Just Another Manic Monday – Value Investing
by Phil - September 26th, 2011 8:27 am
Up, up and away!
As I mentioned in Friday’s morning’s post, we did a lot of bottom-fishing on Thursday as we began to develop Disaster fatigue with long plays on XLF at $11.50, shorting TLT at $123, shorting VXX at $49.50, TNA at $34.50, BRK.B at $65, AA at $10.20, VLO at $19, IMAX at $15.75, BA at $58.32, AGQ at $170, CHK at $27.50, DIS at $30.14 and ABX at $47.50. They were hedged, of course and, for the most part, you still had a nice chance to make those entries on Friday – but not so much this morning as the futures are up about 1.5% already (7:30).
Friday morning, in my Alert to Members, I reminded them that BCS looked like an excellent VALUE to me, no matter what the PRICE was ($8.75 after hitting $8.40 the day before) and this morning, that PRICE is up well over 10% in EU trading. Did the VALUE of BCS change materially over the weekend? Of course not, certainly not by the $4Bn their market cap gained – like the song, the VALUE remains the same – only the highly variable price of a share of BCS is undergoing ch-ch-changes…
I pointed out similar hedged, long-term plays could be made on GS ($94), MS ($13), BAC ($6) and C ($24). Of course we hedged them per our discussion in the morning post (TZA was our morning choice but we’re out over 650 on the RUT) but then we went long on EWG (Germany) again with the very aggressive Oct $16,18 bull call spread at $1.30, offset by the sale of the $17 puts for .90 for net .40 on the $2 spread. 10 of those in our virtual $25,000 Portfolio cost $400 and can return $2,000 in less than 30 days if EWG is over $18 and, guess what – they’re over $18 this morning!
Another bullish bet we placed was USO Nov $28/30 bull call spread at $1.30, selling the $27 puts for $1.10 for net .20 on the $2 spread with a 900% upside if USO simply doesn’t drop from where it is now. That’s what’s nice about options – you don’t need the market to go up to make money good money. On this trade idea, your worst-case scenario is owning USO at net $27.20, about 10% lower than it…
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DiggTGIF – Stop the Week, We Want to get Off!
by Phil - September 23rd, 2011 8:35 am
What a disaster!
Of course, that’s why we have Disaster Hedges, right? August 11th was the last time we did a "Hedging for Disaster" post which included a LONG trade idea on gold that’s done now (we’re short) after gaining over 300%. We’re a little mixed in our results on the other hedges but that means we can SWITCH HORSES – from the trades that have already worked to the ones that haven’t yet. That’s how we cash out our winners on a regular basis – it’s the pony express of investing. Our other Disaster Hedges from that post were:
- DXD Oct $23 calls at $2, selling Oct $27 calls for $1.15 and the Oct $19 puts for .70 for net .10. That spread is currently -.05 so down 150% so far and a nice horse to switch to, offering a .05 credit on the $4 spread.
- FAZ Oct $65 calls at $22, selling Oct $72 calls for $20 and selling JPM 2013 $20 puts for $2.05 was a net .05 credit as a backstop to our long financial plays. FAZ is now at $71.34 and the October FAZ spread is now $3.70 but the JPM puts are now $3 so net .70 is only up 1,500% so far. Should the financials stay low, we get the full $7 from the spread and we’re obligated to buy JPM for $20 (now $29.27) in 2013.
- SDS Sept $26 calls at $3.20, selling Sept $32 calls for $1.65 and selling VLO Jan $15 puts for $1.20 for net .35. SDS is only at $25.73 so far (not a disaster yet) and the spread is now net $1.25 and the short VLO puts are .17 so net $1.08 on this one is up 208% and we’re not even at goal – that’s pretty good! Note the spread is LOWER than when we started so this can also be used as a fresh horse with a different offset, like X Jan $15 puts for $1.20 for a net .05 trade.
- TBT was stopped out with a small loss at $24 (fortunately). My comment at the time, with TBT at $24.88 was: "Keep in mind though, that the Fed has said rates will stay low through 2013 so it would be wise to uses stops on the puts, at least, if TBT fails to hold $24!"
- EDZ
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Which Way Wednesday – Fed Edition
by Phil - September 21st, 2011 8:28 am
Strap in folks, it’s going to be another wild ride!
As you can see from Doug Short’s S&P chart,we are about to slam right into that collapsing 50-day moving average, now at 1,223.40 – right about where the S&P topped out on yesterday’s morning spike. Unfortunately, the Nasdaq topped out and headed down before the other indexes got a chance to complete their up cycle and the Dollar rose back over the 77.50 line and tanked the market – exactly as we predicted it would at the bottom of yesterday morning’s post.
Of course, I can’t MAKE these things happen – I can only tell you what’s going to happen and give you trade ideas to help you profit from it. I mentioned that we had picked up 10 DIA 9/30 $115.75 calls in our virtual $25,000 Portfolio at $1.05 on Monday and they topped out at $1.75 (up 66%) but we took a non-greedy exit at $1.45 in the morning spike (up 33%) and we switched to 20 QQQ 9/30 $57 calls at .45 in the afternoon sell-off. So, we made $350 off a $1,050 investment and then we spend $900 but now we have 20 contracts instead of 10 but we also have $450 in cash so now risking just $600 of our original investment on the much more volatile Fed day.
Another trade idea we like ahead of the Fed that’s still playable is 20 FAS weekly $13/14 bull call spreads at .38 ($760), selling 10 JPM Oct $28 put for .55 ($550) for net $210 invested on the 20 $1 spreads. The worst-case on this spread is owning JPM for net $28.10, which is 13% off the current price and the best case is a $1,790 profit (852%) in a week. That sounds like a lot but options let you do funny things like at 11:30 in Member Chat, we saw PCLN making new highs against news that we thought was not actually that good for them on closer examination. Our trade idea to take advantage of that was:
If you want to play PCLN bearish – it’s very risky but the weekly $565/555 bear put spread is $6 and you can sell the $565 calls for $4.70 for net $1.30 on the $10 spread. Oct $620s are $4.10 so your bet is
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Friday Follies – Did Obama Blow Jobs Speech?
by Phil - September 9th, 2011 8:15 am
Obama did not satisfy the markets last night.
Although his $447Bn American Jobs Act is a step in the right direction, $307Bn (68%) of the money is coming in the form of tax cuts and Unemployment Insurance extensions, leaving just $140Bn to go towards the creation of actual jobs. Even if every single dollar of that money went directly towards paying a $40,000 salary – the entire amount would employ just 3.5M people, not even 1/4 of the amount of people who are out of work.
Is that the best America can do? Come up with a jobs program that MIGHT lower unemployment from 9% to 7% over the next year? Of course we won’t create 3.5M jobs for $140Bn because a lot of that money gets spent on parts and materials. It’s certainly not that the projects are unnecessary, it’s just that the scope of the program is too limited to have a substantial impact.
In fact, exactly one year ago, I wrote "Jobless Thursday – America’s Infrastructure Crisis" where I laid out the TRILLIONS of Dollars worth of repair work that MUST be done in this country sooner or later. Why don’t we do them SOONER, while 20M potential workers are sitting on the sidelines? We MUST spend at least $2Tn on infrastructure in the next 10 years so why not spend $400Bn this year and next rather than waiting until the last minute to do anything? The money is all borrowed over time either way but NOW is when people need to get back to work and, of course, if we get necessary projects done now instead of 10 years from now, then we, the People, get to enjoy 10 years of beneficial use out of them. This is not complicated stuff folks, just common sense…
Nonetheless, $447Bn is 3% of our GDP and figure about 2/3 gets spent in the first year so the program SHOULD keep us out of Recession in 2012 – yay for that at least. If Recession is off the table, then the markets are underpriced – now we have to consider whether or not the bill can get past the Republicans in Congress. By the way, if you have not read "Reflections of a GOP Operative" yet, please do – it’s an excellent insight into the current political climate.
We had flipped bearish yesterday, anticipating…
Hedging For Disaster – 5 Plays that Make 500% if the Market Falls (Members Only)
by Phil - August 11th, 2011 7:30 am
We took our last round of disaster protection back in early July and almost all of those trades are well in the money.
Since you know I am a big fan of taking cash off the table in either direction, let’s not be greedy and look at ways to "roll" our downside protection into new downside plays so we can set SENSIBLE stops on our now deep in the money short plays (very similar to our Mattress Strategy). Keep in mind that this is the biggest market decline we’ve had since last Summer, so adding a layer of protection here doubles our returns if this is the first leg of a major sell-off, or it gives us a smaller hedge that we can roll up later while we take our bigger hedges off the table. As I have to say WAY too often to members – It’s not a profit until you cash it in!
Hedging for disaster is a concept I advocated during another "recovery," in October of 2008, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – "just in case." That "just in case" saved a lot of virtual portfolios! The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn. That way, 10% allocated of your virtual portfolio to protection can turn into 30-50% on a dip, giving you some much-needed cash right when there is a good buying opportunity. At the time, I advocated SKF Jan $100s at $19. SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting even just 5% of your virtual portfolio into that financial hedge would give you back 75% of your virtual portfolio when you cash out.
Keep in mind these are INSURANCE plays – you expect to LOSE, not win but, if you need to ride out a lot of bullish positions through an uncertain period, this is a pretty good way to go. We cashed out our bullish $25KP positions by July 28th, (our active virtual portfolio) with the S&P at 1,340 and, since then, I’ve had a very hard time making long-term bullish picks. I want top put up a Buy List but it’s still too risky – this will be step 1 though – protect first, then buy! Once we cash…
Volatility Sellers Attack UltraShort S&P500 Calls
by Option Review - August 8th, 2011 4:07 pm
Today’s tickers: SDS, RIMM, KWK & XLB
SDS - ProShares UltraShort S&P 500 ETF – Roughly 50% of the S&P 500 Index rally from August 2010 through early-May has evaporated, with the market meltdown accelerating on the heels of the downgrade of U.S. debt. The VIX spiked to flash-crash levels today, and exceeded 40.95 earlier in the session as U.S. equities tumbled lower. However, barring a repeat of the flash crash or some other unforeseen piece of negative news, it looks like options strategists are positioning for investor fears to ease in the near term. Heavy out-of-the-money call selling on the SDS, an ETF corresponding to twice the inverse of the daily performance of the S&P 500 Index, was likely initiated by traders selling the spike in volatility. Shares in the SDS shot up 7.9% this afternoon to $26.52, the highest since November 2010. Volatility sellers targeted the August $30 strike most aggressively, selling some 45,000 contracts at that strike against paltry previously existing open interest of 1,651 contracts. Investors short the calls pocketed an average premium of $0.43 apiece, which they keep if shares in the SDS fail to rally above $30.00 at expiration. Traders have time on their side and may be able to buy back the calls, even if the S&P 500 Index continues to slide, at an advantageous price as long as volatility comes off in the next couple of weeks. Call selling spread to the August $31 strike, where nearly 10,200 contracts sold for an average premium of $0.32 each. Sellers dominated up at the August $32 and $33 strikes where some 2,600 and 6,100 calls sold for an average premium of $0.26 and $0.21, respectively. Volatility could come off should President Obama, one of the G7 leaders, the IMF, a central banker, or other government leader throw a few crumbs of optimism the market’s way this week to assuage investor fears. Meanwhile, closer-to-the-money call buying, on the other hand, indicates other strategists expect the S&P 500 Index…
Which Way Wednesday?
by Phil - August 3rd, 2011 8:29 am
Wheeeeeeeeeeeee!
I love the smell of capitulation in the morning (illustrated nicely by David Fry). It smells like — opportunity. We haven’t had a good bottom-fishing expedition in ages and it’s amazing to think that less than two weeks ago I was having to tell our Members NOT to BUYBUYBUY at the top. On Friday, July 22nd, when Jimmy Cramer was crowing Thursday night over "29 of 30 Dow Stocks" closing higher as if that meant you should buy everything that wasn’t nailed down, I was warning that the new EU rescue fund only indicated things were worse than they seemed. My comment that morning (7/22) was:
I like shorting the Futures here: S&P (/ES) at 1,346, Nas (/NQ) 2,415, Dow (/YM) 12,720 and Rut (/TF) 842.6 – as long as 74.20 hold on the Dollar, we should get a bit of a sell off so these are levels to look for as the Dollar heads back over that line but we can scale into position between 75.20 and 75.10 but, below that, too dangerous! Oil is good too below $99.50 with tight stops (now $99.66 so a patience game) – couldn’t quite get back to $100 ahead of the EU open.
I was wrong (so far) on shorting gold as our GLL Aug $22 calls have fallen from .50 to .10 (we rolled down to the $20s but those are not faring much better at the moment) but that was much more than made up for with the MASSIVE gains on the short futures as well as huge winning spreads like that morning’s Alert to Members, where my trade idea was to buy the SQQQ Aug $21/24 bull call spread for .90 and sell the AAPL weekly $375 puts for .80 for net .10 on the $3 spread. Of course the AAPL puts expired worthless and SQQQ is now at $25.29 and the spread is $1.85 so up 1,750% so far (and half off the table with stops on the rest at this point, of course).
THAT’s why we love our disaster hedges – they really help balance out your virtual portfolio in the event of an actual disaster with every $1,000 hedged paying $17,500 on that play. We then turn around (like today) and cash out that money and use it to buy more longs or roll our existing long positions.…
Throw the Bums Out Thursday
by Phil - September 16th, 2010 8:11 am
There’s only one thing voters hate worse than Democrats:
That is, of course, Republicans. The latest NY Times/CBS News poll found that, while while voters rate the performance of Democrats negatively, they view Republicans as even worse with 63 percent disapproving of Democrats and 73 percent disapproving of Republicans. Still, the prevailing "they all suck" attitude is not good news for the Democrats as they have the most seats up for re-election and over 63% of the voters are pretty much determined to vote for "the other guy."
I would propose instead that we begin a national campaign to elect "None of the Above" as a write-in candidate. I don’t expect it to change much but it would force a lot of run-off elections and would send a real message to Washington that we are sick of the nonsense, that we are "as mad as Hell – and we’re not going to take it anymore." If you watch this video clip from 1976 (click picture) you’re realize how little progress we’ve made in 35 years of American politics. If only we’d taken Howard Beale’s Oscar-winning advice at the time and gotten off our sofas and actually said: "I’m a human being, goddammit! My life has value!" – maybe we could have done something about the Corporate Kleptocracy this nation has morphed into. Now, instead, we are once again asked to flip the switch for Republicans or Democrats and, if the candidates weren’t labeled, it would be very hard to tell most of them apart.
In many election cycles, voters readily acknowledge that they are dissatisfied with government or Congress in general, but they tend to have a stronger connection toward their own representative. That is not the case this year, with 55 percent of voters saying it is time for new leadership and only 34 percent saying their lawmaker deserves re-election. It is a historic high for a question asked in each midterm election year since 1990. Of course, the MSM plays a huge roll in this as 8 out of 10 Americans rate "the economy" negatively but, when asked about their own family’s financial situation, 6 of 10 say it is the same or improving. So 40% of the people feel their own situation is negative but 80% think it’s negative for everyone else. Gee, I wonder where they get that impression?
Voters do not perceive Republicans as having better ideas and…
Monday Morning – Basel Boosts Bourses
by Phil - September 13th, 2010 8:03 am
Nice pop in the futures this morning!
The big news, which we already discussed in the "Weekend Reading" post, is the historic remake of the World’s banking regulations, which was finalized in Basel, Switzerland by the G20 Finance Ministers over the weekend. You can click over there for the details, as well as discussions on gold, college costs and the jobs market – so I won’t get into all that here. Suffice to say, the rules are good and, like FinReg, they will take a long time to go into effect and the markets are relieved that the uncertainty is over (well, that particular uncertainty, at least).
Jean-Claude Trichet, President of the European Central Bank and Chairman of the Group of Governors and Heads of Supervision, said that "the agreements reached today are a fundamental strengthening of global capital standards." He added that "their contribution to long term financial stability and growth will be substantial. The transition arrangements will enable banks to meet the new standards while supporting the economic recovery." Nout Wellink, Chairman of the Basel Committee on Banking Supervision and President of the Netherlands Bank, added that "the combination of a much stronger definition of capital, higher minimum requirements and the introduction of new capital buffers will ensure that banks are better able to withstand periods of economic and financial stress, therefore supporting economic growth."
All seems right with the World this morning as Oil touches our $77.50 goal in pre market trading and Gold stays below the $1,250 mark (no panics). Copper is in the upper end of our expected $3.40-$3.50 range and is likely to break over -even our poor Natural Gas is catching bids at the $3.80 mark, now $3.85 and TLT continues to fall (TBT continues to climb – see Dave’s chart) . This is all despite a strong dollar That held the 50 dma all last week – another week over the line and we begin to bend it up to match the rising 200 dma and then the fun can begin. Fortunately, we have had less of a run in the commodity sectors this time so, hopefully, the rising dollar won’t be the market-killer it usually is but we will be watching out for that.
Another chart we’ll be watching is the VIX, the volatility index, which is known as a "fear" indicator for the markets, hasn’t been below 20 since April and,…
Which Way Wednesday – Beige Book Edition
by Phil - September 8th, 2010 8:06 am
On June 9th we liked the Beige Book, which confirmed our bottom call.
On July 28th, we did not like the Beige Book and I said to Members in my review of the report: "Housing drives the market and housing and commercial construction are dead. How can commercial construction come back if we have less employees? How can housing come back if fewer people qualify for loans and the population doesn’t grow? How does anyone think that we can address these problems through capitalism (ie. without stimulus)?"
We got the GDP report that Friday (July 30th) and the low expectations there gave us the gap up we were expecting and Alan Greenspan went on Meet the Press that weekend and admitted I was right – both stealing my "Tale of Two Economies" economic outlook and blasting the Republicans, saying the party had "lost their way."
We couldn’t do anything about the Republican’ts but I was able to call a "Toppy Tuesday" on August 3rd and we drifted along that top until the next week, where we caught the action just right as we took our bullish money and ran on Monday and began grabbing downside hedges including the QID play I put up right in that Tuesday’s (8/10) morning post, where I said:
Yesterday we knew that the move up was fake, Fake, FAKE and we acted accordingly in Member Chat. We had a nice QID cover play right in the Morning Alert that was an easy fill as the Nas went higher and higher all day. It was the Aug $16/17 bull call spread at .42, and the $16 puts sold for .29 for net .13 on the $1 spread with a nice 669% upside if the Nasdaq heads sharply down on us. Our stops on the play were a combination of Nas 2,300, Dow 10,700 and Russell 666 and we got the Nasdaq and the Dow over their marks but, once again, 666 proves to be an ominous barrier for the Russell.
That hedge did, of course, return the full 669% as QID finished the expiration period at $17.80 and there was no doubt on the trade as we had a mild drop Tuesday morning, followed by a major drop the next day, where my opening comment was: "Wheeee - I told you this was going to be fun!" It is FUN when you are prepared to ride…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
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coordinator for PSW. She manages the Favorites backup site
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