Considering strategies as my over-bearish portfolio struggles

My portfolio went down 8.5% last week. I suppose it could’ve been worse. My heaviest position, long calls in TLT, has been getting hammered as interest rates on the long end continue to rise. Meanwhile, my second largest position in the top 4 miners of GDX (shares with covered calls sold on them) has been hammered as well.

From my portfolio as listed last week, I had a total of 48.7% TLT calls, 32.1% gold miners, 9.9% puts (in IWM and EEM which were flat & volatile on the week), which represents 90.7% of my portfolio in things that lost value, so it’s interesting that it only fell 8.5%.

Trading began on Tuesday, when I reduced my gold miners substantially. I bought FSR (the gamma squeeze play) around $19.50 and was able to get $0.50/share on covered calls ending the week at a $25 strike. I bought them back a few hours later for only $0.14 – so far so good. The next day, I dumped FSR at $18.50 (you don’t want to hold a gamma squeeze when the big contracts fall out of the money) but it recovered and I bought back at $18.90 … only to dump it the next morning around $18.60 again. By then the trade was clearly dead. My other significant trade did better, as I bought AG (silver miner), sold covered calls on it for $0.55/share, and they expired worthless at the end of the week as the stock closed flat. My CCJ has been reduced substantially as I was selling short term at-the-money covered calls on it and they expired in the money – so that trade worked, 5% gain over 2 weeks.

Now I’ve got a tough decision to make. Do I dump my gold miners because they correlate too strongly with TLT, or do I wait for a bounce. I’m going to reduce them significantly again as a bunch of covered calls expired, but the question is how much. I’m tempted to just close out all of my FNV, WPM and NEM Monday morning and leave the rest, but then what do I invest the proceeds in because holding unallocated cash, TLT, and puts is very defensive for a market in a parabolic move higher.

The biggest narrative I’ve been hearing is the re-flation trade which has everyone excited about oil, uranium, silver, copper, farmland, housing, etc. Here’s a quick check on the market over the last 6 months:

Summary:

  1. SPY and IWM are both wildly bullish, with smaller companies outperforming large ones.
  2. Best trending sectors: Energy, Technology, Materials, Consumer discretionary, Financials
  3. Weaker upward trends: Real Estate, Health Care
  4. Consolidating: Industrials
  5. Weakest trends: Utilities, Consumer Staples

The most defensive sectors are struggling the most (utilities and staples) while the most aggessive are powering higher. It loos like chances favor another upward leg to this market.

I plan on keeping my TLT calls because I believe that the overall market is fragile such that beginning a risk-off posture could easily create an avalanche of selling with no buyers. I think the re-flation theme is a head-fake, that the underlying economy is struggling, and that rising bond yields and commodity prices will eventually lead to a market correction.

However, I don’t think this turn is imminent. While anything can topple an unstable market structure, it can also persist higher over the next year and I cannot allow my savings to get crushed if that is the case. That means I need to balance out my TLT and puts with significant upside exposure. One way I’m thinking of playing this is by looking for whatever pays the most in the least amount of time for covered calls. This will lead me to companies with bullish sentiment where I can position for a relatively safe return. So far I’ve got the following:

  1. PSXP with an at-the-money June 18 call pays an 8.2% call premium plus a 3.4% dividend payment on 4/30. Or I could sell the Mar 19 call and get 3.2% for one month. I can do better…
  2. PVG with a Mar 19 call gets me a 6% premium in a month. Not bad.
  3. AG gets me a 3.4% premium in a week at-the-money or 2.5% out of the money allowing up to a 5.3% max weekly gain – thats a winner
  4. CCJ gets me a 2.4% premium in a week allowing up to a 4.8% max weekly gain – thats a winner

I’m already significantly in AG, I’ll continue running with CCJ, and I’ll probably do PVG but I should find a few more. However, I still need the play for outsized rewards which is this week’s gamma squeeze play … here goes:

This is a very large number of options contracts that expire this coming Friday. They go out to a $65 strike where nearly 10,000 contracts were purchased. As the price goes above $30/share, it should start getting serious momentum higher. If it goes below $28/share, especially with only a day or two left, dump the trade. Expect shares and call options to be flying off the shelves Monday Morning. If you buy shares then, I highly recommend selling significantly OTM covered calls around the $33 or $35 strike and then purchasing them back a few hours later when they’ll likely be much cheaper. Aside from that, shares are the best risk/reward because they could potentially shoot up significantly while you can limit your downside by dumping after a 10% drop.

Keep in mind that these are risky plays, and I would never recommend buying the calls. Chasing these worked brilliantly for me with AMC, then SLV and FSR were both duds. As long as the market stays fully risk-on, enough of these should work to make it worthwhile.

I’ll end it here, wrapping up with my current portfolio:

  • PRECIOUS METALS
    • 14.7% Gold Miner Stocks, large
    • 7.0% EQX (small gold miner stock)
    • 2.6% SAND Calls (small gold streamer)
    • 10.6% AG (silver miner I’m selling weekly covered calls on)
  • HEDGES
    • 47.4% TLT Calls
    • 9.0% IWM Puts
    • 2.1% EEM Puts
  • OTHER
    • 3.6% CCJ w/ covered calls sold
    • 3.0% Unallocated cash

Note that I didn’t add any puts, they just went up in value relative to the rest of my portfolio. Also, TLT didn’t decline that much percentage-wise because I added more on Friday – though I admit I shouldn’t be following it down because I’m over-allocated there as it is.

Good luck on your trades.

About johnonstocks

I've been trading stocks since 2003, active on Motley Fool's discussion boards and using first Hidden Gems, then Global Gains. I no longer have the newsletters, but I keep up on the WSJ and read David Rosenberg everyday at gluskinsheff.com. Education: CFA level 2 candidate MBA-focus in Finance, Marshall, University of Southern California - expected Dec 2010. BS Mechanical Engineering, UC San Diego, June 2002
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