Below please find subscribers’ Q&A for the June 17 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley, CA with my guest and co-host Bill Davis of the Mad Day Trader. Keep those questions coming!
Q: What is the best way to buy long term LEAPS for unlimited profits?
A: There is no such thing as unlimited profits on LEAPS; they are specifically limited to about 500% or 1,000%. Most people will take that. The answer is to wait for crash day. That’s when you dive into LEAPS, or during very prolonged sell-offs like we had in February or March. That’s where you get the bang per buck. On a capitulation day, you can pick up these things for pennies.
Q: How do you explain that all the cities and states that had major COVID-19 outbreaks and deaths are controlled by Democrats?
A: That’s like asking why you don’t get foot and mouth disease in New York City. The majority of US cities are Democratic, while the rural areas tend towards Republicans and the suburbs that flip back and forth. So, you will always get these big hotspots in cities where the population density is highest and there is a lot of crowding because that’s where the people are. Covid-19 is a disease that relies on within six-foot transmission. You are not going to get these big outbreaks in rural places because there are few people. Horse, cow, and pig diseases are another story. That is one reason the disease has become so politicized by the president.
Q: What is the time horizon for your picks?
A: It’s really a price function rather than a time horizon. Sometimes, a trade works in a day, other times it’s a month. I try to send out a large number of trade alerts because we have new subscribers coming in every day and the first thing they want is a trade alert. Occasionally, I’ll make 10% in a day and I take that immediately.
Q: I’m a new investor; trading in a pandemic is one thing, but what about other risks like volcanic eruptions, major solar flares, or global war? How do I prepare for one of three of these things in the next 25 years?
A: I’m actually worried about all three of those happening this year. If you lived through 1968, everything bad tends to happen in one year, and bad things tend to happen in threes. This is a year where we’re kind of making it up as we go along because there is no precedent. The playbook has been thrown out. Those who always relied on trading stocks and securities predictable ranges got wiped out.
Q: Beijing has quarantined its population again and canceled flights; is this going to cause the Chinese government to ramp up the blame game with the US?
A: Absolutely, the US is the number one Corona incubator in the world by far. We have 120,000 deaths—China had 4,000 deaths with four times the population. Many countries are blaming us for keeping this pandemic alive and spreading it further. But I don’t think foreign relations are a high priority right now with our current government. That said, it is easier for a dictatorship to control an epidemic than a democracy. In China, they were welding people’s doors shut who had the disease.
Q: Do you think taking away the $600 or $1200 stipend for the unemployed is going to crush the chances for many trying to get back to work?
A: It will. A lot of the stimulus measures only delay collapse by a couple of months. The PPP money was only for 2 months; I know a lot of companies are counting on that to stay in business. Some state unemployment benefits run out soon. Either you’re going to have to start forking up $3 trillion every other month, or you’re going to get another sharp downturn in the economy. Cities are bracing themselves for the worst eviction onslaught ever. Mass starvation among the poor is a possibility.
Q: Where do you place stops on vertical spreads?
A: Since vertical spreads don’t lend themselves to technical analysis, you have to draw a line in the sand—for me, it’s 2%. If I lose 2% of my total capital, or 20% on the total position, then I get the heck out of there and go look for another trade. That’s easy for me to do because I know that 90% of the time my next trade is a winner.
Q: Why did you sell your S&P 500 (SPY) July $330/$320 put spread at absolutely the worst moment?
A: The market broke my lower strike price, which is always a benchmark for getting out of a losing trade. When you go out-of-the-money on these spreads, the leverage works against you dramatically. This market isn’t lending itself to any kind of conventional historic analysis. The market went higher than it ever should have based on any kind of indicator you’re using. When the market delivers once in 100 year moves like we had off the March 23 bottom, you are going to be wrong. However, we immediately made the money back by putting on a (SPY) July $335/$340 put spread with a shorter maturity, and a (SPY) July $260-$$270 call spread. If you’re in this business, you’re going to take losses and be made to look like a perfect idiot, like I did twice last week.
Q: Who is getting involved down 10%?
A: I would say you’re getting both institutions and individuals involved down 10%. You keep hearing about $5 trillion in cash on the sidelines, and that’s how it’s coming to work. Plus, we have 13 million new day traders gambling away their stimulus checks.
Q: Why have you not put on a currency trade this year?
A: With the incredible volatility of the stock market, there were always better fish to fry. Currencies haven’t moved that much, and you want stocks that are dropping by 80% in two months and gapping up 200% the next two months. So, in terms of trading opportunities, currencies are number three on that list. Would you rather buy Apple (AAPL) for a 75% move, or the Euro (FXE) for a 6% move? My favorite has been the Aussie (FXA) and it has only gone up 20%.
Q: Do you issue trade alerts on LEAPS?
A: I don’t; most trade alerts are short term trades in the next month or two because we have to generate a large number of them. However, in February, March, and April, we started sending out lists of LEAPS. We sent out about 25 LEAPS recommendations. We did ten for Global Trading Dispatch (BA), (UAL), (DAL), ten for the Mad Hedge Technology Letter (AAPL), (MSFT), and five for the Mad Hedge Biotech & Health Care Letter (BIIB), (PFE). Even if you got just one or two of these, you got a massive impact on your performance because they did go up 500% to 1,000% in 2 months, which is normally the kind of return you see in two years. So, getting people to buy all those LEAPS was probably the greatest call in the 13-year history of this letter. I know subscribers who made many millions of dollars.
Q: I am new to trading; other than placing a trade, what do you recommend I get a handle on in the learning process?
A: We do have two services for sale. We have “Options for the Beginner,” and that I would highly recommend, and I’ll make sure that’s posted in the store. You can’t read or study enough. If you really want to go back to basics, read the 1948 edition of Graham and Dodd, where Warren Buffet got his education actually working for Benjamin Graham in the ’40s.
Q: Will Occidental Petroleum (OXY) go bankrupt?
A: No, they have the strongest balance sheet of any of the oil majors, so I would bet they would hang around for some time. They also have no offshore oil, which is the highest cost source of oil. But it’s going to be a volatile time for a while.
Q: Usually the selling is telling me to go away. With this market, the amount of money on the sidelines, is it going to be a stock picker’s market?
A: Yes, like I said the playbook is out the window. Normally, you get a month’s worth of trading in a month, now you get a month's worth in a day or two. So, we’re on fast forward, Corona is the principal driver of the market and no one knows what it’s going to do. The teens were a great index play. The coming Roaring Twenties will be a stock picker’s market because half of the companies will go out of business, while many will rise tenfold. You want to be in the latter, not the former. And index gets you the wheat AND the chaff.
Q: Will there be another opportunity to buy LEAPS?
A: Yes, especially if we get a second corona wave and it slaps the market down to new lows again. There’s a 50/50 chance of that happening. The rate of Corona cases is now increasing exponentially. We had 4,000 new cases in California yesterday.
Q: How do you see Main Street two years from now? Will the battered middle class ever recover?
They will if they move online. I think main street will be empty in two years. Only the largest companies are surviving because they have the cash reserve to do so. And they seem to be able to get government bailout money far better than the local nail salon or dry cleaner. Again, this was a trend that had been in place for decades but was greatly accelerated by the pandemic. I was in Napa, CA yesterday and half of the storefront shops had gone out of business.
Q: What are your thoughts on the spacecraft company Virgin Galactic (SPCE)?
A: Great for day traders, great for newbies, but not real investment material here. I don’t think the company will ever make money. It was just part of the temporary space had. Better to read about it in the papers and have a laugh than risk your own hard-earned money. Elon Musk’s Space X though is a completely different story.
Q: Which is the better buy now: Walmart (WMT), Costco (CSCO), or Target (TGT)?
A: I’d probably go for Target because they have been the fastest to move to the new online order and curb pickup universe. But Costco is also a great play.
Q: When should I buy Tesla?
A: On the next meltdown or down 30% from here, if and whenever we get that. It’s going to $2,500, then $5,000.
Q: With QE infinity, it doesn’t sound like we’ll get to LEAPS country. Do you agree?
A: No, I wouldn’t agree because at some point, the government might run out of money, the bond market won’t let them borrow anymore, and the money that gets approved doesn’t actually get spent because the works are so gummed up. Plus, Corona is in the driver's seat now. What if we’re wrong and we don’t get 250,000 cases by August, but 500,000 cases? 20 million? There are 100 things that could go wrong and get us back down to lows and only one that can go right and that is a Covid-19 vaccine. We’ve essentially been on nonstop QEs for the last 10 years already and the market has managed many 20% selloffs during that time. If we pursue a Japanese monetary policy, we will get a Japanese result, near-zero growth for 30 years.
Good Luck and Stay Healthy.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
