update

Well let me see BVF gets early lump of coal Xmas present , gold goes sideways and all else goes down, down, down. I see that those banks and US financials had a better than i figured pop and then went right back south to retest lows until Friday.

I bought calls on TCK.a-T Friday. I think this is the largest CND miner, with a solid dividend, and exposure spread over metals, oil, coal and whatever else. I figured its off because metal prices are down, the high CDN $ and Fording coal is off which Teck owns a large stake in. Going forward Teck is far below the 1 yr low and IF seasonality ever does kick in this one could run so i bought only a DEC call.

It goes away from my time value of 3-6months minimum requirements but then again i expect a bounce soon or not at all so i will sell quick if it goes sideways. The Teck calls have large time premiums so buying months out would mean it would need a large rise to make the trade profitable or go up quick, which means i am better off with the Dec expiry call. The Delta will be better on the Dec and i can leverage my money better ie. more shares for my money put out. Also Teck has a Dividend coming in Dec which should help the share price rise a little.

Ah yes my Xmas present. Well BVF is again full of good news. I lost about $400 on the BVF-033 extended review but it began its descent before that, which brings my total on this to about -$1500 for 3 months. OUCH! Well i bought Jan puts when i bought the stock so i have no downside left until Jan expiry and may buy shares only into this weakness.

I also am looking at calls now for PFE-N (nice week ending spike), BMO-T (this may be better to own puts?), PDN (U prices are stable but market draft has taken them down too, i also like DML or UUU maybe for this sector).

I have looked at lots of oil and service companies as they are all soft right now. The best balance sheet however belongs to AKT.a-T which is not optionable. Well just wait and watch these stocks and maybe PD.un-T will announce a distribution cut to get it into 'on sale' range?

Loblaws has awful earnings again but this is just a watch and see like the drillers its soo beaten up i can't decide to buy calls or puts. I suppose one could buy commons and write calls against it but i would rather do that with BMO-T, PWF-T, or BVF-T.

Still holding my IMG-T calls for Feb expiry. I may just leave this for a while but if it starts to fall with the market i will exit this. Currently at break even.

As the market falls it makes me happy long term but unfortunately my RRSP has little outside equities so i cannot buy into the ongoing weakness for the long term. Dollar cost averaging is still a great strategy for long term investing with this market sell off.

DH

current market Nov 7th

As i scan over the market i notice financials, particulary WM-N, IIC-T and other large financials getting smoked. Is it value time and should i be picking up calls? Nope.

The options for these will have huge time values because of the large price movements. Also i can see no near term catalyst propelling them higher? I will keep them on my watchlist, but as Buffett says you want your long term holdings to have a 'moat' besides just strong fundamentals. By 'moat' i am speaking of some sort of competative advantage. As i see it WAMU or WM-N has neither mentioned. Its a smaller financial with recent accounting fraud accusations and large outstanding residential home loans.

Enough of the bad lets see some good in this market? Well i am happy to report my account only has 2 holdings. IMG-t and BVF-t. Both have suffered slow and steady flat lines and are eroding my purchased calls time value. BUT>

BVF will hopefully paint a pretty picture with earnings out 8:30 am Nov. 8 and IMG reports next Tuesday. I may pick up some calls for IMG with NOV expiry just to play possible earnings upswing. This will consist of only a few hundred dollars capital as the risk is high due to lack of time value.

I sold out of my WAG-N calls. Time was eroding them and i should have sold when it spiked quickly above $40. Could have turned a $600+ profit on $2200 risk in less than a month, but will settle on $100 loss.. mostly due to the lovely rise in CDN $$.

Did i mention that CDN $$$? It is killing me with BVF. I would be up on that nicely but i am slightly down because the US dollar is in free fall mode. I promised myself i would transfer more of my long term RRSP holdings from CDN funds to NON US or CDN funds ie Oversea's.

I have several Oversea's funds and i am happy to report that they have all sucked this year! Why? Because all their loss and then some is because of the CDN $$. So the underlying stocks are performing ok and have little US subprime risk.

Well back to current trade ideas. I have looked at UUU. After its recent smackdown it may be a good one to try a short term (1-2 months) call write. Until today it had $10 support. Now who knows? It has a juicy time value for DEC calls with 10% downside protection on shares held.

Loblaws L-t is another beatin down dog. I may try a credit spread on this one, which would be a sold put $44 perhaps and a purchaed protective put around $40. I have to play with this one some more to see how it's risk/reward is. Until then it continues to slid and allow me a lower entry. The company has good sales but poor margins.

TDG.un and PD.un may be some other plays for covered call writing or using in the money protective puts to preserve capital. Both are drillers than are trading @ or below 2x book value and have rigs in US still working although CDN $$ is hurting them there.

Hopefully my next post will have some positive news to report.
DH

Volatility

Oh the pain and suffering. With today's market downdraft i really should be buying more put options and selling call options. For that matter i compounded my misery by BUYING call options on several stocks yesterday.

I found IMG-T and WAG-N to be lagging or beatin up as of late. So i purchased some calls on both yesterday! Was that smart? I don't know yet? I also sold out of my UUU-T call options today... at a loss. These were shares i picked up when Uranium was sagging. I had to sell today because they expired and i didn't want to buy the shares on Monday (these calls were in the money).

I may buy back UUU-T or another PDN-T but will wait to see how the markets shake out come Monday. I did a quick calculation on my trading account today and figured i lost just over 2% today. The so called 'safe' TSX index lost just over %2 also today! My trading account is presently 30% cash, almost 45% BVF-T common shares, and several call options making up just over 25%.

It's leveraged slightly more than i would like at 25% in options but i should explain why. I have protective puts to cover my BVF-T shares. After including dividends these puts will limit my max loss on this stock to only 5% until the end of Jan.

Why did i do this? Well i do like BVF-T long term, but this account is after all my 'trading' account. If you looked at BVF-T on a 1 yr chart the reasons for 'protective puts' becomes obvious. Ever had a stock 'gap down' on you? No stop loss in the world will save you from a 'gap down'. Why didn't i buy the call option instead?

Good question and i already had is my answer. Tax planning was the name of this game. Dividends are taxed a 'nicer' rate than capital gains so i was just trying to keep a few more dollars at tax time.

Well happy trading. I will post more fun updates as they unfold. My watch list radar today has some stocks for long term such as L-T, ATA-T, and BCB-T. As you can tell by the picks i don't enjoy following the 'hot' picks but rather the beatin down dogs.

DH

recent stockhouse article

As promised here is the article I wrote recently:

Title: Options Trading, Friend or Foe?

A good many people may know or understand a thing or two about investing in stocks, but when it comes to options many don’t find them an accessible trading tool. I want to help introduce people to the wonderful world of options. My focus will be on some of the strategies I use and to demonstrate that options are a great tool for active and maybe passive investors. I will focus mainly on Canadian options but will add in the occasional US option just for fun.

I would first like to establish a baseline of understanding for options before proceeding. Without this basic knowledge what I say will look like a foreign language.

First off options are a derivative meaning they derive their price from something such as a stock or index price. An option is a contract that gives the buyer the right to purchase the underlying security at a predetermined (strike) price. Options are priced with a set formula, which is fairly complex and uses current: interest rates, stock price, dividends paid, volatility and remaining time to expiry. Some basics terms and points to know about options are:

· An options expiry date is always the 3rd Friday of the stated month
· Strike price indicates the price that you are willing to buy or sell the stock
· A stock’s volatility is a measure of its movement up and down in a given time period
· Time and intrinsic value are important to understand (see websites below)
· Premium is the price paid for the option
· Options trade in contracts (or lots) and 1 lot controls 100 shares of the underlying stock
· Both call and put options can be bought or sold (selling is more risky and requires a margin account)

For a better understanding on definitions please visit www.optionetics.com . For US option quotes I use http://moneycentral.msn.com/investor/research/welcome.asp and type in the symbol then click on the left where is says options. The msn site shows a nice view of time value in its own column to help see the difference between intrinsic (actual) and time values. Another US site worth mentioning is www.cboe.com .

I will quote primarily US sites for educational purposes because frankly, Canada has very few besides the Montreal exchange home page. One Canadian website I’ve found is www.optionmatters.ca . This is an interesting site that contains educational tools and a weekly blog.

In Canada, the Montreal exchange is where options are traded. I go to the Montreal exchange home page www.m-x.ca/accueil_en.php to find out what stocks currently have options. Currently the Montreal exchange has over 140 stocks and several ETF’s (exchange traded funds) with more being added as options increase in popularity.



Let’s use an example to make options easier to understand. My current strategy involves buying call options that have some intrinsic value or ‘partially in the money’ with at least a few months time to expiry. This means the stock doesn’t need a large move up for me to make money and that I have allowed time for it to move, hopefully in my chosen direction.

Biovail, (BVF-T) is an option I am currently trading.

I bought 5 calls (controlling 500 shares) @ Jan $16 2008 for $2.3 each contract.

Buying a call option is a bullish strategy where the buyer is betting the stock price will go up. The Jan indicates that this option expires Jan 18th 2008, which is the third Friday in January. The $16 is what I will pay per share assuming I exercise my rights and buy the stock from the seller. On Jan 18th my break even point will be $18.30. My total paid was $1150 for control over 500 shares. I left out commission but my CIBC account costs me $8/trade and $1.25 per contract. This trade cost me $14.25 to buy, which is close to 1% of the trade value.

I bought these calls on Aug 10th when the stock was trading @ $17.25. So I paid $1.25 intrinsic value and I paid$1.05 time value. Dividing the stock price into the time value lets me know that I paid roughly a 6% premium for this option. This is ok with me because BVF is at or near the bottom of a 3yr chart, which shows me it has some good technical support around these levels.

BVF last traded at $18.05 on Aug 28th and the option was worth $2.8 each. So, if I were to sell today I would make about $220, which sounds like peanuts but let’s look closer. I have now paid $1178.5 including trade costs and sold for $1400. That’s about 18% return on capital in less than 1 month!

I have control over 500 shares of BVF that would cost me $8500 to purchase without the use of an option. This strategy frees up capital to buy stocks that have no options. I am also able to control more shares of higher priced stocks that would otherwise be unobtainable for me.

I am limiting the amount invested into this call option strategy to a max of 10% of my trading capital. This ensures that most of my capital is safe so I can live to trade another day. I am ok (but not happy!) if I lose $1100 and know that my max loss will be no more, but at the same time my possible returns are huge!

If BVF went back to its June glory days around $25 that would net me a return of about $3300 or 300%. On my trading capital of about $20k this would be a gain of 16% while only risking 5% of my capital. Now, does this risk/reward strategy sound like a good way to beef up your overall returns risking only small amounts of your total investment capital?

As always do your homework or DD before putting any of your hard earned money at risk. I hope this helps to expand your knowledge on options and that you can consider them a viable ‘option’ to simply just buying the stock. In my next article I would like to share my first experience trading options and what I learned the hard way!

This article was my attempt to make options clear as mud. Hope this helps.

Taxing options.

I had a rough idea how options were taxed, but I posed the question to someone with more experience than I. The response I received was good and stated that he was NOT an accountant. How I understood it was that most of us can include options into our capital gains or losses.

Unless you are a very active trader, and very good, the chance of you paying anything other than capital gains taxes on your options profit is slim. However the government does leave room for interpretation. One thing to note is that if you don't derive the majority of your income from trading options it doesn't make sense for the government to waste time with you.

The government would not want to make bad options traders pay the full tax rate on their options trading because that could wind up lowering the total taxes paid. Not exactly in the governments best interests. I think the odds of the government allowing bad option traders to write off losses against regular income is about as likely as a decision to no longer tax income trusts in 3 years.

One thing the person I asked about taxing options did say is that 'Native' Canadians would do better putting options into regular income. Don't ask me, but it has to do with Native Canadians paying more capital gains tax than regular tax?

The feedback i received about tax on options was from a few people, with most of it coming from optionmatters.ca writer Richard Croft. If one ever has a question about options Mr. Croft seems to be an excellent source of knowledge, and doesn't mind sharing it!

I have written an article on options and published it on stockhouse.com. I figure that it should be posted here for background knowledge to learning about options. Look for it in the near future.

I will be looking at doing some option trading in the next week or two as October options will expire Friday Oct. 19.

Starting new blog

Hello to any and all readers,

First off i am a Canadian who enjoys reading and writing about investing. So i figured i would start this blog. I have several reasons why i wanted to start but, first and foremost was to journal my thoughts, trades and ideas regarding investing.

I figure my background in how or why i started investing is a good idea so here it is:

I started investing seriously in the past 4-5 years. I figured it was important since my pension plan is self directed. I jumped around with different investing techniques from daytrading, value investing and options (all this with non-registered funds). Most of my funds continue to be left in a few 'choice' mutual funds. While i like ETF's in theory i have not had much use for them yet. I will explain my disdain for Canadian ETF's in another entry.

While i have tried many different investing ideas (some more foolish than others) one staple remains. I have continued to add monthly contributions to my current low MER mutual funds. This dollar cost averaging is almost fool proof for younger investors such as myself because it takes the market psychology away from investing. One of the first investing books i read was 'The Wealthy Barber' which outlines principles for 'easy' investing that are still with me.

Currently i do little to no daytrading as this is stressful, time consuming and doesn't make sense for me. I have shifted my focus to a Ben Graham value type approach. In Graham's book 'The Intelligent Investor' he highlights principles for sound investing. He also states that one may allocate 'funds' (lets say 10% of a portfolio) for speculative or gambling type endeavours.

This is where my blog is headed. I currently 'play' with about 10% of my investment capital using mostly options trading. I have yet to incorporate options into the bulk of my investments, but can see this happening in the future.

One final note i have never been or will claim to be an English major so if you see any grammar or spelling mistakes please ignore.

Please stay tuned to my different thoughts and ideas, most of which will surround the world of Canadian options trading.