Secret Santa’s Inflation Hedges for 2011
by phil - December 25th, 2010 4:30 am
Merry Christmas!
I hope you got everything you wanted this holiday season and, most importantly, I hope you had time to spend with your family. I'm waiting for mine to wake up – waiting for my children to come out of their rooms so I can videotape (gosh I'm old, there's no tape anymore) them in those first moments of Christmas morning – how can I not be of good cheer anticipating that?
It occurred to me, though, that I have something I can give you. Not peace on earth but perhaps peace of mind heading into the New Year – a way to help insure some future prosperity with a few inflation-fighting stock picks that can brighten up your virtual portfolio, which also can be used to help balance the budget against unexpected cost increases.
This isn't an options seminar or one about risk or leverage – these are just a few practical ideas you can use to hedge against inflation as it may affect your everyday life using basic industry ETFs and some simple hedging strategies to give you an opportunity to stay ahead of the markets if they keep going higher.
Idea #1 – Hedging for Home Price Inflation
Let's say you have $20,000 put aside for a deposit on a home but you're not sure it's the right time to buy. On the other hand, let's say you are worried that home prices will take off again (I doubt this but you never know). XHB is the homebuilder's ETF, currently at $17.46 and they bottomed out at $7.77 in 2009 and were in the $40s back in 2006.
You can sell 20 contracts of the XHB 2013 $14 puts for $1.70 each ($3,400) and that obligates you to buy 2,000 shares of XHB at $14 (20% off the current price) and you can use that money to buy 30 2013 $15/18 bull call spreads for $1.40 ($4,200) so another $800 out of pocket and you have 30 $3 contracts for net $800 that pay back $9,000 if XHB simply gains .54 by Jan 2013. These bull call spreads, however, do not pay off early – the ETF needs to be above $18 at Jan 2013 options expiration day (the 18th).
Frenzied Options Activity Observed on Transocean Ahead of Earnings
by Option Review - August 4th, 2010 5:02 pm
Today’s tickers: RIG, BKS, GPS, HIG, CX, GENZ, ENP & PG
RIG – Transocean, Ltd. – Shares of the provider of offshore contract drilling services are up 6.75% to stand at $53.79 with 20 minutes remaining before the closing bell. Transocean is scheduled to reveal its performance for the second quarter of 2010 after the market closes today. Impending earnings inspired a flurry of options activity on the stock in afternoon trading. Investors are making good use of RIG’s weekly options pre-earnings, placing both bullish and bearish bets by exchanging calls and puts. Optimists hoping to see Transocean shares extend gains through weekly-expiration on Friday purchased roughly 3,200 calls at the August $55 strike for an average premium of $0.74 each. Buying interest spread to the higher August $60 strike where approximately 1,000 calls were coveted at an average premium of $0.08 apiece. A strong earnings report and continued rally in RIG’s shares will benefit traders making bullish wagers today. On the flip side, some investors are hedging possible disappointing earnings and subsequent share price erosion. Put players picked up roughly 2,500 puts at the August $52.5 strike for an average premium of $0.96 each. These contracts, which expire on Friday, yield profits – or downside protection – to investors should Transocean’s shares decline 4.2% from the current price of $53.79 to breach the average breakeven point on the downside at $51.54 by expiration. Calls expiring on August 20 were also heavily traded ahead of earnings. Trading traffic is heaviest at the August $55 strike where more than 11,500 contracts changed hands by 3:50 pm ET. Overall, options players exchanged roughly 1.65 calls for each single put traded on the stock today.
BKS – Barnes & Noble, Inc. – The bookseller’s shares surged 24.9% at the start of the trading session to an intraday high of $16.04 on news the retailer willing to consider offers from others to buy the company and its 720 outlets. Shares cooled slightly by 3:20 pm ET, but are still up 18.85% on the day to arrive at $15.26 ahead of the final bell. The U.S. bookseller was upgraded two levels to ‘neutral’ from ‘sell’ at Goldman Sachs. Options traders hoping to see Barnes & Noble’s shares continue higher ahead of expiration next month purchased roughly 1,000 calls at the September $18 strike for an average premium of $0.47 apiece. Call buyers make money…
Bye Bye Buy List!
by phil - March 18th, 2010 6:15 pm
Oh, I have tried!
I have tried to be bullish, I have tried to get enthusiastic about this rally but I have been reviewing these picks for a few days and looking at the market, the charts, the sentiment, reading the news and studying the fundamentals and I'm OUT! Oh, I'll be back, we'll set up a new, aggressive $100K Virtual Portfolio next week for some fun shorter-terrm plays (still keeping the conservative one for the full year) to take full advantage of this insanity but it's going to be mainly cash through the end of the month as I do not trust this rally one bit and it will be so nice to head into the easter holiday with lots of cash on the sidelines.
We hit a perfect entry on Feb 8th, in our last round, and the market is up almost 9% since that day and I'm not expecting another 9% in the next 6 weeks so it's a very good time to take a break. We were able to roll and enjoy these trades since Christmas and we will be revisiting some, maybe even keeping a few but, on the whole, I want to do what I often counsel members to do, which is follow our simple two-step process to maximizing your profits in a market rally:
- Step 1) Take Money
- Step 2) Run
There – isn't that simple? Keep in mind that we LOVE all of these stocks so we'll be back in them if they go on sale and, perhaps, even if they don't and the market looks stronger through April earnings. Meanwhile, keep in mind that these are 6-week profits so 20% is A LOT for generally conservative plays. Not much else to talk about – let's just see how many of these suckers are worth keeping (noted in green):
AET (12/21 – $34.04, 1/9 – $32.70, 1/31 – $29.97, 3/18 – $33.24) They could not have done better for us, staying right in range and giving us 4 excellent sales but health care is passing this weekend and that's too wild for us to stick with. Our last batch is right on target:
- Apr $33 calls sold for $2.40, now .40 – up 83%
- Apr $30 puts sold for $1.50, now .02 - up 99%
- 2012 $25/35 bull call
The Buy List – Q1 2010 (Members Only)
by phil - January 9th, 2010 7:26 am
Well we finally hit our levels!
Fundamentally, I still don't buy this rally but, technically, we could go up and up from here. We discussed in chat yesterday how we may be in a pattern similar to 2003-7 where we came out of the dot com crash and 9/11, which took the market lower than it should have and then government stimulus took us higher than we should have been. Sure it all ended badly but there was a really good ride up in between. HOWERVER, 2004, which is about where we would be now, was a choppy and downtrending year. That is not a problem for our buy/write strategy as long as we keep our heads and scale into our positions.
Obviously we can't rely on patterns to simply keep repeating themselves. We could have another terrorist attack, we could have more stimulus or maybe both in our future but, until we see the patten broken, we can play for a similar move. Our buy/write strategy is ideal for this as it's a conservative play that gives us 15-20% downside protection. Combine this with our usual strategy to scale into positons along with some sensible disaster hedges and we can build a nice, bullish virtual portfolio for 2010. Keep in mind we don't fear the upside with buy/writes as our "worst case" there is we get called away with a nice profit.
I put up our latest Watch List on Dec 22nd, following through from our bullish lists of September 6th, October 8th and Nov 24th. These are the bullish plays that form the bulk of our virtual portfolios and that sometimes gets lost in our weekly short-term trading. It was a lot like shooting fish in a barrel, picking winners since September (we had our last Buy List on July 11th our first since the bottom in March, which was followed by the more conservatively mixed $100K Virtual Portfolio that we used from April through July, when we were worried the market would be choppy (it was). As always, our active lists are found under the Virtual Portfolio Tab near the top of our pages - always check there for recent updates.