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