Well, we got the new year off with a bang!
Despite a very tough 3rd and 4th week of the month and a very tough purge of many oil and builder plays that just were not working, we managed to finish the month with a 65% average gain on 144 positions closed on 18 average days held. While this was way down from the first two weeks of the month where we averaged 100%, it's still a fairly respectable total!
Always note that that figure is based on the adjusted capital at risk at the time of closing and is not a virtual portfolio increase. And there were indeed many adjustments made this month, we doubled down on 37 positions, obviously because they were in trouble, and the strategy worked out on half of them. 16 times, we actually lost more money after the double (which reduces the average basis by 25%) but, of the 21 times that upping our bets improved our positions, 10 were doubles or better and another 6 turned into greater than 50% gains.
Our worst plays were generally oil and builder plays, both of which whipsawed us right after an entry, meaning we had (or should have had) very small positions, which we chose to add to rather than take our 20% stops and go home. As I said during the week, fundamentals were thrown out the window in both of those sectors and we should have been riding the waves instead of trying to fight the tide.
We picked the wrong day to enter TSO $65 puts at $1.33 (1/16) as it went up from there but we took a second round anyway (the cheapest kind of DD we have) at $1.10 but it went up and up on us until we had to finally be glad to get a nickel back (down 96%) after a huge 1/31 earnings spike.
MOT killed us on our first attempt to enter the Jan '07 $20s for $1.15 (12/14) but I still believed in it enough to take a second round for $1 but we gave up on 1/18 at .05 (down 95%) as we had called a bottom the week before and decided to move to leaps. Thank goodness because the much larger Jan '09 $17.50s (1/10) already picked up $1.20 (up 30%) but we need a tight stop here as I'm not willing to go net negative on the trade.
DHI (1/4) and KBH (1/4) puts were also wipeouts and the thing our top 4 losers all have in common is we didn't wait for them to go down 50%, we simply violated our 20% rule and bought more… Rules are good, but only if we follow them!
HES $45 puts (1/11) weren't even funny as they went from our $1.25 entry to .65 so fast that adding another round on the 16th seemed like a no-brainer. On the 19th it was .40 and on the 22nd it was .20 so, although we got a nickel back in the end, we ended up putting $3.50 into a position we should have stopped out at $1.00 with a .25 loss! This is probably the best example of the month of how chasing can kill you:
Fortunately they don't all go bad:
DOW Mar $45s (11/20) for .50 were really hitting the skids to the point where we day traded an additional position to bail them out. After two doubles off a full position and a .25 credit from the $40s we played as a momentum trade to fund it, we had a ton of shares with a .03 basis that were sold at .30 for a 900% gain off the adjusted basis.
We entered our XLE Jan $58 puts (11/29) for $1.30, totally the wrong day as it zoomed up on us. Still, when the puts dipped .20 they seemed cheap for a DD and .20 seemed cheap again but we took a .15 profit from the last double and reduced the position by half, going from way too much to just a lot with a remaining basis of just .58. It was all good by 1/5 when we got stopped out at $2.80 for a 383% gain off the remaining basis.
RDS.A Jan '07 $70 puts for $1.1 (12/13) were also worth sticking with as we built up a full position but we could smell the crash coming over at the NYMEX so we doubled up on the 18th at $1, took half off for $1.35 and applied the .25 profit to the remainder and doubled back up again on the 20th at .65. bringing the total basis down to .65 which we were then able to ride out until we finally go our break and we got out on 1/9 while the getting was good at $3.90 for a 359% gain off the average basis.
Sometimes they work, sometimes they don't but, as long as you manage your portions, the beauty of the market is that you can't lose more than 100% of a position but there is no limit to how much you can gain!
As a group, the average gain of the positions we doubled down or made other adjustments to (nearly half our plays for this choppy month) was 68% on 21 average days held vs. 56% on 14 average days held for the positions we left alone. Whether or not that extra 8% is worth committing the extra time and capital to is a matter of individual preference but, as a fundamentalist, I tend to press a position if it moves against me as I always hope the markets will see things my way tomorrow.
Primarily, I try to pick winners. We had 105 of them in January and only 39 losers – the rest of the statistics usually take care of themselves if you can get that first part right!
Our biggest losses and biggest gains of the month all came from the energy sector and you certainly can't count on a crash like that all the time (as we were made painfully aware of the past two weeks!) but, as I said back on 1/18 when we entered this very light round of oil positions: "Valero rule says get out! There will most certainly be pain if you hold so only do so if you like it! We are not holding any oil positions that we aren’t ready to either double down on at half or roll into a longer contract."
On that same day Zman warned us: "Watch out for a potentially large bounce off $50.00.!!! If we don’t knife through it the bounce could be very painful so watch your puts." While we were geniuses in our timing calling the bottom, we certainly were not smart enough to turn around and buy the calls (actually that was me, Zman DID buy some calls!). We'll all find out next week whether the first two weeks of this month were a mild correction in the big oil rally or if the last two weeks of the month were a mild correction in the big oil collapse.
Our long-term virtual portfolio still has a relatively bullish posture and the fact that we held off selling calls on all but 7 of the 31 long calls allowed the virtual portfolio to run back up to a 56% average gain on 50 average days held.
We had a nice recovery on our short-term folder as we pared off some of the losers and left ourselves with 56 open positions that have been open for an average of 25 days (still too long). The remaining positions are still evenly split between puts and calls with just 12 Februarys remaining. The virtual portfolio will be up on the members site over the weekend.
We still have 6 boring old regular stock positions that are now up 15% on 77 average days held. It would have been much better but to say my TSO puts went the wrong way would be quite an understatement!
So that's it for January, it's always good to get through the first month without losing too much ground – often the first quarter's earnings set the market tone for the year, for good or bad. Now that we have the short-term virtual portfolio down to a more manageable size (with a lot more length to it now) we will have the opportunity to make a lot of fun earnings plays as the stragglers start reporting in!
Here's to a short but happy February!
– Phil
