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Author: Mike Celeste Editor: Tony Ponzo February Circulation: 6251

Stat Sheet Week Ending February 26th 2011

ChangesWeeklyYear to Date
Indexes Points Percent PointsPercent
Dow-261.0-2.1%+652.0+5.6%
S&P-22.0-1.6%+62.0+4.9%
NAS-53.0-1.9%+128.0+4.8%

Highlight of this past week: The Basic Strategy closed out another winning stock split play (WLL) this week posting a $3.21 profit! This Week's Results

Stock Split Special: If you've been reading our newsletter, you know how well stock splits have been doing lately. You also probably know about our 2 - 1 February Special. Become a Level 2 member and take advantage of these stock splits that keep coming in! This special even includes a 30-day money back guarantee trial! There is still time to take advantage. Sign up here or email us to learn more at Contact Us

NOTE: See the bottom where we mention a freebie presented by a close friend of ours. This is related to those that enjoy great food in the Itallian manner.

In this Issue---
SplitMaster Basic System---
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The splitters continue to do well. We closed out another winner, WLL this week and team members, please note we have another sale coming Monday. At this point in the early going, we have closed out 8 splitters and 7 were winners. That is a very high rate of winners, and we know losers will be added, but we also have faith that stock splitters are going to be profitable.

Big Dipper System---
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With the big drop in the market this week, we had another Big Dipper enter our list. It is already at a profit. We continue to say that this might be a good time to look for Big Dippers, especially if you believe the market is going to make a correction and this week was the start. With the Big Dipper being a strategy of buying the split picks at a lower price, the odds of making a profit are even better. And if you trade the Basic Strategy then the Big Dipper is a great cost averaging technique.

Options---
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Lately we have been watching something happening that makes us wonder if it is a recurring pattern a majority of the time. We took a chance on a Feb. optionon a stock we have been watching . Unfortunately, it ended up expiring worthless. Funny thing—the next trading day after expiration(Monday), the underlying stock not only regained its cost, but it moved up into profit territory. So if the option had not expired it would have become profitable again. Another way to look at it is if the next month's option had been purchased instead, we would have had a profit instead of a loss. We seem to recall that this happens pretty frequently. If you were wondering how to estimate which direction it will go after expiration, it seems that the direction would be the opposite of what is was on expiration. Just something to keep your eye on at this point.

Option Lesson of the Week: We have talked about Covered Calls many times. Here is a variation of a Covered Call that I don't think we have ever brought up before. With a Covered Call you start out buying a particular stock. Or perhaps you have owned the stock for a while. Say you bought it at $45.00 and it has gone up nicely and is now at $48.50. From the recent news you have read about it, you think it is reaching a top. You don't think it is going to drop anytime soon, but you think it does not have much further to go. So you look at the 50-strike Call for the current expiration which is three weeks from now and you see that it is going for $1.50. That is a good price for that option so you sell the Call to open and create a Covered Call. The idea is if the stock is at or over $50 on expiration date your stock will be called out for $50 giving you a $5 profit plus you collected $1.50 for selling the 50-strike Call giving you a total profit of $6.50. If the stock is not at $50 or more at expiration date, you keep the stock and the $1.50 you collected and you can write the next month's Call and create a new Covered Call. That becomes like collecting rent or a dividend on your stock.

Now here is the variation. This strategy works best on more expensive stocks and you will most likely get called out on expiration date which you are about to find out why. This is an interesting strategy indeed. Let's say you own or buy XYZ stock and it is at $120. You look at the Call options on the stock and see that they are selling at a high price meaning the time value portion of the options are trading with a high implied volatility. With this strategy you are going to look at the deep in-the-money options. You look to sell to open the 100-strike ($20 in-the-money) and see that this strike is trading for $21.50. That equals $20 of intrinsic value and $1.50 of time value. This much time value in an option that is $20 in-the-money does not happen a lot but it does happen when the volatility is up for whatever reason. OK what does this get you? Well, it means that the stock can drop as much as $20.00 and you will be called out and still make your $1.50 profit. In fact, because you have $1.50 in time value you are safe from a loss even if the stock drops all the way to $98.50. Now that is a big drop and unless the market is crashing or some very bad news about the stock comes out, it will most likely not drop that far. This equates to much higher odds of making a profit as opposed to the standard type of Covered Call described in the paragraph above. Let's look at the math. You bought the stock for $120 or less. You sell the 100-strike Call for $21.50. If the stock drops up tp $20 you will be called out at the strike or at $100. That means you lose $20 on the stock side but you collected $21.50 for the option so your profit is $1.50. ($120-$100= -$20+$21.50=$1.50 profit) Do you see the advantage? If not, think about it and pencil it out. We think you'll get the idea and be intrigued.

There is one more leg to this strategy that can be employed. If the stock has been dropping substantially and you have reason to believe it is going below your 100-strike, you can buy a Put for protection. That way if the stock really drops you wind up making profit on the Put, offsetting the loss you might have from the Covered Call combination.

Now there is one draw back, and that is you need to have the funds to buy $120 stocks, but if you are buying stocks in that price range or higher anyway, give this strategy some thought.

Note: While this play can be very profitable as we saw from the above, you should not attempt to make such a trade unless you have a full understanding of the type of option play you are making and understand well the possible outcomes and risks involved. If you are newer to option trading consult your broker or financial adviser before making such a trade. And always paper trade a new strategy several time before making an actual trade.

Momentum Plays---
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We have another week of great profits in the aggressive portion of this strategy. Now it was a week that was a little hectic with some losses taking place, BUT -- once again both the conservative and aggressive trades brought in an overall profit. And the aggressives actually posted a strong overall profit as one of the trades made a very nice 60% profit or $850 on 10 contracts. And remember most of the aggressive trades are finished in less than 2 hours! This Week's Results

Indicator Play---
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We finally ended a long streak, maybe the longest we have had here at SplitMaster. The streak was how many plays we had in a row—The Indicator was in play 11 of 12 days. That is a very long time to have a daily play. It is a good winning strategy, but it had mixed results, depending on whether you used stop losses and whether you went for the Basic-Conservative play or the higher potential Aggressive play. The volatility increased, which means that there was a wider swing from daily highs to daily lows in the Spy options. That, in turn, meant stop losses were hit more often, before the market turned and went in the desired direction. Tuesday and Wednesday saw triple digit down moves in the Dow, which emphasized the volatility. The VIX indicator jumped dramatically to show this.

The Economy, The Markets & Commentary---
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Investor sentiment continues to be baffling. Even the “experts” on CNBC are talking about the strength of the market in relationship to the facts of the economy. This time I agree with their confusion about a lack of correction since the market has moved to such lofty heights. Yes, we had a losing week in the markets this past week, but was it due to a correction, or was it due to the crisis in the Mid-East, which centered around oil and the huge increase in the oil price? It is too soon to tell, but Friday we saw a rebound, which showed the strength still is there, and in the face of some contradictory reports.

Let’s take a look at the happenings in the Mid-East. There has been no slowdown in the delivery of oil—but just the threat of a slowdown, centering now around Libya, has sent oil prices skyrocketing. Gasoline prices are in the stratosphere, where our local area has the dubious claim to having the highest priced gas station in the country—with regular gas going for close to $5/gallon. Libya produces only about 2% of the oil supply. The Saudi’s have stated they are more than willing to increase their output to make up the difference if Libya was cut off. Here in the US we have an oversupply of oil. Demand is going down due to the high prices. The old bug-a-boo - speculation, continues to be the reason for this viscious climb in prices. The number of oil contracts recently traded was reported to be 3 times the normal volume. Congress again refuses to raise the margin requirements from 5-6% to the same level for stocks, 50%. The administration again refuses to let us drill for the vast supply of oil and natural gas right here in the US—and a lot of it on government land, where we the people would get royalties. Why is that? Even Jim Cramer on CNBC is speaking out, saying the natural gas industry should come up with about $500 million to lobby for drilling—saying that much money can finally get the attention of our reps. Unfortunately, money talks more than reason and common sense. There is no reason for these exorbitant energy prices and the “experts” are still saying that inflation is not a threat, that oil prices at this level won’t affect the economy much until they reach even higher prices. What world are they living in? This is what brings out the conspiracy believers. What is happening makes such little sense that you start to believe there could be a conspiracy afoot.

Have you noticed that every time there is some crisis in any small oil producing country, the price of oil immediately jumps—and gas prices jump even more in anticipation of even higher prices? Nigeria had some trouble and oil spiked, then it was Egypt, even tho they don’t produce oil they are at the Suez Canal, which transports it. Now it is Libya. Then, it often goes in a circle, going back to some small producer and doing it again. Our government does not have our interests at heart, when they blatantly prevent drilling here in this country—where we would not see our economic lives controlled by outside initerests. We respect our government for trying to protect the environment from pollution but in this case choices have to be made if only until a better solution comes up. And when the logic is so overwhelmingly clear, and our government does nothing to take the obvious steps to solve our immediate and serious problems, extreme frustration sets in. Either our politicians are a bunch of morons or they have ulterior motives.

Adding to the baffling confusion about where our economy stands, we saw conflicting reports come out this week. Consumer Confidence came out Friday and beat the estimates, with results the highest in 3 years. I continue to wonder how they conduct their surveys of consumers??? I wish they would ask us!! Everyone I know is cutting back and not confident, what with employment continuing to struggle, and being hurt by inflation on all aspects of their daily living costs. Also on Friday we saw the GDP (Gross Domestic Prod.) being revised downward for the 4th quarter, from being up 3.2%, down to 2.8% The 3rd quarter saw a downward revision for the reported up of 3.3% to 2.6%. Hey, that’s a miss of 21%, not considered very accurate in my book. So, consumer confidence goes up in the face of negative amendments to the economy. That is hard to fathom—and to believe. It seems the public is gullible enough to believe what is coming out of Washington. How about this?---Some rep was on TV using the term “less positive” instead of the word “negative” when discussing the state of affairs!

The other matter, and one very close to home, and very close to being the set-off to a ticking time bomb is the state of financial affairs at the state and local levels. We all have heard what is happening in Wisconsin and New Jersey. Spending cuts have to be made. We have been pointing out the very tough results in this mess. Cut spending and you increase layoffs, which of course, increases unemployment—and that increases our cost of unemployment benefits. The results are difficult no matter which way you go. That is the result of fiscal irresponsibility that our governments have shown. If a company isn’t doing well, it cuts costs and sometimes lays off people, in order to quickly get back to a balanced budget for the company. Governments don’t do that—they keep spending money they don’t have until you can’t “kick that can down the road” any more and you are forced to do something drastic about it. Actually, the government is doing something that a person would be put in jail for—a Ponzi scheme! They are taking in money from current taxpayers and paying it out in outlandishly high pensions and benefits to gov’t. workers and gov’t retirees. Sure, if I worked for the government I would be fighting to keep it going---but it can’t keep going forever without some kind of adjustments. It now stands that there are trillions—that’s TRILLIONS—of dollars that are underfunded in gov’t. pensions----and in many corporate pensions, too. This time bomb is of an unknown size, but it is getting bigger all the time—maybe going atomic!

Another joke is the comment that government workers are paid less than the private sector and that their benefits are not better than that given to the private sector. How come everyone wants a government job, if that is the case? You might not realize that unions were not allowed in the public sector, and even the mighty Democratic president, Franklin Roosevelt railed against allowing public unions. To get more detailed info on this subject, search online under “public and private unions”, paying particular attention to the history of public unions.

OK, now that your consumer confidence is reportedly too high, go take a nice long leisurely drive, spend some $ to help the economy, forget the price increases—just enjoy.---but---

Stay tuned.............these are very interesting times.

Today's Thought---
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The economy is so bad that..........Jury duty is now considered a good-paying job.....(And I just received my jury duty summons—lucky me)

Mike

Note: A very dear family friend, Linda Calabrisi Hanks, has kindly offered to pass her website and blog information to you. She’s from an Italian background in NY and now resides in Atlanta. This website centers around food—Italian food, primarily. Everything on it is free, except for any products a viewer might like to order. The site is http://www.lindasitaliantable.com and the blog is http://blog.myitaliandish.com . The blog publishes weekly at a minimum. It is a joy to take some time and go through all that Linda offers. Also check Facebook; search Linda’s Italian Kitchen. Her musings are on “all things Italian, but specifically Italian recipes, most of which are her own development. She has a most interesting method of mixing recipes and stories to go with the recipes, giving much credit to her parents, who passed on this passion for cooking. Please subscribe to the free blog and receive her posts by email. (It will always remain FREE) You will certainly enjoy it. Comments from you are always appreciated, too. Doing this also helps Linda increase her subscriber base as she attracts new advertisers, which will mean new offers from these advertisers for you. Her next step is to publish a book on the subject. Personally, I believe she should be on the TV Food Channel. She is better than some that are on there now. By the way, she is married to Tom Hanks, (not the famous actor) who did all the beautiful photography on the site---the pictures are so good you want to get up right then and run to the kitchen. And don’t worry about missing a recipe—everything is archived. Parla Come Mangi !

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