Thrill-Ride Thursday

SKF – Those $120s are hysterical.  Doesn’t matter what level SKF is at they go from $1.40 to $2.20 depending on the last move.  Too bad the spread is a very digusting .30 or we could just trade them all day…

Names/Texas – I agree and the fact that I haven’t got the heart to run through the Buy List today is a form of capitulation on my part as well.  They get to a point where there are just no buyers left and THAT’s when SOME kind of action gets taken. 

GS/Kustomz – Yes, they’ve never steered us wrong before… John Stewart should make a video of their calls!

POT/Anton – There was a thing about Russians lowering rates for potash drastically yesterday.  Good plan to be in at $61 but scale in, just in case.

KO still falling.

By the way guys, that was a buy on HOV, not a sell!  D’oh!

RUT past 5%, not good at all.  S&P right on the 4% line, NYSE below it and Dow just above it.  Nas holding -2.5% at least.  QID up at our April target of $67 by the way!

This is kind of fun, it’s like a time machine.   We are down to 1996 levels – I wonder if we can blow it all the way to the 80s (about 2,700).  I guess 13 years of global growth are gone, yeah, that makes sense… 

Has anyone contemplated the massive burden this will place on the world with a whole generation of retirement wealth wiped out?  There are about 80M Americans between 45 and 65 who have pretty much nothing for retirement now.  That will be a fun thing to deal with.  Of course there’s another 20M people over 65 who got their retirement cut in half and they don’t have time to wait for a recovery. 

Amazingly, we hit the 3pm sell-off yet again.  Doesn’t matter how low we go, they can still sell into the close (day traders getting out probably).

FXPs are still good covers if you need them.  The March $39s are $5, about 1/2 premium.

Obviously have to go bearish again into the close, I still like a 1/2 cover with DIA $68 puts at $3.80, just in case something happens but it’s kind of doubtful looking at this point.

JPM getting killed into the close, WFC broke $8, GS below $80 and SKF hitting $250 finally!

Buy list/DB – Well the idea is to roll them down and out if you don’t want them, DD and continue if you are scaling in – it all depends on where they fall and how much you want them.  We bailed on the fincancials but everything else sucks too.  Sadly, at this point, there’s almost nothing you can look at and think that 20% down should be safe.

Capitulation/Relax – No, it is not!  This is a slow melt-down, not enough volume, not enough sharpness. 

What happened/Chuck – It’s the typical 3pm script these days, take it all down.  The opposite of the stick saves we used to get.  As I said, very likely due to the fact that hedge funds are running 70% cash and day trading the markets so they liquidate eod (and if you cover with SKF you can make great money buying financials in the morning and dumping in the afternoon).

By the way, SKF $290 puts still $66 – that’s a good thing about that play, they pick up a lot of premium as the ETF moves against them but get all intrinsic value on the way down.

LOL Bro – Welcome back!  It’s a risk example.  If you 1st plan on what you are risking ($1,000) you then work that backwards to 20K shares at .63 ($12,600) for an entry with a stop at .58.  As a goal, if we make .10 ($2,000) at .73, we take 10,000 shares off the table ($7,300), leaving us with a $5,300 basis up .20.  At that point, you can keep the same stop and relax as you are in a no-lose trade and you can then ride out all the ups and downs, hoping for a big rally one day.

By the way, I’ll be here only in the morning tomorrow, until 11 and then on Web TV at 1pm with Tim Sykes, who’s a penny stock guy. 

FAS/Red – The catch is you’re forced to own it at .95, but you’re righ, it’s an excellent play.

Good Strategy tip for DIA:

DIA/Edro – First of all, for your own sanity it’s best to simplify.  That’s a lot of things to watch.  Obviously, at $66.30, there’s no issue with the March $68s with $1.50 in remaining premium.  2nd of all, you missed a VERY important point, which is you need to have position advantage over your putter of at lease $3 unless you are really bullish.  That makes a huge difference in your p/l on the way down. 

Now the $69 puts have $1 in premium, I don’t think I’d move them but you need to think of it like leap-frog, take the putter with the least premium, the $70 puts at $4.80 and move them to Apr $68 puts at $4.75, which have $3 in premium.  There is no hurry to make this roll as long as you are adding $2.50 in premium and not taking more than .60 out of pocket. 

Why?  Well he already gave you $3.10 so giving him .60 back puts him at $2.50 and putting him into something that has $2.50 in premium and less than $2 in intrinsic value means he has made no progress against you.  You, on the other hand, have made $2 in position progress giving up a month out of 3 you had to give. 

Now you shouldn’t have any May $70 puts since they can be rolled up $1 for .50 so that consolidates that.  Either the DIA goes lower and you make $1 for your .50 or the DIA goes higher and your putter’s losses pay for the roll…  Your next goal is to get another .90 from your next set of putters to pay for a roll back to June (hopefully once again consolidating).  That leaves you with 50 June $71 puts at about $6.70 avg covered with roughly 45 Apr $68s at $4.50. 

If you do not have a clear path to a double if the Dow keeps dropping, then the postion is wrong.  You started with around $4 net entry and the Apr $68 puts can roll to the May $66 puts which roll to the June $64 puts for a $7 spread so a little shy of a double (although not a full cover so maybe).  The main adjustment to make is either rolling up your longer puts to a higher strike (at .50 per $1 roll up you improve your end game quickly) or keeping stops on some of your putters. 

A good rule of thumb with stops is to stop out 1/4 of the covers for each .25% they go against you.  So if you sell 20 $68 puts for $2.62, you should take 5 off at $3.27 and 5 more at $3.90.  That leaves you with 10 covers at $3.90 and those can be rolled to 2x the $66 puts at $2.42, which gives you back most of what you lost and puts the putter back to all premium. 

If you take out 1/4 at $3.27 and it reverses on you.  You can just sell them again at $2.62 and it ends up costing you .15 per cover (5%) or you can cover with a higher strike and get it all back but keep a very tight stop on the higher strike. 

So, if you are entering a new position from scratch – we select the June $69 puts for $7.20 because they are the first June puts that cannot be rolled up for .50.  The reason for this is we have a better than .50 delta so we know what to expect and that delta improves pretty rapidly as the Dow drops.  We ALWAYS offer to roll up to the next higher strike for .50 as we always want a good cover.  You get the cheapest rolls when the Dow is moving up, not down so you have to pay while that position is losing to stay in position.  Generally, you want to use 1/2 the money you collect from putters for rolling up. 

Per today’s close, I went with 1/2 covers and I liked the $68s at $3.80 on the 3:40 alert.  Those pay for me to roll up 3x .50 on the Junes, which is 300 Dow points so I’m pretty much protected from a 300 point gap up tomorrow.  In practice, a 300-point gap up would only kill about half the value of the puts right away but that’s fine as I can still sell the other half to cover and, if they Dow never comes back down, I don’t pay them a penny and, if the Dow does come back down, my 3 .50 rolls up return $3 in intrinsic value.  So selling 1 set of calls for $3 and another set of calls for $3 means the Dow can gain 600 points (10% now!) and I will have rolled up to the June $75 puts paid for by my putters March putters who are all way out of the money with 1/2 at $68 and 1/2 at $70 maybe. 

If they finish out of the money, then I will collect $3 new dollars on my April covers and be in great shape.  If we plow back down, my 25% stop rules keep my putters from burying me and I end up so in the money on the longs I don’t care.

Well, that’s the short overview.  Hope it helps!

Volume/Jordan – As I mentioned earlier, SKF volume on blow-off top was 30M and 40M, today was 24M.  Dow volume in Thanksgiving panic was about 8Bn, Jan 20 was also about 8Bn, today was 6.9Bn so not really a big volume capitulation today.  Also, the VIX is not angry like it was back then.  While 50 is very historically high, back then we were getting 60s and 70s so you knew a lot of people were making big bets the other way.

ROFL Texas – I wish I could disagree with you but we have absolutely screwed things up massively, no question about it.  The only thing is, I don’t just blame the hippies and drugs – all don’t tax but spend policies pursued by this government were a disaster.  Unfunded programs were insane from the start – Europe practices socialism but the people pay for it, they don’t create programs and then have the next administration cut the taxes that paid for the programs while ignoring spiraling deficits.  You are right, they teach leverage and deficit financing at the business schools, that’s the playbook and living in 40 pretty good years since the big war ended has not prepared people for this at all.

Glad we’re helping Bvar!  Just like any new hobby/profession – it takes a while to get used to the jargon and build up a base of simple strategies you get used to but, once you do, the more advanced concepts get much easier.

DIA/Mampcs – The key to the DIA covers is: Do you have a clear path to a double?  If not, you need to adjust. 

Did you sell the March $72 puts for $6?  That’s a pretty deep cover!  If the market heads up, you shouldn’t be shy about taking the Junes off the table as they are up almost $2 already. 

Since making $2 is a double on the $2 spread you have with the June/March, it’s not to be taken lightly.  If we head lower, the putters are going to kill you so we want to roll those to the Apr $64 puts, which are $3.  You can roll them to 1.5x (costs $1.50) or 2x (even) and then you are $9 above your putters on the Junes and $4 over on the Mays so if the Dow keep going down you’re looking at 20 at $9 and 20 at $4 = $26,000 clear vs. the current net spread cost of (using your numbers above) $17,400 so not quite a double there but you have another two months to roll).

Of course, if the set-up you have isn’t working, don’t fall in love with it.  If you start from scratch with the 30 June $69 puts at $7.20 ($21,600) and sell 20 March $67 puts for $3 ($6,000) then you are in for net $15,600 and you can roll the 20 $3 $67 puts to 30 $2 Apr $61 puts and those can be rolled even to the May $58 puts, which can be rolled even to the June $55 puts, which puts you $14 in the money times 30 = $42,000 so that’s the benchmark with some margin for error. 

On the other hand, if that spread pays off $42,000 then you’d better use half of it for guns and ammo as we are going to be really falling apart!  We don’t WANT to win these put spreads, if we win them then the market sucks – they are designed to be relatively cheap insurance and my adjustments are generally reflective of that.  Ideally, if you make 20% on the spread, let’s say it was 50% of your portfolio, then you have 10% cash to spend to add or roll your long positons (over 20% of their total value since they lost money). 

Since we are looking for a bottom, if you were only buying GOOG and had 100 shares at $300 (30K) and the above cover at a $15,600 net entry and we assume GOOG moves with the Dow – then a 10% drop down to 6,100 ($61 DIA), forces your April roll and GOOG is $270.   Another 5% drop down to 5,800 and you execute the roll to the May $58 putters and GOOG is $257.  Another 5% drop down to 5,500 and you execute the roll to the June $55 putters (GOOG $244) and you WILL have a $42,000 advantage over the putters less the remaining premium but if you look up $14 in position from any March put that is near the money, you’ll see you could cash out now for about $11 of that money. 

So you cash out $33,000 and you still have $24,400 worth of GOOG which is already more than you started with.  Then you rebalance and lets say you want to be 60/40 bullish as we’ve finally found the final bottom at 5,500.  So you run the GOOG position up to 60% of $57,400 or $34,440, which is 141 shares of GOOG and you cover the other 40% with (assuming it works out the same at $55 as it did at $72) about the same 30 share spread for $15,600 leaving you $7,500 to make adjustments or you could buy 50% more puts to stay well covered. 

Now if GOOG recovers and goes up the 20% over $300 you thought it would in the first place, you own 141 shares at $360 or $50,760 worth of GOOG PLUS whatever value remains in your long puts.  Of course, we didn’t even discuss the benefit of having covered GOOG along the way as that could have softened the downside blow considerably.

Obviously nothing ever works out perfectly but by having the general balance in place and getting used to it, you can shift the weighting of your portfolio very quickly and go with the flow.  It doesn’t have to be just GOOG of course and it doesn’t have to be just DIA puts but it all flows out of that basic concept.  The most important thing is to know how much your covers will bring in because that allows you to keep at your longs when they go the other way.

Good morning!

5% Rule/JW – Generally it’s that markets or stocks in general tend to move in 5% segments.  The more liquid something is, the more the rule is obeyed to the point where you actually see significant trends at 2.5% and 1.25% as well in very liquid issues like the Dow, S&P, GOOG, AAPL…  I came up with this theory when I was doing consulting as I noticed that brokers and the programs they thought were proprietary ended up picking similar buy and sell points.  The reason for this is partly due to the influence of technical analysis and partly human nature – You have the chart levels and then you have the psychological, whole number levels and then you have all the clever men who tell their programmers that their special system is to take profits at X% but X% averaged across thousands of programs is 5% and then you have the effect of computer programmers forced to pick a number in order to do what the clever funds tell them they want and that number is then rounded off somewhere and it bumps into a bunch of other rouned off numbers and, before you know it – we’re back to 1.25%, 2.5% and 5% triggers. 

So that’s why there’s a rule, the rule is pretty simple on any 5% move (including 1.25% and 2.5% if liquid) over any period there is an expectation of a 20% (of the move) retracement.  This tendency gets stronger at 10%, 20%, 40%, 50%, 60% and 100% as you also run into Fibonacci sets, psychological levels as well as other TA issues.  So when GOOG goes from 300 to 315, we expect a $3 retrace and holding that $312 line means the trend is unbroken.  If they run to $360, holding $348 means the uptrend is unbroken.  Sadly, with the markets yesterday, holding -4% means that trend was unbroken and we expect follow-through to 5%, although we did touch it yesterday so it’s possible today that we can follow through and break -4%. 

We had a nice volume spike right at the close yesterday, hopefully bets were made on both sides for the pending jobs numbers.

50% Ajay – Yep, this market is incredible.  If we don’t pull it out soon, what Kustomz posted from Germany is going to seem like a cakewalk here.  I don’t think this country will slide slowly into chaos, I think that we could be headed into a domino-type event that collapses the financial system.  The FDIC is flat-out saying they don’t have enough money to cover the closures that are already on the table – what happens if that spreads?  I have mentioned before, we are not a nation of farmers, we are a nation of people who can’t eat the minute there’s no money.  There are about 60M people in this country who would have no food within 3 days of the ATMs turning off. 

I’m already dumbfounded that the government has let things get this far.  The economy is like a car that’s rolling down your driveway – if you catch it right away, one guy can stop it, if it starts building up momentum, maybe a few guys can stop it but once it picks up speed downhill, it will just kill you if you get in it’s way.