To The Moon Tuesday: Damn The Torpedoes!

Includes: AAPL, QQQ, SPY
by: Philip Davis

SPY 5 MINUTE Full speed ahead and damn the torpedoes!

When Admiral Farragut was in Mobile Bay (Gulf of Mexico) in the last great naval battle of the civil war, he faced a harbor full of mines and his lead ship, the Tecumseh hit a mine (called a torpedo at the time) and sank. Other ships began to turn back but Farragut was lashed to the rigging on the perch of his own command ship and gave the order for the fleet to ignore the danger and blitz the harbor - leading the North to a decisive victory in an act of guts and faith.

There are many men who would have turned back facing a mined harbor and the war would have waged on and maybe the North wins anyway and maybe they lose - we'll never know. There are also many men who bravely face the odds and "go for it" - and most of them are as dead as Custer - BUT, the ones who make it are heroes, aren't they?

"He who fights and runs away, lives to fight another day" is a more relevant quote for stock market investing as the heroes are few and far between and the path is littered with the bodies of men who have "gone for it" before you.

Andy Zaky is one of those bodies and we were discussing his fate in Member Chat last night and this morning as his AAPL fund has gone belly up and it's no secret that our own Apple (NASDAQ:AAPL) positions are also hurting with the stock at $420. Had AAPL turned up this month, Zaky would have been a hero and everyone would know his name and sing his praises for the next 100 years (like John Paulson's day in the sun, shorting housing at the right time - since then, not so much) but it didn't and the fund had to be liquidated.

In our case, we rolled our "so far, so wrong" AAPL positions out in time and down in strike as we do still like AAPL but, unlike Zaky, we are willing to give them more time to turn around, rather than making a series of shorter and more aggressive bets. We had pursued the same strategy in the Fall and our AAPL bets were back to even in January, prompting me to remind our Members at the time, regarding the management of our virtual portfolios:

Very tempting to cover in $25KPs and AAPL money but we may as well stay for the ride and see where we land. As usual, I will point out to $25KP players who were not comfortable with the dips last month (year) - GET OUT!

These are supposed to be 10% or less of a larger portfolio that is MUCH more conservatively invested and you should be VERY comfortable taking a loss on these plays. They are aggressive positions and we are "going for it" - having played for exactly the rally we're getting now but it can still all blow up in our faces and then we're screwed and next time - I will not have the confidence we will come back - this IS the rally we were waiting for with the Fed throwing money at us and the Fiscal Cliff worries past us and AAPL acting like a real stock again (just hit $555) but no more catalysts ahead and I am concerned about Europe's crap economy as well as upcoming earnings so BE CAREFUL!

Even when I made AAPL my "One Trade for 2013" back on Jan 15th, when AAPL was trading at $485, I said at the time that AAPL could easily dip to $400 but the point of the trade was to bet on them to get back to $500 by the end of the year with a break-even at $414 and an assignment at net $364 (another 24% down from $485). If we thought AAPL couldn't possibly go down from $485, we could have made much more aggressive trades but we EXPECTED to be "wrong" in our timing so we took a conservative position that would allow us to ride out a storm.

The trade on the left is the same one I laid out on TV and we even added the trade to our Income Portfolio (4 virtual contracts), hoping to make $34,000 in profits if AAPL finishes the year at $500+ (Jan expiration day) and risking owning 400 shares of AAPL for net $72,800 if they are below $350 over the same period.

Today, they are closer to $350 than $500 and the Jan $400 calls are $54.40 and the Jan $500 calls are $18.80 for net $35.60 so that spread is down 32% and the 2015 $350 puts are $43.50 so those have gone $5 against us (13%), which is not so terrible considering AAPL itself is down $65 from our entry (13%). With 4 contracts, our AAPL losses in the Income Portfolio were $9,520 out of a virtual $500,000 portfolio. We did, in fact, close our Income Portfolio last week because it made TOO MUCH MONEY (in other positions, obviously, not AAPL) and started a fresh one with, so far, 12 positions, including AAPL, where we picked up 5 of the 2015 (went longer) $350/450 bull call spreads for net $29.33 and sold 5 of the 2015 $350 puts for $39.83 so a similar, but slightly more conservative play than we had before.

The net on those 5 spreads was a net credit of $10.50 so our break-even on 500 possible assigned shares (if AAPL is below $350 in Jan 2015, we are forced to buy the stock for $350, less the $10.50 we have in our pocket) is $339.50 or $169,750 worth of AAPL using up roughly 17% of our buying power in ordinary margin. Are we being too aggressive with our AAPL trading or is it worth the risk of owning 500 shares of AAPL stock for $339.50 per share vs the possibility of netting $55,250 in profit if AAPL simply holds $350 (down another 16.7%) over the next two years?

As I said in the interview, as long as you really, Really, REALLY want to own AAPL for net $339.50 - what do you care what happens to the stock between now and January 2015? As our Members can attest, we usually worry as little about a long-term position when it's up a lot as we do when it's down a lot because both conditions tend to be transitory - unless something fundamentally bad has happened to the company.

QQQ WEEKLY I'm not here to convince you to buy AAPL. In fact, if you do, you'll likely be competing with Warren Buffett for shares at this point and we plan to buy more if they go lower. I just think that, as we move towards $400 finally, it's a good time to discuss WHY we're not selling - despite the horrific technicals the stock is now painting.

As Dave Fry notes in his QQQ chart, the broader index has decided to leave AAPL behind, which is a very neat trick as AAPL is still about 17% of the index so imagine how well the Nasdaq would be doing if not for the 22% drag of AAPL's drop since Jan 2nd. 17% of 22% is 3.74% so we can assume that the Nasdaq would be 3.74% higher, at 3,300, if not for AAPL's weight around it's neck - and that's not even accounting for the additional weight of AAPL's suppliers - many of whom have also sold off in fear of something actually being wrong with AAPL (otherwise, what sense to the technicals make?).

It was Keynes who said: "Markets can remain irrational a lot longer than you and I can remain solvent" and he should know because he went nearly bankrupt trading stocks into the great crash of 1929 (which he didn't see coming) but he made it all back and more sticking with the market subsequently (while extolling the virtues of MORE FREE MONEY, of course). Keyens had $500,000 when he died in 1946, about $17M these days and he lived a famously lavish lifestyle and, in fact, his last words were "I should have drunk more champagne."

So, what would Keynes do with AAPL trading at $420? He'd go for it, that's for sure. He'd go for it and petition the Government for a bailout and tell the Fed to print enough money for everyone in America to have an iPad and an iPhone and an iWatch and ITV. Come to think of it - are we sure Keynes is dead, because that's pretty much what the Fed is doing?

Full speed ahead and damn the torpedoes!

Disclosure: I am long AAPL, GDX, TZA, CIM, GLD, BA, ALU, DBA, GLW, SQQQ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Positions as indicated but subject to change (fairly even mix of long and short positions - see previous posts for other trade ideas). Commodity positions are very short-term and not tradeable by the time you read this.