This rally sure seems real. That is why I'm so paranoid. I've seen this picture before and the ending is not usually nice. I've taken a bit of ribbing from more than a few people the last few weeks for my having missed this bounce. I just smile and remind them that I also missed it on the way down. I believe the markets are still down about 10% this year while my model portfolio is up 8% so far this year despite missing this latest rally. That is on top of the 19% gain in the last 1/4 of 2008. Net gain is about 28% since October. I am willing to start nibbling on the long side on any significant pull backs.
According to the powers that be, I am allowed to tell you about trades that I have completed, just not trades still in play. I still hold the SU, USO option positions, and uranium stocks as well as the SPY straddles and strangles but I can't comment on how they are doing. I have also completed 2 trades in the last week. On Mar 31st, I instigated a straddle trade in Soyabeans. On that day, beans had a huge spike up and I sold the MAY 930 straddle for 74 pts. After settling down the next few days, beans spiked higher again on Friday and I exited the straddle at 73 for a small 1 pt profit. On the 24th I put on a short term short straddle in the CDN$. We were trading at about 81.70 so I sold the APR 8150 straddle for 186 pts. The options were set to expire on April 3 so only 10 days to expiry. Unfortuanately the CDN$ plunged on Monday so I exited the 8150 puts for 185 pts and the 8150 calls expired worthless on Friday so basically a break even trade.
I will continue to update you after I close each trade I am in.
I thought I would spend a bit of time clarifying my style of trading/investing. To put it simply, I am a long side bias trader but have no issue being stopped out if things are going down. At times I will end up 100% cash due to a dropping market. On top of that long side bias I will trade just about anything as long as the risk:reward is good. I also consider myself well versed in options. Hence my recent activity in straddles.
Everyone understands how to be long. Buy, hold and if the stock goes up, profit. Most however have little to no experience in proper risk management, use of stops, etc. Look back to the post outlining the beginning of the position in the uranium stocks. This is how you should approach every long stock trade. 1) Allocated a specific amount to be risked, usually no more than 5-10% of your portfolio no matter how good it looks. 2) Divide your purchase into 2 or 3 purchases, never all-in from the start. Only add your 2nd or 3rd portion once things are going your way. 3) Have exit stops and stick to them. 4) Once fully invested do the reverse, have exit stops split into 2 or 3 groups and follow your stock up. This is far from a perfect system that ensures profit every time and yes, you will be stopped out only to watch the stock shoot up after your out. But, you will also only lose in small increments. Preservation of capital comes before hitting the home run. And, every now and then you will find yourself on the winning side of a huge trade and reap the rewards accordingly.
Unfortuanately not very many investors understand the power of options. Adding options to your trading enables you to dramatically alter the risk:reward in your favour. Even the basic strategy of selling calls against your long stock positions puts you in the drivers seat, especially during times of high volatility such as now.
Options also enable you to employ strategies such as selling straddles and strangles. As you have seen, these can be enormously profitable. The theory behind selling straddles is so simple it defies reason. Yet, tell someone that you are selling both calls and puts on a stock or index and watch their reaction. Why aren't more people doing this? I don't know. Why aren't you? I believe that the markets will settle into a new trading range and move sideways. These are the perfect trades to do at a time like this.
Put simply, nobody knows what is going to happen. The best you can do is formulate an opinion and put on your position. I've always said it is easy to make money, just easier to lose. It is the risk management and use of advanced strategies that will prove themselves over time.
Options Guy
optionsguy@shaw.ca
Just popping in from Wendy's blog.
ReplyDeleteYou have a pretty good way of explaining this. I have to admit the whole stock ex. scares the tar out of me, but perhaps if I understood it a little better I'd learn to manipulate it. I'll have to read some more of your posts....unless you want to do a post on "Stocks for Dummies"...!?
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