Thanks for the overwhelming number of great, thoughtful comments left on our Open Thread over the weekend!
As always, it was hard to pick “winners,” but some of the ones I chose include…
- What’s going on with DB right now? What about my puts?
- Are we still going to have a crisis? When?
- Why is gold going down?
A number of Zenith Trading Circle members also asked specific questions about the service and about our current trades. I kept those questions private, but I want to answer them too – though of course, I can’t do it in Sure Money. Zenith members, stay tuned – I’ll have a special Q&A for you next week.
Also, don’t forget – I’ll have a complete and thorough analysis of the broader markets in my 2017 Forecast, which I’ll release to Sure Money in early January.
Without further ado, then, here are some of your best questions (and my best shot at answering them).
Q: Michael – Throughout the year you have predicted that Deutsche Bank would continue its downward trading trend into single digits based on its current financial structure. However, since the election, financial institutions including DB have been on a tear. Has the environment now changed to where DB can stabilize and move upward or do you believe this upward momentum will turn and DB will resume its downward pricing spiral toward single digits?
Do you still expect DB to nosedive by year’s end? What should we do with our current DB puts?
A: With only two weeks left in the year I doubt DB will collapse by then. I would extend my DB puts and buy DB April 2017 $10.00 puts (DB170421P00010000), however, because the bank is far from out of the woods. DB is different from US banks which are much better capitalized and have lower derivatives exposures. DB and the rest of the European banking system are in big trouble and in need of government bailouts or massive debt-for-equity restructurings in order to survive intact.
Q: Why are you not recommending a long term put on the S&P 500 or a more volatile market segment considering the credit crisis we are going to experience?
A: I will be making those recommendations when I believe the crisis is imminent but I do not believe it is imminent at this time. The indicators I am watching closely to tell me when a crisis are imminent are credit spreads, interest rates, stock market valuations and other proprietary indicators. Right now the markets are not sufficiently stressed to justify putting on a crisis trade but the time will come and I will let everyone know in time to profit.
Q: Regarding the Chipotle debacle, in your view do think we will see some dumb money pouring into the stock prior to Christmas, in the vain hope of a rebound? I only ask as following the $30 drop 5-6 days ago, I have already read several blogs/statements re-hyping the company…..
A: There is always dumb money chasing stocks like Chipotle especially when celebrity investors like Bill Ackman are in the stock. Chipotle was grossly overvalued before its food safety scare. Today it is still grossly overvalued. Stocks like this attract hot money and dumb money that is looking for a short term trade. Long term investors understand that a restaurant company faces few barriers to entry and can’t grow at a high enough rate to justify a 30+x P/E and that the only direction for the stock long term is down.
Q: Hi Michael. Are you able to recommend any books or online resources to improve both mine and other subscribers’ knowledge about options trading? I understand the basic principles behind puts and calls and where duration risk enters the picture. However, as a novice in this area my concerns are over both trade execution and risks I could blunder into that fall under “Unknown Unknowns”.
Would be great if you could offer any insights or suggestions in this area. Thanks.
A: One book I like that is basic but helpful is Jon and Pete Najarian’s How We Trade Options. As well, my colleague Tom Gentile’s free Power Profit Trades newsletter is a treasure trove of options resources and education. You can read all his archives online here.
Q: Michael, is there a “sweet spot” for selling OTM options which you previously purchased (and let’s call them way out of the money options) as the time value (extrinsic value) begins to go to “zero”? Is it 30 days before option expiration date, 20 days, 15 days, 10 days, etc.?
Is there a general rule (I know each stock is different and the variables for each trade is different) that will tell you when the best time to sell to close this position is? In other words, is there a rule to figure out at what point does the declining extrinsic value overtake the increasing intrinsic value (because the trade is moving in your direction) and the premium begins to decrease? (It should of course, the premium, end up at zero at expiration because there is no intrinsic or extrinsic value, or am I wrong on that assumption??. Thanks.
A: This is a great question. The answer, unfortunately, is no.
Don’t forget that along with intrinsic value and time value, an option’s premium also depends on the implied volatility of the underlying. Implied volatility makes it difficult to find your so-called “sweet spot” – because it’s calculated differently depending on the underlying.
What’s more, this also affects the time value of your options…
Let’s say you have two options:
- Option 1 is on a stock with low implied volatility. Option 1 expires in 30 days. Because the implied volatility of the underlying is low, the premium is going to suffer more as time value declines.
- Option 2 is on a stock with high implied volatility. Option 2 expires in 20 days. Because the implied volatility is high, the premium won’t suffer as much because the higher volatility mitigates the decaying time value. A higher implied volatility means an expected move is more likely.
For this reason, you have to watch your options trades carefully. Look at the implied volatility of the underlying. If it’s high, you can hang on longer waiting for your expected move towards profitability.
Q: Mr. Lewitt: First let me say THANK YOU for the opportunity in Zenith Trading Circle and especially the education that comes along with it, not to mention the already realized portion of profits, realizing there is much more to come. Everything you show and teach makes so much common sense to me. However, Gold has me scratching my head. I have read what you and many others have said regarding Gold. Yet, I see what is going on with a very strong Dollar that had been beat up for decades, now on a tear to the upside against all other currencies, of late. As we all know, the Dollar pretty much is the inverse of Gold. And that is exactly how this is playing out.. Dollar Up… Gold Down. Looking at a Month chart on the GLD (Spider Gold Trust), I see the Month chart rolling over as the Week chart and Day chart show a relentless drive in the southward trajectory. Please explain the logic in this. Ever grateful for your knowledge sharing.
A: This is a great question. Gold is an investment in monetary disorder and the destruction of paper currencies. While in the short term it reacts to moves in the dollar and inflation and deflation, in the long term it is an inverse play on the value of all paper currencies. And in the long run we know that paper currencies are consigned to the junk heap. Since Nixon took the US off the gold standard in 1971, the dollar has lost more than 90% of its value against gold. I believe it will lose another 90% of its value against gold over the next few decades because there is no way for the US and the world to deal with its runaway debt other than to devalue the currencies in which the debt will be repaid – and to devalue them drastically. Gold is not a short-term investment and should not be bought to trade – it should be bought to pack away for decades and given to your children and grandchildren to protect your family’s wealth against the corruption and incompetence of central bankers and governments.