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Mad Hedge Fund Trader

A Special Note on Exercised Bank of America Options

Diary, Free Research, Newsletter

This morning, Bank of America paid out a five cent quarterly dividend, which works out to an annualized yield of 1.18% and the shares will open this morning trading ex.

For those of you who have wisely followed my Trade Alert to buy the Bank of America (BAC) December, 2014 $15-$16 vertical bull call spread, good for you. As of last night, you were showing a profit of 0.88% on the position.

However, there is a chance that the short side of the trade, the December, 2014 $16 calls were exercised against you before the opening this morning. If that is the case, you would have been informed by your broker by email and immediate action is required on your part to avoid unnecessary risk.

The options traded on US exchanges and referred to in my Trade Alerts are American style, meaning that they can be exercised at any time by the owner. This is in contrast to European style options, which can only be exercised on the expiration day.
The vertical option spreads that I have been recommending for the past year are composed of a deep in-the-money long strike price plus a short portion at a nearer money strike price.

When stocks have high dividends, there is a chance that the near money option you are short, the December, 2014 $16 calls, gets exercised against you by the owner.

This requires you to deliver the stock equivalent of the option you are short, plus any quarterly dividends that are due. Don?t worry, because your long position perfectly hedges you against any principal risk in this situation.

However, you will be liable for the five-cent dividend, which works out to $5 for every call option you are short. If you executed the full 110 contracts recommended in my Trade Alert that works out to $550 (100 shares per option X $.05 dividend X 110 contracts).
You then need to email or call your broker back immediately informing him that you want to exercise your remaining long option position to meet your assigned short position.

This should completely close out your position and leave you with about half your remaining profit. This is not an automatic process and requires action on your part!

It also means that you get your margin back, plus your profit, the next day, and don?t have to run the position another two weeks into expiration. That means you are free to use the money to put on new trades.
Assignments are made on a random basis by an exchange computer, and can happen any day. You may get exercised, or you may not. Exercise means the owner of the option that you are short completely loses the entire premium on his call.

Dividends have to be pretty high to make such a move economic, usually at least over 3% on an annual rate. But these days, markets are so efficient that traders, or their machines, will exercise options for a single penny profit.

In fact, there are now some dedicated hedge funds and independent individual options traders that specialize in buying up calls the day before and ex dividend day to capture a tiny 29 basis point gross overnight profit. That is before execution expenses.

It hardly seems worth it to me, but I guess what they lack in size, they make up in volume. Hey, you do what you can do to earn a living.
Surprise assignments create a risk for option spread owners in a couple of ways. If you don?t check your email every day, you might not be aware that you have been assigned.

Alternatively, such emails sometimes get lost, or hung up in local servers or spam filters, which occasionally happens to readers of my own letter.

Then, you are left with the long side deep out-of-the-money call without on offsetting short position. You are now unhedged. This means you will have a substantially higher margin requirement, and is the equivalent of going outright long the stock in large size.

Suddenly, you are playing a totally different game, and not one I recommended. If the stock rises, then you could be in for a windfall profit. But if it falls, you could take a big hit. Guess which way the stock usually goes.

Better to completely avoid this situation at all cost and not take the chance. You are probably not set up to do this type of trading.
If you don?t have the cash in your account to cover this, you could get a margin call. If you ignore this call as well, your broker will close out your position at market without your permission.

It could produce some disconcerting communications from your broker. They generally hate issuing margin calls, and could well close your account if it is too small to bother with, as they create regulatory issues.
In order to get belt and braces coverage on this issue, it is best to call your broker and find out exactly what are their assignment policies and procedures. Believe it or not, some are still in the Stone Age, and have yet to automate the assignment process or give notice by email.

An ounce of prevention could be worth a pound of cure here. You can?t believe how irresponsible some of these people can be. The phone calls are free.
Consider all this a cost of doing business, or a frictional execution cost. In-the-money options are still a great strategy. But you should be aware of all the ins and outs to get the most benefit.

Good Luck and Good Trading
John Thomas

 

BAC 12-2-14

 

 

John Thomas

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Mad Hedge Fund Trader

December 2, 2014

Diary, Newsletter, Summary

Global Market Comments
December 2, 2014
Fiat Lux

Featured Trade:
(DECEMBER 3 GLOBAL STRATEGY WEBINAR),
(LOADING UP ON LINN ENERGY),
(LINE), (USO), (UNG), (XLE),
(THE MOST FUNCTIONAL WORD IN THE ENGLISH LANGUAGE)

Linn Energy, LLC (LINE)
United States Oil ETF (USO)
United States Natural Gas ETF (UNG)
United States Oil ETF (USO)

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Mad Hedge Fund Trader

Loading Up On Linn Energy

Diary, Newsletter, Research

You can pay up to $17 a unit for (LINN) and have a good chance of making a quick, snapback profit.

All of a sudden, everyone I know in Texas, and there are quite a few of them, called to tell me to buy Linn Energy, all within the space of one hour. I summarize their diverse comments below.

We have reached a margin call induced capitulation sell off in Linn Energy this morning, when oil was trading as low as $64 a barrel at the European opening.

There were obviously also a couple of leveraged energy and commodity funds that blew up and are undergoing forced liquidation at the market.

Add to that all the individuals who bought (LINN) on margin when the yield was only 8% so they would take 16% home to the bank.

This has taken the price of the units down to an artificial, and hopefully temporary, low of $15.90. At that price, the yield was a mind blowing 17% (after all, this is California).

It was a classic ?Throwing out the baby with the bathwater? moment. (LINN) gets 54% of its $1.6 billion in revenues from natural gas, which has held up remarkably well in the energy melt down, thanks to the early arrival of the polar vortex this winter.

Only 22% of its income derives from oil related projects, and half of this is hedged in the futures market from any downside exposure in the price of oil, according to the company?s recent pronouncements. Linn has actually plunged more than oil from its recent peak.

Does a loss on 10% of its revenues justify a gut wrenching 50% drop in the units? I think not.

But then, I am being rational and analytical, and I can assure you that the energy markets are now anything but rational and analytical.

Its not like oil is going to stay this low forever. Try to buy oil for delivery in the futures market two years out, and it has already recovered to $75/barrel, and there is very little available at that price.

What happens when the price of something goes down? Demand increases, and that will be good for Linn Energy, which is inherently more of a volume play on gas and oil, not a price play.

Keep also in mind that the absurd salaries the company was paying for workers in the Midwest has also vaporized. Roustabouts can now be had for as little as $75,000 a year compared to $200,000 only six months ago. This will cut (LINN)?s costs quickly and flow straight to the bottom line.

Falling costs and rising volumes sound like a winning formula to me.

And if you have the courage to buy the units here on margin, the yield rockets to a breathtaking 34%. It therefore can?t stay this low for long.

Linn Energy, LLC is an independent oil and natural gas company based in Houston, Texas. It holds oil and gas producing assets in many parts of the United States: Mid-Continent, including properties in Texas, Louisiana, and Oklahoma; the Hugoton Basin in Kansas; the Green River Basin in Wyoming; East Texas; California, including the Brea-Olinda Oil Field in Los Angeles and Orange Counties; the Williston/Powder River Basin, which includes a position in the Bakken Formation; Michigan/Illinois; and the Permian Basin in Texas.

At the end of 2012, the firm reported proved reserves of 4,796 bcfe (billion cubic feet equivalent) of oil and gas combined. Of this total, 24% was crude oil, 54% natural gas, and 22% natural gas liquids.

Structured as a master limited partnership for tax purposes, the firm is required to pay out most of its cash reserve to unitholders (stockholders) each quarter as distributions, thereby ducking the double taxation of corporate taxation.

However Linn retains some attributes of a limited liability corporation, including giving voting rights to its unitholders. Linn Energy also operates a subsidiary, LinnCo, a C Corporation, which is subject to different tax rules from its parent company.

All we have to do is survive the near term volatility and Linn Energy will be a winner.

 

Line 12-1-14a

LINN Energy

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Mad Hedge Fund Trader

The Most Functional Word in the English Language

Diary, Newsletter

Passed on by a friend with my apologies in advance:

Well, it's?shit... That's right, shit!

Shit may just be the most functional word in the English language.

You can smoke shit, buy shit, sell shit, lose shit, find shit, forget shit, and tell others to eat shit.

Some people know their shit, while others can't tell the difference between shit and Shinola.

There are lucky shits, dumb shits, and crazy shits.

There is bullshit, horse shit, and chicken shit.

You can throw shit, sling shit, catch shit, shoot the shit, or duck when the shit hits the fan.

You can give a shit or serve shit on a shingle.

You can find yourself in deep shit or be happier than a pig in shit.

Some days are colder than shit, some days are hotter than shit, and some days are just plain shitty.

Some music sounds like shit, things can look like shit, and there are times when you feel like shit.

You can have too much shit, not enough shit, the right shit, the wrong shit or a lot of weird shit.

You can carry shit, have a mountain of shit, or find yourself up shits creek without a paddle.

Sometimes your breath smells like shit.

Sometimes everything you touch turns to shit and other times you fall in a bucket of shit and come out smelling like a rose.

When you stop to consider all the facts, it's the basic building block of the English language.

And remember, once you know your shit, you don't need to know anything else!!

You could pass this along, if you give a shit; or not do so if you don't give a shit!

Well, shit, it's time for me to go.

Just wanted you to know that I do give a shit and hope you had a nice day without a bunch of shit.

But, if you happened to catch a load of shit from some shit-head........... Well, Shit Happens!!!

HOPE YOUR SHITTY DAYS ARE FEW AND FAR BETWEEN

Girl-I don't know!

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Mad Hedge Fund Trader

December 1, 2014

Diary, Newsletter, Summary

Global Market Comments
December 1, 2014
Fiat Lux

SPECIAL OIL ISSUE

Featured Trade:
(CHICAGO TUESDAY, DECEMBER 23 GLOBAL STRATEGY LUNCHEON),
(AN IRAN PEACE DEAL AND YOUR PORTFOLIO),
(USO), (UNG)

United States Oil ETF (USO)

United States Natural Gas ETF (UNG)

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Mad Hedge Fund Trader

An Iran Peace Deal and Your Portfolio

Diary, Newsletter, Research

With the price of oil (USO), (XLE) hitting an eye popping $64 this morning, in the wake of the failed OPEC summit in Vienna, it is clear that something long term, structural, and epochal is going on.

But what is it?

We mere mortals are blind to it, but the financial markets haven?t the slightest doubt. Blame the wisdom of crowds. There is something big going on somewhere.

So I thought it would be a good time to check in with my friend and expert on all things international, David Hale, of David Hale Global Economics.

I have been relying on David as my global macro economist for decades, and I never miss an opportunity to get his updated views.

The challenge is in writing down David?s eye popping, out of consensus ideas fast enough, because he spits them out in such a rapid-fire succession.

Since David is an independent economic advisor to many of the world?s governments, largest banks, and investment firms, I thought his views would be of riveting interest. For my last interview with David, please click here.

On November 21, David was on Capitol Hill testifying in front of congress about the implications of a peace deal with Iran. He was kind enough to pass on to me a transcript of his talk.

The Iran nuclear negotiations broke up last week, extending the deadline for the current round by another seven months, to June 2015.

What David had to say was eye opening. If successful, a deal would have momentous implications for not just the US, but the global economy as well.

All trade with Iran ceased in the wake of the overthrow of the Shah of Iran by fundamentalist religious fanatics led by the Ayatollah Khomeini in 1979. The tortuous yearlong Iran Hostage Crisis followed, and relations with the US went into a deep freeze.

US Secretary of State John Kerry certainly has his work cut out for him today. Iran and America deeply distrust each other and philosophically couldn?t be further apart. They have been fighting proxy wars against each other for three decades, both in the analogue and digital worlds.

Remember Stuxnet?

It also doesn?t engender Iranian trust that the US has decimated a half dozen Arab countries in 30 years, and has more than the means to continue on that path, if it so desires.

Now 35 years later, America and Iran oddly find themselves on the same side of the latest Middle Eastern conflict. Sunni extremist forces lead by ISIL has launched a full-scale invasion of Iraq, capturing about one third of the country, and butchering Shiite opponents along the way in true, barbaric, 14th century fashion.

It has not gone unnoticed in Tehran that steady US air attacks against ISIL have meshed nicely with Iranian ground support to accomplish the same, although ?officially? there has been no cooperation whatsoever.

Not surprisingly, nuclear talks between the two countries, long considered a pipedream and simmering on a distant back burner have suddenly come to life.

If successful, a nuclear deal with Iran would have momentous implications, for not just the US, but the global economy as well.

First and foremost, Iran would be able to increase its oil exports by 1 million barrels a day, and then 1.5 million barrels a day over 2-3 years. The deluge could take the price of Texas tea down to $50-$60 a barrel and keep it there for a while.

Such a collapse, down 56% from the June peak, would amount to a $400 billion annual tax cut for the global economy. It would add 0.2% a year of GDP growth for every $10 price drop.

So the boost that we have seen so far amounts to an impressive 1% growth pop. That is an enormous number, increasing the world?s projected economic activity by a full third.

Major energy importers, like Europe, Japan, China, and India would benefit mightily. The US would prosper as well, as one third of its oil still comes from abroad.

It would be a disaster for high cost energy exporters, including Russia, Venezuela, Nigeria, and Canadian tar sands.

Russia, in particular, would get it right between the eyes. Oil and gas account for a whopping 68% of Russian exports and 45% of government revenues. To defend a crashing Ruble, the central bank has embarked on a series of gut wrenching interest rate hikes.

Russia is now looking into the jaws of its own Great Recession. After seeing its economy shrink this year by -0.2%, it could nosedive by at least 5% in 2015.

When they talk about self-sufficiency, they really mean starvation. This is why I have been saying all along that the Ukrainian crisis is going nowhere, except to create buying powers for equity investors.

Venezuela is a basket case, depending on oil for 90% of its exports. Expect hyperinflation, leading to a headline grabbing default on its national debt. Political instability is to follow.

Another big plus for the world economy is the reemergence of Iran as a significant consumer. This is not a small country. It has a population of 78 million and a $369 billion GDP. Sanctions have successfully crippled the economy, shrinking its GDP by -5.8% in 2012 and another -1.9% last year.

The sanctions have not been a one-way street. They have cost the US a not inconsequential $175 billion in sales over the past 17 years. A rebound would lead to a surge of exports of consumer goods (iPhones), and oil drilling equipment to facilitate a long delayed modernization of the industry there.

A major roadblock to peace has been the Revolutionary Guard. Originally an elite group of fighters during the revolution, it has evolved into a modern day Mafia.

It controls the black market, smuggling and a host of other illegal activities, earning billions in illicit profits along the way. It has a vested interest in maintaining the status quo. War with America is good business for them.

Iran is now a classic case of where the government hates us, and the people love us.

I have written extensively in the past about the global implications of peace with Iran. For my latest opus, please click the titles: Here Comes the Next Peace Dividend and Why You Should Care About the Iranian Rial Collapse.

To learn more about David Hale and the extensive list of services he offers; please visit the website of David Hale Global Economics, http://www.davidhaleweb.com.

 

WTIC 11-28-14

USO 11-28-14

UNG 11-28-14

XLE 11-28-14

David Hale

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Mad Hedge Fund Trader

November 28, 2014

Diary, Newsletter, Summary

Global Market Comments
November 28, 2014
Fiat Lux

Featured Trade:
(DECEMBER 3 GLOBAL STRATEGY WEBINAR),
(SURVIVING THANKSGIVING)

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Mad Hedge Fund Trader

November 26, 2014

Diary, Newsletter, Summary

Global Market Comments
November 26, 2014
Fiat Lux

SPECIAL SOLAR CITY ISSUE

Featured Trade:
(LOADING THE BOAT WITH SOLAR CITY),
(SCTY), (USO)

SolarCity Corporation (SCTY)

United States Oil ETF (USO)

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Mad Hedge Fund Trader

Loading the Boat with Solar City

Diary, Newsletter, Research

In recent weeks, I couldn?t help but notice the green and white vans of Solar City (SCTY) visiting my neighbors. My trader?s radar went up, so I thought there might be an opportunity here.

What I found made an intriguing investment opportunity. As a preeminent supplier of solar energy, Solar City is a de facto indirect call option on the price of oil, not a bad bet here at $74 and change.

As a huge consumer of capital, the company is a major beneficiary of the prolonged low interest rate scenario which I envision.

A 30% tax credit on any alternative energy investment is set to expire at the end of 2016. I think this will trigger the mother of all stampedes by consumers to buy solar systems while they can still get the government to pick up one third of the tab.

Solar City has also recently completed several high tech acquisitions which will enable it to lower costs while enhancing output efficiencies.

Did I mention that anything Elon Musk Touches turns to gold?

The stock here also looks attractive. Collapsing oil prices had a leveraged effect on (SCTY) shares, dropping a heart stopping 42% in only three months. Heaven knows investors are starved for cheap stocks these days.

This week, (SCTY) poked its nose above the 50 day moving average. If it hold?s then it is off to the races. My only concern here is the volatility that the Thursday OPEC meeting in Vienna is certain to bring to energy markets.

With my second Tesla (TSLA) about to be delivered, the Model X SUV, it was time for me to review my electricity bill.

My first Tesla, a very early Model S-1 (chassis number 125), boosted my monthly power consumption from 600 kWh to 1,800 kWh per month, about what a small industrial facility might use.

Yet, my bill from PG&E increased from only $350 to $450 a month. This is because they effectively give away power for free from 12:00 AM to 7:00 AM to qualified EV users, charging me only a scant 4.7 cents per kWh.

On my suggestion, Tesla then upgraded their software so vehicles could be programmed to recharge only at these hours. That means it is costing me $4.00 for a full 80 kWh charge that can take me 255 miles, or 1.6 cents a mile. That doesn?t include the enormous savings on maintenance (there is none).

Well then! The IRS currently allows a mileage deduction of 56 cents per mile for business purposes, so that?s an opportunity to exploit right there.

Given that the average US car now gets 25 miles per gallon of gasoline (and that is being generous), that means my equivalent cost for running my S-1 works out to paying a scant 40 cents a gallon.

This compares to the $2.79 at the local service station ($2.57 at Costco), which is at a four year low, or a savings of 86%. That is a little more than I paid for gas when I first started driving a beat up VW Bug at the Santa Anita Race Track parking lot back in 1967.

That sounds like a deal to me.

However, the second Tesla is likely to boost my monthly power consumption from 1,800 kWh to 3,000. When PG&E sees bills that big, they assume someone is operating an illegal marijuana grow house and send the DEA to kick your door down at 5:00 AM on a Monday morning.

So I was on the phone to Solar City the next morning. What I heard was nothing less than amazing.

For a start, they called up a Google Earth mapping program that focused on a picture of my roof from a low earth orbit satellite (Google has invested $280 million in Solar City). Then a second program autofits their existing solar panels to my roof and spit out a mass of numbers.

This complete stranger told me things about my roof that I never knew, like it was 4,000 square feet of flat concrete tiles on 14 planes. Welcome to the 21st century.

I nervously looked down and made sure my fly was fully zipped up.

He went on to tell me that he could fit a 15 kW DC system on my roof that would generate 106% of my power needs, generating 19,365 kWh a year. That would make me completely self sufficient in electricity, even though I will be charging two hulking Tesla 1,000 pound lithium ion batteries every day.

They will install a ?net? two-way electric meter on my house. When the sun shines, it will run backwards as I can sell power to PG&E at high prices. So many people are doing this now that the traditional afternoon price spike in electricity had virtually disappeared.

At night, when I recharge my cars, I would then buy cheap power from Solar City. No storage devices are required. The PG&E grid is effectively the storage system. That would turn me into a day trader of electricity, selling high by day and buying low by night. I love it!

How did their satellite know I was a hedge fund trader? What else does it know?

Now comes the best part. The cost of the installation and panels was $66,000. Solar City would do it for free. Yes, free, as in gratis, with no money down.

They would lease me the panels for 20 years, with an annual price increase of 6.2%. That would cut my monthly electricity bill from $450 to $200. It does this by eliminating the tier 3, 4, and 5 prices I am currently paying PG&E.

If I sell my house, I can either buy out my contract at the discounted, fully depreciated value, or pass it on to the new owners. It is well known that solar panels significantly increase the value of existing homes.

Installation can be done in a day. But it can only take place on unbreakable concrete tile roofs. Those made of clay tiles, metal, tar and gravel, wood shakes, or slate don?t work for various reasons. You need a FICO score of 680 or better to qualify. There is a 60-day waiting list to get this done.

It didn?t take me long to figure out the game here. By purchasing the panels and leasing them to me, they keep the 30% government subsidy for capital investments in alternative energy, which works out to $19,890 for my house alone. Solar City also gets to depreciate these panels on an accelerated schedule, mostly in the first five years.

This explains why Solar City has grown larger than the next 15 competitors combined. Solar City?s largest customer is the US Army, which has already installed panels on 1 million structures.

There is one cautionary note to add here. The government subsidies that help float the company expire in 2018, making the entire proposition financially less attractive. That is, unless they get renewed. Think President Hillary.

The only things that would save them are dramatically higher conventional energy costs. However, right now energy costs are heading the opposite direction, thanks to fracking and a well-publicized war for market share at OPEC.

As with everything else Elon Musk touches, an investment in Solar City has been wildly successful. Since the company went public at the end of 2012, the shares have risen by an awesome 670%. Needless to say, with no earnings, and no dividend, the $5.5 billion market cap company may appear hopelessly expensive.

Like with Elon?s other company, Tesla, you aren?t betting on the value of the business today, but where it will be in five years, when it has a far larger share of the market.

Given Musk?s track record so far, that is a bet that I am willing to take.

For a detailed training video on how to execute a vertical bull call spread, please click here at https://www.madhedgefundtrader.com/ltt-executetradealerts/.

 

John's RoofMy Home from Outer Space

 

VW BeetleIt?s Been a Long and Winding Road Driving From this?

 

John ThomasTo This

 

SCTY 11-25-14

USO 11-25-14

Solar ShieldsThere?s a Profit in Here Somewhere

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Mad Hedge Fund Trader

November 26, 2014 - Quote of the Day

Diary, Newsletter, Quote of the Day

?I don?t know who spends more, Democrats or Republicans, but Democrats seem to enjoy it more,? said former Federal Reserve governor, Bob McTeer.

Money-$100 Bills

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Page 545 of 678«‹543544545546547›»

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