Stock markets continue to rally. Bond markets are nervous. Options expiry time brings some surprising assignments and some handy profits on stocks that just want to go up. Hedging trades cost but that is what insurance is for - insurance. I do find a way to reduce the cost of insurance.
Portfolio News
Market Rally
US markets continued to rally on positive news from China discussions.
The first headline has a note of caution that bond investors may be seeing a recession coming. The stock markets are feeling good about Federal Reserve, progress on trade discussions and US growth. Bond markets are not buying the story on growth rates.
I did get an email from Scott Grannis, the Calafia Pundit, sharing his data driven view. He puts a lot of weight on the state of swap spreads - not concerned is he just yet.
I'd characterize the market and the economy as in a holding pattern: fundamentally healthy but still worried about the future. Animal spirits are on a tight leash until it becomes clear than global disturbances are being correctly dealt with. All eyes are on Trump and Xi and their upcoming meeting
http://scottgrannis.blogspot.com/2019/02/mixed-signals-put-market-in-holding.html
More concerning are his views on Europe again looking at swap spreads
Chart #1 compares 2-yr swap spreads in the US and Eurozone. Here we see that swap spreads have been extremely well-behaved in the US, trading within a normal range of 10-30 bps for most of the past 5 years. This is a clear sign that the financial fundamentals of the US economy are sound: systemic risk is low and liquidity is abundant. The Fed has not made any move that would disturb this. The Eurozone, in contrast, has been struggling with above-average systemic risk and liquidity shortages for the better part of the past 3 years, even as many Eurozone bond yields trade in negative territory; low interest rates are not necessarily stimulative. Eurozone yields are low because growth and opportunity are in very scarce supply.
And then across to Industrial Production. The slip in European industrial production is of some concern especially if we see a another spike in European swap spreads - not there yet is his view but worth watching.
http://scottgrannis.blogspot.com/2019/02/us-vs-eurozone-comparisons.html
Bought
Lam Research Corporation (LRCX): US Semiconductors. Jim Cramer added to his core holdings. I followed suit. See TIB364 for the updated discussion on semiconductors and LRCX
Tilray, Inc (TLRY): Canadian Marijuana. Averaged down my entry price in one portfolio
Aurora Cannabis Inc (ACB.TO): Canadian Marijuana. Continued to add small parcels in two other portfolios.
Caterpillar Inc (CAT): US Industrials. Industrials have been a strong beneficiary of the improved sentiment about the China trade talks. I averaged down my average price in one portfolio.
BlackRock MuniYield Quality Fund III, Inc (MYI): US Municipal Bonds. With the Federal Reserve softening its stance on interest rate hikes, I added this municipal bond stock to one portfolio and averaged down my entry price in another. This trade helps to fund dividend payments on short interest rate stocks (specifically iShares 7-10 Year Treasury Bonds (IEF) and Utilities Select Sector SPDR ETF (XLU))
Sold
3 stocks were assigned on covered call trades.
CVS Health Corporation (CVS): US Healthcare. Stock assigned on covered call in 3 portfolios. 5% profit since January 2019. I will buy the stock back and continue writing covered calls. Price move made to reach strike was 4.7%
Roku, Inc (ROKU): TV Streaming. Stock assigned on covered call. 17% blended profit since June 2018 and January 2019. Price move made to reach strike was 12% which surprised me. The question is should one buy back in and if so at what level? Quick update on the chart since Roku listed. Price has made it about 40% of the way back from the lows to the all time highs. Earnings are due on February 22 and we have seen wild price swings up to 20% either way on prior earnings.
Cisco Systems, Inc (CSCO): Network Software. Stock assigned on covered call. 7.7% profit since December 2018. I remain exposed to Cisco through 45 strike call options and a 40/50 bull call spread. Price move made to reach strike was 6.1%. The question is should one buy back in and if so at what level? A quick update on the chart which shows the open call option contracts which are both in-the-money.
Price is operating somewhere between the green and the pink arrow price scenarios but running more steeply. This certainly shows the 40/50 bull call spread hitting maximum profit and the 45 strike call looking a chance for 100% profit. I must say I would be very happy buying Cisco at 40 and maybe even 44/45.
Texas Instruments Inc (TXN): US Semiconductors. 5% profit since March 2018. Stock sold to switch into LAM Research. See TIB364 for the updated discussion on semiconductors. As I did when I sold Analog Devices (ADI) and switched to Lam Research, I switched from a laggard to a leader.
Texas Instruments (orange line) has tracked the sector (SOXX - black bars) and is well ahead of Intel (INTC - red line). Chart goes back to when I first reinvested in semiconductors. Lam Research (LRCX - pink line) has shown a willingness to separate from its industry.
Hedge Trades
SPDR S&P 500 ETF (SPY): US Index. I kept working my way through Hari Krishnan's Hedging book.
He aims to make his hedging trades cash flow neutral if he can. The way he does this is to buy a ratio spread. To protect the downside he would buy a put option at his first strike and then sell enough put options at a lower strike price to cover the premium for the bought leg. Now this does open up exposure to take delivery of stock which is not covered by the bought legs. In the event of a calamitous market collapse, this is an uncomfortable place and needs to be managed closely.
Looking to expiring hedging trades, both sets of hedge trades on SPY and Nasdaq expired. In one portfolio, this brings realized net cumulative hedging cost to $511 = 0.092% of total portfolio value. This is acceptable. Had I used ratio spreads, this percentage would have been lower BUT I would have been strongly exposed in the big selloff. As it happens, the rally since then would have recovered that exposure fully. The challenge is the next selloff could be the start of the next market crash.
Invesco QQQ Trust (QQQ): Nasdaq Index. Hedging trade using 147/140 bear put spread expired worthless with price closing at $171.94.
SPDR S&P 500 ETF (SPY): US Index. Hedging trade using 241/233 bear put spread expired worthless with price closing at $277.37.
Expiring Options
iShares US Real Estate ETF (IYR): US Real Estate. Rolled out strike 74 put option expired worthless. Federal Reserve softening stance on interest rates propelled real estate forward. Trade never looked like going in-the-money.
VanEck Vectors Rare Earth/Strat Mtls ETF (REMX): Rare Earths. Strike 24 call option expired with closing price at $14.89. China tariffs and softness in lithium markets smashed this trade idea.
iShares China Large-Cap ETF (FXI): China Index. Rolled out 37.5/35 bear put spread expired worthless with closing price at $42.63. Progress of China trade discussions put a solid floor and foundation under China stocks.
Alphabet Inc (GOOGL): Short strike 1100 put expired worthless with price closing at $1119.63. This was an earnings trade idea from CNBC Options Action predicated on a muted response to earnings announcements. This is exactly what happened - markets did mark Alphabet stock down but not enough to take price below $1100. Lowest close after trade set up on Feb 4, was $1102.12 though price did trade below $1100 on two days. It is a good thing that options are seldom exercised before expiry as I would have had to buy $110,000 worth of stock on exercise.
Income Trades
Of the 14 covered calls written, 5 were assigned (3 on CVS, CSCO and ROKU). Two traded above sold strike for part of the month (FEYE and EWT) but pulled back below before expiry.
I did write naked puts on 3 stocks during the month. They all stayed above the sold put strike.
McDonald's Corporation (MCD): US Fast Food. Strike 165 short put option. With close of $179.97, price stayed well clear of the $165 strike I sold this option. Nice income play on a stock I would be happy to buy at $165.
Honeywell International Inc (HON): US Industrials. Short strike 125 put expired worthless with price closing at $153.32.
FireEye, Inc (FEYE): US Cybersecurity. Short strike 17 put expired worthless with price closing at $17.23. FireEye had a volatile month. I had written a strike 18 covered call which had price needing to move 12% to pass the sold strike. Price did exactly that ahead of earnings. I wanted to position myself to buy the stock back if it fell on earnings and sold a 17 strike put. Earnings guidance disappointed and price dropped well below $17 to a low of $16. I resisted the urge to buy the stock at that level as I figured I would be exercised at $17 anyway. As it happens price closed at $17.23 taking it to the middle ground between the low strike and the long strike - I get to keep both sets of premium.
Cryptocurency
Bitcoin (BTCUSD): Price range for the weekend was $119 (3.3% of the low). News of the withdrawal of the Reality ETF did not hinder markets with price making an engulfing bar on Sunday and following up to take out the spike high from 10 days ago.
We now have a higher low reversal followed by a higher high - that wants to go higher. Do not be surprised to see hesitance at the next high of $3774.
Ethereum (ETHUSD): Price range for the weekend was $15 (12.6% of the low). I did write in TIB364 that Ethereum was more decisive - it showed its true intent with two strong daily moves.
When I checked prices this morning, I saw that price on Kraken had passed $125 which is where my take profit target was. My IG Markets account was not showing that level and I moved the take profit target above the price showing to $129. That target was hit and trade closed for $12.14 per contract profit (10.4%). It has been a while since I scored a profit in this account on crypto trades.
CryptoBots
Profit Trailer Bot One closed trade (1.70% profit) bringing the position on the account to 5.71% profit (was 5.69%) (not accounting for open trades).
Dollar Cost Average (DCA) list extends to 6 coins with XLM and EOS joining. All coins have made one level of DCA.
Pending list remains at 12 coins with 0 coins improving, 2 coins trading flat and 10 worse.
Days that ETH rises hard are never good for altcoins - takes a few days before buyers buy into the positive news more widely than BTC and ETH.
PT Defender continues defending 11 coins with one successful defence of XLM. I identified the missing coin - QTUM - somehow it has fallen off this list probably as a result of fork activity or problems on the exchange. Fixed now.
New Trading Bot Trading out using Crypto Prophecy. No closed trades.
Currency Trades
Outsourced MAM account Actions to Wealth closed out 8 trades for 0.25% losses for the day.
Cautions: This is not financial advice. You need to consider your own financial position and take your own advice before you follow any of my ideas
Images: I own the rights to use and edit the Buy Sell image. News headlines come from Google Search. Calafia Pundit charts are credited below the charts. All other images are created using my various trading and charting platforms. They are all my own work
Tickers: I monitor my portfolios using Yahoo Finance. The ticker symbols used are Yahoo Finance tickers
Charts: http://mymark.mx/TradingView - this is a free charting package. I have a Pro subscription to get access to real time forex prices
February 15, 2019