Wow, what a ride!  

We had a super-busy day on Friday and it’s a great example of exactly why we play this hyper-aggressive virtual portfolio the way we do – with balanced positions on both sides, taking advantages of moves in either direction – not just to cash out winners, but to press our losing bets on the theory that our ranges will continue to hold.  They will, of course, break one day – and that’s why we keep such a close eye on our watch levels but, as long as they remain range-bound – it’s just a little gold mine that we can tap over and over and over again.  

We caught the downturn on the dime on Wednesday and yesterday it was crazy from the first minute – so much so that I had to send a 7:15 am Alert to Members regarding the earthquake in Japan, an update on the “Day of Rage” (as we expected, a big nothing) and how the Wall Street Journal was once again ripping off my headlines.  

On the whole, we got the spike low and then the ridiculous run-up we had expected for Friday – the Japanese quake was just the “reason” de jure for the bots.  Although I sincerely hope I do not have to remind our Members of Rule #1 (as we only have two rules) – I did send out another Alert at 9:34 saying:  “$25KP Moves.  I do not have time to check prices – take money and run on FAZ short calls, USO long puts and EDZ of course.  More to follow.”  – as there was not a second to waste if we were going to sell into this particular excitement.  

At 9:40 I was already flipping bullish and we added the DIA March $120 calls at $1.03 in the $25KP and then, by 9:59, we had a slew of adjustments to make, which I will detail below.  I did not have time to mention it in the morning, so I will mention it now – one of the only times it is acceptable to put in market orders is when you are selling into the excitement.  If you have 3 positions to dump out of before the market turns and 7 other positions to look over to decide what to do with them – you’d better execute those sells but that then goes back to why I use TOS – you also need a broker where you are confident that your executions get done at fair prices.  I don’t want to make this a commercial but good execution trumps low fees pretty much every time for a serious trader.  

Looking at the above chart, I think it’s very telling that someone did not want to hold 750 of these calls over the weekend!  We had a huge advantage over that guy because A) we knew we didn’t want to hold them over the weekend all day long and B) we are NOT GREEDY!  Look how much it cost this guy to wait – shameful!  

Were we greedy in not taking profits on the 1pm dip?  Yes and no.  As I said to Cnarbis at 2:04: “There is never anything wrong with taking 10% or 20% off the table. I don’t always get a chance to see everything in time and, at this point, if we blow 12,000 it’s a good place to stop but I still hope for a nice stick into the close.”  

If it were a weekly call, that expired on 4pm, my attitude would have been different but we had a week to go and we were willing to go long over the weekend if we got no upward movement but the trade was set up with a 11,950 stop line and, once we broke over 12,000 – that became a good stop line that we could afford to stick with.  12,000 was briefly broken just after 1pm but we did not get our two consecutive 10 minute candle bodies below the line.

Even if we did, a trade like that is always a judgement call.  We never went below even and we felt we should be able to make at least 20% on a good stick so we were risking (hopefully) 10% to make 20% – a good risk/reward ratio.  I have learned over the years that my brain is strange as I used to tell people that the best time to get out is when the risk/reward ration vs. the probability of success begins to get out of line but I have learned that most people don’t have those equations constantly running in the back of their minds (and it’s pages of work if you do it on paper) so the best thing I can say is “let’s watch our levels” but it’s still a bit of a judgment call as you have to have a bit of a feel for the markets when you are day-trading.  

And, by the way, anyone who says they are not a day-trader and doesn’t need to work on these skills is kind of an idiot because we ALL buy and sell things during the day, don’t we?  When you make an entry, don’t you try to time it?  That’s day trading!  The same goes for exits.  When interviewers ask me if I’m a day trader, my usual response is: “I’m not a day trader but I’m not adverse to taking profits in one day.”  The trick is, as Buffett likes to say, to “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”    

To apply this logic to options trading, we only buy positions (excluding our “craps rolls“) that we are willing to scale into.  We only buy small initial entries that we are willing to buy more of if they get cheaper.  If you buy an option for $1 and you do not fully intend to buy more at .60 – why are you buying the option?  If you like an option at $1 you should be loving it at .60, right?  

Of course there are a lot of other factors, like how much time is remaining and how fast did you lose that 40% (the faster the better!) and, most importantly, WHY did the option drop 40%?  We don’t mindlessly double up on anything that loses money but, as many nervous $25KP followers have noted – we also don’t mindlessly exit anything that loses money either.  We WAIT for better information.  Since I generally choose positions I feel very strongly about, it’s rare that I’m not willing to press a bet at least once when it goes against us BUT (and it’s a Big But) each time we double down or roll, we should be looking at the whole trade as a brand new position – not just something we are trying to  “win back.“

As I have mentioned in our many $25KP updates – we like to close our losers and try to “fix” our winners but that’s because we are playing a range with a balanced portfolio so, even if our losers get worse, there are always winners to offset them.  So let’s go over the logic of each position, keeping the above in mind:

We began the day with $30,141, which was $5,141 of realized gains and then the following unrealized wins and losses (note that the “now” prices were as of Thursday night as were the notes):  

  • 8 DIA May $124 puts at avg. $6.11 ($4,888), now $6.35.
  • 8 short DIA March 31st $122.75 puts, sold for $2 (-$1,600), now $3.40.
  • 10 EDZ April $18 calls at $3.15 ($3,150), now $4.20 – We’re looking for $5+ tomorrow to get out.
  • 40 EGLE April $4 calls at .35 avg ($960), now .20 – Looking to sell 20 for .35 on a move up.
  • 20 FAS April $32 calls at avg. $3.21 ($6,420), now $1.60. This one, of course, looks worse than it is as we did put short profits to cash twice.
  • 10 short FAS March $30 calls sold for $1.45 (-$1,450), now $1.18 – stop is now back at $1.45 (even).
  • 10 short FAS March $31 calls sold for $1.50 (-$1,500), now .72
  • 20 INTC March $21 calls at avg .70 ($1,400), now .22 – Would love to get out at .70 but not likely. Possible roll to Apr.
  • 10 HOV March $3.50 calls at .80 ($800), now .30 – We never got a chance to get out on the quick drop – have to be lucky now.
  • 10 C Apr $4 calls at .70 ($700), now .57
  • 5 UUP Apr $21 calls at $1 ($500), now $1.23
  • 4 FMCN Apr $28 calls at $1.30 ($520), now $1.95
  • 5 FMCN short March $27 calls sold for $1.15 ($575), now $1.80 – Will roll next week if we have to.
  • 10 USO Aril $40 puts at $1.03 ($1,030), now $1.38
  • 10 GMCR Apr $50 puts at $1.10 ($1,100), now .78

On Thursday afternoon I had said of our EDZ trade: “At the moment, if we close down here we can look forward to a nice 300+ drop on the Hang Seng tomorrow and who knows what over the weekend so, unless we can get $5+, I’m inclined to stick it out.”  At 2:52, I added the general comment: 

As to the RUT – down 2.5% in a day and “holding” is not bullish at all – it’s a strong indication that there will be at least a 1.25% follow-through to the downside. On the 5% rule, a finish between the level (1.25%, 2.5%, 5%..) and the 20% retrace is just consolidating for the next move down, likely to be (not necessarily in one day) 50% less than the current day’s move. If we don’t get a stick in the next 90 minutes then that’s going to be a very bearish sign for tomorrow.

VIX/DC – I think there’s too much danger things calm down tomorrow. I would think “Day of Rage” is over by the time we open so could be a major non-event first thing tomorrow or by lunch at least.

After watching the action for another hour, my comment into the close was:  

Tomorrow/Gucci – Hey, good time to ask. Seems to me weekend is way too risky to go long into and 5% rule says stay bearish so I’m staying short. After all, what can they do – take the money back? We sure didn’t expect a drop like this today so I’m going to consider it a bonus and “go for it.”

DIA/Manimal – I think Asia freaks out in the morning, Europe heads down and we spike down to day’s low. Then maybe we might want some bullish bets into the close if we’re not in free-fall.

At any time, all we can do is guess what will happen from the information that’s available.  I had let us get pretty bearish in the $25KP but pretty bearish is not 100% bearish and barely 75% bearish.  We were painfully letting our long positions twist in the wind because I didn’t feel we were ready to press those bets yet (based on the above observations).  Again, I must remind people that this is a VERY aggressive virtual portfolio we are tracking here – not for the feint of heart – this is not the way a broad portfolio should be played but the techniques we use here do have broad applications so it makes a great learning tool since our broad portfolios are generally full of “Buy this, cover with these – see you in 2013 when it’s time to adjust” – you will learn plenty from tracking those over time – it will just take about 10 years!

Patience is our number one lesson at PSW and we force our Members to watch “The Man Who Planted Trees” as a standard assignment for new Members. Once you learn patience, the next lesson is balance and, as the great Mr. Miyagi said, “Better learn balance. Balance is key. Balance good, karate good. Everything good. Balance bad, better pack up, go home. Understand?” Substitute trading for karate and you get the gist of it… 

I won’t get back into it here, it’s covered over and over in our Education Section but EVEN IF you are 80% bullish and 20% bearish and the market crashed and your bullish positions are cut in half (40%) and you bearish positions double (40%)  – then you “only” are down 20% and you are in a perfect position to cash out your bearish positions, double down on the bull side and follow Mr. Buffett’s plan and wait 10 years for the markets to reopen (or, hopefully, a quicker recovery).  Had that been your case in 2008, you would now have 160% of what you started with (roundabout).   Just imagine how much better that works out when you are 70/30 or, dare I say – 60/40 in your portfolio on a regular basis!  

 

 

 

 

 

 

 

 

 

 

 

IN PROGRESS