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Two Tips for Permabears Eager to Short a Major Top

15 comments

We got short at the top on Friday, but how long will Mr. Market let us enjoy the ride? Our vehicle, QQQ put options, nearly ran off the road on Tuesday when the Dow began the day with a 125-point rally. A pullback in the early going shaved that gain by two-thirds, but by early afternoon bulls were beating on the highs, threatening to send bears into a new round of short-covering. The pessimists got a reprieve, however, when something spooked the market late in the session, sending the Industrial Average into a 225-point dive that left it 66 points lower on the day.  It was not a session for the faint-hearted. Still, the outcome boosted the value of our put position, leaving Rick’s Picks subscribers in good shape to try to lock in a profit no matter what the stock market does as 2011 draws to an unpredictable close.

On Friday, we’d actually been bullish for most of the day in anticipation of a powerful rally in the E-Mini S&Ps to exactly 1259.25, a Hidden Pivot target. With ten minutes to go before the bell, the futures got as high as 1258.50, and so we sent a bulletin to subscribers telling them to get short by buying January 54 puts for 0.96 in QQQ. This equity-based vehicle corresponds to the S&P futures and was making its high at 57.17. Although we rarely advise opening a position on a Friday afternoon, the circumstances strongly warranted it. This time, taking a gamble paid off when the new week began. Monday’s gap-down opening caused our Jan 54 puts to spike to as high as 1.25, and so we told subscribers to take a profit on half the position.

Now that the selling has resumed, our goal will be to spread off our remaining risk by selling some puts of a lower strike against those we still hold.  If we are able to do so for more than we paid for the January 54 puts (whose costs basis, by the way, was reduced by partial profit-taking on Monday to 0.76) then we’ll have a bearish position that cannot lose and which would show a maximum gain of $200 per spread if the QQQs fall 7% or more between now and January expiration. But the weakness needn’t be so severe in order for the position to reward us, since it would require a decline of just 3.3%, to below 54, to go into the black dollar-for-dollar with the underlying vehicle.

Never Assume…

Now for the two tips we promised permabears who are understandably eager to get short at a top that will endure for a long time. First, although there’s nothing wrong with shorting at every opportunity, even minor-trend rally targets, we should never assume that whatever selloff follows is a resumption of the Mother of All Bear Markets. Odds are against this, since the broad average have been mostly moving higher for the last 33 months. If you keep this well in mind, you are less likely to make the mistake of going “all-in” based on your emotions.  Which leads us to the second tip:  Take partial profits the first chance you get, even if the initial take-out is minuscule. This should be routine on all option trades, since time decay will sneak up and clobber you from behind if you gloat for more than a couple of days about a winner.  Option trades advised by Rick’s Picks almost invariably use this tactic, but we also go a step further if the trade moves our way, selling puts/calls for a sum equal to or greater than what we paid originally.

Naturally, we play both sides of the market, up or down. If you want to see the ideas described above in action, click here for a free trial to Rick’s Picks so that you can follow our efforts to leg into a bullish butterfly spread in the SPY, an optionable vehicle that tracks the S&P Index.

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  • Seawolf December 15, 2011, 4:33 am

    Here is an interesting piece

    http://www.groenewegenreport.com/

  • Steve December 14, 2011, 9:44 pm

    Trade On. Don’t worry.
    AP 12-14
    “. . .A defense spending bill up for a House vote today would require military custody . . . and indefinite detention without trial for some suspects, even U.S. citizens captured on American soil.”

    Read ‘Trading with the Enemy Act’, and the ‘Emergency Banking Act’ which which Obama, Bush and the others declare the “Emergency” without any facts.

    McCain who sponsered this bill should be tried by the House for High Treason assault on the right to Writ of Habeas Corpus, and destruction of the Declaration.

    • Robert December 14, 2011, 11:02 pm

      John McCain is a man of limited (and suspicious) character. He fears everything he doesn’t understand. He is not a Patriot. If the house should choose to try him I would be in full support, but fat chance- this man was the best option the Repubs could roll out in the 2008 election…. Doesn’t that say a lot about the terminal condition of the patient suffering from the cancer that is Washington DC?

      Steve- I just don’t care about these laws.
      I know that they will never be able to detain me, just as I know that there is no way they would have ever gotten me onto the train to Auschwitz…

    • Steve December 15, 2011, 7:29 am

      Freedom lives in the heart and mind Robert. The Law only shows the sinner sin.

  • gary leibowitz December 14, 2011, 7:14 pm

    Should be a really strong year end rally based on the previous surge. The news is all EU. It should be baked in by now.

    The conspiracy/manipulation theories on golds underperformance has me perplexed. With deflation and a stonger dollar what would you expect?

    I do believe we will have a blow-off top soon. If so then January/February should drive over 20 percent down.

    • Robert December 14, 2011, 11:31 pm

      Gary-

      You mean a blow off top in the Dollar index, yes?

      I was looking at the dollar chart and I can’t look past the fact that even with all the carnage in the equity and commodity markets the past couple weeks, the dollar index is barely breaking 80…

      The flight out of commodities is not moving exclusively into the greenback, even though the dollar is the currency most commodities are priced in- I find this fascinating. Either the funds are moving into other currencies, or the dollar is being debased at a rate nearly equal to the pace of the selloff in commodities.

      More fascinating- The Gold lease rate is negative for the second time since September 2011 (and the 4th time since Sept 2008)- and every single time, when the Gold lease rate went negative, the Gold price was smashed.

      Now, at the risk of sounding too “Conspiracy theory-ish” I will only state a fact: when Gold lease rates are negative, then the lenders are PAYING the borrowers to take the lender’s Gold and sell it into the market.

      Only a REALLY friendly neighbor would give you their car and say “Sell it for whatever you can get, and just make sure you give me back an equivalent car next week”

      The trough to peak move in the dollar since Oct has not even been 10%, while commodities have been crushed. Today, not even oil could stem the tide of the increasing risk of War War War in Iran…

      I agree- it sure smells like deflation… all but those pesky Gold lease rates…

  • Robert December 14, 2011, 6:58 pm

    55,000 SI contracts traded on the CME so far today. 550 Million ounces of Silver.

    Only 5% of those (5% of ONE day’s trades) need to stand for delivery in March to demolish the COMEX registered silver inventory…

    This stuff had better start leaping out of the ground soon.

    I’ve been following the PM markets for 10 years, and the parallels with late 2002, Mid 2004, early 2007, and early 2009 are becoming pretty clear to me.

    I expect the force majeure and commercial signal failure crowds to start screaming from the rooftops any day now…

  • fallingman December 14, 2011, 6:36 pm

    Sound advice.

  • Robert December 14, 2011, 5:52 pm

    Falling knife or not… I don’t care.

    Long 200 more shares AGQ @ 46.04

    • Rick Ackerman December 14, 2011, 8:57 pm

      Careful, Robert. I see minimum downside potential to 41.14 at the moment — about $3.60 beneath current levels.

    • Robert December 14, 2011, 10:51 pm

      Thanks Rick… I have a pretty tight stop on the trade, and I’m encouraged that it has held firm through the day.

      We’ll see what tomorrow brings.

      One thing is for certain, with his $1.5 Billion shelf statement on PSLV, Eric Sprott is going to be well positioned to remove a serious quantity of 1000 ounce bars from the exchanges….

  • Rich December 14, 2011, 4:46 pm

    Aloha All
    Nice QQQ trades Rick.
    ISEE ISE sentiment seems to be working for me Mario.
    Monday’s Opening Call/Put low of 64% suggested a bounce and that’s what we got…

  • Robert December 14, 2011, 4:43 pm

    I hate to sound do pessimistic (no seriously, I REALLY do)…

    But, I fear we are just barely into “You ain’t seen nothing yet, folks”

  • mario cavolo December 14, 2011, 2:42 pm

    Not a session for the faint of heart, indeed Rick.

    Pay attention to sentiment? What a joke…this market and the gyrations up and down are RUN by machines now, what is it 70-80% of the volume is done by algorithmic driven machines. I suddenly thought we aren’t mindful of this as we write our passionate diatribes…I look forward to the fabulous bounce coming in the euro and gold and silver as more BS news developments hit the street headlines..

    Cheers, Mario

    • John Jay December 14, 2011, 4:05 pm

      I know Mario. I have read retail investors are still pulling money out of the market. By now even the dumbest of the dumb know it’s rigged. But where to go for safety? MF Global and Angelo M just proved the oligarchs can outright steal with impunity, even if it crashes the whole world economic system. Eric Holder just proved Congress is not going to enforce the law to protect you and I. Seven Wal Mart heirs worth more than the bottom 30% of America show who is running the show. Thank god for the flight to safety supporting our Treasury market for the time being. Libya and Egypt just proved the results of a peoples’ revolution are worse than what they revolted against. Law and order are breaking down all over the world. I think we have just experienced the financial equal of WWI which toppled the existing world order back then. One can argue that we are still feeling the aftershocks from that today.


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