StockTwits for Idiot Retail Investors: Week #5

Walking into the Propeller Blade

Rough week to be short.

This week started out with the predictable selling into the rally, selling Feb $15 call premium on half a the INTC position in my hold account on Wednesday.

All through the last 6 months, it’s felt like the right thing to do is run against the trend, to run into the burning building instead of out of it, and to avoid friendly trojan rallies bearing gifts. And to a large degree, it’s worked out. Even in the darkest hour, the bear would come through and save the short trades, and buying quality companies beaten down turned out well.

This past week, I did the same, but the usually queasiness felt a little deeper than normal. The bull sentiment seemed broader, and I felt like I ended the week like someone finding out too late that the game is musical chairs and the music stopped a couple of days earlier. For the first time, I realized how attentive and agile you have to be to enter these short term positions.

The next two or three weeks will tell whether limited (but focused) attention is enough to stay profitable, or whether it really is a full-time daytrader’s game.

With that, the rest of the recap.

AAPL: Somebody Moved My Swingset

I twice averaged down on AAPL July 80 puts on Wednesday and Friday as it flirted with $100, and sit now with a cost basis of 6.65. I haven’t had a bad trade on AAPL since I’ve become more active since September, but this may be the first time. Currently down 20% with a position size that is about double what it should be.

Financial Hijinx

After Visa (V) reported earnings and Mastercard gapped up, I took one small sip of puts at a lower price, but didn’t average down further when Mastercard itself posted better earnings. Overall, these are still down a little over 40%. I need to just put this one behind me.

When the FAZ hit $45, I bought some. Another ridiculous move when Swan and others are calling for FAS to be the one to rally. FAZ is going to open Monday in the mid-30s, it appears, and my string of poor timing on financials continues.

What I plan to do this week is look at BAC, BAC calls and FAS to hedge these financial positions and buy time. The StockTwits sentiment seems to be putting forth this notion that BAC could see $10 again in the short term, which would help the financials overall, even though this could be another C situation where the boost is just a little exuberance due to government intervention and a reprieve before it continues its drop to 3. If it plays out right, then I could see some benefit from a BAC rise, then switch directions again to get out of the financials altogether.

Finally into PALM

Finally snagged my long awaited Palm May 5 puts after executing on my Friday plan. I’ve decided to go with a shorter leash here. While I still think they suck for the long term, the second wave of Pre buzz seems to be coming. Ultimately, I stand by the notion that after everyone tries the pretenders, they’ll come back to the iPhone. However, the timing is what may be off.

X Marks the Failure

Still on tilt, I averaged down on X puts. Not a good idea when the government is getting ready to dump a bunch of money into things needing STEEL. US STEEL. Got no long term conviction here, despite how I felt earlier in the week.

Trying NDAQ short again

I think NDAQ is primed for a fall, and as it crossed $24, I bought some more puts. It’s a laggard and I would expect that if we do see a termination to this rally, it’ll be one of the first ones to drop. But it indirectly increases my negative position on financials, so I either have to get hedged or get smaller.

Buh-Bye: BBY Puts

Tried averaging down on BBY puts into the rally, but despite Best Buy touching $30, the order never filled. Along with my NDAQ puts, this is the short I feel most comfortable with. I may sit this one out awhile, but will look to average down if the optimism just gets stupid.

Other Stuff: Position Sizing

Last night I ran across this fairly good thread on position sizing after looking around for more info on the concept of “optimal f”. The first couple of pages are worth a read as the debate goes on about the Kelly criterion vs optimal f as maximizing returns based on adjusting position size. I’ll digest this some later, but it ended up being a good practical introduction to what’s involved, like whether you want to tune position size to the maximum downturn you can stomach, or to reduce your risk of ruin.

One of the comments contained this down-to-earth simple heuristic for position sizing:

The idea that money management is a mysterious and complex issue is proliferated by books like this. I can sum up effective money management in two steps: First take your worst case loss scenario, which will be based on a run of lossses with a less than one percent probability of occurring, as calculated by your expected win/loss ratio. For example, if you reasonably expect to win 40% of the time and lose 60% of the time, there is a less than 1% or “worst case” probability, that you will see ten losses in a row at some point in your trading (this may look like hard math but the calculations are actually grade school level). Next, determine your max desired drawdown. What’s the biggest hit you could possibly stand? Ten percent down? Twenty five? Fifty? Let’s say you are moderately aggressive and able to deal with a twenty percent drawdown without losing your nerve. Divide twenty percent by ten, and you see that your max allowable risk is 2% of your account balance, including calculated slippage and commissions per trade. If you can stomach a 40% drawdown you don’t risk more than 4%, and so forth. Simple, straightforward, no hidden gimmicks, gizmos or geekspeak. The only other bogey you have to deal with is the once in a blue moon nasty price shock that blows your stop to kingdom come (a simple and emphatic argument for less risk per trade, not more).

The one thing it helped me remember is that position size isn’t simple; separate positions may in fact be representing the same thing (e.g., my MA puts and FAZ positions are redundant to a certain degree; MA puts themselves relate to beliefs about consumer/retail, etc.) That kind of overall view of relationships between positions gets lost when you are listening to the StockTwits stream and evaluating opportunities. If you’re not careful, you can end up with a collection of positions that all fall together, or a single “theory” that ends up with a too large bet size on it. I’ve been lucky so far, but I need to add this basic macro overview to my evaluation criteria.

New to This?

If you’re new to this blog, and disgusted by my amateurish week, check out some of the previous posts in this series when things looked a little better:

• StockTwits for Idiot Retail Investors: Week #0
• StockTwits for Idiot Retail Investors: Week #1
• StockTwits for Idiot Retail Investors: Week #2
• StockTwits for Idiot Retail Investors: Week #3
• StockTwits for Idiot Retail Investors: Week #4