Wonderful Wednesday – Oil Sell-Off Gives us $1,500 Gains to Start the Week

Wheeeeeee! 

That's the sound we make at PSW when we get a nice sell-off and it doesn't get much nicer than making $1,500 PER CONTRACT off our call to short Oil Futures (/CL) at $53.20 in yesterday morning's post as we rode down a $1.50 drop back to $51.70.  

That wasn't our only winner either – Gasoline contracts (/RB) were shorted at $1.65 and they fell quickly to $1.60 so we took that money ($2,100 per contract) and ran though they picked up yet another $840 in the overnights as gasoline continued to fall – all the way to $1.58 this morning where we flipped long (as well as long on oil at $52.50 on the new, /CLH7 March contracts) – looking for a small bounce but with little conviction – as we still think oil can go lower.  

As we have told you, we can make great calls like this because the energy markets are just a scam and we have a pretty good idea of how that scam works.

Now, there are some people (who shall remain nameless) who think that NYMEX traders trading 4 BILLION barrels worth of contracts (4M) back and forth during a month in order to ultimately accept delivery of less than 20M barrels (0.5%) is somehow legitimate speculation but the friction costs alone of trading 200 barrels for each barrel delivered ads $20 to each barrel purchased in the US – even if it were legitimate, the practice should be stopped!  

Yesterday, I printed a chart of the NYMEX open contracts and I said that the 197,589 open orders (at 1,000 barrels per contract) for February were FAKE!!! and that they would be cancelled and put into other months to FAKE!!! demand in future months so the cycle can repeat.  Our short bet was based on the pressure they had to sell or roll the Feb barrels over the next few days.  Already today we can see the difference:

While 71M contracts were cancelled for Feb delivery (depriving the US of 10 days worth of imports that were otherwise scheduled for delivery) March went from 564,000 to 607,000 – up 43,000!  April gained 12,000, May gained 5,000 and June gained 7,000, which is 68,000 of our 71,000 barrels now rolled to FAKE!!! demand in other months, which will also be cancelled.  The other 3M barrels were scattered to longer contracts – the FAKE!!! and blatant manipulation of the oil contracts is a constant thing – not something just happening this month…

As I often tell our Members at Philstockworld:  We don't care IF a market is rigged as long as we can figure out HOW it is rigged and place our bets accordingly.  

I know that's a bit cynical but I have spent over 10 years calling for investigations and government action and instead we now have a Secretary of State who was the CEO of Exxon – why fight it?  As the great Republican, Clayton Williams used to say about rape: "If it's inevitable, just relax and enjoy it."  

We will have to deal with the inevitable on Friday, as Donald Trump is sworn in as the 45th, and possibly last, President of the United States of America.  Our "rally" has ground to a halt and volume on the S&P ETF (SPY), which we've been watching, was an anemic 59M yesterday, less than 60% of "normal" – where normal is half of what it was in 2014.  How low can the volume go and, as I asked yesterday, what will happen when the volume picks up or, even worse, when people try to sell and find out there aren't actually any buyers out there – that's how you get catastrophic market crashes.  

ALL of the indexes that usually track the S&P have disconnected this month and we're looking at a 15-20% correction for the S&P 500 for these things to get back in line.  Either that or they Yen could get stronger (Ha!) or Interest Rates could go lower (HaHa!) or consumer demand for goods and services could push inflation higher (HaHaHa!).  Given those choices, it's no wonder we're betting the S&P will go lower.  

Even as I'm writing this (9am), oil is falling all the way down to $52 and gasoline looks like it might hit $1.56 before it's done falling.  Below that and, again (as I predicted yesterday), there will be a drag on the S&P and we still aren't seeing any Dollar strength (100.80) and that's another thing that can knock the indexes down hard and fast.  Nasdaq (/NQ) Futures short at the 5,050 line is our favorite play at the moment – it's a very easy stop line if we go back over and the Nasdaq is massively stretched vs the other indexes.  

Last Wednesday, we discussed hedging the Russell (/TF) at 1,370 on the Futures and those are up $1,300 per contract at 1,357 and we also had the following options hedge:

• Buy 20 TZA March $18 calls for $2.25 ($4,500) 
• Sell 20 TZA March $22 calls for $1 ($2,000) 
• Sell 5 TASR 2019 $20 puts for $3.20 ($1,600)

The net of the spread is $900 on the $8,000 spread that's $2,500 in the money at $19.25 so TZA has to fall 6.4% for you to lose money on the March spread.  We offset the cost by promising to buy 500 shares of Taser (TASR) (our Stock of the Decade) for $20, which is $4.63 (19%) off the current price but you can substitute any stock you REALLY want to own if it gets cheaper.  

TASR is up a bit and the short puts are down to $2.85 ($1,425) and the TZA $18 calls are $2.66 ($5,320) and the $22 calls are $1.14 ($2,280) so the net on the spread is now $1,615 which is up $715 (79%) in a week and on the way to the full $7,100 gain so it's still a pretty good trade with another $6,385 (395%) left to gain from here but it would have been much smarter for you to pay $3/day ($21) to subscribe to our newsletter instead of getting these trades a week late, don't you think?

In fact, our Options Opportunity Portfolio has gained $3,000 in the past 7 days on otherwise untouched positions (the above was the only new one) – so a lot of bang for your buck with those subscriptions, right?  Anyway, if you are futures-challenged, you can make an options play on the Nasdaq using the Ultra-ETF (SQQQ), which is currently at $46.85 and it's a 3x ETF so a 5% drop in the Nasdaq would cause a 15% rise in SQQQ to about $54 so let's use that for our March goal.

• Buy 20 SQQQ March $44 calls for $4.40 ($8,800)
• Sell 20 SQQQ March $50 calls for $2.30 ($4,600) 
• Sell 5 AAPL 2019 $95 puts for $7.40 ($3,700) 

The net on this spread is just $500 in cash but keep in mind you are promising to buy 500 shares of Apple (AAPL) for $95 if it goes lower (now $120) and that's $47,500 so pick a different offset if you don't REALLY want to own a bunch of AAPL (we do).  The margin requirement on the short puts is $4,763.  Meanwhile, if the Nasdaq even twitches lower, our spread goes $12,000 in the money at $50 for a profit of $11,500 (if the short puts go worthless) or, even if we buy them back for $4,000, we still clear $7,500, which would be up 1,500% – not a bad hedge!  We will also add this one to our Options Opportunity Portfolio to lock in our recent gains.  

We get the Fed's Beige Book at 2pm and I doubt it's good news because Yellen speaks at 3pm to spin it.  We'll be doing a Live Trading Webinar at 1pm, EST this afternoon but it's Members Only this week, as we have a lot of trading to do and we'll be reviewing our Member Portfolios. 

Be careful out there.