Covered calls have their place

At times covered calls can be very profitable. The most significant problem arising from covered call "mentality" (I say that because many firms used to let you do these in IRA's but not other strategies, the idea being that these were conservative) This was left over from the gaga nineties of markets always come back and buy and hold syndrome. Time has proven both of these absolutely wrong. (see my latest newsletter regarding why the myth lasted so long) Anyways, as we know now (at least the main stream media will finally admit) this flawed attitude made covered calls fall from grace. If the underlying is falling, you are now going to have to sell calls closer and closer. A bounce and the underlying is now higher than your strike price and you have not recouped any profit thereby locking in a loss.

But with the advent of a bear market, we can now buy many low priced and use the covered call strategy once again. It is not as good as the calendar for most cases, but if you are in an archaic broker that will only allow covered calls in retirement accounts, then this will work.

One of my favorites now is ERF. This is a Canadian trust in the energies. It has a 11% dividend. So if you hold it, you get at lest 11% (not bad in this environment) taking the strikes above, you now can enhance the return. Since oil has taken a severe beating, this should have found a bottom in the 22.00 area.

Failing banks

There is plenty to be nervous about. Bof A, Citi are in serious trouble as well as JP. So the next question out of folks mouths is, "If the banks are in trouble, why are you buying a bank index? Particularly UYG?"

While I am not actually long UYG, I am in essence betting that it will eventually be above 3-4 dollars. If we look at the holdings, the 3 majors that are almost certain to be different in the coming months, they are 15% of the ETF. If they should go to zero ( which they wont since they will be merged sliced diced or other sorted things, but for our example, if they should go to zero, that is a 15% hit on the ETF. At 3 and change, this would mean .45 (cents)

then what? I would expect the ETF to buy sound banks and have the ETF move higher. Now if I were to sell a 3 Feb put, I would collect the same amount as the potential of the ETF to drop. .45 I am only banking (pun intended) on the ETF eventually being above my strike and expiring worthless. If it takes a few months or even a year, I can roll out each month collecting more premium.

Fundamentals

Once again I will try to give some insight to the fundamentals.

In todays trading, too often action like today with the employment numbers folks will ask why? Dell, you talk of fundamentals, but when the news comes out the markets does opposite what the fundamentals say. Well first off, these numbers are not fundamentals. These numbers are manipulations. Statistics to prove anything that the individuals putting them out there wants them to show. If you look into those numbers (and I refuse to anymore) you will see things like Nov. revised up even Oct revised up. So which is worse to days numbers or the messaged numbers a month from now.

Employment numbers lag the markets and as a result you get head fakes all the time watching these things. What these numbers do tell you is fundamentally, we are not improving. Take the swings out, and you will see these numbers sink in in the next few trading sessions.

Remember economics is supply and demand. Knowing where the supply is short or too much leads to profitable trades. That is fundamentals.

Just because economists "polled" expected 525,000 and it was only 524,000 does not mean anything at all other than a day trader takes a spike and gets out with a loss or profit. For my style of trading, it is a mere blip on our radar screen.

Bonds WOW!

Hope everyones holiday was fine and are ready for a new year. I read where the media is postulating that thank heavens it is over (2008). I myself found 2008 quite rewarding and not just for money sake.

We did post about the possible bubble in treasuries. This fast unusual run up is now having an unusual quick drop.

We just move from one bubble to the next the last decade or so. Who ever thought you would get double digit returns from bonds? Now look at the drop in them.

If you missed the pop, dont fret, these things have other chances. Wait for the next run up to get a position. My favorite is a diagonal put on TLT. This ride down although will have moments of fast movements, will be a longer period than most will expect. Much like the unwinding of R.E. in its 2nd year and equities in their 14 months. This too will take a few years to reach bottom.