From the past few weeks of trading I had concluded in a previous post that live was much better on the long side. So I reminded myself from time to time to avoid taking the short side. I thought about taking the short side in pre-market this morning when I noticed future was down so much but I was hold 
back because of past experience. In retrospect if I went short at pre-market and went long in after-market then what a great day it was going to be.
Anyway I bought Bank of America and I bought 2,000 shares at average $12.50. I not only bought Bank of America but also added more Patriot Coal (PCX) also at $6.12. My average on PCX is now $6.90. I am buying the dip. In fact I am all in already and on a small margin. I changed from the short mind to a long mind and the market changed from bullish to bearish. The result was of course I lose big. At today’s close I lost almost $2,500 today. My account balance stood at $27,107.79 which was 10% down from my initial capital.
I bought Bank of America because I was betting there would be a run up after the prefer to common share conversion. I am surprised to see someone post my link about the conversion on yahoo message board
http://messages.finance.yahoo.com/Stocks_(A_to_Z)/Stocks_B/threadview?m=tm&bn=1903&tid=1042741&mid=1042741&tof=11&frt=2.
I still think my entry point at $12.50 can make me some money in a couple of days because I believe the conversion price will be above $12.50. But I feel a bit shaky after seeing the market tanked like this today.
I am not sure if I should put today’s trading in the lesson learned category but I put it there any way. I don’t know what kind of lesson I have learned today. Probably I act too early again in the trading day. At least I put it there so that it would remind me what I was thinking when I losing big on my trades.
I am trying to make this blog completely transparent except that I don’t want to let my readers know who I really am for now. I don’t feel comfortable doing that now. I feel other than that I am pretty much comfortable to disclose any other information related to the blog. I think the readers of the blog would like to know how this blog is doing. So I feel it may be good idea to update with blog readers with that information along the way.
I started this blog on May 13th. It has been a month. The following graph shows the blog traffic for the past 30 days.
 stock traders blog traffic update |
Sometimes I am wondering if I don’t make a dim after a few years of trading how many people will still come back and read it. I was wondering what kind of value this blog can provide to readers other than providing values for myself. Well I think of one way you can get some value out of it is when I am shorting a stock and I lose money (the stock goes up) you can probably think about shorting it at a higher price for a short term play. If I buy a stock and I lose (the stock goes down) you can probably think about buying it at a lower price for a short term play. I am just kidding. But this is something you can think about. 
At today’s closing price Bank of America June 12 put and US Bank June 17.50 Put should expire without value. That means I should’ve collected the proceeds in full on selling the puts. The total was $890. But my account still show these put worth $70. I guess I have to wait till Monday for them to be cleared out.
 Put Option Positions |
As you know I started trading options just a couple weeks ago and I realize selling put options is a fantastic way to earn higher then CD rates return without taking too much risk. I want to explain it in more detail for those readers who never trade options before. A put option is the right to sell certain number of shares of stock at a fixed price on or before the option expiration day. For example if you buy 1 contract of USB July 16 Option you will have the right to sell 100 shares of US Bank stock at $16 a share on or before July 18th. Right now USB July 16 Option premium is $0.35 per share. So if you buy 1 contract you will have to pay $35. Instead of being a buyer of put option you can act as the seller. In that case you will be paid $35 per contract and at the same you will give the buyer the right to sell you 100 shares of US Bank stock at $16 a share on or before the 18th of next month.
By 18th next month if the buyer does not exercise the contract the $35 is yours. The only situation that the buyer wants to exercise the option contract is when US Bank stock is traded below $16 a share on or before July 18th. In that case the buyer of the put option can buy 100 shares of US Bank stock in open market and sell them to you at $16 to make a profit. Take a look at what is price of US Bank stock currently. It is closed today at about $17.90. So the question is will US Bank stock price drop below $16 on or before July 18th. Do you feel comfortable to own US Bank stock at $16 a share? If your answers to the two questions correspondingly are “Not likely” and “Yes I feel comfortable” then I believe it is better for you to sell put option then let your money sitting in CD.
Let’s look at the return and risk. If you sell 1 contract of USB July 16 put and US Bank stock dropped to $15 a share you will have to pay $16 X 100 = $1,600 and end up with holding 100 shares of US Bank stock. Your lost will be $1,600 + $35 – $1,500 = $65. So you will probably want to keep $1,600 cash ready to pay for the shares. If US Bank stock stays above $16 you will get $35. So the return is $35 / $1,600 X 12 = 26%. What is CD rate right now? I think 3% is the best you can find in this market. Of course 26% of return is not come out of free. You will take the risk of losing money if US Bank stock drops below $16 whereas CD guarantees your return. Ok if that is too much risk for you then you can use options with a lower strike price say $15. The premium is 0.15 right now. So you can earn $15 instead of $35 per contract. That is $15 / $1,600 X 12 = 11.25%. Frankly I think if you can get USB at $15 by July 18th you are very lucky. I am bullish on US Bank and believe it will not drop to $15 even the market have a correction.
So that is how it works and don’t forget there are transaction fees involve in trading options. Right now my account have about $30,000 if I don’t want to risk my money doing day trading I can sell put and I feel comfortably it can really make me better than CD rates of return. Anyway selling put options works for me put owning PCX (Patriot Coal) is a pain for me I don’t know when I can get rid of it. If it were not for PCX I should have come back above my original capital of 30,000. Right now my account balance stands at $29,537.36 and it is up $320.00 today
Account Balance Changes: +$320
The follow image has the equity portfolio of Warren Buffett’s company, Berkshire Hathaway Inc. I don’t remember where I got it. I kept information I got from the internet from time to time. I got this before I set up this blog and I think this is good information. This is Buffett Portfolio in 2008. It may have been changed since then.
 Buffett portfolio |
I was able to escape the fall of Verisign (VRSN) and Western Refining (WNR) but I caught the falling knife on patriot coal (PCX). If you follow my previous posts you knew that I was lucky enough to escape the free fall on VRSN and WNR. I bought VRSN at around $19.06 and WNR at around $8.18 and I was able to get out with a small profit. VRSN is now at $18.52 after falling to $17.54 earlier. WNR fall to $7.63.
I wasn’t so lucky on patriot coal. Yesterday when I set up the buy order at $7.55 PCX was still trading at above $8. It stood at that level nicely in pre-market. Since it had the secondary offering price at $7.90 I thought it would be safe to set the buy order at $7.55. I was thinking $7.50 would be the support line. The minute when the market open it fall to $7.03. I was watching it fall only could not cancel my order fast enough. Now I am stuck with it. Yesterday it was close at $7.10. I thought about increasing my bet on it but luckily I didn’t. Now it stood at $6.55. I am having that thought to increase the bet again. If you have an opinion feel free to let me know. PCX has been falling for 5 consecutive days from $9.30 to $6.55. That is 30% drop in five days.
 Patriot coal price graph |
The coal energy sector is not doing well but seems to me PCX is falling too much. Its trailing twelve months P/E 2.53 sounds extremely low to me. Anyhow I have lost more than one thousand dollar on PCX at today’s closing price. Today my sold put positions went up nicely because BAC and USB went up. I sold BAC at $12.90. So my account balance actually went up. It stood at $29,217.36
 Account balance 20090618 |
Account Balance Changes: +$409.27
Sometimes you really have to believe some of the popular theory. The option pain theory says that stock price will trend toward their max pain when option expiration day get close. I sold 20 contracts of BAC June 12 puts last week and 10 contracts of USB June 17.50 puts a couple weeks ago. When I sold the put on BAC it was around $12.90 and running up and I felt it was pretty safe. When I sold the USB puts it was at around $19.00 I felt it was safe too. But look at today’s after market BAC is trading at $12.26 and USB is at $17.74. BAC’s max pain is $11 and USB’s max pain is $17.50. So they are trending toward their max pain.
If BAC drop below $12 and USB drop below $17.50 I will probably end up buying 2000 shares of BAC at $12 and 1000 of shares of USB at $17.75. Including the 1000 shares of BAC I am already holding I would probably end up holding 3000 shares BAC and 1000 Shares of USB by the end of this weekend. I prepared for that or I have to take lose by buying back the puts. I will know in a couples days.
After I bought 1000 shares of BAC yesterday at $12.76 S&P downgraded 18 US Banks today. The news together with FedEx’s depressed earning report drag the market down. The Dow was down 30 points not long after opening. It came back up in positive territory later. Inflation was in check but it does seem to help. Bank of America dropped more than its peers. I feel I am getting slap on both side of my face. A couple days ago I lost more than a thousand dollars by shorting BAC. Now I lose again because I am buying BAC.
I think Bank of America dropped more than its peers for several reasons. First it rose substantially for the fast couple days. The higher it flies the harder it drops. This rule seems always apply. Option expiration this week also weight on price. The max pain for Bank of America June option is $11. There is a popular view that stock price will trend toward the max pain when option expiration is getting close. The view is based on that institutional traders will manipulate stock price toward max pain so that they can maximize the profit they get on writing options. Bank of America has other reason to go down because the trading price this week will determine the prefer share to common share conversion price. I believe Bank of American doesn’t want to set the price too high to dampen the conversion interest.
But As I mentioned previously I expect BAC will rise after the conversion. That’s one of the reason I am still keeping it. In addition to BAC I also bought Patriot Coal Corporation (PCX) today. I bought it at $7.55 so I lost a few hundred dollars on this one too.
My account balance is not going anywhere one month after I setting up this blog. I really hope this blog can provide values other than entertainment. I don’t know where this blog will standard a few months later but I truly hope this is a long last endeavor.
My account balance stood at 28,807.69
Account Balance Changes: -$920.30
I brought western refining yesterday and I felt I was lucky that I made a small profit on it. It was closed down a lot today. It looks like the whole independent refinery sector is bearish. See the following Barron article. I didn’t know that before I brought into Western Refining
More Misery For The Refining Story
Oil refiners have been broad-sided by dismal fundamentals. As a group, they’ve tried valiantly to retreat from higher utilization levels. But the gap between the input costs of rising crude and the dismal pricing in their end markets has left the sector in something of a limbo. Fundamentals aren’t going to improve until the demand picture ratchets back up - something that has continued to seem remote, according to analysts watching the sector.
Credit Suisse said independent refiners have done the right thing by holding down utilization, but that the effort wasn’t a long-term solution to weak margins. Demand would need to recover before participants in the market could see some recovery - a prospect that the firm suggested looked remote.
Bearish as it is Western Refining has dropped from its recent height of $15 in the mid of May to now below $8, almost 50% drop. I personally like the idea of shorting the high flyer and buy in the dip. The question is how dip Western Refining can be. Many economist suggest recession will end starting next year. Next year doesn’t look remote to me. See Roubini VS Buffet
I just created two posting categories, the Bull Thoughts and the Bear Thoughts to collect the thoughts of different authorities. Here is the first one and it is a bear one.
More Pain Ahead For US Economy
A rebound in key U.S. economic indicators masks an underlying malaise that will likely hamstring growth for many years and keep housing and banks in a rut, several top economists said Monday.
Nouriel Roubini, president of RGE Monitor, said a recovery in risk assets like stocks and emerging markets would not last, since it had been based on unrealistic expectations for a global economic rebound. “I see subpar, anemic, below-trend growth for the next couple of years,” Roubini said on a panel sponsored by Time Warner.
Housing expert and MIT Professor Robert Shiller was equally pessimistic, saying, with regards to the four-year housing downturn: “This thing is not over yet.”
Banking analyst Meredith Whitney said she was even more bearish than her fellow panelists, saying that better bank earnings would eventually be challenged by the toxic assets on their balance sheets.
I covered my 2000 shares of shorted Bank of America yesterday at $13.30 only to realize it dropped half a dollar more today. Half a dollar a share is translated into $1,000 lost. That means if I still keep the 2000 shares shorted BAC I would recoup almost all my lost. As I mentioned in my previous post my average price on the shorted position was $12.50. If you read my previous post I almost increased 2000 shares of shorted position on BAC when it was at $13.20. If I did that the average price would be at $12.75 and I would able to recoup all my lost today. The only thing is that I have to hold the shorted position for four days. If I increased my shorted position the day before yesterday on BAC at $13.70 which was the closing price that day (I had thought about that). My average would be $13.10 and I could make a very nice profit today.
I know there are too many IFs. Every time when I looked back at my lost I became a very sophisticated programmer making a lot of complex IF statements. I think this run up on BAC and the last one I experienced on Wells Fargo tell us something in common. If a stock runs up too fast and out paces its peers by 15% percent or more not because of fundamental changes and not because of the sentiment of the whole sector then it is doom to retreat. Of course to someone who shorted at $13.70 the day before yesterday there was a lot of luck for them because no one can predict the NY Empire Manufacturing Index drop so much yesterday.
So much so for retrospection. I made some profit today and became a holder of Bank America again at a much higher price. As you know I bought it at $12.06 last week only to sold it too fast. I bought 1000 shares of Bank of America closing to end of the market at $12.76. I made a lot of trades today. I brought MGM in pre-market and sold it for a small profit. I sold my Western Refining position for a small profit. I bought BAC at $12.99 and sold it at $13.10 before I bought it again at closing. At the end My account was up $309.78. The value of put position I am holding drop a bit. Excluding that the trades I did today net more than $400 profit. I expect I will eventually collect all the proceed from selling the puts. If I don’t trade for the rest of the week my account should still be up $400 by the end of the week and I should get back above my initial capital level which is $30,000.
Hopefully the data is good tomorrow and I can make some profit on BAC. BAC’s trading range this week will determine the common share price Bank of America uses to convert its prefer shares. I believe there will be great opportunity to make profit. I believe it is very likely that BAC’s price will trade above the conversion price right after it is announced (June 23rd) and before the final conversion deadline which is June 24th.So I will watch out and keep an estimate of the conversion price. I believe the investment banks will Jag up BAC price large enough to attract prefer share holder to tender their shares for conversion after the conversion price announcement.
Lets see if this is correct
Account Balance Change: $309.78
