Trade Management: ERX 3X Energy Bull

1/26/09 Bought ERX @ 38.22
1/26/09 Sold Feb 35 call @ 6.40 (expired)
2/23/09 Sold Mar 30 call @ 2.10

So far this has proven to be a weak trade. I was getting too comfortable with ERX and the market in general when it was placed. Fortunately the premiums are high enough that it's possible to manage my way out of it. This is not the path to high returns.

This trade was done in my wife's Roth IRA. Incidentally she couldn't care less about her account, trading or even money. She's a great balance to have in my life. The total freedom to do whatever I want in her account may be why I was comfortable taking a chance and buying ERX at what turned out to be near it's top.

Anyway, the return if this is called away is a whopping .94% for 51 days or 6.73% annual. Actually, when you look at what the S&P has returned the last 10 years this return looks stellar. We'll see what happens. I'm happy if it gets called away and I'm happy to write on it again so long as it doesn't take the gas pipe..

Trade Entered: KO Coca Cola

Today I sold several KO May 35 puts for .55 ($55) each in a large taxable, margin account. The margin maintenance requirement this far out of the money is $410 per contract. Return on margin (ROM) is 13.41% (55/410) for 79 days or 61.96% annual. At the time of the trade KO was trading at $42.50 and the Dow was at 7400. We have downside protection to $34.45 and there is strong technical support for KO at $40.

Coca Cola just had a nice quarterly report and raised their dividend to 3.87%. If put to us the dividend would be 4.7%.

In this account there is a ton of margin going unused. I've been looking for some safe bets to collect premium and have time decay go to work for us. I didn't enter this trade when the market was panicking like I normally do and this may be a mistake but the market is sufficiently beaten down that we're not trading at the top of the cycle. In addition, KO didn't trade much lower than this during times of panic.

Precious Metals still correcting...

GDX , SLV and GLD are correcting. I'm happy about this because I thought I might have missed the precious metals express. I plan to buy on the dip but I'm going to wait until it looks like it's done dipping. Come to Papa..

Trade Management: ERX 3X Energy Bull

1/20/09 Bought ERX @ 30.19
1/21/09 Sold Feb 30 call @ 6.00 (expired)
2/23/09 Sold Mar 25 call @ 3.10

This is a trade that I've done in my Roth IRA. With the latest premium received I have downside protection to $21.09. If ERX is called away my returns will be 18.54% for 57 days or 118.72% annual.

I thought about waiting for ERX to rise before writing this but the returns are fine dropping the calls to the 25's. Basically, I got a real good deal when I first entered this trade. I thought about writing the 30's but I've got to manage a lot of ERX in several accounts and thought it would be best not to bet too heavily on ERX rising.

The option premiums on ERX have dropped since it's inception. In addition, the bid/ask spreads have improved but are still fairly wide. While I may continue to trade ERX I will also trade my old fav's XLE and OIH. As I've stated before, XLE has a few extra strike dates which allow us to get an extra few bites at the apple.

Trade Management: NLY Annaly Capital Management

2/2/09 Bought NLY @15.28
2/2/09 Sold NLY February 15 calls @ 1.00 (expired)
2/23/09 Sold NLY March 15 calls @ .57

This trade is in my Roth IRA. I have downside protection to 13.71. If these get called away I will earn 9.41% for 44 days or 78.09% annual.

I thought about selling the 14's since this market is such a bundle of joy. I decided against it since NLY pays a 14% dividend and in my book that adds to my downside protection. As of this writing NLY is trading at 14.42.

NLY is a mortgage REIT which might seem like an idiotic thing to invest in but all their mortgages are Fannie and Freddie and, therefore, government backed. Couple that with the dividend and pretty nice option premiums and NLY is a solid albeit not very sexy covered call candidate in my opinion.

Trade Management

For the first time since starting this blog, all my naked puts didn't expire worthless and all my covered calls didn't get called away. So now it gets fun. It's time to manage those trades and thus the new and ingenious title "Trade Management."

Trade management is crucial to being successful in this business. Starting today I will start posting what I've done with some open transactions. I've only managed a few ERX open positions because I'm waiting for it to rise which I think will happen shortly.

Please feel free to let us know how you've managed your trades and what you think about how I've managed mine.

The correction in precious metals has started

For those interested in loading up on GDX, GLD or SLV the correction has started. I'm looking for the decline to fall back to support which will probably be a higher low than last time. When it begins it's bounce there will be a lot of out of the money put writing happening in the OPC camp.

On a side note I was checking out option premiums on SRS the ultra short real estate ETF. They're very high. Housing is screwed as we know but commercial is just beginning to fall off the cliff. Retailers and anchor tenants are closing up shop. Big problems to come in my opinion...This smells like opportunity to me.

Are we having fun yet?

Well folks we've got the honor of trading in the New Depression. Puts written on long ETF's that once were 40% out of the money are quickly approaching in the money status. All long positions with very few exceptions are experiencing either the slow or fast bleed.

I have continued to move more money into cash. I've been rolling down covered calls....working, squeezing every last dime of premium income. But alas, even in the money covered calls and far out of the money put writing will end up losers if the markets keep going down.

I sold puts on GLD today. Gold and silver seem like safe places although there are events happening that are suggestive of a bubble.

My protective index puts have been going up in value but they are just allowing my accounts to tread water. I could move to all cash, wait for things to blow over and just enjoy myself....hmmm.

And of course there's always the dark side....joining forces with the shorts and the permabears..

Trade Entered: GLD Gold ETF

Today I sold GLD March 90 puts for $1.25 ($125) each in a traditional IRA account. These puts are cash covered so the return if they expire worthless is 1.38% for 26 days or 19.37% annual.

In this account we want to enter into this gold position as our IAU stock got called away. We are happy to switch from IAU to GLD because the strike prices in GLD are in one dollar increments and the bid/ask spreads are much narrower.

Gold is money, gold is a safe haven, gold is a hedge, gold is in a long term bull market, gold is....well you get the point.

Trade Result: Gain on XLE puts

On January 9, 2009 I sold multiple XLE February 40 puts for .82 ($82) each. They expired worthless. The margin maintenance requirement was $476 per contract. The return on margin (ROM) was 17.22% (82/476) for 42 days or 149.65% annual.

I love trading oil and am close to deciding that I will trade my old favorites XLE and OIH and give my good buddy ERX a rest. The premiums in ERX have come down significantly and the bid/ask spreads haven't narrowed enough yet. In addition, XLE has a few bonus expiry periods so you can milk some additional premium out of it.

Trading gold

It looks like gold is repeating it's pattern of hitting $1000 and pulling back. On GLD and GDX shares that are owned in various accounts I'm writing out of the money covered calls this morning. Generally speaking I'm looking for at least $100 per contract. For example, I just wrote some GLD March 106's for $1.20. This brings in nice income while allowing for participation in significant appreciation.

As I've stated I'm looking for a new entry point to write some out of the money puts on GLD and GDX. I'm waiting to see where the new support levels are. I keep forgetting to give SLV it's props but it's in the mix as well.

Good luck trading to all.

Gold hits $1000

We've been bullish on gold for quite some time here. In some accounts that predate this blog we've been in gold since the 600 level. That has saved our butts. All the premium collection in the world can't pump water out of a sinking boat fast enough. Gold and protective puts have allowed us not to lose money but making money sure is tough as an option premium collector right now. It's time to take a closer look at collecting option premiums on the ultra shorts.

Unfortunately I didn't load up on more gold as I was waiting for a drop to support levels. Now that fiat currency is speeding toward it's demise and we are in a Depression it may be time to reevaluate. As I stated in a post earlier this week: "Other than gold and to a slightly lesser extent, silver, what can you honestly be bullish on? Gold is money. Gold is a hedge. Gold is a safe haven. If we were in caves with clubs, gold could be bartered."

With that being said I am still wary of entering a trade at the top. Everyone and their barber is touting gold. Danger Will Robinson! Sign of a top! Sigh...pros and cons. It is probably safe to sell GLD and SLV puts way out of the money regardless I just hate to do so at a top. Last time gold hit 1K it fell back quickly and hard. We'll just have to wait and see.

The ones making the money in this market are the chart readers and the bears. That's not really my cup of tea but adaptation is essential to survival. Time to dig out my Murphy's Technical Analysis bible.

Sharply lower open

Support levels have been broken. Asian markets plummeted overnight. If you haven't bought your protective index puts yet it's still not too late.

Let's keep a clear head. Acting in panic only results in serious losses. In a taxable account I wrote an ERX 35 put for 4.10. My cost basis is 30.90. I'm going to take it like a man and write the 30 call (possibly the 25) as soon as it's put to me. I'm not going to try to buy back the put because the spreads are not advantageous. Writing on it will lower my cost basis.

I wrote the 35 before I changed strategies to write puts way out of the money. We can now see why a strategy change was necessary. I still think the trade will end up profitable but now it will take some management.

Bottom line: conservative trades, protective puts and no panic are the mantra for today. For those who aren't already extended and who are calm there will probably be some very profitable way out of the money put selling opportunities while the herd panics. I would stick with the highest quality ETFs and stay away from financials.

For those daytraders out there this may be a day to play the ultra shorts. Please feel free to post comments for us all to ponder.

Rolling, rolling, rolling

Tomorrow is options expiration Friday. I will be at the computer all day figuring out how to manage different trades. If anyone has a question about whether or how to roll any of their positions then post a comment to this post. Let's work together to survive and make money in this crazy market.

I will be watching the Asian markets closely this evening. I'm not optimistic. We have breached Dow support levels and it's a scary time. If you haven't bought your protective puts it's still not too late. After all of my harping about hedging I hope none of this blog's regulars get caught without protection. One of my favorite Warren Buffett quotes is "It's only when the tide goes out do you find out who's been swimming naked."

Very interesting reader question

An excellent comment was recently posted by learningNewIncome which has got me thinking. Here it is:

"PC - still learning here so i may say something totally stupid. You repeat the importance of buying protective puts... i understand the reasoning of the protection - my question is: would it not be better to sell puts on a short index ETF? you dont have the time decay of buying puts on the normal index. ??"

What is your opinion? Which serves us better? My initial reaction is mixed. I love having time decay on our side rather than working against us. On the other hand there is unlimited risk in the event the market rallies. [Note: some astute commenters have pointed out that this will not provide the hedge we need to protect against a market crash. We would only get to keep the premiums collected. The post does raise an interesting new strategy to ponder.]

If the market rallies...

Those who come by and visit this blog know I've been beating my chest to encourage traders to buy portfolio protection and to write only very conservative trades. If the market rallies we should be looking to add some protective index puts on the cheap. Maybe we should load up on a few extra to sell at a profit when the market inevitably tanks again while leaving a few in the account for protection. I'm not going to take a rally as an indicator that things are back to normal and get a little greedier in my trades.

We are in a Depression with a capital D. I will only write on the highest quality issues, preferably ETF's. When support levels for GLD and GDX are touched I will be looking to write several strikes below support. I'm probably going to chill a little bit on ERX because I've traded it so much and feel the need to diversify a little more. ERX 17.5 and 20 puts look yummy, however. Notice how far out of the money they are...that's the way I'm trading until further notice.

More Protective Puts Bought

Yesterday's drop below critical support levels caused me to lose a little sleep last night. That's not acceptable. In each account I trade I purchased more protection. My favorite purchase was the SPY April 75 put. They're not too expensive since they're short term and out of the money. Just the cost of doing business.

Thanks again to the bankers, deregulators, the SEC, Greenspan, Bernanke and Hank. Good show mates.

10 reasons to trade options on ETF's

Here is a good article from the Options Insider: http://tinyurl.com/c89gxv. The reasoning is sound. An additional reason I like to trade ETF's is that if one stock gets creamed for reasons unbeknownst to us until it's too late it usually doesn't have much effect on the basket of stocks. You don't actually believe in corporate transparency and that top executives are making decisions that are solely in the best interests of the shareholders, do you?

Trade Entered: FXI Xinhua China ETF

Today in a larger sized taxable margin account I sold FXI May 17 puts for .55 ($55) each. At the time of the trade FXI was trading at $25.15, the Dow was at 7631 and the S&P 500 was at 796. The margin maintenance requirement this far out of the money is only $290 per contract. We have downside protection all the way to $16.45. The return on margin (ROM) if these expire worthless is 18.96% (55/290) for 88 days or 78.64% annual.

China along with Brazil and Malaysia may be the only bright spots in a worldwide depression. This ETF has shown strong technicals after getting slaughtered with the rest of the emerging markets in 2008. We're bullish on China long term.

This ETF will have to drop 35% before we get hurt. That's possible in this market but we feel it's unlikely. Writing puts this far out of the money is the way we're playing the market right now. In addition, we'll look to add additional protective index puts in this account when we see a bear rally.

Trade Entered - Tiny Tim: ERX 3X Energy Bull

Today I entered my first trade in the account we're calling Tiny Tim. Tiny Tim is a new $6,000 account I'm trading and since it's the first new account I'm trading since starting this blog I'm using it to measure my performance. The starting date for the account is 2/13/09.

Today I sold one ERX March 20 put for $1.15 which after commissions resulted in a net deposit of $104.25 into the account. This put was written so far out of the money that the margin maintenance requirement is only $290. The return on margin (ROM) is 35.94% (104.25/290) for 32 days or 409.94% annual. We have downside protection to $18.96.

We've traded ERX a lot since the inception of this blog. I felt that today's panic was a buying opportunity and that oil and the overall market were near short term bottoms. If not, we don't get hurt on this trade until ERX drops another 33%. In this market anything is possible.

With Tiny Tim our first goal is to beat the S&P 500. Our second goal is a minimum 1 year return of 20%. We feel that this trade is the first step in that direction. Time will tell.

As of this writing our plan is to take 25% of premium received and putting it toward buying protective index puts. We just collected such a small amount, however, that we are going to wait until more premium is collected. With the 33% downside protection of this trade we do have a buffer. We might dig into the corpus to buy a protective put or two if the market were to rally and make the puts a bargain.

Sunday evening thoughts

How do we trade this crap that the greedy bankers got us into? That's not fair, it wasn't just them. A special shout out goes to Greenspan, the deregulators, Bernanke and Paulson as well. Anyway, how do we trade this market?

Wait for gold to drop to support levels and write out of the money puts on GLD or GDX. If you're a covered writer then wait for the same drop and write covered calls a strike or two in the money. ETF's protect against a single company tanking for reasons unknown to us regular folks until it's too late. Other than gold and to a slightly lesser extent, silver, what can you honestly be bullish on? Gold is money. Gold is a hedge. Gold is a safe haven. If we were in caves with clubs, gold could be bartered.

We can daytrade the ultra short ETF's. We can also write way out of the money naked puts on the ultra shorts like I just did with TBT but admittedly that's a little different than the stock index ultra shorts. We can wait for bear rallies and buy index puts in abundance, keeping some as hedges and selling others for profit when the market tanks again.

We can do what I've been doing a lot of lately which is writing naked puts way (and I mean WAY) out of the money. There is so much fear out there that even several strikes out of the money the premiums are worthwhile. Hedgers and speculators are buying up puts like crazy. We can be the sellers and in doing so give ourselves ridiculous amounts of downside protection. Since we're writing so far out of the money our brokers don't demand that we put up much margin maintenance. This allows us to have great returns on margin with very little risk. Combine that with protective put buying for insurance and we are as snug as a bug in a rug.

If you're bullish on an individual stock it better be of the highest quality or it could get hammered at the slightest bit of bad news. Even better in my opinion is to trade ETF's on sectors or foreign countries that you're bullish on. My favorite foreign country ETF's right now are EWZ, which I've just traded, and FXI. For an interesting read on FXI see: http://tinyurl.com/bbgjf4. Don't be greedy. Write your puts way out of the money and your covered calls way in the money. I prefer the naked puts because of the return on margin but to each his own.

You can prove your mettle as a trader if you can make gains while all the buy and holders get slowly bled and the cash holders are arguably preserving capital. This market is a great opportunity to hone your skills. Traders who start five years from now will not have had the experience that we have. It's like learning combat skills in battle versus reading about it in a book. We will have been through the worst market in history and we not only survived but we thrived. Some traders I really admire are very frustrated right now. We can strategize our way through it.

I hope you exit this Depression wearing a top hat and tails and raising your cup in the winner's circle.

Trade Entered: TBT Ultra Short 20+ Year Treasuries

Today I sold TBT June 37 puts for 1.05 ($105) each. At the time of the trade TBT was trading at 45.90, the Dow was at 7825 and the S&P 500 was at 823. We have downside protection to $35.90. The maintenance requirement for this trade is $485 per contract. The return on margin is 21.65% (105/485) for 128 days or 61.74% annual.

This trade is a play on rising Treasury yields. Long term Treasury yields are insultingly low. If we want the Chinese to continue to finance our economic follies and imperialism we are going to have to pay them a better interest rate.

If we want to continue to run the printing presses 24/7 and pursue every course of action available to devalue the dollar then it is inevitable that deflation will eventually give way to inflation. Treasury yields have to rise during inflationary times to incentivize buying these "safe" investments.

I've wanted to get in on this trade for a while now but was put off by the Fed's comments that they would buy our own Treasuries to keep yields low. Talk about robbing Peter to pay Paul. Bottom line: the U.S. is in trouble and in my opinion they aren't going to be able to loan money indefinitely as if we have a AAA credit rating.

My tone may sound confident but the fact that I sold the 37's when TBT was trading near 46 suggests otherwise. We are in a Depression which is defined as 6 consecutive quarters of GDP contraction. I haven't traded through one of these before, have you?

Caution and preservation of capital are paramount and I don't trust nor can I predict the actions of a desperate government. Our leaders look like deer in headlights right now. As such, I need a lot of downside protection and plenty of protective puts.

Gotta love it...

If you're an option seller you gotta love the return of volatility like we saw today. The market swings today were massive. Time to jack up the option premiums boys.

When the Dow was down 230 or so I almost pulled the trigger on some naked puts but didn't. I traded a lot yesterday and my margin levels are pretty close to my comfort level in my personal accounts. Basically I didn't have the balls but that's fine I live to play another day. I did finally enter a TBT trade which I'll post later..

If some of you sold options when the market was down at that level perhaps you could post your trades here. It's a chance to show off your balls of steel.

Thursday morning thoughts

We are at some pretty important support levels for the Dow, S&P and crude oil. If we drop below them and a bunch of black box selling takes place then look out below!

Even deep out of the money put selling can be unnerving when the market is in slow bleed mode. Don't panic; protect yourself.

I have been harping on portfolio protection and it's been a good exercise for me and I hope some readers have benefited as well. Did you suck it up and buy your hedges? Have you been writing covered calls in the money and your puts way out of the money?

This market and economy are scary so hedgers and speculators are paying nice money for way out of the money puts. I've entered into some trades with 40% downside protection that still will have good returns if they expire worthless. Combine these strategies with protective puts and we will be fine.

When the market has it's next up cycle it may be a good idea to buy extra protective puts so when the market inevitably tanks again we can profit. That is, buy more protective puts then needed to protect the portfolio so we can sell a few during the next and inevitable panic. There are some very smart people making truck loads of money by playing the down side. We don't have to be 100% long and, in fact, in this environment that's probably foolish.

If you're ballsy, today could be a field day for the naked put writers. The fear is palpable. But let's be careful, conservative and protect ourselves with hedges. Be safe. It's a jungle out there.

Trade Entered: ERX 3X Energy Bull

Today I sold ERX March 20 puts for .80 ($80) each in a larger sized taxable margin account. At the time of the trade ERX was at $33.50, the Dow was at 7953 and oil was at $36.20. We have downside protection to $19.20.

The maintenance requirement this far out of the money is only $295 per contract. The return on margin (ROM) is 27.12% (80/295) for 38 days or 260.49% annual.

I couldn't pass up the option premiums at this strike price. Never say never but it seems very unlikely that we can get hurt on this one. I believe we are at the bottom of the trading channel for both oil and the market, at least for the next 38 days. If I'm wrong we have 43% downside protection and protective index puts in place.

Trade Entered: ERX 3X Energy Bull

Today I sold the ERX March 22.5 puts for 1.40 ($140) in a smaller sized taxable margin account. ERX was trading down at $32.63 at the time and the Dow was at 7909. The price of a barrel of oil had dropped below $36.

The maintenance requirement for this trade is only $345 per contract. Return on margin (ROM) is 40.57% (140/345) for 38 days or 389.68%. We have downside protection to $21.10.

At the time of the price of oil was hitting it's support level and was beginning to bounce off of it. ERX was likewise hitting it's support and rebounding. Basically this is a bottom of the cycle play and the pattern to date has repeated itself consistently.

The risk/reward ratio of this trade is very appealing. ERX would have to drop well below the price it has ever traded and that would have to happen in the next 38 days to get hurt on this trade. This is likewise a very conservative trade since it is so far out of the money and the potential returns, which we've already pocketed, are more than satisfactory. And finally, we are of course hedged with protective index puts in case the market goes to hell in a hand basket.

Trade Entered: EWZ Brazil Index Fund

Today I sold EWZ March 31 puts for 1.00 ($100) each in a smaller sized taxable margin account. The maintenance requirement is $435 per contract. The return on margin (ROM) is 22.98% (100/435) for 38 days or 239.24% annual. Downside protection is to the $30 mark. Trade reasoning can be found in the previous EWZ trade entered today.

Trade Entered: EWZ Brazil Index Fund

Today I sold EWZ June 25 puts for $1.55 ($155) each in a larger sized, taxable, margin account. EWZ was trading at 39 at the time of the trade and the Dow was at 7961. The maintenance requirement for this trade is only $435 per contract since these puts are so far out of the money. The return on margin (ROM) is 35% (155/435) for 129 days or 99.03% annual. We have downside protection all the way to $23.45.

Brazil is one of the strongest emerging markets. They actually produce things that people need. This index fund got slaughtered last year and is now showing technical strength. EWZ hung pretty tough through yesterday's >4% market drop.

This is another very conservative trade that pays well. We have 40% downside protection. We have protective index puts in place. Nuff said..

Wednesday morning thoughts..

I totally missed the crash yesterday taking care of family business. Not good timing. There were a smorgasbord of naked put selling setups. They're still not bad today but this is feeling like one of those crazy last hour of the day volatile closes.

I'm looking closely at the pullback in TBT which is due to the herd running to safe havens. Are Treasuries really safe? Gold is probably safer and my bullishness on the precious metals looks to be accurate. I didn't enter any new positions because I thought it would pull back more. If fear subsides I think it will.

In a conservative account I'm looking at EWZ June 25 puts. This looks like nice money just waiting to be taken. I like EWZ better than FXI since FXI is heavy in financials.

So, fear is good for entering most positions but bad for entering gold. That's because we want to sell puts when stocks or ETF's are being panic sold. That's when way out of the money puts have juicy premiums. Sell puts a few strikes below the panic selling and you're sitting pretty when the market inevitably calms down a bit. If panic selling continues you have really nice downside protection and if you listen to what I say in any way whatsoever your hedges will be rising in value to offset the declines.

A few thoughts premarket..

I'm only going to have access to the market the last couple of hours today due to some family business. They are the best anyway in my opinion, especially the last 45 minutes or so.

I'm looking at selling naked puts on TBT, EWZ, FXI, ILF, XLV, XLK but will only pull the trigger if there is fear out there. I've talked about the TBT trade on here several times and the thing has done nothing but rise. Time to put up or shut up and fear is not as necessary with this one. Emerging markets seem to be heating up again and I don't wanna miss that train.

Gold is up premarket. I wonder if the latest pullback is the new higher low. Probably not but gold is taking off in my opinion. It's just a matter of time. With the right setups GDX and GLD far out of the money puts using leverage ought to be money. I'll check in later.

Not enough fear..

Unless things drastically change, today is probably not the day to enter into new put selling positions. I like to collect the high premiums that fear brings.

I shouldn't have to wait long. The news is all bad. People are now throwing around the word Depression without worrying if it's politically correct. Our government is essentially bankrupt and they're bailing out other bankrupt entities with taxpayer dollars and foreign loans. We're still fighting two foreign wars. Well you get the picture...

I think the price of gold is going to keep going up. It's trading within a channel that has higher highs and higher lows. When we reach the low end of this channel I'm going to load up by selling far out of the money GLD and GDX puts.

I'm also keeping a close eye on Coke (KO) and Pepsi (PEP) which report pretty soon. They're down today and if they fall after reporting I'll probably sell some puts on them once they stabalize a bit. Foreign market ETF's like EWZ, ILF and FXI look interesting again. I'm looking to add on the dips. I'm also keeping a close eye on the technology, healthcare and defense sectors, particularly XLV, XLK and GD.

Trade Result: Gain on GE puts

Today I bought to close GE Feb 11 puts for .26 each. I sold them for .43 each on 1/27/09. The return on margin (ROM) is 4.86% for 13 days (17/350) or 136.37% annual. The maintenance requirement increased a little bit due to the drop in GE's stock price after the trade was initiated.

It was a pleasant surprise to see GE jump up in price today from $11.12 to $12.73 and I took advantage of the opportunity to close the trade out at a profit. I don't think there is any need to trade companies that are under duress. I'll leave that to the daytraders and the speculators. There are plenty of great return on margin opportunities out there in sector ETF's and the highest quality stocks.

General Electric

GE is up sharply this morning. Immelt is now an Obama insider/advisor. GE has troubled commercial real estate investments. The TARP plan is now going to be buying bad commercial real estate assets (liabilities?). This is how I'm connecting the dots.

This is making me feel a lot better about the February 11 puts I sold. It is the only trade I have outstanding that has troubled me. GE was at 13 and showing strength when I entered the trade and it's been on slow bleed cardiac arrest ever since.

Tracking Results, Fresh Account - Tiny Tim

Since 11/28/08 when this blog was started I have posted all new trades and their results. All accounts I work on, however, were already in existence and had some open positions which predated this blog. A decision was made early on not to include trades on those old positions because the process of detailing the history would be onerous. If one wants to see how we've done with new trades since inception they would just need to click on the "trade results" label on the right hand side of this blog. For open trades one would just need to click on "trade entered."

I am going to be trading a fresh account albeit a small one and will be tracking it here. This account is only starting with $6,000 so there will probably be plenty of one contract transactions for a while. This will work to my disadvantage as the commissions are reduced the more contracts one trades.

In this account I plan on writing way out of the money naked puts on ETF's and blue chip stocks. I plan on taking 25% of option premium received and buying equally way out of the money protective index puts. Leverage will be generously applied. I will be calculating returns on the account and posting them here including comparisons with the S&P 500. Since this account is so small I'm going to refer to it as "Tiny Tim."

TD Ameritrade has a lovely policy of placing a 6 day hold on checks used for options trading. I won't be able to trade Tiny Tim until later this week.

Poll Result: Portfolio Protection

We have spent a lot of time in the last month discussing how to protect one's portfolio from a market crash. There are some who don't think the market will crash and that November 20th started a new bull market. There is a whole range of opinions out there from bull market to financial Armageddon.

For the sake of being cautious I think we all need to take the issue of hedging and portfolio protection seriously. I have chosen the least popular way among those voting in the poll to protect one's portfolio. I use protective index puts.

The results are as follows for the question "How are you predominantly protecting your portfolio?":

1) Collecting a lot of option premium - 32%
2) Nothing. I'm letting it fly! - 22%
3) Sitting mostly in cash - 20%
4) Setting tight stops - 9%
4) Hedging with ultra shorts - 9%
6) Hedging with protective puts - 6%

Collecting a lot of option premium - The top choice didn't work in 2008. While option sellers had a lower cost basis than stock holders they still got slaughtered. Check the results of some very good covered call writers whom I respect. They can be found on my blog roll. On average they lost 20% plus which was way better than the market but devastating nonetheless and more importantly, avoidable.

Nothing. I'm letting it fly! - I was surprised this response came in second. If this is in fact a new bull market these traders will participate in it to the fullest. They will have most of their capital in the market and they won't have spent money on hedges. More power to them but too risky for my appetite.

Sitting mostly in cash - It's hard to argue with this response. It's effective. This doesn't work for me because I want to put capital to work and am not content waiting around for things to get better. Perhaps they are picking their spots to trade very infrequently. I would rather enter a high number of very conservative trades which have above average returns due to the high option premium. I just don't want to enter these trades and not be protected.

Tight stops - It's hard to argue with this strategy as well. The problem I have with this strategy is the gap up or down premarket or after hours. Perhaps this is an issue I have with my broker TD Ameritrade and other brokers will honor stops premarket or after hours. Another issue is that this method is more effective for daytraders, momentum and swing traders. For the option seller who has time decay on her side, not as much. The underlying stock can go down a little and with very conservative trades, down a lot and the option writer still wins. Tight stops would yank us out of many profitable trades too early in the game in my opinion.

Hedging with ultra shorts - This strategy works if you trade the ultra short ETF's short term. If you hold these things the returns are disappointing even if you are right about market direction. They are calculated daily in a wacky way. There has been so much discussion about this on the web that there is no need to go into more detail here. I'll take this strategy over "Nothing. I'm letting it fly!" but that's just me.

Hedging with protective puts - My method of portfolio protection came in last place. So much for fancying myself persuasive. Protective puts can be bought and held more effectively than ultra shorts. The downside is time decay. The upside is that you can buy them as far out as you want although they are more expensive. I buy protective index puts on the exchanges where most of the trades in the account can be found. I'm willing to take 25% of the premium collected and buy this insurance. The options I'm selling are jacked up more than 25% above normal due to unusual market volatility so it's a wash in my book. It is an art and for me a continuing work in progress to figure out how many puts to buy and at what strike price and month. Since I've been writing puts so far out of the money I feel comfortable buying index puts that are far out of the money as well since the market would have to tank really bad before I get hurt. These index puts are far less expensive.

Can a lot of money still be made when one enters very conservative trades selling puts way out of the money while also paying for portfolio protection? I believe so. First of all the premiums are high due to speculation, market volatility and hedging. Second, if one uses leverage the margin maintenance requirements are extremely low on way out of the money puts. One needs to only set aside 10-12% of the cost of the stock if put to her. This jacks up the return on margin. I don't think the use of leverage in this instance is risky due to the very conservative nature of the underlying trades and if enough protective puts are bought. Bottom line: if you use leverage you can make very conservative trades, protect the portfolio and safely make a lot of money...and that's the idea, isn't it?

Trade Entered: LMT Lockheed-Martin

I finally got the setup I was looking for when LMT dropped below 80. Today I sold the March 65 puts for .85 ($85) each. LMT was trading at around 79 at the time of this trade which is down 3% and the DOW was up about 140 to 8200 or so. The maintenance requirement is $722 per contract. The return on margin (ROM) is 11.7% (85/722) for 43 days or 99.31% annual if they expire worthless.

There is talk today about the Pentagon having a limited budget. This doesn't include the wars in Iraq or Afghanistan. It also allows for extra funding for modern fighter planes like LMT produces. LMT is not totally reliant on the U.S. as their products are in great demand worldwide.

These puts are way out of the money and I'd be very surprised if this stock were to drop 18% in 43 days. There is strong support for LMT at 70 and we wrote these at 65. Never say never especially in this market but the account that these were written in is hedged with SPY index puts.

I love this method of trading because I can be wrong about the direction of a stock and still make great gains. We win if the stock goes up a lot, goes up a little, stays the same, goes down a little and even if it drops a lot. It has to get crushed before we get hurt. C'mon Mr. Time Decay, do your thing.

Trade Idea: Defense stocks revisited

I really want to write some naked puts on General Dynamics (GD) or Lockheed-Martin (LMT) and to a lesser degree Raytheon (RTN). I thought they might drop after their quarterly reports due to charges to bring deferred benefit assets back in line. As I've stated they can easily pass these expenses on to our ever philanthropic government. Well I was wrong about the drop, it never happened.

A couple of days ago I haggled over a nickel and lost a LMT naked put trade when it dropped into the low 77's. In the few minutes I was trying to figure out the reason for the drop the stock went back over 79. It is now hovering around 82.

Bottom line: I'm waiting for a retracement on LMT to the high 70's and GD to 50 or so and then I'll be pulling the trigger on multiple way out of the money puts. With economic strife comes civil unrest. Every war ever fought was done so for economic reasons in my opinion.

I have a hard time seeing how these stocks can get hurt badly which is what they would have to do before I lose money on them. Even then my protective puts would probably go up in value enough to offset the losses.

Trade Result: Gain on GDX puts

Today I bought to close my GDX February 29 puts for .30 each. On January 5, 2009 I sold to open the puts for 1.80 each. This is a gain of 1.50 per put and the maintenance requirement was $561 per contract. The return on margin (ROM) is 26.73% (150/561) or 314.72% annual.

I could have waited until options expiration and these probably would have expired worthless. These puts had pretty much run their course and I have some ideas about putting the capital to work somewhere else.

Gold up, market down, morning rant

Gold up, market down. Sound familiar? Asian markets turned mostly sour overnight. Europe is down as of this writing. Pre-market futures are pointing to a sharply lower open. Gold futures are headed higher.

Thank you bankers, broker-dealers, Greenspan, Paulson, Bernanke, the SEC and, of course, all the politicians who let greed get leveraged to such an extreme that the world economy is falling off a cliff. Perhaps you should reward yourself with a $50,000 golden toilet for your office or a remodel of your 2nd vacation home.

The rest of us are left to hedge, make bets on crashes and if we're dumb enough to have any long positions watch them get bled like a stuck pig. Can we write covered calls deep enough in the money? Can we write puts far enough out of the money?

Gold is rising because it is a sane, tangible commodity/currency in an insane world. Moving to cash is nice but as soon as deflation inevitably turns to inflation that won't be the answer either. Nice work boys.

Too bad about water...

We have water shortage problems. We have water infrastructure problems. Water is essential for life. I would love to trade water ETF's but the option premiums are either nonexistent or the spreads are wide enough to drive a Prius through.

Here is a good article which compares the four major water ETF's http://tinyurl.com/dftva2. I'm keeping an eye on the options to see if the volume picks up. PHO is the best as of now. I predict that one day water will be the hottest commodity out there and people will be trading these things like crazy.

Not all doom and gloom

This morning I woke up to some articles that were recognizing some positive things happening in the economy: http://tinyurl.com/apmppp, http://tinyurl.com/bvfw47, http://tinyurl.com/blhno4. TED spreads and Libor rates are narrowing, Merck had great earnings and existing homes are moving a little more. Some are even calling for the recession to end in 2009. Is this a sign of good things to come or just people tired of the doom and gloom?

Put Option Selling

For those of you who are just learning options in general and put selling in particular I recommend the Jeffrey Cohen "Put Options" book listed first in my recommended books. I just read it for the third time and it's fantastic.

For those of you who haven't purchased or read Jeffrey Cohen's book here's a lean and mean article which competently sets forth the basics: http://tinyurl.com/czelym. It's a great strategy, plain and simple.

Hedge Hog's Day

Today I took advantage of some rare strength and sold almost all of the odd lots in all accounts. If I was writing on 500 shares but held 518 the 18 extra were jettisoned to maximize cash.

More importantly, during the last hour rally I bought SPY index puts as insurance against a crash. Almost all hedging is now in place. I have been waiting for the right setups to switch hedges from ultra short ETF's to protective puts. The ultra shorts are calculated daily in a wacky way that doesn't provide the protection one would think they are getting.

In accounts where most of the short options are way out of the money I felt comfortable purchasing April 75's because there was a lot of downside protection already built in. In Roth IRA's where most of the positions are covered calls I purchased a mixture of June 80's and June 84's. I'm learning hedging for the most part by trial and error and look forward to the learning experience.

Jeffrey Cohen in his Put Options book suggests spending 25% of option premium collected on protective puts. In this market where the volatility is high and thus the option premiums are likewise high I find 25% to be a reasonable number to work with. There are still great returns to be had out there.

Now that the hedging is in place I'm ready to write some more naked puts when the market inevitably tanks. I almost pulled the trigger today on Lockheed-Martin, one of favorite defense stocks when it was in the low 77's. I was going to take the free money for writing the March 60's for .75 but let the trade slip away while haggling over a nickel. The stock shot up to nearly 80 and the bid/ask for the March 60's sits at .40/.50. Note to self again, don't lose good trades by haggling over nickels.

Anyway back to hedging, the bottom line is that if the market tanks tomorrow, next week or next month we won't get pummeled like so many investors and traders did in 2008. Combine that with our being overweight precious metals and I'm looking forward to sleeping like a baby tonight.

How Obama will Influence Energy Stocks

I love to trade energy ETF's so this article is germane http://tinyurl.com/dgq823. Bottom line: Obama is going to make it hard on coal companies because coal burns so dirty. Wind companies should do well under Obama. Wow, is that a little bullish news for GE? I haven't heard any in quite some time. This article examines most types of energy and is worth a read for all the energy players out there.

Recession/Depression; duration; depth?

In case you haven't heard we are in for a prolonged slump. Here is an article written by an author many of us respect: http://tinyurl.com/anjkhb.

How are we going to deal with it? Capital preservation remains paramount. Learn how to make money on the short side. Buy protective puts, etc., etc. Why don't I just re-post my strategies from Saturday http://tinyurl.com/avqt9r so I don't have to repeat myself.

Today the market is up some. Might it be time to nibble at buying some index puts?

Thoughts about tomorrow

We are very oversold here and sitting on support levels. The tiny rally near the end of the day I believe bodes well for tomorrow. In addition, Asian markets are up as of the time of this writing. I'm glad I dumped my ultra short holdings this afternoon after some nice gains. [Note: Europe ended lower and Asia ended mixed. The slow bleed could continue.]

There are a lot of earnings due out tomorrow and investors have very low expectations. If we get a super nice bounce I'll be looking to add to my protective index puts because it's just a matter of time before the bears take control again.

Trade Entered: NLY Annaly Capital Management

In my Roth IRA today I bought NLY for $15.29 and immediately sold the February 15 calls for 1.00 each. I have downside protection to $14.29 and the return if exercised is 4.97% for 18 days or 100.78% annual. The yield on a $14.29 cost basis is 14%.

NLY is a mortgage REIT. All their loans are Freddie and Fannie and, therefore, backed by the U.S. government. The dividend is fantastic and the covered write yields are pretty good too. NLY has shown strength in a weak market as investors figure out that NLY is basically government backed and you don't have to avoid all REITs.

Monday Morning Quarterback

We wake up today to the Asian markets trading lower. The Dow has broken below the 8000 support level. The talking heads are spreading doom and gloom. What's a poor boy to do?

Hopefully everyone has some portfolio protection in place. We've been nagging about that here for the last 2-3 weeks.

If you think the market is going to tank after breaking below support then you might want to consider day trading some ultra shorts. If you think the bottom is in then way out of the money put selling is paying very nicely right now. The hedgers and speculators are driving up put premiums so that way out of the money puts are bringing in what just out of the money puts used to do in a sane environment.

I've sold a lot of way out of the money puts and the stock prices are in slow bleed mode. I might put a little more capital at risk but the conservative in me begs to take a breather. I'm also looking at possibly opening an NLY covered call position in my Roth IRA. It is holding up very well, paying a 13% dividend and all loans are backed by the government. The February 15 covered write returns just under 5% if exercised.

Stay warm, keep safe and may all your arrows shoot straight.