If you have been listening to any market veterans these last many weeks, you have almost certainly heard many say that they have never seen anything like this market, especially with regard to the huge swings in prices and volatility.

Today was just another example of that sentiment.  The only thing we know, at least for now, is that the trend in place is still down…  until it isn’t.

Also, we haven’t seen these kind of wild swings in price since 2000 - early 2003, and we all know how those years turned out.   3+ years…  This current bear, based on all of this continuing bad news, has been showing these big volatility signs to the downside for only about 5 months…

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With expiration tomorrow, we have been spending much of our time yesterday and today, and will spend much of it tomorrow, making adjustments to our ongoing and carryover positions.

If anyone is holding any of the trades we have entered over the past couple of weeks…   

GOOG - Exiting tomorrow with possible adjustments 

DELL - The long side of this trade will expire worthless tomorrow unless there is a huge BO above $32.50 and the position will experience a small loss after we exited the Short side of the trade for a small profit.

YHOO - We will be rolling this trade out as we believe the trade is still live though it is currently negative.

JOYG - We thought we may have the position nailed for a near Max Gain after yesterday but when today started deteriorating we decided to buy 1 MAR 65 Put for $.70 to reduce our risk even further if the price continues to fall.  Our BE to the downside is ~$62 and will now profit below that price.  The BE to the upside is now ~$68.50 with the Max Gain at $70 at ~$1.00/Contract profit.

TMA - The Net Short position was closed at near the Max Gain and the Net Long position risk is significantly reduced by our actions last week.  We will update tomorrow on the status of this position but it appears that the remaining portion of the Short side of the net Long will close for near Max Gain ($2.45/Contract), and we may hold onto the remaining Long JAN 10 - 5 Calls.

Please send us a note tonight so we can make sure you are updated in real-time as we either exit or adjust these positions tomorrow.

Coach BD 

Cramer actually made a great point in his program today that bares repeating.

As a general rule, investors and traders should almost never hold onto stocks or positions based on not wanting to pay the taxes.  

Although every position is, or can be, an income generating vehicle for your portfolio, if the fundamentals of your original decision to enter the position has changed, exit the position and move on to something else, regardless of the tax consequences.

Paying taxes is a problem we all want to have.  If you’re not paying them then that probably means you aren’t making any profits.

So unless you are adept at making adjustments to your holdings that take advantage of changing stories or fundamentals…

Suck it up, pay your taxes, and move on.

Coach BD

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This, like any general rule, has exceptions.  If you have specific questions about some of these exceptions, or about any of your own holdings that may fall into this area, please contact us.

Friday’s sell-off wasn’t all bad news.  Mostly bad, but not all.  On the positive side, the range contraction that has marked this mini-reversal off of January’s lows is still intact, with a pattern of higher lows and lower highs.  That could change on Monday of course, but for now, the consolidation continues. 

Now for the bad news.  First, Friday’s volume was higher though still only average.  Bad economic news continues.  Regional business activity is weaker than it has been in 6 years.  AIG reported the largest loss in company history.  Warren Buffet warned that the insurance business could get tougher.

Oh, and oil passed $103 a barrel…  Yikes!

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From the perspective of our portfolio performance, we are in pretty good shape, up ~5% over the first 2 months of 2008.  The major factors of our success in this tough market are…

• Our basket of Canadian Energy Trusts has performed very well, up nearly 25% from their DEC & JAN lows.  And those 1-1.5% monthly (10-15% annually) distributions don’t hurt at all.
• Our core overweight short position in USNA is finally beginning to show some real strength.
• Our VIX portfolio hedge has also performed very well, up ~40% in 2008, largely due to our timely premium sales during the big spikes in volatility in JAN (2) and early FEB (1).
• The balance of our Long Portfolio has weathered this market storm pretty well as we have maintained tight hedges on all of our Long positions and have taken advantage of this see-saw market to successfully collect (SELL) ST premium against most of our LT positions, thereby minimizing the damage from the current market weakness.
• ST Trades will be discussed in a separate post as they have had little impact on the overall performance of our portfolio.

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We will continue our ST strategy of tight hedges and collecting ST profits from hedge sales and other premium sales (covered calls) as long as the market allows. 

From the perspective of a trader who has several significant long positions, a volatile market moving sideways is an excellent opportunity for ST income generation.  These ST income techniques are one of our core strategies for income generation.

The Trade Coach believes all traders should seek to add one or more of these strategies to their trading and investment arsenal in order to enhance returns and protect LT positions, which ultimately results in reduced risk…  One of our primary goals.

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Finally, we are starting to look seriously at a few metals plays, most specifically Gold.  With the prospect of a prolonged economic downturn and continued market weakness, a few of the Gold stocks are beginning to look attractive.  AUY & GG are two that may offer good risk/reward profiles.  We will update our evaluation early next week.  

Coach BD    

Thanks to m37 for the comment and question regarding our strategy in finding new trade opportunities and about using the 52-week high list.

Coach BD

continue reading "Trade Evaluation Dialogue"

Thanks to Leo for sending this excellent synopsis, by Price Headley, of the important themes in the book titled Mind Traps by Roland Barachand.

I have not read the book but the points summarized by Mr. Headley are largely excellent considerations and observations that could be very useful to all traders and investors.

I have entered comments where appropriate.  Please comment or question if you have an alternative opinion.

Coach BD

continue reading "Trading Psychology"

Excellent inquiry and understanding of our Long Trading Rules from Leo…  Our responses are included below.

Leo wrote:

“Good afternoon,

When you have a moment, please clarify one item if you would.Our Long Trade Rules (3) says…“…Our goal is to select the ITM position where the premium can
be “neutralized” by the sale of a front-month OTM Call…” By premium are you referring to the “time” portion only of the ITM
Call that we would purchase?”
[Coach BD]  YES. 

“For example…

…If the Front Month OTM Call premium is $5.00 with all OTM
premiums being 100% time value.

…are we looking for  an ITH Call option where the “time” portion
only is ~$5″
[Coach BD] YES. 

“In other words, we look for a Call option (our Target Month + 2
months) where the time portion of the Premium would have a time
value of ~$5.00.”
[Coach BD] CORRECT. 

“(Where the ITM Total Premium [Coach BD] PRICE  is $20 of which $15 is Intrinsic Value and
$5 is Time Value).”
[Coach BD] Remember “Premium” is the “Time Value”, or “Extrinsic” portion of the “Price”.   

“Please let me know if this is correct.”
[Coach BD]  Good work.  The strategy behind this goal is that we are able, if we choose, to neutralize the ENTIRE premium we had to pay for our ITM position with a single sale of an OTM strike, giving us a ”fair value” (all intrinsic value) position through expiration of the front-month short option. 

We may choose to do this on entry…

1) If we are entering a bit more speculative trade (we feel there may be some downside in the ST) or if our strategy was to leverage a larger position with the use the OTM sale (Leverage = the ability to enter a larger position with an equal risk than simply entering a long position without protection.

2) Again, we are a bit cautious about the ST volatility of the trade and we want to use “some” of the Premium sold to pay for Put protection, reducing the downside risk even further. 

We may not do this if…

We are very confident of our evaluation, and we believe the entry price is a value, or even undervalued, AND, we are following our rules for set percentage entries (i.e. 1/3, 1/4, etc that both Sam and The Trade Coach outlines).  Thereby, the percentage entry itself is the full amount of risk we are willing to accept to open the trade and there is no need to hedge it….YET. 

Though as both Sam and I have suggested throughout these past few months… In a market like this one, without any strong clarity of direction, most, if not all, trades should be opened with some hedge, unless the apparent value is so compelling that we feel the downside risk is almost nil.

Thanks Leo.

Coach BD

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