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Weekly Wrap-Up

Lithium Rocketbottle – Posted August 24, 2007 at 3:36 pm:

"It appears the explanation for the market performance was that it was sad that Phil went on vacation. Thanks for coming back Phil. Your teaching made this an up 35% month (profitable both up and down)."

Boy is it good to be back!

This is about the most exciting market I've seen since 1999, which of course has a downside to it, but let's just enjoy the ride…

Last weekend I said "It's hard to see a bottom except in retrospect" at the same time as I put up the Thought for the Day, which was basically that you can be TOO safe and perhaps it was time to do a little bottom fishing.  Last weekend we were bullish by accident as Thursday's drop and recovery took us out of our short positions but this week we put capital back to work, albeit well-hedged as we still continue to see some scary fundamentals. 

Above all else, lets remember that this market rally was based on the Fed Funds Futures starting the week pricing in a 100% probability of a half-point rate cut on September 18th, something I consider very unlikely to actually happen.  Nonetheless, we have the chance to remain irrationally exuberant until September 6th, when it is very likely that the ECB (the bank of the World's #1 economy) gives us a cold slap in the face with a rate hike of their own.  This is, of course, just my prediction but I was just there checking things out and that's my call…

Option Sage, who took his turn to vacation this week, made the call last Sunday that "The result of a weak dollar is likely going to mean a continued stock market rally.  It appears to me that we could rise up another couple of hundred points on the Dow before encountering a down-trending resistance line that began with the 14,000 peak and continued with the 13,600 rejection."  The Dollar did indeed pull back from resistance at 81.50 all the way back to 80.68 (1%) while the Dow climbed 250 points (1.9%) a gain that appears slightly muted when priced in Euros or Yen.

Happy Trading was also looking on the bright side last Sunday stating: "SPX closed at 1445.94 on Friday, above the 1440 level. Its 10-day MA and MACD have turned up. The broader market made a follow-through with a higher high and a higher lowSo, let’s keep an eye on the financial sector next week. If the financial sector stays strong, I’m looking for a positive open next week."

To say every thing went according to plan Monday would be the understatement of the yearAt 9:29 am I posted my chart illustrating the various psychological issues we face trading in a choppy day and the markets were kind enough to follow the pattern to the letter!  This is great because we pride ourselves on being an educational site and whenever we can take total control of the markets for a day in order to illustrate a point for our members we consider it a job well done!

 

My Monday morning call was to continue with the cash but I was on the bandwagon at 3:20 when I posted to members (and later on the free site): "I’d love a low volume break of last week’s highs, that would be enough to get me back in a little. Low volume indicates a lack of seller interest (as long as we drift up) and passing critical resistance around 13,250 will probably range us between 13,200 and 13,600 which is the low end of what I was hoping for in a consolidation."  That didn't stop us from cashing down to 10% invested by Tuesday's close but it set us up nicely for Wednesday's action.

Tuesday the WSJ alerted us to the plight of sea turtles that were fleeing the hurricane, which got me off on a rant about the pending Murdochification of my favorite paper and our concern about T-Bill action kept us in cash.  That concern reversed, along with the markets, near Tuesday's close as Paulson, Bernanke and Dodd did their best to talk us back over 13,200.  Sage stated: "We are at critical resistance levels that MUST be broken if we are to resume our march higher.  Thursday & Friday should be critical in determining the future direction of the market.

On Tuesday's wrap I promised: "We’re not going to go crazy but 90% cash leaves us lots of room to play without over-committing.  I’ll be bargain hunting in the morning so expect lots of trade ideas on the member site as my watch list is now teaming with nice looking opportunities." 

On Wednesday the Hang Seng put up yet another 600-point gain for the day, a move we just couldn't ignore, causing me to ask "Are they crazy or are we simply missing the party?"  The World Banks were continuing their wild cash injection party and I declared the US markets to be "the least sucky place to put your money in the second half of ‘07."  Yes, this is the sort of academic insight we at PSW are famous for!

Wednesday we got very busy with new positions with one of the largest Virtual Portfolio Moves sections we've had in a long time.  This activity continued Thursday and Friday as we put close to 15% of our cash back to work including well-timed free morning picks on PID at $19.62 (now $20.27) and LFG Jan '10 $55s at $12.65 (now $14.10).  I had said in the morning that the rally was the result of a massive global effort on the part of the central bankers to bail out angry rich folks like Senator Kent Conrad (and his string pullers), who wants to fire Fed officials who let the market drop and BAC closed the deal on Wednesday afternoon by stepping in to bail out CFC.

Thursday we set some goals (all of which were met yesterday) and now I'm just waiting for GOOG $525 to confirm the next leg up in the markets.  The Nikkei stepped up to the plate by not hiking rates (but I still don't see Europe going that way) reigniting the carry trade for at least another week.  I was cautious going into the day and we were indeed rejected on Thursday, finishing just under my 13,250 mark for the Dow but I said that night: "Flatlining here isn’t terrible, just a little disappointing."

Hedge funds continue to fall apart and I pointed out some of the biggies on Friday morning but we called on the C in C (Cheerleader in Chief) on Friday morning's post to root the markets on to, well not new highs – we're still miles from those, but at least to what's starting to look like a bit of a recovery.

We're not out of the woods yet and we are, as I said, well hedged, but we also are putting our money back to work.  As Jimmy Stewart told us in the morning: "Can’t you understand what’s happening here? Don’t you see what’s happening? Potter isn’t selling. Potter’s buying! And why? Because we’re panicky and he’s not. That’s why. He’s picking up some bargains. Now, we can get through this thing all right. We’ve got to stick together, though. We’ve got to have faith in each other."

That's what PhilStockWorld is all about – having a collaborative community of excellent traders who stick together through the ups and downs of the market, sharing experience and ideas and learning from each other's successes and failures – it's a beautiful thing!

Our Short-Term Virtual Portfolio added 4.5% for the week, which is not bad considering we paid a lot of premiums to initiate new positions, leaving us at 76% cash.  We now stand with 52 open positions weighted with 37 calls and 8 covered calls but protected to the downside with plenty of DIA puts.  For the year, the virtual portfolio stands up 520%.

The Long-Term Virtual Portfolio had a great week, gaining 16.5% in a choppy market as the drop in the VIX wrecked havoc on our callers.  We are 70% cash and up 187% for the year with 35 open positions, 16 of which are covered.

We moved the $10,000 Virtual Portfolio to 87% cash and the 5 remaining items there are up 63% since our June opening.  The virtual portfolio made a nice 24% gain on the week, thanks to nice early action on CROX (and a well-timed, non-greedy exit!).  We still have time to be right on JOSB (Oct $35s) and YHOO (Oct $25s) but I'll be working hard to find some new plays so we can break $20K by this expiration!  I ran a special position analysis of this virtual portfolio on the members site.

Our Apple and Google-heavy Complex Spreads Virtual Portfolio put up a rockin' 40% gain for the week as Apple made a winning comeback and Google looked like it was coming back which let us sell calls right at our $515 target on Wednesday for a neat little profit.  On the whole, the virtual portfolio has 13 open positions that are now up 210% since we opened this folder in May.  This virtual portfolio is 72% cash.

The boring old Stock Virtual Portfolio continues to be dull at 30.5% for the year (up 1% on the week) with 8 open positions.  We added the PID and NAK positions this week as they both seemed like good places to park some cash and we are now 59% invested.

The Free Picks Virtual Portfolio continues its charmed existence with a 63% gain on the week10 open positions are now up 463% since 4/30 and we are 70% in cash.  The FXI roll was the call of the week with a 72% gain on the Sept $142s from Thursday's entry but, frankly, any of them would have worked!  The strong gains for the week have left us 30% invested.

On the whole, we closed out 55 positions on the week for a modest 15% total gain, held down by the swings that cost us a lot of repositioning in the DIA puts and calls as we worked into the strangle.  A sharp market move will more than make up for that next week and, if not, the lack of volatility will take us through expiration in great shape on the Long-Term virtual portfolio!

Congrats to all the members, who seemed to overwhelmingly have a very good week – hopefully we are ready for anything as we move into the end of the month because anything and everything is probably what we'll be getting!

Description

  Basis

Open

 Sale Price

Sold

 Gain/Loss

%

20 SEP 130.00 AAPL CALL (APVIF)

13,010.00 8/21 9,990.00 8/22 -3,020.00 -23%
40 OCT 135.00 AAPL CALL (APVJG) 21,410.00 8/1 25,990.00 8/21 4,580.00 21%
40 SEP 37.50 ABX CALL (ABXIU) 410 8/3 1,790.00 8/22 1,380.00 337%
8 JAN 30.00 ACI CALL (ACIAF) 2,530.00 8/1 3,030.00 8/20 500 20%
20 SEP 75.00 CAT CALL (CATIO) 4,810.00 8/23 6,390.00 8/23 1,580.00 33%
40 SEP 40.00 CCJ CALL (CCJIH) 4,810.00 8/20 4,470.00 8/22 -340 -7%
80 SEP 20.00 CFC PUT (CFCUD) 11,930.00 8/21 11,990.00 8/24 60 1%
100 JAN 85.00 COP CALL (COPAQ) 22,010.00 8/1 41,970.00 8/20 19,960.00 91%
5 SEP 57.50 CROX CALL (CQJIS) 1,310.00 7/23 2,365.00 8/22 1,055.00 81%
5 SEP 57.50 CROX CALL (CQJIS) 1,310.00 7/23 2,190.00 8/21 880 67%
400 SEP 132.00 DIA PUT (DAWUB) ######### 8/13 99,990.00 8/23 -18,020.00 -15%
150 SEP 133.00 DIA CALL (DAWIC) 37,510.00 8/24 44,990.00 8/24 7,480.00 20%
150 SEP 132.00 DIA CALL (DAWIB) 44,260.00 8/21 49,490.00 8/23 5,230.00 12%
200 SEP 132.00 DIA CALL (DAWIB) 59,010.00 8/21 65,990.00 8/23 6,980.00 12%
200 SEP 130.00 DIA PUT (DAWUZ) 57,610.00 8/13 44,990.00 8/22 -12,620.00 -22%
20 JAN 10.00 DNDN PUT (UKOMB) 7,610.00 6/1 5,790.00 8/22 -1,820.00 -24%
25 OCT 35.00 EBAY CALL (XBAJG)  1,635.00 5/16 4,240.00 8/22 2,605.00 159%
20 JAN 55.00 EDU CALL (EDUAK) 8,010.00 7/24 11,990.00 8/21 3,980.00 50%
10 OCT 70.00 EOG CALL (EOGJN) 2,810.00 7/31 4,390.00 8/20 1,580.00 56%
10 JAN 35.00 GM PUT (GMMG) 2,610.00 6/29 5,990.00 8/23 3,380.00 130%
20 SEP 510.00 GOOG CALL (GOPIU) 26,010.00 8/23 32,990.00 8/24 6,980.00 27%
10 SEP 510.00 GOOG CALL (GOPIU) 13,010.00 8/23 16,490.00 8/24 3,480.00 27%
10 SEP 510.00 GOOG CALL (GOPIU) 13,010.00 8/23 16,240.00 8/23 3,230.00 25%
20 SEP 510.00 GOOG CALL (GOPIU) 20,810.00 8/21 25,990.00 8/21 5,180.00 25%
5 NOV 52.50 GSK CALL (GSKKX) 885 6/1 1,065.00 8/21 180 20%
15 SEP 115.00 IBM CALL (IBMIC) 4,960.00 8/2 5,230.00 8/23 270 5%
10 SEP 110.00 IBM CALL (IBMIB) 3,310.00 8/20 3,690.00 8/23 380 12%
160 SEP 25.00 INTC CALL (INQIE) 8,010.00 7/18 7,990.00 8/20 -20 0%
40 OCT 25.00 INTC CALL (INQJE) 4,210.00 6/15 3,790.00 8/20 -420 -10%
10 OCT 55.00 JWN CALL (JWNJK) 60 5/21 590 8/20 530 883%
7 OCT 20.00 KNOT CALL (BQCJD) 1,410.00 4/4 2,090.00 8/21 680 48%
20 SEP 40.00 KWK CALL (KWKIH) 1,810.00 8/20 1,790.00 8/24 -20 -1%
30 SEP 17.50 MRVL CALL (UVMIW) 310 8/3 590 8/24 280 90%
20 SEP 17.50 MRVL CALL (UVMIW) 210 8/3 390 8/24 180 86%
20 JAN 15.00 MRVL CALL (UVMAC) 4,910.00 5/24 7,990.00 8/23 3,080.00 63%
500 Northern Dynasty Minerals Ltd. (NAK) 5,135.00 8/22 5,440.00 8/23 305 6%
10 JAN 57.50 NUE CALL (NUEAY) 2,910.00 7/30 2,990.00 8/21 80 3%
20 SEP 170.00 OIH CALL (OIHIZ) 10,010.00 8/21 10,990.00 8/22 980 10%
5 OCT 75.00 PCLN CALL (PUZJO) 735 7/5 3,490.00 8/21 2,755.00 375%
10 SEP 140.00 PTR CALL (PTRIH) 5,160.00 8/22 4,240.00 8/24 -920 -18%
10 SEP 37.50 QCOM CALL (AAOIU) 1,310.00 8/20 1,990.00 8/22 680 52%
10 JAN 86.63 RIMM CALL (VHOAW) 3,210.00 7/6 21,490.00 8/21 18,280.00 570%
50 SEP 27.50 SBUX CALL (SQXIY) 3,510.00 8/2 3,490.00 8/24 -20 -1%
10 SEP 150.00 SHLD CALL (KTQIU) 2,410.00 8/2 2,590.00 8/24 180 8%
20 SEP 135.00 SHLD CALL (KTQIX) 12,510.00 4/19 19,990.00 8/20 7,480.00 60%
100 SEP 22.50 STX CALL (STXIX) 11,510.00 5/21 20,490.00 8/20 8,980.00 78%
25 SEP 17.50 SYMC CALL (SYQIW) 3,010.00 7/26 3,490.00 8/21 480 16%
20 SEP 40.00 T CALL (TIH) 1,810.00 8/20 1,990.00 8/22 180 10%
40 OCT 40.00 T CALL (TJH) 6,010.00 7/2 5,790.00 8/20 -220 -4%
25 OCT 40.00 T CALL (TJH) 3,510.00 6/1 3,615.00 8/20 105 3%
20 JAN 120.00 TM CALL (TMAD) 3,010.00 5/10 10,790.00 8/20 7,780.00 259%
30 JAN 50.00 UNH CALL (UHBAJ) 14,260.00 6/1 11,690.00 8/20 -2,570.00 -18%
10 JAN 55.00 UNH CALL (UHBAK) 860 3/6 1,790.00 8/20 930 108%
20 OCT 65.00 VLO CALL (VLOJM) 6,010.00 8/21 7,990.00 8/22 1,980.00 33%
40 SEP 65.00 VLO CALL (VLOIM) 10,810.00 8/1 10,790.00 8/20 -20 0%

 


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  1. Phil – in your comments on the 10K portfilio you said “… I’ll be working hard to find some new plays so we can break $20K by this expiration! I ran a special position analysis of this portfolio on the members site”.

    Is the position analysis in the portfolio archive file or elsewhere on the website? Can you post a link to it. Thanks!



  2. Sorry, I screwed up sending it to Jared but it should be up in the morning.

    CFC – Yeah, that’s a nasty article! I was going to talk about it this morning – I wonder if it’s enough to pause our markets (Asia and Europe don’t seem too concerned but that 1 in 4 delinquent number is scary).

    From a value perspective, this is key:

    “One former employee provided documents indicating Countrywide’s minimum profit margins on subprime loans of different sizes. These ranged from 5 percent on small loans of $100,000 to $200,000 to 3 percent on loans of $350,000 to $500,000. But on subprime loans that imposed heavy burdens on borrowers, like high prepayment penalties that persisted for three years, Countrywide’s margins could reach 15 percent of the loan, the former employee said.”

    So how out of whack is their valuation if. on a go forwared basis when only 10.2% of their total loans were prime last year?

    “As recently as July 27, Countrywide’s product list showed that it would lend $500,000 to a borrower rated C-minus, the second-riskiest grade. As long as the loan represented no more than 70 percent of the underlying property’s value, Countrywide would lend to a borrower even if the person had a credit score as low as 500. (The top score is 850.)”


  3. Asia Markets : Monday, August 27, 2007

    Japan*

    16301.39
    52.42
    0.32%

    Hong Kong*

    23577.73
    655.84
    2.86%

    DJ Shanghai*

    525.82
    0.38
    0.07%

    S.Korea*

    1803.03
    11.70
    0.65%

    India

    14764.19
    339.32
    2.35%

    * at close
    Sources: Dow Jones, Reuters


  4. Asia and Euro Markets

    European Stocks Track U.S., Asia Higherhttp://www.cnbc.com/id/20455842
    European stocks opened higher Monday as investors took confidence from strong U.S. economic data Friday and looked ahead to a speech from European Central Bank President Jean-Claude Trichet.

    Germany’s LBBW Buys Stricken State Bank SachsenLBhttp://www.cnbc.com/id/20454204
    German state-backed bank Landesbank Baden-Wuerttemberg agreed on Sunday to buy subprime victim and fellow lender SachsenLB, as pressure mounts for further mergers among German state banks.

    As part of the sale hammered out at the weekend, LBBW will inject immediately 250 million euros (US$340 million) in capital to prop up SachsenLB, which ran into trouble this month over investments linked to risky mortgages in the United States.

    SachsenLB will be run by LBBW as a subsidiary and LBBW secured the right to return it to its owners if losses turned out to be substantially larger than initially expected.

    LBBW said it expected to see no credit defaults at SachsenLB and foresaw no net job losses as a result of the takeover.

    Asian Markets Are Higher, Japan and South Korea Make Gainshttp://www.cnbc.com/id/20451810
    Asian stocks were stronger in the afternoon session Monday with markets taking cues from a Wall Street rally triggered by surprisingly strong economic data, while the Japanese yen weakened against the U.S. dollar as risk appetite strengthened.

    Exporters and U.S.-linked firms helped lead the rally in Asian equities after the solid U.S. housing and durable goods numbers on Friday. The reports helped quell fears about the impact of the worst credit market turmoil of the decade on the outlook for global growth.

    China Construction Bank, one of the country’s big four state lenders, said it held US$1.062 billion worth of U.S. subprime mortgage loan-backed securities at the end of June and expects the securities to have “limited impact” on its operating results for the year. – http://www.cnbc.com/id/20454161


  5. Phil,
    Last week I saw your review of the Long term Portfolio for A thru J. Can you tell me where I could find the other remaining part of the review or post a link to it?
    Also, I would like to know how you manage exits – I seem to have trouble not exiting at the right time. Appreciate your help.
    Thanks!


  6. I made additional LTP plays in comments, I think Wednesday as the market made me nervous and I went for quick covers but I am updating the LTP review this morning.

    As to managing exits. The same rules that apply to any position (see Strategy section as well as extensive comments I think on Thurs/Friday) apply to the calls and puts you sell to some extent. Usually, once I make about 50%, I will tighten my stops and buy them back if they start to recover.

    There’s a lot more to it and, if you remember to ask me on a Saturday morning, we can make a whole weekend post out of it as it’s a very valid topic… Unfortunately, now that the week has begun, I’m buried in data and very concerned about protecting our existing positions.

    The key point about LTP plays is NOT to overmanage them. Stocks go up and down and they will do so while you have a caller/putter and their value will go up and down. If that sounds obvious to you then why worry about something you knew was going to happen?

    We sell premiums, not positions. The premiums will, 100% of the time, evaporate to 0 on expiration day. As long as there will be another month, you will always be able to roll your caller/putter to the next month so your worst-case scenario is that you will get a crappy premium (which an optimist like me would call a lot of downside protection) if your caller/putter goes way in the money.

    Unless there is a fundamental change in direction on the underlying stock, I am loathe to make LTP changes based on one or two days’ movement. I just went away for 2 weeks, made (I think) 3 adjustments on 35 LTP positions in a market that went up and down 800 points and the portfolio went from 173% to 171% to 174% and then, this week, up to 187%. The big change was due to stopping out callers who got trashed last Thursday and staying naked for a week – that’s the kind of tinkering Sage was talking about in this mornings post but I don’t want people to get the idea I advocate daily moves.

    It’s all about waiting for the premium to expire but, if I my caller/putter happens to lose 75% of their investment with 2 weeks to go – why the hell should I give them the two weeks when it’s MY option to buy them out at a discount. That’s not greed, that’s foolish greed! As soon as the risk/reward turns against you (with a heavy factor of time to be considered) you need to turn defensive. At the same time, if your caller goes up 50%, that is not the time to buy him out (again, if there is no fundamental change).

    You need to learn your own trading style, if you can’t stand to have a caller up 50% on you, then you need to stop them out at 20% but, if you do that, you are probably not suited to selling options as it’s a numbers game more than anything – over time, statistically, you will win out but it takes a properly diversified portfolio (as is true in most cases) to maximize your profits.