Wheeeeeee – isn't this fun?
We're certainly having a good time and, if you've been following our posts and getting our trade ideas – you probably are too as yesterday's DXD trade idea, for example, made 100% in a day for the 2nd time this week!
Now let's say you put just 2% of your portfolio into a hedge like that against a worry that we'd have a 5% drop. Well, on Tuesday we collected 100% of that 2% on a 2.5% drop and yesterday we collected another 100% of 2% on another 2.5% drop – there's 4% back and we never even fell 5%. This is how you hedge and hedging is what we teach you to do at PSW (sorry, Memberships now full, try the wait list for next month).
Of course, if you find yourself on the wrong side of the market, the Futures also make excellent hedges and it just so happens that we teach that as well! We did a Futures Webinar just this Wednesday and you can watch us make money live on the replay.
Those are the hedging strategies that led us to call for shorts yesterday (right in the morning post) at 1,100 on /TF (Russell Futures), 4,040 on /NQ (Nasdaq Futures), 1,965 on /ES (S&P Futures) and 16,900 on /YM (Dow Futures). Aside from the Alert we sent to our Members, we also Tweeted out and Facebooked? the trade ideas – THAT'S HOW SURE WE WERE! If you followed those, we closed the day at:
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- Dow (/YM) 16,550: down 350 points at $5 per point – Gain of $1,750 per contract
- S&P (/ES) 1,918: down 47 ponts at $50 per point – Gain of $2,350 per contract
- Nasdaq (/NQ) 3,950: down 90 points at $20 per point – Gain of $1,800 per contract
- Russell (/TF) 1,060: down 40 points at $100 per point – Gain of $4,000 per contract
The margin requirements for the Futures trades are roughly $4,000 per contract so we're talking net gains of roughly 50-100% IN A SINGLE DAY on our hedges. It's a very simple process – we send out an alert pre-market and we have a Live Member Chat Room where we discuss these and other trade all day long as the market progresses – this allows us to adapt to changing market conditions very quickly.
There are not the vague, empty promises you get from other Newsletter services – this is our LIVE performance! We gave you the trade idea yesterday, for free – no credit card, no firewall, no nothing – and now we're discussing the results. Usually we don't give out free trades in October but, this being a crisis and all – we felt it was a valuable public service (plus it sold a lot of new Memberships to people who realized these are JUST the free ideas!).
Of course, our whole Short-Term Portfolio is a hedge for our 2 Long-Term Portfolios, so we are very happy campers as we closed the day up 63%. Of course our Income Portfolio and Long-Term Portfolio (one is Conservative and one is Aggressive) both lost some money, but, as we discussed extensively in Member Chat this morning (very good discussion on Portfolio Management Techniques as well as Crash Management, Following the Crowd and Valuation Studies in a Down Market), we are more than happy to use the short-term cash gains to add to our long-term positions.
And what do we do when we add more long-term positions? We buy more short-term hedges! See how easy this concept is? At the moment though, we're playing for a bounce but we're not expecting too much as those 200 dmas are starting to act like magnets for our indexes.
That's fine, as this is the 5-10% correction we had been waiting for. In fact, just over a week ago, in our Live Member Chat room at 9:41am – I said:
Dow 17,350 to 16,800 is 550 = 3.17%. That could be 2.5% with a 0.5% overshoot or it could be (since we finished at the low) a fairly good indicator that we'll be completing the 5% drop to 16,500.
As you can see from Dave Fry's Dow chart, that was a pretty good call, as were our EWJ Oct $12 puts at 0.20 (from last Tuesday's post) that are now 0.85 – up 350% in 10 days – yet another nice hedge that was given away for free. We really don't mind giving away free trade ideas because – unlike other market newsletters – we have hundreds of them.
In that same post we called gold (/YG) long at 1,200 (now $1,221 and up $750 per contract) and silver long at $17.15 (now $17.30 and up $750 per contract too) and GDX has now completed the down pattern we were following that day so we'll be pulling the trigger on some miners back in our Live Member Chat Room today and next week.
Yesterday we flipped long into the close with a very aggressive TNA bull call spread into next week's expiration. It was the October $58/60.50 bull call spread, which filled at 0.95 and finished a bit lower with TNA at $57.50 into the close but we needed a long for our Short-Term Portfolio, as well as our $25,000 Portfolio.
This morning, in Member Chat, we went long on /TF (Russell Futures) at 1,057 – just in case the Fed speak isn't as bearish as we thought it would be. We're not enthusiastic about it and we do expect to complete our down move to 16,500, etc but we're already very bearish, so we like to have a little balance. So far so good at 1,062 but we'll stop out at 1,060 if it fails with a 2-point trailing stop ($100 per point, per contract).
No matter which way today goes, we intend to keep a bearish stance into the weekend. In fact, like Wednesday, when we shorted the open – the higher the market goes today the more we'll see it as a chance to beef up our shorts. Still, I think it's more likely the relentless Fed hawks will give us the nice, blow-off bottom we've been waiting for – and then we can hit the Buy List!
Have a great weekend,
– Phil
From Bloomberg, Oct 11, 2014, 1:33:35 PM
Tarullo speaks with Tim Adams, president of the Institute of International Finance, at the IIF’s annual membership meeting in Washington. (Video is courtesy of IIF. Source: Bloomberg)
Two Federal Reserve officials warned
of risks to the world economy amid global financial cross
currents, as the Fed reviews raising interest rates while the
euro area and Japan concentrate on boosting stimulus.
To read the entire article, go to http://bloom.bg/1o5gypV
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 10, 2014, 11:03:28 AM
U.S. housing affordability has taken a big hit in the past year after soaring amid the financial crisis, when interest rates fell and prices collapsed. Declining affordability, lately the result of rebounding prices, often means fewer home sales and pressure on prices.
To read the entire article, go to http://bv.ms/1skThjk
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
http://www.bloomberg.com/news/2014-10-12/fed-officials-may-slow-tightening-if-world-growth-disappoints.html Um, so, mild correction next week followed by frantic large cap buying? Investing is even more about fed-watching than fundamentals these days, it would seem.
From Bloomberg, Oct 12, 2014, 7:18:17 PM
U.S. index futures (DJA) fell with
Australian stocks, signaling the rout in equities may be
extended after Federal Reserve officials said the global
slowdown could delay interest-rate increases. The yen climbed
with gold and Treasury futures, while crude oil slid.
To read the entire article, go to http://bloom.bg/1yrf0JZ
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 12, 2014, 7:20:13 PM
Australian stocks fell, extending a
decline in global equities, after Federal Reserve officials said
a slowdown in global economic growth may delay the start of U.S.
interest-rate increases.
To read the entire article, go to http://bloom.bg/1rpkqfU
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 12, 2014, 12:00:01 PM
Rating companies say the risk of
defaults in China has risen as Premier Li Keqiang pares implicit
guarantees for local-government financing vehicles.
To read the entire article, go to http://bloom.bg/1rplrEH
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 12, 2014, 4:21:37 PM
Police confronted protesters in St.
Louis early today after demonstrators staged a sit-in at a
gasoline station, fueling tensions after a day of peaceful
rallies.
To read the entire article, go to http://bloom.bg/119hzCG
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 12, 2014, 7:08:13 PM
Hong Kong police began removing some
barricades erected by pro-democracy protesters in the Central
business district as the demonstrations enter their third week.
To read the entire article, go to http://bloom.bg/1vZcGWg
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 12, 2014, 12:00:00 PM
Hong Kong’s commuters are sharing
crowded subway cars with some rarefied company these days: movie
stars.
To read the entire article, go to http://bloom.bg/1tme0pk
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
From Bloomberg, Oct 12, 2014, 12:07:01 PM
Dutch police arrested four drivers
in Amsterdam early Sunday after they were found to be improperly
using the Uber app for taxi services, posing another challenge
to Uber Technologies Inc.’s efforts to expand in Europe.
To read the entire article, go to http://bloom.bg/1tlRn49
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From Bloomberg, Oct 12, 2014, 7:11:37 PM
Investors have had enough of Europe.
To read the entire article, go to http://bloom.bg/1rplgJt
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
Futures down a lot already. /TF down almost 1%. /ES down 0.6%.
Pretty good synopsis of where we stand.
http://finance.yahoo.com/tumblr/blog-is-that-all-there-is-musings-on-a-temperamental-old-224212115.html
From Bloomberg, Oct 12, 2014, 8:21:45 PM
U.S. index futures slipped,
signaling more equity declines following a three-week selloff
that last week sent stocks to the lowest level since May.
To read the entire article, go to http://bloom.bg/1rpgDPD
Sent from the Bloomberg iPad application. Download the free application at http://itunes.apple.com/us/app/bloomberg-for-ipad/id364304764?mt=8
DPS an impressive rise from Oct 13 43 to today 64 looks like we all drinking cool aid. Even KO same time only from 37 to 44 !!!!! sorry no FACES
/CL 84.54 and I do not see any major price drop in gasoline here in Germany. Diesel 1.30€ per liter only in Spain my friend reports 1.08€ and France 1.10€ Looks like we pay for the rest of Europe!!!
I guess you guys do not know how cheap you buy the black gold in the US 1.30 x 3.8 = 4.94 € 3.89 $ / gal.
Gasoline by the way 1.60€ x 3.8 = 6.09 € / gal. or 4.79 $. So you will understand that I use my bike to move around.
Good morning!
Futures were down over 0.5% at the open last night but back above even now – that's an improvement.
Allocations/Jet – Check out the article on Scaling In and Out of Positions in the Strategy Section as well as the comments (there are lots). If you have a $10,000 allocation, that means your initial entry block on a position is $2,500 so you can't afford to play RIG at $40 because 100 shares is $4,000 and you can't enter with a 1/4 position below $2,500 – very simple. If you start out with 5 contracts, 500 shares at $40 is $20,000 – you are double your total allocation before you did anything, so OF COURSE you get into trouble.
Now, I like RIG a lot, but it's at $28 and you are in for net $31, so down about $3,000 on 10 contracts. That's only 30% of a single allocation block and, if you don't actually intend to make RIG one of your most significant long-term holdings – I'd strongly suggest you lighten up. 2017 puts should be out soon, you can roll your 10 2016 $35 puts to 5 2017 $35 puts for maybe a couple of thousand out of pocket but you'd still have the $4,000 you initially collected so net $2,000(ish) credit on 5 short $35s isn't too terrible – but you are in no positions to adjust it as it's way too big for you so think long and hard before making even that commitment.
Let's say, instead, you bought something you could afford, like F. F is $13.79 and you can sell the 2016 $13 puts for $1.43. If your allocation block is $10,000, then you are happy to own $2,500 worth of F and selling 2 of the 2016 $13 puts for $286 is a good way to start. If you have $100,000 with $200,000 worth of buying power and do just 10 trades like that each quarter – EVEN IF NONE OF THE STOCKS GET CHEAPER AND LEAD TO A 2nd ROUND ENTRY – you still collect $2,860 per quarter or $11,440 per year by JUST SELLING PUTS. That's an 11.4% return on your $100K with minimal risk.
If F drops to $7.32 (the current price of CLF), then you would be obligated to buy 200 shares at net $11.57 but you could then roll (using current CLF prices) the 2 short 2015 $13 puts ($6.15 = $1,230) to 4 of the 2017 $8 puts ($4.30 = $1,720) and drop another $490 in your pocket and then your obligation is to buy 400 shares at net $6.06 (=$2,424). That's still just a 1/4 allocation and, over 3 years, you collected $776 on your unused $10,000 allocation block – even on a terrible trade.
If you really liked F at $7.32, you could allow the first 200 to be assigned for $2,314 and then sell the 2017 (again using CLF) $8 calls for $2.35 and the $8 puts for $4.30 and that drops $1,330 in your pocket (another 13.3%) and STILL you are not even using 1/2 of your allocation block.
THAT is how you allocate positions. You may scoff at starting out making 10% a year but the trick is, as Buffett admonishes – DON'T LOSE MONEY. In 6 years at 10% (and this is the bad luck route we're looking at), you'll have $200,000 and 10% will be $20,000 more a year and 6 years later you'll have $400,000 and 10% will be $40,000 a year and 6 years after that $800,000 and now, 24 years later, you are making each year about as much as you started with.
What's wrong with that for a conservative strategy?
Big Chart – So ugly it's hard to imagine us bouncing without more pain.
I like those Rolling Stone stats, StJ!
Bull spreads/Nram – You have to manage your time very carefully but it's a valid strategy (as long as you are EXTREMELY selective about what you play it on). I prefer to keep things simple as I have a lot of things to look at and, as you've seen, I have enough trouble keeping my 2016s and 2017s straight without adding a ton of additional factors on each trade. In your example, if USO goes against you and wipes out your $32 put, the 2016 put would still have value. You would low your $1.90 by Jan but the delta on the 2016 $30 put is 0.35 and USO is at $32 now so it would have to be at $34 just to knock 0.70 off the short call while your put is worthless at anything over $32. Also, the time decay on 458 days when your 95 days has passed is maybe 22% of the long premium, so figure 0.50 the best so, the puts you sell will maintain $1.75 of their value while you will lose $1.90 of your value over the same period so, if USO flatlines or goes up, your net 0.27 credit turns into a $1.50ish loss. What exactly were you trying to accomplish??? Hopefully this gives you an idea of why I don't bother…
EZCH/Yodi – They are at the bottom of the channel and your net $3 is now net $2. If the market holds up, I'd rather roll the $2.42 calls ($20s?) out to the April $19/24 bull call spread at $2 so your drop your net to $2.50 on the $4 spread that's $2 in the money – if you still believe in them. I wouldn't sell puts unless they drop further, maybe the $17s for $1.50+.
Stock World Weekly/Burr – Thanks, that's the last straw for me, we're pulling the plug on that thing.
Time for me to work – please reask anything I missed in new chat.