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Boxing Day Blues for Retail

[Retail sales chart]Retail Sales Plummet!

That's the front page, huge font headline in the WSJ this morning.  "Discounts Don't Revive Holiday Spending; High End Walloped" is written below that in the font size that is usually used for headlines.   And the numbers were, in fact, beyond awful – with luxury goods sales down 35% and electronic sales down 27% with a big bah, humbug to gift cards as 40% less of those were purchased this year and that does not bode well for January sales either.

We expected as much as we've been running our annual PSW Holiday Retail Survey for a month and our channel checks across the country painted a grim picture for retail BUT – is it really as grim as the headlines would have us believe?  The FACT is, when gasoline sales are excluded, the fall in overall retail sales is more modest: a 2.5% drop in November and a 4% decline in December. A 40% drop in gasoline prices over the year-earlier period contributed to the sharp decline in total sales.  This is right in-line with what we noted in our survey, that shoppers were done early this year and the markdown mania we saw at the malls – ESPECIALLY AT LUXURY STORES – made it seem pointless to rush into purchases as things only seem like they will be cheaper if we wait a little.

Since Luxury goods and Electronics/Appliances are often the kind of big ticket items you are often buying for your own family, it makes sense that many parents made the decision to wait.  I myself was about to buy a really cool rock band kit for my kids for the Wii, which has a guitar and a drum set that works like Guitar Hero but it wasn't on sale and a few days before Christmas I saw stacks and stacks of them (a little high ticket at $189) so I decided I'd wait and see what they would sell for next week (we did get the Wii-Fit pad, which is excellent).  That's the basis of a deflationary cycle, consumers put off purchases with the expectation that prices will fall in the future.  As long as the purchasing power of the dollars they don't spend keeps increasing, the process reinforces itself as it continues.

So whether it's rock star games or another pair of earrings, a washing machine or even a new car – if you don't NEED a big ticket item on Christmas Day then it's less hassle to wait and if it's also probably going to be cheaper, then the retailers really have no chance on the big ticket items.  So DESPITE the TERRIBLE numbers on the high end, OVERALL retail sales were down only 4%.  The Retail Sector however (RTH), is trading 30% off last year's highs and that is after a nice recovery to 75, after falling all the way to 60 in the November market panic.  As I keep saying, things are indeed bad, but they are not 40% off bad!

Like any unnecessary luxury item, sales of stock certificates have been off 40% from last year with buyers disincentified as prices keep dropping and the bargains don't look like they are going away anytime soon.  As with any product purchase, if the general belief of the consumer is that it pays to wait, then waiting is what they will do.  Meanwhile, also like retail, some people are simply holding too much merchandise and need to clear out inventory so, on a fairly regular basis, if you keep your eyes open, there are big discount sales as one retailer or another flushes his inventory. 

That's why we keep getting offered AAPL at $85, GOOG at $300, F at $2, C at $6, DRYS at $7.50 and LVS at $5…  There is lots of stock out there and until the losing retailers (funds) dump their excess inventory, there will be sale after sale after sale.  The game we've been playing this quarter is finding the bottom on our selected favorites and doing a little fishing whenever we get there.  8,200 on the Dow has served us well and now we have raised our expectations to make 8,650 the mid-point.  That means that we expect the Dow to respect the range from 5% down (8,217) to 5% up (9,082) and, with little exception, that is EXACTLY what it has been doing since we called that range back in November.

Also per our expectations, the VIX has been dropping as the Dow and other indexes become more range-bound.  We are surely consolidating for a breakout one way or the other and we generally do expect to get a move up, perhaps to 9,500 where we will hope to establish a higher base.  The question is – can it be sustained through Jan 20th and will Obama's inauguration further boost the market or will it be the "sell on the news" event that takes the market lower should Wall Street reject the New, New Deal we are anticipating in Q1?

None of this is a break in our roller coaster model yet, starting next week, we are in stimulus anticipation mode as it's widely expected that Obama will be writing a $1Tn check almost as soon as he gets the Presidential Pen and I think the numbers announced in his first 100 days will be higher than that.  So things are not so bad and they may actually get better but that doesn't stop retail holders of both merchandise and stock certificates from panicking and, until the sales stop coming – the buyers are not going to feel any particular urgency to jump back in.  As I've been saying for months, this country is suffering from a crisis of confidence and a lack of leadership – with any luck, much of that will be resolved in the new year and we can get to work rebuilding our economy.

AMZN, who we could not believe was being offered to us below $40 back in November, just announced that the 2008 holiday season "finished as its best ever," selling over 6.3M items on thier peak day which was, as we noted in our Holiday Survey – December 15th.  AMZN's top electronics sellers were all high-end:  The Samsung 52-inch TV, the IPod Touch and Aspire 8.9-inch notebooks.  "We are extremely grateful to our customers," said Amazon Chief Executive and founder Jeff Bezos.  AMZN was one of the easiest bargains we picked up this holiday season and is a great example of how stocks are being sold off in panics despite all rational fundamental evidence to the contrary.

Fundamental evidence in China points to a massive slowdown as 9% less electricity was consumed this November compared to last.  The Hang Seng is closed and had a poor open but jumped back over the 14,000 line and finished flat yesterday at 14,200 while the Shanghai fell 0.3% today, barely holding 200 at 200.73.  The Nikkei bucked the trend in Asia and closed up 1.6%, following through to break 2.5% up at 8,739 after bouncing off 8,500 on Wednesday.  Global trading is very thin and we're not going to read much into the action.  Our main concern is the S&P, which is currently down 41.5% for the year and it would be nice to get back under 40% before we roll the calendar.

"We would have to get busy to get up to slow" – said Bob Pasani on CNBC this morning, ahead of the US open.  In addition to Hong Kong – Australia, the UK, Germany and France all have a market holiday today.  One thing that is trading in Europe is the Ruble but, unfortunately, it is all sellers and no buyers as Russia's currency falls to a 3-year low against the Dollar and an all-time low against the Euro and, of course, the mighty, mighty Yen.  The only reason gold isn't flying yet is because Russians can't afford gold but it won't be long before panic sets in if the Ruble doesn't find a floor.

That floor may be Jim Cramer's proverbial linoleum floor if Russia collapses.  There are still three things, each of which may take us 20% lower in the future:  The collapse of a major bank (much less likely thanks to government intervention), the collapse of GM (on hold until March at the moment) or the collapse of a medium country and there we have quite a list with Russia as our leading contender closely followed by Venezuela, Pakistan, Iran and Spain to name a few of the biggies.

Last year, I rightly declared that US equities would be the "least sucky place" to put your money in 2008 but I did not realize how sucky the year would actually be for the rest of the world.  I my "Index Round-Up of 2007" I said: "We have many burstable bubbles that may join the housing bubble in decline including oil and metals as well as Asian markets if we get a stall over there" and boy, do I wish I was wrong about that!  Still, we are getting everything we expected – the fall of commodities, the popping of the BRIC bubble and a slow, painful rotation back to US equities but, due to the financial crisis, the bottom may be a lot longer and flatter than we had hoped. 

My play of the day is to watch BBY for an early sell-off on the poor retail headlines as, like AMZN, they have a corner on their end of the market and by far, the biggest lines I saw at any retailer all season were at BBY so it's a little anecdotal but getting an opportunity to pick this stock up around $26.50 and selling the Feb $25 calls for $3.65 and the Feb $25 puts for $2.10 puts you in the stock for net $20.75 and, if called away at $25 on Feb 20th, you gain 20% and, if the stock is put to you at $25, your average entry is going to be $22.88, a 14% discount off today's price.

Happy Holidays!


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  1. Good Morning Phil.
     
     
    Today is a holiday in the UK. Looks like it is there too :-)   Is the US market open all day ?


  2. Good morning.  Markets are open all day, which is really silly on a Friday.  Nothing that happens today really matters and I don’t know why they can’t admit it and give everyone a day off although I’ll bet hardly anyone is even bothering today.


  3. "We would have to get busy to get up to slow" – That was Rick Santelli by the way…not often i gt the chance to correct you so i took advantage :)


  4. Doesn’t the NYSE have some rule they cannot be closed for 2 consecutive days.  Last time was 911 and I think the previous time was war.


  5. Great video on Trading Goddess of Santa asking Congress for a bailout.

    GMAC qualified as a bank and will now get TARP funding in addition to GM bailout – GM stock popped up on that news but I still would way rather have Ford as at least there’s a real company there – not just some propped up disaster that will cave in if someone pulls out the wrong pin…

    As expected, GOOG still hanging around $300 and, tempting though it may be – we still have to get past New Years and the premiums are still ridiculous.  I’ve been putting off reposting my bargain-hunting list as I just don’t feel good about buying things here (below but close to our mid-point).  We’re not getting clear signals and New Year’s, to me, is the single most likey time for a terrorist attack so I’d rather be flexible until we pass that date.

    Santelli/Kustomz – Thanks.

    NYSE/Grant – I don’t know if it’s a rule but they sure never are.  I don’t know what terrible things people think will happen if we close the market for a 4-day weekend.  China and Japan take a week off and I haven’t seen it really hurt either one of them that I can remember.  Hell, you could walk away from our market for a week and miss it going up and down 500 points 3 times and come back to be within 50 points of where you left.  It’s the brokers that don’t want the markets closed – it would suck if people realized it wasn’t necessary to trade every single day!



  6. G’Day to all.
    Were I can download IE refresher from? Thanks.


  7. Thanks Pharm!

    Oil is up $1 but USO is down 4% (expectations).   XOM is up a point along with the rest of the XLE.  OIH is up 2% but we’ll see if that lasts.

    This market is like watching paint dry today…


  8. Good Morning everyone! 
    I am back from a month long vacation in Africa. What did I miss? :)


  9. Jambo Emo!  You missed nothing, we’re pretty much in exactly the same place but they did dump about $5Tn into the hole since you left and we’re still not sure if it’s enough to float the economy…


  10. phil- any thoughts on RIG (transocean)? stock has been dumped in last week because of technical reasons (removed from S&P500 because they changed their corporate base from Caymans to Switzerland)…trading at 3x 09 P/E with healthy backlog of contracts…low oil prob a good thing because it will reduce competing new projects…


  11. Auto sector leading us, they were the early week losers and are doing an about face.  Energy is second, also a pre-Xmas loser and consrtuction was off too so it’s a lot of bargain shopping but not much else.

    RIG/SNS – I don’t trust the sector.  I think it’s like housing, they went down and then down and then down and then, when you thought it couldn’t be deader, they went down again.  Shipping had the same issue and that business is very similar to rig rentals and based on similar commodity demand issues so, although I think they are a nice long, long-term play, I don’t really like them short-term.


  12. Phil,
    USO – WOW when I left it was in the 40s now in the 20s. what happened? Do you see a further decline in oil? I have a lot of catching up in reading


  13. Dec. 23 (Bloomberg) — Boeing Co.’s new Navy P-8 patrol aircraft for spotting enemy submarines and ships faces a cut of more than $900 million in the Defense Department’s proposed fiscal 2010 budget in order to pay for a new warship, according to budget documents.

    http://www.bloomberg.com/apps/news?pid=20601087&sid=ajzAtUCkwuTQ&refer=home


  14. phil- txs for prior response…barrons writes about how to capitalize on "cash bubble" (ie, a reversal of cash hoarding) by buying January 2010 call spreads…examples from article are below…
     
    curious for your thoughts on (1) when call spreads are mor attractive than the hedged entries we"ve been discussing and (2) your thoughts on the ideas below (or other ideas you might prefer)… 
    From Barrons: "Gonzalez likes buying Lennar (ticker: LEN) January 15 calls that expire in January 2010, and selling the 25 calls with same expiration date. He also likes call spreads in Centex ‘s (CTX) January 17.50/30 call spread at $2.40, Dryships ‘ (DRYS) 17.50/25 for $1.70, Las Vegas Sands ‘ (LVS) 10/20 call spread for $1.70, and OfficeMax ‘s (OMX) January 10/17.5. All options are January 2010 expirations."


  15. Oil/Emo – Yeah, it collapsed, mainly as speculators are losing interest – which is what we need to see as stage one of rotation but as long as people like SNS continue to want to put money back into the sector, we’re not going to get the full rotation we need into other sectors.

    Rotation is a simple enough concept, especially with less money coming into the markets we simply can’t afford to have any devoted to dead sectors, where it is unlikley to spark an interest among other buyers.  If 75% of the potential investors have been burned in commodities and are generally on the sidelines, money flowing back into energy from the 25% who still believe won’t spark a rally and, since the energy sector is still $3Tn, sucking up $300Bn won’t do much for it.  If however, $300Bn goes into the much smaller semis or retail or solar or something else, the gains will look very exciting and the 75%, who are basically followers and late movers anyway (which is why they got burned in the first place) start feeling like they are missing out and begin to invest, fueling a sustainable rally.

    So far though, we’re really not seeing any particular sector stepping up and we’re not going to get out of this slump until we do.

    Oil and energy went from 2nd at up .96 at 10:59 (last time I refreshed my comment-writing page) to 9th place up .44% on my just refreshed comment reading page.  That’s pretty interesting but the other sectors didn’t get better, there is a general weakness other than Autos, which improved 0.23% in 20 mins – This is good stuff to watch!

    BA – Yet another buying opportunity if they fall below $40.


  16. BA – I own the stock – unfortunately bought much higher aroudn $59. Sold off the calls I had as cover too and now naked.
    I agree that it has quite some upside potential, but how to cover it so that there is decent upside left? Sell the Feb $45 calls that can get about $1.40 right now?


  17.  Leaps/SNS – I really do not like vertical spreads that take a year to play out.  I much prefer calendar spreads where you sell front-month calls 12 times as it’s rare you don’t get a better return (generally a big run up or down will hurt you) in a normal market (not that we’ve had one for 2 years!).  If the company goes BK, you are just as screwed and you have little flexibility once you get in it.  How he can say it’s "better" than a hedged entry is beyond me.  Our system net’s 10% in a bad month and, no matter what happens outside of bankruptcy, you have many years of ownership ahead of you to gain additional income.  His ONLY pays if you exceed your target price by more than your net premium next year with very painful adjustments long-term.  It’s not an invalid system, just not for me.

    BA/M2 – They pay a 4% dividend so I lean towars keeping the stock but when you are behind you want to get caught up too.  It takes a very long time to catch up to $59 from $41 but you can go 2x the 2011 $20s at $21.20 and sell 1x the Feb $40s for $3.50 as clearly they can already be rolled to 2x the May $50s even and, at $50, your leaps will be better than $30 each and you’re even.  Meanwhile, on the downside you have less delta than you do owning the stock now and some pretty flexible protection that pays more on the half cover than fully covering with  the Feb $45s.


  18. Retail sector holding up despite the headline scare.  I guess I’m not the only one who reads deeper into the numbers…

    Very interesting to see oil up $1.45 and USO down .72 (2.5%).


  19. txs…just to clarify, he didnt say it was better thanhedged entries…i was asking if there were certain market conditions where you thought vertical spreads were better than hedged entries


  20.      Phil, In 2009 could you give us an article on portfolio balancing with options?
       PS   Love the dashboard.


  21. Verticals/SMS – I like a vertical if you are deep in the money and feel there is no way it’s going below the caller you are selling – the kind that pay 20% or so (Like GOOG $270s at $35, selling $280s at $27) and pay off quicky but taking the (same example) GOOG 2010 $300s at $65 and selling GOOG 2010 $310s at $60 give me one chance to make $5 in if GOOG goes up $10 in one year vs a chance every month to make $2 if GOOG doesn’t drop $20 in 20 days…

    Portfolio balancing – Good idea silent, just keep bothering me and it will come.  Best time to remind me is on a Saturday morning as I sometimes get in the mood to ramble then…


  22. Good day everyone.  My wife is 5 months preggers… We opened an envelope Christmas morning to find that we’re having a son!  Oh yeah, she bought me a WII for Christmas along with "The Perfect Push-up" (I guess that is a hint) LOL. 
     
    Phil/CHK-
    I started my position back on Dec 5.  Cost basis not 8.57.  In that original entry, I sold the Jan $10 calls for $3.00 (now 5.40).  Should I hang tough for the sake of protection? (as we discussed a couple days ago) or roll him out to the Jul 12.50… I could also roll to the Apr 15s and sell the 15 puts… That would more than pay for the roll and put a couple bucks in my pocket.  Thanks for the feedback


  23. Bronek
    here is a link for refresher
    http://www.softpedia.com/downloadTag/Refresher


  24. Phil: bon jour,
    what are the best DIA PUTS today ?


  25. BTW, any cool little day trades out there?  I’m bored


  26. I have several spreads where my long call is ATM and I’m wondering whether to sell my cover at the money or up one strike.  I have this situation with IBM, MMM & BA.   Also, which if any of those would you pay to roll down?  I’m relatively short of cash and would rather save it for exceptional situations.


  27. BA  I suppose I should wait for a response to my question, but I decided to sell an ATM straddle on 1/2 my BA position.  That way if my cover is too close I at least get paid for my short put.


  28. Covers in general.  All else being equal, we should probably sell covers early this cycle since it’s a short cycle and made even shorter by the holidays, right?


  29. DIA puts/RMM – Well we have 3 days (half today and 2.5 next week) to New Year’s and we are probably going to drift into that too so I’d want to sell Max Jan premium through the 31st and then maybe take some off or roll the covers down so we sell the Jan $85 puits at $3.25 and those can be rolled to Feb $80 puts about even which means if we buy the March $88 puts for $8.05 we’re in for net $4.75 on a $3 initial spread that we are fairly certain can croll to a $8 spread so that is pretty cheap coverage for pretty good 90-day protection to 8,000.

    Short primer for Silent: So if you have $100K in upside plays that you think will drop 30% when the Dow goes to 8,000 (assuming you think that is "worst case" for a drop before you can adjust, the coverage would be to try to make up about $20,000 of that loss (2/3).  The DIA cover above is good for about 70% so $20,000 is 70% of what number = $29K coverage.  So you put in $29,000, by buying 36 DIA March $88 puts at $8.05 and you sell 36 DIA Jan $85 puts for $3.25 ($11,700) so you are only spending $17,300 to get your $20,000 upside – already not so bad. 

    If the market heads up – hopefully the $100K you have on the plus side will gain more than you lose on the March puts.  If you look at other March puts, you’ll see that the March $78 puts are $3.85 so it will take a quick 1,000-point Dow move for you to lose half your value ($8,650) – that is the real "cost" of your insurance.  So the trick is about balancing out your expectations on each end so that a big SUDDEN move in either direction doesn’t burn you.  On the fringes, you can take some speculative plays on either side that would triple on a 1,000-point move and then you can be assureed that a major move in either direction can net you a profit, even while the bulk of your positions remain neutral. 

    When you sell puts and calls against your main positions, it’s a little more complex and you need to stay aware of the fact that you are capping your gains but – using our typical hedged position strategy, we would be expecting to make 20% if the market runs up on us so as long as we don’t stand to lose more than 20%, it’s a winner.  If you consider that our hedged entries pay 20% up and cover us 20% down and then we are offetting an additional $20K of losses with the $17,000 cover, we’re essentially covering a 37% drop in the Dow.  That of course, assumes our positions don’t drop independently of the Dow.

    See, it’s kind of a whole book once you get me started….

    Congrats Texas.  On CHK – I’d keep the protection through next week, you still have 3 weeks to adjust and you never know what craziness we get over the holidays.  You can roll the caller to still nicely covered Feb $12.50s for $1.43 and making $2.50 a month in progress for $1.50 or less takes you to $43 at the end of the year with a $26.57 cost basis.  Unless that is below your expectations for CHK then not much to be worried about as long as you are on that track.

    As to day trades – I posted a good quote on Tuesday about not trading out of boredom, it’s very dangerous.  Premiums are too high and movement is just too random today.  BBY is back at my buy point though..

    Spreads/Eph – I’d go with 1/2 covers at the money.  It’s better just in case something bad happens as you are more flexible but collect just as much as if you full cover higher.  Like IBM $80s for example are $3.60 while the $85s are $1.35 so you get much more money for 1/2 the $80s but if you look at the $75s, they are $7 so you can assume on a $5 move up, you will have an even roll to 2x the $85s.  Obviously to the downside, you can sell more $80s or even $75s and THEN roll yourself down (as it’s cheaper to roll down when things are dropping) and, of course, on the way up, being half covered doesn’t make rolling down the leaps such an emergency…   As to which to roll down, best to just take 1/3 of what you collect and use it to always roll down when you get a good price (like IBM 2010 $80s are $14 and $75s are $16.70 so if you get that roll for $2.50 or less, that’s good).

    BA/Eph – that works too!  Cycle is not that short (3 weeks from Friday) but, as I mentioned, it’s the holidy that worries me along with it being the close of the year so I can’t say I’d want to take a lot of risks here with this lethargic market.  AMZN didn’t even budge on that nice report so what chance does a regular stock have?


  30. Texas thats great news congrats to you and the wife, get your time in on that WII while u got have it


  31. Steve – Thanks a lot..


  32. LOL  Thanks guys…  We’re excited… he will be our first. 


  33. Actually, watching paint dry is more exciting than this.


  34. If we hold 865 on the S&P AAPL stays green GOOG hangs on 300 GE holds 16 we just may rally little bit into the close, only because i just bought GE so it helps to think positive


  35. Rally/Kustomz – Yeah, I think if you buy 1,000 shares of GE you can rally that sector on this volume…


  36. Cap, I guess I picked the wrong day to quit sniffing glue… LOL


  37. Traders on TV say it’s surprisingly slow but I don’t know what the heck they were expecting…

    Gold had a big spike up, that was exciting for a minute but also totally expected by us so who knows what these people are thinking.


  38. texas; congrats on the little one to be … great news.


  39. Sniffing glue, back in 1982 this group of guys caught this glue huffer trying to break into a car. I was 12 and tagged along as they chased him around. He ran like the wind, he would stop, huff on the bag and continue running until he finally collapsed. Taught me a great lesson at a young age, make sure no ones around when breaking into a car!;)


  40. LOL Kustomz – Yes we all get life lessons from great mentors from time to time…  8-)

    Wow, I am literally watching the volume tick by in hundreds, that is amazingly slow! 

    GS trading down, very pathetic at $75,  JRCC getting some buyers but someone seems to be bottom fishing energy in general.  Financial sector pretty weak overall with MET the best I see.  All entertainment is going up (TWX, DIS, NWS.a), beverages are green and defense is green and utilities are getting bought.  OIH is strong now, up 2.5% and really leading the markets as oil is closing up $1.50 right at $37.

    Overall, dull, dull, dull…


  41. Phil – Ref JRCC. They are up b/c I this morning decided to cover w/Jan15 @1. It always works like this.


  42. X- making a little move


  43. LOL Bro – Well why didn’t you say so? 

    YRCW back to $2.50, I like them here as a buy/write with the Feb $2.50 puts and calls at $1.45 for net $1.55/2.03.


  44. Let’s see if we can close at 8,500.  S&P looks happy with 870 but nothing special here at all.


  45.  Hi Phil,
    Since it’s such a boring day today, figured I’ll squeeze in a question for you.  You mentioned a while back about position sizing and cash management and how we shouldn’t risk more than 1% of our capital per trade.  In order to utilize the majority of our cash, I think this implies that we either need tighter stops on our positions or be in more trades with 1% risk in each.  From a practical standpoint, I can only keep track of 3-4 open positions at a time, and I’d like to start moving towards that model (1% risk per trade).  What sort of plays should I be looking at so I can feel like I’m "utilizing" the most of my trading cash?  Or is this not really an issue as these hedged entries give us 20% wiggle room (depending on premium) so a tight stop isn’t really tight with respect to the underlying stock price?  
    But what about once I’m in a position long term writing calls each month?  Specific example, lets say I have 1K shares of T (with leap puts so there’s 0% risk with that position) with 100K capital.  I write the Jan 09 27.5′s for 1.15.  I put a stop in at 2.15 (1% max loss).  I’d like to watch out for the temporary runup so in these cases should I only write 1/2 and wait for a runup to roll up 2x?  Or are there better strategies to still give 1% max loss that’s more flexible with price swings?


  46. It may be slow but they’re still sucking premium out my longs. I guess volatiliy is still getting lower ?


  47. Cash management/Chen – To be clear for otheres, 1% risk means 5% of your money in a position with a stop loss of 20% so each individual loss cannot be more than 1% of your total.  The next issue is having some reasonable balance of puts and calls or positive and negative market plays which shouldn’t all trigger at the same time.  I’m NOT advocating betting against yourself, it’s more like I’ll go short XOM because I think that sector and that stock in particular will go down while being long generally in the Dow.  The theory is that I could get a double win if the Dow goes up but XOM goes down while I’ll be very surprised if XOM goes up during a Dow crash.  That is balanced but, of course, just make sure you aren’t making too many assumptions along the same lines…

    There is then a difference between trades you need to track and trades that generally take care of themselves.  When you do a covered buy/write positon, you shouldn’t feel the need to baby-sit it.  That allows you to keep a nice chunk of money in things that should generate a reasonable small return.  On the T example, you own T at $28 and wrote the $27.50s but you are looking at your loss wrong.  Do you really want to keep it so much that you would rather spend $1 (5%) in order not to make 5% in a month by being called away?  When you own a stock, getting called away at a profit is not something you want to try so hard to believe.  Earlier I said to Texas on CHK that he could spend $1.50 to gain $2.50 in position on the caller but that is still getting an additional 5% premium and staying well covered.  By buying out your caller you are moving to 100% risk and turning a win (where you keep the cash and get more cash) into a loss.

    If you sold the $27.50s of T and they get away from you, then look to roll them to the Feb $29s, then the March $31s etc.  Spend very little and stay covered while gaining value.  If the stock spikes up and calls you away at a rate that is faster than a $24 annual gain – perhaps you need to consider that the run-up at that rate is probably unsustainable and cashing out may not be a bad idea…  I’m bullish on T but with 1,000 shares at $28,000 I’d rather have 500 shares and sell the Feb $27 puts and calls for $4 which takes $18,000 off the table and puts me back in the stock with 1,000 at $25.50 if it’s put back to you so you get the same upside you have now with half the capital at risk.   T does have a nice 6% dividend but another way you can put 1/2 your money to work for the same return is to go for the 2011 $20s at $9.32.  You can sell the same calls you’re selling now with little upside risk and keep the capital on the side to roll up your caller or add more long calls in a rally.  If you are selling $1.40 a month in premium and making 5% on $28,000 plus a 6% dividend,  I am dead certain it’s worth giving up that 5% to make the same $1.40 a month against just $9,000 worth of 2011 calls and diversify yourself with the other $18,000 (have I mentioned I like gold lately?).

    VIX is way down at 43 now!


  48. All right, we finished flat and that was expected.

    It’s nice when the markets are dull once in a while.

    Have a good weekend everyone!


  49. 2K, not bad and here i thought i wasn’t going to make a dime and ended up making double, great weekend folks i’m driving upstate have to water the plants and do some star gazing, if weather permits. Be safe out there lots of desperate people out of work, like former BSC employees :)


  50. Great, thanks for the very thorough explanation Phil.  I think I understand it better now and definitely was looking at the call writing stop loss thing the wrong way.  I’ll look into repositioning my T real soon.  The difficulty here is that I have a huge chunk of T in my Vanguard brokerage account now and I’m slowly moving towards a TOS account I’ve set up so I have an easier and more flexible time doing stock/option plays.


  51. Have a great weekend…


  52.  Oh yes, I’ve been following your GLD comments too, will look to do that soon.