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.

“CNBC could be an incredibly powerful tool of illumination for people that believe that there are two markets. One, that has been sold to us as long term. Put your money in 401(k)s, put your money in pensions, and just leave it there. Don’t worry about it, it’s all doing fine. Then there is this other market – this real market that’s occurring in the back room, where giant piles of money are going in and out, and people are trading them, and it’s transactional and it’s fast. But it’s dangerous, it’s ethically dubious, and it hurts that long-term market. So what it feels like to us – and I’m speaking purely as a layman – it feels like we are capitalizing your adventure by our pension and our hard earned [money] – and that it is a game that you know is going on, but that you go on television as a financial network and pretend isn’t happening.”
—Jon Stewart

And that, my friends, summarizes the motivation for 6 months of active trading in the market.

Before September 19, 2008, I was a buy and hold investor. I picked stocks, held them for too long, reluctantly sold, because in the long run, stocks went up. And I was extra dumb because I bought individual stocks instead of index funds, so the odds were against me since about 2/3rds of stocks (as do 80% of mutual funds) underperform the market.

Then I wanted a MacBook Pro.

Invest in tools. Invest in yourself. That’s what took me into that first short term trade. AAPL was down too much, into the $120s and I knew that it had to pop. So I bought calls, put in a limit order to sell at a profit, and bam, made a cool $1700. I didn’t know anything about position sizes, I didn’t know jack. But it won. Then I won about 14 more, and I thought I had it figured out. When the building is burning and people are running away, run towards it. Buy when the spike down occurred, sell (and sell short) on the spike up.

Sure, I had up months and down months, but in the trading portion of my account, I was generating some serious alpha. And that’s when it started to become clear to me that passive investing is just a way of becoming a sheep to be slaughtered for the active investor. In poker, there’s a saying: if you look around the table and can’t find the fish, the fish is you. I’ve shown that time and time again over the last six months.

My money is split into two pots: my “buy and hold” account which operates under the same premises as it did for the 15 years prior, and my trading account, which I actively enter and exit positions in under timeframes ranging from hours to days.

Since mid-September, my buy and hold account is down about 25%. My trading account is up 220%.

Lesson learned.

But it sucks. I’ve been able to generate these decent return, at the cost of about 10 hours a week at night and on the weekend studying and following up tweets and links and StockTwits threads and participating. The opportunity cost is that “investing in myself” has turned into “managing my money”. I’m not necessarily creating new value, I’m trying to salvage the value I had before, swimming against a current of bad news. I’m learning a lot, no doubt, and due in no small part to the relationships I’ve established through StockTwits. It’s not enough to make a career of it, but it’s also enough to keep me from giving it up and just resorting to mutual funds and CDs.

So I got my MacBook Pro with the proceeds I earned. And it’s paid off several times over. So score one for investing in tools, investing in yourself.

Trades: Out of INTC, AAPL calls

Earlier I had purchased two lots of INTC calls for a cost basis of around 0.36 per contract. The first batch (about 60%) sold at 0.50, the second batch (about half the remaining) sold Tuesday at .55 and the final batch went this week on Thursday at .64. My thesis back in week #7 of the StockTwits experiment was that INTC was a bargain at 12.75 or below. The whole trade ended up being a 51% gain. Not bad for catching part of the turnaround.

The AAPL calls I had purchased at 12.50 went for $17 on a limit order Thursday for a 35% gain. Could have let those run a bit more. I still think there will be several opportunities for AAPL in the 80s, although the low end of the range seems to be creeping up. Previously it was a no-brainer to go long in low-80s and short at 97. That range may have shifted up about 5 bucks.

Puts on the Pop: BBY and SPY

While this may end up being a mistake, I took the opportunity to buy more Best Buy and SPY puts with the proceeds from the closed calls. These are fairly minor positions. I’m just going to continue playing this back and forth of buying on weakness and selling on strength until it starts to fail.

The funny thing is that I missed out on a lot of upside by holding the existing BBY and SPY puts as the market rallied. The BBY is especially interesting because it’s the second time that I wrote a long post being negative on a stock only to have the market prove me totally wrong in short order. The first time was when I panned Mastercard; this time, I was talking down BBY at 24.50 just before it rallied to 28.50. In both cases, I lived up to the idiot retail investor moniker. Treat me as a contrarian signal when I’m talking something other than tech. I’m not sure whether it is just coincidence, or whether some subliminal survival mechanism kicks in that starts a rationalization process, but it’s something I’m going to watch.

Long Term: AMZN

The Amazon I bought last week turned out to be a good buy. I’m staying long AMZN. If you didn’t catch my Kindle 2.0 review, be sure to check it out.

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.

Louis Menand had a great review of Donald Barthelme’s writing in a recent New Yorker. Early in the piece, Menand gives a lesson in the two meanings of postmodern. The first meaning of postmodernism comes from the belief that “modernism won” (i.e., “mission accomplished”) and that a postmodernism movement is a declaration of victory. The second meaning comes from the sense that modernism is over, and we’ve moved on to something entirely new.

I thought about these definitions quite a bit with regard to the market and the economy. In which sense does the whole investment ecosystem rising up around social utility services such as Twitter, StockTwits and disqus feel postmodern? It’s not as easy an answer as it seems.

First, we need a definition of what modernism is. I’ll define modernism in investing as the disintermediation of layers and the reduction of friction between investors and markets. It started with Schwab and the rise of the discount brokers, continued as discount brokerages drove down transaction costs, the progression in access to data from the Wall Street Journal through O’Neil’s Investor’s Business Daily and Bloomberg terminals on through to the AOL-era Motley Fool and Yahoo Finance, fueled by the market of the 1990s, cresting with the internet bubble.

Given that definition of modernism, you can think of postmodernism (in the first sense of “mission accomplished”) as what’s going on when social networks and investing intersect. Schwab began the disintermediation of the broker, the internet continued the process, reducing friction, the intersection of advertising models and the internet disintermediated access to market data, and sites like the Motley fool disintermediated the need for paid analysts and blew up the mystique around mutual funds. Modernism won, and now it’s time to see what’s next.

The second sense of the term would indicate that there’s something beyond that modernism, that what’s going on with social networks is truly something different, that it’s not just a continuation of those initial changes.

My take is that the first sense is a better fit. As transaction costs have fallen, and information has become more free, the last pillar is the demolition of the illusion of expertise.

What struck me this past week, reading the wide variety of wisdom available for free on the internet, is that the notion that anyone can charge for a newsletter or trading model or any kind of educational material for any significant period of time is over. Blogs and crowd-sourced financial services provide for free what paid portals and paid expertise did in the past.

Over on Gregor Macdonald’s site, I put it this way:

E.M. Forster: “How do I know what I think until I see what I say.” Your last sentence seems to convey the same sentiment.

I have a blog post that I’m working on that proclaims the death of the newsletter. My basic theory is that as more voices emerge, for every paying newsletter writer, there will be 10 up-and-coming analysts giving it away for free to make their marks, devaluing (in the long run) the paid analysts. This cycle will repeat, and names will continually turn over. The social filter will replace the editorial filter; there will still be value in finding the new and relevant voice instead of relying on the previously relevant established voice.

The good news is that the right voice at the right time, properly amplified, can capture value for the content creator, but only for a limited time before circumstances and competition displace it. The numbers are against any single content creator having a long run.

What may happen then, if you can’t amplify that value into other venues (e.g., books, paid media appearances), is that your last observation in the post also becomes the primary value to you, the author—that the clarity of thought of working in the open results in the production of personal clarity of action, and you end up profiting far more from the direct use of your better (and more honest) thinking than from selling it.

And that evolved into the eventual conclusion I posted the other night about the free content creators and people like Gary Vaynerchuk having to move from just producing the ideas to becoming the performers that amplify their free content.

With Cramer launching his VIP service, you see him on the wrong side of it. He’s a performer who has amplified to 11 who’s now running in the wrong direction. Instead of giving more away for free and focusing on amplification (can Cramer really go to 12, one higher than 11?), he’s attempting to cash in directly on his voice, which I guess is all a fading star can do. It’s time for some turnover. That voice has run its course.

When it comes to learning about investing and where to invest at any given point in time, cost-effectiveness for the consumer comes down to whether you can learn—and I mean actually learn—these lessons better and in less time from a course or subscription or book than you can from any of the bloggers and tweeters giving it away for free.

The challenge now is how to deliver the best stuff in a way that reduces the cost for the consumer. How do you quickly find the good stuff? We’ve got the reduction in friction on sharing ideas, we have crude tools for filtering, but how are we going to ride the wave and find the ever-changing set of experts?

StockTwits is one tool that can help…but there are others out there. If you’ve got any kind of entrepreneurial itch at all, you’ve got to be thinking about these postmodern investment problems and postmodern investment tools and opportunities that the StockTwits ecosystem is enabling.

Exciting times.

Week #8 Trades

Three trades this week. On Monday, I got averaged down on INTC July $17 calls, bringing my cost basis down to a little over 35 cents. I had a limit sell of a portion of the overall position which partially filled on Thursday at 0.50, for a 40% gain. My current INTC long position in the calls is about half the size of an average unit, and I may try to average down again as it gave back a lot of the gains this week.

On Tuesday, I established a small position in SPY September 64 puts which were up and down over the course of the week. I tried averaging down during the rallies, but didn’t get my price, so I’ll stick with the small position.

Finally, on Wednesday, I flipped FAS for 10 pennies, in a wild ride. On the short term chart, I bought in as it started to break out at 5.55, held it as it went to around 5.67, then rode it down to the low fives where I just about got stopped out, and finally settled for a 10-cent gain (even though later in the day it could have been a 50 or 60-cent gain.) Once again, messing with financials, day-trading, but learning. Unlike past failures, I did show a little more discipline here, but instead of an “F”, I’d probably grade my performance on that one as a D+.

Other Positions

I still have NDAQ and BBY puts that are slightly profitable, although I had sells in for those that didn’t fill during the week.

I should have sold my failed MA puts when the stock dropped early in the week, but didn’t. I’ll most likely punt those this week and chalk up the big loss.

Still long SRS, which I will most likely kick part of this week on any spike up. Since this has been my primary hedge (for all the wrong reasons) during January and February, I’ll need to replace it with more SPY puts once I take it off.

And finally, I still have a long-running BBY short that I’m about to give up on due to the stock’s strength during the turmoil of the last few weeks.

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.

This week’s trading didn’t turn out all that well, so I’ll cover that quickly and then dive into two other topics that I’ve been pondering: how I trade, and the whether averaging down works for me or not.

This Week In Failball

Going into this week I was way short, so I tried to get long financials prior to the stimulus hijinks. Unfortunately, that didn’t work out; my position in FAS was creamed (down about 30%), and my BAC calls are still underwater by about 30% even after averaging down. I also averaged down on both Best Buy (BBY) and Palm, two trades I expect to pay off well. I tried salvaging things on the financials by selling some premium, but was a day too late to get off some call premium on FAS and FAZ.

I’m still working on ideas for next week. My hold portfolio is all long (except for about 25% cash) so a bear rally next week doesn’t hurt too much, although there’s no denying that I was on the wrong side of a lot of financials this week.

The pain is no fun to talk about right now; I’m in denial. Let’s get to the good stuff.

How I Trade

I’ve mentioned before that the demands of my real job make it nearly impossible to day trade of follow the market on a daily basis. I tend to swing trade over the course of a few days or a few weeks, and sometimes over the course of a month or two. I focus on equity options, with a mix of equity positions. Over the past 5 months I’ve been primarily on the short side, although I have played AAPL, INTC, AMZN and DGP long trades. If I broke down the trades by dollar volume, it would probably be around 70% options (with about 15% index options), 15% equities and 15% ETFs.

On average, I’d estimate I’ve been putting in about 7-10 hours a week focused on the market and managing my trading portfolio. I typically start the night before by checking the stock futures on Bloomberg to help get a sense for what’s going on the next day. Next, I check after hours quotes on the stocks I’m following, as well as any new commentary that’s turned up on my StockTwits portfolio page. After that, I place my initial trades for the next day. Since the first 30 minutes and last 30 minutes of the trading day tend to be the time that market makers screw over the part-timers like me, I generally place my trades slightly outside the money, trying to snipe overreaction in sentiment one way or another. While this sometimes keeps me out of profitable trades, it also keeps me from some of the morning shenanigans. For the most part, this has worked in my favor.

The next morning about 90 minutes before market open, I take about 10 minutes to check the futures again and the pre-market quotes. About one in every ten or fifteen trades, I’ll adjust my bids/asks based on changes in conditions. That’s where I stand most of the day (on days I work) with occasional checks and adjustments over lunch or as time and schedule permits, occasionally checking my Twitter feed for any updates.

And the next night, it starts over again; hit my Twitter network, then the StockTwits main stream, then check in on the main blogs I follow for trading purposes:

• Howard Lindzon
• Upside Trader
• @mandelbrot’s Twitter Reality
• Buy on the Dip
• Brian Shannon’s alphatrends
• @fortune8’s Fade Me

There are about a dozen other blogs I kind of half follow (or catch up with on the weekends); but since I maybe have 30-45 minutes a night to review and get trades in, I can’t follow everything I want to (or should). Really, the crest of my Twitter network acts as the filter. Over the last 6 months I’ve come to see this as both a blessing and a curse. A blessing because I find good stuff I wouldn’t find otherwise; a curse because I tend to rely more on the network than on primary sources. And that costs.

So far, I haven’t set stops on my trades. Quite a few of my winning trades have been down 40% before turning around for gains. However, I think I can improve my return slightly with a couple of adjustments to this practice described below. The main reason I haven’t been setting stops is because of the extreme volatility; it seems like three times out of four, the trade will recover quite a bit from where I might typically set a stop. Because I can’t trade during the day, I almost always set an ask price outside the spread before the day begins and take it. I shoot for something in the range of a 10-20% gain, adjusting up and letting stocks run a bit if I have conviction. To a fault, I average down when I think my thesis is right but my timing is wrong. I talk about this a little more below.

And that’s it. I was lucky—really lucky— when I started in September in that I was making trades that represented about two to three units on AAPL and ran off a great streak that doubled my bankroll of sweep cash in short order. Believe it or not, I hit a streak of 15 winning trades right out of the gate (although some took a month or so to finally be closed out.) This came from a combination of tuning into AAPL’s volatility, going against Best Buy (BBY) per Lindzon’s blog posts and tweets, and trading a couple of other stocks I was already familiar with from my portfolio. I’ve come back down to earth since then, but I’m still doing okay, and tuning how I work.

I expect that a year from now I’ll have this workflow honed even further. Early on, I didn’t really have a notion of position size. Lacking discipline, I put too much at risk and lucked out in that it paid off. I didn’t pay much attention to beta-weighting or any kind of traditional balancing. If anything, I was successful because I took my trading account extremely short during an epic downturn primarily to hedge against my hold portfolio.

Workflow is important when you only have limited time. Since getting into digital photography several years back, and processing thousands of images, I’ve come to realize that when you’re learning, you go slowly and take many unnecessary steps and make unnecessary optimizations that just take time. With changing light conditions outdoors, you jack around with white balance on every shot, and adjust the unsharp mask on every shot. When learning, processing a series of 200 shots picking and finishing winners might have taken me 4 hours to complete. Yet after you’ve done a few thousand shots, you figure out what really matters and you can get through the same 200 shots in about 1/3rd to 1/4th of the time. I expect at some point, I’ll reach this with analysis. One key element will be always tuning the social filter.

Averaging Down

Last Sunday, fortune8 reminded me that averaging down is generally a bad idea unless you have a strong feel for an idea. Since I’ve started trading more actively over the past five months, I have enough data (113 trades) to see if that applies to me.

In the last 5 months, I’ve taken “initial positions” in securities 69 times, and averaged down on an initial position one or more times for 44 trades. Of those 43 trades, 21 turned out to be profitable, 12 turned out to lose, and 11 trades are still open. The net gain per trade on these trades is 9.69%. When I average down, 67% of the time I make money.

By way of comparison, overall I’ve made 113 trades with 66 winners, 26 losers and 21 trades still open with a net gain per trade of 7.86%. (For initial positions, I’m 45-14-10, with an net gain per trade of 7.38% with 76% wins.) Overall, that’s picking right 71.7% of the time.

Overall, I’m up a little over 6 “units” of my current average trade size. Until recently, I haven’t been that consistent on position size, in some cases going as high as 4 units, with most of the average-down trades on the order of 1/4th or 1/2 a unit.

Those numbers are eye-opening to me, even though I have no frame of reference. I think I saw that some systems assume that they pick right as little as 35% of the time, willing to take more losses to let bigger winners run (e.g., typical winner might be 2.5x the size of a single loss.) In theory, with such a system, you’d end up winning about 17% per trade over a course of trades.

The numbers I’m showing are about half of that in terms of return. And what comes to mind when I see that?

Poker. The classic amateur poker player is the one who’s the happiest guy at the table, pulling in the majority of the pots, winning almost every hand, frustrating other players as he sees each deal through to the river, grinding out low-return hands. And does that guy ever really win? No. The solid poker player lets the amateur harvest all those low return pots, content to sit back and play tight until it’s time to play loose and take the big pot.

Can I change my style and let my winners run? Is averaging down throwing money into a lost hand when you’re already beat?

At this point, I don’t think so. The data shows that for the most part, the primary difference between “initial” position trades and the “average down” trades is that the initial position trades tend to close out more quickly, and the average down trades tend to get more run. But in terms of success and return, there’s not a significant difference. In other words, for the most part, they should be thought of as independent events, even though psychologically, I tend to clump them all together, trying to “save the trade” as a single unit (e.g., referring to my “cost basis” rather than treating those as separate trades).

And maybe that’s the lesson: there’s no such thing as averaging down. Each trade is truly an independent event for a swing trader. Cost basis is interesting only for tax purposes. In trading, it’s simply a psychological construct that may inhibit appropriate decision making.

As I mentioned above, I go without stops and allow a lot of play when I have time. Based on the data above, I could probably improve my results slightly by setting a stop at something as crazy as 40%. Doing so would a) maintain my overall “initial position” winning percentage, b) cut my overall return slightly, but c) keep me “smaller” (as in too small to fail) by keeping me out of some of the long-running, large position trades. And in doing so, this might also allow me to get back to larger initial position sizes, which could make up for some of the loss in terms of actual trading units.

Focus on the Feel

The thing is: it’s not simple. Part of the reason I have so few trades is because I have such limited time. When I have a “feel” for a stock (e.g., AAPL and INTC), I can dial in and trade it with great success. Averaging down is a form of that, what I call “focus on the feel”. The areas where I’ve been killed have come from stocks outside the “feel” and in places where I shouldn’t have been. USO calls in the fall. The financials pretty much anytime. So cutting out the more profitable (but lower success rate) average down trades would be a bad thing if done on stocks for which I have a feel. But I could safely do so on stocks that are outside my comfort zone.

And this is all just a long way of partially agreeing with fortune8’s comment:

New People I’m Reading this Week

I haven’t done the StockTwits Saturday brunch yet, but thankfully we have @dakapbj’s great synopsis on Keep Unread.

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

INTC Win

Closed out a long April $15 call position in INTC early last week for a 36% gain. I had initially entered with a lot of calls at .60, doubled down after a drop to .50 for a cost basis of .55, then sold it all Tuesday for .75. I might have been able to let this run a little longer, but I think I ended up pretty close to the optimal position. This is the second week I’ve flipped INTC calls for gain while being net short against the market in my trading account. With INTC closing at 12.90 Friday, I may look to go back to the well one more time, with the April 15 calls trading at .49 now, I will probably stake out a small position with a limit buy.

The Good: AAPL and BBY Puts

I also went with AAPL July $80 puts this week; they’re slightly up on the week (about a half-percent). I almost was able to average down. The Best Buy (BBY) June $25 puts I picked up at 2.50 are up 14% as of Friday…these are the ones I’m going to let run a little. They represent an averaging down on a core short BBY position (which is still underwater). Now that the big game is over, it’s hard to see what’s going to drive business for BBY until next Christmas.

The Not So Good: X and MA

My US Steel (X) puts are not doing well. I heard about a huge slump in Asian manufacturing late last week and thought that might be enough to take it down in sympathy, and it did recover some of the rather large loss I’d already incurred. Cost basis on July $20 puts is $3; the puts are trading at $2.45 now. I don’t have a lot of conviction around this one, so getting out at even money or a small loss may be the best course.

A few days ago I posted why I don’t like credit card companies. The basic premise: they’re a business that really works against their best customers, they’re exposed to economic downturn, and they’re a necessary evil. So I went with Mastercard (MA) July 115 puts which promptly got hammered and now sit down 6.7%. Discover Financial Services (DFS) might have been a better one to bet against.

In general, I have not faired well with any of my financial company trades, being wrong on the timing at various times with C, WFC, JPM and now MA, losing about 4 times with 2 wins. This is compared to a rather remarkable winning percentage with AAPL, INTC and AMZN. The sample size is still small, maybe 12-15 tech trades to 5 or 6 in the financials, but my sense seems to be stronger sticking with AAPL and INTC. Consequently, it would take a crazy DFS price before I’d look to add another position. I haven’t given up on MA yet, though. The financials are tough for me because the fix is in, so you have the government putting in all these short term measures which stretch out the time it takes for gains the be realized, while not providing clear opportunities. Ironically, the government interventions seem to introduce more perceived volatility than they take out.

The Missed: PALM AND SRS

I’ve had this standing order to buy PALM May $5 puts for about a week now, and it has not filled yet, even though the spread has come down to put my bid in contention. I’m holding the line on this one; I think if PALM hits 8.50 (or if volatility increases) I may be able to fill this, but I fear now that these puts are too thinly traded to be a good investment.

I didn’t buy more SRS when it hit $49, nor did I sell more premium when it was in the $60s. I could do either or both this week, depending on how it goes. I’m really liking my long term prospects on SRS now; the buzz I pick up around how this recession is progressing leads me to believe that the commercial real estate domino is teetering. Hard to explain this intuition or pattern; it’s almost a deja vu feeling around the talk 2-3 months before some of these other massive failures occurred, only this time the early warning system is around commercial real estate. Consequently, I’m going to continue to hold SRS and sell premium on half of it on the way up. If we get an SRS eruption, this could be a huge win. I’m very interested in buying more on the next mini-rally of the market and if it drops into the 40s again. I know leveraged ETFs suck, so if there’s a better way to do this, let me know.

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.

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.