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Understanding Options, Maximizing Gains

Written By Brian Hicks

Posted January 6, 2009

With a monumental strain on the global financial system that lead to unparalleled governmental intervention and stimulus, we found ourselves knee deep in the worst market performance since the 1931 Great Depression.

We were met with unbridled volatility and strain that may impact the financial markets for at least another year.

And it was all thanks to:

·  Housing meltdown
·  Financial meltdown
·  Stock Market meltdown
·  Dollar meltdown
·  Massive government bailouts and exorbitant stimulus
·  The death of Indymac, Countrywide, Washington Mutual, Fannie Mae, Freddie Mac, Goldman Sachs…
·  Humiliated realtors, discredited NAR, destroyed homebuilders
·  Inflationary and deflationary risks
·  Oil at new highs
·  California disasters
·  Massive layoffs across the board
·  Fraud
·  Poor retail sales
  Consumer sales and confidence in the toilet
·  High delinquencies and foreclosures
·  Higher credit card defaults
·  Sky-high unemployment
·  Hedge Funds blowing up.

And we still haven’t dealt with the possibility of:

·   Hyperinflationary risks, which will send oil and gold skyrocketing
·   Arrests
·   More Ponzi schemes uncovered
·   Another $700 billion needed
·   Government failure
·   Collapsing treasuries
·   Even more poor retail sales, low consumer sales and confidence
·   Higher delinquencies and foreclosures
·   Higher unemployment
·   A larger wave of residential housing mortgage failure
·   Auto loan failures and repossessions
·   Billions of dollars in credit card defaults
·   Commercial mortgage failures and foreclosures on such things as malls and office buildings
·   Credit default swaps that required no money down will lead to financial chaos

And, already there’s talk of a 2009 recovery? Not likely… and that’s because of Option ARM resets, which could send the S&P 500 to 600 and the Dow to 6,500.

But it’s not as if everything that happened was unexpected. We called for the fall in February 2007 around the same time we profited from New Century Financial put options.

In review, the financial chaos began in the subprime collapse of 2007 and grew in 2008. It led to the collapse of the rest of the mortgage market, resulting in tighter credit lending standards, lock ups of asset-backed securities, defaults, ridiculous delinquencies, foreclosures, and failing banks.

We lost Countrywide because of a greedy Mozilo. We watched as the Bear Stearns behemoth fell and got a $2 buyout offer. Fannie and Freddie were seized. Lehman, AIG, and Merrill plummeted. And on and on… Yep, 2008 needs to be forgotten and never repeated.

Volatility made the market pop 800 points one day, only to fall 650 the next day… and it repeated again and again, only to be met with bailout plans and Fed injections that our great-grandchildren will one day pay back.

And for the overall year:

  • The Dow fell 33.8%, its biggest fall since 1931. 
  • The S&P 500 fell 38.5%.
  • And the NASDAQ fell 40.5% – a figure worse than the 2000 bursting of the tech bubble.

But we beat them all… easily.

Understanding Options, Maximizing Gains

With options, our end-of-year average stands at 68%… which includes losers (average loss was 41%; we only had eight losers out of 40 trades) and winners (average winner was 95%), plus such gems as:

  • Chesapeake Energy January 2009 15 call (57% on half)
  • DryShips January 2009 10 call (average gain of 41%)
  • AMAG December 30 put (140%)
  • American Express January 17.50 put (86%)
  • January 10 put (37% and 49%)
  • AIG January 5 call (125% and 100%)
  • Morgan Stanley January 25 put (71% and 13%)
  • Lehman Brothers put options (208%, 135%, 95%, 49% and 188%)
  • Freddie Mac January 6 put (44%)
  • Fannie Mae December 9 put (46%)

We can’t guarantee 100% success on all positions, but we always do our best. Considering we handily beat the market with an average gain of 68%, we’re not doing too shabby. And there are still many ways to profit from the malaise.

Good Investing,

Ian L. Cooper

P.S. There’s simply no better way to profit from today’s chaotic markets than by trading options. And our Options Trading Pit advisory is nailing quick gains, one by one, like no other service available today. To learn more on how we’re averaging an amazing 95% on our winning trades (with an average hold time of just 11 days), just follow this link.