Weekly Wrap-Up

I love a good recovery but not so much when I'm betting against it!

While I am pleased I managed to hang onto our positive plays in the STP and we were well protected in the LTP, on the whole we could have managed with less insurance.  On the other hand, our insurance policies are still good for another month, leaving us in a pretty good position to take an aggressive stance.

A virtual portfolio is not just a couple of plays (or at least it shouldn't be) it is a living, breathing COLLECTION of strategic positions that need to adapt and change with market conditions.  As Sage said in last weekend's educational piece, it's all about risk tolerance and finding your comfort zone.

We talked about our low-risk strategies for choppy markets with WMT being our latest.  How is that one working out?  We bought the Jan '09 $55s for 3.40 (now $3.30) and the Jan '09 $45 puts for $3.30 (now $3.20) and we sold the Apr $50s for .50 (now .15) and the Apr $47.50 puts for $1.10 (now .50).  So, on the whole, we laid out $6.70 and got $1.60 back for a net outlay of $5.10 and, if we were to close it out today, we would be ahead by .95 – roughly 19% in two weeks.  Tedious but effective.

If you can't be satisfied with that rate of return making up the bulk of your trades then our strategies are not for you as this is how we balance the bulk of our long-term trading strategies, not always the same stock but in the virtual portfolio as a group.  Our SHLD play was not hedged on the put side (as I love the stock and wouldn't short it) and they had a nice (for our caller) $7 run this week.  Our Apr $180 caller stopped out at $4.50, costing us $1 but our June $180s jumped back to $11.25, a $5.25 gain for the week so we are certainly not complaining – especially as our basis on this play is just $3.15 ($2.15 plus the extra $1 we had to pay our caller) for a nice 257% gain so far.

This is how we should be playing the bulk of our option virtual portfolio, not in open positions that can be virtually wiped out in just a few bad days of trading.  I'm saying this now because it came up on the member site just this week, that too many people overtrade the short gambles in time, dollars and effort and don't spend productive time "gardening" in the LTP.

I always tell people that the STP is really just a way to pass the time while watching the LTP take root and grow.  It's a slow, tedious process but it yeilds good, consistant results while the STP may be good for some "fast money," it is certainly no way to play money you would rather not lose.

First of all, like a poker game, you will win some and lose some.  If you won every hand then no one would play with you (or you'd be shot for cheating).  The trick is to stay in the game, leave yourself in a good position with reasonable outs and take advantage of an opportunity to push your chips in when the cards are right.  In poker and in the market, those who grow impatient and try to force a hand, often end up going home early, leaving many chips on the table.  As Sage said last week (and boy does this apply to poker as well) "boredom is not a reason to make or not make a trade."

Second of all, like a poker tournament, you have to have a long-term goal and a plan you can stick to, despite the shorter timeframe of the individual trades.  Sage and I will be devoting a lot more time to cash management on the member's site as this week has certainly showed me that even the best traders (myself included) can overreact to unexpected market moves.

While Sage talked about market risk over the weekend I was predicting market turmoil, postulating the we may be headed for an Economic Tornado and my just-finished trip to Washington leaves me convinced that is the case.  It's not just the fact that Al Gore is now invited to speak to Congress but you will start seeing these changes coming from the top as the Democrats take back the pulpit and force their issues back into the public agenda.  Some are good but some are very bad for the Wall Street status quo, which could stand to do with a bit of shaking up anyway…

On Monday I said that Dow 12,112.50 had to be our Maginot line for the week and that's right were we held things that day after a morning dip to 12,167.  I should have allowed myself to get bullish then but I couldn't (and still can't) shake the feeling that a lot of this is EOQ window dressing and we won't see the real market in action until the week of 4/2. I was bullish enough to select WFC $35s for .45 and they finished the week at .70 (up 56%) for reasons I outlined in that post.

Also on Monday, I doubled down on a variety of oil puts, which turned out to be our worst plays of the week (so far!) as that sector just flew on us for reasons we won't get into here.  The smartest move we (well, most of us it turns out) made on Monday was covering our oil puts with the COP $65s for $2 (now $4.85), that alleviates A LOT of pain at the pump!  My call at the time (11:45) was: "Someone is just selling COP to anyone who wants to buy it. 6M shares is half a day’s avg already and they are pinned down by $65, I’m taking $65 calls for $2 as a cover in a continued rally."

Under the cover of COP we picked up more TSO puts and more XOM puts and all I can say is thank goodness COP kept going up because the puts were a catastrophe so far!  Monday afternoon someone asked me about our $10K Virtual Portfolio and I said: "…if you want to see a $10K account, open a $50K account and short TSO."  On the whole, I finished Monday bearish which, at the moment, seems wrong.

Tuesday was the beginning of the Fed meeting and here's where I misread the tea leaves as the BOJ left rates at .5%, reviving the carry trade so business could resume as usual (or as usual as it gets around here).  In the end, it was just that simple I think…  PTR had a very disappointing report and was punished but the other oil majors acted as though this could never happen to them and zoomed higher all week.

Tuesday morning I warned: "Any time you short oil, you have to leave yourself lots of room to DD and roll to the next month because it can go the wrong way on you for quite a while."  But you can't fault people for giving up when faced with the relentless 7% march in the oil sector of last week.  Lend became the first play in our $10K Virtual Portfolio, selling calls against positions there.  I finished Tuesday still very concerned about housing starts but I said: "If the market can shake off negative after negative and keep on going then, at a certain point, who am I to argue?"

Frank Sinatra advised us to "pick ourselves up and get back in the race" and Bernanke agreed on Wednesday by making all the right noises to get the markets back in gear.  Ahead of Wednesday's oil inventories I said "I still have my COP covers if it’s bullish and I guess I would go with XOM $72.50s or HAL $30s on upward mo." and despite a fairly bearish report the pump crew swung immediately into action and brought oil up to $62 for the week.   I wasn't buying it and killed my COPs for $2.80, a BIG MISTAKE for the week.

My other big mistake was not taking my own pick on the DIAs when I said: "DIA like a coiled spring right now, up or down 150 very possible… I think having $122 puts (BQQOR – .65) and $123 calls (BQQCS – .75) que’d up and ready to go is prudent on the Fed announcement (bearing in mind there may be a head-fake)."  The Fed sounded hawkish to me but not to the Dow, which hit my 150-point target just 1 hour after I made that statement.

At 2:45 I was capitulating my bearish stance, saying: "I was right about a 150 point move, just wrong about direction! If they can hold this level we just have to throw in the towel on puts I think – basically the market (PPT or no) is choosing to interpret the tea leaves as totally positive, ignoring language that would have crashed us last Q so there’s really nothing you can do about that but go with the flow."

At 3:48: "Almost no way we go down now as Asia is sure to rally and Europe will rally as they closed flat before the Fed minutes so we will open into a huge up global market – this is a day the US funds get to really stick it to the rest of the planet!  XOM is at the 5% rule from Monday, if they break $73.50 it may be all over for oil puts in general."

Wednesday's wrap-up saw us with all of our indicators well on their way to 50% retracements and by Thursday morning we were back to making bullish picks.

I was introspective on Thursday as I packed for my trip and, while I couldn't bring myself to throw caution to the wind, I did decide that roasting marshmallows while Rome burned was a rational way to deal with the markets.

We made some black sheep oil plays on PTR, HAL and BJS and SU was my laggard play to add a little length to our oil calls.  On the main post I went back to the well on COP, covering with the May $70s at $1.50 (now $2.35) but my call of the day may have been at 10:09 when I said: "NSC may be resting here, I would like them on a good market move with the $50s at $1.40" (now $3).  Rack was another intraday winner but only up 45% (yawn).

By Thursday night I was already in DC and losing touch with business reality at a rapid pace!  The markets were flat and we picked up a few calls, still cautiously enthusiastic.  Friday morning I was still concerned about the Implode-O-Meter and still concerned about the NYMEX barrel count but, since no one else seems to be, we continued to go with the flow.

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Because the flow was so strange this week we sold very few positions.  Like many of you, I'm very sorry I didn't stop out of more oil puts but that is why we cover!  We'll see what Monday brings but the Iran situation is still up in the air and gives the oil bulls the excuse they need to keep pumping up the markets, irrespective of actual supply and demand functions.

We only closed out 11 positions with an average gain of 27% on 14 average days held but our 2 losers were the end of our PD trade, both total losses but only $1,300 vs. the $3,500 we gained on the $130s we sold.  Without those two losses, the average gain was 45%, more in-line with where we've been for the month.

The remainder of the short-term virtual portfolio took a hit on our index and oil puts and the average gain on the 80 remaining open positions dropped to 32% (down 10%) but there are still 4 full weeks until April expiration so we're not ready to panic just yet.

We are much better balanced than we were last week and our only real fear is a flatline for the next 20 trading sessions.  Our Long-Term Virtual Portfolio made a nice improvement, with a 97% average gain on 47 open positions (55 average days).  It's important to note that the STP did take a hit to protect the more important LPT, which is still heavily weighted to the call side – so I guess I am optimistic after all!

We began a new $10K Virtual Portfolio this week and so far we have plays on BIDU, LEND and WCI which have tied up $3,580 of our money and are up $569 to date (up 16%), not bad for a first week…

Our 12 regular stock positions rocked and rolled to a 9% average gain, up a full point from last week despite our TSO shorts simply killing us.  Let's keep in mind though that we also couldn't believe it when LVS went to $105 and we're very sorry we didn't stick to our guns then!

On the whole, it was not a bad week considering I started out being far too conservative and I think we're well positioned now for a strong move in either direction.

Have a good weekend,

– Phil