The Week of Jan 13-18 – Down Periscope

Busy down week. I feel fortunate to have exited the week with modest 2% profits, and now sit on 88% cashif


Now wasn’t that ugly. Again Gov’t regulation that lets the “protects’ less than accredited investors hurts the small guy again. Specifically, no access to Hedge Funds. Fortunately I roll my 401k into a self-directed IRA every year. I feel like I can handle the market much better than any long only Mutual fund Mgr with a mandate to maintain at least 70% invested. Give me a fund selection that is allowed to buy puts or shorts, or roll into cash at a high level any day. Don’t get me wrong, I don’t necessarily want the mass market to have access to Hedge Funds that use enormous leverage and risk blowups. But there are other more conservative hedge funds these days.
That said, with the market down huge this week (S&P -5.6%), I was pleased to have my acct up about 2% this week. Now that expiration has passed, I sit in 88% cash. I made a number of exits this week, and a few small entries. Here were friday’s moves:
AAPL – 2 units of Feb/Apr 160p calendar for 5.40. This has huge potential. With earnings on tuesday, and a monster Volatility Skew. Feb 67%, Apr 55%, and a 3 day weekend to collect Theta (time decay), I am very happy with this. I put this order on in the morning, however, it didn’t get filled until the afternoon, when I was taking a break with my ski group. The pre-earnings breakeven on this position is 140 and 188. I was filled @ 160.34.
SDS – S&P morning trade. Bought 64.01, sold 64.30. Bought on the morning spike, sold before I had to leave for the ski day. Eventually 66.21. I just didn’t want to be away from the computer on this unhedged Double short inverse S&P fund.
USB- Sold 2 units of feb/jan 32.5p for .40, and .43. I somehow escaped these positions as a profit. Amazing. this was hurting earlier in the month. And exited my directional hedges in proportion, Mar 30p for 1.25, and Mar 35c for .35
ANR – sold 2 units into the am spike. Jun 30/40c for 1.45. I lost 50% on this unit, Sold Mar 30/35 for .70. Sold these with the underlying @ 25.38, it closed @ 24.51. It crossed below my “Uncle pt”. Unfortunately, I wasn’t able to get out right when it broke support @ 26.90.
AIG – Sold final Jan/Feb 55p @ 1.75 (underlying @ 53). I was hoping it would stay between 54 and 56 to maximize profits. When AIG broke I was watching something else, and missed the break, oops. But I managed to play the bounce off of 53 and sell into it. I was happy because the underlying finished @ 52.10. I still am benefiting from a slight down move or a flat market. I have 8 – Feb 55/50/45 butterflies, originally purchased for .40 and .50. Excellent. The Breakevens on this are 45.45 and 54.55. This offers a 9:1 reward to risk, and I am loving this position. It has followed it’s trendchannel nearly perfectly. I have been buying this butterfly as the price was bumping it’s head against resistance. It has support around 52, I think we might see one more pop before it drops below.
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Current position AIG Butterfly risk graph: $360 risk, $3500 reward. This is a small <1% risk allocation for a nice < 28 day trade.
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Here is part of an article from Real Money.com

The new phrase that can’t be uttered is “systemic risk,” and with bond insurer Ambac (ABK – commentary – Cramer’s Take – Rating) losing its triple-A credit rating from Fitch Ratings on Friday, the real risk of a financial disaster will be widely whispered into the next week amid the possibility of more downgrades for the industry.
T.J. Marta, fixed income strategist with RBC Capital Markets, estimates that roughly $2.5 trillion in outstanding debt is backed by bond insurers like Ambac and MBIA (MBI – commentary – Cramer’s Take – Rating), and credit downgrades are a mortal threat to their business models.
If the bond insurers fail, that raises the specter of a massive wave of wealth destruction in a global financial system that is flooded with illiquid and opaque derivative securities of which there is little understanding, except that their value is connected to credit ratings on structured finance securities.
“This is going to be worse than anybody thinks,” says Marta. “What I heard from Ambac [on Friday] is that they’re throwing back the lifeline and saying, ‘We’re not going to make it.’ On a fixed income trading floor, that means the world truly is upside down.”

Some are seeing capitulation around the corner. Maybe, but a real gov’t solution is needed. Does the government need to take over all the Monoline “Insurance” companies, and insure the $$ at a reduced rate. I think it would be more effective than giving every American tax payer $800 to spend.
This is a significant weekly chart. We achieved a 50% retracement of the past 3 years of upmove. I’d say that is significant. We have broken the uptrend. The next level of significant level of support, if the 50% breaks, is 1262 on the SPX is @ the 61.8% retracement. This level happens to coincide with a previous basing area.
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Now, we may see a strong up move on a capitulation opening on Monday or Tuesday, but I will be selling into the backside of the 2003 trendline. I emailed friends a few days back, with an alert to bail on this market. The catalyst to the downside is systemic financial risks, and monoline insurance providers. Until this is directly addressed, I will remain LT bearish. However, I believe we are due for a snapback, counter trend rally. This may come from fed intervention or Govt intervention. We will see.
I am off to the hill. It has been cold, but the snow is excellent. I look forward to skiing with some great people today. I have received a half a dozen emails from previous skiers I have taught Lvl 7 through 9. I will see where I am need today, and get to catch up with some good folks.

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