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9/19/2008 7:03:51 PM

Summary of Position For September

We entered a half Sep SPX 1395/1405 Call Option Spread on August 15 and received a premium of $60 per spread. Then on August 18 we entered a full position in a Sep 1195/1185 Put Option Spread and received a premium of $90 per spread. Finally, after a tumultuous week during options expiry we defended the Put Option spread by closing it on September 18 for a net cost of $400 per spread.

The combined total of this equates to a net loss of $285.70 per $1,000 of margin used or 28.57% after commissions for 5 weeks in the position (using Interactive Brokers commission rates). The loss before commissions was 28%. The official CBOE settlement price for the September SPX options was 1279.31 (note, this is not a typing error, the market added around 10% in 2 days! Also, the actual trading high today was 1265. This is settlement risk).

Current Position:

The system has now moved into Buy mode.

SPX Chart - Bigger Picture

From the chart above we can see that during the week all supports were broken as the markets went into panic, however in the end the market closed back in the trading range area. The probabilities now favor a trading range of 1170 - 1300 for the month ahead as the market digests all history making events that have occurred this week.

SPX Chart - Shorter Picture

Well, we'd thought that last week was a wild one, but this one simply a mind blowing one. Monday started with a 60 point drop to 1192, Tuesday continued lower to 1169 to start with but finished strongly at 1213, then Wednesday another 57 points down to 1156 and clearly the market was spooked, Thursday saw one of the biggest turnarounds on record with the market moving 70 points higher in the afternoon to close at 1206 and finally Friday, the horse bolted out of the gates gapping up and closing almost another 50 points higher to 1255.

We now have a downward trend channel with approximately a 150-point range from 1275 - 1125. Given the exuberance today, if we can get above 1275 next week, that'll be a sign of changing sentiment in the short term. Although the most likely outcome for next week is that we consolidate towards the 1200 level before advancing again.

For next week, support is 1170 - 1130 and resistance is 1260 - 1280.

One thing's clear, the type of market action we've seen this week cannot be reasonably foreseen. I mentioned during the week that statistically these are very rare occurrences, in fact the likelihood of what we saw this week was less that 5%. When we enter a position, we work on a risk factor of about 10% (i.e. that there is a 10% chance of the strike we enter to be hit during the month).

It's never easy taking a loss but we do what needs to be done and move on.

Finally, I'll reassess if we are to enter a position for Monday and issue an email on Sunday evening.

The quote this week is from Arnold Schwarzenegger, "Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength."

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