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INDU WEEKLYWhat a rally!

The markets are going up and up and up some more, which is exactly what we were guarding against on April 14th, when I wrote "5 Trade Ideas that can Make 500% in an Up Market." At the time, the S&P was "only" at 1,588 (now 1,632 and see Dave Fry's SPY chart) and, of course, the intention of our bullish hedges was not to catch a 3% move but, now that we are up 3% in 4 weeks - let's see how they are performing, along with my other 5 inflation hedges from the following week, which I will review tomorrow.

At the time I had noted: "What's really been disturbing us is that our Materials indexes aren't following though. Not just oil and gold - those are silly things anyway - but copper and iron and corn and wheat and rice and rebar - things that are, traditionally, consumed in a healthy economy."

Just today, we finally began to see serious signs of life in the materials sector and, of course, this morning we finally capitulated to the upside and redrew our Big Chart - maybe this rally IS here to stay. We'll benchmark our trades by netting in a virtual $1,000 cash to each one and see how they performed. Obviously margin requirements vary widely, but we went into that in the original post, so I won't waste the time here:

  • DBA Jan $23/26 bull call spread at $2, selling $2015 $25 puts for $1.55 for net .45, now .65 - up 44% (+$440)
  • U.S. Steel (X) 2015 $15/22 bull call spread at $2.80, selling $13 puts for $2 for net .80, now $1.70 - up 112.5% (+$1,125)
  • Cliffs (CLF) 2015 $18/28 bull call spread at $3.20, selling $15 puts for $3.10 for net .10, now $2.10, up 2,000% (+$20,000)
  • Barrick (ABX) 2015 $20/30 bull call spread at $2.95, selling $20 puts for $3.30 for a net .35 credit, now -$1.20, down 242% (-$2,420)
  • 7 QQQ Jan $65/$70 bull call spreads at $3.24, selling 1 AAPL 2015 $300 put for $22.50 for net .20, now net $15.46, up 7,630% (+$74,200).

Wow, up $93,345! Now, on CLF, we would not have made a commitment to buying 100,000 shares of them, even at net $12 so let's say 10,000 shares and drop the net return on $100 cash and call it just $2,000 profit and let's say we just committed to 3 of the AAPL positions and made "only" $4,638 - that's still a very nice $5,783 profit on 5 positions in a month! The average gain was a crazy 1,908% on cash, a very nice rate of return indeed.

I STRONGLY recommend you go back to the original posts, look at the charts for the positions we're discussing from those days and think about the logic we used to identify these trades. As I often say - if you are not willing to buy when things are cheap, you are dooming yourself to always chasing stocks after they've gone up.

FUNDAMENTALS give us a correct VALUE for stocks. We don't care about PRICE - other than in so much as it's far enough below our value to indicate we should take levered trades like this these.

It's also very important to note that these are aggressive upside hedges that you can commit small amounts of cash to for very nice returns and your downside (see original post) is owning a stock you REALLY want to own for rock bottom prices but you WILL be stuck with that stock, so you'd better love it. Even so, if you have a $1M portfolio and you commit to buying 300 shares of AAPL at $300 if that last trade goes bad, that's "just" $90.000 or about $45,000 in margin IF AND ONLY IF it's put to you. Otherwise, the margin requirement for the short $300 puts (3 of them) is about $10,000. That plus the $6,804 in cash required for 21 of the QQQ bull call spreads netted $4,638 profit in 30 days, still an annualized 331% profit and, of course, these trades aren't even fully valued yet!

Obviously, when we do make this much money this fast, we like to take things off the table and, what we usually do with these for positions in our virtual portfolio is to take off the big winners (QQQ, CLF) and double up on our losing position (ABX) - especially if we still think it has legs.

So that's the official "new" pick for May - the above ABX spread for a $1.20 credit. That's our ONE trade idea to make 500% in an up market. I'll probably have a new one tomorrow - stay tuned!

Source: 5 Great Trade Ideas: 30 Days Later

Additional disclosure: Positions as indicated but subject to change (fairly bearish mix of long and short positions - see previous posts for other trade ideas). Positions mentioned here have been previously discussed at philstockworld.com - a paid membership site that teaches stock, options and futures trading, portfolio management skills and advanced income-producing strategies for investors.