Long Call Options Struggle With Market Woes!

Another tough week with options, as market woes continue to pressure our long term call options. We need the market to rebound sharply by September to put us back in the money on many of the call options with expirations in Sep and beyond. The summer months are traditionally slow months, but hopefully the market will begin to gain traction by late August, otherwise we risk running out of time on some of these positions. We had a call spread position in Base Metals (DBB) expire in July with a net loss. Unfortunately, commodity prices have taken hits following the correction in May which put us out of the money by expiration. We had also taken a put spread position against the market index for insurance against further losses. We show a slight loss on the spread position, but remember this was purchased as protection against a sharp decline, so the expected loss is not really a bad thing. We will occasionally buy or sell protection as market sentiment becomes extreme in either direction. Unfortunately, we have been on the wrong side of the market over the short term and that has wreaked havoc with a near term option returns. We are moving to reduce our long positions and to move toward more short positions and income producing strategies. That transition will allow us to take advantage of the range bound trading that we have been experiencing. The challenge with trading options is that investors have to get both the direction and timing of price moves correct. We believe we understand the direction, but our timing was off as we did not anticipate the market correction that began in May. However, this is still our best performing portfolio long term, and we know that option returns can recover just as sharply as they fall.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Another Tough Week, Portfolio Will Recover When Market Rebounds

Another tough week in our options portfolio as the market malaise continues to drag down our long call positions. We are down YTD in this portfolio, but also know how quickly returns can turn. We fully expect this portfolio to outperform the market by the end of the year. We have some call options in financial stocks including Bank of America and EZCorp and expect both to take off now that clarity over financial reform has improved. Most of our call options expire in September or later, so hopefully that will be enough time for the overall market to recover and restart its advance. We did purchase a call spread position against AutoZone last week having a January expiration. We need the stock price to rise just 3% by January to breakeven, but could make big gains of up to 100% if the stock price rises just 7%. We like the risk return tradeoff on this one and the January expiration gives us plenty of time to profit. The broad market volatility spiked again last week and if premiums continue to rise, we make take a short position on options that are close to expiration.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Rising Back from Yearly Low!

Our options portfolio has begun to recover from the losses in May due to the market correction. The time limits on options really magnify returns when the market moves sharply down over short periods. There is always concern that the market may not recover quickly enough for long positions to regain value prior to expiration. As a portfolio management strategy we try to reduce this risk by spreading expiration dates on options holdings throughout the year. We also limit the capital allocation that we make to any one position. Amerigroup (AGP, Healthcare Facilities) and Clearwater Paper (CLW, Paper Products) are currently on our buy list. We have written before about our interest in purchasing an AGP Dec call spread with exercise prices of $35 and $40. We would buy the $35 and sell the $40 for a net debit. The option is already in the money and we would have six months to realize additional price appreciation. Healthcare has been an underperformer the past six months, and we expect that to change providing additional lift to Amerigroup. We may also sell the $25 put for additional premium to offset our net debit entry cost. Selling the put does have risk, but we are prepared to own the stock at $25 which in our mind represents exceptional value. Clearwater Paper was just added to our buy list and we may look to play a similar option structure but with January 2011 expiration. We plan to wait for the market to open next week and gauge sentiment before taking positions. Option premiums have declined from recent highs, but remain elevated. We may dip our toes back in the water and evaluate near term VIX short positions to cash in on elevated premiums. However, as learned in May, short positions can hurt if the market moves sharply against us. We remain very optimistic that our portfolio will bounce back sharply and finish the year much higher than the market averages. Over the longer term, this continues to be our best performing portfolio.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Rise Back From Yearly Lows!

A good week as our options portfolio increased 4%. We are still at a loss YTD, but are confident we will have another market beating year. The biggest gain for the week was our call option on SanDisk which benefited from the 12% increase in share price. We are now up 76% on our SDNK call position, but expect more since expiration is not until October. We are holding a number of long call positions with expirations that range from June through January. These positions all took big hits with the May market turbulence. However, we think the market will settle down over the summer and these positions will return to profitability. Our short position against the VIX position has now also expired, and that had been by far the biggest drag on this portfolio. Amerigroup (AGP, Healthcare Facilities) stock is currently on our buy list. Options are also available for trade on AGP, and we are currently evaluating a Dec call spread with exercise prices of $35 and $40. We would buy the $35 and sell the $40 for a net debit. The option is already in the money and we would have six months to realize additional price appreciation. Healthcare has been an underperformer the past six months, and we expect that to change providing additional lift to Amerigroup. We may also sell the $25 put for additional premium to offset our net debit entry cost. Selling the put does have risk, but we are prepared to own the stock at $25 which in our mind represents exceptional value. We will wait for the market to settle a bit before setting up these trades next week. The month of May has been our worst options trading month ever. As we have said before, trading options can be very rewarding, but investors need to understand the trading risk and volatility that can occur over short periods. We remain very optimistic that our portfolio will bounce back sharply and finish the year much higher than the market averages. When measured over the longer term, this continues to be our best performing portfolio.

Big Bounce, But Could Have Been More!

Once again, volatility wreaked havoc with our options portfolio. After four trading days, our portfolio return was back to breakeven, a whopping reversal of 23% over the prior week. Unfortunately, volatility once again spiked higher on Friday which cause some of those gains to evaporate. We still ended the week with an overall gain of 9.6%, but Friday’s losses still hurt! Our short position against the VIX index is causing the biggest drag on the portfolio. We think the market will bounce back again on Monday and Tuesday, so we plan to hold through the position’s expiration which is Wednesday next week. We expect to take a loss, but are optimistic we can minimize that loss if we get that market bounce. We fully expect this portfolio to recover in the near term once volatility begins to subside.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com

Volatility Delivers Crushing Blow!

Ouch. The surprise volatility in the market last week delivered a crushing blow to our options portfolio. Our options portfolio had been trading significantly above the market return, and after one short week has fallen behind. Options returns are by nature far more volatile than stock movements. In that sense, the risk is higher, but so are the rewards. We purposely set limits on our overall options allocation to no more than 20% of our investment portfolio. We know the risk and returns for trading options is higher, so we manage our overall risk by placing limits on what is allocated to speculative investments. We also know that our options portfolio will bounce back sharply when the market recovers from this short term panic. Volatility will test patience and conviction, but now is not the time to bail on long positions that still have time to run. We expect our options portfolio to bounce back sharply once market fears begin to subside.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com/

YTD Return Rises to 33%!

Our Aggressive portfolio has been on a tear rising another 6% last week bringing its YTD return to 33%. That is a great start to the new year, but the bigger story is our return since inception which has now reached 570%. That is an incredible return in just over three years in what has been one arguably one of the most difficult investing periods in history! We have laddered our option positions to take advantage of different expiration dates that close over the next eight months. That helps reduce some of the market timing risk that can wreak havoc with options trading. Generally speaking, option premiums are relatively cheap so now remains a good time for taking long positions. We have also taken more call spread positions where we buy to open a call with a lower expiration while selling to open a call having a higher strike price and the same expiration. This strategy reduces risk by lowering entry cost and the price required to breakeven. We look for six month positions where we have the opportunity for 150% gains while limiting our entry cost to 7% or less of the current stock price. Having six months until expiration provides enough time for the underlying stock to gain in price and for our option positions to make money. We use our Momentum and Value Stock Screen to find and select the stock and option combinations for investment.

Portfolio Details Available Online At:
http://www.marketbeatingstocks.com