SURVIVING THE GAME

Friday

April 1, 2010

After almost 1 year of silence I am speaking out.

Wow

That is all I can say. What a rally ! I only caught small bits of the stock rally. Still holding my uranium basket from last spring. The SU and USO positions I had as of last post both worked out well. I have added a few small positions in the RARE Earths as brought up by Jim Dines in his newsletter. For all his bad qualities they do some decent research. Long some RES and AVL in Toronto.

I've been quite active this last year doing straddles, strangles, etc. Mostly on Silver, currencies and a few fliers on Cocoa and Sugar ! Made some good gains doing straddles on the $CDN. I actually had one of the followers of theblog contact me and we did a bunch of $CDN trades together. He made about 20% on his money in 3 months and was a happy camper. I got lucky and caught one of the huge up moves in Silver last year. :}

Volatility in the S&P 500 has steadily dropped to quite low levels. No straddles there since last November. Not good risk:reward ratio will low option prices.

As of today I only have 2 small straddles going. One in the $CDN with 9800 as middle and one on the 10 year note with 116 as the middle.

Currency, energy and ags are particularily volatile these days :} Great for my type of trades.

Hope this finds all of you well and up considerably from last year at this time.

Options Guy

Sunday

SURVIVING THE GAME

MAY 18, 2009

2009 - 30

MARKET COMMENTARY:

Decline continues to set in. Futures down again in Sunday evening session. S&P 500 nearing 875. As mentioned, lightening up on long positions was a good idea. The question is...how far will we pull back? I suspect we have a bit to go, probably down to 800 on S&P 500. You can lighten up a bit more if desired and get in lower.

TRADES:

I closed my USO July positions on the big spike up on Tuesday. Sold the JULY $35 calls at $150 each. Net a small loss of $1080 on that position. Still have USO JAN 2010 positions.

Sold an SPY straddle. Can't say which one but it is below current market levels of $88 on SPY. Netted $845 per straddle. Did 25 straddles for portfolio. Risking +/-1.5% of portfolio for potential 7% gain

OPEN POSITIONS:

Still in USO, SU, JULY OIL straddle, GAS and uraniums. Hold.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Monday

SURVIVING THE GAME

MAY 11, 2009

2009 - 29

MARKETS:

It appears the correction is at hand. Most indicators I watch are pointing to a significant pullback. My guess is back to 800 on S&P 500. I think Toronto will hold up better. Base metals and other commodities are rebounding nicely. If your a short term trader you may want to lighten up a bit on your longs and re-enter at lower prices.

URANIUMS:

Yahoo. Hold tight. They appear to have sucessfully separated themselves from the pack. If they are able to hold up during this pullback it bodes well for a continued rally. I am surprised at the speed of the rebound but I'll take what I can get. I'm ready to add the second allotment if we rally high enough.

TRADES:

Still in USO, SU and July crude straddle. USO starting to come to life. SU is doing really well. Oil straddle flat. Long Natural Gas using the GAS in Toronto. Moving up nicely.

No new trades lately. Just waiting to re-enter some SPY straddles. Probably around the $83 level. Volatility dropped off during rally so I'll wait to get a better price as we decline and volatility increases.

With that I'll see you later

Options Guy
optionsguy@shaw.ca

SURVIVING THE GAME

MAY 4, 2009

2009 - 28

HOW TO BE WRONG AND STILL COME OUT AHEAD !!!

The beauty of options is that you can be wrong...dead wrong and still come out smelling like roses. I have to admit, I sure called it wrong on this rally. I almost missed the whole thing except for my uraniums and SU position. The beauty is, I still made money being wrong.

I closed some positions this morning after the housing numbers so now I can fill you in on the trades.

On Mar. 16th I sold the MAY $75 straddle on the SPY for $980 each. On Mar 25th as we rallied I bought back the $75 calls for $840 each. I then sold the $82 straddle for $960 and sold some $89 calls for $195 each to balance the short $75 puts. So I had a short straddle at $82 and a short strangle at $75 and $89. Today as we rallied I bought them all back. I paid $10 for the $75 puts, $35 for the $82 puts, $710 for the $82 calls and $185 for the $89 calls. All told I sold the set of options for $2135 and bought them back for $1780, making $355 per option or $8875 for the portfolio. Not bad considering I was dead wrong.

On Apr 23rd I sold the SPY June $84 straddle for $955. Bought it back today for $920 even though we have rallied 50 points on the S&P or $5.00 on SPY. How is this possible? Two reasons. First, time has gone by, 11 days to be exact. That erodes the value of the options. Second, volatility has fallen from about 43% to 35%. That also erodes the value of the options. So, even though I was wrong again...I still made money, not much but a total of $875 for portfolio.

On Apr 6th I sold the Crude Oil June $52 straddle for $8900. I bought it back on Apr 23rd for $6650 and sold the June $50 straddle for $6000. Today I bought back the $50 straddle for $5100. Total is net gain of $3150 per straddle x 5 straddles is $15750 profit in one month !!!

OPEN POSITIONS:

Still short the July $52 straddle. Sold at $8900 each. Closed today at $8800.

Stil lhold the long SU/short Jan $20 call position. SU closed at $28.36 and option closed at $960. Open profit of $5060 on that position.

Still have USO July and Jan 2010 option positions. Hold

Uraniums.....up 72.51% on basket since March 16th. What can I say. Preparing to purchase second $16000 worth if we get to 100% gain. Hold.

I can only imagine all of you holding the uraniums are over the moon happy. I am happy for you as well. I hope they hold and don't give back these great gains of the last 6 weeks.

SUMMARY:

To sum it up..I blew it. I completely missed this rally. The upside is that on March 10th, the beginning of the rally I was up 6% for the year. Today after closing the SPY and Crude positions I am up 20.5% for 2009 and up 43% since October last year. I cannot complain. This shows how powerful options can be. Able to make money even being completely wrong on the market direction.

This rally still creeps me out but I am obviously wrong. Still waiting for a big pullback to get long. I will be selling more straddles on SPY soon.

I will keep you posted of any new trades as they come along.

Options Guy
optionsguy@shaw.ca

Thursday

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

Tuesday

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

Saturday

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

Tuesday

SURVIVING THE GAME

MARCH 31, 2009

2009 - 24

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

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

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

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

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

DEBT - FRIEND OR FOE ??

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

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

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

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

There are 3 possible outcomes to this strategy.

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

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

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

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

What to do with cash.

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

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

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

Options Guy

Thursday

SURVIVING THE GAME
MARCH 27, 2009
2009 – 23

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

COMMENTARY:

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

FILLS:

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

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

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

OPEN POSITIONS:

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

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

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

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

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

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

NEW TRADES:

There will be no new specific trade recommendations.

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

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

Good luck with your future trading.

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

SURVIVING THE GAME
MARCH 27, 2009
2009 – 23

Tuesday

SURVIVING THE GAME
MARCH 17, 2009
2009 – 22

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

FILLS:

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

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

OPEN POSITIONS:

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

SU – love it ! Hold

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

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

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

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

NEW TRADES:

No new trades.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Monday

SURVIVING THE GAME
MARCH 15, 2009
2009 – 21

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

OPEN POSITIONS:

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

SU – Doing great. Hold

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

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

NEW TRADES:

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

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

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

URANIUM:

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

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

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

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Wednesday

SURVIVING THE GAME
MARCH 10, 2009
2009 – 20

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

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

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

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

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

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

OPEN POSITIONS:

USO – still a chance on this one. Hold.

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

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

NEW TRADES:

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

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

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Thursday

SURVIVING THE GAME
MARCH 5, 2009
2009 – 19

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

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

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

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

FILLS:

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

OPEN POSITIONS:

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

NEW TRADES:

No new trades.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Monday

SURVIVING THE GAME
MARCH 2, 2009
2009 – 18

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

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

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

FILLS:

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

OPEN POSITIONS:

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

NEW TRADES:

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

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

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 27, 2009
2009 – 17

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

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

OPEN POSITIONS:

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

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

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

NEW TRADES:

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

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Tuesday

SURVIVING THE GAME
FEBRUARY 23, 2009
2009 – 16

WTF. I’m sure all of you are familiar with that wonderful email short form. I believe it describes the current market conditions perfectly. How ugly can this get? Dow 6000, Toronto under 6500, maybe. Despair has turned to disgust and both investors and traders are abandoning this market in droves. Volume is not huge and VIX is not spiking to the moon which shows it is a lack of interest, not panic selling. We are now down 15-20% this year on the major indices with no bottom in sight. And it’s only Feb. 23rd. Not really funny but there was a great line from Jim Crammer tonight. He was quoting his wife, Karen Crammer aka the trading goddess, and said “ well Jim, there is only 7100 more points to go before we get to zero”.

Model portfolio stopped out of many positions last 2 days. Will send Position Summary as well. Holding on to 7.8% gain so far this year. Given that, and with huge uncertainty it is, as we used to say on the trading floor, “ time to get small “. That means close out most positions, take your gains/losses, reduce risk and sit back and watch for a while. As I mentioned in newsletter 2009 – 14 this is no time for heroics, it is time to be VERY cautious.

POSITIONS/FILLS:

Encana, my beloved butterfly. Stopped out of long APR $46 calls at $395.00 each and bought back short APR $60 calls at $39.00 each. I’m a little ticked about this one, thought it was going to be a solid winner for you. You still have long APR $74 calls but not much hope for them. Hold them for now. They are not worth much.

Time to close out the leftover short calls that have been hedging your losses. Buy back the following tomorrow after the open, not at the open. Let things settle before entering your trades.

Buy back the 30 DIA JUN $87 calls.
Buy back the 30 DIA SEP $87 and 30 $92 calls.
Place order to buy back 40 USO JUL $45 calls at $25 instead of $10.
Buy back 3 SPY JUN $90 calls.
Buy back 12 XIU JUN $14 calls.
Buy back 10 CAT JAN 2010 $35 calls.
Buy back 20 AA JUL $7.50 calls.
Buy back 20 AAUK JUN $10 calls.
Buy back 25 SPY APR $85 calls.
Buy back 25 SPY JUN $83 straddles.
Buy back 25 SPY SEP $83 straddles.

This will clean up most open positions and lock in gains while reducing risk dramatically.

OPEN POSITIONS:

You are left with some USO options. Hold

You have a few long calls in ECA and DIA. They are basically worthless so just hold them for now. Will most likely expire worthless.

You are still long SU and short the JAN 2010 $20 calls. The only surviving trade from the long stock/short call positions. SU is down $1.90 from entry at $18.90 on Jan. 23rd but option is also down $1.90 so position is exactly flat despite stock being down. I love options. Hold exit stop at $15.00 on SU.

SPY APR $80 straddle. Hold. Closed at $1073.00. Entered at $993 on Feb. 19th. Exit stops at $68.00 and $92.00 on SPY.

NEW TRADES:

VIX is still quite high at 52.62. This encourages options selling so you can add one new position. Short term, only 3 weeks and 3 days to expiry. Sell 25 each SPY MAR $78 straddles. Closed today at $786 - $807. Should net approx $790 per straddle. Exit stops at $68.00 and $88.00 on SPY.

That leaves you with 2 SPY straddles and out of almost everything else. If we don’t calm down soon you will be out of those as well and 100% cash. Let’s see what happens over the next few days.

That about sums it up. A wild, wild market with huge risks so stay small and hang in. They say it will get better. I hope they are right.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

Saturday

SURVIVING THE GAME
FEBRUARY 19, 2009
2009 – 15

Model portfolio stopped out on SPY and AAUK yesterday. Hold short calls, stops as indicated in position summary. Already out on AA. Close to being out of XIU and CAT. Only SU has some breathing space. As a group they are showing a small loss of $1539 or less than ½% of portfolio since positions instigated between Jan. 15th and Feb. 6th. Not bad considering the markets are down 10%+ in the same time period. If market continues down, this will actually turn into a profitable set of trades despite being completely wrong on direction. The gain on the short calls will become greater than the loss on the long stocks.

The risk to the portfolio continues to decline. It is currently in the 8-10% range, down from 14% a week ago. As losses are incurred, pare back your risk until things level out or start to return in your favor.

OPEN POSITIONS:

Hold Encana butterfly.

Short DIA JUN & SEP calls. Hold, stops as indicated. Gains on these as markets decline softening losses on other positions.

USO – actually up today..unbelievable! Hold positions.

XIU, SU, CAT – still in, hold, stops as indicated. May be out of XIU and CAT today by the look of things. Markets down in overnight due to poor earnings reports after close yesterday.

SPY straddles – roll APR down as shown in new trades. Hold others.

NEW TRADES:

Roll the SPY APR $85 straddle down to $80. Buy back the 25 $85 puts, sell 25 each of the $80 calls and puts. Place exit stop on short $85 calls at $250 each.

Place orders to purchase the Encana $60 calls at $40 each to close and to purchase the XIU $14 calls at $25.00 each to close.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 17, 2009
2009 – 14

UGLY - that about sums up today’s action. Dow closed within 2 pts of low on Nov. 20th last year. S&P 500 closed down over 4.5%, Nasdaq down over 4% and Toronto down 3.5%. It sure looks like we will continue lower, but how far? I don’t know. One of these days we will get another big up day, just to clean out the weak shorts if for no other reason. Be VERY cautious, not a time for heroics.

Surprisingly volatility hardly spiked at all. The VIX moved up to 48.66 from the 43.00 area. The last time we saw 7850 on the DOW the VIX hit over 80. This is a sign that panic is leaving the market and being replaced by depression. As I said in the last newsletter it appears that many are simply throwing in the towel and walking away. Volume today was far from heavy, another sign of lack of interest. The VIX at 48 is still a good level for selling options, so you benefit. I think it would take a real jolt, say a 800+ point down day to send the VIX spiking a lot higher again.

That said here are the results in the model portfolio from today’s action.

Closed the DIA MAR $84 straddle at $907 each at the open today. Exit stop was $900 so got out near stop. Net profit of $3040 on that trade.

Bought back the DIA JUN $87 put at the open for $1310 each. Sold the SPY JUN $83 straddle for $1445 each.

Bought back the DIA SEP $87 put at the open for $1480. Sold the SPY SEP $83 straddle for $1845 each.

Stopped out on AA today at $7.00. Still short the JUL $7.50 calls. Place stop on AA JUL $7.50 calls at $150.00 each.

So, you are out of the DIA March position and left with the SPY -APR, JUN and SEP straddles. You are short the extra DIA JUN and SEP calls. See position summary for stops. Will exit extra short calls on any decent rally. They act as a bit of a hedge if markets continue lower. Place order to buy back the DIA JUN 87 calls at $50 each, SEP $87 and $92 calls at $100.00 each. Exit stops on new SPY straddles as indicated in position summary.

Model portfolio took a small hit today but hanging in there, up about 9% so far this year. Relative to the market averages, I feel good. The SPY, XIU, SU, CAT, AA and AAUK long stock/short option positions are actually showing a small loss of $566.00 all together. Stopped out on AA today. Close to being stopped out on SPY and AAUK. The short call positions saved our butts on these set of trades. The long stock positions are down $9200 but the short options are up $8634. If stopped out on stock, place stop on short call approx 20% above current price. That way, if market rallies, stopped out and only a small loss is incurred. If market continues down, profit grows on short calls to further offset loss on stocks. Always close out short calls if become very cheap.

USO trades hurt. OIL is pitiful.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 16, 2009
2009 – 13

FILLS:

A few fills for the model portfolio on Friday. Bought the DIA JUN $92 calls at $100 each to close position. Bought the USO APR $45 calls at $10 each to close position. Buy back the Soybean APR 1000 straddle in the night session for 97. Currently trading at 73 for puts and 24 for calls. It was sold on Feb. 9th for 118. You will be flat in that position now. Soybeans declining and moving away from middle of straddle, now at 950, volatility declining as well. Profit of $5250 for that trade.

OPEN POSITIONS:

Encana at $54.11, butterfly at 652. Hold

DIA MAR 90/100/110 butterfly basically a write-off. Closed at $19 each.

DIA MAR 84 straddle. Closed at $775. Move exit stop to $900.00.

DIA JUN 87 straddle. Closed at $1358. New exit stop at $1600.00. Close JUN 87 put Tuesday. See new trades below.

DIA SEP 87 straddle, short 92 calls. New exit stop on straddle at $2000. Close 87 put Tuesday. See new trades below. New exit stop on 92 calls at $250.

USO positions. Closed APR $45 calls Friday at $10 each. Hold all 3 positions.

SPY, XIU, SU, CAT, AA and AAUK. Hold, stops as indicated. Positions showing profits despite market declined due to premium erosion in options.

SPY APR 85 straddle. Sold Feb.11 at $1075 per straddle. Closed Friday at $1010. Market moving lower but volatility down as well. Hold.

MARKET COMMENTARY:

It sure looks like many traders are throwing in the towel. DOW closed at lowest level since huge down day on November 20th and market is sinking overnight. S&P 500 holding up better but close to breaking low of Jan 20th this year at about 806. I think people are just disappointed that there is still no miraculous plan to bail out the banks. I’m not sure what they were expecting but nothing is clearly not it. The question is how low will we go? I expect we are simply creating a new trading range. If we break the lows of Nov. 20th, watch out. That low has been touted as “ a line in the sand “ that must hold or DOW 6000 is right around the corner. I am adjusting the model portfolio so that if markets continue lower, you will be out of your long positions quickly, taking profits in some positions and small losses in others. You will also be short extra DIA calls to keep the portfolio more “delta neutral“. It is time to be very cautious, if things fall apart you want to be out quickly, not riding this thing down.

NEW TRADES:

Buy back the 30 DIA JUN $87 puts, leave the short $87 calls. Stop on the $87 calls at $250 each. Sell 25 each SPY JUN $83 straddles. Should net approx $1420-1450 per straddle. Exit stops at $65 and $101 on SPY.

Buy back the DIA SEP $87 puts, leave the short $87 calls. Stop on the $87 calls at $400 each. Sell 25 each SPY SEP $83 straddles. Should net approx $1810 - $1850 per straddle. Exit stops at $61 and $105 on SPY.

This leaves you with 4 straddle positions. DIA MAR 84. Stop very close at $900. If hit, will exit position with small gain of approx $3000.00. SPY APR $85 straddle. SPY JUN $83 straddle and SPY SEP $83 straddle. You also have extra short DIA JUN $87 calls, DIA SEP $87 and $92 calls. All these extra short calls have exit stops very tight so if market rallies, you will be out quickly. A rally is good for the portfolio in general. The extra short calls also act as a hedge if market continues to decline, offsetting some of the losses incurred in the long equity and short straddle positions. The extra short calls make the portfolio more delta neutral.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 11, 2009
2009 – 12

It seems that the latest bailout plan stinks. At least that is how the market is voting. As soon as it became clear that there was no plan yet, down we went.
I’m surprised it wasn’t worse. The market had hung its hat on the bad bank idea and that seems unlikely to happen, at least in the near term. Maybe another 1000 points down on the DOW will convince them to do something.

Model Portfolio stopped out of the DIA FEB 85 straddle yesterday at $605. $575 for put and $30 for call. Final profit was $12600.00. Can’t complain about that. Looking to purchase puts for MAR DIA straddle to lock in profits.

April soybean 1000 straddle trade working out well so far. Sold for 118, closed yesterday at 107.75 and looks like it will be down again today. May soybeans floating around $10.00 per bushel and volatility dropping back down. Squeeze in the stops to 885 and 1115. Expiry March 27th.

All other positions remain the same.

NEW TRADE:

As you can imagine, volatility spiked a bit yesterday with the 380 point drop. Now that you are out of the FEB DIA position, time to roll to new position in April, taking advantage of that volatility spike. You already have a March position. I am recommending that you switch from using the DIA options to using options on the SPY. SPY tracks the S&P 500 index as opposed to the DIA that tracks the DOW. SPY options are even more liquid than DIA. The volatility is slightly higher now in the SPY than DIA so option prices are a bit better. Sell 25 each SPY APRIL 85 calls and puts. Should net approx $1075 per straddle. Currently $1065-1085. Exit stops at $72 and $98 on SPY.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 9, 2009
2009 – 11

I have spent the last six weeks doing far more research and study of the markets than I normally would. One of my main strategies of investing is to intentionally avoid the day-to-day clutter that the markets produce. It allows me to stay focused on the big picture and not be swayed by a single event such as an employment report or Fed meeting. My quest, given that we are in the most difficult market conditions any of us have ever seen, was to try and decipher something unique, something different from normal. I am sorry to report that my quest has failed. I see nothing different today than I did a year or two ago. What I mean is that I see nothing that would sway me in any particular direction. No clear signs that tell me that we will rally strongly or that the next wave down is imminent. I mean that for all markets, not just the stock markets. I see the same, nothing clear. I think that is why the markets are so difficult to trade. They give few clear signals. Everything is hidden or disguised as something else. I believe that the failure of most traders and investors is that they believe they can see through the clutter and decipher something others cannot see.

The information coming out of the reports certainly paints a grim picture. The economy, particularly in the US is not just slowing but collapsing. Employment is weak, confidence is low, house prices continue to decline, not what I would call a very rosy outlook. But, the markets are supposed to be forward looking, seeing past the next 3-6 months and looking into next year and beyond. If that’s the case it appears that things will be bleak for some time to come. I have read several newsletters and reports and I am baffled that some of them have the nerve to predict any future market movements given the uncertain economy, etc. Some are bearish, some bullish, I guess that’s why the markets work the way they do. The never ending push and pull of the different sides of the market. I certainly don’t see anything that says we will go either way.

This leads me to my pet peeve. My biggest complaint about market newsletters, commentators on TV and the like is two fold. First most are very vague about how to trade their opinions. They love to use statements like “I think oil looks good down here”. What exactly does that mean? I believe this is intentional so that if they are correct they can say 6 months from now after oil is up $20, “see, I said it looked good $20 ago”. If they are wrong they can save face and stay in business. Second, those that are more forward, more clear in their direction, tend to hang their hat on one theory and ride it out, good or bad.

I will use The Dines Letter as an example. I have subscribed to TDL for many years so I feel safe commenting on his performance. Clearly Dines is not unintelligent. His career spans decades and I guarantee he has a whole lot more money than I do. I made money following his uranium recommendations up and was stopped out in stages as they retreated. But, I think he has either lost his mind or is too stubborn to back down. He is as guilty as any of using intentionally vague statements to express his views but my biggest concern is his ridiculous stance that the only way to make money in stocks going forward is uranium or gold/silver. I owned a basket of uranium stocks such as PNP, MGA, DML, UUU, PDN, etc. At one point the basket was worth $220,000.00 I was out of the last few as the basket fell below $160,000.00. I have tracked this basket of stocks ever since. It bottomed last fall at about $27,000 and is currently worth about $38,000. That is a decline of 83% and he is still fully invested. His latest newsletter switched all these shares to BUY, BUY, BUY. The problem is that he has been saying that almost all the way down. 83%, how does one recover from a beating like that? Most of these stocks need to rally 500% or more to regain their old highs, which is where he was still recommending them as BUYS. These are the “ good quality “ stocks of his uranium picks. The smaller stocks are doing even worse, some down as much as 98% from his entry point. I do not understand why he has been so stubborn, despite the terrible loses. It is fine to believe in the uranium story, I still do myself, but to bet the ranch on it is crazy. What if he is wrong? It can be argued that the huge declines in the uranium stocks are, as he says, due to liquidation by hedge funds, but what if they are not? It is too late to get out with a decent amount of capital intact so what to do? I think he is just being stubborn. He has staked his reputation on his uranium call and given his age, may not be alive to see if he was right or wrong. If he is right and these stocks recover and push on to new heights he will be hailed as one of the most astute investors of all time. If wrong, he will be mocked, much as he has his whole career, and tossed into the pile of market has-beens. The problem is that he has a huge following of investors who will see their net worth tossed into the same pile. I hope for the sake of his followers that he is right and they get their money back. I just don’t understand how it got to this point. Why didn’t he take most of the money off the table as we declined? Only he knows and he is not likely to tell me.

I have read several other reports put out by firms such as Merryl Lynch, Raymond James and others. I have also read reports and newsletters by other market commentators such as HS Dent, Dennis Gartman, etc. They give very conflicting and very different views. All give their opinions on what the future holds but no clear direction on how to act on that information. Lots of vague statements like “housing may decline into the 3rd quarter” or “ the US dollar should peak late this year”. How do they expect you to make a profit from that?

A side note on housing. As an investment category, real estate scares the hell out of me. By its very nature you are encouraged to use leverage. Investors put down only a percentage of the purchase price, mortgaging the rest. Typically investment property is 25% down, 75% borrowed. When times are good this leverage works in your favor but when the tide turns, a decline of only 25% wipes out your entire investment. This is no different than buying stocks on margin. If you told anyone you always leveraged yourself 4:1 by borrowing 75% as margin for your stocks, you would rightfully be looked at as crazy. But what really scares me is that real estate is NOT liquid. If you want out, you had better hope the market is good or you left holding the bag as they say. Many investors have investment properties and would like to liquidate them. The market has turned and turning those properties into cash is a lot harder than it was last year. If you are holding for the long term the liquidity isn’t an issue…today. Real estate has been seen as a more stable, predictable investment than stocks. Try telling that to someone living in California. And, if you think that what has happened in California ( a 50% decline ) can’t happen here, think again. I’m not predicting a real estate crash here but there are lots of signs that tell me that the peak we saw 18 months ago will hold for a long, long time. I prefer to stay in financial instruments that can be valued daily and can be liquidated in short order.

NEW TRADES:

Soybeans had another spike in volatility late last week. Volatility in Soybeans ( and agricultural products in general ) is opposite the stock market. In the stock market, down is always easier than up, therefore when the market drops quickly, volatility rises. With agricultural products, up is always the danger. A drought or some other weather issue can send agricultural commodities soaring, therefore when soybeans rally, volatility rises. Sell 5 each of the APRIL $10.00 calls and puts at 120 or better. This collects $30000.00 in option premium. April options are based on the May Soybeans contract. May beans closed at $10.06. Exit stops at 860 and 1140 basis the May Soybean contract. Expiry is March 27th, 6 weeks and 4 days from now. Risk is approx 20 cents or $1000 per straddle with total risk of $5000 or 1.5% of portfolio value. Soybeans trade in both the pits and electronically. For straddles it is better to enter them as straddle orders through the pit traded options rather than trying to execute them yourself through the electronically traded options.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 6, 2009
2009 – 10

What a week! We came into Monday looking pretty grim, markets threatening to punch through major support. Wednesday morning, all was well and the rally was on. By 10AM Thursday, it was official, the end of the world was imminent and markets were set to plunge to new lows and then boom, a rally kicked in and we find ourselves up nicely on the week. Now before we proclaim the rally is on understand that we are exactly where we were 10 days ago, and 20 days ago, 2 months ago, 4 months ago etc. The point being that a bounce off the bottom is nice but not nearly enough to get too excited about. It sure looks like 8000 on the DOW and 810 on the S&P 500 are major support and I’ll take it. Just be cautious.

This leads me to the following rant about options. My opinion is that options are the KEY to successful investing. Unless one is ordained with the gift of being able to pick more winners than losers, and get the direction correct, and exit at the right time, you inevitably fall far short of your goals when buying and selling stocks. It is a well known fact that less than 10% of fund managers can beat the index averages over a 5 year period, and they are supposed to be good at this! Options are the crucial element missing that will enable you to take a loss and lessen it, enhance a modest gain or produce gains where you may have though none existed. Another benefit is the ability to take a position in something with high risk, eg OIL, without taking on a huge amount of risk. Add in options and a rigid risk management system and you are ready to extract serious gains from the market.

NEW TRADES:

A few fills ffor the model portfolio rom this week. Sold the AA July $7.50 calls at $200 each on Wed. Sold the AAUK June $10.00 calls at $190 each on Wed. AAUK gapped open above $10.00, thus the fill was higher than the $150 desired. Sold the XIU June $14.00 calls at $110 each today.

You need to adjust the exit stops on several positions. I will send a position summary. All the changes are in orange. You will see that I have cancelled the exit stops on the DIA JUN and SEP $92 calls. I will explain that later in this letter.

OPEN POSITIONS:

Encana butterfly is performing nicely. Initiated for $355 each on Oct 28th. Closed today at $687 each. Hold, no stop. Expiry 3rd Friday of April.

DIA FEB 85 straddle. Closed today at $448. I have reduced exit stop to $600. Can’t complain about this for any reason. Open profits of $15800. If $600 exit stop is hit, will become closed profit of $12500. Beautiful spot to be in. Expiry in 2 weeks, will keep squeezing in exit stops until hit or position expires.

DIA MAR 90/100/110 butterfly. Or should I say dog. This was your Obama rally position…..hmmm. What happened to the rally? Initiated Dec 17th at a cost of $224 per position. Closed today at $89. Only benefit is that you still have 6 weeks to expiry so hang on. Hold, no stop. Exit at $200 if possible.

DIA MAR 84 straddle. Initiated Jan 5th as an 89 straddle, rolled down to 84 straddle Jan 15th. Kept short 89 calls. Closed 89 calls at $100 on Jan 29th. Position looks good so far. Closed at $755 today. Open profits of $6080. Exit stops at 7400 and 9400 on the DOW. If exit stops hit, profit will be reduced to approx. $2000. Nice position to be in. 6 weeks to expiry.

DIA JUN 87 straddle. Initiated Jan. 5th as 92 straddle, rolled down to 87 straddle on Jan. 15th. Kept short 92 calls. Still have both positions. Open profit of $7200, exit stops at 7100 and 10300 on DOW. 4 ½ months to expiry.

DIA SEP 87 straddle. Initiated Jan. 5th as 92 straddle, rolled down to 87 straddle on Jan. 15th. Kept short 92 calls. Still have both positions. Open profit of $7950, exit stops at 6700 and 10700 on DOW. 7 ½ months to expiry.

For both these positions you should cancel the exit stop on the short 92 calls. The reason is that with the addition of the long stock/short call positions in SPY, XIU, SU, CAT, AA and AAUK, the portfolio is now net long. The DIA straddles are neutral positions, favoring neither up nor down. The remaining DIA MAR 90 calls are net long so keeping the short DIA JUN and SEP 92 calls balances the portfolio and makes it more “ Delta Neutral “. Delta neutral is an options term used to describe how the movement in direction of an underlying, eg the DOW, affects the options on that instrument. Delta neutral means that whether something goes up or down, it has NO effect on the portfolio. The portfolio is not delta neutral, it is delta positive, meaning up in the market is good, down is bad. The short DIA 92 calls simply hedge the entire portfolio in the event of a market downturn because the value of the calls will drop if the market goes down, hedging some of the loss in the long equity positions. This technique is the key to reducing risk for someone holding a large equity portfolio.

USO APR, JUL and SEP butterflies. Oops. All are down as of today. Oil appears to be basing in the $40 range. Buy the short USO APR $45 calls at $10 each if possible. This will add to your initial cost but leave you net long the APR options. Any small move up will bring you back to even, a large move would result in huge gains.

SPY, XIU, SU, CAT, AA and AAUK long stock/short call positions all doing well. Together these positions have generated open profits of $7500. I have adjusted the exit stops on most of them. See position summary for new stops. Hold, various expiry dates.

I think that is enough for now. I known a lot of this is slow, tough reading and difficult to understand but believe me, it is worth it. Once you get your head wrapped around options it all becomes much easier.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME
FEBRUARY 3, 2009
2009 – 9

Markets sliding sideways. No news to generate much action either direction. FEB DIA position just sitting $150 or so above exit stop. You will either be stopped out at $750 on the next leg down and book a nice profit or pocket an even larger gain should we manage to rally.

Soybeans moving lower again. Close out 1010 straddle. Currently 81-85. Sold at 102.5 on Jan 26th. May re-enter a new straddle at lower strike price.

AA and AAUK up today, no fills yet on options in those stocks. No fill yet on XIU JUN $14 calls yet. Keep orders in for now.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 26, 2009
2009 – 7

Markets up a bit this morning despite brutal CAT earnings. Maybe the uptick in existing house sales helped. We sure seem to be putting in a bottom in this area. Three bounces off the DOW 8000 level.

NEW TRADES:

CAT is still a great company. Buy 1000 CAT at market. Currently $32.70, down $2.70 for the day. Sell 10 CAT JAN 2010 $35 calls at approx $560 each. Currently $560 - $570. This puts you net long CAT at $27.00 with the bonus of a 5% dividend. This is similar to SUNCOR trade but dividend actually counts for something. Place exit stop at $27.50, that would be a new low for CAT. Best come scenario is that CAT is above $35 in JAN 2010. You then sell at $35, netting $8.00 per share or about 30% on your $27 per share investment. Add on the 5% dividend and that gives you 35% upside with protection down to $27.00 or a 20% hedge to the downside.

SOYBEANS. Yes soybeans. March soybeans are currently trading at about $10.30 per bushel. Soybeans trade in 5000 bushel contracts so 1 cent equals $50.00. Sell 5 each soybean March 1010 calls and puts. Will net approx 104 per straddle. 104 equals $5200 per straddle x 5 equals net $26000 premium. Exit stops if March soybeans hit $11.20 or $9.00 per bushel. Cost to liquidate straddle would be approx 125, a loss of 21 or $1050 per straddle. Total risk is $5250 or less than 2% of portfolio. This trade acts just like the DIA straddles. Time erodes value of options, moving significantly away from $10.10 increases value of options. Will be looking to purchase options as insurance as time goes by. Expiry for these options is Feb. 20th or 3 weeks and 4 days from now.

SPY is now at $84.62 up almost $2.00 from your entry point. Time to hedge. Sell 3 SPY JUN 90 calls at $5.50 or better. This gives you a downside hedge to $77.26 and nets you $5.50 per share option premium. Optimally SPY is just below $90 at option expiry in JUN. You then sell more options, further reducing your entry cost. At $90.00 in Jun you will have gained $12.74 per share or about 16%. Add a small dividend and that’s pretty good for 5 months on an index. Looking to do something with the XIU if we get a bit of a rally.

Oil sure looks like a bottom has been made. Our USO, ECA and SU trades are benefitting from this. Hold tight.

Leave all other positions the same.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 30, 2009
2009 – 8

Sideways markets and lower volatility. Just the recipe for options decay. All the DIA straddles showing profits for the week. Soybean trade working out really well. CAT down a bit but so is option.

OPEN POSITIONS:

As stated, all positions are performing well except USO and CAT. The USO positions are basically flat. You need to do a few adjustments to reduce risk.

1) You bought back the DIA MAR 89 calls on Thursday for $100 each. Cancel stop to buy at $200.00. Tighten stops on DIA MAR 84 straddle from 6900 & 9900 on DOW to 7400 & 9400 on DOW.

2) Tighten stops on DIA JUN 87 straddle from 6700 & 10700 to 7100 and 10300.

3) Tighten stops on DIA SEP 87 straddle from 6400 & 11000 to 6700 & 10700.

4) Soybean straddle doing really well. Sold for 102.5 on Monday, currently in the 78 range. March beans at 985 so still close to middle strike at 1010.0 This was another volatility trade, taking advantage of spike in volatility, therefore spike in option price, on soybeans. Looking to buy options to protect position. Looking at 910 put and 1110 call. Buy either at less than 3.0 each. Exit stop at 105 on straddle. Expiry in 3 weeks.

5) Place order to sell DIA MAR 90 calls at $250 or better. Trading at about $90 so will only be filled if we rally substantially. 7 weeks to expiry so we’ll see what happens.

NEW TRADES:

With the ability to reduce risk by lowering stops, tightening stops and buying options, it allows you to continue to add positions to portfolio without increasing overall risk. With that in mind, here are a few new trades.

1) Sell 12 XIU JUN $14 calls at $110 or better. This will be tough as the CDN options market is pretty thin. Open interest is only 861 in this contract ( as opposed to over 21,000 in the SPY JUN $90 calls you sold ). Just put in your order and be patient. This will put you long XIU at $12.10. Closed Thursday at $13.57. That gives us a 10% hedge to the downside. You are obligated to sell at $14.00 on 3rd Friday of June if above that price. That would give you a 16% return in 5 months. Small dividend as well. This reduces, not increases total portfolio risk.

2) AA. Alcoa. Beaten down but not likely to be out. Buy 2000 AA at $8.10 or better. Sell 20 AA JULY $7.50 calls at $2.00 or better. This puts you long at $6.10. Exit stop at $6.50. 25% hedge to downside, 25% potential gain if above $7.50 in 25 weeks. Dividend is also 8.00% if it holds. Risk of approx 1% of portfolio.

3) AAUK. Anglo American PLC. No I don’t have a thing for companies with ticker symbols that start with A. I have to thank James Dines for this one. I have been watching this company for many years because it is a core holding in his portfolio. He bought it at $9.20 in May, 2002 and is now flat after 7 years. I think it used to pay a small dividend but can’t remember for sure. No dividend now. The beauty is that it WAS $35 per share, now $9.17. Buy 2000 at market. Sell 20 AAUK JUN $10 calls at $1.50 or better. Puts you long at $7.67, exit stop at $7.00, new low in stock. 17% hedge to downside, potential 32% return if above $10.00 in June. Risk of approx 1.5% of portfolio.

Options Guy
Editor
Surviving The Game
optionsguy@shaw.ca

SURVIVING THE GAME
JANUARY 23, 2009
2009 – 6A

Model portfolio bought back remaining DIA MAR 100 calls at $10 each. Flat in those now.

Bought 1000 SU at $18.90, sold 10 SU JAN 2010 $20 calls at $520 each. Net long at $13.70, stop at $14.00. This trade worked out really well, oil started rising right after you got in. SU closed at $19.50 and the option closed at $570. Let’s see if the oil Gods are good to you on this trade.

Adjust stops on DIA FEB 85 straddle to exit at $900. This assures a profit on this trade even if markets continue to decline.

I’m going to walk through the DIA FEB options position to try and make it a little more clear.

Initially sold the FEB 90 straddle at $1310 on Dec 17th. Five days later after the market declined you purchased the FEB 102 calls at $27 each. These act as insurance against a huge rally. Now net $1283 for straddle. Market then rallied into the first part of this year. The market has since sold off sharply. On Jan 15th, you adjusted position by buying back the FEB 89 puts for $945 each and selling the FEB 85 straddle for $917. You kept the short FEB 89 calls which were at approx $150 each and placed a stop to get out of them at $200 each if we rallied. The market has since continued to slide and you are now near the lows of the year. I continued to lower the stop on the FEB 89 calls until this morning when they were bought back for $20 each. The 89 straddle was initially sold for $1310, the 89 put was bot for $945 and the 89 call for $20. This resulted in a net gain of $345 per straddle. The 85 straddle that was sold on Jan 15th for $917 each closed today at $698 each showing an open gain of $219 per straddle. The FEB 102 call bot as insurance for $27 closed at $5 and is basically a write-off. I have now placed an exit stop on FEB 85 straddle at $900. This will be triggered by a further decline of 200 points or more in the DOW. If not hit, I will continue to tighten the stop until we get to expiry ( Feb. 20th ) or stop is hit.

Hopefully that makes that trade a bit more clear. The DIA positions in MAR, JUN and SEPT follow the same theme.

ECA, USO and other trades doing fine. Leave stops as indicated and we’ll see what happens in the months to come.

Still contemplating what calls to sell against our long SPY and XIU positions.

We’ve had a few more join our little newsletter. Welcome aboard. Thanks to those who attended the seminar Wed eve. I am always open for further discussion with anyone looking to execute these trades or just to chat about options, strategy etc.

Options Guy
Editor
Surviving The Game

optionsguy@shaw.ca

SURVIVING THE GAME

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