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Author: Mike Celeste Editor: Tony Ponzo March Circulation:

Stat Sheet Week Ending March 1st 2010

ChangesWeeklyFebruaryYear to Date
IndexesPointsPercentPointsPercentPointsPercent
Dow-77.0-0.7%+258.0+2.6%-103.0-1.0%
S&P-2.0-0.2%+30.0+2.8%-8.0-0.7%
NAS-6.0-0.3%+91.0+4.2%-31.0-1.4%

Highlight of this past week: Straddles are proving to be a great trading strategy as 4 out of 5 trades won this week with profits far outpacing the one loss. See Results

In this Issue---
Options---
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Our testing of different types of strategies for options continues. As team members know, we have been working on straddles and strangles and find that there is a lot less stress than playing just one side. Having said that, tho, we note that there are times when it might be a consideration to break up a straddle or a strangle and close out one side and keep the other. We did that this week with POT, by selling the Call and keeping the Put, after the stock had gone up for 7 straight days and our Indicator said it was overbought. That change worked out well, as the stock fell and the Put value increased.

In addition, and again, just for testing, we tried writing a strangle. That is, we sold a Call and Put to open a position, looking for the combination of the two prices to drop, and that would create a profit. We did it just before the close of the day, wanting the time value to deduct from the prices of the Call and Put when they traded the next day. This was following a big move in the averages, and we didn't think there would be too much change. The next day, the combined price of the strangle dropped quickly, we took our profit and looked for something else. As it turned out, there was double the profit not too long after that, with not much change in the stock price. That time value just wore out the price of the options. The strategy on selling (shorting) straddles and strangles is the opposite of buying or (going long). With the long play we want a stock that is on the move up or down. With shorting a straddle or strangle we want a stock that is not moving much that day. That way the volatility in the option drops and time value decays allowing you to buy back the position for less than you sold thus creating your profit.

These strategy suggestions are for experienced options traders only, and you need the approval of your broker. The main thing, tho, is that you understand them. For definitions of straddles and strangles you can look them up on www.cboe.com, and use their dictionary. You can then take a look at some options whose stock moves at least 3 points from high to low, on average, during the course of the day. Just something to keep in mind.

Momentum Plays---
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We had a very nice SPY win this week but the real story here is the Straddle/Strangle trades. We are still in testing with this play but we are doing live testing meaning not only are we actually making the trades here at SplitMaster but quite a few non-auto trading members are making the trades with us. This week we had 5 trades with four wins and one loss for an 80% win rate.

To give a short recap, the straddle/strangle has not changed the type of stocks or the reasons we go into a play. The momentum strategy that we have had for years is still the same. The only thing the straddle/strangle has changed is the way we approach the play. It is just part of life for things to go through changes and this is especially true in business. We know that from many years of experience being in business. And there is no business that this is more true than in the stock trading business. So it is important for any entrepreneur to be flexible and to adjust for those times. That's why we at SplitMaster continually analyze and make adjustments and that is exactly why we have been concentrating on this form of option trading lately.

As we have been discussing in this newsletter for awhile now, the complexion of our momentum plays and the overall market for that matter have been changing this year. They are not following their normal patterns we have been used to for years. It has been harder to peg the right time to jump into a directional move. The straddle/strangle solves that as with this approach we don't care what direction the stock goes. We don't even care if it goes one way then abruptly changes and goes the other way (which many have been doing). The only thing we care about, is that the stock moves substantially. That is what our momentum picks are all about, movement. The straddle/strangle really improves the odds of winning in either direction and cuts back substantially on sudden losses caused by stops. With this strategy, stops are not necessary. Of course as with any strategy, there are rules to follow and things to watch for but as we always say, that part is our job. We look forward to working more with this approach in the weeks to come and to getting more members involved. See Results

Indicators---
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We had a big win on our Indicator play this week, and part of it, we have to admit, might be because of some luck. We called the play, and it was a Put play. Shortly after getting in, negative economic news hit the market and the Put went way up in value as the market dropped fast. We won't make excuses, however, as we also see bad luck every once in a while. We take the win and the profit and look forward to Monday, when our Indicator shows another play. Team members should take a look at the Indicator page on our web site and we will also be sending a notice shortly before the market opens on Monday, when we get a closer look at the pre-market action. Learn More

The Economy, The Markets & Commentary---
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This week's action in the markets was pretty much a wash, as you can see by the statistics for the week. There was less than 1% change for the week in each of the three averages that we cover. February turned out to be a good month for the markets as we ended the month on Friday. The strong upward momentum lost a lot of steam, but it wasn't knocked out of the box yet. We saw the DOW recover well over 100 points of a triple digit decline on Thursday, followed by a small up move on Friday. The overall economic news was probably to the negative side this week, but the markets still had enough strength to resist much of a decline. Is it going to take a breath? It definitely tapered off, but we don't count it out until that pendulum definitely swings to the negative side.

The summit on the Health bill was much of the same bickering that we have seen all along. It did give us a good insight into how partisan politics works. There is a good point that can be made, tho, for having strong opposite opinions on subjects. Do you think it is better to give in and weaken your position just for the sake of compromise? That way, we have seen before, leads to weaker bills that don't really help much at all. On the other hand, do we want to continue to see 25-39% price increases for health insurance? Mathematically, that can not continue. Just like when housing prices were going up at those rates, they can not be sustained. When measured against family income, there comes a limit to how much extra can be taken out of that income. The result of these price increases--on top of big increases in earnings from the insurance companies--is that people have to give up something else in order to pay for the increase. That decrease in spending on other things means that the economy is hurt further. If someone doesn't pay the increase, they drop the insurance---and who is most likely to drop insurance? Healthy people drop insurance, as they figure they don't need it and can't afford it. What does that mean if they stop paying for insurance? It means that people that are not healthy are an increasing percentage of the group that does pay for the health insurance. Illness causes costs to go up for those that supply health coverage. More rate increases on the people that need it the most. Then, some of those people stop paying, and they get sicker and some die because they can't afford these obscene increases. It's a vicious circle and no one seems able or willing to make health insurance affordable AND still give high quality of care. There seems to be more media coverage of how much quality health care would cost under a universal system. We do have to consider how we are going to pay for all of these programs, not only health care. The country is in such a financial mess that the light at the end of the tunnel isn't even dimly visible yet. It was all caused by greedy people in the financial world in combination with our elected officials who let us down and allowed and even promoted 100% loans to people that didn't have to prove their income was enough to make the payments---with the aid of fraudulent income statements that didn't have to be backed up with documentation.

Keeping on sort of the same subject, I noticed something that confirmed what I said quite a while ago. Bank failures mean that the rich get richer. People that are involved in causing some of these financial problems continue to benefit, while we regular people continue to pay the price. I'm speaking of a bank that was closed and sold off to a group of rich investors. The old bank was Indy Mac and it was sold to this investment group last year. Now, less than a year later, that bank showed a profit of 1.6 billion dollars, more than the total that they paid for the bank. Whenever you can return more than your total investment in less than a year, you are doing some fine, fine investing---but I predicted it would happen, and it did. Why did I predict it? Because that's what happened the last time the Savings and Loans went under, after rules were changed and allowed insiders to get loans from the bank. Many builders got on the board of directors of these banks and got into the position of getting loans for themselves. The easy loan arrangement meant that they took undue chances with building programs, overbuilt, and declared bankruptcy later on. Of course, they took lots of money out before the final bankruptcy. The government insurance program stepped in, closed the banks, absorbed the losses--over $11 billion on bad loans is possible on Indy Mac-- and sold the remainder at bargain prices. Now bargain prices are still too high for us common folk to come up with, so those same people were able to buy the new bank and use the attractive loan programs that the government provides---like interest rates close to zero. This is not going to be an isolated incident--watch for more of the same.

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

Today's Thought---
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I have wondered at times about what the Ten Commandments would have looked like if Moses had run them through the U.S. Congress.......Ronald Reagan (Think compromise as you go down the list---add the word "except in certain circumstances" at the end of the Commandment)

Mike

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