SURVIVING THE GAME
OCTOBER 14, 2008
2008 - 5

Goooooood morning investoooorrrrs !!! I bet most of you feel a lot better this morning than say……Friday ! Libor down from 5.09 % to 2.18% VIX ( fear-o-meter) down from 70 to 54. Your UYG you bought for $$8.65 is at $12.18 for a gain of $3.53 per share while the options you sold for $2.90 are at $3.70, for a loss of only $0.80 per share. A net gain of $2.73 per share. Look to collapse this trade if we rally to $15 or above, taking profit instead of holding to Dec waiting for the last few cents of profit. Remember, the max gain on this is at $10.00 or higher on the 3rd Friday of December. That is a max gain of $4.25 per share. You already have $2.73 of that now. Collapse position at $3.50 or higher. Greed is good but too much is unwise. The potential 74% gain on this trade is ENORMOUS. Do not expect to see a situation like we are in now for a long, long time to come. This is due to extremely high VIX and current market conditions. A point I failed to mention when describing this trade on Friday. In normal market conditions, a gain of 5%-10% would be amazing in a 10 week time frame.

Overall I am very happy with the big rally yesterday. Almost 1000 pts up with 10:1 or more up volume. The wheels of credit starting to turn ( LIBOR ).The only issue is that overall volume was not huge due to partial holiday in US. But, I’ll take it. We should now establish a fairly wide trading range of approx 1500 pts on both Dow and TSX. Look to purchase the stocks you want on pullbacks, selling covered calls into each rally. We have a window of 4-6 weeks here as the new trading range is established and volatility ( VIX ) is high. This enables us to establish these new positions with the advantage of high options prices, therefore padding our pockets with option dollars ( premium ) while limiting our initial downside exposure.

I am in the midst of putting together the real-time model portfolio. It currently holds the UYG position. Portfolio is approx 3% invested. I expect to be issuing several letters over the next few weeks to instigate new positions. No trades today.


Options Guy

Editor
Surviving The Game

optionsguy@shaw.ca