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