Making 18% Doing Nothing In 3 Days

We had a discussion last week about following virtual portfolios.

I'm striving with our new system to make our moves very clear and I'm posting virtual portfolios mid-week and grouping moves together during chat, which sacrifices good timing in exchange for clarity but there's not much point in making new virtual portfolios if people get lost right away so I'd rather make less money and be more clear.

One thing that gets lost though in all this virtual portfolio following is what I really feel it is important to learn and that's building a balanced virtual portfolio, learning how the various positions interact and sticking with them and, more importantly, sticking with your plan.  If you said "what plan" then perhaps we have uncovered a problem right there!  Trading is hard.  Don't let people tell you otherwise.  I'm not going to do a victory dance because we had a good day but I am pleased that oil is down, the dollar is up and money is rotating out of energy and commodity stocks and into banking and tech – trends I've been harping on for quite a while, a little too early it seems as many people were getting frustrated waiting for things to improve.

The reason I love my LTP strategy and the reason I work very hard to push members to it is because it works.  Well, it works most of the time.  Our Stock Club started at the top of the bear move in May and that virtual portfolio took a 50% hit.  While I'm confident it will recover, it's a rotten way to start a virtual portfolio.  Our LTP was down 30% at one point last year, now it's up 198% and 18% of it came in the past 3 days.  Since I was called away and didn't reconcile my sheets with today's trades, I still have the exact same group I had Thursday and I encourage members to compare the moves, position by position that were not touched as the Dow dropped 150 points on Friday, 100 points Monday morning and while it flew up today.

BECAUSE I was confident with my mix, because I was confident in my market premise, I did not change a thing until this afternooon when I realized I had gained 18% in 3 days and would feel like a real ass if I blew it so I started covering some of the open positions on top.  If you have time, compare the two virtual portfolios and reread the comments from Friday and Monday as we essentially stood pat and let the markets work their magic.

Could you have replicated those positions and made 18% in 3 days?  Yes, you could knock off a zero from each positon here and it would have cost $280K to replicate this virtual portfolio exactly but there is nothing magic about THIS virtual portfolio and I will not always be here to build them.  The important thing is to understand that this system can and does work over time but you have to tinker with it, get the right balance of positions and then work on your timing for buying and selling your callers.

We have rules for these things:  Buy your caller out when you are up 50% (with stops, of course, not immediately) and there are more than 2 weeks to expiration.  Within 2 weeks it's 70% and within one week it's 80%.  Also, we stop out callers that are getting away to the upside at a rate of 1/4 per 20% gain.  This is very simple, it means that you automatically knock out 1/2 your callers when they double in value, at which point you can roll them to pure premium in a higher position.

That's about it, the rest is learning how to make good adjustments and learning to interpret market movements by paying attention to the micro and macro effects we discuss every day (like ignoring yesterday's panic as it was sparked by the same idiots we've been watching for months saying the same crap they've been saying for months).  I wish I could teach all this in one day and give out a one-page study guide and send you on your way but it doesn't work like that.  Trading is a profession, it takes years to develop the skills to make a living playing the markets.  Just like in school, copying will only take you so far – it won't do you any good at all when you are on your own.

Note the flexibility of partial covers.  Our biggest negatives come from our full covers, which bury us but they were strategic covers that balanced the 22 naked calls we had.  There are actually $2.9M worth of positions very bullishly covered by just $523,000 worth of calls in the LTP.  Had I been wrong and the market kept going down, this would have been very painful.  As I said to DM last night (8:20): "No improvement and none possible as it’s long-term and the long-term positions aren’t moving.  The trick is not to over-cover as a nice market move up can put us back in quickly but I’m sure you understand that with the longer-term positions, they can’t improve until the stock goes up other than small gains as we gain premium each month.  It’s the same as the LTP, still hovering around 170% for a few months, the difference is the LTP is much bigger and, since a 170% gain is $2.7M off a $1M starting base, making just 3% a month is $81,000, which is an 8% improvement off the original basis.   That’s why the gains look so good once any virtual portfolio gets over that first double, it doesn’t take much to move the needle the next time."

It takes many months to get a virtual portfolio to a position where it starts producing an income, just like it can take years after you plant a tree to start producing fruit.   Patience and balance are not just important, they are everything in investing.  I often refer people back to the video "The Man Who Planted Trees" and that's what the LTP strategy is about.   Here's me talking about it in December 2006 and I'm sure it comes up at least twice a year. 

I don't really like to repeat myself, which I suppose is a failing as a teacher.  I assume people actually read the new member guide and read the strategy section and read the K1 project and Sage's book because they want to learn be professional traders (that would be one who actually makes money trading) which, like any proper profession, requires years of study, hard work and practice.

I'm very happy to help whenever I can but I'm not happy to see so many people who want to follow along without doing the work.  This leads to misunderstandings, poor position management and inappropriate risks being taken – all very bad things.  Of course options are inherantly very, very risky things, that's why I scrapped our previous virtual portfolios to concentrate on our 4 new strategy virtual portfolios BUT (for those of you who did not read the guide, K1, the strategy section or Sage's book) bear in mind that the VAST majority of my money goes to the LTP strategy and the other virtual portfolios represent relatively small gambles. 

So, back to basics:  Compare this list with last Thursday's and look at the intraday charts for whichever ones you are interested in.  They go up, they go down – WHO CARES?!?  It's not about a day's move or even a week's move, it's about liking your positions and wanting to stick with them, through thick and thin.  Some positions won, some lost but what's really important is when you learn to balance a virtual portfolio like this, vacations can be taken and family emergencies can be attended to and you can take control of your life back from the markets because your trading is under control – isn't that a good goal?:

function addCommas(s)
{
s += ”;
x = s.split(‘.’);
x1 = x[0];
x2 = x.length > 1 ? ‘.’ + x[1] : ”;
var rgx = /(\d+)(\d{3})/;

while (rgx.test(x1))
x1 = x1.replace(rgx, ‘$1’ + ‘,’ + ‘$2’);

return x1 + x2;
}

if( dCurrentReturn < 0.0 ) document.getElementById("return_span").innerHTML = "” + addCommas(dCurrentReturn.toFixed(1)) + “%”;
else
document.getElementById(“return_span”).innerHTML = “” + addCommas(dCurrentReturn.toFixed(1)) + “%“;