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Top Trades for Wed, 30 Aug 2017 13:13 – MO

CMG/Pat – Don't get too excited, just a weak bounce off $300 so far:

$500 to $300 is a 40% pullback and down $200 means the bounces are $40 just to be weak – not even close yet.  $10 is a weak bounce off the more recent leg down so if you can't even make that – you are still in trouble.  

Pot/Pstas – You mean the price of a weed goes down when it gets legal?  Shocking!  I grew up in NY and I knew a dozen kids who were able to grow pot on their property – and these guys didn't know anything about growing plants other than put the seed in the dirt and water it.  If it's legal to smoke – it's way too easy to grow for these prices to last.  Still, MO will be thrilled to sell you 20 joints for $20 in a pack and people will pay for convenience and quality control – that's where the long-term money is.  

It's been a while since MO was cheap but they took a nice refreshing dip yesterday and now we can add the following plays:

In the OOP:

  • Sell 5 MO 2019 $55 puts for $3.75 ($1,875) 
  • Buy 10 MO 2019 $57.50 calls for $8.70 ($8,700) 
  • Sell 10 MO 2019 $70 calls for $3.20 ($3,200) 

That's net $3,625 on the $12,500 spread so we have $8,875 (244%) upside potential at $70 and we're $6,500 in the money to start.  

In the LTP, we can afford to be more aggressive:

  • Sell 10 MO 2019 $60 puts for $5.65 ($5,650) 
  • Buy 20 MO 2019 $57.50 calls for $8.70 ($17,400) 
  • Sell 20 MO 2019 $70 calls for $3.20 ($6,400) 

Here we have a net of just $5,350 on the $25,000 spread with $19,650 (367%) upside potential.  The difference is, in the LTP, we can easily deal with a move down in MO against our $60,000 commitment to buy the stock (which pays a 4% dividend) while in the OOP, we don't REALLY want to own it – so we make a smaller, more conservative commitment on the put side.  

Peak oil/Japar – Well I was hoping for $48.50 but the hurricane has screwed that up, lucky to see $47.50 now.

TEVA/Jabob – If you need a double to get even you should get out.  The only reason you should ever let yourself lose more than 20% is if you are 100% willing to add to the position and lower your basis on the way down and that includes planning on doing it again if it keeps falling.  So, at $37.50, you should be out at $30 (down 20%) unless you are going to be THRILLED to DD at $18.75, which would give you 2x at $28.13 and $18.75 is already down 33% at $18.75 and then down around $14 you want to DD again for 4x at $21 and still down 33% and, of course, you would sell puts and calls to lower that basis, hopefully to around 20%.

BUT – If you are not going to be THRILLED to own 4x at $21, when the stock is at $14 and plan to be in it long enough for the stock to NORMALLY gain 50% (3-4 years growth) – they why the F did you not stop out with a small loss at $30?  

You MUST have a trading plan for every position and, generally, with our LTP positions, our PLAN is to own 4x at 60% off our initial entry (if we should get so lucky).  Our PLAN is to then work the trade over the next few years, pare down our basis and, hopefully, when and if the stock comes back – we'll own a whole lot of it at a nice, cheap entry.  

If that is not your plan – then get out of positions that move against you!  

Sitting on TEVA at $37.50 and needing a double to break even isn't a plan at all…

DBA/Jet – No, no sign of food inflation but it was a hedge against it.  In theory, you saved it by getting cheap groceries.  The Jan $18s are still $1.05 and they can be rolled out to the 2019 $17 ($2.40)/20 ($1) bull call spread at $1.40 so net 0.35 buys you a $1 lower strike and another year of hedging.  The Jan $20 puts I'd just hold until the end as you either get lucky or you roll them.  By the way, the storm is ruining the cotton crop but, sadly, DBA isn't big on cotton:

Cocoa should come back now that the season is over:

Hogs likely to do better and cattle assuming disruptions in TX cause supply issues. 

Unfortunately, less cows = less need for cow food, which is also in DBA:

CBI/Jel – Cool! 


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