Hand-over of Funds to another trader

As communicated verbally to all stake-holders, our chief trader has reset his life priorities and moved on to focus on other area of interests. We wish him well.

The existing funds have been transferred to Victor who is more experienced and very capable in option+share trading strategies. We are confident he will do well and will achieve the funds' goal. He will communicate with you all directly going forward.

Funds Status as of 1-Jul-09

Zero to minimal trades since last update. Chief trader tied up with personal matters. Sorry. Will try to catch up later or close out the funds.

Fund C
No trades for Fund C.
Net Asset = $21,027.
Cash On-hand = $22,477.






Fund D
No major trades for Fund D.
Net Asset = $102,615.
Cash On-hand = $102,615.
Zero positions...100% in cash.

FINAL RESULT on Citi arbitrage (Free Money)

FINAL RESULT on the arbitrage position for C (opened in 15-Apr with expiry date on 19-Jun). A total cummulative of 6,000 positions were created.

AVERAGE PRICE
Short Sell 6,000 C at $3.89
Sell 60x Jun-PUT-Strike-$5 at $2.16
Buy 60x Jun-CALL-Strike-$5 at $0.43
Net cash collected is $5.62 ( i.e. 3.89 + 2.16 - 0.43 ) per share. PUT option was assigned on end of day 19-Jun at $5.00.
Gross target profit was $0.62 x 6,000 = $3,720 (commission already net off except interest cost on short-sell).
Accrued interest is $1,132.
FINAL net profit (free money) realised is $2,588 ($3720 - $1132).

Interest charge on shorting C (borrowing shares) was $1,132 / (6000 * $3.89) = 4.85% for about 2 months. Seem very high... an annual equivalent rate of 29.1% ! Need to check on this. I thought it was 9% annual rate.

Fund D account net balance as of now is $102,860.

FINAL RESULT for QQQQ Butterfly (opened 15-May)

Original view was the Nasdaq already had a good run. Expect it to consolidate and stabilize around $33. At point of entry the risk/reward ratio was good (max potential gain was 200%). However, the tech bull continue to run and we lost.

Due to personal matter, have no access to trading account for 9 days. The exit criteria has surfaced several days ago but was not around to close it. Closed the QQQQ position today and lost about 69%. If closed earlier as planned the lost will be limited to less than 50%.

Manually closed the 3 legs one by one instead of using the Combo trade as the combo BUY/SELL spread is wide.

Bought the butterfly combo at $0.488 (i.e. 1.665 + 0.330 - 0.753x2) per contract.

Sold the combo at $0.150 (i.e. 0.01 + 0.18 - 0.02x2) per contract.
Loss is $0.338 per contract, i.e. 69% of original value.

Monthly Statement Fund C & D 1-Jun-09

Continue to cut losses on Tech stocks PUT positions... as Tech stocks continue to rally. All technical analysis pointed towards a bull market with MA-20 and MA-50 crosses stock price. Fund D had net losses. Fund C has some slight gain as the 2-year insurance PUT bets (PUTs sold on Citi) continue to gain in value due to significant decay in volatility value.

Have been out of country most of the time about 4 to 5 days each week in May. Several positions were under managed.

Fund C
Net Asset = $20,897.
Cash On-hand = $22,487.


Fund D
Net Asset = $103,745.
Cash On-hand = $135,229.

Open a Butterfly PUTs combo on QQQQ on 15-May-09

QQQQ was at $33.50. Placed order for 10 contracts on Butterfly PUTs combo 19-June at strike 31, 33 and 35 for $0.49.

Total cost is $490. Potential max loss is $490 and max gain is $1,510 approx.

i.e.
Buy 10x Jun-PUT-Strike-$31 (@ $2.16)
Sell 20x Jun-PUT-Strike-$33 (@ $1.08)
Buy 10x Jun-PUT-Strike-$35 (@ $0.49)
(Butterfly combo is always at a ratio of 1:2:1).

If at expiry QQQQ is below $31 or above $35, max loss is at $0.49.
If QQQQ is between $31 and $35, there is some amount of Gross Profit. After minus cost of $0.49, to have Net Profit the break even points are QQQQ at >$31.49 or <$34.51.
Max potential profit is when QQQQ is centre at $33 which gives $1.51.


Position management.
Normally do not hold until expiry. Take profit when it is reasonable amount (e.g. 100%) or to consider cut loss when it skew towards $31 or below.
Also consider to close positions if price of Middle Leg drops to $0.25 or lower OR if its time premium left drops to $0.125.

At expiry, if QQQQ is above $35, no action needed and all PUTs expire worhtless and we will lose max amount $490. But if it is below $35, some of the PUTs (31, 33 and 35) will get exercised. Which is the reason why we prefer to close out the positions before expiry.

Summary : we are expecting QQQQ to stay within the range of $31 to $35 from now until 19-Jun and volatility to reduce or stay flat. (QQQQ is NASDAQ-100 ETF).

Vesak Day 09-May-09

To stay calm as water when one is at the trading desk.....
No greed no fear, just a desire to win the game.

Monthly Statement Fund C & D 1-May-09

Volatility continue to drop in Apr. Have been focusing on Bank stocks and volatility play for the past few months. Switched to mainly tech stock play expecting them not to do well in general. But fund houses have been switching their weighting to Tech stocks some of which still have plenty of cash and no toxic assets like the financial stocks. It was like facing the train's headlights head-on.

Fund C
Net Asset = $19,847.
Cash On-hand = $22,497.


Fund D
Net Asset = $111,262.
Cash On-hand = $134,899.

How much margin is needed to short shares ?

Account used is from Interactive Broker.

Shorted 5,000 shares of BAC at $9.02 (SELL) i.e. about $45,100.

Maintenance Margin shown is about $25,000.

So margin is about 55.4% (i.e. 25,000 / 45,100), seems quite high.

Put in place Stop Loss order at $9.20 and Take Profit Limit order at $8.80 (target profit is $1,000).

Within a short few minutes, the position was positive in the money. Manually adjust Stop Loss order tighter from $9.20 to $8.89 to protect profit.

Wanted to sleep soon. so continue to manually tigthen Stop Loss gradually and it got triggered and closed out at $8.86 (BUY). Collected profit $760.50.

Added another 1,000 C "free money" position

The price divergence for C is still there today. Checked with Broker website and they still have 600,000 shares available for shorting.

Price divergence is at $0.76, still looks attractive. Gone ahead and added another 1,000 position so total position is now 3,000. Target free money is around $2,163 ( i.e. 3,000 x $0.721 ).

AVERAGE PRICE
Short Sell 3,000 C at $3.855
Sell 30x Jun-PUT-Strike-$5 at $2.403
Buy 30x Jun-CALL-Strike-$5 at $0.537
Net cash collected is $5.721 ( i.e. 3.855 + 2.403 - 0.537 ) per share.

Free money through Citi shares Reverse Conversion

Price divergence on C still here today. The potential gain per share has dropped to $0.73 as compared to yesterday's $0.90.

Today the Broker has 1.3M C shares available for shorts. Gone ahead to create a small position on this.







AVERAGE PRICE
Short Sell 2,000 C at $3.75
Sell 20x Jun-PUT-Strike-$5 at $2.46
Buy 20x Jun-CALL-Strike-$5 at $0.48
Net cash collected is $5.73 ( i.e. 3.75 + 2.46 - 0.48 ) per share.

If no major events occur, by expiry Jun we will buy back C share at $5 to cover back the Shorts and gain a net $0.73 profit per share. It's like converting the Share (sell at $5.73) into Option (to buy back share at $5.00), a reversion conversion.

For those people who own C shares, it is easier as they need not Short Sell but just to sell their C shares. And by expiry June, they can get back their C share at $5 and keep the $0.73 per share profit.

A) BY EXPIRY JUNE - OK

1) if C > $5, we exercise our CALL option to buy C at $5 to cover the Short Sell. The PUT option expires worthless.

2) if C < $5, we are oblighted by the sold PUT & assigned the C shares at $5. The CALL option expires worthless.

3) if C = $5, assign or exercise price is same as market price. Likely both options expire worthless and we buy C from open market to cover the Short Sell.

B) OPEN POSITIONS MANAGEMENT FROM NOW TILL EXPIRY JUNE

1. If C > $5, no action needed. The CALL option provided us the right to buy C at $5. The PUT is out of money and will not be assigned. OK.

2. If C < $5 and the PUT get assigned early, we pay $5 for C shares. The CALL will still have some time value e.g. $0.10 or $0.20. So net gain will be more than original target of $0.73. OK.

3. If C is at $5, no action needed. OK.

4. If broker requests us to return C shares early ( not sure whether they have this right or not ).

a) If C is > $5, we exercise our option at $5 and return C share to broker. We Buy back the PUT position which by now will be very cheap. So will be in the money but slightly less than $0.73. OK.

b) If C is < $5 but > $3.75, we need to buy from market at less than $5 (additional saving) and return to broker to cover Shorts. The CALL will have increase in value and the PUT reduce in value. We will Sell the CALL options and Buy back the PUT options. So end result is we will make more than original target of $0.73. OK.

c) If C is < $3.75, we need to buy from market at less than $3.75 (additional saving) and return to broker to cover Shorts. The PUT when bought are in-the-money PUT, so as the share price dropped, likely the PUT will increase in the same amount or slightly lower (assume volatility about the same). The cheaper amount we pay for buying back the shares from open market, can offset the cost increase to Buy back the PUT. The CALL price (bought at $0.48) will reduce. So net profit may be slightly less than the targeted $0.73. OK.

d) If C is = $5, we buy from open market to cover the Shorts. Then Sell the CALL and Buy back the PUT. The price of the CALL should be about equal to the price of PUT. OK.

Free money from Citi share+option combo setup appeared again today !

Was out for 2 weeks. No major trades over that period.

Today most banks share price dropped while Citi share price increased.

Citi is the largest shorted share in the open market, about 1.2 billion shares shorted. It is about 4 times the 2nd largest shorted share SPY (about 300 million shares shorted). Citi price has been on the increase over the past 2 weeks, so likely most of the pure shorties (no option protections) are rushing to buy in to cover their short positions. So C will likely to continue to rise this week until a few days after Citi announce their earnings this Friday.


The free money from Citi scenario appeared again today! Tried to setup a 5,000 positions on that combo to check out margin requirement and plan to increase it to much larger quantity after that.

Steps are :
1. Short Sell C at market price $4.41 (collect money)
2. Sell June PUT option strike price $5 for $2.30 (collect money)
3. Buy June CALL option strike price $5 for $0.81 (pay money)
Total net money collect is $5.90 ($4.41 + $2.30 - $0.81).
The option setup enable us to buy C at $5.00 by expiry June.
So net free money per unit is $0.90 (i.e. for each share shorted + option positions created).

Surprised to find that the queue for Short Sell at Market Price did not get executed. It normally happen instantly for Market Price orders.

Went in to check my Broker website for Shares Available to short and found that there is non available to loan to short for C (on 20-Mar-09 there were 2 million shares availalbe !).

Sigh..... gone ahead and cancel the Short Sell order for C. Checked out a few other bank shares for similar opportunity but none have such a big price divergence situation.

Fund C & D Account Balance 1-Apr-09

Fund C (11.8% gain in about 2 months, within goal of 5% to 10% per month)
Net Asset = $22,356.
Cash On-hand = $25,295.







Fund D (21.3% gain in about 2 months, within goal of 5% to 10% per month)
Net Asset = $121,345.
Cash On-hand = $128,017.

What is Synthetic Position ?

A synthetic LONG position is created by selling an out-of-money PUT and buying an out-of-money CALL.
A synthetic SHORT position is created by selling an out-of-money CALL and buying an out-of-money PUT.

E.g. Synthetic LONG Position The idea is to use the money collected from selling the PUT to buy the CALL option. You basically create a LONG position fairly much like a Stock position with zero upfront payment. The time-decay on the PUT sold will compensate for the time-decay on the CALL.

E.g. Synthetic SHORT position
25-Mar-09 Wed (expecting UBS price to drop)
Created 30 contracts of synthetic SHORT positions on UBS when the share price was $11.21.
STO 30x UBS-Apr-$12.50-CALL at $0.70 (collected $2,100)
BTO 30x UBS-Apr-$10.00-PUT at $0.70 (paid $2,100)
For Sold leg (i.e. the CALL option), we placed STOP-LOSS order for protection and LIMIT order for Profit-Taking.
If share price at expiry Fri stays within $10 to $12.50, both legs will expire worthless.
If share price drops before expiry, we can make money. If share price is below $10 at expiry, we made money.
If share price increases before expiry, we can lose money. If share price is above $12.50 at expiry, we lose money.








27-Mar-09 Fri (UBS share price dropped as expected)
UBS at $9.91 now. Instead of waiting for the sold CALL position to reach 80% (at $0.14) of max potential profit (at $0.70), we manually closed the CALL position (at $0.25) when profit reached 65% of max potential profit. And we closed the PUT position (at $1.10) as well which is already 57% in profit. Closed the positions because the risk/reward ratio has skewed significantly due to deep in-the-money.









BTC 30x UBS-Apr-$12.50-CALL at $1.10 profited $1,329 (65%)
STC 30x UBS-Apr-$10.00-PUT at $0.25 profited $1,188 (57%)
Total profit $2,517.

One of the main advantage of synthetic position is we are "neutral" to time decay. This can be very useful if we create position with far far out expiry-date.

Fund C & D Account Balance 21-Mar-09

Fund C
Net Asset = $21,387.
Cash On-hand = $24,702.





Fund D
Net Asset = $116,362.
Cash On-hand = $105,677.

FREE money from Citi share+option combo setup

A short time window of opportunity opened up last night (for about 30 minutes).

We can short sell C at $3.35 and collect the money upfront. Then create an option setup guranteed that we can buy back the share (to return to Broker) by June at an "effective" cost of $2.44 only.

Which means by June, you get to keep $0.91 per share (totally Free and almost no risk).... regardless of what C share price is from now till June.

Check with Broker at that time they have 2.6M shares available for people to borrow and short. Could have potentially make some good money due to this significant divergence in prices (very rarely occur).

---

Rephrased in simplar term.

C share price is at $3.35

Jun-Strike-$5-CALL was at $0.34
Jun-Strike-$5-PUT was at $2.90
We will Buy a CALL and Sell a PUT to create the synthetic position to enable us to Buy C share at $5 in the future.

Short Sell C shares at $3.35 and collect $3.35 per share.

Create synthetic position on C using options that guranteed us to Buy C share at $5 from now till June expiry Fri.

By creating the synthetic position on C, we collect a net of $2.56 (i.e. $2.90 from Sell PUT minus $0.34 cost of Buy CALL).

So total we collected upfront is $5.91 (i.e. $3.35 from Short Sell C shares plus $2.56 net proceed from the synthetic C options).

By June expiry Friday, regardless of C share price we are obligted to Buy share at $5 due to the synthetic position.

Once Bought at $5 we return the share to the broker.

Net result is we get to keep the $0.91 per share regardless of what price C share is at that time.

(The CALL gives us the right to buy at $5 if C climb above $5. The PUT makes us obligated to buy at $5 if C drop below $5).

Our final synthesized C net cost is $5 + $0.34 - $2.90 = $2.44 only vs current market C share price of $3.35

---

Same as above but more wordy.

An opportunity appeared tonight for 'almost unlimited" profit over a 1 to 3 months with almost zero risk due to significant divergence in prices.

Citi was at around $3.35.

An opportunity presented itself by using options (either this Apr or June) to create a synthetic position for C with a much lower cost than the actual share price.
e.g. for Apr contract the synthetic cost is $2.82 and for Jun it is only $2.44. But the actual C share price was at $3.35.

So the plan was to Open a synthetic position which cost $2.44 (e.g. for Jun) using Options and simultaneously Naked Short Sell C share at $3.35 at current market price. For each combination created we keep $0.91 !!

If we Short Sell 1,000,000 share of C and create a synthetic position for 10,000 contracts we get to keep upfront $910,000. By Jun expiry Fri, we keep this entire $910,000 regardless of what price C ended up with.

You can actually create as many positions as you want !!

By the time we check with US broker and find out all the details on whether naked short sell is allow, how long can we hold the short positions, what's the share borrowing cost if any, etc...... Citi price has moved down to $2.80 now and the opportunity is already gone. What a pity. Will try next time....when such opportunity arise again.

This is how to create that C synthetic position for $2.44.
Jun-Strike-$5.00-CALL was at $0.34
Jun-Strike-$5.00-PUT was at $2.90
We will Buy a CALL and Sell a PUT.
At end of June whether C is above or below $5.00, we have to buy the share at $5.
(The CALL gives us the right to buy at $5 if C climb above $5. The PUT makes us obligated to buy at $5 if C drop below $5).
So our synthesized C cost is $5 + $0.34 - $2.90 = $2.44 only vs market C share price of $3.35

Fund D Account Balance

Fund D
Net Asset = $95,463.
Cash On-hand = $105,678.

Fund D - Selling LEAP PUT for C

Interesting Setup and Transaction on LEAP PUT for C

2-Mar-09
STO long term LEAP options
STO 200 contracts C-Jan-2011-$2.50-PUT for $1.58. Collected $31,600.

In about 2 years time,
if C stays above $2.50 we keep 100% profit of $31,600.
If C stays above $0.92 we will profit.
If C stays at $0.92 we break-even.
If C stays below $0.92 we will lose money.
Worst case if C bankrupted (which US government will avoid at all cost), we lose $0.92 each i.e. a total of $18,400.
Not a bad deal as we plan to win max $31,600 but loss max $18,400.

13-Mar-09
Surprise thing happened today. Someone exercised their PUT option and we got assigned 125 contracts i.e. 12,500 C shares. At that time C share price is at $1.80.

Which means we paid $2.50 to buy these 12,500 shares but current market value is only $1.80. So by having to buy the shares we lose $0.70 each. But we have already collected $1.58 upfront when we sold the options on 2-Mar-09. So for each share our immediate net gain is $0.88 (i.e. $1.58 minus $0.70).
If we sell C immediate at $1.80 at market price now the gain will be a total of $11,000 ( i.e. $0.88 x 12,500). That is pretty good profit.

It is our initial belief that C will cross or stay at $2.50 in about 2 years time. If someday we can sell C share at $2.50, then we will be able to realize the max profit target of per unit of $1.58 which is a total of $19,750 (i.e. $1.58 x 12,500).

With this belief, instead of selling off the 12,500 C shares at $1.80 and closed out, we decided to Sell covered CALL for current month with Strike of $2.50. And will continue to do so on a monthly basis until it get exercised at $2.50 (resulting in max profit of $19,750). This covered CALL provides additional monthly income along the way. The Risk is if C drops a lot in price, we will incur paper-loss along the way, which is ok because these Shares (not Options) have no expiry date. Our time horizon is 2 years. Or we can close out earlier along the way and lock-in the profit if we want to.

STO current month option 125 contracts covered CALL on C.
STO 125 contracts of C-Mar-2009-$2.50-CALL at $0.067 and collected $837.




STO another 25 LEAP contracts to round up the balance 75 LEAP contract to a total of 100 contracts. Average cost for this 100 contracts is now at $1.6098.
STO 25 contracts C-Jan-2011-$2.50-PUT (total collected for the 100 contracts is $16,098).

Fund C & D Account Balance 28-Feb-09

Fund C
Net Asset = $16,030.
Cash On-hand = $26,030.







Fund D
Net Asset = $74,586.
Cash On-hand = $129,031.

Fund D Update @ 21-Feb-09 after Expiry Friday

Realized P&L of about -$21,908.
Unrealized P&L of about -$11,577.
Net Asset = $80,605.
Cash On-hand = $98,595.

BIG MISTAKE : failure to protect Unrealized profit as of last Fri +10,151 leading this week major Realized losses. Right strategy but Trader's mistake.

DETAILS :-

Final week of Feb-09 option month.
BAC and C dropped drastically over fear of "nationalization" of some major US banks. Market was trying to read into Bernanke's speech "we will keep the banks or return the banks to private sector.......". The phrase "return the banks" have been interpreted by market as possible nationalization of US major banks.

Option Expiry Friday today.
Expected short sellers have to cover their position in the afternoon after the past 4 days of heavy short sellings. Waited for the US traders to be back from lunch to cover their short positions but have to cut loss at around 1:00am as our losses have hit threshold level. After 1:30pm, all those fat traders came back from lunch, BAC and C moved up sharply as expected to happen on typical Friday option expiry day as they have to cover their short positions. Sigh.

Fund D unrealized profit was +$10K as of last Friday. Goal was for it to hit at least 80% ($12K) of target maximum profit ($15K). Should not have left the +$10K unrealized profit on the table for a potential profit of only incremental $2K only..... the risk/reward ratio have shifted so much already. BIG mistake and we closed out this week with an overall realized negative profit of -$22K.

Made several very bad mistakes of typical newbie option trader (sigh, a $10K+$22K lesson). Maybe should fire the Trader... guessed he will definitely remember this well going forward).

Major Mistakes
1. Too much focus on 80% profit target of maximum potential profit.
2. Failure to protect already in-the-money "unrealized profit". This is as good as CASH !
3. Removed auto stop-loss and get into manual mode. Stop-loss could have been at -$15K but turned into -$22K instead.

Very expensive but valuable lessons learnt today. Need to revisit "Protect the in-money unrealized profit" and "Stop-Loss" strategy.

Notes : Gold price cross $1,000 today. Dow crossed below the lowest low since 1997.
Washington spokesman said more details will be provided next week regarding the possibility of nationalization of bank.

Fund C Update @ 14-Feb-09

Unrealized P&L of about +$162.
Net Asset = $24,185.
Cash On-hand = $22,187.

Net Asset increased from last week $23.1K to $24.2K.
1 more week to Expiry Friday 20-Feb.