There's a huge move up in the Futures this morning simply because China said they wished to resolve the trade dispute with a "calm" attitude. I've never seen a market move up and down 1% on words before.
- “We firmly reject an escalation of the trade war, and are willing to negotiate and collaborate in order to solve this problem with calm attitude,” Gao Feng, spokesman for China’s Ministry of Commerce, says Thursday, according to a CNBC translation of his Mandarin-language remarks.
- Gao noted the Chinese and U.S. trade delegations have maintained “effective” communication.
- But he did not confirm U.S. President Donald Trump’s claim on Monday that the Chinese team called the U.S. over the weekend with the desire of reaching a deal soon.
So that's hitting the headlines but, as I'm sure you read in the People's Daily (Government Publication) this morning:
US risks losing big for fighting trade war with China
The trade war has already affected both sides. However, all you need to do is look at the videos of Chinese shoppers crowding the aisles of the Costco store in Shanghai to know that the United States has a lot to gain from greater cooperation with China and a lot to lose if it erects a wall between the world’s two largest economies.
China saying they firmly reject an escalation of the trade war ahead of Trump's plans to escalate the trade war is not submission – it's a warning that they will fight back! They still don't have actual talks scheduled so it's all up to whether or not Trump puts the tariffs on next week, which retailers say will ruin Christmas.
This morning, the S&P is basck to our strong bounce line at 2,910 and maybe we get back to 3,000 or even 3,300 on a trade deal but if we get that we'll lose the Fed cut – as there would be no point – the trade war is their premise for cutting.
I'm very tempted to call for cashing our our Member Portfolios as we re-test the strong bounce lines but it's also cushion that allows us to wait and see how things shake our next week before pulling the plug on our positions but we WILL take advantage of the move up to improve our hedges into the weekend – just in case.
Meanwhile, last week, in our Live Member Chat Room, we came up with 5 trade ideas that can each make $5,000 between now and January expirations and my point was that, if the market is going to go higher – it's very easy for us to go to cash and pick new trades that will still make plenty of money. I'm going to post those trades along with the links to our original logic but with updated prices as of yesterdays close so they can all be used today.
Keep in mind, however, I am not bullish, per se – these are simply trades we can initiate with cash in conjunction with cashing out our portfolios – starting fresh with much smaller positions that will still give us enough profits to have a very merry Christmas.
Our first pick was made in our morning chat session with our Members at 10:37 last Tuesday (8/20):
While it's likely to be a bumpy transition year for VAC, I want to establish a conservative entry position in the Long-Term Portfolio and it's going to be the first in a series I had planned to do called "5 Trade Ideas to Make $25,000 in 5 Months".
VAC doesn't have very long options but that doesn't matter as we're looking to make Jan trades in this set. Due to the recent volatility, we can get a good price for short puts and the premiums on the calls are also higher than they should be – we can take advantage of both with this play for the LTP:
- Sell 5 VAC April $85 puts for $5.70 ($2,850)
- Buy 7 VAC Jan $80 calls for $20 ($14,000)
- Sell 7 VAC Jan $90 calls for $12.80 ($8,960)
The net cost of the spread is $2,190 and, if successful, it pays $7,000 at $90 or higher for a gain of $4,810 (219%) in 5 months, though the short puts won't expire until April – it should get us very close to our goal by January. The ordinary margin requirement of the short puts is $5,280 so a pretty efficient way to make $4,810 in 5 months!
I don't want to make this a "you should subscribe" thing (although you really should by CLICKING HERE!) but I want to point out that the we caught a good bottom on this one and the original entries were:
- Sell 5 VAC April $85 puts for $6.75 ($3,375)
- Buy 7 VAC Jan $80 calls for $16 ($11,200)
- Sell 7 VAC Jan $90 calls for $9 ($6,300)
So that was net $1,525 and, at $2,190, this spread has already gained $665 (43%) in a week. Aren't options fun?!?
Our second trade idea was later the same morning (8/20) and is in contention for our Trade of the Year for 2020 (we will finalize on Thanksgiving) and that's Walgreens (WBA), which I cannot believe is at $50:
When a stock has been as volatile as WBA, we don't have to play them to win – they just need to not go lower so we're going to engineer a spread that pays us if the stock simply holds $50 into January options expiration (17th):
- Sell 10 WBA Jan $50 puts for $3.70 ($3,700)
- Buy 30 WBA Jan $47.50 calls for $5 ($15,000)
- Sell 30 WBA Jan $50 calls for $3.60 ($10,800)
The net cost of the spread is $500 in cash and the ordinary margin requirement for the short puts is $8,918 and, if WBA is over $50 on Jan 17th, the short puts expire worthless and the spread would be $7,500 in the money for a $7,000 (1,400%) gain in 5 months.
We are already long WBA in our Long-Term and Options Opportunity Portfolios and make sure you REALLY want to own 1,000 shares of WBA if the market turns down – because it's not likely they'll be exempt from a downturn – despite the great value. The 2021 $42.50 puts are $3.70, so assume that would be the roll and that's another 15% lower – so not too bad as a worst case.
I love these kinds of trades as the worst case is owning 1,000 shares of WBA for net $42.50 (assuming our roll works out) plus the 0.20 per share cash we put in, so $3 is still almost $7 below the current price. If we don't get to own WBA that cheaply, our consolation prize is making $7,000 – and then we can do it again and again and again – as long as they want to keep paying us NOT to buy a stock – we are happy to keep taking their money, right?
For our third trade idea, on 8/22, we went back to our 2017 Stock of the Year runner-up, L Brands (LB) who own Victoria's Secret and have gotten very cheap recently as they are in the middle of a difficult restructuring.
Sometimes we like a company, not because it's likely to go up but because it's unlikely to go any lower. LB closed 50 Victoria Secrets this year out of 957 so about 5% of the stores and, taking that into account – the decline in sales should not be a surprise. They added 3 new Pink stores (144 total now) and netted 13 new Bath and Body Works to get that segment up to 1,632 stores (US numbers) so the fluctuations we're seeing in sales and margins will normalize, but obviously not while they are shutting 5% of their stores.
Forgetting the potential upside down the road, how much should we pay for a company that's making $650M a year? Well, certainly 10x earnings doesn't seem too crazy and that would be $6.5Bn or about 25% above the current price of $19, so $23.75 seems fair as long as there is no additional bad news and, having just had earnings, none is likely to come until November's report.
Meanwhile, we can take advantage of the opportunity and put our foot down at the $20 line (even though we're a bit below it now) and set up the following options play – the 3rd in our series of 5 Trade Ideas to Make $25,000 in 5 months:
- Sell 10 LB Jan $17.50 puts for $2.80 ($2,800)
- Buy 25 LB Jan $15 calls for $3 ($7,500)
- Sell 25 LB Jan $17.50 calls for $1.85 ($4,625)
That's net $75 on the $6,250 spread so there's $6,175 (8,233%) upside potential if LB can get back over $20 by Jan 17th (option expiration day) and it's an efficient trade as the ordinary margin requirement is just $3,834 so a very good way to make $5,150 into the holidays!
Later that day (8/22), we came up with Trade Idea #4 is a stock we often buy under $20 – Tenet Healthcare (THC):
We've played THC several times over the years, usually around $15 but we're not going to be so lucky this time but all we're going to do is play them not to go lower than $20 into Jan 17th expirations and we'll be home free with the following trade:
- Sell 10 THC Jan $20 puts for $2.50 ($2,500)
- Buy 20 THC Jan $15 calls for $6.50 ($13,000)
- Sell 20 THC Jan $20 calls for $3.10 ($7,500)
That's net $3,000 on the $10,000 spread so $7,000 (233%) upside potential is not as exciting as our other trade ideas but THC is a lot more of a blue chip so possibly the least risky of the set. Margin is also light, just $2,886 according to TOS in an ordinary margin account.
Our final trade idea came in last Friday's chat room and we went with Tanger Factory Outlets (SKT) a shopping mall REIT we feel is ridiculously undervalued:
#5 of our 5 Trades to Make $25,000 in 5 months is going to be Tanger Factory Outlets (SKT), which took a deeper hit today to $14.29. I just did a whole Top Trade write-up on them on Aug 1st – $1 higher, so no need to get into that but, for the purposes of this series, the trade idea will be:
- Buy 50 SKT Jan $12.50 calls for $1.85 ($9,250)
- Sell 50 SKT Jan $14 calls for 0.95 ($4,750)
- Sell 20 SKT Jan $15 puts for $1.85 ($3,700)
That's net $800 on the $7,500 spread so $6,700 (837%) of upside potential if SKT is over $15 on Jan 17th. Since we're selling puts over the current price, the ordinary margin is $5,741, so more than we'd like but, as noted on Aug 1st, I think SKT is ridiculously under-priced.
Retailers rallied this week on good news and SKT rents to retailers and the CEO has been buying shares at $14.50 and the company just beat expectations and raised guidance and is simply caught up in a rate-drive REIT sell-off that doesn't really apply to their type of business. I think one more quarter is enough time for buyers to step in on this one.
Remember, the premise of these trades is that we'd be WRONG cashing out our portfolios too early and this would be our consolation prize into the holidays. If there's a trade deal with China, it should be great for retailers and a rising market should get people to take another look at some of these value plays. There is, however, nothing bullet-proof about them – if the market heads lower, they will too!
Still, our Options Opportunity Portfolio, for example, is up from $100,000 to $275,714 (175%) in less than two years so what I'm suggesting is cashing in that $275,000 and putting up just $6,565 in cash and using just $26,659 in margin to make up to $33,603 if all goes perfectly (it won't).
The logic is that that's a nice, respectable 12.2% gain on what we have now if the market rallies and our positions do well or we end up owning these 5 stocks at low prices to begin a new portfolio next year. Meanwhile, we eliminate the risk of LOSING the $275,714 we have in our hands. That seems like a sensible strategy to me!
