Commodities – Page 91 – Slope of Hope with Tim Knight

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.

Hedging Update (by Dave Pinsen)

By Dpinsen - 15 years ago (23, May 2011 10:36:14 PM)

In the table below, I've updated the costs (as of Monday's close) of hedging three major index-tracking ETFs against greater-than-20% declines over the several months, using the optimal puts, along with the costs of similarly hedging a handful of their most widely-traded components, and several precious metals ETFs.

Two new ETF additions this week

In the wake of LinkedIn's IPO last week, I also added two Internet ETFs (I suspect when those two ETFs update their top holdings, LinkedIn will be one of them). First, a reminder about why I've used 20% as a decline threshold, and what "optimal puts" means in this context.

Decline thresholds

As I've mentioned before the threshold I usually use when I hedge is 20% (i.e., I want protection against any decline worse than that). The idea for a 20% threshold came from a comment fund manager (and Stanford finance Ph.D.) John Hussman made in October 2008:

An intolerable loss, in my view, is one that requires a heroic recovery simply to break even… a short-term loss of 20%, particularly after the market has become severely depressed, should not be at all intolerable to long-term investors because such losses are generally reversed in the first few months of an advance (or even a powerful bear market rally).

Optimal puts

Optimal puts are the ones that will give you the level of protection you want at the lowest possible cost. With Portfolio Armor (available as a web app, and an iOS app) you just enter the symbol of the stock or ETF you’re looking to hedge, the number of shares you own, and the maximum decline you’re willing to risk, (your threshold). Then the app uses an algorithm developed by a finance Ph.D. candidate to sort through and analyze all of the available puts for your position, scanning for the optimal ones.

Costs (as of Monday's close) of hedging against >20% declines

Symbol	Name	Cost of Protection (as % of Position value)

	Widely-Traded Stocks
INTC	Intel	1.84%*
CSCO	Cisco Systems	2.02%*
MSFT	Microsoft	1.49%*
LVLT	Level 3 Communications, Inc.	17.5%***
BAC	Bank of America	3.50%**
F	Ford	4.53%***
GE	GE	3.82%***
PFE	Pfizer	2.19%***
SIRI	Sirius XM Radio	10.0%***
S	Sprint Nextel	7.00%**
	Major Index ETFs
QQQ	PowerShares QQQ Trust	1.95%***
SPY	SPDR S&P 500	1.63%***
DIA	SPDR Dow Jones Industrial Average	1.39%***
	Precious Metals ETFs
GLD	SPDR Gold Trust	0.66%***
SLV	iShares Silver Trust	4.52%*
DBP	PowerShares DB Precious Metals	1.71%*
SGOL	ETFS Physical Swiss Gold Shares	3.25%***
SIVR	ETFS Physical Silver Shares	7.59%***
	Internet ETFs
FDN	First Trust Dow Jones internet	10.0%*
HHH	Merrill Lynch Internet HOLDRs	2.91%**

*Based on optimal puts expiring in October, 2011

**Based on optimal puts expiring in November, 2011

***Based on optimal puts expiring in December, 2011

Twitter

I've noticed other posters here mention that they are on Twitter. In the event anyone's interested in my occasional tweets, here's my Twitter ID (or handle, or whatever it's called): @dpinsen

Pattern in Oil (Mike Paulenoff)

By TheTechTrader - 15 years ago (23, May 2011 6:15:19 PM)

Last Wednesday we told subscribers that the day's upmove in WTI crude oil futures from $95 to $101 was not the start of a new upleg. We noted that the pattern exhibited on the daily chart since the May 7 at $94.63 to Wednesday's high at $100.99 resembled a bear flag formation much more than a significant bottom. It had the look of a digestion-consolidation pattern in the lower quadrant of the larger downleg from May 2's $113.97. The analysis remains unchanged, and still argues for another downleg into the $90-$88 area next, which should negatively impact the oil & gas names as well.

Originally published on MPTrader.com.

A Missed Opportunity (by Dave Pinsen)

By Dpinsen - 15 years ago (19, May 2011 1:03:19 PM)

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.

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.

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.

Guideposts

By Tim Knight - 15 years ago (08, May 2011 7:46:27 AM)

My biggest problem right now with my analysis is that I don't want the repeated disappointments of the past eight months overly-cloud my thinking with respect to the markets. The disappointments are legion – – Egypt, Libya, the Japanese nuclear disaster….I've really started to lose track of it all – – – which are the instances of the market beginning to break and then rapidly recovering to new highs.

The irony of last week's selloff is that it was based on good news instead of bad. That's actually encouraging. It all began last Sunday with the out-of-the-blue drop in silver futures, and when the OBL killing hit the wires, equities soared, only to give it all up later. And on Thursday when I said to pray for a rally, we got our prayers answered with a rally that, just as I had hoped, almost completely faded by day's end.

If I was forbidden from watching any stock indexes, I could content myself with watching silver all by itself as a signal about when to get really aggressive about shorts again. The charts below – the Euro, gold, oil services, and silver, all are painting the same picture for me: a possible bounce to clearly-defined levels, and then a resumption of the downturn. Just as I had hoped for a rally at the end of last week, I likewise would be delighted to see a nice rally Monday. It would making adding to my shorts much more comfortable.

As it is now, my portfolio is about a 20/80 bull/bear split, with the largest bullish position being UDN (betting on weakness in the US dollar). I am preparing myself to move to a 0/150 split if we can push to the levels suggested below (that is, entirely short, and using margin).

Dusting Off An Old Context Model

By Trade Flight Plan - 15 years ago (01, May 2011 6:50:58 AM)

Back in February we published a context model shortly after ES made new highs. The good Dr. Knight kept playing the Chocolate Rain video and sure enough, the market tanked shortly thereafter. Let's see if we can get this to work again.

It's time to dust this puppy off and see where we are. The break above prior ES highs at 1343 makes us wonder just how far the S&Ps can go with QE2 and the debt ceiling. Back then, we declared ES 1310s as our line in the sand, which was crossed and broken several times before hitting new highs. Believe it or not, they shall remain our LIS. A break below 1326s can serve as a potential early warning signal. Upside targets remain in the 1445-1450 zone.

ES Context Model Circa February 18, 2011
Originally published on www.tradeflight.com

We keep an eye on ES, but our primary trading vehicle continues to be volatile, liquid, light, sweet crude. As an aside for those interested, we are planning an upcoming gratis educational series on how to trade CL by asking only 4 key questions each day. The questions, and the answers, may surprise you – they are a combo of herd psychology and price levels deemed important by professional money. All those interested, say ay.