TGIF for sure, it seems like ending the week is the only way to stop the markets from dropping!
We failed to take back our weak bounce levels I laid out in yesterday's morning post as the Dow failed to hold 8,250 on a very brief spike past it, the S&P failed right at 888 in the morning and again in the afternoon (where we were able to use it as a "go short" indicator), the Nasdaq flirted with 1,750 all day and barely held it, the NYSE also failed 5,700 in the afternoon and gave us a good, bearish indicator while the Russell never came close to 488 and failed our critical 480 mark at the close. As I've been saying all week, we really don't have to watch anything but the NYSE, which will test the critical 5,600 mark this morning and failing that level would be, in technical terms: BAD!
Oil ($62) and gold ($920) also failed our levels so there was nothing to be bullish about in yesterday's action. We were in and out of DIA puts and calls, using S&P 880 as our inflection point and we took the money and ran on our AA calls (up $330, 78%) and DIA calls (up $45, 20%) as our first two completed plays in our $5,000 Virtual Portfolio, which will now be tracked under Seeking Alpha's "Stock Talk" feature as an experiment for non-members. We did a day-trade as well in the $5KP on MCD, picking up the $55 calls at $1.65 for a quick ride to $2, adding another $175 (21%) to the kitty for the week. Our only open trade in this hit and run virtual portfolio is SGR, where we are in the $22.50 calls for $3.30, selling the $25 calls for $1.45 for a net $1.85 entry on this bullish $2.50 vertical spread (4 contracts). Earnings were a slight miss but we're not worried as the order backlog is fantastic and we'll be buying more if the after-hours sell-off holds into the morning. If this play comes through for us we'll be up about $800 in our first week and well on-track of our goal to double up over earnings season.
It will be a shame to have to play the dark side but we're back to neutral now after covering our bullish plays with DIA puts as the upside just seemed way too risky heading into the weekend. It looks like the puts will be doing well this morning as the futures look dreadful (7am), pushed down by a 2% move up in the dollar that has oil back below $60 and gold under $910. CVX gave disappointing guidance last night and if XOM follows them down 2%, just those two will cost the Dow 25 points. We have trade data at 8:30 but I don't see that as a rally point and at 9:55 we get to see how confident (or not) our consumers are.
As you can see from David Fry's SPY charts, we have now clearly formed the dreaded "head and shoulders" pattern and only a very rapidly declining 200 dma stands between us and technical Hell. We are going to test that line today (87.69 on SPY) and possibly run into the 89 dma at 86.48, which is almost exactly a 10% drop off the June 11th top of $96.11 so we are loving that spot for a 20% (of the drop) bounce back to 88.40 so that will be our significant upside line today. Sadly, that is just 2 S&P points over yesterday's close and 888 resistance is above that so the chance of slogging through that mass of resistance to have a good day is not very high this morning.
Only the low volume caveat is giving us hope as perhaps Mr. Stick is saving up his firepower for a big finish on Friday. It will indeed take a Deus Ex Machina to save the markets this week as we're not expecting any data or announcements to move the markets this morning. Next week is a data fiesta with PPI, Retail Sales, CPI, Industrial Production, Fed Minutes, Housing Starts and the NY and Philly Fed Reports plus tons of earnings so it's good to be in cash or neutral into the weekend as we'll have plenty of fun things to play off next week, especially with options expiration day looming on Friday!
Asia closed out their week fairly flat and back around the May averages. The Nikkei finished at 9,287, 500 points off Friday's open and the Hang Seng gave up early gains to finish down 82 at 17,708, also down about 500 points for the week. Japanese shipping stocks fell after a report in the Nikkei that rates on container ships from Asia to North America had been dropped for the first time in three years, reaching six-year lows. The paper said in just-ended negotiations with businesses, shippers had agreed to reduce rates by 20% to 40% for the fiscal year ending May 2010. The dollar was propped up to 93 Yen in overnight trading but wasn't fooling anyone and is back to 92 Yen ahead of the US open yet the dollar remains strong against the Euro ($1.39) and Pound ($1.62), which means those currencies are exceptionally weak against the Yen which is, as we've been saying, TERRIBLE for Asian exporters.
Chinese exports did, in fact, fall 21.4% in June but that was a little better than May's 26.4% decline. Imports were down 13.2% in June, despite China's massive commodity stockpiling during that month and it was, of course, much better than May's 25.2% decline. You can see on the chart of the Baltic Dry Index how China's commodity binge pretty much commandeered the fleet for June, pumping up rates and then dropping them as the program wound down. That being the case, it's no surprise that the BDI chart looks very similar to the oil chart or the CRB chart for that matter. China's stimulus program is having some effect as June property prices rose 0.2%, the first increase in six months, fueled by low interest rates and government measures to support the sector including tax breaks on transactions and lower downpayment requirements – things our government needs to do if they want to get serious about building a recovery.
Europe is down about half a point (8 am) ahead of the US open with the FTSE testing the 4,100 line, the DAX bumping along 4,580 and the CAC barely holding 3,140, all right about the 10% lines off the June highs. Overall, the global markets have gone from being down about 20% for the year in March back to up about 5% at the end of May and are now (other than the Hang Seng, which is outperforming) down about 5% for 2009. Of course our starting point for the year already sucked and we're all (other than the mighty Hang Seng) still down around 40% off our highs. The question that will be answered next week is: "Do earnings justify that 40% drop in valuation?" Perhaps they do but I don't think they justify a 50% drop in valuation and the Nikkei is already there so we'll see if they can hold the 9,800 line.
If not, it's the Hang Seng that has the farthest to fall and FXP (ultra-short China) is a good way to cover the potential drop. July $12 calls are $1.07 while the July $13 calls are .57 with FXP at $12.83. Taking this $1 vertical spread for net .50 gives you a break-even at $12.50 and makes excellent weekend disaster protection as it won't take much of a dip in China to double you up by taking the FXP over $13. On a longer-term basis, the Jan $15 calls at $2.62 make excellent downside protection as naked longs (FXP was over $100 last Fall) or you can sell the Jan $20s for $1.62 against them and put yourself in a $5 spread for $1 net. These are nice protective plays as you can take $5,000 out of a $100,000 portflio and have $20,000 worth of downside protection against a collapse in Asia. 5% of your virtual portfolio giving you a 20% hedge is a good risk/reward strategy.
Another fun way to play FXP is a FREE play you can create by buying the ETF at $12.83, selling the 2011 $40 calls for $1.75 and buying the Jan $20 puts for $8.80. This puts you in for net $19.88 and you have the right to sell your stock for $20 through January 15th (by exercising your put) so you have no downside. Should the FXP fly up, you will, of course make all of the upside gains and you will be capped out at $40 by the calls you sold. Should FXP head down and force your exercise, the 2011 caller will retain some value and that would be your loss (risk) against the potential $20 upside. Those are a few of the creative ways you can hedge against disaster as the Hang Seng is outperforming other global indexes by 20% or more and if we go down, you can be pretty sure they will go down too!
We don't want to hedge the US markets lower, we think they are low enough and hopefully today we'll get the bottoming action this market needs to break higher but Mr. Stick has his work cut out for him this afternoon as we need a move up over 8,300 to avoid printing a very ugly weekly chart. As I said to members yesterday into the close:
I just don’t get this half-assed defense of MINIMAL support levels. Right at 480 on RUT and 880 on S&P and 1,750 on Nas. Arguable the Dow and NYSE have made progress but if this is all they can do then this is very scary. Maybe they are saving up for a ridiculous rally tomorrow or maybe they simply can’t do it, even on this pathetic low volume and that means we are one snippet of bad news away from a black Friday-type event.
My logic is that clearly the markets are being supported but then I have to say, to what end? Why support them at all if you can’t close the deal? I expect better out of my evil market manipulators, that’s all….
So it's all up to Mr. Stick to save the markets today but in cash we trust is our motto as we don't like to place our faith in the invisible man pulling the strings (but we sure have learned not to bet against him!). Our trade deficit numbers were actually great, the lowest number since 1999 in May, despite a 20% rise in oil prices that month. Import PRICES, on the other hand, were up 3.2%, the biggest monthly increase in 20 years thanks to Goldman's commodity manipulation (oops, allegedly!). Excluding petroleum, import prices were up just 0.2%.
Lines we don't want to fail today are: Dow 8,100, S&P 880, Nasdaq 1,750, NYSE 5,600, Russell 470. Most likely, we will open below all of those lines so the trick will be taking them back but even that is just going to be pathetic and will give us a bad pattern into the weekend. The only thing that is going to turn us bullish is a return to Wednesday's opens and that would be Dow 8,300, S&P 895, Nasdaq 1,775, NYSE 5,750 and Russell 495. Our shining ray of hope is the SOX, which close to recovering at 262 so we'll be watching them very closely but these are the slimmest of hopes and the dark side is still the quick and easy path for most of our trading.
On the whole, we should be thrilled though. We finally got the down week we expected (and held out for) all last month but, as the old saying goes: Be careful what you wish for because you might actually get it!
Have a good weekend,
Meanwhile, GS came down nicely…
DELL/Morx – Oh no, it’s a weekend hold.
STICK, STICK, STICK….
Weekend/Pstas – If we close red, then you want to be covered with the DIA Sept $82 puts at $4.15, selling 1/2 the Aug $80 puts at $2.30. If we head down, the Septs Roll to Dec $81 puts ($6) and you roll down the Aug puts to 2x whatever works, probably the $77 puts and that would be a $4 spread for net $5 with 4 months to go. It MAY be possible in a down move to roll the Aug puts to 2x July somethings too, that would be best.
In JAVA for 9.14…..unless the deal falls apart by DOJ, the 9.5 target is good…..
FWIW – I think the computers are trading with the technicals, I think there is a possibility of a big sell off into the close. Just my opinion.
Phil, I wrote you an email a couple days ago…. just wondering if you received it?
Except for the high TRIN (2.02) it almost seems like market wants to trade a bit higher.
C’mon stick man, give us a little juice into the close.
Someone’s computer wants to keep jamming every attempt to move higher.
Still going nowhere….
I’ll say 880 close.
Phil – Would you recommend I today roll my short DIA July81 puts to AUG77’s (and keep long DIA Sept puts as is). I give up a week of time value for more security of not being assigned Monday if negativity over weekend pushes DIA below 81. Or is my concern unwarranted since my put holders would most likely sell not assign? Your thoughts pls.
Still no volume but someone is dumping out financials and keeping things down.
Coming into 3:30 with 120M so a nothing half hour (10M).
Not looking too promising on the half hour mark, waiting until the last 15 mins to goose the markets has to look lame even if they do it so why bother? Although we have seen that BS trick work on Asia over and over again…
Email/Roamer – Not that I saw, resend it to Greg.
DIA/Concreata – I wouldn’t roll today. Why should you pay them a premium when it’s going to drop 20% a day next week? You can’t play being worried about assignments. It can happen but it just means you have to turn around and sell the stock (and your putter sacrifices all their premium so you have that cushion). Put holders don’t often do an assingnment with more than .25 premium.
Re: Dell $5KP play. I am interpreting as Buy 5 contracts of Dell July $13 Calls at $.36. Anyone care to confirm or correct? Is this a quick day trade or hold over to Monday? Now at $.42; is it still good at this price or hold until it returns to $.36?
Ha ! Thank you Mr. Stick ….
DELL/Sunco – That’s right 5 $13 calls at .36 for a weekend hold. I wouldn’t chase it as this rally is obviously BS so who knows how quickly it can be reversed?
MMMM.. lets see if is a real run or a false spike
Oh well, got ..85 on the DIA $82s so that’s a win but another disappointing move into the close on the whole.
Looks like I was wrong about the selloff. Dont know why you all listen to me 🙂 Usual BS. Just adding to my shorts. Nothing underpinning this crap.
Peter D, I am just courious what is RUT? I know it is the echange sybol but I don’t find a tradable sybol on an american exchange? I know the info maybe somewhere in the last 30 days of Blogs (90,000 words) but I think I would get blurry eyed looking for it.
Still think Citi is an opportunity?
sunco – if you have e trade, as i do, you have to call to trade indexes.
878.90; pretty close !
878.92; pretty close !
Sunco, RUT is Russel 2000 Index. However, different brokerages use different symbols. TDAmeritrade uses $RUT.X, Yahoo uses "^rut", and ThinkorSwim uses RUT.
879.08 … pretty close !
sorry …. 😀
enjoy the weekend
Alright folks, that’s a 5% profit week for my entire portfolio as I got lucky and sold into the VIX surge a couple of days ago. Have a good weekend!
Well that was a sad little closing rally…
Still we held out bottom and now we get real data next week and tons of earnings so no more manipulated markets hopefully (or at least a break from them).
RUT/Sunco – Try putting in $RUT in your trade system. Otherwise ask your broker how to trade Russell index options.
C/Morx – I like the leap gamble but that’s only because it’s a 5:1 payoff.
174M is final volume but very distrurbing that 55M shares in last half hour do nothing. Funds must be dumping like mad.
Have a great weekend everyone! I’ll be around catching up on some work.
Have a great weekend
Sunco – Etrade uses RUT or $RUT. It is not tradeable, but it’s options are tradeable.
Nice weekend all.
Looking for next week action!
Cya – Spider
Very useful list of stocks with biggest short interest, great for earnings:
um, anyone knw when the Citi "leap gamble" was posted. I must of missed it.
C/Morx – It was the 2011 $2.50 calls, now for .83, selling the 2011 $5 calls for .40 so net .43 on the $2.50 spread with break even at $2.93.
thank you very much
Phil. gentle reminder if you have time this weekend to expand a little on the logic of your comments last Tues/Wed. Thanks.
RRSP/Jofori – Well you can sell covered calls right? So that means if you get a dip in GE like from $11.90 to $11.30, you can sell 1x Aug $11s for .99, which lowers your basis to $10.90 and then buy more (say 1/2 x) if you cross $11.50 and another 1/2x at $11.90 for 2x at avg $11.30 with the 1/2 cover of the Aug $11s and the stock at $11.90 so you can set a stop on 1/2 at $11.60 at which point you’d be full covered at net $11. Happy to go into details after hours, it’s a good thing to get the hang of!
Phil – RE FXP buy/write: I held off doing this bec didn’t understand how I break-even below $20, for example – if FXP flatlines and stays at 13.15 – how do the options behave between now and Jan to cover the additional net 6.90 cost of placing the long put? Secondly, to prevent the EFT position to go down to 9, would I need to place a 3%-5% stop when I buy the ETF? Your comment and my question are pasted below. Thx and very appreciative of your guidance.
FXP/Concreta – it still works. Stock at $13.15, Jan $20 puts at $8.70 selling 2011 $40 calls at $1.80 nets $20.05 so not too much risk. Of course you really don’t make money until it’s over $20 (because your put loses money while the caller makes it) but the nickel won’t be your biggest worry.
Phil – I like your premarket comment RE: long term protection idea – FXP buy/write Free play – Buying ETF, Buy Jan 10 $20Puts, Sell Jan 11 $40Calls – But FXP has rallied and is now drifted lower tot 13.14.. I figure it needs to drop to 12.90 for trade to work (to keep my basis under the 20 put price). So I am hopeful you are correct for a market rally – I may need to sell the Jan 11 $35 Call however to make this work. Comments/Suggestions? Thx.
PHIL, what do you think of the following play. Assuming the us fininacial system doesnt go bankrupt FAZ should start to decay. The 2011 $60 calls are selling for $27. I think that is far enough out that is basically a zero percent chance that FAZ is trading that high in 2011. So the trade I propose is selling the 2011 $60 calls for $27 naked.
Covered calls/Jofori – I just put a covered call example up on SGR in a comment under the $5KP post but here I was talking about managing your position and scaling in. I did write a whole article on scaling in HERE (by the way, the rolling strategy outlined there for USO returned a triple) but let’s look at another example:
First of all, lets’s be clear that scaling into a position means, AT MINIMUM, that you are looking at 3 rounds of buys. In round one, you buy 1x and in round 2 another 1x and round 3, WHICH YOU HOPE NEVER TO GET TO, you buy 2x more. Allocation-wise, let’s say you are willing to commit 10% of your porfolio to a position, then you start with 2.5%, move up to 5% and, HOPEFULLY, that’s all you ever need. The times you do commit 10% are saved for big positions where you got a REALLY cheap price that you want to hold for a REALLY long time.
So, if I buy AAPL at $135 and another round at 20% lower around $110, then my basis is $122.50, That’s nice but not an amazing price. If AAPL falls another 20% below $110 to $88, THEN I think (assuming nothing fundamental has changed), I have an amazing price and I am happy to buy 2x more at $88 for a $105.25 average entry (ignoring any calls I hopefully sold).
Using this entry system properly you are automatically buying more of things that are cheap and less of things that are expensive.
So 20% is generally our action point. If a stock or option contract loses 20% we need to decide whether to cut our losses or add to the position. Again, there is a certain automation to the process that promotes good decision-making as your first 20% loss, if you start with 2.5% of your portfolio, would only be 0.5% of your portfolio. That should be easy to walk away from right. If you double down there to 5% (although it’s less because the 2nd 1x is 20% cheaper) and the position drops another 20%, you have lost 20% of 5% (1%) plus the original 0.5% for a 1.5% portfolio loss AFTER taking a 40% hit on your posiiton. Again, this should be managable and something you can walk away from. If you add another 2x at that point, ignoring the fact that it got cheaper, you are in for 10% of your portfolio and another 20% drop will cost you 2% plus the 1.5% you already lost is 3.5% lost on the position after it went 60% the wrong way on you. That is bad but not devastatiing and don’t forget you have to be totally wrong 3 times in a row with no covers for that to happen.
By comparison, what is the upside. We don’t cap gains so there’s not limit but we do take 20% profits off the table. If you are in for 1x and it goes straight up 20% so fast that’s all you get, it’s a 0.5% gain in your portfolio. You need 7 wins like that to cancel out one 4x wipeout, which is why you need to think VERY hard before you ever double down on something. If you take a 20% hit and get out in step one, it only takes one win to get it back. The deeper you chase a bad position, the more right you need to be on your winners just to get even.
Let’s look at GE this month. Say we entered on June 12th at $13.50 and sold the July $14 calls for .60 and the July $13 puts for .60 too. That would be a net entry of $12.30/12.65, not very good but that’s why we weren’t buying then!
Anyway, so by June 19th expirations, GE has fallen all the way to $12.10, below our net entry. This is no reason to do anything! It’s not 20% off, which would be $10.80 and you need to go into the position with that target and plan. IE: I am in for net $12.65, if GE drops 20% to $10.80 I will be assigned so I will have X at $12.65 and I will buy 1x more at $10.80 for an average entry of $11.73. My expectations are that I can sell another $1 of $11 puts and calls to lower my net to below $11, where I will own 4x at $11 if assigned or 2x at $11 if not assigned. By the way, with an entry on a buy/write you can start with X (2.5%) or 1/2 X (1.25%) but I find it’s better to run more than less positions and put your money into the losers, which are offset by the profits from the winners. Keep in mind though that EVERY SINGLE time you sell a naked put – you’d better be damn well committed to long-term ownership!
So good discipline should have stopped you from doing anything with GE at $12.10. If you remember our original buy list, we rode out the entire March market collapse without doing much of anything and came out just fine. You have to think in terms of years of ownership, not days and you only take action when events strongly dictate it.
That’s why we have guidelines for taking out calls and puts we sold when they are ahead by 50% with more than 2 weeks to expiration and 75% with one week to expiration and 85% during expiration week. We also have a guideline to take out off 1/4 of our callers or putters when they gain 25%, not just from where you sold them but from whatever low they hit. So, in other words, if a caller drops from $1 to .60 with more than 2 weeks left, you don’t wait for it to go to $1.25 before buying back 1/4 of them, you buy 1/4 back if they bounce to .75! When you are 3/4 covered, you set another 25% stop on 1/3 of the remainder (the 2nd quarter) and, should you trigger and find yourself 1/2 covered, you have once again reaced a decision point.
So on June 19th, the GE $13 puts had hit $1.25 but had spiked to $1.75 earlier in the week. Had you followed guidelines for stopping out the putters, you would have taken 1/4 off at .75 and 1/4 off at .90 so you would be 1/2 covered at $1.25 or you would have possibly already rolled them down to a full cover at Aug $12 puts. Today, the $13 puts are $2.25, a great example of how using stops can greatly improve your returns and limit your losses. Of course, you have to have at least 2 contracts to work with, preferably 4 (if you have 2 you can stop 1/2 out at 33% but you have to be quick to re-cover if it turns).
The $13 calls, on the other hand, fell to .10, so were up more than 50% with more than 2 weeks left. You don’t stop them out for no reason, you stop them out because you have a plan of what you are going to do next. With the gain of .50 on the calls and the loss of .65 on the puts, perhaps the plan would have been to reposition the puts and calls at the July $12s or Aug $12s – somthing where you adjust your target… The key to that decision would be redoing your cover math and trying to stay even at least. Obviously (I hope) dropping the put strike from $13 to $12 would knock .50 off the high end of your basis (the strike if put to you) so it would drop from $12.30/12.65 to $12.30/12.15 – assuming it was an even roll.
Don’t forget we enter these positions because we WANT to own GE at around $12 so this is just fine! We haven’t had to make a bigger commitment and we knocked .50 off the assignment price and, as of June 19th, the stock was at $12.10 and our assignments were right about there – not a win but not a loss at all.
Anyway, NOW we are at $10.80 (20% off) and regardless of what puts and calls we sold it’s decision time so do we still like GE and do we want to buy another round or do we want to cut our losses at about 10% or do we want to try to roll our $12 puts and calls, now $1.37 to something more forgiving like the Aug $11 puts and calls at $1.55? Our original buy-in was way up at $13.50 so less $1.55 is net $11.95/11.48 at August expiration, not a bad entry but depressing with GE at $10.80. GE was $7 in March though so, just in case, we may want to save our DD firepower for a real bargain. The premiums on the puts aren’t all that thrilling to sell (.69 for the Sept $10 puts) so, at this point, just 10% down overall, we’re probably best off riding it out.
If GE heads up we may want to have a buy point since we don’t want to get called away at $11 with our entry point at $11.95 (it only gets cheaper if we are assigned more at $11) but that brings us back to why we should be stopping out 1/4 of our $11 callers, now .66 at .75 and again at .90. Then we would be 1/2 covered at $11 with putters expiring worthless and we can easilly roll to the Sept $12 or $13 puts and calls and be right back on track.
As you can see, there are always many options at each decision point (illustrations are in the article) but, over the long-term, it’s a very powerful and flexible way to manage your portfolio.
craigzooka, you should also sell $40 2011 calls at the same time. This way FAS/FAZ calls act as hedges against each other.
oops. "sell $40 2011" should be "sell FAS $40 2011"
FXP/Concreata – The break-even below $20 is simple. You are BUYING the puts. That gives you the right to put the stock to someone at $20. So, between now and Jan 17th, the LEAST you can get back for your stock is $20, no matter what the current price is. Of course, the caller will still be out there and you won’t want to leave a 2011 naked caller so whatever you have to buy him back for would be your loss. That is the risk on the play. Ideally, you will either be up above $20 by then or possibly will want to spend another $1.50 or so to roll your put to 2011, where you can ride out the expiration of the caller so your 18-month cost of having this protection would be about .10 per month. As I said, you have to keep in mind that these are insurance plays, they are not supposed to make you money UNLESS the rest of your portfolio is getting hammered, then they are a nice check to mitigate the damages.
So you don’t need a stop at all on the ETF, if it goes to zero you can still exercise your put option and force someone to buy it for $20, that’s what you paid $6.90 for! There are, of course, many in-between cases, like FXP could go to $17 but the Jan puts may still be worth $4.50 so net $21.50 there and if you can buy back the caller for less than $2, you have a small win…
I don’t think you want to sell the 2011 $35s, it’s not so much about being called away at $35 as it is selling a higher delta play that will gain value faster, meaning if FXP goes to $17, as the above example, you would be more likely to owe that caller the $1 you made.
FAZ/Craig – I do agree with that logic as long as you set realistic stops or have a cover strategy (like buying calls if they break over $60 as mo plays because your front-months will have higher deltas than the longs). Also, why sell the $60s for $27 when the $65s are $26? Almost 10% safer…. That’s another aspect, if you have the margin (and stomach) to roll those up to 2x the whatevers if we do head down, then you are probably looking at almost $90 before you run into trouble which is 50% up from here (15% down for the financials, it could happen but hopefully not).
Another way to play that FAZ logic with more limited risk is to buy the $65 puts for $36.35 and sell the $35 puts for $29.80. That’s in for about $6.50 on a $30 spread and your total risk is $6.50 so much more margin-friendly. Obviously, you need a lower price to get a good payoff but if you take the margin into account, you can have 2 or 3 of these for far less than one of the naked call sales. If you do the same with FAS, you just need either one to fall to be in pretty good shape and there’s a good chance they both end up in the $20s by then!
What do you think of shorting FAZ long term? I have no interest in buying it and I am not allowed to do naked option trading. But the way it gets eaten up is certainly tempting.
FAZ/Celeste – Just realize that you are shorting a 3x ETF and a 10% drop in XLF (could happen any morning a big bank fails or a rumor starts) will jump FAZ 30% in price (certainly not in value!). If you are comfortable doubling down into a panic, say at $76 for net $66 and again at $96 for net avg $76 (and you would be over 20% down) and then you were willing to ride it out from there until, hopefully, sanity was restored to the financial markets then, yes, I think it’s a good short. Meanwhile, you can cover your short play by selling puts right? I would find a short at $56 a lot more palatable if I sodl the Aug $50 puts for $6.15, at least that way you have a 10% cushion this month. It’s not much but if you collect 10% every month, it does start to add up!
Phil – I really appreciate your explanation, much thanks,