TFN eNews 10/05/2009: Will the imminent collapse of Latvia be good news for the greenback?
Published via e-mail broadcast on October 5, 2009
In today’s TFN eNews:
* This tiny European country may put some green back into the greenback
* Your options clinic
* Explaining our covered call
Dear TFN eNews reader,
It’s season that financial pundits are predicting oil at $100 and gold at $1,500.
Make that $5,000.
It’s a seasonal occurrence: Despite all Hope and Change and notwithstanding all financial upheaval of the past 18 months, the Tevias of the market punditry steadfastly stick to “tradition.”
There’s indeed comfort in those numbers.
But I think there’s at least the possibility for some short-term reversal in the decline of the dollar — and maybe a 10% drop for gold prices.
According to the Svenska Dagbladet newspaper, Sweden’s finance minister has warned Swedish banks in secret that Latvia’s political order was unraveling.
They’re supposed to prepare for the collapse of Latvia’s rescue talks.
“Latvia has failed to deliver draconian spending cuts agreed to secure the next tranche of its €7.5bn (£6.85bn) bail-out from the EU, the International Monetary Fund, and Sweden, balking at 20pc cuts in pensions and a further 15pc cut in public wages,” writes the UK’s Telegraph today.
Latvian GDP plummeted 18.2% between June 2008 and June 2009. Economic hardship this winter is expected to be “unbelievable”.
Battered Ireland has just decided to ditch its prosperity-bred aversion to Europe’s Lisbon treaty, now that it’s down on the luck o’ the Irish. Bankrupt Iceland has forsaken its Viking independence and is waiting, cap in hand, to be admitted into the EU. And now both Latvia and Lithuania are beginning to look like fiscal basket cases that will have to be put on euro-funded life support.
Spain and Portugal aren’t smelling all that good, either.
I’m unsure where the overall optimism for the long-term outlook of the euro stems from. It can’t be the growing line of financial derelicts lining up in Brussels.
Look for the unfolding Latvia story to be the first in a line of tremors that helps the dollar to a short-lived but much-needed face-lift.
*** There were a few questions about Andrew Snyder’s “plunge protection” strategy we featured in Friday’s eNews. Andrew explains it a bit more in-depth:
One of the downsides of options investing is that they aren’t your average investment. But that is also one of their best advantages.
Sure, you can buy and hold an options play just like any stock. But you can also use the derivatives as part of many other profitable strategies.
Once you make just a trade or two, trading options will seem as natural as tying your shoes.
On Friday, the TFN eNews highlighted one of my recent options picks for TFN Strategic Trader members. It was a fairly simple covered call strategy based on the SPDR Trust, a massive, highly liquid ETF that holds all the assets of the broad S&P 500.
Since then, I received several questions on the technical aspects of a covered call.
Options investors have the option of buying or selling (writing) an options contract. With covered calls, we are writing the contracts, meaning we are selling “the right but not the obligation” to buy 100 shares of a stock (in this case the SPDR ETF) if the asset reaches a predetermined price (the strike price).
With our covered call, we sold March 114 calls (SPYCJ), which are currently selling for $2.10 per contract.
As you remember, a standard options contract represents 100 shares of the underlying asset. In this case, by selling the March calls for $2.10, the proceeds of the sale, $210, would have been added to our trading account.
To make this a covered call, we have to own at least 100 shares of the underlying asset.
That’s a simple. Buy them using the $210 to help reduce the purchase price of 100 shares of the SPDR ETF, which sells for $103.44 per share at the moment.
Again, 100 shares would be needed, which would cost $10,344. But because we sold the calls and banked the premium, our actual entry price would be $10,144 or $101.4 per share, a 2% discount.
So, just buy selling the calls, we bought ourselves a 2% cushion. Call it downside insurance, if you will. Remember, for the S&P 500, a 2% downside move is significant. And we didn’t have to pay a thing to insure ourselves against it.
*** Now, what happens if the ETF moves higher?
Because we wrote the 114 calls, we are forced to sell our 100 shares if the ETF reaches $114 per share, meaning the S&P 500 reaches 1,140. From our entry price of $101.4 per share, we would be sitting on gains of 12.4% if the index stretches that far. Not bad for such a conservative play.
And what happens if the ETF does not reach $114 by our March expiration date? That’s the really good news. You get to keep the premium you banked by selling the call contracts and you no longer have the obligation to sell your 100 underlying shares.
Typically, with covered call strategies, the goal is to have the contracts expire just shy of the strike price. That way you can benefit from strong share price appreciation and the premium derived from selling the contracts.
I know a covered call strategy based on the S&P500 may cause a few folks to yawn. I agree.
That’s what I told TFN Strategic Trader subscribers it would be the most conservative recommendation I would make.
But remember, when I recommended the play, the markets were top-heavy, risk was on the rise and the strategy showed the potential of 17% gains. As I write, we are well on our way to locking in those gains.
Believe me, writing covered calls can lead to big gains.
In fact, TFN Strategic Trader subscribers who followed my advice are just days away from locking in another set of triple-digit gains thanks to this exact strategy. Best of all, we used the options market to nearly eliminate all of our downside risk in a speculative $245 million trucking company.
It may sound confusing at first. But all it takes is a trade or two, with the wisdom of a well-trained guide at your back, to become a master options trader.
(This is Andrew’s polite way of saying “Why not come over to the ‘dark side’ and join his options mavens at TFN Strategic Trader: http://www.todaysfinancialnews.com/TST/china/ETSTK702.html
*** 3 tiny stocks you need to own now!
This upstart financial information network has generated 63 double-digit gainers so far in 2009! Find out what “ridiculous” method they found to reliably pick winning stocks. You need to read this! http://www.todaysfinancialnews.com/HSC/ridic/EHSCK901.html
Quote of the Day:
“A presidential strategy is half-baked if its author decides it is dubious after its first collision with difficulty.”
– George F. Will, NewYorkPost.com
Recommended Reading:
Three big movers to start the week
Q4 Update: TFN Complete Guide to Stem Cell Stocks under $10
The 3 Best Stocks under $3 to Buy NOW!
Today’s Top 3 Financial News Stories:
Telegraph.co.uk – ‘Gold has proven historically to be a poor hedge against major inflations’ “Since 1971 bullion has risen by an average of 8.5pc per annum, compared with average annual inflation of 4.5pc. But if you had bought the last time prices peaked, in January 1980, gold returned just 1.2pc per annum compared with inflation of 3.3pc”
Timesofindia.indiatimes.com — Sensex down 268 points, Bharti tanks over 8% “After a particularly weak opening, the barometer index settled the day at 16,866.41, down by a significant 268.14 points or 1.56% from its last close. The decline followed 2.65% gain in the previous three days which saw the Sensex closing above 17,000 level for the first time in 17 months.”
Bloomberg.com — Unemployment Becoming Leading Indicator for Pimco’s New Normal “The climb in the September rate to 9.8 percent, double the level at the start of last year, leaves the U.S. saddled with about 15 million people out of work and with limited prospects. That will further hurt the housing market and weigh on the wages of those still employed, threatening to undercut the economic recovery”
Cordially yours,
J. Christoph Amberger
Executive Publisher, TodaysFinancialNews.com
P. S. ***Research your currency opportunities: EverBank provides you with the free tools . Visit their free Foreign Currency Resources today — http://www.everbank.com/002Currency.aspx?referid=12250
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