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Throwback Thursday – Sanctioning China Again

relates to China’s Bid to Rival U.S. as Debt Haven at Risk After CrackdownsWell, it didn't work the first time – so why not do it again?

Congress is voting to punish China for its treatment of the Uyghur Muslims, which is kind of funny considering how we treat Muslims in this country.  We are also talking about sanctioning China over their aspirations in Taiwan and we're staging a diplomatic boycott of the Olympics and, oh yes, Trump's tariffs are still in place.  

China has dropped behind the US in it's "Safe Haven Ranking", which means it's an even worse place to put your bonds than the US but, then again, they rank Japan first and that country is DEFINITELY going to end up defaulting on its debt at some point – as they are already over 300% of their GDP in debt.  China is already paying effectively 2.05% interest on their debt – far more than any other nation on that list.  Notice China is as bad as Japan in Credit Rating and, as I just said, Japan is DEFINITELY going to default.

What exactly does it take to be considered a haven asset, anyway?  According to a European Central Bank working paper, safe assets are debt issued by a “safe” government of a country that has its own central bank, a stable currency, protection of property rights and low inflation.  They are also highly liquid, an International Monetary Fund report said.

In the context of the China's Government Bonds, one key concern is that a sudden change in rules could make it harder for investors to sell their holdings or repatriate proceeds.  Despite those risks, overseas investors have kept putting billions of dollars in China’s government bonds. Their holdings have grown by 513.7Bn Yuan ($81Bn) in the first 11 months of the year, the most ever for this period.  Like everything else in the past two years – all this new money being printed has nowhere else to go – so it's forced into risky investments.  

Global funds continue to buy China's government bonds this year

As China's economy softens, the Communist Party has been making it harder to obtain information about the Chinese Economy:  A new data-security law has made it harder for foreign companies and investors to get information, including about supplies and financial statements. Several providers of ship locations in Chinese waters stopped sharing information outside the country, making it hard to understand port activity there. Chinese authorities have restricted information on coal use, purged documents related to political dissent cases from an official judicial database, and shut down academic exchanges with other countries.

Strict Covid-related border controls, including canceled flights and weekslong quarantines, have added a drastic drop in face-to-face interactions between Chinese citizens and the world, compounding the disconnect. Airlines carried around 1 million people in and out of China over the first eight months of 2021, down from almost 50 million over the same period in 2019, according to data from the Civil Aviation Administration of China.

President Xi has indicated he will take more control of the PBOC, risking their "independent" status and the new data-security laws indicate the Government has watching EVERYTHING that goes on and it risks making it impossible for Chinese companies to list on foreign exchanges.  It's also becoming more difficult to simply do business with Chinese suppliers.  Suppliers of metals like cobalt and lithium used in Electronics have grown reluctant to share information with customers outside China, said one executive at a major U.S. technology company. Data the suppliers now consider sensitive includes details like how much of a given metal they have available or what percentage of their supplies are recycled

Steve Dickinson, a lawyer at U.S. law firm Harris Bricken, recalled a recent episode in which a U.S. client had asked a Chinese company for audited financial statements to determine whether it was creditworthy. The latter declined, citing Chinese policy that states they can’t release financial statements to foreigners.  Tha's going to be a problem!  In early November, global ship-tracking platforms began to notice disruptions to the flow of location data of vessels in Chinese waters. Some local providers had stopped sharing detailed information of ship positions, citing the new data-security law. 

The World's second-largest economy can't be a black hole – it's very destabilizing…

Also unstable is the Oil market and we shorted the Oil Futures (/CL) yesterday in our Live Trading Webinar and, this morning, it's down $1 at $71.50 for gains of $1,000 per contreact, so congratulations to all who played along at home.  

Our goal is $71 even but we have to check the bounces off $71.50 and, since we fell $1, the bounce line is 0.20 at $71.70 (weak) and we're not even going to stay in for a strong bounce as I'd rather just take $800 per contract off the table than risk another $200 at that point but I do strongly feel that the weak bounce will fail and we'll break through and head for $71- as I said in yesterday's PSW Morning Report as well.

We also still have our S&P 500 (/ES) shorts at the 4,700 line and those are also up $1,000 per contract already and also probably consolidating for a move back down.  /NG is at $3.75 this morning and that's good for a long re-entry ahead of inventories at 10:30 as I can't see how they can be bad enough to justify a two-week drop from $5.25 (28.5%).  Natural Gas tends to move with $2 and $4 being the major supports – $5 is just nuts and we hit $6.50 in early October.  

$4.50 is our target price for /NG to settle down at but that would be the midpoint from a $3.50 to $5.50 range we expect going forward so getting an entry this close to $3.50 is very, very attractive to us as a long-term position.  UNG is the Natural Gas ETF and it's over-sold at $12.50 so, for our Short-Term Portfolio (STP), let's do the following:

  • Sell 20 UNG 2024 $10 puts for $3 ($6,000) 
  • Buy 50 April $10 calls for $3.10 ($15,500) 
  • Sell 50 April $12 calls for $2.05 ($10,250) 

That gives us a net credit of $750 so our worst case would be owning 2,000 shares of NG at $10 ($20,000) less $750 so $19,250 or $9.625, which is 23% below the current price so about $3 for NG.  Since we think that's below the low end of the range and since we can sell the UNG 2024 $12 (at the money) calls for $2 – being stuck with 2,000 shares of stock we can make 10% a year on is not a terrible scenario for our downside.  To the upside, it's a $10,000 spread so, if UNG holds $12 into April, we make $10,750 (1,433%) - though we'll have to wait a while for the short puts to pay off.  

Aren't options fun?  

 


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  1. Some possible dumb question but what happens if you hold an ITM long put or call at expiration day? Do you receive the stock at the strike price or the remaining cash value? I never tried it.






  2. Good Morning.


  3. Good morning. SPWR getting pushed down again. I don't understand these analysts.  what is it.. $27 or $86??

    JP Morgan downgraded SunPower (SPWR) to
    Underweight with target $27
    12/9/2021, 6:59 AM | BRFUPDN

    DJ SunPower Price Target Announced at
    $86.00/Share by JP Morgan
    12/9/2021, 4:20 AM | DJ-GL

    DJ SunPower Cut to Underweight From Neutral
    by JP Morgan
    12/9/2021, 4:20 AM | DJ-GL
    JP Morgan Downgrades SunPower to
    Underweight, Announces $86 Price Target


  4. Phil/UNG

     

    You talk about the STP but then you have 2024 options listed (certainly not short term) and then you talk about holding $12 into April (like you are referencing this coming April 2022). Just trying to clarify this potential position.

     

    Thanks







  5. Now a 4th shot from PFE? You either have the antibodies or you don't. No wonder people are so confused. Haven't they made enough billions yet?  Are the shots so weak that they don't last a month, six months? Give me a freaking break. So  tired of this confusing bunch of garbage.





  6. Good morning! 

    Nice pop in /NG already.  

    Possibly it's only because I mentioned it so be careful.

    ITM Call/Yodi – If you have a call option and you fail to exercise it some brokers will call it worthless and some will force a cash out (market price at close) and others will exercise it for you, taking cash from your account (at the strike) to buy the stock – assuming you have enough money in your account.  Either way, the option expires worthless.   Bottom line – don't do it!

    SPWR/Jeddah – Wow, mixed signals.  I don't see anything other than a headline on that report either.  2021 is only just ending for our Stock of the Decade and they didn't make Stock of the Year for 2022 (or one of the 3 runners up) because there is no near-term immediate catalyst so I agree with JPM that they are not that exciting at the moment and I also agree they will get to $86 over time.

    UNG/Jeff – I'm sorry, I didn't know there were laws regarding 2024 short puts.  Yes, the short puts are 2024 as the April $10 puts are only 0.42 so that's no fun to sell and I'm a lot more comfortable paying net $8 for UNG than net $9.58 and you always have to plan for what happens if you are wrong and get stuck with something – not for your optimal outcome.  

    PFE/Pirate – I don't think they'll be happy until you are getting weekly boosters.   And now Viagra prevents Alzheimer's they say – long PFE for sure!


  7. Speaking of stock erections:


  8. Phil/STP

    I guess I'm just wondering why these are in the STP as opposed to the LTP?  It seems 'long term'.  What is your "rule" for STP vs LTP?  Just trying to get in your mindset of the difference between the two portfolios and how you decide what position goes in where.  Do you regard this as a hedge against something?


  9. Options exercise

    Another perspective  if you are short. If a call or a put is in the money ( more than .01) at expiration, the seller retains the premium, but has to pay the difference between the strike price and the asset price at the time of expiration.?


  10. Thanks Phil, Just in case, as I never have let it go that far. 


  11. Phil:  I think that the confusion regarding your UNG trade comes from the fact that you showed April 2024 spreads (which, of course, don't exist), when it seems that you mean April 2022 10/12 spreads. 

     It seems that NG has dropped recently on Omicron economic fears and on indications of a warm early winter.  My only concern about the April 10/12 spread is that if we do indeed have a warmer than normal winter, there is no catalyst until summer with cooling demand, and most of all, the beginning of hurricane season to push NG prices back up.  Do you think a Jan 2022 10/12 spread might be a wise and perhaps safer idea?

    Also, could you give your thoughts on decay in terms of the UNG ETF.

    Thanks.


  12. WBA dont over do it!


  13. PETS leally on the bottom of the scale again. Possible will buy some more stock


  14. RETA…toast.

    Vaccine….come on. The common cold is a coronavirus. Flu shots are given every year. Antibodies are being made by your body (against the vaccine and if you are struck by a virus/bug), and it is proven that a booster will raise the response to fight off infections. Unfortunately bugs and viruses mutate. The booster will help as there are common elements to the variants and we are trying to keep those that work in health facilities safe.  Majority still going into the hospitals are unvaccinated and misinformation is rampant. 60% of the population has been vaccinated. 22% are antivaxxers.  Enough. Get a booster and move on. Yes, a few companies are making a fortune. 


  15. Proof is in the data. Get a booster.

    Image


  16. STP/Jeff – Because it needs constant attention if it goes the wrong way and because it's a relatively short-term play and because we do not let ourselves be bound by arbitrary labels when the point is to simply place a good trade.  The LTP is full, the STP is empty with tons of cash sitting idle.  

    Exercise/Randers – Whether it expires or goes worthless, the option premium expires on termination.  All that remains is the ability to buy or sell the underlying stock at the strike price.  It's confusing because you can buy the contract back for whatever price ahead of expiration but, essentially, you buy or sell and option and that's that as far as the money paid or collected go.  If you are not paying or collecting money to cancel the contract, then the execution of the contract leaves the original money where it was and only the transaction strike matters.  

    UNG/John – Oh I see, yes, it is April 2022, not 2024.  I think I was originally making a 2024 spread and then decided the shorter-term bull call spread would be more effective (and less boring).  As to the time-frame, we can always roll the long calls out to Jan (for hurricane season) before their price drops below the net of the bull call spread ($1.05) to recover that investment and re-bet.   Again, this is why it's in the STP.   Your comment is exactly why /NG is oversold, people can't get their heads out of the heating use but all these climate goals and LNG exports.  /NG is not a local commodity anymore but all these traders know how to do is check how warm it is to govern their outlook.

    • Natural gas use by U.S. consuming sectors by amount and percentage share of total U.S. natural gas consumption in 2020 was:1
    • electric power11.62 Tcf38%
    • industrial10.09 Tcf33%
    • residential4.65 Tcf15%
    • commercial3.15 Tcf10%
    • transportation0.98 Tcf

    Only 15% of /NG is used to heat homes these days.  

    Arguably air conditioning comes more into play than heating these days.  

    WBA/Yodi – You have to go there for your weekly shots now.  

    PETS/Yodi – I think earnings will pop them (mid-Jan).   From the last CC:

    PetMeds has several core fundamentals that are compelling, including a strong balance sheet. We do not have debt, we have over $100 million in cash and we are cash flow positive. We have a long history of providing shareholder returns though our dividend and a strong return on equity that has been historically over 30%.

     

    We have started to build a recurring subscription based through our customers with a program which we just recently launched in July this year, through our new AutoShip & Save program where we are building higher lifetime value and recurring relationships with our customers. In September approximately 20% of our customers signed up and ordered via our AutoShip & Save subscription program, and that number continues to rise. Our customers responded very positively and enrollment in AutoShip & Save has increased steadily throughout the quarter.

    We expect many of our reorder sales to eventually transition to AutoShip & Save by the end of our fiscal year, which will only continue to strengthen our relationship with our customers. We also continued to have a large base of returning customers, which is an indication of the quality of service and the value that we deliver to our customers.

    For the second fiscal quarter ended on September 30, 2021 sales were $67.4 million compared to sales of $75.4 million for the same period in the prior year, a decrease of 10.7%, but sales were only down 3.6% versus the quarter ended September 30, 2019 prior to the pandemic. The decrease in sales was due to decreases in both new order and reorder sales. Our sales were negatively impacted by a much more competitive market and a crowded advertising space with substantially higher costs compared to the same quarter last year.

    In addition during the past six months there was a dramatic increase in veterinarian visits by both pet owners were unable to visit their veterinarian during the pandemic. We believe the increase in veterinary visits was primarily due to pet owners needing to visit the veterinaries for their pet exams and to renew their prescriptions. Since some pet owners purchased medications directly from their vets during their visit, the company believes this negatively impacted sales and especially reorder sales during the quarter.

    We were disappointed with our sales results during the quarter, however sales were trending more positive in the months of August and September 2021, when you compared them to August and September 2019. Reorder sales decreased by 80.5% to $62 million to the quarter compared to reorder sales of $67.8 million for the same quarter last year, while for the quarter ended September 30, 2019 our reorder sales were $61.9 million. Encouragingly reorder sales in the most recent quarter while down versus a year ago, were up slightly compared to 2019 pre-pandemic. We would expect to see stronger reorder sales in the back half of fiscal 2022 as we anticipate more prescriptions being renewed.

    A positive trend to highlights for the quarter was a continued increase in our average order size. Our average order value was approximately $92 for the quarter compared to $87 for the same quarter last year and $85 for the quarter ended September 30, 2019. The increase in AVO can be attributed to a shift in our product mix to more prescription items and less over the counter items with prescription items having a higher gross margin profile in comparison to over the counter items.

    They are dropping about $25M to the bottom line and $26.63 is $571M in market cap so 23x current earnings for a growing company does not suck.  Just a lot of impatient traders in on this one.

    Good summary, Pharm.  I take D3, good advice.  Vitamin D deficiency is a very common problem.


  17. /CL almost at $71 so $71.25 is now the stop.


  18. I had an oversold target on NG for Feb '22 of 2.9 due to previously mentioned factors (mild winter, Russia Gazprom going live, historical averages, etc) but Phil's analysis gives me pause. May have to adjust my position…


  19. KRBN has been on a tear!  Along those lines do we have any thoughts on ABXXF? Vancouver management with a good reputation, commodities exchange goes live in Singapore sometime in 2022.


  20. Wow, oil came down nicely after failing at $71.25.  $70.50 is plenty for me to cash out ($2,000 per contract).  

    /ES coming down too.

    KRBN/Pman – Yes we are working on a Carbon Credit project and, in my research, I noticed how wildly underpriced KRBN was.   

    ABXXF/Pman – Not a company I know anything about.  Does seem interesting and I guess it's worth a toss.   No options so basically, just a penny stock you have to pray works out.


  21. Back in /NG at $3.75 – worked before….


  22. Phil / AVGO – Hit a home run today….  Beat on Rev and Earnings, buying Back $10B in shares ( about 4+ % of Mkt Cap) and increased dividend by 15%, 

     …..  Outlooked 15% Rev growth in Q1 …..  and next year is probably looking like ( my view)  a 14 to 15  % growth for the year  on Rev with Earning growing a bit faster….    

    My new Price target for '22 is 540 to 580/sh and '23 is 580 to 660/sh… implies a 14 Percent growth next year, and I'm slapping on a 16 to 18 Multiple…    I did buy  a large BCS on this, in late Oct / Nov but blowing through it…  '24.  400 /550 and a 450 / 600..

     The Jan 530 short caller I have is getting painful…  will need to figure out how to roll.  luckily it is covering with some of the shares…. 


  23. Here is the link to the replay of this week's webinar.

    https://youtu.be/NZDaYr3KvO8


  24. AVGO/Batman – Way better than we thought.  Just have to roll it along.  


  25. Phil / AVGO – I’m looking to Adjust The Below BCS I think a 600 to 650 share price at for FY 23 ( ’24 options) is reasonable target.  

     

    I have the following positions,  Note I  have plenty of margin in this account to stay unbalanced if needed….

     

    Short 5X Jan ’22 $530 Call ( 20) I plan to roll this to March XX on a pull back 

     

    The below positions have gotten out of Sorts because I sold some of the calls on the run up ( that hasn’t stopped made a bit $$ on these but now need to true up…some )  

     

    Long 35X Jan ’24 $400 Call (162)

    Long 18X Jan ’24 $450 Call (147) 

     

    Short 30X Jan ’24 $550 Call (63)

    Short 35X Jan ’24 $560 Call (70)

    Short 16X Jan ’24 $580 Call (67)

    Short 9X Jan ’24 $600 Call (75)

     

     

    Short 6X Jan’24 $440 Put (55)

    Short 6X Jan’24 $450 Put (54)

    Looking to roll these puts up to 15X of the ’24 $500 ( 50)

     

    I need some help o adjusting the two BCS I have going forward…   I was looking at possible Selling short the ’24 $650 Callers and buying up more longs of the $450 ( 2X more)   and then sell some short term callers to ….  

     

    Anyway I’m hoping you see something to adjust with less pain.  Thanks for the help.


  26. batman, AVGO

    First you do not quote how many shares you have. Looking at the above, you holding 37 X ITM short options naked!!! For me an absolute no no position.

    The puts are not the problem at this time, even having a load of any puts can be fatal in a crash. I trust you do have enough stocks to cover the naked calls. All your short calls do have still a healthy extrinsic value between 35 and 63 dollars. So all covered short calls, I would just leave as is until they ripe to the full spread value. Why mess with them and pay for premium more than two years out?. However the naked once I trust you have enough stock to cover them and if not, sell a certain amount of stock, equal to the cost of the long calls, being able to buy sufficient long calls to cover the remaining naked calls. 

    I do as well have positions in AVGO but no stock, as they well pay 2.47% but still below my 3% target. You better off with BCS.

    But lets see what Phil has to say.