The Untouchables

We were having a discussion yesterday about the Dalit, the "untouchable" caste of India so I thought it was a good time to discuss the value of not touching your virtual portfolio.

I like to use the $25KP because it’s a good blend of our two strategies; a modified version of our LTP strategy (but with mid-term long legs) and the targeted plays of the STP.  Combining our two disciplines in one virtual portfolio has been successful all three times we’ve run the $25KP this year and it’s been a lot of fun to play but, much more importantly, a well-balanced virtual portfolio like this can be lots of fun NOT to play – as we recognize that small virtual portfolio players may have a life outside the markets, so we balance our trades to make sure they stand up to the daily swings in the market.

Today we had quite a swing – a nice 198-point drop in the Dow, presumably over an assassination but that’s just market shorthand for one of those things that can happen at any time.  I myself was called away on an emergency today (mission accomplished, by the way!) and was unable to do more than take a quick peek at the action between meetings.  For people who have to earn an actual living, this (I hear) happens a lot and, if you want to do well at your job, you need to have a virtual portfolio that can be left alone for a day without costing you a week’s pay.

We just did a $25K Virtual Portfolio review on Wednesday morning but, as I like to do once in a while and as I will continue doing until every single member learns to stress-test their virtual portfolios and find the right mixes in order to make what Charles Dow called "a reasonable return" without an abundance of "speculation."

Without being touched, our $25K virtual portfolio would have gone from $153,997 on Wednesday to $154,967 as of today’s close.  While not a spectacular gain, this is what a stress test is all about – how do we survive a 150+ point drop in th Dow?  Had we lost more than $4K (2.5%), I would have said: "Gee, I guess we need some more puts" and done something about it.  There is no magic formula for balance, we build up to is as we build our virtual portfolio but if we watch our virtual portfolios carefully, we can look for stress points each time and make positive adjustments.

So that’s the untouched virtual portfolio – let’s see if I had the touch with the changes I suggested Wednesday morning:

• CAKE "let’s sell the 10 that are uncovered for $2.50"
  • These came close but still haven’t stopped out yet.
• GE "is also having a tough time getting going here and I don’t like holding  a Jan call so we’ll have to get out of that this week despite my love of the company."
  • We don’t like those Jan calls, too risky.  We were happy to get .95, they dropped to .70 yesterday.
• HMY "we should cash the Jan $10s for .70 or better but certainly by the end of the week."
  • I had a $1 ask with a .10 trailing stop and they went off yesterday, I hope I don’t regret selling them but we still have the Mays, which are well ahead.
• MSFT "these contracts just aren’t worth the risk so out at $2"
  • Only managed $1.95 at Wednesday’s close but they dropped to $1.45 yesterday so good call.  Note to newer members – contrary to popular belief, these targets are not perfect – I have been known to miss my targets by as much as a dime so please don’t not sell for want of a nickel!  
• PFE "should be good."
  • See – there I am being totally wrong!  As these are March calls I’m considering doubling down at $1.
• SHLD "hopefully will give us a run to sell calls into"
  • We got a very nice pop to just under $104 and the $105s fetched $4, nice against our $8 position.
• T "our Jan Ts need to go for $2 as well."
  • These rocketed on Tuesday and didn’t stop out until $2.55 at the day’s end, now $2,20 after a slight pullback yesterday.
• DIA "puts can be rolled up to the $135 puts for .82 and we then sell the Dec 31st $135 puts for .80 and hope the market holds up until Monday."
  • Well, we can’t always get what we want but the Jan $135 puts gained $1 yesterday and even if you didn’t stop out your putter (who ended up selling for .90 on Weds) in accordance with our very basic strategies, he only gained .66 on the day and still has .25 in premium.

We rolled our T spread and they nicely kept going up and TSO never gave us a good price for the putter ($1.25 target) so that remained unchanged.  All this messing around netted us an extra $4,000, not a bad day’s work but, more importantly, we moved from $77K in cash to $90K in cash, further reducing our downside exposure over the holidays and leaving us with plenty of money to take advantage of dips (like buying more PFEs at $1!).

Here is the untouched virtual portfolio, it’s good to bring this up next to Wednesday’s and see how the various positions balanced each other out on a volatile day: