StockTwits for Idiot Retail Investors: Week #3

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.