Selling puts

Here is a strategy that works well for low priced equities. We now have many many to choose from. Bear in mind here that the worse case scenario is for the underlying to go belly up and stop trading in that equity. Since the advent of the ETF's, this is not so much a problem. For this reason I particularly like this strategy.

Example: we have UYG trading for about 5.25. If we were to sell Feb 4 puts and collect .35 we would have a gain of 14% (250.00 margin required) If the stock is above 4 by the 3rd Friday in Feb, this will expire worthless and I pocketed the 35 already. If the stock is say 3 by then (or a week or so before ex date) we can buy the option back for a significant loss (possibly the price would be 1.20) but then we sell the March for a gain (possibly sell the March for about 1.40) We continue to do this until some day the stock does close above 4 and our position expires worthless.

If you are in love with the underlying, you can always take assignment and sell calls against the long equity you own.

I have done this strategy for over 15 years. It is a good cash generating strategy.

Virtual trade it and see.

By now we have all heard of the "flations"

Is it inflation with all the monies pumped into the economy, or is it deflation as economic growth goes south for a season.

Given the choice between the 2, govs of course prefer the inflation. Tax revenue, business models, retirement planning etc all hinge on being able to have a higher valuation down the road.

I think everyone is as confused. We see gold taking off the last few days like no tomorrow, yet on the other hand, we witness the lowest fed rates in history. Gold screaming inflation while fed funds screaming deflation. What is an investor to do?

Well, I think both scenarios are not good for equities. That should be a given. I supposed that deflation has not run the course yet. I would be on that side of the aisle until proven otherwise. But if after writing this I see inflation getting the upper hand, would it be wrong to switch opinions? Isn't that what trading is about?

As some one commented about 30 year bonds and a 30 year cycle, we are on the edge of yet another bubble. The treasury bubble. If inflation takes hold, these thing are certain to come tumbling down. Since I am not a good timer, I will sit on the sidelines of this show until I feel confident of the bubble popping. Then I expect to get in.

Didnt we see this movie before?

If I remember the plot, we watch as lending rates go to zero and we have a horror of a lost 2 decades. It must be a rerun, because certainly we cant be witnessing the same movie twice?

I am referring to Japan for those unaware. I think they tried the same things. They Had the same lies spread about their banks that we do. I remember reading about all the same gimmicks used before.

I guess we can sit back and watch the sequel. As in sequels, we all know what happens. We just watch to see the twist and turns to get us there.

Those that do not learn from history are doomed to repeat the same mistakes.

Fed rates

It is no surprise that the feds will cut the rate. The only question is by how much. If they take the lead from last weeks zero return for t-bills, then it will be 3/4 cut. I personally expect 1/2. They will want to have some left over for the next meeting.

At this time it does not matter much. They will most certainly go to zero before this is all through. Then what? The next great bubble? Treasuries?

Interesting read last night from a respected analyst (respected by me at least) if we are to work the numbers (I wont bore you with the analysis) the projected mean for this recession based on previous recessions that have been as severe, he is expecting a 500 S&P. That tells you the downside potential.

Now we will not go there over night and if this turmoil is anything like the '30's, we still have about 2 years of pain to go and another 20% or so of house prices to fall.

You will need to change your habits of buying on the dips we have done so long and start (or continue) to sell on the rallies.

You all should know my preference. Buy the long month puts and sell the short months. If we get large rallies, buy back the short month wait for the drop and then sell again. Either that or wait for the drop, get out of the entire position, wait for the run up and place the trade again.

For the bold...Buy puts. You will need to have some pepto on hand because the swings will make the most iron stomach wretch as we go down and come screaming back up again.

Madoff

Excuse me for posting twice in one day, but the news just keeps talking about this guy.

My input. I am so conservative that any one that talks to me cringes at what comes out of my mouth. Anyways, Roosevelt over 40 years ago set up the SEC. Where is this agency? Isn't this what the SEC is supposed to find and stop? I have a neighbor friend that works for the SEC. We spoke about this and the usual blame game is transferred to not my department etc.

Wake up people!!!!

These agencies are setup to hold you in check while the fox raids the hen house. It never has and never will be a level playing field. The sooner you realize this the sooner you can get on with your retirement plans. Do not act surprised or disgusted. This corruption goes on and on and on.

As Warren Buffet is supposed to have said "it isn't until the tide goes out that you can see who is swimming naked"

Now that the tide is out, we are seeing all the cracks of the last 70 years. Best of luck to everyone, you will need it. If you like what you are seeing here and it has helped, let others know because we are a little minority now and the masses are getting fleeced like no tomorrow. They need help and the typical financial advice is unqualified to help.

Wish they would just do it!

We know the bailout of the 3 dinosaurs will happen. We just wish it would happen already and see what morphed animal it takes on. Tax payers are on the hook we know this already, please put us out of our misery and quickly.

Diagonal puts have been good to us these past few months. We can ignore the sucker rallies and stay the course.

Many were using iron condors and I think they see just how those investments can blow up on you. I am sure there those that have had both side taken out on a single day.

Iron condors are best used in volatile markets that increase the premiums on both sides. then have the volatility subside. Theory anyways practice? You get hammered on both sides and if there is not enough volatility, then you get not premium to make it worth your time.

My opinion only. I get responses from long time option traders that criticize my criticism, but then that is what makes markets.

Bailouts

We are not even going to get into the fact that these things are unconstitutional. What is that paper anyways.

We are going to get into the fact that emotions are running high...These bailouts while sound good short term, eventually prolong the inevitable. Capitalism (the way I understand it anyways) if to allow each and every individual the opportunity to succeed or FAIL! as they choose. Isn't that why the constitution allows for bankruptcy? Take away the chance to succeed or fail takes away risk. without risk, we go stagnant. Take away short selling or requiring to file when taking a short position does the opposite of what it is intended to do.

So now that we are officially a nationalized nation, where is the risk and the reward?

Off my soap box...as traders we need to understand human behavior since the markets are basically swung from fear to greed and back. We see the auto bail out fail. The market is in a tailspin. The fear is rampant as I write this. But wait...is there anyone reading this posting that really thinks the auto industry is going in the dumpster while central planners are at the helm? How soon we forget only a month or so ago this same play on the nation stage only it was 700 billion. Remember?

If you have a gambling bone, buy calls on GM. If you are conservative like I am, buy into the soon to be rally after this fallout today is over. Remember who is calling the shots. After another round of appeals, the bailout will happen.

My question looking past next weeks massive rally is then what?

Looking to take off the long side on my calendars and diagonals and waiting for the bounce and then buying the long side once again. If this is a bit too complex for you, then just get out of the short SPY and then re-enter next week after the hoopla Detroit is saved mantra wears off and then short the SPY once again.

Bear market rallies

Sometimes the rally witnessed in a bear market can really be convincing that the bottom is in and time to go long equities once again. However, fundamentals are decaying around us on a daily basis. News media cannot stop predicting the bottom and investors touting things like the January effect etc. lead me to believe there has not been enough "blood letting" so to speak to have reached the bottom. If the bottom were truly in, I would expect to hear much different tales from the media.

So how does one keep their assets intact? If we stay out of the market, we get "ZERO" yield (anyone notice this yesterday on the t-bills?) if we stay in the market we will get whipsawed even if we are right on the markets continued slide we cannot hold out with the rally we are witnessing. So what is an investor or trader to do?

If you do not like my approach of buying long puts and selling short puts against the long thereby smoothing out the swings, then you can be an aggressive trader and get long on the rallies expecting full well to have sharp drops for which you will need to be short then once again long etc. Problem with this is 1) you need to be in front of a computer during trading hours and 2)You need to be good at timing.

If you want to trade the latter way, then make sure for sake of your sanity to have tight stops in place.

Wild swings

These markets are just plain crazy. Having never lived through a depression before, I can only read history and make assumptions.

Looking at history, '29-'32 saw a 90% top to bottom. However, there were many large rallies along the way. Each intervention from the government lead to hopes of the bottom in only to be dashed again. Once the bottom was truly in so many had lost faith in equities that it took 20 years to gain back the glory.

This is why we are not at a bottom yet. We still have pundits predicting the bottom is in. That probably wont happen until no one claims the bottom. Until then these are very wild times. Swings from euphoria to depressed are happening on a daily basis.

Even the fed chairman and his books on the depression fails to see what is before him (at least he wont admit it publicly). What sets this financial tsunami from the 30's is the massive debt load. In the '30's we were a creditor nation and borrowed our way out of the mess. Today we are so far in debt that we are pushing on a string.

When JP Morgan goes on the ropes, it will be much larger than any of the other bailouts we have witnessed. That should take the markets down much more. As noted before, I expect around a 5,000 DOW maybe even more.

If you do not have the skills to trade these wild swings, then go to cash and wait the great buying opportunities that are coming up in businesses that fail, Real Estate on the cheap and stocks that will be at generational lows. (Those that survive)

For now, I am long puts on just about anything and selling the closer month. When we get a rally, I buy back the short side wait for the next large drop and then sell it again over and over.

Later

Sucker Rally or the Beginning

What a week in the markets!
Has the Gov actually plugged the holes? Has the feds lent us to prosperity?

If history is on our side as it should be, then we are in for much more intervention, much more liquidity collapse and much more pain for shareholders.

Just like 1930's, once the devalue comes into play it will be off to the races with gold.

For now we will take a wait and see approach.

Still short SPY.

Citi

Here we go again....

This time it will be different. This time 300 billion will just be right.

This is what you get from central planning. You cannot know as much as Mr. Market does. Never! So why do we pretend to send supposedly smart people to DC. and Wall Street expecting to outwit Mr. Market. Dynamic markets are far to complicated for one man or even many men to understand. Let the market do it's thing. the alternative is outright socialism.

I noticed an "End the Fed" rally in my area. Why after the facts did I see this. If I had known, I would have been there. (there was no lack of publicity for a rally against prop 8 in cal that for one has nothing to do with my state and 2 prop 8 will be over turn by a power hungry judge system in cal. but that is another subject) It is about time folks started to wise up about these crooks. Talk about organized crime...I understand Ron Paul has some bills flying around to abolish the Reserve act and other assorted bills. I don't take political sides as most of you know I feel both parties are as corrupt as the mob, however in the case of the reserves being abolished, I don't care who does it, just do it. Google Ron Paul and maybe even get on his email list.

Until we get rid of the reserve, plan on more gimmicks, like the devaluation that is coming and our currency backed by a world currency. That would make gold go out of sight.

In the event of a devaluation, creditors get hammered.

Pushing on a string

We have seen unprecedented pouring of cash into the economy to no avail. We have reached the point of pushing the string. For the last 50 or so years the economy reacted to the fed stimulus. It apears this is no longer working. Defaltion is the headlines. Problem with headlines is that are usually after the fact.

I dont recall many in the press shouting of the disasters we are in until they appeared. So take what the press is squaking with a grain of salt.

As traders we always need to understand what is coming not what is. So looking down the road....History is on our side here.

What will likely happen is a massive devqaluation of all major currencies. Roosevelt did this in 1932 and forbad anyone from hold gold. We witnessed this on an almost daily basis in South America in the '80's. About the only way to get out of all the debt we have now is to devalue. The inflation gig did not work. Defation is everywhere.

Who gets hurt in a situation like this. Creditors. Debtors (like the U.S.) come out great. Creditors take less than face amount on the loans. Much like the inflation of the '80's. there is talk already of placing the dollar on a world bank standard. It will be interesting to see waht happens. Gold shouls shoot for the moon much like it did in the 1930's after the equities collapsed.

I am not recommending running out and buying all you can of gold, but in the very near future this will in all probability play out.

Just be ready.

Senate Approval

With that done it goes to the house that already said no Monday. This time though there is more pork added to make it attractive. Last I read, it has 112 billion of pork added to it and a simple 3 page proposal has turned into a Novel size now. Just ridiculous.

Did not get filled yesterday on the Nov puts early on as the market went south in the beginning. Canceled the trade. Looking for this political voting to end then place the trade again.

In my humble opinion, October should be a very bad month for stocks. A very good probability trade for the short side.

A question

If the supposed bailout is to effect the banking system, why do we need a vote for 700 billion. Didnt the reserves just pump 650 billion into the system already?

Is this bailout pacakage more of a "see we are doing something" in Washington.

Looking to go long Nov. puts in the next few days on the SPY. What strike depends on where the market is at the time. I am looking for a real route this month in equities. I do not usually do this, but what the market is showing us this makes sense to me.

Another Day?

After the failed bailout, I was told by economists and what all that we would be destroyed, the sky would fall etc. I went into my bunker and hunkered down. But then I heard some birds chirping this morning. Opened the door and I could not believe we actually survived the night.

So goes the socialists and their central planning. Glad to see common sense rule for once. Now lets not stop when a new watered down version comes along. The gang of 3 will not stop with this defeat.

Mr. Market will get where he wants regardless of how much money you or I or the feds pump into to the contrary. Let the banks that gambled go down. A stronger bank will takes its place.

Now if we can just stop the FDIC from its grabbing tactics. Just because a bank has a run on its money, does not mean they have to force a sale in order to place the bank off the endangered species list. What the FDIC has done the last week is a crime. This is all so that they do not have to tap into the reserves and make it look like the FDIC is solvent when in reality we need 125 billion to cover the losses that will come.

We won a great battle, but free markets are still be assailed.

Long gold....

And Now WAMU

JP Morgan bought Washington Mutual after the FDIC seized them. Morgan it is estimated has 30-1 leverage of their own. My guess is that Morgan will be the next victim of the investment bankers. they can only buy so much of the counter party that they sold to.

This is getting interesting to say the least. If you wanted to play a pretty good idea, you might look to selling a call spread on Morgan 6 months out and 10% above its price. However wait until the big rally today once the WAMU news jumps Morgan.

Here is the fundamentals as I see them. We are setting up the largest drop in the dollar to happen. The next big bust is bonds as interest rates go up regardless of what the reserve does. They will almost certainly have to raise to keep up with market pressure.

I mentioned inverse ETF's and that has backfired. With the SEC banning short selling, many of these instruments had to stop trading since they could not sell short. If they were set up with puts, then they were not effected.

It is tough to have any degree of confidence when they change the rules on you. Many are sitting on the sidelines and that can be a position too, I think the gold,oil,etc. game is just fine in these times for me anyways

Where do we go from here?

It looks like many in Washington are not going along with the bailout. Good for them.
So the markets should continue to drop and the natural resources should continue to go up. Nothing has changed. what we will see though is much more back door policy. since the reserve can do whatever they want in the disguise of "Emergency", they will place billions upon billions of dollars into the economy forcing inflation higher. I noticed yesterday that the reserve placed 30 billion of my money into foreign money markets.

Any question where this is going?

Short selling

We are witnessing an attempted price control on stocks. These idiots some refer to as the gang of 3 should be prosecuted. To blame short sellers really shows the ignorance running rampant.

Here is some thing to think about. The last time this was done was in the great depression. That didn't solve the problem either back then.

Bailing out their fellow buddies with taxpayer dollars should be a crime not a justifiable necessity.

Short sellers are risk takers and should be rewarded for their risk. Not penalized. If they wanted to do this, however misguided it is, then at least give traders a chance to unwind the positions not change the rules on them forcing a false rally as they covered the short position thus making an unsuspecting public jump into stocks that are basically insolvent anyways.

Hang on here...this ride is getting wild.

Nov options

Most of my positions did not trade on the November cycle. As a result, we needed Sept to expire before Nov would trade (the next two months trade on options now). Well just because they start to trade does not mean the market makers are on top and allow for those options to trade. By this I mean for example XLE did not have any stikes above 71 and the etf traded into 72 yesterday. It was frustrating. Any how, we did get a nice fill to day on the 74 strike netting 1.27 (which most of you right now could get a better fill. Such is my timing)

You have to take what the market gives you and if they do not change the rules mid stream, you can usually wait for the trade to come your way.

I also rolled out to Nov on my TLT trade for an over 10% which as you all know I try to get each and every month on each and every trade. Some times much more as in the XLE roll some times less. I do have some GTC rolls on GDX. EWZ is not where near where I would like. We need several more good days before I can get a good roll. This one may just have to let the Oct expire and then look to see form there where to go. As for DBA, I am long way into 2010 so I can wait for this one to come back and begin to sell short months again.

Best of trades out there. This is some wild stuff.

We humans never learn

It took The soviet Union a complete meltdown, It took Rome a complete meltdown and now the US of A a complete meltdown.

No economist over the weekend read doubted the need, no politician doubted the need, even great investors such as Buffet did not doubt the need, yet here we are down again today.

Never fool with Mr. Market. It is always right no matter how much you or I or the feds pump into it, ultimately it is always right. Leave trading to traders and politics to idiots.

If you have had the courage to stay this course, we are sitting in the cat bird seat once again. You will probably not see such draw downs as you have this past month trading this way. These come along very rarely compared to traditional trading but it does occur.

I am looking to roll out to Nov. Not there yet but in the next day or so I will put in some GTC's

Side note here, do not let AIG scare you from otherwise good insurance. Every portfolio should have insurance.

I still doubt my abilities to take just a straight call in these extraordinary times. Logically I know that this method will far out pace the strategy you all have come to know I like best. But 30 years of watching the markets do what cant possibly happen I am reluctant to go straight calls. Those of you that can my hat is off to you. These times will make for some very good rewards. Maybe I will dip a toe or two in the water so to speak.

What a difference a day makes

We were certain the trend in commodities had changed. MSNBC proclaimed it therefor it was. The masters of the universe proclaimed it therefore it was. They stole my money and pumped it into the system therefore it had to work. Yet we are still going down.

Central planners will be burning the midnight oil this weekend I am told. To finalize a game plan. Once the proclamation was made the edict pronounced, it was so. Now the details just have to be hammered out. Details like how much for a bridge to nowhere. How much longer to extend unemployment benefits etc. Not no never mind the market will do what the market will do. I don't care how much of my money they are going to throw at it.

One thing is certain. Mr market is always right no matter how long it takes and how stupid we reject it, ultimately Mr. Market always wins. Even if we forbid the speculator from shorting and making Mr. Market work more effectively, Mr. Market will still find the true value. Even if we postpone Mr. Market from trading (as in Russia), sooner or later when we do finally open the doors, Mr. Market will be right.

A month or so ago one of my many readings (otherwise I would give credit) the point was made that if the government does nothing, this mess will take about 2 years to clean up. If the government gets involved, it will take 5-10 years.

Now as most of you know I am a very conservative speculator. But times like these call for action. I have not seen such an opportunity for wealth creation by trading in 30 years. You will see me offer straight calls and puts. This is because as phase 2 of this great bull run in commodities takes hold, we will want to leverage all we can out of this. This is the phase where all out gains are made.

For this reason I will shock many including myself. But the gains are just too large to be made to ignore. So instead of all calendar and diagonal spreads, we will be using many long calls. Should make for some very large gains over the next 2-3 years.

Strong stomach

It has been a gut wrenching month to say the least. As was noted a few times, some times a severe enough correction can make it look as if a trend has changed. It takes courage to stay the course.

I think golds 100 dollar rally the last few days should put any one's mind at ease as to where things stand. Oil is now becoming a hedge against inflation once again and the price is running up again.

If you have any funds left to use, now is a good time to add to our ideas. If not, let the prices rise back up and continue to roll out.

One stop shopping

My retirement was taken care of before I was born with Social insecurity. We all know how that has turned out. Now I can go to the feds for not only retirement, but now I can get a home loan through them as well as(of today) any insurance needs.

Who needs a Free and orderly market. Just let the feds handle it. I never thought I would see my beloved home land become a socialists Paradise. But here we are.

Now the gov gets to determine who lives and who dies. Why wasn't Lehman important enough to live yet AIG, Bear, Fannie etc. When you get central planners isn't this what happens? Not my choice, but they decide who survives and who doesn't. Start the lobbying now because if I want to survive I had better get on the good side of these Central planners.

I read where I am a snotty nosed immature thinking of free markets at this time. We need the gov to step in I am told. Heaven help this mentality.

If you cannot see the inflationary pressures, then you should turn your money over to one of these institutions. 140 billion pumped into the markets this week not including the 85 billion rescue of AIG. Yet we cant even pay our bills but we spend more and more.

I will ride out this correction. As long as we have the established mentality we do, we are destined for hyperinflation. The only investments I know that can withstand this assault is commodities.

Best of luck to everyone, these are trying times of our very existence of free markets.

Another Sunday

Well Lehman could not get the needed funding. It will file for BK today. Wonder if they had fessed up earlier and got the needed bail out before Bear or would it have mattered not because Bear had better lobbying. No one will know. Just another weekend from a corrupt government.

They even opened for an emergency trading session. Let me explain. You just got screwed again!!! What level playing field??

Will Merrill trade against Goldman, how about Bank of America against JP Morgan?? Not likely. They are all in this game the same. What the emergency trading is really about, is taking out stops that were placed Friday. Forcing you and I as speculators to regret our positions.

Hold on tight because this emergency trading is nothing more than a fleecing. What pensions and IRA's are going to get hit on this one? What banks that are not invited to this special trading will not be able to sell their pie of Lehman?

Glad my positions are where they are. These corrupt guys are not even hiding the stealing.

Glad we have Obama or McCain to save us....get real here folks. Wake up. The real power is showing you right now. We have allowed ourselves to be controlled by institutions we cannot even vote on.

Now that the cheers are over

We begin the terrible dissection of what just happened Sunday. I am a bit surprised that 300 million taxpayers putting 5 trillion into this only saw a 300 point rally in the dow. This is an example of things to come.

So where do we go from here? There is no argument that housing loans will now get cheaper. In fact housing loans have been the cheapest in a lifetime most of this decade. So that is not new. What most are missing here is that just because loans are going to be cheap, who is going to make the loans?

It is like every time I make a trade, someone on the other side has to take the opposing view for the trade to go through. For every loan, there has to be someone buying the paper. Just because the feds are going to be there artificially buying these things does not has not will not change the fact that Real Estate is still going down. Homes are still in record foreclosures, housing inventory is still million in surplus and getting larger. So as an investor, once I come down off my cheap credit fix I will be once again looking for the next high. What part of our freedom are we going to give up to make our junkie habit feel good again. When will it stop? After the auto industry, the airline industry, etc. Once we all become shareholders who or what is left?

Once again after the dust settles and we begin to understand what we just did, the only stored wealth will be gold, silver, oil etc.

It sounds like a record, but as long as the feds keep with the same tunes the same tunes for investors hold true.

As option traders we need to focus on the trend and buy out far enough to not get trapped in the violent swing these knuckleheads in Washington cause. Then as the trend continues we are there. But we have to remember that time is eroding our value each day. To compensate for this we sell closer options to collect time decay in our favor while we wait for the trend to do its thing. Often times corrections appear to be trend changes. Most of the time the talking heads can make us feel that we are wrong. Do not listen to them after all they are for entertainment value and to make the masses feel good about the investments they have made. We all know how the masses come out in the end.

THE bailout

Certainly everyone has heard...Is this American free enterprise or is this old school European style socialism?

This was supposed to bring confidence back yadda yadda. What it did was bring up more questions. What do you do with a bankrupt company? Yes, the only reason this is done is because these two are bankrupt. What does this say about the housing industry? What is happening to all of these banks holding these notes as assets now?

We as taxpayers now own 1/2 the U.S. real estate. We all know how good a job the gov does running things. But the big fear that only one I have seen to far reading about addresses, we have just doubled our treasury debt on one weekend. Think you taxes are high now....Forget about Obama or Mccain, concentrate one Paulson and Bernanke.

Buy treasuries? No thank you I like gold please and more quantities please. But make it on the sly, last time this happened it became illegal to own the stuff. So be careful who you tell you are buying. If you are aggressive like we try to be, buy gold companies those seem to avoid the hording un american blame game since they do employ people

U.S. Growth

We are told today that last quarter the U.S. grew at 3.3% Not bad (if you can believe gov numbers) if we take this for truth, we can see that the stimulus package that each of us was given did have an effect. Now what? That is my question.

First, I do not believe the number 3.3 once we get the revision it should be downgraded as most often the fed numbers lag going up and going down.

Second if this is the result of the stimulus package, then it has run its course.

It is a wonder to behold the trickery to buy votes. My best guess is that we shrank by 1.2% but then if you count a deficit spending as growth then you can make the gov statistics an argument. around my house if I use credit cards, I seem to be more prosperous until i have to pay them. then I realize that I didn't really have the money in the first place and now I have to cut back to pay the cards off. Why would uncle Sam be any different. We are addicted to easy money. Giving quick fixes only delays the with drawls needed to get over our addiction.

It did make for a joyous pre holiday rally that everyone will enjoy until after the holidays.

Political

While we are at the home stretch to the white house vote, let it be clear here that I do not endorse either Republican or Democrat. Both parties in my opinion are socialist. Neither one will make a difference. This past year as we watched the candidates grapple for delegate votes, the feds took more of yours and our freedoms without a vote and without our consent. The treasury and the reserve together set back economics to the dark ages. All on the premise that we as citizens do not know what is best for us and that they know which institutions are too big to fail etc.

If you will recall it was these same individuals that gave out low interest loans that bailed out the economy after the equities blew up. So low that it started the housing bubble. Now that the housing bubble is popped, we are witnessing the commodities bubble. All because of the feds (and now the treasury) pulling levers and tweaking things to make U.S. look prosperous.

Now I get the same old bull jive about better regulations and what all and that it is the evil speculators that caused our problems. I see both candidates making promises that even they know they cannot keep. There was a candidate I preferred that wanted to repeal the reserves act, stop wasteful spending all the things most Americans would agree on, yet he was not even invited to the debates.

So we have the media telling us whom to vote for and we have the elitists in power telling us we know nothing and stop complaining because they are in charge.

What scares me the most is that these are the opportunities for dictators and tyranny. Malcontents springing up etc. We are already pandering to them and look what is happening. Do you seriously think for one moment that either Mcain or Obama or any of their insiders will use a "universal health care"? This will only create a black market. So why do we even entertain this. You see that those in power already are too good to participate in social Security. They have their own federal retirement system.

I am only spouting here because we have allowed this and whenever I see an ad, it does not even cover the real solutions.

Sigh, we get what we deserve in a government. So trade accordingly.

Credit risk spreading

Now that Fannie and Freddie are on the brink of a massive gov. bailout, what will this do to the hundreds of financial institutions that own the shares? What will this do to the exposure of the already debt instruments issued by the feds?

With the uncertainty of which financial institution is going to survive, why risk it? Why not invest in gold since it is at a very good low right now. If you want the conservative way of holding the bullion, you can now buy GLD without the storage problems that used to be associated with gold investing. If you want to ramp up the leverage, buy stocks in gold companies. The theory is that as gold runs up, the companies are more profitable and the stocks move more than the gold itself. Or buy L.E.A.P.S. (long term anticipation securities) an acronym for options that trade 1 year or more out.

Things like oil and gold can not go to zero. They have a value. But as we are watching many stocks can and do go to zero.

The fall out is just starting to move into gear. As more institutions have no choice but to show the losses on the books it will get more ugly. Try to make sure your retirements are not involved in this toxic mess. I know many have no choice but what they are allowed to place into, but try to find the safest place. If you are in a retirement plan that offers nothing against this onslaught, try opening up a brokerage account elsewhere and buy ultra shorts as a hedge.

What this means

Several Attny "G's" are acting like they care about this credit crises and are pursuing the bankers and brokers that sluffed off this garbage to "unsuspecting" investors.

Truth is the pensions and what all that got caught (Warren Buffet is supposedly to have said that it is not until the tide goes out that you can see who is swimming naked) with their trunks down are now applying pressure and crying foul.

I thought the over regulated Oaxly sar whatever was supposed to end all of Wall Street shenanigans?

We digress here. The point is these firms have no money to buy back these securities. They are hemorrhaging billions in losses. They have no choice but to buy this toxic stuff back and beg at the reserve window for capital while using this junk as collateral.
Now how is this going to look on the balance sheet? 1 mil. in toxic waste that cannot be peddled so it really is not worth 1 mil. more like 400,000. Now I magically go to the feds place it with them at a collateral price of 1 mil. get treasuries of 1 mil. and poof my portfolio is now triple grade AAA investments.

Nice gig if you can get it.

Now the sad part is that who pays for this? That's right you and I. Now the only way they can take this from me without me screaming is to tax me. But since I am already taxed to death and will revolt with more taxes, they simply go to the auction blocks and offer this debt to anyone that will take it. Now all I am responsible for is to make sure the interest is paid. Since I will never need to pay the principle. Because when the principle is due, I simply have the treasury sell more debt. Kind of like we do roll out each and every time debt comes due.

Now if anyone can explain to me with a straight face how this trickery is not 1) Very bad for the dollar 2) Very bad for inflation. I am listening. What we are doing now is going to cost several generations.

Careful out there

We had the bounce off what appears to be the bottom however, as in the expected correction, we also expect wild swings to take out the weak positions. Weak meaning those that are not convinced and take small losses or gains and exit.

We rolled out on TLT and DBA as well as XLE to Oct. you take what the market gives you and yesterday the market gave us good premiums to roll out. I tried for GDX but did not get a fill.

The next financial meltdown

Now that the commodities correction is behind us, who will the next victim of financial chaos? My bet is on Leahman but then what do I know.

The dollar is once again dropping as we write. So where does this put bonds? They should be imploding as well. However past concerns were averted by jumping into bonds. this time it will not help as investors scramble to find safety.

What most do not realize since their information comes from the entertainment channels is that none of the regular investments are going to work. Commodities is the place to be and so far these investments are merely exotic tools for the rich. well why do you think the rich are in them....

I am sure just as we were sure of the correction that commodities will be the next bubble. It is far from a bubble now, but as more common folks see where the action is and see that they are getting slaughtered in the usual hyped wall street junk, they will coming running. when they do, expect severe run ups and severe drops.

Until then, we will quietly amass positions.

P.S. we got such a good price on our XLE and TLT that we rolled yesterday to Oct. Once again we take what the market gives us.

Rolling out

We are seeing some great moves. This should be an indication the correction is over and onward and upward for commodities. As a result, we can roll out to the next month. I would prefer more of a run so i will defer rolling until next week.

Word of caution here. Some times when you get a good bounce of a correction you may see some back sliding.

If we were to roll out this week we would get a nice 10%. I think we can do better next week. Now when I am talking about 10% I am talking about all positions. XLE right now is much better than 10%.

Where we stand

With the correction in the commodities full upon us, I thought it would be useful to talk about some of the positions we like and have. Now it is no secret that we have come off a very large run in the commodity sector. How we got there is important. I say that because I read some very smart economists are calling for deflation. While I agree, the points I disagree are that this deflation will be for the U.S. for 2 billion people it is inflation. We are now experiencing import cost rising as our Asian manufactures are asking for price increases.

Anyways, the point here is that if we take and look at our portfolio, we can roll out to another month and get a 10% cash infusion. Not ideal, but much better than I know anywhere else with out taking on the high risks. I am not so sure I want to do this at this time. I may regret this decision later. So I am content to sit on the positions for another week and see if a larger rally wont give me a better return rolling to the next month.

These corrections can be very gut wrenching I know. It is times like this where it is hard to stay the course. You read every day that oil is coming down due to consumers using less and that this drop is demand driven etc. Yet when I study and read the international scene, 2 billion Asians are buying not only any company that will produce natural resources for them but also anything tangible (like our own Chrysler building) I cant help but think we are going to be paying much more for our natural resource consumption.

Are we in a recession? Of course, we have been since January. Yet we have seen prices jump on most commodities during this time.

I for one am still convinced of the course we established almost 4 years ago. I may be stubborn and pay the price dearly, or this may be one of the last times to buy gold below 800 an ounce for a very long time as well as all the other commodities.

A few words about diversification

I know it is the classic planning idea. I have to buy into to (well act like it anyways) every time I get by the government. The idea is that you will put some money in bonds and stocks and money markets and growth and income stocks etc. the amount or percentage that you place in each will depend on your risk tolerance and how close you are to retirement etc.
This in my opinion has always been a mistake. More so now as you see each and every asset class dropping (with the exception of commodities that is until this past month or so)
As I meet to plan individuals goals, the single most important factor IMHO (in my humble opinion) is being on the right side of the mega trends. Period. It does not matter how well diversified your portfolio is if you are on the wrong side of these tremendous trends. the entire world was caught up with equities for the mega bull we just came through. so much so that you cannot talk to any so called financial planner that does not include some portion of stocks in their recommendations. Well to be honest, where have stocks gone for the last decade?
Real Estate was always the thing to do. Until now. Once the advisors catch up to commodities, that gig should be well on its way to being a thing of the past.
My point is, when stocks are good run with them. when R.E. is good run with that. Now that commodities have come off there 20 year bear, look to them.
As we try to use leverage when we trade it is a bit different. If we were concerned about our retirement we would buy outright gold like GLD or oil like USD or something to that effect and let it run until it will become obvious the trend is over then look for the next trend. But since we enjoy the gains that come from leverage, we want to be able to stay in the game come the corrections that always show up. For that we like options. We can own or control for a fraction what it would take to own or control regular shares. But then we get the time decay that is a problem, a constant never ending problem each and every day. By using spreads, we nullify the time factor allowing us to participate in the leverage with out the other usual consequences. We will let the other hot shots buy our short side and tell us all about how much they make on the short term. We will smile and know to ourselves that the next trade he/she will give it all back.

Inflation says the headlines today

Worst since 1991 it goes on to say. Shocked and dismayed cry the pundits...Is not the feds in control of inflation they ask.

Truth is, the feds are the ones that create inflation. It does not just grow and need to be trimmed back each fall. It is a direct result of too much fiat currency. Every time a public figure throws my hard earned money at a problem, that is inflation.

You can either listen to your broker and believe stocks will come back because they always do and go about your business, or you can start to take charge of your finances.

Bonds will get hit as the feds (as usual) will follow the interest rates higher. I know you have been taught that the feds control rates, but that is fantasy.

Corporations will get squeezed between raising costs and trying to raise prices. this will erode profits. Will anyone pay todays price for a company that is not going to earn as much down the road? Of course not so stocks will continue to fall.

Real Estate normally would rebound in this type of environment, however since Real Estate is the symptom of loose credit, it too has a way to go of contracting.

In my view that leaves only one asset that will even keep up with inflation and you already know what that is.

10 years from now most folks will know about commodities like they do mutual funds. Why not get involved now and be one of the smart investors that will reap windfalls in the next few years.

One of the best ways I know is through leverage. However I hate to take on risk. You say then how can you leverage without risk taking. Technically you cannot. But you can manage the risks like the insurance industry does.

This takes this article to where we are now. Long term options for the growth potential, followed by selling short term options to counter the dangers of time decay.

If you can time when these natural resource markets are going to turn and run followed by the always present corrections, then you will come out far better than me. But 30 years of trading tells me I cannot accomplish this feat therefore I just want to make sure that I am there when the market is moving

Is the correction over

This is the question I am getting many times right now. To which I reply it may very well be. If it is not, then it will be soon.

Not being a timing expert, I can only go with what should be. As we look at the gold market jumping 9 yesterday and the grains moving once again. What really is getting my attention is the dollar. It appears that the run up over the last few weeks seems to be at a stall.

If you are in the commodities as a bull for a while longer, this has you excited. After all since oil is traded in dollars, any weakness in the dollar spills over into higher oil prices. If you are not of the opinion of this blog author, then you are going to be upset with the prices of everything marching higher.

Corrections can be very gut wrenching. Especially watching the entertainment channels. I too see what you see. Instead of getting fearful, I smile and enjoy the pundits. It is almost as fun as watching the Olympics. The Real Estate market has bottomed, the oil bubble has popped, gold investors are taking a beating...Yes I see it too.

Fundamentally, the housing has more to go, what has changed over the course of a year since it first reared it's ugly head. Only billions upon billions poured into the mess. The same billions poured in at cheap interest that caused these bubbles in the first place. That has not changed. While the U.S. has drop slightly in consumption, that has been taken up world wide by many other nations. We are still as a world consuming more than we are producing. That is the fundamental picture.

Consumer spending

Wal mart less than expectations. So the consumer is showing signs of stress. Many will point this out as proof positive that the slow down will take a bite out of natural resources.
If you see the numbers, that is not true. Many producers of natural resources are falling in output. Once that is really understood in the market place the next phase of the bull run will take off.
I am playing this with diagonals. The explosive possibilities to the upside make it a better return with diagonals.

For the whole world to see

I placed an order for XLE Mar '09 long 73 call and sell Sept '08 74 call. for 4.60

The correction we expected has happened. Are we at bottom? Not sure. But I placed the trade so everyone can see.

For those that do not know, this is called a diagonal spread.

Corrections vs. Trend reversals

Okay so we have before us the long awaited correction in commodities. Look at past posts to show we expected this we wanted this we relish this. Another chance to get long the commodity train as it pulls out of the station.

So the logical question that I am getting asked is "how do I know this is not a trend change a reversal in commodities".

I even went so far in one post to say that these corrections can appear as reversals and to not lose hope.

One thing about corrections is that they always occur. You can count on them like clockwork. They indicate a healthy trend. But trends do change and reverse and we want to make sure we are not stubborn and end up on the wrong end of a trend.

1) Mega trends that I like to follow typically take at least10-20 years. The commodity trend is in its infancy of only 8 years.

2) Not that I am by any means a technical trader, but trend reversals typically have double tops. Look at the mega bull in equities. Topped out in 2001 had another basic top in Oct of 2007. So if we get to 147 a barrel in oil again and gold at 1,000 an ounce and have a massive correction like we are in now, that would be time to sit up take notice and re-evaluate our trend.

3) Mega trends usually blow off with a mad rush of mass hysteria and buying. Dot.coms were going to make everyone millionaires if you remember, Houses were the next gold mine, and when we hear the man on the street making millions in commodities, then we know this too will have run its course and ready for a trend reversal.

4) When you watch a game show and the contestants tell you they trade commodities for a living, then definitely get out.

So all the pundits may have this one right. We may be in a reversal. I even read yesterday someone spouting that the oil bubble is losing its air. Oil isn't even at its inflationary high, so why would I expect this to have been a bubble?

If you have never been in a correction trading, it can be scary. This is where the opportunities are made more than any other time. We will look back on 115 or even less barrel of oil with woulda shoulda coulda.

If you remember the equities, '87 was a killer and yet look at them now. In fact any blind buy and hold cling to this as proof, not realizing the gig in equities is up for many years to come.

If you cannot stomach the corrections even though we spell them out for you, then wait until the trend is obvious again and get in. You will not get the gains that are possible, but then sleeping at night is much more important.

This is why we trade with long term options being on the right side of the trend at the same time selling options to smooth the corrections that come our way. I wish there were a way to avoid corrections that always seem to appear as trend reversals, but then these are the buying opportunities.

Real Estate

I went out this weekend just to peruse the scene. For the most part our area had held up pretty well over the last years carnage everywhere else. It too is collapsing. Bargains to be had. Problem is, if I buy now, will there be more drop left to go. I am thinking yes. So now we play the tight rope game here. Wait too long and the deals will not longer be there, get in too soon and it could be a few years to break even point.

What has this to do with options? Plenty. Remember it was the lose credit policy from investment houses, lenders, the feds etc. that got the housing bubble going full steam. Which in turn has bleed over into the over all economy. So until housing comes back we are still headed for troubled waters regardless of what the feds put out there for numbers. After all we should all know the feds numbers eventually show the truth. Problem is I cannot invest properly on "revised" numbers. By the time the gov revised last falls numbers this past week, the financial stocks had already imploded. Shorting financial stocks now would be just a small gain while taking large risks.

Use your common sense while looking at fundamentals. If you see everyone chasing something, know that the gig is up. The same thing will hold true to commodities. By the time this bull is over, we will see unheard of prices and the masses tripping all over each other trying to get long. Some touting how smart they are and to follow them and amass a fortune. Yadda yadda yadda. In the last 10 years we have seen this attitude in dot.com stocks, Real Estate and now commodities. Once this happens,look to exit the game and find the next bubble the feds create.

Revised Numbers

As we sift through the numbers out today, we find that the economy did indeed contact last year. Once again the revisions...

What we have is indecision between inflation and deflation. The housing (which is estimated to be around 1/3 consumer) is imploding and the feds are throwing any and all money to try and prop it. This is very deflationary. In fact so much so that it is causing debts to explode. NY is in trouble, Cal is in trouble etc.

This is why given the choice the fed will always push inflation over deflation. They can always pay back with less dollars whereas in deflation everything collapses under debt burdens.

So while we are imploding with debt making our economy very deflationary, we have the emerging markets exploding driving up every commodity under the sun. If we were as great an economy as we were in past years, our slowdown would effect commodities. However, (sorry folks this does not mean I am UN American just realist) we are no longer the big cheese. Many are starting to figure this out. What we cut back on in consumption is picked up by other countries coming along.

My bet is more inflation of commodities and a contraction of our own economy. Much to the dismay of most economists. It will be awhile before they figure this out.

So long natural resources and short bonds. Remember most of our debt is to foreigners. They will demand more interest from the U.S. in the futures pushing down bond prices.

Stocks Soar as Oil Drops Again

Just as we mentioned. The headlines are all a jitter with oil dropping. The bottom is in some say. I disagree. If you have followed at all, we were salivating waiting for a big drop to get long. Now the drop is here, we are waiting for a good signal to get long XLE. My best guess (and we know how good I am at this) is 70 or so to get long a calendar. We should see some very low premiums as the masses will know that the oil bubble has popped.

We all should know better. But then this is what makes markets.

Also Gold is getting soft and grains...So if you missed the commodity train last stop, you will have one more chance to get on board. It will be a difficult decision if you have not been riding this already. Since the media will be all against this sort of trade, it will take courage.

I have seen the same arguments since oil was at 20 a barrel and gold at 250. Now I am by no means a gold bug but when the forces of inflation line up such as they are, it is silly to listen to the talking heads. We are in one of the greatest bull markets in commodities. The corrections are part of the game. Take the corrections for what they are and don't get sidetracked believing otherwise.

Accounting

When using spreads, it can be daunting figuring out the accounting.
For example, I start out with 10,000. I buy this amount in options long. Now I sell options. This is premium I collected. For sake of ease here lets just say I received 30%. Now I have 3,000 back in my account. A tidy 30% return if everything goes as planned.

But lets say we took the 3,000 because we want to gain more and buy some more options and once again sell to collect premiums. Now we have just taken on more options than we have in cash to start with. What will this show on our accounting? It should show that we are now at about the same level of 10,000 that we started with. So you ask yourself where did the 30% go? It went to owning another position. We now have 13,000 in options long and the equivalent outstanding short.

So as we roll out to the next month we collect more premiums and if we buy more spreads, we once again are back to 10,000. Our net gain is showing nothing while we are slowly gaining more and more positions. So eventually we would own more than twice as many options as the original 10,000 but only show a slight gain.

If you want the income, then you simple do not buy more positions and let the cash pile up with each roll out. However if you are in the stage in life where you are wanting to increase your assets, then you will want to keep buying more positions ignoring the fact that the overall gain on your account is minimal but you are gaining more and more positions in your portfolio.

It sounds more complicated than it really is. The point here is that you will be hard pressed to figure out just exactly how much you are gaining if you continue to buy more positions, since each new position will once again drain the cash you have and show a slight loss until the spreads starts to work its way through. Then once again any cash would be put to work thereby showing again no increase in cash value, but you are gaining more and more positions.

I hope this helps.

600+ pages

That is what the "Housing rescue bill" contains. Now I am by no means a speed reader, but 600 pages to digest and get a real understanding before I vote? Come on leaders give me a break. Not one of you even read those pages. It was so full of pork. How do I know? I did read enough of the bill that I vomited!! I was force fed so much pork I could not handle any more. Chrysler gets in on the act, city and counties can now be rehabbers, first time buyers can now get 7,500 credit, oh and yes the poor screwed over mortgage lenders will get tax credit till the cows come home.

Who is going to pay for all this? Well if you believe what you read, not one penny of tax payer money is on the line here....Wait a minute...what exactly is a tax credit...Oh yeah it means if I do exactly as they say, I don't have to pay taxes on certain things. So if we are now allowed to borrow 10 trillion (yes that is what this bill also allows, the raising of the debt level to 10 trillion) and the large corporations that just fleeced mom and pop for everything they had in the way of any sort of assets i.e. homes, are paying less taxes but we are now indebted 10 trillion, my taxes wont go up?

At least give me a twinkle and a grin Paulson when you speak like this. That way I will understand it is a joke.

Inflation inflation inflation

..."all the kings horsemen and all the kings men"...

300 billion that is billion folks. I am sure that estimate is way low more like 1 trillion.

That is the bailout estimates bantering around for the housing bust. Now the media is giving you a good story about the particulars of the plan so I wont need to explain that, but the media is only telling you what 400,000 hopeful over extended homeowners want to hear.

Econ 101...Inflation: too much money chasing too few goods.

If you cannot see where this bailout is headed, then we really need to get you up to speed.

If there are any questions in any one's minds right now where inflation is headed, read the news...

So we know the gov. is bent on throwing enough of my money after the problem to solve it, leaving me no alternative but to be UN American and short the banks after this nice bounce and stay long natural resources. After all, what maintains or even goes up in value in inflationary times?

You take what the market gives you

I rolled out to Sept today on many of the plays. I know it is 1-2 weeks early, but with this much of a correction, I could not pass up the returns. I am waiting for more to be filled.

With this new cash infusion, I am looking at KOL and XLE very seriously. Not sure when the time will come to pull the trigger. But soon. Now things I contemplate about pulling the trigger is not so much getting the low, that is a mute issue since we are doing spreads. I don't however want to get in to have them drop significantly before the continued trend.

What I look for is more of the strike and the months premium. Right now XLE is at a cross roads. 75 is good, but then in order to play this for longer than 5 months, I need to go out farther say 2010 Jan's. I don't like the premiums on that so I am looking at the futures strike price of June Q2. that gives me until the end of June not the 3rd week of June as most regular options trade. That has a more appealing time frame for me.

Just another glimpse of what is looked at to trade from.

Buy back and sell again

I get asked this all the time. All of you that have asked this know my answer.

Could I just buy and sell the option as the stock goes up and down?

Yes you can and some do. I myself being the ultra conservative trader that I am, do not. This requires timing and you know about my timing. I have tried to buy back before only to have the market keep going and thereby losing out on more value.

So to answer this question since many of the stocks we have been following are in the inevitable correction phase, you may want to virtual trade buying back the short positions then selling again on the next rally. See if you have the gift to do this.

Short covering rally

Dead cat bounce or not, the short covering forced by the SEC certainly is an opportunity for the very agressive trader. Now FNM is 96% above what it was before the SEC ruling. If the fundamentals are still intact, then FNM should still be a good short.

To play this as a conservative trader that I am, selling a call spread works for me.
FMN and many of the other financials that bounced last week should make for great sell call spreads.

Until the next play the feds give us....

Just to Reiterate

Why I trade the way I do....

First off, you will be severely hard pressed to make any sort of money if you do not get the trend straight. Yes I am aware of supposed neutral trades. Those sound good on paper, but don't really work. Here is the reason. You are up against other traders that have the same news you do. They have to take the other side of your trade in order for the trade to be executed. Now if you are asking for the supposed by the book trade, no one will take the other side. Regardless of the theo or delta etc. and to top it off, your spreads are criminal to say the least but then we know this already. We know to get filled we have spreads that would make a loan shark blush. We digress.

So now we know in order to make any sort of money other than chump change, we need to be with the trend. Now options are just plain terrible to ride out a trend. I have yet to see a trend that did not have wild swings. If you are a market timer and good at it, (I have yet to know one. Athough many claim to be) then you will want to buy calls and puts accordingly. If you are one of these unknown to me individuals, let me know. I would love to learn.

Okay so we know time decay is eating us alive each and every day like clock work. so we can either take advantage of it or let it destroy our returns. Now if we happen (which means 50% of the time for me) to get into the trade as the market goes against us, we have to wait until the trend is once again established. If that takes any time at all, we have lost much time decay and now we not only have to have the stock move to gain back the time decay, now we are asking the stock to keep moving to start making money. Any more pull backs are we once again fall prey to time decay.

So to avoid this, we sell options that decay in time faster than the ones we buy decay in time. Thereby offsetting the time decay. This is done by spreads. Buying an option and selling an option.

Now since we have done away with the evils of time decay, now we have to decide if we want to have many short small gains each and every month that would in all likelihood be offset by one major wrong trade, So now we are at the point of my trading.

Using the same premise of spreads, we now take a longer term approach that smooths out the hick ups along the way that all trends come across. So now we can wait patiently for the trend to kick back in with out the worry of time decay since we are gaining time decay from the short sell.

Questions to ask your Advisor

We are at a point now where the markets are dropping severely.

You need to ask your advisers what they are doing for your portfolio. Ask them if their strategies have steered them away form losses, ask them if they have prospered in these times. If not why?

If you have an option advisor, are the strategies paying off for you or them? Are the complex strategies costing more for commissions then they are paying out?

Can a double calendar or a iron condor be as profitable as a simple buy of an option?

If you continue as you are now, it will be costly. How do I know? The letters and call I get tell me that the same old buy and hold is still prevalent.

Truly this approach is no longer working.

I have written an introduction to a paper I am writing about financial planning. If interested, drop me a line and I will let you review it.

Correction

We are getting the correction we were looking for in XLE and KOL.

Just a reminder here, the trend is still very much bullish. Don't let a pullback like this sway you to think otherwise. Nothing has changed fundamentally. While these went up too fast in too short a time, this is typical. This gives us a better buying opportunity.

I have not set up a trade yet, looking for a bit more weakness.

Stay tuned.

Buy and Hold

As sure as birds fly south for the winter, out come the cheerleaders every time a market has a downturn. You have heard it before, the market always comes back, don't sell now you should be buying more etc.

Listening to this garbage has led you to an S&P 500 that will touch a 12 year low before this is over. Banks are already there....

Well I do not know about you, but if I had bought a mutual fund for my retirement only to see it where it was 12 years ago, that would upset me to no end. Then to add insult to injury these cheerleaders touting the same old routine that was fine 12 years ago.

Although I am not a great chartist, looking at the double top over the last 20 years shows me a long term down for the S&P for quite awhile. That is no way to make money.

Who knows, after 10 more years or so, then we can once again buy and let the S&P make us rich but for now that is not the case.

Our pullback

If you agree with the assessment that we are in for a long term inflation including economic stagnation, then the pullback in the natural resources today is good to see. Long time readers know I have been patiently waiting for the energy pullback to get back in. Not ready yet, but it is getting close.

Remember nothing goes straight down or straight up. We take these as opportunities to get in.

So looking to get long diagonals on XLE and calendars on KOL.

Patience here.

On a political note here, we are seeing winds from Washington that I do not like. But then most of what comes out of there is not good for investing. Only pandering to the masses. What has me concerned is the blame game. Us "speculators" driving up prices and manipulating them. I wish this were true, then I could know with certainty a direction and capitalize on it.

What is really going on is the masses are hurting and need a scapegoat. That scapegoat is anyone that is prospering during this meltdown.

The question is not what the gov will do, that is a given. The question is how will that effect trading. We will stay tuned.

Reality is that traders make it liquid to get in and out of positions. If the gov limits this, then you can make a trade and if wrong take a long time to get out. Take Real Estate for example. If that market were liquid, the first sign of trouble you could get out with a small loss. However trying to sell in a buyers market is a killer. What I hear coming out of Washington will only make the housing problem linger much longer.

Fannie Mae

Vacation was too short as it always is.

If you received my newsletter, we discussed the Fannie Mae problem. As I am writing this, the feds have indeed stepped in and made some bogus rescue plan. This is clearly an obvious move that has taken no one by surprise.

This should turn out nicely for the selling puts idea.

Ahh the gov. so predictable Always wrong but predictable

What you will not get

Typical options traders will overwhelm you with technical ideas. While technical analysis has its place, it is far too often used wrongly. Many traders think because they are in a bull market and just about any analysis for buying on the dips works, they are geniuses. Many technical anaylsis comes about during great bull runs. As you will soon notice this great bull run in commodities will bring about many new and improved technical ideas.

Reality is that just about any analysis works in a strong market.

Now back to the idea that you can trade by technical analysis. The overall trend is what you need to be watching. Then when you have the corrections that always come along, you buy more. With options this is not the appropriate way to trade. Options lose value each and every day due to time decay. So to buy and hold for even 6 months is a losing proposition. That is why the technical is supported so much, trying to get in just as the underlying is about to move. If you are great at timing, (which I am terrible at) you can buy calls and puts and make a very nice return. If you are like most mortals, then you cannot time with any exactness to avoid time decay.

For that reason I trade the way I do. Taking advantage of time decay. Find the fundamental forces driving a particular market and then jump on board with calendars or diagonals. Then if my timing as it usually is, fails, I still am in a position to prosper.

Natural resources

We take the market as it gives us.

EWZ Long Jan'09 85 short July 85 net debit 6.70 with only 11 trading days left it looked good to me.

KOL looks like a good correction. Watching this one

Still hoping for XLE to drop significantly to get in on that one again.

Will keep you posted

Glass half full or half empty

Auto industry tanks so they said yesterday, housing continues to erode, oil still shooting for the moon.

While many are losing faith in the capitalistic markets, we continue to appreciate what capitalism gives us. As we ponder the independence day this weekend, try to remember that it is not the greedy capitalists that caused this mess. If you have been around my ranting for at least the last two years, you would not find this surprising at all. so to us the glass is half full.

I read everywhere the assault on capitalism. It just is not true. It is power hungry fed officials that have caused the mess. I do not want to get into a political debate here, but it is the Gov. causing everything we are witnessing now.

Understanding this is vital to your sanity and investing safety. What bubbles greenspan did with loose monetary policies for the last two decades is coming home to roost in higher prices. Get used to it and either stand in line and complain like the masses or do something about it. That is buy tangibles and if you are aggressive use leverage as in options to make a decent return. Other wise suffer the losses them masses are and will be losing.

Someday when everyone is touting how much they are making on commodities, this gig too will be up and we will need to move to the next bubble created. Until then ride this wave for all it is worth.

Iron Condors

This is the reason that I do not like Iron Condors. Having been around for 30 plus years trading, you get months like June happen more than you care to remember. If you are in an Iron Condor at the time you lose more on the side that gets in the money than you can compensate by selling the other side.

Iron Condors like any other product has its advantages and disadvantages.

The pluses for an Iron condor is that you can trade these in sideways markets and collect premiums. However, we all know sideways markets tend to not give much premiums because the guy on the other side knows the market is going nowhere and the odds of the option being in the money at ex date are nill. So no premiums.

The negatives are that most get caught up in the premiums just when the market is heating up because once again the trader on the other side knows the odds are now on his side to be in the money so he is willing to pay the premiums.

Iron condors are best traded just after massive market gyrations. Problem is that I for one do not know when the gyration is over or just a fade. I have 100% clarity looking back. Just like everyone and their dog will have perfect clarity looking back on these years and what was and what could have etc. but right now in the moment you cannot even get the gov to admit a recession. Sure they will in about 18 months...

I will get off my soap box....

Bonds and stock correlation

I tried to put the charts for this on the blog but I am not the best techno geek.

If you look at the CRB (commodities) CRB Chart they topped out at 325 in '81 and slide down to about 180 by 2001

30year bonds were at 48 in '82 the start of the equity market and topped out last year at 120 Bonds chart

Now were are seeing the CRB on a tear with the equities getting soft and bonds getting soft. So you can see the correlation.

While you get days like today when the market is dropping hard and the masses look to perceived safety by running for bonds, the long term correlation is there to be seen.

Housing tanks again

It is getting more and more likely that we are headed into far deeper trouble than most are letting on.
New homes drop this does not bode well.

Anyone not realizing the significant factor that Real Estate plays on our economy has a rude awaking coming. It is probably too late to short the housing sector but not the bonds. Those are next.

For those that do not understand the significance of MBIA et al being downgraded need to read up on this. Municipalities relied on these guys to offer assurances to investors that the muni's would be investment grade. Now that they cannot perform themselves being lowered credit, the muni's are at risk of defaulting or at least many percentage points higher for gov entities to make payments. On top of a tax base shrinking both receipts and property taxes.

Not looking good at all IMHO!

Citigroup Lay off

The definition of a recession "your neighbor is laid off" definition of a depression "You are laid off" Seriously the "gov." definition (this is on test by the way) Recession 2 consecutive quarters of negative growth. Depression 6 consecutive quarters of negative growth.

The financial sector keep cracking. So who cares? If they have to contract to shore up balance sheets, then there is no lending and no lending means no expansion.

Now the gov will twist and manipulate the numbers so it will not look like a recession until you get smacked up the side of the head and say wow we are in a recession. The numbers will be too late after the adjusted for....

What we do know is that supply of grains and metals and oil and just about everything produced in is less than the demand. We also know that the feds will pump more and more money into the economy to try and avoid the inevitable.

So what are traders to do? Play the inflation card. Long natural resources and short bonds.

Inflation

It is here and it is not fooling the consumer anymore.

Contrary to the manipulated government stats, inflation is roaring ahead full speed with no end in sight for a long time.

There is really only a few ways to stay ahead of inflation. Going long tangibles or going short intangibles. Pretty simple. The problem being that if you go long or short these tangibles, you will keep up with inflation.

In other words if you buy wheat and store it, next year you can use the wheat to bake a loaf of bread and it will not cost you any more since wheat will keep up with inflation.

So the only way to prosper and gain wealth is to leverage the wheat. Say buying from a farmer to deliver the wheat to you in 6 months at a price you both agree on and then put a down payment on this. (much like the housing market) We have just created a futures contract (deliver on a future date)

What happens to most traders is they either are too conservative and do not stay ahead of the inflation, or get too far leveraged that any small correction and they cant meet their obligations and have to sell out at a loss.

ETF's have now solved this and as we all know, we love to use options to trade these thereby gaining more than enough leverage to not only stay ahead of inflation, but to gain wealth as well.

Options 10/6 rule

While this was printed almost 10 years ago, it is still valid in today’s market. Simply stated, 10 percent away from the current price and 6 months out .

That is it in a nutshell, but to implement this we need to understand a few things. This is the important part. Miss this and you might as well not trade this way.
1) Do not try these on individual stock you will understand the reasoning for this after we talk about rule 2
2) Know where the underlying has been sounds good so far.

What you have here is a high probability trade. If we look to history we see that a normal market in equities rises typically not more than 10% in any given time. So we have run ups and then consolidation.

That is where the sell in May and go away mantra came from. The markets most movements tended to be in the periods from Nov. to April. So year over year while the net for the year is about 8% (yes we are talking more than the gaga years as history) So now that we know what is typical, when we see a market move that far in a short time frame, we have good probability that the market is prone to stall if not go down.

Knowing this we can now go up 10% from the current price and sell a spread. Now we all know that going that far out of the money will not generate enough premium for the credit to make it worth our time. So we go out 6 months to collect enough premium to make it worth out while.

If you did nothing more than sell these spreads every May you would come out with a very good return.

Bear in mind (pun intended) that this works for the down side as well, in other words when we have a market correction of 20%-30% we can have great expectations that the market will rally from here. So a credit strategy 10% below the current price will accomplish the same effect.

If you are looking to enhance a portfolio of conservative investments, you may want to look to an idea like this. It should not take more than 5% of a portfolio to gain the extra 5%-10% gain you are looking for.

This will take some practice and should be tried with a Virtual account. Many of the topics we discuss are not intended to be used solely but are meant to be used to put your portfolio over the top and stay ahead of inflation.

Make sure you feel confident in this by trading virtual before you try it with real money. CBOE.com has a virtual trading platform on their site.

Double Calendars

I bring this up only because I hear much radio ads with Investools. One of the lines is double calendars. This is probably because of the need for something new.

Basically you are selling the front months strangle and buying far months a strangle. That's it...not worth paying big bucks to learn.

What you are doing is in essence selling strangles without the large margin required because they are covered by the far month longs you have. Allowing for several chances to sell these before the far month is reached.

Are they worth it? That depends on two factors. 1) The underlying is range bound meaning it is trading between a high and a low so that neither side gets assigned. 2) There is much volatility. This tends to inflate the front months more and you get more premiums.

Would I trade these? Not really. The charge for 4 trades in my humble opinion negates any real advantages. Particularly since we know that range bound stocks have a tendency to not attract option players.

Always remember that it takes someone on the other side to take your trade. If you expect a range bound stock, so does the other trader. The premiums typically will not be there. Now as we are taking about this, we are in wild times so you just may come out ahead doing one of these now, but these are not usual times. Place some virtual trades and see if you like this strategy.

A friend once called these several sided complex strategies "alligator spreads" because they end up biting you.

What do I know....

Today's Action

While the long awaited decline in oil prices may or may not be here, it certainly has my attention. after getting in long around 69 '09 and short 71. it has been a very straight up move. Yes I would have definitely made more if I had the straight call, but hind sight is always 100%.

Gold has come back, oil, much of the natural resources, yet grains moved up today.

So our long gold position made back in Nov of last year is once again back in the money on the options. I have more than doubled my money on this trade, so don't tell me calendars don't work....I digress.

We are looking for the banking sector to become very weak and the feds having no choice to raise rates. This leaves bonds in terrible shape going forward. CD's will lose out since the rates are locked in as they raise, the best way for a secure way to trade this is money markets. Try to get treasury ones if you can.

So we are still short bonds, long natural resources ( you have a better buying opportunity now) long grains and short the dollar (which we are getting killed on)

Those interested, drop me a note to subscribe to a (hopefully) weekly newsletter via email. dc@dcadvisors.net
Subject line subscribe.

Selling Put strategies

Last night in the webinar the question was brought up about selling puts. I have discussed this on the blog before (see the archives) but this should be another good time to discuss this. In fact I was about to post an article about this this weekend at ezine.com So I will just copy here and paste it there.

Puts as we should know give the owner the right to sell a particular underlying (stock, ETF etc.) at a given price. Example, July 20 put give the holder (owner) of this option the right to sell this stock at 20 before the 3rd week of July.

This also obligates the seller of this put to buy this from the put owner at the given price. In our example, the seller of this put is not obligated to buy the shares at 20 if assigned. There is always another side to a trade.

Now to do all of this, there is a premium involved. Much like insurance (in fact this is what options are is passing on risk to someone else) so if I want to own the right to sell at 20 by July, then I have to agree upon a premium to pay for this right. The trade grating this right is taking the premium to allow this. (again much like you car insurance, they take your premium each month for you to have the right to present claims in the event of an accident)

Now that we have the basics behind us, let's look to a few neat strategies.

Now if I expect a stock to go down, I can buy the put and sell the shares to some one at 20 and then buy back the shares some time in the future at a lower price (selling higher and buying lower)

The premium for this would be less than margin for the (20x100=2000/50%)

Now if we want to own a stock and we sell a put, there are 2 things that can happen. The stock rises above 20 in which case we will not exercise the option and just walk away with the total premium we collected, or the stock drops and we get assigned, so we own the stock for less than we could have bought at the current market, because we now own it for 20 less the premiums we received.

Now here is where most that teach this or use this strategy give it a disservice.

You do not have to get assigned just because the stock drops. We have what is called time value.... as long as there is time value we will usually not get assigned. so we can now buy back the options we sold for a loss, then sell the next month for a gain (this is called rolling out). we can do this month after month until re get the shares fro free or the stock ends up above 20.

If we do this strategy on say Ford (F) which is at 6.27 as I write this. So by selling the July 6 put. for .39 cents. we are now obligated to own ford for 5.61 (6 strike less the .39 premium. to do this we would need in our account around 300 dollars (yes this would be a margin trade so you may want the entire 600 set aside for conservative traders) That is over 10% return less than 6 weeks.

Now if Ford drops below 6 the put premium will go up so we will be losing on our July put. However, we can now roll to Aug. (unfortunately for our example Aug is not trading for 2 more weeks) But if we look at today's pricing of July/Sep we can get the idea of rolling out. The spread between July /Sep is about .30 (we buy back July for .39 and sell Sep for .68

If Ford stays where it is at for 10 months, we have a free trade (.30x10=300-300 margin).

Don't get flustered it takes time to grasp this. but it is fun to do. The single most important underlying factor to this trade is that ford will be around for 10 months. Countrywide would be an even better example given the fact that B of A has the Green light to acquire them. Look at the return on this one. 5.00 strike sell for .41 (on a margins account of say 250.00 in the account to bring in 41.00 for less than 6 weeks is better than a poke in the eye......

Grains gain

Record Prices
Looks like we are in for quite a run up in food prices this year.

Long DBA....

Interesting play

If anyone is a fan of India's growth potential, here is a play that you will want to virtual trade (IMHO...in my humble opinion)
EPI...Long the Jan '09 22 call and get this, the July has 22.50. So by selling this July we now have a .50 upside with out doing anything. I placed this for a debit of 1.80 lets see if some one on the other side takes it.

I will discuss this more tonight in the webinar for those "inquiring minds"

On a much serious side here. CNN reports of a 67 SS recipient that is living out of her car with her two dogs because of layoffs. I cannot help the entire world, but if I can help a few to understand the world of finance and they in turn show others, maybe we can change things.

Tell a friend about what we do here you wouldn't want them to end up like this lady...

Now comes stories of Crop Problems

More demand and less plantings makes for a great shortage of grains. If you have not looked, you may want to research DBA. An agri ETF. While my significant other complains about the prices of everything going up (unless you believe the CPI numbers, if you do we need to talk about prime Real Estate I have)

I explain to her that this pain is in reality our gain. More at the market means a very healthy bullish trend to leverage gains on.

Take advantage here. It is not always so easy to know and see and follow a trend.

Seriously here folks.....Stocks are not any higher than 9 years ago.....Real Estate is imploding all around....Bonds are showing great weakness and contrary to what is taught out there, bonds typically follow equities...CD's are at pitiful 1-2%....

As most are watching there retirements drop in value either real or in purchasing power, you are lucky enough to understand and profit from this. Many more will fall behind, but that does not mean you have too. This is a great opportunity. Many new fortunes will come out of this and it may as well be yours.

Tell a friend

Banking problems

Just when you thought it was safe to buy into the banking sector. Not really if you have followed any of my rantings, we are staying away from this sector.

Bad news a plenty here folks. Another bank goes insolvent. This makes so far this year as many as all of last year.

Batten down the hatches. This goes for life insurance as well. Although states have what is called a re-insurance fund where any carrier that wants to place business in that state is required to take on the burdens so to speak of carriers that go insolvent.

While I feel safe with carriers given the track records, it does not mean that there wont be some times to wonder.

Why this on an options blog? Because many of the insurance companies are stock companies and as such you can trade the stock. So lets say for example that my retirement is in XYZ insurance, you can now hedge against this. Buy some puts.

Tell your friends

Make Money when others don't

Selling puts....
Yes that is right. By selling puts we can own shares for far less than current market. If wanted nothing more than to buy your favorite stock for 10% or more savings, this is the strategy for you. If you want to simply trade to make money this can work too.

Take a stock that you wont mind owning and in fact thinking about buying, and sell a put. Take for example a 30 dollar stock, this would cost you 3000 to own. Now if the stock goes up up and away, then we lost out on an opportunity. If the stock drops down and we get assigned, then we own the stock for less because we generated premium from the original sale of the put.

Now here is the fun part, if you buy back the out before you get assigned and sell the next month, then you can do this a few times and maybe even end up owning the shares for free.

Give it a virtual try and see

Tell a friend.

Calendar and Diagonal Spreads

It was brought up to discuss the mechanics of calendars and diagonals. I have posted a few times about this, but since I did the webinar last Thursday, there may be many that are new to this.

Calendars (some times called horizontal) spreads are no more complex than to know you are buying a farther out month (say Jan '09) and then selling a closer month (June '08) Same strike different month. Example buy a Jan '09 50 strike and sell a June '08 50 strike.

A diagonal is no more complex. The difference is we are now selling a different strike. Example.. Buy the Jan '09, 50 strike and sell the June '08, 55 strike.

That's it simple and very basic. the challenge comes in to play on how you as an investor wants to play these. that is where the experience comes in.

Are you very bullish, mildly bullish or neutral. Are you an aggressive trader or one that wants to preserve capital or maybe hedge against something else.

If you are very bullish, then you look to diagonals. If you are aggressive, you take on a wider spread. Example.. Instead of the Jan 50 and the June 55, you could go Jan 50 June 60 etc.

You can be neutral or mildly bullish yet still be an aggressive trader thereby doing a calendar but closer to the money (conservative) or farther out of the money (aggressive)

You can also decide how aggressive you are as a trader or on each trade. More conservative you would want to go farther out months say leaps etc.

So I gave you some knowledge here to blow yourself up. Try to virtual trade and find out
First, am I an aggressive trader. I myself am very conservative
Second am I bullish or bearish a certain sector.
Third how bullish or bearish am I
Fourth, how aggressive am I on the underlying investment.

Do not despair, we will discuss these at great length. For now, start to virtual trade and find where you are on the speculation spectrum.

Feel free to refer your friends to this site

World out look for commodities

World demand is increasing. Several reports are telling us that world grain and metal stockpiles are at record lows. We already know that world stock piles of oil are low, now we are getting grains and also metal (not just precious but also industrial).
Fun times. Just make money off this. Other wise it should be a brutal time for wage earners not to mention retired folks. Maybe you can offer some help to them. Refer them here and see if they can learn something to help them.

Even though we will see record prices, we are entering a phase that makes for wild times. About the only way I know to not get wiped out trading options would be playing this with options can be LEAPS or cal- diagonal spreads. If you do not understand them, speak up.

Commodity ETF's

Here is a lsit of them. Have a look see.

DBC,GSG,DJP,GSP,RJI,GSC,GCC,RAW,PCRCX

DBA,JJG,JJA,COW,RJA,FUE,GRU,EOH

USO,OIL,DBO,DBE,UNG,GAZ,JJE,RJN,USL,DCR,UCR

IAU,SLV,GLD,DGL,DBP,DBS,DBB,JJC,JJN,JJM,RJZ

It was fun hope everyone got something out of the webinar

Go with the weakness

The bonds are showing signs of stress. We filled with the TLT put cal and so far so good. We will stay on course for this. Looks like the economy is slowing and the feds rate cuts didn't have the effects it was counting on and so inflation has raised its ugly head. so that we are to now have the feds raise rates giving us an opportunity for shorting bonds. This may be for a few years here folks so it is not a quick in and out trade.

Turning to internationals, Asia and Latin America will leave us in the dust in the years to come. You can sit back and watch or get on board. Kind of like the discussions I have had of late about oil prices. After I hear the others gripe, I ask them if they own any oil stocks? Interesting responses.

The short of it, you can complain about what is happening, or you can take advantage of it. Not that I am in favor of what I see, but it does me no good to complain. I try to change with my vote, but I also am a realist and I see opportunities here that most do not.

A published article

Check out an article I published.
http://www.goarticles.com/cgi-bin/showa.cgi?C=937081

Short Bonds

Last week I got filled on TLT put calendars. Now we hear the feds claiming no more rate cuts. This should make for an interesting week with the bonds clearly becoming weak now. After all ow much lower can the feds go now that their counter parts over in Europe have not followed suit.
I also look for Latin America to continue to explode. Asia markets as well. However since many Latin America countries are solid with natural resource companies I like them better right now. I plant to go long a diagonal on EWZ some time this week.

P.S. sorry about the delayed postings.

P.S.S. Remember these are for educational purposes and not for real trades.