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  • USO: A "Double Play" On Oil [View instapost]
    Hi BrutalHonesty and Alpha Man.

    Thanks, I appreciate it.

    Many of my followers have lamented SA not allowing option articles. I'll probably start in again and write more on options, they'll just be in "blog" form. I'm on vacation (to Hawaii) for a month, and will start back in when I return.

    Good luck to...

    Jan 16, 2015. 04:08 PM | Likes Like |Link to Comment
  • USO: A "Double Play" On Oil [View instapost]
    Hi BrutalHonesty,

    Thanks for taking a second look and I appreciate your comments.

    In essence, there are two opposing positions taken simultaneously.... a long position and a short position. Normally, the combined deltas would be zero, representing a neutral position. In this particular case, it is slightly bearish (the delta is negative) by virtue of the far-dated DOTM short call, rendering the call a call spread.

    The strategy is really a "theta-play". To put it simply ... the sum of weekly extrinsic exceeds (by a large margin) the far-dated extrinsic. So, "cost recovery" or profit can be achieved. This is achieved if the underlying remains near the delta. In this case, at or slightly down. (I won't go into it, here, but trust me that the "profit window" each week is twice the weekly extrinsic.)

    The "problem" as you have pointed out, is getting the direction right. Not so much, ultimately, but on a weekly basis ... especially on a volatile stock that. Otherwise, it is pretty easy to be whipsawed.

    For instance, if the strike is at $18 and the underlying goes to, say, $20, there is a significant loss. Now if the strike is set at $20 and then the stock drops back down to $18, the loss is permanent.

    The best way to overcome being whipsawed is to set the initial strike for the weekly (in this case $18) and HOLD it there if the underlying rises above. As long as there is at least 2 cents extrinsic, one is on pace to recover the call-spread debit and break even, even if the direction guess is wrong.

    On the other hand, if the underlying drops back down, any monies lost on the "over-shoot" will be regained on the drop.

    Now, if the underlying starts to drop, the strike can be lowered to slightly OTM and it becomes the new "set-point".

    So, using this set-point-method, the delta varies as you go along. When the stock rises, the delta becomes more negative, when the stock falls, less so. Just a variation of buy drop, sell rise.

    This approach eliminates timing-guess-work and condenses the strategy to a mechanical execution, rendering the "viable premise" the only significant factor.

    I'm happy to help, if you need more.
    Jan 16, 2015. 08:27 AM | Likes Like |Link to Comment
  • USO: A "Double Play" On Oil [View instapost]
    Hi BrutalHonesty,

    I appreciate your "2 cents"

    Yes, I have a lot of experience with these types of trades ... I've written many SA articles on the basic techniques that have to be employed.

    I've allocated about 1% of my portfolio. Each successive week, the % of portfolio will decrease as call-write credits reduce my costs.

    If, over the two year horizon, USO continues to go down or stays flat (best scenario for this type of play), and assuming a net credit of 15 cents/week, the return will be slightly above 500%, which translates to a "boost" of 5% total portfolio return.

    If oil rebounds to $100 in two years (USO goes to $27 or above) the return will be about 300% ... giving a 3% overall portfolio boost.

    Now, the downside ... if USO jumps up and down on a weekly basis it is possible to be whipsawed and lose money. However, I've written many articles on this and am skilled in its execution. On the other hand, since the net debit of $2.47, spread over 100 weeks, means I need only net 2 cents per week to break even, it would require continuous weekly rise in USO of about 10% before I am threatened with loss.

    P.S. It's been only four days, but if I wanted to "bail out" today, I show a net profit of just under 10%. USO is trading just around $18, so I pocket the weekly call and USO has risen from $17.42, when I bought the Bull Call Spread, and that's shown a gain.

    However, I'm going to roll next weeks $18 call at a credit of around 50 cents. If USO closes below $18, I've gotten back 40% of the call spread in two weeks, with 100 weeks to go. If USO goes up, I make money that week as long as it stays below $19 (a 5.5% move) and am still overall ahead unless it goes to $20.

    So, the only way to lose is if my "viable premise" is wrong and oil is headed up, fast and soon. In that case, I'll have plenty of company on the wrong side.
    Jan 15, 2015. 11:38 AM | Likes Like |Link to Comment
  • USO: A "Double Play" On Oil [View instapost]
    Hi Mike,

    You're welcome.
    Jan 15, 2015. 07:05 AM | Likes Like |Link to Comment
  • Options Strategy: Addition By Subtraction [View article]
    Hi User,

    You pose some very good questions.

    First, the study does not include transaction costs or taxes. Transaction costs vary but really shouldn't be too much of a concern unless it is a small position, in which case .... why bother?

    Taxes are another issue. I illustrate SPY because it has a "tight" bid/ask spread and can be easily implemented with market orders.

    Personally I use SPX because of the 60/40. It is a little more rigorous as the bid/ask is much greater and limit orders are a necessity. So it takes a little more work and a better "feel" for what is an executable price. But it is certainly the ax advantaged way to go.

    Regarding continued performance ... anyone that can assert any future performance of anything is a fool ... and I hope I'm never caught in that trap.

    That said, one can analyze the fundamentals and set conditions where performance is better/worse. goes....

    Selling OTM calls is most effective in slowly rising markets, flat markets and down markets. It is less effective (actually negative) in rapidly rising markets and highly volatile markets.

    So, the outperformance requires that, over time, markets will tend to be slowly rising and average volatility. This should be a reasonable assumption over sufficient time-frames ... but not predictive over short time frames.

    With this understanding, I refrain from selling OTM calls AFTER a market drop. My basic premise is that the market rebounds on a path ever-upward (over time) and selling after a drop is the easiest way to get whip-sawed. This method sort of neutralizes the under-performance in a volatile market and just leaves underperformance in a rapidly rising market.

    So, I think if you know the situation where underperformance come into play, you can help offset it ... but nothing is magical and doesn't require some skill and, of course, luck.

    Hope this helps, let me know if you need more.

    Jan 12, 2015. 01:46 PM | Likes Like |Link to Comment
  • Wall Street Breakfast: Oil Extends Decline Below $50 [View article]
    Hi Interesting Times,

    You raise interesting scenarios.

    It's just my view, but, first ... Do you really think Venezuela would go to war? ... and if so, who do they attack? ... and where does a "bankrupt country" get the money for war? ... and what good would it do them? Starting a war would pretty much guarantee a regime change/overthrow so I just can't see this as plausible.

    Now Putin is a complex issue. Anyone that thinks they can predict what he will do is pretty brave and I'm not going to even try.

    On the other hand, his economy is in trouble and wars cost money. It is my sense that he was emboldened in Ukraine by high oil revenues.

    I ask the same questions ... who will he attack and what does he hope to gain?
    Jan 6, 2015. 10:51 AM | 3 Likes Like |Link to Comment
  • Wall Street Breakfast: Oil Extends Decline Below $50 [View article]
    Hi Interesting Times,

    Interesting comment on ...."Wars have broken out for less then this ."......

    I'm not in agreement with you on this one. History has shown that Wars start because someone is trying to "grab" some other asset that they need, not because they have a glut of an asset.

    High oil prices have financed recent wars, not the other way around. If anything, it is more likely that falling prices will strengthen the resolve of peaceful nations and weaken the ability of aggressive nations to conduct "expeditions".

    Just my view and opinion.
    Jan 6, 2015. 07:37 AM | 11 Likes Like |Link to Comment
  • Selling Puts And Calls: A Better Recipe [View article]
    Hi Aqua Vitae,

    The strategy put forth in this article works best in a low-beta stock (please re-read the "Summary").

    When a stock is volatile, it can work, but it requires more effort and discipline. On a big drop down, the next "roll" has to forego extrinsic and hold the puts DITM and the calls DOTM waiting for the rebound. Conversely, if the underlying jumps up, one needs to keep the calls DITM and the puts DOTM, waiting for a fall. If one simply follows the trajectory, looking to garner extrinsic, they run the risk of being "whip-sawed".

    When it comes to something like USO, I would not try to guess it, but rather just sell a far dated put. I wrote an article explaining why I do this specifically with Oil and other commodities that I consume ( It may be worth your while to read it.

    Hope this helps, let me know if you need more.

    Dec 28, 2014. 02:28 AM | Likes Like |Link to Comment
  • There Is No January Effect [View article]
    Hi Author,

    I think if you posted your second chart first, you would see that the data is supportive of a January effect.

    With the exception of January 2009, the returns for 2010 through 2014 average over 3.5% per year.

    So, the question cannot really be answered as simply as you suggest... it is dependent upon the data being used. Had you decided to exclude January 2009 as an anomalistic occurrence (and many would call it so) then the results indicate a strong January effect.

    I think the debate should not be so much of whether or not there is a January effect as much as "cherry picking" data points.

    Perhaps you have additional data points that can lead to a more precise conclusion.
    Dec 25, 2014. 10:24 AM | 2 Likes Like |Link to Comment
  • Why I Bought Linn Energy In My Roth IRA [View article]
    Hi Joneb,

    First... you can achieve a negative UBTI, not from the share price falling, but from operational losses. The "I" in UBTI stands for INCOME, so in essence, negative INCOME. Any such losses can be carried forward to offset future UBTI from LINE, but not offset other income from other MLPs or other sources.

    I'm not going to go into tax law history, but basically certain types of investments (mainly partnerships) have their income taxed, even if the entity is otherwise tax exempt. There is a rationale for it, but, as I said, it requires me to go into the history of tax exempts.

    The issue revolving around MLPs in ROTH stems from UBTI. There are two parts to it .... annual UBTI and UBTI recapture. Once again, the issues are complicated, I've written exhaustive articles for SA and you may want to catch up on it.

    However, here's a "shortcut" to the issues.

    1) Annual UBTI in excess of $1000, as reported on the K-1 is taxed each year. If you only have a small position, it may never occur.

    2) Recapture UBTI is a tax imposed when you sell your shares. It's a complicated calculation, but to simplify... the cumulative distributions that you received each year, minus any UBTI that you already reported on your K-1, will be taxed on sale. Not that simple, but you get the idea.

    So, the end result is ..... you may have to pay some tax and that will reduce your net yield. Also, there is some paperwork issues. Not much of a problem for small holdings, but it increases as your holdings increase.

    Let me know if you need more.
    Dec 22, 2014. 07:59 AM | Likes Like |Link to Comment
  • Energy sector weighs heavily on European shares [View news story]
    It seems everyone just misses the big picture.

    When oil prices fall (or anything else, for that matter), it simply shifts where the money in circulation goes.

    In the present case, capital is shifted from BIG OIL, OPEC, etc., to the consumer.

    So, certain parts of the global econ-system benefit at the expense of other parts. Whenever you take money from the wealthy and distribute it to the middle, luxury expenditures decrease and staples increase.

    Now, generally that just means a shift in sectors, not a loss.

    But, when it comes to the stock market (today's version of the stock market, that is) ... well... BIG MONEY doesn't like taking money from BIG OIL and throws a tantrum. After all, the stock market is all about making the rich, richer. So the stock market is simply voting that it would rather have BIG MONEY and BIG OIL walk together.

    Once this hissy-fit is over, look for a rebound. Meanwhile, consumer staples is worth a look.
    Dec 12, 2014. 07:51 AM | 2 Likes Like |Link to Comment
  • 321K jobs added in November [View news story]
    Hi Mark,

    I guess it's all a matter of how one looks at it.

    Do we want not-so-good numbers so we can continue to get "free money" so we can continue to cash in on inflated markets until they burst and also continue the great capital shift to those that have ... from those that don't....


    Do we herald good economic news...putting more people to work...increased wages, etc... so that the economy can stand on its own two feet and everyone gets a piece of the pie.

    So, in that framework, it's either good news or bad news....your choice.
    Dec 5, 2014. 11:12 AM | 3 Likes Like |Link to Comment
  • Senate fails to approve Keystone XL pipeline [View news story]
    Hi ads7w6,

    I'm sorry, but I have to disagree with you. STRVROB asked for another possible word having denied that "fails to approve" shows bias.

    I was simply illustrating another phrase that highlighted two different explanations, each carrying its own, different, subliminal meaning.

    I never proffered that one was correct or not, just that there are different explanations and the choice of one over the other demonstrates bias. So, in that regard, I believe my post was not, as you suggest, wrong.

    Now, I can deal with your particular point ... The most appropriate phrase is not "fails to approve" but, rather, "fails to pass".

    "Fails to approve" has a subliminal meaning, indicating that the passage would have been satisfactory, whereas "fails to pass" simply states that the vote was insufficient.
    Nov 19, 2014. 07:40 AM | 1 Like Like |Link to Comment
  • Senate fails to approve Keystone XL pipeline [View news story]
    Hi strvrob,

    "Rejects" would be another choice instead of "fails to approve."

    The subliminal meaning of these are quite different and each, in its own way, demonstrates bias.
    Nov 18, 2014. 09:14 PM | 3 Likes Like |Link to Comment
  • Weighing The Week Ahead: Time To Buy Commodities? [View article]
    Excellent article.

    Most "novices" confuse between correlations and coincidences. Your article points out how too many have made this mistake on the QE/S&P coincidence.

    Seasoned professionals have learned that simply comparing data points does not a correlation make. Unless one can establish a verifiable REASON .... the infamous "WHY does "A" cause "B" " corroborate a correlation .... is simply a coincidence.
    Nov 16, 2014. 08:04 PM | Likes Like |Link to Comment