We need this market to do something.
Options plays require some volatility and going up 100, down 100, up 50 down 50 is not the kind of volatility we want! It would be fine if the market stayed in the tight little range it's gotten itself into as we can reposition and move to more of a stock picker's market (which I actually prefer as fundamentals tend to win out) but it's a very painful transition for us to shift our virtual portfolio to begin tracking micro, rather than macro trends.
The week went out with a whimper but, on the whole, we are glad it didn't end with a bang as we were all ready for a big one (and not the cool, creation of the universe kind of Big Bang, more like the awful, horrible, everything blows up in your face kind!). Unfortunately, we were so ready for it that we took a lot of new put positions that, so far, are not doing well.
We closed out just 22 positions this week with an average return of "just" 44% (we are so spoiled!) over 16 average days held. I called for our third position reduction of the month on Thursday so many of the remaining spots are placeholders (very small positions) but my attempts to fully stop out were thwarted by some very lackluster movements in the market.
We had 8 losers (AXP, CHKP, GE, GOOG, HPQ, JOSB, SU and VLO) but no wipeouts (those are all still open!) and 14 winners, including doubles from AA, CY, LVS, T and YHOO.
Our only successful puts were LVS $105 puts (up 114%) and GOOG $470 puts (up 13%) while the rest were calls taken off the table. Since I was stopping out on pullbacks though, we may have a more interesting week next week as usually things are more balanced.
We still have 68 open positions and they are almost evenly divided between puts and calls, insuring that we will neither make nor lose too much UNLESS the market does nothing – in which case we lose on both sides! This is a very real danger we need to face up to next week and it will be time to either fold 'em or roll them so get ready for a lot of excitement before we close out the month!
Our open virtual portfolio has a sad 23% average gain on a very large 23 average days held, which is a sure sign of trouble as it means we haven't been able to get out of positions and time is eating into our premiums. This is why the overriding adage: "When in doubt, sell half" is so critical – we need to have money on the side to make new decisions next week and I am going to be spending the weekend making a naughty and nice list for the prospects of each one and we will make our final cuts by Wednesday. Please review the updated virtual portfolio in the member's section this weekend!
What is killing the open virtual portfolio is, very simply, the lack of doubles. We can lose 20% on 5 positions as long as we have a double to make up for it but the market has gotten stuck in a pretty tight range and at this point our diversification is working against us as we have no real breakouts to hang our hat on. Also, it's late in our buying cycle and we are left with all the losers of the month after closing out 114 other positions with an average gain of 92% so far. Adding these dogs into the mix (if we closed them all out as is) would drag our month down into the 60% range, which is still a little above an average month, but coming down from an average gain of 84% to 42% to 23% over the past 3 weeks is very painful and, of course, we still have our remaining dogs to contend with!
Of course, this is why I said, back in the month's 2nd wrap-up: "Our energy plays kicked in with a vengeance and we closed 30 positions with and average gain of 121% – that’s a pretty good week! So good in fact, that our best bet would be to pack it in right now and go on vacation since last week was 107% and we are now heading into the most dangerous part of the year – EARNINGS SEASON!"
Next time wer're up 121%, please remind me what our best bet is!
If it is indeed time for the pullback we've been long expecting, we need to gear down our return expectations and start following our trading rules very closely. It's fun to gamble when you have the possibility of a big win but, if the market is going to stay this choppy, too many small bets will fall by the wayside to make it worthwhile.
In a choppy market like this, we take all the little profits we can get.
It's really cool to swing for the fences on every pitch and sometimes you knock one out of the park but what people never remember about Babe Ruth is he batted .342 for his entire career – that's what made him great, the home runs were a bonus! Another thing that made Ruth great was that he walked 2,000 times out of 8,000 at bats. I don't end up taking more than a token position in about a quarter of the stocks I pick (much more in a worse market) as noted in our "strategy" section. If you wait, you'll get your pitch but when you swing at two bad pitches in a row, you're already in trouble no matter what the next one is.
This is why, in times like this, we need to lean more on our long-term virtual portfolios (which should be about 75% of your weighting anyway) rather than keep swinging at all the wild pitches the market keeps throwing us!
The long-term plays allow us to go from the buyer to seller side of the equation, cutting down on our risk while enabling us to ride out the market while it picks a direction. Rather than buying AAPL Mar $90s and hoping Apple makes a big move so we can get our $2.50 back, we can buy the AAPL Jan '08 $90s for $12.50, and sell someone else the March $90s for $2.50. This lowers our capital at risk down to $10, the cost of the Jan '08 $95s ($10.50 actually) so we should have about $5 worth of downside protection between now and March.
Meanwhile, we wait patiently and Apple can rise all the way to $90 (6%) over the next 45 days and we would owe our caller nothing. If Apple goes all the way to $95, we would have to give our caller $5 to take him out of the $90 calls but we would be in far better position on our leaps. The current cost of the Jan '08 $80s ($10 more in the money) is $17.30.
While we would have some time deterioration, the gist of it is that we would pick up about 1/2 of the $10 move in our position. If we cancelled the postion out right there, we would net $2.50 on $10 of capital at risk (25%) in 45 days. This is certainly not as sexy as the returns we've been getting on our short-term plays but it is a far safer use of our cash in a choppy market.
While there will certainly still be a lot of short-term opportunities, we will not force them and you need to be satisfied with aiming for a much more conservative return until the market picks up a sustainable direction, either good or bad, we don't care which as long as it goes somewhere!
This is what the big boys do to you (and yes to me, that's how I learned!) but there's nothing in this wonderful democracy of ours that stops you from doing it to someone else. Just remember – if we didn't pay our dues by losing and learning, how would we expect others to do it for us as we mature as traders? Just like poker, we learn by being the mark and it's an expensive process! Learn to lose, learn to give up on losing positions, learn that you are not as smart as you thought you were (check out "The Microwave Oven Theory" under Trading Policies).
Our current long-term virtual portfolio has 35 open positions that are up an average of 49% after 46 average days open. My dogged optimism cost me a lot of money as we did not sell calls against 25 of those position as they were "way ahead" and I thought we could afford to wait for a better price. While we haven't lost anything from last week (as they were an excellent group of picks – pat, pat) we should have collected another 10% against our remaining open positions and we would have had a much better sense of humor about this week,s drop.
My mistake was that we had been doing so well, I played some of the long-term positions for straight gains, and that is not why we bought them! Those of you who have a sports car and a family car know what I mean, you don't take the sports car on a ski trip and you don't take the 4 wheeler on the 200-mile beach run – you buy them for different reasons and you need to use them for those reasons!
Of course one of these babies may be the exception:
This is one of my goals – I really want one of these things! It's totally stupid and costs more than getting a boat and getting a car and I can't even imagine what kind of underbody rust issues you get but who cares – if they can get it to fly too you've got Chitty Chitty Bang Bang!
Anyway, so where was I? Oh yes, moderation! So let's not go swinging for the fences on every pitch and let's not "try to catch up." It is not the fault of your new position that you lost money on your old position and asking it to shoulder the burden of double returns is a sure way to break it…
If you are behind, take a fresh start and try to get even at a sensible pace, if you are ahead, let's stay ahead, the market will turn and make a bulk move at some point and the best thing we can do is make sure we have cash at the ready to take advantage of it. It is safest to play stocks when they make a clear top or a clear bottom. When the whole market is gyrating on you, picking a stock is like trying to guess the position of an asteroid that's circling a planet that's orbiting a sun that's moving erratically (or even worse, about to go nova and collapse into a black hole (market meltdown), sucking all the planets into it's white hot molten core!
Try not to get burned – let's be careful out there!
