Friday, February 5, 2010

Bookkeeping: Selling 1/3rd UUP March 23rd Calls

We bought a batch of Powershares DB US Dollar Bullish ETF (UUP) Calls one week ago.  [Jan 29, 2010: Bookkeeping - Long US Dollar with ETF and Calls]  Due to volume issues with Investopedia (which tracks my trades) it is difficult (nearly impossible) to trade lower volume instruments, so I had to buy the March 23 Calls, when in a real world environment I said I'd buy the March 24 Calls.  (The 23's had much more volume last week) Obviously both have run up in that time, after taking a hit Monday and Tuesday.  As I wrote last Friday:

Currency is generally "slow money" not "fast money" but I love the technicals on the dollar here.

I am going to go, for the second time in the past few months, long the dollar - this time via both UUP ETF and UUP Calls. I am putting 3% into the ETF, and 4% into the calls - we will use March 23's (UUPCW) - in the real world I'd most likely be using March 24's (UUPCY) as they will provide much more upside as a % gain, but the volume in the 23's is much higher so it's easier for me to move in and out of, in the simulator I use to track my moves (which does not work well in lower volume instruments). The 23's are trading in the low .50s while the 24s are around 14 cents.

I now have a 36%ish gain in a week on the calls, so I am going to trade around a core position (I plan on remaining a dollar bull until the chart tells me not to be) by taking 1/3rd off the table.  I will buy that 1/3rd back on any material pullback as we saw Monday/Tuesday of this week.  There is no technical reason to sell here - the chart looks splendid

But here is the risk to bears.  The IMF (or Germany, but I believe it will be the IMF) is going to swoop in to save Greece one of these weekends.  At which points, the "markets" which love moral hazard, will react much like when the US said you can no longer short US banks, and in fact we are not going to let any other major US bank fail - the taxpayer be damned.   I expect when this event happens in Europe for speculators to rejoice and we could gap up 3%+ on any Monday.  There is no way to game that as an investor - the type of things we have to adjust for have nothing to do with investing - it is just how it will go down one of these weekends in my opinion.  Could be this weekend or 6 months from now.

So under that thinking, the "risk trade" (moral hazard trade) would go back on - the dollar crushed, Euro surge - blah blah blah.  Hence I am going to take profits along the way and I am never unhappy with 35%ish gains in a week.  These are on the March 23 Calls.  For comparison purposes the March 24 Calls I would have used in the "real world" could of been bought at 14 cents last Friday, and now trade at 20 x 23 (very wide spread) which would of been a 42% gain on the bid and higher if you could sell them at 21 or 22 cents.  Indeed that would of been the better play over the March 23rds as I predicted, and each 0.1% the dollar rallies from here the 24s will do even better than the 23s...

But we're working with what we can do in this environment; the March 23s are much more liquid. I am selling 450 of 1400 contracts (about 30% technically) bought last week at 53 cents a contract for 72 cents.

I am curious what "magical Mondays" (market up 17 of the past 19 Mondays) will bring to us next week. For now I have added back some of the puts I sold into the close yesterday, let's see if we can get one more nice selloff to end the week. (still targeting S&P 1045)  If not, we'll liquidate and go into the weekend swimming in cash.

Long UUP ETF and calls in fund; no personal position

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