Weekly Wrap-Up

Whoopie, yet another amazing week put to bed.

It’s always great when pretty much all of our major bets work out:

Last Friday Zman pointed out some refiners that had gotten ahead of themselves and we decided HOC Aug $75 puts at $2.25, now $2.88 and WNR Sept $55 puts at $2.12, now $3.50 made good plays.  We also liked BHI Aug $85 puts at $1.62, now 4.15 from the 12th and the BHI July $85 puts at .30, which finished the month at $2.60.  That was the last of our official "Free Picks" but there were so many good plays lest week we still found a couple of new ones to play.

In last week’s wrap-up I outlined Dr. Brett’s concerns about the market and nothing that happened last week changed our opinion of that.  On Monday morning I promised a thrill ride for the week and that’s exactly what we got with the Dow; up 150 by Tuesday afternoon, back down 175 to 13,850 by noon on Wednesday, up over 14,000 again on Thursday morning and back down to 13,800 at 1pm on Friday.  Since we went into the week with a pretty good strangle on DIA puts and calls (which we spent the whole month working into), it’s no surprise that they were the stars of our virtual portfolio, accounting for much of the week’s gains despite the fact that they are there mainly for "protection."

In Monday’s wrap-up I pointed out that the dollar could go further down and that gold could go further up, and they did.  Finally all that discussion about China and the Euro and the carry trade starts to pay off for us! 

Someone was interviewing me last week and they asked me if we specialize in energy and I said no, it’s just hot so we talk about it.  I explained to him that if medical devices were hot my members would know every last detail about drug coated stents because, over the long haul, THAT’S HOW WE MAKE MONEY, we take the time to learn the sectors that are in play because this is not roulette, this is the market and there are market forces at work and understanding those market forces allow us to make sensible bets over time!

On Tuesday, Happy and I were concerned and I said: "I don’t expect to break 14,000 without some sort of "venting," as Happy likes to say so let’s stay light on our feet and keep our eyes wide open as truly anything can happen in this wild earnings and data week" and it took us all the way until 3:45 to be right as the Dow put on a heck of a show all day but watching the S&P kept us from irrational exuberance as we broke 14,000 for 90 glorious minutes that afternoon, leading me to make a cash call for Tuesday Evening/Wednesday Morning.

Not trusting the rally and pressing our DIA puts was our best call of the week but we also had the very brilliant idea of lightening up on Google and going into earnings with a 1:1 put//call spread but kept a bullish stance on Apple – these have worked out nicely so far but after last week’s Google dip, we did up our hedges on Apple!  Wednesday also was the peak of oil pumping as we flew to $76 on Thursday, capping off CNBC’s week-long pump fest which I considered (and still do) a sign of a blow-off top.  Also helpful on Wednesday was my intra-day bottom call which got us out of index puts and into index calls mid day but then back in index calls as we over-corrected in the afternoon.  Just keeping up with the old James Bond investing techniques!

Thursday morning it looked like we were ready for take-off but I warned that an economy that had chosen guns over butter for the decade was simply too susceptible to rising oil prices and I continued my cash call saying: "So let’s enjoy the ride while we can but let’s also take a little off the table on the way up.  If the market is going to go up forever, then we can reinvest our cash and make more money but if we get an earnings shock that drops the market, you’ll be glad to have a little cash to pad your mattress."

As I had said all week, Google would trump all else and they did with "disappointing" earnings that I considered a buying opportunity.  We never got taken in by Thursday’s strong action as the S&P couldn’t break my 1,555 target, even as the Dow pushed over 14,000.

On Friday I cautioned not to be taken in by a strong Asian performance because our markets had information that they didn’t during their trading day, China was hiking rates.  We were mainly in cash and extremely well hedged though so the drop was actually a blessing on option expiration day as our poor callers got hammered all the way into the close.  We’ll see if we get follow through to the downside this week but 13,800 held up well on Friday and we are naked on many of our leaps (but well hedged with index puts) and ready for anything.

Needless to say it was a spectacular week from a virtual portfolio perspective:

We closed 141 positions (expiration week) with a 147% average gain as many, many, many of our poor callers expired worthless.  Of course we had some ridiculous gainers that pumped up the average and the gain on cash was a much tamer 52% as we struggled to get back to 2/3 cash by the week’s end.  That leaves us with 73 open positions that have an average gain of 52% but those low percentage/high dollar value DIA and QQQQ positions ran the total Short-Term Virtual Portfolio gain up another 50% for the week, now up 277% for the year.  This is an interesting thing as I’ve never left this much cash in play before but, since we started the year with just $400K and now have $1.5M, it only takes a 13% gain on the total to add 50% to the starting basis.  Also helping boost the STP’s gians is the fact that we hedge ALL the virtual portfolios with index options there and the accidental pay-off there was a huge windfall.

Still, no matter how well the STP does, it can’t hold a candle to our simple little Free Picks Virtual Portfolio, which gained another $14K as we took Google puts and Apple calls off the table in addition to the previously mentioned refinery plays.  Since the starting basis back on 4/30 was just $25K, $14,000 gave our total returns a boost all the way up to 377% with just 10 open positions remaining, also at about 2/3 cash (but not very well hedged).  Almost 1/2 of the open balance is the GOOG Sept $530s (we rolled for position) and we will quickly sell Aug $520s against them if things don’t go well.

Our $10K Virtual Portfolio finally made a bit of a comeback and 9 open positions there are down "just" 12% halfway through our second month.  We have very little cash there and we will have to either make some sales or cash out some positions as we still have a lot  of work to do to get this thing back on track!

The Long-Term Virtual Portfolio gave us a nice 11% gain on the week and our 36 open positions have a 150% gain for the year.  We have 22 open calls and just 4 puts (but a ton of DIA puts in the STP as cover) as I decided to see how the Dow handles 13,800 before selling too many calls.  Let’s not forget that early last week, we were crying about how many of our callers were in the money…   As we prepare to roll the second half of the alphabet this week, we are half cash going into the week.

The Stock Virtual Portfolio was the least sexy of all our efforts, gaining just a point on the week.  Our 6 remaining positions are up 37% for the year and we are in 2/3 cash there as well but I simply haven’t seen a stock I’ve wanted to buy since mid-June.  

Complex Spreads were again a very pleasant surprise with a huge gain on the week as we played our heavy Google and Apple positions perfectly, driving us to another 45% jump off our May 1st basis of just $150k.  25 remaining open positions are up 124% for the 3 month period but we still have too much riding on Apple and I will have to wrestle with that as we fly into earnings on Wednesday.  Our current Apple mix is:

As you can see, we added 40 Aug $135 puts to protect the open balance over the weekend.  We had been watching the action on these as we sold the same puts as part of a straddle back on the 11th and the discount seemed attractive as Apple headed the other way.  We can only hope for some volatility so we can see how our mix holds up but our goal is to work into a tight strangle, much like the way we played Google.  As much as we love Apple, it is hard to reconcile taking a 79% gain into earnings!

Have a great weekend – our very lengthy list of closed positions follows: