Wow, we are sinking to new levels of idiocy now.
The MSM would have you believe that the tremendous sell-off in the markets was just a trading error. If it was a trading error, then these markets SUCK! Are you telling me we put TRILLIONS of dollars, including our retirement savings, into a system that can be completely thrown into chaos because a single guy hits the wrong button on a single transaction? It’s a good thing Faisal Shahzad isn’t still working on Wall Street anymore, or he could have just pushed a button and caused a lot more damage that way than he did with a faulty car bomb…
This is financial terrorism, folks, retail traders were stopped out and margined out while the pros made Billions picking up the pieces. Don’t worry though, if you are rich enough and connected enough, the Nasdaq will reverse your losses but if they really wanted to make amends, they would cancel the day’s trading for ALL traders. My Members don’t care, we were, of course, in cash and generally short on our fun plays so we made out like bandits or, should I say, like banksters! Heck we even used our cash to do some bottom fishing in that ridiculous sell-off.
This market didn’t just sell off because of a trading mistake. Whatever really happened, it happened because there were no real buyers when the selling came - something I have been warning would happen during the last 3 months of low-volume run-ups. I keep using the house of cards/Jenga metaphor and that’s exactly what we have so be very careful when the same idiots who have been telling you BUYBUYBUY are now telling you to "come back in - the water’s fine." We all know how that advice worked out in Jaws…
I’m certainly NOT saying not to buy now. We dumped our short yesterday, as I told members during Chat to take the ridiculous money we were getting for the day and run:
2:17: Well you can assume today is a very nice move down and get out now. Tomorrow, even if jobs are bad and we head lower, then you can still flip to a June spread. Don’t foget that VIX keeps climbing as we head lower. Also, don’t forget how nice it is to be in cash and not care what happens tomorrow!
2:43: If you need them (our very successful DIA puts) for protection then just lighten up. You can sell some or you can cover by selling SOME May $104 puts for $2.90
2:50: I’d say wheeee but this is just scary now! We broke below 10,000? Wow, things are just going insane now and we still have an hour to go.
2:54: You’re playing for a meltdown and this is a meltdown so not much to do about it. This is such total BS it’s incredible! Good time to do some bottom fishing at these crazy lows. Volume is pretty good now, 273M on Dow at 2:50 but 5% lines held and now we’re bouncing to -4% so watch those lines. What a crazy day!
3:11 (to a Member who still had some long positions): Don’t start capitulating unless you have to, this was a forced move that can’t be real but, of course. Money coming out of bonds now, rates ticking up a bit. People back to bargain-hunting stocks.
Same comment, answering whether bears should take profits: YES. YES TO ALL BEARS, TAKE PROFITS ON A 5% ONE DAY MOVE!!!!
I know - wow, what a flip flopper, right? Actually 10,200 was our established buy line, the level at which we intended to flip bullish if it held on a sell-off but we sure didn’t expect to see it break and be retaken yesterday! Of course we have our stopping disciplines for taking profits in our Members’ Strategy Section but the action was so fast and furious that it was really just about controlling greed and taking profits as they were offered on the way down. The bid/ask spreads on options went so crazy that we were sometimes getting ridiculous prices for our puts and sometimes trapped in bearish spreads by the ridiculous prices of the puts we sold (which is still the case and gives us opportunities in today’s trading).
Today and next week our Members will be concentrating on selling options to the panicked retail investors, just like the big boys. We can pick beaten-down companies like Transocean (RIG) or Massey Energy (MEE) who had the mining disaste,r and put on what we call a buy/write play like this:
Buy MEE at $33.50
Sell 2012 $30 calls for $11.20 (net $22.30)
Sell 2012 $30 puts for $8.30 (net $14)
So our entry on MEE is net $14 and we are obligated to buy another round at $30 for an average entry of $22 if MEE finishes below $30 at Jan 2012 expiration. If MEE finishes over $30, we collect $30 from the person we sold the call to and we have a 114% profit in 20 months. This is what we do in hedge funds - we hedge! We’re not buying options, we’re selling them to people who think they can beat the markets and are willing to bet that MEE will go below $22.30 or above $38.30. In this particular case, we also think it will go above $38.30 but, rather than pay $8.30 for the call contract, we are HEDGING our belief in a way that protects us all the way to $22 (a 33% drop from today’s price) but pays us a better percent return than if the actual stock hit $65. Is that so complicated?
That’s what we do at PSW and today is a good time to review my "How to Buy Stocks For a 15-20% Discount" where we reveal my secret hedge fund techniques. Why do I do this? Because the people who put money into a hedge fund don’t do it because they don’t know how to trade - they do it because they are busy making other money or enjoying their lives instead of putting up with this market nonsense every day. Due to ridiculous regulations, it’s not realistic to set up a hedge fund for small investors so, for what it’s worth, I do my best to teach people how to use these strategies in their own trading. The BEST time to do this is when the VIX is high and I WILL be putting together a Buy List this weekend to select a couple of dozen sticks (we already grabbed 5 on yesterday’s dip) that are good candidates for the hedge.
I strongly recommend that anyone who has ever considered options at least try this strategy with one stock in your portfolio. If it works out, you’ll have at least one tool that you have learned how to use that will serve you for the rest of your life!
Meanwhile, nothing is better and nothing is fixed and don’t believe a word they say about "fat fingers" causing the crash. This crash was caused because a little boy finally pointed out that this Emperor of a rally actually has not clothes and all the MSM analysts who have been fawning over the magnificence of the rally are once again revealed to be nothing but fools, yet no greater fools than those who follow them…
So Asia blah, blah and Europe blah blah - I’ll go back to talking about fundamentals over the weekend. But watch the lack of reaction to 290,000 April Job gains this morning and then you decide if yesterday’s drop was a "mistake" or not. Greece may be solved, Greece may not be solved - if you have unhedged cash at work in the market over the weekend you will either be lucky or you won’t, but we will have cash and we will take advantage of whatever situation presents itself next week.
Have a great weekend,
- Phil
About the author: Philip Davis Philip R. Davis is a founder of Phil's Stock World (www.philstockworld.com), a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders. Mr. Davis is a serial entrepreneur, having founded software company Accu-Title, a... More
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