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Long Shots Part Deux

Our last Long Shot list was a huge success.

As we are in a similar situation this weekend, when stocks may have run up a bit too far to buy – it's a good time to look at other long plays we can make "just in case" the rally continues.  Our Long Shots are meant to pay off big when the market rises big while not risking too much capital but they are RISKY plays as they are not very adjustable if there is a pullback.  Nonetheless, our last group has performed spectacularly so let's review those and then make some new plays as the market swings for the fences.

C – Buying 2011 $2.50 calls for $1.14 (now $1.98) and selling the 2011 $5 calls for .56 (now $1.03).  That's a net gain of .37 on the .58 spread or 63%, which is pretty darned good for 6 weeks but our goal on this trade is a 346% profit and we're not going to get there without some very greedy holding through some very big returns.  One trick with these sort of plays is to buy a bit more than you plan to hold long-term, like 20 @ .58 ($1,160) rather than 10 ($580) since the downside curve is not very steep (unless C suddenly went BK, which was doubtful).  Then you could snatch 10 off the table at .95 ($950) and you could let the remaining $210 ride and it would still pay your target $2,500 if it hits goal at expiration. 

Always remember with these plays they are like betting on long shots at horse races EXCEPT, you get to change your mind and withdraw most of your bet after the race starts and you get a look at your horse's performance.  That's a very good deal but you MUST use that power and take the bad bets off the table otherwise you blow your entire advantage! 

UYG was another one that just seemed too darned cheap at $3.87 (now $5.55) and we went for the 2011 $4s at $1.38 (now 2.30), selling the $5s for $1.12 (now $1.90) so we've gone from net .24 to net .40, up 66% but, like C, we're not going to get to our 300% goal without holding on through some ridiculous profits are we?  Of course with this play, as well as C and others like them – just because we hold on at 66% doesn't mean we don't stop out with a 40% profit (25% trailing stop) if things turn sour.  There's no sense in letting profits slip away as these are very liquid positions and we can always re-enter once things stabilize.   This is especially true for an ETF like UYG, which has strikes to buy and sell at each $1 increment. 

We also made a complex paired spread of FAZ and UYG and you can go back to the original post for a full explanation of the logic but let's let the performance speak for itself:

  • Buy 100 FAZ for $494, now $252  

    • Sell 2011 $3 puts and calls for $435 (net $59), now $230 (net $22, loss of $37)
  • Buy 6 UYG 2011 $4 calls for $828, now $1,380 

    • Sell 6 UYG 2011 $5 calls for $672 (net $156), now $1,140 (net gain $240)

So that's a net gain of $203 (94%) on just $215 at risk in just 6 weeks in a very well-hedged, self-contained play.  These are the kind of things we like to construct in uncertain markets and can be done with fairly small amounts of capital.  If you want to take risks – take risks like this, not paying huge premiums on front-month calls that can turn on you in a matter of days!

As I said in the the June post – it's not foolproof but it would take a lot of bad luck to lose on a play like this and the idea is to strictly limit your risk while maintaining a nice upside.  That makes this a nice addition for a small, speculative portion of a virtual portfolio.  If you have 5% of your virtual portfolio on 5 speculative plays like this and  just 2 of them pan out, that would be +7% on 2 plays and -3% (assuming a wipeout) on the other 3 for net +4%, an 80% gain in 18 months on 5% of your virtual portfolio.  If you keep an eye on these trades, you can often pull the plug well before they lose half their value – another plus.

YRCW – Selling 2011 $2.50 puts for $1.75 (now $1.70) and 2011 $5 calls for .75 (now .90),  a net loss of .10 on the spread so far.  We need to keep track of this one because our plan was to buy into YRCW if they cross $2.50, which puts us in the spread at $0/$1.25 with a call away at $5 so we are in now means worried by YRCW's rise.  Of course if they go back under $2.50, we simply get out of the stock and go back to the naked short straddle. 

Our father's day trade of June 20th was on ELY (Callaway Golf) with a buy/write at $5.36 (now $6.95), selling Nov $5 puts and calls for $1.85, now $2.20.  That's a VERY nice 35% gain already and our max gain was 42% so you can be done with this trade in 40% of our projected time-frame with 83% of our projected profits! 

Now there are two lessons I want to teach here in-line with our recent chat discussions on strategy

One – PATIENCE!!!  We did not touch these trades at all since June 20th.  They are very long-term trades and, like our Buy List, they are meant to RELIEVE stress from your virtual portfolio (and your life), not add to it.  We make a play we expect to come to fruition by 2011 – staring at it all day long in July of 2009 is just silly…  If you keep most of your virtual portfolio invested in a balanced set of longs like this, THEN you can afford to day-trade some of your profits while you wait and it can then be fun, not life and death stressful… 

Two – FUNDAMENTALS!!!  You can construct plays like these on about 1,000 different stocks and ETFs, but that does NOT mean you should.  These are carefully selected plays on stocks we felt were way undervalued, do not mistake this for some magic money-making formula you can apply to any crap stock you hear about on Mad Money.    I looked at about 100 stocks I considered undervalued and found 5 (FIVE) plays that I liked for the article.  ELY is a great example as I said at the time: "Remember in March I liked HOG because it was stupid low at $7.95 for one of the greatest brand names in America?  Well, Callaway is to cart-riders what Harley-Davidson is to bike riders and it’s trading at the low, low price of $5.36 after being savaged in Barron’s at $6.25 on June 9th, after cutting dividends.  While not expecting them to make a lot of money, we have no reason to think they are going to lose any and they just raised $140M, which should see them through a rough patch." 

That's an investing premise – ELY dropped for reasons that could be clearly identified and our valuation of the company's prospects led us to conclude that we felt safe with a $3.51/4.26 hedged entry and we were WILLING, if push came to shove, to own the stock long-term if it did continue to sell off.  Good investing is about identifying good companies first, THEN coming up with an investing strategy that fits your projected LONG-TERM outcome.  The problem with short-term investing is simply that the short-term outcome is MUCH more randomized AND you are subject to overall market moves AND you face rapid premium deterioration AND you have very time to adjust your positions AND you have very little room to manoeuver and make adjustments to positions that aren't working.  See the difference?

So, with that little lecture in mind, let's take a look at a few new prospects for our fabulous economic recovery:

Today I want to bottom fish and focus on sector laggards, stocks that are way behind the indexes for no particular reason.  This gives us (hopefully) a little bit of a cushion in a fall and, of course, we're trying to pick stocks that we don't mind terribly getting stuck with in a crash.  I'm also going to bottom fish a couple of bearish indicators so we have a little balance.  If we pick 2 plays that pay 300% in an up market and 2 that pay 300% in a down market then we're going to make 100% one way or the other – as long as we don't flatline for 2 years! 

BHI is interesting to me as people could not be more down on rigs at the moment.  They are very heavy into land-based drilling and still carry an $11Bn market cap but it's not like they've lost money this decade, nor is anyone not expecting them to earn well over $1Bn this year, probably $1.5Bn.  Steel costs are down, labor costs are down and demand may be down but it's not out and we can expect the very good management to shift their focus to where the business is over the next year.  July rig counts are already up 5% over June but still down 40% from last year so a lot of room for improvement if the economy picks up.  We don't need to be greedy here, the Jan $32s are $7.40 and the Jan $37s can be sold for $4.40 so that's net $3 on a $5 spread, a 66% upside in 5 months that is already in the money.  This spread is a nice way to hedge oil shorts. 

Your downside on this trade is you lose $3 or you own BHI for $35 and then we buy/write it down to $30 (crash lows were around $25).  This trade can be actively managed in a downturn and you can buy back the caller if they drop 50% and use that $2.20 to roll the calls either down $3 or $4 or to roll out to 2011 (the 2011 $35 calls are $8.20, just .80 more than the Jan $32s) so lots of good escapes on the downside. 

We still like the financials and a nice spread on the continuing success of UYG is a 2011 butterfly with a break-even at $4.11, which is 25% below the current price but we do need to keep in mind that ultra ETFs do tend to perform poorly over time so there is risk in the trade for sure although less so than trying to pick individual performers.  The spread would be buying 6 2011 $3 calls at $3 ($1,800) and 3 2011 $7 calls for $1.15 ($345) and selling 8 2011 $5 calls for $1.85 ($1,480).  That is in the trade for net $665 and there is no option requirement as the covers work out and the 1 extra calls means you can make quite a lot if UYG heads back near the $40 level it was trading at back in early 2008. 

On the upside, this trade returns $300 or better (50%) above $8.75 or between $4.50 and $6.15 and I love plays that work in a flat-line as well as to the upside.  Between $6.15 and $8.75, you can make as little as $135 but that's still 20% and, of course, adjustments can be made along the way to improve the returns.  Another way to play UYG is to replicate the original UYG $4/5 spread by buying the 2011 $7 calls for $1.18 and selling the Jan $8s for .95, which is a .23 net on the $1 spread and a nice 300% profit if called away.  The difference between the two UYG trades here is that you can commit $665 to make about $300 as long as UYG stays over $4.50 or you can gamble a bit more and commit just $100 to make the same $300 if UYG hits $8 (up 45%).

C has still not risen so far as to be unattractive with the 2011 $5 calls at $1.04 and the 2011 $7.50 calls can be sold for .61.  That's net .43 on the $2.50 spread, a nice 480% return if C doubles in 16 months. 

We'll be adding the rest of our Long Shots as well as some other spreads in some Members Only posts over the next few weeks as we take a look at the market movement into expiration week.  Our brand new $100,000 Virtual Portfolio starts right after expiration week as well and we'll be focusing on fairly conservative, income-producing stocks in that one.  


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  1. Are the $4s and and $5s in the following statement both puts and calls?
    Buy 6 UYG 2011 $4s for $828, now $1,380 

    Sell 6 UYG 2011 $5s for $672 (net $156), now $1,140 (net gain $240)

  2. They are calls, I edited it now for clarity. There is a detailed explanation of the trade if you follow back to the June 20th post.

  3. Phil, what is the process for closing out these positions? Wait until expiration and execute the options or close them out before that?

  4. Urgent SRS-related potentially compelling news.
    This is going to sound unbelievable but if the attached PDF is indeed a GS memo, they’re ACKNOWLEDGING that REIT’s are overvalued and could fall by 40%.  GS being who they are, I’m sure they’d like to profit from that fall.  Would love to get your thoughts on this Phil.

  5. I read that PDF yesterday and was going to post it here. It is put together very well and sure looks like something GS would put out.

  6. Closing/Blair – You close out when you are either way ahead in profit expectaitions/time or there is some fundamental change in your outlook on the stock or the overall market.  Of course, once you are up 50% on anything, not getting out with a 20% trailing stop is criminal…

    GS PDF doesn’t download for me, gets stuck halfway.  Of coures, GS said to underwieght REITS back in early june and warned the fundamentals would deteriorate in the second half and that spiked the SRS up to 23 – I guess they were wrong then or just had bad timing…

  7. Good Morning Phil & all

  8. Asia/Pacific Markets    Monday, August 10, 2009
    (The following is from Yahoo, please confirm with other sources)   
    (Singapore markets are closed for a national holiday)

    Australia All Ordinaries*             4,309.20       6.10     0.14%
    Nikkei Average*                       10,524.26    112.17    1.08%
    Shanghai Composite*                3,249.76     -10.93    -0.34%
    Hang Seng*                            20,929.52     554.15    2.72%
    Seoul Composite*                     1,576.11         0.11    0.01%
    Singapore Straits Times*           2,549.35         0.00    0.00%
    Bombay Sensex                     14,963.05     -258.22   -1.70%
    Baltic Dry Index                        2,772.00    – 135.00    -4.64%

    * at Close

  9. Oil Dips Below $71; Inventories, Dollar in Focus

    Oil prices dipped below $71 a barrel on Monday, losing momentum after last week’s rally as traders focused on swollen inventories and prospects for a stronger dollar.

    U.S. crude [ 70.44    -0.49  (-0.69%)] fell. London Brent [ 73.33    -0.26  (-0.35%)] fell.

    Although last week was overall positive for the oil price, the more striking movement was the rise in long positions, regarded as a bet on future price strength, reported by the U.S. regulator the Commodity Futures Trading Commission.

    In a report released on Friday, the CFTC said crude oil speculators on the New York Mercantile Exchange had increased their net long positions sharply in the week to Aug. 4.

    Oil at above $70 is "not bad" from the standpoint of the OPEC, the group’s president said over the weekend. Leading exporter Saudi Arabia was expected to provide steady supplies in September compared with August to European refiners, industry sources said on Monday.

    Dollar Lower After Payrolls Gain; Fed Awaited

    The dollar was slightly lower against the euro and a currency basket on Monday following a broad rally late last week on surprisingly strong U.S. jobs figures.

    The euro [1.4205    0.0024  (+0.17%)    ] was slightly higher versus the dollar, hovering near a one-week low around $1.4154 hit on electronic trading platform EBS in the aftermath Friday’s data.

    Against a currency basket, the dollar was little changed at 78.869, while the U.S. currency [ 97.2    -0.34  (-0.35%)    ] inched down against the yen, after rallying as high as 97.79 yen, its strongest in nearly eight weeks, on Friday.

    Dollar selling by Japanese exporters in the Tokyo session weighed on early dollar/yen trade, but the dollar pulled away from the day’s low around 97.10 yen in Europe.

    The Bank of Japan will announce its rate decision on Tuesday, while Norway’s central bank will end a policy meeting on Wednesday.

    Gold steadies above $955/oz, ETF dips 0.4 pctGold steadies above $955/oz, ETF dips 0.4 pct

    Gold was at $956.45 per ounce at 0559 GMT, up 0.3 percent from the notional close in New York of $953.80.

    The world’s largest gold-backed exchange-traded fund, the SPDR Gold Trust GLD, said its holdings stood at 1,068.90 tonnes
    as of Aug 7, down 3.97 tonnes or 0.4 percent from the previous business day.

    Platinum  fell to $1,251.50 per ounce, down 0.8 percent from the notional close in New York of $1,261.50.

  10. Good morning from Scotland!
    Interesting 30,000 ft. view of the economy here: