I skipped last week’s update. Not a lot of trades, got killed on my shorts, and busy in real life to the point that I couldn’t commit the requisite ten hours a week or so to trading. But here are some quick updates of the blunders of the last couple of weeks.

Crushed on BBY and FAZ

Totally missed out on the chance to cover all my BBY positions (the shorts and the puts) back when it was at $25, only to see it rise to $39 in a squeeze. I’m still short, although I can’t carry this for much longer. Their ad campaign (i.e., “I must not be cool enough for a Mac”) and their IT to me means that there’s a good company in there somewhere saddled to a failing business model. I did average down on the puts, which I think are a losing cause, so those will be the first to go.

I took a big one day hit on FAZ, but luckily bailed before it lost even more, riding it from 43 to 27. Stupid, stupid, greedy, greedy.

I also had some SPY puts that I need to pitch—well over my typical loose stops. I recovered a little today on all the weakness, and despite the futures looking up for tomorrow, I think I can sit it out a little bit longer. A lot of the government’s actions, working or not, seem to be improving sentiment, so this comes down to whether my desire to fight a trend is stronger than my trading account. Maybe the two weeks of goosing was just there to give cushion to this weekend’s firing of Wagoner. Although come on. Are corporate structures really working if it requires the government to step in and fire a guy who lost $82 billion under his watch? We’re not even talking market cap loss. $82 billion in losses. You think after the first, I don’t know, $40 billion or so they maybe think about “going in a different direction”? No one who gets fired after losing $82 billion is a “scapegoat”.

I’m within about 5% of the largest cash position I’ve had in the last six months, so being a little short isn’t hurting. It’s just hard to find things to bet for or against at these levels.

The Big Lesson These Last Two Weeks

If life events interrupt, set stops or get neutral before checking out.

Upcoming

The end of the quarter is near. I still hold some SRS, the BBY and SPY puts, long AMZN and sitting long INTC. Sometime this week I’ll sell April calls into whatever trend continues—either the INTC and ATVI on strength, or the SRS on weakness. I really need to get back to neutral and recalibrate for more limited attention. StockTwits has fallen by the wayside for the time being, although armed with TweetDeck, I’ll make another run at it in the second quarter. Apologies to the people in that community whom I’ve forsaken. I shall return. I may just be focusing a little more on the Code and Literature, and a little less on the Money.

This week was mixed, marked primarily by a desire to get smaller. I started the week by closing a couple of bad long positions I had entered the week before while anticipating a bigger rally, and ended the week covering a ton of successful shorts. I’ll start with the bad, end with the good.

Rhymes with Ass and Ack

Tuesday I closed out two of my failed trades. The week before I bought FAS and Bank of America BAC May 10 calls as long insurance against my massive shorts, playing the news cycle. What I failed to pick up early enough was the depth of the outright hostility there was to the bailout news of the last couple of weeks. FAS ended up being a 38% loss; BAC a 52% loss. With the discipline of small position sizes, this hurt, but not fatally as it might have hurt later last year when I was routinely taking positions 4-5x the size I should. The silver lining is that I acted decisively Tuesday morning and avoided further huge losses. As someone still saddled with a buy and hold mindset, this was a bit of a breakthrough to actually cut and run when the tape was so clearly against me.

In examining this, there were several problems, and several points of hope. First problem: the initial idea was wrong. I had seen several times that Congressional action had temporarily revived an industry, but this time it was different; the looming threat of nationalization gave no bounce. Second problem: execution of the idea. Rather than go into something broad (like the FAS), I traded too much. I had to hope that there was a secret surprise in there for BAC. That’s just gambling. I would have been better off trying to ride FAS up alone. Complexity kills. Finally, had I maintained some discipline around stops, I could have saved some of the BAC loss. What started as a quick trade (averaging down too early) turned into a longer duration trade, and I was adrift. Proven wrong, I at least acted decisively when it was clear I was wrong.

Conviction Closed

One of my long underwater put positions, US Steel (X), finally got back above water, and I quickly pulled the trigger, selling all calls for a 21% gain. All the profit came from the puts I bought when I averaged down. Had I waited another couple of days, I could have increased this gain to around 35%, but I was happy to salvage the bad initial buy at the transaction cost.

The lesson I learned from this one is that there are different classes of people I follow on StockTwits. There are those who generate good trend ideas but whom I may not want to treat as signals for entry points (e.g., BuyOnTheDip on this X call, although he falls into the next category on a few of his recommendations.) There are those who generate ideas and make their entry and exit criteria clear from an intraday perspective (e.g., UpsideTrader and Mandelbrot at TwitterReality and fortune8 who uses a more Socratic method—complete with reinforcing visual aids of what a double bottom looks like—of teaching the method behind his entries and exits). And there are those who also make the most sense to listen to if you’re at your computer while the market’s open—again, UpsideTrader is one of the best.

So one of the new elements for my trading and following checklist is to classify the source of the ideas based on these characteristics; is the idea recognition of a trend that just hasn’t taken hold yet, or does it come with a source who gives a clear idea of when to get in or out?

Getting Clean on Tech

My other goal for the week was to close out my tech put positions as they moved into profitability. After spending a long time in the stratosphere (relative to where I thought it would be after the Steve Jobs announcement), Apple (AAPL) came back down to earth, and I eased out of those puts over two days for an overall 8.5% gain. Palm, which I had also averaged down on, went out Thursday for a 18% gain. These exits seemed to work out okay; both recovered Friday, so I might have been able to get a better day trade price, I’m happy to be sitting with the cash now.

Back into INTC

I’ve been watching INTC for some time. $14 a share didn’t seem sustainable, but $12.75 didn’t seem fair on the downside either. With an RSI below 30, it seems way oversold, so I finally bought some July 17 calls Thursday. The technicals don’t look that strong, and I may buy some more if they strengthen, but my goal with these small trades is to be satisfied with 10-15% gains.

The main reason I’m in it, and why I dumped my tech puts, is that from the last few weeks, tech has been surprisingly resilient in the face of all the bad news. Not quite immune, but poised to lead us out of this mess. I want to have a few quality longs in this space, since I see them as bellwethers and ways to profit quickly on any false bear rallies.

Tried My First Twitter Reality Recommendation

Picked the wrong one, but after seeing Mandelbrot’s record related to story stocks, I tried one experimental trade by buying AMED with a bid below the expected open on Thursday, catching it at 49, but getting out Friday at 48.60. In the past, I might have held this longer, but the conditions for those story stock trades is to get in and out on the same day, so I didn’t have any reason to hold longer than the extra morning. I may try this again, but only when I see futures being up and the stock recommendation hitting something I’m more familiar with.

SRS: Botched, or Not?

My cost basis on SRS is around $86; I’ve been selling premium on it for some time, and watched with glee as it climbed slowly back into the 80s. When it was in the 50s, I had sold some Feb $86 call premium at a fair price, thinking that if I got taken out, I’d at least have a couple of months of premium in exchange for the trade. On expiration day, SRS stood at around $82, and I considered buying back the calls to close to keep the shares. In retrospect, the right move might have been to buy back the premium and dump the shares entirely, since it closed at $72. I still haven’t decided yet whether to just write this one off, write some more premium, or let it play out as commercial real estate hits further pain points over the course of the year. Psychologically, I feel the need to make a profit. Classic irrationality. The shares are up 40% over the last couple of weeks; they make no sense to carry overnight at any time. Yet I keep doing it, rationalizing it by selling insane premium and bringing down my cost basis. There has to be a name for that. Reverse Martingale?

And the Big Winner: FAZ

As part of my foray into the financials, I started out with a buy of FAZ at $45 on February 6. Thursday it climbed to the $70s and I decided to take the money and run, selling at $71 for a 13-day, 57% win. Had I waited another day, I might have sold it at $81. The weird thing is that it must have sold after hours on Thursday—looking at Google Finance, it appears that it never really got to $71 during the day. Given that it closed after hours Friday at 70.99, I consider the exit okay. It could have just as easily gapped down Friday as up.

Who I Started Following this Week

I started following Michael Lazerow this week; I really enjoy his blog.

In the interest of full disclosure, I have to cover my bad trades as well as my good. Anyone can crow about their winners. Here’s the anatomy of yet another bad set of trades I closed out today.

At the end of the first week of February, I went long FAZ at $45. At this point I’d been piling up shorts into the rally and the ever-declining FAZ seemed to be ripe for a turnaround. After holding over the weekend and watching the futures turn up in anticipation of the stimulus package, I got nervous and decided I needed to hedge long. As FAZ dropped to about $40 last Monday, I actually went long FAS and bought some BAC May $10 calls. The lame motivation there was that I expected some extreme daily volatility that would end with the financials continue their rise up, so the byzantine logic was that I’d have a chance to kick a FAZ rally as doubt rose, then cash in on the rebound when the stimulus details came out. I couldn’t day trade during this period, so the complexity came from trying to lock in trades with limit buys

The flaws (more like a comedy of errors) are compounded: being long and short at the same time with vehicles you shouldn’t carry overnight, buying derivatives on a broken bank, adding complexity and too many moving parts to a theory that could have been greatly simplified had I picked a single trade that was likely to work, believing that there might be something in the plan that the market would like. Traders talk a lot about “context” and the context that helped make me stupid here was that I was way short and the bulls were making noise like this could be a significant run that I had to hedge. Just got on tilt.

So BAC fell, as did FAS. The 11% loss in FAZ that I had when I added FAS was effectively baked in with the hedge, but as the week went on, the ETF sawtooth effect compounded the problems. Rather than save face immediately and admit the bad trades, I tried a couple of times to sell premium on both FAZ and FAS (out of the money) but didn’t get my ask. After averaging down a little bit on BAC, I gave up and spent the weekend analyzing my trades from the last five months.

I learned that while my winners outnumbered losers by almost 3:1, the average loss for a loser was about 33% greater than the win on a winner. Since I give a lot more play due to the volatility of the last several months, it didn’t totally surprise me, as I had a couple of big losers. Rather than set tight stops (which I may eventually come to—since it’s the conventional wisdom), I do need to execute a lot more discipline and cut my losers earlier.

Today I followed through. With the futures down big before trading, I tried to dump my FAS pre-market (not recommended) but only got out when the market opened at $6.79, saving another 11% in downturn over the $6 close (but locking in a painful 36.7% loss overall). I dropped the BAC calls next, dumped for a painful 50% loss. FAZ rose 24% today (and is up 50% from when I bought the FAS), so I’ve worked through the FAS loss and started in on the BAC loss.

Tomorrow (Wednesday), if we’re down, I’m looking to cover my tech puts (PALM and AAPL) and buy some INTC calls (RSI is really, really low, so looking to wait until the stock is in the $12s again), but let my other puts run (NDAQ, X, MA, BBY). As I type, the futures are up, so I may have to start plotting revenge for later in the week.