Book-keeping

Just to keep myself honest, here's a portfolio update.

I got out of the Dec SPY 116 call for almost the same price I got in for a while ago.

Currently:

-1 AAPL 165 Jan '10 Put: sold at $15.25, now at $4.50

-1 AAPL 180 Apr '10 Put: sold at $20, now at $14.425

-1 AAPL 220 Jan '11 Put: sold at $50.20, now at $49.925

-1 $2.50 Jan 2011 C Put Option @ $1.55, now at $0.235
-2 $2.50 Jan 2011 F Put Option @ $1.28, now at $0.215

The 220 Jan '11 AAPL Put that I recently sold represents a new strategy, selling deep ITM puts. It also represents what should be my last move for AAPL for the rest of 2009 and 2010. As the other puts expire I will start opening positions in other companies to diversify as the "sure" gains from AAPL will have run their course at valuations above $220.

I don't know why I didn't sell deep ITM puts on AAPL before, but this is how I view it now. I view selling deep ITM puts as a way of buying into a stock at a discount with a set sell price. I guess that's because it's Equivalent to a covered call, but I like the put more because you don't have to pay margin interest if you don't have the cash to buy underlying for the covered call.

Keeping Commisions Low

I've taken an excursion from my trading blog diary, but I want to keep it up because I like revisiting posts to see how my trading strategy has evolved over time, with the hindsight of how the market has done.

So, I didn't end up moving to Interactive Brokers and I've kept my ThinkOrSwim account. Although $1 option trades would be nice, $2.95 from ThinkOrSwim isn't too shabby. I think a lot of individual investors don't think about commissions when they put on a trade. I have a goal of keeping commission costs below 1% of my assets every year. This would keep my costs in line with the costs associated with a mutual fund or more managed ETF. If trading costs are much higher than this, the extra risk you have to take on to get a better return to make up for the cost difference will eat you up one day. At that point your money is better off in a mutual fund.

My ultimate goal is to keep commissions at 1% of profits per year (lower than 1% of assets every year you don't have a 100% gain). And how else to do that, but to aim for the commission only taking up 1% of your expected profit on every trade!

An added reason I like selling put options is that if the option expires worthless then closing out the position is commission-free. Hence, when I sold that AAPL Jan '10 165 put for $15.25. My max expected profit was $1,525. The $2.95 commission amounts to an expense of only 0.19% of my max expected profit.

A trade that I would do with lower commissions is selling E-Trade Jan '11 $2.5 puts for $1.2. Almost 100% return on risk, but the commissions eat up 2.45% of max expected profits. To me, the broker is getting too much of my potential return and I take on all the risk! Selling at the $5 strike for $3.50 might better.

Finally Switching to Interactive Brokers

Although I am very happy with ThinkOrSwim, I think I'm ready for a little more active trading style that $1 stock and option trades at Interactive Brokers will enable.

There are many other smaller plays I have been missing out on by either not doing enough research, or just thinking it's not worth the cost of commissions at TOS. For example, buying a $1 SPY Oct put or shorting USO in anticipation of a correction.

With a little bit more of a correction I'm looking at selling the AAPL Jan '10 $150 put for $10. Hopefully, my new account will be up and running in time to catch that. Would probably close out the Oct 140 put at the same time, to take gains and leave less risk on the table in case we have another disastrous September/October.

Bought very small SPY call

I think the market is fairly priced here, and I find it harder to find good valuation plays.  I will not put my money at risk to chase these valuations, as I would be a seller with 10 to 20% moves up.  However, I will play with a very small amount of money to go along investing in the Bigger Fool strategy - buying something you don't think is worth as much as you're paying in the hopes that a bigger fool comes along to buy it off you for more.  I just bought a single $116 SPY Dec '09 call for $1.

The motive behind this move is almost identical to when I held the AAPL Jan '10 $200 call.  I just found this SPY play to be a lot cheaper.  For AAPL to get to 200, SPY will have to break 115.  It's almost the same play, but with less risk-return.

Out of CMG.B, look to buy in lower

CMG.B has been showing considerable weakness in this market correction sell-off.  I'm sold out of my small 20 share position at $78.28, taking a $50 gain.

It seems like the realization that the stock market going up can not bring the economy out of this recession, and instead of a new cyclical bull market we are seeing a bear market rally.  I'm thinking of buying an SPY put as portfolio insurance to hold onto my gains, similar to the way Trader Mark has outlined.

AAPL is showing considerable strength though...