Well, it looks like we dodged a bullet.
More like $50Bn worth of Hurricane Irma damage vs up to $200Bn expected, so a nice break for insurance stocks (KIE) – as long as there are no other storms barreling down on us. The markets have gapped up half a point and we're back to our usual Mon/Tues shorting levels at Dow (/YM)21,900, S&P (/ES) 2,475, Nasdaq (/NQ) 5,970 and Russell (/TF) 1,410. We had many, many thousands of Dollars of winning plays from those levels on the short side over the past few weeks (see recent posts), so no reason to change our minds now.
Speaking of recent posts, 2 Mondays ago (8/28) our PSW Report was titled "Monday Market Musings – Making Money on Misery" we taled about several hurricane plays and it's important, as an investor, that you learn to turn macro events to your advantage – or you will always be at their mercy.
- VLO 2019 $60 calls at $10.35 are now $13 – up $265 per contract (25%)
- Oil (/CL) Futures long at $47.35 topped out at $49.45 – up $2,100 per contract
- Lowes (LOW) Oct $75 calls at $1.70 are now $4.80 (our target was $4.50) – up $310 per contract (182%)
I know it comes across as bragging when we review our trades but it's important to LEARN what worked and what didn't so that, next time a similar situation presents itself, we can make those good trades as a reflex. The premise was simple, the Hurricane would disrupt oil and gasoline production and repairs (and preparations) from the hurricane would benefit Lowes and Home Depot – not complicated, right? The only trick is using that knowledge to make the right bet – and that's exactly what we are trying to teach you to do!
July 31st was a Monday and our Report was titled: "Monday Market Maintenance – Dressing the Windows for One More Day" in which I said: "It's going to be a meaningless Monday, we're just going to sit back and see how the month ends up but we'll certainly short the S&P again if we're back to 2,480 – along with the other shorting lines we were using last week." The next day (8/1) was: "Toppy Tuesday – Back to our Shorting Line on the S&P 500" and, in our Live Member Chat Room that morning, I had put out the following note to our Members:
Markets blasting up yet again for no particular reason. Now I like /YM short at 21,950 with tight stops but then again at 22,000, /NQ 5,900 is good as well and you know 2,480 was my target short on /ES and that's lined up with 1,430 on /TF – definitely a short the laggard day*.*
As you can see, the S&P took a nice dip to 2,420, which was ultimately good for gains of $3,000 per contract on those Futures shorts for our Members and, per our fabulous 5% Rule™, we know that a weak bounce off 2,420 was 12 points to 2,432 and a strong bounce of 24 points took us back to 2,444, so we knew to wait before getting aggressively short again as we were over our strong bounce line. We were right to short Oil (/CL) at $50 (now $47.50, up $2,500 per contract) and going long Natural Gas (/NGZ7) at $3.07 (now $3.14, up $700 per contract) but wrong about the Dollar long (/DX) at 92.75 (now 91.60, down $1,150 per contract), which is a play we're still in.
As an option earnings play, I suggested shorting Amazon (AMZN) as follows:
- Buy AMZN Jan $1,100 puts for $101.50 ($10,150)
- Sell AMZN Jan $1,050 puts for $72.50 ($7,250)
- Sell AMZN Jan $1,200 calls for $21.50 ($2,150)
The net of the spread was $750 and AMZN is well on track to pay us in full and the short $1,200 calls are now $5.35 ($535) and the spread is $40 ($4,000) so net $3,465 so far is up $2,715 (362%) so far but still another $2,285 (304%) left to gain and, even if you start from scratch here, you still make 84% in 4 months picking up our Members' trading scraps – not bad for the free readers, right?
So that was a good day's report, well worth the $3… The next day (8/2) was "Whipsaw Wednesday – The View from Dow 22,000" and I was getting more concerned about a major correction so we added a Dow hedge using the Ultra-Short ETF (DXD) as follows:
Buy 100 DXD Oct $11 calls for 0.45 ($4,500)
Sell 100 DXD Oct $13 calls for 0.12 ($1,200)
Sell 5 AAPL 2019 $120 puts for $4 ($2,000) DXD is at $11.24 so in the money and $13 is $1.66 away or 15% so a 7.5% drop in the Dow will pay you back $2 x 10,000 options (100 per contract) or $20,000 and the net cost of the spread is $1,300. That's a profit of $18,700 (1,438%) if the Dow drops 7.5%, and stays down, into the October expirations. You are obligating yourself to buy 500 shares of AAPL at $120 ($60,000) so make sure you REALLY want to own AAPL if it drops 20% but, chances are your will be safe with that bet if the Dow stays up and, if the Dow falls and puts AAPL in the money, then you have an extra $20,000 to buy the shares with!
As it turns out, DXD has gone net nowhere but, because we followed our core philosophy of Being the House – NOT the Gambler, all that premium we sold has decayed and the Oct $11 calls are still 0.45 ($4,500) while the $13s we sold are down to 0.08 ($800) and the short Apple (AAPL) puts are $4.50 ($2,250) for net $1,450, which is up $150 (11.5%) despite no major, lasting sell-off. Now, to lengthen the term of our insurance, all we have to do is spend 0.35 to roll the DXD Oct $11 calls to the Jan $11 calls (0.80) and then sell the Jan $13 calls for 0.35 for net $0 and now we have the same protection through January (we leave the short October calls to expire on Friday).
Thursday (8/3) was the key day I wanted to get back to. That post was "Thursday Market Folly – You Need an AAPL a Day to Maintain Dow 22,000" and my premise was (and is) that, without constant stimulus of some sort, 22,000 on the Dow is not sustainable and we expected a correction of at least 2.5% (550 points to 21,450) or possibly 5% (1,100 points to 20,900). We did fall just below 21,600 but no lower(so far) but I do still think that correction is coming.
Obviously, I still like that Jan DXD hedge and the AAPL puts going higher makes the net even cheaper as a new play but, be aware – as I told our Money Talk viewers last Wednesday – I see AAPL correcting 10% to $150, which means those puts will be painful to hold as they rack up some paper losses but, long-term, I have faith AAPL will hold $120 without too much trouble and, if not, I certainly would love to own them at that price for the long haul.
Other than Friday's Quad Witching expirations, it's going to be a quiet data week with very few earnings reports so it's a good time to assess where the market is trending a week ahead of the Fed's pending non-decision (they will delay due to the hurricanes). Today is certainly a watch and wait sort of day – our long positions are doing fantastically and we've added to our hedges – just in case.
Now there's not much to do other than wait and see.