We're halfway to goal – let's see if we can double up in two months!
We began this virtual portfolio on June 11th and we ran $10,000 to $26,000 by October 4th, when I decided the risks of playing with our 160% profit in what was getting to be a very choppy market outweighed the potential reward of doubling up again. Two months later, I'm not entirely sure I've changed my mind but we've had so many nice, short-term opportunities lately and we've been doing so many short-term, focused trades as we try to keep to cash that I thought this would be an ideal time to sharpen our short-term trading skills and spend time focusing on trades we can all follow and learn from.
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. We wanted to increase our shopping budget for Christmas and, while 5x would have been nice, 2.5x in the hand beats 5x in the bush – always keep that in mind as we try to turn $25K into $50K.
What kind of trades were successful last time? It wasn't really directional trades so much as opportunities, like grabbing BP on the cheap and, of course, our lovely artificial buy/writes like C, which was one of our surviving spreads and should finish off at the December goal of 1,150% profit. Of course we had a better VIX then – we were in the 30s in June and it's not as simple to make money by just selling options at VIX 22 but it's better than 18, where we've been since early October and that's one of the reasons I lost my taste for this Virtual Portfolio – too much risk and not enough reward with the low VIX!
The lower VIX is a also why we've been taking more directional plays in Member Chat. If it's a bad time to sell premium, then it's a better (it's never good) time to buy it. I tend to look at premiums like an appraiser – there are cheap ones and expensive ones and if something is too cheap to sell (always our preference), then maybe we should consider buying it. Of course I'm expecting the market to dip and the VIX to pop so a very good time to consider getting back into the premium selling business that we love so much. Before we begin, let's take a giant step back and look at the big picture on the S&P chart:
See folks, this is not rocket science. I have a 5% rule, Fibonacci has a regression series and they both say the 50% line (1,200) is a BIG DEAL on the S&P and they both say, more or less, that the 40% and 60% lines (20% moves off 50%) are also BIG DEALs and, as Captain Kirk so often tells us – you can't argue with the Big Deal. Oh, in case some of you are wondering, this is a WEEKLY chart. Each one of these little ticks represents 10,080 of the 1-minute ticks you folks usually look at. When you look at the BIG PICTURE, you can see how well behaved the S&P actually is in it's little channels. For some reason, the Fib tool won't do 1,600 so that's why those numbers are a bit off but you get the idea, we are getting perfectly normal market behavior and you can see by those 6 red circles that this is probably not a good time to bet long.
Notice that the 5% rule dictates we can expect a 20% "weak bounce" (sometimes called a dead cat bounce) off significant moves. "Significant" then depends on your time-frame and here it is years. We can see a move WAS significant after the fact but that doesn't do us a hell of a lot of good in our betting, does it? So we use the 5% rule to ANTICIPATE what is LIKELY to be the termination of a move and that is, of course, 5%, 10%, 20%, 40% and 50% so those are our "pivot points" and we expect more and more resistance as we move up the scale. As you can see on the chart, that 40% line gets particularly heavy as Fibonacci sets in at 38.2% and enough people do TA with Fibonacci that it's very hard to cross it without seeing some resistance selling (or buying, as the case may be).
The "art" of the 5% rule is learning to ignore spikes. That's VERY hard to do while a move is in progress and that's the sort of thing I was doing early this month as I felt we were in a spike, even though we were breaking our levels. My logic was based on the dollar being at 75.6 at the time as well as the Fed's POMO announcement. Since those were clearly both additional upward thrust for the market, I was less impressed by the move over our levels. Also, note the volume wasn't too exciting either. You don't want to have red flags like that while you are making new highs…
That's another reason I'm not impressed with the overall move so far, we have a 50% retrace of our drop from the top but the Dollar has dropped 10% during that time so we kind of need to move the S&P down 10% to compensate and that puts us move along the 40% line than the 50% line and that can indicate a failure to recover, especially as we are double topping (possibly) right here. If everything goes well: If we don't have an Oil Crisis or Food Inflation or a China Meltdown or a Euro Default or a poor shopping season or anymore US Financial Meltdowns – then I think we can drift along between those 40 and 60% lines and maybe head higher if we clear another year. If, on the other hand, pretty much any of those things go wrong – it's a very easy ledge to shove the markets over…
Inflation is the other wild card. A falling Dollar can move us towards that 60% line and, once we get over that, it's a clear shot to 100% but that's a BIG move and, in the grand scheme of things, we won't miss much if we play it cautiously until we confirm the 60% line vs. how screwed we can be if we're over-invested in a rally and have another dip like Sept '08 where it was, if you remember, not all that easy to liquidate quickly without taking some big losses.
That's all my cash call boils down to – playing it safe in uncertain times. I waiting until I thought the Dollar was bottoming at which point cash (being US Dollars) became a valid investment premise and here we are, with the Dollar up 9% from my cash call so, boring though it may be – sitting on the sidelines has been profitable. They said I was crazy when I made the UUP call back then and I wrote that Dollar 88 is a possibility (up another 10% from here) yesterday and I've already been getting hate mail on that but check out the weekly dollar chart:
Now I'm not TA guy but dollar bears should be VERY concerned if we break up here as conditions are ripe for a big run. The EU did get their act together and put up a $90Bn bailout, which may be enough to stop the Ireland slide and they've made provisions for additional bailouts for Portugal, Spain etc. should they become necessary. Will this be enough to really calm Europe down or will analysts immediately say it's still not enough?
We'll have to play things by ear as we look at the market reaction this week so don't expect a bunch of plays for this Virtual Portfolio right out of the box. We still could very much go violently in either direction and we'll just be looking for opportunities in Member Chat this week. Japan is very happy to get the Yen down to 84 to the Dollar but that will be another wild-card this week as a weaker dollar will worry Japan. At least some of gold's $1,360 is based on EU fears so it will be interesting to see how it behaves this week if those fears are cast aside.
No immediate trades on the 1050 Virtual Portfolio then as we'll have to watch and wait for a good opportunity – it would suck if the markets picked now to calm down as calm with a low VIX is NOT the environment we want to try to double up in. Our financials are still beaten down and that's where I'll be looking first for opportunities. One trade I'm looking at is BAC, which one would hope can hold $11 so selling 10 Jan $11 puts for .62 ($620) and buying 20 Jan $11/12.50 bull call spreads for net .54 is net .25 ($500) with $3K of potential upside at $12.50. BAC is a mess and I have to think about whether the risk is worth it but that's the kind of trades we want to look for if the markets are turning positive again.
Looks like we might have gotten out of those XRT puts early with 14 misses vs 11 beats!
Stick/Jabob – Volume is low enough (132M on the Dow) but it’s going to be up to Consumer Credit in 5 mins. Monday is iffy,. that’s why I said take money and run on Q puts – not worth the risk but we are still aggressively short in $1050P (and running out of time).
Still, it’s "Buy the F’ing Dips" until it doesn’t work anymore and AAPL is still fueling the Nasdaq all by itself and, at over 20% of the Nas, it can do that if it wants to. I like the DIA Jan $116 calls at $1.10 for an upside momentum play above Dow 11,600, with as stop below that line, maybe at $1.
DIA Mattress/Yodi – Now don’t lose your head…. ROFL! I’ve been waiting all weekend to say that!! Anyway, yes to selling DIA Jan $115.75 puts for $1.15 against June $118 puts, now $6.90 full cover as they can be rolled to Feb $111 puts (now .95) but a stop on 1/2 at $1.30, just to be safe.
Speaking of DIA – Those $116 calls are still $1 at the 11,600 line and we still like them as the upside cover.
Speaking of overbought. The 1050P has just two positions left:
So Russell 800 or bust and I don’t like anything long (other than our long-term hedged plays) until we are firmly over that line. Meanwhile, in additiona to still liking the NFLX shorts, you know I like shorting oil futures off the $90 line, where we still are this morning.
Oil/Jrom – They are pounding the Dollar and driving everything up. This is going to be a great short I think, now $91.
USO/Amatta – Any time you hit 20% – it’s a decision point, whether up or down. Meanwhile, you probably did not miss much as they should get a goose into close back to that $91 line. Tomorrow we have inventories and maybe another pop up but then the sell-off should begin. They have already dropped Feb down to 226M barrels with 270M in March and 97M in April so the same 600M barrels being shuffled around but now stuffed to the gills in March. May is still 81M and it looks like June is swelling at 101M already. It is doubtful they want more than 26M in Cushing so 200Mb must get spread over those next 4 months. 8 sessions left, 200Mb to go = 25,000 contracts per session must die. Anything less than that is a problem so we’ll have to watch to see if they are on or off track this week.
USO/Bob – Note for the 1050P. I just went over the NYMEX and I will be very surprised to lose on this one. Of course I have been very surprised before, especially with oil so it’s a matter of whether you want to risk it overnight. By doing that though, we’re pretty much committing to rolling up and out (to Feb) if it goes against us.
AAPL/Dflam – Above $300 you keep the $2 and get another $50 for the spread, that’s right. $29 + $23 is $52.
USO/Bob – Too late! 8)
ETFs/StJ – It’s because they all roll over into contango. For instance, The Feb contacts are $89.50 and the March contracts are $90.50 and Feb is $91.50 so if USO rolls 50% to each contract, they lose $1.50 (avg) per contract this month. That cash has to come from somewhere and it shows up in a reduced NAV for the fund each month. Do that 12 times a year and you are causing some pretty significant damage. XLE is, of course, not oil but oil companies but they move with the price of oil and, since no decay, a better track!
Not looking good for the 1050P but let’s do the right thing on the assumption that this is just the blow-off tip we expected at S&P 1,280 and RUT 800:
These are very aggressive short plays that risk our profits but if you believe in the downside, then a move up like this is an opportunity to press your bets, not cut and run.
Those USO puts would be my play of the day, I’m loving oil short here but, so far, it isn’t loving us!
Rolls/Morx – At a certain point, you don’t want to put fresh money in if you can avoid it and you look for ways to sell puts to pay for your rolls. For example, in the 1050P, we have 40 USO Jan $40 puts at net $1.53 and they are now $1.23 so we are down .30 ($1,200). If it looks like we can’t win, then we can sell the Jan $39 puts for .57 and use that money to roll to the Feb $40 puts ($1.86). If we are lucky, the Jan puts expire worthless and then USO crashes after expiration. If we are not lucky, it goes up and we sell more puts and roll or it goes down fast and we roll the putter into a bear put spread in Feb (the Feb $37 puts are .55 with a .20 lower delta so we lose about .20 to roll the puts to a $3 spread). Notice the idea is to know what you will do if the position goes up, down or flat and to be comfortable with what you need to do in each circumstance.
USO/DC – Well it’s often they react to the oil number first and then rational players look at the net total (big build) and you get the real reaction but it’s usually within 15 minutes, not 40. As you can see from the oil chart, it’s pretty much "sell off -spike – sell-off" every month but it’s a little tricky calling the top of the spike.
Keep in mind this is the front-month contract and they still have 226M open barrels for delivery as of next Friday (8 trading days) that has a 45Mb capacity and is almost totally full as is. So, at best, about 26M barrels can actually be accepted and the rest must be rolled to March (270M) Apr (97M), May (81M) or June (101M) by next Friday’s close. UNLIKE options, where we have to find a buyer for our front-month contracts – the NYMEX allows traders to ROLL their contract to the next month without ever selling it. That is the main reason this scam can go on month after month. Right now, March is going for $92.36 and the goal of the Feb pumpers is to get that price (currently $91.20) as close to March as they can to make for a $1 or less roll. Feb is up $1.86 this morning and March is up $1.78 and June is up just $1.59 so the plan is working this morning and it’s mainly a question of who breaks first as some people don’t want to roll and will begin cashing in on the first signs of weakness and who is going to buy a barrel contract that expires in 8 days at the high for the month?
USO/QC – Those are a roll up to the Jan $40s, now $1.12 (net .60). If we don’t get our sell-off by next week – we never will so not much point in going to Feb.
USO/MJJ – My answer does not convey the 10 minutes I have spend contemplating this position but I still think it’s worth holding. They are down to 195M in Feb now so 30M contracts rolled out today.
As you can see, I’m doing a lot of soul-searching as I try (and I really am trying) to get more bullish. You’ll notice I don’t talk about the news much when I’m trying to get bullish because the news isn’t very bullish and I have this brain disease – where mine functions – and I have trouble shutting down the parts that tend to think in what I used to consider objectively but is now considered critically, since any negative thoughts are now considered somehow too critical. On the whole, it’s all very "1984" where I worry about thought-crime…
Anyway, 1,285 on the S&P, 800 on the Russell and our 11,850 goal on the Dow is our goal between now and expiration day and then we have to capitulate and go long the week after. Until that week (24th), I still like yesterday’s short plays from the 1050P and especially oil as the dollar is now 79.50 and oil is STILL stuck at $91.50. QIDs are good too as the Nasdaq is ridiculous.
QID Feb $10 calls are .95 and that’s where we’ll be rolling our Jan $10s in the 1050P if they don’t work out by next Wednesday (+.15) and INTC has earnings tonight so that’s our bearish play of the day. Oil may turn down on a disappointing Nat gas report at 10:30 but not likely if the Dollar is under 80. We lost another 445,000 jobs today so that keeps the Fed on the table indefinitely (as if they needed an excuse) so not much chance for a dollar recovery unless something bad happens in Europe.
USO/Amatta – I see $1.32 for the 40 puts, that’s up a lot from yesterday’s low of $1. USO is at $38.80 so they are "worth" $1.20 with expirations so close – it’s all about the actual move down in USO now, the premium is a gonner.
MRK/QC – They just halted a study so I wouldn’t catch a falling knife today but $33 does start getting attractive. I still like PFE better overall.
USO/Willie – Very possible they drop .50 after inventories but right now it’s about the Dollar (above) as a breakdown in the dollar will send a lot of people running into commodities – which is kind of the plan that was put into motion by Geithner yesterday morning to help out his pals at GS to make their $100 mark on oil. I did not think it would work but the coordination of China and Japan stepping in to bail out Europe along with our own pledge through the IMF to make more money available has totally turned sentiment on the Euro around and is squeezing the hell out of the bears from $1.29 just yesterday to $1.333 this morning – that is a sick move for a major currency!
USO Jan $40 puts back down to $1.05, good spot to buy.
TZAs jumped to a nice $1.66 – now we protect the dime gain, probably at IWM $80. Keep in mind .20 is very nice for a quick trade. Same goes for the USO $40 puts, back to $1.35 so if you did that quick trade from $1.05 you are now greedy!
Wow, INTC flew up on still no news.
Oh, here it is .59 a share on $11.46Bn so beat (.53) and beat ($11.36Bn) – now we need to hear outlook. Gross margin 67% – that’s crazy! How can they guide those margins higher? Oh, they can’t 64% next year.. Well, this is no Nasdaq-killing report, that’s for sure – not looking good for QID.
Good morning!
Lots of cross-currents this morning. Dollar still 79.50 but refusing to die so far. Oil down to $90 so today we’ll be taking it and thankfully running in the 1050P!
Good morning!
Not even the oil pullback is bothering the market – I’m not sure anything will.
Long weekend/Mike – Oh thanks, I forgot actually. All the more reason to cover those DIAs and make that, hopefuly, our only remaining open play in the 1050P.
USO/Amatta – I hope you took them all off at $1.60. Way too risky over the weekend with just 4 days left to trade. We might be crying over the missed opportunity but at least we’ll have cash to trade another day.
$1050P – Rolling 20 QID Jan $10s at .70 to 20 Feb $10s at .85 for .15, which makes avg $1.45 so we DD at .85 and have 40 at avg $1.15.
QIDDrum – Well since we were saved from doom on USO I got brave and went for a DD on the QID Feb $10s (now .82) and I think that’s worth the risk into expiration and the following weekend. Same goes for waiting on the puts as $12 isn’t all that far away if AAPL falls.
USO/Amatta – NYMEX boys are still on schedule of 25M per day and 4 days left to sell but March is getting crowded with 362M barrels and Feb still has 129M so 100M to dump next week. Conditions still ripe for another sell off but weekends are very risky to stay short – which is why I was very glad to kill those puts earlier.