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Saturday, September 24, 2022


Range Trading 101 – The Balancing Act (Part 1)

What a crazy month we've been having!  

We were fortunate enough to go bearish at the beginning of the month, when I cautioned we could correct 20% from our highs and then we became "Cashy and Cautious" for the next couple of weeks because we anticipated the middle of our W pattern, leading up to the Fed's hinting at QE3 in Jackson Hole so we could repeat the rally we got last year, on QE2.  It was all looking good – from our bottom call of the 19th until the last day of the month, when we we now see that my Tuesday title "Breaking Higher or Dressing Windows" seems to have been answered with the latter.  

This, however, is not an article about that.  This is a good time, I thought, since we came off a very cashy bias – to talk about how we look to make additions and subtractions to our portfolios over time (in this case, the past two weeks).  Of course we are talking about virtual trades and virtual portfolios – keep that in mind, we're just going to do our best to see what trade ideas worked, which ones didn't and which ones COULD have been used to build up a balanced collection out of the many, many trade ideas we have each week.  

Keeping our eye on the Big Chart and thinking about where we were each day, I'll try to lay out the trade ideas in order and comment when appropriate so bear with me as this article will have loose structure as it's main goal is to begin a conversation about trade selections.

Also, Elliot (our Stock World Weekly Editor) has designed a cool graphic to give us a quick view of our virtual asset allocations.  Coming off our very Cashy, day-trading weeks in the middle of the month, we are pretty much back to where we like to be early in a market cycle:  


Friday, Aug 19th:  TGIF – Are We There Yet?  

I led off the post saying "We are now officially getting silly."  That day began only 350 points below where we are today on the Dow so keep that in mind going forward!  This is not an outlook post though, we'll do that later in the week as first I like to look backwards before we look ahead.  Germany was down 30% in 30 days – that seemed very excessive and the VIX was up around 42, also seeming excessive so, despite the scary-looking futures, right at the top of the main post I put up the following trade ideas:  

  • EWG Sept $19 puts, sold for $1 – now .45 (up 55%)
  • EWG Jan $17 puts, sold for $1.25 – now .90 (up 28%)
  • VXX Sept $45/40 bear call spread at $3.40, selling VXX Sept $45 calls for $3.25 for net .15 – now net $2.76 (up 1,840%)
  • IMAX 2013 $15 puts sold for $4 – now $2.70 (up 32%)
  • XOM at $70, selling 2013 $55 calls for $18.65 for net $51.35 – now net $52.34 (up 2%) 
  • XOM at $70, selling 2013 $55 calls for $18.65 and 2013 $57.50 puts for $5.20 for net $46.15 – now net $47.54 (up 3%)
  • Russell (/TF) Futures, long at 650 – now 682, up $100 per point per contract ($3,200) 
  • Nasdaq (/NQ) Futures, long at 2,050 – now 2,168, up $20 per point per contact ($2,360)
  • Oil (/CL) Futures, long at $80 – now $86.73, up $10 per penny per contract ($6,730)

That was just in the main post!  These are, of course, the current prices.  During the course of two weeks, most of the bullish positions did MUCH better and, of course should have been stopped out by now but, I'm not trying to prove anything here, so we're just using Friday's (9/2) close as a reference point – obviously the bullish trades did better and the bearish trades did worse.  

So, coming off a cash position, the idea is to look at a bunch of trades like this and decide which ones feel right to you, based on your own outlook and, more importantly, which ones fit in with both the size and goals of your portfolio.  We have a series of articles on "Smart Portfolio Management" in our Education Section so we're not doing that here but, if you have a small or restricted account, you don't want to play the Futures or a trade where you sell naked puts and the XOM trade is, of course expensive as it requires at least $5,135 to be spent – if you are scaling in, that's got to be at least a $20,000 allocation and that means you'd better have at least a $200K portfolio before you go throwing $5,135 at XOM.  

It's OK to short an EWG contract and collect $100 – as long as you are ready, willing AND ABLE to pay $1,800 to be long on Germany at net $18.  Again, scaling in, you would need to be willing to go to $7,200 so we're talking $100K portfolio territory for that trade but, with short puts, it is OK to go into a position with a stop loss and that's why we do occasionally do use them in our $25KP BUT – that is a VERY AGGRESSIVE portfolio which is, in theory, the aggressive 10% of a conservative $250,000 portfolio.  If all you have is $25,000 – getting stuck with $1,800 worth of Germany can be a big inconvenience!  

Also (and I won't be going this in depth on every day – hopefully), if you like a trade idea like the VXX bear put spread but can not or should not sell naked calls – it's fine to just pick up the bear spread without the pair trade and it still pays a very nice $1.60 back on $3.40 if VXX finishes below $40 at September expiration (now at $41.48).  Sadly, if you have less money to start, you are likely to make less money as the bigger hedges are not available to you BUT – if you are not anxious or greedy or impatient, $25,000 can turn into $50,000 and then into $100,000 and then you can start taking the more aggressive trades BUT – if you try to take them when all you have is $25,000 – then your chances of ever getting to $50,000 become VERY SLIM!  

Getting back to Friday, then, we opened at 11,000 and finished around 10,825 so a generally down day and we were still worried that it wasn't going to be the bottom we expected.  In the morning Alert I put up 7 long put ideas as CATASTROPHIC INSURANCE plays but cautioned that they were not needed while the markets were going up, nonetheless, I'll list them here as that's what we were thinking that morning:

  • AXP Jan $30 puts at $1.15 – now .64 (down 44%)
  • BIDU Jan $50 puts at $1.10 – now .72 (down 34%) 
  • CAT Jan $57.50 puts at $2.10 – now $1.61 (down 23%) 
  • CMG Dec $165 puts at $2.10 – now $1.75 (down 17%)
  • DECK March $42.50 puts at $2.20 – now $1.40 (down 36%) 
  • FCX Jan $32.75 puts at $1.56 – now $1.50 (down 4%)
  • GOOG Jan $300 puts at $3.10 – now $2.40 (down 23%)

If you are trying to be 20/15 bullish in a $100,000 portfolio then you are looking for net $20,000 worth of longs and net $15,000 worth of shorts.  Since your allocations are no more than $10,000 per position and that would be scaling in at $2,500, $2,500 and $5,000 then the trick is to allocate $15,000 worth of short positions – but in proportion to the longs as you add them.  Also, if your long is the XOM buy/write (above), that has a net of $46.15 and a break-even at $51.83, then that has a 25% built-in protection and doesn't really need to be hedged.  

Only if you have aggressive open calls do you need aggressive open puts protecting them so let's say you went with VXX, IMAX and EWG at $2,500 each.  With IMAX and EWG, you still need to consider that you have 20% built-in protection in your position so those don't really need much of a hedge so that means that a single hedge of $2,500 or, since they are straight puts, a couple of hedges at $1,000 each should be just fine to protect the while $7,500.  Another important thing to keep in mind is how much you expect to MAKE on your longs vs. how much you expect to LOSE on your hedges.  If your longs aren't likely to outgain your hedges by 2:1 (assuming you are long, of course) then you are going to run into problems!  

In the above example, let's say we sold 25 EWG puts for $1 ($2,500) and risked a stop at $1.50 (down $1,250).  Those are up $1,375.  Selling 6 IMAX puts for $4 ($2,400) made $520 and 3 VXX spreads (as they were $15K in margin) made $783.  So that's a gain on the long side of $2,678 and if you had offset with $1,000 of the two worst performing puts (AXP and DECK), those would have given back $800 for a net gain of $1,678 – which is just about right for a bullish balance.  As I said, that's a simplistic view of timing and no use of stops but you get the idea.  With a little position management, you can greatly improve those results!  

  • Gasoline (/RB) Futures at $2.80, now $2.84 – up $420 per penny per contract (up $1,680)
  • $25KP:  20 HPQ Sept $26 calls at .60 ($1,200), selling 5 Sept $23 puts at $1.57 ($785) for net $415 – now net $240 (down 57%) 
  • TZA Oct $57/75 bull call spread at $3, selling $63 calls at $6 for net $3 credit, now net $1.95 (up 35%) 
  • QQQ Jan $54/48 bear put spread at $2.75 – now $2.01 (down 27%)
  • TIE 2013 $12.50/17.50 bull call spread at $1.80, selling $12.50 puts for $2.60 for net .80 credit – now .10 (up 112%) 
  • TNA Sept $35/39 bull call spread at $2, selling Sept $26 puts for $1.60 for net .40 – now $2.62 (up 555%)

Notice that the HPQ spread was at $1,800 on Thursday and fell to $240 on Friday.  Of course we don't ride those out but a very fine example of how greed kills but, as I keep saying, if you are up 50% (let alone over 300%) and don't set stops, then Darwin's law will take care of you in short order!  It's interesting that both the TZA and TNA spreads paid off as of Friday.  The common factor there is SELLING more premium than we're buying.  Since we sold premium on both ends, we were able to make money on both ends now that we've drifted down to not much over where we were that Friday.  

The same goes for the TIE play – we SOLD a lot of premium and it's working great already, even though that trade has miles to go.  This was a pretty busy day because we were excited that we were finally making a good bottom but notice that we still mix in a few bearish bets with the bullish.  In general, if I've made 2 or 3 bullish calls in a row – I tend to look for something bearish to balance it out.  

When you are allocating a portfolio, you have 10 or 20 slots to fill and you sure don't want to fill them all in one day!  If we're going from cash to bullish and looking to allocate $35K out of $100K, then we want to just find perhaps 4 bullish and 3 bearish bets over a couple of days.  Notice the HPQ play was a $25KP trade idea, which means I felt a bit more strongly about it but the problem with those aggressive plays is you MUST take those profits off the table as they can reverse as fast as they go up.  

Muammar Monday – Forced Wealth Redistribution Cheers Markets 

We had been discussing taxes in the weekend post and it was apropos that Ghadafi's $40Bn fortune, which is 1/2 of Libya's entire GDP, was going to be redistributed in the ultimate form of taxing the rich (by deposing them).  While I mentioned some of Friday plays, I did not call any new ones in the morning post (I usually don't as we save them for Members).  In the post, I reminded readers that: "As usual, I am neither bullish nor bearish – I am simply rangeish and we are at the bottom of our range so we play it a little more bullish until and unless the range breaks."

  • $25KP Play: AGQ Sept $180 puts at $4 – now .65 (down 84%)
  • Income Portfolio: SVU at $6.94, selling 2013 $5 puts and calls for $3.95 for net $2.99/4 – now net $3.64 (up 22%)
  • Gasoline (/RB) Futures long at $2.70, now $2.84 – up $420 per penny per contract ($3,360)

I also continued the Long Put List early the next morning (but under Monday's post) with this very important caveat:

The idea is to pick 2 or 3 that offset whatever sectors you are weighted to and PLEASE keep in mind that our goal is to LOSE this money. When they are down 50% we assume the market is recovering and we we don’t need them anymore, which is why it’s so great if you have the opportunity to take a couple of 25% gains off the table. Obviously, they should all be cheaper this morning – always look for the best deal, this is all about playing for overall market fluctuations.

  • IBM Jan $100 puts at $1.50 – now .75 (down 50%)
  • ISRG Jan $190 puts at $1.70 – still $1.70 (even)
  • KO Jan $55 puts at .98 – now .65 (down 34%) 
  • MA Jan $150 puts at $2.65 – now $1.75 (down 34%)
  • MMM Jan $50 put at .88 – now .55 (down 38%)
  • NFLX Jan $100 puts at $3.95 – now $2.10 (down 46%)
  • PCLN Jan $240 puts are $5 – now 2.50 (down 50%) 
  • QQQ Jan $40 puts at $1.30 – now .80 (down 38%)
  • V Jan $60 puts at $2.38 – now $1.50 (down 37%) 
  • WYNN Jan $77 puts at $3.10 – now $1.45 (down 53%) 

These trades did just what they were supposed to as speculative protection.  Today (9/2) I posted an updated list on the same stocks to guard against a major downturn but, once we don't get the downturn – then we're done with the puts.  No need to mindlessly ride them out over time!  In the post, I had updated the levels on Barry's old image of a dead cat bounce and it's funny as we pretty much followed that exact path over the last two weeks, peaking out right at that 1,200 line:  

Tempting Tuesday (23rd) – Futures So Bright, We Had to Short Them!  

The Futures had run up a lot and I sent out an Alert to Members at 4:59 am with trade ideas to go long on gasoline (same /RB long at $2.70 that's up $3,360 per contract) and to short the Dow (/YM) off the 11,000 line.  As per-market Member Chat moved along that morning, we took the money and ran at 10,930, which was good for $5 per point per contract ($350) – always nice to pick up some bagel money in the morning!  Futures are useful for making small adjustments if you see some news and feel you are too bullish or too bearish or, as in this case, if you get a big gain in the Futures and want to lock it in.  We felt the 11,000 line on the Dow, coming from below, would be at least some resistance, so it made sense to short it – just like it later made sense for us to go short the S&P at 1,200.  

As I said in the morning post: "Make no mistake about it, we're heading into a MAJOR inflection point."  I used the above chart to show the two possible paths we could go on and, so far, after 2 weeks tracking the green line, Friday's dip put us right back in the center of the zone – back at a major inflection point with that "Euro-Bank Moment" now looming as a VERY large possibility and that's not something our Fed is going to be able to paper over!  Despite the dip (which we were playing for in pre-markets) my comment to Members in the 10:19 Alert was:  

To be clear – despite my disgust at what’s going on, I still think Ben will "save" us on Friday and we begin to move higher again.  It cost $600Bn of QE2 to kick the can down the road from last September to this August so, on the whole, it was a pretty good use of $600Bn, wasn’t it?  Who’s going to say "No, let’s take our chances on BAC failing and costing the FDIC $1Tn (50% write-off)?"  Certainly not the IBanks, as they would be called upon to replenish the FDIC (assuming the World still existed at that point).   Nope, much better to have the Fed print money and steal it from the American people without asking the Banksters to kick in a penny.  So business as usual is my expectations and that’s BULLISH!  

  • Income Portfolio:  RRD at $13.63, selling 2013 $12.50 puts and calls for $4.80 for net $8.83/10.67 – now net $10.83 (up 22%)
  • SQQQ Sept $29/33 bull call spread at $1.20, selling VLO Oct $18 puts for $1.20 for net 0 – now .60 (up infinity)
  • TZA Sept $52/56 bull call spread at $1.40 with the same VLO sale for net .20 – now .70 (up 250%)

Note that, even though those spreads failed their goal, they still made money – that's the beauty of using bullish offsets against ultra bull spreads – just make sure you pick the right offsets!  Other offset suggestions for the hedges against a Friday downside surprise were:

  • HOV 2013 $2 puts sold for $1.15 – still $1.15
  • HPQ Oct $22 puts sold for $1.15 – now .80 (up 30%)
  • JPM Sept $32.50 puts sold for $1.25 – now .58 (up 53%)
  • OIH Oct $95 puts sold for $2.35 – now .90 (up 61%)
  • X Oct $23 puts sold for $1.27 – now .80 (up 37%)
  • XLF Oct $12 puts sold for .87 – now .63 (up 29%) 
  • YRCW 2013 $1 puts sold for .92 – now .91 (up 2%) 

Of course those were all doing much better a few days ago!  Still, you see how well this works – especially when your offsets are stocks you REALLY want to own anyway if they get to their strike.  All of the short puts are on target despite the sell-off and hopefully will expire worthless for 100% gains.  

  • BK at $14.71, selling 2013 $17.50 puts and calls for $7.30 for net $11.88/14.69 – now $12.75 (up 7%) 
  • GLD Nov $147 puts at $1 – now .55 (down 45%)
  • GLL Sept $16/17 bull call spread at .35, selling ABX Sept $43 puts for .27 for net .08 – now .07 (down 12%)
  • HMY 2013 $10 puts sold for $1.30 – now $1.10 (up 15%)
  • 4 QQQ Sept 30th $48 puts at .96, selling 3 weekly $50 puts for .40 for net $264 – now $200 (down 24%) (the idea was to sell more weeklies but there was no follow-through) 
  • AGNC at $29, selling March $28 calls for $2.25 and 2013  $25 puts for $5.60 net $21.25/23.13 – now $19.22 (down 10%)
  • XLF 2013 $11/13 bull call spread, selling $10 puts for $1.26 for net .24 – now net 0 (down 100%)

Gold has been, of course, a disaster to short and the financials have gone the wrong way on us.  The key to managing these trades is to pick a spot – like gold $1,800 or XLF $13 to stop out.  When you enter a trade you have a premise that certain things will happen and you have a target – if you are off track and failing critical supports – GET OUT!  If you are scaling in, at an early stage you should not have more than 2.5% of a portfolio committed to any single position and even a 20% loss is just 0.5% of the portfolio ($500 out of $100K).  It is far better to get back to $99,500 cash and try to get up $1,000 than to stick with a trade that's already losing $500 if the premise is already not working.  

Of course, then we need to decide WHY we're down on our first round and if it's an opportunity to improve our position or bail out.  GLD, for example, we still think will come back down so if we had gone in with $1,200 on 12 Nov $147 puts, those are now $660 and can be rolled up to the Nov $154 puts for .45 ($540).  That would put us up to a $1,740 commitment out of $2,500 and we're down $540 (31%).  BEFORE we commit more cash, we should have already decided what we're going to do if gold goes up ANOTHER $150 to $2,000.  We can expect to be down the same 31% after we roll up to the Nov $161 puts for another $540 out of pocket, at which point we'd be in for about $2,280 – which is a full commitment in a $100K portfolio.  

If we're not willing to risk $2,280 (an estimate, of course) to be in the Nov $161 puts with gold at $2,000 then we should take the $540 loss now and just find something else to trade.  We could also work it into a spread, but that's complicating things, although we do it all the time in Member Chat.  The point is don't let yourself get sucked into a trade.  If your first entry goes bad and your premise for the trade is blown – just walk away!  If your first entry goes bad, on the other hand, because of market panic (like TLT) then perhaps it's an opportunity to get longer but don't fall in love with your positions and the stops should get tighter as the position sizes increase. 

openingimageW Formation Wednesday – Waiting on the Fed 

Durable goods were better than expected and I declared our status "Still skeptical – but hopeful."

  • $25KP: USO Sept $32 puts at avg .85 – now .51 (down 40%)
  • $25KP: AGQ 2 Sept $180 puts sold for $8 (up 100%)
  • $25KP: AGQ 3 Sept $180 puts sold for $10 (up 150%)
  • GLD Jan $175/195 bull call spread at $5.20, selling $146 puts for $3 for net $2.20 – now $7.15 (up 225%)
  • ABX 2013 $35 puts sold for $3.10 – now $2.10 (up 32%)
  • CCJ 2013 $25/35 bull call spread at $2.10, selling $15 puts for $1.80 for net .30 – now net .95 (up 216%) 
  • Dow (/YM) Futures short at 11,290 – now 11,229 (up $305 per contract) 
  • Russell (/TF) Futures short at 690 – now 682 (up $800 per contract) 

Obviously the intention wasn't to hold the futures for 2 weeks!  We did get a great sell-off on the morning of the 25th and cashed those out at the time.  Notice that we are not complete idiots and went long on gold after getting smacked around in our previous trades and, lo and behold, we did way, way better on the long side than we lost on the shorts.  

So again, what is smarter?  Doggedly sticking with the short play going the wrong way or taking that 20% loss and going with the flow the other way?  And there is no reason you have to be all or nothing either.  You could have scaled into the November puts the day before but hedged with the long play.  If you had run November up to $1,740 and committed just $600 (1/3) to the hedge.  The hedge would now be $1,950 and you could take that off the table and now the ENTIRE short play is free.  THAT'S BALANCE!  

Jobsless Thursday – Steve Joins the Ranks of the Unemployed

Jobs leaving AAPL trumped the news of more jobs leaving the country.  We talked about oil inventories in great detail.  We were up at resistance off a very nice run from the 19th and we expected some wild moves ahead of the Fed the next day and I warned Members at 9:53 that the rejections at Dow 11,400, NYSE 7,300 and Russell 700 did not look good so the first play of the day was a Nasdaq short:  

  • $25KP: 10 QQQ 9/2 $52 put at .92 – expired worthless (down 100%)
  • RIMM Sept $26 puts sold for $1.20 – now .73 debit (up 39%) 
  • RIMM Sept $25 puts sold for .93 – now .55 (up 40%)
  • $25KP: 10 BNO Sept $71 puts at $2.20 – now .80 (down 63%) 
  • $25KP: 10 USO Sept $32 puts sold for $1.40 (up 64%) 
  • $25KP: 10 QQQ $52 puts sold for $1.20 (up 30%)
  • AEO at $10.27, selling 2013 $9.50 puts and calls for $4.25 for net $6.02/7.76 – now $6.34 (up 5%)
  • Income Portfolio: 70 DIA Oct $95 puts at $1.45 ($10,150), selling 10 BA Nov $50 puts for $1.52 ($1,520) for net $8,630 – now net $5,450 (down 36%) 
  • $25KP: 20 XLF Sept $13 calls at .43 – now .20 (down 53%)
  • 2x XLF Oct $12/13 bull call spread at .62, selling 1x Oct $12 puts at .70 for net .27 per long – now .18 (down 33%)
  • IWM Sept $69/63 bear put spread at $2 – now $1.83 (down 9%)
  • TZA Jan $32 puts sold for $3 – still $3 (even) 
  • $25KP: 10 FAS 9/2 $13 calls at $1.25 – now .85 (down 32%) 
  • AGQ Sept $255/235 bear put spread at $14, selling $255 calls for $10 for net $4 – now net .50 (down 87%)
  • $25KP: 10 FAS 9/2 $13 calls sold for $1.42 (up 13%)
  • YRCW 2013 $1 puts sold for .90 – still .90 (even)

Note at the time we took the Wednesday USO puts off the table (good thing too as they are now down 40%) I said: "$25KP – $1.40 is good enough on the USO puts. We have the BNOs to gain from a bigger drop so best to take a near double off the table."  We know BNO is very risky and the only reason we're riding it out is because we had a $650 win in our pocket on USO – it's just different ways of working the same premise.   Also note on the QQQ play the difference between sticking with it (100% loss) and taking the money and running with 30%.  The same with the FAS trade.  They are not profits if you don't take them off the table!  My comment on the FAS trade was:  

FAS/$25KP, GS – We did not get the move up I hoped for an the Next week $13 calls are now $1.42 so we may as well just take the small profit and forget it as the idea of turning it into a .25 spread is shot.  

Our premise was blown so we took a small profit and ran.  End of story!  We get to live to trade another day.  Look how many of our short-term trades were up huge on Wednesday and are now down significantly today.  Only GREED stops you from taking those huge profits.  The XLF $13 calls, for example, were .70 all of Wednesday until 1pm (up 62%).  They fell to .54 by 3:30 but rallied back to .68 at the close.  The next day, they opened at .53 and topped out at .60 and then went down slowly, all day to finish at .44.  At some point you HAVE to stop out!  If you get nothing else out of reading this review – look how many great winners turned to losers if you let them ride out.  

People think I'm too strict with my 20% stops but almost every single losing trade above was, at some point, AT LEAST a 20% winner.  What would you rather have, a dozen 20% winners you were in and out of for quick profits every day or 30%, 40%, 60% losers ON THE SAME TRADE because you wanted to make more?  

GDP Friday – Waiting for The Bernank

In the morning post, I warned Members not to get sucked into any reaction to the GDP – which we expected to be negative, saying:  

So my expectation for today is a sell-off on GDP, panic ahead of Bernanke’s speech and then, possibly, even more panic when the speech does not specifically lay out QE3 (the one above is from November of last year, NOT from Jackson Hole) but, I HOPE (not a valid strategy) that, during the day, Fed people who are not Hoenig (the host of the conference!) will line up and begin talking about additional measures.

  • Russell (/TF) Futures long at 666 – now 682 (up $1,600 per contract)
  • S&P (/ES) Futures long at 1,150 – now 1,172 (up $1,100 per contract)
  • EDZ Sept $24/28 bull call spread at $1.30, selling $21 puts for $1 for net .30 – now -.55 (down 283%)
  • $25KP: 10 9/2 QQQ $52 calls at .95 – expired at $1.28 (up 25%)
  • $25KP: 10 TLT Sept $107 puts at $2 – now .55 (down 73%)
  • Dow (/YM) Futures long at 11,000 – now 11,229 (up $1,145 per contract)

My impression of Bernanke's speech at 10 am was that it certainly did have enough language in it to give us QE3.  I made the long calls on the Dow Futures (10:17) and the Qs (10:11) and TLT (10:11) while the market was crashing, going against the grain and at 10:45 I put up the text of Bernanke's speech with my highlights and notes, saying to Members at 10:49:  

Now that we are past Ben’s speech and QE3 seems likely – it is time to lighten up on the hedges (with the Long Puts being least useful as they are unhedged) and cash in winning short plays. Of course it’s good to have some hedges but things are looking up and it’s not a good time to be too bearish.

That turned out to be a perfect bottom call.  As I said earlier, I'm just running all the trade ideas through Friday's close but the reality is that we hit the turn about as perfectly as it could be and, if you are balancing a portfolio that was 20/15 bullish, all you have to do is cash out 1/2 of your bearish bets on a turn like that and PRESTO! – you are 20/7 bullish!  When we're playing a range, that's how we make the adjustments – we buy the bullish bets at the bottom of the range and cash out the bearish bets and then, as we move higher, we add back some bearish bets and cash out some of the bullish ones.

To some extent, your stops can control your balance.  If you start out with $20,000 bullish and $15,000 bearish bets and you move to $24,000 bullish (up 20%) and $12,000 bearish (down 20%) then the prudent thing to do is take $1,000 off the bullish side (4%) and use it to improve your bearish side by $1,000 (8%).  If we then move another 20% higher, you have $28,000 bullish (simplified, of course) and $10,500 bearish and you add maybe $1,500 more (1/3 of the gain) to the bear side, which is cashing in 5% of your bullish positions and increasing your bearish bets by 15% to $12,000 again.  That's how you naturally go from being 20/15 bullish to 28/12 bullish.  Then, as I said, when you feel a turn coming, all you have to do is cash in $9,000 of your winning longs (or they may stop out) and you are back to a much more sensible 19/12 bullish automatically.  Not only that, but as the market drops, your bearish bets gain 20% and your bullish bets lose 20% (if you don't stop them out) and then you are back to 15/14.4 bullish with $9,000 cashed on the side totals $38,500 off your $35,000 start – a nice 10% upside on the series.

See – it's completely mindless if you follow the rules!  Of course, we do our best to find winners on both sides and you GREATLY increase the chances of that happening by SELLING premium, rather than buying it.  We also try to work on our losing positions – IF IT MAKES SENSE TO ONLY – as a range-bound market is like a ping-pong game and each side scores a fair share of points over time.   

  • $25KP: 10 9/2 QQQ $52 calls sold at $1.70 (up 79%) 
  • SQQQ Sept $28/31 bull call spread at .70 – now .55 (down 21%)
  • EDZ Sept $25/28 bulll call spread at .80 – now .40 (down 50%).

The Shark Wave and the SurferNotice how we added aggressive bearish spread ideas while the market was going down.  As I said at the time: "Obviously the hedges are to offset bullish positions only. It is INSURANCE that you EXPECT to lose!"  In other words, we had cashed out our very profitable puts from when the market was higher, earlier in the morning as planned – that left us (for example) 20/7 bullish so, as the market came back up, we picked a couple of hedges that would let us move to 20/10 to lock in some of the profits from our bullish side on the way up.  

Think of it like riding a surf-board – you are always trying to adjust your weight to keep things balanced to the center.  Just don't forget – there are sharks in the water!  

That weekend, I put up an aggressive series of upside trade ideas called "September's Dozen" and, providing we don't fall off a cliff next week, there should be plenty of good entry opportunities to choose from that still makes sense as we re-test those lows.  

Well, this post is getting long so we'll call this Part 1 and I'll get to this past week later.  Let me know if this review has been helpful in comments and what I can do to make it more so.  Thanks!  



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 Phil – how do you calculate a stop on a BCS with an offsetting put? For example, I bought an Oct HPQ 24/25 BCS and sold the 22 put. The net debit was $.12, now it’s down by $.25 (another $.13 debit to close it out). The BCS is down about 20%, and the offsetting put is down maybe 22%. Should I have just closed them both out EOD Friday? Or does it make sense to wait and see if Tuesday we open up (hold) or down (close it out then)? It doesn’t really make sense to calculate 20% down from the $.12 debit, that would be closing it out when I’m down $.03, right? The two parts are down about the same %, but if they weren’t, would you stop them out separately? The 22 put seems relatively safe since that’s below the August low, and there’s no particular reason now. But that kind of thinking got me in trouble with TBT. Thanks.

This recap is great ! If it’s not more work, the time of your trade calls posts would be helpful to have in this summary. I know I can backtrack thru the daily posts to "see what you’re seeing" (hopefully/eventually) at the moment you had a specific trade idea, but if easily added here, would be useful. Thanks for your help.

 Just realized that my numbers were out of date, and that both sides of the trade are down more than 20%. I guess I should have closed at that point on Friday. I’m still curious about whether to split up the trades when stopping out, though. 

 Phil – thanks for going in depth about managing bullish/bearish positions in a range bound market. I am mainly a longer term investor but I think we will be more rangish as you say for a while as the macro issues play themselves out. I have been matching hedges to my option expiration dates, but was not doing enough adjusting with the market swings, thus missing some opportunities for intermediate term profits. Your explanation is very helpful to me in buying the hedges at the top of the range and harvesting them at the bottom knowing that I can buy more if the lower support levels are breached. I have also become more aggressive in managing my sold calls within the option time frames instead of letting them passively expire. Buying sold calls back on dips. Holding the stock naked for a bounce and reselling after the recovery. I use your 5%, 10% , must hold etc lines to know where i am on surfing the waves and these are companies I like long term, usually with good dividends and they are not falling on news other than the general market. My goal is to break even going down and make money using buy writes on uptrends. Hedging and portfolio management were important parts of the system that I have not mastered, but am getting much better thanks to your explanation and also list of possible hedges. I look forward to Part 2.
Thanks again

Phil – good recap and pretty easy to see the logic.  I think one thing that needs to be cleared up for those newer to the site is that one does not need to enter EVERY trade on here.  These are guides and suggestions.  Pick a few that are balanced in different industries, and then do some homework.  If someone sees something about a company that could impact it one way or another, speak up, Phil, nor myself, nor anyone for that matter can see it all coming down the pipe!


On anther note, maybe Phil and the QE’ers are right, but not yet.  Here is the gist:

I’m not selling Ford, regardless of your opinion of my stock picking ability.  I apparently represent a subset of the baby boomers known as the "Jones", a pejorative, as in "keeping up with."  I have never bought an American car, buying mostly Lexuses and BMW’s, and before that Mazdas. My next car, however, will be a Ford. In my test drives the Fusion blew away the Prius, and the Escape blew away the Lexus SUV. Given the trend setting nature of my birth demographics, it is entirely likely that the rest of the boomers will follow. It’s odd, but they usually do.  At any rate I am a long term investor. One of my most successful positions is three decades old, so the idea that I would sell Ford because everyone is in a panic makes no sense to me. The company has great management, and great products.They will likely regain investment grade at some point and their intent at that point is to pay a dividend.  What I was looking for was a strategy for selling calls against a position that is down where there is no compelling reason to sell at a loss.

I was looking at the virtual XOM trade and had a few thoughts. I had been reading a few articles on Seeking Alpha about shorter term bull put  spreads and it seemed that althoug the trades looked somewhat safe , the bettor…sorry investor was often potentially risking about $1000 to win $150.
I decided to look at longer term implications of this by substituting buying a long XOM LEAP instead of the stock to execute the same buy/write & sell put maneuver only as bull call & sell naked put. Having examined this for XOM, I also took a look at how it would work with competitors like COP, CVX, and BP with at least 20% downside protection.
CVX (last price $96.38) seemed to offer the best deal, as you could buy the January 13 $60 call for $33.30 and sell the $75 call and put for $24.65 and $6.50 respectively for a gross debit of $6.70. This essentially meant that on the $15 spread you were putting $6.70 at risk to win $8.30 if the stock stays above $75 at expiry. (If you moved the spread up to $65/$80 you could make it risking $4.50 to win $10.50. ). Note that I am ignoring, for the time being, any losses incurred if the stock is put to you below the price of the short put.
Am I missing anything particularly bad or detrimental about such a trade? Obviously there is money tied up for the short puts. I suppose it would be desirable to calculate the probability of CVX going below $75 at expiry vs the $6.70 to $8.30 odds, which may be greater than I think, especially since that stock reached those levels early in 2010, so obviously could go there again, even though 20% below currrent stock price. However it appears to me that the overall losses could not be worse than if holding the actual stock. CVX does not have much of a dividend, so that is not much of a factor.

You might be right about the generational thing. I am a baby boomer. My father now 86 has been driving Fords for 60 years and my first and second cars were Fords, before I was seduced by the charms of Mercedes Benz and Lotus Flower Toyota. However today I took delivery of a Ford Lincoln which seems like a very nice car. It is a 1994 with 95K on the clock, but my mechanic whom I have patronized for 15 years and who is as honest as the day has been using it with trade plates for 6 months and has fixed a few items and is including a 7-day bumper to bumper warranty. I may have overpaid as he wanted $3000, reduced from $3900, but was able to partly finance the purchase by shorting my 299,972 mile Camry for $1200, so a net debit of $1800 is the maximum downside. I may also go long SIRI. Was this a reasonable trade? See picture below. (My average mileage is about 50 per week so I am a bit worried about the gas consumption.)

It must be a generational thing. I am a baby boomer. My father now 86 has had Fords for 60 years. My first two cars were Fords, but then I was seduced by flight things like Mercedes Benz and Lotus Blossom Toyota. However, today I took delivery of a Ford. It is a 1994 Lincoln Town car with 94K on the clock. My mechanic whom I have used for 15 years and who is as honest as the day has been using it with trade plates for 6 months and has fixed a few thing including cylinder heads. He has also given me a verbal 7-day bumper-to-bumper warranty
He wanted $3000 for it, reduced from $3900, but I was able to offset that trade by shorting my 299,970 mile Camry for $1200, so only  a net debit of $1800 is actually at risk. I may also sell SIRI puts. If the trade goes bad on me, I think I may be able to roll into a 2012 Mustang. My average mileage is about 50 per week, so I am a bit concerned about the gas consumption. Did I do wrong?

Phil- This post is very useful. It covers pretty much all the mistakes I’ve made in the last two weeks along with how AND why I should avoid them. Hopefully I can put the knowledge into action and SELECTIVELY/PATIENTLY build my $25k into $50k and beyond.

Thanks for all your hard work in trying to minimize our losses and max out our long-term gains.

Any update on Vegas?

I like the summary of the recent picks and supporting rationale. 
I look forward to the answer on the stops on BCS. Options First allows an advanced trailing stop, but it can only look at one leg of the spread, thereby making it more difficult, since a 20% drop in the call does not mean a 20% drop in the total spread,  since the caller has increased in value.

pharm of course the returns would not continue on a similar trend scale qe to qe as the intial qe was from a much ‘dumber comp’ ie the lows of 09…otherwise we would see a dow at 24k now if the scale of return for qe2 had mirrored qe1 returns..the returns would become exponentially parabolic….of course if all the fed intends to do is to hand free money out to the i bankers the result will be an utter failure and public sentiment will become incendiary..i think the fed will have to work on a plan that will put money into consumers pockets and not creat further non stock bubbles in energy food mats etc.,…i believe that if we get it it will take a very different form than previous banker friendly liquidity stuffing..just my take

Quite by accident today  I ran across a Krugman op ed from November 2008 where he argued that the problem for the Fed in a liquidity trap in creating future expectations of inflation "the Zimbabwe effect" is that there must be an expectation that irresponsible monetary policy will occur in the future.  Krugman pointed out that it was better to err on the side of FISCAL overstimulus, because the Fed could always pull the string even if they couldn’t push it anymore. Barring that, his suggestion at the time (2008) for creating the presumption of irresponsibility: Suggest that the fed funds rate will remain at zero for a specific period of time. We are so not Japan, and we’re not the 1930’s either, not demographically, technologically, or psychologically, (even if Richard Koo is very compelling) so even if we are in the same type of liquidity trap there are so many things about today that make it "at least a little different this time."  I’m pretty sure that a determined Fed can create the expectation that monetary policy will be irresponsible, even if it means actually being irresponsible, so unless we see a fiscal miracle maybe that’s what we should be looking for next.

Must be a generational thing. I am a baby boomer. My first car was a Ford and then I fell for the wiles of Mercedes Benz and Toyota, but yesterday I shorted my old 299,000 miles Camry  and went long on an inexperienced 1994 Ford Lincoln of 94,000  miles with a killer body for a net debit of $1800. Call it an old man’s folly if you like, but maximum loss on the trade is the debit and with an average mileage of about 50 per week gas mileage is not a huge issue. Possible upside is a few years of modest comfort, but I am thinking that if the trade goes bad on me I can always roll over into a Toyota Celica if my sciatica doesn’t get any worse.

Good luck with both the sciatica and the trade! Since I am a long term investor, I still keep a 2002 GS 300 which drives better than the new ones even after a decade. The current 2012”s accelorate like golf carts in comparison.

A Very Good Meet the Press this beautiful Sunday….

An interesting site as well….

PLX article on SA…I couldn’t agree more..

Angel – of course they came from a lower comp (QE1), but even if it was cut in 1/2 (QE1 gains), the laws of diminishing returns are there.  Operation Twist IS underway already, with the roll over of maturing debt and further low rate policies.  If they do go further, they will hit mid/longer term rates, like the 10 yr, to 1%, in-other-words, setting the rate.  This will drive bonds down further, but the market will be under water already, and does nothing for the longer term outlook for the average Joe. I agree that they may as well give money to ‘average’ consumer’s pockets, but that ain’t gonna happen. 

Phil (and anyone else who might know) – First of all, pardon my ignorance on this subject.  I’ve tried looking for this information elsewhere and couldn’t find it so I’m asking you folks. 
What happens when a caller (someone you’ve sold a call to) exercises a shorter-term call you had sold to him/her against your longer term calls?  Do your longer term calls turn to zero to let the caller get his shares?
For example, I have Oct $45 TZA calls and I sold Sept $48 TZA calls against them.  My Oct $45 calls are now worth $8.85 and the Sept $48 calls I sold are now worth $2.60.  Let’s say TZA finishes at $48.01 on 09/16 (Sept expiration date) and the values of the two calls remain the same on 09/16 as they are today (hypothetical example for simplicity…I know they won’t be the same due to time decay, possible vix change, etc) and the caller decides to exercise his calls.  What would happen to my October calls?  Would they turn to zero [in order to deliver the Sept calls I had sold to the caller] leaving me with only the premium I collected on the $48 calls?  If that is the case, why do we often sell short-term covers at the same strike price as the longer-term calls we own?  Don’t we risk losing our longer-term more expensive calls if the caller exercises the shorter-term cheaper cover calls we sold him/her?
Along the same lines, I’ve read that 70% of equity options never get exercised.  I’m curious about what the statistic might be for In-the-money calls (i.e. what percentage of ITM calls expire every month without being exercised) and if that has anything to do with the answer to the previous question.
Lastly, have you ever known one of your callers [someone you had sold a call to] to exercise a call PRIOR to the expiration date of that call?  For example, if TZA goes to $51 on Tues, do you think it’s possible the person I sold the $48 calls to would exercise them since they’d be $3 in the money?  If you were the seller of those $48 calls (instead of me), would you buy those $48 calls back immediately on Tues and sells $52  calls or would you wait until expiration day to see if TZA drops below $48? 

Not certain about this, but I think your brokerage would sell the longer call on your behalf if there was excess value in the option, buy the shares at market and then sell them to the caller, assuming you had enough cash in the account to do this.
There is a fairly good FAQ that covers this and similar topics on the TradeKing web site. I imagine it would be the same or similar at your brokerage.
What to do if you’re assigned early on a short option in a multi-leg strategy
Early assignment on a short option in a multi-leg strategy can really pull a leg out from under your play. If this happens, there’s no hard-and-fast rule on what to do. Sometimes you’ll want to exercise any long options and sometimes you’ll just want to close your entire position. But it’s always a good idea to keep a swear jar and some small bills near your computer just in case.
If you are assigned early on a multi-leg strategy, feel free to give us a call at TradeKing and we’ll help you handle it in the most opportune way

Read more at: http://www.optionsplaybook.com/managing-positions/early-options-exercise/#ixzz1X1tM78aY
You should be able to access this page:

Here’s a good post entitled:
[Quick summary: Implement the plan that you made before you entered the trade!]

you know i saw a little vidoe clip of o in new jersey with christie..i thought..wow chris looks like a big ol  sour dour crackah compared to mr smoothbeam…i just dont see anyone announced for president beating him..i think ron paul could suprise but mishy (phils gal) and the mormon elders arent looking too sharp these days..big…ok REALLY BIG christie is the gops last chance..how sad that this is the field gaming to preside over the free world…pathetic..so long as the gop continues to throw up characteers that look like they are on the set of carnivale o can rest easy

 NYT graphic. top 1% blah blah blah, more of the same

Christy is a fat pig. Go on a friggin diet. Is it really so hard to weigh 150 lbs?
No, it’s not.

bdc–will you be willing to coordinate the dinner–time, venue etc for 8th of Oct in Vegas?

 Revtodd:  Thanks for your comments on mental illness. A population’s general sense of well being does appear tied to expectations as opposed to any absolute level of satisfaction.   I have no doubt that the drug companies are more than happy to have doctors prescribe pills rather than counsel patients in a more holistic manner, but time is money in the "modern world"
Although I think that 25% of all Americans reporting a mental health problem in the last year seemed way over the top.  But then I ran into the following this evening.  The two wealthiest regions with the craziest, most depressed people.  Seems like the "modern world" is missing some important point in respect of human happiness.

LONDON — Europeans are plagued by mental and neurological illnesses, with almost 165 million people or 38 percent of the population suffering each year from a brain disorder such as depression, anxiety, insomnia or dementia, according to a large new study.

"Mental disorders have become Europe’s largest health challenge of the 21st century," the study’s authors said..
With only about a third of cases receiving the therapy or medication needed, mental illnesses cause a huge economic and social burden — measured in the hundreds of billions of euros — as sufferers become too unwell to work and personal relationships break down.

Mental Illness…did you all read my post?  Also, read this.  Therapy works, but drugs, both old and new are needed.  RevTodd, is your place a 501c3 org?  If so, drop me a line at pharmboy123 at gmail.  Thx.

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