Reviewing the situation

It's been 2 months since I posted the portfolio (sorry) so I'll do that this weekend. It does not look good but I am actually feeling very positive.

Bearish positions are improving:
* Ultrashorts are rebounding. This is 25% of the portfolio, so continued weakness in the markets will move these up nicely
* Puts are rebounding a bit. This is now ~20% of the portfolio but has more potential impact given the leverage. I think AN, HOG, & NKE may pull through for us. ZLC and VMC are showing just too much resistance.
* DUG is up big. I wrote covered calls at $40 (instead of selling at $39.50). This may get exercised.

ETFC excepted, long positions are close to worthless. The calls alone created a massive $12K+ loss.

My mistakes the last 2 months are strategic and tactical.
Strategic: getting into commodities. I interpreted the July drop as a pullback when it was the start of the crash. My analysis of the fundamentals is correct (these companies are incredibly profitable and will remain so). But the point is that the market does not think so.

Tactical: Removing my STOP loss. It is there for a reason and I have not applied it twice: once to ensure the Puts yielded maximum return in July and again when the calls started to drop. STOPs are there for me to lock in gains and limit the downside, and by temporarily abandoning this critical tool, I am facing a loss this year. I can only hope tha tthe Puts yield some golden fruit. Next month is critical.

Buying more ETFC

Buying 4000 ETFC @ $3.30
Selling 40 Covered calls Oct $4 $0.10

Updating my Strategy

Half of the portfolio is ok: ETFC, DUG, Ultrashorts, QID
Half is not: MUR, Calls, Puts

I am going to continue my strategy of selling covered calls – that should generate ~1%+ yield per month on average.

The Ultrashorts really depend on a crash, which I think is imminent. So I am ok riding them out.

The Puts are not performing at all. And the performance really rides on them. The companies I chose are struggling, but the stock prices don’t reflect that. Take ZLC for example. They are pulling out Oscar Award quality accounting special effects. For example, they would have had a $0.60 EPS loss instead of $0.15, but they reversed vacation day accruals.
I am waiting on the Puts because I sincerely believe that these companies are running on fumes.

The Calls are where we face the toughest decision.
The fundamentals are sound – energy demand is strong. Even with oil at $100, these companies are much more profitable than they were last year. And even at $80. But the concern right now is not this quarter or next quarter, but next year. And the market is spooked.
Plus there are clear signs of commodity hedge funds selling. With just 3+ weeks left in the quarter, funds are not making profits and they have to re-position. A $3B commodity fund just went belly up (http://www.iht.com/articles/2008/09/03/business/03fund.php). And they probably were very leveraged, so that’s more like a $20B+ position being unwound. They were concentrated in ACI among others, which explains the sell-off there. They are liquidating positions and that is triggering automatic sell programs.

So the current atmosphere is working against my investment approach which is to buy undervalued growth stocks and sell overvalued dogs.
If anything, it looks like the market is running for safe haven: stocks that have been consistent in ability to deliver over a 5~10 year period.

So, to re-cap:
Short the market with Ultrashorts and QID
Stay the course with the puts because the accounting games are running out for AN, HOG & ZLC
Focus on ETFC as a winning long
Wait out the liquidation one more month. If no rebound post earnings, close out the calls and trim losses by year end

Selling Covered Calls

Writing covered calls as follows:
1 contract each unless specified otherwise
QID Sept $50 @ $0.35 2 contracts
SRS Sept $100 @ $0.90