Still Mostly In Cash

 I’m still mostly in cash in my account with the following options still losing time value each day.  I’m short all of them except for the DIA 103 calls I used to hedge my short DIA 102 calls.

• -4 DIA December 102 Calls (DIALX)
• 4 DIA December 103 Calls (DIALY)
• -3 DIA December 102 Puts (DIAXX)
• -3 NDAQ December 19 Puts (NQDXL)
• -5 UCO December 12 Puts (UCOXE)

All of these options expire on Friday and unless we get two more days like today for oil, UCO will be the only one that finishes in-the-money at expiration.  If UCO is above $11.50-11.60 I might roll these naked puts to January expiration and possibly pocket a small profit in the meantime.  If UCO levels out here I’ll plan to take the option assignment, buy 500 shares and most likely I’ll sell a strangle on UCO for January.  That’ll be five new naked puts, possibly at the $10 or $11 strike and five covered calls at the $12 strike.  Doing that will reduce my cost per share by more than $1.00 if UCO stays above the put strike and if it dips below the put strike at January expiry I’ll be getting in at a steep discount to today’s price.

I’m having trouble committing to other long positions still.  Barron’s had a great bullish cover story written by Jonathan Laing on AXA in this week’s edition, but while he praised AXA’s value and potential for multiple expansion along with earnings growth, they didn’t cover the currency risk.  I think at some point in the next six months the dollar will turn higher.  The Fed didn’t give us a solid clue today as to when rates would go up, but I can imagine that sometime in the next six months we’ll have a better idea and with that will come lower bond prices and higher interest rates and a stronger dollar.  A stronger dollar could nullify all of the gains AXA has overseas in dollar terms.  So while I liked the Laing’s logic on why AXA shouldn’t be so cheap, I think the potential for a reversal in the dollar makes that trade too risky for me right now.

Using that same theory of the potential for the dollar to gain is keeping me weary of a lot of other US companies with big exposure overseas.  Some tech companies and small caps might be able to push past that risk, but they’re both up so much for 2009 they might both need a little correction before I feel I should venture back into them again.  (This is how I was lead into researching more dividend paying stocks like I mentioned last week.)  I don’t have that same risk feeling with oil.  For rates to increase, the economy has to improve more first.  With an improving economy an increased demand for oil come with it.  That should keep the floor for oil not too much lower than it is right now which makes selling naked puts a great strategy.

If the dollar and basic valuation wasn’t enough to give me pause for most equities, the simple fact that the Dow is having such a hard time making it above the 10,515 ish area and staying up scares me too.  The S&P’s nemesis is the 1,110 – 1,115 range.  A breakout above these areas would make me react and I think a lot of other technicians would be following suit.  I have a trade trigger set to text me if these areas are broken so I don’t miss the pop.  Until that happens, I’m content to sit in cash and wait.  I’ll probably add a little to a shorter term bond fund soon.  I was waiting until after Bernanke spoke today to make sure there wasn’t a curve ball in there.  I don’t want to go longer than 10 year bonds, probably shorter, due to my expectation of interest rates rising.  I don’t want to go too short because the yields aren’t worth it.  And that’s why I’m so heavily in cash.  Not losing money is as much or more of a skill than making it sometimes.  I think a lot of money managers agree with that which is one more reason the markets are stalling at these levels.  It’s so close to the end of the year, a lot of us just want to lock in the profits we’ve made so far in 2009.