Strategery is a word a Bush imitator used on Saturday Night Live and I couldn't find a clip of that but I came across this interesting clip about the war instead – the voice changes are hysterical! This one is good too.
(I'd love to graph US productivity against YouTube usage – I'll bet it's destroying society!)
We all need good strategies so let's talk about ours as there's no point in setting up a new virtual portfolio unless we know why I'm doing it so I'm going to do a quick review of the state of the virtual portfolio as I realize it is kind of hard to follow closely in the day to day madness we've been having lately. Usually it's not this crazy but lately it certainly has been unusually crazy….
Remember Buffett's Rule # 1 – Don't lose money! It may seem obvious but he finds it necessary to make Rule # 2 – Don't Forget Rule #1 so we can imagine that even Warren must have had troubles with this at some point in his career. If you think you have a better first and second rule of investing, come talk to me as soon as you make your first $30Bn. The only other guy in the World with more money than Buffett is Bill Gates and he spends all his free time hanging out and learning from the man…
So what did I do with $1M in a new virtual portfolio? I followed Rule #1!
When we start a new virtual portfolio we need to layer in our selections, making some evenly balanced picks, trying a few strategies until we get a feel for what works. "What?" you may say, "Don't you have an all-purpose winning strategy that doubles your money every 30 days?" Sadly, I do not.
Anyone who tells you that they have one strategy that works in all market conditions is pretty much an idiot.
Market conditions change constantly and what works one week may be a terrible idea the next. When I set up a new virtual portfolio it's like a spider setting up a web. I put a thread here and a thread there and I sit myself down in the middle and wait to see what I will catch. Like a spider, symmetry is the key. Too much one way or the other and the one thing you may catch can cause the whole web to fall apart on you!
We need to construct a virtual portfolio that will hold up under all market conditions but with spots that will outperform that we can nurture when the market turns a certain way.
The timing could have been better. I started yesterday with a lot of fear as we had no idea when this selling would stop but I picked up some of my favorites to get started:
| Symbol | Description | Amount | Offer | Current |
| .XOMOX | XOM MAR 72.5 Put | 1 | Limit 0.85 | Cancelled |
| .DAWPM | DIA APR 117 Put | 100 | Limit 1.65 | $1.60 |
| .NQGD | INTC JUL 20 Call | 50 | Limit 1.10 | $1.08 |
| .GPYCB | GS MAR 210 Call | 50 | Limit 1.25 | $1.25 |
| .WBOAR | BA JAN 2008 90 Call | 20 | Limit 8.10 | $8.00 |
| .VLOPK | VLO APR 55 Put | 50 | Limit 1.80 | Cancelled |
| .AXPDL | AXP APR 60 Call | 50 | Limit 0.45 | $0.45 |
| .VKAR | SHLD JAN 2009 190 Call | 10 | Limit 34.00 | $29.60 |
| .LTAAU | CCJ JAN 2008 37.5 Call | 20 | Limit 5.60 | $5.60 |
| .BQVGG | BEAV JUL 35 Call | 20 | Limit 0.90 | $0.90 |
| .HRBGX | HRB JUL 22.5 Call | 12 | Limit 0.95 | $0.95 |
| .PEPDM | PEP APR 65 Call | 50 | Limit 0.45 | $0.45 |
| .STZDD | STZ APR 20 Call | 50 | Limit 0.45 | $0.45 |
| .XOMPU | XOM APR 67.5 Put | 50 | Limit 1.25 | $1.25 |
| DNA | JAN 2008 85 CALL / APR 80 CALL | 20 / 10 | Market | |
| .YZTAQ | DNA JAN 2008 85 Call | 20 | $7.50 | |
| .DWNDP | DNA APR 80 Call | -10 | $3.80 | |
| .LHTAE | PGR JAN 2008 25 Call | 50 | Limit 1.20 | $1.20 |
| .WXOMX | XOM JAN 2008 72.5 Put | 100 | Limit 6.60 | $6.60 |
| .DAWOP | DIA MAR 120 Put | -100 | Limit 1.10 | $1.10 |
| SIRI | SIRIUS SATELLITE | 1000 | Limit 3.40 | $3.40 |
| SIRI | SIRIUS SATELLITE | 9900 | Limit 3.40 | $3.40 |
| .BQQCR | DIA MAR 122 Call | 50 | Limit 1.60 | $1.60 |
| NEW | NEW CENTURY FINANCIAL CORP | 1000 | Limit 5.30 | $5.24 |
| .VHVAD | NEW JAN 2009 20 Call | 30 | Limit 0.65 | Cancelled |
| .MGMDN | MGM APR 70 Call | 10 | Limit 2.30 | $2.30 |
| .ATIDT | ATI APR 100 Call | 20 | Limit 5.00 | $5.00 |
| .GOPFG | GOOG JUN 470 Call | 20 | Limit 20.00 | $19.50 |
| .IQQCY | IWM MAR 77 Call | 20 | Limit 1.65 | $1.59 |
| .RQQCJ | SPY MAR 140 Call | 20 | Limit 1.70 | $1.70 |
| APKT | ACME PACKET INC | 200 | Limit 15.15 | Open |
| .XBADZ | EBAY APR 32.5 Call | 20 | Limit 1.10 | Cancelled |
| .ATIDT | ATI APR 100 Call | 10 | Limit 4.00 | |
| .GGGY | GG JUL 27.5 Call | 10 | Limit 1.75 | Open |
| .WUHAK | UNH JAN 2008 55 Call | 10 | Limit 5.00 | Open |
| .IHHDK | ICE APR 155 Call | 10 | Limit 5.50 | Open |
| .STXIY | STX SEP 27.5 Call | 20 | Limit 1.60 | Open |
| .YOFAT | FXI JAN 2008 100 Call | 10 | Limit 10.00 | $10.00 |
| .GOPCJ | GOOG MAR 450 Call | -15 | Limit 8.00 | $8.00 |
| .GOPCJ | GOOG MAR 450 Call | 15 | Market | $12.40 |
The allocation of this virtual portfolio, since it is a combination of short and long-term plays is about 60/40 Long-Tem/Short Term (because we are being aggressive in the Challenge). That means I have $600K to put towards long-term positions and $400K to put towards short-term positions. I am also not as covered as I like to be but I keep Rule #1 in mind at all times!
There are several other rules (and all this is under the strategy section on the member site):
- No more than 5% on any single position
- No more than 20% in one sector
- No more than 70% in one direction
Since my max intended size on any position is 5% that means a full short position is $20,000 and a full long-term position is $30,000. I already messed up by buying 100 XOM Jan $72.50 puts for $5.90 ($59K), that will be my one indulgence and I'm already being punished for it!
Monday (a down day) I tried to buy current XOM $72.50 puts and missed it by a nickel.
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I took my XOM puts first to protect my calls
- If the whole global market is collapsing, oil will suffer
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Calls on AXP, BEAV, HRB, GS, INTC, PEP, PGR, STZ
- financial, aircraft, service, broker, tech, consumer, insurance, consumer
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Leaps on BA, CCJ, SHLD
- an old reliable favorite, a commodity that I like, another reliable favorite
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Stock in SIRI
- see today's comments for why I love them long time.
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I took a spread on:
- DIA Apr $117/Mar $120 puts
- DNA Jan $85s/Apr $80s
The DIA spread is an interesting form of protection as I got a little bullish at the end of the day and regretted my April puts. Rather than take them off the table I sold the Mar $120s (3/16) to cover myself, leaving me room to roll to the 3/31s in an emergency but I didn't think 12,0000 was going to fall all that easily.
My idea for the first day was not to lose money. Even so I went down $14,000 as I purchased $200,000 worth of options and the virtual portfolio includes fees and immediately penalizes you by only selling to you at the ask and only paying you the bid. I just found this out today and this puts a massive amount of additional pressure on me but I figure if I can win under those conditions, then I REALLY will be putting together a good virtual portfolio!
Today was a very tricky day and I followed my own advice not to chase things. If it's a REAL rally, we've got 600 more points of catch-up ahead of us before we get back to the highs we were at just 10 sessions ago. So far we've had an 800-point drop and a 160-point bounce – does that ring any bells?
We wanted to buy a ton of things today but the market gapped up and I ended up buying very little:
- I took no puts but sold GOOG $450s short (disaster, already out).
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Calls on ATI, DIA (at 10:48 on pullback), GOOG, IWM, MGM, SPY
- industrial metal, large caps, internet, small caps, gaming, mid caps
-
Leaps on FXI
- foreign markets (but a proven earner)
- Stock in NEW (gamble).
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I didn't understand I would only fill on the Ask and I missed out on:
- APKT (great suggestion) offered $15.15, now $15.84
- ATI Apr $100s (round 2) offered $4 – never came down
- EBAY Apr $32.50s – offered $1.10, now $1.30
- GG Jul $27.50s – offered $1.75, now $2
- ICE Apr $155s – offered $5.50, now $6.70
- STX Sept $27.50s – offered $1.60, now $1.70
- UNH Jan $55s – offered $5, now $5.60
Hard to say if I would have paid another dime if I knew about the bid/ask rule – probably yes for the July+ and no for the closer calls.
The ATI is an important strategy point. I only bought 20 contracts ($10,000) because it was higher than I intended ($4) but the market was booming so I took a chance. (speaking of BOOM, let's watch that one tomorrow) I was hoping to average into $4.50 but since it got away from me that is likely to be all the position I will take if it keeps going up.
On day one I was able to go crazy with the call buying as long as I had my trusty $59K XOM puts protecting me. That's still far shy of 30% as the DIAs are already hedged but, like I said, I stand ready to yank the DIA $120s I sold to add another $10K of pure downside protection should I get nervous. Of course it's not all math, I felt like we hit a bottom so I ran around grabbing bargains, taking a chance and leaving myself overexposed on the downside, a strategy that paid off today.
Today we did OK and the virtual portfolio finished off down $12,000 net of all fees (and all the values are based on the bid price!). Since this rule puts me 10% behind every time I buy, I will have to avoid cheap thrill stocks so I will still call them in the intraday but I won't be adding them to this virtual portfolio.
So with $300K deployed we are down $12,000 net of all fees after 2 days with 700K left to spend. My web is spun but I need some put plays and, now that the market ran up a bit, I think we may see some overexcited opportunities tomorrow (GM anyone?). Like a spider, I set myself up in the middle and wait for the vibrations – when I see an area turning green, I think of what I can add to it and when I see something going red on me, I consider cutting the thread entirely and think about which other connected plays may be affected.
We need to learn to think of our virtual portfolio as a whole, not just a bunch of individual stocks. Even though I picked the wrong time to sell a bunch of calls against the LTP yesterday, it still gained over 4% today but I'll be doing a full rundown of that over the weekend.
It's very painful to build a new virtual portfolio and they don't pay off right away so we must learn patience. I always assign new members to watch "The Man Who Planted Trees" as I think it's a great summation of an investment (and lifestyle) strategy I aspire to, so please do if you haven't already. Trust me, the more you feel you don't have time for this, the more you need to take 30 minutes to watch it!
All the best,
– Phil
