Thursday, May 17, 2012


Murphy's Law - After giving a talk on the DITM strategy to the options group last month, recommending a buy/write on CLF (Cliff Resources), it -along with the overall market- started a precipitous spiral downwards. The good news is that I did it with the DITM, not just buying the stock for the dividend.
I bought the stock (200 shares) at just under $70, for $13,805. In my talk I mentioned that since I was going on vacation for two weeks I might put on a debit Put spread: 57 1/2 by 55 May, which I did and closed out today for a $716 profit. If the Oct. calls expire worthless, and I receive $250 for two dividends, I would sustain a loss of $465 IF CLF stays at $51 - unlikely! Just buying the stock, I would have lost $3800 (minus the $250 dividends). I would assume that the stock must be oversold by now and at some point before October CLF should rally higher, again making the trade profitable.
As for the rest of my portfolios under management, 9 other stocks are slightly under water (mostly $1) with two at $3 losses, with the market down 6% from the top.
Barring a Black Swan, I would anticipate a rally into the final months of the year  making all of the above profitable. YTD my small IRA ( the purest test tube of DITM) is up over 11% annualized. Bear markets ( 20% down or more) since 1900 have averaged between one and two per decade, in which case hedging with puts or inverse ETFs is advisable.
For now, no more positions would be opened until the correction is over - then, lower prices, higher dividend % and higher Volatility will be ideal.

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