2 Winning Shorts And 2 Big Losers Equal A 3-Bagger

 |  Includes: AAPL, AMZN, BBRY, NFLX, P, QQQ, SIRI
by: SA Editor Rocco Pendola

Before I left for vacation, I updated the $10,000 portfolio by selling my stakes and taking small losses in Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN). Both moves turned out to be the right ones, as declines in each stock intensified shortly thereafter. Coupled with a small gain in the PowerShares QQQ Trust ETF (NASDAQ:QQQ), I left the $10,000 portfolio with a cash balance of $4,563 as I headed out for holiday.

I also left the portfolio with four live positions and a total value of $27,474. With a double in the books long ago, I set my sights on a three-bagger. As of this past Friday's close, here's how each of the portfolio's positions stands:

Option Quantity Entry Price Midpoint Price, Friday's Close Profit/Loss
Research in Motion (RIMM) March 2012 $20 put 30 $2.70 $5.35 + $7,950
Sirius XM (NASDAQ:SIRI) March 2012 $3 put 25 $1.58 $1.26 - $800
Netflix (NASDAQ:NFLX) June 2012 $50 put 8 $4.50 $7.77 + $2,616
Pandora (NYSE:P) June 2012 $15 call 9 $2.55 $0.82 - $1,539
TOTAL P/L + $8,227
Click to enlarge

The value of these four holdings, combined with the above-mentioned cash balance, brings the total of the $10,000 portfolio to $30,717. That, my friends, is a triple. I started this thing back in August and, in less than three months, turned $10,000 worth of speculative money into over $30,000.

At this point, I think I would be crazy to do anything other than close out my positions and sit in cash while I consider my next set of moves. The only position I cannot sell is the mammoth RIMM winner. During a drunken stupor - or something - I agreed to hold certain positions through earnings. RIMM was one of them and the company does not report until December. While I still believe considerable downside exists in RIMM, I would love to bank those mean profits. In "real life," I undoubtedly would.

By taking profits in NFLX and losses in SIRI and P, the $10,000 portfolio has a cash balance of $14,667. It's a bit scary that over $16,000 of the portfolio's value, as of this past Friday, sits in RIMM, but even if the stock experiences considerable upside ahead of or after earnings, I think I have a fair amount of breathing room.

Speaking of "real life," I hold a long position in P and a short position in NFLX. As of Friday's close, my Pandora stock holding is down 29.3%, while my NFLX June 2012 $40 put options are up 122%.

I intend to keep the Pandora position open for at least another six months, but more than likely for several years. I closed it in this portfolio because options have expiration dates and, despite Pandora turning a profit in the most recent quarter, investors shunned the company's conservative guidance.

Like fellow Seeking Alpha contributor Spencer Osborne, I saw the profit coming. I also expect the company to beat estimates going forward. To steal a line from another Seeking Alpha comrade, Cameron Kaine, with Pandora, the company could continue to outperform the stock in the near-term.

Ironically, my conviction toward Pandora resembles the conviction of long-time SIRI shareholders. While not facing the obstacles that SIRI did as a penny stock, some investors and critics aim quite a bit of negative sentiment at Pandora. Some even claim the company will go out of business.

I strongly believe in what Pandora is doing and in the opportunities it has in front of it. Pandora's multi-platform, local-national advertising model, coupled with the new Pandora for business, provide the catalyst to make the stock a high-flyer for the decade. As such, I am more than comfortable buying a little bit of P every couple of weeks, regardless of the stock price. It's the type of long-term conviction play that I do not attach stop losses or price targets to.

As for NFLX, I see no reason why it trades higher than RIMM. In fact, I think you could make a better case for NFLX trading below book value than for RIMM. For one, despite its horrendous performance and dismal outlook, RIM still turns a profit. And the company's cash burn looks nothing like the hemorrhaging taking place at Netflix.

Allow me to be perfectly clear - I am not making a bull case for RIMM. Instead, I am just saying that Research in Motion stands, not so proudly, as the lesser of two evils. I never thought a company could rival and then promptly surpass RIM's incompetence until Netflix came along.

I intend to hold onto my NFLX puts. That said, the sailing has been way too smooth as of late. I expect bumps in the road, maybe as early as this week.

Whitney Tilson is now in full pump mode on the stock, making outlandish predictions that it could double. It's difficult to put into words the absurdity of his about-face, given that his original bear case was validated long before Netflix increased prices, aborted Qwikster and comically raised $400 million in cash. And I would not be shocked to see Netflix CEO Reed Hastings put some of his own money on the line - money that he has no concerns over losing - to give the stock a bump on the CEO is buying shares headlines.

In any case, it's all noise. I hate to leave what is now a double open without taking profits, but I would also hate to bail before my bear case has the time it needs to fully play itself out.

Disclosure: I am long P.

Additional disclosure: I am short NFLX.