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Defending Your Virtual Portfolio With Dividends – Q4 (Members Only)

In uncertain markets, dividends can give you a critical investing edge.

As you can see from the chart on the left, just mindlessly investing in dividend-paying stocks can give you more than a 2:1 annual advantage in your investments

Of course, here at PSW, we teach the art of selling options premiums – something that turns virtually any stock into a "dividend" payer.  For example, MSFT is only a small, 2% dividend-payer but a fairly solid cash-machine of a stock that we don't feel is likely to go bankrupt overnight so it makes for a nice safe staple in a long-term virtual portfolio.  But MSFT is also a very poorly-run company that hasn't grown in 20 years but we can make it a much more interesting stock by simply selling covered calls.

For example, in our August edition of Dividend Payers,  we looked at MSFT for $24.23 and we sell the Sept $24 calls for .77.  This lowered our effective basis to $23.46 and selling the call putus in no special danger – we simply agreed to sell MSFT for $24 on expiration day in September (the 17th).

The stock was called away from us, and we made a .54 profit or 2.3% of our net $23.46 cash investment in less than 30 days.  That works out to a 26% annualized ROI and we had an opportunity (as we had expected) to buy the stock again and again at $24 on Oct 4th and 5th and sell the November $24 calls for .90 for a net $23.10 re-entry and ANOTHER 3.8% GAIN if we are called away at $24 or greater on Nov 19th.  Doesn't that beat waiting a whole quarter for your 1% dividend checks?  

Of course, you can optimize all this with timing and we favor stocks that are on sale – this is just a very simple example of how our most basic options strategy can drastically boost your annual returns on any stock in your virtual portfolio.

Let's say you don't want to mess around with MSFT every month.  You could have simply sold the 2012 $22.50s for $4.40 (also suggested in the August post), that dropped your net entry from $24.23 to $19.83 and getting called away at $22.50 would be a profit of 13.5% over 17 months PLUS you would be getting your .52 annual dividend so let's call it .75 more for a total profit (if MSFT holds $22.50) of $3.42 or 17.25%.  1% a month certainly beats what the banks are offering these days as well as the dividends paid by most stocks!  Not as sexy as the 26% ROI you make by working the trade every month but you do get a built-in cushion that drops your break-even price to $19.83, which is a full 18% below the current price.  So MSFT would have to fall 18% (not including the .75 dividend) before you are even behind on this trade

Would making 1% a month on your entire virtual portfolio have enhanced your lifetime earnings?  If so, you should probably be using  this strategy whenever possible, right?  Here's a nice chart showing average annual S&P results for each decade:



Dist. Rate
Inflation Real
Price Change
Total Return
1950's 13.2% 5.4% 19.3% 2.2% 10.7% 16.7%
1960's 4.4% 3.3% 7.8% 2.5% 1.8% 5.2%
1970's 1.6% 4.3% 5.8% 7.4% -5.4% -1.4%
1980's 12.6% 4.6% 17.3% 5.1% 7.1% 11.6%
1990's 15.3% 2.7% 18.1% 2.9% 12.0% 14.7%
2000's -2.7% 1.8% -1.0% 2.5% -5.1% -3.4%
1950-2009 7.2% 3.6% 11.0% 3.8% 3.3% 7.0%



Notice the inflation the Government keeps denying is a actually 3.8% for the past 60 years and is still 2.5% despite all the talk of deflation.  That means, if your money isn't doing SOMETHING to make at least 2.5%, you are falling behind every day.  Of course, putting your money in the market for the past 10 years hasn't helped, without dividends that would have cost you an additional 2.7% of your cash!  Notice that in EVERY decade, our very simple combination of dividends plus call selling would have kept you above both inflation and market dips – IN THE LONG RUN.   

I emphasize IN THE LONG RUN both because it's a great Eagles song and also because most investors are way too short-term focused and forget to look at investments as….  well, investments.   Using a simple Compound Interest Calculator, you can take $10,000, add just $5,000 a year for 30 years at the average real total return (ABOVE inflation) of 7% and that nets you $581,487.76 inflation-adjusted dollars to retire on.  This should be the base goal of any investor – simply make sure you have a conservative base to build on. 

Keep in mind that selling covered calls adds no risk other than you may, potentially miss a big move up in the stock as you have already promised to sell it for "just" (in the MSFT example) a 26% annualzied ROI but are there ANY decades where the market gained 26%?  No, of course not.  Just change that 7% figure in the calculator to 17% and watch what happens when you hit the "calculate" button - $4,898,165.34!!!  Don't you think this is a strategy that deserves some of your attention?

Is this realistic?  Of course it is!  If people would get their head out of the short-term trading BS and concentrate more on their INVESTING, the World would be a far better place.  Few people plan for the far future but look at this chart of what 8% in a Roth IRA can do for your children's children.  Do you need a new Mercedes or do you need to leave a family legacy?  

Hopefully, I've done enough to get your attention so that now we can look at some boring, slow-moving, dividend-paying stocks in a better light.  It's all well and good to have fun playing the short-term market moves but, without a solid base in your virtual portfolio that is delivering consistent annual returns, the risks can be unacceptable.  Short-term trading can be wonderful as we can hedge our longer-term positions against market downturns or we can take advantage of aggressive up moves in the market that will be calling away our longer positions but, in both cases, the short-term trading is the fine-tuning that is meant to lock in those 8% annual returns (hopefully better!) that will make you a family legend for generations to come.  

Our last set of picks is, of course, 100% successful as we stuck to "safe" Dow plays when the Dow was 10% lower, my comment at the time was:

"In the grand tradition if KISS (Keep It Simple, Stupid), let's start by looking at the Dow's top dividend players.  We like the Dow because it's easy to hedge with our Mattress Plays (see "The Stock Market Parachute" as well as commentary in our Strategy Section).  T, VZ, BA, HD, KFT, MRK and PFE are generally the best payers and, in establishing a long-term virtual portfolio with a dividend strategy, it's good to keep an eye on your diversification.  Since we are selling covered calls as well, we also take into account which option sales give us the most bang for the buck and, of course, which stocks represent a good value at the current prices.  That knocks MCD, XOM and CVX off our list as they represent more of a gamble and, if we are going to gamble – we can do A LOT better than 3%

I'm not going to review the whole thing but I led off saying BA was the best at $63.16 (now $71.26).  It was 10 for 10 on the rest with VLO, XOM and EXC added in the comments that same day (8/29).  I hate it when I have to do a follow-up to a perfect post as the pressure is on to do it again so I wlll caution now against runaway expectations because this is not the same market we had in late August, when we were very confident we had formed a playable bottom.  As we did last time, we are using buy/writes for the spreads.  You can opt NOT to sell the puts, of course – it will simply lower the returns but if you can get 17% in 17 months – that's PLENTY and that's all we look for in our Dividend payers (now looking for 15% in 15 months with 2012 hedges). 

Sadly, the Dow is no longer cheap, and, while I do favor cash in this market, if we continue to have a runaway Federal Reserve that is hell-bent on devaluing our cash assets – what choice do we have but to BUYBUYBUY – at least enough to guard against the inflation that is robbing us of our savings?  Last time I got away with very little company description for our trade ideas as they were all Dow components but this time we're bargain hunting so forgive a little color commentary with the picks but I'm not here to sell you the stocks, so just quick notes:

CTB makes replacement tires and, with auto sales way down, at some point all these older cars are going to need new tires.  Revenues have been growing at a 25% clip despite the recession and the company is expanding internationally.  This company dropped like a rock in the crash so not for the feint of heart but you can buy the stock for $20.46 and sell the May $17.50 puts and calls for $6 and that nets $14.46/15.98, which is a 22% discount to the current price and that makes the little .42 annual dividend a whopping 3%, which isn't sexy but you do net an additional 21% profit in 7 months if you are called away at $17.50, which is 14% LOWER than we are now.  

NGG was on my Watch List in August but they had just popped from $37 to $42.50 so I figured we should wait for them to come down, now they are $46.35 and I STILL like them!  NGG is an electric and gas infrastructure (transmission) play in the US and UK.  Nice, steady business, good profits and a 7.7% dividend paid twice a year (June and December).  After paying a $1.77 dividend in June the stock fell $4 so be ready for that!  Since we expect a dip in Dec, selling the Dec $45s for $2 makes sense and those can be paired with the sale of the June $40 puts for $1.50, which nets a reentry back at net $38.50, which is where we wish we had gotten in in the first place!   So net $42.85 on the buy/write and collecting about $1 (2.3%) in December makes for a pleasant couple of months, with another $2.15 profit (5%) if called away at $45 – that's how we turn a 7.5% Annual dividend payer into a 7.5% Quarterly dividend payer!  After the dividend dip, you can take out the Dec caller and sell some June calls for more premium.  

PVR is an old favorite of ours as they have some very fun dips they tend to recover from.  The last fun dip was during the "flash crash" when the went from $23.50 to $9.82 and then back to base at $18 in May before climbing back to $25.60.  So I'm not as gung-ho as I was before but they control (leases) of 829M tons of coal (collecting royalties) as well as a nice nat gas pipeline business.  Not the best call options to sell but the May $25 calls can be sold for $1.45 and the $22.50 puts can be sold for $1.40 for a net $22.75/22.63 entry – just a 10% discount but the 7.5% dividend will soften the blow and that 10% is for 7 months anyway….

BMY is a long-time favorite of ours and is no longer cheap but, even at $26.96, the $1.28 dividend adds up to 4.7% a year, which is nothing to sneeze at (get it, drug co – sneeze!!).  Earnings are on the 26th and you can hope a miss of some sort gives you a cheap entry but I say blow off the dividend and let's look at buying 2012 $20 calls at $7.30 (which is just .34 of premium) and selling the 2012 $22.50 puts for $1.80 and the Jan 2011 $27 calls for $1.10 which is a net of $4.40 on the $7 spread so a nice 60% profit if you get called away is better than the dividend and don't forget you own the calls so you can demand ownership of the stock at any time for $20 more, which would put you in a traditional buy/write and let you begin collecting dividends.  The benefit of starting with the spread is you get a bit more protection if they do miss and, if they hold $22.50 through Jan 2012, your net entry if you pull the stock into a 2013 buy/write is $24.40 on round one (10% below current price), less whatever additional calls you sell in 2012.  


Good time to remind you:  We do not necessarily get called away at $62.50 - we can execute our Rawhide Strategy of "Rollin' rollin' rollin'"…  Had we sold, for example, the August $60 calls and decided we did not want to get called away, we could still roll the net $4.60 caller out to 2012 and collect net $8.70.  Presumably, we would have a far lower basis and you will find this happens over the years as you build your virtual portfolio as it would only take 8 rounds of collecting net $8.70 against your BA shares to lower your net basis to zero – at which point collecting $1.68 in dividends starts seeming like a great deal!   And what do you do with the cash?  Buy more dividend-payers of course! 

This is how we "compound" our virtual portfolios over the years, we sell options and collect dividends and use them to buy more stocks that we can sell options and collect dividends against.  That brings up another thing we are not discussing here – the naked put sale!  This is the key to our Buy/Write Strategy (see "How to Buy a Stock for a 15-20% Discount") and I am 100% in favor of it but this is a post for the IRA crowd, who do not get the full benefits of selling the naked put side (and are often not allowed to) so we're concentrating on the basic strategy – feel free to ask if you are interested in the more advanced versions.


PFE makes for an interesting conservative buy/write as they are still pretty cheap at $17.50 but still pretty volatile.  Selling the 2012 $15 puts and calls for $4.65 drops your net entry to $12.85/13.93, which is 20% off even if put to you.  If PFE manages to hold $15 (not lose 20%) by Jan 2012 expirations, then you get your .72 dividend plus $2.15 in profit on your $12.85 investment for a very nice 22% return.  This is what I'm talking about – you MAKE 22% EVEN IF the stock drops 20% – THAT'S the way to construct a conservative virtual portfolio!  

JAG doesn't pay a dividend but, as I demonstrated with MSFT, you can pay yourself a dividend by selling calls.  JAG came off my watch list because they ended up with the Gurupi Project in Brazil, which has 1.4M ounces of proven reserves, which is 3x more than Jags market cap.  They sort of lucked into owning this as, over the years, the $550 per ounce extraction cost had caused various operators to walk away so this is a bet on gold staying near or above $1,000 long-term.  Very simple buy/write with the stock at $6.46, selling June $7.50 calls for .85 and the $5 puts for .50 is net $5.11/5.06 with a nifty 47% profit if called away in 7 months and, if not – do it again and you've got a long-term gold hedge with a good chance of collecting 50% annual dividends.  

HRB cannot be less loved at this point.  This is very much about the demise of "rapid refund" which was a big source of revenue as well as fears they have sour mortgage loans due to Foreclosuregate but, strip that away and you still have a nice little company that pays a nice 5.6% dividend.  We did this one during the week and the stock is now $10.78 and you can sell the 2012 $10 calls for $3 and the the $7.50 puts for $1.80 for a net $5.98/6.74.  It is VERY possible that they drop enough to concern you so make sure you REALLY want to own 2x at $6.74 (37% off).  $6.74 makes that .60 dividend close to 10% a year on the best known tax preparation service in America that has learned their lesson and will be more likely to stick to the knitting from now on.  

FHN used to pay a dividend but hasn't since March, 2008.  They did a 66:16 reverse split in September and announced a dividend of 1.8% payable in new shares to holders of record on Dec 10th.  It will be messy if you don't own 1,000 share blocks though.  So this Tennessee-based bank is a LONG-TERM recovery play but I think if they put those dividends through for a couple of quarters, interest will perk up.  They repaid $8.5Bn in debt in '08 and '09 and took a big adjustment in June but they are sitting on $5Bn in cash with $21Bn in investments with just $23Bn in liabilities yet their cap it just $2.3Bn – priced for liquidation.  At $9.93, 1,000 shares will set you back $9,930 but you can get $1,500 back for selling 10 May $9 calls fro $1.50 and another $900 for selling the puts for .90 so that's net $7,530 for 1,000 shares and you'll get bonus shares in Dec and a 19.% profit if called away at $9 (10% below current price) or an average entry of $8.27 on 2,000 shares if they fail to hold $9 at May expiration, which would price them 15% below book value.  

HCBK does pay a 5.2% dividend and they are location, location, location for me as a NY/NJ bank servicing the top 10% suburbanites in the North.  I've always liked these guys and I love them when they are being sold off on fear and lumped in with all the dumber banks.  At $11.53 a share, you can play this safe and sell the 2012 $10 puts and calls for $3 to make a $8.53/9.27 buy/write which pays 17% plus the dividend if called away at $10.  I like them more than that and prefer the riskier sale of the $12.50 puts for $2.10 along with the $2 sales of the $10 calls which give you net $7.43/9.97 so not too much more upside but a great 34% if called away at $12.50 in exchange for a much greater risk of assignment at .70 per share more.  Keep in mind that, since you are doubling your return on the riskier strategy, you can bet 1/2 as much in the first round and diversity is key with the financials because you just do not know what dirty little secrets they may be hiding…

MTB caught my attention because they dropped over 20% since September because all banks are evil or whatever.  They just put out nice numbers and no one cares.  Deposits increased, impairments are down, loan-loss provisions have decreased and write-offs dropped by 1/3 and no one cares.  Well I care!  Investors have turned prejudiced against banks and it's a heck of a good opportunity to buy some and Buffett owns MTB so I like the partners.    At $74.44 you bite off a lot to get involved so it's more of a set and forget play, selling the 2013 $70 calls for $14 and the $60 puts for $10 which is net $50.44/55.22, a 25% discount if put to you and $50.44 makes the $2.80 annual dividend 5.5% while you wait so that makes for a 36% downside cushion before you even buy a hedge.  

OK, that's 10, which is good for now.  We'll look at more during the week and please, Please, PLEASE keep in mind that I'm not all gung-ho to buy anything right now but, if we are going to hold those 10% lines and move higher, then we'll need something to guard against inflation and these are a good place to start.  


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  1. Phil and/or Gel- FX markets- I assume you saw the "flash crash" late Friday. It looks as though this happened just after the New York markets closed? Can you shed any light on what happened?

  2. My posts from late last might in case you don’t go back to that thread:
    I need some behavioral finance therapy and direction here. Remember my GOOG positions that I had rolled down then "lost faith at the point of greatest financial opportunity" and prematurely covered? I missed out on the initial run then rolled up the previous calls to NOV 540s and also missed the pop on earnings. I could have made at least 20K on that trade. I’m pretty rattled and angry about the whole mess. I closed that out today…didn’t see any profit to be had and couldn’t stand to look at it anymore. Anyway, I am still 150K in stock, all covered but rolled up my SPY shorts from last month to 28 Nov 118s and my TZA puts to 18 Nov 21s. I also have 5 DXD Jan short puts and 4 DIA 105 disaster hedges. Basically 1% up in the market equals about 1K down in portfolio value. I have faith in a sell-off eventually and want to stick with the short side but if we moved up 5-10% from here, it would hurt. So, I sold 10 TNA Nov 49 puts as a partial cover to my bearish bets. However, I feel it is not enough as my account still goes negative as the market moves up and I will be extremely upset if we go up 5-10% and I just watch it happen without making SOME profit. So, I am very tempted to add about 20-30 more TNA puts but I don’t want to go neutral and negate the sell-off I’ve been waiting for and make the same mistake, capitulating when I am so close to realizing my trade goal. Yet, there is the very real possiblity that we run up on QE or elections. I know you are in more of a wait and see mode but my portfolio is not balanced that way right now. Please advise.
    and another thing!  :-)   I’m not good at the trades where you say put on such and such a momo play and kill it if we cross this line. I’m not watching the markets all day, everyday as I have kids to get from school and part-time jobs and such goings-on around town on a regular basis. So, I am much more comfortable just selling premium that can be rolled and doesn’t have to be watched so closely. (Hence, the TNA puts I chose). I know this violates your rule about not selling puts you don’t want to own but with the "rollability"  of those and all the shorts I have going (so no additional margin requirement…actually takes it down I think) and that I am only at .85 leverage, I think it is a reasonably safe strategy. I don’t know where I’ve been going wrong but I need to make some real money here. If I said here is 250K, make 5K per month without taking too much risk, that doesn’t seem unreasonable, so why am I not doing that? I have a lot of good stock positions (XOM, ZMH, VZ, etc.) but don’t now feel comfortable turning them into round-two buy/writes because I am afraid to commit my remaining cash in case good opportunities come up. I almost want to close everything out and start over. It seems like I might be better off not owning anything and using all my margin and buying power just selling premium that is farther OTM but safer.

  3. Phil,
    I still have the Nov QID 13/15 bull call spread. Do you think it is too early to roll to Dec or should I wait to see which way things go after the election/fed the week after next? The spread is almost out of the money, the Dec 13/15 is about a $.05 roll and the Dec 12′s are awful rich @ $1.45

  4. "Doom-and-gloomers, take note: Of the 139 S&P 500 companies reporting results so far, 83% posted earnings that topped forecasts – better than the typical 62%. It’s not just cost-cutting either: Revenue growth is "across the board" and running about 7% ahead of a year ago."
    "Forcasts were made 14% ago on the Dollar – Geeze, does no one get this?"
    Earnings- so far, the numbers look good as expected and generally, guidance for EOY is positive. No read yet on outlook beyond yr end, though.
    We can make too much of the dollar/bond-stock/commodity relationship. The theory says one thing and the markets quite another – especially in the short term. They don’t move in lock step.
    My view is that Mr. Market is saying " we like it up here" as long as rates are low and earning/cash flow is steady.

  5. Pstas / FX Flash Crash
    Cause ??? – I dunno. It must have been either a software glitch ( my guess ) or possibly a massive sovereign sell order, or buy order that was either purposively miscalculated or placed by mistake… wrong decimal placement ???. I have three trades in place at the moment involving either the USD or the EUR, and I was not stopped out, and should have been given the movement in the currencies. Very strange! 

  6. Pstas / Market Forecast
    Looking forward, one must always try to determine what lies ahead as the probable direction of the market, and of course the legitimacy of the drivers that propel the direction.  Many of us watch the charts and say " wow ,  the market has reached its channel top – time to short" . Maybe so, but first analyze the drivers behind the upward moves.
    Since mid August, the market has climbed 12%, representing one of the fastest recoveries in history. So what is the reason, and will it continue? Firstly, as you have cited, earnings are very good with 83% of those reporting, topping estimates. Corporate America is healthy at the top ( large corporations ). This is a strong positive that will continue, as the reporting corporations have found a way to be profitable in a weak economy, mostly through good management practices. The other cause of market exuberance, over this period since mid August, is the Fed implimentation of its POMO program to purchase long dated treasuries. The idea behind this program is to "return inflation" over time, and the Fed has targeted enough liquidity to achieve 3% inflation, no matter what the consequences might be. The Fed is buying these treasuries on schedule. and the money supply (M2) has doubled from 3.5% to 7.4%.
    The combination of low interest rates and low price inflation is every Fed chairman’s dream, as it is very positive for the stock market, as well as the economy. ( Milton Friedman was the cheerleader for this theory, and it has worked in the past – usually six months later ) Phil may not agree…. but the numbers prove it out.
    This POMO activity, will continue for some time…. and the USD will become " the bastard child" but we will see lots of action,( lots of nice currency plays as well over the next few months ), and for sure the markets will be happy. I believe in hedging, but with this much positive upward market catalyst, I am being very careful about any of my shorts, and will let my long positions ride it out for a while longer, until I see a reversal signal.. The Fed will own close to $1 Tril. of the Treasuries before this is over…. Our TBT wishes are on hold for some time to come, but when the dam breaks, the yields could really fly ( along with TBT ).

  7. New post on ARIA and TSRX here.

  8. Comments from Friday’s chat – some important points worth a re-post here

    Good morning!  

     Levels/Jordan – Hopefully I can get to that today.  On the one hand it’s easy, you just add 14% to everything and that means we’re still in the bottom of our range on real movement but that doesn’t tell the big picture or give us an idea of the fair value of the dollar – which is necessary in order to project forward levels.  Then we need to take into account that the bots don’t really care about the international relativity of value – they are just pushing TA on US charts so the whole thing is very mitigated.  On the whole, I would guess that the devaluation of the dollar, assuming we hold 76 – it probably only likely to warp the top of the range – making it easier for us to spike over but it won’t really change the range much.  

    DX/Boobear – Possibly a flush before DX goes higher.  I can’t see the G20 resulting in the dollar going lower.

    Speaking of futures – the RUT (/TF) took an interesting dive last night.  They are the only futures contracts that had any acivity but it was all down

    Wipe out/Amatta – It depends on where your profits are.  If you entered a buy/write down at 10,200 and it was a normal one that makes at least 20% if the stock simply holds its value then you probably have a 10% cushion before your profits are in peril and a 30% cushion before the spread loses money.  So the question is do you like it enough to ride out a dip.  We have many many downside plays to take advantage of a dip and 30% is probable not going to happen overnight and may not happen at all so, as long as you have plenty of cash on the side, you can get more bearish WITHOUT giving up on your longs.  Just make sure the longs you have are ones you won’t be losing faith in if the market does a major dive.  

    Reid/Cap – Good job.  Your smear tactics have gotten so disgusting that now a group has formed in Nevada called "Republicans for Reid."  

    “To lose Sen. Reid would be catastrophic for Southern Nevada,” Rogich said. “We need Harry Reid at the table. He’s our only leverage. If we elect Sharron Angle, it would probably be the most embarrassing moment in Nevada’s history.”

    “I’m a little confused still, to be honest with you. I think it’s absolutely frightening that these are the candidates we get,” said Sam Francovich, owner of the Grill at Quail Corners, a Reno restaurant. “But from everyone who’s running at this point, he’s the best choice we have.”

    Perhaps no one on Reid’s list is more aware of this than state Sen. Bill Raggio, who has endured a cavalcade of calls to remove him as Senate minority leader, a position he was expected to easily retain.  

    “The short answer is, I issued a news release, and that’s all I have to say about it,” Raggio said. “I said what I thought about Reid, and that I was reluctantly willing to vote for him. 

    “I’m sure there will be some criticism,” said state Sen. Dean Rhoads, the most recent addition to Reid’s list of Republican supporters. “But I’m not too concerned about it.”

    “We tell people, look, we don’t happen to agree with 100 percent of the policy matters that come before Harry Reid, but we’re setting aside the ideologies for the betterment of the state,” Rogich said.


    ROFL Cap – your party is such a friggin’ mess, taken over by candidates rational people are embarrassed to support.

    Who’s buying/Goldman – No shocker there.  It’s what we’ve been seeing all summer.  If they can’t pull the retailers in, this will get ugly fast.  Of course, the most reliable retail suckers are Republicans when they win an election and begin buying with their dreams of low capital gains, corporate bailouts and country-crippling tax cuts so there’s another reason the Banksters are making record contributions to the GOP this season.  

    Depression 2.0/Goldman – That’s a good one!  Interesting way of looking at it.  

    CMG/Rav – Don’t forget Kent (KO) told us that they weren’t hit by commodity inflation in Q3 but the wave was swelling into the end of September.  CMG is all fresh food, it is very doubtful they won’t get hit on margins this Q.  They added 22 stores and had a 2% increase in sales.  They have 1,000 stores and 22 stores is 2% – people simply can’t read quarterly reports is why they are flying.  CMG is up 130% since Jan.  I don’t know about you but that seems like a lot for a company that didn’t get a sudden FDA approval….  Keep in mind that you sold 9x Nov $200s now at $10.70 and it becomes logical to sell 3x the Jan $180 puts ($5) to help finance the rolls if needed.  The relative delta is still 9:1 to the downside buy you’re selling $1.50 per long and you can sell another $1.50 if they go higher and another $1.50 if they go higher (setting stops on the lower sets each time you are forced to sell higher).  That’s how you can avoid having to keep DD’ing on rolls because, for $4.50, you can roll the Nov $200 calls to the March $240s ($6.10) and that’s another 20% CMG has to climb with another $1.3Bn added to the cap.  

    Food stamps/Ac – Just another way the IBanks have found to steal money.   

    GOOG. etc/AC – If you are losing 1% against a 1% up move in the market, then you are 100% bearish.  That’s a lot and it’s a gamble and you are obviously not being a seller of premium so my advice is to rethink what you are doing entirely.  You have $150K tied up in GOOG, which I hope means you have at least $2M in your portfolio but that doesn’t sound right with the other numbers you are putting up.  Anyway, what are you upset about in GOOG, that you didn’t make 10% ($15,000) – well you can make $8,500 in GOOG by agreeing to buy them again for $520 by selling 5 March $520 puts for $12 and buying 5 $480/510 bull call spreads for $26, which is net $13 on the $30 spread that’s over $100 in the money and you make $8,500 if Google simply holds $520 through March.  Because of the $480 callers, your b/e is $506.50.  That’s how you play a stock – don’t try to win big because you can win small like that every 6 months consistently and the worst thing that happens is you get the stock you wanted anyway cheaply.  Meanwhile, net margin on selling 5 March $520 puts is $14K according to TOS plus the $13K for the spread and you used $27,000 of your $150,000 to make $8,500.  That means, if GOOG starts to drop – all you have to do is buy some puts as a momentum play to protect yourself.  

    I know it is very exciting to have big winners but it’s also exciting to consistently make 20% a year.  If you keep swinging for singles, you will accidentally hit a few home runs but, if all you do is swing for home runs, the singles will rarely come and the strikeouts will kill you in the end.  Don’t fool yourself into thinking you are balanced because you have a series of wildly offsetting directional bets – that just means you paid premium in every direction and you have guaranteed you will lose money no matter which way the market goes.

    The reason our buy/writes work so well is that they have built-in discounts and they are all about selling premium.  Even if you are wrong – you still collect the premium.  It’s like buying a condo and renting it – even if the value goes down, at least you had some of your mortgage offset by the renter.  Sure if the building zooms up in value and you have a tenant, you may not be able to sell but that is a fact for all rental properties and how many men, in the entire history of investing, made their fortune by sitting on empty buildings?   It’s ridiculous, it’s stupid, it’s wasteful and inefficient and it’s what you do when you neglect to sell premium every time and, when you buy premium – you are a renter and not an investor at all!  

    DX/Flips – That’s great and I’m very encouraged about the politics.  I will keep working on that as well!  8-)

    Rollability/AC – That’s fine as you can keep rolling things down but it boils down to what you will do when the swan is black?   This is still a violent and dangerous market.  Suddenly everyone seems to forget that we could have another terrorist attack any moment – any time.  I certainly don’t advocate living in fear but that doesn’t mean we should live in denial either.  As I said above, you are correct, better to reboot the portfolio and start with a more conservative premise.  It doesn’t sound like this is gambling money for you so the obvious answer is – don’t gamble with it!  XOM, ZMH and VZ are nice long-term plays but what are you doing with them?  It’s not that easy to make $5,000 a month off $250,000 when the VIX is below 20 as you are looking for more than 20% returns.  Sure you can do it with leveraged plays like GOOG, which makes 32% against cash and margin by March but, if it goes the wrong way on you – it will suck up a lot of your $250K managing it and then you won’t be on target for the in-betweens.  

    VLO is still cheap at $17.65 and you can play them with the March $13/16 bull call spread at $2.60 and sell the $16 puts for .85 and that’s net $1.75 on the $3 spread.  If you play 20, you commit to buying 1,000 shares of VLO at net $17.75 but the $13 calls push your break-even down to $15.38.  Net margin on the $16 puts is just $2 ($4,000) and the spread is another $3,500 so $7,500 to make $2,500 by March if VLO holds $16 – not too different from GOOG and about what you can expect to make using fairly conservative hedges.  Trying to make more means taking on more risk and more risk means more likelihood of failure.  If you can’t afford the failure, then the risk simply isn’t worth it because, certainly this trade isn’t risk free either.  VLO was $13.41 during the crash, albeit briefly.  Owning VLO long-term at today’s price is perfectly great but that’s the fallback to these positions – OWNERSHIP.  If you don’t REALLY want to own the things you are trading, it will be very difficult and very stressful for you to trade them.

    Currencies/Kinki – It is getting very scary seeing what these computers can do to almost any market, seemingly at will.  

    Good chart guy Exec!  

    OK moving on to chat under the Dividends post for the weekend as I still have work to do there. 


  9. FX/Pstas –  See ZHedge on the subject.  Also, Kinki pointed out this chart and it does look like a flush on the dollar longs – the kind that often comes before a move up.  

    Behavior/AC – Such a good question I already reposted the answer!  

    QID/RJ – If you intend to stick with a position for the longer-term, then it’s a fine time to roll as you don’t know if you will get such a fine opportunity to buy December (although I’d go Jan) calls again so cheaply.  Since you are wishy-washy about the timing, the most sensible thing to do is make a low offer on the roll and then, if you get it – it’s time to roll!  Consider that you can pick up .50 for rolling your callers to the Nov $13 calls while you spend $1 to roll to the Jan $12s so .50 for you to buy 2 months and $1 in position.  Of course you don’t do as well if they kick back up but you can roll the Nov $13 caller to the Dec $14s and then the Jan $15s at least so fine if they keep going up.  When you get behind, a conservative roll to get even with hopeful upside is a smart way to adjust.   

    Mr. Market/Pstas – And if Mr. Market and his friends all jump off a bridge, would you do it too?  Wow, first time I got to use my Mom’s advice and apply them to the markets – she’ll be thrilled!   8-)

    Great summary Gel!  

  10. Hello Phil, I own SKX, CLF, DV. Would you recommend holding them through their earnings (the coming week) or selling before the earning and then buying back after? I think that many people expect SKX and CLF to miss on earnings, yet this seems to be already priced in the stock, so a minor miss might actually cause the stock to go up? Speaking about DV I am afraid of a repeat of what happened when APOL announced their earnings several days ago. Thanks.

  11. With a further thought to my previous comments, we must also factor in the coming election results, and what those predictions might have on our positions, and market direction.  Our old reliable ( accuracy is quite good ) futures market site –  has the odds of Republicans taking over the House of Misrepresentatives at 89.8%, and the odds of Democrats retaining the Senate at 56.7%.  Other than corporations being thrilled by the hope of a change in the House, I do not have a feeling one way or another what that will do for the markets, but I doubt it world be negative. Given the probability Pelosi would be sent out to pasture with the other old could be positive.  Usually if business is happy, then the economy has a chance for expansion, and thus the market may, with this environment, become optomistic.

  12. Good afternoon, Phil- I have difficulties understanding when to close trades particularly bull call spreads. I followed you advice and bought ADBE:

    buy 2 Apr $24 calls for $4.11, now $5.43
    sell 2 Apr $18 calls for $2.09, now $2.89
    sell 2 Jan $26 puts for $2, now $1.15

    the margin is about $900, the profit on the trade so far is $200.

    2) Bought 200 shares of STX at $13.20, now $15.20. Sold Jan 12, $10 straddle for $6.35. The put that I sold is now .44 cents. The margin on the sold put is $1000. I am thinking it wud be wise to buy back the put.

  13. House of Misrepresentatives .. that’s a good one Gel !
    Mr. Bipartisan is at it again: 

    Obama: Republicans Will Overturn Wall Street Reform And Let Foreclosures Run Wild
    I smell desperation …
    (Photo of Mr. Bipartisan can be found here: )

  14. BOJ will likely take new measures nest week to intervene in their efforts to weaken the Yen.. Structure your USD plays against the JPY with this in mind ( tight stops on the downside with lots of upside limits on upside stops.This could be aggressive, givem the recent failure of previous attempts.

  15. Cap…. I need to place a bet ( hedge against others in play) – Who will control the Senate in January 2011?

  16. Republicans will control the Senate in January 2011.  Obama is a lame duck one term loser.  IMHO

  17. doubled
    Thanks… my bet is there will be a change in the Senate – I now will "double down" and make some good profits, as the odds favor the inverse.  Oh boy, this is getting interesting!

  18.  gel- I know absolutely nothing about trading currencies, but I want to follow along on paper with this trade against JPY. If I expect the JPY to fall relative to the dollar, would I be looking to buy or sell JYZ10? Since it’s priced in dollars, I would assume you want to BUY this if you expect the Yen to fall relative to the dollar. It seems strange to be buying futures in something you expect to fall in value. Or is my assumption wrong?

  19. drcraig
    I play both the FX markets as well as ETF ultra for the most part. I am expecting the Yen to fall against the Dollar, both from a technical point of view, as well as the rumblings taking place about the imminent intervention by the BOJ, and predictions are it will take place next week. I will be taking a long position on USD/JPY – buying the Dollar. I might also buy the Ultra short ( 2 X ) FXY Yen . Alternatively, you could go short the Ultra long Yen YCL. Additionally is the ETN that pairs the Yen/Dollar exchange rate – JYN/USD, which would be a short.
    Good luck!

  20. Gel – Senate …. 50/50 odds I would guess.
    Foreclosure / short sale article … these banks are impossible.

  21. gel1
    i believe you meant the YCS as the ultra short on the yen--what do you think of puts on the fxy?

  22. Sorry about the earlier link. A stronger than expected statement from G20 leading to a weaker than expected dollar right now! Hope this URL works.

  23. oops… Yes, I meant to say  the Ultra (2X ) short Yen is YCS. not FXY. The options are OK on this ETF, but not quite as good as the FXY ( which is a long ). I like the idea of buying puts on FXY, as intervention will eventually take place. DATUU… let me know your play on this one, as I initially will test the waters on the FX market with a long position on USD/JPY, and will maybe add a short play on the FXY.

  24. gel1
    will do--i have had pretty good success with the puts on the fxe and have been watching and waiting for a chance to enter on the FXY and i agree with you that the time is probably now--
    do you participate in the daily 3am yen trade? i would like to understand that trade and give it a try but i have never traded futures --the only currency trading i have done is on the etfs--

  25. datuu
    My only trades are FX ( mostly ) and etf options. I have done better lately with the etf trades, but prefer the FX . It will be fun to play the Yen going the other way. With the Dollar showing some cracks, I might play the Yen with another currency as well, possibly the SGD, as the fundamentals in Singapore are looking better each day.

  26. gel1
    i am curious--when you say that most of your trades are FX --do you mean that your other positions like SLB, NGG etc.. that you have mentioned are long term holds vs short term trades?

  27. datuu
    I should clarify… I was referring to just currency plays. At the moment I have 125 equity positions, divided among stock positions and option plays. Lastt year I was holding approximately 335 positions, until Phil convinced me I was reckless to think I could manage that many, and he was right. So at the moment, I feel diversified, but not overworked. The FX trades I am doing is an effort to follow more closely the currency moves, as I believe we will see an unusual amount of volitality as many of the countries of the world de-leverage, and many emerging markets develope strength. Most of my stock holdings are long term positions, and I usually iniate my option plays looking forward 3 to 4 months. I seldom day trade, except occasionally for earnings plays.

  28. Good morning!  

    Holdings/Alik – As long as we hold 3 of 5 of our 10% lines, we’re still bullish overall.  We may think it’s all a nonsense house of cards but you can’t argue the TA of the moment.  DV is one in particular where we expected the truth to set them free as they are mainly down due to being lumped in with all those other jokers.  If you have straight plays where you can take profits off the table ahead of earnings – of course that’s a good idea, why risk losing gains.  Either they go down and you buy them again or they go up and you find something else that’s cheap.  Otherwise, as long as you are covered with conservative hedges, then the trades are on track and we’ll have to see what happens after we get a reaction.  

    Elections/Gel – I’m not sure that I see the elections being bad for the dollar unless the Dems keep both houses.  Any Republican headway would seem to indicate (to the international crowd) that things will change and any change can hardly be worse for the buck (again, from an international viewpoint where they take Reps at face value – I think, longer-term, Republican policies will destroy the dollar and this country irreparably).  

    Closing trades/Nicha – When you take a long spread like that, it’s generally either on track or it’s not.  The ADBE trade I assume you sold the Apr $28s, not the $18s and the net 0.02 entry is now net $1.39 with a max gain of $6 with ADBE at $28.21.  So you are on track and, assuming you took the trade last month, you expected to make $100 per month and right now you have just over $100 (per contract) so you are neither ahead of or behind expectations.  Unless you have a reason to think ADBE will fail $26 in April and unless you don’t REALLY want to own it for that price (b/e is $25) then there’s not much reason to worry.  STX is the same deal.  You are going to get called away, of course or you can roll out to some combination of puts and calls at a higher strike like the 2012 $12.50 calls for $3.50 and the $15 puts for $1.50 but that’s a big change of risk profile vs. just taking a huge profit and running in Jan.  Why would you buy back a put with STX at $15 (33% over the put strike) unless you have a much better use for the margin than a virtually guaranteed 4.4% in 3 months.