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.

Fund D Update @ 14-Feb-09

Unrealized P&L of about +$10,151.
Net Asset = $122,453.
Cash On-hand = $123,112.

Net Asset increased from last week $113.7K to $122.4K.

1 more week to Expiry Friday 20-Feb.

C share price fairly stable and above $3.00 most of the time. Volatility decayed to 135% and time decay kicked in very rapidly this week (and next week too) as it is last 2 weeks before option expiry Friday 20-Feb.

BAC share price swing up-and-down and dropped to $5.58.
We want BAC to stay above $6.00 so as to keep 100% profit. Breakeven point for the closest defense line option is at $4.75. Probability of winning for the BAC option chain is still high.

Fund C Update @ 7-Feb-09

Unrealized P&L of about -$926.
Net Asset = $23,058.
Cash On-hand = $20,928.

On 5-Feb after opening during first 20 minutes BAC showed extremely skewed number of Sellers vs Buyers. Best time for momentum trades. Fund C managed to increase from $19.8K to $23.1K this week.

Fund C now 15.0% gain and ahead of Fund D performance of 13.7%.

Fund D Update @ 7-Feb-09

Unrealized P&L of about +$2,106.
Net Asset = $113,725.
Cash On-hand = $120,178.

2 more weeks to Expiry Friday 20-Feb.

C doing well. BAC dropped significantly & continuously for several days, heart-wrenching problem period early this week. Towards the end of the week BAC started to stabilize, a good sign. Only worry is not sure whether it is due to short-sellers covering their positions or BAC finally stabilizing.

Funds C & D Update

In January Fund D increased by about 13.2% from $100K to $113.2K but Fund C decreased by about -0.1% from $20K to $19.8K.

Fund C investor questioning why Fund D was very active and making money while Fund C was not highlighted much and was losing money. That's true, in January most of the effort was put on Fund D which is a larger fund of $100K.

OK. Will Blog less and put more time and focus on Fund C. Will cut-down Blog to only once a week or on some unique trades only.

Will try Momentum Trading using Level II Quotes for Fund C to catch up. This strategy is a lot of hard work as one has to monitor and hunt for the opportunity. Very intense and focus short-term momentum trading which can result in minimum 5% to 10% gain within 2 to 10 minutes.

This is how it works. Search for stocks that have significant skew in the number of Buyers vs Sellers (demand vs supply). A ratio of more than 3x preferred. But the window of opportunity can be very short. If it is 10x or more, chances of winning is greater than 90%.

This is done through monitoring and hunting using Level-II Quotes.

If Buyers are significantly more than Sellers, then follow the Buyers momentum and BTO at-the-money or in-the-money CALL options.
If Seller is more than Buyers, then BTO similar kind of PUT options.

Track closely and STC the opened positions once 5% or 10% target is met or when the Level-II ratio starts to reduce significantly (do not get caught by this). This usually can be achieved within 2 to 5 minutes and will normally be less than 10 minutes.

Things to watch out. Some of the market-makers use computer to generate dummy Orders in system that may trick you. E.g. BAC is at $5.00. You may see a single 10,000 order waiting to buy BAC at $5.50. When BAC price increase to $5.30, the 10,000x $5.50 order disappeared and a new order of 10,000x appear at queue price of $5.80. And when BAC price increases further e.g. to $5.55, you can see that huge order move up again and away from the current price. That is automatic computer trading by the market-maker and you can get trick into believing that those reflect the market.

This strategy is a lot of hardwork, very intense and can be stressful. Those with heart problem should not attempt this.

Fund D Update for 30-Jan

Unrealized P&L of about +$4,489.
Net Asset = $113,196.
Cash On-hand = $118,165.

No new trades.

3 more weeks to Expiry Friday 20-Feb.

Fund C Update for 30-Jan

Unrealized P&L of about -$1,602.
Net Asset = $19,783.
Cash On-hand = $19,020.

Fund C trading strategy followed closely to Fund D. Has also been trying a few new strategy along the way.

Fund D Update for 29-Jan

Unrealized P&L of about +$4,364.
Net Asset = $113,071.
Cash On-hand = $118,165.

No new trades.

Volatility decay and Time decay are to our advantage.

Fund D Update for 28-Jan

Unrealized P&L of about +$3,520.
Net Asset = $112,227.
Cash On-hand = $118,165.

No new trades.

Government finalizing "Bad Bank" and "Good Bank" plan. Most financial share price gone up, except LM which announced earnings below market expectation.

Fund D Update for 27-Jan

Unrealized P&L of about +$1306.
Net Asset = $110,013.
Cash On-hand = $118,165.

(Will try continue posting daily account update for about 1 month, per request by friend John. He wanted to see both -ve and +ve P&L, instead of just +ve P&L which seems to him to be too good to be true).

Need the price of BAC & C to stabilize, to rise or to drop slightly by Expiry Friday 20-Feb and we will get to keep the Option premium ($14,260) collected upfront. Continue to put Stop Loss protection along the way.

Day to day there are other small simple straight trades when opportunity arises which are not posted. Focusing mainly on Bank/Financial companies and CreditCard issuers. Wanted to trade on Sea Shipping companies but do not have time to do research on it yet.

Fund D Update for 26-Jan

Unrealized P&L of about -$1089.
Net Asset = $107,617.
Cash On-hand = $118,038.

Chinese New Year Day yesterday. Checked the market for position management and no significant transactions.

Fund D Update for 22-Jan

Unrealized loss of about -$3K.
Net Asset = $105,150.
Cash On-hand = $119,551.

My friend John K asked how come all or most of the trades are profits only. Don't you make losses ? Answer is yes, we do make losses from time to time, both Realized and Unrelized Losses (paperlosses). So will try to spend 5 minutes a day to post a short note on Net-Asset position for a week or two dedicated to Mr.K.

Fund D Update for 22-Jan on NOK

NOK announced earnings tumbled 69%. Share price dropped.
(Buy PUT and/or Sell CALL-SPREAD).

STO
10x NOK-Feb-$14/$15-BEAR-CALL-SPREAD at $0.35

BTO
10x NOK-Feb-$13-PUT at $0.70
10x NOK-Feb-$12-PUT at $0.35

STC
10x NOK-Feb-$13-PUT at $1.250 profited $550 (78.6%)
10x NOK-Feb-$12-PUT at $0.725 profited $375 (107.1%)

Position still open
10x NOK-Feb-$14/$15-BEAR-CALL-SPREAD at $0.35 (most likely to keep 100% potential max profit $350 by Expiry Friday 20-Feb).

Remarks :
STO = Sell-To-Open
BTO = Buy-To-Open
STC = Sell-To_Close
BTC = Buy-To-Close

Fund D Update for 21-Jan

Dow gone up across the board.
Unrealized loss of -$10,425 reversed into a small positive gain of $921 within a day.

UnRealized gain about +$921.
Net Asset = $107,698.
Cash On-hand = $117,577.

Fund D Update for 20-Jan

UnRealized loss about -$10K
Net Asset = $97,616
Cash on hand = $117,889

POSITIONS MANAGEMENT
Price of C and BAC continue to drop and several of the Options were getting closer to the Stop Loss trigger points. No stop loss was triggered.

Implied Volatility is still very high with both C and BAC above 210%. We have entered the trades a bit early. If waited for 1 to 2 days before entering these positions, the potential profit could have been 50% more ! Margin has crossed my 50% buffer, so did not open more trades.

Total UnRealized loss is -$10,425. Quite a big sum. Many questions came up in the mind ..... should I move in ahead of the Stop Loss and close the positions ? Should I move out the Stop Loss further by 10% to 20% ? Obama already sworned into office. His team will start working on the financial crisis... so expect the market to stabilize very soon over the next 1 to 2 days (price need not increase, just need to stabilize and we will still win at Expiry Friday!).

It's the Darkest before Dawn... thinking of whether to move the Stop Loss out by another 10% to 20% but decided to keep the Stop Loss position as it is. If C and BAC continue to drop another 5% to 10%, likely at least half of the positions will be triggered by the Stop Loss Protection and close out.

Fund D Update - New positions setup for Feb

Very volatile day as it was Option Expiry Friday 16-Jan.

Implied Volatility for BAC and C are around 170% and 190%. STO some PUT positions for Feb.
.
BAC support level at $7.00 and C support level at $3.50.

Look at the Stochastic chart to time entry point for the STO of PUT option when it is close to the over-sold area (optional).




STO the followings :-
60x BAC-Feb-$5-PUT at $0.52 (share price at $7.15)
1x BAC-Feb-$6-PUT at $0.76 (1 contract only to test out a new strategy later)
50x C-Feb-$3-PUT at $0.51 (share price at $3.75)
25x C-Mar-$2.50-PUT at $0.40 (share price at $3.75)

Did not use vertical spread today, trying to save cost on the "Buy" leg. Put in far out Stop-Loss protection instead.

BTO this 1 position :-
10x BAC-Feb-$7.50-CALL at $1.45 (to test out a new strategy)

Target max profit for these positions is around $6,746 which is within plan of $5K to $10K per month (3,120 + 76 + 2,550 + 1,000). If at 80% it is still around $5K.

Remarks :
Very volatile day as it is Option Expiry Friday. Market opened on down trend and stabilized/reversed after lunch time.
At 3pm several share prices moving nicely upwards, could be due to Short sellers trying to cover thier positions before the long weekend starts (next Monday is holiday in US ?). Massive swing downwards at around 3:30pm, definitely a lot of big players out there manipulating the shares prices trying to "kill" each others.... to see who blink first before the Option Expiry Friday.
Citi incurred $8.3B loss last quarter. Planning to split company into two. One with all the toxic waste and the other with the healthy business (sounds familiar ???). Someone commented on CNBC that C is worth only $1. I think all the US banks share are also worth $1 each right now. There are so many "skeletons" in the closets and we do not clearly know how many there are and in who's closet. But the government will definitely continue to bail them out and it's a right thing to do. Just hope the government do not become bankrupt instead of the banks.

MER incurred $3.9B loss in Q3 and $16.4B in Q4 !

BAC gets $20B funding from TARP (or spell as TRAP? Need to check).