Despite the drop in the market, our bearish attitude about builders and oil companies netted us an average 84% gain on 23 positions closed with an average hold time of 19 days.
Our open short-term portfolio actually improved a little this week, with a 35% average gain on 93 open positions (23 average days old) but the big jump in open positions is due to our new portfolio tracker which now treats our 13 short-term spreads as two transactions.
The long-term portfolio has an average gain of 92% on 42 positions (same spread issue) that have been held for a whopping 47 average days (seems like forever, doesn’t it?) but, now that we have our new system we’re going to start tracking the cash gain, which is $156,091 or 104.27%. There is a lot of noise in the average position gain since we buy and sell puts and calls against our positions constantly and, as we wear down the basis of plays like Titanium Metals Corporation (TIE) (now down to .20) we have nowhere left to credit the money!
In the short-term portfolio, the balance (up 37%) is meaningless as the holdings change daily so I still prefer to look at the average gain there for a true performance picture. In a choppy market like this, our strategy is to have a diversified mix of puts and calls, keeping the bulk of the portfolio fairly even as we cherry pick the winners and sell them in a nice non-greedy fashion.
We only had to close five losers this week:
• Bank of America Corporation (BAC) Jan $55s were just too tedious to hold and was banished from the LTP at $2.55 (down 12%).
• Peabody Energy Corporation (BTU) Mar $40 puts stopped us out at .75 (down 21%) on Wednesday’s run as they were the naked side of the calls we sold last week (too early it seems!).
• Diamonds Trust, Series 1 (DIA) Mar $127 puts were last weekend’s insurance play and came off Tuesday at $1.20 (down a nickel) and I WISH I had those back (now $1.60). This weekend we have the iShares Russell 2000 Index (IWM)’s…
• Google (GOOG) Mar $470 puts (out at $5.50 for a 53% loss) are another one we could have hung on to, I guess I am too much of a Google optimist but doubling down on the $480 puts at $8.60 was a good trade-off.
• Hydril Company (HYDL) Mar $80 puts were our wipe-out of the month! We bought them on 2/9 and they were worthless just two hours later as the company announced a deal with TS at a 15% premium. C’est la vie!
The winners were a nice, diversified group with Apple (AAPL), The Dow Chemical Company (DOW) from Adobe Systems Incorporated (ADBE), Business Objects S.A. (BOBJ), EnCana Corporation (ECA) - puts, National-Oilwell Varco Inc. (NOV) - puts, Schlumberger Limited (SLB) - puts and Exxon Mobil Corporation (XOM) - puts. This is what I’m talking about with balance and diversity - we don’t know which way the market will break but we have opportunities to take advantage if it whichever way it goes.
As long as we EXPECT to take some losses and manage our stops, then the winners that we let run can make up for them. Generally in a choppy market like this you need to be either patient (DD, roll) or impatient (tight stops, get our quick when it moves against you) - being wishy washy will only wash away your money!
We started the week with Super Market and ended the week with Clark Kent but that’s okay, Superman needs his Clark Kent side to make him approachable, and the market needs its dips to make it buyable. If it went up, up and away every day it would be fun but we’d be back to 1999 valuations in no time and we all know how that ends…
We can only hope that underneath this mild-mannered pullback still beats a heart of steel (and that sector is certainly holding up well) that can leap overhead resistance in a single bound, well maybe a few bounds, as breaks the chains of gravity that have kept us in this narrow orbital trading range.
We were on the money last weekend as Asia was the story of the week as the BOJ raised rates but not enough to spook investors into U.S. securities. My Coinstar (CSTR) Apr $30 calls were a nice pick as they finished the week up 16% already, not bad in a bad market.
Tuesday the WSJ said "the mood is downright bullish" and I said, "I hate to hear that kind of talk, it’s often the sign of a top when everyone starts telling you how great the markets are" and I warned that "this sub-prime mortgage problem is NOT going to go away."
This week we got lots of confirmation of that as IMPAC Mortgage Holdings (IMH) joined the conga line to hell with a 12% drop, along with New Century Financial Corporation (NEW) and Novastar Financial Inc. New Century Financial Corporation (NFI) who flopped 50% on Wednesday morning.
The ripples are spreading and starting to affect the people who lend money to the lenders like Lehman Brothers Holdings (LEH) and Bear Stearns Companies (BSC), who both took 5% hits at the end of the week but don’t think the buck will stop there in this very tangled web of sub-prime financing..
We got the "knee-jerk pullback" I predicted on USB and Wells Fargo & Company (WFC) but USB bounced already so we’ll take a look at WFC in the morning for a possible opportunity to jump in. I also picked that AtheroGenics (AGIX) trade on Tuesday which ended up making us a quick 25% so, all in all, it was a good day!
Wednesday we got our BOJ rate hike and we wondered who would suffer as the flow of cheap yen gets trimmed back but the BOJ made some very bullish statements about the world economy that gave a particular boost to Asian markets and sent money rotating back over there that was on its way over here.
I picked the DaimlerChrysler AG (DCX) Apr $70 puts at $2.35 on Weds AM along with the General Motors Corporation (GM) March $35 puts for .80, both of those plays were smart but DCX dropped a little too fast in the morning and we only picked up the GMs, good for 100% so far…
I posted my candle charts Wednesday morning and said, "Are we toppy here or are we heading higher? What we don’t want to see is anything more than a 50% retracement of yesterday’s gains, you can see in prior sessions how that can quickly lead to trouble." Well, trouble it was as we had our 50% + retracement right at the open and, as expected, it quickly led to trouble.
Our biggest mistake of the week was misinterpreting the oil situation as Zman pointed out that NYMEX traders had pared back their positions but, rather than portend a sell-off, it gave the traders the room they needed to jack the contracts back up. At the close of the March contract on Tuesday I said, " We need to exercise caution as this give traders a little wiggle room for shenanigans as they open the April contract tomorrow" - I should have listened to that guy!
We’re still waiting for the dollar to make that Rocky recovery we talked about on Wednesday but when I said "Gold SEEMS safe at $660, as it should provide some support" I didn’t know it would win the understatement of the week contest! I was right when I pointed out that "the Yen carry trade can unwind in mysterious ways as I think a lot of Yens have been pouring into Euros and commodities, not so much into Dollars" the dollar continues to hug the 84 line, getting pummeled by the 50 dma at 84.5.
Thursday started off with great hopes as AAPL and Cisco Systems (CSCO) worked out their differences and India and Pakistan signed a treaty but then some psycho warmonger had to go and stir up tensions again, rocketing crude prices back over $60. The fact that these comments boosted the price of Halliburton 5% (HAL) is pure coincidence and I am just shocked that people would think there is some kind of connection!
Still, despite the encouraging words from our Veep, I was cautious on Thursday morning and warned: "Today I will consider anything less than retaking our Tuesday levels to be a failure." Well, fail we did and despite the ADI-led SOX rally we took a lot of gainers off the table and despite the huge oil rally, we started working into some new put positions.
Friday morning I made a timely call on a bunch of homebuilder stocks and, as we thought, Sanyo was the straw that finally broke Goldman Sachs’ back (GS) as they had their first decent pullback in a couple of weeks. Speaking of GS, our GS powered Treasury department gave the green light to hedge funds to keep on doing that voodoo that they do so well as long as they force the "upper middle-class" (those without 2.5M liquid dollars) investors back to the brokers.
I was so worried on Friday I finally picked up some gold stocks. We ended up getting our entries on Minefinders Corp. (MFN), Aurizon Mines Ltd. (AZK), Newmont Mining Corporation (NEM) and Yamana Gold Inc. (AUY) but let’s make sure gold holds it’s direction - remember these are hedges against our oil puts and neither is meant to be held naked!
As I said, all in all, it wasn’t a bad week because we were hedged for anything and we love the pullbacks against our long-term plays as it knocks out the value of the calls we sell and our LTP did very well this week!
On the educational side, we got stopped out of our BOBJ play as our strategy of taking half off the table at $2, for a 74% profit and stopping the rest out at $1.40. The final tally on BOBJ:
• 4 April $40 calls purchased for $860 on 2/5
• 4 March $40 sold for $1 on 2/5, expired worthless
+ collect $400
• 2 April $40s sold on 2/20 for $2.05
+ collect $420
• 2 April $40s sold on 2/21 for $1.40
+ collect $280
While we only ended up collecting $1,100 on our $860 investment, we never really risked more than $460 as we got the dollar back right away from our caller. Don’t forget we had $360 of our $400 target gain on Friday and, as I said last week, holding on at that point was essentially a new gamble. I also said: "If you can’t be satisfied with a 74% gain in 2 weeks, trading is not for you!"
Naked calls were not for us on this play and that was a good thing as the March $40s are down to .25, an 85% loss if you held it to the bitter end while buying 100 shares of stock at $3,870 would have cost us $147 (4%) so far.
Our volatility play of buying the Sears Holdings Corporation (SHLD) June $185s for $12 and selling the March $180s for $7.80 (we should have held out for our $8.20) has the $185s at $14.50 (up $2.50) and the $180s at $10.30 (up $2.50) so we are dead even but starting this week that time value should start to weigh in on our caller (we hope!). Last week’s e.g. "CSCO" or "Google" Kinder Morgan Energy Partners LP play (KMP) will take a year to resolve itself so we’ll only check in on that one when there’s action.