What an appropriate way to end the year.
The Futures are being jammed higher to provide cover for sellers at the open and reel in more suckers to hold the bag. The Dow Futures (/YM) are back to 24,850, where we shorted them yesterday and make a quick $250 per contract. So that's every day this week we've been able to short the moringing run-up and, this morning, we might be able to catch 24,900 – or just under it and the S&P Futures (/ES) are an easy short at 2,698, with tight stops over 2,700 and that would be risking $100 per contract losses vs gaining $500 per contract is they calm back down to 2,688 – once again, we go for the positive risk/reward profile.
We also put our foot down and went long on the Dollar (/DX) at 92.00, that half-point drop this morning is the only thing boosting the indexes and commodities. Gasoline (/RB) is also a fun short at $1.795 but that one is over the weekend into next week and might be painful if wrong ($420 per penny, per contract) but our logic is that the record cold snap doesn't encourage people to drive a lot and, after this weekend – what is the catalyst for gasoline over the usually slow winter?
Closing the markets at record highs gives the Banksters a great narrative to sell you overpriced equities next quarter. After all – you don't want to miss out, do you? Having the Dollar drop 3% since early November has made it more expensive to buy many things – including equities, which are exchanged for Dollars.
Manipulating the Dollar lower is a great way to manipulate the market higher and the Banksters do this all the time when they want to paint a pretty picture for their year-end charts. There's really nothing going on globally to justify a broad sell-off in the Dollar so we're going to start accumulating down here as a bounce back to 93.50 is good for $1,500 per contract and the margin requirement for Dollar Futures (/DX) is $1,980 per contract, so it's a pretty efficient way to make a bet.
The Dollar ETF (UUP) is down to $24 and, if you are futures-challenged, you can pick up the Jan $24 calls for 0.10 and that gives you 21 days until expiration. You'll be paying an 0.10 premium, of course but we're targeting a return above $24.20, at least, and that would be a double on the contracts.
So let's say, for example, you were willing to risk $500, that would be 50 contracts at 0.10 but beware broker fees when dealing with such tiny contracts! Anyway, we can compare the returns to the returns on /DX and see who comes out better on the deal.
Meanwhile, if the market is going to continue higher and/or the Dollar lower, we're going to be needing some inflation hedges for 2018. I haven't done new inflation hedges yet but, in last year's "Secret Santa's Inflation Hedges for 2017" we gave our Members the gift that keeps on giving – profits! Our 4 trade ideas were:
- Sell 10 Barrick Gold (ABX) 2019 (Jan) $13 puts for $2.63 ($2,640)
- Buy 20 ABX Jan (2018) 12 calls for $4.10 ($8,200)
- Sell 20 ABX Jan $18 calls for $1.95 ($3,900)
That spread was net $1,660 and it's fortunate that we had conservative targets as ABX has sold off recently (so we like it again for next year!). Nonetheless, since we are BEING the HOUSE and NOT the Gambler – we come out nicely ahead as the Jan $12/17 bull call spread s now $2.42 ($4,840) while the short 2019 $13 puts are 0.95 ($950) for net $3,890, which is up $2,230 (134%) for the year, despite the fact that gold itself is only up 8.5%. If that's how we do on a "loser" – I can't wait to see how the winners did!
Meanwhile, the disparity between gold's price (up $100) and ABX's price (down $1) makes it once again a fantastic hedge for next year and we'll be looking at 2018 inflation hedges next week as we begin to build our new portfolios.
In Hedge #2, we were worried about the price of gasoline going up and it is up about 15% since last Christmas, costing us 0.25 per gallon more and, in our example, we assumed your family would use 1,500 gallons and we wanted to offset any increase in fuel costs. At 0.25, we have to beat $750 on our spread, which was:
- Buy 1,000 shares of Sunoco (SUN) for $26.98 ($26,980)
- Sell 10 June 25 calls for $3.30 ($3,300)
- Sell 10 June $22.50 puts for $1.60 ($1,600)
SUN closed June at $29.92 (and it's back there now) and that was miles over our tartget so the net $22,080 spread was closed at $25,000 (called away at $25) with a $2,920 profit plus the $826 dividend in February and again in May broght the total gain to $4,572 (20.7%) in just 6 months so we ented up more than covering the families ENTIRE fuel costs for the year with this simple hedge. Of course we'll do another one next year – who doesn't like free gas?
Hedge #3 was against food inflation and food went the other way in 2017, with groceries dropping nearly 20% on average. Our trade idea was for a spread on the Agriculture ETF (DBA) as follows:
- Sell 4 DBA 2019 $20 puts for $1.45 ($580)
- Buy 8 Jan $18 calls for $2.65 ($2,120)
- Sell 8 Jan $21 calls for $1.80 ($1,440)
We were looking good into the summer but then things fell apart (so good for next year) and the Jan $18/21 bull call spread is 0.75 ($600) and the 2019 $20 puts are now $1.90 ($760) so this spread would cost $160 to close out from our original $100 net cost means we're down $260 on our food hedge but, even if food costs are only down 10% – if you spend $200 a week on groceries that's $10,000 a year and $1,000 saved in the stores. That's how hedges should work – not too much damage on the way down and a real windfall when your own costs rise.
Meanwhile, there's no need to pay the $760 for the 2019 puts, we can let them ride and hopefully recoup that money and turn this into a profit next year.
Finally, our last hedge was to help pay for your PSW Membership (like we just did with GreenCoins) and, at the time I said:
So, for 2017, let’s make things interesting with another metals hedge. If you sign up for a full-year membership between now (12/25/2016) and Jan 2nd, 2017 and the following trade idea does NOT net 100% on the cash outlay by expiration day on Jan 2017 then I will give you a free Membership for 2018!
The trade idea was our 2017 Trade of the Year on Silver Wheaton (SLW) who are now called Wheaton Precious Metals (WPM) but the stock and options remained the same through the name change. Our trade idea was:
- Sell 10 WPM 2019 $15 puts for $2.80 ($2,800)
- Buy 15 Jan (2018) $15 calls for $4.75 ($7,125)
- Sell 15 Jan $20 calls for $2.65 ($3,975)
As you can see, we're well over our $20 target and the Jan $15/20 bull call spread is $7.15/2.20, so $4.95 out of a possible $5 x 15 contracts is $7,425 and the short 2019 $15 puts are already down to 0.35 ($350) so the net on the spread is $7,075, which is up $6,725 (1,921%) from the $350 cash outlay so I'm sorry to those of you who were hoping we'd give you a free Membership but $6,725 more than pays for any of our non-Premium Memberships so, you're welcome!
I encourage you to go back and read the original post as we laid out our logic and the mechanics for each position and we will do so again next week with our fresh hedges for 2018 (Members only). As we hit 3 out of 4 on this set and made $13,267 for the year – you might want to consider putting aside a little cash to hedge against inflation in 2018 as well.
Meanwhile, that's about all for 2017 and it's been such an exciting year we cashed out our 4 Member Portfolios and that makes 2018 exciting already as we start the new year off with endless opportunities to re-deploy our CASH!!! For now, however – let's party!
I'm already in Vegas and I hope you have great plans to celebrate with your friends and family.
May your new year be happy, healthy and wealthy!
– Phil
