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$5,000 Virtual Portfolio Update – Week 6 – $5,614

Well we're back to cash…

After getting off to a great start, up 12% in the first 3 weeks, we were lucky this week to get back to 12% after having a run of bad luck (or bad skill actually, as we went bearish too early and got punished for it).  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 learning from our successes and failures – I hope! 

Our first play 5 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.  A full review of Stock Talk commentary regarding the $5KP is available here and please make sure you click "Follow" on my picture so that you will be able to track further updates.

We closed positions on WFC and AXP, up $258 in our last review on July 25th and we have since closed our YUM position with a $256 loss on the 28th, which was a shame as we gave up on 8 Aug $35 calls at .45 ($360) and they flew up to $2 ($1,600) just a week later.  Unfortunately, in a small virtual portfolio, you don't have the luxury of riding out your losses and, at the time, we felt lucky to escape this underperfomer with a relatively small loss.

A VNO put spread we couldn't fill the week of the 21st, was an easy fill the next week and 3 Sept $50 puts were in at $3.70 ($1,110) and 3 Aug $50 puts were sold for $2.90 ($870).  The premise of this play is a tough one to hold on through as we expected VNO (and all commercial realty) to rally while, at the same time, believing the rally was utter nonsense and expecting the foolishness to be over by September.  Keep in mind that we also had the SRS calls (just 2 at the time) so selling $810 worth of VNO puts short was an additional hedge on that play.  Even in a very small virtual portfolio, it is possible to hedge and balance your bets!  It took a week but VNO flew up the week of the 3rd and my Alert on August 7th was: "VNO – Buying back 3 Aug $50 puts at .30 and rolling 3 Sept $50 puts, now $1.20, up to 3 Sept $55 puts at $2.50."  While we had hoped to do a little better, we took the opportunity to exit that trade at $3.10 (net $930) yesterday as the market took a spill.  So we spent $1,110 on the Sept $50 puts, collected $870 on the Aug $50 puts, spent $90 to buy back the Aug $50 puts and spent $390 to roll to the Sept $55 puts which we finally sold for $930 to close the trade with a net profit of $210, a lot of work but a very nice gain (77%) off our initial spread of just $270

WHR was an interesting play that started out as a bear put spread on Tuesday, the 28th, where we took 2 Aug $60 puts for $6 ($1,200) and sold 2 Aug $55 puts for $2.80.  We did get the poor durable goods report we expected but WHR and the rest of the market went the wrong way on us and on Thursday we bought back the $55 puts for $2.05 (up $150) thinking it wouldn't last.  On Tuesday the 4th, WHR kept going up so we sold an Aug $60 put for $3.20 and rolled our 2 puts to the Sept $60 puts for $1.60 each.  That put us in a calendar spread at no cost, giving us more time for WHR to turn back down.  On Friday, WHR flew to $62 and we took that opportunity to buy back the Aug $60 puts for $1.70 (up $150) and spent $320 to add one more Sept $60 put, bringing our average cost down to net $5.13 and, like VNO, we were relived to get out today at $4.80 with a loss of $99.  

Which brings us to our disaster play.  We originally went long on SRS (ultra-short real estate) with 2 Aug $16 calls at $1.50 ($300).  SRS went down slightly and we added 2 more at $1.30 ($260) on July 28th, expecting the market to turn down at some point.  On Aug 4th, it had done just the opposite and SRS was down $3 (20%) from our entry.  Rather than cut and run, we rolled the 4 calls we had to the Aug $13s for .70 ($280) and added 4 more when they hit .70 ($280), which we thought was going to be a bottom.  That put us in 8 SRS Aug $13s for net $1,120.  Our intent was to cover with the Aug $14s "on a bounce" but the bounce never came and we stayed "naked" – bad idea.  I had mentioned to Members on the 4th that this play could be covered by buying URE (ultra-long real estate) at $5 to offset the loss in the SRS but I never made that an official $5KP position to cover the calls, much to my regret. 

SRS, in fact, plunged from $13.34 on the 4th to $11 on the 7th (sending URE to $5.90), where we decided to throw another $280 at them to DD with 8 more at .35, leaving us with 16 at $1,400 or .88 each.  We were right about that being a bottom but, unfortunately, the $13s were too far out of the money and the slow comeback wasn't helping us.  On Thursday, we decided to spend .30 to roll down to the $12s ($480) hoping we could catch a move up, leaving us with a basis of $1.08.  Fortunately, we finally caught a break yesterday and the SRS $12s ran back to $1, where we took our $1,600 and ran, happy to be done with it with "just" a $128 loss. 

This is a great example of the old expression "The market can remain irrational longer than you can remain solvent" as SRS defied all logic (or what we considered logical) and went down and down and down and down.  We would have been far better off cutting our losses on day one and just walking away.  Once you pour more money into a trade to try to "save" it, you can find yourself in deeper than you had intended to be.  Also, without good timing, this trade would have been a disaster as we did our final double down at the low on Friday and then were lucky enough to catch a cheap roll the next Thursday and our exit, even though at a loss, was also well timed as the $12 calls finished the day at .70, which would have been a $480 additional loss had we held it

As it was, after a very stressful week of trying to work our way out of trouble, we are thrilled to be back to cash at $5,614 after we had such bad luck with SRS and our other bearish plays.  As I said in our last report, even in an aggressive virtual portfolio, it's good to follow Warren Buffetts #1 Rule for investing – DON'T LOSE MONEY! 

Ufortunately, we came very damned close to violating that rule.  We went into the end of July with YUM putting us in a hole and, since that was a bullish bet, we made bearish bets on VNO (it does make sense that if YUM isn't working then commercial real estate may have problems too) and WHR (how much capital goods spending can there be?) but adding SRS to the mix was greedy and URE should have been an official cover for it.  Also, giving up on our bullish YUM play while sticking with our bearish SRS play is exactly what got us into trouble because, as I mentioned, giving up on YUM cost us $1,200 in gains that would have more than offset our bearish plays.  

In a nutshell, we lost our balance and that caused us to waste 2 weeks with very little progress.  Hopefully we can learn from our mistakes and not make them again, we'll try to do more of what worked and less of what didn't. There are tons of earnings still to come and a lot of possibly overbought names that we can go short on (especially if the market turns a bit less forgiving) with our backspreads, which have been our best overall performers so far

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.  Also, in September we will be setting up a live, virtual portfolio so you can see every single trade, details will follow but you MUST be registered to follow me on StockTalk by then.

By the way, if you have any friends who might want to follow a virtual portfolio like this, you can send this newsletter to them by using our "Refer A Friend" box on your Member management link.  

Thanks and have a great weekend! 

- Phil


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Sign up today for an exclusive discount along with our 30-day GUARANTEE — Love us or leave, with your money back! Click here to become a part of our growing community and learn how to stop gambling with your investments. We will teach you to BE THE HOUSE — Not the Gambler!

Click here to see some testimonials from our members!