For the Options Traders in the Audience

As part of my personal defense of free market principles (okay, it's really to make a little money), I sell premium on listed stock options for extra monthly income. I won't get into a long tutorial on options selling, but if you want to know more, here is an elementary description of the strategy.

Yes, there is risk involved, but I have been trading futures, stocks and options for over twenty years, and have paid the "tuition" required to make this a moderately profitable and enjoyable avocation, rather than a source of added stress.

Recently, I've started looking at options on Exchange Traded Funds (ETFs) in addition to options on stocks. I have to admit that I got out of my comfort zone at the outset by selling a naked out-of-the-money call at a strike price of 100 on an ETF that tracks the value of long term bonds (NYSE:TLT). Even though that option is over 5 points out-of-the-money with 3 weeks to go until expiration, bonds are in a short-term uptrend and have moved against me this week. Risk is infinite with naked calls, so I closed this position today at a gross profit of $40 (net $34.10 before taxes) so that I could sleep soundly over the weekend. You're right - that's a whole lot of risk for 34 bucks.

But I still believe that the profligate spending of the Obama Administration will drive interest rates up and bond prices down (you knew I had to get a shot at them somewhere here). How does the small investor profit from this, beyond keeping one's money in a mattress and waiting for CD rates to go up?

It turns out that there is a way. The clever folks at ProShares have introduced a fund that mirrors the TLT and also trades on the NYSE. It is called the TBT, and it is short the long-term bond market -- in other words, it goes up when bonds go down. Since I predict that bonds have further to fall, I believe that the both the TBT and interest rates are going up

So -- for far less risk, I was able to take a position consistent with my view of what Obama's policies will do to the economy by selling a cash-secured put on the TBT at a strike price of 46 (again, about 5 points out of the money), and put 30 more bucks in my pocket. The option expires on the 3rd Friday in July. I'll let you know how it goes.

Free Markets - Key to Our Standard of Living

A friend forwarded this article from the Atlantic the other day. My friend is a brilliant defense intellectual and a defender of the West, but seemed to be easily swayed by the all-too-easy argument that Wall Street "oligarchs" are to blame for the current economic mess, and that we should break up the oligopolies (banks) in order to solve the problem.

The danger here is that very smart people who do not have the time to think seriously about the importance of free markets to our standard of living are susceptible to anti-market arguments in times of crisis.

There is always increasing systemic risk and a buildup of toxicity over time in a free market system as transactions become more complex in support of a rising standard of living. And it always flushes itself out. Breaking up the largest banks would not change that (in the U.S., this has been tried).

Moreover, I think that it is politically dangerous to blame any single 'class' for the inevitable corrections in market systems. Government may be able to moderate the effects of these corrections, but it is not, in my view, smart enough to prevent them.

Besides, there are other folks besides investment bankers who are powerful, closely linked to government, make significant political contributions, and who arguably deserve part of the blame for this crisis (e.g., the unions and trial lawyers). Why does Johnson not recommend that *these* "old elites" be broken up? Perhaps because he is a friend of left-liberal Bill Moyers (see this softball interview with Johnson on Bill Moyers' Journal: http://www.pbs.org/moyers/journal/02132009/profile.html )

But, if we must have a fall guy, there is another group of suspects. I do not think that the oil price spike last summer was a coincidence. I think that it was an act of intentional economic sabotage committed principally by the Russians, Iranians and Venezuelans in order to influence the election and bring us to heel (more subtle than the oil embargoes of 1973 and 1980, but effective, nonetheless). Yes, our adversaries paid an economic price when oil demand and prices plummeted at the start of the recession, but, given the more accomodating foreign policy of the Obama Administration, it was a pretty good investment.

That said, this time, oil prices rose (or were driven higher) at precisely the wrong time for the West -- at exactly the 'tipping point' -- when enough toxicity had accumulated in the system to require readjustment.

Here's the bottom line for me -- while I was checking CNBC to see how my positions were doing yesterday morning, I heard Kevin Ferry of Cronus Futures Management say something like (paraphrasing Jack Nicholson in "A Few Good Men"):

"I have neither the time nor the inclination to explain myself to someone who rises and sleeps under the blanket of the very economic protection that I provide, then questions the manner in which I provide it. I would rather they just said thank you, and went on their way, Otherwise, I suggest they come down here [to the floor of the options exchange], open an account and try their luck."

Here's the link, the quote is a little over 5 minutes in:

http://www.cnbc.com/id/15840232?video=1079589726&play=1

Administration Should Remember - "First, Do No Harm"

The most frightening part of the current crisis facing the economies of the West is what it means for our children. The measure of success for any civilization is whether it can leave the succeeding generation more prosperous and secure. By that measure, we are failing.

These unpleasant thoughts occur to me as I consider the prospects for my own six children, all smart and hardworking, ranging in age from 3 to 28 (five over the age of 18), and with an assortment of talents, but *none* of them have jobs with retirement plans.

You don't have to accept my word that they are talented - one has an engineering degree from a first-rate school, but is underemployed and is finding that getting a flying slot at Air Force Officer Training School is harder today than getting into Harvard.  Another is graduating from a top-ranked public university and headed for a top-ranked graduate program in Public Health this fall.  Most of the rest are doing well at university, but their prospects upon graduation seem grim.

In the meantime, our new President is proposing to increase the tax on my capital gains from 15% to 40% and to reduce my ability to pass my estate on to my children. Not the best recipe for building intergenerational wealth. His bloated budget and 'stimulus' bill also insure that my children will bear a massive tax burden.

America (and the rest of the Western, capitalist world) - should be outraged - not only at what this new Administration is doing to further undermine confidence in the U.S. economy during this crisis - but also at what it is doing to our childrens' futures.

Turnabout is Fair Play

I said that I wouldn't write about politics for awhile, but I can't help myself. That said, this post is designed simply to tweak the pundits --- not to endorse any particular candidate.

I don't like political labels, but I guess you can describe me as a person who believes in freedom and the rights of the individual as described in America's founding documents (e.g., "endowed by their Creator"). To my mind, that naturally makes me a national security hawk, as well as a fiscal and social conservative -- a member of Ronald Reagan's 27 year old coalition.

That is why it has disturbed me over the past few months to hear the fiscal conservatives and national security hawks in our coalition chide the social conservatives who said that they would not vote for the pro-abortion candidate (or the candidate who was pro-life, then pro-abortion, and then pro-life again).

The fiscal conservatives and national security hawks were afraid that if the social conservatives sat out the election, they would hand victory to Hillary -- the greater of the two evils.

To be fair, this argument makes some sense. Why cut off one's nose to spite one's face? As a person of faith and a social conservative myself, I can tell you that a Democrat victory would do more harm to the interests of unborn children than Giuliani ever would.

From my perspective, it looked like the acquiescence demanded by the fiscal conservatives and national security hawks was galling -- but necessary.

But an interesting thing has happened on the way to the Republican nomination -- the GOP's pro-abortion (Giuliani) and flip-flop (Romney) candidates have faltered -- and Republicans have started gravitating towards a pro-life social conservative who has a real chance to beat them in Iowa, South Carolina and Florida (Huckabee).

The reaction from the fiscal conservatives and national security hawks has been illuminating. You would think that Hillary was about to capture the GOP nomination. They are outraged over Governor Huckabee's apostasy on fiscal and national security issues! So the attacks are coming in fast and furious from the right(!) -- with hit pieces from Novak, the American Spectator, National Review (the folks who endorsed the flip-flopper), the Wall Street Journal, American Thinker and others.

At one level, this is amusing. Turnabout is fair play. But at another level, it is dangerous to the conservative coalition. As Tony Blankley put it in his terrific piece Small Tent Conservatives, "professional conservative activists and commentators certainly are busy these days trying to put up a pup (rather than a three-ring) tent for the GOP".

Folks -- if you want a Republican President in '08, you should follow the same advice that you gave to evangelicals a few months ago -- cut it out, or you will hand the White House to the Democrats.

Note: After I put this post to bed, I ran across this terrific piece by Jeffrey Bell in the Standard on why American social conservatism is here to stay as a political force. Recommended reading.

Cut down on energy consumption with a videophone

In the spirit of our new noncontroversial style, we have committed ourselves to finding new technologies and new lifestyle choices that will reduce the West's dependence on terror-sponsoring states.

The two month old post below provides one possible answer - electric or other energy efficient transportation that would allow us to maintain our mobility without consuming quite so many gallons of gas.

But there is another way. We can use new telecom technologies to reduce the number of miles we travel. Yes, email and the 'net have moved us pretty far in this direction, but there is still something missing from all of these forms of interaction - moving pictures of the people you're talking to.

For years, the seers (and even the Jetsons) have predicted that we would all communicate by videophone someday soon. but it is 2007 - 6 years after Kubrick's 2001 - and I haven't seen my family in California for a year (while the webcam on my laptop sits unused) because I haven't had time to fly out -- and my Dad and Grandmother aren't the kind of folks who download Skype. But this is not just generational. For one reason or another, neither my tech savvy brother nor my two daughters away at college have had time to set up their webcams either. It is just too hard.

This is about to change. I just bought an easy-to-install $149 videophone (my personal phone is pictured above - photo taken with my Nokia E61i mobile videophone). Added to my $23.99/month VoIP service, it gives me a normal dialtone and free unlimited domestic calls -- with the added bonus of video to similarly equipped numbers.

My sister has one on order and I will make sure that my Mom gets one too. Mom is only 2 hours away by car, but she is 69 years old and living alone - the videophone will let me check up on her in a way that the telephone cannot (with the additional benefit that she will get to 'see' her grandchildren more often).

More later - along with a report on calculated fuel savings.

Energy Independence and the Battle for the West

While the Freedom Fighter temporarily serves in the U.S. government, he will stay away from controversial issues in the Battle for the West.

That said, the need for Western self-sufficiency in energy is hardly controversial, and has been embraced by all sides of the political spectrum.

Reducing dependence on fossil fuels, particularly those from the Middle East, would clearly have positive effects on both the environment and on Western security.

For that reason, the Freedom Fighter is commuting to work, several times a week, by electric bicycle (a picture of my new ride, "Frankenbike", is attached to this post).

We are experimenting with various battery chemistries and other technologies and will try to chronicle our adventures in a way that is both interesting and encouraging for those who believe that energy security and national security are linked.