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Tuesday, November 29, 2022

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Wobbly Weekly Wrap-Up

"You never give me your money, You only give me your funny paper and in the middle of negotiations, you break down.

Out of college, money spent, see no future, pay no rent.  All the money's gone, nowhere to go, Any jobber got the sack – Monday morning, turning back, Yellow lorry slow, nowhere to go

But oh, that magic feeling, nowhere to go" – Beatles
 

Another week, another $2Tn showered on the stock market by Uncle Ben and all we got was a lousy 55-point gain for a week.  Steve Colbert and Simon Johnson say things could be worse and Zachs says things will get better (eventually), but I was very upset by the week's action.

In last weekend's Wrap-Up I said: "We must break 7,450 next week or we are very likely to retest the lows once again."  I had laid out the logic in last Friday's Member Chat and you can read part of that commentary in Thursday's post and you really should unless you are already good at calling the exact movement of the market a week ahead of time already.  I'm not saying this to brag but if I don't point out the fact that I was dead right about that, then you may not believe me when I tell you what to watch out for next. 

Unfortunately, what happens next can be very ugly if we can't turn it back up right away next week.  We went into the weekend 55% bearish but we had a discussion about what to do on a "Black Monday" – very sobering discussion for a Friday afternoon.  Our fear is that Japan, which has been closed during our 200-point drop of the last 2 sessions, will wake up on Monday to see that the dollar is now 95 Yen or less and will gap down 5% so we'll be watching the critical 7,800 line on the Nikkei, who are the first market to open Sunday night.  The Hang Seng already gave up 2.5%, completing the requisite 20% pullback off their recent run and a drop in the Nikkei is likely to push them under the 12,800 line as well.

Since the FTSE, DAX and CAC are all percariously balanced at their own 10% lines, WITHOUT the requisite 20% retrace so far, we can imagine a poor Asian session leading to a minimum 2.5% pullback in Europe.  If we open Monday morning with Europe already down 2.5%, it's very easy to imagine us gapping back down below the 7,200 line, on the way to a likely retest of 7,000.  As I pointed out in Thursday's post, where I reviewed why we had gone 70% bearish in our Wednesday 3:02 alert to members (when the Dow was at 7,500), we were very concerned that a large portion of our rally was coming from dollar devaluation (thanks Ben!) and the S&P chart, when priced in Euros, looked exactly as bad as I had predicted it would the week before when we went bullish for the run to 7,450.

How then, you may wonder, can we "only" be 55% bearish?  Well, for starters, we already caught first 200-point drop in a much more bearish posture and shifting to 55% bearish is taking bearish profits off the table.  A couple of members asked whether cash was a good way to go neutral into the weekend and it certainly is (but not for too long as I may soon be posting the lyrics to "Your Cash Ain't Nothin' But Trash" for my next scary article).  We are still hanging on to the ever-thinning hope that Tim Geithner will save the markets with the Treasury's plan to take toxic assets off the books of the banks.  Unfortunately, I still have the same worry as I had Friday Morning when I asked – "Am I being too bullish?"

I has a brief bout of bullishness from Thursday at 12:15 until about Friday morning when I questioned that stance and, since we didn't make our levels in the morning we went back to a bearish death watch.   At 11:03, I sent out an alert to members, saying: "Bernanke is going to speak and that's boosting the market at the moment but if he doesn't say something that sounds like more free money – watch out for a breakdown!"  Well he didn't and we did – thus ended the week.

The key to trading in this kind of market is to remain flexible.  Dr. Brett wrote a post on this subject yesterday in which he says:  "One of the most valuable trading practices, I've found, takes place before markets actually open. It's the practice of framing "what-if" scenarios for the day, so that you're prepared to act when your market hits crucial price levels. Note that I emphasize scenarios in the plural; the idea is to be prepared for a variety of situations, not to get locked into any single one.  The combination of an open mind and an ability to quickly and decisively act upon fresh developments is something I've found in successful traders. Much underperformance comes from the inability to keep the mind open and the inability to be decisive when markets shift."  This is why we have focused so much attention to level watching in this crazy, choppy market.

That's why our Friday morning alert for members was, very simply: "Very simple plan today – Failure to hold our 10% levels is bearish.  If 3 of our 5 indexes fail there, a bearish stance is required but even hitting them without getting to our breakout levels is not going to be enough.  Break up levels are:  Dow 7,450, 788 on the S&P, 1,475 on the Nasdaq, 4,950 on the NYSE and 425 on the Russell.  10% levels are: Dow 7,404, S&P 775, Nas 1,466, NYSE 4,839 and RUT 402.   If Europe is red at all, that’s bad for us."  That's all a trading plan has to be, an inflection point where you are ready to make the key move that turns your risk profile from bullish to bearish.  You can see on the charts how we scooted along those 10% levels until we finally gave up the ghost at 12:45, right after Bernanke was done so were the markets.

I'm doing something different this week, rather than rehashing the articles (which you can re-read yourself with little effort), I'm just going to review the week's trades as I'm trying myself to see what worked and what didn't in this up and down madness.  Our trading rules are generally simple (see strategy section):  Scale into a trade on momentum, set trailing stops (20% of the profits) at 20% on options, 5% on straight stocks for shorter-term trades, adjust positions by rolling to more advantageous spreads on longer positions.  We generally hedge with index puts, especially when we are bottomish like we are now, preferring not to have too many long downside positions.  This allows us to be more flexible by covering and uncovering the long index puts to keep up with the minor directional changes, something I discussed in last week's Wrap-Up.

Sunday (post):  AMZN $68.63, topped out at $74 (up 7.8%).  FAS $5.15, topped out at $7.34 (42%), FAZ $50s (calls left over from Friday's trade, detailed in the wrap-up) at $2, topped out at $2.75 (37%), C 2011 $2.50/$7.40 spread at .52 (already up 148% from our member chat entry), now .69 (32% more). 

Similar spreads on AA, UYG, XHB, LVS and CBS also preformed well but were for members only.  I will be reducing the number of free public trades ideas for non-members and our Free Sample Membership offer will end next weekend so if you have not signed up for that, please do so by then as it will no longer be free after March 31st!    YOU CAN SIGN UP HERE.  Feedburner readers also MUST switch as we will no longer be sending out even partial posts that way. 

A very famous options trader, who charges $495 a month for "2-4 trading ideas a day" told me I was crazy to give ANY trades away.  My attitude is, in a rapidly changing market – timing is everything.  Most of these trades are over by the time we get to these reviews.  On the other hand, I guess if I only had 2-4 ideas a day, I'd keep them locked up tight as well…  Our "Buy List" alone has 42 long-term trade ideas for April already and the rising VIX and falling markets mean we are likely to trigger some of those plays next week IN ADDITION to our usual daily dose of trade ideas.  

Also on Sunday (and I'm only counting trade ideas that I said were still valid, not the ones we reviewed for the week):  AA (hedged entry at $4.35) at $5.83, now $6.54 (12%), DRYS (hedged entry at $3.39) at $4.20, topped at $5.45 (30%), now $4.49 and still a good hedged entry.  As I mentioned above, I closed the post stating our target for the week was 7,450 and the Dow topped out with a 300-point gain from Monday's open at 7,570 (up 4%), 7 minutes before I called a top on Wednesday and flipped bearish for the 300-point reversal. 

Monday (post):  RSX at $13.46, hedged to $11, now $14.63 (8.6% but 18% if they hold $13) also, the spread of the 2011 $9 calls at $6.85, now $7.90 (15%) hedged with Apr $14s at $1, now $1.68 assuming you covered right away (-68%).  Of course, covering long positions is a whole, complex strategy but we'll just look at the week's moves…  My closing comment for that day still goes for next Monday too: "We need those 10% levels or we’ll be seeing the 5% levels (and maybe lower) very soon!"  I also mentioned in Monday's morning post that: "G-20 central banks also committed to maintaining expansionary monetary policies for “as long as needed” after cutting interest rates to records and will use all the tools they can.  Have I mentioned I like gold lately?"  The last bit is a running joke with members, as I have gone on and on, ad-nauseum, about how gold is an essential inflation hedge for virtual portfolios.

Monday (members section): QQQQ $27a at $1.94, topped out at $3 (50%).  Like many member trades, this is more complex than can easily be summarized as we stopped out at $1.75 and re-entered at $1.55 – something that happens a lot when day-trading.  SNDK at $10, hedged to $8.55, now $10.15.  VNO Jan $45s at $5.95, topped out at $6.80 (14%) now back at $4.05

This is a good example of how scaling works.  If you planned on a $2K position and spent $595 on the first set of calls, generally you would either let it keep going or buy another round at 20%, which reduces your total gain on 200 contracts to 10% and you would raise the stop to even on at least half.  Since this trade did not hit 20% and is down over 20%, you can can scale in round 2 at $405 to lower the basis on 200 contracts to $500 (down 20%).  Should we drop another 20% (and we're assuming no covers were sold) you can add 200 more contracts at $3 each and we are in for 400 contracts at a total of $1,600 or $4 per contract average.  This is a lot more contracts than you could have bought at $5.95, of course but you are still down 25% so you'd better be sure you feel VNO will come back by January or, at least, that you can sell enough calls to make it worthwhile

Since we are still bearish, however (and we called the top on Wednesday, so this would have been killed or covered and this is all hypothetical), had you chosen to remain in the initial entry and ride it out – rather than just buying more here, we have an opportunity to spend $275 more to "roll" the position down to the Jan $35 calls, which are $6.80 per contract.  That would put us in for a total of $870 out of $2,000 allocated in contracts with a $10 lower strike than we started with.  Even better, we can sell the April $35 calls for $2.23, lowering our net basis back to $6.47 in our $6.80 calls.  The game plan forward (Dr Brett says always have a plan!) would be to add back Jan $45 calls at $5, spending $500 of our remaining $1,353, which would put us in 200 contracts at an average cost of $5.90 at an average strike of $40.  From there we could manage continuing rolls of the calls we sold.  On the downside, we are even with the hedge and any finish lower will expire the caller worthless but, if you are not prepared for a revisit to the lows at $27, it's best to take the current $200 loss (10% of full position) now and wait to see what happens.

confusion.jpg Confusion image by arakdemonbladeIf this sounds confusing to you, it is!  Trading options contracts is something you learn over time, not something you just jump into.  Like any profession, trading needs to be studied and practiced and anyone who tells you they have quick and easy answers is not giving you the whole story.  Even on this trade, which I posted at 11:58 Monday morning in response to a general question on buying distressed debt, it was clearly not the best time to enter the trade as I said in the next paragraph "Gotta flip bearish here.  That was a good run and needs to be protected so naked DIA puts, June $74s at least, they can always be covered back up if we break the highs but I’m not feeling it here."  For simplicity's sake, I'm just tracking the trade ideas as if they were taken that moment, regardless of actual conditions…

Next up Monday was PGH at $5.41 (hedged to $4.41), now $6.10 but called away Friday at $5 with a very quick 13% profit.  VLO 2011 $12.50s are back at $8 and I still like them as a scale in, not covering until $22.50.  DIA June $74 puts at $5.75, now $6.42 (up 11.7%) were covered with 3/31 $73 puts at $2.10 – still $2.10 but, of course they fell all the way to $1 Wednesday when we flipped bearish and then was the rolling up of the June $74 puts to the June $76 puts for $1 – like I said, more complex than can easily be explained in a summary but, amazingly, you get used to it with practice!

At 2:58 on Monday I decided we hit a bottom and liked selling the naked SPY $76 puts for $1.50 which, of course, expired worthless (up 100%) and never really gave us any trouble. 

Tuesday (post):  We were bearish going into the morning (carry over from Monday's call) but we held the test levels we expected across the board.  I said in the morning post: "It should be a fun day ahead, hopefully we can test our bottoms and then break through our tops" and that's exactly what happened.  The only new trade idea in the morning post was SPWRA, which opened at $20 with a hedged entry at $17.50 and finished the week .03 below our call-away target of $22.50 so up 28.5% in 4 days with a new set of puts and calls to sell for April! 

Tuesday (members):  S&P futures were selected at 8:08 am at $750.50 with a stop if they S&P failed 750.  The S&P hit our 778 target on the nose and each futures contract pays $20 per point ($760).  By 9:45 I decided it was a flush and we made 3 bullish plays:  DIA $68 calls at $4.10, which topped out at $8.15 (98%), SPY $72s at $3.90, which topped out at $8.90 (129%) and IWM $36s for $2.87, which topped out at $6.20 (116%).  We covered up our DIA puts again and those guys got smoked for 50% gains.  BA was a hedged entry at $34.06 to $27/31, now $32.55 but the call-away is $30 as we were fairly bearish but looking to establish an entry cheaply.  In the afternoon, we took cheap stab at going long on FAZ by selling the $35 puts for $1.85 and buying the $45 calls for $1.95 so loss of .10 as FAZ finished at exactly $35 but it was a cheap way to cover a financial crash. 

I did call for profit-taking on the index plays at 1:26 (S&P 765) but the dip was shorter than I expected and the recovery was greater.  We made a quick play on the DIA $75 puts at $2 to cover into the next morning, which was good as we did drop 150 points at the open.  Having a cover like this let's you ride out a retrace without messing around with your running bull plays.  In Tuesday's post but at 6:04 the Wednesday morning I said: "The Fed is going to talk quantitative easing and if gold comes back down to $910 again in the futures I will pick some up."  Gold hit $650 that day after giving us a great entry and we also shorted oil for a quick in and a very wise out

Wednesday (post):  Selling USO $29 calls for $1, which quickly dropped to .40 (60%) and finished the day back at $1.  Our trading plan for the morning was: "Going short on the Dow overnight allowed us to let our long plays run as we’re still hoping for a test of 7,450 (only 55 points away) and if we break through there we are happy to flip bullish, using 7,540 and 7,400 as stops along the way."

Wednesday (members): I laid out a list of levels that we followed for the rest of the week and they were VERY helpful.  We finished the week between our 10% levels and the breakdown levels we'll be worried about on Monday, which are: Dow 7,150, 748 on S&P, Nas 1,430, NYSE 4,620, and RUT 380.  We had gone into the morning with bearish covers but, on the way down, we sold the FAZ $35 puts for $3.50, which expired worthless on the button (100%) which was a wild ride that included a plan to roll to 2x the $30 puts as we were pretty confident that 7,450 would be the top for the week.  Nasdaq futures were shorted at 1,190 at 9:54 and that gave us a 10-point ride before stopping out (up a lot). 

We don't do a lot of verticals but the FXP $27s for $4.95, selling the $31s for $1.70 was net $3.25 and gave back $4 two days later (23%) and was a lot more than that for sharp day-traders as the $31s got crushed to .50 in the afternoon while the $27s held $2.50.  We have rules for these kinds of trades of course…  At 11:40 we had another little fake down and I said: "Now next time they break up over the watch levels I’ll be a little more impressed if we survive this…"  At 12:12 we made a failed attempt to short the Nas futures wish razor tight stops (-1 point) and we lost a quick .60 on the QID $51s but these are the kind of plays you make ahead of an inflection event (the Fed) you are playing bullishly

At 1:41 we were looking for a big move, one way or the other but we bullishly started with DIA $75 calls for .43 with a plan to buy puts if things turned but they never did and we ended up cashing out at $1.50 (up 249%).  My position statement ahead of the Fed was: "Fed in 10 mins – Don’t forget that any reaction you see in the first minute or so is pure BS as it’s not possible to read and digest the statement in that time.  Very likely the fix is in no matter what but I have no idea which way that fix will be as I am baffled that we are waffling into it without a big sell-off.." 

By 3:02 I had digested the Fed statement and decided everybody was nuts and I said in our alert: "Wow, this is nuts!   The Fed will buy Treasury paper – hooray!  Scary that they have to, indicates last, desperate move if you think about it. Very important note to all.  Last Fed day was Jan 28th, we gained 200 points on the day and it completely reversed the next day so cover, balance etc….  I personally am going 70/30 bearish here – let them keep going tomorrow and I’ll flip for the duration."  That was pretty much the exact top for the week.  DIA June $76 puts at $5.70 were the cover of choice at the time, now $7.47 (31%) and there was nothing else to do there

Thusday (post): I pointed out that the "rally" was mainly caused by the dollar dropping 5% and our S&P priced in Euros chart told the tale.  I talked about this above so no point in mentioning more…  I mentioned some DIA day trades we were looking at but the only play I picked in the post was the RUT June $310 puts at $7, now $10.70 (53%), which is exactly the kind of returns we look for in an index put when the index drops 5% on us as the Russell did.  This allows us to recoup losses to the broader virtual portfolio, even if we are only 20% bearish.  I also called a dead top on the RUT May $410s we picked up March 5th for $9.85 at $35 (255%) as well as the IWM Aug $38s we had picked up for $3 on March 9th at $6.75 (125%).

Thursday (members):  DIA June $76 puts were still the cover of choice in our 8:25 alert to members as we still got in for $5.70 and made the same 31% in 2 days as the previous day's close.  These are our standard index covers, meant to offset losses on our bullish plays and making 31% on your short side when the Dow drops 4% is why these hedges work!  VLO Jan $15s at $6.50 are off to a bad start, dropping to $5.45 (-16%) and the Apr $20s were only a half cover at $1.15, now .58 (49%) but this goes back to that whole scaling in thing where the move now would be to roll down AND BACK to the 2011 $12.50s for +$2.52, upping our total commitment to $9.02 in the $7.97 position and we would set a tight stop on the puts we've beat (.70) and stand ready to 1/2 sell the Apr $18s at $1.20 (now $1.36) if VLO breaks below $18.  See, it's already easier to understand the second time we run through it!

As I mentioned above, I went temporarily insane at 12:11 and went 60:40 bullish, thinking we were consolidating on our 10% lines for a move UP but I had not given enough thought into how silly traders are and how they only react to news AFTER the media explains it to them.  P T Barnum once said: "You'll Never Go Broke Underestimating the Intelligence of the American Public" and, sadly, it still seems to be true today as it actually shocks people that $12Tn of government bailouts may lead to inflation now that CNBC has decided to spin it that way…  

GOOG $330s at $3.75 blew 20% very quickly but I did say that scaling into the Apr $350s at $10.65, now $11.30 (6%) was the more sensible play in the same comment.  I also liked the Jan $460/$470 vertical spread for $1, now $1.35 (35%) as the VIX has picked up considerably even though GOOG actually fell.  We did a bearish hedge on FAS for $319,/4.10, now $5, which is up 56% if we can hold that goal through Apr 17th.   That was it though as we were just watching the flatline for the rest of the day with no breakout in either direction.  I did add two butterfly plays at 4:26 the next morning and members should be sure to check out the DNA play as it's an amazing risk/reward profile with a good strategy discussion on those types of plays.

Friday (post): I was introspective and wondering if I was too bullish at 60%.  GOOG $340s were a fun play at .30 but a loss is a loss (50%).  In the morning post I called for neutral into the weekend but I changed my mind during the day and we ended up 55% bearish. 

Friday (members):  GOOG $320 puts were another waste at .30 but these are great fun when they pay off.  BMY Sept $17.50 puts have not hit our target to sell naked at $2 yet.  Naked FAZ $35 puts sold at $2.30 were a 100% pay-off and FAS $5 puts at .15 gave us a nickel to go away (33%) but, of course, we were hoping to do better.   I mentioned above how we ended up flipping bearish just in time but really, at 11:33 we were ready for it if the QQQQs broke our final straw level of $29.50.  Despite the carnage, we still like FAS when it dips down to $5 but this time we just sold the Apr $5 puts naked for $1.20 to give us a $3.80 entry – just in case.  At 3:06 we tossed our final $50 into the GOOG craps pit – another loss, but something fun to do on a dull expiration day.  Our final play of the week was a 1/2 cover of the long DIA puts with 3/31 $73 puts at $2 and using .60 of that to roll the long DIA puts to higher strikes to give us better leverage, just in case! 

So here we are, at the edge of an abyss once again and flirting with disaster.  I'll be posting more economic comments in the Weekend Reading post but, all in all, it was a very interesting week to say the least

 

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Phil:
Thanks so much for explaining the GOOG play in so much detail. These plays are fascinating.

Phil,
I am very concerned that we are in the mother of all bubbles, what I call the "Dollar Bubble."  The world is awash in dollars, and now the Feds are printing money to loan to themselves.  Furthermore and frightingly, by their policies they have motivated scared investors (especially seniors) to park their savings "safely" in CD’s and money markets.  My fear is that we experience yet another "unforeseeable event" and we wake up one day and our dollars can only buy half of what they bought yesterday.  Have you thought this thru?  What would be the impact to the investing world?  Besides $2,000 gold, what is the end game here?  Your thoughts?
Thanks in advance,
Prof

 Phil,
3 or 4 days ago, I raised the question of selling callers on my UYG 2011 3 calls. I have 40 of these positions at 3.91, and as the price caved in, I bought another 140 at an average price of 1.26. The overall average is $1.86. I also have 5000 shares at 4.75. These were mainly shares assigned on sold puts, which didn’t look too awful at the time. My question is should I retain the lower priced calls while biting the bullet on the other 40.
 I bought FAS shares yesterday, and sold  April 5 puts

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