Thrilling Thursday: The Wild Market Ride Continues

We're in cash, so we don't care.

That's right, remember how we cashed out last week and how we had those disaster hedges in Friday morning's post?  Turns out that was kind of a good idea as the market has whipsawed around and we get to enjoy it from the sidelines.  

Our first aggressive hedge idea, the Russell ultra-short ETF (TZA) Oct $10/13 bull call spread with the short Jan $10 puts for net $1,400 is only at $1,610 (up 15%) so far and it has potential to pay back $6,000, which is still a $4,390 profit (272%) even with the late start, so still a good hedge to have - as are the others we discussed.  

We put our money where our mouth was in our 5% (Montly) Portfolio over at Seeking Alpha and gained $3,000 (3%) yesterday as we timed the sell-off very well by getting more aggressive on our Dow (DIA) shorts, pushing us to close up 7.8% for the month + 1 day.  My live chat comment at noon yesterday to our Members was:  

In the 5% Portfolio we now have 10 long and 20 short and we're going to close our remaining 10 long DIA Sept $155 calls at $10.20 and HOPE the short calls expire lower than they are now.

HOPE, however, is not a valid investing strategy so we will protect ourselves with 15 DIA Nov $165 ($5.65)/$170 ($3) bull call spreads at $2.65 ($3,975). That gives us $6,025 of upside protection in case the Dow pops higher than it is now and, of course, if it does, we'll add more bullish positions.

On the whole, though, it reflects my bearish attitude because I don't see $167.50 as a big threat and certainly not $170 which is less than 5% up from here (17,250) by next Friday.  

As you can see on the chart, our timing was fantastic and the Dow fell off a cliff shortly after so we got the best of both worlds.  By simply pulling the long portion of the bullish DIA spread we picked up on 8/24 in what we call a Jenga Play, we were able to cash out the winning portion at the top of the fake rally and then take full advantage of the ride down.  

Having hedged positions like that in your portfolio lets you rebalance on the fly by just adding to or removing from one of the legs.  In a wildly gyrating market like this, you can take advantage of the moves up and down by dismantling each leg as you hit the top or bottom of the channel and the nice thing about options is you get paid more (more premium) when you sell into the excitement.  In fact, we only have two trading rules at PSW and they are:

  1. ALWAYS sell into the initial excitement.
  2. When in doubt, sell half.

See, very simple.  We just follow our own rules and make money.  Of course it's a bit more difficult when the Central Banks are changing the market rules every day but, as I've said before - we love the volatility.  That's why our 5% Portfolio is now called the Option Opportunities Portfolio - it describes the overall strategy better and, after all, we're already up 7.8%, which means the 50% intro discount will end very shortly.  

Possibly not before Chinese markets have their own 50% off sale as we went right back to bear last night as the Shanghai fell 1.4% into the close and the Hang Seng dropped 2.5% along with the Nikkei as both China and Japan seem to be running out of ways to stimulate their markets.  

Chinese markets were disappointed today as the Government dropped the Yuan again and put another 80 Billion of them ($12Bn) into the market and, even with trading volumes 99% below average (it's a crime to short the market) - it still wasn't enough to stop the people who are willing to sell - even at these low prices.  

Speaking of thought crimes, Chinese regulators are prosecuting Moody's for pointing out in a 2011 report that 49 of 61 Chinese non-financial companies issuing debt were raising too many "red flags" to be investable.  In its 25-page report, Moody's screened Chinese companies, many of them listed on Hong Kong's stock exchange, for 20 "red flags" to sniff out weak corporate governance, opaque business models, too-fast growth and poor quality earnings or financial statements.  

One of the companies flagged was Kaisa Holdings who, as I pointed out way back in April, was the canary in the coal mine that told us to get out of China ("Friday Failure – Kaisa Bond Default Underlines China Housing Crash").  At the time I warned our readers:

If you are an investor in Chinese notes or Chinese stocks, consider this a warning.  I will remind you that these are slow-rolling crises that take quite a long time (in the timeframe of the average investor) to unwind.

Turns out it took about 60 days from my warning!  What China is doing with Moodys (and now there's a case against Citron Research too) is warning ratings agencies, analysts - EVEN TRADERS and the press not to look too closely under the hood of China's corporations or their economy - because they need to maintain the illusion that it's not a complete disaster for a while longer, at least.  

Meanwhile, red flags abound in the news (and this is just this morning!):  

That's a lot of red flags!  This is why we went to CASH!!!  It would be fun to go gung-ho bearish and short the market but, so far, the Central Banksters have not hesitated to prop the markets back up every time they begin to fall and we don't want to gamble that this time will be different so, for now, we're simply going to watch from the sidelines and follow the range set by our 5% Rule (see older posts).  

Please, be careful out there!