Our Boeing (BA) $150/$145 July credit call spread fell to our price target of a $0.71 bid within eight minutes of this morning’s opening bell, allowing us to cover the position and claim $370 in profits on our $1,775 risked, for gains of more than 20%. If you haven’t taken profits yet, then you should, by buying-to-close BA’s $145-strike July calls, and selling-to-close its $150-strike calls. This, of course, is only for subscribers who entered the position previously.

Last Thursday, shortly after we covered our Gilead (GILD) $125/$120 July credit call spread for a $350 loss, our unhedged $126-strike calls on the iShares Russell 2000 ETF (IWM) hit our $1.45 price target, allowing us to take gains of nearly 30% – $561 on a $1,904 investment. With our BA position closing out today, that leaves us with a record of six winners and just two losers among our closed-out positions, for net gains of $2,504.

Unfortunately, all three of our open positions are fairly deep in the red, and with hindsight 20/20, it’s clear we should have dumped our bullish Dow Chemical (DOW) $52.50/ $55 July debit call spread instead of our bearish play in GILD on Thursday. Holding on to our IWM calls a bit longer would have also been wise. As of 10:20am ET today, our three open positions are down a total of $1,980, still leaving us up a net $500+ after six weeks, on pace for annualized gains of $4,541 – well above my mandate of $2,000, but with our losses concentrated in the past six weeks, things have clearly gotten more difficult, and the investment tides are turning.

I really expected both the dollar (UUP) and gold (GLD) to surge this morning, after Greece closed down its banks and stock markets. The country’s government has rejected the terms offered by its creditors and has called for a nationwide vote on the matter for July 5. The odds of Greek voters assenting to the demands of the EU and IMF are beyond remote, and Greece definitely looks headed for default. This was my thesis when I recommended plays on UUP and GLD many weeks ago, and even as the story has unfolded in line with my lowest expectations, UUP and GLD have been unable to capitalize – thus far. Although it would have been preferable to enter these positions at more opportune times, even now, I remain confident that both positions will be winners by their September expiration – still a long ways in the distance.

As for our DOW position, it’s time to pull the plug. On Thursday, I considered closing out our DOW position instead of GILD, or both our DOW and GILD positions, but as DOW was our only bullish-on-the-market play, I thought it best to leave it open just in case the market continued to be irrationally exuberant. Over the weekend, reality struck and it has sunk our DOW play. DOW is still a good stock, and it might even close July 17 above the $53.67 level we need to see, but with it trading more than $2 below there today, and with the bid on our spread down to an ugly $0.42 as of this writing (edit: it has since dipped lower), it’s time to salvage some of our capital to prevent a total loss.

I would sell (sell-to-close) DOW‘s $52.50-strike July calls, and buy (buy-to-close) DOW‘s $55-strike July calls, at the market. We paid $1.17 to enter this position, and we’ll receive around $0.30 to close it out – ouch. That’s a loss of around $1,500 on a play we entered to hedge against our bearish positions. Hedges haven’t worked out well for us – in fact, without them, we would have avoided our huge losses on AAPL and our currently losing position in GLD, as well as this one. We also need to reexamine our profit-taking policy, as several of our winners have gone on to bigger gains, while we’ve held our losers too long (despite my official stance of letting winners run and cutting losers short). The market environment has shifted in the past six weeks, and so should our policy.

But with the closeout of our positions in GILD, IWM, BA, and DOW over the past three trading days, we’ve nearly wiped the slate clean. All that will remain, following the DOW closeout, will be our September expiration plays in UUP and GLD. And this week, the play I have my mind may be short-lived, so we’ll still try to reach out and grab 20% gains, since we don’t have to worry about other, contra-correlated positions losing ground (UUP and GLD are hedged against one another, and they have a lot of time value remaining). I like short-term calls on XLU, the Utilities Select Sector ETF.

Investment Thesis

A few weeks ago, I introduced the new theme of inflation. This is something Americans have largely forgotten to be a problem, after six years of profligate money creation by the Federal Reserve resulted in deflation in some corners of the marketplace. In reality, the Fed’s funny money found its way into the stock and bond markets, and that’s why consumer prices haven’t appreciated as expected, but with a global selloff looming, some of that cash is going to find its way into the real economy, and this is threatening to spark inflation well above the Fed’s 2% target.

Inflation is bearish for the dollar and bullish for gold. But since the dollar is measured against other fiat currencies, and the other central banks of the world are even more intent on destroying their currencies than the Fed is on destroying ours, the dollar could gain relative to the euro, the yen, and the pound, even as its real purchasing power declines.

This is extremely bearish for bonds and other “fixed-income” investments, and since utilities stocks tend to trade in tandem with bonds, you might think inflation would be bearish for utilities, too. But utilities aren’t “fixed income” – they can generally raise their government-regulated prices to compensate for inflation, and this makes them sort-of inflation-protected securities.

From the start of the Fed’s QE on December 1, 2008 until the conclusion of QE III on Halloween 2014, XLU and the Vanguard Total Bond Market ETF (BND) were 91.56% correlated, while the year prior to that, they had a correlation of just 10.59%. Investors are beginning to turn to XLU for inflation protection, and when bonds rise and yields fall, this only makes XLU more attractive by comparison.

Here you can see XLU is on the rise this morning, along with bonds; but on Friday, XLU was the S&P 500’s top-performing sector, despite the yield on the 10-year Treasury rising to a multi-month high of 2.48%. XLU may be headed back to the $43 level it last touched just a week ago, and may even challenge its 50-day moving average line. I like calls on XLU as a short-term play.

The Play

I like XLU’s $43-strike July calls. As of 11:15am ET, they were trading at a bid/ask of $0.21/$0.25, with 3,170 contracts in open interest, and more than 500 contracts in early volume. I like these calls at the market, and we’ll set price target of +30%, rounded down to the nearest $0.05 increment; and a stop-loss of -40%, rounded (up or down) to the nearest nickel. We’ll risk an absolute maximum of $2,000 by entering the play, but we’ll try to keep a lid on our losses at a max of $800, given our 40% stop-loss. We’ll base our price target and stop-loss on our actual entry price.

Sample Ticket:

*= At the current ask price of $0.25, we could purchase 80 contracts for exactly $2,000, but should the ask rise above $0.25 in the time between this writing and the newsletter’s publication, subscribers will need to scale back the number of contracts they buy to stay within the $2,000 maximum risk limit.

-Happy trading!

Open Plays

UUP $25-strike September calls

Entry price and date: $0.58 on 6/8/15

Position Size: 32 contracts

Total Risked: $1,856

Current bid/ask: $0.41/$0.43 (11:56am ET)

Target: $0.70 bid (for 20% gains)

The dollar surged last week, allowing UUP to reclaim the $25 level on Friday, and it look poised to surge more today. But then, when U.S. markets opened, shares of UUP fell from $25 to around $24.90, near the bottom of their one-week range. I continue to be baffled by this movement, but I’m still as steady in my belief that this position will close out a winner. If the dollar remains stuck in this rut much longer, I may look to add to this position. The last time I thought of doing so, our calls were under $0.30, and we’d be looking a lot better now had we doubled down.

GLD $110/115 September credit put spread

Entry price and date: $1.94 credit on 6/15/15

Position Size: 6 contracts per leg

Total Risked: $1,836 ($1,164 credit received)

Current bid/ask: $2.23/$2.40 (11:56am ET)

Target: Hold until expiration for 64% gains.

Gold should also be performing well amid the Greek chaos, and I expect GLD to close well above $115 by September. Yes, we could have timed our entry here better, but in the end, we’ll be happy to cash this play in for gains. The perma-optimists can’t keep a lid on both gold and the dollar much longer – you can feel the tension building.

DOW $52.50/55 July debit call spread

Entry price and date: $1.17 on 6/19/15

Position Size: 17 contracts per leg

Total Risked: $1,989

Current bid/ask: $0.34/$0.38 (11:56am ET)

New Target: Sell “at the market” to salvage some of our capital.

Our DOW play hasn’t worked out, and now’s the time to take the risk off the board. After holding up decently for most of our holding period, DOW shares plummeted today, and took our call spread with them. Now the stock is in danger of falling through its 50-day moving average line, and it may have difficulty reclaiming that threshold. Let’s take the $500 or so we can get for our spread here and redeploy it into this week’s play.

Previous Winners

PM $80/$82.50 September debit put spread

Entry price and date: $0.97 on 5/18/15

Position Size: 20 contracts per leg

Total Risked: $1,940

Closed: Sold at $1.19 on 6/5/05 (10:43am ET)

Profit/ Loss: +22.7% ($440 profit)

MCD $95/$100 June debit put spread

Entry price and date: $2.15 on 5/21/15

Position Size: 9 contracts per leg.

Total Risked: $1,935

Closed: Sold at $2.60 or higher on 5/28.

Profit/ Loss: +20.9% ($405 profit)

BA $150/145 July credit call spread

Entry price and date: $1.45 credit on 5/26/15

Position Size: 5 contracts per leg

Total Risked: $1,775 ($725 credit received)

Closed: Covered at $0.71 on 6/29/15 (9:38am ET)

Profit/ Loss: +20.8% ($370 profit)

QQQ $113/110 June credit call spread

Entry price and date: $1.36 credit on 5/28/15

Position Size: 12 contracts per leg

Total Risked: $1,968

Closed: Covered at $0.16 on 6/15/15 (12:16pm ET)

Profit/ Loss: +90.2% ($1,776 profit)

USO $21-strike July puts

Entry price and date: $1.48 on 6/1/15

Position Size: 12 contracts

Total Risked: $1,776

Closed: Sold at $1.96 on 6/5/15 (9:33am ET)

Profit/ Loss: +32.4% ($576 profit)

IWM $126-strike July puts

Entry price and date: $1.12 on 6/22/15

Position Size: 17 contracts

Total Risked: $1,904

Closed: Sold at $1.45 on 6/25/15 (2:18pm ET)

Profit/ Loss: +29.5% ($561 profit)

Previous Losers

AAPL $131-strike June calls

Entry price and date: $1.53 on 6/4/15

Position Size: 13 contracts

Total Risked: $1,989

Closed: Sold at $0.55 on 6/11/15 (2:23pm ET)

Profit/Loss: -64% ($1,274 loss)

GILD $125/120 July credit call spread

Entry price and date: $1.51 credit on 6/11/15

Position Size: 5 contracts per leg

Total Risked: $1,745 ($755 credit received)

Closed: Covered at $2.21 on 6/25/15 (12:21pm ET)

Profit/ Loss: -20% ($350 loss)

Jason’s Bio

Jason Seagraves is a 37-year old writer, options trader, entrepreneur, homeschool dad, and evangelist for free-market economics. He launched a successful dot-com business while still in college in the late 90’s, and then went back to school to graduate with a degree in Business, concentration in Finance, from Siena Heights University in 2006. That year, he also earned a Series 7 stockbroker’s license, but opted to pursue a career in freelance writing. From 2008 through 2013, he worked as a “ghostwriter” for a popular stock and options trading newsletter, before joining up with Dividend Lab for a stint in 2014. Now he’s back providing market commentary and actionable options trades for the Big Deal Newsletter, and he’s happy to be here!

 

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