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Tuesday, February 7, 2023


Testy Tuesday – 1,072 or Bounce!

SPY DAILYHas it been a week already? 

That’s right – last Tuesday our title, after 3 bullish days, was "S&P 1,200 or Bust (again)" and bust we did!  At the time I said "It’s not that I’m flip-flopping – we’re simply playing the range and if the trip from the bottom to the top of the range is just 2 days – then flip-flop we must!"  Our bearish hedge in that morning’s Alert to Members was 30 DXD Oct $18/20 bull call spread at .70 ($2,100) offset by the sale of 10 GE Jan $15 puts at $1.05 ($1,050).  DXD is already at $21.34 and the bull call spread is $1.30 (30 = $3,900) while the 10 GE short puts are $1.75 ($1,750) for a net $2,150, up 105% in the first week – even if the short puts were not stopped out with a smaller loss.  

We also ran our Long Put List that morning (see Weekend Reading for recap of that strategy and list of short trade ideas) and those, of course, are up huge across the board as things got so bad yesterday we even had to short IBM – our list’s last brave holdout.  Another fun short we played that day was a ratio backspread on CMG.  

Taking advantage of selling into the pre-earnings excitement, we were able to add the following trade to our virtual $25,000 Portfolio:  

Earnings are on the 20th, the day before expirations so I like the volatility crush of selling 5 $340 calls for $9 ($4,500) and buying 3 Dec $350s for $15 ($4,500) for a free spread.  No matter what CMG does, $4,500 of premium will be gone from the callers on Oct 21st, then the Nov whatevers can be sold, hopefully for another $4,500 in premium or perhaps we can just pull the trade so let’s do one set in the $25KP and see how it goes. 

EEM WEEKLYCMG took a nice dip since then (now $292) and the 5 Oct $340 calls fell to $2.20 ($1,100) but the 3 Dec $350s have held $8.60 ($2,580) for a net profit of $1,480 off a trade that cost no cash just 7 days ago.  These are the kinds of trades we love around earnings season.  We didn’t need to hold it for a month and now we can free up the margin (about $6,000) and move on to another trade (in fact we did one on GS yesterday).  When you are working in a small portfolio, picking up $1,480 in a week on a single trade is a big deal!  

Another hedge we added that afternoon to the $25KP (as the S&P was clearly failing) was 10 EDZ (our favorite overall hedge) Oct $28/34 bull call spreads at $1.10, selling FCX Oct $31 puts for .91 for net .19 ($190).  FCX, unfortunately, has dropped like a rock and the Oct $31 puts are $1.85 ($1,850) but, fortunately, EDZ has gone up like a rocket to $35 (opposite of EEM on David Fry’s chart) and the spread is 100% in the money and currently priced at $3 ($3,000) for net $1,150 so up 505% despite our offsetting hedge behaving badly (and again assuming our naughty traders don’t stop out at the recommended 30% loss on the short put).  

See – hedging is FUN!  We can (and will) make trades like this every week on the way down and, of course, the real VALUE of that EDZ spread is $6 if the premiums all wash out in the money so another $3,000 to come if EDZ simply fails to bounce back.  I’ve been emphasizing hedging and balancing these last couple of weeks as we move into a potential down cycle and there is no more important skill to master than learning how to make these relatively minor adjustments to be able to shift your portfolio from bullish to neutral to bearish at will.  

VIXEven as I write this, the EU is down ANOTHER 3.5%.  Today’s worry du jour is the EU signaling to bondholders that they need to expect to take bigger losses on Greek debt in the second aid package.  People who lent money to Greece this year at 20% and higher interest rates are SHOCKED that there’s a chance the debt may not be repaid in full.  After all, aren’t the wealthy ENTITLED to get money from Governments?  What next – will they be expected to pay the same tax rates as everyone else as well?  MADNESS!

The EU Finance Ministers also pushed back a decision on the release of Greece’s next 8 billion-euro loan installment until after Oct. 13. It was the second postponement of a vote originally slated for yesterday as part of the 110 billion-euro lifeline granted to Greece last year. “The endgame for Greece has now begun,” Sony Kapoor, managing director of policy group Re-Define Europe, said in an e-mailed note. “It seems that the ground is being laid to revisit the private sector involvement agreement reached in July.” 

Also spooking the Financials this morning is news that Dexia SA, BNP Paribas SA and Societe Generale SA are resisting pressure from regulators to accept more losses on their holdings of Greek government debt amid criticism they haven’t written down the bonds sufficiently. While most banks have marked their Hellenic debt to market prices, a decline of as much as 51 percent, France’s two biggest lenders and Belgium’s largest cut the value of some holdings by 21 percent. The practice, which doesn’t violate accounting rules, may leave them vulnerable to bigger impairments in the event of a default. The three firms would have about 3 billion euros ($4 billion) of additional losses if they took writedowns of 50 percent, according to data compiled by Bloomberg.

That’s helping to push MS and GS credit default swaps to their highest level since 2008  as concerns intensified that Europe’s debt crisis will infect the global banking system.  Contracts on Morgan Stanley, the New York-based owner of the world’s largest retail brokerage, soared 92 basis points to a mid-price of 583 basis points as of 4:30 p.m. in New York, the highest since October 2008

Goldman was no help for their own cause as they just issued a statement raising the odds of a US Recession to 40% and declaring it more or less a done deal for France and Germany.  Oddly enough, GS still maintains a 1,200 price target on the S&P for 2011 and a 1,300 target for the end of 2013, with steady progress throughout they year.  Trying to reconcile that with the text of their report reminds me of the great Yogi, who said: "You can’t get there from here."  

Of course, talking out both sides of their mouth is a GS specialty and we are loving all this bad news as it (hopefully) shows us where the real support is.  As in this title, we’re expecting to see it at 1,072 as that’s our 2.5% overshoot of the 10% drop on the S&P and then we bounce back to test 1,011 and we’ll see what happens there but it’s going to be fun, Fun, FUN this week as we continue Thursday’s search for bottom.  

IWM WEEKLYOur favorite long play is a speculative bet on the Russell with the TNA Oct $28/33 bull call spread at $2.25, selling the Oct $23 puts for $2.10 for net .15 on the $5 spread.  TNA is currently $28 so a $5 drop is about 20% and that would be a 7% drop on the Russell to 558 before this trade is in serious trouble while our goal would be an 18% gain, which would require a 6% move up on the Russell, back to about 640 on October 21st.  

We already played the Russell Futures (/YM) bullish off the 600 line this morning in Member Chat but, keep in mind – we are playing both sides of the fence so we are grabbing bullish plays to protect our winning bearish plays and then grabbing bearish plays to protect our bullish winners as we move the other way.  For the most part – CASH remains king but we will be looking for the Dollar to be rejected at our 80 target today and retrace back to 78.50 for it’s first major test – despite all the nonsense in the EU.  

We also did our usual TLT short play as it hit $123 yesterday (so far, so wrong at $124) and this morning we will likely play our VXX short spread – probably selling the weekly $55 calls for $3.50 and buying the weekly $56 puts for $2.50 for a net $1 credit on the puts.  

Why so bullish?  Because we are already up 505% on hedges like our EDZ spread and all it has to do is not go down (Global markets up) and we make another 1,600% as the premium wears off the bull call spread so anything down is a huge win on our leveraged protection and we need to begin protecting those gains with some leveraged bullishness.  BALANCE – it’s all about balance….

Ben speaks to Congress today and there’s a Beatles song to cover that.  

Let’s hope we get that bounce because it’s not a pretty picture at all if we break down here!  



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Oil Lines

R3 – 82.45
R2 – 81.04
R1 – 78.73
PP – 77.32
S1 – 75.01
S2 – 73.60
S3 – 71.29

Yesterday’s high and low – 79.64 / 75.92

Breakout lines – 85.65 / 66.18 

At the risk of speaking too early (again) EURUSD is getting accumulated, under normal market conditions a jam is to follow dragging equities to the plus side.


The pre-market quotes are pretty bad:

TLT – Up to 124.50
FAS – 8.85
XLF – 11.12

Looks like the financials are going to get hit again today

Barry has a great post about the situation at the banks:


The bottom line is this: Investors do not really have a clear idea of how healthy any of these banks truly are. We do not know the state of their balance sheets. We do not know what their exposures are to mortgages, to Europe, to Greece, etc. They could all be technically insolvent, as far as any investor can tell.

Bankers, enjoy your beds. You made them, now lay in them . . . 

This chart is making the rounds on Wall Street today, due to the exact close of yesterday
For Those Who Don’t Believe That History Repeats Itself…

Phil, Thanks for the FTR roll on the Jan 6 short puts but just leave the May 7 short puts in place? Thanks

And also from Barry’s site, a Paul McCulley interview from John Mauldin:


Phil, this guys support our view that austerity in this time is never going to work:

You mean that cutting federal spending in a liquidity trap, like we’re in, is absolutely counterproductive?

Yes, it’s ludicrous and I don’t use that word too often. There’s a large range of opinions about most issues, and rightfully so. But if you are in a liquidity trap and you are advocating frontloaded austerity—

The Tea Party is really talking about killing the economy —

Again, it’s absolutely ludicrous. And if we need an example, we can just look across the pond and see what’s going on in Euroland. Putting somebody who is suffering from anorexia on a diet doesn’t make a lot of sense to me. But essentially that’s what the austerity folks are preaching and that’s what we’ve been grappling with here in the United States.


Are you implying that the Tea Party has been sold a bill of goods?

Yes, they have. I mean, the historical parallel that a lot of us point to would be 1931, when Andrew Mellon said, essentially, liquidate, liquidate, liquidate and assets will be transferred to moral hands, and we’ll live a more moral life.

Until we starve to death.

Right — but we will live a moral life.

Good news: Ford makes commitment for 12,000 new jobs in the US in tentative agreement with UAW.

Poker is still under consideration for the place, but looks like a friendly game is going to happen (sub – $200)…..yeah, and you can give me your money now! ūüôā

USO weekly 30 calls at .90 yesterday afternoon. Any recommendations based on what you see so far today? Thanks!

FAS Money Recap

Long Strangle –Jan 12 Calls (2.71 now 1.60) and April 11 Puts (3.30 now 4.72).

Weekly – Full Cover October 13 Puts (1.98 average now 4.35)
Monthly –  Full Cover October 13 Puts (1.98 average now 4.35)


Here’s a thought on reform from an interesting article that even speaks to me as a loony flaming radical – after hours, of course, Phil, what do you think?
"if we had a conception of government that was not only tax agent, service  deliverer, but also an investor  in the economy like a bank, and it was entitled to a return just the way a bank gets return, we’d have plenty money.  But we don’t treat ourselves as the investor. But every major technological growth has been publicly invested in. If we were a shareholder in Microsoft because we invented the computer, it would be a very different terrain. So the reinvention of capitalism is the issue, and the reinvention of government is what is happening. So capitalism is directly claiming public investment now. "

man I hope we get a bounce… this is too painful.
FU financials!!!

 jabobeast, i am with you…:-(

FAS Money / Phil – Should we consider rolling down the long puts and take the money to roll the short ones. We could probably buy 2 or 3 strikes down.  

Re my question on SQQQ from yesterday. Luckily I didn’t sell the long 25′s before the plunge or I’d be in very deep trouble now. But still have a potential big problem if we continue down and the OCT 34′s go in the money as I would have 40 34′s uncovered. 
Again the position is 60 long Oct 25′s (net 2.35) against 20 short Oct 31′s and 80 short Oct 34′s. 

RIMM putting itself up for sale?? Hired GS to explore "strategic alternatives". Nice move up this AM

October 4th, 2011 at 7:48 am | PermalinkIgnore this user
good morning Phil
I have 500 JNPR @ $24.90 (now $17.08) and sold 20 JNPR Jan12 $19.00 P @ $2.00 (now 3.55)
Although I think $17.00 is a good entry for the stock in Jan. the  puts are down 75%.
How can I best reposition these potential loses?

 Bring it on Pharm!  How bout a little heads up saturday afternoon and the looser buys dinner for the winner at Nobu?

GS – $80 anyone?  CAT at $69 and falling.  DD – OH MY!

craig – I would love to, but I will be driving from San Diego….  Talk off line later.

Just filled HOV Jan 13, $1.00 P for $.55.  Seems like a reasonable play just hope they don’t go broke!

BAC – $5.19….  

Euro spiking down.

What’s the lower level lines you’re working with today?

looks like Bernank was a dud?

Good cartoon from Barry:


Traders on the Long Side forget to hedge their positions . . . 

 Not following actively here anymore! Still, hello all! Been a wild ride in market recently. I am aggressively adding to long term positions here that are looking like great values. I know we could go down more, but i think in 12 months, many of these prices will look like great buys. Buying some financials (BAC, MS, GS), MT, MGM, IBM, GLW. Casting net pretty wide, with stocks that look like good values. 

Apparently we are now officially in a bear market:


Oh wait, not yet… 

Update – We are again in a bear market!

Latest update – Not anymore!

These definition are just so absurd!

Heavy USD/CHFselling being blamed for $ weakness..

Kustomz – Thanks, I was wondering what that dollar dive was about.

Another hedge that has been decent for me has been SDOW (proshares ultrashort dow30).

Short TNA 30 calls, took the $ and bought TNA 24 puts.

" producers of other goods and services were able to pass through some of their higher input costs to their customers." – that would be the goverment service sector of vendors and suppliers.  i’m sure no trouble passing on their inflated prices.

VXX running out of strikes in the weeklies…. It stands at 58.85 and the highest strike is 60 now! With 3 days to go, might need to create new ones!

EMN/Phil – down significantly, putting dividend at over 6% and just announced a 2-1 split. if one wants to start a new entry to EMN..and rules of thumb re better to wait for after the split or take it before..?

RUT and SOX turning up.
Think rotation into Semi’s?? — I hope!

EMN/Phil – that would be "…any rules of thumb…"

I wonder if we will follow Europe’s close today?  Hmm…

Heavy sellers 1.3280 in EUR/USD…not confident in the Euro sustaining this move and the markets decoupling from Euro moves seems possible.

Is there any scenario where you can see the dollar strengthening and the market going up?
If our economy shows signs of improvement before other areas of the world wouldn’t undervalued equities move up regardless of the value of the $?
Reluctant to go long based on your comment re the $ over $80.

Phil / tech — I watched Frontlines "Digital Nation" last night. They talked about an IBM campus that is a ghost town because the people that work there have virtual meetings (in a 3d virtual world simulator) from whereever they might be. Add a digital assistant and you could then be in two places (or more) at one time! There are some strange psychological studies being done based on personalities and virtual environments, spooky, but interesting nonetheless.
We are all screwed if an EMP forces a reboot of the system.

not that heavy after all kustomz

Interesting that the stock started deeper in the hole today, but right now up 6% for the day. Maybe the company is buying back stock or someone thinks enough is enough.

Phil / lows — 2200 new 52 wk lows

Ahh, short squeezes……gotta love them.  The show must go on, and it appears China is buying large blocks of treasuries…..that is a good thing if you are long treasuries, not so good for the market….

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