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Educational Update

Be careful to leave your sons well
instructed rather than rich,
for the hopes of the instructed are better
than the wealth of the ignorant

I’m very pleased with our education program so far but I wish you guys would leave more comments on the book site as we would really value your feedback!

This is just a quick update on the status of our first two plays:

On February 5th, we used BOBJ as the example of a long-call option.  The stock was at $38.70 and the contract for the March $40s was $1.65.  As we had $4,000 to invest and a goal of making or losing 10%, we suggested that, while you could purchase 4 March $40 contracts for $660, it would be wiser to do a calendar spread of 4 April $40s for $860 and sell 4 February $40s for $400.

Let’s compare the results:

Had you purchased the stock itself, you would have committed, let’s say $3,870 for 100 shares.  The stock is now at $39.48 so you would have gained $78On 2/12 the stock bottomed out at $38 so you would have gone down as much as $70 while you held it.

The 4 March $40 contracts are now worth just $520, a loss of $60 so far but those contracts traded as low as .70, a loss of $380, just about our limit!  Of course my members know I would have been doing a ‘mon back at .70 but trade management is the subject of another post!

Our recommended April $40s, on the other hand, closed trading on Friday at $2.05, $820 on our 4 contracts while the February $40s we sold expired worthless so we have a net profit of $360 on our $460 (net) investment in just 2 weeks!  The lowest level the April contracts fell to was $1.20 on the 13th and, even then, our loss on the spread was only $260, not as bad as the naked March calls.

This was the play we went with on the members site and, now that we’ve made a 74% profit, we need to set a stop at $1.75 to preserve a 50% gain or you can take half off the table, recouping $410 of the $460 that was laid out and setting a stop way down at $1.40, which would still net you 50% if you stop out there (really, do the math) but allows you to ride out another dip to around $38 if you should so choose.

Of course our strict rules say you should stop out at no more than $1.90 but those rules are statistical rules and my call is based on my belief that the stock was pinned down into expiration and still has room to fly.  Make no mistake about it, this is effectively a new bet on a naked April $40 where I am now risking $820 of my money (that used to be $460) hoping to get $3 for 2 of my contracts and setting a .50 trailing stop on the last 2.  I feel strongly enough about this to risk losing $120 if I stop out at $1.75.

We’ll keep an eye on this one but remember – this is effectively a new bet…  If you can’t be satisfied with a 74% gain in 2 weeks, trading is not for you!


On February 12th, flush with our successful play on BOBJ, we decided to take a closer look at volatility and how and why it can make us money.

This is very apropos as the VIX, the market’s volatility indicator, is sitting near an all-time low at just 10 after peaking out at 23 in June.  The last time we had a sustained drop to 10 was 1995, the year before the markets exploded!  This is right on track with my August 31st prediction of a history-repeating market rally but I digress, this is an article about education…

Our volatility example was SHLD and we took the June $185s for $12 and ended up selling the March $180s for $7.80, a little shy of our $8.20 goal.  Sears had a very good week, gaining $6 quickly, not a good case when you sell a diagonal!

The March $180s jumped up to $3 to $10.80 while our June $185s gained just $2.80 to finish the week at $14.80, putting us .20 behind on the spread.  As our net investment was just $4.20 per option, that .20 represents a 5% loss for the first week.

Bear (oops – never say bear!) in mind that our BOBJ contract spread contracted in their first week too, that’s what the volatility game is all about.  Our March caller should be taking his quick 40% profit and running, only we control when we sell the contract, not him and we are betting that his $3.54 of premium decays faster than our $12.54 of premium on our June contracts.

What’s more important to us is our basis, which is just $4.20 (we paid $12 and sold $7.80) compared to the value of the June $185s, now at $14.80.  We have made a $10.80 profit on our $4.80 investment this week but we made it by "borrowing" $7.80 from our caller, who we are assuring the ability to purchase a share of Sears stock for $180 on March 16th.  Earnings are 3/1 so stay tuned for the fun as we may make an adjustment before then but, at the moment, we are hoping for a nice sell-off.

Following this trade through will teach us a lot about volatility as it affects these two contracts over time.


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  1. Is the SHLD volatility spread above still worth getting into, since the cost basis now, if I am understanding it correctly, is $4.00? Thanks.

  2. Phil

    Your quote from Epictetus speaks volumes….

  3. Phil,

    Agreed, love the quote.. Would like to teach my boys (4 and 6) in the stock market if they are interested when they get a little older. Wish I would have gotten into it 10 years ago. .

  4. Phil:

    I have only been a member for a week but I’ve spent most of every day reading your site and tracking your trades. I have not commented b/c I’m here to learn & have benefitted particularly in your LT strategy of selling premium agains LEAPS and the impact of volitility. I have taken a few trades with you and learned tremendously the value of BEING RIGHT. On one position I would have bailed out with a 40% loss the day before it turned around and is now green. You have a tremendous site for education and coaching.

    I disagree with lots of the political commentary – but I like to know what other people are thinking. There are only a few of us who are right all the time! :)

  5. SHLD – it is still a good trade as you have great downside protection and it would take a hell of a gain to wipe out your $3.50 premium advantage – probably $15+ but you will both lose a lot of premium after earnings if it flatlines.


    My girls are 5 & 6 and I use to get them involved in what I do. You can get beutiful (and real) certificates framed like a picture in stocks they can relate to: AAPL, BBW, CAKE, DELL, DIS, KO, GYMB, HSY, JBX, LF, MCD, MRVL, MSFT, MOT, SBUX, SIX, TGT, TIVO.

    It’s already great as we actually talk about the business aspects of the places we go. The first big word both of my girls ever learned was “influence” as I always told both my kids what was really up with commercials. It’s a pleasure, I have the only 2 kids out of all my friends who don’t ask for everything they see on TV! My little on has gone a little Marxist though as her comment about every sales promotion she sees is “oh, they’re just trying to get your money.”

    As they get older, one can hope that looking at that $35 share of Disney that will be worth $100+ when they’re 18 will hopefully give them an effectiive contrast to the thousands of dollars of junk they accumulate…

    My Grandpa Max used to go over the stocks with me in the papers every weekend when I was a little kid and he bought me my first shares in Cadbury (my favorite chocolate) when I was 7. It did very well and I guess that’s what got me hooked! Of course I also learned the fundamentals from Max Davis, who owned two very exclusive dress shops in London, where I would visit in the summers. While my little brother hung out upstairs with my Grandma Lucy and all the ladies, I would hang out in the basement with Grandpa doing the books!


    Thanks Mike, welcome aboard!

    I don’t ask people to agree with my politics but I also don’t believe in pretending I don’t have them as it certainly colors my investing decisions and you have a right to know who I really am.

    I just had the most appalling meeting with a very well-know newsletter team and they actually told me that their “polling people” tell them that you lose readers by discussing politics so they never disclose their personal opinions and I told them how dishonest I thought that was as always prefer to know more about the people I’m getting advice from.

  6. Phil
    Excuse my ignorance here (as I’m sure I don’t totally get it) but I’m not sure I understand how safe the SHLD spread is for some. Let’s say sometime this week, SHLD is trading around 183….Isn’t there a chance that you could get assigned on the March 180 and have to put up the shares ? Thanks !

  7. Hi Phil:

    I read all your educational stuff. Excellent.

    I wasn’t sure until now, perhaps, it is time I introduced my 8 yr old to the wonderful world of stocks.

    I like your candor, I enjoy it very much.
    Well, if liberals are not there, it would be so boring, we may have to invent them. :-)

    - Ramana

  8. Phil,

    While I know you and I will never agree on everything politically, I do respect your right to express your feelings, and I will always listen to anyone who puts forth a reasonable argument. If we can manage to avoid the personal attacks and name-calling, we could have a meaningful debate and remain as friends. My closest friend is a liberal attorney, my attorney, and we debate constantly, and then we’ll play some golf and have a few beers. I wish our politicians, most of whom I have little respect for, could learn to intelligently debate the issues that effect this country, instead of the partisan wrangling and bitter back-biting we hear every day. I also partially blame the media for inciting this nonsense.

    Bill P.

  9. While you can be called away on an in-the-money call, it is exceedingly rare. You would need to discuss the policies with your broker and decide if the risk is appropriate for your particular account.


    Stocks – I don’t force it on my kids but I’ve fostered an interest. My older daughter is very into coming home from school and grading me as she now knows which are my daily tracking indicators and she can see if I’m having a good day but the green and red numbers.

    Mostly we talk about business they are interested in and how things work, like at BBW we were on line for a ridiculously long time and, as stockholders, they were concerned that the store was poorly managed. We discussed the trade-offs of staffing up for a rush vs. overhiring vs. good customer experience – more fun for me than having them ask how many more minutes for a half hour!

    My little one just had a gift card for the toy store and she thought very hard about it and took 4 little ponys instead of the big one she originally wanted because she said it was “a better deal” as 4 friends could play together instead of taking turns – not bad for 5!

  10. LOL – you’re right Bill, I love a good argument, debate being the cornerstone of democracy and all that but if you can’t agree to disagree with people and still be friends, it’s a very sad situation for all.

  11. HPQ reports earnings tomorrow after the market closes. Pundits are expecting good news. It’s their first report since overtaking Dell. Time to take some profits on some near-term positions. I’d expect a run-up early on Tuesday, and then there may be a sell-off later in the day (that’s a big maybe). I’ll sell as soon as I am up 30% or see a reversal. Have to watch it closely. Hopefully, the HPQ leaps will do well after earnings – I’ll keep those.

    Did pretty well on Garmin last week, into earnings, but I’m not going to get back into it. Still a great company, but I’m seeing too much competition from the new cell phones w/GPS capabilities, and that should force Garmin prices down in the consumer sector. Although Avis is running a great add featuring Garmin GPS in their cars.

  12. BOBJ – why not sell the March 40 Calls, currently 1.25?

  13. Phil, remember last Friday when we had fun on the GOOG expiration call. Funny thing happened to me later that same day…I received an email from Google wanting to do a job interview with me on the phone. I’m excited!!! Out of frustration from an argument with my boss late last year, I sent out a resume to Google. Last Friday, I joined your site, made some money, and got this email from Google all in the same day. I am looking forward to more of this good luck and increasing my financial education :-) Thanks!

    Regarding the 20% Quick Gain Rule, when a trade profits do you set a Good Til Cancelled stop to lock the 15% gain or do you prefer a mental stop and just keep a close eye? I have Options Express as my broker.

  14. Cool Marvin! Good luck on the interview.

    If I’m around I just watch my stops. If the whole market/sector is going down (as opposed to collapsing), I am more forgiving of my individual plays and, of course, I ignore spikes that aren’t confirmed by movement on the 5 or 10 min charts. Setting hard stops will trigger you out more often than not as they often purposely try to flush the suckers who use them before a big move.

    I use hard stops when I’m going out or sometimes when I can’t decide what to take off the table so I let fate decide…


    BOBJ – I swear I anwered this already, did you ask it somewhere else?

    Short answer is I don’t like it enough to trap myself in it for a month. I’ve made enough money and it’s time to move on.