The Money Talk Portfolio Review – Jan 30, 2019


I'll be onBNN's Money Talktonight at 7pm. 

For the past year, we've been keeping a Money Talk Portfolio, which we only adjust live on their show, once per quarter so we have to keep it well-balanced and self-hedging.  We rode out the recent downturn with style as our last review,on Oct 24th (the last time I was on the show) we were at $95,645, up $45,645 (91.3%) from our $50,000 start and we projected that our remaining positions would gain $70,015 by Jan, 2021 (the time-frame for our spreads). 

Not content with that, we added two new trades (MU and MJ) and one hedge (TZA and CAT), adding another $50,000 of upside potential over the same time-frame.  So, with $120,000 of upside potential over the next 24 months, we expect to make about $5,000 per month but the market took a nasty downturn and we're only just recovering so I'm sorry to report that we're only up to $105,845, which is up $55,845 (111.7%) and "only" up $10,200 (20.4%) in the past 3 months.  

We were unable to make adjustments during the downturn, which we did call very well in our Live Member Portfolios (see our Jan 21st Portfolio Review), so the performance is not quite as good as our Live Trading Portfolios but it's the perfect portfolio for less active traders, who just like to check on their progress every few months.  As of yesterday's close, our positions were:

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As you can see, the MJ trade we added during the October show has blasted higher and is up $6,550 already but it's a $40,000 spread we had intended to make $38,500 on so up $6,550 in a quarter is what we call "on track" and, even as a new trade, the net is still just $8,050so the upside is $31,950 (396%)if MJ is over $45 in 2021.

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And that, by the way, is how we review our portfolios.  You should always know how much you expect to gain from every one of your trades and options allow us to know not just how much but WHEN we expect to realize our gains – so it's very easy to check to see if our trades are on or off track and make adjustments accordingly. 

Of course, at Philstockworld, we are primarily Fundamental Investors and what we really care about is buying stocks that are undervalued.  The options are just a way for us to leverage the anticipated gains – as well as to provide good hedges – just in case we're wrong!  So, without further adieu:  

ALK – A lot of times, we sell a put on a stock we'd REALLY like to own to rasise cash to pay for a hedge.  That way, if the market goes higher (and our stock does well), it mitigates the cost of the hedge.  ALK is a nice sleeper stock andwe expect to collect the next $2,600 on this one*.*
CAT – This also begain as an offset but CAT took another dip recently so we're going to turn it into a full spread becausethe CAT always comes back!  We're going to add the bull call spread to the short calls:
Buy 5 CAT 2021 $100 calls for $35 ($17,500)
***Sell 5 CAT 2021 $130 calls for $19 ($9,500)***That's net $6,000 on the $15,000 spread but we sold the short puts for $6,000 so we have a net gain of $15,000 if all goes well and the $5,000 margin requirement doesn't change so a very efficient trade from that perspective as well.  Even if you were to sell the $100 puts today for "just" $8.50 ($4,250) the net of the spread would be $3,750 with $11,250 (300%) of upside potential just $4 higher than the stock is trading at today!  As it stands, we certainly expect to make the full $15,000 on this spread and currently it's valued at net $1,712 (the $6,000 we're investing less the negative $4,288 value of the puts we already sold) soour upside potential at $130 is $13,288 (776%)from here.

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SQQQ – This spread is a hedge and SQQQ is the 3x Ultra-Short for the Nasdaq 100 (NDX).  The potential of the spread is $10,000 and currently it's value is net $4,700 so it's offering just $5,300 of upside potential but,hopefully, we lose the remaining $4,700 while our longs go higher*. .*  

TZA – Since this hedge expires in April, it's more urgent to make an adjustment (I won't be on the show again until then) so we'll do the following to buy more time and add more protection:

  • Buy to close 40 short TZA April $15 calls for 0.50 ($2,000)
  • Roll 40 TZA April $10 calls at $1.95 ($7,800) to 40 of the Jan 2020 $8 ($3.90/15 ($1.60) bull call spreads at $2.30 ($9,200)

We're spending net $3,400 to move to a $28,000 insurance policy that lasts through Jan of 2020.  The only way we lose (it's in the money) is if the market goes up and that would be a win on our longs.  That's what hedges are supposed to do.  The current net of the TZA spread was $5,660 plus the $3,400 we just spent puts us in for$9,060 we hope we're going to losewhile our longs gain the big bucks.  It's our "insurance" cost to protect our other positions.

GE is crazy cheap at $9 and, despite taking a bath on the original trade, I'd like to stick with them with the following:

  • Buy to close 10 short GE 2020 $18 calls at 0.10 ($100)
  • Roll 10 short GE 2020 $15 puts at $6.10 ($6,100) to 20 short 2021 $12 puts at $3.80 ($7,600)
  • Roll 30 GE 2020 $13 calls at 0.41 ($1,230) to 30 2021 $8 ($2.70)/12 ($1.20) bull call spreads at $1.50 ($4,500)

Here we're spending net $1,870 to put ourselves into a $12,000 spread that's $3,000 in the money to start.  The GE spread we had was net -4,990 (we had a loss) and that loss is lowered by $1,870 as it's cash that came in from the sidelines so less cash and less loss.  That makes the new position -$3,120 and, if we collect the full $12,000, it will be a +$15,000 for the portfolio less the $1,870 adjustment cash equalsa potential gain of $13,250*.*  

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GIS – Off to a choopy start but we like this one for 2019 and we need to gain 10% to get our full $11,250 from the current net $1,890 so$9,360 (495%) left to gain for the yearmakes this still very nice for a new trade.

GOLD – Was ABX but they bought GOLD and decided to use that symbol.  About where we came in after 6 months but I love gold and GOLD in 2019 and this trade has $12,500 potential and currently just net $1,812 soupside potential of $10,688*.*

LB – Our 2018 stock of the year is not doing so well at the moment and it's tricky in this portfolio as we can't take advantage of the ups and downs (we've been in and out twice in our other portfolios).  Still, that's no reason not to buy into a great value stock so our adjustment will buy us more time to be right:

  • Roll 40 LB 2020 $27.50 calls at $4.30 ($17,200) to 40 2021 $22.50 ($8)/32.50 ($4) bull call spreads at $4 ($16,000)
  • Buy back 20 (1/2) of the short 2020 $35 calls for $1.80 ($3,600)

In this case, we're spending net $2,400 to drop our target by $5 on the $50,000 spread.  The net was just $940 + the $2,400 is our contribution into the new $50,000 spread sowe still have $46,660 left to gain– very good as a new trade!

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One question I get asked is "What about the money we originally spent?"  In this case, it was net $2,840 but that money is already out of the balance of our portfolio and what matters is the position we have NOW against the cash we have NOW and what we can do with that.  You should always look at every new trade as if it's a brand new trade and decide if THAT trade is the best thing you can do with your cash and margin at any given time.  In LB's case, we have a position that's slightly down but spending just $2,400 turns it into a position that has a great chance of returning 20 times that amount.

MU – Our other trade from last Q.  Off to a slow start but on track at net $1,525 from our original net $550 start so up $975 (177%) on cash so far and on the way to our full $15,000 means we haveanother $13,475 (883%) left to gainover the next two years if we hit $50.
WPM – Our 2016 Trade of the Year is doing very well already at net $7,545 and it's an $18,750 spread so$11,205 left to gainand we're only 10% below our goal, miles ahead of schedule..

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So that's $152,476 of potential gains from our 9 long positions less $13,760 we expect to lose on our hedges (if things are going so well on our longs).  Of course, nothing goes perfectly according to plan but a plen to make 300% on a $50,000 portfolio that's already up 100% is a pretty good way to start!  

We put very little additional cash to work and didn't use much margin either so we still have about $100,000 of buying power (ordinary 2x margin) but I'm aiming to keep the portfolio within the bounds of what you can do with $50,000, not $105,845.  

As we have plenty of room, let's add our 2019 Trade of the Year, IBM to the mix with a brand new trade as it's still cheap at $135 and we don't have to be too aggresive to make good money so we'll play it as follows:

  • Buy 5 IBM 2021 $120 calls for $21.50 ($10,750)
  • Sell 5 IBM 2021 $135 calls for $14 ($7,000)
  • Sell 2 IBM 2021 $130 puts for $16.50 ($3,100)

That's net $650 on the $7,500 spread so the upside potential is $6,850 for a 1,053% return on cash and the ordinary margin requirement for the 2 short IBM puts is $4,488 so it's a very margin-efficient trade as well (using little margin to make big gains).  

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The key to successful trading is having a realistic trading plan and then making sure that plan is successful.  If you are diversified in your positions and if you hedge properly – there shouldn't be any times in which all your positions are losing and that, then, gives you the flexibillity to make adjustments when you need to or, in the case of our Money Talk Portfolio – the ability to completely ignore the market gyrations and simply take stock and make adjustments once a quarter.

You don't need to play a lot to make money – just play smart when you do play! 

You are invited to attendtoday's Live Trading Webinar at 1pm, EST, where we'll get the Fed results and discuss these and other positions.  Just click the link above to register.