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Last night I watched the schlocky film 10,000 B.C. as part of my research for life skills in the time of Dow 1000. Consequently, this week I’m going long mammoth pelts and have began careful study of the art of curing meat on a clothes line, Andy Swan’s optimism be damned.

I call this “investing in myself”. While I’m not accurate with a spear honed from a wooly mammoth femur, I did take some money off my wife and kids on a bet Saturday by draining a wicked three-pointer, so there’s hope that those skills may transfer to hunting.

On the off chance that we aren’t headed for doom, I did begin to start taking short money off the table, and established a couple of new base long positions.

What’s different for me this time was that in the past, when I’d close a winning position, I’d close it out completely; lately I’ve been staging my exits in chunks, trying to take profits off and keep the positions in balance overall. So far, it seems to be working out well. As I looked back over my monthly performances for the last six months, things seem to be going slightly better—less variance, and fewer huge mistakes. (For what it’s worth, here are the monthly numbers. Sep 2008: +27.4%; Oct 2008: +107.6%; Nov 2008: -7.1%; Dec 2008: +15.96% Jan 2009: -5.81%; Feb 2009: +10.71%; March to date: +19.8%. The great returns in September and October were due to flat out gambling and taking positions that were about 60-70% of my total trading account at the time. Better to be lucky than good.)

Started covering SRS

Monday I wrote some March 100 call premium on SRS on half my position. By Friday, this looked like a bad trade, with SRS at $111, but it feels like it’s time to get out, and I sold 1/4th of my SRS position at $104 on Friday for a 21% gain. I get the sense that its run is over (as @thehawaiitrader says: “$SRS takes the stairs up, the elevator down.“) Consequently I make be looking for an exit on the other quarter of it, and then see if the rest gets called away.

SRS is a trade that I did just about everything wrong on—too big of a position, held an ultra ETF for too long, averaged down. If I can unwind it entirely at these levels, though, it’ll end up being a fairly profitable mistake.

Closed out the Mastercard Put Failure

Finally got out from underneath this put position as Mastercard tanked this week. The right trade might have been to assume my timing was poor and let it fade some more, but from what I’ve learned, this was just trying to turn what might have been a 60% loss into a 36% loss, so I can use the money for better trades.

BBY Starts to Flame Out, and Pay Off

I’ve had a long running short position on Best Buy with a cost basis of around 26.40, but rather than adding to it as it showed strength on the way to $30, I bought puts. Going into this week I was sitting on a pretty good pile of profitable June 25 puts; on Monday I closed 40% of them for a 29% gain, then eased out of 30% of the overall position for a 45% gain on that lot, and took down 1/4th of the short position.

BBY is still my second biggest short position (SRS is first by dollar volume, and SPY puts are third.) I went to Best Buy this weekend and while it didn’t seem as empty as some of the home improvement stores I’d been to, the kind of stuff I saw people walking out the door with were fairly small ticket items. Keyboards and $200 video cameras. The DVD area is wasted space, the TV and appliance areas are empty, no one buying phones. The only area with anything going on was the video game section, which they’ve smartly moved to the back of the store.

Closed out NDAQ Puts

The other big short I had working, and perhaps the first trade where I showed discipline and awareness of the charts, closed out Friday for a 60% gain. I had a small position of NDAQ puts with a cost basis of $2.50 that went off for $4 as the stock dropped from the $24 range to $18.50 over the course of a couple of weeks.

Bought More SPY Puts

On the strength Wednesday morning, an order for Sep 56 SPY puts filled, giving me two separate SPY put positions (the other is Sep 64s) that are up 15% and 40% respectively. Beanieville had a great post on simplification this week, and in retrospect, getting rid of the exotics like SRS and limiting exposure to specific stock shorts might be a good idea, so these SPY puts are perhaps a better way to go with the flow as the market trends down.

Started Longs with AAPL and AMZN

Before Apple imploded late in the week, I bought some July 85 calls. Sentiment would seem to tell me I’m flat out wrong on this one, and that AAPL might not be a leader, but Andy Swan’s optimism gives me a moment of pause, and I want to be in some leaders if things turn around.

I’d been trying to get into AMZN for awhile, and finally entered a small position at 60. Although this morning, reflecting on things, as much as I love Amazon, how can anyone think we’ve hit a bottom in either the market or the overall economy if Amazon is still at 60? Won’t it have to be punished in a sustained way for some time? I went in thinking this was an investment, but now I’m wondering if it is a short term trade.

Other Positions

Still hold some of the initial INTC calls I started taking down last week. I’m less enamored with these, but it’s part of my Bear Rally Early Warning System (BREWS) and a buy on the dip kind of move. It’s weakening though, so my patience is getting thinner.

Keep Your Spears Sharp

If there’s one thing I learned from “10,000 B.C.”, it’s to keep your spear sharp. Both ends. The volatility is back, both sides are trying to punish the other, and in the course of a single week, both sides can claim victory. Stay agile.

I’m dumping Google for Amazon in a couple of ways, and here’s why:

For the past year or so, I’ve had a Google AdSense block over there to the right. Not because I had illusions of making any money, but to get a sense for how it worked, and what typical click-through rates are on a personal blog. As the focus on my posts moved away from the Code and Literature of the blog’s tag line, and more to Money, the ads settled in on a bunch of penny stock pushers. No one clicked on anything anyway, and in the course of the experiment, I netted little more than a postage stamp’s worth of value.

Consequently, I’ve dumped the AdSense in the sidebar and limited my commercialization to book recommendations. For my kind of site, I think this works a lot better. And my decision to do so tells you something about the two companies.

Fat Head Aggregators vs the Filtered Long Tail

Currently I’m reading Howard Lindzon’s new book, The Wallstrip Edge (full review later, when I finish). I’m about 1/3rd of the way through the book, just past the part where he describes experiences in finding trends. And the trend I see here is not only relevant to monetization of blogs, but to the underlying stocks as well.

Google is great for monetizing commercial eyeballs. AdSense works not for the long tail, but for the “fat head” aggregators and ad farmers who can pull in 1M page views per month, or really narrow their focus to attracting search traffic on a topic rather than building an audience. Facebook’s click through rates, which are reported to be notoriously low (in the 0.04% range), in fact may be more typical than anyone wants to admit. Like so many of the faith-based schemes that have been exposed in the last year, AdSense profitability and conversion ratios seem to be overstated. Not good for the GOOG. A thesis I’m working on for a later post is that you can find things that are “too good to be true” and profit by avoiding them. As the web matures, I suspect that the AdSense ecosystem, which for much of the decade was too good to be true, will grow far less attractive monetization option.

Amazon, on the other hand, caters better to the long tail, to those finding trusted voices, and to those building audiences.

The trend I see (confirmed by observing the many-to-many relationships on Twitter, and by the dynamics of StockTwits as it relates to trend following is that repeated interactions lead to trust, and so much commerce—finding things, finding what you should be interested in, learning what’s best—are enabled and made more effective by the social filter. The actions taken due to these recommendations results in real commerce taking place; a “real” transaction occurs as opposed to a trivial payment for shifting attention.

Trust the Filter; Monetize the Trust

It’s no wonder that a trend rider like Howard is investing in StockTwits and Amazon; it’s a coherent theory that makes sense. Trust the filter; monetize the trust.

So I’m avoiding Google and looking to buy Amazon. Put another way (inspired by a line in Howard’s book), I’m more confident that Amazon is the next Amazon than I am that Google is the next Google.

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.

@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.

One of my resolutions for 2009 is to figure out how to make better use of StockTwits as a tool for the part time intraday trader. I realize it’s pretty ludicrous to be using what amounts to a day trading tool for a strategy of intraday trades in this kind of market, but my intent is to learn. In fact, when your blogging ad revenue is measured in the millicents per year, the learning is the only thing of value you can glean from doing this in the open.

My going in premise on 2009 is that we’ll see a shallow rally of the S&P 500 to about 1000 on low volume, followed by a continued fall throughout the year to around 770 and possibly lower. I’m more inclined to follow through on ideas that I come across which fit that philosophy.

I’ll try to post once a week on the ideas that have caught in my filters, and the trades that resulted. As we stand before the first full trading week of 2009, I’ve inherited a number of StockTwits-inspired trades that I need to close out before I can fully embrace the one-idea-per-week goal for the year.

The current open positions (and the source of inspiration):

Short NDAQ

I entered this in stages. Short NDAQ common at $23 and $24.50 for a cost basis of $23.50. Long June $20 puts with a cost basis of $2.47.

I found this one via @alphatrends’ post. This was probably a bad idea—the theory really makes no sense from a Madoff perspective, but may pay off if my bearish sentiment is realized early in 2009. As with most of my options-related failures, the timing is key. In the fall, timing mattered little when there were DJIA swings of 1000 points in a day; now that swings have slowed down, timing matters more.

Selling SRS January premium

I’m trying to sell some premium here on my open $SRS position at a basis of $86. Selling a January $70 call tomorrow on any early pop.

$COST Puts

Found this one in two places. While I don’t believe that the payment form limitations cited by @BuyOnTheDip will prevent people from shopping there, I do buy the EarningsBreakout channel check that people are going to focus on staples rather than on premium electronics. Therefore, I’m going short with the puts. Long the July $40 puts with a cost basis of $2.10.

Short BBY

Went in to buy an iPhone this weekend. They were out of what we wanted, so we left. I can’t decide if that’s a good channel check or a bad one, but it signals to me that they are retrenching. Short the common with a basis of $26.45, and also sitting with June $20 puts at $3. Not looking so good with $BBY up to $30 today.

Long $AAPL April $100 Puts

Cost basis $16.86. I still hold that $AAPL is range bound between $80 and $100, so this is sort of neutral. I was simultaneously long and short last week, but closed out my open call positions. I have a tight leash on this into a rally. I may have to hold this until the post-show return to earth.

So far, only the $COST move is in the money. As I close out one of these others, I’m scanning for other opportunities. And trying to stay too small to fail.