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Breakout Defense – 5,000% in 5 Trades or Less (Members Only)


I mean wow!  Will this market ever go down?  My mother called me this morning and she’s raising her GDP outlook for 2011 too – that’s how crazy things have gotten out there.  I’m just waiting for the Pope to come out and tell us to buy CMG and Netflix and THEN we’ll know it’s a sign.  I called it wrong on Friday morning as I thought we were fading out for the week but instead the Russell flew up for a 1.2% gain on the day while the Nas gained 0.8% and the rest put up between 0.3 and 0.5% (check out David Fry’s charts as well as Market Tamer for the whole story) – on the whole, a bullish day – especially when we are starting to look strong above our breakout levels.  

That’s the key now, we’ve been watching Dow 11,500, S&P 1,220, Nasdaq 2,600, NYSE 7,750 and Russell 725 for a very long time and, other than the Dow, our indexes have now smashed through that upside resistance and look like they are heading to the moon – especially the Russell 2000, which is up 25% for the year!  Small-caps may not be hiring or making a lot of profit and they may not have the ability to get loans from the bank and their customer base may be hurting but BOY, just look at that performance!  

And, as I’ve said before, once you break the orbit of a fundamental market, then "Stock Market Physics" no longer apply and there is no limit to the madness that lies ahead of us when (and if) the Dow breaks that 11,500 line.  With the Russell up 25% and the Nasdaq up 17%, the Dow, NYSE and the S&P are looking kind of pokey hanging around the 10% lines, aren’t they?

As we can see from the multi-chart, we’re right about 5% over the April highs and, if you play with the time-frames on the multi-chart (see, interactive fun!), you’ll notice that we are up 30% on the Dow on the 2-year, 40% on the S&P and NYSE and a whopping 65% on the Russell and Nasdaq.  So, either the Dow has plenty of room to run or the Russell and the Nasdaq are going to fall so fast your head will spin.  Not only that, but if you flip to the 5-year view, we’re still over 20% off our all-time highs and, according to the MSM and the Gang of 12 – why shouldn’t we be there?  

Really, have you heard a single word as to why it may seem strange to retake the highs that were achieved in a drastically different global economy at a time when, just last week, we didn’t know if the whole European Union was going to collapse or not?  I have a theory that all the lithium from all the rechargeable batteries has seeped into the water supply and made it impossible for investors to worry about things – which would explain the VIX plunging back to 17.61, not even 1/2 of the average of the past 3 years!  Heck, in July of 2007, when things still looked good, the VIX was at 23.  Gosh-darn life must be great now – congratulations America, you’ve never looked better!    

We’ve been betting on the fall and not getting it so it’s time to look up, not matter how silly that may seem.  Our breakout levels are now our support levels and, while I still hesitate to draw new upside levels for fear we will get nose-bleeds just thinking about them – we can certainly come up with a few plays that will make us money if S&P 1,350 and Dow 12,000 is going to be a reality.  

Last Friday, we had two high-reward trade ideas featured in the main post.  The first one was the FAS April $20/25 bull call spread at $2.70 (now $3.20), selling the April $21 puts for $2.55 (now $1.75) and that net .15 spread is already net $1.45 so a pretty good gain (833%) for a week there.  Our other upside hedge was DBC and again I liked April for a simple play to just buy the $27 calls for $1 (now $1.10) as well as the more complex spread of the short 2012 $22 puts at $1.10 (now $1) to offset the cost of the 2012 $26/30 bull call spread at $1.40 (now $1.50).  That one is, obviously, still playable if you need an inflation hedge and the LACK of commodity performance during this week-long stock mania is what still gives me pause so please keep in mind that I do think this is all BS but now we have support lines to play off and, as you know, losing 3 of 5 is a signal to flip bearish again for sure!  

VIXThe out of the money spread did worse because the VIX fell 8% since last week and that crushed the premiums of our callers.  That’s why I usually prefer in-the-money calls for the ones we buy, they get play off the actual movement of the stock and generally, we do expect the VIX to fall while the market rises so, the closer the trade (in time) the more I want my strike to be in the money.  That’s also why, for our downside plays, we’ve been buying straight puts lately.  With the low VIX, they get a huge kick if the market starts dropping and our target stocks or ETFs fall while the VIX rises although – nothing has really fallen on the Nasdaq since Nov 16th and the Russell is up over 10% in the 17 days since then with barely a twitch down the whole time – AMAZING! 

Since there is APPARENTLY no risk in owning equities, then there should be no risk in owning ultra equity ETFs either and I think we can start with a play on SSO, which is a 2x track of the S&P that is surprisingly reliable over medium amounts of time (12 months).  I like the 2012 $30 calls at $18, covered with the June $42 calls at $7.60 for net $10.40 on the $12 spread (and, of course, you can roll the caller if things go well) that can be offset by selling an SPX Jan 1185 put for $10, which has a high premium of about $20K (to get $1,000) but it’s offset by the fact that your margin is released on Jan 21st if things go well and that leaves you in a net .40 2012 bullish play on the S&P that has an easy 1,000% upside if things go just a little well.

The SPX is currently at 1,240 so the S&P would have to fall 4.5% to put the puts in the money.  If that should happen, it would, of course, be a good idea to slap on a downside cover if you don’t already have them.  Hopefully, with the new market breakers, we aren’t likely to drop 5% in a day and, for example, SPY March $115 puts are just $2 so 10 of those slapped on real quick would take a lot of the sting out, as would rolling.  Keep in mind, these are upside HEDGES at the moment, we go bullish on stocks, not 10:1 paying ETF plays!  These are for protection on bearish positions as well as for small bets so you don’t feel like you’ll miss out on the rally.  As I pointed out last Friday, if we have a FAS play that makes 3,233% by April and we commit just 1% of our virtual portfolio to it, that’s 32% gained on the whole virtual portfolio on that one play – that should keep you up with even The Bernank’s wettest dreams of hyper-inflation without over-committing your cash!

Taking a fresh look at DBC, I still like them as a hedge against inflation long-term.  If we buy the 2012 $22/27 bull call spread for $2.90, we can also think out of the box and say how low can oil go?  USO hasn’t been much below $32 since the crash and you can sell the 2013 $30 puts for $3.30, which is pretty much betting that oil will hold $65 over the next two years.  If you are comfortable with that, then you can sell just 3 of those contracts for $990 and buy 4 of the bull call spreads for $1,160 and that puts you in the 4 $5 spreads for net $170 with an upside of $2,000, which is a very nice 1,076% profit – especially when you consider that DBC is at $26.24 today so you are just .76 away from goal with 25 months to get there! 

Isn’t hedging fun?

Now, I am working you slowly, but surely outside of your normal trading box so let’s think about something a little more radical.  These are bullish investments but IF the market starts to FALL – what do you want to buy?  I always like to buy BA, GE, VLO, XOM, MO, WFR, UNG, PFE, MCD, KO, JPM, FDX, HPQ, GS, GOOG, AAPL, DIS, T, VZ and AA when they are on sale and those are just off the top of my head.  At the moment, BA, for example, is a big underperformer, about 10% behind the Dow.

So let’s say, I’m willing to buy 500 shares of BA at $45 (it’s $65 now) EVEN if the market crashes.  So I just sell the 2012 $45 puts for $2.50, which puts $1,250 in my pocket (just for being willing to buy BA for $45 next year) with about $3,500 in margin used.  As long as I REALLY want to own $22,500 worth of BA, AFTER they drop 30%, this is just free money.  Now we can use that $1,500 to buy 5 of those FAS spreads or whatever other upside plays I want.  You don’t have to be limited to trading the same groupings as long as you are comfortable with the downside.  The downside to this is you are less closely correlated in your offsets and that makes it trickier to see if you are doing well or not by quickly looking at the markets but it solves margin issues for a lot of people.  

Did you know that, right now, there is a man that will pay you $1.10 NOT to buy GE for $12.50 in 2013?  That’s right, you can sell the 2013 $12.50 puts for $1.10!  Net margin on that spread is $1,240 according to TOS and, frankly, by itself is a nice way to make $1,100 but We think GE is better than that yet the guy selling the 2012 $17.50/20 bull call spread only want’s .95 for that.  So a .15 credit on a $2.50 spread that’s on the money now is essentially a free look at GE through next Jan, as long as  you REALLY have no fear of owning it at net $12.35 in 2013 if they are below that line.  I’ve been noticing from the questions on this post that a lot of people aren’t COMMITTED to ownership down the line.  DON’T EVER sell a put in a position you are not Ready, Willing AND Able to own at the strike price and hold long-term.  These are aggressive trades, they are not for everybody.  

How about HOV?  They have about $1Bn of land inventory, $531M in cash and $1.6Bn in debts so they are valued at $340M.  If we’re going to have hyper-inflation, nothing is better than real estate and the builders have been turning around to profits.  If you want to be paid not to buy HOV for $5 in Jan 2012, you can collect $1.60 today (net $3.40) and the 2013 $5/7.50 bull call spread is .45 so you can collect $1,600 for agreeing to own 1,000 shares of HOV at $5 (10 contracts) and use that to buy 50 of the spreads for $2,250, which is a grand total of $650 cash spent to gain $12,500 of potential upside – that’s a nice 1,823% upside if housing takes off – and isn’t that kind of the whole point to what the government is trying to do?  

I’ll add a few more of these during the week but this set is a good start for us to add some upside as we break over our breakout levels.  







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  1. Phil/TBT – i know you don’t play TBT any more, but can you make an unofficial recommendation or suggestion?

  2.  Phil    I know the RUT is leading the charge, do you recommend a play using UWM?   I have been selling covered calls on it for about a year, but feel it is parabolic and have stopped as of lately.  Just curious about your thoughts.  Love the SSO play by the way.  Thanks for all you do for us!

  3. Phil/Artificials
    I am having challenges in determining how to set up the plays. I try to analyze your suggestions and am looking for guidance in how to set parameters – risk/reward, strikes, and spread width. I have made some of the plays you suggested and they have worked well. I can manage trades rolling the puts and calls as the profits have often risen faster in these times than the monthly accumulation rate so I capture additional upside by adjusting.
    I have a spreadsheet that analyzes Buy/Writes which I constructed after reading all the suggested materials and following your trade recommendations. It tracks parameters regarding ROI, downside put exposure and price relative to prior lows that helps give me a system to evaluate a good trade and entry. After two wash/rinse/repeat cycles since May, I am getting confident in using it to produce good returns.
    With regard to artificials, I am now thinking that if I can "qualify" a trade as good using my Buy/Write spreadsheet then I can see if doing an artificial is better on a non dividend stock. Can you give me some suggestions from your experience as to where to place the spread (how far ITM), how wide (I am thinking 15% of the stock price for the spread) and other things that you consider. I mainly do 2 month to 18 month plays. Not doing many now because cash is king. I follow chat daily and I am letting my current positions mature and going back thru charts and restudying materials to stay involved while I patiently wait for entries.

  4.  Phil   One more question.  What is the risk of assignment using leaps as outlined in your SSO spread.  Just curious.  Also thanks for the pics of your cars on friday.  Hope i didn’t digress our trade talk too much with the discussion of cars.  

  5. Phil / FAS
    The net cost of the FAS upside hedge is .15, so $150 for 10 Bull Call spreads and selling 10 Puts.  The Margin Cost (Premium?) is between $5,500 and $13,000 depending on broker.  The put commitment is at 21, so $21,000 if put to us in April.
    For a $100,000 portfolio, committing 1% is $1,000.  This would be 66 spreads and 66 puts, between $36,000 and $85,000 Margin Cost, and a commitment to buy $138,000 if put to us in April.
    I am finding a conflict between keeping any single position to maximum 5% – 10% of a $100,000 portfolio and considering 66 FAS positions as 1% of my portfolio cash value. 
    For a 10 unit position (10 spreads and 10 puts), is the potential PUT cost of $21,000 considered as 21% of my portfolio "allocated", or is the net $150 cash cost only considered?
    For practical purposes, for a $100,000 portfolio, what is an appropriate position size if using the FAS play as a SMALL position to play the apparent breakout up?
    I have printed and read the $10,000 portfolio, the $100,000 portfolio, the $1mil portfolio, the portfolio allocation papers, etc., but am now going in circles trying to tie things together.

  6. I’m not buying this run up just yet. Look at the BDI. And how much more are shippers paying for fuel than the last time the BDI was this low, 20, 30 40% ???? That must not be making squat.

  7. "My mother called me this morning and she’s raising her GDP outlook for 2011 too"
    Ha – that’s funny.   Thing is, my taxi driver just upped his GDP outlook as well.

  8.  If it were a movie, it would be called "Terminator – Rise of the Machines – Short Seller edition"

    “We’re starting to see reallocation out of safer Treasury assets into riskier equities as investors become more comfortable with growth in 2011,” – Bloomberg
    Isn’t this the definition of the ‘Buy High – Sell Low’ portfolio destruction strategy?

  10.  txchili
    Your Buy/Write approach is definitely well managed, in my opinion, as you have set up parameters for risk evaluation. Buy/Write are a big part of my portfolio, and I, as well as you, are always trying to fine-tune the strategy. We all would be interested in seeing how you set up your spread sheet, as it does sound very interesting.
    That being said, and possibly on point to your specific question to Phil ( who could answer the question far better than I), one of the principle criteria for establishing the strike points in establishing a B/W is the volatility anticipated over the time frame desired. I concentrate primarily on momentum stocks in my portfolio, and therefore I usually determine the presumed rate of momentum anticipated in selecting the strikes. Usually I go out three months and in cases of anticipated aggressive  upward movement in the stock valuation ( expected earnings, potential acquisition and general market trend  situations ), I then choose first the short put strike, with a focus on maximum income potential. The further OTM, the better. It all depends on where I think the stock will be at expiration. My short calls, I keep tighter, as a hedge and rolling is always an option. One the conservative stocks that move slower, usually following general market trends, I buy a 1/2 position, and go out three to four months on short puts with a strike that if put to me will give me the other half of the position I desire. The short call side is closer in ( short strangle ) and the strikes are OTM for a hedge and call writing income.
    I have found Buy/Writes to be very profitable, but they do require management for maximum potential….. and as always – make the right pick on the stock you are working with. ( Rule # 1, I guess )

  11. txchili / Spreadsheet
    +1 on Gel’s comment – I would be interested to see your spreadsheet.

  12.  willsons
    " Car talk" is fun, just like all the neat cars many of you guys have. JRW has some neat stuff ( excluding that pink Ferrari ), and speed and horsepower have always fascinated me. Over the years I have had many exotics and speed monsters. Years ago I had a Maserati that I bought at the factory in Modena, Italy. At the time it was my "dream car" I shipped it first class in its own container to Baltimore, and upon receiving it at the port I drove it to my condo in Washington DC.  It was parked under the Porte Cochere at the Watergate and some jealous bastard took a nail and gouged the entire side of it.
    The following week I drove it to the West Coast  ( still pissed off ) and on Interstate 80 across Nevada ( no speed limit) blew the engine out at 175 MPH. Moral of the story is, many folks are envious and your car can piss them off. You might as well be wearing a T shirt that says " go ahead and hit me with a bottle"  Today, I keep anything exotic in the garage, and drive a car that nobody cares about.

  13. gel1   Well spoken and i appreciate all of your input both  about cars and investment strategies.  

  14.  txchili / Spreadsheet – I would love to see it too. Thanks.

  15. Biodieselchris: Charterers pay fuel cost so shipowners don’t care very much. Only if they are deadheading would it impact them.

  16. I don’t know how to attach a spreadsheet so here is an example for BSX that I did in August. Hopefully you can recreate or tell me how to import into the chat.
    Entry                        5.42
    Call Strike                5.00
    Put Strike                5.00
    Expire Month            Jan 2012
    Days left                    492    
    Call Premium            1.44
    Put Premium              .96
    Net Entry                3.02     Entry – (Call Premium + Put Premium)
    Net Call Away Gain    1.98   (Entry – Call Strike) + Call premium + Put Premium (which adjusts for call above or below entry
    Call Away Gain            65%
    Annualized Gain          49%   Call Away Gain/Days left X 365 (this allows me to compare different time frames)
    Put net entry               4.01     ( Put Strike + Net Entry)  / 2
    Put NE% to Entry        26%    Put Net Entry / Entry  (measure of how far stock must fall to give loss on play)
    Gain if not called away 2.40     If call is placed above entry and stock does not reach strike, return is still made
    Gain not called %           44%
    Annualized                    33%  Gain not called % divided by days then multiplied by 365
    Target/Support Price        4.00  Analyzing chart to see lows for the past years/months depending on the time frame                                                     of the play to see where support would be and  how close the Net Put To Entry is to support
    My desired parameters for this type of trade were :
    Call away gain greater than 15%
    Annualized ROI greater than 30%
    Net Put to greater than 12%
    Hope this helps

  17. Gel1
    Thanks for the comments. They are exactly what I was looking for to apply in thinking about trades.
    I will use them as further refinements.

  18. txchili
    That looks like a great tool. Probably would benefit all of us.

  19. Gel1 txchili
    Gel the buy/write is very well taken. The only think I still like to add, that I watch the short caller during the time period and I sometimes buy and sell  the same caller up to 3x during the current month. This is great on up and down markets and gives you extra profits. Once the caller shows 30 to 50% profit in a short period buy it back and wait for the next up turn of the market.
    Spread sheet> The one decribed above is very much the same  one an other member sent out a while back. Regret I can not recall the member. Very usefull. It is very simple to add some oftxchili calculation to the mentioned spread sheet. Regret the spead sheet is no good for synthetic buy writes.

  20. Pete:  I believe your points are well thought out and I think that the cost to buying power is really what’s important, not the absolute cash value.  The sale of puts is very much a double edged sword; I use them but sparingly, as they require frequent attention which I can not always provide.  In your example, the sale of the puts increases potential profit from $15180 to $32010, but even with portfolio margin decreases buying power from $13448 to $43824  (per TOS analysis ).   The potential for huge loss is what requires the daily attention; for my peace of mind, I would be happy to just buy the vertical bull call spread and not sell the puts.
    I believe the use of put sales makes for great headlines, but caveat emptor

  21.  txchili  -  can you email the spreadsheet to me
    yodi – exec, gave us one version of the B/W and covered call spreadsheet. Once txchili sends his, I can compare and maybe merge things and create a new one for myself.

  22. txchili – thank you in advance for sending the sheet.

  23.  txchili
    Thanks for your spreadsheet fields – I would have chosen the same to provide appropriate needed information. It is a terrific tracking vehicle. I forgot to mention one of my tools that I often use for keeping everything in balance until the anticipated payday, and that is the hopeful move in the short calls to the point you are about to get called away ( this is good, because it means the trade is moving in your projected direction, and your short puts are making money as well as the underlying stock ) The short calls ( one month out ) should be rolled to a higher strike, and depending upon the anticipated upward movement in the following month, I usually DD and choose a strike that seems to be out of the range. This way you can have the short calls expire worthless, and you pocket the premium on all your short plays. I then reload, depending upon sentiment for the market trend and the underlying stock. Eventually, if everything goes as planned, you wind up with FREE stock. Picking the right stock, and moving in the same direction of the market, while exercising the BW strategy makes this become reality. I followed this trading scenario in 2009, and had a 80% gain in my portfolio. I have to admit, I was fortunate to stay with the bullish attitude when so many said " we are overdue for a correction". I was concerned, but I kept my bias and also respected the requirement for hedging for protection.

  24.  Phil….. a "weekend" question – I am not a professional trader, but do find the markets fascinating. I have been asked to serve as a trustee for two estates that have a time frame of approximately ten years until liquidation. If you were placed in this situation, and wanted a "game plan" that did not take much of your time, and was "safe"…. how would you execute a plan. I hate the responsibility, but I also recognize placing the responsibility into the hands of the inexperienced, or the hands of "less than competent" professionals, would be undesirable. 

  25.  Yodi
    Your buy/write comment is what I was trying to say…. but you said it better…

    Your spreadsheet looks like a great tool. I would appreciate if you can send it to my email yehoram dot shenhar at gmail dot com.

  27. Gel1 B/W  thanks just plain English the German way.
    PS I am just correcting the spread sheet to include txchili addings

  28. Humvee
    Thanks for the feedback.  I track my positions to monitor the % of total portfolio allocated to each position. 
    The "art" comes in deciding whether to consider the put obligation a full fledged part of the allocated amount.  For buy / writes with a sold put, I do consider the put obligation part of the allocation, so if I use 25% of the allocated position amount to purchase the stock, I also consider the put obligation as another 25% of the allocated position amount.  If the put is never exercised, fine (as Phil points out, making money is always good and there is always another opportunity).
    For pure short-term hedges, I do not "charge" my account anything.  I monitor these daily and remove them when no longer needed or wanted.
    For something like the FAS play, although it has been called a hedge, I am using it more as a 4 month upside play, so feel I should "charge" my account the full amount.  Since it is a bull call spread, the "cost" for that portion of the play is simply the net cost of the calls.  However, I consider the put obligation amount of the put portion of the play a "charge" to my total portfolio committed amount.
    This logic makes the FAS play, @ 10 units, an "expensive" one for me as far as using a full 10% of my portfolio amount available to be allocated.  However, it is already quite profitable, and I may close the put portion Monday since the 10 puts are up $1,000, and this will leave me with the bull call spread well in the money and will recover the $13,000 Buying Power that TDAmeritrade charged me.
    Phil’s call on the FAS / banking play was perfect.  It will be quite a few years (more than the 5 part-time years already spent) before I learn to understand the markets well enough to be able to call plays like that.  That means I will be a member of chat a long time.
    I really appreciate this group – Phil’s leadership – and everyone’s willingness to help each other.

  29.  buy/writes
    would like to add something: when we open B/W we usually don’t count margin of short puts which we should. I understand if everything is going well, put margin is covering by value of long position (stock or call spread for artifitial B/R). But when market crushed value of longs go down (specially for artificial) and margin of puts start going up. So if you have to many positions in your portfolio you can get a margin call

  30.  Gel/ B/WR
    could you pls. explain your strategy of trading callers in your B/WRs. my main question: do you split amount of callers at the begining (some part is long term callers and some part of monthly callers for trade and rolling)? if yes, how do you split them?

  31.  Gel and others / B/WR
    would like to know your way of closing buy/write positions before exp.
    Lets say market is way overbot and we need to reduce some of our long positions to get more cash. What is your criteria to choose which position to reduce/close?


  33. From Birinyi Assoc.:
    Trading Range Update: S&P 500 is Overbought
    The market has risen 3.7% in the month of December and is currently 1.2% above its trading envelope.

  34. Good morning!

    While I’m still thinking about it – CAKE is way better than CMG in the revenue department with $1.6Bn vs $500Bn (as I suspected) but what a massive margin difference with CAKE just $80M a year vs. CMG at $160M.  So, I guess CMG is better than CAKE from that perspective but CAKE is valued at $2Bn and CMG $10Bn so not THAT much better.  Since CMG never goes down I still like CAKE to go up and you can buy the 2012 $20/30 bull call spread for $7.40 and sell the $30 puts for $3.50 and that’s net $3.90 on the $10 spread that’s $13.32 in the money and your break-even is $26.75 so not a bad way to make $6.50 in a year!  

    TBT/Terra – If you want to play them up with some conviction then you can sell the 2013 $30 puts for $3.90 and that pays for the 2012 $35/45 bull call spread at $3.80 with a dime to spare.  Worst case is you own TBT at $30.10 in 2013.  You can do a 1/2 sales to make for an easy roll and that still gives you a $1.85 net entry on the $10 spreads, which isn’t bad but it’s an aggressively bullish play, not a safe one.  Another way to play is to take the 2012 $40/55 bull call spread at $3.25 and sell the Jan $35 puts for .55.  The plan would be to make 6 short sales and have a free shot at the long spread.

    UWM/Wilsons – No, I like shorting the RUT, not going long on it.  When an index has had a run like this, even if they go up 40% for the year, we’re still going to be looking for that 20% pullback eventually.  That makes TZA a more and more attractive hedge every day.  It’s the Dow and the S&P we want to play to catch up, not chasing the leader.  The fear in TZA buyers is amazing right now.  They will pay you $1.30 to sell them a Jan $16 put – that’s almost 10% of the current $16.21 in a month.  If someone is willing to pay you 10% of a stock price PER MONTH to sell them puts – you have a pretty good chance of winning over the course of a year, don’t you?  Your bet ends up being that you will collect 12x $1.30 ($15.60) in anticipation that TZA will be worth more than .60 at the end of the year, if you are assigned.  

    As I always point out, as long as you only sell puts in things you REALLY want to own a long-term position in at that strike – this is never a big problem.  Collecting $1.30 for the TZA Jan $16 puts allows you to buy the 2012 $14/20 spread for the same price.  That’s net $0 for a $6 spread and, if this month works out, you can buy another set next month, offset with another put sale.  If this month does not work out, then hopefully your longs are going well and you can roll the short puts along.  At the moment, the April $14 puts are $1.60 and the July $12 puts are also $1.60 and the 2012 $10 puts are also $1.60 so that’s your rolling path.  

    In short, if you take this play as protection, you are getting a free bull call spread in exchange for agreeing to own TZA at net $10 in 2012.  Of course then you can roll it to 2013 and 2014 but that’s a 40% drop in TZA, which would be Russell 900ish and it won’t take much of a long bet above to cover that, would it?  When you think about these trades, think about them working together as a group, not as a single trade.  If you have a $100K portfolio and you are willing to risk owning $10K of TZA in Jan 2012 to protect $90K of bullish bets, then you sell 10 Jan $16 puts for $1,300 and buy $1,300 worth of the long spreads (10).  

    Now, let’s say you get away with this in Jan and the puts expire worthless.  Then you sell another $1,300 in Feb and now you buy 10 more bull calls.  That would leave you with 20 2012 $14/20 bull call spreads that cost you nothing.  That’s $12,000 of downside protection you can use as a backstop the rest of the year!  

    When TZA turns the other way, it’s because the market is going up and your worst case is an assignment of 1,000 shares at $10 and, even if TZA drops to $3, you are out "just’ $7,000 on your protection while your bullish $90,000 better make 10% at Russell 1,000+ or I have really failed to teach you anything!  

    Illinois Seeks Wall Street Cash
    "Times have gotten so tough for the Illinois state government that it has begun turning to Wall Street trading houses and hedge funds to help pay its bills.
    The state owes more than $4.5 billion to vendors large and small, ranging from prison-cleaning crews to schools for the disabled. Tax shortfalls and pension obligations continue to leave the state light on cash.
    The Illinois approach works like this: Investors take over the delinquent bills owed by the state to its vendors. Those vendors are due a 1% penalty each month after the state falls behind by 60 days. The financial investors make the vendors whole and are entitled to 1% monthly penalties until the state pays the investors back.
    With Illinois currently five months behind on its bills, investors who participate in the program today could collect 3%, which state officials say works out to an about 12% annualized return. The rate is double that of many long-term Illinois state bonds, which pay roughly 6% annually.
    State officials said they expect to pay back investors in less than six months, but won’t guarantee that."
    So, pick your metaphor- digging the hole deeper or adding a story to the house of cards. This in a devious scam to add more state borrowing ‘under the radar" and paying the equivalent of 12%. It likely will simply add to existing debt levels as the "new" lenders are stonewalled and the "old" vendors are sucked in again.
    We are likely to see a doubling of income tax rates here in Illinois next year which will allow the excesses in pensions, patronage/cronyism and public sector union control to continue. Meanwhile, people and jobs are voting with their feet.
    Other states in trouble are sure to follow this lead and presto, the state budgets crises are solved-ain’t high finance grand?

  36.  Tchay / Buy Writes
    My strategy is unique to the individual stock – ie, all stocks move diffferently and accordingly must be evaluated on an subjective t basis.  Using a Buy/Write strategy, as a clarification, I would make the assessment for strike selection much differently for a "channel walker" such as KO, as compared to some of the rocket rider momentum stocks that I favor. The same goes for structuring a bull call spread. Anticipated velocity of potential movement in the stock price is always a high priority when selling the shorts on a BW
    When entering the BW, I more often than not go out three months when picking the strikes, as one of my objectives is to capture income from the short option sales, but also want the options to be investments and not a gamble. I do not split the option dates at the inception. I. however will sometimes sell the calls and puts on a "ratio" basis, ie more puts than calls or inversely the opposite – this is done when I am overly bullish looking forward three months ( I put a heavier emphasis on the short puts – and inversely I weigh the call to a stronger bias if I have concern about the bullishness of the trade over the first three months.I objective is to make money on the stock, as well as both sides of the straddle, or in some cases a strangle.
    I watch the trade ( all three components ) and adjust by rolling the short options as needed. I us the DD approach on occasion, and have even gone 4X if I feel I can recover. If it looks ominous to recover, I just buy back the short options and close them out. I love the B/W strategy, because you can adjust this play as you go forward  ( I think it is like a three legged stool ) and by keeping everything in sinc, you can make money simultaneously on the directional move of the stock as well as profit from time decay on the options.
    Since many of my stock selections are momentum plays that sometimes have "explosive" moves upward, I sometimes just close out the short calls that were part of the B/W and let nature take it course…. sure I may take a small loss on the short calls, but I’m more than compensated by the short put that has gained value. I also roll the short puts forward in situations like this in order to capture more premium income.
    This is a rambling answer to your question, but sums up my thought process.
    I hope you are staying warm up there in Calgary!

  37. Gel1
    Thanks for the further thought process. It gives me more to look at when I roll. I do both channel and momo trades. I had not thought about the velocity piece other than to sell premium when it is high. With Phil’s comment previously and yours, I can now formulate a more robust strategy for me. I agree with your comments re: explosive moves and taking advantage of all three legs. By watching those, I have had 3-6 month trades that moved so much in 2-3 weeks that they were 50% of the profit. So I adjusted the puts & calls and took some profit off then reset for the remaining months. I can now think about volatility when making the adjustments.

  38.  Thanks Gel for your thought process, your post is very informative.
    by the way I’m in Sibiria now and just dreaming to go back to warm Calgary :)

  39. pstas – the creative financing around state budgets will be the housing-bubble-in-hindsight conversation we will be having in 2015. That type of financial hooey is showing up in articles all over the place.
    Think about this: it’s all about timing, because the testicle-less federal government has insured these outcomes are rigged and no longer zero-sum games. For example, the housing bubble created an alphabet soup of MBS, CDS and so on and so forth, which, stuffed to the teeth with fees and points for the insiders, created an entire industry of fraud that added no value whatsoever to the American dream, and then — poof — once it evaporates the smarter, leaner fish were already out of the game. Sure the gov’t let’s a few companies go down (ones so greedy and so far gone they can’t be saved like Bear Stearns), and a Madoff or two falls off the wagon, but for the aggregate criminals their free gambling money back with bailouts! Trillions once it is all said and done!! Not one criminal indictment. Not one mortgage lender jumping out of a window (And believe me, for people lik eme who were actually paying attention I wanted to see blood in the streets).  And the audacity of these criminals! — they take billions and billions and bitch and moan when a few meek voices raise an issue with their 8 figure bonuses they are paying themselves with taxpayer money. And now it continues, they literally stealing homes back without any punishment whatsoever. OBAMA IS SUCH A PUSSY. I am so pissed, you should see what I would do (and Phil), if people who actually gave a shit were in charge.
    But I digress. The point is, no lessons have been learned, no criminals have gone to jail, SO WHAT’S THE INCENTIVE TO NOT DO AGAIN AND AGAIN AND AGAIN?  There’s none. So the question is where, not if, does the next mega America-Dream crushing Wall Street scam come from? And getting back to the great state of Illinois, my theory is state debt and pension assets.
    (PS please stop blaming "corrupt unions" and idiotic nonsense like that — blame the real criminals — and to find them FOLLOW THE MONEY. Nobody cares about a bunch of poor minions, even if they band together. The fat cats and hedge fund insiders must toast each other to people like you, who enable them to continue their theft of America. And the unions will go broke and disappear anyways (see, you get what you want afterall), they are no match for Wall Streets trillions.) 

  40.  great, just great, I had a great post and it got lost during "Submit Comment" no man’s land.

  41. txchili/spreadsheet
    I used to do what you are doing with the spreadsheet & man,it took a lot of time.I discoverd and they havea fantastic program that sets up a fantastic spreadsheet that does it all and even has a "analysis" of each of my positions (about 50 ) that gives me a recommendation when to roll and what options to roll to including the return on investment for my original position vs the new postion recommended.I also get an email each monrning with suggested trades.
     It costs about $60 / month & is well worth.They also offer a 1 hour consultation with one of their guys on a first come basis. I highly recommend it since it has made me more than the subscription  costs many times over and saves me about 20 hours of tedious spreadsheet work /week. If you do sign,up please use me as your referral since I get a month added to my subscription.

  42.  Tchay
    I heard from Kent Moors the other day…he was in Western Siberia –  said he was "freezing his @$$ off, and I believe he said it was -35 F. Oh boy !

  43. txchili/spreadsheet;
    CORRECTION!  It’s not

  44. Dflam
    Thanks for the site. I will explore and let you know if I sign up. Sounds like the ongoing tracking is well worth it.

  45.  Gel
    right now is – 35F, the worst which I witnessed here was – 65F last winter :)

  46.  Tchay
    Good days are ahead for you on your return to Calgary…. usually a nice "Chinook wind" in January – can go from -20 F to + 40 F all in one day ! ( as I remember ).

  47. Phil…I have reviewed your SSO trade above and I have one question please. Why are you selling the June 42 Calls when the SSO closed at 46 on Friday? How can you make any money on the SSO side of the trade if the short 42 Calls are blocking your upside move in the market? Please advise. Thanks.

  48. For the Apple specialists out there, I was wondering if the leaked news about the iPad2 coming out in Q1 next  year will hurt sales of the iPad this quarter. Honestly, if I were thinking of buying one now (I have one already) I would be holding off until the new one comes out (specs look pretty good, although there are some good Android slates out there now so competition is stronger). This could push back some sales to Q1. Of course, many of us will probably buy a new one sometimes after it comes out so sales could be strong next quarter. Just a thought!

  49.  I think Gold has almost completed its correction… am placing GTC orders for next week on my favorite miners – my preferred trade is a GTC order for ABX at anything under $50.00.  I placed an order tonight to sell Dec $50 puts… if filled I’m happy, and if not then I’ll buy the stock Friday, and sell a short straddle for the discount. If assigned on the puts prior to expiration, then I’ll take the assignment and sell the options for a short straddle. I’m looking for ABX to go above $58.50 in the near term for a nice short term profit. ( Phil – I know you like ABX…. do you like this strategy? )

  50. ABX/Gel – On a technical basis, you might be a tad early with ABX or gold for that matter… Why not sell the ABX Jan 12 50 calls for $6.00 (which gets you in at $44 or close to 20% discount) and leg in to the buy/write that way? Then see what happens with the stock in the coming week and sell the calls when ABX makes new highs. Just curious!

  51.  stjeanluc / ABX
    I look at Barrick as a long term  "momentum" play, that is subject to conservative corrections, that are short term, but looking forward –  it will be trading far higher than 50 in the short term. My target on this trade is short term, and looking for a quick 10%. I have other longer term gold plays that have differing strikes.  In terms of longer plays… I think selling the Jan 13  - 50 puts for near $9.00 is superior….. how can you go wrong with any upside play in the long term?.. some are better than others. With the play I suggested, I believe you will still be able to leg in to a subsequent play, but at a better price point.

  52. Artificials/TxChili – I don’t really have rules like that.  I have certain companies I like and don’t, probably about 200 I’ll be paying attention to at any given time and I scan their option chains all along the various strikes looking for "bargains."  I guess, usually, it’s going to be 2012 or 2013 and the key is to sell as much premium as possible, buy as little as possible and try to set a target that gives you at least a 15% and preferably 20% discount if the stock is put to you.  If you stick to that rule, then you have a pretty good idea of what kind of protection you’ll need as the market heads lower.  

    Assignment/Wilsons – You very rarely get an early call away but anytime you go under a put strike you risk having the stock put to you at any time.  The real question is whether that’s a big deal and, with most brokers – it’s not but, unfortunately, you don’t know how nicely your broker handles assignments until they actually happen to you. 

    Margins/Pete – Yeah, if you don’t have PM, it’s a lot of margin but if you are all in cash, then you aren’t doing anything else with the margin anyway.  Committing to buy $138,000 worth of FAS does not mean losing $138,000, your loss is 6,600 times the difference between $21 and zero.  With FAS at $27 now, that’s a pretty cushy margin.  If your margin requirement is $36,000 and the upside of this play at $25 (which FAS is above now) is $33,000, that’s a reasonable risk/reward on almost any play.  If you are locking up your entire portfolio with $85K of margin then it’s a bad idea to go for a $33,000 win that way but perhaps just aim for making $10K or so, never a bad thing to do in 5 months.  As to allocation, with volatile spreads like this you need to consider what is realistically being allocated here.  Of course if you sell 10 puts, you may be assigned $21,000 worth of FAS at $21 but, realistically, what are you going to do?  You will roll them to the 2012 $16.67s and then to the 2013 $12s so, even conservatively, you’re maybe allocating $15K of FAS but, from a margin perspective – if you own $15K of FAS that’s only going to be $7,500 in margin when all is said and done.  Also, keep in mind that we are doing these plays ABOVE our 3 of 5 breakdowns.  

    If we drop 3 of our 5 levels, then you don’t stay in the play – simple enough?  10 of these is fine as it gives you a nice $5K at $25 and that’s 5% of your whole portfolio as a gain if the market "gets away from you" on a big run..  Along the way, you can add some less margin-intensive plays as you build up your commitment level and, of course, when this is up 1,500%, maybe cash it out early and move on to other upside plays.  This is all a very fluid thing – you can’t get caught up treating every play like it will have to run to the end and either win or lose – the in-between is the result 75% of the time. 

    BDI/BDC – The list of things that are being ignored grows larger every day.  Incredible…

    Trustee/Gel – Well it depends on a few things.  If the goal is "don’t lose the money or they sue you" then you have to be pretty damned conservative, right?  There is no such thing as "safe" in stocks but bonds don’t look very safe these days either so I’d just do a blue-chip diversification, like our dividend-payer portfolio and lean towards lower strikes on buy/writes to just sort of try to make 10% a year with 20% downside protection.  PFE for example, is $17 and you can sell the 2013 $12.50 puts and $15 calls for $4.20 for net $12.80/12.65 with a 17.2% profit at $15 plus the 4.3% annual dividend and you have built-in protection down 25%.  Do about a dozen diversified plays like that with some sensible downside protection and you only have to set your alarm to wake you up if the market drops more than 10%.

    Thanks Pete – it does sound like you are getting the hang of it! 

    SSO/Cman – It’s what we call an artificial buy/write where we buy a bull call spread (or, in this case a diagonal calendar spread) instead of the underlying stock.  In this case it’s the $30 calls vs the $42 calls, a $12 spread.  We pick an in the money call because it gives us a bit of downside protection and suits our purposes as we have a year to roll them to higher strikes.  The goal is not to maximize potential gains, the goal is to maximize the probability of having a reasonable gain.  I often say, I am a singles hitter who occasionally hits home runs – they tend to have better averages than the home run hitters who occasionally hit singles…

    IPad/StJ – I know I’m waiting although the new software update on my current IPad sped it up considerably – it’s like having a new one already.   I have now been in 3 malls in two weeks and have yet to see a Droid pad.  I haven’t really been looking but you would think someone would have been making a big deal out of them.  That seems a little strange.  The AAPL store I went to today was not packed.  It’s a huge one and it was dinner time on Sunday but I had only a 10-min wait at the genius bar for tech support and there were plenty of demo systems available.  I’d love to see breakdowns on what percentage of business is being done on-line this year for each company…  I came home yesterday and ordered all the things I didn’t see in the stores.  

    ABX/Gel – I always like selling puts as an entry strategy but, since you REALLY want them, why waste time selling Dec $50s for .12 when you can sell Apr $55 puts for $5.10?  If you are right and ABX goes up, you make as much as you would if they went from here ($53.30) to $58.40 and, if they head lower, your net entry is $49.90, even if you don’t roll.  Of course, that’s based on your premise – I still think gold heads lower as the Euro breaks down in the next round of worries.  

  53.  Phil / Trustee
    You must have read my mind, as I was thinking exactly the same. It is a task I really don’t want….. If the trust makes money then the beneficiaries think that is just "normal" and they take it for granted ,but if it loses value…. you are the cause no mater what the circumstances are – no way to win. I would love to get out of this, but I see no way… I plan to be super C-O-N-S-E-R-V-A-T-I-V-E.

  54.  Phil, do you have any plays for GE.  I really think GE will do long – term.  They really wouldn’t have boosted their dividend if things were not on the upswing, especially since Immelt has gotten a chance to experience all five stages of grief.  Looking at a Call spread of 15/20 2013 for about 2.3.    I may even consider selling the 17.5 puts for 3.2.  I know this is a pretty aggressive Buy/write so would be interested in your opinion.  

  55.  Its official… China will not raise rates until some time next year. Axelrod predicts the tax rates will be extended with confirmation coming before year end. Both of these events are positive for the markets going into year end. Good news for the bulls !

  56. Good morning!

    Conservative is right Gel, falls under the category of noblesse oblige.

    GE/Jo – Funny you should mention it, see above.  GE is EXACTLY the kind of company they are pulling out all the stops to help.  

    China/Gel – Wow, we do not have the market cornered on screwing the poor with inflation…

  57. biodieselchris- "please stop blaming "corrupt unions" and idiotic nonsense like that "

    I did not intend my post on Illinois financing schemes to be a political one. It was intended to point out, as you recognized, that many states (and cities for that matter) are in terrible shape. You can blame the bankers and hedge funds for their activitities- correctly so in many cases but it ignores the reality that they are just the enablers. The "addicts are us", the citizens. We allow the farce to continue. In Illinois, the State has outspent it’s resources by an average of 8% over 10 years. Taxes were not raised. Benefits and goodies were handed out and the game continued with borrowed money. The fact is , at least in this state, that the public sector unions are a very powerful political force. Opposition to them comes at great political peril. They are not omnipotent but have crafted and maintained a support structure within government which is now almost self-sustaining. They control an active voting block which tilts the scales in their favor over and over again. The ironic result is the once champions of the poor working class have now become the exploiters of the masses beneath them. Those with the resources and wherewithal to exit the state are doing so. Those who cannot will be shafted with the future burdens.

    The essential point is that it’s easy to  blame the convenient boogymen on "Wall street" when the we, the citizens have been corrupted by the entitlement mentality that we have a right to this, that  or whatever and someone else will pick up the tab. While the housing crises was certainly brought to critical mass by stupidly risky creative financing- the root cause is the individual who signed the dotted line on mortgages and equity loans which put them at serious risk. Why don’t people get this? Millions of people took the (small C) conservative path and did not participate in the housing mania. That often meant lifestyle choices which postponed, deferred or even eliminated gratification. Individuals made choices- no one put a gun to their heads. If no one signed the loan papers then there would be no loans to bundle, slice and dice.

    The same applies to state and municipal finances. If you don’t sign the contracts for which the resources do not exist, then there is no need for hedge fund creative financing schemes.
    It is really very simple.


  58.  Sorry phil, i think my question was ahead of your post.

  59. Hi Phil,
    Haven’t chipped in anything in a while as I’ve been snowed under with work lately.  Ironically, dealing with REO properties mostly.  While I wasn’t watching close enough, I saw my small position in DF take a dive and now see that bankrupt was a term thrown around a bit.
    I’ve got 200 shares bought at $9.80 with Jan. 2011 $10P/$12.50C strangle sold for 2.60.  What are your thoughts on this position and DF’s prospects.  When I started it, I of course was willing to own 200 more shares if put to me.  Not so sure now.