Losses on our AAPL position can be more than recovered by taking profits on our QQQ credit spread. We’re also looking better on our BA and GILD positions, as the markets have resumed their downtrends. This week, I’m looking at GLD (gold – not to be confused with Gilead!) to hedge our UUP position, but first, let’s take a look back at our first losing trade:

Apple Postmortem

Last Thursday in Big Deal #8, I set a $0.55 stop-loss on our AAPL $131-strike June calls. The options fell to $0.55 about two hours after publication, causing us to take a painful 64% loss on our $1,989 risked. Ouch. Of course, getting $0.55 was much better than the $0.09 the calls were trading at early on Monday, and the $0.55 stop-loss was designed to protect against a “total loss.”

Our first loser was a big one, but our short-term bullish play on AAPL was entered as a hedge against the market trending higher, since we had four bearish positions open all premised on the same thesis. If AAPL and the rest of the market had broken out to new highs, we could have taken big gains on AAPL while continuing to hold our other positions, waiting for the market to reverse lower and allowing us to take profits on them, as well. If, instead, the market went higher and didn’t reverse, then we’d have been able to take smaller losses on our bearish positions, while being compensated with the equivalent of an “insurance claim” on AAPL. Instead, we ended up paying a $1,274 “insurance premium” for an event that never happened – it was expensive insurance, but AAPL‘s losses were more than made up for by gains on our QQQ position, just as I anticipated.

Take Action on QQQ

We received $1.36 per share for entering our QQQ $113/$110 June credit call spread back on May 28. We executed the spread across 12 contracts per leg, collecting a total credit of $1,632, and risking a maximum of $1,968 should the trade have gone the other way. As of 11:35am ET on Monday, the ask on our spread was at $0.13, which means we could close out the position for $156, keeping the rest of our initial credit, or about $1,476. We could hold on to this position until it expires on Friday, but I think we should take it off the board as a hedge against the Fed doing something crazy at its meeting this week.

I would buy (buy-to-close) QQQ‘s $110-strike June calls, and sell (sell-to-close) QQQ‘s $113-strike June calls, closing out our spread. Let’s take this tail-end risk off the board and be happy with our $1,400+ in profits.

Even with the $1,274 losses in AAPL, we’re up $238 across the two positions, which leaves us looking good after taking gains on MCD ($405), PM ($440), and USO ($576); and we’re currently up on our BA and GILD credit call spreads, too. Our only play that isn’t working right now is our bullish calls on the PowerShares DB US Dollar Bullish ETF (UUP).

Investment Thesis

We entered UUP‘s $25-strike September calls at $0.58 last Monday, with the ETF at $25.12. It had just posted big gains the previous trading day, after U.S. economic data came out bullish, oil looked bearish, and Greece was unable to make its loan payment. UUP was down last Monday on what I perceived to be profit-taking, but its losses continued throughout the week, leaving us at $0.48 or so on our calls – down about 17%.

The Federal Reserve’s Federal Open Market Committee meets on Tuesday and Wednesday of this week, and after the conclusion of the two-day affair, Chairwoman Janet Yellen will give a press conference. Most U.S. economic data has been bullish, and if the Fed remains true to their “data dependency,” they should give some indication that they plan to hike interest rates in September, and that should be bullish for the greenback. Our calls were selected for September for this reason.

Greece remains in turmoil, and the world remains awash in oil. These factors should be bullish for the dollar, but if the Fed decides to keep asset prices inflated by announcing it won’t be hiking interest rates, the dollar could collapse to new lows. This would be bullish for gold, a traditional safe-haven that has underperformed as the dollar has firmed for most of the past year. It’s truly amazing that, in light of all of the events in the world, both UUP and the Gold Shares ETF (GLD) have been underperforming – I don’t think this is sustainable.

As you can see from the chart above, GLD has been staging a recovery since bottoming out south of $112 on June 5. The ETF has given back the gains it notched on June 10, but is staging a recovery in early trading today. A Greek blowout and/or hesitancy from the Fed could send gold soaring, while even the Fed taking a hard line is unlikely to knock GLD much lower.

What I’d like to do is enter a play that will perform well if I’m wrong on UUP, but can still be profitable even if I’m right. We have long calls on UUP, so instead of going long on GLD, I think we should enter a bull put spread – also known as a credit put spread. This will allow us to collect a premium and keep the whole thing so long as GLD doesn’t ground – it can be flat or post gains, and we’ll make money.

The Play

I want to sell (sell-to-open) GLD‘s $115-strike September puts as the dominant leg of our credit put spread, and I want to buy (buy-to-open) GLD‘s $110-strike September puts as the recessive leg of our credit put spread. We’ll receive a net credit for entering this spread, and our hope is that GLD‘s share price remains flat or rises, but doesn’t fall. Since the value of puts rise as a stock or ETF falls, and since we’ll be short the more expensive puts, we want the value of the puts to fall – get it? It would be best of all for GLD to close September above $115.

GLD‘s $115- and $110-strikes have the most open interest among its September puts. As of this writing, there were 8,576 contracts of open interest at the $115 strike, and 24,809 at the $110 strike. We’ll receive around $3.70 for selling the $115s, and we’ll pay around $1.76 to hedge ourselves with the $110s long. On a net basis, we’ll take a credit of about $1.94 or so, which means we can play this spread across 6 contracts per leg and remain well under $2,000 risked.

Sample Ticket:

Risk and Position Size: Our risk is equal to the distance between the strikes ($5) minus the credit we receive (around $1.94), or $3.06 per share, $306 per contract. Entering the trade across 6 contracts per leg of the spread would risk $1,836.

Objective: We’ll collect a premium and hopefully keep the whole thing. This play also insulates us against losses in our UUP position, although I expect both plays to be closed out profitably – unlike our AAPL/QQQ gambit.

Open Plays

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

Current bid/ask: $1.14/$1.28 (11:56am ET)

Target: $0.71 ask (for 20% gains)

As you can see from the chart below, shares of BA have generally trended lower since we entered this bearish/neutral position on June 28. We’ll continue to hold this play but look to take profits should the ask dip to $0.71.

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

Current bid/ask: $0.13/$0.15 (11:56am ET)

NEW TARGET: Close this position “at the market” for huge gains.

After falling to as low as $0.09 this morning, the bid on this spread – which we collected $1.36 for entering – has risen to as high as $0.15. Let’s not mess around – let’s take profits here. We were wiped out on AAPL, so we don’t want to risk any possibility of a whipsaw taking away our chance at net profits across the AAPL/QQQ hedge. We’d break even across the two plays at a $0.30 ask on this spread, but I want to do more than break even. Close out this position at the market.

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: $0.49/$0.50 (11:56am ET)

Target: $0.70 bid

I continue to like this position ahead of the Fed’s likely rate hike in September. We could get some serious action on it following Janet Yellen’s press conference on Wednesday, and we’re hedging our bets by entering a bull put spread on GLD, which also expires just two days after the Fed’s expected decision on interest rates.

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

Current bid/ask: $1.30/$1.43 (11:56am ET)

NEW TARGET: $0.81 ask (for 20% gains)

GILD has generally trended in the right direction, and it’s never even reached the $120 level of our short-call strikes. The stock and company are both great, but the broad market is under pressure, and GILD never experienced any pain from the most recent sell-off. Let’s take profits on this play, though, should the ask reach $0.81. We’d make $350, or about 20% on our $1,745 risked.

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)

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)

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)

Happy trading!

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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