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Sunday, November 27, 2022


Follow-Through Friday – Out of Gas or On the Launch Pad?

UUP WEEKLYWheeeeee, what a fun weeek!

I couldn’t say how many “fixes” we’ve had over the past two years but there have been plenty. Each has proven ephemeral but each new effort has become more assertive. This current plan now comes with wide global support. We have to remember these governments have skin in the game for their own economies. BRIC countries have plenty of “stuff” to export to a healthy euro zone so they’ll be supportive. Bernanke is also determined to be a player rumored to be adding $100 billion in aid to Europeans. Also in support were the ECB, the SNB, the BOJ and the BOE. I guess you could say; “it takes a village”, eh?David Fry

Bears should know they can’t fight the Fed and when the Fed brings all of it’s buddies along with their various economic weapons – it’s probably not the best time to stand up to them.  We still need to hear the word on QE3 next Wednesday or all these gains will vanish in a puff of smoke but, really, what are the odds that all this leads up to a Fed meeting where they say: "No more free money"?

 FXE WEEKLYIn our current environment, any whiff of the European financial crisis abating seems to send the markets higher. "Somehow we’re back to a risk-on trade again," says Custom Portfolio’s David Twibell, but the problem in Europe is very serious, and if there was an easy solution, we would have already solved the problem. "The market is being a bit Pollyannaish right now," he says.

We went risk-on on in a big way on Monday, as we bet on the manipulators to manipulate (seemed like a reasonable premise) and today is the day we take those profits off the table and use some of them to hedge for the weekend.  I laid out the trade ideas from our Monday and Tuesday morning posts on Wednesday and it now looks like FXE will finish above $37 for the full 1,100% gain so we’re off to a good start already!  

XLF is an Oct spread but on track and the Short FAS $8 puts for October are already down to .30 (up 70%) so there’s no sense waiting a month for the last 30%, is there?  Certainly not after we make 70% in a week!  VXX is well below $45 so that spread should make the full 200% (was "only" up 56% at Wednesday’s review) and TNA is miles in the money and that .08 spread was up 1,462% on Wednesday but should return the full 3,650% today – not bad for a spread that was initiated Tuesday morning

Now, unfortunately, it is time for my usual "Now we are in the middle of our trading range and it’s harder to call direction" speeches.  The reason we can come up with trade ideas that return 3,650% in 4 days is BECAUSE we wait for the indexes to move into the right position within our trading range and we wait for other factors to line up like (in this case) a high VIX, high negative sentiment, the political climate (which people say I pay too much attention to) and, of course, the recent AND incoming data.  When we are patient, we get fat pitches like that to swing at.  We still may swing and miss but at least, if you wait for the right pitch, there’s a chance of knocking one out of the park.  

We’re currently watching these uptrending channels on our Big Chart and we are not at all impressed with any "rally" that doesn’t break over those rising green lines so the longer it takes – the higher the green lines will climb and the more it will take to impress us.

The Nasdaq made it over our Must Hold Level at 2,603 yesterday and today they need to hold it.  We are still expecting to break over next week – thanks to the Fed, but you never know what nasty bit of news could hit us over the weekend so we’re not going to go too crazy into the close.  We will be looking for some protective plays as we test the top of the channel on the Qs this morning.

Before you get too complacent with your stock positions – take a look at RIMM, who missed earnings last night and were slapped down 20%, despite already being down 57% from the February highs.  We saw NFLX take a nice, 20% tumble this week as well.  That one is another good example of waiting for the fat pitch as NFLX was at a still-ridiculous $280 on July 25th, when the trade idea on them in Member Chat was:  

NFLX – That one is way too scary for me and no way on earth would I want to play them bullish.  My favorite play on them, longer term, is the Jan $270/210 bear put spread at $20, selling the $325 calls for $21 for a net $1 credit on the $60 spread.  The 2013 $400 calls are $22.50 so the bet is really a short $1 call that NFLX doesn’t make $400 in 18 months (up 41%) with the bonus kicker of a 6,100% gain if it turns out they aren’t as good as people think and they drop 30% instead.  

We already had shorter-term aggressively bearish bets from the week they hit $300 (July 11th) which, of course, did great.  This spread is technically still in progress but the Jan $270/210 bear put spread is already $59 out of $60 and the $325 calls are down to .30 so net $58.70 now off a $1 credit is a gain of 5,970% on cash in just over 2 months – not bad and certainly no sense letting it ride for 3 more months to make another 130% – although it’s kind of funny when you realize you can’t be bothered to make another 130% of your original investment in 3 months, isn’t it?  

Hopefully QE3 will give us more ridiculous run-ups we can short into down the road – those are always my favorite kind of long-term protection, rather than shorting an index that we actually hope will go higher.  For now, we will watch and wait for our breakouts, sticking with the game plan we’ve been executing since the early August lows.  To keep us on the Bull side, we need the S&P to hold their 1,200 target but we won’t be comfortable with betting up from here until we see the Russell and the NYSE poke through their -5% levels at 735 (21 points away, 3%) and 7,473 (144 points away, 2%) so it’s not too likely we’ll be having that feeling into today’s close.

Europe is drifting up around 1% this morning and at 9:55 we have University of Michigan Consumer Sentiment numbers, which are likely to suck.  If we can get past those and the EU close, we can hope to finish at the week’s highs.  As long as we’re holding those -5% lines we’ve had a good week though and this week it’s up to the EU not to blow it (again) and then it will be up to the Fed not to disappoint us on Wednesday afternoon.   

Have a great weekend, 

– Phil



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NFLX failure was related to a change in the business, and could hardly have been unexpected. It didn’t fail because people saw the chart pattern and bailed. At least I hope that’s not what happened. Now, if only that would happen to GMCR….

Selling put options is a great source of income over time, provided that you NEVER allow puts to be exercised or rolled. I have studied my trading history in detail for the last 4 years, going back to my pre-Phil days, and I found 95 pure option trades that were winners or washes over their initial term (93 of them short put trades), another 27 trades that became complete after rolling or owning and then selling a tight call and getting them called away. Against that, I have a list of 7 trades, all still running, that have not resolved themselves successfully, and truth be told, most of them will NEVER be resolved successfully.
Now, I knew all this, but I rationalized it, and I used rolling to extend the trades until my initial judgement had been "proven right". In other words, I allowed the option " tool" to enable a flawed investment strategy. In short, I cut my winners short and let the losers run. While the number of winners far outweighed the number of losers, the total amount of profit, net, was shamefully small.
I want to share with you my "Magnificent Seven" mistakes that by themselves have generated paper losses (so far) that wiped out 81% of my stock-option trading profits from four years of active trading.
1. TBT – this baby is responsible for wiping out 32% of my 4-year profits. I began this journey with a 42/51 bull call spread back a ways, it finished at a loss. I still believed in the idea, and began selling puts and rolling them when they failed, as most did. It was dropping like a stone a while back, so I had to increase the quantity. Lately, I have been rolling the short puts to short TLT calls. OK, there is hope for this one, but I am damned sorry I stuck with it.
2. GMCR – I called this the worst single trade I had ever entered because unlike TBT, none of the legs did anything but immediately go wrong and lose money. This one accounts for wiping out 19% of all my 4-year trading profits.
3. WFR- I began trading this at 13.50, and I have taken assignment on a couple of puts to build a position now capable of losing real money in the future. Should have been cut loose immediately.
4 – 7: CENX. Don’t really know what happened here. The trade started going bad before the "crash", and has not recovered, PARD – a wrong bet that I should never have even considered extending. Essentially a total loss. SRS – an idea that has been a disaster, and I still don’t understand why it didnt work, and finally AMAT – somewhat in the hole but I have doubled down twice. A bit behind, but now has lost noticeable money.
When Phil says "you should never sell a put unless you really want to own the stock at (whatever)" he is probably wrong. You should never sell a put with the idea it should be rolled or the shares accepted. I will discuss that in the next post.

The problem with "really wanting to own a stock" is that your judgement is made today, you enter the trade with a plan, and if the market drops, you blame that for your losing position, and then things happen, there’s news on your stock, and sometimes, the news is a killer, and the loss is now significant. You have to be prepared to change your judgement on a stock even if your reasoning was perfect to start with. I have several positions that were not losses during their option phase, and some aren’t losers today, but, when you add it all up, the stock is going nowhere and maybe never will.
Here’s the thing, I have had good stock positions in the past, (none now), but in every case, I sold calls against the position and lost it. When my wife said "I thought we had a big position in gold", I scuffed at the rug, looked out the window and said, "it got called away when it reached 100", which I thought then was a ridiculous price. GLD now at 175. with all of the option sales and holding it for a while, I got about 12 or 13 points of profit, and missed 75. I have more stories but I will spare you.
I have always suspected that the selling of calls produces little bits of income but every once in a while cuts you out of a huge profit. Only sell calls against a stock you really really want to dump. Spotting a dead stock is easier than spotting a long-term winner.
Finally, these days I have come to believe that nothing about the stock market is real and in any case, what you see, and what you can find out is probably manipulated and spun. A company that is sick can cover up that fact for a long time. In short, how the hell do I know if I really, really want to own a stock? I want to own something right up to the day their lies are made public, or they explode for other reasons, and then it is too late.
Finally, I used to be a dividend chaser. I owned a canadian oil and gas company that made some strange business error and blew themselves up. The wonderful 11% dividend was on its way to zero when I escaped. That taught me, and it has happened two or three more times with other dividend paying stocks. A good dividend with a solid history is not evidence of future performance. Remember, don’t believe any rumors until somebody in charge denies it three times – THEN you know its true.
My retirement is ENTIRELY paid for by trading SPX strangles, a strategy I invented for myself in 2000. It is the only thing that works over the long term, since the days of the permanent bull market are gone for the rest of my life.

The problem with Fed action is that it will either give us a relentless up market (I won’t call it a bull, exactly) or crash us breathless. The tension is building. Nothing is safe. I have never been less comfortable with my investing approach.
Well, except for the flash crash. I was headed for the window when I remembered I was on the ground floor….

Interesting post. The trouble with selling puts to get the stock is that you will always get the stock at a price higher than the current stock price, maybe quite a lot higher, so that differential has to be set off against the original premium received. The good part is that you will invariable make out better than if you had bought the stock first and then watched it decline.
However regarding Phil’ s maxim that you should never sell puts unless you really want to own the stock, I was not familiar with most of the stock symbols you mentioned so I checked them out. It does not seem to me that these are really widows and orphans stocks. Two of them have something to do with solar, energy, and another is a pharmaceutical development stock. These are highly speculative plays. Another is a leveraged real estate play. Another is Green Mountain coffee, on which you should have been able to make money selling puts even though a glance at their Web site suggests that their products are foul.

barfinger/spx strangles
Would appreciate more information on methodology you use for this.

Phil, to be clear, my TBT position cost me 32% of the income I earned from the plays that went well. It is not even 4% of my portfolio. I could keep rolling them forever, I think, but it appears to be a bet with an extremely long wait for the payoff, and the point of my post is that even things you think are still good, you would be better off cutting your loss before it builds.

Jmm1951: I was short the CALLS on GMCR, short puts would have made a gazillion. Others here are using short strangles. I would look for the posts by Peter D. He seems to have an actual plan, whereas i just sell puts and calls, now weekly and quarterly. I am sick to death of being burned by overnite BS and holding the monthly SPX, which settle as the sum of the 500 stocks opening on Friday. The Sept 1210 Calls would have cost me $7 to buy back at the end of their trading on Thursday, with the index at 1209, so I held them and watched the operators pump things up at the open and give me a settlement number of 1216, a cost of $6 and change. I felt swindled, which I believe was the correct term to describe what happened.

well i think we are saying the same thing phil that without a collusiion of some sort the notion of a rogue element in a bank that is teetering and has had many prvious overisght issues is silly…the fact this poor guy gets arresred is another example of misguided justice…

 Hmmm, I don’t like the sound of this  . .  
“We are not discussing the increase or the expansion of the EFSF with a non-member of the euro area,” he said. German Finance Minister Wolfgang Schaeuble spoke of a “very intensive but friendly discussion” and Austrian Finance Minister Maria Fekter found it “peculiar” to be lectured by the U.S., a country with higher aggregate debt than the euro area.
Instead, the ministers recommitted to a July 21 decision to empower the fund to buy bonds in the primary and secondary market, offer precautionary credit lines and create a bank- recapitalization facility. The target for completing national approvals of the new powers slipped to mid-October."
The Market didn’t seem to impressed with the "July 21st decision" in the first place.

Random thoughts:
 "If we don’t get rejected at those must hold lines, the short squeeze alone should take us up another 5%."  That’s a BIG IF.  But who the hell knows.  I certainly don’t.
The Solyndra deal for O’bama’s campaign contributor stinks to high heaven.  I’ve got nothing against subsidizing the solar industry.  The Chinese are doing it.  It’s a highly uneven playing field.  But it should be done evenly.  Not by picking winners and losers.  That is the WORST policy.  Obama should lose the election solely for the political patronage directly benefiting his benefactor.  If I hear, "there were 1100 jobs that would have been lost!" one more time I’m going to puke.  Jobs are lost everyday.  Shut the F up you bunch of snivelling, wimpy, hypocritical losers.  The only problem?  The Republican front runner is an even worse offender of patronage.  Is there any wonder why I hate politicians of all stripes and colors?
Geitner lecturing Europe on printing more?  That’s rich!  ..and makes me think I can’t get any more disgusted.
Phil, I don’t know how you do it.  I’ve never felt more disenfranchised.  Thank goodness I’ve been distracted by work so I don’t have to dwell on the pervasive sickness in our governemnt and economy.  But you can’t seek the same refuge.  Your work is to actually pay attention to this stuff!  More power to you~  Because I don’t know whose head is going to explode first.  Mine or Dylan Ratigan’s. 

Guys, leaving tomorrow for a week at Lake of the Ozarks, Mo., with a group (and yes, it includes wives). Ive never been there, but the advance notices are great… anyone have tips for a noob?

I like this interview with Ray Dalio, especially the similarities to what is spoken frequently here. 1) Macroeconomic conditions are not as random and unpredicatable as it would seem. Therefore, knowledge and common sense give you an edge. 2) How can anyone be surprised about the problems in Europe? The outcomes there were very predicatable if you understand mathematics and investment decisions should follow the math.
He makes a point about what he calls the Holy Grail of investment success which is that by finding 15 or more uncorrelated return streams you reduce your risk by 80%, and he also debunks the claim that everything is correlated. Very interesting.

this guy is going to be totally exonerated..time for reup of glass steagall in this country..ludicrous that these banks have been allowed to compromise systemic health repeatedly with little consequence to them while costing the taxpayer trillions world wide..a stain on any society promoting this outrageous fraud…

barfinger – if you are anywhere near table rock lake, I would make it a point.  Fishing is a must!  Enjoy…..I am sure you will.

If Greece is going to default, September 20th seems to be as good a day as any. Actually, it is far better than most to be GD-Day.
Two big bonds, the 4.5% of 2037 and the 4.6% of 2040 both have coupon payments due that day, totalling 769 Million Euro.  So if the IMF wanted to avoid letting another billion euro go down the drain, September 20th would be a good day to do it.  The IMF seems to have delayed approving another tranche for now, so Greece must already have the money for this payment?
The Fed Scheduled their meeting for 2 days.  It now starts on September 20th.  Maybe a co-incidence, but what better way to be prepared for new emergency policies?

Good Grant interview:
"It is the nature of gold that its valuation must forever be a mystery. It earns nothing. It pays no dividend. No conference call, no management to call up and complain to. What I do think is gold is simply the reciprocal of the world’s faith in the institution of managed currencies. It is one divided by T, where T stands for trust. And trust is a shrinking number and will continue to shrink. Therefore, I am still bullish on gold."
"The dollar will become the beneficiary of this mess. The euro is Confederate money. It is the emission of a confederation of states. It’s an indictment of the dollar that it for so long was trading at 1.40 euros, rather than 1.15 or 1.05. The centrifugal forces in Europe are strengthening, and they are beyond the capacity of governments to deal with. The euro will break up. At the margin, Europeans with money will seek a haven in this country."
"But it is remarkable that people are flying for safety into a class of security denominated in the very paper money that others are flying from. The great gold bull market is driven by people in flight from paper currencies. Somebody has not gotten the memo. "

I’ve been to Lake of the Ozarks many, many times over the last 45 years (I live in St. Louis). Can tell you about most of the resorts, all but a couple of the golf courses, some of the restaurants. Don’t miss the deep fried lobster tail at The Blue Herron or The Potted Steer (same owners). The old part by Bagnell Dam hasn’t changed since the 60’s and is worth a visit only if you have extra time or like tatoo parlors and souvenir shops. Traffic on the main drag (Hwy Business 54) can be brutal at times, so be prepared. The Outlet Mall is the big attraction (perfect for the wives, no sexism intended) and has too many stores to visit in one day. Hottest bar scene (so I’m told) is The Horny Toad. If boating, there is the original Party Cove where you can see just about anything and it can get really wild. There are several other coves that are well known party hangouts. The lake water itself is probably toxic. You will see some very expensive, very fast boats and awesome lakeside homes. Have fun!

A transcript of the Ray Dalio talk pakdog linked to a few comments up. 

Wheee… S&P futures down 15 points at the open on Sunday night! Dollar at 77.50! 

Wall Street’s Optimism Fades
"After a summer of denial, reality has caught up with Wall Street strategists.
Having spent much of the year making ever-higher predictions for the Standard & Poor’s 500-stock index, and sticking to them through August’s turmoil, many strategists are now cutting their forecasts.
It is about time, some investors say—and a sign that expectations may now be better calibrated to the realities of a global market crippled by a European debt crisis and sluggish U.S. growth prospects.
"At the beginning of the year, everyone was tripping over themselves to raise their S&P 500 targets, and now it’s the opposite," said Scott Migliori, U.S. chief investment officer for money manager RCM, a subsidiary of Allianz Global Investors.
Goldman Sachs last Wednesday ratcheted down its end-of-year prediction for the S&P 500 to 1250, from its previous forecast of 1400. Last Monday, Wells Fargo dropped its forecast to 1250 from 1390. And on Friday, Citigroup lowered its target to 1325 from 1400."

Problems in Germany?
This is by way of a brief prologue to ruminating aloud on a recent piece by Nancy Lazar, Ed Hyman’s savvy sidekick at ISI, who incidentally has made some pretty darn good and timely calls this year on various international economies and markets. Her trusty regression model sees German GDP growth declining over what’s left of this increasingly bizarre and often frustrating investment year and slowing to roughly 1% in the second quarter of 2012.
Recent surveys of business expectations and manufacturers’ sentiment support this unwelcome prospect of slackening growth in what remains the economic powerhouse of Europe

As it is, she reports, many German companies are investing overseas to take advantage of lower costs.
And on the homefront:
At the same time, meanwhile, our own wobbly economy shows few signs of bracing up. And, if anything, jobs have not gotten noticeably more numerous or easier to find, and the income squeeze on working stiffs continues pretty much unabated.
The latest monthly report put out by our old friend and smart-as-a-whip market watcher, Steve Leuthold, avers there’s still significant downside market risk and suggests an ultimate bottom for the S&P 500 somewhere around 955-995; it closed Friday at 1,216.01.

Back to "normal", I guess — futures gap moves- $ up; Euro down; /ES down.

Nice rant Matt.

 VOTE – YES on the "Buffett Tax"
Or at least that’s what Obama will ask the Congress to support sounds like it will raise $480 billion in 10 years…
Good time to watch the Daily Show’s recap on the fact that $700 billion is HALF of EVERYTHING that the bottom 90% of all american own.

What an interesting case study in human behavior in the aggregate as we watch how both Europe and the US deal with negative choices.   It seems in both cases that real outcomes need to be sufficiently negative in order for players to concede ideological positions which have some value to those players.  Unfortunately, game theory would suggest that the outcomes will be pareto sub-optimal, or in other words, worse than if a omniscent player made moves without vested interests.     We keep looking for "leadership", which is another way to say that omniscent player, but it’s just not in the human nature to suppport that behavior and therefore we aren’t seeing it.   I’m just developing a bias to the downside as this cycle of hope and despair play out from headline to headline.

Phil – The president as the executive power has the capacity to lead, but again the human condition begs the lowest common denominator behavior as best shown by the House of Representatives.  The problem is that the President has not convinced the populace of the need to take a new view, and I think that is due to the vested interests of the parties.  That vestiture is what the founding fathers did not intend, in my opinion.  Unfortunately, the likelihood of a third party is low, and so we’re stuck with what we’ve got, which is why I’m taking the more bearish bias.

PP for today.  Sorry, won’t be around…it looks like it is going to be fun.  But back the SPY 123s, and get ready to move out of the other SPY P calendars.  I want to be out of all calendars b’f the wonderful world of Bernie airs on Wednesday.

I think everyone wants leadership, but probably it only works when the conditions are ripe for leadership. Throughout human history people have yearned for a leader. It all started with Moses who led his people out of Egypt (probably mythical), and then centuries later the prophets of the Old Testament constantly called for a Messiah (leader) who would restore the supposed majesty and independence of the reigns of (the somewhat barbaric) King David and Solomon.
After World War I when Germany was suffering from having to make massive reparations, there arouse a leader (Der Fuhrer means "The Leader" in German) to take his people to the promised land
Leaders are often remembered after the fact by the speeches they have made. Like Churchill:
I would say to the House as I said to those who have joined this government: I have nothing to offer but blood, toil, tears and sweat. We have before us an ordeal of the most grievous kind. We have before us many, many long months of struggle and of suffering.

You ask, what is our aim? I can answer in one word: Victory. Victory at all costs — Victory in spite of all terror — Victory, however long and hard the road may be, for without victory there is no survival.
Ask not what your country can do for you, but what you can do for your country.
This was unreasonable, so his country killed him.
At the present time it is hard to find populations that will submit to leadership. Interesting that Islam literally means "submission to God" and that its adherents believe that they are promoting His leadership.

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