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Thursday Failure – Supply Chain Issues Force Toyota to Cut 40% of Production

Poets&Quants | Where Top MBAs Work In Hedge FundsAs we've discussed, we are cutting back our positions.  

CASH!!! is one of our best hedges against a market downturn and we've been reluctant participants in the rally recenty but the combination of resurging Delta infections, continuing (and worsening) supply chain disruptions and a possible end to the constant supply of FREE MONEY that has been propping up the markets is simply a bit too much to stay bullish around – so back to CASH!!! we go.

If this were a one-time, one-off event, I would not be so concerned but Toyota's (TM) recent problems are the very big tip of the iceberg that we've been seeing from miles away.  The Global semiconductor shortage is NOT improving and another wave of Covid doing things like shutting China's ports certainly isn't making things better.  The CEOs of various semi companies have just warned us that these shortages will persist into next year and companies only now are starting to actually run out of chips to the point where production becomes impossible.

Chip shortages are like cash-flow shortages.  A company like Toyota makes about 1M cars a month and, like any clever manufacture, they have enough chips for 3 months ready at the factory – in case there's some kind of supply disrubtion like the one we just had.  Now, the supply of chips didn't go to zero during the crisis but let's say they have been getting 30% less chips for the past year – how long does it take to wipe out their supply of chips? 

30% less for a year is a 3-month supply that has to come from somewhere and now TM is scraping the bottom of the barrel and they have to simply make less cars until they get more chips.  It's not that drastic – TM expects a 40% reduction for 2 weeks should be enough but that's 500,000 cars that won't be made x $40,000 per car is $12.5Bn but think about the effect this will have on their suppliers and dealers as well.  And don't forget the nice people who make money financing you car.  

And, of course, it's not just Toyota.  In fact, they are one of the best-managed companies in the World so it's likely far worse for many of their competitors and many other industries.  The Japanese car maker had touted its ability to insulate itself from the global shortages that burned its peers thanks to stockpiles of components and close relationships with suppliers. At a February briefing, chief financial officer Kenta Kon said people outside Toyota were saying the semiconductor shortages could last through the summer, but he said Toyota’s own people were telling him, “It doesn’t look like it will go that far.”

TM will be down about 3.5% this morning, which is fair when 1/60th of your production is shutting down.  We'll see if other car companies trade lower or if traders need to wait to hear the actual announcement before cutting back.  This is why we pared back most of our auto holdings – too much uncertainty and this is exactly the sort of thing we were worried about.

Dow Jones 30,000: Here's Why It's Still Underperforming the S&P 500 and the  Nasdaq | The Motley FoolTM is not in the Dow but, out of 30 components (easier to go through than the S&P), the following are likely to be affected by supply shortages:  HON, BA, CAT, MMM, NKE, AAPL, IBM, CSCO, INTC.  So that's 9 out of 30 and we're giving comanies like MSFT, CRM and JNJ passes but supply disruptions take many forms.  Like Labor Supply, that is hitting components UNH, GS (just boosted salaries for entry-level staff), MCD, DIS, JPM, WMT (2M employees), VZ….  

Those are a lot of hot-points that can be hit by rising costs of goods, services and labor.  Then there's the threat of rising rates – and the Fed discussed tapering (a prelude to rate increases) in the minutes of their last meeting – which were released yesterday.  

Industrials, Communication Services and Technology make up 41.3% of the S&P 500 and they've also had the most growth and they are ALL considered by Schwab to be poor values due to their recent runs to record highs NOT backed up by recent earnings growth:

In 2008, it was Real Estate, Financials and Energy that were riding high and, to this day, neither Real Estate or Financials are anywhere near their former glory, when they were almost 1/4 of the S&P 500 – but at least Schwab sees some value in those sectors…

Speaking of energy, Oil (/CL) fell hard and fast – testing the $62.50 line this morning.  Generally, as we expected, post July 4th Oil began to collapse off our predicted $75 top.  We were short for the first drop but the subsequent run back up caught us by surprise and we've since sat out but this ($62.50) should be the bottom into the next holiday (2 weeks) – unless the Dollar gets stronger.  If Gasoline (/RB) hits $2, that will certainly be a good line to go long on.

Other than that, it's a watch and wait kind of day.  The Philly Fed came in ligher than expected (+19.4 vs +23 and +21.9 prior) and we get Leading Economic Indicators at 10 am.  Of course Auto Stocks will be selling off and also watch out for Material Stocks, especially Industrial Metals as iron and copper prices are in decline.

We pretty much bottomed on the Dow right at 34,500 and that's down 1,000 points from Monday's high but 1,000 points is only 3% – so not so terrible.  As we know, there's a 2.5% Rule™ and that means that 35,500 x 0.975 is 34,612 and the rest was just over-shoot.  Best to calculate that bounce and that would be down 900 points (rounding) with 200-point bounces (rounding) to 34,800 (weak) and 35,000 (strong) so we need to see the Dow back over 35,000 at tomorrow's close to be back on a bullish track.

I'll work out the rest of the indexes later.


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  1. T at 27.75 !!!!

  2. Good Morning.

  3. Morning Phil / SPWR – are you concerned the chip shortage will effect them?  Secondly, If you were to open a new position today, would you stick with the 2023 $20 or drop to $15?

  4. yodi      T   

    look at the massive put buying in October 

  5. DNUT with a bounce today 

  6. INTC  someone sold 1500 Jan23 $45 puts for $4.35

  7. T – wow, the 2023 $25 puts are same price as the $27 calls with stock @ $27.69. Mr. market appears overly negative long term or am I reading wrong. Either way, pretty juicy premiums

  8. Well if people throwing the stock away I am buying yield stands at 7.5% NOW

  9. Good morning!

    T/Yodi – People are REALLY missing the big picture here.  2 massive new groups of users coming on-line:  Cars and Robots.  Delivery bots don't run on WiFi and who is not going to pay $20/month for a mobile hot-spot in the car?  

    General Motors and AT&T Set Automotive Connectivity Benchmark with 5G

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    SPWR/Jeddah – The chip shortage will affect everyone but I'm more concerned with SPWR's dependence on Chinese manufacturing, which used to be lower but they spun of MAXN so it's hard to say where the bulk of their stuff comes from now.  As to a new play, the 2023 $20s are $6.30 and the $15s are $8.60 so only $2.30 to be $5 in the money is a now-brainer.  

    In fact, as a new trade, you can:

    • Sell 10 SPWR 2023 $20s for $5.50 ($5,500)
    • Buy 30 SPWR 2023 $15 calls for $8.60 ($25,800)
    • Sell 30 SPWR 2023 $20 calls for $6.30 ($18,900) 

    That puts you in the $15,000 spread that's 100% in the money to start for $1,400 and all SPWR has to do is NOT fall below $20 into Jan, 2023 and you make $13,600 (971%) in 16 months.  Worst case is you own 1,000 shares at net $21.40 – just a bit higher than we are now.  Why do anything risky with your money when you can do that?  

    DNUT/Stock – I can't really get into paying $13Bn for a company with $1Bn in sales that still doesn't make a profit.  It's not like they haven't had 85 years to work on it.  Let's say they drop a ridiculous 20% to the bottom line.  They need $650M in profits to justify $13Bn so they'd need $3.2Bn in sales – when and how is that going to happen?  It's pretty much trading as a meme stock – people have heard of it and the shares are cheap ($15) so kids can buy them – that's the investing premise.  

    By the way, revenues are only up because they used up their IPO money overpaying for Insomnia Cookies (which are pretty good) and opening new shops – the organic growth of stores open 12 months or more was only 1% – you always have to watch out for that stuff. 

    INTC/Stock – That's a smart person!  

    T/Jeddah – Crazy out of favor at the moment.  

    And what Yodi says  – 7.5%!  

  10. Here is the link to this week's webinar. As always, all past webinars can be found on our youtube page.

  11. Phil / SPWR -

    that puts you in the $15,000 spread that's 100% in the money. 


    Don't understand the BCS on this did you mean 15/30 vs the 15 do in the spread above?

  12. Well if people throwing the stock away I am buying yield stands at 7.5% NOW

    BATMAN SPWR I think it is BCS 15/20 as well sell the 20 put 10 off

  13. Short-Term Portfolio Review:  $124,675 is down $58,615 since our last review and that's what's supposed to happen when are are tightly hedged.  The LTP is up $68,608 so we still squeaked out a new combined total of $ 2,152,571 so we're cashing out (50%) $152,571 over our $2M stop line.  On Tuesday, we cut back our LTP by about 50% and that means the STP is now way over-hedging BUT it could now be considered a downside bet which could easily double up on a small correction.  Also we have to consider that, even if the market doesn't correct – we will still be adding more longs so maybe it's not worth cashing out short positions but getting a bit more defensive with them instead.  

    We sold so many puts and calls here that we have more cash than we do position value – we have to be careful about that as well but we're not shutting down the LTP and going back to $500,000 so we still have $2.15M sitting in that portfolio to "fix" things with if needed.  

    • SQQQ – I can't believe these things are still 0.53.  We're certainly not going to pay $2,650 to buy them back!
    • TQQQ – Another leftover from a spread.  It's at the money so it won't take much for this to turn into a winner and 15,000 is crazy high on the Nasdaq so we'll keep it for now.  

    • FXP – China melted down as planned and on schedule.  We're at net $22,600 out of a potential $40,000 and I don't see China getting better in the next 120 days so let's let this play out.  

    • TZA – Picked up a quick $5 so far and this spread is only net $14,500 but, if we expire at $40, it's $20,000 and $20,000 more for the next $5 so let's let this one play out.  

    • CMG – This one is sucking up all our money!  The long Jan $1,500 puts are leftovers from the spread but got killed in the recent run.  We sold the 2023 $1,800 calls for $259 and, even though the stock is at $1,870, the premiums have gone $60 higher.  We could and should roll the short Sept $1,500 calls to the 2023 $1,800s as well but we're going to wait and see where they settle.  Of course if the market goes it will take CMG with it but this thing should collapse on it's own.

    • SCO – As noted above, we expect at least a bounce in oil into the holiday but you always have to do the math so, with oil at $63, SCO is at $22 and we're hoping for $30, which is up 36% and SCO is a 2x ETF so oil would have to fall 18% from here, to about $52.  Do we still believe that's possible into Christmas?  That did happen in 2018 and in 2019 right after Christmas and last year we were around $45 and 2017 was $47.50 so it seems we do have a realistic target AND it's a great hedge against the virus coming back (was under $20 last March) or a market melt-down, which usually drags oil down with it.  

    • SQQQ – So what we have is 100 2023 $5 calls with the stock at $8.50 so $35,000 worth of calls.  We have short $15s above them so our max payout is $100,000 and the Jan $25s will certainly die worthless.  We also sold 50 2023 $25 calls and we're up 65% on those so we'll take them off the table and we'll probably eat or roll the Jan puts.  

    • W – Looked like it was trying to burn us but then calmed back down.  On the whole, it's only a net $50,000 position and currently $13,530 and we'll pick up $3,645 on the short Nov calls and sell more of those ($7,000 next year) and the short Jan puts should go worthless for $14,000 so we've got about $25,000 coming by Jan on a $13,530 spread – that would be silly to close without good reason, right?  

  14. SPWR/Batman – If you are going to ask me to figure out what I meant, we will be here forever!  cheeky

    30 x $5 spreads are $15,000 and our target is $20 and the stock is over $20 - so we're 100% in the money.

    • Microsoft (MSFT +1.8%) is hiking prices for business subscriptions to its Microsoft 365 product, the first such major change since its 2011 launch as Office 365.
    • On March 1, 2022, it's raising the price of Microsoft 365 Business Basic to $6/user from $5/user; on Microsoft 365 Business Premium to $22/user from $20/user; on Office 365 E1 to $10/user from $8/user; on Office 365 E3 to $23/user from $20/user; on Office 365 E5 to $38/user from $35/user; and on Microsoft 365 E3 to $36/user from $32/user.
    • It's not boosting prices on education and consumer products. But the business increases will happen globally.
    • That's set to give a jump to revenues and profits, with Office business customers playing such an outsized role in the company's sales (subscriptions in particular have made up most Office revenue for four years).
    • It also says it's extending audio conferencing capabilities by adding unlimited dial-in for Microsoft Teams meetings across its enterprise, business, frontline, and government suites over the next few months. "Currently included with Microsoft 365 E5 and Office 365 E5, we have come to see dial-in as an important part of the complete Teams experience."
    • Cathie Wood spoke about the recent bearish sentiment, and short interest around ARK Invests actively managed exchange traded funds in an interview with CNBC.
    • When asked what the message should be to the short community around ARK, Wood stated: "I don't think we are in a bubble, which is what I think many bears think we are."
    • The areas which blew up back during the tech and telecom bubble are now beginning to flourish. "We couldn't be further away from a bubble."
    • Five of those areas, according to Wood, are DNA sequencing, robotics, energy storage, artificial intelligence, and blockchain technologies and they are barely off the ground Wood mentioned.
    • Wood also continued to expand on her stance around deflationary pressures and how ARK believes the energy and financial sector along with the auto industry are in harm's way as they are all behind the innovation eight ball with the expansion of electric vehicles and digital wallets.



    • The department store sector is shaking off some early jitters over news that Amazon is planning to open a few larger-format stores that will sell clothes.
    • Macy's (M +17.4%), Kohl's (KSS +6.3%), Nordstrom (JWN +3.5%) and Dillard's (DDS +1.1%) are all higher after the sector earnings reports came in ahead of expectations.
    • The broad mall sector is mixed on the day with Delta variant news still being weighed. Gainers include Express (EXPR +4.0%), Abercrombie & Fitch (ANF +3.5%) and Guess (GES +3.1%), while it is a rougher session for Victoria's Secret (VSCO -2.5%) after earnings, as well as Duluth Holdings (DLTH -1.8%) and Chico's FAS (CHS -0.9%).
    • Meanwhile, Target (NYSE:TGT) has swung back around to post a 0.22% gain as more sell-side analysts weigh in positively on the long-term upside. Shares of TGT are still up 40% YTD even after the post-earnings selling pressure.
    • Despite the current uncertainty over federal legalization of cannabis, BDSA, a Colorado-based research firm focused on the industry, expects U.S. cannabis sales to hit ~$41.3B in 2026, Reuters reports.
    • Legal cannabis sales approached $17.6B in 2020, indicating ~45.5% YoY growth, and the market is set to expand further as more and more states clear legal hurdles against the use of cannabis. Meanwhile, despite the current legal overhang, Cantor Fitzgerald projects U.S. marijuana sales to approach $36B in 2023.
    • Already, 36 U.S. states and the District of Columbia have legalized cannabis for medical or recreational purposes, but strict federal laws have largely kept the growth in check.
    • In July, Senate Majority Leader Chuck Schumer (D-N.Y.) suggested that the Cannabis Administration and Opportunity Act, introduced by him aiming for federal legalization of cannabis was unlikely to garner enough votes to pass.
    • Yet, analysts predict that Congress is closing towards looser cannabis legislation. BDSA expects some level of federal legalization in 2022.
    • However, given the lack of clarity, a select group of cannabis stocks has shown weakness over the past 30 days despite their outperformance early this year as positive signs for legalization sent shares of the U.S. MSOs higher.
    • Similarly, TerrAscend (OTCQX:TRSSF -13.2%) has posted its biggest intra-day loss today in more than a year despite recording a margin expansion and ~70% YoY growth in gross sales for Q2 2021.
    • Other MSOs are also trading lower: MSOs: MedMen Enterprises (OTCQB:MMNFF -4.6%), Curaleaf Holdings (OTCPK:CURLF -1.9%), Acreage Holdings (OTCQX:ACRHF -1.9%), Harvest Health & Recreation (OTCQX:HRVSF -3.4%), Cresco Labs (OTCQX:CRLBF -0.8%), Green Thumb Industries (OTCQX:GTBIF -1.5%), Trulieve Cannabis (OTCQX:TCNNF -2.0%), Ayr Wellness (OTCQX:AYRWF -1.1%), Columbia Care (OTCQX:CCHWF -2.3%)
    • Even Canadian LPs have recorded losses in morning hours: Canopy Growth (CGC -3.4%), Tilray (TLRY -2.9%), Cronos (CRON -2.6%), Aurora Cannabis (ACB -3.4%), Sundial Growers (SNDL -3.4%), OrganiGram Holdings (OGI -3.3%), HEXO Corp (HEXO -4.0%)
    • Recall: Tilray (NASDAQ:TLRY) took a bet on the federal legalization of cannabis with the acquisition of a majority of outstanding convertible notes of MedMen Enterprises.
    • SQM (SQM -1.2%) shares slide despite reporting stronger than expected Q2 earnings and revenues, as lithium producers fall across the board following yesterday's gains.
    • Q2 earnings improved to $0.31/share from $0.19 in the year-ago period, while earnings in the first half rose 65% over the first six months of 2020.
    • SQM says Q2 lithium sales volumes surged more than 90%, while average lithium prices rose nearly 20% Q/Q, as sales contracts signed last year expire and a higher percentage of sales are invoiced based on the current pricing scenario.
    • The company says global demand for lithium is rising at a faster pace than previously thought, forecasting global demand for lithium could increase more than 40% this year, translating into sales volume of more than 95K metric tons, up from its 85K-ton guidance three months ago.
    • SQM says a tightening global market should help average prices continue to rise in H2.
    • SQM is the world's second largest lithium producer and plans to increase its capacity 3.7x by 2025, faster than any other miner. Malcolm Geddes writes in a bullish analysis posted on Seeking Alpha.
    • Macy's (M +15.9%) CEO Jeff Gennette appeared on CNBC this morning to discuss his company's strong earnings and retail trends as the stock continues to soar.
    • The areas of Macy's that saw strength during the pandemic continued to grow as the economy reopened. Meanwhile, other businesses, like luggage and women's clothing, rebounded as shoppers launched what has been characterized as "revenge shopping" in the wake of COVID.
    • A lack of office commuters and tourists are hurting business in big cities, but suburban Macy's stores are performing exceptionally. Some urban consumers are still not comfortable entering retail stores.
    • Gennette does not see a correlation between vaccination rates and store performance. Areas with lower vaccination rates actually had higher store traffic on average.
    • Commenting on the firms supply chain, Gennette says that Macy's inventory is "in great shape."
    • "I love the level I'm at right now and I want to be able to satisfy the demand in the third and the fourth quarters based on these receipts," he commented, as Macy's expands its offering with the addition of Toy"R"Us products and others before the start of the back-to-school season.
    • Online traffic and conversion both increased double digits due Macy's website's improved layout and experience.
    • Gennette notes that the majority of sales still take place in person so he is not surprised that Amazon is planning to open physical retail locations.
    • Intel (NASDAQ:INTC) CEO Patrick Gelsinger said Thursday that the semiconductor industry is ripe for further consolidation because of production and R&D's high costs, and that INTC plans to be one of the companies buying smaller competitors.
    • "We will be one of the consolidators," he told CNBC.
    • Gelsinger explained that the high cost of development made scale extremely important in the semiconductor industry. He added that Intel (INTC), which recently announced a broad array of new products, is one of three companies that can effectively compete.
    • Gelsinger didn't specify the two competitors who had the requisite scale to challenge INTC as a major consolidator, but he presumably had NVIDIA (NASDAQ:NVDA) and AMD (NASDAQ:AMD) in mind, as they rank as the other major players in the sector.
    • Looking to the global chip shortage, Gelsinger repeated his projection that supply and demand in the industry wouldn't find a balance until 2023.
    • "It is a challenging time, and it will remain a challenging time for every aspect of the semiconductor industry for at least a year and a half yet," he said.
    • On the subject of consolidation, The Wall Street Journal reported in mid-July that Intel was in talks to buy GlobalFoundries for about $30B.
    • However, GlobalFoundries CEO has since shot down the takeover report, and the company has reportedly pursued a potential IPO.

    • Grubhub is taking its robot delivery concept to its first college campus with a rollout at Ohio State University in partnership with Yandex.
    • Students will be able to order food from on-campus dining locations via the Grubhub app and have them delivered by one of 50 Yandex robots operating on the campus to the residence halls, library or student union. The rovers will operate from 9 a.m. to 9 p.m. seven days a week. Students can request robots to deliver food to every residence hall on campus as well as Thompson Library and Bricker Hall.
    • The advantage of the Yandex robots is that they can autonomously navigate pavements, campus crosswalks and pedestrian areas, which are notoriously challenging to reach by car.  The robots are spacious enough to fit a couple of coffees and a bagel sandwich, or multiple pizzas – while keeping the food at the right temperature.
    • The robot delivery platform is expected to only be used in very specific settings.
    • Grubhub owner Just Eat (NASDAQ:GRUB) is up 1.79%. Earier this week, Just Eat gave a positive update on the profitability track.

    Headline should read "Ohio State loses 100 delivery jobs" 

    So there's 3,982 Universities in the US and then thousands of community colleges so let's say 500,000 jobs just on campus are being erased – and that's just GrubHub.   Wheee – this is going to be fun!   Good thing we're killing off the poor – they are going to become quite a burden….

  15. Good article on work philosophy.  We are going to have to realize we are creating a society in which is will be pointless for 80% of the people to "work" and that requires some massive social restructuring we are in no way ready to process….


    • Olivia Goldhill
    By Olivia Goldhill

    Science reporter

    Published This article is more than 2 years old.

    Today, being a hard-worker is seen as commendable, almost virtuous. “Get a job” is an insult intended to insinuate that someone is lazy and contributing little to society, while “hard-working folk” are considered morally decent citizens. It wasn’t always that way.

    More than 2,300 years ago, the philosopher Aristotle declared that the virtuous life was not one devoted to work. Writing in Politicshe declared that:

    …in the most nobly constituted state, and the one that possesses men that are absolutely just, not merely just relatively to the principle that is the basis of the constitution, the citizens must not live a mechanic or a mercantile life (for such a life is ignoble and inimical to virtue), nor yet must those who are to be citizens in the best state be tillers of the soil (for leisure is needed both for the development of virtue and for active participation in politics).

    In other words, people who are too busy working don’t have the time to perform their civic duty or develop sophisticated morals.

    In the book Bullshit Jobspublished last month, London School of Economics anthropologist David Graeber traces how we’ve shifted away from Aristotle’s perspective and towards the work-focused attitudes of today. Graeber argues that the blame lies, as it does with so many assumptions in contemporary western society, with Judeo-Christian religion.

    In the book of Genesis, when the Judeo-Christian god kicks Adam and Eve out of the Garden of Eden, he sentences women to the labor of childbirth and men to physical labor; both are meant simultaneously as punishment and an opportunity for humans to imitate god’s divine power of creation. “The Judeo-Christian God created the universe out of nothing,” writes Graeber. “His latter-day worshippers, and their descendants, have come to think of themselves as cursed to imitate God in this regard.” In other words, to work is divine.

    In the feudal societies of medieval Europe, the function of paid work was explicitly founded on these theological ideas. Children aged seven to 15, from all classes, were sent to work in other households or as apprentices in order to learn self-discipline and manners, to, in theory, become better people. “Work, especially paid work, was seen as transformative,” writes Graeber. People went from apprentices to masters, using their training to set up their own businesses and become their own boss.

    Then capital took over. When the means of production moved out of the hands of the producers themselves and into the control of an ownership class, apprentices increasingly lost opportunities to grow into self-governing masters. By the 16th century, there was less of a clear path from apprentice to boss, and so work became less of a practical means to a better way of life. English middle-class Puritans began to emphasize the value of work for its own sake. “Work was self-mortification and as such had value in itself, even beyond the wealth it produced,” writes Graeber.

    These ideas were expressed even more emphatically after the industrial revolution, particularly in 19th-century philosopher Thomas Carlyle’s theories on what he called the “Gospel of Work.” This notion, highlighted in Graeber’s book, reveals a religious reverence for work: “All work, even cotton-spinning, is noble; work alone is noble, be that here said and asserted once more,” Carlyle wrote in his book, Past and Present. “Oh brother, if this is not ‘worship,’ then I say, the more the duty for worship; for this is the noblest thing yet discovered under God’s sky. Who art thou that complaints of thy life of toil? Complain not.”

    These ideas linger on today, even if they’re no longer explicitly expressed in a religious context. Graber quotes Al Gini and Terry Sullivan, two sociologists who wrote in a 1987 paper titled “Work: The Process and the Person that “work is not just a course of livelihood, it is also one of the most significant contributing factors to an inner life…. To be denied work…is to be denied the ability to define and respect one’s self.” Gini and Sullivan found that though most people value work, they also hate their jobs.

    That’s because self-sacrifice is seen as an inherently character-forming aspect of work. “Suffering has become a badge of economic citizenship,” writes Graeber.

    When people emphasize just how overworked they are today, they’re not simply complaining of burdens, they’re also signaling their diligence and good standing in this moral economy. As Graeber shows, this notion is inherently Judeo-Christian. But, though 2,000 years of religious teaching have solidified this credence, Aristotle saw things differently. The theory that working hard signifies morality is widely-accepted but, ultimately, far from objectively true, and there’s no reason we should continue to buy into this belief.

  16. Image result for one million dollars animated gifButterfly Portfolio Review: $1,174,367 is up $22,433 since last month's review and that's fantastic for our most stable portfolio.  It seems very impressive (up 487.2%) but the Butterfly Portfolio wasn't shut down in 2019.  Why?  Because it's not very directionally dependent.  Also because I wanted to demonstrate what's happening now and that is that the Butterfly Portfolio is a very slow grower at the outset but, once it gets going – it becomes a money-printing machine! 

    We keep a lot of cash on hand to buffer all the puts and calls we sell but we try to be fairly conservative though we do do obvious things like play a channel – as we did last month, when I said about WBA:

    • WBA – The short July calls will go worthless for a $4,000 profit on the net $2,075 spread in the first two months.  For our next trick, let's buy back the 25 short 2023 $60 calls for $1.78 ($4,450) and wait for a bounce off $45 to sell more.   We only have 10 short 2023 $45 puts, so let's sell 10 more of those for $6.63 to collect another $6,630 against our $2,075 spread.

    WBA was testing $45 and we felt is would bounce from there so we bought back the short calls and then it took off and hit $50 – where we forgot to sell more short calls – and that's where the plan falls apart, unfortunately.  Still, no harm done and next time we'll remember to sell at $50… if someone reminds me….

    • AAPL – We have a net $270,000 bull call spread but it will be $480,000 if AAPL is over $150 in Jan 2023 and it's at $146.54 now – not a long trip.  If the market does crash, it will take AAPL down too and let's say we want to roll the $120s to the $110s for $5 ($80,000) and buy back 1/2 of the $150 calls for $15 ($120,000) – well we can afford to do that and we'd love to do that so no particular reason to change it now, is there?  It can either pay us another $210,000 or we spend another $190,000 to get far more aggressive.  Meanwhile, the 3-month puts and calls we sold in June are hurting us a bit but they are meant to as it was mostly to protect our longs – we're certainly not going to complain if we have to pay the short caller $51,000 as our longs go $160,000 deeper into the money, right?  So, despite the size of the position – since it's a reasonable target on the greatest company in the known Universe – KEEPER!  

    • AMZN – In this case, we brilliantly sold 2 Sept $3,600 calls for $37,400 and already they are up $36,470 and, on the very unlikely chance that they might possibly hurt us over the next 29 days – we'll take them off the table.   Now it's a shame to waste the spread so let's be cautiously neutral into Jan and sell 2 Jan $3,500 calls for $103 ($20,600) and sell 2 Jan $2,800 puts for $103 ($20,600) and that's $41,200 collected over 3 months against our net $100,000 spread.  In this case, we don't believe in the long spread at all (that's why there are no puts) – it's just there to protect us from a spike up like we had last month.  Otherwise, we expect AMZN to keep drifting lower unless we're all locked in again.  

    • DIS – Wow, these Butterfly Positions get big over time!   Last month we were worried about rolling but I said "Hakuna Matata" and, PRESTO!, we're right on target again.  The Aug $175s expire tomorrow so let's sell 25 of the Jan $175 calls for $11 ($27,500) as I would rather have better protection than make money at the moment.  Meanwhile, this is a net $94,983 position (not counting profits already taken) and we're selling $27,500 (29%) of premium against it for the next 155 days.  It's still a potential $210,000 spread at $200 – but that's just a nice bonus to our premium-selling business.  

    • F – As noted this morning, parts issues but we love them long-term so let's just make a bigger sale of 30 of the Jan $13 calls for $1.17 ($3,510) and sell 20 of the Jan $12 puts for $1 ($2,000).  So we're collecting $5,510 (33.6%) against the net $16,375 position over the next 5 months and our spread is 1/2 in the money and that would be another $18,750 at $12.50 so no reason to sell something that can make us another $10,000 in sales while we wait to see if we get $18,750 or $37,500 at $15 and, if it goes even lower – I'd love to own a ton of F below $10 in the next round.  This parts issue will pass eventually – even if it lasts another year and ford goes to $2 – it will still end at some point and then people will have a pent-up demand for cars.  

    • GNW – Still on track at the bottom of the channel.  Usually I would buy back the short calls but not in an aggressive mood.

    • GOLD – Well those aggressive puts have come back to bite us but we can be patient.   Nothing to change, we'll just ride it out.  I am more tempted her to buy back half the short 2023 $23s but better to get more information first.

    • IMAX – Wow, they went right back down.  Can go back up just as easily and I don't mind owning them for the long haul and the position is very small – so we wait.    Usually we would DD here on the longs and wait for a bounce.

    • KO – Did not suffer from the pandemic.  Also smallish and well in the money and our short Aug calls are going out about even and we'll buy back the short Jan puts and sell 10 of the Jan $57.50 calls for $2 ($2,000) and see how that goes.  If KO is higher in Jan, I have no problem doubling down on the long spread and doing a 2x roll.  If KO goes lower, then we sell 10 more calls for $2,000 (lower strike) and take the $4,000 we collected and spend it to roll the 2023 long $45s to the $35s for about $5 each.   If you are happy with all the possible outcomes – it's a no-brainer to keep the trade.  

    • MJ – We are only in this one to sell short-term premium, which tends to be very high on MJ (get it?).  We should collect the full $5,460 against our net $23,975 position but we can double that by selling 30 of the Jan $16 calls for $1.70 ($5,100) and keep a stop on the 30 short Jan $19s at $1 ($3,000).

    • WBA – We got more aggressive at the wrong time here.  I'm banking on the next flu shot going through WMT and CVS and not just Government centers.  Too soon to roll so we'll wait.  

    • WHR – Has done surprisingly well but still in the channel so we love them.   The Aug $210s are coming in with a small profit and let's sell 10 Jan $210s for $21 ($21,000) and see how that goes.  That's against a net $60,512 spread so 33% is very nice for 5 months.


    See, it doesn't seem like we're doing much be we just sold $100,000 worth of puts and mostly calls so this is a self-hedging portfolio that sells a ton of premium (nothing we sold was in the money) and the only absolutely sure thing in the market is that ALL premium WILL expire worthless.  So why on Earth would you be buying it instead of selling it?  

  17. Phil / AMZN –  Would like your view on this one….

    I'm looking at setting up a BCS and selling short term callers against it….  What do you think of the following set up….  ….  I've been waiting for it to stop falling and think that 3100 or 3000 should be a good support line …   Once it starts recovering I'd sell some short term callers in the 3500 range…  

    LONG 5X June '23  $3100 (530) Calls

    Short 5X June '23  $3700 (305) Calls

    Short 1X June '23 $2800 (270) Puts