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.