$10,000 Portfolio Update: Flying To 'Safety' In An Uncertain Environment

by: SA Editor Rocco Pendola

I'm making an adjustment to the $10,000 portfolio. Last week, I updated the portfolio, using proceeds from recent sales to add positions alongside the 30 Research in Motion (RIMM) March $20 puts that I must hold through the company's December earnings report.

Those puts continue to produce considerable on-paper profits as RIM continues its death spiral. As of Wednesday's close, the bid price on them stands at $4.50. I picked them up for an average of $2.70. Do the math and you have a current market value of $13,500 and an unrealized gain of $5,400. That's nearly $2,000 better than how things looked on December 1st.

The $10,000 portfolio also holds 25 Netflix (NASDAQ:NFLX) June $40 puts that I intend to hold onto. I picked them up for $3.85 apiece. At Wednesday's closing bid of price of $2.81, the position sports a market value of $7,025 and an on-paper loss of $2,600. Once the Facebook euphoria wears off, the Q4 report nears and FY12 (and possibly FY13) losses become a reality, I expect Netflix's implosion to continue.

These short-term pops represent little more than trades and an overly-optimistic dead cat bounce. For whatever reason, most of the financial media refuses to expose the inanity of Reed Hastings' speech at UBS yesterday. In another Seeking Alpha article, I recap Hastings' segue from boasting about spending to a discussion about liquidity that would have sank most stocks immediately. Anyhow, I reopened my puts in "real life" at a better price and intend to stay with them for the next act.

The two moves I am making say nothing about my thoughts on the near- or long-term prospects of Apple (NASDAQ:AAPL) and Amazon.com (NASDAQ:AMZN) as companies. I believe in both as long-term investments. I just do not think now is the time to make short-term plays on either, particularly in a portfolio that has done so well in such a short period of time.

Hence, I am unloading my 3 AAPL July 2012 $500 calls for $9.20 and my 1 AMZN July 2012 $210 call for $19.60. That frees up $2,760 and $1,960 worth of cash, respectively, and represents losses of $75 and $205. Hardly a back-breaker.

Taken together, the $10,000 portfolio has a market value of $25,245. That includes $4,720 worth of cash, thanks to the AAPL and AMZN sales.

Here's my rationale. I don't necessarily want to be short the market here, but I definitely do not want to be long the types of stocks that I tend to follow. I'd rather be short companies right now that have obviously weak prospects headed into 2012. RIM and Netflix fit that bill.

Otherwise, I like the idea of a flight to safety, however you define that. For some people, that means sitting in cash. For others, it means buying stocks that pay a dividend and exhibit minimal volatility. For the more aggressive, that means getting short. After all, as investors, we're not passive observers to carnage when it happens. You can profit from stocks when they go down.

I'm not one to buy into the notion that the sky is falling. It always is. For the 36 years I've been around, there's always been a crisis. And it's always been the type of crisis, according to some, that would crush the system and send irreversible and profound shockwaves through society. Somehow, though, people persist, make adjustments and those with the resources (i.e., money, time, education, "ability," some set of intangible qualities) do well enough to, ultimately, keep themselves and their families happy. Those without the resources stay too busy just trying to survive that they don't have time to look up and incite meaningful change.

That said, what's happening in Europe will play itself out over the coming weeks and months. While the dust will settle sooner than the most ardent doomsayers predict, it could be an ugly and painful process. I always enjoy reading what James A. Kostohryz has to say on Seeking Alpha. Earlier in the week, something he wrote about Europe stuck out at me:

Expect unrest. When you tell people who are used to certain entitlements that they'll have to do without them, things can get ugly. (It is interesting to note that some nations lack the political will to ask their citizens to sacrifice). But, the ugliness ebbs and flows. Here, in America, the Occupy Wall Street movement, which was purported to be "real," has proven to be nothing more than a fleeting effort not worth a quarter of the publicity it received. In other words, this too shall pass and you'll be left with, for all intents and purposes, the status quo.

As these events play themselves out, however, the market can have some pretty bad days. Given the run we've seen recently, I think we're in for a few of those days. As I looked at the impressive history of the $10,000 portfolio, I asked myself if it makes sense to sit in any long positions when I am of that somewhat bearish mind. The clear answer was no. Stay tuned, though, because the time will be right to use the cash I have to make more moves, possibly before 2011 ends.

Disclosure: I am long AAPL.

Additional disclosure: I am short NFLX via a long position in NFLX June 2012 $40 put options.