MEA CULPA - OVER THE CLIFF!

Edward Murphy was an aerospace engineer who is responsible for Murphy's Law: If anything bad can happen it will!
Last month I appeared before the S.F. Bay Area Options Group with a rare stock/DITM recommendation that I thought highly profitable as well as a margin of safety - Cliff Resources, which I personally bought at $70/share. At the time of the talk, it was $67 - today it is $47.
Condolences on anyone who followed me into this torpedo - but I still feel this 1 of a 100 instance is more a reason FOR DITM, than against it.
Being a Technician, I usually rely on other "experts" for Fundamental Analysis - S&P, Schwab, Ned Davis, Reuters, etc. S&P still rates CLF 4*, Merrill just lowered it to Neutral after it fell over 50% from its 2011 high!! It now seems that the excessive Premium in the Call was,as usual, warranted for things to come (expected IV).  In my talk I mentioned that, as I was going on vacation, I would put on a  Bear put spread below my Call price (62 1/2) - I did: 57 1/2 X 55 puts. I paid $.30 and closed them for a $2.43 profit; I have since traded 50 X 47 1/2 spreads and now in a weekly 50 X 49 - all profitable and ITM.
Just as with BP in 2010 - it was a Perfect Storm - May has seen huge declines in stocks (worst month for down days for awhile) with which CLF is highly correlated; commodities - Oil down 18%, Gold down 6% MTD are also tanking; with RS Steel going bankrupt , all steels are dropping with China's slowdown. It appears to be a Blood-In-The-Street moment.
Technicians know that historically, the first trading day of the month (e.g.,tomorrow) outperforms the rest of the month combined. On Oct.4, 2011, CLF spiked down to $47.31 - today's low (so far) $47.06. Hopefully, Buyers will again come in at this level. My SELL filter is to break support with 3 daily closes - I hope to hold on throughout tomorrow's Unemployment release.
TALE OF TWO TRADES:
Had I only bought 200 CLF, my loss would now be $4600 (less $125) in dividends.
If CLF stays the same (unlikely) until Oct., or I bail out - my overall loss would be under $1500 - still bad. If it rebounds, as most stocks to with a V-spike: original profits, plus $270 from the Put spreads, would be gained by Oct. expiry.
 We shall know in the fullness of time!

CONGRATULATIONS !!

Those of you who were smart and brave enough to follow this "safety net" strategy should have come out of this nasty 10+ % correction with very little damage - in fact the washout has produced a very attractive entry point for future positions, due to: Lower stock prices, which brought much higher Volatility and option premium to sell, as well as a higher dividend %.

This DITM plan offers up to a 10% safety net by selling a Call option below the price that the stock was bought at, and offers a 10-15% annualized return on combined option premium and dividend, according to my extensive testing for more than a year, in all kinds of markets.

Investors who have been in Index funds or unhedged stocks have actually incurred negative returns over the past decade, with the future not looking much better, in lieu of the global economy. Of course there will be occasional rallies, which can be participated in with ETFs or options, but the prospect of assured income instead of "Hoped for" appreciation is certainly preferable.

Everyone reading this should at least look into this plan to see if it is useful for at least a portion of their assets. Its only weakness is a full blown Bear market, which has happened only once or twice per decade since 1900 - even then, one should lose far less than a portfolio unhedged, as well as having some time for warning.

Recent trades placed in my accounts include:

 LO with a Sept. 115 call

TAL with an Oct.30 call 

LMT with a Dec.77.5 call -  all three ex-D tomorrow, the 30th.

SFL has a little more time - Ex-D June 13

Some other June ideas: TOT, LEG, PM, HNZ, HUN

FACE PLANT

The only stock more disappointing than FaceBook (FB) remains Cliff Resources (CLF) down nearly 3 today again. As I mentioned in my talk to the Option Group last month, to be safe it would be wise to hedge with puts or put spreads. Searching Yahoo, et.al., I find nothing but good news on it - even Jim Cramer recoms it. I made profits on my recom of 57 1/2 X 55 put spread, put on a 50 X 47 1/2 May 25 put spread, and just rolled the 50s to June 1 (hoping the 47 1/2 will expire tomorrow and I shall sell the June 47 1/2 put against the 50. CLF has been tightly correlated with market movement - ugly in May!
I was going to close out my June TLT B/W after the last dividend, but it was called away, being so far ITM. Just as well - reward of under 5% not worth the worry.
Latest trade, in spite of a weak market: DITM on SDY, with hopes of an oversold market. Upcoming candidates: TOT,PM,HNZ,LMT,HUN,TAL,LO.
Into every life a little rain must fall - looks like rain Friday!

CLIFF DIVING:

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.

ANOTHER FINE MESS: CLF

Does it just seem that way (cognitive dissonance), when I publicly recommend an investing position it falls off a CLIFF?
At the monthly SF Options Group meetup I shared my CLF in-the-money call trade with the group, which I had put on a few days earlier at $70. It being $67 at that time, I suggested dropping it a strike. In my last blog I also recommended putting on a put spread if it continued down - which it is doing. Going on vacation this week, I put on a May 18: Buy 57.50, Sell 55.00.
Here is a possible outcome:
Bought 200 -$13804, put spread (3 X 3) $100 - total outlay: $13904
Even if CLF goes down to and stays at $55 by Oct. (doubtful, as it has vascillated 6 times since last Oct.) , it would still be profitiable:
Sell 200 at 55 - $11,000; 2 div'ds - $250; Calls sold initially-$2310, put spread profit-750: Total $14.310. Net $400. If it drops below $55 for a lengthy time, I'd bail out, as I did in 2010 with BP. Or hedge with more puts.
Fundamentally (!) UBS rates CLF a BUY with a $100 target; S&P has it at 4*s. The whole energy complex is struggling - hopefully by next winter/ election season markets should improve.  Still - no strategy (yielding an average 10%) is perfect, but if CLF can drop from 70 to 55 and the investor still profitable, it seems justified.