Hedging For Disaster – 5 Plays that Make 500% if the Market Falls

by Phil - July 3rd, 2010 8:27 am

Well, I am totally disappointed with Friday’s close. 

I was going to be pleased but then we had a very sharp, last minute sell-off on heavy volume that pretty much ruined the day.  I have been bullish and we have been buying at what we thought was a bottom, moving up to 35% invested in long-term, hedged positions but what if the 20% built-in protection (see "How to Buy a Stock for a 15-20% Discount") isn’t going to be enough?

You know I am a big fan of taking cash off the table in either direction, and we were not greedy and took most of our short-term bearish hedges out in the last two days.  We had a couple of new hedges already in this week’s Member Chat but let’s look at some other trade ideas that can bullet-proof our portfolios, all the way back to the March, 2009 lows.  Our usual  Mattress Strategy is not going to be enough to save us if we have another "flash crash" - especially one that sticks!   Keep in mind that this is the biggest market decline we’ve had since February ’09 so adding a layer of protection here doubles our returns if this is the first leg of a major sell-off, or it gives us a smaller hedge that we can roll up later while we take our bigger hedges off the table.  As I have to say WAY too often to members – It’s not a profit until you cash it in! 

Hedging for disaster is a concept I advocated during another "recovery," in October of 2008, where we made our cover plays to carry us through a worrisome holiday season and into Q1 earnings – "just in case."  That "just in case" saved a lot of portfolios!  The idea of disaster hedges high return ETFs that will give you 3-5x returns in a major downturn.  That way, 5% allocated of your portfolio to protection can turn into 15-25% on a dip, giving you some much-needed cash right when there is a good buying opportunity.  At the time, I advocated SKF Jan $100s at $19.  SKF hit $300 around Thanksgiving and those calls made a profit of over $280 (1,400%), so putting even just 5% of your portfolio into that financial hedge would give you back 75% of your portfolio when you cash out. 

Keep in mind these are INSURANCE plays – you expect to LOSE, not win but, if you…

Tags: DXD, EDZ, Hedging, Options Strategies, SDS, TBT, TNA, TZA

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Fickle Friday – Budapesky Concerns to Trump Jobs?

by Phil - June 4th, 2010 8:29 am

Oops, now it looks like Hungary is blowing up!

This is a big concern to me because I just asked "What will be the ‘shot heard round the world’ that sparks the next global revolution" and, wouldn’t you know it – it’s Hungary again!  It was also in June (of 1914) when the assassination of Archduke Ferdinand of Austria and his wife triggered a series of events that plunged the planet into World War I.  Today Hungary is the first of the Eastern Europe block to step into the economic confessional as a spokesman for Prime Minister Viktor Orban was quoted this morning as saying the nation’s economy is in a "grave situation."

Before WWI, Hungary was the 2nd largest nation in Europe (behind Russia) but the Treaty of Trianon (June 4th, 1920!) carved it up into 7 countries.  Modern Hungary has about 10M people and a GDP of $185Bn ($18,500 per capita) so it is not, by itself going to bring Europe down but keep in mind this is EXACTLY where we predicted we’d be last Friday, when I put up the chart of the Cycle of Fiat Currency Failures.  So let’s take this seriously folks – next on the list after the baltics is the UK and France and then it’s our turn!

They say those who forget the past are condemned to repeat it and maybe that’s why we are able to stay ahead of the game.  Yesterday we became concerned that Obama’s prediction of strong jobs numbers on Wednesday were already baked into the 200-point rally they sparked so I called an end to "short-term, unhedged, upside plays" in Member Chat at 10:04 and we added an aggressive upside play on BGZ that is designed to pay 1,000% if the market falls.  We also got more aggressively bearish on our Mattress Plays so to say we’re not expecting a big push on the jobs number is an understatement. 

Ahead of the close, I had commented to Members that, even if we get a big pop on the jobs number (need 600,000+), then we would likely short into it - looking for 10,350 at best to settle out but it the jobs come in below 450,000, then "look out below!"  Volume was unimpressive yesterday and, even though we benefited from the daily stick save, it wasn’t strong enough to impress us. 

The futures were looking like they were…

Tags: EDZ, Hungary, TBT, unemployment

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Wild Weekly Wrap-Up – The Madness of the Markets (Part 1)

by Phil - May 21st, 2010 11:22 pm

Where do I even begin to go over this week?

I think, to set the proper tone, let’s look at my Thursday morning Alert to Members where I said: "Get out, Get Out, GET OUT of the short-term short-side plays if we get back over the 200 dmas.  Take the money and RUN.  CASH OUT THE SHORT SIDE.  Is that clear?  We may not hold these lines but that’s why we have October Disaster Hedges, the shorter-term downside plays are huge winners and should be cashed here – we’ll find something else to short if we fall off this support level.   200 dmas need to be held and those are: Dow 10,250 (8,650 is next major support), S&P 1,100 (900), Nasdaq 2,225 (not there yet!  1,800), NYSE 7,100 (5,500) and Russell 630 (still above!  500)." 

We never did hold those levels but, as I mentioned in Friday morning’s post, I thought the end of day sell-off on Thursday was a bit forced, and, in my first Alert of Friday morning I said: "TAKE THOSE SHORT PROFITS OFF THE TABLE!"  Now, I am not prone to making statements in all caps in Member Chat - almost never is about how often so this was a pretty important statement.  Before that Alert, right at 9:42, I had already called for the SPY $105 calls at $2.45 as our first trade of the day.  Those calls finished at $4.11, up 67% for the day so a good start to our expiration day!

A good start and our other day trades did very nicely as well:

• FXI June $39 calls at .98, now $1.28 - up 30%
• DIA May $102 calls at .13, out at .45 – up 246%
• DIA May $101 calls at .95, out at .80 - down 16%
• DIA May $101 calls at .10, out at .80 – up 700%

Of course we followed our strategies and took 1/2 the DIA’s off the table at a double so the other half was a free ride (we like to gamble but we’re not crazy!) but the FXI was the only "keeper" for the day, we’ll see if that was a good idea on Monday.  We also took (as I said we would in the morning post) a number of well-hedged, bullish plays on BA (from the post), TNA, TBT (have I mentioned how much I like them lately?), INTC, AAPL, VLO, FCX (I guess we’re done relentlessly shorting them!), XOM and…

Tags: AAPL, BIDU, DIA, EDZ, FAZ, FCX, FXI, FXP, GLD, INTC, IYR, NFLX, OIH, QID, SSO, TBT, TNA, TZA, UGL, USO, VLO, VNO, WFMI

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Weekend Reading – Now What?

by Phil - May 16th, 2010 9:42 pm

We had a totally exciting week last week!

I was busy this weekend so no Wrap-Up but I did write about 5 pages of commentary under Sage’s $1,000,000 Portfolio article regarding portfolio allocations and scaling strategies - all Members should read that!   We were discussing our Disaster Hedges as well which are all well in the money but hardly a double in the bunch so far, which is actually fantastic news if you haven’t entered them yet as you can enter these plays now and still do great if EITHER the market continues lower OR the VIX calms down since it’s the high VIX that is keeping us from making big money.  These are October hedges so no one expects them to pay off this early but the fact that you can still get in them even after this dip is a nice break if you intend to start getting bullish and want hedges. 

We took shorter-term hedges for more aggressive traders during the last week of April and those, of course, are up very nicely like: 

• EDZ June $38/44 bull call spread at $2.80, now $3.50 - up 25%
• EDZ June $35 puts sold for at $1.25, now .70 - up 44% (pair trade)
• FAZ July $12/16 bull call spread at $1.10, now $1.35 - up 18%
• FAZ July $10 puts sold for .70, now .50 – up  28%
• IYR May $52 puts at $1.30 (fell to .79), now $2 - up 54%
• OIH May $131 calls sold for $3.45, now .05 – up 98%
• OIH May $131 calls sold for $3.90, now 05 – up 99%
• QID May $16 calls at .32 (fell to .27), now $1.27 – up 296%
• QID May $15 puts sold for .32 (rose to .37), now .02 - up 94% (pair trade)
• QID June $14/16 bull call spread at $1.15, now $1.50 – up 30%
• TBT Sept $43 puts sold for $1.50, now $3.90 – down 160%
• TBT Sept $43/48 bull call spread at $2.60, now $1.55 – down 36%
• TZA June $6 puts sold for .70 (rose to .94), now .74 - down 5%
• UGL Oct $49/54 bull call spread at $2, now $2.50 – up 25%
• GLD March $90 puts sold for $1.20, now $1.40 - down 17% (pair trade)
• VNO May $80 calls sold at $2.30 (rose to $3.90), now $1.85 – up 19%

As I often say, sometimes the best way to enter a trade is AFTER they are down and most of…

Tags: debt, DIA, EDZ, Europe, FAZ, Foreclosures, FXI, GLD, Greece, IYR, OIH, QID, SPY, TBT, TZA, UGL, VNO

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Weak Weekly Wrap-Up – Charting Uncertain Waters

by Phil - May 8th, 2010 5:43 am

I’m just doing a quick wrap-up this week because, surprisingly, it MIGHT be time for a new Buy List!

I had said to Members on Cinco de Mayo, in our 5% Rule Review, that if we broke below 1,155 we would retrace all the way to 1,100 with our 5% Rule resistance points around 1,100 at 1,155, 1,114, 1,100, 1,073 and 1,045.   We actually spiked as low as 1,066 on Thursday but finished the week at a very sad 1,110 as we watched for that "weak bounce" zone to be broken all day.  This does not bode technically well for the markets next week but I told Members we would have to give the markets a pass for the day.  Based on the uncertainty of the weekend, we can’t expect a lot of capital commitments ahead of the EU decision.  After all, we’re in cash – why shouldn’t other smart funds be too?

When I predicted we’d hit 1,000 on Wednesday, I did not think it would be on Thursday!  The markets are now negative for the year and the S&P has spiked almost to the Feb low of 1,044 (and our lowest close was 1,056).  That’s right, these 5% Rule numbers are the SAME ones we used back then and it’s the same series we used to measure our winter run at the end of last year.  We expect a bounce here, hopefully at least a test of 1,155 on a relief rally if Greece is "fixed" yet again on Monday but we’re not going to be too impressed until we’re over that line. 

Still that means it’s time to at least lay out a new Watch List, which is the prelude to a Buy List – giving us a list of stocks we’d like to get into at lower prices.  Our last Member Watch List was back in December and by Feb 6th we had our famous Buy List, which we triggered at Dow 10,058 for a very successful run through March 18th ("Bye Bye Buy List!"), when we closed 2/3 of the positions and we have since cashed out the rest as I got more and more worried about the rally, finally calling for all cash last week.  

Speaking of last week, for those of you who say I don’t pick enough straight stocks – I listed 33 short trade ideas from my unofficial "Sell List" last Friday (4/30) when the Dow was way up at 11,167…

Tags: ABX, AMZN, BIDU, BLK, BUCY, CIB, Cramer, CREE, CTB, CY, DECK, DSD, EDU, EDZ, ERX, EUO, F, FAZ, FFIV, FOSL, Gold, GOOG, GS, MBI, MEE, MMM, MON, OIH, QID, SDS, SHOO, SMN, SPWRA, TBT, TD, TZA, UNP, UPS, USO, VIX, VLO, WYNN

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GDWheee Friday – Could be a Wild Ride!

by Phil - April 30th, 2010 8:30 am

Attention ladies and gentlemen:

The stock market will soon be leaving the station, please secure all personal items, pull down the safety bar (our Disaster Hedges) and keep all body parts inside ride at all times.  Well you know you can follow all of the safety instructions and STILL get smacked in the face with a black swan (like our friend Fabio, pictured here) which is why we elected to get back to cash ahead of this report.  The markets were just too insane this week and who the heck knows if Europe will still be a Union on Monday or what the GDP number is going to be (but I do think it’s a miss). 

Since our biggest weekend fear is financial panic in Europe, our cash US dollars will become more valuable in a crisis and if the market drops, all the better as we can ride back in and do some bargain hunting.  If the market takes off on good GDP and Greece is "fixed" and Spain is "fixed" and Portugal and Ireland are not really a problem (especially for MS and JPM) and the CRIMINAL charges against Goldman look beatable and and the Financial Reform Bill doesn’t disrupt the market with a disorderly breakup of the big banks and the Bank of International Settlements Report continues to be ignored and the run on the Greek banks doesn’t spread to other STUPID counties – well, then we can BUYBUYBUY because, if all this doesn’t matter, then it’s very likely that the entire planet Earth could explode but Wall Street will keep ticking higher.

Yep, I can’t wait to ride this baby mindlessly higher!  After all, what can go wrong?  BIDU is ONLY $710 a share, BLK is $190, CMP is $76, GOLD is $84, BUCY is $65, FAST is $56, MMM is $90, FOSL $40, F $13.50, DECK $149, SHOO $55, TPX $35, LZB $14, CTB $22, NOG $16, CEO $176, FTI $75, CLB $150, CIB $46, BBD $19, TD $75, BCA $45, BAP $87, ITUB $22, EDU $94, WYNN $93, FFIV $72, CY $14, CREE $77, UPS $70, UNP $78… 

These were stocks I was looking at last week, when I told members I thought it was easier to construct a Sell List than our usual Buy List for this market but, if we’re heading…

Tags: BAP, BBD, BCA, BIDU, BLK, BUCY, CEO, CIB, CLB, CMP, CREE, CTB, CY, DECK, DNDN, DVN, EDU, EDZ, F, FAST, FFIV, FOSL, FTI, GDP, Gold, GS, ITUB, JPM, LZB, MMM, MON, MS, NOG, OIH, SHOO, SPWRA, TBT, TD, TPX, UNP, VLO, WYNN

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Thursday – The Pain in Spain will Hardly be Contained

by Phil - April 29th, 2010 7:28 am

The S&P downgraded Spain yesterday.

That sent our markets tumbling to the day’s lows and rightly so.  After all, how much better does our economy look than Spain’s (8th largest in the world)?  It’s certainly worse on a debt to GDP basis by a wide margin and so is Austria, Belgium, France, Germany, Greece, Hungary, Italy, Ireland, Japan, Netherlands, Portugal and, of course, the UK – who are particularly worrying because they also have one of the largest bank assets to GDP ratios (570%), which means the country would be hard-pressed to stop a major slide in the financials, which is what, ultimately, undid Iceland.

Wouldn’t it be lovely if we didn’t have to worry about these things?  We’ve grown accustomed to facing Greek debt and no one is even asking why can’t the English pick a government but just you wait, because it will take more than a little bit of luck before this market is off to the races and we can once again dance all night instead of worrying about what’s going to happen in the morning.  Until, then, we’re going to be staying mainly in cash, although some would say that ain’t nothin’ but trash - so we hedge it with TBT, of course!

Yesterday morning’s news prompted me call for an EDZ hedge in Member chat, which is an ultra-short on the emerging markets and Spain’s very close ties to South America make it a very prominent domino if things begin to fall apart.  Things are already falling apart in China, where the Hang Seng dropped another 170 points this morning and 200 of them came after lunch, right into the close.  That drops the Hang Seng all the way to 20,778, down 1,000 points (just under 5%) since Monday and now 7.5% below the April 12th high at 22,400.  India also got whacked for 1.7% and the Shanghai continued to tumble while Japan was mercifully closed today:

If this set of charts made you spit coffee on your keyboard, you are not alone – that’s what happened to me when I pulled up the 2-month set this morning!  Yes, this is the planet Earth – although obviously not a part of the planet covered by the US media, nor part of the planet where the FOMC (not you Hoenig – you are…

Tags: BIDU, debt, EDZ, Greece, GS, Oil, Spain, USO

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Weekly Wrap-Up – Why Does This Rally Give Me the Creeps?

by Phil - April 25th, 2010 8:29 am

I’m sorry, I am trying so hard to get bullish but it’s not working…

My only solution is to, as we often joke, switch off my brain and stop reading the news (listening to it is great as everything is coming up roses in TV-land) and ignore the now-exposed shenanigans on Wall Street (why should I worry about my investments just because the people running the game are up on fraud charges?) and for goodness sakes don’t even look at something as depressing as "The Economic Elite vs. the People of the United States of America," neither Parts 1-3 or Parts 4-6 because that can lead to thinking and thinking makes it REALLY hard to go to sleep at night with your money riding on the top of an 80% market while gold is trading at $1,150 an ounce because of overwhelming global instability and a total lack of faith in the global financial markets. 

Yep, if we don’t think about all that stuff and focus on the good stuff, like the fact that Unemployment is only 3% for those of us who earn $150,000 a year (for the poor it’s 31%), and 93% of our virtually fully-employed analysts predict the S&P will finish the year even higher (although not too much higher) with only Andrew Garhwaite of Credit Suisse in need of an "attitude adjustment" with his puny target of 1,175, which is 32 points lower than Friday’s close.  Fortunately, enlightened analysts like Deutsche Bank’s Binky Chad think we can still squeeze another 100 points out of this rally (about 10%) although Goldman Sachs is wimping out at 1,250, their partner in "whatever you want to call it", JP Morgan is up at 1,300.  So it’s BUYBUYBUY from the gang of 12 and we’ll be whipping Andrew into shape by the next report or he may find himself the fall guy for the next scandal…

Oops, sorry, I wasn’t supposed to mention the scandals as that’s not really a buying premise unless of course you look at the sheer volume of things the IBanks were getting away with and then look at the virtual nothing that is being done about it and then we can conclude there is no reason they can’t pump this market back up to Dow 14,000 because we already know it was such total BS last time, when we dropped 50% like…

Tags: AAPL, AMZN, BWLD, C, DIA, DVN, EBAY, EDZ, FXP, GOOG, GS, GSK, HD, IBM, INTC, IYR, LEG, MS, MSFT, NFLX, OIH, QID, SBUX, SPWRA, SSO, STX, TBT, TZA, UNG, USO, VNO, XLF, XOM

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Turnaround Tuesday – Flip, Flop and Fly!

by Phil - April 20th, 2010 8:10 am

Give me one more kiss, hold it a long long time

Give me one more kiss, hold it a long long time

Now love me baby, till the feelin’ hits my head like wine

Now flip, flop and fly

I don’t care if I die

Don’t ever leave me, don’t ever say goodbye
 

We’re back in business with the old 10-2 play! 

After taking a week off – after I blew the whistle on Mister Stick and revealed the "Super Secret Buy at 2pm, Sell at 10 am Market Strategy," the trade bots are back in business since I called the dip on Friday Morning and the stick on Friday afternoon and the dip yesterday morning and the stick yesterday afternoon (this is not complicated people, stick with me!).  This morning the futures are once again off to the races, looking to kiss Friday’s highs and maybe, this time - hold it a long, long time (or, at least until 10am). 

Fortunately, we were able to execute our own flip-flop yesterday as we fully expected the BS to continue despite the GS charges and I sent out a 9:57 Alert to Members re-upping last week’s 566% bullish plays on the Dow and the S&P that pay off at 11,000 and 1,200 respectively.  We also took bullish plays on GOOG, C, UNG and even the den of evil itself – XLF!  Keep in mind that GS isn’t being busted for manipulating the markets and making a sham of Wall Street.  Instead, like Capone, the Government is going after them on a technicality and, if anything, that is emboldening the other Banksters, especially as Capone-Sachs vows to go down fighting. 

Of course, we were looking for bullish plays to keep us balanced as we wanted to hang onto our longer-term disaster hedges because - despite the market movement – we’re not out of the woods yet!  As I said we would in the morning post, we had some earnings fun, this time with IBM where we did a ratio spread in a 3:38 Alert to Members, buying 5 July $135 calls for $3.50 ($1,750) and selling 4 May $130 calls for $4.10 ($1,640) on the premise that IBM very slightly pulls back on earnings, which it did.  We’ll see how our net $110 spread improves this morning but I’ll guess – very well! 

These are not textbook ratio backspreads because we are not neutral traders, we use options for leverage and…

Tags: EDZ, GS, IBM, Ratio Backspread

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Which Way Wednesday – Fed Up Edition

by Phil - April 7th, 2010 7:56 am

I don’t know what Fed minutes the market red yesterday but the ones I read scared me!

As usual, I went through the minutes in Member Chat (and there’s a highlighted version in Seeking Alpha minus my color-coding) and the red (negative) statements are far outnumbering the green (shoots) in the minutes including little blow-offs like "the Federal Reserve’s total assets had risen to about $2.3 trillion" and "the Desk had been reinvesting all maturing Treasury securities by exchanging those holdings for newly issued Treasury securities" which, if you put them together in non-BS language, pretty much says: "Of the $1.3Tn in Treasuries sold in 2009, it’s hard to see how the Fed bought less than half of them, maybe closer to all of them since we rolled our short-term paper over each time, therefore buying much more than it seems."

Once again, the finger is pointed sqarely at Commercial Real Estate as, according to the minutes: "Conditions in the nonresidential construction sector generally remained poor. Real outlays on structures outside of the drilling and mining sector fell again in the fourth quarter, and nominal expenditures dropped further in January. The weakness was widespread across categories and likely reflected rising vacancy rates, falling property prices, and difficult financing conditions for new projects."  In a real economy, that statement alone would send investors running for the exits but we also got these three – all in a row:

The dollar value of commercial real estate sales remained very low in February, and the share of properties sold at a nominal loss inched higher. The delinquency rate on commercial mortgages in securitized pools increased in January, and the delinquency rate on commercial mortgages at commercial banks rose in the fourth quarter. The percentage of delinquent construction loans at banks also ticked higher in the fourth quarter. 

Delinquency rates on credit card loans in securitized pools and on auto loans at captive finance companies remained elevated in January but were down a bit from their recent peaks.

Total bank credit contracted substantially in January and February. Banks’ securities holdings declined at a modest pace after several months of steady growth, and total loans on banks’ books continued to drop.

The Fed blows off this bad news by noting that CDS rates were ignoring the weakness in CRE (so we should too?) and, even worse is the way the Fed keeps…

Tags: DIA, EDZ, FXP, GILD, GLL, MEE, Oil, RIMM, TZA

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