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Two Week Wrap-Up – Trading Our Range

Your "crystal ball" was dead-on with the insights into the report on jobs as well as the initial rise and then correction. Truly impressive.  – Champstar2

We didn't have a weekly wrap-up last week because of the holiday.

In our Nov 21st Wrap-Up, I had said next week we’ll be watching to see if we can get more bullish above our 25% lines at: Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,000 and Russell 600 and that became the bottom of our new range while I sent out a 9:41 Alert to our Members on Nov 23rd sticking with our upside targets of Dow 10,471, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605.  That has been a very reliable range to play for the past two weeks and we've been having a good time playing both ends of it.

Rather than just wrapping up this week's moves, I thought we'd add the prior week as the pattern is very much the same (and it was the same the week before) so it certainly bears (oops, don't say bears!) studying.  Of course, when I talk about patterns, I don't just mean the chart pattern where we have all of our gains for the week on Monday and Tuesday on low volume and then larger volume selling for the rest of the week as the funds who pump the futures up dump their ill-gotten gains on retail investors.  I'm talking about the global new patterns, as reported by the MSM, that make this sort of manipulation so effective.  It's not that I'm so good at predicting things – it's really just that I'm good at spotting the BS…

Monday - Stuffing the Futures for Thanksgiving

I was pointing out that morning that 90% of the market gains since October had been coming on a single day each week and how a lot of that was happening in the very thinly-traded Futures market, where a few thousand shares traded overnight are able to lever the entire US market up by Trillions of Dollars.  It's a very sick and broken system that has been seized by manipulators to yank investors around, making sure retail investors have little ability to participate in these wild market moves as the game is already over by the time trading starts the next day

This week, we had 2 days like that with both Tuesday and Friday gapping up over 100 points at the open, accounting for 250% of the week's gains.  So a few thousand futures contracts added 250 points to the Dow this week while most traders slept and then 150 points were sold off in active trading as retail investors tried to play catch up (spurred on by hedge-fund lackeys like Mr. BUYBUYBUY) and end up being the ultimate bag-holders.  That's what I see going on for the past few weeks, the funds are exiting the game while herding in as many retail investors as they can get their hooks into before they pull out the rug (after they cash out and flip short) so they can force another bottom where they'll buy again while telling the retail investors to get out and save themselves

The Dow futures were up 100 points that Monday (and Monday is the cheapest day to manipulate the US futures since they close by 6pm Friday and don't open until Monday morning so there is much less chance for Europe and Asia to participate than in the 24-hour market the rest of the week) on a rumor that China was upgrading their GDP forecast.  The rumor wasn't true but who cares since it did it's job and took the Dow to 10,524 that morning but, by Thursday we had touched 10,179.  My very cynical take on the action that morning let to a very excellent week of trading for us as we were able to sell high and buy low for the week.  Trade notes are a bit different this week as we took the money and ran on our bear plays on 11/27 and took the money and ran on our bull plays on 12/1 as we moved mainly to cash and more bearish over 2 weeks:

  • DXD $28 calls at $1.85, $2.80 on Thurs – up 51%
  • DIA $104 puts at $1.45, $2.70 on Thurs – up 85%
  • TZA Jan $12.50 calls at $1.15, $2 on Thurs – up 73%
  • SRS Dec $9 puts sold for .75, .36 on Thurs – up 52%
  • EDZ Jan $5 puts sold for .60. .55 on Thurs – up 8%
  • DIA March $106 puts at $5.70, $6.95 on Thurs – up 22%
  • FAZ July $15 puts sold for $3, now $2.70 – up 10%
  • FAZ July $15/25 bull call spread at $3, now $2.70 – down 10% (pair trade)
  • EDZ Jan buy/write at $3.78/$4.39, now $5.08 – on target
  • VIX Feb $22.50/Jan $22.50 calendar spread at .40 credit, now .20 – up 50%
  • RTH Jan $90 puts at $1.25 (avg), now $1.15 – down 8%
  • SPWRA Dec $21 puts sold for $1.25, now .50 – up 60%

We didn't expect a big reverse and went 1/2 covered into the close.  Notice this was a super-bearish day for us with 10 bearish plays out of 12 and it was actually 13 because we had a very complicated play on RMBS but it's worth noting here as it's a very good way to hedge an entry in an uncertain market: "RMBS – There is also an interesting play if you REALLY want to own them at $12.50.  Buying the 2012 $10 calls for $10.50 and selling the 2011 $17.50s for $6.20 and the 2011 $12.50 puts for $3.70 is net .60 on the $7.50 spread.  If RMBS falls 25% to below $12.50, you are in for net $13.10."  RMBS did go up and the $10 calls are now $14 and the 2011 combo is $11.90 for net $2.10, up 250% so far with no reason to suspect we won't get the full $6.90 gain if we want to wait.  Even if you have to commit $6.25 in margin to the play, this is a very nice way to ride out a choppy market long-term

Testy Tuesday Morning – Big Data Day

I began the morning by putting up a new Watch List for Members with 20 stocks we like as upside plays as we PATIENTLY wait for good entry points.  We had also initiated our new $100K Virtual Portfolio on Monday (now $102,264 after the first 2 weeks)  and 4 of Monday's bearish picks went right into the list.  Even this early in the week, I laid out our exit plan as I pointed out that the Thankgiving before we had bottomed on Friday and then shot up the next week.  I also noted that the upcoming data was likely to look good but that we shouldn't be fooled because we were running up against very easy comps from the prior year. 

I was in a bad mood that morning watching yet another pointless pump into the futures and said in that post: "It’s a very brave bunch of bulls who have run the futures up half a point off their lows this morning with all that data coming up.  When I say brave of course, I mean the disgustingly manipulative and should be thrown in jail kind of brave but, since none of our regulators seem to care about the nonsense that goes on every day at the commodity and futures exchanges – I guess they are not so brave after all as there is no downside to their actions."

The Shanghai had sold off sharply in the morning and the S&P had published a report that showed 45 Global lenders falling below the 8% line on risk-adjusted capital ratios yet none of this was being reported by the MSM so we stuck to our upside watch levels taking quick advantage to buy out the Dec DIA puts we sold as covers the day before (dropping us down to 55% bearish into the close as is more or less usual for us after a down day) and flip back to 60% bearish first thing in the morning.  In my 10:10 Alert to members, I targeted 10,320 as our bottom test for the Dow and we bounced right off it.

  • SIRI June $1 calls for .10, still .10 – even
  • VLO Jan buy/write at $13.95/14.48, now $16.47 – on target
  • RMBS – restated plays from day before
  • WFR Apr buy/write at $9.15/10.58, now 12.78 – on target
  • WFR selling Jan $12.50 puts for $1.15, now .75 – up 35%
  • GE artificial buy/write (too complicated to summarize) – on track
  • GLL Apr $11/12 bull call spread at .20, still .20 – even
  • URE at $5.90, now $6.60 – up 12% (hedge to SRS plays)
  • PARD March $2.50 puts sold for $1.05, now $1 – up 5%

We had a real nonsense move into the close and I said to our Members at 3:38: "DIA – Still naked and staying that way.  I have a gut feel we gap down tomorrow morning as people bail on this nonsense.  It’s risky and not for everyone…"  I was 24 hours early with that call.  Notice that, after a very bearish Monday, we were hunting for bullish opportunities – just in case. 

Weak Dollar Wednesday – Charging More for Less

Commodities were flying as the dollar was diving and that was about the only thing supporting the rally.  I noted that gold $1,200 was this year's oil $140 and the same tricks were being used to drive retail investors into the metals market as had been used to drive them into crude markets at the top last year. 

I laid out my case for gold being overplayed and used the example from PT Barnum's "Art of Money Getting" to try to hammer home the point that what was going on was a huge push to get the suckers into the tent before the big "blow off" that I felt was just around the corner

Our plan was to expect a push higher and offer .50 for the GLL Apr $11s, a play that filled easily the next week (we added the $10s too!) and our upside speculation was the Jan $49/53 bull call spread at $2, which we're out of but are still $2 despite the sell-off, which is why we like in-the-money bull spreads when we're not really confident of a direction.  In my 9:41 Alert to Members I said: "Volume will be low today and I’m leaving at 1pm so I doubt I’ll be shifting off my 60% bearish stance because, even if Friday is an up day, I would only be shorting into the weekend anyway."

  • UGL Jan $52/Apr $54 calendar spread at net $1.60, now $2.55 – up 59%
  • ERX Dec $42 calls at $2.10 (day trade), out at $2.50 – up 19%
  • C 2011 $5 calls for .69, now .59 – down 14%
  • BRCD Jan buy/write at $6/6.75, now $7.06 – $7.50 target
  • IYT Dec $70 puts at .90, done at $1.50 (next morning) – up 66%

I called a top in my 11:01 Alert, saying: "If you want to momentum trade short, this is a good spot (10,450).  Rolling DIA March $106 puts up to DIA March $107 puts for .50 but, other than that, I’m bearish enough considering I’m leaving in 2 hours and they can still stick this thing back to 10.500."  Notice how our Monday puts still weren't working so we were still picking up the best upside plays we could find, ones we wouldn't mind being "stuck with" long-term if we did get our crash and ones we thought would offset us well.

Fall Down Friday – Dubai Cruel World!

It doesn't matter that it was Dubai, it could have been anything.  As Tommy Lee Jones points out in "Men in Black":  "There’s always an Arquillian Battle Cruiser, or a Corillian Death Ray, or an intergalactic plague that is about to wipe out all life on this miserable little planet, and the only way these people can get on with their happy lives is that they Do… Not… Know about it!"  We are the Men in Black – the people who know what's REALLY going on in the markets and we do our best to warn people about impending problems but we are shouted down by the MSM circus act that keeps the masses placated with happy talk while all the first class passengers head for the life-boats.

As I said in the morning post as we stared at a greater-than 200-point pre-market drop: "While it may make us overly cautious at times, it also helped us digest our food yesterday and wake up in a great mood today as we are well prepared for this little market correction.  I quoted PT Barnum Wednesday and, since my point is made so well this morning, I’ll quote him again because it’s good advice for all traders to follow":

"A man who is all caution, will never dare to take hold and be successful; and a man who is all boldness, is merely reckless, and must eventually fail. A man may go on "’change" and make fifty, or one hundred thousand dollars in speculating in stocks, at a single operation. But if he has simple boldness without caution, it is mere chance, and what he gains to-day he will lose to-morrow. You must have both the caution and the boldness, to insure success." 

So that's 3 times in two weeks quoting PT Barnum – If you're not going to write it on a post-it and tape it too your monitor, don't blame me!  Speaking for bold – pre-markets were down so badly we played the Dow futures up from 10,200 in a Special 5am Alert to our Members (to lock in our bearish gains at what I thought would be the max).  At $5 per point it was up $250 per contract by 8:30 and another $500 by 11 am, which is not bad for putting $5 per contract at risk.  We also had a nice win on the oil futures as well. 

It was a short day and a Black Friday so we weren't taking any chances as I had predicted we'd move 100 points off the bottom at 5am and, in my 8:39 comment to members I reminded them that Rule #1 was: "ALWAYS sell into the initial excitement," which means we don't take our chances when we get a big move in our favor – we take our profits and run.  At 8:57 I reiterated: "There’s nothing wrong with using 10,250 if you want to stay aggressively bearish but my expectation is we WILL get pushed higher on low volume unless there is VERY heavy selling volume."  We got so bullish that, at 9:55, I actually picked a full cover of our long DIA puts, looking to take full advantage of the turn up.

  • RIMM Jan $55 puts sold for $3, now $2.70 – up 10%
  • DIA Dec $102 puts sold for $2.05, now .63 - up 69%
  • DIA Dec $105 puts sold for $2.55, now $1.80 – up 29%
  • DIA Dec $103 puts sold for $1.75, now .90 – up 49%

I followed up my DIA cover play at 9:55 with the following comment to Members at 10:02: "JPM very funny but also true, this whole Dubai thing can be fixed with a wave of a checkbook and we could get a major manic monday so I’m not likely to go into the weekend more than 55% bearish from this spot (hence the sale of the DIA putters)."  Notice how, other than taking a stab at RIMM, we stuck with shorting the Dow puts on the short day – taking advantage of the cushion their premiums provided us if we were wrong and the markets headed lower

Monday – Mixed Signals Ahead of Data

The Dollar was down again as EU finance ministers were rebuffed by Wen Jiabao - an action that was interpreted as bad for the dollar although, actually, de-pegging the Yuan from the Dollar would probably be worse for the dollar as people ran into more Chinese currency.   "The Chinese are telling us exactly what they told President Obama," Mr. Barroso said after a dinner with Premier Wen. The U.S. president failed to extract any public concessions on the yuan on his recent visit to China. 

  • DIA $103 puts sold at $1.65, now .90 – up 45%
  • LYG Jan buy/write at $4.32/4.66, now $5.26 – on track
  • DIA $104 puts sold at $2.25, now $1.28 – up 43%
  • USO $39 puts at $1.14, done at $1.45 – up 27%
  • SONC Jan $10 puts sold for .85, now .70 – up 18%
  • DIA $104 puts sold at $2.55, now $1.28 – up 49%
  • BAX artificial buy/write (too complicated to summarize) – on track
  • FRO Feb buy/write at $22.70/22.60, now 28.40 – on track

We flipped bullish on the sell-off back to our 10,250 target (ALWAYS sell into the initial excitement) and at 1:24 I said to Members: "Volume a joke at 75M at 1:23 so we kind of have to expect a stick."  Maybe the markets aren't fixed but it's a good thing we think they are or we'd miss all these great opportunities!  8-)

10 Trillion Yen Tuesday – Japan's Turn at the Pump

This was a total no brainer as I pointed out that "Making bonds worthless is a great way to force more money into the stock market, which is also fueled by low-cost margin loans and, don’t forget, those commercial banks can leverage up that $115Bn ten to one – so we’re talking about 100 Trillion Yen put into play last night and that’s over $1Tn US Dollars, which is quite a lot – even if they don’t buy what they used to."

Thank goodness too because we had played the EWJ Dec $9 calls back on the 16th at .75 and did a DD on the 18th at .45 as I really thought it would be the best upside defensive play on a global rally.  We had drifted around below break even (.60 average) the week before and we would have had to pull the plug had we fallen again but, as it was, we were able to get out with a nice double this week.

My very prescient comment came at the close of Tuesday Morning's commentary, where I said: "Speaking of the dollar – it’s not dead yet at 74.5 and if they form a base here and break up, all of these good times will come crashing down like a house of straw.  The threat of a strong(er) dollar is probably the biggest, baddest wolf in the economic woods but it certainly isn’t the only one."  At 9:43, in my first Alert to Members I added: "Looks like the DIA is miles ahead of the actual Dow again.  Last time that was a sign that the move was BS but that was a 40-point gap, this is just about 20 but let’s watch that.  Our tops were Dow 10,495, S&P 1,113, Nas 2,205, NYSE 7,266 and Russell 605 on Nov 13th, which was a Friday and a big gap-up day too so I’m not going to be too impressed until we break it…"  Of course, we did not.

  • SRS Jan $8 puts sold for .52, bow .79 - down 52%
  • AMZN Dec $150 calls sold at $4, now .65 – up 84%
  • UUP Jan $23 calls at .15 (a DD from .25), now .20 – even
  • UUP artificial buy/write (too complicated to summarize) – on track
  • LOW artificial buy/write (too complicated to summarize) – on track
  • GS artificial buy/write (too complicated to summarize) – on track
  • SRS at $8.50, now $7.92 – down 7%
  • DIA Dec $103 puts at .93, done at $1.19 – up 28%
  • MOS Dec $60 calls sold at $1.33, now $1.40 – down 5%
  • DRYS Jan buy/write at $5.07/5.54, now $6.33 – on track
  • HOV Jan $5 puts sold at $1.25, still $1.25 – even
  • IYT Dec $75/72 bear put spread at $2.15, stopped out at $2 – down 7%
  • USO Dec $39 puts at .82, now $1.40 – up 70%
  • GLL Apr $10s at .70, now .90 – up 29%
  • LYG Jan buy/write at $4.33/4.67, now $5.25 – on track
  • SRS Apr $7/9 bull call spread at .80, now .66 – down 18%
  • CREE Dec $50 calls sold for $1.55, out at $1.75 – down 13%
  • CROX Jan buy/write at $4/4.50, now $5.42 – on track
  • X Dec $45 calls sold for $1.86, now $1.72 – up 8%
  • FXP Dec $8 puts sold for .70, still .70 – even

Wow that was an active day!  Once again we were getting comfortable that a top was forming and it wasn't an opportunity we wanted to miss out on as it had worked so well the prior week.  Effectively, we were being presented with the same opportunity to go short at the same strikes that had made stunning returns a week before but this time, we mixed it up a little more with a few long plays. 

Which Way Wednesday?

I made a simple observation Wednesday morning: "Our lower breakout on the Dow has been 10,250 and that has held up very well for the past few weeks so we have to respect that but, at the same time, we seem very overbought and just needing some sort of correction to help us confirm the bottom of the channel is still supporting us (see Fallond chart)."

I calculated that the highest possible level for gold was another 20% up ($1,440), at which point I feel there is not enough sucker money left to support the price but we were thrilled to fill our April GLL calls into the gold rally as $1,200 still seemed like a likely turning point.  My closing comment for the morning was: "So we continue to tread carefully, ready to go bullish if the technicals force us to but we’re not going to be at all surprised if this does, indeed, turn out to be nothing more than the top of our range."  By 10:22 I said to Members: "So far, I’m only adding to my shorts on this move, more like 70% bearish at the moment but the next move is to take some upside plays if this sustains."  It didn't so we went very bearish. 

  • DIA Dec $103 puts at .83, now .90 – up 8%
  • OIH Dec $120 calls sold at $3.25, now $1.06 – up 67%
  • CCJ artificial buy/write (too complicated to summarize) – on track
  • AMZN Jan $140/135 bear put spread at $2, now $2.50 – up 25%
  • IWM $60 puts sold for $1.30, now $1.02 – up 22%
  • SRS Apr $6/8 bull call spread at $1.10, now $1.04 – down 5%
  • NSH June buy/write at $18/20.25, now $24.90 – on track
  • AGU Dec $60 calls sold at $1.85, now .85, up 54%

At 2pm we got the Fed Beige Book and I summarized it for members and that led us to resolve to stay bearish despite any BS moves up the market might make.  My outlook for the afternoon in my 2:45 Alert to Members was: "This is a terrible report and that means I now need to see ALL of the November highs broken before I would even consider going bullish.  Volume is still very weak and I suspect that's because those who planned to pump up the markets today are now in meetings trying to figure out how to get out of this thing."  At 3:49 my closing comment was: "If we rocket up again tomorrow, I’ll be rolling and shorting and back to 70% bearish unless Obama is whipping out a $2Tn check tomorrow."

Thrilling Thursday – Japan Jump Juices Futures

We had a huge run-up into the open and we took full advantage by shorting some of the futures in a special Alert I sent out at 5:49.  Needless to say the returns were stunning as the Dow fell from 10,500 all the way back to 10,350 at the close – almost as good as the previous week's upside play but it was the RUT we caught right on the money as they fell from 600 to 590. 

We discussed how seasonal adjustments were likely to give us an upside surprise in jobs and how the MSM was very likely to not report anything other than how wonderful it sounded.  In fact, the MSM was on the attack, discrediting blog writers who dared to say the emperor may not have any clothes on.  Emperor Cramer was pimping AMZN for all he was worth on Wednesday evening and I do try to bite my lip and ignore him but herding his sheeple into AMZN at the top of a 180% run from last November was just reckless and stupid so I tried to warn what few people I could to stay out of that trade.

That did not, of course, stop us from taking full advantage of those people foolish enough to not subscribe to our newsletter.  As I said in the morning post: "We're already short AMZN and we thank Cramer for lining up the buyers for our short positions (mostly selling long calls).  If it wasn’t for market pumpers like Cramer sending his lambs to the slaughter at the tail end of a 200% run, we would have much less fun in the markets." 

Despite all the hoopla surrounding Black Friday and Cyber Monday, the ACTUAL retail sales numbers we saw that day were not very good at all with 18 out of 25 reporting Retailers missing expectations.  In my 9:46 Alert to Members I said: "The adventure trade of the day is selling AMZN $145 calls naked at $4.75 – VERY dangerous and the escape is to roll them up to the Jan $155s" but I called an audible in chat and we held off for a few minutes as AMZN topped out.

  • AMZN Dec $145 puts sold at $5 (average), now $1.40  – up 72%
  • POT Jan $115 puts at $4.25, now 5.85 – up 37%
  • VIX Dec $22.50/24 bull call spread at .45, now .50 – up 11%
  • EDZ Apr $3 calls at $2.20, now $2.30 – up 5%
  • DIA Dec $103 puts at .85, now .91 – up 7%
  • SRS Dec $9 puts sold for $1.15, now $1.20 – down 4%
  • AMZN Dec $150 calls sold at $3, now .65 – up 78%
  • RMBS 2010 $10/20 bull call spread for $3, now $3.65 – up 22%
  • BAC 2011 $12.50/17.50 bull call spread for $2.60, still $2.60 – even
  • BAC 2011 $12.50 puts sold at $1.40, still $1.40 – even (pair trade)
  • RUT Jan $640/Dec $610 calendar spread at $1 credit, now -$1.60 – down 60%
  • AMAT Jan buy/write at $11.87/12.19, now $13.32 – on target
  • TIE 2011 $7.50/12.50 spread for $2.40, now $2.10 – down 13%
  • AIR artificial buy/write (too complicated to summarize) – on track
  • DIS artificial buy/write (too complicated to summarize) – on track

Thank Jobs It's Friday!

We would have gone even more bearish Thursday but the White House threw us for a loop by pre-announcing bad employment numbers, which had the effect of lowering expectations into a report that we thought was going to be a big beat anyway.  Cramer gave us huge, quick scores on AMZN as thee stock topped $145 in the buying frenzy and then fell off for the rest of the week

As we expected Thursday morning, we got a huge boost from the jobs report and we played the futures to the upside in a 6:17 Alert to members where we once again targeted oil (above $76, hitting our $76.75 target) and this time we played the S&P to the upside from 1,100 and it hit our target of 1,107 on the nose, which is very nice for a trade that pays $12.50 per .25 per contract (a $350 per contract winner).  Again, we don't play the futures that often, only when we have good opportunities at key resistance points AND we have something worth protecting (in this case our bearish positions).

I had the first Alert out at 9:32 because, as I said then, I was just pasting the same Alert (and game plan) from the day before – shorting into the run-up as long as we didn't break our highs. 

  • DIA $103 puts at .60, done at $1.20  – up 100%
  • TBT June $42/26 bull call spread at $1.80, now $2.05 – up 14%
  • TBT June $42 puts sold for $2.15, now $1.85 – up 14% (pair trade)
  • SRS $8 puts sold for .42, now .45 – down 5%
  • FXP Jan $6 calls at $1.40, now $1.50 – up 7%
  • IYR Dec $46 puts at $1.40, now $1.45 – up 4%
  • IYR Dec $46 calls sold for .85, still .85 – even
  • SRS Jan $8 puts sold for .80, still .80 – even
  • ITMN artificial buy/write (too complicated to summarize) – on track
  • IYT Jan $72 puts at $1.60, still $1.60 – even
  • USD Dec $30 calls sold for $1.80, still $1.80 - even
  • DIA Dec $104 puts sold at $1.60, now $1.30 – up 19%
  • UGL Dec $49/50 bull call spread at .45, now .35 – down 22%

As planned we went into the weekend fairly well balanced, about 55% bearish after 2 weeks of fantastic trading where the market pretty much ended up going nowhere at all (but what a trip!).  We played this very narrow trading channel as well as could be expected and with 2 weeks to expirations it's good to have gotten to a mainly cash position ahead of the holidays.  As I reminded members at 12:31 on Friday: "This may be a good time to remind bears to take 20% profits and run!  We can always short some more stuff if we break lower but , as I hope you noticed this morning, those bounces can kill you!"

It's going to be all about the dollar next week.  If the dollar starts to rally commodies may drop rapidly and that can spur a lot of profit taking in what were our leading sectors but we also may get another shot of stimulus, or proposed stimulus to say the least and that's always good for a day or two of upside.  I still think this rally is out of gas and that cracks are beginning to show in what we think is a very poorly-constructed foundation but the volumes will be thinner and we need to be ready for anything – and I think we are…

 


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  1. Phil,
    I’m considering a position which I would like to lay out for your input, and to refine some of my hedging questions. I am looking at using a position similar to the double diagonal you set up on BAC in the last 100KP. Parameters are as follows;
    The portfolio will have approx. $96K in initial cash. Based on recent discussions on this site, I intend to invest approx. 50% & leave 50% in cash for maneuverability. I think 4 positions of about $16K each would be very manageable. Based on this I am considering the following;
     
    Aflac (AFL) currently at $45.83 per share
    Buying the Jan. 2011 $40C/$55P spread at net $24.10 leaving $9.10 in premium on the $15 spread
    With 13 months to OEX, that means the time decay will be at a rate of approx. .70c per month
    At $24.10 entry cost, I am looking at 700 shares, or $16,870.00 invested.
     
    Selling Jan. 2010 $46 caller & putter for net $4.25 with $4.08 in premium. I am assuming, (perhaps from inexperience), that I can capture on average about 50% of the premium each month, so $2.04 per month captured. The return profile should be;
    (2.04 – .70)*700 = $938 per month or 66.7% APR on the $16,870.00 invested.
     
    Looking at AFL , past, present & likely future, I can’t see the stock likely exceeding the $55 range, but dropping under the $40 strike seems possible. I see fair value for AFL as $40 to $41 range and would have no problem with owning it at or below these numbers, so would likely take out the long spread at lower range if short puts were in position to be put to me under about $40.
     
    Questions? 1) As the shorts are already taking care of the premium decay of the longs, there appears to be downside only in the management of the short straddles. Should I be looking at hedging the shorts, or would I just manage them by rolling, etc. 2) As I am starting with a long option position such as this, is there still a need to scale in. The potential problem I see is that if I were to take the underlying, at say $38 per, the size of the position grows immediately about 60% or so. Is this a valid use of the extra cash for maneuvering purposes, or should I be looking at bringing the position back down to the $16K range as quickly as possible in this scenario.
     
    Looking forward as always to your input. Thanks!


  2. Phil,
      What came of the penny stocks you were looking for a couple of weeks ago?


  3. Phil
    I have been studying various alternatives in order to simplify my trading activities, so that I do not have to allocate as much time concerned about market movements, thus necessitating constant adjustments. I would like to impliment some "auto-pilot" positions that provide leverage as well as hedging qualities, not to mention the desired income producing potential of near term sold options, in addition to long term gains. My feeling is the market will, over the next 12 months, experience some serious downward moves, and with this, increased IV in option price. Long term, I see the market to continue upward.  Assuming this scenario plays out, I am contemplating buying high delta DITM Leap options on some stocks I like long term ( eliminating day to day management ), and selling front month OTM calls on the underlying for income in order to pay for the long Leap.The advantage to me would be conservation of time, that could be spent having fun playing with some of your great shorter term plays and  some of Peter D’s short strangles. What do you think of this strategy?. I have a couple of stocks in mind that fit this Leap strategy, and was wondering if you might have a few  for consideration. Thanks!


  4. Phil a reminder re contact.
    Funding/Colberg – I know just the guy I need to talk to but it’s a weekend project.  Do remind me Sat morning because I do want to get on it.


  5. Gel, on your strategy above what do you call high delta on DITM leaps?


  6. Hi guys.  I caught up on Friday’s post so check there before reposting please.

    AFL/Chaps – As long as you are more or less in range then all you are doing is rolling the "winner" each month.  Winner being either the put or call (can’t be both) that you sold that had the highest remaining value.  So any month that you nail AFL within $2 of your target, you make $2 and any month it goes more than $4 off your target, you lose whatever the difference is.  So, in 13 months let’s say you make an average of $2 6 times, break even 3 times and lose an average of 2 4 times.  Then you make a total of $4 and your long position loses $9 and you are down $5.  If there is a big blow-our one way or the other, you can lose substantially more. 

    Is AFL THAT safe to stay in a range?  Well they fell from $70 to $50 last July,then back to $70 in Sept and then down to $30, back to $50 and then down to $5 in March and now back to $45.  Does that make you comfortable betting they will stay within a $2 range every month for 13 months?  There’s a reason we ran that play on BAC and UYG and NOT on GOOG or AAPL or AFL. 

    What is it you want with AFL?  What is your long-term goal?  If you are going to throw $9 out the window to be neutral and hopefully collect $28 (assuming generally successful outcomes) then you are hoping to collect net $19 over 13 months on a $20 investment.  Since you are looking at $16K per investment your goal is to make just over $1,000 per month right?  I’d rather buy the 2011 10 $35s for $13.50 ($13,500, $3 premium) and sell 7 Feb $45 calls for $3.50 ($2,450) and 5 Feb $41 puts for $1.50 ($750) for net $10,300.  If AFL goes up, you can buy more longs and roll the callers up to 2x whatever and if it goes down below $41 you can roll the putters to 2x the May $35 puts (now $1.50) where you would be in big trouble on the other spread anyway. 

    You only need 4 good months out of 13 (but figure only 5 sales at this rate) to make your double and nothing to the upside can really hurt you since you are $10 in the money to your callers so your only issue comes if AFL drops lower than $40 and you can cover that with an overriding market put (as long as your other 3 positions are diversified).  Again, I’m not loving AFL for that purpose but your safe range here is down to about $35 with the only upside issue that you may not make any money if called away in the first month. 

    Penny Stocks/Japar  – The guy who wants to do the project with me got caught up.  I’ll revisit when he’s ready.  I’m not a big fan of penny stocks usually but, in my talks with VCs, I’m having a lot of interesting things thrown at me and one of them involves working with undervalued and unknown public companies, perfect for penny stocks.

    Deep Leaps/Gel – Well see above comment to Chaps.  These are not strategies you apply to any stock.  You guys go about selecting things sort of the opposite way I do by starting with a strategy and then looking for stocks whereas I look for stocks that are seriously under or over valued and then find a strategy that suits them based on where they are now, where they are going to be and what I can get paid while I wait.  If you are worried about the market selling off, then why on earth would you want long-term DITM leaps?  Their single vulnerablity is that they DON’T do well in a big sell-off. 

    Last week, I picked AMAT for a buy/write as I decided (after watching them for 3 months) that I think $12 will hold as a floor so I consrtucted a sale that has them put to me at $12.19.  It’s an early entry and I already know that if they fall to $10 I have no problem sticking it out and if they fall back to $8 (their low) I’m willing to DD to average my entry at $10 so that’s my position on AMAT.    That accomplishs my goal of simplifying the trade because, other than a massive collapse in the market or something specifically happening to AMAT to knock more than 1/3 of the price – I don’t have to look at them again until Jan 15th.   There is no leap that would give me as much comfort as the buy/write but it’s the desire to own THIS stock that drives my decision process and THEN the fact that I do see an option construct with what I consider a favorable risk/reward ratio, especially when the risk side penalty is one I can live with. 

    Set up a base of conservative trades and then you can mess around with day trading and index spreads.  Once you know where your pressure points are to the downside, you can incorporate that into your short-term trading, being more apt to go with the downside flow since you alerady have your low-touch upside bets in place. 

    Funding/Colberg – See last post.


  7. Phil/ssdirk
    By high delta, I’m thinking close to 100 as possible. My strategy buying DITM money Leaps is to acquire the stock at a later date for about the price it is selling for today. With the option purchased with almost ALL intrinsic value in its cost,, with much less money invested than buying the stock outright. You are paying for almost no premium, have far less outlay of cash, and all you need to break even is to have the stock flatline. In the interim, you can sell front month OTM calls and over 12 to 24 months enjoy the income. I believe this strategy works if you target a stock you like and have a reasonable feeling of assurance the company will grow and the stock will appreciate. I am looking at KO, buying the June 2012 50′s calls for no more than 3.00 in extrinsic premium. Another advantage to this strategy, is there is some cushion in time to achieve the goal at the end which is the acquisition of a stock you want at a hopefully inflated price at the time of expiration. The OTM covered calls should provide some insurance as well as income during the interim. Phil - tell me where I am wrong in my assumptions.


  8. Thanks Phil. I’ll wait to hear from you. Feel free to email me as well.


  9. Good morning!

    Leaps/Gel – That’s a perfectly rational strategy.  Just be aware that you are leveraging losses as well as gains.  For example, if you buy 400 shares of KO for $23,000 and KO drops $10, you lose $4,000 less whatever your covers are (say 4 Jan $57.50 calls at $1.40 or $560 so net $3,440 loss).  If, however, you buy 4 2012 $50 calls at $10.50 ($4,200) and sell the covers ($560, net $3,640) and if KO drops $10 the leaps drop to $5.30 (the price of the 2012 $60s and you lose $1,520 but that’s 42% of your position vs 15% lost on the actual stock.  If you are using leaps to diversify and set up a well-balanced portflio, that’s great but, if you end up using it for leverage and have a fairly bullish portfolio, you can get hit really hard in a sharp market correction. 

    I would not buy KO at the top of a 60% run off the lows as it’s too easy for them to have a 20% correction.  Notice their legs up from the bottom were $6, $6, $6 and now $6 again (at $58) and this is the furtherst they’ve been above the 200 dma since late 2007, when they fell from $61.60 back to $53 (and then to $47 even during the strong first half of 2008).  KO is a safety stock and if the market is coming back and the dollar is getting stronger, they could run into problems. 

    You can start a posiiton in KO (allocating $15K to a full positions) by taking 10 2012 $60 calls at $5.30 and selling 10 Feb $57.50 calls for $2, which is net $3.30 plus $2.50 in margin.  If KO does well, you either sprend $5 to roll down to the $50s (putting you in a $7.50 spread for net $8.30 with 20 months to go) and/or add to your long positions and roll the caller up to something like 2x the May $60s, which are now $1.77.  So upside is taken care of an planned for and flatline, obviously, is fine and downside is you are in for net $3,300 (20% of full position) and if KO drops 20% the 2012 $70s are $2.20 so you are looking at a $1,100 loss on your first scale.  Summary:  Risk $1,000 on 20% down move.  Reward is collect $2,000 on flatline in 60 days (13% of full $15,000 commitment) or commit to 2nd round of leaps and you are back to square one next month.

    That strategy is based on my expectation that KO either sells off or flatlines for about a month at $58 and that $60 would be a tough nut to crack even if they don’t.  $60 should yeild a $1.10 (.45 delta) profit on the leaps and I owe $2.50 to the callers (.50 loss) and that would be a $600 profit in 60 days on $3,300 (18%) or 4% on the full $15,000 allocation. 

    So that would be the plan but as Carl von Clausewitz used to say: "No plan survives first engagement with the enemy" – the idea is to have a plan and have a good idea of what you will do in each possible outcome.

    Funding/Colberg – I’m giving Bob today but I’ll annoy him tomorrow.  Feel free to remind me and then we’ll get in touch.

    Dollar still pretty strong.  Gold at $1,141, oil at $74.71, siver back to $18 and copper $3.18.   Futures are pretty lame overall, down about 0.3% but we’re still above our levels (more on that in the post) so don’t get too excited if you are a bear just yet.

    Monday’s economic calendar:
    10:00 Employment Trends Index
    12:45 PM Bernanke: FAQ on the Economy
    3:00 PM Consumer Credit
    5:45 PM Fed’s Dudley speaks

    More than one quarter of borrowers that benefitted from government-assisted loan modifications are already behind on their new mortgage payments.

    Amazingly, the government’s mortgage modification scheme fails to consider whether a property is underwater – likely the driving force in delinquency. It also refuses to address second liens – the ones owned by the same banks the Treasury is urging to modify loans they service.

    Based on the last two recessions, even once payrolls go positive – which they almost did Friday – the peak in unemployment could still be a year away.
    "None of them would have survived," Tim Geithner tells Bloomberg, disputing a claim by Goldman (GS) president Gary Cohn that the firm had enough cash to weather the storm.

    U.K. Treasury prepares multi-billion pound – wait, make that multi-million pound – windfall tax on banks. "It is a matter of justice," said one minister. "Investment banks are making exceptional profits as a result of the intervention of government and the Bank of England to limit the economic damage from the mess caused by those very same banks. So it would be outrageous if they paid those profits to employees and bonuses. We are determined to prevent that."

    In one of the first cases to be heard involving the sale of Lehman notes, Finra awards $200,000 to an investor who claimed her UBS (UBS) broker inappropriately sold her the risky notes. Her lawyer says he’s representing a dozen clients in similar situations around the country.

    On a quiet Sunday, BIS publishes its Quarterly Review, and warns of a significant link between low interest rates and banks’ risk-taking: "The main implication of these findings is that monetary policy is not fully neutral from a financial stability perspective."

    Zero Hedge serves up a property-level analysis of the most at-risk CRE properties you’ve never heard of.

    In August 2000, Fortune Magazine ran an article titled 10 Stocks to Last the Decade. As the decade draws to a close, Jacob Wolinsky tracks Fortune’s picks vs. the S&P 500 (ouch) and the decade’s true top performers (ouch!).
     


  10. Phil – too late to get in on the GLL trade? Don’t want to chase but gold could still tank