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Thursday, March 28, 2024

Tepid Tuesday – Waiting on the Fed

Waiting.

Another day until the Fed's pronouncement but already we seem to be drifting aimlessly along with all of our indexes flatlining since yesterday's pumped-up close.  Bloomberg had a nice run-down of the status of the major Central Banks – unfortunately in the context of how totally screwed we all are after 8 years of ZIRP financing where all roads lead to inversion and, most likely, Recession.  

At the same time equities are boiling over at record highs, Team Trump is doing its best to take the shakels off the Banksters by rolling back Dodd-Frank which, as noted by Business Insider's Pedro da Costa, risks "another Lehman Brothers but on a larger scale."  That's right, the banks are even bigger now than they were then.  Simon Johnson, who was Chief Economist for the IMF agrees with what I said on Friday, stating that the latest proposal is "a dangerous plan for financial deregulation [where] the primary beneficiaries would be the big banks."

The current Vice-Chairman of the Federal Reserve, Stanlely Fischer warned the President that rolling back reforms poses a serious risk to the entire Financial System:

"We seem to have forgotten that we had a financial crisis which was caused by behavior in the banking and other parts of the financial system and it did enormous damage to this economy.  Millions of people lost their jobs, millions of people lost their houses."

"The strength of the financial system is absolutely essential to the ability of the economy to continue to grow at a reasonable rate, and taking actions which remove the changes that were made to strengthen the structure of the financial system is very dangerous."

When did this country decide to enter into a suicide pact?  We're tearing down the regulations that protect us from harm and destroying the environment while breaking off long-standing relations with our allies – and it's only Day 144 – not even a baseball season!  I'll be George Steinbrenner would have fired Trump by now.  As noted by Seth Meyers, Trump has yet to score a significant win, he is mainly focused on tearing down the accomplishments of others.  What baseball team would keep a guy like that?

 Will Trump also end up tearing down the economy his predecessor built back from the ruins of the Bush Administration?  Well, dismantling Dodd Frank is a good way to start that process as "never again" becomes "any time now."  

Meanwhile, congratulations to those of you who played along with our Nasdaq (/NQ) longs from yesterday morning's PSW Report (a total waste of $3 here) as we topped out this morning at EXACTLY our predicted weak bounce line at 5,740, which was good for one-day gains $800 per contract – you are welcome.  

Notice we went 40 points lower before going 40 points higher.  According to our 5% Rule™, that's just a normal overshoot and the fact that it was 40 points on the nose and then 20 points before moving higher only served to confirm our hypothesis.  Today, since we did squeak our 5,740, we'll be looking for the strong bounce line at 5,780 (see predictive chart in yesterday's report) for another $800 per contract gain for you.  We need to take and hold that strong bounce line into the Fed on Wednesday in order to be bullish over the weekend but I'm actually expecting a failure – we'll have to see. 

Waiting and seeing turned out to be hugely profitable for our Options Opportunity Portfolio, which you can follow over at Seeking Alpha, as we gained $33,354 (33%) for the month – albeit after losing 7% the previous month.  We knew our positions would snap back and 10% is our average monthly gain so back on track and, as you can see, very much in cash and using very little of our $600,000 in ordinary margin – keeping us very flexible even as our current positions have the potential to gain well over $200,000 (200%) between now and Jan 2019.

We only added one position over the last 30 days because we didn't see anything that compelling to buy and, more importantly, we were perfectly balanced – making money in up or down markets (by Being the House, of course), so we weren't exactly looking for reasons to mess around with it – especially after our May loss (our first of the year).  Now that we're back on track we'll be back on the hunt for more Options Opportunities (hence the name of the portfolio) – especially as we're quickly coming up on the next earnings season.  

One add-on to the OOP that we forgot to make official was our Brazil ETF (EWZ) trade idea from our May 19th Report, when I had pre-called the Temer scandal in an interview with China Global Television that played out exactly as we expected it to this past week.  EWZ, meanwhile, has gone exactly nowhere so our trade idea still stands and today we'll make it official for the OOP (adjusted to today's prices):

  • Sell 5 EWZ 2019 $25 puts for $2.30 ($1,150) 
  • Buy 10 EWZ 2019 $25 calls for $10.35 ($10,350) 
  • Sell 10 EWZ 2019 $35 calls for $5.10 ($5,100) 

That's net $4,100 on the $10,000 spread that's over $8,000 in the money to start.  The upside potential is $5,900 which would be a 143% return on your money and your worst-case downside would be owning 500 shares of EWZ for net $33.20/share ($16,600).   The ordinary margin on the short puts is just $780 so it's a very margin-efficient play as well.

That's how we're able to make such extraordinary returns with such small cash outlays.  Yes there are the risks of assignment but, realistically, Brazil is not going to zero and, even if it drops 50% (super-unlikely), that's still $17 and our loss is 500 x $16.20 = $8,100 so not really outsized compared to the potential reward – especially considering how much more likely one is than the other.  

Don't be put off by long time-frames on the trades – they are there to protect us, to allow us to ride out moves against us and adjust along the way.  Long time-frames for the options don't stop you from making quick profits.  For example, the GM trade idea we mentioned in the May 4th Report was:

  • Sell 10 GM 2019 $32 puts for $4.25 ($4,250)
  • Buy 25 GM 2019 $28 calls for $7.25 ($18,125)
  • Sell 25 GM 2019 $35 calls for $3.60 ($9,000)

It's only been one month out of 20 (5%) but that trade, which is in our Options Opportunity Portfolio, now nets $6,775  with the short puts at $3.60 ($3,600) and the spread at net $4.15 ($10,375) for a gain already of $1,900 (38%) – getting off to a good start but the potential payout from our net $4,875 entry is $17,500 so, on the whole, the trade is generally on track as it should be making 20% a month if all goes well.  Even at $6,775, this is still a great trade with $10,725 (158%) of upside potential – only 100% less than if you came in with us on day one but, then again – you saved $90 by not subscribing for the month!  

Even in this crazy market, there are plenty of great opportunities if you know how to look for them – and how to play them!  

 

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