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