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Toppy Tuesday – S&P 2,900 so it’s 3,000 or Bust!

Wow, just wow! 

As you can see from the chart on the right (click for bigger view), people have been saying this rally is going to end since it started – and that was about 10 years ago at this point!  I'm included in those people as, on several occasions, including this year – I have wanted to cash out and, in fact, I did cash out my kids' college accounts into the Summer (still in cash) and our Hedge Fund is mainly in cash as well as we wait for the market correction (and buying opportunity) that never seems to come.

I was bearish in 1999 and the market went up 100% that year before it collapsed and I was bearish in 2007 and the market went up before it collapsed (about 10%) and I have been bearish most of this year – well, after we did a lot of buying during the February dip.  Even our Big Chart is still full of the old Must Hold levels that there's little chance of re-testing.  Granted they were the levels we set in 2015 for our expectations of the end of 2017 but we never changed them because we kept thinking the move 20% above our lines would correct – that was incorrect…

Being cautious hasn't stopped us from making money but we certainly could have made more money if we hadn't hedged (and yes, we just put more money into hedges yesterday).  Still, that's not the right way to play but we do need to make some realistic assumptions about where the bottom of this new range should be and it's probably not 2,200 on the S&P – which would be a 24% correction from here.  

Image result for S&P 500 price earningsWithout getting into the whole "fair value of the S&P" which we do when we are setting our major Must Hold Levels, what has really changed since 2015?  Well mostly we have higher wages, a stronger GDP, lower unemployment and much lower taxes – mostly good things for the bottom line of S&P 500 companies.  Good but not so good they should be trading at 35x Cash Flow (which they are) but good enough for 25x cash flow – even though that's based on a shaky assumption that these tax cuts will never be rescinded and rates will only rise gradually.  

Still, until those things change, there's no reason to expect such a huge correction in the indexes so we will need to adjust our lines to a "more fair" value, which is mostly a factor of adding the tax cut effect to our old numbers.  We'll also have to consider that the Tax Cuts are not evenly distributed as the S&P 500 Companies (the Top 1%) were given full advantage of the cuts while some small-cap companies were actually hurt by them.  The discrepency between where the Nasdaq is and where the broad NYSE is 2 years after Trump was elected is amazingly large:

Of course the Nasdaq is made up mostly of Amazon, Apple, Google, Facebook and Netflix and those stocks racking to $1Tn valuations (AAPL won) have driven the Nasdaq up 20% since March.  FAANG is 12.8% of the S&P and they are up an average of 111% since Trump's election (FB – 40%, AAPL - 116%, AMZN – 171%, NFLX – 160% & GOOGL – 66.6% – really!) - 12.8% of 111% is 14.2% so those 5 stocks added 14.2% to the S&P's 33% returns of the last two years – about half the growth.  

Image result for madness sparta animated gifOn the Nasdaq, FAANG is 30% of the index now with AAPL alone at 15% and 30% of 111% is 33.3% (half of 66.6%) and that is 2/3 of the Nasdaq's 2-year gains coming from 5 stocks.  $2.5Tn has been added to those 5 stocks over 2 years, which MORE THAN ALL of the GDP growth (12.5%) of the United States of America going to just those 5 stocks – that's MADNESS!  

So you can understand, perhaps, why I may still feel that these prices are unrealist or, even if they are realistic for FAANG stocks – why should that then translate to the rest of the index?  Are they ALL on their way to becoming Trillion Dollar companies?  Are they ALL exceeding expectations?  

Let's say that Usain Bolt (who plays soccer now) can run 100 yards in 8.2 seconds.   We KNOW he can do it – we've clocked him.  Does that then mean his whole team can run that fast?  If I'm paying Usain $3M to play soccer, should I then pay them all $3M because, clearly, if he's that fast then they should all be that fast, right?  

No, not right at all!  That's silly, flawed logic.  There are people who outperform and there are companies who outperform yet we are valuing ALL companies as if they are incredible performers – even companies like Tesla (TSLA), who don't even make any money or Uber (private) who just got a $78Bn valuation from TM, who just gave them $500M to cover this quarter's losses.  That's a little bit crazy and, more to the point – it's unsustainable.  

But it's not just about TSLA, it's about every average company that isn't going to earn $50Bn to justify a $1Tn valuation in the near (or distant) future.  These valuations are insane, as in – they are not sane, rational valuations and, for the first time in a long time, we are working on a Sell List of companies we want to short because, sooner or later, this market will correct and the question is how deeply it will correct and where will it recover to.  Those will be our new Must Hold lines and I'm going to work on them over the weekend.  

Meanwhile, last Tuesday, we talked about how Coffee (/KC) was too cheap as it tested $100 and it blasted up to $107 yesterday and is at $104 now but that's still up $1,500 per contract so you're welcome.  We took ours off the table at $106 (we were playing /KCN9 and we do plan to get back in when it's done pulling back) but there was also the longer-term BJO spread and that's fine to hang on to.

Today we're starting to put on shorts on Gasoline (/RB) as it tests $2.10 but it should go higher into tomorrow's inventory but for sure we'll be shorting /RB over the weekend along with /CL and we already picked up the Ultra-Short ETF (SCO) in yesterday's Live Member Chat Room almong with shorts on /CL at $69 with tight stops above and we'll short every $1 line it hits until it fails!  

Let's be very, very careful out there – while it's been suicide to short this market – it hasn't been illogical!  

 


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  1. will you let me ask questions now?


  2. Can't have bad news – will need to start censoring Google searches:

    https://gizmodo.com/president-trump-accuses-google-of-rigging-search-result-1828647850

    “Google search results for ‘Trump News’ shows only the viewing/reporting of Fake New Media. In other words, they have it RIGGED, for me & others, so that almost all stories & news is BAD. Fake CNN is prominent. Republican/Conservative & Fair Media is shut out. Illegal?” President Trump tweeted.

    Straight out the Putin playbook! LinkedIn banned in Russia because used to spread bad news…


  3. Good morning. Looks like the cannabis crew is pulling back a bit pre-market… TLRY, CGC, MJ, CRON…


  4. Did we just add $2T to the debt to keep things as they were:

    http://ritholtz.com/2018/08/jobs-jobs-jobs-or-not-so-much/


  5. What's a trillion dollars:

    http://ritholtz.com/2018/08/what-is-a-trillion-dollars/

    The top 1% could really make life much better for the other 99% with a little effort!


  6. Good Morning!


  7. "Europe Is Warming Up to Putin"     https://www.bloomberg.com/news/articles/2018-08-23/europe-is-warming-up-to-putin      I didn't think this was allowed


  8. QCOM – Strong today.  New recovery high.


  9. WPM, not showing any love on gold, silver going up


  10. Good morning!  

    I was trying to get more bullish but as I started running the numbers I remembered why I'm not…

    FAANG is up $2.5Tn in 2 years and the GDP of the US is less than $20Tn so more than 12.5% in an economy that's growing at 3% ($1.2Tn in 2 years) so where exactly does this money come from?  It doesn't – it simply represents the fact that people are buying and holding and the last guy to buy pays a bigger and bigger price that reprices all the shares at valuations for which there is LITERALLY not enough money in the World to cash out at those prices.  

    Like 2008, everything will be fine – unless people start trying to sell….

    Image result for ponzi collapse animated gif

    Questions/Jabob – I'm always happy to answer questions!  

    Trump/StJ – That guy is seriously trying to revoke the First Amendment.  Getting scary.

    Cannabis/Soma – I don't know about them but New Age just got two new orders (with the new machines we're buying) for 250L and 120L/month at $7,950/liter.  That's monthly!   That pretty much fills up our new capacity so we'll have to start using new cash flow to buy more machines, etc…  I don't know why people are chasing into these companies that already went public with Billion Dollar valuations when there are all these start-ups out there looking for cash so they can become Billion Dollar companies.  

    It's a very strange situation as these companies have great cash flow but no bank will lend them money and most investors are scared of the Federal Laws (and they should be!) but it's like the gold rush in California and we're being smart and just selling the picks and shovels and pans and mules to the endless supply of people who think they are going to get rich. 

    Down the road, we'll buy a mine or two but only with a portion of the cash our "General Store" is going to generate. 

    Image result for general store gold rush mining supplies

    Debt/StJ – Oh yeah, things are insane.  So is that Trillion Dollar chart – wow! 

    Putin/Mike – The trick is to present them with a far worse alternative.  Putin played it perfectly.  

    WPM/Jomp – Another one that just lays around waiting for buyers.  


  11. this is what posts

     

     

    [Your comment is awaiting moderation.]


  12. Yodi,

    Few questions about armchair trade.

    I think selling cherry calls functions a bit like hedging. So the question is do you do hedging as well as Phil (TZA, SQQQ, etc) or not, because cherry calls is enough for that?

    Second question. If you buy a stock and begin selling strangles and the stock goes higher (+20%), then  do you stop selling puts, because it's too dangerous or not? Selling calls is ok, because covered, but if you sell puts when the stock is high, it can be very dangerous. Is it correct?

    Thank you for your answers

    Gabor


  13. Phil – too late to get the info on New Age?


  14. Moderation/Jabob – I think that's because I had you on ignore.  

    /RB with a nice dip already!  I'm inclined to take 0.02 and run ($840/contract) ahead of API and EIA tomorrow.  

    Same with /CL at $68.50 – a quick $500/contract there. 

    Dollar coming back just a bit:

    We have a lot of notes to sell this week – $200Bn!   That's a pace for $2Tn in debt this year!

    DAX hit a wall with an hour to go

    And that's following up on our great day yesterday!


  15. what do you think GE and ABX are worth?


  16. New Age Investment/Deano – It's not too late until the last person sends a check and, as far as I know, we don't have all the checks yet so contact Greg (at philstockworld dot com) and he can shoot you over the paperwork.


  17. Phil,

    Any changes adjustments on the NQ shorts ? 

    Thanks as always 

    Pat


  18. are you adding to /nq short with an eye on rertracement here

     

    tom


  19. Phil/Greg

    I sent an email 2 weeks ago and got no response.  Is there a trick to get Greg’s attention?


  20. I also sent Greg an email


  21. Worth/Jabob – Well, ABX, to me, is worth a function of their gold reserves (65M ounces) x the price of gold ($1,200 seems to hold up) less their extraction cost ($850 conservatively) so 65M x $350 = $22.7Bn and they produce about 5M ounces a year ($6Bn) and some other stuff that adds $2.5Bn and they drop $1.5Bn to the bottom line (call it $800M "normally") so we have 10 years of that to look forward to – even assuming they don't find more gold in their newer projects and don't buy any new projects.  

    That's net of debts, etc so, even at $800M x 15 is the current $12Bn but that gives them no value for operations or assets - that's just their running value so $10 is a very good floor.  If gold were to go up $100, then they'd make $500M more selling the same gold.  I just want to be there when and if that happens.  

    GE is a very different case as they have $120Bn in sales and it's very, very hard to gauge their profits since they've done massive restructuring.  Revenues seem steady though and we have plenty of examples of what they CAN make on $120Bn in sales (10% or more) so the question is whether or not we want to be patient while they finish their reorg or do we bail on them at $112Bn ($13/share) because we don't think they can even make $11Bn for a 10 p/e, let alone get back to their normal p/e in the mid teens (about $18 with $120Bn in reves and $12Bn in profits).

    Year End 31st Dec 2012 2013 2014 2015 2016 2017 TTM 2018E 2019E CAGR / Avg
    Revenue $m 144,121 110,137 116,639 115,158 119,687 120,468 122,480 122,610 123,686 -3.5%
    Operating Profit $m 16,203 8,592 10,991 8,141 9,961 -8,036 -8,643      
    Net Profit $m 13,641 13,058 15,233 -6,126 8,831 -5,786 -8,154 8,155 8,800  
    EPS Reported $ 1.38 0.73 0.92 0.14 1.00 -0.30 -0.42      
    EPS Normalised $ 1.33 0.56 0.87 0.28 0.98 0.71 -0.11 0.94 1.02 -11.7%
    EPS Growth % +36.4 -58.1 +57.1 -67.7 +246.3 -27.0   +32.1 +7.96  
    PE Ratio x           17.9 n/a 13.5 12.5  
    PEG x           0.56 n/a 1.70 1.03
    Profitability

    Do you think the management of GE is incompetent and they don't know how to run a company and they spent years analyzing what to sell and what to keep to align themselves for the next 20 years but they blew every decision they made and now, despite still having $120Bn in sales in what they thought were more profitable divisions (in the long run) and despite sitting on $15Bn in cash that it's all just going to slip away and they haven't got the brains to stop it?  I'm just taking the other side of that…

    /NQ/Tommy, Pat – No I got burned twice and way behind so I'm just crossing my fingers and hoping things get better at some point (not a valid investing strategy).   Had I stopped out over 7,500 like I was supposed to, I'd be jumping back in below 7,600 but I need to get back to 7,500 just to get back to a nice, $3,000 loss!

    Trick/DC, Soma – For you, or ANYONE, who wanted paperwork on New Age and didn't get it.  Let me know here in chat and I'll get Greg right away.  That's the trick!  cheeky

    There will be other opportunities down the road but not in New Age, which HOPEFULLY will be able to self-fund from now on.  They just needed to get over the hump from small medical batches to large retail batches by adding some expensive machines that no one is willing to lease (federal issues) so there we are on that.  

    Down the road, we're probably going to create a new hedge fund vehicle (pending lawyer nonsense) that will specialize in Marijuana investing but there we'll be looking for many, many Millions for various projects.  The reason we were so gung-ho on New Age is they give us the inside track to working with dozens of start-ups (as we handle the manufacturing for them) in each new state and then we can decide who's looking like a good investment for the new fund.  


  22. Gabor,
    your question on hedges Yes I do hold hedges like TZA. But I do it in much more conservative way. Like a small insurance. You right cherry calls are in one way like hedges but they do not go 2x or 4x as the normal hedge. It very much depends on your market view. I must say in these times it is much more difficult to look through the haze. I always like to refer to TSLA. I believe we will make our goal. But there are enough crazy buyers just as you find supporter of Trump. Especially if you sit on this side of the pond.
    Stock going up and selling puts. Again you need to assert yourself at which position the stock is in its range. If it is exceeding the top of its scale, you might look at closing your position. But again difficult to say. Look at CAT I was trading CAT when it was 70 went up to 90 and I closed my trading. It went up to 173 and is a present at 142. I took my money at 90. Like Monday morning quarter back!!!!
    Again when selling a strangle you need to add up the call and the put and deduct it from the stock price, than you need to decide if it is still a good thing to do this trade if and when it falls below your lower breakeven level would you than still like the stock?. It very much depends how you feel about the stock.


  23. Phil – i recall you mentioned New Age may look into franchise opportunities down the line at some point. 

    Realize you probably have little info on this  now, but definitely interested to hear more when the time comes! I assumed it would be some typical franchise model where they would provide training, help with set up etc and the franchisee funds start up costs of the operations, buying whatever machines are necessary etc…and then pay either a franchise fee or % of profits on an annual basis? 

    Im up in Toronto and know a couple people who would be interested in the opportunity to open a franchise pot processing facility. Not sure what kind of expertise would be needed, the people I know aren't the genius pot scientists at new age, but I'm sure would be open to receiving training etc. 

    Anyway, just throwing it out there in case you have any details on this or whenever it does eventually come up!

    thanks


  24. I also e-mailed Greg (just sent him a follow up), not sure i'll meet the accredited investor requirements (at least not for salary component), but maybe if my primary residence counts towards net worth? In any case I'll give it a whirl!

    thanks


  25. Phil – re: New Age Equipment Lease – I might be able to help with that. Let me know if needed.


  26. Gabor,
    One more thing to consider.
    Say you trading a stock like MO or PM for the last 5 or 6 years, you have built up in your port. a credit of say 45K on the plays. I have sold now some puts which are ITM and I decide I do not want the stock at the present price any more. So I buy the put back and spend 3 or even 5K. So my overall credit is now down to 40K. Most stocks move in cycles. I now carry on with MO or PM as they are now, still paying a heathy div. for a bad habit.
    Will the world give up smoking, I think they still will smoke after Trump!!!


  27. I mean WTF:

    https://www.washingtonpost.com/news/morning-mix/wp/2018/08/28/trump-wakes-up-googles-himself-and-doesnt-like-what-he-sees-illegal/

    The Trump administration is “taking a look” at whether Google and its search engine should be regulated by the government, Larry Kudlow, President Trump’s economic adviser, said Tuesday outside the White House.

    “We’ll let you know,” Kudlow said. “We’re taking a look at it.”

    Can't have too many free speech regulations. But guns… 2nd amendment baby! Or pollution….


  28. Wow, finally a little selling!  

    I will be on CNBC Japan later and explaining to them how ridiculously overvalued the market is.

    Franchise/Crs – That's one way to go and I'll be happy to talk to you about it.  We weren't even looking at Canada because there's competition up there but I guess people still need manufacturers – even in a more mature market.  I don't know what's required either but SOMEONE has to be a proper chemist as one of the things they need is a BLAST-PROOF ROOM to make the stuff in!  So not the kind of thing a hobbyist should be doing…

    Will follow up with Greg, CRS.  

    Leasing/Deano – We must have a talk about that. 

    GOOGL/StJ – I wonder if that's what hit the Nas?


  29. Is Tuesday going to wipe out another meaningless Monday?


  30. Phil, Need your way of thinking
    I am holding the AAPL Jan 20 170/220 BCS with all the rolling and selling I landed up with half the amount of Jan 19 170 caller. (Value 51.65 received 11.90 originally) I hate to see that the stock value increases today by 1.65 and the Jan 19 170 caller increases by over 2.00. Obviously something is not right, but it effect the overall position. The short puts I hold in the overall play are milked down to just a bout worthless. So I could sell additional puts, but the stock is considerable high. Obviously my overall position is looking positive in the end.
    But I do not like to see that 170 caller!!!
    Somewhat I am thinking of rolling the Jan 19 170 caller to April 19 220 caller for which I would have to pay some 35$, Putting it in far higher position than my long Jan20 170 call, also pls. take in to consideration that the Jan 19 caller still holds some 2 dollar premium.


  31. Thoughts on HD. I have a January 2019 180/195 BCS with stock trading at approx $201.50.  Dividend (approx $1.03 or 2%pa goes ex tomorrow).  Thinking of widening spread to 180/200 (costs $3.30 but 100% ITM) or 180/205 (costs $5.5 for $10 that is $6+ITM). Could possibly sell a put to finance this, but HD is 22+PE.  


  32. Tuesday/Den – Nope, looks like a brief pause.

    • Federal Reserve Chairman Jerome Powell's comments on Friday may not be as dovish as many investors perceived, Goldman Sachs economists tells bond traders, Bloomberg reports.
    • The economists still see two more rate hikes this year, pointing to Powell's mention of a Fed study indicating it would be wrong to ignore the low unemployment rate.
    • “Unlike the bond market, we did not view Powell’s speech as dovish, partly because of its references to the Fed staff study,” Goldman Sachs economist Daan Struyven wrote in the note. “We expect not only a limited core inflation overshoot but also a sizable unemployment undershoot — and an FOMC that continues to care about that undershoot.”
    • U.S. money-market traders, though, see things differently, according to Bloomberg. They see a September rate hike, but aren't as confident about a December rate increase.
    • U.S. 10-year Treasury note yield up 3 basis points to 2.877%; (TLT -0.5%), (TBT +0.9%).
    • ETFs:TMVTBFEDVTMFTTTZROZVGLTTLHUBTSPTLDLBSVUSTXTYBSDLBLOPER
    • Previously: Fed's Powell sees further gradual rate increases `appropriate' (Aug. 24)
    • In a statement to Bloomberg, Google (GOOGGOOGL) responds to President Trump’s allegations this morning.
    • "Search is not used to set a political agenda and we don’t bias our results toward any political ideology. Every year, we issue hundreds of improvements to our algorithms to ensure they surface high-quality content in response to users’ queries. We continually work to improve Google Search and we never rank search results to manipulate political sentiment.”
    • Source: Bloomberg First Word. 
    • Previously: President Trump accuses Google of favoring "Fake New Media" (Aug. 28)
    • Best Buy (NYSE:BBY) is facing the consequences of posting improved comparable sales growth marks over the last two years as the upcoming quarterly comparisons become tougher to match. The retailer's guidance mark for 2.5% to 3.5% comp growth in Q3 stands as the slowest pace in the last six quarters.
    • "The challenge for the company, in our view, is to maintain the strong top-line results as comparisons become more difficult, especially since the stock has already re-rated meaningfully over the past year," notes RBC Capital Markets.
    • During the conference call, Best Buy execs laid out the long-term benefits from its tech support spending even as the outlay weighs on near-term margins.
    • Shares of Best Buy are down 6.21% on the day.
    • Previously: Best Buy hikes guidance (Aug. 28)


  33. AAPL/Yodi – Well, I don't know the amounts but let's say you have 10 spreads and 5 short calls and 5 puts.  AAPL is at $219, up about $40 (20%) for the year and last year it was up 30% so keep that in mind re the rolls.  

    The 5 short Jan $170s are $51.65 ($25,825) and the 10 short 2020 $220s are $30.60 ($30,600).  The 10 long 2020 $170s are $61.50 ($61,500) and the puts, as you say, are essentially worthless.  

    I would cash out both short calls ($56,425) and sell 15 of the Jan $215 calls for $29 ($43,500) and cash in the 10 2020 $170s for $61,500 and buy 25 of the 2020 $200 ($41)/250 ($18.40) bull call spreads for $22.60 ($56,500) so that's net $7,925 out of pocket and you push the short callers to mostly premium against what is now a $125,000 spread (vs $50,000) so a lot more headroom and you can always sell puts if they dip again (I'd buy back the ones now to clear space).

    If you want to be careful, you could put a stop on 5 short calls at $30 ($15,000) and 5 at $35 ($17,500) and 5 more at $40 ($20,000) and then you'd have 30 longs that are well in the money vs just 10 short calls at $40 ($40,000) and you'd be in the $150,000 spread for net $7,925 + $15,000 + $17,500 + $20,000 = $60,425 plus whatever net you put in already but I bet it's a lot less than $90,000!  

    And, of course, you can always roll short callers to April too but I'd go for the short-term decay first and see how that goes….  

    That's how our LTP ends up making those crazy returns as time goes on.  We have winners and we have losers but sometimes we can take a winning play like Yodi's $50,000 AAPL spread that maybe cost him net $20,000 and turn it into a $150,000 spread for $8,000 more.  You only need a few of those to go well and you can get some fantastic returns!  

    Image result for nom nom animated gifHD/Nom – The Jan $180/195 bull call spread is now net $11.60 out of $15 and well in the money.  What I would do, though it adds margin, is cash the $180s ($23.60), which is much more than you'd get for the spread and then buy 2x the 2020 $190 ($25.30)/$215 ($13) bull call spreads for $12.50 and wait and see where the short Jan $195s expire.  Not only do you go from one $15 spread to 2 $25 spreads (so $35 more upside potential) but you are also moving from a call with an 0.82 Delta to 2 spreads with net 0.21 deltas so call it 0.42 and your $23.60 is safely out of reach in a position that's half as volatile while you wait for the premium on the short caller to expire. 

    Once you are clear you can roll the Jan caller or, if it expires worthless and you still like them, you can sell more short calls and maybe some short puts too.

    Since you are now net 0.42 Delta, a $20 drop in HD would cost you $8.40 but your position is $23.60 and that less $8.40 is still $15.20, more than the max you could get out of the current spread if it doesn't drop $20 on you (to $181, where you'd get $1)!  

    As I was saying in last week's webinar – if you practice these things enough you start to think many moves ahead and then you see all sorts of ways to optimize your portfolio and take advantage of BEING THE HOUSE! 


  34. Phil; can you discuss your view on triggers for a position adjustment like Yodi's AAPL trade above or even the CMG trade adjustment from last week.  When is the right time to make an adjustment to a position or what is the trigger?  On both trades there was still plenty of time to expiration.  I have a similar position in AAPL but my short calls are Oct 190 and 195's.  I've been watching the Xdiv date and otherwise looking for a pullback.  Thanks


  35. New Age/Phil-perhaps Greg can send me the paperwork as well.  I believe I have already qualified.  Is there a minimum?


  36. Thanks Phil on AAPL


  37. Greg, please send me paperwork as well. Though not sure if being in Canada will create issues?


  38. Yodi / AAPL / Phil – just one slight error in the prices:

    I would cash out both short calls ($56,425) and sell 15 of the Jan $215 calls for $29 ($43,500) 

    The price for those Jan $215 calls is for the 2020 Jan calls. The Jan 19, $215 calls are priced at $15 ($22,500).

    But I may have misunderstood.


  39. Winston Thanks for the comment quite something to think about. Phil aswell things AAPL will go up 30% p.a. also something to take in to consideration. It is just a big adjustment more than 10 (120) for me and as you can see at this stage the 170 caller increases more than the stock, which aswell I do have in my arsenal. My position is overall positive, but in the short run the 170 caller is an ugly thing!!!


  40. Triggers/Options – It's kind of like asking a batter when is the right time to swing at a pitch and how exactly to swing on what pitch – lots of variables and it depends.  The trick is to just get the experience to know when and I'm not even saying I KNOW when to adjust but, if my short callers are deep in the money and I don't think the stock will pull back – then what good are they doing me?  If my longs are deep in the money and I have to hold them 18 months to make my last 20% – what good are they doing me?  

    Then it depends on how confident I am in the position, etc. as well as whether or not it's more attractive (from a premium-selling and safety perspective) to change the position or not. 

    With CMG, I felt it was overpriced so, since I though it was over-priced, I tried to figure out how to take my 2020 longs off the table, which then left me with the problem of what to do with my shorts.  That then leads me to consider how confident I am that $520 is too much and how low I think they will go when they settle down.

    With AAPL, Yodi's position was too deep in the money and, since I think AAPL can go a lot higher, it was in danger of flipping on him so problem one was what do do with the short puts and problem 2 was how to pay for the roll to more short premium while covering the risk of AAPL potentially moving up another 20-30% while the trade is open.  

    The kind of pullbacks we're looking for are not a 1% ex-dividend pullback – I'm taking about something that will send a stock 10% or more lower or 10% higher and, if I don't see that coming and my position is on track – why would I mess around with it (see 10 years of Portfolio reviews for examples!)?

    You're welcome Yodi but Winston says I had the wrong call prices, which matters a lot.  I was looking at June as Jan 2020 and Jan 2020 I thought was 2019.  The concept is the same but we have to find the right strikes and dates.  If you'd like, give me the actual number of contracts and I can rework it for you.

    Thanks Winston.  I get messed up when there are strikes past Jan 2020! 


  41. W – Wayfair – Citron is back banging their short drum on W once again. They have been wrong for about 50 some points on their previous call(s). This has been a MOMO/sentiment/story stock for some time. Is it time for the wheels to come off? Perhaps add to the short list?


  42. Hello Phil.  Here in CR, finally getting some quality time to look at portfolio  (a better investment strategy).  Some help, please.

    MDR2  10 Jan 17.50/22.50 BCS (basis 6.50/2.85).  Cash out the short caller and ?

    WPM   20 Jan calls (basis 7.25).   Cashed out the short callers.

    MET   500 shares (basis 46.31);  short 10 Jan 52.5 calls (7), short 20 Jan 47.5 puts (5.50)   On track. Roll?

    Thanks.


  43. I mean WTF – Part 2:

    https://talkingpointsmemo.com/news/trump-abe-remember-pearl-harbor

    During an economic discussion between President Trump and the Japanese prime minister in June, Trump raised Japan’s attack on Pearl Harbor in an attempt to negotiate a bilateral trade deal complimentary to the U.S.

    “I remember Pearl Harbor,” Trump told Prime Minister Shinzo Abe, according to The Washington Post, referencing the surprise attack, which prompted the U.S. to retaliate with the first and only nuclear weapons bombing in history. Abe was enraged by the meeting with Trump, an incident the Post called reflective of the two’s relationship; a bond that was once close, but has become increasingly strained.

    Making friends everywhere! Putin rubbing his hands…


  44. Ultyguy – also in Canada and potentially looking at the new age ventures investment so if you do come across any issues specific to potential canadian investors please do post here and I'll do likewise. I don't forsee anything, I imagine it will be handled similar to my US stocks/options on my tax return but i could be wrong on this.  

    Phil – Greg got paperwork to me today so kudos to him for getting it out quickly, I'll fill out the forms and return ASAP. 

    Quick question, is there a minimum investment amount you are looking for or certain size "blocks" you are looking to receive? I.e. should it be blocks of $50k, or $100k as a minimum? 

    let me know, thanks. 


  45. Phil

    Well here are the actual positions Jan 20 120 170/210 BCS (not 220) and Jan19 65 170 callers. As well I hold 300 stock bought at 152.00. Sold 7x 165 Jan20 puts for 11.07 now 4.95 and 7 Jun 20 155 for 10.95 now 4.67.
    Original cost of BCS was 1460.00 x 120
    So as you can see a couple of bigger numbers. My overall credit on the total AAPL play is 500K


  46. Pstas, I saw that report as well.  So far not having any effect.


  47. OLED up another 4 1/2 points.  Pushing above the 200dMA.

    Scottmi made a great call more than 30 points ago.  Glad I joined him.

    Thanks again, Scott.


  48. Yodi: your AAPL setup is my favored: Buy the furthest dated LEAP BCS and then start selling front month calls expecting to grind down the overall cost basis on the LEAP spread until it goes down to zero. As you know, this is a fantastic strategy when the underlying moves slowly over time upwards, just enough to let your 'cherry' calls expire worthless, or at least rolling up to the next month for a credit.

    That beautiful story gets tarnished when the underlying starts moving too far too fast. 2017 was a very difficult year for this strategy. I had BA, GS, LMT, PCLN, VLO and everytime I adjusted by layering on new BCS they would go pretty quickly ITM and I still had to manage the 'cherry' callers who, as you mention, accelerate at a faster pace. 

    You also correctly identify that the adjustments mean that you are almost condemned to move yourself into a much larger position than you ideally would like to be in. You are then violating your own rules on position sizing, and increasing the risk incrementally.

    As Phil rightly says, you can manage the callers by closing out 25% of the contracts as they increase, but again, when the underlying moves too far too fast that is a very costly manoeuvre – although without many alternatives. One's psychology when this happens has to absolutely ruthless – but that is a time when your left brain is telling you 'don't be a fool and buy that premium back, things will settle down'. Your right brain is telling you that this is all going to end badly, and why the hell did you sell those 'cherry' callers in the first place – why the hell did you go naked on a stock that has so much momentum. Lastly the devil whispers in your ear, 'Didn't you attend class when the guy said NEVER SHORT AAPL!!'


  49. Winston,

    Good comments, as I sad the 65 170 callers are basically left overs of previousl liquidated plays.

    Now a sore in my overall play. But still in all things are positive. It always good to have some other considerations. Thanks


  50. Excellent post Winston… thank you!


  51. Ultyguy – just did some quick research and it looks like the LLC structure could present some issues (not 100% sure though) see the link below:

    http://cadesky.tax/tt-15-03/

    If you have a dedicated tax person you may want to run it by them, I'm planning on talking to someone in the tax department of my bank before finalizing anything just to be sure. 


  52. W/Pstas – I sympathize as W is a furniture store with a good web site that, like AMZN, keeps selling more stuff and losing more money.  Too scary to short but very tempting.  

    MDR(2?)/Taihu – Are you saying you paid $3.65 for a $5 spread?  Is that a converted CBI play?  All the long options are still funny options with partial shares and a cash component so I'd just be happy to be getting out until they fix them (2021 should be fixed).

    WPM/Taihu – You know I love them long time…  No one else does at $17.64 and those naked Jan $20 calls are 0.41, not much to save there.  I still like them and, as a new trade, I'd sell 20 2020 $17.50 puts for $2.10 ($4,200) and pick up 40 of the 2020 $17.50 ($2.50)/$22.50 ($1) bull call spreads at $1.50 ($6,000) for net $1,800 on the $20,000 spread.  If you're already in for $14,500 and you get $1,000 back on the calls, then it's net $19,500 and you hope to get even at best (or whatever you made on the short callers).  

    MET/Taihu – Well, eventually you'll have to roll but no hurry.   You overshorted by a wide margin and the short calls should go worthless and the short puts keep them in check but, if you think they are going to burn you – just keep your eyes on the potential rolls in case it moves. 

    WTF2/StJ – WTF???!!!  Holy crap – how was this not a big deal then?

    Canada/CRS – I believe we already have Canadian investors.  It's the same but they have to give us 25% more if they use that funny money… cheeky  Minimums are supposed to be $100K but Greg has paired a couple of $50Ks.

    AAPL/Yodi – Well if it's 120, we'd better get the numbers right!  

    • 120 2020 $170 calls at $59.50 is $714,000 
    • 120 2020 short $210 calls at $32 is $384,000
    • 300 shares at $220 is $66,000 
    • 7 short 2020 $165 puts are $5 ($3,500) 
    • 65 short Jan $170 callers are $52 ($338,000) 

    The liquidation of this position is $54,500 and that's essentially what you'd be doing.  As a new spread on AAPL, I'd go for:

    • Sell 15 June 2020 $185 puts for $11 ($16,500) 
    • Buy 80 June 2020 $180 calls for $54.50 ($436,000) 
    • Sell 80 June 2020 $240 calls for $22 ($176,000) 
    • Sell 40 Jan 2019 $210 calls for $18.20 ($72,800) 

    That $480,000 spread that's $320,000 in the money nets you in for $170,700 but, hopefully, it will produce a pretty steady $40,000 per q in profits while you wait and whittle that $170,700 down quickly.  If AAPL goes lower, the short calls go worthless and you sell more for another $80,000 and then you have $10 per long to roll down $20 and widen the spread.  If AAPL goes higher, just remember to stop 1/4 over $20 and 1/4 over $25 so you would only be 1/4 covered (easy DD roll) if AAPL made a big move up.

    I prefer the smaller, more manageable size to start as you can easily DD on these if you have to and they'll still make over $300,000 (200%) in two years with not much of a move from AAPL required.  

    OLED/Albo – Crazy on that one.  Great call by Scott! 

    Indexes turning red.


  53. Thanks Phil, that is well laid out. Interesting excercise. Some work for me tomorrow.


  54. You're welcome Yodi.

    Wow, quite the pop into the close – everyone is green, /ES 2,900 on the button!  


  55. Thx Phil.  MDR2 is a converted position.  Had sold puts to buy the spread, good profit  on those. My AAPL position tomorrow!


  56. WTF part 3/Phil, StJ – He's consistent. Trump is making noise about slapping South Korea with sanctions if they don't toe the US line on diplomacy with the north, that is, nothing happens until NK promises to de-nuke and shows it. SK is seriously considering the most diplomatic way to tell Trump to go away…..


  57. Top Trade idea: 

    As a new spread on AAPL, I'd go for:

    Sell 15 June 2020 $185 puts for $11 ($16,500) 

    Buy 80 June 2020 $180 calls for $54.50 ($436,000) 

    Sell 80 June 2020 $240 calls for $22 ($176,000) 

    Sell 40 Jan 2019 $210 calls for $18.20 ($72,800) 

    That $480,000 spread that's $320,000 in the money nets you in for $170,700 but, hopefully, it will produce a pretty steady $40,000 per q in profits while you wait and whittle that $170,700 down quickly.  If AAPL goes lower, the short calls go worthless and you sell more for another $80,000 and then you have $10 per long to roll down $20 and widen the spread.  If AAPL goes higher, just remember to stop 1/4 over $20 and 1/4 over $25 so you would only be 1/4 covered (easy DD roll) if AAPL made a big move up.

    I prefer the smaller, more manageable size to start as you can easily DD on these if you have to and they'll still make over $300,000 (200%) in two years with not much of a move from AAPL required.  

    +++++++++++

    Phil, i would suggest that this starts to push the limits on position size that we are trying to discuss with the average member (hedge fund and dope smoking/investing high net worth individual excepted).

    Those 15 short $185 mean one is obligated to own $277,500 worth of AAPL – that is close to a 3 lot position size when we have always been mentioning $100k positions.

    I have updated my own thinking on the ABW strategy. This leveraged BCS through the sale of a short put is a staple of the PSW approach. Quite rightly the emphasis who partakes of this strategy has to know that they have to be willing to own the stock at the price of the sold Puts offset by any excess sold premium. If ownership is not an option then do not sell the put. Well, after many years I have modified the disclaimer to be:

    The very act of selling the put means you WILL OWN THE STOCK AT THE STRIKE PRICE OF THE SOLD PUT.

    There is no such thing as free money. The frisson of excitement as you sell the put and see the cash in your account increase is but an illusion. It's Shylock's pound of flesh. In the best of times it's the future chicken's potentially coming home to roost.

    …and then you see that wonderful PUT sale being recommended a few days or weeks as a no brainer to finance the purchase of a hedge on a 3X ETF that in this raging bull market that you are never going to need. That's the same raging bull market that is somewhat qualified by your opening statement at the start of today's post:

    "I did cash out my kids' college accounts into the Summer (still in cash) and our Hedge Fund is mainly in cash as well as we wait for the market correction (and buying opportunity) that never seems to come."

    That's fine, but excuse me if I comprehend I slight contradiction in the approach – You and the hedge fund is mainly in cash but we the people are pointed in the direction of a very bullish AAPL trade. 

    I am playing somewhat of devil's advocate twinned with the court jester, but I think you sometimes underestimate the power of your words. I know that all trade ideas are caveat emptor, but for some of the new subscribers they may not be as battle hardened as some of the long standing regulars here.


  58. Wilsons – always appreciate your comments. I have found that by paying attention to the overall position deltas, and adding a few short term OTM calls when you get buried, and working those downward over time can help. For example, your net delta goes over 500 or 700, and you really don't want to invest too much more in the position. Buy a few (5-10) one – two month out calls. Perhaps paid for by a put on this or another position.   If/when the stock declines, roll down as you can until you are in the money. Not saying I have done this for many positions, but it has certainly helped with a few – AAPL, IBM, and AAXN for example. I am not sure what Phil would think – as we're initially buying premium, but it has helped me.


  59. deano – a specific example would help.


  60. Phil / AAPL – Wanted to bounce something off you.  AAPL seems to have a pull back every year in September.  Worries about new phone announce and questions on new phone line up / sales once announced.  Like classic stock manipulation but it's pretty consistent ..  last year the pullback was about 6%,  '16 about 2% and '15 about 2.5%.  Apple is above my price target for '18 (210 to 220) and below '19 (220 to 245).  Everything I see looks like it is ahead of itself , but it just keeps going like the energizer bunny.   My gut tells me AAPL is due for a small pull back ( maybe 2 to 5 percent) in the next 30 days.  I have some short callers that I want to give some more time to play out to be able to exit with a smaller loss.  The short callers are covering some puts, and BCS  and stock so they are shorts covering less than 35% of my longs / stocks but they are racking up large paper losses at the moment.   Do you think we'll see a pull back in the next month or so? 

    The short callers I have are:

    Sept 21  

    50X $205 ( 3)

    50X $210 (3) 

    50X $215 (3) 

    Sept 28

    30X $215 (4) 

    30X $220 (3)

     I Have some Aug 31 short callers $220 ( 2.6) I think these are ok but will exit with a small gain 


  61. Top Trade/Wilsons – In the note of the trade, I said "You may want to divide this position by 10" but, in any case, it's not for a portfolio, it's a Top Trade Idea and obviously (I would hope) it's not an appropriate size for people who don't have $170,000 to put into a single position.   On the other hand, there's not much assignment risk (1,500 shares for $277,500) and little chance of that triggering so it's a pretty darned good trade for a $1M portfolio with $2M in buying power.  

    And I can be VERY bullish on AAPL (3-time Stock of the Year) without being bullish on the other crap in the market and AAPL is a big position in our portfolios and the fund – why do I have to hate every stock if I think the market is generally over-priced?  

    Anyway, good point about the size, I didn't realize the disclaimer only comes out in the text message.  

    Very good adjusting strategy, Deano.   That's what I mean by learning to play a few moves ahead!  

    AAPL/Batman – I think that, if FA NG is "fairly valued", then AAPL is still the bargain of the century.  Don't forget the $250Bn cash they are sitting on, in addition to the $55Bn they are adding to it this year – and that's AFTER taxes!  You are playing some very short-term stuff – I don't know if it started out that way but very dangerous.  Honestly, I wouldn't even attempt to pick short-term targets like that but I imagine you must have a substantial long position backing it up, in which case the idea is simply to roll them along but you have to take the occasional losses – you can't just keep adding to the shorts when they don't go your way.   And, on top of that, you're trading weeklies?  Wow, I'd have a permanent headache unless this is the only thing you do all day – in which case I'd be permanently stressed.

    150 short Sept calls avg $210 and the $210s are $11.  I don't know what $3 is, is that what you sold them for?  I don't know what your longs are, so I couldn't possibly even begin to talk about potential adjustments but – yikes!    I mean clearly the easy answer is the Jan $220s are $12 but we're talking 210 short calls here, which would be $252,000 and there's earnings in between that can burn you for another $10 – even $20 ($500,000) and then what?  

    AAPL moved up $30 in May, down $15 in June, up $15 in July and up $30 in Aug so the chance of them NOT moving $15 in Sept is very, very low and it's a coin-flip whether that's for or against you for $200,000+.  Is that really the risk you wanted to take?


  62. Phil,

    What’s your /NQ position?


  63. Phil / AAPL – Thanks…  I think i see your point… on the risk…. and should probably roll… I think i'm hoping for the quick pull back.  The numbers in () are what i sold them for..  Most of these have been open for a while ( some since July when When AAPL was in 190 / 200 ish range)  but the weeklys were just opened  in the last few wks.   The BCS are as follows are shown below.  I'm leaning towards taking the hit on half the Sept Callers and rolling sa maller amount to Jan ( or Dec), then going w/ the 180 / 240 BCS you featured today…..

    80X Jan '20 160 / 190 (paid 12)

    50X Jan '20 165 /  195 (paid 15)

    15X '19 140 puts ( 16)  15X '20 140 ( 12)

    5K shares purchased in Jan / Feb of this year for about 167 / sh  - i've been making money ( + 60K on the callers during year ) got bit this last time.

    1000's  more shares that are have a sub $45 purchase price (adj for splits)  


  64. Winston and others.
    I see my AAPL question to Phil has set up quite a discussion. I did mention in my discussion, that during the time I have traded AAPL I could set aside just about 500K.
    The Jan 19 170 caller was a rest substance of previous trades liquidated. I fully agree with you, that especially for new comers even approach a trade with high stock prices, I mean over 70$ or so in that range, should be taken with extreme great precaution.
    You have criticize the selling of leap puts or for that matter even shorter term puts.
    However I like to add one comment to my trade position given to Phil, in my given positions I actually failed to sell more puts. Selling more puts would have balanced the runaway 170 caller to a certain extend.
    The 170 Jan20 long call is just not a match for the half number of 170 Jan 19 caller. I did even have 15 more than 50%
    Obviously in any new play I would have sold a caller in the range of at least over the present stock price. My BCS originated end Nov. 17 and no callers were sold for this position. I did this, as I still did have the old 170 callers.
    Would I have sold a good amount of puts at the time of the purchase of the BCS the decrees of the putter would have fairly balanced the increase of the 170 caller.
    So from that point of view, selling puts would have been the right thing. (Monday Morning ect)
    You obviously, when selling puts, have to make sure that you happy to receive the stock at this price and you have the cash to cover.
    In a heave falling Market the danger in the runaway put is worse than a California forest fire!!! So I agree.
    However again by setting up a leap BCS with selling at the same or better half the amount of puts, I feel is still well positioned. Again selling the appropriate short term half cherry call.
    I noticed in Phil’s play suggestions he always sells only half the amount of putters, in case he might have to double. Mostly in these plays I sell positions in lots of 4 or max 6x option leaps, so I can sell 2 or 3 cherry calls.
    In a flat market the cherry call goes worthless.
    In a rising market the short leap put and the long leap call are the main parts which work for you, at the same time the short cherry and the short leap call run against you. So here it is important to have your proportions right.
    In a down going market, the leap short caller and the cherry caller will run with you, on the other hand you will lose on the long call as well on the put, they will run against you. So here again balance is the secret to have right at a given time.
    I hope this discussion will be a good lesson especially for new comers, still wetting their tows.
    You can take only higher type of risk, if you do have a good cash build up behind the relevant position.


  65. Yodi – very valid points.


  66. PS my new trade will be in the direction of
    Jun20 BCS 25x 180/240 sell 5x Jun 20 185 puts I still hold some 7 off so it is a total of 12 puts, committing 12x 185= 222K!!!! Sell Jan 19 225 call @ 9.65. x 10. So you see less than half, which you can roll and important is over the Jun 20 180 call. The cost after Phil's discussion will be in the range of 10K and we have a spread of 60 x 100 600K with a cash outlay of 10K after closing my present positions.

    So if AAPL will reach 240 plus by Jun20 I would be looking for some 540K not taking in to consideration any rolls which might have to be done on the Jan 19 225 caller.

    Any questions or further comments welcome.

    PS my new trade will be in the direction of
    Jun20 BCS 25x 180/240 sell 5x Jun 20 185 puts I still hold some 7 off so it is a total of 12 puts, committing 12x 185= 222K!!!! Sell Jan 19 225 call @ 9.65. x 10. So you see less than half, which you can roll and important is over the Jun 20 180 call. The cost after Phil's discussion will be in the range of 10K and we have a spread of 60 x 100 600K with a cash outlay of 10K after closing my present positions.


  67. Sorry some duplication to be ignored


  68. Yodi: the selling of short puts is a valid element of any strategy where you want to generate cash to finance the transaction. My point is that it is better to factor in the consequences of that sale as if you would be 'put' the stock, so psychologically you maintain the right level of balance in your account. I may be talking to myself here, but it helps. 

    Too often in the past, I have picked up on a stock that Phil has really liked, and for solid reasons that I agree with, (e.g. ABX, CLF, GE, TEVA) have used them to finance the purchase of BCSs. However, and this is totally my responsibility, as in the case of those examples make separate and multiple PUT sale transactions on those stocks (the table thumping, back up the truck, good things) believing that assignment will never happen because investors are going to discover the locked in potential of these companies (within the timeframe of my PUT sales) and bid the stock prices up. 

    LB is the relative newcomer on the block as a PUT sale financing vehicle. But all the stocks mentioned have experienced significant declines to such an extent that the management of adjustments can be quite challenging especially if the position size was way out of balance. 

    A few years back when CLF was a favorite on the board in the low $20's, I had used this as a vehicle to sell PUTs to finance other transactions. The sting in the tale was as it tumbled over many months – after rolling down and out in time many times, I ended up having to DD with a significant increase in the number of sold contracts at the $5 strike level. 

    Phil was incredibly supportive on helping me with this, and his analysis that CLF would hold the $5 level gave me the confidence to DD and not bail out.

    But it was completely my fault for getting the initial position size on CLF completely wrong, and it was my naivety believing that assignment was only something that happened to other people. 

    So everytime I think of going back to the same well – I just ask myself who's been putting something in the water while I've been away. 


  69. Winston I guess we all have its horror stories of puts. They always nice on a up market, but hell can break lose on a down market. One thing I seldom do is doubling up on puts. I rather roll the same amount in a better position and or pay the piper. I know than I can swim that far but no further. That said might be the wrong approach, but I feel more secure. The doubling up might be looking good on paper, but I trust most of us have learn the other way. ABX yes I still do hold put in moderation. CLF I did cut my losses, LB and TEVA I never touched. Always told everyone that bra will never hold water. Possible one day it will float.
    Mostly I look at the overall picture of my ports. 66% win 34% lose. So that can take care of the suckers. Obviously you always have to trade in accordance to the cash in your portfolio.
    If you have a 25K port you should hold 12K in cash to play it safe. Mainly trade with smaller stocks.
    I feel for me the armchair trade is still the more comfortable.


  70. Winston I know Phil start a play with higher numbers. Possible he should start with 2, 4. or 6. You can always go for more. This aswell would give the newcomer a better start.

    But obviously the final decission is always on yourself.


  71. The only numbers he stinged on was the latest TSLA trade. I even sold more callers. If they reach 420 than Musk will be selling a flying car at this point.


  72. Yodi, would you mind if I took a look at your spreadsheet?   TIA

    grasshopper67@yahoo.com


  73. Yodi………would appreciate if I could look at your spreadsheet as well.  ssg74@hotmail.com