Failing Thursday – Hedging for the Next 10% Correction


This is getting to be fun, right?  It certainly is for our Members as we shorted the Nasdaq at 7,000 on Tuesday morning and, for those who missed that, we laid out a strategy for shorting the Dow in yesterday's Morning Report at 25,500, which paid $2,500 per contract and the S&P at 2,750, which also paid $2,500 per contract so – you're welcome!  Now we'll see if the rest of our prophesy plays out:

"…if the S&P can't hold that 2,750 line – next stop is 2,735 and below that is DOOM!!!"

DOOM!!! in this case is the 200-day moving average, all the way down at 2,557 but there should be interim support at 2,640, which is the 20% line on the Big Chart so we'll take short profits there and look for a bounce.  We're certainly not going to be bullish again until those 50-day moving averages are retaken (see yesterday's notes) and keep that in mind for next time when we urge caution.  

As we expected, our Short-Term Portfolio, which was $116,777.50 yesterday morning, jumped to $123,397.50 for a gain of $6,620 as our DIA June $255 puts moved back into the money and SQQQ climbed back over $15 but those trades "only" provide $100,000 and $40,000 worth of protection, respecitively, so it's time to consider the next layer of hedges – just in case this drop doesn't stop at the previous lows.

One thing we can do with DIA that doesn't cost much is to add a more speculative spread.  Our June $255 puts were at the money when we bought them and we sold 1/2 as many June $230 puts, capping our gains a bit but what if we added the Sept $240 ($8.50)/225 ($5.50) bear put spread for $3.  20 more of those is just $6,000 and gives us $60,000 worth of proetcion if the Dow drops 20% and, more importantly, it let's us take a profit on the $255 puts off the table (when we decide to) and then becomes a cover for the short June $230 puts in case we're wrong and the Dow continues lower.  

That's how we layer our hedges.  We…
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