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Breakout Defense Part Deux – 5 More Trades that Make 500% in a Rising Market (Members Only)

SPY 5 MINUTEHere we are again!  

The last time I wrote a Breakout Defense article was back on December 11th when I said: "Wow!  I mean wow! Will this market ever go down? My mother called me this morning and she’s raising her GDP outlook for 2011 too – that’s how crazy things have gotten out there. I’m just waiting for the Pope to come out and tell us to buy CMG and Netflix and THEN we’ll know it’s a sign."  Clearly, my Mom and the Pope nailed it as the the Dow is up another 500 points (4.3%) since then and CMG made a comeback yesterday and is a bit higher than Dec. 10th’s finish at $238.22 and NFLX is well above $194.63 so the infallibility streak continues for the pontiff!  

As with last time, I would urge you to spend some time reading (and now viewing) David Fry’s market commentary over at ETF digest.  Dave’s take on the IWM, which we have been playing this week, is that it is still rolling over and that investors should not be fooled by the Dow.  I’m not here to debate the points – this is an article about what we can do to make sure we don’t miss the rally train if it does leave the station and, like last time, it’s very easy to set aside a small amount of capital into highly leveraged trades like this, which can make excellent returns on even small rises in the market.  On the whole, I remain cautious and still believing that we may be in a blow-off top but we have plenty of bearish short-term bets and we need some balance – just in case… 

We had just a 4.3% gain since our December picks and check out this performance on those already:

  • FAS Apr $20/25 bull call spread paired with the sale of the April $21 puts for net .15, now $3.98, up 2,553%. 
  • DBC Apr $27 calls at $1, now $2.05 – up 105%
  • 4 DBC Jan $22/27 bull call spread paired with the sale of the 3 USO 2013 $30 puts for net $170, now $740 – up 335%
  • DBC Jan $26/30 bull call spread paired with the sale of the $22 puts for net .30, now $1.50, up 400%
  • SSO Jan $30/June $42 diagonal call spread paired with the sale of and SPX LAST Jan $1,185 put that already expired worthless for net .40, now $10.85, up 2,613%.
  • GE Jan $17.50/20 bull call spread paired with the sale of the 2013 $12.50 puts for a net .15 credit, now $1 – up 766%.  
  • 50 HOV 2013 $5/7.50 bull call spreads paired with the sale of 10 2012 $5 puts for net $650, now $1,250 – up 92%
  • BA Jan $45 puts, sold short for $2.50, now $1.10, up 56% (alternate funding suggestion).

We have more than our target 5,000% worth of gains already and the year has hardly begun.  That’s pretty good!  Keep in mind these are highly leveraged trades based on the idea that you REALLY don’t mind having the underlying stock you sell puts against put to you (hence the BA alternative example in the post).  In other words – If FAS had fallen below $21 (the November low) we have to be willing to either roll the puts along in hopes they expire down the road or to accept a long on the ultra ETF.  Since we felt that QE2 gave us a firm floor on the financials, we would not have minded going long on a dip (plus, of course, we would have then hedged that anyway).  

I said in the December post, if you commit just 2% of your virtual portfolio’s sideline cash (more in margin) to a spread of trades like this that makes even just 2,000% – that’s a 20% boost to your ENTIRE virtual portfolio.  Even The Bernank hasn’t been able to devalue the dollar that fast – yet.  My comment in early December on the market was as follows:  

That’s the key now, we’ve been watching Dow 11,500, S&P 1,220, Nasdaq 2,600, NYSE 7,750 and Russell 725 for a very long time and, other than the Dow, our indexes have now smashed through that upside resistance and look like they are heading to the moon – especially the Russell 2000, which is up 25% for the year! Small-caps may not be hiring or making a lot of profit and they may not have the ability to get loans from the bank and their customer base may be hurting but BOY, just look at that performance!

And, as I’ve said before, once you break the orbit of a fundamental market, then "Stock Market Physics" no longer apply and there is no limit to the madness that lies ahead of us when (and if) the Dow breaks that 11,500 line. With the Russell up 25% and the Nasdaq up 17%, the Dow, NYSE and the S&P are looking kind of pokey hanging around the 10% lines, aren’t they?

We only had a couple of more days of pokey behavior, with a nice little dip that gave us fabulous entries on that Wednesday (Dec 15th) and then Santa Clause came to town and we were off to the races.  Of course we lost a little money running short-term protection along the way but the idea of short-term plays is to protect your long-term plays.  Otherwise it would be madness to watch them go up 100%, 200%, 500%, 1,000%… – without taking any off the table, wouldn’t it? 

Keep in mind we had not only these trades coming off our pretty much all cash position we were getting bored with, but then we had our less aggressive but also POMO-minded, "Secret Santa’s Inflation Hedges for 2011," which actually weren’t a secret at all as it was Christmas Day and I decided to give the World (especially Phil’s Stock World) some good money-making ideas for Christmas.  

Usually we don’t publish our virtual portfolio trades for the general public but it didn’t seem like there was anything that was going to stop The Bernank from destroying the Global Economy with inflation so, it made sense for us to hold our own bags out if Uncle Ben was going around handing out money to the top 10%, right?  Those trades were far more conservative, so appropriate for larger bets as we looked to hedge our still 75% cash positions against various kinds of inflation (see post for details).  Those trades were:

  • 30 XHB 2013 $15/18 bull call spreads paired with the sale of 20 2013 $14 puts for net $800, now $1,940 – up 142% (on track to $9,000)
  • 2 XLE Jan $55/60 bull call spreads paired with the sale of 1 2013 $50 put for net $120, now $700 – up 483% (out of 733%, this one is done with risk now outweighing reward 2:1 and a whole year to go).  
  • 6 DBA Jan $26/29 bull call spreads paired with the sale of 4 2013 $25 puts for net $380, now $1,100 – up 189% (on track to 373% but high enough to urge caution already).  
  • XLF Jan $12/13 bull call spread paired with the sale of the Jan $11 puts for net .40, now .68 – up 70% (on track to 150%)

One of the things I’ve been getting upset with is how fast our inflation hedges are making money.  Perhaps that’s why I (and other Members) are a little more sensitive to what BS the Fed’s money-printing policies are as we see the effect on our own meager holdings and that makes it very easy for us to imagine the many Billions that are being funneled into the IBanks, who are playing trades like these right along side us and funneling that money out of the pockets (and mouths!) of the non-investor class, which is really 99% of the people in the World if you don’t count mindless 401K contributions and retirement funds.  

So we make money and we complain about it.  Is that really so strange?  I often say to Members – "We don’t care IF the game is rigged as long as we can figure out HOW the game is rigged and place our bets accordingly."  It’s a bit cynical and, if I felt that our participation in this scam was perpetuating it, then I’d have a real moral dilemma…  But it’s not.  We are but fleas on the ass of Goldman Sachs, et al. and they are going to do what they are going to do.  To go against the forces of the market is like betting that a star in the event horizon won’t get swallowed by a black hole, just because we don’t want it to.  You COULD bet against it, but I doubt your find any Physicists who are willing to bet with you.  

Speaking of science – in the December post I made a comment about the plunging VIX, then 17.61, which was: "I have a theory that all the lithium from all the rechargeable batteries has seeped into the water supply and made it impossible for investors to worry about things."  That theory has been holding up all too well with the VIX at 15.93 at Friday’s close!  Be afraid, be very afraid that nobody else is!  Here’s a look at the multi-chart as we ignore, well – everything that is going on in the World – for the last six months:

Wheeee!  This is fun!  Now keep in mind that most of the punditry is telling you that they EXPECT to do this again in the next year.  As Eddie Murphy said in Trading Places when the rich guys told him he was getting a mansion, servants, a job etc. "Yeah, I’m cool with that because stuff like this happens to me all the time!"  He was being sarcastic but there’s not even a hint of irony in the expectations of the vast majority of investors and that makes me very, very nervous.  On the other hand, there’s not a hint of irony in a wildebeest when they are stampeding, either, and it’s not a good idea to go against that herd.

VIXWe’re testing 20 and 25% breakout levels from the August lows and, as I have long been saying, it is now "safe" to go back in the bullish water if we remain over our major breakout levels of Dow 12,000, S&P 1,300, Nasdaq 2,750, NYSE 8,250 and Russell 800.  As we stay above them, they begin to give us firmer and firmer support, which means the plays we take here (at the lines) that are designed to withstand 20% drops, will look as safe as our last set of December upside trades do now.  Note also, the way the chart was on December 11th is the way the chart is now and, like December 11th, we begin with our breakout defenses and we will move on to plays that we are willing to commit more capital too once we have a little more comfort and experience over those lines (maybe end of this month if all goes well). 

We have plenty of downside covers in place so now it’s time to give ourselves something to cover but it’s all about holding at least 3 of 5 of those levels – anything below that and we can consider it a bearish turn for the market!  TZA is our lead cover (see yesterday’s post) along with EDZ.  As I mentioned last time, there are several stocks we should always look to pick up when they are "on sale" and that’s:  BA, GE, VLO, XOM, MO, WFR, UNG, PFE, MCD, KO, JPM, FDX, HPQ, GS, GOOG, AAPL, DIS, T, VZ and AA off the top of my head.  Please use the comments below to make suggestions and identify opportunities, especially as I’ll be out for a few days so any research you guys have time to do would be much appreciated and I can concentrate on making plays out of them.  Thanks!  

And, Finally, Some New Trade Ideas:  

Since there is APPARENTLY no risk in owning equities, then there should be no risk in owning ultra equity ETFs either and I think we can start with a play on SSO, which is a 2x track of the S&P that is surprisingly reliable over medium amounts of time (12 months). I like the 2012 $44 calls at $11.30, covered with the June $50 calls at $4.70 for net $6.60 on the $6 spread (and, of course, you can roll the caller if things go well) that can be offset by selling an SPX March 1215 put for $6, which has a high premium of about $17K (to get $1,000) but it’s offset by the fact that your margin is released on March 18th if things go well and that leaves you in a net .60 2012 bullish play on the S&P that has an easy 1,000% upside if things go just a little well.

The SPX is currently at 1,310 so the S&P would have to fall 7.25% to put the puts in the money. If that should happen, it would, of course, be a good idea to slap on a downside cover if you don’t already have them. Hopefully, with the new market breakers, we aren’t likely to drop 5% in a day and, for example, SPY March $125 puts are just $1 so 10 of those slapped on real quick would take a lot of the sting out, as would rolling. Keep in mind, these are upside HEDGES at the moment, we go bullish on stocks, not 10:1 paying ETF plays! These are for protection on bearish positions as well as for small bets so you don’t feel like you’ll miss out on the rally. As I pointed out last Friday, if we have a FAS play that makes 3,233% by April and we commit just 1% of our virtual portfolio to it, that’s 32% gained on the whole virtual portfolio on that one play – that should keep you up with even The Bernank’s wettest dreams of hyper-inflation without over-committing your cash!

Also, keep in mind, this is where those substitutions come into play.  Why are we selling the SPX March 1,215 puts?  To get $6!  We like it because we don’t think the S&P is too likely to drop 7.5% in 45 days and, if they do, we can roll ‘em to the June 1,025 puts (also $6 at the moment) and then on to the Dec 800 puts ($6.70). If you think the S&P is going to fall below 800 or fall so fast you won’t be able to roll – THEN WHY THE HELL WOULD YOU BE TAKING THIS AGGRESSIVE UPSIDE PLAY???  There, in a nutshell, is the logic of these kinds of positions!

So, where was I?  Oh yes, substitutions.  So if the idea of playing SPX makes you squeamish, the thing to do is find something else you REALLY want to own that will pay you $6 instead.  Try to make it something that you REALLY, REALLY want to own long-term and are willing to commit to now so that, even if the stock falls 20% below your strike, you would still be thrilled to have such a bargain and, if the stock falls 20% more below your strike to 40% off your entry, you will be THRILLED to double down and be in 2x at an average of 20% off.  

AAPL is always a good example – I would love to own AAPL for $250.  Unfortunately, it is at $346.  Yet, amazingly, there is someone willing to pay me $8.90 to promise to buy his Apple stock for $250 in January (selling me the put).  Why does he do this?  Well, from his point of view, maybe he is worried Steve Jobs will die or the Droid will wipe out the IPhone or NFLX will come out with a Pad computer and he wants to limit his potential losses to 27% and he’s willing to pay $8.90 (2.5%) – whatever, it’s not our problem.  All we have to do is say: "Sure, you give me $8.90" and I will buy your Apple stock for $250 in January if you ask me to.  That’s what a short put is.  Since $250 is 27% lower than the current price, the margin on my TOS ordinary account says net $2,500.  Not a bad deal for letting giving me $890 in cash now.  

This is our famous "Wimpy Investing Strategy" as we get paid today for promising to buy something tomorrow.  If I REALLY, REALLY want to buy 100 shares of AAPL for $250 a share ($25,000) and I would REALLY, REALLY be thrilled to buy another 100 shares 40% lower at $150 ($15,000) so I would own 200 shares of AAPL for $40,000 when they are down to $30,000 because I would be confident enough to hold them LONG-TERM and wait for a comeback – then why not take $890 now against $2,500 in margin?  

Again, keep in mind, it does not have to be AAPL – it can be any of the stocks I listed above at 20-25% off and it can be any stock you REALLY want to own at the strike you sell a put at.  This is an ideal strategy when we have a lot of cash on the side that we would like to deploy on a dip but, we also don’t want to miss out on a big move higher.  Even if we margined 50% (because when you buy the stock it’s only 50% margin) for the trades and allocated 50% of a $250,000 virtual portfolio to 10 short AAPL Jan $250 puts, we’re still collecting $8,900 cash while we wait, which is 3.5% interest on our entire balance.  Better than putting it in a CD, right?  

Another thing people say, especially those with 401K accounts that have restrictions on short puts selling, is can we just take the suggested bull call spread?  Of course you can!  Generally, I’m looking for bull call spreads that are very likely to double and then offsetting the cost by selling puts that reduce the net cost of the bull spread by 75% of more to turn a 100% return into a 700% return.  So, if you can be satisfied with "mere" 100% returns – the bull call spread alone is fine and, of course, set stops if we break down – which is really easy to do as we’re right above our major levels.  I would caution against applying this strategy to any old thing though – although I liked the above SSO play do do it again, I generally look over 40 or 50 trade ideas that I reject before one of them makes these virtual portfolios.  It is VERY painful when they go the wrong way so it’s important to be very selective in your picks as well.  

I still love my Financials because that’s where all the POMO goes.  XLF was only $15.76 when I made my 12/11 picks and now just $16.61 so we didn’t miss too much of a move.  Financials are lagging the market and probably for good reason with however many bank closings per week but, still, clearly the top of the heap, that make up the bulk of the XLF, is certified by the Government as "too big to fail."

FAS is always a favorite because it has very attractive spreads.  The July $28/35 bull call spread is $2.10 and we can offset that by selling 3x the C 2013 $3.50 puts for .40 ($120).  I like C as a TBTF bank and also, in TOS, the margin requirement is net $144 to collect $1.20.  So this trade obligates you to buy 300 shares of C at $3 ($900) and you toss in another $90 in cash fro the bull calls spread and you have a $700 upside at FAS $35, with FAS at $31.12 today.  Of course, you won’t net out the $700 until/unless C finished over $3.50 in Jan of 2013 but you will make $490 CASH at $35 and you can quibble about the value of the trade over a very nice steak dinner.  Another thing about a trade like this is, if successful, you can re-load and re-load and re-load – as we are doing right now off our last set.  

HOV just came down in price as they sold a little stock to raise a little cash.   Home builders are THE place to be if inflation works its way back to real estate as they are sitting on huge piles of land (and unsold homes) that are already highly leveraged so, what looks like a bad thing now can turn into a very good thing very quickly.  So think about betting on HOV, and possibly TOL later on, as speculating on the speculators – their leverage can make for astounding gains if real estate prices inflate.  Also keep in mind they are just as likely to collapse and that’s why I like HOV, who have already written off their asset values tremendously.  

HOV 2013 $5 puts can be sold for $2.  The most you can lose is $3 – simple enough?   If you are willing to lose $600 you can sell 2 contracts.  With that, you can buy 6 2013 $5 calls for $1.10.  That’s another $60 out of your pocket and you control 600 shares at $5 and make every net penny above $5.10.  That’s not complicated, right?  Why do I like this trade?  Here’s a chart of what happened to HOV the last time they were at $5 and there was a housing boom:  

Let’s say HOV "only" gets to $20 in 2 years.  What do we get?  We get the net of $5-$20 ($15) x the 600 shares we control for a $9,000 reward on our $600 risk.  If you simply run a trade like this every two years, we would have to go 30 straight years without once getting the 300% run we’re looking for AND you would have to be wiped out ALL 15 times to not break even on this trade.  It is rare that we get an opportunity to buy into a cyclical industry so near the bottom.  If we do get wiped out on HOV (they go BK), then I can assure you that in January of 2013 I will be telling you what a great opportunity it is to invest in whatever other beaten-down builder looks good because the ones that are left will likely be even cheaper then if the market is so terrible that it bankrupts HOV.  

So consider a play like this scaling in.  Maybe set a $300 stop-loss on the short puts on this one and then we go in with another $600 attack once the dust clears on whatever it is that forces us to stop out of this one.  Speaking of beaten-down and out-of-favor sectors.  How about shipping?  The BDI, which is the rate shippers charge, is down at just over 1,000 on the index.  It was only below 1,000 between October of 2008 (down from 12,000) and January of 2009 – after which it went back to the 4,000′s, which it held through last June and then down and down they went.  A shipper just went bankrupt and there probably is too much capacity but, if the global economy is really recovering (and that’s the premise to this virtual portfolio), then 1,000 will not last long again.  

DRYS is attractive, mainly BECAUSE they are right on the $5 mark.  That makes their contracts a little better for us to sell at the moment (as people bet off key levels in both directions, increasing the implied volatility for the stock) and, with a low VIX, we need all the help we can get!   This is a judgement call but I’m looking for BDI to bottom here and turn up on Q2 earnings (again, assuming the bulls are right) and that should power them towards $10 in the summer.  

The June $4/5.50 bull call spread is .79 and is already .21 in the money (options are funny that way) with a potential for $1.50 (up 90%) and then it’s just a matter of paying for that with anything you REALLY want to own between now and then but let’s say we do REALLY want to own DRYS long-term at a 30% discount, so we sell the 2013 $3 puts for .40 and that’s net .39 on the $1.50 spread with a $1.11 upside (285%) and our WORST CASE is that we own DRYS for net $3.39, which is 32% below the current price.  

These are not meant to be complicated ideas.  If you like the idea of shipping and you are a long-term investor and DRYS appeals to you.  Then you can set aside $3,390 (for example) to buy 1,000 shares, right?  On the whole, it doesn’t matter whether or not you make money on the short-term bull spread because all you are doing is setting aside $3,390 to buy DRYS.  If, by some happy accident, DRYS finishes at or above $5.50 at June expiration.  Then you will be handed $1,500 for your 10 contract spread.  That means, the net possible cost of having DRYS put to you in 2013 would drop to $1,890 or $1.89 a share.   If you do not buy DRYS in 2013 because it never comes back down to $3, then you paid net $390 to collect $1,500, which is a $1,110 profit.  Even with no margin at all, that’s a nice return.  

DRYS can, of course, be played more aggressively and, for that, I’d go for selling the 2012 $5 puts for $1 and buying 2x the $5/7.50 bull call spread for net .60 so that’s net .10 per $2.50 spread with a 2,400% upside if DRYS can finish over $7.50 next January.  That’s another one of those fairly low net margin plays (about $1) so really fun if you have a margin account.  If I have a $100K virtual portfolio and I’m willing to own $5K of DRYS then I can allocate $2,400 to selling 6 of the 2012 $5 puts on the assumption that I can roll those back to the 2013 $4 puts (now .85) even.  Of course we can roll again and again but I like to assume we’re stuck after 2 years.  

So let’s say DRYS is $2 by then and I have 600 shares at $4.  Well, if I then take the $2,600 that’s left of my $5K allocation, I can buy 1,300 more contracts at $2 (obviously assuming we still like it based on 2 years of new information) and that would leave me with 1,800 shares for $5,000 or $2.77 each with the stock at $2 so down a little over 20% after a 60% drop in the stock.  If I decide I can live with that, then on THAT basis, I am deciding to allocate $600 in margin to take $600 in cash today for selling 6 2012 $5 puts and applying that cash plus another $200 to buy 12 of the $5/7.50 bull call spreads.  

If all goes well, DRYS finishes above $7.50 and I collect $3,000 (1,200 x $2.50) against my $600 of margin and if all goes horribly wrong, I own 1,800 shares of DRYS at net $2.77.  THAT’s how I’m thinking of a position when I tell people not to worry about them sometimes and I apologize if I come across as flippant about it but, in this trade, for example, think how silly it seems to worry if DRYS dips down to $4.50.  If you are looking ahead to your $2.77 entry because you REALLY want to own DRYS long-term – then this doesn’t bother you at all because you’re not going to get your price unless it gets a lot cheaper than that!  

The $2,800 you make on this play is a consolation prize.  It’s what you have to settle for for NOT getting your 1,800 shares of HOV at $2.77.  I WANT, REALLY, REALLY want a virtual portfolio that is filled with LONG-TERM positions like DRYS at $2.77 and GE at $11 and AAPL at $250 etc.  I want a virtual portfolio like that that I can sell calls against for the rest of my life for a nice little monthly income.  You’d better pay me not to take it!  

Develop that attitude, and you will become a much better, much more relaxed option trader!  

 


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  1. Phil

    Good morning!  

    I’m out of here (please don’t use this post for condolences  - I appreciate it but let’s keep this post business so I can keep up on the IPad).  I won’t be much for long explanations but, as I said in the post, I would very much appreciate hearing your ideas and research on stocks that you think fit our criteria for winning plays we can leverage.  Most of you are experts in one industry or another – let’s use our skills to find the best of the best – especially those diamonds in the rough that we can add to our collection.  

    Thanks and have a great weekend!  

    - Phil

  2. tradinv1

     Phil,  AKAM has been on my radar screen for quite a while.  Last summer it dove after an earning report into the upper thirties, but rebounded pretty quickly.  In the past few months it has really been consolidating and reports next week.  My thought is a 2013 40/50 bcs for $5; selling the 2013 35 put for about 4.50.  I think scaling in is very important here in case they disappoint, but they are in this streaming video space and acquired a company last year to give them a presence in the mobile space.  Why wouldn’t we want to own them for $30 in 2013?  All of these stocks’ p/e’s are high, but they have no debt.  Maybe the smarter entry is to just sell the 2013 35 puts, wait for earnings and get a better entry on the spread if they pullback.  thoughts?

  3. Phil

     That’s that’s exactly the kind of trade ideas I’m talking about folks!  Take notes – nice summary of reasons, history of price action and an idea for a trade – very nice Trad!  

    Now is where I tell you what’s wrong! 8-)

    They have a pretty high p/e here, even forward it’s 29.  Mostly I want to see stocks I will be happy to buy more of if they drop 40% as opposed to ones that need to drop 40% before I even think I’m getting a good deal.  They are in a hot and growing space, however so points for that but already at their post 2000 highs is a big negative.  

    Good balance sheet, growing income but poor cash flow.  They bought back their stock, which I’m not a fan of in tech companies and they have a lot of competition so I would look at them as a company that should put out a solid $1.50 a share going forward but not count on growth and give them a 20 multiple (generous for me) and figure $30 is my target.  

    Problem is, you net is not $30, your net is $35 because you are spending $5 on the spread and if the stock is put to you, then your cost is $35.  (+ .50 actually).  I would play them the other way, much more conservative, with the 2013 $25 calls at $26, selling the $35 puts for $4.50 and the 2013 $35 calls for $18.  That’s net $3.50 on the $10 spread and IF they go lower, you can roll yourself lower and cash out the caller for a bounce.  If they don’t go lower, $6.50 upside should be 100% of margin and your break even is the spread between the $28.50 net of your calls and the $35 put-to price so $31.75. 

    To me, that’s tying up $600 to make $650 as long as they don’t fall more than 26%.  If you make all your plays like that, you’ll probably have a good trading career!  

    Note to all, keep in mind the margin is $600 but you’re obligated to buy 100 at $35 so $3,500.  This is not magic.  If you commit (in your mind) 50% of your worst case or about $1,750 and think of that $650 as against what you might need, it’s 37% and the key is you have a dozen positions and you are generally balanced so if the market goes up more than 20% then half your portfolio makes 30-40% and the other half loses a bit and if the market goes down more than 20%, then half your portfolio makes 30-40% and the other half loses a bit BUT (and it’s a BIG BUT) – If the market does not move more than 20% in each direction – then you make 30-40% on both sides and you are a happy, happy camper. 

  4. tradinv1

    Thanks Phil, BTW, if you didn’t tell me what was wrong I would wonder what I was paying for.  I appreciate the help!! 

  5. tradinv1

    Phil,  I have also been thinking about this whole commodity issue and the continuing expansion of the worldwide economies.  the problem is that these things are so overbought and driven by the weakness of the dollar that it is hard to figure out what the real value is.  If there were a short term rebalancing, then some of these stocks would take a hit but longer term it does not appear to be anyway that the demand equation is going to slacken.  It also does not appear that there is going to be any conscious effort to strengthen the dollar in the near term, just the opposite.  So with all that said, the miners feel like a safe long term play.  For instance, following your logic above, the BHP 70/80 2013 bcs is say $6; we can sell the 65 puts for $5.75.  The near term worry is inflation in the emerging markets, but isn’t that a positive for these miners?  We can make a similar play on FCX, but the potential for a copper specific ETF needs to play out to understand the affect on them – yes or no?

  6. tradinv1

    Phil, Safe may be the wrong word.  A "reasonable investment thesis" may be a better phrase? 

  7. stjeanluc

    I updated the screen I ran on Monday using the fundamentals critera described in a previous post:
    http://lemoyne-mappingthemarket.blogspot.com/2011/02/scren-results-252011-update.html
    Overall, the screen did better than the market with a 2.33% return over 4 days. I plan on tracking that every week and rebalance on a monthly basis. 

  8. kevinb63v

     Phil.
    I totally agree that trading should be a major part of any book. In my view it’s just another thing in America that needs fixing. If people should be aware of  something as simple as how they are being taken advantage of on market orders, they could make a simple change that could materially benefit them. IMO, the level of financial illiteracy in this country is astonishing, even among the college educated.
     
    When I’ve been thinking about this project, my thoughts have centered around what you might want to say and how to facilitate getting that together, which is why I started with a purpose definition. I have also thought that a first cut at chapter titles might help to create an outline. So far I’ve come up with Chapter titles like: The Banksters; The Polluted (Main) Stream (Media); Plunder and Pillage, Inc.; and Catch Me Now I’m Falling (with a nod to The Kinks), the idea being to delineate a category or concept and then utilize a category index that I would build from your prior articles to put sections of content at ready disposal to paste together a first draft.
     
    Godspeed on your journey.
     
    P.S. I’m happy to report that I had outstanding dual daughter report  cards, as did you!

  9. kmaus80

    How about the following buy-write on National Bank of Greece?  Buy for 2.04 while selling 2013 2.24 Calls and Puts for 1.625 gives you a .415/1.3275 entry which is either a 439% return or 35% downside protection.

  10. jerconn

    Phil, I wasn’t logged on yesterday so missed the news…sorry to hear, but you should only have good news going forward…question reg today’s post:  You mention that "TZA is our lead cover (see yesterday’s post) along with EDZ" but I don’t see anything about TZA (not in yesterday’s post either) – what am I missing?  I’m carefully watching the $25K portfolio and don’t see it there either…thanks for filling me in…

  11. rj_jarboe

    kevinb63v/Phil – Book
    Since last spring I have been building a Word document by cutting and pasting the responses given to members when they ask for advice on trades. I always keep any response that gives advice that I think goes beyond the particular trade being responding to. I have slowly been editing out the screen names of the members being responded to and have been organizing by sections such as Verticals, Selling Puts, Protection, etc. I have been doing this for a reference for myself to keep me from asking questions that may have already been answered. If you think this document could be used in the book project or could be used as a member help document let me know.

  12. nicha

     rj_jarboe – I would appreciate the document. nichania@gmail.com. I have a few things of Phil in my email but I never got around to organizing it in a document. Thank you.

  13. terrapin22

    rj_jarboe – that is a great idea.  I would appreciate a copy.  thegeneral91@gmail.com   I have built a word doc with all of Phil’s trade ideas that I liked for past year.  It’s easier for me to track than on the website as sometimes I don’t enter the trade right away.  not quite as organized as yours.  thanks. 

  14. rj_jarboe

    Phil/ Potential trades
    CHS recently punched through the 200 DMA (helped by an analyst upgrade) and is closing in on the 50 DMA. They have a market cap of 2B, a FWD P/E of 14, Revenue of 1.87B, Operating Cash Flow of 192M, Debt of $0.
    The Jan12 $10/12.50 BCS is $1.20 ($1.38 ITM) and the $10 puts can be sold for $1.25, the Options may be too thinly traded to suit you though.

  15. rj_jarboe

    nicha/terrapin
    It is not totally edited yet, it will take some time. I want to wait until I find out if Phil wants to look it over (since it is his comments, some of which may have been taken out of context since I only have his answers) and if he wants to make it available on his site. If he has no interest, I will send it to you guys when I am done cleaning it up.
    I do the same as you terrapin on the trade ideas. I do not have time to keep up very well during the week, so I cut and paste all trade ideas for the week into a document and then do my own analysis over the weekend and place any orders Sunday night. I miss some trades this way, but I also get better entries every now and then.

  16. dclark41

    Phil
    I have been watching FDO. It has been hammered down ~25 % over the last month. Family Dollar Stores reported an increase in both net sales and net income for Q1 of fiscal 2011 ended November 27, 2010. Net sales increased 9.5% to $1.997 billion compared to $1.823 billion in Q1 of fiscal 2010. Net income for the quarter increased 9.9% to $74.3 million compared with net income of $67.6 million for Q1 of fiscal 2010. Net earnings per diluted share increased 18.4% to $0.58 compared with $0.49 for the Q1 of fiscal 2010. Q1 comparable store sales increased 6.9%. They also pay a 1.7% dividend and dividends have increased every year for the past 35 years. They company plans to open 300 stores in 2011.
    In addition Family Dollar entered into an accelerated share repurchase agreement in October 2010 to repurchase $250 million of its common stock, as part of its previously announced $750 million share repurchase authorization. During Q1, the Company received approximately 4.4 million shares related to this transaction. The company is authorized to purchase up to an additional $500 million of its common stock.
    This company may be in a sweet spot with the swelling number of unemployed. Most of their products sell for less than $10. It may not be the best value (certainly not overvalued IMO) in it’s category, but the recent drop in price makes this an intriguing stock.
    I like the buying the stock for 41.51 and selling the 2012 $40 puts and calls for $8.30 for net $33.21 if put the shares (20% discount) or avg. $37.36 for all shares owned and that doesn’t include the dividend of 1.7% . On the other hand, if called you stand to make 32% in 12 mos.. (I think I got that right?)
    If you don’t buy the stock you can go with the 2012 $40 call ($4.90) and put ($3.40) paired with selling the July’11 $45 call for $1.50 for net  0 on the $5 spread. If the stock is less than $45 by July you can sell the 2012 $45 calls or move up to the $50′s.

  17. williex

    Since I am new to PSW can someone tell me if these new trades are in conjunction with the 25kp or should I consider these trades as a seperate position. 
     
    Also I don’t always know if the trade is a buy or a sell.  Is there any standard terminology that phil uses when he means buy or sell.  I have been assuming if he does not say sell he means buy.

  18. humvee4me

    Welcome Williex:  yes, if unstated the trade is a buy;   unless stated otherwise, no trades are for the 25K Port.  The 25K portfolio trades will be addressed as such and you can follow the progess through the great spreadsheet that PharmBoy is creating for us!!
    http://www.editgrid.com/user/pharmboy123/25K_Portfolio

  19. dclark41

    Phil, Pharm, or other board members:
    Does anyone know what happens when you have bull call spread and the underlying stock gets bought out for a price greater than short call on the spread? Just curious and want to be prepared in the event this happens. Thank you.

  20. pstas

     1099- anyone get these from TOS?

  21. scottmi

    Inflation – excellent and not too long Jim Rickards interview on fed inflation and currency games
    HRN: Why do you think the situation is unstable?
    Jim Rickards: There is a lot of inflation, but it is being offset by deflation.  I compare it to an arm wrestling match.  If you’ve ever seen an arm wrestling match with two really powerful participants, nothing really happens for a long time.  The two arms just kind of sit there, then all of a sudden it starts to tip, then one guy just breaks and his arm is slammed down on the table.  Just because nothing is happening at the surface doesn’t mean that a lot of things aren’t happening below the surface…

  22. nicha

     pstas/1099 – haven’t got it yet.

  23. pstas

     1099- just got reply from TOS- said 1099 will be mailed on 2/15. I thought these had to be out by end of Jan? Anyone know what the regs are?

  24. humvee4me

    1099′s are supposed to be mailed by end of January, but its not uncommon to have them late, i get 1099′s into March every year  :(
    dclark:   you are golden if your stock is bought out above the sold calls.

  25. nicha

     scottmi – thanks for the link. A good read.

  26. yshenhar

     I checked the FAS July 28/35 spread and the quotes I see (from Friday) are 2.92 / 3.32 – has anyone checked that trade?

  27. rj_jarboe

    yshenhar/FAS
     
    I am seeing around $3.00 also

  28. dmci

     Phil, 
    I don’t understand the HOV trade logic. "Let’s say HOV "only" gets to $10 in 2 years.  What do we get?  We get the net of $5-$20 ($15) x the 600 shares we control for a $9,000 reward on our $600 risk" 
    If you own 6 of the Jan13 $5C and the stock is at 10 in Jan 2013, the most you can make is $3000 ($5 x 6 contracts)+$600 put premium(you would have to sell 3 Jan13 $5P contracts @ $2+ $.60 to finance the calls) which is $3600. What am I missing?

  29. rossmanmd

    rj_jarboe
    As a newcomer to PSW, I have been cutting and pasting as I have time trying to understand the terminology, advanced strategies, etc.  If you choose to share the book, I would love to receive a copy. (ref48188@gmail.com) Thanks.

  30. rossmanmd

    1099s
    The IRS requires that Form 1099 information be furnished to customers no later than Feb. 15, 2011.  Corrected 1099s are  mailed thereafter, usually in early March.

  31. exec

    Jeanluc,
     
    I was checking out your link and had a question. 
     
    The securities that you listed came from a screen that you ran…..correct?  Their performance ranged from approximately 15% gain to a about a 6% loss for the week. 
     
    When you ran the screen were the individual securities rated?   (i.e. did Hitachi rate as a more attractive buy than say Hess Corp on your screen?)  I was curious if you did a report to see how the higher rated companies on your screen did relitive to their performance for the week.

  32. stjeanluc

    Exec, I didn’t rank the securities in the screen. That would be another project. For now I am just taking the entire set at once. I was thinking of adding a criteria for volume because some of the securities are thinly traded. Also, I don’t like stocks under $10 as they are usually too volatile. If you are interested I can post the results of the screen for the week.

  33. Pharmboy

    dclark – not sure exactly what you mean, but GXDX is a perfect example of the BCS working in a buyout.   Our play was the 17.5/22.5 BCS and they were bought out at $25, so you collect the entire premium.  If it falls within the premium, then it depends upon the cash and or cash/stock offer.  That gets more complicated.

  34. dclark41

    Pharm
    Kind of confused myself with that question. Been thinking too much. Thanks for the response anyway.

  35. jerconn

    Pharm, what is the TZA cover play that Phil mentioned in his Saturday post?  I’m not seeing it…

  36. jerconn

    Pharm, found the TZA in an earlier post: Sell (I think) the April 13 puts at $1 (now $1.04), buy the $12/17 BCS now at 1.91 approx.  But, Phil didn’t say how many of each.  Also,  I’m not sure if a bearish play is still appropriate at this point…what do you think? 

  37. Phil

    Good morning!

    Still down in Florida, of course with lots of family stuff going on later but I can do a little catching up and I’ll get a new post up so everyone has a place to go for comment.

    I’m working on one computer with one screen so don’t expect too much….   I’m still waiting for Shadow to make ma a laptop with 3 screens that fold out so I can take my show on the road more easily.

    Congrats to Cap and other Packers fans, by the way!

    This is a very strange day in Liberal land as AOL buys the Huffington Post for $315M and pretty much all cash so congrats to Arianna, yet another immigrant making good in America!.  They get 25M uniques a month but how AOL will benefit from that I am not sure other than being able to claim the eyeballs and pick up the ad revenues – good things but I don’t see the synergy.

    As to suggestions here, I will get back to these when I get back so please keep making them but I’m not set up at the moment for proper analysis and I don’t want to give half-assed answers as we build our bullish positions going forward.

    HOV/Dmici – I meant to say gets to $20, not $10, net of $5-20 is $15.

  38. japarikh

    Has anyone been able to figure out why NFLX flew up on Friday? I can’t find any news.

  39. jomptien

    VIX/24K Portfolio,  Phil is busy but anyone rolling the VIX Feb 17/19 BCS, selling the 17 puts? I’m thinking of rolling the 19′s down to the 18′s – appreciate any suggestions. Thanks

  40. judy

    Here is an idea for consideration. Masco MAS – B/W -  buy mas 14.43 selling 15 strike Jan 12 puts 2.65 and calls 1.87 yields about 20% and a net entry of 12.45 if put.  The 20% is based on maintaining cash to buy the put – eg. in an ira.
    The prices are mark and spreads about .40 so a careful entry would be needed.
    Or, maybe buying the Jan 12 10-15 bcs – buying strike 10 $5.00 selling the strike 15 $1.85 and the strike 12.5 puts 1.45 so about $1.70 for the $5 spread.

  41. Phil

    Good morning!

    DC reminded me to catch up on this post, which is a good thing to do with me from time to time!  

    AKAM/Trad – I’m liking the entry now better than before.  It looks like you can pick up the 2012 $27.50/35 bull call spread for $5.25 and sell the 2013 $30 puts for $3.35 for net $1.90 on the $7.50 spread that is 100% in the money with a 15% drop to spare.  After that one works out, then you can go for another one in 2013.  The spread I suggested last week is still $3.40 amazingly – that’s why I like to play them that way.  What happens is the lower call, which had no premium, gets premium on the drop, which preserves some of the value.  It doesn’t last on a steep drop but it does give you a chance to change your mind. 

    BHP/Trad – That’s a nice, conservative spread.  Obviously, I much prefer to catch things AFTER they have a nice fall.  I think with FCX under the 50 dma, then I’d say that this trade can be executed with little difference if we wait to confirm strength in this sector.   

    Book Kevin – I have to catch up on stuff this weekend but please remind me that next weekend we need to talk about this project.  Congrats on the kids, what a nice feeling! 

    Greece/Kmaus – I take it you are looking on a foreign exchange?  Mathematically, the spread makes good sense but I can’t speak to the prospects of that particular bank.  Obviously, you are getting a big reward carrot because there is a lot of risk so be careful.  

    TZA/Jerconn – Thanks.  I don’t know when I mentioned it but it’s cheaper now, that’s for sure!  It wasn’t for the $25KP but right now I like selling the July $11 puts for $1.20 and buying the $12/17 bull call spread for $1.35 and that’s net .15 on the $5 spread that’s already $1.15 in the money.  The assumption on a trade like this is that you can roll the puts down to the Jan $9 puts and then the 2013 $6 puts so a 50% drop in TZA would be about a 15% gain on the RUT.  

    Let’s say we figure that we won’t mind owning $6,000 worth of TZA at $6 as a LONG-term hedge after the RUT gains 15% so we can sell 10 of the $12 puts now for net $150 and that buys us $5,000 of downside protection.  In a normal market – these work so well you can overhedge with little fear of excitement but, in this inflationary market, 15% doesn’t sound like a very big move anymore so we have to be more careful.  This is one reason the VIX is so low – fund managers have no incentive to buy puts in spreads like this unless they REALLY need them.  

    Keep in mind though, that if we have $200,000 and we are 35% invested and 20% is bullish, that’s $40,000 and $5,000 worth of protection is an additional 12.5% of downside protection on the bullish plays over and above whatever hedges those bullish plays are using so it is VERY adequate protection at this stage of the game.  

  42. Phil

     Book RJ – Thanks, that sounds good.  I was hoping we could get started with a Wiki project but, so far, I don’t think anyone actually knows how to work those things.  

    CHS/RJ – That’s a good choice, they have good growth although I do have some concern on cotton prices, which are out of control but, on the other hand, that does give mid-level retailers an advantage as the discounters MUST raise their prices as they don’t have the margin to spare.  Your spread is good and I also like the 2013 $10 calls at $3.60, selling the $10 puts for $2 and the 2012 $12.50 calls for $1.55 which is a nickel to make $2.50 but don’t forget that you also can likely pick up another dollar on a roll to the next year.  

    FDO/DC – I don’t know if the unemployed are still "swelling" but I do know people are broke.  Again though, I do worry about margin pressures selling things for a dollar as inflation kicks in but maybe they can change to a 5 & 10 store, which will probably buy about the same in dollars as nickels and dimes used to buy us when I was a kid.  Anyway, in case you are too young for that – my point is that there are no more 5&10 stores because inflation wiped them out so just keep a good eye out for margin pressures and what they plan to do if they have to up their prices to cope.  Your spread is good but my issue with them is that, if the stock does fall so far out of favor that they head back below your net $33.21 – do you REALLY want to double down on them?  See, for CSCO at $17, I can say yes but on FDO at $33 – I’m just not so sure…

    Spreads/DC – It depends on your broker.  I certainly wouldn’t let it ride that long, a sale doesn’t happen overnight, it’s announced and then you deal with it, not let it go through on you.  

    MAS/Judy – I think they are in a tough spot.  Home improvements are generally optional and optional items are dropping like flies.  I don’t think they are particularly cheap at this price and the declining 200 dma is a bit scary.  

  43. jomama

     Phil, on Feb 23 or something they are going to have a reverse split on TZA so these are likely to get messy (I have a bunch so just be warned)

  44. amatta

    Good afternoon Phil, 
    The last 2 months have been harsh for my portfolio (between persisting with the DIA shorts on the 1050′s, and my otherwise tilted bearish stance coming into the new year (based on the Alpha 2 expectations), plus in the last 2 weeks having been decimated with the short calls (which I have decided based on the pain suffered already and your recommendation--stay out of entirely, meanwhile of course I am trying to make a good portion of it back by rolling and doing whatever else--the positions I need to keep on top of are WYNN, CMG, OPEN and NFLX, so I still have my handsful for a good few months, until hopefully I can be free of these distractions). 
    In any case I have decided to go with 3 pronged approach--follow IncomeTrader on his monthly cycles, follow you on the 25K, and rebalance my long-term portfolio to be ready for a potential 30% drop in the next months. It’s with this in mind I am posting here. I am working all of today in looking at every position and deciding which to keep and eliminate. I have some questions about this and how to properly balance them out. I will finish off the parts I can deal with myself and if you don’t mind I’ll either post what I would be left off with and questions about it later or tommorrow. 
    Thanks and have a great weekend.

  45. jmm12

    Phil, on these breakout trades, you mention allocating 2% of your portfolio to these types of trades that will return 2000%.  How do you measure that 2%.  On a 100k portfolio, is it 2% cash out lay for a levered trade, example on a call spread put package that the cash outlay is .10 per package would you do 200 or is 2% of your margin or is it 2% of the forced buy cash out lay? I apologize for the beginner question.

  46. amatta

    The most obvious question is I have 3 positions in miners (which is obviously way too much and so need to decide which ones to stick with). ABX, HMY and JAG. BTW JAG released a financial outlook for 2011-15 yesterday, don’t know really what to make of it, so I’d appreciate your input. I am willing to stick with it now that I have rode it down from 7.5 to 5.15, unless you see something really off (I entered another 50% on the stock at 6.20 as 6 had proven a good support level before but now they cut through it like butter) . As for ABX and HMY, on ABX (’13 50/65 with the April 45 puts sold) I am about even and I’d be thrilled to be in it for $500 to make $4K if they do hold 45 in April. HMY I am down $1.7 ($4K on 24)-- and rolled from the April 13/15 spread (with the ’12 10 puts sold) to August 12′s for .50. The April callers are almost worthless now obviously.  
    Thanks

  47. yshenhar

     
    jomama ,
    Can you please post a link to the planned TZA split?

  48. scottmi

    Five and Dime – as an aside, last week I noticed a larger %-age of old pennies, dimes, nickles in my pockets as change returned. May be nothing, or suggests people are breaking into old change jars/piggy banks for spending money… Take a look in your own pockets after getting some change anywhere (like a grocery story or pharmacy in particular). I’d be interested to know if anyone else notices similar.

  49. abel1236

    what happens to the options with a reverse split of TZA?

  50. yshenhar

    abel / TZA reverse split
    Last time they had a reverse split (in the summer of 2010, 5:1 ratio) they had 2 chains of options – those from before the split were based on 1/5 of the price of TZA. The only down side is that those chains are not traded much and therefore are hard to get out from if you need to.

  51. amatta

    Phil, 
    These would be the other positions where I have a question on:
    VLO I have realized 90% of profits on the  2012 15/17.50/15. At this levels would you roll up to something else or just move on to a different opportunity?
    JCI same scenario 80% there. Bought at 27.66 sold 2012 35 calls and 25 puts. At this levels I don’t know if you like the stock or move on? 
    CSCO back to even on this one with this move. I have the 2012 15/20/20. Would you add to take advantage of the drop?
    INTC I am 60% of the way there but no protection down as I have the 2012 15/22.5/15 so no intrinsic on the callers… 
    I am trying to cut to 10 long-term positions and have well balanced exposure to the sectors you think will do better this year… I have posted the positions in an easy to glance spreadsheet so if you get a chance I would greatly appreciate your input. (My goal is to make $60K on the long term positions) hopefully $75K on the 25K and 50K on the Income monthly Cycles. This way I can be relaxed instead of killing myself with the goddamn MoMos--AND not be bug you anymore with them ;-)
    https://cid-a1001f22e9ad5308.office.live.com/self.aspx/.Documents
    Thanks a lot.

  52. jomama

    Yshenar, i havn’t figured out how to post/paste a link but it is in yahoo finance under tza – a 3:1 reverse split based on the NAv of TZA on feb 23. these options will be the messy nonstandard options that re thinly traded….i.e. they become a real royal pain in the ass!

  53. Phil

    Good question –  JMM asked:   

    Phil, on these breakout trades, you mention allocating 2% of your portfolio to these types of trades that will return 2000%.  How do you measure that 2%.  On a 100k portfolio, is it 2% cash out lay for a levered trade, example on a call spread put package that the cash outlay is .10 per package would you do 200 or is 2% of your margin or is it 2% of the forced buy cash out lay.

    My response was: 

     

    Breakouts/JMM – It’s not so much as cash as focusing on your goal.
     
    If you have a $100,000 portfolio and you want to make $14,000 on the FAS $32/39 bull call spread at $3 using JPM 2013 $35 puts for a backstop then you need 20 of the bull call spreads at $6,000 and you sell 20 of the JPM puts for $5,800 and you are out of pocket for just $200 net cash and TOS says the net margin is about $13,000.  
    Of course you are obligated to buy 2,000 shares of JPM at net $35 and that’s $70,000 but that’s fine as it would be $35,000 net margin to actually own the stock and we only do these kind of plays when we’re mainly in cash to avoid missing a rally.  
     
    So, if you don’t REALLY, REALLY want to own a whole lot of JPM, then this is a foolish trade but, again, the logic is, if you are not that bullish about JPM, why would you be playing FAS up.  There has to be a consistency to your logic.  Of course, if this is a small part of your risk portfolio in a large account, then being assigned $70K worth of JPM simply means you would reallocate those shares to your long-term portfolio or IRA and it wouldn’t affect your risk side at all (see Smart Portfolio Management – the $1M Portfolio).  
    Back when we kept a long-term portfolio, the main way stocks joined it was from failed trades in the STP and, over time, the LTP outperformed the STP as it was filled with nothing but stocks that we REALLY wanted that were bought very cheaply – all the "failures" of our short-term hedges.  
     
    And, of course, also keep in mind that your risk is the LOSS on the JPM side (plus net $100 cash), not the entire trade.  
    Hopefully, we don’t get a Bear Stearns and let’s say that JPM drops to $32.50, as it did from $47.50 over about 5 weeks in the fall of 2008.  Even if we assume a rapidly rising VIX sends the short puts flying to $10, that’s still "just" $20K to dump them (assuming the bull call spread is a total loss) – a vicious loss but survivable – especially if you have a disaster hedge on the other side to offset a bit.  
     
    Again, the whole point of these trades is we DON’T trust the market and we are taking the Breakout Defense trades ONLY as long as we hold 3 of 5 of our breakout levels.  
    We still follow the rule of not losing 20% on a position and that doesn’t mean 20% of $200 here.  Your real position is the 20 short 2013 $35 puts at $2.90 so, very simply, if they go past $4.50 ($3,200 loss) and you don’t stop them out – then you are simply gambling foolishly.  
     
    When I talk about risk – I talk about what CAN happen (and you always need a plan for worst-case) if you wake up tomorrow and JPM is liquidated and your puts suddenly cost you $35 each with no hope of recovery.  How many times has that happened in the history of stocks?  Can it happen?  Yes, it just did.  Although, as I pointed out, it didn’t happen overnight – it happened to people who held through a 20% loss and then another 20% loss and then another 20% loss and then another and another and another and refused to get out of their positions and had not offsetting hedges.  Let’s try really hard not to be those people!   (This, by the way, goes for being too bearish too!)
     
    You can avoid the obligation entirely by just going with a bull/call spread.  They are easier to manage and still make nice gains.  You can also simply be less greedy and take 20 bull call spreads for $3 ($6,000) and offset it with the sale of 6 BA 2013 $55 puts at $5 ($3,000) and now you are in for $3,000 cash and $5,000 in margin on the $14,000 spread so you net $12,000 or "just" 400% on a big move up in the financials.  That way, your risk isn’t even in the same sector.
      
    And, of course, there is always just buying the damn spread.  $9,000 worth of the BCS buys 30 and pays $21,000 at $39 for a 133% upside and you can set a stop at $5,000 so you are risking $4,000 to make $12,000.  Can you lose all $9,000?  Sure but you can also get hit by a runaway train in your living room and I’ll bet more people have been hit by a runaway train in their living room than have lost more than 50% of a bull call spread of an index in a single day (not close to expiration).  
  54. Phil

    TZA/Jo – That’s good to know.  Hopefully that will set us up for a double short (of FAS and FAZ) as, typically, if you play two, one ultimately decays while the other rises or stays flat and, sometimes, they both go down over time.  

    Rebalance/Amatta – That’s a good idea.  I’ll be back this evening.  Keep in mind though, as it sounds like you are still very bearish, that if inflation really kicks in then stocks will go up and up and up and up.  You MUST have a plan for that.  If NFLX is taking in $1.6Bn in revenues with 20M subscribers ($80 per subscriber) with $200M in profits and we assume their costs are relatively fixed, then raising their fees 20% can drop $300M to the bottom line and, if you keep giving them the same idiotic 75 multiple, that takes them up over $500 a share.  Keep in mind that the early adopters are people like us, who have a lot of disposable income so they can "prove" (and should) that their consumers are price flexible by raising rates early on as you or I wouldn’t even notice if the bill went from $8.99 to $9.99 a month.  That leads idiot extrapolators to believe that that this trend can be applied to the 280M people in America who don’t subscribe and then people can predict they go to the moon (this happened with Blockbuster, who had insane valuations when we shorted them, now bankrupt).  

    So, the short story here is NFLX is NOT a stock you want to press short into inflation.  Neither is PCLN, who collect a fee and outsource their labor so costs are relatively fixed.  The models can be gamed by inflation.  CMG, on the other hand, has a wider distribution and suffers margin pressure from time to time and rising local labor costs can be very painful – that’s the kind of business that we can expect an eventual sell-off in.  But, in a real inflationary environment, it’s hard to bet against anything other than utilities and insurance – who have regulated charges and often can’t get increases fast enough to keep up.  

    Also keep in mind it is ALL, ALWAYS about balance.  If you do not have balance, you have nothing.  We generally talk about bearish as 60/40 bearish and bullish as 60/40 bullish and I said a few weeks ago that I had gotten so bearish that I didn’t mind being 85% bearish on 25% of the portfolio (with the rest in cash) UNTIL we broke our levels and at the point when we were approaching them, not all the time.  But we did break our levels and now we are bullish – even though it sickens most of us at these levels it also sickens us to lose money betting on logic when logic has nothing at all to do with what’s happening here.  

    Well, I’ve got to run.  Will be back this evening to catch up.

  55. rainman

    amatta / 3 prong — amatta, perhaps it’s my perception, which is likely quite wrong, but my hunch is that your 3 prong approach is going to stretch you too thin. If you asked me (and you haven’t), I’d suggest following one of the strategies and perhaps learning something else in addition (maybe read about fundamental analysis –  RE: JAG), or self motivation/conviction (RE: 90% potential on a 2012 trade). It is not my intention to offend, it is just my beleif that the frustration I often hear in your posts, is likely continue if you try to follow all 3 strategies. I’d work on getting one down first.

  56. amatta

    rainman, 
    Well I appreciate your input. My feeling was that setting and forgetting the long term buy writes, following IncomTrader on his monthly cycles wouldn’t really need a lot of my attention, following Phil does, so I would focus on that and learn from his adjustments and trading logic. My frustrating posts are entirely re MoMo stocks which I decided to stop shorting (as I said through much pain). 
    Could you elaborate on your points about fundamental analysis-JAG? and motivation/convition-90%? not sure I follow. I guess you are saying that following each position closely if you have the time would have uncovered a bad situation for JAG before it got to this level? Not sure what you are referring to with the 90%.
    Thanks…

  57. nicha

     rainman – I remember you mentioned once that you never stay in a trade if the loss on it is more than 20%. Does that apply to buy writes as well?
    From your post to amatta, I do agree with one point, and that is we have to get the strategies inside out before executing them. I have a problem understanding rolling covered calls, which is why I struggle with it a lot. 
    With the buy writes and income trader, the only thing to watch for would be the margin. Phil’s 25KP and other short term trades require more attention. Do you agree?
    Thank you.

  58. rj_jarboe

    Phil,
    I am not sure which post you will check in on so I am going to post in this chat and in the Breakout chat.
    If you have time, could you give your take on NOK. Obviously they have their work cut out for them if they are going to make inroads into the market owned by apple and google. NOK does have a nearly 35B market cap with nearly 57B in revenues. They also have 17B in cash vs 7B in debt. They may be a little bit of a gamble, but the Jan13 $7.50/12.50 BCS is only $1.75 for a $5 spread and the $7.50 Puts are $1.15 and the $10′s are $2.60 (which seems to be a pretty good bet in itself with the stock at $9.36 after a huge drop). Can you see a better way to play or stay away?

  59. tuscadog

    Phil / Corp Tax windfall
    Uncle Tom caved on the Bush tax cuts and now that the Corp Trojan horse Immelt is advising we should assume he’s whispering in the fools ear “ Just grant a 5% amnesty tax rate and a trillion $ will come flooding immediately back to the US to be invested in creating American manufacturing jobs”.
    How about some plays on this Corp income/CF boost? I’m not sure how the accounting works. Maybe they have already reported the earnings based on zero or lower foreign rates, or maybe they have taxed at US rates in the books but recorded a deferred tax expense? So, I don’t understand if this boosts EPS when announced or whether it’s just a C/F play? Any tax experts on the site?
    Anyway, a trillion $ remittance should be good for a long $ short Euro / Yen play at least?
    Plus feel good factor for whole mkt?
    Corps will of course not spend any money on US jobs and will instead buy back stock and declare special divs. Which cos will offer most leverage, remittance vs. mkt cap?
    I’m thinking cos who’ve been offshore longest, eg oil majors, tech majors MSFT, CISCO, Intel, Yahoo (with valueable minority interest in China/ Japan which they can sell), IBM, miners, fast food guys McD, Yum, consumer stuff like P&G?

  60. Phil

    Miners/Amatta – Why 3 miners?  If you diversify in 5 sectors and pick 3 in each sector – that’s too many stocks to follow right there.  Jag is mainly positioning for a sale but if gold crashes, they won’t get it and they could be screwed so consider them highly speculative.  I find it deeply disturbing that you buy unhedged positions in commodities.  Back when I did pick them, I ONLY liked them because we could hedge to $5.11/5.06, which I thought was a fair price.  Why you bought more at $6.20 instead of SELLING some other sucker puts and calls is so beyond me I don’t even know what to say.   On ABX, that trade was from way back in November and it was selling 2x the ABX Apr $45 puts at $2.30 to pay for 1x the 2013 $50/65 bull call spread at $4.50 so a free trade if the puts expire worthless and that’s all it was ever meant to be.  ABX is $47.50 at the moment and I’m sure I mentioned a GLL hedge along the way but, if you didn’t take that, as long as you REALLY, REALLY want to own ABX for net $45, there’s not much to be done about this and, if not, then you should take back the net $4 that’s still on the long spread and that makes your April net on ABX $41 so more than 15% lower than here before it’s a loss.  HMY is similar as the 2012 $10 puts pay for the spread and HMY is at $10.65 so if you REALLY, REALLY want to own HMY LONG-TERM, it’s a non-issue and, if you don’t – then get out of the spread and you just have a short put at net $8.50 and if you don’t REALLY, REALLY, REALLY want to own HMY for $8.50 – then why the hell do you own 3 gold stocks?  

    By the way – You do know I’m bearish on gold, right?  My gold trades are inflation hedges only and I was so anti gold for so long that Gel quit the site rather than have his world view challenged so please do not confuse inflation hedging with gold to be some sort of overall bullish outlook on this ridiculously overbought metal.  In fact, I advocate OWNING the miners (ie. selling puts in miners you REALLY want to own) because at least there is a working business there that you can hold onto long-term if gold cycles down again, rather than being stuck with a boatload of gold tucked away in Nicaragua that you bought for over $1,200 an ounce like Gel might be…

    Old money/Scott – That’s interesting.  I wonder if CSTR has a system to pluck out "valuable" old coins?  

    More stuff/Amatta:

    • VLO – 90%?  Are you kidding?  That would be our two-step program where step 1 is "Take the money" and step 2 is "Run."  
    • JCI – 80%?  You are right – same scenario.  
    • CSCO – It depends where you are in the scale.  You already are looking at a 2x assignment.  If anything, I’d roll to 2x the 2013 $15 puts at $1.35 as that puts .70 in your pocket and drops your put-to price by $5 and the spread is still $3 out of $5 so if you kill that at $2.50, your net on the $15 puts is $13.75, which is still 22% lower than CSCO is now.  
    • INTC – Same old thing.  Do you REALLY want INTC to be part of your LONG-term holdings?  If so, fine.  If not, 60% profit with a year to go is time to go into our two-step program. 
    • Your spreadsheet requires a password.  

    NOK/RJ – I thought their plan to split the company into a phone division and a smartphone division is so dumb that I can’t see investing in them.  Nobody wants a dumb phone and AAPL will be putting out $200 IPhones soon, which would make them free with pretty much any telco contract anywhere in the World.  What is NOK going to do?  Come out with a $49 dumb phone to combat it?  Don’t forget the poorest people on earth are the ones who can’t afford a computer so don’t think of the IPhone as an expensive phone but as a cheap laptop that makes phone calls – that’s what it is to people in 3rd World Countries.  

    Corporate Tax/Tusca – They don’t declare the money as income otherwise it would be taxed.  They will take the money in as "income" in some sort of late realized way but Bush let them do something similar and it kicked off the M&A boom that actually cost us millions of jobs and drove the markets to insane valuations (energy and Pharma companies have the most overseas cash) on buyout speculation right into the crash so why not reload?  It’s FUN!!!  I find it hard to invest on that basis as it was a total disaster last time and MAYBE investors wised up but maybe not so I’ll want to see a list of who has what to repatriate (IF they actually sign this bill).  

  61. rainman

    amatta – You may be right on how much time it will take to follow the other strategies. I haven’t been following them so I guess I should insert my foot in my mouth. When I read your posts, I get the impression that you are not systematic in your approach, nor building a systematic approach (and I certainly could be and probably am wrong here). Part of the reason I believe you find it more difficult to follow Phil’s strategy is that you do not appear to have the conviction to follow through on what is said. For example what Phil is telling you about the 2 step program (RE 90%). I tend to think you should have already known the answer to the VLO trade by now, especially with Phil hammering home those two steps. Perhaps I’m wrong (going by memory and that certainly isn’t what it use to be), but I’ll bet you already knew those two steps (i.e. take money, run). If you did, then I tend to believe you don’t have the conviction to follow through. Now, I suspect your response to those comments will be something like "but sometimes Phil says to leave a trade that’s on track run". Well, to that I’d say if you have to ask, then you don’t have the conviction to believe the trade is on track so there should be no question that step one is the answer.

  62. rainman

    nicha — did I say I don’t stay in trades that are down 20%? I don’t recall the context. There are times when I’ll stay in a trade that is at a loss of 20%, for example on a long term buy write, I want to average down or believe in a bounce, etc. I haven’t been following income trader so I can’t comment on that strategy. I tend to agree that shorter term trades require more attention than longer term trades since in my experience, they are more susceptible to the market winds that change more frequently than long term fundamentals.

  63. amatta

     rainman,
    Thanks again for your input. Well on VLO’s 90%, I did know when I last went through all my long-term last positions at the beginning of the year (which as you rightly picked up--I should systematize and I am now doing that to check all long term positions once every two weeks and make adjustments if need be (Phil has also said btw set-and forget, so that was my attitude with most of these). I hadn’t killed it (as I have several others) because it was up to 70% when I checked last and I know Phil likes it as one of the core holdings, but didn’t know if at that level, so there wasn’t much harm in holding it when I have the short callers so deep in the money protecting the spread. 
    I have been learning a lot and I feel I am preparing myself now to be much more succesful. What is still very hard is to balance between bullish and bearish. 
    Thanks again rain.

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