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[Weekend Summary]
Dear Member,
I hope you are having a wonderful Labor Day weekend. We are about to begin the "trading season" in earnest and I am really looking forward to it. The major indices (DOW Industrials, SP-500 and NASDAQ) have been in downtrends since last winter. Each moved up from mid-August, but on less than average volume. On Friday, each produced a cautionary Japanese candle. Perhaps there was selling pressure because traders did not want to risk staying in over the long weekend. Next week should begin to provide valuable information on overall direction.
I have been happy with my trades. Last week, I was able to make a profit on my CYBX spread AND remain in a free position. You may recall I originally entered the position by selling the Sept 20 calls (for $1.45) and buying the Sept 22.50 calls for ($0.85). That meant on entry, I received a CREDIT to my account of $0.60 a share. This play was a bearish credit spread. Bearish because I would make money as long as the stock didn't go above $20 by expiration and credit because I was taking money in upon entry. Well, CYBX dropped in price which is definitely good when in a bearish position. I was then able to close the leg where I had sold the Sept 20's by buying back the Sept 20's. Remember, I sold them for $1.45, but was able to buy them back for only $0.30. In other words, I originally received a credit of $0.60 and gave half that back ($0.30) to close the short leg. Thus, I locked in a $0.30 profit. Guess what. I still own the Sept 22.50 calls. I already made the profit AND I still own the Sept 22.50 calls FOR FREE. I no longer have any risk in the position. If the 22.50's are worthless, so what. If they have some value or if the stock moves up, I just make more profit. Neat,huh???
I am still in the Harley Davidson (HDI) Feb 60 straddle. The stock has been moving up, but there has been little change in volatility. As the stock moves up, of course, we expect the call side to get more valuable while the puts lose value (but at a slower rate). That is one of the nice things about a straddle. Generally it is a spread where there is no rush. I still like the play.
Northrup Gruman (NOC) has been moving up right along the uptrend line so I am pleased with the position in the Jan '06 50 LEAPS calls.
Before concluding this weekend's summary, I want to mention something about entering spread positions or positions in which there are multiple legs. Some of you have emailed and indicated you were entering one leg at a time. When I enter a spread I enter it as ONE ORDER. In other words, I don't place an order to enter one side and then place another order to enter the other side. I place a SPREAD ORDER which includes all legs in the order. I place it as a limit order and for the day. By placing a spread order, I know I will enter the whole position for the debit or credit I seek or I won't get in at all. Often, that also helps me enter at a discount over the individual spread legs as well. Suppose I want to enter a bullish credit spread using puts on the fictional XYZ stock. Let's say I want to sell the 20 puts and buy the 17.50's as my protective leg. If I placed two separate orders to do that and only filled on the sale leg, I would then be naked the 20's. While I do play naked puts, it is a position that can easily result in the stock being put to me if it drops quickly in price, and obviously is a much different play with a much different risk graph than the spread I was trying to enter. Incidentally, when I exit or adjust, I may only exit or adjust one leg at a time as in the CYBX trade I discussed earlier.
Hope I haven't been too verbose in this weekend's summary and hope you have a great holiday.
Sincerely,
Bill
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