Saturday, October 30, 2010

How and when to be Bearish

If you want to be bearish there are various options for you. First of all, you have to determine your time frame and when to be bearish. ALthough you can trade breakdowns for the short term if you can buy it back before the trend reverses back to the upside, many breakouts in the long run actually end up below where they started.
So a more intelligent idea if you are not very quick and nimble is to sell high and buy back low. One way to do this is to identify breakouts that have reached their target, but this is more of a contrarian approach and is difficult to do if you go short stock as opposed to writing calls or buying puts.

Another thing to do is look at the market. The slow stochastic indicates when the momentum to the upside or downside is no longer sustainable for a long time. It will tell you when stocks are oversold and overbought. It's still a little difficult as overbought stocks can still go higher longer than you would expect because all the dumb money follows always too late.

If you are going to go with this you can buy puts on the market that are cheap and out of the money and you can keep mostly cash. This way you can't get burned too bad, and if the market continues higher, you only lose the small premium. If you are right and after stocks are overbought they gradually move towards oversold, your out of the money put will become in the money and you can earn a lot of money fast. They're considered more of a long shot to expire in the money, but you will sell them before they expire, and you only buy them when the market is overbought. If conditions continue to remain overbought, it's fine, but eventually it will reverse and when it does, unless it's a new bull market the stocks will trade lower and lower. The more it's overbought the more it can sell off. The overbought/oversold conditions of the market generally are not factored into the price of an option premium.

The good thing about this is when stocks rally, the VIX drops, and as the volitility drops, the options become cheaper. So being bearish by buying put options is a good thing if you can spot the right time because you also gain volitility in general.

The Slow Stoch can be measured in different timelines. While you may have a minute chart overbought, the weekly could be oversold. It's important to be aware of several different timelines. Although what goes up must come down, you shouldn't bet the house on it. Just a small 2% position in an OTM put is plenty as if you are right, you stand to make a lot, and if you are wrong, it won't hurt you as long as you keep the position small.

Another thing to note about the slow stoch is whether it is showing an uptrend or a downtrend and whether the stocks agree with it. If the slow stochastic shows a downtrend while stocks show an uptrend this means the move is not to be trusted, and the evidence is that there will be a reversal. So look for false moves and short after overbought conditions are met.

Right now we are overbought on a weekly chart, but on a monthly and daily chart we are not oversold or overbought. This represents a difficult market to be short.

The RSI is also a good indicator of overbought vs oversold. However, the RSI is not yet overbought. It is however close on monthly, daily, and weekly.

This is a signal that any longs better be very careful. Any bears must also not get carried away. There really is no clear sell signal, however it is very close, and if you had to be one it would be defensively short. The highs for the year also should act as resistance. We may surpass them breifly, but unless we see it find support at the highs of the year and continue to break higher gradually without the slow stochastic and RSI going overbought, you must tread carefully.

Although a small retracement followed by new highs is a base, if the base is too deep (like 20% or more) it is less trustworthy because it requires that stocks get overbought and continue to remain overbought which isn't likely. A lot of the deep bases are false breakouts. From april to July S&P declined just under 20%, but RSI is clearly nearing overbought and it's still possible new highs will not be broken.

This means you should prepare to get short.

Like I said before, you want to use OTM put option. So you would want to buy ontracts 3 months past the point you want to sell it. So it's almost November. If we assume we buy puts in November with a 2 month holding period (3 to be safe) that would take us to Februrary. Leave 3 more months and May or later is when out contracts should expire. So we will buy June 2011 SPY contracts at maybe a strike price of 116. These will cost about $8 per share or $800 per contract of 100 shares.

Based on what options with the same strike price are worth 3 months out, if we are wrong and the SPY remains at the same price, we can see that it will drop to 4.50 a nearly 45% drop. If however, the SPY drops 10 points, the option would be worth $10 intrinsic value, plus we would still have the time value remaining. However, gaining $2 and risking $4 does not seem like a very good bet. So we can see why it's tough to be short the overall market, and if you're going to own OTM puts you have to be right either a high percentage of the time, or you need to expect a big decline when you are right. Options are often met for short term trading of individual stocks.

Option trading can be difficult and being bearish can be difficult.

Thursday, June 3, 2010

How To Win by selling stocks and being bearish when the market stays flat

Inverse ETFs are actually not the way to go if you're bearish. The trick is to know which stocks to buy, and which stocks to sell. Ha, I lied, the real tricks are in betting against the obvious. Think about it, the game is rigged so a casino wins, why not become the casino rather than be a player. If you trade back and forth with a group of people and you buy and sell stocks a million times everyone goes broke and the stock market brokers win. Buffett teaches you that buying stocks and tradin them constantly is a way for 99% of people to lose money, .9% to basically break even, and .1% to do really well. However, fees, taxes, expenses and difference in bid/ask price along with brokerage fees and such can be the death of you. If you are simply trading stocks you are speculating. So what's the solution?
You can use income strategies.

The mildly bullish income strategy is covered calls. You own a stock and you sell calls against it. You still are at risk if the stock goes down, but you are given a premium which you instantly can invest... Overtime if the stock remains relatively unchanged, you still collect the premiums and those add up. You are basically rewarded when people buy calls to speculate. You are guarenteed the premium, and the premium is the amount the option trader is willing to risk in order for bigger gains. You sell the dream of bigger gains like the casinos do, and you receive a slight edge that adds up over a period of time. The problem is you have to own the stock long enough so that the calls can be constantly written off to pay for the stock, and the stock has to maintain enough value so you can continue writing calls at around the same price.

The mildly bearish strategy is to short stock, and sell puts against your short position. This is where you are still at risk of the stock going higher but you constantly receive premiums in the same way the covered call strategy works.

Neither of these strategies work that well in my opinion. The reason is, if a stock goes higher you miss the gains, and you constantly have to pay fees anyways. Although you may make a profit beyond what you pay for the fees, it's hardly worth it.

So now we have another strategy, and that's to sell etfs that don't work.
Leveraged ETFs are going to provide income based upon the inverse of the daily return. This basically guarentees that it will lose value over time.
Look at FAZ, or SRS or QID. All these are leveraged inverse ETFs. Shorting them would be a bullish strategy. However, shorting leveraged ETFs like URE, QLD, DDM and others is a bullish strategy. The trick is to short both of them, leave enough cash in case the difference between the bid and ask goes crazy and liquidity becomes a problem, but short slightly more of the leveraged long funds if you're bearish, and short slightly more of the leveraged inverse funds if you're bullish. If you're neutral short them both.

Owning puts works as well, but you do lose value over time when you own options. The trick is to mitigate the risk of buying an option by selling one at a different strike price. You own a long term option that loses less value over time than a short term option, and you sell a short term option. Then you sell your longer term option when a fair amount of time runs out as the time decay increases exponentially over time. So this strategy can work. But you can also sell calls to pay for the puts, but that takes on added risk. You can trade both inverse and regular ETF options as well.

For example. You are bearish on real estate. You own puts in URE because you know that is a better long term bet than calls in SRS. At the same time, you sell puts in SRS. You also can own a call in SRS and sell a call in URE. But this gets complicated, tricky, and options and bearishness is usually not for most investors. Actually it's probably too much risk. You will have to trade at your own risk and stuff and make sure you manage your money so as you can handle the risks. That's another story though. For now learn how to sell stocks, short stocks, buy stocks, and make good decisions.

By the way, I found an awesome site called stock trading investments, it has tons of great info, although I'm not sure why, but some of the posts are not nearly as good, but the ones that are, are certainly worth sorting through the ones that are not to find the good ones. I say check it out, because it's most definately worth it if you have the time. Either way, I suggest you find a site like Zacks.com or yahoo finance as well, read up and get educated I prefer stock trading investments though as the site is better and specific to mostly stocks.

Tuesday, March 16, 2010

Get your bear on

Although I've been bearish recently, I've still been winning. How? Dow/gold baby.
Dow/gold has continued to trend down. so while dow goes up, gold goes up more.
Silver goes up....
When the market is tough, you can still win when trading against the market.
I don't have time to explain it.

Friday, September 16, 2005

What this blog is

This blog is a bear market blog. It is for talking about buying stocks in a bear market.
Or better yet, selling stocks and buying etfs.
Inverse etfs
gold etfs
silver etfs
bonds etfs
and various others.

that's all for now.