I’ve seen the needle
and the damage done
A little part of it in everyone
But every junkie’s
like a settin’ sun. – Neil Young
Come on Bennie, give us another hit!
We’re hurting man, we need the good stuff. The markets love to get high and, just when we thought the trip was never going to end – we crash hard! Big Ben and his Central Banking buddies fed our commodity addiction with a flow of easy money and the speculators got so hooked that they have now overdosed and the price of commodities is now killing the host (the Global Economy).
Gee, who could have ever seen that coming?
Oh yeah, right, it was me. Well, very good then… I guess. There’s nothing like a good correction to make some fast money. In yesterday’s post (and Tuesday’s) I mentioned our TZA and EDZ hedges and thank goodness we dumped XLE as they flew back to $78 on the oil madness (more on that later). In yesterday morning’s Alert to Members we added IWM $83 puts at $3 and they finished the day at $3.93 (up 31%) but we were done with them earlier as we flipped bullish when they pulled back to $3.75 and grabbed the IWM weekly $80 calls at 1:03 at .66 and we flipped out of those at .93 (up 40%) for a nice, quick gain.
We also lost .20 on an SSO trade, trying to catch one more bear wave that didn’t come but, on the whole – Wheeeeeeeeeeeeeee! This is the best ride EVER!!! We love a volatile market, especially when it gooses the VIX (something we were also long on) as that gives us better and better prices for the options we sell to suckers who think they are smarter than the market. Yes, we buy them too – but look how fast we dump them. Options are great for momentum trading and for controlled leverage but the REAL MONEY is made BEING THE HOUSE – not the gambler and what we really love to do is SELL options, not buy them.
When the VIX is low, selling options is much less fun but, when the VIX goes up, so does the amount of money people will pay us for all sorts of things. For example, we can get paid $1.55 to promise to by CSCO for $17.50 in January. CSCO is $18.40 now so buying it for $17.50 less the $1.55 we are being paid now to promise to buy it (we sell a Jan $17.50 put) nets out to $15.95 to buy CSCO. That’s 13.3% less than it costs now. Even better, the net margin on this transaction (according to ThinkorSwim) is $2.75. Even if you allocate 50% margin to the possibility of owning CSCO at $15.95, that’s still $1.55 paid on $8, which is 19.37% in 10 months and you get paid in full as long as CSCO doesn’t GO DOWN 90 cents.
Getting paid 20% if a stock doesn’t go down 5% – BRILLIANT!
I was invited to speak to an investing group last month and it was amazing to me how few people utilize even the simplest of hedging strategies like this to enhance their portfolio performance. If you REALLY want to be a long-term owner of CSCO – what is the downside? If you were going to buy it now and buy more if it got cheaper (dollar cost averaging), why not skip a step and just buy it cheaper now? That, in a very brief nutshell, is all we try to teach people to do at PSW – you don’t have to be the sucker buying premium and watching time eat away your positions – you can be the guy selling premium and taking worry-free vacations. You don’t have to join my site to learn this – there are books on option strategies like our own Option Sages “Secrets to Tame Volatile Markets,” which is the updated version of the EBook our Members get. I don’t get paid for this but Gareth is a friend who happened to write a very good book – so take my recommendation for what it’s worth.
Now, let’s see if we can figure out what the market is worth… How quickly the worm has turned, right? Actually, wrong – you are all a bunch of whining, sniveling babies who forgot how a real market acts thanks to B-B-B-Bennie and the Fed’s 3-month morphine drip of POMO that’s had investors in a stupor, ignoring bad news that was piling up like trash in a crack den. We finally had a little wake-up call from our friends in the Middle East but, don’t worry, Uncle Ben’s coming back today with $6Bn of the “good stuff” this morning and promises to score us another $8Bn tomorrow and that should hold us over through the weekend, as we expect another $26.5Bn next week – Ahhhhhhh…..
So far, we’ve had minor pullbacks at best: The Dow fell from 12,370 (rounding) to 12,070 at yesterday’s low – that’s just our 2.5% rule – what did you expect to happen after a virtually unbroken run from 11,800 at the end of January (5%) and from 11,000 at the end of November (12.5%)? We expected a retrace of 20% of the run up (2,370 points) so that’s about 500 points, back to 11,800, which would be a proper correction, even in a hyper-stimulated bull market like this one.
IN PROGRESS
