We had a pretty good week with our new virtual portfolio.
The goal of the $5,000 virtual portfolio is to play around the volatility of earnings and make no mistake, it's a high-risk way to trade $5,000 and is meant to be a small portion of a large virtual portfolio – not something you would want to do with your only $5,000. Of course the usual disclaimer is, this is a virtual portfolio, don't try this at home, trading is dangerous, always consult a professional financial adviser, etc, etc. The idea is to practice different option strategies and we had a very exciting first week!
Our first play 4 plays that we closed were on AA, DIA, SGR, MCD and DELL, which had a total gain of $629 in our first 6 days. For details on those trades, go to the Day 6 post. We have been posting all of the moves for the $5KP in member chat, of course, but also on Seeking Alpha's Stock Talk, where we have discovered the added bonus that, like Twitter, you do not have to refresh the page to see new comments! If you want to follow these trades, just click on "Follow" under my picture and you will automatically see any comments made there.
On Wednesday, we also had an open a ratio backspread play on YUM and we sold 6 Aug $37 calls for $1.15 ($690) and bought 4 Aug $35 calls for $2.20 ($880). The idea of a trade like this into earnings is that a large drop will hurt your callers more than it hurts you and, to the upside, you have net $800 in the net $190 spread before you have to pay your 2 open callers a penny. That means they would each have to go up $3 before wiping out your profits. Since YUM was at $36 at the time and we did not feel it would be likely to go to $40, even on great earnings, the play made sense. YUM had very poor earnings and dropped right down to $34, below our strike. We decided to buy back the 6 Aug $37 calls for .40 ($240), so a gain of $450 on that leg. That left us with the 4 naked Aug $35 puts, which we paid $880 for, less the $450 gains so we are in those 4 calls for an average of $1.13 per contract. The calls have fallen to .70 so we are down .43 on those ($172) so far. While we do feel that YUM is still a good value, our concern is whether that value will be realized in time for August expirations. The bullish logic is, YUM gave poor guidance because they do not see the economy picking up in the second half . Clearly the broader market doesn't feel that way this week so, if YUM is wrong in their outlook, perhaps the stock is wrong for going down in price.
Our next play was CY and we went short on them ahead of earnings with 5 Aug $9 puts at .28 ($140). At the time I said: "Hopefully they don't drop more than 1/2 as CY won't gap through $10 so easily" and that's exactly what happened as CY did better than expected and we cut our losses at .15, losing .13 per share ($65). The trade had what we considered a good risk/reward ratio as a miss could have sent them sharply lower.
We did much better on our other Wednesday put, choosing 3 MAR Aug $20 puts for .60 ($180). MAR had had good earnings but lowered guidance on Thursday and the stock fell sharply, giving us a double and a $180 profit.
Our last play of the week was a very speculative play on DIA puts that did not work out. Our intention was to risk 20% of our profits ($150) on a play that could pay off substantially if the market sold off. We started with 3 DIA $87 puts at .57 on Thursday afternoon and added 3 more at .29 this morning, leaving us in with 6 at an average cost of .43 ($258). Those went terribly wrong today (expiration day) but we took advantage of an afternoon spike in the Dow to buy 10 more at .05 ($50) and then we killed the trade at .10, collecting $160 for the 16 puts and taking a $148 loss on that play.
So we now have closed 9 trades for a $596 profit, but we have the unrealized loss from the open YUM calls of $172, which nets our 9-day profit at $424 so far (8.5%). We decided not to take any trades over the weekend and Monday morning is fairly light on earnings (for a busy week) so we figured we would see if this week's massive rally would stick. The temptation is to short stocks that have already had big runs ahead of earnings but, with the indexes on such a run, the short squeeze may not be over next week so we'd rather wait and see.
I'm still a little skeptical, even with 3 out of 4 reporting companies beating expectations this week. Better bank earnings have been the result of trading revenues and changes in accounting rules and not much to do with their fundamental operations. I pointed out to members that C booked a $6.7Bn profit on the sale of Smith Barney that turned $4.3Bn of operating losses into a "surprising" $2.4Bn gain. Also, many of the companies reporting beats so far have had strong overseas sales and government contracts – this does NOT mean that the consumer is back. We'll be watching with great interest how less diversified companies and financial institutions behave in the coming weeks.
You can follow the action by subscribing to our FREE newsletter trial (use promo code "5K" and make sure you sign up for Alerts!) and you can also follow any additions we make live on Seeking Alpha's "Stock Talk" feature so that non-members can follow along as well. You can follow along by using THIS LINK to follow my trades (click on the word "Follow" on my picture). This will also serve as a back-up to our site should we ever have trouble with our own chat room so members please sign up and bookmark the site as well.
By the way, if you have any friends who might want to follow a virtual portfolio like this, there is no better time to tell them using our "Refer A Friend" box on your Member management link as that will automatically enter you in our $1,000 JULY CONTEST where one randomly selected pair during July will win $1,000 for the referring Member AND $500 for the person they refer – a very nice bonus on a $5,000 Virtual Portfolio!