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Posted by Martin November 13, 2023
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Options Portfolio Management

When buying stocks in a cash account, you can go all in and be fully invested. But when you are buying stocks on margin and, on top of that, trading unsecured options, proper options portfolio management is a must.

I learned my lesson the hard way when, during the raging bull market, I invested everything in stocks and sold naked strangles. Then, the market turned bearish, and I was sweating to keep it afloat. And it cost me a lot of money!

Portfolio management doesn’t have to be complex. It is simple. What is difficult is the self-discipline to follow the rules.

When trading options, you will need a margin account (unless you plan to trade only basic strategies such as covered calls and cash-secured puts). And margin will throw a wrench into investors’ simplistic thinking. It all suddenly becomes complex and scary.

If you decide to trade SPX trades with us (subscribe) or on your own, you will need a set of rules to follow, such as allocation, positioning, cash management, and scaling the trades.

Here are the rules I set up for our portfolio (though I must admit, in 2021 mania, I too became reckless, and I am still cleaning up the mess):

Options Portfolio Management – Cash allocation


Cash allocation in portfolio management was my most significant issue. I hated to keep cash in a brokerage account, earning nothing. This drove my urge to be fully invested, although I knew it was wrong.

The rule is to keep 30% of the entire portfolio in cash but invest in a cash equivalent ETF. Some brokers, such as Fidelity, offer suitable money market ETFs that earn a good interest (currently up to 4.25%, not much, but better than nothing). Others don’t provide anything, and the cash makes zero return.

In this case, I use short-term bond ETFs such as ICSH and SGOV. They hold value during turbulent times and pay a decent yield.


Options Portfolio Management – Options position sizing


No matter how much money you have in your account, set a realistic position sizing. If we keep 30% of our portfolio in cash, then put 20% of your portfolio for options trading.

If 20% appears to be too large for you and you feel scared to deploy it, then go smaller. You can always scale up later.

Once you have the amount set, determine the trades you would trade. I decided to sell one Iron Condor contract with 2 DTE and $5 wide spread, one Iron Condor contract with 7 DTE and $5 wide spread, and one Iron Condor contract with 30 DTE and $5 wide spread.

That means over a month-long period, I trade 13 trades and risk no more than $1,500 on any given day or week. And I keep trading these positions again and again. I open new trades only when the old ones expire (or if I have to roll them, then after they finish, too). Do not scale the trades!


Options Portfolio Management – Scaling up


Do not scale trades up! At least not initially. Keep trading the same trades repeatedly, and do not use proceeds from your previous trades to open more trades! This is a common mistake and a trap everyone can easily fall into. Look at it this way: you trade Iron Condors, and you are successful in 9 trades, but the 10th trade can wipe out those trades if something goes wrong. And if you scale your trades up, you can wipe out not only the previous nine trades but your entire portfolio.

Instead, use your proceeds to buy other investments.

When can you scale up? Once all your allocations are met, then you can scale up.


Options Portfolio Management – Equity Allocation


Start building your portfolio base by buying good companies. Use proceeds from the options to buy stocks. Do not gamble with these stocks. Do not buy penny stocks or high-flying growth stocks. This should be your base, not a roller coaster. Since you will purchase these equities in a margin account, stock market fluctuations will still give you a headache, even with these lazy, good-quality stocks. But if you blow your options trading, you will not blow your entire account!

I blew my account many times, and this strategy saved my account often. After I wiped out cash for options trading, I still had enough equity in good-quality stocks.

I keep 50% of my account in dividend-paying stocks as my base.


Options Portfolio Management – Summary


To summarize these rules, this is what I do in my accounts:

  • Build and keep 30% in cash equivalents such as ICSH or SGOV ETFs. When the markets rallied, I added more cash to stay at 30% or buy long-term equities. When the markets crash, I start selling ICSH or SGOV to release cash and buying power to avoid margin calls.
  • Build 50% of the portfolio in long-term, good-quality stocks. I prefer dividend stock, so they also generate cash. I never sell these positions unless I must satisfy margin requirements. But once the margin requirements are satisfied, I immediately buy these positions back.

  • Use 20% of the portfolio for options trading. I do not necessarily use it all, but start small and add slowly.

  • Use proceeds from options trading to buy cash ETFs and dividend stocks.

  • Scale your options trading up only when your other allocations are met. You have 30% in cash, 50% in equity, and more cash on hand. Then, slowly add more trades.

  • Scaling up options trades could be widening the spreads (for example, going from a $5 to $10 spread) or adding more contracts. If you are unsure and not ready to scale up, keep unused funds in cash. For example, I “save” all unused funds and proceeds from options trading in the ICSH fund, while I save 30% cash in the SGOV fund.

Following these rules will save you a lot of headaches when the markets crash or go into a bear market. You will also have enough cash on hand to buy stocks if a great opportunity arises (and lately, there was a lot of opportunity, but I was out of money).


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Posted by Martin November 12, 2023
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Apply force on the market and it will distort

When you try to force on the market any agenda you may have, the market will react. And usually not the way you want. We have seen this in 2020 when politicians decided to shut the markets and the entire economies down. They distorted not only the markets but the entire economies.

People get this wrong. They think that everything we are experiencing with the stock market results from a lousy economy due to too much money in the system. It is true, but partially. The primary reason is elsewhere. The primary cause is the abrupt stop of the world economy. The rest are consequences, like a domino.

First, they stopped the markets. Then, they had to pour trillions into the markets to save them. The pendulum was pushed toward one side. Because of the trillions in the system, people went on a spending spree. That raised inflation. Did it hurt businesses? No, companies made trillions in profits! Everyone was happy, and everyone was spending like crazy.

Inflation was rising, and politicians and FED got worried. But even during high inflation, people kept spending like crazy. Airports were full. Vacation destinations were booked months ahead. Some restaurants were booked weeks ahead (check Texas Roadhouse, for example). And politicians were worried, so they swung the pendulum in the opposite direction. And to the other extreme. Now, we have high inflation and the risk of halting the economy once again.

But the markets will react and resist the force. The question is how and which direction it will resist.

And the recent force on the markets we saw was EV. During the hype, everyone was about electric cars. Tesla was going to the moon. California applied another force on the market, approving a bill to go full electric by 2030 (or so).

The pendulum was moved to another extreme. Today, the EV pushers are surprised that no one is buying electric cars. Tesla is forced to lower prices, narrowing its margin beyond sustainability. GM just announced suspending manufacturing of EVs whatsoever, and Ford is following suit.

I do not say that there is no market for the EVs. There is. But we are not ready for it. The electric grid is not prepared for it. The charging system across the country is not ready. And customers are not prepared to pay horrendous money for overpriced cars. We need to grow to it naturally and not by the dictate of politicians (Communists tried this in their central economies and failed miserably).

Apply force on the market, which will do the opposite of what you wish for.


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Posted by Martin November 07, 2023
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Expanding the Crumbs strategy to regular stocks

Two months ago I started trading the Crumbs strategy against SPX spreads. The strategy is to move short strikes so low that the trade will be very safe and a likelihood of getting busted is lowered to a very minimum. This type of trading has 97% to 98% probability of profit. Only a black swan event would go and bust it. And today I decided to expand this trading to regular stocks and trade naked puts.

Crumbs strategy
Source: Pixabay
Trading naked puts with Crumbs strategy is safe. Relatively. It increases the POP to almost 100% (99% to be exact). The premium is very low. I will collect $21 bucks premium ($19.87 after commissions and fees) but it is almost a sure profit. Unfortunately, the capital requirements are a lot higher than with spread. Traders may consider this not worth it.

Today, I opened a new trade against Amazon (AMZN). I sold a December put contract with 115 strike price and collected $21 premium. The capital requirements or buying power is $1,150 and a total risk is $11,500.00 (that is in case the stock goes to zero). So you may think that this is not worth it – risking 12 grand to make 21 bucks? Go figure!

Well unless you can repeat this over and over every month with peace of mind sleeping well every night knowing that your trades will most likely expire worthless for a full profit. Of course, if you want a thrill and excitement of being in a roller coaster, raise your strikes up and collect $200 of the premium (or sell at the money puts). But be prepared that you may get assigned if the trade goes against you.

This strategy is to generate income, not to buy the underlying stock. If I want to buy the underlying, I would go closer to the money to collect nice and juicy premium and buy the stock for a better price. But I consider this strategy to generate income and not interested in owning the stock and in this case, I want it to expire every month worthless.


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Posted by Martin November 05, 2023
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Is the market rally sustainable?

Last week we experienced an incredible market rally. The S&P 500 rallied from a several weeks long bearish craziness to a bullish madness by 5.86%. What is crazier is that this, almost, 6% rally took just 5 days to happen. On average, this rally consisted of a 1% a day move. And now, the question is, is this market rally sustainable?

market rally

This crazy move could be just a relief rally before we resume bearishness, but we need to wait to see what happens next. Why? So far, we only reached the previous support which now acts as a resistance, and we may bounce from there down.

I was thinking what has changed in the market? Well, the answer is simple: nothing. Let’s review:

The bearishness was based on silly behavior from investors who were scared of a known event – interest rates. But that fear was irrational. Everyone knows that the economy is still strong, that the labor market is still strong, consumer spending is strong, and inflation is easing. Yes, in September and October we saw an uptick in inflation but that was a very small uptick. It didn’t change the trend. Yet, the investors freaked out and kept selling. And the selling lasted for two months!

But last week, the GDP came in lower than expected, Jerome hinted longer pause in hikes, and these same investors who were panicking for the last two months started buying like crazy.

Interestingly, last week’s rally caught a few big hedge funds with pants down causing them losing a lot of money.

So, are we out of the woods? I think not. This type of violent rallies are usually overblown and attract sellers. But we need to put this into perspective. People fail to do it. They look at today’s or yesterday’s price action and make conclusions.

A good way to determine if the market rally is over and we are in a bear market again, is to zoom out:

market rally

Are we in a bear market? No. Was last week rally just a bear market bounce? No (twist it anyway you want, it was not a game changer). The longer-term market still shows very clearly that we are in a secular bull market.

Will it last?

Yes, the market will go up. But maybe not next week. This rally was not sustainable, and I expect some type of a correction. I think, we will bounce down on Monday or early next week. But eventually, earnings will win this over and we will resume uptrend.


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Posted by Martin November 02, 2023
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Technical view: 3M Company (MMM)

Technical view

MMM is in stage #4 but attempting to create a new base (forming to stage #1). Lately the stock went from an all-time high of $250 a share to last week’s close at $87.52 a share (over 65% decline since 2017). I bought this stock for $202 a share when it first dipped thinking that this could be a great deal. 3M was a great company back then. Like other big names involved in multiple sectors (to name one Johnson & Johnson (JNJ) or Grainger (GWW)) I expected 3M to perform in a similar manner. JNJ, for example, is so widely involved in multiple trades such as consumer staples that a problem in one sector will not impact the entire company. A great example of diversification. 3M, unfortunately, was so badly mismanaged that the same diversification couldn’t protect the company from this 5-year long slump. And now, investors are asking whether MMM is a good buy or not. This, however, depends on the goal you have when thinking about buying or selling this stock. As a dividend investor, I think this company is way better value than it was back in 2017 and there are a few reasons why I think so.

1) The company’s broad and diversified structure will survive, and 3M will get over its current problems. Unless they start spinning off the good and healthy parts of the company, the problems will be solved at some point in the future. But this will take time, and, in the meantime, Wall Street will panic and predict the end of 3M (the same way they were talking about the end of JNJ multiple times in the past when they got hit with lawsuits and troubles).

2) The recent steps the management took started the improvement process. The company’s financials are becoming healthy again. Let’s just hope they will keep moving in the right direction.

3) The stock valuation is now in a very deeply undervalued territory (based on the adjusted earnings growth, the fair value of this stock for 2023 is at $136.49 and for 2025 it is at $158.24 a share). Last time the stock was this undervalued was in 2008, briefly in 2010 and in 2019. The current valuation provides a great opportunity.

4) The company pays dividends (current yield is 6.86%) and increases it every year even despite its current problems, the company generates enough cash flow to sustain the dividend. There was a rapid decline in cash flow in 2022 where the dividend got endangered, but since then cash flow started improving and it is heading in the right direction.

On the weekly chart, we can still see a continuation of the problems. There is no change in the trend. It is clearly in stage #4 and continues lower.

Technical view weekly

We can’t see any base forming on this chart yet. So technically, this trend is still strongly bearish.

The 3M’s revenue kept going higher over the years, even during its problems in 2020-2023 revenue kept growing but slowed significantly. On a one-year basis, revenue declined by 3.56%, a 2-year decline by 3.59%. A 5-year still shows a meager 0.39% growth, 10-year is at 0.49% growth. I believe investors see this and punish the stock.

Technical view weekly

As mentioned earlier, the company’s cash flow started falling rapidly since 2019 but in 2021 we are seeing improvement and growth again. Will it continue?

Technical view weekly

This chart shows the free cash flow line better (the orange line with a tiny “F” boxes):

Technical view weekly

As you can see, the cash flow is improving, and it is also expected to improve. If it will, the stock price will follow.
Here is a culprit of all the troubles:

Technical view weekly

Earnings got hit hard and the stock followed. I keep saying that what matters the most in the stock market is “earnings, earnings, and earnings.”

Since 2014, the company started piling up a huge debt and not having enough cash to sustain it. This was unprecedent for 3M. Fortunately, in 2020 the company started aggressively paying the debt off. There is still a long way to go and in the current interest rate environment, this is a burden which also weights on the current stock price:

Technical view weekly

3M pays dividends and increases them since 1970. It started increasing dividends in 2013 very aggressively. But if we look at the cash flow, earnings, and debt levels, it seems obvious that this dividend growth was not supported by the company’s earnings or free cash flow but by debt. Yes, the company may have been borrowing money to pay increased dividends and today, the stock is punished for it.

Technical view weekly

I think this is the only positive chart so far – declining shares outstanding. The company is constantly and systematically buying back its shares at 2.75% annual rate (5-year average is at 1.52%).

Technical view weekly

Employment at MMM holds steady and it started declining slowly in 2022:

Technical view weekly

I believe, at the current price, MMM is very undervalued providing a great potential for future price appreciation and collecting dividends while waiting for it to increase the price.

Technical view weekly

If the price appreciates, it may take some time. I do not expect it to happen in 2025 but over time. If we are investing in a 10 year or more time horizon, this might be a great opportunity.

Over the years, MMM beat the market. With the last few years’ declines, it is not able to do so anymore. It beats the market with dividends but not the capital growth:

Technical view weekly

Despite all the recent negative sentiment and bad financials, I do not think these are systemic issues. The company made bad decisions in the past, it is now paying for it and it is improving its balance sheets. If it keeps doing it and going in the right direction, this recent selling can be a good opportunity to make some decent profits.
I think all the hurdles will be overcome in the future and buying now could bring long-term profits. Buying slowly at the current levels should be a good contrarian opportunity.

The stock is now BUY

This post was published in our newsletter to our subscribers on Sunday, October 29th, 2023. If you want to learn more about our stock technical analysis subscribe to our weekly newsletter.


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Posted by Martin October 26, 2023
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The market lost 9.94% since the end of July this year. It was a brutal decline. Selling had only a few bounces but new sellers came in and pushed the markets lower pushing it into a correction territory.

It is perfectly normal and to be expected correction. Too soon after a recovery from the not so distant bear market, but still normal. The question is, will we stop here? This may turn into deeper declines and turn the recent rally into a bear market bounce erasing all bulls hopes.

Economically, this makes no sense. The US economy shows strength and growth. GDP growths, retails sales grow, consumer confidence grow, the labor market is strong (not a recession when everyone loses jobs, not gains them)… so the only reason for this selling is the fear of “higher for longer” interest rates. That is not sustainable and at some point this fear will go away. In the meantime, we have to wait this out.

How frustrating this is compared to easy market in 2021, right?

Tomorrow, we will see a report on the current inflation, so be prepared for another market’s haphazard reaction in any direction. If the repost shows easing inflation, the markets will rally. If not, more selling will come.


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Posted by Martin October 22, 2023
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Market action and economic data not aligned.

The market was declining last week but none of the selling was aligned with economic data. Economy is clearly strong. Labor market is strong. And the consumer’s sentiment is improving. Unfortunately, in today’s market, this is negative. Good news is bad news. Investors simply ignore that the inflation as transitory after all and it will go lower. Some perceive it as not going lower fast enough, others even believe, it is actually going up. But that is not the case, well, it depends, how far you are willing to look. If just around the corner, you may be right, this is all bad, if your horizon is more than 5 years, you should rejoice.

Weekly initial unemployment claims report has been pushing bond yields higher lately because the 4-week average of the series has been declining, suggesting that the unemployment rate remained low in October. Jobless claims likely remained low too during the October 20 week. And short-sighted investors do not like it.

The market is deeply oversold, and I expect a bounce. Futures are up right now, but will this hold throughout the day or even a week? We must wait and see, but the market is clearly driven by the bond yields now and nothing can stop it. If the yields keep rising the markets will sell. And any bounce will find sellers.

In this environment, it is hard to say what is going to happen. The rates were going up and there is no sign of a change:

economic data and bond yields

Over the weekend, the yields eased (which explains the futures rising). If this continues, the markets will see a relief rally next week:

economic data and bond yields 2

Oh, and if you still believe in hard landing, the economic data indicate that your beliefs in doom and gloom will hard land. Not the economy…


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Posted by Martin October 19, 2023
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Rate hikes yes, rate hikes no, stocks up, stocks down… circus continues.

Powel is speaking and as he does, he provides “hints to the FED’s rate hikes pause” then says the economy is still too strong and so he may raise the rates up and seesaw continues. And the stock market is on the FED’s swing.

rate hikes seesaw

As long as the market stays flat overall (we do not care about the daily choppiness), our trades are all safe.

rate hikes seesaw


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Posted by Martin October 19, 2023
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More weakness today

The market is experiencing more weakness on Thursday, October 19th, 2023. Futures were down significantly overnight but surprisingly recovered all losses prior to opening. Unfortunately, after opening the markets slipped lower ahead of J. P. speech today at noon ET. We can only speculate about how Wall Street will react to his speech. The market may not like it and we will move lower, or they will cheer it and we will see a sharp rally.

All indicators are weak today and point to lower trading. We are bearish again.

SPX weakness

This didn’t impact our yesterday’s trade. We had a “crumbs” Iron Condor, and it was in the safe territory, so it expired worthless despite the selling. We also opened a new Iron Condor with tomorrow’s morning expiration. If the trade stays inside the green box in the chart above, it will expire worthless for a full profit too.


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Posted by Martin October 17, 2023
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Consumers are spending like crazy but complaining about inflation.

If you go to social media like Twitter or Reddit, you will find many people posting about high inflation and how we are being lied to by the government. The narrative is that inflation is a lot higher than we are being told. Not 2%, 3% or 4% but 75% (let’s ignore for now that these people are comparing two different items. What is however interesting, is that the same people who are complaining about inflation are buying stuff like crazy.

Today, we received a report about retail sales growth. It was stronger than expected. The Atlanta Fed’s GDPNow tracking model shows real GDP grew 5.4% (saar) during Q3, up from 5.1% on October 10. Leading the estimate higher is real consumer spending with a 4.1% increase. I have seen people on Investing.com saying that the earnings from companies are fake because the reported EPS comes from increased prices of goods and not from increased sales. Today’s report proves this view wrong as well.

inflation from consumer spending

The chart clearly illustrates that sales are there supporting good EPS reports. These are coming from sales and not necessarily high prices (though they contribute to it too, but are offset by higher input prices).

But what is more striking is that people are complaining about inflation but spend like crazy. They buy everything no matter how expensive it is. Why are they buying stuff and then complain how expensive it is? And do not tell me that they are buying only essential things. They are not. The best way to measure this is to look at Amazon sales. During this fall Prime sales event, people ordered 150 million items (50 million more than prior Prime Day), and the holiday spending growth is expected to be 4.4% higher. And in July’s Prime Day, people spent 12.7 billion on stuff.

According to Amazon: “Shoppers snapped up Apple AirPods Pro, Bissell carpet cleaners and Crest 3D Whitestrips, as well as Amazon-branded devices such as Fire TVs and Echo smart speakers, the company said.” How essential is the “snapped stuff?”

So, if you want inflation down, stop buying crap.


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