Take this review with a grain of salt as we went back to cash on most.
Still, it’s good to take a look at what worked and what didn’t – especially since those that didn’t are often some of our best new opportunities! It’s been a crazy market environment but we try to find at least one Top Trade each week for our Alert subscribers (and, of course, our Premium Members). I don’t force them – I either like a trade enough to feature it or I don’t.
On February 20, Gogo Inc (NASDAQ:GOGO) was our pick around lunchtime as we liked the story on the provider of WiFi services for airplanes. GOGO was a part of our Income Portfolio before we cashed that out and it was just starting to rally back from the low end of the range and we didn’t want to miss the breakout. I wrote quite a dissertation about why I liked them and our new trade idea was:
So, for the LTP, let’s sell 10 2017 $15 puts for $4.40 and buy the $20/25 bull call spread for $1.20 so we still have a net $3.20 credit for a net $11.80 entry (worst case) on 1,000 shares with the upside of $8,200 at $25.
As you can see, GOGO went flying higher and that is why it didn’t survive when we closed the LTP – as I thought $22 was a bit overdone so soon. It did dip back to $19 since but now back near $22 but too rich for my blood as a new entry. The puts are already down to $2.30 and the bull call spread is $1.90 so net -0.40 is a $2.80 improvement (87.5%) already.
This is already a great time to point out that our CONSERVATIVE LTP strategy still makes you fantastic short-term returns when you time the position right. You won’t get any exciting 300% pops in a week but the main difference is you are very unlikey to get badly burned if it moves against you! In this trade, our max gain was $8.20, which would still be 256% if GOGO is over 25 in 2017 – also not a bad return for PATIENT investors.
We had another great idea on February 26, as our Stock of the Century, iRobot Corporation (NASDAQ:IRBT) came up for discussion. Our trade idea for that day was:
As a new entry (we have a spread in the LTP), you can sell the 2017 $28 puts for $4.75 and buy the 2017 $28/35 bull call spread for $4 and that’s a net 0.75 credit on the $7 spread that’s $4.50 in the money to start.
Worst case to the downside is owning IRBT at net $28.75, which is a 12% discount to the current price and best case is a $7.75 gain (+1,033% on cash) if IRBT is over $35 in Jan 2017.
On this one, our timing was terrible and IRBT dropped all the way back to $30 in March but now back up a bit higher than our entry. Nonetheless, since we are being the house, not the Gabler (our core strategy at PSW), time is all we need to make our profits and already the short puts have fallen to $3.30 (up 30%) but the bull call spread, for some reason, is $3, so net -0.30 is only up 0.45 (60%), but that means it’s still a great opportunity because this net 0.30 credit pays $7 at $35.
We had another idea in the afternoon of 2/26 that was Top Trade worthy and it was Verizon Communications Inc. (NYSE:VZ), due to their possible partnership with DISH on spectrum leasing that we thought would be beneficial. Our trade idea was a very conservative for our dividend collectors:
They pay a nice $2.20 dividend (4.5%) and are a cash machine so owning the stock is not a bad idea but I don’t want to over-commit so let’s buy in the LTP 500 at $49.43 and sell the 2017 $47 calls for $4.50 and the $45 puts for $4.25 and that’s net $40.68/42.84 so called away at $47 is + $6.32 + $4.40 in dividends is $10.72 x 500 = $5,360 and we risk owning 1,000 shares at $42.84 if VZ fails.
VZ closed Friday at $50.03, only up 0.60 and the $47 puts are $4.35 while the $47 calls are $4.90 – so this trade is down a bit (0.50, -1.2%) on paper – even though it’s going in our direction. Don’t forget, we only need VZ to be over $47 in 2017 to make our expected $5,360 (26%) – an example of our “Get Rich Slowly” strategy.
4 Top Trades in one week! That’s unusual, so it must have been great, and it was as it was ProShares Ultra DJ-UBS Crude Oil (NYSEARCA:UCO), which dipped back down to $7.92, so we jumped on it (it went lower at first) with this trade idea on 2/27:
Here’s one way to play oil long: UCO is back at $7.92 and you can buy the July $7/10 bull call spread for $1.10 so just 0.18 in premium on this 2x ultra. You need a $2 move or 25% which is 12.5% on oil to $55.70 to be 100% in the money on this one, which would be up 172% if it sticks. Over the last year, UCO is only down 77% with oil down 50% so I think it’s worth the risk of also selling the July $6 puts for 0.80 to net into the trade for just 0.30 with a max return of $3 (1,000% return on cash). Since I have no problem being long $30,000 on oil at $45, let’s do 50 of these in the LTP. It costs $1,500 and pays $15,000 if all goes well.
Sometimes I hate to mention a play to people who missed it. This is one of those times! With UCO back at $9.24 on Friday, the short puts have dropped to 0.20 and the bull call spread is $1.68 for a net of $1.48 x 5,000 options is $7,400 back from our $1,500 investment (up 393%) already. This is one of the trades that is still in our Long-Term Portfolio as it’s “only” halfway to goal and right on track as there’s less than 3 months left to go.
It’s funny because here’s a trade that is now $7,400 and we’re still in it for the next $7,600 in 83 days but it’s hard to call it a pick as it’s “only” going to make another 102% – that doesn’t seem that good compared to the 1,000% return our original players will be getting but 102% is nothing to sneeze at either.
On March 2, we hit the ground running with another aggressive trade idea, taking advantage of Lumber Liquidators Holdings Inc’s (NYSE:LL) misfortune. As it turned out, we caught a bit of a falling knife and have since adjusted our original trade idea, which was:
Those LL 2017 $40 puts ended up selling for $12.50 once trading began (about 11) and are still there now for a net $27.50 entry and the 2017 $35s dropped to $13.50 and the $55s are fetching $6 so net $7.50 on the spread is about what we were looking at but with a short $12.50 on the $40s, it’s now a net $5 credit, which drops the worst-case net entry to $35 so let’s do 5 in the LTP so we can see how it goes. The potential upside is $10,000 at $55 vs owning 500 shares at net $35 ($17,500) and, if they drop 50% more ($20) – we’re happy to DD.
Even though LL is quite a bit lower, this is a good example of our ALWAYS Sell into the Initial Excitement rule. Since it has calmed down, the delta on the short puts has also calmed down and they are only $14 – far less damaging than you’d think since LL is 15% lower than our entry. Of course, that’s why we liked them – the fear premium was too good to pass up. The $35s are now $8.50 and the $55s are $3.77 so net -10.23 vs our original net $5 credit is down 105%, which sounds bad but our break-even is $35 and LL is at $33 and we have 20 months left to play.
In our LTP, the only adjustment we made was rolling down to the $30 calls (now $10.80 or +$2.30) and doubling down on them (the $30 calls) so we have 10 $30s against 5 short $55s and the 5 short $40 puts. It will take a while for LL to resolve their issues but we’ve been confident enough to leave it in the LTP.
March 9th was our next opportunity and that day we liked Barrick Gold Corporation (USA) (NYSE:ABX) as they came back to the bottom of their channel. It looks obvious now but the trick to value investing is sitting at the bottom of that drop and deciding it’s time to buy!
Our ABX trade idea was:
ABX/Jabob – ABX actually could be a fun way to play gold iWatches. Turns out China and India is where they expect huge sales as those guys love gold. We’re at a good point in the month to make a bull play on ABX for March and the $10.50 calls are 0.79 and you can sell the $11s for 0.45 and that’s net 0.32 for a 0.50 spread that’s 100% in the money and can make 47% in 11 days if ABX holds $11.
That’s certainly worth a toss in the $25KP so how about we pick up 10 for $320 and see if we can’t make a quick $180 next week.
Certainly the IWatch is not going to use a large amount of the World’s gold supply but it may spark a resurgence in demand for gold jewelry since Apple Inc. (NASDAQ:AAPL) is making it hip again. Anyway, despite gold itself taking a dive this week ($1,179.50 at the moment), ABX is up at $12.52 but that trade was short-term trade taking advantage of the iWatch rumors. ABX finished at $11.10 on March expirations. That means the $10.50 calls paid 0.60 and the short $11s cost 0.10 to close for the full 0.50 expected and yes, that was a 47% profit in 11 days.
March 18th was our next Top Trade Alert but it was another fantastic one as we though Proshares Trust II (NYSEARCA:SCO) was topping over $100 and we called for an aggressive sale of April calls:
We topped out at $110 in Jan but already we can sell the April $110s for $10.50 so let’s sell 3 of those in the STP for $3,150. We already sold 3 March $105s for $5.40 (now $4.50) and they are going to be cutting it close but, worst case, we’ll just roll them to April $110s. We also already sold March $120s for $13 on the spike to $110 and those look good at $2.50 with 3 days to go.
Of course I also like the long on /CL off the $44 line – as I said earlier, I expect us to test $45 into the inventories but at least $44.50 should be hit.