Monday, October 18, 2010

It's still about the Mighty Dollar and and an Update on our Positions.

It's still all about the Mighty Dollar!!

Look at the chart below specifically at the red circles and you will see that the dollar is WAY oversold and becoming less so as we speak. While the old saying goes that the market can stay irrational longer than we can stay solvent we use option to try and even the odds against this fact. I mentioned this back on Sept 29th 2010 and gave you a trade to play this upturn in the dollar and even a way to benefit while we wait for the upturn to happen.  See link for more information on the trade.

In case you've been living under a rock over the past few years and specifically the last few months and haven't noticed, the dollar has been under enormous pressure as the Federal Reserve (Ben Bernanke) has all but stated that they are going to print money in order to get the economy roaring again ala via QE2 (Quantitative Easing Part 2).

While I personally believe throwing good money after bad is useless and will not solve any of our financial debt issues, the stock market, the materials sector and anyone that thinks they know anything about investing in stocks has decided to party like it's 1999 by throwing caution to the wind by buying anything and everything in sight in order to get out of dollar denominated assets. This prescription for disaster has been good to the dollar bears short term but I have noticed the boat getting a little heavy on one side. When this happens no mater what we're trading the counter trend is close behind. 

The way the market has been rallying lately with common sense being thrown to the wind the visual I can paint for you is imagine sitting on a beach watching a Tsunami rolling in, the wave might be beautiful but once it hits all hell breaks lose and what was once beautiful has now just become your worse nightmare. This is what we are experiencing currently with regards to QE2. 

The Trade:
We got long by purchasing 50 UUP December 23 call contracts for .40. As I showed you in the past chart the dollar had not turned up.....yet but it should over the next few weeks to a month. Based on this thought to help finance the purchase and lower my cost in the trade I sold 50 of the October 23 calls for .17 cents. I have effectively said the dollar will drift here and I'll take the time premium and pocket that cash waiting on the dollar to turn up. This worked out perfectly as the Oct 23 call expired last Friday letting us pocket the entire $850 we collected on the calls we sold. We are now long the December 23 calls for a basis price of  $1150. 
How did we come up with this number you ask? 
We get this by purchasing 50 calls x (100 shares equals 1 contract) = 5000 shares x .40 = $2000 
We sold 50 calls x (100 shares equals 1 contract) = 5000 shares x .17 = $850
$2000 - $850 = $1150 is our basis in the option.

What we do now:
Based on my original thesis that I've laid out above as well as they way things are looking in the broader market as well as the chart above, I believe we will see a violent snap back in the dollar which could force everyone to cover over the next few weeks. When this happens the stock market, commodities, oil, gold, etc will go down. This whole melt up has been based on the dollar weakness. This could reverse very quickly and in fact might happen this week as GOOG, AAPL & IBM have all reported earnings. While their earnings were great bottom and top line numbers, investors had poured into these stocks pushing them up to all time highs which when you hit every pitch out of the ball park you're doomed to hit a double which is not good enough in this market and the markets are punishing these stocks in the after hours. Tomorrow is a new day and we'll see how things open but considering AAPL makes up 20% of the QQQQ's that could push this index down which could shift sentiment quickly over to the booking profits side. Keep this trade open and we'll monitor it. 

Other trades Open:
Back on Sept 30th we put on the following trade of Nov 115 Puts as protection for $4.10 per contract. If you had no protection against any market rollover this was a good trade for protection.This trade is down to $1.38 per contract currently but with the sell off after hours in the tech stocks this trade which is our insurance against any forthcoming sell off might come in handy. Hold for Now. Click on the link to read more about the trade. 

Back on October 6th, we put the following trade on for the stock FFIV. We bought the Jan 2013 $85 call and sold the $105 call for what is called a bullish call spread. This should have cost you around $850 - $900 dollars per contract and can still be purchased in this range amount. We still like this trade. The stock is now trading for $91.00 per share. 

Thats going to do it for today. Remember to keep a watch on that dollar with the UUP etf. If it breaks out watch out below in the overall market and commodities(oil & gold) in particular.

Happy Trading *DYOD* (Do Your Own Diligence)
Marty Blackmon

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