Have you been reading us all week?
If you've been reading us longer than that, you know we LOVE Natural Gas at these low levels. Well, not so low anymore as Natural Gas Futures (/NG) have jumped 0.20 for the week, which pays $2,000 PER CONTRACT and not only did we feature it on Monday's post but I discussed it in studio with Jill Malandro at Voice of America on Monday afternoon - my trading gift to the World!
Remember, at Philstockworld, we are FUNDAMENTAL investors who use Options and Futures to both leverage and hedge our positions but beneath all of our trades are sound fundamental principles which guide our selections. Our premise on Natural Gas was, to me, so obvious, that we made it our trade of the year for 2016 and, as I said in Monday's post:
Keep in mind the Natural Gas ETF (UNG) is our Trade of the Year and it's very rare that you are still able to play our trades of the year this deep into the first quarter but you can still make the following trade:
- Sell 10 UNG 2018 $5 puts for $1 ($1,000)
- Buy 20 UNG 2018 $5 calls for $2.10 ($4,200)
- Sell 20 UNG 2018 $9 calls for $0.95 ($1,900)
That puts you into the $8,000 spread for a net of $1,300 in cash, so the potential upside is $8,700. Your obligation, should UNG be below $5 (now $5.90 with Nat gas at $1.62) would be to own 1,000 shares of the ETF for $5,000 PLUS the $1,300 you put in (presumably lost if you don't pull the plug early) so net $6.30 is more than the current price, so this is a very aggressive trade. The margin on 10 shorts is net $517.49 of ordinary margin so it's a very efficient trade to have in your portfolio with a potential for a better than 4x return on cash+margin.
I know UNG isn't as sexy as our usual trade of the year picks but there's nothing unsexy about 200% annualized returns, is there? That's why I've been banging the table on this one. Once people catch on to the fact that US exports of natural gas have nowhere to go but up – it's not likely we'll see these prices again.
UNG has already popped from $5.90 at Monday's open to $6.45 this morning, up almost 10% on the week - so not bad, even if you are just playing the boring old ETF. The options spread we outlined above was a very easy fill as /NG opened lower (easy fill for our Futures trades too!) and, as of yesterday's close, the spread was already at $1,780, up $480 (36%) per set in just 4 days.
As I often remind you, we don't have to take big risks to make very big money very quickly. This is a very conservative, well-hedged entry yet it still managed to out-gain the actual ETF by 26%! Options are FUN!, not scary - if you learn how to BE THE HOUSE - Not the Gambler! In fact, if you follow that link to my Jan 20th Forbes interview, you'll see that, at that time, I gave an example trade of UCO (page 4), where I said:
Yesterday (8/15), we took a long on oil as it tested $29 – while we think it may go a bit lower, we think by July we’ll see $40 again and that’s +33% from here – though the options strategy we’re using will make 376% on cash if all goes well.
Those are the kind of trades we like to make at PSW!
- Buy 10 UCO July $5 calls for $3.70 ($3,750)
- Sell 10 UCO July $10 calls for $1.55 ($1,550)
- Sell 10 USO July $8.50 puts for $1.10 ($1,100)
That’s net $1,050 on a spread that will pay back $5,000 if UCO is over 10 at July options expiration day (15th). The potential downside to the trade is USO finishing below $8.50 (currently $8.79), where 1,000 shares would be assigned to you for $8,500 plus the $1,050 you already spent would effectively be $9.55 per share or, roughly $30 oil. So our worst case is being long on oil in July at $30 and our best case is making a 376% return ($3,950) on our $1,050 cash outlay. That’s not bad for 6 months’ “work”!
As you know, oil took off since then and is now $39, which is up $10,000 per contract on the /CL Futures but even our little, conservative spread is doing nicely, with UCO now at $9.90 and the net of that spread is already $2,170, up $1,020 (97%) in less than a month and that is only on track to the potential 376% return we fully expect in July.
Again, these trades are simply made using sound FUNDAMENTALS that we observe in the market and then we take our expected time-frame and look to see if we can construct an options trade idea that takes better advantage of it than just playing the stock, which was $7 at the time and is now up 41%. So YES!, we do make stock picks at PSW - when we like the options, of course we like the stock too but stocks are SOOOOOOO boring and, in most cases, less safe AND less profitable to trade.
In Tuesday's post (and you can get these reports, pre-market, every day in your inbox by SUBSCRIBING HERE), we reviewed the previous day's Futures trade ideas:
- S&P Futures (/ES) short at 2,000, out at 1,990 – up $500 per contract (twice)
- Dow Futures (/YM) short at 17,000, out at 16,950 - up $250 per contract
- Nasdaq Futures (/NQ) short at 4,350, out at 4,775 - up $1,500 per contract
- Russell Futures (/TF) short at 1,080, out at 1,085 - down $500 per contract
- Nikkei Futures (/NKD) short at 17,200, out at 16,700 - up $2,500 per contract
- Natural Gas Futures (/NQ) long at $1.62, out at $1.72 - up $1,000 per contract
Those did well but we didn't feel comfortable making new bets that morning (we made plenty in our Live Member Chat Room during the session, of course) but on Wednesday morning we wanted to take advantage of yet another Tilson attack on Lumber Liquidators and that trade is still playable as they've gone nowhere so far:
That nets you into the $7,000 spread for just $300 in cash and your worst case is you end up owning 500 share of LL at net $13.60. If LL recovers and gets back over $20 by Jan 2018 expiration (19th), you make $6,700 in profits, which is a return of 2,233% of your cash invested and the ordinary margin on the short puts should be about $2,400 – so it's a very margin-efficient trade as well (248% gain on cash + margin).
- Sell 5 LL 2018 $13 puts for $5.20 ($2,600)
- Buy 10 LL 2018 $13 calls for $5.20 ($5,200)
- Sell 10 LL 2018 $20 calls for $2.30 ($2,300)
Yesterday it was all about Draghi and again we liked shorting the Futures and holy cow, what a ride we had! Our shorting lines were:
- S&P Futures (/ES) short at 2,010, out at 1,970 – up $2,000 per contract (twice)
- Nasdaq Futures (/NQ) short at 4,330, out at 4,230 - up $2,000 per contract
- Russell Futures (/TF) short at 1,085, out at 1,055 - up $3,000 per contract
- Nikkei Futures (/NKD) short at 17,100, out at 16,500 - up $3,000 per contract
As you can see from the Nikkei chart above and this Nasdaq chart, we're back where we started from and I already sent out an Alert to our Members this morning with the following trade ideas (and even Tweeted it for people who don't like to pay for winning trade ideas):
I still lean on shorting /ES at 2,000 but very tight stops above and we're lined up with Dow 17,100, Nas 4,325 and RUT 1,070 and /NKD below 17,000 was such a good short yesterday I'd love to take another poke short there if the others are below. Figure the DAX is rejected at 9,800 – that needs watching too.
We're still (8:44) right on those lines so don't say I didn't tell you so and PLEASE don't ask me "how come I missed that great trade idea" - which happens to be the number one comment we get from non-Members, who wait to see our syndicated column later in the day. As I pointed out above, some trades are still fillable - you just have to watch the markets and make your own timing calls but at least you're saving $1 a day not subscribing to our newsletter, right?
Anyway, Draghi's had his turn at bat and it was 0-2 in the count yesterday as neither the Rate Decision or Draghi's press conference did the trick but the overnight spin was a home run and all seems well in Europe but, as I just said to a Reuters guy who interviewed me a few minutes ago and as I said in the morning Alert, I don't think it will last and I expect us to be back at 1,980 into the close - that's going to be a $1,000 per contract gain in the S&P Futures (/ES) and the way you play it is with very tight stops over 2,000, so you don't risk much (it's $50 per point) but, if the trade works out, you make 20x the risk.
That's how you win in the markets - make sure your potential rewards are greater than your risk and then you only have to be right half of the time to do great!
Have a great weekend,
- Phil