Banking on Short-Side Profits
by Michael Shulman 04/23/08
I like to use past trades to illustrate how you can make money on new recommendations -- and my favorite is a very successful short position based on problems with Citigroup and the entire banking sector.
The performance of the financial sector is often a harbinger of how the rest of the market will trade. When the banking stocks are doing well, the market typically finds itself in an uptrend. But when the lenders are the ones finding themselves with empty pockets -- and, in turn, their stocks start to slide -- it's not uncommon for the broader indices to tumble as well.
The subprime-lending mess was accelerating last fall, when I was sitting in the "green room" at Fox Business. The room isn't actually painted green, mind you, but this is the common name for waiting rooms for TV shows. In any event, this particular room ended up making my subscribers a lot of green, so the name is pretty appropriate!
In the green room that morning was Meredith Whitney, a brilliant analyst with Oppenheimer, and she had just put out a "Sell" rating on Citigroup (C). This had led to death threats and an appearance on Fox that morning.
We went over some gruesome numbers, and although Wall Street didn't like her outlook, I could see exactly where she was coming from. When I got back to the office, I looked at more and more data on Citi, and it was clear to me that the company needed to shed assets and cut their dividend -- and that shareholders weren't exactly going to be receptive to it when it happened.
So, I decided to not only short this bank -- but also the entire financial sector -- through buying put options on Citi as well as on the XLF, which is an Exchange-Traded Fund that represents the banking sector.
Although market volatility is a short-side investor's best friend, as it can help falling stocks to go down even more quickly than they already were, sometimes a market sell-off can become our worst enemy, particularly when we're trying to establish new put-option positions at a time when premiums are soaring.
Such was the case in mid-November when we were establishing these positions. We got into the XLF March 28 Puts relatively easily at $1.44 apiece, but we had to wait for a couple of days for the Citibank puts to trade down to a reasonable entry price.
I issue Buy Under prices with each recommendation to ensure that my subscribers get the best-possible risk/reward scenario. This means that if we keep our cost basis low, then the higher the option trades, the better our profits can be. And if the trade turns against us, that also means the less we can lose.
As I mentioned, Citi was not an easy trade -- the puts were bouncing around -- and we waited a bit waited a bit more and then got in, buying the June 30 Puts at $2.15. This was a bet that shares, which were worth $35 at the time, would slide below $30.
Our patience was rewarded just two months later when we closed the puts at six bucks – a near-triple!
Meanwhile, our XLF put -- which was a $1.44 bet that this $31-a-share ETF would drop below $28 -- paid off for us in the same time frame.
In fact, we sold it for $3.50 on the day after we closed the Citigroup put. All told, we banked a 179% gain in Citi and another 143% return in the XLF, while the broader market was having one of its toughest weeks.
Now, while I love to talk about winning trades, there's the occasional position that turns against us. As I said earlier, if the financials get a boost -- whether through a Fed interest-rate cut or some other good news -- then it's time to head for the hills, if you hadn't already done so.
With the same alert that we closed our XLF puts, I'd told subscribers to establish another XLF position -- one with a June expiration and a $23 strike price, as it had traded down to $27 and had some more downside left in it.
Unfortunately, we lost some pennies on that one when the Fed made an emergency rate cut, which helped the stock and hurt our puts. So, we closed out the position with a 3.5% loss -- but I love this trade anyway.
Why? Discipline and communication, plain and simple.
We're using trading tactics -- that is, buying put options -- to make smart short-side investments. This means that things can change frequently for our positions, so I aim to stay in touch as much as possible to let everyone know when to sit tight and when to protect their capital.
I had told subscribers that Citi would bottom when the stock hit $25 bucks a share. The alert telling folks to close out the puts was sent out when the stock hit $26, because trying to perfectly time a bottom is surefire way to get in trouble and give hard-earned profits back.
The stock went down to $24.47 the next day but then bounced like a lacrosse ball and shot straight up above $28. Whether it was helped by bullishness surrounding the Fed actions and/or by investors looking to pick shares up at bargain-basement prices, the fact is that we were smart to take our short-side profits and run when we did.
You have to stick with that kind of discipline -- and it's my mission to not only bring strong short-side recommendations to my subscribers, but to stay in touch with the progress of our positions. This means sending out alerts when we should hang in there and ride out the volatility, and also let subscribers know when it's time to hit the exits and preserve our winnings.
Although many investors haven't yet discovered the amazing profits and potential that the short side holds, those who are journeying with me on the so-called "dark" side are blazing their way to truly spectacular returns.
When markets, sectors and stocks are falling and other investors are heading to the hills, we are confidently jumping in and riding these names down as far as they can go.
We've made some nice returns so far, and there are plenty more to come. And I'm already looking for the next batch of opportunities that will make my subscribers tons of dough.
These goals, and these profits, can be yours with ChangeWave Shorts.
by Michael Shulman 04/23/08
The performance of the financial sector is often a harbinger of how the rest of the market will trade. When the banking stocks are doing well, the market typically finds itself in an uptrend. But when the lenders are the ones finding themselves with empty pockets -- and, in turn, their stocks start to slide -- it's not uncommon for the broader indices to tumble as well.
The subprime-lending mess was accelerating last fall, when I was sitting in the "green room" at Fox Business. The room isn't actually painted green, mind you, but this is the common name for waiting rooms for TV shows. In any event, this particular room ended up making my subscribers a lot of green, so the name is pretty appropriate!
In the green room that morning was Meredith Whitney, a brilliant analyst with Oppenheimer, and she had just put out a "Sell" rating on Citigroup (C). This had led to death threats and an appearance on Fox that morning.
We went over some gruesome numbers, and although Wall Street didn't like her outlook, I could see exactly where she was coming from. When I got back to the office, I looked at more and more data on Citi, and it was clear to me that the company needed to shed assets and cut their dividend -- and that shareholders weren't exactly going to be receptive to it when it happened.
So, I decided to not only short this bank -- but also the entire financial sector -- through buying put options on Citi as well as on the XLF, which is an Exchange-Traded Fund that represents the banking sector.
Although market volatility is a short-side investor's best friend, as it can help falling stocks to go down even more quickly than they already were, sometimes a market sell-off can become our worst enemy, particularly when we're trying to establish new put-option positions at a time when premiums are soaring.
Such was the case in mid-November when we were establishing these positions. We got into the XLF March 28 Puts relatively easily at $1.44 apiece, but we had to wait for a couple of days for the Citibank puts to trade down to a reasonable entry price.
I issue Buy Under prices with each recommendation to ensure that my subscribers get the best-possible risk/reward scenario. This means that if we keep our cost basis low, then the higher the option trades, the better our profits can be. And if the trade turns against us, that also means the less we can lose.
As I mentioned, Citi was not an easy trade -- the puts were bouncing around -- and we waited a bit waited a bit more and then got in, buying the June 30 Puts at $2.15. This was a bet that shares, which were worth $35 at the time, would slide below $30.
Our patience was rewarded just two months later when we closed the puts at six bucks – a near-triple!
Meanwhile, our XLF put -- which was a $1.44 bet that this $31-a-share ETF would drop below $28 -- paid off for us in the same time frame.
In fact, we sold it for $3.50 on the day after we closed the Citigroup put. All told, we banked a 179% gain in Citi and another 143% return in the XLF, while the broader market was having one of its toughest weeks.
Now, while I love to talk about winning trades, there's the occasional position that turns against us. As I said earlier, if the financials get a boost -- whether through a Fed interest-rate cut or some other good news -- then it's time to head for the hills, if you hadn't already done so.
With the same alert that we closed our XLF puts, I'd told subscribers to establish another XLF position -- one with a June expiration and a $23 strike price, as it had traded down to $27 and had some more downside left in it.
Unfortunately, we lost some pennies on that one when the Fed made an emergency rate cut, which helped the stock and hurt our puts. So, we closed out the position with a 3.5% loss -- but I love this trade anyway.
Why? Discipline and communication, plain and simple.
We're using trading tactics -- that is, buying put options -- to make smart short-side investments. This means that things can change frequently for our positions, so I aim to stay in touch as much as possible to let everyone know when to sit tight and when to protect their capital.
I had told subscribers that Citi would bottom when the stock hit $25 bucks a share. The alert telling folks to close out the puts was sent out when the stock hit $26, because trying to perfectly time a bottom is surefire way to get in trouble and give hard-earned profits back.
The stock went down to $24.47 the next day but then bounced like a lacrosse ball and shot straight up above $28. Whether it was helped by bullishness surrounding the Fed actions and/or by investors looking to pick shares up at bargain-basement prices, the fact is that we were smart to take our short-side profits and run when we did.
You have to stick with that kind of discipline -- and it's my mission to not only bring strong short-side recommendations to my subscribers, but to stay in touch with the progress of our positions. This means sending out alerts when we should hang in there and ride out the volatility, and also let subscribers know when it's time to hit the exits and preserve our winnings.
Although many investors haven't yet discovered the amazing profits and potential that the short side holds, those who are journeying with me on the so-called "dark" side are blazing their way to truly spectacular returns.
When markets, sectors and stocks are falling and other investors are heading to the hills, we are confidently jumping in and riding these names down as far as they can go.
We've made some nice returns so far, and there are plenty more to come. And I'm already looking for the next batch of opportunities that will make my subscribers tons of dough.
These goals, and these profits, can be yours with ChangeWave Shorts.
A quick quiz -- what are the three things you can short? Check your answers below.
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