When the Dow crashed 514 points in a single day a few years ago, the market lost a staggering $850 billion in market capitalization. High frequency traders were possibly responsible for half of this move, but generated a mere $65 million in profits, some 7/1,000’s of a percent of the total loss.
Are market authorities and regulators being penny-wise but pound-foolish?
The carnage the HF traders are causing is triggering a rising cry from market participants to ban the despised strategy. Many are calling for the return of the “short sale test tick rule”, or SEC Rule 17 CFR 240.10a-1, otherwise known as the “uptick rule”, which permits traders to execute short sales only if the previous trade caused an uptick in prices.
The rule was created eons ago to prevent the sort of cascading, snowballing selling that we are seeing today. It was repealed on July 6, 2007. Check out a chart of the volatility that ensued and it will make your hair on the back of your neck raise.
Those unfamiliar with how algorithmic trading works, see it as something akin to illegal front running. “Co-location” of mainframes with exchange computers, or having them in adjacent rooms, gives them another head start over the rest of us.
Much of the trading sees HF traders battling each other and involves what used to be called “spoofing”, the placing of large, out-of-the-market orders with no intention of execution.
Needless to say, if you or I tried any of these shenanigans, the SEC would lock us up in the can so fast it would make your head spin.
Many accuse exchange authorities of a conflict of interest, allowing members to reap sizeable custody fees from HF traders, while the rest of us get taken to the cleaners. Co-location fees run in the hundreds of thousands of dollars per customer per month. This is happening while traditional revenue sources, like proprietary trading, are disappearing, thanks to Dodd-Frank. There is no doubt that the volatility is driving the retail investor from the market.
In fact, HF trading has been around since the nineties, back when the uptick rule was still in place and co-location was a term out of Star Trek. But it was small potatoes then, confined to a few niche players like Renaissance, and certainly lacked the firepower to engineer 500-point market swings.
The big problem with this solution is that HF trading now accounts for up to 70% of the daily trading volume. Ban them, and the market volatility will shrink back to double-digit trading ranges that will put us all asleep.
The diminished liquidity might make it difficult for the 800-pound gorillas of the market, like Fidelity and CalPERS, to execute trades, further frightening end investors from equities. It is possible that we have become so addicted to the crack cocaine that HF traders provide us that we can’t live without it?
https://www.madhedgefundtrader.com/wp-content/uploads/2018/10/Stock-Swing.png414579John Thomashttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngJohn Thomas2021-04-13 10:02:152021-04-13 11:14:26Bring Back the Uptick Rule!
Her name is Goldilocks. The neighbors have been sneaking peeks at her through the curtains at night and raising their eyebrows because she is slightly older than my kids, or about 50 years younger than me.
I have no complaints. Suddenly, the world looks a brighter place, I’m getting up earlier in the morning, and there is a definite spring in my step. My doctor asks me what I’ve been taking lately.
It helps a lot too that the value of my stock portfolio is going up every day.
I don’t know how long Goldilocks will stay. The longer the better as far as I am concerned. After all, I’m a widower twice over, so anyone and anything is fair game. But two or three months is reasonable and possibly until the end of 2021.
That’s the way it is with these May-December relationships, or so my billionaire friends tell me, who all sport trophy wives 30 years younger.
At my age, there are no long-term consequences to anything because there is no long-term. I don’t even buy green bananas.
I have been expecting exactly this month’s melt-up for months and have been positioning both you and me to take maximum advantage. I am making all my pension fund and 401k contributions early this year to get the money into the stock market as fast as possible.
So far so good.
More money piled into stocks over the past five months than over the previous 12 years. And this pace is set to continue. Those who sold a year ago are buying back. $2 trillion in savings enforced by the pandemic are also going into stocks. And after all, there is nothing else to buy.
If all this sounds great, it’s about to get a lot better. Europe and Asia are still missing in action, thanks to a slower vaccine rollout. When they rejoin the global economy in the fall, it will further throw gasoline on the fire. Exports will boom.
The money supply is growing at an astonishing 26% annual rate, thanks to QE forever and massive government spending. That’s the fastest rate on record. In ten years, a PhD will write a paper on how much of this ended up in the stock market. Today, I can tell you it is quite a lot.
In the meantime, make hay while the sun shines. What am I supposed to talk to about with Goldilocks at night anyway?
Do you suppose she trades stocks?
50 Years of Money Supply Growth is Going Vertical
A face-ripping rally is on for April, or so says Strategas founder Lee. A Volatility Index with a $17 handle is sending a very strong signal that you should be loading up on energy, industrials, consumer discretionary, and travel-related stocks. Avoid “stay at home” stocks like Covid-19, which are extremely overcrowded. I’m using dips to go 100% long.
It’s all about infrastructure, 24/7 for the next three months, or until the $2.3 trillion spending package is passed. It might have to take a haircut first. Biden has set a July 4 target to close thousands of deals and horse-trading. With the S&P 500 breaking out above $4,000 and the financial markets drowning in cash, the plan could be worth another 10% of market upside. Would your district like a new bridge? Maybe a freeway upgrade? The possibilities boggle the mind.
US Manufacturing hits a 37-year high in March, driven by massive new orders front-running the global economic recovery. The Institute for Supply Management publishes a closely followed index that leaped from 60.8 to 64.7. Buy before the $10 trillion hits the market.
US Services Industry hits record high, with the Institute of Supply Management Index soaring from 55.3 to 63.7 in March. The ending of Covid-19 restrictions was the major factor. Roaring Twenties here we come!
US Job Openings are red-hot, coming in at 7.4 million compared to an expected 7 million, according to the JOLTS report. It’s the best report in 15 months. It's a confirmation of the ballistic March Nonfarm Payroll report out on Friday.
US Auto Sales surge in Q1, shaking off the 2020 Great Recession. It’s a solid data point for the recovery, despite a global chip shortage. General Motors (GM) was up 4%, thanks to recovering Escalade sales, and strong demand is expected for the rest of 2021. Toyota (TM) was up 22% and Fiat Chrysler 5%. “Pent-up demand” is a term you’re going to hear a lot this year. The Economic boom will run through 2023, says JP Morgan chairman Jamie Diamond, one of the best managers in the country. In his letter to shareholders, he says 10% of his workforce will work permanently from home. Zoom (ZM) is here to stay. Fintech is a serious threat to legacy banks, which is why we love Square (SQ) and PayPal (PYPL). Keep buying (JPM) on dips. Interest rates will rise for years, but not fast enough to kill the bull market.
IMF predicts 6.0% Global Growth for 2021, the highest in 40 years. China will grow at 8.4%. It’s a big improvement since their January prediction. The $1.9 trillion US Rescue is stimulating not just America’s economy, but that of the entire world. Expect a downgrade to the 3% handle in 2022, which is still the best in a decade.
Fed Minutes say Ultra Dove Policy to Continue, so say the minutes from the March meeting. Rates won’t be raised on forecasts, predictions, or crystal balls, but hard historic data. That’s another way of saying no rate hikes until you see the whites of inflation’s eyes. $120 billion of monthly bond buys will continue indefinitely. Bonds dropped $1.25 on the news. Sell all (TLT) rallies in serious size. It’s still THE trade of 2021.
Disneyland in LA to open April 30 after a one-year hiatus. It’s time to dust off those mouse ears. The last time the Mouse House was closed this long, antiwar protesters took to Tom Sawyer’s Island and raised the Vietcong flag (I was there). Some 10,000 cast members have been recalled. Only 15% capacity will be allowed to California residents only. The new Avengers Campus will open on June 4. The company is about to make back the 25% of revenues it lost last year, but with a much lower cost base. Buy (DIS) on dips.
Was that inflation? The Producer Price Index jumped by 1.0% in March compared to an expected 0.40%. It’s the second hot month in a row. Basically, the price of everything went up. The YOY rate is an astonishing 4.04% a near-decade high. If it looks like a duck and quacks like a duck….Stocks didn’t like it….for about 15 minutes.
When we come out the other side of pandemic, we will be perfectly poised to launch into my new American Golden Age, or the next Roaring Twenties. With interest rates still at zero, oil cheap, there will be no reason not to. The Dow Average will rise by 400% to 120,000 or more in the coming decade. The American coming out the other side of the pandemic will be far more efficient and profitable than the old. Dow 120,000 here we come!
My Mad Hedge Global Trading Dispatch profit reached 5.80% gain during the first nine days of April on the heels of a spectacular 20.60% profit in March.
It was a very busy week for trade alerts, with five new positions. Sensing an uncontrolled market melt-up for the entire month piled on aggressive long in Visa (V), JP Morgan (JPM), and Microsoft (MSFT). I also poured on a large short position in bonds (TLT) with a distant May expiration.
My now large Tesla (TSLA) long expires in 4 trading days. Half of my even larger short in the bond market (TLT) also expires then.
That leaves me 100% invested for the sixth time since last summer. Make hay while the sun shines.
My 2021 year-to-date performance soared to 49.89%. The Dow Average is up 11.60% so far in 2021.
That brings my 11-year total return to 472.44%, some 2.00 times the S&P 500 (SPX) over the same period. My 11-year average annualized return now stands at an unbelievable 41.68%, the highest in the industry.
My trailing one-year return exploded to positively eye-popping 128.94%. I truly have to pinch myself when I see numbers like this. I bet many of you are making the biggest money of your long lives. Every time I think these numbers can’t be topped, that increases by another 10% during the following two weeks.
We need to keep an eye on the number of US Coronavirus cases at 30.6million and deaths topping 563,000, which you can find here.
The coming week will be dull on the data front.
On Monday, April 12, at 11:00 AM, the US Consumer Inflation Expectations for March is released.
On Tuesday, April 13, at 8:30 AM, US Core Inflation for March is published.
On Wednesday, April 14 at 2:00 PM, the Federal Reserve Beige Book is out. On Thursday, April 15 at 8:30 AM, the Weekly Jobless Claims are printed. We also learn US Retail Sales for March.
On Friday, April 16 at 8:30 AM, we get the Housing Starts for March. At 2:00 PM, we learn the Baker-Hughes Rig Count.
As for me, the whole Archegos blow-up reminds me that there are always a lot of con men out there willing to take your money. As PT Barnum once said, “There is a sucker born every minute.”
I’ll tell you about the closest call I have ever had with one of these guys.
In the early 2000s, I was heavily involved in developing a new, untried, untested, and even dubious natural gas extraction method called “fracking.” Only a tiny handful of wildcatters were even trying it.
Fracking involved sending dynamite down old, depleted wells, fracturing the rock 3,000 feet down, and then capturing the newly freed up natural gas. If successful, it meant that every depleted well in the country could be reopened to produce the same, or more gas than it ever had before. America’s gas reserves would have doubled overnight.
A Swiss banker friend introduced me to “Arnold” of Amarillo, Texas who claimed fracking success and was looking for new investors to expand his operations. I flew out to the Lone Star state to inspect his wells, which were flaring copious amount of natural gas.
Told him I would invest when the prospectus was available. But just to be sure, I hired a private detective, a retired FBI man, to check him out. After all, Texas is notorious for fleecing wannabe energy investors, especially those from California.
After six weeks, I heard nothing, so late on a Friday afternoon, I ordered $3 million sent to Arnold’s Amarillo bank from my offshore fund in Bermuda. Then I went out for a hike. Later that day, I checked my voice mail and there was an urgent message from my FBI friend:
“Don’t send the money!”
It turns out that Arnold had been convicted of check fraud back in the sixties and had been involved in a long series of scams ever since. But I had already sent the money!
I knew my fund administrator belonged to a certain golf club in Bermuda. So, I got up at 3:00 AM, called the club Starting Desk and managed to get him on the line. He said I had missed the 3:00 PM Fed wire deadline on Friday and the money would go out first thing Monday morning. I told him to be at the bank at 9:00 AM when the doors opened and stop the wire at all costs.
He succeeded, and that cost me a bottle of Dom Perignon Champaign, which fortunately in Bermuda is tax-free.
It turned out that Arnold’s operating well was actually a second-hand drilling rig he rented with a propane tank buried underneath that was flaring the gas. He refilled the tank every night to keep sucking in victims. My Swiss banker friend went bust because he put all his clients into the same project.
I ended up making a fortune in fracking anyway with much more reliable partners. No one had heard of it, so I bought old wells for pennies on the dollar and returned them to full production. Then gas prices soared from $2/MM BTU to $17. America’s gas reserves didn’t double, they went up ten times.
I sold my fracking business in 2007 for a huge profit to start the Diary of a Mad Hedge Fund Trader.
It is all a reminder that if it is too good to be true, it usually is.
Stay healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
https://www.madhedgefundtrader.com/wp-content/uploads/2019/07/john-thomas-8.png422564Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-04-12 09:02:542021-04-12 14:11:44The Market Outlook for the Week Ahead, or The Melt Up is On!
Followers of the Mad Hedge Fund Trader Alert Services have the good fortune to own no less than SIX deep-in-the-money options positions, all of which are profitable. These expire in five trading days on Friday, April 16, and I just want to explain to the newbies how to best maximize their profits.
I will start sending out trade alerts with the closing P&Ls over two days starting on Thursday, April 15 so I don’t overwhelm your inbox with an overabundance of profits.
It was time to be aggressive. I was aggressive beyond the pale.
These involve the:
Global Trading Dispatch
2X (TSLA) 4/$450-$500 call spread 20%
2X (TLT) 4/$142-$145 put spread 20%
(TLT) 4/$127-$130 call spread. - 10%
Mad Hedge Technology Letter
(TSM) 4/ $111-$116 call spread 10%
Provided that we don’t have a huge selloff in the markets or monster rallies in bonds, all six of these positions will expire at their maximum profit point.
So far, so good.
I’ll do the math for you on the United States Treasury Bond Fund (TLT) April 16 $142-$145 vertical bear put spread, which I initiated on March 23, 2021 and will definitely run into expiration. (TLT) shares are currently trading at $137.73, some $4.27 lower than the $142.00 strike price.
Provided that the (TLT) doesn’t trade above $142.00 in five days, we will capture the maximum potential profit in the trade. That’s why I love limited risk put spreads. They pay you even when you are wrong on the direction of the stock. All of the money we made was due to time decay and the decline in volatility in (TLT) shares.
Your profit can be calculated as follows:
Profit: $3.00 expiration value - $2.60 cost = $0.40 net profit
(4 contracts X 100 contracts per option X $0.40 profit per options)
= $1,600 or 16% in 19 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning April 19 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen when a security has only hours, or minutes until expiration on Friday, April 16. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
If for some reason your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.
If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
Ready to Put Out Any Fire
https://www.madhedgefundtrader.com/wp-content/uploads/2019/12/john-oakland-fire-dept-e1575991479435.png335500Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-04-09 10:02:192021-04-09 11:47:24How to Handle the Friday April 16 Options Expiration
“You want to be in the stock in the second inning of the ballgame, and out in the seventh. That could be 30 years,” said legendary value stock manager Peter Lynch.
https://www.madhedgefundtrader.com/wp-content/uploads/2020/01/ballgame.png397600Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-04-09 10:00:412021-04-09 11:43:49Quote of the Day - April 9, 2021
I know all of this may sound confusing at first. But once you get the hang of it, this is the greatest way to make money since sliced bread.
I still have a record five positions left in my model trading portfolio, they are all deep in-the-money, and about to expire in six trading days. That opens up a set of risks unique to these positions.
I call it the “Screw up risk.”
As long as the markets maintain current levels, ALL of these positions will expire at their maximum profit values.
They include:
2X (TSLA) 4/$450-$500 call spread
20.00%
2X (TLT) 4/$142-$145 put spread
20.00%
(TLT) 4/$127-$130 call spread
-10.00%
With the April 16 options expirations upon us, there is a heightened probability that your short position in the options gets called away.
If it happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away.
I’ll use the example of the Tesla (TSLA) call spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point the day before the April 16 expiration date. In other words, what you bought for $44.00 on March 19 is now worth $50.00, giving you a near-instant profit of 13.63%!
In the case of the Tesla (TSLA) April $450-%500 in-the-money vertical Bull Call spread all have to do is call your broker and instruct them to “exercise your long position in your (Tesla) April 16 $450 calls to close out your short position in the (Tesla) April 16 $500 calls.” This is a perfectly hedged position, with both options having the same name and the same expiration date, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
To say it another way, you bought Tesla at $450 and sold it at $500, paid $44.00 for the right to do so, so your profit is $6.00, or ($6.00 X 100 shares X 2 contracts) = $1,200. Not bad for a 20-day limited risk play.
Sounds like a good trade to me.
Short positions usually only get called away for dividend-paying stocks or interest-paying ETFs like the (TLT). There are strategies out here that try to capture dividends the day before they are payable. Exercising an option is one way to do that.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (TSLA) position after the close, and exercising his long (TSLA) $500 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it.
This generates tons of commissions for the broker but is a terrible thing for the trader to do from a risk point of view, such as generating a loss by the time everything is closed and netted out.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many ways to steal money legally that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options!
https://www.madhedgefundtrader.com/wp-content/uploads/2018/11/Call-Options.png345522MHFTFhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMHFTF2021-04-08 09:02:222021-04-08 10:40:20A Note on Assigned Options, or Options Called Away
(THE IRS LETTER YOU SHOULD DREAD),
(PANW), (CSCO), (FEYE),
(CYBR), (CHKP), (HACK), (SNE)
(FB), (AAPL), (NFLX), (GOOGL), (MSFT), (TSLA), (VIX)
(TESTIMONIAL)
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-04-06 10:06:022021-04-06 10:37:10April 6, 2021
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