Option Investor


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The market bounced a little on Friday, but is wasn’t very impressive. The volume was low and the internals were weak. The market is trying to put in a bottom. It’s tough because, for the most part, the earnings suck and the stock prices are coming down to catch up with the earnings. For the time being, the indexes are holding above recent lows.

There is no telling which way the market will go this week. But, I’m comfortable with our positions – for the moment.

I will be scouting around for another December position this week. I’m still being particularly (maybe overly) cautious about new positions. November is the first month of our seventh year tracking our portfolio and I want us to get off to a good (profitable) start and continue through December.

Although the VIX came down to close at 56.10 on Friday, it’s obvious that we’re going to have exaggerated volatility for months to come.

As you know, I’m still suggesting positions of 20 contracts. However, I urge you to be careful and adjust your positions to your account size and risk tolerance.

Warren Buffet Exposed
It’s common knowledge that Warren Buffet uses options. But I never knew to what degree. I read an article from Bloomberg News this weekend that was an eye-opener. Here are the few paragraphs that got my attention.

“Losses (for Berkshire Hathaway) from derivatives result in part from accounting rules related to bets Buffet made on four stock indexes, including the Standard & Poor’s 500. If the indexes fall below contractually agreed-upon levels at expiration dates beginning in 2019, Berkshire will lose the bets.

Berkshire has collected $4.85 billion on the contracts and can profit from investing the funds, the firm said.

The investment loss “doesn’t look great,” said Tom Russon, a partner at Gardner Russon & Gardner, which manages holdings including Berkshire shares. “But shareholders should rejoice that he was able to obtain that capital to invest on such attractive terms for years before the chance comes that he’ll have to pay anyone.”

Interesting. It appears that Warren may be selling uncovered long term puts. Can you imagine how many he must have sold to generate $4.85 billion? Plus, where is he finding strikes all the way out to 2019?

I would never dare to question Warren’s genius. He’s 78 years old and I hope he lives to 100. But I also hope that his successors know how to make adjustments if necessary. Those options expire in 2019. There’s a chance he won’t be around to pull the strings.

Wilber Ross
The man is a zillionaire – and for good reason. He’s come up with a great idea on how to deal with the mortgage bailout fiasco. Will the government do it? Unlikely. It makes too much sense.

Scenario: A house was purchased and has a $150,000 mortgage. The current value is only $100,000.
1. The government would guarantee the $50,000 difference to the lender.
2. The lender would create a new $100,000 fixed-rate mortgage to the homeowner.
3. The bank would get 25% of the home appreciation (above $100,000) upon sale.
4. The government would get 25% of the home appreciation (above $100,000) upon sale.

That should substantially reduce the payments for the homeowners and allow them to participate 50% in the appreciation of the home. It would allow the homeowner to stay in their home. This is not a cure-all for all situations, but it’s a hell-of-a-lot better than what’s being done now. What’s being done now sure isn’t working.

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Detroit Lions

As most of you know, I live in the Detroit metro area. We’ve been blessed with the Detroit Pistons and the Detroit Red Wings who are competitive year after year. The Detroit Lions, however, are another matter. Those who follow football may know that the Detroit Lions are 0-9 so far this year and have been an embarrassment.

Here are just a few of the jokes going around regarding our less than beloved Lions on sports radio.

Michigan Law: The Michigan State Police are cracking down on speeders heading into Detroit. For the first offense, they give you two Detroit Lions tickets. If you get stopped a second time, they make you use them.

Q: What do you call 47 millionaires around a TV watching the Super Bowl?
A: The Detroit Lions.

Q: How do you keep the Detroit Lions out of your yard?
A: Put up a goal post.

Q: What do the Detroit Lions and an opossum have in common?
A: They both play dead at home and get killed on the road.

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CPTI NOVEMBER Position #1 - RUT Bull Put Spread – 505.79
On 10/15, with the RUT at about 436, we sold 20 RUT November 390 puts and bought 20 RUT November 380 puts for a credit of $.80 ($1,600). Maintenance is $20,000.

CPTI NOVEMBER Position #2 - RUT Bull Put Spread – 505.79
On 10/16, with the RUT at about 480, we sold 20 RUT November 360 puts and bought 20 RUT November 350 puts for a credit of $.80 ($1,600). Maintenance is $20,000. - - - - - - - - - - - - - - - - - -

CPTI DECEMBER Position #1 - RUT Bull Put Spread – 505.79
On 11/6, with the RUT at about 510, we sold 20 RUT December 330 puts and bought 20 RUT December 320 puts for a credit of $.55 ($1,100). Maintenance is $20,000.

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In the past, I outlined a strategy based on an initial investment of $100,000. At that time, $74,000 was spent on zero coupon bonds maturing in about seven years at a value of $100,000. The principal $100,000 investment is guaranteed. We're trading the remaining $26,000 to generate a "risk free" return on the original investment. We are not compounding our profits by dramatically increasing the number of contracts we trade. With the September profits, our new cash total is $66,440 ($64,220 + $2,100).

ZERO PLUS POSITION – RUT Bull Put Spread – 495.84
On 10/16. we sold 30 of the November 360 bull put spreads and bought 30 of the November RUT 350 spreads for a credit of $.80 ($2,400).

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Couch Potato Trader Disclaimer
All results reported in this section are hypothetical. While the numbers represented here may have been achieved or beaten by our readers, we make no representation that any individual investor achieved these exact results. The tracking for the plays listed in this section uses closing prices for the day the newsletter is published and it is not meant to imply that any reader actually received those prices (though many often do) or participated in these recommendations (even though many do). The portfolio represented here is hypothetical and for investment education purposes only. It is only an illustration of what type of gains a knowledgeable trader might receive utilizing these strategies. If you don't get close to these results, guess what. It isn't the fault of the strategies.

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