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