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Coach BD

We covered all of our Short 40 Calls today and repurchased those same 40 Calls Long today for an average price overall of ~.23  We continue to believe that the traders will make yet another attempt at a false rally in the next couple of days.

After today’s trades, our MAX loss expiration would be at ~$35, rendering our hedge 40 & 45 Calls, and 30 & 35 Puts worthless, and our Short 40 Puts at MAX Loss.  Our overall position, however, would still be positive due to our LT core Short.  The ST loss at $35 would be ~$2.90/contract short, with a near 150% ST hedge below $35…

We are actually hoping for a manipulation rally to collect some significant ST gains on our Call hedges.

But history is NOT necessarily an indicator of future action, which has been shown time after time with USNA.

Coach BD    

FMD - A Classic “throw the baby out with the bathwater” situation. 

We feel that FMD is inappropriately being associated with the subprime loan crisis.  Though they announced ST weakness and a dividend cut due to the overall credit tightening and washout of some of these heavily leveraged players, we see the FMD selloff as already overdone, though there probably will be continued weakness through their next earnings release, which will apparently be not so great, based on the recent comments by their CEO.

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But don’t misunderstand, we don’t think FMD is ready for any new entries at this level.  We will, however, be watching closely after their next earnings report for a significant reversal of FMD which could, eventually, set up as an excellent low-risk, and potentially long-term value trade for next year.  Definitely one to watch as history shows this stock has followed big declines with huge runs. 

This is one of the best, and most lucrative, patterns that we love to identify and trade. 

Coach BD

Well…

USNA has officially become a boring trade…   a bit too boring!  Which leads to us to believe that something must be afoot…  so to speak.

We would not be surprised if the new week, and BTW, also expiration week, were to greet us with some significant price manipulation in yet another attempt to wreak some havoc among the complacent. 

We have been selling ATM premium throughout the week (not today) after having established our big 45 Call hedge to limit our exposure.  We also have been adding JAN 35/30 Put Spreads, and some DEC 35’s and 30’s at low prices to minimize the downside effect, should the news/event that we have all been waiting for finally occurs next week.

On Monday, if the price opens near where it closed today, and the 40 Call prices show an appropriate decay from the weekend, we may cover our short position on those if the price is under $.40, and open a “spec” hedge with those same 40 Calls Long, with the expectation that some sort of false rally will be attempted as has been the pattern in months past.

It’s just too quiet.

Coach BD  

Since we are near year’s end, we have decided that posting details of our ongoing Long Trades is in most cases, moot, since we will be exiting many of them before the end of the year…

The goal was to give all of you an example of how we will report and comment on our new and ongoing trades once the service is fully functional.    The AAPL example is a good model for how we will report our evaluations and actions when we get up and running.

But we do want to give you an idea of what we have been doing over this year so below is a summary of our significant ongoing Long trades with current status…

AAPL - See posts

ATVI - Net Long since March with JAN 15 Straddles, tightly hedged.  On recent BO opened “spec” JAN OTM Calls.

CROX - Long in JAN, using step-up approach throughout the year until OCT when volume dried up near highs.  Closed out Long on 10/17 and opened a “spec” Short position ahead of NOV earnings.  After plunge to 35 we went neutral and remain so, selling ATM premium.  By far our most successful trades this year.

ESRX - Long in March, added using step-up approach.  Currently Net long but tightly hedged.

NVDA - Long in June, added using step-up approach.  Sold 50% on 10/17, and opened a “spec” OTM 2 to 1 Short.  Closed out the Short on 11/13 reversal and replaced with ATM Call sales.  Added 50% to core Long on 11/28 gap up with JAN 30/35 Call Spreads. Yesterday we adjusted the position to Net neutral by creating a Net JAN 30/40 Strangle, selling DEC 35 Straddles.

RMBS - Net Long on reversal in AUG + 2 add-ons in SEP.  Closed out Long at $20 and opened a JAN 09 20 Straddle with DEC 17.50 Puts, which is ongoing.  On the recent breakout we added to hedge with DEC 20 Puts.

SNDK - Net Long in March. Closed a month later at Sell stop.  In JUN opened 45 Straddle.  Became a perfect example of overtrading.  Finally, went Net Short on OCT breakdown and have recovered 75% of losses.  Net Long again on 11/27.  Currently Net neutral with DEC Puts and both ITM and ATM Short Calls.  Not one of our better efforts, so far.

ISIS - Net Long in JUL with JAN 10 Straddles, 2 add-ons using step-up approach and with ST Put hedges.  On weak OCT highs rolled out to JAN 09 15 Straddles.  Currently Net long with Short DEC OTM Calls and JAN 15 Puts.

ELON - Net Long in FEB.  3 add-ons using step-up approach.  On 8/8 Closed out Long position.  On 8/24 we reentered with FEB 25 Straddles.  When the stock rolled over on 10/19 we added Short “spec” trade with DEC 22.50 Puts, which were sold on 11/28 reversal along with the Put side of the FEB 25 Straddle.  Also added a 1/3 Long position with FEB 10 Calls.  Currently Net Long with FEB 10 & 25 Calls, Short DEC 15 & 17.50 Calls and DEC 15 Puts.

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More later…  More Long trades and Long trades that were closed on Sell stops and not reentered (Translation = Losers).

Coach BD

Update on our USNA trade activity…

If you are up to date on our current strategy you know that we have built a significant Call hedge at the 45 strike for ~$.22

We have also been selling ATM DEC Straddle premium (40 strike) when advantageous and have collected an average of ~$2.00 (in premium alone, not the price).

We have also purchased offsetting JAN Put hedges with 35/30 Spreads at an average premium of $1.10.

As of today we have sold enough Short premium to cover the entire hedge costs for the DEC 45 Calls and the JAN Put Spread hedges, if the stock expires at or near $40.

AND, we still have the opportunity, especially in a manipulation rally, between now and expiration to sell additional premium and/or cash the DEC 45 Call hedge for a significant profit.  Right now our hedge to the downside is fully hedged (down to 30) with equal numbers of Long Spreads in JAN to cover the DEC Short Puts.  This also gives an opportunity to sell additional JAN Puts at the 40 strike if the stock continues to hover here.

On the Call side, we have only sold 25% of the potential Shorts that would bring us to a 1 to 1 hedged Call ratio at the 45 strike.  In other words, we currently have a 4 to 1 hedge ratio, provding us with the potential to sell more 40 Call premium and/or sell up to 50% of the Long Call hedge that would bring us to a 2 to 1 hedge at 45.  We don’t want to get to a 1 to 1 ratio on with the upside hedge because this would result in a significant ST loss on the monthly trade if the stock were to be manipulated up to 45 at expiration. 

We learned our lesson the hard way last month on that one… 

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Again, these are more advanced trades that we don’t recommend until you are fully educated on how to identify and execute them efficiently and safely.  If you review the current strategy for the core position, this may be much more suitable for entering a new position, or managing an ongoing trade.

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Please feel free to send me your questions or comments.

Coach BD 

Updating AAPL since our initial discussion on 11/28…

With 50% of the original position still on with Short DEC 180 Calls we have made the following adjustments…

On 12/6 when AAPL broke out to new highs at near 190 we opened a 50% add-on (of the existing position) with a DEC 165/190 Call Spread.  We used a front-month Call spread for the following reason…

The Deep ITM 165’s carried little premium and the 190’s that we sold carried nearly 7x the premium we puchased.  We decided this was a superior strategy to simply rolling up the Short 180 Calls because the Short 180 Calls still had a significant amount of premium (3x that of the new 165 DEC Long Calls) and provided a significant hedge from the combined amount of premium now Short with a signiificant upside potential.

Also, with $1.00 of that addtional premium we collected we added to our downside hedge  with a 175/165 Put spread, further protecting our Long add-on at minimum cost. 

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Yesterday after the FED action and the markets started to break down we opened 2 new positions to bring AAPL near neutral and provide a good hedge both to the downside and upside assuming we may see some significant volatility from here until expiration.   

When the stock broke below 190 we opened a DEC 210/190 Put Spread covering 50% of the Long position, with the same reasoning as the Long add-on of 12/6, the Long 210 Puts carried little premium and the Short 190’s carried almost 6x the premium puchased. 

These trades resulted in our total position now carrying more than $15 of total NET Short premium (per contract) at the 190 strike expiring in 10 days, and another $3+ of premium still remaining on the Short 180 Calls.

We also rolled our Put spread hedge at 175/165 UP to the 180/170 for a NET debit of $.61… We also covered the Short side (150’s) of our original 160/150 Put Spread hedge for $.11 and bought 2 of these 150 Puts also for $.11.  Finally, we doubled our 160 Put hedge for $.25

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The result of all of this activity is that we have secured nearly our entire profit from the core Long position with our hedges and still have a Max upside to ~$200. and a Max downside of less than 10% (of our current aggregate profit) at ~$180.  

Our best case scenario at expiration would be if the stock expired right at $190 thereby collecting the entire amount of Short premium on both the Call and Put sides, which would give us an additonal 20% profit on the overall position for the year.

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We realize that much of this may take some time to digest so if anyone has any questions feel free to send those to us.  The ultimate goal with expiration closing in and premiums still high is… First, protect our profits, and second, attempt to keep the position as near neutral as possible over the next 7 trading days in order to collect the maximum amount of premium before closing all of the those expiring positions.

Coach BD  

OK…

Now that we have provided the background of our USNA core Short, here is where we are and how we are managing this ongoing position.

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First, as we discussed yesterday, in our opinion the big picture has not changed.  What has changed though is that the stock price has become merely a trading manipulation without regard to any of the events, news or financial condition of the company.

This presents much danger to all who believe that this “house of cards” must ultimately come crashing down.  The only problem is…  WHEN??? 

Unfortunately, many of the new revelations and red flags have been met with virtually no effect whatsoever on the stock price.  So what do we do when these disconnects exist?

The easy answer, at least for those who are considering new positions, is simply to stay out until some clarity emerges, either in the form of some action, a significant company announcement that would lend some credence to the allegations or other news that would appear to reveal a “Smoking Gun”.

For those of us with ongoing positions, the task may be a bit more complex but the goal is still a simple one… Protect your Capital !

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We have shifted our strategy a bit and have been taking opportunities to do the following…

1)  Roll our core Short positions out to APR & JUL.  All but our far OTM “spec” trades (JAN 20’s) have been rolled out.

2)  Take advantage of these manufactured and false rallies to sell far OTM Call premium to offset premium purchased and finance hedges.  We have also been adding small increments to our Core Short position on these low volume spikes and opening some additional “spec” trades with OTM Put Spreads in JAN & APR, and far OTM Puts in APL & JUL.  Generally, for every new position or add-on we have made since NOV expiration we have offset these with far OTM Short Call sales. 

3)  Take advantage of the recent spikes down to build a substantial ST hedge in anticipation of another manipulation upward.  Our hope is that we may have an opportunity in the next 10 days leading to expiration to sell some ATM premium on both the Call and Put sides to capture some ST profits and hopefully be able to sell our substantial ST hedge at 45 for a profit, or at the very least be able to sell it at breakeven.  Our hedge cost now is at ~.22 so in any significant squeeze or manipulation before expiration, it wouldn’t take a huge move upward (with IV expanding) to provide us the opportunity to see a significant profit on this hedge.

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Please feel free to send your questions and comments…

Coach BD     

USNA Strategy review…

In March, soon after the story broke via the FDI investigation, we opened our initial Short Position with a combination of OCT Deep ITM Puts and JUL 50 Synthetic Shorts, and hedged those positions with a combination of May 50 & 55 Calls.

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By May Expiration we had decided that this story may take a bit longer to play out than we had originally thought and instituted a slight strategy shift to attempt to collect some ST premium to help pay for our hedges, cover LT Put premium and hopefully collect some ST profits on these ST trades. 

On the Monday following May expiration when the stock made a fairly big move up, AND because of the overpriced premiums that had become available at the ATM strikes, we began selling front-month Straddles and hedging with a combo of front-month and following month Call and Put hedges one strike out.  On the Put side we used Put Spread hedges due to the skew in overpriced premium for Puts vs Calls.  On the Call side we initially split our hedges between one & two strikes out, and between front-month and following month.  The reason for this is that we were still anticipating that the trend would continue down and we wanted to be hedged at a lower cost to the upside since we didn’t, at that time, consider the manipulation trading that was to come. 

Roughly two weeks after we initiated our first Short straddle the stock started to break down and made a new low.  This new low gave us an opportunity to cover the Short Call side of our straddle at ~75% profit, initiate a 50% Call hedge at the same strike we were Short AND double our original Call hedges very cheaply.  This proved to be a very fortunate move because over the next two weeks leading up to JUN expiration the stock made it’s first big squeeze run up to 50, before backing off at expiration.  On those two days (Thu & Fri) we were able to…

1) Cover the Short Put side of our straddle (40 strike) for a ~80% gain…

2) Sell all of our Call hedges 40, 45 & 50 Call hedges for gains ranging from 200-500%.

Additionally, when the stock made the new low noted above, we rolled our JUL 50 Syn-Shorts out to the OCT 35 Syn-Shorts and added to our exisitng Deep ITM Puts.

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We continued this strategy through NOV.  In JUL & AUG the strategy worked very well due to the overpriced premium available to sell and the excellent opportunities from the wild price swings to profit from our ST hedges.   In SEP the strategy, while still profitable in the ST, was much less so due to the fact that the premiums ATM had become much less overpriced and the price swings were moderating.

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In addition to the ST trades, in early AUG when the stock made new lows down near 30, we added to our core Short position with Deep ITM OCT Puts and opened new Deep ITM Puts for JAN.  We also rolled our now OCT 35 Syn-Shorts out to the JAN 30 Syn-Shorts.

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In OCT and NOV, the ST opportunities that had been abundant in past months, evaporated.  However, due to our conviction that the volatility would most certainly return, we made a slight change in the execution of the monthly trade, which ultimately turned out to be a mistake.  We purchased our hedges first per our previous strategy (50% front-month / 50% following-month), and waited for the volatility we expected to return in order to secure a better price for the Short Straddle sale…  But the volatility continued to decline and we found ourselves in the unfortuante position of selling ATM premium that would not cover the cost of the hedges at the OCT 45 strike.

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In other words, instead of entering a trade with a good risk profile as we had done over the past few months, OUR SUCCESS CLOUDED OUR JUDGEMENT, and we entered a trade that was dependent upon specific price action to complete the trade’s execution, or better said, we were chasing our tails instead of just passing on the trade because it did not set up with the edge we had in previous months.

The results were that we wound up playing catch up through NOV expiration and ultimately gave back about 1/3 of our ST gains from the excellent returns we had secured over the summer.  A perfect example of how success can cause you to do dumb things and that even the most experienced of us fall victim to overconfidence and/or complacency.

On the upside, it was a wake-up call that we needed to get back to our fundamental trading rules, be patient and wait for the edge to present itself again.  Also on the upside, overall the strategy was very successful, but due to our own disregard for our strict trading rules, it was much less successful than it should have been.

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The best lessons are almost always painful, financially and otherwise.  In Part 3 we’ll address our current strategy and how we are managing this LT position that just doesn’t want to do what we all think it should be doing.

Caoch BD     

Many of you have been asking over the past week about our current USNA strategy, how we have profited on it over the months and for suggestions about potential strategies from here on out.

First, let’s start with our assessment and evaluation of the story and the ongoing trade.  As to the story itself, our feeling is that nothing has changed. 

1) Bad news and questionable business practices continue to be uncovered without any substantive response or contrary evidence from the company, other than the “He’s a liar, he’s a felon” defense.

2) Mr. Minkow’s investigation is ongoing.  Our assessment is that if he had determined that he had come to a dead-end, he would have suspended the investigation.  Comments from him, and the continuing lawsuit filed in Utah regarding “Naked Short Selling”, suggest he is continuing to seek and build convincing evidence for the allegations made in his reports. 

Additionally, if he had NOT received supportive feedback from the agencies he has  submitted these reports to (SEC, FBI, IRS, China Law Enforcement), we believe he would have concluded his investigation and moved on to other consumer fraud work with a higher chance for successful prosecution.

3) Red Flags continue to surface.  Regular large lot stock sales appear to be continuing at an increasing rate.  One obvious red flag recently was that the individual responsible for the operations in Asia, the area which is the focus of the most recent FDI report, liquidated most, if not all, of his holdings.

4) The SEC “informal” inquiry continues.  History suggests that the longer these informal inquiries go on, the more likely it is that irregularities or illegal activities have been uncovered and the agaenices are moving diligently to build a solid case for an action against the company.  

5) The company has engaged in a PR and spam blitz campaign on stock message boards in an attempt to hide as much of the relevant discussion of the company’s problems as possible.  This is NOT the strategy of a company who has nothing to hide in our opinion. 

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So, in our opinion the story remains unchanged and we remain overweight Net Short the stock with substantial ST hedges.  In our Part 2 post we will address our current strategy and how that strategy has changed over the past few months.

Coach BD