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Toppy Tuesday – Trouble at 12,222?

How high is too high?

You pot smokers out there know what I mean!  High can be fun, too high can be scary.  On August 11th it was: "20 Million Tuesday, 28,000 Tuesday – Record Infections, Record Highs" and, speaking of infections, happy 6M America!  We had 5M on August 10th…  Anyway, August 3rd was "Monday Market Movement – Nasdaq 11,000 and Bust, Again?" and, 10% later, I was certainly wrong about that one.  

AAPL was $425 on month ago, now it's split 4:1 and it's $129 so 4x that is $516, that's up 21.5% in 30 days for the World's biggest company so of course the AAPLDaq is up 10% but AAPL had help.  GOOGL has gone from $1,450 to $1,650 (13.7%), AMZN from $3,100 to $3,450 (11.2%), FB from $250 to $295 (18%) and, of course, TSLA has gone from a split-adjusted $300 to $500 (66%) over the past 30 days.

This is NOT reality, this is a game.  When you are playing a game and the rules are not clear and they keep changing – your chance of winning becomes random or, if someone else is making the rules, then your chance of winning is pretty much zero and you might want to play a board game under those conditions but should you really be playing with your retirement account?  

The Water Comics And Cartoons | The Cartoonist GroupPlease just THINK about what you are doing.  As I noted last week, there's very few stocks pulling up the whole market and, while some of these sky-high valuations may be justified, the weight of the thousands of others that are not begins to put a drag on the indexes at some point.  Think of each index Dollar added to the underperforming stocks as a weight the high-flyers need to carry with them to get to the next level.  At the rate the Government is spending and the Fed is printing – we do have a lot of lift – but it's not infinite and every day the markets move higher adds more weight that needs to be lifted to the next level. 

Evenually, gravity will take its toll.

You don't have to take great risks to make good money in a bull market.  Take our Income Fund, for example, which is up 12%, net of fees (free and clear returns) in just two months.  We started the Income Fund on July 1st and the S&P was at 3,100 and now it's at 3,500 so it's up 12.9% – we're matching the S&Ps returns (exceeding them actually but there are management fees, of course) WITHOUT taking excessive risks (see Doug's notes).  It's not just about MAKING 12% in a quarter, it's about KEEPING the money you've made if the market begins to go the other way. Hedge Funds don't outperform in a bull market because they are hedging the risk of a downturn.

There are no crazy momentum stocks in our Earnings Portfolio but it's up 84.8% for the year with sensible stocks like HRB, ACB, GILD, WBA, HBI, INTC, IRBT and M – just a nice, diversified group of value stocks generally in well-hedged positions that simply do very well (along with everything else) in a bull market:

I'm not saying you should get out of everything – I'm just emphasizing that you can make very nice returns WITHOUT taking on a lot of risk.  Look at GILD, which is at a loss in the portfolio.  That's a $15,000 spread at $75 or above in June of 2022 and currently the spread is net $1,800 so it has a $13,200 (733%) upside potential and the worst case is owning 500 shares of GILD at $60 ($30,000) plus the $1,800 you may lose is net $63.60, which is still 5% below the current price.  That's your worst case to own on of the World's top pharma companies – THAT is how we invest sensibly!  

Yesterday our index shorting lines were:

  • Dow 28,750
  • S&P 3,500 
  • Nasdaq 12,000 
  • Russell 1,585 

We made some quick money on the dip but now the Dow and the Nasdaq are over the lines so it's no play unless one of them crosses back under (and the others are below).  One day this rally will break – not necessarily today though…

Be careful out there!  


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  1. Good Morning.

  2. NAK – how do you evaluate the likelyhood of a stock with their financials going bankrupt in the next year or so?

  3. Phil / rb-

    Thanks for being the voice of reason on my FOMO trade.  Im sad that I cant do the trade but I guess not being down $1200+ right now is ok too LOL!

  4. Good morning!

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    Robinhood, TDAmeritrade, and other online stock-trading platforms all experienced issues on Monday.

    NAK/Tangled – If Biden is elected, investors may give up on them and they can't be sustained without one company or another paying them for an option to co-operate the mine (that's what they've been doing).  They are sitting on a massive potential asset, hundreds of Billions of Dollars and the cost of speculating on that asset is $60M a year so no real shortage of people who don't mind taking a chance.  

    The biggest hurdle they face is Biden being elected because that's a 4-12-year setback for them, most likely but, if they do pull another $120M or even $60M investor to get them through Biden's 1 term (he said so) then NAK will rally back yet again – as it did through Obama/Biden last time.

    Obviously this is a high-risk stock though, that's why it's foolish not to take some off the table when it rallies.  My kids cashed out 1/2 with a 200% gain so it's all free money for them and now we even bought  some more on the recent dip but the cost basis is still $0 but that doesn't mean we won't cash half out yet again at $1.30, which is a double off the recent batch.  

    That's right Mike, not losing is as good as winning. 

    $43.50 again on /CL – very tempting but too close to the holiday to short.  

    Don't ignore the VIX folks – SOMEONE is buying a lot of hedges:

  5. Phil // SPWR  -

    my $5/$12 spreads are $5.67.  Wait till Jan 22 for that extra $1.37?

    my short $8 puts are now $1.82 from a $4 entry.  Wait till Jan 22? 


  6. ** collect the $1.33 (bad math)

  7. The market is going up but WBA is tanking?  Any news?


  8. Phil/WBA

    I have some naked 2022 $30 calls that I bought for $10.5 last week with WBA at $39.change.

    Add to the calls or do we expect further downside and covering is in order? I find it hard to know what to do here as the company is obviously on sale but it may get more on sale…

    what are your thoughts? Buy more calls or cover existing?

  9. Good grief.  Zoom now worth more than IBM.  PE of 2588.   TSLA is so yesterday

  10. SPWR/Monk – The question is, do you have anything better to do with $5.67 over the next two years than make $1.33 (24%).  And that means better and safer, not just more money.

    And just because you have a better play – do you actually need THIS money?  If it's just going to be sitting in your account – isn't 24% in two years good interest?  

    WBA/Rookie – Yeah they appointed the RAD CEO to oversee the US business.  I'm almost ready to bail on that news! 

    WBA/Maya – The 2022 $30s are already down to $9 but that's too early to DD.   The $25s are $13 and that's too expensive to roll to so not much to do but wait.  The $37.50s are $5 so you can sell those and roll down to the $25s and be in the $25/37.50 spread for less than $10.  That's your escape hatch if things get worse.  

    Zoom/Tangled – That's crazy.

  11. Hi, Phil.  Have 500 shares Roku, basis 117 and short 5 Jan 150 calls, basis 22.50. Shares are short term (3/20).  Thoughts, please.

  12. ROKU/NPaul – I would cash 500 shares at $181.30 ($90,650) and roll the 5 short Jan $150 calls at $47 ($23,500) to 8 short $185 calls at $29.50 ($23,600) and buy 8 June 2022 $150 ($72.50)/250 ($40) bull call spreads for net $32.50 ($26,000).  That's taking net $66,750 off the table and you are still left with an $80,000 spread covering the short puts.  You were in for net $47,250 so now net $19,500 credit and another $80,000 upside potential.  

  13. Thanks, Phil.

  14. npaul Roku You have net 31,000 in stock your net cost on opt is 12,125.00. Stock pays no div. I would take the cash and run.

  15. Phil, I had hoped to roll out some sold MIDD calls over the months after 3/23. I didn't think MIDD or the market would shoot up like it did after 3/23 without a major correction by now. Also MIDD did not add Mar 2021 options until it seems like recently and there is very little traction/activity in most of the calls.

    Can you help me salvage these call options in some way? (I took some profits over time from the original BCSs on MIDD but did not net out the spreads; just closed/cashed only the one (bought) side (in the green) of the spread expecting the sold calls to contract as the market corrected – which it never did enough for how much the sold calls blew up!) I'm sure I probably should have closed out the BCSs rather than separating the spread into single transactions? For awhile there I became immobilized once the sold options blew up in March and I had taken too big positions with the MIDD BCSs. Various 15 Bought MIDD calls/15 Sold MIDD bull call spread positions was not inconsequential when volatility explodes like it did in March. Obviously I have way too much to learn and have made some expensive mistakes getting caught in the March maelstrom:(  Thank you.

    MIDD 18 Dec 20 Sold -5     50 Calls @$8.11; now $47.50;

    MIDD 18 Dec 20 Sold -5     70 Calls@$3.60;  now $28.30

    MIDD 18 Dec 20 Sold -10 120 Calls @$9.60; now $3.20

    MIDD 18 Dec 20 Sold -5. 75 Puts @$18.06;  now$3.275

  16. Thanks, Yodi.    

  17. Phil, re: Roku, please explain how the new Jan 185 short call is covered by the BCS?  It makes me net short. Thanks.

  18. MIDD/Scout – Are you 100% short on MIDD or do you own some longs?  I take it you have some profit off the table but not enough to cover the  losses.  There's $6,400 profit in the 10 short $120s, selling those was, mechanically, the right thing to do but you should also take the profits quickly. Same goes for the puts with most of that collected and an $8,000 profit.  That leaves you with a $12,500 and $19,695 loss so we'll call it $32,000 and you can sell 10 March $80 puts for $6 ($6,000) and sell 10 March $110 calls for $10 ($10,000) and there's half the money back and you just roll the losing side along but if MIDD goes over $110 or under $90 – I'd strongly consider buying back 1/2 and waiting for it to calm down to re-sell rather than riding out such a massive move against you.

    Roku/Npaul – The Bull call spread, is being bought for $26,000 and pays $100,000 at $250 while the short $185 calls are being sold for $23,600 and pay $65,000 at $250.  So your net cost of the new spread is a $2,400 credit which means you don't lose money until $253 or higher.  If you think ROKU will be over $253, then why are you selling any short calls at all, you should be buying the hell out of it!

    Of course, the $185 calls are January so you also have 18 months to roll them to higher strikes.  They are $29.50 and ROKU options don't go higher than $260 because no one but you thinks that's going to happen but buy then they will probably make $300s to roll to, giving you even more room if the stock goes higher.

    That's what I call covered.  

  19. ROKU Covered call. Some what not clear. leap BCS should possible be 10 off and and only roll 5 150 calls to where???, so to stay by the role of selling half the calls against the leap BCS, and not having 8 longs against 16 short calls. Maybe I am wrong.

  20. Here's an example of Stock Market Physics:  

    Michael Jordan can jump REALLY high.

    Michael Jordan

    He has the NBA record for a vertical jump and that's 48 inches – 4 feet.  

    So, if you ask me to bet that MJ can't jump 50 inches – I'm not likely to spend much on that bet.  

    Of course, if you ask me to bet that MJ can't jump 60 inches – then it begins to get interesting as it seems very unlikely, even in the best of conditions, that he will beat the all-time athletic record by 20% – the one himself set in his prime.  

    You can't get sucked into believing that just because something went higher – it can just keep going higher.  If that were the case, we'd have lots of Trillion Dollar stocks – not just APPL, GOOGL, MSFT and AMZN (and soon TSLA).  Why don't we?  Physics!   

    Physics gets them all eventually because, if the company isn't supported by actual earnings and earnings growth then it's supported by sentiment and, at some point, the sentiment turns and the support wanes and the stock collapses under the pressure of its own enormous valuation.  

    This has happened to 35,996 stocks other than AAPL, GOOGL, MSFT and AMZN – all of whom are unique giants in their spaces with virtual monopolies that they are able to exploit with products that are used by a good portion of all the people on this planet.  

    Other companies tend to follow more normal paths.  TSLA is not at the moment but neither did Yahoo 20 years ago – and that did not end well for them, mostly because GOOGL came along and kicked their asses.  

    It may seem like we're in an ever-expanding stock market universe at the moment but we're just looking at carnival balloons being blown up by kids with water pistols – they are going to pop eventually…

    The higher in price a stock goes the more money inflows are needed to sustain it's valuation. Buyers must be found for every seller and the higher in price the stock goes, the more money the buyers need to replace the sellers so there are a couple of major factors at work:

    • How many people want to sell vs how many people want to buy.
    • How much money are people willing to accept vs how much people are willing to pay.

    A thinly traded stock like TSLA, with only 1Bn shares outstanding (post-split) may seem very popular as the average volume is, like most stocks, 10% or 100M but really it only takes a very small imbalance of buyers to sellers to drive the price up.   

    If a motivated buyer has trouble buying a share, they bid up the price in order to get one.  If the sellers have no pressing need to sell, they don't jump to accept offers and the price goes higher.   TSLA is 73% held by insiders and institutions – they are generally not selling:

    20.51% % of Shares Held by All Insider
    57.93% % of Shares Held by Institutions
    72.87% % of Float Held by Institutions

    AAPL, on the other hand:

    0.07% % of Shares Held by All Insider
    62.12% % of Shares Held by Institutions
    62.16% % of Float Held by Institutions
    4,296 Number of Institutions Holding Shares


    0.11% % of Shares Held by All Insider
    58.56% % of Shares Held by Institutions
    58.62% % of Float Held by Institutions
    2,594 Number of Institutions Holding Shares

    So TSLA is very unusual and the "insiders" are pretty much Elon Musk so 20% of the stock is completely off the table.  That means it takes very few buyers to exert upside pressure on the stock and Musk is a master of getting people to want to buy his stock.  As long as he keeps that going – things will be fine but if the tide ever turns and people want to sell and the buyers need to come up with $500/share?  Where's that going to come from?  

    Any stock gets to a point where you simply can't get enough people with enough money excited enough to sustain a valuation and, when that happens, it can then spread the negative sentiment throughout a sector or to the whole market – just like a few drops lead to a rainstorm.   

    Those clouds carry the POTENTIAL for a downpour with them for long periods of time but one day, seemingly at random, the right conditions prevail and the flood-gates open up and, when they do – there's nothing you or Elon Musk can do to stop them.

    Physics – it gets you eventually.

    Williams %R | technical analysis