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Smart Portfolio Management – The $25,000 Virtual Portfolio

Options Sage submits:

Never risk what you do have and do need on what you don’t have and don’t need

Smart virtual portfolio management is a world apart from conventional virtual portfolio management.  While conventional virtual portfolio management offers generic guidelines to diversify capital, smart virtual portfolio management is tailored to your personal circumstances.  We have, in the past had similar articles on managing $10,000, $100,000 and $1M Virtual Portfolios.  This article is a variation of the $10,000 article in preparation for our new 2011 Member Virtual Portfolio with the goal of turning $25,000 in into $100,000 over the next 12 months.  Phil is, of course, proposing an aggressive stance but, after turning $10,000 into over $30,000 in just 7 months in the prior virtual portfolio – let's just say we are confident it can be done.  

Although this article focuses on prudent strategies for a $25K virtual portfolio, many less conservative investors are likely to find  the strategies addressed throughout suitable for their own virtual portfolios – though the % allocations will differ as we will see in Phil's virtual exercise.  No matter what your risk tolerance, a virtual portfolio comprising some relatively conservative trades is always prudent!

$25,000 Virtual Portfolio

Phil once commented that, when trading a $10,000 virtual portfolio, “every $100 counts”! 

Capital should be allocated judiciously in a small virtual portfolio.  NEVER allocate a majority of your capital to any single trade.  Dedicating 20% of your virtual portfolio to relatively conservative trades (shown below) is appropriate but exceeding 30% is far too risky when dealing with limited capital.  With a $25K virtual portfolio, it becomes increasingly imperative to be right first time.  Financial constraints limit your ability to scale into trades at different threshold levels and that makes timing critical unless….

Unless you figure out how to trade without requiring perfect timing of the market!  Those of you trading along with Phil’s earnings spreads have already seen some of the ways we take advantage of stock movement, whether they go up, stay flat or even drop to some degree…

Strategy A:  The Covered Call – With a Twist – Making 44% in Just 13 Weeks

Instead of placing the short call out-of-the-money in the conventional format, the short call is actually placed in-the-money.  

C closed on Friday at $4.89.  Since the C has just tested the 50 dma, we're a bit more comfortable establishing a position.  Rather than spending $4.89 a share for the stock and covering it, we can leverage our money and buy 10 April $4 calls for .94 ($940).  C has been hovering around $5 since early December and it hasn't been below $4 since October an in-the-money bullish call spread can be employed which will produce a 44% profit return in 13 weeks should C make it to $5 OR 28% if they stay flat at $4.89 and it leaves you with a profit even if the stock pulls back to $4.70 (4%). 

This trade involves purchasing 10 C April $4 calls for .94 (paying .05 in premium)while simultaneously selling 10 C April $5 calls for .25 (a .36 premium) which, based on Friday’s close, gives you a net entry of ..69 on 10 contracts (100 options per contract) for a net cost of $690.  Instead of taking $489 out of your pocket to buy 100 shares of C and selling 1 April $5 contract to cover for $25 (net $464 with a $36 upside), you are spending $201 more to give yourself an upside of 10 x $31 ($310) instead.  That $690 is the most that is at risk in the trade.  

The trade is set up so the stock will be sold at a loss and yet the trade itself can end up profitable!  The reason the trade can end profitable is because the short call profit more than makes up for any stock loss down to $4.69 (down 3.8% from Friday's close). 

So, with a risk of .69 per contract and an obligation to sell at $5 for a nice .31 profit - If the stock remains above the short call strike price at $5, the trade generates 44%! 

If it stays below that strike price, the trade can still be profitable but must remain above breakeven at $4.69. 

The bottom line is the stock can drop from $4.89 to $4.69, a 4% drop, before the trade would show any loss.  Should the stock pullback more significantly, the short call could be rolled further out in time to offset the correction to a greater degree and this would further lower risk (for example, the Sept $4 calls are $1.08 so we could spend about .14 per contract ($140) to buy ourselves 5 additional months for C to recover – and to sell more calls!).  We can also simply set a stop if the value of our spreads dips below net .44, down $250 on the trade, insuring our $25,000 Virtual Portfolio is not risking more than a 1% loss on this trade. 

For a $25K virtual portfolio, this strategy can be employed regularly on relatively inexpensive stocks; less than $20 per share.  At times you may elect to take the stock in a more traditional covered call and at times the bull call spread may work to your advantage.   The key is to manage the risk so that no single trade can wipe out several successes. 

Another way to protect this play inexpensively is to follow one of Phil's hedging suggestions.  Phil suggested hedging with the FAZ April $7/9 bull call spread at $1, selling the July $7 puts for .75 for net .25 on the $2 spread.  Even if you have an IRA and have to put down a full $1,400 in margin for 2 naked put sales, the bottom line is you are spending $50 in cash for a spread that is $314 in the money already and can grow to $400 if the Financials sells off.  If the Financials go up and up and you do get assigned the ETF at 18% below Friday's close, then you have a long-term hedge against other bullish financial plays to balance your virtual portfolio (and you can sell calls against them too!).  You can use one cover like this to offset over half of the potential losses of a $690 play like C and it's entirely possible, if the financials stay in this range, that you can collect on both sides of this hedge while it is extremely unlikely that you can lose on both sides.

Hedging does not have to be only for people with $1M to put into Phil's hedge fund, at PSW and Market Tamer we can teach any level of investor how to hedge like a professional.

Controlling Greed

The trap most traders fall victim to when trading smaller amounts of capital is greed!  Looking at the return on this trade, a trader could easily view the capital return of $310 as a minuscule amount and dismiss it as not worth considering.  But look at the rate of return!  44% in 13 weeks is outstanding!  Of course a discount broker will charge about $15 for the spread (assuming it expires in the money and requires no further adjustments) but net $295 profits on $690 is still 42.75%, or 3.2% a week.

Focus on the percentage return because, if you know how to generate even 3-4% per MONTH on small amounts consistently, your capital will grow exponentially and soon you could be generating 3-4% per month on larger amounts of capital producing larger returns for you. 

In fact, for a trader who wants to be more conservative, the lower strike short calls, can often be used to offer greater stock protection at the tradeoff of a lower % return.  This is ideal for the investor who is not in a position to lose a substantial percentage of their capital.  For example, you can buy C stock for $4.89 and sell the 2013 $3.50 calls for $1.90, which lowers your basis to $2.99, called away at $3.50 (38% below Friday's close) for a 17% net profit in 2 years.  So you have 38% downside protection on your 17% upside play!  There are many investors who would consider that a great rate of return and it not only outperforms bonds (other than greek ones) but it's a long-term capital gain AND, you collect your dividends on the stock if Citigroup reinstates them.  

Watch Out For…

[1]  A cautionary note for highly conservative traders… Commissions can consume a large fraction of your returns if the dollar return if less than $100 so make sure that you keep a close eye on the how big a percentage impact your commissions are having on your overall return and make sure you find a broker who is appropriate for your style of trading.

On The Risks of Not Taking Risks[2]  Earnings!  As earnings season approaches, volatility inevitably picks up.  For stocks that have a history of extreme volatility, this strategy may not be prudent since the short call only protects the stock to a limited degree and earnings volatility could threaten profits.

Phil likes to sell options into earnings, letting others pay the high premiums while we collect our fees but it is still a dangerous game if you can't consistently guess the outcome of earnings and perhaps not suitable for more than one trade at a time in our $25K Virtual Portfolio.  Incorporating 2-4 covered call trades in your virtual portfolio and dedicating no more than 10% to any single position will set your account up with relative safety early on and should produce some handsome returns quite quickly.  This allows you to take the occasional chance on the "more interesting" plays without putting too much of your capital directly at risk.

Another smart trade for a $25K virtual portfolio is…

Strategy B:  LEAPS Calls

Phil favors buying the WFR (an old Buy List pick) April $10 calls for $1.65 to keep the risk low ahead of earnings, followed by a roll into the Jan '12s, probably the 2012 $10s, currently at $2.65 (or whatever they end up at).  The idea behind this entry is that the stock is unlikely to fall below $10, which has held since August, so the loss per contract is unlikely to exceed .80 while the gain per Jan contract (delta .75) will be about the same as the gain on the 2012s (delta .69) that we really want without having to commit $2.65 to the position ahead of earnings, which could go either way.  Buying 4 of the Apr $10 calls for $1.65 ($660) and selling 2 of the Feb $11 calls for .75 ($150) for protection give us a net entry of $510 ($1.25 per contract) ahead of the earnings release.

For a $25K virtual portfolio, our planned position of a 4 contract lot of the 2012s would be relatively safe, representing an account capital allocation of approximately 4%.   The incentive to entering a trade like this is that you can sell call options against your LEAP call at regular intervals when the stock has approached resistance levels and is due for a pullback.  This approach will continually reduce risk in the overall trade and magnify returns without relying as heavily on bullish stock movement.  For more conservative traders, delaying the entry entirely until after earnings might be more attractive.  A pullback is possible and might offer an improved entry point or an opportunity to enter additional contracts.  Obviously the flip side is that more aggressive traders jumping in ahead of the announcement may well be rewarded by a positive spike should the company report good numbers and/or offer a rosy outlook.

Strategy C:  Hedged Calendar Trades

As I said above, these are the plays Phil favors ahead of earnings.  More often than not calendar trades comprise the purchase of longer term long options (usually calls though puts can be employed as well) and the simultaneous sale of a similar number of shorter term short options at the same strike price.  This trade primarily takes advantage of the rampant effects of time decay on the shorter-term option which erodes quickly, particularly during the last 2-3 weeks before expiration.  Usually we are not expecting much volatility in the underlying stock (or at least not as much as our caller!) when entering this position.

The above variant on this trade is called a ratio calendar trade.  If the expectation is that a stock will remain relatively flat but we have some concern that the stock might make a charge higher (potentially because the stock is hovering closer to support than resistance or perhaps because an event such as earnings is imminent and could prove to be a catalyst to a gap up) then we might wish to purchase more options than we sell..   

Strategy D:  Speculative Trades

Speculative trades can fall into a number of categories including:

  • Momentum “Everybody else is buying so I should too!”
  • Predictive “I can see the future!”
  • Hope “It’s just gotta move higher…right?!”

No matter which category we consider choosing above, we should restrict speculative trades to not much more than 5% of our trading capital on a $25K virtual portfolio. 

Momentum trades are likely the easiest of the speculative trades to profit on if you can identify the trading channel.  For example, this last month COH offered numerous opportunities to jump on board as they pulled back to the bottom of their bullish channel.  Even if you knew nothing about the company, the lemming-like behavior of speculators was evident and Phil has pulled it early off his watch list for this post as earnings are Tuesday morning and he was going to wait for an entry at $52.50 on Monday, where he likes the February $50/52.50 bull call spread, now $1.60.  A 5 contract spread for $800 is unlikely to lose more than $400 if wrong and COH is already at $53 so a move up will likely lock in $2.50 on the trade for a 56% profit ($450) for the month. 

Predictive trades are slightly more challenging to ‘get right’.  For example, if a stock has had a big run or even more so, if it has had a big run but you don’t like the fundamentals, it’s hard to pick the exact top.  FCX which Phil has talked extensively about, and on which we took multiple short plays earlier this month, is a prime example of a predictive trade and that $120/119 bear put spread taken on the 11th for .42, closed Friday at $1, up 138%!  For a $25K virtual portfolio $420 position (risking 1.7% of the virtual portfolio) is now worth $1,000 (4%) 10 days later!

Trades based on ‘Hope’ include purchasing long call or long put options ahead of an earnings announcement.  As much as any of us can know the fundamentals of a company, a risk always exists at earnings that a company surprises us with poor forward-looking guidance or the analysts latch onto a particularly poor number in a generally positive report (or vice versa).  These trades are ‘all-or-nothing’ because options are usually inflated right before earnings announcements building in the expectation of a big move and, if the move fails to materialize in the expected direction, the options suffer from implied volatility crush and rapidly become worthless.  In the speculative category I would place these ‘Hope’ trades last on my list of preferred trades.

That is why Phil suggested a more conservative play was to hedge the FCX bet with the sale of the Jan $120 puts for with the sale of the $119 puts.  That lowered the cash basis on the trade to -.42.  Often we pair trades like this with short puts or short calls in larger virtual portfolio but this strategy is margin-intensive and should be used judiciously, as in the protective FAZ hedge above.  

These are not positions for Phil's $25,000 to $100,000 Porfolio that begins next week, just examples of 3 of the types of trades he has on his watch list.  In the action of the trading week, when Phil identifies trade ideas like these – we don't have a lot of time to contemplate the mechanics of the trade but, if you study and practice long enough, that part will become second nature and the rest simply comes down to execution when an opportunity presents itself.  In that way, a top trader is much like a professional athlete but keep in mind, professional athletes practice, practice and then practice some more before stepping onto the field.

Have a fantastic week!

Options Sage


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  1. Good for our game-plan next week:  



  3.  Very interesting article on the Dendreon saga.  

    Barron’s discusses Fed fakery:  

    “OUR UNEASE ABOUT THE STOCK MARKET and, to a lesser extent, the economy, also springs from the fact that the Fed has been the prime agent of stimulus for both. Our misgivings, let us make clear, do not imply that Bernanke & Co. should have stood mutely by when the financial system and the economy seemed headed for perdition. In our view, they unarguably did the right thing in shelling out hundreds of billions to keep both from going under.

    But we also believe they were excessively eager when the crisis ebbed to keep share prices rising via QE2, if only to buoy consumer sentiment (which strikes us as akin to buying approval). In any case, it’s difficult to underestimate the impact of such stimulus or accurately gauge what might happen when it vaporizes, as it likely will as early as this year.

    Which leads us to an interesting riff by Barry Ritholtz, chief cook and bottle washer at Fusion IQ, entitled, “How Much Has the Fed Distorted the Stock Market?” In search of the answer, Barry sizes up the averages of the rallies for one and two years going back to the 1930s. He found the most intense of the postwar moves came in 1982, when stocks shot up 58.3% in the first year — until, that is, the scorching bull run of 2009, which posted a rousing 68.6% gain.

    Over two years, the winner had been the bull market that started in late 1974, following the end of a devastating bear market, and climbed 65.7%, only to be left in the dust by the current astonishing advance that racked up a 90.1% gain in just 22 months.

    The critical question is how much of this fabulous performance is attributable to the Fed? While it obviously can’t be determined to the penny, Barry reckons that even if only half the market’s superior showing compared with the best of previous postwar rallies can be credited to the Fed, it means that the U. S. central bank created out of thin air “several trillion dollars in market cap.”

    He refuses even to guess “the end game of this or the unintended consequences.” We’re brave enough to hazard that the latter won’t be all good.

    Barry’s Summary of the Week’s events:  


    1) German IFO hits record high dating back to ’91, ZEW hits 6 month high
    2) French business confidence near 3 yr high
    3) Bonds of Portugal, Greece, Ireland, Spain, etc… rally on possibility of EFSF supported debt buybacks
    4) China Q4 GDP, IP, and retail sales above expectations
    5) US initial claims head down again (seasonality caveat but trend still lower)
    6) Philly and NY mfr’g surveys about in line at good levels
    7) Existing Home Sales above forecasts
    8) Brazil proactive in cooling inflation with rate hike


    1) Asian markets all lower on inflation and rate hike fears
    2) Inflation apparent in NY and Philly mfr’g surveys, German PPI, UK CPI, Hong Kong CPI and Chinese CPI and PPI
    3) US, German, UK and French long term bond yields also head higher
    4) Brazil raises rates
    5) The greatest CEO of our time takes another medical leave and we hope he’s back soon.

    David Rosenberg’s "What Will Turn Me More Bullish on the USA":

    1. An energy policy that truly removes U.S. dependence on foreign oil (shale case, coal, nuclear).

    2. A complete rewrite of the tax code that promotes savings, investment, and a revamp of the capital stock. Cut tax rates, eliminate loopholes and costly tax breaks. Tax consumption, promote savings and investment. That is crucial. But it will take political courage (ask Brian Mulroney).

    3. A credible plan that reverses the runup in the debt to GDP ratio. This includes not just on-balance sheet items but new rules governing entitlements too. We need delineation of the future of Fannie and Freddie if there is any … they became wards of the government nearly three years ago and there is still no clarification on this file (slightly more important than these periodic consumer spending gimmicks that have surfaced over the past few years). We need a complete rewrite of social contracts and a reversal in sacred cows that have been created over the years that are completely unaffordable. Plus, people are not going to learn to live within their means if our politicians continue to set a bad example. The act of dipping into Social Security, incentivizing companies who are already cash-rich to spend more on new equipment and extending a Bush tax cut that always had a 10-year expiry date at the expense of the already severely strained public purse was political expediency at its worst.

    4. A massive mortgage write-down by the banks — a Jubilee of biblical proportions — that provide much-needed equity to upside-down homeowners.

    5. A creative strategy to put people to work instead of paying them to be idle — having nearly half of the unemployed ranks out of work for over 15 weeks and a 25% youth jobless rate is unacceptable at any level.

    6. Tort reform. The only way to rationally bring down health care costs to more manageable levels.

    7. And from six — use whatever proceeds they can save to enhance their education skills, especially in the sciences and mathematics where the U.S.A. is sliding down the global scale.

    8. Financial sector regulatory reforms that actually have some teeth.

    9. Change tax policy to free up the hundreds of billions of dollars of corporate cash sitting in reserve in overseas accounts — bring this money home!

    10. Our Republican friends may not like this too much but in Canada, we understand the importance of immigration inflows and the U.S.A. should be doing more on this front to stimulate its long-run growth potential. This is where Japan’s decade of lost growth became two decades but its decision to resist immigration rule changes is more cultural in nature. The U.S.A., like Canada, is already extremely diverse. But as economists, what goes into economic growth is both simple and complicated. The simple part is merely identifying the two ingredients: growth in the population (more specifically, the part of the population that is working) and productivity (what most of the other nine ideas listed above would attempt to generate). But the dependency ratio is working against the U.S.A. and a smart immigration policy would help at least stem the runup.

  4. Just noticed an error to correct, it is underlined.
    Phil favors buying the WFR (an old Buy List pick) April $10 calls for $1.65 to keep the risk low ahead of earnings, followed by a roll into the Jan ’12s, probably the 2012 $10s, currently at $2.65 (or whatever they end up at).  The idea behind this entry is that the stock is unlikely to fall below $10, which has held since August, so the loss per contract is unlikely to exceed .80 while the gain per Jan contract (delta .75) will be about the same as the gain on the 2012s (delta .69) that we really want without having to commit $2.65 to the position ahead of earnings, which could go either way.  Buying 4 of the Jan $17.50 calls for $1.65 ($660) and selling 2 of the Feb $11 calls for .75 ($150) for protection give us a net entry of $510 ($1.25 per contract) ahead of the earnings release.

  5. I guess it’s not underlined, it is just bold.

  6. Phil, 
    Just to point out there are a couple of typos on the post (in the C play). The first is the 4% drop to $3.89 which should read $4.89 and then rolling to the Sept $3 calls for $1.08 should read $4 calls… 

  7. Good evening all!  I am working on a new TA book (updated) and have posted the first chapter for many of the new members


  8.  Good morning!  

    Thanks for pointing out typos – fixed now! 

    Thanks for post Pharm – Do we need to do anything or is the PDF updated?

  9.  Strangles- Another positive month playing very conservative short strangles along with put vertical insurance- following Peter’s outline- 1.1% return which is 13% annualized. Made no adjustments this month- could have improved the return a bit by rolling up putters but played it safe anticipating a correction which did not come. Did not even sell a full allocation of strangles (i.e., 1/$20M) keeping some dry powder again in anticipation of a drop & VIX spike which did not materialize. 

  10.  Pharm/TA – Thanks for the post, I enjoyed reading the TA manual.  I have a question about technical analysis.  Do you find technical signals still give you an edge in the midst of all the market manipulation happening -whether through QE2 or actions by big banks and high frequency trading?  

  11. TA PDF – it will be updated at the end.


    rev – I have been using Opts methods and TA on FRX, and it has worked pretty well as I have paid down the long Ps..  A few of the swing trades I have noted in chat have been ZMH, HGSI, PODD and TA has been my basis for it.  Those have paid off.  Few losers as well, but if things are kept to a 2% portion of the portfolio, winners have beaten the losers.  The HARDEST thing is psychology.  I still get my emotions going on some trades, and I need to take them out.

  12.  Packers in the Super Bowl !
    Congrats to me & 1020 (both shareholders), and any other Packer fans here !
    All Green or all Gold Super Bowl to be determined shortly.

  13.  Cap: Pack
    Good on you guys, although they didn’t look as good on offense in the 2nd half.  I’m in charlotte and often when playing GB there are more cheeseheads than panther fans here :)  Must be even more fun as a shareholder.  I take it Phil is a Jet fan so let’s hope they win to set up a little good natured grudge match.

  14.  Phil – Just noticed the PSW Wiki page. Awesome information out there and so easy to go thru it. Love that you incorporated chat and charts. Thanks so much!

  15. Phil – got a trade i’m putting together and would love your advice. You have suggesting some similar trades in the past as a stock replacement strategy for AAPL. 
    Here goes: Buy Jan 2012 300 Calls, Sell Jan 2012 400 calls ; i’m offering net $38 for the call spread (50 contracts). Then, sell 10 Jan 340 calls for $55. If AAPL continues down, I would sell another 10 calls for $65 (or sell the 330s for 55). in the first case, it would be $135k net, breakeven AAPL 327at year end. although i would still get assigned the 1000 shares (thats OK). Max trade value would be 500k at AAPL 400. 
    In the second case, if I could sell a second 10 puts for $65, the net trade cost would be 70k. 
    I decided to use the puts that were basically at the money because their premium is HUGE. I played with other ways. The only restrictions are that I dont want to get assigned more the 2k shares of AAPL. I know its an aggressive bet on AAPL, but i think the story is really strong, and with inflation, i expect it to inflate a little more…
    Any one else have any advice? I think it will be 380 to 400 by year end, and if not i am comfortable holding it…

  16. Congrats, pstas!  13% annually means you’ve beaten the S&P500 from 1995 to now handily.  The index returned just about 5% compounding since 1995.

  17.  A note on Steve Jobs’ Health, from my medical knowledge and what i’ve gathered from the media; this is important for any of us considering investing in AAPL. Note that there is a ton of incorrect information out there.

    Jobs had a rare pancreatic tumor known as an Islet cell neuroendocrine tumor. They are mostly functional, secreting some hormone/enzyme. We dont know what kind he had. From the operation and treatment, lets presume he had an Insulinoma, gastrinoma, or VIPoma. I actually would guess the latter given things that have been reported. However, it is an extremely rare tumor. 

    He then had a pancreaticoduodenectomy ("Whipple Procedure"). Basically, this removed his pancreatic head (and the tumor with it), and a portion of his small intestines, and then hooked everything back together again.

    Subsequently, we know he had a liver transplant. Now, the only way you can a liver transplant in the USA with islet cell tumor is if you have had an operation that removes the primary tumor and you have metastatic disease ONLY to the liver. Thus, in this instance, a liver transplant is considered a definitive treatment. We will assume this is what he had.

    After this he has had some nutritional difficulties, and had trouble keeping up his weight. This is probably 2 fold, related to his transplant management and the immunosuppressive drugs, and also perhaps his intestinal operation causing some GI issues. Ultimately, it seems most likely that one of these issues has caused him to take medical leave at this time. He is having some sort of biliary issue from his surgery and/or some GI/absorptive issue. Less likely (but more concerning) he could be having trouble with the liver transplant itself (fibrosis, rejection, failure, etc).

    All this to say, from everything we know, I would presume that he is out for 3-4 months and then returns perhaps in the late spring early summer. Now, its always possible that something worse has happened, but…..keep in mind that the average life expectancy for a post-liver-transplant candidate in the USA is 15 years. There is little data on islet cell tumors, but they are not nearly as fatal as other histologic forms of pancreatic cancer (some of the lay press fail to make this distinction!).

  18. Hello Wisconsin….went to school in Beloit….go Pack.

  19. PSW Wiki:  Yes, I just noticed that link too! Phil, have you advertised this yet?  Maybe I missed it. Great functionality! Thanks.

  20.  hanna/Steve Jobs
    Very concise assessment of the medical situation.
    However, I would not rule out new metastatic disease, either in the OLT or elsewhere since he has been on imunosuppressives for a while….or, an unrelated malignancy.
    Given the fact that he did not scede CEO role to Tim Cook, if taken at face value, would imply his conviction to return. However, it could also be an investor pacifier move.
    Just my $0.02 worth

  21. Phil/25K,
    On the FAZ April 7/9 BCS, how many contracts are you buying & selling?  Thanks

  22.  AFL- Phil , your opinion on this- I did an IRA buy / write in June – stock @ 42.50; sold Jan 12 P/C @ 19.20. Stock is now at 58; so I am up 32% if I were to close this out vs. potential 75% is held to expiration in Jan 2012. Also pays a decent 1.20 div. 
    My take is to just leave it alone for now  or possibly roll up the putter to the Jan12 45 or 50?  Any suggestions? 

  23. Good morning!

    As you can see, we’ve had a busy weekend with the PSW Wiki (thanks Kwan!) finally up and running and all of our new authors are now represented with tabs along with a ton of other changes (thanks Matt) that have been in Beta for quite a while.

    Keep in mind these are works in progress – I don’t actually know how to edit a Wiki and it will probably take me ages to get around to learning so this is very much up to those of you who are familiar with the format and motivated to work on it.  Ideally, in addition to stock stuff, we’d like to start putting together a trading and strategy guide so when you find comments you feel are useful, we can put them up there and hopefully, through group commentary and additions, come up with a nice guide discussing our trading techniques as well as fundamental and technical analysis tips.

    If you need editorial access to the Wiki, let Greg know and he’ll arrange it.  Again – WORK IN PROGRESS – don’t wait for me to have an idea.  Essentially, I would like the book crew (and I know we dropped that because I was very busy getting all the new writers in gear and launching Stock World Weekly) to start putting things together here as well as I’ll bet we can pretty much put the whole thing together as a Wiki first with far better functionality than we’d get from a book.

    Please don’t forget that, in addition to Optrader and myself, Sabrient, Income Trader, All About Trends and Alpha Quest are also available for chat, although they are not there all day long but they will be checking in during the day every day to chat and answer questions – please take advantage of that as well, we don’t want them to get lonely…  

    Overall, for the week, we’re waiting out the Alpha 2 pattern.  While we are a bit tongue-in-cheek following these Bot patterns – it does get a little scary when they are as close as what we’re seeing in Stock World Weekly.  Remember, they run these patterns because they work, both for driving up the markets and for driving investor psychology because – just like any casino – the entire experience:  the sights, the sounds, the smells, the feel of the chips (slippery and cool in the middle), the layout of the tables, the rate of payoff on the games… ALL are designed with one purpose in mind – to get you to take money out of your pocket and bet.  

    "THEY" don’t care whether you win or lose because they are playing the long, percentage game and they WILL make money.  And the more money that’s in play, the more money they make.  That’s true for casinos and it’s true for Wall Street.  Wall Street is even smarter than casinos because they don’t have to give you a free room or buy you a drink – they do however give you a show and that show is on Bloomberg and CNBC and the WSJ etc., where they tell you they have a "winning system" where you can beat the market and they tell you if you are not in the top 1% you are not "winning" at capitalism so, no matter how much money you have, you will be inclined to put it on the table, in hopes of getting richer.  

    Unfortunately, even Michael Fascitelli (VNO) wants to be Donald Trump and Donald Trump wants to be Sam Zell and Sam Zell wants to be Warren Buffett and Warren Buffet want to beat Bill Gates and Carlos Slim so, if you want to know how much is enough – the answer is you will never be satisfied once you start buying into the idea that this is a game you must "win." 

    Our "winning system" isn’t really a system at all – it’s three simple words that could easily have been told to you by Buddha over 2,000 years ago and that is simply:  BE THE HOUSE.  

    The house does not always win but the house usually wins and, if you play often enough, usually will begin to pile up the cash over the long haul.  100,000 people a day may walk into Steve Wynn’s casino but the chance of one of them being richer than he is is just 1 in 10M because Steve is the 600th richest person on Earth (and it takes $2Bn just to make that distinction!).

    Steve Wynn is not sitting at the roulette wheel betting on 24, is he?  He is spreading out his bets and taking slightly favorable odds and letting statistics do the work for him – PATIENTLY!  That’s what we do when we sell options and that is the OPPOSITE of what you do when you buy them.  Keep that in mind… 

    Also in SWW – it is so all about the dollar and they crashed the dollar to 78 after Friday’s close but it’s back at 78.5 already so they may be getting pushback now and ONLY a falling dollar kept us from going over a cliff last week!  

    Can we avoid a cliff dive?  Sure we can!  The Fed is pumping another $30Bn into the economy this week – that’s like ALL 300M Americans deciding to spend $100 extra dollars this week.  Do you think that should boost the economy?  More to the point – isn’t it pathetic if it doesn’t?  

    Well, it didn’t last week so let’s be VERY concerned if it’s two in a row!  

    Those Breakout II Levels are now MUST HOLD levels at Dow 11,600, S&P 1,260, Nas 2,675, NYSE 7,935 and the Russell already blew 800.  Oddly enough – it’s the Dow that is in denial and perhaps that’s because they are the easiest to manipulate, with just 30 stocks to play with.  The Russell fell 4.2% last week and the Nas fell 3.3% – the Dow was UP 0.7% and seemed like a big winner for just hanging on didn’t it? 

    Beware of low expectations – they get you to bet on things that would never be worth your time in a good market….  We get 15 Dow Reports this week and we left ourselves very short on the Dow with the last of our $1050P.  I’ll rerun this list for this Alert (even though it’s right above in comments) as it’s very good to have on hand as we move through the week:

    It’s going to be fun AND informative this week – let’s enjoy ourselves!  

    - Phil

  24. Congrats on Packers Cap.  Should be a good bowl game.  Jets choked in the first half and THEN played well – very annoying…

    Wiki/Nicha – Yes, that’s been a year-long project but the rest is up to you guys now to make it better.  

    AAPL/Hanna – You don’t REALLY want to own 5,000 shares of AAPL at net $327 do you?  If you don’t, then why are you doing this?  What if Jobs dies and they announce it Friday after the close and, over the weekend, people decide it does matter and the stock opens at $250 on Monday?  What is your plan there?   If you REALLY wanted own AAPL at $327 then the easy answer is take the stock, sell the 2013 $250 puts for about $50 and be thrilled if you get assigned another round at net $200 for a $263 average entry.  That’s why we trade amounts that we REALLY want to own a stock for.  You MUST allow for the possibility, however remote, that you are wrong – especially when dealing with an individual stock and not an index.  

    You can collect $30 for selling the 2013 $270 puts.  You can use that $30 to buy the 2012 $300/365 bull call spread for about the same.  That makes you $65 (20% of AAPLs price) at $365 (up 12.5%) and your rollable break-even is $270 (down 17%) and, if you start with a REASONABLE amount of money, you can always add some 2013 calls and roll your callers to 2x something higher AFTER you have more confidence in the position.  

    Nice rundown on Jobs by the way.  AAPL has $20Bn in cash and it’s worth spending $2Bn of it to keep Steve alive so I have no doubt he will push the envelope on survivability but the fact is we don’t know for sure what is wrong and the fact that the World’s best possible care can’t prevent him from having to announce he’s stepping down (and he only has to go in once a week, at most, to keep up appearances) means the best possible care isn’t cutting it at the moment. 

    $25K/Jomp – That’s not a trade for the new $25KP, these are just examples for moves we can make in a $25,000 Portfolio.  They are, of course, perfectly good plays but this is NOT THE $25KP.  I will be waiting out the week, PATIENTLY waiting for great entries on our new $25KP because we’re not going to get to $100K by forcing our entires, are we?  

    AFL/Pstas – Sure, unless you have something you expect to make more than 43% on with that money – why change it.  When it gets down to 20% remaining, THEN you probably want to reconsider your risk/reward.  I’d be really surprised to see them fail $50 and, if they do, it’s very likely I’d be looking to get in there.  

  25.  This post originally appeared on RealMoney Silver on Jan. 21 at 7:41 a.m. EST.
    Doug put together a list of his lessons learned this week:

    1. There are substantive risks to momentum-based investing.
    2. Even in a bull market, mo-mo investors in the highfliers see increasing risks Examples:Coinstar (CSTR), F5 Networks (FFIV), U.S. Steel (X), Freeport-McMoRan Copper & Gold(FCX), Gold (GLD).
    3. Price action in certain market-leading stocks suggests a lot of the company-specific news has been discounted.
    4. The market’s unrelenting advance is not likely unlimited, as trees don’t grow to the sky. Beware as monetary stimulation wanes.
    5. If investing/trading in highfliers, particularly in light of a relatively low VIX, buy cheap protection by purchasing out-of-the-money puts. (Shorts,can buy cheap protection with out-of-the-money calls).
    6. Being more flexible and opportunistic by identifying group rotation, rather than buy-and-hold.
    7. Always be prepared for surprises.

  26. 25K/Phil, thanks for the clarification.

  27. Wiki / Phil – Phil, I’m impressed very much by the wiki; it looks very useful even at this stage. I’m a long-time occasional Wikipedia editor, and find people who are not real familiar with it don’t make the fullest use. One should read an article, then click on the discussion tab and see where the arguments are that didn’t make it (yet) into the main article. A look at the history is often helpful as well. I don’t think i saw a discussion tab on your wiki, and in the current format I’m not sure it’s needed, but that’s something to consider.