Wednesday, January 12, 2011

12 January 2011 Volatility can be volatile

BAGAKOAA 12 January 2011 Volatility can be volatile

I had to remind myself why we publish this blog. We have 44 readers, about 16 regular daily visitors, our record for visits in one day was 22, and we get about 5-10 comments a week. So needless to say we are not ready to start selling subscriptions. Our purpose in writing this (besides the psychological catharsis it provides to our staff of writers) is to keep our self honest and occasionally remind us of why we did what we did. It is also a great place to share triumphs and tragedies.

Today we had both. We have told you about our position in AAPL Apple Corp for quite a while when rumors or recirculated (is that a word?) rumors of the iPhone being distributed by Verizon began hitting the street we wanted to ride the wave but at $300+ a share did not want to tie up so much cash. So we did the wise thing, we picked up some April calls (Still pricey in the 26 dollar range, but remember for each contract at 26.00, it was only costing us 2600 dollars to control 30,000 dollars of the Apple stock.) With the announcement (buy of the rumor sell on the news) we cashed out of the calls with a 30.2% gain. Very nice indeed.

We also discussed the new Panama canal here way back when and shared some homework on GLDD, Great Lakes Dredging. We got into some march $7.50 call options which panned out today for us with a 58% gain.

In an exercise of full disclosure, we have been advising that we all set our stops, stop limits, and trailing stops to protect our gains. In a demonstration of doing what I say, I inadvertently set a 10% trailing stop on VXX. We had a very sizeable position in this iPath track of the CBOE volatility index (VIX). We have talked about it here on many occasions. Remember it is a contrarian indicator. As the market does well the VIX goes down. When there is uncertainty or mayhem, the VIX goes up. The market did so good today that the VIX went down as did our VXX ETF and our trailing stop triggered. It was a sizeable loss. (23%) and it wiped out the gains from the call options we just bragged about.

So what did we (and hopefully you) learn from this faux pas. First off if you are counting on a holding to do something, be sure your stops and and limit orders are in line with your expectations. This VXX position was being accumulated because we KNOW there will be a correction. It maybe tomorrow, it maybe next week it maybe next month, but it will come. So why would I be stupid enough to set a trailing stop to sell it as it was going lower? (Because I am.) This is an ETF tracking an index. There is no value to worry about it is a bet about volatility. It is not a bet about if there will be volatility, it is a bet about when there will be volatility. With the VIX below 20 and this ETF at 30ish, there is very little more room for it to go down. Liken it to a Roulette Wheel where the 38 numbers (1-36, 0, and 00 unless you are playing in Monte Carlo where they do not have the 00 making it only 37 numbers, But I Digress) are drawn but not replaced eventually you will be betting on a number that will come up. I did to mean to set a trailing stop. It cost me dearly. In order to recover, we will be buying January 2012 40 dollar calls at the 15-25 cent level. This will tie up a lot less cash and deliver the same results when the correction comes. When the VIX spikes because some crazy guy in Korea shoots a rocket off, or because Portugal actually admits they need a bailout, or if Nancy Pelosi and crack her face, or if someone in Congress can actually understand that a family making 78,000 a year can not afford a 13.8 million dollar mortgage, these calls will rally from .25 to 2-5 dollars. That will help me bandage my wounds from today.

Banks and Oil

Today we had a great day in the market. Real confidence about the financial market was leaking its way into the news and those folk sittin or ready were, ready. There is less oil out there because of supply and refining issues so that drove the black gooey stuff up making nice heady for the likes of XOM and CVX (We own CVX). Rumors of $110 barrel oil got some people attentions. And the new Beige Book had some relatively nice things to say. More about that later.

We had a nice jump in one of our Spec stocks SDIX. If you recall we had a post here on November 30th called I Do Not Like Green Eggs and Ham about the senate passing a bill to address tainted foods. We suggested you do homework on three stocks that we were taking new positions with. VIFL up 1.38% since the post, NEOG up 1.49% since the post and SDIX, as of today up 48.36%. Most of that gain came today after they had won an FDA approval for a new Salmonella test of raw eggs. The test is a huge competitive advantage in the market place and should make SDIX a likely take over target. This has more legs but should be watched closely.

The volume in the markets today was respectable. Not great but better than the last two days. Quite a few more people applied for mortgages than expected so that is a good confidence indicator.

The New Beige Book is Here, The New Beige Book is here.

Ok we got the new beige book today and it is full of almost positive tells of a slowly recovering economy. I won’t spoil the exciting read for you but will give you this snigbit:

Conditions were said to be improving in the Boston, New York, Philadelphia, and Richmond Districts. Activity increased modestly to moderately in the Cleveland, Atlanta, Chicago, St. Louis, Kansas City, and Dallas Districts. The economy of the Minneapolis District "continued its moderate recovery," while that of the San Francisco District "firmed further" in the reporting period leading up to the close of 2010. Conditions were generally said to be better in Districts' manufacturing, retail, and nonfinancial services sectors than in financial services or real estate.

Here is the link so you read it in its entirety.

Slave Lucrum


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