Some Thoughts & Views

Its been a while that this blog got updated. Do not have much time, it is time consuming to do this regularly.

Plus, we have been beaten up too much that there was less motivation to post anything. However, I think prudent investors need to position whereby they do not have to depend too much in near term, or the job market, learn what can be done looking into the future, as well as protect the portfolio with whatever is left.

Too much negative news & fear in the market have torn apart all theories & analysis.

Anyways, some of the readers are involved in UYG, FAS, or XLF now with average quite low. Congratulations on waiting all this time so you entered when we know nationalization of banks is sort of ruled out & the ETF is so low that it is near zero with not much to lose anymore. Plus the Fed is a partner investor in these financial institutions.

One lesson learned here is that we should have had married PUTs accompany our trades to protect the down side. Holding stocks without any hedging or having a downside protection is painful.

So going forward, additional strategies should be applied whereby:
1) Stock gets purchased
2) Buy a suitable PUT for 2010 or 2011 to cover downward side
3) Sell a covered call to generate income
4) Sell a deep PUT to generate income
5) Monitor & adjust the positions.

No need to have too many positions so as to better manage.

Stocks by itself, is a big no no !!!. Definitely needs some combination of above to hedge.

Investigate & research: EP, GE, OIH, USO, INTC, BRCM, ISRG, FAS, BAC, C, FLR, DOW, using the above strategies. There will be a pull back soon. This rally is a bear market rally.


What else?

Looking into the near term, stuff that one needs to study & learn trading Emini & Treasury Futures , Commodity Futures ,& Forex Options.

Why?

Now, economy is bad, the Feds have been printing dollars, so that implies in theory that dollar will be weaker & there will be inflation. However, given that the phenomenon is worldwide, the currency will remain fairly stronger thru 2009.

Of course, US dollar may weaken in 2010 because of all this. Net result on weakness will be that Oil & Commodities, which have taken a big beating will ultimately go up & so will the interest rates.

Oil futures for example, are trading in high 40s to 50 bucks for next year already.

So one should to analyze & learn the currency FX market too. Options for Australian & New Zealand dollar will benefit in future with commodity prices & so will other commodities futures (Wheat, Corn, Sugar, Oil etc)

Anyways, these are some of the thoughts.

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UYG - Covered Calls & Puts

Analyse the following two example trades with current prices on paper & see if you get the picture on how covered calls work & how a selling of a naked out works:

Trade 1 (Covered call example) :

Buy UYG at $5.3193
Next - Sell to Open Call UUFBE (Feb, strike price 5) at $0.90
Return = 11.xx% for 1.5 months

Stock gets sold at 5 if at expiration it closes at or above 5. You keep the stock if it closes below 5 & the cost basis now is 4.10 going forward.

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Trade 2: (Selling naked PUT)

Sell to Open Put UUFOD (March Strike price 4 bucks) for .45

Return = 10% for 2 months

Committment will be that if it closes below 4, you have to buy the stock at 4 bucks, but you already got .45 for it in advance. You will be assigned the stock, with a cost basis in that case of 3.55 going forward.
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UYG Chart & Movements on Dec 31

Here we analyze UYG using the charts.

In past 1 day, UYG went up quite a bit.

So we need to analyze that if one did not take any position, what should be the next move. Or, if positions were taken, then should they be unloaded.

As a day trading candidate, with 5K shares, a 20 cent move accounts for 1K before commisions. For the long term position takers (based on previous posting) with covered calls, UYG has already given a nice % return & such movements can be ignored through expiration because they are in positive territory with a low cost basis from the spreadsheet.

Let us analyze the chart that is attached here. UYG is approaching a cluster of past resitance indicating that there will be sellers who will take a profit & there may be a pullback in this upward movement.

Also, the S&P futures dropped alot in overnight trading after the so called rally of S&P on last day of trading.

So it may be best to wait & watch to see if it pulls back to the levels of 5.7 to 5.9, which should be the case base on various Fibonacci retracements plotted or further wait till it even pulls back down to 5.4.

On the upside, if it moves upward & breaks through 6.4, then it may March towards 6.8 or 6.9

The fact that it moved up more than 10% in just 1 week, & the charts indicate resitances, the probability is that there will be a pullback.

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