Don’t Touch That Dial! $25KP Lesson

Wow, what a day!

The Dow flew up right at the open 169 points to 13,570 and fell all the way to 13,225 (345 points) by 3:10 bouncing back to up 59 for the day.

Earlier this week I reminded you guys to reread my article from August (back when 300-point intraday moves  were considered rare!) called "Don't Just Do Something, Stand There" and today was such a good example I thought I'd hammer the point home.
At the time I said: " When you think about all the effort (and cost) that is involved in changing course, it is no wonder that we should be willing to sacrifice, to take a few blows, to let the FEAR pass over us, before we commit to a new action.  If we are properly hedged, a few moves against us may sting, but they shouldn’t wound.  This gives us time to calmly assess the changing market, understand the new paradigm and gage our own preparedness (our investment mix) to deal with it and to choose the course that will best get us to our goals."

Since I happened to post the $25KP in the morning I thought it would be a good idea to run the updated numbers on the untouched set.  It is very easy to panic and rush to buy out your callers into a spike but, as I often say, a spike at the open in either direction carries little weight and it's the last thing you should be reacting to.  If your virtual portfolio is decently balanced, you should be able to ignore the individual losses (PAPER LOSSES) on a few callers and focus on the fact that, on the whole, you're even for the day so THERE IS NOTHING TO PANIC OVER.

Rule #1 is: Always sell into the initial excitement.  Anyone who reads me regularly knows I am no fan of absolutes, YET THIS IS MY #1 (of 2!) RULE.  There is NOT a rule 1.a that says "Never buy into the initial excitement" even though it would seem to follow rule #1 but that's because I would not say never.  Sometimes a stock is going higher and higher so perhaps buying Google at $120 on IPO day makes sense or perhaps buying out an XMSR caller when they announce a deal with SIRI is prudent, even if you are taking a bath.

Rule #1 is "Always" because it NEVER hurts you to take a profit.  You may regret not taking more of a profit but the guy who sold his DIA $133 calls, up 30% at 13,570 has a lot less regret than the guy who held those calls at the open just like the guy who bought out the DIA $133 caller at 13,570 for $3.80 in early trading ended up overpaying by the entire $1 of the gap up from Thursday's close. 

Our friend Dr. Brett has a nice article on overtrading and this is something we all need to work on.  He makes an excellent point saying: "My experience is that the main cause for overtrading has nothing to do with personality per se. Rather, traders overtrade because they are trying to make a living from relatively small account sizes. They cannot trade large and thus cannot make much money per trade, so they hope to compensate by trading more often. It's a clear road to ruin."  That's why you don't get a lot of "action" in the $10KP and $25KP, it's simply not risk appropriate for the position sizes.  Every time you buy and sell you are losing money on a spread and paying a commission, no matter how small. 

Balance, balance, balance, balance, balance and balance (oh my gosh, I'm starting to channel Steve Ballmer!) is the key because it changes you from a reactor to a person who takes action.  You can remember the difference by keeping in mind that one is toxic and deadly and one is James Bond cool.  Put a picture of Chernobyl next to a picture of James Bond on each side of your bathroom mirror and decide which direction you want to go each morning…

Being James Bond makes you cool, even if you're George Lazenby (just once thank goodness) or (choke) Timothy Dalton.  James Bond isn't cool because he kills people, James Bond is cool because he stares danger right in the eye, calmly assesses the situation (while getting the villain to reveal their evil plan) and then takes decisive action.  Chicks really dig that sort of thing!  When your positions are in danger you need to aspire to be like Bond, otherwise you do face a meltdown!  Balance is your bulletproof Bond tool.  James Bond is always prepared, he goes into the field with devices for any situation because he doesn't know what will happen but he's pretty sure someone will try to kill him very soon.

When you balance your virtual portfolio with contrary positions, it is like getting a laser watch from Q.  When you take some index puts to balance out a bullish virtual portfolio it's like getting your first bulletproof Aston Martin, sure you're probably going to wreck it but it's going to save your life!

I did a whole article on James Bond Investing so I won't rehash that but, if you have balance, you can afford to look at the manageable dangers to your individual position calmly.  Balance allows you to wait for them to shake your vodka martini while you decide if a move against you is a spike that can be ignored or a real danger that requires you to spring into action. 

When I look at my virtual portfolio on a spike, I may have dozens of callers that are killing me but my virtual portfolio balance remains neutral, slightly up or slightly down, which let's me concentrate on the positions that are hurting me the worst.  By adjusting those positions, AS WELL AS TAKING MY WINNERS OFF THE TABLE ON THE SPIKE, I stand to make much more money on the rebound AND IT HELPS ME IDENTIFY WHICH SIDE OF MY Virtual PORTFOLIO NEEDS ADJUSTING TO GET — MORE BALANCE!

Balance, balance, balance, balance, balance and balance (gee, maybe I need to stop making fun of Steve, you do have to repeat yourself sometimes), I don't think anything is more important in this crazy market than Balance, balance, balance, balance, balance and balance…  Remember I'm not talking about 50:50 balance unless you are going away for the week or something but I AM talking about 70:30 bullish to 30:70 bullish and understanding what it takes to get you from one side of that pendulum to the other.

Balance can change your life.  Here is a great video of your virtual portfolio in action, think about how your positions interact with each other as a group and think about the box as profits that need to be protected once they are pulled in.  Notice what greed gets you in the end!

So look before you leap.  If a 150-point spike in the morning makes you panic, it's not the positions you have that are the problem – it's the balance you DON'T have that is!  In the case of the small virtual portfolios yesterday, we were able to take advantage of the dip and put some cash to use as we weren't scrambling to cover just because we had a little spike in the morning or a little dip in the afternoon.  The $25K postions that were at $115,342 on Thursday's close finished Friday at $118,877, that's not a bad days work off a $25,000 basis, especially as we're $85,487 in cash, ready for our next opportunity!