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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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Phil/GLW: I bought 1000 shares at $16.67 and sold 2013 $12.50 P & C for $5.30 for net $11.37/$11.94 .Stock now at $11.83 and chart looks like it’s in free fall. What ‘s your opinion.Thanks

Tough times for the financials… Performance and CDS changes:


Damn, I just went out on the high school pickup run and came back to find the bulls had stampeded while I was gone.

Ezra Klein looks at OccupyWallStreet and explains who the 99% are:


These are not rants against the system. They’re not anarchist manifestos. They’re not calls for a revolution. They’re small stories of people who played by the rules, did what they were told, and now have nothing to show for it. Or, worse, they have tens of thousands in debt to show for it…

This is why I’m taking Occupy Wall Street — or, perhaps more specifically, the ‘We Are The 99 Percent’ movement — seriously. There are a lot of people who are getting an unusually raw deal right now. There is a small group of people who are getting an unusually good deal right now. That doesn’t sound to me like a stable equilibrium…

What gives their movement the potential for power and potency is the masses who just want the system to work the way they were promised it would work. It’s not that 99 percent of Americans are really struggling. It’s not that 99 percent of Americans want a revolution. It’s that 99 percent of Americans sense that the fundamental bargain of our economy — work hard, play by the rules, get ahead — has been broken, and they want to see it restored.


Wall Street caused this mess, and the government paid off their debts and helped them rake in record profits in recent years. The top 1 percent account for 24 percent of the nation’s income and 40 percent of its wealth. There are a lot of people who don’t seem to be doing everything they’re supposed to do, and it seems to be working out just fine for them.

Reasons to be angry for sure…. 

Boy, those guys in Europe are busy bees considering it was after 9PM there when the news about Dexia finally filtered out and just so happened to coincide with the US markets close..


They are already making comparison between the new iPhone 4S and current Android sets:


Competition is getting better which I guess is good for users! 

But that Siri feature looks pretty cool I have to say… 

 Whoa! i picked a nice day to buy aggressively in the morning. MS and MGM up about 20% from this morning!!! GS up nearly 10% from 85 to 95. MT did great too. A couple more days like this and maybe those stocks i was gonna buy and hold, i should just sell!! šŸ™‚

 Why did we go up? Oh – did someone say free money for banks?
3:40 PM Apparently sparking the turn higher in stocks the last few minutes is the recycling of news that EU finmins are looking into recapitalizing the banks. There aren’t any details, just a realization from the leaders that not enough has been done to convince markets the banking system can absorb the hits from the debt crisis.
4:05 PM Market recap: News of EU finance ministers looking at ways to recapitalize European banks, plus Dexia’s plans to set up a bad bank, sent shorts running for cover, as stocks capped a furious last-hour comeback. Banks ripped higherMS +12%, GS +5%, BAC+4%. The euro reversed losses vs. the dollar; 10-year Treasury yields jumped 11 bps. NYSE gainers led losers three to one. 

 danosu77, you can tailor the trades in the 25k portfolio for what ever level of risk you are ok with.  For example,
"USO Friday $30s back to .35 and that’s a DD for a .53 avg on 20 in the $25KP"
In the 25k portfolio we have 20 of the USO FRIDAY 30 CALL, if you are still learning just do 1 contract.  That way your risk is only $35. 

Moodys DG Italy… 3 notches!!

Thanks Phil and Craig,  See you this weekend!
I have got to watch The Hangover again….

Where’s the guy who mistakenly bought SPY calls yesterday? Dmoroz, I think? I gotta hear how you played it. It turns out you should be well ahead if you only managed not to piss your pants at the early action today.
I have to say that playing 3x ultras in this market gives you more action than the craps table. Why go to Vegas?

Didn’t people go bonkers right before the Lehman crash saying the banks were ok?  Italy is downgraded….jeepers….

“In the U.S. and many other countries, the too-big-to-fail banks have become even bigger,” Stiglitz said in an interview today (from mid-Sept) in Paris. “The problems are worse than they were in 2007 before the crisis.”

I don’t care how many times they tell me that everything is ok, when the patient is on life support, everything is not ok.  They are alive, but things are not ok.  Again, I would sell the news, b’c tomorrow, or the next day….they will say everything is not ok.


I will start accumulating OTM puts on SPX and SPY (January).  I don’t think things last very long.  There is no reason to be up here either, and Dr. Copper, Gold, Silver, Oil all say that it is not going to stay up here.  The dollar has held pretty well, and China is buying US T.  I ask again, why would they do that with our ultra low yields?

Tis the season to be jolly, fa la la la la la la la la! 
Its almost that time of year and YUM brought us our first gift. šŸ˜‰

Pharm,  what strikes are you looking at on the OTM puts on SPX and SPY?  I have done a lot of research on the SPX long term options.  My concern would be that with the VIX so high, prices are very inflated (clearly).  Of course, with what is going on in the world, they still may be cheap.  My experience is that if the vix drops, the OTM SPX long term options will take a beating (the more leverage the more beating – basic)(my guess is that it is tied to the IV the MM uses and that can lead to huge wipsaws in price with the way long term way OTM option prices are calculated – i am guessing about pricing)( do you know if they "individually " set that part of the pricing equation) , any thoughts on how to hedge that?  I would love to hear.  I bet Phil has a take on this.  Phil, can you share your experience?  TIA.
I will start accumulating OTM puts on SPX and SPY (January). I don’t think things last very long. There is no reason to be up here either, and Dr. Copper, Gold, Silver, Oil all say that it is not going to stay up here. The dollar has held pretty well, and China is buying US T. I ask again, why would they do that with our ultra low yields?

robert – Good question for Pharm.  My gut and intellect tell me he’s right about the market, but the VIX is very high right now as you note.  I’ll be interested in his response. 

 I am trying to back-test some options strategies. Anyone know of a good source of historical option prices?

lzega – Are you looking for minute by minute prices?  When I looked into that kind of data it cost thousands of dollars.  Or are you just interested in backtesting, as you can in Thinkorswim?

If you are going to play SPX options, Sell them!
It is actually fun to sell weekly puts and calls and you can actually watch the premium decay, like watching the grass grow in florida in the summer…. For the last six weeks, I have been selling against whatever the move is that day. Today, I sold weekly calls (twice, once smart, once maybe not, lol) Yesterday, I sold more puts.

I also have positions on the last quarterlies, 825 puts, 1300 calls. I have layered them on as the market moved. First of all, I consider it unlikely we reach either level. Second, if we threaten the downside, you will have a fabulous array of rolling possibilities. If we threaten 1300 by the end of the year, the VIX will be low, and rolling is more difficult.
With PM, these way OTM options cost you almost nothing, so watch out how big you get. It can go bad fast when the market moves hard.

On the weeklies, if I write them on Friday, I try to get $2 or a bit more. You can usually add another $2 play on Mon or even Tues, against the movement of the day. Otherwise, there is no system. I tend to write what I figure won’t happen and take whatever they give.

The VIX fell 10%, and that was into the close.  I can see it dropping another 10% or so to hit the 50d MA at about 35.  If it closes below there, my longs should more than offset those.  I am not going crazy with puts, just have a bad feeling that the market will tank one night, and when we wake up…..well, it will be too late.  MS is on the ropes, and the EU is not fixed.  I don’t care about earnings that much, because this is a rotation, and I just don’t see things getting better without the gov’t spending and steriods that Dr. Ben gave us.  I might be wrong, but I don’t think I am….

With these up/down movements and if tomorrow we open up, the SPX Jan 1000/975 put vertical is  ~5.90.  So that is about 10% down from here.  Things go down much faster than they go up.  Today was a classic short squeeze move on what?  Nothing, but that is where they make their money right now…it ain’t with retail.  The SPY 100 Jan Ps are also ~ $4.11, and very cheap insurance as well.  A few to hold, and DD as things move up….but I really don’t see them making it back to as high as JRWs chart after this move down.  Maybe 117 on SPY.

SQQQ is also a very good one, as is TZA.

 Thanks jcaesar. Daily EOD close would help. I don’t use TOS, I use Schwab and they don’t have a backtesting tool, unfortunately.  

Here is is picture again for reference.

W. Palm Beach
Since I know we talk a ton about the wealth divide, I’d like to share a short story.  I drove down from juno beach, fl to West Palm Beach this afternoon to look around.  I’ve never seen anything like West Palm beach. Within 15min I saw 4 Bentleys, 2 db9, 1 dbr, 2 phantoms, and about 7 gt3’s. The houses look like French and Italian castles.  Just massive. No place I’ve been has had this concentration of wealth.  
This is truly the divide.  There are people I know who have enough money to "not work" any longer, but they live a simple lifestyle without any lavish items.  I and they learned our lesson early from the "millionare next door" books.  Regardless, it was just jaw dropping.  

Pharm / SPX Options
Just a note that SPX options are more tax advantageous to trade since they are treated with 1256 treatment.  They settle to cash, not a underlying.  So cap gains are taxed at 60% long / 40% short rates.  I always try to trade those instead of SPY , QQQ , etc

Burrben: take a good look at the Ft. Lauderdale waterfront, in particular from the waterside. The millionaire next door is gonna be netted in the current class warfare struggle, while the super rich escape as always.
I wish I could get Phil to understand that reality.

Burrben: exactly. Of course LT cap gains tax rate may change. I’m not entirely confident in the survival of the 1256 treatment. SPX options that expire are the major source of my income since 2000. This has enabled me to retire on the West coast of FL, not the East. Maybe I should have gone bigger šŸ™‚

Barfinger, where on the west coast of FL are you?  I am in Tampa, and like you, the major source of my trading income are SPX options expiring worthless…  Maybe meet for a coffee?

Hackers will erase the NYSE

Is Paul McCulley feeling liberated by his retirement from Pimco?


 UPDATE: I did keep my SPY 113 calls. I also, purchased some OCT SPY 106 puts and sold some OCT SPY 103 puts. ALSO, I sold some weekly SPY 113 calls. I was thinking (or maybe not fully) we are going to keep going down. I figured the 106 put would make money and the 103 puts would be some insurance. The 113 weekly short calls were a way to try to offset some of the loss on 113 long calls by cashing in on premium at the end of the week. Well, things did not go exactly as planned but I think I have something to work with. My biggest concern will be that I am on a plane tomorrow and the 113 short calls may fall in the money. Would like to here what I SHOULD have done.

barfinger : What strat are you using for the SPX option selling.  Back in 04-06 ago I was generating most of my income from following the Iron Condor type system that Dan Sheridan was putting forth in the CBOE TV videos.  Before the crash came, I got a job that restricted trading.
There were a few scary times though where a full year of profits could have been wiped out with the wild index movement.  And I used to bite my nails until the SPX prints came out mid day Ex Friday.   

Burrben/PB – Have you ever walked around Mayfair in London? My buddy and I were there this spring and his exact words to me (after seeing Ferraris, Astons, Bents/Rolls, high end MBs, etc all carelessly parked on the side streets as if they were Kias) were "if there were ever a single scene to capture just how bad we’re getting our asses kicked economically, this is it."
Must agree on Palm Beach though… it’s just sick. Did you see Rod Stewart’s yellow Rolls?

drcraig – The other day you mentioned "supply/demand nodes" with regards to trading JRW’s system with the futures.  I don’t know what supply or demand nodes are.  Do you mind explaining that a bit?  TIA.

Phil…Bot  Jan. 12  EDZ 25 calls at 5.40 and sold offseting Jan. 40 calls at 3.50 and Jan. 70 calls at 1.90. Now way up on 25 calls,how do I lock up some profits,and still hold onto premium in 40 and 75 calls? Thanks

 Newbie here… which dollar index do you reference – is it DXY? 

It seems to me as if you are betting against yourself as you are long both the October 113 calls and the October 106 puts.
I think you are OK with the short 113 calls, because you can roll them over to the next week anytime before the close on Friday. And you can roll to 114 at any time. I don’t know how your broker works, but with mine you can place contingent orders. For example to buy back the short 113 calls if SPY < 110.

drcraig/Palm Beach
Nah, half of those wealthy individuals lost their savings to Madoff and the fake palaces and castles were sold off to South American drug lords with a need for discreetly ostentatious pads with a private dock.

Dennis – Personally, I’d take off half.
Nice job….

Dennis – I would sell 1/2 and set a trailing stop for the rest and go to sleep! Can’t lose now!

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