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Turning $10K into $50K by Jan 21st – Week 16 Update (Members Only)

What a wild ride! 

We’re right at the mid-point after 3 months after starting this group on June 11th, when the Dow was at 10,200 and we’ve been up and down over 5% in each direction several times since then.  Despite the aggressive nature of the virtual trades listed here, we try to keep this a low-touch virtual portfolio to better teach the effectiveness of letting the strategy do its work by NOT adjusting the positions from month to month.  So far, so good as we’re up over 160% in the first 3 months and back to mainly cash as we head into the home stretch.

Of course, if something drastic were to occur, then adjustments would be necessary but, on the whole, we’ve been fortunate to have the market pretty much behave right in line with our expectations.  We are now turning bearish so it’s time to cash out our remaining bullish winners or, at least, be prepared to!  

The idea of these picks was to find $10,000 worth of small plays that we thought could gain 500% by Jan 21st as part of a larger virtual portfolio. If you can do this with just 10% of a $100K virtual portfolio or 5% of a $200K virtual portfolio, that’s plenty of risk for these uncertain times and it’s a nice 25-50% bonus on the entire virtual portfolio if it works out. Risk can be a component of a conservative virtual portfolio if we wall it off safely.

Our first play was a fundamentals play on YRCW, assuming they wouldn’t go bankrupt.  That went very well (see prior updates for details) closed out with a total profit of $7,710.  YRCW is now YRCWD after doing a 1 for 25 reverse stock split that took them up to over $5 and, of course, they get interesting to us again under $5 but our big money was made on a Double Down at .11, 25x of which is just $2.75 so we’re not going to get too excited unless we see around $4 for a new entry.

20 C Dec $3/4 bull call spreads were .62 each ($1,240) and paired with the sale of 10 2012 $4 puts at $1.08 ($1,080) for net $160 investment in the artificial buy/write. The $3/4s are now .85 ($1,700) and the $4 puts have dropped to .70 ($700) so now up net $1,000 (up 525%), slow but steady progress. This one is a fine example of Theta decay working on your favor: The 2012 puts do their job by getting cheaper while the spread more or less holds value. It’s like taking out a loan that asks you for less and less money back as time goes on!

Do we take this play off the table, up 525%? Well, our goal is to make a clean $2,000 on the $3/4 spread and we’re halfway there and the trade is clearly on target and we got past earnings so no reason not to hang on as long was we hold our 5% levels (10,700, 1,123 etc.). Just keep in mind that the focus is on the shorter-term bull call spread and there we have $1,700 to lose if things go badly so pretty much we move a stop up to $1,500 now and push it up another $200, each time we gain $200 more.  Those 5% levels are going to be the stop for most of our upside plays! 

TASR failed $4 again and was put to rest with a $200 loss.  I still very much like TASR but it’s a long-term patience play, not suitable for short-term trading until they get back to $5 (a strike we can play off).  Our next trade on TASR will probably have to wait until they release 2012 strikes to give us a better base to play off of.  

BP was the riskiest trade we looked at but became a very nice winner. 10 Jan $17.50 puts sold for $2 ($2,000) are already down to .05 ($50) and looking like they will certainly expire worthless, up $1,950 so far.

The other half of that BP trade was the Jan $30/34 bull call spread at $2.20 (10 were $2,400) and those are now $3.65 ($3,650) so a nice $1,450 profit (52%) on this leg but up a net $3,250 on $400 committed on the paired trade (712%) is well over target for our 500% goal already. Our max profit is, of course, $3,600 at $34+ in Jan so we have "just" $200 more to collect and this trade is no longer worth the margin required to sustain it – even though that $200 is pretty much a sure thing.  Keep in mind that we do have all this money AT RISK – no matter how safe you think things are, something crazy can always happen like…  I don’t know…. Let’s say something crazy like an oil rig blowing up and spilling millions of gallons of oil into the Gulf of Mexico….   So – we’re outta here! 

Our last play on June 11th was selling (we love to sell) 10 XLF Jan $15 puts for $2 ($2,000) and XLF has gone absolutely nowhere (but what a ride!) yet Theta, as always, is our friend and the $15 puts dropped to $1.21 ($1,210) so a quck $790 profit there even though the puts are .50 in the money. This is a good place to note how totally great it is to sell puts against stocks or ETFs that you REALLY want to buy. In a $100K+ virtual portfolio, we have no problem owning 1,000 shares of XLF at net $13 ($13,000) – it’s a little heavy but, hey, it’s the financials and they’re all on sale!  We still have $1,210 to pick up but out of this trade if our 5% lines don’t hold (stop at $600 – $200 trailing stop).   

Leg #2 of the XLF play was 10 FAS Jan $21.67/27 bull call spread at $2 ($2,000).  In the July 26th update I said: "Now XLF has gone nowhere but FAS has dropped from $22.82 on June 11th to $21.98 on July 23rd. That’s important to take note of, we lose about $1 per month on FAS in a flatlining XLF. Fortunately, the Jan $21/27 bull call spread is still $2.20 (up 10% at $2,200) despite the decay.

Why? Theta is our friend – as the VIX goes down both our $21.67 calls and the $27 callers lose value but our $21.67 calls are still .15 in the money and that helps a lot but not enough to make us very comfortable so we needed to see XLF over $15 by the end of the month or we were to ditch this trade as an underperformer with too much risk." We didn’t make it so the spread was ditched with a .20 profit, up $200. The vertical spread is STILL $2 and still interesting as a bullish play but we’re not very bullish at the moment – the important lesson here is take stops seriously!  

So far, In this example, we have laid out net $4,250 on these 5 trades and collected back $5,850 last time on YRCW which left us letting ride a $1,600 cash credit as of July 26th. We since decided to cash out $7,710 on the YRCW and $200 from the XLF and took a $200 loss on TASR. That’s a net $9,310 profit and our liquidation value on what remains is $1,000 on C, $3,400 on BP and $790 on XLF (but, of course, if you do liquidate – it would be less) for a total gain of $14,500 (up 341% from the original allocation) in round one so far. This is not bad but still a long way from $40,000! Since we had our entire first $4,250 back plus a cash profit was off the virtual table. On July 26th we initiated a second round of trades despite our less bullish outlook at the time when I said:

As I noted in our 5% Rule Update, we are now annoyingly right in the middle of our range, which will limit our betting at this stage as we could go either way. Of course, we could always go either way but, as I explained in that post, it was much easier to take bullish chances coming off a 5% rule floor than it is when we’re back at S&P 1,100, where we could go either way 5% – especially during earnings season! 

We ended up falling EXACTLY 5% to EXACTLY the 1,045 line and it’s been all uphill since then.  Nonetheless, our UNG play did not go well as we sold 30 Jan $6/9 bull call spreads (after rolling adjustment) at $1.32 ($3,960), now .54 which is down over $2,000, which triggered our stop-loss on the total trade, which was down $1,350 before we made our adjustments.  The bottom line is we played this one for a strong hurricane season and we didn’t get them at all and you don’t keep after a trade once your premise is blown.  UNG did have a nice pop in between, all the way up to $6.75 on the 16th so there was an excellent exit opportunity with a small loss but we’ll assume the max loss was taken now that they are back to $6.07.  I still like UNG, but we’ll walk away for now. 

VLO was too close to our $16.50 buy-in to ignore at $17.09. We liked selling 10 Jan $16 puts for $1.50 ($1,500) and those are now .65 ($650) with VLO back at $17.65. This is why we ALWAYS sell into the initial excitement. The putter who bought the $16 puts for $1.50 was betting VLO would keep falling to $14.50 or less by January 21st. Since VLO has stopped falling, those puts look less and less attractive every day and the bet loses it’s value. Keep in mind that even IF VLO falls to $14.50 by Jan 21, all that happens is the putter gets his money back and you had a free loan for 6 months! That loan was used to partially fund 20 Jan $15/17.50 bull call spreads at $1.45 ($2,900) and that spread is now $1.62 (up $340) so a a net $1,190 profit (85%) on the $1,400 cash outlay so far!  Since we REALLY want to own VLO at net $15.35, we are not worried about the puts but we’ll stop the bull call spread out if VLO can’t hold $17.50 at this point.

I really liked 10 XLF Jan $13/15 bull call spreads at $1.22 ($1,220) and XLF has gone nowhere, but buying a spread that’s in the money is SMART and we’re still $1.50 in the money and the spread is still $1.27 (up $50) and we’re done with that leg though as there’s no sense risking earnings after a disappointing start. We paired that with the sale of 10 Jan $14 puts for $1.12 ($1,120) and, again, despite XLF losing ground, the puts dropped all the way to .73 for another $390 gain so $440 gained off a net $100 cash commitment – up 340% and not sure about the financials means taking the money and running is the prudent strategy.

We already took the money and ran on our July 26th FAZ hedge, up $1,975 on two legs.

That brings our net profit on the 2nd set up to $1,605 for a grand total of $16,105 or $26,105 with 3 months left to go.  Because no one reminded me to put any trades in this virtual portfolio last month – we "missed" the whole rally and now the pressure is on me to come up with a bearish set of small virtual portfolio plays right at the beginning of earnings season – thanks a lot guys!  

So now we have $26,105 that’s almost all cash and stops to cash out the rest in any event which makes our new goal how to double up $25,000 in 3 months (although we are up over 160% in the first 3 months so very doable).  Please, please, PLEASE remind me to add plays to this during Member Chat as we’re going to have another busy week and there’s no point in adding trades now as Friday’s rally into the close was total BS and we’ll probably gap down Monday morning as I’m not seeing enough M&A news to offset global worries.

Still, cash is always good – there are lots of fun things to do with cash!  

 

 


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  1. Trades for this will be in the Chat room under the section headed Phil ?
    We I have access as a Limited Member?
    Where or who are the  trades, I am receiving as Email are coming from and based on what strategy.
     
    Spence