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PhilStockWorld January Portfolio Review – Part 2

What is hedging? | Advanced trading strategies & risk management | FidelityThank God for hedges!  

As of Tuesday morning's review, we had $800,000 worth of hedges in our Short-Term Portfolio and suddenly, on Friday morning – we're already wondering if that's enough, right?  This is why we ALWAYS hedge – especially in a toppy market and, as Fundamental Investors – we know when a market is toppy.  We also have RULES about hedging, like putting 25-33% of our unrealized gains into our hedges.  That's how our hedges rise proportionally with our portfolios – so we don't let ourselves get complacent in a rally.

Our Short-Term Portfolio (STP) is paired with our Long-Term Portfolio (LTP) and acts as the primary hedge there but it also has enough to spare to cover our other portfolios against a 20% correction.  Above that and we're in trouble but, of course, we simply add more hedges when 10% fails and again when 20% fails.  At the moment, 10% seems ready to fail.

  • Dow  36,000 to 34,200 has bounce lines of 34,560 (weak) and 34,920 (strong) 
  • S&P 4,700 to 4,465 has bounce lines of 4,512 (weak) and 4,559 (strong) 
  • Nasdaq 16,500 to 15,000 has bounce lines of 15,300 (weak) and 15,600 (strong) 
  • Russell 2,400 to 2,080 has bounce lines of 2,144 (weak) and 2,208 (strong)

That's the chart we've been using to track a 10% market correction, using the Nasdaq as our primary indicator as 1,500 was our predicted test into January earnings but we blew right past that yesterday by, yes, 300 points and that's a 20% overshoot of the 300-point drop —- so far.  It COULD, as I noted in yesterday morning's PSW Report, simply be the halfway point, on the way to 14,500 and, if we lose that last line on the Dow today – that's how we'll be playing it into the weekend.  

So far, we haven't taken too much damage in our long portfolios.  That's because we mostly buy the kind of safety stocks people run to when there's a correction and also because, to some extent, our trades are self-hedging – as we tend to sell a lot of premium, which enables us to ride out small dips but, past 10% and things are still going to get ugly!  

Earnings Portfolio Review: $308,733 is up $11,060 despite the downturn because this is a self-hedging portfolio which we added a second round of SQQQ calls to in our last review on Dec 23rd.  That was very good timing and made all the difference as our SQQQ positions gained $26,450 – more than offsetting the losses in the primary positions.  This is why it's critical to know the POTENTIAL upside to your hedges – you have to be aware of where your protection runs out – as we can see how fast this market can fall.  

  • SQQQ #1 – The $25 calls are $13.60 in the money and SQQQ is a 3x ETF so, if the Nasdaq falls 20% more, then we can expect 1.6 x $38.61 = $61.77 and that would bring our longs up to $36.77 or $73,552.  Currently we're at $34,300 so this is $39,252 of protection.  
  • IBM – Short puts that we are not worried about over the long-term, though there may be some short-term pain.  We have lots of cash and margin so no need to change these.  We expect to gain the full $9,963.  
  • SQQQ #2 – This is our new spread (post-split) and it maxes out at $50,000 and is currently net $14,000 so $36,000 of protection.  

  • GILD – On track and we have no problem with GILD as a long-term hold.  It's a small position so we'd be happy to improve upon it if it gets cheaper.    Currently net $6,467 on the $15,000 spread so we expect to gain $8,533 over time.

  • GOLD – We're aggressively long here and it's a good inflation hedge so no regrets.  We're looking for at least $25 which would put us $2,000 in the money and currently net -$1,180 so $3,180 expected gains.   Another one with no need to hedge as we'd happily make it a much larger position if it got cheaper.  

  • JACK – This is a $30,000 spread at net $8,575 so it's on track to make us $21,425 (249%) – that's good for a new trade!

  • PETS – Aggressively long with the $25 calls and let's say $35 would give us $20,000 and currently net -$2,300 so $22,300 in upside potential here.  

  • SPWR – Yet another aggressive long.  Getting back to $30 would be $40,000 and currently the spread is net $13,975 so a lovely $26,025 in upside potential is about 200% if all goes well.  

  • VIAC – Very aggressive and was starting to pay off but fell back yesterday.  Anyway, let's say we get to $40, then we have 40 of the $25s for $14 ($60,000) and 20 of the $35s for $5 ($10,000) so $70,000 potential and currently net $22,600 so $47,400 (209%) of upside potential if we can get back over $40 – I love this one!  

I really don't understand why people think this system is complicated, do you?  We have $138,826 in upside potential and $75,252 in downside protection and we also have $222,258 in CASH!!! to deploy as we only have net $86,474 in total positions.  Our big risk is being assigned (from the short puts) 500 shares of IBM, 500 shares of GILD, 1,000 shares of GOLD, 500 shares of JACK, 1,000 shares of PETS, 1,000 shares of SPWR and 2,000 shares of VIAC. 

That would be our worst-case in a catastrophic market breakdown and, unless they all go Bankrupt, we can deal with that too – epecially as we'd be getting $75,252 in additional cash to buy/adjust them with along the way.  So, unless the World ends, this is a fantastic portfolio to roll into 2022 with!  

Butterfly Portfolio Review:  $1,356,362 is up 578% from where we started on Jan 2, 2018 in our oldsest portfolio but it's also down $35,027 in choppy waters since our Dec 21st review.  No big deal though, we just need to make sure we're not over-exposed as this too is mostly a self-hedging portfolio but mostly we rely on short calls to protect us in our Butterfly plays.

  • AAPL – Big pullback on our biggest position but of course we have long-term faith and those short April $155 calls were deep in the money and now we're simply back on track and still way over target.

  • AMZN – The short Jan puts are going worthless (barely) and we're going to take the 2 short April $3,700 calls off the table and see if there's a bounce.  If not, we'll sell much lower calls (probably $3,000) to balance out the short puts that are now in the money.  

  • BDX – This is our newest addition and doing fine so far.  

  • DIS – The stock is at $137 so the short April $160 puts are an issue at the moment but the short calls will expire worthless so let's wait and see how bad next week is before adjusting.  

  • F – Miles in the money on our older play and the other play is on track so not much to do but wait.  

GNW – The short $4.50 calls will go worthless and the rest is on track.  March $4 calls at 0.32 aren't worth selling so better off  waiting and seeing.

  • GOLD – Aggressively long.
  • IMAX – The short $20 calls are going worthless and I think we should sell 15 of the March $19 calls for $1 ($1,500) as that's enough to pay for us to roll the 2024 $17 calls to the $15 calls.

  • KO – At $61.05 we have to roll the 15 Jan $55 calls to 15 of the April $57.50 calls at $4.35 and no new put sales until we see if $60 holds up.  

  • MJ – Testing $10 today so the Jan calls will go worthless but what next?  We picked up $10,560 on that sales and it's a net $0 spread but we risk being assigned $4,000 shares at $15 ($60,000) so we'd better keep making some money.  With 200 longs, we can certainly afford to sell 50 of the April $10s for $1.25 ($6,250)  and let's sell 25 of the April $10 puts for $1.10 ($2,750) and we'll see how that goes.  

  • WBA – Seems a shame not to sell some short calls since we have 25 uncovered longs.   Let's sell 15 of the April $52.50 calls for $3 ($4,500) and see what happens.  

  • WHR – The short Jan puts are expiring worthless with the stock at $204.66 and we sold the March $230 calls so all seems well here.  

We have a lot of adjustments at the end of a quarter but, otherwise, it's a nice, dull portfolio where we sell premiium for income and whether or not the long position is winner is a bit of an afterthought.   This is our most reliable portfolio but people ignore it because there's not much to do.  The reason we left it running after the last purge was to demonstrate how powerful it becomes over time and now we're up 578% in 4 years and still no one seems to care.  Oh well….

Dividend Portfolio Review:  $4,105 is just the dividends we collected this quarter.  I LOVE dividends and our strategy in the Dividend Portfolio is to lower our basis to $0 over time on each position and keep collecting those dividends.  It's amazing how powerful this strategy is over time but we're only two years into this one.  At the moment, we're at $411,146 which is up 105.6% since our Oct 25th, 2019 start with $200,000 and we're up $19,869 since our Dec 23rd review, where we only adjusted DOW and cashed out PFE – very low-touch! 

  • GILD – On track 
  • VIAC – Back on track.

We only have 2 short puts and only 11 long positions so this sell-off will be a good time for us to promise to buy more stocks if they get cheap.

  • ET – Perfect for our targets.  

  • KHC – Perfect.

  • LYB – Perfect

  • MO – Perfect but the short $40 puts are going worthless and we'll have to buy back the short $47.50 calls for $2.93 ($1,463).  Now we can sell 5 of the 2024 $45 puts for $5.25 ($2,625) and 5 of the 2024 $50 calls for $4.50 ($2,250) and that's another net $3,412 collected and our original net was $17,250 so, not including dividends, we have reduced our basis to $13,838 yet we're still collecting $450 per quarter or $1,800 per year for a 13% annual return and in 4 more cycles (8 years, 10 total years) we should have recovered all the money we laid out PLUS the dividends, which we will collect forever more.  

  • NLY – A bit low as we were aggressive with the short puts but we don't mind owning more NLY, who just paid $440 against a net $11,450 position.  That's better than 10% annually on just the dividends.  

  • TWO – Slipped a bit on us but another nice dividend payer as we just collected $340 against the net $8,510 position so we certainly won't mind being assigned 3,000 more at net $5.15 – if it gets that low.  Meanwhile, $1,360 is a 16% annual return on what we have at the moment.

  •  VTRS – Perfect.

  • DOW – Pretty new and right on track.

  • FRO – The only one that does not pay a dividend but I want to be in it when they reinstate it – which is my theory.  They just took a hit but basically on track.

  • PETS – As we expected, they went back to paying a dividend and we got $300 last Q so $1,200 against a $23,330 position is just 5% a year but I'm sure it will increase and we'll sell calls to lower our basis next time they pop.  The 2024 $25 calls are $4.50 so we could knock $4,500 off the basis right now if we wanted to but, no thanks.

  • T – The king of the dividend stocks.  Just paid us a lovely, reliable $1,040 so we're collecting $4,160/yr against our net $45,740 position and we sold $17,100 worth of puts and calls in the first round so perhaps only 8 years until we have all our money back while STILL collecting $4,160/yr.  

Notice it's incidental to this strategy whether or not the spread actually works out.  We WILL get our basis down to $0 and we WILL keep collecting those dividends.  In the case of T, above, we made a big put commitment because we love and trust them and, if they happen to get called away at $54,000 – that's a net gain of $8,260 (18%) on top of the 8%(ish) dividends we're collecting.  We're only 1/2 covered on the calls too, so we can collect another $2,000+ selling more calls.  

That's what's great about this strategy – so many ways to generate cash and, over time, it becomes a very powerful money-maker.

Have a great weekend, 

- Phil


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  1. Notre Dame rises again

  2. How Norway Popularized an Ultra-Sustainable Heating Method

  3. Netflix stock plunges as subscriber growth worries deepen

  4. Good morning!

     A little bounce that quickly fails – most likely we will be adding more hedges today. 

    May I Have Some More GIFs - Get the best GIF on GIPHY

    But first, two more reviews to complete.

  5. SPWR taking a serious beating. 

  6. Good Morning!

  7. SQQQ-how did the old positions get converted to the new?

  8. SPWR    I forgot to add that one. Phil…would you do a 13/25 bull call and sell 15 puts as a new position?

  9. Butterfly Portfolio is finished above.  

    SPWR/Jeddah, Willsons – They guided Q4 to the low end of range but so what?  

    SunPower sees Q4 adjusted EBITDA at low end of guidance range

    They have supply chain issues but they are still making about $20M for the Q despite this:

    • The company says $6.5M of Residential EBITDA was effectively pushed into 2022 because of weather in California and impacts from COVID-19, and another $3M was spent on sales and marketing to expand its serviceable solar market to underpenetrated areas nationally.

    Last 3 Qs are $50M, $111M and $60M so $20M more is $241M and $16.26 is $3.3Bn for the whole company – it is now officially silly cheap.

    SQQQ/Pstas – I had to do the match as PowerOptions doesn't automatically do it for you.  Couldn't leave the old ones as they were not trackable.

    SPWR/Willsons – Sure, I would do that spread.  This is a clear overreaction.

  10. what do you think about volume today phil

  11. Finished the Dividend Portfolio above, so all done with reviews.  

    On the whole, we're holding up very well and our hedges are doing great, so we're ahead of the game so far.  

    Indexes failing weak bounces again but we're very well-covered at the moment so I'm not in a huge rush to cover more but I'll take a look.

    Volume/Tommy – Our theory that over 120M is a disaster has been holding up:

    Date Open High Low Close* Adj Close** Volume
    Jan 21, 2022 445.56 448.05 440.66 443.57 443.57 99,029,610
    Jan 20, 2022 453.75 458.74 444.50 446.75 446.75 122,029,500
    Jan 19, 2022 458.13 459.61 451.46 451.75 451.75 109,357,600
    Jan 18, 2022 459.74 459.96 455.31 456.49 456.49 109,709,100
    Jan 14, 2022 461.19 465.09 459.90 464.72 464.72 95,849,600
    Jan 13, 2022 472.19 472.88 463.44 464.53 464.53 91,173,100
    Jan 12, 2022 471.59 473.20 468.94 471.02 471.02 67,605,400
    Jan 11, 2022 465.23 469.85 462.05 469.75 469.75 74,303,100
    Jan 10, 2022 462.70 465.74 456.60 465.51 465.51 119,362,000
    Jan 07, 2022 467.95 469.20 464.65 466.09 466.09 85,064,800
    Jan 06, 2022 467.89 470.82 465.43 467.94 467.94 86,858,900
    Jan 05, 2022 477.16 477.98 468.28 468.38 468.38 104,538,900
    Jan 04, 2022 479.22 479.98 475.58 477.55 477.55 71,178,700
    Jan 03, 2022 476.30 477.85 473.85 477.71 477.71 72,668,200

    That's pretty damned reliable!

  12. 1. Liberty Media

  13. SQQQ-once again  I am underwhelmed with this issue as a hedging vehicle. In the past, my experience has generally been disappointing so I have been reluctant to jump back in. Given the ongoing bubble inflation in stock prices I felt compelled to do something  So, I entered positions back in July/Aug and added in early Jan. Given the reverse splits causing tracking headaches and the silly bid/ask spreads and thus the resulting lack of ready liquidity my overall positions should be back to break even but show paper losses. Thus, if I chose to call this level a "bottom" and wanted to relinquish the hedge, I would not very likely get out intact and in fact likely to take some losses. Glad to see portfolio hedges doing "great" but for me, not so much. 

    I need to remind myself the best hedge is cash. 

  14. SQQQ  / pstas

    I agree with your thoughts. I am in a similar situation. I feel like the market makers manipulated and did the split before the crash.

  15. SQQQ again- can anyone explain to me why the deltas are so different comparing pre/post split options? For  example, If my understanding is correct presplit 23-Jan $5 call is the equivalent to the post split 23-Jan $25 call. Yet, the corresponding deltas are .20 and .85 respectively. Huh?

  16. Agreed that these leveraged ETF’s are not the easiest to time and get right. That is why they come with

    extensive disclosures. Like Phil said (kind of) recently, do you want to make adjustments every time the

    market twitches, sneezes or pukes?  I am not able to monitor enough for futures, but I do like to play casino

    on small amounts of liquid indices with hunches for market directions. SPY puts have been very good lately. I am definitely

    not JRW (for older subscribers). Just wish I could get some free drinks while watching the market Lotto’s !

  17. Looks like we're heading into a craptastic finish!


    I think, for the Earnings Portfolio, we need something with a little more hard-core payoff.  

    While SQQQ is problematic for now, what matters is whether or not you are in the money – not what your broker's screen shows you with random bid/ask spreads.   SQQQ is at $40.50 so, if you have a $20 call, it's worth $20.50 if it expires here – that's a fact, not an opinion.  Whether your broker is currently telling you that call is worth $20.50 or $30.50 or $10.50 at the moment - it's still worth $20.50 if it expires at this level.

    In fact, the current SQQQs have mispricing we can take advantage of.  

    In the Income Portfolio, we have a $30,000 hedge and also 20 open 2023 $25 calls (which are $15 in the money), currently priced at $19.  A 20% drop in the Nasdaq would take us to $65 but SQQQ calls only go up to $55 and the 2023 $55 calls are $11.25 so let's sell 20 of those (full cover on our open $25s) for $22,500 and use that money to buy 50 March $40 ($6)/50 ($3.65) bull call spreads for $2.35 ($11,750) so we're taking $10,750 off the table and adding a $50,000 spread that's at the money to cover the short-term.  

    In the STP, I think we are OK into the weekend as we were fortunate to get a huge dip in CMG that put our Jan $1,500 puts into the money for an additional $60,000 gain.  

  18. This was from Tuesday's review:

    • CMG – Haha!  Actually came below $1,500 but a long way to go if we're going to get all our put money back (was part of a cashed-in spread).  Looks like our short calls are in good shape – hopefully make $19,600

    Here's where we are: 

    CMG Long Put 2022 21-JAN 1,500.00 PUT [CMG @ $1,387.15 $-33.29] 5 4/19/2021 (0) $69,020 $138.04 $-25.04 $94.86     $113.00 $37.20 $-12,520 -18.1% $56,500
    CMG Short Call 2023 20-JAN 1,800.00 CALL [CMG @ $1,387.15 $-33.29] -2 7/21/2021 (364) $-51,876 $259.38 $-195.63     $63.75 $-26.25 $39,126 75.4% $-12,750
    CMG Short Call 2022 21-JAN 2,000.00 CALL [CMG @ $1,387.15 $-33.29] -3 9/16/2021 (0) $-23,109 $77.03 $-77.01     $0.03 - $23,102 100.0% $-8

    We were at net -$8,000 Tuesday morning, now $43,742 but I also expect that' $12,750 to go worthless down the road.  

    VIX is finishing at highs – also not good:

  19. Maybe a little stick action into the close to stave off complete disaster….

    Have a great weekend, folks,

    - Phil

  20. CMG P/E back to 55. Phew! Back to reality, where a restaurant trades at only 50 times earnings. Normal times are here again!

    I was doing some QQQ long term math today. 2000 high (120.5) to 2009 low (19.76) to recent high (408.7). It lost -84% over NINE YEARS (-18% APY), then made 1968% over 13 years (26% APY). Average APY (22 years): 5.71%. There were some dividends too, maybe a few bucks. About the same as a taxable muni fund (e.g. BBN). Note that BBN is buy at or below 20.

    Long term, do "tech stocks" and the "tech revolution" provide about the same benefit as municipal spending? Interesting question. Here's 22 years worth of data to indicate the investments were a wash.

    Of course, I'm fond of hearing how CrAzY UnsTaBLe CrYPto iS. Yeah. I guess because it can lose 84% in one year and not over 9 years? 

    Note that LTCN is trading at 55% of its NAV right now. It's  a pinko stock, but unless something is rotten in denmark, you can buy litecoin at half price this way (not that I would buy crypto yet, but I'm watching this one for entry).

  21. Am with you on SQQQ. I have not been successful with it as a hedge at all. Same as VXX in fast and then out. Every time they pull this. Won't do  anything long term because they never adjust and rip you off.

  22. SQQQ- of course you are right about whatever is in or out of the money if the option expires today. But that's the rub. The longer term options are not expiring today and bid/ask prices may or may not accurately reflect premiums due thus contributing to the lack of what I refer to as ready liquidity where one can trade with some greater degree of confidence. Suppose I wanted to lighten up or exit completely I am subject to what the market actually allows in the here and now despite my asking for what may be warranted. As Randers indicated-  timing. 

    Place your bets, takes your chances. 

  23. CMG/BDC – That one was bothering me for a long time.   So was NFLX:

    Submitted on 2019/11/01 at 9:26 am

    NFLX/StJ – I'm not sure they have a path to profits with al this competition.  They have a lot of old contracts for shows that will be much more expensive to renew now that there are more bidders – these models don't account for that or the rising costs of creating new shows (also supply/demand driven).  Half the people I talked to in California are pitching projects to NFLX and fires and power outages can disrupt their schedules and increase costs too.  

    "If you want to make money off Netflix, sell the company a screenplay. Writers and consumers will win biggest in an increasingly competitive streaming market."

    In just the last year alone, Sarandos estimated that it costs 30% more to produce a show. A 30% cost increase per show in one year. They also stated that House of Cards, a show that has been pegged as a $100 million show when it began seven years ago, would be a bargain at $100 million in today's competitive content production market. The show was a hit, according to Netflix, and $100 million today would be just 1% of Netflix's production budget.

    The cost inflation is spilling into movies as well. Netflix's new prestige movie, The Irishman, alone has amassed a budget of more than $140 million. No studio prior to streaming could have justified a budget of that size for something simply designed to groom Oscar voters and win awards. In the old theatrical-only release world for movies, a movie had to double its budget at the box office for the studio to break even because theaters kept approximately half of the take. The prospects of a prestige movie for adults raking in more than $280 million at the box office would have been slim at best.


    Next month, competing products Apple+ and Disney+ will launch. As those two platforms evolve, Netflix will face increased competition for writers of new shows and movies. Netflix will also have to pay to keep any talent that produces hits on its own platform. The disadvantage facing Netflix is its financial situation.

    The company recently issued $2 billion in additional debt, bringing its debt load to more than $14 billion. The company also issued $2 billion in debt in April. Netflix is currently burning cash at torrid rate and may not be cash flow positive until 2023.

    Netflix is trading at a steep premium on a P/E basis to comparable media plays. Domestic subscriber count appears to be saturated. International will continue to grow, but margins are lower for international subs. As buzz picks up around Disney+ and Apple+ next month and into next year, domestic subscriber count could take a hit again. And it remains to be seen how much pricing power Netflix will have with consumers as streaming options continue to expand. It's hard to see a catalyst on the horizon that is going to send shares up in any meaningful way.

    At $126Bn now ($287.50) when are they going to be at $6Bn to grow into that valuation?  

    They only SEEM like a bargain compared to the completely insane levels we shorted them at over the summer and I wish they would go back to $360 so we could short them again but, other than that, it's a "stay away" with a ridiculous valuation but plenty of idiots willing to pay it.

    October 10th, 2019 at 3:22 pm | (Unlocked) | Permalink

    NFLX into earnings:


    The pandemic gave them a huge pop but now they're back to where they were in 2019.

    As with Crypto and Beanie Babies – these valuations are always just some guy's opinion.

    SQQQ/Pirate, Pstas - Well there's no "success" unless the market goes down and stays down – THEN we get paid.   Or if we do something clever like we did with TZA last week and cash out the deep in the money call and replace it with longer-term calls but now we have a 2024 TZA hedge that won't be very short-term effective (though we do have $260,000 to spend on new hedges).  

    At a certain point, we can unwind the hedges.  We can take 1/4 of our longs off the table and that leaves us with a 33% more short calls and the cash – that's a move we make when we think things have bottomed.  If we are wrong, we add more hedges back but, if we catch it right – it's a great way to cash out on a dip.   

    Speaking of which, we'll have to re-chart for the longer-term pullback if we aren't bouncing on Monday.  The way we finished – I am not counting on the bounces.  


    Spitting cobra patterns!  

    I mean, gosh, do you really think the S&P shouldn't have gone up 150% in 5 years?  Nooooo……

    VXX/Pirate – That is a total joke, we haven't played it for years. 

  24. Boy, you have to strain to argue that the Dow even has support at 30,000.  S&P maybe 3,500, Nas 12,000, RUT 1,800 – those would be very ugly pullbacks – although only 10% to go for the RUT.