And already Q1 comes to a close.
We've had War, we've had Rising Interest Rates, we've had Inflation, we've had new strains of Covid. we've had a Yield Curve Inversion… If this were a history book you'd say: "Oh yes, that was obviously the start of the Great Depression – how could they have not seen it coming?" But it isn't so obvious when you are in the middle (or beginning) of it, is it? I suppose while you are being eaten by a shark you rationalize that you'll be able to get along without the leg and then you start thinking about how you can get a replacement arm… assuming you're an optimistic sort.
Optimistic sorts are what the market is full of these days – the pessimists are long gone so now you have filtered in just the optimists, all bidding against each other to see who can overpay the most for stocks while ignoring the macro environment completely.
At the moment, we are using hedges to repel the sharks but shark repellent doesn't work if the can is empty so we tend to go over our hedges A LOT in turbulent times. We did an STP review in last Wednesday's PSW Report ("Which Way Wednesday – Trouble at 4,500 for the S&P 500)" and this morning the S&P is at 4,596 – up almost 100 points (2.2%) for the week and our Long-Term Portfolio is at $2,606,583 – which is up $27,015 since last Wednesday and we'll see how much of that we want to use to add more protection in our Hedges in the Short-Term Portfolio:
- Short Puts – W is a bit of a worry but our net is $126.55 and the stock is at $121.47 so almost all of the loss is premium – so our best bet is to let that burn off.
- CVX – That was easy. It was trading stupidly high. This is a $45,000 spread at net $31,875 so $13,125 downside protection if CVX stays below $170.
- DIA – We bought back some short puts and it's generally a $150,000 spread currently at net $51,587 but we'll certainly sell some short calls to lower the basis and it's only 2/3 covered so it's over $100,000 worth of protection. Note DIA is not an ultra but a 10% drop in DIA would take us to $315 and 100% in the money.
- TQQQ – These are leftovers from a hedge we cashed in. The 2024 $70s will keep their value longer so we're just letting the Jan $75 puts burn out for now.
- SQQQ – The short calls are just to make a little income but that little income was $12,754 we sold in Jan and we're already up $7,854, which is very nice as it's a net $96,375 with the potential to be $525,000 so a good $430,000 of downside protection as we're sure to sell more short calls and lower the basis further.
- TZA #1A – We have the $200,000 Jan $20/40 spread at net $55,250 and it's halfway in the money so good for another $95,000 of potential protection.
- TZA #1B – We have another $200,000 2024 $40/60 spread at net $20,500 so these have $180,000 worth of protection. In reality, though, we have this spread in order to cash out the Jan $20 calls if they reach $200,000 ($20) as this spread would then be covering the remaining short Jan $40 calls (assuming we believe TZA is done going down, of course). So we're pre-planning our exit strategy well in advance. Should we end up doing that – it's very likely we would buy another set of 2024 or maybe 2025 hedges as well. Considering how cheap this protection is – it's a great strategy to play it. We call this "Leap Frogging" the options.
- TZA #2 – We rolled 1/2 of the 2024 $30s to the $25s because it was cheap to do – so it didn't make sense not to. Now we are less than 1/2 cash but it's still our best use of money since we are buying $100,000 worth of position for $30,000 – so let's roll the rest of the $30s to the $25s. That will leave us with an $800,000 spread at net $104,750 so there's $695,250 of downside protection. Ah, but we forgot about the 50 2024 $40 calls at $10.25 ($51,250) – let's roll 25 of them ($25,625) to 50 July $40 calls at $3 ($15,000) and that will cost us $10,625 but it's a drop in the bucket as we keep whittling away at those old covers (from our original spread where we cashed in the longs).
We spent a bit more than planned but it was a housekeeping expense and we added $70,000 more protection, bringing us up to $1,513,375 worth of protection in our STP to help hedge all those long positions – JUST IN CASE – reality, like that shark fin – ever rears it's ugly head while we're out for a swim.