Several of you have asked about our VIX hedging strategy and requested more information…

First, the VIX is treated exactly like any other trade, EXCEPT, we are assuming that over the course of the coming year that the VIX will trade at higher levels than last year, when it traded the first half of the year near historic lows, then with much more volatility the second half of the year.

Given our assessment and evaluation of this assumption, we believe the VIX can be entered on pullbacks (market rallies), as long as the averages do NOT breakout above OCT highs and confirm a continuation of the LT bull run which still is in place, but showing some significant signs of weakening, or perhaps reversal. 

Today we covered our short 25 Calls for DEC and banked a 50% gain in those Calls, which we had already rolled for profits since the NOV 12 peak a couple of times.  From here we wait to see what happens tomorrow, treating tomorrow as a kind of “earnings”, or event that we do NOT want to be short going in to. 

If the market rallies after the FED action tomorrow we will probably sit tight to see if the rally can breakout strongly above 14,000 on the DOW (one of the resistance points technicians have been pointing to in the classic “Head & Shoulders” pattern), and then if it can breakout to new highs made in OCT.

If we see a weak rally up to the 14,000 area, and start a reversal, we will add to our VIX position, if the rally is strong and breaks above the 14,000 level, or bolts to new highs, we’ll probably sell our Long VIX position and call it a year, and wait until the new year to reestablish a new position at lower prices.  We have hedged most of our gains in the VIX Long position through spike premium sales and are now willing to hold the position down to the 15 level, and either sell or add, depending on the market action.

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If anyone has any questions please send those to us.  I will post more later regarding the overall strategy, but as for a buying opportunity in the VIX, I would say that to wait and see how the market reacts tomorrow.  If we get a weak rally up to the 14,000 area I would guess that the VIX will fall back to the 15-17.50 level, which may be a good opportunity to consider an entry.

More later…

Coach BD

More excellent inquires from Wayne regarding our VIX hedging strategy.  See discussion below…

Coach BD

continue reading "VIX Hedging"

Wayne made some good inquiries about USNA.  Below are his questions and my responses.  If anyone has anything to add please email me so I can post your thoughts.

Wayne wrote:

“I may have missed it, but did the new accounting firm ever “certify” the books/numbers Usana is reporting?  If not, could this be the trigger for the next big move in the stock?   Just a thought I had when reading your commentary on the big block trade this week.”

I have not seen any news about USNA having submitted their “Audited” 10-Q.  The last filing on NOV 7, was reported with “Unaudited” financial statements, described in the first paragraph of their quarterly report (Item 2. Mgt discussion…..)

I would imagine that any news, of any kind, will trigger a move of some kind.  I would guess that if they file their “audited” 10-Q and PwC certifies those results for the quarter, that would produce a big run up in the stock.  We will use that event to add to our core short, UNLESS, there is something within the report that contradicts, at least initially, what we all believe is happening to their business (growth is falling, not growing) and the financial condition of the company (it has near zero book value).

That is why we built such a large hedge with 45 Calls @ ~.27  We want to be in a position not only to add to out core long, already having the hedge in place very cheaply, but also be able to sell that hedge for a substantial profit to fund hedges further out and whatever premium we may have to pay in adding to our core short position.

Coach BD

We entered the MBI short trade on 11/12 with a bit different strategy than ABK.  We decided on a defined risk short spread on MBI buying JAN 25/20 Put spreads for ~1.00.

Today we added 50% to that position at $1.40.  If the stock makes new lows again this week we may add to that position and probably add some hedge to protect a portion of our profits.  May also buy some “spec” OTM positions if the down move continues or accelerates.

 Coach BD

We entered this short trade on 10/25 with a 1/3 position in the JAN 60’s Puts. 

On 11/1 when the stock gapped down to close below 30, we rolled our JAN 60’s down to JAN 40’s and bought DEC Call hedges at the 40 strike. 

Two days later with the stock near $23 and showing signs of reversal we added to our hedge with DEC 30 Calls. 

On 11/14 we added another 1/3 to our core short with JAN 40’s Puts, with the hedge already in place.  We also added “spec” positions with JAN 20 & 17.50 Puts.

Today as the stock began imploding, we doubled our “spec” positions in JAN 20 & 17.50 Puts, and rolled our hedge 30 Calls down to DEC 25 Calls, to guard against any snapback rally with expiration closing in.

If the stock makes new lows below 20 we may add a final 1/3 to our core short, and hedge either with JAN Calls or by selling JAN OTM Put premium, or perhaps both in order to protect our “spec” trade profits.

Coach BD

More big lot trades today corresponding with Put/Call combos.  Spent much of the day wondering whether the big traders moving this stock price around were setting up newly opened shorts for a new round of squeezing.  As has become the pattern, even down days end with a flourish of low volume buys that send the stock significantly higher into the close. 

We continue to look for opportunities to add to our core short, and have somewhat changed our strategy for ST hedging.  On Monday and today, as the price tested recent lows we took that opportunity to build a significant overweight low cost hedge with DEC 45 Calls at an average price of ~.27

If we do get the expected manipulation rally over the next or so, we will be looking for opportunities to add to our core short and sell some DEC premium for ST profit and to offset hedge costs.

There were two very large trades today on USNA.

The first was a 200K share trade appearing as a sale that corresponded with equal lots of JAN 50 Calls and Puts.

The second was a huge trade of 1Miliion+ shares, appearing as a buy, and corresponding to DEC 50 Calls and Puts.

Both were apparently done as single transactions so the details of what exactly has occurred is somewhat murky.  However, the last two times that these huge lot trades were executed with Deep ITM Puts and far OTM calls, a significant rally (or squeeze) followed shortly thereafter.  The large lot trades that occurred on both 9/21 & 11/8 both preceeded big runs up in the stock.

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The Coach offers this speculation about this action…  A major holder, or trader, wants to open a large short position (perhaps with insider shares) and contacts a market maker to execute the transaction in one trade.  However, the major holder and his trader are also about to generate a significant upward manipulation in the price. 

Because the MM who executes the actual trade for them must buy Puts to hedge his now huge long position, the major holder/trader who is selling the shares, also sells those Deep ITM Puts and buys the far OTM Calls creating a synthetic long stock position, with the MM taking a fairly small premium for the synthetic position since the trade is so big. This hedges the huge short sale with the intent that the major holder/trader wants to take advantage of the planned manipulation to gain some additional profit from syn-long as they step-up the price and reset the short at a higher price.

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So everybody in this trade wins,  the MM gets a hefty premium for executing the transaction and is fully hedged on the syn-long because he now holds the shares.  He collects maybe .25/contract premium, which equals… $277,500 just for executing the the huge lot sale at set price, or within a tight range (which is why you never see much volatility in price when these occur).

The huge lot share seller/trader, accomplsihed their goal of selling or shorting a huge lot at fair value price that wouldn’t be possible in the open market, AND, they now have a huge syn-long position ahead of their planned manipulation as a hedge that is part of the strategy to profit from the syn and reset the short position at a higher price. 

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With USNA the real story is anyone’s guess but this at least seems plausible.  As Sam has pointed out many times, we have never seen anything even close to this manipulation so it’s all speculation to some extent.  The action proceeding the last two of these huge lot trades was what led me to the speculation above.

Sam, if you are looking in now and then, what is your take?  Or anybody else…  Please use the email link on the question page.  In any case, we are expecting a price step-up or squeeze ahead and bought DEC 45 Calls to hedge our ongoing net short.

Coach BD