SURVIVING THE GAME
OCTOBER 21, 2008
VOLUME 1 NUMBER 9



Things are progressing nicely the last few days. The credit market is thawing ever so slowly. LIBOR overnight rate is down to 1.25% and the 3 month rate is down under 4%. This is a good sign that the credit markets are starting to loosen up. Our biggest ally is the VIX. As I am writing this, the VIX has dropped to 51%. It closed Friday at about 69%, and yesterday at approx 53% and is down again today. Essentially, the mood is that maybe, just maybe, the world is not going to end anytime soon. This is the key to the trades we have initiated. Remember, 51% is still an extraordinarily high number, just not 81% !! The price of the options we sold ( premium ) is melting faster than the snow in Calgary during a Chinook.

As an example, the DIA NOV 92 straddle was sold for $11.45 on Oct. 15. It went as high as $13.50 during the few days following when the VIX spiked to 81% and the market was down as low as 8200 on the DOW. Here we are 6 days into the trade and the option straddle is now bid/ask at $9.75-$9.95. Time accounts for maybe $0.50 of the lower price, the lower volatility accounts for the remainder. What this means is that the options sold 6 days ago for $11.45 per straddle or $17175.00 could now be bought back for $9.95 per straddle or $14925.00, leaving a profit of $2250.00. My intention with this trade is two fold. First, monitor it and potentially repurchase for $4.00 per straddle or less. Second, watch the out-of-the-money call and put options at around 104 and 80 ( 10400 and 8000 on the DOW). I will attempt to purchase these options cheaply. If successful, the options bought will protect from massive up or down movement in market, essentially limiting risk. The 104 calls are about $0.70 each and the 80 puts are about $1.80 right now. As you can see, the puts currently cost much more even though they are about equal in distance from the current market price. This is almost always the case. General consensus is that down is always much easier than up. I will update you if I place an order in this position.

The other positions are also performing nicely. Call option premium is falling quickly, puts slowly. Even the SLV and the uranium stocks are coming back a bit.
I am looking a many other trades. Will keep you posted.

The BNS put option was changed from the APRIL 2009 34 put to the 36 put. Sold Monday at $3.00.

Dave Knight
Editor
Surviving The Game