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May Flowering Inflation Hedges – Members Only

Holy cow, what a week!

Will the market ever stop going up?  Well, if it doesn’t, we need to be prepared – just like we were at the beginning of the year with our "Secret Santa Inflation Hedges" it is once again time to put a little thought into more strategies that can make us 300-1,000% gains on cash so we can make small commitments that will do a lot to protect our sidelined cash from yet another 10% drop in the dollar.

That’s the stop on these trades, it is still very much my thought that the market will tank hard should the dollar recover but we already have that covered with disaster hedges against our longs – now it’s time to hedge our cash against devaluing simply because we were dumb enough not to spend it.  The above chart is of the indexes priced in Euros with a view of the stunning fall in the dollar as it dropped 5% in 2 months.  That means the money we left on the sideline buys 5% less stuff than it did just 2 months ago – this is how FEAR of inflation drives money into equities and commodities.  

Fortunately, we can stay well ahead of that.  As I mentioned, our Secret Santa hedges were good for up to 1,000% in just 4 months so committing just a few percent of our cash to a hedge can keep us well ahead.  On Monday I was worried that this week would go the way it did (up and up) and I suggested the GLD Jan $140/165 bull call spread at $790 (one contract) as a superior bet to physical gold ounces and the suggestion was to layer into the Jan $145/165 spread on a cross over $1,550 and here we are already

So, how does this work out?  Well, it’s early but the original Jan $140/165 spread is already $1,120 and the new layer (the Jan $145/165 spread), came in at $750 so right on track with a $330 profit on the first layer (41%) in just 5 days while an ounce of gold went from $1,425 to $1,563, making "just" $138 on $1,425 committed (9.6%).  Generally, we just keep layering up every $50 and we can continue to out-pace the actual gains in gold by 4 to 1 and, since gold is out-gaining the decline in the dollar by 5 to 1 – that’s a pretty good hedge!    

We have fun playing the NYMEX down from the $112.50 line so it was almost a free bet take the contrarian play with the USO July $43/47 bull call spread at $1.70, selling the Jan $35 puts for $1.30 for a net $40 per contract spread with 1,000% upside if USO hits it’s targets.  USO ended the week up $2 to $45 (up 4.6%) and the $43/47 spread only got to $1.90 so far but the long puts fell to $1.16 for a net  $74 per contract, up 85% on the week.  

In Member chat on Monday, we countered those trades with a bet against silver, which seemed to be the most overpriced commodity and the play there was the AGQ June $345/335 bear puts spread for $5.50.  The timing was great and AGNC crashed Monday and Tuesday and that spread peaked out at $8.20 (up 49%) but is now back to $5.50 again so maybe good for next week too!   

While I’m on Monday, that same morning comment had a backspread on OPEN.  In case I forget to mention it this weekend, these earnings backspreads are THE BEST.  Our play was buying 3 Jan $135 calls for $12 ($3,600) and selling 4 May $115 calls for $8 ($3,200) for a $400 spread into earnings.  The Jan $135s dropped to $9.87 ($2,961) and the May $115s fell to $5 ($2,000) for net $916 – up 140% on the week.  On the other side of that trade, I suggested buying 4 Oct $110 puts for $13.50 ($5,400) and selling 3 May $110 puts for $5.50 ($1,650), which was a much more aggressive net $3,750 entry aimed at establishing a long-term short on OPEN.  That one is also a winner, of course as OPEN fell right to our target range and finished the week with the Oct $110 puts at $17 ($6,800) and the May $110 puts at $6 ($1,800) for a net $1,250 (up 33%) gain on the week.  That play is less sexy but the idea is to stay short long term and keep selling puts for income as OPEN melts down.  The call play is meant for a quick kill because, obviously, we had no intention of being long – that is just the hedge we use to guard against a move against us at earnings.  

We’ll be doing plenty of those during earnings season but keep in mind they are NOT good for any old play.  They work when you get the targets right and, if not, you are stuck with a spread to work out.  On Monday afternoon we had another inflation hedge that did not work out as, despite the massive jump in the markets, oil, metals etc. and the huge drop in the Dollar – TBT, for whatever reason, went DOWN for the week.  Our Monday trade on them was the Sept $34/40 bull call spread at $2.60, selling the Sept $36 puts for $2.33 for net .27 on the $6 spread. 

The Biggest LoserTBT fell to $35.65 from $36.50 and the $34/40 spread is now $2.36 and the $36 puts are $2.57 for a net loss of .35 or 129% on the week.  Of course it’s all premium and the key when taking ANY of these hedges is that you MUST be willing to be a long-term holder of the stock or ETF that you are hedging with if things go the other way because, if all you are doing is playing the percentage gains and losses – a trade like this will stop you out very early in the cycle on almost any move down.  

The way we look at these trades is there’s a net risk of owning TBT for net $36.27.  At the time we took it, TBT was $36.50 and now it’s $36.65 so the spread lost a lot less cash than the ETF did (.85) but, even so, you have to be careful with these.  If you are a true long-term player, then you look ahead to the 2013 $30 puts, which are $2.82 so an evenish roll for your September putter and that’s another 20% down from here.  If you don’t REALLY want to be long on TBT at net $30.27 – THEN you need to consider killing this trade when it goes against you.  Obviously, it seems ridiculous for rates to be this low and I don’t think anyone really thinks it will last but Japan has been doing this for 20 years so don’t count the possibility completely out.  

Another hedge from Monday that went the wrong way was EDZ, where we looked at the June 14/17 bull call spread at $1.40.  That’s still $1.40 actually so no biggie there and we WISELY hedged that with CHK, thinking that if Emerging Markets continued to do well then energy demand would stay high and natural gas would finally begin to act like a commodity and that should be good for CHK, who we like as a company and REALLY want to own at net $30.08 so we sold the CHK June $31 puts for .92, which are now $2.67 out of the money at .61 so our .48 spread there is now .79 for 64.5% gain EVEN THOUGH EDZ itself went the wrong way on us.  

Hedging is GOOD.  It does take practice to get used to the relative moves of various stocks and ETFs in various market situations but it’s just a matter of time and practice.  In Gladwell’s “Outliers: The Story of Success,” the author makes a very good case in which studies have also shown that excellence at a complex task requires a minimum level of practice, and experts have settled on 10,000 hours as the magic number for true expertise. This is true even of people we think of as prodigies, such as Mozart.  Gladwell quotes neurologist Daniel Levitin as follows:

In study after study, of composers, basketball players, fiction writers, ice-skaters, concert pianists, chess players, master criminals, this number comes up again and again. Ten thousand hours is equivalent to roughly three hours a day, or 20 hours a week, of practice over 10 years… No one has yet found a case in which true world-class expertise was accomplished in less time. It seems that it takes the brain this long to assimilate all that it needs to know to achieve true mastery. 

I’m bringing this up because it’s very important NOT to go overboard while you are learning how to trade.  Trading is a profession and takes time and practice to get used to.  There are no short-cuts.  I talked last week in our Investing for Income Virtual Portfolio (up fantastically already, thanks to the silly markets) about how there are very few successful young investors.  Being 55 years old and playing the markets with a bunch of cash you made in Real Estate or as a Doctor DOES NOT make you an experienced investor.  You may be ahead on life skills but you have no more trading ability than a kid out of Wharton sitting at a desk at Goldman Sachs and they certainly don’t hand those guys any major accounts until they have had YEARS of practice and training, working under the best teachers in the business.

That’s what our virtual portfolios are for – you can get tons of practice following along, hopefully accelerating the learning process without having to risk a lot of cash – learning from our ups and downs along the way until you get to the level where you are confident in your ability to handle trading an account.  Notice that many of our most experienced Members tend to find something they specialize in like JRW’s Russell trading, Income Trader and Peter D’s short strangle strategies, Pharmboy’s Biotech Stocks, etc.  

Over time and with practice, you will find the style of trading you are most comfortable with and those will be the skills you work on.  Just like in baseball, football or any other sport – if you expect to be a professional, you are going to have to master a position – you can’t seriously expect to master them all.  

With that in mind, let’s see if we can try out a couple of inflation hedges as we now have our 100% lines to let us know when it’s time to get out (3 of 5 breaking would be key and the Dow still is not above so that’s one already!).  Keep in mind what worked and what did not work from this week as well as from our December selection.  Of course we make picks like this all the time – on Tuesday we added XLF on the bull side, on Wednesday it was CCJ, DDM and JAG (still cheap), Thursday we went with TNA and TBT (even cheaper now!) in the Morning Alert and then UNG with an upside play on the VIX (also still playable) and yesterday it was back to EDZ (June spread again) on the short side with ABX (still good of course) as a new gold hedge.  

Our directional bets have not been working at all which is why we allocate very little of our virtual portfolio to short-term trading.  In a $100,000+ virtual portfolio, we are 20/15 bullish (35% invested) with most of that money allocated to long-term buy/writes that are generally 20/5 bullish (the short call is the bearish portion).  That leaves us just 10% to play with on the short side and the rule of thumb is we allocate for at least 10 positions ($1,000 each on a $100K virtual portfolio) and scale in on a 1x:2x:4x level, which means our initial risks are kept very low ($100-$150) on directional plays (see Strategy Section for more detail as well as "Smart Virtual Portfolio Management I, II and III" articles).  

Even in our bearish 10%, we shouldn’t go 100% bearish – that’s why we always try to have a balance of bullish and bearish trades as 75% one way or the other is about as far as we ever want to go.  

Keeping that in mind, we’re going to discuss UPSIDE hedges but the assumption is you have some of our disaster hedges in place (TZA, SDS, EDZ) to offset a sudden drop in the markets on some Japan-like event that sinks the markets faster than we can stop out.  

 The way AGQ held up, which is 50% ahead of the gain of SLV (see Monday’s post for chart) and the way gold is taking off makes me think SLV may not be so crazy of an inflation hedge.  I don’t really have much faith in commodities holding up but we can just kill this kind of trade (on the long side) if gold fails to hold $1,500 or silver fails $47.50.  Keep in mind we’re not playing for silver at $50, we’re playing for $75 so we take advantage of the out-of-the-money premiums on long calls and take the SLV Jan $47/57 bull call spread at $3.10 on the $10 spread, which has a potential 222% upside if SLV gets to $57 and holds it through January expiration.  

The net delta on the spread is just .22 so, for each $1 SLV drops (2.5%) you can expect to lose .22.  Looking at it this way, you really only have to hedge to your stop (say .60) with something you think will do well if silver drops, like short AGQ May $540 calls at $3.20.  So 5 SLV Jan $47/57 bull call spreads at $3.10 ($1,550) can be hedged with on short AGQ May $540 short call at $3.20 ($320) to offset a stop of a 20% drop, which should be a 10% drop in silver, which should be a 20% drop in AGQ from $358 to $286 which, even at just a 0.08 delta on the short calls should be a a pretty sharp drop (and, of course, at $286, we’d feel pretty good about riding them out to expiration).  

Not to complicate things too much but let’s look several moves ahead.  We have 5 long $10 spreads with $6.90 of upside each ($3,450) offsetting the possibility of getting burned on AGQ to the upside.  Since we are just selling one short call, we have a buffer, long-term of $34.50 per short call so we don’t really get into trouble unless AGQ is over $574.50 at Jan expiration.  

Meanwhile LAYERING is the key to these trades.  If AGQ goes up $50 and the short calls double, then you can either buy them back for a $400(ish) loss and hope to collect that $3,450 down the road on the 5 longs or you can buy 5 more long spreads at a higher strike, put a stop on the gains of your lower spread and now you have 10 potential $690 gains ($6,900) that will be 100% in the money long before AGQ hits $500.  

Layering you winning spreads is a great skill to master.  Usually, the markets aren’t crazy enough to give you much experience but, these days, it’s almost the norm!  As you can see from Monday’s gold trade, the bottom layer made 40% by the time we trigger a buy on the next layer.  Our hedge still protects us and we add a new layer and put a stop at a 30% gain on the original layer.  If we keep protecting 30% gains and keep layering up, by the time we add our 4th layer to the trade we have locked in a 90% gain on the trades below it (but we would have raised the stops on the lowest layers too).  

And, of course, when we choose a short call to protect ourselves it works very well with a layering strategy as the May $540 calls on AGQ can be rolled out to 1/2 the June $570 calls (now $7.50) and we’d go higher but nobody in their right mind thinks silver is going that high so there simply are no higher calls (yet) – all the way out to 2013.  Now, doesn’t that make you feel better about selling the short call?  

Going the other way, if silver drops and we stop out of the $47/57 bull call spread at $2.50 then, as I said, the AGQ should be in the bag and we get our money back.  If we get worried that silver may bounce – it’s a no-brainer to just buy another spread at a lower set of strikes to protect ourselves.  Silver fell from $31 to $26 in January, for example.  In a similar drop perhaps the VIX would have spiked up and the $540 short calls may have annoyingly held their value despite the 15% decline in silver that month.  Well, for one thing – at some point they do expire and, for another thing, we can just buy the (going back to our current price example) Jan $42/52 bull call spread for $3.10 and roll the $540s over to June and pick up $3+ more or, of we are feeling brave, simply add a short June call and put a stop on the May calls.  

Unfortunately, like chess, the what-ifs quickly multiply beyond the ability to lay them out on paper which is WHY, if you are going to be serious about being a trader, you have to learn HOW to trade and understand WHY you are making the trade and you should NOT just follow picks other people give you.  That is not learning and you are WASTING the 10,000 hours you should be putting into mastering a skill by (for lack of a better word) cheating.  

There is of course, much merit in learning by example but people learn nothing just following the trades of others – I’ve seen it over the years, the people who learn the best are the ones that make their own suggestions and enter their own trades and ask for advice on adjustments or the fundamentals and the students who "never get it" are the ones who simply follow whatever is being traded – they can do that for 20 year and, on the 21st year, they still need someone to make picks for them! 

I am not saying don’t follow any trade ideas – we have many, many good ones but I am saying you need to ALSO come up with trades of your own so you can better understand WHY we do things the way we do.  Like chess, you can only learn so much from a book and there are only so many "rules" that can apply.  In fact, once you get past the first few opening moves, there are no books to guide you – there are simply too many possibilities and each game is unique unto itself.  Only experience will get you to a level of proficient play and isn’t that what you are trying to do with your trading as well?  

We looked at one gold hedge on Monday and another simple one you can do as a long-term gold play is the GLD 2013 $150/200 bull call spread at $13, selling the $130 puts at $8.20 for net $4.80 on the $50 spread with a nice 941% of upside if gold hits $2,000 and holds it through 2013.  So the real question for a gold bug is:  How much are you willing to lose if you are wrong?  Assuming you don’t REALLY want to own gold at $1,300 an ounce if it’s below $1,300 an ounce, how much of a risk were you willing to take on gold in the first place?  

If you were considering allocating 5% of a $250,000 virtual portfolio ($12,500) to gold as a hedge against inflation, we can assume you didn’t intend to ride gold down to zero but, of course you were going to stick it out for a 20% loss ($2,500) so let’s call that our risk tolerance and structure the play to make that a 50% loss on the position so we’re talking about a 10 contract spread at net $4,800 that will cost us $2,400 if gold moves against us.  The delta on the short puts is .25 so our cushion on this trade is only about $10 on GLD going down so let’s say $1,400 with this structure so you have to be pretty bullish on gold but the upside is a nice $45,200 at GLD $200 which would be an 18% pop to a $250,000 virtual portfolio.

Here’s where scaling in can help you a lot.  Rather than an all or nothing bet on gold going up $450 before it goes down $100, you can begin with a 25% position and scale into it.  If gold goes down OR UP $100 and once, you can add another round, adjusting the strikes if you have to and then again at another $100 move each time.  That way, you are expanding your range by $200-300 before you make a full commitment.  Keep in mind that making 914% is A LOT and you don’t NEED to structure plays to make 900% – rather you can take advantage of trades that CAN make 900% to prudently set yourself up to make about 300% as you sensibly scale in.  If 300% isn’t keeping you ahead of inflation – we have bigger problems than the returns on your trade!  

Another way to buffer your downside risk to being long on gold is going short on gold.  ABX is a miner we like and you can play the 2013 $60/50 bear put spread at $6.30 which pays $3.70 if ABX fails to hold $50.  5 of those spreads will cost you $3,150 and pretty much a loss if ABX goes up 20% but we can assume that won’t happen unless gold goes up 20% to $1,860, putting your 10 long spreads $36,000 in the money so you are HEDGING 20% of the anticipated profits to protect $1,850 of the anticipated downside loss.  

This is the kind of fancy hedging hedge funds do but keep in mind that hedge funds have a gold desk and there are guys who do nothing but man the gold trades all day long.  It is VERY ambitious for a regular trader to do this sort of juggling and you are often better off just keeping some cash handy to buy short-term puts on GLD when it breaks support (say, below the $1,500 line) of a size that will buffer your long-term losses, which will allow you to keep and/or roll the long position – assuming your long-term opinion of gold doesn’t change or to get out with a lesser loss than you would have if you do change your mind.

Again, it’s a case of – the more you understand the hows and whys of the trades, the more options become available to you – more tools that you will be able to apply to your virtual portfolio as the situation evolves.  

 

 

 

IN PROGRESS

 

 

 

 

 

 


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  1. pstas

     http://online.wsj.com/article/SB10001424052748704330404576291772245610028.html?mod=djemEditorialPage_h
    Inflation; dollar; taxes and a bit of class warfare --
     
    It’s Getting Harder to Bring Home the Bacon
    "the cost of corn has gone from a base of $2.40 a bushel to today at $7.40 a bushel, nearly triple what it was just a few years ago." 
    Now 40% of the corn crop is "directed to ethanol, which equals the amount that’s going into livestock food,"
    "Maybe to someone in the upper incomes it doesn’t matter what the price of a pound of bacon is, or what the price of a ham, or the price of a pound of pork chops is," he says. "But for many of the customers we sell to, it really does matter."
    Nor does the science. The ethanol industry would supply only 4% of the nation’s annual energy needs even if it used 100% of the corn crop. The Environmental Protection Agency has found ethanol production has a neutral to negative impact on the environment. "The subsidy has been out there since the 1970s," Mr. Pope says. "If they can’t make themselves into a viable economic model in 40 years, haven’t we demonstrated that this is an industry that shouldn’t exist?"
    I fundamentally don’t understand the logic of corporate income taxes," he tells me. "If I have a 35% tax, all I do is take that 35% tax and I transfer it into the price of bacon and the price of pork chops."

  2. biodieselchris

    A snap back to the 20 day for the dollar (here, as UUP) means GLD and especially SLV take a hard corrective turn (and probably stocks too, for that matter). But always the tough call – when does the music stop?
     
    UUP is 2.3% below the 20-day. A further drop means a ‘new normal’ would be in place. Such thinking always makes me nervous.

  3. biodieselchris

    I just can’t get over how the long term chart on AGQ is shaping up to be one of those rare gifts-that-keep-on-giving looking charts. Like SKF back in 2009: wait for it, wait for it, wait for it, then plow in, and my hope is I have something left when it finally goes because it’s been a bad, VERY BAD ten months for me (maybe I’m only at 5,000 of my 10,000 hours?). It’s a crowded expensive trade though – everyone and there brother is in on the secret. But that doesn’t mean you can’t make a ton of cash.
     
    Selling calls is one way, maybe selling call spreads is easier in ret. portfolios. But buying puts at the right time is warranted giving the inevitability of the fall.

  4. biodieselchris

    pstats good article. Despite what you may gather from my handle I have no sympathy for gov’t policy that would turn food into fuel. I spend my working life turning WASTE streams into fuels such as biodiesel, glycerol, biogas, and fertilizers, but never EVER would advocate for arable land resources to be dedicated to such nonsense. 
     
    Here’s a suggestion. First, take a look at the biggest most profitable companies in the world. The top 10 biggest publicly traded companies: MSFT, AAPL, WMT and 7 oil companies (including the #1 spot held by Exxon). If you want renewable energy, put a special tax on these 7 largest companies in the world and make them pay for it. Then research the high tech options that have a snowball’s chance in hell of working at a scale that could make an impact. Hydrogen fuel cells to fusion power are definitely on the table, as well as massive solar and algal projects.
     
    The corporate tax comment is kind of an enigma though. Corporate owners (top 1% own more than 50% of all assets) are taxed more heavily through corporate taxes, so the "It just raises everyone’s prices" comment, though true, doesn’t add up. These days, tax debate really boils down to distribution. Everyone pays, and if you don’t want to pay then cut spending (including military!!), but otherwise distribute fairly, and it’s fair if you make $1M and pay a 35% rate. Sucks to be rich?…  Crocodile tears, I’m not buying that argument….

  5. amatta

    Phil, 
    I am going to be out of town for the next week and I am worried about the positions I am working of winding out of from the 25K. USO and FAS much more than any others. 
    I have the FAS position fully covered as per yesterday;s instructions, but since I am not going to be able to be monitoring them nor following the chat, what should I set as a stop on the cover in case we do get the much much anticipated drop in the market this week?
    With USO I am naked with the July 43 puts, hoping as you are that we do get a drop over the weekend. If not what would be the target to slap a cover on Monday? Full cover? 
    I believe you mentioned you will be making moves on the other 25K positions expiring in May on Wednesday?
    Thanks 

  6. Jbur

    Jbur
    April 30th, 2011 at 2:37 pm | Permalink  
    sbrownA: In one of your posts yesterday you addressed revtodd: "Revtodd, I answer that question all the time and you are exactly right.  Get the exposure to the short position through buying puts (60 delta).  I have lots of backtest information on using options as a means of gaining exposure and often times it reduces volatility and increases alpha.  I am happy to share those with you if you like". Heck I don’t know about anyone else here, but I would love to know more about increasing alpha and decreasing vol in my IRA’s. So I you don’t mind sharing, I would love to know about this topic and your backtesting. I have been trying to improve my collar skills, but find I invariably lose $ on the long put side. My email is jamesieb2@gmail.com, or on the site is fine. Thanks in advance.

  7. yshenhar

     Funny analysis of the Amazon Web Services outage - 
    http://i.imgur.com/ldP1f.jpg

  8. gwwyat

    Ysenshar:
    That link took me to an image that is too small to read.

  9. grenowoods

     gwwyat – click on it

  10. goober

    Something I find a bit strange. Since I started reading here I see lots of comments about corn for fuel. Biodiesel/ethanol and not one person has mentioned that biodiesel is complete garbage as a fuel. It is very hard on diesel engines and creates all manner of problems as it creates much more water in fuel tanks and gets sucked into fuel systems (filters and injectors). we figured out ways to avoid it 100% even though it is mandated to the public. It is a bad idea on every count and a bunch of  politicians bought into it  and blessed it as though they have any idea what they are talking about. This is old news to everybody who buys large quaqntities of diesel, construction companies, truckers, farmers etc and I assumed everybody knew it was garbage but apparently not, as not one comment or even an inkling ? We were using 2K to 5K gals a month so you find out quickly. I have known about it since about 2003 or 4 when the states started in on it and mandated % in blend. It took a while to figure out where the problems were coming from. I don’t know 1 person that wants to use it and many that would like it to go away for lots of valid reasons. Another brilliant government mandate and waste of resources by the clueless. They will only go to NG as transportation fuel after they have made so many mistakes it is beyond obvious to a 6th grader….that is how smart these guys are, not very, and it is all out there for all to see,  is it not. Bush started this stupidity on his watch and gave the big farm entities another stroke and the biodesel startups a freebie ! Whee free money and phony accounting, Yeh we’re rich! Who cares about all the starving poor guys, we can buy whatever we want.  
    Obama has done the same in other ways like Lithium and electric cars which are just as much of a bad idea for all the same reasons, only different ? Why does anybody think any of these people are smart or ethical ? they are not and they are all criminals as well.
     
    Phil -  The PM hedges are exactly why I came here and plays on any more run up on both . I think a correction is inevitable soon, but as long as the gov policies and your boy are in office, it will continue up after consolidation. It can be no other way with QE of any description. Of course they will try to disguise it to the masses and call it something else ? Obama is very good at that (disguising policies/actions) as you are finding out yourself much to your chigirn I imagine, in many different ways. 
     
    Check out some of TALs other videos on You tube where she plays more solo. I picked that song with Imagen becasue I think it is quite beautiful as well as the other. Here is another for all to check out. You compared her to probably the best  bassist on the planet but she is more of a jazz and fusion type as Beck is evolving as well. But I imagine she would consider the comparison a compliment. Just a reminder Phil, there is more to life than money as your comments indicate she might do OK as a musician ?  I think she is likely in heaven, doing what she wants to do and incredibly well at that and many years to grow . See all next week…………enjoy !
     
    http://www.youtube.com/watch?v=j4zO6HPgQ3w&feature=related 

  11. revtodd64

     Jbur/SBrown @ Sabrient – thanks for posting that comment.  I missed it yesterday.  I would like to see that back-testing as well.  
    Jbur – I have fiddled with collars for a few years and find them tricky to manage for a profit because of the time decay on the put, as you mention; and also because I’m not always a patient man.  But I find the safety appealing and can never quite break myself of using them.  Here’s my latest attempt.  I’m buying in-the-money puts, sometimes 10 percent in the money or more, but never over 15%.  That way they don’t lose so much value on the way up.  Yes, I’m paying more for them, but here’s my second trick I’m trying out.  I don’t sell the call until the stock proves itself and rises.  I’m going after fast movers I wouldn’t otherwise take a chance on in my IRA.  I may only catch half to 2/3 of the value of the upward price movement in a stock, but on the downside I can only lose about 5 percent max.  I find it works well with momentum stocks, commodity related stocks and pre-earnings.

  12. Phil

    Good morning!

    Ah Pstas, I thought you were making a point but it always comes back to not taxing your beloved corporations.  Please explain how it would be that Google would pass through their tax increase on to consumers if the Government tried to get them to pay more than the 2.4% they paid last year – I am just fascinated by your thought process.

    Silver/BDC – Looks a lot like SKF did before the crash.  We were a week too early on SKF and it was painful to ride up but super-rewarding on the way down.  On the whole, I think it’s better to wait as SKF went down for months – just nothing as good as that initial collapse from 1,072 back to 600 in a week!  The insane pricing of the options makes AGQ very hard to play, unfortunately because, like SKF, it can still go from $350 to $700 or more before it’s done.  

    Tax/BDC – Since the oil boys claim Americans are unfazed by $4 gas, then why not just slap a $1 per gallon consumption tax on it?  Airlines are now surcharging passengers $400 for fuel to Europe so that’s about $40,000 per flight they expect to have handed over as a tax and everyone’s fine with that – why can’t Government get in on the game.  We use 400M gallons a day of gasoline, that would raise $146Bn a year for alt energy research and, gasp, may even get people to consume a bit less fuel. 

    Positions/Amatta – If you are going out of town on FAS, it might be a good idea to roll out to the July $31 calls at $2.25 and sell the May $30 and $31 calls (1/2 each) as a cover.  You can cover with all May $30s if you don’t want to put the .50 in to make the split because the $30s still have good premium (.75) to sell and you have lots of time to roll with that spread.  On USO, I’d sell the May $45 puts for $1.10 and roll the July $43 puts up to the $45 puts for .90 and, if you want to be more aggressive, just do a 3/4 or 2/3 cover but it’s a more neutral position that way and, most importantly, your long time premium burn won’t outpace the short puts and calls you sell.  Obviously, it won’t do well on a big move in your favor but it won’t lose much on a move against you – that’s what neutral is all about. 

    Uh oh – Wal-Mart now saying they will match any competitor’s lowest price.  

    Funny on AMZN Yshen!  

    LOL Greno – I think if Gwwyat doesn’t know to click on it then the much of the technical humor may be lost on him (no offense Gwwyat but it’s a funny question given the context of the link).  

    Ethanol/Goober – I thought we settled the idea that this was a bad idea years ago but I guess a good subsidy never dies, it just skips a budget cycle and then comes back with a new name….  The only "logic" I can see to it is that, from a macro view – the US can say "well, if you are going to double the price of gasoline, we’ll respond by doubling the price of food and I’ll bet we can stop driving long before your people can stop eating."  Unfortunately, the collateral damage is immense in this little tit for tat we’re doing.  Of course, the interesting thing is that the OPEC nations, since they have plenty of fuel to export, tend to charge their own people around $1 per gallon for gas (the real cost) but the US, who exports our surplus food to the World, charges its own citizens more internally than we collect from countries we ship food to.

     

  13. Phil

    By the way, that reminds me that we should buy ADM! 

  14. stjeanluc

    The discussion about corporate taxes sometimes makes me think that people don’t understand how it works – taxes are paid on profits, not revenues! Taxing profits at 35% doesn’t mean that you have to pass on 35% raises to the customer! To begin with, if you net margin (after all expenses are paid) is 10% (common in small businesses), then a 35% tax rate means 3.5% of revenues. Going from 25% to 35% is only a 1% increase on revenues… But of course, some like to play on ignorance to make it sound so much worse!  

  15. nicha

    Gold and Silver are now being bought as investments in India.

  16. 1020

    Phil-  Yes, When will the Market stop going up?  I thought the Markets lead the economy….
     
    http://www.businessinsider.com/signs-the-economy-is-slowing-down-may-1

  17. kinkistyle

    leading indicator/1020:  I think its a lagging indicator now.  Or maybe the lead has gotten so large that the market is now lapping the economy buy a full business cycle :D

  18. biodieselchris

    A couple of points on renewable energy in no random order or topic:
     
    - biodiesel is good for some type of generators (all of Hawaii’s electricity, for example, is made from diesel shipped in). I have some experience with ASTM D6751 for transportation but wasn’t aware of issues beyond bacterial growth. There in more water in mineral diesel than biodiesel. If bio-D was grown or cultivated as algal sources, it would reduce the carbon positive diesel AND the need to ship it in from overseas. [plus, Hawaii has lots of natural sunlight and fresh water, so the environmental impact is much lower than it might be elsewhere.]
     
    - utilizing waste streams is the the low hanging fruit want so I really want to convince folk to start here. 33 of the 34 million tons of food waste produced annually in the US ends up in landfills. Food waste is a biogas source. I’m working on a tech to make biogas and high-grade fertilizer out of food waste (the latter being where the $$ is, natural gas is worth much less). Think of it as ‘cleaning up efficiencies at the edges.’ We can get 5 maybe 10% aggregate increase in energy without adding any capacity to the energy system. Imagine 10 or 20 years from now the idea of a landfill doesn’t exist. Post consumer means a raw material for someone else. This is possible for more than 95% of landfill waste.
     
    - Think $200 oil. Then think $300. How do people’s lives changes. If vine ripe organic tomatoes go from $4.99 to 8.99 a pound, do people grow their own? There’s less  money to ship around via the great American WalMart / trucking economy, so people take up urban farming. They need resources, locally waste-to-fertilizer sources of fertilizer, etc. I’d write more but I wanted to post some links and the link button isn’t working. Here’s one anyway:
    http://www.kickstarter.com/projects/1189103863/little-city-gardens-an-experiment-in-the-economic-0?ref=live
     
    More on renewable energy later. But more importantly, more on the economics around it. Like computers in the 90′s and internet in 2000′s, this is the decade these systems change from an economic standpoint. Let’s have a discussion around that, like Pharm does around biotechs, and throw some smart-money investment ideas at it to make it happen!

  19. 1020

    Kinki – I agree, but where is/was the correction?  I’ll I can say is fingers-crossed for QETHREE….. ;)

  20. 1020

    I’ll = All  :)

  21. dclark41

    Phil:
    An option play on ADM you would recommend?

  22. goober

    Diesel – Agreed biomass is a great solution and solves many problems and can certainly turn what we consider garbage into many useful compounds like fertilizer and fuel source as in methane. I do not know the physics of why biodiesel causes so much more condensation and moisture in fuel tanks than pure carbon based only diesel fuel, but I can assure you it is a real phenom . I think it is in the process itself of making the fuel. I have been to several seminars on the subject and researched it thoroughly with the top people in PNW area who are not only fuel suppliers but testing agencies as well . It is a commonly known phenom as I mentioned by all those I mentioned. There was a compound on the market made of  rapeseed oil base (canola oil is rape seed oil) that did in fact deter the moisture build up and was excellent oil additive as well for diesel engines. They went out of business because one of the guys a Vietnamese, got caught putting up a fake 20 million dollar supposed CD from Citi bank as collateral for their start up and told investors they were safe because of this as collateral ? The compnay was started by a Russian and a VNamese guy. I met them both in Santa Ana California and reported back to my guys that sent me there, that these guys are straight up criminals and would likely kill you and your family if you crossed them. Did not find out about the killing part but did about the rest and saved my guy 1 MIl loss. The bacteria you speak of in tanks comes from the moisture I am refering to and is a nightmare on equipment of all types. I am very well versed in all forms of diesel power and have literally a wealth of knowledge on this subject, largely not going to any good use at this time because I am not involved in the same dealings I was any longer. Since the inception of biodiesel many tanks in large opereations have had to be drained and cleaned, which is a major malfunction for operations of scale, although diesel has always had an inherent moisture problem but was able to be overcome by changing out filters often and watching moisture buildup closely at onboard seperators. Bio, simply magnified the problem. Bio mass is a solution to many real problems as well as NG because NG is here and in abundance. No doubt fracking must be looked at and it’s problems considered as well, but all can be done if we want to. Aren’t you all amazed that we actually have had many solutions to many of these problems for a long time and politics has kept us fom actually accomplishing anything. Obama and his crew are no different.  IMO it is well past time to rethink all political flavors as it is all hurting us more than benefitting us. How many examples do I have to give ?  We simply need to demand accountability with facts and logic from all and things will change. Most of us simply go along with the staus quo……………………………. stop and THINK about it ? What I am saying is very real.
     
    Phil your graqphics when you get pumped on a matter are very good indeed. Stay fired up on this one, it is very real. And please let go of some of the donk mantra. Much of it does not exist for good purpose as it once may have. They are nearly all criminals ! Did I already say that ?
     
    1020  – I hope there is no QE 3. Worse thing that could possibly happen actually. I gotta go and buy a new shoe.
     
    Good luck to all

  23. cslanson2

     Phil,
    Nearly a year ago, per your suggestion I sold AAPL 2012 $185 Putters & used the proceeds to buy the 2012 $200-$250 Call Spread.  It ran just as advertised and with still 8 months to go before expiration, I bought back the Putters for $1.35 (to free up the margin) and at this time the Call Spread is within $3 to $4 of earning it’s maximum.
    What do you think of buying back the Caller keeping the Long Call and writing the Jan 2012 $320 Caller for a $52 premium. Net I would have approximately $50 invested by buying back the $250 Caller & selling the $320 Caller but if AAPL holds only $320 it would be a heck of a return for 8 months with not much risk?  Your thoughts?

  24. goober

    Phil – Isn’t it a pisser having to acknowledge all these issues and then turn around and go to a company like MON or ADM or GE knowing they are n fact a big part of many of the problems we see world wide? In that sense we ar all caught in a major double-bind are we not ? You and me included. I am consatnly thinking about this and where to draw the line so to speak. I imagine you are as well as many others. In that sense don’t we actually have all the power if we choose to use it properly and focus it properly ? I think so. 

  25. flipspiceland

    @Felipe
    Something doesn’t add up:
    Headline says 2.4% OVERSEAS rate however the Bloomie article goes on to say:

    "……which helped cut Google’s overall effective tax rate to 22.2 percent last year, shows one way that loopholes undermine that top U.S. rate".
    At 22.2%, when the CFO sits down to relate to the board  that Ireland has decided to eat its Dutch sandwich, effectively eliminating the tax loophole,  he will recommend raising prices that Google charges for all kinds of revernue streams to maintain profit margins and maybe add in a little extra for kicks.  THAT"s how it’s done.

  26. goober

    These guys are interesting as well in urban farming as a business. I have spoken with them and they have one huge advantage that actually is the differnce between success anfd failure. They are setup as an economically  deprived minority business entity and receive various subsidies from Obama admin. The basic underlying ideas are good but the racial based  and political crap would preclude most. I think we need to get away from subsisdies, isn’t that part of the problem ? Another example of poor governance , need is say more. Take away from these guys and give to these guys simply will not work long term or short term for that matter. Donkey dogma.   

  27. goober

    Sorry did not link , here it is
    http://www.growingpower.org/

  28. goober

    Stjean – You miss one completely valid point. There are a million ways for corps to massage all the numbers in accounting and it is in their benefit to use the "pass it in to consumers" mantra and so they do and are very successful with the aid of PRAVDA to convince people so it is actually real in a sense because the masses believe. In the past they have actually passed on cost which are incorporated in higher pricing overall and likely we will see more of this as well as negative feedback from public sooner than later. So in a way they get what they wish for but now that will likely come back to haunt going forward. More of the illusions. A flat tax of some description and do away with IRS menagerie of loop holes would be far better approach and solve many real problems, if we were truly progressive thinkers and not donks and reps. Current so-called progressive thinking is in fact regressive thinking in many ways. Just saying……………………. the truth! why do so many of the biggest corp offenders pay little tax like GE and or get a huge refund under this admin ? Fuel for thought, indeed.

  29. escohen5

    AGQ --       
    BDC or Phil --
    I wasn’t around here for the collapse of SKF…looking back, what was the best way to play it? 
    Buying puts would be a shocking amount of premium to pay!

  30. stjeanluc

    Goober – I was only looking at the tax side which seemed to always get distorted. I understand the larger point. You also mention GE not paying taxes under this administration which I think is obscene, but I think that most corporations are "apolitical" and will do what they can to avoid paying taxes no matter who is in power which is why it would make sense to take money completely out of politics! Maybe better individuals (rather than corrupt ones) would get a better change at power! As to tax rates, I would not be opposed to a lower corporation tax rate as long as the entire set of loopholes they use disappear! Make it simple and transparent. The same guys who keep on complaining that we have the highest corporation tax rate at 35% pay on average 15%. But no one knows it so they keep on cranking out the small violins! I would do the same with individual taxes, but I am not in favor of a flat tax. Brackets are not hard to manage as long we do also do away with all the IRS tax code… But unemployment would rise with all the lobbyist looking for jobs!

  31. stjeanluc

    And dollar getting sold early evening… to start the week in a good tone! And the euro is moving up because we all know that things are honky-dory there…. 

  32. escohen5

     Not quick enough!  Silver down over $5….

  33. stjeanluc

    Silver / Escohen – Indeed, someone must be dumping… Dollar is coming back up but not enough to justify this silver move. This is quite unreal a 10% move in 15 minutes! And they say that the market is not manipulated by speculators. 

  34. stjeanluc

    And 6500 contracts exchanged in about 15 minutes on a Sunday night! 

  35. escohen5

    Yes, and gold is holding, which is odd. That was as much as a 12.5% drop, which is about 90 points down on AGQ (25% of 360)!

  36. stjeanluc

     I don’t know about gold… it went from 1575 to 1545 in about 20 minutes.Not bad!  Might be some profit taking somewhere! And both are slowly crawling back!

  37. stjeanluc

    Speaking of fuel/ethanol, better fuel efficiency is apparently better at lowering the price of gas than drill, drill, drill…
    http://www.good.is/post/the-definitive-proof-that-even-massive-expansion-of-offshore-drilling-won-t-lower-gas-prices/ 

  38. kinkistyle

    Pumping and dumping!

  39. Phil

    Big moves this evening already.  Will give us better entries on inflation hedges of course – we’ll have to see what sticks in the morning.  

    "These record-high levels are probably not sustainable," says Jan du Plessis, CEO of Rio Tinto (RIO), talking about base metals prices. While remaining confident of continuing strong demand from China and India, du Plessis, is prepping his firm’s balance sheet for falls in copper and iron ore. 

    Silver is plunging in early trading Sunday evening, -12.1% at $42.73. No particular news, but there is (make that was) a lot of air underneath the price. Ed Bradford at Full Carry notes the metal was trading 88% above its 200 day moving average. Gold is spared any damage thus far. 

    More on the Fed’s dollar dilution from The Telegraph’s Liam Halligan, who warns that if things get out of hand and the greenback goes into freefall - it could be the genesis of the next global financial crisis. 

    Tim Geithner and Treasury may not be intentionally holding down the dollar, but that doesn’t mean it’s poised for any kind of rally. There are still ways to profit from the incredible shrinking greenback, including large-cap heavy exporters, international bonds, gold (of course), and some – not all – foreign currencies.

    Is the Fed your friend? It depends, Ed Yardeni writes: "The Fed is still your friend if you are invested in cyclical stocks , commodities and foreign currencies. If you eat food and run your car on gasoline, the Fed will continue to hurt you… In other words, the Fed seems to be doing everything to widen the gap between the Haves and Have Nots."

    BOJ Gov. Shirakawa, calling the economic outlook "very severe," tells legislators the bank will "take appropriate policy steps." A plan to expand QE was voted down by the BOJ this week, but Shirakawa’s comments may mean it could pass at the next policy meeting.

    The House GOP has its plan to cut the deficit and Obama hashis. Now six senators, three from each side, are formulating a bipartisan program to slash borrowing by $4T over the next decade. The Republicans would have to agree to tax hikes, the Democrats cuts to health and even social security.

    A Saturday night NATO airstrike on a Tripoli house kills Gaddafi’s youngest son Saif al-Arab, and three of his grandchildren. Gaddafi was in the house at the time, but survived the attack. 

    Should bring XLF back down:  Berkshire Hathaway (BRK.Aestimates its Q1 net profit plunged 58% to $1.5B due to $1.7B in pretax insurance losses following major disasters in Japan, Australia and the U.S. Warren Buffett described the period as "probably the 2nd-worst quarter for the insurance industry in terms of disasters." Full results are due Friday. (PR

    This too:  Community-bank closures are still shaking out of the system with some costly shutdowns in FloridaGeorgia and Michigan - at an estimated cost to the Deposit Insurance Fund of $643.2M, and bringing the YTD count of FDIC-insured failures to 39.

    Buffett: "Having a debt ceiling to start with is a mistake… If Congress doesn’t raise the debt ceiling, it would be Congress’s ‘most asinine act’ ever… The U.S. is not going to have a debt crisis of any kind as long as we keep issuing our notes in our own currency." (Reuters)

  40. Phil

     

  41. lori13

    Goober, If you were going to buy a little tractor ( 20-25 hp kubota) would you get diesel?  I knew about the problems with regular gas because we own watercraft, didn’t know diesel had the same problems.  Only going to use it intermitantly.

  42. lori13

    Phil do you think stocks and commodities will keep going up if the dollar keeps falling? 

  43. rehat

    Osama bin Laden is DEAD

  44. escohen5

     TOS just doubled the margin requirements for /SI and /YI…..

  45. Pharmboy

    Futures gone wild…..BIG move in the past 15 min…1% in a matter of minutes…fake? real? joke? OMG its because of what rehat said….

  46. lolkha

    Osam’s death explains drop in oil, not in silver

  47. Savi

    oil dropping also

  48. bps2002

    couldn’t dollar rally explain all the drop in oil and silver?

  49. jabobeast

    still the futures are flying for the market (i guess the strong dollar doesn’t hurt anymore)

  50. humvee4me

    lori:  i owned a Kubota diesel tractor for about 5 years when i had a lot of land to tend to.  Never had a lick of trouble with it; started up quickly, even after a few months of inactivity.  And when I sold it, it really held its value.  I would get another one without any hesitation.

  51. rehat

    The Donald will now demand the long form death certificate of Bin Laden

  52. kinkistyle

    damn… I am feeling something I haven’t felt in a long time… patriotism.  I think we know on what platform Obama will be running on in 2012.  Everything kind of pales in comparison.

  53. stjeanluc

    I’ve seen this Mark Twain line dug up by a number of people: “I’ve never wished a man dead, but I have read some obituaries with great pleasure.”

  54. lori13

    Thanks Humvee.  Wanted a kubota for years.
    We finally got him!  Hope  Osama is somewhere explaining to all the people he killed what the point was.

  55. stjeanluc

    2 words for the silver move – margin calls! TOS has raised margins to $30k for silver futures. I can imagine that it had some nasty effects on people’s margins.

  56. goober

    Lori – I would definitely buy a diesel tractor, hands down the best. Kubotas are excellent buit so are Yanmars and several others. The key is the type of dealership close to you and what kind of support you are offered. There are actually some good rigs coming out of China now as well.  I am not even aware of any other type other than diesel at this point it time except very old rigs. Diesel engines have a life of more than double that of gasoline maybe 5 times. Like all things they simply require good maintainance, regularly. Good fuel, clean air and good clean oil. Diesel engines run much cooler and do not carbon the top and bottom end as bad if run properly and that is why they last much longer. 
     
    Osama death at this point is quite meaningless. I find it interesting that he was actually killed last week, not yesterday. I have respect for him as a foe. Imagine all our technology could not or would not get him for ten years, kind of hard to believe really. A feather in Obamas political cap for sure, but be careful what you wish for . The fall out may be a payback not liked ? I was watchnf when it cam on wires as I had some weekend hedges on futures. ES surged and pulled back oil/gold /silver all pulled back and now have stabilized. USD surged and could not hit 73.50 and fell back. Within 24 hours or less all will back to where it was or close . AJ tells a different story and point of view. More realistic IMO   

  57. 1020

    A Toast to a Navy Seal:
     
    http://www.youtube.com/watch?v=o9mJ82x_l-E
     
     
    Nice Work Mr. President!!!  :)

  58. kustomz

    here comes the blow off top…maybe

  59. lori13

    Thanks Goober.  Just need to make 20K this year and sell all my other machines and I’m good to go on the tractor.

  60. goober

    Stjean – Of course all business is looking for the best tax situation and the biggest ones go with either side that is in power and donate accordingly hoping for favor. All part of the reasons the tax codes need to be simplified and all subsidies revisited and diminished on a scale over time so as not to destroy markets overnite. The simple problem in inequity is that the bigger corps have a mountain of money to hire lawyers and accountants (which is a write off) to minimize taxation while everybody else gets hosed for a lack of funding. A self fulfilling prophecy is it not ? Like many other facets, like lobbyist. In the end the bigger corps actually write their own tax write offs via congressioanl buy offs. True story. The current system is a hoax and a whore for the big boys. It has been written by lawyers over many years. How many in congress are or were lawyers ? I once gave a banker a new TV set and a trip to Hawaii and wrote it off as business expense as a bribe/cost of business for a 100% land loan. True story and it flew ! From that point on I knew we were effed. That was in 1979 and by 1981 I was almost bankrupt, even with zero invested. Interest rates killed everything, even 100% loans. So always be careful what you wish for. I eventually got out with no profit and losses but did not BK. I was very young and dumb, but I was one of the lucky ones as my basis was zero, other wise I would have been toast like everybody else. That was with a black guy I knew at Ben Franklin Savings and Loan. We partied heartily on the companies dime !!!!!!!!!!!!!!! I even voted for some donks back then.  
     
    Coming week will be intersting but I suspect it will return to business as usual quickly once Osama is realized to have been out of power for some time now and some what meaninless in the system of things now.. 

  61. goober

    Lori – selling machines now is not a good thing. I still have a few items left from a fairly big inventory and quit trying to sell 2 years ago because prices were so depressed and my stuff was paid for so I could simply let it set and hopefully wait for better prices. Still not looking good especially in Kawleefornya with new emissions laws killing used equipment sales. Contrary to what PRAVDA puts out new equipment sales are way off as well for construction stuff. I only have a few items left but would like to sell so I can leave US in not oo distant future hopefully . We shall see. Good luck with your Kubota , they are very good rigs, I have owned several different ones, mini excavators. The best way to acquire them now is to go to Ritchie Bros auctions great deals, but you must know what you are looking at. Pretty easy to get 50% off for low hour near new rigs in all brands from bankruptcies . All those guys that did not get the 100% land loans losing stuff in abundance, a pure buyer market at RBA.  If I had any confidence in America getting better I would  borrow a Mil and turn it into 5 short order , but I don’t have the confidence . If a guy was really risky he could figure out a way to do it with no collateral ( perhaps use machinery) and if things don’t pan out , walk and give back the equipment. If it does pan, bingo in the chips on OPM. Just saying , it has been done. Isn’t that what the banks did ? I have connections in Singapore and would rather play in that neck of the woods for a while.

  62. rkpagadala

    Hi All,
      Anybody have access to historical VIX futures data? I want them as far as they go. Daily data is good enough. I can be reached at rkpagadala@yahoo.com
    Thanks much.

  63. flipspiceland

    Osama bin Laden is dead.
    Silver is off 3.00.
    There is no connection between these two events.

  64. samz3700

     I have cnbc -
    I had a new alert set and damn thing went off at 5am to inform me  that Osama was dead - 
    The fact that this is moving the markets is nuts – but i also doubt the correlation established by msm.

  65. samz3700

     correction – i hate hate hate cnbc

  66. Phil

    Good morning!  

    Nothing to do with news like this but watch and wait, futures were flying at 10:30 but the Dow has pulled back 50 from the top – still up 72.  Keep in mind that Bin Laden was actually killed around 4pm yesterday and the market did not react until Obama made the official announcement so it’s not the "smart money" that was buying in on the news.  Oil, on the other hand, did not wait for Obama to start falling.  Neither did gold, or copper or silver – all of which gapped down at their open.  THAT’s what smart money was doing – getting some of the "terror premium" out of commodities.  

    Of course, that’s perhaps a bit early because it seems to me that any terror cells who had a plan in the works, now cut off from their leadership, might decide on their own to push up their timetable so I’d be cautious about the next few days.  Here’s the 5:30 am futures, already pulling back at the time and now down a bit more.   

    We also killed Qaddafi’s son over the weekend but missed the big guy and now his troops are attacking embassies in retaliation so quite the aggressive weekend for team USA.  

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