Monthly Mop-Up – March Madness Edition

What a wild month that was!

You have to be flexible to stay on top of this market and last Thursday I quoted James Baldwin, who warned us not to cling to our hates and "to deal with the pain."  This led to a timely reversal in attitude and some very good cover taking as we traded our way out of what was (the week of the 23rd) our worst week of the year.

Would you believe the Dow finished the month UP 90 points?  It sure doesn't feel that way but part of that is because we had an annoying oil and commodity led rally starting on the 19th, just as we decided to adopt a more bearish outlook.

Still we finished the month with a nice recovery after having STP drop 10% as our oil and index puts went the wrong way on the sudden "recovery."  With a month to go there was no need to panic out of our April puts last week and we took the opportunity to deploy some cash on some very well covered calls (28 out of 54 closed positions) with 17 of the 24 puts being our "mattress plays" it means that we played both sides of the fence quite well in this week's action.

Our 54 closed positions had an average return of 42% this week but the gain on cash was 56%.  This was huge because we began the week with $405K in short-term positions, cashed out $550K with a $199K gain and left $338K on the table.  This accomplished our whole game plan of moving to mainly cash (although we didn't think we'd do it by making more!) and cutting back on our close positions.

Unlike the earlier part of the month we did not sell a lot of positions as we were well enough hedged that we didn't need to make too many new spreads.  Other than our COP covers plays, there were no particularly overweighted positions – our TSO $95 puts got heavy as we doubled and doubled and doubled but we were amply rewarded for our troubles as our biggest loser turned into our biggest gainer with a 35% return on what turned out to be a heavy position.  Now we are sitting on a double on our TSO $100 puts on what is currently my favorite short!

Most of our 28 winning calls were taken just this past week and we only closed out WFC on the call side with a small (11%) loss.  On the put side our only loss was our LEND stock but that was part of a spread that added $250 to our $10K Virtual Portfolio.  Of course, all this success comes at a price as our remaining 83 short-term positions are down 4% on cash on 26 average days open as we are still waiting for the markets to move one way or the other.  Our 44 April open positions have 19 calls and 25 puts and need to be dealt with as they are mainly left BECAUSE they are in bad shape.

As I said last Thursday: "Let’s not think of it as fiddling while Rome burns, think of it as seeing a big fire (of burning dollars) and being savvy enough to grab a stick and start roasting some marshmallows."

I tried my best to be positive last week, after 5 straight days of gains that drove the Dow up 350 points for the week but on Friday the 23rd I said: "It’s not working here because MANY people in Washington think we have a serious problem but, like us, they don’t buy enough ads on CNBC or other MSM to get their message out.  Here’s a sobering take on the situation from the Wall Street Examiner though.  So sobering that I might suggest we all start drinking heavily…"  I strongly suggest you read this article as it does reflect my current mindset.

Taking our gains with a grain of salt turned out to be a good strategy for the week as it kept us from being greedy and the whipsaw action of the markets turned a lot of gains into losses for people who left it on the table a little too long.

When you are down 20% on an option position you are very likely to have a chance to get even, if you double down and bring your loss down to 10%, you can often get your money back on the smallest retracement.  What kills traders, and I'm seeing this a lot, is that they are not satisfied to get their money back and get out – they tend to still look for a 20% gain, even though the time clock is running down on the options.  When you lose 20%, say from $1 to .80, you need a 25% gain to get back even.  Another 20% gain from there would be a 50% gain from your secondary position – perhaps a little too much to expect?

The long-term virtual portfolio ended the week none the worse for the wear with a net gain of $5,000 (now $355K) and an average open gain of 114% with a more important gain on capital of 63%.  We barely touched it the past two weeks and while we remain far underweight in our long-term positions, there are, in fact 8 leap positions "on-deck" in the STP, accounting for $60k (20%) of that total.  Unless I really LOVE a spread, usually our leaps go through a one to two month audition before graduating to the LTP and the past 30 days have not been the best environment for moving things up.

Our $10K Virtual Portfolio moved into week 2 with a cash gain of $240 (the LEND trade) and an unrealized gain of $950 on our 6 open positions with $5,055 invested.  We are so well balanced there that it will be difficult to make much money unless we get a really nice move next week, one way or the other but we are following Warren Buffett's Rule # 1: "Don't lose money."

The $10KP is meant to be self-contained while the short-term virtual portfolio functions to protect the LTP, even as we try to make a few bucks.  Hopefully we'll get a nice sell-off, perhaps a retest of 12,000 (although I still predict 11,500) so we can establish some new plays but, for now, I'm more comfortable with cash.  As Sage said in last week's educational article: ""boredom is not a reason to make or not make a trade."

Cash is key, we used our cash to make lemons out of lemonade this week as our heavy, wrong-way bets (like TSO) from last week were doubled down or used for backstops on aggressive, contrary plays that worked very well in the tail end of that momentum.  As the market headed back down our puts started to work for us again and we made some nice, non-greedy exits.

It is not enough to just set sensible targets and stops on our positions, it is critical that we RE-SET our stops and targets as conditions change.  That is why our strategy section talks about trailing stops on a percentage of our profits and portioned entries, these are the tools we use to keep ourselves out of trouble in a choppy market, and they don't get much choppier than this one!

Sage's article last week talked about turning your short-term failures into successful long-term plays and my weekend wrap-up focused on risk where I compared our virtual portfolio to a poker hand, saying: "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."  On the 19th Sage had written about how important it is to trade within your comfort zone because once you begin to get uncomfortable, you tend to fold too early or bet too lightly on potential winning hands, not a recipe that will get you to the final table in a tournament…

Comfort Zone is the working phrase here, you play to win but you must play to win with what you can afford to lose.  Even for those of you who are "well-heeled" and play with much more, the $10K Virtual Portfolio is an exercise in discipline that can be applied to an entire trading strategy and makes a good exercise in diversifying risk.

On Monday I said I was determined to keep a positive mental attitude and I also predicted the Gonzales thing would be the story of the week, nudging out Iran by a nose.  I was right about Gonzales but the positive attitude dissolved by Monday night when I said: "I don’t know what to trust less – initial market moves or Steve Ballmer…"  Combine that nonsense with oil, which we saw going up and the dollar, which we saw going down and we knew we were in for a rough ride.

That was confirmed on Tuesday when we went positive on oil and negative on the markets as I said: "We lost the Dow today and much of our buffer that we had on the other levels.  Tomorrow will be a real test of that 50% line as it will be very hard to recover from an additional slip."

 While I give some credit to Bernanke for doing his best to calm the markets without lying too much, I sure am glad we lined up our mattress plays as they came in handy on a very rocky day.  The S&Ps drop triggered us out of the gate but the whole dip was over by 10:45, while Thursday and Friday visited the same lows at 2 and 12 respectively.   Wednesday night I filled in the gaps in Uncle Ben's love letter to Congress and, despite the jokes, I think these housing issues are deadly serious.

Thursday the oil pirates unleashed T. Boone, forcing us to head into the weekend neutral, despite every bone in my body screaming farce at this entire spectacle of greed, manipulation and corruption broadcast daily by Criminal Narrators Boosting Crude (and I will keep saying this until the MSM picks it up!).  We had a 48-point gain on Thursday, prompting me to say this about the idea of getting on board the market train:

Friday was a whole lot of nothing as we dribbled into the EOQ but, as I said in the morning, anything down is a big, big danger sign and that's what we got, the same one that's in the above photo (by the way, never take these "scenic" rail trips).

As I said in the morning, I only hope we don't look back on this quarter fondly as the one before the market went sour on us but we are moving into the weekend pretty much prepared for anything with a strong cash position, hoping for the best but well prepared for the worst.

On the whole, the month was very good to us, we closed 153 positions for a 50% average gain but a very nice 156% gain on cash as we took in a lot of money on positions we sold earlier in the month.  This would probably be a good time for a vacation but, like I said, we are scaling back considerably and are already past 1/2 cash as there is no way to expect that the sting of the week of the 23rd will never happen again.

The entire virtual portfolio is up on the member site so I'll just run down the closed positions for the week, which went a very long way, accounting for 40% of the month's gains, overcoming last week's retraction quite nicely!