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  1. phil

    Hola people! 

    Futures opening just as crazy high as they closed – ain't no stopping us now.  

    Trade of the Year/Maya – That's a good question because I wanted it to be LB but then LB took off too fast before Thanksgiving and, officially, I switched to HBI.  Both have pulled back a bit and I do like LB better and it was simply a positioning issue.  So the trade we have in the Money Talk Portfolio, when I was on in Sept, was our original LB trade and, since we reset the other portfolio in Dec (before the drop in Retail), we didn't have a chance to get back into either at low prices yet (though we are still hopeful earning will disappoint or the market simply corrects).  

    NAK/Maya – Ouch, that totally sucks! 

    Good quote Naybob.

    Speaking of the Money Talk Portfolio, I'm on the show Wednesday and I've got to write up a review:

    From a $50,000 start we're up 74% to $86,975 in our first year.  These are very much "set and forget" trades as we have never even made an adjustment and they represent trade ideas that were made on just two shows – one in January and one in September.  

    As with many of our Philstockworld trades, we use very little cash for our initial positions, saving that firepower for adjustments if a trade goes south but, when they don't – they can be money-gushers.  These trades, of course, follow our strategy of "Be the House – NOT the Gambler" in which we sell more premium than we buy, giving ourselves a tremendous edge every time we make a trade.  

    AAPL – This is a $30,000 spread that cost us $6,100 in cash to initiate and the margin required on the short puts is $8,541 but worth it as we had very little fear Apple would fail $140 so the risk was deemed low.  Currently, the spread is net $13,550, which is up $7,450 (122%) but we still have another $16,450 left to gain so, even as a new trade, this makes a very nice 12-month return from here.  

    IMAX – IMax has run into trouble recently but we sill love this one as a new trade at essentially the same price we paid for it.  Actually, it's up $175.  As an adjustment, however, we are going to roll the March $18 calls ($1.88) to the Sept $15 ($5.20)/20 ($2.20) bull call spread at $3 for + $1.12 ($2,240) and we'll buy back the short March $22 calls for 0.35 ($700) so $2,940 added to our original $1,250 outlay means we're in the now-wider $10,000 spread for net $4,190 and, if all goes well – we'll have a gain of $5,810 (138%) on the trade's 1-year anniversary if IMAX is over $20 so great for a new trade!  

    LB – Our Trade of the Year for 2018 is miles over track at net $21,050 which is up $17,650 (519%) from our initial cash outlay of $3,400 just 4 months ago!  The maximum payout for this trade, however is $30,000 so this trade, if LB stays over just $40, will pay another us $8,950.  I know it seems boring to "only" make another 50% in 12 months but it's a very safe 50% – and that's worth something, so I'm inclined to hold it as is.  

    WPM – This one was our Trade of the Year for 2017 and it's right on track for a full payout as well.  Our initial outlay was just $2,000 in cash and the short $17 puts are using just $2,563 in margin so a very margin-efficient trade as well.  At the moment, the spread is net $13,700 for a gain of $11,700 (585%) and the maximum value next January is $25,000 if WPM holds $22, which we feel is very likely.  So that's another $13,300 (113%) left to gain from here so no reason to throw this one away either.  

    So there's 4 trades that, even if taken as new, will return another $44,510 between now and next January so a very nice return – even for latecomers.  

    Since we've already made $36,975 in year one and we expect to make another $44,510 in year 2, it makes sense to hedge our positions – just in case the market does tank.  Since we know if it doesn't tank we'll make $44,510 (unless something specifically goes wrong with our picks), we can set some of those gains aside in a hedge.

    SQQQ is the ultra-short Nasdaq ETF that's a 3x inverse of QQQ.  So, if the Nasdaq drops 10%, SQQQ goes up 30% (in theory, it's not perfect).  I'm going to add the following trade as a hedge and WE EXPECT TO LOSE MONEY ON THIS ONE – it's like life insurance, you pay for it but you hope that, each year, it's a waste of money!  

    • Buy 40 SQQQ Sept $16 calls for $2.80 ($11,200)  
    • Sell 40 SQQQ Sept $23 calls for $1.20 ($4,800) 
    • Sell 5 ALK 2020 $60 puts for $8.20 ($4,100) 

    That's net $2,300 and $2,620 in margin (from the short puts) to protect our current $36,975 gains and our potential profits – not a large price to pay and, if the Nasdaq drops 10%, then SQQQ (now $16.25) should climb 30% to $21.12 and put the $16 calls $5.12 in the money for $20,480, so we'd be up $18,180 and the max pay-out on the spread is $28,000 so about $26,000 of downside protection – which is half of what we started with!

    ALK is a stock we feel is very underpriced but you can use any stock you'd REALLY like to buy as an offset on these hedges but, keep in mind, if the market does tank, you REALLY will be buying that stock!

    Now that we have a hedge, let's look for a new spread and I have two catching my eye at the moment:

    GE is the most hated stock in the Dow and the S&P, off about 50% from last year's high as the company has sold of divisions and retooled and now their accounting plan has garnered an SEC investigation which is spooking investors.  As I often say to our Members – "If you're not going to buy low, when are you going to buy?" but there may be more pain ahead so we're just going to dip our toes in the water on this one:

    • Sell 10 GE 2020 $15 puts for $1.95 ($1,950) 
    • Buy 20 GE 2020 $15 calls for $3.60 ($7,200) 
    • Sell 20 GE 2020 $22 calls for $1.10 ($2,200) 

    This one has a $3,050 cash outlay and requires $1,312 in margin for the short puts.  If all goes well and GE is back over $22 in Jan, 2020, this spread will net $14,000 for a gain of $10,950, a 359% return on cash.  While the cash return is a bit less exciting than some of our other trades – we feel very confident GE won't go much lower ($14 should be the worst) so the low risk profile makes up for it.

    Our worst case here is owning 1,000 shares of GE for $15 (the put strike price) plus the $3,050 we laid out would be net $18.05 per share and, at $14, we'd be down $4,050 vs the potential gain of $10,950 and we don't feel the risk is anywhere near as likely as the reward – which is what we consider a good trade at PSW!  

    Finally, we like Barrick Gold (ABX) and consider them very undervalued, especially with gold prices climbing.  ABX also has great option prices so we can be a little aggressive here with the stock at $14.25:

    • Sell 10 ABX 2020 $17 puts for $3.75 ($3,750) 
    • Buy 25 ABX 2020 $13 calls for $3.90 ($9,750) 
    • Sell 25 ABX 2020 $20 calls for $1.55 ($3,875) 

    That puts us in this $17,500 spread for net $2,125 and the upside potential at $20 is $15,375 (723%) and it's aggressive because the strike we chose for the short puts is $17, which is $2.25 HIGHER than ABX is trading for now but we only sold 10 and the margin requirement is $1,830 so a good fit for our $50,000 portfolio (initially).  

    So, with the 3 new trades, we stand to make an additional $26,325 less the $2,300 we expect to lose on the hedge is still plus $24,025 on a $7,475 net cash outlay.  Not a bad way to start a new year!





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About Phil:

Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...

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Ilene is editor and affiliate program coordinator for PSW. She manages the site market shadows, archives, more. Contact Ilene to learn about our affiliate and content sharing programs.

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