Weekly Wrap-Up

Includes: DIA, QQQ, SPY
by: Philip Davis

Dow closes Friday 12/21 down 65 points from Friday, 12/14’s open!

Woo-hoo! Party time, excellent - what a rally! Quick, take a 3rd mortgage on the home and buy some stocks… While I am pleased that we look like we’re making a healthy consolidation here, I’m still glad we went to more cash because there was nothing exciting at all about the weekly movement, right up until Friday when we made all the gains that kept us from posting the second negative week in a row.

Last week I wrote an article about making better use of your time by following simple hedging strategies and I know there are many of you out there who could have found better things to do from Monday through Thursday this week than watch the market do pretty much nothing. This is especially true around the holidays for you parents as you will have hopefully 100 Christmases to spend in your life but only a dozen of them will be the ones that leave a lifetime impression on your young children. This is what we’re working for folks, don’t let the work get in the way of our goals!

Option expirations days like Friday are always mandatory for options traders, there’s nothing we can do about that but we can try to have a nice couple of days and not worry about the markets if we hedge properly tomorrow morning so please glance over that article and let’s make sure we carry a fairly level portfolio into next week.

On Tuesday we discussed how tempting it was going to be to get into the markets with $500B being LOANED out by the ECB yet we got very little movement from the financials, who should have been the direct beneficiaries of this bail-out and that makes me nervous still. The other fundamental issues remain and it’s times like this when it is very important to contemplate whether you are investing or gambling in the markets. If you are investing, then you should sit out a rally the same way you sit out the dips, when you are playing for the long haul daily moves do not make a trend. If you are gambling - then you hate to miss "your big chance" and that may lead you to overdoing it on the next bet before "it gets away from you."

Wednesday was my last day serving as Time Magazine’s Man of the Year 2006 but the timing was perfect as I just won a BESPy for 2007 and there is only just so much room on the mantle! Thursday morning saw Chinese money flowing into the financial sector and still no reaction over there so either this is an amazing case of sector-wide options pinning or the problems in the financial sector run so deep that $500B isn’t going to help…

I did declare myself to be bullish by the end of Thursday’s member comments but my heart wasn’t really in it on Friday as the gap up at the open left us with few "bargains" to pick up with the exception of those pesky financials who laid there dead as if all those terrible things we’ve been hearing about actually do matter. On Friday morning I said let’s look for $29.50 to break us out of a tough channel ($29.60 now that I’ve looked again) and the (NYSEARCA:XLF) finished at $29.29 - just a bit shy!

Last week we discussed how obvious the drop was and I said at the time my goal was to get back to cash for the holidays and despite the good finish, I wasn’t able to get all excited until we really start breaking up on multiple indices. Our portfolios did fairly well for the week but our goal was getting good balance and setting up to sell more calls on what’s left, not playing the short game. We ended up the week accidentally bullish as Friday’s constant rise left many of our positions naked, something we prepared for Thursday morning in the LTP review:

The Short-Term Portfolio tacked on another 10% for the week and will finish the year just under 1,900% ahead and we’re just under 90% in cash. The remaining market value of our current positions is $913K and I’ll be looking to head into the new year with an even $1M if possible.

Our Long-Term Portfolio added 22% to the basis and is up 472% for the year, also with near enough to $1M in value that I’m going to shoot for that as a target to start the new year. Keeping low cash balances in January will force me to pare down positions to buy new ones, a necessary triage to get ourselves in shape for 2008.

Only (NYSE:FNF) and (MRB) are left in the Stocks Portfolio which is now 80% cash and up 85% on the year but I like MRB a lot and FNF is only there because I didn’t get called away by the $15 caller as I had planned so I guess I resell the Jan $15s for another 5% in a month- oh the agony! We’ll be resetting this one at $200K for those of you who like to hold actual (yawn!) stocks.

Our $10,000 Portfolio finished the week at $12,408, a whopping $75 increase over last week with practically no cash. This is the portfolio that will require our attention on Monday as we are, perhaps, too well hedged there, especially with our now very deep in the money (RIMM) March $100s.

The $25,000 Portfolio continues to shine on like a crazy diamond, now up 510% after gaining another $13K on the week. We have a lot of open positions there but we are 50% cash already so not quite as frantic to make adjustments as we are in our junior portfolio.

Complex Spreads had a nice week and it was hard not to as we had hedged with the (NASDAQ:GOOG) $690s and Google was kind enough to finish just over that level, giving us near perfect rolls to the Jan $690s. Our (NASDAQ:FSLR) was also perfect with an open at $250 but Cramer was on CNBC in the morning and the stock went up and up right through 11 when he closed his appearance telling everyone to BUY BUY BUY our stock which gave us a better than expected exit on our $270 calls, which should have been dead. So our thanks to Cramer, for being such a perfect tool! This portfolio is up 917% since we started it in May but we don’t really track this like the others as it’s just a dumping ground for complicated trades so I have to think about what to do with that one.

Finally, there is no doubt about what we will be doing with the Happy 100 Portfolio now that it’s almost even. Last week it was down 16% but our (NASDAQ:AMGN), (NYSE:HXL) and (OTC:IMCL) callers all expired just about exactly worthless, nicely offsetting the losses in the January positions and bringing us back to down just 1.3% over 3 months. I’ve already told you how bad of an idea it is to hold Jan calls so we are going to be looking for any excuse to stop out of our remaining, all naked positions.

All in all, we closed out 185 positions, many of them callers that expired with a 52% gain on capital for the week and a very silly looking average gain of 212% as many of our positions sold short expired worthless. It was almost a perfect finish to the expiration period, which we played from the start to hit the 13,000 to 13,300 range and it took a coordinated international effort of the central banks to get us out of it but not before we had already cashed out the majority of our poor callers.

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