I carried through on Friday’s plan to unwind the short position on crude oil, selling my holding of the double-short, exchange-traded fund Horizons BetaPro NYMEX Oil Bear Plus (HOD). I had planned to do it when the price went up another 5% to give me a 50% gain, but instead settled for 47% just before lunch today.
Why wait for a few more percentage points to take the gain, as several readers rightfully asked in emails and blog posts? I had said 50% for “silly psychological reasons” as I replied to one reader – i.e. that was the gain that would have offset the Nortel loss in one account.
Over the weekend, I read halfway through Timothy Sykes’ book, An American Hedge Fund, and came across a passage where he similarly held out for a few more points because that would exactly offset his loss on previous trades. His experience highlights the utility of having more objective criteria for buying and selling. He writes:
“I promised myself that I would hold [my short position] until I broke even from the two earlier trades. My paper profit now surged to $27,000, but I still didn’t take it. Within minutes, it turned into a $6,000 paper loss. I couldn’t chance another reversal, so I decided to cut my losses. Unfortunately, the quick reversal scared many other short sellers into trying to cover too … and I found myself chasing the stock higher … and was finally out … with a $28,600 loss.”
Preet Banerjee emailed in with his hedged trade on HOD. When oil was near $140, his mock portfolio bought HOD and several energy stocks to arbitrage the undervaluation of oil stocks relative to the commodity. That turned out well, he reports, and now he is unwinding the trade.