Business Magazine

Range Trading 101 – The Balancing Act

Posted on the 03 September 2011 by Phil's Stock World @philstockworld

We were fortunate enough to go bearish at the beginning of the month, when I cautioned we could correct 20% from our highs and then we became "Cashy and Cautious" for the next couple of weeks because we anticipated the middle of our W pattern, leading up to the Fed’s hinting at QE3 in Jackson Hole so we could repeat the rally we got last year, on QE2.  It was all looking good – from our bottom call of the 19th until the last day of the month, when we we now see that my Tuesday title "Breaking Higher or Dressing Windows" seems to have been answered with the latter.  

This, however, is not an article about that.  This is a good time, I thought, since we came off a very cashy bias – to talk about how we look to make additions and subtractions to our portfolios over time (in this case, the past two weeks).  Of course we are talking about virtual trades and virtual portfolios – keep that in mind, we’re just going to do our best to see what trade ideas worked, which ones didn’t and which ones COULD have been used to build up a balanced collection out of the many, many trade ideas we have each week.  

Keeping our eye on the Big Chart and thinking about where we were each day, I’ll try to lay out the trade ideas in order and comment when appropriate so bear with me as this article will have loose structure as it’s main goal is to begin a conversation about trade selections.

Also, Elliot (our Stock World Weekly Editor) has designed a cool graphic to give us a quick view of our virtual asset allocations.  Coming off our very Cashy, day-trading weeks in the middle of the month, we are pretty much back to where we like to be early in a market cycle:  

Range Trading 101 – The Balancing Act

 

Friday, Aug 19th:  TGIF – Are We There Yet?  

I led off the post saying "We are now officially getting silly."  That day began only 350 points below where we are today on the Dow so keep that in mind going forward!  This is not an outlook post though, we’ll do that later in the week as first I like to look backwards before we look ahead.  Germany was down 30% in 30 days – that seemed very excessive and the VIX was up around 42, also seeming excessive so, despite the scary-looking futures, right at the top of the main post I put up the following trade ideas:  

  • EWG Sept $19 puts, sold for $1 – now .45 (up 55%)
  • EWG Jan $17 puts, sold for $1.25 – now .90 (up 28%)
  • VXX Sept $45/40 bear call spread at $3.40, selling VXX Sept $45 calls for $3.25 for net .15 – now net $2.76 (up 1,840%)
  • IMAX 2013 $15 puts sold for $4 – now $2.70 (up 32%)
  • XOM at $70, selling 2013 $55 calls for $18.65 for net $51.35 – now net $52.34 (up 2%) 
  • XOM at $70, selling 2013 $55 calls for $18.65 and 2013 $57.50 puts for $5.20 for net $46.15 – now net $47.54 (up 3%)
  • Russell (/TF) Futures, long at 650 – now 682, up $100 per point per contract ($3,200) 
  • Nasdaq (/NQ) Futures, long at 2,050 – now 2,168, up $20 per point per contact ($2,360)
  • Oil (/CL) Futures, long at $80 – now $86.73, up $10 per penny per contract ($6,730)

Range Trading 101 – The Balancing ActThat was just in the main post!  These are, of course, the current prices.  During the course of two weeks, most of the bullish positions did MUCH better and, of course should have been stopped out by now but, I’m not trying to prove anything here, so we’re just using Friday’s (9/2) close as a reference point – obviously the bullish trades did better and the bearish trades did worse.  

So, coming off a cash position, the idea is to look at a bunch of trades like this and decide which ones feel right to you, based on your own outlook and, more importantly, which ones fit in with both the size and goals of your portfolio.  We have a series of articles on "Smart Portfolio Management" in our Education Section so we’re not doing that here but, if you have a small or restricted account, you don’t want to play the Futures or a trade where you sell naked puts and the XOM trade is, of course expensive as it requires at least $5,135 to be spent – if you are scaling in, that’s got to be at least a $20,000 allocation and that means you’d better have at least a $200K portfolio before you go throwing $5,135 at XOM.  

It’s OK to short an EWG contract and collect $100 – as long as you are ready, willing AND ABLE to pay $1,800 to be long on Germany at net $18.  Again, scaling in, you would need to be willing to go to $7,200 so we’re talking $100K portfolio territory for that trade but, with short puts, it is OK to go into a position with a stop loss and that’s why we do occasionally do use them in our $25KP BUT – that is a VERY AGGRESSIVE portfolio which is, in theory, the aggressive 10% of a conservative $250,000 portfolio.  If all you have is $25,000 – getting stuck with $1,800 worth of Germany can be a big inconvenience!  

Range Trading 101 – The Balancing ActAlso (and I won’t be going this in depth on every day – hopefully), if you like a trade idea like the VXX bear put spread but can not or should not sell naked calls – it’s fine to just pick up the bear spread without the pair trade and it still pays a very nice $1.60 back on $3.40 if VXX finishes below $40 at September expiration (now at $41.48).  Sadly, if you have less money to start, you are likely to make less money as the bigger hedges are not available to you BUT – if you are not anxious or greedy or impatient, $25,000 can turn into $50,000 and then into $100,000 and then you can start taking the more aggressive trades BUT – if you try to take them when all you have is $25,000 – then your chances of ever getting to $50,000 become VERY SLIM!  

Getting back to Friday, then, we opened at 11,000 and finished around 10,825 so a generally down day and we were still worried that it wasn’t going to be the bottom we expected.  In the morning Alert I put up 7 long put ideas as CATASTROPHIC INSURANCE plays but cautioned that they were not needed while the markets were going up, nonetheless, I’ll list them here as that’s what we were thinking that morning:

  • AXP Jan $30 puts at $1.15 – now .64 (down 44%)
  • BIDU Jan $50 puts at $1.10 – now .72 (down 34%) 
  • CAT Jan $57.50 puts at $2.10 – now $1.61 (down 23%) 
  • CMG Dec $165 puts at $2.10 – now $1.75 (down 17%)
  • DECK March $42.50 puts at $2.20 – now $1.40 (down 36%) 
  • FCX Jan $32.75 puts at $1.56 – now $1.50 (down 4%)
  • GOOG Jan $300 puts at $3.10 – now $2.40 (down 23%)

Range Trading 101 – The Balancing ActIf you are trying to be 20/15 bullish in a $100,000 portfolio then you are looking for net $20,000 worth of longs and net $15,000 worth of shorts.  Since your allocations are no more than $10,000 per position and that would be scaling in at $2,500, $2,500 and $5,000 then the trick is to allocate $15,000 worth of short positions – but in proportion to the longs as you add them.  Also, if your long is the XOM buy/write (above), that has a net of $46.15 and a break-even at $51.83, then that has a 25% built-in protection and doesn’t really need to be hedged.  

Only if you have aggressive open calls do you need aggressive open puts protecting them so let’s say you went with VXX, IMAX and EWG at $2,500 each.  With IMAX and EWG, you still need to consider that you have 20% built-in protection in your position so those don’t really need much of a hedge so that means that a single hedge of $2,500 or, since they are straight puts, a couple of hedges at $1,000 each should be just fine to protect the while $7,500.  Another important thing to keep in mind is how much you expect to MAKE on your longs vs. how much you expect to LOSE on your hedges.  If your longs aren’t likely to outgain your hedges by 2:1 (assuming you are long, of course) then you are going to run into problems!  

In the above example, let’s say we sold 25 EWG puts for $1 ($2,500) and risked a stop at $1.50 (down $1,250).  Those are up $1,375.  Selling 6 IMAX puts for $4 ($2,400) made $520 and 3 VXX spreads (as they were $15K in margin) made $783.  So that’s a gain on the long side of $2,678 and if you had offset with $1,000 of the two worst performing puts (AXP and DECK), those would have given back $800 for a net gain of $1,678 – which is just about right for a bullish balance.  As I said, that’s a simplistic view of timing and no use of stops but you get the idea.  With a little position management, you can greatly improve those results!  

  • Gasoline (/RB) Futures at $2.80, now $2.84 – up $420 per penny per contract (up $1,680)
  • $25KP:  20 HPQ Sept $26 calls at .60 ($1,200), selling 5 Sept $23 puts at $1.57 ($785) for net $415 – now net $240 (down 57%) 
  • TZA Oct $57/75 bull call spread at $3, selling $63 calls at $6 for net $3 credit, now net $1.95 (up 35%) 
  • QQQ Jan $54/48 bear put spread at $2.75 – now $2.01 (down 27%)
  • TIE 2013 $12.50/17.50 bull call spread at $1.80, selling $12.50 puts for $2.60 for net .80 credit – now .10 (up 112%) 
  • TNA Sept $35/39 bull call spread at $2, selling Sept $26 puts for $1.60 for net .40 – now $2.62 (up 555%)

Range Trading 101 – The Balancing ActNotice that the HPQ spread was at $1,800 on Thursday and fell to $240 on Friday.  Of course we don’t ride those out but a very fine example of how greed kills but, as I keep saying, if you are up 50% (let alone over 300%) and don’t set stops, then Darwin’s law will take care of you in short order!  It’s interesting that both the TZA and TNA spreads paid off as of Friday.  The common factor there is SELLING more premium than we’re buying.  Since we sold premium on both ends, we were able to make money on both ends now that we’ve drifted down to not much over where we were that Friday.  

The same goes for the TIE play – we SOLD a lot of premium and it’s working great already, even though that trade has miles to go.  This was a pretty busy day because we were excited that we were finally making a good bottom but notice that we still mix in a few bearish bets with the bullish.  In general, if I’ve made 2 or 3 bullish calls in a row – I tend to look for something bearish to balance it out.  

When you are allocating a portfolio, you have 10 or 20 slots to fill and you sure don’t want to fill them all in one day!  If we’re going from cash to bullish and looking to allocate $35K out of $100K, then we want to just find perhaps 4 bullish and 3 bearish bets over a couple of days.  Notice the HPQ play was a $25KP trade idea, which means I felt a bit more strongly about it but the problem with those aggressive plays is you MUST take those profits off the table as they can reverse as fast as they go up.  

Range Trading 101 – The Balancing ActMuammar Monday – Forced Wealth Redistribution Cheers Markets 

We had been discussing taxes in the weekend post and it was apropos that Ghadafi’s $40Bn fortune, which is 1/2 of Libya’s entire GDP, was going to be redistributed in the ultimate form of taxing the rich (by deposing them).  While I mentioned some of Friday plays, I did not call any new ones in the morning post (I usually don’t as we save them for Members).  In the post, I reminded readers that: "As usual, I am neither bullish nor bearish – I am simply rangeish and we are at the bottom of our range so we play it a little more bullish until and unless the range breaks."

  • $25KP Play: AGQ Sept $180 puts at $4 – now .65 (down 84%)
  • Income Portfolio: SVU at $6.94, selling 2013 $5 puts and calls for $3.95 for net $2.99/4 – now net $3.64 (up 22%)
  • Gasoline (/RB) Futures long at $2.70, now $2.84 – up $420 per penny per contract ($3,360)

I also continued the Long Put List early the next morning (but under Monday’s post) with this very important caveat:

The idea is to pick 2 or 3 that offset whatever sectors you are weighted to and PLEASE keep in mind that our goal is to LOSE this money. When they are down 50% we assume the market is recovering and we we don’t need them anymore, which is why it’s so great if you have the opportunity to take a couple of 25% gains off the table. Obviously, they should all be cheaper this morning – always look for the best deal, this is all about playing for overall market fluctuations.

  • IBM Jan $100 puts at $1.50 – now .75 (down 50%)
  • ISRG Jan $190 puts at $1.70 – still $1.70 (even)
  • KO Jan $55 puts at .98 – now .65 (down 34%) 
  • MA Jan $150 puts at $2.65 – now $1.75 (down 34%)
  • MMM Jan $50 put at .88 – now .55 (down 38%)
  • NFLX Jan $100 puts at $3.95 – now $2.10 (down 46%)
  • PCLN Jan $240 puts are $5 – now 2.50 (down 50%) 
  • QQQ Jan $40 puts at $1.30 – now .80 (down 38%)
  • V Jan $60 puts at $2.38 – now $1.50 (down 37%) 
  • WYNN Jan $77 puts at $3.10 – now $1.45 (down 53%) 

These trades did just what they were supposed to as speculative protection.  Today (9/2) I posted an updated list on the same stocks to guard against a major downturn but, once we don’t get the downturn – then we’re done with the puts.  No need to mindlessly ride them out over time!  In the post, I had updated the levels on Barry’s old image of a dead cat bounce and it’s funny as we pretty much followed that exact path over the last two weeks, peaking out right at that 1,200 line:  

Range Trading 101 – The Balancing Act

Tempting Tuesday (23rd) – Futures So Bright, We Had to Short Them!  

The Futures had run up a lot and I sent out an Alert to Members at 4:59 am with trade ideas to go long on gasoline (same /RB long at $2.70 that’s up $3,360 per contract) and to short the Dow (/YM) off the 11,000 line.  As per-market Member Chat moved along that morning, we took the money and ran at 10,930, which was good for $5 per point per contract ($350) – always nice to pick up some bagel money in the morning!  Futures are useful for making small adjustments if you see some news and feel you are too bullish or too bearish or, as in this case, if you get a big gain in the Futures and want to lock it in.  We felt the 11,000 line on the Dow, coming from below, would be at least some resistance, so it made sense to short it – just like it later made sense for us to go short the S&P at 1,200.  

Range Trading 101 – The Balancing Act

As I said in the morning post: "Make no mistake about it, we’re heading into a MAJOR inflection point."  I used the above chart to show the two possible paths we could go on and, so far, after 2 weeks tracking the green line, Friday’s dip put us right back in the center of the zone – back at a major inflection point with that "Euro-Bank Moment" now looming as a VERY large possibility and that’s not something our Fed is going to be able to paper over!  Despite the dip (which we were playing for in pre-markets) my comment to Members in the 10:19 Alert was:  

To be clear – despite my disgust at what’s going on, I still think Ben will "save" us on Friday and we begin to move higher again.  It cost $600Bn of QE2 to kick the can down the road from last September to this August so, on the whole, it was a pretty good use of $600Bn, wasn’t it?  Who’s going to say "No, let’s take our chances on BAC failing and costing the FDIC $1Tn (50% write-off)?"  Certainly not the IBanks, as they would be called upon to replenish the FDIC (assuming the World still existed at that point).   Nope, much better to have the Fed print money and steal it from the American people without asking the Banksters to kick in a penny.  So business as usual is my expectations and that’s BULLISH!  

  • Income Portfolio:  RRD at $13.63, selling 2013 $12.50 puts and calls for $4.80 for net $8.83/10.67 – now net $10.83 (up 22%)
  • SQQQ Sept $29/33 bull call spread at $1.20, selling VLO Oct $18 puts for $1.20 for net 0 – now .60 (up infinity)
  • TZA Sept $52/56 bull call spread at $1.40 with the same VLO sale for net .20 – now .70 (up 250%)

Range Trading 101 – The Balancing ActNote that, even though those spreads failed their goal, they still made money – that’s the beauty of using bullish offsets against ultra bull spreads – just make sure you pick the right offsets!  Other offset suggestions for the hedges against a Friday downside surprise were:

  • HOV 2013 $2 puts sold for $1.15 – still $1.15
  • HPQ Oct $22 puts sold for $1.15 – now .80 (up 30%)
  • JPM Sept $32.50 puts sold for $1.25 – now .58 (up 53%)
  • OIH Oct $95 puts sold for $2.35 – now .90 (up 61%)
  • X Oct $23 puts sold for $1.27 – now .80 (up 37%)
  • XLF Oct $12 puts sold for .87 – now .63 (up 29%) 
  • YRCW 2013 $1 puts sold for .92 – now .91 (up 2%) 

Of course those were all doing much better a few days ago!  Still, you see how well this works – especially when your offsets are stocks you REALLY want to own anyway if they get to their strike.  All of the short puts are on target despite the sell-off and hopefully will expire worthless for 100% gains.  

  • BK at $14.71, selling 2013 $17.50 puts and calls for $7.30 for net $11.88/14.69 – now $12.75 (up 7%) 
  • GLD Nov $147 puts at $1 – now .55 (down 45%)
  • GLL Sept $16/17 bull call spread at .35, selling ABX Sept $43 puts for .27 for net .08 – now .07 (down 12%)
  • HMY 2013 $10 puts sold for $1.30 – now $1.10 (up 15%)
  • 4 QQQ Sept 30th $48 puts at .96, selling 3 weekly $50 puts for .40 for net $264 – now $200 (down 24%) (the idea was to sell more weeklies but there was no follow-through) 
  • AGNC at $29, selling March $28 calls for $2.25 and 2013  $25 puts for $5.60 net $21.25/23.13 – now $19.22 (down 10%)
  • XLF 2013 $11/13 bull call spread, selling $10 puts for $1.26 for net .24 – now net 0 (down 100%)

Gold has been, of course, a disaster to short and the financials have gone the wrong way on us.  The key to managing these trades is to pick a spot – like gold $1,800 or XLF $13 to stop out.  When you enter a trade you have a premise that certain things will happen and you have a target – if you are off track and failing critical supports – GET OUT!  If you are scaling in, at an early stage you should not have more than 2.5% of a portfolio committed to any single position and even a 20% loss is just 0.5% of the portfolio ($500 out of $100K).  It is far better to get back to $99,500 cash and try to get up $1,000 than to stick with a trade that’s already losing $500 if the premise is already not working.  

Of course, then we need to decide WHY we’re down on our first round and if it’s an opportunity to improve our position or bail out.  GLD, for example, we still think will come back down so if we had gone in with $1,200 on 12 Nov $147 puts, those are now $660 and can be rolled up to the Nov $154 puts for .45 ($540).  That would put us up to a $1,740 commitment out of $2,500 and we’re down $540 (31%).  BEFORE we commit more cash, we should have already decided what we’re going to do if gold goes up ANOTHER $150 to $2,000.  We can expect to be down the same 31% after we roll up to the Nov $161 puts for another $540 out of pocket, at which point we’d be in for about $2,280 – which is a full commitment in a $100K portfolio.  

If we’re not willing to risk $2,280 (an estimate, of course) to be in the Nov $161 puts with gold at $2,000 then we should take the $540 loss now and just find something else to trade.  We could also work it into a spread, but that’s complicating things, although we do it all the time in Member Chat.  The point is don’t let yourself get sucked into a trade.  If your first entry goes bad and your premise for the trade is blown – just walk away!  If your first entry goes bad, on the other hand, because of market panic (like TLT) then perhaps it’s an opportunity to get longer but don’t fall in love with your positions and the stops should get tighter as the position sizes increase. 

openingimageW Formation Wednesday – Waiting on the Fed 

Durable goods were better than expected and I declared our status "Still skeptical – but hopeful."

  • $25KP: USO Sept $32 puts at avg .85 – now .51 (down 40%)
  • $25KP: AGQ 2 Sept $180 puts sold for $8 (up 100%)
  • $25KP: AGQ 3 Sept $180 puts sold for $10 (up 150%)
  • GLD Jan $175/195 bull call spread at $5.20, selling $146 puts for $3 for net $2.20 – now $7.15 (up 225%)
  • ABX 2013 $35 puts sold for $3.10 – now $2.10 (up 32%)
  • CCJ 2013 $25/35 bull call spread at $2.10, selling $15 puts for $1.80 for net .30 – now net .95 (up 216%) 
  • Dow (/YM) Futures short at 11,290 – now 11,229 (up $305 per contract) 
  • Russell (/TF) Futures short at 690 – now 682 (up $800 per contract) 

Range Trading 101 – The Balancing ActObviously the intention wasn’t to hold the futures for 2 weeks!  We did get a great sell-off on the morning of the 25th and cashed those out at the time.  Notice that we are not complete idiots and went long on gold after getting smacked around in our previous trades and, lo and behold, we did way, way better on the long side than we lost on the shorts.  

So again, what is smarter?  Doggedly sticking with the short play going the wrong way or taking that 20% loss and going with the flow the other way?  And there is no reason you have to be all or nothing either.  You could have scaled into the November puts the day before but hedged with the long play.  If you had run November up to $1,740 and committed just $600 (1/3) to the hedge.  The hedge would now be $1,950 and you could take that off the table and now the ENTIRE short play is free.  THAT’S BALANCE!  

Jobsless Thursday – Steve Joins the Ranks of the Unemployed

Jobs leaving AAPL trumped the news of more jobs leaving the country.  We talked about oil inventories in great detail.  We were up at resistance off a very nice run from the 19th and we expected some wild moves ahead of the Fed the next day and I warned Members at 9:53 that the rejections at Dow 11,400, NYSE 7,300 and Russell 700 did not look good so the first play of the day was a Nasdaq short:  

  • $25KP: 10 QQQ 9/2 $52 put at .92 – expired worthless (down 100%)
  • RIMM Sept $26 puts sold for $1.20 – now .73 debit (up 39%) 
  • RIMM Sept $25 puts sold for .93 – now .55 (up 40%)
  • $25KP: 10 BNO Sept $71 puts at $2.20 – now .80 (down 63%) 
  • $25KP: 10 USO Sept $32 puts sold for $1.40 (up 64%) 
  • $25KP: 10 QQQ $52 puts sold for $1.20 (up 30%)
  • AEO at $10.27, selling 2013 $9.50 puts and calls for $4.25 for net $6.02/7.76 – now $6.34 (up 5%)
  • Income Portfolio: 70 DIA Oct $95 puts at $1.45 ($10,150), selling 10 BA Nov $50 puts for $1.52 ($1,520) for net $8,630 – now net $5,450 (down 36%) 
  • $25KP: 20 XLF Sept $13 calls at .43 – now .20 (down 53%)
  • 2x XLF Oct $12/13 bull call spread at .62, selling 1x Oct $12 puts at .70 for net .27 per long – now .18 (down 33%)
  • IWM Sept $69/63 bear put spread at $2 – now $1.83 (down 9%)
  • TZA Jan $32 puts sold for $3 – still $3 (even) 
  • $25KP: 10 FAS 9/2 $13 calls at $1.25 – now .85 (down 32%) 
  • AGQ Sept $255/235 bear put spread at $14, selling $255 calls for $10 for net $4 – now net .50 (down 87%)
  • $25KP: 10 FAS 9/2 $13 calls sold for $1.42 (up 13%)
  • YRCW 2013 $1 puts sold for .90 – still .90 (even)

Range Trading 101 – The Balancing ActNote at the time we took the Wednesday USO puts off the table (good thing too as they are now down 40%) I said: "$25KP – $1.40 is good enough on the USO puts. We have the BNOs to gain from a bigger drop so best to take a near double off the table."  We know BNO is very risky and the only reason we’re riding it out is because we had a $650 win in our pocket on USO – it’s just different ways of working the same premise.   Also note on the QQQ play the difference between sticking with it (100% loss) and taking the money and running with 30%.  The same with the FAS trade.  They are not profits if you don’t take them off the table!  My comment on the FAS trade was:  

FAS/$25KP, GS – We did not get the move up I hoped for an the Next week $13 calls are now $1.42 so we may as well just take the small profit and forget it as the idea of turning it into a .25 spread is shot.  

Our premise was blown so we took a small profit and ran.  End of story!  We get to live to trade another day.  Look how many of our short-term trades were up huge on Wednesday and are now down significantly today.  Only GREED stops you from taking those huge profits.  The XLF $13 calls, for example, were .70 all of Wednesday until 1pm (up 62%).  They fell to .54 by 3:30 but rallied back to .68 at the close.  The next day, they opened at .53 and topped out at .60 and then went down slowly, all day to finish at .44.  At some point you HAVE to stop out!  If you get nothing else out of reading this review – look how many great winners turned to losers if you let them ride out.  

People think I’m too strict with my 20% stops but almost every single losing trade above was, at some point, AT LEAST a 20% winner.  What would you rather have, a dozen 20% winners you were in and out of for quick profits every day or 30%, 40%, 60% losers ON THE SAME TRADE because you wanted to make more?  

Range Trading 101 – The Balancing ActGDP Friday – Waiting for The Bernank

In the morning post, I warned Members not to get sucked into any reaction to the GDP – which we expected to be negative, saying:  

So my expectation for today is a sell-off on GDP, panic ahead of Bernanke’s speech and then, possibly, even more panic when the speech does not specifically lay out QE3 (the one above is from November of last year, NOT from Jackson Hole) but, I HOPE (not a valid strategy) that, during the day, Fed people who are not Hoenig (the host of the conference!) will line up and begin talking about additional measures.

  • Russell (/TF) Futures long at 666 – now 682 (up $1,600 per contract)
  • S&P (/ES) Futures long at 1,150 – now 1,172 (up $1,100 per contract)
  • EDZ Sept $24/28 bull call spread at $1.30, selling $21 puts for $1 for net .30 – now -.55 (down 283%)
  • $25KP: 10 9/2 QQQ $52 calls at .95 – expired at $1.28 (up 25%)
  • $25KP: 10 TLT Sept $107 puts at $2 – now .55 (down 73%)
  • Dow (/YM) Futures long at 11,000 – now 11,229 (up $1,145 per contract)

My impression of Bernanke’s speech at 10 am was that it certainly did have enough language in it to give us QE3.  I made the long calls on the Dow Futures (10:17) and the Qs (10:11) and TLT (10:11) while the market was crashing, going against the grain and at 10:45 I put up the text of Bernanke’s speech with my highlights and notes, saying to Members at 10:49:  

Now that we are past Ben’s speech and QE3 seems likely – it is time to lighten up on the hedges (with the Long Puts being least useful as they are unhedged) and cash in winning short plays. Of course it’s good to have some hedges but things are looking up and it’s not a good time to be too bearish.

Range Trading 101 – The Balancing ActThat turned out to be a perfect bottom call.  As I said earlier, I’m just running all the trade ideas through Friday’s close but the reality is that we hit the turn about as perfectly as it could be and, if you are balancing a portfolio that was 20/15 bullish, all you have to do is cash out 1/2 of your bearish bets on a turn like that and PRESTO! – you are 20/7 bullish!  When we’re playing a range, that’s how we make the adjustments – we buy the bullish bets at the bottom of the range and cash out the bearish bets and then, as we move higher, we add back some bearish bets and cash out some of the bullish ones.

To some extent, your stops can control your balance.  If you start out with $20,000 bullish and $15,000 bearish bets and you move to $24,000 bullish (up 20%) and $12,000 bearish (down 20%) then the prudent thing to do is take $1,000 off the bullish side (4%) and use it to improve your bearish side by $1,000 (8%).  If we then move another 20% higher, you have $28,000 bullish (simplified, of course) and $10,500 bearish and you add maybe $1,500 more (1/3 of the gain) to the bear side, which is cashing in 5% of your bullish positions and increasing your bearish bets by 15% to $12,000 again.  That’s how you naturally go from being 20/15 bullish to 28/12 bullish.  Then, as I said, when you feel a turn coming, all you have to do is cash in $9,000 of your winning longs (or they may stop out) and you are back to a much more sensible 19/12 bullish automatically.  Not only that, but as the market drops, your bearish bets gain 20% and your bullish bets lose 20% (if you don’t stop them out) and then you are back to 15/14.4 bullish with $9,000 cashed on the side totals $38,500 off your $35,000 start – a nice 10% upside on the series.

See – it’s completely mindless if you follow the rules!  Of course, we do our best to find winners on both sides and you GREATLY increase the chances of that happening by SELLING premium, rather than buying it.  We also try to work on our losing positions – IF IT MAKES SENSE TO ONLY – as a range-bound market is like a ping-pong game and each side scores a fair share of points over time.   

  • $25KP: 10 9/2 QQQ $52 calls sold at $1.70 (up 79%) 
  • SQQQ Sept $28/31 bull call spread at .70 – now .55 (down 21%)
  • EDZ Sept $25/28 bulll call spread at .80 – now .40 (down 50%).

The Shark Wave and the SurferNotice how we added aggressive bearish spread ideas while the market was going down.  As I said at the time: "Obviously the hedges are to offset bullish positions only. It is INSURANCE that you EXPECT to lose!"  In other words, we had cashed out our very profitable puts from when the market was higher, earlier in the morning as planned – that left us (for example) 20/7 bullish so, as the market came back up, we picked a couple of hedges that would let us move to 20/10 to lock in some of the profits from our bullish side on the way up.  

Think of it like riding a surf-board – you are always trying to adjust your weight to keep things balanced to the center.  Just don’t forget – there are sharks in the water!  

That weekend, I put up an aggressive series of upside trade ideas called "September’s Dozen" and, providing we don’t fall off a cliff next week, there should be plenty of good entry opportunities to choose from that still makes sense as we re-test those lows.  

Well, this post is getting long so we’ll call this Part 1 and I’ll get to this past week later.  Let me know if this review has been helpful in comments and what I can do to make it more so.  Thanks!  


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