Option Expiration

Recently, I've started to play option expiration. I will position myself 1-2 weeks out on options that I think will expire worthless. My bet is that certain stock candidates will be 'pinned' to a particular strike. With that belief, selling options on these stocks will benefit from accelerated time decay and hopefully some sweet profits if the options expire out of the money.

What I like about this play is that the results are almost immediate. Within a week, you will know whether you are right (assuming you hold the position to expiration). Secondly, the risk/reward can be substantial assuming you cherry pick the right stocks to play. I typically look for at least 3 or 4-1 risk/reward ratio. Because the option decay is so fast this last week of expiration, the profit curve can quickly move in your favor to the max reward zone. Of course, if you are wrong, you can quickly lose your entire investment. This is where position sizing and risk management is important.

I key off of technical levels to determine where I would get out for a loss. I intend to hold until option expiration barring a stop loss so I can squeeze the max potential out of the trade. With these trades, you're either dead wrong about the zone in which the stock will end up or absolutely right within a week so it's important to be disciplined and adhere to stop losses.

Some keys things I look for. 1) Tight bid/ask. 2) Stay away from stocks announcing earnings the week of (or industry related cousins). 3) Technicals (support/resistance) has to corroborate my idea of a potentially range bound stock. 4) Nice to have open interest indicating a possible pin play.

Also, one of the ways I have found good candidates have been after a news driven event that has moved the stock. Afterwards, the stock is usually range and would be a potential candidate.

So far, my picks have been about 50% winners. For 1 unit of risk, I make about 3-4 units. If I can keep at this rate, it will quickly add to big gains.

Two candidates I have for this week was HD and APOL. Already HD has stopped out for a loss. APOL is looking good as it looks like it might pin at 60.

Resource stocks

Resource stocks have been on a tear recently. Not sure if the media or anyone else has been noticing. I haven't seen or heard much press about it.
I was hoping gold would dip below $1100 and wash some more people out but that hasn't happened. At this point I'm not so sure it will happen. Gold and silver has rebounded strongly off of these levels and looks like it wants to run to retest previous highs.
As they say, the hardest thing to do is always the toughest thing to do. So I've forced myself to buy some of the strongest resource stocks that haven't really dipped this last round. Nothing like backing up the truck, but more of nibbling here and there. The easiest thing would have been to do nothing and stare like a deer in headlights.
Here are some of the stocks I like in no particular order.
HL, SVM, SL, SWC, NXG, CEF (bullion fund).
Notice that there are no blue chips of mining like GG, HMY, ABX. I'm not particularly fond of these as they have not shown great relative strength. That is not to say that they wouldn't play catch up at some point. But it's not my cup of tea.
Another way to play the bull market is to sell some puts against stocks that you wouldn't mind owning. Due to the volatility of some of these stocks, you can earn some fat premiums while waiting for them to come in. This is a nice way of buffering your portfolio with some income.

Deflation or Inflation

There's been lots of debate in the media whether we are in a deflationary period or an inflationary one. Both camps seems to have great arguments for their position. But it seems like everyone is missing the big picture. The label is not important, only the result.

Let me explain through my perspective. What we have seen is the Fed inject boat loads of money into the system. Shoring up the coffers of the banks has been their priority in order to save the financial system. The deflationists have pointed out that the banks have not been lending this extra money and therefore there cannot be inflation. Point well taken. On the flip side, the inflationists have argued that the act of printing money itself out of thin air is the very definition of inflation. I'm no academic to be able to argue this.

What I do see is this. The balance sheets of banks have been shored up by the printing of money from the Fed. This money did not exist before - they did a magic trick and pulled a rabbit out of the hat or ass. Unlike you and I, money doesn't just magically appear in our wallets - we actually need to put in a day's labor for it. So this waving of the magic wand generated tons of extra money in the system where there was none before. It is the perception of fiscal responsibility and living within our means as the country with the currency reserve status that is of utmost importance here. When all investors see the way with which we uphold the value of the dollar they quickly lose confidence that there is in fact any value left in the dollar. This is key and in my opinion why the dollar has been tossed by the wayside as everyone has been scrambling to anything they perceive to be a better store of value.

So to argue whether there is deflation or inflation is purely academic. It is besides the point. The fact is that you don't want to be holding all that worthless paper called the dollar or any fiat currency for that matter - not when all governments are running the printing press. Invest in something that will maintain its value through time. Act now before its too late.

$1 Trillion Healthcare plan

http://www.bloomberg.com/apps/news?pid=20601087&sid=aoQVT0QdanBA&pos=1

Apparently, the US has enough money in the bank to pay for the $1 trillion healthcare plan. Wait, I might have misspoken. I meant that the US is currently bankrupt and has no means nor plans to fund this or any other hair brained schemes that they come up with aside from printing more money and issuing more debt. Really, this is just the type of behavior that us as citizens should participate in. You lead by example right?

Hmm, I really like that Porsche 911 I saw the other day. I'll just go into the dealership to purchase it and hand the salesperson an IOU. I'll tell him I'll pay it in 10 years, but I'll probably declare bankruptcy before then. So its a win win for me. That's just the type of irresponsible behavior our leaders are promoting.

Seriously, when your personal finances are tight, do you go out on a spending spree? Or do you cut back and live within your means?

Regardless, our lawmakers will continue to drive the dollar to the gutter and propel precious metals to new highs. Better diversify while you can. That Benjamin in your pocket won't buy you a movie ticket in a couple of years.

I'll get off the soapbox now.

The train is pulling out of the station.

Today's move in precious metals surprised me a bit as I looked at the intraday chart of silver and gold just take off. The pundits rationalized this move was due in part to India buying half of the 400 tonnes of gold the IMF is selling. This doesn't really make sense to me as I read a story yesterday regarding this breaking news and did not see the market react to it. After 11AM this morning, did the gold price take off.

Is there something else afoot here? Perhaps this news story is being bandied around to cover up a larger more sinister event taking place.... Hmmm, if I was to put on my conspiracy theory hat, I could easily say that there's a large request for delivery of physical taking place, but there is no physical to be had anywhere... But that would be jumping to conclusions.

I'll just be satisfied with the fact that gold is at new highs and silver is tagging along for the ride. You can bet that there will be more explosive moves to the upside as everyone clamors to buy the limited number of metals available. Reminds me of tickle-me-Elmo many years ago.

Are you on board yet?

Waiting to exhale

The expected pullback in precious metals is finally here. I foresee gold retesting $1000 just b/c that is the number everyone is focused on. Silver will over correct as it is more volatile than gold. I would expect a bottom in silver only after gold has bottomed. Along those lines, I would like to see gold firm up at $1000. If not, a retest of $960-970 is possible within the scope of a longer term uptrend.

I already have a list of miners that I will pick up when gold looks like it has bottomed. My favorites at the moment are SLW, CDE, AUY.

I'll go out on a limb here and say that this might be the last dip into $1000 territory before we have a new bull leg up in gold.

There is a new Gorilla in the room.

China urging its citizens to buy gold and silver.

Why would China publicly advertise and urge its citizens to buy gold and in particular silver? What do they know that we don't?

I believe that there is a new 500 lb gorilla in the room. The old gorilla represented by JPM and other banks have been allegedly short massive amounts of gold/silver to suppress its price. Now the new alpha male has entered the room and has its own agenda. It's not going to sing to the tune of the old cabal. The agenda of China is to enrich the lives of its citizens and its own coffers by ensuring it owns a large % of hard assets to diversify out of the depreciating dollar.

When it is good and ready, they will strike with little warning. They will announce their intent to acquire an x% of precious metals in relation to their foreign currency reserves. This announcement alone will skyrocket the price of the PMs. But of course, they would have already acquired all the tonnage they need prior to the announcement.

Beware shorts, your day is coming.