Markets I Trade: February 26, 2019

In my non-registered account, I am developing my trend following strategy continuously. I don’t pretend to have all the answers. I am sharing this ongoing learning journey with you in this series.

I am always exploring new ways of trading, new markets to access, and better control of risk and opportunities. My main goal is to avoid large losses while achieving reasonable returns over time. I try to focus on trades which I believe have good reward-to-risk ratios.

You will see me trade index products, currencies, and commodities primarily with futures contracts and LEAPS options for maximum capital efficiency. I try risk small amounts of capital with each trade targeting high return multiples on that risk.

IWM: LEAPS Options

Source: StockCharts.com

I purchased IWM $160 call options on January 15, 2019 when IWM was trading at approximately $143 per unit. With the recent advance of U.S. Small Cap stocks, my stop has moved past purchase price and my options are nearly at-the-money.

IWM is in an overbought range at this point. At some point, the buying should relax allowing prices to drop. IWM has had barely a few down days in the past two months. As I stated last week, I am expecting the price is likely pull back somewhat in the coming weeks.

EEM: LEAPS Options

Source: StockCharts.com

I purchased EEM $45 call options on January 15, 2019 when EEM was trading at approximately $40.50 per unit. EEM has moved up in price since my purchase and my stop is set at a little under $40.

EEM had a moderate pullback at the beginning of the month, but is now moving higher. I am looking for the price to move strongly past the $43.50 level to indicate a healthy continuing uptrend.

EWZ: LEAPS Options

Source: StockCharts.com

I purchased EWZ $50 call options on January 25, 2019 when EWZ was trading at approximately $44 per unit. Since last week we have no seen a higher high, so I'm holding my stop level at a little under $40.

While EWZ does seem to be grinding its way higher, it is certainly not a very strong uptrend at this stage. I am waiting to see a move past $45.50 over the coming weeks.

GLD: LEAPS Options

Source: StockCharts.com

I purchased GLD $125 call options on November 19, 2018 when GLD was trading at approximately $115.65 per unit. This has been a very profitable trade for me; my stop is set a little under $122 per unit right now.

GLD has been in a textbook uptrend since my purchase. There are small pullbacks on overbought readings with continuations to higher highs that follow. There is little not to like about this gold move right now. I'm looking for GLD to break past $127 in this next move.

VXZB: Options

Source: StockCharts.com

I purchased VXZB $20 put options on January 16, 2019 when EWZ was trading at approximately $20.40 per unit. This is a volatility short trade that I made following the volatility spike we saw in December. So far the trade has nicely moved into profit.

For my stops, I track the more responsive VIX Index and VXXB ETF which both do not translate directly over to values in VXZB. At this point I would look for VXXB to spike above $40 to close this trade.

KWEB: LEAPS Options

Source: StockCharts.com

I purchased KWEB $50 call options on February 20, 2019 when KWEB was trading at approximately $45.10 per unit. Since my purchase, the price of KWEB has increased to $46 so my trade is in profit with a current stop set at $39.40.

KWEB is a Chinese Internet Index ETF that got absolutely hammered in 2018. It provides exposure to Chinese-based tech companies like Alibaba and Tencent. I would consider KWEB to be a concentrated, higher risk bet.

DXJ: LEAPS Options

Source: StockCharts.com

I purchased DXJ $55 call options on February 22, 2019 when DXJ was trading a little under $51 per unit. My initial stop is set at $47.60 per unit.

Like many other equity markets, Japanese stocks are setting a pattern of higher lows and higher highs since the end of December. We'll see if this pattern continues over the coming months.

Silver: Futures Contracts

Source: StockCharts.com

I purchased Silver futures contracts on December 20, 2018 at approximately $14.83 per ounce. Silver has moved up in price since my purchase and my stop is set at $15.10 per ounce.

This past week, silver got held back again at $16.20 per ounce. While it's too early to tell if this is a top in the current uptrend, it would be important to see silver move past this number for the uptrend to hold.

Brazilian Real: Futures Contracts

Source: StockCharts.com

I purchased Brazilian real futures contracts on January 3, 2019 at approximately US$0.267 per real. The real has strengthened slightly against the dollar since my purchase. I have my stop set at US$0.253 per real.

For a continued strengthening uptrend, I am looking for the real to move past the $0.275 level that we saw at the end of January.

South African Rand: Futures Contracts

Source: StockCharts.com

I purchased South African rand futures contracts on January 25, 2019 at approximately US$0.0731 per rand. The rand has weakened a bit against the dollar since my purchase. I have my stop set at US$0.0692 per rand.

The rand actually tested my stop this past week, held the price, and moved back up. I will look for the rand to move back to those January highs. If you look at the chart above (inverse of the rand value), you can see a clear pattern of higher lows since last September.

At this point I've basically exhausted all of the long equity ETF positions that I would be interested in pursuing. I believe I have relatively broad exposure to all the major equity markets except for European stocks. I am still looking at some currency pairs to add to my positions.

Comments & Questions

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6 Replies to “Markets I Trade: February 26, 2019”

  1. Daren,

    Appreciate you sharing this series on a more frequent basis – very informative and interesting.

    Question about option value to ensure I am understanding correctly. Let’s take your GLD position as an example and presume you only purchased one option contract. If you exercised the option at the time of writing the value would be: ($125.50 – $115.65) * 100 – option premium paid – any commissions paid. Is that correct?

    Also, if you hold a stock or ETF option for a security that pays a dividend do you receive the distributions monthly or quarterly as you would if you actually bought the security traditionally? Or is it handled differently?

    Thanks.

    1. Daren (Editor) says:

      The procedure would be correct if I executed the option as you say. For example, if I hold a $125 call option and the unit price is $126, with one contract I could buy 100 units of GLD for $125 per unit. I cannot execute the option if it is not in-the-money though. Ie. I wouldn’t buy units for $125 via the option contract if I can buy them for $115 on the open market.
      Options holders don’t collect dividends. Instead, the value of any distributions is factored into the price of the option. For example, lets say ABC pays a yield of 3 percent and DEF pays a yield of 1 percent per year. If I buy an option with an expiry 12 months down the road, provided all other factors are the same (unit price, strike price, volatility, overall return, etc.), the option for ABC would be a bit cheaper to compensate for the higher dividend. Or, in other terms, DEF would be a bit more expensive because more of its return should be reflected in unit price appreciation.

  2. So sorry if the unit price is $126, is your profit component ($126 – $125) * 100 as 125 is the strike price of your contract, or is it ($126 – $115.65) * 100 as that was the unit price when you purchased your option contract?

    1. Daren (Editor) says:

      It would be: (Unit Price – Option Premium Paid – Strike Price) * 100 for each contract. But that’s only if you exercise the option. You can also sell the option back into the market to capture the current premium value. This could be a better choice if there is still a fair of time remaining before the option expiry, or if volatility expanded.

  3. In that case my initial calculation was incorrect? Using your formula, and one GLD contract at the time of writing would be: ($125.50 – $0.70 – $125) * 100. But that can’t be right as you wouldn’t even be in the money yet but you said the trade has been very profitable? What am I missing?

    1. Daren (Editor) says:

      Since I haven’t exercised the option, it might be easier to simply look at the option premium value for GLD200117C00125000 for the duration of this trade.
      https://www.marketwatch.com/investing/fund/gld/option/GLDA17203125000

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