Hedging For Disaster – Now, Are You Ready To Listen?
A follow-up to our September 4th post with new, actionable trade ideas. Our Options Opportunity Portfolio in now up 8.1% in week 7 – here’s how we did it. For those who can’t, or won’t, go to cash – we have some great hedging ideas. 3 weeks ago, we told you how to protect yourself from a market downturn . 21 days is not a lot of time to test an investing premise, but it’s good to take a look at our progress on this relatively small market dip (that we accurately predicted), so perhaps you’ll take the necessary precautions to avoid taking losses in the next leg of downturn. My biggest regret in 2008 was ” trying not to be so gloomy “, so now I’m going to keep reminding you to hedge (or better yet, get to cash!!!) – all the way down to the bottom. As you can see from Dave Fry’s S&P 500 chart, we’re barely down on the S&P from where we were on September 4th, so you’d think our bearish hedges wouldn’t pay off – but you’d be wrong! Why? Because, like our long market conditions, our bearish hedges follow our Be the House – Not the Gambler™ strategy, which allows you to make money in relatively flat markets too. Let’s take a look at the hedges we showed you that day (September 4th) from our Short-Term Portfolio: (click to enlarge) These are simple option trades called ” bull call spreads ” – something our PSW Members learn in their first week of trading stock options. This isn’t an educational post, so we’ll go right on to the results portion of the discussion: The ultra-short S&P (NYSEARCA: SDS ) September $21/24 bull call spread expired on 9/18 at $2.48 – up 50% from the $1.23 net we showed you on 9/4 (5th column from the right was that day’s prices). With 50 contracts, the position we showed you made $6,150 in 3 weeks. The ultra-short Nasdaq (NASDAQ: SQQQ ) September $21/24 bull call spread expired on 9/18 at $1.48 – up 169% from the 0.65 net we showed you on 9/4. With 50 contracts, the position we showed you made $4,150 in 3 weeks. The ultra-short Nasdaq January $18/30 bull call spread closed Friday at $4.50 – up 45% from the $3.10 net we showed you on 9/4. With 50 contracts, the position we showed you made $7,000 in 3 weeks. The ultra-short Russell (NYSEARCA: TZA ) October $11/14 bull call spread closed Friday at $1.28 – up 70% from the 0.75 net we showed you on 9/4. With 50 contracts, the position we showed you made $2,650 in 3 weeks. So that’s $50 less than $20,000 in gains from positions we showed you from our Short-Term Portfolio just 3 weeks ago (you’re welcome). At the time, our $100,000 portfolio was up 214.5% and $20%, added another 20% to bring us up to 234.5% all by itself; but we also wisely cashed in our longs right at the September highs, locking in gains on those positions as well (as noted in that post) – so our net is a bit better than that. I would tell you that you can learn all about hedging and options strategies at Philstockworld.com but wait, there’s more! That’s right, we also showed you our long trade ideas for our Option Opportunities Portfolio – a portfolio we have partnered with over at Seeking Alpha to help teach people basic option trading strategies following our virtual portfolio. At the time (same 9/4 post), the positions looked like this: With the full image, it’s easy to see what I meant by the current price. As with our Short-Term Portfolio at PSW, the Option Opportunities Portfolio practices a strategy of cashing in the winners and adjusting the losers (assuming we still like them) until they are also winners and we can profitably take them off the table. The performance of the above positions (and we detailed our logic for each one in the ” Hedging ” post) over the last 3 weeks has been: BID January $34 calls are now $1.95, down 28% for a loss of $1,500 in 3 weeks. We have rolled the position to the April $32 calls, now $3.80. DIA September $155/159 bull call spread expired at $4, up 207% for a gain of $5,400 in 3 weeks. RJET February $2.50/4 bull call spread is now net 0.45, up 350% for a gain of $350 in 3 weeks. IRBT January $25/Dec $32 bull call spread is now net $4.24, up 19% for a gain of $690 in 3 weeks. CCJ September $13 calls expired at 0.32, down 60% for a loss of $480 in 3 weeks. CCJ short December $14 calls are now 0.36, down 69% for a gain of $790 in 3 weeks (because we were short, not long). CCJ March $11/Jan $12 bull call spread is now net $1.05, down 58% for a loss of $1,450 in 3 weeks. TASR 2017 3-legged spread is now net $1, up 222% for a gain of $1,800 in 3 weeks. USO April/January 3-legged spread is now net $1.73, up 5,766% for a gain of $3,400 in 3 weeks. They weren’t all winners (can’t be, as we bet against ourselves to hedge our positions) but, as a group, the trades we showed you as a free sample just 23 days ago are now up $9,000, which is 9% of our $100,000 Portfolio. Of course it’s a live portfolio and we’ve added and subtracted positions since then, but our net return of 8.1% roughly reflects the gains we’ve managed to take off the table and now, hopefully, our new round of trades can do just as well in the next 3 weeks (sorry, no more freebies!). Would now be a good time to sell you on looking into our service? But wait – there’s more! In that same free post, I also laid our 3 brand-new trade ideas to prevent your portfolio from losing money in the rough markets we forecast ahead. As I noted above, we haven’t had much of a correction (yet) but, since we used our patented ” Be the House “™ strategy to lay out our trades – we still did pretty good. Buying 10 SQQQ October $22 calls for $4.20 ($4,200) Selling 10 SQQQ October $28 calls for $1.90 ($1,900) As you can see, ProShares UltraPro Short QQQ ETF ( SQQQ) can be extremely volatile and that’s why we were comfortable with such a wide spread (all the logic is laid out in the original post, which was more instructional). Now those October $22/28 bull call spreads are net $2.60 – up just 13% ($130) and still very playable as a hedge. We also suggested paying for the spread by selling the TASR 2017 $20 puts, which are now $3.60 (up $200) and we still like that combination but remember – you are obligating yourself to own 1,000 shares of TASR at $20 (now $23.58) – keep that in mind. Our second big hedge of that day was far more aggressive: Buying 20 TZA Oct $10 calls at $2.20 ($4,400) Selling 20 TZA Oct $13 calls at $1.00 ($2,000) Selling 10 TZA Jan $10 puts for $1.00 ($1,000) (click to enlarge) Another really volatile one but, as you can see, it’s well on track to our $13 goal and already the net on this 3-legged spread is $1.24, up 77% from the net 0.70 start and good for a $1,080 gain. It’s well on the way to a full $4,600 gain, so it’s still good as a new trade – just not as good as it was when we told you about it 3 weeks ago! Our final hedge from that day was our most aggressive as far as commitment. We felt very strongly the S&P would not hold 1,950 and we wanted some nice portfolio protection but, since that’s expensive, we offset the cost by promising to buy more of our Stock of the Year, Apple (NASDAQ: AAPL ): Buying 30 SDS March $23 calls at $3 ($9,000) Selling 30 SDS March $28 calls at $2 ($6,000) Selling 5 AAPL 2017 $70 puts for $4.35 ($2,175) (click to enlarge) (click to enlarge) As you can see from the chart, SDS is well short of our goal, but does show the tendency to show dramatic gains on a sell-off. At the moment, the March $23/28 bull call spread is up slightly (+33%) at net $1.33 (+$990) but the short 2017 Apple calls have already dropped to $2.73 for a very nice $810 gain on 5 contracts. That means our net $825 spread is already $1,800 and up 121% ($975) in just 3 weeks. The maximum return on that spread is $15,000, so another $13,200 to go means you didn’t miss much if you are coming in late to the party – it just seems that way, if you didn’t catch the entries we published for our members (and for you) back on September 4th: “As I mentioned, we’ve gotten mainly to cash, but that doesn’t mean we don’t find new opportunities for trades almost every day and that’s all the commercial you’re going to get in this post because I’m sure the performance of the picks we publish speaks for itself and we assume you’re an intelligent man (or woman) and can make your own decision as to whether you want to invest in learning our investing techniques.” “Learning how to use options (and Futures – but that’s another article) to hedge your portfolio gives you BALANCE that can steer you through the roughest market waters – keep that in mind next time your portfolio is heading for the rocks!” Enjoy your weekend, – Phil