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