What an exciting start to the year this has been.  

It's been a difficult trading environment, to say the least and this will be the first full year featuring our new Top Trade Alerts™ (Members Only) and I look forward to doing these educational review sessions at least each quarter (our last one was January) to review both our trade ideas and our use of options to make those trade ideas as profitable as possible.  

Top Trade Alerts are sent out once or twice a week via EMail and Text Message from our Basic and Premium Live Member's Chat Room.  These trades are just a very small portion of what we discuss during chat each day, but hopefully a good representative sample of the dozens of trade ideas we share with our Members each week in our Live Member Chat Room as well as our Weekly Live Webinars (replays can be seen here).  

Keep in mind these are just snapshots of trades as of today – it's up to you to take good trades off the table and cut the losses (or make adjustments) on ones that go bad.  We're always discussing adjustments in our Live Member Chat Room – join us there for follow-ups.   

Our first top trade idea for 2015 was UCO on Jan 5th and UCO did have a nice pop and we cashed them out of the $25,000 Portfolio with a nice profit on February's pop to $9.50+.

 UCO has since pulled back and the July $14s fell all the way to 0.15 but now the July $8s are just 0.95 and make a nice way to go long on oil or, you can be more conservative and buy the $6 calls for $1.85 and sell the $9s for 0.70 for net $1.15 on the $3 spread.  

On Jan 8th we took a poke at RIG when they fell to $16.15, selling the 2017 $8 puts for $1.70 for a net $6.30 entry, paired with the 2017 $10/15 bull call spread at $2.50 for net 0.80 on the $5 spread.  RIG has fallen off considerably since, to $13.60 and that has pushed the puts up to $3.20 and the spread is now 0.85 so, on paper, it's a nasty loss at -$2.35 to close it out, down 390% from the 0.80 entry.

Still, the net entry on the spread is $10.80 since we spent net 0.80 and we own the $10 calls and RIG is at $13.60 so the loss is on paper ONLY because this spread is $3.60 in the money and would have a 350% PROFIT if it closed today.  We still like RIG but expect a long, slow recovery for them and we can make an adjustment.  The 2017 $10 calls are still $2, which is more than we paid for the spread.  We can reinvest in the position by spending another $1.50 to roll down to the $5 calls at $3.50.  That puts us in the $5/15 spread for net $2.30 and, at the moment, we're $8.60 in the money!  

See how much more flexible it is to have options than stock?  As long as you REALLY want to own the position long-term, a 20% drop in the stock (and we first had a 20% pop) is an OPPORTUNITY, not a disaster.  

On Jan 14th, our Stock of the Century, IRBT went on sale and we couldn't resist a chance to get in at $30 and my trade idea on that one came from our Live Member Chat Room, where I said:

IRBT/Maya – This is a good spot for a long-term play.  Let's say you don't mind owning $15,000 worth (500 shares) so you start by selling 2 2017 $28 puts for $6 for a net $22 entry on 200 and you can leave it at that as the margin is just $600 to collect $1,200 or you can use that $1,200 to buy 4 of the $28/33 bull call spreads for $3 for net $0 on the $5 spreads that are $3 in the money ($2,000 upside potential).  Nothing wrong with that on our Stock of the Century. 

Because we sold into the "excitement" (the sharp drop), we got a great price for the $28 puts  from panicked traders and they have already crashed in price to $4.34 ($868 for 2).  The $28/33 bull call spread is $4.35 ($1,740 for 4) so already net $872 but, as with the paper losses – we simply consider our long-term trades to be on or off track.  This one is clearly ON.   Also, you may notice that IRBT went down lower after we entered – there were instructions for that too!  

If it goes down from here, then you should be THRILLED to use the uncommitted $9,000 of buying power to roll the calls lower and maybe DD on the puts and then you'll be committed to 400 shares at a net below $20 on the put side.  If you aren't going to be THRILLED to own 400 shares of IRBT below $20 – why on Earth would you be buying 200 shares when they are over $30?  

That's how you should think about every stock purchase and, if you are doubling down, the same logic applies – if you aren't VERY WILLING to buy more of a stock if it gets even cheaper – STOP BUYING IT NOW! 

If you enter a trade EXPECTING it to go against you and PREPARED for what you will do when it moves against you, then you won't be caught like a deer in the headlights when it happens.  See our Strategy Section's article on scaling in for more on this topic. 

On January 21st, NFLX popped to $415 and we grabbed the Feb $350 puts for $2.40 but NFLX kept going higher and they failed.  We also put a watch on IBM as it came near our $150 target. The following day (1/22) we issued a Top Trade Idea for UNG as follows:

Doesn't look like much but Feb $15 calls are 0.90 so we can SELL those and buy the $13.50 calls for $1.70 and that's net 0.80 on the $1.50 spread so 0.70 upside (87%) if Nat Gas is over $3 in 3 days.  

What I like about this trade is it's not very likely to burn you for a 10% drop ($2.70 on /NG) and, if it does, we'll be loving /NG longs there anyway.  

As you can see from the /NG chart (Natural Gas Futures) we were spot on with our bottom call and caught a nice ride to $3+ for gains of $3,000 per contract along the way.  As to the nice little UNG spread, it finished on the 20th (expiration day) right on target at $15.03 for the full $1.50.  Margin on /NG is $3,520 per contract and putting that same $3,520 into 50 contracts (similar risk) would have netted back a gain of $2,816.  That's how a well-constructed spread can perform as well as a Futures contract!  

On 1/27 we had not one but 4 Top Trade Ideas and NONE of them have gone anywhere so far, so I'll just reprint them as they were but with adjusted prices in case you want to look at new entries – not on BTU though, as I have lost faith in coal recovering!:

• RIG 2017 $10 puts can be sold for $3 $3.25 for a net $7 $6.75 entry, less than 1/2 of the current price.  If you have $10,000 in an allocation block, you can sell 5 of the puts for $1,500 $1,625 and only risk owning 500 for $700 $675 ($3,500 $3,375).  Meanwhile, you are collecting $1,500 $1,625 back on a $10K allocation of which you are using about $350 of margin buying power.  That's a fantastic return on margin!  
• BHI was already a Top Trade – my fists are sore from banging the table on that one. 

 

• ABX is interesting to me.  Do you REALLY think gold is no longer a thing.  It had a good run – about 100,000 years as the most desirable mineral on the planet but it's so 10 millennia ago, isn't it?  For those of us who love the classics, ABX seems pretty cheap at $13 and much cheaper if we sell 10 2017 $13 puts for $2.75 $3.95 for a net $10.25 $9.05 entry on 1,000 shares ($10,250 $9,050).  

• HOV is cheap again and you know I love the short 2017 $4 puts for $1.30 for a net $2.70 entry.  TOS says I can sell 20, promising to own 2,000 for $5,400 and I collected $2,600 against $800 in margin.  It doesn't get much more efficient than that! 

You are always going to get price fluctuations with options so that shouldn't be the focus of your attention.  What matters is whether your premise is holding up and whether or not your trade is on track.  Since we're selling puts on ABX, for example, our net entry was $10.25 and now the stock is $10.25 so there's nothing to get upset about as long as we REALLY wanted to own ABX at net $10.25 when it was $13. 

If we were scaling into the position and we took a 1x position (out of 4x), let's say our allocation was $50,000 and we started by selling 10 puts $2.75.  If those puts were assigned tomorrow, we'd own 1,000 shares of ABX for net $10,250.  Since ABX is at $10.60, that's not a loss at all, even though the short puts are currently showing us $3.95 and are down $1,200  (-43%) in our portfolio. 

Even so, $1,200 is less than the $2,400 we would have lost had we simply bought 1,000 shares of ABX in the first place – options are almost always a better way to go!  

Anyway, if we were assigned 1,000 shares of ABX at $10,250 AND we decided we wanted to stick with it long-term, we could take a small loss and start again with short puts for a lower entry or we could accept the 1,000 we have and SELL the 2017 $10 calls for $2.80 and the $8 puts for $1.10 and then we've collected $3.90 ($3,900) against our $10.25 shares and reduced the basis on our first 1,000 to net $6.35 and we've promised to buy 1,000 more for $8 ($8,000).  

If ABX continues down, we would end up with 2,000 shares for $6,350 + $8,000 = $14,350 or $7.18 per share, another 30% off the current price.  We'd still have $35,650 of our $50,000 allocation on the side in case ABX goes lower and we want more or, if it goes over $10, we can take $10,000 to give up the stock (profit of $3,650 or 57% on the cash in play) or we could then widen our spread for the next cycle.  

These are not bad outcomes for a stock that's dropped 30% since we entered it!  

Speaking of going against us:  On 1/29, our last Top Trades of the month were on USO, UCO and SCO and they were:

• USO July $17 calls at $1.80, now $1.72 – down 4%
• UCO July $6 calls at $1.85, still $1.85 – 0% 
• USO 2017 $16 calls at $3.60, now $4.10 – up 16% 
• SCO March $120 calls sold short at $13, now 0.50 – up 96%
• SCO July $80 puts at $10.50, now $14 – up 33%

Of course, those oil trades were much better off in early February, when USO jumped up to $20 on several occasions and yes, in our Live Member Chat Room we took the quick money and ran but now we're jumping right back in on these trades as they get back to our entries.  We're not ashamed to go back to the well with the delicious water – why should you be?  

You can see why we love these hedging strategies, we have fantastic upside leverage, we can make simple adjustments when things go wrong to ride out a dip and our worst case is we end up buying stocks we REALLY want to own for a substantial discount – win, win win!  

By BEING THE HOUSE – and Not the Gambler, we are able to set up trades that give us multiple opportunities to make money while GUARANTEEING that the premium we sell WILL EXPIRE WORTHLESS.  That gives us a huge edge on every trade we participate in.