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Wild Weekly Wrap-Up

Wheee – that was fun!

Last week, I asked the question were we "Too Bearish or Just Too Early?"  I said in that wrap-up: "This Friday the market topped out about 150 points higher than last Friday, closer to the top of our range so we went much more bearish on Friday, perhaps too bearish considering this was the best Friday finish since Nov 6th and we haven’t had a down Monday since October 26th."  We did get the move up we feared on Monday but we stuck to our guns and had a fabulous week.

Even as the market was going against us Monday morning, my first Alert of the week to members at 9:44 said: "I’m still more inclined to look downward at: Dow 10,250, S&P 1,100, Nasdaq 2,187, NYSE 7,200 and Russell 600…  I’m still bearish because oil is weak, gold is weak, the financials (XLF at 14.30) are weak and most of the good news we are hearing is nothing but fluff."  That was a pretty good call as we hit our target levels yesterday and held them, so we flipped more bullish right at 11:30 on Friday, in what was some very good timing for our intra-day play. 

We are still on a stock market roller coaster that's going to have plenty of ups and down in the thin, holiday trading that will likely characterize the end of the year.  The market will be closed 2 Fridays in a row and good luck finding people around this Thursday or the next one so 6 proper trading days left to 2009 at best.  We got out – that drop was very satisfying and we've moved mainly to cash (our $100K Virtual Portfolio has $88,000 in cash at $107,249 at the end of it's first month).  Last week we were able to cash out the bull side, this week we got satisfaction from our bear plays and that leaves us footloose and fancy free to have fun the next two weeks.  If our day trading goes as well as it did on Friday, we can end this year with quite a bang.

Manic Monday – Dubai, CitiGroup and GS Move Markets

This picture says it all.  When you want to blow smoke up investors' asses, the dream team of economic BS is Greenspan and Cramer, who appeared on Meet the Press last Sunday to tell us that the market is smarter than reality and Greenspan actually had the nerve to say that we are underestimating the positive effect of rising stock market wealth this year.  What a tool!  In case the ex-Chairman's math is rusty, losing 50% of your retirement account and then having a 60% rally back only gives you back 60% of 50%, which is 30%.  That totals 80% of what you had which is LESS, not MORE

Greenspan doesn't feel poor because his new job at PimpCo pays a hell of a lot more than being Fed Chairman ever did and Cramer is practicing wrinkling up his face in hopes that he will one day be Fed Chairmen so he can screw millions more people over than he is able to with his current platform.  Monday night, Cramer was still on fire, herding the sheeple into CitiGroup (a pick I agree with but not the timing) on the same day I was concerned about the overall weakness in the XLF.  Jim should know better as he's clearly fixated on trying to negate my plays lately but after shearing the sheeple by herding them into the very top of AMZN and RTH, he had to made it a hat-trick by jamming them into C ahead of the dillutive secondary.  It is only fitting to see Cramer taking tips from the master, Greenspan, who's advice bankrupted an entire nation:


Now, where was I?  Oh yes, Monday…  So it wasn't just the comedy duo of Greenspan and Cramer boosting the markets Monday morning, the MSM was touting C's exit from TARP (at all costs) as some sort of triumph of American capitalism while, at the same time, yet another economic fiasco was being bailed out as Abu Dhabi gave $10Bn to Dubai.  In the usual sick and predictable way, the global markets once again celebrated a bailout as if it fixes everything and the US futures were up 100 points in early trading, causing me to comment:

I don’t know why they even bother to pretend anymore – they should just put 10 market-boosting statements on a chip that randomly plays one of them whenever the MSM needs a quote for the morning.  People don’t seem to notice it’s the same thing over and over and over again so why even bother with the pretense? 

Right in the morning post, FOR FREE, I suggested a bullish hedge to the week that I felt would hold up in wild market conditions which was buying the RUT Dec $590 calls for $14 and selling the Dec $600 calls for $7.50 and funding it by selling the Jan $560 puts for $7.50.  The Russell finished the week at 610.57 so the spread netted a $10 return and the Jan $560 puts finished at $4.07 for a total profit of $6.93 on a trade that gave you a $1 credit out of the box.  That's like infinity percent and those are 100 options per contract!  Monday's trade ideas for members went pretty well too:

  • LYG at $3.64, now $3.36 – down 8%
  • SRS at $7.90, now $7.82 – down 1%
  • IYT Dec $75 calls sold at .65, expired worthless – up 100%
  • DIA March $106 puts at $5, stopped at $6.10 - up 22%
  • IWM Dec $60/61 bull call spread at .63, expired at $1 – up 59%
  • IWM Dec $60 puts sold for .36, expired worthless – up 100% (pair trade)
  • VNO Dec $70 puts sold for .75, stopped at $1.40 – up 87%

We went into Monday's close extremely bearish, with both our DIA March $106 & $108 puts naked (double our usual position) as the market flatline was not fooling us at all.  We also took the money and ran on last Friday's very aggressive FDX play and boy were we glad we did that on Thursday! 

TARPless Tuesday – WFC Joins the Exodus

More happy, happy news for bankers looking to get bonuses as WFC announced they were going to repay their TARP money too.  You would think the market would be bored with all these announcements but, no, we rallied again on that news.  My comment in the morning post was: "It’s good that we can label this bailout a success because that way Congress won’t waste time approving the next one in March when CRE fails (oops, that’s supposed to be a secret)."

Thomas Jefferson warned us the whole thing was a scam over 200 years ago and no one listened to him and poor Ron Paul is trying to wise people up today and he's treated like a radical as well so I know better than to beat a dead horse so we moved on to look at some more global concerns like the Hong Kong property bubble that had spread to China, prompting the state-owned Xinhau News Agency to say the Chinese government will target “excessive” property price increases in some cities.  Maybe I neglect to point this out often enough but there's a BIG difference between what happens when the Chinese government says something and when our government says something.  When our government says they will do something – it's 50/50 at best.  When China's government says they are going to do something – it's probably already being done and already looking like a success.  Their country still has 5-year plans, our country doesn't even know who's going to be in charge next year.

German confidence was down, Japanese confidence was down, Mexico's debt was downgraded, British consumer prices were rising out of control and our producer prices were skyrocketing but the manufacturers were eating the cost as they couldn't pass a penny onto consumers.  The Empire Manufacturing Index was a big disappointment and OPEC was trying to tell us demand was picking up so I said: "Needless to say, we’re still pretty bearish but mostly watching with cash on the sidelines, looking for good spots to deploy some capital but happy to wait out the end of the year if this market continues to act like it has been the past two weeks."

  • EWJ Dec $10 calls for .05, out at .10 – up 100%
  • MA Jan $240/Dec $250 put spread at $2, now $2.50 – up 25%
  • IYT Jan $72/Dec $75 put spread at .40, now .64 – up 60%
  • FCX Jan $75 puts at $2.20, now $2.60 – up 18%
  • RIMM March $70/Dec $65 at $1.75, now $1 – down 43%
  • RIMM March $55 puts/Jan $60 puts at .25, now .67 – up 168% (pair trade)

Although we expected a run-up in the morning, we stayed bearish into the close as the NAHB Housing Market Index fell to it's lowest point since June and a NY Times/CBS poll of the unemployed (16-28M of them, depending on who's counting) found that almost half have suffered depression or anxiety, 40% of the parents said it's affecting their children and 25% say they've lost their homes or been threatened with foreclosure or eviction.  Merry Christmas indeed! 

Which Way Wednesday – Fed Edition

Man, we are used to nonsense in the futures but this 100-point pump-up was just too ridiculous for words.  The dollar was being taken down on rumors of what the Fed was going to say and I pointed out how there was NOTHING the Fed could say that they haven't already done to destroy all confidence in our currency so, ipso reductio, whatever the Fed said would have to boost the dollar.

Our Fed has not cornered the market on printing money.  One of the things that was boosting the futures was news that the ECB was handing out cheap loans.  As I noted in an early morning comment to members:

Yet another super-pump in the futures back to yesterday’s highs so we’ll see if this one holds.   This isn’t so much about the PMI in Europe as it is about the ECB lending $141Bn to banks at record low rates.  FREE MONEY!!!  Also there have been a ton of positive statements about the economy and outlook etc from the usual suspects in the Gang of 12.  I look at something like this and I see all this effort being made to pump up the markets yet they can’t even hold Monday’s futures high and it makes me think they are in deep trouble on the whole.

In the morning post I said: "Don’t be fooled by the pre-market smack-down of the Dollar.  The Euro hit $1.45 in yesterday’s trading, the lowest level since last October, when the dollar was 10% higher, and the Dollar briefly punched through that critical 77 line we’ve been expecting all month…  Boy would we feel silly if we were just 55% bearish when this house of cards comes tumbling down.  We’ll see what the man of the year has to say for himself this afternoon.  Usually we play both sides of a Fed meeting and we thank the pumpers for giving us a cheap entry on the DIA puts to get started."  Of course the DIA $105 puts were the first play of the day in our 9:47 Alert to Members

  • DIA Dec $105 puts at .65, finished at $1.86 – up 186%
  • QID Dec $19 calls at $1.15, stopped at $1.50 – up 30%
  • QID Jan $19 calls at $1.55, stopped at $1.85 – up 19%
  • SRS at $7.80, now $7.82 – up 1%
  • SRS Apr $7 puts sold for .85, now .80 – up 6%
  • SRS Apr $5/7 bull call at $1.30, still $1.30 – even (pair trade)
  • VIX March $20 puts at .35, still .35 – even
  • TOL Jan $17.50 calls at $1.40, now $1.15 – down 18%
  • XTO Jan $47 puts at $1, now 1.45 – up 45%
  • UUP Jan $23 calls at .25, now .35 – up 40%.
  • UUP June $22/24 bull call at .85, now .90 – up 6%
  • UUP June $22 puts sold for .55, now .40 – up 27% (pair trade)
  • RIMM March $75/Jan $70 net .68, now .75 – up 12%
  • V Jan $85 puts at $1.93, now $1.40 – down 28%
  • DIA Dec $104 puts at .42, finished at .86 – up 105%

I did my usual parsing of the Fed statement and sent it out in a 2:23 Alert to our Members which concluded: "So not a supportive report by any rational stretch.  Nice head fake but down we go – should be great for the DIA puts!"  At the close we decided to stick with our convictions and stay naked, probably the best decision of the week as we finally did get a down day that followed through.  I was far from certain but my 4:01 comment to members captured my logic:

I’m sure they’ll say something to pump us back to 10,500 overnight but yes, I think the dollar will be hard to keep down in Europe and Asia and I think commodiities will sell back off and take down the markets a bit but it’s expiration week so not at all sure.  My naked March (and March is a long time) DIA puts are very risky and it’s a conviction stand that there is no justification for topping 10,500 but the markets are far from logical so not much to hang my hat on.  Well, that was a fun day.  It would be nice if just ONCE they don’t pump up the futures but good luck with that

Thrill Ride Thursday

I said in the morning post: "It has been volume, volume, volume that kep me questioning the rallies this year - the fact that all the up moves come on very thin volume (ie. manipulated) while all day long the insiders sell to the suckers who are draw in by the futures action and stick saves (it’s a team effort)" and we had a nice chart to illustrate my point.

I reminded people that we had covered this contingency in our "Hedging for Disaster" post of Dec 10th.  A 2.5% pullback in the market is hardly a disaster but those hedges holding their own so far, which is just right for insurance plays:

  • DXD Apr $26/33 bull call spread at $2.40, now $3.07 – up 27%
  • FAZ July $20/35 bull call spread at $2.90, still $2.90 - even
  • SDS March $38/50 bull call spread at $2.10, now $1.80 – down 14%
  • SMN Apr $11 calls at $1, now $1.05 – up 5%

My issue of the day was why does the government and the media feel they have to lie to us (we already know Wall Street lies to us constantly)?  Perhaps we can't handle the truth but, as I said in the post – sometimes the sky IS falling and it is helpful if you let the people know it.  Pretending everything is fine when it isn't leads to a lot of very poor monetary decisions and our country has made some doozys this past year but why drag the people down with it?  Tell the people the truth about the economy and our prospects and let them decide what to do about it.  Yeah, right – like that's going to happen…

  • C 2011 $4 calls at .50, now .55 – up 10%
  • TWM $26 calls at $1.05, out at $1.30 – up 24%
  • RIMM March $75/Jan $70 net .43, now .75 – up 74%
  • FXP June $6/9 bull call at $1.40, now $1.50 – up 7%
  • MA Jan $230 puts at $2.05, now $1.30 – down 37% (rolled up to $240 puts at $3.20)

There wasn't much to do because everything was going our way.  Once again we went naked into the close on our March DIA puts but I did mention to Members that the prudent cover was 1/2 the DIA 12/31 $103 puts at $1.30, now $1.15 so, as I often say, there's rarely harm in choosing a well-placed 1/2 cover. 


Fa La La Friday – Scroogy Swap Prices Blacken Christmas

Credit Default Swap rates are heading higher all over the world yet there's a parade of analysts (I argued with one on my BNN spot last night) who will tell you how great things are and how much better off we are than last year.  This is like telling a double amputee how much better off they are than last year when they were on the operating table and we thought they were going to lose 3 limbs – sure it's better, but forgive them if they don't feel MUCH better about the loss of 2 limbs.  

As our own economy limps into the last few days of this century's first decade, do we really feel that things are "better" than they were last year?  Things are better than the doom and gloom outlook that was being peddled last year but we never bought into that in the first place.  Things are not better with 5M more job losses than they were a year ago except for corporations that trimmed the fat so of course there will be success stories as some businesses are easy to scale and some are not. 

It's not the success stories that worry us, it's the failures, and we'll find out soon enough how many retailers are making it through the holidays intact and then we'll find out how many REITs will survive the failure of the retailers and how many builders survive a third year of effectively not building things.  If we can get past all that and if Q4 earnings look good, then there will be plenty of things to buy in 2010 but for now, cash and short positions still dominate our end of year strategy:

  • Short oil futures at $75.50, stopped at $74 – up $150 per contract (from the main post)
  • BAC 2012 $15/22.50 bull call at $1.25, still $1.25 – even
  • BAC 2011 $12.50/17.50 bull call at $2.35, still $2.35 – even
  • USO Dec $37 puts at .20, out at .60 – up 200%
  • EWJ Jan $10 calls at .15, still .15 – even
  • DIA 12/31 $101 calls at $2.35, now $2.70 – up 15%
  • EDZ July $4/8 bull call at $1.10, still $1.10 – even
  • DIA 12/31 $103 puts sold at $1.40, now $1.17 – up 16%
  • XLF artificial buy/write (too complicated to to summarize) – on target
  • XLF Jan $14 puts sold for .42, now .38 – up 10%
  • V Jan $85 puts at $1.15, now $1.40 – up 22%
  • MAT artificial buy/write (too complicated to to summarize) – on target
  • XOM Apr $75 puts sold for $2.40, now $2.30 – up 4%
  • SRS Jan $8 puts sold for .55, still .55 – even

Not bad for a Friday overall.  It's always nice to have a few day-trade winners into the weekend.  Notice we did take some upside plays – just in case and we went into the weekend "just" 55% bearish, a very big turn-around from earlier the week as we seek to protect our very nice bearish profits, which are mainly off the table anyway. 

We have a big data week coming up and just 4 days to get everything done.  Nothing on Monday so the bulls can jam us up if they have anything left but Tuesday morning we get hit with Revised Q3 GDP and GDP Prices, followed by Existing Home Sales, which are likely to be off in November as rates ticked higher and government assistance fell off slightly.  Wednesday we get Personal Income and Spending for November (which may disappoint slightly), PCE Pirces, Michigan Sentiment and a very sad New Home Sales Report of under 450,000 annulized sales (exactly what I was saying to the guy on BNN!).  On Christmas Eve we'll wave goodbye to another 500,000 lost jobs (Ho, ho, ho!) and wish our 5.2M "officially" unemployed people a merry Christmas while we get a read on how many  Durable Goods they bought in November.   

Lots of fun in store so tune in next week for all the excitement!


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  1. Phil and or Chaps – BAC
    I was looking at this from earlier:

    BAC/Chaps – The double diags still work but now that BAC is back at $15, the 2101 $15/22.50 bull call spread at $1.25 is very attractive (possible 500% gain and b/e at 10% gain) as is the 2011 $12.50/17.50 bull call spread at $2.35 with a plan to sell the $10 puts (now .85) for $2 if we have a nice dip which would make the play just a .35 loss between $10 and $12.85 or BAC put to you at net $10.35 below $10.

    Don’t see where the 15/22.50 spread can be had for $1.25?

  2. pstas:
    Don’t see where the 15/22.50 spread can be had for $1.25?
    You’re right. It’s more like $2.10

  3. Phil -
    ON Friday you mentioned short term trading using a daily or hourly chart in one or two minute increments – can you talk a little bit about how to do short term trading like this and what you are looking at – I will go back and find the comment in fridays discuss.
    Thanks Sam

  4. Does anyone have any interesting spreads on EEM or other emerging market ETFs? I am a believer in the long term growth story there, especially Asia, and want to explore opportunities, with the prudent realization that they have already run up a whole bunch and are due for a major pull back (but then again, that’s the same story for the US as well). Thx. Also, I feel dumb to ask this, but what the hell does RUT stand for? 

  5. bord:
    RUT is the Russell 2000 Index. It’s the bottom 2/3 of the Russell 3000 Index, and so it basically serves as a US small cap index. It’s like a compliment to the Russell 1000 or the S&P 500. The Russell 3000 covers about 98% of publicly traded securities in the US.

  6. Premiums on APOL are huge. I know there’s been (and will be) lots of controversy about for-profit education. But APOL is the 900-lb gorilla in the field and their financials are generally pretty good. I’m sure the major risk is the government fooling around with the student loan model.
    The stock statistically actually has a negative beta relative to the market – counter cyclical, and all that. I may add it to my high premium portfolio as balance. High premiums and neg. correlation to the rest of that portfolio. So it would be like a high-risk mattress where you get paid instead of paying…sort of…
    Anyone have any thoughts on them or how else you might play them?

  7. bord/emerging markets:
    I fooled around w/ emerging markets for years, but don’t much anymore.
    My feeling is that long-term successful investors pick their spots and develop their expertise. I’ve come to realize that by playing options for premium selling on US (and some European) stocks while remaining balanced is a good way to do well. You don’t have to depend on the US getting back to a roaring bull (or bear) market to make money, and you don’t have to try to figure out what’s going on in China, Argentina, etc., because America seems tapped out, or whatever.
    I got drawn to emerging markets for the reason I imagine most people do: the emerging market growth story. But unless you develop real expertise and have rare access to information in that field, I think it’s like every other investment you can make where you’re really not an expert or on the inside. The experts/insiders are going to make the real money, and you’re not.
    I also personally don’t believe in the model of chasing "growth stories." For instance, everyone already knows the emerging market story, and the real money’s probably already been made by the time the story gets to you – or it will be made in the future in individual companies by people with much better access/connections than you have. I think the average guy doesn’t make money that way – whether it’s emerging markets, technology, whatever.
    I remember Jeremy Siegel’s (Wharton School) study of "emerging markets" in the US – IT, internet, biotech, etc. over the last 50 years. He found the average guy didn’t make money. They were chasing the growth story after the horses were out of the barn. The real money was made by the entrepreneurs, venture capitalists, and investment bankers.
    What’s going on here (Phil’s place) is not easy and has a barrier to entry (the learning curve). I’d prefer for that to be my advantage.

  8. Thank you for your insight Chaps. I appreciate the detailed reply. I spend half my time in Asia (Thailand), so I have some on the ground insights on what’s going on, and you are right, the easy money has already been made,  a lot of the growth here is very bubblish and likely to pop. That said, there are opportunities to be had. And on the macro level, the "see and feel" of recovery if much more palpable than what’s going on in the US now (I spend 2-3 months here, then back to US for 2-3 months, etc. so I can compare/contrast with some accuracy). The most telling sign these days is western and middle eastern expats here desperate to unload condos they bought because they lost their jobs, the bad economic situation in their countries, while the Chinese are replacing them because they have the money now. Japanese are holding steady.
    Is there a specific ETF you use to play the RUT?

  9. bord:
    Phil uses the RUT as one of the major indexes he follows to determine breakout/breakdown levels in the overall market. A number of us day trade the market to pick up dimes and quarters in addition to our major investments. Sometimes he’ll invest in cash-settled RUT options if he sees a good opportunity. He’ll also use a variety of ETFs (on the RUT or other indexes), generally as hedges and to provide balance. Often he’ll use the leveraged ETFs.
    Peter D is the resident expert on trading options on indexes as a main trading strategy. He generally trades cash-settled options on the SPX (S&P 500) and RUT. My understanding is that he’s more partial to SPX, but RUT provides diversity. I’m a novice trying to learn his system. Peter focuses on selling short strangles, and interlacing that with buying put verticals. Again, he usually trades cash-settled options, not ETFs. His system is all about capturing premium he’s sold and using margin wisely.

  10. Chaps/Strategy focus
    I read all of your posts, and have much respect for your discipline as a trader. Your post at 12:58 on Friday is a very good example. Certainly one of the greatest benefits of PSW membership is to follow all the diverse strategies and individual focuses presented by each contributor, and from studying the strategies that are posted, then form your own matrix of trading style that you are most comfortable with. Following your post to bord, re emerging markets, and your eventual refinement and adjustment of trading style is intereting. My style is somewhat different, as it works best for me. I try to follow the dynamics of change, as I believe change creates opportunities. As you say, you have to be early to the table before the best dishes disappear. I try to identify opportunities that are six months to a year out, based upon events or situations that are in development. As I see it metaphorically, you, as a PSW co-pilot, are flying a F-15, making surgical strikes. Me, I would be flying a bomber, dropping cluster bombs. Phil, well whatever he wants – maybe the Dreamliner!

  11. gel1:
    I read all your posts and learn a lot from them. You’re right. We learn and exchange, and come to know what’s best for us as individuals.
    There are some basic principles of investing that separates investing from speculation, but there’s no one "right way." What I’m not particularly adept at doing, someone else may be. Those people have different contacts, strengths, that I don’t have.

  12. chaps: again thanks for the insights. do you day trade using options? i’d be curious to hear your day trading strategy and how it’s worked out for you. i have been reading up on peter d’s short strangle/vertical put strategy-- it’s something i want to try once i am more facile in how it works.

  13. bord:
    I’m not a day trader. I’m not good at it. I spend most of my effort on fundamentals and a long-term portfolio. I focus on trying to understand how to capture option premium. Here we both buy and sell options. But generally, the focus is on selling option premium and learning how to adjust positions when they start moving against you.
    I feel I’m not particularly talented at discerning market direction. So I’d rather sell premium to other people who are directionally oriented. I certainly adjust when I think the market is seriously overbought (like now) or oversold. But I want to get away from having to rely on market direction as much as possible, because it’s not a strength.
    Phil has a hedging strategy he calls "mattresses" that uses the DIA ETF. Part of that strategy involves selling front-month DIA puts. Since the market tends to fall into patterns, it’s relatively easy to pick up money on those front-month short puts after you pay attention to them for awhile. That’s the only "day trading" I do regularly. But the mattresses are fundamental to my long-term portfolio. So day trading the front month short DIA puts supports my long-term portfolio.

  14.  bord - "Is there a specific ETF you use to play the RUT?"
    iShares Russell 2000 Index (IWM)

  15. Great interview Phil. I’m glad you were able to respond to specific points with refutations of the crap spin that MSM is used to churning out. Of course, you are aware that you are a voice crying out in the wilderness but as long as you keep helping us make money no matter what the market does, it’s all good.

  16. Phil – Nice interview on BNN. It is amazing how calm you seem to stay when trying to reason with these clueless analysts!
    Suggestion: you need to get yourself a backdrop made with philstockworld dot com repeated so that you have free advertising that stays on camera while you speak.

  17. Phil, good morning.
    Can you please clarify the following, if you have time, just to keep things in perspective and to help me (and others half way up the learning curve) make better use of the posts. When you say you are 55% bearish, what exactly do you mean? Is the 55% a percentage of a portfolio made up of the bold reccos (excl. $100k reccos) or is the % just a gauge of your feeling at the time, eg 55% bearish represents the probability of a downturn? Also do the bold reccomendations (excl. those re $100k) form part of a balanced portfolio finetuned by the mattress strategy or just adhoc trade ideas to profit from particular real time stock movements. In other words when you make a recco do you take into a/c existing positions to ensure that overall portfolio leaning is in synch with your overal feeling of the market?
    Also are these weekly trades intended to be closed after a week since the weekly wrap up refer only to the trades of the latest week? Thanks and please excuse me if the above are stupid queries. Thanks again.

  18. Phil,
    Do you have recommendations/plays on retailers ANF, CHRS and Crox?

  19. Bord -
    If you are in Asia that frequently is sounds like you should be recommending interesting companies to us!! Let us know what you see and hear!!
    Another option that I like is closed end funds – Barons runs a list of closed end funds every week – review the various funds and see which ones you like – then wait for a major sell off and pick them up at a discount when everyone starts bailing out to raise cash.
    I did this very succesfully with closed end municipal bond funds – lots and lots of leveraged investors had to dump them and there were some bargains for a while.
    If we get a sell off, the closed end funds should sell off – the Big one is Templeton – they have various funds some devoted to China – some to Asia and some to Emerging markets – I believe the are a value oriented shop – you have to be willing to ride this out for a long time because the funds could trade below Net Asset Value for some time -
    You could also try the Wisdom tree funds – these are not close end but ETFs – they don’t have as long a track record -
    sure that most people on the board are not too into mutual funds but I cannot really follow internation too closely – just so much time in the day -
    You might also check out Artisan International – mutual fund – they outperformed the indexes during the crash – value oriented small / mid-cap – just realized problem with them is not enough asia exposure – mostly europe -
    What I do is hold the funds and then write calls on EFA and EEM – if i get really bearish I do Phil’s mattress play on EFA.
    If you find a fund of any form that you like - if it has a lower Beta than the index and you buy puts you might slightly out perform in a down market – because you holding should drop less than the market -
    Sure that a 30% decline - even if it is outperforming the market – would not be seen as a victory by most here.

  20. Anyone remember the discussion of very short term trading that occured on Thursday or Friday – it was a brief mention by Phil of using one or two minute charts – or time increments – for setting up trades – he said we could discuss on the weekend -
    I cannot find the reference in the long Friday thread so if you remember it could you just post a reminder about the details.
    Thank you. Sam

  21. Wonder how much the storm is going to hurt retail.

  22. BAC/Pstas – Sorry, that was 2012 on the first one.  2011 was correct on the 2nd.

    Short-term trading/Samz – Hmm, where do I even start with that topic.  I guess thing #1 is we want to play indexes off major support/resistance levels like Dow 10,250.  Contrary to popular opinion, it is fairly easy to make money day trading IF (and it’s a huge IF) you have paitence and discipline.  MOST days, I have no interest at all in day trading but it gets very temping on expiration week, when we can get huge leverage by playing front-month calls with very little premium.  

    What you need to do is WAIT and WAIT and WAIT for three green lights.  You want a long-term trend to bring you into the top or bottom of a channel but let’s stick to bottoms or this will get confusing.  So at 11:30 yesterday the Dow tested 10,250 and held it.  That made an easy call on the 12/31 $101s as we felt confident there would be at least a little bounce even if they hit it again.  Even when you identify a strong entry point, you want to pick an entry as close to the line as you can and strictly get out if you fail that line.  That’s the hardest thing about momentum trading – giving up.  The third thing you need is to be sure the rest of the market is moving in your direction.  So it wasn’t just that the Dow hit 10,250 that made me want to day trade the DIA – it was that we also had S&P 1,100 and Nas 2,200 at the exact same time so I could watch for ANY of them to fail to know to get out.  Relying on one signal is never a good idea.  

    I also played the DIA Dec $102s yesterday, entering for about .97 when I thought we’d break $103 at about 3pm.  We didn’t break $103 then and they fell 20% to .77 so I decided to DD and lower the basis to .87 and drop my stop to .65, which would have been painful but I did so because the S&P and Nas were holding up AND XOM and BA looked like they had bottomed and I was fairly sure we’d get at least a small stick into the close.  That trade worked out but nowhere near as well as the earlier trade of the 12/31 $101s because I didn’t wait for the pullback so I ended up scrambling to turn it into a play rather than simply playing the rules and getting an easy win. 

    Remind me during the week and hopefully we’ll have a slow day where we can identify something fun to trade.  Futures work too if you are able to track those and you’ll notice I rarely make futures plays but, when I do, it’s because I see significant resistance to play off of and usually because I think we hit the resistance on news that wouldn’t stand up to real volume trading. 

    Emerging markets/Bord – We are bearish on emerging markets with our EDZ plays but you can go the other way with EDC, which is a 3x bull play on them.  People are put off by the very high premiums but that’s fine for us in a bull call spread and you can get the July $125/140 bull call spread for just $5.50 with almost 200% upside and, if you really believe in emerging markets (which I don’t) you can even pay for that play almost twice over by selling the July $65 puts for $9.  EDC is at $121.60 so it would have to fall almost 50% (about a 15% pullback in emerging markets) for the $65 puts to cost you money but I would urge you to consider WHY the 50% out of the money puts are so damned expensive in the first place… 

    APOL/Chaps – They have accounting and accredation issues which is boosting the volatility.  We picked them up when they fell to $55 and they’re not too far off but it will be a long road to recovery for them.  There’s still a lot of fear and you can sell Jan $50 puts for $1.50 and the low VIX makes the 2011 $50/65 bull call spread at $7 a mellow way to play as you can set a $5.50 stop and there’s $8 of upside if they recover half the drop by then.  You can take that spread and sell Jan $70s for .85, 10 sales like that give you a free ride and you are starting out $8.40 in the money.

    Backdrop/Diamond – Thanks, I was just looking into that.  They seem to want me every Friday so I guess I should (also some kind of better light for the camera would be a good idea. 

    55%/Magret – It’s a weighting.  Generally, if I have $100K invested and I’m 55% bearish, it means I expect to lose $5,000 on a 100-point move up in the Dow and make $5,000 on a 100-point move up.  If I feel I need more bullish plays, I add some and the same on the bear side.  It helps if you have a handle on HOW bullish or bearish your new position is (that’s kind of what delta is all about) and how it will affect the overall portfolio.  My bold picks are any plays that I feel would be generally good for people to make but I do not look at all 200 trade ideas for the month of December and balance each on as I make them. 

    As you can see from the $100KP, very, VERY few of my trade ideas end up there – how can they?  Even if I only put $1,000 into each play, we’d be 100% over budget in the $100KP in a month and I’m staying 80% cash so that leaves little room for anything.  Some people have $100,000, some have $25,000 and some have $25M – you need to decide what’s an appropriate add for your own portfolio.  As you can see from the $100KP, I went from 75% bearish with 10 March $108 puts and 20 March $106 puts naked all week to 55% bearish by selling the $106 puts and covering the March $108 puts fully with the 12/31 $103 puts.  That’s how fast you can flip a portfolio using mattress plays. 

    The remaining positions are long ABX, long C, short DXD (not short on DXD but a short play using DXD), short EDZ, long PARD, short RTH, short SMN, short SRS, short V, long WFR and long XLF.  Also, you’ll notice I have $5K committed to the EDZ Apr $3s but I don’t look at that as more than a $1,000 risk because I will certainly kill it if China starts to recover while my C plays at $3,500 will be stuck with through thick and thin so are more at risk from a downturn than EDZ is from an upturn. 

    That’s why it baffles me when people say they just want trades and don’t want to learn the how’s or why’s of trading.  How can you separate them?  If you don’t know what your goals are and you don’t know how to balance and adjust a portfolio – you may as well be at a casino betting on a wheel spinning around.  Actually, playing the market with no plan is probably worse as people tend to play until they lose wheras even the most worst gambler in Vegas walks away from the table with cash once in a while. 

    If you want a rule of thumb and you haven’t read the strategy section then take your money off the table (using stops, NOT immediately) when you gain 20% and take your money off the table (immediately) when you lose 20% – that’s about as simple as I can possiblly make it.  If your goal entering a trade is to make more than 20% then, statistically, you have a 75% probability of failure.  There were 33 winners and 7 losers in last weeks picks (and a few still even) and 22 made 20% or more by Friday.  If you went with all 7 losers, as long as you stopped at 20%, then only 2/3 of the winners would have offset them – that’s why balance is so important.  Position sizing, scaling in, managing risk, using stops – all of those things are as important or more than picking winners.

    Ty Cobb was the greatest hitter that ever lives and 2 out of 3 times he went to the plate he was put out.  27 men go out in every game of baseball and a winning team gets about 10 hits all game.  It’s not about winning trades – it’s how you use them and how you allocate your resources and that’s something you MUST learn if you want to make money trading long-term. 

    Retailers/Bord – You missed the boar on CROX I think.  We were in for the easy money from $1.50 and we just went back in at $5 but $5.60 with a low VIX to sell premiums is not a good price.  I don’t follow CHRS but they are way too close to their highs for my taste and ANF I always like but why not give retail a chance to crash on poor holiday sales and then pick them up as a bargain?

    Storm/Samz – We’re not going anwhere today in NJ – lots of snow and that’s another thing that bothered me about the mall yesterday as we all knew it was going to snow big so I don’t think people were putting things off until today.

  23.  Phil
    I have GLD calls long Jun 103′s with Jan 100 calls (only) sold against them. Based on the recent pullback I’m looking at rolling to the Feb 103′s (p&c) – any alternate suggestions? Thx & enjoy the snow!

  24. Peter D/Phil/Cwan or whomever wants to chime in:

    Short strangles- I have been digging into the posts on the subject since I had some time this weekend.
    Want to be sure I have a handle on the overall strategy i.e., SPX strangle/Crazy Play – as outlined by Peter/others.

    As to general tactics/strategy- look to enter the position one to two months out- keeping an eye on the VIX and or general market decline to sell into for better premiums. Pick strikes – short call – +10% cushion; short put- 15% cushion.
    Position sizing is critical as margin levels can/do change with underlying movement. Portfolio margining allows much greater flexibility vs. conventional. Rule of thumb position sizing is allow (in the case of SPX- up to $20,000 margin) per contract entered

    To hedge against a large market decline, purchase one long put bear put spread per short strangle set. Long put leg strike should be approx. the midpoint of the strangle range (i.e., 5% down). The purpose of this play is to mitigate the paper loss and provide some "interim" profit to fund rolls. To finance the long put spread, sell an additional further out of the money put.

    Sell the put/call legs at the same time; Enter the long put bear spread also at the same time if concerned (such as now) there may be a significant general market correction.

    So, for a Feb entry-
    Strangle- Feb 1210/900 C/P
    Long put spread- Feb 1040 long/ 1030 short
    Additional short put to finance – Feb 950 put

    Assuming I have the above parameters correct, I am having trougle understanding how to manage the put vertical if SPX moves down to the 1040 range.
    Also, I don’t see where the margin mitigation comes into play.
    I figure that I am over complicating something but can’t get a handle on it. Hopefully someone can point me in the right direction.

  25. PHil,
    BAC-the 2012 spread (15/22.50) is net $2.22, not $1.25 so I assume you were looking at something else?

  26. Pstas
    Working on the weekend ?? – me too, but for other reasons. As a resident of California, I am doing my bit to help the state with their budget deficit (20 Bil. if you can believe). I am filing an estimated tax return, and paying the state tax early. This works well for me as well, inasmuch the tax paid is deducted on this years Fed tax return due in April. This might apply as well in other states.
    Re: TBT – I revisited all the fundamentals that I think apply to the movement in this ETF, as well as the historical chart valuations. My plan is to keep my short puts as they are for the June 46 strike, and add positions slowly as soon as the fundamentals suggest there will be some significant movement in an upwardly direction. The only way I see it at this point is the rates will have to rise for lots of underlying reasons. Foreign central banks are starting to back off of the idea of acquiring more Treasury debt, because they believe (and rightly so) the dollar is quickly being debased. The bonds they currently hold will drop significantly in value just as soon as the Fed starts to tighten the current policy of over liquidity. Why would a responsible foreign government want more of this very unstable instrument of debt knowing full well the value is sure to drop, the moment the Fed raises rates? This event is sure to take place in the not too distant future. The current administration has doubled our national debt in just two years, and this debt has to either be financed through sales of bonds or otherwise monetized. Both choices are real bad, and they both point to eventual inflation. There are other ways of playing this scenario, but I like TBT, because of the option volume and flexibility. I have made the assumption we will see some action in this direction by the Fed by the later half of ’10, and am buying Jan ’11 50′s calls.This will give me the unlimited upside potential I’m looking for. In order to finance this play, as well as to make some premium income, I am selling 15 contracts for each 10 call contracts bought, January ’11 45′s puts. I like these strikes as in the case of the calls I believe there is very little risk, and there is room for profit. In the case of the put strikes, the strike is conservative as I would not be disappointed with the assignment, and there is a good chance to make some income. This is an aggressively bullish play, but has lots of wiggle room as the ratio can be easily adjusted as time passes and of course be rolled. By the way, I too am hopeful that after the first of the year, I will be joining you, Peter et al, having fun with the short strangles on the indexes.

  27.  Saw this posted recently. A classic:

    From 2000. For the full text, go here:
    Editor’s Note: James J. Cramer is the keynote speaker at the 6th Annual Internet and Electronic Commerce Conference and Exposition, held today at the Jacob Javits Center in New York City. We’re running the full text of that speech here.
    You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.
    OK. Here goes. Write them down — no handouts here!: 724 Solutions (SVNX Quote), Ariba (ARBA Quote), Digital Island (ISLD Quote), Exodus (EXDS Quote), (INSP Quote), Inktomi (INKT Quote), Mercury Interactive (MERQ Quote), Sonera (SNRA Quote), VeriSign (VRSN Quote) and Veritas Software (VRTS Quote).

    We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over — and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don’t even have earnings per share, so we won’t have to be constrained by that methodology for quarters to come. 

  28. Pstas/
    I will do it this way: because I bot put vertical as a protection against my short put leg, I will not touch it untill will deside to roll short puts ( that time I will cash vertical)
    if market bounce back and your vertical play will expired worthless, so be it, we bot it as an insurance and was ready to loose it at the begining

  29.  From 2000. For the full text, go here:
    Editor’s Note: James J. Cramer is the keynote speaker at the 6th Annual Internet and Electronic Commerce Conference and Exposition, held today at the Jacob Javits Center in New York City. We’re running the full text of that speech here.
    You want winners? You want me to put my Cramer Berkowitz hedge fund hat on and just discuss what my fund is buying today to try to make money tomorrow and the next day and the next? You want my top 10 stocks for who is going to make it in the New World? You know what? I am going to give them to you. Right here. Right now.
    OK. Here goes. Write them down — no handouts here!: 724 Solutions (SVNX Quote), Ariba (ARBA Quote), Digital Island (ISLD Quote), Exodus (EXDS Quote), (INSP Quote), Inktomi (INKT Quote), Mercury Interactive (MERQ Quote), Sonera (SNRA Quote), VeriSign (VRSN Quote) and Veritas Software (VRTS Quote).
    We are buying some of every one of these this morning as I give this speech. We buy them every day, particularly if they are down, which, no surprise given what they do, is very rare. And we will keep doing so until this period is over — and it is very far from ending. Heck, people are just learning these stories on Wall Street, and the more they come to learn, the more they love and own! Most of these companies don’t even have earnings per share, so we won’t have to be constrained by that methodology for quarters to come.

  30. GLD/Deano - I’m still bearish on gold to $950 so just make sure you really want to DD on GLD at $103.  I’d roll to the 2011 $105s at $15.20 (+$4), which are easy to roll down and leave the Jan $103s as good protection and sell the Jan $103s for .92 as they can be rolled down to the Feb $97s so you have room for gold to fall $100 and if the puts go in the money you owe the caller nothing.  If gold holds up in Jan, then you can move to a Feb spread that bumps the Jan caller to a higher Feb strike (the Feb $107s are $5.60). 

    Short strangle/Pstas – I’ll let Peter take that one as he give them WAY more thought than I do.  These plays have a lot of moving parts when you do them that way and, to some extent, you end up betting against yourself, which I’m no fan of for my own trading – which is based more on targeting while this is more of a statistical model.  SPX is at 1,100 and you are looking to collect about $6.50 against a possible negative outcome of a Feb move of 10% up or down.  I’d be more inclined to sell the Jan $1,125s (the 2.5% rule) for $11 and the March $900 puts for $7.50 and put my faith in rolling but you absolutely need pm to even consider this kind of play as a money-maker. 

    Someone said something about TOS having a chart that plots expiration to expiration – please let me know where to find that as I’d love to play with it.

    BAC/Pstas – OK, looks like I missed $1 there as it sure does look like $2.25, not $1.25! 

    TBT/Gel – I totally love them, of course but keep in mind that a revaluing dollar is another positive factor in people buying treasuries (you make money off the dollar rebound plus interest) and could keep rates lower longer than you think.  The real big move in TBT will come in the next dollar cycle, after we peak out and then the dollar starts falling – at that point, I don’t know what they will have to pay in interest to get people to lock up their money in devaluating dollars but I’m betting it will NOT be 4.5%. 

  31. Phil/TOS
    if you would like to see how your position or portfolio will looks like at diff. expiration days, you need to go to Analyze tab and chose from drop down menu: expiration – +2 or +3 or +4 ( depends how many expirations you would like to see)
    I hope it is help

  32.  Phil – Re: "TOS having a chart that plots expiration to expiration" …
    If my memory serves me correctly, when on "Charts" tab, in right hand corner there is a drop down menu (chart ag period) where you can change from "1 min; 5 min etc to Opt Exp" view.

  33. Spitzer wants to see AIGs books.

    Figuring parent AIG is wavering in its support for its plane-leasing unit, International Lease Finance Corp., Moody’s slashes ILFC’s rating well into junk, putting more pressure on AIG – who says it’s committed to supporting the for-sale unit through Nov. 15.

    People in the Chzech Republic, Hungary and Estonia are happier than we are:


    We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.  It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue…

    The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.  However, the reason it hasn’t actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece — banks and investment banks and whatever is left of the financial sector — that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.  This whole article is a good read!

    Contrary to reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners do not strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to induce homeowners to ignore market and legal norms under which strategic default might not only be a viable option, but also the wisest financial decision. Unlike lenders, individual homeowners have thus generally not acted to minimize their losses and have born a disproportionate share of the burden from the housing collapse.  Another great article to read.

    Another gem from Time’s Bernanke features: The man who has done his part to keep mortgage rates low refinanced his own house in the past few months, to around 5% fixed: "We had to do it because we had an adjustable-rate mortgage and it exploded." And if loans are blowing up on Bernanke while the Fed is actively intervening in the MBS market …

    Moody’s looks into downgrades for $143B of jumbo-mortgage bonds, as losses start to pressure wealthy borrowers. The firm now expects losses of 3.8% on loans underlying 2005 prime-jumbo bonds, 8% for 2006, 10.9% for 2007 and 12.3% for 2008.

    The FDIC fails to find a bank to take over Atlanta’s RockBridge Commercial Bank – the 134th bank failure of the year – and will pay out insured deposits, at an estimated cost of $124.2M.

    The FDIC celebrates the last business-as-usual Friday of the year by announcing a total of seven bank failures, bringing the year’s total to a nice round 140. Banks were closed in California (2), Texas, Georgia, Michigan, Florida, Alabama and Illinois. Total assets of the seven banks were $14.4B. Estimated cost to FDIC: $1.8B.

    Brands we lost in 2009:  Circuit City, Saturn, Pontiac, Kodachrome..  Soon to be joined by Saab.

    The government’s broadest measure of labor underutilization — known as the U6 — has more than doubled in the two years since the recession began to 17.5%, and it is up from 12% just a year ago, according to the Bureau of Labor Statistics. This means that nearly one in five people are either unemployed, involuntarily working part-time or "marginally attached" — they want jobs but haven’t searched in at least a month. It also counts "discouraged workers" who have stopped searching.  "The number would be much higher if we included the mechanical engineers working at 7-Eleven," says Heidi Shierholz, who studies underemployment at the Economic Policy Institute, a left-leaning Washington think tank.

    The recession’s toll on consumers will be laid bare today as Bank of England figures show that nearly a third of workers have had their household income drop by at least £1,200 a year amid soaring unemployment, shorter working hours and pay freezes. About 30 per cent of manual workers and 27 per cent of office workers said that their disposable income — money left to spend each month after paying tax, housing costs, utility bills and loan payments — had fallen by £100 or more over the past 12 months, according to the Bank’s Quarterly Bulletin.  A further 22 per cent of manual workers said that their income had fallen by between £50 and £100 a month, denting annual disposable income by between £600 and £1,200.

    With many retailers disappointed with their "Black Friday" and "Cyber Monday" sales, many hopes turn to "Super Saturday" – but chain stores are digging in on discounts, avoiding deeper markdowns for now. Retailers "are several shades away from pushing the panic button," says analyst John Morris.

    A look at possibilities for the Commodity Futures Trading Commission’s plans for investment position limits, which are due any day now.

    Not a single bear in Barron’s 2010 survey. (via Roger Nusbaum, whose 2010 S&P target is 1,000)

    According to John Mauldin, we’re still in a long-term secular bear. "I want to see valuations come way down before I suggest that the index-investing waters are once again safe. That day will come. Just not for a while."

    After looking at the dismal performance of last decades’ stockpickers, Brett Arends comes up with some safe bets for the next ten years: pay off your credit cards; max out your 401(k); run the numbers on buying a home; weed out high-fee mutual funds; avoid inflation risk; EWJ?

  34. Option View/Diamond – Thanks, I never noticed that before – that’s great! 

  35. Herre’s one that couldn’t make it through the holidays:

    Citadel Broadcasting Corp., the third-largest radio broadcaster in the U.S., filed for bankruptcy in New York on Sunday.

    Citadel, which owns and operates 224 stations across the country, listed debt of more than $2.4 billion and assets of about $1.4 billion.

    As of Sunday morning, only Citadel’s voluntary petition had been filed with the bankruptcy court.

    Citadel is expected to file a deal supported by lenders collectively owed $2 billion, known as a "prearranged" deal in bankruptcy parlance.

    These lenders plan to swap a big portion of their debt for equity in a reorganized Citadel, effectively handing them control.

    The deal would reduce Citadel’s debt load to about $762.5 million, people familiar with the matter said. The company will need to solicit more creditor support in court to get its reorganization plan approved by a judge.

  36. Phil,
    BAC- Too bad, I was hoping you were running a Christmas discount sale on those spreads.:)

  37. pstas,

    You followed the SPX crazy play very well, just went a little side track at the end.  We don’t need to finance the long PUT spread by selling an additional further out of the money PUT.  So normally, we have 1x PUT vertical for each 1x short strangle.
    If SPX moves down to the 1040 range, the delta At The Money is around 0.5, so the 1040/1030 PUT spread would worth around $5.  We have several options:
    1- Do nothing
    2- Sell the PUT vertical and take the profit from the hedge off the table
    3- Sell the PUT vertical and use the profit to roll down the short PUT (away from the money).  This is more applicable if the short PUT is only 10% OTM (1,000 level).  I picked 900 so that we have a huge cushion on the downside, so we unlikely need to roll.

    If the short PUT is at 1,000, the margin requirement would have gone up considerably when SPX is around 1040, this is where selling the PUT vertical to roll down the short PUT would greatly reduce the margin requirement.
    4- Do option 2 or 3, plus roll down the short CALL for additional credit (double dipping the short CALL)
    5- (For PM folks and advanced traders) With 1-2 weeks to expiration, if SPX is above 1090 and less than 1170 or so, we can buy back all the short strangles as they would have lost 90% of their value, plus sell the 1040 PUT, so just shorting the 1030 PUT, which would be around $1 or 2 at that time.  We would recover $1 or $2 from the $2 hedge and bet that the market won’t drop below 1030 in 1-2 weeks.

  38. Hi folks,
    I used TOS Analyze Tab to do further analysis of the SPX February short strangle crazy play.  You can also do this for any other spread.  The parameters are:
    - Date: 12/18 closing price
    - SPX Feb 900/1210 short strangle for $6.5 credit
    - SPX Feb 1040/1030 PUT vertical for $2 debit
    Analyze Tab set up:
    - Risk Profile with Price Slice of "7 rows of 5% step"
    - Use Margin Indicator (under the Set up Button) for Reg-T accounts, BP Effect Indicator for Portfolio Margin accounts.  This is because the Margin Indicator doesn’t show the true effect of Portfolio Margining.
    - Change the simulation dates to give snapshots every two weeks, i.e. for 12/21, 1/4, 1/18, 2/1 and a special one at 2/19 to show the Profit/Loss (P/L) at expiration.
    - Ignoring the effect of volatility (big exclusion here)
    From this set up, I get 7 data points for the margin requirement, as well as 7 data points for P/L, every two weeks from now to expiration.
    To figure out the reserved margin and projected P/L, we need to make further assumptions.  My assumptions are:
    - The market would move at most +/-5% within two weeks, +/-10% within four weeks, +/-10% within 6 weeks and +10%/-15% within 9 weeks.

    The results:
    - Reg-T account: The highest margin is $262.  The potential profit between 1040 and 1210 is $4.5, which is 1.7% of the highest margin.  For SPX between 900 and 1030, the profit is $14.5, which is 5.5%.
    - Portfolio Margin account: The highest margin (from BP Effect indicator) is $70.  So the return is 6.4% between 1040 and 1210, or 20.6% between 900 and 1030.
    We discussed previously that we would reserved $200 per contract for PM account for the SPX crazy play, this analysis shows that we only need $140 budget, allowing for a doubling down.

    Additional observation:
    - If the market is flat to -5% down, the profit is $4.8 to $5.8 on 1/18.  So basically, the entire gain is achieved within the first 4 weeks.  No effect of VIX is taken into account in this observation.
    - If the market is -10% down on 1/18, the crazy play with the PUT vertical gives a profit of $3.5, versus a loss of $1.1 without the PUT vertical.  This is where we see the usefulness of the vertical, allowing for adjustments.

    - The level of reserved margin determines when we should make adjustments to avoid the margin call

    - If the market moves +/-10% within two weeks of initiating the spread, the required margin increases to $267 for Reg-T, and $75 for PM accounts.  Not a big increase in comparison with the above results.
    - The 1000/990 PUT is around $1.25.  We can save some money ($0.75) for less protection.

    I’ll repost this on Monday.

  39. Peter D, This is great information. Thank you. One quick question, as I want to learn the theory properly. You do put vertical and not a call vertical as well. Is that based on the idea that markets are more likely to explode down rather than up?

  40. Gel -
    Being short puts on TBT is like selling calls on TLT -
    Be careful because TBT could explode to the downside if we have another panic / mini crisis -
    I went short calls on the TLT – a little to early during the crash last year – I figured the dollar was going to come way down – right idea – wrong timing -
    I am assuming you have taken a look at the yearly moves in TBT -
    I want to put on the same trade that you suggest – just a little cautious about going short calls on tlt – / puts on tbt

  41. TBT- I will echo samz’s comments. My view is that TBT seems a "no-brainer". That is what concerns me. If it is so obvious that Treasuries will have to come down, then why are so many still in them? The answer? Fear and timing. There is still legit concern for a general economic decline (the so-called double dip) we don’t here much about currently. I guess these Treasury investors are trading security for yield and are betting they can get out if conditions improve before suffering big losses. Who knows?
    So, I am in the Jan 45/55 spread and will add to that position and sell some puts (or whatever else makes sense at the time)  if and when we get a meaningful market correction.

  42. Peter/tchay/Phil- thanks for comments on strangles. The picture is becoming clearer.

  43. bord, you are correct that it’s easier to go down faster than going up.  We can also do a CALL vertical, but the cost of the PUT and CALL verticals would add up to $4 or more, making it less attractive as we are betting against ourselves in a way. 

  44. Thanks Peter D