Comment by Phil

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Phil
October 27th, 2011 at 9:55 am

Good morning!  

Congrats to all the bulls but let’s get serious now as we’re up 1,500 points in October and the month isn’t even over yet.  

Profits are not profits until you take them off the table and we’re certainly going to get some serious resistance at Dow 12,170 (already over!), S&P 1,297 (2% to go), Nas 2,733 (half a point), NYSE 7,866 (120 away) and RUT 774 (3% to go) so it’s not likely to happen today or even tomorrow and that means we put up a toppy-looking pattern into the weekend.  

There’s certainly no reason we shouldn’t be able to plow back to our July highs now (+10% lines) but let’s keep in mind that if you are going to let those huge gains ride on TNA, SSO, etc – in order to get even bigger gains – then it is PRUDENT to take a percentage of those gains (20-25%) and buy some hedges along the way.  

It’s still earnings season and we’re getting out of the large-caps and moving into the small caps.  This will be put up or shut up time for the RUT and the SOX and, with a 15% move under our belts in a month, a 3% pullback (20% of the gains) back to yesterday’s close is not just a possibility, but a probability.  

So NOW is the time to hedge and I like the following:  

• SQQQ Dec $20/25 bull call spread at .80.  $4,000 buys 50 and pays $20,000 if the Nas falls apart and you can stop out at $2,000 so risk 2% to cover 20% of a $100,000 bullish set of gains.  
• TZA Nov $30/34 bull call spread at $1, selling $26 puts for .90 is net .10 on the $4 spread.   The logic here is that if the RUT breaks over 774, you can roll the puts and kill the longs with better than .50 for a hopefully even exit or you can just roll the short puts because, eventually, you WILL want some protection. 
• USO Nov $34 puts at .77 – I like them again, they topped out at $1.25 yesterday, that’s up 66% from here!  

That’s it for now, we HOPE the markets just keep going up but let’s set sensible stops on our gains and make sure we have some downside hedges because the bears are circling the wagons this morning and will throw whatever they have left in an attempt to stop or reverse this rally.  

Done with directional longs, of course, including the Futures and my favorite play of the morning is the DIA Nov $119 puts at $1.85 with a stop at $1.55 so let’s risk losing $300 and put 10 of these in the WCP (White Christmas Portfolio) to protect our unrealized gains.  

Dollar not failing 75 is a bad sign, Euro not making $1.42 is also a bad sign but of course there’s going to be some profit taking as people who were bullish (like us) do a little "selling on the news".