Friday 17 August 2012

Position Update

I am short Manchester United (MANU) at $13.71, Long Eni (E) at
$43.94, Long Novartis (NVS) at $ 60.02 and Long Total S.A (TOT) at $49.52.

Stocks I am Considering:
Main Street Capital (MAIN)
Nestle (NSRGY)
Heineken (HINKY)
GAMCO Gold ... Fund (GGN)

My most successful position is my Facebook short position I initiated at $28.83. Now at $19.21, it is a 33.4% gain for me. Still holding it with a target price of $14.40, which will give me a 50% gain.

Risks: The market is a few points away from its 2012 top and it may be risky for some.

Happy Trading!

Thursday 9 August 2012

The VXX, And How To Profit From It

For those who are not familiar with the VIX, it tracks the volatility of the S&P 500 index. It is also often referred to as the "fear index" as it goes the opposite way when the market goes one way. As the market is going up these days (S&P 500 up 11.4% YTD) ,the VIX have dropped a lot, way below its normal trading range of 20-30,to around 15 now. The VIX has not seen these levels since 2006, when it fell as low as 10. On the other hand, during the 2008 recession, the VIX soared as high as 80 and in the two pullbacks in May 2010 and August 2011, to around 40
You can view the chart here: (http://finance.yahoo.com/echarts?s=%5EVIX+Interactive#symbol=%5Evix;range=5y;compare=;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=off;source=undefined;)

Onto our main topic for today, the iPath S&P 500 VIX Short Term FuturesETN (VXX), the ETN that tracks the aforementioned VIX, has lost up to 80% to $11.70, at a 52-wk low after hitting a peak of $60 during the 2011 August pullback. This means that if the market declines again like the past 2 pullbacks before rising to new highs (which is highly possible), the VXX is sure to soar. It may not rise as high as the high of almost $60 last August, but this could potentially be a multi-bagger. Another good buy is the ProShares Ultra VIX Short-Term Fut ETF (UVXY), which tracks the VIX too, but is twice more volatile by the VIX itself. This means that if the VIX drops by2%, the UVXY is supposed to drop by twice more, or 4%. The UVXY is also at a 52-week low of $5.51 after hitting a top of $244.80 (split-adjusted) shortly after it was introduced last October. The UVXY would move about twice what the VXX would move, therefore, this ETF should only be traded if one is very sure about the market's direction.
But, even if your direction and your timing is correct, you could lose money in the VXX. If you did not already know, ETNs lose value automatically. If you compare the VXX chart above to the VIX chart in the link above, you would realise that the VXX drops much more compared to the VIX. This means that if your sentiment is correct but the action takes too long to unfold, you may also lose money. These are the reasons why I will never put more than 5% of my money in this ETN. How would I counter this? Well, options would be a good way to do this. By this way, you can hold shares and not lose money even as the VXX plummets.
What I would do is a collar. Buying a collar is equal to buying insurance for your   position. The ideal trade for the VXX, now at $11.70 would be:
SELL a Sep 2012 Call (strike price 15)
BUY a Sep 2012 Put (strike price 11)
BUY 100 shares of VXX

There are three scenarios where the VXX goes. Let me show you how you can profit from each of these ways.

Scenario #1, VXX falls below $11
If the VXX falls below $11, the call would expire worthless and you would get to keep the premium. Not only that, the put would be profitable too. These profits would neutralise your losses in the your VXX shares, and you may even pocket a profit, instead of a loss when you only buy VXX shares.

Short Call Profit
Long Put Profit
Shares Loss
Overall Profit

*Please note that the profits from the options may not be enough to neutralise the losses on the stock if the price falls too low. But, in the next scenarios, where the price is above $11, the overall return will surely be a profit.

Scenario #2, VXX rises above $11
If the VXX rises to around $14-$15 (I'll tell you why I put it in this range later), you would also profit. The call would expire worthless and you would get to keep the premium. The put, on the other hand, would expire worthless. But, you would not make a loss. The 100 VXX shares bought at $11.70 would give you a good profit.

Short Call Profit
Long Put Loss
Shares Profit
Overall Profit

Scenario #3, VXX rises above $15
You should immediately roll your short call to a new strike when the VXX price edges to $15. If the call option expires above $15, you would be required to deliver the shares to the call-buyer at $15 and the put would expire worthless. Although you could still make a profit, the shares would be lost. Remember, the aim was to HOLD shares without losing money, not lose shares after gaining money. Therefore, one should roll the strikes of the call up every time the shares reach around $14.70, in the VXX's case. I would roll the call up by $3-$5, so I do not have to do this too frequently.

Short Call Profit
Long Put Loss
Shares Profit
Overall Profit


You can do this repeatedly as months pass. After the September options expire, you could do it on the October ones, then the November ones, for as long as you want. This may sound very easy, but you will not understand its difficulties before you try it out yourself. I encourage you to use a simulator before trying out with real money. Here is a good article about this method from Optionetics, describing the both the method and the difficulties more in depth: (http://www.optionetics.com/marketdata/article.aspx?aid=15510)

Finally, I would like to wish Singapore, my country, a very Happy 47th birthday.

Happy Trading!

Wednesday 1 August 2012

Cup & Handle??


There is an evident and very nice cup and handle pattern forming in Express Scripts (ESRX). This one would be a buy once it closes above $59.50. I also recommend an article from seeking alpha about Seagate Tech (STX), with the opportunities that it presents. Below is the URL.
URL:http://seekingalpha.com/article/768511-seagate-technology-investors-are-missing-the-point

That's all for today!

Happy Trading!