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Monday Market Madness – China Goes on Hold, Markets Go Crazy!

All fixed! 

That's how the markets are acting now that Trump and Xi have agreed not to employ more tariffs while they negotiate trade.  I'm not quite sure how they plan to fix, in the next 90 days, what they haven't been able to in the past 360 but it is fun to be hopeful, isn't it?  As you can see from the Chart, the S&P is flying back to 2,800, where we were in early November but still way below 2,950, where we were in early Ocober but it's only early December and now Trump and Xi only have to keep quiet for 30 days and we can all pretend everything is high and go back to paying record-high prices on stocks – Merry Christmas!

Of course a Santa Clause Rally is a time-honored tradition as it's how all the Wall Street Banksters lock in their bonuses so it was never likely we were going to end the year on a sour note – that's why we put a lot of money into our bullish positions in the last round of portfolio adjustments.  Even GE is up 2.5% this morning as all the switches have been thrown on all the Buy Programs and every stock – good or bad – is on the move this morning.

Image result for trump xi negotiation cartoonWhen you think about it, of course, not only has NOTHING changed since last week but now we know for sure there will be no trade deal until March at best.  Trump showed real weakness backing down on more tariffs since that was the only leverage he had in this negotiations and China's tariffs have always been retaliatory – so Xi has given up nothing at all and Trump has stopped fighting – how is that worth $500Bn of stock advances?

Still, it is what it is and we'll just have to see how things shake out.  We're now soliday over our bounce lines but that doesn't matter unless we're still over them on Wednesday so today is very much a watch and wait kind of day, which is good – because I'm on vactation.

Be careful out there, 

- Phil

 


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  1. Diogenes (@WallStCynic) tweeted at 0:25 AM on Sun, Dec 02, 2018:

     

    What’s good about it? China knew they could play Trump because of his near-term stock market obsession and long-term political risks. The USA is now getting played by Putin, Xi and MBS. And the rest of the world knows it. But the stock market will go up on Monday!


  2. AS Barry pointed out, so far it's "He said, Xi said"…

    Xi is making promises knowing that he can wait out Trump!


  3. Josh on that Moscow Trump Tower deal:


  4. Good Morning.






  5. The Race to Dam the Himalayas




  6. A Coal Mine Is Devouring a 12,000-Year-Old Forest




  7. Yodi / spread comments – it's more calls for sure, but thinking that even adding some long deltas on AAPL when it gets to around $210 would/could neutralize that upside risk, and then combined with rolling out in time and strike I think it is manageable. I've been bitten by those adjustments that create more short calls than long calls and it is a challenge. But the last time that happened it was when I was trying to manage short calls that were one year out. I know a few people must be in that position with the last suggested adjustments on AAPL spreads. It's always frustrating to have to sacrifice significant profits to pay off the short callers. But you don't get paid without taking the necessary risk.


  8. Good morning!

    Things pulled back a bit but, as I said, it only matters where we settle and it will take a lot more than this to stop those death crosses:

    RUT not looking healthy at all.

    Good old 11,500 and 3,200:


  9. Winston, In deed it is more risk. Only today I can see how my cherry calls working against my longs!

    Again I prefer to stick to my roles.


  10. Winston, on an up beet market like now, mostly the BCS does not hold up with the cherry calls. Only if you hold the stock you have a better showing, as the stock always goes up with a delta of one.


  11. Winston Typical example I hold CCL in my armchair plays. Stock is up .61 cents Dec 60 caller is only up .27 cents.


  12. Yodi, that's where buying some 60 delta longs come in useful. The AAPL Mar 19, $175 call is @ 60 delta so buying those in sufficient quantity to balance off the short calls can be helpful. I believe it was part of the standard PSW adjustment playbook a few years back. Buying back the short calls (gradually) helps was well. Of course, for going long the March AAPL calls, they will start losing value pretty rapidly if AAPL starts dropping or getting close to expiration - so balance is essential. 

    One may ask why bother? Always good to learn new tricks. Nothing ventured nothing gained.


  13. A while back someone shared an analysis of FTR prospects of survival by SA contributor 'the Owl'. There is a follow up analysis here. Thrust of the article:

     "This stock is going nowhere until there is a path through that debt wall."

    I have a small put position in FTR which I keep to remind me that banging on the table has its uses, but not in staying with stocks where the fundamentals are going down the tubes and the management aren't even aware of it.


  14. AAPL/Winston, Yodi – If you look at the AAPL play you were discussing:

    Sell 20 AAPL 2021 $170 puts for $20.35 ($40,700) 

    Buy 40 AAPL July 2019 $175 calls at $19.50 ($78,000) 

    Sell 60 AAPL July 2019 $215 calls for $5.10 ($30,600)

    Net cost of $6,700. Max spread value if AAPL is at $215 next July 2019 and returns $160,000. 

    Effectively, you are a bit bearish on AAPL into July, thinking it won't go over $215 (not recapturing former glory over 9 months is saying you never thought it was worth $230 in the first place). 

    However, if you look at it in the context of a larger trade, then you would only have to roll the short $215s if the $175s are $40 ($160,000) in the money and that's up about $150,000 so you have more than $20 leeway to the upside before real trouble sets in and, somewhere between now and then, you could add 60 of the 2021 $200/250 bull call spreads which are now about (I don't have TOS up) $15 so $90,000ish to cover means you'd still be taking $70,000 off the table and then you'd have a well-covered $300,000 spread with 18 months to roll the short calls before you'd be forced to take your $300,000 for the 2021 spread and buy 60 2023 spreads to cover those annoying short calls.

    In that context, there's nothing at all wrong with setting the aggressive target for July – just make sure you have the firepower to follow though!


  15. Phil Winston. Might look OK on paper but I still do not buy it To much high rollers.


  16. Thanks Phil, you and Yodi's critique are very helpful. I either ten to skew too cautious, which normally happens after I have skewed too risky. It's a tough journey to find that balance, but I think it will payoff when I do. But as Yodi mentions, the risk on the trade (if you focus on the extra short callers) is not to everyone's taste. 


  17. Just on a day like today shows you, how quick the fire fizzles out.


  18. Phil

    When a call spread drops to the price you payed for the  call it’s time to roll 

    correct ?


  19. Spread/QC – When the price of the long call you bought falls below the net of your spread, you should strongly consider rolling.  Why?  Because the short calls are all premium (or the net wouldn't be dropping) and your long calls still have some premium, which will fade out even if your stock flatlines forward.  Rolling to a longer call saves the money you put in and then puts that money to work in a long call that is CURRENTLY worth the basis + premium so you are reinvesting what you originally put in to a new, hopefully better position, rather than watching it erode.


  20. Wow, this rally did not hold up well at all!


  21. Phil/HOV,

    Any interest at this price level 1.20?

    thanks as always

    regards


  22. Phil Can you specify the net of your spread. "When the price of the long call you bought falls below the net of your spread"


  23. yodi – i think it means the net price paid for the spread;

    i.e. if you bought the call for $2 and sold the higher call for $1 the net of the spread would be $1

    so if the long call drops from $2 down to $1, the price of the long call is now at the "net of the spread"

    phil can confirm if thats correct? 


  24. Thanks CRS


  25. Winston and Yodi.  This is a great discussion.  Thank you for sharing.  Winston, why did you pick the .6 delta callers?  Is there anything special about 60 delta callers verses a different strike.  The .6 should be ITM by a strike or two.

     

    Winston 
    December 3rd, 2018 at 10:49 am | Permalink | Tweet thisIgnore this user

    Yodi, that's where buying some 60 delta longs come in useful. The AAPL Mar 19, $175 call is @ 60 delta so buying those in sufficient quantity to balance off the short calls can be helpful. I believe it was part of the standard PSW adjustment playbook a few years back. Buying back the short calls (gradually) helps was well. Of course, for going long the March AAPL calls, they will start losing value pretty rapidly if AAPL starts dropping or getting close to expiration - so balance is essential. 


  26. Winston I once more set your AAPL idea on my oracle calculator.
    I buy 3x Mar 19 175 calls @ 16.10 and sell 6x 210 Mar callers @ 2.69.
    At 185 you need to close the play in Feb with a profit of 350.00 Do you keep the play until expiration you lose 216.00.
    Raise the stock to 190 at expiration you gain about 1300.00
    At 200  4,280.00
    At 210 6,900.00
    At 220 4,250.00
    At 230 1,280.00
    At 235 -216.00
    Interesting range. Obviously at 235 the light goes out at which time you need to add more long calls further out.

    Any down turn of AAPL under 182 you going to lose, as Your long call loses very quick on value.


  27. HOV/Pat – I'm not home so ask tomorrow – haven't look over HOV in a while.

    Net/Yodi – The net price you pay like the AAPL 2021 $200/250 spread is $25/10 so net $15 so when the $200s drop to $15 it's a good idea to salvage your original investment but making a new spread out of it that will be covered by the short $250s you leave open.

    And what CRS said!


  28. Thanks Phil understood


  29. robert / delta callers. The aim is to provide firepower for rolling the additional short calls out of trouble. And, to do this in the most economical/efficient way – balancing bang for the buck vs. time decay. Simply put, the 60 delta calls 3 months out will sacrifice only gaining 60% of the upward stock price move but will only lose 60% of any downward move on the stock. But just as importantly the amount of extrinsic premium you are buying is much less when the call is ITM. The March 19, $175 call (delta 60) costs $17 so with AAPL @ $185 you are buying $7 of extrinsic premium ($175 + $17 – $185). In contrast, the $185 call (50 delta) costs $11.50, but that is all extrinsic premium. We are looking to sell more premium than we buy.

    It is absolutely not an exact science as the multiple variables are changing all the time. But if these delta longs start losing value quickly – because AAPL is going down in price you need to cash them out quickly. It's a delicate balancing act.

    And of course, remember to take the profits and then reload with another set to provide more firepower for the rolls.

    But I am certainly not the expert on the delta adjustment strategy and the various moving parts. I would be very interested to hear your viewpoint. It's a subject worthy of more discussion.