SURVIVING THE GAME
OCTOBER 16, 2008
VOLUME 1, NUMBER 7



The markets have presented us with an unprecedented opportunity. In my opinion we have seen the bottom and are now establishing a wide trading range of 8000 to 10500 on the DOW and 850 to 1100 in the S&P. It is the volatility as seen in the VIX that is giving us this opportunity. The LIBOR rate has fallen to below 2% from 5%+ and the rest of the credit markets are loosening up a bit. I am not as sure about the TSX as it is so linked to resources that a continued drop in commodity prices will pull the TSX down even further. I believe we are near the end of the down cycle in oil, gas and other commodities but not as sure as I am that the DOW and S&P have bottomed.

We already have one position on in the UYG that was established due to the high volatility. We are long UYG at $8.65 and short the Dec 10 call at $2.90 for a net long position in UYG at $5.75. That position is doing fine. UYG closed at $10.21 and the option closed at $2.65. This means that the long position at $5.75 is now at $7.56 ( $10.21 - $2.65 ), up $1.81 per share. The option is still quite high in value due to high volatility, but not nearly as high as that morning that the position was put on.

The following is a list of the trades I will be adding to the portfolio tomorrow morning. These are all stock and option trades except in Encana, which is a pure option play. All are quality companies I would be happy to own long term except GM.

These trades are based on a $250,000.00 portfolio. In no particular order of best to worst or more to less risky, here are the trades.

GE General Electric $19.89 close Yield 6.23% 52 wk low $18.40
Part industrial, part financial, GE is a monster of a company. The yield serves as a buffer to downside losses and if Warren Buffet likes it….so do I !!

Buy 500 GE here at $20.00
Sell 5 GE March 2009 $17.50 puts at $2.25
Sell 5 GE March 2009 $23.00 calls at $1.65
This nets you $3.90/share in option premium.
You are now long 500 GE at $16.00/share.
You are obligated to sell those 500 shares at $23.00 in March 2009 if we are above that price
You are obligated to purchase another 500 shares at $17.50 if we are below that price in March 2009.




It spells out like this:

PRICE STOCK OPTIONS NET $ GAIN/LOSS
15 -5 +1.40 -3.60 -1800*
17.50 -2.50 +3.90 +1.40 +700
20 0 +3.90 +3.90 +1950
23 +3 +3.90 +6.90 +3450
AND UP

*You are also long 1000 shares total, 500 at $16.00, 500 at $17.50 and down $1800

Good company, good dividend. Position offers downside protection to approx $17.00, new low. I would be fine long another 500 shares at $17.50.

C Citibank $15.90 close Yield 8.05% 52 wk low $12.00
Pure financial play. Too big to fail syndrome. The Gov’t is about to take a stake in Citibank. Exceptional yield that is supposed to be safe.

Buy 500 C at $15.90
Sell 5 March 2009 $12.50 puts at $1.95
Sell 5 March 2009 $20.00 calls at $1.80
This nets you $3.75 per share. You are now long 500 C at $12.15
You are obligated to sell those shares at $20.00 in March if we are above $20.00
You are also obligated to buy 500 more shares at $12.50 in March if we are below $12.50

It looks like this

PRICE STOCK OPTIONS NET $GAIN/LOSS
10 -6 +1.25 -4.75 -2375*
12.50 -3.50 +3.75 +.75 +375
15 -1 +3.75 +2.75 +1375
17.50 +1.50 +3.75 +5.25 +2625
20 +4 +3.75 +7.75 +3875
AND UP

*You are also long 1000 shares total, 500 at $12.15 and 500 at $12.50 and down $2375

Same reasoning as GE but with the Fed as a shareholder instead of the Buffetmeister.

C presents such a compelling opportunity that I am putting on 2 separate positions. The following is the second.

Buy 500 C at $15.90
Sell 5 Jan 2010 $10.00 puts at $2.10
Sell 5 Jan 2010 $22.50 calls at $2.30
This nets you $4.40 per share. You are now long at $11.50
You are obligated to sell your 500 shares at $22.50 in Jan 2010 if we are above $22.50
You are obligated to buy 500 more at $10.00 in Jan 2010 if we are below $10.00

It looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS
10 -6 +4.40 -1.6 -800
12.50 -3.50 +4.40 +.90 +450
15 -1 +4.40 +3.4 +1700
17.50 +1.5 +4.40 +5.90 +2950
20 +4 +4.40 +8.40 +4200
22.50 +6.50 +4.40 +10.90 +5450
AND UP

*You are now long 1000 C, 500 at $11.50 and 500 at $10.00.and down $800

LVS Las Vegas Sands $11.83 close 0% Yield 52 wk low $10.66
This was brought to my attention by a reader.

Quality company. Leader in the industry. Stock beaten to death. No Buffet, no Fed, just pure speculation with downside protection. The numbers on this will shock you. This stock is not as liquid as the others, especially the options. Will take some effort to execute this trade.

Buy 500 LVS at $11.83
Sell 5 March 2009 $15.00 calls at $3.50
Sell 5 March 2009 $10.00 puts at $3.65
This nets you $7.15 per share. You are now long at $4.68 per share.
You must sell your 500 shares at $15 in March if above that.
You must buy 500 more at $10.00 in March if below that.

It looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS

5 -7 +2.15 -4.85 -2425*
10 -2 +7.15 +5.15 +2575
15 +3 +7.15 +10.15 +5075
AND UP

*You are now long a total of 1000 LVS at avg price of $11.00 and down $2425.00

This company is like Citibank. Presents such a unique opportunity that I am doing 2 separate trades in LVS.


Second trade looks like this.

Buy 500 LVS at $11.83
Sell 5 LVS Jan 2010 $20.00 calls at $4.40
Sell 5 LVS Jan 2010 $10.00 puts at $5.20
This nets you $9.60 per share. You are now long 500 LVS at $2.23 per share
You must sell at $20 if higher in Jan 2010
You must buy 500 more at $10 if lower in Jan 2010

It looks like this: YES, THESE NUMBERS ARE REAL

PRICE STOCK OPTIONS NET $GAIN/LOSS

0 -12 -.60 -12.6 -6300*
5 -7 +4.40 -2.6 -1300
10 -2 +9.6 +7.6 +3800
15 +3 +9.6 +12.6 +6300
20 +8 +9.6 +17.6 +8800
AND UP

*This is max risk as you are now long 1000 LVS at avg of $6.00 and we are at $0.00 !!!

Please look at this carefully. I will explain this one a bit more as it is unbeleivable.
To instigate this position you will need to have $6000 to buy the 500 LVS. You then receive $4800 in options premium. That means you are now $1200 out of pocket. You will also need to have $5000 in liquid reserves in order to be able to purchase the second 500 shares at $10 in Jan 2010 if we fall below that level. That means you need to have $6200 in free cash for this trade. That is also your max risk if LVS goes out of business. Your potential gain on this trade is at $20.00 or higher in LVS in Jan 2010. You then profit $8800, a tidy 142% gain in 14 months. I will not go deeper into this explaining that you really do not need $6200 to instigate this trade, you actually need about $3000, because that makes the potential gain almost 300% on capital and that makes me look like some sort of crackpot.

Here are 2 trades for our Canadians.

BNS Bank of Nova Scotia $43.29 close Yield 4.53% 52 wk low $39.30
Probably the best of the Cdn banks. They managed not to get too deep into the US mess. Safe dividend, good quality company

Buy 500 BNS at $43.29
Sell 5 April 2009 $50.00 calls at $2.90
Sell 5 April 2009 $34.00 puts at $3.00
This nets you $5.90 per share. You are now long at $37.39
You must sell at $50.00 and buy 500 more at $34.00

It looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS
30 -13 +1.90 -11.1 -5550*
34 -9 +5.90 -3.10 -1600
40 -3 +5.90 +2.90 +1450
45 +2 +5.90 +7.90 +3950
50 +7 +5.90 +12.90 +6450
AND UP

*You are now long 1000 BNS at avg of $38.50 per share and down $5550.00
I will be allotting $15000 of capital to carry this position.

The next is a pure options play on one of Canada’s prize possessions…Encana

ECA Encana $46.50 close Yield 3.44% 52 wk low $42.00
This is a pure options play because of risk to downside. I do NOT wish to own it outright and I do NOT want more at a lower price. This stock will either recover with the price of Nat gas or not.

Buy 20 ECA April 2009 $46.00 calls at $9.50
Sell 40 ECA April 2009 $60.00 calls at $4.40
Buy 20 ECA April 2009 $74.00 calls at $1.90

This means that you pay $19000.00 for $46 calls + $3800 for $74 calls and you collect $17600 for the $60 calls. This nets to approx $5200.00 out of pocket. This is your maximum risk – NO MATTER WHAT HAPPENS.

Here is how it unfolds:

PRICE $46 CALLS $60 CALLS $74 CALLS $GAIN/LOSS

$46 OR
LOWER -9.5 +8.8 -1.9 -$5200
$48.60 -6.9 +8.8 -1.9 $0.00
$55.00 -.50 +8.8 -1.9 $ 13700
$60.00 +4.5 +8.8 -1.9 $22800
$65.00 +9.5 -1.2 -1.9 $10400
$71.40 +15.9 -14 -1.9 $0
$74 OR
HIGHER +18.5 -19.2 -1.9 -$5200

This is called a long Butterfly. Huge potential gains if range holds.
It targets a specific range in a stock. In this case I believe Encana will rebound to the $60 range but not higher than $70. This gives me a wide window from $48.60 to $71.40 to make a profit on this trade. The down side is that we close outside that range and lose. Unlike the stock/options trades above, a strong rally results in a small loss, not max profit.

This is the last trade. Not a company I want to own long term but a good trade for now.

GM General Motors $6.40 close Yield 15.63%( if paid) 52 wk low $4.00

For this trade I believe GM will survive, a least until Jan 2010 !! Limited downside risk as $0.00 is close by. Also there is talk of a buyout/merger. Also, GM is considered a national treasure and would be bailed out by the Feds. They are about to get a $25 billion loan any day now. If we end up holding stock and dividend pays…wow 16% Yield…..dreamy.

Buy 2000 GM at $6.40
Sell 20 GM Jan 2010 $7.50 calls at $3.15
Sell 20 GM Jan 2010 $2.50 puts at $1.60
This nets you $4.75 per share. You are now long GM at $1.65 per share
You must sell at $7.50 in Jan 2010 or buy 2000 more at $2.50 per share.

Looks like this:

PRICE STOCK OPTIONS NET $GAIN/LOSS
0 -6.5 +2.25 -4.25 -$8500
2.50 -4 +4.75 +.75 +1500
5.00 -1.4 +4.75 +3.35 +6700
7.50 +1 +4.75 +5.75 +11500
10.00 +3.5 +2.25 +5.75 +11500
ETC

Max loss of $8500 ( 3.4% of portfolio ) vs Max gain of $11500 ( 4.6 % of portfolio ) plus dividend of $2000+ if dividend pays. This is definitely the high flyer of the portfolio.

To summarize. These are all outstanding trades. Each one has a different risk/reward profile. Some like the second LVS trade are hard to believe but I didn’t make these numbers up. I will be executing these trades tomorrow. All of these trades have potential add-on trades to help limit risk/lock in profits. I will explain these trades if they come available.
It will take some courage to execute these trades, especially if you are down significantly. Remember, this is one step towards rebuilding you portfolio. These trades may NEVER be available again. The VIX is higher than ever and when it falls, the option prices will fall with it, changing the risk profile of each one of these trades. Again I offer to assist anyone who wishes to try these trades or just wants someone to bounce ideas off.

David Knight
Editor
Surviving The Game