Hail! The rise of Republic of America!

While I haven’t written about my stance on the flood of bailouts, I have been against it all along. Pouring tax payers’ money into a select few elites in the name of helping the economy has sank my respect for the American government to a new low. This is just like the Bush’s Weapons of Mass Destruction lies and the subsequent Iraq invasion all over again, only on an epic scale and the effect much more encompassing.

However, the situation have reached a new low. In today’s news, there’s talk of banks asking for credit card debt forgiveness. They might as well just hand out each American a million dollar cheque. Then watch the American dollar become Zimbobwe money and plunge America back to the Medieval era when people would barter for their goods. The sheer stupidity of this move is below even that of Bush’s intelligence!

If what the U.S.A. is doing lately isn’t socialism, then I don’t know what is.

That is one huge factor why I’ve been long gold and silver with my accumulating position in SLW. It looks as though we might be in for a continued downtrend in precious metal prices. But sooner or later, prices will reflect their true values.

Update: The Big Picture made a post about mortgage bailouts today on the same issue. Barry puts the issue of bailing out bad debts succinctly, “moral hazard not only encourages recklessness, it leads to people looking to avoid responsibility for bad decisions.”

SOLD -5 SLW 100 DEC08 7.5 PUT @4.00 LMT

mini Silver

SLW

Wrote some puts on Dec08 of SLW at 7.5 strike price. Fee $7.5.

Upside: Volume on the rally from the low has been consistently high. Price of silver looks as though it has seen the low for now. Note the volume graph on 15-min YI price, the retest of last Friday’s high occurred at lower volume, marked by yellow line.

Resistance: $4 first, then primary at $5. Next up is $9 – $10.

Downside: Week prior to election, rally not supported by volume on overall market. Earnings report on Monday. Commodities under pressure.

Support: $3.

Bottom Line: Can’t say for sure if we’re at the bottom yet. The sentiment is definitely turning. By now til late December, SLW and the overall market should make a sizable rally. I will unload this then.

Stop: If on expirary I’m being put to, then I might just pony up the cash and buy the shares. Effective share price will be $3.5.

Using Option Pain (Max Pain) to estimate stock price

While the market is sorting things out today, I’d like to document a simple stock price predictor based on put/call activity called Option Pain or Max Pain.

It is widely believed that professional traders favour writing options. Since trading options is a zero-sum game, it is in their best interest if a majority of options expire worthless on expiration day.

By observing the open interest of a stock at each strike price, we can see at what price the Option Pain would occur. Of course, this is just another tool for the trader to use, so do your own due diligence as usual when trading.

SLW Nov08 Max Pain

Using this chart from Option Pain, we can see that the minimum option total value of November SLW is at $5. So our max pain price is at $5 for November’s SLW. That is to say, if SLW settles at $5, then the most call option would expire worthless and most of the put option would expire worthless. Such that the option sellers (the pros) can pocket your money.

Another way to use this information is to find the best Max Pain to Current Price ratio among a list of stocks. For example, SLW closed at $2.59 yesterday. Its max pain is $5 from the chart above. That is almost a double. Note, however, that we haven’t figured out the probability of SLW reaching $5. This would be something for me to look into.

In comparison, GOOG’s max pain for November is at $360. Its previous closing price is 329.49. Based on these numbers, SLW is a better buy than GOOG for now.

Mid-week Positions Review, October 21, 2008

CAF, DELL, ESLR, SLW

Like the market, my holdings are going sideway this week near their lows. Based on the price/volume observation this week, here’s my short-term ranking from strong to weak.

1. ESLR
2. DELL
3. CAF
4. SLW

I feel ESLR is strongest because of the last hour spike last Friday on 1 million+ volume. They are now sueing Barclays and Lehman to return their 30.9 million loaned shares.

DELL is showing some resilience despite negative news on Yahoo today. It is testing its low the 2nd time at end-of-day today on a regular late-day volume. The next day or two will be important times for DELL in the short term.

CAF is just drifting sideway for now on low volume.

SLW is now under pressure because of weakness in precious metals and the Euro.

Positions review after the crash in first week of October 2008

CAF, DELL, ESLR, SLW

It’s time to review my positions as promised last week. After the record up day on Monday and then the lackluster follow-through Tuesday, today is probably going to be a down day in the markets. Given my intermediate term outlook, I am inclined to hold my positions. However, I need to unload my weakest link to reduce my risk.

Above is a quick snapshot of my current holdings.

Notice that DELL and ESLR are holding on nicely on this down (DJX -3.18%, SPX -3.57% as of this writing) day after the previous spike. This is a very good sign indeed as it shows they’re likly to hold on to the previous ~20% gain, at least for now.

Actually, the price action of ESLR seem very healthy in particular. There’s been a couple of big volume spikes in late day trading. Although it does seem to be in a constant downtrend, as you can see from its chart.

As for CAF and SLW they are both below support at the moment. CAF has broken its $25 support last Friday and is trading below it at the moment. SLW is definitely the weakest at the moment. If it isn’t such a cash cow, I would probably be selling it in yesterday’s rally. Furthermore, it still seems to be holding on to its decending support line on the daily chart today.

SLW

At this point, the question I ask myself is, if I’m in all cash now, would I be buying these companies at this point? CAF – yes, DELL – yes, ESLR – yes, SLW – yes. Is this the bottom? I don’t know. I’ll just have to wait and see. However, I will watch the day-to-day action of my holdings carefully and unload one of two of them to reduce my risk.