Samwise Model Portfolios
The portfolios below are separated by launch dates. Each portfolio is entirely independent and has no bearing on any other model portfolio. We launch entirely new portfolios during each market correction as an illustrative tool for new subscribers who weren't present during...
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Sometimes
Do you have any thoughts on the last eight trading sessions before today resembling an island reversal?
Given the impending nature of a correction, at what point, if any, do you consider a longer put position? I know you mention in your materials that it’s not great to bet against the market, but I would think an argument could be made for considering a hedge against a 10-12% correction starting sooner than expected. You mentioned that if the correction has already begun, we’d be roughly a third of the way through it, but that still leaves ~$25 of movement in strike price to benefit from. If dated far enough out to include the likely correction timeline in either expected scenario, the position could always be added to at the peak for a discount should the expected rally occur first. This is just what’s coming to mind for me, so I would love to hear your thoughts on this, as well as any holes you see.
So it’s nearly impossible to forecast a correction as we usually don’t know that we’re in one until it’s like half-way done.
For example, this sell-off resembles a correction, but we did fall 4% and this could be nothing more than just a regular 4% pull-back.
Also, we don’t really hedge against corrections, we hedge more against the potential of a crash. A regular correction of 10-12% isn’t going to do anyting at all to any of our portfolios. But a crash definitely could.
So when we’re putting on hedges, it’s to protect against that possibility — the QQQ falling under $400 or Nvidia falling back under $90. Things like that.
I’ll caution that betting on the downside of the market or even getting into that mental framework is pretty dangerous. Been there and done that. It’s best not to think in terms of trying to capitalize on the market’s downside.
What we can do is hedge when the market becomes extremely overextended or sell covered calls for the same reasons. But the covered calls need to be very conservative — like Nvidia $170’s we wanted to sell when Nvidia was near $150. The covered call targets hold be prices you’d be very happy selling the underlying at. For us, that was/is $170 on Nvidia for example.
In terms of our hedges, our entire Lannister portfolio is already hedged minus NVDL which only makes up a small portion of our portfolio. There, we’re hedging through selling covered calls. We’re also already fully hedged in Tyrell with NVDA $85 puts and QQQ $450 puts.
It’s really Arryn and Tarly that we need to still places some hedges against. And both those portfolio have really really low entries. The QQQ would need to fall substantially more than 12% to see those cost-basis again.
So I think we’re okay at the moment hedging wise.
Thanks for the reply; I appreciate the opportunity to learn through your feedback. I’m still exploring how to combine your methods with my situation and active positions, and do have a tendency to look for intermediate term plays that can add to the balance. I may keep a modest discretionary fund for the occasional opportunity, but I like your approach and am working toward finding profitable closes for my current positions and timing the availability of funds with this next correction. Thanks for sharing.
In terms of the island reversal, of course a case can be made for an island top as we have back-to-back unfilled gaps between $503 and $508. That’s always a possibility when you have back-to-back unfilled gaps. It’s not a very common pattern for the market on a broad scale. I don’t think we see it often on a large daily scale like we have now.
I do think a market sell-off — if we have one here — is at worst going to be a correction and relatively minor one. After which the market is likely and swiftly going back to its highs.
We’ve had too many successive corrections in a short period of time. Usually when that happens, they get progressively smaller as there are less built-in profits in the market.
The most logical place for the QQQ to go would be $470 at the lows. That’s a 9% correction that fills a $5.00 gap from $477.40 down to $472. With a short-term breach of $470, we might get down to $467-$468 which gets us closer to 10%. We were there just a month or so ago.
Okay, thanks. I’ve not gotten into candlestick patterns much, but I did learn that one a while back and it jumped out at me in one of the graphs you posted, so I was curious.
The Nov 22 500$ put now (11h40) trades at or slightly below 4.00 $. What is the updated plan ?
QQQ Covered calls is not an option to me since I don’t own the underlying.. the alternative is just sell these two options at some point? Or is it better to purchase the underlying to support covered calls?
You’re right, we can’t sell covered calls without owning the underlying, otherwise it wouldn’t be a named a _covered_ call. I don’t know why Sam mentionned it in this post.
So it’s true it’s technically not a “covered call,” what we’re doing is creating a spread. Using the covered vernacular to be clear that we’re not selling our long position but selling a call option against that long position. I’ll often refer to it as covered since we own a long call at a lower strike.
However, we’re creating a spread by selling calls against our long call position. And that is an extremely important hedging tool. There’s big limitation in not being able to execute that strategy. As selling calls allows us to participate long while reducing risk at a lower level than buying puts.
Sometimes buying puts isn’t the way to go because the cost of protection could be very expensive.
Ok.. I understand this line of thought.. in terms of the 5K challenge, it really is a derivatives project, therefore owning the underlying is not a needful thing. In light of your explanation, I will consider such terms as interchangeable where this challenge is concerned.
I need to do homework to better understand creating a spread. See y’all tomorrow..
So it’s possible to execute the strategy by purchasing long calls. If we couldn’t buy call-spread, we’d just buy the long call and play the rebound during corrections.
That could be more effective at times or less effective at times. For example, suppose we had purchased the November $110 call options when Nvidia was trading at $100 a share back in September. There’s a good chance that those November call options would have performed better than would have a spread. If we compare to the 105-115 call spread at the time, there’s a decent chance that this spread underperformed the $110 calls alone. That’s because of how far Nvidia rallied.
At the same time, the call spread itself is a little more conservative because we only need NVDA to close north of 115 and it’s trading way above that right now.
There are certainly big limitations in not being able to create spreads. But it can be done without it.
Being able to sell calls against a long position whether it’s common stock, Long calls or long leaps is critically important. It’s literally a hedging tool in those cases.
This helps a lot.. thank you!
Hi Sam, do you plan to trade in the last half-hour of this session ?
Darn. I frenetically refreshed the Daily page for new posts all day, and the last half hour every minute or so. I’ve never figured that you added updates within this post. I was only searching for new comments. That’s why I was concerned about not hearing from you all day.
So the plan was to wait until tomorrow as we never reached a 50-RSI on the hourly. We haven’t reached any of our targets yet to sell or hedge.
Right. I had an opportunity to buy the put at 3.90, but didn’t.
If we put on a trade in the last half hour, we would make a separate post about it. In fact, we’ll generally give a heads up before putting on a trade.
Trying to get text notifications working to make this a lot easier. But it’s actually becoming a far more complex issue than I first thought.
Sam, it looks like the less-than bullish sentiment today might be indicative of a correction, but should we give it one more day for the QQQ to conclusively break $500 before saying that we are in full blown correction?
It’s still too early at this point to draw a conclusion one way or the other regarding the correction. The market could still very easily take off after a retest. We won’t know until we see the strength of selling in the next leg lower (if it happens at all).
Tuesday pre-market : it looks like QQQ is stuck like a magnet to 500 as if pro-traders load/unload dynamically around the 500 strike price for delta-hedging.
“BOJ will bid farewell to QE and embrace rate hikes in policy review (RT)”
Do you think this may trigger another August correction?
I think if the market is ripe for a correction, it’s going to correct. I don’t think the BOJ’s action or monetary policy is large enough of an impact to cause U.S. market to enter into a correction. But it could act as an accelerant to an already developing correction. Especially with last week’s comments from Powell that lead to some selling on Friday. But so far the market doesn’t seem to are much about any sort of news as the market is barely down today. The QQQ is now trading flat on the session while the SPY is down .24%.