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Tuesday, February 27, 2024

Monthly Mop-Up

And you may ask yourself – What is that beautiful house?
And you may ask yourself – Where does that highway go?
And you may ask yourself – Am I right? …am I wrong?
And you may tell yourself – My god!…what have I done?
– Talking Heads

Letting the days go by / let the water hold me down
Letting the days go by / water flowing underground
Into the blue again / in the silent water
Under the rocks and stones / there is water underground.

Once in a lifetime/water flowing underground.

Same as it ever was…same as it ever was…same as it ever was…

Is the market truly operating under a new paradigm or is today’s situation simply "the same as it ever was"?

I love doing the wrap-ups as they are a great exercise in perspective and when I went back to the August wrap-up I was struck by the similarities.  We had just come off our August 16th lows and the Dow had risen from a low of 12,500 (spike down) all the way back to 13,400 in just 6 sessions, a Hang Seng-like effort.  At the time I didn’t want to get too excited as we had just barely made it back to the month’s open, which were also pretty much the July lows.

Here we are 30 day’s later and we’re just about back at the July highs, where I first posted this cartoon:

While we KNEW there was no good reason for the July run to 14,000 at least we can point to our latest 7-day, 600-point rally and say: "Oh, well that was because the Fed lowered rates."  Of course the fact that they lowered rates to avert a potential melt-down in the finance sector as Trillions of dollars of poorly constructed loans began to backfire is generally what history would consider closing the barn door after the horses get out but, since we’re all living in the moment, we’ll continue to pretend that it was some brilliant strategic decision.  There will be plenty of blame to go around later!

I know I should just shut up and enjoy it but I just watched The Grapes of Wrath on AMC and holy cow is that a depressing movie!  I haven’t seen it since college and my perspective has shifted from "Gee, that was good acting" to "Oh my God, how can they have treated human beings that way" so I guess I’ve matured…  Anyway, we should be thankful that Uncle Ben gave us a good month:  The Short-Term Virtual Portfolio was already in great shape with a 562% gain but added another 123% for the month to finish up 685% despite being close 70% in cash, the amount in play $949,000, is itself more than twice as much as we started the year with and, of course, our hedged positions show all our callers as debits so there are, in fact, closer to $1.5M in play and the gain of 123% off our original basis of $400,000, while still very impressive, is really "just" a 32% gain for the month on the positions we held.

It’s important to keep those things in perspective or we get a little too full of ourselves, risk perhaps too much and give up what were, in the first half of the year at least, very hard-fought gains.  Playing options the way we do we should reap the benefits of a runaway market but that is all the more reason for caution as we head for an uncertain curve in the road (earnings season). 

As Option Sage pointed out last weekend:  "Anything can happen at earnings! A company can beat expectations but announce poor forward looking guidance, causing the stock to be punished. Alternatively, a company could announce dismal earnings but project a fantastic upcoming year, which may result in big stock price gains. In short, even if you do enormous due diligence on the fundamentals of the company and you are correct, the stock price may not move in the expected direction as analysts grab hold of a key metric or piece of data as an excuse to move the stock one way or the other."

While we are enjoying our seven weeks of market plenty we should be preparing for the possibility of seven lean weeks to come – NOT piling position on top of position until the entire house of cards collapses on us:

 

Do markets ever really go down?  Well they dropped from 14,000 to 12,500 between July 19th and August 16th, they drpped 800 points (12,800 – 12,000) from Feb 20th through March 5th but before that we have to go all the way back to two a 600-point drop in July of ‘06 that was part of the "recovery" from the big drop from May 10th to June 13th of last year, when the Dow fell from 11,700 to 10,700 in a really awful month.  Heck even the Hang Seng had a couple of 2,000-point corrections on the way to 27,000, most recently a 4,000-point dip in that same July 26th through August 17th period.

Wait, did I say the same, oops, no it seems like WE caused THEIR sell-off, not vice versa as the media would have you think.  It was Europe that give us an early warning sign, leading the Dow lower by almost a week, with a sharp downturn on July 17th when we became concerned about a possible market meltown and began our timely move to cash.  While our immediate environmental concern was a toxic waste spill at a nuclear facility in Japan, our market concern at the time it was toxic builder earnings that were concerning us.  Builder earnings are just as terrible now, worse even – we just don’t seem to care anymore.  The real turn signal was BSC’s ironically named "High-Grade Structured Credit Strategies Fund," which turned out NOT to be high-grade, well structured or strategic and destroyed $20Bn worth of investor assets.

YHOO (10/16) and INTC (10/16) both disappointed us with earnings AND guidance (that would be guidance for this quarter, you know!) and PFE had an awful miss and JPM sold off despite a 10% beat.  There are supposed to be seven signs to an apocalypse and there are 6 off the top of my head that caused us to begin taking it off the table starting on the morning of the18th.  Kudos to Happy Trading who pre-categorized the drop as "healthy venting" and kept us with a sharp eye for the turn which we picked up to a tee on August 16th, leading to this month’s stunning virtual portfolio performance

Going to all cash at the top of a market (actually we did take a lot of puts) and then flipping to a lot of long calls at 12,700 is nice work if you can get it, but we were lucky AND good, but let’s never forget the lucky part because sometimes our timing isn’t always this perfect.  I was even a week ahead then in moving towards cash but, as any good trader knows, you get better prices selling into the rally, once the market heads down it’s a little late.  Our 7th sign came on the 19th when Google took a $40 dive over a .03 miss

Another great call from July 18th was my take on the dollar:

  • As I said last week, this is now or never for the World banks to step in, but now I’m becoming concerned that we may be establishing a sort of dollar carry trade – where investors borrow dollars at 5%, which devalue at a rate of more than 5% a year, making them effectively better instruments than the yen for international investors.  You engage in this carry trade every time you dip into your margin account to buy stocks, which are themselves a commodity along with gold, which jumped $8 to finish at $673 or oil, which ran up over $75.
  • Why did Japan become the lender to the world?  They had a strong but stagnant economy that was being held aloft by ultra-low Central Bank rates while their currency languished.  Does that sound like any countries you know?

Kudos to me for nailing it on Monday, July 23rd when I called the RIG/GSF $53Bn deal "the last merger."  It was a string of insane mergers and acquisitions that were keeping up the market and this one and others like it that were percolating just seemed like the wrong thing to base a rally on.  While we milked what we could out of the last day’s of Pompeii, we continued to get out of positions as the declining dollar and shifting rate environment signaled that gravity would soon take its toll on the markets.

I won’t bore you with a recount of the markets during August, we went down, we came back and now we are right back where we were on July 18th, ready to test 14,000 again after a tremendous rally.  If you want to review the bottom of the market and how Happy, Sage and I handled that, use this link but, as I said at the beginning of this post (and that was a while ago now!) – it’s the same as it ever was so, if you got burned last time the market dropped, perhaps this time our advice will be taken more to heart…

Last week I advised taking 1/3 of our forward profits and start putting it into puts.  Mainly on the DIA but we began accumulating oil puts and puts on high flyers like RIMM, BIDU, LVS, etc.  It’s not about calling a top, it’s about recognizing that 14,000 may still be a serious barrier and earnings season may be exactly the WRONG time to test it.   If we get a boost, fly over 14,000 and establish it as a new base, then our longer positions are safe, we’ll lose about half the put money and throw it back into positions on the way to 15,000.  If we get a rejection, I’m going to look like a genius!

I’m not being smart – I’m being careful.  I’m simply NOT being irrationally exuberant and allowing for the possibility that markets do, in fact go down and the big "chance" I’m taking is getting back to a fairly heavy cash position so I can take advantage of the next good drop.  If the drop never comes, well I’m fairly certain there’s good money to be made between here and 15,000, we don’t need to try to make it all between 13,900 and 14,100 do we?

If it’s a real rally, there will be plenty to be made on the upside and if it’s a real downturn there will be plenty to be made on the downside and THEN the upside and if we’re trapped between 13,500 and 14,000 then we are perfectly positioned already with the calls we’ve sold.  So let’s continue to take this rally (assuming it keeps going) with a huge grain of salt while we try to remember the site’s mission statement: FUN and profits!

The Short-Term Virtual Portfolio had both fun AND profits as it jumped 44% for the week to finish up 685%.  We really didn’t do all that well with new picks but the cash came in mainly from hedging our DIA puts and letting the DIA calls ride.  We played the Diamonds for a 300-point move at the beginning of the month and got a nice payoff on the early 500-point dip where our re-squeeze paid off in triplicate as we got a 400-point gain ahead of the fed followed by another 500-point move after.  I will remind you that the Fed caught me totally by surprise and I can’t even imagine where we’d be had I been positive all along…   As I said on Monday: "Our friends at GS tell us all is well (or at least better) in the credit markets and, as we discussed this weekend, betting against Goldman Sachs has not been a smart-money play this year."  Despite the early drop, we went bullish early in the week and that was a winning play.  On Thursday we sold our winners and protected the downside – we’ll find out if that was a good decision next week.  Our 64 remaining open positions have just $100,000 out of $1.5M that is not hedged and we stand ready for anything at 70% cash, effectively all of our new profits came off the table plus another $100,000 (10%).

Our Long-Term Virtual Portfolio had a very nice week, gaining 12% to finish up 221% as the volatility was sucked out of our callers and we cleverly rolled all our leaps back to ‘09 and ‘10 way back in July (at that bottom we just talked about), which insulated them somewhat.  Of the 43 open positions, 5 of the 8 uncovered calls are leftover ’08s including 2 disastrous CC calls (one was deployed to save the other and both were lost but, unlike those horror movies where they keep sending another guy to see what happened to the first two, we DO know when to quit!).  We are at 52% cash, up 10% from last week as well.

The new $10KP is off to a decent start with just 1/4 of our cash deployed and a $345 gain on the week, thanks pretty much entirely to our first play on CSCO $32.50 calls at the beginning of the week.  Our big loser is the TSO puts spread, which went a little TOO far in our direction, but we’re only down .35 on what was a $1.05 spread and there’s lots of time until October 19th.  There are 5 open positions.

Our $25KP is also 25% invested but our 13 open positions there are already down 5.8% as NOT ONE of our open calls is ahead.  We still have plenty of cash to deploy and the losses are unrealized but it is not the best start…  The real pain is coming from our LVS and TSO spreads, both of which have loads of time to work themselves out but we’ll be taking a contrary bet or two next week – just in case they don’t!

Our Dow Virtual Portfolio was established on Wednesday with $100,000 and we’ve already spent $81,970 of it as our goal was to take a $3K position in each component.  We’re up to T, which leaves UTX, VZ, WMT and XOM, three of which (not VZ) we already have positions on so it was no emergency to stick our necks out with those on Friday.  28 positions (we also have DIA puts and I won’t play MO) are down 2.3% so far, which is pretty good since we opened spreads on 18 of them.  This virtual portfolio is actually fairly bullish, assuming a breakout over 14,000 AFTER expiration so we’ll have to keep a close eye on the DIA $140 puts as they are disaster protection only.

Also off to a slow start is the Happy 100 Virtual PortfolioOur 3 positions are poking along for a nasty 5% loss so far.  HLX Dec $22.50s were taken Wednesday at $2.60, now $2.10 and we are planning to roll them to January $22.50 but the .25 we offered will not get triggered if there is no improvement in the price.  IMCL has been a big disappointment, dropping from Monday’s open at $6.30 to finish the week down 27% at $4.60.  A double down at $4.30 will bring our basis to $5.30 and that is the general plan as we can then make up the loss by selling premiums but Happy and I will confer on this and update it in Monday morning’s post.  Our third play so fart is the IBM Jan $120s, which we covered with the Oct $120s and those seem like they are on a good path so far. 

The boring old Stock Virtual Portfolio is looking for some new positions after going 70% cash, as we sold our flaky, but profitable gold plays, leaving us with just 3 open positions and a 36% profit for the year.  We covered MU again and one day we may actually get called away, which has been our intention for the past 2 months!

Complex Spreads had a complex week as we decided to cover CROX before it went crazy on us.   GS and YHOO were also very good to us and both were rewarded with covers that we would be happy to remove next week if the Hang Seng breaks 28,000.  Our 9 open positions gained 16% for the week, finishing up 312% for the year at approximately 2/3 cash.   We are diversifying somewhat, now only 4 of the 9 positions are Apple and Google!

We closed out 54 positions for the week with an average gain of 66%, a likely outcome as the general strategy was to take our winners off the table and cover the rest coming off last week’s bullish (but not really believing) postiion.  It’s OK to go with the flow as long as you don’t get washed away in the storm, consider this a little toweling off…  As we noted earlier, the cash gain was huge as we closed a lot of old winners – hopefully our luck will hold out next week but at least we have a very clear line to watch!

Description

  Basis

Open

 Sale Price

Sold

 Gain/Loss

%

30 APR 150.00 AAPL CALL (APVDJ) 50,710.00 9/19  $  66,590 9/28  $   15,880 31%
40 OCT 40.00 ABX CALL (ABXJH) 5,010.00 9/19  $    7,590 9/24  $     2,580 52%
20 OCT 55.00 AMGN CALL (YAAJK) 2,410.00 9/12  $    3,310 9/25  $        900 37%
10 OCT 45.00 BBY CALL (BBYJI) 1,310.00 8/27  $    1,790 9/25  $        480 37%
100 DEC 15.00 BEAS CALL (BUCLC) 5,010.00 9/14  $    5,490 9/24  $        480 10%
10 OCT 90.00 BHI CALL (BHIJR) 2,610.00 9/25  $    2,790 9/27  $        180 7%
5 OCT 250.00 BIDU PUT (BDUVJ) 1,510.00 9/20  $    1,490 9/28  $        (20) -1%
50 OCT 30.00 CAL PUT (CALVF) 7,010.00 9/14  $    8,990 9/24  $     1,980 28%
20 OCT 35.00 CHK CALL (CHKJG) 1,610.00 9/12  $    1,790 9/25  $        180 11%
20 OCT 60.00 CROX CALL (CQJJL) 10,010.00 9/24  $    7,190 9/25  $    (2,820) -28%
10 OCT 32.50 CSCO CALL (CYQJT) 660 9/30  $    1,290 9/28  $        630 96%
10 OCT 32.50 CSCO CALL (CYQJT) 660 9/25  $       790 9/25  $        130 20%
200 OCT 139.00 DIA CALL (DAZJI) 27,610.00 9/25  $  38,990 9/28  $   11,380 41%
200 OCT 138.00 DIA CALL (DAZJH) 38,010.00 9/25  $  51,990 9/28  $   13,980 37%
200 SEP 137.00 DIA PUT (HLKUG) 0 9/25  $    1,990 9/28  $     1,990 100%
400 SEP 138.00 DIA PUT (HLKUH) 0 9/25  $    2,390 9/28  $     2,390 100%
100 OCT 133.00 DIA CALL (DAWJC) 40,510.00 9/12  $  56,990 9/25  $   16,480 41%
300 OCT 138.00 DIA CALL (DAZJH) 84,020.00 9/19  $  79,490 9/24  $    (4,530) -5%
20 OCT 90.00 DRYS CALL (DQRJR) 8,610.00 9/27  $  13,990 9/28  $     5,380 63%
20 OCT 90.00 DRYS CALL (DQRJR) 8,610.00 9/27  $  11,990 9/27  $     3,380 39%
10 OCT 60.00 EDU CALL (EDUJL) 3,430.00 8/29  $    1,790 9/25  $    (1,640) -48%
10 DEC 110.00 FSLR CALL (QHBLB) 12,510.00 9/27  $  16,990 9/28  $     4,480 36%
10 NOV 130.00 FSLR CALL (QHBKZ) 6,810.00 9/27  $    9,290 9/28  $     2,480 36%
20 OCT 105.00 FSLR CALL (QHBJA) 9,510.00 9/17  $  31,490 9/24  $   21,980 231%
40 JAN 30.00 GG CALL (GGAF) 9,010.00 9/19  $  11,990 9/24  $     2,980 33%
40 OCT 30.00 GG CALL (GGJF) 4,010.00 9/19  $    5,990 9/24  $     1,980 49%
20 OCT 35.00 GM CALL (GMJG) 4,810.00 9/26  $    6,590 9/28  $     1,780 37%
30 DEC 20.00 IRBT CALL (IRQLD) 4,350.00 9/17  $    6,890 9/27  $     2,540 58%
20 NOV 80.00 IWM PUT (IOWWB) 9,700.00 9/14  $    5,990 9/25  $    (3,710) -38%
10 NOV 77.00 IWM PUT (IOWWY) 2,860.00 9/14  $    1,990 9/25  $       (870) -30%
10 OCT 20.00 KNOT CALL (BQCJD) 2,010.00 4/4  $    1,990 9/24  $        (20) -1%
10 OCT 135.00 MA PUT (MALVG) 3,260.00 9/13  $    4,240 9/24  $        980 30%
8000 METALLICA RESOURCES (MRB) 30,410.00 5/23  $  36,790 9/24  $     6,380 21%
500 Northern Dynasty Minerals Ltd. (NAK) 5,135.00 8/22  $    5,990 9/24  $        855 17%
20 OCT 72.50 PEP CALL (PEPJA) 2,510.00 9/26  $    2,490 9/27  $        (20) -1%
25 NOV 17.50 RMBS CALL (BNQKW) 4,750.00 9/12  $    6,740 9/26  $     1,990 42%
50 OCT 30.00 SBUX CALL (SQXJF) 1,010.00 7/19  $       490 9/25  $       (520) -52%
10 JAN 140.00 SHLD CALL (YQHAW) 27,010.00 9/10  $  28,990 9/24  $     1,980 7%
20 OCT 135.00 SHLD CALL (KTQJX) 10,770.00 6/3  $    6,990 9/24  $    (3,780) -35%
50 OCT 50.00 TSO PUT (TSOVJ) 9,510.00 9/26  $  11,490 9/26  $     1,980 21%
25 OCT 70.00 VLO PUT (ZPYVN) 4,710.00 9/19  $    8,740 9/28  $     4,030 86%
25 OCT 70.00 VLO PUT (ZPYVN) 4,710.00 9/19  $    6,490 9/25  $     1,780 38%
15 OCT 135.00 WYNN PUT (UWYVV) 6,460.00 9/12  $    3,590 9/24  $    (2,870) -44%
5 OCT 135.00 WYNN PUT (UWYVV) 3,150.00 9/12  $    1,190 9/24  $    (1,960) -62%
10 JAN 105.00 X CALL (XAA) 5,660.00 7/30  $  10,990 9/24  $     5,330 94%
100 SEP 75.00 XLE CALL (HGHIW) 3,510.00 9/26  $    4,990 9/26  $     1,480 42%
200 SEP 75.00 XLE CALL (HGHIW) 7,010.00 9/26  $    9,990 9/26  $     2,980 43%
100 SEP 76.00 XLE CALL (HGHIX) 2,010.00 9/21  $    2,490 9/25  $        480 24%
200 SEP 76.00 XLE CALL (HGHIX) 4,010.00 9/14  $    6,990 9/25  $     2,980 74%
200 OCT 90.00 XOM PUT (XOMVR) 17,010.00 9/25  $  39,990 9/28  $   22,980 135%
200 OCT 95.00 XOM CALL (XOMJS) 15,010.00 9/25  $  18,990 9/25  $     3,980 27%
30 OCT 85.00 XOM PUT (XOMVQ) 100 9/12  $    2,090 9/25  $     1,990 1990%
120 OCT 85.00 XOM PUT (XOMVQ) 19,930.00 9/12  $    7,790 9/25  $  (12,140) -61%
200 OCT 90.00 XOM PUT (XOMVR) 30,010.00 9/19  $  38,990 9/25  $     8,980 30%

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