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Saturday, September 24, 2022


Breakout Defense Part Deux – 5 More Trades that Make 500% in a Rising Market (Members Only)

SPY 5 MINUTEHere we are again!  

The last time I wrote a Breakout Defense article was back on December 11th when I said: "Wow!  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."  Clearly, my Mom and the Pope nailed it as the the Dow is up another 500 points (4.3%) since then and CMG made a comeback yesterday and is a bit higher than Dec. 10th's finish at $238.22 and NFLX is well above $194.63 so the infallibility streak continues for the pontiff!  

As with last time, I would urge you to spend some time reading (and now viewing) David Fry's market commentary over at ETF digest.  Dave's take on the IWM, which we have been playing this week, is that it is still rolling over and that investors should not be fooled by the Dow.  I'm not here to debate the points – this is an article about what we can do to make sure we don't miss the rally train if it does leave the station and, like last time, it's very easy to set aside a small amount of capital into highly leveraged trades like this, which can make excellent returns on even small rises in the market.  On the whole, I remain cautious and still believing that we may be in a blow-off top but we have plenty of bearish short-term bets and we need some balance – just in case… 

We had just a 4.3% gain since our December picks and check out this performance on those already:

  • FAS Apr $20/25 bull call spread paired with the sale of the April $21 puts for net .15, now $3.98, up 2,553%. 
  • DBC Apr $27 calls at $1, now $2.05 – up 105%
  • 4 DBC Jan $22/27 bull call spread paired with the sale of the 3 USO 2013 $30 puts for net $170, now $740 – up 335%
  • DBC Jan $26/30 bull call spread paired with the sale of the $22 puts for net .30, now $1.50, up 400%
  • SSO Jan $30/June $42 diagonal call spread paired with the sale of and SPX LAST Jan $1,185 put that already expired worthless for net .40, now $10.85, up 2,613%.
  • GE Jan $17.50/20 bull call spread paired with the sale of the 2013 $12.50 puts for a net .15 credit, now $1 – up 766%.  
  • 50 HOV 2013 $5/7.50 bull call spreads paired with the sale of 10 2012 $5 puts for net $650, now $1,250 – up 92%
  • BA Jan $45 puts, sold short for $2.50, now $1.10, up 56% (alternate funding suggestion).

We have more than our target 5,000% worth of gains already and the year has hardly begun.  That's pretty good!  Keep in mind these are highly leveraged trades based on the idea that you REALLY don't mind having the underlying stock you sell puts against put to you (hence the BA alternative example in the post).  In other words – If FAS had fallen below $21 (the November low) we have to be willing to either roll the puts along in hopes they expire down the road or to accept a long on the ultra ETF.  Since we felt that QE2 gave us a firm floor on the financials, we would not have minded going long on a dip (plus, of course, we would have then hedged that anyway).  

I said in the December post, if you commit just 2% of your virtual portfolio's sideline cash (more in margin) to a spread of trades like this that makes even just 2,000% – that's a 20% boost to your ENTIRE virtual portfolio.  Even The Bernank hasn't been able to devalue the dollar that fast – yet.  My comment in early December on the market was as follows:  

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?

We only had a couple of more days of pokey behavior, with a nice little dip that gave us fabulous entries on that Wednesday (Dec 15th) and then Santa Clause came to town and we were off to the races.  Of course we lost a little money running short-term protection along the way but the idea of short-term plays is to protect your long-term plays.  Otherwise it would be madness to watch them go up 100%, 200%, 500%, 1,000%… – without taking any off the table, wouldn't it? 

Keep in mind we had not only these trades coming off our pretty much all cash position we were getting bored with, but then we had our less aggressive but also POMO-minded, "Secret Santa's Inflation Hedges for 2011," which actually weren't a secret at all as it was Christmas Day and I decided to give the World (especially Phil's Stock World) some good money-making ideas for Christmas.  

Usually we don't publish our virtual portfolio trades for the general public but it didn't seem like there was anything that was going to stop The Bernank from destroying the Global Economy with inflation so, it made sense for us to hold our own bags out if Uncle Ben was going around handing out money to the top 10%, right?  Those trades were far more conservative, so appropriate for larger bets as we looked to hedge our still 75% cash positions against various kinds of inflation (see post for details).  Those trades were:

  • 30 XHB 2013 $15/18 bull call spreads paired with the sale of 20 2013 $14 puts for net $800, now $1,940 – up 142% (on track to $9,000)
  • 2 XLE Jan $55/60 bull call spreads paired with the sale of 1 2013 $50 put for net $120, now $700 – up 483% (out of 733%, this one is done with risk now outweighing reward 2:1 and a whole year to go).  
  • 6 DBA Jan $26/29 bull call spreads paired with the sale of 4 2013 $25 puts for net $380, now $1,100 – up 189% (on track to 373% but high enough to urge caution already).  
  • XLF Jan $12/13 bull call spread paired with the sale of the Jan $11 puts for net .40, now .68 – up 70% (on track to 150%)

One of the things I've been getting upset with is how fast our inflation hedges are making money.  Perhaps that's why I (and other Members) are a little more sensitive to what BS the Fed's money-printing policies are as we see the effect on our own meager holdings and that makes it very easy for us to imagine the many Billions that are being funneled into the IBanks, who are playing trades like these right along side us and funneling that money out of the pockets (and mouths!) of the non-investor class, which is really 99% of the people in the World if you don't count mindless 401K contributions and retirement funds.  

So we make money and we complain about it.  Is that really so strange?  I often say to Members – "We don't care IF the game is rigged as long as we can figure out HOW the game is rigged and place our bets accordingly."  It's a bit cynical and, if I felt that our participation in this scam was perpetuating it, then I'd have a real moral dilemma…  But it's not.  We are but fleas on the ass of Goldman Sachs, et al. and they are going to do what they are going to do.  To go against the forces of the market is like betting that a star in the event horizon won't get swallowed by a black hole, just because we don't want it to.  You COULD bet against it, but I doubt your find any Physicists who are willing to bet with you.  

Speaking of science – in the December post I made a comment about the plunging VIX, then 17.61, which was: "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."  That theory has been holding up all too well with the VIX at 15.93 at Friday's close!  Be afraid, be very afraid that nobody else is!  Here's a look at the multi-chart as we ignore, well – everything that is going on in the World – for the last six months:

Wheeee!  This is fun!  Now keep in mind that most of the punditry is telling you that they EXPECT to do this again in the next year.  As Eddie Murphy said in Trading Places when the rich guys told him he was getting a mansion, servants, a job etc. "Yeah, I'm cool with that because stuff like this happens to me all the time!"  He was being sarcastic but there's not even a hint of irony in the expectations of the vast majority of investors and that makes me very, very nervous.  On the other hand, there's not a hint of irony in a wildebeest when they are stampeding, either, and it's not a good idea to go against that herd.

VIXWe're testing 20 and 25% breakout levels from the August lows and, as I have long been saying, it is now "safe" to go back in the bullish water if we remain over our major breakout levels of Dow 12,000, S&P 1,300, Nasdaq 2,750, NYSE 8,250 and Russell 800.  As we stay above them, they begin to give us firmer and firmer support, which means the plays we take here (at the lines) that are designed to withstand 20% drops, will look as safe as our last set of December upside trades do now.  Note also, the way the chart was on December 11th is the way the chart is now and, like December 11th, we begin with our breakout defenses and we will move on to plays that we are willing to commit more capital too once we have a little more comfort and experience over those lines (maybe end of this month if all goes well). 

We have plenty of downside covers in place so now it's time to give ourselves something to cover but it's all about holding at least 3 of 5 of those levels – anything below that and we can consider it a bearish turn for the market!  TZA is our lead cover (see yesterday's post) along with EDZ.  As I mentioned last time, there are several stocks we should always look to pick up when they are "on sale" and that's:  BA, GE, VLO, XOM, MO, WFR, UNG, PFE, MCD, KO, JPM, FDX, HPQ, GS, GOOG, AAPL, DIS, T, VZ and AA off the top of my head.  Please use the comments below to make suggestions and identify opportunities, especially as I'll be out for a few days so any research you guys have time to do would be much appreciated and I can concentrate on making plays out of them.  Thanks!  

And, Finally, Some New Trade Ideas:  

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 $44 calls at $11.30, covered with the June $50 calls at $4.70 for net $6.60 on the $6 spread (and, of course, you can roll the caller if things go well) that can be offset by selling an SPX March 1215 put for $6, which has a high premium of about $17K (to get $1,000) but it’s offset by the fact that your margin is released on March 18th if things go well and that leaves you in a net .60 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 1,310 so the S&P would have to fall 7.25% 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 $125 puts are just $1 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!

Also, keep in mind, this is where those substitutions come into play.  Why are we selling the SPX March 1,215 puts?  To get $6!  We like it because we don't think the S&P is too likely to drop 7.5% in 45 days and, if they do, we can roll 'em to the June 1,025 puts (also $6 at the moment) and then on to the Dec 800 puts ($6.70). If you think the S&P is going to fall below 800 or fall so fast you won't be able to roll – THEN WHY THE HELL WOULD YOU BE TAKING THIS AGGRESSIVE UPSIDE PLAY???  There, in a nutshell, is the logic of these kinds of positions!

So, where was I?  Oh yes, substitutions.  So if the idea of playing SPX makes you squeamish, the thing to do is find something else you REALLY want to own that will pay you $6 instead.  Try to make it something that you REALLY, REALLY want to own long-term and are willing to commit to now so that, even if the stock falls 20% below your strike, you would still be thrilled to have such a bargain and, if the stock falls 20% more below your strike to 40% off your entry, you will be THRILLED to double down and be in 2x at an average of 20% off.  

AAPL is always a good example – I would love to own AAPL for $250.  Unfortunately, it is at $346.  Yet, amazingly, there is someone willing to pay me $8.90 to promise to buy his Apple stock for $250 in January (selling me the put).  Why does he do this?  Well, from his point of view, maybe he is worried Steve Jobs will die or the Droid will wipe out the IPhone or NFLX will come out with a Pad computer and he wants to limit his potential losses to 27% and he's willing to pay $8.90 (2.5%) – whatever, it's not our problem.  All we have to do is say: "Sure, you give me $8.90" and I will buy your Apple stock for $250 in January if you ask me to.  That's what a short put is.  Since $250 is 27% lower than the current price, the margin on my TOS ordinary account says net $2,500.  Not a bad deal for letting giving me $890 in cash now.  

This is our famous "Wimpy Investing Strategy" as we get paid today for promising to buy something tomorrow.  If I REALLY, REALLY want to buy 100 shares of AAPL for $250 a share ($25,000) and I would REALLY, REALLY be thrilled to buy another 100 shares 40% lower at $150 ($15,000) so I would own 200 shares of AAPL for $40,000 when they are down to $30,000 because I would be confident enough to hold them LONG-TERM and wait for a comeback – then why not take $890 now against $2,500 in margin?  

Again, keep in mind, it does not have to be AAPL – it can be any of the stocks I listed above at 20-25% off and it can be any stock you REALLY want to own at the strike you sell a put at.  This is an ideal strategy when we have a lot of cash on the side that we would like to deploy on a dip but, we also don't want to miss out on a big move higher.  Even if we margined 50% (because when you buy the stock it's only 50% margin) for the trades and allocated 50% of a $250,000 virtual portfolio to 10 short AAPL Jan $250 puts, we're still collecting $8,900 cash while we wait, which is 3.5% interest on our entire balance.  Better than putting it in a CD, right?  

Another thing people say, especially those with 401K accounts that have restrictions on short puts selling, is can we just take the suggested bull call spread?  Of course you can!  Generally, I'm looking for bull call spreads that are very likely to double and then offsetting the cost by selling puts that reduce the net cost of the bull spread by 75% of more to turn a 100% return into a 700% return.  So, if you can be satisfied with "mere" 100% returns – the bull call spread alone is fine and, of course, set stops if we break down – which is really easy to do as we're right above our major levels.  I would caution against applying this strategy to any old thing though – although I liked the above SSO play do do it again, I generally look over 40 or 50 trade ideas that I reject before one of them makes these virtual portfolios.  It is VERY painful when they go the wrong way so it's important to be very selective in your picks as well.  

I still love my Financials because that's where all the POMO goes.  XLF was only $15.76 when I made my 12/11 picks and now just $16.61 so we didn't miss too much of a move.  Financials are lagging the market and probably for good reason with however many bank closings per week but, still, clearly the top of the heap, that make up the bulk of the XLF, is certified by the Government as "too big to fail."

FAS is always a favorite because it has very attractive spreads.  The July $28/35 bull call spread is $2.10 and we can offset that by selling 3x the C 2013 $3.50 puts for .40 ($120).  I like C as a TBTF bank and also, in TOS, the margin requirement is net $144 to collect $1.20.  So this trade obligates you to buy 300 shares of C at $3 ($900) and you toss in another $90 in cash fro the bull calls spread and you have a $700 upside at FAS $35, with FAS at $31.12 today.  Of course, you won't net out the $700 until/unless C finished over $3.50 in Jan of 2013 but you will make $490 CASH at $35 and you can quibble about the value of the trade over a very nice steak dinner.  Another thing about a trade like this is, if successful, you can re-load and re-load and re-load – as we are doing right now off our last set.  

HOV just came down in price as they sold a little stock to raise a little cash.   Home builders are THE place to be if inflation works its way back to real estate as they are sitting on huge piles of land (and unsold homes) that are already highly leveraged so, what looks like a bad thing now can turn into a very good thing very quickly.  So think about betting on HOV, and possibly TOL later on, as speculating on the speculators – their leverage can make for astounding gains if real estate prices inflate.  Also keep in mind they are just as likely to collapse and that's why I like HOV, who have already written off their asset values tremendously.  

HOV 2013 $5 puts can be sold for $2.  The most you can lose is $3 – simple enough?   If you are willing to lose $600 you can sell 2 contracts.  With that, you can buy 6 2013 $5 calls for $1.10.  That's another $60 out of your pocket and you control 600 shares at $5 and make every net penny above $5.10.  That's not complicated, right?  Why do I like this trade?  Here's a chart of what happened to HOV the last time they were at $5 and there was a housing boom:  

Let's say HOV "only" gets to $20 in 2 years.  What do we get?  We get the net of $5-$20 ($15) x the 600 shares we control for a $9,000 reward on our $600 risk.  If you simply run a trade like this every two years, we would have to go 30 straight years without once getting the 300% run we're looking for AND you would have to be wiped out ALL 15 times to not break even on this trade.  It is rare that we get an opportunity to buy into a cyclical industry so near the bottom.  If we do get wiped out on HOV (they go BK), then I can assure you that in January of 2013 I will be telling you what a great opportunity it is to invest in whatever other beaten-down builder looks good because the ones that are left will likely be even cheaper then if the market is so terrible that it bankrupts HOV.  

So consider a play like this scaling in.  Maybe set a $300 stop-loss on the short puts on this one and then we go in with another $600 attack once the dust clears on whatever it is that forces us to stop out of this one.  Speaking of beaten-down and out-of-favor sectors.  How about shipping?  The BDI, which is the rate shippers charge, is down at just over 1,000 on the index.  It was only below 1,000 between October of 2008 (down from 12,000) and January of 2009 – after which it went back to the 4,000's, which it held through last June and then down and down they went.  A shipper just went bankrupt and there probably is too much capacity but, if the global economy is really recovering (and that's the premise to this virtual portfolio), then 1,000 will not last long again.  

DRYS is attractive, mainly BECAUSE they are right on the $5 mark.  That makes their contracts a little better for us to sell at the moment (as people bet off key levels in both directions, increasing the implied volatility for the stock) and, with a low VIX, we need all the help we can get!   This is a judgement call but I'm looking for BDI to bottom here and turn up on Q2 earnings (again, assuming the bulls are right) and that should power them towards $10 in the summer.  

The June $4/5.50 bull call spread is .79 and is already .21 in the money (options are funny that way) with a potential for $1.50 (up 90%) and then it's just a matter of paying for that with anything you REALLY want to own between now and then but let's say we do REALLY want to own DRYS long-term at a 30% discount, so we sell the 2013 $3 puts for .40 and that's net .39 on the $1.50 spread with a $1.11 upside (285%) and our WORST CASE is that we own DRYS for net $3.39, which is 32% below the current price.  

These are not meant to be complicated ideas.  If you like the idea of shipping and you are a long-term investor and DRYS appeals to you.  Then you can set aside $3,390 (for example) to buy 1,000 shares, right?  On the whole, it doesn't matter whether or not you make money on the short-term bull spread because all you are doing is setting aside $3,390 to buy DRYS.  If, by some happy accident, DRYS finishes at or above $5.50 at June expiration.  Then you will be handed $1,500 for your 10 contract spread.  That means, the net possible cost of having DRYS put to you in 2013 would drop to $1,890 or $1.89 a share.   If you do not buy DRYS in 2013 because it never comes back down to $3, then you paid net $390 to collect $1,500, which is a $1,110 profit.  Even with no margin at all, that's a nice return.  

DRYS can, of course, be played more aggressively and, for that, I'd go for selling the 2012 $5 puts for $1 and buying 2x the $5/7.50 bull call spread for net .60 so that's net .10 per $2.50 spread with a 2,400% upside if DRYS can finish over $7.50 next January.  That's another one of those fairly low net margin plays (about $1) so really fun if you have a margin account.  If I have a $100K virtual portfolio and I'm willing to own $5K of DRYS then I can allocate $2,400 to selling 6 of the 2012 $5 puts on the assumption that I can roll those back to the 2013 $4 puts (now .85) even.  Of course we can roll again and again but I like to assume we're stuck after 2 years.  

So let's say DRYS is $2 by then and I have 600 shares at $4.  Well, if I then take the $2,600 that's left of my $5K allocation, I can buy 1,300 more contracts at $2 (obviously assuming we still like it based on 2 years of new information) and that would leave me with 1,800 shares for $5,000 or $2.77 each with the stock at $2 so down a little over 20% after a 60% drop in the stock.  If I decide I can live with that, then on THAT basis, I am deciding to allocate $600 in margin to take $600 in cash today for selling 6 2012 $5 puts and applying that cash plus another $200 to buy 12 of the $5/7.50 bull call spreads.  

If all goes well, DRYS finishes above $7.50 and I collect $3,000 (1,200 x $2.50) against my $600 of margin and if all goes horribly wrong, I own 1,800 shares of DRYS at net $2.77.  THAT's how I'm thinking of a position when I tell people not to worry about them sometimes and I apologize if I come across as flippant about it but, in this trade, for example, think how silly it seems to worry if DRYS dips down to $4.50.  If you are looking ahead to your $2.77 entry because you REALLY want to own DRYS long-term – then this doesn't bother you at all because you're not going to get your price unless it gets a lot cheaper than that!  

The $2,800 you make on this play is a consolation prize.  It's what you have to settle for for NOT getting your 1,800 shares of HOV at $2.77.  I WANT, REALLY, REALLY want a virtual portfolio that is filled with LONG-TERM positions like DRYS at $2.77 and GE at $11 and AAPL at $250 etc.  I want a virtual portfolio like that that I can sell calls against for the rest of my life for a nice little monthly income.  You'd better pay me not to take it!  

Develop that attitude, and you will become a much better, much more relaxed option trader!  



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 Phil,  AKAM has been on my radar screen for quite a while.  Last summer it dove after an earning report into the upper thirties, but rebounded pretty quickly.  In the past few months it has really been consolidating and reports next week.  My thought is a 2013 40/50 bcs for $5; selling the 2013 35 put for about 4.50.  I think scaling in is very important here in case they disappoint, but they are in this streaming video space and acquired a company last year to give them a presence in the mobile space.  Why wouldn’t we want to own them for $30 in 2013?  All of these stocks’ p/e’s are high, but they have no debt.  Maybe the smarter entry is to just sell the 2013 35 puts, wait for earnings and get a better entry on the spread if they pullback.  thoughts?

Thanks Phil, BTW, if you didn’t tell me what was wrong I would wonder what I was paying for.  I appreciate the help!! 

Phil,  I have also been thinking about this whole commodity issue and the continuing expansion of the worldwide economies.  the problem is that these things are so overbought and driven by the weakness of the dollar that it is hard to figure out what the real value is.  If there were a short term rebalancing, then some of these stocks would take a hit but longer term it does not appear to be anyway that the demand equation is going to slacken.  It also does not appear that there is going to be any conscious effort to strengthen the dollar in the near term, just the opposite.  So with all that said, the miners feel like a safe long term play.  For instance, following your logic above, the BHP 70/80 2013 bcs is say $6; we can sell the 65 puts for $5.75.  The near term worry is inflation in the emerging markets, but isn’t that a positive for these miners?  We can make a similar play on FCX, but the potential for a copper specific ETF needs to play out to understand the affect on them – yes or no?

Phil, Safe may be the wrong word.  A "reasonable investment thesis" may be a better phrase? 

I updated the screen I ran on Monday using the fundamentals critera described in a previous post:
Overall, the screen did better than the market with a 2.33% return over 4 days. I plan on tracking that every week and rebalance on a monthly basis. 

I totally agree that trading should be a major part of any book. In my view it’s just another thing in America that needs fixing. If people should be aware of  something as simple as how they are being taken advantage of on market orders, they could make a simple change that could materially benefit them. IMO, the level of financial illiteracy in this country is astonishing, even among the college educated.
When I’ve been thinking about this project, my thoughts have centered around what you might want to say and how to facilitate getting that together, which is why I started with a purpose definition. I have also thought that a first cut at chapter titles might help to create an outline. So far I’ve come up with Chapter titles like: The Banksters; The Polluted (Main) Stream (Media); Plunder and Pillage, Inc.; and Catch Me Now I’m Falling (with a nod to The Kinks), the idea being to delineate a category or concept and then utilize a category index that I would build from your prior articles to put sections of content at ready disposal to paste together a first draft.
Godspeed on your journey.
P.S. I’m happy to report that I had outstanding dual daughter report  cards, as did you!

How about the following buy-write on National Bank of Greece?  Buy for 2.04 while selling 2013 2.24 Calls and Puts for 1.625 gives you a .415/1.3275 entry which is either a 439% return or 35% downside protection.

Phil, I wasn’t logged on yesterday so missed the news…sorry to hear, but you should only have good news going forward…question reg today’s post:  You mention that "TZA is our lead cover (see yesterday’s post) along with EDZ" but I don’t see anything about TZA (not in yesterday’s post either) – what am I missing?  I’m carefully watching the $25K portfolio and don’t see it there either…thanks for filling me in…

kevinb63v/Phil – Book
Since last spring I have been building a Word document by cutting and pasting the responses given to members when they ask for advice on trades. I always keep any response that gives advice that I think goes beyond the particular trade being responding to. I have slowly been editing out the screen names of the members being responded to and have been organizing by sections such as Verticals, Selling Puts, Protection, etc. I have been doing this for a reference for myself to keep me from asking questions that may have already been answered. If you think this document could be used in the book project or could be used as a member help document let me know.

 rj_jarboe – I would appreciate the document. nichania.com. I have a few things of Phil in my email but I never got around to organizing it in a document. Thank you.

rj_jarboe – that is a great idea.  I would appreciate a copy.  thegeneral91.com   I have built a word doc with all of Phil’s trade ideas that I liked for past year.  It’s easier for me to track than on the website as sometimes I don’t enter the trade right away.  not quite as organized as yours.  thanks. 

Phil/ Potential trades
CHS recently punched through the 200 DMA (helped by an analyst upgrade) and is closing in on the 50 DMA. They have a market cap of 2B, a FWD P/E of 14, Revenue of 1.87B, Operating Cash Flow of 192M, Debt of $0.
The Jan12 $10/12.50 BCS is $1.20 ($1.38 ITM) and the $10 puts can be sold for $1.25, the Options may be too thinly traded to suit you though.

It is not totally edited yet, it will take some time. I want to wait until I find out if Phil wants to look it over (since it is his comments, some of which may have been taken out of context since I only have his answers) and if he wants to make it available on his site. If he has no interest, I will send it to you guys when I am done cleaning it up.
I do the same as you terrapin on the trade ideas. I do not have time to keep up very well during the week, so I cut and paste all trade ideas for the week into a document and then do my own analysis over the weekend and place any orders Sunday night. I miss some trades this way, but I also get better entries every now and then.

I have been watching FDO. It has been hammered down ~25 % over the last month. Family Dollar Stores reported an increase in both net sales and net income for Q1 of fiscal 2011 ended November 27, 2010. Net sales increased 9.5% to $1.997 billion compared to $1.823 billion in Q1 of fiscal 2010. Net income for the quarter increased 9.9% to $74.3 million compared with net income of $67.6 million for Q1 of fiscal 2010. Net earnings per diluted share increased 18.4% to $0.58 compared with $0.49 for the Q1 of fiscal 2010. Q1 comparable store sales increased 6.9%. They also pay a 1.7% dividend and dividends have increased every year for the past 35 years. They company plans to open 300 stores in 2011.
In addition Family Dollar entered into an accelerated share repurchase agreement in October 2010 to repurchase $250 million of its common stock, as part of its previously announced $750 million share repurchase authorization. During Q1, the Company received approximately 4.4 million shares related to this transaction. The company is authorized to purchase up to an additional $500 million of its common stock.
This company may be in a sweet spot with the swelling number of unemployed. Most of their products sell for less than $10. It may not be the best value (certainly not overvalued IMO) in it’s category, but the recent drop in price makes this an intriguing stock.
I like the buying the stock for 41.51 and selling the 2012 $40 puts and calls for $8.30 for net $33.21 if put the shares (20% discount) or avg. $37.36 for all shares owned and that doesn’t include the dividend of 1.7% . On the other hand, if called you stand to make 32% in 12 mos.. (I think I got that right?)
If you don’t buy the stock you can go with the 2012 $40 call ($4.90) and put ($3.40) paired with selling the July’11 $45 call for $1.50 for net  0 on the $5 spread. If the stock is less than $45 by July you can sell the 2012 $45 calls or move up to the $50’s.

Since I am new to PSW can someone tell me if these new trades are in conjunction with the 25kp or should I consider these trades as a seperate position. 
Also I don’t always know if the trade is a buy or a sell.  Is there any standard terminology that phil uses when he means buy or sell.  I have been assuming if he does not say sell he means buy.

Welcome Williex:  yes, if unstated the trade is a buy;   unless stated otherwise, no trades are for the 25K Port.  The 25K portfolio trades will be addressed as such and you can follow the progess through the great spreadsheet that PharmBoy is creating for us!!

Phil, Pharm, or other board members:
Does anyone know what happens when you have bull call spread and the underlying stock gets bought out for a price greater than short call on the spread? Just curious and want to be prepared in the event this happens. Thank you.

 1099- anyone get these from TOS?

Inflation – excellent and not too long Jim Rickards interview on fed inflation and currency games
HRN: Why do you think the situation is unstable?
Jim Rickards: There is a lot of inflation, but it is being offset by deflation.  I compare it to an arm wrestling match.  If you’ve ever seen an arm wrestling match with two really powerful participants, nothing really happens for a long time.  The two arms just kind of sit there, then all of a sudden it starts to tip, then one guy just breaks and his arm is slammed down on the table.  Just because nothing is happening at the surface doesn’t mean that a lot of things aren’t happening below the surface…

 pstas/1099 – haven’t got it yet.

 1099- just got reply from TOS- said 1099 will be mailed on 2/15. I thought these had to be out by end of Jan? Anyone know what the regs are?

1099’s are supposed to be mailed by end of January, but its not uncommon to have them late, i get 1099’s into March every year  🙁
dclark:   you are golden if your stock is bought out above the sold calls.

 scottmi – thanks for the link. A good read.

 I checked the FAS July 28/35 spread and the quotes I see (from Friday) are 2.92 / 3.32 – has anyone checked that trade?

I am seeing around $3.00 also

I don’t understand the HOV trade logic. "Let’s say HOV "only" gets to $10 in 2 years.  What do we get?  We get the net of $5-$20 ($15) x the 600 shares we control for a $9,000 reward on our $600 risk" 
If you own 6 of the Jan13 $5C and the stock is at 10 in Jan 2013, the most you can make is $3000 ($5 x 6 contracts)+$600 put premium(you would have to sell 3 Jan13 $5P contracts @ $2+ $.60 to finance the calls) which is $3600. What am I missing?

As a newcomer to PSW, I have been cutting and pasting as I have time trying to understand the terminology, advanced strategies, etc.  If you choose to share the book, I would love to receive a copy. (ref48188.com) Thanks.

The IRS requires that Form 1099 information be furnished to customers no later than Feb. 15, 2011.  Corrected 1099s are  mailed thereafter, usually in early March.

I was checking out your link and had a question. 
The securities that you listed came from a screen that you ran…..correct?  Their performance ranged from approximately 15% gain to a about a 6% loss for the week. 
When you ran the screen were the individual securities rated?   (i.e. did Hitachi rate as a more attractive buy than say Hess Corp on your screen?)  I was curious if you did a report to see how the higher rated companies on your screen did relitive to their performance for the week.

Exec, I didn’t rank the securities in the screen. That would be another project. For now I am just taking the entire set at once. I was thinking of adding a criteria for volume because some of the securities are thinly traded. Also, I don’t like stocks under $10 as they are usually too volatile. If you are interested I can post the results of the screen for the week.

dclark – not sure exactly what you mean, but GXDX is a perfect example of the BCS working in a buyout.   Our play was the 17.5/22.5 BCS and they were bought out at $25, so you collect the entire premium.  If it falls within the premium, then it depends upon the cash and or cash/stock offer.  That gets more complicated.

Kind of confused myself with that question. Been thinking too much. Thanks for the response anyway.

Pharm, what is the TZA cover play that Phil mentioned in his Saturday post?  I’m not seeing it…

Pharm, found the TZA in an earlier post: Sell (I think) the April 13 puts at $1 (now $1.04), buy the $12/17 BCS now at 1.91 approx.  But, Phil didn’t say how many of each.  Also,  I’m not sure if a bearish play is still appropriate at this point…what do you think? 

Has anyone been able to figure out why NFLX flew up on Friday? I can’t find any news.

VIX/24K Portfolio,  Phil is busy but anyone rolling the VIX Feb 17/19 BCS, selling the 17 puts? I’m thinking of rolling the 19’s down to the 18’s – appreciate any suggestions. Thanks

Here is an idea for consideration. Masco MAS – B/W –  buy mas 14.43 selling 15 strike Jan 12 puts 2.65 and calls 1.87 yields about 20% and a net entry of 12.45 if put.  The 20% is based on maintaining cash to buy the put – eg. in an ira.
The prices are mark and spreads about .40 so a careful entry would be needed.
Or, maybe buying the Jan 12 10-15 bcs – buying strike 10 $5.00 selling the strike 15 $1.85 and the strike 12.5 puts 1.45 so about $1.70 for the $5 spread.

 Phil, on Feb 23 or something they are going to have a reverse split on TZA so these are likely to get messy (I have a bunch so just be warned)

Good afternoon Phil, 
The last 2 months have been harsh for my portfolio (between persisting with the DIA shorts on the 1050’s, and my otherwise tilted bearish stance coming into the new year (based on the Alpha 2 expectations), plus in the last 2 weeks having been decimated with the short calls (which I have decided based on the pain suffered already and your recommendation–stay out of entirely, meanwhile of course I am trying to make a good portion of it back by rolling and doing whatever else–the positions I need to keep on top of are WYNN, CMG, OPEN and NFLX, so I still have my handsful for a good few months, until hopefully I can be free of these distractions). 
In any case I have decided to go with 3 pronged approach–follow IncomeTrader on his monthly cycles, follow you on the 25K, and rebalance my long-term portfolio to be ready for a potential 30% drop in the next months. It’s with this in mind I am posting here. I am working all of today in looking at every position and deciding which to keep and eliminate. I have some questions about this and how to properly balance them out. I will finish off the parts I can deal with myself and if you don’t mind I’ll either post what I would be left off with and questions about it later or tommorrow. 
Thanks and have a great weekend.

Phil, on these breakout trades, you mention allocating 2% of your portfolio to these types of trades that will return 2000%.  How do you measure that 2%.  On a 100k portfolio, is it 2% cash out lay for a levered trade, example on a call spread put package that the cash outlay is .10 per package would you do 200 or is 2% of your margin or is it 2% of the forced buy cash out lay? I apologize for the beginner question.

The most obvious question is I have 3 positions in miners (which is obviously way too much and so need to decide which ones to stick with). ABX, HMY and JAG. BTW JAG released a financial outlook for 2011-15 yesterday, don’t know really what to make of it, so I’d appreciate your input. I am willing to stick with it now that I have rode it down from 7.5 to 5.15, unless you see something really off (I entered another 50% on the stock at 6.20 as 6 had proven a good support level before but now they cut through it like butter) . As for ABX and HMY, on ABX (’13 50/65 with the April 45 puts sold) I am about even and I’d be thrilled to be in it for $500 to make $4K if they do hold 45 in April. HMY I am down $1.7 ($4K on 24)– and rolled from the April 13/15 spread (with the ’12 10 puts sold) to August 12’s for .50. The April callers are almost worthless now obviously.  

jomama ,
Can you please post a link to the planned TZA split?

Five and Dime – as an aside, last week I noticed a larger %-age of old pennies, dimes, nickles in my pockets as change returned. May be nothing, or suggests people are breaking into old change jars/piggy banks for spending money… Take a look in your own pockets after getting some change anywhere (like a grocery story or pharmacy in particular). I’d be interested to know if anyone else notices similar.

what happens to the options with a reverse split of TZA?

abel / TZA reverse split
Last time they had a reverse split (in the summer of 2010, 5:1 ratio) they had 2 chains of options – those from before the split were based on 1/5 of the price of TZA. The only down side is that those chains are not traded much and therefore are hard to get out from if you need to.

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