When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
BUY the iShares Russell 2000 ETF (IWM) December, 2017 $152-$155 in-the-money vertical BEAR PUT spread at $2.50 or best
Opening Trade
11-9-2017
expiration date: December 15, 2017
Portfolio weighting: 10%
Number of Contracts = 40 contracts
I'm not sending out this update because I want to boast, take credit, or run a victory lap.
After all, since I sent out the Trade Alert to sell short the Russell 2000 two hours ago, the small cap index has plunged $2, or 1.36%, creating an instant $1,480 profit for nimble followers.
No, I won't do that.
Instead, I want to continue on with the finer points of the rational for doing this trade.
I didn't have time earlier because I was in a rush to get the Alert out while the (IWM) was still rallying to its high for the day.
The new Republican plan floated today to delay corporate tax cuts to 2019 has certainly put the cat among the pigeons with equity investors.
It has reminded them how high stocks have run, and how much now withering unrealized profits are sitting on their books.
The Russell 2000 is actually misnamed, as it now has only 1,700 stocks.
The rest have disappeared over the years through mergers, privatizations, or bankruptcies, and have not been replaced, as happens quarterly with the S&P 500 (SPY).
For you and me this means that the (IWM) is more illiquid that the (SPY). When stock markets fall, the (IWM) falls about 1.5 times faster than the (SPY).
In other words, it's a great short to have in a falling market.
I think stock markets may be starting to either top out, or roll over here, at least for the short term.
That is especially true of the Russell 2000, which has not participated in the rally for the past month.
An approaching yearend is a big risk for the markets, as are overstretched valuations and prices.
The warning signs of a sell off are absolutely everywhere, but until now, have been ignored.
My Mad Hedge Fund Trader Market Timing Index has been living in overbought territory for the past two months. The normal life of a medium-term top is, guess what? Two months.
I am therefore going to pick up a position in the IShares Russell 2000 ETF (IWM) December, 2017 $152-$155 in-the-money vertical BEAR PUT spread at $2.50 or best.
This is a bet that the Russell 2000 will trade at or below $152 by theDecember 15 option expiration in 26 trading days, compared to the current $147.00.
Don't pay more than $2.70 for this position or you'll be chasing.
If you don't do options, this would be a great level to scale into a long in the ProShares Short Russell 2000 ETF (RWM), which has recently started to move.
Here are the specific trades you need to execute this position:
Buy 40 December, 2017 (IWM) $155 puts at............................................$9.00
Sell short 40 December, 2017 (IWM) $152 puts at.................................$6.50
Net Cost:....................................................................................................
Potential Profit: $3.00 - $2.50 = $0.50
(40 X 100 X $0.50) = $2,000 or 20.00% in 26 trading days.
To see how to enter this trade in your online platform, please look at the order ticket above, which I pulled off of Interactive Brokers.
If you are uncertain on how to execute an options spread, please watch my training video on How to Execute Vertical Call and Put Debit Spreads by clicking here.
You must be logged into your account to view the video.
Please keep in mind that these are ballpark prices only. There is no telling how much the market can move by the time you get this.
Be sure you've signed up for our FREE text alert service. When seconds count, this feature offers a trading advantage. In today's market, investors need every advantage they can get.
The best execution can be had by placing your bid for the entire spread in the middle market and waiting for the market to come to you.
The difference between the bid and the offer on these deep in-the-money spread trades can be enormous.
Don't execute the legs individually or you will end up losing much of your profit. Spread pricing can be very volatile close to expiration.
If you don't get done, don't worry. There are another 250 Trade Alerts coming at you over the coming 12 months.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
November 9, 2017
Fiat Lux
Featured Trade:
(NOVEMBER 8 2017 GLOBAL STRATEGY WEBINAR Q&A),
(TAKE A RIDE IN THE NEW SHORT JUNK ETF),
(THE COOLEST TOMBSTONE CONTEST)
Below please find a transcription of the viewer questions that popped up in my chat box during the November 8 Global Strategy Webinar, along with my answers.
If you find this useful please email Nancy in Customer Support at support@madhedgefundtrader.com and we will make it a regular feature of the service. Just put "Webinar Questions" in the subject line.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
1) What do you see for the banks?
Jim
They are totally slaved to the interest rate outlook, and I expect interest rates to bottom right around here. If you get another spike up in interest rates, the banks will take off like a rocket and go up for 3 more years. I still see a double in the banks.
2) Would you touch Wells Fargo?
Bill
I like Wells Fargo the most because you have a huge number of scandals built into the price now, and they really have run out of scandals. All you need is all quiet on the Western Front for a little bit and the stock will catch up with the rest of the banking sector.
3) Is biotech a long term buy?
Steve
Absolutely! If you only have to pick 2 sectors and forget everything else that's going to be technology and biotech.
4) Will tech perform well next year?
Doug
Answer, yes but only expect to get 1/3 to 1/2 the gains that we saw this year. Stock prices have run way ahead of earnings and we need earnings to catch up with share prices, so that is why I am saying rotate out of tech, but only for the short term. Long term, tech will be the top performing sector for the next 20 years.
5) What is going on with Tesla?
Matthew
This is a very difficult stock to trade. My inclination is wait for it to test $280 and then buy it with both hands. They are now at their maximum spend to create a 500,000 a year rate assembly line. So big cash drawdowns this quarter, probably again next quarter, are to be expected. After that we probably get to see the actual numbers that the investment in production will create.
6) Is it life or death on taxes for the Republicans?
Bart
Yes Bart, I would agree on that. If they can't get a tax package through next year we are looking at an all Democratic congress in November 2018, and we are already seeing a preview on that with the Democratic win in the Virginia and New Jersey governor's races yesterday.
7) Could change in the Fed chair also change the QE status, i.e. no bond sales?
George
The answer is yes. It could change if they postpone QE, bonds will rocket, yields would collapse and the stock market would continue rising for another year. That has always been a risk with a new Fed governor if he superheats the economy to try and get the 4% growth rate that the President promised in the campaign. So you cannot rule that out. It's unlikely, because stimulus is not needed now with stocks delivering their best year in decades. Corporate profits at all-time highs, unemployment at 20 year lows signal no need for further Fed stimulus. But you never know with this President.
8) John, would you buy TBT at these levels?
Joseph
It's a screaming buy. In fact, as soon as I finish with this webinar, I'm going to buy more (TBT).
9) Will the strong dollar hurt emerging markets as they try to pay off debt in US dollars?
Jim
Yes, it will. In fact, it could trigger a few trillion dollar's worth of defaults, which we have seen in past cycles because emerging market companies have almost all their debt in US dollars. This means the value of their debt increases just through currency appreciation.
10) What do you think Applied Materials?
Matt
I'd be a buyer on the dips. I think the artificial intelligence boom goes for several more years. Certainly, until the end of this bull market which is 18 more months.
11) Is it time to take profits on home builders?
Doug
I'd say no. Here's your big trade on home builders. If they cut out the loss of deductibility of local taxes and mortgage interest then the housing sector takes off like a rocket. That's going to be a big 2018 trade, so that is why you want to watch this sector. If you already have the home builders, I would probably hang on to them depending on what your risk tolerance is.
12) What do you think of GE?
Andrew
No way to tell if this is bottoming, but it could be a big 2018 trade. Classic Dog of the Dow situation.
13) Am I late to buy energy now?
Renee
I do think it is late on energy. They were getting thrown out with the bath water for most of this year. It just had a monster run. I would rather go out and short treasury bonds, short the Euro, short the Japanese yen, and buy gold on bigger dips. At this point, buying an energy name is at the bottom of the list.
14) Any thought on buying VIX calls as insurance?
Michael
You can do that Michael, but it is very expensive. We did this in October and it ended up eating up 3/4 of my performance for the month with only a 5% weighting. We bought (VIX) calls with the (VXX) at $40 and it went to $34. Ouch! The value of our call options dropped by half. Remember, in the (VXX) you have giant contango that guarantee about a 40% a year loss in any long position, so you are trying to trade against that. It really is a classic catching a falling knife situation.
15) Should i buy tech laggards?
Thomas
If you're going to be in tech then you might as well go with the Gucci stocks, and those are the FANG's. That's what people want to buy. Those are still cheap relative to the rest of the market, rather than chasing these marginal names like (SNAP) that have had monster sell offs.
To prove that The Diary of a Mad Hedge Fund Trader only deals with the highest quality, top drawer clientele, I want to share the picture below sent in by a subscriber.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
Global Market Comments
November 8, 2017
Fiat Lux
Featured Trade:
(BEHOLD THE POWER OF THE LEAP!),
(TLT), (TBT), ($TNX),
(EUROPEAN STYLE HOMELAND SECURITY),
(TESTIMONIAL)
