One of the biggest advantages of trading in the commodities, futures and forex market is the tax simplification. Active traders – especially day traders – know that tax time can be painful with the requirement to log every trade with the IRS. For those that practice channel trading and dollar cost averaging, it becomes even more complicated with the IRS wash sale rules. Taxes on futures – which can include commodities, futures and the forex market – are much simpler. From the book Getting Started in Commodities, by George Fontanills:
Futures on both individual commodity futures and index futures are subject to Section 1256 of the Internal Revenue Code. Gains on Section 1256 contracts are taxed as if 60 percent of the profits are long-term gains and the other 40 percent of the gains are short-term. This scheme creates a blended tax rate of 23 percent, regardless of holding period…
The downside to Section 1256 treatment is that all contracts are marked to market at the end of each year. Taxes are due as if each contract was liquidated on December 31, so profits cannot be deferred.
Of course taking advantage of the special tax treatment first requires one to learn about how to trade commodities. The best book to get started with this quest is Fontanill’s book below. Just click on the book to buy it.
Getting Started in Commodities (Getting Started In…..) by George A. Fontanills
The stupidity in congress continues. The latest round of fiscal recklessness was in the form of a new House Bill (now approved!) to hand out $4,500 in free cash to anyone who owns a scrap of metal they call a car.
The bill (H.R. 1300) is formally called the “Consumer Assistance to Recycle and Save Act”, but more commonly referred to as “Cash for Clunkers”. The full text of the bill can be found at this link.
Ohio democrat Betty Sutton is the sponsor of the bill. But “sponsor” is a very loose term, because Betty Sutton obviously has no idea how to pay for it. The $4 billion cost allocation for the bill will come entirely from begging the Chinese government to buy more of our outsized debt. Way to go, Betty. I’m sure your fellow Americans will be proud to know that paying their neighbors mortgage is not nearly as fun as paying their mortgage *AND* buying them a new car!
The proshares ultrashort treasury etf (symbol TBT) is gaining a lot of attention lately. The theory is that as the government recklessly runs up larger and larger deficits, the borrowing costs to the government will go up, in the form of higher interest rates. Bond prices behave inversely to interest rates, so as interest rates go up, the bond prices should go down. When treasury bond prices go down, the investment vehicle that has short exposure to the treasuries will go up.
Read the excerpt from a recent Bloomberg article below:
Yields on 10-year notes climbed above 3.4 percent for the first time since November as investors also raised concern about the possibility that record supply of Treasuries to pay for a mounting budget deficit may jeopardize the U.S.’s AAA credit rating.
And here is a chart of the TBT ultrashort treasury profund.
But before you start listening to the 1000 idiots on CNBC, you should consider this before racing to buy into the TBT:
- The government has already declared it won’t be constrained by higher interest rates, and will simply sell the bonds that it can sell at reasonable rates, and just wildly print money out of thin air for bonds that it can not sell, which artificially manipulates the long term treasury rates.
- The Proshares TBT fund is a giant black hole of complex derivatives that few people understand
- The Proshares TBT has significant risks
From the Proshares TBT prospectus:
Proshares Ultrashort 20+ Year is subject to the following risks – Ttreasury Aggressive Investment Technique, Risk Correlation Risk, Counterparty Risk, Credit Risk, Debt instrument Risk, Interest Rate Risk, Inverse Correlation Risk, Investment Company and Exchange Traded Fund Risk, Liquidity Risk, Market Price Variance Risk, Market Risk, Non-Diversification Risk, Portfolio Turnover Risk, Short Sale Risk and Valuation Time Risk. The Fund may be subject to risks in addition to those identified as principal risks.
To breakdown just two of these risks in layman’s terms:
- Risk correlation risk – This essentially means that despite what the objective is (inverse performance of the treasuries), there are no guarantees to matching that objective, or even coming close to that objective. It’s quite possible that treasury yields could go up at the same time that the ultrashort treasuries (TBT) could go down.
- Counterparty risk – The instrument is a complex mix of derivatives that few people understand. Derivative contracts have two parties and the other party will not be disclosed. Further, the other party, whoever it is, may go bankrupt (Hint: Lehman Brothers, Bear Stearns) and render those complex derivatives that make up TBT entirely worthless.
Bottom Line: If you are interested in TBT, you may want to consider it for a quick trade only. Holding on to this one for the long haul may yield unintended and non desirable consequences!
Anadarko Petroleum witnessed some massive volume in the June 45 strike calls yesterday. Even today, there is significant volume in the same June 45 strike calls. I just initiated my own play on Anadarko, but using the strategy discussed at the following link:
Here is a static snapshot of the June option chain for Anadarko.
I initiated the following play this morning:
- Bought the June 45 strike call
- Financed most of the cost of it by selling the June 44 strike put
- Note: Other options are to sell the 45 or 46 strike puts if you are more bullish.
I executed this trade in my OptionsXpress account. They only charge a single commission for up to 10 options of a spread contract. Virtually every other broker would have charged 2 commissions for this order; optionsexpress only charged 1.
My margin balance requirement for the trade is $4,400 for the naked put sale. I’m fine with having the shares put to me if Anadarko drops because I need some more oil and energy in my portfolio anyway. And if Anadarko does go up significantly, then I will cash out my call option for a profit and look for another energy play later.
Disclaimer: This is *NOT* advice. Trade at your own risk!
The Geldpress trading team is still mildly bearish on the market in the short term. But we are carefully watching the price action of several fundamentally sound companies for a potential entry in the next few weeks. The watch list, in no particular order, includes:
- HAIN, CPB, HES, RBA, CMS, ABT, MKC
- BMY, FISV, PCP, CAM, HRS, SII
- RIG, FLR, JEC, SGP, EMR, AMZN, ABC
- MCK, SGR, CVS, CL
As always, trade at your own risk, do your own research, and practice money management!
Disclosure: Currently long BMY
This site discussed a play on DNDN just a few days ago, with this article. Implied volatility had spiked in DNDN due to the announcement of an April 28th conference with the AUA (American Urological Association) that DNDN was invited to. The conference is not the FDA, and had no capacity to approve or deny Dendreon’s Provenge drug. But nonetheless, the spike in volatility provided ample opportunity to sell some premium. With my own account, I took the conservative approach with a calendar collar (Buying the shares and the April 5 PUT’s, and selling the May 5 Calls). I also announced a more aggressive play of just buying the shares and selling the May 5 Calls or May 7.50 Calls (without the added PUT protection). Take a look at the chart of DNDN – before and after our entry into the DNDN calendar.
If you played along with the DNDN play, then regardless of which play you did, you have already collected over 90% of the profit potential well ahead of the May option expiration. This is due to the delta effect. Prior to the GAP UP, the May 7.50 strike options were out of the money. After the gap, those same options are now deep in the money. The more in the money the option is, the more it behaves like a stock,which means that most that time premium sold from the original covered has already been collected. Here is a recent snapshot of the option chain data:
- DNDN last traded at $17.20
- May 7.50 strike call is about 9.85
- Adding 7.50 (strike) to 9.85 option price comes to $17.35, which is just 15 cents higher than DNDN shares.
If you stay in this particular trade through May expiration you will only collect another $15 per covered call contract, but you risk making it through potentially damaging conference news on April 28th. Rather than risk everything for a few dollars more, covered call players on DNDN have the opportunity to close the entire position on the delta effect.
To close the position, simply buy back the originally covered call you sold (BUY TO CLOSE), and then *IMMEDIATELY* sell the Dendreon shares.
Disclaimer: This post is informational only, and not advice of any kind. Trade at your own risk!
Also see:
Dendreon is up to its old tricks again. For most of 2006, this stock (symbol DNDN) hovered around the $5 mark. Then it briefly shot up to the $15-$20 range on hopes for a quick FDA approval of its Provenge prostate cancer drug. After an unfavorable FDA decision, the stock quickly dropped to the $5 range, and was as low as $2.55 over the last month. The stock recently got another boost from renewed rumors on Provenge and it currently trades around $6.35 at last check.
The DNDN stock chart can be seen here.
For option traders and speculators, the volatility in Dendreon’s shares is much more interesting than the back and forth discussions between Dendreon and the FDA. And with high volatility comes opportunity. According to this AP article, Dendreon was invited to present data to the American Urological Association on April 28 in Chicago, and that news likely sparked the recent rally in its shares.
As an option trader, here is the play that I like on DNDN:
- Purchasing shares in 100 lot increments – trading near $6.39 at last glance
- Selling the May $5.00 in the money COVERED CALL – last glance near $3.10 per contract
- Buying the April $5.00 PUT – last glance near $.50 per contract
The above trade is what I executed this morning. I may or may not close the April 5 PUT early. More aggressive option traders may like one of the following:
- Purchasing DNDN (~$6.39) and selling the May $7.50 strike covered call for roughly $2.30 per contract
- Or…Purchasing DNDN and selling the May $5.00 in the money call
Note the lack of PUT protection in the last two choices.
Disclaimer: As always trade at your own risk! The author is long DNDN, with a covered call and put protection in place.
Goldman Sachs is now trading again near $115, where Warren Buffett purchased the bulk of his shares. I don’t follow Buffet’s trades, but I do recognize that his purchase price acts as a good support level. Goldman Sachs is still mostly a big black whole of finance, and I would never risk my money on an unhedged position in Goldman. But for a short term trade, I do like, and just initiated an option collar on Goldman Sachs.
- Purchased 100 shares of GS (around the 115 mark)
- Sold a May 125 covered PUT for around $6.50
- Bought a May 115 PUT for around $6.50
Implementing the collar for May was essentially free, since I collected the covered call premium to pay for the PUT protection. Goldman Sachs earnings are scheduled (according to this Yahoo Link) to be released on APril 14th, just a few days ahead of April options expiration. For that reason, I opted for the May collar, which gives me more time to adjust the collar (depending on how it looks after earnings) if need be. With no adjustment, my profit is capped beyond the 125 level (about $1,000 max profit), which is the upper end of the collar, and my losses are capped below the 115 level.
Goldman Sachs has recovered significantly off its low of $47, and in the short term they will probably endure more financial pain. But two of their competitors have sustained near fatal blows – Bear Stearns and Lehman Brothers. I say “near fatal” because those organizations have been partly absorbed into other defunct organizations. In the last month, Goldman has displayed an upward trend of higher lows and higher highs. The chart could easily be null and void as far as an indicator of whats to come after earnings. But based on the recent insanity in the markets (investors buying financial companies again), I like the risk/reward of this trade and just executed it for my own account earlier today.
Disclaimer: This is **NOT** trading or investment advice. Trade at your own risk!
For more insights on option collars:
For a great book on adjusting option positions:
The Option Trader Handbook: Strategies and Trade Adjustments (Wiley Trading) by George Jabbour
Watching the option chains can often reveal what some of the big money traders are up to. Check out the April option chain for General Electric below, with volume snapshot information taken on March 19, about 1 hour prior to the market close.
Take note of a few items from the chain above:
- Today’s April 11 Strike CALL volume (29,372) is over half of the entire open interest (55,360)
- Today’s April 10 Strike PUT volume (32,522) surpasses the entire open interest (26,277)
- The highest volumes of option activity appear at the 11 Strike CALL and the 10 Strike PUT, implying somebody (or a group) may be placing a HUGE STRADDLE BET on GE.
What is a straddle, and what is a strangle? - Option straddles and option strangles are used when traders expect a BIG MOVE in the market, but they are unsure about which direction. A long straddle is the simultaneous purchase of both a CALL option and a PUT option at the SAME STRIKE price. A long strangle also involves simultaneous purchases of both CALL and PUT options, but at DIFFERENT strike prices.
While its not possible to tell exactly who is making up the bulk of the option volume in the GE April options, there is a strong indication that someone or some group is placing a large bet on the GE April 10/11 straddle. If we assume that 20,000 units of calls and puts are part of the straddle, then the total size of the bet is about $3.3 million. There are certainly other combination possibilities (Butterfly call spreads or butterfly put spreads, vertical spreads), but it is probably safe to say that there is definitely a chunk of volume dedicated to the GE 10/11 straddle.
Risk reward for the GE straddle:
- Assuming $.65 for the $11 call and $1.00 for the 10 put, the total cost of the straddle is $165 per straddle
- The profitability range would occur if GE is $1.65 ABOVE the $11 call strike, or $1.65 BELOW the $10 put strike at expiration.
- Naturally, there are unlimited possibilities to morph the trade into a new strategy, or even close the trade early (prior to expiration) for a profit or loss.
Other items to note in the GE option chain (put call ratio) – The put call ratio is another item that option traders like to look at when considering their own option trades. The idea is that the big money is often right so if you follow the big money, you may also be right. There are many ways to calculate the put call ratio, but my preferred method is to add up the open interest of the 2 strikes nearest the money for both calls and puts. This comes to 175,656 on the call side and 32,886 on the put side. This implies that there is a stronger BULLISH sentiment on GE based on the option open interest.
Disclaimer: The above information IS NOT TRADING ADVICE. It is simply an observation of option volume on a security. As always, TRADE at YOUR OWN RISK!
Check out the volume of Calls vs Puts on the GE February or March options. Call volume outnumbers put volume by 2:1 in the March “at the money” 12.50′s. I’m bearish on the economy in 2009, but I’m going long GE for a trade this week to balance out more of my downside plays, and to play the potential short term Geithner rally.
Disclosure: Long March 12.50 Calls on GE – FOR A SHORT TERM TRADE.
Disclaimer: Stop buying and selling based on Internet blogs, UNLESS you TAKE RESPONSIBILITY FOR YOUR OWN TRADES!!!