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George Acs
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I am a simple individual investor who believes that the playing field is level, but may require active management of one's holdings. I've devised a series of steps that constitute a highly defined covered option strategy that most anyone can follow and that I've described in Option to Profit... More
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  • Weekend Update May 7, 2012 0 comments
    May 5, 2012 10:33 AM

    Weekend Update May 7, 2012On a positive note, owning shares in Green Mountain Coffee Roasters does not obligate you to drink their coffee.

    Green Mountain is among the shares that I've recommended among the weekly selection of "Momentum" class of stocks on this site, but with lots of caveats, especially before earnings I've owned shares on and off for nearly two years, but I've long ago been at the point that paper losses or gains don't move my needle.

    If only there was a blue pill for that.

    Green Mountain, along with MolyCorp, ProShares UltraShort Silver and Barclays Volatility ETN help to satisfy that portion of me that needs to seek some level of stupidity.

    I recently updated a post that originally appeared in TheAcsMan and called it "My Personal Green Mountain," not because I wanted to entice anyone to join me on the wild and wrong sides of momentum waves, but rather as a Case Study to demonstrate how lemonade is made.

    It just got a little more sour this week. That's all.

    But for a week that included major hits to Green Mountain and Chesapeake Energy, it wasn't terribly bad. My personal account was down 2.3%, while the S&P 500 was down 2.5%.

    But on a negative note, whereas I usually like to see 20-40% of my positions turnover each week, I'll only have about a 3% turnover. That means that I'm not very likely to follow my own suggestions unless I close out a position or two to raise the money. I'm usually not inclined to do that unless I want to take a strategic tax loss, but it's far too early to be thinking defensively like that.

    Besides, I look at each week as its own opportunity.

    For example, even though I may now be sitting on a capital loss on the shares of Green Mountain Coffee Roasters, it's entirely possible that the income that I can generate by selling calls on its shares will be at least as good, if not better, than I could get on anything else at the moment.

    Besides, it's not how you got to the finish line. It doesn't have to be pretty.

    As an aside, if you followed the last three week's of advice regarding Chesapeake, you coined put premiums for two weeks and a call premium for this past week, with another 2% weekly premium possible if Chesapeake opens at or above its Friday close at $17.40. If you get that premium on Monday and finally get assigned at your purchase price of $18, your 4 week return would be 12.3% on a stock that ended up right where it started.

    Were there too many "ifs" in the preceding paragraph? But that's precisely the same situation that you may be faced with on Monday if you were following the past few week's recommendations regarding the ProShares UltraSilver ETF. After two weeks of collecting nice put premiums, now's the chance to get a call premium, and before you know it, you'll be out of the position, awaiting a new entry point and a new escape point.

    Maybe so, but I hope you get the idea. If not, it may really be helpful to use the OTP Profit Tracker spreadsheet. That tool is a simple way to keep track of your aggregate net on any position, taking into account all premiums, dividends and capital gains or losses on the underlying stock.

    Hedging your bets works best during a downslide, but still won't offset bad stock picks. Maybe if we could figure out a way to use Chesapeake's natural gas reserves to roast those Green Mountain coffee beans the bottom line would have been better at both, although the other human issues still remain.

    But enough about me.

    The past week turned out to be a perfect one to trade, re-trade and re-trade the volatility shares. I may have done so and Tweeted so ad nauseum, but it never gets tiring.

    This week, I jumped the gun a bit with one of the recommendations, having Tweeted the suggestion that British Petroleum was looking like a good Double Dip Dividend play for the week. In fact this coming week had a few contenders. I thought about Starbucks (Monday ex-div), Weyerhauser and Boeing, as well, which go ex-dividend on Wednesday. But British Petroleum looked to be the best. At $40.98 (it eventually closed the afternoon at $40.95), the May 11, 2012 $41 call premium was $0.38 and the dividend, if not assigned, was another $0.48. Knowing what I know about rationale option purchasers, the weekly shares of BP would not be assigned by Tuesday's market close, unless shares were well in the money. So there's needs to be an additional 1% upside gain to steal the dividend out of your ravenous Double Dipping hands.

    After a week of falling prices, there appear to be some bargains to be had, as long as there aren't further better bargains down the line.

    At some point the inexplicably optimistic rise in stock prices had to ease.

    If anything, volatility has been back the past three weeks as it may be the investing world's metaphor for the Four Horsemen of the Apocalypse.

    One of my favorites, that appears to be bargain priced is Halliburton.

    I often own shares of Halliburton, British Petroleum and Transocean at the same time and refer to them as my "Evil Troika." I lost my Halliburton shares to assignment just a week ago, as I wrote a call option in the last hour of trading, trying to squeeze out a few pennies.

    Sometimes it's the wrong decision, but you know that sooner or later the opportunity to re-purchase shares will appear.

    Just usually not this soon.

    Halliburton at $32.45 looks like a good purchase, although I usually try to find shares that are priced closer to a strike price. That way, regardless of share movement, if you sell a near the money call you squeeze the most out of the premium, whether the contract is exercised or not.

    I like JP Morgan this week. The financial sector has taken it on the chin the pat week or two, but the post March 2009 history is that those downturns are short lived. On a premium bang for buck basis, Morgan Stanley, with its $15.95 close on Friday offers a 2% premium for the $16 strike, since it is already right at the strike's edge.

    I like that kind of proximity.

    If you're the gambling kind, MolyCorp reports earnings on May 10, 2012. At Friday's close of $26.49, it's offering a $0.92 premium for the $27 call contract or $1.37 for the $26 contract expiring May 11, 2012. Take your choice, depending on your level of daring behavior.

    Continuing on the speculative side, if you weren't assigned the ProShares UltraSilver ETF after two weeks of writing puts, if silver opens with a neutral or negative bias, I would either buy shares or sell $48 weekly calls on the ones that I own.

    Not to be overly repetitive, but I still have to go with both Caterpillar and Goldman Sachs.

    If you followed that advice over the past few weeks and collected the premiums, the decline in their prices have been greatly mitigated. Although sometimes you're wrong to say "If I loved Caterpillar at $103, I really love it at $99," but I do.

    So, if you don't have shares, great time to pick some up and immediately write the calls.

    If you did pick up shares the past few weeks, now would then be a great time to pick up some more and follow the "Having a Child to Save a Life" strategy. It is an absolutely great way to reduce paper losses by applying an "averaging down" approach, yet keeping the lots separate and distinct for hedging purposes.

    To do so, buy new shares at the lower price and write calls near the money only on that lot. The higher priced lot can either go unhedged or have calls written more closely aligned with its purchase price.

    Traditional Stocks: Halliburton (NYSE:HAL), British Petroleum (NYSE:BP), Morgan Stanley (NYSE:MS), JP Morgan Chase (NYSE:JPM), Caterpillar (NYSE:CAT), Goldman Sachs (NYSE:GS)

    Momentum Stocks: MolyCorp (NYSE:MCP), ProShares Silver ETF (NYSEARCA:AGQ)

    Double Dip Dividend: British Petroleum

    Happy Trading.

    Are you an existing Twitter Follower? If so, special subscription offer expires May 13, 2012

    Disclosure: I am long MCP, GMCR, HAL, AGQ, MS, JPM, BP, RIG.

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