Friday Already?

Yet another exciting week in the markets draws to a close.

With lots of members going on vacation, we skipped the wrap-up last night and posted our guide on how to vactaion-proof your virtual portfolio using DIA index puts.  This is mandatory reading for new members and recommended for everyone as hedging your virtual portfolio is what enables us to make the riskier upside plays that make big returns when the markets run up.

Of course option hedging works both ways and we can write a book about that (in fact Sage, K1 and I are!) but learning just this relatively simple strategy can help you ride out the market gyrations and manage your virtual portfolio with much less stress.  We didn't have too much stress in yesterday's drop as we were a little over-covered anyway after the big run up and yesterday's pullback gave us a chance to buy back some of the calls we sold at a very nice profit as well as giving us a chance to reposition some of the financial callers that had buried us in last week's run up.  As I often say during big runs – what is easily done can be easily undone and we got a huge reversal of Tuesday's XLF spike that put our spreads right back on track.

We were expecting durable goods to save us this morning, despite the bad housing numbers, after reading WHR and CAT's earnings reports and listening to the conference calls.  We thought WM's sell-off was enough nonsense to add them to our Stocks Virtual Portfolio on yesterday's dip but selling the $4 calls as we're not THAT confident.  Still, picking up the stock at $3.90 and selling a .80 call puts us in for net $3.10 and getting called away on the 15th at $4 is a very quick 29% gain and we liked that play so much we decided we were willing to double down by selling the $4 puts for .80 as well.  That means if we get called away over $4 our basis is $2.30 and, if the stock is put to us at $4 because it turns lower, our average entry is just $3.15, since there are $3 calls as well, we can simply reload and try again in September.  This is the strategy we outlined in last months post "Can You Be Satisfied Making 20% Returns Each Year?"

That's why we reset the Stocks Virtual Portfolio this month and added the Butterfly Collection Virtual Portfolio – we know the market is going to be choppy and the trades we play around with in the $10KXtreme virtual portfolio (aiming to get to $100K as quickly as possible) and the $25K Virtual Portfolio (aiming to get to $50K during the quarter) are not the kind of things you do with retirement money – all unhedged stock trading is gambling and options trading is more so but it's gambling we can afford if we follow the safer, more dependable strategies with the bulk of our investment virtual portfolio.

We had fun taking a few risks yesterday, pressing plays on WHR, BA and, of course, our beloved Googles.  We're not expecting a big run here as the weekend looms large and scary and the oil bulls are on the march again as nothing of substance is being done as yet to reign in the madness other than scapegoating some small speculators on the NYMEX as if THEY were the problem.  What this case actually proves is that anyone, even less experienced traders with a few million dollars, can manipulate the energy markets and make millions.  Imagine what a multi-billion dollar investment house with a "win at all costs" attitude (the bottom 5% performers are laid off each year – that's the message!) and a long history of price fixing and stock manipulation can do…

As expected, Asia did not take our little correction very well and the Nikkei dropped 2% (saved by the bell) while the Hang Seng gave up the week's gains to finish back at 22,740 (down 1.5%).  Samsung's profits jumped 51% on cellphone and flat panel sales but there were bombings in Bangalore that spooked the morning markets and certainly give us a reason to keep covered over the weekend.  Europe was well down this morning but has recovered about half to about 1% in the red across the board.

Back home, NY Attorney General, Andrew Cuomo, kept the heat on the financials by filing civil fraud charges against UBS, accusing the firm of "multibillion-dollar consumer and securities fraud," and demanding that the firm pay back its profits from the business, make investors whole and pay damages. The firm is accused of pushing risky securities on retail and corporate customers with misleading sales tactics, even as the market for those securities was falling apart. When the collapse came, many customers faced losses or were stuck with securities they couldn't sell.

The New York complaint also alleges that several high-ranking UBS executives, whom the New York attorney didn't name, sold roughly $21 million of their own auction-rate securities holdings amid the turmoil. Some 50,000 UBS customers were left holding $37 billion worth of the struggling investments, the complaint says.  Needless to say, UBS is not one of the banks we are keen on!

We're still waiting for our housing package to be finalized but I'm encouraged on that front, our HOVs came back down again and gave us a chance to load up again after cashing 1/2 out with a double the other day.  The dollar is quietly gathering strength as both Europe and Asia are looking a little more iffy to investors but it is still all about the POO (Price of Oil) and it would be nice if the New Home Sales Report at 10 is not as miserable as yesterday's Used Home Sales Report and I'm pretty sure it won't be as it's the incentives offered by the builders on new homes as they clear out inventory that have been cutting into the sales of old ones.  As with everything else we are watching in the markets – rotation can be painful but good over the long haul.

We don't want a huge reversal today, that will just make the market look flaky, but a nice 50% retrace of yesterday's drop with a strong finish is just what the doctor ordered for today.  Ahead of the weekend, anything up is good but I'm not going to be happy if we can't finish with Dow 11,450, S&P 1,260 and Nasdaq 2,300.  While we're wishing, lets go for oil below $125, GOOG above $480 and AAPL back at $165.  That would make for a very nice weekend!