Rick’s Picks

Tuesday, May 15, 2007

“Phenomenally accurate forecasts” 

The QQQQ trade recommended in Monday’s Touts worked out so perfectly that I want to review the steps we took to get ourselves risklessly short “the market” for the next five weeks. By day’s end, we had legged into bearish June 46-45 put spreads at no cost. That means that if “the Cubes” are trading below 45 when our options expire on June 15 (they settled yesterday at 46.45, off 39 cents) we will make $100 per spread. Even if we are wrong and the QQQQs rally, we will still make money under $46, and we will lose nothing if they continue to rise in the coming weeks. In fact, we cannot not lose even the cost of commissions, since we put on the spread for a small net credit.

We accomplished this by doing the buy side of our vertical bear spread when the underlying vehicle rallied very briefly in the opening minutes of Monday’s session. Here’s the recommendation exactly as it was disseminated over the weekend:  “I don't want to overuse the word ‘ominous,’ so let's just say that the divergence shown in the chart is...disconcerting. At the very least, it should make technically aware bulls think twice about trying to milk the uptrend to the last drop. As you can see in the chart, stochastic tops have actually declined since the stock-market rally steepened in late March, and the divergence has become even more pronounced in the last week or so. We don't usually like to buy options other than at precise Hidden Pivot swing points, but I'm going to make an exception this time by suggesting that you buy four June 46 puts (QQQRT) for 0.52 or better, day order. With no Hidden Pivot tie-in, this trade is speculative, so don't overdo it if you plan to step up the size of your order.”

‘Dirtbags’ Helped Us

This advice proved timely. Under the influence of the dirtbags who manipulate the QQQQs professionally, the index head-faked higher in the first few minutes of the new week, hitting an intraday peak at 46.88 that lay 15 cents above Friday’s settlement price. This allowed us to buy some puts for 0.52, three cents off the intraday low. (Incidentally, our puts subsequently traded as high as 0.74, yielding a theoretical annualized profit – as some of my guru competitors would have it --  of more than 15,000 percent!) 

Once we’d bought the puts, reducing our risk to the vanishing point entailed simply shorting other puts against them after the QQQQs came back down to reality. This they did, and with a vengeance, falling to an intraday low of 46.19 by day’s end. As the cubes fell, we profitably closed out half the ones we’d acquired initially, reducing out costs basis on those we kept to 0.40. Then, we shorted some June 45 puts for 0.41 against them, effectively legging into a vertical bear put spread for a small net credit.

Shunning Four-Baggers

As long-time subscribers will already know, we never swinging for the fences when we buy put options. Anyone who has persisted at this over the years has probably lost a great deal of money. Inveterate put buyers could probably count on their fingers and toes the number of days in the last thirty five years that they would have felt something approaching exhilaration. Put options are the worst sucker-bet this side of a casino Big Six Wheel, and you’ve got about as much chance turning a profit on them as you do knocking over five milk cans at Coney Island with a single toss. Even so, it is human nature to want to hold at least some puts these days, since the stock market is primed to collapse at any moment. If it is possible to hold puts that effectively have cost us nothing, then we should try to do so whenever possible.

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Information and commentary contained herein comes from sources believed to be reliable, but this cannot be guaranteed. Past performance should not be construed as an indicator of future results, so let the buyer beware. Rick's Picks does not provide investment advice to individuals, nor act as an investment advisor, nor individually advocate the purchase or sale of any security or investment. From time to time, its editor may hold positions in issues referred to in this service, and he may alter or augment them at any time. Investments recommended herein should be made only after consulting with your investment advisor, and only after reviewing the prospectus or financial statements of the company. Rick's Picks reserves the right to use e-mail endorsements and/or profit claims from its subscribers for marketing purposes. All names will be kept anonymous and only subscribers’ initials will be used unless express written permission has been granted to the contrary. All Contents © 2006, Rick Ackerman. All Rights Reserved. www.rickackerman.com