailout plan.

For my personal view, I think White House should not save the auto maker. But it may arrange it into more manageable bankrupt plan, or merge them together, to compete with Germany and Japan automaker. Certainly, everybody know, US automaker are not competitive enough, it is not a secret. And, with lending 14 billion to them, to pay the dealer, won't solve anything. Everybody know it, but they are trying to avoid a massive collapse on auto.

There are still a lot of uncertainty on financial sector. And the first 350 billion of TARP, already dry up after save the giant bank, Citigroup. If they still lend the money to automaker, when another round of financial institution problem arise, they will not able to act. It will be unlikely the second phase of 350 billion will be pass for current Bush administration.

We shall see, in the next few day.

2008/12/12 NTES

Though not a strong down trend, but is quite a nice trade. Might not sell on target, maybe on 1-2R is enough, on this volatile market.

NTES
=======
Sell when below : 19.40
Stop Lost : 20.60
Target : 15

Risk : 1.2
Reward : 4.4
RRR : 3.6

WLP, HCN Trade Update

HCN, (2008/11/28 post)

Short : 37.20
Buy to cover : 34

Earn : 3.20.

-Day Trade. Set BTC(Buy to cover). Never think of market will drop like this. Really volatile market.

WLP, (2008/12/01 post)

Short : 34.20
BTC : 36.99

Lost : (2.80)

- Never think the market change into up trend again, in such a short period. The key point I wish to share here is, I should had SL at 36.20, according to my initial plan, but I didn't. This make me pay for additional 0.80, to cover this mistake. I am lucky, but not again.

2008/12/01 WLP

Just a quick one. It looks bearish for the market. But SPY stay hold above 80 in these few days, then the trend might change.

WLP
=======
Sell when below : 34.20
Stop Lost : 36.50
Target : 27

Risk : 2.3
Reward : 7.2
RRR : 3.13

SPY 2008/11/28, AVB HCN

SPY rise in the short session of last trading day in Nov, post the biggest 5-day gain since 1929, broking most analyst glass. However, we can see low volume on this few day, which mean the real challenge will begin next week, with all the investors and traders come back after the holiday. The previous high 92.06, will perform as a short term resistance. If it cannot break through on the following week, we shall see some pull back and profit taking action. Uncertainty remain, with big 3 automaker fate, and possibility of more financial institution will dry up, and seek for government help.

Have 2 watch list currently. AVB and HCN. Both showing sign of reversal, and Reward/Risk Ratio is high. Will watch closely on Monday.

AVB
=======
Sell when below : 58.46
Stop Lost : 62.29
Target : 41.43

Risk : 3.83
Reward : 17.46
RRR : 4.5

HCN
=======
Sell when below : 37.05
Stop Lost : 40
Target : 30

Risk :2.95
Reward : 7.05
RRR : 2.39

SPY 2008/11/27

Today is holiday, Thanksgiving days. No market today, hence spend some time to review the current SPY situation.

SPY rally for the fourth day, although all the news announce is bad news. Let's look at the chart, although the price increase, but the volume is dropping. This might be a sign of weak rally. It is still down trend, and will have a resistance at 93-94.

I think now is a good time to short. I might be wrong. But I still cannot see any sign of recovery. The big 3 car maker bailout will have a great debate. Still a lot of uncertainty. Again, 80 is a crucial support line for SPY.