I'm not doing a weekly wrap-up.
I pretty much did one on Friday in the morning post and I posted my weekend reading list this morning at the end of Friday's comments for members and Peter D posted 4 excellent plays for those of you willing to dip your toes in the financials once again. We actually had a great day on Friday as we sold premium in long SKF and had a fantastic 10-bagger on SKF puts later in the day. At 9:45 I called fro a switch from UYG at $2.02 to FAS at $4.30 and FAS ran up to $5.20 and finished at $4.90 (14%) while UYG peaked at $2.24 and finished at $2.20 (up 9%) so a good switch to the faster horse.
We also flipped from FXP covers to FXI longs (hedged at $20.98/21.99), a very well-timed about face as we sold FXP into the initial excitement. VLO got too cheap to turn down on the leaps and even C became attractive at 1:35, when the Sept $3s hit .52 and I noted they could be covered with 2011 $5s at .58 but, so far, we haven't needed to pull the trigger on the cover! My last call of the day came at 1:48, when I said to members: "SKF $200 puts at $1.45 for the brave, out if XLF cant cros $7 when Volcker starts speaking." As we expected, the moment Volker came on TV to dispell some of the silliness we got a double and were able to take half off and let the rest ride. That ride took us all the way to $16 just one hour later – not bad for a day trade!
I did add a mattress layer at 2:34, going for the $185 puts for $2 and those quickly ran to $6 but "yawn" compared to our original play as it ran and ran. We were all stopped out by 3:12 and sadly, by 3:28 we had to turn a little bearish (we had originally planned 50:50) as the administration backpeddled on a statement that the Treasury would actually have a plan for us next week. Since we never had to trigger our bearish QID play from the morning post, I was wishy-washy about the downside and said of our DIA puts to members at 3:36: "Hmm, possibly there is a plan but they don’t want to have any expectations going into it so they are covering up a slip on the release of a plan… very confusing, half covers very appropriate."
I thought all the talk of bank nationalization was a bit overdone and BAC came out with very strong denials and were rewared for it into the close with a 46% rally off the bottom. This is why the SKF is at the same time fun to play and very dangerous. While Cramer warned his people to stay away from this 50% gainer last week, we generally play it for the drops whenever it goes too far up. As I pointed out to members, with the XLF at $7 and SKF at $205, a .35 (5%) move up in the XLF becomes a $20 drop in the SKF (10%). As I said when we discussed this on Wenesday the 11th:
Meanwhile, Cramer is once again playing fast an loose with the facts on SKF. After talking his sheeple out of protection that went up 15% yesterday while the financials collapsed, in yesterday’s show Jim justified his massive disservice to viewers by pointing out that the SKF, SRS, FXP and DUG "would have actually had a 30% loss" in 2008. While that is true, it ignores the fact that they were up 150% in early December, where a 30% hedge in the ultra-shorts would have offset a 64% drop in the remainder of the virtual portfolio. When a hedge pays off, as I would imagine Jim knows, you cash it out – only a truly MAD money manager would press an insurance bet that goes (in the case of the SKF) from $100 to $300 during the year.
If your virtual portfolio had $100,000 worth of exposure to the financials that day, with the XLF at $9.25, you may have watched them drop 24% in the next 6 market sessions and being unhedged meant either riding the roller coaster into the pits of hell or jumping off and taking a massive hit. Putting just $10,000 into 45-day protection of the SKF March $160s at $18 that day (SKF was $140) would have returned $40,000 if you had cashed out at $64 – which is obviously something we would recommend doing per my above statement! Of course we don't advocate spending 10% a month on naked puts and we certainly don't advocated buying SKF at all at $188 but the correct play at the time would have been selling the Feb $180s for $5 to offset the premium loss. The Feb $180s finished at $7.45 and we would have been very happy to give that caller his extra $2.45 back but, if SKF had finished lower, that $5 would have paid for half of a roll to the March $140s or the Apr $155s so another 2% of the virtual portfolio to protect your bullish positions for another 30 days.
Ideally though, as we did on Friday at 3:13, you want to call a bottom and cash out your short play, then use the cash to reposition your financials ($40,000 buys a lot of repositioning on the $76,000 worth of financials you have left) and rehedge from scratch. Our general cover of choice going into the weekend (the "mattress play") is the DIA June $77 puts, which are now $8.22, 1/2 covered by the March $75 puts at $3.85. We go to June because we are HOPING for a bottom and the June puts have a lower downside delta and the 1/2 cover assures us that a severe drop in the Dow won't hurt us to the downside, where we can roll our March $75 put covers to 2x the Apr $66 puts if we had to, leaving us with a $11 spread off our net $6 entry. Ideally, we want to have a clear path to a double on our downside protection so when we allocate 20% or 30% to coverage, we know how much we can expect to get back in a real catastrophe.
Of course nothing beats sector specific covers against your own mix of positions but we like using the DIA puts as general virtual portfolio coverage although, as I mentioned last week, both the DAX and the Qs may now have farther to fall. I was over at the NYC Traders Expo yesterday, which was well worth attending, and had a great conversation with Tom Sosnoff, who is one of the founders of Think or Swim (a platform I am now enjoying very much). We were discussing using index futures as hedges and I will be experimenting with this in March and hopefully Tom will be able to help me put together a primer on the subject down the road. New E-mini futures trading makes it more realistic for retail investors to get involved but it's going to take us a while to settle on some good, hedged strategies on these.
I haven't had a chance to try it live yet but I was very impressed by the demo of www.bestfreecharts.com. It seems they are ad supported and give free streaming quotes with a nice interface, worth checking out if you don't have live for sure (or don't like what your broker gives you). Also from Think or Swim, Tom showed me a very nice blog they're keeping called MonkeyBrains and they are in month 31 of a sequence of posts following an Iron Condor Strategy on the S&P that is worth keeping tabs on as they make 1 trade a month and track the results (so far, no profits but good eductaion).
Oops – never got to finish this post as I ended up writing a book in the comments! There is a lot of good stuff on our buy/write strategy there so members should look below and also at the end of Friday's comments to get a very in-depth idea of our strategies.
New post up soon!
