Monthly Archives: September 2015

Rogue Contrarian Speculation in Bonds

To sum up the current state of affairs in the bond market (at least as near as we can tell):

*“Everyone knows” that the Fed is “certain” to raise interest rates and soon.

*As a result, “everyone knows” that bond prices will be headed lower soon – as a rise in interest rates implies a decline in the prices for existing bonds (In fact, I wrote about one example way to play this very scenario here using options on TBT).

It is very difficult to find anyone who will argue vehemently against this scenario.  Which leads us to this:

*The current weekly and daily Elliott Wave counts for intermediate-term treasury bonds are actually suggesting higher bond price in the months ahead (shown in Figure 1 below).

OK, talk about a “contrarian” point of view.  A couple of key notes here:

*I am not necessarily agreeing with this outlook, I am only presenting it as a potential “contrarian” speculative play.

*Yes, Elliott Wave counts can be kind of a nebulous thing – i.e., one day everything is lining up bullish (or bearish) and the next day everything changes.

*Nevertheless I am relying here on ProfitSource by HUBB software which has an objective, built in mechanical method for calculating he wave counts and NOT on my own arbitrary interpretation of chart movements (which would be a really bad idea).

*Also, as I have touched on in the past, the only time I really pay attention to Elliott Wave is when the daily AND weekly counts are in agreement (which of course guarantees nothing, but has proven useful in identifying some potentially good speculative ideas in the past).

The “idea” I am about to detail I categorize as “rogue contrarian speculation” – and should be treated as such – i.e., there is the potential to look like a complete fool and end up asking yourself “what the heck as I thinking about.”

People who do not routinely speculate should not start with this one and people who do speculate should remember that only a small amount of capital (1% to 5% of trading capital) should be committed to any single speculative position.

Ticker IEF

Ticker IEF is an ETF that tracks the price of intermediate-term (7-10 years) treasury bonds.  If intermediate-term interest rates rise this ETF will decline in price.

*Since “everyone knows” that the Fed is “certain” to raise short-term rates (which FYI is the only thing they control), it would…

*Seem fairly certain that as part of a ripple effect, intermediate term rates would also rise and..

*As a result intermediate term treasury bonds will decline in price.

And I am not prescient enough to say otherwise.  Still, as you can see in Figure 1, both the weekly and daily Elliott Wave count are pointing higher. 1(click to enlarge)

Figure 1 – IEF Weekly and Daily Elliott Wave counts both pointing higher (Courtesy: ProfitSource by HUBB)

Given that “everyone knows” that rates are headed higher and bond prices are headed lower this is clearly a contrarian point of view.

Trading IEF

To consider entering a bullish option position in IEF is clearly a contrarian play.  To buy 100 shares of IEF at $106.97 would cost $10,697. This seems like a lot of money to commit to a “rogue” idea.  On the other hand the one problem with options on IEF is that the further out months are often thinly traded and tend to have wide bid/ask spreads.

So the prudent thing to do given all of this might simply be to walk away.  But the “rogue contrarian speculator” is not afraid to “risk a few bucks” on an idea that others shun.  So here is one “example” way to play.

One Rogue Contrarian Speculation Play in IEF

As always, I need to state that this is not a “recommendation”, only an “example”.  But for arguments sake, there are some “requirements” involved:

*First off you have to be willing to “fly in the face of conventional wisdom” (which is another way of saying “you could end up looking like a complete idiot for ignoring what everyone else already knows”, and you have to be mentally strong enough to shake it off without a second thought, rather than sitting around kicking yourself wondering “how could I be so stupid”).

*Also, you will want to consider using “limit orders” for entering this trade (which can result in you not getting filled at all).  Still given the width IEF option bid/ask spreads it is important to take steps to improve your odds as much as possible.

So one example way to play appears in Figures 2 and 3.  The gist of this trade is to buy 3 January 107 call options and to sell 2 December 108 call options to pay for part of the January option position.  Specifically:

*Buying 3 January 107 calls

*Selling 2 December 108 calls

To enter this trade with a market order you would pay $1.35 to buy the Jan. 107 and you would receive $0.60 to sell the December 108, or a spread of $0.75.  Rather than settle for paying a wide bid/ask spread, we will assume that a limit order of $0.55 (buying at $1.25 and selling $0.70) is entered (and for examples sake) is filled at that price.  Aggressive traders might consider an even smaller limit.  Assuming a trader bought a 3×2 position at this price the position would cost $235 – which is 98% less than the $10,697 needed to buy 100 shares of IEF.  $235 also represents the maximum risk for this trade as depicted in Figures 2 and 3.

2Figure 2 – IEF calendar bull call spread (Courtesy

3Figure 3 – IEF calendar bull call spread (Courtesy

One of several things will happen from here:

*If IEF drops back to the recent low near 103.50 this trade will lose $190 to $235, depending on how soon that price is hit.

*On the upside, if the lower Elliott Wave target of $109.51 on the daily chart is hit the trade will show a profit of $160 to $210, depending on how soon that price is hit.

*If the lower Elliott Wave target of $112.39 on the weekly chart is hit the trade will show a profit of $430 to $470, depending on how soon that price is hit.


So if this a good idea?  Well, according to conventional wisdom “everyone knows” that betting on lower interest rates at this point in time is “obviously” a terrible idea.  And again, for the record I am not offering this as a “recommendation”, but only as an example of a “rogue contrarian speculation” – how to risk a relatively small amount of capital to “bet against the crowd” (note that while “compliance types” cringe at the use of the word “bet”, in this case I believe it is the proper word choice – hey, if you aren’t willing to speculate the don’t speculate).

In other words, for a person who is willing to spit in the eye of conventional wisdom, there are usually ways available using options to “risk a couple of bucks” in return for the “potential” to make a pretty decent return if what “everyone knows” doesn’t pan out as everyone just knew it would this time around (which is pretty often when i comes to the the financial markets).

NOTE: It should be noted that the example trade detailed here and the one using TBT in the earlier link will NOT both make money at the same time.  The IEF trade is bullish on intermediate-term treasury bonds and the TBT trade is bearish on long-term bonds. Theoretically, both trades could end up profitable at different times, but just be aware that if TBT calls are making money then IEF call options will be losing money and vice versa.

The bottom line:

Given the current state of affairs it seems highly implausible to expect intermediate-term bonds to rally strongly in the months ahead.  But that’s not the real question that a rogue speculator would ask.  The question he or she would ask is:

“Am I willing to risk $235 that they might?”

Jay Kaeppel

Bye Biotech; Pound Pounded

The good news is that if you do this long enough you will eventually get something right once in awhile.  To wit, today just a quick follow-up on a couple of things I noted a short while back.

The Fall of Biotech

In this article I highlighted the concern that if the 1999-2000 advance in biotech stocks was a “blow off top”, well then what the heck just went on in biotech in recent years?  See Figure 1.3Figure 1- Biotech Blow offs (Courtesy: AIQ TradingExpert)

Well the day after I published that piece ticker IBB topped out and subsequently plunged -28% before bouncing sharply.  See Figure 2.2Figure 2 – IBB plunges then bounces (Courtesy: AIQ TradingExpert)

Now if I were smart I would gloat about how I “called the top with uncanny accuracy” – and I must admit there is a part of me that really wants to (sorry, it’s just my nature).  But the real lesson here is that certain “things” do repeat in the financial markets (for example, why are we all familiar with the “head-and-shoulders” chart formation?  Simple, because it happens repeatedly among all of the various financial markets).  So it does pay to learn from the past and to look for familiar events unfolding in real-time.

So where to from here for biotech?  I have no meaningful prediction other than to expect some very wide price swings for a while.  Figure 3 displays the weekly IBB Elliott Wave count in the top clip and the daily IBB Elliott Wave count in the bottom clip.  The daily is suggesting sharply lower price in the near term and the weekly is suggesting sharply higher prices. 3Figure 3 – Weekly and Daily Elliott Wave counts for IBB conflict (Courtesy: ProfitSource by HUBB)

So your choices are:

1) Take your pick and strap yourself in, or;

2) Stand aside for now.

One other possibility is tobuy an options straddle – i.e., buy a call and a put.  However, given the high price and large bid/ask spreads for options on IBB I can’t really suggest that as a good idea.  Not saying it can’t make money but the reward/risk outlook  is not wildly favorable.

The Fall of the Pound

In this article I highlighted the fact that the Elliott Wave counts for the British Pound (using ETF ticker FXB) generated by ProfitSource by HUBB were pointing to lower prices.  Um, so far so “bad” (“Bad” in this case is roughly defined as “good”).  As you can see in Figure 4, since topping out on 8/24 (head-and-shoulders top anyone?) FXB has declined 8 trading days in a row.  4Figure 4 – FXB breaks hard to the downside (Courtesy: AIQ TradingExpert)

The option trade example I highlighted in the original article is showing a profit of 51% as I write as shown in Figure 5.5Figure 5 – FXB option trade showing a profit (Courtesy

The real question is “what to do from here”?  Since this is a hypothetical example of a trade I will list the choices and you can decide for yourself what you believe is the best course of action.  First, two important points:

FXB options are thinly traded and typically entail very wide bid/ask spreads.  The good news is that – as this trade illustrates – it is possible to make money trading such options.  The bad news is that it reduces one’s flexibility in terms of “adjusting a position”.  In other words, where a trader might consider turning the original trade into some sort of spread and locking in a profit while letting the remaining position run, when bid/ask spreads are this wide it is usually not worthwhile.

The Weekly Elliott Wave count is still pointing to the potential for much lower prices-and much greater put option profits – as shown in Figure 6.

6aFigure 6 – Ticker FXB; Weekly Elliott Wave count still pointing much lower (Courtesy: ProfitSource by HUBB)

The basic choices appear in Figure 7


Figure 7 – Possible outcomes for FXB put position (Courtesy

If FXB does manage to fall all the way to the upper Elliott Wave channel line ($139.77), this trade may show a profit in excess of $8,000.  Of course, if FXB bounce from here, the open profit could be lost and a trader still faces a maximum loss of -$2,640.

So the a few basic choices are:

1) Sell all and take a 51% profit

2) Hold all in hopes of a really large profit

3) Sell some and let the rest ride.

There is no right or wrong answer.  The key in this exercise is to consider what your own priority would be in this situation:

1) Registers a decent profit but foregoes the potential for “the big score”

2) May result in exceptional profits, but current profit may get away and trade could still turn into a loss.

3) Reduces risk but also reduces profit potential

If you want to be a better option trader, give each of these possibilities some consideration and answer the question for yourself.

Jay Kaeppel


What to Expect From Here

If you have been in the markets for any length of time, then you have seen this movie before:

(See also How NOT to Lose -97.5% in Semiconductors (Part II))

*The market is moving along swimmingly.  A few brave souls shout “The End is Near” as the Dow catapults a couple thousand points higher and then starts to level off.

*Suddenly [the financial press agrees on] one or more “causes” (circa 2015, think “China”), um, “cause” the market to plummet.

*We see the obligatory BOLD HEADLINES reading “Dow Down [-xxx] Points” accompanied by the also obligatory pictures of “worried traders” (who are these guys anymore anyway, hired actors?  I thought everyone traded electronically now? Seems like they should show a picture of a guy sitting at his computer with his mouth wide open, palm to forehead, with that WTF look on his face) standing and staring up at some distant screen, dumbfounded.

*Soon comes the (I am thinking about trademarking this phrase)“Obligatory Technical Bounce”, accompanied by  the equally obligatory “Dow [+xxx] Points – Is the Worst Over?” headline.

*Shortly thereafter we see the resounding answer – “No, the worst is not over”!

*And over a period of months the stock market becomes an endless roller-coaster, alternating with extreme volatility between “swooning and soaring”.

*Each “soar” is accompanied by more “Is The Worst is Over?” headlines and a lot of “Brace for more trouble” articles.

*Each “swoon” is accompanied by more “Dow Down [-point value here]” headlines and more “forlorn trader” photos.

And so it goes and so it goes.  To wit:1a-2002Figure 1 – 2002 (Courtesy: AIQ TradingExpert)

1a-2006Figure 2 – 2006 (Courtesy: AIQ TradingExpert)

1a-2007Figure 3 – 2007 (Courtesy: AIQ TradingExpert)

1a-2008Figure 4 – 2008 (Courtesy: AIQ TradingExpert)

1a-2010Figure 5 – 2010 (Courtesy: AIQ TradingExpert)

1a-2011Figure 6 – 2011 (Courtesy: AIQ TradingExpert)

As you can see in Figure 7, the 2015 decline is “off to a good start” (“off to a good start” being  defined as “big drop” followed by “soar” followed by “swoon”).

1s-2015Figure 7 – 2015 (Courtesy: AIQ TradingExpert)


Expect big prices swings by the major stock market averages.  Also expect to have the financial press raise your hopes that “The Worst is Over” each time the averages “soar” and to attempt to scare the crud out of you each time the averages “swoon.”

In the meantime:

*If you are an excellent short-term trader then there is the opportunity to make a lot of money.

*If you are a poor short-term trader then there is the opportunity to lose shocking sums of money in an incredibly short period of time (so assess your skills carefully before attempting to ride each “swoon” and/or “soar”).

*If you are a more traditional investor then the reality is that you should continue to follow your investment plan (you do have one, right?  Right?) and not “react” every time you see a picture of a dumbfounded trader juxtaposed to be staring at the latest “Dow Down [xxxx] Points” headline.  Remember:

Jay’s Trading Maxim #29: If you had a trading plan that you were following yesterday, you should continue following it today.

Jay Kaeppel