SURVIVING THE GAME

MARCH 31, 2009

2009 - 24

Up, down, up, down. Here we go again. The rally fizzled and now we consolidate. I expect we will move sideways now for a few months as we digest the gains of March. Good time to sell index straddles :} I see a range of 700-850 on the S&P.

Volatility is still high with VIX at about 43 which translates to high option prices. Good to sell options, not so good to buy.

Lots of commodities displaying similar characteristics. A big bounce off extreme lows, a correction and now......? I suspect sideways action. Look at oil, soybeans, copper, etc.

The uraniums have shown that they are simply market followers, not capable of extending gains on their own. We'll see over time if that changes.

If your looking for a play on the recovery, take a look at the steel ETF's.

DEBT - FRIEND OR FOE ??

We all know there is good debt and bad debt. Good being a mortgage ( if you can afford it ) or working capital for a business, etc. Bad being the no money down, no payments until 2010 on the big screen TV or any credit card not paid off in full each month. If you have access to capital, say equity in your home, should you use it? I contend that there is a place and time to access that money and the time is now.

I believe inflation will return with a vengance. You just can't dump trillions of dollars into peoples lap and not expect it to come back as inflation. Given that belief, here is a strategy to survive the coming interest rate hikes and to prosper from it.

Get rid of your bad debt. Then use good debt to build wealth over the next decade.

You borrow the maximum ( up to 75% ) on your home. You don't want to get into high ratio insured mortgages,etc. DO NOT use a HELOC with floating interest rate. You can get a 10 year term in the 5-5.25% range if you look hard. I suspect inflation will rear its ugly head in 1-2 years. This will drive up interst rates so lock in now for the long term. Now, what to do with all that money?

There are 3 possible outcomes to this strategy.

1) I am right and inflation returns. You have locked in a low interest rate on your debt. You have used the cash and invested in hard assets and are now reaping the rewards.

2) I am wrong and inflation remains stable. No harm. As long as your return equals the interst rate on the debt you are breaking even. I am comfortable saying that I can achieve a 5% return with very little risk.

3) I am wrong and we enter a deflationary spiral. This is the worst of all because you will see your incomes, home, etc decline in value. In a period of deflation, cash is king. Since you have already borrowed on your equity, you are set. you can take advantage of lower prices on hard assets such as real estate using your cash. If home values decline significantly, you will be unable to borrow as much in the future against that asset.

So, I feel there is little risk in pursuing this strategy no matter what the future holds in terms of inflation, interest rates, etc.

What to do with cash.

1) Stuffing it into mutual funds was a long time strategy of PATHETIC, CORRUPT financial planners. You pay interest on the money borrowed, you pay management fees to the mutual fund company so you need to make at least 7% just to break even. Many people followed this strategy and are still paying on the debt and their money hasn't grown a dime in over 10 years. Nice idea if your a mutual fund salesman ( which is what most financial planners are ). Do not follow this strategy.

2) Put it into short term instruments. Yield right now is low so you would be running negative on the cash flow. BUT, if inflation returns and/or interest rates spike you could be yielding more on short term money than the 5% your paying. Not a bad strategy.

3) I suggest spreading into several asset classes weighted mostly to commodities. How long do you think oil will be below $50 per barrel when the many producers require $75+ to break even? You can diversify your money using ETF's. I would avoid buying stocks in oil producers or gold miners, etc. Too much risk of something happening to a single company. Concentrate on the physical commodity, not the producer. Look at oil, gold and other metals, grains, soft commodities such as sugar, cocoa. What is the worst that can happen? These commodities may decline but how far? Some are near 10 year lows, can they really go down much further? Remember, this is real stuff. Stuff we use every day, not some peice of paper that is supposed to represent a percentage ownwership in some company. You can't eat paper but you do eat corn, you do drive a car, etc. Now don't get the impression that I am some commodity nut like Jim Rogers. I woul never suggest going " all-in " on anything. But adding a portfolio of real, hard assets to your holdings will stand you well over time. Heck, you can even look at real estate as a real asset, just make sure your not overpaying for it.

Options Guy

SURVIVING THE GAME
MARCH 27, 2009
2009 – 23

Farewell my friends. This will be the last newsletter in this format. After seeking legal council, it has been determined that I should not continue to publish the newsletter in this format. It is in violation of too many securities laws to make me feel comfortable. To make a long story short I cannot recommend specific trades, especially if I am myself trading that security. It is much safer for me to sell the newsletter to subscribers than to give it away and I do not feel it is ready to put out as a pay subscription newsletter. And I should really be a registered representative if I am going to council people on investments. So, given that I do put my money where my mouth is and actually trade what I recommend and I am not a registered representative, I have to change how I do things. This is the last newsletter you will receive by email. I have created a blog. optionsguynewsletter.blogspot.com. All the newsletters have been posted there and I will continue to add new posts. From this point on I must be intentionally vague with what I say. I cannot say buy this here or sell that at this price. I will continue to try and pass on my thoughts and steer you in the right direction.

COMMENTARY:

Markets continue to push higher. Every point higher makes me more nervous. I concede we were way too oversold and a bounce was due but this rally is too much, too fast. I still believe we are simply establishing a new trading range and will pull back soon. I am anxious to start getting long on a decent pullback with stops to exit if we break to new lows.

FILLS:

SPY APR $74 Straddle. Bought back $74 calls for $845 each on Monday as market spiked up.

SPY MAY $75 Straddle. Bought back May $75 call for $840. Sold 25 MAY $82 straddles for $960. Sold 25 May $89 calls for $195 each.

CDN$ - Sold 10 each APR 8150 straddles for 186 pts each on Tuesday.

OPEN POSITIONS:

USO – Closed today at $32.02. Place order to sell the long APR $35 calls at $75.00 each. This will close out APR position. Still have JULY and JAN 2010 positions. Hold. Actually showing profit in July position right now. Exit if position deteriorates to 50% loss from original entry point.

SU – Hold. Exit only if position falls back to break even. This is what I like to call a “ drawer trade “. Just stick it in the drawer until options expire next January. If SU is anywhere above $20.00 you pocket maximum profit of $6.30 per share or 46% return if purchased shares with cash. As described when trade was initiated, your return could be over 1300% if you purchased the shares on margin.

SPY APR $74 straddle. Closed short $74 calls when SPY hit $82.00. Still short $74 puts. Exit stop at $100 or buy back for $25 or less.

SPY MAY $75 straddle. Closed short $75 calls. Still short $75 puts. Sold $82 straddles for $960 each. Sold $89 calls for $195 each. Now have short $82 straddle and short $75 put/$89 call strangle. Hold. Exit stops if SPY hits $74 or $90. Exit 75/89 strangle if combined value of options exceeds $500

CDN$ - SHORT TERM TRADE. Initiated on the 24th. Options expire on April 3rd. Sold 8150 straddle for 186. Exit stops if CDN$ hits 7950 or 8350 before Friday the 3rd. Collected $18600 in option premium. Risking approx $3000 or less than 1% of portfolio.

URANIUMS – up about 11% from entry point. Hold. The real test will come if markets pull back, do the uranium stocks hold gains or fall back with general market. OR, can they continue to push higher if general market stalls and moves sideways. Remember, this is a long-term trade.

NEW TRADES:

There will be no new specific trade recommendations.

In closing I would like to say it has been quite enjoyable sharing my trades with you. I know most of you are not following the recommendations but it is still exciting to think that someone may be listening. I leave this format proud of the results of the last 6 months. The portfolio is up almost 30% while markets are down about 25% over the same time period. I have completely missed this rally of the last 2 weeks but I also missed it on the downside. I will always argue that it is easy to make money trading; it is just easier to lose it. Preservation of capital and risk management is the key to successful long-term gains. I will continue to share my thoughts through the blog but unfortunately I cannot make specific recommendations. I am allowed to make comments such as “ I think it is a good time to sell option straddles “, I just can’t tell you the exact ones to sell.

As always I am available to anyone wishing to discuss any of the trades I have mentioned or to just yak about trading, strategies, etc. You can reach me by email or call me.

Good luck with your future trading.

Options Guy
Editor ( retired )
Surviving The Game
optionsguy@shaw.ca
optionsguynewsletter.blogspot.com

SURVIVING THE GAME
MARCH 27, 2009
2009 – 23

Farewell my friends. This will be the last newsletter in this format. After seeking legal council, it has been determined that I should not continue to publish the newsletter in this format. It is in violation of too many securities laws to make me feel comfortable. To make a long story short I cannot recommend specific trades, especially if I am myself trading that security. It is much safer for me to sell the newsletter to subscribers than to give it away and I do not feel it is ready to put out as a pay subscription newsletter. And I should really be a registered representative if I am going to council people on investments. So, given that I do put my money where my mouth is and actually trade what I recommend and I am not a registered representative, I have to change how I do things. This is the last newsletter you will receive by email. I have created a blog. optionsguynewsletter.blogspot.com. All the newsletters have been posted there and I will continue to add new posts. From this point on I must be intentionally vague with what I say. I cannot say buy this here or sell that at this price. I will continue to try and pass on my thoughts and steer you in the right direction.

COMMENTARY:

Markets continue to push higher. Every point higher makes me more nervous. I concede we were way too oversold and a bounce was due but this rally is too much, too fast. I still believe we are simply establishing a new trading range and will pull back soon. I am anxious to start getting long on a decent pullback with stops to exit if we break to new lows.

FILLS:

SPY APR $74 Straddle. Bought back $74 calls for $845 each on Monday as market spiked up.

SPY MAY $75 Straddle. Bought back May $75 call for $840. Sold 25 MAY $82 straddles for $960. Sold 25 May $89 calls for $195 each.

CDN$ - Sold 10 each APR 8150 straddles for 186 pts each on Tuesday.

OPEN POSITIONS:

USO – Closed today at $32.02. Place order to sell the long APR $35 calls at $75.00 each. This will close out APR position. Still have JULY and JAN 2010 positions. Hold. Actually showing profit in July position right now. Exit if position deteriorates to 50% loss from original entry point.

SU – Hold. Exit only if position falls back to break even. This is what I like to call a “ drawer trade “. Just stick it in the drawer until options expire next January. If SU is anywhere above $20.00 you pocket maximum profit of $6.30 per share or 46% return if purchased shares with cash. As described when trade was initiated, your return could be over 1300% if you purchased the shares on margin.

SPY APR $74 straddle. Closed short $74 calls when SPY hit $82.00. Still short $74 puts. Exit stop at $100 or buy back for $25 or less.

SPY MAY $75 straddle. Closed short $75 calls. Still short $75 puts. Sold $82 straddles for $960 each. Sold $89 calls for $195 each. Now have short $82 straddle and short $75 put/$89 call strangle. Hold. Exit stops if SPY hits $74 or $90. Exit 75/89 strangle if combined value of options exceeds $500

CDN$ - SHORT TERM TRADE. Initiated on the 24th. Options expire on April 3rd. Sold 8150 straddle for 186. Exit stops if CDN$ hits 7950 or 8350 before Friday the 3rd. Collected $18600 in option premium. Risking approx $3000 or less than 1% of portfolio.

URANIUMS – up about 11% from entry point. Hold. The real test will come if markets pull back, do the uranium stocks hold gains or fall back with general market. OR, can they continue to push higher if general market stalls and moves sideways. Remember, this is a long-term trade.

NEW TRADES:

There will be no new specific trade recommendations.

In closing I would like to say it has been quite enjoyable sharing my trades with you. I know most of you are not following the recommendations but it is still exciting to think that someone may be listening. I leave this format proud of the results of the last 6 months. The portfolio is up almost 30% while markets are down about 25% over the same time period. I have completely missed this rally of the last 2 weeks but I also missed it on the downside. I will always argue that it is easy to make money trading; it is just easier to lose it. Preservation of capital and risk management is the key to successful long-term gains. I will continue to share my thoughts through the blog but unfortunately I cannot make specific recommendations. I am allowed to make comments such as “ I think it is a good time to sell option straddles “, I just can’t tell you the exact ones to sell.

As always I am available to anyone wishing to discuss any of the trades I have mentioned or to just yak about trading, strategies, etc. You can reach me by email or call me.

Good luck with your future trading.

Options Guy
Editor ( retired )
Surviving The Game
optionsguy@shaw.ca
optionsguynewsletter.blogspot.com

SURVIVING THE GAME
MARCH 17, 2009
2009 – 22

Happy St. Patrick’s Day. The markets sure are enjoying today. Up across the board on positive home starts and comments from Larry Summers. My position remains the same, bounce, not the start of something huge.

FILLS:

Filled yesterday in SPY MAY $75 straddle at $980.

Filled on uranium basket as follows; 2000 PNP @ $0.98, 1600 MGA @ $1.25, 700 PDN @ $2.64, 700 FRG @ $2.95, 1200 LAM @ $1.68, 2500 UEX @ $0.74, 1400 DML @ $1.43 and 900 UUU @ $2.24.

OPEN POSITIONS:

USO – maybe, just maybe APRIL position has a chance. You are long the $35 and $55 calls. Closed today at $29.44. It’s a stretch to think that the APR calls have much hope but JULY and JAN 2010 look good. Hold.

SU – love it ! Hold

CDN$ - starting to pay off nicely. Still 17 days to expiry. CDN$ closed at 78.80. 7900 straddle closed at 222, down 18 today. Move exit stops to 7650 and 8150.

SPY APR $74 straddle. Closed at $767. Sold at $745. Hold

SPY MAY $75 straddle. Closed at $970. Sold at $980. Hold

Uraniums – Bought basket for total of $15,757.00 Closed today at $16,813.00 Takeover rumors swirling about PDN and possibly MGA. I think that is about the worst thing that could happen. After falling from $9.00 per share in April 2007, I would hate to see MGA taken out for $3.00 per share or something cheap like that. Your not into these for a quick buck, you want to see them move up 5-10x over the next 5-10 years. But, we’ll see what becomes of the rumors. Hold, no stops.

NEW TRADES:

No new trades.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
MARCH 15, 2009
2009 – 21

The rally is on! I still believe this is nothing but a bounce so be careful. The difficult thing with bounces is how high and how long? If you are jumping on board, use stops so if we turn and make new lows your out. After trading in a range on the Dow from 7500 to 9500 and from 750 to 950 on the S&P 500, I believe we are simply establishing a new trading range of 6500-8500 on Dow and 660-860 on S&P 500. Toronto is a bit of a different story. Although Canadian markets suffered similar percentage declines as US markets, the reasons were quite different. Our financials held up much better than those in the US. It was our energy and mining companies that took it on the chin. With oil looking like it has bottomed and turning up, copper doing the same and other metals such as gold and silver doing better, I believe the Canadian market will outperform the US over the next few years. I’m not in any hurry to jump in, just making an observation.

OPEN POSITIONS:

USO – Hanging in there. April looks like a loss for sure but July and Jan still look good. Hold all 3 positions.

SU – Doing great. Hold

CDN$ - this position starting to move in your favor. Cdn$ June futures closed at 78.54 on Friday. APR 7900 straddle closed at 252. Initially sold straddle for 341 on March 2nd. Open profit of 89 per straddle or $4450 so far. Hold. Looking to purchase cheap options as insurance. Exit stops at 7600 and 8200 on CDN$. Expiry is in 2 weeks, 5 days.

SPY APR $74.00 STRADLE – filled at $745 per straddle on Wed. SPY closed at $76.09 on Friday. Straddle closed at $761, up slightly from entry point. Hold. Exit stops at $68 and $82 on SPY. Expiry is in 4 weeks, 5 days.

NEW TRADES:

Given my view that we may well have made a short-term bottom and are entering a period of consolidation, I recommend taking advantage of this.

Sell 25 each SPY MAY $75 calls and puts. Closed Friday at $960-985. Should net approx $970 per straddle. Net premium received of $24250. Exit stops at $64 and $86 on SPY. Risk is approx. $5000 or 1.6% of portfolio. Expiry is in 9 weeks. Do not enter trade if SPY opens up or down more than $2.00 Monday morning.

As a side note, there is a way to do these straddle type trades inside an RSP account. Contact me if interested.

URANIUM:

After watching for the last year and digesting the latest DINES letter, I am finally ready to dip a toe back into uranium stocks. The fundamentals behind a future rise in uranium stocks are compelling. They look to be quite solid, just that it will take time to unfold. The brutal market conditions have taken a terrible toll on the uranium stocks, much more than the broad averages. Since the uranium story is so compelling, it is time to act. You need to allocate a percentage of your portfolio to this theme and stick to it. The model portfolio will allocate 15% to the uranium theme. That is currently approx $48000.00. Take this allocation and divide it into three units of $16,000.00 each. Use the first unit to purchase a basket of uranium stocks here at these depressed prices. The model portfolio will purchase equal dollar amounts of PNP, MGA, PDN, FRG, LAM, UEX, DML and UUU, all in Toronto. That is $2000 worth of each, rounded to nearest 100 share increments. These are all basically penny stocks with some trading under $1.00. Purchase Monday after open. No exit stops on any, just hold. The plan is to add the second $16,000.00 unit if and when the basket doubles in value, then the third after it triples. If it doubles and second unit is deployed then a stop is put in to exit at original purchase price of first basket purchased. This way the maximum risk is always no more than the initial $16,000.00 or approx 5% of portfolio. Using a stop on the basket eliminates the risk of getting hit on an individual stock. There are no options available that would help reduce risk at this time. Options will come into play if the price of some of the shares doubles or triples. I see this unfolding over several years, not months. These are good stocks to put in the new Tax Free Savings Accounts due to the possibility of a “homerun” or huge gains on some of them. I would pick MGA and LAM as the best bets. The strategy of splitting allocation into three parts and only investing 1/3 initially is used to limit risk. This basket of uranium stocks is the poster child for speculation. In the dictionary under speculation there should be a chart of PNP! Look at the moves they have made the last 4 years. Given that, it is wise to ease in slowly so that if uranium turns out to be the next “sure thing” that never happens, your loss is very small. If it works, continue to add to positions as indicated above until you are fully invested and already up money.

If you are already heavily invested in uranium stocks, here is a strategy. Sell ½ your position here at these prices. That leaves you 50% invested. Take the other ½ and use some of the strategies used in this newsletter to re-build your portfolio. IF, the basket of uranium stocks doubles, you then add back the ½ you took out that is hopefully worth more than when you started. If uranium never recovers or continues lower, you are still using ½ your portfolio to make money in other ways.

A final parting comment on taxes. Anyone reading this who has personally, or knows someone who has suffered large losses this past year, please take note. A provision in the tax code allows a person to declare themselves a “sophisticated investor”. If this election is taken, all gains and losses are now considered income, not capital gains. By default, I am considered “sophisticated” due to my days as a floor trader in Toronto. So, if you have had a huge loss, you may be able to have yourself declared “sophisticated” and be able to write-off the loss against other income. If you are in a 40% tax bracket, that means you could get 40% of your losses back as a tax refund. The loss can be taken back 3 years and/or carried forward up to seven years. This is not something that is easy to do, you need to consult a tax specialist to do it. I have seen this actually done so I know it is possible. The only downfall is that future gains will always be considered income and taxed at that rate. If you were to follow this route and get a refund, you then have your spouse open a trading account and any future gains are capital gains for them, not income for you. Again I stress that I am not a tax specialist and you must consult one to be able to follow this strategy.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
MARCH 10, 2009
2009 – 20

Citi up 38%! By the news I’m hearing tonight, the bottom in the markets has come and gone. After closing Monday at the lowest level since early 1997, the market rallied today and that is it, there is no where to go but up from here! Of course there is the odd “ non-believer “ that doesn’t agree that this is it but they are being scorned by the talking heads as “ blind “. I saw a clip where Mark Haines, the morning guy on CNBC, called the bottom because we are at 66.7% of the 200 day moving average or something like that. Phooey.

The rally today, led by the financials is likely nothing but a dead cat bounce. It had to come sometime. Even in a raging bear market it isn’t straight down every day. I would recommend you avoiding jumping on this bandwagon. If anything, I would be selling into this rally, looking to re-purchase at lower levels. If Friday’s inter-day low was, “ the bottom “, we may rally for a few days and with almost near certainty we will retest the lows. Rarely do you see a sharp rally after grinding down in a slow methodical manner such as the one we have seen. Sharp rallies generally come after a huge spike down like we saw on Oct. 10th and Nov. 20th last year.

Many other indicators suggest that today was not an important turning point. Indicators like the VIX, put:call ratio, volume, advance/decline line, etc all point to nothing more than a normal up day, not THE beginning of something sustainable. Being almost 100% cash enables one to look clearly at the current situation instead of through rose-colored glasses. Most commentators you hear are simply “ talking their book “ and since 99% of them are long, what else would you expect them to say.

I also heard two other interesting things today that reinforced my dim view of money managers in general. The first was an advertisement for Trimark mutual funds. Their slogan was “ it’s time in the market, not timing the market “. They went on to say that being 100% invested all the time was the only way to succeed long term in the market. As long as you had a 5 year or longer time horizon, you will do just fine. Hmmmmm, I’m glad I didn’t put 100% of my money in their funds 5 years ago, or 10 years ago. The other was some joker on BNN doing technical analysis. When asked, “ by looking at the past can you accurately predict the future? “, he actually said yes! I hope all of you reading this understand that technical analysis is accurate only about 52-54% of the time at best and is only one of many tools you should use to determine entry and exit points on your trades. Isn’t it funny how what is touted as SUPPORT at a certain price on a stock all of a sudden becomes RESISTANCE when the analysis is proven wrong as the price plummets through this magic support number? I use charts and technical indicators all the time, but only to try and reinforce an already existing hypothesis.

I believe, and I think it has been proven repeatedly; that there is no way to consistently beat the market using any sort of “ mathematical “ or “ canned “ system. The best example is Long-Term Capital Management. That is the hedge fund that blew up in 1998. They were the best of the best. Nobel prize winning economists, mathematicians, theoretical quantum physicists, etc and they were wrong. They were unable, with all that brain power to anticipate every possible outcome or condition that would affect their positions. They were caught off guard and suffered enormous losses that were not supposed to be possible according to their “ models “. Many hedge funds suffered the same fate this last year as the “ impossible “ occurred almost on a daily basis. Regular, long only, mutual funds suffered by default as the markets declined because their only position is long.

But, I may be wrong. As I have said over and over, I don’t KNOW any more than the next guy. All one can do is amass information, take an educated guess and dive in. If you’re right, great. If you’re wrong, move on. The money is not made in being right or wrong. The money is made in using the right financial instrument for the particular trade, applying rigid risk management and leaving your emotions at the door. I am wrong more than I am right but I somehow manage to come out ahead of the game when all is said and done.

OPEN POSITIONS:

USO – still a chance on this one. Hold.

SU – I wish all the long stock/short call positions were like this one. SU up $4.75 from entry point, short $20 calls up only $2.70. Net gain of $2.05 per share. Hold

CDN $ - dong well so far. CDN$ closed at 7775 today. April 7900 straddle closed at 301, down 40 from entry point at 341. Adjust exit stops to 7500 and 8300. Three weeks and 3 days to expiry. Look to purchase calls at 8200 and puts at 7600 for less than 15 each as insurance.

NEW TRADES:

After sitting back for a while and watching, it’s time to dip a toe back in.

VIX still high at 44.37. SPY made a low of $67.10 on Friday. Closed today at $72.17. Sell 25 each SPY APR $74 calls and puts. Straddle closed at $747-767.Should get close to $750 per straddle. Net premium received of $18750. Place exit stops at $66 and $82 on SPY. Risk is approx $5000 or 1.7% of portfolio. Expiry is in 5 weeks and 3 days. DO NOT enter this trade if SPY is up or down more than $2.00 at the open Wednesday.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
MARCH 5, 2009
2009 – 19

Today is why you need to “ get small “ as markets are moving against you. As recommended, you have had fewer and fewer positions, and less and less risk as the markets plummeted. This has enabled you to still be up almost 6% year to date as the world is crumbling. You now carry only three small positions with less than 3.5% of portfolio at risk.

What has happened should be the wake-up call to all investors and to those that preach that averaging down on a position is wise. It is one of the most destructive methods of trading or investing. Continuing to buy more and more of anything as it declines is counterproductive. You only add to positions when they are going in your favor.

Tomorrow morning is probably the most anticipated jobs report ever. Estimates are for up to 750,000 jobs lost and unemployment topping 8% in the USA. Given the action of the last week this could very well be the capitulation everyone has been waiting for. We may collapse or absolutely exploded tomorrow depending on the number and reaction to it. I have no idea what will happen but my guess is a lower open then a strong rally, possibly 500 points or more. There is no safe way to position yourself for that so just sit back and watch. Remember, my guess is no better than anyone else.

With markets being beaten down so badly and no rhyme or reason to market action, I have no choice but to step back and reassess the situation. The open positions are very small with very little risk so they can stay in place. I want to sell more straddles and buy equities and sell covered calls so as to collect the very high option premiums but I think it wise to just take a breath and watch, at least for a few days. There will always be another good time to get in. So, just sit back and enjoy the show tomorrow. Maybe it will be a non-event but my gut tells me something is going to happen.

FILLS:

Stopped out of SPY MAR and APR straddles this morning. See position summary for fills.

OPEN POSITIONS:

USO. Hanging in, hold. SU, same as USO, hold. CDN$ just floating around even. No large risk anywhere just hold all three positions.

NEW TRADES:

No new trades.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
MARCH 2, 2009
2009 – 18

I hope all of you realize the magnitude of what is happening. The daily noise of the market commentators can actually numb a person so the reality of what is happening escapes them. The moves in the equity markets are almost unprecedented, eclipsed only by the 90% move down from top to bottom in the crash of 1929 and the following 4 years. The bottom was hit in 1933 and it took until the mid 1950’s to reach the pre-crash levels of 1929. Also look at the period from the mid 1960’s to mid 1970’s. It was another lost decade in terms of equities. Those of us a little younger were fortunate not to have invested through those times but they may have returned. How low will we go and how long will it take to recover to the old highs set in 2007? I believe it will be many years, possibly another lost decade.

Peoples nest eggs, education funds and net worth are being decimated and the hope of rebuilding them slowly disappearing. We were sold on the “ buy and hold “ philosophy and it turned out to be a lie. But what will happen next? The decline in the markets threatens the core of our financial world, not just the banks. Life insurance, annuities, essentially most long-term financial products were created and based on assumptions of long-term returns in the equity markets of 6-8%. Even the CPP and QPP started to invest in equities. Many also mix in real estate and fixed income products but with long term government bond rates at 2-3% and real estate declining, where will the money come from to pay these contracts? How secure are your insurance policies, annuity contracts and pensions? I became convinced 20 years ago that I would never receive a dime from CPP even though I have been forced to pay into it. If I had a company pension plan I would be quite worried about it as well. What is it invested in? I believe the only defense is to accumulate large amounts of money, far more than you will ever need. You then must diversify across the globe and also across many asset classes, eg cash, equities, gold, real estate, etc. Only then will you be able to weather any financial turmoil that descends upon you.



I believe you will be forced to look into the world of “ alternative investments “ in order to be able to rebuild your wealth. These are the very products that have contributed to the financial mess we are in but they will also be the ones you can use to come out the other side. I am speaking about commodities, currencies, derivatives such as options and futures. If the equity markets continue down and/or simply level out and spend years stumbling along, it will be these types of investments that allow you to rebuild your wealth. I do not see real estate or fixed income coming to the rescue any time soon. Believe me, I hope I am wrong. I too own a home; have insurance products and an education fund for my children. All are down in value and may be threatened in the future. I’m not predicting an end to the financial system, as we know it, just a prolonged period of little to no ability to generate a decent return using traditional methods.

FILLS:

Sold CDN$ 7900 straddle instead of 8000 after lower open this morning. Netted 341 total. Stops at 7450 and 8350. Closed today at 77.70 on CDN$ and 348 on straddle.

OPEN POSITIONS:

Not out yet but getting close on both SPY straddles. Hold both. Hold USO and SU positions.

NEW TRADES:

No new trades but I have adjusted exit stops on SPY straddles. See position summary.

As always I am available if anyone would like to discuss the strategies employed in this newsletter or just to yak about trading, investments, etc.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 27, 2009
2009 – 17

Today was another down day for markets. Seems like we’re just slowly grinding our way down. We all know that we won’t get to zero but how low will we go? If I knew I would certainly share it with you.

What is wrong with holding cash or being very light on equities? I listen to the talking heads on TV and they all want to be long and pick the bottom. They all want to be heavily invested in equities, no matter how bad it gets. One fellow today said he had adjusted his position to ONLY 60% equities and that was being very conservative. Even if you have 60% equities, when the market drops 20%, you lose 12% of your total! Nuts. Everything I have learned tells me to get smaller and smaller as I lose and not take on more risk until I’m into a solid upswing in profitability. In a screaming up market I would recommend being at most 70-80% invested. Never go all-in, this is not a poker game. These markets are tough, stay small and hold on until the tide eventually turns. Using the option strategies I have recommended will help you rebuild your portfolio while waiting for the next Bull market to come. By the way, I think it will be years of waiting, not months.

OPEN POSITIONS:

USO. Is there a chance of turning a profit? Maybe. Hold

SU. Closed at $20.79, up $1.89 from entry point. Jan $20 call closed at $560, up only $0.40 from entry point. Trade working well so far, open profit of $1490. Hold. This is the sole survivor of the long stock/short option trades. Take a good look at them as a group. Bought SU, CAT, AA, AAUK, SPY and XIU then sold short calls against each. Five of six have been stopped out. Together they are showing a profit of $1596.00, and that is after being WRONG and the markets being down 15%+. Imagine what the gain would be if we could actually get the direction right!

SPY MAR $78 and APR $80 straddles. Up slightly on both. Hold. Will be out pretty quick if markets continue down. Small positions with little risk.

NEW TRADES:

The Canadian dollar is falling apart. I believe it is a bit overdone and will simply trade between 77 and 83 cents for a while. Volatility high. Sell 5 each Canadian dollar APRIL 80 calls and puts. Closed at 347 today. Best to sell on electronic platform. This will net you approx $3400 per straddle or $17000.00 total. Set exit stops if dollar hits 76.50 or 84.50. Risk is approx $6000 or 1.8% of portfolio. Watch for decline in volatility or sideways action to erode value of straddle.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca