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Goldilocks and the 300,000,000 Bears

Talk about feeling outnumbered!

As the guy in Airplane kind of said – "Looks like I pricked the wrong week to get bullish!"  Of course, as I often tell people I am neither bullish nor bearish – I'm rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions.  Despite the fact that this is the range we predicted last October and is the range we've been in (other than a brief trip to 11,200, which we shorted the hell out of) all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel.

I suppose I have been HOPEFUL for the month (now heading into day 14) that we will finally make a little progress and establish a higher floor at our usual mid-points while, at the same time, the MSM have decided that we are all going to die.  That does make me kind of bullish by comparison doesn't it?  We are mainly in cash and we are well hedged to the downside so, unless we are REALLY heading much, much lower, there is little profit in speculating to the downside, other than our quick trades.  As PT Barnum once said:

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

Balance is the key to long-term success and we've had many conversations about that in Member Chat.  Our goal is to be neither bullish or bearish but rather to sell premium to both the bulls and the bears when conditions permit us.  As Ravalos said Friday in Member Chat:

"Ever since I became member (actually before I became member I was already following your newsletter for quite some time) I find it hard for me to BUY PREMIUM. Over time, I’ve realized that buying the premium results in my virtual portfolio account reflecting red numbers as the time progresses.. on the other hand, selling the premium almost inevitably results in green numbers all over my virtual portfolio (confirming indeed the whole premise of being the house in a casino)." 

Nothing makes me happier than seeing our Members "getting it."  If PT Barnum were able to sell options to the suckers (who are born every minute) I doubt he would have bothered doing anything else.  Selling option premium to others is the epitome of caution AND boldness and, as Ravalos notes, the best way to insure success.  So we don't really care whether the market goes up or down - As long as it says in our fairly narrow 5% range on each side of our midpoints, we'll be just fine as long as we remember to sell contracts to the bears when we are near the bottom and to the bulls when we are near the top.  Watching the economy should be incidental compared to watching our ranges! 


Yet I see a lot of people getting all hot and bothered about the economy, which is clearly a mess and needs fixing but that shouldn't prevent us from TRADING THE MARKETS – which have a little, but not too much, to do with the actual economy.  I pointed out in Friday's post that the Dow rallied from 580 in August of 1975, when we were losing 500,000 jobs a week back to over 1,000 in Q1 of 1976, when we were losing 400,000 jobs a week.  It was a relative improvement of 20%, far less than the improvement we've seen as job losses fell from 650,000 at the beginning of last year to about 450,000 18 months later.  Should the fact that job losses haven't returned to their normal 300,000 a week (it's called turnover on 140M jobs) be considered an abject failure of this economy? 

What’s going to happen next?

That’s the main question I get from people.  I find it interesting that so many people want to believe that I can see the future but I suppose that’s been the same for thousands of years – people want to know what’s going to happen and they are willing to put their faith in someone who’s just a little more insightful than they are.  This isn’t unique to stocks, my old consulting company was called Delphi Consulting – also taking advantage of my reputation as a business prognosticator.

While I do pride myself on my ability to spot trends early AND to figure out how to make a buck playing them (you can see how I did last year in our 2009 Review) - I don’t like it when that part of my reputation distracts from my general message, which is that NO ONE, not me, not Cramer, not anyone, can tell you what is going to happen next in the markets and the best strategy you can follow is one of maintaining a balanced, sensibly hedged virtual portfolio that can make money in ANY market direction.

There is an excellent presentation by James Montier, now of GMO, who listed "Ten Lessons (Not?) Learnt," which is a must read for all our Members, as it lists and expands on 10 themes that echo what we discuss every day at PSW – things every investor needs to hear and understand before they go chasing off after the next guru who promises to give them a peek at the future (emphasis on my 5 favorites):

  • Markets Aren’t Efficient
  • Relative Performance is a Dangerous Game
  • This Time is Never Different
  • Valuation Matters (in the Long Run)
  • Wait for the “Fat” Pitch
  • Sentiment Matters
  • Leverage Can’t Turn a Bad Investment Good
  • Beware of Over Quantification
  • There is No Substitute for Skepticism
  • The Benefits of Cheap Insurance

In short (since this is not supposed to be a philosophical article) neither James Montier or I can predict the future.  I can’t speak for the thousand other bozos who tell you they can but we’re telling you, for a fact, that we cannot.  Our job is just to keep an eye out for good opportunities, be they bullish or bearish, that have a good chance of making a little bit of money

When the media is extremely bearish, you will find me often defending the bullish side and when the media is extremely bullish, I will tend to poke holes in the bullish outlook.  Why?  Because our goal is to be BALANCED so I will always nudge you towards the middle.  If you are looking for extreme bullish or bearish sentiment then I'm sure there's an App for that but you won't be getting it from me.  I think people who think we are heading back to 666 on the S&P are idiots and I think people who see a V-shaped recovery back to 1,566 are idiots too.  About halfway between the two, at about 1,100 on the S&P – like Goldilocks I think the markets are priced just right.

When things are in balance, they are very easy to push one way or the other and the Gang of 12 take advantage of that and unleash their TradeBots in either direction because there is A LOT of money to be made stampeding the beautiful sheeple in and out of their positions as they leave a trail of losses and fees in their wake.   

While things can get pushed too far in either direction, it is more likely that they go too far to the downside, which is why we ALWAYS advocate our Mattress Plays as well as some disaster hedges, no matter how bullish our current outlook may be.  Anyone who had money in the markets on 9/11/01, or even in 2007, 2008, 2009 or 2010, can tell you how nice it is to have 5% of your virtual portfolio in a play that makes 500% when the market dips 10% very quickly.

 Our first post of this week was called "Monday Market Momentum (or Lack Thereof!)" and we were up around 10,700 on the Dow and, guess what?  I was BEARISH!  I pointed out that we had rallied on QE2 expectations and that everyone seemed to have ignored Meredith Whitney's waring on the Financials from Friday as well as the terrible jobs news.  I warned not to get excited about Europe's 1.5% open and I also said:

I’ll believe in QE2 when it’s matched by a big-gun stimulus program that creates JOBS FOR THE MIDDLE CLASS – a situation we discussed in detail over the weekend in "The Crisis of Middle-Class America."  We are not taking any positive moves in the markets too seriously until we see some improvement in the lot of the bottom 90% of our people.  We are bullish – in that we are betting the rich (Big Business) will get richer under current market conditions but the foundation of this country is still crumbling and that makes it kind of hard for us not to take all of these moves with a Lot’s wife-sized grain of salt.

That was, of course, 500 Dow points ago and I got pleased enough about the correction to turn a bit more bullish at the end of the week but I find myself very frustrated when I have to explain to people, over and over again, that I am not a perma-bull.  We are playing a range.  Not everything in the World has to be all one way or all another way with no possibility of compromise.  I used to be a Republican (in some past life, when Lincoln was President) and now I'm a Democrat and maybe things will change again and I'm always open to both sides of a discussion BECAUSE I'M SEEKING THE TRUTH – and you don't find the truth by closing your mind to conflicting opinions (or market signals). 

Monday's first Member Alert of the Week came at 9:45 and I don't think I was too ambiguous saying:

Looks like we have a nice, bump at the open with Nas making that 2,300 mark but no one else looks very serious so far.  Breakout levels remain: Dow 10,700, S&P 1,155, Nas 2,300, NYSE 7,350 and Russell 666 - I don’t think we have enough to get through it this morning and if we don’t get QE2 tomorrow, then down we go so make sure you are well covered – just in case.

QID Aug $16/17 bull call spread is .42 and is .42 in the money and you can sell $16 puts for .29 to drop the net to .13, which is a nice way to play the Nas down and we can kill the trade if we get green on the Russell (666) and the Dow (10,700) for a small loss vs. a potential .87 gain (669% upside).

QID finished the week at $18 and the $16/17 bull call spread is .90 and the $16 puts are .05 so net .85 for a 553% gain in 5 days.  That's what I'm talking about when I say a nice 500% hedge can help you enjoy the rough spots in the market!  I made a call to cash that out with "just" a 392% gain on Wednesday as we flipped to a DXD hedge that was able to make another 900% as 392 + 900 is more than our 669% potential upside on the QID hedge alone.   Also, by flipping out with the profit, we lock in gains and only play the DXD with profits so we no longer care if the market reverses on us.  Balance – it's ALL about balance!

On the bull side, I liked the idea of selling the HPQ Jan $39 puts for $2.10 (now $2.95, down 40%) and I still like that target.  My 10:20 comment on our Mattress play was to go naked on the Dec $109 puts and those popped from $6.50 on Monday to $9.25 at Friday's close but we rolled up to the $110 puts and then stopped half out so it's messy to track. 

At 11:42 I put up another bearish trade idea on SDS, with the Jan $31/35 bull call spread at $1.50 (now $1.65), selling 1/2 the March $27 puts for $2.60 (now $1.40).  So that play is up from net .20 per long to net .95, which is up 375% in 5 days but notice where the payoff really is – you get very little gain out of a vertical (just the net delta of the two positions) but the short put does most of the heavy lifting in the early stages of the play and you can cash the puts out for a $1.20 gain, which reduces your basis to .60 on bull call spreads that are $2.64 in the money (up 340%) already and we KNOW (because we just saw it happen) that it's going to be hard to lose much on our vertical if we reverse so we lock in most of the percentage gain we have now by sacrificing .60 of our potential best-case upside.  This, of course, assumes we are adequately insured otherwise

BECAUSE we had good protection we felt good about taking some long gambles on the way down.  Balance, balance, BALANCE and, have I mentioned – BALANCE is the key to managing a portolio.  Perhaps also – BALANCE! 

SPWRA I have a soft-spot for but not so soft that I didn't want a tight cover into earnings so we liked the Jan $12.50s at $2.15 (now $1.55) covered with the Aug $13s at .72 (now .06) so up a tad on that one but we expected the disappointment and the plan was to roll down to the $11s for .70 more and then wait for a bounce or sell the Sept $12.50s, now .60 if SPWRA can't hold $12.

CSCO was another calendar spread from Monday morning (we were busy!) and that one was the Oct $24/Aug $25 combo for net $1.11 (now .23) with the sale of the Oct $23 puts for .59, now $2.10 so a total disaster there but we got out at the bell before things got too ugly.  If you are still in this spread, the adjustment I like is rolling to the Jan $20/22.50 bull call spread at $1.35 (+$1.12), which makes net $2.46 on the $2.50 spread and rolling the Oct $23 puts down to the Jan $21 puts ($1.70) for net .40, which makes your new net basis $2.27 and the worst case is you are assigned CSCO (if under $21 in Jan) at net $23.27 but, of course, you can roll the puts down and out to the 2012 $20s (now $2.85).  So, as the great Yogi says: "It ain't over 'till it's over." 

UNG went against us this week but the Jan $6/7 bull call spread at .60 is still $1.29 in the money and still valued at .60 while the short Jan $6 puts sold at .34 actually fell to .32 so a whopping .02 profit on the week there!  That was it for our bullish plays on Monday and our last move of the day was my 3:53 call to roll those DIA Mattress puts up to the Dec $110s and "stay naked through tomorrow" as we still expected that drop on the Fed.  My best comment of the week came just after Monday's close when Jvest said:

Phil, need advice on a DXD hedge adjustment. Around 7/14 you suggested and I bought a DXD Oct $26/30 bull call spread financed by sale of Jan 2011 $25 puts. When I first bought it, I saw some moderate gains and probably should have closed it out then, but I kept it around as a medium-term hedge. Now the spread has fallen out of the money and the put sale is almost at the money. How would you adjust based on what we know today?

To which I responded (in bold because I thought it was important for ALL Members):

DXD/Jvest – See above.  When all you guys start capitulating on your short positions I usually figure that’s a great time to get aggressively short because the end is probably near.  Keep in mind we are trading a range and right now we are at the top of that range so hedges like DXD are going to get stressed.  If you do not need the protection, of course take it off the table but if you do need downside hedges, then a simple roll on the call side can give you a much bigger upside

I don't know how many ways I can keep saying the same thing and I do apologize if I sometimes get testy but we go through these things over and over again yet every time I feel like we're starting from scratch.  And I'm not even talking about Jvest's question, this is more about the general very short-sighted view I see a lot of people having as they get way too focused on short-term market movements and lose sight of what has been, so far, a very reliable big picture.  After hours Diamond asked me if I thought JPM and BAC, who were lagging the market move, were being held back and I thought that comment was also important enough to bold for all Members:

BAC, JPM/Diamond – I think they are trading accurately and it’s the rest of the market that’s being boosted.  Same goes for a lot of big caps, which made modest gains compared to other sectors.  Why can’t the Dow hold 10,700 when we were over 11,200 in April?  Why can’t the NYSE break 7,200, when it was up at 7,700 last time oil was $82 and copper was $3.40?  The Nasdaq was 2,5535 in April and the RUT was 745 last time gold was over $1,210 – if this is a rally, it’s a very strange one and, of course, the last time we were at those 5% higher levels – we dropped like a rock over 10% in 2 weeks so what on Earth is everyone getting excited about??? 

So there's a quick summary of Phil the Perma-Bull's Monday adventures.  In retrospect I could have said short everything and I would have looked very smart but not everyone is a day trader and we picked up some nice stocks for medium-term positions very cheaply.  Only time will tell if I was wrong on those but if we stick to our rule of taking 20% losses (of full positions – see Strategy Section) off the table and make the occasional 300% gains on our hedges – then we pave over A LOT of mistakes, don't we? 

We took a few speculative longs early Tuesday but, as we popped on the Fed report and I did my usual highlights and interpretation for members my decision was:

So it’s "take money and run" on those short-term, long plays – that’s about it I think.  Nothing to see here, this is wishy-washy BS that people will read what they want into but it solves nothing

The dollar took a total dive and I just realized my logic was right but my direction was wrong on the Yen trade as I should have been looking to SHORT the USD/JPY ahead of something that was going to be dollar-weak!  This is why I don’t play currencies – too confusing!   Now they are down to 85.26 Yen to the dollar and I do still like the upside on the support issues

My call for the next day at 3:40 was:

Sell-off/Jrom – As I said above, Fed notes good for 50% retrace and that’s where we should finish.  Then we think WWAD (What Will Asia Do) and the Fed "reinvesting" in TBills isn’t really doing anyone any good at all unless they were worried about the US being able to keep borrowing money but judging from the bid/asks we’ve been getting in note auctions and the way people still fly to the dollar every time a banker in Spain sneezes – I don’t think very many people were worried anyway so no major effect and that means we revert to our means around the 2.5% rule (10,450 on Dow) in absence of some other catalyst.

Geez Phil, pull in those horns you mad bull!  By the way – look what the Dow did the next day:

Wednesday morning I said:

Range trading is great but you have to BELIEVE in your range.  The bottom of our range, as I posted in yesterday’s Morning Alert to Members, is Dow 10,200, S&P 1,070, Nas 2,200, NYSE 6,800, and Russell 635 and until we fail 3 of those 5, we will continue to make bullish plays when we get near those levels, just as we make our bearish bets as we test our breakout levels.  Even these levels are just 2.5% off our midpoints so we don’t get gung-ho bullish until we hit the full 5% bottom – which is now the rising 50 dmas (red lines) - but we’re kind of losing faith in getting back there so we’re a little more aggressive with our buys now than we were last month.

I'm sorry to have to repeat this stuff but you would think I didn't say a word of it to listen to some people.  I started this review to see if I was really too bullish because that's what I'm hearing from pretty much EVERYBODY as the week finished to the point where even I am thinking I must have been too bullish this week.  As I review the week, I realize that, in fact, everybody is crazy EXCEPT me.  That's OK though – I'm used to being the lone (and lonely) voice in the wilderness!

My trade ideas for Wednesday were a USD artificial buy/write that's not too far off target, IWM $64 calls that were later 1/2 covered with the weekly $63s (which expired worthless, of course) that we ended up giving up on, AAPL Aug $260s that stopped us out for a 25% loss, a MO artificial buy/write, that new DXD spread (Aug $26/28 bull call at .70, selling $26 puts for .40 – the 900% play I mentioned earlier that's currently 333% in the money), an AA 2012 artificial buy/write, an MEE Jan artificial buy/write, a C March artificial buy/write, an XLF Jan artificial buy/write and another doomed CSCO play (net $21.10 entry in October).

Notice we tend to go with artificial buy/writes for our longs when the market is uncertain as we only risk assignment of a 1x position, as opposed to 2x if we are assigned a regular buy/write.  By keeping our initial commitment low, we can bottom fish with roughly 20% cushions and be comfortable that we can DD and then DD again to ride out at least a 50% correction in the market and establish our full, long-term positions at very serious discount to today's prices (IF we should be so lucky as to get an another opportunity to buy at those crazy-low prices). 

It was Wednesday night that I began to get annoyed with all the negativity on the site (and in the media) and I won't re-hash it here but it is worth reading if you missed the bull-bear debates in Member Chat.  By Thursday morning, I declared the markets depressed again but like the song, the game plan remained the same as I closed the morning post with:

We had a few bullish trade ideas (and a CSCO spread that needs to be dumped right away!), trying to get ahead on some bottom fishing yesterday but so far, so bad on those!  Today we may actually be forced to join the bears if we blow 3 of our 5 bottom levels but I am hoping that this holds as it would be very nice to begin to establish what has been the mid-point of our trading range as more of a base.  

Is that too optimistic?  We’ll see…

We took a stab at the DIA $104 calls in the Morning Alert but they went nowhere and we gave up.  VZ was good for a 2012 artificial and CSCO 2012 $22.50 puts sold for $3.90 are still $4 and net $18.50 is a VERY nice entry on CSCO!  We like CSCO's price so much that we also picked an artificial Jan buy/write.  Gold was shorted with a GLL bull call sprerad, STX looked good enough for a regular buy/write, a JWN ratio backspread is underperforming for now, IDCC was a long ratio backspread, CAVM and NETL both looked good for artificial buy/writes as they were killed with the SOX and we found a nice, "boring" XLF vertical to make us 17% in 7 days.  I also reiterated that USD play with a slight variation – I really like that one!

My 2:07 prediction in Member Chat was a pretty good road map for the rest of the week:

It would be encouraging if they can hold 10,300 and 1,080 but still lame if we can’t get green after such a massive sell-off over 3 days.  We’re down 3.7% since Monday’s close with the actual 5% drop line at 10,165.  Tues we bounced off 10,560 (1.25%) and yesterday we couldn’t take back 10,432 (2.5%) and now we’re looking at 10,298, which is 3.75% down so it’s possible we’re stepping down in a controlled drop to the 5% lines and that means we need to look at the 4% line (10,272) as that will be our bounce zone anyway and that is about what we bounced off this morning.

Note the bounce line of Thursday afternoon and Friday on the above chart.  This stuff isn't complicated folks and, when the market does exactly what you expect it to do – why on Earth would you then change your expectations based on what it just did?  

My TGI Friday post was "Hoping the Weekend Brings Perspective" but I heard little of it, either from our own chat room or from the MSM, who are in full-blown disaster mode already.  I dd the charts, I did the graphs, I pointed out what the cycles of greed and fear lead to in the markets and then we all sat back to watch our levels which – held…

Friday's trade ideas were just another GLL artificial buy/write, a TBT spread (as we no longer trust them naked), an ARNA 2012 artificial buy/write, a NFLX ratio backspread, HPQ short put sales and a full buy/write on HERO, which was a great catch by Pahurik as they are way cheap at $2.28.  That's it.  My 3:07 comment to Members was:  

Weekend stance – off this disappointing two-day run I’d say as neutral as possible over the weekend.   I do think we need a good blow-off bottom now because we blew our chance to turn it around on volume yesterday

Trading Range – I was counting on QE2 AND a stimulus announcement by next week.  After the weekend we may have neither so it’s really going to be all about watching our levels in absence of any fundamental market forces.  Monday we have the NY Fed and NAHB Housing Index.  Tuesday is Housing Starts, Building Permits and a PPI that will also be BTE along with Industrial Prodcution (probable disappointment) and Cap Utilization (dragged down by refiners).  Thursday is Leading Economic Indicators and the Philly Fed and that’s it for the week so, once we get past housing, the newspaper is more likely to move the markets than the data points

Not much to add to that.  We'll see what happens Monday but my overriding concern for next week is an oil crash taking us lower or a general commodity crash set off by a big dollar bounce as the BOJ steps in (already happening – as I predicted – and that currency trade would have made a Bazillion dollars already) and tries to get the Yen back closer to 90 Yen to the Dollar.  Copper is key as last time we failed 1,070 on the S&P, copper was under $3.  It's now at $3.25 and over $3.20 is considered "healthy" by us while under $3 is BAD. 


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  1. Phil, you mentioned this past week all the oil contracts that are still outstanding and that will need to be rolled in this coming week.  You are expecting a decline.  The numbers do seem compelling.  Well, woudln’t you know last night on Kudlow’s show he was being a blatant fear monger on predicting Israel’s reaction to Iran’s impending nuclear reactor and its impact on oil prices.  A nuclear reactor that, according to the media this week, will be going online by the end of next week. 
    Hmm.. what’s with all these weeks?  Just how the hell do we know it’s only a week away from going live?  This is starting to smell fishy..  I wonder what supposed horrors we’ll be hearing about over the weekend and into next week from the oil mongers next?

  2.  Hi Phil,
    I wish I had asked your advice on this earlier.  I sold a 270/280 call spreads (thank goodness it was only 1!) on PCLN BEFORE they reported earnings.  I factored in a max 15% move from earnings to OpEx.  We all know what happened.  I’ve been trading in and out of PCLN trying to reduce my anticipated $1K loss on OpEx by selling 270/260 put spreads, a 310/320 call spread when it hit 300 the other day (out of this one yesterday) and buying strangles and straddles (holding for about a day or two and unloading when I’m up $50).  I’ve been doing a lot of massaging on this one all for a lowly $80 on that spread when I had put it on.  All I have now is the 270/280 call spread and 2X of the 270/260 credit put spread.  If everything goes well and I don’t do anything until OpEx, my net loss would be about $490.  Consider this trade as a "WTF was I thinking" and charging it to my ever ballooning "experience" bill --I’m sure a lot are feeling my pain and those who did this with AMZN 2 reports back can relate.  
    My question is, what should I do with this losing trade?  Do I swallow the pill and cough up the loss?  Or should I even dare to try and roll this spread out to a 2x higher spread for a small debit (or breakeven)?  I’m just worried this is another BIDU and they could just ram this up all the way to oblivion. Even AMZN went up another $20 after that big spike before declining and it will probably take a really bad market for PCLN to not go up.  High target for analysts is $335 but we all know that that doesn’t really matter when they want to play with a stock.
    Thanks in advance for this one.  And apologies for the lengthy post.

  3. Chaps- following up on your strangle posts from Friday- another question.
    What is your rule or guideline for picking strikes and the spread for the protection/put verticals? For example – on SPX Sept – 1200/930 (which I sold the other day when 930 was 15% out) – where would you place the vertical put spread? I have been placing them somewhere between 5 to 10 % below actual – no set formula- Do you have a method which may be more precise?

  4. Phil    In all my accounts i still have the faz, qid, dxd, sds hedges and own the buy list.                                                                      I also have a newly established account with all cash in it and was wondering if i should approach the buy list now and also do some downside hedges or just wait to test 5% levels and see if we go bullish or bearish at that time.  Thank You for your great website and the work you put into it.

  5. pstas/put verticals: I basically follow what Peter D has outlined, which is to buy$10 spreads. I usually try to buy them for between $1.30 and $1.80 when I’m selling puts. That usually puts me in a reasonable position between the money and my short puts. I’ve had short puts for Sept on since about Aug 3rd,  and they currently range from 1060/1050 (from when the market was higher) to 1015/1005 (sold more recently with the market pullback.)
    I’ve also learned you can get killed buying/selling just one side of the vertical at a time. It’s a blatant example of how "they" know where the market is going. For instance, I once bought the higher  strike of the vertical only for some stupid reason, then tried to sell the lower strike at increasingly lower prices as I could not get a fill – down to significantly the theoretical value of the option – and it would not fill. Half an hour later, there was a major upswing in the market, which later sold off.

  6. pstas:
    "I’ve had short puts for Sept on since about Aug 3rd": I meant long put verticals. I’ve had short puts on in Sept for longer, because I tend to trade the month past the current month (call it the "second month." I start worrying about covering short puts with put verticals in the second month when they’re about 6 weeks from expiration. When the duration to expiration is longer out than six weeks, the price swings on my total position in the second month (consisting of puts and calls that are significantly out of the money) are not dramatic enough for me to feel I need put verticals as covers.
    "down to significantly the theoretical value of the option". I mean "significantly below".

  7. All--recently joined and am enjoying site. Find it cumbersome to keep up with analytics of 3 leg plays. Have searched around for commercially available software in vain. Am using excel spreadsheet but there’s got to be a better way. Any ideas?

  8. Options Analysis/lpjblb:  Go to and open a new account.  You can then download the thinkorswim trading software for free and start paper trading.  Click on the "Analyze" tab and you can conduct simulated trades and analyze the risk and return profile.  Its a little difficult to use in the beginning especially for those just starting trading options, but try an easy trade and play around — like say an AAPL "vertical" call trade.  You can then make paper trades and it will keep it for you in your TOS portfolio and you can use that to keep track of your real portfolio.

  9. Phil:  Aww but Phil! I was just reading the Huffington Post today and they had this huge article on the "Hindenburg Omen"!  EVERYBODY’S talking about it now, just like Head and Shoulders shampoo was a few weeks ago.    Does this mean the stock market will catch on fire and burn down to the ground?! :rolleyes:

  10. Ok, this is somewhat disturbing.  After checking out as what I usually do over the weekend, I noticed the amount of GS shares sold on 8/11by top level executives including our good ‘ol buddy Lloyd.  Something is definitely up--either there will be some bad news to come from within or they too are expecting some big downward that will take down the whole market.  
    Of course it could be your normal sell some stock to raise some cash BUT here’s what I’ve found (and you can too by going to
    Blankfein(CEO): Last sold GS stock on 1/07 BUT not in the amount he unloaded last Wed.
    Cohn(COO): Last sold GS 10/06 and just like his buddy Lloyd, amount of selling last Wed. trumps how much he sold back then
    GS Counsel, CFO and V. Chairman also unloaded a lot of shares.
    I’m also seeing a certain China Investment Corp. unloading a big chunk of MS shares.
    Am I overreacting to this or is this a case of where there’s smoke, there’s fire?

  11. jdub:  The MS sales look pretty major, but in the case of GS, it may be that everyone wants to take some profits before capital gains tax goes up.  It looks like Lloyd still has like $258 million worth of GS stock left.

  12. jdub:  PCLN.    IMO, your time and energy is better spent on other trades.  Move on.  It appears you managed to reduce a $1000 loss to $490.  That’s good.  If all you lose on a bad trade is $490, thats not so bad.  Even if $490 is a big amount for you to lose, which it sounds like it is.
    Some trades go bad.  You lose money.  Live and learn and move on.  Not all trades need to be repaired.
    Focus on what makes you money, not getting back at a stock.  You will make back that $490 many times over.

  13. Oh man what Cap says is so true. Never get in a personal grudge match to get "payback" on a stock. It can spiral out of control and end badly most every time.

  14.  kinkistyle-With regards to GS, they are restricted to selling no more than 10% of their total stock holdings as per agreement with BRK agreement.  
    Cap-Thanks for the comment.  $490 isn’t really a big amount but if there was a rolling opportunity or other option strategy that would greatly reduce the loss that I may have yet to explore, I’d like to look into it although I’m resigned to the fact that I should just really close it out on OpEx. 

  15. Good morning!

    Iran/Matt – I know, we complain an awful lot about not getting access to inspect their stuff but the Conservative pundits always seem to know the exact number of centrifuges they have and how many pounds of plutonium and how many tests they’ve run and what stage they are at – is there some kind of press release Iran issues?  Of course, Iranians and Conservatives have been working together for years so maybe we are up for an "October Surprise" again this year to really throw a wrench into things…  I think it’s amazing that people have totally forgotten Iran-Contra and the fact the Bush stopped the Congressional investigations by pardoning six men who were indicted, wasting 6 years and $30M worth of work.   

    Salon had a great article this weekend that pointed out that the Conservatives are stepping up the Iran rhetoric once again:

    It is important to note that the aim of this unfolding campaign may not be to pressure Obama into military action. It could just as much serve to portray Obama as weak and indecisive on national security issues that are of grave concern to the U.S. and that are of existential nature to Israel. This portrayal will give the Republicans valuable ammunition for the November congressional elections as well as for the 2012 presidential race.

    Indeed, the likely political motivation for this unfolding campaign should not be underestimated. Just as much that the building blocks of the Iraq war were put into place under the Clinton years — most importantly with the passage of the Iraq Liberation Act in 1998 — serious preparation for selling an Iran war to the American public under a Republican president (Palin?) in 2013 must be undertaken now, both to establish the narrative for that sell and to use the narrative to remove any obstacles in the White House along the way.

    Foreign Policy Reveiw also had an article noting the Republicans in the House unveiled H.Res.1553, a resolution providing explicit support for an Israeli bombing campaign against Iran. The measure, introduced by Texas Republican Louie Gohmert and forty-six of his colleagues, endorses Israel’s use of "all means necessary" against Iran "including the use of military force".

    It’s also a nice way of providing explicit support of $70 oil depsite drastically decaying fundamentals that might impact the amount of money a Texas Congressman might be able to raise from his supporters this year….

    I’m sure you guys can have fun debating this issue so I’ll leave it at that.  I report – you decide…   Salon also had a good article on Carter-bashing and I’m sure you’ve noticed how those talking-points have gone up 10-fold on the site lately as it’s just a trickling down off the mountains of crap that is being thrown against the wall by the Conservative media lately. 

    PCLN/Jdub – I don’t have all my usual screens in front of me but my general comment is the people pricing options are not generally idiots and when you see a huge premium offered it’s usually because there is a huge risk, which means targeted plays like a vertical are just as likely to get you in trouble as they are to pay off.  Bottom line is you stand to lose $500 on PCLN and the question is, is it worth chasing?  First of all, I take it you sold the $270s, right?  If so, those are $27.80 with about .60 in premium so why not just roll them to the $290s for $10.60, which have $3.40 in premium?  You’re going to pay back the $27.80 anyway but you can knock net $280 off the price by flipping the caller to something with premium that’s going to expire. 

    Also, what Cap and Kururi said!

    Waiting/Wilsons – I think waiting is best if you are looking to deploy more cash.  We could break either way next week and I know it would suck if we break higher (as I take it you are generally bullish) but there’s always something to buy, especially when we can give ourselves 20% discounts on long-term positions so better safe than sorry – especially with the dreaded "Hindenberg Omen" now hitting the front page of the WSJ! 

    Analytics/LP – Options Express has a nice Trade Calculator that I used to use where you could plug anything in for a quick analysis that I think is easier to read than TOS. doesn’t analyze (that I know of) but it does do a nice job letting you track complex spreads as you can group trades by symbol.  It is my understanding that if you tell them we sent you they double the free trial to a month.

    Hindenberg/Kinki – LOL!  GMTA, I guess.  I couldn’t believe the WSJ is carrying this nonsense.  The key point to take away from the article is this: "The Omen was behind every market crash since 1987, but also has occurred many other times without an ensuing significant downturn. Market analysts said only about 25% of Omen appearances have led to stock-market declines that can be considered crashes."  So it’s only inaccurate 75% of the time, which is about in-line with my "Upside Down Lincoln Head Warning" which tells us that 25% of the time when I flip a penny and Lincoln’s head is visible but upside down – the market is heading lower!  

    GS/Jdub – My understanding is that they all have a lot of options that are expiring so it’s either cash them in or they go worthless.  Not sure about the deal at MS but Chinese companies may just need to raise cash on the new government standards so I’m kind of getting the impression that there is a major attempt going on that is aimed at engineering another panic sell-off in the markets. 

  16. Phil, what you think : buy INTC jan12 15 call for 5.3 and then selling short therm calls, like oct 20 0.69 or oct 21 0.37 to collect more premium then directly selling 2012 jan higher call for spread?  And of course maybe selling jan2012 17,5 puts 2.58.

  17. Salon- now there is an unbiased source one can take to the bank. No "crap" like we get from the "Conservative media".
    Plus, we get a brand new conspiracy saga to play with – more wizards behind the curtain. Let’s all get our tin foil hats on and read along!
    And this —
    "give the Republicans valuable ammunition for the November congressional elections"
    What a bombshell of a revelation! Can you imagine? Republicans playing politics? Shocking. Will they stop at nothing?

  18. srfrog/6.5% — Trading Sept IWM options.

  19. Salon/pstas – now, now, remember Phil’s mantra – listen to a variety of voices. Personally, Salon’s gotten way too conservative and fluffy for me; I stopped my subscription last year sometime after the 73rd Palin article. I don’t care about Sarah, but they just kept those sarahstories coming.

  20. lpjblb
    August 14th, 2010 at 2:48 pm | Permalink  
    All–recently joined and am enjoying site. Find it cumbersome to keep up with analytics of 3 leg plays. Have searched around for commercially available software in vain. Am using excel spreadsheet but there’s got to be a better way. Any ideas?

    Check out OptionsOracle from SamoaSky.  It does a great job netting all positions in a security down to risk, profit, breakeven, greeks, etc. 

  21. Phil/Balanced — Awhile back I commented that I thought some might be getting confused by your bull/bear calls. Today’s week in review points out some of my observations. I don’t want you to think I’m griping, because I’m not and if I’m confused I’ll state it (I have not been but I think that’s due to having enough experience with the market). I’m just observing what I think is some of the member’s confusion that results in your getting "testy" (which I think is justified). I think for the most part it’s due to the lesser experienced members misinterpreting your calls in timeframe and type of position (they lose track of why the trade was put on). Also, I’m not expecting a response to the reasons you said these quotes because I know why you did. I would find it much more interesting if members would step forward if any of these were confusing and what was confusing about it. If I’m right and this identifies a problem, then (and only then) can we determine if there is a solution. So, on to some of the quotes in the week in review:
    "Of course, as I often tell people I am neither bullish nor bearish – I’m rangeish – and our range is the 5% band between around Dow 10,200 and S&P 1,070, which takes us as low as Dow 9,690 and S&P 1,016 and as high as Dow 10,710 and S&P 1,123 before I really "flip flop" my positions".
    As you have been stating for a long time. Followed by confirmation of the confusion:
    "all year – people still seem to find it necessary to call me either bullish or bearish as we navigate the channel".
    Followed by:
     "Our first post of this week was called "Monday Market Momentum (or Lack Thereof!)" and we were up around 10,700 on the Dow and, guess what?  I was BEARISH"! 
    Followed by:
    "We are bullish – in that we are betting the rich (Big Business) will get richer under current market conditions but the foundation of this country is still crumbling and that makes it kind of hard for us not to take all of these moves with a Lot’s wife-sized grain of salt".
    Followed by:
    That was, of course, 500 Dow points ago and I got pleased enough about the correction to turn a bit more bullish at the end of the week but I find myself very frustrated when I have to explain to people, over and over again, that I am not a perma-bull. We are playing a range.
    Followed by:
     "I see a lot of people having as they get way too focused on short-term market movements and lose sight of what has been, so far, a very reliable big picture."
    It has indeed been a very reliable big picture and that big picture is rangish but I think when you make calls like "bullish into the weekend", "take short term longs off the table", etc. I think some aren’t able to properly identify the timespan of those calls or perhaps the trades associated with that call/time period.
    You then say:
    "In retrospect I could have said short everything and I would have looked very smart but not everyone is a day trader and we picked up some nice stocks for medium-term positions very cheaply".
    Please don’t do this. Your granularity is impeccable and balance, balance, balance. Did I mention balance? 
    This statement does again identify the confusion of members with the trades timing. You then mention the 20% loss rule which even though stated, restated and restated you still get questions about trades that are in violation of without the  commitment to double down. That one baffles me as well.
    Next we have:
    "So it’s "take money and run" on those short-term, long plays – that’s about it I think".
    Here’s where I think you might lose some. Now I know you can’t identify for people what they are holding in short-term longs, but I think there are members with less trading experience that can’t correctly identify what’s short term in thier own portfolios. I think it was hai5 that commented that some suggested trades not being followed up on, while a more experienced trader can look at a position and know if it’s short term, long term, violated the 20% rule, should be doubled down on, etc. Should you hold their hands? No! Should you track every trade? No! Should they be paper trading? Yes! Or maybe only trading the long term portfolio and paper trading the shorter term stuff until they can identify what to do with each position on a turn in short/mid term outlook. Of course postitions aren’t going to be followed up on, especially if they hit 20% rule or option expiration.
    You also link to a comment from Wed which  I find this statement the most relevant:
    "Maybe I’m the crazy one because I don’t feel the need to go totally bearish when we have a dip or totally bullish when we have a bounce becasue everyone else seems to swing wildly from one extreme to the other as if the trading of the day is the only thing that matters in the market and not one person here seems to look at a chart that includes any activity older than 5 days.  If we finish next week at 10,200 then all we have accomplished since July 16th is to run from 10,200 to 10,700 and back to 10,200 – effectively the exact mirror of the above chart with the exact same nonsense in between the the two expiration dates".
    In which you correctly identify the short term focus. Some of that short term focus might actually be built-in to the trading methodology. I know it is for me. I hold long term postions that I do nothing with except for keeping an eye out for news that fundamentally changes the company. If you’re way out in Jan 12 with these positions there’s nothing to do execept sit on your hands or make shorter term trades (you can’t make longer ones without the hedges for 2013 available). This is independent of the confusion I think I see but fitting of your strategy.
    There is a point in time where with experience in trading (I’ve been at it since ’95, full time since ’98) that you can glance at your positions and know absolutely why your holding it, for how long, your expectations, and exit conditions. I don’t know exactly when that happened to me but I know it wasn’t in my first 5 years. Now I think I take it for granted but know the value of being able to quickly asses a position and knowing what to do with it, when and why. I also remember the emotional roller coaster ride of fear and elation of stock market moves before having that ability. I’m sure there are members here that are still on that ride and getting decision paralisis. Between that and the overwhelming amount of information they see here, I’d bet I’m right for at least a few members. I feel I might be able to make a contribution to this site for those members if I’m right.   
    Of course, all of this is a speculative play on my part and is just my opinion. Again I don’t expect a response from you, Phil but it would be nice if members that do get confused to say so. I’d rather see Phil not getting testy since I’m sure it only reduces his productivity (from 1000% to 999% :-) .
    I’d also like to take the opportunity to thank you Phil. I had been trading options before becoming a member but mostly in a void. I was making use of similar buy write strategies but had no way to validate what I was doing. This site does that for me and that brings me more confidence. Also, the downside hedging and disaster plays beyond the buy-writes are something I hadn’t thought about or made use of. Those strategies are worth the cost of admission alone. I’m still trying to find the right fit for my style using these but you bet your butt I will be! 

  22. HIndenburg Omen? Oh, now "They"re reaching. Down we go!  and why did that article have to mention the guy was blind?

  23. pstas – Salon – LOL.
    As for Iran, we see how well the Obama / Hilary engagement plan is working now don’t we.
    The longer we wait (and we have waited quite long already – 8-10 years) to put a stop to Iran’s nuclear aspirations, the more costly, deadly and risky it will be.  And given that the you know who’s spent years trying to prevent Bush, and now Obama, from isolating Iran economically, politically and thru real sanctions with teeth (that the Chinese and Russians are determined to prevent anyway).
    Remember that leaked Nat. Sec report claiming Iran had given up on trying to build nukes ?  purpose to undermine possible Bush admin action (which it certainly undermined).  Well guess what, those Nat’l intel estimates have since been rescinded to say that Iran never gave up its efforts and is well on its way to nuke bomb capability.
    And given the crazy genocidal maniac wannabees that rule the roost in Iran, that is not going to be a happy day for the West, Israel and the middle east should that happen.

  24. Rainman
    Excelent post! That was a great contribution from you!! Thank you very much for identifying some problems and missundestandings I clearly identified myself with, as a newbie I had found myself feeling I was receiving some contradictory signals, sometimes from Phill himself sometimes from other people in the site…as of today and after Phil´s many comms and clarifications about that matter (being rangboundish, neither bullish nor bearish) I feel I completely understood his point of view!

  25. at the end is all a function of BALANCE and beliveing the range your trading into!

  26. Rainman
    Thanks for bringing up the issue of confusion. I too get confused a lot…. "short-term, long plays" –
    what the heck is a short term, long play? How long is a "short-term, long play" supposed to last? I also don’t understand if  a small portfolio of 15K needs hedging. The 20% rule to the downside happens a lot to me. When I lose 20% in a trade, I really have no idea what to do or how to correct it. I know Phil is not going to be holding my hand with each trade and although I have been gaining a lot in theory my portfolio is losing money because of my inability to understand what’s going on in the fast paced nature of this site.
    My other problem is every time Phil posts something interesting, I buy it and that locks up all the money in margin in my IRA. Greed is killing me.
    Sometime back Phil said that I would be better off with David Riastu’s picks and he was right. It is simple and easy for me to follow Oxen but I keep getting drawn to Phil’s boards because of his strategies like covered calls, selling puts for stock you really like to own and his insightful articles.
    Finally I whole heartedly agree with your comment, "I also remember the emotional roller coaster ride of fear and elation of stock market moves before having that ability. I’m sure there are members here that are still on that ride and getting decision paralisis".

  27. Rainman/Phil: Thank u both for a good write up. As u both say, it takes a while to get the hang of it & I’ve come  along way in 9 months. I mostly use  Phil for  his excellent ideas on buy/writes which I find very valuable. For me, I still don’t understand why I need both mattresses plays & insurance.