Archive for 2007

How to Hedge Your Virtual Portfolio

Options Sage submits:






In our comment section this past Tuesday, Turtle referred to Warren Buffett’s Rule #1 of investing: “Don’t lose money” and pointed out the integral link between succeeding at Rule #1 and hedging one’s virtual portfolio. The question arose “How do we hedge our virtual portfolios?” 


In order to set a context for explaining strategies let’s briefly revisit the Golden Rule of Investing.


The Golden Rule of Investing


 “The more uncertain you are about a position, the more you should hedge your position!”


This might be worth sticking right next to Phil’s post-its that state:


“It is NOT my Job to Save the Market”




"When in Doubt – Sell Half"



Before we figure out how to hedge, let’s evaluate how certain we are of the current direction of the market. On Monday Phil posted links to an article on record margin debt in January of $285.61B surpassing even the March 2000 highs and he was very concerned that the SEC's solution to this was to relax the margin requirements, which could lead to a 1999-like crisis.


On Greenspan’s remarks "We have extraordinarily low risk premiums now. Risk is no longer perceived as major risk, at least as it was in years past and that, I must say, I find disturbing," he said. "We do not and cannot look into history without being very concerned when
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Weekly Wrap-Up – Making Money on the Great Crash of 2007


What a crazy week!

I pretty much did a wrap-up yesterday morning (I think I stopped myself at Thursday) but I just put up a blow-by blow account of Wednesday which we will put in the educational archives as an example of how to remain calm and rational while the markets are falling apart.

I think the great advantage of having a community like ours is that we can always have someone to talk to when things get tough.  It's very hard having to deal with tough weeks on your own, with no one but an overworked broker to talk to about your account…

Luckily our game plan for the week (hedged and ready for a drop, weighted heavily on oil sector and HB puts) was pretty much exactly the right way to play the market.  On Tuesday I used the China Syndrome to describe the market and either it wasn't that original or a lot of media people read us because that was the phrase that paid for the rest of the week.

We pulled most of our big winners off the table last week as I said at the time: "Keeping the bulk of the virtual portfolio fairly even as we cherry pick the winners and sell them in a nice non-greedy fashion…     The ripples are spreading and starting to affect the people who lend money to the lenders like LEH and BSC, who both took 5% hits at the end of the week but don’t think the buck will stop there in this very tangled web of sub-prime financing.. "

Maybe I was a little too prescient on Monday when we talked about the margin calls and the new SEC regulation and concluded "We are gonna party like it’s 1929 as this is a rollback of laws that were put in place during the great stock market crash in order to prevent this sort of nonsense…

I maintained my grumpy attitude despite the markets flying up in Monday's pre-market futures and I cautioned: "With all that money pouring into the markets you would think we should be heading up from here but let’s make sure we are really breaking up before we all go and drink the Kool Aid."

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A Day in the Life of PhilStockWorld


Crises and deadlocks when they occur have at least this advantage, that they force us to think. – Jawaharlal Nehru



A lot of people ask me what goes on in the member site besides studying the virtual portfolio.

Locations of visitors to this page

As I was looking for something clever I said on Wednesday (yes, I know the joke – must have been a difficult search!), I realized how proud I am of our community as a whole and felt it was a good time to give them credit for all the great contributions they make every day.

When we took the site private our primary goal was to make enough money to turn it into something realy useful and, just 3 months into it, I think it’s coming along fairly well.  The old site was becoming too much like a Yahoo message board – just too much nonsense being posted by pumpers and bashers and no way to tell who was who – we were a victim of our own success…


Now we are well on the way to forming a collaborative trading community of sharp, involved people who bring a diversity of ideas and a wealth of information together every day.  While my morning rants may set the tone for a day’s conversation, our comment section quickly takes on a life of its own - we never know what the day may ultimately bring, there’s no finer group of people I’d want to face the unknown with!

On Tuesday, after our long-anticipated "crash," I said "I’ll set levels in the morning but we can expect a 20% (of the drop) bounce at the open and ANY failure of today’s lows by more than 2 canaries means you ain’t seen nothin’ yet with this drop but I remain cautiously optimistic ahead of the GDP report, which I think will beat the 2.2% consensus."

By Wednesday morning I was a little more bearish, saying: "While I certainly don’t want to come across as a prophet of doom, I did say last night (and 20 other times) that I do expect a pretty significant correction at some point.  If we don’t break out
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Stop the week, we want to get off!

It's funny as it seems like this week will never end and I was just rereading last Friday's post (to get some perspective on what signs there were last week) and my opening comment was: "Wow, this week flew by!"


We should have paid more heed to the Hang Seng as our canary in the international coal mine (represented in this chart in canary yellow!) as it started falling that morning but we wrote that and the Nikkei's drop off to the Sanyo investigation - which was, as I said at the time, an "Enron-sized scandal."  That was also the day the Presidential Working Group concluded there was nothing wrong with hedge funds and, free of the annoyance of potential regulations, perhaps some of them got together for lunch and decided it would be a good day to take down the markets.

Not that the worsening housing situation didn't give them a good excuse but we did see it coming and I said on Friday morning: "If you can’t beat them and you’re too poor to join them, I guess we may have to start betting with them!  If we can’t hold on (to our levels) here, we are going to have to take some solid covers into the weekend!"

Greenspan (remember him) kicked off the week with recession talk and the 2% GDP pushed us right over the edge but I said on Monday that we need to focus on the ISM index and that was a big beat yesterday, in news that was buried in all of yesterday's action.

Had we not had that big round of mergers on Monday, we probably would have fallen first thing this week but as I said on Monday morning: " With all that money pouring into the markets you would think we should be heading up from here but let’s make sure we are really breaking up before we all go and drink the Kool Aid."

I also said "If oil stays over $61 it will be time to quickly revalue those positions but we can certainly expect a test of $62 before we get a turn down."  So far we are right on plan for the week, waiting for our next opportunity to short…
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Thursday Wrap-Up


Well I'm half out!

As we discussed last week we went into the weekend with a 50/50 mix of puts and calls and the puts were lagging the calls by a wide margin.  Our short-term porfolio was up to $176K (up 37%) after we pulled off a bunch of winners and it left us bearish going into the weekend.

After today's morning dip I decided I'd had enough and gave up on the half of the virtual portfolio that had me most worried – the puts!  We shut down $203K worth of positions this week, mainly puts and added very little to either side as we switched to defense on Tuesday.  On Wednesday I said that the dip did not necessarily mean BUYBUYBUY, so we patiently waited and started lightening up on the "recovery."  That recovery pretty much fizzled out today as the markets gave back much of Wednesday's gains, despite Dr. Greenspan's apparent change of heart.

After running our entire virtual portfolio up to $379K (up 115%) in just one week, it seemed to me there was more risk in leaving our recent successes on the table than reward in letting them ride (as they were generally shorter positions).  Due to the disparity in length, our longer positions weren't quite so crushed (other than Google) and I set 15% stops on the remainder ($126K), hoping for a bounce but not really expecting it.  Please note that some of this money (perhaps $50K) came from brand new trades so not all of it was made off last week's base!

This all works out for the best as we are changing virtual portfolios next week with a new and hopefully improved tracking system as the new system we experimented with did not hold up well in a super-busy week.  I apologize to those who miss the intraday alerts, it's a nice system for a dozen trades a day but we closed out 37 positions today alone and, like the NYSE, we weren't prepared for the volume.  Unlike the NYSE, we already have a plan in place to address the situation, just in time for the CNBC $1,000,000 Challenge!

While CNBC's rules are silly, it will still be fun to see what we can do with $1M
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Thursday Morning

Federal Reserve chairman Alan Greenspan

Now what?

Greenspan retracted his recession statement, in Tokyo this morning, saying he DOES NOT think such an economic slowdown is "probable."  Now that he's a private citizen perhaps we should just short the market the day before he is scheduled to appear anywhere!  Hopefully Mr. Greenspan has learned that he still carries a very big stick and needs to walk a little more softly but private corporations don't hand out big, fat speaking engagement checks to hear carefully worded statements so the former Fed Chair is going to have to choose between income and integrity in the future.

It's too late to put the fear genie back in the bottle though and it will take a lot more than a "mea culpa" to restore investors to a state of less than rational exuberance.


Asia continued down other than India, which jumped almost 2% as investors decided the new budget was not as bad as first thoughtNotice that yesterday morning, India was not on my list of Asian indices to short at it was Asia's strongest economy last year, something I predicted after the Jan '06 World Economic Forum.  I picked the US economy this year but I didn't think it was going to be the strongest of a weak group, which is how things are shaping up – let's hope we can pull it out before things really do turn ugly.

Japan led the downturn with a 1.5% drop in industrial output and retail sales falling .8%, indicating that the Japanese economy may still not be strong enough to withstand paying half a point to barrow money.  The weak index of mining and industrial output "can be seen as a sign that the Japanese economic growth is losing momentum," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. Inventory developments — which will likely affect future demand and consumption — should be carefully monitored to gauge the outlook for Japan's economy, she added.

Keep this in mind when CNBC tells you about the rising global demand for oil against as the World's number one and two economies both just significantly lowered their economic forecasts!

I mentioned on 2/20 that EADS would be cutting 10,000 workers, which is why we held our BA…
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Wimpy Wednesday Wrap-Up

Not a very exciting day.

I like to think that not going down was good but it was the end of the month and funds may have wanted to hold out before taking their losses so they could dress up one last virtual portfolio (and what a great excuse the drop is for the underperformers to point to!).

We did not hold out levels and I made a mistake saying Russell 780, I meant 800 so I’m not happy with any of them so I’m going to skip a depressing rundown and leave it at that..

I hope my warning this morning was taken to heart as we got just what we expected, across the board rejections at the 20% retracement line.  We’ll see tomorrow how Asia opens, we need a real recovery there to get our markets back on track!

Gold took a nice tumble today and we’ll see if it lasts but, after falling back to $60, oil was pumped up at the close yet again, testing $62 and finishing at $61.79 against a flat dollar.

Nonetheless at 10:07 I said: "I’m doing a ‘mon back on XOM $72.50 puts at under $1!" and I happened to be on the radio at the time (listen here) where I told the entire country to buy the XOM puts (since it’s very liquid I wasn’t worried about not getting mine).  After trading all day at .85-$1.05, the puts took a nice turn in the afternoon and finished the day at $1.75 – not bad for a day trade in a poor market!

I also told the radio audience that Google was good for a $10 pop as Google was laying at $446 and it jumped to $453 just 45 minutes later.  The $460 puts I suggested went from $4.70 to $8.30 but by the time I was going to mention the trade here it was already at $7.50 - that’s what prompted me to take another look at the new virtual portfolio tracker we are considering for the member section.  In this market – we will need to be faster than ever to take our trade opportunities.

I suppose I ended the day a little bullish as I sold my DIA June $124 puts for $3.50 (up 169%) while holding onto the June $124 calls.


Wimpy Economic Outlook – Does It Finally Matter?


Are our economic sins finally starting to matter? 

Could it be that borrowing $9 Trillion dollars is not the smartest way to fund a tax cut that gave the "bottom 80%" of Americans an average of $500 a year off their taxes and the top 1% an average of $53,000 per million off theirs?

$53,000 just so happens to be the ENTIRE median income of the fourth 20% of all American families total income, over $9,000 higher than the highest income level of the bottom 60% of all taxpaying US families.

Before you go complaining about it I will say that this represented a substantial compromise as the original Bush tax plan had the ratio at $54,480 for the top $1.3M taxpayers and just $256 for the bottom 78M (that's the plan he was elected on!) - that $347 doled out to the bottom 98.4% of the country (lazy bastards) represents a 35% increase in Republican largess.

[Ben Bernanke]

While you were out whooping it up with your $347 (or let's assume you were in the top 4% and got a whopping $3,345 check), we racked up an extra $3.5T in additional debt to help fund those tax breaks.  I'm bringing this up today because Ben Bernanke is VERY concerned about it, even if you're not…

Have we finally choked every last dollar out of the bottom 78M American families?  Bernanke is predicting a "deficit storm" that will take up 4.5% of our GDP just to pay interest on the debt we accumulated in order to make sure Donald Trump could gold plate one more toilet seat in the purest example of trickle down economics.

What we seem to have forgotten in this orgy of elitist entitlement spending (not that we spent money on entitlement programs, rather we pillaged the entitlement programs and spent the money!) was that the $53,000 we stole, came out of the pockets of the people who ultimately made us that $1M that put us in the top 1% bracket in the first placeMedian family income actually fell $1,586 (2.3%) from 2000-2004 and that is very deceiving because the top 1% jumped in total US income from 33% in 1980 to 44% in 2000,…
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Which Way Wednesday?

You may have heard that the Chinese word for "crisis" is also the word for "opportunity"

Chinese character ji1 -- in traditional form ?

While it makes a nice catch phrase for bored business writers it is not actually correct.  The Chinese word for crisis is composed of 2 elements that signify DANGER and CHANGEYou will hear many pundits today telling you how real men buy on the dips or some such nonsense and you must ignore them!  These people are up to their eyeballs in positions and they want you to come in and save them.

Today I would like you to take a post-it and put it up in the corner of your monitor, where you can’t ignore it and write in a nice, thick marker: It is NOT my Job to Save the Market!  Opportunity, yes but DANGER!!!   Real men (and women) protect their families (and their assets), not their egos.  If we are having a real recovery than we have a 400 point gain ahead of us – you will not miss anything by sitting out the first 100!


A 20% retracement of yesterday’s losses will put the Dow up 83 and the Nasdaq up 24 and the S&P up 12.  If you drop a ball from 5 feet and it bounces 1 foot do you bet 10% of your virtual portfolio that the next bounce will be 2 feet?  No – you get the air pump!  If that doesn’t work, it’s time to get a new ball…

Is the air coming out of the global economy or did China just spring a small leak?

The Shanghai Composite recovered 3.9% today and that is the headline of every section of the on-line WSJ as they and CNBC put on their cutest cheerleader outfits but Europe is off 1.25% this morning and Asian markets, led by a Nikkei 500 point, 3% drop had a terrible morning!

Let’s not forget that a 4% gain off a 10% loss is really only a 3.6% retracement at best, the math trick is that you are starting from a lower point.  This is like buying IBM at $100, having it drop to $50 and, when it bounces back

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Terrible Tuesday Wrap-Up



What a great day that was!

I'm finally seeing stocks at prices I may want to enter and we used the 5% rule to take some off the table and pick up a few positive postions at the close (just in case).

Even after removing these superstar positions, our short-term virtual portfolio still finished up 28% in total (not bad after a 600 point drop in 5 days).

I was starting to feel silly sitting on all those puts and writing every other day that there were terrible things wrong with the economy and people were starting to laugh at me when I said that commodities (which includes housing, of course) are still in a bubble.

Today justified a lot of those fears…  As Option Sage said in our very first educational post: "The next rule we should be equally cognizant of is The Cardinal Sin of Investing which is to ignore risk management – Don’t every do it!!!  Simply put “Don’t ever put all your eggs in one basket” otherwise Murphy’s Law kicks in and no matter how confident you were in the position you might quickly find it moves against your initial expectations!"




My initial expectations of this drop began on Jan 10th when I said: " Are you prepared for a down 295 point day?  Let’s remember I am a bull with a short-term target of Dow 11,500!  I would like to say I would be pleasantly surprised to be wrong but I will not be able to really enjoy additional advances unless we get a long-overdue correction out of the wayI’m saying this today as I see several disturbing market trends while I also see a lot of irrational exuberance on our member site and like Uncle Greenspan, I may feel the need to take away the punch bowl if the party starts getting out of hand!"

While many of you may have forgotten my cautionary words, the virtual portfolio didn't as we tracked progressively more bearish over the next 45 days.  Our weekly short-term profits slipped from 100%+ to 42% as I hedged like crazy but, at the same time, we let the long-term virtual portfolio run and gained a ridiculous 100% there.  We suffered for our bullishness in the long-term
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Zero Hedge

Enemy Of The People?

Courtesy of ZeroHedge. View original post here.

Via The Zman blog,

There has never been a time when normal people did not know the media was biased and biased in a predictable direction. For every non-liberal in the media, there were at least ten liberals. The ratio was probably higher, but then, as now, some lefties liked to pretend they were independents or some third option.

The media used to invest a lot of time denying they had a bias and an agenda, but the only people who believed them were on the Left, which had the odd effect of confirming they had a bias and an agenda.


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Phil's Favorites

A 2019 Earnings Recession?


A 2019 Earnings Recession?

Courtesy of 

Shout to Leigh!

On the new Talk Your Book – Josh Brown is joined by Leigh Drogen of Estimize, one of the leading providers of crowdsourced financial and economic data to talk about the trend in corporate profits that could potentially lead to an earnings recession later this year.

What is the thing that Leigh is seeing in the data that Wall Street isn’t yet picking up on? What segment of the stock market is most at risk? Why is the crowd smarter than the narrow consensus of Wall Street analysts?

Check out Estimize ...

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D.E. Shaw Investment Calls For Leadership Change At EQT

By ActivistInsight. Originally published at ValueWalk.

Elliott Management has offered to acquire QEP Resources for approximately $2.1 billion, contending the oil and gas explorer’s turnaround efforts have done little to lift the company’s share price. The company responded and said that a thorough review of the proposition is imperative in order to properly act in the best interests of shareholders, “taking into account the company’s other alternatives and current market conditions.” The news came only a month after Travelport Worldwide agreed to sell itself to Siris Capital Group and Elliott’s private equity arm Evergreen Coast Capital for $4.4 billion in cash and two months after Athenahealth was bought by Veritas and Evergreen for $5.7 bi...

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Kimble Charting Solutions

Gold & Silver Testing Important Breakout Levels!

Courtesy of Chris Kimble.

Gold and Silver from a long-term perspective have created a series of lower highs over the past 8-years. Will 2019 bring a change to this trend? A big test is in play!

Gold since the lows in 2016 has created a series of higher lows, while Silver may have created a double bottom.

Gold & Silver are currently facing break attempts a (1) and (2). These falling resistance lines have disappointed metals bulls for the past few years.

The direction of Gold and Silver weeks and months from now should be highly influenced by what each does as they are attempting to break above important resistance levels.

To become a member of Kimbl...

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Insider Scoop

UBS Says Disney's Streaming Ambition Gives It A 'New Hope'

Courtesy of Benzinga.

Related DIS Despite Some Risks, Analysts Still Expecting Double Digit Growth From Communications Services In Q4 ... more from Insider

Digital Currencies

Russia Prepares To Buy Up To $10 Billion In Bitcoin To Evade US Sanctions

Courtesy of Zero Hedge

While the market has been increasingly focused on the rising headwinds in the global economy in general, and China's economic slowdown in particular, while the media is obsessing over daily revelations that Trump may or may not have colluded with Russia to get elected, a far more critical, if underreported, shift has been taking place over the past year.

As we reported in June, whether due to concerns over draconian western sanctions and asset confiscations following the poisoning of former Russian military officer Sergei Skripal, or simply because it wanted to diversify away from the dollar, Russia liquidated virtually all of its Treasury holdings in the late spri...

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Chart School

Weekly Market Recap Jan 13, 2019

Courtesy of Blain.

In last week’s recap we asked:  “Has the Fed solved all the market’s problems in 1 speech?”

Thus far the market says yes!  As Guns n Roses preached – all we need is a little “patience”.  Four up days followed by a nominal down day Friday had the market following it’s normal pattern the past nearly 30 years – jumping whenever the Federal Reserve hints (or essentially says outright) it is here for the markets.   And in case you missed it the prior Friday, Chairman Powell came back out Thursday to reiterate the news – so…so… so… patient!

Fed Chairman Jerome Powell reinforced that message Thursday during a discussion at the Economic Club of Washington where he said that the central bank will be “fle...

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Members' Corner

Why Trump Can't Learn


Bill Eddy (lawyer, therapist, author) predicted Trump's failure based on his personality, which was evident years ago. This article, written in 2017, references a prescient article Bill wrote before Trump became president, in July, 2016, 5 Reasons Trump Can’t Learn. ~ Ilene 

Why Trump Can’t Learn

Donald Trump by Gage Skidmore (...

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Opening Pandora's Box: Gene editing and its consequences

Reminder: We are available to chat with Members, comments are found below each post.


Opening Pandora's Box: Gene editing and its consequences

Bacteriophage viruses infecting bacterial cells , Bacterial viruses. from

Courtesy of John Bergeron, McGill University

Today, the scientific community is aghast at the prospect of gene editing to create “designer” humans. Gene editing may be of greater consequence than climate change, or even the consequences of unleashing the energy of the atom.


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Mapping The Market

Trump: "I Won't Be Here" When It Blows Up

By Jean-Luc

Maybe we should simply try him for treason right now:

Trump on Coming Debt Crisis: ‘I Won’t Be Here’ When It Blows Up

The president thinks the balancing of the nation’s books is going to, ultimately, be a future president’s problem.

By Asawin Suebsaeng and Lachlan Markay, Daily Beast

The friction came to a head in early 2017 when senior officials offered Trump charts and graphics laying out the numbers and showing a “hockey stick” spike in the nationa...

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Swing trading portfolio - week of September 11th, 2017

Reminder: OpTrader is available to chat with Members, comments are found below each post.


This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current  trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).

We also indicate our stop, which is most of the time the "5 day moving average". All trades, unless indicated, are front-month ATM options. 

Please feel free to participate in the discussion and ask any questions you might have about this virtual portfolio, by clicking on the "comments" link right below.

To learn more about the swing trading virtual portfolio (strategy, performance, FAQ, etc.), please click here ...

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Free eBook - "My Top Strategies for 2017"



Here's a free ebook for you to check out! 

Phil has a chapter in a newly-released eBook that we think you’ll enjoy.

In My Top Strategies for 2017, Phil's chapter is Secret Santa’s Inflation Hedges for 2017.

This chapter isn’t about risk or leverage. Phil present a few smart, practical ideas you can use as a hedge against inflation as well as hedging strategies designed to assist you in staying ahead of the markets.

Some other great content in this free eBook includes:


·       How 2017 Will Affect Oil, the US Dollar and the European Union


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About Phil:

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...

Learn more About Phil >>

As Seen On:

About Ilene:

Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

Market Shadows >>