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