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How to Play the Coming Downturn

By Dan Dicker | Fri, 16 August 2013 23:03 | 0

The latest market downturn has been brewing, in my mind, for the last two months.  And we’ve been a bit too sanguine about the prospect, considering that the gains in the indexes have been so strong, but the time has come to make some sweeping changes to the portfolio, both in energy and outside of it, to protect those gains going into the 3rd and 4th quarters.  

There’s still a lot to protect and all the risk seems to me to remain on the downside.  But knowing my penchant for dividend and distribution producing stocks like MLP’s, there’s a tricky way to do this besides throwing in the towel, merely selling shares and giving up on stocks.  

One of the biggest sins of trading is in not booking profits and watching them melt away – and in the smaller cap E+P’s and newly IPO’ed MLP’s that I’ve been concentrating on for the last several months, there’s quite a bit of profit to book. The way I’ve been doing it for the past weeks is with slightly in-the-money or even slightly out-of the money calls, selling them with expirations from October 2013 to January of 2014.  

Here’s my thinking:  With most of the likely profits for 2013 already represented in our shares, we want the market to pay us for the privilege of owning our shares a bit lower.  That’s what a covered call strategy basically represents; earning a premium for the probability of having our…

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