Spike Option Strategy

 I would venture to set up this type trade in the beginning. 1. Set up a straddle (or buy stock and put position delta neutral). 2. When it is reaching a frenzy, sell OTM put position (GME case sell $250 put for $120 for instance). 3, sell the stock and call after a climax top (tricky here), exit the put positions at the same time ?. 4. after the collapse, add to the call position

Fed Summary

Summary of Fed Facilities in Response to Covid-19 Government Shutdown of Economy:
Unlimited QE - UST
• Unlimited open-ended purchases of US Treasury and GSE MBS securitiesQE - MBS
• Purchases of MBS securities backed by US GSEs$1 Trillion Repo Market Interventions
• Purchases of US T-Bills in order to avoid disruption to the short-term Repo marketTALF (Term Asset-Backed Securities Loan Facility)
• Eligible collateral expanded to AAA CMBS and newly issued collateralized loan obligations. Size of facility remains $100bn. Only static CLOs will be eligible. Single-asset single-borrower CMBS and commercial real estate CLOs will NOT be eligible.Municipal liquidity facility
• Total size: Facility is being funded initially by $35bn from the Treasury using funds from the Exchange Stabilization Fund (ESF) and the SPV can purchase up to $500bn. As it stands, the SPV will terminate on September 30, 2020.PPPLF (Paycheck Protection Program Lending Facility)
• Facility established to lend to small businesses under the Paycheck Protection Program (PPP) of the CARES act, taking PPP as collateral and with no recourse to borrowerPMCFF (Primary Market Corporate Credit Facility)
• Eligible issuers must be rated at least BBB-/Baa3 as of March 22, 2020. May purchase corporate bonds as sole investor in issuance. May purchase no more than 25% of syndicated loan or bond at issuance. Corp bonds & loans levered 10 to 1, other assets levered 7 to 1.
SMCFF (Secondary Market Corporate Credit Facility)
• Eligible issuers must be rated at least BBB-/Baa3 as of March 22, 2020. If downgraded after March 22, rating must be at least BB-/Ba3 on date that the facility purchases the issuance. ETF purchases will be aimed at providing exposure to the US IG credit sector with remainder for ETFs that provide exposure to the US HY credit sector. IG purchases levered 10 to 1 and HY purchases levered 7 to 1. Other assets levered in 3:1 to 7:1 range depending on risk.
Main Street Lending Program
• Fed will buy 95%, eligible lender will retain 5%, recourse loan up to 4 years.
• Total size: $600bn. Treasury will back it with $75bnSupport for the Paycheck Protection Program
• The Fed also announced details of the new Paycheck Protection Program Lending Facility. Depository institutions that originate PPP loans are eligible to borrow from the Fed with the PPP loans - which are guaranteed by the SBA - as collateral. They will be funded at 35bp, essentially serving as a discount window for PPP loans. The loans will remain on bank balance sheet but will not consumer capital - assigned a risk weight of zero percent under the risk-based capital rules.

Lessons of 2020 - 04-08-20

Market:

up 1-2% pre-open. Mortgage players have more good news NLY came out and said there is no margin call issues, share buybacks too. The whole space is rallying again. IWM seems to run ahead of other indices.

Corona: US. tops 400k, altho the rate is slowing. That is the news which has been driving the market.

Corona stocks (GPS, UAL, DRI, MAC, APO, CAKE, RCL, BA, HLT, BX, KSS, M, CCL, F, C, FITB + 5% - 12%) and Mortgage REITs (MITT, TRTX, NRZ, NLY, ACRE, AI + 20%+) are leading the way. Very few stocks were even weak. The breadth is close to 5:1. BKLN/HYG are up 1-1.5%. The fed's action was really timely.

Portfolio:

BIIB, NFLX, and AMZN are basically doing nothing while the corona and REITs are soaring. The portfolio is effectively short. BIIB and NFLX calls should be closed because there does not seem much upside to them. Closing BIIB/NFLX against QQQs.

Given how much index vols came in, it may make sense to turn the portfolio into a reverse dispersion where long index (more than 1 to 1) vs. stocks which have very high vols.

Timing in trading stocks are critical: the stocks trade in waves or follow certain kind of rhythm. Good idea + timing is everything!

The portfolio suffered two consecutive days of big losses:

•  Lessons & lessons: Now, all I had was the lessons + the sleepless nights:)
• One positive note was the discovery of some of the mortgage REITs, and MSR servicers.
• The positions were made sense when it was first set up, but over-stayed its welcome. 
• All the stocks were 100% correlated and went down together. When the trade is set up to long cheaper vol names, which happened to be the stocks least affected by the corona virus. During the market bounce, good names bounced along with the bad, but the vol really came in hard, with high vol names have more room to fall, therefore, benefiting the trade. 
• When the market tanked again, it was also favorable because the good names did not tank as much. 
• During the latest rally of past 3 days, the worst names had their biggest move. Since the vols already had fallen (no room to fall), it was all negative delta. 
• Also the rally happened when AMZN, NFLX, BIIB were already sitting on the top of the chart. They were not about to make new highs. As such, they were like cash. The short side was a naked short as it turned out.  
• Even if the idea makes sense, the timing of the trade needs to be optimal: figuring out how much expectations are baked into the stocks. 
• The other blinding issue is that the market value of the long gives the impression that it is market neutral, but not in reality. 
• Also, admittedly I expect the market to go down.

Trading Ideas

Ideas:

"We lose money on every sale, but make up for it with volume"

• Market observations
• Leading stocks - to see if the leaders are driving the market higher or lower
• Lagging stocks - to see if the market is still in trouble or see what the short sellers are doing
• Breadth - For the market to move big in 1 way or the other, it needs to have majority 90% + of the stocks to move in 1 direction. If there are traitors (backing the trend), directional move will be sabotaged.
• Dispersion: This sharp downturn brought down almost every stock. As a result, the correlation among stocks are very high (almost 1). Index options are jacked up as a result. We all know the correlation can only go down from here. It should make sense to set up a dispersion trade of shorting index vol and long its members vol. NDX should be a good choice because tech is relatively less affected by the economic impact. I just picked lower vol stocks against QQQ (65%) and IWM (65%): AMZN (49%), NFLX (63%), GOOG(50%), BIIB(49%). 
• Relative Vol Value: Many of the NDX memebers that are trading super high vols: AMAT (99), HPQ (93), KLAC (92), DELL (88), INTC (74). Despite the high vol, I don't expect these names would be the leaders once the market started to rally. Why not short the calls of these names against QQQ, capturing nearly 30-50 pts in vol. What is the downside.
• Long vol: setting up straddles (TLT vs call (22% vol)).
• Climax: How to trade a stock going thru a climax whether it is the top climax or bottom? Can it be a strategy? 
• Usually, it takes 3-5 days of building up or down (work both ways). When it goes parabolic, go the opposite way towards the close of the 3rd, 4th or 5th day. 
• Equity REITS/XLU: it tends to follow 3 day rule. If it declines for 3 days straight, long the 3rd day towards the close the hope for the best.
• KR was perceived as a safe stock with the corona virus, so it was speculated from a normal 28 to 36 and back down as the market rallies, the players to unwind their trade. Maybe they can put the on trade again? the stock is up a little. Get started.
• Hedging Ideas:
• Can you long IWM (BKX or a bad bank stock) puts and short QQQ puts as a hedge against market downturn? This is because IWM (BKX) seemed to underperform QQQ by a large margin (over 10% this time) during the market downturn.  
• Shorting mortgage REITs: The reason is that they are all leveraged. The the market is under stress, their assets (mortgages) will decline, triggering margin calls from brokers. They need to sell more in order to reduce leverage, the assets get further depressed, triggering more margin calls. A slippery slop into a downward spiral into a black hole. The banks have the same problem, but their loans are not market to market everyday, plus they are financed by depositors, not the market sensitive brokers!
• Sell safer stock puts to finance Index puts such as SPY or IWM
• Short term trading
• Against the market:
• During a selling panic pre-open (2-3 days of intense selling), on the 3rd/4th day, market is down again pre-open: buy index ETF
• During a short-covering panic Pre-open: crowded short stocks were up 10-70%. Selling bunch of them. Cover after the market opens. 
• Short ideas: 
• USO - this the crude futures that should have difficulties of rallying because it is driven by the supply and demand of the underlying futures market, not by the short squeeze occurrences in equities. Given the high cost of USO, and the negative carry (in rolling the contract from one month to the next). I don't expect oil would recover anytime soon. 
• Banks
• Retailers, GM/F
•  

Searching for the Bottom

Search for the bottom

• VIX made a high of 83 on 3/16/20
• QQQ/SPY made a low on 3/20/20 (170/223)
• Market (VIX) is most likely to test the lows (high) within the next 1 - 2 weeks. 
• Start looking for stocks that made higher lows.

Market Diary - 3-15-2020

3/15/2020

My take on the stock market

There are many similarities between the current downturn than the one in 2008. The market has declined at the similar pace (20%+ in 3 weeks) as in 2008, after the Lehman Brothers failed. The VIX (the fear index) index hit an intra-day high of 77 yesterday (3/13/20), before it settled at 57 after a late rally. I remember VIX hitting 79 in Oct. 2008 also. This time, VIX closed at 75 on Thursday, very close to the peak in 2008.

I think the current market downturn will create once-a-decade investment opportunities. I am planning to shift some of my capital intended for real estate to stocks now. After the market recovers, I can shift it back to real estate where more investment opportunities will come later. 


My past experience tells me that the market turmoil will not be over for another couple of months at least. The more severe the decline the longer it takes to recover or repair the damage. The first priority is to preserve financial capital and emotional capital, so you can have a chance to capture the upside. Back in 2008, I did manage to preserve my financial capital, but I was too emotionally exhausted to invest in 2009, so I missed the 11 year bull market, where SPX went up 4-5X.

Market bottom

I believe the key is to look for signs of market bottom or the downside is limited before one can really put in a lot of capital. The future is unknown and there is no perfect method. It is going to be process of trial and error. It will have a few false starts before the rally becomes more sustainable. It is going to cost a few dollars in a process. From the past downturns, here are my observations:

1) VIX index: This index, to me, really measures the speed the market declines, or the second derivative of the market index. It usually peaks right after a period of the fastest decline. The market may still has more downside even after the VIX peaks because it may go down at a slower pace when VIX and market both decline. However, more than 75% of the damage should already have occurred  when VIX peaked, according to the past 4 episodes (Aug. 98, Oct. 2008, Feb 2018 and Dec 2018, I didn't include the 2000-2002 ). With the exception of 2008, the market's (NDX) bottom coincided with the peak in VIX. There is a good chance the market already had its low, assuming VIX being 75 was the peak.

2) Leading stocks or indicators: Not every sector will hit the bottom at the same time. Some sectors are known to lag, such as the Russell 2000 index (or IWM) vs. SPX. For instance, as of 3/12/2020, NDX, SPX and Russell 2000 were down 22%, 25% and 33% respectively. The tech sector heavy NDX is outperforming SPX because it is weighed down by the energy sector, travel/service related sectors, and financial sector, which were the worst hit. In 2008-2009 crisis, Apple stock bottomed a few months before SPX did in March 2009. I am not sure what stocks will lead this time, but I do think QQQ will lead SPX and Russell 2000. In summary, a higher trend should be observed before one can deploy too much capital.

3) It is difficult to know how long it takes to contain the corona virus, but the experience of S. Korea and Japan is encouraging: the spread of the virus seemed to have peaked. Although we cannot trust the official figures from China, but their measures should produce the similar result: the virus has been contained. Since the numbers in the U.S. would most likely to increase, given it is in the early stage. However, the lock-down measures should yield encouraging results soon. If that happens, it should help the market. Again, I do believe the U.S. will lead the world in financial market. 

What to buy

The most important factor is timing, what to buy is secondary. The most important consideration is about portfolio positioning: meaning your percentage exposure at a given point. This will determine 90% of your gain or loss. I prefer to stay with liquid instruments such as index related ETFs or large cap stocks because it is easy to be in and out of the market with less transaction cost because all instruments are high correlated.

It is very easy to fall in love with your own favorite stocks and expect them to outperform the market. In my case, my loved ones almost always are the last ones to rally. In my hedge fund days, I often found myself losing money from my long positions and short positions at the same time when the market started to rally. It is not what market likes matter, not you:).

1) Crude oil: The crude hit a low of $31.5 on 3/12/2020, which is the second lowest price ($26.66 in 2016, $31.5 on 3/12/2020, $33.16 in 2015 and $35.59 in 2008) since 2008. The oil demand will definitely be greatly reduced by the lock-down measures China, the US. and Japan, the top 3 economies in the world. So will be the supply at this price level where it is not economical for shale oil, tar sand oil or deep ocean to maintain the production. Assuming, the low of $26.66 holds this time, the downside is only about $6 (using $33 on 3/13/20). This is better than most stocks.

2) Leading sectors or stocks: QQQ and other tech stocks (such as AMZN, AAPL, etc), I believe, are good choices because they should have less downside than stocks in other sectors. Note that many of the large tech companies are virtual monopolies in their industry: MSFT, INTC, GOOG, FB, ORCL, CRM, ADSK, INTU, ADBE, etc. They are good candidates for long term holdings.

3) Lagging sectors: The sectors, which were the hardest hit, should have more upside when the market turns, but they will have more downside as well. I prefer not to touch them until I am convinced the market indeed turned. Here are some of the sectors, I see, were hit pretty hard:

• Travel/entertainment/service related: 
• the cruise ship operators: RCL, CCL
• Casino stocks: LVS, MGM, BYD, CWN, VAC
• Newbies: UBER
• Airlines: UAL, etc
•  Financial Sector: 
• Investment Banks: JPM, GS (leaders)
• Banks
• REIT: One of the surprising things is that some specific REIT stock got hit hard. EPR properties, which specialize in ski resort, gaming, entertainment, and education segment of the market, came down more than 50% within days. It went down 36% on 3/12! The lack of travel, and school closures should affect their customer base, very significantly. Some other REITs such as the cell tower rental operators AMT and CCI have hardly gone down at all. Their business is probably the most recession proof because they have long term leases (5-10 years) with inflation escalations terms built in with major cell phone carriers.
• Energy Sector: After the sharp decline in oil prices of over 20% on 3/9/20, due to the disagreement of production cut between Russia and Saudi Arabia, the energy sector got hit hard, especially the shale producers and mid-stream master LP stocks. In general, resource stocks in energy, mining and ag sectors, in my opinion, are going to zero in the long term. As soon as their reserves are exhausted, they vanish. Politically and socially, they are pressured to keep the prices low so people can afford to live.
• CEFs: the Closed End Funds offer an unique opportunity to invest because some of them are trading at a significant discount to their NAV values. The challenge here is that they can be very illiquid. I believe the only sensible way of buying them is to have an effective to hedge the downside, should the market goes down hard. Here is a link where you can search and screen for CEFs: https://www.cefconnect.com/closed-end-funds-screener

Short term trading

There are some opportunities to trade if you are willing to counter the market trend in the very short term. For example, if the market has been going down for a day or two, it went down another 3-5% pre-open the following day, it is often worth taking a long position pre-open and exit 1/2 during the morning rally, the other 1/2 either at the close or next day, depending how the market acts. I traded QQQ this 4 times last week. So far, it was 4 for 4, capturing over 2% on average each time.

You can also use the rally to exit or lighten up your positions, and sharp down turn (after at least down two days).


https://www.thebalance.com/oil-price-history-3306200

Preserving wealth

The greatest danger, in my mind, is the collapse of the U.S. dollar. How should one protect himself?

Why do I think the dollar is in danger? We need to look at the current state of affairs. The center of gravity is the banksters who control the $ (infinite because they can print), politicians/political institutions/political process (elections), media. What do they do with their power? Bubbles, crashes, and economic terror thru unfair taxation, theft during chaos and wars. They use their spying and military machines against their "sheeple". When the crisis comes, will the soldiers and policemen, whose families were financially decimated, follow their order to suppress their countrymen for their justified outcries. I think not. This will be the end for the banksters.

Let's imagine the trajectory of the american dollar. The first is the status quo, meaning everything is going the way it has been. Inflation will constantly erode the purchasing power of this paper. Over time, cost for college tuition, food, gas, healthcare will continuously be going higher and higher at a rate, which is probably greater than 5%. The second is the less than continuous fall due to $-shattering events, such as wars, ebola, economic collapse, etc. Whatever that scenarios the future may unfold, it would seem to make sense to own something that the central bankers cannot print.

1. Precious metals

Gold and silver, which have been around more than thousands of years, should have a better chance out-lasting any paper money. I think it would be wise to own them in the physical form because you have the ultimate control over them. It is not subject to any manipulation or potential madoffication. I dont think the government will dare to confiscate from people individually because it is much easier to cheat thru inflation. The ETF, GLD and SLV, may be good temporarily, but I seriously doubt that they will not be a good idea in the end because they are paper money, which may not have enough physical backing. Also, it is easier for the government to seize their physical metals.

Another interesting point is that there are some evidence that the SLV, silver ETF, was manipulated from traders, and mining CEOs. Silver potentially can be a better investment than gold.

One can also explore the possibility of owning gold and silver mining stocks. A good research is definitely needed.

Eric Sprott's

Sprott Gold & Precious Minerals Fund:

Top Ten Holdings

1. Osisko Gold Royalties Ltd.
2. Pan American Silver Corp.
3. Guyana Goldfields Inc.
4. Kirkland Lake Gold Inc.
5. Pretium Resources Inc.
6. Tahoe Resources Inc.
7. Silver Wheaton Corp.
8. Alamos Gold Inc.
9. Torex Gold Resources Inc.
10. Asanko Gold, Inc.

2. Natural Resources

There are two ways that I can see to play this theme. One obvious way is to buy natural resource stocks. The energy sector is the first coming to my mind. There are four types:

• Conventional oil, gas, and coal
• Oil sand
• Coal
• Shale oil and gas
• Uranium
• Green energy such as solar, wind, bio, geothermal, etc. 

The conventional oil and gas producers are challenged with their dwindling reserves, and their heavy exposure in shale investment, which may or may not pay out. Despite of all the hype about shale oil and gas, no companies seem to make any $ (in terms of free cash flow). On the contrary, there were about $35 billion write-downs by majors who rushed in. The majors seemed to be incentivized due to a new SEC accounting change in claiming reserves, which is something they all have trouble in growing. When these companies got the capital to develop within a set time period from their leasing rights, they have to. As a result, they created a NG glut that depressed the price and caused a crash in coal prices. If the shale boom is a bubble, the glut would be temporary.

The oil sand is the only economically viable source of non-conventional oil production, as far as I know today. Canada is also a politically stable country and an ally to the U.S. Suncor, for instance, is a big player there. SU has been paying a dividend and has been buying back shares, in sharp contrast to shale players. There are other companies like SU, but I need to do more research.

Coal companies are depressed by the glut in NG, import from Columbia, and weak economy. The top producers BTU, ACI and ANR all face liquidity issues in a year or so. I do expect the eventual recovery, but they may not survive this current downturn.

The shale oil and gas market today is a bubble in my opinion. It was evidenced by the $35 bln write downs and fate of FST (Forest Oil). Here is a link:
http://www.globalresearch.ca/the-fracked-up-usa-shale-gas-bubble/5326504

Uranium should be very interesting because of the low prices, global conflict (restocking of nuclear weapons?) and increasing energy demand in general. Need some research. 

3. Real Estate

Real estate market is tightly associated with the economic boom and credit (this was why the Chinese real estate market has been so hot of late). The hottest real estate markets in the U.S. are NYC (financiers), DC (politics) and Silicon Valley (digital age). Texas is doing ok because of energy. The oil sand area should do ok considering the future oil investment. Venezuela should be an interesting case study because of her enormous oil reserves, which tops Canada and Saudi Arabia.

4. Optimism

The change is inevitable because the current course is not sustainable.

• Ron Paul has won the hearts and minds of people. He is still there.
• U.S. war machine has serious challenges abroad against Russia and China, but also at home where people have doubts. Back in WW2, Germany and Japan were on the rise in every aspect. They could not win the war. Despite of the war mongering propaganda, I dont think people really want to go to wars. I also believe the U.S. population is split on wars because too many people know better. Even the top may be split on how to proceed. In addition, the U.S. allies are certainly not in favor of wars against Russia because Europe can be obliterated in the process. The war machine is full of cracks right now. Bribing and blackmailing a few puppets may not be enough. Other dirty tricks like false flag operations may not sustain it either. The disadvantage factor is that the U.S. war industry is profit oriented, so there is a lot of over-charging at best and corruption at worst. 
• There is the internet, which gives people an alternative media, and voices. You dont need to win 100% of the population, but just enough critical mass and the rest will follow.
• The drug war is ending, so there is a chance the U.S. society will become more civil. 
• The economic reset is inevitable. There is a great opportunity to build something new, but the process can be very painful.