Tag Archives: philip-davis

Faltering Thursday – Here Come Those Tears Again

Summary The S&P is still knocking on that 2,000 line. Our Option Opportunity Portfolio ends month 2 up 15.1%. A quick review and a look at a couple of trade ideas we’re still hot on. And the struggle continues. As you can see from Dave Fry’s SPY chart, this is the worst kind of ” rally ” where we get big volume sell-offs followed by low-volume, bot-driven pump jobs aimed to sucker the retailers into buying the dips so the guys driving the tradebots can dump more shares on them. Wash, rinse and repeat until the big boys are all cashed out (we already are!) and then they pull the rug out and crash the market . The crashing part will be easy – all they have to do is not prop it up but, for good measure, ” THEY ” can always send their minions out to TV stations with a few well-placed downgrades to really send things into a tailspin. Suddenly, Russia bombing Turkey Syria, China’s collapsing economy, Europe’s slow economy, the refugee crisis, Fed raising rates, terrible US Jobs and Manufacturing numbers, Brazil or Venezuela’s collapsing economies, Greece (again) or even our Debt Ceiling (again) will suddenly matter and the markets will quickly drop 10%. I was on Benzinga’s Pre-Market Show yesterday morning talking about my value reasons for being short up here (S&P 2,000): It’s not that we’re all bearish – we have a lot of material stocks and our portfolios are at record highs this week so THANK YOU manipulators – it’s just that we think the stocks we already cashed out of have further to fall before they are ” correctly priced ” – like the many material stocks we stuck with when we cashed out the rest. Having a materials-heavy portfolio this past week turned out to be the perfect way to play this bounce. In fact, today is the end of month 2 for our Option Opportunities Portfolio over at Seeking Alpha, where our goal is to make $5,000 a month (5%) in a $100,000 portfolio and I’m very happy to say that our closed positions are, in fact, up $14,905 (14.9%) after 60 days: (click to enlarge) As you can see, we only had to close 12 positions, averaging better than $1,000 per position with an average hold time of just over 2 weeks but, as we do that, we’ve been putting some of our profits back into longer-term positions that are much more relaxing to manage but still give us those great monthly returns. If you are interested in this kind of trading, you can check out our open positions by signing up here and, if you don’t like our strategy after looking – SA has a generous satisfaction guarantee. (click to enlarge) One of our long positions, Lumber Liquidators (NYSE: LL ) is going to be having a good day as they settled up with the justice department over their importation of wood that violated EPA standards by paying a $10M fine . “Ow, my wrist” said a LL spokesman! This fine is NOT related to their flooring issues but it lets investors know that fears of fines that break the company are almost certainly unfounded (which was our investing premise back on 9/25). The stock should be up 10% this morning so even if you didn’t use our option play – which is on the way to a 100% gain – it’s still a pretty good return for 2 weeks, right? This is what we mean by ” Option Opportunities ” – we seek out mispriced stocks and then use options to make hedged and leveraged bets to take advantage of the situation. You can always just play the stock – but it’s way more fun with options! Our OOP Members also have access to our Live Weekly Webinars (Tuesday’s 1pm, EST) and you can view a replay of this week’s here , where we had a wide-reaching conversation about the current market situation and our featured trade idea was for NLY – which then did this: (click to enlarge) We’re value investors and that means we know how to find opportunities in any kind of market – even the ones we’d rather not play in like this one. Still, my overriding concern about the S&P’s ability to take out the 2,000 line is keeping us ” Cashy and Cautious ” in our 4 Member Portfolios, as we wait to see how the situation resolves itself. As I noted at Benzinga yesterday, I think we fail here and leg back down to 1,850 but that is good and health and we’ll be happy to do a bit more buying down there (we already have an offer on AAPL at around $100, but using short put options to drop our net entry to $75). As we come into earnings season, there are going to be tons of fun short-term trades we can take. Just yesterday we did a hedged short on Netflix (NASDAQ: NFLX ) for our OOP and our short play on oil using the Ultra-ETF (NYSEARCA: SCO ) is going well as yesterday’s inventories were a bust. There’s always something to trade – that’s why we have no fear keeping our portfolios 90% in cash – if we can make 15% in 2 months using just 10% of our cash – why risk exposing ourselves to the downside?

Back To Cash, Back To Basics: Buying Stocks For A Discount

Our Portfolios are over 75% cash as we simply don’t trust these markets. We’re looking forward to going shopping but shopping wisely. That means reviewing some of our basic option strategies – techniques that makes us money. We took the money and ran – now what? As you can see, our Long-Term Portfolio is now swimming with cash as we cashed in our winners and kept the losers. Our losing positions include 24 short put sales that currently represent about $150,000 of that “Negative Market Value,” though it’s not really negative because we already have the Cash on Hand (a great benefit of selling puts), so it’s just a matter of how much cash we need to give back in the end. When we sell a put, we are promising to buy a stock for a certain price (the strike) and we get paid by the holder of the stock to make that promise. They benefit by putting a price floor under their stock and we benefit from getting cash in our pockets and, ultimately, from potentially buying a stock cheaply. Unfortunately, most people are traders, not actual investors, and they tend to forget why they entered a short put trade in the first place. Because of that, when the short put positions turn negative in a market downturn, they tend to start thinking of them as losses, rather than progress made towards buying the stock at our discount target. (click to enlarge) In the 2013 example, the stock that is used is AT&T (NYSE: T ) and the strategy was to sell the Jan 2015 $30 put contracts for $2. This obligated us to buy the stock for $30 in exchange for $2 paid to us by the stockholder. Had it been assigned to us, our net entry would have been $28 (as we had the $2 in our pocket) and, as you can see, $28.90 was the 2014 low and it hit Jan 2015 well above $30. So, in effect, we would have kept the $2 and not owned the stock and we could have then turned around and sold the Jan 2016 $30 puts for $2 and already we can sell the Jan 2017 $30 puts for $2.75 (higher premiums due to market volatility) or the 2017 $28 puts for good old $2. Either way, the concept is we don’t have to own T at all (no cash out of pocket) yet we collect $2 a year, which is more than the $1.88 annual dividend we’d be buying the stock for. If T ever does get a major selloff, we certainly don’t mind owning it cheaply and, since we’ve already collected $6 for not owning the stock, our net entry would be $24 – $8.50 (26%) below the current price. That’s our ” worst case ” – and then we can turn around and sell calls against the stock, promising to sell the stock to someone else at a pre-determined strike. If, for example, we were assigned T at $30 tomorrow, we could turn right around and sell the 2017 $30 calls for $3.50. That would drop our net basis to $24-$3.50 = $20.50 and, if the stock were finally called away at $30, our final profit would be $9.50 (46%) plus 6 dividend payments of 0.47 = $2.82 for a total profit of $12.32 on the $20.50 cash we ultimately put to work (60%). And that is how easily we slide into our 7 Steps to Consistently Making 20-40% Annual Returns: In a video from 2013 and you’ll notice the example was Transocean (NYSE: RIG ), which was trading at $44.13 when the trade was initiated on May 5th of 2012 and is now trading at $13.45 – a total disaster – or was it? As noted in the video, we sold call contracts for $1.60 per month consistently against it, collecting $9.67 before being called away with an additional gain at the $46 strike. In fact, this strategy forces us to cash out when a stock jumps up on us and, as you can see from this chart, that made for the perfect exit in the fall of 2014 at the $46 price mentioned in the video. Once called away, we don’t jump right back in and buy the stock again, because the fact that we wait patiently for a stock to be low in the channel and then sell those puts to give ourselves a 15-20% discount on the next entry and then go back to our call-selling strategy give us a huge edge on passive investors. We combine that with our basic strategies for establishing new positions – especially the practice of scaling in to new positions . We do, in fact, have 50 RIG 2017 $13/20 bull call spreads in our Long-Term Portfolio and it is our intent to sell puts, like the 2017 $13 puts for $4.50, which would drop our net entry to $8.50, which we feel is a good enough value on the stock to commit to owning 2,500 shares (25 contracts at $11,250). This more than pays for the spread so we make a profit on every penny the stock is over $13 times 5,000 shares we control and our worst case is we’ll own 2,500 shares of RIG for the long-term. (click to enlarge) Another great, live example of a put-selling strategy is Sotheby’s (NYSE: BID ), which is in our Options Opportunites Portfolio . Our cur rent position is 20 long Jan $34 calls, which we bought for $4 and are now $2.70 as BID has gone down further than we thought but now it’s very attractive to sell some puts to offset the cost of those calls. With the stock at $34.09, the 2017 $30 puts can be sold for $3.50, which is a net entry of $26.50, a nice 22% discount off the already low price. Selling just 10 of those reduces the basis on our 20 long calls by $1.75 each and now we own those long Jan $34 calls for net $2.25 and we expect Sotheby’s to be back in the $40s after their next earnings report (11/11) – plenty of time for us to cash out with a nice profit! It’s a very choppy market and we’ve gone mainly to cash but that doesn’t mean we won’t be agreeing to take other people’s money in exchange for our promise to buy their stock if it gets 20% cheaper than it is now. As the great Warren Buffett like to say: ” Be fearful when others are greedy and greedy when others are fearful .” Our strategy of selling puts to initiate positions sets us up to be buyers when others are panicking and then, once we own the stock, our strategy of selling calls sets us up to be sellers when others are in a buying frenzy. That’s why it works so consistently! Disclosure: I am/we are long BID, RIG, T. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: Positions as indicated but subject to RAPIDLY change (currently mainly cash and an otherwise bearish mix of long and short positions – see previous posts for other trade ideas). Positions mentioned here have been previously discussed at www.Philstockworld.com – a Membership site teaching winning stock, options & futures trading, portfolio management skills and income-producing strategies to investors like you.