Weekend Update

Weekend Update March 24, 2012It’s really amazing that this past week marked the single worst one of 2012.

With now nearly 25% of the year having passed, we can look back and say that a 0.5% drop is the largest we have had. Hard to believe, given where we had come from.

Reminds me of the comment a neighbor made when we bought our new long haired miniature dachshund home for the first time.

“I have poops that are bigger than that thing.”

That’s what I imagine 2011 saying to 2012.

You call that volatility? I’ll show you volatility.

The two big stories of the week were undoubtedly the debacles surrounding the IPO of the BATS Exchange and plunge in Credit Suisse’s leveraged VIX product, TVIX.

In the case of the TVIX Exchange Traded Note, there is nothing but misunderstanding regarding pricing and the risk. The details regarding the general misperceptions around TVIX is really well adressed by Kid Dynamite, who is part of the StockTwits family of bloggers, that includes The Reformed Broker and James Altucher.

Not a bad bunch, despite the fact that Phil Pearlman, one of the founders of Stock Twits hasn’t added me as a blogger.

Tell Phil.

Of course the fact that Credit Suisse stopped adding new shares about a month ago was viewed as problematic and was quickly remedied on Friday, after Thursday’s 40% loss.

Small consolation for that coincidence.

In the meantime, the BATS IPO was cancelled at the end of the day after some spectacular systems failures of its servers, including those that traded shares of Apple and BATS, itself.

IPO’s don’t get cancelled very often.

Interestingly, one of the most frequent Google searches bringing people to this site is for “Dennis Barnhardt” who was the CEO of Eagle Computer.  He died in a car crash on the morning of the IPO nearly 30 years ago and the IPO was cancelled, as he was Eagle Computer. At the time, Eagle Computer, was seen as the hot-shot rival to IBM back in the early days of the PC. It never recovered, even though the IPO was eventually re-engineered and Eagle eventually disappeared.

The most frequent search hit, however, comes frm Saudi Arabian searches for “Wife’s Bra.” I don’t have any other point to make about that particular factoid.

Okay. Enough about everyone else’s problems.

How about me?

Well, for one, I picked a bad week to get back into the volatility game, having last played with shares of  the VIXY ETF back in July 2011, when it had hit its lows.

That was a time when volatility was still alive, just resting a bit.

This time around, with both the VIXY and its ETN cousin VXX at lows, I went in again in anticipation both of a decline in the markets and increasing volatility.

Did you know that low get get lower?

Despite a few promising days, the markets regained most of the early day losses through the week and whatever gains were made in the VXX were lost and then some.

And then some more.

And more,

At least its comforting to know that the volatility index  itself was volatile.

That has to be worth something.

Starting Monday, I’ll have about 25% of my shares that will need to be replaced, having lost shares of MolyCorp, Mosaic and Morgan Stanley.

I’m sensing a pattern.

I will also be adding shares of the very same VXX and British Petroleum subsequent to put assignment.

As the week is ready yo begin, I always scour for upcoming dividends and see that one of my favorites, that I haven’t owned in about two months, will be going ex-dividend on March 28th.

So I may purchase shares of Dow Chemical before that date.

Along with its sort of cousin, DuPont, Dow was a mainstay of my portfolio for its combination of option premiums, share capital gains and dividends and really helped my portfolio recover value from the 2009 lows.

But it’s fallen out of favor with me a bit because it doesn’t offer weekly options.

To demonstrate how a “Double Dip DIvidend” play in Dow Chemical might work, consider that at its closing price on Friday of $35.02 it was offering an April 2012 expiration bid premium of $0.77 for the $35 strike.

Add the dividend of $0.25 per share and then if your shares are assigned, your ROI is 2.8% for a 4 week holding period, less trading expenses.

Back when volatility was king, the ROI would have been greater. I typically look for monthly ROI of 2-4% on each holding, but get the lower end these days.

For those who will deride my analysis and say that the option premium already takes into account the upcoming dividend, I can only say that we live in an imperfect world and that includes spasms of imperfect pricing, as well. I don’t really see much difference in option pricing for similar comapnies that aren’t subject to a dividend payment during the term of the contract.

But what do I know?

Mind you, all of the above that assumes a few things. You can re-read the previous paragraphs to figure out what those assumptions are. If you can’t, you shouldn’t try to do any of what I’m doing, although I will be mulching later in the day.

When it comes to trying to Double Dip Dividends, I like to purchase shares that when you subtract the dividend payment would end up right near, above or below, the strike price.

Those situations are much less likely to have someone exercise their options for purposes of capturing a dividend.

Options palyers could care less about paltry dividends. They want the big payday, while I want the crumbs to add up and make a full loaf. They certainly don’t want to lay out the money to buy the shares.

A couple of caveats. You’re more likely to be assigned if your shares are well within the money after you subtract out the dividend payment. Additonally, the closer the dividend date is to the expiration of the contract, the more likley your shares will be assigned if they’re still in the money after subtracting the dividend.

In this case, expiration date isn’t for another 4 weeks. If you were to buy Dow at $35.02 and sell a $35 call option, unless shares had a tremendous rise by the close of trading on March 27th, you’re likely to capture the dividend in addition to the option premium.

Again, re-read, for full understanding of the word “if.” It’s not like I’m Bill Clinton, “if” means “if.”

Speaking of volatility, thanks to the return of volatility in the precious metals, I outperformed markets for the third week in a row.

That might sound good, but I conveniently don’t mention the fact that I’m still underperforming the S&P over the year and that too, is largely related to the lack of volatility, in that the price of my shares of the ProShares UltraShort Silver ETF have gone basically in one direction, as silver has appreciated in value.


But some nice volatility has returned to silver prices, so I’ve again sold puts as the price of silver takes a large drop and then sold calls when it has taken a large enough rise in price.

Some day I’ll do an analysis similar to that recently done for Green Mountain Coffee Roaster shares that shows the ROI on the ProShares UltraSHort Silver ETF, owing to its great option premiums, despite the fact that I currently have a capital loss on shares.

I’ll save that for some other Weekend Update.

In the meantime, the decision to purchase shares of the iShares Silver ETF, as a hedge against the hedge, is still under probation. I did make some small option premium income on both the call and put side, as the shares lost some value. I’m hoping to do both of the same again this week.

I’m also hoping they find Amelia Earhart.

Anyway, for Monday, I’m also looking at the possibility of re-purchasing my Mosaic shares if it gravitates near the $57.50 strike. I’m a rpeeat offender when it comes to buying shares of Mosaic, selling calls, having them assigned and then rebuying shares and starting the process over and over again.

Sometimes I may go a week or two between owning shares and that’s sad for me, but I’m not proud.

I may also buy back shares of the ProShares Energy ETF that I lost last week at $74.50, but not after capturing the dividend, picking up a capital gain and an option premium. That’s the Triple Threat kind of stock that you just have to love.

On top of that, its close on Friday was $72.23 and that was up about $0.80 for the Friday session.

Although I’ll be losing my MolyCorp shares, I’ll be looking for any opportunity to re-purchase those, as well, if it approaches $28. It has been another great one for which to sell calls or puts, depending on the stock’s price movement.

Big drop for no real reason other than fears of macro-economic news? Sell puts.

Big rise, for whatever reason? Sell calls.

But once again, what do I know?




Check out Recent PortfolioTransactions and
Transaction Performance 


Recent Trades Security Type Action Type
March 24, 2012 CHK Call Expired Weekly
March 24, 2012 FCX Call Expired Crumbs
March 24, 2012 GMCR Call Expired Weekly
March 24, 2012 MCP Put Expired Weekly
March 24, 2012 MS Put Expired Weekly
March 24, 2012 SLV Put Expired Weekly
March 24, 2012 VXX Call Expired Weekly
March 24, 2012 BP Put Assigned Weekly
March 24, 2012 MCP Call Assigned Weekly
March 24, 2012 MOS Call Assigned Weekly
March 24, 2012 MS Call Assigned Weekly
March 24, 2012 VXX Put Assigned Weekly
March 23, 2012 ZSL Put STO Monthly
March 23, 2012 FCX Call STO Crumbs
March 22, 2012 ZSL Call STO Weekly
March 21, 2012 GMCR Call STO Weekly
March 20, 2012 MS Put STO Weekly
March 20, 2012 ZSL Call STO Monthly
March 20, 2012 MCP Put STO Weekly
March 20, 2012 BP Put STO Weekly
March 20, 2012 SLV Put STO Weekly
March 19, 2012 VXX Call BTC Weekly
March 19, 2012 CVC Call STO Monthly
March 19, 2012 MOS Call STO Weekly
March 19, 2012 MOS Stock Added
March 19, 2012 MS Call STO Weekly
March 19, 2012 KSS Call STO Monthly
March 19, 2012 KSS Stock Buy
March 19, 2012 KSS Put STO Monthly
March 19, 2012 VXX Put STO Weekly
March 19, 2012 VXX Call STO Weekly
March 19, 2012 VXX Stock Buy
March 19, 2012 MCP Call STO Weekly
March 19, 2012 CHK Call STO Weekly
March 19, 2012 ZSL Put STO Monthly
March 19, 2012 AFL Call STO Monthly