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Monday Market Moves Up (again) on Trade Progress (again)

Yay, I guess.  

The crisis we created may be over!  The US and China may lift tariffs by March 27th – after President Xi finishes a trip to Italy and France, where China may buy both countries under the EU's new BOGO Program.  Meanwhile, to appease Presdent Trump, President Xi has agreed to buy $18Bn worth of Natural Gas (/NG) from, specifically, Cheniere Energy (LNG), the US's largest exporter of Liquefied Natural Gas.  

Of course, this kind of concession is completely meaningless as Natural Gas and Oil (/CL) is what they call a "fungible" commodity, meaning that it's essentially irrelevant WHERE China buys it's Oil and Nat Gas because they will simply replace another buyer here and the guy who used to buy it from us will buy it from someone else or, perhaps, forced Chinese buying of our Natural Gas will create a shortage and artificially raise prices for all Americans.  

Image result for fungible cartoon

Of course LNG has been spending big to boost exports ($15Bn, in fact) as if they KNEW this deal was coming or maybe it's because the deal already came and Trump is just acting like he did something (not surprising) as LNG already signed a deal with China National Petroleum in November, to buy 1.2M tonnes of LNG a year and a tonne of LNG is 48.7Bcf so 58.44Bcf of Natural Gas is 3.6% of the entire US supply of Natural Gas, which is already in the low end of the 5-year range.

Working Gas in Underground Storage Compared with Five-Year Range

We talked about why we like Natural Gas just last Wednesday and we played the /NGV19 October Futures at $2.75 and Wednesday they were already $2.85 for a $1,000 gain per contract and today they are $2.97 so up another $1,200 per contract but of course not everyone is ready to play the Futures so our suggestion as a stock play was Chesapeake Energy (CHK), where we went with the following trade idea:

As a new trade on CHK, I'd go for:

  • Sell 20 2021 $3 puts for $1.10 ($2,200) 
  • Buy 30 2021 $1 calls for $1.60 ($4,800)
  • Sell 30 2021 $3.50 calls for 0.55 ($1,650)

So that's net $950 on the $7,500 spread that's $1.50 ($4,500) in the money to start and not far to go to make the full $6,550 (689%) at $3.50 and the worst case is you own 2,000 shares at about $3.50.

As you can see, CHK really took off on the day of our post (cause/effect?) and already the $3 puts are down to 0.85 and the $1/3.50 spread is now $2.30/0.97 so net $1.33 x 30 contracts is $3,990 less 20 at 0.85 is $1,700 so net net $2,290 is up 240% on cash already and well on it's way to our expected $6,550 (689%) gain.  That is what we call "on track".  

This is what Fundamental Investing is all about – we read the news, we think about what stocks that news is likely to affect and we come up with a trading premise.  We also prefer to use options both to hedge and leverage our bets – just in case we get it wrong – but usually we get it right — eventually…

Timing is the hardest thing to get right in these cases.  Getting back to LNG, we used to play them but they have since more than doubled and we lost interest as $64 is a $16.5Bn valuation and the company made only $500M last year but should make closer to $800M this year and the China Deal alone (the November one) was good for $500M and, if the trade deal does throw anoher $18Bn worth of business at LNG – even if it's over many years – then buying them now is a no-brainer.

Fortunately, we can use options to construct a more interesting play on LNG, who are likely to be up 5% on this news so there's a little guessing in these option prices:

  • Sell 5 LNG 2021 $55 puts for $4 ($2,000) 
  • Buy 10 LNG 2021 $60 calls for $15 ($15,000) 
  • Sell 10 LNG 2021 $70 calls for $10 ($10,000)

The net of the spread is $3,000 cash and it requires another $2,760 in ordinary margin to sell the puts but, at $70, it pays back $10,000 for a $7,000 profit (233%) and I have been banging the table on Natural Gas for 3 years now and it's all playing out just as we expected.  Remember:  I can only tell you what is likely to happen and how to make money trading it, the rest is up to you!  

We'll see if the market is ablfe to get excited about more Trade Talks and we still haven't cracked 1,600 on the Russell (/RTY) but as long as the S&P (/ES) is over 2,800 – all is technically well in the markets.  It's a fairly light data week with just 4 Fed speakers but we do have PMI and ISM tomorrow and the Beige Book on Wednesday that should cover the shutdown period and Friday we have Non-Farm Payrolls, which were red-hot in January at 304,000 but it's wages we're going to be focused on.

7,200 on the Nasdaq (/NQ is a good shorting line for today as is 1,590 on /RTY, since that's the 200 dma – tight stops above!


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  1. Good Morning!

  2. A good start from Barry:

    The threat to America is this: we have abandoned our core philosophy. Our first principle of this nation as a meritocracy, a free-market economy, where competition drives economic decision-making. In its place, we have allowed a malignancy to fester, a virulent pus-filled bastardized form of economics so corrosive in nature, so dangerously pestilent, that it presents an extinction-level threat to America – both the actual nation and the “idea” of America.

    This all-encompassing mutant corruption saps men’s souls, crushes opportunities, and destroys economic mobility. Its a Smash & Grab system of ill-gotten rewards for the well-connected few. The rest of the population? Fuck ’em. This is not what Capitalism is, at least not as conceived by Adam Smith.

    The peril gravely putting our nation at risk of failure is Crony Capitalism.

    We can define this as the return on capital generated not by innovation and risk taking, but rather through the unholy alliance between the business and political classes. Instead of genuine competition, they use the states’ power to legislate, regulate, grant hand outs, permits, government licenses, special tax breaks, and other dispensations as favors to enrich each other.

  3. Good article….

  4. Phil,

    Are you in /SI? If not, where are you looking to get in?

  5. Good morning!

    Got a quick dip already in the indexes but nothing severe.  

    Good article, StJ.  

    /SI/Japar – I'd love to get back in at $15.  I'm always in /SI through WPM so I don't wory much about silver (or gold with ABX) unless there's a particular bargain.  You should be a bit concerned that Trump tried to talk down the Dollar this weekend (by making fun of Powell) and that didn't work.

    We are so off the rails in this country!  

    I've listened to preachers, I've listened to fools

    I've watched all the dropouts who make their own rules

    One person conditioned to rule and control

    The media sells it and you live the role

    Heirs of a cold war, that's what we've become
    Inheriting troubles, I'm mentally numb
    Crazy, I just cannot bear
    I'm living with something that just isn't fair
    Mental wounds stop healing
    Who and what's to blame
    I'm going off the rails on a crazy train – Ozzy

  6. AAPL $177 – We'd be in trouble if they were falling too.

  7. Phil / CMG –  at 620 today…  is this getting away from us?

  8. Phil, do you have any opinion on US Steel?  They’re down 50% from a year ago. Currently near the bottom of a rising channel. Potential beneficiary of a trade deal, if it happens?

  9. Phil / Thoughts on FXI? Also sold March MJ 35 calls and MJ is at 36.65. Do I roll these out and up and sell some calls or puts to offset cost? Thx

  10. CMG/Batman – Well we're going to have to DD on the long end but not away from us yet – just annoying that they never pull back to give us a cheaper entry.

    X/Idi – Well they should benefit from the tariffs but it isn't helping and yes, they made $1.1Bn last year so $3.8Bn seems cheap but not to people who owned them in 2013, 2014, 2015 or 2016, when they lost $3.6Bn and, give them 4 more years and they may be able to net $0 for the decade. 

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 2019E 2020E CAGR / Avg
    Revenue $m 17,424 17,507 11,574 10,261 12,250 14,178 14,076 14,080 -4.0%
    Operating Profit $m -1,900 413 -1,238 -223 615 1,026      
    Net Profit $m -1,645 102 -1,642 -440 387 1,115 535.6 459.2  
    EPS Reported $ -11.4 0.67 -11.2 -2.81 1.73 6.25      
    EPS Normalised $ -2.14 3.46 -7.91 -2.13 1.76 6.44 2.92 2.50  
    EPS Growth %           +267.1 -54.6 -14.6  
    PE Ratio x           3.46 7.63 8.93  
    PEG x           n/a n/a n/a

    Paying -$300M in taxes last year was a big help.  Assuming that means they really earned $800M and should have paid $200M for net $600M – there's nothing impressive at all going on here.  

    I prefer MT, who are safely over the wall in Europe where, even under the oppressive yoke of Socialism,  they somehow managed to squeeze out $5Bn in profits last year on $76Bn in sales vs $14Bn for X and you can buy MT for $23Bn at $23 (so there must be 1Bn shares!) and yes, they lost net $8Bn in 2013-2016 but that's only double what X lost and they've already made it up. So MT is my choice for the sector and we already have it in the LTP:

    Short Put 2020 17-JAN 30.00 PUT [MT @ $23.11 $-0.01] -10 3/6/2018 (319) $-4,000 $4.00 $3.45 $-43.00     $7.45 - $-3,450 -86.3% $-7,450
    Long Call 2021 15-JAN 20.00 CALL [MT @ $23.11 $-0.01] 40 10/19/2018 (683) $43,400 $10.85 $-4.55     $6.30 - $-18,200 -41.9% $25,200

    Our 2/15 adjustment was:

    • MT – Betting on trade deals that never come.  Still, the 2021 $20s at $6.40 can be rolled to the 2020 (yes, earlier) $15s at $8.70 for net $1.30 ($5,200) so let's do that as I'd rather have leverage than time.  On the other hand, the 10 short 2020 $30 puts at $7.60 ($7,600) can be rolled to 15 short 2021 $25 puts at $5.25 ($7,875) for about even.  

    So the adjustment is what I'd do for a new trade.

    FXI/Soma – Too crazy for me.  I wouldn't go bearish as it's too risky and I wouldn't go bullish as we already missed a huge run. 

    MJ/Soma – Do you have any longs?  If you are naked short the calls, then that's way too risky but if they are covers, then let the premium wash out and then sell something with more premium to replace them.

    HRB/Soma – Damn!  

    Might not be worth keeping:

    Short Put 2020 17-JAN 25.00 PUT [HRB @ $24.06 $-0.08] -10 1/19/2018 (319) $-4,200 $4.20 $-0.60 $-2.40     $3.60 - $600 14.3% $-3,600
    Long Call 2020 17-JAN 18.00 CALL [HRB @ $24.06 $-0.08] 20 6/18/2018 (319) $12,940 $6.47 $0.08     $6.55 - $160 1.2% $13,100
    Short Call 2020 17-JAN 25.00 CALL [HRB @ $24.06 $-0.08] -20 6/20/2018 (319) $-6,000 $3.00 $-0.73     $2.28 - $1,450 24.2% $-4,550

    Let's kill HRB in the LTP and OOP as it's close to even (a bit green) but with no exciting prospects so wasting space.  

  11. X vs MT…thx, Phil!

  12. Wow, things really went off a cliff, nice way to start the week/month on the shorts!  

    Hopefully that will be it, 2,780 though is a terrible fail of 2,800 and down 100 points on the Nas is a quick $2,000 and /RTY 1,568 should be support but, if not, could see 1,550.   Tight stops in any case but I'm happy with these gains!  


    Image result for khan! animated gif

  13. You know, sometimes I think we overthink (and overtrade) things.  The Money Talk Portfolio, which we can't touch, is now up 141.1% after adding another $4,000 since 2/13 and it's better than that because those are the old GE options, with also get some WAB stock from the split. 

    All we did here was pick the kind of stocks we didn't think we'd have to adjust and then – WE LEFT THEM ALONE.

    And we're only using $30,000 in margin too!  

  14. Ouch for DPZ!  

  15. CMG – if you have short calls, then I would say, yes it's getting away from us. If you are fully covered with short calls, then yes it is getting away from us. If you are condemned to rolling to Jan 19, $600 short calls – then it could be a white knuckle ride for the next 9 months. Layering on more BCS will create opportunities to DD – the question is when do you double down – this upward momentum has not stopped since January. 

    When does one capitulate to reduce the number of sold short call covers and wait for the stock to 'settle' down. That of course will require significant cash – as will layering on BCS. 

    We did discuss 2019 year end price targets of $600, and prior to that there was a calculation of fair value at $450.

    What does one make of a restaurant stock that is trading at a P/E of 100, when rational thought would suggest a P/E of 35 would be most appropriate? The next two quarters of good earnings could see a 10% pop every time – with management spinning the numbers for all they are worth (new marketing campaigns, new menu offerings, new technology and logistics enhancements. With Bill Ackman in the background being the main cheerleader.

    I'd plan for a $700 – $750  price point at least by the end of the year and plan accordingly. Although this goes against the selling premium principle, maybe it makes sense to start buying back 50% of any short call covers (in small tranches) to allow for a double down at a much higher price.

    And we still need to discuss the plan for the Mar 15, short $550 covers. A pre-roll has been done on 8 to the Jun $600 (or was that the Jan 20, $600 (for around $75) - it would be good to discuss what is the plan of the action on the rest of those short $550 covers.

    A question is, if you can keep on rolling, do you roll in steps to achieve what you believe is a rational price target, or do you roll to always keep pace with the current price of the stock?

    I find it difficult to believe that CMG was so undervalued back in January with a price tag of $450 that people now believe that it should be re-priced at over $600. But Batman and Phil are more experienced than me in the valuation of companies.

  16. Winston, I can only say thanks I am out of CMG with my short puts during Jan 19 close.
    Never had a good feeling, more it would go down again than up, with all the dead mice and food poisoning.
    Today I would like to draw you guys attention to T again below 30, 29.77 an attractive price to get in to the stock again or sell a put.. 6.77% div., nothing to sneeze on for an armchair trade!

  17. CTL- Albo, do you see any news? I am not seeing anything new. 

  18. CMG/Winston – These are just time slices of the stock.  On this day, it's this price but so what?  Yes, if you are in a position that's over your allocation and you have margin pressure – it's a big deal – which is why you should never mess around with $500 stocks in a portfolio that doesn't have $1M liquid in it!  The "flaw" to the strategy is if you let yourself get forced out of positions – otherwise, trading in a rational fashion doesn't generally have a huge downside in the long run.  

    We are down about net $10,000 in our current position and, since we have the $480/540 bull call spread showing just $77,000 out of $120,000, we KNOW we have another $43,000 coming to us if we're going to owe the short callers a penny.  The 12 short March $550 callers are at $68.50 and they have no premium and we sold 8 June $600 calls for $50 as a pre-roll and those are now $52 and only worth $20 at $620 - so hardly a panic here.  

    Long Call 2021 15-JAN 480.00 CALL [CMG @ $618.24 $6.61] 20 11/20/2018 (683) $180,000 $90.00 $104.80 $-10.03     $194.80 - $209,600 116.4% $389,600
    Short Call 2021 15-JAN 540.00 CALL [CMG @ $618.24 $6.61] -20 11/20/2018 (683) $-133,000 $66.50 $89.90     $156.40 - $-179,800 -135.2% $-312,800
    Short Call 2019 15-MAR 550.00 CALL [CMG @ $618.24 $6.61] -12 1/18/2019 (11) $-19,440 $16.20 $52.30     $68.50 $5.70 $-62,760 -322.8% $-82,200
    Short Put 2021 15-JAN 450.00 PUT [CMG @ $618.24 $6.61] -10 2/19/2019 (683) $-30,400 $30.40 $-5.45     $24.95 - $5,450 17.9% $-24,950
    Short Call 2019 21-JUN 600.00 CALL [CMG @ $618.24 $6.61] -8 2/15/2019 (109) $-40,400 $50.50 $1.50 $-50.50     $52.00 $3.02 $-1,200 -3.0% $-41,600

    The "plan" for the March $550 calls is to buy them back – hopefully for less than $60.  We already sold the June calls to replace them – we simply hoped CMG would go down, not up but the risk is 12 calls going $12,000 or $24,000 more against us but we pay that money, say $100,000 at $630 and then we have 20 of the 2021 $480/540 bull call spreads covered by 8 of the short June $600 calls and the 10 short 2021 $450 puts (which we just sold) so our net is $97,160 on the $120,000 spread but, of course, we're in this mess because we already cashed out 20 Jan $460s for a $92,480 profit on 10/25 and 15 Jan $400s for a $78,600 profit on 8/27 – these short calls are the leftovers that we didn't want to pay off at the time – hoping for a better price that never came.  

    If, in the end, we net a $21,400 profit on these leftover short calls, that would be a miracle and we'd be up about $200,000 on the overall position so I don't think we NEED to do anything special with the March calls – those were a fail and we already rolled them to 8 short June calls – it's just a question of how much we'll actually have to pay the March callers.  

    Now, rather than spend $100,000 buying back 12 short March $550s, we COULD cash our 20 2021 Bull Call Spreads for $77,000 and buy 40 of the 2021 $550 ($152)/650 ($102) bull call spreads for $50 ($200,000) so $23,000 more than buying back the short calls and then we have $400,000 worth of longs covering the 8 short June $600s and we could roll the 12 March $550s ($70) to 12 more June $600s ($53) for net $17 ($20,400) and now we've spent $43,400 instead of $100,000 and we have a $400,000 spread 1/2 covered with 20 June $600s and, if we can roll up $50 each quarter for $17 ($34,000) that's $650 in Sept and $700 in Jan and $750 in March and $800 in June 2020 for another $136,000 and we'd be in our deep in the money $400,000 spread with 20 short June $800 calls (still rollable) for net net $97,160 (our current spread) + $43,400 (our rolls) + $136,000 (our prospective adjustments to the short calls if CMG goes up another 30% by next June) for net $276,560 on our $400,000 spread.

    That's not unappealing but it makes CMG a huge and risky position so, on the whole, I'm more inclined to just kill the short $550s in this cycle and hope to make that last $20K without spending another $100,000 (at least) to hopefully make $150,000 (realistically).  We have other, less stressful ways to make $150,000 with $100,000 over 2 years and also it would be more diversified – so that's how I end up at my decision.

    T/Yodi – See my other post this morning.  GMTA! 

    CTL/Pstas – The new FTR.  They always need someone to beat up on in that sector.

    Should have went long when I made that bottom call…

    Let's hear it for non-greedy exits.  

  19. Phil T I did not see this one. You dancing at too many weddings. Good play too. I set to buy the stock and sell the put and wait a bit for selling the call.

  20. Phil, have you considered EAF as a steel play instead of X and MT?

  21. Pstas / CTL – CTL said they are unable to file its 2018 annual report on time because of "material weaknesses" in its internal controls over its revenue recording procedures and for measuring the fair value of assets and liabilities related to its Level 3 Communications acquisition. They did say it does not expect any material changes to its 2018 financial results that were previously reported on Feb 13th.

  22. T/Yodi – Ilene wanted me to write something she could promote.  

    EAF/Millard – They are interesting a side-play on steel but I don't see US demand coming back that fast (where is the infrastructure bill?).  Options only go out to Oct but you can sell $15 puts for $2.30 to net in for $12.70 – that's a good start.  At the moment, the $12.50 ($2.85)/$15 ($1.60) bull call spread at $1.25 is good to play as well but I'm not so in love with them that I'd do a 1:2 ratio as I'd want that credit if I"m going to make an entrance below $15.  

  23. Eric – CTL – thanks

  24. XLU- executed short play on utilities- buying June 57/52 bear put spread for $1.44 and selling June 57 calls for $1.59

  25. Oops, news is going to new post.  

  26. S&P: Would today make a quad/peta-top at 2800? 

    Interesting too today SPY volume close to 80M shares while last week about half that on average…

  27. Phil/ CMG

    I didn’t enter the CMG position, now as a fresh entry do you recommend the same one?

  28. advill I would think twice!!!

  29. Advill / if you play CMG (and play is the operative word because this stock moves outside the bounds of rational thought) you need to have the stomach for 10% moves on earnings (up or down). For the rest of the year I see the probability that there will be 10% moves to the upside (on earnings). A plain vanilla bull call spread is probably the best way to play it – but without selling short covers.

  30. Pstas – Sorry, I was playing in a golf tournament today, and out of touch.

    I did manage to sell 50 May 11 puts for an average of $.55.

    Hope their statement of no material changes is correct.

  31. Phil – thanks for the in-depth thinking around CMG and the various pros and cons. I thought the pre-roll was about first selling a new set of calls (the June 600's, although the 'official' adjustment was to the Jan 20, $600s, and then rolling the 12 existing short calls from Mar 550 to June 600's, making 20 short calls in total and being fully covered (like you are in the hedge fund). But it doesn't matter, the principles are more important. 

    I see you prefer buying back (reducing) the short calls – and I understand that – when a position is going against you and particularly when the objective is to recover from short calls not 'dying on the vine' – it is kind of crazy to scale up the size of the position. And of course, the idea that money could be made on a quarterly basis by the strategy of selling short calls for income died a death the moment the stock took off at the end of December. Those red flags are enough to warrant reducing risk and exposure.

  32. Peta/Mito – Yeah and whatever comes after it.  Some are determined to keep us up here – no matter what.

    CMG/Advill – It's been very annoying, unless you have TONS of margin – I'd stay out.  It was compelling when we entered and they were below $400, that's where all our profits are from – this is just getting silly.  

    CM G/Winston – Fund has (almost) unlimited margin so the open CMG for 2 years is a non-issue.  In the LTP, I don't want one trade to take over the portfolio and freeze us out of other trades we could be making.  Also, 3 weeks later – it's more robust than I thought so it looks like we'd be forced to DD on the longs for a $400,000 position and, again, not appropriate for the LTP although, if it were AAPL – I'd be fine with it – as it's more predictable and we wouldn't mind being "stuck" with a lot of it.  That's not the case for CMG.

  33. OK – so I jumped in on CVS after the initial drop around 64.  It has kept falling like a rock on no additional news that I can find.  Any thoughts or opinions on a future outlook? 

  34. Phil, Winston Yodi/ CMG


    Thanks the advice!…staying out and away!.