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Saturday, September 24, 2022


Testy Tuesday – More Stimulus PLEASE!

What a crazy ride!  

The chart on the left is a take on market sentiment but it’s the kind of mood swings that should be talking place over a span of weeks or months, not HOURS – like it has been recently.  

Volatility has gone completely crazy this year, to the point where a stock like BKS has an AVERAGE intraday spread of 8.3%.  8.3% used to be considered a big year for a stock – now it’s considered lunch…

Even worse, BKS doesn’t even top the list:  GMCR (8.7%), PDC 8.5% and PCX (8.4%) as well as BAS (8.2%) all have AVERAGE daily price swings above 8% and Bespoke has a list of 50 stocks (not even the ultra ETFs) that move 6% or more in the average day.  

MS is one, so is X – as well as JEF, NFLX, AMED, ANR, FSLR, NILE, ZEUS, LZB (really Lazy-Boy?!?), TEX and HAYN among the well-known names that swing up and down like penny stocks in the "average" day.  This is not rational.  MS has a $32Bn market cap – do we really think the value of MS jumps up and down $1.8Bn a day based on anything other than sheeple stampeding in and out of the stock?  

This creates tremendous opportunities for Fundamental investors as well as option SELLERS, which is what we prefer to be as – whether the market goes up or down – there is always someone who thinks it will go much lower or much higher and they are willing to give us lots of money to bet that they are right.  All we have to do is BE THE HOUSE and take bets on both sides and wait for those times when nothing happens and we cash out both ends of the trade (kind of like bookies when a team wins but doesn’t beat the spread). 

That’s right, bookmaking is illegal (unless you are Steve Wynn) but ordinary citizens like us can SELL options to suckers who think they are smarter than the markets.  I was on BNN yesterday and I’m sorry I didn’t catch the guy’s name but I guess he was another host and we were discussing using offsetting short puts to lower the next cost of our GNW and AXP spreads and he said "but retail investor does have to understand (the risks)" – which is a very important point but let’s not overstate the risk COMPARED TO OWNING A STOCK.  

With GNW, for example, on October 24th, the stock was $6.15 and, rather than buy $6,150 worth of stock and hoping for the best, we instead bought the Jan $5 calls for $1.50 and sold the $7.50 calls for .40 to drop the net to $1.10 on the $2.50 spread.   We also sold the December $6 puts for .85 to give us a net .25 entry on the entire spread.  We did 10 of these spreads in our WCP and, while our obligation was to buy 1,000 shares of GNW as net $6.25, the margin requirement on the short puts was just $625.  

This is not to say you should be reckless with margin but you can be realistic.  The reason the margin is $625 is because many well-paid derivatives experts have determined that the loss-risk of holding 10 short contracts of GNW Dec $6 puts is approximately $625 – NOT $6,250.  Can GNW go bankrupt and leave you with a $6,250 loss?  Sure, anything can happen.  It has, however, been determined by top analysts that the likelihood of this happening is roughly 10% or less so they are willing to extend you 90% margin against that possibility.  

You all look at Lloyd Blankfien and Jaimie Dimon and even Warren Buffett and say, "why can’t I make money like that" and one reason is that, when someone allows them to leverage their money 10:1 against REASONABLE risks – THEY TAKE IT!!!  The reality of having 10 contracts of GNW for net $6.25 is that perhaps GNW drops 20% (to $5) on some catastrophe before we stop out then we lose $1,250 – but not $6,250.  That’s why we’re playing with GNW and not NFLX – we think the odds of GNW suddenly going bust in the next 90 days is thin – beyond black swan thin…

When the calls dropped to .14, we bought them back for a small profit, leaving us in the $5 calls at net $1.34 along with the short puts, now .13.  With the Jan $5 calls now at $1.90, less the .12 we require to buy back the short puts if we closed it out today (but we are confident they will expire worthless), the net on this trade has gone from .25 to $1.78 up $1,530 (612%) in just over a month.  The stock is at $6.71, up "just" $656 on the same 1,000 shares (10%).  At 50% margin, $3,000 was committed to owning the stock while we committed $675 of cash and margin.  

This IS how the big boys make money.  We did not risk more than a typical retail investor who just buys GNW for $6.15 and crosses his fingers.  In fact, our net entry with the short put sale was $5.25 per share so we had a better than 15% downside buffer before we would begin to take a loss.  This is the fairly simple math of option strategies – we SELL the premium – we don’t buy it.  It puts us in a BETTER position than the retail investor but, as you can see from the BNN interview – there is always someone lurking around who wants to keep retail investors out of options.  

Of course the big boys want this to themselves – it’s where they make all their money!  

We don’t control the kind of Billions that let us design our own derivative deals (yet – see Build a Berkshire Workshop for our plan in that regard) but we can take advantage of leverage to sell our options – essentially taking out loans in order to operate our own little casino, where traders line up every day to take our bets – handing us cash so that they can speculate that, for example, TLT will be over $120 on Friday, for which they will bet us .50, even though TLT is at $118.40.  

That’s our "spread" – we’re the bookies and they are spotting us $2.10 (the $1.60 out of the money plus the .50 they pay) on the bet.  Now, we may win and we may lose but we know that there’s another sucker lined up next week to spot us another $2.10, and then another and another.  It’s not about us winning or losing a single, $2.10 bet – it’s about the fact that, over 52 weeks, we can collect $26 against $2 spreads betting TLT stays under the $120s.  Sometimes we may be wrong and sometimes we’re right – but our bet is that we won’t be $26 wrong!  

The gamblers come and go but the casino is always there – always taking the bets.  That’s how you win over time…  

As to the markets, we’re waiting and seeing as we continue to test our levels, generally consolidating in a pretty healthy way – the same way we did in mid-October, prior to making another big move up to close the month – a move that would give us a classic Santa Claus rally to finish 2011.  Lots of "bad" news yesterday did not do significant damage and even Europe down half a point isn’t bothering the US futures (however we did short oil this morning at $101 in Member Chat and got a quick ride back to $100.25) so, on the whole, it’s very impressive so far.  

We’ll just have to see how things shake out but, if the Dollar goes back over 79 – I would certainly get a lot more cautious.  



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iflan/AAPL – ignore me, plz.  rough day.  time for a drink.   might as well be less than lucid for a reason.

Verizon – Hmmm.  Isn’t FIOS already a kind of streaming?  I don’t sub to any NFLX service now – nor AMZN (even tho I’m a Prime member, free crap is still crap…) – but I guess since NFLX still eats up so much prime time bandwidth, Verizon may as well do something.  Seems like they’re swinging at a paper tiger tho in NFLX’s case.  And if they try to compete on price and content with AMZN/NFLX (free or less than $20 per month in exchange for weak content) – aren;t they cannibalizing the heavy cable-based fees they already corner?  Tho maybe that’s part of the push: they capture some of the low-end market that NFLX, AMZN and HULU have – folks that don’t have cable or premium channels because of the cost.   Doesn’t look like the news hit NFLX’s price yet tho.  

-API Crude Oil Inventories (Dec 2) W/W -5035K vs. Prev. 3439K
-API Gasoline Inventory (Dec 2) W/W 5966K vs. Prev. -173K
-API Distillate Inventory (Dec 2) W/W 1680K vs. Prev. 1347K
-API Cushing Crude OK Inventory (Dec 2) W/W -1223K vs. Prev. -426K
Basically they produced gasoline and people don’t buy it.
Looks quite bearish for me, but futures still go up 🙁

Iflan. Actually, I see an answer to my question in one of your earlier posts, pardon me for not reading more carefully. Thanks for that explanation.

 Phil, belated kudos for your strong defense of Hilary Clinton the other day.  I am also an admirer, and she has done yeoman’s work as SoS.

 Phil – The Pragmatic Capitalist article you posted at lunch on why Europe won’t be fixed this weekend was excellent.  It affirms why I am holding a lot of cash in my account. I hate missing all the moves, but can’t find a reason to get bearish or bullish since I don’t day trade.  I would be interested to see a strategy article that is the equivalent to the business plans many companies are making in case their is a big free fall.  Right now my plan is mostly cash and corporate bonds, and a few long and short positions in case something happens either way.

RevTodd – that was me…but I know that there is some speculation that Phil is me and I am Phil……and JRW….and ….. 🙂

Verizon / NF – Apparently, they realize that the writing is already on the wall with cable services. I just read an article that the majority of new young households didn’t subscribe to cable at all and just got Internet services! 

Look at what Microsoft is doing with the Xbox – you get games, DVD, streaming services and music from the same box. Now Verizon will also allow some channels to be streamed as long as you have cable services. Maybe one day they’ll let you choose the channels you want without cable service. So Verizon is really playing for the future.

BTW, that Xbox deal is really one thing that MSFT is doing well! They beat Apple and Google to the living room! Don’t know if that will continue, but it’s a good start. They sold 1 millions of these suckers over the Black Friday weekend…


Hi and thanks for the input today on APPL. I said I’d give it a whirl and bought the Jan 390 calls for 17.70, but sold the weekly Dec 9 calls for 3.90 — unfortunately just before your post to buy them back. Oooops! Only in for 2 on the Jan calls and 1 on the weeklys so not in that much hurt.

I’m guessing the long calls should work out fine between now and APPL earnings, but I’m curious about the methodology behind the short calls. You say it "would not be at all unreasonable to hold them overnight" — meaning, I’m thinking, you would expect them to drop a little further during the day tomorrow or Thursday. However with APPL on its typical annual trajectory upwards until Q1 earnings, wouldn’t it have been safer to have sold puts? Or are you expecting further drops between now and Dec 9 expiration so the caller expires or can be bought back at a profit.

Overall, it would be great to get an overview of the system as I kinda got blindsided by the speed of the weeklys transactions today. Is the plan to buy long ITM calls and sell weeklys on a day-trade basis against them? Or something totally different…

Thanks. I’m sure I’ll get the hang of it as we go on.

 Pharm:  Well, there PHil Davis, and PHil Klein, and PHarm, so only JRW’s true identity is shrouded in mystery….that, and the secret of how this amalgamate personage manages to only sleep once per month.  If "he" were to sell his secret, none of "them" would ever need to work again, but don’t tell "them" that, or we would all then be sentenced to wander aimlessly through the option wilderness for all time.

If you can’t sell puts naked to off set a call spread, but can do a bull put spread is that less attractive becauce you lose out on some of the premium?  Or is it better still as a partial off set still selling premium? 

Sellpremium:  And I thought I was the only one nostalgic for Spitzer!!  Not politically correct, I know, but there are worse crimes than consensual sex for hire.  Most of them, actually. 

 Pharm – well I am glad no one suspects me of being anyone else.  I’m glad you posted the article and I like reading pragcap.com too.  I realize that lately I’m reading more about European politics in the Financial Times than I’m reading US politics in the New York Times.  Since it is after hours I’ll share a couple of interesting articles on OWS, that shows an enduring strength and adaptability of the movement.
Paul Farrell makes the point on Marketwatch that you kind expalin OWS through normal political categories of Democrat and Republican.  It is about inequality and the way the system tilts against the middle class and poor.  Democrats do not control it and there is no Soros-like figure behind it.  Frank Luntz, for one, is scared of the movement:
Alternet reports that some groups are starting to block foreclosures and occupy foreclosed homes.  They are looking at tactics already begun in Spain.  I don’t think most pundits understand that this is part of a global social movement where people are fighting against both political and economic tyranny.  A cold winter and knocking down some tent cities is not going to make this go away.   Much like the Civil Rights movement, this movement may continue to be the focus of political and cultural battles for the next decade, rather than the election year sloganeering with no substance.  

 I hope you’re right, Rev

OWS – At the risk of being pilloried by Phil again, here’s a good means test for whether OWS has legs and whether it’s part of a real global social movement: What percentage of the OWS “base” is of color and-or from the working poor “class”? The answers are recently examined and published: almost none on both counts. Does that make it any less important? I don’t know. Frankly, Wall Street should appreciate tent cities versus Jay Gould having the shit kicked out of him just walking down the street. Frank Luntz is not afraid of OWS. But it’s good business for him to make others afraid.

stjean/Verizon – good points. Actually, I only have FIOS for Internet. But may not be in the sample group since I pay through the nose for DirectTV.

Australian Q3 GDP +2.5% YoY, +2.1% expected
AUD getting bid up..may see commodities perk up a bit also.

HBO Go / Phil – That’s a good point and a good platform. It’s on everything now – iPad, Android, Roku and coming to the Xbox as well. Good selection of shows… I am sure they will soon have an online only membership for the non-cable people (you still need a cable subscription to access it – for now!)… Good stuff! 

 NF – Good points worth raising about OWS in the US.  John Stewart did a great take on the class division at Zucotti Park a few weeks ago.http://www.thedailyshow.com/watch/wed-november-16-2011/occupy-wall-street-divided  The civil rights movement was by nature a movement of people of color, but I’m not sure if any other US movement has really drawn on or included people of color.  The working poor are mostly too busy working the 3rd shift to join in.  While it is important to look at the diversity of a movement, many successful movements are not that broad, from either the right or the left.  The various Christian Right groups, Tea Party, environmental groups, anti-war groups and so on are all relatively narrow bands of society and yet often gain a reasonable amount of success on various issues.  You have made me curious and I am going to keep my eyes open to see the diversity of how OWS is shaping up.  I would guess it is a little more diverse than other recent comparable US social movements, but I don’t know.  
The reason I see it as a more global movement is that I think it did not really begin in the US.  I think many people were inspired and encouraged to see people toppling dictators without civil war.  I think the spark was lit abroad and hit the dry tinder here in the US.  So if you look at OWS as just one manifestation of a global movement against economic tyranny, it is a very diverse movement, though not as much yet here in the US.

zipla….re your 6:38 post.    Yes, some of my trades on AAPL come fast and furiously, and my techniques vary greatly in real time.   This is because opportunities for profiting can come and go rapidly.  And this is what I want to try and teach those who want to make money investing in AAPL.  My trades today were:   At 2:56 pm  I was sure that the stock was trending upward.  Thus the purchase of the Jan 390 calls.  At 3:20 pm  I noted a reversal, but because AAPL is generally uptrending and because the Jan 390 calls move slowly with the price of the stock, I chose to take advantage of the reversal by selling weekly 390 calls.  I only covered 1/2 so as not to lose the opportunity for profits should be stock go back upward on a stick.  But the reversal continued, so  bought the 1/2 covers back at 3:50  pm for a $500 scalp on the day trade.  So now I’m left with the Jan 390s and I’ve already made $500 with one day of trading.   And of course I want to use the long calls to sell short calls against when the opportunity presents itself.  You must sell premium in order to make significant profits.   I will often hold calls just so that I can sell premium against them.  I’ve found that I can make more by coming in and out of the covers as opposed to just doing spreads.  It can seem very complex at first glance.   Now you are fine with your present holdings.  If AAPL ramps up tomorrow you are 2 to 1 longs to covers and you will do fine.  If it drops, then you can buy your cover back at a lower price than I did. 

rev/OWS – good stuff. And ur such a good and even-handed person here. Being a firm believer in our adversarial style of “justice” – and being an Italian by birth, debater by education and lawyer by trade – I too often throw a blow first. But almost always meant to elicit, as here, a better argument coming back. I actually do learn a lot this way. Sorry for imposing it on others sometimes.

HBO Go – Nice catch, PD. And right on stjean: it’s a killer, very well done app.

iflan – nice rap on ur tactics today. And re holding calls to sell premium. After my NFLX march 155 Cs long ago were obviously going to never recover – now at around 10 cents – I just use them to write weekly calls. Tho I’ve moved on and don’t feel the need to “make back” those errant longs thru NFLX, I can still write against them for a few more months.

 NF – My best friend always take the opposite side of an argument whomever he is with to see what it would be like to think differently.  he gets me all worked up and then backs off.  We find this works best over beers watching football in a bar.  He manages to drag others in, including the waitresses into the mix and ask them what they think too.  Never a dull moment, though we miss lots of big plays.

Yes…. learning humility can be a real bitch…………….

I…will roast this but need to get some sleep.
Would love some back up fro you Phil if you have any time, please… 

Phil- How does the European banking system which was already stretched due to their leverage stand the capital flight that has and is taking place. Without sufficient cash- does all this posturing not amount to nothing more than possibly putting off a calamity? I understand everyone is hoping for a solution- which I do not believe there is one- but is not everything going to end up being nothing more than an unachievable plan, which does nothing more than temporarily placate the markets, only to eventually fail? It would seem similar to one who is forced to use predatory lenders due to lack of assets and a poor credit rating- they could not survive in the normal banking system and will eventually sink in the system that forces them to pay much higher rates and be extended much less ( if any ) credit. I know I am hard headed but I just do not see how any solution works in the long run now that their credit worthiness has been seriously questioned and funds have fled.

"concerns over China’s intellectual property rules and tough regulatory environment weighed on them."

I would be interested in how Germany intends to replace nukes in their energy mix. There’s a wind turbine visible almost everywhere in Germany, but their resource is marginal – 5.5 meters/second, which is the bare threshhold for commercial use. Solar? In Germany?

H’m, now that sounds reliable. And – this may come as a shock – you have to duplicate the baseload generating capacity of each because, oddly, you only get electricity when the wind is blowing adequately (35% would be a generous estimate) or the sun shining (probably less, given the latitude and that pesky nightime thingy). So they’re going to have to build a lot of coal burners, which will probably kill more people than nukes ever will (unless they hire TEPCO to build them).

Bottom line: ain’t gonna happen, it’s just the sound of politicians pandering.

Phil, I owned shares of TASR via option assignments a while back. I am waiting to sell some calls when its value recovers. What’s a good strategy right now? Sell calls or wait? thanks

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