• This Week's Trade Ideas:

Volmageddon Episode 2? OR…The FED Rides to the Rescue… Again!

Bullish Ideas: Micron Technology Inc. > MU > $42.63 Last. Buy the Mar. 2nd 41.5 Calls for $2.75 or less with a close or anticipated close above $43.05 in an up market with expectations for continued strength in the major indices.  Earnings Release 3/22.

Bullish Mentions: TRIP > Earnings due out, big move today, counter-trend, trying to rise above 200 SMA.

Bearish Ideas: Carmax Inc. > KMX > $63.39 Last. Buy the Mar. 9th 63 Puts for $1.90 or less with a close or anticipated close below $63.30 in a down market with expectations for continued weakness in the major indices.  Earnings Release 4/4.  Note: Slightly OTM Put Selected.

Bearish Mentions: FB, HSIC, TRU, XRX, KMX, DAN, TTWO, SNE.

• Market Overview:
Not knowing if we’re in the beginning, middle or end of the volatility maelstrom, we’re going to tread ultra-cautiously for the time being. Situations such as this one can cause collateral damage to financial institutions which is essentially “blood in the water” which then leads to even more panic once the media picks up on it. That type of news can hit the tape at any time and throw a monkey wrench into the best laid trades.

• Below the Radar:
The sad reality is that the heavy-handed asset inflation policies, that are the hallmark of this bull market, have created a situation in which too many investors, desperate for yield and such, have sold premium over the cliff… Too many players were too short ultra-cheap volatility and now it’s blown up. The FED & co. created this moral hazard/financial-system-time-bomb and we’re all living with it as much as they NEED to support it by saving it.

• Options Academy:
Even though it seems like a long time ago, we recently covered our preferred approach to stocking up on out-of-the-money puts which are often referred to as the “30 delta” puts. Given how many questions arose with respect to buying puts…

Volmageddon Episode 2? OR…The FED Rides to the Rescue… Again!

The Mystery Deepens – Too early to call it the End Game for Great Global Melt-Up?

Buckle Up! - Conditions remain Extremely Challenging!

WOW!  Where to begin?  So much happened over the past week and so much new material has hit the proverbial tape that we’re left speechless!

But that doesn’t work for a newsletter!  So…away we go…

The Trade(s):

A few weeks back we noted:

In other words, if you decide to become or remain involved, stay nimble!!!

That CERTAINLY still applies!

And last week we wrote:

There’s no telling how slowly or quickly this volatility surge will simmer down.

We’re forced to stick with those sentiments.  As we write things are relatively calm but just yesterday the DOW rallied nearly 600 points.  We need to stay even more sharply-focused than normal until things settle down.                       

We strongly suggest attending tomorrow morning's Advantage Point Morning Call for full details with respect to these idea(s), last week’s and options education.

Week 2 of our Special Note:

Not knowing if we’re in the beginning, middle or end of the volatility maelstrom, we’re going to tread ultra-cautiously for the time being.  Situations such as this one can cause collateral damage to financial institutions which is essentially “blood in the water” which then leads to even more panic once the media picks up on it.  That type of news can hit the tape at any time and throw a monkey wrench into the best laid trades. 

Bullish Ideas: *Not many solid bullish ideas are out there now, and naturally, the outcomes of trades are likely to be even more market-dependent than usual.  Realize that you may be operating in a stormy environment should you decide that to enter the markets.

Micron Technology Inc. > MU > $42.63 Last.  Buy the Mar. 2nd 41.5 Calls for $2.75 or less with a close or anticipated close above $43.05 in an up market with expectations for continued strength in the major indices.  Earnings Release 3/22.

Bullish Mentions: TRIP > Earnings due out, big move today, counter-trend, trying to rise above 200 SMA.

Bearish Ideas: Carmax Inc. > KMX > $63.39 Last.  Buy the Mar. 9th 63 Puts for $1.90 or less with a close or anticipated close below $63.30 in a down market with expectations for continued weakness in the major indices.  Earnings Release 4/4.  Note: Slightly OTM Put Selected.

Bearish Mentions: FB, HSIC, TRU, XRX, KMX, DAN, TTWO, SNE.

Outlook:

The indices and naturally the stocks within them are EXTREMELY oversold in the short-term yet fear lingers.  Risks remain high as visibility remains low.

Technicals:

Will be discussed in-depth in the Advantage Point Morning Call webinar.

Fundamentals:

These trade idea(s) and mentions are technically-driven.

(Editor's note: This trade idea may be updated periodically, in keeping with market conditions. It is intended solely for educational purposes.)

Recap of Last Week:

This week we have choice but to remark on last week as it was one to remember:

https://www.cnbc.com/2018/02/09/dow-travels-20000-points-in-wild-week.html

Dow travels more than 22,000 points in one of the wildest weeks since the financial crisis

• The Dow Jones industrial average posted its worst week in two years. Earlier in the session, the index was on track for its worst week since October 2008, during the financial crisis.
• The stock index has traveled more than 22,000 points this week in a volatile few days that kicked off Monday with the Dow's biggest closing point drop on record.
• Stocks are falling as traders worry about rising interest rates, and volatility as measured by the VIX has jumped to its highest since the market turmoil of August 2015.

With the volatility maelstrom remaining in hyperdrive, we decided to AVOID getting rolled by volatility.

We’re content that decision as the markets moved so swiftly and violently at times that timely updates would not have been possible given our current system of communication: Written Emails

In one week, stocks moved more than they often do over the course of weeks and even months at times.  Within minutes, working trades were turned from big winners into losers for many folks that we’ve spoken with and the reverse is true of course.  When conditions become less predictable and reliable then we’re dealing in more noise and chaos which can present many challenges.

All that being covered, we kept our eye on things and ran our scans, but trading remained extremely volatile throughout the week and we opted to err on the safe side.  The likely-was the President’s Working Group intervention in the markets on Friday as many stocks were near their 200 SMAs, crushed shorts out of the blue.  That type of action and getting Shanghaied by it before we can communicate, is exactly what we were concerned about with respect to last week’s volatility.

We’re leaving a full reprint in ITALICS (below) of where things have been the past few weeks for background as we may be at an important juncture.

Our recent thoughts on the market can be summarized as follows:

1. It broke below key trendline support.
2. There were many support levels below that, but FEAR can trump them all and it did, and very quickly due to extreme stretch and extreme shorts in VOLATILITY, for lack of a perfect description.
3. We believed that the indices could fall back to TREND if they cracked further, with trend being the 200 SMA which equated to $253.00ish on the SPYs.
4. We alluded to the fact that the PPT may be summoned to stave of further damage. We assert here that they went to work on Friday to save Wall St. once again.

Here’s the current visuals which we will discuss tomorrow.  As usual, we’re focusing on the SPYs as the DIAs and QQQs are similar in terms of price action:

The last few weeks’ we’ve sounded “ONE NOTE” but that’s our job!  We’ve got to call it like we see it and then recall it another way if conditions change.  Last week we concluded with graphic and comments that follow in italics, but we’ve added BOLD for emphasis:

We’ve yet to get that bounce-back attempt and stocks did easily shred their way through multiple would-be support levels.  Our best guess is that the sentiment and extreme volatility shorts combined with extreme long exposure of many groups quickly converted into a very strong fear cycle.  To wit…

One “PRIME DIRECTIVE” of the Advantage Point Newsletter is to help folks better understand how to operate in the trading markets, mainly the equity markets but with options as our investment vehicle.  PLEASE allow the last few months of content to guide you in the future as there will be other phases like this one.  We’re not trumpeting anything here, we’re simply noting that when things become very extreme, as we made it a point to note in dozens of ways, that it should guide our risk appetite and advise our trade management.  We can still trade during risky times, but we must be even more prudent and less cavalier when most are acting quite the opposite.  But now, we’re onto NOW:

If we were to try to “nutshell” the recent develops, we do it this way:

The market is simply falling back to trend, albeit, very rapidly and very fearfully.

This is really a week where the markets must sink or swim on their own accord except for the helping hand they may receive from the President’s Working Group aka the “Plunge Protection Team”.  It could be a very interesting week to say the least.

BACK TO THIS WEEK!:

The calendar is fairly-heavy this week and not with rinky-dink numbers.  There are some important reports on the way.  In this charged environment they’ll likely be used for futures ramps and intra-day reversals and ramp jobs where needed.  If they’re waiting on material to rally on, they should have it.  The wildcard remains inflation/interest rates etc.  Nothing mattered for a quite a while and now we’re back to where things may matter, at least, for a little while.

Last week’s BTR concluded with:

Act prudently!  Like it is late Summer 1929!

Forgive us as we’ll probably use that one again this week!  We remain concerned but now it is more two-way concern than one way.  The past 8 soon going on 9 years of financial engineering are in danger of falling apart and despite popular conspiracy theories to the contrary, we’re not buying that THEY are going to let the bottom fall out very easily, at least, not yet!  Although, we do find it very curious that Mr. and Mrs. Magoo have both suggested that stocks are in a bubble over the past few weeks.  All we need is for Helicopter Ben to do so to compete the trifecta!

The sad reality is that the heavy-handed asset inflation policies, that are the hallmark of this bull market, have created a situation in which too many investors, desperate for yield and such, have sold premium over the cliff…  Too many players were too short ultra-cheap volatility and now it’s blown up.  The FED & co. created this moral hazard/financial-system-time-bomb and we’re all living with it as much as they NEED to support it by saving it.  YES, they’re saving the super-reckless all over again.  The FED destroyed normal volatility and thus set us up for Volmageddon as it is now being called.  Now that we’ve gotten that off our “desk”, we’ll move on…

We could fill over a hundred pages with interesting content for this week’s main body of BTR work.  That’s how many notables have decided to chime in on last week’s goings-on and the ramifications going forward.  We’ve done our best to hone in on what we see as only the most-timely information as situation remains fluid.  Normally in BTR we’re presenting background information could cause issues for the markets.  Since they now are experiencing issues, we’re trying to keep up with the flow!   Here’s a read on what one of Wall St.’s biggest Head Honchos, Ray Dalio, ephemeral thoughts are at the moment.  He’s a pretty influential guy or so it’s thought:

https://www.marketwatch.com/story/risks-of-a-recession-are-rising-says-ray-dalio-2018-02-13

Here’s a good read from James Montier, it may be worth your time as he’s worked with notables and is now exiting due to his belief that even the “Greater Fool” trade has ran it’s course for now:

https://www.gmo.com/docs/default-source/research-and-commentary/strategies/asset-allocation/the-advent-of-a-cynical-bubble.pdf?sfvrsn=4

Here’s the gist in two graphics if you don’t have the time but this is great stuff in our view because what it boils down to is this as far as money managers go:

1. They don’t care, it is your money not theirs.
2. Everybody else is doing it.
3. I can’t miss out so I gotta be in despite knowing better!

Here is the proof.  They believe stocks are overvalued like never before…

In closing I can’t do better than repeat the words of caution offered by Keynes:

It is the nature of organized investment markets, under the influence of purchasers largely ignorant of what they are buying and speculators who are more concerned with forecasting the next shift of market sentiment than with a reasonable estimate of future yield of capital - assets, that, when disillusion falls upon an over-optimistic and over-bought market, it should fall with sudden and catastrophic force.

Add those thoughts to Dalio’s and then mix in record “Vol” shorts and there you have it!  The powder keg might not even be lit at this point.  Now we’ll add that the retail trader on whom they love to feast upon, is in again and bigger than ever!  Those odd-lotters are wheeling and dealing again and that’s rarely been a bullish sign:

Another sign that things may not be done is that the BTD (buy the dip) crowd may need to be broken before the selling ceases.  That sure hasn’t happened and it seems there may be more BTDers than ever at present:

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As Nanex's Eric Scott Hunsader notes, the last week has seen liquidity levels for S&P futures - the most liquid equity security in the world - collapse to record lows, far worse than during the peak of the crisis in 08...

AVOIDING MASSIVE DRAWDOWNS IS ONE OF THE BIG SECRETS TO INVESTING SUCCESS

Act prudently!

If all is well, there will be plenty of time and opportunity!

Given, well…last week, we’re heading back into PUTS in this week’s OA.

Even though it seems like a long time ago, we recently covered our preferred approach to stocking up on out-of-the-money puts which are often referred to as the “30 delta” puts.  Given how many questions arose with respect to buying puts over this weekend’s workshop, we thought the subject was worth revisiting.  We’re providing a full reprint from our January 16^th Options Academy section of the AP Newsletter below as we’re riffing on that one this week.

We thought it would be a fun and interesting exercise to follow through on what was covered in that column and other columns that we’ve written dedicated to initiating and managing Calendar Spreads.  It may be helpful to read the content from a few weeks back first before returning to here for what follows.

In the chart above, we’ve drawn a RED arrow to highlight Feb. 2nd.’s close below horizontal support but please note that the SPYs fell below our ORANGE support line on Jan. 30^th, that’s our GO TIME!  However, by Feb. 2nd, it should have been clear to all that trouble was brewing.  Thus…

On Jan 30th, a 30 Delta Put buyer could have:

Bought the SPYs Mar. 2^nd 276 Strike 30 Delta Put for $2.17 and sold the same strike in the Feb. 9^th expiration for $0.89 and thus have went long the 276 Put Calendar Spread for $1.28 net, thus keeping Theta issues under control if the gang kept the SPYs levitating for a while.

Moving ahead to Feb. 2^nd, we’d now seek to buy back our short Feb. 9^th puts to simply be long our Mar. 2^nd Puts.  Why?  Well, as we outlined in prior OA installments:

1. We only trade the Calendar Spread to keep Theta controlled, otherwise we’d simply buy puts.
2. Once the break-down begins, (as far as we can tell), and when the stocks head to our strike, we BUY BACK the short side of the OTM Put Calendar before it can hurt us by falling below and away from our strike.
3. Remember, our scenario is playing out, so we execute our trade management plan accordingly.

Thus:

On Feb. 2^nd we’d have to pay $2.66 to buy back Feb. 9^th puts we sold for $0.89 thus taking a $1.77 loss on that leg but we retain ALL our Mar. 2^nd puts which we bought for $2.17 but are then worth $4.30.  Notice, that we could sell them for $4.30 and realize a $2.13 profit on that leg of the original trade and thus, NET, we could close out the entire spread for a $0.36 profit if we’d like.  HOWEVER, we didn’t set out to make peanuts!  We set out own OTM puts that could pay off big while keeping Theta under control until real trouble brewed and oh did it!

If we jump ahead to Feb. 8^th’s close, we could have sold our Mar. 2^nd puts out for $16.92!  Not too shabby!

Now, let’s net this all out:

We close out the short Feb. 9^th Put for a $1.77 loss on Feb. 2^nd.

We close out the long Mar. 2^nd Put for $14.75 profit on Feb. 9^th.

The NET, NET is a $12.98 profit.  That would equate to $1298.00 on a 1 lot or $12,980 on a 10 lot with $128.00 or $1280.00 of max. risk respectively depending on trade size.  That’s better than a 10 to 1 reward to risk ratio.  We’ll take it!

This approach is most definitely something to consider the next time you believe that something is amiss in the markets.  Going further out-of-the-money is also worth considering if you’d like more time and price movement to the downside to react.

If you have questions, ask away in this week's Advantage Point Morning Call webinar.

January 16^th Options Academy

We’ll use the same graphic but do keep in mind that things have only become even more vertical in the interim!

We noted last week that when indices become too extreme to the bull side, many folks like to set about acquiring OTM 30 Delta Puts on stocks and indexes that they believe are due for a correction.  Being that those puts are OTM and thus “cheap” in several ways, the idea makes a lot of sense.  First off, as they are relatively “dollar cheap”, many more of them can be acquired vs. costlier (closer to the ATM) puts.  Additionally, with the VIX and options in general being so cheap, it’s as if we’re picking up these types of puts on “sale”.  Thirdly, they will not only gain in value due to delta and gamma if the markets pull back, but it will be likely that they will also delivery a “volatility pop” for the holder as investors scramble for this very form of insurance as they finally realize that a significant drop is occurring.  All of that is well and good except for the fact that if buying the 30 Delta Put is all we do, we’ve taken on nothing but a speculative counter-trend position that’s entirely comprised of EXTRINSIC VALUE!  That means we’ll be right up against “it” and by “it” we mean THETA aka DECAY and not the positive kind!

The “theta” concern is what drives us to suggest that folks consider going long the OTM Put Calendar spread.  This can even be done in ratio form to balance out theta.  Consider this entirely hypothetical example simply to illustrate the point.

Let’s assume that we sell 100 30 Delta Feb 2^nd Expiration Puts as we buy 200 March 2^nd Expiration Puts at the same strike on the same imaginary stock.  If the Feb’s decay at .10 per day but the March’s lose only .05 per day, then we’ve balanced out our theta issue, and yet we have “net long” puts.  However…

…We could still treat this as we like and once the markets have broken below a key support level, we could elect to buy back our short puts and live the naked long 30 Delta Put Dream as the indices are cratering, as originally planned of course!  At least, this way, we kept our theta under control until it was “go time”.  We much prefer this approach if one insists on initiating the put purchase BEFORE the technical signs have confirmed that it is go time.  Think about it…

At many, many junctures along the way of even 2017 alone, the markets looked overdone, and yet, they continued higher.  Had we “stockpiled” 30 Delta Puts and done nothing beyond that, we’d be holding the bag!  (So to speak) That’s the real danger with this approach if it is not actively managed with an eye towards theta hedging.  We like the idea, it’s just, all things in moderation...even Crash Bets!

If you have questions, ask away in this week's Advantage Point Morning Call webinar.