SURVIVING THE GAME

2010-04-02T09:42:00.001-06:00

April 1, 2010

After almost 1 year of silence I am speaking out.

Wow

That is all I can say. What a rally ! I only caught small bits of the stock rally. Still holding my uranium basket from last spring. The SU and USO positions I had as of last post both worked out well. I have added a few small positions in the RARE Earths as brought up by Jim Dines in his newsletter. For all his bad qualities they do some decent research. Long some RES and AVL in Toronto.

I've been quite active this last year doing straddles, strangles, etc. Mostly on Silver, currencies and a few fliers on Cocoa and Sugar ! Made some good gains doing straddles on the $CDN. I actually had one of the followers of theblog contact me and we did a bunch of $CDN trades together. He made about 20% on his money in 3 months and was a happy camper. I got lucky and caught one of the huge up moves in Silver last year. :}

Volatility in the S&P 500 has steadily dropped to quite low levels. No straddles there since last November. Not good risk:reward ratio will low option prices.

As of today I only have 2 small straddles going. One in the $CDN with 9800 as middle and one on the 10 year note with 116 as the middle.

Currency, energy and ags are particularily volatile these days :} Great for my type of trades.

Hope this finds all of you well and up considerably from last year at this time.

Options Guy

2009-05-17T21:02:00.003-06:00

SURVIVING THE GAME

MAY 18, 2009

2009 - 30

MARKET COMMENTARY:

Decline continues to set in. Futures down again in Sunday evening session. S&P 500 nearing 875. As mentioned, lightening up on long positions was a good idea. The question is...how far will we pull back? I suspect we have a bit to go, probably down to 800 on S&P 500. You can lighten up a bit more if desired and get in lower.

TRADES:

I closed my USO July positions on the big spike up on Tuesday. Sold the JULY $35 calls at $150 each. Net a small loss of $1080 on that position. Still have USO JAN 2010 positions.

Sold an SPY straddle. Can't say which one but it is below current market levels of $88 on SPY. Netted $845 per straddle. Did 25 straddles for portfolio. Risking +/-1.5% of portfolio for potential 7% gain

OPEN POSITIONS:

Still in USO, SU, JULY OIL straddle, GAS and uraniums. Hold.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-05-11T22:06:00.002-06:00

SURVIVING THE GAME

MAY 11, 2009

2009 - 29

MARKETS:

It appears the correction is at hand. Most indicators I watch are pointing to a significant pullback. My guess is back to 800 on S&P 500. I think Toronto will hold up better. Base metals and other commodities are rebounding nicely. If your a short term trader you may want to lighten up a bit on your longs and re-enter at lower prices.

URANIUMS:

Yahoo. Hold tight. They appear to have sucessfully separated themselves from the pack. If they are able to hold up during this pullback it bodes well for a continued rally. I am surprised at the speed of the rebound but I'll take what I can get. I'm ready to add the second allotment if we rally high enough.

TRADES:

Still in USO, SU and July crude straddle. USO starting to come to life. SU is doing really well. Oil straddle flat. Long Natural Gas using the GAS in Toronto. Moving up nicely.

No new trades lately. Just waiting to re-enter some SPY straddles. Probably around the $83 level. Volatility dropped off during rally so I'll wait to get a better price as we decline and volatility increases.

With that I'll see you later

Options Guy
optionsguy@shaw.ca

2009-05-04T18:20:00.003-06:00

SURVIVING THE GAME

MAY 4, 2009

2009 - 28

HOW TO BE WRONG AND STILL COME OUT AHEAD !!!

The beauty of options is that you can be wrong...dead wrong and still come out smelling like roses. I have to admit, I sure called it wrong on this rally. I almost missed the whole thing except for my uraniums and SU position. The beauty is, I still made money being wrong.

I closed some positions this morning after the housing numbers so now I can fill you in on the trades.

On Mar. 16th I sold the MAY $75 straddle on the SPY for $980 each. On Mar 25th as we rallied I bought back the $75 calls for $840 each. I then sold the $82 straddle for $960 and sold some $89 calls for $195 each to balance the short $75 puts. So I had a short straddle at $82 and a short strangle at $75 and $89. Today as we rallied I bought them all back. I paid $10 for the $75 puts, $35 for the $82 puts, $710 for the $82 calls and $185 for the $89 calls. All told I sold the set of options for $2135 and bought them back for $1780, making $355 per option or $8875 for the portfolio. Not bad considering I was dead wrong.

On Apr 23rd I sold the SPY June $84 straddle for $955. Bought it back today for $920 even though we have rallied 50 points on the S&P or $5.00 on SPY. How is this possible? Two reasons. First, time has gone by, 11 days to be exact. That erodes the value of the options. Second, volatility has fallen from about 43% to 35%. That also erodes the value of the options. So, even though I was wrong again...I still made money, not much but a total of $875 for portfolio.

On Apr 6th I sold the Crude Oil June $52 straddle for $8900. I bought it back on Apr 23rd for $6650 and sold the June $50 straddle for $6000. Today I bought back the $50 straddle for $5100. Total is net gain of $3150 per straddle x 5 straddles is $15750 profit in one month !!!

OPEN POSITIONS:

Still short the July $52 straddle. Sold at $8900 each. Closed today at $8800.

Stil lhold the long SU/short Jan $20 call position. SU closed at $28.36 and option closed at $960. Open profit of $5060 on that position.

Still have USO July and Jan 2010 option positions. Hold

Uraniums.....up 72.51% on basket since March 16th. What can I say. Preparing to purchase second $16000 worth if we get to 100% gain. Hold.

I can only imagine all of you holding the uraniums are over the moon happy. I am happy for you as well. I hope they hold and don't give back these great gains of the last 6 weeks.

SUMMARY:

To sum it up..I blew it. I completely missed this rally. The upside is that on March 10th, the beginning of the rally I was up 6% for the year. Today after closing the SPY and Crude positions I am up 20.5% for 2009 and up 43% since October last year. I cannot complain. This shows how powerful options can be. Able to make money even being completely wrong on the market direction.

This rally still creeps me out but I am obviously wrong. Still waiting for a big pullback to get long. I will be selling more straddles on SPY soon.

I will keep you posted of any new trades as they come along.

Options Guy
optionsguy@shaw.ca

2009-04-23T19:50:00.004-06:00

SURVIVING THE GAME
APRIL 23, 2009
2009 - 27

It has been 9 days since my last post. Guess what....nothing has happened. The sideways action in the markets continues. I posted on April 4th and the S&P was at about 845, I posted April 14th and the S&P was at about 845 and today the S&P is at about 850. I see more sideways to down in the near term.

As you can imagine this sideways action is incredibly profitable for short straddles. I am still in the SPY MAY $82 and doing great. The MAY $75/89 strangle is doing even better. I can't say how good but it is really good. These expire May 15th.

I closed a trade today in crude oil. I sold the June $53 straddle for $890 each on April 6th. Closed it today for $665 each. I did 5 for the portfolio. Net gain of $11,250. I put on 2 new straddles in oil today, one in June and one in July. Can't say which ones but you can probably guess.

Also started a new straddle in SPY for June. Again, can't say which one but it is close to where we are now.

Still in USO, SU and uraniums.

Uraniums starting to outperform general market. Up about 25% since getting in March 16th.

It has been quiet for 2 weeks, no trades until today. Portfolio approaching +40% since Oct. 6, 2008.

Options Guy
optionsguy@shaw.ca

2009-04-14T19:00:00.003-06:00

SURVIVING THE GAME

APRIL 14, 2009

2009 - 26

MARKET COMMENTARY

Sideways action. After topping out at 865 or so the S&P is now pulling back. I think it is the classic buy the rumour, sell the fact. Intel is a good example. Strong rally into tonights earnings, they beat by a mile but still selling off after report. I feel that the market has just overdone it and needs to rest. I will still get long on a strong pullback to 750 or lower but that might not happen. Will see what happens and assess getting long in the future if we simply consolodate.

Many commodities have done the same as the stock market. Big rallies. Look at Copper and Soybeans as an example. I expect those markets to pullback as well and consolidate.

Natural gas has been beaten to death. You could consider starting to get long at these low prices. Remember to allocate, divide and enter in stages.

TRADES

I closed a trade in the CDN$ today. I sold the CDN$ MAY 8050 straddle at 348 on March 31st. Closed it today for 295. Small gain of 53 pts ($530) per straddle. I did 10 for the portfolio.

Still holding SPY straddles, SU, USO and uraniums.

Uraniums showing the first sign that they can uncouple from the general market. Up today despite market correction. MGA and PNP doing really well. Even DML coming back. Up about 20% on basket since getting in March 16th. Hold.

Portfolio up about 35% since October.

ETF'S

I thought I would talk a bit about ETF's. They have become a popular investment tool. Some are outstanding, others not so.

The grand daddy of them all is the SPY. Yep, the one we have been doing some straddle trades on. It is the largest, most liquid of all ETF's. It tracks the S&P 500 exactly. Great tool for trading a large basket of stocks.

At the other end of the line are the leveraged ETF"s offering 2x or 3x exposure to their underlying. An example is UYG (2x) or FAS (3x). Both these track a basket of financials. We traded some UYG back in October and made a few bucks doing so. The risk of these is that they don't always track their underlying well. The best example I know of is the Horizon BetaPro ETF's. eg. The HBU in Canada tracks gold 2x up. In the last year gold is basically flat. The HGU is down 23%. The HBD which is supposed to follow gold down 2x actual movement is down 15% in the last year while gold is flat. How can that be? Both should be even. The truth is very hard to explain but simply put, the tools used to lever your investment 2x cause losses over an extended period of time. Poor management by Horizon has a lot to do with it as well. The point is, you need to know what your getting into. These funds are designed to move 2x the movement of gold BUT only on a daily basis, not over a long period. As seen, if you bought either, you would be down 15-23% in a year while gold is flat.

There are numerous examples of ETF's that perform just as poorly. Just be careful!

ETF's are great for following sectors. eg financials, energy, gold. You just need to use the right ones. For gold, use the GLD, for financials use XLF. These are liquid, non-leveraged ETF's with low expenses and good tracking to the underlying. Avoid the crazy ones like FAS and all the Horizon funds, they are not worth it. If you want leverage, buy on margin. You can purchase most liquid ETF's with 30-50% margin. This gives you 2-3x exposure without the nightmare of being involved with the leveraged ETF's offered out there.

Options Guy
optionsguy@shaw.ca

2009-04-04T21:45:00.006-06:00

SURVIVING THE GAME

APRIL 4, 2009

2009 - 25

This rally sure seems real. That is why I'm so paranoid. I've seen this picture before and the ending is not usually nice. I've taken a bit of ribbing from more than a few people the last few weeks for my having missed this bounce. I just smile and remind them that I also missed it on the way down. I believe the markets are still down about 10% this year while my model portfolio is up 8% so far this year despite missing this latest rally. That is on top of the 19% gain in the last 1/4 of 2008. Net gain is about 28% since October. I am willing to start nibbling on the long side on any significant pull backs.

According to the powers that be, I am allowed to tell you about trades that I have completed, just not trades still in play. I still hold the SU, USO option positions, and uranium stocks as well as the SPY straddles and strangles but I can't comment on how they are doing. I have also completed 2 trades in the last week. On Mar 31st, I instigated a straddle trade in Soyabeans. On that day, beans had a huge spike up and I sold the MAY 930 straddle for 74 pts. After settling down the next few days, beans spiked higher again on Friday and I exited the straddle at 73 for a small 1 pt profit. On the 24th I put on a short term short straddle in the CDN$. We were trading at about 81.70 so I sold the APR 8150 straddle for 186 pts. The options were set to expire on April 3 so only 10 days to expiry. Unfortuanately the CDN$ plunged on Monday so I exited the 8150 puts for 185 pts and the 8150 calls expired worthless on Friday so basically a break even trade.

I will continue to update you after I close each trade I am in.

I thought I would spend a bit of time clarifying my style of trading/investing. To put it simply, I am a long side bias trader but have no issue being stopped out if things are going down. At times I will end up 100% cash due to a dropping market. On top of that long side bias I will trade just about anything as long as the risk:reward is good. I also consider myself well versed in options. Hence my recent activity in straddles.

Everyone understands how to be long. Buy, hold and if the stock goes up, profit. Most however have little to no experience in proper risk management, use of stops, etc. Look back to the post outlining the beginning of the position in the uranium stocks. This is how you should approach every long stock trade. 1) Allocated a specific amount to be risked, usually no more than 5-10% of your portfolio no matter how good it looks. 2) Divide your purchase into 2 or 3 purchases, never all-in from the start. Only add your 2nd or 3rd portion once things are going your way. 3) Have exit stops and stick to them. 4) Once fully invested do the reverse, have exit stops split into 2 or 3 groups and follow your stock up. This is far from a perfect system that ensures profit every time and yes, you will be stopped out only to watch the stock shoot up after your out. But, you will also only lose in small increments. Preservation of capital comes before hitting the home run. And, every now and then you will find yourself on the winning side of a huge trade and reap the rewards accordingly.

Unfortuanately not very many investors understand the power of options. Adding options to your trading enables you to dramatically alter the risk:reward in your favour. Even the basic strategy of selling calls against your long stock positions puts you in the drivers seat, especially during times of high volatility such as now.

Options also enable you to employ strategies such as selling straddles and strangles. As you have seen, these can be enormously profitable. The theory behind selling straddles is so simple it defies reason. Yet, tell someone that you are selling both calls and puts on a stock or index and watch their reaction. Why aren't more people doing this? I don't know. Why aren't you? I believe that the markets will settle into a new trading range and move sideways. These are the perfect trades to do at a time like this.

Put simply, nobody knows what is going to happen. The best you can do is formulate an opinion and put on your position. I've always said it is easy to make money, just easier to lose. It is the risk management and use of advanced strategies that will prove themselves over time.

Options Guy
optionsguy@shaw.ca

2009-03-31T09:27:00.005-06:00

SURVIVING THE GAME

MARCH 31, 2009

2009 - 24

Up, down, up, down. Here we go again. The rally fizzled and now we consolidate. I expect we will move sideways now for a few months as we digest the gains of March. Good time to sell index straddles :} I see a range of 700-850 on the S&P.

Volatility is still high with VIX at about 43 which translates to high option prices. Good to sell options, not so good to buy.

Lots of commodities displaying similar characteristics. A big bounce off extreme lows, a correction and now......? I suspect sideways action. Look at oil, soybeans, copper, etc.

The uraniums have shown that they are simply market followers, not capable of extending gains on their own. We'll see over time if that changes.

If your looking for a play on the recovery, take a look at the steel ETF's.

DEBT - FRIEND OR FOE ??

We all know there is good debt and bad debt. Good being a mortgage ( if you can afford it ) or working capital for a business, etc. Bad being the no money down, no payments until 2010 on the big screen TV or any credit card not paid off in full each month. If you have access to capital, say equity in your home, should you use it? I contend that there is a place and time to access that money and the time is now.

I believe inflation will return with a vengance. You just can't dump trillions of dollars into peoples lap and not expect it to come back as inflation. Given that belief, here is a strategy to survive the coming interest rate hikes and to prosper from it.

Get rid of your bad debt. Then use good debt to build wealth over the next decade.

You borrow the maximum ( up to 75% ) on your home. You don't want to get into high ratio insured mortgages,etc. DO NOT use a HELOC with floating interest rate. You can get a 10 year term in the 5-5.25% range if you look hard. I suspect inflation will rear its ugly head in 1-2 years. This will drive up interst rates so lock in now for the long term. Now, what to do with all that money?

There are 3 possible outcomes to this strategy.

1) I am right and inflation returns. You have locked in a low interest rate on your debt. You have used the cash and invested in hard assets and are now reaping the rewards.

2) I am wrong and inflation remains stable. No harm. As long as your return equals the interst rate on the debt you are breaking even. I am comfortable saying that I can achieve a 5% return with very little risk.

3) I am wrong and we enter a deflationary spiral. This is the worst of all because you will see your incomes, home, etc decline in value. In a period of deflation, cash is king. Since you have already borrowed on your equity, you are set. you can take advantage of lower prices on hard assets such as real estate using your cash. If home values decline significantly, you will be unable to borrow as much in the future against that asset.

So, I feel there is little risk in pursuing this strategy no matter what the future holds in terms of inflation, interest rates, etc.

What to do with cash.

1) Stuffing it into mutual funds was a long time strategy of PATHETIC, CORRUPT financial planners. You pay interest on the money borrowed, you pay management fees to the mutual fund company so you need to make at least 7% just to break even. Many people followed this strategy and are still paying on the debt and their money hasn't grown a dime in over 10 years. Nice idea if your a mutual fund salesman ( which is what most financial planners are ). Do not follow this strategy.

2) Put it into short term instruments. Yield right now is low so you would be running negative on the cash flow. BUT, if inflation returns and/or interest rates spike you could be yielding more on short term money than the 5% your paying. Not a bad strategy.

3) I suggest spreading into several asset classes weighted mostly to commodities. How long do you think oil will be below $50 per barrel when the many producers require $75+ to break even? You can diversify your money using ETF's. I would avoid buying stocks in oil producers or gold miners, etc. Too much risk of something happening to a single company. Concentrate on the physical commodity, not the producer. Look at oil, gold and other metals, grains, soft commodities such as sugar, cocoa. What is the worst that can happen? These commodities may decline but how far? Some are near 10 year lows, can they really go down much further? Remember, this is real stuff. Stuff we use every day, not some peice of paper that is supposed to represent a percentage ownwership in some company. You can't eat paper but you do eat corn, you do drive a car, etc. Now don't get the impression that I am some commodity nut like Jim Rogers. I woul never suggest going " all-in " on anything. But adding a portfolio of real, hard assets to your holdings will stand you well over time. Heck, you can even look at real estate as a real asset, just make sure your not overpaying for it.

Options Guy

2009-03-26T23:53:00.002-06:00

SURVIVING THE GAME
MARCH 27, 2009
2009 – 23

Farewell my friends. This will be the last newsletter in this format. After seeking legal council, it has been determined that I should not continue to publish the newsletter in this format. It is in violation of too many securities laws to make me feel comfortable. To make a long story short I cannot recommend specific trades, especially if I am myself trading that security. It is much safer for me to sell the newsletter to subscribers than to give it away and I do not feel it is ready to put out as a pay subscription newsletter. And I should really be a registered representative if I am going to council people on investments. So, given that I do put my money where my mouth is and actually trade what I recommend and I am not a registered representative, I have to change how I do things. This is the last newsletter you will receive by email. I have created a blog. optionsguynewsletter.blogspot.com. All the newsletters have been posted there and I will continue to add new posts. From this point on I must be intentionally vague with what I say. I cannot say buy this here or sell that at this price. I will continue to try and pass on my thoughts and steer you in the right direction.

COMMENTARY:

Markets continue to push higher. Every point higher makes me more nervous. I concede we were way too oversold and a bounce was due but this rally is too much, too fast. I still believe we are simply establishing a new trading range and will pull back soon. I am anxious to start getting long on a decent pullback with stops to exit if we break to new lows.

FILLS:

SPY APR $74 Straddle. Bought back $74 calls for $845 each on Monday as market spiked up.

SPY MAY $75 Straddle. Bought back May $75 call for $840. Sold 25 MAY $82 straddles for $960. Sold 25 May $89 calls for $195 each.

CDN$ - Sold 10 each APR 8150 straddles for 186 pts each on Tuesday.

OPEN POSITIONS:

USO – Closed today at $32.02. Place order to sell the long APR $35 calls at $75.00 each. This will close out APR position. Still have JULY and JAN 2010 positions. Hold. Actually showing profit in July position right now. Exit if position deteriorates to 50% loss from original entry point.

SU – Hold. Exit only if position falls back to break even. This is what I like to call a “ drawer trade “. Just stick it in the drawer until options expire next January. If SU is anywhere above $20.00 you pocket maximum profit of $6.30 per share or 46% return if purchased shares with cash. As described when trade was initiated, your return could be over 1300% if you purchased the shares on margin.

SPY APR $74 straddle. Closed short $74 calls when SPY hit $82.00. Still short $74 puts. Exit stop at $100 or buy back for $25 or less.

SPY MAY $75 straddle. Closed short $75 calls. Still short $75 puts. Sold $82 straddles for $960 each. Sold $89 calls for $195 each. Now have short $82 straddle and short $75 put/$89 call strangle. Hold. Exit stops if SPY hits $74 or $90. Exit 75/89 strangle if combined value of options exceeds $500

CDN$ - SHORT TERM TRADE. Initiated on the 24th. Options expire on April 3rd. Sold 8150 straddle for 186. Exit stops if CDN$ hits 7950 or 8350 before Friday the 3rd. Collected $18600 in option premium. Risking approx $3000 or less than 1% of portfolio.

URANIUMS – up about 11% from entry point. Hold. The real test will come if markets pull back, do the uranium stocks hold gains or fall back with general market. OR, can they continue to push higher if general market stalls and moves sideways. Remember, this is a long-term trade.

NEW TRADES:

There will be no new specific trade recommendations.

In closing I would like to say it has been quite enjoyable sharing my trades with you. I know most of you are not following the recommendations but it is still exciting to think that someone may be listening. I leave this format proud of the results of the last 6 months. The portfolio is up almost 30% while markets are down about 25% over the same time period. I have completely missed this rally of the last 2 weeks but I also missed it on the downside. I will always argue that it is easy to make money trading; it is just easier to lose it. Preservation of capital and risk management is the key to successful long-term gains. I will continue to share my thoughts through the blog but unfortunately I cannot make specific recommendations. I am allowed to make comments such as “ I think it is a good time to sell option straddles “, I just can’t tell you the exact ones to sell.

As always I am available to anyone wishing to discuss any of the trades I have mentioned or to just yak about trading, strategies, etc. You can reach me by email or call me.

Good luck with your future trading.

Options Guy
Editor ( retired )
Surviving The Game
optionsguy@shaw.ca
optionsguynewsletter.blogspot.com

2009-03-26T23:53:00.000-06:00

SURVIVING THE GAME
MARCH 27, 2009
2009 – 23

2009-03-17T21:44:00.001-06:00

SURVIVING THE GAME
MARCH 17, 2009
2009 – 22

Happy St. Patrick’s Day. The markets sure are enjoying today. Up across the board on positive home starts and comments from Larry Summers. My position remains the same, bounce, not the start of something huge.

FILLS:

Filled yesterday in SPY MAY $75 straddle at $980.

Filled on uranium basket as follows; 2000 PNP @ $0.98, 1600 MGA @ $1.25, 700 PDN @ $2.64, 700 FRG @ $2.95, 1200 LAM @ $1.68, 2500 UEX @ $0.74, 1400 DML @ $1.43 and 900 UUU @ $2.24.

OPEN POSITIONS:

USO – maybe, just maybe APRIL position has a chance. You are long the $35 and $55 calls. Closed today at $29.44. It’s a stretch to think that the APR calls have much hope but JULY and JAN 2010 look good. Hold.

SU – love it ! Hold

CDN$ - starting to pay off nicely. Still 17 days to expiry. CDN$ closed at 78.80. 7900 straddle closed at 222, down 18 today. Move exit stops to 7650 and 8150.

SPY APR $74 straddle. Closed at $767. Sold at $745. Hold

SPY MAY $75 straddle. Closed at $970. Sold at $980. Hold

Uraniums – Bought basket for total of $15,757.00 Closed today at $16,813.00 Takeover rumors swirling about PDN and possibly MGA. I think that is about the worst thing that could happen. After falling from $9.00 per share in April 2007, I would hate to see MGA taken out for $3.00 per share or something cheap like that. Your not into these for a quick buck, you want to see them move up 5-10x over the next 5-10 years. But, we’ll see what becomes of the rumors. Hold, no stops.

NEW TRADES:

No new trades.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-03-16T21:15:00.001-06:00

SURVIVING THE GAME
MARCH 15, 2009
2009 – 21

The rally is on! I still believe this is nothing but a bounce so be careful. The difficult thing with bounces is how high and how long? If you are jumping on board, use stops so if we turn and make new lows your out. After trading in a range on the Dow from 7500 to 9500 and from 750 to 950 on the S&P 500, I believe we are simply establishing a new trading range of 6500-8500 on Dow and 660-860 on S&P 500. Toronto is a bit of a different story. Although Canadian markets suffered similar percentage declines as US markets, the reasons were quite different. Our financials held up much better than those in the US. It was our energy and mining companies that took it on the chin. With oil looking like it has bottomed and turning up, copper doing the same and other metals such as gold and silver doing better, I believe the Canadian market will outperform the US over the next few years. I’m not in any hurry to jump in, just making an observation.

OPEN POSITIONS:

USO – Hanging in there. April looks like a loss for sure but July and Jan still look good. Hold all 3 positions.

SU – Doing great. Hold

CDN$ - this position starting to move in your favor. Cdn$ June futures closed at 78.54 on Friday. APR 7900 straddle closed at 252. Initially sold straddle for 341 on March 2nd. Open profit of 89 per straddle or $4450 so far. Hold. Looking to purchase cheap options as insurance. Exit stops at 7600 and 8200 on CDN$. Expiry is in 2 weeks, 5 days.

SPY APR $74.00 STRADLE – filled at $745 per straddle on Wed. SPY closed at $76.09 on Friday. Straddle closed at $761, up slightly from entry point. Hold. Exit stops at $68 and $82 on SPY. Expiry is in 4 weeks, 5 days.

NEW TRADES:

Given my view that we may well have made a short-term bottom and are entering a period of consolidation, I recommend taking advantage of this.

Sell 25 each SPY MAY $75 calls and puts. Closed Friday at $960-985. Should net approx $970 per straddle. Net premium received of $24250. Exit stops at $64 and $86 on SPY. Risk is approx. $5000 or 1.6% of portfolio. Expiry is in 9 weeks. Do not enter trade if SPY opens up or down more than $2.00 Monday morning.

As a side note, there is a way to do these straddle type trades inside an RSP account. Contact me if interested.

URANIUM:

After watching for the last year and digesting the latest DINES letter, I am finally ready to dip a toe back into uranium stocks. The fundamentals behind a future rise in uranium stocks are compelling. They look to be quite solid, just that it will take time to unfold. The brutal market conditions have taken a terrible toll on the uranium stocks, much more than the broad averages. Since the uranium story is so compelling, it is time to act. You need to allocate a percentage of your portfolio to this theme and stick to it. The model portfolio will allocate 15% to the uranium theme. That is currently approx $48000.00. Take this allocation and divide it into three units of $16,000.00 each. Use the first unit to purchase a basket of uranium stocks here at these depressed prices. The model portfolio will purchase equal dollar amounts of PNP, MGA, PDN, FRG, LAM, UEX, DML and UUU, all in Toronto. That is $2000 worth of each, rounded to nearest 100 share increments. These are all basically penny stocks with some trading under $1.00. Purchase Monday after open. No exit stops on any, just hold. The plan is to add the second $16,000.00 unit if and when the basket doubles in value, then the third after it triples. If it doubles and second unit is deployed then a stop is put in to exit at original purchase price of first basket purchased. This way the maximum risk is always no more than the initial $16,000.00 or approx 5% of portfolio. Using a stop on the basket eliminates the risk of getting hit on an individual stock. There are no options available that would help reduce risk at this time. Options will come into play if the price of some of the shares doubles or triples. I see this unfolding over several years, not months. These are good stocks to put in the new Tax Free Savings Accounts due to the possibility of a “homerun” or huge gains on some of them. I would pick MGA and LAM as the best bets. The strategy of splitting allocation into three parts and only investing 1/3 initially is used to limit risk. This basket of uranium stocks is the poster child for speculation. In the dictionary under speculation there should be a chart of PNP! Look at the moves they have made the last 4 years. Given that, it is wise to ease in slowly so that if uranium turns out to be the next “sure thing” that never happens, your loss is very small. If it works, continue to add to positions as indicated above until you are fully invested and already up money.

If you are already heavily invested in uranium stocks, here is a strategy. Sell ½ your position here at these prices. That leaves you 50% invested. Take the other ½ and use some of the strategies used in this newsletter to re-build your portfolio. IF, the basket of uranium stocks doubles, you then add back the ½ you took out that is hopefully worth more than when you started. If uranium never recovers or continues lower, you are still using ½ your portfolio to make money in other ways.

A final parting comment on taxes. Anyone reading this who has personally, or knows someone who has suffered large losses this past year, please take note. A provision in the tax code allows a person to declare themselves a “sophisticated investor”. If this election is taken, all gains and losses are now considered income, not capital gains. By default, I am considered “sophisticated” due to my days as a floor trader in Toronto. So, if you have had a huge loss, you may be able to have yourself declared “sophisticated” and be able to write-off the loss against other income. If you are in a 40% tax bracket, that means you could get 40% of your losses back as a tax refund. The loss can be taken back 3 years and/or carried forward up to seven years. This is not something that is easy to do, you need to consult a tax specialist to do it. I have seen this actually done so I know it is possible. The only downfall is that future gains will always be considered income and taxed at that rate. If you were to follow this route and get a refund, you then have your spouse open a trading account and any future gains are capital gains for them, not income for you. Again I stress that I am not a tax specialist and you must consult one to be able to follow this strategy.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-03-11T00:15:00.000-06:00

SURVIVING THE GAME
MARCH 10, 2009
2009 – 20

Citi up 38%! By the news I’m hearing tonight, the bottom in the markets has come and gone. After closing Monday at the lowest level since early 1997, the market rallied today and that is it, there is no where to go but up from here! Of course there is the odd “ non-believer “ that doesn’t agree that this is it but they are being scorned by the talking heads as “ blind “. I saw a clip where Mark Haines, the morning guy on CNBC, called the bottom because we are at 66.7% of the 200 day moving average or something like that. Phooey.

The rally today, led by the financials is likely nothing but a dead cat bounce. It had to come sometime. Even in a raging bear market it isn’t straight down every day. I would recommend you avoiding jumping on this bandwagon. If anything, I would be selling into this rally, looking to re-purchase at lower levels. If Friday’s inter-day low was, “ the bottom “, we may rally for a few days and with almost near certainty we will retest the lows. Rarely do you see a sharp rally after grinding down in a slow methodical manner such as the one we have seen. Sharp rallies generally come after a huge spike down like we saw on Oct. 10th and Nov. 20th last year.

Many other indicators suggest that today was not an important turning point. Indicators like the VIX, put:call ratio, volume, advance/decline line, etc all point to nothing more than a normal up day, not THE beginning of something sustainable. Being almost 100% cash enables one to look clearly at the current situation instead of through rose-colored glasses. Most commentators you hear are simply “ talking their book “ and since 99% of them are long, what else would you expect them to say.

I also heard two other interesting things today that reinforced my dim view of money managers in general. The first was an advertisement for Trimark mutual funds. Their slogan was “ it’s time in the market, not timing the market “. They went on to say that being 100% invested all the time was the only way to succeed long term in the market. As long as you had a 5 year or longer time horizon, you will do just fine. Hmmmmm, I’m glad I didn’t put 100% of my money in their funds 5 years ago, or 10 years ago. The other was some joker on BNN doing technical analysis. When asked, “ by looking at the past can you accurately predict the future? “, he actually said yes! I hope all of you reading this understand that technical analysis is accurate only about 52-54% of the time at best and is only one of many tools you should use to determine entry and exit points on your trades. Isn’t it funny how what is touted as SUPPORT at a certain price on a stock all of a sudden becomes RESISTANCE when the analysis is proven wrong as the price plummets through this magic support number? I use charts and technical indicators all the time, but only to try and reinforce an already existing hypothesis.

I believe, and I think it has been proven repeatedly; that there is no way to consistently beat the market using any sort of “ mathematical “ or “ canned “ system. The best example is Long-Term Capital Management. That is the hedge fund that blew up in 1998. They were the best of the best. Nobel prize winning economists, mathematicians, theoretical quantum physicists, etc and they were wrong. They were unable, with all that brain power to anticipate every possible outcome or condition that would affect their positions. They were caught off guard and suffered enormous losses that were not supposed to be possible according to their “ models “. Many hedge funds suffered the same fate this last year as the “ impossible “ occurred almost on a daily basis. Regular, long only, mutual funds suffered by default as the markets declined because their only position is long.

But, I may be wrong. As I have said over and over, I don’t KNOW any more than the next guy. All one can do is amass information, take an educated guess and dive in. If you’re right, great. If you’re wrong, move on. The money is not made in being right or wrong. The money is made in using the right financial instrument for the particular trade, applying rigid risk management and leaving your emotions at the door. I am wrong more than I am right but I somehow manage to come out ahead of the game when all is said and done.

OPEN POSITIONS:

USO – still a chance on this one. Hold.

SU – I wish all the long stock/short call positions were like this one. SU up $4.75 from entry point, short $20 calls up only $2.70. Net gain of $2.05 per share. Hold

CDN $ - dong well so far. CDN$ closed at 7775 today. April 7900 straddle closed at 301, down 40 from entry point at 341. Adjust exit stops to 7500 and 8300. Three weeks and 3 days to expiry. Look to purchase calls at 8200 and puts at 7600 for less than 15 each as insurance.

NEW TRADES:

After sitting back for a while and watching, it’s time to dip a toe back in.

VIX still high at 44.37. SPY made a low of $67.10 on Friday. Closed today at $72.17. Sell 25 each SPY APR $74 calls and puts. Straddle closed at $747-767.Should get close to $750 per straddle. Net premium received of $18750. Place exit stops at $66 and $82 on SPY. Risk is approx $5000 or 1.7% of portfolio. Expiry is in 5 weeks and 3 days. DO NOT enter this trade if SPY is up or down more than $2.00 at the open Wednesday.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-03-05T22:35:00.001-07:00

SURVIVING THE GAME
MARCH 5, 2009
2009 – 19

Today is why you need to “ get small “ as markets are moving against you. As recommended, you have had fewer and fewer positions, and less and less risk as the markets plummeted. This has enabled you to still be up almost 6% year to date as the world is crumbling. You now carry only three small positions with less than 3.5% of portfolio at risk.

What has happened should be the wake-up call to all investors and to those that preach that averaging down on a position is wise. It is one of the most destructive methods of trading or investing. Continuing to buy more and more of anything as it declines is counterproductive. You only add to positions when they are going in your favor.

Tomorrow morning is probably the most anticipated jobs report ever. Estimates are for up to 750,000 jobs lost and unemployment topping 8% in the USA. Given the action of the last week this could very well be the capitulation everyone has been waiting for. We may collapse or absolutely exploded tomorrow depending on the number and reaction to it. I have no idea what will happen but my guess is a lower open then a strong rally, possibly 500 points or more. There is no safe way to position yourself for that so just sit back and watch. Remember, my guess is no better than anyone else.

With markets being beaten down so badly and no rhyme or reason to market action, I have no choice but to step back and reassess the situation. The open positions are very small with very little risk so they can stay in place. I want to sell more straddles and buy equities and sell covered calls so as to collect the very high option premiums but I think it wise to just take a breath and watch, at least for a few days. There will always be another good time to get in. So, just sit back and enjoy the show tomorrow. Maybe it will be a non-event but my gut tells me something is going to happen.

FILLS:

Stopped out of SPY MAR and APR straddles this morning. See position summary for fills.

OPEN POSITIONS:

USO. Hanging in, hold. SU, same as USO, hold. CDN$ just floating around even. No large risk anywhere just hold all three positions.

NEW TRADES:

No new trades.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-03-02T19:55:00.000-07:00

SURVIVING THE GAME
MARCH 2, 2009
2009 – 18

I hope all of you realize the magnitude of what is happening. The daily noise of the market commentators can actually numb a person so the reality of what is happening escapes them. The moves in the equity markets are almost unprecedented, eclipsed only by the 90% move down from top to bottom in the crash of 1929 and the following 4 years. The bottom was hit in 1933 and it took until the mid 1950’s to reach the pre-crash levels of 1929. Also look at the period from the mid 1960’s to mid 1970’s. It was another lost decade in terms of equities. Those of us a little younger were fortunate not to have invested through those times but they may have returned. How low will we go and how long will it take to recover to the old highs set in 2007? I believe it will be many years, possibly another lost decade.

Peoples nest eggs, education funds and net worth are being decimated and the hope of rebuilding them slowly disappearing. We were sold on the “ buy and hold “ philosophy and it turned out to be a lie. But what will happen next? The decline in the markets threatens the core of our financial world, not just the banks. Life insurance, annuities, essentially most long-term financial products were created and based on assumptions of long-term returns in the equity markets of 6-8%. Even the CPP and QPP started to invest in equities. Many also mix in real estate and fixed income products but with long term government bond rates at 2-3% and real estate declining, where will the money come from to pay these contracts? How secure are your insurance policies, annuity contracts and pensions? I became convinced 20 years ago that I would never receive a dime from CPP even though I have been forced to pay into it. If I had a company pension plan I would be quite worried about it as well. What is it invested in? I believe the only defense is to accumulate large amounts of money, far more than you will ever need. You then must diversify across the globe and also across many asset classes, eg cash, equities, gold, real estate, etc. Only then will you be able to weather any financial turmoil that descends upon you.

I believe you will be forced to look into the world of “ alternative investments “ in order to be able to rebuild your wealth. These are the very products that have contributed to the financial mess we are in but they will also be the ones you can use to come out the other side. I am speaking about commodities, currencies, derivatives such as options and futures. If the equity markets continue down and/or simply level out and spend years stumbling along, it will be these types of investments that allow you to rebuild your wealth. I do not see real estate or fixed income coming to the rescue any time soon. Believe me, I hope I am wrong. I too own a home; have insurance products and an education fund for my children. All are down in value and may be threatened in the future. I’m not predicting an end to the financial system, as we know it, just a prolonged period of little to no ability to generate a decent return using traditional methods.

FILLS:

Sold CDN$ 7900 straddle instead of 8000 after lower open this morning. Netted 341 total. Stops at 7450 and 8350. Closed today at 77.70 on CDN$ and 348 on straddle.

OPEN POSITIONS:

Not out yet but getting close on both SPY straddles. Hold both. Hold USO and SU positions.

NEW TRADES:

No new trades but I have adjusted exit stops on SPY straddles. See position summary.

As always I am available if anyone would like to discuss the strategies employed in this newsletter or just to yak about trading, investments, etc.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-03-02T10:59:00.000-07:00

SURVIVING THE GAME
FEBRUARY 27, 2009
2009 – 17

Today was another down day for markets. Seems like we’re just slowly grinding our way down. We all know that we won’t get to zero but how low will we go? If I knew I would certainly share it with you.

What is wrong with holding cash or being very light on equities? I listen to the talking heads on TV and they all want to be long and pick the bottom. They all want to be heavily invested in equities, no matter how bad it gets. One fellow today said he had adjusted his position to ONLY 60% equities and that was being very conservative. Even if you have 60% equities, when the market drops 20%, you lose 12% of your total! Nuts. Everything I have learned tells me to get smaller and smaller as I lose and not take on more risk until I’m into a solid upswing in profitability. In a screaming up market I would recommend being at most 70-80% invested. Never go all-in, this is not a poker game. These markets are tough, stay small and hold on until the tide eventually turns. Using the option strategies I have recommended will help you rebuild your portfolio while waiting for the next Bull market to come. By the way, I think it will be years of waiting, not months.

OPEN POSITIONS:

USO. Is there a chance of turning a profit? Maybe. Hold

SU. Closed at $20.79, up $1.89 from entry point. Jan $20 call closed at $560, up only $0.40 from entry point. Trade working well so far, open profit of $1490. Hold. This is the sole survivor of the long stock/short option trades. Take a good look at them as a group. Bought SU, CAT, AA, AAUK, SPY and XIU then sold short calls against each. Five of six have been stopped out. Together they are showing a profit of $1596.00, and that is after being WRONG and the markets being down 15%+. Imagine what the gain would be if we could actually get the direction right!

SPY MAR $78 and APR $80 straddles. Up slightly on both. Hold. Will be out pretty quick if markets continue down. Small positions with little risk.

NEW TRADES:

The Canadian dollar is falling apart. I believe it is a bit overdone and will simply trade between 77 and 83 cents for a while. Volatility high. Sell 5 each Canadian dollar APRIL 80 calls and puts. Closed at 347 today. Best to sell on electronic platform. This will net you approx $3400 per straddle or $17000.00 total. Set exit stops if dollar hits 76.50 or 84.50. Risk is approx $6000 or 1.8% of portfolio. Watch for decline in volatility or sideways action to erode value of straddle.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-24T21:59:00.000-07:00

SURVIVING THE GAME
FEBRUARY 23, 2009
2009 – 16

WTF. I’m sure all of you are familiar with that wonderful email short form. I believe it describes the current market conditions perfectly. How ugly can this get? Dow 6000, Toronto under 6500, maybe. Despair has turned to disgust and both investors and traders are abandoning this market in droves. Volume is not huge and VIX is not spiking to the moon which shows it is a lack of interest, not panic selling. We are now down 15-20% this year on the major indices with no bottom in sight. And it’s only Feb. 23rd. Not really funny but there was a great line from Jim Crammer tonight. He was quoting his wife, Karen Crammer aka the trading goddess, and said “ well Jim, there is only 7100 more points to go before we get to zero”.

Model portfolio stopped out of many positions last 2 days. Will send Position Summary as well. Holding on to 7.8% gain so far this year. Given that, and with huge uncertainty it is, as we used to say on the trading floor, “ time to get small “. That means close out most positions, take your gains/losses, reduce risk and sit back and watch for a while. As I mentioned in newsletter 2009 – 14 this is no time for heroics, it is time to be VERY cautious.

POSITIONS/FILLS:

Encana, my beloved butterfly. Stopped out of long APR $46 calls at $395.00 each and bought back short APR $60 calls at $39.00 each. I’m a little ticked about this one, thought it was going to be a solid winner for you. You still have long APR $74 calls but not much hope for them. Hold them for now. They are not worth much.

Time to close out the leftover short calls that have been hedging your losses. Buy back the following tomorrow after the open, not at the open. Let things settle before entering your trades.

Buy back the 30 DIA JUN $87 calls.
Buy back the 30 DIA SEP $87 and 30 $92 calls.
Place order to buy back 40 USO JUL $45 calls at $25 instead of $10.
Buy back 3 SPY JUN $90 calls.
Buy back 12 XIU JUN $14 calls.
Buy back 10 CAT JAN 2010 $35 calls.
Buy back 20 AA JUL $7.50 calls.
Buy back 20 AAUK JUN $10 calls.
Buy back 25 SPY APR $85 calls.
Buy back 25 SPY JUN $83 straddles.
Buy back 25 SPY SEP $83 straddles.

This will clean up most open positions and lock in gains while reducing risk dramatically.

OPEN POSITIONS:

You are left with some USO options. Hold

You have a few long calls in ECA and DIA. They are basically worthless so just hold them for now. Will most likely expire worthless.

You are still long SU and short the JAN 2010 $20 calls. The only surviving trade from the long stock/short call positions. SU is down $1.90 from entry at $18.90 on Jan. 23rd but option is also down $1.90 so position is exactly flat despite stock being down. I love options. Hold exit stop at $15.00 on SU.

SPY APR $80 straddle. Hold. Closed at $1073.00. Entered at $993 on Feb. 19th. Exit stops at $68.00 and $92.00 on SPY.

NEW TRADES:

VIX is still quite high at 52.62. This encourages options selling so you can add one new position. Short term, only 3 weeks and 3 days to expiry. Sell 25 each SPY MAR $78 straddles. Closed today at $786 - $807. Should net approx $790 per straddle. Exit stops at $68.00 and $88.00 on SPY.

That leaves you with 2 SPY straddles and out of almost everything else. If we don’t calm down soon you will be out of those as well and 100% cash. Let’s see what happens over the next few days.

That about sums it up. A wild, wild market with huge risks so stay small and hang in. They say it will get better. I hope they are right.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:30:00.001-07:00

SURVIVING THE GAME
FEBRUARY 19, 2009
2009 – 15

Model portfolio stopped out on SPY and AAUK yesterday. Hold short calls, stops as indicated in position summary. Already out on AA. Close to being out of XIU and CAT. Only SU has some breathing space. As a group they are showing a small loss of $1539 or less than ½% of portfolio since positions instigated between Jan. 15th and Feb. 6th. Not bad considering the markets are down 10%+ in the same time period. If market continues down, this will actually turn into a profitable set of trades despite being completely wrong on direction. The gain on the short calls will become greater than the loss on the long stocks.

The risk to the portfolio continues to decline. It is currently in the 8-10% range, down from 14% a week ago. As losses are incurred, pare back your risk until things level out or start to return in your favor.

OPEN POSITIONS:

Hold Encana butterfly.

Short DIA JUN & SEP calls. Hold, stops as indicated. Gains on these as markets decline softening losses on other positions.

USO – actually up today..unbelievable! Hold positions.

XIU, SU, CAT – still in, hold, stops as indicated. May be out of XIU and CAT today by the look of things. Markets down in overnight due to poor earnings reports after close yesterday.

SPY straddles – roll APR down as shown in new trades. Hold others.

NEW TRADES:

Roll the SPY APR $85 straddle down to $80. Buy back the 25 $85 puts, sell 25 each of the $80 calls and puts. Place exit stop on short $85 calls at $250 each.

Place orders to purchase the Encana $60 calls at $40 each to close and to purchase the XIU $14 calls at $25.00 each to close.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:29:00.001-07:00

SURVIVING THE GAME
FEBRUARY 17, 2009
2009 – 14

UGLY - that about sums up today’s action. Dow closed within 2 pts of low on Nov. 20th last year. S&P 500 closed down over 4.5%, Nasdaq down over 4% and Toronto down 3.5%. It sure looks like we will continue lower, but how far? I don’t know. One of these days we will get another big up day, just to clean out the weak shorts if for no other reason. Be VERY cautious, not a time for heroics.

Surprisingly volatility hardly spiked at all. The VIX moved up to 48.66 from the 43.00 area. The last time we saw 7850 on the DOW the VIX hit over 80. This is a sign that panic is leaving the market and being replaced by depression. As I said in the last newsletter it appears that many are simply throwing in the towel and walking away. Volume today was far from heavy, another sign of lack of interest. The VIX at 48 is still a good level for selling options, so you benefit. I think it would take a real jolt, say a 800+ point down day to send the VIX spiking a lot higher again.

That said here are the results in the model portfolio from today’s action.

Closed the DIA MAR $84 straddle at $907 each at the open today. Exit stop was $900 so got out near stop. Net profit of $3040 on that trade.

Bought back the DIA JUN $87 put at the open for $1310 each. Sold the SPY JUN $83 straddle for $1445 each.

Bought back the DIA SEP $87 put at the open for $1480. Sold the SPY SEP $83 straddle for $1845 each.

Stopped out on AA today at $7.00. Still short the JUL $7.50 calls. Place stop on AA JUL $7.50 calls at $150.00 each.

So, you are out of the DIA March position and left with the SPY -APR, JUN and SEP straddles. You are short the extra DIA JUN and SEP calls. See position summary for stops. Will exit extra short calls on any decent rally. They act as a bit of a hedge if markets continue lower. Place order to buy back the DIA JUN 87 calls at $50 each, SEP $87 and $92 calls at $100.00 each. Exit stops on new SPY straddles as indicated in position summary.

Model portfolio took a small hit today but hanging in there, up about 9% so far this year. Relative to the market averages, I feel good. The SPY, XIU, SU, CAT, AA and AAUK long stock/short option positions are actually showing a small loss of $566.00 all together. Stopped out on AA today. Close to being stopped out on SPY and AAUK. The short call positions saved our butts on these set of trades. The long stock positions are down $9200 but the short options are up $8634. If stopped out on stock, place stop on short call approx 20% above current price. That way, if market rallies, stopped out and only a small loss is incurred. If market continues down, profit grows on short calls to further offset loss on stocks. Always close out short calls if become very cheap.

USO trades hurt. OIL is pitiful.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:28:00.001-07:00

SURVIVING THE GAME
FEBRUARY 16, 2009
2009 – 13

FILLS:

A few fills for the model portfolio on Friday. Bought the DIA JUN $92 calls at $100 each to close position. Bought the USO APR $45 calls at $10 each to close position. Buy back the Soybean APR 1000 straddle in the night session for 97. Currently trading at 73 for puts and 24 for calls. It was sold on Feb. 9th for 118. You will be flat in that position now. Soybeans declining and moving away from middle of straddle, now at 950, volatility declining as well. Profit of $5250 for that trade.

OPEN POSITIONS:

Encana at $54.11, butterfly at 652. Hold

DIA MAR 90/100/110 butterfly basically a write-off. Closed at $19 each.

DIA MAR 84 straddle. Closed at $775. Move exit stop to $900.00.

DIA JUN 87 straddle. Closed at $1358. New exit stop at $1600.00. Close JUN 87 put Tuesday. See new trades below.

DIA SEP 87 straddle, short 92 calls. New exit stop on straddle at $2000. Close 87 put Tuesday. See new trades below. New exit stop on 92 calls at $250.

USO positions. Closed APR $45 calls Friday at $10 each. Hold all 3 positions.

SPY, XIU, SU, CAT, AA and AAUK. Hold, stops as indicated. Positions showing profits despite market declined due to premium erosion in options.

SPY APR 85 straddle. Sold Feb.11 at $1075 per straddle. Closed Friday at $1010. Market moving lower but volatility down as well. Hold.

MARKET COMMENTARY:

It sure looks like many traders are throwing in the towel. DOW closed at lowest level since huge down day on November 20th and market is sinking overnight. S&P 500 holding up better but close to breaking low of Jan 20th this year at about 806. I think people are just disappointed that there is still no miraculous plan to bail out the banks. I’m not sure what they were expecting but nothing is clearly not it. The question is how low will we go? I expect we are simply creating a new trading range. If we break the lows of Nov. 20th, watch out. That low has been touted as “ a line in the sand “ that must hold or DOW 6000 is right around the corner. I am adjusting the model portfolio so that if markets continue lower, you will be out of your long positions quickly, taking profits in some positions and small losses in others. You will also be short extra DIA calls to keep the portfolio more “delta neutral“. It is time to be very cautious, if things fall apart you want to be out quickly, not riding this thing down.

NEW TRADES:

Buy back the 30 DIA JUN $87 puts, leave the short $87 calls. Stop on the $87 calls at $250 each. Sell 25 each SPY JUN $83 straddles. Should net approx $1420-1450 per straddle. Exit stops at $65 and $101 on SPY.

Buy back the DIA SEP $87 puts, leave the short $87 calls. Stop on the $87 calls at $400 each. Sell 25 each SPY SEP $83 straddles. Should net approx $1810 - $1850 per straddle. Exit stops at $61 and $105 on SPY.

This leaves you with 4 straddle positions. DIA MAR 84. Stop very close at $900. If hit, will exit position with small gain of approx $3000.00. SPY APR $85 straddle. SPY JUN $83 straddle and SPY SEP $83 straddle. You also have extra short DIA JUN $87 calls, DIA SEP $87 and $92 calls. All these extra short calls have exit stops very tight so if market rallies, you will be out quickly. A rally is good for the portfolio in general. The extra short calls also act as a hedge if market continues to decline, offsetting some of the losses incurred in the long equity and short straddle positions. The extra short calls make the portfolio more delta neutral.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T18:27:00.005-07:00

SURVIVING THE GAME
FEBRUARY 11, 2009
2009 – 12

It seems that the latest bailout plan stinks. At least that is how the market is voting. As soon as it became clear that there was no plan yet, down we went.
I’m surprised it wasn’t worse. The market had hung its hat on the bad bank idea and that seems unlikely to happen, at least in the near term. Maybe another 1000 points down on the DOW will convince them to do something.

Model Portfolio stopped out of the DIA FEB 85 straddle yesterday at $605. $575 for put and $30 for call. Final profit was $12600.00. Can’t complain about that. Looking to purchase puts for MAR DIA straddle to lock in profits.

April soybean 1000 straddle trade working out well so far. Sold for 118, closed yesterday at 107.75 and looks like it will be down again today. May soybeans floating around $10.00 per bushel and volatility dropping back down. Squeeze in the stops to 885 and 1115. Expiry March 27th.

All other positions remain the same.

NEW TRADE:

As you can imagine, volatility spiked a bit yesterday with the 380 point drop. Now that you are out of the FEB DIA position, time to roll to new position in April, taking advantage of that volatility spike. You already have a March position. I am recommending that you switch from using the DIA options to using options on the SPY. SPY tracks the S&P 500 index as opposed to the DIA that tracks the DOW. SPY options are even more liquid than DIA. The volatility is slightly higher now in the SPY than DIA so option prices are a bit better. Sell 25 each SPY APRIL 85 calls and puts. Should net approx $1075 per straddle. Currently $1065-1085. Exit stops at $72 and $98 on SPY.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T18:27:00.004-07:00

SURVIVING THE GAME
FEBRUARY 9, 2009
2009 – 11

I have spent the last six weeks doing far more research and study of the markets than I normally would. One of my main strategies of investing is to intentionally avoid the day-to-day clutter that the markets produce. It allows me to stay focused on the big picture and not be swayed by a single event such as an employment report or Fed meeting. My quest, given that we are in the most difficult market conditions any of us have ever seen, was to try and decipher something unique, something different from normal. I am sorry to report that my quest has failed. I see nothing different today than I did a year or two ago. What I mean is that I see nothing that would sway me in any particular direction. No clear signs that tell me that we will rally strongly or that the next wave down is imminent. I mean that for all markets, not just the stock markets. I see the same, nothing clear. I think that is why the markets are so difficult to trade. They give few clear signals. Everything is hidden or disguised as something else. I believe that the failure of most traders and investors is that they believe they can see through the clutter and decipher something others cannot see.

The information coming out of the reports certainly paints a grim picture. The economy, particularly in the US is not just slowing but collapsing. Employment is weak, confidence is low, house prices continue to decline, not what I would call a very rosy outlook. But, the markets are supposed to be forward looking, seeing past the next 3-6 months and looking into next year and beyond. If that’s the case it appears that things will be bleak for some time to come. I have read several newsletters and reports and I am baffled that some of them have the nerve to predict any future market movements given the uncertain economy, etc. Some are bearish, some bullish, I guess that’s why the markets work the way they do. The never ending push and pull of the different sides of the market. I certainly don’t see anything that says we will go either way.

This leads me to my pet peeve. My biggest complaint about market newsletters, commentators on TV and the like is two fold. First most are very vague about how to trade their opinions. They love to use statements like “I think oil looks good down here”. What exactly does that mean? I believe this is intentional so that if they are correct they can say 6 months from now after oil is up $20, “see, I said it looked good $20 ago”. If they are wrong they can save face and stay in business. Second, those that are more forward, more clear in their direction, tend to hang their hat on one theory and ride it out, good or bad.

I will use The Dines Letter as an example. I have subscribed to TDL for many years so I feel safe commenting on his performance. Clearly Dines is not unintelligent. His career spans decades and I guarantee he has a whole lot more money than I do. I made money following his uranium recommendations up and was stopped out in stages as they retreated. But, I think he has either lost his mind or is too stubborn to back down. He is as guilty as any of using intentionally vague statements to express his views but my biggest concern is his ridiculous stance that the only way to make money in stocks going forward is uranium or gold/silver. I owned a basket of uranium stocks such as PNP, MGA, DML, UUU, PDN, etc. At one point the basket was worth $220,000.00 I was out of the last few as the basket fell below $160,000.00. I have tracked this basket of stocks ever since. It bottomed last fall at about $27,000 and is currently worth about $38,000. That is a decline of 83% and he is still fully invested. His latest newsletter switched all these shares to BUY, BUY, BUY. The problem is that he has been saying that almost all the way down. 83%, how does one recover from a beating like that? Most of these stocks need to rally 500% or more to regain their old highs, which is where he was still recommending them as BUYS. These are the “ good quality “ stocks of his uranium picks. The smaller stocks are doing even worse, some down as much as 98% from his entry point. I do not understand why he has been so stubborn, despite the terrible loses. It is fine to believe in the uranium story, I still do myself, but to bet the ranch on it is crazy. What if he is wrong? It can be argued that the huge declines in the uranium stocks are, as he says, due to liquidation by hedge funds, but what if they are not? It is too late to get out with a decent amount of capital intact so what to do? I think he is just being stubborn. He has staked his reputation on his uranium call and given his age, may not be alive to see if he was right or wrong. If he is right and these stocks recover and push on to new heights he will be hailed as one of the most astute investors of all time. If wrong, he will be mocked, much as he has his whole career, and tossed into the pile of market has-beens. The problem is that he has a huge following of investors who will see their net worth tossed into the same pile. I hope for the sake of his followers that he is right and they get their money back. I just don’t understand how it got to this point. Why didn’t he take most of the money off the table as we declined? Only he knows and he is not likely to tell me.

I have read several other reports put out by firms such as Merryl Lynch, Raymond James and others. I have also read reports and newsletters by other market commentators such as HS Dent, Dennis Gartman, etc. They give very conflicting and very different views. All give their opinions on what the future holds but no clear direction on how to act on that information. Lots of vague statements like “housing may decline into the 3rd quarter” or “ the US dollar should peak late this year”. How do they expect you to make a profit from that?

A side note on housing. As an investment category, real estate scares the hell out of me. By its very nature you are encouraged to use leverage. Investors put down only a percentage of the purchase price, mortgaging the rest. Typically investment property is 25% down, 75% borrowed. When times are good this leverage works in your favor but when the tide turns, a decline of only 25% wipes out your entire investment. This is no different than buying stocks on margin. If you told anyone you always leveraged yourself 4:1 by borrowing 75% as margin for your stocks, you would rightfully be looked at as crazy. But what really scares me is that real estate is NOT liquid. If you want out, you had better hope the market is good or you left holding the bag as they say. Many investors have investment properties and would like to liquidate them. The market has turned and turning those properties into cash is a lot harder than it was last year. If you are holding for the long term the liquidity isn’t an issue…today. Real estate has been seen as a more stable, predictable investment than stocks. Try telling that to someone living in California. And, if you think that what has happened in California ( a 50% decline ) can’t happen here, think again. I’m not predicting a real estate crash here but there are lots of signs that tell me that the peak we saw 18 months ago will hold for a long, long time. I prefer to stay in financial instruments that can be valued daily and can be liquidated in short order.

NEW TRADES:

Soybeans had another spike in volatility late last week. Volatility in Soybeans ( and agricultural products in general ) is opposite the stock market. In the stock market, down is always easier than up, therefore when the market drops quickly, volatility rises. With agricultural products, up is always the danger. A drought or some other weather issue can send agricultural commodities soaring, therefore when soybeans rally, volatility rises. Sell 5 each of the APRIL $10.00 calls and puts at 120 or better. This collects $30000.00 in option premium. April options are based on the May Soybeans contract. May beans closed at $10.06. Exit stops at 860 and 1140 basis the May Soybean contract. Expiry is March 27th, 6 weeks and 4 days from now. Risk is approx 20 cents or $1000 per straddle with total risk of $5000 or 1.5% of portfolio value. Soybeans trade in both the pits and electronically. For straddles it is better to enter them as straddle orders through the pit traded options rather than trying to execute them yourself through the electronically traded options.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:26:00.002-07:00

SURVIVING THE GAME
FEBRUARY 6, 2009
2009 – 10

What a week! We came into Monday looking pretty grim, markets threatening to punch through major support. Wednesday morning, all was well and the rally was on. By 10AM Thursday, it was official, the end of the world was imminent and markets were set to plunge to new lows and then boom, a rally kicked in and we find ourselves up nicely on the week. Now before we proclaim the rally is on understand that we are exactly where we were 10 days ago, and 20 days ago, 2 months ago, 4 months ago etc. The point being that a bounce off the bottom is nice but not nearly enough to get too excited about. It sure looks like 8000 on the DOW and 810 on the S&P 500 are major support and I’ll take it. Just be cautious.

This leads me to the following rant about options. My opinion is that options are the KEY to successful investing. Unless one is ordained with the gift of being able to pick more winners than losers, and get the direction correct, and exit at the right time, you inevitably fall far short of your goals when buying and selling stocks. It is a well known fact that less than 10% of fund managers can beat the index averages over a 5 year period, and they are supposed to be good at this! Options are the crucial element missing that will enable you to take a loss and lessen it, enhance a modest gain or produce gains where you may have though none existed. Another benefit is the ability to take a position in something with high risk, eg OIL, without taking on a huge amount of risk. Add in options and a rigid risk management system and you are ready to extract serious gains from the market.

NEW TRADES:

A few fills ffor the model portfolio rom this week. Sold the AA July $7.50 calls at $200 each on Wed. Sold the AAUK June $10.00 calls at $190 each on Wed. AAUK gapped open above $10.00, thus the fill was higher than the $150 desired. Sold the XIU June $14.00 calls at $110 each today.

You need to adjust the exit stops on several positions. I will send a position summary. All the changes are in orange. You will see that I have cancelled the exit stops on the DIA JUN and SEP $92 calls. I will explain that later in this letter.

OPEN POSITIONS:

Encana butterfly is performing nicely. Initiated for $355 each on Oct 28th. Closed today at $687 each. Hold, no stop. Expiry 3rd Friday of April.

DIA FEB 85 straddle. Closed today at $448. I have reduced exit stop to $600. Can’t complain about this for any reason. Open profits of $15800. If $600 exit stop is hit, will become closed profit of $12500. Beautiful spot to be in. Expiry in 2 weeks, will keep squeezing in exit stops until hit or position expires.

DIA MAR 90/100/110 butterfly. Or should I say dog. This was your Obama rally position…..hmmm. What happened to the rally? Initiated Dec 17th at a cost of $224 per position. Closed today at $89. Only benefit is that you still have 6 weeks to expiry so hang on. Hold, no stop. Exit at $200 if possible.

DIA MAR 84 straddle. Initiated Jan 5th as an 89 straddle, rolled down to 84 straddle Jan 15th. Kept short 89 calls. Closed 89 calls at $100 on Jan 29th. Position looks good so far. Closed at $755 today. Open profits of $6080. Exit stops at 7400 and 9400 on the DOW. If exit stops hit, profit will be reduced to approx. $2000. Nice position to be in. 6 weeks to expiry.

DIA JUN 87 straddle. Initiated Jan. 5th as 92 straddle, rolled down to 87 straddle on Jan. 15th. Kept short 92 calls. Still have both positions. Open profit of $7200, exit stops at 7100 and 10300 on DOW. 4 ½ months to expiry.

DIA SEP 87 straddle. Initiated Jan. 5th as 92 straddle, rolled down to 87 straddle on Jan. 15th. Kept short 92 calls. Still have both positions. Open profit of $7950, exit stops at 6700 and 10700 on DOW. 7 ½ months to expiry.

For both these positions you should cancel the exit stop on the short 92 calls. The reason is that with the addition of the long stock/short call positions in SPY, XIU, SU, CAT, AA and AAUK, the portfolio is now net long. The DIA straddles are neutral positions, favoring neither up nor down. The remaining DIA MAR 90 calls are net long so keeping the short DIA JUN and SEP 92 calls balances the portfolio and makes it more “ Delta Neutral “. Delta neutral is an options term used to describe how the movement in direction of an underlying, eg the DOW, affects the options on that instrument. Delta neutral means that whether something goes up or down, it has NO effect on the portfolio. The portfolio is not delta neutral, it is delta positive, meaning up in the market is good, down is bad. The short DIA 92 calls simply hedge the entire portfolio in the event of a market downturn because the value of the calls will drop if the market goes down, hedging some of the loss in the long equity positions. This technique is the key to reducing risk for someone holding a large equity portfolio.

USO APR, JUL and SEP butterflies. Oops. All are down as of today. Oil appears to be basing in the $40 range. Buy the short USO APR $45 calls at $10 each if possible. This will add to your initial cost but leave you net long the APR options. Any small move up will bring you back to even, a large move would result in huge gains.

SPY, XIU, SU, CAT, AA and AAUK long stock/short call positions all doing well. Together these positions have generated open profits of $7500. I have adjusted the exit stops on most of them. See position summary for new stops. Hold, various expiry dates.

I think that is enough for now. I known a lot of this is slow, tough reading and difficult to understand but believe me, it is worth it. Once you get your head wrapped around options it all becomes much easier.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T18:25:00.001-07:00

SURVIVING THE GAME
FEBRUARY 3, 2009
2009 – 9

Markets sliding sideways. No news to generate much action either direction. FEB DIA position just sitting $150 or so above exit stop. You will either be stopped out at $750 on the next leg down and book a nice profit or pocket an even larger gain should we manage to rally.

Soybeans moving lower again. Close out 1010 straddle. Currently 81-85. Sold at 102.5 on Jan 26th. May re-enter a new straddle at lower strike price.

AA and AAUK up today, no fills yet on options in those stocks. No fill yet on XIU JUN $14 calls yet. Keep orders in for now.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T18:24:00.004-07:00

SURVIVING THE GAME
JANUARY 26, 2009
2009 – 7

Markets up a bit this morning despite brutal CAT earnings. Maybe the uptick in existing house sales helped. We sure seem to be putting in a bottom in this area. Three bounces off the DOW 8000 level.

NEW TRADES:

CAT is still a great company. Buy 1000 CAT at market. Currently $32.70, down $2.70 for the day. Sell 10 CAT JAN 2010 $35 calls at approx $560 each. Currently $560 - $570. This puts you net long CAT at $27.00 with the bonus of a 5% dividend. This is similar to SUNCOR trade but dividend actually counts for something. Place exit stop at $27.50, that would be a new low for CAT. Best come scenario is that CAT is above $35 in JAN 2010. You then sell at $35, netting $8.00 per share or about 30% on your $27 per share investment. Add on the 5% dividend and that gives you 35% upside with protection down to $27.00 or a 20% hedge to the downside.

SOYBEANS. Yes soybeans. March soybeans are currently trading at about $10.30 per bushel. Soybeans trade in 5000 bushel contracts so 1 cent equals $50.00. Sell 5 each soybean March 1010 calls and puts. Will net approx 104 per straddle. 104 equals $5200 per straddle x 5 equals net $26000 premium. Exit stops if March soybeans hit $11.20 or $9.00 per bushel. Cost to liquidate straddle would be approx 125, a loss of 21 or $1050 per straddle. Total risk is $5250 or less than 2% of portfolio. This trade acts just like the DIA straddles. Time erodes value of options, moving significantly away from $10.10 increases value of options. Will be looking to purchase options as insurance as time goes by. Expiry for these options is Feb. 20th or 3 weeks and 4 days from now.

SPY is now at $84.62 up almost $2.00 from your entry point. Time to hedge. Sell 3 SPY JUN 90 calls at $5.50 or better. This gives you a downside hedge to $77.26 and nets you $5.50 per share option premium. Optimally SPY is just below $90 at option expiry in JUN. You then sell more options, further reducing your entry cost. At $90.00 in Jun you will have gained $12.74 per share or about 16%. Add a small dividend and that’s pretty good for 5 months on an index. Looking to do something with the XIU if we get a bit of a rally.

Oil sure looks like a bottom has been made. Our USO, ECA and SU trades are benefitting from this. Hold tight.

Leave all other positions the same.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:24:00.003-07:00

SURVIVING THE GAME
JANUARY 30, 2009
2009 – 8

Sideways markets and lower volatility. Just the recipe for options decay. All the DIA straddles showing profits for the week. Soybean trade working out really well. CAT down a bit but so is option.

OPEN POSITIONS:

As stated, all positions are performing well except USO and CAT. The USO positions are basically flat. You need to do a few adjustments to reduce risk.

1) You bought back the DIA MAR 89 calls on Thursday for $100 each. Cancel stop to buy at $200.00. Tighten stops on DIA MAR 84 straddle from 6900 & 9900 on DOW to 7400 & 9400 on DOW.

2) Tighten stops on DIA JUN 87 straddle from 6700 & 10700 to 7100 and 10300.

3) Tighten stops on DIA SEP 87 straddle from 6400 & 11000 to 6700 & 10700.

4) Soybean straddle doing really well. Sold for 102.5 on Monday, currently in the 78 range. March beans at 985 so still close to middle strike at 1010.0 This was another volatility trade, taking advantage of spike in volatility, therefore spike in option price, on soybeans. Looking to buy options to protect position. Looking at 910 put and 1110 call. Buy either at less than 3.0 each. Exit stop at 105 on straddle. Expiry in 3 weeks.

5) Place order to sell DIA MAR 90 calls at $250 or better. Trading at about $90 so will only be filled if we rally substantially. 7 weeks to expiry so we’ll see what happens.

NEW TRADES:

With the ability to reduce risk by lowering stops, tightening stops and buying options, it allows you to continue to add positions to portfolio without increasing overall risk. With that in mind, here are a few new trades.

1) Sell 12 XIU JUN $14 calls at $110 or better. This will be tough as the CDN options market is pretty thin. Open interest is only 861 in this contract ( as opposed to over 21,000 in the SPY JUN $90 calls you sold ). Just put in your order and be patient. This will put you long XIU at $12.10. Closed Thursday at $13.57. That gives us a 10% hedge to the downside. You are obligated to sell at $14.00 on 3rd Friday of June if above that price. That would give you a 16% return in 5 months. Small dividend as well. This reduces, not increases total portfolio risk.

2) AA. Alcoa. Beaten down but not likely to be out. Buy 2000 AA at $8.10 or better. Sell 20 AA JULY $7.50 calls at $2.00 or better. This puts you long at $6.10. Exit stop at $6.50. 25% hedge to downside, 25% potential gain if above $7.50 in 25 weeks. Dividend is also 8.00% if it holds. Risk of approx 1% of portfolio.

3) AAUK. Anglo American PLC. No I don’t have a thing for companies with ticker symbols that start with A. I have to thank James Dines for this one. I have been watching this company for many years because it is a core holding in his portfolio. He bought it at $9.20 in May, 2002 and is now flat after 7 years. I think it used to pay a small dividend but can’t remember for sure. No dividend now. The beauty is that it WAS $35 per share, now $9.17. Buy 2000 at market. Sell 20 AAUK JUN $10 calls at $1.50 or better. Puts you long at $7.67, exit stop at $7.00, new low in stock. 17% hedge to downside, potential 32% return if above $10.00 in June. Risk of approx 1.5% of portfolio.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:23:00.001-07:00

SURVIVING THE GAME
JANUARY 23, 2009
2009 – 6A

Model portfolio bought back remaining DIA MAR 100 calls at $10 each. Flat in those now.

Bought 1000 SU at $18.90, sold 10 SU JAN 2010 $20 calls at $520 each. Net long at $13.70, stop at $14.00. This trade worked out really well, oil started rising right after you got in. SU closed at $19.50 and the option closed at $570. Let’s see if the oil Gods are good to you on this trade.

Adjust stops on DIA FEB 85 straddle to exit at $900. This assures a profit on this trade even if markets continue to decline.

I’m going to walk through the DIA FEB options position to try and make it a little more clear.

Initially sold the FEB 90 straddle at $1310 on Dec 17th. Five days later after the market declined you purchased the FEB 102 calls at $27 each. These act as insurance against a huge rally. Now net $1283 for straddle. Market then rallied into the first part of this year. The market has since sold off sharply. On Jan 15th, you adjusted position by buying back the FEB 89 puts for $945 each and selling the FEB 85 straddle for $917. You kept the short FEB 89 calls which were at approx $150 each and placed a stop to get out of them at $200 each if we rallied. The market has since continued to slide and you are now near the lows of the year. I continued to lower the stop on the FEB 89 calls until this morning when they were bought back for $20 each. The 89 straddle was initially sold for $1310, the 89 put was bot for $945 and the 89 call for $20. This resulted in a net gain of $345 per straddle. The 85 straddle that was sold on Jan 15th for $917 each closed today at $698 each showing an open gain of $219 per straddle. The FEB 102 call bot as insurance for $27 closed at $5 and is basically a write-off. I have now placed an exit stop on FEB 85 straddle at $900. This will be triggered by a further decline of 200 points or more in the DOW. If not hit, I will continue to tighten the stop until we get to expiry ( Feb. 20th ) or stop is hit.

Hopefully that makes that trade a bit more clear. The DIA positions in MAR, JUN and SEPT follow the same theme.

ECA, USO and other trades doing fine. Leave stops as indicated and we’ll see what happens in the months to come.

Still contemplating what calls to sell against our long SPY and XIU positions.

We’ve had a few more join our little newsletter. Welcome aboard. Thanks to those who attended the seminar Wed eve. I am always open for further discussion with anyone looking to execute these trades or just to chat about options, strategy etc.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T18:22:00.001-07:00

SURVIVING THE GAME
JANUARY 23, 2009
2009 – 6

Another ugly day. They seem to be coming more frequently. Market sentiment is just plain gloomy. No real enthusiasm for anyone to buy. The next few weeks will show us whether we continue to drift lower or finally buyers step up to take on some risk.

Model portfolio bought 20 DIA MAR 100 calls yesterday for $10. Buy back remaining 20 today. Trading at $2 - $10 now. This leaves you long the DIA MAR 90 calls. Hold on to them for now.

Bought back 20 DIA FEB 90 calls this morning at $20 as per last newsletter. Cancel stop at $60. Flat in those now.

Lower stop on DIA MAR 89 calls from $250 TO $200.
Lower stop on DIA JUN 92 calls from $400 to $300.
Lower stop on DIA SEP 92 calls from $550 to450.

This simply limits risk if we have a rally.

Leave all other positions as they are.

NEW TRADE :

This comes to us compliments of one of the attendees of the seminar Wed eve.

Purchase 1000 Suncor (SU) here at market. Trading at $US 18.87
Sell 10 SU JAN 2010 $20 calls at $510 or better. Currently $510-550
I recommend doing these trades in the US vs Canada. This puts you net long 1000 SU at $13.70. Place stop to exit trade at $14.00 on SU. If hit, buy back short SU JAN $20 calls.

Here is how this trade unfolds.

Duration is 51 weeks. Options expire 3rd Friday of Jan, 2010. You are obligated to sell our shares at $20 each at expiry if SU is anywhere above $20.00. If held to expiry, you have no risk unless SU drops below $13.70.

There are 2 ways to look at the profit/loss on this trade.

1) If you purchase SU outright it costs $18900. You them receive $5200 for selling the options. This leaves you net $13700 invested. If SU is at or above $20 Jan 2010, you receive $20000 back. This is a gain of $6300 on your $13700 investment or a 46% return. You also receive a small .80% dividend but that hardly accounts for anything.

2) If you purchase SU on margin, you will need $5670 in your account, or 30%, to buy 1000 shares. You then receive $5200 for selling the options. This leaves you net $470 invested. Sounds ridiculous but it is true. Now, if SU is at $20 or higher in JAN 2010, you receive $20000 for selling shares, you pay back the $13230 loaned to you as margin and pocket the remaining $6300 profit. I’m hesitant to say this but that is a 1340% return on your initial $470 investment. You still receive the dividend but you will also pay interest on the $13230 margin. Remember, if SU declines, you will have to add additional funds to meet margin call. Eg If SU declines $1.00 per share, you have now lost $1000 on the 1000 shares. You have lost $300 and the broker has lost $700 of the margin loaned to you. You would have to replay the $700 lost margin to keep account square with broker.

This is a great risk:reward either way. The danger is that someone over leverages themselves with the ability to buy SU on margin. I would always suggest that you have at minimum 50% of the cash to purchase the shares outright, then sell the options. Another way to limit risk is to determine your exit point and make the number of shares purchased relative to the risk.

Exit on this trade is if SU drops to $14.00. This would be a new low for stock. Loss would be approx $4.90 per share or $4900. There would be an offsetting gain on the option. The gain would be determined by when the event occurred. If SU dropped to $14.00 in Jan next year, the option would be virtually worthless and you would recoup as much as you lost on the stock. Remember, the breakeven point on SU is $13.70 per share at expiry. If SU dropped quickly to $14.00, say in next month, the option would fall but not to zero. If this were to occur, the option would drop from $510 to approx $340. This would result in a gain of $170 per option or $1700. This would reduce overall loss from $4900 to $3200. This is how I determine how many shares to buy for model portfolio. Portfolio is taking on a 1% risk for portfolio on this trade.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:21:00.005-07:00

SURVIVING THE GAME

JANUARY 15, 2009
2009 - 4

Timing seemed to work out this morning, bought near lows of day
Bought 300 SPY at $82.76
Bought 800 XIU at $12.98
I wish my math was better ! It should have been 1200 XIU.
Buy 400 more Fri morning for total of 1200.

You will be selling out-of-the-money calls against these positions in the near future. Place stops at $74.00 on SPY and $11.50 on XIU

Will add equal number to these positions if we rally.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:21:00.003-07:00

SURVIVING THE GAME
JANUARY 21, 2009
2009 – 5

Markets seemed to have digested Obama’s arrival. The massacre in the bank stocks yesterday was brutal. It seems to hint that the TARP program is failing and the demise of many US banks is inevitable.

A few adjustments to to reduce risk in the portfolio.

Reduce the stop on the DIA FEB 90 calls from $200 to $60 and place order to close at $20.
Place stop on 20 ( ½ the position ) DIA MAR 100 calls at $25 and order to close at $10.
Reduce stop on the DIA MAR 89 calls from $350 to $250 and order to close at $100.
Reduce stop on DIA JUN 92 calls from $500 to $400 and order to close at $100.
Reduce stop on DIA SEP 92 calls from $650 to $550 and order to close at $100.

This simply reduces risk in the event of a rally.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T18:20:00.003-07:00

SURVIVING THE GAME

JANUARY 15, 2009

2009 - 3

Hello from not so sunny Mexico. Markets have decided down is better than up.

Model portfolio stopped out on DIA JAN 86/86 this morning at $509. Bought puts at $505 and calls at $4. Flat in Jan DIA now. Nice gain on that position.

You need to adjust some other positions.

Buy back 20 DIA FEB 90 puts
Sell 20 DIA FEB 85 calls and puts.
Place stop to buy back 20 DIA FEB 90 calls at $200 each
Move stops for Feb to 7300 and 9700

Buy back 20 DIA MAR 89 puts
Sell 20 each DIA MAR 84 calls and puts
Place stop to buy back 20 DIA MAR 89 calls at $350
Move stops for Mar to 6900 and 9900

Buy back 30 DIA JUN 92 puts
Sell 30 each DIA JUN 87 calls and puts
Place stop to buy back 30 DIA JUN 92 calls at $500
Move stops for Jun to 6700 and 10700

Buy back 30 DIA SEP 92 puts
Sell 30 each DIA SEP 87 calls and puts
Place stop to buy back 30 DIA SEP 92 calls at $650
Move stops for Sep to 6400 and 11000

These trades simply adjust straddles down to make portfolio more neutral. The leftover calls will be stopped out or bought back cheaper later.

Leave other positions as is.

Time to get a bit long at these prices.
Normally you would want to be about 50% invested net long. So, to start the process you will get long 1/3 of that. You are committing 15% of capital to long equities. Yer are going to use ETF's instead of individual stocks . Split it 2/3 US market and 1/3 Cdn market.

Buy 300 SPY in US This costs approx $25000 $US. Buy 800 XIU in Toronto. This costs approx $10000 $CDN. You must buy in 100 shares blocks.

You will be selling covered calls against these position shortly.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:18:00.001-07:00

SURVIVING THE GAME
JANUARY 8, 2009
2009 – 2

I am also sending a position summary with the fills from the trades on Monday. The stops are also in the summary.

Move the stops on the DIA JAN 86/86 straddle from $800 to $600. The straddle is currently $404-410. Will tighten again as we get closer to expiry if not stopped out. Expiry is next Friday the 16th.

All other trades stay the same.

NEW TRADES:

I believe oil will go back up. When, I’m not sure. There is clearly a glut now with overcapacity and lack of demand. But, as with everything in this world, this to will change. So, to take a position with limited risk and maximum gain do the following trades. You are putting on butterfly option trades just like in Encana and the DIA MAR 90/100/110 position. Limited risk, high potential gains. The key is to get the timing and target price correct. You are using the USO, which is an ETF that tracks short term oil prices.

1) Buy 20 USO APR$ 35 calls, sell 40 $45 calls, buy 20 $55 calls. This will cost approx $160 per trade to initiate. Risk is $160 per trade, max potential gain is $840 per trade. You lose the entire $160 if MAY crude oil futures are below $45.00 at expiry. Max gain is at approx $57.

2) Buy 20 USO JUL $35 calls, sell 40 $45 calls, buy 20 $55 calls. This will cost approx $140 per trade. Risk is $140, max gain is $860 per trade. Same prices as above but based on the AUG crude futures contract.

3) Buy 20 USO JAN 2010 $40 calls, sell 40 $55 calls, buy 20 $70 calls. This will cost approx $160 per trade. Max risk is $170 but max gain is now $1340 each. Max loss occurs if FEB 2010 crude futures are below $51 and max gain occurs at approx $70 at expiry.

These are all extremely low risk/high reward trades. I encourage you to look at them closely. If crude does not move up at all, the value of these positions will deteriorate very slowly. You will exit at ½ premium paid on all these, risking ½ initial cost. This makes the risk on each position approx $80.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:17:00.001-07:00

SURVIVING THE GAME
JANUARY 6, 2009
2009 - 1a

To those in the uranium and silver stocks.

You were stopped out today at $2.00 on DML and $10.75 on SLV. You had stop on PNP at $.90, move up to $1.20. You had stop on MGA at $.85, move up to $1.10. Stop in on UUU at $1.60.

I believe this is a short squeeze so you should be out if we pull back. Grateful to be showing a small profit on these positions.

Maybe the tide has turned?
If so, great, still in 3 uraniums.
Will keep moving stops up as stocks rise.

Will consider adding to positions if we double from these levels.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:14:00.004-07:00

SURVIVING THE GAME
DECEMBER 30, 2008
2008 - 26

Things have gone well the last week. Moving sideways to slightly up. Straddle positions performing well. Need to do some adjustments.

NEW TRADES:

Sell 20 DIA JAN 76 puts.
Place stops on JAN DIA 88/88 straddle at $800.
Currently trading at $542-550.
Hang on to long JAN DIA 96 calls, not worth selling at $8 each.

This removes insurance bought to protect downside but stop is in to liquidate if we drop too much.

Place a stop on UDN APR 25 calls at $200. Currently $240. Don’t want to let the gains in this get away if $US turns up on us.

Will send position summary tonight with fills and stops.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:14:00.003-07:00

SURVIVING THE GAME
JANUARY 5, 2009
2009 – 1

Here we are, a new year is upon us. Lets hope the markets treat everyone a little kinder than 2008 did. As I have stated before I expect 2009 to be flat but with continued volatility. I am looking to take a long equity position, most likely in index funds as opposed to individual stocks, then use options to start hedging risk and collecting premium to enhance return. Will let you know as soon as I see a good entry point. Probably if we get a pullback to Dow 8500 or lower.

Model portfolio stopped out on Friday on the final 15 UDN APR 25 calls at $200. Now flat in $US. Will look to re-enter if market sets up properly.

OPEN POSITIONS:

ECA butterfly puttering along slowly. Now at $514 each. In for $355, hold.

DIA JAN 86 straddle closed at $586. Stops to exit at $800. These options expire on Jan. 16th. If stops not hit, will tighten as we get closer to expiry.

DIA FEB 90 straddle doing great. Sold for $1310. Closed at $830 on Friday. Own FEB 102 call so upside is protected. Tighten stop to exit at Dow 7800. Looking to purchase cheap insurance to lock up gain.

DIA MAR 90/100/110 ( my Obama trade ) butterfly is up slightly. Hold, no stop.

NEW TRADES:

Markets seem to have calmed a bit the last few weeks. VIX at 39.19, down from 60 a month ago. This has been good for your open DIA straddle positions. 40 is still a very high reading so time to take advantage of that fact. One year ago VIX was at approx 22.

1) Sell 20 each DIA MAR 89 calls and puts. Closed at $1075-1125 on Friday. Should net near $1100 per straddle. Set exit stops at 10400 and 7400 on DOW. Risk is approx $8000 or 3% of portfolio. Potential gain is $22000 or 9% of portfolio.

2) Sell 30 each DIA JUN 92 calls and puts. Closed at $1575-1645 on Friday. Should net near $1600 per straddle. Set exit stops at 11200 and 7200 on DOW. Risk is approx 4% of portfolio. Potential gain is $48000 or 16%.

3) Sell 30 each DIA SEP 92 calls and puts. Closed at $1925-1990 on Friday. Should net near $1950 per straddle. Set exit stops at 11550 and 6850 on DOW. Risk is approx 4%, potential gain is $58500 or 20% of portfolio.

Yes, these are all very similar trades and no, I haven’t lost my mind. After much study I have decided that these are incredibly good trades. The risk/reward is good and if I am correct that 2009 will be flat, these trades will reap healthy gains. If I am wrong, the risk is manageable and losses will be relatively small. Remember this is based on what is now a $300,000.00 portfolio and the percentage risk can be scaled down if you are not comfortable with the level of risk indicated. Also, will be looking to purchase options to reduce/eliminate risk on all of these positions.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:13:00.001-07:00

SURVIVING THE GAME
DECEMBER 22, 2008
2008 - 25

Markets are trading sideways and marking time until Christmas. I think everyone is just exhausted and wants the time off. Friday was am amazing expiry for DIA DEC options. DIA closed at $85.26. You bought back the 84 calls at the close for $150 each. The 84 puts expired worthless.Volatility is collapsing as we speak. In the last 11 days we have fallen from 56 to 42 on the VIX. This has led to large gains in your DIA JAN and FEB straddles. The JAN 86/86 was sold for $1275 each on Dec 2nd, it closed Friday at $695 and is currently $650-$665. The FEB 90/90 was sold on Dec. 17th for $1310, closed Friday at $1080 and is currently $1050-$1080.

There are two ways to play this. The decline in volatility is great for existing positions, not so great for any new positions. The lower volatility leads to lower option premium, therefore reducing amount we would get for selling new straddles. In the good old days, I would be chasing this volatility down, adding furiously to new positions, “before it is too late”. Today I view this the exact opposite. I’ll take the juicy gains and do what I can to protect them. There will always be another opportunity to start new trades.

With that, here are some new trades:
Buy 20 DIA JAN 96 calls at $21 each.
Buy 20 DIA JAN 76 puts at $80 each
Total cost $101 per trade
The JAN DIA position is now risk free.
Sold the 86/86 straddle, bought the 76 put and 96 calls as insurance.
The most you can give back now is $1000 per straddle and net premium is $1174 per straddle. Remove stops on the straddle.
Try to buy 20 DIA FEB 102 calls at $30 each or less. This will cover the upside of the FEB 90/90 straddle.
Lets see what the Christmas break hands us.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:08:00.001-07:00

SURVIVING THE GAME
DECEMBER 12, 2008
2008 - 24a

Quick note. Tomorrow is final trading day on the DIA DEC options. Make sure you are flat by end of day. Call closed at $280. Put closed at $24. Move stop from $600 to $400 or $80 and $88 on DIA. DIA closed at $86.36. The closer to $84 we close, the cheaper the options become. One will expire worthless, the other you will have to buy back near close or you will be exercised.
Exercised means you will be buying or selling 2000 DIA at $84 ( the strike price of the options ).

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:07:00.002-07:00

SURVIVING THE GAME
DECEMBER 16, 2008
2008 - 24

TRADES:

DIA DEC 84 straddle came close to hitting exit point today. Futures show a lower open tomorrow but we’ll see what happens. Keep stop at $600 or $90.00 on the DIA. High today was $89.75.

DIA JAN 86 straddle doing fine. Closed at $955. Sold for $1275 on Dec 2nd. Stops at 7000 and 10200 on DOW. Watching the 72-74 puts and 100-102 calls to buy as insurance. Buy either at $40 or lower.

Encana butterfly at $415, up from entry point of $355. Hold, no stops.

UDN calls doing really well. $US is collapsing. The UDN APR 25 calls closed at $235. Bought at $80. Half of position sold at $200, no stop on second half. We’ll see how far down $US goes.

NEW TRADES:

Sell 20 each DIA FEB 90 calls and puts. Closed today at $1320-1385. Should net approx $1350 per straddle. Exit points are at 7300 and 10700 on DOW. These options expire Feb 20th, 9 weeks from now. Will look to purchase OTM ( out of the money ) calls and puts to cover these short options when prices come down.

Volatility continues to drop slowly. VIX closed today at 52.37. I have to stress that this is still a HUGE reading, therefore driving up the option prices. Another jolt down would drive the VIX up again. I believe we have seen the highs near 90 on the VIX and may never see them again. If we collapse ( down more than 300 points ) tomorrow, hold off on sale of DIA FEB 90 straddle until next newsletter.

Buy 20 DIA MAR 90 calls, sell 40 DIA MAR 100 calls, buy 20 DIA MAR 110 calls. This is a butterfly, just like in ECA. This will cost between $200 and $250 per position. Why? This is to capture a rally over the next 3 months. A rally that does not exceed 11000 on the DOW. Reward:risk is 4 or 5:1 depending on fills. I am far from convinced that all is well but the market seems to have bottomed. The fed is determined to push the market up so we might as well jump on board. Risk is limited to total premium paid of $4000-$5000. Execute this trade no matter what happens tomorrow. Volatility does not affect this type of trade as much as other option trades.

MARKET COMMENTRY:

I have spent the last 3 months watching in awe as history unfolds in front of my eyes. Understand that we are in uncharted territory and books will be written for 50 years about the events of 2008. So, if your feeling a little overwhelmed by what has happen, join the club. I am simply trying my best to navigate through these difficult times. I have chosen to trade, very conservatively, instead of sitting on the sidelines and watching. I feel that the opportunities presented, especially from high volatility, justify the risk under these conditions.

You may have noticed that we now have exclusively option positions. I would really like to start putting on some “ normal “ long equity, short call positions but frankly I’m not convinced the bottom has come and gone. If I had to bet I would say yes, the bottom is in, but I’m not sure enough to take on a lot of risk yet. So, I’ll stick to lower risk options trades and see what the next 3 months brings us. Risk is always my first priority, profit second.

Ben Bernanke has been upgraded from Helicopter Ben to Carpet Bomber Ben. In case you haven’t heard the story, here it is. In a speech Bernake once made reference to dropping bales of cash from helicopters if that was what it took to stimulate an economy. Well, he certainly has done that and more, hence the upgrade to Carpet Bomber Ben. The action today and more precisely the wording of their future intentions left no doubt as to where the Fed stands. They will do whatever it takes and spend however much it takes to right the ship. Period. No wishy washy statements today. The question is, will it work and what are the ramifications of TRILLIONS of dollars of either debt or printed money?

JOBS:

You can lower interest rates to zero and it will eventually help business to expand and hire. But, it does nothing for the unemployed. They have no money to spend and are unlikely, or unable, to borrow to spend with no job. So, lower interest rates and easier credit do nothing for the current and future unemployed. It will however lead to more employment in the future. My guess is 12-18 months at least before it helps.

HOUSING:

I believe the real problem is still housing. Again, lower rates are great IF you can take advantage of them. You have to be in a position to qualify to re-finance for lower rates to help you. Most Americans do not. Even if they have equity, their credit scores are too low to qualify, especially with tighter requirements. Also, millions of homeowners are underwater on their mortgages ( owe more than the house is worth ). Lower rates will help these people only if somehow they can be convinced to stay in their houses instead of walking away and turning in the keys. Those of us who live in Calgary saw this happen here in early 80’s. It took 15 years for Calgary real estate to recover. No matter the rate, many will give up their houses instead of re-finance. The sub-prime mortgages helped trigger this disaster, but there is more to come. There were approx $1 trillion in sub-prime mortgages and we all know what has happened with those. But, there are $1.6 trillion in Alt-A and adjustable ARM mortgages. These were written from 2005 to 2007. They will start to hit the market in 2009. These were the interest only or extremely low introductory rate mortgages. Some as low as 1%. They are set to re-adjust to market rates starting next year. Most of these loans were to speculators or people who would not normally be able to afford the house they bought. Many of these were the famous NINJA loans ( no income, no job, no assets for the borrower ). They were also called “ liar loans “. Everything was peachy, assuming house prices continued to climb, but, they have not. I believe these mortgages are the next shoe to drop on the credit markets. The US is currently building homes at the same rate as 1959 but there is a huge overhang of existing homes and lots of supply ( foreclosures ) coming soon.

Credit card and auto loans:

Same situation as the mortgages. Lower rates will NOT trickle down to most of these loans. The big banks have HUGE exposure to credit card debt. As unemployment rises, so do defaults for both of these type of debts.

Consumer Confidence:

At the lowest level since the 1930’s. Obviously doesn’t bode well for stimulating the economy. As one commentator said, “ the consumer has seen $4 per gallon gas, realized that they cannot exist in that environment, and is afraid of going back “. Will we see a sudden shift in the US from a consumption driven economy to a saving ( or debt reduction ) society? That would spell disaster for the US economy measured in decades, not months. Early signs are that the consumer is holding back, despite efforts to stimulate spending. Watching the value of your house drop by 30-60% doesn’t help boost confidence much either.

Inflation or deflation?

The consumer is showing signs of retreat, maybe even a permanent shift in spending mentality. Will this lead to deflation or will the massive liquidity injected by the government lead to inflation? I wish I knew. The fear has always been of runaway inflation. That was easy to see, easy to measure and easy to fight. Raise rates, stomp down inflation. But nobody would ever admit that a little inflation was actually good, kept thing rolling along. I think stagflation is off the table for now. The boogeyman is deflation. Cash is king in a deflationary cycle and very few people have cash. Most have debt. If your assets are falling, your wages start to fall and you owe a substantial amount, you’re a dead duck. Bankruptcy is next on your agenda. We have seen home prices and commodity prices collapse but other than fuel, no significant drop in other prices. The fed may have avoided a nasty deflationary spiral but the potential still exists to head down that path. It all rests on the consumer, will they spend or will fear keep them out of the game. Time will reveal the answer.

As the above commentary outlines, the future is far from certain. I maintain that we will see sideways market action for an extended period. Things look good for a bounce from now into the post-inauguration period, then POW, reality will set in once again. I will continue to do my best to try and extract gains from this extraordinary market.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-21T18:05:00.002-07:00

SURVIVING THE GAME
DECEMBER ?
2008 - 23a

Bought the DIA DEC 95 calls this morning for $5.00 near open.
Flat in that position now.
Move stops on DIA DEC 84 straddle from $750 to $600
Essentially if DOW gets to 9000 or 7800 get out.
Currently at 8620

Dave

2009-02-21T18:04:00.001-07:00

SURVIVING THE GAME
DECEMBER 11, 2008
NUMBER 23

Need to do a few adjustments to orders.

Reduce exit stop on DIA DEC 95 calls from $150 each to $40. Closed yesterday at $33. Currently $21-24. These are left over from DIA 85/95/105 butterfly and we don’t want them to become a problem if we rally huge between now and next Friday. Also, enter order to exit the same at $10 or better to become flat.

We are entering the end game for our DIA DEC 84 straddle. Closed yesterday at $587-610. Our stop is currently at $900. Lower stop to $750. There are several ways to use a stop on this position. I actually use the DOW JONES mini futures contract, symbol YM. It is very liquid. 1 mini futures equals 5 options. If you are in this trade and need assistance with stops, please call me at 403-464-9998. As we get closer to expiry next Friday, will continue to tighten stop until we are forced out.

The UDN is spiking higher today as the $US crumbles. Options currently $185-200. Hold, no stop on this. Entry point was at $80 each, half already sold at $200.

The Encana butterfly is just sitting in the $390 range. Entered at $355 so up slightly. The stock is at $59. This expires in April so just set aside a we’ll see what happens.

The DIA JAN 86 straddle is doing fine. Entered at $1275, currently approx $1040. Nice profit starting to show there. Starting to look at DIA JAN 100-102 calls and 70-72 puts to purchase as insurance. Still a bit pricey but coming down fast. Will keep you informed when good time to buy.

Watching the DIA FEB 86-90 straddles. Currently in the $1400 range. I want to sell these as soon as possible. Will let you know when. The VIX has now pulled back to 53 from the 80’s. This shows that fear is slowly leaving the market and things are starting to calm down a bit. I know not many of you are doing these straddles. I can only encourage you to do so. Because of the high volatility, the premium received is extraordinarily high. Unfortunately this will not last forever. One year ago, you would only receive maybe $600 for a straddle with 2 months to expiry, not $1400 like the FEB positions are now.

I sent out the beginnings of my trading manual last night. I will continue to add to it and update existing sections over time. I realize much of this is new to many readers so I am trying my best to explain what is going on. I encourage you to try the straddle trades. They are relatively low risk with high probability of profit. I do not expect any measurable move up in the markets for quite some time. The straddle trades are a way to recoup some of the loses incurred this year even as we move sideways. Again, please call if you would like to attempt these trades and want some one on one time to go through the details.

Dave Knight
Editor
Surviving The Gme

2009-02-21T18:03:00.001-07:00

SURVIVING THE GAME
DECEMBER 2, 2008
VOLUME 1 NUMBER 22

Well, another ugly day yesterday. Seems like every time the market starts to look good, POW right in the kisser. Unfortunately this what I expect for quite some time. This leads into our next trade.

Sell 20 each DIA JAN 09 86 calls and puts. Should net approx $1270-$1300 per straddle. Exit points at 7000 and 10200 on Dow.

The other positions look good. Keep an eye on the DIA DEC 68-74 puts. Try to pick up some cheap insurance ( less than $50 each ) to cover the DIA DEC 84 straddle.

Dave Knight
Editor
Surviving The Game

2009-02-21T18:02:00.000-07:00

SURVIVING THE GAME
NOVEMBER 24, 2008
VOLUME 1 NUMBER 21

Stopped out on the AAPL $140 calls today at $350. Now flat in all the equity/option trades initiated over the last 6 weeks. As an observation, you can see that every single stock trade was a loss. The addition of options turned two from losses into gains ( GM & UYG ). Three lessened the loss on the stock position ( LVS, NUE & AAPL ). Two were flat ( GE & C ) and 1 made it worse ( BNS ). All said, the options did what they were supposed to do, lower loss in event of a move against position and/or enhance gain if flat or correct on direction. I am not at all happy that every position has been stopped out but that is life. I am especially disappointed that the NUE, AAPL and BNS positions were taken out last Thursday on the most recent thrust lower. However, while NUE and AAPL are now rebounding above our exit point, look at the losses that would have been incurred if we had simply hung on or averaged down. The UYG, C, LVS and GM positions would have been devastating. I am looking to reinitiate some stock/option positions soon. Will keep you informed.

On the bright side, the pure option positions are performing wonderfully. The DIA straddle positions have generated over $13000 in profits so far, offsetting the losses on the equities. The ECA and DIA butterfly positions are holding their own, essentially flat so far. The UDN ( $US ) position is now starting to show good gains.

Overall I am happy that we are flat over the last 7 weeks given the turmoil in the markets. I am cautiously looking at adding new stock/option positions if the market holds most recent low.

We are positioned neutral with the DIA DEC 84 straddle, protected to the upside by the long DEC $100 calls. Looking to purchase downside protection with the DIA DEC 65-70 puts. They are currently in the $70 - $130 range. Purchase one of these for $40 or less if given opportunity. The higher the strike price ( eg 70 vs 65 ) the more protection but also higher the cost of that protection. If able to purchase downside protection, look at selling JAN postions. I am looking for a small rally with the DIA DEC 85/95/100 butterfly position, anything above 8765 generates a profit. As long as the rally stays below 9735, we profit.

I am working on a newsletter that outlines my basic strategies. Briefly it will say that I am looking to capture profit from multiple sources while always striving to limit risk. Some examples are: 1) Long stock, short options to garner premium. 2) Selling option straddles, strangles, condors, etc to capture premium decay in a sideways market. 3) Various option strategies such as butterflies, spreads and outright option purchases to benefit from a correct determination of direction. I will also be doing directional trades in commodities, currencies, etc.

Those looking to educate themselves on options can go to www.onn.tv. It has lots of info on options, strategies, etc. Some of the info is a bit dry but still quite informative.

Until then, I hope we have seen the bottom and will consolidate in this 8000-9000 range for a while. If not you will be hearing from me sooner rather than later.

Dave Knight
Editor
Surviving The Game

2009-02-21T18:01:00.000-07:00

SURVIVING THE GAME
NOVEMBER 20, 2008
VOLUME 1 NUMBER 20

Flat now in DIA NOV option positions. It worked out well today. Exited the 80 puts at $136 each then we rallied. I kept ratcheting up the stop on the 92 puts and when we rolled over and sunk in the afternoon, was stopped out at $965. Actually managed to turn a profit on the NOV positions despite market collapse!

I am attaching position summary that shows all the fills from last week and yesterday. Portfolio hanging on but still sinking slowly. You will notice that the positions for the 4 uranium mining shares and the SLV are now deleted. My single paying subscriber, who is trying to market this newsletter to clients, has requested them to be removed. His argument being that they were initiated before I even started the letter and nobody could have been in on those trades. I am not in favor of this but have agreed to remove them. You and I know that they are in my personal holdings so if one day you hear that either uranium or silver have rallied huge, you know I’ll be a happy camper. I have included current closing prices for the positions we have been stopped out on. As much as I was disappointed at being stopped out, look at the huge losses that would have been incurred if we had “hung on for a bounce” as the talking heads on TV like to say. Preservation of capital is far more important than trying to catch a small gain on a bounce. We can always re-enter on the long side when the markets finally turn up.

Now is not the time to be a hero, but rather to hunker down, get really defensive and see how things unfold. This is serious stuff, not a craps game at the casino. We are still in BNS, NUE and AAPL but barely above stops. The ECA, UDN and DIA options positions are all doing fine even with the market turmoil. This shows the advantage of these options strategies over buying stocks directly. You can sustain huge movements against your position without the catastrophic losses.

It is time to adjust the DIA DEC positions down again. We currently have the 88 straddle. Buy back the DIA DEC 88 puts and sell the DIA DEC 84 calls and puts. This will result in a small credit of approx $150 per position. Keep the DEC 88 calls and place an order to exit at $350 each. Also place an order to buy back at $100 each. This makes the DIA DEC position more neutral with 8400 on the DOW as the middle instead of 8800. The exit stops will be at 6900 and 9900 on the DOW. Place an order to buy back ½ the DIA DEC 95 calls at $40. This converts the butterfly into a spread, altering the profit curve in the event of a rally between now and Dec 21st. The 95 calls closed at $98 today.

Again I must state my disappointment at having a negative return thus far. The fact that the major indexes are crashing to new lows and are down 40% or more is of little comfort. My job is to preserve your capital and position you for gains if market conditions are favorable. This does not mean we need a rally. Sideways movement would be fine. The DIA straddle positions will show tremendous returns when we get a sideways market. Until then, we are positioned to benefit handsomely from a rally or sideways action and will be stopped out quickly if we continue down, limiting losses. I am surprised that the S&P and NASDAQ have broken to new lows. As I have said, I am no market guru when it comes to direction, I simply react to what is happening. If I do have an opinion, such as shorting the $US, I will put on positions to benefit from being right while limiting losses if incorrect. My opinion is that the lower we go, the tighter the spring is being wound. A snap back up is inevitable…but when? Will react when that event occurs.

Dave Knight
Editor
Surviving The Game

2009-02-21T18:00:00.002-07:00

SURVIVING THE GAME
NOVEMBER 19, 2008
VOLUME 1 NUMBER19

Markets continue to bounce around near their lows. We’re hanging in, down about 3 % on portfolio. Execute the following trades.

Sell 15 DIA NOV 80 puts. Currently at $125.00
Place stop on DIA NOV 92 puts at $1150

This eliminates the spread position and we exit if market continues down. Selling the 80 put captures gain on that position before we expire on Friday.

There are several ways to place a stop on the 92 put, the easiest is with the mini-dow futures. Call if want help with that order.

Dave Knight
Editor
Surviving The Game.

2009-02-21T18:00:00.001-07:00

SURVIVING THE GAME
NOVEMBER 13, 2008
VOLUME 1 NUMBER 18

The unthinkable has occurred. The model portfolio has gone negative. Some may think that down 3% is not much given the circumstances but I will tell you that it INFURIATES me. What it means is that I must work even harder to protect capital while extracting small gains from extraordinary option volatility.

The indexes are testing the Oct 10th lows and may penetrate as early as today. Dow is holding up better than S&P and Nasdaq. I still believe we are bottoming and will bounce from here. With that in mind, we will adjust the portfolio to capture gains from a bounce while not adding much to risk.

Just after open today, assuming we are flat to down, execute the following trades.

1) Buy back 15 DIA NOV $92 calls. Closed at .40-.49
2) Lower stop on GE to $15.00
3) Lower stop on NUE to $26.00
4) Buy back GE MAR 09 $23 calls. Closed at .73
5) Buy back BNS APR 09 $50 calls. Closed at .86
6) Roll DIA DEC $91/91 straddle down to $88/88 straddle. Buy back both $91 call and put, sell both $88 call and put. Should cost approx $100 per position
7) Buy 20 DIA DEC $100 calls at $45 or less

What does all this do. It eliminates the upper side of our DIA NOV $92 straddle which positions us for large gains if we rally but adds only $675 (total cost to buy back $92 calls) of risk if we continue to sink. We own the DIA NOV $80 puts so we now have a $92/80 spread which will increase slowly in value if we fall but shrink quickly in value if we rise. Shrink is good as we make money if value drops. These options expire next Friday, the 21st so we won’t have to wait long to see.
Lowering GE and NUE stop to give a bit of breathing space.
Buying back GE calls with plan to re-sell after decent rally.
Same with BNS, re-sell if get decent rally.
Moving the DIA DEC $91/91 straddle down to make it a more neutral position. Doesn’t cost much at this point so take advantage of it. Buying DIA DEC $100 calls as upside protection for $88/88 straddle.

Now it is time to get long. How? With options of course. I’m fairly certain not one of you are in the mood to just pile on with uncertain downside risk so we will implement some basic option strategies to get long while limiting our downside exposure.

The most basic “ getting long “ option strategy is to by call options. Eg We could buy the DIA NOV $83 call. DIA closed at $83.09 Wednesday. It costs us $340 each. Well that means that we need to rise $3.40 points above $83 to break even and then away we go to the upside. $83 on the DIA is like 8300 on the DOW. We closed today at 8282.66. Can we make money on that trade? Yes, if we are right and it happens quick. You see, the NOV options expire next Friday so we only have 7 trading days to get it right. We could buy ourselves more time and buy the DEC $83 calls instead of the NOV. Problem is, they cost $590 each, meaning we would need to rally to 8890 to break even, then we make money. The benefit of this strategy is defined risk. The max risk is whatever you pay for the option, never a penny more. The downside is that you must get both the direction and timing right. If we were to rally the day after the option expires, you get nothing. For those reasons, as well as the fact that prices are extremely high right now, I will pass on this strategy for the indexes.

The second simplest strategy is an option spread. This is buying one option and selling another option against the first. Essentially one offsets the other with a price difference. A slightly more advanced version is called a butterfly. We currently have a butterfly on Encana. This is the strategy I will employ to “ get long “. If you have been watching the ECA butterfly this will make sense.

Purchase 20 DIA DEC $85 calls, sell 40 DIA DEC $95 calls, buy 20 DIA DEC $105 calls. This will cost approx $270 per set or total of $5400. This trade unfolds like this. I am looking for the DOW to rally above 8500 between now and Dec 19th, but not rally much above 9500. We will make the maximum profit at 9500 on Dec 19th. It looks like this.

DOW $85call $95call $105call Profit/Loss
X 2
8500 or 0 0 0 -5400
lower
8770 270 0 0 0
9000 500 0 0 4600
9500 1000 0 0 14600
10000 1500 -500 0 4600
10230 1730 -730 0 0
10500 2000 -1000 0 -5400
or higher

So, we want to see the DOW end up between 8770 and 10230. Anywhere in that range we make a profit, outside, we lose. BUT, we can only lose $270 per trade as a maximum while we can gain up to $730 per trade or a 2.7:1 risk:reward ratio with a high chance of success. We will exit his position if the value falls to $120 or less, risking $3000 maximum.

If we rally 500 pts on the DOW soon, this position will move from $270 to approx $325. If we sink 500 points it will move from $270 to approx $200.
It will ebb and flow up and down as we move closer or away from 9500 on the DOW. As we get closer to expiry on DEC 19th, it will move much higher if we get close to 9500. eg The NOV position with exact same options is now worth $217, even though we are 1200 pts below 9500 with only 7 trading days left. The NOV 75/85/95 position, which is almost exactly in the middle, is worth $500 with 7 days left. If we were to close here at 8282 next Friday, the NOV 75/85/95 would be worth $782 each.

I am looking to do a similar trade on the Nasdaq using the QQQ’s and on oil using the USO. The oil trade looks especially nice. 6:1 profit potential. Will keep you informed. This type of trade is also possible on the Toronto index, the i60. If anyone wants to do the i60 trade, email me at davidknight7@shaw.ca and I will send you my best recommendation for the Canadian market.

I also want to get short the $US. The rally Wednesday failed to make new highs. The safest way to do this is again using options. We will use options on the UDN. UDN is an ETF that tracks the $US. It rises as the $US falls. It trades in the US. Buy 30 UDN MARCH 09 $25 calls at $80 each or better. This will cost $2400. UDN closed yesterday at $24.28. The $25 is called “ at the money “ meaning it is the closest call to current price that is not “ in the money “ or below current price. UDN has fallen from the $30 range in July to current price. I do NOT believe this rally in the $US is sustainable. I will risk ½ the premium paid or $1200 on the position. If the $US declines, we will profit above $25.80 on UDN. This is a straight call option purchase because the volatility in the $US is much lower than the stock indexes, making option purchases possible. I will sell ½ this position at $200 each and reassess other ½ at that time. Each $1.00 rise in UDN with net us approx $2100 in profit.

I am still watching the Gold/Platinum spread. Closed below $100 yesterday. Was as low as about $90 and now at $121. Remember, this spread was $1200 earlier this year. I am research historical data to determine best course of action.

It may seem to many that I am executing a lot of trades. You would be correct. Normally I would expect to do 2-5 trades per month, mostly selling more options on open stock positions as old options expire worthless. Believe me, I would like nothing better than 6 months of nice quiet sideways to up action to sooth everyone’s nerves. Trades like the DIA straddles will almost always be a staple of the model portfolio, especially when volatility is high. Trades in individual stocks and one off trades like the $US and Oil come and go periodically. There may be times like this where there are opportunities left, right and center, the problem is finding the best ones. And, months may tick by with no new opportunities at all. A trade like the one I am looking at in Gold/Platinum may occur once ever 20 years, it just happens to be now!!

These are unprecedented times and I will continue to do my best to try and point you towards profitability.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:59:00.001-07:00

SURVIVING THE GAME
NOVEMBER 7, 2008
VOLUME 1 NUMBER 17

Filled DIA DEC 91 straddle at $440 for calls and $815 for puts. Bought back the C Mar $20 calls at $48.00 and the Jan 10 $22.5 calls at $96.00. Bought 100 AAPL at $98.45.

Look to purchase cheap insurance to cover the DIA DEC 91 straddle. Watch the DEC 101 calls and 79 puts. Buy under $0.50. Look to sell more C calls on a rally. Watch the MAR $17.5 calls. Sell 2 more AAPL APR $140 calls at $7.00 or more.

Close position in LVS. Currently at approx $8.00. Close options as well.

Looking to get net long the markets. Will assess over weekend and send out newsletter Monday or Tuesday with trade recommendations.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:58:00.002-07:00

SURVIVING THE GAME
NOVEMBER 6, 2008
VOLUME 1 NUMBER 16

Executing a few trades.

Sell 20 each DIA DEC 91 calls and puts. Should get $12.20 or more. Buy back the C Mar 09 20 calls at approx $0.48 and the C JAN 10 22.5 calls at approx $1.00. Buy 100 more AAPL.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:58:00.001-07:00

SURVIVING THE GAME
NOVEMBER 4, 2008
VOLUME 1 NUMBER 15

Closed the GM trade yesterday morning. $5.99 for stock and $2.50 for Jan 10 $7.50 call. Net gain of $840.00 on entire position.

Market poking its way up this morning. Close DIA NOV 88 straddle. Actually lower in price now due to lower volatility. Purchase DIA NOV 80 put for downside protection of 92 straddle.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:57:00.001-07:00

SURVIVING THE GAME
NOVEMBER 2, 2008
VOLUME 1 NUMBER 14

I just sent out a new position summary for the model portfolio. I thought I would take this time to explain some of the outstanding trades.

The 4 positions in MGA, PNP, DML and UUU are all uranium related plays. I was into these equities and many others from 2006 through to this year. I was systematically taken out of all my positions in these and the other uranium’s since the peak in April 2007. As mentioned before I was not happy as I was being taken out but as I look back now and it was the discipline of legging in and out that saved a fortune. PNP which is now at $0.98 was at $16.10 last year!! I started to dip my toe back into some of these in September. There are no stops due to low price and extreme volatility of these shares. These initial buys are ½ positions. I will add to these positions if prices double or more from initial entry points. All are down except UUU, which is up slightly. DML and UUU have options but are so cheap that the options are too far out of the money to be useful. I will integrate options into the trades if possible.

I purchased a ½ position of 700 SLV on Oct 2 after the big pullback in silver prices. I was looking for a rally in precious metals due to financial crisis. Wrong. Gold, Silver and particularly Platinum have just imploded along with the equity markets. I am holding, expecting a recovery. No stop yet. Will add second ½ position at $13.00 and put in stop at $11.80 if filled. Platinum is even more interesting. Watching the Gold/Platinum spread. It could get to a negative. Closed Friday at $113. Was over $1200 in March this year. May switch SLV to DBS. It is a silver ETF that has options available. The GLD also has options.

Exited the UYG position with $1000.00 profit Tuesday morning. I did not like the action of the financials during the initial 300 pt open higher and subsequent pullback. Saw an opportunity to book a profit even though stock was $1.00 lower than where we bought it on Oct. 10th. This is a PERFECT example of why we use options instead of just buying stock. The stock was down, but the option was down more. Made a profit being wrong…love it !! Will probably re-enter UYG or XLF soon.

The 5 positions in DIA spell out like this. Short the 88 and 92 straddles at average price of about $12.00. That equates to 1200 pts on the DOW. The mid point is 90 or 9000 on the Dow. That creates a profitable range from 7800 to 10200. I purchased cheap insurance covering ½ the position at 10300 with the DIA 103 calls. Essentially I am looking for the DOW to stay as close to 9000 as possible until November 21st. That is expiry day on these options. The range from 8800 to 9200 is neutral ( I am short the 88 calls and 92 puts ). This is called a “guts” in optionspeak. The way it works is that having collected nearly $36000 in premium, we must give back $3000 for each 100 pts above or below 9000 on the DOW on November 21st. eg. If we close here at 9325, we will give back $9750.00 and keep $26000.00. Exit points are at 7500 and 10500 on the DOW or $75 and $105 on the DIA. Looking to purchase more cheap insurance at 78 ( currently about $1.05 ) and 102 ( currently about $1.09). Will purchase either under $0.50. Also, watching the DIA December 90-95 straddles. Trading at about $13.50 now.

GE, C, BNS are just as explained in newsletter number 7 on Oct. 16th. Long stock, short calls and puts. Willing to buy more stock cheaper and willing to sell at pre determined prices higher. Up slightly on GE and down on C and BNS. Options are cushioning decline in both losers. Hold positions Stops as indicated.

LVS is why I do what I do. I pulled the stop in LVS that Friday morning when we were set to gap lower. I did it because we are so close to $0 that it can be done. We have a very defined risk on this trade. We know from the newsletter on the 16th what the maximum risk is on this trade. I am willing to accept that risk. We have since rallied $10 on LVS and are now up $1500 or so. This is a trade that could net almost $14000 in profits, worth the max $8700 risk if LVS goes to $0. The volatility of the LVS options is so high, that the prices are crazy, cutting into our profit of $2900 on the stock itself. If you have not done this trade, now is the time. Volatility will decline and profit and risk will rise accordingly.

GM is another strange position. I really liked it on the 16th, not so much now. The beauty is, we are allowed to change our minds. Unlike the infamous CDS’s ( credit default swaps ) that are ravaging the financials, these positions are liquid and we can exit anytime. I closed the 2.5 puts at a small loss of $7 each or $140.00 We are about $600 right now. Exit this trade tomorrow. I don’t like the way the talks with Cerebrus are going and needing more gov’t money to close the deal.

NUE and AAPL are dreamy. Both stocks up, gains in both positions. Hold

Executed the ECA options butterfly at $3.55 on the 28th. Hold. This trade lasts until April next year. Looking for ECA to be around $60 per share then. This position ebbs and flows with the price of ECA but very slowly. Will start to bear fruit in Feb/Mar if we are anywhere near $60 on ECA.

That sums up our open positions. We are up about 2.5% on the portfolio despite the open losses in the uranium’s and SLV.

I am looking at some trades in the precious metals and the broader indexes. Look at the SPY, DIA and QQQ in the US and the iShares 60 in Toronto. Almost time to load up on net long positions in the broad markets, using options of course. Also looking to short the $US soon. Best way is the futures or the UUP in the US market. This rally in the $US is horsepucky and should roll over soon when the world realizes there are more $US floating around than air molecules.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:53:00.000-07:00

SURVIVING THE GAME
OCTOBER ?
2008 -`13

2009-02-21T17:52:00.000-07:00

SURVIVING THE GAME
OCTOBER 24, 2008
VOLUME 1 NUMBER 12

Executing second DIA options trade. Sell DIA November 88 call and put for $12.40 or better. This gives us 1 set at 92 and 1 set at 88 for average of 90 as mid-point. Premium collected is average of $11.85. Breakeven now at 78.15 and 101.85 on the DIA, equal to approx 7800 and 10200 on DOW 30. The volatility is so extreme that it makes takes on a second position worthwhile.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:50:00.000-07:00

SURVIVING THE GAME
OCTOBER 24, 2008
VOLUME 1 NUMBER 11

The name I selected seems more appropriate every day!! Hold tight, do absolutely nothing. I removed all the stops pre-open to avoid getting hit on LVS and coming close on BNS. I am quite comfortable holding everything right here. The best medicine would be to turn off the TV. The hysteria was unreal. The talking heads were tripping over each other spewing out numbers and predictions left, right and center. I heard one fellow predict down 2000 today when we are done.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:47:00.002-07:00

SURVIVING THE GAME
OCTOBER 22, 2008
VOLUME 1 NUMBER 10

Purchased DIA NOV 2008 103 calls at $0.39. This covers our DIA NOV 92 straddle on the upside.

The market will continue to be volatile and we will see lots of action like today. We need to use days like today to purchase good quality equities we want to own.

Purchase 500 NUE ( Nucor ) here at $35.00 and sell 5 NUE April 2009 $45 calls at $3.50. This puts us long at $31.50 and obligated to sell at $45 in April if higher than that. That is downside protection plus a potential 42% profit gain. Exit both positions if NUE makes new lows below $26.30. NUE also has a 5%+ dividend and pays special dividends each quarter.NUE is top notch in the steel industry and worth the risk here at $35.00

Purchase 100 AAPL ( Apple ) here at $98.00 and sell 2 AAPL April 2009 $140 calls at $5.00 or better. This leaves us long AAPL at $88.00 and obligated to sell at $140.00 This is a ratio write meaning we are also obligated to deliver 100 shares at $140 in April, even if we are much higher. Of course if we are lower, the options expire worthless. Exit if AAPL makes new lows below $85.00. Apple reported blow-out numbers yesterday. Chart shows nice choppy action between $85 and $110.00, a good sign of a potential bottom. This is a leader in its industry and worthy of the risk to buy here.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:47:00.001-07:00

SURVIVING THE GAME
OCTOBER 21, 2008
VOLUME 1 NUMBER 9

Things are progressing nicely the last few days. The credit market is thawing ever so slowly. LIBOR overnight rate is down to 1.25% and the 3 month rate is down under 4%. This is a good sign that the credit markets are starting to loosen up. Our biggest ally is the VIX. As I am writing this, the VIX has dropped to 51%. It closed Friday at about 69%, and yesterday at approx 53% and is down again today. Essentially, the mood is that maybe, just maybe, the world is not going to end anytime soon. This is the key to the trades we have initiated. Remember, 51% is still an extraordinarily high number, just not 81% !! The price of the options we sold ( premium ) is melting faster than the snow in Calgary during a Chinook.

As an example, the DIA NOV 92 straddle was sold for $11.45 on Oct. 15. It went as high as $13.50 during the few days following when the VIX spiked to 81% and the market was down as low as 8200 on the DOW. Here we are 6 days into the trade and the option straddle is now bid/ask at $9.75-$9.95. Time accounts for maybe $0.50 of the lower price, the lower volatility accounts for the remainder. What this means is that the options sold 6 days ago for $11.45 per straddle or $17175.00 could now be bought back for $9.95 per straddle or $14925.00, leaving a profit of $2250.00. My intention with this trade is two fold. First, monitor it and potentially repurchase for $4.00 per straddle or less. Second, watch the out-of-the-money call and put options at around 104 and 80 ( 10400 and 8000 on the DOW). I will attempt to purchase these options cheaply. If successful, the options bought will protect from massive up or down movement in market, essentially limiting risk. The 104 calls are about $0.70 each and the 80 puts are about $1.80 right now. As you can see, the puts currently cost much more even though they are about equal in distance from the current market price. This is almost always the case. General consensus is that down is always much easier than up. I will update you if I place an order in this position.

The other positions are also performing nicely. Call option premium is falling quickly, puts slowly. Even the SLV and the uranium stocks are coming back a bit.
I am looking a many other trades. Will keep you posted.

The BNS put option was changed from the APRIL 2009 34 put to the 36 put. Sold Monday at $3.00.

Dave Knight
Editor
Surviving The Game

2009-02-21T17:46:00.000-07:00

SURVIVING THE GAME
OCTOBER 20, 2008
VOLUME 1 NUMBER 8

A quick note to update readers. All the trades have been executed except the Encana options butterfly. The Canadian options market is very thin and I have tried several times with no luck getting inside the bid/offer spread on the options we want. I will continue to monitor that trade and execute if possible. For those holding ECA, it is up nicely today.

David Knight
Editor
Surviving The Game

2009-02-21T17:44:00.000-07:00

SURVIVING THE GAME
OCTOBER 16, 2008
VOLUME 1, NUMBER 7

The markets have presented us with an unprecedented opportunity. In my opinion we have seen the bottom and are now establishing a wide trading range of 8000 to 10500 on the DOW and 850 to 1100 in the S&P. It is the volatility as seen in the VIX that is giving us this opportunity. The LIBOR rate has fallen to below 2% from 5%+ and the rest of the credit markets are loosening up a bit. I am not as sure about the TSX as it is so linked to resources that a continued drop in commodity prices will pull the TSX down even further. I believe we are near the end of the down cycle in oil, gas and other commodities but not as sure as I am that the DOW and S&P have bottomed.

We already have one position on in the UYG that was established due to the high volatility. We are long UYG at $8.65 and short the Dec 10 call at $2.90 for a net long position in UYG at $5.75. That position is doing fine. UYG closed at $10.21 and the option closed at $2.65. This means that the long position at $5.75 is now at $7.56 ( $10.21 - $2.65 ), up $1.81 per share. The option is still quite high in value due to high volatility, but not nearly as high as that morning that the position was put on.

The following is a list of the trades I will be adding to the portfolio tomorrow morning. These are all stock and option trades except in Encana, which is a pure option play. All are quality companies I would be happy to own long term except GM.

These trades are based on a $250,000.00 portfolio. In no particular order of best to worst or more to less risky, here are the trades.

GE General Electric $19.89 close Yield 6.23% 52 wk low $18.40
Part industrial, part financial, GE is a monster of a company. The yield serves as a buffer to downside losses and if Warren Buffet likes it….so do I !!

Buy 500 GE here at $20.00
Sell 5 GE March 2009 $17.50 puts at $2.25
Sell 5 GE March 2009 $23.00 calls at $1.65
This nets you $3.90/share in option premium.
You are now long 500 GE at $16.00/share.
You are obligated to sell those 500 shares at $23.00 in March 2009 if we are above that price
You are obligated to purchase another 500 shares at $17.50 if we are below that price in March 2009.

It spells out like this:

PRICE STOCK OPTIONS NET $ GAIN/LOSS
15 -5 +1.40 -3.60 -1800*
17.50 -2.50 +3.90 +1.40 +700
20 0 +3.90 +3.90 +1950
23 +3 +3.90 +6.90 +3450
AND UP

*You are also long 1000 shares total, 500 at $16.00, 500 at $17.50 and down $1800

Good company, good dividend. Position offers downside protection to approx $17.00, new low. I would be fine long another 500 shares at $17.50.

C Citibank $15.90 close Yield 8.05% 52 wk low $12.00
Pure financial play. Too big to fail syndrome. The Gov’t is about to take a stake in Citibank. Exceptional yield that is supposed to be safe.

Buy 500 C at $15.90
Sell 5 March 2009 $12.50 puts at $1.95
Sell 5 March 2009 $20.00 calls at $1.80
This nets you $3.75 per share. You are now long 500 C at $12.15
You are obligated to sell those shares at $20.00 in March if we are above $20.00
You are also obligated to buy 500 more shares at $12.50 in March if we are below $12.50

It looks like this

PRICE STOCK OPTIONS NET $GAIN/LOSS
10 -6 +1.25 -4.75 -2375*
12.50 -3.50 +3.75 +.75 +375
15 -1 +3.75 +2.75 +1375
17.50 +1.50 +3.75 +5.25 +2625
20 +4 +3.75 +7.75 +3875
AND UP

*You are also long 1000 shares total, 500 at $12.15 and 500 at $12.50 and down $2375

Same reasoning as GE but with the Fed as a shareholder instead of the Buffetmeister.

C presents such a compelling opportunity that I am putting on 2 separate positions. The following is the second.

Buy 500 C at $15.90
Sell 5 Jan 2010 $10.00 puts at $2.10
Sell 5 Jan 2010 $22.50 calls at $2.30
This nets you $4.40 per share. You are now long at $11.50
You are obligated to sell your 500 shares at $22.50 in Jan 2010 if we are above $22.50
You are obligated to buy 500 more at $10.00 in Jan 2010 if we are below $10.00

It looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS
10 -6 +4.40 -1.6 -800
12.50 -3.50 +4.40 +.90 +450
15 -1 +4.40 +3.4 +1700
17.50 +1.5 +4.40 +5.90 +2950
20 +4 +4.40 +8.40 +4200
22.50 +6.50 +4.40 +10.90 +5450
AND UP

*You are now long 1000 C, 500 at $11.50 and 500 at $10.00.and down $800

LVS Las Vegas Sands $11.83 close 0% Yield 52 wk low $10.66
This was brought to my attention by a reader.

Quality company. Leader in the industry. Stock beaten to death. No Buffet, no Fed, just pure speculation with downside protection. The numbers on this will shock you. This stock is not as liquid as the others, especially the options. Will take some effort to execute this trade.

Buy 500 LVS at $11.83
Sell 5 March 2009 $15.00 calls at $3.50
Sell 5 March 2009 $10.00 puts at $3.65
This nets you $7.15 per share. You are now long at $4.68 per share.
You must sell your 500 shares at $15 in March if above that.
You must buy 500 more at $10.00 in March if below that.

It looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS

5 -7 +2.15 -4.85 -2425*
10 -2 +7.15 +5.15 +2575
15 +3 +7.15 +10.15 +5075
AND UP

*You are now long a total of 1000 LVS at avg price of $11.00 and down $2425.00

This company is like Citibank. Presents such a unique opportunity that I am doing 2 separate trades in LVS.

Second trade looks like this.

Buy 500 LVS at $11.83
Sell 5 LVS Jan 2010 $20.00 calls at $4.40
Sell 5 LVS Jan 2010 $10.00 puts at $5.20
This nets you $9.60 per share. You are now long 500 LVS at $2.23 per share
You must sell at $20 if higher in Jan 2010
You must buy 500 more at $10 if lower in Jan 2010

It looks like this: YES, THESE NUMBERS ARE REAL

PRICE STOCK OPTIONS NET $GAIN/LOSS

0 -12 -.60 -12.6 -6300*
5 -7 +4.40 -2.6 -1300
10 -2 +9.6 +7.6 +3800
15 +3 +9.6 +12.6 +6300
20 +8 +9.6 +17.6 +8800
AND UP

*This is max risk as you are now long 1000 LVS at avg of $6.00 and we are at $0.00 !!!

Please look at this carefully. I will explain this one a bit more as it is unbeleivable.
To instigate this position you will need to have $6000 to buy the 500 LVS. You then receive $4800 in options premium. That means you are now $1200 out of pocket. You will also need to have $5000 in liquid reserves in order to be able to purchase the second 500 shares at $10 in Jan 2010 if we fall below that level. That means you need to have $6200 in free cash for this trade. That is also your max risk if LVS goes out of business. Your potential gain on this trade is at $20.00 or higher in LVS in Jan 2010. You then profit $8800, a tidy 142% gain in 14 months. I will not go deeper into this explaining that you really do not need $6200 to instigate this trade, you actually need about $3000, because that makes the potential gain almost 300% on capital and that makes me look like some sort of crackpot.

Here are 2 trades for our Canadians.

BNS Bank of Nova Scotia $43.29 close Yield 4.53% 52 wk low $39.30
Probably the best of the Cdn banks. They managed not to get too deep into the US mess. Safe dividend, good quality company

Buy 500 BNS at $43.29
Sell 5 April 2009 $50.00 calls at $2.90
Sell 5 April 2009 $34.00 puts at $3.00
This nets you $5.90 per share. You are now long at $37.39
You must sell at $50.00 and buy 500 more at $34.00

It looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS
30 -13 +1.90 -11.1 -5550*
34 -9 +5.90 -3.10 -1600
40 -3 +5.90 +2.90 +1450
45 +2 +5.90 +7.90 +3950
50 +7 +5.90 +12.90 +6450
AND UP

*You are now long 1000 BNS at avg of $38.50 per share and down $5550.00
I will be allotting $15000 of capital to carry this position.

The next is a pure options play on one of Canada’s prize possessions…Encana

ECA Encana $46.50 close Yield 3.44% 52 wk low $42.00
This is a pure options play because of risk to downside. I do NOT wish to own it outright and I do NOT want more at a lower price. This stock will either recover with the price of Nat gas or not.

Buy 20 ECA April 2009 $46.00 calls at $9.50
Sell 40 ECA April 2009 $60.00 calls at $4.40
Buy 20 ECA April 2009 $74.00 calls at $1.90

This means that you pay $19000.00 for $46 calls + $3800 for $74 calls and you collect $17600 for the $60 calls. This nets to approx $5200.00 out of pocket. This is your maximum risk – NO MATTER WHAT HAPPENS.

Here is how it unfolds:

PRICE $46 CALLS $60 CALLS $74 CALLS $GAIN/LOSS

$46 OR
LOWER -9.5 +8.8 -1.9 -$5200
$48.60 -6.9 +8.8 -1.9 $0.00
$55.00 -.50 +8.8 -1.9 $ 13700
$60.00 +4.5 +8.8 -1.9 $22800
$65.00 +9.5 -1.2 -1.9 $10400
$71.40 +15.9 -14 -1.9 $0
$74 OR
HIGHER +18.5 -19.2 -1.9 -$5200

This is called a long Butterfly. Huge potential gains if range holds.
It targets a specific range in a stock. In this case I believe Encana will rebound to the $60 range but not higher than $70. This gives me a wide window from $48.60 to $71.40 to make a profit on this trade. The down side is that we close outside that range and lose. Unlike the stock/options trades above, a strong rally results in a small loss, not max profit.

This is the last trade. Not a company I want to own long term but a good trade for now.

GM General Motors $6.40 close Yield 15.63%( if paid) 52 wk low $4.00

For this trade I believe GM will survive, a least until Jan 2010 !! Limited downside risk as $0.00 is close by. Also there is talk of a buyout/merger. Also, GM is considered a national treasure and would be bailed out by the Feds. They are about to get a $25 billion loan any day now. If we end up holding stock and dividend pays…wow 16% Yield…..dreamy.

Buy 2000 GM at $6.40
Sell 20 GM Jan 2010 $7.50 calls at $3.15
Sell 20 GM Jan 2010 $2.50 puts at $1.60
This nets you $4.75 per share. You are now long GM at $1.65 per share
You must sell at $7.50 in Jan 2010 or buy 2000 more at $2.50 per share.

Looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS
0 -6.5 +2.25 -4.25 -$8500
2.50 -4 +4.75 +.75 +1500
5.00 -1.4 +4.75 +3.35 +6700
7.50 +1 +4.75 +5.75 +11500
10.00 +3.5 +2.25 +5.75 +11500
ETC

Max loss of $8500 ( 3.4% of portfolio ) vs Max gain of $11500 ( 4.6 % of portfolio ) plus dividend of $2000+ if dividend pays. This is definitely the high flyer of the portfolio.

To summarize. These are all outstanding trades. Each one has a different risk/reward profile. Some like the second LVS trade are hard to believe but I didn’t make these numbers up. I will be executing these trades tomorrow. All of these trades have potential add-on trades to help limit risk/lock in profits. I will explain these trades if they come available.
It will take some courage to execute these trades, especially if you are down significantly. Remember, this is one step towards rebuilding you portfolio. These trades may NEVER be available again. The VIX is higher than ever and when it falls, the option prices will fall with it, changing the risk profile of each one of these trades. Again I offer to assist anyone who wishes to try these trades or just wants someone to bounce ideas off.

David Knight
Editor
Surviving The Game

2009-02-21T08:26:00.003-07:00

SURVIVING THE GAME
OCTOBER 15, 2008
2008 - 6

Execute new trade now. Sell 15 DIA Nov 92 calls and 15 DIA Nov 92 puts. Combined value of $11.45 per unit. This is called a straddle. DIA is the Diamonds Trust traded on the AMEX. What is happening is that I am neutral on the Dow for the next 5 weeks and I do not expect the volatility (VIX) to increase much from these levels. The VIX is currently at 59. This is based on a $250,000 total portfolio. 15 straddles receives a total premium of $17,175.00 minus commission. The position is this. You are creating a range on the DIA with 92 as the middle. The DIA tracks the DOW 30 stocks almost exactly. The range is from 80.55 on the bottom to 103.45 at the top. This translates to approx 8055 to 10345 on the Dow Jones Industrial Average. I believe we will stay within that range for the next 5 weeks and that volatility will fall. The risk is that it moves significantly outside this range and/or volatility expands significantly from this level. The exit points are if we hit 7750 on the downside or 10650 on the upside. At that time, liquidate both positions. This puts the potential risk at approx $6000 ( 2.4 % of model portfolio ) at this time. The risk will diminish with the passing of time and/or a drop in volatility. There will be several updates on this position as time passes because there are several add-on trades that may become available to limit risk.

I will post another letter explaining this trade and options in general in the next few days.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-21T08:15:00.002-07:00

SURVIVING THE GAME
OCTOBER 14, 2008
2008 - 5

Goooooood morning investoooorrrrs !!! I bet most of you feel a lot better this morning than say……Friday ! Libor down from 5.09 % to 2.18% VIX ( fear-o-meter) down from 70 to 54. Your UYG you bought for $$8.65 is at $12.18 for a gain of $3.53 per share while the options you sold for $2.90 are at $3.70, for a loss of only $0.80 per share. A net gain of $2.73 per share. Look to collapse this trade if we rally to $15 or above, taking profit instead of holding to Dec waiting for the last few cents of profit. Remember, the max gain on this is at $10.00 or higher on the 3rd Friday of December. That is a max gain of $4.25 per share. You already have $2.73 of that now. Collapse position at $3.50 or higher. Greed is good but too much is unwise. The potential 74% gain on this trade is ENORMOUS. Do not expect to see a situation like we are in now for a long, long time to come. This is due to extremely high VIX and current market conditions. A point I failed to mention when describing this trade on Friday. In normal market conditions, a gain of 5%-10% would be amazing in a 10 week time frame.

Overall I am very happy with the big rally yesterday. Almost 1000 pts up with 10:1 or more up volume. The wheels of credit starting to turn ( LIBOR ).The only issue is that overall volume was not huge due to partial holiday in US. But, I’ll take it. We should now establish a fairly wide trading range of approx 1500 pts on both Dow and TSX. Look to purchase the stocks you want on pullbacks, selling covered calls into each rally. We have a window of 4-6 weeks here as the new trading range is established and volatility ( VIX ) is high. This enables us to establish these new positions with the advantage of high options prices, therefore padding our pockets with option dollars ( premium ) while limiting our initial downside exposure.

I am in the midst of putting together the real-time model portfolio. It currently holds the UYG position. Portfolio is approx 3% invested. I expect to be issuing several letters over the next few weeks to instigate new positions. No trades today.

Options Guy

Editor
Surviving The Game

optionsguy@shaw.ca

2009-02-20T22:42:00.005-07:00

SURVIVING THE GAME

OCTOBER 10, 2008
2008 - 4

Execute this options trade. Purchase 1000 shares of UYG at $8.65. That is the Proshares Ultra Financials in the US. Basically a basket of financial stocks. Take a look at a chart, you will see what has happened with this ETF. Sell 10 UYG December 2008 $10 calls at $2.90. This means you are now long UYG at a cost of $5.75. Now sit and wait. You put up $8650 to purchase shares, you collected $2900 for selling options so net out of pocket is $5750. That is your max risk as long as you hold the two positions together. Your potential gain is $4.25 per share or $4250 which is almost 74%. You will achieve that if UYG is at or above $10.00 on 3rd Friday of December ( 10 weeks from now ). This is a typical ( actually fairly conservative ) options hedging strategy.

Options Guy

Editor

Surviving The Game

optionsguy@shaw.ca

2009-02-20T22:29:00.000-07:00

SURVIVING THE GAME

OCTOBER 9, 2008
2008 - 3

I am sorry. That is what I feel today. I am sorry for delaying the start of this newsletter until now. I have been toying with this idea for years but just never got around to it. For that I am sorry. The money that most of you could have saved this last year is astounding. Who would have thought things could unfold as they have? Today was another brutal day for most investors. I heard today was the 3rd worst day for the Dow ever. Worst day was the crash of 1987, 2nd was a day the week after and today was the 3rd. Unfortunately, Toronto isn’t far behind. My only hope is that I can possibly help guide you through this mess.

If you are light on equities, stay out. This is probably not the bottom yet. I said I thought we could drop another 20 %, I didn’t mean in 2 days !! If you are fully invested or just can’t resist getting in, please don’t just buy stock or sit there and watch your money melt away. Try to use some of the options I outlined in the last newsletter or call if you would like to discuss other options not yet explained. Typically the bottom will be marked not by some huge volume blowout day to the downside, but by a huge volume blow-out day up. Look for 10:1 up vs. down volume on HUGE overall volume. This is usually followed by a pull back and then off to the races we go. We may see a 1000+ point up day when this is over. So, keep your cash safe and wait for the sign. I will try to send out a letter during this time. It could be next week or not for some time. I felt a noticeable change in attitude today amongst the talking heads on the TV and radio. They started to say things like “ maybe this problem can’t be solved “ and “ this market could drop another 50% “ as opposed to their usual “ don’t worry, stay invested and ride this out “. This market is different than most because we have the added twist of the seized credit markets. Usually when things are bad the Fed just opens the tap and pours dollars into the system, lubricating the recovery. This time, no amount of dollars are able to unlock the fear that those with money have. I heard today that there are 7 trillion dollars in private equity waiting on the sidelines.

Keep your eye on the LIBOR rate. That is the London Inter Bank Offered Rate. They have started showing it on CNBC on the top line. It is currently at 5.09 % As little as last month it was at about 1.5%. This is what banks charge each other to lend money back and forth overnight. THIS IS THE ROOT OF THE PROBLEM. This is a benchmark used for many lending rates but most importantly it is a gauge of confidence. Of all the things one could watch, I believe this is one of the most important. If banks won’t lend to each other, they sure won’t lend to me or you ( or a company like GM !!! ). The system is frozen due to a lack of trust and that will take time to ease. The lack of positive reaction from the bailout bill and the coordinated rate cut shows that this will be a tough ship to turn around

Also, watch the VIX. Look at a long-term chart of VIX and VIN. These are volatility indexes put out by the CBOE. A better name for them would be fear-o-meters. We are reaching levels not seen since the meltdown in 2000 and the crash of 1987. A huge spike like this in the VIX is another good sign that the bottom is near. When fear reaches unbearable levels, it is over. The volatility is what drives up the price of options. This is what makes some of the option strategies I discussed last time look so appealing. We are looking at an opportunity that comes around maybe once every 10 years or so. Those able to stomach the risk will be able to sell options soon and make an absolute killing. The best example I can give is in 2000 near the top ( all this stuff works in reverse as well ) one of the internet stocks was trading at about $300. A person could sell an options straddle for almost $300. That meant that if the stock dropped to $0 you broke even and you didn’t lose unless the stock rallied above $600. I can’t remember which stock it was but I know it sold off to less than $100 and you were able to buy back the options you sold for $300 for about $230, pocketing the $70 profit. And this was on a stock that was crushed! The same sort of thing is setting up now only in reverse. Stay tuned, I will send out specific recommendations when it is time.

To close I just want to say that I believe we are getting pretty close to the end of this nightmare. So hang in there and start to think outside the box to be able to benefit from the coming market conditions – whether that is a rally, sideway action or a continued decline. You can profit in any market.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-20T22:06:00.000-07:00

SURVIVING THE GAME
OCTOBER 7, 2008
2008 - 2

This is another newsletter, rushed out to try and help during these extreme market conditions. Today marked yet another serious down day on North American markets in particular. I spoke with several readers today, which has prompted this letter.

The point I am trying to make today is that there are several options for you in these current market conditions. You may be in one of three situations. 1) You are sitting with high cash levels, riding this out – congratulations to you and/or your advisor. 2) You are a long-term investor, still fully invested, suffering losses and riding this out – this to shall pass. 3) You are somewhere between 100% cash and 100% invested, losing some or a lot of money, worried as heck and looking to do something…whatever something may be! My concern is for those of you in situation number three. What to do?

This is meant to show readers that they have many options, not just buy, sell or hold.

I am going to give an example using RIM, Research in Motion for those not familiar with this equity. This is a classic example of a market darling that has fallen on hard times. It closed today at $60.93, -$5.07 today alone. This was a $150 stock in June this year. RIM hasn’t seen $60 since June 2007. What happened? If I knew, I would be writing this from my new yacht parked in Monaco. Was I in this? No. As recently as last month this stock was touted by many as a screaming buy at $100. Their new products were an Apple killer….blah, blah, blah. Well, things haven’t panned out that way. IF, I had been fortunate enough to be in RIM, I would have been stopped out of my final 1/3 position around $100.00. The example I am giving is for someone who is either holding the stock currently, long or short term, or someone looking to enter the market here.

RIM
$60.93 -$5.07

Options:

A) Buy stock here ( or hold your current position ) If I was holding 200 shares, I would sell ½ here and follow this option. If this is your choice, here is my advice. There is no way to know if $60 is the low or not. If you buy here, buy only a maximum of ½ your desired position. I would be using a stop around $45 as that is slightly below the price that RIM had it’s breakout towards $150.00. Place a buy-stop order to purchase the other ½ position at $100, this shows that the recovery is for real and you have some breathing space between your entry points and stops. You are now 100% long at an average of$80.00. I would then hold trailing stops of $10 on ½ position and $20 on second ½ from recent highs. If it goes up, great. If it collapses again, your out with a small profit, on to the next trade. This is the simplest way to trade RIM. Very easy to execute, very easy to figure out how much you will make or lose.

Profit/Loss based on 200 share position ( bought in 100 share increments at $60 and then $100 )

Closing price Gain Loss

$40 -$2100
$50 -$1100
$60 -$100
$68 $700
$80 $1900
$90 $2900
$100 $3900
$110 $5900
$120 $7900
ETC

B) Covered call option writes. This the most conservative, most often used trading strategy to enhance gains and offer some downside protection. This entails purchasing the stock here at $61.00, and simultaneously selling 1 call option for each 100 shares purchased. For the sake of time I will make the assumption that we do not reach $100 per share before mid-March 2009 ( five months from now ), therefore you only ever purchase ½ your position which is 100 shares. After purchasing the 100 shares at $100, you then sell one March 2009 RIM $68 call option at $11.00 which equates to $1100.00. This is now your position. You own 100 shares at $61, you have collected $1100 from an unknown, unnamed option buyer. That equates to $11 per share. Your actual purchase price is now $50 per share, not $60. What happens now? Here is the breakdown.

Closing Price Gain Loss

$40 -$1000
$50 $0
$60 $1000
$68 $1800
$80 $1800
$90 $1800
$100 $1800
ETC

As you can see, compared to simply being long the stock, you are substantially ahead at all price points unless we rally above $80.00. At that point you have given up the potential gains above $80 for the safety of not losing anything until we drop below $50 and essentially being paid if the stock is flat or even declines slightly. For those not familiar with options, the final result of this is that if RIM rallies above $68 by mid-March, you will be selling your 100 shares to someone at $68 per share. You get to keep the $1100 collected at initial sale. That is how we arrive at a profit of $1800. $700 gain on stock ( boughtt at $61, sold at $68 ) plus $1100 gain on option.

C) Ratio call write. Similar strategy as above but involves potential risk of loss if stock explodes to upside. Here is how it works. Purchase 100 shares here at $61.00 Instead of selling 1 March 2009 $68 call at $1100, you sell 2 March 2009 $80 calls at $740 each. What happens next? You own the 100 shares, you have collected $1480 from selling your 2 options. Therefore, your actual purchase price is reduced from $61 per share to $46.20 per share. You are also obligated to sell your 100 shares at $80 if we are above $80 in mid-March 2009. As a kicker, you start to lose on the second option you hold if RIM rallies above $87.40. Bearing in mind at $87.40 per share you have already pocketed $2640 profit on your 100 shares and 1st $80 call. Here is the breakdown.

Closing Price Gain Loss

$40 -$620
$50 $380
$60 $1380
$68 $2180
$80 $3380
$87.40 $2640
$90 $2380
$100 $1380
$110 $380
$120 -$620

Again, this does not show buying the second 100 shares at $100, this will alter the profit/loss above $100. It reduces the loss with RIM at $120 from a loss of $620 to a gain of $1380. As you can see, this strategy offers even greater downside protection than option B. It also has substantially higher profits compared to option A and B unless we rally above $85. Again, you are sacrificing potential profits way up there for cold hard cash now, downside protection and much higher profits if we are flat to slightly higher.

D) Here is one most of you have probably never dreamed of. Instead of buying any stock, just sell Put options !!! Here is how it works. At the close today, the RIM March $58 put closed at $11.00 That means if you sell 1 option, you get $1100. You are now obligated to purchase 100 shares of RIM at $58 per share in mid-March if we are below $58.00. BUT, you get to keep the $1100 no matter what. That means that you have effectively bought the 100 shares at $47.00 per share no matter what the price is. If we are above $58, you pocket the $1100. If we are at $40, you are now long at $47 and losing $7 per share or $700. Here is the breakdown
Closing Price Gain Loss

$40 -$700
$50 $300
$58 $1100
$60 $1100
$68 $1100
$80 $1100
ETC

As you can see, this is great strategy for a slightly down to up market. Unlike option C, there is no risk of loss on a huge rally but your gain is limited to the $1100. This is the ideal strategy for someone who really wants to own RIM for the long term.

E) One final example ( there are many more ) Combine option C and D together. This is really cool. Here is how it works. Buy 100 shares here at $61. Sell 2 RIM March 2009 $80 calls at $740 each AND sell 1 RIM March 2009 $58 put at $1100. You now own 100 shares, have collected $2540 in option premium ( cash ). You are effectively now long 100 shares of RIM at $35.60 per share and we are at $61 per share. You are obligated to buy another 100 shares at $58 if we are below $58 in mid-March, you are also obligated to sell your 100 shares at $80 if we are above $80 in mid-March. Obviously only one of those can happen, we cannot be below $58 and above $80 at the same time. And remember, we also have the 2nd March 2009 $80 call we sold. Clear as mud I bet. Here is the breakdown.

Closing Price Gain Loss

$40 -$1360
$50 $640
$60 $2440
$68 $3240
$80 $4440
$90 $3440
$100 $2440
$110 $1440
$120 $440

Again, this does not show buying the second 100 shares of RIM at $100. That increases the profit above $100 by $100 per $1 eg. At $120 the profit is now $2440. This is hardly a common strategy employed by your average investor. Most investors, their brokers, friends, family and shrinks would all consider this an insane thing to do. BUT, look at the numbers for yourself…..does it seem insane to you??

I will wrap it up here. I just wanted to open Pandora’s Trading Box a crack and let you see what is inside. This is but one example of how to do essentially the same thing…buy RIM, but with numerous different possible outcomes. I personally am not in RIM and would not get long here, not yet. These examples are for someone in RIM now or considering getting in soon.
The markets are NUTS. The Fed is scrambling to save the free world from itself. If I were heavy into only equities I would liquidate ½ and stand back. You can always get back in. There is a chance, slim as I see it, that we may fall another 20% or more before seeing the bottom of this decline. If they can’t get the credit markets to loosen up, watch out! I honestly think we are close to the bottom but I am more comfortable getting in on the way back up than standing in front of the freight train headed south.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

2009-02-19T20:31:00.000-07:00

SURVIVING THE GAME
OCTOBER 6, 2008
2008 - 1

This is the first post for this new investment newsletter. It is 2 weeks premature due to the extreme market conditions.

I am not a market guru or great stock picker. I am a good follower. I study other newsletters such as The Dines Letter, Dennis Gartman and others. I often listen to market commentators such as Jim Crammer, David Baskin and the like. They are extremely valuable sources of information. My beef is that they are not specific. How would you like to trade following Jim Crammers Lightning round…some people do, believe it or not.

CURRENT MARKET CONDITIONS

Normally I would have little to say about the day to day actions of the markets. My view is that of a 3 month to 5 year time horizon. BUT...this is hardly a normal time. This may be the first time any of you have seen a market like this or felt the agonizing pain of watching your portfolio melt away in front of your eyes, and felt almost helpless. What has been on the financial networks makes me mad as hell so I am forced to jump the gun and send this out today. Also, a few of the conversations I have had with people who are invested have made me realize the need for this newsletter now.

The first bit of advice is to do nothing. Sounds simple but is difficult to execute. Most investors claim to be in it for the long term, not short-term traders. If you are such a person, you should be gleefully oblivious to the current market downturn as you only consult your advisor once per year, usually in Jan/Feb to review your portfolio and make minor adjustments. Reality is everyone wishes that was the case but you are pounded daily with information on the markets whether you like it or not. This leads you to be actively aware, if not involved, in the management of your investments on a continuous basis. This of course leads to the knowledge that you are probably down on most if not all your investments. This in turn causes you to become involved in your investments, etc, etc

My advice to do nothing means this…. do nothing out of fear, panic or ignorance. If you feel you need to do something, whatever it is, seek help. If you are managing your own portfolio, and it is sinking like a stone, you are probably in a state of confusion, fear and anger. If you have an advisor you may very well be flipping through the back of Soldier of Fortune magazine looking in the Hitman for Hire category.

I had a conversation over the weekend with a person who has actually gotten this far in this mess relatively unscathed. They have a balanced portfolio of equities, bonds, fixed income and some precious metals. What astounded me was that they were considering liquidating the equities and holding the rest “ until things calm down ” Upon questioning them I discovered that they were not aware why their bonds were doing so well. They had heard on the TV about a “flight to quality” but did not really know what that meant. Upon asking him whose idea was it to tinker with his portfolio, he said it was his brokers idea. After popping a couple blood pressure pills I calmly suggested to him to re-think the idea of selling all his equities and either keep his balanced portfolio or find a new advisor!

The reason for telling this story is to emphasize the point that doing anything without due diligence is not only crazy but potentially financial suicide.

I do not pretend to know what is the right thing to do is for this particular gentleman. I only know that he should have a plan in place BEFORE ever starting down the path he has chosen.

TO THE POINT

If you are hoping I have the answer to what will happen to the markets tomorrow, next week or for the rest of the year, sorry, I do not. I do have opinions but today is hardly the time to launch into my rendition of what the future may hold. Today is about survival.

My intention was to start a newsletter to teach people how to make money by using trading techniques honed over 29 years of trail and error. Every letter I would update the model portfolio explaining how and why each trade was made or why nothing was done at all. I will give specific entry and exit points, no wishy washy “ take some profits on the way up “. Individuals can follow the model portfolio and duplicate the returns experienced by the portfolio. Each newsletter would also include an in-depth study on one particular topic, eg equities, currencies, futures, options, etfs, etc. The goal is to show you not only what I am doing but how to apply the same techniques to your other investments. In short, teach you how to trade/invest. My focus is on equities, options and futures. I’ll admit I’m not much of a fixed income guy but the same rules apply to those markets. Actually, the rules apply to any type of investment.

Right now, some of you may be wishing for guidance. My long-term goal was to begin to offer portfolio management services to my subscribers. Since I have neither subscribers nor a track record with the newsletter to substantiate my claims of greatness, I can offer only this. If anyone receiving this is in desperate need of some impartial advice, please contact Options Guy by email at optionsguy@shaw.ca . If you are facing situations such as margin calls, massive loses or just wondering how and when to get back in, there are ALWAYS multiple solutions to any situation. For example, did you know there are at least 10 different ways to get “ long of silver “, each with different costs, risks and rewards.

Options Guy
Editor
Surviving The Game