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Flip Flopping Friday – Winding Down a Weak Week

That went pretty much as expected

On the whole, it was just the one big drop on Wednesday morning that did us in and, if we just consider the drop from our 20% line at S&P 3,420 to our 15% line at 3,277.50, then it's just a 5% correction in a bull market and our weak bounce line is 20% of the 142.5 drop (we ignore the spikes), which is 28.50 but now we rond so call it 3,310 and 3,340 would be our strong bounce line – where we were rejected yesterday afternoon.

This morning we're back down to 3,280 as Apple (AAPL) earnngs disappointed along with, as we predicted – Starbucks (SBUX) but not too badly so, in yesterday's trade idea for our Earnings Portfolio, we're going to cash in our 10 Jan $70 puts for a small profit and the real money will be made on the expiration of the short calls below the $90 line -so those we can ride out for a bit.  We never thought SBUX would hit $70 but the puts would have jumped nicely if SBUX took a big hit.  It didn't so that part of the trade is over.  Never forget why you got into a position.

Earnings reports and guidance from technology companies after the closing bell weighed heavily on markets overnight. Twitter (TWTR) plunged 15.3% in offhours trading after posting its slowest user growth in years and warning that uncertainty around the U.S. Election could compress ad spending.  Apple (AAPL) shares dropped 4.2% ahead of the opening bell after quarterly iPhone sales fell from a year earlier. That, combined with a delay in the launch of the company’s new smartphone, led to iPhone revenue falling more than analysts had expected (but exactly as we had expected).  Shares of Facebook (FB), Amazon (AMZN), Tesla (TSLA), Microsoft (MSFT) and Netflix (NFLX) are all down over 1% premarket – Google (GOOGL) is up $100 (7%) and is pretty much holding the market up by itself this morning.

The big tech earnings were not that bad but markets did not respond positively, so that does suggest a deeper sense of negativity in the market,” said Seema Shah, chief strategist at Principal Global Investors.  "While big tech has driven the U.S. stock market recovery this year, that means when we see any disappointments on particularly high-multiple stocks, then obviously the magnitude of the downgrade or the earnings-miss becomes far greater,” said UBS strategist Nick Nelson.

That's a very big problem for the Nasdaq (which is why it's our primary hedge) as we are down below the 50-day moving average at 11,532, so call it 11,500 and that's down 1,000 points (8%) from 12,500 in September and 11,250 is our 25% line so this is a very dangerous zone for the Nasdaq as there's no real support between here and 10,000 if 11,250 fails

That means we can add the Nasdaq 3x Ultra Long (TQQQ) back to our Short-Term Portfolio as a hedge as we have limited downside to a short over the weekend with 11,500 being a hard line to recover and that's 2.5% up so a 7.5% gain in TQQQ, from $126 to $135 while a 10% drop in the Nasdaq to 10,125, would send TQQQ plunging 30%, to $88.  We also have the advantage that TQQQ, like any ultra ETF, tends to decay over time.

We'd like to be protected over the holidays so let's buy the following hedge for our Short-Term Portfolio:

  • Buy 50 TQQQ March $110 puts for $22.50 ($112,500)
  • Sell 50 TQQQ March $90 puts for $15 ($75,000) 
  • Sell 5 GOOGL Jan $1,800 calls for $50 ($25,000) 

We're paying net $37,500 for the $100,000 spread and we're lowering our cost by selling 5 of the GOOGL $1,800 calls for $50 as GOOGL is a $1Tn company and it's not likely to gain $200Bn more and we can always roll the short calls to higher strikes in longer months.  The 2022 $2,500 calls are $50, for example.  That brings the net cost of the spread down to $12,500 so we're buying $88,500 in protection.  There is a $50,000 margin requirement on the short GOOGL calls so simply don't do them if you don't have tons of margin (we have plenty to spare in the LTP) and there's still $62,500 (166%) upside potential in the zero-margin bear put spread.  

Speaking of looming disasters Exxon (XOM) warned it may take up to $30Bn in writedowns on natural gas fields after posting a historic loss despite sweeping budget and job cuts.  Exxon is confronting one of its biggest crises since Saudi Arabia began nationalizing its oilfields in the 70s. The company lost $680M, or 0.15 per share, during the 3rd quarter, compared with the 0.25 loss forecast by leading Economorons. Shares are down 1.2% in pre-market trading after being up 4.4% yesterday but it's not cash-rich XOM I'm worried about but the rest of the sector if they report this kind of wipe-out.

BREAKING NEWS: Exxon/Mobil Ordered Out of Torrance, Guilty of Greenhouse  Gas Pollution – Creative GreeniusFortunately, energy stocks are no longer a major part of the S&P 500 as they've already taken major hits.  XOM started the year close to $70 and is down 50% but it's hard to call them a bargain at $139Bn, despite the fact that they made $14Bn last year because they are likely to lose $1.5Bn this year PLUS the 2 years worth of earnings they are about to write off.  A Biden Presidency would not be good for them either as XOM has done almost nothing to embrace and alt-energy future – they are going to die out like the dinosaur that used to be their symbol.

Total (TOT) is the way to go in the big oil space as they have also been beaten down from $50 to $30 (down 40%) but they are holding the line and have been the sector leader in alt-energy investments.  We sold 5 TOT Nov $30 puts for $1,625 in our Future is Now Portfolio back in May and those are going to expire worthless as earnings have beat estimates and now we can add a bull call spread for next May (as long as they go, unfortunately) as a consolation prize if Trump wins but also because they earned 0.29 per $30 share for the Q, so holding up very well in a crisis.

  • Buy 20 TOT May 30 calls for $3 ($6,000) 
  • Sell 20 TOT May $35 calls for $1.50 ($3,000) 
  • Sell 5 TOT May $30 puts for $4.20 ($2,200) 

That's net $800 on the $10,000 spread so there's $9,200 (1,150%) upside potential if TOT is back over $35 in May but anything over $30.40 is going to be a winner and our worst case is owning 500 shares of TOT for $30 ($15,000) plus the $800 cash we spent works out to $31.60/share if we are totally wrong but, of course, we already made $1,625 from the short Nov puts so really net $28.35 is our worst overall case.

Aren't options fun? 

Have a great weekend,

- Phil


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  1. Good Morning.

  2. This week has been one step forward, 2 steps back!

    Europe will soon be completely in confinement, growth is going to slow down dramatically everywhere in Q4. Valuations will look pretty silly soon.

  3. Phil/AAPL- 

    Is it time yet to add a new BCS in AAPL if I don't have any exposure to AAPL. Thanks!

  4. Good morning!

    More selling already – this is not a good trend.

    Wow, $60 for the GOOGL Jan $1,800s!   That gives us a margin of safety filling TQQQ but I think we can get $7.50 on the spread pretty easily.  

    AAPL/Ravi – If the VIX is high and AAPL is low, it's a good time to sell the put as you are selling great premium.  That's how you start a spread.  It's not a good time to buy a call as it has too much premium and it's not a good time to sell a call, as the stock is too low so, obviously, we sell the put first and wait.  

    It's still jumping the gun in a weak market that is potentially going to collapse but, if you must, I'd consider selling 1/2 or 1/4 of the 2023 $90 puts for $13.50 as that's a stupidly low net $76.50 – even in a depression I'd be happy to double that down.

    THE BEST OF ADMIRAL ACKBAR, IT'S A TRAP. Star Wars Scenes - YouTube

    And what Akbar said! 

  5. AAPL/Phil – Thank you, I can wait, in no rush. Do like the 1/2 or 1/4 put sale.

  6. On my charts, 3250 is the line in the sand for the S&P. Below that is our Must Hold line at 3150 and the 200 DMA is close at 3129! 

  7. CHL is at the bottom of it's channel .. hope to see a nice bounce.  Man, you can buy the shares for $30.73 with 6.5% dividend, sell Jan22 call @ $2.4 for a nice 20% dividend in 14mo.  Sell Jan22 $27.5 puts for a little more bang .. if you dare in this market.

  8. See – it's a trap!

    Admiral Ackbar Its A Trap GIFs | Tenor

    See, and my Mom said I'd never learn anything from watching that stuff…

    AAPL/Ravi – As long as you won't freak out when your put is down 100% and you plan to ride it out until 2025 (with rolls) then I'd go 1/2 and be happy to DD when it's at $27 but, if you are going to freak out and stop out when it hits $21 (down 50%) because you can't stand the pain – then you shouldn't be playing it at all.

    3,250/StJ – We're right there.

    From last night:  

    SBUX/Batman – $2.50/$87 share is nothing to crow about, it it?  $3 not much better and they are not even there this year.  Just not exciting.

    AAPL/Batman – It's a trap!  Come on, still to expensive to fight a major downturn.  See this morning's comments (above now).  I agree, can't wait to start accumulating but I want to wait until after the election at the moment.  

    CHL/Jeddah – That's disappointing so far.

  9. Phil,

    Tactical bailout question re NVDA puts. During "a walk on the wild side" I sold Nov 470 puts @6.76 when NVDA was in greener pastures. Today the Nov 470 puts are $17.75. Thinking of rolling the Nov puts down to either the Jan '22 195s @ 4.80 or initially a higher strike of Jan '22 330s @ $27 with the thought of rolling down again should the slide continue. Would appreciate your guidance.


  10. CHL – Phil, I wonder if it's the fear of another 4 years with Dear Leader and an all out trade war against China

  11. Phil / AAPL – I had to pick some up – sold some '$90  '23 putters for 14 and bought some shares at 109… covered them w/ Jan '21 callers at 115 for 6….  I like this cause I average in at 100 ish, or I quick 10% on my return….    look forward to placing a BCS for '23 when you think the time is right….

  12. EQR / Phil-

    Can i get your thoughts on EQR.  They're getting crushed on recent earnings miss but wondering if it is overdone?  Thanks!

  13. ARNA is the new honey badger…

  14. Things are not getting much better especially the Nasdaq!

    Next week is going to be testing I am sure!

  15. Are you selling vol products currently stjean? VXX? Just curious… I've heard several folks talking about a large contraction after the election, and it seems pretty likely. 

    Barring someone getting coronavirus this weekend of course…


    Happy weekend everyone!

  16. Gosh, this week is not ending well at all.

    NVDA/8800 – See, you guys wonder how I can sit there all summer and not buy things but it's simply KNOWING that overpriced things eventually sell off.  I simply don't feel the pressure to chase because I don't imagine that things that are expensive are going to get more expensive.  As to NVDA, fortunately you sold the Nov $480s so you have ages to roll but, if you don't REALLY want to own the for the long haul (at 100x falling earnings, you sly devil!), then you have to be very careful about how you handle this.  NVDA was at $132 last year and $180 in March and you promised to buy it for $452.25 – that's a lot of conviction!   Frankly, I can't find a reason to pay 50x earnings for NVDA ($250) but 30x ($150) I wouldn't mind and the Nov $470 puts are $34 and the 2023 $250 puts are $20 so a 2x roll these puts you in at net $0 and, if NVDA drops down to $100, then you DD to average $175, sell calls and puts on what's left and THEN you have a value play.  So, if you REALLY want to own 2x NVDA at $175 and risk owning 4x at $150 or less for the very long-term, then there's no reason not to roll out now but, if that's not the case – then take the loss you should have taken 300% ago and move on.

    CHL/Jeddah – Somewhat. It's also early in the 5G cycle and they've been investing in the future – companies get punished for that but a company with 950M subscribers can't run the World's slowest network.   

    China Mobile (NYSE:CHL): Q3 net income of RMB 81.6B (-0.3% Y/Y).

    Revenue of RMB574.4B (+1.4% Y/Y)

    Press Release

    It's the usual problem – EXTRAPOLATION – they margins are trending down because they are preparing a 5G network for the World's largest customer base in one of the World's largest countries (in area).  At some point they no longer have to spend this money and reap the rewards of having the largest, fastest network.

    So silly.


    Admiral Ackbar Its A Trap GIFs | Tenor

    Yoda Quotes Funny -

    EQR/EMike – Good, solid apartment managers so I think they'll muddle through overall but not really a bargain at $17.5Bn ($47) when MAYBE they are good for $600M in profits so 30x earnings for a REIT?  They had an outsized gain last year due to a profitable sale of assets but that means less income going forward and of course they will buy something else – it was probably wise timing – but that's not going to get your P/E under 20 for the next 3 years, is it?  

    See, you look at a chart and the chart doesn't tell you this isn't the same company you were looking at 2 years ago so why would you expect the chart to go back to "normal"?  That's as if this were the chart of a home's average outdoor temperature and it used to be in New Jersey, where it averaged 60 degrees but now you moved the home to Minnesota and you are averaging 46 degrees.  If you bet on the temperature going back to 60 just  because it used to be there – you are blindly ignoring all the actual factors that led to that temperature reading in the first place.

    That's what's wrong with TA – it's total BS – it's the ridiculous belief that a picture of something is what causes the thing to occur (though that would be a good Twilight Zone plot, wouldn't it?).  That's not at all the way things work yet 90% of the traders in the market act as if that's the way things happen.  As if sticking a thermometer into a child that says 105 degrees means they have a fever – tails don't wag dogs! 

    Little spike into the close.

    Have a great weekend, 

    - Phil

  17. I have been having fun with GOOG options today. I had a 1625 call expiring, It spiked to $1,687 at the open on earnings, so I rolled to the Nov 1650's. Turns out that I probably just could have left them alone and let it expire worthless.

  18. CHL – Thanks for the insight.  Would you mind ever sharing some of the tools/sources you use for your analysis?  I use IB as my broker and they have decent FA but suspect I need to go more paid sources too.  Wondering if you have a recommended list of sources you use?   I think 90% of traders use TA because it's far easier than FA as it's widely available on all trading platforms whereas FA requires a lot more domain knowledge of an industry.  I struggle with it and always doubt myself, but that's why I'm here.  I've learned a ton from you but still often amazed at how you are right a lot more than wrong.  And wrong usually translates to you being a bit early.  I'm firmly in the FA camp and hoping to keep absorbing everything you throw out.  As always, thx for all you do!

  19. UK just announced National Lockdown Emergency – Christmas is cancelled.

  20. Phil / EQR-

    Thanks Phil.  Where did you get your info about the asset sale?  I didnt think to look for something like that, but it explains the solid P/E & P/S figures I am seeing in analyst reports.  Kinda feel like there should be an asterisk next to those figures!!!

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  26. Hi Phil, 

    As per the webinar reminding you to look in to IVZ (Invesco) 

    thank you as always