What a crazy market!
On Tuesday, in the morning post, we put our foot down and called for index shorts in the Futures, saying:
And THAT is why we're short the market here. That's why we're short the S&P Futures (/ES) below the 2,200 line (with tight stops above) and Dow (/YM) 19,100, Nasdaq (/NQ) 4,875, Russell (/TF) 1,330 and even the Nikkei (/NKD) at 18,500 – because that same economy also can't sustain an ever-rising Dollar.
In fact, we called an audible in our Live Member Chat Room at 10:15 to catch the Russell short at 1,335 so really it was a $1,500 per contract gain for our Members but not a bad gain for you free readers either, more than enough to buy you a subscription so you don't miss those extra $500 moves next time, right? The adjustments I suggested to our Members in the morning were:
Oil stocks jamming up the indexes but there's an undercurrent of selling so good shorts at 19,200 (/YM), 2,212.50 (/ES), 4,880 (/NQ) and, of course, 1,335 (/TF). /NKD is no good because the Dollar is rising, now over 18,500 but very tempting to short.
The Dow (/YM) dropped to 19,120 for a $400 per contract gain and the the S&P (/ES) hit 2,195 for an $875 per contract gain and the Nasdaq (/NQ) fell to 4,805 for a $1,500 per contract gain so not bad for a day's work! In yesterday's Live Trading Webinar, we flipped to the Nikkei (/NKD) shorts, as they had the farthest left to fall and, of course, we are still liking the oil shorts (/CL) once the squeeze is over, as we test $50.50 this morning.
Watch for Brent (/BZ) to fail $52.50 and that's game on for the /CL shorts but no shorting above those lines. We caught a $1,000 per contract drop off our first test at $50 yesterday but overnight oil got jammed up again at the Asia open (as they had to square off their accounts at their open) as well as a boost from a weaker Dollar (101.24). As we expected yesterday morning, OPEC reached a BS deal that only cuts 1.2Mb/d and it's not enough to rebalance the market as $50 oil brings US shale production back on line almost as fast as OPEC takes it off.
As you can see, just in anticipation of an OPEC cut, US crude production jumped 200,000 barrels a day last month and we are still 500,000 barrels a day below January's production levels. Then there's Canada, Mexico and many other non-OPEC producers who are THRILLED to sell $50 oil. In fact, oil was under $35 until March and we STILL put out 9Mb/d. At $45, we may set new production records next year.
That's good for Transocean (RIG) (we're long), Baker Hughes (BHI) (we're long), Encana (ECA) (we're long) and Seadrill (SDRL) (we're long) so, needless to say, we are fine with the OPEC decision overall – we just don't think it's enough to support $50 oil so we're happy to short the /CL futures – especially as we already have a ton of long position on oil, so the short product play makes a great hedge.
One nice way to play oil short is the Ultra-Short ETF (SCO), which has dropped to $70 pre-market so we're going to add the following trade to our Options Opportunity Portfolio:
- Buy 10 SCO Jan $65 calls for $10.40 ($10,400)
- Sell 10 SCO Jan $75 calls for $7 ($7,000)
That's net $3,400 on the $10,000 spread with an upside potential of $6,600 (+194%) in 50 days if oil gets back below $50 post-holidays which, Fundamentally, is a very strong possibility. It's a nice play as it requires no margin but it can be paired with a put sale like, for example, selling 40 SDRL 2019 $1.50 puts for 0.80 ($3,200), which nets the trade out for $200 with the same $10,000 potential return. SDRL is priced for Bankruptcy and your worst case is owning 4,000 shares for $1.50 as they go worthless but, at the moment, those shares are $3, so I love the gamble!
And that's how you can turn a $200 cash outlay ($2,040 in ordinary margin) into $10,000 in 50 days – a 4,900% (49x) return on your money, averaging 100% per day – aren't options fun? That's why we don't mind the fact that our Member Portfolios are 80% cash – it makes us feel all safe and secure, allows us to run in and BUYBUYBUY if we do get a correction and, there's always fun plays like this we can make if we're bored.
Don't forget we're talking our book, we have a big position on SDRL in our Long-Term Portfolio with a net entry at $1 and a max gain of $9 on 2,500 shares ($22,500). It's actually the most speculative play in our Long-Term Portfolio at the moment and, so far, it's up $6,813, so plenty of room to run if all goes well.
We're off our index shorts this morning – giving the market a chance to bounce but it's the bounce lines we'll be watching, especially S&P Futures at 2,200 this morning – now we're being tested from the bottom!
And don't forget last Friday's DIA hedge – in case you think you've been too bearish…
