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Weekly Wrap-Up

22-feb-v2.jpgI'm not doing a weekly wrap-up.

I pretty much did one on Friday in the morning post and I posted my weekend reading list this morning at the end of Friday's comments for members and Peter D posted 4 excellent plays for those of you willing to dip your toes in the financials once again.  We actually had a great day on Friday as we sold premium in long SKF and had a fantastic 10-bagger on SKF puts later in the day.  At 9:45 I called fro a switch from UYG at $2.02 to FAS at $4.30 and FAS ran up to $5.20 and finished at $4.90 (14%) while UYG peaked at $2.24 and finished at $2.20 (up 9%) so a good switch to the faster horse.

We also flipped from FXP covers to FXI longs (hedged at $20.98/21.99), a very well-timed about face as we sold FXP into the initial excitement.  VLO got too cheap to turn down on the leaps and even C became attractive at 1:35, when the Sept $3s hit .52 and I noted they could be covered with 2011 $5s at .58 but, so far, we haven't needed to pull the trigger on the cover!  My last call of the day came at 1:48, when I said to members: "SKF $200 puts at $1.45 for the brave, out if XLF cant cros $7 when Volcker starts speaking."  As we expected, the moment Volker came on TV to dispell some of the silliness we got a double and were able to take half off and let the rest ride.  That ride took us all the way to $16 just one hour later – not bad for a day trade!

I did add a mattress layer at 2:34, going for the $185 puts for $2 and those quickly ran to $6 but "yawn" compared to our original play as it ran and ran.  We were all stopped out by 3:12 and sadly, by 3:28 we had to turn a little bearish (we had originally planned 50:50) as the administration backpeddled on a statement that the Treasury would actually have a plan for us next week.  Since we never had to trigger our bearish QID play from the morning post, I was wishy-washy about the downside and said of our DIA puts to members at 3:36: "Hmm, possibly there is a plan but they don’t want to have any expectations going into it so they are covering up a slip on the release of a plan… very confusing, half covers very appropriate."

I thought all the talk of bank nationalization was a bit overdone and BAC came out with very strong denials and were rewared for it into the close with a 46% rally off the bottom.  This is why the SKF is at the same time fun to play and very dangerous.  While Cramer warned his people to stay away from this 50% gainer last week, we generally play it for the drops whenever it goes too far up.  As I pointed out to members, with the XLF at $7 and SKF at $205, a .35 (5%) move up in the XLF becomes a $20 drop in the SKF (10%).  As I said when we discussed this on Wenesday the 11th:

Meanwhile, Cramer is once again playing fast an loose with the facts on SKF.  After talking his sheeple out of protection that went up 15% yesterday while the financials collapsed, in yesterday’s show Jim justified his massive disservice to viewers by pointing out that the SKF, SRS, FXP and DUG "would have actually had a 30% loss" in 2008.  While that is true, it ignores the fact that they were up 150% in early December, where a 30% hedge in the ultra-shorts would have offset a 64% drop in the remainder of the virtual portfolio.  When a hedge pays off, as I would imagine Jim knows, you cash it out – only a truly MAD money manager would press an insurance bet that goes (in the case of the SKF) from $100 to $300 during the year.

If your virtual portfolio had $100,000 worth of exposure to the financials that day, with the XLF at $9.25, you may have watched them drop 24% in the next 6 market sessions and being unhedged meant either riding the roller coaster into the pits of hell or jumping off and taking a massive hit.  Putting just $10,000 into 45-day protection of the SKF March $160s at $18 that day (SKF was $140) would have returned $40,000 if you had cashed out at $64 – which is obviously something we would recommend doing per my above statement!   Of course we don't advocate spending 10% a month on naked puts and we certainly don't advocated buying SKF at all at $188 but the correct play at the time would have been selling the Feb $180s for $5 to offset the premium loss.  The Feb $180s finished at $7.45 and we would have been very happy to give that caller his extra $2.45 back but, if SKF had finished lower, that $5 would have paid for half of a roll to the March $140s or the Apr $155s so another 2% of the virtual portfolio to protect your bullish positions for another 30 days. 

Ideally though, as we did on Friday at 3:13, you want to call a bottom and cash out your short play, then use the cash to reposition your financials ($40,000 buys a lot of repositioning on the $76,000 worth of financials you have left) and rehedge from scratch.  Our general cover of choice going into the weekend (the "mattress play") is the DIA June $77 puts, which are now $8.22, 1/2 covered by the March $75 puts at $3.85.  We go to June because we are HOPING for a bottom and the June puts have a lower downside delta and the 1/2 cover assures us that a severe drop in the Dow won't hurt us to the downside, where we can roll our March $75 put covers to 2x the Apr $66 puts if we had to, leaving us with a $11 spread off our net $6 entry.  Ideally, we want to have a clear path to a double on our downside protection so when we allocate 20% or 30% to coverage, we know how much we can expect to get back in a real catastrophe.

Of course nothing beats sector specific covers against your own mix of positions but we like using the DIA puts as general virtual portfolio coverage although, as I mentioned last week, both the DAX and the Qs may now have farther to fall.  I was over at the NYC Traders Expo yesterday, which was well worth attending, and had a great conversation with Tom Sosnoff, who is one of the founders of Think or Swim (a platform I am now enjoying very much).  We were discussing using index futures as hedges and I will be experimenting with this in March and hopefully Tom will be able to help me put together a primer on the subject down the road.  New E-mini futures trading makes it more realistic for retail investors to get involved but it's going to take us a while to settle on some good, hedged strategies on these.

I haven't had a chance to try it live yet but I was very impressed by the demo of www.bestfreecharts.com.  It seems they are ad supported and give free streaming quotes with a nice interface, worth checking out if you don't have live for sure (or don't like what your broker gives you).  Also from Think or Swim, Tom showed me a very nice blog they're keeping called MonkeyBrains and they are in month 31 of a sequence of posts following an Iron Condor Strategy on the S&P that is worth keeping tabs on as they make 1 trade a month and track the results (so far, no profits but good eductaion).

Oops – never got to finish this post as I ended up writing a book in the comments!  There is a lot of good stuff on our buy/write strategy there so members should look below and also at the end of Friday's comments to get a very in-depth idea of our strategies.

New post up soon!

 

 


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  1. Sorry I missed you at the Trader’s Expo, but I’m still laid up with a broken foot and didn’t feel like hobbling around the joint.   I thought you’d like TOS.  I don’t have that much to compare it to, but I’ve always thought the platform was great.


  2. Phil,
      I’d like to increase my exposure to oil. I have several oil plays that are all down significantly, but I have always been in oil for the long run. I think that even if renewables gain popularity, India and China will stil require oil (as will most of the rest of the world). Hence, I think 5, 10 yrs from now, oil will be higher than $35. So my question is, what is the best way to get into the oil game? I’m leaning toward the USO but am not sure. Thanks.


  3. Trader’s expo was good, better than the $5,000 Value Investing Conference I went to in Oct (I didn’t pay it, Seeking Alpha gave me a ticket).  TOS put on the best seminars and I was really impressed by all the stuff I’m not doing in their platform yet.  I could best summarize the attitude at TOS as a bunch of stock geeks with an unlimited programming budget to customize their platform – very cool guys and I’m glad we finally got together.

    Oil/Japarikh – Understand the problem with USO is they are forced to roll their contracts every month and so take a loss every month and end up holding less oil.  In other words, if they hold 1M barrels at $40 and they have to roll to barrels at $42, they then have 950,000 barrels at $42.  Then, over the course of the month, if oil drops to $38, they then have 950,000 barrels at $38 and if the roll is to $40, they then have about 900,000 barrels at $40,  Even if oil goes up to $44, they are still missing out.  This was the logic on which I used to tell people USO was the best long-term short in the market. 

    It is possible for the market to move from heavy contango (where longer months cost more due to low front-month demand) to backwardation (where there is a percieved shortage in the current month and longer months are cheaper) but not likely enough to fix USO – ever.  I don’t expect oil to turn around much until the economy turns around and that may be a while.  Keep an eye on the price strip on the NYMEX along with the barrel count of the front months.  Anything over 500,000 contracts (1,000 barrels per contract) in the first 4 months is unhealthy as we only import 300M barrels a month but, more importantly, this is for FOB delivery to Cushing, OK, which can only handle about 42M barrels a month so anything more than that (right now 316Mb for April delivery) must be dumped by expiration day. 

    One tip-off we had last year that oil prices were BS was that I kept pointing out that it made no sense that there were about 8 different months in 2011 and 2012  where no barrels had sold over $70.  This was despite oil being at $140.  Think about it, if oil were really worth $140, wouldn’t at least 1 person in the US say "Gee, I would like to lock up some barrels for May 2012."  So not rocket science, just logic….  We’re seeing active buying of oil at $56 for Dec 2010, $60 in Dec 2011 and $63 in 2012, even $48 this Dec.  Some of it may be traders trying to jack up the front months but there are plenty of people playing this as a fairly temporary dip. 

    My oil play of the moment is OSX, the oil service sector index.  They have fallen from $350 to $120 but I’d say $200 is a fair value for them.  I figure even if oil goes down in price, it still needs to come out of the ground and someone needs to replace parts and clean up goo or whatever it is these people do.  One thing I do not like about OSX is that it’s 17% RIG, 10% SLB, 10% TDW and 8% each OII and BHI.  I say don’t like as it’s not really very diversified but, on the other hand, those are 5 pretty good companies that are dirt cheap. 

    What I do like A LOT about OSX is you can buy the Dec $110 calls for $29 and you can sell the March $130 calls for $5.35.  This is a nice way to stay bullish on oil VERSUS just being long but it will not save you if the index falls another 50% (possible).  The good thing is you can pretty much just keep an eye on RIG, SLB and TDW to know if you need to cover lower or you can day trade the front month $110 puts (as it stands now) which are $4.75 and double your downside protection (this is not a play for casual traders).  You are starting at Dec $110 at $29.40 with $20 in premium and your downside emergency roll would be to the Sept $90s, now $38 but probably $32 (the current price of the Sept $100s) if there were a $10 dip which would knock the Dec $110s down to $24 (the current price of the Dec $120s). 

    So that means – IF OSX goes down more than $10 – your $5.35 caller is wiped out and you use that money plus about $3 more to give up 3 months and move down $20 in strike.  The very good news about that plan is that the $90s, at $110, would still have the same $20 in intrinsic value you have now.  I hope that’s a clear trading plan, I think it’s a good trade for anyone who wants an upside hedge on oil and it was a good time for it as I notice a lot of people seem to have no plan at all for what they are going to do if their premise is blown so my intention is to spend more time talking about entry and exit strategies when I have time for it.  During the week, I would have just said "I like the OSX De $110s, selling the March $130s for $5.35" and the rest is implied!  8-)


  4. Mattresses/Edro – As in the post above where I discuss the DIA trade, you have to have a reason you are in it.  Also, as I just said to Japarikh about OSX front months – the day trading part is really for more expert traders, not something you should mess around with.  The base strategy is very simple, buy a put at LEAST 45 days out, always erroring on 1 more month at the first strike that cannot be rolled up for .50.  Immediately put in an order to roll it up for .50 and do that EVERY time you roll up but DO NOT keep rolling while the Dow is in a big rally – you may get cheaper rolls but you do want those .50 single rolls on a spike when they happen so the order for one roll should always be there.

    As to cover.  You want a cover that pays for you to roll up if the Dow gaps up 500 points.  A quick check of the math at .50 per $1 (100 Dow points) indicates you want $2.50 worth of coverage at least.  At that point, you then have to decide how bullish or bearish you are for the timeframe you are playing to set your cover.  As I am here every day and will pull my covers off, on, full, half…  I generally go for Max Premium, which in today’s case is the March $74 puts, which have $3.20 in premium vs the $3.08 of the $73 puts at $3.08.  Also, I’m a little worried about and up move but I was also worried enough about a gap down to 1/2 cover with the $75 puts instead, which paid $3.85 but could be rolled to 2x the March $69 puts even.  If, on the other hand, the Dow shot up, I got $3.85 rather than $3.20 so if I sell another half of March whatevers that are $2.55 or better – I’m no worse off than I would have been.  Since the March $71 puts are $2.35, that means my margin of error is about 300 points to the upside – not likely enough as a gap that I’m going to lose sleep over it. 

    Mattress plays are NOT unhedged DIA puts.  When your putter goes to less than 1/2 premium (like the March $76 puts are now) it is time to add a mattress layer.  There is a whole post on this subject that I refer to once a week but generally the idea is to add 1/2 x (1/2 your original long hedge) in the appropriate put (the one that can’t be rolled for .50) to the puts you have that are well in the money.  If you had sold the March $76 puts than your long should have been at least the June $78s, which are now $8.80 with .63 for the next $1 up (that is your delta). 

    So if you have a .63 delta on your long and the March $76 puts have a .57 delta, you are no longer in a very good relative position if we keep going down.  Adding more 1/2 puts with a .50 downside delta changes your combined downside delta to .88 and now you are back in business in relative gain.  If the Dow keeps heading down (generally every 200 points we add a layer) you add another layer of 1/2 x puts but each time you should be setting a .25 trailing stop (or 20% of the profits) on the original highest puts.  This makes the whole thing mindless, you gain more and more and more as the Dow keeps going down and when it goes back up you stop out you most profitable (and most vulnerable) long puts and then you follow the normal rolling protocols for the new puts.  Since your top puts were gaining .63 on the way down and you are rolling up you new puts for .50, you have made a .13 profit per $1 in position. 

    Once things settle down, then you have to decide what to do with the putters but they are a non-issue.  They are there to protect your new long puts, which you bought into the excitement but, if you went to layer 2, probably have a higher upside delta than your new long puts and thus offer very good protection on the way up as you roll again.  While .13 doesn’t seem very sexy, the point is that you can do this 5 times a month and suddenly it’s an extra .60 per $1 move – it adds up pretty fast.

    So it doesn’t matter what postions you have now – those are the right ones to have and there is always a right one to have and if you are not in them – then you are in the wrong position.  At the end of any major move, you should be repositioning back to the proper positions.  The only real exception would be if we strongly feel one way or another about direction the next day.

    The other major factor about mattress plays is that they are not some sort of magic long-term portfolio proteciton.  They are a relatively safe way to place a significant amount of coverage against the bulk of your positions so that a 500-point drop in the Dow doesn’t kill you.  So if you do not have a VERY clear plan of getting a double out of your DIA spread if the Dow falls 500 points, then you are in the wrong positions.   If that double is not enough to mitigate more than 1/2 of your downside damage, they you are foolisly undercovered.  I have not one time, since September, called for being more than 60:40 bullish overall and we went into the weekend closer to 60:40 bearish due to the 1/2 covers the DIAs. 

    Balance is the key to everything (and I have written nauseating amounts of articles on that) and, just as you need to know how much you need to protect on a 500-point drop, you need to know how much you will lose on your short side if there is a 500-point gain.  Too much either way is never a good thing.

    As to your other positions:

    C – I would roll the 20 March $5 puts at $3.15 to 60 June $2.50 puts at $1.21, if nothing else than the .70 premium (x 3 = $2.10) is a big help.  You can cover with 1/2 2011 $2.50 puts for $1.57 that should hold decent value (comparatively) but will mitigate your loss should C go BK (super doubtful) or be nationalized (doubtful but not super anymore).  On the very defective long side.  The play I made Friday was brilliant, selling 2011 $5s, now .69 against Sept $3s, now .66, as a BK costs you nothing and, even in a big run up, you have the right to buy C for $3.66 with a call-away at $5, a pretty nice profit.   You need to make $10,000 on that end of the trade so 100 ought to do it but check with your margin guys as to how they deal with that kind of spread as I’ve seen all sorts of interpretations.  You also would need to keep a close eye on that play as you’ll need to roll your calls if things aren’t working out by Sept.  Also, you’d better have $30K to buy C with should things go well.

    GE – The good news is they still haven’t cut the dividend!  I’m not clear on why you have no caller or if they are already adjusted into your basis.  You have 10 puts at $2.64 avg and 1,500 shares at $14.65 with the stock at $9.  When you get behind like that it’s all about getting even so I think moving to 15 June $9 calls at $1.95 and 20 June $9 puts at $1.64 brings the basis down to $12.38/10.69 so a net loss of $5,070 if called away and a nearly 40% improvement in your cost basis if put to you. 

    As with all these plays, if you are not willing to hold GE for the very long haul, then you shouldn’t be in it in the first place.  Never, ever, ever, ever sell a naked puts if you do not full intend to become a long-term holder in the stock at that price.  Remember the original article was titled "How to buy a stock for a 15-20% discount."  This is NOT the same thing as "How to buy a stock and never lose any money no matter how far it falls."  As with any stock entry, scaling in over time makes this a much easier play as you could DD at $9.38 to net $11.82 and then the sale of the June $9s for $3.58 would drive the basis on round 2 down to $8.24/8.62, that’s another 40% off today’s price.  If that gets put to you and you are ready for round 3 at (say) $7.50 and you can sell Sept $7.50 puts and calls for just $2, that would drop the net to $6.06/6.78, 52% below your current basis, which I assume was 20% lower than where round 1 started

    As discussed in the strategy section and as discussed in the how to buy article, the key is scaling in over time.  Since our upside in month 1 is 20% if called away (sometimes much more) and initial entry of 25% would still make you 5% IN ONE MONTH on what would be a full position if called away.  That is with leaving yourself 75% in cash.  If you then DD in round 2 and take another 20% off the next set, you are now 50% in with a 40% discount.  If you then DD in round 3 and hedge again, you are now buying the stock for 60% less than you did in round one and if you are not willing to own and hold that stock at 60% less than your original entry, then you NEVER should have made that first purchase.  The whole point of this strategy was to give us some upside plays to offset a bearish portfolio at a time when we had no idea how low the bottom would be.

    This is a fantastic strategy if used correctly and is still a fantastic strategy and I will be updating our list of "Stocks to Buy" next week but I’m taking the time now to go over this to make sure this does not happen again.  If you want ot be gung-ho bullish and commit a lot of captial to upside positions in one shot – then this is NOT the way to go.  We have all sorts of hedges for that.  If you WANT to own a stock like GE for 10 years, knowing that, even at $2.50 with a basis of $6, you can still sell .10 per month in premiums and collect $1.20 a year (20%) and be happy – then this is the best strategy I know for playing your way through a recession/depression. 

    UYG – I take it you sold naked puts?  Of course the key is to roll before your callers go too far past 1/2 premium, otherwise you have no choice but a DD.  I’d go to 2x the Sept $3 puts at $1.43 but my premise is that AXP, BAC, BK, C, GS, JPM, TRV, USB, V and WFC (the top 1/3 of the holdings) will not all go bankrupt.  Maybe I’m wrong but, if I am, I think having worthless stock certificates will be the least of our troubles (have I mentioned I like gold lately?).  At $2.20 you can still sell June $3 puts and calls for $1.85, which drops your basis to .35/1.68 so you can assume a similar deal if you are assigned in Sept for selling contracts a few months out.  As long as we stay above zero, even with a $5 basis, just .10 a month is a 40% return per year – that was all the plan ever was – to ride out the recession with surviving companies we can always derive a small income against.

    LDK – Crazy dip on them.  Forbes did a hack job on them last week with a massively negative spin off their lowered guidance, which was mainly due to write-downs.  Todd Pitcher wrote a good piece on them so I won’t bother.  Obviously this would be a scale-in for me with a DD at $6.12 to knock the basis down to $8.07, rolling the March puts at avg $2.82 to 2x the March $7.50 puts at $1.85 and 1x the June $5 calls at $2 for a net $6.63/7.07 (30% below your current basis) with 1/2 called away for a $1.63 loss (assuming you can’t roll them but we could always go to a 2x leap, 2x caller) and 1/2 with unlimited upside. 

    I’ll get to more later – time for dinner!


  5. Phil
    Thanks for the response.
     
    As to your questions –
     
    I had 2000 UYG until Friday when you suggested I switch to 1/2 FAS instead.  I did but didn’t want to hold them over the weekend.
     
    GE – I have no caller because I just closed the caller at a 50% profit and was waiting for a bounce to sell the next set.


  6. Hi There, I am a new subscribers and still trying to get a grip of the site. K1 project was exellent but there are a lot of things I am missing. Could someone pls point me in the right direction.
    1) Where are portfolios located?
    2) How do I get the timely updates? via reading posts?
    3) HOw do I set-up my mobile service? I am an international subscriber
    4) Sounds very naive to ask this but what does LTP and STP stands for? Long Term Play/portfolio and short term play/portfolio?
    That’s it for now  :)
    Thanks for the help, Shiv


  7. Phil, I was assigned TXT at 10 on Friday, at a cost basis of $9. As this is a long term hold, what’s the short term strategy for March? We had discussed selling Mar 7.50 puts and calls, but if I am called away at 7.50, I won’t be that happy, nor do I want to buy any more TXT. Is it still advisable to sell the 7.50 puts and calls and then rolling whichever leg ends up ITM?
     
    More generally, once a stock gaps down significantly from our initial cost basis, is it still effective to sell covered calls and risk being called away before we’ve had the opportunity to make up the loss?


  8. Sitting on a bunch of CAT stock at a net loss. Worth flipping to 2011s and selling callers to try and make up the loss? Thanks.


  9. Cap/C Article.    Fortune had an article where they talked about converting the preferred shares to common.  In addition to improving the tangible common equity ratio, a conversion saves billions of dollars in dividends this year.   I think this should be part of a four step plan for the all the troubled TARP banks:
    1) Convert the government’s preferred to common, probably at the average price over the last 10 trading days (or whatever is standard in takeovers).  Encourage other preferred to convert on the same terms as the Feds.  If they don’t want to convert they will have to wait to get paid because….
    2) No dividends paid on common or preferred until the institutions are adequately capitalized under Mark-to-Market (MTM) standards. Preferreds that don’t want to convert can accrue dividends as they always would, but they’d have to wait a long time to get paid.
    3) Suspend MTM for regulatory capital purposes.   The company would publish both the marks they keep for regulatory capital and their best estimate of current distressed marks.   Each year, however, the company would have to write down assets equal to the amount of preferred dividends that they formally paid to the government under TARP.   They could chose which assets to write down, but they’d have a minimum amount each year.  Basically rather than sending capital out the door, in dividends,  they would be cleaning up their balance sheets.   They would also have to declare actual losses as they do now when an asset actually become impaired.
    4) After 3 (5?) years the government starts selling it’s stake on straight-line basis over 10 years, sort of like a gigantic executive stock-sale plan.   The government takes it’s billion or so shares that it owns, divides it by the total number of trading days over 10 years, and sells that number of shares every day until their stake is gone.   This would gradually return the bank to fully public ownership and reduce the overhang of shares on a transparent basis. 
    This plan seems like a reasonable balance between immediate nationalization and the zombie banks of Japan.  


  10. Good Morning Phil & all


  11. Asia Markets :    Monday, February 23, 2009
    (The following is from WSJ; please cross check with other sources to confirm.)   

    Nikkei Average*                     7376.16     -40.22   -0.54%
    Hang Seng*                         13175.10    475.93    3.75%
    China: DJ Shanghai*              266.49        6.99    2.69%
    Seoul Composite*                1099.55      33.60    3.15%
    Bombay Sensex**                 8843.21  -199.42   -2.21%
    Baltic Dry Index                      2099.00      42.00    1.96%

    *at Close
    ** Data from Friday, Feb 20,2009. Market closed on account of holiday.


  12. Asia Rallies, Dollar Slips on Relief Over Citigroup

    (Indian markets are closed on account of holiday, will reopen Tuesday)

    Asian markets were mostly higher while the greenback tumbled Monday on media reports the U.S. government could end up with as much as 40 percent stake in Citigroup. This sparked some relief among investors who cut their safety trades.

    The Nikkei closed down about half a percent to a four-month closing low on fears about U.S. bank nationalization, but the report that the U.S. government may raise its stake in Citigroup pared earlier losses.The failure of SFCG, a high-interest lender to smaller companies, underscored worries about tightening credit hitting businesses throughout the Japanese economy and sent shares in rival firms such as Takefuji tumbling. The Nikkei lost 40.22 points to 7,376.16, its lowest close since Oct 27, after earlier falling as far as 7,209.43 — in sight of the 26-year low of 6994.90 hit on Oct. 28.

    South Korea’s KOSPI finished 3.15 percent higher, ending a five-session losing streak as bank stocks rebounded, following those Citi reports. Top technology titles rallied.

    Australian stocks ended down 1.5 percent, dragged by a big loss for miner Rio Tinto, but recovered from earlier lows on a report the U.S. government may raise its holding in Citigroup. The Citi reports sent banking shares briefly into positive territory, but they were mostly unable to sustain the rises.

    Hong Kong shares rose 3.8 percent as investors fled safe havens to dabble in stocks after some of the uncertainty surrounding U.S. banks was lifted.

    Singapore’s Straits Times Index swung into positive territory, up 2.2 percent as investors bought local stocks and while the Singapore dollar rose on news of the possible Citi stake increase by the U.S. government.

    China’s Shanghai Composite Index rose 2 percent, led by property shares after official media said the government was considering a package of measures to provide long-term support for the residential housing market.


  13. Relief Rally in Banks Lifts Euro Stocks

    European shares rallied early on Monday, led by financials such as Royal Bank of Scotland on relief that the U.S. government may not, contrary to market talk on Friday, have to nationalize some big banks.

    The FTSEurofirst 300 index of top European shares was up 1.1 percent at 744.05 points, having fallen to a six-year low on Friday.

    Europe’s top-300 index fell more than 7.5 percent last week.

    Royal Bank of Scotland shot up 17 percent after news it would set up a non-core division for unwanted assets and a report it might cut up to 20,000 jobs. RBS declined to comment. UniCredit rose 9 percent after Chief Executive Alessandro Profumo said he trusted that the Italian bank had reached its 2008 net profit target of 4 billion euros ($5.03 billion). Financials gained on a broad front, with Barclays up 9.5 percent and Societe Generale up 5 percent while insurers Allianz, AXA and ING Group added around 4 percent each. Shares in VP Bank, however, fell 4 percent after Liechtenstein’s third-biggest bank reported a 2008 net loss. The Vaduz-based bank has also been suffering from pressure on Liechtenstein’s banking secrecy rules.

    The DJ Stoxx insurance sector index gained 2.5 percent and the bank index was up 2.2 percent.

    Shares in London-listed Mexican miner Fresnillo, the world’s biggest primary silver producer, fell 5 percent after the company posted a bigger-than-expected fall in 2008 profit and forecast mostly flat 2009 output and lackluster demand.

    Outside financials, shares in Austrian builder Strabag rose 10.5 percent after news that Russian billionaire Oleg Deripaska has no plan to sell his 25 percent stake in the company.


  14. Oil Rises Above $40 on Citi Stake Report

    Oil rose above $40 a barrel on Monday, recovering from earlier losses, after sentiment was lifted by a report the U.S. government was in talks on increasing its stake in Citigroup.

    Further evidence the Organization of the Petroleum Exporting Countries has enforced output cuts also provided support, although persistent worries about the weakness of the global economy limited gains.

    US light, sweet crude [ 38.94  ---  UNCH  (0)] for April delivery rose, off a session low of $39.53. The March contract ended 15 cents lower at $40.03 on Friday.

    London Brent crude [ 42.28    0.39  (+0.93%)] gained.

    OPEC has already agreed on cuts totaling 4.2 million barrels per day since last September and evidence has mounted of a high level of compliance with the lower production targets. The producer group is also very likely to decide on a new production cut at its next meeting scheduled in March, Algerian Energy and Mines Minister Chakib Khelil said at the weekend.

    Euro Rises vs Dollar as Market Cheers Citi Report

    The euro rose close to a two-week high against a broadly lower dollar on Monday on reports the U.S. government is to take a large stake in struggling lender Citigroup. Rising stocks helped the euro rise to a one-month high versus the Japanese yen, which also tends to gain in times of heightened risk aversion. Citigroup is in talks that could lead to the government owning as much as 40 percent of the ailing U.S. financial giant, though Citi executives hope to limit the government’s stake closer to 25 percent, the Wall Street Journal reported. The U.S. government would take the stake by converting preferred stock into common stock, the report said.

    "People are arguing that this move will give the U.S. government the right tools to manage the recession situation," Commerzbank head of FX research Ulrich Leuchtmann said. "The dollar has been a safe haven during the economic downturn and it tends to fall on good news," he said.

    The euro [ 1.2824  ---  UNCH  (0)   ] was up against the dollar, having earlier hit a session high of $1.2991.

    The dollar index fell 0.6 percent to 86.088.

    Among currencies perceived to be higher risk, sterling [1.4636    0.0204  (+1.41%)   ] gained versus the dollar, as did the Australian dollar [ 0.6497    0.0045  (+0.7%)   ] .

    Against the yen, the euro [121.68    1.96  (+1.64%)   ] rose to a one-month high of 121.32 yen and the dollar [ 94.81    1.49  (+1.6%)   ] gained versus the Japanese currency.

    The yen reversed some of last week’s falls, when a deteriorating Japanese economic and political outlook damaged its perceived safe-haven status.


  15. Good morning!

    FAS/Edro – Ah well, c’est la vie on not having those this morning.  As to the GE caller, in these plays, we WANT to be called away and get back to cash, you aren’t looking so much to take out a caller, even at 50% as you also benefit from an up move by not paying off your putter and taking out the caller and not the putter leaves you with much more downside exposure than was intended by the position.  When we have a calendar spread, on the other hand, we like to take out a caller because we have the protection of time on our side on the other side so, logically, if we take out a caller at 50%, we already have enough money to roll down and sell another call if we get a bad reversal but if you leave yourself with just stock and a putter – you have intense downside exposure and risk giving it all back.

    C/Cap – Well that should help a little.

    Welcome Shiv!   The K1 project was written back when we did keep portfolios but those were too much trouble as you can’t have 500 people on the same thing so I now maintain a simple Buy List under the portfolio tab for long-term plays and Optrader keeps a Swing Trading Portflio under his tab for shorter-term trades.  Timely updates are here, in comments, during the daily posts (my most recent, Optrader’s most recent) and we are testing our alert system this week.  Mobile service, I’ll have to check with Matt the programmer (unless someone here knows).  Yes on the portfolios, we used to keep a short and long-term portfolio, now I just keep the buy list but am always happy to help with individual portfolios as I am now doing with Edros (but weekends are best).

    TXT/Ajay – Well it’s that same scaling in issue isn’t it.  Once you are at a full position you’d better be damn well happy with your discount and willing to hold until it recovers.  Even with this disaster since Feb, had you been ready for round 2, your cost basis would be $7.50 and this would look very different.  Make sure you internalize that for your next entry – you need to PLAN to have 2 rounds put to you – any time you get called away with a profit should be a pleasant surprise.  So that’s the answer to generally.  If you scale into a position (and, of course you are only scaling when the stock has a big drop, on a little drop a roll will suffice) then you can usually withstand a 60% drop in value (math done earlier).  In this particular case, I take it you do not love TXT at $9 but I will point out that you can simply sell March $10 calls for .25 and if you do that 12 times this year you will be getting a $3 annual return on your $9 investment (33%) and that was the whole point of buying stocks like TXT – as long as they don’t go BK, we can always make a nice return just selling calls every month.  So this is the more aggressive strategy at $9 and not wanting to take a big chance – Sell the June $7.50 calls for $1.38 and the $5 puts for $1.30.  That brings your basis down to $6.32/5.66, so 37% off your current basis and still an 18% profit if called away (about the same as you would do selling $10 calls for .25 every month).

    CAT/Ajay – Yes, you can go 4x the Jan $22.50s at $7.03 (+$2) and cover with 2x the May $28s at $2.42 ($4.80 per current share credit) so you put net $2.80 per current share in your pocket and you have an easy roll to 2x the Aug $35s if CAT takes off or you can cover the other half with the May $25s if they slip below $3 (now $3.90) which would be an average cover of $2.70 per leap, which should be enough to roll you down $5 more if cat heads lower.
    Bank conversion – The conspiratorial side of my brain suggests that the financials may have been driven down in order to make the government’s very cheap conversion price palatable to other shareholders, who are now happy simply not to be BK. 

    More Edro stocks:

    Well this goes back to that basic thing where you own a stock for $5.33 and can sell the  March $5s for .40, which drops your basis to $4.93 and a big .07 if called away but that’s still 15% annualized return, which is considered a good return on stocks.  Of course, this goes back to the old "did you actually want to own it or not" quesiton as you can get .08 for the $7.50s with a way better call away or you can sell the June $5 puts and calls for $3.10 to lower your basis to $2.23/3.62, 32% off the current price without taking another penny out of your pocket.  I hope everyone realizes how flexible and useful this strategy is, which is why it has been our main play since the market turned sour!

    TXT – Same as Ajay above.  You are right on track there and, if you have lost your taste for it, you could always roll you $2.65 March $7.50s to the $3.70 June $5 puts and calls to lower your put to price but, with just 500 shares – better off waiting to see if you do get assigned first. 
    WFR – A profit?  I don’t know what to do with that….  Well you are off track as you have no putters, even the .75 for the $12.50 puts improves your basis by 5.5% and improving your basis by 5.5% a month lowers your cost by 66% a year so nothing to sneeze at.  I think the problem is you do not view this as a running strategy and you are getting caught up in the time slices.  Ideally, sometimes we get called away and sometimes we scale lower and sometimes we roll but, over the course of the year, if we just average 5.5% a month in profits – it’s a pretty good year!

    YRCW – Another profit?  I advise sticking to the later part of the alphabet from now on (I hear X is cheap!).  Again you are off track not selling puts and calls – that’s the whole point.  You have 1,500 but let’s say you don’t want 3,000 – then sell 1,000 and leave 500 and sell the March $2.50 puts and calls for .92, which puts that lot in for $1.98/2.24 so if it’s put to you it drops your basis on 1,000 to 18% lower than it is now on 1,500 and, if called away at $2.50, it’s a 26% profit – even if you divide that by 3 for the other 1,000 shares it’s still 8% a month return with 2/3 of your position sitting in cash.

    VERY IMPORTANT TO ALL:  Keep that in mind when you are successful in the position.  You are NOT locked into the amount of shares you have.  If you are not comfortable with an assignment number, you can always cut your entry back by half or more so the assignment only has the net effect of putting you back to the same amount of shares at a lower basis.  Obviously, again, again, again I say – If you don’t WANT to own the stock – you shouldn’t be doing this in the first place!  If you want to gamble on YRCW going up but have no intention of owning them, you can take net .60 and buy the Jan $2.50 callls and sell the Jan $5 calls, which makes a 300% profit if called away so rather than risk $4,100 on this position hoping for a double, you can buy 20 of the bull call spreads for $1,200 and make a $3,800 profit if called away and use the other $2,900 to diversify the risk as well as take some downside plays to smoothe out the portfolio volatility.

    DRYS – This is such a crazy stock you can just ride it out and you may be clear by March 20th.  You can roll to the June $5s for $2.45 or 2x (or more) the June $2.50s at .78 as 2x doesn’t change your exposure but puts the putter into all premium.

    I like the Naked sell of the DRYS Jan $2.50s for $1.25 as a new play.  If you have 50% margin it costs you .25 to hold this position and you can set a stop at $1.50 or just get out if DRYS breaks below $3, which it hasn’t done yet.


  16.  Phil,
     
    Any thoughts on naked puts here BAC ?


  17. 8-)