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Saturday, December 3, 2022


TGIF – Hedging for Disaster with our Short-Term Portfolio Review

What is hedging? | Advanced trading strategies & risk management | FidelityAren't you glad we added hedges last week?  

We did a review of our Short-Term Portfolio last week and our timing was excellent as this has been a rough week for the markets but we were able to relax as our STP bumped up from $245,485 to $281,128 as of yesterday's close, gaining $35,643 (14.5%) for the week.  Meanwhile, our Long-Term Portfolio (LTP) positions, which the STP is designed to protect, are down $79,067 (4%) since our April 16th review, so our STP is mitigating about 1/2 of the damages – as it's designed to.  Of course the STP kicks in a bit harder between a 10-20% drop but no real signs of that so far as we're bouncing nicely this week after a 7% drop in the Nasdaq (more on that later).

Let's take a look at where we stand now in our STP:

  • XRT – We went from 20 to 70 last week and caught a nice downturn and a lot of retail earnings are coming out next week – so we'll leave these for now – even though we should take 1/2 off the table now that we're even(ish).  

  • SCO – During the week we doubled down on the long calls as oil got expensive ($66.50), taking advantage of the lower price on the calls.  We also shorted Oil Futures (/CL) in our Live Trading Webinar and we bottomed out at $63.50 – up $3,000 per contract – that's another way we can enhance our returns while we wait for these longer options to play out.  At net $13,000, this is a $30,000 spread if oil is under $60 in January and half of our gains are uncapped – so I still like this spread but we do expect oil near $70 in the summer – so it's going to be a rough ride.   Rembmer, these are hedges – if the economy collapses, oil goes down and we win.  If the economy stays hot – we still think $60 is too much for oil – that's what makes it a good hedge.  

  • FXP – We bet China would begin to collapse.  Bingo.  Unfortunately, they are collapsing for many of the same reasons I predict the US will follow.  The nice thing about this spread is we sold June $35 short calls and we're right on track.  They can be rolled to higher, long-term calls to widen the spread.

  • TQQQ – Nice pay-off on the Nasdaq dip.  As we expected, the Ultra-Long ETF took a drastic hit, dropping 21% when the Nasdaq fell 7% and now we're in the money at net $64,000 but only half-covered and the short puts are rollable so I'm loving this hedge!  

  • CMG – We're losing on the short $1,400 puts ($1,800) and the short calls aren't worth much so let's buy those back and sell 5 June $1,400 calls for $21 ($10,500) and roll the 5 short June $1,400 puts at $96.85 ($48,425) to 4 short Jan $1,200 puts at $85 ($34,000) so we're spending net $5,725 to roll the 5 short calls down $200 in strike with a 20% lower obligation.  Meanwhile, at $1,200, the 5 Jan $1,500 puts would be worth $150,000, $30,000 more than they are now – so we're well-covered.  

  • SQQQ #1 – SQQQ is at $12.77 and let's say the Nasdaq drops 20% and SQQQ goes up 60% (3x inverse ETF) to $20.40.  That puts our $5 calls $15 in the money ($150,000) but the Nasdaq looks weak to me so let's buy back 1/2 (50) of the short 2023 $25 calls at $3.14 ($15,700) – just in case things go worse than expected.  
  • SQQQ #2 – I'm more comfortable here as $30 is unlikely and the short $20 calls are rollable but let's buy back half (50) of the short Jan $20 calls for $2.07 ($10,350) just to be safe

  • TZA – We doubled down on this protection last week and it paid off already.  Another 3x inverse ETF but at $35.45, a 20% drop in the Russell would lead to a 60% gain to $56.72 so I very much doubt we hit the short June $60s and we'll buy back the short June $45s ($4,575) – so no reason to worry on this spread, which would pay $167,200 at $56.72 yet this entire spread is currently (after adjusting) a net credit of $3,763.  

  • W – We sold more short calls just in time for the dip.  We're making money selling short calls, the put spread would be a nice bonus win – a $20,000 potential currently at $10,000 but we just sold $7,020 of premium for the month – that's fun too!

So each week we're hedging just a little more as we get closer and closer to the inveitable correction.  

The Nasdaq 100 has become stuck between the 50 and 200-day moving averages and the significan lines are 12,000, 13,000 and 14,000 so we're halfway to a 15% correction at 12,000 and the weak bounce line is 13,200 – failing to hold that today would mean we're likely to get the rest of the drop next week but that would only be a re-test of the March lows – not a tragedy.

Have a great weekend, 

– Phil



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Phil / Nasdaq – does a close above 13400 (the strong bounce line) suggest that uptrend is resuming (i.e. we will revisit the old highs)?

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