Of course we cashed most out already but even now (7:45), the Dow (/YM) Futures are still above the 31,000 line, which is our shorting line for /YM and the S&P Futures (/ES) only just crossed back below 3,800, which is our shorting line for /ES. As I noted in yesterday's Morning Report:
It's an interesting way to start the year and we'll see how things play out but we're still shorting those index lines at Dow (/YM) 31,00, S&P (/ES) 3,800, Nasdaq (/NQ) 13,000 and Russell (/RTY) 2,100 and we'd love to see Oil (/CL) closer to $55 so we can short that into tomorrow's inventory report as further OPEC cutbacks aren't going to make a dent in the surplus we have going on. For now, we can use the $52.50 line as our shorting zone with very tight stops above.
The hardest thing about trading the Futures is all the NOT trading the Futures you have to do in between. It's been a long time since we've played the indexes but we now have a nice alignment of good, solid resistance points to guide us and market conditions that are truly toppy so the risk/reward profile brings us back to Futures trading for the first time in quite a while.
Unfortunately, I can only tell you what is likely to happen and how to profit from it – the rest is up to you. On Monday, for example, I said:
According to our fabulous 5% Rule™, the Nasdaq topped out at 13,060 and 12,900 is the 7.5% line up from 12,000 and 13,200, of course would be the 10% line and a rejection of that 1,200-point run would be 240-points but we'll call it 250 and that make 12,950 the weak retrace line. If that holds, we should be worried but, if it fails, the next support is way down at 12,700 so that's the next shorting zone we can play.
If you missed Monday's call (and you would not if you subscribed HERE) I would not chase the Nasdaq this morning but play the S&P as it crosses back under the 3,800 line as it's lagging the others – as is the Russell (/RTY), which is still over 2,100 at the moment. Of course we already have our index hedges in place in our Short-Term Portfolio, which is now down 52.8% thanks to this never-ending rally. That's OK as our Long-Term Portfolio is now up 200% and now we'll see if we have enough protection in our STP to keep us even on the way down.
How much protection do we have if the market heads lower?
- FXP – This hedge is sprecific to a China crash and pays $28,000 at $40 and is currently net $3,000 so there's $25,000 upside potential if FXP goes up 33%, which would be a 16.5% drop in the Chinese markets.
- TQQQ – This is a 3x Ultra-Short on the Nasdaq that pays $60,000 if TQQQ is below $40 which is down 22% so a 7% drop in the Nasdaq is all we need and currently the spread is net $30,000 so $30,000 upside potential if the Nasdaq falls 7%.
- CMG – This one is tricky and the Jan positions are expiring. The short puts will go worthless so a gain of $4,750 but the Jan $1,300 calls are $102 in the money and we're down $9,675 but, at the moment, that's offset by nice gains on our longer puts. We think $1,400 is very toppy so we're not going to sell more short puts and we'll roll our 5 short Jan $1,300 calls at $102 ($51,000) to 5 short March $1,400 calls at $95 ($47,500) – so we'll spend just a little money to push the short calls $100 (7.6%) higher.
- SQQQ – We are still at the money on our 2022 $15 calls so a 20% drop in the Nasdaq will send SQQQ up 60% to $24, which would put the $15 calls $9 in the money for $180,000. The rest is just preemium selling we do in between. The net of the spread is now $35,187 so about $145,000 of upside potential here. The short calls will expire worthless for a $36,375 gain and we're down $7,625 on the short puts – I can live with that! We will roll the Jan $21 puts at $6 to the March $20 puts at $6.20 and we'll hold off on selling more short calls for now.
- TSLA – Fairly new and already in trouble. We sold the short puts and calls for $20,400 and it's going to cost us $9,930 to roll the short Jan $700 calls. We'll roll them ($150 = $15,000) to 2 short March $900 calls at $98 ($19,600) picking up another $4,600 and hopefully TSLA doesn't go over $1Tn mark in valuation (now $800Bn) and the short calls expire worthless. As with CMG, this is too tricky to count on.
- TZA – The short Jan calls will expire worthless but the long $10 calls are way out of the money now. In March, TZA went from $33 to $118 so we can get a 3x move on TZA in a big drop but even that would only take us to $15 and it's certainly nothing we can count on. Since our primary concern is getting through Q1, we can cash out the $10 calls for $7,500 (the others should go worthless) and pick up 200 June $6 (0.90)/11 (0.55) bull call spreads for net 0.35 ($7,000) and the upside potential is $100,000 for a potential gain of $93,000 – that's a lot more realistic.
So that's $293,000 of protection (not counting our short stock spreads) if the market falls 20% and what we need to do is take a good look at the Long-Term Portfolio (LTP) and make sure we feel comfortable that it won't lose more than $500,000 on a similar pullback. We cut a lot of LTP positions in our last adjustment (Dec 16th) and should be less exposed but we'll verify that in the review.