Where's my tax cut?
The market is getting worried that TrumpDon'tCare is not only going to impoverish tens of Millions of Americans (bad for Retail) but that the fight over it will delay the things they really care about like MORE FREE MONEY in the form of lower taxes for the Top 1% and, of course, the dismantling of regulations as well as the regulatory agencies that are supposed to enforce them. In short – where is our Gangster's Paradise?
Fortunately, as members of the Top 1%, we are able to take full advantage of the chaos and the Biotech Short (IBB) from yesterday's morning Report opened at $4.45 and closed at $5.90 for a nice 32.5% gain on the day. Of course that's nothing compared to the Monday morning Report's timely Tesla (TSLA) short, which was:
We're hoping TSLA goes higher but worried they won't so our trade for the moment is going to be:
- Sell 3 TSLA April $265 calls for $9 ($2,700)
- Buy 5 TSLA April $290 puts for $30 ($15,000)
- Sell 5 TSLA April $275 puts for $19 ($9,500)
That nets you into the $7,500 spread for $3,300 so the upside potential is only $4,200 (127%) but, on the bright side, it's only 32 days away (April 21st) to expiration. We only need TSLA to stay below $265 to collect the money and, if they go higher, we will roll our short calls to 6 May or June calls at higher strikes (the June $305 calls are $5 and the margin is $15,000 on 6 short ones) and then we would widen the spread, possibly adding $5 or less to roll our $290 puts to the $300 puts (now $38.50).
Tesla tumbled to $250 yesterday and that may not seem like much but the trade was short-term and aggressive and already the short April $265 calls have dropped to $4.90 ($1,470) while the $290 puts are now $40.50 ($20,250) and the $275 puts are now $27 ($13,500) for net $6,750 less the short calls is net net $5,280 for a $1,980 (60%) gain on cash in two days but only "on track" for our full 127% expected gain. That's two months in a row our TSLA trade has made you thousands of Dollars – you're welcome!
If you think it's worth $3 a day to have these Reports dropped in your InBox at 8:35 every morning – then you can subscribe here. The TSLA trade was also sent out as a Top Trade Alert at 11:30, when the prices improved slightly and the trade was officially added to our Short-Term Portfolio.
Our Feb 8th Top Trade Alert is more useful at the moment as it concerned hedging the S&P and we were using the Ultra Short ETF (SDS) and that trade idea was to buy the June $12/16 bull call spread for net $2. The S&P was at 2,294 at the time and now 2,344 and SDS is at $13.67 and the spread is now net $1.45 for a 27.5% loss so far but that makes me like it even more since it still pays $4 at $16, which is where we were mid-November, when the S&P was at 2,180, which is down 7% from where we are now.
So, as a new hedge, you can buy the SDS June $12 calls for $1.70 and I wouldn't even bother selling a cover as the fall-back plan (if the S&P goes higher) would be to sell June $13 calls ($1) and roll the June $12s to the Jan $10s ($3.50) for +$1.80 and then you'd be in that spread for net $3.50, no worse than if you'd just bought the Jan calls in the first place.
To offset the cost of that spread, let's find 3 stocks we'd REALLY like to buy if the market falls 20% from here. On our Watch List (Members Only) I see Target (TGT), Taser (TASR) and Gilead (GILD) as irresistibly low so I would sell the following puts in a $100,000 portfolio:
- Sell 3 TGT 2019 $45 puts for $4.20 ($1,260)
- Sell 5 TASR 2019 $20 puts for $2.90 ($1,450)
- Sell 2 GILD 2019 $55 puts for $5 ($1,000)
That obligates you to buy 300 shares of TGT at a 16% discount, 500 shares of TASR at a 12.5% discount and 200 shares of GILD at a 19% discount. I'm not counting the cash as we're using it to buy 30 SDS June $12 calls for $1.65 ($4,950) and that would be a net cost of $1,240 to protect your $100,000 portfolio through June and, if the S&P drops 5%, SDS would go up 10% to $15 and your calls would return $9,000 to offset your portfolio's losses with a $7,760 gain.
If the S&P, however, drops 10%, then SDS goes up 20% to $16.40 and your 30 $12 calls jump to $13,200 and a 20% drop nets you a 40% gain to over $19 and over $21,000 on your hedge. So you can see that we mitigate most of the damage from a drop (between now and June) for a net cost of $1,240 along with a promise to buy 3 good stocks if they get cheaper. That's all it takes to hedge a portfolio!
Of course, we use more complex strategies in our Member Portfolios but this is a nice, simple way to put the brakes on a market slide. As noted above, our very simple IBB put play made 32.5% in one day. We're already well-hedged, so we're just having fun picking individual stocks and ETF's to short.
There's no Fed speak today but tomorrow gets busy again and we will be doing a Live Trading Webinar this afternoon at 1pm (EST) and I will open it up to the public (we do one free one each month) so tune in for the afternoon adjustments and perhaps even some Futures trading – if we can get a proper sense of direction.
Oil will be interesting today as Brent tests $50 from above and that line should be bouncy but it all hangs on the 10:30 inventory report where any net build can send us lower. The most exciting Futures long at the moment is Gasoline (/RB) at the $1.60 line with tight stops below. We love that trade into the weekends, especially when it's been beaten down – as it has this week.
