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Income Portfolio – Month Four – Stormy Weather!

Riders on the storm 

Into this house we're born 

Into this world we're thrown 

Like a dog without a bone 

An actor out alone 

Riders on the storm 


What a crazy couple of week's we've been having!  Very fortunately, in last month's update of our virtual income portfolio, we had already cashed out $33,084 – more than enough to take us through our first 8 months (our planned $4,000 a month to live on).  We did that using just $200,000 of our $1M in buying power ($500,000 portfolio), staying very conservative and waiting for a bigger dip than the one we had had in June.  

Well, here we are!  We are now 10% below June's bottom and we did do a little bottom fishing, adding positions in WFR, SONC, IMAX, VLO, OIH, TBT and HOLI – positions we'll be reviewing below.  To a large extent, we followed the strategy I called "Don't Just Do Something, Stand There" during this sell-off although it was (and still is) a nail-biter as we tested my August 2nd prediction of the "worst-case" scenario of a 20% drop from the top.  

We stuck to our guns this week and had a lot of fun playing the wild gyrations with our short-term betting but the Income Portfolio is an exercise in managing a "low-touch" portfolio – one that does not require us to make daily adjustments.  I am aware that can be frustrating for people who stare at the markets every day but that is what our short-term trade ideas are for in Member Chat.  That goes for people who are retired or semi-retired too.  You don't HAVE to play every day – or any day for that matter but you do need to work one week a month and that would be this week – the week of options expirations, when we do our update (this post) and then next week we make our adjustments (if any).  

Other than that, if you happen to be home, then you can always check in in our Chat rooms – in the average day there are 5 or 6 trade ideas and you can pick bullish ones or bearish ones, depending on your mood.  In our very active $25,000 Portfolio, we make many, many short-term plays and that's suitable for more active traders but, for good or bad – that is not how we manage the Income Portfolio.  

I did send out one Member Alert that required emergency action this month and that was on August 1st, at 9:41 am, the day before I made my 20% drop prediction on TV (not my fault they didn't have me on earlier!).  We had a spike up at the open and I had already warned in Chat at 9:09 to take bullish plays off the table, selling into the excitement at the open and by 9:41, I had turned more bearish into the silly spike up, saying:

Things are looking good at the open and they’ll probably stay good until/unless we get negative noises from some Tea Party people or other indications the Bill won’t pass. If the Bill does pass, Obama has already said he would sign it so we may not get much of a sell-off until/unless the ratings agencies weigh in with a negative outlook – which is very likely given the shallow and uncertain scope of this deal – especially in light of our downgraded GDP outlook.

What I do believe in is shorting the Dow with DIA Aug $119 puts at $1.20 or the SQQQ Aug $21/23 bull call spread at .85, selling the Sept $19 puts for .55 for net .30 on the $2 spread.

USO Weekly $38 puts are .44, 20 of those in the $25KP for $880! (longs are, of course off).

Let’s be straight about that, all the short-term long, including the ones in the Income Portfolio – are DONE. This was the pop we hoped for and now it’s done and back to cash!

That happened to be the dead top of the market for the month and congrats to all who acted on that Alert.  Those USO puts finished the week at $4, up 809%, the DIA Aug $119 puts are still $7 (up 480%) but we flipped bullish 500 points ago and the SQQQ bull call spread was done on the spike up to $35 on Monday but the bull call spread is still deep in the money at $1.80 and the short puts are just .18 so net $1.62 is up 540% on that spread too.  As I said, if you happen to be around to trade, it's fine to play a couple of these aggressive plays – especially when they are geared towards protecting a generally bullish portfolio like this one.  

As we were not liking the short-term outlook for the markets last month, we had already dumped out of ALL of our short-term bullish positions in the Income Portfolio.  Our remaining short put ideas were all for either Jan 2012 or Jan 2013 and, while they have taken hits, of course, we have a LONG time to recover and, of course, they are all stocks we really, Really, REALLY want to own long-term at the net prices.   

  • 10 KFT Jan $30 puts sold for $1.60 ($1,600), now .82 (up $780)
  • 10 EXC Jan $37.50 puts sold for $2.20 ($2,200), now $1.50 (up $700)
  • 10 HCBK Jan $10 puts sold for $1.50 ($1,500), now $3.70 (down $2,200)
  • 10 HCBK Jan $7.50 puts sold for net $0, now $1.56 (down $1,560) 
  • 10 GE 2013 $17.50 puts sold for $2.10 ($4,200), now $3.70 (down $1,600) 
  • 10 HPQ 2012 $35 puts sold for $2.90 ($2,900), now $4.70 (down $1,800) 
  • 10 CCJ Jan $25 puts sold for net $1.25 ($1,250), now $4 (down $2,750)
  • 5 RIMM Jan $35 puts sold for net $1.65 ($825),now $11.50 (down $4,925)
  • 10 RIMM Jan $27.50 puts, sold for $4 ($4,000), now $5.70 (down $1,700) 
  • 10 IMAX Jan $25 puts sold for $2.40 ($2,400), now $8.50 (down $6,100)
  • 10 IMAX 2013 $22.50 puts for $4.90 ($4,900), now 7.50 (down $2,600) 
  • 30 FTR 2013 $7.50 puts sold for $1.30 ($3,900), now $2 (down $2,100)
  • 20 GLW 2013 $17.50 puts sold for $2.40 (4,800), now $4.80 (down $4,800) 
  • 30 NLY 2013 15 puts sold for net $2.43 ($7,290), now $2 (up $1,290)
  • 20 VLO Jan $20 puts sold for $3.05 ($6,100), now $2.45 (up $1,200)

We have a net of $29,565 if we stay this low though January 2012 and January 2013 expiration dates.  Not so bad with the market dropping 20% on us and the VIX blowing up.  Also, as with any of our portfolios – these are the LOSING ends of spreads – don't forget we've already cashed in $33,084 and we have plenty of calls to sell and dividends to collect.  At the moment, there's really no point to even adjusting these positions.  I had mentioned, in the past, that we do need to stop out short puts with a 30% loss and, from now on that is going to be a rule but, since it seems many people have not done that, I'm going to play this set through as it's more educational to follow it over time anyway but PLEASE look over this list and consider how sensible stops could have saved a huge amount of our virtual cash!  

We did close a few positions as well, mostly on Aug 1st, when we had to dump out of our short-term bullish positions.  After that we just rode things down and did a little bottom-fishing along the way:  

  • 10 TBT Aug $32 puts sold for $1.10, out at $1.35 – down $250 
  • 40 IMAX Aug $27/28 bull call spread at .55, out at .20 – down $1,400
  • 50 IYR Aug $60 puts sold for $1.24, out at $1.30 – down $300
  • 50 DIA Aug $116 puts sold for $1.10, out at .70 – up $2,000 

Nothing exciting to report there, a net gain of $50 and it was my mistake not calling for ALL short puts to be pulled in.  Better safe than sorry next time – especially as we were well ahead at the time and could have just gone to all cash and waited out the uncertainty.  In general we don’t really want to be up or down, we just want to collect our premiums and our dividends – which brings us to our Dividend Positions and Spreads:

  • 3,000 NLY at net $15.76, now $17.88 – .62 dividend expected 9/30 ($1,860)
  • 2,000 AGNC Sept $28 covered call at net $27.21, now $29.11 – $1.40 dividend expected 9/30 ($2,800). 
  • 3,000 FTR at net 6.29, now $6.95 - .19 dividend expected 9/30 ($570)
  • 20 GLW Jan $16 calls at net $2.55 ($5,100), now .85  (down $3,400)
  • 1,000 CSCO 2013 $17.50 buy/write at net $11.92/14.71, now $15.99 – .06 dividend expected 7/15 ($60) 
  • 1,000 HCBK at net $6.83, now $6.23 – .08 dividend expected 8/30 ($80)
  • 2,000 SKX Jan $14 buy/write at net $9.75/11.88, now $15.46
  • 5,000 WFR 2013 $7.50 buy/write at net $3.85/5.67, now $6.53
  • 50 WFR Aug $8 calls sold for .32 ($1,600), now .03 (up $1,450) - should expire worthless
  • 2000 SONC March $10/$12.50 buy/write at $6.95/9.72, now 9.05
  • 5 OIH 2013 $110/130 bull call spreads at $10, now $11 
  • 5 OIH 2013 $100 puts sold for $11.50 ($5,750), now $8 (up $1,750)
  • 3,000 HOLI Jan $7.50/5 buy/write at net $2.90/3.95, now $6.41

Our spreads are simply on or off track.  The main idea here is to establish inexpensive entries for future call selling and dividends.  We broke up some of our buy/writes and that pushed the losing puts into the earlier section and there are many thousands of call contracts so be sold when the market comes back.  Meanwhile, we hope we have adequate protection from our long-term hedges to see us through things – just in case we don't bounce back!     


  • 100 IYR Jan $50 puts at net $1.70 ($17,000), now $3.05 (up $13,500)  
  • 50 IYR Aug $57 puts sold for $1.05 ($5,025), now $2.70 (down $8,250) - rolling to 100 Aug $55 puts at $1.35 (even)
  • 50 DIA March 2012 $110 puts at $4.15, now $7.95 (up $19,000)
  • 50 DIA Aug $116 puts sold for $1.40 ($7,000), now $4.10 (down $13,500) 


A nice net $10,750 on our protection and, of course, we turned bullish on the drop and decided to protect our gains.  So far, so wrong and we went lower but a very easy roll on the IYR puts will send them down to 100% premium that expires on Friday (the benefit of doing 1/2 covers) and, for the Dow – it's very possible those short puts expire worthless and, if not, the Sept $112 puts are $4 so we sacrifice a month (out of 6 we have to sell) and gain $4 in position – not a bad trade-off.  

All in all, we weathered our first major drop quite well.  We still have more than 60% of our cash and margin to deploy and our main positions are all on track except GLW, which is the only call we bought so hopefully that's a nice, memorable $3,400 lesson on why we should always SELL premium, not buy it!  We pocketed $50 in virtual cash for net $33,134 now collected in our first 4 months so we are still good through December before we have a need to withdraw cash and our net balance of the other positions is -$29,565 on our short puts and + $10,750 on our protection (which I expect to improve) for a net paper loss of $18,815 against the $33,134 gains we cashed.  

That's what a CONSERVATIVE portfolio is supposed to do in a crisis – pretty much nothing!  That's why the first thing we do in a crisis is – NOTHING!  We take a step back, we assess the situation and then we make calm, intelligent decisions to make the best of what we have.  

Again, I cannot stress enough how much simple, 30% stops would have saved us on the short puts.  That's a discipline you MUST have.  Let's say your puts are down 30% and you stop them out but then we find a bottom and now they are down just 20% if you resell them.  So what?  You can sell them again and all you miss is 10% of your intended profits because you played it safe instead of sorry – that's smart in the long run as you free up a lot of margin and keep yourself more flexible when you buy back those puts (we could have bought a lot more CSCO and WFR!). 

Our biggest losers are our short puts on RIMM, IMAX, GLW and HCBK but none have more than a 2,000 share commitment so all are adjustable – we'll just have to wait and see where the market settles but RIMM, for example, has 1,500 shares at about net $26.75 ($40,125) and the stock is at $24.56 ($36,840) so hardly a crisis worth of taking a $6,625 loss on our puts over, is it?  That's what I mean by taking that step back and assessing your situation.

1,500 shares of RIMM at net $26.75 can be turned into a 2013 buy/write, selling the $22.50 calls for $7.50 and the $17.50 puts for $3.20 for net $16.05/16.78, which would be $50,340 if assigned to us at net $16.78.  If you don't REALLY want to make RIMM 10% of your portfolio at $16.78 then take the 1% loss now and get out of the puts – isn't that an easy decision process?  

That's how you need to evaluate ALL of your short put positions, run them through your worst-case scenario and make sure you are gong to be HAPPY to own them for the net price in the quantity that you will be assigned.  If you are not comfortable – then at least lighten up on the position.  For instance, with RIMM, we have just a $1,700 lose on 10 Jan $27.50 puts (0.34% of the portfolio) – take that off the table and your entire current commitment to own RIMM drops to 500 shares.  The Same goes for IMAX, where a small loss can be taken on the 2013 puts if you don't want to risk a larger potential assignment.  

Remember, we are building LONG-TERM positions here, when we first bought RIMM is was at $37 and we would have LOVED to own 4,000 shares for $16.78.  What's changed?  Have they really dropped 50% in value in a few months?  If not, then why quit the position?  Think through all of your long-term positions this way and you will be much less likely to panic next time the market decides to have a sale!  


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  1.  Good morning, Phil.  In respect to our running discussion about whether corporations are "persons", for which you correctly cite Supreme Court cases, I offer you the following [political]support, with a considerable degree of amusement; politics makes strange bedfellows, it is said.:
      You already know what I think, but repetition is satisfying if not elucidating.  I believe that treating U.S. multinationals as "citizens" is a barbarity.  Corporations are faceless, often largely-foreign-owned entities, which are legally termed "anonymous societies", managed by professionals whom, while not individually evil people, are legally bound to seek profitability above social welfare, and whom are largely immune, by definition, to every humanistic impulse. You often launch attacks on corporate managements, which demonstrates an instinct for the capillary rather than the jugular.
      "Corporate citizenry" represents a serious distortion of the U.S. constitution, and provides a recipe for exactly the kind of behavior we have witnessed — outsourcing American jobs, holding profits offshore to avoid taxes, transferring sensitive technologies to our military rivals, and even straight-up selling them weapons technologies.  Moreover, these corporations wield a level of political clout that all but a handful of very wealthy Americans can even approach — not a lot of U.S. billionaires with $30 Billion in cash lying around, like Apple.  
    But the Supreme Court absolutely agrees with you in Citizens United v. Federal Election Commission.   As a Huffpost reporter wrote, "In one swoop, the court did away with nearly everything in federal campaign finance law, allowing corporations free reign to inject as much money as they jolly well please into federal campaigns. The decision completes what Slate’s Dahlia Lithwick calls "The Pinocchio Project," in which the Court transforms "a corporation into a real live boy," complete with personhood, free-speech rights and the unfettered opportunity to drown the body politic in a tidal wave of perverse incentives."
    And further: "A very large percentage of U.S. corporations are owned by foreign persons or entities. In 2006, USA Today reported: "Nearly one in five U.S. oil refineries is owned by foreign companies. Foreign companies also have a sizable presence in running power plants, chemical factories and water treatment facilities in the United States." It was also reported that, "Roads and bridges built by U.S. taxpayers are starting to be sold off, and so far foreign-owned companies are doing the buying." In 2008, it was reported that foreign ownership of U.S. companies "more than doubled" between 1996 and 2005. To get a fix on the spending power, consider this: "The total receipts of foreign-owned companies were $1.7 trillion in 1996 and just $39 billion in 1971."

  2. New PLX post is up.  Will add to the Financials as I can.

  3. PHil, what do you think about REIT’s now. One I saw picked up by Weitz Funds recently is RWT- pays a nice dividend and got knocked down in the selloff. Weitz is pretty conservative so it caught my attention.

  4.  Oh by the way TOS called me (I guess I should be honored) to tell me they will be down until tomorrow afternoon as they decided to do the big fix this week.

    Also – an this is going to blow your minds! – As of tomorrow night, you will no longer have a funded futures account because, for the next 30 days – it will no longer be linked to your trading account and you must SPECIFICALLY fund you futures account separately from options.   

    The system will go back to where it was in 30 days (they say) but, if you want to allocate money for futures trading, it has to get funded separately which is, of course, ridiculous because of margin issues as it’s the unused margin from the stock and options account that makes futures trading viable in the first place.  

    They said they will be sending out an Email but they wanted me to know as we apparently have their attention with our futures activity.  


  5. Phil TOS funded future acc we need to complain about this as I have a letter stating nothing will be changed once they change over.

  6. I agree with Yodi- this is crap. They pulled the same nonsense about a year ago on the extra margin reserve which changed over night dramatically and without warning. Everyone needs to email to TOS and complain. Such changes with out warning screws up strategies and trading plans and is simply NOT acceptable.
    If they need to change the rules of the game then customers must be given opportunity to adjust – either changing strategies or moving accounts.

  7. pstas
    very well said we should look at the changes this afternoon and if not aceptable should combined our forces and complain!

  8. I’m still waiting for the damned system to come back up.  Can’t finish this post!  

    Bottom line is they are changing their clearing house to the one TD Ameritrade uses.  The good news is there is no change in the software, this is the big change everyone was worried about and the problem with the futures is SUPPOSED to last 30 days and then go back to way it was (all in one account) under the new clearing firm.  I don’t see any possible good that complaining or protesting or anything else will do. 

    They did SAY they will work with people and will be lax on margin issues but, of course, if they don’t put that in writing – how can you possibly trust them when you have an apparent margin violation?  They also SAY you can transfer funds back and forth as often as you with "instantaneously" but that still doesn’t solve the buying power issue – even if true.  

    Basically, not at all a cool thing to do!  

  9. Anyone can tell me when is 12.00 CST in the USA ??? One possible needs a TOS watch.

  10. My conversation with TOS
    Version:0.9 StartHTML:-1 EndHTML:-1 StartFragment:0000000111 EndFragment:0000002923

    18:50 yodi: Looks like my PM margin has been changed to normal margin18:57 kms: checking18:57 kms: you need to transfer cash for a margin account to the futures account now18:58 kms: go to TD website login then accounts> deposits & withdrawls18:58 yodi: I am not even talking about the future account all my normal account can not be traded!!!!18:59 kms: THE pm ACCOUNTS ARE NOT UPDATED YET19:00 yodi: Well surely a balls up you are presenting to clients. I am a member of the PHIL’s Stock world and all people are in arms!!19:01 kms: the conversion is not completed but will be later today19:02 yodi: In one of your previous emails received you stated nothing will be chaged so why are you pulling the chair under us in respect to futures ?19:04 kms: we sent out emails about all the changes19:04 yodi: Not on futures19:08 kms: sorry they should have been sent out19:09 yodi: Your trading experience will remain the sameTrading platform, service and support won’t change: As we promised you, the trading platform, service and support that you counted on at thinkorswim will remain the same. You’ll still be able to trade on your favorite downloadable thinkorswim platform and will enjoy the same features and speed of order entry that you’re familiar with now. You’ll be able to continue monitoring your balances and positions through the downloadable trading platform. Even your paperMoney19:10 kms: ok19:10 kms: I am not agruing with you about something that surprised you19:10 yodi: OK this with futures is not OK19:10 kms: if you want to trade the futures you need to do the transfer19:11 kms: I will paSS THIS ON TO A MANAGR19:13 yodi: It is not a question of trading futures it is a question of the futures one holds. The account with stocks and options in the past guarantied the sufucient funds for futures now there is nothing and you ask as todrain the account to fill the hole for futures is that it?19:13 kms: I am just trying to help you19:13 kms: I dont make th erules19:15 yodi: rules are agreed apon by both sides they are not applied over night so one sit’s there on Monday morning with roles only one party made up!19:16 kms: sorry please send an email with your thoughts to support@thinkorswim.com19:16 yodi: Well we will see what gives. Thanks bye19:16 kms: thanks

  11.  Too bad about TOS.  I love the platform but have kept all my money with IB because of the complications with server access during crashes and so on.  I think I get better fills at lower cost.
    Anyway I’m looking forward to where you are headed next as this portfolio has become my core with a few other buy-writes.  In my IRA I’m think about starting to accumulate holdings again and sell covered calls.  I’m thinking of concentrating on value stocks where the insiders are buying shares.  Sabrient has some good data on stocks where the insiders are buying, so these are where I’m starting my research for a buy list.  Much like the way you are selling puts scattered through different months, I’m thinking I will do a few near month covered calls sold ATM and then some medium and longer term calls sold OTM based on the growth prospects.
    Last week you made some comments about Iron condors and credit spreads that I found interesting.  I gave up on condors a couple years ago for the same reasons you mentioned: terrible risk reward trade-offs.  I checked out the track records of a number of iron condor traders and they all had big blowups, often losing 30-50% in one month.  They got killed in the 2008 downdraft, then again in the 2009 updraft, and now again in 2011.  There is just too much volatility right now.  I also don’t like the idea of selling lots of credit spreads for income, because you have to win so much, it just catches up to you at some point.
    However, I am thinking about experimenting with credit spreads as an alternative to selling puts in my IRA.  My reasoning is that I always have to cash secure any sold puts and it ties up a great deal of margin.  So I’m thinking of selling credit spreads on stocks I want to buy, not just for income, but in the same way I would sell puts in the income portfolio.  If the stocks drops below the sold strike, my plan would be to sell the long put at a profit and take assignment of the stock.  This way I’m getting the advantage of selling puts in my IRA without tying up all my margin.  I would keep my trade sizes at a level where I only sell as many credit spreads as shares that I want to own.  
    I’m also thinking of using sold credit spreads as offsets for disaster hedges in my IRA.  That way I don’t have to have a call spread on TZA and tie up full margin to sell a put as an offset.  By the way, it seems like a change the last few months that you have suggested selling puts on whatever you want to buy as an offset, rather than selling puts on the same equity as the call spread.  I have loved this change and it has transformed my trading.  I have a tendency to over hedge, but it does not effect me so much if I sell a put on something different, like selling a VZ or IBM put on a TZA call spread.  
    I’ve been in cash and bonds for several months and trying to restrain my self from being too eager right now, but the high VIX is compelling.  I appreciate any feedback from Phil and anyone else on the board about buying stocks with insider buying and selling credit spreads.

  12.  Phil 
    Do you have an interesting play on GOOG. I would like to construct the following trade
    I was thinking of Jan ’13 500/600 bull call spread for $50 offset by the Jan ’13 450P for $40 for a net $10 entry into a spread thats already $57 ITM.
    Your thoughts are appreciated

  13. Revtodd do you still have a website for your IRA trading.  I’m getting killed on my puts with no margin.  Would like to try out
    some of your ideas.  Thanks!

  14. Submitted on 2011/08/18 at 1:20 pm

    Income Portfolio/Savi – Well unless we get a full reversal tomorrow, we’re going to have to!  That was a nasty plunge in IYR – we’re just going to roll them straight across as I’m not that bearish over the next 30 days.   

    Submitted on 2011/08/19 at 3:21 pm

    Income Portfolio (thanks Savi):  

    • DIA short Aug $116 puts, now $8, can be rolled even to Sept $114.75 puts.
    • IYR short Aug $55 puts, now $2, can be rolled to Sept $52 puts for a .05 credit.  
    • WFR Aug $8 calls expiring worthless, as expected.  

    Submitted on 2011/08/22 at 2:00 pm

    SVU/Ban – I do like them at this level, good catch!  You can buy the stock at $6.94 and sell the 2013 $5 puts and calls for $3.95 for net $2.99/4, which is a huge 42% discount to current price and 66% profit if called away 30% lower than we are now so what’s not to like.  Let’s add 5,000 shares to the Income Portfolio and sell 50 calls and 50 puts for net $15,000 out of pocket with a $1,750 annual dividend!  

    Submitted on 2011/08/23 at 10:54 am

    RRD/Jomp – Now that they’ve sold off so hard I do like them.  They are a huge company and pay a very nice $1.04 dividend so you can buy them at $13.63 and sell the 2013 $12.50 puts and calls for $4.80 for net $8.83/10.67, which makes that $1.04 dividend 11.7%.  Be aware that they were $4.75 in the crash so a small entry with a plan to DD if they go below $7 is the way to go.  For the Income Portfolio – I like buying 1,000 shares and selling 10 puts and calls on an entry we’d be happy to put another net $12K (assuming net 2,000 more at net $6 or less) into if they go that low.  

    Submitted on 2011/08/25 at 12:08 pm

    Hedging the Hole/8800 – The Russell is currently outperforming short-term by about 1.5% but if you move to 3-months, it is underperforming the Dow by about 7%.  Who gets hurt the most by now FREE MONEY?  The Dollar gets stronger and materials get weaker so worse for the Dow than the RUT as no one is handing any money to small businesses anyway.  SO, I think the best hedge against the Fed fumbling the ball tomorrow is still our Long Put Plays or the DIA Oct $95 puts at $1.45 because the $90 puts (500 points down) are $1 (31% down) and the $100 puts are $2.10 (45% up) and, of course, it’s a lot more likely we drop 1,000 than go up 500 quickly.  

    So, if you wanted to hedge $5,000, you can buy 70 of the DIA Oct $95 puts for $10,150 and those will pay (in theory) $14,700 on a 500 point drop or about 10% per 100 points.  The expected downside is about $3,000 so that’s the cost of insurance on that trade.  You can offset that cost by selling 10 BA Nov $50 puts for $1.52 and that’s $1,500 that is VERY LIKELY to expire worthless if the Dow is not down considerably.  

    That’s all it takes to hedge an event like this and, of course, any offset you REALLY want to own is fine – the idea is just to say to yourself – IF the market drops 20% – what stocks would you want to buy.  Also, keep in mind that a 20% drop in the Dow is DIA $89 and a $22 move in DIA would put the price of the Oct $95 puts to roughly where the $117 puts are and that’s $8 at the moment (but the VIX would be higher) and that would be $56,000 back on a 20% drop in the Dow and that money would go a long way towards buying 1,000 shares of BA at $50 (17% off), right?  

    In fact, let’s do a set like that in the Income Portfolio (70 Oct $95 puts at $1.45, funded with 10 short BA Nov $50 puts at $1.52) so we can track it forward.  

  15.  Submitted on 2011/09/06 at 10:02 am

    CAT 2013 $80/95 bull call spread at $6, selling $55 puts for $5.55 is net .45 on the $15 spread.  That’s too good not to put in the Income Portfolio  - 5 spreads at net $225 with $2,700 in margin makes $7,275 at $95 and worst case is owning CAT at 1/2 that price!  

    NYB/Pstas – They were not regional enough for me as they are out in Florida and Arizona as well (following New Yorkers as they retire).  Now they are interesting at this price as the Dividend is rocks steady at .25 per quarter, even through the crash so, at $12.25, that’s over 8% and you can drop your net to $8.30/9.15 by selling the 2013 $10 puts and calls, which makes for a good cushion to build on and, even if you get called away at $10, that’s $1.70 plus $1.25 in dividends for a 35% profit.  Good enough to put 1,500 shares in the Income Portfolio, selling 15 of the puts and calls.  

    I suppose, even if I had a small portfolio, I’d take $500 and buy the XLF Oct $12/13 bull call spread at .50 as that can make 100% on a very small improvement in the financials.  A stop at .30 limits the loss to $200 and 10 Oct $9 puts can be sold for .15 ($150) as an offset to that but you have to be prepared to own 1,000 shares of XLF at net $9,000.  Let’s do 40 and 40 in the Income Portfolio and the $25KP following those rules.  

    TITN/Silent – Good call.  They are down because they didn’t beat crazy bullish whisper numbers but, on the whole, they are doing great so it’s not the sort of thing that should concern a long-term investor.   You can sell March $22.50 puts for $4.50 thanks to the crazy VIX – I like that trade idea enough to put 10 in the Income Portfolio.  

     FAS Oct $11 puts can be sold for .92 and that money pays for the Oct $12/14 bull call spread at $1.15 for net .23 on the $2 spread that’s $1.66 in the money so 10 of those in the $25KP and 20 in the Income Portfolio.

    Submitted on 2011/09/15 at 6:48 pm

    FAS/Burr – In the context of our Income Portfolio, it’s a $500,000 portfolio that’s very far ahead of schedule for the year and I don’t consider the risk of owning 2,000 shares of FAS at net $11.23 in October to be a bad use of funds as they were at $13.30 in the morning when I picked the play so a 15% drop before it’s a loss (5% on XLF) and the April $14 calls (in-line with current price) can be sold for $5.70 so figure we get at least $4 for the $12s if the stock is put to us at $11.23 and that drops our net to $7.23 on 2,000 shares ($14,460) without even selling a put as an initial entry on a $50,000 allocation.  Meanwhile, that’s the worst case.  The best case is we make $3,540 if FAS is at $14 or higher in 36 days, which is almost an entire month’s income goal.  

    If you are a technical trader who believes stocks have no actual value, then I’m not going to try to convince you that Financials are ridiculously cheap other than to point out that Financials earn 1/3 of all the Corporate Income in the US yet they are valued at less than 15% of the S&P.  You say it’s like a racehorse but I’m not betting on FAS to win the race, I’m just betting they make it around the track without dropping dead…  Of course, if the trade makes you nervous – DON’T TRADE IT!  We find trades every single day, there’s no reason to ever try one you aren’t 100% comfortable with.  

    My logic this morning that prompted me to put it in the Income Portfolio was that EU banks were moving up 10% and a 5% bump in XLF would send FAS up 15% to $15, which was my fundamental target anyway so that confirmation and the fact that the entire G7 is now backing Europe has a very good chance of buying us a bump in the financials for at least a month and, if not, it certainly should take a collapse off the table for 36 days which makes this a risk of just $460 if FAS holds $11 (and, of course, we can roll the puts too).  


  16. Income Portfolio – I will update the post this weekend (hopefully) but it’s very boring as we didn’t do anything short-term other than roll the IYR short puts ($55), which are almost certain to expire worthless and the DIA short puts ($115), which will expire worthless if we are lucky but we’ll watch that one closely in the morning as it would be nice to get naked on our DIA March puts over the weekend if it doesn’t cost us anything to do so!   

    Submitted on 2011/09/16 at 9:52 am

    As I mentioned last night, in our Income Portfolio, we only need to watch those IYR short puts expire and keep an eye on the short DIA $115 puts, now .67, which HOPEFULLY (not a valid strategy) will expire worthless but, if not, we will want to roll them to maybe 1/2 the Sept 30th $113 puts (now $1.80).   Anything below .50 at the end of the day and we can just take it off the table and not bother as that will give us nice coverage over the weekend (don’t forget it’s a conservative portfolio).  

    Good morning! 

    Feeling good about taking the money and running on FXI on Friday as well as our move to go more bearish in Income Portfolio but, sadly, NOW oil finally drops to $86.50 – they held it over the weekend – longer than we had the nerve to risk it…

    Submitted on 2011/09/19 at 10:03 am

    It would be very foolish of us not to take advantage of the opportunity to do a 1/2 cover of the DIA Oct $111 puts at $3.10 in the Income Portfolio – we are plenty well-covered and we can leave IYR puts naked while we wait for housing data.  

    Submitted on 2011/09/19 at 10:36 am

    I certainly like owning the stock at $1.41 and selling the 2013 $1 puts and calls for $1.23 for net .18 on the $1 call-away so you make a nice 455% in 15 months if HOV doesn’t drop 30% by then.  If not, worst case is you own 1x at net $1.18 and say you DD at .52 for 2x at net .85 and then another DD at .45 for 4x at .65 and another DD at .25 for 8x at .45.  So, now let’s say we’re willing to spend $4,500 on 10,000 shares of HOV at .45 and risk a BK.  That means we start out risking 15 of these spreads for net $270 in the Income Portfolio and, if it works out and we never get a chance to DD, etc – then it’s a nice $1,230 profit in 15 months on the small upside.   

    ANR/JMM – They had a very bad Q2 with a $56M loss on a $6Bn market cap (10%) but $250M of that was merger-related costs with MEE.  I liked MEE at the time but ANR paid a lot for them.  They are probably way undervalued here but it’s risky until we see how the consolidated company performs and they may be taking a lot of write-offs but, on the other hand, the company is buying back 10% of the stock so I don’t think they have any real interest in seeing it recover until they get a good chunk on the cheap.  So, let’s say it’s a really good long-term prospect but iffy in the short run and that means I like the 2013 $25 puts sold for $6, buying 2x the 2013 $30/40 bull call spreads for $2.85 for a net .30 credit so the worst case is you own 1x at net $24.70 while you make $20.30 if they hit $40.  That trade is good enough to put 10 in the Income Portfolio.  

    Submitted on 2011/09/21 at 2:27 pm

    Killing short-term bullish plays including buying back DIA short puts in Income Portfolio!  

    Balance/JC – No, that’s Deninger’s psycho Conservatism but I do like the guy – even though I very often disagree with him.  

    Gotta go back to 1/2 sale of Oct DIA $111 puts at $3.10 in Income Portfolio – happy to roll those out but don’t want to turn down the cash.  

    11,250 seems to be holding and S&P 1,178 and RUT 666 – all our old favorites!  I wouldn’t count on it but we could get a bounce here at least.  

    Submitted on 2011/09/21 at 4:11 pm

    Dollar 78.25.  TLT $118.50.  

    IYR doing a great job of covering the Income Portfolio with a massive drop today!  That’s one to keep an eye on because, if that sector loses it (commercial realty) then this economy is screwed.  

    Also fun – TLT Oct $118/114 bear put spread at $1.05, selling TBT Nov $18 puts for .90 – 10 of those in the Income Portfolio.  

    Income Portfolio – 100 IYR Jan $50 puts at $4.40 are done (up $27,000) – seems silly not to take the cash, we can always find something else to play.  The DIA puts are half covered and that’s our open hedge.  If the Dow fails to hold 10,750, we can add 50 more March $100 puts (now $6.30).  

     Berkshire hit $65!  No need to buy the stock when you can take the 2013 $70/82.50 bull call spread at $4.70 and sell the $50 puts for $4.40 for net .10 on the $12.50 spread.  If you don’t REALLY want to own Berkshire Hathaway for net $50.10, then this trade is not for you but let’s allocate $50,000 to that in our income portfolio and take 10 of those spreads.  Once it’s on track, we’ll be able to sell naked calls as they are not a big mover to the upside normally (it’s not like someone will buy them).  

    Submitted on 2011/09/22 at 2:02 pm

    Wow, this is just sad.  IYR resuming downward trend so we need to protect Income Portfolio again.  Dow puts triggered, of course but let’s add 50 SDS Jan $24/30 bull call spreads at $2 ($10,000) to give us another $20,000 of downside protection if things turn ugly and damage our Jan short puts further.  

    MT kind of a joke at $16.  Forward p/e of 5 (current 7).  They have a $24Bn market cap at this price but made $10.4Bn in 2008 and $114M in 2009 on 1/2 the business ($61M) and last year made $3Bn on $78Bn.   They bottomed out in 2008 at $14.37 and that price was so silly that they only hit $15.57 in 2009 and only briefly below $17.50 on both occasions.  2013 $15 puts can be sold for $4.20 or you can capture the 4.2% dividend by buying the stock for $16 and selling the 2013 $15 puts and calls for $8.50 for net $7.50/11.25, which is 100% if called away and a 29% discount if put to you at $11.25 so let’s do 500 in the Income Portfolio and sell 5 of the puts too!  

  17. Thanks L4!   Keep in mind that my system is all about taking a balanced group of trades and cashing out the winners and working out the losers while JRW’s system is VERY directional and short-term.  The two can be used together the same way I favor having the bulk of our assets in well-hedged positions like our Income Portfolio and using a small portion for short-term gambling like our $25KP.  Over the course of a year, we expect the $500K Income Portfolio to make 10-20% so even getting wiped out of the $25KP only dings us slightly but making $75K on the $25KP still adds 15% more to the overall portfolio so we risk losing 5% to make 15% and 15% is A LOT when you add it to a long-term strategy and reinvest it SENSIBLY over time.

    It’s a rough market and we still could move violently in either direction – everyone needs to keep that in mind as we’re back to Cashy and Cautious for the moment (20/15 or 15/10 bullish until we fail our goals).   

    I don’t want to jinx it but congrats to all the $10KP players who became $25KP players and are now going to be $100KP players.  As I mentioned on Thursday, my plan is to start again next year with a 10/100 portfolio and we’ll keep the Income Portfolio going because that’s what you should be doing with $100,000 – not gambling it on aggressive plays!  Ideally, if you have $100K, you can carve out $10K for an aggressive portfolio and if, like this one, it goes to $100K in two years – even if you made "just" 15% a year on your conservative $90K, that’s going to wind you up with about $220,000 – that’s not a bad outcome – and you don’t have to risk your whole $100K to get it.  

    We’ll talk more about that when we close this portfolio out and start the next one properly.  Hopefully I was right to ignore the BS sell-off yesterday and the markets shake off the Euro worries for a nice couple of window-dressing sessions as we close out the Quarter! 


    Speaking of cheap blue chips – AA did not declare bankruptcy but are still trading at $9.98, with a p/e of 11 that was just confirmed and a forward p/e of 8.5, which was just confirmed.  You can bring that p/e down below 6 by buying the stock and selling the 2013 $7.50 puts and calls for $4.55 for a net $5.43/6.47 entry so almost 30% off even if it’s put to you and a 38% profit if you are called away on anything less than a 25% drop from here.  Let’s go for 4,000 shares in the Income Portfolio as that pays us a $480 dividend while we wait.