How goes it Tackle Traders!  

 

So it’s another week and a new day, folks! It is nice to be back in the states and settle back in for a minute, since I am very slowly trying to tapering off the nomadic life, kinda. For example, the daily shower is not so much of a commodity as it was abroad… I find myself taking extra advantage of them. Same goes for food, I have been stuffing my face. My beer intake has also gone up slightly as I have been consistently getting together with friends, meetings with the Justice Brothers, and so on… I have even been hitting the road on the weekends in the ole RV as well—going fishing, hiking, and the infamous “glamp” Franco may have mentioned a while back in one of his blogs. So I’m part domesticated, part feral at the moment. We’re getting there though. 

 

Speaking of Franco, good on the guy! He has been doing a nice job with the system and detailing it in the blog and I look forward to seeing his Operation Market Garden come to fruition. I have no doubt he will acquire the materials needed via the trading system, but I will be shorting his skill set as a gardener, wink wink… If he pulls it off I will personally send Matt or Beau Moody down there for a fruit and veggie symposium put on by Franco, haha.  

Jokes aside I want to reflect for a second on what he is doing, though. He is, in essence, translating clicks on a smartphone into physical fruits and vegetables in a roundabout way. Its roundabout but hey, it translates into complete subsidization of a garden via the marketing could be contrived as free. But Franco is in a difficult position being that he does not have a backyard, but rather a deck, (something most millennials understand). Thus he has to buy and install all the necessary things, i.e., grow boxes, soil, water system, and so on… Which is a costly enterprise and is a reason why so many of us do not have a garden, especially when you can buy a tomato for under two dollars at the store.  

But as investors, we understand that investing more than just two dollars here and now, we can later enjoy a massive pile of tomatoes down the road, for free. We all know the saying: “give a man a fish and feed him for a day. Teach a man how to fish and feed him for life.” So, for one, Franco will be learning how to garden. I am sure there will be some trial and error, but in a season or two he will be able to keep his fridge well stocked with healthy food throughout the season…or maybe even longer assuming he gets a vacuum sealer or cans his produce. Either way, he will have a set up that can be reused indefinitely and will reduce his overall grocery costs in due time.  Also, this is something that, especially the knowledge aspect, he can take anywhere he goes. It truly is an important skillset to have, folks!   

 Secondly, he obviously will continue to trade and obviously will continue to compound the system, which, as we know, when you compound in an appreciating asset, eventually gains begin to snowball given enough time. Fortunately, the guy gets that and sees the big picture. Third, I have no doubt Franco will continue to become an excellent investor; and that one day, sooner than later, he will have his food, energy, and transportation consistently subsidized by the commodities market and oil industry…just from using a smartphone to do something other than check Facebook.  

And lastly: As he does all of this stuff, he will be literally taking money from companies that are doing future generations wide-eyed disservice. He is as well incrementally compounding that money into companies that may better serve future generations, responsibly and practically. But the best part, in doing so he will make money; receive subsidized products like solar panels and such, (or a “free” garden); lower his monthly expenses; hedge his carbon footprint; redistribute wealth; and conceivably do so for the rest of his life…  

And hopefully, he will retire from the 9-5 earlier than expected and have the opportunity to see the world and help others along the way. Which is why, ladies and germs, we are traders.  

Cheers Franco, happy to be apart of it!  

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So last blog I did detailed my adventure. I did mention, however, that in the next blog I was going to get into the strategies, stock picks, and so on—the system itself. There are several blogs on the matter but new people are always popping in, and for their sake, a refresher on the trading system is always helpful. That and I am going to add some stock and commodity picks as well as create an open forum for all of you.   

So, If you are trading anything that fits the EH philosophy feel free to mention it in the comment box and I will be happy to research the company and etc… Let’s try to democratically broaden our trading horizons, folks! 

The system itself is very basic, as trading systems ought to be. There are two strategies mostly used: The Naked Put and the Covered Call. Beyond that all other strategies like Bull Puts, Collar-Trades, Short-Selling shares, and Inverted Covered Calls are conditional—just depends on the situation and the market.  

We trade in two separate accounts in this system. One is a margin account with Tier 3 trading authority. The other account is a non-margin account. The margin account is for naked puts, non-margin account is for covered calls. And we will move money and shares back and forth between both accounts, consistently. That and one of the accounts needs a debt card attached to it, (preferably the non-margin account).   

1). Naked Puts on the Dirty List 

Franco has taken the liberty of changing the “Robin Hood” list into the “Dirty List” but we can call it whatever we want. What I have put on the list, however, are companies that I have identified as particularly destructive—environmentally or culturally—and which pay well on premium for the strategies we implement. The dirty list is a ever-growing list… so what I did over a year ago is take that pool and fiddle it down to “dirty” companies that are not only dirty in practice but are most importantly tradable, profitable, and are technically readable stocks or E.T.F.(s).    

And what we do with this list on a weekly basis is go through it and elect candidates that exhibit decent set-ups. Then in most cases we fire off naked puts on them and manage those puts until either they expire worthless or until enough premium is captured to realize a gain.   

 

The rules are as follows:

a). Sell Put(s), closest to and above 30 days out. And sell Put(s) closest to .20 Delta. Lower Deltas equal high probability so if permum is strong there is another wrong with going to, let’s say, .15 Delta.  

b). Try to buy back put(s) for no less than 50% of premium captured—75% or above is preferred. That, or allow put(s) to expire if at all possible, thus saving on commissions. Ive literally had maybe 20 some odd naked puts expire in my trading career, (sometimes I like being efficient with my money). 

c) Only sell what you can afford. In other words, if your account cannot handle being put 600 shares of United States Steel, thendo notsell 6 contracts. Sell an amount that your account can take ownership of.  

In fact, sell naked puts assuming you WILL take ownership of the stock, even though per Delta rule 80% of the time that will not happen. In other words, sell at the right time and for the right price, always. And always position size yourself to accommodate assignment.  

 

I will often allow things to get put to me and in response use the Covered Call to cash flow off the position as it returns the my assignment price. Then I will often sell at the money calls to get out of the share position or simply sell it. It just depends… Remember, I am trying to not give these guys my money, right?   

 

2). Covered Calls on the Clean List. 

 

The “Clean List” as Franco calls it is comprised of AMERICAN renewable energy companies and / or AMERICAN corporations that are on a decent track (all things consider) to leading future generations into a environmentally sound, equitably fair, and profitable future as corporate entities. But an important aspect they are American only. For one it’s only in the American markets that we can we trade options the way we do… That and I love my country, I want to see it healthy and have healthy potential, like most of us do. 

The trick with the clean list, however, is that not only are we compiling a list of premium friendly stocks or E.T.F. (s), but they it is important that they be ones that are revolutionary, or are leaders in their respective industry here in the states. And since we are compounding shares here, we are only buying companies that exhibit decent fundamentals or have a promissory on good fundamentals down the road.  

If they do not meet those standard (in a weighted equation) they will be dropped from the list, entirely. Business is, unfortunately, business.  

*I am sure you may have gathered I am hinting at ole’ Elon…Yes, Tesla has been testing this filter. But we can still trade it, profit and buy their products, no questions asked.*  

The term “States” is very important, though. As one of the top contributors to global warming I  think solutions should be exemplified stateside for two reasons: Its the only way we will be able to preserve the “American Century” and “American Exceptionalism” on a strategic level. As leaders in the oil industry, (especially in the industry’s early years), we can as well become leaders in the future of energy. In fact, such a move could be considered as a national security issue. (think China)    

Another reason for this is commonsensical: 

 “When you break something that is not yours, best you fix it or pay for it, unless you’re a complete a$%*^@. That’s patriotism at its finest. Also, its less taxing on me if people were not so dependent traditional energy systems.”  

*Those are the words of a Green Beret who severed 8yrs in war zones abroad (some disclosed, others not) and was in over 175 firefights in his second to last year on active duty (and thats only what he can legally tell me).* 

Anyways, happy Memorial Day Josh! Thanks for your words of wisdom, your service, and that lesson on renewable as a national security issue. Cheers!   

Josh is right. This whole effort is twofold; to make America “infra-structurally” great again. That, and we need to help corner a market that, (as the inventors of renewable energy), we should corner.  

Lets also think of this beyond globalism. Indeed owning shares of an industry that is just getting ramped up is a good idea in terms of profiteering. But more powerful is being able to curb you expenses in the process. Especially considering wages have largely flatlined since 1981 and most Americans are pay check to pay check here and now. Whatever makes your life cheaper but increases quality of life is a win-win.   

So give me a garden, give me renewal energy, and give me high gas-mileage transportation, please.   

 

The rules for a Covered Call are as follows:   

a). Sell call options against the respective shares you own. You can do 1/3 the amount or you can do the full amount, its up to you. Either way, If you own 200 shares, you can sell -2 call options against those shares. If you own 100 then you can sell -1. If you own 1000 then you can sell -100. Get the the picture?  

What you are doing is, in effect, renting out your stock position, just like you can with a house. You can expect 2-6% a month if you are good at covered calls and nailing retracements and trend changes. Ive seen 10% monthly in my heyday before… 

b). Sell call(s) at .40 Delta. And sell calls 30 days or more from expiration. Unlike the naked put, however, the covered call is more confined in terms of time… try to keep it as close to 30 days as possible. But if there is a premium issue, going above 30 days (say 40 or maybe 60) is a little trick to increase premium. Just be mindful that expiration becomes less likely and assignment more likely as a result of the increase of time. Also, Weeklys are fine to use if you are faced with a numerical conflict. Say, 28 days for a non-weekly month, and 31 for a weekly. Choose the weekly.  

c). Realize call option gains that are above 60% of premium or, preferably, above 85%. In the best of worlds you will sell calls that expire worthless—which means you have sold calls to LOCK IN GAINS at the height of the stock price or at the beginning of a retracement or neutral trend-line… 

d). Only sell calls with the expectation that you will get CALLED OUT. Renewables are bullish, as is the overall market, thus assume the worst case that you are off on timing and a CC may go against you. Obviously manage the P/L difference of the strike price sold and trade price. Watch the following:       

 

CC & NP Management:  

So what I do I liken to a “Wheel of Fortune” if you will. I would issue naked puts on select candidates on the dirty list and follow the above parameters. But let’s say I issued a naked put and it went against me… Unless it was a drop that would drastically changed the fundamentals of the stock, since I only sold what I could afford, I would allow shares to get put to me.  

Upon receiving shares I would write covered calls where appropriate and do so until I reached a breakeven level on share price. Then I would dump the shares and go back to issuing naked puts where appropriate. Make sense?  

In the clean list lets say I sold calls at the wrong time, the stock shot up and my CC was in the money. In that case I would wait it out in the anticipation of being called-out. A lot of time I discovered that the stock would drop again and my calls would expire worthless. If the northernly jump held, however, I would get called out and then reengage my share position via the naked put. Yes, sometimes I would just buy shares again but more often than not I would just write naked puts until the stock was put back to me.  

When shares were put to me from the dirty list, however, I would move them to the covered call account. But when I eventually got rid of them I would move that original principle back to the naked put account and leave any residual in the covered call account for products or the compounding of clean-tech shares.    

What I Traded to Tavel for a Full Year via EH: 

Well, I have several accounts and have them for specific reasons. In the case of this adventure, only two were implemented. I called it my travel account but there are two accounts. In this system I needed a margined environment for the naked puts and a non-margined environment for the covered calls. But shares and money were consistently transferred between the two, as explained in the management section. 

For the majority lot I used Environmental Hedging. But I also used Personal Gold. Often what I discovered was that when EH was slow to produce cash flow, PG filled the gap more often than not.  

So…first and foremost, let’s get that “Dirty List” out of the way, that money churning, world travel list: 

  

AMD—Advanced Micro Dynamics.  

 

As you can see Naked Puts did well on this stock over the course of a year. I did, however, have the stock put to me… I learned a valuable lesson to not hold naked trades through earnings, even though I already knew that rule. Which is what you get when you break rules.   

So I transferred those shares to my CC account and fortunately, as I am writing this blog, I just received full repayment on those shares, plus some. That, and I obviously wrote covered calls in its down trend after Q4 earnings.  

For awhile there AMD paid a decent premium and is associated with cryptocurrency (like 10% of their business)—which at the time I was trading this stock, one Bitcoin required 100 barrels of oil to produce. It was a hedge for my Coinbase account at the end of the day…  

Also consider what chip makers require in terms of basic materials. Coltan and Cobalt come from conflict mining regions, nearly 80% of the time. AMD is guilty of such a charge. Only Samsung and their affiliates are rigorously trying to develop products that require less metals and most certainly are attempting to not buy from conflict zones—which the both are more difficult than you imagine.     

 

X—United States Steel.  

  

Another selection that obviously went up…and shareholders were aided by Trump. As you can see the thing did nothing but go up during the grace period between earnings reports. And did so carrying a high premium pay-out for a large portion of the run. I admittedly got burned on a couple earnings reports. But when the tariff conversation became more of a reality, I completely stopped trading X. But…as you might assume I kinda wish I had a position on it this last week.   

Heres a little teaching moment, though. In complex systems, like the stock and commodities market, what you do not know, you indeed do not know. That, and what can happen will happen at some point. Since a weighted conversation centered around steel and aluminum, I did not not dare try to interpret Trumps tweets nor the their market reaction. I backed off X at some point in Feb.  

 

FCX—Freeport McMorhan. 

 

These guys have a bit of a dirty history… They are one of the biggest metals and natty gas companies on the planet and they have been connected to the modern resource curse. They as well have a poor track record in Indo and the Philippines with workers rights and they also have a history of supporting governmental coups in commodity rich nations like the D.R.C..  

As a stock they were a easy one for naked puts and carried a high premium most of the time. It wasn’t until Q1 of 2018 did they have a sizable drop and fortunately I was not trading it that month. I suspect a double bottom here soon and I will be getting back in FCX. 

 

USO—United States Oil Fund.  

 

When premium was good on this gal it was an easy trade. For the year that I was abroad it maintained a slightly bullish trend, which picked up into a very bullish trend on the last leg of my trip. As far as the future goes, I would not be surprised to see oil at $80 per barrel by the end of 2018. I made out nicely with USO.  

 

UNG—United States Gas Fund.  

 

I had mixed results with this ETF, especially after premium took a dump early on. Although we had a modest jump in Nat Gas this last winter, I did not take advantage of it as I should have. This pick will be dropped from the list but /NG futures will be added to replace it.  

 

 

FSLR—First Solar 

I enjoyed compounding on this stock and writing covered calls… It simply has gone up since I started this trip, thus making good use of my compounded gains. Also it pays well on covered calls to boot. I did get called out once however. But got back in pretty quick. Being that most of my shares were free I plan on holding my position for as long as it makes sense.  

 

SPWR—Sun Power

 

This one was a little bit jumpy, I was called out on several occasions, and had stock put to me on several occasions—most of which took place in and around $8 a share. Ive almost made as much as I have off of SPWR as I have FSLR, but the majority has been in options premium, not growth.   

I am currently riding on some $8.5 naked puts and should take assignment later this month. Although FSLR is fundamentally a stronger company, SPWR does hold sway insofar they are more widely used in the residential sectors. This is another position I hope to hold for the long-term.  

 

TSLA—Tesla Motors

I swing traded this one when and were I could. I use to own stock way back but dumped those long before I created this system. During my travels I would use Bull-Puts to trade the stock. As of late, however, I have not been trading Tesla. I see gloomy horizons and will be giving things time to see how it all plays out. But, if any short-term opportunities present themselves, I have no problem doing a day trade or a swing trade.  

During my travels, however, Tesla treated me quite well and paid for a lot of my trip. I also used residual gains to compound in REGI and NRG Thanks, Elon! 

 

REGI—Renewable Energy Group 

So this ETF was basically a dump station for gains I wasn’t sure what to do with, but wanted that money working in some what shape or form. I owned shares but didn’t write any CCs against them, just swing traded it. Fortunately REGI made it into the S&P 300 and the fund jumped. I literally sold today but plan on further compounding once the fund retraces a bit. 

 

NRG—NRG Energy 

 

This was another compounding station for residual gains and as well was a good use of those profits.  

NRG is a utility company but one with a high emphasis on becoming exclusively a renewable energy utility company. This shift in direction is taking time, but corporate leadership is fixated on it as the industry develops. Thus I have no problem investing in their mission statement and foresee them taking a nice market share as time progresses. I started buying in and around $15-18 per share.  

 

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Future Additions:  

So here is a little list I am going to start researching. For these selections feel free to chime in on. What do you think? What do you know about them, and are there additions you wanna make? The next blog I write we will go into detail on them and see what makes it and what does not make it to our list.  

•  AIG 
• American Standard 
• Applied Materials  
• Burlington Northern Santa Fe 
• Convanta 
• Exelon 
• FPL Group 
• GE 
• International Rectifier  
• Itron 
• Johnson Controls  
• Medermott International  
• MEMC Electronic Materials  
• Ormat Technologies  
• Phillips Electronics  
• Rohm & Hass 
• Shaw Group 
• Tenneco 
• Trinity Industries.  

 

Cheers,   

Bob