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Why I’ve Been Taking Profits in the Market

Why I’ve Been Taking Profits in the Market

Posted On August 25, 2020 2:54 pm
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In my Options 360 trading service, we spent most of the past week managing/adjusting closing existing positions, some of which were over two months old, and getting stale as they approached expiration. 

I’m glad to say we have mostly been taking profits or money off the table and I’m comfortable with what we left in terms of both set-ups and their risk/reward potential. To put it in COVID terms, we’d been living off the bullish inventory accumulated during a period of hoarding, now it’s time to restock the cupboard. 

Of course, it’s becoming increasingly difficult to want to load up too much as it’s clear there is no longer a scarcity.  Rather, there is quite an abundance and I discussed last week in comparing the current environment to pressing bets on a  ‘hot roller’ at the craps table and we should expect some type of reversion to the mean.  

So, with indices set to open sharply higher, it will again feel like starting new bullish positions will be chasing an increasingly precarious position. But, unlike the statistics which apply to truly pure repeatable events the financial markets have many external forces; changes in monetary policy/liquidity, sentiment, and most importantly, the size of the pie can in fact get to grow and get larger over time.  

Indeed, broadly speaking the ‘market’ in general has rebounded with even the hardest-hit sectors now some 30%-40% off the March lows, but the largest gains have accrued to those that already had the biggest slices. 

Compare the market cap-weighted S&P 500 Index to an equal weight measure of the Index, the RSP.  After moving in near lockstep prior to the virus, the market cap-weighted is now outperforming by almost 17 percent.

spy 500 chart 2020

And there are some truly transcendental players which are changing the way the game is played.  When “Apple (AAPL), “ Amazon (AMZN)”, and the most confounding of all, “Tesla (TSLA)”  add 5% day-after-day in market cap it makes me think of Michael Jordan. 

Specifically, his infamous “shrug” after he hit his 7th 3-point shot during the first half of 1992 finals game. At the time that was insane; the best player leapfrogging his own best. Basically, the shrug says, we all knew I was good, but damn, I’m surprising even myself right now. And just deal with ‘cause I’m not stopping and I ain’t apologizing.  

Likewise, AAPL and the Big 5 or Awesome 8 or whatever you want to label the top mega-cap tech names powering the indices higher are truly different beasts from past environments; the Virus put the trend of digitalization and scale on steroids. What might change in the future?  Baseball eventually regulated steroids and home runs dropped for a few years before more tightly wound balls and sabermetrics said ‘swinging for the fences’ is better than batting for average and have led to more, and longer distance, dingers than ever.  I don’t see meaningful antitrust rulings that would alter the overall trajectory but who knows. 

So too, Jordan’s feat in 3-point production is positively pedestrian compared to the current era in which new transcendent players such as Steph Curry have not just rewritten the record books but changed the entire style of play to one of  ‘space and pace”  heavily reliant on 3-point shooting.  Now, we have 7 footers such as Brook ‘f’n’ Lopez who used to be planted back to the basket and who had not made a single 3-point shot in his first six NBA seasons, takes 6 a game and hits 32% of them. 

The overall efficiency and skill set of athletes and businesses has improved over time and the best become completely dominant. What will come along to change or disrupt it, and give a bigger slice of the growing pie to newcomers? I don’t know.  But something will.  It always does. 

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Current Open Positions:

1.VXX long 2 contracts Aug 27 calls at $0.70 cost basis.  This was established as a small hedge or insurance against the bullish positions.  Now that we’ve lightened our load I’ll take these off before they turn to zero come Friday.  

2. MS bull diagonal of  Long 2 contracts MS September (9/04) 49 calls and short 2 contracts MS August (8/28) 52 call a $1.20 cost basis. Financials are still lagging but MS is holding up better than some traditional banks and XLF in general.  We’ve made a few adjustments/rolls to reduce cost basis and are no in position for a decent profit if shares simply hold their ground for the next week or two.

3. FLIR long  3 contracts FLIR Sep (9/18) 40 Call at $0.75 cost basis.  We let the short leg of the original calendar spread expire (worthless).  The charts looks blah, and the lack of weekly options means we’re now just waiting/hoping for as rally

4.VISA (V) current position: long 1 contract Sep (9/11) 202/5 call
and short 1 contract Aug (8/28) 207.50 call at a $2.75 cost basis.  The stock has a lull back after initial entry on what seemed to be a breakout on 8/11.  It consolidated but has now cleared $201-$202 level confirming breakout and suggest a move up to fill the gap at $208 level.

5. WYNN current position long 1 contracts Aug (8/28) 84 call and short 1 contract 1 contracts WYNN Aug (8/28) 87 call for a 2.55 cost basis.  The new cost basis includes the $1.30 loss taken when I got shaken out and closed half the position. The chart now looks good and is doing what it was supposed to do when we established the position last week. Now in retrospect using just a two-week time frame looks short-sighted.

6. MRNA Bear Vertical of long 1 contract MRNA October (10/16) 70 Put and short 1 contract October (10/16) 55 put at a $4.60 cost basis.  We’ve made a couple of short-term bull put sales to collect credit and reduce the initial cost basis by some 20%.  Still think this stock is trash and will head lower but with spread dropping partially ITM I’ll start looking at ways to take some more money off the table.

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Steve Smith
Steve Smith

Steve Smith have been involved in all facets of the investment industry in a variety of roles ranging from speculator, educator, manager and advisor. This has taken him from the trading floors of Chicago to hedge funds on Wall Street to the world online. From 1987 to 1996, he served as a market maker at the Chicago Board of Options Exchange (CBOE) and Chicago Board of Trade (CBOT). From 1997 to 2007, he was a Senior Columnist and Managing Editor for TheStreet.com, handling their Option Alert and Short Report newsletters. The Option Alert was awarded the MIN “best business newsletter” in 2006. From 2009 to 2013, Smith was a Senior Columnist and Managing Editor for Minyanville’s OptionSmith newsletter, as well as a Risk Manager Consultant for New Vernon Capital LLC. Smith acted as an advisor to build models and option strategies to reduce portfolio exposure and enhance returns for the four main funds. Since 2015, he has worked for Adam Mesh Trading Group. There, he has managed Options360 and Earning 360, been co-leader of Option Academy, and contributed to The Option Specialist website.

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