What the Heck Was I Thinking?

Boy I make a lot of bad picks! That’s my determination on reviewing our open positions… Sure we made 117% on the closed positions this month but, doing the second half of my weekly wrap-up (if I don’t get staff soon I cannot keep this up!) I have come to the conclusion that I’m not so great. Our open trades have 22 losers and 8 neutral trades against 50 winners for a 27% average return over an average of 8 days. If we add that with the closed positions, it brings our monthly average down to just about 70% and only 60% if we throw out that curve crushing 1,975% Google profit. So the performance is really only 50% better than our average month, which explains how we can do this two weeks in a row. I usually don’t separate closed and open positions and now it will be very interesting to see if the market is indeed turning and getting choppier. Not to make excuses but we do have 5 halves of splits in the losers, but to not count them means I shouldn’t count the winning side of the trade! We’re going to need a more complex model at some point because it doesn’t weight the fact that we lose 76% (our worst performer of the month) on the GOOG Oct $340 put which was taken as protection for $3.50 against the 9/11 Oct 420s that closed out at $13 for a 341% profit. My feelings about this, from a statistical standpoint, is that one way or another, it’s still a loser. I think people delude themselves too much by making excuses for losers and I don’t want to do that here so I think we do need to trade the wrong side of splits as a bad trade. You’ll notice that I took a few splits in the past week, this reflects my growing uncertainty with the market direction. My overriding concern is that the fantastic (and continuing today) fall in oil will affect the broader markets once it becomes apparent that the funds who hold your money are holding far less of it than you may think. Also, oil majors have not yet truly capitulated and the sector makes up close to 15% of the S&P’s total cap. Anyway – so the bad open trades include 3 Google puts (which we need to have so we don’t become mini-Amaranths with way too much on one side of a position), 7 leaps, which I am not worried about and 2 CAT calls which I really have to give up on at some point! Since I always talk about picking up some of the laggards I think this is a good time to take a look at these pokey picks and see if I can remember what the heck I was thinking at the time. ADM Jan $35 puts at $1.20 (down 8%) and Mar $40 calls at $3.10 (down 3%) are a split that is still in play. I think one way or the other we will get a big earnings move but the ethanol money, for good or bad, is here to stay despite Cramer’s very negative take on the sector. BP Oct $60 puts at .20 (down 33%) is one I still like as pumping 200,000 more barrels of oil a day is not going to offset a 25% drop in the other 3M barrels they sell. I’m giving up at .15. CAT Oct $70 at .20 (down 60%) and the Nov $70s at .60 (down 33%). Had I at least hedged on Tom’s advice this would have been one of the month’s biggest winners! This is a great example of the market remaining irrational longer than our position can remain solvent… Dow Oct $40s at .30 (down 15%). I don’t get this one – oil and gas are 1/3 of their expenses. I may go after these again for earnings. FRK Mar $45s at $1.85 (down 24%). This was a contra play to my closed and horrible TOL puts but somehow TOL went up and FRK went down – oh what a world, what a world… Stop the pain at $1.50. GCI Jan $60s for .75 (down 12%) could have been a winner but took a nasty reverse on day 2 but I’m going to give this and the Jan $65s, still at .20 another week, as long as we hold $54. GENZ Oct $70s are a disaster at .65 (down 46%) – Boo! But the Oct $65 puts are a huge winner at $1.75 (up 75%) – Yay! This is the joy of spreads! Earnings are 10/12 and a purist would take a tight stop on the put at $1.60 to cash out on any upswing (this would involve a trailing .10 stop on a rising call). The problem with cashing either of these out is it will probably be more expensive to buy in closer to earnings so my play (and remember I just made 22 bad picks!) is to double up on the calls to a 2/10 position and hoping for a Google-like breakout post-earnings. Three Google puts are all discussed in the Google update so let’s not go there! INTC Oct $20s at .30 (down 33%). Please sir, may I have some more? JNJ Oct $65s at .65 (down 24%). BSX looks terminal and JNJ was in the same room so investors are avoiding JNJ like the plague. This is a very risky double down pre earnings but I will buy another round at .55 (2/10 in). MS is my Moby of the month (the whale, not the singer) with the Oct $65s at .90 (down 38%) I originally bought for $1.65 already doubled down to a $1.45 average so no more there! We were in and out of the same trade last week for a great profit from .65 to $1.15 but I’m not counting that against this loss as it was not my intent to DCA the position for a long hold. A strong market will kill this trade and I guess I have to give up at $72.25 (kick, kick, kick). NOK – we buy, we sell, we buy, we sell… This is the batch I am holding into earnings. The $20s are an all or nothing bet at .60 (down 14%) as there will be not time for recovery after the 19th. We also made the same call on the 12th, which is even at .60 and again on the 18th, which is up 50% from .40 so you could call it a blended 0% on the three calls that are still open. You can tell I have a lot of faith in this one because we have made 5 buys on dips, only sold 2 and my most recent buy – .70 – was at a level we’ve been selling for in the past. PEG is the other half of my Moby Dick saga. Their merger with EXC fell apart and I expected immediate damage but there is a whole delusional thing going on in the sector, which got a boost from the merger, which isn’t happening. PEG execs are pumping like crazy but the fact is that they got shot down by regulators and it is very unlikely another buyer wants to waste 18 months jumping through hoops for nothing, especially at this premium. Apparently, either my logic or timing is wrong as the $60 puts fall to $1.10 (down 31%). SHFL is one I have faith in, I thought they were done going down but they weren’t. We still have time with the Nov $30s at .50 (down 23%) but I’m not upping the bet at this point. SNY Dec $50s are just laying there at .40 (down a nickel) as we have zigzagged in the two weeks we have owned it. TARO is a very risky pharma play with the Apr $12.50s at $2.40 but, like I said when I picked it, the stock was at $34 last year! XOM has a spread that is waiting to be resolved with the $67.50s at .65 (down .10) and the $62.50 puts at .70 (down .15), which is still a good play with a whole month left on the spread (although below $60 a barrel, I’m very happy with my naked $65 puts!). YHOO is a double loser so far but should bounce with the markets. The Oct $27.50s are a worry at .50 (down a dime) while the Jan ’08 $25s are $5.20 (down 26%) against the Jan $32.50s we sold for $1.35 (now .45 and being taken out). So far so good on the leaps as we expected a sell-off, just not that much of a sell-off! So there it is, my losers! I guess, in perspective, it’s not so bad out of 184 picks for the month but we also had 16 losers that are already closed. Like I said, it’s easy to try to sweep these things under the table but I think we learn more from our mistakes – we need to avoid getting complacent or, worse, overconfident as we move forward in what has been, on the whole, a spectacular month.