Since June, we’ve held a tracking position consisting of four Dec 19 34 puts @ 0.40. Take heart! JNK looks ready to slip below 37 for the first time since 2011. I remain confident in our position and am looking forward to a few days of exhilaration and fun when reality dawns on ‘investors’ in the form of a shocking reminder of why high-yields are called junk. Meanwhile, JNK will continue to fall as USU and TLT rise, since they are on opposite ends of the risk-perception spectrum. (I put the word ‘investors’ in quotes here because it is mostly a bunch of institutional clowns and thieves throwing Other People’s Money at garbage.)
From a Hidden Pivot standpoint, JNK has signaled minimum downside over the near term to at least 36.65, and thence to 35.60 (see inset). If it should rally back up to p2=37.70, I’d strongly suggest a mechanical short there. It would be a very appealing opportunity for those who missed the initial trade in June. For now, you can also bid for as many as 40 more of the puts. However, DO NOT PAY UP FOR THEM! They closed yesterday for 0.35, and you should bid no more than 0.30 unless JNK is trading below 36.90 this week. If that happens, raise the bid to 0.35. Also, you should lower the bid to 0.25 from 0.30 if JNK is trading above 37.20.
The market makers will wonder where all the bids are coming from for an option that barely trades. Just keep your bid out of harm’s way using the tactics described above. Eventually, they will grow so annoyed that they may even fill our bid at a bargain price just to have us out of their face. They will also ‘lean’ on our bid, hitting it if and when the short sale can be hedged with an option bought for an even better price. That is why you need to be careful about giving them too juicy a target. _______ UPDATE (August 24, 9:25 p.m. EDT): Our puts soared to 0.75 yesterday, and they could go still higher if JNK falls as I expect to the 35.60 target given above. Instead of trying to spread them off, let’s offer half of what we hold to close for 0.80. If anyone bought additional puts with the large bid I’d suggested, please let me know in the chat room and I’ll add them to our tracking position.
_______ UPDATE (September 1, 12:45 a.m.): We hold a cheap put on disaster. Do nothing as this garbage continues to waft higher. Keep in mind that a long in junk paper is effectively equivalent to being short in T-Bonds. _______ UPDATE (September 3, 1:23 a.m.): I’ve run out of patience. Let’s look to scratch the trade, offering the puts for 0.40, good-till-canceled. We’ll find a better way to short it, since it actually is on its way to hell, albeit much too slowly.
_______ UPDATE (8:11 p.m.): All contracts that traded today were at 0.40, so I’ll consider the order filled. We’re out of JNK, at least for now.