Take a Knee

by JDH on September 19, 2009

On Monday night I watched the first Monday night football game of the season: the Buffalo Bills vs. the New England Patriots. Buffalo had just finished a disastrous pre-season, culminating with the firing of their offensive co-ordinator. New England had their star quarterback back, Tom Brady, after a year off from injury, and they had never lost a home opener in their new stadium, so all predictions were for a big New England win.

Interestingly enough, Brady was not sharp, and with two minutes to go in the game Buffalo was in the lead. New England scored a touchdown to bring the game close. For the kickoff after the touchdown Buffalo brought in their “hands” team, so that if New England attempted an on-side kick, their skill players could recover the kick and preserve the win. New England realized that, so they kicked the ball deep into the end zone. Buffalo’s Leodis McKelvin caught the ball, and he had a decision to make: run the ball out, or drop to his knee and have the ball automatically brought out to the 20 yard line.

The obvious decision is to take a knee in the end zone, and Buffalo has the ball on their 20 yard line with just over two minutes remaining. You run one play, and then the clock stops for the two minute warning. You run another play, and New England uses a time out to stop the clock. On third down you run another play, and New England uses their final time out to stop the clock. If Buffalo can’t make a first down, it’s now fourth down, and they punt, and New England gets the ball, in decent field position, with probably more than a minute remaining. Giving Tom Brady more than a minute with good field position is dangerous if you are the opposing team.

The other option is to run the ball out. That’s a problem, because your normal blockers are on the bench. Buffalo had the “hands” team on the field to protect against a New England on-side kick. The “hands” team is a bunch of smaller, skilled players, not the big burly blockers you want if you are going to run back a kick off. So, if you run the ball out, you won’t have much blocking.

Leodis McKelvin decided to run the ball out. Of course with no decent blocking New England put on the pressure to strip the ball, and they did, causing a fumble. New England recovered the fumble, and a few seconds later scored the touchdown that won the game.

Typical New England. Typical Buffalo.

Sometimes when you are winning late in a game you are not expected to win, you think you are invincible. You run out a kick off instead of taking a knee. And you lose the game.

In hindsight, however, there was no “correct” decision.

Taking a knee was the conservative approach, and if Buffalo could have then made a first down, the game would be over. They made first downs all night, so they probably had one more in them; New England does not have a great defense.

However, running the ball out also makes sense, since you are running even more time off the clock. But, if you run, you can not fumble! You put two hands on the ball, and do everything in your power to avoid a fumble. They fumbled, and they lost.

Wow. That was a long, boring, story, particularly for those of you who don’t care about a week-old football game.

So let me tell you another story. A story about the gold market.

Three weeks ago I bought the following gold and silver stocks:

AEM.TO – Agnico-Eagle Mines Ltd.

G.TO – Goldcorp Inc.

K.TO – Kinross Gold Corp.

PAA.TO – Pan American Silver Corp.

SLW.TO – Silver Wheaton Corp.

SSO.TO – Silver Standard Resources, Inc.

Then, on Friday September 11, as they were approaching their high points for the week, I covered them. I sold September call options, slightly out of the money, on each of these stocks. The options were set to expire on September 18, so one of two things could happen: These stocks would continue to advance, and I would lose my stocks, which is fine, because if that happened I would make a profit of between 4% and 12% on each of them. The stocks would get called at a higher price than I paid for them, and I get to keep the premium from the options I sold.

If the shares finished below the strike price, that’s fine too. I get to keep the premium, which lowers my cost of ownership, and I get to keep the stocks, which longer term I want to own anyway.

Sort of a Leodis McKelvin type decision. Play conservative and take a knee, or be aggressive and start running.

As it turned out, the market pulled back considerably on expiration day, Friday September 18, and all but one of my stocks closed below the option strike price, so all but one of the options that I sold expired out of the money. I get to keep the premium, and I still own my stocks.

Only SSO.TO – Silver Standard Resources, Inc., which I covered by selling the September 24 calls, got called away because it closed on Friday at $24.32 Still, I’m not crying. I got to keep the premium of around 90 cents per share, and I sold my shares for $24, which is more than the $23.46 I paid for the shares three weeks earlier. So my profit is 90 cents plus 54 cents or about 6%, not including commissions. That’s not bad for less than three weeks work.

And remember, that six percent profit is on my losing trade, where my stocks were called. On the other trades I still have the stock, and I kept the premium.

Friday was options expiry day, and based on my un-scientific observations it is not unusual for stocks, or commodities, to pull back to just below where all of the options are written, so that the options expire worthless. This is not a unique observation on my part. There are lots of articles, like this one, that reach the same conclusion. Fine. If they are going to expire worthless, then I want to sell them, not own them.

GoldSept18-09

Do I think gold is going to drop? No, of course not. We are in the early stages of a bull market. In fact, the Australian Privateer web site shows a confirmation on their gold chart of the gold rally. But nothing goes up in a straight line. In fact, last week I said that an RSI over 70 was worrisome, so as the chart here shows, the big drop of Friday brought the RSI down to 66, which is still high, but not as high as 70.

A pullback to below $1,000 would not be surprising. Even a pullback to $950 would not shock me. So my plan this week? I will place some stink bids below where we are trading now, and continue buying on big drops. Then, two weeks from now, on up days I will do what I did this month: selling calls, out of the money, on my positions. I will continue to pocket premiums until we get through the expected market weakness in October and November, in anticipation of better things ahead in 2010.

You can try to run the ball out and make a big play. But that’s risky.

If you want to run the ball out, put two hands on the ball, keep your head down, and hang on tight.

Even better, take a knee in the end zone, bring it out to the 20, and don’t lose.

Because now, in this market, it’s not about winning. It’s about not losing. So buy on dips, do some covered writing, and if we do have another crash in October, you will be mostly in cash, so you won’t lose.

(Yes, I know, the recession is over and everything is fine. Call me a skeptic, but since bottoming at a 12-year low March 9, the S&P 500 has gained 58% and the Dow has gained 50%. Since bottoming at a six-year low, the Nasdaq has gained 68%. Those would be great gains in a bull market, but this isn’t a bull market. This is a dead cat bounce, and it’s not sustainable. The Big Boys have made their money; now it’s time to cash in, and that will drop the market. So I like cash).

So I will keep mostly in cash, make a few bucks doing some covering on stocks I want to own anyway, and I’ll take my chances from the 20.

Thanks, and see you next week.

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