Wheeeeeeeee!
We love a good market sell-off – especially when WE TOLD YOU SO and we placed our bets accordingly. I hope that you were able to do the same as our CASH!!! looks pretty good right now while our Short-Term Portfolio, which was up 123.9% at Friday's close (see our weekend Portfolio Review), closed yesterday at 129.5% – up $5,583 in 3 days!
The cool thing is, as you can see, that we are almost entirely in CASH!!! and using very little of our margin, which keeps us flexible in these crazy markets. If the market heads lower (and it's already off this morning in the Futures), our profits will accelerate as we added 50 SDS June $20 calls at $1.05. As I had said to you in Friday's morning post, we were looking to short the S&P or the Dow on the BS morning pop – and we did.
Ultra ETF hedges are a great way to take advantage of a short-term drop in the markets, they give you excellent bang for the buck because SDS, for example, is a 2x ETF that tracks the S&P, so a 5% drop in the S&P is a 10% pop in SDS.
As I noted above, on Friday, with the S&P at 2,105 we pulled the trigger on 50 of the SDS June $20s for $1.05, costing us $5,250. Since we are mainly in cash in our Member Portfolios, this was more of a bet than a hedge (and we already have long-term hedges that are less aggressive). So far, the bet has paid off and the June $20 calls finished yesterday at $1.30 – up a quick $1,250 (23.8%) so far.
Of course, now comes the fun part though as we're mostly in the money with the S&P at 2,080 (down 1.2% from our entry) and that means our Delta on the option is increasing (now 0.93) so we gain almost a full $1 (95%) for each 2.5% lower the S&P falls (if it does).
Think of that in terms of a hedge. If you have a $100,000 bullish portfolio and you want to protect yourself against an S&P drop of 10% and you are well correlated (a different educational post if you want to learn how to do that) and you expect to lose $10,000, then we KNOW SDS will gain 20% on a 10% S&P drop. Since 20% of SDS takes us from Friday's 20.50 to $24.60, we KNOW the June $20 calls will be $4.60 on a 10% S&P drop.
Since we know that, we can then calculate how many $20 calls we need to pay us $10,000 – and that would be 22 (100 contracts per unit) for $1.05 or $2,310 would be the cost of insuring $100,000 against a $10,000 loss between now and June. As I mentioned above, our SDS play wasn't a hedge, it was a bet – because we were fairly sure we'd be getting a drop (and we're only looking for 5%). If we're right, and SDS hits just $22 – we'll get back at least $10,000 for a $4,750 profit (90%) in less than a month.
Learning how to make money in down markets WITHOUT having to run in and out of your main positions (generating nothing but fees for your broker) is the key to becoming a successful long-term investor.
We also employ hedging on our long-term positions and our Long-Term Portfolio, which is also mainly in cash, has only lost $100 since Friday. That's why our Short-Term Portfolio play on SDS was a bet and not a hedge – the LTP doesn't need protecting as it's very well-hedged internally. Balance is the key to our trading style:
Better learn balance. Balance is key. Balance good, trading good. Everything good. Balance bad, better pack up, go home. Understand? – Miyagi (sort of)
Also key to this hedging strategy is that we also KNOW that, if the S&P does not fall, our long-term positions will make us more than 2% ($2,000) between now and June to cover the money we spend on the hedge. That's because our key strategy is SELLING premium to other options traders that we KNOW is going to expire worthless as time goes on. The only direction that worries us is down – and that's what we're hedging against.
Another great way to profit from quick market moves is trading the Futures. For some reason, Futures trading has a very bad reputation and most investors are terrified of it but, if you learn how to trade properly and manage your cash properly – Futures can be an extremely valuable tool in your investing arsenal.
For example, yesterday morning I told you that the oil demand was FAKE and that we would be shorting /CL (Oil Futures) at the $62 mark. Not only that, but I told you:
…we jumped in short again on /CL (Oil Futures) at $62 and already caught our first $500 gain, down to $61.50 – looking for a reload as we head into the inventory report at 10:30. Hopefully, we'll get another nice intra-day spike to short into (we also can go long at $61.50 while we wait).
As you can see, everything proceeded as I had foreseen and we got a great spike over $62 right on the inventory report (what we call a "head fake") before oil took a nice dive for us – all the way down to $60.50. When oil spiked up at 10:33, I said to our Members in our Live Chat Room:
Still, the move was anticipated so I'm adding shorts on /CL at $62.50 to avg $62.25 on 10 and, of course, I'm out (of the additional shorts) as soon as possible since we didn't get the disappointing build we had hoped for.
Since I posted the trade in the morning post, I wanted to make sure our free readers were updated, so I tweeted this at 10:38.
That was the key to why oil spiked and then dropped, the headline number in the EIA report showed a small net draw in oil but, when you looked at the actual details of the report (as, sadly, few traders do), it was obvious that the draw was caused by a deliberate cut-off of import supply. Unfortunately, this is very easy to do as all Goldman Sachs (GS) or JP Morgan (JPM) allegedly have to do is park a few oil tankers offshore long enough not to be counted in the inventory and they make a small fortune on their long oil positions from people who only read the headlines of an inventory report.
We LOVE trading the Futures because we can get in and out of positions quickly, with very low friction costs – and that let's us take advantage of moves in either direction and, on mornings like this, when the markets have sold off and hit some of our support levels, like 2,060 on /ES (S&P Futures) and 1,210 on /TF (Russell Futures), we can go long to protect our short option positions, which we won't be able to trade for another hour or so.
BALANCE is what it's all about – it makes us much happier traders because we take the time to learn these skills – don't be afraid of them.
