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Just Another Manic Monday – The Inverted Risk Pyramid

This is going to be fun!


We already have a bigger boost than we expected in the futures market.  After extensively reviewing our picks (generally bearish) from last week's action we determined that even 55% is too bearish as we pop over our breakout levels.  So we added more picks to our very bullish Watch List, held an extensive conversation on Mattress Plays in Member Chat (just in case) and dug through the dirt looking for "green shoots" in our weekend reading – all to help us get more comfortable with the bullish plays IF we break over our watch levels and hold them (3 of 5 at least):  Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620.

Also, just in case, we reviewed the Collar Strategy, which is a very useful way to use options to lock in long-term profits, which can have nice tax advantages if you can benefit from hanging onto things over 12 months.  Japan is closed and Asian stocks fell off on low-volume trading.  “The question is whether the rally has over-extended beyond the confirmation of economic stability that we’ve seen,” said Jason Teh, who helps manage about $3.2 billion at Investors Mutual Ltd. in Sydney. “It’s still hard to know exactly where the world’s going to go, and the degree of growth remains very hard to quantify.”  The Hang Seng dropped 200 points (1%), back to 21,299 and the Shanghai fell half a point but India went the other way (industrial output up 10.4%), along with Singapore, who are claiming a 14.9% rise in GDP – how's that for a green shoot?

The futures went wild at 3 am, when Europe opened, and those markets are up over 1% on continuing news that the dollar is being dumped.  This time we have an article in Bloomberg indicating that Central Banks have printed over $400Bn in new money last quarter, bringing their holdings up to $7.3Tn, yet only 37% of that money went into the US dollar.  The dollar’s 37 percent share of new reserves fell from about a 63 percent average since 1999. Sever Englander of BCS concluded in a report that the trend “accelerated” in the third quarter. He said in an interview that “for the next couple of months, the forces are still in place” for continued diversification. 

That helped reduce the dollar’s weight at central banks that report currency holdings to 62.8 percent as of June 30, the lowest on record, the latest International Monetary Fund data show. The quarter’s 2.2 percentage point decline was the biggest since falling 2.5 percentage points to 69.1 percent in the period ended June 30, 2002.  “The world is currently flush with the U.S. dollar, which is available at no cost,” said Chris Kind of Frankfurt Trust.  “If there’s a turnaround in U.S. monetary policy, there will be a change of perception about the dollar as a reserve currency. The diversification has more to do with reduction of concentration risks rather than a dim view of the U.S. or its currency.”  

People didn’t like the dollar in 1995,” said John Taylor, whose firm has $9 billion under management. “That was very stupid and turned out to be wrong. Now, we are getting to the point that people’s attitude toward the dollar becomes ridiculously negative.”

Europe is very excited that Latvia has agreed to reduce spending and to raise taxes in a last-minute effort to satisfy its international loan donors.  The IMF, the EU and Sweden agreed to give Latvia a 7.5 billion-euro ($11 billion) loan in December and urged the government to adopt tougher austerity measures. Swedish PrimeMinister Fredrik Reinfeldt, who holds the EU presidency, on Oct. 5 said Latvia “must correct” its deficit while Riksbank Governor Stefan Ingves has said the country risks being “left in the cold.”  It's kind of like that new TV show, Flash Forward, where Americans get a glimpse of what will be happening to them in the near future….

Phillips Electronics jumped 6.2% this morning on an earnings beat and AIB got a big boost as the Green Party expressed support.  Swedbank was up 6.3% on relief over Latvia.   “Topline growth can support markets and even edge them further,” Kevin Gardiner, head of investment strategy for Europe, the Middle East and Africa at Barclays Wealth in London, said in a Bloomberg Television interview. “As economies move away from the recession, we’re going to see a rise in revenues. The story is growth is going to be restored over the next six months.”  Gosh, I think it's fantastic that so many Barclays people have taken the time to tell us how great everything is.  If you ever wonder why that is, just put your favorite stock symbols in this box and see who's in the list of top 10 shareholders

There is still room for stocks to rise, according to Barclays Capital Inc.’s Larry Kantor, head of research at Barclays Capital in New York, was one of the first economists to call the end of the recession, in March. Barclays sees GDP expanding at a 4 percent rate now, 5 percent in the first quarter and 3.6 percent for 2010.

Sorry, I am trying to be positive but this is all just such total BS that it's laughable.  While we discussed all the rosey GDP forecasts over the weekend as well as the math that points out that a 3% increase after a 6% decline still leaves you down at 96.82%, the markets also seem to have NO risk factor AT ALL.  There used to be something called a "risk-adjusted return," which Investopedia defines as: "A concept that refines an investment's return by measuring how much risk is involved in producing that return, which is generally expressed as a number or rating. Risk-adjusted returns are applied to individual securities and investment funds and virtual portfolios."  The mere fact that I have to explain it at all shows how far off the path of investing and into pure speculation this market has gone. 

Not only are the markets and commodities "priced to perfection" but we have inverted the entire "risk pyramid" to the point where options, and futures (including commodity contracts) are now the PREFERRED investment and cash ain't nothin' but trash.  Indeed the risk factor being applied to owning futures contracts, commodity contracts and individual equities has gone negative (you pay a sharp premium against normal returns for them) while most of the World's Central Banks are just half a point away from having to actually pay you to take a cash loan.

Gregor MacDonald has a great article this morning titled "The Alignment of Asset Reflation and a Collapsed Economy" in which he rightly states:

If all the highly informed people who’ve been waging a war the past six months against rising stock prices would just step back for a moment, they would perhaps understand better that their macro views are supported, not negated, by asset reflation. For it’s this asset reflation that hints at the singular and doomed strategy of our monetary policy, and its overlay on our collapsed economy. Just so that I’m clear: there is no macroeconomic recovery occurring in the United States. What’s unfolding currently is snap-back from last year’s crash, which led us to the bottom of a spider-hole. The positive bits of macro data, dribbling out here and there, are really just about getting us back to zero. A kind of steady-state, expected to carry on for some time to come. And that’s a best-case scenario.

Our society’s hierarchy rests in part upon the following assumption: that the intellectual capacity of the chairman of the Federal Reserve, with his PhD and his white papers, is superior to that of a mortgage broker from Orange County, California. I think we need an adjustment to this type of assumption. Because the spread I see opening up everywhere in the US economy is what I call the Prestige-Performance gap, whereby the assertions of our elite no longer comport with observable reality. If the chairman of the Federal Reserve will not allow that the greatest credit bubble ever has now burst, or that it ever existed, then this partially explains why he would think stuffing the banking system with fresh capital would revive the economy.

For those who recognize a rising stock market as evidence of disarray, what we should anticipate now is the recognition phase where the wider public finally comes to understand the nature of our inflationary depression. My marker has been 100 dollar oil and 15% unemployment in California. That should finally get the message across. But other combinations will do: 1300 dollar gold, 1300 on the SPX, and more problems with Commercial Real Estate will also suffice. Like the prestige-performance gap, the divergence between the economy and asset prices apparently has to become even more grotesque before people will understand.

So happy Monday to you!  MacDonald is very likely 100% right and we are heading off a cliff but, as he also points out, gold and the S&P can rise 30% before we get to the jumping point.  The strategies we discussed this weekend along with our Watch List and long index vertical plays will allow us to play along without losing our heads – just in case we wake up one morning and find that the cliff was a lot steeper than we had imagined!


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  1. 14.9% GDP growth in Singapore? Isa it true?
    That’s not a green shoot. That’s a forest!

  2.  WSJ reports the co might have some good news to tell investors when it reports earnings this week, and traders who think the stock could move higher as a result can buy options to take advantage of the situation. With Google scheduled to report third-quarter results on Thursday, analysts at Goldman Sachs say the market as a whole has underestimated the company’s potential for growth. Not only could Google generate higher revenue by charging more for online ads, but its stock could climb if investors believe the company can make money from YouTube and DoubleClick, Goldman says. And with Microsoft and Yahoo attempting to iron out a search partnership, the competitive landscape for Google might ease a bit. To take advantage of increases in Google stock, investors can buy October "call" options that allow them to buy the stock for $530, says Goldman Sachs derivatives strategist John Marshall. Those October calls are currently priced at $7.90 and make money if Google shares rise above $537.90 before this Friday, about 4% above last Friday’s closing price of $516.25, up 0.4%

  3. Singapore is ‘forecasting’ 14.5% growth of Q3 over Q2. Q3/09 is 0.8% over Q3/08, and Q2/09 was -3% as compared to Q2/08. 

  4. How nice of GS to point out the opportunity to make money on Goog if it goes up to $537.90 from $516.25.   Have they ever pointed out an opportunity for investors to lose money?  Oh wait… they just did.  There is a special place in hell for those folks.
    Phil, in John Mauldins recent write up he says:
    Let me see, is there any group I have not offended yet? But something like I am suggesting is going to have to be done at some point. There is no way we can continue forever on the current path. At some point, we will hit the wall. The fight between the bug and the windshield always ends in favor of the windshield. The bond market is going to have to see a credible effort to get back to a reasonable deficit, or we risk a very difficult economic environment. The longer we wait, the worse it will be.
    What he’s saying is that the bond market will probably be the only thing that forces the government to deal with the reality that things really really suck and they can’t make them suck any less.  All they can do is make them suck more.  i just want to make sure I understand what he is saying.  What will the bond market do to do that?  Will bond investors sell, driving down the price and forcing interest rates to attract capital up?  If so, TBT continues to look like the place to be.

  5.  As mentioned earlier Deutsche Bank downgraded BIDU to Hold from Buy and lowered their tgt to $411 from $426 as they believe stock price has accurately factored in near term catalysts and potential for upside surprise is limited. Firm says channel checks suggest 3Q rev may have met the low end of its prior 3Q guidance. While metrics such as SME customer number’s continue to grow healthily, they believe scope for surprise in average ad spend and margins to be limited.

  6. Investors are on to the Fed’s game, which means the game is over. If the Federal Reserve is always on the lookout for inflation expectations, I suggest that Ben Bernanke take a look at the September ETF net cash flows, courtesy of the National Stock Exchange. It is ringing a bell, loud and clear, that investors fear inflation. The No. 1 destination of investors’ cash was SPDR Gold Shares, with $2 billion in net inflows. It was followed by iShares Barclays TIPS, with $847 million; Vanguard MSCI Emerging Markets, with $770 million; iShares MSCI Emerging Markets, with $651 million; and ProShares UltraShort 20+ Year Treasury, with $538 million. Altogether, that’s more than $4.8 billion for antidollar, anti-inflation investments, more than 50% of the $9.5 billion in total ETF inflows for the month. …

  7. And just who are those bond holders who might sell?  Maybe China….where they can drive down the value of the dollar further so the dollar-yuan peg affords them export growth again?  Japan won’t sell since they already have a huge currency problem, and the Middle East won’t since their sovereign wealth (right now) is denominated in dollars.  Let’s just hope there are enough buyers to keep some sort of equilibrium.  If the Fed ends up being the buyer, then they can’t very well hike interest rates to defend the currency;  it will be left to the private market to take interest rates to where they need to be to clear the bond markets.

  8. Interesting history from Bespoke’s B.I.G. Tips (9-Oct-09):
    "The S&P 500 closed higher on all 5 days this week.  Believe it or not, this is the first time this has happened during the current bull market.  the last time we had a 5-day Monday through Friday winning streak for the S&P 500 was in November 2006, and the index declined 1.38% the next week.  Over the last ten years, this has happened 12 times, and the index has gone down the next week 8 times for an average loss of 0.65%."

  9. Phil: What do you suggest regarding ERY Nov Calls?
    Oil has gone up to about $73.59.

  10. Good morning Phil, need advise on PCU sold Jan call 30 short for 2.32 now trading at 5.15 regret faild to buy the stock Thank you

  11. Singapore/Steve – I couldn’t find more than a paragraph on it to verify but it certainly is the claim.  Of course the economy  contracted severely and the 14.9% is DOWN from 22% last Q and they expect 2009 to finish around -2.5% but what a great headline the MSM is running with…

    We’re at goal on that DIA call spread, we’ll have to keep an eye on the 9,900 mark.

    Oil is jammed up to $73.65, which is normal the week before their contracts expire as traders need to dump their contracts and are willing to risk Congressional investigations with Billions of dollars on the line (and we’ve seen how useless those Congressional investigations are). 

    Bonds/Matt – At a certain point, like Latvia, your creidtors won’t lend you any more money.  You can keep printing it but if the people you trade with (and we run a massive trade deficit) won’t accept your BS currency, then you are forced to raise foreign capital for whatever it costs and that can send bond prices through the roof as you have to offer 10 and 20% to entice people to exchange their valuably Yen for your crappy Dollars.  Just like a bankrupt company that can refinance 5 times on the way to zero, you can keep the scam going all the way until you run out of lenders but once the last lender says no, you lose 100% of your remaining "value" at incredible speed. 

    Keep in mind that Zimbabwe started out just trying to stave off a recession, just like we are.  It’s a trap to support an economy like this and the more they "grow" the markets, the more fuel they need to be sustained, which just makes a much bigger bubble to pop.  See, once again you guys are focusing on the negative when we should be celebrating the bullish breakout! 

    Our breakout levels are still:  Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620.  Only the RUT is lagging so we’ll watch them closely but 3 of 5 need to hold for the day and, of course, with 15M shares at 9:45, we’re not going to be very impressed anyway.

    BIDU/New – Thank goodness, that one was getting annoying (the $420s sold naked).

    ERY/Cwan – The Nov $12s were $1.75, now $1.30 and I’d say offering $1 to roll down to the Nov $10s is a good deal as it pretty much takes you out of premium.  If we don’t like the action we can sell the $12s for $1 to get that money back and THEN maybe we roll out or DD.  Obviously, if that series of events doesn’t appeal to you, take the loss now!   I don’t see how we can put any weight to this move with Japan closed and our light holdiday trading. 

    ERY – Nov $11 puts make a nice naked sell at .75.

  12. PCU/Yodi – No biggie.  You didn’t buy the stock for $30 but you can buy 3 2011 $25 calls for $11.40 and sell 3x the Nov $35s for $1.50.  I’m not saying to do that but keep in mind that you are in no way in bad shape on this trade yet.  How about buying 1x the 2011 $25s and rolling the caller to 2x the Jan $35s at $2.40?  That puts them up to all premium and $1 out of the money and you don’t give them back their $2.40 until you are $12.40 in the money on your longs and then you can DD and roll them to March $40s (now $1.65).  You can also be a little more daring and backspread the 2x roll with 1.5x the March $40s at $1.65 and just hope earnings (end of Oct) takes care of your problem.

    Wow, a new high on the Dow with 22M shares traded at 10am – what an amazing lack of conviction!   Both buyers are high-fiving each other.  8-)

  13. TLT still looking sick from friday.  Consequently, SRS and IYR are behving themselves this morning.

  14. "Both buyers are high-fiving each other."  - ROFL! 

  15. Pair trade on gold:

    • GLL (ultra-short gold, now $11.50) Apr $12/13 bull call spread for .40, returns $1 if gold finishes around $900.
    • UGL (ultra-long gold, now $42.40) Apr $40/41 bull call spread for .40, returns $1 if gold doesn’t drop.

    Just looking for a good move one way or the other and you can pull the losing side once you get comfortable with the winner enough to ride it out.  If you get .20 back on the loser, it cost .60 to make $1. 

    X not having a good day, ZION down at $17, JPM getting sold along with GS, MS…  Watch that XLF $15 (now $15.24) for signs that something is really wrong (in addition to the BS we already know about that everyone is ignoring). 

  16. URE -Phil, anything interesting to do on this – ?   since it is trading at around 6.00 right now?
    how about buy the Jan. 2011  2  calls  and buy the Jan. 2011   10 p uts  for a joint of $9.20  for the $8.00 spread,
    and then sell the Nov. 6 calls and puts for $1.20,   reducing  the cost to $8.00 right away, and you still have 13 more months after that to sell…..premium……

  17. any USO play today?

  18. Very important question: How does one make the smiley face with the sunglasses?

  19. Good reminder that hardware and providers do matter:

    Sidekick contacts, data gone, T-Mobile says Owners of Sidekick phones may have lost all the personal data they stored on the phone, including contact numbers. The phones are made by a Microsoft Corp. subsidiary and sold by T-Mobile USA, which say many Sidekick owners’ information is "almost certainly" gone after a failure of servers operated by Microsoft wiped the data out.

    Soros supposedly putting $1Bn into renewable energy investments, boosting that sector today.

    URE/DMan – I only use them as a brake on SRS calls when they are moving up.  I suppose if they break over $6 they make a mo play up there but let’s hope things aren’t getting that silly today. Your play is good for playing the middlle and these ultras usually do pay very well selling the front-months. 

    Here’s an interesting thought though, what if you buy just the SRS 2011 $7.50 puts for $2.30 and buy the 2x URE 2011 $5 puts for $1.50 and sell the SRS Nov $10 puts for $1.35 and 2x the URE Nov $6 puts for .65.  That puts you in for net $2.65 plus $3.50 in margin and you’re collecting $2.65 in month 1.  They can’t both lose and it would take a 10% or more move down for you to owe either putter money and 20% for you to lose on both ends.  Since only the put side can win, you have limited downside losses too.  Even if you only make .50 net per month on average, that’s an ROI+margin of 113% over 14 months.

    USO/Roaster – The $39 puts have little premium at $1.60 (.28) and I like them looking for $2 with a DD at $1 ($1.30 avg) and a stop at .80

  20. Phil,
    I have the CEPH Jan 11 50-60 spread and I’m thinking about buying back 1/4 of the callers in this selloff. Your opinion?

  21. HI Phil always made some money on selling verticals puts on GS how about the Nov 185/180 for 1.85 your thoughts

  22. TM – Seems solid support at $75 level. Assuming it keeps going up or stays aroudn where it is with teh rest of market for thos OpEx week, here is a decent risk-reward optiosn play.
    With stock @ $79.3, Sell Oct $80 Puts that expire on Friday for about $1.5 and buy Nov $70 Puts for $0.65 (or $75s for $1.7). You can roll the Oct $75s to Nov later in the week.
    Anyone have a better options play that above?

  23. Phil, re 100KP, on Friday you said something about posting over the weekend.  I don’t see anything – did it just get delayed, or did I overlook it or misunderstand?

  24. Smiley/AC – That’s 8 plus - plus )

    BIDU found some buyers – craziness continues.  

    Dollar getting killed at $1.48 to the Euro, $1.58 to the Pound and back down to 89.76 Yen now that Asia is closed (was over 90 until 6 am). 

    CEPH/Maxt – My attitude is that, for the same $1.50 per long contract (1/4 of $6), you can roll 1/2 your calls down $5 (yields + $10 at same target) or you can roll all the callers up $5 (yields + $20 at higher target) or you can roll 2 of your calls back to 2012 $50s, which buys you another year of growth or puts you in a position to roll 1/2 the callers.  You can also buy 1x the 2011 $75s for $2 ($8), which puts you in a position to roll all the callers up to 2x the $70s and gives you a cover in case you want to stop out your $50s at some point.

    GS/Yodi - A little dangerous ahead of earnings (Thursday),  If you want to be short on GS, why not sell the 3 Nov $210s for $2.40 against 2 Apr $250s at $3.15?  If they fly up, you can buy 3 more Apr $250s and roll the callers up to 2x the $240s or maybe the Jan $250s, which are already .90.  Obviously anything down is a win with whatever you keep in value on the longs

    TM/M2 – Yes, $75 was our target last time.  The plan was to sell Jan $75 puts for $5+ as we’re happy to be in at net $70.  Now those puts are $3.10 and still not a bad entry.  Your play works too but what’s your plan if the market drops 300 points on Wednesday and you’re looking at a $5 putter vs your $1.75 Nov $70 puts?   TM earns on 11/5 so why not buy the Jan $90 calls for $1.05 and sell the Oct $80 call for .85 with a plan to sell Nov $85s for another $1 or perhaps just take the money and run….

  25. $100KP/Java – There were no adjustments I wanted to make.  I knew today would sting but I wanted to ride it out and see where things shake out.  We have a $97,900 portfolio value with over $100K in cash so far from panic mode so far.  Since we’re only going to roll things along, there’s really not much to do until Wednesday. 

  26. Good Morning. Phil could this be the time to start dipping into any ultra short etfs – as we get closer to Dow 10 Grand? Thanks

  27. Phil,
    here is pointer to ‘national deviation from normal temps’ for the u.s. which was just used by cnbc without credit. good info for heating oil guys

  28. WFMI has gone completely nuts !
    Big short squeeze going on there.
    One of the more ridiculous valuations in this market of many ridiculous valuations.

  29. WFMI has gone completely nuts !
    Big short squeeze going on there.
    One of the more ridiculous valuations in this market of many ridiculous valuations.

  30. sorry for the double post … mouse problem !
    How bout dem Yankees !?!?!

  31. interesting, cnbc using ‘phone war’ bs story btwn aapl and goog to keep both down in order to ‘steer’ market downwards???

  32. FSLR catching Soros fever, up at $160 but we can’t go short on things like that with our indexes at breakout levels, tempting though they may be…

    Ultras/1020 – We have our lines clearly drawn now so we can just short when 3 of our 5 indexes fall below and go long when 3 of 5 are above.  Once we stay over the levels for a couple of days (if it happens) they will begin to form solid support which we can feel comfortable buying at.  If we fail here though, then the same can be said about downside plays, as we know these upside levels won’t fall easily. 

    Deviation/High – The best way to measure that is Zman’s system of measuring what he calls "Heating Degree Days," which is a measure of total deviation over time.  The problem with this measurement is the Jimmy Carter factor, which is that people with no money will put on a sweater and 72% is no longer the temperature at which people run for the heater.  There’s an assumption in many of these forecasts that Americans are unyielding consumers with infinite amounts of credit to buy things with and that’s how commodities can go on such a speculative run with no demand.  If they can’t get the US consumers off the couch and into the stores this XMass, those assumptions will have to come down hard. 

    Yanks/Cap – Man they are not even making it interesting.  I liked the quote in the Times this morning:

    “They just keep running great hitters at you.  That’s why you end up having to make pitching moves. Change, change, change, because they are so dangerous that you just try to finagle your way through it half the time.  It’s a great baseball team.  They deserve all the accolades. They have got a great bullpen. Those guys come out there firing. Bench. The whole package. They’ve got the whole package, they’ve got the whole deal, and they have got some of the classiest players in the league out there, guys I really enjoy watching play. 

    THAT was the Manager of the Twins! 

    Phone war/High – That’s kind of silly, still 5Bn people on the planet who don’t have phones…

  33. I would think the threat of AAPL being forced to open iTunes and the iPhone itself is a good story. Networks will be seriously hit for revenue and hence ability to pay for iphones if VOIP becomes usable on it.

  34. Phil – a question regarding naked call sales – that you have a few of.  Take BIDU as example.  IF you roll the 420 – to a higher strike for Nov, for a credit or flat – assuming you have margin, you can keep rolling – and collecting $10/month in premium – and as long as the stock on an average doesnt rise as much – eg. $60 over the next 6 months – eventually you can get ahead of the stock and on the next correction in the stock – can cash out the money.  Whats the catch in just rolling the position along (other than the stock doesnt correct and keeps rising at a rate thats greater than the front month premium).

  35. LYG went down to 5.88!  What’s news?  Back in May, we did a buy/write at about 5.6.  Scale-in by selling some puts?

  36. DELL down yet INTC expected to beat and is up on the day hmmm

  37. Hi Phil I like and thank you for your suggestion below but thinkor swim hammers me with a 6,400.00 margin are other people trading with them fro better deals I find this very high even in the past I got hit with high margins even that I hold a large acc with them does any one deals with trade station ?
    GS/Yodi - A little dangerous ahead of earnings (Thursday),  If you want to be short on GS, why not sell the 3 Nov $210s for $2.40 against 2 Apr $250s at $3.15?  If they fly up, you can buy 3 more Apr $250s and roll the callers up to 2x the $240s or maybe the Jan $250s, which are already .90.  Obviously anything down is a win with whatever you keep in value on the longs

  38. Ultra – Thanks Phil.  Just itching to go long on a short  :)  

  39. boy,
    that last cnbc ‘from the right’ analyst sounded like she was doing a sat night live segment. what an accent!

  40. Should we just not short anything in this ridiculous market besides maybe some DIA/SPX/SPY puts for some insurance? With earnings fairly easy to beat it seems this market rally will last at least another month. Even though I don’t necessarily agree with it, I can see the rationale behind oil and metals going up, but RETAILERS!? You kind of already touched on it with,
    "If they can’t get the US consumers off the couch and into the stores this XMass, those assumptions will have to come down hard. "
    but I swear Im about to start imitating George from Seinfeld and just do the opposite! What retail sales down again!? BUY! BUY BUY! Everyone knows an Abercrombie and Fitch TShirt is much better protection against inflation then oil and gold! THeir $50 T-shirts provide REAL value and we all know that the 10%+ unemployed are spending their extended benifit checks on clothes! Sry for the rant, this market has had my head spinning for months and cost me a lot of $! On the plus side since I’ve subscribed to this website Im in the green….

  41. Wow SUN broke $30 – remember when we bought them because they were lagging?

    Volume 60M at 12:15, could be worse…

    VOIP/Steve – They’re just going to go back to metering bandwidth.

    BIDU/Parth – There is no catch really, other than, at a certain point, you are tying up $15,000 in buying power to make $1,000 and maybe you have better things to do…   There could be a huge run up that gets away from you too but if you don’t mind rolling, rolling, rolling then: Move ‘em on, head ‘em up, Head ‘em up, move ‘em out, Move ‘em on, head ‘em out Rawhide!

    LYG/Cwan – They are raising capital by selling shares again.  We’re going to like them again when they settle down.  About .30 lower would be nice but $1.70 for the Jan $5 puts and calls is not too shabby.

    Margin/Yodi – If by large you mean over $150,000, then you should ask TOS to put you in for a Portfolio Margin account – that should cut down the requirements considerably.  Also, in TOS, if you right-click on the Nov $210 calls and choose "sell custom" you can set up that trade unbalanced with a $6 stop and they’ll margin you about $6K.  It would be best if you went over this with your account rep but you are essentailly setting a stop if the total cost of the spread hits $6K (and I use the Mark) price.  There are a lot of factors here and getting stopped out would suck so I would suggest going over it with the Rep and making sure you understand it and STILL doing a very small spread but by placing a loss limit, you cut the margin considerably without having to go to a PM account. 

    Ultra/1020 – If you are not as bearish as many of us already are, then nothing wrong with taking a stab at something.  I still like the SKF and DXD verticals where we sell at the money callers and buy whatevers beneath them for 60-100% returns if they simply hold their current levels.  That’s a nice mellow way to be short. 

    DXD Apr $30/33 bull call spread is $1.40 for $3 and DXD is $33.60 so nice 105% return if DXD simply doesn’t go lower.  I like 3 of those better for $4.20 than a single Apr $34 that would have to get to $42.50 to net the same as the 3 spreads do at $34.  Everyone should think about their plays this way – isn’t it better to buy a call that has value than one that is all premium?  You can even be brave and do a 2/3 cover with a cover stop on the last 1/3 at $3.50 as that changes your average cover from $4.40 to $4.10, raising your spread from $1.40 to $1.70 – big woop…

  42. Phil,
    good job so far today restraining your bearishness. Just grin and bear it.. :)

  43. VOIP/Phil – but therein lies the run, VOIP doesn’t consume any bandwidth.

  44. Rally/Jrom – If we don’t turn down by Wednesday there’s no point in shorting anything until we test 1,200 on the S&P at least.  I’m very glad we’re helping a little – unfortunately I’m still too bearish because of this damn brain thing but I’m going to do my best to beat it into submission with alchohol and I’m going to force myslef to watch Mad Money every day this week until I’m ready to BUYBUYBUY in this runaway market. 

    It’s like the Giant game yesterday (sorry Raiders fans) – there’s a certain point, sometime around when the 3rd consecutive possession by the Giants ends in a TD, that you have tgo admit you aren’t going to win.  So you have a few choices, you can be a perma-Raider and keep betting more and more on your team (not smart).  You can swallow your losses and leave the stadium.  You can swallow your losses and stay on the sidelines and watch the game.  Or you can switch sides and start betting on the Giants, maybe even recovering some of what you lost.  You can keep some of your useless-looking Raiders bets, just in case but what’s the sense of not betting on a clear winner?  Even if you are skeptical, that can be useful as it keeps you out of trouble.

    VOIP/Steve – Really?  That I did not know.  I just assumed it must use some somewhere.  Well either way, they’ll raise prices or whatever because the backbone providers hold the real cards as those phones are just paperweights without them. 

  45. I had WFMI Jan 15 calls from way back when. Bought at 1.41 (!!!) and sold at 7 and 9, now worth 18. That is the power of holding long call options during a recovery and/or inflation bubble.

  46. steve,
    yes but oddly enough it requires a high bandwidth (greater than at&t gererally can provide) to provide the turn times that voip needs to operate well and at&t knows most users will not be that happy with it.

  47. Just did a Buy/Write on NLY selling April 19.00 P&C. Stock pays a 15.65 dividend. Discount on entry – 19%. This is a REIT that specializes in mortgage backed loans (whopee) guaranteed by the US government – not much risk unless the government goes BK .

  48. Hi Phil holding Oct vertical on FLSR short 5@ 155.00 long 5@ 160.00 shall I wait still until the heat of todays run cools down or what do you suggest? Thanks

  49. I’m short a mix of C 4 and 5 strike Dec. straddles. These have done very well: up about 25 and 31% respectively in four weeks as measured against their modest $90 margin.  I’m actually adding a few more of the 5s to be a bit more bullish.

  50. Good Bespoke Chart:


    WFMI/BDC – Nice one.  If only the government were handing us free cash like they were for GS and the banks back in March, we probably could have done better than GS did just following the Buy List picks.  I think that’s one of the reasons I have so much trouble being bullish here.  A lot of stuff we’re buying now is up 100% or more from then (some 300%) and back then (only 7 months ago) people thought we were crazy for buying and we were nervous enough to cover everything.  Now, 7 months later, suddenly everything is "undervalued" when it’s 150% higher?  What if these were houses, or cars, or jewelry?  Would we be rushing out to pay 150% more than we could have bought it for not even a year ago?  Oil isn’t up 150%, gold isn’t up 150%….  Somebody is wrong and if stocks are right and oil is going to catch up and gold is going to $2,000 then we’ll just be right back where we were last year with commodities putting everyone into bankruptcy right before they crash. 

    NLY/Gel – That’s a good one!

    FSLR/Yodi – I’d take the money and run on the calls, that’s $4 off the table and you can roll the caller to the Nov $175s if you have to (now $6.80) and take up a position.  If you are worried about it going up more you can buy the Nov $180s at $5.40 as they only have a .30 delta or the $185s at $4.30 would do there.  Also, don’t forget that you can roll the $7.20 caller to the Nov $190 calls ($3.30) and Nov $135 puts ($3.70) which, if they keep going up and you have the $185 cover, put you in a $5 bull call spread with a bonus $3.70 from the puts. 

  51. dear phil-sold GS 190 calls on 10/2 when it was $180 for 2. Don’t know to take the hit or, possibly sell the 185puts. As you say, they could fly up, but maybe plunge less down in this market?  thanks

  52. TM – Thanks for your opinion & cautionary reminder of what-if market drops 3-5% on Wed and playing Oct options that expire 2 days after!
    I already do have an old Oct 75 Call sold against Nov 70 bought – keeping it for now as it is nice and green – plan to cover Oct later in the week as it still has almost a $1 in time premium left…

  53. Highlander I agree, it is difficult to achieve a landline quality phone conversation over VOIP. VOIP is however usually  quite close in quality to a cellphone conversation. As you hint, the small amount of bandwidth isn’t the issue, it’s latency.
    I suppose you are right they will find a way around it. They could probably detect VOIP traffic and charge more for it than other uses of  bandwidth. However I do think there is some potential for a dislocation of pricing models while they react.

  54. "I’m still too bearish because of this damn brain thing" 
    I know Phil, I’ve never experienced such cognitive dissonance in trading. During the crash there were a lot of unknowns, so you could at least understand how the market might be right in pricing a huge disaster in even if you thought it was overdone. We now have a lot of good reasons to think this is way overbought, but also good reasons to think it’s going to get even more overbought.
    It’s frankly not very comfortable. I’m not complaining about making money, but it’s not exactly a ‘fun’ rally.

  55. REITs look weak and have been drifting, but they might just be coiling for a big push higher. I’m selling some lightly bullish Nov SPG strangles of Nov 65P, 75C. This is against another net short position.

  56. DXD Apr $30/33 bull call spread is $1.40 for $3 and DXD is $33.60 so nice 105% return if DXD simply doesn’t go lower.  I like 3 of those better for $4.20 than a single Apr $34 that would have to get to $42.50 to net the same as the 3 spreads do at $34.  Everyone should think about their plays this way – isn’t it better to buy a call that has value than one that is all premium?  You can even be brave and do a 2/3 cover with a cover stop on the last 1/3 at $3.50 as that changes your average cover from $4.40 to $4.10, raising your spread from $1.40 to $1.70 – big woop…
    Phil, could you explain exactly what you mean in the last sentence about the covers. Sorry to be dense.

  57. Allen, you are buying a $30 call and part funding it with the sale of a $33 call. Phil is saying rather than sell the same quantity, you could sell only 2 of the $33 for every 3 of the $30 you bought. This puts your net cost at $1.70 rather than $1.40, but will benefit you more to the upside. If you did this hoping for DXD to go up, and instead it went down, you would sell the one extra $33 call for no less than $3.50.

  58. Sorry, your net cost goes from $1.70 to $1.40 assuming you ended up selling the 3rd $33 call at $3.50

  59. ROFL I should shut up.
    Your net cost goes from $1.40 to $1.70, assuming you ended up selling the 3rd $33 call at $3.50

  60. Hi Phil " I’ve got LYG at  $7.05 (now $5.90) and sold Jan. $7.50 calls for .80 (now $.25) I’m thinking of closing call position and selling April $5 calls & puts for $2.15 What do u think?

  61. Ron Gardenhire; Twins manager; a class act …
    Boy did his players make some bonehead moves on the bases that cost them big time !
    Apart from A-Rod, Yanks did not hit particularly well.  Damon was abysmal.

  62. Shorting … today is too thin a day to be an aggressive short.  Too easy for the manipulators to jam stocks higher and squeeze.   WFMI for example.
    Some possible shorts I like at these levels:
    I think the energy names are getting ahead of themselves …
    SRS long; not much else !
    COF … one way to get short is sell the 39/41 spread or 40 calls naked.
    BIDU & AMZN getting some comeuppance today.

  63.  Phil, any thoughts on shorting CERN? It’s trading at 30 times 2010 earnings, growing at roughly 10%. It’s very expensive. It was downgraded this morning, opened lower and is trading up again. The highest target on the street is $80. Most Wall Street targets are below $60. It has gone parabollic and it’s at an all time high…

  64. FYI, Phil’s VIX trade from a few months ago is working very well so I’m going to keep rolling and stay with it over the long haul: we bought DITM DEC calls and sold front-month calls on the spikes.  I’ve done this several times now when the VIX gets above 27, and really clean up when it drops.  Check it out.  The only downer is a sizable margin hit.

  65. BIDU new low for day and dropping !

  66. GS/Drum – They are going to have a huge quarter.  Not only did they seem to call everything right but there are indications that they cashed out so I think selling puts is pretty safe.  GS has a forward p/e of 10, which is about right for an IBank and their profit doesn’t really grow that much because it all goes on bonuses so figure $230 would be a stretch for them and also figure $160 is very fair.  You have a $11 caller that’s worth $9.81 and you can roll him into the Nov $200 calls at $4.80 and $180 puts for $4.90 and those can be rolled to Jan $220 calls, now $4 and Jan $165 puts now $4.80 if you miss those.  So not a big deal and, if you don’t mind rolling, you can even start by rolling the callers up to Oct $185s at $7.30 and selling the $190 puts for $4.50 so a flatline would do very well for you and, otherwise, you can roll it to any $12 combo the next month. 

    Rally/Eric – Did you read Riholtz’s article calling this "The most hated rally ever?"  That was right on the money.  REITs are something I just can’t get behind as I think that’s the next straw that breaks our backs – but maybe not until after XMass.

    Covers/Allen – Do you mean the cover stop?   I’m saying you can initiate a bull call spread, like this one at $5.80/$4.40 by making it a 3/2 spread where you buy your 3 at $5.80 ($1,740) and sell just 2 of the calls initially ($880) and then put a "sell stop" on the 3rd call IF it drops down to $3.50 (from $4.40).  Since that will only happen if you were wrong, it’s an emergency cover that will put you less bullish.  Since the lower-priced sale is only 1/3 of your cover, it only knocks down your average sale price by .30 and your $1.40 net spread becomes a $1.70 net spread but still with $3 to the upside. 

    LOL, or I could have read Seve’s comment first and said he’s exactly right (about up)!  Thanks Steve…  8-)

    LYG/Dflam – You’re in for $6.25 net and the stock is $5.90 with your call way at $7.50 and no put obligation.  If you raise your basis to $6.50 by buying back the caller and now sell the Apr $5 puts and calls for $2.15 to end up at $4.35 with a call away at $5 and an obligation to buy another round if they perform REALLY horribly.  Nope, not enough incentive for my taste, better off waiting.  Or maybe, if you are worried, sell 1/2 the Jan $5s for $1.25, which drops you to net $5.75 with the 1/2 cover. 

    That BIDU is a wild ride!  Gotta have faith…

    CERN/Soul – Growth looks more like 20% to me but still a little pricey so I agree that selling calls is a good idea.  You can get $4.70 for the nov $85 calls and if you need to cap margin you can buy the March $105s for $2.  Also, not too much wrong with the Nov $85/80 bear put spread for $2.10 as that’s a nice return if they head down. 

    Ah, now the market’s getting "normal" looking.  Volume 83M and climbing at 2:13

  67. Okay BIDU, come to Papa!  Been waiting days for this!

  68. Just did a Buy/Write on TDG as well as a short strangle selling Nov 50 calls and Nov 40 puts. The BIG DEAL about this play that is notable: they are paying a one time divident of $7.65 / share on Oct. 26th. Record date is Oct. 14th. This play represents a very quick payback on the discount when you add in the dividend.

  69. Why the sudden market dive?

  70. Dive – I missed whatever reason there was for this…

    This is the problem with NOT covering well with bearish positions, we sure do go down quick don’t we?

    What’s the bottom line?  We may not hold our breakout levels:  Dow 9,829, S&P 1,071, Nas 2,146,  NYSE 7,047 and Russell 620 - as I said on the wekeend, that would just suck for the bulls.

  71. Dollar showing sudden strength again with a possible double-bottom intra-day. Oil has yet to break: getting a little more bearish on my USO position.

  72. Bespoke with more good charts:



    Cramer on CNBC claiming he was told Retail Sales were "off the charts" this quarter???  Is he on drugs? 

    No much of a dollar move, I’m not sure what’s justifying this drop but, then again, we didn’t know what was justifying the run-up either….  Possibly just the Jr. Bot programs can’t let it ride the way GS and JPM could.

    Just like that cliff we talked about this morning on the charts but we can easily get support back here at Friday’s close.  The only thing that matters is whether or not we hold the levels and it’s not looking so good at the moment but it could have just been one big guy pushing the sell button and then we go back to "normal."

    Volume at 2:45 is 95M.

  73. phil
    re-your gs coment of 2.13pm. i sold the 190′s at $2. is the logic still the same?

  74. Retail Sales off the charts ? … LOL !
    I was in a Target in NJ saturday …. dead.
    In fact, the whole retail corridor on Route 22 which normally would be bumper to bumper traffic was very much NOT crowded.

  75. Phil – SKF  – what do you think of selling Nov 23 put naked for $1.75, expecting Wed news to push SKF back up over 25+? I know this trade continues to disappoint, so I suggest this very tentatively.

  76. Things must be better in Chicago…Target is still slammed every day.
    Then again, Target is our Wal-Mart as Daley won’t let them build in the city.

  77. Echo?  No posts in 30 minutes?

  78. Echo? No posts in 30 minutes?

  79. perhaps Phil’s site is part of the DoS attack on SA…

  80. Mr M…. Just waiting to hear from you !

  81. Just bought some Direxion bull(sh!t) efts, counting on Hal to hook me up with a nice stick save :)

  82. VNDA from MrM – now starting to look like somethings gonna happen.  Bounced right off that support line.

  83. Pharmboy, agreed on VNDA, I’m in the NOV 10s, have been averaging down for a few days.  Sometimes they rocket right to 15 during OpEx week.

  84. Phil,
    Feeling more bearish on today, or are Tue / Wed earnings too much of a wild card ?

  85. Check out the SPY and QQQQ October put volume today (on the ‘action tracker’ index tab below). A whole week drifting like this would be just perfect for the option shorts, lol.

  86.  On such a busy news day, I’m sure most of you may have missed this:

    New York City - AP  October 12, 2009
    The Downtown Athletic Club, in a surprise announcement, has awarded the Heisman Trophy…named after legendary college football coach, John Heisman to President BARACK OBAMA.    White House press  secretary and master spin artist Robert Gibbs, when questioned about who this could have happened simply said…"Well, he watchedthe Florida-LSU game on TV on Saturday so he obviously was deserving of the award.   This coming on the heels of his surprise winning of the Nobel Peace Prize is another affirmation of his overwhelming popularity and clearly shows that he’s on a roll."

  87. In MHP Jan10 17.5 – 25 bull call spread. Looks like it can be closed for about 7 on 7.50 spread so not much juice left in that one. Would you close out or make adjustments? Seems like too much time left to hold onto as is for .50 upside.

  88. NLY: I know it’s a REIT.  But is it some kind of partnership so that I get K-1 (or any tax forms) at the end of the year, if I own the stock even for one day?
    I bought stocks on some publicly traded LPs (Limited Partnership) before.  I lost money and then I had to deal with those crazy K-1 forms.  If I do tax returns myself, it costs hours of my time.  If I turn them to an accountant, it costs tons of accounting fees.  So, I am trying to avoid anything that will give me any such headaches.

  89. Woops – finallly got my web connecition back on.  Went down for a while, not DOS, the whole cable was down…

    That was interesting at the end and not the finish the bulls were looking for but nothing definitive either.

    GS/Drum – Sold which $190s for $2?  That sounds low.

    SKF/Concreata – Selling the put I hope.  Sure I like them down here but it’s rough shorting the financials.

    Today/JRW – Didn’t really count as the volume was so low.  Finished with just 157M shares and back where we started more or lesss. 

  90. Phil what CB Radio channel should we tune to if your web connection goes down again someday? lol

  91. Oveeall, we are over our levels on all but Nas and RUT and you do have to respect that, even though it was a weak finish.  It’s not gung-ho bullish but it’s alson not a signal to go short. 

    Seeking Alpha STILL having trouble, that’s strange.

    MHP/Roaster – You are right, much more to lose than gain so may as well cash out at $7 with a nice, early profit.  Now you can see why I was banging the table on those guys…

    Headaches/Cwan – I agree with that!

    CB/Eben – LOL, that was messed up.  I would have gone to SBUX with my laptop but the cable guys assured us it would be right back up.  So I figured by the time I ran out it would be silly.  That is funny though as we were down and the site I count on for a back-up was down too!

    Now I have to run to a meeting, will catch up later.

  92. Phil-sold the Oct 190 GS at 2 on oct 6 when gs was 180.

  93. BAC – haven’t got back to them lately.  I’m eyeing the following play: buy stock for dividend, and buy BAC Jan’12 20 PUT for protection, totaling $24.35, $4.35 of which is extrinsic for 27 months.  Since the analyst target is $30 for BAC in a year, anything above $24.35 is profit, and the most we can loose is $4.35 minus whatever dividend is for 27 months.
    Then we’d look to recoupe the $4.35 by selling front month short PUTs and CALLs, such as Nov 15 and Nov 21 for $0.47, but I’d wait until after earning to get into both the stock, the long PUT and the shorts.  We don’t have to sell the shorts every month.  If the analysts are right with the $30 price target in a year, $40 in two years, it’s a nice 60% profit with no selling of shorts, or 100+% with selling of shorts for 2 years.  The PUT protection would make us sleep easier too.  The one draw back is when the stock price is higher than the PUT strike of $20, selling short PUT for strikes above $20 would require additional margin, which is equal to the difference between the short and long PUT strikes.
    If BAC drops after earning, we can buy a lower strike long PUT and have a lower breakeven point. You can leverage up 2x and buy Jan’12 12.5 CALL instead of buying the stock.  The long CALL makes up a long strangle with the Jan’12 20 PUT, and the CALL has $2.66 extrinsic, meaning it takes more selling of the shorts to break even, and you’d get no dividend.  I’d just buy the stock itself.
    This works for WFC, JPM and other banks.

  94. GS/Drum – Because of earnings, they will hold their value so you are playing very tight for a miss.  I think you are better off doing the roll to the Nov $200s now or maybe the $210s at $2.45 with the $170 puts at $2.35 as well.    Of course you could just go for it and sell the Nov $195 calls for $6.70 and the $185 puts for $6.70 and that’s a b/e range of $171.60-208.40 (not counting the $2 you are already out).  It depends on how long you want to mess around with them…

    BAC/Peter – At the moment, divdend is .04 so not enough reason to collar the stock to me.  I’d rather go 2x the 2012 $17.50/22.50 bull call spread for $1.80 ($3.60) that pays $5 ($10) at $22.50 and sell 1x the monthly straddlle (Nov $17.50s are $2.30) as I doubt BAC jumps $5 in one month and, even if it does, I make $6.40 on my longs so I don’t mind giving the caller $2.70 more than I collected.  Meanwhile, there’s only $3.60 at risk on the long side and $20+ of collections ahead and, if it’s put to you, it’s still cheaper than buying it

  95. Here U go MrM –
    Novartis, Vanda in deal worth up to $265M that lets Novartis sell Fanapt in US, Canada

  96. VNDA – Looking at the deal now, seems light to me for a $12B world market.  NVS gets only the US/Canada selling rights, and can opt in for the rest of the world.   NVS sold the compound to another company years ago, VNDA picked it up, failed in one trial in 2008, and were down to 45c.  Look at ‘em now, smiling all the way to the bank.

  97. as i was reading, I was posting all over the place, sheeesh!  Nice for me though, and MrM…I am sure.

  98. BAC, good call Phil.  For impatient traders, we can do Jan’11 $17.5/22.5 bull call spread for $1.9, and only have to wait 15 months, instead of 27 months. 

  99. Phil
    I altered my SKF position(24/26 NOV @1.05) and heres what I own now BOT today.
    10 NOV 22 CALLS
    -16 NOV 26 CALLS
    10 NOV 32 CALLS
     What would you reccommend if the financials do well after GS and JPM?.In other words what would be an exit strategy? I am not holding this as a hedge.
    Secondly, does anybody know if Meredith Whitney released Q3 expectations? She has a write-up about loan modifications rising in the last quarter by 140% but I do not know the contents.
    Thirdly, what kind of exposure do our banks have for eastern europe? Is that a shoe that can drop?
    Thanks again. 

  100. BAC/Peter – At $2 a month in premium sales, I wouldn’t want to let it go…

    SKF/Chakra – You should keep tight stops on the $22s and let it tiurn into a bear call spread if SKF breaks down.  Don’t forget it’s not all or nothing, you can stop out 1/2 at $2.50 and 1/2 at $2.25 and then put back 1/2 at $2.50 if they head back up.   You can also sell a FAS $84 put for $9.50 to offset a lot of damage on SKF. 

    More stimulus: An extension of the $8,000 first-time-homebuyer tax credit past its Nov. 30 expiration is "very close," according to Mortgage Bankers Association Chairman David Kittle. How exactly it would happen is unknown; more than 20 bills have been drafted about the credit, including plans to give it to all home buyers or increase it to $15,000.

    Taxpayers’ costs in the global crisis have been exaggerated, says Goldman Sachs (GS) chief economist Jim O’Neill: “It’s suddenly become very trendy to be the toughest person around, whether you’re in the private sector, or in government, or opposition, as to what we’re going to do about the deficit … We need to get growth back, and then we can have a more sensible look at what the true fiscal position is.”  In my case, he continued, my fiscal position is filling my swimming pool with $100 bills I got as a bonus for spewing this kind of BS to justify our raping of the American people.

    If call options on the XLF banking-sector ETF are anything to go by, there are expectations for big earnings from the financial companies reporting this week, including JPMorgan Chase (JPM), Citigroup (C), Goldman Sachs (GS) and BofA (BAC).

    Barron’s says a legal challenge to the much-reviled Sarbanes-Oxley legislation, if successful, could have widespread implications: "Stocks initially might soar because SarbOx imposes significant costs on publicly traded companies. Afterwards, however, the markets might have second thoughts: Congress could make the law even tougher." And then there’s investor mistrust.

    More than $1T in corporate bonds have sold this year, the fastest pace on record, led by Citigroup (C) and the finance unit of GE (GE). The biggest year for bond sales was 2007, with $1.17T, and $873.2B sold in 2008. Some money-manager cognitive dissonance could be helping to push the numbers.

    No letup in credit tightness for small businesses, as many banks aren’t expecting to loosen standards before the middle of next year. Economists say high risk aversion is to blame, rather than lingering crisis effects, as banks await losses in CRE and credit cards before loosening.

  101. I have what is likely a silly question, and hopefully just an oversight.  I’m having trouble figuring out what Phil means by the following:
    ENP (10/8) is a nice little E&P operation but they zoomed up on me, probably for good reason.  Even at $17.43, they pay a $2.05 dividend (11.7%) and you can sell the March $17.50s for $1 and sell the March $15 puts for .90 for net $15.53/16.51
    So, the underlying is 17.43, and net credit 1.9 for the sale of the put and call sides.  Silly question time – The $15.53, thats the price of the underlying if you were to exercise?  The $16.51 is the cost if you are assigned?  I understand how we get the $15.53, and the $16.51 (underlying+strike) * 0.5 + (call credit + put credit) * 0.5, but not sure I get what it means…
    Thanks in advance (newbie to the site)

  102. Phil – sorry, just read you last post on the BAC 2012  Jan 17.5/22 spread.  I understand the bull spread…on the 2X side, R U referring to selling 2X 17.5 and 1x 22, while selling 1X straddle at 17.5 (or whatever is $2 – Not quite getting the 6.4 on the longs.  Thx.

  103. Dlast – 15.53 is if called away by your caller (17.43 – 1.9  =15.53) – so you understand that one.   If the puts finish in the money, stock will be put to you – so say 100 shares — call side (17.43 – 1.9) +  Put side (17.5) = (15.53 + 17.5)/200 = 16.5….

  104.  Phil,
    What are your thoughts on YRCW buy/write for the Nov 4′s, $2.41/$3.21?

  105. Many Thanks Pharmboy.

  106. Welcome Dlastor!  Wow, for a newbie you certainly seem to have the buy/write down very quickly.  The notation $15.53/16.51 (which is incorrect, but we’ll get to that next) is, as you thought, the net entry cost of X shares and constract/the average cost of 2x shares if the stock is put to you at any price below (in this case) $15 – the March puts you sold.  While we may make adjustments along the way, from a risk standpoint, we treat it as a static event so we have $17.43 – $1.90 = $15.53 is the net entry price.  That let’s us know we’ll make $17.50 (the call strike sold) less $15.53 = $1.97 (12.6%) if called away.

    On the other side, we are in our first 100 shares at $15.53 but we have the obligation to buy the next 100 shares at $15, which is the strike of the puts you sold.  That means your average cost on 200 shares would be ($15.53 + $15)/2 = $15.265, which I always round up so $15.27. 

    The great thing about the buy/write strategy is it’s like scaling in for dummies as it forces you to take your steps over time.  If you have $5,000 to spend on ENP then you see this trade and say, yes, I wouldn’t mind owning 200 shares at $15,27, which is 12% lower than it is now.  So you buy not 200 shares but 100 shares in the above buy/write and if you get called away at $17.50, you make $1.97 plus $1 in dividends or 19% between now and March.  If ENP falls below $15, you will end up with your 200 shares at $15 plus your $1 dividend for a net net of $14.77 on 200 shares ($2,954 of $5,000 sprent).

    If we follow this through to the next round, aiming to buy 200 more shares down around $12.50 avg, then you would end up fully invested with 400 shares at an average of $13.63 ($5,454), which is 100 more shares (33%) than you could have bought if you had spent the whole $5K on day one at $17.43.  Since we very often get called away with a profit, people tend to forget that a buy/write is an OWNERSHIP strategy.  We REALLY want these stock at the discount prices BUT, if they are going to give us a quick 20% profit, we’re not going to turn it down.

    Another issue people have is impatience – which is also bad with this strategy.  By deploying little capital in stage one, you leave yourself with plenty of cash and you are not over-committed.  However, even in this relatively tame example that takes 6 months to make 20%, if 25% of your portfolio makes 20% twice a year (you get called away from everything with a quarter position), that’s still a profit of 10% on your entire portfolio over the year and you have barely touched your cash. 

    The biggest flaw in doing this with dividend stocks is that the main reason dividend stocks dive is that they cut their dividends so your stock flies down and there are no bonus collections.  This is why I look very carefully at the cash positions of my dividend selections and ENP does not pass the smell test as they lost $37M last Q and they have too many wells producing too little product to make money in a low-price environment.  They dropped $30M of cash off the balance sheet last Q and their A/P is growing faster than their A/R and debt is up $13M as well, even though they raised $40M by issuing more stock and borrowing $10M. 

    Essentially, this company is going into debt and draining cash in order to keep up their dividends.  That will be fine if oil and nat gas jump another 30% and return them to their former glory but, if not, you can expect a dividend cut and another sharp dip. 

  107. BAC/Pharm – No, it’s 2x the $17.50s and selling 2x the $22.50s for net $1.80 each so $3.60 for the two spreads and if BAC goes to $22.50, they each pay me $5 so $10 for the two is a $6.40 gain at $22.50.  That then becomes the upside protection for the calls I’m selling so I don’t really need to buy the stock as it’s VERY unlikely that BAC is going to blow through $22.50 so fast that my caller buries me and a sudden buy-out of BAC for a 30% premium (which still wouldn’t kill me) is pretty much out of the question. 

    So I’m risking LESS to the downside ($3.60) than I do with the stock at $18.03 and I make 50% more up to $22.50 than owning the stock.  Of course there’s the time factor etc so it’s not as simple as all that but the concept is that you have a MUCH cheaper way to protect yourself and, effectively, you are just selling naked strangles each month with the long calls acting as an upside hedge so it’s generally a pretty bullish play on BAC, which is fine if you don’t mind having it put to you at $16.

    YRCW/Calch – I’d wait for CSX earnings tonight and see how the transports respond tomorrow.  In a vaccum, I like the play. 

  108. Watch List is updated.  Now let’s see if we can hold our levels today so we have a reason to buy something.

    Gold is going crazy again, $1,067 and oil is $74.  We’re back to ridiculous manipulation again as the dollar fell off a cliff against the Yen about 30 seconds after the Nikkei closed. 

  109. Gotcha, thx, my brain was not working well last night…

  110. Pharmboy: Did a bull spread on SPPI  Feb. $5/$7.50. Now  ouy of $ 7.50 and have net loss of $1.00. What’s next ?  DD now,hold, or bail out? thanks