SURVIVING THE GAME
JANUARY 23, 2009
2009 – 6

Another ugly day. They seem to be coming more frequently. Market sentiment is just plain gloomy. No real enthusiasm for anyone to buy. The next few weeks will show us whether we continue to drift lower or finally buyers step up to take on some risk.

Model portfolio bought 20 DIA MAR 100 calls yesterday for $10. Buy back remaining 20 today. Trading at $2 - $10 now. This leaves you long the DIA MAR 90 calls. Hold on to them for now.

Bought back 20 DIA FEB 90 calls this morning at $20 as per last newsletter. Cancel stop at $60. Flat in those now.

Lower stop on DIA MAR 89 calls from $250 TO $200.
Lower stop on DIA JUN 92 calls from $400 to $300.
Lower stop on DIA SEP 92 calls from $550 to450.

This simply limits risk if we have a rally.

Leave all other positions as they are.

NEW TRADE :

This comes to us compliments of one of the attendees of the seminar Wed eve.

Purchase 1000 Suncor (SU) here at market. Trading at $US 18.87
Sell 10 SU JAN 2010 $20 calls at $510 or better. Currently $510-550
I recommend doing these trades in the US vs Canada. This puts you net long 1000 SU at $13.70. Place stop to exit trade at $14.00 on SU. If hit, buy back short SU JAN $20 calls.

Here is how this trade unfolds.

Duration is 51 weeks. Options expire 3rd Friday of Jan, 2010. You are obligated to sell our shares at $20 each at expiry if SU is anywhere above $20.00. If held to expiry, you have no risk unless SU drops below $13.70.

There are 2 ways to look at the profit/loss on this trade.

1) If you purchase SU outright it costs $18900. You them receive $5200 for selling the options. This leaves you net $13700 invested. If SU is at or above $20 Jan 2010, you receive $20000 back. This is a gain of $6300 on your $13700 investment or a 46% return. You also receive a small .80% dividend but that hardly accounts for anything.

2) If you purchase SU on margin, you will need $5670 in your account, or 30%, to buy 1000 shares. You then receive $5200 for selling the options. This leaves you net $470 invested. Sounds ridiculous but it is true. Now, if SU is at $20 or higher in JAN 2010, you receive $20000 for selling shares, you pay back the $13230 loaned to you as margin and pocket the remaining $6300 profit. I’m hesitant to say this but that is a 1340% return on your initial $470 investment. You still receive the dividend but you will also pay interest on the $13230 margin. Remember, if SU declines, you will have to add additional funds to meet margin call. Eg If SU declines $1.00 per share, you have now lost $1000 on the 1000 shares. You have lost $300 and the broker has lost $700 of the margin loaned to you. You would have to replay the $700 lost margin to keep account square with broker.

This is a great risk:reward either way. The danger is that someone over leverages themselves with the ability to buy SU on margin. I would always suggest that you have at minimum 50% of the cash to purchase the shares outright, then sell the options. Another way to limit risk is to determine your exit point and make the number of shares purchased relative to the risk.

Exit on this trade is if SU drops to $14.00. This would be a new low for stock. Loss would be approx $4.90 per share or $4900. There would be an offsetting gain on the option. The gain would be determined by when the event occurred. If SU dropped to $14.00 in Jan next year, the option would be virtually worthless and you would recoup as much as you lost on the stock. Remember, the breakeven point on SU is $13.70 per share at expiry. If SU dropped quickly to $14.00, say in next month, the option would fall but not to zero. If this were to occur, the option would drop from $510 to approx $340. This would result in a gain of $170 per option or $1700. This would reduce overall loss from $4900 to $3200. This is how I determine how many shares to buy for model portfolio. Portfolio is taking on a 1% risk for portfolio on this trade.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME

JANUARY 15, 2009
2009 - 4

Timing seemed to work out this morning, bought near lows of day
Bought 300 SPY at $82.76
Bought 800 XIU at $12.98
I wish my math was better ! It should have been 1200 XIU.
Buy 400 more Fri morning for total of 1200.

You will be selling out-of-the-money calls against these positions in the near future. Place stops at $74.00 on SPY and $11.50 on XIU

Will add equal number to these positions if we rally.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 21, 2009
2009 – 5

Markets seemed to have digested Obama’s arrival. The massacre in the bank stocks yesterday was brutal. It seems to hint that the TARP program is failing and the demise of many US banks is inevitable.

A few adjustments to to reduce risk in the portfolio.

Reduce the stop on the DIA FEB 90 calls from $200 to $60 and place order to close at $20.
Place stop on 20 ( ½ the position ) DIA MAR 100 calls at $25 and order to close at $10.
Reduce stop on the DIA MAR 89 calls from $350 to $250 and order to close at $100.
Reduce stop on DIA JUN 92 calls from $500 to $400 and order to close at $100.
Reduce stop on DIA SEP 92 calls from $650 to $550 and order to close at $100.

This simply reduces risk in the event of a rally.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME

JANUARY 15, 2009

2009 - 3

Hello from not so sunny Mexico. Markets have decided down is better than up.

Model portfolio stopped out on DIA JAN 86/86 this morning at $509. Bought puts at $505 and calls at $4. Flat in Jan DIA now. Nice gain on that position.

You need to adjust some other positions.

Buy back 20 DIA FEB 90 puts
Sell 20 DIA FEB 85 calls and puts.
Place stop to buy back 20 DIA FEB 90 calls at $200 each
Move stops for Feb to 7300 and 9700

Buy back 20 DIA MAR 89 puts
Sell 20 each DIA MAR 84 calls and puts
Place stop to buy back 20 DIA MAR 89 calls at $350
Move stops for Mar to 6900 and 9900

Buy back 30 DIA JUN 92 puts
Sell 30 each DIA JUN 87 calls and puts
Place stop to buy back 30 DIA JUN 92 calls at $500
Move stops for Jun to 6700 and 10700

Buy back 30 DIA SEP 92 puts
Sell 30 each DIA SEP 87 calls and puts
Place stop to buy back 30 DIA SEP 92 calls at $650
Move stops for Sep to 6400 and 11000

These trades simply adjust straddles down to make portfolio more neutral. The leftover calls will be stopped out or bought back cheaper later.

Leave other positions as is.

Time to get a bit long at these prices.
Normally you would want to be about 50% invested net long. So, to start the process you will get long 1/3 of that. You are committing 15% of capital to long equities. Yer are going to use ETF's instead of individual stocks . Split it 2/3 US market and 1/3 Cdn market.

Buy 300 SPY in US This costs approx $25000 $US. Buy 800 XIU in Toronto. This costs approx $10000 $CDN. You must buy in 100 shares blocks.

You will be selling covered calls against these position shortly.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 8, 2009
2009 – 2

I am also sending a position summary with the fills from the trades on Monday. The stops are also in the summary.

Move the stops on the DIA JAN 86/86 straddle from $800 to $600. The straddle is currently $404-410. Will tighten again as we get closer to expiry if not stopped out. Expiry is next Friday the 16th.

All other trades stay the same.

NEW TRADES:

I believe oil will go back up. When, I’m not sure. There is clearly a glut now with overcapacity and lack of demand. But, as with everything in this world, this to will change. So, to take a position with limited risk and maximum gain do the following trades. You are putting on butterfly option trades just like in Encana and the DIA MAR 90/100/110 position. Limited risk, high potential gains. The key is to get the timing and target price correct. You are using the USO, which is an ETF that tracks short term oil prices.

1) Buy 20 USO APR$ 35 calls, sell 40 $45 calls, buy 20 $55 calls. This will cost approx $160 per trade to initiate. Risk is $160 per trade, max potential gain is $840 per trade. You lose the entire $160 if MAY crude oil futures are below $45.00 at expiry. Max gain is at approx $57.

2) Buy 20 USO JUL $35 calls, sell 40 $45 calls, buy 20 $55 calls. This will cost approx $140 per trade. Risk is $140, max gain is $860 per trade. Same prices as above but based on the AUG crude futures contract.

3) Buy 20 USO JAN 2010 $40 calls, sell 40 $55 calls, buy 20 $70 calls. This will cost approx $160 per trade. Max risk is $170 but max gain is now $1340 each. Max loss occurs if FEB 2010 crude futures are below $51 and max gain occurs at approx $70 at expiry.

These are all extremely low risk/high reward trades. I encourage you to look at them closely. If crude does not move up at all, the value of these positions will deteriorate very slowly. You will exit at ½ premium paid on all these, risking ½ initial cost. This makes the risk on each position approx $80.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 6, 2009
2009 - 1a

To those in the uranium and silver stocks.

You were stopped out today at $2.00 on DML and $10.75 on SLV. You had stop on PNP at $.90, move up to $1.20. You had stop on MGA at $.85, move up to $1.10. Stop in on UUU at $1.60.

I believe this is a short squeeze so you should be out if we pull back. Grateful to be showing a small profit on these positions.

Maybe the tide has turned?
If so, great, still in 3 uraniums.
Will keep moving stops up as stocks rise.

Will consider adding to positions if we double from these levels.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
DECEMBER 30, 2008
2008 - 26

Things have gone well the last week. Moving sideways to slightly up. Straddle positions performing well. Need to do some adjustments.

NEW TRADES:

Sell 20 DIA JAN 76 puts.
Place stops on JAN DIA 88/88 straddle at $800.
Currently trading at $542-550.
Hang on to long JAN DIA 96 calls, not worth selling at $8 each.

This removes insurance bought to protect downside but stop is in to liquidate if we drop too much.

Place a stop on UDN APR 25 calls at $200. Currently $240. Don’t want to let the gains in this get away if $US turns up on us.

Will send position summary tonight with fills and stops.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 5, 2009
2009 – 1

Here we are, a new year is upon us. Lets hope the markets treat everyone a little kinder than 2008 did. As I have stated before I expect 2009 to be flat but with continued volatility. I am looking to take a long equity position, most likely in index funds as opposed to individual stocks, then use options to start hedging risk and collecting premium to enhance return. Will let you know as soon as I see a good entry point. Probably if we get a pullback to Dow 8500 or lower.

Model portfolio stopped out on Friday on the final 15 UDN APR 25 calls at $200. Now flat in $US. Will look to re-enter if market sets up properly.

OPEN POSITIONS:

ECA butterfly puttering along slowly. Now at $514 each. In for $355, hold.

DIA JAN 86 straddle closed at $586. Stops to exit at $800. These options expire on Jan. 16th. If stops not hit, will tighten as we get closer to expiry.

DIA FEB 90 straddle doing great. Sold for $1310. Closed at $830 on Friday. Own FEB 102 call so upside is protected. Tighten stop to exit at Dow 7800. Looking to purchase cheap insurance to lock up gain.

DIA MAR 90/100/110 ( my Obama trade ) butterfly is up slightly. Hold, no stop.

NEW TRADES:

Markets seem to have calmed a bit the last few weeks. VIX at 39.19, down from 60 a month ago. This has been good for your open DIA straddle positions. 40 is still a very high reading so time to take advantage of that fact. One year ago VIX was at approx 22.

1) Sell 20 each DIA MAR 89 calls and puts. Closed at $1075-1125 on Friday. Should net near $1100 per straddle. Set exit stops at 10400 and 7400 on DOW. Risk is approx $8000 or 3% of portfolio. Potential gain is $22000 or 9% of portfolio.

2) Sell 30 each DIA JUN 92 calls and puts. Closed at $1575-1645 on Friday. Should net near $1600 per straddle. Set exit stops at 11200 and 7200 on DOW. Risk is approx 4% of portfolio. Potential gain is $48000 or 16%.

3) Sell 30 each DIA SEP 92 calls and puts. Closed at $1925-1990 on Friday. Should net near $1950 per straddle. Set exit stops at 11550 and 6850 on DOW. Risk is approx 4%, potential gain is $58500 or 20% of portfolio.

Yes, these are all very similar trades and no, I haven’t lost my mind. After much study I have decided that these are incredibly good trades. The risk/reward is good and if I am correct that 2009 will be flat, these trades will reap healthy gains. If I am wrong, the risk is manageable and losses will be relatively small. Remember this is based on what is now a $300,000.00 portfolio and the percentage risk can be scaled down if you are not comfortable with the level of risk indicated. Also, will be looking to purchase options to reduce/eliminate risk on all of these positions.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
DECEMBER 22, 2008
2008 - 25

Markets are trading sideways and marking time until Christmas. I think everyone is just exhausted and wants the time off. Friday was am amazing expiry for DIA DEC options. DIA closed at $85.26. You bought back the 84 calls at the close for $150 each. The 84 puts expired worthless.Volatility is collapsing as we speak. In the last 11 days we have fallen from 56 to 42 on the VIX. This has led to large gains in your DIA JAN and FEB straddles. The JAN 86/86 was sold for $1275 each on Dec 2nd, it closed Friday at $695 and is currently $650-$665. The FEB 90/90 was sold on Dec. 17th for $1310, closed Friday at $1080 and is currently $1050-$1080.

There are two ways to play this. The decline in volatility is great for existing positions, not so great for any new positions. The lower volatility leads to lower option premium, therefore reducing amount we would get for selling new straddles. In the good old days, I would be chasing this volatility down, adding furiously to new positions, “before it is too late”. Today I view this the exact opposite. I’ll take the juicy gains and do what I can to protect them. There will always be another opportunity to start new trades.

With that, here are some new trades:
Buy 20 DIA JAN 96 calls at $21 each.
Buy 20 DIA JAN 76 puts at $80 each
Total cost $101 per trade
The JAN DIA position is now risk free.
Sold the 86/86 straddle, bought the 76 put and 96 calls as insurance.
The most you can give back now is $1000 per straddle and net premium is $1174 per straddle. Remove stops on the straddle.
Try to buy 20 DIA FEB 102 calls at $30 each or less. This will cover the upside of the FEB 90/90 straddle.
Lets see what the Christmas break hands us.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
DECEMBER 12, 2008
2008 - 24a

Quick note. Tomorrow is final trading day on the DIA DEC options. Make sure you are flat by end of day. Call closed at $280. Put closed at $24. Move stop from $600 to $400 or $80 and $88 on DIA. DIA closed at $86.36. The closer to $84 we close, the cheaper the options become. One will expire worthless, the other you will have to buy back near close or you will be exercised.
Exercised means you will be buying or selling 2000 DIA at $84 ( the strike price of the options ).


Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
DECEMBER 16, 2008
2008 - 24

TRADES:

DIA DEC 84 straddle came close to hitting exit point today. Futures show a lower open tomorrow but we’ll see what happens. Keep stop at $600 or $90.00 on the DIA. High today was $89.75.

DIA JAN 86 straddle doing fine. Closed at $955. Sold for $1275 on Dec 2nd. Stops at 7000 and 10200 on DOW. Watching the 72-74 puts and 100-102 calls to buy as insurance. Buy either at $40 or lower.

Encana butterfly at $415, up from entry point of $355. Hold, no stops.

UDN calls doing really well. $US is collapsing. The UDN APR 25 calls closed at $235. Bought at $80. Half of position sold at $200, no stop on second half. We’ll see how far down $US goes.

NEW TRADES:

Sell 20 each DIA FEB 90 calls and puts. Closed today at $1320-1385. Should net approx $1350 per straddle. Exit points are at 7300 and 10700 on DOW. These options expire Feb 20th, 9 weeks from now. Will look to purchase OTM ( out of the money ) calls and puts to cover these short options when prices come down.

Volatility continues to drop slowly. VIX closed today at 52.37. I have to stress that this is still a HUGE reading, therefore driving up the option prices. Another jolt down would drive the VIX up again. I believe we have seen the highs near 90 on the VIX and may never see them again. If we collapse ( down more than 300 points ) tomorrow, hold off on sale of DIA FEB 90 straddle until next newsletter.

Buy 20 DIA MAR 90 calls, sell 40 DIA MAR 100 calls, buy 20 DIA MAR 110 calls. This is a butterfly, just like in ECA. This will cost between $200 and $250 per position. Why? This is to capture a rally over the next 3 months. A rally that does not exceed 11000 on the DOW. Reward:risk is 4 or 5:1 depending on fills. I am far from convinced that all is well but the market seems to have bottomed. The fed is determined to push the market up so we might as well jump on board. Risk is limited to total premium paid of $4000-$5000. Execute this trade no matter what happens tomorrow. Volatility does not affect this type of trade as much as other option trades.

MARKET COMMENTRY:

I have spent the last 3 months watching in awe as history unfolds in front of my eyes. Understand that we are in uncharted territory and books will be written for 50 years about the events of 2008. So, if your feeling a little overwhelmed by what has happen, join the club. I am simply trying my best to navigate through these difficult times. I have chosen to trade, very conservatively, instead of sitting on the sidelines and watching. I feel that the opportunities presented, especially from high volatility, justify the risk under these conditions.

You may have noticed that we now have exclusively option positions. I would really like to start putting on some “ normal “ long equity, short call positions but frankly I’m not convinced the bottom has come and gone. If I had to bet I would say yes, the bottom is in, but I’m not sure enough to take on a lot of risk yet. So, I’ll stick to lower risk options trades and see what the next 3 months brings us. Risk is always my first priority, profit second.

Ben Bernanke has been upgraded from Helicopter Ben to Carpet Bomber Ben. In case you haven’t heard the story, here it is. In a speech Bernake once made reference to dropping bales of cash from helicopters if that was what it took to stimulate an economy. Well, he certainly has done that and more, hence the upgrade to Carpet Bomber Ben. The action today and more precisely the wording of their future intentions left no doubt as to where the Fed stands. They will do whatever it takes and spend however much it takes to right the ship. Period. No wishy washy statements today. The question is, will it work and what are the ramifications of TRILLIONS of dollars of either debt or printed money?

JOBS:

You can lower interest rates to zero and it will eventually help business to expand and hire. But, it does nothing for the unemployed. They have no money to spend and are unlikely, or unable, to borrow to spend with no job. So, lower interest rates and easier credit do nothing for the current and future unemployed. It will however lead to more employment in the future. My guess is 12-18 months at least before it helps.

HOUSING:

I believe the real problem is still housing. Again, lower rates are great IF you can take advantage of them. You have to be in a position to qualify to re-finance for lower rates to help you. Most Americans do not. Even if they have equity, their credit scores are too low to qualify, especially with tighter requirements. Also, millions of homeowners are underwater on their mortgages ( owe more than the house is worth ). Lower rates will help these people only if somehow they can be convinced to stay in their houses instead of walking away and turning in the keys. Those of us who live in Calgary saw this happen here in early 80’s. It took 15 years for Calgary real estate to recover. No matter the rate, many will give up their houses instead of re-finance. The sub-prime mortgages helped trigger this disaster, but there is more to come. There were approx $1 trillion in sub-prime mortgages and we all know what has happened with those. But, there are $1.6 trillion in Alt-A and adjustable ARM mortgages. These were written from 2005 to 2007. They will start to hit the market in 2009. These were the interest only or extremely low introductory rate mortgages. Some as low as 1%. They are set to re-adjust to market rates starting next year. Most of these loans were to speculators or people who would not normally be able to afford the house they bought. Many of these were the famous NINJA loans ( no income, no job, no assets for the borrower ). They were also called “ liar loans “. Everything was peachy, assuming house prices continued to climb, but, they have not. I believe these mortgages are the next shoe to drop on the credit markets. The US is currently building homes at the same rate as 1959 but there is a huge overhang of existing homes and lots of supply ( foreclosures ) coming soon.

Credit card and auto loans:

Same situation as the mortgages. Lower rates will NOT trickle down to most of these loans. The big banks have HUGE exposure to credit card debt. As unemployment rises, so do defaults for both of these type of debts.

Consumer Confidence:

At the lowest level since the 1930’s. Obviously doesn’t bode well for stimulating the economy. As one commentator said, “ the consumer has seen $4 per gallon gas, realized that they cannot exist in that environment, and is afraid of going back “. Will we see a sudden shift in the US from a consumption driven economy to a saving ( or debt reduction ) society? That would spell disaster for the US economy measured in decades, not months. Early signs are that the consumer is holding back, despite efforts to stimulate spending. Watching the value of your house drop by 30-60% doesn’t help boost confidence much either.


Inflation or deflation?

The consumer is showing signs of retreat, maybe even a permanent shift in spending mentality. Will this lead to deflation or will the massive liquidity injected by the government lead to inflation? I wish I knew. The fear has always been of runaway inflation. That was easy to see, easy to measure and easy to fight. Raise rates, stomp down inflation. But nobody would ever admit that a little inflation was actually good, kept thing rolling along. I think stagflation is off the table for now. The boogeyman is deflation. Cash is king in a deflationary cycle and very few people have cash. Most have debt. If your assets are falling, your wages start to fall and you owe a substantial amount, you’re a dead duck. Bankruptcy is next on your agenda. We have seen home prices and commodity prices collapse but other than fuel, no significant drop in other prices. The fed may have avoided a nasty deflationary spiral but the potential still exists to head down that path. It all rests on the consumer, will they spend or will fear keep them out of the game. Time will reveal the answer.

As the above commentary outlines, the future is far from certain. I maintain that we will see sideways market action for an extended period. Things look good for a bounce from now into the post-inauguration period, then POW, reality will set in once again. I will continue to do my best to try and extract gains from this extraordinary market.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
DECEMBER ?
2008 - 23a

Bought the DIA DEC 95 calls this morning for $5.00 near open.
Flat in that position now.
Move stops on DIA DEC 84 straddle from $750 to $600
Essentially if DOW gets to 9000 or 7800 get out.
Currently at 8620

Dave

SURVIVING THE GAME
DECEMBER 11, 2008
NUMBER 23

Need to do a few adjustments to orders.

Reduce exit stop on DIA DEC 95 calls from $150 each to $40. Closed yesterday at $33. Currently $21-24. These are left over from DIA 85/95/105 butterfly and we don’t want them to become a problem if we rally huge between now and next Friday. Also, enter order to exit the same at $10 or better to become flat.

We are entering the end game for our DIA DEC 84 straddle. Closed yesterday at $587-610. Our stop is currently at $900. Lower stop to $750. There are several ways to use a stop on this position. I actually use the DOW JONES mini futures contract, symbol YM. It is very liquid. 1 mini futures equals 5 options. If you are in this trade and need assistance with stops, please call me at 403-464-9998. As we get closer to expiry next Friday, will continue to tighten stop until we are forced out.

The UDN is spiking higher today as the $US crumbles. Options currently $185-200. Hold, no stop on this. Entry point was at $80 each, half already sold at $200.

The Encana butterfly is just sitting in the $390 range. Entered at $355 so up slightly. The stock is at $59. This expires in April so just set aside a we’ll see what happens.

The DIA JAN 86 straddle is doing fine. Entered at $1275, currently approx $1040. Nice profit starting to show there. Starting to look at DIA JAN 100-102 calls and 70-72 puts to purchase as insurance. Still a bit pricey but coming down fast. Will keep you informed when good time to buy.

Watching the DIA FEB 86-90 straddles. Currently in the $1400 range. I want to sell these as soon as possible. Will let you know when. The VIX has now pulled back to 53 from the 80’s. This shows that fear is slowly leaving the market and things are starting to calm down a bit. I know not many of you are doing these straddles. I can only encourage you to do so. Because of the high volatility, the premium received is extraordinarily high. Unfortunately this will not last forever. One year ago, you would only receive maybe $600 for a straddle with 2 months to expiry, not $1400 like the FEB positions are now.

I sent out the beginnings of my trading manual last night. I will continue to add to it and update existing sections over time. I realize much of this is new to many readers so I am trying my best to explain what is going on. I encourage you to try the straddle trades. They are relatively low risk with high probability of profit. I do not expect any measurable move up in the markets for quite some time. The straddle trades are a way to recoup some of the loses incurred this year even as we move sideways. Again, please call if you would like to attempt these trades and want some one on one time to go through the details.

Dave Knight
Editor
Surviving The Gme

SURVIVING THE GAME
DECEMBER 2, 2008
VOLUME 1 NUMBER 22


Well, another ugly day yesterday. Seems like every time the market starts to look good, POW right in the kisser. Unfortunately this what I expect for quite some time. This leads into our next trade.

Sell 20 each DIA JAN 09 86 calls and puts. Should net approx $1270-$1300 per straddle. Exit points at 7000 and 10200 on Dow.

The other positions look good. Keep an eye on the DIA DEC 68-74 puts. Try to pick up some cheap insurance ( less than $50 each ) to cover the DIA DEC 84 straddle.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 24, 2008
VOLUME 1 NUMBER 21


Stopped out on the AAPL $140 calls today at $350. Now flat in all the equity/option trades initiated over the last 6 weeks. As an observation, you can see that every single stock trade was a loss. The addition of options turned two from losses into gains ( GM & UYG ). Three lessened the loss on the stock position ( LVS, NUE & AAPL ). Two were flat ( GE & C ) and 1 made it worse ( BNS ). All said, the options did what they were supposed to do, lower loss in event of a move against position and/or enhance gain if flat or correct on direction. I am not at all happy that every position has been stopped out but that is life. I am especially disappointed that the NUE, AAPL and BNS positions were taken out last Thursday on the most recent thrust lower. However, while NUE and AAPL are now rebounding above our exit point, look at the losses that would have been incurred if we had simply hung on or averaged down. The UYG, C, LVS and GM positions would have been devastating. I am looking to reinitiate some stock/option positions soon. Will keep you informed.

On the bright side, the pure option positions are performing wonderfully. The DIA straddle positions have generated over $13000 in profits so far, offsetting the losses on the equities. The ECA and DIA butterfly positions are holding their own, essentially flat so far. The UDN ( $US ) position is now starting to show good gains.

Overall I am happy that we are flat over the last 7 weeks given the turmoil in the markets. I am cautiously looking at adding new stock/option positions if the market holds most recent low.

We are positioned neutral with the DIA DEC 84 straddle, protected to the upside by the long DEC $100 calls. Looking to purchase downside protection with the DIA DEC 65-70 puts. They are currently in the $70 - $130 range. Purchase one of these for $40 or less if given opportunity. The higher the strike price ( eg 70 vs 65 ) the more protection but also higher the cost of that protection. If able to purchase downside protection, look at selling JAN postions. I am looking for a small rally with the DIA DEC 85/95/100 butterfly position, anything above 8765 generates a profit. As long as the rally stays below 9735, we profit.

I am working on a newsletter that outlines my basic strategies. Briefly it will say that I am looking to capture profit from multiple sources while always striving to limit risk. Some examples are: 1) Long stock, short options to garner premium. 2) Selling option straddles, strangles, condors, etc to capture premium decay in a sideways market. 3) Various option strategies such as butterflies, spreads and outright option purchases to benefit from a correct determination of direction. I will also be doing directional trades in commodities, currencies, etc.

Those looking to educate themselves on options can go to www.onn.tv. It has lots of info on options, strategies, etc. Some of the info is a bit dry but still quite informative.

Until then, I hope we have seen the bottom and will consolidate in this 8000-9000 range for a while. If not you will be hearing from me sooner rather than later.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 20, 2008
VOLUME 1 NUMBER 20


Flat now in DIA NOV option positions. It worked out well today. Exited the 80 puts at $136 each then we rallied. I kept ratcheting up the stop on the 92 puts and when we rolled over and sunk in the afternoon, was stopped out at $965. Actually managed to turn a profit on the NOV positions despite market collapse!

I am attaching position summary that shows all the fills from last week and yesterday. Portfolio hanging on but still sinking slowly. You will notice that the positions for the 4 uranium mining shares and the SLV are now deleted. My single paying subscriber, who is trying to market this newsletter to clients, has requested them to be removed. His argument being that they were initiated before I even started the letter and nobody could have been in on those trades. I am not in favor of this but have agreed to remove them. You and I know that they are in my personal holdings so if one day you hear that either uranium or silver have rallied huge, you know I’ll be a happy camper. I have included current closing prices for the positions we have been stopped out on. As much as I was disappointed at being stopped out, look at the huge losses that would have been incurred if we had “hung on for a bounce” as the talking heads on TV like to say. Preservation of capital is far more important than trying to catch a small gain on a bounce. We can always re-enter on the long side when the markets finally turn up.

Now is not the time to be a hero, but rather to hunker down, get really defensive and see how things unfold. This is serious stuff, not a craps game at the casino. We are still in BNS, NUE and AAPL but barely above stops. The ECA, UDN and DIA options positions are all doing fine even with the market turmoil. This shows the advantage of these options strategies over buying stocks directly. You can sustain huge movements against your position without the catastrophic losses.

It is time to adjust the DIA DEC positions down again. We currently have the 88 straddle. Buy back the DIA DEC 88 puts and sell the DIA DEC 84 calls and puts. This will result in a small credit of approx $150 per position. Keep the DEC 88 calls and place an order to exit at $350 each. Also place an order to buy back at $100 each. This makes the DIA DEC position more neutral with 8400 on the DOW as the middle instead of 8800. The exit stops will be at 6900 and 9900 on the DOW. Place an order to buy back ½ the DIA DEC 95 calls at $40. This converts the butterfly into a spread, altering the profit curve in the event of a rally between now and Dec 21st. The 95 calls closed at $98 today.

Again I must state my disappointment at having a negative return thus far. The fact that the major indexes are crashing to new lows and are down 40% or more is of little comfort. My job is to preserve your capital and position you for gains if market conditions are favorable. This does not mean we need a rally. Sideways movement would be fine. The DIA straddle positions will show tremendous returns when we get a sideways market. Until then, we are positioned to benefit handsomely from a rally or sideways action and will be stopped out quickly if we continue down, limiting losses. I am surprised that the S&P and NASDAQ have broken to new lows. As I have said, I am no market guru when it comes to direction, I simply react to what is happening. If I do have an opinion, such as shorting the $US, I will put on positions to benefit from being right while limiting losses if incorrect. My opinion is that the lower we go, the tighter the spring is being wound. A snap back up is inevitable…but when? Will react when that event occurs.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 19, 2008
VOLUME 1 NUMBER19


Markets continue to bounce around near their lows. We’re hanging in, down about 3 % on portfolio. Execute the following trades.

Sell 15 DIA NOV 80 puts. Currently at $125.00
Place stop on DIA NOV 92 puts at $1150

This eliminates the spread position and we exit if market continues down. Selling the 80 put captures gain on that position before we expire on Friday.

There are several ways to place a stop on the 92 put, the easiest is with the mini-dow futures. Call if want help with that order.

Dave Knight
Editor
Surviving The Game.

SURVIVING THE GAME
NOVEMBER 13, 2008
VOLUME 1 NUMBER 18


The unthinkable has occurred. The model portfolio has gone negative. Some may think that down 3% is not much given the circumstances but I will tell you that it INFURIATES me. What it means is that I must work even harder to protect capital while extracting small gains from extraordinary option volatility.

The indexes are testing the Oct 10th lows and may penetrate as early as today. Dow is holding up better than S&P and Nasdaq. I still believe we are bottoming and will bounce from here. With that in mind, we will adjust the portfolio to capture gains from a bounce while not adding much to risk.

Just after open today, assuming we are flat to down, execute the following trades.

1) Buy back 15 DIA NOV $92 calls. Closed at .40-.49
2) Lower stop on GE to $15.00
3) Lower stop on NUE to $26.00
4) Buy back GE MAR 09 $23 calls. Closed at .73
5) Buy back BNS APR 09 $50 calls. Closed at .86
6) Roll DIA DEC $91/91 straddle down to $88/88 straddle. Buy back both $91 call and put, sell both $88 call and put. Should cost approx $100 per position
7) Buy 20 DIA DEC $100 calls at $45 or less

What does all this do. It eliminates the upper side of our DIA NOV $92 straddle which positions us for large gains if we rally but adds only $675 (total cost to buy back $92 calls) of risk if we continue to sink. We own the DIA NOV $80 puts so we now have a $92/80 spread which will increase slowly in value if we fall but shrink quickly in value if we rise. Shrink is good as we make money if value drops. These options expire next Friday, the 21st so we won’t have to wait long to see.
Lowering GE and NUE stop to give a bit of breathing space.
Buying back GE calls with plan to re-sell after decent rally.
Same with BNS, re-sell if get decent rally.
Moving the DIA DEC $91/91 straddle down to make it a more neutral position. Doesn’t cost much at this point so take advantage of it. Buying DIA DEC $100 calls as upside protection for $88/88 straddle.

Now it is time to get long. How? With options of course. I’m fairly certain not one of you are in the mood to just pile on with uncertain downside risk so we will implement some basic option strategies to get long while limiting our downside exposure.

The most basic “ getting long “ option strategy is to by call options. Eg We could buy the DIA NOV $83 call. DIA closed at $83.09 Wednesday. It costs us $340 each. Well that means that we need to rise $3.40 points above $83 to break even and then away we go to the upside. $83 on the DIA is like 8300 on the DOW. We closed today at 8282.66. Can we make money on that trade? Yes, if we are right and it happens quick. You see, the NOV options expire next Friday so we only have 7 trading days to get it right. We could buy ourselves more time and buy the DEC $83 calls instead of the NOV. Problem is, they cost $590 each, meaning we would need to rally to 8890 to break even, then we make money. The benefit of this strategy is defined risk. The max risk is whatever you pay for the option, never a penny more. The downside is that you must get both the direction and timing right. If we were to rally the day after the option expires, you get nothing. For those reasons, as well as the fact that prices are extremely high right now, I will pass on this strategy for the indexes.

The second simplest strategy is an option spread. This is buying one option and selling another option against the first. Essentially one offsets the other with a price difference. A slightly more advanced version is called a butterfly. We currently have a butterfly on Encana. This is the strategy I will employ to “ get long “. If you have been watching the ECA butterfly this will make sense.

Purchase 20 DIA DEC $85 calls, sell 40 DIA DEC $95 calls, buy 20 DIA DEC $105 calls. This will cost approx $270 per set or total of $5400. This trade unfolds like this. I am looking for the DOW to rally above 8500 between now and Dec 19th, but not rally much above 9500. We will make the maximum profit at 9500 on Dec 19th. It looks like this.





DOW $85call $95call $105call Profit/Loss
X 2
8500 or 0 0 0 -5400
lower
8770 270 0 0 0
9000 500 0 0 4600
9500 1000 0 0 14600
10000 1500 -500 0 4600
10230 1730 -730 0 0
10500 2000 -1000 0 -5400
or higher

So, we want to see the DOW end up between 8770 and 10230. Anywhere in that range we make a profit, outside, we lose. BUT, we can only lose $270 per trade as a maximum while we can gain up to $730 per trade or a 2.7:1 risk:reward ratio with a high chance of success. We will exit his position if the value falls to $120 or less, risking $3000 maximum.

If we rally 500 pts on the DOW soon, this position will move from $270 to approx $325. If we sink 500 points it will move from $270 to approx $200.
It will ebb and flow up and down as we move closer or away from 9500 on the DOW. As we get closer to expiry on DEC 19th, it will move much higher if we get close to 9500. eg The NOV position with exact same options is now worth $217, even though we are 1200 pts below 9500 with only 7 trading days left. The NOV 75/85/95 position, which is almost exactly in the middle, is worth $500 with 7 days left. If we were to close here at 8282 next Friday, the NOV 75/85/95 would be worth $782 each.

I am looking to do a similar trade on the Nasdaq using the QQQ’s and on oil using the USO. The oil trade looks especially nice. 6:1 profit potential. Will keep you informed. This type of trade is also possible on the Toronto index, the i60. If anyone wants to do the i60 trade, email me at davidknight7@shaw.ca and I will send you my best recommendation for the Canadian market.

I also want to get short the $US. The rally Wednesday failed to make new highs. The safest way to do this is again using options. We will use options on the UDN. UDN is an ETF that tracks the $US. It rises as the $US falls. It trades in the US. Buy 30 UDN MARCH 09 $25 calls at $80 each or better. This will cost $2400. UDN closed yesterday at $24.28. The $25 is called “ at the money “ meaning it is the closest call to current price that is not “ in the money “ or below current price. UDN has fallen from the $30 range in July to current price. I do NOT believe this rally in the $US is sustainable. I will risk ½ the premium paid or $1200 on the position. If the $US declines, we will profit above $25.80 on UDN. This is a straight call option purchase because the volatility in the $US is much lower than the stock indexes, making option purchases possible. I will sell ½ this position at $200 each and reassess other ½ at that time. Each $1.00 rise in UDN with net us approx $2100 in profit.

I am still watching the Gold/Platinum spread. Closed below $100 yesterday. Was as low as about $90 and now at $121. Remember, this spread was $1200 earlier this year. I am research historical data to determine best course of action.

It may seem to many that I am executing a lot of trades. You would be correct. Normally I would expect to do 2-5 trades per month, mostly selling more options on open stock positions as old options expire worthless. Believe me, I would like nothing better than 6 months of nice quiet sideways to up action to sooth everyone’s nerves. Trades like the DIA straddles will almost always be a staple of the model portfolio, especially when volatility is high. Trades in individual stocks and one off trades like the $US and Oil come and go periodically. There may be times like this where there are opportunities left, right and center, the problem is finding the best ones. And, months may tick by with no new opportunities at all. A trade like the one I am looking at in Gold/Platinum may occur once ever 20 years, it just happens to be now!!

These are unprecedented times and I will continue to do my best to try and point you towards profitability.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 7, 2008
VOLUME 1 NUMBER 17


Filled DIA DEC 91 straddle at $440 for calls and $815 for puts. Bought back the C Mar $20 calls at $48.00 and the Jan 10 $22.5 calls at $96.00. Bought 100 AAPL at $98.45.

Look to purchase cheap insurance to cover the DIA DEC 91 straddle. Watch the DEC 101 calls and 79 puts. Buy under $0.50. Look to sell more C calls on a rally. Watch the MAR $17.5 calls. Sell 2 more AAPL APR $140 calls at $7.00 or more.

Close position in LVS. Currently at approx $8.00. Close options as well.

Looking to get net long the markets. Will assess over weekend and send out newsletter Monday or Tuesday with trade recommendations.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 6, 2008
VOLUME 1 NUMBER 16



Executing a few trades.

Sell 20 each DIA DEC 91 calls and puts. Should get $12.20 or more. Buy back the C Mar 09 20 calls at approx $0.48 and the C JAN 10 22.5 calls at approx $1.00. Buy 100 more AAPL.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 4, 2008
VOLUME 1 NUMBER 15



Closed the GM trade yesterday morning. $5.99 for stock and $2.50 for Jan 10 $7.50 call. Net gain of $840.00 on entire position.

Market poking its way up this morning. Close DIA NOV 88 straddle. Actually lower in price now due to lower volatility. Purchase DIA NOV 80 put for downside protection of 92 straddle.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
NOVEMBER 2, 2008
VOLUME 1 NUMBER 14

I just sent out a new position summary for the model portfolio. I thought I would take this time to explain some of the outstanding trades.

The 4 positions in MGA, PNP, DML and UUU are all uranium related plays. I was into these equities and many others from 2006 through to this year. I was systematically taken out of all my positions in these and the other uranium’s since the peak in April 2007. As mentioned before I was not happy as I was being taken out but as I look back now and it was the discipline of legging in and out that saved a fortune. PNP which is now at $0.98 was at $16.10 last year!! I started to dip my toe back into some of these in September. There are no stops due to low price and extreme volatility of these shares. These initial buys are ½ positions. I will add to these positions if prices double or more from initial entry points. All are down except UUU, which is up slightly. DML and UUU have options but are so cheap that the options are too far out of the money to be useful. I will integrate options into the trades if possible.

I purchased a ½ position of 700 SLV on Oct 2 after the big pullback in silver prices. I was looking for a rally in precious metals due to financial crisis. Wrong. Gold, Silver and particularly Platinum have just imploded along with the equity markets. I am holding, expecting a recovery. No stop yet. Will add second ½ position at $13.00 and put in stop at $11.80 if filled. Platinum is even more interesting. Watching the Gold/Platinum spread. It could get to a negative. Closed Friday at $113. Was over $1200 in March this year. May switch SLV to DBS. It is a silver ETF that has options available. The GLD also has options.

Exited the UYG position with $1000.00 profit Tuesday morning. I did not like the action of the financials during the initial 300 pt open higher and subsequent pullback. Saw an opportunity to book a profit even though stock was $1.00 lower than where we bought it on Oct. 10th. This is a PERFECT example of why we use options instead of just buying stock. The stock was down, but the option was down more. Made a profit being wrong…love it !! Will probably re-enter UYG or XLF soon.

The 5 positions in DIA spell out like this. Short the 88 and 92 straddles at average price of about $12.00. That equates to 1200 pts on the DOW. The mid point is 90 or 9000 on the Dow. That creates a profitable range from 7800 to 10200. I purchased cheap insurance covering ½ the position at 10300 with the DIA 103 calls. Essentially I am looking for the DOW to stay as close to 9000 as possible until November 21st. That is expiry day on these options. The range from 8800 to 9200 is neutral ( I am short the 88 calls and 92 puts ). This is called a “guts” in optionspeak. The way it works is that having collected nearly $36000 in premium, we must give back $3000 for each 100 pts above or below 9000 on the DOW on November 21st. eg. If we close here at 9325, we will give back $9750.00 and keep $26000.00. Exit points are at 7500 and 10500 on the DOW or $75 and $105 on the DIA. Looking to purchase more cheap insurance at 78 ( currently about $1.05 ) and 102 ( currently about $1.09). Will purchase either under $0.50. Also, watching the DIA December 90-95 straddles. Trading at about $13.50 now.

GE, C, BNS are just as explained in newsletter number 7 on Oct. 16th. Long stock, short calls and puts. Willing to buy more stock cheaper and willing to sell at pre determined prices higher. Up slightly on GE and down on C and BNS. Options are cushioning decline in both losers. Hold positions Stops as indicated.

LVS is why I do what I do. I pulled the stop in LVS that Friday morning when we were set to gap lower. I did it because we are so close to $0 that it can be done. We have a very defined risk on this trade. We know from the newsletter on the 16th what the maximum risk is on this trade. I am willing to accept that risk. We have since rallied $10 on LVS and are now up $1500 or so. This is a trade that could net almost $14000 in profits, worth the max $8700 risk if LVS goes to $0. The volatility of the LVS options is so high, that the prices are crazy, cutting into our profit of $2900 on the stock itself. If you have not done this trade, now is the time. Volatility will decline and profit and risk will rise accordingly.

GM is another strange position. I really liked it on the 16th, not so much now. The beauty is, we are allowed to change our minds. Unlike the infamous CDS’s ( credit default swaps ) that are ravaging the financials, these positions are liquid and we can exit anytime. I closed the 2.5 puts at a small loss of $7 each or $140.00 We are about $600 right now. Exit this trade tomorrow. I don’t like the way the talks with Cerebrus are going and needing more gov’t money to close the deal.

NUE and AAPL are dreamy. Both stocks up, gains in both positions. Hold

Executed the ECA options butterfly at $3.55 on the 28th. Hold. This trade lasts until April next year. Looking for ECA to be around $60 per share then. This position ebbs and flows with the price of ECA but very slowly. Will start to bear fruit in Feb/Mar if we are anywhere near $60 on ECA.

That sums up our open positions. We are up about 2.5% on the portfolio despite the open losses in the uranium’s and SLV.

I am looking at some trades in the precious metals and the broader indexes. Look at the SPY, DIA and QQQ in the US and the iShares 60 in Toronto. Almost time to load up on net long positions in the broad markets, using options of course. Also looking to short the $US soon. Best way is the futures or the UUP in the US market. This rally in the $US is horsepucky and should roll over soon when the world realizes there are more $US floating around than air molecules.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
OCTOBER ?
2008 -`13

SURVIVING THE GAME
OCTOBER 24, 2008
VOLUME 1 NUMBER 12



Executing second DIA options trade. Sell DIA November 88 call and put for $12.40 or better. This gives us 1 set at 92 and 1 set at 88 for average of 90 as mid-point. Premium collected is average of $11.85. Breakeven now at 78.15 and 101.85 on the DIA, equal to approx 7800 and 10200 on DOW 30. The volatility is so extreme that it makes takes on a second position worthwhile.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
OCTOBER 24, 2008
VOLUME 1 NUMBER 11



The name I selected seems more appropriate every day!! Hold tight, do absolutely nothing. I removed all the stops pre-open to avoid getting hit on LVS and coming close on BNS. I am quite comfortable holding everything right here. The best medicine would be to turn off the TV. The hysteria was unreal. The talking heads were tripping over each other spewing out numbers and predictions left, right and center. I heard one fellow predict down 2000 today when we are done.

Dave Knight
Editor
Surviving The Game

SURVIVING THE GAME
OCTOBER 22, 2008
VOLUME 1 NUMBER 10



Purchased DIA NOV 2008 103 calls at $0.39. This covers our DIA NOV 92 straddle on the upside.

The market will continue to be volatile and we will see lots of action like today. We need to use days like today to purchase good quality equities we want to own.

Purchase 500 NUE ( Nucor ) here at $35.00 and sell 5 NUE April 2009 $45 calls at $3.50. This puts us long at $31.50 and obligated to sell at $45 in April if higher than that. That is downside protection plus a potential 42% profit gain. Exit both positions if NUE makes new lows below $26.30. NUE also has a 5%+ dividend and pays special dividends each quarter.NUE is top notch in the steel industry and worth the risk here at $35.00

Purchase 100 AAPL ( Apple ) here at $98.00 and sell 2 AAPL April 2009 $140 calls at $5.00 or better. This leaves us long AAPL at $88.00 and obligated to sell at $140.00 This is a ratio write meaning we are also obligated to deliver 100 shares at $140 in April, even if we are much higher. Of course if we are lower, the options expire worthless. Exit if AAPL makes new lows below $85.00. Apple reported blow-out numbers yesterday. Chart shows nice choppy action between $85 and $110.00, a good sign of a potential bottom. This is a leader in its industry and worthy of the risk to buy here.

Dave Knight
Editor
Surviving The Game

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

SURVIVING THE GAME
OCTOBER 20, 2008
VOLUME 1 NUMBER 8



A quick note to update readers. All the trades have been executed except the Encana options butterfly. The Canadian options market is very thin and I have tried several times with no luck getting inside the bid/offer spread on the options we want. I will continue to monitor that trade and execute if possible. For those holding ECA, it is up nicely today.

David Knight
Editor
Surviving The Game

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

SURVIVING THE GAME
OCTOBER 15, 2008
2008 - 6

Execute new trade now. Sell 15 DIA Nov 92 calls and 15 DIA Nov 92 puts. Combined value of $11.45 per unit. This is called a straddle. DIA is the Diamonds Trust traded on the AMEX. What is happening is that I am neutral on the Dow for the next 5 weeks and I do not expect the volatility (VIX) to increase much from these levels. The VIX is currently at 59. This is based on a $250,000 total portfolio. 15 straddles receives a total premium of $17,175.00 minus commission. The position is this. You are creating a range on the DIA with 92 as the middle. The DIA tracks the DOW 30 stocks almost exactly. The range is from 80.55 on the bottom to 103.45 at the top. This translates to approx 8055 to 10345 on the Dow Jones Industrial Average. I believe we will stay within that range for the next 5 weeks and that volatility will fall. The risk is that it moves significantly outside this range and/or volatility expands significantly from this level. The exit points are if we hit 7750 on the downside or 10650 on the upside. At that time, liquidate both positions. This puts the potential risk at approx $6000 ( 2.4 % of model portfolio ) at this time. The risk will diminish with the passing of time and/or a drop in volatility. There will be several updates on this position as time passes because there are several add-on trades that may become available to limit risk.

I will post another letter explaining this trade and options in general in the next few days.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

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

SURVIVING THE GAME

OCTOBER 10, 2008
2008 - 4

Execute this options trade. Purchase 1000 shares of UYG at $8.65. That is the Proshares Ultra Financials in the US. Basically a basket of financial stocks. Take a look at a chart, you will see what has happened with this ETF. Sell 10 UYG December 2008 $10 calls at $2.90. This means you are now long UYG at a cost of $5.75. Now sit and wait. You put up $8650 to purchase shares, you collected $2900 for selling options so net out of pocket is $5750. That is your max risk as long as you hold the two positions together. Your potential gain is $4.25 per share or $4250 which is almost 74%. You will achieve that if UYG is at or above $10.00 on 3rd Friday of December ( 10 weeks from now ). This is a typical ( actually fairly conservative ) options hedging strategy.

Options Guy

Editor

Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME

OCTOBER 9, 2008
2008 - 3

I am sorry. That is what I feel today. I am sorry for delaying the start of this newsletter until now. I have been toying with this idea for years but just never got around to it. For that I am sorry. The money that most of you could have saved this last year is astounding. Who would have thought things could unfold as they have? Today was another brutal day for most investors. I heard today was the 3rd worst day for the Dow ever. Worst day was the crash of 1987, 2nd was a day the week after and today was the 3rd. Unfortunately, Toronto isn’t far behind. My only hope is that I can possibly help guide you through this mess.

If you are light on equities, stay out. This is probably not the bottom yet. I said I thought we could drop another 20 %, I didn’t mean in 2 days !! If you are fully invested or just can’t resist getting in, please don’t just buy stock or sit there and watch your money melt away. Try to use some of the options I outlined in the last newsletter or call if you would like to discuss other options not yet explained. Typically the bottom will be marked not by some huge volume blowout day to the downside, but by a huge volume blow-out day up. Look for 10:1 up vs. down volume on HUGE overall volume. This is usually followed by a pull back and then off to the races we go. We may see a 1000+ point up day when this is over. So, keep your cash safe and wait for the sign. I will try to send out a letter during this time. It could be next week or not for some time. I felt a noticeable change in attitude today amongst the talking heads on the TV and radio. They started to say things like “ maybe this problem can’t be solved “ and “ this market could drop another 50% “ as opposed to their usual “ don’t worry, stay invested and ride this out “. This market is different than most because we have the added twist of the seized credit markets. Usually when things are bad the Fed just opens the tap and pours dollars into the system, lubricating the recovery. This time, no amount of dollars are able to unlock the fear that those with money have. I heard today that there are 7 trillion dollars in private equity waiting on the sidelines.

Keep your eye on the LIBOR rate. That is the London Inter Bank Offered Rate. They have started showing it on CNBC on the top line. It is currently at 5.09 % As little as last month it was at about 1.5%. This is what banks charge each other to lend money back and forth overnight. THIS IS THE ROOT OF THE PROBLEM. This is a benchmark used for many lending rates but most importantly it is a gauge of confidence. Of all the things one could watch, I believe this is one of the most important. If banks won’t lend to each other, they sure won’t lend to me or you ( or a company like GM !!! ). The system is frozen due to a lack of trust and that will take time to ease. The lack of positive reaction from the bailout bill and the coordinated rate cut shows that this will be a tough ship to turn around

Also, watch the VIX. Look at a long-term chart of VIX and VIN. These are volatility indexes put out by the CBOE. A better name for them would be fear-o-meters. We are reaching levels not seen since the meltdown in 2000 and the crash of 1987. A huge spike like this in the VIX is another good sign that the bottom is near. When fear reaches unbearable levels, it is over. The volatility is what drives up the price of options. This is what makes some of the option strategies I discussed last time look so appealing. We are looking at an opportunity that comes around maybe once every 10 years or so. Those able to stomach the risk will be able to sell options soon and make an absolute killing. The best example I can give is in 2000 near the top ( all this stuff works in reverse as well ) one of the internet stocks was trading at about $300. A person could sell an options straddle for almost $300. That meant that if the stock dropped to $0 you broke even and you didn’t lose unless the stock rallied above $600. I can’t remember which stock it was but I know it sold off to less than $100 and you were able to buy back the options you sold for $300 for about $230, pocketing the $70 profit. And this was on a stock that was crushed! The same sort of thing is setting up now only in reverse. Stay tuned, I will send out specific recommendations when it is time.

To close I just want to say that I believe we are getting pretty close to the end of this nightmare. So hang in there and start to think outside the box to be able to benefit from the coming market conditions – whether that is a rally, sideway action or a continued decline. You can profit in any market.



Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
OCTOBER 7, 2008
2008 - 2

This is another newsletter, rushed out to try and help during these extreme market conditions. Today marked yet another serious down day on North American markets in particular. I spoke with several readers today, which has prompted this letter.

The point I am trying to make today is that there are several options for you in these current market conditions. You may be in one of three situations. 1) You are sitting with high cash levels, riding this out – congratulations to you and/or your advisor. 2) You are a long-term investor, still fully invested, suffering losses and riding this out – this to shall pass. 3) You are somewhere between 100% cash and 100% invested, losing some or a lot of money, worried as heck and looking to do something…whatever something may be! My concern is for those of you in situation number three. What to do?

This is meant to show readers that they have many options, not just buy, sell or hold.

I am going to give an example using RIM, Research in Motion for those not familiar with this equity. This is a classic example of a market darling that has fallen on hard times. It closed today at $60.93, -$5.07 today alone. This was a $150 stock in June this year. RIM hasn’t seen $60 since June 2007. What happened? If I knew, I would be writing this from my new yacht parked in Monaco. Was I in this? No. As recently as last month this stock was touted by many as a screaming buy at $100. Their new products were an Apple killer….blah, blah, blah. Well, things haven’t panned out that way. IF, I had been fortunate enough to be in RIM, I would have been stopped out of my final 1/3 position around $100.00. The example I am giving is for someone who is either holding the stock currently, long or short term, or someone looking to enter the market here.

RIM
$60.93 -$5.07

Options:

A) Buy stock here ( or hold your current position ) If I was holding 200 shares, I would sell ½ here and follow this option. If this is your choice, here is my advice. There is no way to know if $60 is the low or not. If you buy here, buy only a maximum of ½ your desired position. I would be using a stop around $45 as that is slightly below the price that RIM had it’s breakout towards $150.00. Place a buy-stop order to purchase the other ½ position at $100, this shows that the recovery is for real and you have some breathing space between your entry points and stops. You are now 100% long at an average of$80.00. I would then hold trailing stops of $10 on ½ position and $20 on second ½ from recent highs. If it goes up, great. If it collapses again, your out with a small profit, on to the next trade. This is the simplest way to trade RIM. Very easy to execute, very easy to figure out how much you will make or lose.

Profit/Loss based on 200 share position ( bought in 100 share increments at $60 and then $100 )

Closing price Gain Loss

$40 -$2100
$50 -$1100
$60 -$100
$68 $700
$80 $1900
$90 $2900
$100 $3900
$110 $5900
$120 $7900
ETC

B) Covered call option writes. This the most conservative, most often used trading strategy to enhance gains and offer some downside protection. This entails purchasing the stock here at $61.00, and simultaneously selling 1 call option for each 100 shares purchased. For the sake of time I will make the assumption that we do not reach $100 per share before mid-March 2009 ( five months from now ), therefore you only ever purchase ½ your position which is 100 shares. After purchasing the 100 shares at $100, you then sell one March 2009 RIM $68 call option at $11.00 which equates to $1100.00. This is now your position. You own 100 shares at $61, you have collected $1100 from an unknown, unnamed option buyer. That equates to $11 per share. Your actual purchase price is now $50 per share, not $60. What happens now? Here is the breakdown.

Closing Price Gain Loss

$40 -$1000
$50 $0
$60 $1000
$68 $1800
$80 $1800
$90 $1800
$100 $1800
ETC

As you can see, compared to simply being long the stock, you are substantially ahead at all price points unless we rally above $80.00. At that point you have given up the potential gains above $80 for the safety of not losing anything until we drop below $50 and essentially being paid if the stock is flat or even declines slightly. For those not familiar with options, the final result of this is that if RIM rallies above $68 by mid-March, you will be selling your 100 shares to someone at $68 per share. You get to keep the $1100 collected at initial sale. That is how we arrive at a profit of $1800. $700 gain on stock ( boughtt at $61, sold at $68 ) plus $1100 gain on option.


C) Ratio call write. Similar strategy as above but involves potential risk of loss if stock explodes to upside. Here is how it works. Purchase 100 shares here at $61.00 Instead of selling 1 March 2009 $68 call at $1100, you sell 2 March 2009 $80 calls at $740 each. What happens next? You own the 100 shares, you have collected $1480 from selling your 2 options. Therefore, your actual purchase price is reduced from $61 per share to $46.20 per share. You are also obligated to sell your 100 shares at $80 if we are above $80 in mid-March 2009. As a kicker, you start to lose on the second option you hold if RIM rallies above $87.40. Bearing in mind at $87.40 per share you have already pocketed $2640 profit on your 100 shares and 1st $80 call. Here is the breakdown.

Closing Price Gain Loss

$40 -$620
$50 $380
$60 $1380
$68 $2180
$80 $3380
$87.40 $2640
$90 $2380
$100 $1380
$110 $380
$120 -$620

Again, this does not show buying the second 100 shares at $100, this will alter the profit/loss above $100. It reduces the loss with RIM at $120 from a loss of $620 to a gain of $1380. As you can see, this strategy offers even greater downside protection than option B. It also has substantially higher profits compared to option A and B unless we rally above $85. Again, you are sacrificing potential profits way up there for cold hard cash now, downside protection and much higher profits if we are flat to slightly higher.


D) Here is one most of you have probably never dreamed of. Instead of buying any stock, just sell Put options !!! Here is how it works. At the close today, the RIM March $58 put closed at $11.00 That means if you sell 1 option, you get $1100. You are now obligated to purchase 100 shares of RIM at $58 per share in mid-March if we are below $58.00. BUT, you get to keep the $1100 no matter what. That means that you have effectively bought the 100 shares at $47.00 per share no matter what the price is. If we are above $58, you pocket the $1100. If we are at $40, you are now long at $47 and losing $7 per share or $700. Here is the breakdown
Closing Price Gain Loss

$40 -$700
$50 $300
$58 $1100
$60 $1100
$68 $1100
$80 $1100
ETC

As you can see, this is great strategy for a slightly down to up market. Unlike option C, there is no risk of loss on a huge rally but your gain is limited to the $1100. This is the ideal strategy for someone who really wants to own RIM for the long term.

E) One final example ( there are many more ) Combine option C and D together. This is really cool. Here is how it works. Buy 100 shares here at $61. Sell 2 RIM March 2009 $80 calls at $740 each AND sell 1 RIM March 2009 $58 put at $1100. You now own 100 shares, have collected $2540 in option premium ( cash ). You are effectively now long 100 shares of RIM at $35.60 per share and we are at $61 per share. You are obligated to buy another 100 shares at $58 if we are below $58 in mid-March, you are also obligated to sell your 100 shares at $80 if we are above $80 in mid-March. Obviously only one of those can happen, we cannot be below $58 and above $80 at the same time. And remember, we also have the 2nd March 2009 $80 call we sold. Clear as mud I bet. Here is the breakdown.


Closing Price Gain Loss

$40 -$1360
$50 $640
$60 $2440
$68 $3240
$80 $4440
$90 $3440
$100 $2440
$110 $1440
$120 $440

Again, this does not show buying the second 100 shares of RIM at $100. That increases the profit above $100 by $100 per $1 eg. At $120 the profit is now $2440. This is hardly a common strategy employed by your average investor. Most investors, their brokers, friends, family and shrinks would all consider this an insane thing to do. BUT, look at the numbers for yourself…..does it seem insane to you??


I will wrap it up here. I just wanted to open Pandora’s Trading Box a crack and let you see what is inside. This is but one example of how to do essentially the same thing…buy RIM, but with numerous different possible outcomes. I personally am not in RIM and would not get long here, not yet. These examples are for someone in RIM now or considering getting in soon.
The markets are NUTS. The Fed is scrambling to save the free world from itself. If I were heavy into only equities I would liquidate ½ and stand back. You can always get back in. There is a chance, slim as I see it, that we may fall another 20% or more before seeing the bottom of this decline. If they can’t get the credit markets to loosen up, watch out! I honestly think we are close to the bottom but I am more comfortable getting in on the way back up than standing in front of the freight train headed south.


Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca