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Monday, February 6, 2023

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F’ing Thursday – Give Us a Break!

Holy cow – when will it end?  

As I mentioned yesterday, we were expecting a whipsaw after the morning sell-off and we played that perfectly with bullish trades on the DIA and OIH and, as we move up, we took bearish plays on GLL, TZA and QQQ.  All good so far but then we did a little bottom fishing before wising up and shorting USO into the close – just in case.  The futures were up 2% this morning at 5am and I had to warn our Members:  

Overall, this is too weak to get us over the hump and we are going to have to lean a little more bearish unless we can follow Europe up 2.5% or more.  Our charts will turn from "spiking low on volume" to "consolidating for a move below 20%" very quickly if we don’t gets something bullish going by tomorrow.  

The Dollar was at 74.64 at the time and it’s only 75.04 now (7:50) but the futures have gone from up 2% to down 1% in less than 3 hours – that is insane!  How are retail investors supposed to play this market?  The average person does not have the stomach for watching their virtual portfolio’s value go up and down 5% a day – at some point they are all going to pull the plug and walk away.  Of course, as I was saying yesterday – that’s just what the Banksters want you to do, assuming they know QE3 is right around the corner, accompanied by a 20%+ market rally into the year’s end.  

Anyway, hope is NOT a strategy for the prudent investor so I published another set of Disaster Hedges this morning as it’s time to add a layer to our longer hedges (which are now deeply in the money).  I hate to chase these plays but one thing we learned in 2008 is that there may never be a bottom (not in the short run) no matter how oversold you think things may be.  Was the market wrong in 2008 to go below S&P 1,000?  Well 3 years of subsequent trading seem to indicate that it was – but that did not stop us from dropping 33% lower, to 666 (the mark of the Blankfein!).   

Our entire goal in a sell-off like this is to simply preserve our cash.  The lower we go the better the opportunities will be in the future but for now, it’s going to be a wild ride down to the bottom if we’re breaking below our 20% lines (-10%) along with investors’ spirits.  

Once we have our additional highly leveraged, downside hedges in place, THEN we are able to do a little bottom fishing.  Even yesterday, when we opened with a bullish trade idea on the Dow in my Morning Alert to Members (made 20% or more 4 times yesterday!) by 10:20 I put up the following hedge idea for TZA:

Disaster hedges – I would wait and see if my premise is right at 11:30 but the TZA Sept $61/73 bull call spread is $2 for the $12 spread and that’s 500% upside right there so you can risk stopping out at $1 to make $10 and you can offset with anything you REALLY want to own like VLO Sept $18 puts at $1.03 or DIS Sept $29 puts at $1.15, or T Sept $28 puts at $1.  

These are the kind of hedges I favor at the moment, ones that set us up for a new entry on one of our favorite stocks at a better price.  This is still an optimistic strategy as our goal is to offset a potential 50% loss on the spread (where we would stop out or roll) with a short $1 put that is unlikely to expire in the money if the Russell is on the rebound.  

With luck, these insurance trades will work out very cheap if it turns out we don’t need them.  I still think this is all a flush ahead of QE3, with the IBanks and their Media Lackeys doing everything they can to panic competing investors out of equities so they can buy in at another Bernanke bottom.  

I know investors have short memories but wasn’t it last August, after the Fed minutes on August 10th and before QE2 was officially announced on Sept 1st that the market dropped 7.5% in less than 3 weeks.  It was August 25th that I put up a Hedging for Disaster post, JUST LIKE THIS MORNING’s – that turned out to be completely unnecessary just 5 days later.  Fortunately, on August 29th, we also picked up a half dozen bullish Dow plays that did very, very well in "Defending Your Virtual Portfolio With Dividends."

What were the stocks we liked then?:

  • MSFT at $24.23, ran up to $29.29, now $24.20
  • T at $26.94, ran up to $31.51, now $27.88
  • VZ at $29.84, ran up to $37.96, now $33.66
  • HD at $28.74, ran up to $38.82, now $28.51
  • KFT at $30, ran up to $36.30, now $32.80
  • PFE at $16.09, ran up to $21.21, now $17.05
  • MRK at $35, ran up to $37.25, now $29.81 (we don’t like MRK anymore!)
  • INTC at $18.37, ran up to $23.73, now $19.93

So, thanks to additional action from the Fed just days later, 7 of 8 were big winners and, of course, using our options for leverage, even bigger and now a couple have made the full round trip and are attractive again.  As I said, we’ve been doing some bottom fishing in Member chat but it’s on companies like these and with 20% downside hedges from here as we don’t know when this madness will end but I HOPE (not a valid strategy) it ends soon.  

Let’s keep in mind that those were our "safety" picks as we were hoping we had bottomed at Dow 10,000.  AFTER QE3 was announced, on Sept 3rd, with the Dow already up 350 points (which seemed like a lot at the time – it’s amazing what you get used to), felling more confident I put up our much more aggressive "September’s Dozen" list and those 12 plays averaged over 160% returns vs. less than 50% on our dividend plays – EVEN THOUGH THE DIVIDEND PLAYS HAD BETTER TIMING!  

PLEASE keep that in mind this week.  We are simply following a prudent strategy as we test the waters bringing our cash off the sidelines and that’s hedge first, then take CONSERVATIVE long positions and then AFTER we have DEFINITIVE bullish news (like QE3) THEN we layer in some aggressive long positions.  

Even as I write this, the futures markets are in another wild swing, this time back up and are now about flat to yesterday’s close.  Why?  Who cares?  This is a very silly, irrational market and we should just be glad that we’ll get a good price on our disaster hedges and THEN we can look for some more upside plays – maybe we can go for yesterday’s DIA calls again, those were fun…  

 

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Hoss made a very interesting comment today about QE3 being timed for December to preserve Obama’s presidency for another term. I think thats probably true, and the facts bear it out. We are just to premature late summer/fall for QE3. Too much recent talk of inflation and QE3 has gotten a bad rap. I think we will need to have additional some real pain before they are able to justify it again. I seperately had heard rumors Obama is a sure win next election due to some powers that be  – maybe there is a plan afoot?

the symbol SET should give you the daily quote on any system, otherwise, go to the CBOE site, where they will show you the expiration figures for all the indexes (but not the interim numbers). I emailed them, and they admitted it was a transposition: 1311.11 should have been 1131.11, and it showed up on my quote screen minutes later.
 
What this demonstrates is that even though the settlement number is calculated on the computer, some DUDE has to TYPE it in for distribution to all trading houses, and therefore, it can be bungled (like it was today). My confidence in all of this was shaken, to say the least.
 
I will question any expiration settlement number that doesnt make sense, from now on.

The Fed though is supposed to act independently of the President and Congress and Bernanke was appointed by Bush.  I don’t know if they would save QE3 for that.  Right now, the anger at Republicans from the debt deal and unwillingness to budge on increasing tax revenue, Obama has a pretty good shot even now of keeping office.  Wish there was a 3rd party candidate or someone else would step up in the Democratic party to run against Obama.

May sound crazy, but is there any chances that they are looking for a crash ? Everybody seems to be expecting QE3 in one form or another.
Sorry if I sound paranoid but like Kissinger once said : Even a paranoid can have enemies. 😉
Maybe someone is interested in getting rid of Bank of America "à la" Bear Stearn/Lehman brothers…
Hearing Goldman Sach saying QE3 is their base case makes me nervous.
http://www.businessinsider.com/goldman-sachs-qe3-is-now-our-base-case-2011-8

Phil,

thanks for the advice today.  I was unable to get my order in before the close, but I think that may be a good thing.  If you don’t mind, I would like your help with a post-mortem on things so far.  My starting cash is $3000.

What was done:
—————-

* Sold 2 x WFR 2013 7.5 P @ 1.75
* Sold 1 x NLY 2013 17.5 P @ 3.30
* Sold 2 x WFR 2013 7.5 P @ 2.40

So, going into the crazyness, I had

1 x NLY 2013 17.5 P * 3.30 = $330 credit
4 x WFR 2013 7.5 P * 2.075 = $830 credit  (looking to get out of 2x at break even 2.075)

total collected: $1160 collected.

I didn’t have anything to the down side, so, as things got more crazy, I first added:

3 x QQQ SEP 52/51 Put Spread @ .30 = $90 debit

and then when that didn’t feel like enough, I added:

1 x TZA 60/70 BCS @ $2 = $200 debit

At this point, I was thinking I had $290 protecting the $1160 I collected and essentially 10% of my overall account protecting to the downside.

Limitations:
—————-

* With the size of my account, I am not allowed to day trade, so, I am limited in doing any type of very short term trading.
* I don’t have the margin to do many of your offsets.  I tried to find trades that were small enough for me to do without tying up all of my remaining margin.

What I learned:
—————-
When you had been calling for getting to cash I wasn’t exactly sure what that meant.  I get it now, it means get to cash :D.  More specifically, I watched some puts I sold go from being a little bit up to A LOT down.  I watched spreads that I had sold go from green to red.  I watched as a fair amount more of my margin melted away.  Fortunately, much of this was in a paper account.  The WFR and NLY puts were up a little and I watched them go way down.  Next time, if it’s not nailed down, it’s getting sold 🙂
 
I am grateful I listened to your advice and didn’t sell puts on a company or price I was uncomfortable with.

Hedges are a lot cheaper when everyone’s not panicking and trying to buy hedges.

Don’t panic.

What to do:
—————-
I am not sure what to do.  I am not sure if I should invest another $120 to try to salvage the TZA or just try to get out with half and make sure next time I have downside protection before I need it.  I think I can get out of the QQQ’s close to even.  Any advice you or the group have for me is most appreciated.

thanks in advance 🙂

scot.

Hi, barfinger, regarding SET:
Wow, that’s amazing!  Thanks for your effort.  I’ll keep an eye on that as well.  I do trade SPX strangles.

Kustomz/ Kwan/ Phil
Thanks! I’m Glad to be back and anxious to make some money!

seer – I’m inclined to agree with you too, actually, but I know Phil does likes to include a variety of strategies because they work differently for different people. I like it because its hands off and works with my day job well, but I’m not so keen on the statistics. I’m always looking for something better, just need to the take time to paper trade it for a bit before I change strategies.

Pharm / SPY Phantom lines:  Pharm, you are right, it is incredible. On Monday, the SPY after-hours phantom quote was 117.45 and foreshadowed Tuesday’s big gain. On Tuesday, the AH phantom quote was 112.14 and foreshadowed the sharp Wednesday drop.  Wednesday AH quote was 117.49 and of course we had the massive rally today. So the AH quote tonight of 112.34 seems ominous. It is like being given tomorrow’s newspaper today. I guess it will work… until it doesn’t.  Let’s see how it goes tomorrow!

It looks like the Yuan is being allowed to appreciate in a serious way. Phil, if you have In mind any U.S. corporate candidates that will likely benefit most from a weakening dollar through stepped up exports to China, I could use a few candidates. Thanks.

Yuan P.S. – Since the Euro seems to be tanking vs. USD, loosening the Yuan peg will also benefit European exporters (e.g., BMW?) so Euro companies would be equally interesting.

"….11 out of 30 economists polled by the WSJ don’t think the Fed will stick to its pledge not to hike rates before mid-2013, believing Ben Bernanke & Co. will be "forced by market conditions" to tighten monetary policy beforehand. The Chinese yuan is the favorite currency of the polled economists to buy, and the euro their favorite currency to short."
So 19 believe it will stick, and the Yuan is not the fave currency?
Taken all together that economists are:  little more than brainiac charlatans, gorgon creatures with bad breath (Greeenspan was notorious for his) or on some tenure track at some prestigious university, and have never had a real job in the real world, are generally wrong just about all the time just about everything including the last 3 years’ debacle in the RE markets, recessions, and historic unemployment, i can safely disregard any of their prognostications, take out my Ouija board, and find more accurate answers to those questions than any "economist" can provide. I findit remarkable that many economists are ironcally,  multimillionaires.  One wonders if they are just wrong but lucky sometimes to DO the opposite of what they say will happen or if there is an intention to mislead.
True Story:  a good friend in grade school, and high school was the smartest boy in the room. Valedictorian and top of his MBA and PHD  class. Went on to become an Economist at a major mutual fund and eventually became VEEP and with his stock holdings—in the corporation which he amassed over 15 years and a subsequent buyout by a major insurance company—- became a multimillionaire before age 50.
During a market low which had recently been on a tear, rising 15% in several weeks, he was interviewed by the WSJ. He was asked if he thought the market turn was for real and replied that it was a fake, to stay with bonds.
I called him up out of the blue, reminded him of our earlier association— due to the fact that I set him up, at his request, with a date with the head majorette at a local high schoo,who he was too shy and nerdy to ask out– remembered me fairly well. I asked him if he was completely confident about his market prediction that it would turn south and go even lower than before the runup. He assured me he was and that if I really wanted to do well, to stick with the bond market.  I heeded his advice to my eternal regret. As the stock market took off like a rocket for the succeeding several years, never did return to its low. 
I ran into an associate of his many years later who shared a VEEP spot at his former company, who also became a multimillionaire, but had not stuck with bonds.  When I mentioned to him the epsisode described above, he said, "If it wasn’t for me pressing him to buy our shares in the early years for single digits when we were just getting some traction, today he would be teaching at some obscure university in Wyoming instead of attending wine tastings all over the world. He owes his fortune to me."

Phil
Thanks for your view on the condors.  I didn’t play the put side last month which made it a directional bet, but it was a good hedge. 

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