Philip Davis

Options Trader: Friday Outlook

Thanks Lobster. If you want to get an idea of what we do in member chat, I did take the time to address BSchecker's "concerns" to the trades he asked about in the next post. I don't claim to be perfect - we have wins and misses but the nature of the hedged strategy we run is that we cash in our wins and usually we can roll our misses and turn them into wins at a later date. With a diversified portfolio, time is on your side and, as I we like to say at PSW, there's always an option...


WM/Calvin - Of course there's a possibility but $2 would very likely be on the way to $0 as the bank is already priced for bankruptcy. Like the stand we took on C in the teens, sometimes you just have to look at a stock and say "Yes, I would buy the whole company at that price." WM tested $3 and bounced sharply back on the 14th and we're hoping that line holds for the rest of the month. On this play, if we have faith that the downside is $3 on our $3.10 net entry and the upside is $4, it's a pretty good risk/reward spread.

Also, you have to look at the fundamentals. Congress is passing a housing bill that Bush said he would sign. The concerns on the banks is primarily based on concerns of the value of their housing portfolios due to high default rates so fixing the housing problem fixes the banks. While it might not make everything all better, it sure might mean that some part of the 85% drop in value for WM may be recovered, giving us a nice win.

Options Trader: Friday Outlook

BSchecker, Rumplewhatever, Contender - as much as it pleases me that you hang on my every word like you do (it's a powerful thing to take up so much of someone else's life), it seems the curse of the Midianites is upon you and that's a sad thing so I will help anyone who asks for it and you can dream about me this weekend or obsess over me during your waking hours but that's no reason I can't chat with real people on this site.

Lobsterboy - what would you have me respond to? They make things up that aren't true and expect me to spend time defending myself, not worth my time. We have over 1,000 members now and a couple of them must be satisfied and I still post on SA for free because they gave me an early break (well before I had a pay service) and I'm loyal to them and allow them to publish my morning posts. How do you see my providing to SA for free something that other people pay for to be "just using this webside to get more clients"? If anything, it costs me clients as it's a very low cost alternative for people who don't want to pay for membership.

If these boys want to attempt to turn this site into the YHOO message board, that's not my problem and even their obsession with me isn't my problem, clearly it's theirs. There are people I don't like and I just don't read them, much less hang on their every word. Stalkers go with the territory, most of the popular writers I talk to have their obsessed anti-fans. I'm harsh on Cramer, Bush and Whitney myself so I guess it all goes with the territory but I don't see them interrupting their lives to address my concerns.

What bothers me is I used to enjoy having conversations with readers here as there are lots of really smart people who read SA but, as you point out, my disinterest in rising to their bait is taken by someone like you to be an admission of guilt of some kind so I'm saying this once here and that's it. I am very amused by the fact that I, Phil Davis, occupy the thoughts of these people to this extent while if I don't happen to click over here for a day, they don't even exist to me at all. Just think of the disproportionate impact I'm having!

So I've decided to simply respond to the people who have real questions (why should they suffer) but, overall, it sure is nice to be ranked as one of SA's most commented authors!



CROX/Likestock - What a disaster! I have to give props to Ahmit, who totally called this one while I trusted the management. I still can't figure out what they did with all the money as sales were "only" off 2% for the Quarter, down $4M from last year, yet the company managed to not make the $48M they made last Q2. Our bullish case was based on the 80% increase in international sales that were reported in Q1 and had increased to over 1/2 of total sales. Now that's drying up too but it's the MASSIVE missed guidance by management that makes me want to give up on them.

Our position, which had been rolled and doubled several times from our original play (but we sold many calls against them along the way so, until today, we were in decent shape) was the Sept $6 calls with a $2.85 basis against which we'd last sold the $9s for $1.15.

It's rare but there's really nothing to save in this trade, all we could do was sell the current $5s for .70 and use that money to roll back to the Dec $5s and hope we find some way to make back the $1.70.

Usually, if you get blown out of a hedged position (and almost all of our positons are hedged) the best course of action is to sell another option with good premium that pays for you to roll yourself back in time and closer to the money but you never want your caller to have position advantage over you, in case there is a sharp bounce.


I would say that this is the type of strategy we teach but Lobsterboy would think I was soliciting so I'll just say that there are many fine web sites that teach using stock options as a hedging tool and those strategies can get you through many tough times but there's really nothing that's going to save you from a 50% drop pre-market and that's why position management MUST be a part of any good portfolio strategy (many fine sites teach that as well).

Murphy - this is all your fault as your link caught my attention and I decided to respond to you but first I had to do a little housekeeping! First point is XLF is financial so I'm not sure we're talking apples to apples subsituting a health-ETF basket but I think you were thinkining about the XLV.

We use the XLF because the risk of owning any single bank is pretty insane. We took gambles on C and BAC pre earnings as well as LEH and JPM as they were ones we were pretty sure were going to beat. We also took the XLF and had a variety of covers and naked positions among the 5.

You can pursue a similar strategy targeting health care but one interesting use of an ETF, if you are playing a major component of it, is to go long on the single stock and short on the ETF ahead of earning. Bad earnings from a major player in a sector can bring down the whole ETF but good earnings from one stand-out don't always translate into a sector break-out.

All portfolio management is about balance and it's not the sort of thing you can learn without practice but, as Mr. Miyagi says "Once you find balance, you can accomplish anything."

Have a good weekend all,

- Phil

Options Trader: Tuesday Outlook

I don't know of a proper Dow study. The S&P routinely changes components too and the Russell just rebalanced but with the Dow just having 30 components, you really can't just go pretending it doesn't matter when you trade 2 in, especially with their whacked out weighting system - that in itself could have used an extensive study to figure out what the hell they did.


SC Boeing: www.bloomberg.com/apps...

I would understand the lack of action by the government if the situation was insoluble, but it isn't. It just takes firm action and some vision. Unfortunately, those are things we are very short of in our government.