Wednesday, August 24, 2011


As of last Saturday's option expiration much happened in this volatile market - mostly good: Two LO puts that I had sold to take on the stock before ex-D, expired worthless, netting $240 (ex-D next week); MAT was put to me and I sold some nice 26 calls on them. One of my 3 plungers - DIA - was put to me at 122, so I'll wait on a rebound to sell a call, taking in monthly dividends - a positive.
In this 20% decline only 2 of my 22 stocks plunged - NOC and TOT - so I'll just collect the larger % dividends while I wait as with DIA. Remaining stocks are just above or below water.
Fine-tuning: since MAT was put above the current price (as with the DIA) I wrote calls ABOVE, not the usual DITM below. Any stock that plummets much lower than the market, such as my last (and only) stock losses of 1 1/2 years ago - BP and UVV deserves to be sold. Since there have never been more than two Bear markets in a decade since 1900 (or less than one) let us hope this is one and it is mostly over.

Thursday, August 18, 2011

"Are You Ready For Some DEFENSE?"

In lieu of today's 500+ point rout, I wanted to update the DITM portfolio in my account:
Of the 22 current positions, 9 are still above water ! Mostly because the rose a bit under QE II, and should rise again by year end.
8 positions (covered calls and short puts) are within 3-4 points of B/E (break even) where I receive maximum return (DITM is a fixed income strategy on the stock market, not hoped for appreciation, which can be done outside of it, such as GOLD).
That leaves 5 stocks down as much as 10 points, BUT I am receiving a much higher dividend % on them while I await their return, as well as milking some option premium.
As much as I hate to make or receive market projections - give me facts, not opinions- the strong position of the US stock market and its appeal from European and other foreign investors make me anticipate a huge rally down the line. At worst, entering DITM positions at this time, for the strong of heart, makes a great deal of sense.
BTW - I just learned that Trader's Press has expressed an interest in selling my books.

Wednesday, August 10, 2011


For the first time in nearly 30 years of investing (including the 1987 Crash), at no time have I felt the panic or need to bail out of any of my 15 DITM positions. Although at the recent lows of 20%, most stocks were under water, with the Safety Net cutting losses (as well as some timely hedges -puts and Inverse ETFs), my rationale was that as long as I was receiving the dividends and milking Call premium, I would be well ahead when the downdraft was over - which it inevitably is.
The 4 or 5 worst stocks are defense and energy, along with WM.
Here is what I call a hypothetical microcosm of the market decline:
The following theoretical stock trade best illustrates how the DITM defensive strategy works in the typical market cycle:

Stock XYZ trades at $50; in its usual upward path of a normal market, it rises to $60 (stocks normally have a right translation, meaning they rise 50-60% of the time, partially due to Inflation, correct down 10-20% and trades sideways for the balance). XYZ pays a 4% dividend - $.50 a quarter.
The Investor does a Buy/Write on XYZ at $55, selling an ITM (in-the-money) covered call at $50 strike price for $6 , five months into the future ($5 for the top part of the stock to be surrendered later, and $1 option premium).

Upon reaching $60, a Bear Market sets in and it falls 25%, from $60 to $45 ! The Investor's cost basis is only $48, including the immediate and second dividends.
Meanwhile, anyone else who bought XYZ near $60 is at a huge loss - $15- and must consider selling at some point. However, our Investor, being only down $3, will hold on while receiving the dividend and milking call option premium. No panic, no fear!

5 months later, the stock has rallied back to above $50 again - a normal occurrence. As the 50-strike call expires, the Investor "steps down" and sells the $45 call another 5-6 months out (for another $6). Now the stock is paying a higher dividend %, and the Implied Volatility of the call has risen with the fear from the decline, and should they want to buy more, the stock price is now cheaper.
Bottom line: after 1 year, the stock is called away at $45. Profit/loss is as follows-
Cost: $55.
1st call sold: $6
2nd call sold: $6
4 dividends: $2
XYZ sale: $45
TOTAL: $59 - $55: $4 profit, or 7.37%, while the stock has dropped 10-15%!

Although DITM is a defensive strategy, if one considers the other possible stock scenarios, the Investor would have made a similar profit had the stock moved sideways or slightly up. Only a large rise would have profited more, and the Investor has the choice of only investing a portion (CD or money market funds) into DITM, while chasing stocks with options, ETFs, and other stocks.

More information is available Brent has written a print book and now an eBook on the DITM strategy, called Zero (IN) Tolerance.