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