Entries from January 2009 ↓

Last night I thought I made a mistake buying puts on Mastercard (MA). The StockTwits community was tweeting about 9:1 in favor of $MA for the long run. I’d been trying to snag puts at fire sale prices for about a week and finally got them just before the Wednesday rally really kicked in.

Then I got thinking this morning about the whole credit card industry, and I decided that holding puts wasn’t a mistake. The credit card companies’ best customers are the ones who run a balance and rack up charges but still make some sort of minimum payments; the deadbeats are the ones who pay their bills on time. And if you run a balance, say, trying to stimulate the economy by buying overpriced close-out electronics at Circuit City, then your reward for failing to make a payment is a late fee and massive finance charges from the time of purchase. If times are good, you keep making your monthly minimum, or not, and they pile it on. If times are bad, they just pile it on. Now you’ve gone from being a good customer to a burden; they jack your rate up to 20%, or 25% or 30%, and with late fees it works out to even more, and even the minimum payments can’t be met.

So the best customers get hosed, while the credit card companies’ worst customers are only racking up transaction fees on the backs of the retailers.

Here we are, facing a potentially deflationary economy, in need of consumer confidence and stimulation, and the credit card companies are not only dropping credit limits, but accelerating the fees and rates on whole new classes of consumers who before were their bread and butter. Fewer people will hold credit cards (or be able to) and the ones who do will be spending less. I just don’t see a strategy of business as usual with regards to fees and rates as sustainable through a very nasty recession. In the bigger picture, it might make more sense to reduce rates and finance charges, and stimulate more growth. Share the burden, in the interest of

From my perspective, the credit card companies are at war with their customers, the very people who use their products, whose confidence is a critical element of stimulating the economy and lifting all boats with a rising tide.

So I’m staying with the MA puts a little while longer. The real dog in this industry is Discover Financial Services (DFS). For the first time in a long time, I’m seeing it accepted at fewer places. It may have been a better pick than MA, and I’ll be keeping an eye on it for a possible entry after I close out this MA position. DFS has not much coverage on StockTwits, but seems the one most at risk.

The credit card companies aren’t the only ones whose business model and relationship with their customers create an adversarial relationship. There are others. More on that analysis later. These are not companies you want to be on the wrong side of during a recession.

Made three trades this week:

NDAQ

Closed out my $NDAQ short. Lindzon said it would be a teenager and it was. Covered at $19 on cost basis of $23.50. If you recall, this was my “bad” trade (from a technical perspective) that turned out to be solid based on the fundamental premise. Uncertainty about possible taxes on the exchanges, and an overall down market, drove this into the $18s, but tripped my limit at $19. Overall, the NDAQ short and the puts I bought (when the stock was around the $25 mark) have netted me the largest combined gain this year.

Props to @alphatrends for highlighting this trade; even though it was a very profitable botch on my part, the simple fact that the social filter pointed me in the direction of a good story and good trading stock was worth it.

The lesson learned here is that if there’s a good story behind the stock, for my style, the entry point may turn out to be more of an optimization than an absolute rule. I entered (with the initial short) at the right time for a short term trade, but had to sit through quite a downturn when the market rallied. Since I had some confidence in the story, and a reasonably-sized position, I could weather it.

I’m not sure what “real” traders do. I’m trying to stick to a little discipline here around maintaining position sizes that are roughly 2% of my overall portfolio (yet about 8-10%, and sometimes as much as 25%, of what I consider the trading portion of my portfolio.) To the extent that other traders make bigger bets, there perhaps is much more importance to setting close stops in these trades, and being satisfied with smaller percentage gains (but higher dollar gains) based on the taking larger positions.

One thing I’m not learning from StockTwits is how others do bankroll management. I’ve read Fortune’s Formula: The Untold Story of the Scientific Betting System That Beat the Casinos and Wall Street and have internalized a lot of what it discusses, and follow that to a certain extent, but that’s all theoretical. I’d like to hear some real-life war stories and see people start tweeting their position sizes relative to their bankrolls.

Got off some SRS premium

Tuesday, near the open, I sold premium again on half my $SRS (ProShares UltraShort Real Estate) for what here at the end of the week turns out to be a 8.5% return over the next 28 days (Feb 86 calls). Had I waited until later in the day, that might have been as much as a 15% premium. SRS spent some time in the $70s, and since it is the bulk of my short position now, so I didn’t sell covered calls on the other half; I have a GTC sell in at an obscene amount in case it pleads temporary insanity. If my short position grows elsewhere, or if I turn even more negative, I may sell calls on the rest as we get closer to expiration.

Sold my gold: closed out DGP

My cost basis on this was $14.50, and it limited out Friday at 19.10. @sorenmacbeth called a turning tide in gold earlier in the morning (which turned out, at least for Friday, to be a bad call. Although he absolutely nailed a gold short call the week before. And adjusted his thinking later in the day. So no fair to pick on him…just that I recalled reading that and was surprised when I found myself closing out the position later in the day. Developing…)

I’d been in DGP since December 1, but a 31.7% gain over 53 days wasn’t that bad, and I can’t really count this one as part of the experiment (even though I got into it based on a StockTwits recommendation I’ve long since forgotten.) I’m not sure I can go short on any double ETF, but if it dips into the $15 range again, depending on the conditions, I’ll be interested. @mandelbrot seems to tune into metals analysis; I may need to check him out for potential entry points, as he seems to be hitting his stride over on Twitter Reality.

Entered an INTC April 15 Call Position

This one is risky. Last week I had flipped these calls for a .15/contract gain; I watched carefully this week and entered the position again in two trades for a cost basis of .55. The first trade was pre-earnings (and pre-layoff announcements.) The second was when the layoffs and results were announced, averaging down. I could have closed it out today for around a 22% gain, but decided that based on my overall positioning, I wanted to retain some kind of long position. April is a little too close for comfort for my style of option trading. I’ll probably put this one on a short leash next week.

I’m long INTC in my hold account and sell current-month 16 call premium when it is worthwhile. I don’t see much wrong with INTC; they aren’t as exciting as AAPL, they’re almost like a basic material at this point, with tech vig. An INTC below 12 for any period of time would shock me.

Trades I Didn’t Make

The AAPL-PALM swap I talked about a couple of weeks back didn’t pan out. But I was prepared. I had put buys in all week trying to snag some summer 5 puts, but the stock fell just enough to keep the bid from being hit. Late in the week, the rallies just weren’t strong enough to get a comfortable entry point.

I was in a great position to trade this one though. The day of AAPL’s earnings call, I knew I should have gotten on the short side of PALM for the reason that a bad AAPL number would drag all tech stocks down (including ones that imitate the leader poorly) and a good AAPL number would hurt PALM because it would likely further distance AAPL as the front-runner. The downside of not being able to trade during the day is that you’re not nimble enough to enter the position at a price you want and quickly enough after the insight.

PALM is in a horrible position here; there’s some interest, but when you really drill down, their value is only in making sure Apple keeps honest around innovation. Someone on StockTwits pointed out today that they can’t out-Apple Apple or out-open Google’s Android, and that leaves them no clear identity. No identity, no platform, no developers, no market.

My lesson: look for this in other situations where the 800-lb gorilla (e.g., AAPL or AMZN) is announcing and has a direct but chimpanzee-like imitator (e.g., PALM or PCLN) riding unexpectedly high. I’m not sure there’s a screen for that. But it’s a theory that could work.

I also tried to take upsidetrader’s advice and go short GS and MA earlier in the week (by buying puts). But they too fell out of the range I was willing to pay, so no position there. Once again, I failed to cash in on the meltdown in the financials.

Current Positions

I’m still short BBY, but not in the money on that one. I have the April 15 calls working on INTC (in the black). Still have the X puts (at just under cost). Next week I’ll keep watching BuyOnTheDip’s analysis around the financials; I just flat out missed that this week. My track record trading the financials is poor. Anytime the house can come in and change the rules of the game, I get screwed.

I’ve got nothing for next week; I’ll have to see what the rest of the weekend brings. I’m sitting on a pile of cash once again. I’m roughly 30% short, 10% long and 60% cash.

STFIRE: Week #2

The third installment (and second week) of StockTwits for Idiot Retail Investors turned out fairly well.

It started rough. I’ve already recounted how I sat there full of shorts Tuesday and got itchy and blew a Citi short for 27 cents. (Turns out if I had held it all week, I would have made 1.50 per share.) I’ve already talked about one lesson: don’t go against type. The second lesson here is that I’m not at all comfortable shorting and taking a loss. I have far less tolerance with rapid losses on shorts than I do with losses on options, which I let play longer. It’s probably due to my upbringing in this volatile market. Way too itchy.

Then Wednesday came around and I had four limit sells in that fired in the first few minutes of the market being open. First, my $COST puts went off at 2.90 for a 38% gain over a 12 day holding period (Jan 2 through Jan 14). Thanks to @BuyOnTheDip for that tip (turns out from the StockTwits $COST page, he got out Wednesday also.) Next, the $BBY puts sold for a 22.6% gain over that same 12-day holding period. I’m still short $BBY common, but on the previous rise to 30, rather than averaging up by selling more shares short, I bought June $25 puts. Then, the $AAPL puts I’d been holding and averaging down on since December 8 sold for a 13.2% gain.

In retrospect, I sold the AAPL puts too early; after the market closed that very day, the Steve Jobs health announcement came out. I left a lot on the table by closing out the April 100s.

The final trade Wednesday was closing out a huge June 70 SPY puts position I’d been carrying since last year for an overall loss (although all the puts I’d bought between Christmas and now produced nice profits.) While the early large lots were down 60% and 33% respectively, the last two smaller lots were up 60% and 14%. Overall, however, a 20% loss on a position size and duration that got out of hand.

What made the $AAPL and $SPY sells so painful is that had I been able to follow the market more closely that day, I could have done better—I sold anywhere from 6 to 24 hours too early. I can’t complain, though, since there were a lot of positives there, and I closed out some earlier mistakes, raised my cash position significantly, and got smaller. I could actually breathe more easily.

You see the issues here? Stay home on vacation, get itchy, over-trade and lose; do the day job, have all your profit points taken out too early, miss more upside. But who can argue about erring on the side of profit?

A Quick $INTC Win

As the market got crushed on Wednesday, a trade in $INTC April $15 calls went off at $0.80. I had tried to make the trade the day before, but didn’t get my price, and ending up catching the dip Wednesday. The calls dropped further the next day and I placed an order to double down at $0.60, but it didn’t fill. Finally, Friday my sell at $0.95 filled near the high-of-day for a two-day 18.75% gain. Nice. For the record, I like buying INTC in the 12.50-13.00 range, and I sell premium as it closes in on $15. Two stocks I don’t bet against are $AMZN and $INTC. I feel much more comfortable buying calls or going long, or selling covered calls at the peaks than I do going short or going with puts. ($AAPL, on the other hand, I can play either way.)

BOTD’s Guide to Shorting

BuyOnTheDip has been crushing it lately. Most recently, convinced by the stunning simplicity of his consistent yet perhaps engineering-unaware guide to shorting (i.e., planes are bad, planes are made of STEEL, therefore short $X) I bought US Steel July $20 puts for $3.10. I could have sold out fairly quickly (and probably should have) for a one-day 15% gain, but held tight because by that time I’d gone from a huge short bias to a neutral to long bias, and wanted to retain some kind of hedge. This position is still open. I’ll look to cover fairly quickly here if it does drop again (e.g., $X at 27.50 or so) but the July date gives me some time.

I tend to go with options six 5-6 months out, which I’ve observed is much longer than most of the people doing options on StockTwits. Since my style is to hold for longer periods of time, I need more leeway.

Trades I Didn’t Pull the Trigger On

I really wanted to get in on FAZ earlier in the week based on Fortune8’s comments last weekend about it being a fairly good buy at the $42.50 level. Only problem is that I was trying to get too cute getting it at $42 or $43 and missed getting in, and didn’t feel like taking a chance at $45 or any of the other higher numbers. Psychology is weird. Totally missed out on a large gain.

Mandlebrot had one analysis of $DBP that I thought might mean something, but I looked at the chart and using Fortune8’s 4-8-21 guide, declined to get in. While the trade would now be up, I already have a position in $DGP, so there wasn’t enough reason to try. But I’m starting to dig what @mandelbrot is doing.

Up Next Week: Check out the $PALM short

Last week I talked about the possibility of $AAPL falling and $PALM rising on the Pre announcement, and how one trade might be to rid myself of the $AAPL short as it drops and enter some kind of $PALM short position. I held off this week because I don’t have a feel for $PALM yet (and because the 4-8-21 signal isn’t close to being set up), but I think $PALM fails here in the long run. I don’t know where they are on the hype curve and therefore don’t know how high they can go, but in @upsidetrader’s parlance, I’m watching this one like a peregrine falcon.

Selling more $SRS Premium

Last month, with 18 days to go, I sold $SRS Jan 70 calls on half my underwater $SRS. Athough SRS spent quite a bit of time late in the week over $70, those calls didn’t exercise. I’ll do the same this week sometime with the Feb calls. The cool thing here is that I can sell them for enough premium out of the money that I can still get around a 5% gain for four weeks on my original investment, and ensure a small gain on the original if it gets called. This is making lemonade from lemons, but a gain is a gain. Selling $SRS premium late is a wonderful thing, like finding someone else’s change in the vending machine. With futures looking to be down tonight, I may wait to see how far SRS rises to see if I can collect enough premium at a strike price high enough to guarantee a gain on the overall trade. This position is quite a bit bigger than what I should be holding based on portfolio size, so I don’t mind taking a smaller gain to get a little less exposure.

Watching $AAPL and $INTC

The Steve Jobs announcement was one shoe dropping; but surprisingly, the stock didn’t fall as much as I expected. Based on the news flying around Twitter this weekend, the situation isn’t any clearer. My take now is that rather than settling into that $55-$75 range immediately, we’ll see a narrower $75-$85 range, trending negative, until closer to summer, or until Jobs just flat out shuts it down. I see no upside surprises that carry us through the year. They’ll do great in the long term, but I’m not squirreling away any until it sees the 60s (which I think it will, based on overreaction to and misinterpretation of news that has no fundamental bearing on their future.)

I don’t have any entry points in mind for $AAPL, but I will start moving out from the April options to a later series because my timing sucks. It’s stupid of them to try to pump up the stock until they get past this year.

I’m watching INTC as well, to see if there’s a chance to reprise the trade of last week.

Where I Stand Now

Still long $SRS (with a position about 4x as large as it should be based on my trading portfolio size.) Long $DGP (missed selling for a nice gain when @sorenmacbeth hinted he felt a top at about the same time I did). Long $X puts. Still short $BBY (I’m holding out, will look at averaging down with puts if it pierces $30 again). Still short $NDAQ (it was briefly a teenager this week, but I kept trailing down to maintain more shorts—looking for $19 or less). Pile of cash, needing a few longs to hedge another rally. Maybe something pre-market Tuesday for a single day pop?

New StockTwits I Started Following this Week

• @brasil61 on finz.tv had a great post earlier in the week.
• @tradefast over on Character 141 Best. Site Banner. Ever.
• @mandelbrot’s Twitter Reality is becoming a regular read for me on Tumblr

This week

Later on this week, I’ll post “How I Trade” to give more insight around how I manage to take advantage of StockTwits and all this volatility without being able to day trade.

@brasil61 over on Finz.tv posted a good article today about discipline. And I read it about two hours too late.

My approach is more akin to enjoyable surfing or fishing.. not competitive surfing or fishing. Enjoyable, relaxed wait for the exact perfect moment type surfing…nothing to prove..and if the ocean’s flat ..fine …waiting…waiting ..waiting…more waiting..and then… here comes my wave ..time to play.

Since I had to take the day off, this morning I thought I’d make a quick buck on $C weakness and short a falling knife at 5.11. Bad idea. In about 5 minutes I was down a couple of hundred bucks and losing more, fast. Since by nature I swing trade (primarily intraday), I typically have a much wider tolerance for giving losers a little slack to recover. But not on this one. I heeded the advice I’d heard once to not chase your mistakes and address them as soon as you make them, and ended up taking the couple of hundred dollar loss by covering at 5.38. As $C kept rising throughout the day, I avoided what might have later been a four-figure loss.

Instead of surfing, I was trying to water ski off a submarine.

And the failure is that I went against type. My style is to a) do quite a bit of analysis and triangulation on a position when the market is closed, b) bid out of the money and let 8 trades go by for every one that fills, c) let temporary losses run on a long leash unless evidence accrues that my analysis is wrong, d) stay small, and e) sell for modest gains.

In this trade, I did just about everything wrong. While I think $C is weak and the analysis of “C to 3″ may be good, the day trade bid out of the money meant I was catching a flying knife. I didn’t really stay small because I was looking for a quick gain. Because I wasn’t small, the leash got short.

A better play, and one that would have been more my style, would have been to check the pre-market numbers this morning and saw that the high-of-day was 5.60, then placed a short trade at 5.80 or 6, and give it a week or two. Sure, I might have missed it, like I did Monday with my bids on FAZ at 42, missing out on a quick 15% gain. But the success I have had this year has come from a good idea combined with the discipline of getting my price.

Later, I almost made a similar mistake jumping into FAZ, but recalled the hot stove and withdrew the trade in time.

Until I learn a lot more, that’s what I need to do: stick to my comfort zone, and learn (inexpensively) from small forays outside of it. And to enjoy my days off more.

On the rare occasion I do anything that generates traffic above the background noise of crawlers and spammers (which means, twice a year), I feel the urge to go all meta and point it out.

This retweet of last night’s post was worth a few page views today:

All the traffic isn’t in, and it isn’t on the order of the Indirect Slashdot Effect, but I was fairly surprised at how much cred a StockTwits retweet carries.

And one point of clarification. In that post, my characterization of Brian (@alphatrends) as “chastising” my lack of paying attention was not accurate…I over-dramatized it. He was just expressing angst at someone having gone underwater based on misplaying his analysis (in my case, through lack of attention). Since then, I’ve started watching his market trend videos last week and have learned quite a bit just from watching one, and it’s a great resource for learning. Mea culpa. I typically don’t edit posts for anything other than typos, but I felt it necessary to correct that post.

StockTwits for Idiot Retail Investors: Week #1

Okay, one week into my StockTwits experiment and two trades closed out.

Closed out about half of $NDAQ exposure

First, despite @alphatrends‘ chastisement expression of concern (see my mea culpa for why chastisement was mischaracterization) in last week’s comment thread about not paying close enough attention to his reportage, I managed to turn that failed trade into a good trade by selling all my $NDAQ put options on Thursday’s drop for a ~24% gain. In at cost basis of $2.47, out at 3.10.

The funny story here: I got props from @howardlindzon for the trade, but he said it was too early, teenager:

Only I spent half the day incorrectly thinking he was calling me a teenager. I prefer grasshopper. Or idiot retail investor. I was chagrined. Damn, I missed the insult @howardlindzon day earlier, when I wanted to give him crap about his inability to use apostrophes appropriately in his tweets, and here he was, bagging on me bailing out too soon. Schvitz-behavior-critiquing mofo.

Then I realized about lunchtime that he was talking about $NDAQ as being a teenager (meaning: eventually trading in the teens).

God, I’m a dork.

So I’m still sitting on my $NDAQ short with a cost basis of 23.50. I tried closing it out Friday at a $21 bid, but it didn’t hit. I’ll let this one ride, teenagers.

Sold Some $SRS Premium

Okay, this one worked out—sorta. I sold calls on half my $SRS position. The half (lol) with the $60 cost basis. $70 calls at $1.95 premium. My overall cost basis is $86, so if this gets called, I’m okay (although my cost basis will rise on the overall position to $101 counting these profits.) Not a huge position, so not a lot of premium, and not a lot to write home about.

The one thing I heard this week that intrigued me (on NPR’s Marketplace): commercial property owners are proactively giving retail tenants lease discounts in order to keep them as viable lessors. One example was a top-down mandate to a commercial real estate concern to slash in-progress negotiated leases by 20% to try to keep the retailers from folding. I’m not smart enough to know the best way to play this. It seems like there’s some long-term arbitrage opportunity here. It feels like this is a case of “we all go down together” and the play is to short $RTH and go long $SRS, but I haven’t thought through the game theoretical issues here. Intuition says that it is $SRS that gets hosed no matter what. They lose either way. They give concessions, and margins go down; they don’t, and retailers bail and close stores and they hurt. So despite being way underwater on my $SRS position, I’m liking my 5-6 month chances on turning this one around. The commercial real estate industry is panicking, and they’re counting on retailers of all people to save them. Show me some consumer sentiment and I’ll cover.

In other news: $COST, $AAPL

I just about covered my $COST (Costco) puts this week. They’re good to the tune of about 22% on paper, after Wal-Mart’s fade on Thursday. I’m letting these run a little bit more. While I haven’t disclosed position size yet on any of these trades (waiting for some of last year’s trades to close out before setting that up), if $COST drops to around $48 this upcoming week, I will bank a 45% gain on the puts and the profit will be roughly equal to my $NDAQ put sale this week. This is about 11% of my trading account (and the trading account is in turn is about 16% of my overall brokerage position), so you get the sense of how I view a lot of these trades as tuition in my learning process. In the big picture, I’m trying to stay too small to fail.

I’m still negative on $AAPL with the puts (April 80s at 16.86 cost basis) despite my household buying four $AAPL products over the holidays to the tune of about four grand. Win or lose, I’m going to need to close out this position soon due to the time factor. Right now, I’m down about 6%. While in the long-long term I’m bullish on $AAPL, in the short term I believe it is range bound between $80 and $100, with all the trends pointing to it hitting $65-$70 before it hits $110 (based on lack of transparency around Jobs’ health status). If you’re buying stock for your kids’ college fund, go long. If you’ve got a 12-month time frame, short it north of $90. They have quality management, they have an incredible coherent strategy and management team (second only to $AMZN), but they have the problem in 2009 of a down economy (which will cause them to hold back major innovations) and the doubt around Jobs health. At some point this year, all the bad news will be out (it’s not yet) and AAPL stock will fall and then you can safely load up. Just not at $90. (I expressed similar sentiment in the comments over on Fred Wilson’s blog, with additional info on $GOOG. Great post and comments all around.)

On this trade, the time factor is getting me, so I will look to cover soon and will take whatever profits I can find should it drop to the $85-$86 this week. Hoping for lots of volatility prior to expiration.

What I’m Watching This Week

If you want my play of the upcoming week, it’s going to be this: let’s assume that $PALM ascends another 10-20% Monday/Tuesday based on the announcement of its new Pre platform. And let’s say that $AAPL falls 5% because folks think it’s a zero-sum game and the iPhone is hurt because of this. Then then trade is to cover your $AAPL short on the dip and immediately flip into a $PALM short (or put) situation. I know jack about technical analysis, so I can’t tell you about support, but I sure like $AAPL’s management over $PALM’s, and it should be pretty straightforward to know who the platform winners are going to be. $AAPL and $RIMM we still talk about in a few years; $PALM is just delaying the inevitable. There’s maybe only a 1 in 5 chance this will happen or that I’ll actually go through with the trade, but it’s one thing I’m watching. I like to trade overreactions and irrational exuberance, and any love of $PALM to me oozes irrationality.

What I Owe

I really need to give you the blow-by-blow of my September through December experiences in the market (including my schooling in $SPY and $USO calls), as well as the long-term history of my trading experience and use of online intelligence sources. I’ll sneak those in as posts over the next couple of weeks. It’s important background if you’re trying to judge whether I’m a voice worthy of catching in your filter. And since my day job makes being a day trader (with the requisite attention span needed) impossible, I’ll detail how I trade with a limited attention span and time.

Who I’m Tuning Into

This week I’ve begun to follow @alphatrends blog more carefully, as well as @fortune8 (appreciate the rationality of another part-timer) and @BuyOnTheDip (because I’m bearish as well). Haven’t decided yet on @mandelbrot though—love the art but not sure I can read the correlations between free text tweets and stock prices.