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Discussion in 'Stocks' started by bttweb, Sep 18, 2006.

  1. I appologize, I called it a spread when the technical name for this option strategy is a Straddle...

    Been long the common since the IPO and bought Oct 65 calls on 9/14....My break even prices for this straddle are 62.00 and 68.00

    Call price was 1.15
    Put Price was 1.85

    Profit from the Commom

    Bought --- 44.02
    Sold ---- 67.11
    Net--- 23.09

    Profit from the Calls

    Sold ----3.80

    Took the Net from 1/2 the Calls that were sold and this covered my purchase of the calls and 1.50 of the 1.85 for the Puts...

    This spread cost me .35 when everything was said in done...NICE

    So I double my invested capital @ 61.65 or 68.35 by Oct expiration...


    Closed out part of the straddle on friday
    Sold the Calls for 10.30

    Took some of the profit and I bought straight 75 puts on MA and I still have the 65 puts open....

    Loving the down grades this morning....

    #31     Oct 9, 2006
  2. Insurance Is looking like a good Idea going into elections....


    THE TRUTH CHART. (Back in MARCH 2003 So OLD but USEFUL)
    Geopolitical concerns have dominated investor's attention for the last few months, causing stock prices to wither and, more recently, soar on expectations of a quick victory in Iraq. The primary benefit of an easy win over Iraq is that it would eliminate a major factor inflicting pain on the market. Unfortunately, it will not solve the market's problems. That's up to the economy.

    As you know, stock value is driven by earnings, inflation and interest rates. Value rises when earnings go up and inflation and interest rates decline. Typically, a strong economy leads to rising earnings, which is good, and rising inflation and interest rates, which are bad. So investors are constantly balancing these factors against each other.

    With three factors, each of which can move up or down, there are eight combinations. This array of combinations is called the "Truth Chart." It appears as follows:

    Case/// Earnings///Inflation///Interest///Prices///Comments
    1. Up Up Down Up Bull Market Begins
    2. Up Down Down Up Bull Market Thrives
    3. Up Down Up Up Rarely Happens
    4. Up Up Up Up Bull Market Ends
    5. Down Up Up Down Bear Market Begins
    6. Down Down Up Down Rarely Happens
    7. Down Down Down Down Bear Market Prevails
    8. Down Up Down Down Bear Market Ends

    Case (2) reflects the best of all worlds, a rare combination of a strong economy with rising earnings, falling inflation and interest rates. This is the so called "Goldie Locks" scenario. It prevailed from January 1995 to October 1997.

    This happy scene was rudely interrupted in October 1997 by the "Asian Currency Crisis," which sent earnings, inflation and interest rates tumbling and created the Case (7) scenario. Case (7) did not last long, however, since inflation began to rise from extremely low levels in July 1998. Enter Case (8).

    Dr. Greenspan lowered interest rates in rapid succession in October 1998, giving the market a tremendous boost. The world economies began to recover shortly thereafter, causing short-term interest rates to begin rising. Earnings also began to turn North in January 1999, enter Case (3).

    Case (1), one in which earnings and inflation are rising while interest rates are falling, is the usual combination of factors which fosters Bull markets. Case (3) rarely happens. Although Dr. Greenspan said he was fighting "supply-demand imbalances," he began raising interest rates in August 1999, bringing rise to Case (4).

    Investors, flush with success from the Bull Market, continued to push stock prices higher and higher, even though Dr. Greenspan continued to raise interest rates. The Fed always wins this battle. Case (4) prevailed from mid-1999 to October 2000, when earnings peaked. Enter Case (5).

    Case (5) lasted from October 2000 until January 2001 when Dr. Greenspan began lowering interest rates. The economy went into recession in March 2001, and Case (6) never happened. Once the economy weakened and earnings started to go down, Case (7) occurred again.

    In 2001, Sir Alan lowered interest rates again and again. He ignited an auto and housing buying spree, although the economy remained weak. Inflation has been rising for several months now and earnings are not. We are in a Case (8) scenario and looking for the end of the Bear market. The war rally is nice, but the new Bull market will not get rolling until earnings begin to rise again. Yes, we have heard it over and over that earnings are rising. But are they? Next week, I'll tell you more about the Truth Chart.


    The Case 4 Bull Market Scenario, as described in the Truth Chart, (see my essays of 03/21/03 and 03/28/03), is one in which earnings, inflation and interest rates are all rising. It is by far the most challenging of the eight market scenarios shown in the Truth Chart. In this scenario, the economy is strong, earnings are great, but the day of reckoning is on the horizon. While it is described as the scenario which marks the end of bull markets, Case 4 scenarios can go on for a long time. This one started on May 7, 2004 or 23 months ago. When will it end?

    To answer this question, let's examine each of its key factors: Earnings, Inflation and Interest Rates. First quarter corporate profits are expected to rise more than 10% Y-O-Y. Therefore, it seems reasonable to expect stock prices to continue to go up if earnings have been going up. But that's not the way the game is played. Investors worry because they discount the future, not the past. They constantly look for things that may affect future profits and start selling stocks even before earnings actually start turning downward. They want to get out at the top of the earnings cycle and often give false alarms.

    That's why we need to be very watchful of earnings data. Our Investment Climate graph of S&P 500 earnings continues to show a steady rise in earnings, but its trend indicator has been essentially flat since last November. This suggests a decrease in earnings momentum, and that's not good. But it's too early to hit the panic button.

    Inflation and interest rates have been hitting multi-year highs lately and this has given many investors the jitters. Generally speaking, CPI inflation is not considered to be a serious problem until it reaches 5% or more. It hit a ten plus year high of 4.70% last October, but came down to 3.60% last month. So inflation is getting dicey, but is not dangerous just yet. I'm amazed that high oil prices haven't impacted the CPI more than reported so far, but I have a deep suspicion the number is rigged anyway.

    Here's a number that isn't rigged, the Fed Funds rate. It will be a problem if it goes above 5%. It's at 4.75% now and is virtually certain to be raised to 5% at the next FOMC meeting. However, the 90 Day T-Bill, which we track, closed at 4.58% today. The Fed doesn't usually get ahead of T-Bills too often, so they may, just may, stop at 5% for a while. This would be terrific news for stock investors, but one never knows what the Fed will do. My observation has been that they tend to raise interest rates too high and cause recessions. Now that's something to worry about.

    If you follow the news, there are a million other things to worry about, but don't pay too much attention to them. Keep your eye on earnings, inflation and interest rates, especially inflation. It will determine what the Fed does with interest rates. This, in turn, will determine the fate of the economy and earnings. Knowing where we're at in this mad scramble is the challenge of climbing The Case 4 Wall of Worry.

    I hope this helps for the years of investing ahead us all!!!!!
    #32     Oct 9, 2006
  3. March 28, 2003

    Last week, I introduced you to the "The Truth Chart." This chart provides an array of the eight possible combinations of earnings, inflation and interest rates which may exist in Bull and Bear markets. We used it last week to chronicle the rise and fall of the market from January 1995 to the present time. As shown below, we are now in a Case (8) scenario.

    Case Earnings Inflation Interest Prices Comments
    1. Up Up Down Up Bull Market Begins
    2. Up Down Down Up Bull Market Thrives
    3. Up Down Up Up Rarely Happens
    4. Up Up Up Up Bull Market Ends
    5. Down Up Up Down Bear Market Begins
    6. Down Down Up Down Rarely Happens
    7. Down Down Down Down Bear Market Prevails
    8. Down Up Down Down Bear Market Ends

    There are several aspects of this chart which should be noted. First of all, it shows that no single factor dictates the fate of the market. For example, it shows that Bull markets begin when earnings are going up and interest rates are going down, i.e., Case(1). Bull markets end, Case (4), while earnings are still rising, but interest rates are also rising. The only difference between Cases (1) and (4) is that interest rates were falling in Case (1) and rising in Case (4). Therefore, it takes a combination of rising earnings and falling interest rates to ignite and sustain a Bull market.

    It is also worth noting that combinations of rising inflation and falling interest rates as shown in Case (1) do not last very long. Although Dr. Greenspan has been rather cavalier about inflation for some time now, interest rates have a way of going up when the economy strengthens and inflation rears its ugly head. Be that as it may, the thing we need to see for this Bear market to end is sure evidence of rising earnings.

    As you probably know, we track inflation and interest rates each week in the Investment Climate section of the Views. The data on these factors has been easy to obtain and indisputable because it reflects the past. Not so with earnings. The information we needed in regard to earnings is forecasted, and has been subject to considerable error. How many times have we been led to believe that earnings were on the rise when, in fact, they were not? Today's Wall Street Journal, for example, featured a front page item stating that profits improved in the fourth quarter. That's nice, but the article within revealed that earnings were down 4.0% for the year. A popular newsletter writer claims that earnings of the 900 companies followed by Business Week were down 35% last year.

    So what are we to believe? The answer has been right here before us. Yes, we're going to begin tracking earnings of the S&P 500 companies as forecasted by VectorVest. We'll be using the 50-day moving average of forecasted S&P 500 earnings as shown in the summary graph of the S&P 500 WatchList. This data will be analyzed and published in the Investment Climate as The Earnings Indicator.
    #33     Oct 9, 2006
  4. So why did I post all of this....Through out the past 2 years we have been in a CASE 4 Bull Market (The last stages of a bull market)....It was almost magical how the bond market, gov data and Fed policies moved us into the glorious CASE 2 of a bull market.....From the Chart this is when Inflation data is going lower, earnings are still rising and interest rates are predicted to be going lower.....This all leads to rising stock prices....

    This is what is our "GOLDILOCKS SCENARIO"

    Now some tougher questions....How likely is it that earnings and outlooks for the 3rd quarter and beyond come in better than expected....The point being that Disposible Personal Income has been getting sqeezed over the last 6 months and will continue to do so as time goes on....

    Gotta go were open...

    will continue later
    #34     Oct 9, 2006