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TGIF – A Wild Week Winds Down

The pause that refreshes or the end of the trend?  

It's been a rough week for the market and we're finishing off lower than we started after Biden announced yesterday that he plans to raise the Capital Gains Tax from 20% to 39.6% for people making over $1M per year.  That sent the Dow down over 300 points yesterday – the indexes generally lost 1% across the board but 4,132 is holding for now on the S&P, which is the 45% line with 4,275 the 50% line on the 5% Rule.

Stimulus, Low Interest Rates and Tax Cuts are the reason we're so far over the true value range with the S&P 500 trading above 35 times the expected earnings of its component corporations.  If we begin to dismantle those things – the market will fall in kind.  Earnings have been OK so far, with most companies beating very low expectations.  Remember we shut down during Q1 last year so the comps are against an impacted quarter and, of course, the stimulus has papered over a lot of the losses from the slow economy – we're not really learning much from the Quarter.  

BUT, in happy, happy news, Global Purchasing Managers' Indexes are popping as hiring is picking up BUT, that's hiring in EXPECATION of an uptick in demand that has not, in actuality, happened yet.  In fact, just yesterday, India alone reported 314,000 new cases of Coronavirus, with Modi now putting up Trump-sized numbers in a complete and utter failure to contain the disease.  Of course, to be fair, India has 4 times more people than the US, so there's still a long way to go to match Trump's level of incompetence (or did he do it on purpose?) on a per-capita basis, right?  

Many European countries retain restrictions on services that require close physical proximity and most forms of international travel. But the surveys recorded the first expansion of activity in its dominant services sector since August 2020, while its manufacturing sector continued to enjoy strong growth.  “Although the service sector continued to be hard hit by lockdown measures, it has returned to growth as companies adjust to life with the virus and prepare for better times ahead,” said Chris Williamson, chief business economist at IHS Markit.

There are continuing signs that the pace of the global manufacturing recovery was already straining supply lines, which may prove to be a drag on growth. In the eurozone, businesses reported the largest rise in waiting times for delivery of supplies in the survey’s 23-year history, while the prices they paid for their inputs rose at the fastest pace in a decade.  Similar surveys from the U.S., released at 9:45, are expected to point to continued strong growth, stretched supply lines and costlier inputs and we'll see how that goes in our Live Member Chat Room.

Have a great weekend,

- Phil


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  1. Good Morning.

  2. Phil - I’ve been following/a member for about 9 months now and haven’t experienced a major correction so here’s my question. I have a bunch of BC spreads with short puts following basically all of your trades for the last 9 months (a few tweaks here or there. My question is, if a stock starts to plunge 10,20,30% what should I do?


    Let’s use this position I own as an example:


    Bought 25 GILD Jan 23 $60 Calls $9.35

    Sold 25 GILD Jan 23 $72.5 Calls $5.20

    Sold 10 GILD Jan 23 $65 Puts $6.87


    Assume GILD takes the elevator and goes to $45 today (not likely but it will help me learn), what would you do?

  3. swampfox

    Hi have gone through these a couple of times. Your GILD sample your put is much on the high side, as the stock has moved between say 62 and 68 a few times. In case of a drop, the short puts in general will try to kill you in respect of margin. Even if your put is 50% below the present stock price, margins still will go up in great numbers. So when selling puts make sure you like to receive the stock at the given strike price. I try to keep the numbers of short put down to a minimum. In case of GILD I hold puts between 57.5 and max 60. You always need enough cash on hand to receive these puts at the given strike. Phil mostly uses high numbers in his sample plays, if you do not have deeeep pockets always reduce the numbers of the play. In case of your 10 GILDs you need alone 65K on the side line.!!!!! 

  4. PS a good indicator for put sales is to look at the stock price of Mar 2020.

  5. JPMorgan Apologizes for Role in Soccer Super League

  6. KMB going to buy more stock today to balance my holdings of that stock. Was yesterday 140.

  7. Intel’s Dreams Meet Reality

  8. I hate when the short call of the leap BCS goes up 100% more than the long call.

    AA 15/25  Jan23 .83/ 1.62

  9. Yodi: I typed this wrong. Here's my position:

    Bought 25 GILD Jan 23 $60 calls $9.35

    Sold 25 GILD Jan 23 $72.5 Calls $5.20

    Sold 10 GILD Jan 23 $60 Puts $10.25


  10. That looks much better

  11. Mexico’s drought reaches critical levels as lakes dry up

  12. Good morning!

    PMI was 60, that's encouraging.  

    Planning ahead/Swamp – Well I hope you have some hedges too, like we have in the Short-Term Portfolio, those will protect us well against a 20% drop with the throught being that we'll either cash out positions or add more hedges before things get worse than that.

    So, using GILD for example, the spread is now $10.25/6.00 and $9.85, so worse than you started.  GILD is $65 so – $20 would be down 30%, that's harsh but, if it does, then your $65 puts are the real danger but they can be rolled to 25 of the $50 puts,, which are now $4 for about even so, if you REALLY want to own 2,500 shares of GILD for net $50 – it's a non-issue.  If you don't REALLY want to own it, you should have a stop in mind on the puts or spend $4 to roll down to the $55 puts at $6 as then you'd be in the $55 puts for net $2.87 and again, if you don't REALLY want to own 1,000 shares of GILD for net $52.13 – why the HELL did you sell the $65 puts?  

    As to a hedge, the hedge is meant to MITIGATE the damage on the way down, not completely compensate for it and that then depends on how much GILD you REALLY want to own followed by a secondary set of assumptions. 

    Let's say GILD falls to $45 (and you still like them) and you spend $4 to own them at net $52.13, so you'd be down $7.13 plus whatever you allow yourself to lose on the spread, which is still about even.  Let's say you stop-loss that at $5,000 so then your net is $57.13 on 1,000 shares with a $12,130 loss at $45.  We can assume you can sell the $45 calls for $6.50 (since the $65 calls are now $8) and then some $40 puts for $7 (the $60 puts are $8) and that would drop your basis to net $43.63 with the stock at $45 and you'd be break-even on 1,000 shares and risk having 2,000 shares at net $41.82 if it heads lower.

    That's where the real risk is as we assume $83,000 worth of GILD is a full allocation so now let's say they drop to $30 and you're down $23,000 – THAT is your real risk so, as a hedge, you want something that mitigates about 1/2 of that loss based on the assumption you never stopped out and rolled into a double on the way down and that all turned out badly.

    Because THAT is the point at which you are more likely to want to give up on GILD and move on and moving on with a net $10-15,000 loss is certainly survivable..  So the hedge won't protect you from a loss that's specific to GILD but if GILD is down 30% because of a broad-market correction, then our SQQQ or TZA hedges should do the trick in an amount where $5,000 would become $15,000 or $7,000 becomes $21,000.

    Keep in mind though, that you are spending $7,000 of your potential $31,250 payout and you are in for $3,505 so $27,745 of profit potential and spending 25% of it on a hedge is just about perfect.  

    Also, as Yodi said, the GILD position you have is a bit too aggressive, makes it much harder to protect.  In the LTP we have these:

    GILD Long Call 2023 20-JAN 50.00 CALL [GILD @ $66.31 $0.36] 10 12/30/2020 (640) $12,590 $12.59 $5.01 $12.59     $17.60 - $5,010 39.8% $17,600
    GILD Short Call 2023 20-JAN 65.00 CALL [GILD @ $66.31 $0.36] -10 12/30/2020 (640) $-6,750 $6.75 $2.03     $8.78 - $-2,025 -30.0% $-8,775
    GILD Short Put 2023 20-JAN 50.00 PUT [GILD @ $66.31 $0.36] -5 12/30/2020 (640) $-4,000 $8.00 $-4.13     $3.88 - $2,063 51.6% $-1,938
    GILD Short Put 2022 21-JAN 62.50 PUT [GILD @ $66.31 $0.36] -10 2/5/2020 (276) $-9,000 $9.00 $-3.95 $-9.60     $5.05 $-0.15 $3,950 43.9% $-5,050
    GILD Long Call 2023 20-JAN 45.00 CALL [GILD @ $66.31 $0.36] 50 11/17/2020 (640) $86,000 $17.20 $5.18     $22.38 - $25,875 30.1% $111,875
    GILD Short Call 2023 20-JAN 65.00 CALL [GILD @ $66.31 $0.36] -50 11/18/2020 (640) $-37,250 $7.45 $1.33     $8.78 - $-6,625 -17.8% $-43,875

    $60 puts make things easier but same concept.  

    Speaking of Biotech, LABU took a nice dive and we like them when they are cheap so, for the LTP, let's sell 15 of the 2023 $30 puts for $7 ($10,500) to remind us to keep an eye on them – or to just get $10,500 for promising to buy them for 1/2 of the already discounted price.

  13. California goes from worst to first in virus infections

  14. Phil:  What is your take on INTC's earnings?  Is the market over-reacting?  Should we attempt to take advantage of the drop and add to or adjust current positions?

  15. John  INTC my leap long call is Jun 22 40c what is there to improve? and my Jan 22 40 and 50 puts are still in great shape positve.

    I think Phil's play is still well set, so any new plays for INTC, the stock is still much to high. It will settle after the sheep have jumped over the cliff.

  16. Hi Yodi,  Thanks for your thoughts.  I recognize that INTC is no bargain and that we are overdue for some sort of market correction.  I am just wondering if it is worth rolling the $50 short end of my 2023 spreads up a bit.  But, as you say, perhaps INTC needs to settle a bit further, or in any case, there are better uses of the money.

  17. INTC/John – Our target price on INTC was $50 for 2023, over $65 was simply ridiculous – as are most company valuations now.  As Yodi says, what is there to improve?  We bought this spread for net $15,750 (not counting stuff we already cashed out) and it pays $75,000 at $50 and currently it's net $63,500 on the bull call spread – less the $4,700 on the puts and we have $16,000 to gain on net $59,000 if INTC manages not to fall another 20% – no reason to touch it and not cheap enough to take advantage of.  

    INTC Short Put 2022 21-JAN 30.00 PUT [INTC @ $62.84 $-0.79] -10 3/12/2020 (276) $-3,000 $3.00 $-2.73 $7.00     $0.27 $0.01 $2,730 91.0% $-270
    INTC Short Put 2022 21-JAN 50.00 PUT [INTC @ $62.84 $-0.79] -20 7/24/2020 (276) $-17,000 $8.50 $-6.29     $2.22 $0.05 $12,570 73.9% $-4,430
    INTC Long Call 2023 20-JAN 35.00 CALL [INTC @ $62.84 $-0.79] 50 11/17/2020 (640) $67,000 $13.40 $15.53     $28.93 - $77,625 115.9% $144,625
    INTC Short Call 2023 20-JAN 50.00 CALL [INTC @ $62.84 $-0.79] -50 11/17/2020 (640) $-31,250 $6.25 $9.98     $16.23 $-0.58 $-49,875 -159.6% $-81,125

    • BofA points to no sales growth for Intel in a year when PC units and cloud capex are growing 14% to 15%, a gross margin trajectory continuing in a downwards slope and thinks expansion into competitive foundry could be an expensive and unprofitable transition given its low margins and INTC’s limited experience/potential conflicts of interest.
    • "Meanwhile INTC is lowering buybacks in order to build infrastructure for future foundry volumes, another headwind to EPS. Overall we see muted -1% EPS CAGR from CY20-23E."
    • BofA keeps an Underperform rating on Intel and maintains a price objective of $62 off a lower PE of 13X due to rising capital intensity and lower FCF returns.

    Their underperfom is a 24% outperform for our target.

  18. Some people they like to go out dancing
    And other people, they have to work,
    And there's even some evil mothers
    Well they're gonna tell you that everything is just dirt
    You know that women never really faint
    And that villans always blink their eyes
    You know children are the only ones who blush
    And that life is just to die
    But, anyone who ever had a heart
    Oh, they wouldn't turn around and break it
    And anyone who ever played a part
    They wouldn't turn around and hate it
    Sweet Jane

  19. For the first time in a long time, I actually have some excitement about INTC.  This project is extremely interesting.  I am not yet sure how much adoption there will be, but it is an incredibly cool idea:

  20. This is a great nostalgia video:

    You kind of forget that musicians were the pre-computer nerds.  Some cool kids but mostly guys who were good at music making a band in hopes of getting some girls…

  21. yodi, I'm curious what you think about NMR.  I'm thinking of buying the stock at $5.40 and selling the October $5 strangle for $1.30.

  22. JPH/NMR – No dividend, why buy the stock?

  23. JPH1121 NMR Just looking at TOS the stock pays no div, No why would I spend money on a stock which does not pay div. ?

  24. Have a look at DHT I bought the stock at 5.42 a bit more now, but pays 3.4% yield and has a PE of 3.6. Sell the Jan 22 6 straddle for 1.72.

  25. Amazing, right back to 34,000 on the Dow.  

    Unshortable market.  

    Lumber flaying again:

    Gold harshly rejected at $1,800

    Copper is on the inflation bandwagon

    BYND must be catching on: 

    And WTF is this about?:

    Dollar still in crash mode:

  26. Lumber prices are doubling the price of our Chicken Coop plans. Talk about hens laying golden eggs! 

  27. I was looking at the dividend history and there were 2 payments per year for the last 3 years.

    Is this a case of just a bunch of special dividends?

  28. Also yodi, I did follow you in on DHT already.  Been going well for me!  Thanks!

  29. CORN- I think that's called inflation. Oops, am I allowed to use that word? 

  30. JPH1121 yes I see they pay div every 6 month but failed to pay in Mar21. Very strange. can not comment.

  31. Don't be silly, the Fed says there's no inflation.  

    Have a great weekend folks, 

    - Phil