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Saturday, December 3, 2022

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Free-Falling Thursday – Facebook Faces Fatal Friday Follow-Through

What a week to do an IPO!

Will Facebook save the markets tomorrow with a successful roll-out of the largest IPO of all time or will it be the straw that breaks the camel's back, with a disappointing open that sends the Nasdaq off a cliff along with their entire over-priced sector?  Either way – this is going to be fun.

We can argue the merits of Facebook's value (or lack thereof) all day long but, scam or not, it's very likely FB will set off a buying frenzy in the space and we finish the week off with a bang. If that doesn't happen – I will be very, very bearish but from what I'm hearing and the way they are extending the offer and raising the price – it's way oversubscribed.  Also, we have to consider that people are cashing out 1-5% of their holdings to raise cash for FB on Friday – sure it's moronic, but that's what people do so you have to put yourself in a position of someone who wants to put 5% of your portfolio in to Facebook (the way you wish you had put 5% into Google at $80 when they IPO'd) tomorrow – what would you be doing with the rest of your portfolio today?  

EZU WEEKLYMeanwhile, the rest of the World is falling apart with Europe turning sharply lower as Spain sells bonds at record high yields (5.106% for 4-year notes) this morning after announcing that their Q1 GDP was -0.4% at the same time as Moody's indicates they will be cutting the credit ratings of 21 Spanish Banks this evening AND, to top it all off – there is a run on Bankia, which Spain nationalized last week – with $1.3Bn pulled from accounts this past week!  This sent Spain's markets down 1.6% and Italy (who is next) fell 2%, sending the Euro down 1% to $1.2668 and the Pound followed it down to $1.5832 (while EUR/CHF holds steady at 1.2009 in the most blatant currency manipulation ever witnessed).

Wow – that's a lot of bad stuff!  Maybe too many bad things – as in a bit suspicious that all this bad stuff happens at once – as if maybe someone WANTS to force a panic bottom?  If so, I applaud them – we certainly needed to shake things up a little and nothing gets a rally finally going like a good old blow-off bottom.  This morning's 0.5% drop in the futures looks more like a flush to me than a sustainable move and I think we may take advantage of a morning dip (if it lasts) to firm up some put selling on our Twice in a Lifetime list as we test some 10% drops in our International Markets – a nice, bouncy area in the very least:  

Ugly, isn't it?  On the one hand, we are very worried that this could be the prelude to a 2008-style market melt-down, where we still have another 20% or more to fall but, on the other hand – we fear the Fed and their endless intervention, which makes it foolish to be too bearish on this market.  Cashy and cautious is how we're playing this but we're willing to lose a little doing some bottom-fishing here and, if we're wrong, we either stop out or load up those disaster hedges (see yesterday's post or Monday's post), which will put a ton of cash in our portfolios in the event of a sell-off.  

In Member chat yesterday, we were discussing our disaster hedges and I pointed people towards a classic post titled "Hedging for Disaster – 5 Plays that Make 500% if the Market Falls" that we used in April, 2010 to ride out a similar dip with style.  Hopefully Facebook won't disappoint us tomorrow and I'll be able to write up a full post over the weekend but, if not, I'll certainly be putting up a few new trade ideas in Member Chat – just in case!  

I don't want to oversell the short case here.  We've been layering our shorts since Friday, the 4th, when I titled the morning post "The Blow Jobs Deal to the Market Could be Huge" and my comment on the release of the Jobs numbers at 8:30 (which caused a pre-market rally) was: 

I don't think these numbers are good at all and it's just more evidence that the economy is not picking up and still has significant weakness.   If suckers want to buy into these terrible numbers – let them, it's a good chance for us to add some more shorts because your entire bullish premise cannot be that the economy sucks so badly that our Uncle Ben might give us another Trillion to play with to distract us for another year.

We didn't allow ourselves to get sucked into the pre-market pump job yesterday, following through withour plan from the morning post to use a quick momentum trade (DIA) to ride out the morning move up and thank goodness we held those short positions as I really think we'd be missing them this afternoon (or Monday for that matter!). 

EEM WEEKLYAt the time we were already loaded for bear (see that Thursday's post and our Long Put List) and we only needed to add two additional disaster hedges that day in Member Chat:   

  • EDZ June $12/15 bull call spread at $1.10, selling $13 puts for $1 for net .10, now $2.35 – up 2,250%
  • EDZ July $13/17 bull call spread at $1, selling $12 puts for $1.10 for a .10 credit, now $1.70 – up 1,800%

So, when your hedges make 2,250% on a 7% drop in the S&P – they tend to provide good cover for your bottom fishing – even when you enter too early.  In fact, a non-Member asked me yesterday about how you can adjust a too-early entry on CHK at $18 and my reply was:  

A nice trick for CHK is – let's say you bought it for $18 and you are a dumb-ass who doesn't hedge or cover or enter by selling puts and now CHK is $14. You can sell the stock ($14) and sell the 2014 $10 puts for $3.30 and buy the 2014 $10/20 bull call spread for $4 and that means you are left in the $10 spread that's $4 in the money for net .70 so all CHK has to do is flatline at $14 and you make $3.30 back but you free up $13.30 in cash (using some margin for the short puts) and you get all of the upside to $20 with a max profit of $9.30 less the $4 you lost in the first place is still a respectable $5.30 if CHK gets back to $20, which is way better than you'd do with your $18 basis. 

Meanwhile, your worst case to the downside is CHK is put to you at net $10.70, which is 23% lower than it is now so – FOR FREE – you are getting 23% of additional downside protection, drastically lowering your break-even and taking 90% of your cash off the table. 

THIS is why people subscribe to Philstockworld – we teach you how to do this stuff!

Options are not scary – they help you to be flexible and give you the tremendous ability to hedge your portfolio so you can survive any sort of market turmoil.  We try to stay balanced and have trade ideas that will profit in either market direction – when you have one position that makes 2,250%, it makes up for a lot of 20% losses on the "wrong" side of the portfolio, doesn't it?

Yesterday I called for taking the money and running on our Long Put List (initiated 3/15, last full update: 4/19) and our final outs were:  

  • AXP July $52.20 puts at $1.38, now $1.20 – down 13%
  • BIDU June $115 puts at $2.10, now $2.95 – up 40%
  • CAT May $95 puts at .95, now $3.30 – up 247%
  • CMG June $375 puts at net $7.05, now $4.90 – down 30%
  • FAS July $60 puts at $2, now $3 – up 50%
  • GE Sept $19 puts at $1, now $1.30 – up 30%
  • GOOG Jun $540 puts at net $5.45, now $5 – down 8%
  • HD Aug $50 puts at net $2.50, now $3.20 – up 28%
  • IBM Jul $180 puts at net $2.05, now $1.90 – down 7% 
  • ISRG July $430 puts at net $5.20, now $4 – down 23%
  • IWM Aug $71 puts at net $2.10, now $2.45 – up 17%
  • KO Aug $70 puts at net $1.70 now .72  – down 57%
  • LVS June $55 puts at net $3.35, now $7 – up 108% 
  • MA July $370 puts at net $8, still $8 – even
  • MMM July $82.50 puts at net $1.82, now $1.90 – up 4%
  • PCLN July $620 puts at $9, now $23 – up 155%
  • QQQ July $61 puts at $1, now $1.80 – up 80% 
  • V Sept $100 puts at $2.60, now $2.55 – down 2%
  • XRT June $62 puts at net $3.05, now $3.70 – up 21%

Not too bad with 12 of 19 winners and, of course, we took advantage of exits on some like CMG, that were earnings plays but we're ignoring that.  These are not positions we WANTED to win – they were there to protect us in case there was a major market sell-off.  The fact that 7 of our 19 picks went against us is one of the reasons we DON'T think this sell-off is all that bad yet and, of course, if we do fail to hold 1,320 on the S&P and 775 on the RUT – then it's game back on for those 7 as we have cheaper entries now than we did back in March.  

I think AXP, MA and V would be my 3 favorite shorts if Europe begins to melt down but, as I said above, I think this is a blow-off bottom and it's time to buy, not sell – we'll see how things play out….

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These numbers are getting unreal… AAPL has lost $104 Bn in market cap since its peak. That more than the market cap of all companies in the US but for 21 of them!

http://www.bespokeinvest.com/thinkbig/2012/5/17/companies-bigger-than-apples-decline-in-market-cap.html

That's a lot of money!

/RB / Savi – I should post them in the morning. It's no sweat of my back…

stj—that would be great–merci

Phil – Where do you see a realistic upper range and lower range for XLF over the next 60 days? Thanks!

Interesting After Hour Trading –  Last 3 minutes had anxious TZA (RUT 3x short) sellers but not very interested DIA buyers.  (net long DIA & net long TZA).

Karl, how can you tell that about TZA / DIA?  TIA.

rob – I was buying TZA and selling DIA.

Phil
Only a few weeks ago, I bought some May QQQ 67 puts at 2 and have cashed out. You were correct about the likely pullback.
Now I see that the June QQQ 67 calls are trading at .11—that's right–    .11  So I am thinking bottomish–at least for a bit.
And the VIX is up a lot since late April.
So I will buy those 67 calls hand over fist tomorrow afternoon so long as the Facebook is not a Faceplant IPO by close of Europe tomorrow.
Otherwise, I'll be cashy and cautious.
Thanks 
Strether

stjeanluc 
Can you please post a link to the portfolio google spreadsheet?
TIA

yshenhar  – Here is the LINK to PSW Portfolios (tabs at bottom).

Karl Thanks

TOS mobile app users – do not update to version 12.1. My TOS on the iPhone crashes during load process. The mobile app is now useless!!

Looks like a big wheeeee in Asia with some indices down over 2%. Tomorrow should really be fun as Europe will play catch up and the downgrade of the Spanish banks should grease the skids. Either we grab a life saver quickly or it could turn nasty very fast.

you have to assume there is something in the works using this FB timing as a crutch i am tempted to be a buyer…its taken me months to get into the black on my shorts so i am a but equivocal about believing this is a bottom of any durabilty..someone remind me about how to post a chart and i will or st jean i can send it to you..metals look very interesting as well..oil has to be watched as if there is a whiff of QE then we go parabolic..and with JPM looking a little soiled ben may be thinking hey its g 20 week end..lets partay!!!
oh and
http://www.ft.com/intl/cms/s/0/8ef035de-a043-11e1-88e6-00144feabdc0.html#axzz1vBdiiWmo

Nicha/TOS — my iPhone app is fine, but the iPad app crashes whenever I click on a news story.  Other than that, I really like the TOS software…

BSE opened -1.3%.

Levels/Phil: 
"In the Futures we have Dow (/YM) 12,400, S&P (/ES) 1,300, Nas (/NQ) 2,500 and RUT (/TF) 750 all being tested at the same time – a failure of those levels will take catastrophic to a whole new level!"
 
Uh oh…12,361  1,295  2,494  748  Here we go?!?

Phil/PCLN + general BCS adjustments
Advice appreciated, as this current market situation appears to offer many possibilities to those who heeded the call to go to cash and keep selling premium. I have continued to sell premium throughout the first 5 months, so my cash position has increased month by month, and I also have a broad range of long BCS – which now find themselves far out of the money due to the drop in the underlying.
But first to PCLN. Background on positions here: but to summarize, the long term position is PCLN 2014 750/800 BCS, against which I have sold 2X Jul 780 Calls. The only concern on this position was that if PCLN were to drop significantly, then I am selling calls against a far OTM spread. Is the antidote to this to roll the 2014 650/700 BCS and pay the 4.70 premium, and then financing it with further short term call selling. Or is there a more preferred adjustment?
 
Similar dilemmas in:
GS Jan 13 115/130 BCS can be rolled to Jan 13 100/115 BCS for 2.73
AAPL Jan 113 600/700 BCS can be rolled to Jan 13 525/625 BCS for 14.41
 
It is interesting to note (at first disquieting, but I moved on from that mood) while the YTD returns of my portfolio have crumbled in the last two weeks – the cash position has increased as I continue to sell premium. My thinking was that as long as I adjust on a regular basis to be closer to ATM spreads, at some point the market will turn. Yes, I will be buying premium, but as long as I can find premium sales to provide a zero cost offset – what do I have to lose?
 
I am sure many other members must be in the same situation – so I could have a common issue.
 
Fortunately I did start to layer on EDZ and TZA hedges as well as short term short calls on SPY, so they should provide further cash to fund the rolling strategy. Of course, I have the other problem with the hedges, for the longer term (EDZ Jan 13, 10/20 BCS have moved up fast, so nearly completely in the money but the short calls are holding their premium.

Facebook Faceplant Friday?
 
Highly doubtful! 
 
There are 11 lead investment banks and at least another 20 investment banks (see list) that will get a piece of the action of the Facebook IPO.
 
How would they look if the IPO is a failure?

Some big losses in Asia – Japan down about 3%, Korea down the same, HK down about 2%. Europe just opened and it is a see of red…. Stop, we want to get out now! Considering, futures here don’t look so bad at the moment.

For what it's worth – those who were asking what Andy Zaky is saying about AAPL – as StJ pointed out, the $537 level that AAPL breached yesterday is the 38.2 Fibonacci retracement of the recent rally, and Zaky says that was expected cause it happens after 90% of all of AAPL's rallies…and in 70% of  AAPL rallies, it undergoes a 50% retracement, which would take it all the way down to $503.  From here, he expects it to rally massively, which would follow the patterns of recent AAPL history and that is why he issued a BUY signal yesterday…plus many other signals such as RSI, MacLelean oscillator, etc also pointing to the same thing not only for AAPL but for the Nas and S&P.  He sent an article to SA but they refused to publish cause they said his "oversold thesis does not jive with a buy recommendation."  IMHO, Zaky has a good enough record on AAPL to follow what he is saying for intermediate and long term buys, but his short term (day to week) prognostications are not so good…Lflan's and Phil's much better…(not sure how much of his research I'm allowed to publish but since his list is anyway closed to new members and he wanted to post this on SA so I'm assuming this much is okay…)

China’s Car Dealerships Struggle as Stockpiles Increase

 
"China’s total vehicle sales declined 1.3 percent in the January-to-April period, the worst showing since 1998 when deliveries fell 1.6 percent, according to data compiled by the China Association of Automobile Manufacturers, as slowing economic growth and rising fuel prices dented consumer demand


The monthly NDRC survey of 36 major Chinese cities showed average car prices fell 1.9 percent in April from a year earlier, a fourth straight decline this year."
 
Well, at least they don't have to worry about inflation now.

Super low volume in the oil market this morning.  Up to 93.25 and back down to 93. 

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