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Faltering Friday – Will Oil Drag the Markets Down in August?

Will the last short seller please turn out the lights?

According to S3 Analytics, Bets against the SPDR S&P 500 (SPY), the largest ETF tracking the broad index, fell to $38.9Bn last week, the lowest level of short interest since May, 2013.  The same thing is going on in hedge funds as we're well below 2013 levels in short funds – people have simply given up on the idea that this market is going to go down – and that's probably the best time to short it!  

In our Portfolio Reviews this week, we have been pressing our hedges by using about 1/4 of the money we have made on our longs, simply trying to lock in our gains as we certainly don't expect the market to make 4-7% every month – that would be silly, right?  These days, you have to wonder as the S&P is up 25% from the mid-point (not the lows) of 2015 and early 2016 (2,000) yet, as I noted in yesterday's Live Trading Webinar (Members Only, but you can see the replay here) the earnings of the components of the S&P are not matching those gains at all:

Apple (AAPL) is the top component of the S&P.  With an almost $800Bn market cap, it makes up 3.7% of the index.  In 2015 they had $233Bn in sales and made $53Bn, last year they had $215Bn in sales and made $45Bn and this year they are looking for $220Bn in sales and $46Bn in profit yet AAPL is trading 60 points higher (66.6%) than it was at the beginning of last year (after 2015 earnings were reported).  What has AAPL actually done to justify a 66% gain?  Mostly, it was drastically undervalued but, other than that – it has added no profits to the overall S&P.  In fact, it has subtracted them!  

AAPL is also the largest Dow component and $1 in share price is 8.5 Dow points (yes, it's an idiotic system).  So AAPL alone is responsible for 510 points (12.5%) out of the Dow's 4,100 point run from 17,500 (23%).  Now I love AAPL, it was our Stock of the Year in 2013, 2014 and 2015 (this year it is WPM), so I'm fine with their value now, it was simply too cheap before.  By the way, we make 2-year plays so 2017 was our target exit on AAPL and we got our price, of course (and we still have longs to 2019).  

Microsoft (MSFT) is the 2nd largest component on the S&P 500 at 2.7% of the index ($573Bn market cap) and, in 2015, they had $93Bn in sales and $12.2Bn in profits while in 2016, sales fell to $85Bn but they did manage $16.7Bn in profits – up 37% and this year flat but it' a big, flat number, so who's going to complain?  MSFT has gained 50% over that time and that's $25 and that's 200 Dow points from MSFT.

Amazon (AMZN) is not in the Dow but, at almost $500Bn, it's 2% of the S&P 500 and AMZN is up 66.6% from $600 to $1,000 so, if it was a Dow component, it would have added 3,400 points by itself – see how silly the Dow is?  Earnings-wise, AMZN has been impressive with sales going from $107Bn in 2015 to $136Bn last year and on track for $142Bn this year (slowing drastically, which is why Bezos got desperate and bought Whole Foods (WFM)).  Earnings went from $600M to $2.4Bn to maybe $2.6Bn this year (oops again), but investors don't care about profits, do they?  Why not pay 200 times earnings?  

FaceBook (FB) comes in at #4 and also about 2%, running neck and neck with AMZN at $476Bn.  FB has doubled their 2015 average price, now $165 and that's fair because 2015 sales were $18Bn and last year they hit $27Bn and this year is looking like $38Bn with profits going from $3.7Bn to $10.2Bn to $14.5Bn projected this year.  Hey, where can I buy some of that?  

And that's an important point, by the way – we don't knee-jerk not like all companies.  We have a Long-Term Porfolio with over 50 positions we love.  Our issue is that most of the other 6,550 public companies seem a little expensive to us and that means the indexes they are shoved into are overpriced as well.

Rounding out the top 10 S&P 500 components are:

  • Johnson and Johnson (JNJ): 1.7%, 2015: $70Bn/15.4Bn, 2016 $72Bn/16.5Bn, 2017 $76Bn/19.6Bn
  • Exxon Mobile (XOM): 1.6%, 2015 $260Bn/16Bn, 2016 $219Bn/7.8Bn, 2017 $271Bn/15Bn
  • Berkshire Hathaway (BRK.A): 1.5%, 2015 $211Bn/24Bn, 2016 $223Bn/24Bn, 2017 $239Bn/17.6Bn
  • JP Morgan (JPM): 1.5%, 2015 $93.5Bn/24.4Bn, 2016 $95.7Bn/24.7Bn, 2017 $102Bn/24.4Bn
  • Google A (GOOG): 1.39%, 2015 $75Bn/16.3Bn, 2016 $90Bn/19.5Bn, 2017 $108Bn/23.7Bn
  • Google C (GOOGL): 1.39%, 2015 $75Bn/16.3Bn, 2016 $90Bn/19.5Bn, 2017 $108Bn/23.7Bn

What?  Google is listed twice?  Yes, that's right, the company gets counted as 2 $670Bn companies, even though it's just one and their earnings are double-counted as well so subtract $20Bn from any unadjusted reports you see.  Just one of those funny little financial errors that they let people base their retirements on…  I'm going to include "#11" – just so we have an even 10 ACTUAL companies to look at:

  • Wells Fargo (WFC): 1.2%, 2015 $86Bn/$23Bn, 2016 $88Bn/22Bn, 2017 $89Bn/21Bn

Our Top 10 S&P 500 components account for 20% of the index and, in 2015, they had $1.2Tn (1/3 of all US retail sales) in sales and made $192Bn in profits.  This year, they are projecting $1.37Tn in revenues (up 14%) and $201Bn in profits (up 4.7%).  Sales are not a big deal – especially when AMZN adds $35Bn of them at no profits.  It's EARNINGS that matter and what kind of fools pay 25% more money for for companies that have grown their earnings just 4.7% in two years???

Remember, a fool and his money are soon parted – especially when they don't bother hedging!

From the above, we can conclude that the S&P is 10-20% overvalued and now we have to wonder which Jenga piece will cause it all to collapse?  Our bet is currently on oil because, if the Saudis don't initiate another 1Mb/d production cut at their OPEC meeting next week (in St Petersberg!), we're very likely to see oil fall 10-20% promptly and that will make people think the Global Economy is slowing (has nothing to do with it, oil is just overpriced at $47.50 (and we've been short /CL Futures there – see this week's other reports but we're cashed out now into the weekend – too dangerous!)).  

Image result for putin petro dollarsOf course the Saudis are highly motivated to keep oil prices up because it will affect their $2 TRILLION IPO of the state-owned Aramco oil company coming up in Q1 of 2018.  If oil is at $45 or less, you can cut at least $200Bn off that deal so for Saudi Arabia to cut 1Mbd ($47M) for 180 days "only" costs them $8.5Bn – it's a no-brainer that they will cut production – even if they have to do it themselves.  The catch-22 for the Saudis, however, is that's $8.5Bn less sales for Aramco and less profits, which could also affect the IPO price so the OPEC meeting is in Russla to make one of those famous deals where Donald's boss, Putin gets another $10Bn in exchange for his help in propping up oil prices (how do you think he made $70Bn as President?).  

So maybe it won't be oil (we'll know next week) but it will be SOMETHING that snaps traders out of their zombie-buying state and panics them into a correction.  Could be next week, could be next month but these prices are not sustainable with these earnings and, sooner or later, reality comes knocking.

Two dozen other dirty lovers

Must be a sucker for it

Cry cry but I don't need my mother

Just hold my hand while I come to a decision on it

Sooner or later

Your legs give way, you hit the ground

Have a great weekend, 

- Phil


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  1. Good Morning.

  2. Morning everyone! 

    The webinar replay is now available!

  3. Maybe these people predicting an August correction have insight in the Mueller investigation. That constitutional crisis I mentioned yesterday seems to be closer than we think as Trump already seeks advice on pardons! Apparently extremely disturbed by Mueller looking into his tax returns. I assume it's not because he doesn't have all his receipts for his charitable donations.

  4. Not gonna happen:

    In an analysis for ProPublica, Adam Ozimek and Mark Zandi at Moody’s Analytics, an independent economics firm, estimated that for every 1 percent increase in U.S. population made of immigrants, GDP rises 1.15 percent. So a simple way to get to Trump’s 4 percent GDP bump? Take in about 8 million net immigrants per year. 

    Interactive charts at the link!

  5. Weird that RB moved down from 1.586 to 1.546 and CL barely moved staying in the 46.50-60 range. Did OPEC give any news that is currently holding oil prices from dropping further? Anyone trading CL today?

  6. Phil,

    Are you in /DX? If so, what's your position?

  7. FU GE!!!!!

  8. Ummm – did we know SVU was doing a reverse 1:7 split?

  9. IBM- Phil,I am still looking for an re-entry closer to $130'ish. Would appreciate your take on the latest earnings report. Legacy business still hurting as expected but the future is still Watson/Strategic. IBM sentiment is very negative. Often hear comments re: dinosaur. Don't think big dumb beast could create Watson. 

  10. craigs/oil  I am short from yesterday at 47 even but mostly from a technical POV.  Fun so far

  11. Yodi- are you selling any cherry callers on AAPL up here?

  12. Thanks CDN. Looks like the shorts are winning so far today.

  13. Pstas AAPL NO wait for earnings 8/1 you could get burned if they go up

  14. Yodi- oops, your are correct, sir. Thanks.

  15. Good morning!

    Nice little sell-off to get us started.  Dow way down, much better than /TF this time.  

    Oil back to $46, /RB suffering too.  Dollar still hanging around 94 so don't blame that.  

    Big Chart – Even the NYSE is flying – we have to make a bigger chart.

    Mueller is expanding his investigation of Trump's business transactions, including the Bayrock partnership

    FBI investigators and others are looking at Russian purchases of apartments in Trump buildings, Trump’s involvement in a controversial SoHo development in New York with Russian associates, the 2013 Miss Universe pageant in Moscow and Trump’s sale of a Florida mansion to a Russian oligarch in 2008, the person said.

    The investigation also has absorbed a money-laundering probe begun by federal prosecutors in New York into Trump’s former campaign chairman Paul Manafort.

    Immigrants/StJ – That's one thing I really can't understand here.  I grew up being told this was a nation of immigrants and the "melting pot" was the bedrock of our strength, etc. and all that is very obvious from an economic/history perspective yet suddenly we've completely rejected the concept and gone to the other extreme.  WTF?  Yes, I know, TERRORISM but how about a little perspective?  

    /CL/Craigs – Too crazy for me.  Going to be rumor-driving into the OPEC meeting.  Hopefully higher so we can short it again.

    /KC broke over $135 finally.

    This was our runner-up Trade of the Year, folks!  

    /DX/Japar – Never got back in after my vaca but I do like it here (94 with tight stops below). 

    GE getting killed (down 5%) on weak outlook for oil and gas.  Still:

    Outlook: GE backed its full-year EPS forecast of $1.60-$1.70 on organic sales growth of 3% to 5%. But CFO Jeff Bornstein said EPS is trending to the bottom end of that $1.60-$1.70 range due to oil and gas weakness. The oil and gas industry has been weaker than expected with oil prices down in 2017. Customers are delaying purchases and hurting legacy businesses.

     So $25/1.60 = 15.6 CURRENT p/e – people are simply out of their minds!   And they pay a 3.5% dividend.

    SVU/Jeff – Who can keep track of all these splits?  So annoying!  

    IBM/Pstas – Actually, I'm supposed to talk to an IBM high-up about earnings but I have to do my homework first.  The company is like a huge battleship in the middle of making a turn – its vulnerable while turning but, once it gets on the new course – it will be unstoppable.  

    There's really no one even close to them on R&D and it's not like FB or AMZN or even AAPL are going to pivot and challenge them.  Samsung is really the only viable competitor and they have never been close.  It's not sexy, but they make the stuff everything else runs on.  Don't forget, they also invented the PC and they were right not to take it seriously as we are actually back to mainframes (cloud) now.  That's IBM's problem, they are thinking and making moves decades ahead so current opportunities to make money often pass them by but, over time, they are a juggernaut.  

    Image result for ibm earnings revenue history

    This is the kind of stock I want in my grandchildren's portfolio!  In fact, in the LTP, we have:

    We're going to buy back the short $165 calls and roll the 10 2018 $140s ($10.60) to 20 2019 $130 ($21.30)/$150 ($10) bull call spreads at $11.30 and the puts are fine for now but happy to sell 5 more if we go lower.  

    As a new trade, the 10 2019 $130/150 bull call spreads at 11.30 ($11,300) with 5 short 2019 $130 puts at $10 ($5,000) is net $6,300 with a potential $13,700 (217%) upside potential at $160.  That's a very nice trade for a blue-chip.

  16. PHIL / GE –  Thinking of adding some puts to me GE position. Adding the December '17 25 put (.8) I liked their QTR results but am worried about further exposure to oil and gas … thoughts?

    Current position

    1500 SH ( at 27.4) 

    Short Jan '19 25 Calls (3.69)

  17. Good choices to hedge protect about $250K in profits for the next 6 weeks or so?

  18. Phil/GE/SVU

    Can we enter a trade at this point? I think they already are part of the OOP.

    This was for the SVU I think

    Sell 50 2019 $3 puts for 0.45 ($2,250)
    ? Buy 50 2019 $2.50 calls for 0.80 ($4,000) 
    ? Sell 50 2019 $3.50 calls for 0.35 ($1,750) 

    thanks as always


  19. Phil/CMG

    touching $350…..waiting for double down on the $370 calls. I just have a couple.


  20. IBM / Phil – I think that Google will challenge them at least on the AI side. Obviously IBM seems well ahead on the hardware side. Although that MIT article does mention Google also making a strong push to compete in quantum computing. This could really get interesting.

  21. IBM- thanks, keep us posted on your "higher up" conversation. I used to do that all the time- just pick up the phone and ask for the Corp. Treasurer. Identify oneself as a stockholder;  Have a list of intelligent questions; don't make foolish inquiries re: inside info – and generally get good and respectful response. Obviously, the smaller the firm, the more likely one gets through. The fallback is always just  general Investor Relations.

    Sometimes, with smaller firms it is the best method for clearing up any confusion on available articles as there is limited coverage. Just did that last week on a small bank holding reorganization. 

  22. Phil – TF- are you taking the 8pt drop at 1434? Perhaps move to something else like the NGV7 play next week if its near $3.

  23. CMG – Getting killed.

  24. CMG / Albo – Even the rats are jumping from that ship!

  25. This CMG move is absurd. 1 restaurant, out of 2,200+ has an issue, and the stock is down 12%, knocking $1.5B off their market cap.  

  26. Once CMG broke 356, I believe, there is no real support for it right now.  I would not be touching it until it settles down, even if that mean a bounce up to 370 or 380 and definitely not touch it going into earnings next week.  It is completely oversold at an RSI of 12.62 (incredibly low).  I'd be taking a shot just buying a call rather than be short anything. 

  27. STJ – Sure looks like a put up job to me.  Nonetheless, it's causing quite a sell off on an arguably over priced stock.

  28. CMG/  I have never seen a rat. Are they that bad?

  29. Wasn't this Elon Musk's father?  Thought of him with the BS hyperloop tweets yesterday.

  30. GNC Teased us again. Dang it!!!

  31. Anyone pulling the trigger on /NG?  Getting down there…

  32. Jeff-Phil – NG — yes I was wondering as well…3.01.. not sure I want to hold over the weekend…

  33. Sean Spicer resigns and seems to growing a backbone again as he vehemently disagreed with Trump about the appointment of Anthony Scaramucci as communications director.

    And the Russian lawyer who met with Don Jr previously represented Russia's top spy agency.  No wonder why Trump had his lawyers look into his powers to pardon yesterday.

  34. CMG/Phil  I am holding one CMG Jan 400/450 BCS bought for $22.50, now down $1,500. But I've made much more than that on a sold put that I closed back up at $420 and some sold short-term calls. I wonder if you could suggest a roll that makes sense or just close it out and re-enter with your recommended position, because I think the selling is overdone here.  Thanks!

  35. CF: upside and div payer

  36. New report ranks US last in Health Care and Trump & Co want to take that away!

    As the U.S. is embroiled in a bitter battle to overhaul its current health care system, a new report finds that the country has the worst health care system among high-income countries.

    America ranked last for overall performance and last or near last when it came to data points like access to care, administrative efficiency, equity and health care outcomes, according to a new report published Friday by the Commonwealth Fund, a private foundation that strives to improve health care in America. Paradoxically, the U.S. spends more money on health care compared to other high-income countries, which is notable given its poor performance, the report states.

    The Commonwealth Fund is as apolitical as it gets.  They've been around for 100 years and accomplish great things in health care on a regular basis.  

    GE/Batman – I think our comments crossed.  Yes, I like the put sale but don't overdue it, the market may still correct and take GE down with it.  

    Hedging/Tangled – I like our STP plays (see recent review), they actually add up to $240,000 on a 20% correction but keep in mind that's how much we use to protect against a $500,000 loss (we try to cover about half the potential losses, not all).  

    SVU/Pat – I'd certainly wait until after the reverse split.  Thise things can get crazy.  

    CMG – Yikes!  That's what I mean by Downgrade Police: 

    Analysts Lower Target Price for Chipotle on New Food Safety Issues

    Canaccord Chops Price Target for Chipotle Mexican Grill, Inc. (CMG); Here’s Why

    [$$] Over 100 Report Being Sickened at Virginia Chipotle

    INVESTOR ALERT: Goldberg Law PC Announces the Filing of a Securities Class Action Lawsuit against Chipotle Mexican Grill, Inc.

    Pomerantz Law Firm Announces the Filing of a Class Action against Chipotle Mexican Grill, Inc. and Certain Officers – CMG

    Amid another illness outbreak, activist shareholder Ackman tweets from Chipotle takeout line

    The outbreak, though still one store, did get a lot bigger (100 people) so today's move makes sense but the rat move was ridiculous and, if it's just the one store, they should begin climbing back next week.

    AI/StJ – I don't think AI is much different than making the best mainframe and IBM has been playing that game for decades.  Not always winning but always near the top.  The same will happen with Quantum computing.  More likely GOOG or others will have an epic fail in those pursuits as this isn't about getting one really great kid to pull a few all-nighters and write some code.  Watson is part of a 20-year AI project at IBM and, 6 years after it became the Jeopardy champion, there are still no challengers.  

    The problem is that things like AI and Quantum Computing are so far out of our range of understanding that we think if them as a widget that anyone can make but they are more like computer processors, which only a few companies ever manage to pull off well – even after decades of open competition.

    Does GOOG have the stomach to sink Billions into a project that may blow up in their face?  That's IBMs moat, they've been doing this for so many years that their failures are simply a part of the overall process and the successes are things that change the way the World works but even they don't pick one thing and "decide" to do it.  They work on 100 R&D projects and some work out well.  These companies that say they are going to "do" AI already show a dangerous lack of understanding of the process.  

    DWAVE is selling Quantum Computers now – just $20M!  Maddie wants a new gaming computer – this one might be perfect!  

    • A lattice of 2000 tiny superconducting devices, known as qubits, is chilled close to absolute zero to harness quantum effects
    • A user models a problem into a search for the “lowest energy point in a vast landscape”
    • The processor considers all possibilities simultaneously to determine the lowest energy and the values that produce it
    • Multiple solutions are returned to the user, scaled to show optimal answers

    Image result for deep thought computer animated gif

    Questions/Pstas – My Grandpa Max taught me to do that when I was little.  He'd just go right over to visit a company he was interested in investing in (taking me with him) and ask to sit down with someone to discuss the business.  It was amazing how many times we sat in front of top executives.  

    /TF/Latch – Yes, done now.  We have our hedges that pay on the major drops, this is just movie money.

    Oil $46!  

    CMG/CDN – They don't have rats in Canada?  They are just tough mice with less cuteness.  See the movie "Willard" – that's a good education.  This is actually a good documentary on rats.  

    LOL Rustle.  

    GNC/Jabob – Well it was a good one at least.

    /NG/Jeff – Monday can be very cruel to /NG, I'm waiting.  Of course it's going to bounce off $3 regardless, that doesn't mean the trend is changing.  From $3.40 to $3 is 0.40 so $3.08 is a weak bounce and $3.16 is strong and $3.08 just failed from below – not really encouraging until we clear $3.10 so even at $3, super tight stops below and I'd love to get in at $2.80 but I doubt we'll see that so pretty much the only way I'll play is bullish over $3 with tight stops.  

    Spicer/Rustle – Oh no, that was my favorite SNL bit!  

    CMG/Jet – Jan $400s are still $14.60 and the 2019 $350 ($59)/$430 ($30) bull call spread is $29 so $15 rolls you down $50 in strike and you still have the short calls though very not likely they trigger (I'd keep a stop on 1/4 at $7.50 and 1/4 at $9) and, even if they do, you have a year to roll.  So if you are starting at net $0, it sets you up to salvage $70 at $430 off the $29 for +$41 – and time to sell more calls too!  

  37. If I'm already getting cold feet about the delta exposure on the CMG position, (in retrospect I should have done half), would a decent fallback position be closing the STP position (currently down $13,500), and buying 5 330/380 2018 Call spreads for $23.60 ($11,810), and shorting 3 2019 $300 puts for $29.00 ($8,697)?  That puts me in to the $25,000 spread, for net $3,000, and reduces my delta considerably.  I'll watch the call spread closely, with a plan to roll to 2019 if we see more weakness.  Thoughts?

  38. CMG/Palotay – If you are uncomfortable, then of course it's a good move.  

  39. Rats/  There are rats on the coasts and the great lakes but I live in Alberta where they have a (not kidding) rat patrol brigade.  They are armed and investigate any of them critter reports and promptly take action.  Mostly they try to sneak in on rail cars but we are wise to them..  There were talks of building a wall along our borders but it was deemed to be silly. Now you know

  40. Thanks Phil.

  41. CMG outbreak. I see it's norovirus. Hmm. Not only a very nasty illness, but exceptionally easy to transmit. People who specialize in these bugs note that the virus is very hardy, and apparently only five virus particles (some researchers claim only one) are enough to cause an infection. Hmm. It'd be really easy to start an outbreak – say you have someone who's gotten over the bug but is still in the period where they're shedding virus, and say you wanted to depress the CMG share price…….just sayin'

  42. Snow – "CMG outbreak. I see it's norovirus. Hmm. Not only a very nasty illness, but exceptionally easy to transmit. Hmm. It'd be really easy to start an outbreak – and say you wanted to depress the CMG share price…….just sayin'"

    Looks like the Bhagwan Rajneesh is at it again, except this time it's norovirus?  Nah, its not the CMG stock Bhaggy-man, stockin up on puts and spreading contagion sauce, its just plain old crap sanitary practices.

    Labatt Blues – "CMG/  I have never seen a rat. Are they that bad?"

    What do you think they serve at CMG? But I hear that the Topo Gigio Burrito with Norovirus sauce can be to die for.

    "I live in Alberta where they have a (not kidding) rat patrol brigade."

    I got film of those guys, in action and Out.

  43. nayob/hahahah  Topo gigio – just spit my coffee out  

  44. IBM AI – I used to believe in Watson but an now skeptical as AI has changed so significantly. I don't know if IBM is adapting to the "new AI" and whether they can compete with Google, Facebook and Baidu  in the new AI arms race.  Google hugely improved accuracy of its Google translate literally overnight by changing their approach.  They improved the performance of the product as much over a weekend as they has in the 10 year lifetime to date!  

    This is a fantastic article on AI, long but good weekend reading.  No mention of IBM as a player in this market.  Have been holding shares in IBM since I started my career there and dividends have been great.  I have a soft spot for the company and wish Watson to do well, but my view started to shift based on this article.

    Interested on any thoughts after you read this. This more than anything makes me think Google is more than advertising and is a great play for the long term. 

  45. The Nattering Naybob

    good one Rat Patrol

  46. CMG had this problem before in MA.  Not good that it happened again somewhere else especially when you are not hearing about the norovirus in other restaurant chains.  That being said, I just received a BOGO entree offer from CMG like 10 minutes ago.

  47. More curious option pricing: Buy BA 2019 195/210 BCS @ $8.30 - sell BA Sep 17 210 calls @ $6.30 – so that is $2 more premium to sell over the next 18 months to end up with a zero cost $15 spread. With BA @ $211.50 the spread is 100% ITM

  48. Pharm

     Any interest in

     TG Therapeutics TGTX

     Ignyta RXDX


  49. scottmi/OMER I don't know if i forwarded this along but OMER got an injunction against that TWTR member ArtDoyle that was posting the hit pieces.  First time I have seen the successful pursuit of a short.

  50. HLF – Recently crossed below the 50 DMA and ema 9/21 crossover to the downside.  Earnings on August 1 will reflect a couple of months under new US rules vs last year.  Increasing a short bet here which has not gone well to date with put option spread. 

  51. scottmi / hanjongin 

    From yesterday

    July 20th, 2017 at 10:35 am | Permalink | Tweet thisIgnore this user


     Good article on Omeros Corporation (OMER)

  52. Rats/Cdn – If you'd like, I can send you a few New York rats – good luck killing those with your feeble Canadian weapons!  devil

    Image result for pizza rat animated gif

    AI/Stu – The thing about AI is it's not one big thing.  AI is a program that's able to learn so more of a template and, so far, they deliver it with basic skills and the individual companies need to train it.  I don't like this approach, I think they should have AI as a service but the problem IBM ran into (and GOOG will too) is that MCD doesn't want to share their orders with the same AI that's running Burger King and Wendy's.  I'm just saying that IBM has decades of experience selling complex systems to Corporate cultures and GOOG does not and, if GOOG goes down a wrong path (as they have with several things) and it fails – it will be hard for them to dust off and start from scratch with another few Billions – the board doesn't roll that way anymore.  Long-term problems in any case.

    BA/Winston – Great if you can fill it like that.

    HLF/Stu – Maybe a bit overdone but was a lot more fun going long against Ackman. 

  53. BA – it filled like that – and you can probably still fill it like that.

  54. So, who's betting the indexes are going to run up into the close for the weekend? Overall it seems like a weak drop today and overall sentiment is still bery bery bullish.

  55. I like /RB long off the $1.56 line into the close (very tight stops below).

  56. HLF – Stuman, thanks for the post on HLF.  I agree with you that HLF should be a short.  Have been thinking that the FCC restrictions should hinder them quite a bit.  I never like to play through earnings, and the Icahn potential squeeze is always possible, so I'll wait til after they report, but think you're right on the direction.

  57. HLF – Albo – Yes, risky through earnings and I may reposition before they come out and/or make another play after earnings.  Their earnings results communications are far from transparent so I expect investors will be able to take what they like and don't like from the numbers. 

  58. Rustle – "That being said, I just received a BOGO entree offer from CMG like 10 minutes ago."

    It's part of managements new initiative, seen here in this exclusive video shot at a Dallas CMG.  Double the rat and bathroom fun with Double norovirus chipotle flavored gum!!!

    Phil – New York Rat rollin a piece o pie GIF, surprised he's not packin a piece like they do in Hoboken!!! They just point, nod and give you da finger… now dem's ratz!!!!  Thank you for my ROFLPIMP!!!

  59. Moving away from Rats for just a moment. Just wondering if anyone else has had trouble with Interactive Brokers last few months.  I keep getting freezing and it is slowwwww. I even bought a new computer dedicated to only IB and Phil.  They say I need to expand my memory thru some BS process which is impossible to figure out and doesn't work anyways.  I see others in some forums with same problem.  Would change brokers but they have a CDN office which the government protects. Any ideas…..Hold on maybe Philstockworld is the problem……nah

  60. Cdnjay / IB – I have been having major issues with it  for the last month or so and called in today once again to see what could be done.  Basically I had my memory available doubled today and that helps somewhat but I also deleted a number of stocks in my watchlist and closed lots of windows/tabs that I seldom used but had open.  It helped somewhat but not sure it will last.  Also here in Canada too so maybe it's a connection issue to their servers that isn't helping. Will look for other solutions if it persists but they are damn cheap compared to most other solutions.  TD will offer Think or Swim if you beg them but their Cdn commission rates if I recall were at least double what I pay at IB.  

  61. Long-Term Portfolio Review (LTP) Part 1:  $1,589,601 is the good news, up almost $200K from our last review on June 16th.  We got a lot more aggressively bullish with our positions and that gamble paid off and now I'm worried we're not hedged enough to cover our gains.  Overall, we're up 217.9% from our start on 11/26/14 but we have PLENTY of room to grow as we're only using $957,500 of margin out of over $3M ordinary with $1.2M in CASH!!! (have I mentioned how much I like CASH!!! lately?).    

    If you are new at PSW, I would strongly encourage you to go back to our first cash-out review (which summarized all of our trades at the time, after 6 months) and then go forward a year to see how slowly we add things.  Generally we'd sell one or two puts a month and, if the position got cheaper – we'd set up a bullish spread to go with them (assuming we still liked them).  

    At the time we had AAPL, ABX, BRCM, BTU, CAKE, CAT, CLF, DBA, DE, EBAY, EGLE, FCX, GLL, HK, HOV, INTC, IRBT, LGF, LULU, MSFT, NLY, RIG, RRD, SHLD, SLW, SPY, T, TASR and TWTR and we were up 19% in 6 months and were worried about a correction (as usual).  Not too different than what we do now with a lot of the same stocks – it's the discipline that's important to develop, not the positions.  The Man Who Planted Trees tells you everything you need to know about running a long-term portfolio!  

    Step one in building a portfolio is, of course, identifying stocks you want to buy (and once you buy your first one, all the rest need to balance with it!).  Step 2 is NOT BUYING THE STOCK.  That's one people seem to have trouble with.  Why would you buy the stock when you can sell a put and give yourself a discount?  60% of the time, that's how we initiate a position in the LTP.   Even when we we do start with a spread, we keep it small so we can easily double down – TWICE – if the stock gets 20% or 40% cheaper.

    If you start with a 20% discount ($100 becomes $80) and then you don't add more unless it's down at least 20% ($80 + $64)/2  = $72 avg on 2x = $144) and then you don't add more unless it's down at least another 20% ($72 + 50)/2 = $61 avg on 4x = $244) you end up with 4x at close to 1/2 of what you would have paid ($400) if you jumped right in at full price.  That's why we're THRILLED when a stock we like gets cheaper – even if we're already "stuck" with shares.  


    • FTR – As with our OOP play, we're going to double down, adding 1,000 more shares at $14.68 and selling 10 (half cover) of the 2019 $15 calls at $3.90 which nets us in for $10.78 per new share.
    • PSO – We're going to wait and see how earnings go.
    • ABX – It's a loose leg and we'll sell it when there's a good move up. 
    • AGNC – On track.
    • ATVI – Though they are up 72% already, we don't need the margin and we don't see any reason we won't collect the last $593, so we may as well leave them.

    • BRK.B – I WISH these would lose money so we could buy more cheaply!   On track.  
    • CMG – Now below our break-even but we already added more in the STP so these we leave alone.  
    • DIN – So cheap we should add the bull call spread.   Let's buy 10 Dec $40 calls for $5.15 ($5,150) and sell 10 Dec $50 calls for $1.25 ($1,250).
    • DNKN – Took a nasty dip but should be OK.  I'm tempted to go with a longer position actually.  

    • ESRX – Good for a new trade.  
    • GPRO – I think I mixed these up with GOGO last time.  No biggie as they are on track.

    • INFN – On track. 
    • MON – China is starting to buy from them, so the sky is the limit but we're up $11,000 (64%) with 18 months to go so let's cash this one in.  
    • NLY – We were hoping they'd get cheaper but they didn't.  Our consolation prize is $8,250 for not owning them.  On track. 
    • RH – Boy were these a good deal!  Up 52% but not really worried we won't collect 100%.

    • SBUX – On track. 
    • SEE – On track
    • SKT – I'm feeling better about the bottom now so let's add 10 of the Dec $25 calls for $2.70 and see how they perform.  
    • SKX – Here we have a retailer who's up 70% and maybe toppy – let's cash it in. 

    • SPWR – On track.
    • TLRD – Good for a new trade
    • TWX – On track and getting bought so a very slow grind for the last 24% so let's take the money and run. 
    • VZ – Good for a new trade
    • WATT – Good for a new trade.  

    Now we will have just 16 short puts so we're ready to sell some more!  This is that tree-planting part, every month we find something to sell for about $4,000 and some will become positions and most will simply end up turning into cash, which we use to buy more positions.  After 2 years, we have 24-36 in progress at any given time and it's $50,000+ in bonus profits each year, which is 10% of our original principle.  

    It's a totally passive way to make money, very low-maintenance and your worst case is owning good stocks at great discounts, which then drops them down to one of the trades below…

    • ARR – It went up and up and up and we never had a chance to sell the puts.  We'll end up getting called away at $22.50 but, until then, we get the monthly dividends.  

    • OIH – I'm not even sure I like this trade.  We'll see how oil does next week.  
    • CG – Well over our $15 tartget, we'll get called away.
    • CLNS – Right on track.  Stock is the exact price we paid in Jan but, because we were BEING THE HOUSE and sold puts and calls, we're up $1,650 plus dividends on our net $11,950 entry (13.8%)
    • FNF – I tried to buy this company back in 2009 (the whole thing for $4Bn).  Now it's $13Bn angry broken heart.  I owned a property research company that worked with them so buying these guys last fall was a no-brainer at $32.30.  

    • GCI – On track
    • GE – New one, good for a new trade. 
    • GME – Good for a new trade
    • GNC – Good for a new trade but I'd adjust the options 
    • HOV – On track.

    HOV doesn't pay a dividend but, when it was $1.47, it made more sense to buy the stock than pay a premium for a long call in a bull call spread.  The rest of the ones above pay lovely, lovely dividends of about $6,000/qtr and there's another $24,000/yr (5%) that just rains into our pockets and will rain into the pockets of your children and your grandchildren and your great grandchildren.   Dividend stocks should become more and more of your portfolio as it matures (and as you do) – you should always be looking for good ones to add.  

    Think about what we're accomplishing.  In 3 years we have 6 positions throwing off $24,000 and in 6 years we'll be getting $48,000 and in 12 years $96,000 and in 24 years $192,000 – all from our $500,000 initial investment and dividends tend to grow with inflation so $192,000 a year then is the same buying power you wish you had now.  

    Slow, consistent investing with clear goals in mind – that's all it takes to build wealth sensibly and reliably! 

  62. stuman/ thanks for that. I have used them for over 10 years with almost no issues now it is total crap, almost unusable. Maybe Webtrader works better. Many complaints on the Elitetrader forum so I don't think its just Canadian. 

  63. No luck on /RB and no stick save into the close.  

    No urgent adjustments in the rest of the LTP, so I'll finish over the weekend.  

    Have a good one everyone,

    - Phil

    IB – All, you better have very good hedges if your broker connection is unreliable.  I remember in the last crash how frustrating it was not to be able to get fills as they systems couldn't handle the loads.  

    CMG finishing at new lows (under $345) – rats!  

  64. AI – Phil – Just another thought on AI.  I am assuming that google is using it to improve its voice recognition.  Lately I have been noting how much superior Google is at voice recognition to Siri.  I find that the gap is so large in fact that I am considering going back to Samsung from Apple for my next phone. When I drive and want to use handsfree with Siri, I find it practically useless.  When I use google on my android tv box it is flawless.    I expect that if Apple doesn't get Siri up to par, it will have implications for handsets. Voice capabilities might bring Amazon back into smartphone devices as well.  

  65. Phil,

    Are you still in the CMG Aug call? What's your average?

  66. Phil..I love your site and I have learned so much…There are some things I find tough as a Newbie..Keeping the different portfolios separate in my mind and trying to understand how they interact..Simpletons like me can only maintain one portfolio..I also wish you had one page for newbies with links to first Long term portfolio who grew trees video etc, all in one place, like a little syllabus for beginners..I still don't really feel I understand position sizing and when you recommend the bull spread with a put, the to just buy the stock and sell puts and calls for a straddle..How much to hedge…This is not a criticism, just trying to make life easier for the next guy or gal to join


    Related Quotes









    DJ Frontier: More Pain Ahead? — Barron's Blog 

    Jul 21, 2017 12:52:00 (ET)


    By Johanna Bennett

    Is Frontier Communications ( FTR) near a turning point? Jefferies analyst Scott Goldman, Mike McCormack and Marah Formanek weighed in on the beleaguered telecom stock after it jumped more than 4% in Thursday's market action to close at a split adjusted d price of $14.91. The stock inched above the $15 market earlier today.

    But Goldman et all warned that while they remains bullish on Frontier, with a Buy rating and a $30 price target, second-quarter financial results, due to be released on Aug. 1, might not be enough to improve investor sentiment towards the stock.


    Expectations are low as management highlighted seasonally softer volumes in 2Q while also noting that synergies should take a pause before resuming in 3Q, resulting in sequentially lower adj. EBITDA. Given the trends, merely hitting tempered expectations may not be enough. In our view, until results actually turn, investor enthusiasm for forward looking commentary will not materialize.


    Shares of Frontier have been crushed over the past year, losing more than 80% of their value. In May, the company slashed its dividend payment by more than 60%. And while it was applauded as "the right move, " analysts still wrote the stock off as a show-me-story.

    By the time Frontier implemented a 1-for-15 reverse stock split earlier this month, its stock price had fallen to just above $1 a share.

    Recently, Wells Fargo analyst Jennifer M. Fritzsche and her team said that management may lower 2017 guidance, and speculated about the options Frontier has regarding its debt ratio and looming debt payments.

    Another dividend cut is the "least attractive option," says Fritzsche.


    As we noted on May 3 when Frontier reported first-quarter results, we are suspect of the company's ability to achieve the low end of its 2017 Ebitda guidance range. The Street appears to agree, as we have seen 2017 Adjusted Ebitda estimates trend down closer to $3.6 billion (versus $3.7 billion prior), or toward the low end of its implied range. For fiscal 2017, we estimate revenue of $9.155 billion versus $9.187 billion prior, and adjusted Ebitda of $3.610 billion versus $3.751 billion prior.


    Frontier ended the first quarter with a trailing-12-months net leverage ratio of 4.6 times (closer to 5 times last quarter annualized (LQA), by our estimates). Frontier has $1.55 billion in maturities due between 2018 and 2019. While these are not imminent, this leverage ratio and looming debt payments have generated many questions (from both equity and fixed-income investors) regarding the levers Frontier could pull if the company's Ebitda continues to decline at an aggressive rate. First, Frontier has $750 million available under an untapped revolver. Second, it has $1.5 billion left in secured capacity it has yet to tap. Third (and the least attractive option, in our view), between its common and preferred dividend, Frontier has an annual payment of $400 million. If they choose to revisit this (note: Frontier lowered its common dividend by 62% on May 2), the company would have more cash to de-lever.


    Consensus estimates for Frontier have deteriorated dramatically over the past 30 days. A month ago, the Street forecast a loss of 25 cents for the 2017 calendar year, a vast improvement over the $1.35 loss reported last year. Now, the Street expects the company to post a loss of $3.78 a share.

    More at Barron's Income Investing blog,

  68. FTR / Jabo – You would hope that a loss of $3.78/share would be a kitchen sink event! Of course, setting low expectations allows you to beat them more easily… 

  69. CDNJay / IB


    IB is very light in the use of computer memory and space, you can verify it in the task manager, I used to run it before, now using Ninka trade. I assume it´s a site problem because  is reported in forums and chats,  they have a efficient chat support , ask them

  70. Hussman thinks that the markets are going to crumble in the second week of August (see his post 'Wrecking Ball') and he has plenty of company for the premise if not the timing. No one would be surprised – especially given the pain that the shorts have endured over the last couple of years. In an attempt to at least contemplate personal planning for the 'significant market correction' scenario, what potentially does that mean for the different option strategies that I have in place in my portfolio. Apologies in advance for stating the blindingly obvious:


    All long positions are going to decrease in value – spreads will fair better than short puts.


    BCS are going to lose their value and the long calls will have to cashed out, in order to preserve capital, when the value of the long calls has dropped to the original net cost of the spread. This strategy is valuable, but the more it has to be deployed (creating a new spread at lower strike prices whilst leaving the original short calls in place) the more risk that has to be accepted – as the original BCS morphs into a ratio spread. Current players of artificial buy writes in CMG have a 'live' example in play at this moment.


    Short puts will be hit by a double whammy – lower stock price of the underlying and a massive increase in implied volatility leading to significantly higher option prices. Rolling down in value will be challenged, especially if they are recent trades, as the short puts will have been sold short at low premium prices (the VIX is currently under $10) and they will need to be bought back at inflated option prices. The timing of the rolls will have to be planned carefully as there will not be a lot of LEAPs available – the first 2020 LEAPs appear in September – so rolling will become challenging.


    Short covers – covered calls on stock or synthetic buy writes will benefit – but significant declines in the underlying will likely present a one time opportunity. Future cover sales will be done at lower and lower strike prices – so rolling down both legs of spreads may be needed. The worst case scenario is ending up with inverted spreads.


    Artificial buy writes will have their achilles heel exposed – the spread loses value down to zero whilst the short puts increase in value (that's a negative!) whilst margin requirements also increase as the short puts go deeper ITM.

    Trading becomes more challenging as bid/ask spreads widen, sellers find it increasingly difficult to find buyers for their assets as liquidity continues to contract. Broker IT platforms come under pressure.


    As Phil mentioned, having hedges in place is important. But I get the feeling our current hedging strategies have not been stress tested in real-life market trading. That is for one simple reason – this market has done nothing but go up since 2009! (absent a few instances of short term market declines. And of course, paper (virtual) trading, however useful as learning tool, is never going to be able to replicate the psychological trauma of a significant market correction. For those with larger portfolios, hedging is not so obvious as it appears.


    A number of actions I am currently taking:


    Closing out BCS (without short covers) when they can be sold for at least 75% of the difference in strikes of the spread.

    Closing out short puts that have reached 75% of max profit

    Entering into new spreads which are deep ITM, where short term short covers can pay for a significant % of the spread price

    Mega cautious on entering any new short put sales.


    But I still have many spreads that already have covers – where cashing out at the moment (with current market dynamics) means that I would be taking on too much short risk. That is one major dilemma where I need to find a solution or look at it in a different perspective.


    Oh, and for me significant market correction would be 20%+ over a six month period.


    Would be great to hear other points of view.

  71. Winston- I have followed Huffman missives periodically the past years and although he is the consistent bearer of dismal projections his latest is, indeed specific. I have asked professional money managers their opinion and mostly it is dismissed as doom and gloom. Not surprising given the incentive to cojole clients to buy, buy, buy. Whatever the record, his case(s) can be persuasive. 

    Which raises the issue of risk. IMO the best way to manage risk is to not take on too much. A difficult task in times where markets are racing ahead, spinnakers gloriously unfurled. It is important to keep in mind, I think, that the PSW portfolios are virtual – meaning essentially imaginary existing in paper form only. Doubtful Phil or anyone takes positions in lockstep with them. Parenthetically, for all we know, Phil may have his stash in tax free muni's & T-Bills. :) ? Risk tolerance is personal and moves over time. If one currently earns multi six-figure income with years ahead of earnings power in play, then a higher risk profile is  likely warranted. As one approaches retirement , thoughts should shift toward lifestyle choices and savings drawdowns and mitigating market risk accordingly. 

    Regardless, when the "big one" erupts, it may well take down the good with the not so good. I was in high quality issues back in the crash and still vividly recall the dismay and worry watching my net worth decline precipitously thinking I will never be able to retire. I have been most pleasantly surprised and pleased at the speed and degree of recovery primarily, I think because of my choice of quality stocks (think BRK, etc) and keeping a cool head amidst near panic. I encounter people who sold then and are still waiting to get back in.   

    Well that was then and this now.  Your plan makes sense. Essentially , you are taking money off the table and reducing risk. You may miss some upside in the coming months or even years but locking in gains is prudent. Ready cash will be a good thing to have somewhere down the road. In the meantime, hedging is an art form which I have not fully mastered having been wrong about a general sell-off for a number of months. I am sticking with it because I recall the past pain of not having any downside protection (hell, back then hedging was a foreign concept to me).  

    You are absolutely correct regarding new short put positions as these are potentially the most dangerous given a vix pop ratchets up put prices exponentially. The few new longs I consider are either high quality (think IBM; GE) already beaten down and/or solid dividend payers also preferably currently out of favor (i.e., T; VZ). I still like index strangles with wide spreads (and on a very short margin leash) and select short term covered calls. Modest returns but more within my comfort zone. 

  72. pstas – thanks. All good points. I remember back in 2001 I was in what I thought were high quality names, but they were also taken out to the back of the woodshed. The margin call caught up with me before the stocks ever recovered – and nearly all of them have still not recovered to 2001 levels. That was an expensive lesson on margin and leverage. At least it drove me on a search for a better way – the PSWay. And thanks for the links.

  73. OMER/hanj,qc – thanks for links, keeping connected if just. On holiday in UK.. been nice weather, but rainstorms today in the Newcastle / Hadrian's wall area on first day of the local schoolkids' summer break. Classic, and par for the course I am assured.. ;-)

  74. Winston, Pstas – Hussman is not the only one talking August.  There are some in the monetary flow camp saying that there may not be enough liquidity to keep markets afloat in Aug.  TBD.

    The margin debt is insane, and again it is DIFFERENT this time. Funds are over invested in the index weighted leaders.  What is being treated as money and thought of as liquid, is not.  All the money is in funds and not banks.  Quite some time ago we scooped the new paradigm, as we addressed the systemic risks and MORE at length…

    Platform Value: The Fall?

    The Synthetic Matrix?

    The New Paradigm For ETF, Mutual Fund, Bond Fund And mREITs
    Part 2

    Our advice, don't be like Burt and get a piano lesson, enjoy and keep your eyes peeled to the sky, it could be a name brand, and Out.

  75. Winston,

    Good comments but I need some more specific explanations.

    BCS meaning buying a call ITM and selling a call OTM what do you mean with having short covers do you mean having sold puts against your BCS? Or do you mean selling  1/2 a monthly calls against this BCS?

    Closing out short puts is the first iceberg in a storm I agree 100% with 75% or even less is a good start.

    In respect of BCS as you know I like to plant my trees and it is very painful to chop down a leap tree in the making. Look at AAPL 130/170 just recently planted. Never mind looking at one other AAPL Jan19 90/125 where full matured is 35 and it is offered at 28.85. You will find in most BCS plays the caller (short) is always a higher extrinsic value as the call, with other words you paying a much higher price for the caller.

    Buying back a put if the stock price is 100 and you sold a 50$ put is it wise to buy back this put you need to expect a stock drop of 50% just to be ITM.?

    Another thing I am looking at is for example you hold a Jan18 BCS say 30/60 and your stock price is 35$ I am inclined to roll the call to 25 Jan19 and sell a new caller say 40 or even wait ( but could be dangerous at a drop) and leave the 60 call standing alone (naked). The chance of the stock going to 60 is not very high, so at best put a buy stop order on it.

    The alternative is close everything. Looking at your port at a theoretical value of say 1,000,000. Today after a 20% drop 800,000 to 750,000. The other side is if there is no drop the same port will be 1.2 million or more in a year’s time. So as always what is in the stars? Your play!!!!

  76. AMD170818P9
















  77. Sorry it did not come out as I wanted  But here is a typical example of AMD trading at 13.88 as the 9 call Aug is only .04 and the 11 caller is still .20 cents. This is obviously a strangle and not a BCS or BPS spread

  78. Thanks Yodi. By short covers; selling higher strike OTM calls against either stock or against a BCS. This could be half or full covers (my preferred time scale was one month out, but I am placing a lot more 3 month out). With the run up in stock price of most of my underlying positions the half covers are now mostly full covers as I sold more premium at juicier prices. Of course the prices are even better now, but I do not want to get overexposed on the short calls.

    Your point on the short callers in a BCS hold their premium so close to expiration is a real pain. Most of my spreads are 100% ITM, but difficult to achieve a 75% payout now. My PCLN Jan 19 1500/1600 BCS (with PCLN trading at around $2000) can be closed out for $74 for this $100 spread.

    With such overall momentum, most of the BCS and separate short puts do have a large margin of safety, and I agree if it would take a 50% decline to move the position ITM, it may make sense to pay the opportunity cost of closing it out.

    Balancing between the two LEAP years is one of my favorite strategies. For a few years this worked really well, with the LEAP year 1 naked short calls expiring worthless. This year is one of the times when it has been more challenging, as some positions have moved so far in the money that even rolling the short year 1 calls to year 2 calls was expensive. I am waiting for 2020 LEAPs to come out on certain positions to facilitate this particular rolling strategy.

    And of course to stay or go, you pays your money and you takes your choice. 

  79. Jabo – I guess you bears also have Gartman on your side ;-)

    That putz says buy commodities which means, there's the kiss of death, so go the other way.

  80. Winston Your short covering of selling callers is in my terms selling Cherry calls!!! The problem is stocks have gone up to fast so you will find these callers (cherry calls ) very quickly ITM and in many cases it would have been better at the present market situation to leave the BCS standing alone.

  81. Here an other example

    AXP I hold Jan18 55/67.5 BCS. Stock is trading at 85.59 let us drop 20% 68.47 Doing absolutly nothing I am still getting 12.50 So would you chop this tree now for say possible 12$ leaving .50 on the table? I would say yes lets cut it! OR On the other hand you still have quite a few month to sell cherry calls, good money while you wait. Aug 85 caller 1.53 with 1$ of extrinsic value. An other 4 month like this and you receive an other total of 5$ while holding out for the ,50 cents and waiting for the 20% drop. We better calling on Donald the Clown to throw the darts on the dart board.

  82. Winston your PCLN is only for high rollers they could drop like CMG

  83. I still have to slightly correct on the above theoretical 1Mil portfolio example.

    I my way of trading I would have actually 45 to 50 % in cash, say 25 % or 250,000 in option plays and 250,000 in div paying stocks. So what am I going to lose in a 20% drop? My cash stays the same 500,000.

    My stock drops to 200,000. I do not have to sell any stock!!!! Say my options even drop to a value of 180,000. So what is my loss in my 1 Mil portfolio 120,000. or better I experience a drop of 12% in my port if the market tanks 20%. I do have to deal with my options short or long. But with my stock I am only suffering a paper loss of 50,000. But remember I do not have to sell my stock.

    Does this not look good in theory?

  84. Yodi – being short this market has not been a good idea since many moons ago. 

    PCLN is a well run company with a high stock price and strong momentum. As long as one is ultra careful when (if) selling puts then the same logic applies as trading a stock with a much lower stock price. 

    As to your theoretical 1 mio. portfolio example – what you state looks good in theory – and that's the challenge with a theoretical portfolio. If that theoretical portfolio has 250,000 in BCS and the long call side would be out of the money with a 20% drop then I would suggest that is a problem. Similarly, if there are short puts used to finance those BCS then they would also start to become a problem. 

    It is good to think through and work out the various scenarios, but you always need to apply the sensitivity analysis to your own real money portfolio.

    And sell that AXP spread for close to $12!!!!!!

  85. Winston,

    Having BCS with the long call OTM yes this is a serious problem in a falling market. Mostly the short caller of the BCS has pennies. So what I have done in various cases is, provided you still like the play, to roll the call in a ITM position and sell a lower caller to reduce the cost, leaving the old caller naked, with a close watch, possible with a stop loss buy order.

  86. Yodi, thanks, understood and agree, that was one of the actions I was suggesting:

    "BCS are going to lose their value and the long calls will have to be cashed out, in order to preserve capital, when the value of the long calls has dropped to the original net cost of the spread. This strategy is valuable, but the more it has to be deployed (creating a new spread at lower strike prices whilst leaving the original short calls in place) the more risk that has to be accepted – as the original BCS morphs into a ratio spread. Current players of artificial buy writes in CMG have a 'live' example in play at this moment".

    It works well the first time you have to do this. With CMG for example, I have had to do this a couple of times due to the extent of the collapse in price. I now have a BCS (300/450) with two additional higher strike short calls (at $490 and $520). I feel comfortable with that configuration, but of course if CMG becomes the best restaurant in town then I will be layering new BCS on the way back up, or as you suggest managing with a stop loss buy order.

  87. Phil, looks like your call on /NGZ7 from Monday last $3.20~$3.25(aggressive), was right on the money….should we be dipping our toes in that contract, or still further erosion to come…thanks as always! Maybe a good idea to tease/entice some bot with a buy on 1 contract at $3.10, just for shit and giggles!    

  88. Yodi, Winston -  Thank you both for your discussions on preparing for a market correction.  I am trying to see how your recommendations apply to my portfolio.  For the sake of argument, lets say we are facing a correction of 20%+ over 3-6 months.   Since I have joined only earlier this year, both of you have positions probably more mature than those in my portfolio and probably closer to expirations in Jan 2018?.   Following your discussions, I have looked at my short put positions in detail,  even the most successful (ITM) positions are still barely 50% of the target pnl and these are mostly Jan 2019 expirations.  I also have 80% cash in the portfolio.   As you have both warned,  I want to be prepared for the doubly whammy on my short put positions and wondering if I should close some of these…or hold on for the ride, since their expiration dates are Jan 19.  My unrealized loss through the bear storm will be high but I am hoping till Jan 19, the storm passes.  Rather than cashing out of my Jan 2019 short puts, should my hedging strategy perhaps be centered around long puts and shorter horizon bear put spreads and Phil's SQQQ hedges (I have been rolling those for most of this year)?    Thanks in advance for your thoughts. 

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  92. Phil – GC. Aren't you surprised how it has not responded to the weakening USD?  Seems like it should be near 1300 by now 

  93. Learner,

    First your cash position of 80% puts you in somewhat good shape. The Problem with short puts is the margin requirement once the stock starts to fall. If you have the TOS platform you will find under the activity position, the last column on the right is the margin requirement. Left click on the same and you can see how the margin multiplies up to a drop of 15%. Now I click on one of my AAPL holdings and I find that at a drop of -3% requires a margin of 3K but with a drop of 15% my margin goes up to 23K this is even by having PM margin.

    The short put is always a naked position and stands alone and can make an enormous difference in your margin requirement. Believe me I lived through it. As more short puts you have as greater the mountain of margin. Having not enough cash, requires you to liquidate stock positions at the most unwanted time. That is when the bargain hunters are looking for you. So if you have a good deal of Jan19 short puts, which are OTM now and will be OTM after a 20% drop, they are at this point not a loss to you, provided you can withstand the multiple an storm of margin requirements.

    An ITM BCS can stop the bleeding as the drop in value of the short call will compensate to a certain extend against the loss of the long call. However if the short call is OTM or worse even both are OTM your short call has no beef anymore to compensate! Still having a short put (in a market falling situation) the put will just put more gasoline to the fire.

    Buying long puts now will only balance your position in a 1:1 ratio, whereas hedging positions, recommended by Phil will somewhat fourfold to a certain percentage. You can hedge your port only to a certain extend. I am looking at my TZA position, as long as I am losing money in this positon I am doing well, However if this play is gaining you know your port is losing.

    As you can see Winston as well as I are struggling with decisions to pay the piper.

    I hope this helps. It is like taking an umbrella with you when the sun shines! At worst you can use it as a sunshade.

  94. Learner one more thing I forgot to mention. Making decisions on individual positions closing or not closing short puts, I look at the 2 year chart of the stock, if the stock is on top of the ladder, it is more likely my short put will be more dangerous than if the stock is now already on the bottom of the scale. Obviously we do have some dogs in our port, where it does not matter how low the stock is now, it only will go down more. I try not to mention any positions!!!!!

  95. P.S. I would not tinkle to much with gold stocks, short puts like ABX, most likely gold will go up.

  96. Learner, all excellent points by Yodi.

    Obviously the worst time to start a long delta portfolio is just before a market crash !!!!! (I think that might be a Will Rogers quote). Hedging makes a lot of sense in regard to protecting profits (it will cost money and be a drag on the overall portfolio upside) - but if you are starting out selling naked puts then you better be comfortable with the potential scenario of owning the stock at the short put strike minus the credit. You can tie yourself in knots trying to play both sides of the market and early on betting against your newly created positions it kind of counter intuitive. Having said that, make sure you read everything you can on the PSW archive on Hedging – the articles on mattress plays are particularly useful. Go back and look at the posts around the time of 2008/2009 crash and see what ideas were in play.

    Phil's Butterfly portfolio also seems to be a more robust vehicle to withstand market volatility – so looking into how that is constructed could be useful.

    But a general point, if significant volatility on your (not you personally) options portfolio leading to large drawdowns is something that would lead to catastrophic losses on a personal basis then you should not be playing options. Or perhaps put another way, only trade options with money that you can afford to lose.

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  105. Good morning!

    OPEC meeting in progress but not looking good so far and oil down around $45.80 with /BZ $48.15 and /RB $1.56 – all bad but could quickly improve if there's a deal or plunge on no deal.

    /NGV7 testing $2.95 ($2.933) and that's good enough to take a poke on the long side for me.  It will follow oil up or down and if it goes up, then good and if it goes down, it shouldn't be stuck with oil so I'm happy to add more on a dip (if oil is the reason).

    Indexes flattish but no improvement in Europe, where they had a terrible Friday (and signs of a slowing economy over the weekend) does not bode well for our own open.

    I finally jumped back into 2 long /DX – couldn't resist down here (93.72)

    Silver testing $16.50, gold over $1,250 again:

  106. AI/Stu – I'm sure they will leapfrog each other from time to time.  Siri hasn't had a major update in ages, GOOG just did one.  As with Coke/Pepsi – people will like what they like but I have yet to have a case of Android envy – no matter how many "best phone ever"s people shove at me (as I'm a known AAPL fan, people seem compelled to come up to me with Apple-killers of all types).  

    Apple's Concern With User Privacy Reportedly Stifling Siri Development

    Unlike Amazon and Google, which leverage and retain user data off-device to inform and enhance queries put to their respective smart speakers, Apple is said to work within a culture that prioritizes user privacy, "making it difficult to personalize and improve" Siri, according to ex-Apple employees. The project has also reportedly suffered from the departures of key members as a result, some of whom went to competitors. 

    Considering how much important information is on my phone, I kind of like AAPL's fanaticism about my privacy.  I agree with their concept that the power of the system/network will catch up to make the distinction of data location meaningless not to far down the road (5G), at which point they will be left with the far more secure/stable system by comparison.

    CMG/Japar – No change to our original play so far though there was no new bad news over the weekend so we might want to consider adding a bit this morning.

    Newbie stuff/Millard – Well we do have a New Member's Guide at the top of this page with most of the things you are asking for.  Also our general trading book and the Education archives and strategy section.   If you want a 2-page cheat sheet so you don't have to actually read things – that I don't have.  Also, the virtual portfolio tab does have every review from day one.  We also have a Wikipedia but it's broken until we update to the next version of WordPress (one day – big project).  As to other things, just ask!  

    Oh, and also we have a Long-Term Portfolio which is paired with a Short-Term Portfolio – that's ONE strategy.  We have an Options Opportunity Portfolio which is self-contained – that's ANOTHER strategy and we have a Butterfly Portfolio, also self-hedging but geared towards premium selling – that's ANOTHER strategy.  They don't "interact" – they are different examples of ways you can make money in the market and the idea is that you decide what best suits your own interests and comfort zone (see "Smart Portfolio Management, parts 1, 2 and 3" in the Education Archives).  

    Thanks Joseph.

    Hussman/Winston, Pstas - Well someone is going to get it right eventually.  While our current hedges haven't gotten a good test – we have been doing it for more than just the last few years so I'm pretty confident about our $300,000 level protection in a 20% drop and, in theory, the market shouldn't fall more than 10% without bouncing so we have time to add another $300,000 of protection along the way and another after that (this is what saved us in 2008).  For now, I still haven't seen a 2.5% dip that hasn't been bought right back up so we have to stick with those longs or those hedges will become a money pit. 

    Margin debt/Naybob – That's becoming an issue.  Big, potential fault point.  

    Commodities/Jabob – That's interesting:

    But I'm not looking at commodities and thinking they deserve to be much higher.  Clearly the spikes were oil-driven so we should ignore those so I think we're low but not like we're going to double from here – the global economy simply isn't that strong.  China has stopped growing at 10%+ – it was an unusual event in World history not likely to be repeated yet our capacity to supply materials is still up around those levels so there's a general over-supply of everything running into anemic demand.  

    /NGZ7/Jasu – Yes, I like them too at this level ($3.18 now).  

    Hedging/Learner – You need to pay close attention to how much you lose on your longs in a pullback so you can extrapolate your losses at 10 or 20%.  Then you don't want to hedge 100%, 50% of a 10% loss is plenty because it's very unlikely you won't be able to add more hedges on the way down and, if you over-insure, you are spending money for no reason.  

    Consider if you have $100K in positions that will lose $20K on a 10% drop (leverage) and you spend $3,000 on a hedge that pays you $10,000 back, then you will have $90,000 with the market down 10% which means you can buy the same amount of stocks you could have bought with $100,000 with the market at 90% so you are even.  Even is all we need to be on the way down – don't try to "win" corrections.  

    Gold/Latch – There's no sign of inflation in the World and no shortage of gold – it's not all just about the Dollar.  Also, BitCoin, etc. is attracting a lot of the disaster-protection money so less for people to spend on gold.  I still expect gold to do well – just nothing very exciting.

    And what Yodi said!  

    Great news for NAK (bad for the environment):

    Trump EPA re-opens door to disastrous Alaskan mining project

    Still cheap at $1.36.

  107. Thanks Yodi, Winston, Phil for the portfolio hedging guidance.