My long-time readers know I don’t set out looking to be bearish - I never have fun shorting the market, as I like to stay on the positive side of things, but as a fundamentalist, when I don’t like the undercurrents that are forming in the markets, I’m not so hopelessly optimistic that I don’t shift the portfolio to an appropriately negative stance.
One of the mistakes many traders make is they become attached to their positions and seek to defend them, despite new data coming in. I suppose part of this is that a natural fondness you develop for a position that’s "been good to you" in the past and the other part is that everybody hates to admit they are wrong - and selling something you bought, especially with a little or no profit, is an admission you made a mistake.
There’s a James Bond marathon on one of the cable channels this weekend, and it struck me that he would make a good trader. Bond searches for clues, takes calculated risks, isn’t afraid to get shot at once in a while and leads with his instincts but then questions his own decisions along the way. James Bond isn’t afraid to to commit to a position, but he’s always ready in case the ally he’s with at the moment suddenly pulls a knife on him. Bond forms temporary alliances with people (positions) he hates because he is focused on the big picture - solving the case.
In Octopussy, James Bond bids on a Faberge egg at an auction, not because he wants it, but to flush out who the real buyers are. He then follows that egg around the world, picking up clues along the way but he is patient and, when the opportunity presents itself, he takes decisive action based on the best information he has available. In one scene he is able to fight with a woman, make love to her and then arrest her and he is COMPLETELY UNAPOLOGETIC about his changes of heart - this is how we need to be with our positions! Sometimes we love them and sometimes we hate them; sometimes they are good to us and sometimes they try to kill us - there is no room for "loyalty" in the options market.
We live in a society where "flip-flopping" or being "wishy washy" is frowned upon. Politicians are derided for changing their stance on an issue and we elected a leader who’s a "decider," somehow proud of the fact that no amount of evidence will ever convince him to change his mind. If you take that attitude into the options market you will be killed! Stocks go up AND down and you are operating in a very short time frame in which you need to be correct. Loyalty to a stock can be rewarding over time, but loyalty to an option makes NO sense. It’s called an OPTION for a reason! You may exercise it, you may not, but you pay a serious premium to give yourself the flexibility to change your mind - holding onto an option contract through thick and thin means you paid that premium for nothing.
That doesn’t mean that we flip around like a weather vane whenever the market wiggles, but it does mean that we remain open and flexible as new information is presented to us and we need to be ready to cut and run, reposition, double down or roll at a moment’s notice because the windows of opportunity are very small and the market calls for decisive action. We need to search for clues as to what to invest in, take a few chances and stay "On Mission" at all times. Our mission is to make money, not to wait for the market to turn!
Our mission this week was to take advantage of the dip in the market and get back to cash. After calling for half cash last week and again this week, I am very happy to report that the portfolios are roughly 2/3 in cash and, of course, well ahead for the year. Although our stance is still generally bearish, as I said, I’m not really a downside player so I prefer to watch the carnage with money on the side, looking for opportunities as the tide of the market recedes from our beach.
High tide was our theme of the week, and we’ll see how far back the market will pull in next week’s heavy data cycle. But as I said on Thursday morning, Obi Won had some very good advice on going with the flow so we will not head into the week banking on a collapse or praying for a comeback - we will "let go" of our prejudices and reach out with our feelings until the market picture comes into focus, keeping ourselves ready to take advantage of whatever situation presents itself.
We closed out 77 positions for the week with a 45% average gain on 16 average days open - not our best performance, but our goal was to get back to cash, not to make a lot of money. Since we mainly stopped out of positions that weren’t working anymore, though, the remaining positions are a pretty spectacular set:
The Short-Term Portfolio is down to "just" 53 open positions (down from 69 last week) which are up 126%, a huge improvement from last week (96%) due to it’s bearish nature. But with a much smaller base of remaining positions, we can expect a lot of volatility in the weeks ahead. Most of the windfall came from our large Diamonds Trust, Series 1 (DIA) protective put positions, which we cashed mainly out on Friday, taking a slightly more neutral stance into the weekend to avoid giving back these spectacular gains.
Only three positions were closed in our Long-Term Portfolio and those 32 positions are up 127% for the year, just weeks away from our major July rebalancing. Hopefully, we’ll get a really nice sell-off in the next week or two so we can position ourselves in ‘09 and ‘10 leaps at lower prices! Two of the cut positions were our shorter Exxon Mobil Corporation (XOM) plays as they finally turned positive, leaving just the ‘09 $80 puts as our portfolio’s largest short position.
The $10,000 Portfolio "improved" to a 30% loss, but I’m still sick about that one. The Walt Disney Company (DIS) killed us more than any other single position and, although we got that one back in the STP, we just didn’t have the wiggle room in the $10KP to save it here. Tomorrow marks a month since we started it and, although I meant to make some moves there this week, the market was just too choppy to risk a major change and all we did was get 1/2 out of our Time Warner Inc. (TWX) calls and roll our Foster Wheeler Ltds (FWLT).
Our Complex Spreads Portfolio is up to a 40% gain since 5/1, but I have to confess there’s no longer a condor or a butterfly in it! I simply can’t leave those positions alone as there is always an opportunity to improve them with a little tinkering so they end up getting broken up into separate trades. These are generally back to my favorite calendar call spreads augmented by long puts and calls on the same position. Our Google (GOOG) condor has already changed from Thursday’s open as we dumped our put and bought out our caller on Friday’s strong open, reestablishing with a $500 put (vs. $490 originally) and selling the $520 call (vs. $510 originally) giving up about $1,000 in credit in exchange for $20 in position - a good trade-off, I think!
Our Stock Portfolio held steady at 32% with only Gastar Exploration Limited (GST) and Metallica Resources Inc. (MRB) uncovered, so we won’t expect much action there into expirations. Staying flat is good in a down market, so we are absolutely on mission as far as our stocks go.
The Free Picks Portfolio continues its astounding performance, now up 165% since its inception on 4/30. There are just 10 open positions and only $14K in securities with the rest in cash as, much like the less lucky $10KP, I simply couldn’t find anything good to do that would be risk appropriate for a smaller portfolio. The Google plays need to be watched carefully as a huge spike would hurt us so active management is critical here.
[View Phil's Free Picks Portfolio (scroll down).]