Follow Up to Trade Alert - (SPY) November 19, 2013
As a potentially profitable opportunity presents itself, John will send you an alert with specific trade information as to what should be bought, when to buy it, and at what price.
Further Update to: Trade Alert -(SPY)
Buy the SPDR S&P 500 (SPY) December, 2013 $183-$186 bear put spread at $2.63 or best
Opening Trade
11-19-2013
expiration date: December 20, 2013
Portfolio weighting: 10%
Number of Contracts: 38
I often use my own profit and loss statement as a leading market indicator. Whenever I am blessed with a windfall profit, it is frequently time to sell. On those rare occasions when I take a big hit, it is invariably time to buy.
This is one of those times.
Since November 1, the Trade Alert service of the Mad Hedge Fund Trader has earned a white-hot 12.12%, taking my year to date return up to 56.62%. The last 19 consecutive Trade Alerts have been profitable.
Performance bursts like this occur, not because I have suddenly gotten a lot smarter. If anything, my advanced age assures that I am headed in the opposite direction on that front. It is far more likely that upward spikes in my P&L happen because the market is getting overheated, at least for the short term.
So I think that it is time to take my foot off the accelerator, cut back and neutralize my model trading portfolio, and sit down and smell the turkey. In any case, with 43 Trade Alerts going out this month, I am running the risk of overtrading.
It is very impressive to see how fast the options markets are crushing implied volatility. This means the market doesn?t think much is going to happen over the next few weeks. The stock market has been up for the last seven weeks in a row, a rare event. Portfolio managers are bathing in once unimagined riches and have visions of bonus checks dancing in their eyes.
This is all a nice set up for 3%-4% Thanksgiving mini correction. The market is now wildly overbought on a short-term basis, and I can?t be the only one exhausted from the sheer volume and intensity of the recent market action.
That is why I knocked out two short positions today in the form of the SPDR S&P 500 (SPY) December, 2013 $183-$186 bear put spread and a the Russell 2000 iShares (IWM) December $113-$116 bear put spread. It?s not a huge bearish bet, just a modest one. And these both take advantage of the fact that market volatility will probably die a slow death going into the holidays.
I am going to hang on to my other long positions, since they are so far in the money that the safety cushion to my breakeven point is large.
Apple (AAPL) is moving into its peak earnings period. Citibank (C) is surfing the wave of money pouring into long neglected financials. Ditto for the Industrials ETF (XLI). The Japanese yen (FXY) will probably break to new lows for the year in coming weeks, so I am looking to add on any strength. Bonds (TLT) are trading like the life has been sucked out of them, so the short side is the correct posture there.
Whatever pause in the market action we get will be a brief one. Take a look at the chart below put together by my friends at Business Insider. Despite all the bubble talk by the clueless media, we are in fact still at the bottom of the range for the S&P 500 forward 12 month PE ratios for the past 15 years.
Assume that corporate earnings rise 10% a year for the next four years. Then assume that earnings multiples also rise by 10% a year, taking us back up to the? 22 times found the top of the 15 year multiple range. That gets the (SPX) up to 3,732 by the end of 2017, a near double from today?s 1,790.
Not only has 2013 been a great year, so will 2014, 2015, 2016, and 2017. We are in the midst of a new Golden Age of equity investment.
That?s why I wrote ?Why US Stocks Are Dirt Cheap? on August 6 ).
That?s why the stock market is melting up.
That?s why I?m up 56.63% on the year.
That?s why followers of the Mad Hedge Fund Trader?s Trade Alert service are ecstatic.
That?s why new subscribers are pouring in by the thousands.
Case closed, and please pass me the cranberry sauce and gravy.
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.
Keep in mind that these are ballpark prices only. Spread pricing can be very volatile on expiration months farther out.
Here are the specific trades you need to execute this position:
Buy 38 December, 2013 (SPY) $186 puts at?????$7.84
Sell short 38 December, 2013 (SPY) $183 puts at..??.$5.21
Net Cost:??????????????????.....$2.63
Profit at expiration: $3.00 - $2.63 = $0.37
(38 X 100 X $0.37) = $1,406 or 1.40% profit for the notional $100,000 portfolio.
