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Toppy Tuesday (as usual) – Why Did China Go Home?

Trade on!  

That's right, now Donald Trump claims he was "surprised" when Treasury Secretary Steve Mnuchin asked China's trade delegation to cancel a scheduled US Farm Tour.  That was the cause of Friday's sell-off as the Chinese delegation packed up their toys and went home early and was taken as a sing that negotiations had broken down but now the Administration says that's not the case and that the Chinese were rushed home so they could buy our agricultural products rather than visiting the farms first.  

Despite all the BS, we couldn't be more thrilled as we called Soybeans (/ZSU19) Sept Futures a long way back in our May 10th Morning Report at $825 (published at Seeking Alpha) and those contracts popped to 888.50 and October Soybean contracts are now $895.50.  Soybean contracts pay $1,120 per $1 move so $63.50 for our September longs is a lovely $71,210 gain per contractyou're welcome!  

For the Futures Impaired, we also had the following trade idea on the Soybean ETF (SOYB) that runs into November:

As to SOYB, it hasn't been this low since, well, ever – as the contract began in 2012 at $25 and never really went below $17.50 until the trade war began so $14.50 is quite a bargain and, as much as I hate to bet on Trump doing anything right, it's POSSIBLE we get a trade deal and that will hurt our hedges in the Short-Term Portfolio so, in order to hedge the hedges, a bullish bet on SOYB makes sense.  For the STP, we can:

  • Buy 50 Nov $14 calls for $1.10 ($5,500) 
  • Sell 50 Nov $15 puts for 0.95 ($4,750) 

That's net $750 and, if SOYB goes back to $16 on a trade deal, those options will be worth $1.50 each for $7,500 on 50 100-unit contracts, which would be a 900% gain of $6,750 – not bad for an offset and our worst case is owning SOYB at 7-year lows and we can then sell calls to reduce our net $15.15 entry.

As you can see from the chart, the trade is right on the button so you're very likely to collect the full $7,500 in November (if you didn't already cash out, like we did) but, even now, the $14s are $1.40 and the $15s are 0.65 for net 0.75 ($3,750) and that's already up $3,000 (400%) and, even now, it's not bad as a new trade with an additional $3,250 (86%) upside potential from here.

All this exciting bean trade has gotten the S&P all excited again and we're back over 3,000 – again – and we'll see if it sticks – again – but so far – it hasn't, though there is apparently no limit to how many times we can boost the S&P by saying the China deal is back on:

Since the Soybean trade went so well, let's take a look at Orange Juice, which is priced down at $99.60, the lowest it's been in 10 years – and that was when everything crashed, so I'm not even going to count that and that puts us back 20 years to get this price.  Though the Florida orange crop has bounced back from insects and hurricanes to 2016 levels, we didn't fail $100 in 2015 or 2016 and I like the fact that /OGU20 (Sept 2020) is down at $114 and /OG contracts pay $1,500 per $1 move so a $20 move higher would make us $30,000  vs let's say a stop out below $110 for a $6,000 loss.  The Sept contracts take us through the next harvest as well.

There's no ETF for Orange Juice but there is for Coffee (/KC) and we always love it below $100 and /KCH20 (March) is down to $102 and that makes for a fun play but you have to be willing to Double Down at $98 to average 2x at $100 with a stop at $95, which would be a loss of $375 per $1 or $1,875 per contract.  So the risk is $3,750 but the reward, even at just $122 would be $7,500 on a single contract and /KC has been very good to us for two years now.  

Coffee does have an ETF (JO) and, like SOYB above, we can pick up a spread that can give us a nice return.  We think $100 (though it can dip below) is a good floor for Coffee as it's a point below which the farmers simply can't make money selling it.  For the ETF, which is at $32.50, we can do the following spread:

  • Sell 5 JO March $30 puts for $1.40 ($800) 
  • Buy 10 JO March $30 calls for $4.40 ($4,400)
  • Sell 10 JO March $32 calls for $3.20 ($3,200) 

That's net $400 on the $2,000 spread so $1,600 (400%) upside potential if JO holds $32 into March.  As long as /KC stays above $98, you should get paid in full.  The downside to this trade is that, below $30, you would be forced to buy 500 shares of JO at $30 ($15,000) but we like that price and you can turn right around and sell calls against it to lower the basis further.

There's always something fun to trade in the markets – even when you are on the sidelines!

 


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  1. All bets are off now to find a new distraction away from the latest scandal – more tweets about China and the Fed are probably on the way.


  2. Why bother lowering tax rates on these guys – they don't pay taxes to begin with:

    https://ritholtz.com/2019/09/tracking-global-corporate-tax-avoidance/

    Globally, about $650 billion in profits are shifted to such tax havens by multinational from all countries.

    The loss of profit is the highest for the (non-haven) European Union countries. U.S. multinationals shift comparatively more profits (about 60% of their foreign profits) than multinationals from other countries (40% for the world on average). The shareholders of U.S. multinationals thus appear to be the main winners from global profit shifting. Moreover, the governments of tax havens derive sizable benefits from this phenomenon: by taxing the large amount of paper profits they attract at low rates (less than 5%), they are able to generate more tax revenue, as a fraction of their national income, than the United States and non-haven European countries that have much higher tax rates.



  3. Good morning!


  4. Good Morning!


  5. Good Morning

    NFLX downgraded by Pivotal


  6. Good morning!

    Big Chart was rolling over but all fixed this morning (at the moment).

    Low rates/StJ – So the GOP logic is we should all charge 5%.  A VAT would fix all of that – if you want to sell goods in the US, you pay a tax – no matter where you are from or where you made it.  That's how we channel the power of our strong consumer culture.  

    Forgot to mention the Boris Johnson thing – the British Supreme Court ruled he illegally suspended Parliament – going to be very interesting.  

    Despite President Trump’s claims that U.S. tariffs are putting millions out of work in China, economists say the country's labor market is mostly stable—at least for now

    Image result for trump lie cartoon


  7. Love orange juice/Phil – but can't seem to find it on ToS. It's probably the nut behind the wheel, but why am I getting a "can't find it" response for orange juice futures?






  8. Trump mocks teenage climate activist Greta Thunberg



  9. We’re Likely Headed for Impeachment


  10. Johnson / Phil – Interesting time for leaders with questionable haircuts. BoJo is clearly in trouble in the UK, not sure how he survives this rebuke and I have to believe that if it's true that Trump held back the aid in order to extract dirt on Biden, impeachment proceedings can't be far down the road! This is truly a bizarre world we live in and not sure it's safely investable.


  11. snow – OJ

    about a year ago TOS started charging a monthly fee for access to some of the futures contracts (they said they were passing the fee through to the user)

    it might be one of those that requires the fee


  12. Phil/T

    Good morning!

    Bought T in batches at average cost of $29.70 and sold the Jan $30 calls for $2.33 (now 7.80).

    Things were going well until the Elliot intervention and now I either sell at $32 or do some fancy work..to roll the short calls (this is the reason for this post)

    As a broader picture, I have owned T for a couple of years and have more buyin power, if necessary, for example by selling outs.

    I’m not totally comfortable increasing the size of position any more, though as I worry about a GE like

    scenario.

    Meanwhile, I LOVE collecting the $0.51 dividend (6.86% annually) every quarter while paying 20% federal tax on the dividends, rather than ordinary income tax at 39%.

    Suggestions? The short calls are against half the total position, as a point of reference of the overall picture.


  13. NFLX/Stock – Yay!

    OJ/Snow – It's only trading on ICE, unfortunately, not carried by ToS (unless, as Jeff says, there's some fee you can pay but I don't trade it there).  We caused a spike at the open though:

    Rebuke/StJ – Yes, essentially he lied to the Queen and got her to agree to something that was illegal – that's not good!  

    Yikes, that "rally" faded fast.  RUT back to leading us lower:

    Rejected at $58.50!

    And $65!

    T/Maya – I'm going to miss it too but you have to let it go – it's too messy to try to stay in it and then you're effectively out at $32 and back in at $37 so all you would have done is missed the $5 of gains in between and now you risk owning it at the high and the reason we liked them was BECAUSE $30 was low – this is more than 20% more than that!  It's just time to move on and we'll find something else that's on sale.

    Well, there is one save since you are in Jan short calls at $7.80.  Let's say you have 20 short calls at $15,600 covering 2,000 shares of T at $59,400.  You could sell 1/2 your shares ($29,700) and buy 40 2022 $33 ($6)/$40 ($2.75) bull call spreads at $3.25 ($13,000) and sell 20 2022 $30 puts for $2.85 ($5,700) and roll the 20 short Jan $30s ($15,600) to 40 short 2021 $37s at $3.25 ($13,000) so you end up with:

    • 1,000 shares of T at $37.75
    • 40 2022 $33/40 bull call spreads at $3.25 
    • 40 short 2021 $37 calls at $2.85
    • 20 short 2022 $30 puts at $2.85 

    That way, you have $19,800 back in your pocket and still half (1,000) shares against your promise to buy 2,000 more at $30, which would be no problem if you put a stop on the other 1,000 at $35 and, if the short calls expire worthless, you'll also have a lovely $28,000 spread to play with as a bonus.  

    I'd keep a stop on 10 of the short $37 calls at $3.50 ($3,500) and 10 at $4 ($4,000) and 10 at $4.50 ($4,500) and 10 at $5 ($5,000) but even if they all stop out for $17,000 – you still have the $28,000 spread that would be well in the money + $40,000 or so in stock and the $19,800 in pocket so about $70,000 is better than cashing now and the possibility of doing much better long-term.


  14. US consumer confidence reading sinks market. 


  15. OJ/Phil – thanks – and I figured we would spike it, but I also figured it would pull back some.









  16. Who funds the United Nations?


  17. Orange juice (/OJ) – I was able to buy the contract on TOS /OJU20 — just ensure you have the correct contract spec. I did agree to pay the additional monthly ICE fee a couple of years ago. 


  18. Gold trade – in answer to your question last night, I executed the following trade:

    Ratio spread; GLD Nov 15 contract: Buy 10, 145 calls / sell 20, 148 calls for a $1.15 credit. 

    If the spread goes fully ITM, take the $3 profit on the 10 contract spread, roll the additional 10, 148 calls to December and then sell some puts to turn it into a strangle.


  19. That above post was for Advill :)


  20. Wheee on CMG – everything is selling now.

    As we expected, Consumer confidence is falling.  I don't understand why Economorons can't see these things coming – we had so much data that pointed to this…

    KC Fed was no help either.  

    OJ/RS – Oh, I guess you can call them up and have them add it.

    I'm heading off to do the radio show in about an hour:  https://www.facebook.com/hempbocashow/?fref=ts

    I have Benzinga Friday morning at 8:30 too 


  21. Phil – save your wheee for when CMG drops $60 points !!!!!!!!!


  22. I'm just happy to see it get off that $850 line in the right direction.  Very happy with a $25 drop….

    Chipotle faces more labor complaints at New York City stores

    Speaking of fast food, NDLS is one I'm starting to like.  They actually made $438,000 last Q on $120M in sales and, at $5.71, you can buy the whole thing for $250M and they already have over 400 restaurants, 90% company-owned.  I like that they are pushing the veggie-noodles as a health thing.

    Year End 01st Jan 2013 2014 2015 2016 2017 2018 TTM 2019E 2020E CAGR / Avg
    Revenue $m 350.9 403.7 455.5 487.5 456.5 457.8 460.2 468.5 491.9 +5.5%
    Operating Profit $m 13.6 18.9 -21.1 -67.5 -33.9 -4.38 3.23      
    Net Profit $m 6.67 11.4 -13.8 -71.7 -37.5 -8.44 -0.34 6.77 10.9  
    EPS Reported $ 0.24 0.37 -0.48 -2.58 -0.84 -0.21 -0.014      
    EPS Normalised $ 0.28 0.40 0.19 -1.35 -0.18 0.076 0.10 0.15 0.24 -22.9%
    EPS Growth % +8.5 +42.4 -52.2       -55.1 +99.4 +57.6  
    PE Ratio x           78.3 57.6 39.3 24.9  
    PEG x           0.79 0.58 0.68 n/a
    Profitability

    It's good, solid growth – not exciting but that's good as they are working on getting profitable.  If they can drop 10% to the bottom line, suddenly their p/e is 12 so a nice long-term investment down here.  

    The options only go out to May and now one is trading those but you can buy the stock for $5.70 and sell the May $5 calls for $1.60 and the $5 puts for 0.85 to net in for $3.25 so called away at $5  is up $1.75 (53%) or worst case is owning 2x at $4.125 avg – less than $200M!


  23. BBT – watchlist item from yesterday. Decided on the following trade just to be engaged on how they progress – took advantage of some silly option pricing on the Jan 2022 contracts:

    Bought synthetic stock, long Jan 22, $52.5 calls / short Jan 22, $52.5 puts for a CREDIT of $2.85.

    Sold Nov 15, $52.50 short straddle for $3.64.

    So a net credit of $6.49 to be long 100 deltas of BBT and the opportunity to sell monthly premiums until Jan 2022. All the upside is mine (no capping profits at some arbitrary strike in Jan 2022 – although that option is left open). Just the monthly management of the straddles / strangles; recognizing a 50% win rate on those would be more than welcome.


  24. BBT/Winston – The idea of the watch list is to see which stocks DROP 20% and THEN we look to see if we want to buy them.  


  25. Phil CMG – they (whoever they are) are just playing with us. When has there been a sustained move down in CMG – something that lasted longer than a few days? In the run up to earnings (CMG reports on 10/22) we normally see a move down followed by a whipsaw into earnings and then a push to take out all the short call bagholders with an upbeat earnings report.


  26. Phil BBT – a small snifter trade. I would love for them to drop 20%, I'll just double down on them and hope they just drop 20% more so I can go 4X for a full position. If the momentum goes down I will only sell short calls – no short straddles or strangles – and if I need to then I'll buy a ZEBRA put ratio to neutralize the the negative momentum. 



  27. CMG/Winston – They were at $750 back in 2015 and then $250 last year so yes, they do go down sometimes.  At $500 they fell back to $400 but that was their last significant pullback (last Dec) and now they've doubled up over $800 but forgive me if I don't think it's crazy to keep selling $1,000 calls and playing them for a pullback – my timeframe is just a bit longer than yours.

    More importantly (to me) is that, in 2014 and 2015 the company had $450M in profits and last year and 2017, just 176M in profits and Q1 and Q2 are back to $90M – but 4x 90 = $360M, not $450M so they are still a long way away from justifying their 2014/15 highs – let alone this idiocy.  

    You can see that they've trashed their operating profits as a percentage of sales because they've had to aggressively discount to drive those sales – that's not going to magically go away and, even worse, 

    This is ad spending (Statistica does poor labels):

    So they are spending about 30% more per store than they did in 2015 and their earnings growth is a function of heavy advertising and lots more stores – not more traffic (and more profits) in current stores.  That means, in a downturn, they can get crushed much worse than last time.

    That's why I like them short! 


  28. Winston /GLD

    Thanks,  I´m an early bird for Phil…LOL.


  29. Well, I've gotta run – will check in later.


  30. CMG – can't argue with your analysis of the numbers. But for the moment – and since their last hygiene issue was resolved they have done nothing but burn short callers. I forget what the portfolios started with at the beginning of the year on short CMG calls – around the $400 – $450 level?. Those were rolled and rolled, doubled down, closed out, resold, pre-sold rolls, and the last lot were the Jan 2020 $740 calls which were closed out last week (at a loss when you consider the cost of the previous rolls). At every roll there was an air of disbelief (which I can fully relate to) when each time the strike price was tested and forced a roll. I gave up on that rolling strategy back at the $600 level. So if you have to continually roll a position you will end up shorting CMG at $1000 – and of course you will finally get to the short strike when you have beaten your caller (as long as your cash doesn't run out by that point). PCLN did more or less the same thing a few years back on a run from $400 to $2000.

    As an example – You were right when the Jan 2020 CMG $600 short calls were selling at $80 and it seemed at the time like the trade of the century (it may still be). Those $600 short calls are now trading at $240. I nearly placed the trade because the logic was so compelling, and a price target on CMG of $600 seemed the top of the tops. How did that one work out?

    Rolling and rolling is fine – we do it all the time. But we sometimes forget that rolling also puts you into a bigger size contract (in value terms). That is no problem if you care going to outrun your caller, but it is a pain in the backside if you decide to cut and run – because the premiums you received along the way are never going to be enough to pay the piper when he calls. The devil determines that one bails on short calls and puts at exactly the wrong time!

    But again, you're right – we sell premium so we need to have management strategies being short.


  31. starting a small position in AIMT today, per Albo


  32. Agree with your approach Winston, but CMG is out of the logic of any rational, the problem is we have been mesmerized with it instead of moving out into other stocks…is an opinion.

    FDX or ULTA are perhaps cases that can be interesting to evaluate 


  33. Winston, Your comments in rolling, well on a monthly bases, I roll many options.
    I roll option holding the stock and against a BCS.
    By rolling with stock I find the stock has increased always more than the option to be rolled.
    Rolling with BCS is a bit trickier. Holding a leap BCS by a rising market the long caller is your friend did you sell a leap put option it is also your friend, however the short leap call and the half sold shorter month caller is obviously against you. Now, I find that the short monthly caller, I also call them cherry calls, can develop much more premium than the rest of your "friends". However, in the long run the BCS should bring the expected profit. I obviously do not double down on the short calls always stay half of the BCS.
     However the beloved CMG I departed with a nice profit on naked puts I did sell against them while they were still around 350 400. After that I could never understand how a taco stock could have such a price by selling tacos, too high for me.


  34. Yodi – you have a solid, cautious approach to selling short 'cherry' calls – and keeping the position size reasonable according to the amount of stock held or the number of BCS contracts. And of course, like us all, you have plenty of stories of when your cherries turned out to be rotten apples – but not too many I hope.


  35. House Speaker Pelosi to announce formal impeachment inquiry of Trump


  36. About time Albo!


  37. Neumann's out of the CEO seat at WeWork. I guess he doesn't care, he already cashed in a ton of money. Investors lawsuits and state AGs can't be too far now. Implosion is in progress…


  38. Looks like I missed some excitement.

    CMG/Winston – We've been through this before so I don't know why you continue to believe we were always short.  CMG started as a LONG and we took a couple of winners off the table before we got stuck with some short puts and THEN we began to roll them along but we ALWAYS bought long call spreads to cover and always made money on those and then rolled the short calls.  Overall, the gains outpaced the losses by a very wide margin – it's just that the losses were always open because we kept rolling them along – waiting for a pullback.  

    As I noted above on Maya's T play, you can easily stay out of trouble by setting a series of stops on your short calls but we never had a cash or margin issue on CMG as we kept making money on our longs and short puts – so we left the short calls assuming that, one day, they would finally pay off.  It's all about keeping things in proportion – something I want to stress more of in the new portfolios.

    WeWork/StJ – If they go down, they'll take a lot of the real estate market with them.  They are the largest tenant in many cities. 

    So Trump says he will release the transcript of his call with the Ukraine?  I wonder if it will be doctored and that will cause another scandal?  

    Moments ago, Speaker of the House Nancy Pelosi stepped in front of the cameras and did what everyone had spent the day expecting her to do: she announced that Donald Trump is being impeached. Pelosi gave a stately, eloquent, mature speech which properly reflected the gravity of invoking impeachment. In response, Trump predictably went completely off the deep end.

     
     
     

    First, Donald Trump posted this bizarre tweet: “Such an important day at the United Nations, so much work and so much success, and the Democrats purposely had to ruin and demean it with more breaking news Witch Hunt garbage. So bad for our Country!” That’s surreal, considering that Trump’s UN speech was a total dud, as world leaders in the audience were visibly unimpressed and uninterested in what he had to say. But Trump was about to go even further berserk.

     
     

    Four minutes later, Trump posted this tweet: “Pelosi, Nadler, Schiff and, of course, Maxine Waters! Can you believe this?” Yes, we can believe. Trump got caught red-handed committing treason, and so yes, impeachment is what legally follows. What’s funny here is that Trump is singling out Maxine Waters, even though she wasn’t visibly involved in anything that transpired today, and th other people Trump named all outrank her. Trump seems to be trying to make this a racial thing because, well, he’s a racist.

     
     

     

    Then Donald Trump posted this tweet: “They never even saw the transcript of the call. A total Witch Hunt!” Of course Trump illegally suppressed the whistleblower report about the phone call, which is what put us in this situation to begin with. Trump then fittingly tweeted “PRESIDENTIAL HARASSMENT!” That seems to be the only message he has left. At this rate, Trump may not be president for long.

     


  39. KMX flat on earnings.  NKE way up.

    Curtis Ingraham @CurtisIngraham1  – 18h
    Clearly my sister’s paycheck is more important than the world her three adopted kids will inherit.  I can no longer apologize for a sibling who I no longer recognize. I can and will continue to call out the monstrous behavior and the bully commentary born out of anger.

    "It is possible to do something that is wrong and not be an impeachable offense and people are throwing that term around so loosely it's lost all meaning."

    - Sen. Marco Rubio (R-FL)

    Committee chair Sen. Richard Burr, R-N.C., and Sen. Mark Warner, D-Va., seeking interview with whistleblower — signifying that the panel is pursuing the politically explosive issue on a bipartisan basis. https://tinyurl.com/yyt9phum @Isikoff

    Aquanomics: A debate about the financial and investment considerations surrounding water as the climate changes. Watch live: reuters.tv/l/P1LS #aquanomics #ClimateWeekNYC

    Markets were expecting Trump to offer the Chinese an olive branch, not hit them with it bloom.bg/2liyB1b via @bopinion

    Legally, it doesn’t matter whether Trump explicitly asked for a personal favor, or whether he only hinted bloom.bg/2kXeUM4 via @bopinion

    People who are now headed to prison because Donald Trump involved them in his treasonous Ukraine scandal:

    - Rudy Giuliani
    - Mick Mulvaney
    - Mike Pence
    - Steve Mnuchin
    - Mike Pompeo

    I guess Trump really is draining the swamp!

    Here's the timeline of events that led up to the announcement of the impeachment inquiry

    Image

    The Latest Numbers Tell Us That The Global Economic Slowdown Is Accelerating Dramatically


  40. The Senate has *unanimously* agreed to Schumer's resolution calling for the whistleblower complaint to be turned over the intelligence committees immediately.


  41. WeWork / Phil – Don't know how much of an implosion we will get. That has started with valuation! People using WeWork will need office space even if WeWork is not there. It's not like there aren't many competitors who could grab the space if needed. Might be actually good for some of them. We'll see.


  42. Senate / Phil – Is the dam breaking? 


  43. Does anyone think that Trumps is going to get a China deal that is beneficial to the U.S. while he is under impeachment proceedings?


  44. No.  

    Dam/StJ – I think the Dems have to impeach as a matter of principle but it will take longer than the election so pointless.