Option Investor

Automotive Insanity

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We have only four trading days left to expiration. For the first time in a while, I feel pretty confident that our December position will be profitable. We’re sitting with a 138-point cushion for our RUT 330/320 bull put spread. I’ll take it – even in this market environment.

As most of you know, I live in the Detroit metro area. The “Big 3”, or now the “little 3”, are on pins and needles waiting to see if they’re going to be in business in January. Now they’re basing all their hopes on G.W. coming in to save the day. The CEOs that showed up to explain their plight to congress were somewhat less than convincing or sympathetic. Also, they weren’t prepared. It was like they went to school without doing their homework or not studying for a test. Congress has legitimate concerns. They are being led to believe that the car company leopards are going to change their spots, make major decisions that will bring their companies back to profitability. G.W. might buy into it, but it’s tough for clear thinking folks to swallow. The only way these leopards will change their spots is if there is someone looking over their shoulders at their every move - and there are a lot of egos that are likely to get in the way.

Incompetents don’t become competent over night. We shouldn’t expect them to be. It would be best if the CEO decision makers would willingly step aside and not become obstacles to the sensible path of a structured bankruptcy. It would be painful, no doubt. But, if the proper moves are made, the auto industry can emerge a leaner, meaner and very competitive industry. For us to keep pouring in tens of billions of dollars without a change at the top is folly. I know this is an oversimplification of the problem, but sometimes, to survive, tough decisions have to be made.

It looks like some brave folks ventured into the suggested Quickie trades. The market is likely to continue the big swings, but it has a fighting chance to end up within our established ranges. Just be cautious.

January Position Update
If the market pops up, I might consider putting a bear call spread on top of our RUT January bull put spread. I’m looking at the 600 or 610 area for the short position. We actually might get a pop if the car companies get bailed out. The higher levels might not hold, but they could be there long enough for us to put on a spread.

Even though the bias is slightly to the upside for the moment, there are still a lot of redemptions yet to be redeemed. The one thing to keep in mind is that, as the stocks move lower, the falling prices do not necessarily have anything to do with the fundamentals of the companies. The hedge funds don’t have a choice in the matter. They have to sell, regardless.

One encouraging fact is that there will be a few less trading days for the January cycle due to the markets being closed for Christmas and New Years. It’s going to be an interesting 2009. Very interesting.

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CPTI DECEMBER Position #1 - RUT Bull Put Spread – 468.43
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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CPTI JANUARY Position #1 - RUT Bull Put Spread – 468.43
On 12/1, with the RUT at about 455, we sold 20 RUT January 290 puts and bought 20 RUT January 280 puts for a credit of $.75 ($1,500). Maintenance is $15,000.

CPTI JANUARY Position #2 - SPX Iron Condor – 879.73
On 12/8, with the SPX at about 877, we sold 15 RUT January 680 puts and bought 15 SPX January 670 puts for a credit of $.80 ($1,600). Then, when the market moved up, we sold 15 January SPX 1090 calls and bought 15 January SPX 1100 calls for a credit of $.70 ($1,050). The total net credit is $1.50 ($2,250). Maintenance is $15,000.

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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 November profits, our new cash total is $68,840 ($66,440 + $2,400).

ZERO PLUS POSITION – RUT Bull Put Spread – 468.43

On Monday, 12/1, we sold 30 January 280/270 RUT bull put spreads for a credit of $.80 ($2,400). We will look for a possible bear call spread to complete the Iron Condor if an attractive situation presents itself.

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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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