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Weakening Wednesday – Oil Leads Markets Lower

Wednesday, January 11, 2017 8:03
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We’re short oil at $51 (/CL).

The API report last night showed a 1.5Mb build in Oil, a 1.7Mb build in Gasoline and a 5.5Mb build in Distillates and, if that’s matched on the EIA report at 10:30 this morning – you can say goodbye to $50, which would be a $1,000 per contract gain in the Futures.  

It’s all starting to fall apart and that includes Trump’s plan to be President.  I’m not going to get into it but it’s best to read the UK’s Guardian’s article for an outsider’s perspective on this mess (and this follow up timeline) and, if you dare, to read the actual intelligence briefing on Trump’s ties to the Kremlin, with it’s horrifying details.  As noted by Trump spokeswoman Kellyanne Conway last night, these are “unverified” claims and that’s true because, if they were verified, a lot of people would be going to jail for espionage!  

Now we know why Hillary said she is going to the inauguration next week – she still might end up being the one who’s sworn in!  While it’s doubtful that still-President Obama will declare martial law and delay the transition until a full investigation is completed – it’s not impossible at this point and markets really don’t like political uncertainty – especially in a leading World power. 

That’s all I’ll say about it for fear of being censored for political commentary and then you would miss out on our oil call and other hedging ideas as well as a repeat of our main idea to make sure you have plenty of CASH!!! to ride out what could be a major black swan crisis.  

We’re back to shorting the Russell Futures (/TF) below the 1,370 line (tight stops above) and we expect a rising Dollar (already 102.50) to put downward pressure on the indexes as well as commodities but it’s going to be wild and we probably won’t be playing those.  If you want an option play to hedge with the Russell, I suggest the following using the Ultra-Short ETF (TZA):

  • Buy 20 TZA March $18 calls for $2.25 ($4,500) 
  • Sell 20 TZA March $22 calls for $1 ($2,000) 
  • Sell 5 TASR 2019 $20 puts for $3.20 ($1,600)

The net of the spread is $900 on the $8,000 spread that’s $2,500 in the money at $19.25 so TZA has to fall 6.4% for you to lose money on the March spread.  We offset the cost by promising to buy 500 shares of Taser (TASR) (our Stock of the Decade) for $20, which is $4.63 (19%) off the current price but you can substitute any stock you REALLY want to own if it gets cheaper.  

If TZA hits $22, you collect $8,000 and that’s a $7,100 net profit (788% return on cash, assuming the puts expire worthless), which makes it an ideal hedge for a $100,000 portfolio and we will add it to our Options Opportunity Portfolio today.   

It’s much easier to add a hedge than to liquidate positions every time you are nervous that the President-Elect will be indicted for something or other (will probably happen a lot in the coming years) and our Options Opportunity Portfolio, which we keep for our friends at Seeking Alpha, is up $7,065 (7%) since our Jan 1st Review – no wonder we don’t want to let go of these positions if we don’t have to.

Think of a hedge as an insurance policy that you HOPE you lose money on.  When we buy life insurance – we don’t hope we get hit by a truck to collect $1M, do we?  No, we make our payments and hope to keep making our payments as we keep on living – it’s just insurance, in case we don’t.

Portfolio insurance serves the same purpose and we like to hedge our hedges by offsetting the cost of our protection by selling puts against a stock we REALLY would like to own if it gets cheaper.  It’s actually the cornerstone to our strategy of “How to Buy a Stock for a 15-20% Discount.”  Unless we’re really wrong about TASR, it’s not likely it goes down when the markets are going up so the puts expire worthless and our net cost for $8,000 worth of insurance is, at worst, $900.  

The really cool thing is that, sometimes we get that short-term correction, make our $8,000 on the hedge but then our long-term puts still expire worthless and we collect on both ends.  In this case, the worst thing that can happen is we end up owning $10,000 worth of TASR – a stock we love for the long-term, especially at $20!  

The same logic applies when we are bullish on a stock, as we were with TASR early last year with the following trade in the OOP:

In that case, we promised to buy 1,000 shares of TASR this Jan (next Friday, in fact) at $15 but, since it’s well over $15, the puts simply expire worthless.  Our net cash outlay was $2,800 and, currently, the spread has a net value of $10,025 for a profit (so far) of $7,225 (258%).   Now you can see how a portfolio full of trades like this can be up 147% in 18 months!

Image result for options profitsWe simply apply the same logic we use on our bullish spreads to the hedges and, if we’re not SURE the market will sell off – we simply find a stock we want to own and use that for our offset.  The timing in this case is convenient because our existing short TASR puts are expiring next week, so these will replace them and put another $1,600 in our pockets.  

This stuff isn’t hard folks, these are basic options strategies we use and the reason it’s simple is because we’re not Options Strategists playing the percentages.  We are FUNDAMENTAL Investors who use options to leverage our returns and to hedge against the possibility that we are wrong.  It’s a tool every trader should have in their tool box.  

We’ll talk more about this in today’s Live Trading Webinar at 1pm (EST). 


Provided courtesy of Phil’s Stock World.

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