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$5,000 Virtual Portfolio Update – Week 3 – $5,598

We're up 12% in 3 weeks – not bad…

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're having a a very exciting first few weeks! 

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.  We have since doubled down that position at .40 leaving us with 8 at an average entry of .77 per contract.  Currently, they are trading at .50 so we are down $216 on this position, still hoping for a nice breakout but the clock it ticking on this one!   

From our Day 9 post: CY went against us for a $65 loss, MAR made $180 and DIA puts cost us $148, which was pretty much a wash at the end of week two and we closed out that week up $424, carrying only YUM over the weekend.  As we were behind on YUM, we were fairly cautious this week, taking quick profits and trying to "catch up" on our poorly performing position.

Fortunately, this week went well:

  • On Tuesday, we went for a WFC ratio backspread, Buying 2 Oct $27 calls for $1.60 ($320) and selling 3 Aug $26 calls for $1.08 ($324) a $4 credit on the spread, with a slightly bearish outlook ahead of earnings.  WFC fell hard the next morning and we bought back the Aug $26 calls for .50 (+$174) and eventually sold our two Oct $27 calls for $1.15 (-90) for a net profit of $88. 
  • Thursday we picked up 2 SRS $16 calls for $1.50 ($300) and we are still in those at $1.70 ($340), up $40. 
  • Also on Thursday we added another backspread on AXP, taking advantage of the big run they had a head of earnings.  We bought 2 Oct $32.50 calls for $1.50 ($300) and sold 3 Aug $30 calls for $1.65 ($495).  Friday morning we got a nice dip and took the opportunity to buy out our 3 callers for .85 (+$240) and we sold our calls, a little too early, for $1.15 (-70) for a net profit of $170.

We attempted to fill a $1 calendar spread on VNO (Sept/Aug $50s) but could not fill that so that was it for the week.  We closed 2 positions for a $258 profit, bringing our 3 week total profit on closed positions to $854 and our two working positions (YUM and SRS) hedge each other and have an unrealized loss of $256 so a net gain of $598 after 3 weeks (12%).  I know this doesn't seem very aggressive but it's a rate of 208% a year and don't forget – we did get way ahead and blew $148 taking a chance on the DIA puts on expiration day.  Even in an aggressive virtual portfolio, it's good to follow Warren Buffetts #1 Rule for investing – DON'T LOSE MONEY! 

We went into this week wary of the markets.  In the $5KP Update last week I warned: "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."  Well we waited, and we saw and we are still waiting for our YUM play to take off.  Having $400 tied up there isn't killing us but it's annoying as we hadn't intended it to be a long-term hold.  We did get a little more bullish this week as earnings continued to come in on the high end of expectations but we're not going to go crazy until we see the upper end of our trading range taken out.  The futures jumped half a point after the markets closed so it's very possible something is in the works for Monday, bad for SRS, good for YUM – we'll wait and see….

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!  


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  1.  Phil
    I own SPWRA stock (thanks very much) net at $22.00, half covered by Aug 24 calls. I was looking at rolling but staying half covered on the calls. What would you think of going to the Sep 30 puts & calls? Any other adjustment I should consider? I’d like to stay in the stock longer term. Thanks!

  2. SPWRA/Dean – It’s good that you are only 1/2 covered!  Wasn’t much you could do about a gap up like that but I think protecting your gains with a 2x roll to the Sept $30s at $4 is good progress for now.  You can instead do it and sell the $30 puts (any way to sell premium is good) as long as you seriously don’t mind having it put to you at $30 for net $26 avg.  

    The reason I like the 2x roll to the Sept $30s is you pay almost nothing to push from a $2 gain on half and a $10 gain on half to a $8 gain on all and you are still maintaining more than 10% downside protection.  Also, since SPWRA is not a dividend payer, if they go up another $8 by September, you have a roll to 2x the 2011 $20s (now $14.75) and then you can roll the Sept $30s (now $4) to 2x the Dec $40s (now $2.25) and you would go from 1x at + $8 to 2x with a $20 spread.  We don’t get hung up on the exact but as long as you see a clear path like that to improve your position, it becomes obvious that it pays to play conservative and just worry about the downside….

  3. Phil,
    Last Saturday you posted a writeup about the 5% rule. I still have one question about it. In the daily chart that you post at the end of your daily morning posting (see above), the top line reads "Current" which is the close of the previous afternoon and 2 lines down it says "Prev Close" which is the close from 2 days ago (usually 40 hours before your morning post). The 2.5% calculations are calculated off of this latter price from 2 days ago. Why is that?  It would seem to me that in any trading day you want to calculate percentage support and resistance (2.5%, 5%, etc.) from the previous day, not 2 days before (and also from major highs and lows). This has been confusing me since I first subscribed to your service and makes understanding your 5% rule difficult. Thanks.

  4. There is a typo in the middle line of what I just posted. It should read "(usually 40 hours before your morning post)."
    Sorry about that.

  5. Dear phil,
    I’m in a bit of a quandary over a calendar spread on RIMM, and I would appreciate your imput on what moves I should make in the spread.  I own 3 Sep 75 calls at 4.5 and 3 Sept 65 puts at 5.5. My sold August callers are 3 at $3 and 3  75 puts at 3.45. I guess I am okay on the calls, but I don’t know what to do with the puts. Is rolling up the September puts my best play Here?

  6. allen – fixed it