Bought +3 CVE.TO JUL 30 Puts @ 1.75, mark $30.10

I made my first trade in my RRSP! It is a short on Cenovus Energy (CVE.TO) via buying puts options. I chose the July expiry with the intention to dispose of this position in May. Two reasons for that. 1) Before time decay accelerates (about 60 days prior to expiry), and 2) before the summer starts (low volatility in summer, premiums are discounted).

The following facts/opinions constituted my decision for this entry.

1. TSX index is toppy according to weekly RSI
2. TSX is losing steam this week versus the S&P 500 (see Figure 1), but this is probably due to the forex market
3. MX Implied Volatility Index is testing 10.00 support again
4. Energy sector is weakest of all 3 prominent sectors on TSX (Energy, Financial, Material) in intermediate term
5. Oil is showing negative divergence on weekly chart
6. U.S. dollar index is in uptrend and testing support at 80
7. USD/CAD is testing major support at parity
8. CVE.TO looks weakest amongst top 5 traded Oil/Gas on TSX (for liquidity)
9. Negative divergence as seen on CVE.TO chart (Figure 2)
10. $30 is a strong resistance level (Figure 2)
11. CVE.TO v. Crude Oil chart shows an intermediate term steady down trend

TSX Composite v. S&P 500

Stop: $32.

Target: $27.

Commission paid is $12.95 on this trade (double that for a round trip).

A rough estimate of the premium by May expiry if CVE.TO is priced at $32 then would be $0.80. Thus, I am risking about $240 of my $8,000 account in this trade on a worst case scenario. Which is 3% of my RRSP account.

This is significantly more than my usual risk appetite (less than 0.2% per trade in forex trading). But any less would be pointless due to the high relative commission for options. I had the choice of shorting the market using options or leveraged bear ETF. The deteriorating value of a bear ETF made it less favourable for holding for more than a few days. So I traded options due to a lack of choices in my RRSP.

Anyway, that’s my thought on this. Yet nothing matters but the price. Let’s wait and see how this goes. I plan to make one trade per quarter in my RRSP. This one is for Q2.

Cenovus Energy Inc (CVE.TO)

Option Value Analysis on CIBC (CM.TO) April 2010 Expiration

Warning: Top/bottom picking is a dangerous art. I don’t intend to trade on this information myself. I did this out of pure curiosity.

The Canadian banks are an interesting phenomenon. Are they just hiding dirt under the rug or are they really as good as our government say? Mish Global Economic Trend Analysis posted a bearish view on California v. Ontario. Furthermore, The Baseline Scenario discussed why the strength of our banks is an illusion created by our government.

As such, on both a technical and fundamental viewpoint, share prices of our financial sector is way overbought. Of which, CIBC (CM.TO) seem particularly screwed as its stock price hasn’t been able to join in the unreal rally of late.

That sentiment seem to be confirmed with an option pain valuation as I described before. Max pain for CM.TO for April expiration is pegged at $72.

Not surprisingly, $72 marks a long term support as shown in Figure 2 (blue line). A break below $72 could summon $65.

The data also show that there is a large open interest for put options at the $72 strike. Are they sold as covered puts or something else? That I cannot tell. However, $72 will definitely be an important level for CM.TO in the near future.

Nevertheless, as the options market is small in Canada, I wouldn’t put much weight on options valuation for Canadian stocks. The value of open interest options on April CM.TO is merely about the size of a single day’s of equity traded.

P.S. March’s max pain was $68 one week prior to expiration. But CM.TO closed above $75 on March expiration. That wasn’t even close.

CIBC (CM.TO) option valuation

CIBC (CM.TO)

Sold -1 BC 100 OCT 09 12.5 PUT @1.45, mark 11.27

Brunswick Corp. (BC) stayed above $11.00 as we began the week. I placed a stop at Friday’s high before the open today to be executed at 10:30am. When I got back at lunch, I found that my stop was triggered as soon as it was sent. Luckily, it was also at the time when BC retraced the open’s gain slightly. So it was a good price to be out since BC has closed above $12 today (Figure 1).

This trade was entered last Friday before noon at 1.95, when BC was trading at 10.81. This represents a loss of $65. For this particular trade, I adhered to my exit strategy (even though it was a loss), so that’s good. For the entry, I could have waited later on in the day on Friday to see how the market performs as we approached the end of the week. If I had done that, the reward/risk would have been better. But I think I would have entered short anyway since the sign were pointing downward when BC hung back to around $11 at the close after breaking above $11.20 intraday on good volume. And the fact hat the market was consolidating too.

Looking at the long term, BC has retraced all its loss since the dive last year. For the market, S&P500 has etched higher today too but is still about 10 points below last week’s all-year high. The volume for the overall market is noticeably lighter too. So this uptrend can possibly continue up as not many is riding this move. We shall see how this goes.

As can be seen from Figure 2, BC at $12 has some resistance above to $13. For the lower end of the range, we have $9.60. A break below $9.60 would signal a stop of this recent bull train’s momentum.

Brunswick Corp

Brunswick Corp. 2-year chart

Bought +1 BC 100 OCT 09 12.5 PUT @1.95, mark 10.81

Here’s one last try in shorting Brunswick Corp. BC gapped open about 50 cents this morning on an analyst upgrade. It subsequently tested $11.00 with about 5 times first 30-minute volume. It has since been in a trading range.

Why is this significant? Observing Figure 1, we can see that $10.85 is the 62% Fibonacci level of the entire drop from Sept 19, 2008. Practically exactly a year ago. Secondly, this huge volume at open is good as it typically signal retail/pubic euphoria. Combining the two, huge volume retail push + test a long term resistance = shorting opportunity!

In the near term, BC is also testing a resitance as shown in Figure 2. Finally the stars may be aligned for a short in BC. I have tried many times and failed miserably in the past several weeks. But after analysing my trades and re-evaluating my method, this setup offers a very good chance. So let’s see how it goes.

Entry: $10.81

Stop: $11.00 by end of next week.

Target: $9.00, the next Fibonacci level.

Reward / Risk = $155 / $45 = 3.4. (These values are obtained by estimating the premium of this option at expiry using the Bjerksund-Stensland approximation.)

Brunswick Corp

Brunswick Corp (30-minute)

Expired 15 BC 100 SEP 09 7.5 put, mark 9.78

My fifteen Brunswick Corp (BC) September puts expired on Friday. I entered this at $0.39 back in mid-August. This position is worth $0 now. That is a total loss of $585 + $15 commission.

Long story short, here are some mistakes I made with this trade, in decreasing order of significance:

1. Shorting when the trend is obviously up.
2. Not adhering to my stop.
3. Low liquidity asset.
4. High commission.

Well, as I’ve said earlier, I will be focusing on developing my trading tools and strategies for the next few months. I have just placed my first paper trade using a new strategy in the forex market.

Brunswick Corp