Hola amigos!  

Back at it this week, I hope you are following the blog and trading some of the picks we review each and every week. I have quite a few trades on and I am actually trading almost exclusively EH system during the last two months… #attaboy. Last week I proudly shared with you a “half-year review” with the results of trading this system. As my mentor always says, you gotta treat it as a business. So as every business, I figured we might as well report earnings, right? I you missed it I strongly recommend you to go check it out, it has some good trading picks as well. You can read last week’s HERE

Today, folks, we will not review set-ups in the Dirty and Clean lists, and not because there are not good ones, but because next two weeks are the core weeks of earnings season for most of these stocks. Most of what we usually trade will report earnings sometime during the next 15 days: SPWR, TSLA, AMD, FSLR, X, FCX, EXC, NRG and the list goes on. Pretty much anything I have ever traded with this system. So today we will talk about the importance of trading (or not to) during this time of the year. 

Environmental Hedging Watchlist 

Now, I am not saying that traders go on vacation every end of a quarter, don’t get me wrong. There are plenty of ways to trade earnings: Straddles, strangles, butterflies, debit condors…but we like to keep this system very simple by following the three steps that Bob designed, which involve mostly Naked Puts, Bull Put Spreads and covered calls. The nature of these strategies, A.K.A. credit trades, is that they are theta positive: we need time to pass in order to make money, but we know that Mr. Theta doesn’t even get out of bed for less than 30 days left. So if we want to, for example, sell a naked put on FSLR because the chart this week looks solid, then we have two options: we wait until after earnings, or we do it now and ride the trade through them. The latter, my friends, can wipe you out like Manny Pacquiao to my boy Matthysse last weekend. And to make that statement more truthful, I will share with you a real-life example that happen to a friend of a friend of a friend of mine, called Frankou. Very similar name, but it’s not me, I swear. 

This guy is very sharp, impressive I have to admit, but he is also half Italian and hence sometimes hot-blooded. And one day, overly excited for the high premium offered by VIPS, he made a poor-trading decision through his cell-phone. He decided to sell naked puts two weeks before earnings. He followed the rules by the books: 0.20 delta, >30 days out…such a beauty of a trade. But unfortunately, we he saw the little blue icon on the bottom right, he thought “Meh…what can possibly happen? It will not fall 20% and if it does, I will buy the stocks and write covered calls because I’m a gansta”. Well, s**t happens. VIPS felt way more than 20% and those naked-puts felt ITM quickly, forcing Frankou to buy the stocks below the strike price. Today he is still riding this (losing) trade, but he will be fine as he is cash flowing monthly with covered calls and bear-call spreads, and the trade is hedged with additional puts. However, the time, energy, stress, and margin requirement that he is devoting to that trade does not worth it. (for those of you who know Matt Justice for more than two years now…GPRO De-Ja-Vu). 

Long story short, don’t be Frankou, be Franco. Exit your credit positions before earnings, consider hedging your long term investments, and don’t stress it out. This week, no matter how pretty the chart looks, I ain’t touching it. Repeat with me… 

Now, if you have been following this blog and trading the system, you might be wondering what to do with the trades you have on right now. Wonder-no-longer my friend…let’s do a little bit of portfolio management and review my current ongoing trades, as I will show you how to surf the earnings wave safely. P.S: All the trades that I’m about to review are picks from the last three blogs I wrote…I hope you’re reading them and trading these picks as well. If you are not, well…you’re missing out. Sorry-but-not-sorry. 

Naked-Puts on: SPWR and X 

Plain and simple, I will exit these trades before earnings.  

In the case of X, I have a couple of contracts with August 3rd expiration, which is one day after earnings. These puts have a $32 strike price and are sitting in a 0.10 delta right now (so were VIPS puts before earnings…duh) currently with 55% of the premium, or profit, consumed. I usually buy puts back at $0.05 per contract, but in this case I will probably buy them back at $0.10 to gain some time. Of course Wall Street knows about a company’s earnings before the actual announcement and because of that, sometimes we see sharp price moves a couple of days earlier. For that reason, I will exit next Friday at the latest. 

SPWR earnings report will come out on 7/30 after-market, and I have naked puts expiring on 7/27. This case is a little different than X, since I do not mind getting assigned at $7 which is my puts’ s strike price. Position-size rule is the same for both trades (meaning I can afford getting assigned) but my willingness to buy the stock is much higher on SPWR, so I will let them expire next week and, if assigned, immediately write a covered call. 

Bull-Put Spreads on: TSLA and AMAT 

Similarly to the naked-puts, I will exit my bull-put spreads before earnings. In this case is critical since I cannot get assigned these stocks. First, because they are spreads. Second, even if I bought back the calls, they are way too expensive to own. 

In the case of TSLA, I have a deep ITM bull-put spread expiring Jul 27th with 80% of the premium sucked. As you can see I already have a trigger order to buy it back at $0.05 which hopefully happens Monday or Tuesday. If it doesn’t, my due date is probably Thursday to exit. Earnings Aug 1st. The first time I ever traded the Environmental Hedging system, was with a TSLA bull-put spread. Rookie-me, I rode it through earnings as nothing happened and was very lucky that it moved up. Once it expired, I called Bob super excited to tell him about my first profitable trade, and the only thing he told me was “Do not ever ever ever do that again”…Yes, daddy. 

Similarly, I have a bull-put spread on AMAT with strike prices right below its support at $45. This trade is on its early stages, as I placed it last week and expiration is on August 17th, one day after earnings. I will definitely exit before. Still looking good, no actions needed this week for this trade, unless of course I receive a TOS alert on my phone saying “broke down – get out now”. 

Covered Shares: SPWR 

I have my 200 shares of SPWR covered and I am planning to ride earnings like that. If they go up and I get called out, I will lock-in a nice profit on the stocks as well as the calls. I am not planning to collar the trade in case it goes down, but here you gotta pick your poison. Some investors ride earnings naked, some covered, some collared. I don’t think there is one single rule and it will depend on your position size, downside risk, stock price and nature. In my case, I simply believe that $7 is a very strong support that has hold over several years, earnings have been decently positive during the last quarters, and I do not have a huge position size. But if I am wrong and it goes south rapidly post earnings I will probably hedge with a protective put. Again, not a single rule…pick your poison or discuss it with your mentor. 

Uncovered Shares: USO 

Looking for some ETFs to trade during earnings seasons, I found some nice set-ups on USO and UNG las week (as I shared during last week’s blog). This week USO showed some aggressive down move and then pivoted around $14 which is a decent support level. As the trend is still bullish, to me this represents no other thing than a good buying opportunity. I jumped in like a tiger over a gazelle (sorry vegans) and bought shares, with the idea of letting them move north a little bit and then cover them. Hopefully a quick and sweet swing trade. Not a home-run probably, but a safe trade during earnings season. 

I am also following UNG very closely as it’s forming a potential swing high around $22 and could go back north next week…Stay alert. Stay in tiger mode until the gazelle gets closer. 

Operation Market Garden: Phase III 

During my next blog I will go over all the previous and upcoming phases of Operation Market Garden, as a good summary of this adventure trying to build a bad-ass garden using Mr. Market’s money. Today I will only give you a quick hint of what Phase III consist of, and this is basically go shopping.  Last week I shared my (hopefully yours too) successful trades during 1H 2018 and how that has allowed me to compound in green shares and gardening pots and seeds, as well as collect some cash to buy new tools to start building a big-scale garden in my rooftop. Well, I did indeed spend some of that money with a few purchases. 

Materials bought:

• Garden hose,
• landscape fabric,
• pots (2),
• raised garden bed (1),
• tomato plant cage (3),
• seeds,
• soil,
• garden trowel.    

Money spent: $250 

Money source: TSLA bull-put spread (1 contract), SPWR cov. calls (2 contracts), X naked-put (2 contract).  

This week would have been the 100th birthday of one of the most influential characters in history, and to me one of the best human beings that ever existed, Nelson Mandela. By far, my favorite leader of all times. He taught us so many lessons and shared very valuable principles, but there is one thing that I loved the most about him and is the fact that, while in prison for 30+ years, he grew his own garden. And in his own words, this is what it meant for him: 

 “A garden was one of the few thing in prison that one could control. To plant a seed, watch it grow, to tend it then harvest it, offered a simple but enduring satisfaction. The sense of being the custodian of this small patch of earth offered a taste of freedom.”
– Nelson Mandela 

Money is an excuse, time is an excuse, space is an excuse…so get off the couch and go build that garden. 

Cheers,  

Franco.