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Wild Weekly Wrap-Up – The Madness of the Markets (Part II)

Well this is a first.

For some reason I keep getting an error trying to continue the previous post so I'm just going to continue here.  Sorry about that but it's too early on a Sunday to wake up the programmers.  So, where were we?  Oh yes, we had just finished getting full circle back to last weekend's post, where we reiterated bearish positions.  My target for this week kept falling from 10,700, to 10,500 to 10,200 as we lost all confidence in the ability of our indexes to recover and, of course, Europe fell quickly apart:

Monday Monetary Madness – Ewwwwro! 

It's amazing how quickly people can lose faith in one of the World's 3 major currencies.  So amazing that I can't believe you can sleep at night!  Have I mentioned how much I like TBT lately?  The Euro dropped from $1.51 in November to a low of $1.21 on Tuesday, that's our 20% rule, by the way and a retrace to $1.27 (20% of the drop) is not going to be very impressive until we're well over it. 

Unless you are an exporter (and who in America does that anymore?) then a strong dollar is kind of nice but the dollar isn't actually strong, we're down 6% against the Yen this month, it's just the Euro is very weak.  Unfortunately for Japan – everyone there is an exporter because their own people stopped spending money in 1990, when their market fell off a cliff and Japan's people lost all faith in investing schemes and sham financing deals – you know, the stuff that pretty much drives the US economy…  


The Media talks about Japan's lost decade, but this is the start of decade 3 of their deflationary cycle as the Nikkei has dropped from 40,000 in 1990 to 20,000 in 2000 to 10,000 in 2010.  Remember when Japan was the next big thing and they were going to take over the World and US executives were learning Japanese and US firms were rushing to tie up business in Japan etc., etc?  Thank goodness we're too smart to fall into a trap like that again! 

Nonetheless, I called a top at $25 on EUO and you can see us getting out on Monday as it topped out for the day.  Tuesday they ran it up to $25.43 but that was when we went short (I'm fickle that way) so close enough I suppose.  As I said on Monday morning: "Unfortunately, I can only tell you what is going to happen and how to profit from it, I can't fix things."  I had spent last weekend with some people who were trying to fix things and I was actually encouraged and I mentioned that "There are, in fact, ways to improve our situation but, of course, we are held back by lack of government willpower to make the hard choices and do the right things instead of this global "chicken in every pot" nonsense that predominates global politics."  That led to a slew of Obama-bashing/blaming Emails that made me realize I was wrong – we are all doomed! 

I reminded readers to make use of the DXD spread as protection for the week given all my very serious concerns but, since I had the nerve to mention the fact that the Republicans Republicans had filibustered over 150 votes in 18 months (87%), judging from the EMails, I had already lost half the readers as they rushed to their PCs to tell me how, if it wasn't for the Republicans tying up government for 18 months, things would only be worse.  Apparently it turns out you CAN lower taxes and pay off your debts and promote job growth and build up the infrastructure and eliminate the "death tax" and fight multi-Trillion dollar wars – as long as you don't try to help any sick people or old people and leave those poor bankers alone to do God's work!

I reiterated that DXD play for Members in the morning Alert – to make sure no one missed it:

That DXD play I mentioned is super-sweet as it is now:

  • Long Oct $23 calls at $5
  • Short Oct $27 call at $3.40 (net $1.60)
  • Short Oct $23 puts at $1.35 (net .25)

That’s .25 on the $4 spread and DXD is currently at $26.89.  DXD is a 2x ultra so figure a 10% move on the Dow, to 11,500 is required to force a buy of the puts (and they can be rolled).  If you put $500 into buying 20 of these contracts, the margin is about $5,500 and you collect $8,000 if the Dow is still this low or lower in October…

For now, as I said in the weekend post, we would LOVE a good reason to cash out those short-side hedges but anything below 1,155 is no reason to act and below 1,140 is more of a reason to add more and we’re already getting rejected off that line.

Copper is $3.06 so I don’t even have to look at the indexes to know we’re going to be weak.  Add oil testing $70 again today and we still need a catalyst to take us higher.  Earnings won’t do it, the Fed Minutes on Wednesday are unlikely to do it and none of our Economic data looks likely to do it so I’m not expecting too much for this Options Expiration Week but I will be very pleased if we consolidate between 10,200 and 10,650 on the Dow , which is about 1,100 to 1,155 on the S&P and 2,225 to 2,350 on the Nas and 7,000 to 7,250 on the NYSE (they are the most in trouble so far) and 620 to 660 on the RUT (they are the least in trouble).

So the tone of the week will come from whether the NYSE improves or the Russell deteriorates first – we’ll keep a close eye on them but it’s the S&P that’’s going to give us our best signals for the week.

Like I said, I can only tell you what's going to happen and how to profit from it…  The $23/27 spread has already widened to $2.10 with DXD at $29 and the $23 puts have fallen to $1.25 for a net of .85, up a quick 240% for the week.  On Monday I began a top 10 list for stocks that were worth scaling into as we sell off, using a combination of our DXD hedges (along with other Disaster Hedges already long in place) and our usual buy/write protection that should keep us safe all the way back to 800 if necessary.  Some of those plays are even cheaper now and I'll be updating a Buy List for Members this weekend.  I will share my comment to Members on the oil trade here though, as it's a big change from our historically bearish stance:

Oil/Pastas – Other than the normal futures buy above the $70 line, I’m starting to look at how well DIG performs.  I am liking a Dec bull’call paried with a short put sale but they are very thinly traded.  We should have hurricanes coming off last year’s el nino and, of course, $65 oil isn’t likely to last so the $22/30 spread for $5 paired with the sale of the $22 puts at $3 (now $2) has a nice 700% upside if DIG doesn’t fall 10% and a b/e way down at $23, where DIG has only ever been below for 3 weeks outside of a few quick spikes.

Turnaround Tuesday – Crisis?  What Crisis?

The momentum that carried us into the close continued into Tuesday Morning's session but it was already looking overdone so I warned: "It looks like we also picked the right day to go long on oil and the Euro and short on gold but those are more directional plays and we will be taking money and running as those run out of momentum since we do not have 20% cushions on those entries.  We still have our technicals to get through and despite our amazing V-shaped recovery yesterday, Asia was not all that thrilled and only managed weak bounces with the Hang Seng failing to retake 20,000 (19,944) and the BSE still below 17,000 (16,875) while the Nikkei barely held their critical 10,200 line (10,242) in today’s trading and the Shanghai is still languishing at 2,594 but at least has averted a total disaster below 2,500 so far (300 on StockCharts)."

We looked at our multi-charts and chatted about Germany and the upcoming vote – something it would have done Bob Pisani some good to read as he could have avoided misrepresenting the facts on Thursday (that is, if he actually wanted to).  Most importantly, I noted that our indexes had made "death crosses"  on the 20 and 50 dmas and that is NEVER a good thing but I did have the wrong take on the day as I thought we'd run down but then be saved by the Fed minutes and flatline into the week so we weren't very aggressive with our new short plays.  We did take 8 long plays that we're still working into and the plays we're done with were:

  • DIA May $106 calls at .76 avg, out at .65 – down 14%
  • EUO May $26 puts at .90, expired at $2.19 – up 143%
  • IWM May $69 calls for .71, out at .60 – down 15%

As you can see, we mix it up between short-term long and short plays when we're not sure of market direction.  If you have a good stopping discipline, this can work out quite well but keep in mind the underlying stance, as noted in my 5:36 am Alert to Members was one of extreme caution: "I think it’s insane not to be mainly in cash right now and hedged for at least a 40% drop.  If the guy’s (who predicted a crash) wrong – our buy/writes pay "just" 20% and if he’s right, then we get to DD at good prices with the profits from our Disaster Hedges."

WTF Wednesday?  Bangkok Burns, Blanfein Moves Up

Also in that early morning Alert, we had discussed 3 plays that would quickly pay off (as opposed to our slow-pay Disaster Hedges) if we got a "short, sharp shock" again.  Again, I am not prone to do early morning Alerts to Members as most things are not so urgent that they can't wait for my 8:30 am post but I didn't want anyone heading off to work without the above warning and these 3 trade ideas:

  • DIA June $96 puts at $1, now $1.90 – up 90%
  • TZA July $7 calls for $1, now $1.55 – up 55%
  • TZA June $10 calls sold for .30, now .60 – down 100% (pair trade)
  • TZA July $5 puts sold for .40, now .20 – up 50% (same pair trade)
  • FAZ July $17/25 bull call spread for $1.10, still $1.10 – even
  • FAZ Oct $9 puts sold for $1.10, now $1.20 – down 9% (pair trade)

With FAZ at $15.17 the last is a very aggressive play but also fairly low risk with the financials needing a 15% move up to cost us that October $1.10 and it's a very nice, clean $8 upside if it all hits the fan —- again.  I closed that Alert with the lyrics to "Smoke on the Water" as we checked out the news of the Bangkok riots, which I could not believe were not taking the markets.  I also couldn't believe what BS gold was as it hovered at $1,230 despite the global situation but Steve Colbert put it better than I could.

I re-reiterated our "5 Plays that Make 500% if the Market Falls" as well as our new DXD disaster hedge that’s good for 1,500% if the Dow is below 10,500 at October expirations as well as pointing to our 16 of our shorter-term downside plays in the Weekend Post and if this sounds repetitious – it was!  I don't know how many ways I can say the market is about to fall and lay out plays to make for when the market falls but, like our poor friend Chicken Little – sometimes the sky is ACTUALLY FALLING and all you can really do is stand there and say "the sky is falling" and hope someone will believe you…

After that, it was as I said in the morning post: "Not much to do but sit back and see if our levels hold.  It’s a long way up before we’re going to be bullish again but, as I said yesterday, that does not stop us from doing a little bargain hunting from our mainly cash positions with our Discount Stock Buying Strategy."  We took a few new long plays and took a poke at upside plays on DIA and IWM that did well on the mid-day move up but we took hits on QLD, SSO and TNA that wiped out those gains in a very choppy session and we were very disappointed with the post-Fed action. 

Thursday Thump – Depression Sets In

Now Greece was rioting again and THAT finally caught people's attention as Europe fell about 2.5% before we opened so there was no hope from the get-go.  I once again gave my Chicken Little speech and once again pointed back to our bearish plays (the ones we were protecting with the bullish plays) and Pragmatic Capitalist and Josh Brown also gave us reasons to be very afraid.  I discussed the need for higher taxes and got another boatload of hate mail calling me some kind of Democratic sympathizer despite the fact that my next paragraph criticized Chis Dodd in far more detail than my single sentence about taxes

Cramer said "BUYBUYBUY" to which Karl Denninger said ""Cramer, Are You Hitting the Pipe Dude?" but I did agree with Cramer that is was a good time to buy – but only using our strategy, not Cramer's as Jimbo actually told people selling puts was dangerous and buying calls was "smart."  I'm not going to get too into it with Jim here but if I WANT to buy BAC at $16 then why on Earth shouldn't I sell the Aug $15 puts for $1.15?  If the stock goes up, I make $1.15, which is 8% in 90 days and if the stock goes down, I do own BAC at net $13.85 so I have a built in 13% downside cushion on my entry – WHICH I DO NOT PAY FOR? 

Why Cramer, why do you tell people not to do one of the most basic hedge fund strategies?  Why do you keep your sheeple out of the one thing they can do that can consistently reduce their cost of entering ANY STOCK, ANY TIME?  It's one thing not to tell people the secrets your hedge fund buddies don't want them to know but to actively tell them NOT to do something as simple as selling a put as an entry on THE SAME FRIGGIN' STOCK YOU ARE TELLING THEM TO BUY is just mean.  And then, to top it off by encouraging them to be the suckers that hedge funds sell calls to – well Mr. Madoff Cramer, I am just too disgusted to even come up with ways to explain how friggin' evil that is! 

It is very interesting that Cramer told people to STOP TRADING on Thursday afternoon to tell people that the "people who give such advice" are "idiots" and "morons" and that "I fear if you're short you're going to run into a buzz saw" on the same day that I had posted that idiotic and moronic advice as well as closing my morning post with the following:

It’s going to be a rough day for White people’s markets as European stocks have broken that 2.5% line we were watching yesterday and are down another 2% already, ahead of the US open.  We talked about strikes and riots in Greece over a month ago so again, this shouldn’t be such a shock to US speculators but it does seem to be freaking people out although, as pointed out in this video, White people are prone to freaking out.  Oh yeah, it also turns out they are prone to not paying their mortgage either (1 in 10 now not paying!).

I spend a lot of time teaching people of all creeds and colors NOT to freak out and this is going to be one of those days as we test those "fat finger" lows again.  We are testing the lower end of the range I’ve been pointing to since we went short in early May so yay!  We’ll be buying while others are panicking because we can hedge our entries and our very good timing has been a huge bonus, making us cash rich just as it all hits the fan and, as I said yesterday, we have a system for entering positions at a steep discount to the current prices so today is party time at PSW – let’s sit back and enjoy the ride.

Despite the sharp drop-off, I liked the way 10,200 held up initially and at 9:51 I sent that Alert to Members that I mentioned in part one of this review, so I'm not getting into that again! At 10:31, in Member Chat, my upside trade idea for holding those levels was:

DIA MAY $100/102 bull call spread is $1.35, selling $100 puts for .80 is .55 on the $2 spread that expires tomorrow.  THIS WILL SUCK IF WE DIVE DOWN.

That trade expired at $1.84 (up 234%) and, keep in mind that we take these plays to PROTECT our bearish positions so we don't get whipsawed on the reverses.  We picked up many long-term entries by selling short puts into the drop and, as I mentioned, that screwed up the plans of enough funds that they unleashed the Cramer that afternoon, telling people our strategy of protecting ourselves against a 10-15% drop before we buy a single share of the stock FOR FREE was a bad idea.  Why is it a bad idea?  Because, like the Dukes in "Trading Places" if they are spending their money to induce a panic but we buy their panic-induced shares and then sell them back at much higher prices – we can get rich and put them in the poor house!

Selling int the panic that afternoon was way too easy, we even sold OIH June $95 puts for $3.60 and, despite OIH going nowhere, they are already down to $2.70 (up 33%) – Oh please Mr. Cramer, please save us from these terrible trades!  Another gift handed out during the carnage was my 2:11  Trade Idea for Members: 

We got 33% in 48 hours on a trade Mr. Cramer told us was idiotic and moronic – in other words, a trade that can make you money on the big sell-off and reversal that was being engineered by his hedge fund buddies and his own network (if you believe those crazy conspiracy theories).  Just remember, Cramer told us that if you, as a hedge fund manager, are not willing to manipulate the market using false rumors, pulling the strings of the MSM, then "perhaps you shouldn't be in the game." 

What cracks me up is how many letters I get from Cramerites telling me that the game is NOT rigged and Cramer is not a rigger – WAKE UP!  Cramer says "It's legal, it's a very quick way to make money and it's very satisfying," "you've got to control the market," "you can't foment…. but you do it anyway because the SEC doesn't understand it" and "this is actually blatantly illegal… but I think it's important to foment" and "it might cost me $15 to $20 Million to knock RIMM down but it would be fabulous because it would also beleaguer all the moron longs who were also keying on Research in Motion…"  Wake up, Wake Up, WAKE UP – Before sending me more hate mail, at least take 10 minutes to listen to the man you are defending!  

Freaked Out Friday – Has CNBC Gone Too Far?

You know, as Hillary once reminded us, it takes a village full of idiots to truly manipulate the market and Cramer has certainly found a home over at CNBC where, as John Stewart famously commented: "If I had listened to CNBC's advice, I'd have a million dollars right now — providing I had started with $100 Million!"  I only just realized here that my Friday morning post, in which I summarized Thursday afternoon's nonsense on CNBC, that I should have started with the 2:30 idiocy by Jim Cramer and not the 3pm idiocy by Maria so let's append the above commentary to this Friday post when putting it into a book version

In additions to my rant against the evil that is CNBC, I did suggest it would be better to protect long positions with a simple (well, for us) Sept SDS spread that pays 7:1 if the market goes lower, rather than panicking out of existing positions.  Very consistently, we were buying while the Dukes were selling and our hedges were driving Cramer's fund boyz crazy as they just couldn't figure out how to rip us off.  We took full advantage of the shenanigans (as detailed in part one of this post) in our day trades and closed out a very nice week much more bullish than we started it. 

We still have our October hedges but we're off the sidelines now and ready to get a little more aggressive if we hold our bottoms – next week is going to be fun with plenty of data starting with Existing Home Sales on Monday, Consumer Confidence (misnomer?) and Housing Prices on Tuesday, Durable Goods, New Home Sales and Oil Inventories on Wednesday.  So, as long as the housing sector is going great, the first three days of the week should be no problem! 

Thursday is the Revised GDP and  the usual 450,000 Job Losses while Friday closes us out with Personal Income and Spending, PCE Prices, the Chicago PMI and Conumer Sentiment so we'll get a really good feel on the "mood" of the country next week but, when I need to check my market mood ring – I still turn to CNBC.  It's just as accurate and $1.98 cheaper than the one I got for my daughter at the 7-11…


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  1. Phil/TBT:
    Been playing it along with everyone else. With the downturn, I’ve turned my (Jan 11, Jan 12) verticals into just long calls and have been carefully selling front-month covers against these long calls. I start out with half front-month covers and then see how the month progresses – almost always ending up with full covers by the end of the month and generally having rolled the front months down as TBT continues to go down, but keeping a judicious gap between my callers’ strike and the current price. If TBT went up and I get behind on my callers, I would DD the front months to a higher strike to preserve the premium I sold.
    I would then turn the long calls into verticals again after the general TBT downtrend shows a strong reversal.
    What do you think of this, versus maintaining the long verticals and rolling them down?

  2. Forgot to mention that I’m rolling down my long calls with the money made from the front-month premiums. Generally I’ll try to pay at most $.50 for every $1 improvement in position.

  3. Phil,
    I’m a new member and have been following making virtual trades. I have read the ebook and much more. I have been doing research on some of the picks you mentioned and have found one that interests me. Am I missing something on the following trade?

    Buy 100 VLO for 18.14 Sell Jan11 19 calls for 2.42 and sell Jan11 19 puts for 3.30 (3.30+2.42=5.72). If called away in Jan11 for 19 then 19.0-18.14=.86 gain per share. 5.72+.86=6.58, 6.58/18.14=36% in 9mo. If below 19 roll put to 2012 and sell 2012 call. (or) Year low was in July09 at 15.29. If this low is reached again, this time at expiration, and you are put to at 19 and you don’t roll, you can pay the 1900 for shares trading at 15.29. Your basis on your old shares is 18.14-5.72 premium = 12.42. 12.42+19/2=15.71 basis on your now owned 200 shares. Total loss of 15.71-15.29=.42 against a 36% gain if shares get called or 31% if shares stay flat.

  4. Hi Phil, Seeing the market is down now I show various put, which I am short, are in the money is it prudent to roll them now while the vix is high or wait till things calm down. thks

  5. Phil,
    I’m trying to be bullish, but am not.
    "there’s no way to hedge against a 9/11 event",etc.  I see "Black Swans " hovering like vultures. Considering the leverage employed by Mr Stick to attract real dollars, & his underlying insolvency, isn’t it prudent to expect, & position for more grinding downwards ?
    I do see a bright future towards the Pickens Plan, (UNG, CLNE, QCLN, TAN, FAN, etc), RRs, water & enviroment companys, but probably not yet.
    Sorry to be so gloomy, but please keep the downside protection plays coming.

  6. Happy Sunday all!  Last of the TA Handbook is here.  Ilene will post on the site in the near future.  I should have a PDF available for all members this week.

  7. Phil,
    One of my accounts I am looking to scale into some longs is one of those crappy IRAs where you can only buy long options, but can’t cover them. Naked shorts are out too.  I am thinking of maybe buying common stock and write covered calls, or buying 2012 ITM calls (stocks like CAT, AAPL, BAC, BA). I am leaning towards buying 2012 ITM calls but wonder if the VIX is too high to do that--paying too much premium.  Opinion?
    Also, gotta give you a shout out for how you talked barfinger away from the ledge last week on rolling those short strangles. I read here once how an apt metaphor is the ocean tide washing in. Don’t freak out and run away leaving all your valuables when the water get too close, just move your beach blanket back 30 yards and wait for the tide to recede. Just make sure those high tides aren’t indicative of an incoming hurricane.  Oh yeah and I also peed my pants laughing on your comment about watching CNBC being like watching a Sartre play. Does that make Meredith Whitney Simone de Beauvoir

  8. Oh, and here are last weeks picks…I still like the KERX spread and CLDX.  CLDX was hit for some reason on their data, although it was the same as what has been previously reported.  1/4 or 1/3 enteries to start are recommended. 

  9. The dollar has been strong against a whole host of currencies recently: canadian, brazil, etc etc
    not just Euro; Exports in Japan account for 10% GDP?

  10. Pharmboy – Nice work on the TA Handbook….much appreciated!
    Phil – Couldn’t agree with you more on the active hurricane season potential (See article below).  UNG had much more options activity on Friday…15,000 June $8 calls…instead of the few hundred for DIG.  Any recommendations for UNG option plays, or would you avoid?  Thanks! 
     NOAA: Hottest April and hottest Jan-April on record
    Masters: Record Atlantic sea surface temps in hurricane development region, "The three past seasons with record warm April SST anomalies all had abnormally high numbers of intense hurricanes"

  11. kururi67
    Regarding IRA accounts, I’d suggest that you move your IRA accounts to  Contact scott at thinkorswim dot com and mention that you are a PSW member.  He should be able to give you a discount on commissions.  Last time I heard, it’s $1.50 per contract, no per ticket fee.  I.e, if you trade 1 contract, it’s 1 x $1.50.  If you trade 10 contracts, it’s 10 x $1.50.
    There are many nice thing about TOS (thinkorswim).  For IRA, they allow most, if not all, "defined risk" trades.  For example, they allow spreads.  They also allow naked short puts in IRA, but you have to have enough cash to cover the full margin.  The one thing they don’t allow in IRA is naked short calls.