Wild Weekly Wrap-Up

"Forward, backward, inward, outward, come and join the chase.  Nothing could be drier than a jolly caucus race.   Backward, forward, outward, inward, bottom to the top.  Never a beginning, there can never be a stop to skipping, hopping, tripping fancy free and gay.  Started it tomorrow but will finish yesterday.  'Round and 'round and 'round we go until forevermore.  For once we were behind but now we find we are be-Forward, backward, inward, outward, come and join the chase.  Nothing could be drier than a jolly caucus race!" – Alice in Wonderland

Are we on a road to nowhere or making some progress?

This week was an improvement over last week, when we had 4 consecutive down days, giving up 800 points from Tuesday to Tuesday.  Friday was a big disappointment as we have to crack 12,500 and then 12,700 to achieve some kind of symmetry that would indicate a recovery otherwise, based on chart patterns alone, things are going to look pretty grim.

While the Dow managed to "bounce" off the August lows, the Trader Mike paints a darker picture of the S&P, which treated our old floor as a ceiling in yesterday's trading.  I mentioned in the morning post that we would have to take the pre-market gains with "a large grain of salt" and it only took me 10 minutes of trading to tell members "I’m not very excited about this market" in the morning chat.

At 9:55 we went for the QID $49s (ultra shorts on the Nasdaq) and just 7 minutes later I gave the general warning, with the Dow still at 12,445: "People are taking profits, be careful!"  By 10:39 we broke negative and I said: "For YHOO and all non-executed positions. Cash is better than stocks heading into the weekend. We were very, very lucky to come 600 points off our lows and, as I said yesterday, you have got to be well covered heading into the weekend."

We've been discussing all week the reasons investors tend to lose money and there was an excellent late-night discussion of trading strategies on the member board that I encourage everyone to read.  Along those lines, Dr. Brett posted a piece elaborating on this theme where he brings up the UC Davis study on trading behavior that makes excellent weekend reading.  As Dr. Brett says:  "The surprising finding from the study is that virtually all of the losses of individual investors can be attributed to their use of aggressive orders…  Supporting the idea that execution is crucial to the success or failure of individual traders is the finding that the average returns of individual traders are negative over time horizons of one to ten days, but close to zero 25 days and out. In other words, the individual traders are tending to lose money on their shortest-term trades. Getting a bad price due to aggressively entering markets could be a reason for that: it would lead to a greater probability of a trader's getting stopped out of positions." 

This is not the momentum driven market we enjoyed last year, execution is key and we will spend more time discussing strategies in the coming weeks.  The logic that applies to stock traders goes double for option traders as you can lose as much as 10% on the spread just by entering a position.  That's why we have been leaning towards larger-dollar options lately, the nickels don't kill you on a $3 contract!

We had an excellent week but we were lucky and need to acknowledge that fact before we get too full of ourselves.  In last week's wrap-up I said "I’m not enjoying my weekend with 37 uncovered calls in the virtual portfolio" and you'll notice how I remembered that feeling at 10:39 on Friday in my warning above.  We were lucky that we were closed Monday and lucky that we opened so low on Tuesday that it was pointless to sell, so we rolled instead and made out like bandits on Wednesday's rally – if you want to call that genius that's fine with me but the only real genius this week was taking a lot of those gains off the table just in case the markets aren't so forgiving next week.

Monday was so bad that I ran the Big Chart with futures so we could all get a grip on things during the holiday.  Despite the market being closed, we had 194 comments as we were all deeply concerned about the huge sell-off in Asia and Europe that now seems to have been caused by the SocGen scandal.  Still, if that's the case, why did we have such a lousy day yesterday?  I said on Monday that it was still the economy, stupid and offered up my own solution to the sub-prime crisis as well as a way to take down oil prices but, surprisingly, Bush hasn't set up a meeting yet.

Tuesday morning I was in the middle of discussing the crisis of leadership in this country when the Fed came out at 8:19 with a .75 rate cut that stopped the day from being a total disaster.  The cartoon on the left from Tuesday night says it all and, although we thought the whole thing was a sham, we went with the flow and initiated plenty of new picks. 

As our new Basic Subscription site is still having troubles, we've been posting picks to the free site all week.  Tuesday evening I mentioned the MRVL May $10s at $1.60, now 2.35 and the SU Mar $90s at $5.15, now $5.80 as well as the AMGN Apr $47.50s at $2.35, now $3.55.  I also made a very strong statement on Tuesday evening about buying Apple on this sell-off, we have a ton of Apple now and so far, so bad but we're in that one for the long haul.

Wednesday morning we were saved from a global meltdown by a showing of fiscal responsibility in Asia and Europe, led by very strong statements by Jean Claude Trichet.  That poked a hole in the oil bubble and gave us a break while a combination of Berkshire Hathaway's interest in Swiss Re and New York State's interest in bailing our the bond insurers led us to one of the best intraday rallies of the decade!  We played Wednesday perfectly and even the NFLX March $25s, which came in lower than our $1 target at .50 on Thursday's open, rewarded us by climbing back to .80 mid day.  In addition to posted comments, we put $25KP and Bargain Basement Virtual Portfolio intraday moves up in the free site, in order for soon-to-be members to be able to follow along.  Reviews were also posted during the week and will be again on the weekend.

Thursday morning, the SocGen scandal hit the papers, although our government claims they had no idea of something that began on Friday, which is kind of scary since you think it's the kind of thing that regulators should probably share with each other (kind of like bank intelligence) as well as the sort of thing (international movements of massive sums of money) that our homeland security folks are supposed to be looking for.  Maybe Cramer is right when he says the Fed knows nothing!

In Thursday Morning's post we picked the BTU June $45s at $8.30, now $17.30 and the BTU Jan '10 $45s at $14.75, now $20.65 as well as the NEM March $52.50s at $3.40, now $4.50.  These are not bad for free picks in a choppy market are they?  To continue getting picks like these, please remember to sign up for our free newsletter HERE, as the free site only remains free until we work out the last remaining bugs in the Basic Membership site but this is the kind of thing new members will be seeing every day.

The markets held flat on Thursday but it's the EU that concerns us and we lost the CAC yesterday as it finished below our 4,934 mark.  On Friday morning I put up a $10KP Review and we gained another $700 on the day, leaving us at $15,577, up 55% with $10,397 in cash – a good place to be in this crazy market.  Our brand new $25K Virtual Portfolio was fairly flat on Friday but the virtual portfolio is up 26% for the week with $29,000 in cash so we'll have to call that a very good four days work!  Also initiated on Tuesday was the Bargain Basement Virtual Portfolio, which is up a nice $5,530 for the week (5.5%) which is not bad with just $26,625 at risk and the rest in cash.

Our best performer of the week was the Short-Term Virtual Portfolio, which gained a nice 38% for the week, owing mainly to the fact that we had heavily covered our open positions from several virtual portfolios with DIA puts and QID calls in the STP ahead of the holiday weekend.  Having the Dow drop 600 points from Fridays open to Tuesday's open was fantastic for our put side and making a more than full recovery on Wednesday gave us huge gains on the calls we stuck with. 

The Long-Term Virtual Portfolio was a bit more subdued, gaining 11% for the week but we are left in fantastic shape if we do get some sort of recovery next week.  If not, we still stand ready to fold up our tents with a nice buffer, allowing us to get back to cash and ride out whatever mayhem the markets may bring.   32 of 40 positions are uncovered as hope still springs eternal but it is mainly the result of so many of our new callers dropping 50% just one day after we sold them!

Complex Spreads had a rough week but managed to sqeeze out an 8% gain, thanks to Google's nice comeback but we were forced to re-cover on Friday's poor performance.  9 of 14 positions are naked there so it's all up to the great Google next week with earnings on the 31st.

Amazingly, our Stocks Virtual Portfolio is keeping pace with the options this year, so far up 13% in 3 weeks.  We can thank TASR, which was put to us last week and jumped $2 off the bottom this week as well as our usual MRB, NAK (gone now), ETFC and those Apple $130 puts we sold for the stellar performance so far.

We weren't all that active this week, closing just 68 positions with a 69% average gain as we took our winners off the table and repositioned the rest.  From a dollar perspective, 30% of the gains came from DIA puts with QID calls (also shorts) and beaten up Google callers contributed a nice chunk as well so, like I said, nothing to get cocky about – it's still a very rough market out there and I'm still favoring cash: