Thrift Savings Plan

In light of the market’s recent volatility, four days ago on August 20th I changed my sell limit price on the Intel Oct 20 calls from $5.90 per contract to $4.90 per contract. Instead of locking in a profit of $1.00 per contract, I decided that it would be prudent to only shoot for half that or $0.50 per contract.

Today that order executed! After all commissions, but not including Uncle Sam’s share, I netted an 11.7% return on my cash in just about a month’s time. To recap, my first buy order executed on July 20 at $4.90. As Intel drifted down in price, I placed another order for more contracts which executed on August 1 at $3.80 per contract. This lowered by cost basis to only $4.35 per contract. As the market rallied near the end of the day today, the contract traded as high as $5.10 but I stuck by my limit order of $4.90.

Not a bad way to end the week. Now I can buy that iPod I’ve been wanting… or maybe I should look for my next options trade instead. VMware is looking a little over priced these days!

In my previous post I linked to an article that identified some financial stocks worth researching for investment opportunities. I personally set my sights on Countrywide Financial (NYSE:CFC). This is one of the country’s largest mortgage lenders by volume. It didn’t make sense to me that the government or other financial institutions would let this giant fall. Look at the time Chrysler got bailed out by the government. I’m a firm believer that if you’re going to screw up, do it big time! Some one will help you out.

Tonight the Wall Street Journal is running a story about Bank of America investing $2 billion in Countrywide. Some one is helping out.

In my previous post, I mentioned how it might be a good time to step in and buy some beaten down stocks. While conducting my weekly research for investment ideas, I came across this article. It may assist you in finding good deals among the market’s recent carnage.

If you can’t, or don’t want to, invest in individual financial stocks, then look to mutual funds that specialize in the financial sector, like Fidelity Investment’s Select Banking Portfolio. A mutual fund will provide you with… diversification! This is not a recommendation for that fund; it’s only an example. Do your own research before investing.

With the recent market turmoil, it helps to remind individuals about two basic tenants of any investment plan: (1) diversification and (2) dollar-cost averaging.

If the TSPers in the group have implemented a plan similar to my allocation, then you should be diversified. Diversification helps lessen the pain of market downturns. Notice I didn’t say eliminates that pain; it only lessens it. By spreading your investment dollars across a wide range of investments (stocks, bonds, real estate, money markets) and styles (large, mid, and small cap stocks, investment grade and junk bonds, CD’s, savings accounts and cash) you automatically lessen the impact when an investment asset blows up.

The other point to keep in mind, especially for the TSPers, is dollar-cost averaging. Remember that each paycheck you’re investing a fixed amount of money into your TSP account. When prices are high, your investment dollars buy fewer shares. Now that the market is down, your investment dollars are buying more shares of each asset class than was possible only two weeks ago! Remember Kmart’s “Blue Light Specials” from years ago? That’s the market today; it’s on sale! I know it takes mental fortitude to step in and buy when everyone else is selling, but these are the times when money can be easily made.

As long as your investments are diversified and you’re contributing to your retirement accounts on a regular basis, you have nothing to fear. Even with 300-plus point swings in the Dow, it’s still nothing like October 19, 1987, Black Monday, when the Dow fell 22.6% in one day . On a percentage basis, the recent swings are quite normal. If you don’t believe me, then check out this piece of historical context by Vanguard.

Remember the basics and stick with it. And if you have some spare cash around, now may be a good time to go fishing for some value companies before the market comes to its senses.

I’ve been cautiously quiet during the market decline. However, do not confuse silence with inactivity. I’ve been busy setting entry and exit points on my Intel Oct 20 calls. After my initial order filled, I immediately placed a sell order with a limit price. However, as the week wore on the market declined. I decided to examine the next Intel support level as reported by Market Edge research and other technical sources. If my memory is correct, I placed a conditional All or Nothing, GTC order for five more Oct 20 call contracts at a limit of $3.80. The condition was to activate the trade if and only if INTC traded at or below $23.81 on any given day. That condition was met on August 1. The trade was automatically entered and filled at $3.80.

To recap, I now own 10 Intel Oct 20 calls with an average cost basis (including commissions) of $4.37 per contract. Therefore, I needed to change my exit order. It now reads as an All or Nothing, GTC with a limit of $5.40. That should give me about a $100 profit per contract (before final commissions). With 10 contracts, I’m shooting for about a $1000 profit on the trade.

As of Friday’s close, the option stood at $4.50 placing me barely in the green at about a 2.89% gain. That’s not bad given the fact that the market was down 281 points that day. However, we still have a lot of time before the expiration date in October. Anything can happen between now and then!