Wheeeeeeeee!
We love a good market sell-off – especially when WE TOLD YOU SO and we placed our bets accordingly. I hope that you were able to do the same as our CASH!!! looks pretty good right now while our Short-Term Portfolio, which was up 123.9% at Friday's close (see our weekend Portfolio Review), closed yesterday at 129.5% – up $5,583 in 3 days!
The cool thing is, as you can see, that we are almost entirely in CASH!!! and using very little of our margin, which keeps us flexible in these crazy markets. If the market heads lower (and it's already off this morning in the Futures), our profits will accelerate as we added 50 SDS June $20 calls at $1.05. As I had said to you in Friday's morning post, we were looking to short the S&P or the Dow on the BS morning pop – and we did.
Ultra ETF hedges are a great way to take advantage of a short-term drop in the markets, they give you excellent bang for the buck because SDS, for example, is a 2x ETF that tracks the S&P, so a 5% drop in the S&P is a 10% pop in SDS.
As I noted above, on Friday, with the S&P at 2,105 we pulled the trigger on 50 of the SDS June $20s for $1.05, costing us $5,250. Since we are mainly in cash in our Member Portfolios, this was more of a bet than a hedge (and we already have long-term hedges that are less aggressive). So far, the bet has paid off and the June $20 calls finished yesterday at $1.30 – up a quick $1,250 (23.8%) so far.
Of course, now comes the fun part though as we're mostly in the money with the S&P at 2,080 (down 1.2% from our entry) and that means our Delta on the option is increasing (now 0.93) so we gain almost a full $1 (95%) for each 2.5% lower the S&P falls.
Think of that in terms of a hedge. If you have a $100,000 bullish portfolio and you want to protect yourself against an S&P drop of 10% and you are well correllated (a different educational post if you want to learn how to do that) and you expect to lose $10,000, then we KNOW SDS will gain 20% on a 10% S&P drop. Since 20% of SDS takes us from Friday's 20.50 to $24.60, we KNOW the June $20 calls will be $4.60 on a 10% S&P drop.
Since we know that, we can then calculate how many $20 calls we need to pay us $10,000 – and that would be 22 (100 contracts per unit) for $1.05 or $2,310 would be the cost of insuring $100,000 against a $10,000 loss between now and June. As I mentioned above, our SDS play wasn't a hedge, it was a bet – because we were fairly sure we'd be getting a drop (and we're only looking for 5%). If we're right, and SDS hits just $22 – we'll get back at least $10,000 for a $4,750 profit (90%) in less than a month.
Learning how to make money in down markets WITHOUT having to run in and out of your main positions (generating nothing but fees for your broker) is the key to becomming a successful long-term investor.
We also employ hedging on our long-term positions and our Long-Term Portfolio, which is also mainly in cash, has only lost $100 since Friday. That's why our Short-Term Portfolio play on SDS was a bet and not a hedge – the LTP doesn't need protecting as it's very well-hedged internally. Balance is the key to our trading style:
Better learn balance. Balance is key. Balance good, trading good. Everything good. Balance bad, better pack up, go home. Understand? – Miyagi (sort of)
IN PROGRESS
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