Strategy adjustment from conditions at market open

Yesterday I mentioned jumping in on the gamma squeeze play on PLTR, but I ended up passing on that. Last night, the NASDAQ futures went down significantly. PLTR is an IT company that is part of the big ARKK ETF, so I expected it to be under pressure. Sure enough, morning came along and it went down pretty fast.

One thing to watch out for with the gamma squeeze plays is that it works both ways. If PLTR managed to stay above $30/share, where an enormous number of call options were sitting, it would create significant upside pressure because the options dealers have to buy shares to protect their effective short positions against a move higher. Conversely, a drop below this $30/share threshold means that the options dealers have to sell shares to protect themselves from losing money on a falling security. If you ever chase these, keep that in mind because risk control is essential to making it a winning strategy.

Gold and Silver went up, but I still decided to sell off NEM and FNV, replacing them with PVG, more AG, and more CCJ. As planned, I immediately sold at-the-money covered calls on all of them. Those three companies offer much better premiums for these calls. This as a win-win because I get more money for sitting on the shares, and the premiums reflect that these are more highly favored companies in riding the commodity inflation narrative higher.

Note that PVG, AG, and CCJ are more risky individually in that they will certainly drop further in a deflationary event, but my portfolio is over-hedged in that direction so I needed something more aggressively bullish. The big gold miners are great value plays that will do well over time, but I see a market that shooting higher until it drops and I’m aiming to get outsized returns on either side. Or more accurately, I’m positioned to get significant returns on a downside outcome and I need something that will offset my losses if the market continues wildly higher. My big bet on TLT could easily blow up in my face and I don’t want to go broke if that happens, but if you want a chance at winning you have to gamble a bit. Prudence will help you stay rich, but only risk can get you there – and I’ve never seen a market that is so risk-on!

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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.

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TLRY, FSR, and the band plays on

The great gamma squeeze plays continue. Stocks like AMC and GME are still restricted … I saw a decent number of short dated call options contracts flooding AMC last week, so I tried to get in on the action. I bought AMC end-of-day Tuesday figuring that the big players would try to flood sales into the close and I could get a good price. Then on Wednesday morning when the retail traders flood calls I was going to sell end-of-week covered calls and pick up some premium. Alas, it didn’t work; my Ameritrade account would not allow me to sell covered calls in AMC as it was still a restricted security. That didn’t bode well for a gamma squeeze play, so I dumped the stock at a $0.09/share loss.

Later in the week I saw this fabulous chart:

Apparently the WSB crowd (and whatever hedge funds drive it) has moved on to other names, pushing pot stocks to the skies last week with the main focus on TLRY. The question then became which stock would they pump next week? It is often difficult for me to figure out because I don’t have any fancy screeners and I work during the day, but the great Lily of NOPE @nope_its_lily Nope, it’s Lily – Medium mentioned in a tweet on Friday that FSR was getting gamma bombed. She is a young college student who made a big splash with her work on how options contract can distort the underlying markets, followed by interviews with the greats on Real Vision, Bloomberg and others. Anyway, back to FSR:

I highlighted above what it looks like when a stock is “gamma bombed”. It basically means that the shortest dated call options contracts were purchased in huge numbers. The options dealers who sell those contracts are effectively short the shares, so they have to buy to cover as the price increases so that they won’t lose enormous amounts of money at the end of the week on selling out those options contracts.

Here’s the play as I see it … money will flood into FSR shares and even more into these short-dated calls Monday morning. I’ll buy shares to chase around 30 minutes into trading and then sell some covered calls on them that are significantly out-of-the money. From prior experience, these calls should go down in price by the end of the day and I’ll buy them back leaving just the shares. If the gamma squeeze works, then the share price should shoot way up around Wednesday – with a target above $35 – the highest option contract that was purchased en masse. Then I’ll sell the shares.

I really don’t see how long these plays can last, but while they’re here they shouldn’t be ignored. As of now, I made some money on AMC and lost it back on SLV (I wrote about why last week), so this should push me ahead again. FSR is a small money-losing company in the electric vehicles sector, so this kind of action should dwarf it’s normal trading volume and that’s why it should work.

As for other trades, I’ve had a busy week. First I decided that with all of my hedges in place, I really needed to put the unallocated cash to work so I bought more shares of CCJ and went back into the big 4 from GDX: FNV, NEM, GOLD & WPM. Then I sold out-of-the-money covered calls on all of them to get some premiums.

As the week went on, I started to get more nervous about signs that the party might be over and a truly deflationary wind is underway. As Steven Van Metre @MetreSteven explains it, deflation means that big players need cash and they get it by selling things that are very liquid like treasuries, gold, and gold miners. On his youtube channel he showed the head-and-shoulders pattern of GDX and how both gold and gold miners went down preceding previous market crashes.

On Friday morning, there was a major hit to TLT, GDX, and a dip in the major stock indexes. That afternoon as everything but TLT recovered, I bought back my SLV covered calls, sold all the SLV shares, and put all of that money into Jan 2023 TLT calls. Now I’m pretty heavily positioned for a deflationary spike. Here’s how my portfolio ended up:

  • PRECIOUS METALS
    • 22.7% Gold Miner Stocks, Large with covered calls sold on them
    • 7.0% EQX (small gold miner stock)
    • 2.4% SAND Calls (small gold streamer)
  • HEDGES
    • 48.7% TLT Calls
    • 8.0% IWM Puts
    • 1.9% EEM Puts
  • OTHER
    • 9.0% CCJ w/ covered calls sold
    • 0.3% Unallocated cash

Here’s how I see things playing out:

Interest rates are near zero on all government bonds up to 2 years duration. Interest rates have been increasing on the long end, both the 10 year and 30 year, hence the declines in TLT. With the prevailing “reflation trade” narrative, big investors are heavily positioned in the short TLT and short the US dollar positions, so that simply reducing risk will create buying pressure in the long bond. Also, the US government pays more interest on its long bond than any other developed country except Australia … negative interest rates and extremely low yields are common elsewhere.

The stock market is at a position where institutional investors are almost all levered long. The short-squeeze crowd has been destroying most of the short trades which the big players often use for hedging, to offset risk on their long portfolios. Another important by-product of the gamma squeeze and short squeeze plays is to increase volatility – just look at any of the names affected like GME, AMC, TLRY and you’ll see what I mean.

Most of the volume traded on the US stock exchanges is as follows:

  • Passive flows from 401k’s into index-tracking vehicles. These simply buy at any price when they are put in and then sit there – they don’t buy or sell in a crash, they just take shares off the table for trading.
  • Algorithmic and high-frequency traders. These create a lot of volume, but with very short-term trades. They front-run other traders by purchasing ahead of them and selling immediately after, or they chase momentum or use other short-term strategies. Whatever shares these guys hold will be sold immediately if the market turns dicey.
  • Momentum traders. These have been some of the most successful investment strategies over the past decade. They look at chart patterns to buy as money flows into a stock and it goes up, and they use risk-management tools like stop-losses to sell shares immediately when markets turn against them.
  • Value investors. These funds have struggled mightily over the past decade as both momentum and index-tracking funds outperformed them enormously. They will buy as prices collapse, but they are small relative to the broader market so they will likely wait for prices to form a bottom before jumping in.
  • Buy-the-dip investors. These guys are mainly retail traders, and they just buy any dip in the stock market because stocks only go up. They have been rewarded handsomely over the past year.

With the above setup, I am worried that the biggest funds either remove liquidity from the system entirely (passive investors) or chase momentum in some way which tends to make both up moves and down moves more extreme.

So what happens next:

  1. Volatility rises, as shown in the VIX, as reduced liquidity makes it even easier for the big gamma squeeze plays to pop and drop stocks.
  2. Big investment funds using a VAR (value-at-risk) model decide that they need to take risk off the table. They are levered long (borrowed money invested in the market), so they can’t afford too much of a down move in stocks. They reduce risk by selling shares to pay back some of this borrowed money.
  3. The thin ice of buy-the-dip investors come in to buy these shares as prices begin to fall. All is well unless they are overpowered by this selling.
  4. If the buy-the-dip investors are overwhelmed, momentum traders and algos see the warning and start selling shares. Other institutional funds decide to de-risk as well. You start to see a growing avalanche of shares being sold with few buyers in sight.
  5. The US Federal Reserve carefully watches for signs of “illiquidity” like they saw in the fall of 2019. They respond by stepping into the market with repos or bond bond purchases (quantitative easing) in order to get more money into the market. They are currently only allowed to purchase government-backed securities including US bonds and mortgages from Fannie Mae & Freddie Mac.
  6. This leads to a significant boost for these securities and a spike in TLT, which is made bigger by the big institutional traders reversing their short positions.
  7. If this happens, I plan to sell my TLT calls and reposition into a number of commodity-related names including CCJ, FNV, NEM, GOLD, WPM, EQX, SAND, and others.

For now, I think I’m going to sell off my gold positions that have covered calls expiring in mid to late march. I’ll probably wait for the covered calls to expire for the week of March 5th and prior. I’ll continue to look for gamma squeeze plays to participate in like FSR above, and I’ll hold more cash on the side. I might go longer even longer TLT at some point, especially if work gets so busy I simply don’t have time to think about markets for a while.

That’s my plan. Good luck formulating yours and hopefully seeing it play out.

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SLV aftermath and preparing for risk-off

This week was unusually volatile for the precious metals space. In retrospect it seemed an obvious market trap for the Reddit investors as all the sites and stations were pumping the big SLV squeeze.

I hit the market first thing Monday morning and started with my plan from last week. I sold all of my gold miner shares and call options immediately. Working through multiple names on 3 accounts and quite a number of long calls, it took some time to get through. That was fine, as I wasn’t planning on buying SLV until 30 minutes into trading, to take advantage of the post-buying dip that I saw in AMC the week before.

Short dated option contracts were being purchased in large numbers, many of which were in the money, and that would surely squeeze SLV higher. I decided that in addition to buying SLV shares, I should try my hand at some short-dated calls using the money I made in AMC the prior week. This looked pretty good until silver went sharply lower on the Comex around 11am. I sold a bunch of my SLV shares back in the intra-day test above $27/share around 1:15 and then bought it back 5 minutes before closing as I expected the gamma squeeze to still retain some effect after hours.

That night, silver dumped again as margin requirements at the comex were increased 18% allowing some of the big players to dump future contracts. Tuesday morning, I sold all of my SLV off – call options, shares, everything. My account was down to unallocated cash and hedges (TLT calls, IWM puts & EEM puts).

On Wednesday, I bought a significant number of SLV shares back at $25 and immediately sold end-of-week $25.50 covered calls on them. SLV was trading at a discount to assets, and I figured the crunch was over but they’d likely make sure that all the calls above $25 expired worthless. Turns out I was right on that count.

I am still nervous about overall market liquidity and some of the manic price action, so I increased my TLT calls considerably all week – focusing on 12 to 24 months out. I’m still convinced that we see a significant market drop at some point, which will be associated with new lows in US 20-30 year bond yields. If you want to know more about why I like the TLT trade, look up Steven Van Metre on YouTube.

With all of that hedging, I need to make sure that I’m not crushed if things continue higher, so I looked for some easy trades I could be confident on. I purchased more CCJ, immediately selling covered calls that will give me a 5% gain in 2 weeks as long as it doesn’t tank (I’m still long-term bullish Cameco and Uranium). I was following the miners like crazy, and they all got crushed Monday/Tuesday then seemed to level out nicely. Friday morning I went back and bought a bunch of those again. February and March aren’t strong seasonally for gold, but the pricing was near some solid support – so I stuck with shares only for the most part, and significantly less than I had at the start of the week.

Many people like to complain about the obvious market manipulation in precious metals. It was very obvious what the big players were doing, dumping silver to temper the price and make sure that all those short-dated out-of-the-money calls expired worthless. Honestly, I don’t see the point of trying to moralize this, they aren’t going to change their behavior, I can only change mine. If you think about it though, it was quite a surgical strike. Long term investors in SLV saw the price return to the pre-hype levels of the prior week – and any shares purchased on Monday only really went down between 10-20%. If I bought SLV like crazy Monday morning and just sold covered calls on it, I would have made decent money given those premiums – and that is exactly what I plan to do if this happens again.

All in all, it was an eventful week. Here’s how my portfolio ended up:

  • PRECIOUS METALS
    • 8.3% Gold Miner Stocks, Large
    • 10.3% EQX (small gold miner stock)
    • 2.4% SAND Calls (small gold streamer)
    • 21.7% SLV
  • HEDGES
    • 16.9% TLT Calls
    • 8.4% IWM Puts
    • 2.2% EEM Puts
  • OTHER
    • 5.9% CCJ w/ covered calls sold
    • 23.9% Unallocated cash

I actually like the miners and SLV here as they seemed to hold up well given the Comex pressure this week. Also, if they had to increase the allowable margins to let the big players dump futures contracts then it tells me their ability or willingness to do that again is somewhat limited.

Regardless, my thesis stands that precious metals will dump in a major liquidity-driven drop like we saw last March, but they will rise significantly if that doesn’t happen. I think the potential drop for gold and silver will be much lower than for the high flying US stock market.

My portfolio is uncomfortably tilted to expect a risk-off scenario, and I plan to look for more simple layup trades like selling covered calls to gain a short-term 5% premium on stocks that I don’t expect to go down, like I have now with CCJ. I am feeling increasingly wary of a risk-off scenario, but I’m not willing to risk my capital on betting that the turn happens immediately. Simple trades with an assumed upside scenario will need to offset my portfolio decay if the market continues to move against my hedges.

I’ve heard too many stories of people calling the dot-com bubble early in 1998/99 or calling the mortgage crisis early in 2005/06. The big money is not made in the crashes anyway, but afterwards as our financially engineered system sends those assets soaring in value again.

Good luck and happy trading.

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SLV dud

I’ve been nervous about the market lately, so I thought I could take advantage of the attempted gamma squeeze in SLV to get out of all of my precious metals positions, go to SLV for a day or two, then sell and leave just cash and hedges. So Monday morning I sold all of my precious metals positions, then picked up SLV in the morning and the afternoon.

I had a couple of warnings I should have heeded – especially when someone tweeted a shot of CNBC peddling silver. When they’re pushing trades on any of those major news networks, it generally means some major players want the other side of the trade.

The news about physical shortages might very well be real, but that has little to do with the price of silver futures. The comex extended margin amounts by 18%, and the big players had a field day pushing gold and silver down.

Anyway, I sold all of my SLV at open today and I’m down to cash and hedges. I gave back my AMC gains and a bit more, but it wasn’t too bad considering. After all, if I ignored the SLV trade then I’d be bleeding like crazy from my heavy gold miner positions.

That’s all I have time to say, I need to drive in to work.

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SLV Setup and the AMC Aftermath

How it works, and a potential next move:

Everyone’s heard of the crazy stock moves in GME, AMC, and other names by now, but most people have no idea how that works. I’m going to illustrate that with what looks to be the next one: SLV.

Here’s how it works:

  • One option contract gives you the right to purchase 100 shares of stock at a given “strike” price before a given expiration date. The price is listed per share, so a price of $1.02 means 1 contract for 100 shares would cost $102.
  • When you purchase an option contract, the dealer who sells it is effectively short the stock when the price rises.
  • The dealer sells these all day every day with the idea of making a premium without taking market risk. To do this, he uses a sophisticated method called “gamma hedging.”
  • When the stock price rises past the strike price, the dealer needs to purchase the shares in order to ensure that he can hand them over at option expiration.
  • If the stock rises past the strike price + the premium paid for the call option, then the dealer quickly starts to lose money.
  • The “premium”, or price that the option contract sells for, is lower the closer the option gets to expiration. (look in the “last price” column for this)

The basic idea is that these people are forcing the dealer to purchase 1 share at full price for the per-share premium, so if you load up on the $25 strike at $1.00 price, then the dealer has to put in $25 in shares for every $1 that you put in.

The dealer will not purchase the shares until they approach the strike price, however, so like a rocket it can take a lot of fuel to start moving and then quickly gain momentum.

If this trade is truly being targeted for this type of move, then you should see these out-of-the-money Feb 5th options contracts selling like crazy when the markets open on Monday. I fully expect it to be targeted because of the way those call volumes are spread. The $35 strike hitting in 5 days would be nearly impossible without this momentum build, but 30,092 contracts traded Friday. If you look at any other expirations, the volumes are tiny in comparison.

Note that there is no guarantee that this will work. You could have shares dumped on the market by a big fund or it could fail to get momentum and launch. If you want to play this however, these are your options:

  1. Safest bet: Purchase SLV shares and sell out-of-the money covered calls on them. You’ll collect a hefty premium for these calls if people are spam-buying them. This ensures that you’ll make money if it’s flat, and if it drops then those premiums help offset your losses.
  2. Neutral: Purchase SLV shares and hold them. You’re betting they go up, and I’d say the odds are probably in your favor if people are pumping the stock.
  3. High risk: Purchase some of these call options. If it takes off you win big, if it fizzles out you’ll probably lose everything.

My experience with AMC

I just figured out what these guys were doing and how this worked last weekend. Thinking back, it’s pretty clear this happened all summer, possibly starting with Tesla. On Sunday night I couldn’t sleep because I was so excited about a possible move in AMC.

Monday morning, options contracts that expired in 4 days duration were moving like crazy, and the premiums were getting hefty. I’m used to looking at premiums to determine whether to sell covered calls, so I immediately started buying shares in blocks of 1,000 and then selling covered calls in blocks of 10.

The price was $4.50/share and I initially started selling the a contract for $0.70 with a strike price of $5.50. I was thinking if it ends up flat, I make $0.70/$4.50 over just 4 days which is a 15.6% move! Even better, if it launched I could get up to $1.70/$5.50 which is a 37.8% move! I did a number of those and figured it was enough.

Then the premiums got so hefty that a $7 strike price was giving me $0.70 per share and they were at $4.60 each – so a bought a couple thousand more and sold those, which allowed me a max gain of $7.70/$4.60 = 67.4%.

On Tuesday, the price didn’t seem to be moving much. Then after hours, the stock exploded higher. I never expected it could go up close to $20 per share in just 2 days. I was totally stoked about a max gain, but mentally kicking myself for selling those covered calls. When I logged in to my Ameritrade account though, I noticed a warning about restricted trading in a number of names including AMC. That spooked me a bit so I closed out most of my shares by purchasing back the call options and selling them on the market. After the crazy news and talk of further restrictions, I decided to close out the rest Thursday morning, but they were already called … and then it occured to me that I should have just let it be. I gave back all that call premium by selling those things to unwind the trade, when the holders of those calls were in a much more precarious position. All in all I ended up with a great gain, a bit under 50%.

End of week trades, portfolio, and final note

With the crazy news this week, work being busy, and driving in mid-week (2 hours each way, ugh), I didn’t do much trading outside of that. On Friday I purchased another TLT call – going for a deep in the money Jan 2023 expiration. I’ve certainly heard plenty about liquidity problems and the rickety market structure to make me nervous.

I also sold off some of my SLV calls today because it shot up a bunch so it seemed like a good time to de-risk … and of course it was before I found that SLV was a potential target. I also did a typical lay-up trade, purchasing shares of CCJ near the previous multi-year resistance (now support) and selling 2-week at the money covered calls on it which will lock me in a 5% gain in 2 weeks if nothing happens. CCJ is one of the stocks on my list to accumulate a bunch of when the market corrects, so I’m not too worried about holding it.

Here’s where my portfolio ended up:

  • PRECIOUS METALS
    • 23.6% Gold Miner Stocks, Large
    • 14.3% Gold Miner Calls, Large
    • 11.9% EQX (small gold miner stock)
    • 2.0% PVG Calls (small gold miner)
    • 2.0% SAND Calls (small gold streamer)
    • 5.9% SLV Calls (silver ETF)
  • HEDGES
    • 7.0% TLT Calls
    • 9.8% IWM Puts
    • 2.6% EEM Puts
  • OTHER
    • 0.6% CCJ Calls
    • 2.3% CCJ w/ covered calls sold
    • 0.7% Crypto
    • 17.4% Unallocated cash

If you compare to last week, you’ll see my allocations went down on a number of things. The crazy thing is I wasn’t selling, it’s just diluted from the results this week.

Here’s my plans for Monday morning: I’m going into the market about 30 minutes after open to see if there are SLV contracts flying out like crazy. If there are, then I’ll be buying a lot of shares. I am pretty risk-averse, so I won’t be participating in the lottery ticket contracts … and I might even sell covered calls on it, but this time I’d sell really deep out of the money.

Here are a couple of few warnings to consider with this trade:

  1. SLV has a market cap of $14.8 B compared to a market cap of $1.5 B for AMC last Monday, so it will take a lot more buying to make it move.
  2. SLV has a short interest around 10% of float, compared to AMC last week around 60%. The short squeeze potential isn’t nearly as big.
  3. SLV will likely issue shares to buy physical Silver with. That’s what they do to track silver, and it means that significant share price appreciation would require the whole silver market to move.

On the positive side, silver is considered to be cheap compared to gold, SLV currently (as of Friday close) trades at a slight discount to it’s underlying silver, and the amount of money that’s being poured into the options market should tilt the risk to the upside. As such, I highly recommend that you purchase SLV shares and maybe even sell covered calls to take advantage of an elevated premium in covered calls that expire next Friday. Purchasing those 4-day covered calls is like buying a lottery ticket.

Final note – If you look at the markets Monday and no one is buying Feb 5th out-of-the-money covered calls in SLV, then don’t bother with the trade.

May the odds be ever in your favor!

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AMC: Short Queeze + Gamma Squeeze

Gamestop was the previous gamma squeeze + short squeeze target and it shot up all the way from $4 in August to $98.15 today.

Now it looks like the target is AMC. Notice the extremely high volume as it gapped up from the $2’s to the $3’s last week and to around $4.40 this morning.

Gamma Squeeze: You can see above the enormous amount of out-of-the-money options being purchased for AMC. The numbers were large on Friday as well. These options expire in 4 days, and the market maker selling these can lose a lot of money fast if the stock shoots up, so they have to hedge by purchasing the underlying shares.

Short Squeeze: The chart above that shows a large amount of short interest. When these managers sell short, they borrow the shares and then sell them at market, planning to buy them back for less. If the shares double, then they have to pay twice as much to buy them back. These institutions either have stop-buys where they close out their short positions when the price rises past a point, or they will start to owe so much with the price rising that they have a margin call forcing them to buy back.

Anyway, I decided to get in on this one so I bought a bunch of shares this morning around $4.40 or so and sold $5.50 covered calls at $0.70 or so. By the time I took the screen shots to write this, those 4 day out-of-the-money calls are selling at over $1 each. If they are called out in 4 days, that is a 44% profit! What set this off was a successful debt issuance last week which pushed a possible bankruptcy out for years.

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GME, Short Squeezes, and Volatile Markets

Here’s the crazy chart of the week:

Gamestop is a brick-and-mortar store that sells new and used video games and console gaming systems. The stock has been trending down since 2013, hitting a low around $3.32/share in August 2019 – months before the pandemic. This followed the trend of many brick-and-mortar stores vs online competition, as hard copies of new and used games are sold on sites like Amazon and Ebay while console providers like Playstation and Microsoft were selling new games for direct download to their consoles.

With the pandemic lockdowns, there was serious speculation about Gamestop going bankrupt, and short sellers piled in. You can see on the table above (link here: GME Short Interest Ratio (GameStop) | MarketBeat ) how the dollar value sold short was skyrocketing, from 54,520,000 shares sold short on 7/31 at $4.60 a share to 71,200,000 shares sold short on Jan 23, 2021 (I had to find today’s number here: GME – Short Squeeze Stock Short Interest for Gamestop Corporation Class A ).

Another way of seeing this, the company’s market cap valuation (total shares x share price) went from $470 million in July as bankruptcy fears loomed to $6,650 million today. The stock even peaked above $75/share, significantly eclipsing it’s all-time high in 2008 of around $62.50.

Anyway, this is a classic short squeeze. It’s rare that you see one this violent, but it shows you one of the reasons that it’s never a good idea to sell stocks short. Selling short is a leveraged bet with a significant possibility of sinking your entire account. Imagine paying to borrow shares to sell on the market at $4.60/share because you think bankruptcy is inevitable. The higher the stock rises, the more it draws on margin (borrowed money from the broker) until your account hits it’s limit and you are forced to buy back in and close out the trade. New short sellers are coming in at higher dollar amounts because they know this valuation can’t last – so you see the number of shares sold short continue rising – but those who sold short lower are forced to buy back and speculators come in betting that the share price is squeezed higher.

It’s an amazing sight, and it is why I stick with put contracts if I want to bet on the downside. For the Russell 2000, I have been betting significant amounts of money at every leg higher by purchasing long-dated contracts with the rights to sell shares at a given price. The difference here is that I have no obligation to sell the shares, so the contract value stays above zero until it runs out of time completely and then disappears at zero. It is called a hedge because I expect my portfolio to outperform significantly enough to more than make up for these costs, unless the drop I fear occurs in which case these put contracts will somewhat cushion my portfolio losses.

Here’s where my portfolio landed:

  • PRECIOUS METALS
    • 26.7% Gold Miner Stocks, Large
    • 16.4% Gold Miner Calls, Large
    • 13.9% EQX (small gold miner stock)
    • 1.7% PVG Calls (small gold miner)
    • 2.2% SAND Calls (small gold streamer)
    • 9.3% SLV Calls (silver ETF)
  • HEDGES
    • 5.8% TLT Calls
    • 8.4% IWM Puts
    • 2.5% EEM Puts
  • OTHER
    • 0.7% CCJ Calls
    • 12.5% Unallocated cash

The only moves I actually made this week were adding some EEM calls and CCJ calls. I still like being long Uranium and I will likely increase this position if the price dips further. On the other hand, I don’t want to be too aggressive when there are so many potential warnings of a market top.

Here’s a good example: Looking Deeper at the NAAIM Survey Data | Top Advisors Corner | StockCharts.com

The article goes over data compiled by the National Association of Active Investment Managers, showing their responses and positions. The average manager is invested 113%, meaning a leveraged long position in the stock market. The most bearish manager is at a 75% long position. None of them can afford to be short or even neutral at this point or they’ll risk losing clients. Remember that a professional investment manager plays a game involving relative performance; they can risk their funds losing money along with their peers, but they can’t risk underperformance when everyone else gains.

My current bias is bearish, as I expect a pullback on everything including precious metals. However, I really don’t want to decrease my positioning in them for two reasons. First, I expect precious metals and Cameco (Uranium) to perform well over the next 2 years. Second, I could be wrong about the pullback – and if this is the case, then I need to be long enough to make up for my hedges losing value.

We are at a period of high volatility at somewhat suppressed prices, so it actually makes sense to hedge risky upside positions with risky downside positions rather than sit on the sidelines. In the next few months, the market is much more likely to be either up more than 10% or down more than 10% than ranging in between.

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Risk-off event this quarter?

This has certainly been the craziest year of my lifetime. The lockdowns, protests, endlessly spiking unemployment and huge numbers of small-buisiness bankruptcies coincide with US stock markets that march endlessly higher as any bearish momentum gets crushed.

Narratives have been shifting like crazy to fit the market, all trying to explain how the latest news story somehow justifies higher valuations. Last month, much of the optimism was attributed to the incredible vaccine rollout that would bring everything back to normal fairly quickly. Now that we have a botched and delayed vaccine rollout in the US, new variants of Covid that are much more infectious, lockdowns in the UK, Japan, parts of China, and truly aweful unemployment numbers, the optimism narrative has switched to the possibility of more stimulus.

The truth is simple – the stock prices drive the narratives, not the other way around. There are periods in the market where fundamentals simply don’t matter. As long as cash flow goes into the US stock market, it will continue higher. Modern passive vehicles (index funds) accelerate this path because they ignore fundamentals and assume the price is right. It’s like a classroom where everyone is cheating on an assignment by copying from the same key, and the few people who do the research fail the course because they come out with different results.

With financial markets, it is much more important to decipher why things are moving the way they are than what the underlying value should be. Fundamental analysis only works in distress situations – when you are either purchasing distressed debt, or purchasing stock in the midst of a market crash. Technical analysis tends to be a much more useful approach because it focuses on the patterns of these cash flows, looking for lines of support and resistance and at signals of growing or waning momentum, or even periodic patterns such as tax-loss selling or end-of-quarter rebalancing. That being said, it is rare to see valuations that are so obviously out of whack.

Above is a perfect example of the crazy markets we’re in. In the tweet above, Zach was doing an analysis on IWM (tracks the Russell 2000) showing a possible correction path from the latest resistance. I’ve been using IWM as a hedge for a while now, believing that a bigger index with more small caps would better reflect underlying economic damage, and I couldn’t help but notice that the big support line was at the pre-covid highs. We’re seeing a flood of small businesses permanently closing as unemployment soars while our political system is more dysfunctional than I’d ever seen in my lifetime, and the “small cap” index trades 24% above pre-pandemic highs.

A number of good traders have been posting signs of caution, such as excessively bullish sentiment shown in put/call ratios and other measures, price/volume divergence patterns consistent with early institutional selling, and unusually high insider selling. I’ve also heard the case for the knockown in gold and bond prices (higher yields) being a sign of tightening liquidity all while the US dollar is set for a counter-trend rally amid enormous speculative short-dollar positions. Rauol Pal also noted the institutional bias in the first quarter toward taking profits rather than chasing gains, as their annual score cards reset to zero and they want to make sure they don’t start the year trying to dig out of negative returns.

Whatever it is, I have been building my hedges significantly these past few weeks. I also sold off all of my cryptocurrency yesterday, deciding that these were my riskiest positions in the case of an overall market correction. If we do hit a major selloff than it will hit precious metals, commodities, and stocks as well – but I’ve decided not to touch my precious metals positions.

I will certainly play a market crash very differently this time than I did last March. Here are some changes I’m considering:

  • In March, I learned how responsive the markets are to Fed Policy, particularly in a world dominated by passive investing. I don’t expect fundamentals to come into play in forming a bottom, so the bottom will be higher and the bounce-back sharper than you think. In other words, wait for the decisive move by the fed and jump in.
  • Floods of money into passive vehicles like SPY will relentlessly put the most money into the biggest stocks and then reinforce that trend as they get more expensive. I will be looking at long-dated out-of-the-money call options on things like MSFT, AAPL & AMZN as a way to play this move.
  • Commodities may be crushed, but I really like the unique story behind Uranium, and I will get more long calls in CCJ.
  • Cryptocurrencies will get correct hard, but I expect them to re-visit their highs a lot quicker than you’d think – particularly the biggest 2 which is BTC & ETH. I will put in significant positions in both.

I could easily be wrong here, particularly on the timing. I just see the chances of a correction much higher now than I’m comfortable with. Almost all my call options have between 12 and 24 months duration on them – the only exception being TLT where I have batches of options expiring between 2 and 12 months (heavier on the long-duration end).

Last note – I have decided that it makes sense to look at my overall portfolio including crypto as well as stocks from here on out. I’ve also decided to organize them into categories better. Anyway, here’s where I’m at:

  • PRECIOUS METALS
    • 26.8% Gold Miner Stocks, Large
    • 16.1% Gold Miner Calls, Large
    • 14.0% EQX (small gold miner stock)
    • 1.7% PVG Calls (small gold miner)
    • 2.3% SAND Calls (small gold streamer)
    • 8.9% SLV Calls (silver ETF)
  • HEDGES
    • 6.2% TLT Calls
    • 9.1% IWM Puts
    • 1.3% EEM Puts
  • OTHER
    • 13.7% Unallocated cash

In a sense, my bet is pretty one-sided based on my intermediate-term macroeconomic view. Overall, the dollar will weaken as it becomes less important to worldwide trade, debt, and reserves as trade in foreign currencies continues to grow. Gold will grow in importance as a widely respected reserve asset, though it will remain a fairly minor one. Meanwhile, whatever fiscal stimulus we are likely to see will not be nearly enough to overcome the deflationary forces from defaults, large debts, and stagnant incomes. The federal reserve will try to counter this the only way it legally can – by purchasing government-backed securities and keeping interest rates low.

We are in a world where periodic floods of capital chase fewer and fewer investment opportunities bringing different assets to breathtaking highs as people struggle and political unrest grows. As the only game in town for capital returns, the US stock market continues to hold the highs until a sharp selloff occurs. This is a dangerous market to trade for bulls and bears alike, with opportunities for lottery-like winnings if you get lucky enough on the timing. Combine that with two working generations seeing few opportunities for creative growth in the workplace and dreaming of hitting it big to obtain financial freedom. It makes me think of the roaring 20’s, with the enormous wealth in “The Great Gatsby” contrasted by their brief visit to the shantytown for the poor & industrial workers. Crazy how history seems to repeat itself.

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Crypto, Gold, Hedges, and Options

An interesting point that Raul Pal made on RealVision Friday is that asset managers finish their annual performance in Q4 and start building a new number from scratch in Q1. With US stock markets all at all-time highs, they often take profits around February or March and then scramble to find the next trend that can get the year’s gains rolling. Point is, just another reason to be cautious right now.

I’ll start with Crypto because I’ve been doing a lot of thinking on how to continue playing the space. Here’s a 3-month chart:

I really had no interest in Crypto assets until last summer, and started a Coinbase account around August (you can see my posts around then if you’re interested in why). First I started with buys in Bitcoin and then with Etherium with a simple separate from my portfolio and hodl idea – ultimately getting to a peak of 1 Bitcoin and 10 Ether. Late December after Ripple crashed, I bought some and it jumped 30% overnight – which reminded me of a time losing money after a dead-cat bounce in penny stocks back in the mid 2000’s. I dumped XRP and then downsized my BTC and Ether to take out my initial buy-in at the end of the year.

I dumped the rest of my Ether when it hit $1200 – partly because it went so far so fast and partly because it was getting near its all-time high (around $1400) which is typically a strong zone of resistance.

With Bitcoin, the momentum and story are so strong (a lot of money squeezing into a relatively illiquid asset) that I didn’t want to dump it, but I didn’t want to risk too much either. The idea I came up with is to keep a constant dollar-value of around $20k – so I’ve been selling off at every significant rise. If theres a big dip, I can buy back to hit around $20k and feel comfortable because I know I sold higher … but this hasn’t occured yet for me.

Back to the rest of my portfolio. I’ll start by laying out my allocations.

  • MAIN POSITIONS
    • 30.8% Gold Miners (FNV, GOLD, NEM & WPM), Shares
    • 16.4% EQX (gold miner), Shares
    • 2.8% SLV (silver), Shares
    • 20.3% Gold Miners, Calls
    • 10.9% SLV, Calls
    • 2.7% SAND (gold), Calls
    • 2.2% PVG (gold), Calls
  • HEDGES
    • 4.2% TLT (long 20+ year US treasuries), Calls
    • 8.5% IWM (russell 2000), Puts
    • 1.3% EEM (emerging markets), Puts

Recent trades:

It’s been a very active trading week for me, partly because I had all the gains from Crypto to re-invest. Gold dumped a bit on Wednesday, so I decided to increase my stake. I saw that even though GDX went down significantly, NEM was still rising – which seemed a very bullish sign so I got more exposure there. I also went significantly longer in TLT calls this week.

My thinking on precious metals:

As you can see I’ve been very bullish on gold miners and silver. I’ve been into gold ever since 2008 – and I rode it on past the peak and through the downside. It didn’t matter much at the time because I spent nearly all my savings on an MBA and then struggled through a lousy job market, so I really didn’t have much to lose. Today I strongly believe we’re in the mid stages of a long-term bull market in precious metals, but I know from experience that corrections go on longer than you think and much patience is required in this particular asset class. Recently (starting November), I started moving into call options for leverage and all of them expire Jan 2023.

My biggest positions are merely the top 4 holdings of GDX. I figure that GDX is the most obvious liquid play in precious metals, and most of the money will be allocated to the top 4, and that these top 4 are most likely candidates for big institutional interest, like with Berkshire’s previous dip into Barrick (GOLD). For the smaller ones, I really think you need to trust the leadership so I’m mainly in Ross Beaty’s fund. SAND was a gold streamer I was interested in back in 2010 and I figured it would be well levered to Gold’s rise, and PVG just sounded interesting so I bought a few calls.

My thinking on hedges:

The biggest danger I see with precious metals is a March-style risk-off event which would cause everything to sell off. That is where my hedges come in. They have been losing money of course, but I really like the idea that I would have significant money to invest at a time when everything is selling off.

EEM: I started hedging here back around June because I liked Rauol Pal’s idea about the demand drop from the pandemic causing dollar shortages in emerging markets. Their heavy exposure to Chinese tech companies didn’t bother me because of their relatively high valuations at a time combined with a significant chance of US sanctions. I stopped adding here around August because it seemed to be going terribly wrong – but all the puts are dated Jan 2022 so I’m just holding them for now.

IWM: I started hedging here around June as well, selling off all of my Aug 2020 and Jan 2021 SPY puts which had been going horribly wrong (I lost less than 50% which is why I like long-dated puts). After listening to Mike Green talk about passive investing, I decided that I really didn’t want to bet against the tide of a never-ending passive bid, so I’d stay short the smaller companies instead … they’re more likely to have insolvency issues than SPY anyway. After these started working against me, I decided to only buy one put for every 100 point rise in the russell and then moved that out to every 150 point rise.

TLT: In a March-style liquidity event, everything sells off including bonds. Then the federal reserve comes in with big purchases of the only things they are allowed to purchase and treasuries skyrocket. Look at the behaviour of TLT in March and you’ll see what I mean, and why I consider this an effective hedge. However, this isn’t the entire reason I’m into the space.

Back around early November, Rauol Pal mentioned something about a decent play in March TLT calls and Steven Van Metre. I started following twitter @MetreSteven and his Youtube channel The Market Says a Blue Wave of Inflation is Coming! – YouTube

You should really look at what Steven is saying if you’re interested in this space, but what catches me is the idea of massive speculative short positions in US long bonds, building up like a coiled spring since August while the Federal Reserve is actively buying every month. This could lead to a big short squeeze and it acts as a hedge in case of a major risk-off event. I started getting into this with a couple March 2021 calls back in November, then started going out the time curve with each batch I added – June, August, January, etc.

How I think about options in general:

Options have intrinsic value plus duration/risk value. I like to stick with something that seems to have a good shot at positive intrinsic value, which means I generally buy in-the-money options. I find this an interesting part in the curve because if the trades go my way, the intrinsic value is rising dollar-for-dollar with the stock. Consider this:

  • You have 1 call option with giving you the right to buy 100 shares at $20, the stock moves from $21 to $22, intrinsic value went up $100. Your gain went up a bit less because of the lower risk premium, but that intrinsic value puts in a solid floor which starts to make the slope of gains increase closer and closer to a dollar-for-dollar level.
  • When you are out-of-the money and it trades against you, intrinsic value is still zero but duration/risk doesn’t go away. The dollar value of the option tends to go down at a shallower slope, which is closer to a $0.50 loss per dollar decline.

Look at any options table, especially for longer durations, and you’ll see what I mean. The reason that the slope of losses shallows out is because the option has value until it expires, and anyone looking to hedge outside risk would easily take double the put options to go a bit further out of the money. The pricing makes sense if you think about it, but I really like to be in the sweet spot of the curve where I capture more of the money from a 20% gain and lose less of it from a 20% loss.

As for duration, I often look at the difference month to month and pick one that seems like it has a good chance of hitting a positive intrinsic value. For TLT, I see a test of the 165 resistance level as a fairly likely outcome so I like to make sure that my strike + premium is significantly less than that. For example, Jan 2022 150 strike, cost of $10/share, so my intrinsic value covers my entire cost if TLT hits $160. I really don’t like to hold options when they get too much less than 3 months because the duration/risk value starts to drop fairly quickly.

On the flip side, when options seem crazy expensive I like to covered calls around 1-month because they still have significant value but can quickly decline to zero. For example, I wanted to go long CWH around late October but the options were really expensive – it was trading at just over $28 and 1-month 30-strike calls were selling for $3.40 (perhaps because it was over the election). I jumped right in with 600 shares, sold the covered calls, and ended up with a solid 20% gain in one month

Final note:

I am really nervous about a market correction – and I admit I have been for a while. I think of the crazy Dave Portnoy’s sign “stocks only go up” and picture my own sign “gold is in a bull market.” Gold has been extremely strong in January in past years, and I’m thinking of de-levering my portfolio at the end of the month if I get that up-move I’m looking for. I would do this the same way I did after June – by selling off all of my call options, buying the underlying shares, and then beginning to sell covered calls on them. Still, the idea of a big risk-off event in February/March haunts me a bit especially with my aggressive position in calls right now, so I am very likely to add to my hedges in the near term … particularly long TLT because I really like that story. Good luck and happy trading!

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