Top Trades For Next Month
Philip Davis | Oct 11, 2015 03:09AM ET
How interesting the markets have been.
These are, for the most part, short-term trades but we've been layering in some longer-term trade ideas – using our profits to invest in trades that will generate steady monthly gains over time, rather than only focusing on "quickies."
Our Top Trade Ideas, generally, tend to be longer-term trades and we don't have a portfolio that tracks them specifically. They are generally selected trades from the ones that we are adding to PSW's Short-Term Portfolio or Long-Term Portfolio and tend to be of the "set and forget" variety, while our OOP trades require a bit more active management.
While 30 of our first 45 (66%) Top Trade ideas were winners, 4 of our 15 losers were Lumber Liquidators (NYSE:LL) trade ideas – all of which are now coming back as LL pops back to $20! Hopefully it can break over $20 and we can put all that silliness behind us.
Getting two out of three trades right is plenty to move the investing ball towards the goal line. Combine that with sensible portfolio management techniques (diversification, managing losses, hedging) and you'll beat the S&P by a mile with no sweat. Generally, with our Top Trades, we're simply picking stocks we feel are underpriced and we're using our various options techniques to give ourselves even better discounts and hedged entries but these are patience plays – that do take time to get going, though we did call for a cash-out of our winners in July, so August was kind of a fresh start.
Without further ado, here's the next month of trades for review – some are still good for new entries:
Get The News You Want
On Aug 4th we saw a news article that Windstream (NASDAQ:WIN) won a contract for $450M to build out wireless services for the VA. As WIN was a company we had played in the past, this was a trigger for us to jump in with a new play, which was:
In the STP, let's go for 40 WIN Sept $5 calls for 0.50 ($2,000) and let's do 10 in the $25KP ($500).
As you can see, WIN popped nicely right off the bat and finished Sept 18th (expiration day) at $6.92, with the calls at $1.92 – up 284%. Well, they can't all be long-term trades… ;)
Aug 11th was a double Alert, in addition to a play on Terex (NYSE:TEX), we also included a long oil Futures trade idea:
You can still sell the TEX 2017 $23 puts for $3 and that's net $19, which is very fair, even if the merger fails – I like that and you can add the $20 ($7.60) /25 ($4.30) bull call spread at $3.30 for net 0.30 on the $5 spread but that's betting the merger does go through just to make another $1.70 – not really worth the risk.
Our timing on that one was good, but then bad as people first loved, then hated the merger deal and now they are warming up to it again. Nonetheless, since we were fairly conservative in our play, the short puts are still just $3.30 (down 10%) and the additional spread I said was not worth the risk is now net $1.50, down 50% and NOW it's worth the risk!
A much better trade that day was my Futures pick on oil (/CL) to go long at $43, we pretty much caught the dead bottom there and, as you can see, we popped all the way to $55 before the rally failed – up $12,000 per contract. Of course we don't just get in and ride them out – but, if you are still in this trade back at $52.50 (up $9,500) – it's time to stop out as we're short again!
August 24th was our next trade (we didn't like anything enough in the prior week) and our trade idea that Monday was for our Stock of the Decade, Taser (NASDAQ:TASR), as it fell back to the $20 line. We liked this one so much that, not only was it a top trade but it was the first long-term trade idea added to our Options Opportunity Portfolio as well:
- Buy 20 TASR 2017 $20 calls at $6.20 ($12,400)
- Sell 20 TASR 2017 $25 calls at $4.15 ($8,300)
- Sell 20 TASR 2017 $15 puts at $2.40 ($4,800)
Our net on the spread was a $700 credit and, as you can see, this is another one we caught a nice bottom on and they are now back to testing the $25 level, which is all our very conservative target is looking for to make the full $10,700. At the moment, the net on the spread is $2,500, so already net $3,200 off our original $700 credit is up 457% in just over a month and only just getting started!
Aug 26th we got very busy indeed as we reviewed Goldman Sach's 25 most oversold stock list to see which ones we thought were playable. Our trade ideas were:
Cheap food costs tip the scales for me on this one and sure, I don't like paying 18.8 for a grocery store but I do like paying 12x earnings and that would be $22 and you can sell the 2017 $23 puts for $1.55 to net in at $21.45 (30% off) and we can play that with the $30 ($5.50)/$35 ($3.45) bull call spread at $2.05 to net into the $5 spread for 0.50. Margin on 10 short puts is a negligible $2,300 and I REALLY would like to own $46,000 worth of WFM at $23 so let's do 20 of those in the LTP.
Whole Foods (NASDAQ:WFM) just took off and headed back to the $35 line and the net on the spread has gone from $500 to $1,470, which is up $970 (194%) but merely on trace to the full $5,000 we expect if they can get above $35 and hold it through Jan 2017.
Good time to make a note that you don't HAVE to make short-term trades to get great short-term returns on your cash. This trade was a very sensible entry on 8/24 and it's only 10/10 and already we're up 194% – that's enough to satisfy all but the greediest of short-term trades yet we took no particular short-term risk because we are BEING THE HOUSE and selling more premium than we bought.
10 2017 $35 puts can be sold for $3.20 ($3,200) and $35 is already another 20% off and we can use that money to buy 10 of the $40 ($9.40)/50 ($5.50) bull call spreads for $3.90 for net 0.70 on the $10 spreads that are $4.77 in the money to start. I fully expect these to get cheaper and we'll spend $4.50 more to roll down to the $30 calls (now $17) when and if we have the opportunity. For the LTP.
Marathon Petroleum (NYSE:MPC) was one we put our foot down on as they tested the $45 line and, as we are supposed to do – we took advantage of the OPPORTUNITY to buy low and we took up an option spread that would give us an entry even lower ($35.70 in this case) in our worst case. As it happens, we nailed the bottom and already this $700 spread is netting $3,300 for a $2,600 (371%) gain in just over 30 days. Again – you do not need to take big risks to make big rewards – even in the short run.
- Buy 10 April $40 puts for $2 ($2,000)
- Buy 10 April $50 calls for $4 ($4,000)
- Sell 10 Oct $50 calls for $1.55 ($1,550)
- Sell 10 Oct $45 puts for $2 ($2,000)
This Lincoln National (NYSE:LNC) spread was for our Butterfly Portfolio and that's one that needs managing. The long puts and calls are still net $4,900 (down $1,100) but the short puts and calls are down to $560 already (expire next Friday) for a $2,990 gain and that's an overall net gain of $1,890 (+77%) off our $2,450 investment in just over a month – not bad for a well-hedged Butterfly!
The way our Butterfly plays work is we simply make our next target sale once the first one runs down so, for example, we expect LNC to be around $52.50 into the end of the year and the November options don't pay well so we can sell the Jan $47 puts for $1.90 ($1,900) and the Jan $53.50 calls for $1.50 ($1,500) and drop another $3,400 in our pocket for the next 3 months.
On Sept 2nd, we reiterated our long call on TASR (above) and added this one on Skyworks Solutions (NASDAQ:SWKS):
As we're always looking for our monthly $4,000(ish) in the LTP, let's sell 5 of the SWKS 2017 $60 puts for $7 ($3,500) as that's certainly a stock we don't mind owning way down from here.
While that one got off to a good start, we're right back where we started (a bit below) at $8.20 for a $1,200 (34%) loss. For the purpose of our LTP, we really do want to own the stock for net $53, so we don't care what the PRICE (not value) of the option is at $79.60, but this is a patience play for sure.
September 4th we reiterated our warning to cash out winning positions and we reviewed all of our Portfolio Positions. As I've noted, we don't have a Top Trade Portfolio as these trades are mainly picks from other portfolio plays, but the same rules apple – mainly cash and well-hedged is our current position in all 4 of our Member Portfolios!
Since we had plenty of cash, we were free to add more trades and on Sept 9th we added Yahoo (NASDAQ:YHOO) with the following spread:
- Sell 10 2017 $30 puts for $3.80 ($3,800)
- Buy 10 2017 $25 calls for $8.50 ($8,500)
- Sell 10 2017 $38 calls for $2.20 ($2,200)
YHOO is really only back to where it was on that day after a nasty dip but once again our "Be the House" strategy pays off and the net $2,500 entry is already at $3,240 for a $740 gain, which is only +29% but that's on a stock that's gone nowhere in 30 days. Isn't that a trading style that's worth learning?
Our 2nd Top Trade on the 9th was for the only Chinese company we like, China Mobile (NYSE:CHL) with the following trade idea:
While we're on the top of positions – CHL is up 0.86 today but still cheap at $60.22 and we can sell 5 2017 $50 puts for $3.90 and that drops $1,950 into the LTP and keeps our eye on it.
That one has improved since we called it, though off the highs as China is having a very rough ride (and we knew that but we still like CHL down here). The $50 puts are now $3.83 or $1,915 on 5 contracts vs the $1,950 we collected is up a not very exciting $35 (2%) but it's on track and still great for a new entry.
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