Options Trader: Weekly Wrap-Up

by: Philip Davis
Last Friday at 13,600 I baited the bears.

My words at the time were: "Come on bears, is that all you’ve got? I called for a retest of 13,500 yesterday but below that and things may get very ugly indeed as we could easily drop back to 13,200 and even the dreaded 13,000 mark where we failed to consolidate properly back in August when we had the chance."

A week later we are pretty much on target with the Dow finishing at 13,042 but we were lucky enough to call a top way back on Oct. 29th, when the Dow was still up at 13,900 and I moved our doomsday clock up to Jan 13th, 2000 (5 days before the crash) including the fact that we would get a BS Fed bounce that would signal the end on the 31st. That was the night I accused the MSM of "yadda yaddaing" the bad news…

I won’t get into why we crashed, it’s easy to see now, less so when we were discussing it before the actual pullback (when people were calling me a "perma-bear" because I expected a pullback) but there are 100,000 places where you can go and hear how smart people are after the fact, I prefer to use this space to discuss the future and how to invest in it. The weekends, however, ARE a time to be retrospective so let’s just see how we handled the worst week in the markets since 2002:

On Monday, after surviving a 400-point dip the week before, I worried "Have I gotten too bullish?" and I cautioned we had been conditioned to "buy on the dips." I went into what has lately become a mantra for me: "We won’t be able to post a real rally until the financial community steps into the confessional and clears the deck so we can see where the floor is." The question remains - is THIS a floor and, if not, how much further down into the pit can we slip?

Monday evening I decided the foreclosure crisis was reaching critical mass and NY AG Cuomo threw a spotlight on the issue by going after the home valuation scam, which we noted would reverberate throughout the financials as their "mark to market" will ultimately have to reflect the true values of homes on their books, not the crock of crap they’ve been selling investors for the past 6 years. That shoe is nowhere near done dropping as I doubt many of the regional and local lenders even have a clue as to how little their "assets" are actually worth.

Tuesday morning we noted that breaking up (out of our trading range) was very hard to do. There was a server crash but my incomplete notes that morning are very telling as I jotted down "BZH 68% cancellation, -53% new home orders." Tuesday was an up day led by commodities and energy but we sold and shorted into the rally as I said: "Rallying the market based on the energy sector is like a group of hemophiliacs electing a vampire as their leader, it’s a recipe for disaster."

I closed the wrap up reiterating my stance in member chat: "If the Fed steps in or we get some amazing economic numbers (that aren’t spun, like last week’s GDP), then I can get behind this, but so far, it’s just a lot of cheerleading and rumor mongering that’s moving the market and, while that may be fine for traders, it’s no place for investors to be putting their money."

Wednesday morning it was clear we were going down and what I said about GM pretty much applied to the market as a whole: "This is kind of like when the SS Poseidon was already upside down THEN the water started pouring in, THEN it caught fire and THEN things started exploding." Between that and Japan’s leading economic indicators hitting 0 (out of 100), we had pretty much no chance.

The dollar falling apart didn’t help much but here we are at my long-standing target of 76 (75.39 actually) and by noon that day, with the Dow at 13,480 I made the eloquent call in member chat of "COVER, CASH, COVER, CASH!!!" and that night, with no real floor in site, I posted my favorite market safety video entitled "Duck and Cover."

Thursday Morning I reminded you that the problems we were diving on were only the tip of the iceberg and we had a fantastic day momentum trading Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) while Ron Paul went after Ben Bernanke with some very stinging statements. By late Thursday we were dipping our toes in the water with some buys and Friday we did a little more of the same but we’re a long way from enthusiastic about it. Of course, on the whole, our week went fabulously as calling the right direction is often a LOT more than half the battle!

We had a stunningly good week in the Short-Term Portfolio, adding 101% to our year’s total, now at a truly amazing 1,408%. Every single week for the last 6 weeks I keep thinking we should quit while we’re ahead and we’ve had 6 great weeks in a row despite the incredible market gyrations. At this point, my attempts to get to cash went out the window as we began adding long positions this week. We also spent a lot of our spare cash buying out callers on the dip leaving us with 34% of our cash committed on 70 open position. This effectively leaves us surprisingly bullish with 22 open calls going into next week but that can quickly be remedied by covering with December calls should the market continue to head south. On the put side, our index puts are vulnerable to a large gap us so let’s not call these gains set in stone until we get through next week’s expiration.

Of course the Long-Term Portfolio had a great week as we’re all about selling calls there and THOSE guys had a terrible week! As with the STP our cash commitment jumped from 48% to 58% as we took out a number of callers not yet replaced but we are pretty well covered by index puts in the STP. The total portfolio return improved 17% for the week to 348% for the year, which is fantastic performance for a non-expiration week (when we expect to do well as our callers expire on us). There are 44 open positions and we’ve been rolling down all week and there are still a lot of adjustments to be made if we don’t see some real improvement soon as we’ll want to be close to the money if the market is going to flatline for a while.

The $10,000 Portfolio closes the week at $35,780, up $3,624 and up 257% since we took our first position on 9/25. We’re closing this portfolio next week as it’s mission accomplished to help these members move up to the $25KP and we’ll start fresh on the 19th. Our 10 remaining positions should be cut in half by the week’s end and any remaining positions that are not already replicated in the $25KP will be moved there. Since we are now doing mid-week updates of the $10KP and $25KP in the detail view, we will go back to a position view in the weekly download as it was better for organizing complex spreads. This portfolio is already $30,960 in cash so it’s not a big stretch to close it out.

The $25,000 Portfolio finished the week well off its Wednesday highs, ending up almost exactly flat to last week at $79,114. This is up 216% from our 9/25 initiation and we can lay the blame squarely on Google as we played with fire and got burned on Thursday and Friday’s $80 drop. The fact that GOOG finished the week down at the 10% rule does not fill us with confidence but, on the bright side, we are over covered on the call side, meaning we can mo play puts with little risk next week. The rest of the portfolio was fairly well balanced so it’s all about the G next week and, with $61,189 in cash, we can afford to take a little risk here.

The Happy 100 Portfolio dropped 3% for the week and Happy was dead right holding off on making new selections last week. We are both hoping for a turn that gives us a chance to deploy some of the $79,460 of uncommitted cash and we’re hoping for a floor on Amgen (NASDAQ:AMGN) that we can DD on (the Jan $55s are now $2.57) but IBM (NYSE:IBM) is looking hopeless, although I think a roll down to the Jan $110s may be appropriate at this juncture. We’ll see about making adjustments Monday morning but being down a total of 1.5% after last week isn’t the worst thing in the world.

Our boring old Stock Portfolio had an exciting week as Restoration Hardware (RSTO) took a management buyout and we took the money and ran on Friday! As I said at the time, maybe there is something to owning actual stock, as that play alone bumped the portfolio up 22% for the week, 73% for the year, and we are left with just 2 positions (Micron Technology (NASDAQ:MU) naked and (NYSE:FNF) covered) and 78% cash, ready to go bargain hunting again!

Pain in the Complex Spreads Portfolio turned into gain as those pesky Google $680 callers and Apple $180 callers were MURDERED while our longer positions held up very well. Our GOOG March $620s, for example lost $30,000 but our poor $680 caller lost over $100,000 in value. On the whole, our 10 remaining open positions jumped 116% for the week, now up 681% for the year (actually we started this one in May) and I cannot stress more how important understanding this strategy is as we begin to scale into our new long/short positions over the next few weeks. We took some off the table and are now at 72% cash, up from 64% last week.

Overall we closed 86 positions this week with a silly average gain of 246% because buying back Hansen Medical (NASDAQ:HNSN) calls, for example, at $60, which we sold for $4,290 yields a 7,050% return so let’s call it a 41% gain on cash for the week, a much more conservative indicator!