Monday Market Movement – Making M’s

They're forming them now but it won't be obvious until we're on the other side and re-testing the January lows.  By then it's a little late, isn't it?  That's why, on Friday, we went back to CASH!!! and took a poke at 5 Trade Ideas that can Make 500% if the Market Falls. 

Maybe it won't fall, maybe THIS TIME we're going to bust out to new, all-time highs despite all the woes in the World (see today's news round-up).  Who cares?  As you can see from our January Trade Review, where we had option trade ideas that returned 527% and 1,520% on TSLA (long hedges, we're overall short), 210% on SCTY, 32% on SSO, 633% on DBA, 43% on CLF, 1,340% on LULU, 496% on SLW and 3,150% on BRCM on our cash outlays.   Those are just one-month returns! 

Overall we had 118 Winning Trade Ideas in January for our Members against 27 that have lost money (so far) – and the above examples were bullish trades in a falling market!  So, it's not like we're not confident that we'll find something great to do with our cash – we would just like to PATIENTLY wait for better entries.  It's only two months until April earnings, when we KNOW we'll have more bargains thrown at us by the end of that month, in the very least.  

And, of course, we have our Futures trades.  In last Tuesday's LIVE Webcast, we demonstrated trading the Oil (/CL) and Natural Gas (/NG) Futures.  This morning, we put our skills to the test, shorting /NG at $5.20 (/NGJ4) and $6.42 (/NGHF) in our Member Chat Room.  Already (7:13) /NG hit $5.17, up $300 per contract, and the Egg McMuffins are paid for – but we think we can do much better today as the weather, as we expected, warms up a bit!  

That's all we look for in early morning Futures trading, just enough money to buy a nice breakfast and maybe lunch if all goes well.  If you keep your expectations low, you won't be disappointed and SOMETIMES, quite by accident, you catch a big run and make some good money.  Though the drop in the Dollar (to 80.15), early this morning, was unjustified and, already, it's breaking back over 80.30.  This is not complicated folks, we just have to pay attention.  
Having more tools in our toolbox makes us more comfortable moving back to cash, as we can then use our margin to make quick in and out trades on the Futures, as well as to sell puts on stocks we REALLY want to own if the markets do, in fact, crash.  If the markets don't crash, then we don't get to own our stocks for discount prices but we DO get to keep the short put money.  

For example, KO dropped down to $37.18 from $40 on disappointing earnings but we feel good about them surviving, long term.  While $37 is very attractive, $35 is about as low as they've been since early 2012 and we'd LOVE to own them down there.  So, we SELL 2016 $35 puts $3.50 and that obligates us to buy KO for $35 but it PAYS us $3.50 in exchange for that promise.  If we REALLY want to own KO for $35, then the $3.50 is essentially FREE MONEY – as our worst case scenario is getting to buy KO for $35.  

We can then use that $3.50 to buy something else or just keep the money to drive our net entry on KO (should it be assigned) to $31.50, which is $5.68 (15%) below the current price.  Now, let's say we think the market will fall from here.  We can short the Russell using TZA, a 3x ETF ($16.35) by buying the April $15/18 bull call spread at $1.10.  Since that spread is currently $1.35 in the money, we get 100% of the gains of a move up in TZA from here to $18, which is 10%, which would be a 3.3% drop in the Russell, to 1,130.  
Obviously, a 3.3% drop isn't going to put much of a scratch on our portfolio but it's only a FIRST hedge.  If the market begins to drop, we will layer more bearish plays on.  This one is very simple and, for example, if we are willing to own 1,000 shares of KO at $35, we sell 10 short 2016 $35 puts for $3.50 and collect $3,500 and let's say we put $2,200 into 20 of the TZA spreads.  

If the Russell does pull back slighlty, our hedges will pay off $6,000 and we STILL have $1,300 in cash left from our short KO puts so now we have a $7,300 discount on our 1,000 shares of KO or, if the market recovers and KO holds $35, we simply make $7,300 for doing pretty much nothing.  

Remember, our "worst-case" on these types of trades is that we end up owning a stock we REALLY want to buy for 15%-20% below the current strike while our best case is a $7,300 hedge against a small decline in the market.  Keep in mind, if the market DOES NOT decline, then our other long positions should be doing nicely and, if the market DOES decline, then our $7,300 will go a long way to buying more stocks at a discount (because we remain long-term bullish). 

As you can see from Dave Fry's charts, we're still not out of "head and shoulders" territory on our major indexes but, as I noted above, it's more those little "M" patterns that tend to form in even the most bullish of charts that I'm keeping my mind on now.  

We were artificially pushed off lower support on very low volume – that wasn't the kind of test that's likely to lead the market to new highs and the macro picture certainly doesn't support it so it's back to CASHY and CAUTIOUS into the end of February and, for those of you who heeded my call into the end of 2013 – you know how much more relaxing that position can be!  

It's going to be an interesting week but Housing Data is going to batter us tomorrow and Durable Goods can be a real market-killer on Wednesday, so - be careful out there…