Quote of the Day – January 31, 2020

“Legalize gay Marijuana,” said a bumper sticker seen in Northern Nevada.


Bumper Stickers

January 30, 2020 – Quote of the Day

“In the US you, had ten bad years in a row (during the Great Depression) and it still turned out to be a pretty good century,” said Lloyd Blankfein, CEO of Goldman Sachs.

Elderly Couple

Playing the Short Side with Vertical Bear Put Debit Spreads

note: This is a repeat article for our many new subscribers.

For me, the glass is always half full, not half empty, and it’s usually darkest just before the dawn. After all, over the past 100 years, markets rise 80% of the time, and that includes the Great Depression.

However, every now and then, conditions arise where it is prudent to sell short, or make a bet that a certain security will fall in price.

This could happen for myriad reasons. The economy could be slowing down. Companies might disappoint on earnings. “Sell in May, and go away?” It works….sometimes.

Other securities have long-term structural challenges, like the US Treasury bond market (TLT). Exploding deficits as far as the eye can see assure that government debt of every kind will be a perennial short for years to come, but not yet.

Once you identify a short candidate, you can be an idiot and just buy put options on the security involved. Chances are that you will overpay and that accelerated time decay will eat up all your profits even if you are right and the security in question falls. All you are doing is making some options trader rich at your expense.

For outright put options to work, your stock has to fall IMMEDIATELY, like in a couple of days. If it doesn’t, then the sands of time run against you very quickly. Something like 80% of all options issued expire unexercised.

And then there’s the right way to play the short side, i.e., MY way. You go out and buy a deep-in-the-money vertical bear put debit spread.

This is a matched pair of positions in the options market that will be profitable when the underlying security goes down, sideways, or up small in price over a defined limited period of time. It is called a “debit spread” because you have to pay money to buy the position instead of receiving a cash credit.

It is the perfect position to have onboard during bear markets which we will almost certainly see by late 2019 or 2020. As my friend Louis Pasteur used to say, “Chance favors the prepared.”

I’ll provide an example of how this works with the United States Treasury Bond Fund (TLT) which we have been selling short nearly twice a month since the bond market peaked in July 2016.

On October 23, 2018, I sent out a Trade Alert that read like this:

Trade Alert – (TLT) – BUY

BUY the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.60 or best.

At the time, the (TLT) was trading at $114.64. To add the position you had to execute the following positions:

Buy 37 November 2018 (TLT) $120 puts at…….…….…$5.70

Sell short 37 November 2018 (TLT) $117 puts at….….$3.10

Net Cost:………………………….………..………….…………..$2.60

Potential Profit: $3.00 – $2.60 = $0.40

(37 X 100 X $0.40) = $1,480 or 11.11% in 18 trading days.

Here’s the screenshot from my personal trading account:

This was a bet that the (TLT) would close at or below $117 by the November 16 options expiration day.

The maximum potential value of this position at expiration can be calculated as follows:

+$120 puts
–  $117 puts
+$3.00 profit

This means that if the (TLT) stays below $117, the position you bought for $2.60 will become worth $3.00 by November 16.

As it turned out, that was a prescient call. By November 2, or only eight trading days later, the (TLT) had plunged to $112.28. The value of the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread had risen from $2.60 to $2.97.

With 92.5% of the maximum potential profit in hand (37 cents divided by 40 cents), the risk/reward was no longer favorable to carry the position for the remaining ten trading days just to make the last three cents.

I, therefore, sent out another Trade Alert that said the following:

Trade Alert – (TLT) – TAKE PROFITS

SELL the iShares Barclays 20+ Year Treasury Bond Fund (TLT) November 2018 $117-$120 in-the-money vertical BEAR PUT spread at $2.97 or best

In order to get out of this position, you had to execute the following trades:

Sell 37 November 2018 (TLT) $120 puts at………………………$7.80

Buy to cover short 37 November 2018 (TLT) $117 puts at….$4.83

Net Proceeds:…………………..…………….………..………….……..$2.97

Profit: $2.97 – $2.60 = $0.37

(37 X 100 X $0.37) = $1,369 or 14.23% in 8 trading days.

Of course, the key to making money in vertical bear put spreads is market timing. To get the best and most rapid results, you need to buy these at market tops.

If you’re useless at identifying market tops, don’t worry. That’s my job. I’m right about 90% of the time and send out a STOP LOSS Trade Alert very quickly when I’m wrong.

With a recession and bear market just ahead of us, understanding the utility of the vertical bear put debit spread is essential. You’ll be the only guy making money in a falling market. The downside is that your friends will expect you to pick up every dinner check.

But only if they know.


Understanding Bear Put Spreads is Crucial in Falling Markets

January 29, 2020 – Quote of the Day

“Short term volatility creates long term opportunity, said Rupal Bhansali, of the Ariel International Fund.

January 28, 2020

Global Market Comments
January 28, 2020
Fiat Lux

Featured Trade:


January 28, 2020 – Quote of the Day

“Semiconductors are the new industrials,” said Josh Brown of Ritholtz Wealth Management.

January 27, 2020

Global Market Comments
January 27, 2020
Fiat Lux

Featured Trade:


What is an option? – The Basics

A stock option is a contract that gives the buyer the right, but not the obligation, to buy or sell a certain number of shares in a company at a specified time at a fixed price.

There are two kinds of options, and they are always defined using the same basic terms.

The terms “Calls” and “Puts” tell you whether you have the right to buy or sell the shares of the underlying company.

The Ticker Symbol tells you which company’s shares the options are on. The ticker symbol for Apple is (AAPL).

The Expiration Date is when the contract ceases to be valid.

The Strike Price indicated the price at which you have the right to buy or sell shares.

For example, if you buy one of the Apple June 17, 2016 $110 calls, it gives you the right to BUY 100 Apple shares at $110/share any time on or before June 17, 2016. If Apple shares then rise, you make a profit. This is a bullish bet.

Quote of the Day – January 27, 2020

In the words of United States Army General, Creighton Abrams, “When eating an elephant, take one bite at a time.”


SOLD OUT – Friday, February 7 Perth, Australia Global Strategy Luncheon

Come join me for lunch at the Mad Hedge Fund Trader’s Global Strategy Luncheon, which I will be conducting in Perth, Australia on Friday, February 7, 2020 at 12:30 PM.

An excellent meal will be followed by a wide-ranging discussion and a question-and-answer period. I’ll be giving you my up-to-date view on stocks, bonds, currencies, commodities, precious metals, energy, and real estate.

I also hope to provide some insight into America’s opaque and confusing political system. And to keep you in suspense, I’ll be throwing a few surprises out there too.

Tickets are available for $235.

The lunch will be held at an exclusive hotel in downtown Perth, the location of which will be emailed with your purchase confirmation.

I look forward to meeting you and thank you for supporting my research. To purchase tickets for the luncheons, please click here.