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Faltering Friday – Markets Give Up Half the “Rally” on Bad Trade News

The markets are very moody

Just when we got the S&P back to our 10% line, we're down 20 points this morning and back below the 50-day moving average (2,866), back at the 2,860 line that marks the bottom of our 5% correction zone on the bounce charts we've been using all week.  It's a very disappointing setback and, if this is how we're going to go into the weekend – we are going to need more hedges!  

At the moment (7:30), however, the 5% Rule's™ Bounce Chart™ looks like this:

  • Dow 25,200 is the 5% line and the bounce lines are 25,450 (weak) and 25,700 (strong)  
  • S&P 2,860 is the 5% line and the bounce lines are 2,875 (weak) and 2,890 (strong)
  • Nasdaq 7,475 is the 5% line and the bounce lines are 7,540 (weak) and 7,605 (strong) 
  • Russell 1,550 is the 5% line and the bounce lines are 1,565 (weak) and 1,580 (strong)

We were all red except the Dow (which was at the weak bounce line) on Tuesday morning so this is still progress, but just yesterday afternoon  we only had 3 red boxes left to capture and we would have been back to bullish.  That's what's useful about the Bounce Chart – it keeps you from making bad decisions by making sure the rally is real before we start throwing money after what turns out to be just a dead cat bounce.  

Since the S&P and the Russell are at the -5% Lines, we'll be watching them closely and, if they turn red – we're not going to wait for more evidences to bump up our hedges.  Since we're talking about hedges and since I'm late with our reviews – now is an excellent time to do our Short-Term Portfolio Review!  

The Short-Term Portfolio (STP) is part of a paired portfolio (see our Virtual Portfolio Tab for other reviews) system we teach our Members to use and it's the defensive part of our LTP/STP strategy, where the Long-Term Portfolio gets a $500,000 alllocation and $100,000 is allocated to the Short-Term Portfolio to protect it.  This forces us to have the discipline of ALWAYS being hedged as it's specifically the STP's job to be short the market at all times but not just with mindless hedges that lose money – the challenge of the STP is to try to MAKE money by finding shorts in a bull market.

Frankly, it turns out we're very good at doing that as the Short-Term Portfolio, with it's very aggressive positions, has made much more money than the Long-Term Portfolio this year (on a percentage basis), as it's up 619.4% at $719,355 from a $100,000 start on Jan 2nd, 2018 and the Long-Term Portfolio is "only" up 159.4% but that's a gain of $797,222 from the same Jan 2nd, 2018 start date

 While the LTP has sensible long-term positions that are meant to make slow, steady returns, the STP is very aggressive with much shorter time-frames and we take quick profits off the table and we've been fortunate enough to catch several market dips in the past 18 months – despite the general uptrend of the market – a perfect storm for our paired portfolios to prosper in:


  • Apple (AAPL) - This section is for short puts we used to offset the cost of our hedges.  That way, if we're wrong and the market is bullish – we get cash from the short puts to dull the pain.  Of course we only sell puts against stocks we'd REALLY like to own at the net strike price and, if they do get assigned to us – they become a cheap entry to start a Long-Term Portfolio position.  For instance, here we sold 10 Apple 2021 $170 puts for $22 ($22,000).  That put $22,000 in our pockets in exchange for promising to buy AAPL between now and 2021 for $170 (the contract buyer can assign us at any time but it's not logical for them to do so if AAPL is over $170).  If we do get assigned, our net entry is $148 ($170 less the $22 we were paid for the contract) – which is a price we'd be very happy to own 1,000 shares of AAPL for in our LTP.
  • Celgene (CELG) – They are getting bought by BMY for $100 so we'll be able to close out this contract early.
  • Disney (DIS) -  So deep in the money that we're not in the least bit worried about it.  We've already captured 90% of the value of the put but we don't need the margin so we can leave it on for now but, if we wanted to clear a spot, this would be the obvious choice.  
  • Macy's (M) – We just added this one so great as a new hedge.  M is far too cheap and the implied volatility of the stock allows us to net in for $16, which is 25% below the current price.
  • Twitter (TWTR) – Deeply in the money and we're not worried about this one either.  

  • 20-Year Treasury ETF (TLT) – We just added this spread and it's good for a new trade.  We think rates will head higher from here over the summer (due to weak demand at auctions) and that will weaken TLT.  The potential for this spread is $16,000 and it's still just net $5,090 so the upside potential is $10,910 (214%) in just 126 days (4 months) – this is exactly the kind of play we love in the STP!
  • Small Cap 3x Bull ETF (TNA) – This is the 3x ultra-long ETF for the Russell 2000 so it will fall sharply if the Russell corrects.  We picked it up near the top and it's already up $5,040 out of a potential $85,800 so it's still good for a new trade if you need a hedege as lots of room to grow if the sell-off continues but, keep in mind, these hedges are trades we EXPECT TO LOSE (now net $39,240 out of $120,000 potential) in a bull market, where the gains of the LTP should offset our losses. 

  • Ultra-Short QQQ (SQQQ) – This is the 3x ultra-short on the Nasdaq and it's our primary hedge.  Surprisingly, it's acutally not losing money despite the Nasdaq's recovery.  That's because the Nas volatility is still high, inflating the "value" of our hedge.  Again, we expect to lose money on our hedges – it's like life insurance – you pay every month but you hope you're not going to get your money back!  Since it's a 3x ETF, a 10% drop in the Nasdaq should make it pop 30% from $9.28 to $12.06 and that would make the $8 calls at least $4.06 x 400 contracts of 100 options each = $162,400 and the current net value of the spread is $85,250 so we get $77,150 worth of protection against a 10% drop in the Nasdaq (QQQ).  Of course, it has been known to go much higer…

Notice we sold 200 SQQQ Jan 2020 $12 calls for $20,000 against our 2021 calls.  That's how we hedge our hedges and, if they expire worthless, we'll collect another $20,000 selling 2021 calls so the net of the spread will drop to about $54,000 for 18 months of $162,400 worth of protection but with the bonus that we can make much, much more in a major correction (at $20, the $8 calls would be $12 each but 1/2 are covered at $12 for $80,000 while the other 200 would be $240,000 – that would offset some tremendous losses in the LTP).  

  • Caterpillar (CAT) – We were right about the spread but wrong about the timing as CAT just sold off from $1456 to $126 and we could have and should have cashed this spread in last month at net $7,050 with a $7,450 profit (it was a $400 credit spread).  Now we have a loss but we're going to re-invest as CAT is stupidly cheap and roll the 10 May $125 calls at $2 ($2,000) to 20 Jan $130 ($9.75)/140 ($5.75) bull call spreads at net $4 ($8,000) and that will pay back $20,000 if all goes well.  Hopefully that will give us enough time to resolve this trade nonsense and, if not, the hedges will be doing great! 

  • Alternative Harvest ETF (MJ) – Another bullish offset to the losses we expect to take on our hedges.  It's down at the moment but I'm strongly bullish on the Cannabis space and expect MJ to be well over $50 by Jan 2021, whcih would return $75,000 against our current net $14,100 spread so a potential gain of $60,900 (431%) seems good to me.  
  • Small Cap 3x Bear ETF (TZA) – Our other major hedge has the same $12 goal as SQQQ but these would pay $5 and are uncovered so $100,000 at $12 against a current value of $54,140 and, like SQQQ, we can lower our basis by selling short calls but we'd rather be flexible into the weekend and able to take quick advantage of sudden drops.  Still, only $45,860 worth of protection against a 10% drop means we'll be looking to beef up this hedge into the close.

  • US Gasoline Fund (UGA) – This was featured in our May 7th PSW Morning Report along with the /RBN19 Futures at $1.92, which we just cashed out at $2.03 in yesterday's live Member Chat Room for a gain of $4,720 PER CONTRACT so congratulations to all our Futures players but UGA is a nice consolation prize for the Futures-impaired and we expect to see the full $6,000 on this spread by July. 

So those are our hedges and the deteriorating trade situation between the US and China, which is also turning into a technology spat against various companies that can be even worse than a trade war and the ratcheting up of tensions in Iran leads us to think we're going to need more hedges than this but we're NOT going to do anything unless our Bounce Chart tells us to.  You can't afford to be emotional or in this kind of market so it's one of the rare times we let the technicals tell us what to do.

Have a great weekend, 

- Phil


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  1. Do people still believe what comes out of the White House?

  2. Good morning!  

    Unbelievably, we are pulling back up already.  That's why you can only go by the bounce chart – logic doesn't help you in this market. We're up because Trump kicked the auto tariff can down the road (officially) – timed right at the bell, of course:

    White House Delays Decision on Auto Tariffs for 180 Days

    The Trump administration said Friday it would put off for 180 days a final decision on whether to impose broad tariffs on automobile and auto-part imports. 30 minutes ago

    U.S. Farmers Brace for Aid Package They Fear Will Fall Short

    Stalled trade talks between Beijing and Washington are exacerbating a slump in the U.S. Farm Belt, and many farmers don’t believe an aid package being assembled by the Trump administration will be enough. 11612 minutes ago

    But this is the really big news of the day and it's dire:

    China’s state media signaled a lack of interest in resuming trade talks with the U.S. under the current threat of higher tariffs, while the government said stimulus will be stepped up to buttress the domestic economy.

    Without new moves that show the U.S. is sincere, it is meaningless for its officials to come to China and have trade talks, according to a commentary by the blog Taoran Notes, which was carried by state-run Xinhua News Agency and the People’s Daily, the Communist Party’s mouthpiece. The Ministry of Commerce spokesman said Thursday he had no information about any U.S. officials coming to Beijing for further talks

    This is what I said would happen, China is telling us to F off because we are treating them with disrespect and that's because our Government is full of racist assholes who still think in stereotypes, which make them incapable of handling delicate negotiations with a foreign super-power.  As Trump keeps saying "Imagine if Biden were in charge – he'd go and make some kind of deal with the Chinese like other Presidents have done…"  Yes, asshole, that's what Presidents are supposed to do!  

    /KC plunging back to our buy line at $95 on /KCZ19

    On the whole, I'd still feel better just cashing everything out – this is a very dangerous market.  

  3. Long-Term Portfolio Review – Part 1:  $1,297,222 is up $159.4% but that's down $132,048 from our 4/18 review and, like our other portfolios, it's down about 10% on a 5% drop in the markets – in-line with our expectations but that still doesn't make us happy when it happens.  Of course that review was up $180,087 from our 3/13 review and we knew it was a silly amount of money to make in a month and that it was very likely to correct so really now we're simply back "on track" – as opposed to being way over our goal as we were (briefly) in April.

    I've said before and I'll say again, if you are up drastically on money that matters to you – there is no substitute for cashing out.  My kids' college funds are both in cash because they are both around $250,000, which pays for 4 years of college and, due to tax consequences on leftover money, there's not much point in having more than you need (Maddie MIGHT go to grad school for Psychiatry, Jackie's IT path is very unlikely to go that way) so there's no logic to risking ANY possible loss of funds in that purpose-driven account.

    Our Hedge Fund, however, is still in the markets though playing both sides and, for our portfolios, it's a tough call and, as noted last month, I think earnings justify Nasdaq 8,000, I think the trade war issues CAN cause a panic which then causes a 20% drop in the market and that, in turn, can lead to a full-blown global Recession but that has to be balanced by the Fear of Missing Out on these RIDICULOUS gains – knowing that we have an Administration that treats the market like a scorecard and doesn't mind cheating occasionally (any time they can get away with it, which seems to be all the time).  

    So we keep playing but there are no magic beans here and a 5% drop in the market is not enough to engage our hedges and our portfolios take a 10% hit but I do believe we can make that 10% back pretty quickly and POSSIBLY move on to new highs but, if we fail to recover – then I'll lean back towards pulling the plug and restarting our $2M LTP/STP back at $500,000/$100,000 and the other $1.4M can be put into much safer things – like conservative T spreads that pay 10-15% a year and are very unlikely to take a big hit.  

    Meanwhile, let's look at what we have and thank goodness we went back to 50% cash so we have room to adjust:

    • HMNY – Dead money but they are strangely still in business.
    • NAK – Still hope on that one. 
    • CHK – Another hope play.  We bought back the short calls last time so now aggressively long but China possibly killing LNG deals has set us back. 
    • Short puts:  Generally fine though STMP took a huge hit so let's just look at that one:
    • STMP – Fortunately we only sold 5 of the 2021 $80 puts, now $42 and the $55 puts are $22 so we would have had 500 at net $60 ($30,000) or we have 1,000 at net $33 ($33,000) so there's no reason not to make that roll, as we risk losing just $3,000 more but have a much better chance of winning so let's roll our 5 short 2021 $80 puts at $42 ($21,000) to 10 short 2021 $55 puts at $22 ($22,000) and we'll buy 10 of the 2021 $25 calls for $21 and sell 10 of the 2021 $50 calls for $10.50 for net $10.50 ($10,500) on that spread.  So we're spending net $9,500 and originally we had a $10,100 credit so this whole spread is still a net $600 credit and, if we get back over $55, it's going to pay $25,000 so we've added risk (now net $54,400 for 1,000 shares if assigned and down $15,400 at the current $40 vs. $10,000 if we just give up now) but the upside potential has gone from $10,100 at $80 to $25,600 at $55.  

    • CDE – Very disappointing gold company and we may as well buy back the short $7 calls for 0.30 ($1,500) as it's 0.02/month and I'd rather be flexible for the 0.02.  
    • MT – Huge sell-off but not too much damage so let's take advantage and roll our 20 2021 $23 calls at $1.50 down to the $15 calls at $4 for net $2.50 ($5,000) and let's mostly pay for that by selling 10 of the 2021 $18 puts for $4 ($4,000)

    • ARR – REITs are getting hit hard on rate fears but we are in it for the dividends and we'll just roll the short puts and calls along.
    • BNS – New entry, good for a new trade.
    • ETM – Notice very small net loss though way below our target.  We're in these for the dividends so no worries.  When 2021 comes out, we'll sell the $6 puts and calls for $2+ and that will pay for the short $8 puts (at least) and our net would still be $4.25 and we've collected 0.36 (8.4%) in dividends so far.  It's not exciting like our other positions but this is what you SHOULD be doing with the $1.4M we discussed above – putting it into fairly bullet-proof spreads that still generate nice returns that compound over time.  
    • NRZ – Very confusing as this one is over our target.  See, sometimes we make profits as a bonus…
    • SKT – Down a bit but I love them long-term and we've collected $1.75 in dividends so far against our net $15.50 entry so call our net/net $13.75 and again, we're waiting for the 2021s to come out but if we can sell $15 puts and calls for $5 after paying the $22.50 puts back $3, that's net lowering the basis to $11.75 and we're still getting $1.40/yr in dividends. 

    It's not about how we do for a year but what happens over time as we reduce our basis to $0 on dividend-paying stocks so all that money ($31,000) on this spread, goes back to work after about 5 years yet we're still collecting $2,800 in dividends.  Do that for 20 years on 5 stocks and you'll have 80 of those $2,800 annual payments ($244,000/yr) from $150,000 in "BORING" dividend stocks.   And, keep in mind that dividend payments tend to keep up with inflation

    And, by the way, people often ask me why I'm so conservative in selling long-term, in the money puts and calls on dividend stocks and these plays answer that question.  It's not about a short-term win (which we would not have had here) but about a the long-term strategy which is designed to grind down the basis and put the money back in our pockets so we can do another 6 and another and another.  Keep in mind this was only a $500,000 portfolio and we're taking about generating an inflation-adjusted $240,000/yr in 20 years – how could you not be satisfied with that???

    • T – My all-time favorite and $30 is my buy-in level and T was as low as $27 in Dec and was just $30 two weeks ago, when we jumped in. Again, we could care less about the upside as we're just grinding towards $0 over time but T has long-term options, unlike many dividend-payers so we're already in for net $23.95 and we expect to get $3 in dividends so net/net $20 after the first two years is $10 less than we bought it for so next 2-year cycle and we're down to $20 and the next 2 years the stock is free and that means we can put $47,900 back to work in another stock while these 2,000 shares pay us $4,000 a year PLUS (and I forgot to mention this above) they are still a $60,000 asset AND we can still sell calls and puts if we want for EVEN MORE MONEY AND you don't have to wait 6 years to put the money back to work, you get 1/3 every 2 years!  Still bored by dividend-payers?  

    • AAPL – We just spent $20,000 rolling from the $180s to the $160s and that's what we call a reflex roll we do whenever we can spend $10 to buy $20 worth of in-the-money position in a  stock we really like long-term – it's kind of stupid not to, right?  We've also got those loose puts floating in the other section so lots of puts (20) and we're not going to add more longs unless they get cheaper or if we have to to cover the short July $185s so – if AAPL goes much lower, we'll add more longs or, if AAPL goes higher, we'll add more longs but here, at $180-200ish, we're fine where we are.  

    • ALB – This was kind of a lithium play and there's a potential oversupply as TSLA misses forecasts and other car makers have been slow to get going on electric cars (and Trump is blocking any US advances in clean tech) but the reason I liked ALB is because lithium is only part of their story (40%), not the whole thing.  They are still guiding $6.25/share in earnings vs $5.45 least year yet they are down from $105 last year to $68 – crazy!  It costs $6 to roll to the $55s so we're not doing that – just watching and waiting for now.
    • ALK – My favorite airline, already close to goal.
    • BHC – The notorious VRX.  We already took our profits on lower calls and this is just a trade where we're letting the short premium burn off with 2021 $22s as a cover – just in case.  
    • C – My favorite bank (from a stock perspective, I bank at TD) and right on track for a huge win.
    • CAKE – My favorite restaurant (all that's left in the LTP are my favorites) and we bought back short calls on the dip and hopefully they pop back up to $50+, where we can sell more short calls.  

    • CELG – Just waiting for them to close their deal (probably next Q) and we cash it all in early.  Already crazy profits but silly not to wait for the whole thing since the deal price is $100.
    • CMG – We are getting killed on the short $600 calls and they are June so we'll have to roll them next month if they don't come down.  Fortunately, we only sold 8 in this cycle.  
    • CZR – On track.

  4. Is it a vacation day?

  5. Example of the conservative T spreads you mentioned?

  6. T/Tangled – That spread in the LTP is brand new.  That's why we threw $45,000 into it, we were sitting on a ton of cash we wanted to put to work and I'm very into getting people to understand the long-term portfolio-building strategy in this cycle.  People don't realize what a cash machine these dividend stocks become – if you are patient enough to build them up instead of chasing momo stocks all the time. 

  7. T -  Phil why wouldn't you consider T for the Butterfly? Is it because your main goal is to grind down the cost basis and the dividend?  I thought T would be a good candidate as they are too big to be bought (anti-trust) and the monopoly cash flow will not make them drop significantly and it has been in a decent range.

  8. T/Mito – It does make a good butterfly play but the VIX had been very low so the front-month selling on T wasn't very sexy but looking better now.  Remind me next week and we'll see if we can add it.

  9. Will do – Thanks. Would it help if we sell quarterly options just around Earnings so the IV gets a little more elevated?

  10. That does help but the nature of our cycles means I don't usually take advantage of it.

  11. T – I know this is probably an ignorant question but taking T as an example, we’ve got the stock and the short calls and puts. As we approach expiration and T is potentially well above (or below) the $30 strike, what then? In the case of something like FTR, I get the strategy, either it gets called away for a big win or you get another set of shares cheap and you do it again, but where you want to hang onto the stock, it’s not as clear to me how that gets handled. 

  12. Phil,

    MMM is lower today. What do you think is it a good price now?


  13. Long-Term Portfolio Review – Part 2:  

    • DAL – My 2nd favorite airline.  Manage to make money without torturing their passengers.  On track.
    • DIS – Short $125 calls are hurting a bit but make a good hedge against huge profits so we'll just roll them along next month (I can't believe it's June already!). 
    • F – Another dividend-payer but not in the dividend section because we did an uneven sale.  Over our target so all is well and that's because we got aggressive when it fell below $8 because THAT WAS STUPID and, as value investors, we KNOW when a stock is too cheap, right?  

    • FCX – Hurt by trade troubles but I like them down here though not enough to buy back the short calls yet.
    • FTR – Used to be a dividend stock and I'm betting it will be again while most bet they are going BK.  We are in 20,000 share for net $29,750 so just $1.4875/share and we'll be assigned 10,000 more at $4 ($40,000) and 5,000 more at $5 ($25,000) if they stay this low so that would be 35,000 shares for $2.70 – so that's our long-term break-even.   We could sell 2021 $2 calls for $1 still, and that would drop our b/e to $1.70 but we're not going there yet – just nice to know the option is there.

    • GILD – Already at our goal but still low in the bigger channel so I don't want to cover just yet.  
    • GIS – They went up so fast our short calls are burning us but fine overall.
    • GNC – Another company priced for BK that shouldn't be.  We'll just see what happens.  
    • GOLD – My favorite miner.  We're super-bullish here and they went the wrong way but I have faith.
    • GPRO – I had faith in them and they paid off nicely.  Let's cash it in as it's a lovely gain and no longer cheap.

    GS – Totally evil but they make a lot of money.  Still more than 100% to make and at the money – what's not to love?

    HBI – Was doing better but I think they'll get back on track.  At just $20, this pays $7,500 and currently it's a net $5,500 credit so $13,000 (236%) to be gained at $20 makes this great for a new trade too. 

    IBM – Our 2019 Trade of the Year has the potential to return $75,000 at $40 and we're almost there with 18 months to go and it's only net $28,388 at the moment so another $46,612 (164%) still to be made and a lot safer-looking now than when we entered at net $5,725 and that's why we can have trades that are already up 400% that are nowhere near ready to take off the board!  

    Good examples of how we may not always get our value propositions right but, when we do – it only takes a couple of winners to wipe out a lot of losers.  Also notice how we tend to make bigger plays on Blue Chips and smaller plays on more speculative stocks – that's another key to our success.  

    The way options work over time, as long as a stock doesn't actually go Bankrupt on us, we often can at least get our money back so, if we rarely lose big and sometimes win big and often win a little – we can end up having great overall portfolio performance.

    • IMAX – Another one I love to buy when they are low (and sell when they are high).  I was very impressed with how they did well in Q1 – even though movie chains struggled.  UNFORTUNATELY, they do a lot of business in China and may get caught up in the trade war but that's kind of how we played it with the short Sept $24 calls so we'll stick with them but need to watch very closely in case they catch a bullet from the war. 
    • IP – Nice, boring paper company and we're on track.

    • KHC – GIS is doing great so we can only conclude that KHC's management is really messing up.  Still, I love iconic blue chips when they are beaten down because there's enough people working there who've been there long enough to eventually have a good idea and get things back on track.  $32.50 is just stupidly low, so we bought back the short calls but no changes for the past two months.
    • LB – Our 2017 Trade of the Year already paid off so this is a double-dip and break-even at the moment with earnings next week.  I'm not expecting miracles but it would be miraculously stupid for them to stay at $22 when they are on track to make $2.40/share this year so – good for a new trade at net $0(ish) on a $75,000 spread.

    • M – Another stupidly cheap stock and we're waiting for investors to crunch the numbers we just got from their earnings report and realize that an iconic retailer earning $3/share shouldn't be trading at $22/share.  Analysts are screaming TRADE WAR but how does it hurt Macy's in particular?  It affects everyone and the shock will be a lot worse for Dollar Store shoppers than the Macy's/Bloomingdales crowd.  
    • MJ – The cannabis ETF.  It's on track but, if you are not in it, you KNEW the tech revolution was real in the 1990s simply because things were changing and the Web was everywhere and, even if some companies failed – overall it was going to be the Future.  Well, read the papers and look at the magazine section at Barnes and Noble (they still exist!) this weekend and see if you don't think Pot and CBD is going to be a big thing.  It's still only fully legal in 11 states for about 25% of our population but it's not just about that – it's about the 200 countries where it's not legal yet with 7Bn people in them.   I doubt this genie goes back in the bottle and this ETF is a nice way to bet on cannabis for the long-term.

    • MO – Another pot play as they have the cash to take over the market when it is legalized in the US and they aren't even waiting as they are already making some acquisitions.  This is on track and will more than double from here so good for a new trade, of course.
    • MU – Caught more than one bullet in the last round of the trade war.  We're still up nicely but that was a painful pullback as they were up $10,000 more a month ago.  Still, nothing changed in the business - just trade idiocy so let's take advantage and buy back the short Jan $55 calls for 0.75 ($750) and roll the 2021 $35 calls at $9.45 down to the $25 calls at $15 for net $5.55 ($22,200) and we'll sell more calls when it bounces to recoup that money.  

    By the way, the reason we can spend $5.50 for that $10 roll with confidence is we can always turn around and sell the $35 calls to cover for $9.45 and that would pay for us to roll to the $15 calls (if MU drops another $10) and, effectively, we will have shifted our position from a $35/55 spread to a $15/35 spread for just about what it costs us to buy back the short $55 calls when we're done (though we'd be more likely to roll them to shorter-term calls).

    • NLY – Another uneven dividend-payer but it just keeps going lower.  Puts are only back to where we sold them so nothing to panic about and we have an 0.30 dividend coming soon to make us feel better.  2021 is out now and we can sell the $8 calls for $1.60 but I'd rather not.  They got caught by changing rates and, though income was 0.30/share for the Q, Net Interest Income was off 50% from last year and that was considered a warning sign.  I think it's transitory but we'll have to wait until August to see.  
    • NYCB – Also took a dive on rate concerns and also one we didn't have short calls on (see a pattern – SELL THE PREMIUM!).  Here we can sell the 2021 $10 calls for $1.55 which would drop our net to $10.45 less $2.95 for the puts is $7.50 and we've collected 0.85 in dividends to make it $6.65 which is so good that we're not in a hurry to cover.  Keep in mind we came in at $12 and already down to $6.65 a year later if we want to be!  

    • SKX – My favorite sneaker company!   They took a huge hit as trade talks broke down but still higher than our range so we'll just wait for the full $16,000 (now net $6,200 so about 150% to gain from here).  
    • SPWR – Another one I banged the table hard on and now they've finally exploded higher.  Considering they are doing this against the trade war headwinds – I think we can wait a bit before covering.

    • STT – Got crushed for another $10,000 loser since last month.  HOPEFULLY this is the bottom so we are going to start a roll down by buying back the short 2021 $80 calls for $3 ($6,000) and we'll roll the 20 long 2021 $60 calls at $9.50 ($19,000) to 20 2021 $50 calls at $15 ($30,000) for net $11,000 so we're spending $17,000 and we originally sold the $80 calls for $14,000 so I'm confident we can get our money back when we're ready to sell covers again but that leg we will delay a bit – hoping for better prices.  
    • T – We also have an option trade on T and it's a $25,000 spread that's on track at net $13,558 so almost a double to look forward to so why change anything?  
    • TGT – Will also be hurt by China Trade War but so will everyone so let's ignore the panic.

    • THC – We play these guys over and over when they are low and we got aggressive last month and it's tempting to go more but not much change really so we'll wait.
    • UCTT – On track, even for our aggressive short puts.  
    • WBA – I think these are way too cheap.  They just did a huge merger so of course this year is not spectacular but still they'll make $6/share so anything below $60 is just silly and they just made $1.64, which is on track to $3.20.   We already got aggressive so we'll leave it for now but we could roll the $50s to the $40s for $6 and sell 1/2 the $55s for $6.50 and then it will have cost us just $24,000 to roll our long calls $80,000 deeper in the money but let's just watch and wait for now – that's just our fallback plan…

    • WHR – Another tariff-damaged company but still at the top of our range on the $45,000 spread that's at net $15,375 so this one can make 200% if WHR just holds $130 – nice!  
    • WPM – Our 2016 Stock of the Year is being played for the 3rd time and they are more gold than silver these days and they pulled back hard but our goals were modest so we're still on track for the full $37,500 against the current net $19,700 so $17,800 left to gain is worth keeping for now.

    We have a lot of trade war-damaged stocks and hopefully things will work out but I'm not going to hold my breath.  We'll have to keep a close eye on the news.  

  14. Phil, thanks for all the reviews. Quite useful for a relative newbie like me to read the logic & thinking of how you manage and adjust portfolios.

  15. A quick question on something else. I think at some point you recommended a JO trade: 30/40 Sep'19 call spread funded by 35 Sep '19 put, which I have entered for a total of $0.93 for everything but now valued at -$2.22 per contracts so $305 (paper) loss so far. Would you recommend adjusting with to Dec options?

  16. T/Dawg – Well if T is at $35, we get called away at $30 and our current net is $23.95 and we collected let's say $3 in dividends so $20.95 means we're up $9.05 so, when we buy T back for $35, it's really net $25.95 and then we sell $35 puts and calls for $6 and our net drops to $19.95 into 2023 and we get $4 in dividends since it's a full 2 years so net $15.95 and then you'll be worried about being called away at $40 with a net $19.05 gain at $35 and I'll say that we can rebuy at $40 for net $20.95 and sell the 2025 $40 puts and calls for $6 and that drops our net to $14.95 less $4 of dividends we'll collect by then is net $10.95 with a $29.05 profit if we're called away at $40, etc.  You're selling so much premium and collecting so much dividends – it's very hard for the trade not to work out over time – up or down.

    By 2027 – even if, as you are suggesting, T goes up 15% every two years, the stock is still essentially free for you and then you can stop selling calls and just collect the dividends or sell further out the money calls and maybe out the money puts.  

    If I started with T 8 years ago (at $30 then, $30 now) and it was fully paid for, I'd still get my $2 dividends and I could also sell 2021 $37 calls for $1 and 2021 $23 puts for $1 so I'd have a wide range but now I'd collect $6 against my free stock every two years and, since I initially invested net $20.95 in the first two years, that's a 28% return on the initial capital that's already been returned to me, 14% a year.

    Run that for just 3 cycles (18 years) and you're getting a 42% annual return on your initial capital in dividends and put/call sales plus you should have 3x your initial capital (at least) in stocks AND your initial capital in cash, ready to deploy for the next 6-year cycle. 

    MMM/Kgab – $170 is still $98Bn for them and they only make $5.5Bn a year so p/e about 18 is not a bargain I feel compelled to leap at for a company with NO growth AT ALL.  

    Year End 31st Dec 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 30,871 31,821 30,274 30,109 31,657 32,765 32,350 32,555 33,468 +1.2%
    Operating Profit $m 6,666 7,135 6,946 7,027 7,788 7,207 7,336     +1.6%
    Net Profit $m 4,659 4,956 4,833 5,050 4,858 5,349 5,638 5,572 6,021 +2.8%
    EPS Reported $ 6.72 7.49 7.58 8.16 9.17 9.18 9.37     +6.4%
    EPS Normalised $ 6.72 7.49 7.71 8.03 8.34 8.46 8.67 9.58 10.5 +4.7%
    EPS Growth % +6.3 +11.5 +3.0 +4.2 +3.8 +1.4 +15.4 +13.2 +9.80  
    PE Ratio x           20.3 19.8 17.9 16.3  
    PEG x           1.53 1.50 1.83 2.55

    As I said earlier, in an uncertain market, this is not one I'd be jumping on.  As to what's a good price – 15x would be about $140, that's where I think I'd want to sell a put and those puts are $9 and the $170 puts ($30 higher) are $21 so a lot closer to $21 to sell the $140 puts before I think it's worth getting involved.  

    You're welcome Alter, that's why I do them.  It's a pain in the ass but it's the teaching part of what we do here.  

    JO/Alter – As a rule of thumb, you want to adjust a spread when the price of the long calls drops below the net of the bull call spread.  You are including the short puts, which are now $3.70 and I'm guessing they were $2 at the time and the calls are still $2.85 so you are not in terrible shape.  

    As an adjustment, I'd roll the JO Sept $30 calls at $2.85 to the JO Dec $25 ($7)/$30 ($3.50) bull call spread at $3.50 so net 0.65 for the roll puts you in for net $1.58 on the $5 spread but it's a $5 spread that's in the money, so better than the $10 spread you rolled out of.  It's too early to roll the puts, hopefully longer months are out by then (or we pop and they expire).  The $35 puts are $4.60 and the Dec $33 puts are $3.60 so $1 to roll down $2 but hopefully the March $33 puts will be more than $4.60 when they come out (May $35 puts are $3.80 for reference).  

    By rolling while the long calls still have your initial investment, you are able to buy a new spread of value with that money.  This roll leaves you with naked short Sept $40 calls and they are just 0.50 and very likely to expire worthless but, if you can't leave them naked (with $1 stops on 1/2 and $1.50 on the rest) then your net entry on the $5 spread becomes $2.08 – still not terrible.  

  17. TSLA $214!  Did I say we'd have to wait until next year to see $150?    Short story is they killed another guy with auto-pilot and Musk is now sending out budget-cutting memos so – look out below!  

  18. I, for one, look forward to the "restart" of the portfolios.  Just joining PSW early last fall, cherry picking recommendations based on "good for a new trade" has not worked out well, and is extremely hard to effectively "hedge", as the recommended hedges here are protecting gains, where I'm just trying to protect against more losses.  I've tried to "apportion" hedges based on my positions, but since my holdings are only a subset of those in the various portfolios they are not nearly as effective.

    The one bright side, at least until the past couple weeks, has been the Butterfly portfolio.  There have been two new additions to this portfolio over the past nine months that I've been a member (MDLZ and WHR), which I took advantage of.  I like the relative "calmness" of this portfolio although all the gains in WHR were erased over the past couple weeks, and it seems that we took unnecessary losses on MDLZ over the past couple weeks.  Which brings me to my question…

    It was clear last week, and even before that, that the short $47 MDLZ calls were going to need to be rolled.  However, because we waited until a couple days before expiration, the time decay over the last couple weeks added $1,500 – $2,000 in additional losses that, in my humble opinion, could have been avoided.  Am I incorrect in this thinking?  Is there a better time to assess these type of rolls, or a percentage of loss, where we could minimize this dramatic increase of loss, over the last 2-3 weeks of the options contract?

  19. Many Across the Globe Are Dissatisfied With How Democracy Is Working

  20. China deal died, expect turmoil

  21. Thanks, Phil. Just did the JO adjustments, good logic there.

  22. Butterfly/Idi – That makes sense as we're always just trying to make money from the premium we sell – not so much the movement of the stocks.  

    MDLZ/Idi – I don't have time to go over every position every day so my timing is not always optimized.  It is hoped that, in chat, someone would mention a trade that needs attention however our ratio of lurkers to participants has gone from 70/30 to 95/5 in the past couple of years and I really can't figure out why.  Perhaps a lot of people who used to chat became Trend Watcher Members (who can only look but can't chat) as that is now our most popular membership but there are still hundreds of Basic and Premium Members but, on any given day, no more than a dozen people tend to participate.  

    Also, while MDLZ has gone up and up, we had the May $47 short calls (10) and they were $4.50 on 5/1 and now $5.50 this afternoon so up $1 for the month while the 10 Sept $50 calls we're rolling to were $3 on May 1st and are $3.75 now so the net cost of our "inaction" was 0.25 but we didn't know for sure MDLZ wouldn't correct and, if it did, we would have done much, much better so, for 0.25 – I'd rather take the chance.   

    You're welcome Alter.  

    China/BDC – I can't believe the markets went green for a bit today. It's like macro news events don't even matter anymore.  

  23. The China deal didn't die, it was most likely never there to begin with or at least not in the terms that they described. We were sooooo close to a great deal, the best ever!

  24. And Trump got that lovely letter from Xi, didn't he?  You pretty much have to assume that the opposite is true of anything Trump says! 

    Have a great weekend everyone, 

    - Phil

  25. Remember ZYNE? It hit $16.47 today – was $2.75 at Christmas! I goofed up and sold calls against my stock back at $11…still good :)

  26. ZYNE/Ati – Crazy ups and downs in that stock.  We used to play them but they gapped down 50% then up 100% in a couple of months and we decided it was too silly.

  27. I'm short over the weekend. TZA and QQQ puts, long SQQQ

    Got out of GBTC at 10.37. Looking to re-enter as I am long term bullish btc in general. Whether it's a few days or a few weeks we shall see. I also try to play NAV premium on the issue, currently about +30%.

  28. Pot stocks question- now that you are inside the industry what is your take on the potential/actual supply issue? If you recall, one of the talking points concerning valuation and markets early on was the fact that it is a "weed" and growing is relatively easy (at least outside the realm of legal growers). I see reports of oversupply issues particularly WA and CA.  Also, it seems states like CA are reporting  tax revenues lower than expected bringing to mind the issue of overly aggressive taxation effects on legal revenue streams. A value added strategy is the obvious choice given these circumstances and it sounds like that is where you are invested (as I am). 

  29. Phil, what do you think of CBS?  They seem very undervalued, they have a lot of good content, and a rapidly growing streaming offering.  There is some uncertainty with sexual harassment allegations against the former CEO, and there is some ownership drama and a potential merger with Viacom that may be depressing the multiple.  Analysts seem to expect continued growth, and they have been averaging over 14% per year in operating earnings growth for the last 10 years.  If they continue to grow earnings at 14% per year, and the multiple expands to 12x this turns into a $78 stock (currently $48).  

  30. Well, the reason for the failure of the Hanoi talks between the US and the DPRK (northern Korea) becomes obvious. Ka-ching!

  31. Saudi Arabia says oil producers want to reduce inventories

  32. Good morning! 

    Well, this sums up why we're down this morning:

    Spending Slowed as Companies Weighed Trade Concerns

    Spending on factories, equipment and other capital goods slowed in the first quarter among a broad cross-section of large, U.S.-listed firms, bolstering investor concerns that a key driver of economic growth is fading.

    Also, Trump threatens "the end of Iran" – we're officially the Empire now…

    If Iran wants to fight, that will be the official end of Iran. Never threaten the United States again!

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    Oil was up but fell off.  Nice $600 per contract profits in /NGV19 – again!

    Pot/Pstas – Well that's why we invested in New Age, they are manufacturers so low pot prices are a benefit to us and retail competition doesn't matter to us (to a point) as we're not even wholesalers but are providing the key ingredient (THC and CBD oils) to other manufacturers that then make the things that retailers sell.  It's actually and advantage to us when pot prices drop as that's our main (almost only) input cost.  

    Of course, laws being what they are, we HAVE to be vertical in some states though it's not our preference and we try to be the manufacturing arm of a vertical team if possible.  We really try to avoid growing but, to some extent, it's important to lock in a supply so we are making a few partnerships with growers but not ones where we expect great returns – that's just a bonus if it comes and the only reason we work with any grower is the quality of the strains have to be fantastic (which is much harder than you might think).  

    Retail, on the other hand, is a different story and Jade House Genetics (our retail arm) is putting out some house brands to get a direct pipeline for our oils to the store shelves.  It's just a side venture compared to the manufacturing but it gives us "street cred" when we are looking for manufacturing customers that we make one of the top retail brands (we can't disclose the brands we white label for). 

    Canada is going to be massively oversupplied as well as the business plans of each of the top pot companies are to grow more pot than all of Canada is likely to consume.  Of course they will try to export it but without the US market, it's going to be hard.  There's also tons of illegal growers still operating.  

    Tax balancing is messed up and that's what delayed NY and NJ as they are trying to avoid CA's mistake.  CA charges 25% and that has kept a thriving underground market in existence on a cost basis (also, CA always had very loose laws so their underground was always thriving and will be hard to kill).  This also doesn't affect us because your local corner pot dealer sells raw flower - not the oils and edibles that are becoming much more popular to consumers.  

    Image result for cannabis edible market growth

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    And don't forget, for us manufacturers, there's going to be insane levels of demand for infused products in many industries:

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    We're still in very early stages, there will be over supplies AND under-supplies for years to come.  That's not too unusual for a growth business.

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    Image result for cannabis edible market growth

    CBS/Palotay – Remind me in today's chat.

    NoKo/Snow – US Foreign Policy often comes down to arms sales.