SURVIVING THE GAME
APRIL 23, 2009
2009 - 27

It has been 9 days since my last post. Guess what....nothing has happened. The sideways action in the markets continues. I posted on April 4th and the S&P was at about 845, I posted April 14th and the S&P was at about 845 and today the S&P is at about 850. I see more sideways to down in the near term.

As you can imagine this sideways action is incredibly profitable for short straddles. I am still in the SPY MAY $82 and doing great. The MAY $75/89 strangle is doing even better. I can't say how good but it is really good. These expire May 15th.

I closed a trade today in crude oil. I sold the June $53 straddle for $890 each on April 6th. Closed it today for $665 each. I did 5 for the portfolio. Net gain of $11,250. I put on 2 new straddles in oil today, one in June and one in July. Can't say which ones but you can probably guess.

Also started a new straddle in SPY for June. Again, can't say which one but it is close to where we are now.

Still in USO, SU and uraniums.

Uraniums starting to outperform general market. Up about 25% since getting in March 16th.

It has been quiet for 2 weeks, no trades until today. Portfolio approaching +40% since Oct. 6, 2008.

Options Guy
optionsguy@shaw.ca

SURVIVING THE GAME

APRIL 14, 2009

2009 - 26

MARKET COMMENTARY

Sideways action. After topping out at 865 or so the S&P is now pulling back. I think it is the classic buy the rumour, sell the fact. Intel is a good example. Strong rally into tonights earnings, they beat by a mile but still selling off after report. I feel that the market has just overdone it and needs to rest. I will still get long on a strong pullback to 750 or lower but that might not happen. Will see what happens and assess getting long in the future if we simply consolodate.

Many commodities have done the same as the stock market. Big rallies. Look at Copper and Soybeans as an example. I expect those markets to pullback as well and consolidate.

Natural gas has been beaten to death. You could consider starting to get long at these low prices. Remember to allocate, divide and enter in stages.

TRADES

I closed a trade in the CDN$ today. I sold the CDN$ MAY 8050 straddle at 348 on March 31st. Closed it today for 295. Small gain of 53 pts ($530) per straddle. I did 10 for the portfolio.

Still holding SPY straddles, SU, USO and uraniums.

Uraniums showing the first sign that they can uncouple from the general market. Up today despite market correction. MGA and PNP doing really well. Even DML coming back. Up about 20% on basket since getting in March 16th. Hold.

Portfolio up about 35% since October.

ETF'S

I thought I would talk a bit about ETF's. They have become a popular investment tool. Some are outstanding, others not so.

The grand daddy of them all is the SPY. Yep, the one we have been doing some straddle trades on. It is the largest, most liquid of all ETF's. It tracks the S&P 500 exactly. Great tool for trading a large basket of stocks.

At the other end of the line are the leveraged ETF"s offering 2x or 3x exposure to their underlying. An example is UYG (2x) or FAS (3x). Both these track a basket of financials. We traded some UYG back in October and made a few bucks doing so. The risk of these is that they don't always track their underlying well. The best example I know of is the Horizon BetaPro ETF's. eg. The HBU in Canada tracks gold 2x up. In the last year gold is basically flat. The HGU is down 23%. The HBD which is supposed to follow gold down 2x actual movement is down 15% in the last year while gold is flat. How can that be? Both should be even. The truth is very hard to explain but simply put, the tools used to lever your investment 2x cause losses over an extended period of time. Poor management by Horizon has a lot to do with it as well. The point is, you need to know what your getting into. These funds are designed to move 2x the movement of gold BUT only on a daily basis, not over a long period. As seen, if you bought either, you would be down 15-23% in a year while gold is flat.

There are numerous examples of ETF's that perform just as poorly. Just be careful!

ETF's are great for following sectors. eg financials, energy, gold. You just need to use the right ones. For gold, use the GLD, for financials use XLF. These are liquid, non-leveraged ETF's with low expenses and good tracking to the underlying. Avoid the crazy ones like FAS and all the Horizon funds, they are not worth it. If you want leverage, buy on margin. You can purchase most liquid ETF's with 30-50% margin. This gives you 2-3x exposure without the nightmare of being involved with the leveraged ETF's offered out there.

Options Guy
optionsguy@shaw.ca

SURVIVING THE GAME

APRIL 4, 2009

2009 - 25

This rally sure seems real. That is why I'm so paranoid. I've seen this picture before and the ending is not usually nice. I've taken a bit of ribbing from more than a few people the last few weeks for my having missed this bounce. I just smile and remind them that I also missed it on the way down. I believe the markets are still down about 10% this year while my model portfolio is up 8% so far this year despite missing this latest rally. That is on top of the 19% gain in the last 1/4 of 2008. Net gain is about 28% since October. I am willing to start nibbling on the long side on any significant pull backs.

According to the powers that be, I am allowed to tell you about trades that I have completed, just not trades still in play. I still hold the SU, USO option positions, and uranium stocks as well as the SPY straddles and strangles but I can't comment on how they are doing. I have also completed 2 trades in the last week. On Mar 31st, I instigated a straddle trade in Soyabeans. On that day, beans had a huge spike up and I sold the MAY 930 straddle for 74 pts. After settling down the next few days, beans spiked higher again on Friday and I exited the straddle at 73 for a small 1 pt profit. On the 24th I put on a short term short straddle in the CDN$. We were trading at about 81.70 so I sold the APR 8150 straddle for 186 pts. The options were set to expire on April 3 so only 10 days to expiry. Unfortuanately the CDN$ plunged on Monday so I exited the 8150 puts for 185 pts and the 8150 calls expired worthless on Friday so basically a break even trade.

I will continue to update you after I close each trade I am in.

I thought I would spend a bit of time clarifying my style of trading/investing. To put it simply, I am a long side bias trader but have no issue being stopped out if things are going down. At times I will end up 100% cash due to a dropping market. On top of that long side bias I will trade just about anything as long as the risk:reward is good. I also consider myself well versed in options. Hence my recent activity in straddles.

Everyone understands how to be long. Buy, hold and if the stock goes up, profit. Most however have little to no experience in proper risk management, use of stops, etc. Look back to the post outlining the beginning of the position in the uranium stocks. This is how you should approach every long stock trade. 1) Allocated a specific amount to be risked, usually no more than 5-10% of your portfolio no matter how good it looks. 2) Divide your purchase into 2 or 3 purchases, never all-in from the start. Only add your 2nd or 3rd portion once things are going your way. 3) Have exit stops and stick to them. 4) Once fully invested do the reverse, have exit stops split into 2 or 3 groups and follow your stock up. This is far from a perfect system that ensures profit every time and yes, you will be stopped out only to watch the stock shoot up after your out. But, you will also only lose in small increments. Preservation of capital comes before hitting the home run. And, every now and then you will find yourself on the winning side of a huge trade and reap the rewards accordingly.

Unfortuanately not very many investors understand the power of options. Adding options to your trading enables you to dramatically alter the risk:reward in your favour. Even the basic strategy of selling calls against your long stock positions puts you in the drivers seat, especially during times of high volatility such as now.

Options also enable you to employ strategies such as selling straddles and strangles. As you have seen, these can be enormously profitable. The theory behind selling straddles is so simple it defies reason. Yet, tell someone that you are selling both calls and puts on a stock or index and watch their reaction. Why aren't more people doing this? I don't know. Why aren't you? I believe that the markets will settle into a new trading range and move sideways. These are the perfect trades to do at a time like this.

Put simply, nobody knows what is going to happen. The best you can do is formulate an opinion and put on your position. I've always said it is easy to make money, just easier to lose. It is the risk management and use of advanced strategies that will prove themselves over time.

Options Guy
optionsguy@shaw.ca