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Saturday, November 26, 2022


Wednesday – Rumors of QE Gather Steam

SPY DAILYWheeee – isn't this a fun ride?

I warned the bears on Friday that the drop was a bear trap and we told you Monday was "Time to Buy" as CNBC chased the last of the sheeple out of their bullish positions so all their fund buddies (and us) could scoop up shares at super-low prices.   Yesterday we targeted 1,284 on the S&P and we were off by a point as it rose to 1,285 at the end of the day – can't win them all, I guess

In Friday's post I mentioned that the ABX 2014 $30/45 bull call spread at $6.60, selling the 2014 $30 puts for $3.40 for net $3.20 that we had picked up on 5/3 was only at $3.40 and still made a nice entry – ABX has been having a lovely week and popped from $39 to $42 and the spread is now $4.70 – up a lovely 38% in three days but should be well on the way to $45 today and the max gain on that spread is cashing the spread at the full $15 and a $11.80 profit for a 368% gain on cash so being up 38% in 3 days is what we call at PSW being "on track."  

The other two trade ideas I singled out as still liking from Friday's post were both CHK plays and the 3 CHK 2014 $25/35 bull call spreads, selling a single 2014 $18 put netted out at a $1.20 credit on Friday morning but did even better as an entry on Friday as CHK fell all the way back to $15.60.  Yesterday they were back to $17 (on the way to $18, I imagine) and the spread is already netting another $1.95 for a very quick 262% gain on cash, which is why we love those!  

TLT WEEKLYI called for a short on TLT in the $130s and they topped out right at $130.36 at Friday's close, tested it again on Monday and fell back to $127.60 yesterday while our long point on XLF was $13.50 and, so far, not much excitement there.  Those were just the trade ideas from the morning post, of course – our real fun came in Member Chat where our aggressive bullish trade ideas during the panic Friday and Monday were:  

  • TQQQ July $43/47 bull call spread at $2, selling BA Jan $50 puts for $1.90 for net .10, now .46 – up 360%
  • XLF Jan $12/14 bull call spread at $1.20, selling $11 puts for .55 for net .65, now, .51 – down 21%
  • TNA June $41/47 bull call spread at $3, now $3.40 – up 13%
  • AAPL June $590 calls at $3, out at $4.25 (day trade) – up 41%
  • AAPL June $590 calls at $2.50, out at $4.25 (day trade) – up 70%
  • FAS July $65/66 bull call spread at .65, still .65 – even 
  • QQQ weekly $62 puts sold for $2.05, now $1.05 – up 48%
  • FAS June $69/74 bull call spread at $2, now $2.85 – up 42%

We also added our first 5 bullish trades to our Income Portfolio during Monday's (and another 5 yesterday gives us a great start to our first month) because, as I often say to our Members – if you're not going to take bullish positions when the market is low – when are you going to buy?  We are, of course well hedged and we had hedges ready to spring if we failed our technicals, which we post almost every day in our morning Alerts.  I summarized our top 5 bear hedges in Friday's Member Chat at 10:06, as we rode out the panic dip but my comment on them was:   

I am NOT in favor of chasing this crap around.  I like having a hedge or two and using that as a safety net for making a few bullish bets off our TWIL List or like the FAS play above, which is more aggressive since it's time-sensitive.  The conservative play is CASH – there is nothing wrong with CASH.

Have I mentioned how nice CASH is lately?  

That is why we will take a few non-greedy exits into this morning's pop while we move to fresh horses (longer-term bullish trade ideas that have yet to produce big wins, like the XLF Jan spread above) and, of course, we not only have more attractive entry points on our potential hedges but NOW WE HAVE PROFITS THAT ARE WORTH HEDGING!  See how that works?  This is not rocket science people – it just takes a little practice to get used to the rhythms of the market.  

CASH is still KING as all we have are rumors driving the markets and RUMORS will not do the trick this time – we need concrete action from the EU/ECB/IMF or down we go again.  The ECB met this morning and left rates steady at 1% and that's a bit disappointing but we're waiting on Draghi's press conference, where we expect him to at least extend some LTRO funding, time-wise.  

The big decisions come at next week's G20 meeting as the ESM takes shape next month, which significantly makes it possible for the ECB to bail out banks – rather than them having to go through their sovereign nations – who are generally broke.  

Oh sure, you can quibble that the ECB is broke too and simply printing money it doesn't have but isn't that what the fiat currency system is all about?  On the whole, we're just biding our time, waiting for hyper-inflation to kick in and we're getting our first positive signs of it in the US as Q1 Productivity dropped 0.9% while Unit Labor Costs rose 1.3% – indicating our Corporate Masters have finally squeezed the last drop of free labor out of the population and will now have to actually hire people or purchase more efficient equipment (both good for the economy) in order to produce more goods.  

Of course we need demand not to fall off a cliff or we end up with deflation instead of inflation (see Japan) so maybe it is time for Captain Ben to crank up the old helicopters and toss us another $500Bn before the economy goes back into reverse.  

As you can see from the chart on the right – giving money to the Commercial Banks has been lots of fun but now it's time to do something for the Public to stimulate demand and that's likely to come in the form of some sort of housing/mortgage assistance.  

Atlanta Fed President Lockhart (a moderate on the FOMC) tilted dovish this morning, telling a Ft. Lauderdale audience it's his "sense that material risks to the economic outlook are gathering … I am confident that the committee retains the capacity to act and the tools to promote stability."  

We have more Fed speak today from Tarullo at 10, Lockhart again at 2:15 (after the Beige Book at 2), Williams at 3:30 and Yellen at 7 – who is generally used to float trial balloons for Bernanke.  Big Ben speaks at 10am tomorrow, Lockhart yet again at 11, Kocherlakota at 1:15 and Fisher at 3:30 so, if you think you are confused by the Fed's positions now – just wait until you see how mixed up you are by tomorrow!  

Europe is just as clueless and the Dollar popped back to 83 as Draghi said nothing useful at his press conference but, as I said yesterday – we have "bad news fatigue" and the markets are tired of going down at this point and will tend to drift back up to test some overhead resistance in absence of actually NEW bad news between now and the G20, who MUST act if we want to hold these market levels and must act boldly if we want to make any actual progress this summer.   

As Draghi said this morning:  "Monetary policy can't fill the lack of action by European politicians."




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ISM full report


Lastly, combining the ISM Manufacturing and Non Manufacturing Indices and weighting them for their overall weight in the US economy (last line) shows that the pace of economic activity in May was the same as in April (53.7).  Therefore, according to the ISM reports, while economic activity in the US did not accelerate during the month of May, it did not slow either. 

I guess we should feel lucky as comparable numbers in Europe are in the 40's!

Another Ray Bradbury quote:

I don’t believe in being serious about anything. I think life is too serious to be taken seriously.

Good stuff…

Martin Wolf at the FT is not optimistic:



How much pain can the countries under stress endure? Nobody knows. What would happen if a country left the eurozone? Nobody knows. Might even Germany consider exit? Nobody knows. What is the long-run strategy for exit from the crises? Nobody knows. Given such uncertainty, panic is, alas, rational. A fiat currency backed by heterogeneous sovereigns is irremediably fragile.

Before now, I had never really understood how the 1930s could happen. Now I do. All one needs are fragile economies, a rigid monetary regime, intense debate over what must be done, widespread belief that suffering is good, myopic politicians, an inability to co-operate and failure to stay ahead of events. Perhaps the panic will vanish. But investors who are buying bonds at current rates are indicating a deep aversion to the downside risks. Policy makers must eliminate this panic, not stoke it.

In the eurozone, they are failing to do so. If those with good credit refuse to support those under pressure, when the latter cannot save themselves, the system will surely perish. Nobody knows what damage this would do to the world economy. But who wants to find out?

Emphasis mine!

Phil / TNA – On Monday you put out the TNA BCS 41/47.  As I mentioned I work during market hours so on Tuesday morning on my way out the door (premarket) I put in an advanced TOS '1st trigger sequence' order to fill the BCS.  I can control the entry using this method vs. the vertical entry that TOS allows for the BCS.  I filled the June 41 long call but never filled the 47 short call.  I let that ride into today.  OMG ..TNA popped 7.5%!… the 3.60 entry is almost a double!  Tomorrow will be a OCO bracket to get out of TNA before Ben speaks.  I should be able to preserve 85% – 100% on the trade.  This makes up for some losses on DIA calls that I was early on in by cash (aggressive) account.  For the income portfolio plays in my IRA's, doing very well… I do like collecting premium!  Well done and thanks!

Yelling is yelling more QE!!!

I meant Yellen 😉

Jon Corzine is ?the smartest guy I know in terms of the economy,? Vice President Joe Biden said not so long ago. President Obama praised Corzine as a key architect of the ?national recovery plan? he implemented after taking office back in 2009.
Read more: http://www.foxnews.com/opinion/2012/06/06/jon-corzine-clueless-or-crook/#ixzz1x4p5aeYEhttp://www.foxnews.com/opinion/2012/06/06/jon-corzine-clueless-or-crook/

Burr — that looks pretty good. That is pretty much the classic p&l curve for that kind of trade, and you can see the weakness with it. If the market trends up slow and steady (with a likely drop in IV) you may end up down on the trade. That happened at the beginning of the year and my trades did not do very well. If you think that is likely you can set the trade up more conservatively on the call side (sell a few less, or do a 10 point spread instead of 20). It brings in less credit, but that's OK if your primary goal is as an insurance play to the downside. The trade seems to work better if you do the put and the call side, like an iron condor. One variant I have wanted to test out but never gotten around to really testing is doing a front ratio on the call side and a back ratio on the put side. That would benefit from falling vols on the call side and rising vols on the put side. Peter — any thoughts on that style? Have you ever tried that?
Anyway, look at that p&l if the market crashes and the vols spike up. One trade like that and I'd be happy for the year!  

Yup, that's the type of P/L profile for the trades.  I too got the terminology mixed up.  What we do is a Put Back Spread:

That is there are more long puts at lower strikes than short puts.  Since there are more longs than shorts, increased volatility is good for the spreads, provided that the short strike is not overrun, which is a real weakness with the Put Back Spread.  We can see the huge spike of loss at the short strike at expiration, so we need to pick conservative strikes and make adjustments if the short strike is in any danger.
kurt, please give example of your "front ratio on the call side and a back ratio on the put side" as I may get the shorts and longs mixed up!  My thought is that having more long puts than short puts are always helpful in a crash, so a strategy that follows this rule of thumb is good.

Very cool, thank you for your help!
Let's start the $500k portfolio tomorrow (with Portfolio Margin of course).  It's a bad time to start, compared to last Friday, but as with any income portfolios, we need to get the income no matter where the market is, right?  I'm going to be in a bunch of meetings tomorrow morning, so my post will be later in the day.  If I don't get to post, here is how we get the $5k (1%) for the next month:
– Sell 20 RUT July 610 Put at $1.825, Buy 20 RUT July 580 Put at $0.90, netting $0.92, $1,840.  Initial Margin is $8,100 with PM, going up to $60,000 max.
– Sell 20 RUT July 860 Call at $0.975, Buy 20 RUT July 880 Call at $0.425, netting $0.55, $1,100.  The combine RUT spreads initial margin is $15,000, going to $60,000 max.
That's $2,940 for just over 6 weeks.  Now let's add SPX short strangle with a Put vertical, i.e. a "crazy play" (All July expiration):
+7 SPX 1265 Put/-7 SPX 1260 Put/-7 SPX 1125 Put/- 7 SPX 1430 Call for a net $3.85 credit, $2,695 without commissions.  The value for stjeanluc's spreadsheet are $20.75/19.55/3.95/1.125.  Initial margin is $17,000, increasing to $81k if SPX drops to 1,120, or $123k if SPX jumps to 1,512.  We've used up $31,000 initial margin for RUT and SPX, and the margin may go up to $140,000 if the market drops 15%. 
The SPX short strangle are "naked" without downside protection for illustrative purpose.  The total credit for SPX and RUT is $5,635.  If the SPX put vertical is ITM at expiration, we'll get 700 x 5 = $3,500 extra, making it $9,135 maximum profit.  Most of the shorts would go down to near zero quickly if they are still that far OTM in a few weeks.
BTW, these short strangles and Back Spreads can take a while to fill, so the paper portfolio will often have better numbers than actual fills.  And if you follow this portfolio, please select different strikes, as we won't get fill if we all use the same strikes!
Now we just sit back and see the trees grow, hopefully!  This is easy 90% of the time.  The 10% of the time when the market crashes or jumps that we need to make adjustments. Like barf said, we are expecting those difficult situations to come and will use our $360,000 remaining margin to make adjustments.  Note that we'll see paper loss if the market drops or jumps more than 5% within a week.  But the Theta decay is our friend and it would be able to bring the profit back as time goes by.

PeterD:  I think everyone is excited to see the master at work with this virtual portfolio!  Your effort is much appreciated!

China’s Easing Grip on Gas Opening Door to North America Exports

"Chinese consumers may buy natural gas at more than five times current U.S. futures prices as the government eases control over domestic costs, opening the world’s biggest energy market to more overseas sellers."

At least 30 vessels of unsold coal cargoes float off China's coast

'"The situation is really very bad and is getting worse," one industry source said.

A source from South Korea said he is surprised about the number of vessels that cannot discharge coal in various ports in China, saying he was previously aware that there were only 12 such vessels lying in wait.

Chinese traders who bought and already paid for the coal from the international shippers and producers are now desperately trying to re-sell the cargoes to Chinese end-users or to other north Asian coal buyers whose company does not require a tender process before it can buy coal cargoes, the industry source said.'

Ok, now it kind of feels like beating a dead horse…
Another Railway Official Held For Graft Inquiry

"The general manager of the contractor that built most of the country's high-speed network detained by police"

Peter- great job. Thanks. Should be fun.

Stranger / Phil – That was Heinlein… but these guys were close! And it was a great book! One of my favorites as well!

Good am Phil. Well Sensei, I put my time in and have been reading alot.  Was finally ready to pull trigger in Income Port on Monday and unfortuantely found out Scottrade does not allow put selling UGH.  It took till today to set up and fund my account and now everything you recommended (congratulations on awesome calls) is half off.  And that's not the kind od sale a girl wants!  I know your mantra is tomorrow is another day.  So do I stay in cash?  Thanks J

There is no significant reason for a $30 put spread versus $20 call spread.  Basically, the short Put strike is 20% out of the money and the market is unlikely to get that low next month, so a $30 spread is comfortable, saving some commission costs (with less number of contracts).  On the call side, the premium curve is steep, and they are closer to the money, so a $20 gives a bit more upside protection.  Yeah, upside hedge sounds strange, but it can be helpful on a surge.

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