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No, Please Don't Naked Short

Mar. 21, 2021 6:52 AM ET2 Comments
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  • The odds are seeing a meaningful pull-back in U.S. equity indexes are high.
  • Investors can speculate on the downside, but with a controlled risk strategy.
  • We have synthetic shorts in place with bearish call spreads.

We have been getting lots of question about profiting from the irrational exuberance in the markets and profiting from the upcoming, inevitable down-leg. Now we don't short in our QES and DGR (just raise cash to very high levels when we see markets at extreme highs). But yes, in our personal trading account we are playing the downside in defined risk strategies. And we are NOT outright short. Why? First brokerage cost. Interest needs to be paid daily on short positions. Second, the SPY, QQQ, and IWM pay dividends. The SPY just distributed last Friday. Being short would have meant paying $128 per 100 shares of SPY. We don't do such foolishness. For example, even trying to sell the shares at close on Thursday (to not be short when the stock went ex-dividend overnight) would meant selling somewhere in the $394-397 range to buy back in the $387-$390 range! (depending on the timing luck of your trades).

So what to we do to play the downside? We have a massive bearish call spread in the QQQ, SPY and IWM. For example, with the QQQ, we are long the May monthly calls at strike $320 (a cost of $9.65) and short the May monthly $320 strike calls (for revenue of $85.40). Even is the QQQ's put in one more price spike in the coming weeks, our risk is limited above $320. If the QQQ's indeed start deflating massively, the short $320 call will drop in value at the same rate as the QQQ fund. Yes, a naked short in the QQQs would save us the $9.65 long protection call, but at all times, we need to be risk managers. And not being forced to inopportunely close shorts in another fake-out price spike is what makes our bear strategy undeniably the superior strategy.

Despite our concern over a top in the S&P 500/Russell 2000, our Watch List Trading Model is presenting us with some interesting stocks to buy in all industry groups. These are companies that we still would hold even with the S&P 500 on clear negative divergence. Today we'll share with all followers our latest model recommendations.

For readers not currently following WMA, we are offering FREE access to our private Daily Updates for a short period.  Simply use the free discount code welcome3/21 when creating your log-in here (selecting "Market Perspectives Subscription).  No credit card needed, we don't do that bait & trap crap. We're just here to help our friends and followers and propose access to our segregated managed account service

Finally, if you are wondering HOW MUCH risk you should be taking as an investor in this market, we take a scientific approach to answering this question. Our Investor Questionnaire will provide you with your own personal investor profile. Again, obtaining your score is free. For example, we are recommending that investors qualified as "Moderate" to be no more than 50-60% invested in risky stocks (lower aged investors more towards 60% end).  However "Aggressive Investors" should stay 70% in risky stocks, but rotate to undervalued segments (companies) of the market or to attractive international stocks.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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