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Wrong Way Weekly Wrap-Up

This whole week did not feel right to me.

We were too bearish as I had expected a bogus commodity rally in last weekend's wrap-up but I didn't expect it to persist for a week, even as the dollar held it's ground above 80, a 10% pullback off the top, when oil was $40, copper was $1.50 and gold was $850.  Now oil is $80 (up 100%), copper is $3.35 (up 123%) and gold is $1,135 (up 33%).  Let's say gold is a true indicator of dollar weakness – that means that only 33% of oil and copper's move up can be attributed to the 10% drop in the dollar (not that even that makes sense but we'll give it to them).  Can the rest be attributed to demand?

Certainly not with copper.  Global copper consumption was down 1.9% in 2009 and Q1 2010 is lower than any quarter since Q1 2009 and even Barclays' very aggressive targets for China growth only bring global demand up 2.5% this year – whch would just about bring us back to 2007 levels of consumption.  That, of course, also assumes a rebound in housing construction – something we are not seeing at the moment.   Also, China spent $700Bn last year stimulating their economy and one of the ways they did this was to stockpile copper.  As you can see from the chart – that too appears to be winding down and even Goldman Sachs has abandoned the bullish side of copper at this point.

 

Oil is just as silly.  According to the EIA, global oil consumption is not expected to return to 2007 levels until late 2011 – and that is with some very rosey estimates of a global econonomic recovery – exactly the type of thing that can be derailed by high oil prices!  Mighty China's consumption is projected to go from 8.66Mbd this year to 9.13Mbd in 2011, a 500,000 barrel increase.  Last week, the US had a build in inventories of 4Mb – we just send those over to China and everyone is happy!  I've already had my say on oil demand this this weekend, so let's just move on…

Let's just say I'm a little skeptical about any market moves that are lead by commodity pushers at this very early stage in a recovery.  Prices are not going up based on demand but on expectations of demand in the future and that's a very dangerous game to play because it depends on drawing an ever-increasing number of speculators into the tent as they play hot potato with front-month contracts, like the 250 Million barrels that are on order at the NYMEX for April delivery to Cushing, OK – a facility that can only handle 40M barrels a month! 

If I order 2 dozen Boeing 787s to be delivered to my house because I think there will be demand and I can sell the planes to others for a higher price – am I an investor or a speculator?  Clearly I can't possibly take delivery of even a single 787 as I only have a 3-car garage and I'll never get the kids to clear out their bikes and sleds from the 3rd bay.  So that makes me a speculator.  I am not an airline and I am unable to take delivery.  Why then, is it so hard for our Congress to understand that those extra 210M barrels of undeliverable NYMEX contracts (84%) are PURE SPECULATION. 

You would think the fact that those 250,000 contracts were traded 278,000 times on Friday would be a tip-off as well yet our government sits silently as oil prices are ramped up 100% in 12 months, costing US consumers an extra $24Bn a month in the middle of a recession and hitting the planet up for an extra $1.2Tn – and that's without the refining mark-ups or flow-through inflation. 

We know our Government is bought and paid for by energy interests but et tu Europe?  China?  Bueller???  Anyway, so when I see a "rally" (it was only 150 points for the week) that is led by the commodity pushers in the Materials sector, which is now up 15% in the last 7 sessions, Energy, which is up 5% in 7 trading days, and the IBank speculators (up 12% in a month) then I begin to have late 2007 flashbacks, especailly as we have several countries on the verge of collapse while the markets party like it's 1999.  Forgive me for being skeptical but a low-volume rally led by commodity pushers moving up on a false premise is not a train I'm looking to jump on board of.  But what a week it was:

Monday Market Mayhem

The Earthquake in Chile was the excuse to jam oil and copper up in pre-markets and I noted that copper production in Chile had been unaffected, sending out a 5am Alert to Members with a short play on the copper futures, which topped out at $3.48 and fell all the way back to $3.27, which is huge for a futures move!  We also had a long-standing play to short FCX at $77.50 and they hit our target as well – that's a play I re-stated in the morning post as it was still available at 9:30.

We got mixed signals out of China but it was Goldman Sachs upgrading China’s automobile, health-care, personal computer and Internet stocks that got me bearish as I KNOW that is BS so the whole thing smacks of market manipulation.  As I said that morning: "Gee, a Gang of 12 member dropping the upgrade bomb on foreign markets and goosing our futures – IT  MUST BE MONDAY!"  21,000 was the 5% line on the HSI and I predicted resistance there and we got a nice pullback during the week.  That will make 21,000 a critical global indicator for next week's action!  

I was wrong in thinking that the BOE and the ECB would raise rates to fight inflation on Thursday.  That gave commodities another boost to end the week but it doesn't change my fundamental outlook that they are overbought here.   A huge move in the Dax was the surprise of the week and we are pretty much over all the red lines I laid out in Monday's multi-chart so we will have to prepare to switch off our brains and go with the technical flow if we don't get a quick reversal next week.   

  • FCX short at $77.50, out at $76.50 – up 1%
  • FCX March $75 calls sold for $3.75, out at $3 – up 20%
  • FCX March $70 puts at .75, out at .90 – up 20%
  • TZA Apr $7.50s average $1.05, now .70  - down 36%
  • FCX ratio back spread – on target
  • ERY March $11 puts sold for .50, now .85 – down 70%
  • TBT complex spread – on target
  • TASR Jan $50 puts sold for .55, now .50 – up 10%
  • SPWRA Apr $19 puts sold for $1.60, now $1.10 – up 31%

The smartest thing I said all week was at Monday's close when I was asked if we should flip bullish based on the day's action and I said: " If we hold it tomorrow we’ll have to be until we have a 3/5 breakdown (of our bounce levels)."  I sure would have had a better week if I'd followed the technicals instead of my gut!  Of course, we were trading to balance last week's extremely bullish collection and ALL of our losing plays from last week (ACI, TBT (6x), AMED) except for PALM were bullish plays that have now turned around – bumping us up to 55 winners out of 56 trades for the prior week so it's little wonder we strive to protect ourselves from a drop until we cash out our bull side.  

Tuesday – Bill Gross Gives Us 90 Seconds

Here's how powerful Bill Gross is:  In my post, I called him "a pompous jackass" (lovingly, of course), which I don't feel is unfair for the guy who comes up with this chart to explain why "no one gives a damn about you and your problems – maybe those shoes and that dreadful eye shadow you’re wearing, but not anything audible coming out of your mouth."  Bill Gross is so far up the ladder in the top 0.1% that we are all literally ants that annoy him as he tries to make his way around a buffet table

When this article was published in Forbes, though, Bill Gross becomes "a pompous dude."  Great, 100,000 people think I use the word "dude" to describe people – now my Pulitzer is right out the window!  At least we've spared Bill Gross the awkward shame of being called a jackass just because he thinks its amusing to tell us little people how insignificant their petty lives are to him to the point where 1/1,000th of his day quickly becomes unbearable when someone like you attempts to monopolize it by having the nerve to actually speak to him at a party.  In fact, when you think about it, the kind of people at a cocktail party with Bill Gross are already in the top 1% – when he's forced to go out in public I'm sure he has snipers making sure none of the real riff-raff waste any of the precious time of the man who said: "Medical problems?  Unless you’re dying from cancer – don’t care."

Anyway, Bill did make other, good points in his letter that were similar to my points in "The Wonderland Market" and we talked about how the current market is being governed by "The SEP Effect" and can continue to rise indefinately, now matter what Bill and I think about the fundamentals.  I predicted that Greece would not actually get bailed out on Friday and, not only is Greece not resolved but now Iceland is poised to boil back over into a crisis.  There's clearly a housing bubble in China along with the usual CDS, MBS, unemployment, inflation, deflation, foreclosures and credit-card defaults but, as the markets have clearly indicated this week – they must be somebody else's problems. 

  • DIA March $103 puts at .80, out at $1, up 25%
  • USO Apr $38 puts at $1.05 (roll) now .88 – down 16%
  • EDZ Apr $4/5 bull call spread at .60, now .45 – down 25%
  • EDZ Apr $5 puts, sold for .50, now .65 – down 30% (pair trade)
  • SDS June $29/32 bull call spread at $1.90, now $1.60 – down 16%
  • SDS June $32 puts sold for $1.90, now $2.05 – down 8% (pair trade)

The EDZ and SDS are our newest "disaster hedges," both with 10/1 payoffs if the market heads south.  Both are even cheaper now than the were on Tuesday and can be used to protect uside gains by committing 10% of the profits into the protection – that allows us to ride out our winners past the point where we'd usually want to take profits off the table. 

Something that bothered me on Tuesday was this chart from Bespoke, which listed the S&P 500 companies with the highest percentage of sell ratings.  What's crazy about this chart is there are just 21 out of 500 stocks in which even 1/4 of the analysts following rate it as a sell.  This level of unbridled optimism can be a LITTLE dangerous: 

 

Which Way Wednesday – The Beige Book Boogie

I posted up our 5% rule chart and our 2.5% upside line was 10,420, we topped out almost exactly 1.25% above that at 10,550 on Friday.  We considered this a possibility and my plan in that case was to cash out the longs at 10,700 and go "CRAZY SHORT" on the retest of our tops.  Tracking the last BBook day, we know we had a false rally into the next week but if we get over 10,550, then crazy will be the operative word for going short until things settle down.  We did, in fact get a nice sell-off into the afternoon but then – what a comeback! 

  • GLL Apr $9 calls at .65, now .75 – up 15%
  • FCX March $80 calls sold for $2.50, out at $1.50 – up 40%
  • FCX Apr $75 puts at $2.50, out at $3 – up 20%
  • DBA 2012 artificial buy/write – on target
  • USO Apr $38 puts (roll) at $1.24, now .88 – down 27%
  • RUT complex put spread – on target
  • RUT complex call spread – on target
  • EDZ Apr $5 puts sold for .60, now .65 - down 8%
  • EDZ Apr $4/5 bull call spread at .60, now .45 – down 25% (pair trade)
  • EWJ March $10 puts at .08, still .08 – even
  • TZA March $8 puts sold for .29, now .52 – down 79%
  • FTR Aug $7.50 puts sold for .70, now .75 – down 7%
  • BRK.B artificial buy/write – on target

We got the Beige Book at 2pm and I had the summary with my comments up for Members that afternoon.  The report was far from encouraging – possibly worse than the one we had on January 13th, the week before the market began an 800-point decline but that was spurred on by the catalyst of Greece.  This week we had nothing but happy talk and more stimulus that took us quickly off the bottom – a little to quickly for our comfort.

Thrilling Thursday – Consumers Still Unemployed, but Shopping!

469,000 people were fired in the week ending February 26th.  According to Friday's NFP report though, 459,000 people must have replaced them because our total job losses for the month were 40,000.  We didn't know that was going to happen on Thursday but I was expecting a better-than-expected NFP report on Friday due to census hiring.  The real upside story on Thursday was retail sales, which were much better than last year – which sucked.  Not sucking is rally fuel to good news-starved investors and we should have had more faith in the stick this week as end of day and pre-market moves were responsible for 400 out of 150 points the Dow gained for the week:

Even more impressive, the up volume for the entire week was less than the volume of the 450-point drop from Jan 21 & 22.  So, in theory, a person who ran a program selling into that drop at an average of Dow 10,400 could have run another program to buy back the same stocks between 9,900 and 10,400 (averaging 10,150).  Once they do that, all they would have to do is run a program to jam the market back to 10,700, at which point they could dump everything again for an average of 10,400 and PRESTO – another 2.5% profit! 

Thank goodness there are no firms we can think of who would do something like that, which would virtually guarantee they make money on every single trade and thank goodness such a trading program couldn't possibly exist or I'd be worried by this kind of chart action…  Speaking of market manipulation (not that there is any, of course), Barry Ritholtz has some great advice for traders who are fed up by the games they see being played that I heartily agree with:

Yes, there is an insanity to the markets that can make you mad if you let it. Instead, learn to see the delightful absurdity of it all. Revel in the stupidity, learn to read when the ‘wisdom of the crowd’ turns into an angry mob. Find some Zen in the foolishness of others…  You need to be able to comment on the madhouse — and you can do so acerbically, mockingly, derisively at times — while recognizing, acknowledging, and waiting for the technical set up to bet against the crowd.

You must learn patience, young grasshopper. You must have faith that EVENTUALLY, the sorta kinda, almost efficient market will figure it out. That is when money returns to its rightful owners. There will be long periods of time when the blowhards, the jackasses, the arrogant, the ignorant will be eating better than you. During the dot com bubble, the dumber you were, the more money you made. Many of those who understood how silly things were missed out on the boom.

But this state of affairs is temporary. Eventually, the knaves starve to death under the oppressive force of their own ignorance. Be patient. The day of reckoning is often surprisingly late in its arrival, but it will not be denied. The beast must be fed…  Trust me when I tell you, its worth the wait . . .

It was with the same attitude that I gave this closing advice to readers in Thursday's post: "Greece is still the word and even a rumor of a move regarding a possible resolution to the Greek tragedy send the Euro and the Pound flying up and down.  So let’s enjoy this morning’s "good" news and we’ll see if we can get another nice entry on the USO puts and possibly a re-load on the DIA (same plan as yesterday) but we DO NOT want to be too short into the close as we may get an upside surprise on tomorrow’s Non-Farm Payroll number thanks to the census hiring."

  • Oil futures short at $80.50, out at $80 – up $10 per penny per contract
  • USO Apr $37 puts at avg $1.01 now .88 – down 15%
  • OIH Apr $120 puts at $2.65, now $2.30 – down 13%
  • OIH March $125 calls sold for $3.60, out at $2.45 – up 32%
  • SRS complex spread – on target
  • PNC ratio backspread – on target

Notice we were not sure what was going to happen the next day so we had very little trading.  The quick money from the OIH call sale allowed us to hang tough on the USO and OIH April bearish plays.  This is a good way to look at balance in a microcasm – we take profits off the table to keep ourselves more neutral and, if necessary, we have cash to go long on oil or other commodities (like Wednesday's DBA trade, which is a serious long-term play, not like the smaller, short-term trades) to balance things out. 

Thursday was also TIVO day as they finally won their patent suit.  TIVO is a good example of the kind of "set and forget" plays we do that make up 75% of our virtual portfolios yet get 1% of the time in chat – simply because they work and there's nothing to discuss.  During chat, and even reviews like this one, we talk about DIA and TZA and SRS and many, many short-term trades because they require LOTS of attention but don't confuse that with what is really important – which is finding good value plays where we can park serious money for long periods of time with HIGH expectations of making a profit.  Our TIVO play from December 8th's Member Chat was: 

TIVO – At $9.89 you can buy the 2012 $7.50s for $4.75 and sell Feb $10 puts and calls for $3 so that’s $1.75 on the $2.50 spread with lots of time to roll.  The 2011 $7.50 puts are an even roll from the Feb $10s but you’d better be willing to own TIVO at net $8.50ish to make this trade.  To avoid the put issue entirely, the 2011 $10/15 bull call spread is $1.40 and you can cover that with the 2012 $15/12.50 bear call spread at $1.60 so you get $2.50 back if TIVO goes belly up and we can assume you won’t lose more than .80 on the bear side if TIVO does well and then you collect $5 in Jan 2011 less whatever you lose on the long bear play.

In play #1, we could not have been more thrilled as TIVO hit our target on expiration day, closing at $9.99 on 2/19 and wiped out our caller and putter!  That left us with a very comfortable net of $1.75 on the 2012 $7.50 calls, now $10.50, up 500% in 3 months.  In the second play the 2011 $10/15 bull call spread is now $3.20 (up 128%) and the $15/12.50 bear call spread is still $1 (down 38%).  As a pair, $3 was put in play and the two positions are now $4.20 for a 40% total gain on a very well-hedged position in just 3 months!  Of course, we now feel fairly secure in the bull call spread so we cash out the protective put play, take the .60 loss these and hopefully we'll end up with $1.80 more as the $10/15 spread matures, which would bring us up to a total return of $6 – up 100% but with just $2 of $3 original dollars left on the table for the longer term. 

If 75% of your virtual portfolio is made up of nice, safe plays that make a nice return and require virtually no attention from month to month – THEN you can afford to mess around with the fast money of front-month options but, without building that solid long-term foundation, the pressure to "perform" day in and day out can be overwhelming and even lead you to make poor trading decisions.  I see a lot of people chasing the fast money, possibly because so much of what you see on TV and what many sites advertise is based on that because everyone wants to hit the lottery but the real money in this World is NOT made by the lottery players – it is made by the House!  Please take the time to learn to BE THE HOUSE and not the gambler!

Jobless Friday – US, Japan and Europe Add More Stimulus

We lost a net of 36,000 Jobs in January.  The country needs to produce 100,000 jobs a month to stay even with population growth and we lost 36,000 for a total of 8.4M jobs lost (and none gained) since December of 2007.  9.7% of the population is officially unemployed with 16.8% in the government's U6 statistic – counted as "underemployed."  40% of the unemployed people (3.3M) have been so for more than 27 weeks and are on extended benefits, the kind that barely got extended in last weeks idiocy in the Senate.  The average workweek for those who are "employed" has dropped to just 33.8 hours and over 250,000 of our job additions in the past 4 months have been Temp jobs, including census workers who WILL be let go later this year. 

High-paying Construction and Goods Producing jobs dropped 124,000 in January and were replaced by 42,000 Service Jobs (do you want fries with that?) and 47,000 Temp workers so forgive me if I don't do backflips over these numbers

BUT, as you can see from this chart that Barry dug up, this is GREAT news for us top 10%'ers because look how much cheaper it is to pay the little people!  Good news for US plantations corporations, who are able to drive profits ever-higher despite the declining ability of US consumers to spend, as they are free to pursue both profits and even lower-cost labor overseas.  This slash and burn-style policy is nothing new – here's a 1994 article from Business Net advising corporate pirates to make sure the don't JUST lay off the employees because "they come back like weeds" – the trick is to make sure you ERADICATE the structural position entirely so that cost never again darkens your bottom line!  Ah Capitalism

  • FCX short at $80, now $80.71 – down 1%
  • DIA $106 calls at .61, out at .75 – up 23%
  • USO Apr $38 puts at .88, still .88 – even
  • TZA Apr $7.50 calls at .80 avg., now .72 – down 10%
  • Oil Futures short at $82, out at $81.50 -  up $10 per penny per contract
  • EDZ July $40/48 bull call spread at $4, still $4
  • EDZ July $35 puts sold for $2.50, still $2.50 (pair trade, not trading yet).
  • TZA March $9 calls at .11, now .09 – down 18%
  • DIA $104 puts at .68, now .58 – down 15%
  • AAPL Apr $220 calls sold for $8, out at $7.50 – up 6%
  • GOOG complex spread – on target
  • VIX May $18/March $18 calendar spread for .15 credit, still .15 credit – even (note this is a dangerous play as VIX months do not have a direct correlation to each other!)

At 3pm Consumer Credit came in at +$5Bn vs. -$5Bn expected.  That helped give the markets and added boost to end the day but we just strapped in and endured (not enjoyed) the ride as our short plays were being crushed.  The last play of the day was a tough decision to take out the FAZ $17 calls we sold in the $100KP at .95, up 70% from our original sale but it leaves us exposed on our $15 calls and we'll have to deal with that next week if the markets don't turn down.  We'll do a $100K Virtual Portfolio Review on Sunday. 

So, all in all, it was a rotten week with 17 of 46 trade ideas missing the mark.  We are pretty bearish on our short-term plays and we'll need to get aggressively long if we head higher next week to balance back out but we had to go bearish to protect last week's gains as the prudent thing to do would have been to cash them out at 10,400 but now we are glad we waited as we may hit that 10,700 mark before turning back down after all

 


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  1. Phil
    during last correction looks like I made a big mistake: I didn’t cash my hedge positions ( EDZ,SDS,SRS DXD) and now all profit viporised,
    why I didn’t do that? because of portfolio Delta: If before correction I had balanced portfolio by Delta and market started go down, Delta of portfolio started get positive (because of Gamma), so if I start closing my Hedge positions with profit, portfolio Delta will became even more positive (plus if we start opening additional long positions at the dip)
    So what is your rules about that? May be we shouldn’t watch Delta and make a rule to close hedge positions, let’s say every 200 point drop of the market close 20% of hedge?
    please share your thoughts and experience


  2.  It seems if one of us is having great success with a particular trading methodology, then it should be shared.  On Optrader’s section yesterday he was asked how he works with AAPL as an investment.  He replied that he just ‘plays with the covers’.  I haven’t asked him yet just how, but it prompts me to relate specifically how I’ve played certain stocks that have given me phenomenal gains.
    Pick a stock that is expected up over the long term.  (take GOOG).
    Wait patiently for a significant pullback. (it always comes eventually)
    Buy deep ITM calls far out
    Wait patiently.  When the stock takes a significant upward trend (it will) sell ATM short term calls and be ready to roll them forward to keep the premium high.  
    The first month the covers expire worthless, sell the ITM calls and go back to go.
    I’ve got a separate portfolio where I use primarily this technique over the past 6 months.  Up 60%
    The principles involved are stock selection, patience, patience, using covers to protect profits, rolling covers to maximize premium return, and exiting when covers are gone and stock price is high.
    Sometimes it’s hard to remember where you learn to do this stuff, but much of it is from integrating principles I’ve learned here with thing I already knew.    Thanks for the help on this, Phil and others.  


  3. Thanks Iflan. That sounds like a good strategy. The theory would seem to be that the front month calls expiring worthless is telling you the run in the stock is likely over. Would you agree?


  4.  roaster….exactly.  then time to start over


  5. Iflantheman
    very good strategy indeed, but I like even more to buy LEAPS ITM call spread with 50-100% potential + sell LEAPS ITM puts+ sell 1/2 monthly calls
    this strategy required much less capital ( especially for expensive stocks: GOOG, AAPL and others) have at least the same profit potential and better protected against stock decline


  6. another issue: if you buy just LEAPS call – Theta works against you, but if you buy LEAPS calls spread (ITM) – Theta works for you


  7. plus we can trade with our short LEAPS puts to make it even better, for example after last AAPL run up, my Jan11 170s put drop in price from $17 to $8 just in one month and I bot it back and now will wait and when AAPL pull back to 205-210 area I sell same put again


  8.  tchayipov….Thanks.  I’ll study that technique.


  9.  tchayipov….If you’ve time, for illustrative purposes, show me how you would set this up for , say, GOOG, or any other.


  10. I think it’s worth reiterating a previous point: If the Dems have any control over what happens, the market will not be lower than it is now come election time.  What do you all think?


  11. for example: when GOOG pulled back to 530 area you could buy Jan12 480/530 call spread for $27 ( if GOOG will be above 530 in 2 years just this spread have 100% potential) + you sell Jan12 480s Put @ $54 and sell 1/2 March 560s calls @$7
     
    now after GOOG run up you can roll you Mach 560 to Apr. 580 ( but I will wait because now Mach 560 @$11 and pure premium)
    your short put dropped from $54 to $43 and if you think that GOOG will pull back you can buy them back and re sell after pull back


  12. probably better idea to sell Jan11 480s puts instead of Jan12 480 puts, this way if GOOG decline you have opportunity to roll them down for another full year


  13.  And is there any margin necessary with this GOOG example?


  14. Inflantheman
    by the way, if GOOG will run away from this level in one year ( for example will trade at 650 as expected) you will realize 90% of your profit potential and probably you don’t need to wait for another full year to get remaining 10%, so you can close position and get 90% per year plus whatever you make from your short puts and short monthly calls


  15. yes, you will need margin for short puts and calls


  16. with PM you need around $3000 margin for each put sold


  17.  tchayipov…where’s the best place to go to look at potential trades in graphic form, showing profit/loss with time and price changes. ?


  18. if you have TOS you can go to Analyze tab – click "add simulated trades" and see it


  19.  tchaylpov…..In spite of trying, I cannot find an ‘analyze’ tab on my TOS.  Can you be more specific on how to find it?  Thanks.


  20. do you use web based TOS system??? you should download computer based application from them (much better) and on top you will find tabs: Monitor, Trade, Analyze, Scan, MarketWatch, Charts, Tools and Help
    you need to click on Analyze tab and on the top left choose "add simulated trades”
    I’m leaving town, will be back tomorrow night


  21.  iflan – i do what you described quite a bit.  I have been doing that for AAPL and GS.  sell calls and buy them back.  again and again…..but GS has now run away from me.  So I now have to wait for the premium to whittle down and then roll.  Like you said, it involves picking the right stock that has juicy premiums, patience and conviction.  Easier said than done.  But once it starts going, its pretty nice.


  22. Iflan
    Very informative post.  I have been dating the same gal for a long time, and like you say, it is very profitable. I sometimes do the trade a little differently if I am bulish about the stock, and the market direction, I buy a 1/2 position of the stock and sell ATM puts and calls, with the assumption I must roll if need be. This seems to work well in a market that is pointed up, or the stock has recently taken a hit, such as GOOG..


  23.  aclend, the market could double by Nov (don’t worry, it won’t) and the Dems will still be toast.
     
    This will be a historic toasting.


  24. Health care- So now even the Washington Post is, however meekly, calling for starting over.
    http://www.washingtonpost.com/wp-dyn/content/article/2010/03/06/AR2010030601941.html


  25. Here is a great SPX chart to think about….and the linking article. 



  26. Two stocks interest me: GameStop (GME), with a large Short position, has earnings March 18th, a day prior to Options Friday, and AT&T (T) which is a month away from x-div and may see added commercial interest with renewed corporate spending,  faster internet speeds and new Apple product contracts – any thoughts?


  27. tcha and iflan — I read your comment yesterday, question is this stragety sometime other trader and Phil call it artificial buy/write — i see this comment but not quite sure this is what other traders are talking about. 
    tcha — in Iflan strategy when the stock has it run up, he closed out the long far out position ITM when the first month callers expired worthless, and then wait for a pull back and start the position all over again.  In your case the LEAP bull call spread, you mentioned that you only buy back the putter when the stock at it high price, then buy back the putter when the stock pull back, but what do you do with the LEAP ITM long call and the LEAP short call, do you leave it alone till expiration month then roll the Leap bull call spread again out to Jan 12 LEAP and doing the same thing over and over again sell the front month caller ATM and keep collect the premium. Please explain how the exit stragety work. thx ahead


  28. Pharm- can you explain what he is talking about regarding "GAPS" ?


  29. Edro — If you’re reading this, your thoughts in the TZA April 7.5 calls was much appreciated.  That was time and thought out of your pocket so to speak.  I’m grateful


  30. Well so much for my career at Forbes!  Apparently my discussion of their editorial policy in the above post was the last straw after they have already had to have "several" meetings about my content.  Actually, it lasted long than I thought it would!  8-)

    Corrctions/Tcha - I often say balancing a portfolio is a lot like surfing.  You need to ride the waves and you need to make constant adjustments but what is a wave?   It’s a channel!  If you go too high or too low you wipe out so as you get high, you strive to move to the middle and as you get lower you position to get back up towards the middle.  Consider the 5% lines on the charts to be a channel we move through around the 10,165 mark with 10,700 on the top and 9,700 on the bottom.  You don’t need to be delta neutral all the time.  Your buy/writes and the major hedges should be fairly neutral but you do need to take a stand at certain places.  I generally advocate being 60/40 bullish at the bottom of a channel and 60/40 bearish at the top and we get a little more bearish on 2.5% up (10,400) and a little more bullish at 2.5% down (9,900) although I made a judgement call at 9,900 to be much more bullish – just like I made a (so far wrong) judgement call to get more bearish at 10,400. 

    My logic, of course, was that since the 2.5% line held at the bottom, we should have gotten stronger resistance at the top but really we did as we skimmed along that line all week and it’s actually 10,420.  Between that and the many fundamental problems I still see, I simply didn’t think even "THEY" could pull this off but the volume was crazy low and "THEY" can do whatever they want if they are the only ones playing the game. 

    So it’s really, really good that you are aware of your greeks but that is not what it’s all about – just like surfing isn’t all about where you put your feet on a board.  My "rule" – and we need many more talks about this – is to work on building up 10 positions that are 75% of your portfolio that you believe are rock-solid.  THOSE positions should be generally buy/writes, whether natural or arificial and they should be fairly diversified. 

    If you have 5 positions that make 20% in a flat or up market and 5 positions that make 20% in a flat or down market – what happens?  In a 20% down market you make noting – but you don’t lose either!  In a 20% up market same thing.  Anything in between, however, you make 1-20% and, since we can usually roll to wider strikes – your 20% zone gets wider and wider over time as well. 

    As to closing hedges – hell yes.  Like any position, you MUST have a trading plan.  Our plan on SDS is to make 100% in a down market between now and June (4 months) so I expect to make 25% per month.  If they go up 50% within 45 days, I need to seriously consider taking them off the table.  Also, if I am satisfied with the move down then I want to RE-balance. 

    If the market drops 20% and you were delta neutral, then you have some positons that were up 20% and some that were up 20%.  Where is the logic to "letting it ride" if you think the correction is over.  If your allocation was 50/50 then you are now at 60/40.  If you take 10 of the 60, you can then buy 25% more of the 40 at the bottom (or top) of your channel and now you own MORE long-term position that will make you an income.  If you are even more bullish, you may flip by taking 1/3 of your 60 and using it to buy more and roll and improve your 40 with 50% more buying power and then – PRESTO, you have gone from 60/40 bearish to 60/40 bullish but you have 50% MORE bullish positions than you started with.  If it runs the other way and those positions get back to where they were then your 60 becomes 72 and the 40 become 32 and that’s 104 – suddenly you are up 4% but still with many more long-term positions than you started with. 

    None of this makes any sense if your "long-term" positions are 75% premium that expire in 3 months as the Theta kills you anyway but if your long-term positions are VALUABLE stocks and Leaps then you are in the premium business, not only being the house but putting on additions as they cycle swings back and forth.  This strategy will not (and never should) give you any great thrill of victory.  It is "The Man Who Planted Trees" all the way. 


  31. Patience/Iflan – I think that’s the hardest thing to teach.   Like we had 6 different TBT plays on the way down when people kept freaking out that they had dropped from 50 back to 46.50 but only when they head up again does everyone want to know what play to make.  It’s very important to KNOW there is a price you are willing to own something at and then it’s just as important to KNOW when you are ahead of your profit goals and get the hell out. 

    Dems/Ac – Wall Street does not like Obama (feeling is mutual) so there is no PPT for the White House or the Dems.  Clinton was good with those guys but Obama, not so much…

    Run away/Jo – Don’t forget you can always just roll the caller forward.  Like if you have a GS 2011 $150 and you sold the March $150s, now $17.50 with barely any premium, you can just roll tem to the July $155s at $19.20, not up much but that’s $2 cash and $5 in position against your $27.80 call (25%).  That’s without selling puts too.  Selling the July $135 puts for $2.50 is $1,350 in net margin and that $2.50 is another 10% of your long and can be used to push the caller up another $5 on the next roll (or push your long down).  Maybe GS never pulls back but most stocks do at some point – the trick is to just always strive to make incrimental improvements in the overall spread. 

    Here Cap, this is for your site.  Notice how the GE-sponsored satirists say the word "unpopular" 12 times in 4 minutes to talk about Health Care reform.  I liked this one too.

    TBT/Pstas – Well we kind of knew the budget was BS, didn’t we? 

    GME/Albert – Yes we do like them, we were buying GME on the big dip and we always like T as a long-term play.  Both are still in reasonably good spots to do a buy/write for a first entry – GME has $1 strikes and you can sell Apr $18 calls and $17 puts for $2 for a net $16.08/17.04 entry and T is right at $25 but they pay a nice 6.7% dividend so you can be lay and sell the 2012 $25 puts and calls for $6.30 for net $18.70/21.85, which is a very nice 13% discount if put to you in 2 years PLUS the 13% dividend is a nice 26% cushion to your entry and, if T is over $25 and you are called away – that’s a bonus 33% for you


  32. Gucci
    I think that the best way to leave your LEAPS alone if they stay ITM, but if you have 2 years long spread but got 70-80% of profit potential in 6-10 month you can close position and start it again after dissent pull back but at higher strikes
    short calls I roll as ussual – when premium disappear


  33. Phil thanks,
    but in my situation, when we were at the bottom of the chanel, Delta of my portfolio dropped from 60/40 bearish to 60/40 bullish just because of Gamma, it is mean that if I close my hedge position with profit at that time, my portfolio Delta will be 80/20 or even worst, so this is why I didn’t close them


  34. Re: Forbes, I didn’t want you to go mainstream anyway. It’s like when you "discover" a great band and then everybody else starts listening to them and, somehow, it ruins it. I’m surprised they gave you a shot at all, given all the typos!  HAHA


  35. Phil/Forbes
    I had to laugh, as it was apparent this might be coming.  I must say, "it is bettet to be Right and Bright, than to be a Kite that is driven by the wind". I have full respect for a man that sticks by what he knows, and and is willing to defend his position. It is their loss, not yours.


  36. I stopped reading Forbes after Malcolm died and someone put Junior in charge.


  37. Phil
    just to make it clear, when you talking about balancing (50/50 or 60/40) you talking about Delta, profit potential or capital invested??
    because if it is a Delta, and we have 50/50 portfolio, during market decline Delta balance shifts from nutral to positive


  38. Phil,
    Obama may not like Wall St, but his " advisers " are not going to let him waste $ on bailing the Pension Guarantee Fund that could be spent on their agenda, paying back the people that voted for him !! The PPT will be fully funded .


  39. Phil/Forbes
    I realize Forbes is a conservative publication, as do most readers, but I have difficulty trying to understand how they could pass up the terrific opportunity to expose their readers to your brilliant commentary that is available to our members each day.  I,as a conservative when it comes to politics, look to the content of the missives as jewels of information that give me direction for daily investment ideas, and opinion otherwise is window dressing,  and not the meat of the presentation. Option trading is growing faster than our federal budget ( is that political?) and the Forbes readers are short-changed, in my opinion,  without your commentary and opinions.


  40. Deltas/Tcha – As you can see from the $100KP, it’s not so much delta per se I look at as how the actual cash balance performs.  In theory, of course, it’s the same thing but I like to look at it in terms of where something will leave me in real terms.  Like on Thursday, I said if the market breaks up then the aggressive portfolio would drop to $85K and by staying bearish into Thursday’s close I was committing to going into the weekend at $85K still very short.  The portfolio finished at $84,462 – whether it’s delta or dollars, you have to learn to get a feel for your risk and have a realistic assessment of where a move is going to leave you and what you think you will be able to do about it. 

    Mainsteam/Ac – They called me out of the blue and asked if they could run my stuff and I said sure but even at the time (and I think I said so that day in chat) I was wondering if they had actually read it.  Now I’m sure that some edtior was told – "Get us one of those popular bloggers" and my name came up but as soon as they actually printed my stuff their readers freaked out, which freaked out and the "bigwigs" told the editor to "shut it down" (his words).  My only regret is that they didn’t have the balls to call me down to the offices in NY, where I could have given them the old Otter defense

    Ah well, back to toiling away in obscurity but at least I had a chance to call Bill Gross a "pompous dude" – they can’t take that away from me…  8-)

    Thanks Gel – The MSM is doomed because all they know how to do is mass market.  They want to lever the Forbes brand name by adding a section for bloggers but then they want only bloggers who "fit" with the Forbes family – in other words what they really want is free content so they can lay off more people and avoid coming up with their own ideas or developing their own talent.  I’ve got to tell you though – if you thought I was cynical about what kind of BS filtered content we were getting through the MSM before – this experience has only shown me things have gotten much worse over the past few years. 

    Malcom/Diamond – That guy was a gay biker – he knew how to party! 


  41. Gaps/pstas – if you notice on the chart there are 2 lines that have "gaps" between them that are the same color.  Those lines represent gaps that need to fill.  I and others here, note gaps up or down that need filling on a chart.  It may not happen tomorrow, or in a week, but gaps fill, and technical analysis can help see when those will fill.  My next installment of TA should have some of that in it.
     
    STEC has a nice gap (again, cough) that needs to be filled in the positive direction.  There remains a huge short interest (Tyler’s article on PSW has the info along with many others).  Between STEC and SYNA, they have cost me a small truck, so I will shy away, but for those with iron stomachs, they are there for the taking.