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Triple Toppy Tuesday – Nasdaq Finally Finds a Level it can’t Break Over

6,325.  

Who'd have thought THAT was going to be where the Nasdaq finally had enough?  Actually, the Nasdaq (QQQ) did hit 6,350 on Nov 8th but, before that and since that, it's been getting stuck at 6,325.  6,345 would make more sense, as that's our 17.5% line on the Big Chart off our base of 5,400 we consolidated at last Spring. 

The initial run topped out at 5,800, which was up 7.5%, so another 10% run since then with a pause at 6,000 makes 6,300 the 5% Rule™ and watch that line because, below that, there's really no suport until 6,000.

Apple (AAPL) of course often distorts moves in the Nasdaq as that one stock is over 15% of the index and AAPL has ramped up 10% in two weeks which, by itself, adds 1.5% (94.5 points) to the Nasdaq.  So, without AAPL's strong support, the Nasdaq would already be on the way down and, of course, what Apple giveth, Apple can taketh away – so watch out for any negative signs on that stock.

AAPL busted out of its channel and, deservedly so, as they made more money than the entire Automotive Industry combined.  Or Airlines or Retail, for that matter.  Apple may be part of the Retail Sector but they are nothing like a retailer with their 35% sales margins, constant crowds and absolutely no discounting.  Make your own high-quality stuff, offer great service and people will come is something 1,000 other retailers can't seem to figure out.  

Something traders can's seem to figure out is how easy it is to make money playing Apple bullishly.  Apple is the biggest position in our Options Opportunity Portfolio and our trade will pay us $180,000 if AAPL is over $170 next January, so we're well ahead of schedule.  What's the current price?  $49,350.  

At the moment, we're "in trouble" with our short Nov $145 calls but we can roll them along to 30 of the the Jan $155 calls at $20.40 ($61,200) and it's still only a 1/2 cover and we can kill the short 2019 $130 puts at $3.63 ($7,260) and sell 20 of the 2020 $150 puts for $13 ($26,000) so there's another $22,140 in our pockets while we wait.  Since the short calls are -$60,000 – we don't even care if AAPL dips and runs up the short puts – we're well-covered in both directions.  

The upside on this spread is $130,000(ish) for a 260% return on cash, not counting the $22,140 we just picked up.  There will be winning and losing sales along the way but, when you pick a good stock and the main part of the trade performs and returns $180,000 – you can deal with the little adjustments you make in between, right?  

These are not hard trades to understand.  We have dozens of them in our Long-Term Portfolio and yes, they require margin but you shouldn't be trading like this unless you have Portfolio Margin Accounts (for accounts over $100,000) and, of course, good hedges as well.  The margin isn't an issue as we keep a lot of CASH!!! in our portfolios (over 70% at the moment) and we have a good amount of Nasdaq ultra-short (SQQQ) hedges in place as well – just in case…

Speaking of the AAPL puts, you can construct a good hedge by using them to pay for an SQQQ hedge to protect yourself through the holidays.  We can use the short AAPL 2020 $150 puts to pay for the insurance with the following spread:

  • Sell 5 AAPL 2020 $150 puts for $13 ($6,500) 
  • Buy 50 SQQQ March $22 calls for $2.50 ($12,500) 
  • Sell 50 SQQQQ March $28 calls for $1.25 ($6,250) 

Here we have a net entry of a $250 credit on a spread that pays $30,000 at $28 on SQQQ.  SQQQ is a 3x Ultra-ETF so a $5.50 gain would be 24% and that would be roughly an 8-point drop in the Nasdaq to 5,800 on the /NQ Futures.  See how that number comes around again?  The only real "cost" of the spread is that you've promised to buy 500 shares of AAPL if it falls below $150, which is down 20% from here and, of course, if you don't really, Really, REALLY want to own 500 shares of AAPL at $150 – don't sell the puts!  Surprisingly, the ordinary margin on those puts is $6,138 – so a very reasonable way to hedge a portfolio.

We'll be reviewing our Member Portfolios this week with November Options expiring on Friday but, on the whole, we're very much parket in neutral into the holidays.  The indexes are back to where they were in mid-October, when I moved my kids' college funds to CASH!!! (have I mentioned how much I like CASH!!! lately) because there was no good way to hedge them. 

Our portfolios, however, can be hedged and we use trades like the one above to lock in our long gains that allow us to play from both directions.  However, the CASH!!! we hold on the sidelines does have us rooting for a pullback – because we'd love to do some bargain-shopping.  

Be careful out there.  

 

Provided courtesy of Phil's Stock World.

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