Yesterday sure was fun. The Dow Futures (/YM) blasted up to 26,050 at 10am and then, by 3pm, it was back at 25,700, down 350 points (1.34%) in 5 hours. But don't worry, we recovered 100 into the close and now we just tested 26,000 again, which is a good shorting line with tight stops above since yesterday's 300-point drop was good for gains of $1,500 per contract for the shorts.
In our Live Member Chat Room, we stuck with the Russell Futures (/TF) shorts at 1,600 and those fell all the way to 1,575 for gains of $1,250 per contract and we added longs on the Dollar (/DX) at 90 and Coffee (/KC) at $120 while, of course, taking the $1,000 gain on /RB and running – the same short at $1.85 we played all last week in our morning Reports (you're welcome!).
We still like the Russell for a hedge into earnings and, in the Live Member Chat Room, we chose the following hedge at 11:25, just in time for the massive 100-point drop in the Russell but we're back to 1,585, so you can still make the hedge on the Ultra-Short ETF (TZA) as follows:
- Sell 30 TZA 2020 $10 puts for $2.50 ($7,500)
- Buy 40 TZA July $10 calls for $1.80 ($7,200)
- Sell 40 TZA July $15 calls for 0.60 ($2,400)
That gives you a net credit of $2,700 and a $20,000 upside on the July spread if TZA pops from $11.40 to $15 (31%) and, since it's a 3x short ETF, that would mean the Russell would have to drop about 10%, back to 1,425, which doesn't seem like much of a stretch after yesterday's quick plunge. If the Russell doesn't fall, then we take the remaining $2,700 and invest it in rolling the long July calls to something lower in January and then cover with short Jan calls and then we have a full year of insurance in exchange for our promise to buy 3,000 shares of TZA for $10. The idea, of course, is that our longs make much more money than our TZA shares would lose – hedges…