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Thursday, August 18, 2022


PSW August Portfolio Review

$2 MILLION Dollars.  

Well, actually it's $1,960,061 but that's still up 326% from our $600,000 start in our paired Long-Term and Short-Term Portfolios since their inception on 11/26/13.  We're "only' up $440,607 (29%) in 13 months (see our July, 2016 portfolio review) as, even at that time, I wondered "Are We Too Bullish".  

The S&P was at 2,120 last July and now at 2,425 so up 14% which means we're outperforming the S&P by 100% so I certainly don't think we've become too bearish, we've simply tapered our 40%+ annual growth of the first 3 years in favor of spending more money on hedges – to lock in these ridiculous gains.  

And they are ridiculous.  As I noted on Friday, there isn't enough money in the World, nor are the Central Banks printing money fast enough to pay everyone 40% annual gains.  In fact, if you start with $600,000 and make 40% a year for just 10 years, that's $17.3 MILLION!  So, I will ask you again, do you think it's likely or unlikely we continue along this path?

No, that would be silly, right?  No matter how confident we are in our own abilities to make money, we have to recognize that this is a unique market situation that is inherently unsustainable.  It's a lot like catching a really good wave while you are surfing – we're good surfers and we will take full advantage of it but you can't fool yourself into betting the next wave will be even bigger, and the one after that and the one after that – it's simply not how the universe works.

Of course, we know what's causing these giant wavers – Central Bank Policies – but then we have to consider if those are sustainable and, as you can see from the rate chart – the amount of money they need to pump into the system begins to grow exponentially to sustain these asset gains.  We started with $600,000 but the S&P 500 is now at about $21Tn alone so it will cost SOMEONE $8Tn to add 40% to it.  The entire GDP of the United States is $18.5Tn and is growing at MAYBE 3%, which is $242Bn – far shy of $8Tn or $4Tn (20%) or $2Tn (10%) or… well, you get the idea!  

Image result for cash as a percentage of stocksIt's one thing when we, at Philstockworld, make 40% a year because it's not that much in the grand scheme of things (and see "The Secret to Consistent 20-40% Annual Returns on Stocks" for a quick overview of our market strategy as well as "Don't Gamble With Your Investments – BE THE HOUSE") but it's not good when EVERYONE makes that kind of money because THERE SIMPLY ISN'T THAT MUCH MONEY TO BE MADE.  

That means the paper profits in people's portfolios are not likely to hold up very long if large amounts of those people attempt to convert their stocks into CASH!!! – because there just isn't that much cash around – even if the people who have the cash were inclined to trade it in for stocks.  

I do not want to sound like Chicken Little and I know it sounds hypocritical from someone who is taking full advantage of this market run to complain about how fragile the system is but I say this because I saw people become too complacent in 1999 and again in 2007 (we warned people, but not loudly enough it seems) and I decided that, in 2017 – I will do my best to stop my readers from being hurt and yes, I'm sorry but that also means taking a more cautious stance in what I consider a very dangerous market bubble. 

According to the Fed, as of this 2015 chart, there was only $10.8Tn backing what is now $85Tn in US Equity assets.  The only time in history cash to equity was lower than this was 1999 – another time when low interest rates fueled a market bubble.  As long as investors remain confident, however, this bubble could keep going on but the bigger the bubble gets, the more the downside danger grows as it becomes more and more difficult to convert your stocks to cash on the way back down.  

Image result for margin call trading placesThose of you who were around in 2008 probably remember that the brokers crashed and we couldn't make online trades at times and calling the brokers got busy signals and sometimes took them hourse to sell off a stock for you.  Meanwhile, losses were piling up and margin calls were being made.  That's another great reason to have hedges in your account, the gains on the hedges put back the margin you are losing on the bullish equities and prevent you from getting a margin call in a major crash (where they tend to liquidate your portfolio at the bottom).  

While this isn't an article about bubbles, I want to make sure you understand the logic behind my cautious trading strategy.  Bubbles are formed when assets are in high demand and short supply.  Since Bonds and TBills with negative rates (or rates below inflation) are very poor investments and cash also fails to keep up with inflation, money is forced to go to the only place that is keeping up with inflation – stocks.  

Image result for stock bond allocation us 2017There are very few allocation strategies that have less than 25% of the money in bonds (generally, it's recommended you have your age as a percent in bonds) yet, as of April, 2017, less than 20% of investors' assets were allocated to bonds with almost 70% in equities. 

If demand is high, stock prices can keep climbing.  Take Tesla (TSLA) for example.  There are only 165M shares of TSLA in the World and only 124M of them have been distributed or "floated" to the public.  23% of those (28.5M) are held by insiders and 62% (76.9M) is held by institutional traders (funds, iBanks…).  That leave a grand total of 18.6M shares in the hands of retail traders and they trade those shares back and forth an average of 2.8M times a day for a 15% daily turnover.  

TSLA has sold 200,000 cars and let's say all those drivers are also stock investors (the low-end car is $80,000) and let's say those people took just 100 shares each.  That would be another 2M shares held by the faithful, further depleting the pool of shares available for trading.  TSLA is part of the Nasdaq and, every day, 401K and IRA money pours into ETFs and buys whatever is in them and about 1% of that money goes to TSLA so, when you see ETF inflows of $18Bn figure the Nasdaq is $1.8Bn of that and TSLA gets $180M – enough to buy 500,000 shares of TSLA or about 17% of the day's trading.

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If the fanboys and funds are holding onto their TSLA shares then the bidding war ensues for the retail shares that remain in play because the funds MUST buy their allocations – at any price.  So the stock goes from $290 to $300 to $320 to $355… as long as there is no selling pressure, the sky is the limit but only the last 2.8M shares traded (2.2%) set the price for the other 122.2M shares that are floated.  

Meanwhile, the market cap of TSLA goes from $50Bn to $60Bn but that's based on, perhaps, just $1Bn of net inflows (not all the trades are buys) since TSLA was at $300 in early July.  The next person to buy TSLA is told the stock is "worth" $355 but is it?  No one will actually know until a significant amount of people try to sell their stock and THEN they will find out what people with cash are willing to pay for it and, once you run out of fanboys – you run into fundamentalists who ask awkward questions like "how much money does the company make?" or "how much debt does it have" or "what kind of return will I get on my equity?"  

The people with the most cash are the people with the tightest formulas and they are not likely to jump into TSLA just because it goes back to $300, where they weren't interested in it before.  That's why market bubbles "pop" – because, in order to convert those inflated equities into cash – you have to find a different kind of buyer and those buyers don't generally subscribe to the bullish valuation stories that drove the bulls into a frenzy, these are buyers who, on the whole, would rather have bonds (with guaranteed returns). 

Image result for market bubble crashIf the sellers are worried, they will keep dropping their ask until they arrive at a price the buyers are willing to pay and the more people want to sell, the less the buyers are willing to pay.  In markets like this, where less than 30% of the equities could possibly be converted to cash (even assuming you could convince all the cash holders to convert) – the market drops can become very precipitous.  

Our Long-Term Portfolio (LTP) is hedged by the Short-Term Portfolio (STP) and, originally, our hedges were 20% ($100,000) against our $500,000 allocation toward long positions.  As time has gone on, our LTP has grown to over $1.4M while our STP has grown to close to $500,000.  The reason the STP has outpaced the LTP is because it's designed to make a lot of money on market dips and we have had a few dips over the past 4 years.  Since the market quickly recovered from those dips, we never needed the money from the STP in the LTP – so the cash remained in the STP.  The hedging allocation is still roughly the same 20% of our LTP positions and we're sitting on a ton of CASH!!!, which is fine with me (have I mentioned how much I like CASH!!! lately?).

Our Options Opportunity Portfolio (OOP) is an integrated portfolio that follows the same style as our LTP/STP paired portfolios but from only a $100,000 base, which made it more challenging in the beginning but now, 2 years out, we're up over 200% as it's a more aggressive portfolio and the market has had two fabulous years in a row.  The Butterfly Portfolio is our oldest and most conservative portfolio with spread positions that are essentially self-hedging.  While this portfolio essentially can't possibly make 60% in a year, it also has very little chance of making less than 10% and, so far, our average has been close to 40% since 7/29/13, now with a 235% gain.  

Without further adieu, these are the 4 PSW Portfolio Reviews as they appeared in our Live Member Chat Room this week.  If you are not a subscriber, you will not be able to see the full images of the portfolios with the actual positions but you can read our strategy notes on many positions we hold to give you an idea of how we track and trade things at Philstockworld.  

August 15th, 2017 at 2:22 pm | Permalink

Short-Term Portfolio Update (STP):  $493,840 is up 394% and up $69,514 from $424,326 on our July 18th review.  Note that we have more CASH!!! ($518,415) than the portfolio is worth and that cash rightfully belongs to the LTP – as the whole point of the STP is to hedge the LTP but the LTP doesn't need any cash – as we have $1.2M there that isn't deployed (and little margin too).  

That allows us to take some high-margin plays in the STP, like shorting FAS and AMZN that should not be followed by people who are tight on margin – as they simply aren't worth it.  The STP/LTP is essentially a $2M portfolio at this point (from a $600K start!) but, usually, we stick with plays in portions that reflect our original $600,000 start.

Based on the recent action, where the LTP dipped $100K with the market, I feel our $300,000 protection in the STP is a bit short, so my primary goal today is to add another $100,000 of protection.  

  • AMZN – We rolled our original 2 July $900 short calls ($10,140) to these when they were at $14,900 so $10,140 – $14,900 + $24,000 = $19,240 we collected on these 3 contracts is $64(ish) per contract so our break-even is $1,079 into Jan.  As long as AMZN stays under $1,000 – I'm pretty confident but anything over that isn't really worth the risk.  It's a $16,000 hedge as it stands.  

  • FAS – This one hurt us as bank earnings were strong but it's a leftover leg we already made a lot off so no worries.  What does worry me though, is that $37 is not a realistic target.  The short Jan $37s are $16 but FAS should calm down and let's say they are $50 by Jan so $13 to close.  the 2019 $50s are $10 so we could roll to 1.3x or maybe just roll the loss (1x) and then we can think about selling some offsets.  Meanwhile, it is a $48,000 hedge.  

  • AAPL – We have so much of this in other portfolios and there's not much left to collect so let's just kill it.  
  • ABX – Here we have half left to collect and we don't need the margin and we're confident in the target, so it stays.  
  • GOGO – Though it's 80% cooked, we don't need the margin badly enough to spend $950 to buy it out early, nor are we worried about it falling so we can leave these.  








  • SBUX – Also half left to collect and not at all worried.  Good for a new trade, actually.  TOS says $3,371 in ordinary margin to collect $2,000 and you have a 20% cushion over 16 months to make 60% returns.  Funny how we are so used to making over 100% that this kind of trade sounds boring, right?  
  • LABU – I love them when they are cheap.  Let's spend $5 to roll the Dec $55 calls ($13.80) to the March $50 calls ($18.50) and DD (10 more) and sell 10 of the March $70 calls for $11.50 so we move from 10 $15 Dec spreads to 20 $20 spreads with 1/2 the short calls expiring in Dec and the rest of the trade in March.  Cost of the change is $5,000 + $7,000 so $12,000 and potential at $70 goes from $15,000 to $40,000 so $12,000 more to make up to $25,000 more is a good deal!  Now we can buy back the short Dec $45 puts for $5 ($2,500) and sell 8 of the March $50 puts for $10.90 ($8,720) so we pocket another $6,200 and now we only spend net $5,800 for $25,000 more upside on essentially the same spread!  

What, do you think we make 400% by accident?

SQQQ – Jan $28 calls are at the money and green for some reason.  Don't look a gift horse in the mouth and let's rescue our money ($3.60) and roll out to the March $25s at $5 for +$1.40 ($14,000) and we'll get that money back buy rolling the short Jan $55s (0.65 = $6,500) 60 March $40 calls for $2 ($12,000) and that's left us more aggressive with 40 uncovered March $25s that we can take off the table on a nice dip or, otherwise, a $150,000 spread that's $3 ($30,000) in the money.  

Overall, we're spending net $8,500 to get more aggressively bearish.

TZA – Well, it's math time.  I see $150,000 less $30,000 current value on SQQQ is $120,000 upside (and more since 1/3 are uncovered) and $48,000 on FAS and $16,000 on AMZN is $184,000 so we need another $216,000 out of TZA to make our goal.  

We're already aggressive on TZA with 1000 Jan $15s that are in the money and uncovered with short $20 puts so net cost is $14K and upside potential on a 20% drop would be a 60% bump in TZA from $17 to $27 so $120,000 is way short of our goal.  

  • TZA doesn't have March but the $22 calls are $1.15 and the Jan $15 calls are $3.15 so, if we add 100 spreads at $2 ($20,000) we have another $70,000 upside but it's really more than that since we have 100 uncovered and we should be able to make a 2x roll on the short calls without risk (as they'd all be covered) so even if the short $27s went $2 in the money, like the $15s are now ($3.15) they could then be rolled to 2x the $34s ($1.15 in theory) for $10,000ish and then we'd have 200 of the $15/34 spreads that pay $19 ($380,000) – so I like the cheapness ($20,000) and the flexibility of this adjustment.  

So I feel a bit better about our coverage now and I want to find a $10,000 offset to pay for our TZA roll (or 2 $5,000s) but there's no rush.  

August 18th, 2017 at 12:44 pm  | Permalink 

Long-Term Portfolio Adjustments (LTP):  This is not a full review as I don't have time and we don't really need one, since not much is changing.  We're at $1,466,221 this morning, which is up 193.2% but down $110,286 (7%) from our 7/24 update, mostly due to FU stocks.  Most of that money was made up in the STP (as it's supposed to be) and I'm not looking to get more bullish so staying even makes me happy and we've already got $1.2M in CASH!!! – so we don't need any of that either.  

The only change we made since 7/21 was selling 5 ALK puts and the only Aug position we have is short AAPL calls but we'll make a big change to AAPL to make it more like the OOP version, as our position in the LTP ($100/130) is way too deep in the money.  

So, keep in mind, I'm only going to make notes on the positions we're changing (or need a comment) – the notes from the prior review stand otherwise.  

  • PSO – Just sold their education unit today and lost $21M for the Q on $2.6Bn in sales.  We only have 1,000 shares so let's add 1,000 more for $7.75 and sell March $7.50 calls for 0.85 and $7.50 puts for $0.65 so our net on this 1,000 is $6.25 + $12.25 original is net $9.25 half-covered and, if we're assigned 1,000 more at $7.50, we'll end up with 3,000 at an $8.666 avg ($25,980 – still half an allocation) which is great if they stay over $7 as we can make up the rest with a few call sales.    We still have lots of room to DD, so we can also sell more puts if we feel so inclined. 

 Earnings History

  • ABX – Those calls are leftover from a spread – we need to remember to take profits on a good pop.

All the short puts look good, about $55,000 (more from current gains) worth and we'll be looking to sell more as we're usually in the 24-36 range and now we only have 16.

  • OIH – I meant to kill and forgot.  Now it's a salvage and we can roll the Jan $22s ($1.45) to the 2019 $18s ($4.80) and sell the $24 calls for $1.80 (leave the short Jan calls to die) so we spend net $1.55 ($3,100) on top of the $5,000 we lost puts us in the $12,000 spread for $8,000 and we'll know by Q1 whether oil companies plan to spend a bit more next year or if we should give up.  
  • CG – I want to cash out the stock at $20.88 ($20,880) and pick up 10 March $20 ($2)/$22.50 ($1) bull call spreads for $1 ($1,000) to protect the short calls but hopefully they sell off a bit before we're done.  I like CG but over $20 is way past our 2-year goal.   

  • GME is at a nice low so let's buy back the short $23 calls ($2.35) and wait for a bounce to sell more.  

AAPL – Well, we have to buy back the short $130s for a loss but we may as well redo this because it's too far in the money so it's a cash out, other than the short puts, which are fine.  As a  new play let's do this:

  • Buy 50 AAPL 2019 $150 calls at $23.50 ($117,500)
  • Sell 50 AAPL 2019 $180 calls at $11.25 ($56,250) 
  • Sell 30 AAPL Sept $145 calls at $14.20 ($35,500) 

So just net $25,750 on the $150,000 spread gives us just under $125,000 (500%) upside potential at $180 less the puts we sold for $12,750 too!  Why are we not doing the OOP play?  Because they already made good money on their calls so we'd be chasing (net $10,000) and I'd rather use the $10,000 to roll down and widen this spread later – if AAPL goes lower.  If AAPL doesn't go lower – then we just make the $125,000 as a consolation prize.  

  • AAXN – Let's buy back the short 2019 $30 calls ($1.60) and we'll re-sell on a bounce.   
  • BBBY – Another retail panic.  Fortunately, early entry so let's buy back the short 2019 $40 calls ($1.35) and roll 5 short $40 puts ($12) to 10 short $30 puts ($6.10) and roll our 10 $30 calls ($3.40) to $22.50 ($7.10) and see how things go from there (no short calls for now).  
  • CBI – Hopefully this is the bottom.  Our 15 short 2019 $25 puts are $15.50 ($23,250) and we can roll them down to 30 of the $15 puts at $7 ($21,000), which uses $2,250 of the $7,800 we sold the $25s for.  That nets us into 3,000 shares of CBI for $39,450 ($13.15).  Given that's getting close to a full allocation block (though the portfolio has tripled, so we can afford much more), we don't want to spend too much on the calls so we'll roll the 20 2019 $15 calls ($1.85) to the $7.50 calls ($4.30) and sell the $15s to some other sucker for net 0.60 out of pocket ($1,200) to put is in the $15,000 spread that's back in the money.  We lost $5,500 so $6,700 net cost means our upside at $15 is still $8,300 (123%) despite all the FUs – plus the $5,550 we still hope to make on the short puts!   

This is the key to understand these patience plays.  We started out selling $25 puts in Sept, when CBI was around $30 and now it's $9 and we can still make $13,850 if they just make it back to 50% of where we originally planned to enter and, if not, then we'll own 3,000 shares at $13.15 – MUCH lower than the $25 we planned to buy 1,500 for!  

It's taken just under a year to get to this point and it will probably take more than a year to get back but so what?  As long as our companies don't go bankrupt, there's almost no trade that can't be turned around if you are willing to stick with it and no, we don't really have a better use of $4,000 in net margin than making $13,850 in 16 months so we're not "wasting time" with bad positions and CBI is a company I'd love to own a lot of long-term (assuming their debts don't swamp them).  

  • CHK – Down $10,000 is 20% of an allocation block.  They haven't even missed earnings but they are being killed so it's time to add more.  The 2019 $5 calls are 0.85 and we can roll down to the $2 calls at $2.20 for $1.35 ($6,75) and DD there ($11,000) to 100 $2 calls and let's not sell short calls and see if we get a bounce.  The short $5 puts are a $3,500 loss but it's still a good target, so no reason to change those.  I'd ideally like to sell 50 (1/2) the $7 calls for $1 if we get a good pop.
  • CM – Let's buy back the 3 Sept $85 calls for $1.50 ($450) and sell 5 March $85 calls for $3.60 ($1,800) to pocket $1,350 and, more importantly, move this trade out of the unbalanced pile and back with the other dividend-payers.  
  • CMG – While it's falling, we don't want to commit too much but the 2019 $320 calls ($51) can be rolled to the $280s ($71) for $20 ($20,000) and that puts us deep in the money and allows us to sell short calls on the bounce (if ever).  The real problem is the short Jan $400 puts, now $90 and what we'll do is buy those back ($45,000) and buy back the 7 short 2019 $300 puts for $39 ($27,300) and we'll sell 10 of the $350 puts for $66 ($66,000) so a net cost of $6,300 but 2 less short contracts and we still have $47,575 we sold the original puts for so net $41,275 on 10 contracts means our break-even is below $310 on the puts – again, despite being tragically wrong on our 2/17 entry.  If CMG fails to hold $300, the Jan $300 calls are currently $35 so even a half sale would put another $17,500 in our pocket to spend on more rolls.

  • DIN – This was a first poke and now I'm pretty sure they've bottomed so time to press it.  Also, March calls are out now.  I'm not off my $45 target for Dec but we can roll the 10 short Dec $45 puts at $7 ($7,000) to 15 short March $40 puts at $5 ($8,500) and pick up $1,500 – so why not?  Worst case is we get 50% more shares at net $35.20 ($52,800) vs our original commitment to buy 1,000 at net $41.20 ($41,200) so $10,600 more for 500 more shares is a very good deal ($20/share).  The Dec $40 calls ($3.20) can be rolled to the March $35 ($6.75)/$45 ($1.90) bull call spread at $4.85, so we're spending $1.65 ($1,650) to be in the lower, longer $10,000 spread (and we'll leave the short Dec calls to expire).  We spent $3,900 on the original spread (not counting the short put money) so we're in for $5,550 on the $10,000 spread now and the upside is $4,450 and, if the short puts expire, another $5,300 there.  
  • EWZ – Cash out.  Same as STP.  
  • FTR – They are still paying a $2.40 dividend, so it's hard to walk away from at $13.54.  Let's add 2,000 more at $13.54 ($27,080) to bring our average on 4,000 down to $19.89 and we'll see how things go.  At least the dividend is more than 10% while we wait.  
  • IBM – We'll certainly sell 5 more 2019 $135 puts for $11.75 but that's it as the rolls are too expensive ($3.50 for $5) on the long calls but let's buy back 5 (1/4) of the short $150 calls for $6.35.  
  • IMAX – Going to call a bottom here.  March is out so we can roll our 25 Dec $29 puts ($10.20) that we sold for $3 (ish) to the March $26 puts at $7.50 so we'll spend the $3 but pick up $4 of position on the roll.  The Dec $28 calls can die on the vine and we'll roll our 20 Dec $23 long calls (0.50 = $1,000) to 30 Mar $17 ($3.30)/$22 ($1.20) bull call spreads at $2.10 ($6,300).  The spread pays $15,000 if all goes well and we'll be pretty much even at $22.  

  • LB – I think, perhaps, this will be my 2018 Trade of the Year if they stay this low.  Meanwhile, we sold 10 2019 $55 puts for $11.75 and they are now $21.30 ($21,300) so we'll roll them to 20 of the $40 puts ($9.65 = $19,300) for $2K out of the $11,750 we collected so now we have $9,750/20 contracts is roughly $35 for break-even and the stocks at $36 so what's the problem? cool  Now we look to the OPPORTUNITY on the call side and we have 20 2019 $45 calls, now $3.30 ($6,600) and we can roll them down to 40 of the $32.50 ($7.60)/$45 ($3.30) bull call spreads at $4.30 ($17,200) so we're spending $10,600 (less the net $9,750 collected on short puts) for the $40,000 spread that's $4 ($16,000) in the money DESPITE LB's horrific sell off since our 2/1 entry.  

  • M – No-brainer to roll the 2019 $23 calls ($2.15) to the $18 calls at $3.70 as we're buying $5 in position for $1.55 and widening our spread!  
  • SKT – Probably another retail overreaction and this was our first poke.  The 5 short Dec $30 puts ($6.30) can be rolled to 10 short March $25 puts ($3) about even and the 10 Dec $25 calls at $1 ($1,000) can be rolled to 20 of the March $22.50 calls at $2.50 ($5,000) for $4,000 + the $1,700 loss puts us in the $10,000 spread that's 80% in the money for $5,700 less, hopefully the $2,350 we collected on the short puts.  
  • TEVA – Priced like they are going BK.  Our 15 2019 $37.50 short puts are $20 ($30,000) and we can roll them down to 30 of the 2019 $25 puts at $9 ($27,000) so -$3,000 and we collected $14,000 originally so net $11,000/30 is $3.666 so our break-even is $21.333 – seems reasonable.  The 10 $25 calls are $1.45 ($1,450) and we can roll those down to 30 of the $17.50 calls at $3.60 ($10,800) and I'd rather not sell calls for now.  We have a $9,000 loss from before so we're in for $20,000 on 30 $17.50s less net $11,000 collected on the short puts is $9,000 or $3/contract and that means over $20 we start making money (over $22.50 because of the puts) and at $25 we'd suddenly have $22,500 for a $13,500 profit despite the hard fall.  Meanwhile, we have plenty of room to add more cash if we have to.

  • UNG – No point in staying in it if we don't roll the calls.  We have 40 of the 2019 $6 calls, now $1.40 ($5,600) and the $4 calls are $2.60 so let's spend $1.20 to pick up $2 in strike that's in the money, right?  If we could then sell the $9 calls (0.50) for $1 or better, I'd be happy with the spread – so that's our plan.  

This is what we have CASH!!! for – to put it to work.  We'll see how our stocks do into Q3 – probably back to nothing to do on the next rollover as we are now well-positioned for success if the market keeps going up and, if not – we have our STP hedges.  

August 17th, 2017 at 2:42 pm | Permalink

Options Opportunity Portfolio Update (OOP):  Well we're up $4,000 today so I guess we're still bearish.  Unfortunately we peaked out at $325,753 back on our July 18th review and now we're down to $311,063 (up 211%), which is down $14,690 for the month.  Unfortunately, our two new plays since then were LB and TEVA, both took big losses in the first round.  We'll be adding to both of those losers.

For those who are new, we transitioned this portfolio to more of a long-term portfolio as our first few months (it's our 2-year anniversary, in fact!) made us realize most people were not able to follow active trading due to the platform restrictions at SA.  We've moved towards a hybrid portfolio that mirrors the style of PSW's Long-Term/Short-Term paired portfolios, which relies on long-term positions, short-term premium selling and hedging to create a steady income stream.  

That's going very well, as we're up 211% in two years, so no reason to change things now, right.  It makes the portfolio less exciting but it's exciting to have money too – so we'll stick to the winning formula in year 3 ahead.  

  • CHL – We sell short puts mainly to generate a little cash (often to offset a bearish position) and also, as in this case, to put a placeholder down on a stock we'd really like to buy if it gets cheaper.  What's our buy signal?  When the short puts are losing lots of money!  Sadly, this one is up 59%, so it looks like we won't be getting to buy CHL cheaply this quarter.  
  • NLY – Another one we'd love to own if they get cheap.  In this case, it's our favorite REIT and, rather than buy the stock ($12.30) and then cover it with a call and hope it holds its value while waiting to collect a $1.20 dividend – we just sold the $12 puts for $2.75 (more than two years' worth of dividends) and our worst case is getting assigned the stock at net $9.25 (25% off).  That keeps $12,300 CASH!!! in our portfolio, which generates $24,600 of ordinary margin and the margin requirement on the short puts is just $1,300.  So, to summarize, use 1/10th the cash/margin we would have to buy the stock and collect more than the dividend with a 25% cushion should the stock fall.  THAT is how you buy a stock!  
  • WTW – We cashed out WTW positions twice already this year.  This is the leftover short put and we have no reason to buy it back early because we don't need the margin.  
  • FXP – Looks bad but China can fall fast – we'll just let it play out for now.  They have to deal with that psycho that has his finger on the nukes – as well as Kim Jong Un…

  • SQQQ – This is one of our primary hedges and it's right on the money.  Unlike the STP, the OOP doesn't seem to need to be more bearish.  If we consider it's a 3x ETF, then a 20% drop in the Nasdaq should pop it 60% from $28 to $45, so the spread is exactly what it should be and 50 x $18 is $90,000 worth of protection less the $15,000 current value so $75,000 of potential protection from this position.  I do want to make one change – let's roll the Jan $27 calls ($4.25) to the March $26 calls at $5.25 for $1 as we're buying $1 in position for a Dollar and the extra 2 months of protection is free.  
  • TZA – Our other main hedge.  This one is already $2.50 in the money and x 80 that's $20,000 and the net of the spread is $22,500 and the potential at $30 is $120,000 so almost $100,000 worth of protection here and TZA doesn't have March yet so we'll just let it stand.
  • SVXY – Our bet here was that, by Sept, the VIX would finally make a comeback and send SVXY lower.  While we've had a few spikes in the VIX, none have been sustained.  The Dec $90 ($20)/$80 ($15) bear put spread is $5 and I'm considering rolling to those but, for now, let's BUY 20 of those Dec $90/80 put spreads and keep what we have but our goal is to cash out our Sept $72.50 puts next week – hopefully at a better price.  After that, we'll hope SVXY holds $50 so the short puts expire worthless and we'll be in great shape.  

F – No movement on the stock (good for a new trade) but we're in it for the dividends.  Also, we planned on getting called at $10 so it's a darned good thing we took a conservative entry at $11.03 with the low hedges.  

AAPL – The potential for this position is $180,000 and the current net is a net $2,800 credit so good for a new trade if you want to make $182,800 if AAPL Is over $170 in Jan 2019 (but not too far over or the short calls will hurt us).  The short Sept $140 calls are $19.50 and the Nov $145s are $17.25, so that's the roll we'll be looking at.  Once the premium wears off Sept, it should be an even roll.  Also, it's only a 2/3 cover, so nothing to worry about and I'm glad for the protection in case the market corrects and drags AAPL with it.  This trade alone could double our profits in 16 months!  

AAXN – I can't see why Taser took a dive.  You would think the police would be stocking up for the coming riots.  We still love them and it's a long-term trade so we're going to take advantage of the dip and make these changes:  Roll 10 2019 $20 calls ($5) to $15 calls ($8) for net $3 ($3,000).  Sell 5 more 2019 $20 puts for $2.70 ($2,700).   So we've spent net $300 and added a potential $5,000 to the spread. 

  • ABX – Even though we are on track and up $4,000, it's still a nice trade at $5,000 net that returns $14,000 at 20 in 16 months for a $9,000 profit (180%).
  • ATI – Doing surprisingly well considering we didn't get our infrastructure bill.  I'd say on track, I'd be thrilled to own them if they went lower.  
  • CDE – I like them down here and we're still on track – once again saved because we took a conservative position on entry.  Greed kills!  

  • CHK – We just talked about them in Member Chat and I said that all that shale drilling + Qatar issues make me too nervous to add to CHK here.  On the other hand, I like the long-term LNG export story so I'm not willing to cut and run yet.  

  • CLF – All this tariff talk is good for them and they are on track so all good here.  
  • CSCO – They took a hit today but our long-term premise is the Internet of Things will need a lot of routers.  Too early to adjust though, we'll just watch and wait.
  • CSIQ – Boy did we back the right horse here!  Time to cash it in though.  I still like them but up 30% in two months is good enough for me.  

  • DBA – Our perennial inflation hedge.  Still not working!   We got a nice dip so let's buy back the short Jan $23 calls for 0.05 and roll the 10 Jan $21 put ($2.45) to 15 2019 $20 puts ($2), which drops $550 in our pocket.  Now we can roll our 10 2019 $17 calls ($2.75 = $2,750) to 20 2019 $15 calls $4.20 ($8,400) and sell 20 2019 $19 calls for $1.55 ($3,100).  That's net $2,000 spent plus the net $1,050 we spent in the first place is net net $3,050 on the $8,000 2019 $15/19 spreads with a $5,000 (ish), 160% (ish) upside potential.  Yeah, I like that adjustment.  
  • DIS – Right at our Jan target level.  
  • EWZ – That was a good call.  Potential is $10,000 and current net is $6,692 so about 45% to go if we hang on for 16 months.  We KNOW we can make more than that in 16 months and I'm a little worried our market tanks and drags Brazil with them and I'd say there's almost a 45% chance that another scandal drags their markets back down so let's take the money and run!    

  • FNSR – Back to where we came in.   Like CSCO, it's an IOT play and I think worth sticking with long-term and good for a new trade.  
  • FTR – Have they finally stopped going down?  Our net is $14,888/800 = $18.61/share so doubling down at $13.85 would be $16.23 – that's not worth doing.  So we'll just let it sit and see what happens for now.  
  • GE – When did they get toxic?  Right when we bought them, it looks like!  Anyway, it's GE, so let's take advantage of the dip to roll the 5 short 2019 $30 puts ($5.95) to 10 short 2019 $25 puts at $2.40 ($4,800) and that will cost us $1,950 of the $2,175 we originally collected so net about $0 and our break-even on the puts is now about $25.  We can also spend $1 to roll the 15 2019 $25 calls ($2.10) to 20 of the $23 calls ($3.20) for $1.10 (+ the extra 5 calls).    The new 5 are uncovered with more room to run.

  • GM – On track
  • IMAX – Ouch!  Way overdone sell-off so we'll take advantage buy buying back the short Dec $28 calls (0.10) and rolling the 10 $23 calls (0.45) to 20 of the March $15 ($4.70)/20 ($1.80) bull call spreads at $2.50 ($5,000).  That has $5,000 upside potential which will make up for losses on the call side but the 10 short Dec $29 puts ($10.30 = $10,300) will take some work, starting with rolling them to 20 March $22 puts at $4.30 ($8,600).   That's going to cost $1,700 to roll and we collected $3,150 when we sold the originals so still a $1,450 credit but that's not much (0.70/contract).  Still, it's an improvement and we don't try to win everything back at once – this would be a huge improvement by itself if $20 or better holds.  

  • JO – We can salvage $2.45 from the 15 Dec $15 calls ($3,675) and roll to 15 of the March $12 ($5.30)/$17 ($1.60) bull calls spreads at $3.70 ($5,550) so net $1,875 plus $2,175 we spent to start is $4,050 on the $7,500 spread that's 100% in the money.  The short puts are still an issue and we can roll the Dec $19 puts $2.30 to the March $18 puts at $1.90 for $600 – worth the cost to gain $1,500 in strike.  
  • LB – The thing to understand is LB discontinued swimwear and apparel this year so every quarter they are going to be missing 10% of last year's sales.  They cut the catagories because they weren't as profitable as the rest and the profits are on track so it's all working – yet people are freaking out because their sales are down from last year (not even 10%) and they think AMZN is taking over the panty and bra biz.  Investors are generally idiots, you know…   Anyway, their idiocy is our opportunity and we can roll the 5 short 2019 $40 puts ($9.60 = $4,800) to 10 short 2019 $32.50 puts ($5.40 = $5,400) and that adds $600 to our pocket.  Let's buy back short 2019 $50 calls ($1.90) and roll the $40 calls ($4.10) down to the $32.50 calls ($6.85) for net $2,750 and add 10 more ($6,850).  We'll stay uncovered until hopefully $45 and then turn it back into a very cheap spread.  

  • M – Another market overreaction but that's different than LB, where people clearly just have it wrong.  M I see as a long-term real estate value but we have to let that play out.  I'm not worried about $25 as the short put target but let's roll our 2019 $20 calls ($3.10) to the 2019 $18 calls ($3.85) as it's silly not to for 0.75 and let's buy 10 more for $3,850 while we're in the mood.  I don't want to buy back the short calls because $1.10 is a rip-off for the $28s (40% up from here) so we'll just let them clock out.  
  • SGYP – Big loss for us as they blew their drug trial.  There's another study coming early next year and we have time to hang on but more of a gamble now.  It would be silly not to roll the 2019 $3.50 calls ($1) down to the $1.50 calls ($1.90) for 0.90 ($3,600) and then recover that money by selling 40 $4 calls for 0.90 ($3,600) so now we're in the money again and we collect $10,000 at $4 if all goes well for a small net net profit.  Hopefully, the spread will protect us from taking too much more damage.  

  • SPWR – Another solar play, well on track.  
  • SVU – They did a reverse split but on track overall.  Good for a new trade, in fact.  
  • TEVA – Another awful sell-off.  Fortunately we started small but still down big as it dropped like a rock with a rock around its neck.  The 5 short 2019 $30 puts are $13 and we can roll those to 10 of the 2019 $22.50 puts at $7 and pocket $500.  We'll leave our long $32.50 calls (you never know) and buy back the short $40 calls (0.33) and set up 10 of the 2019 $15 ($4.80)/25 ($1.40) bull call spreads at $3.40 ($3,400) and they return $10,000 if things turn around, which would still be a nice profit despite the 50% drop as we started with a net credit.  

This is why we like to start with small positions.   You always have to expect a stock to go 40% against you and have a plan for what you will do if it does.  Markets don't need good reasons to discount your stocks but smart shoppers keep their heads – and plenty of CASH!!! (have I mentioned how much I like CASH!!! lately?) on hand so that, when the sale comes (and they always do), they will be BUYERS and not panic sellers.

We don't knee-jerk buy everything that goes down but, when we think the move is overdone, having a small start makes it not at all painful to take advantage and pick up a bigger position at better prices.  TEVA started with a $950 credit and we hoped to make $3,750 more at $40.  They went the WRONG way by a mile but now we're spending just $3,065 to put ourselves in a $10,000 spread that pays off at $25 – that's 23% lower than where we came in!  

If you begin with sensible portions in positions that you would HAPPILY double down – even twice – then you will be able to ride out even the harshest of corrections.  

  • TGT – Our faith was rewarded and they are making a comeback.  
  • TWTR – On track.
  • UNG – More nat gas.  Well, we want the short Jan calls to go worthless and plenty of time to adjust the short puts.  A hurricane could put us right in the money. 
  • WPM – Our Trade of the Year.  Halfway to goal with 16 months left – looks good to me!  
  • XOM – Oops, we were supposed to dump them.  Let's dump them.  

A lot of adjusting work this month but I'm very pleased with the overall portfolio – which is really great on a down 200 day and best of all, the Portfolio is rock-steady.  If the AAPL trade works, the rest are just window-dressing anyway!  

August 18th, 2017 at 2:35 pm  Permalink

Butterfly Portfolio Update:  $332,229 is down $24,245 from our 7/20 review but we knew that would happen as we had a silly $38,928 gain, which was a bit much for a month in a conservative portfolio.  This is actually our 4-year anniversary so 50% a year is way ahead of goal and the bigger the portfolio gets, the more these small fluctuations in the VIX can impact it.  

The VIX is up about 30% since 7/20 and, since the Butterfly Portfolio is all about selling premium – of course it does poorly when the VIX pops.  We'll see how the actual positions are doing – all that really matters is whether we're on or off track – the casino game takes care of itself over the long run as we make our premiums off all the people who come to gamble at our casino.  

2020 options come out over the next few months and we are always anxious to decrease our Theta (time) decay on our long positions, so expect adjustments there. 

  • AAPL – We're about break-even on the short Sept calls and I'm not thrilled to be fully covered but, on the other hand, this portfolio is not about gambling but let's buy them all back and sell something with more premium, like 40 Oct $155 calls at $8.50 ($34,000).  That gives us room to roll if AAPL goes higher or room to sell 20 more Oct $140s (now $20 for $40,000) if $150 fails to hold.  
  • COST – Not much of a bounce so far but I'm glad we stayed uncovered.  Earnings are 10/5 and I think they'll be good so let's roll the 5 short Jan $170 puts at $12.80 ($6,400) to 10 short 2019 $140 puts at $7.20 ($7,200) about even and let's cash in our own 2019 $160 puts at $15 ($7,500) so now we're playing more bullish but too bullish.  Our Jan $170 calls are adequate protection if we sell 10 Jan $160 calls for $6.60 ($6,600) and that's premium that WILL expire.  Overall, we're in the position for a net $3,000 credit and now we sold $6,600 more premium – that's how we make our money…
  • CTSH – Nice pullback and we're even on the $65 short calls.  Let's sell 10 of the Oct $70 calls for $2.20 ($2,200) and just 5 of the $67.50 puts for $1 ($1,000).  
  • DIS – Went from being too high to being too low.  Let's buy back the 20 short Jan $110 calls as we're up over $25,000.  I'm not worried about the short Jan $90 puts and we'll sell 5 of the Jan $100 calls for $5.10 ($2,550) as we're deep in the money with our longs and they are well-covered.
  • GIS – We went bullish and it worked!  No reason to be greedy so now we can sell 15 of the Jan $57.50 calls for $2.30 ($3,450).   

  • MSFT – We'll let the Sept calls play out a bit.  The nice thing about MSFT is that it's not prone to violent moves.  
  • PG – A bit high in the channel so let's buy back the short Sept $87.50 puts (0.10) just to clear the slot and let's cash our Jan $85 calls with a nice profit at $8.50 ($8,500) and replace them with 15 2019 $95 ($4.30)/$105 ($1.40) bull call spreads at $2.90 ($4,350) so half off the table and still very good coverage for our short calls.  
  • TGT – I still like them long but we shouldn't be greedy.  Let's sell 15 of the 2019 $60 calls for $4 ($6,000) to lock in our profits on the $50 calls but leave some room to run (1/4) and let's sell 7 Jan $57.50 calls for $2.60 ($1,820).  I'd rather sell none but it's our job to collect premium, so we're selling 1/3.  

  • TXN – On track.  
  • VLO – We got a nice pullback to lets buy back the 15 short Jan $67.50 calls at $3.10 ($4,650) AND the 20 short 2019 $75 calls at $3.05 ($6,100) and we'll sell 10 Jan $60 puts for $3 ($3,000).  Lower oil prices tend to be good for the refiner at first as gas prices take longer to fall (so their spread increases) and Q3 sales are looking strong per inventories.  
  • WMT – Seems toppy so let's close the short Jan $55 puts at 0.15 ($150).  We'll also close our Jan $65/72.50 bull call spread with a nice $8,000 profit about $21,000 and that leaves us with just 25 short Sept $72.50 calls.  We'll cover those with 25 2019 $80 ($6.20)/$90 ($2.60) bull call spreads at net $3.60 ($9,000) so half the bullish money off the table but still $15,000 of upside protection on the short calls.  

  • WYNN – Another toppy one.  Let's cash out the 2019 $120 calls at $31 ($62,000) and replace them with the $145 calls at $17.50 ($35,000) and rolling the $145 calls we have up to the $160s at $12 for net $5.50 ($11,000) so, overall, we're taking $16,000 off the table by rolling our bull call spread higher.  That's good since the entire net of the position was a credit to start so now we've banked $16K.  

A busy month for our Butterfly Portfolio but, on the whole, the positions are very strong and now we've sold a lot more premium so we should be in great shape next month. 

Not a bad collection of trades and I encourage you to go back to last July's review and all the reviews in our Virtual Portfolios Section to see how these positions evolved over time.  You can go all the way back to 2013 on the current portfolios and look at portfolios back to 2006 before that and see how we bulid, balance and hedge our positions over time.



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