Yes, this is Monday morning's Report.
I don't have much to say about the markets, they are back near the highs and we'll see if they hold tomorrow, not today, as it's Monday and Monday's don't matter. What we do need to do is bargain-hunt in case it is a real rally and the best way to do that is to look back on past trade ideas and see if we can find some that haven't gone up yet.
We haven't done a Top Trade Review since the end of Sept so it's a good time to do one of those and, as our Members well know, the vast majority of those trades turn positive so, when they're not, it's usually just a matter of time. As of the September review, we had looked at Top Trades that were initiated in the first half of the year and, out of 27 trade ideas in 26 weeks, we had 21 winners and 6 losers but 2 of the winners turned around by Sept and that left is with 28 wins and 3 losses for a wonderful 90.3% winning percentatge.
Let's start by taking a look at our two losers and see how they are doing:
Tesla (TSLA) had jumped to $390 in Sept and though it was back to $340 by the 30th, we were worried about the 3 short Oct $300 calls we had sold for $30 were $43.50 so we rolled them ($13,050) to 4 short Jan $340 calls at $31.20 ($12,480) for net $570 less than the $9,000 we collected and THOSE short calls expired at $10.02 ($4,080) so we ended up with a net profit of $4,350 on that "loser" trade.
Chesapeake Energy (CHK) is still a big loser and we still have the adjusted position (30 2020 $4 puts at $1.25 (now $1.56) and 20 short 2020 $2.50/5.50 bull call spreads at $1.25, now 0.85) so we are still down on them and I would now double down on the 2020 $250 calls at $1.35 and wait for a bounce to sell 20 more $5.50s for $1 (now 0.40).
IMax (IMAX) is running out of time to recover as we flipped our 10 short Dec $29 puts to 20 short March $24 puts for a net $1,500 credit (0.75/contract) and we added 20 March $22/26 bull call spreads for $1.65 ($3,300) and those are failing too with IMAX languishing around $21.
The March $24 puts are now $3.30 but, fortunately, so are the 2020 $20 puts so we'll roll to those and give ourselves more time to recover at a 20% lower strike with our break-even now $19.25. The March $22 calls are down to 0.10 so a loss of $2,800 there but we still like IMAX though I'd retreat to a long-term play and pick up 25 of the 2020 $18 ($6.20)/22 ($4.20) bull call spreads at $2 for $5,000 more so now we're in this trade for net $2,800 (the loss on the bull spread) - $1,500 (the remaining credit from the short puts) – $5,000 (new money) = $6,300 and we get $10,000 back if IMAX can make it to $22 for "only" a $3,700 profit potential on this broken trade.
So, one of the 3 losers turned around and two are still works in progress. This is how our system works because we deploy very little initial cash and, if the position works out right away, we make huge returns on our cash but, if it doesn't, we make more of a commitment with more cash – but only AFTER the stock we like has gone on sale. It's OK to put $6,300 to work to make $3,700 as that's 58.7% in 21 months – that's a reasonable rate of return and now all we need it IMAX $22, not $26.
Now, on to the 2nd Top Trades, starting in July:
Sell 10 Dec $21 puts for $1.85 ($1,850)
Buy 10 Dec $20 calls for $2.90 ($2,900)
Sell 10 Dec $24 calls for $1.20 ($1,200)
That's a net $150 credit on a $4,000 spread and all IMAX has to do is stay over $20.58 and you break even and holding $21 makes you $1,150 and things get better from there!
This one worked out and returned the full $4,000 for a $4,150 total profit (2,766%) so you see what I mean about getting a very nice profit if it happens to go your way….
In the LTP, we only have 10 short M 2019 $28 puts we sold for $5.60 back in Jan and they are now $8.83 so let's:
Roll 10 short 2019 $28 puts ($8.83) to 15 short $23 puts ($7,500).
Buy 40 2019 $23 calls for $3.20 ($12,800)
Sell 40 2019 $28 calls for $1.75 ($7,000)That's net $5,800 on the new spread less $5,600 we originally collected on the puts plus $1,330 we spent on the roll is net net $1,530 on $20,000 worth of Macy's spreads! If M gets back to $28 in two years, we make $18,470 (1,200%) and, if not, we are THRILLED to roll to a lower 2021 strike and sell more puts*. Even if that doesn't work and we roll it out again to 2023 and we end up in for $5,000 and THEN we hit it – it's still a nice 300% return over 6 years! As long as they don't go BK, this is a great play.*
Clearly, they did not go BK (yet) and now the Jan $23 puts are $4.30 ($6,450) and the spread is now in the money and net $2.75 ($11,000) for net $4,550, up $3,020 (197%) and that's only "on track" for our full 1,200% expected gain so this $4,550 spread is right on track to return $20,000 – that's still great for a new trade, even if you missed our first 197% returns!
As a new trade, the 10 2019 $130/150 bull call spreads at 11.30 ($11,300) with 5 short 2019 $130 puts at $10 ($5,000) is net $6,300 with a potential $13,700 (217%) upside potential at $150. That's a very nice trade for a blue-chip.
They've recovered slightly and now the short Jan $130 puts are $3.70 ($1,850) and the Jan $130/150 bull call spread is $15.30 ($15,300) for net $13,450 and that's up $7,150 (113%) in just 8 months and well on it's way to another $6,550 gain from here if they simply hold $150 into January, so even our leftovers are good for another 91.6% in 9 more months!
See? You don't have to go for spectacular returns to make spectacular amounts of money. IBM dipped to about $145 and all we did was promise to buy 500 shares at $130 and some nervous IBM shareholder paid us $10 ($5,000) per share for that guarantee on our part and then we made an $11.30 bet ($11,300) that IBM would be higher than $150 in January, which would pay us back $20 ($20,000). So our net cash outlay was $6,300 and, if all goes well, we get $20,000 back – just because IBM went up $5 in 18 months!
If you can make that kind of money with solid, conservitive bets – why gamble?
In the STP, we have 5 short Dec $370 puts at $29.50 ($14,750), now $47 ($23,500) and we can roll those along to 7 of the 2019 $300 puts at $33 ($23,100) for $400 out of pocket and we're about net $20 on the 7 short $300 puts for $280 entries, worst case. In the LTP, we'll open 10 2019 $320 ($68.50)/$420 ($28.50) bull call spreads for $40 ($40,000).
That was a good roll as CMG took a nasty dip in December. As it stands now, the Jan $300 puts are now $25 ($17,500) and the Jan $320/420 bull call spread is $30.70 ($30,700) for net $13,200, which is down $3,700 (21.8%) from our $16,900 entry. As a new trade, the break-even at $16.90 is $336.90 but I'd go more conservative and take the 2020 $250 ($105)/$350 ($51) bull call spread for $54 ($54,000) against 5 of the $2020 $300 puts at $37 ($18,500) as that's net $35,500 with a $64,500 (181%) upside potential at just $350 in 21 months. As I said – play conservative!
Buy 500 F for $11.03 ($5,515)
Sell 5 F 2019 $10 calls for $1.63 ($815)
Sell 5 F 2019 $10 puts for $1.02 ($510) That's net $8.38/9.19 ($4,190) and we're obligated to buy 500 more at $10 ($5,000). The dividend is 0.60 ($300/yr) and, if we get called away at $10, that's another $1.62 ($810) profit so a nice 20%+ return on a stock you can pass on to your grandchildren.
We sold the $10 calls when the stock was at $11.03 so we're just playing for those dividends and being conservative did pay off as the stock has dropped to $10.73 ($5,365) but the calls are now $1.35 ($675) and the puts are 0.72 ($360) as they both suffer from time decay so net $4,330 is a small gain BUT we collected an 0.15 dividend on Oct 20th ($75) and an 0.28 dividend on Jan 29th ($140) so net net $4,545 is a pretty healthy net $355 gain (8.5%) in the first 9 months and still on track for the full 20%. It's good to learn how to make these trades as they can fund your retirement!
Friday, July 28th: L Brands (LB) – This became our Trade of the Year as they fell lower but, unfortunately, in July, they were at $45 and, in March, they are $42.26 so it looks like we're going to finish July with a loser?
I'd sell 5 2019 $40 puts ($6 = $3,000) and buy 10 $40 ($9.40)/$50 ($4.80) bull call spreads @ $4.60 ($4,600) for net $1,600 on 10 ($1.60/long contract) and then at $50 you get $10,000 for an $8,400 (525%) profit.
Worst case is you own 500 shares of LB for net $41.60 – still a 10% discount to the current price for a company making $3/share (p/e 15). In fact, that's good enough to put in the OOP because who doesn't like to make 525% in 18 months?
The short time-frame helps and the short $40 puts are now $5.40 ($2,700) but the $40/50 spread is just $3.90 ($3,900) for net $1,200 and we're down $400 (33%) but of course I still like this as a new trade.
That was an inauspicious way to wrap up July but we did have 3 winners against our two losers (60%) in the holiday-shortened month. The net profit worked out to a lovely $6,425 – not our best work but not terrible either and nothing wrong with either of the two losing trades and plenty more to gain from all of them.
Well, it's time to go to work, I'll try to get to August later in the week but for now, it looks like the markets are going to have a very interesting week!