Using Decay in Leveraged ETF's to Make $$ All the time

FAS and FAZ are 3X leveraged Exchange traded funds that are meant to track the Russell financial index (RIFIN.X). Because they are rebalanced daily, Direxion recommends that they be used only as day trading vehicles. While I agree with this premise of Dixexion, it might be hard for all traders to employ a day trading strategy because of the $25000 requirement. Another common idea proposed is to short both FAS and FAZ and hold them short while gaining profits over time with the decay. But you need a large capital reserve for that in your account and it is highly risky and can cause margin calls. So what to do ?? Here I propose..

a slightly different strategy that takes into account the volatility in these ETF's and makes a you good bit of money, while at the same time limiting your downside risk, offering you additional leverage and a great boost in confidence when you look at your portfolio. However to know this strategy you would need to know some basic things about charting, technical trading and most importantly options, and have option trading capabilities in your brokerage account. However, you need only simple privileges like buying calls and puts and covered calls. Options do carry a lot of risks, but the risks are about as much as the risks in these leveraged monsters FAS and FAZ.

How is that possible? Thanks to the wonderful book on Options by Jeff Augen, a master in Options trading, I realized the power of options (sorry for sounding like an informercial). But at the same time I did not get carried away. I used a combination of covered calls, naked calls and naked put option strategies, and deployed them using momentum when the market was in my favor (selling covered calls) and as contratrian when the market was against me (buying calls when stock is falling; buying cheap puts when stock is rising).
I would like to thank my friend Nishant for advice on covered call strategies. If you are more interested in options trading you could also check out this book on trading at Opex.

So what is a learning trader to do.
1. Have patience
2. Have capital ready
3. Be quick to jump into a contrarian position once you feel that an ETF is oversold based on RSI on a 1-2 day chart interval, looking at 15 min interval points.
4. Be willing to take only small capital risks, but be willing to lose all the capital at opex. (isnt that the standard risk statement given with options anyway?)

So anyway what did I trade and how did I do?
I traded options on UYG (covered calls)
UYG basis 2.9, sold $3 calls twice, let it expire when UYG was down in the dumps.
Sold $3 call once in late March, covered when the volatiliy swung the option premium to 50% less.
Then sold again when it ran up and got divested of my UYG stock at Opex because it remained above 3 at opex.

After that I have mainly traded in FAZ calls. I made several small profits but I am getting my aZZ handed to me on my FAZ 12.5 May calls, losing almost 100% of the 250 dollars I placed into.
However I am recovering a bunch of that loss already through FAZ June $4 puts and plan to add more of $3 and $2 puts for June and July, which should put me in good positive.

FAS calls, I missed getting into $11 May calls when the ETF was at 8.40, biggest regret yet!!

Anyways Overall I have made over 65% net on my capital in ETF options. I have had losses without which I would be up even more, but then losses are part of trading, and I regret not getting out sooner from those FAYEV calls.
I am way cautious now, and almost all into FAZ puts because I feel the decay will be strong on the FAZ side for sometime now.

ALSO THE KEY MESSAGE TO TAKE HOME IS THAT DO NOT BE TOO GREEDY and HOLD ON TO YOUR PROFITS TOO LONG. Play the Volatility to your advantage!!!

Equity Options
BMY calls. Made over 80% gains. Now sitting on June calls looking for some upside.

JAVA: Made some money on the stock, sold soon, but reinvested the profits in May $9 calls. Proved correct when Oracle made takeover bid. Promptly sold SUQEA calls for 0.30 cents (basis 0.12) to good coin.

Satyam Computer Scam 2008 - 2009

Happy New Year 2009 everybody. For Satyam (SAY) shareholders this new year does not look happy at all. The chairman of the company came out with a confession letter yesterday detailing how he kept the profit books cooked for several years at the company.

It is sad to hear to this and your blood will boil if you happen to be a shareholder of Satyam, either in the Indian markets or the ADS listed on NYSE (SAY).

The auditors (PWC) are definitely getting chastised by many people, but now the board members will also be clearly under scrutiny. More details are emerging too, ranging from missing bank statements, to the real meaning of the insider transactions (sales of shares) in Sep 2008, by top mgmt.

While some say (sorry) that this will tarnish India's shining image of growth and affect outsourcing, I feel that a knee jerk reaction would not last long to affect business with India. What might really happen is a closer scrutiny of the entire business model in India and a consequent improvement in corporate governance and a healthy skepticism at profit bubbles.

What really caught my eye was this phrase from the confession:
"It was like riding a tiger, not knowing how to get off without being eaten" (link to the scanned letter)

There you go, he has himself given suggestions towards the kind of punishment that may be meted out to him. Get a tiger (man-eating or non man-eating, Indian or Siberian), find a forest and then set him on the tiger and of course, track him with a webcam attached to a bird. J/K, but you have to have a small chuckle at the guts of this guy (R. Raju) to in giving analogies when talking about billion dollar losses.


If you want to follow more discussion on SAY, you can visit some popular South Asian blogs - Sepia Mutiny and Indian National Interest.

Zecco Stock Brokerage and Free online trading

If you have done your due diligence on Zecco.com and are ready to sign up with them, THEN EMAIL me at naridon@yahoo.com before signing up . I will refer you and also tell you about the cut.

This is not endorsed by Zecco, I am just doing it as a goodwill measure for a short time only. This offer might removed from this site anytime if Zecco pulls out of the underlying referral promotion (through which I hope to fund this reward, hehe)

Zecco, the discount online stock broker that offers "10 free trades/month" if you maintain $25000 or more in equity

Stock trading is risky business, the capital is yours and at RISK. Invest only money that you can lose. Take profits easily, cut losses even more easily.
You yourself are responsbile for your money and investment decisions, no body else is the world is responsible for that, including OPEC, Obama, Putin, Pelosi or Palin. I decided to ignore other key names in politics because they don't start with O or P. Also if you join Zecco you are doing so at your own responsilbility and aware of stock market risks as well as the fact that nothing is risk free in today's world. So this is not a forceful recommendation, merely posting some news that I saw about Zecco. Best of luck.
POST ENDS HERE

Stock Market on Monday gains-in-the-East

The Stock Market on Monday, How Will it Pan Out - like last week or like Friday? Or will it be an inverse of Friday's opening behavior?
i.e will it rise fast and then give the gains away?
Reporting time at New York time: Sunday, Oct 12, 2008 9:20pm
(in the Eastern part of planet Earth: Monday, Oct 13, 2008)
- Nari, Soundarrajan. Blogger.

The Latest News coming in from the Eastern parts of the Globe indicates a positive trend in the markets right now. Futures markets in bloomberg also indicate a positive trend

DJIA futures are up 280, no 260 pts as I write this.

Turning our attention back to the "East"...

The New Zealand Stock Market's primary index is up 1% in the afternoon, after falling initially in the morning.

"After starting the day lower, the New Zealand market reversed early losses and was up over 1 percent in afternoon trading.

The benchmark NZX 50 started the day 20.734 points down at 2784.58, after falling 5 percent last Friday.

By early afternoon, the index reversed early losses, to move into positive territory, up 40.232 points, or 1.4 percent at 2845.541."

Reproduced from source: http://www.nzx.com/news/markets/4725582

AUSTRALIAN MARKETS are up close 5% in early trading. The major bounce has been helped by positive moves in bank shares.

This is mostly in response to the Aussie Prime Minister Kevin Rudd's guarantee that the Aussie Federal goverment would guarantee deposits of ANY SIZE in Australia for the next three years.
For more on the news follow this link.

You can imagine what kind of smart money + foreign institutional money that kind of safety net is going to bring in especially when you see negative yields in US and bank failures left and right.

Also I heard (saw on Japanese news feed) that UAE is guaranteering bank deposits. European leaders have pledged support for banks too. S. Korean and Singapore markets are also up. (news from BBC)

Hopefully this might move some positive money sitting on the sidelines to come in and also probably trigger some short covering - both which could lead to a quick upside gain in blue chip stocks and some key emerging market stocks. I am not giving any stock tips here because it is crazy out there and I have no clue just like anyone else. However, I am long on Bristol Myers (BMY) and I would stay long in a company I think is blue chip: ABB (any one agree?).

Update: Just found out that Japanese markets are going to be closed for some holiday -not Columbus day. I am also not too happy that the Driver License office in PA are closed on Sat for
Columbus day -and Monday is their usual closed date.
Update 2: Indian markets gained by about 4-5 % on confident measures by the Indian finance minister, who actually quoted the gains of East Asian markets to seek confidence and calm, duh!
Disclosure: Other joker stocks that I am long on are NAT, NCC, CHKE and CSR (China). I am not short on anything.

AIG Post Bailout Spa Scandal Explained

Can you guess where the taxpayer promised $85 Billion to AIG is being spent? I cannot. But I saw this news article on yahoo, an excerpt from which says:

As of Sept. 30, AIG had drawn $61 billion on the credit facility, of which about $54 billion has gone toward its securities lending and AIG's financial products area.

The rest of the money has been for other liquidity needs amid an "unprecedented" freezing of credit markets, Chief Executive Edward Liddy said last week.

Now, we have all been beaten to death with the St. Regis luxury spa scandal news, so I won't joke about resort spending here. In fact we are talking only $440,000, which is a mere 0.00052% of the bailout amount offered to AIG. Come on people, stop complaining so much about an event at a posh, luxury resort.

It was not a gala bash to celebrate AIG's survival from bankruptcy. It was an event to treat insurance agents.

Wait, what are you saying: 440, 000 can provide for 2-3 comfortable homes, maybe the college education of 2 young adults, 10-20 cars depend on what you pick.

Disclaimer: Ok, I will make one thing clear. I am here to just join the bandwagon and bash AIG, because, it is fun, right now.

It is a faceless corporate entity, which by very definition, protects all the management and employees from any liabilities for conduct that cannot be clearly proven as bad, for the lack of a better legal term. So there, I am not bashing people, I am just bashing a 'corporation'.

AIG - POST BAILOUT Spending Excesses

Now comes news that executives at the government funded, taxpayer supported American Insurance Group (AIG) have managed to treat themselves to close to half million ($440, 000) dollars of spa treatments in a California resort.

This has happened a WEEK after the $85 billion bailout. AIG stock has taken a beating (and crashed) and then bounced back, but actions like these are not good for any left-over shareholders or the taxpayer or anyone holding insurance with AIG.

Fox Business also has put up the copy of the bill (a scanned copy as a pdf file) here.
The news article says that the executives who were at the resort were from the profitable divisions of AIG, but still...

Hello, who is the CEO now, Henry Paulson/president Bush, Neel Kashkari.. who is it?
Or is it you, john/jane doe taxpayer?

The link to the fox article: http://www.foxnews.com/story/0,2933,434223,00.html
I am neither long nor short on AIG common stock or any derivatives.

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More on the SEC and Short selling ban

I came across an article on Yahoo finance which discusses the effect of SEC's sudden ban on (non market maker) short selling. Instead of reducing manipulation or preventing naked short selling, the SEC's ban has more effects than the required stability. Plus, the ban is only on financial and somehow related company stocks.
An excerpt:

From www.ETFguide.com
Ignoring SKF Tipping-Point, SEC Slams Free Market
Monday September 29, 12:05 pm ET
By Max Rottersman

HANOVER,NH (ETFguide.com) - In nine short months, investors rushed $3.3 billion into UltraShort Financials ProShares (AMEX: SKF - News). Any reader of the best-selling non-fiction book The Tipping Point would have come to a natural conclusion. Investors saw trouble.
But not the SEC. They so badly regulated the financials that rumors sent volatility off a cliff. Injuring long-term confidence in free markets, the SEC banned the short-selling of 799 stocks. The government decided who would win and who would lose on September 19th.

Unforseen effects began to ripple through the ETF market. There were failures to maintain a small spread between ETF prices and NAVs. There were liquidity problems; shares could be redeemed by APs, but not created. Counter-party risk raised its ugly head. Read more at

-- Post Ends Here ---

Short Selling Ban

Update: An official from the SEC called me at 9:35 am and informed me on the clarifications that I had sought. Those answers are added below my questions in this post in BLUE COLOR. I will have to say that I am impressed with the fairly quick response (within 30-40 mins) by this government agency. I am happy that the response was quick, although I question the logic of the SEC's decision on banning shorting. What they should have done is merely get the uptick rule back in place, that's my personal opinion on this issue. Please read on.

Dear Chairman Cox

REFER: http://sec.gov/news/press/2008/2008-211.htm

I need some immediate clarification regarding SEC ruling 2008-211. In fact I *desperately* need the clarification before markets open today at 930 am. My question is this, the SEC has banned short selling of financial securities till Oct 2 as I notice in the ruling. Q1) Does this affect companies like General Electric (GE) (as an example) that have substantial financial sector involvement. Or does it involve only the purely financial companies?

>> Read funny note at the end on financials.

Q2) SUPER IMPORTANT: If I am short on any financial security as of yesterday (i.e not a newly initiated position but a previously held position), do I need to cover or can I continue holding that position short?


>>the SEC has not issued any guidelines on existing short positions. As long as are legally short, it is your decision alone to hold or cover.

In case I do not cover, will the SEC or the Treasury guarantee my margin position even if the stock price rockets up?

>> The SEC or the government will not guarantee any margin positions of individual investors.
What they did not add but I am saying is that, they might cover you if you are in the league of Bare Sternums or Fanny May or Fretty Mac (BSC, FNM, FRE). Names misspelled on purpose.

I am also concered if the Stock exchanges will halt trading if the rise is too fast in the indexes (they did this in RUSSIA yesterday).

>> No comments on this issue.

This email may not sound very professional, but I need the clarifications as soon as possible, at least before 930 am.

Thanks a lot.

A concerned investor

Investor in NYSE, NASDAQ, AMEX.


Phone

Currently residing in the state of _____________


FINANCIALS AS IN:
for the blog alone: purely financial companies as in the ones that just push paper form one place to another and do not add any real material value or create any goods. Companies that are just middle men, that get to hold your money for 3 business days or charge you wire transfer fees for moving your money immediately. Or companies that charge 21% interest for providing your loans more than 20 days (for purchases) or 23% interest for cash loans the moment you take them out.
END OF POST, please feel free to add comments

Merrill-instead-of-Lehman-gobbled-Bank-of-America-dividend?

Now that it is well known that Merrill Lynch will be bought by Bank of America (contingent to a slew of conditions), the big question for BAC shareholders would be: 1) How much would this dilute current stockholder's positions? 2)Would this affect the dividend which Bank of America has been paying regularly and reaffirmed recently? What exactly will happen in the near future (1 week?) and....
UPDATE: Now there is definitely talk of BOFA's dividend cut. Check it out in this interview.
What would happen in the medium term (1 year?) and in the near long term (4-6 years?) - when it comes to the health of these financial institutions. This "crisis" which Wall Street still refuses to call as "panic" is mostly one of its own making. Printing money does not make finances strong, nor does undue leverage make any transaction sound and secure. But this has been pretty much the case with most of the mergers and acquisitions proposed and guided by several of these investment banking firms.
I am not expert on these topics, but it had been my grouse to see the easy availability of large money at low interest rates to big banking firms. Now that is it coming back to them, these firms are all crying and hoping for more bailouts. What is worse of course, is the plight of the middle class "investor" who will be hurt even more by the fall in stock price (or wipeout) due to large margin calls - if someone had been over risky to buy this on margin. I was long BAC sometime back, but sold out for a 2% profit on my capital because I just was not sure which way things would go. Of course my profit had already gotten wiped out by an improperly positioned LEH short, back when it was trading at 23-24. Hindsight is always 20/20.
Disclosure: I do not have any position in LEH or BAC or MER.