Rolling up the Holiday Gains (SPXL,TNA,SPY,FCX)

We’re going to open today with a look back at three trades that now require some attention.

 

So, without any further delay…

 

Runners

We start with a trade opened on the 2nd of June in a letter called Truth vs Reality: Cage Match to the Death. There we laid out our ‘philosophy’ of what we expect to transpire as the market comes to a peak – a moment that has drawn nearer much faster than we anticipated and proven us ever more correct than we could have hoped for.

 

Then, we wrote as follows (forgive the lengthy quotation) –

 

We contend that as the market peaks, it will do so on narrowing breadth, as nearly all bull markets do. But more than that, we’re convinced that the coupling of 1) an unprecedented and ever-increasing global liquidity with 2) access to instruments that permit immediate and easy entry into the blue chip sector (like index mutual funds, ETFs and stock futures) will keep the indexes climbing long after the underlying economic fundamentals and corporate growth numbers support any such advance. Those companies that are currently index components – particularly of the biggest and most widely followed indexes – will, of course, benefit most from the surge… those companies that fail to meet the standard of index inclusion will inevitably drop by the wayside, measured as they will be by the old, conventional investment metrics. The ‘truth’ of the underlying market will actually reside with these failing companies’ performance, while the ‘reality’ of the rising indexes will offer outsized gains to all those who remain on board.

 

It’s very important to keep this in mind, as future profits in what remains of the bull market will be predicated on focusing laser-like on those few companies that absolutely everyone holds dear and lovable, and running like mad from anything that falls out of favor.

 

We note, too, incidentally, that the media/analyst set has already fallen into line with our thinking, penning numerous articles on the so-called FANGs group of companies, responsible for an increasingly outsized proportion of the market’s performance as we proceed to the peak. Do a quick Google search using ‘FANG STOCKS’ and you’ll see just how widely the concept has taken hold.

 

FANG, of course, refers to Facebook, Amazon, Netflix and Google, four companies whose collective market cap have the power to influence the major indexes – particularly the NASDAQ – in a disproportionate manner.

 

Vampire

Right, Zerubavella .

 

In keeping with that theme, we bought as much leverage as we could on the big cap index stocks and sold as much as we could on the small caps, using, respectively, the Direxion Large Cap Bull 3x Shares (NYSE:SPXL) and the Direxion Small Cap Bull 3x Shares (NYSE:TNA).

 

The original trade netted us a credit of $0.30, and today we’re ready to close.

Here is how to play it and profit:

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Sell your SPXL January (2017) 115 CALLs for $5.80, and buy back the TNA January (2017) 109.52 CALLs for $3.85 for an additional $1.95 per pair. That’s a grand total of $225 per pair traded on nothing expended.

 

And that’s all lavender and honey, baby.

 

Trade Number Two

 

Our next trade was recorded on the 8th of October, in a letter entitled A Radical trade, in Every Sense of the Word!

 

There, we set two trades, in fact – a CALL backspread and a PUT backspread on the SPDR S&P 500 ETF Trust (NYSE:SPY) for a total debit of $0.76.

 

The trade anticipated a big swing in the underlying index, and because it hasn’t yet occurred, we’re going to intervene and modify the initiative to move us toward a greater chance of profitability.

 

The action we’re recommending is as follows –

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We urge you to sell your two long SPY January 189 PUTs for $1.14 each, for a credit of $2.28, and likewise sell the two long SPY January 206 CALLs for $3.57 each for an additional $7.14.

 

The result of those sales is two-fold.

 

  • First, you now have a net credit on the trade of $866 (– 76 + 228 + 714).
  • And second, the structure of the trade has now been altered. Instead of a CALL backspread and a PUT backspread, what you no possess is a simple short straddle, short the SPY January 199 CALL and PUT.

 

Mask

At this point, not a great deal. All we can say is that because we’ve taken in $866, our upside and downside breakeven levels on the trade are exactly $207.66 and $190.34 with roughly 40 days to go ‘til expiry.

We’ll be watching those levels very carefully in the coming weeks and will notify you if and when any further action needs be taken.

 

Last trade, Matty! Bring it on home!

 

Our last trade to report was launched on November 12th in a Poe-ish inspired missive entitled The Sachs of a McMorAno, in which we paired all-out loser of a miner, Freeport McMoRan (NYSE:FCX) with the investment aficionados at Goldman Sachs (NYSE:GS).

 

We went long PUTs on FCX (who recently helped our cause by cutting their dividend) while shorting PUTs on GS for a total credit of $1.95 on the trade.

 

And today, we’re closing out the long leg.

 

Look here –

 

Technical

FCX has been extraordinarily weak of late, but could be ready for a bounce. RSI (in blue) is awful close to the oversold 20 line.

 

We’re not chancing it.

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Sell your FCX January (2017) 10 PUT for $4.12 and leave your GS PUT to rot.

 

Your new breakeven for the trade is found at a very unlikely GS $143.93.

 

Options Trader Elite recommends you tend to your and SPXL, TNA, SPY and FCX trades, all as detailed above.

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Many happy returns on the season, friends!

 

Matt McAbby

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