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2024
February 25th, 2009 at 6:07 am
Comments/Bro/Edro – I am NOT going down the path again of having porftolios or running trades. That leads to too many problems and I have a hedge fund where people can deposit their money and have trades made for them if that’s what you are looking for. Opt also has a linked account in TOS where people can have him trade for them and will be trading in the hedge fund as well. This column is trade ideas and education. I suggest trades, I will suggest ways to adjust trades, I will be happy to discuss specific adjustment ideas for your own trades but I will NOT be directing trades for others. See the disclaimer at the bottom – I am not your investment advisor, I am not your broker, I am not your hedge fund manager (unless I am), I am not a linking service. Najarian charges $500 a month, has thousands of members and he doesn’t do half of what I do. In fact, I don’t know anyone in the world who does what I do. Was there a single wrong trade idea today? Was there one this week? How many last week? Still not enough??? You can see why I find this frustrating….
Alerts/Cris – We’ll be testing during the day. Let me know if you still have a problem.
Alerts/Binoy – Make sure your Email address is in your profile and let me know if today’s test fails.
Biden/Cap – Oh my God! You’re saying that Biden’s family members had a hedge fund and a guy who brought clients into their hedge fund ran a fraud that had nothing to do with them?!? That is truly stunning Cap – I’m switching parties immediately! What I find really scummy about this particular attack from you is that you know damn well how a fund of funds works and you know damn well that the connection between Biden, his family and the Stanfords is about as close as your connection with my barber yet you gleefully spew this BS as if it somehow proves a point – it’s very distasteful.
TOS/Bigs – Scott@thinkorswim.com is our rep. I understand they’ve been doing flat .70 per contract for me and Optrader’s guys, I’m not sure if it’s $$$ based but it never hurts to ask.
Spreadshee/Cafords – I’m working on one that will go at the top of each day’s comments. As you said, it’s very nice to have a visual during the day.
Portfolio/Shiv – I do not in any way, shape or form advocate taking every trade. There is a hope that you yourself may have companies you like and that when one of my trade ideas line up with something that you have already been thinking about doing through your own research, then you may consider it a good time to get started on the position. I watch about 200 companies at any given time (my desk is littered with papers with stock symbols written all over them along with little comments that end up being less help than I intended by the time I get back to them) and I’ll usually pull the trigger when there is an event that makes it too attractive to pass up. As a rule of thumb, in a small portfolio – you never want to have more than 20% in a position and really 10% is what you should target so $5,000 out of $50,000. Since we advocate entering in a scale that allows for 2 double downs, that means you initial entry should be between $1,000 and $1,500. If you follow this rule and generally keep 20% stops – you shouldn’t lose more than $300 on a bad entry, which is just 0.6% of your portfolio.
Read the strategy section for a general overview but let’s say you are entering UNH at $24 and want to do a buy/write, selling the $22.50 puts and calls for $3.50. That puts you in for $20.50/21.50 but you have to buy 100 shares, which is $2,100 a little high so maybe this trade is not for you in the first place. You MUST be willing to OWN 200 UNH at $21.50 for a LONG time to even consider a trade like this. So your "entry" is $21.50. UNH is currently $24 so that’s about 14% below here and, as I said, we are going to get concerned when you lose 20% so that’s 34% down from here. Let’s say UNH does fall 33% to $16. You are obligated to buy another 100 shares at $21.50 and you have 100 shares that are down $8 already. If you get assigned, you have 200 shares at $16, down $5.50 from your net entry (25%). In reality, we would have adjusted earlier but this is the point at which you MUST adjust….
What would be the adjustment? Well you committed $4,200 already so do we take the $1,100 loss and quit (2%) or DD with another $3,200. Assuming we think the sell-off was not justified, then we have 2 choices. We either sell the April $17.50 puts and calls for $2.50 (guessing), which lowers our net basis to $19, a loss of $300 if called away or $18.25 x 400 shares ($7,300) if put to us. Here is one of the most critical aspects of these kinds of trades: If you don’t really, really, REALLY Today WANT to own 400 shares of UNH at $18.25 LONG-TERM – you should not be entering this trade at $24.21. By planning your trade’s next 2 moves like this, you will know before you allocate your first dollar if you are going to have the wherewithal to ride the trade out.
If you want to get more agressive, you could DD at $16 right off the bat, dropping your net basis to $18.75 and then sell the $15 calls for $2.50 which drops your basis to $16.25/15.63 and a $250 loss if called away (1/2 of 1%) but, of course, we would look to roll to higher May strikes if we get a bounce. We could be more aggressive and sell the $17.50 puts and calls for $2.50, which is the same $16.25 but $16.88 if put to you with 800 shares ($13,500) so it would be a major commitment to be that aggressive.
Meanwhile, notice that you could have gotten out, even with a 33% drop in UNH, with a $1,100 loss and, if you had hedged 30% of your portfolio ($15,000) to the downside and they picked up just 20%, it would pay for 3 losing trades like this. Now, let’s look at the upside. If UNH does, in fact hold $24 through March 20th, you make $350. This may not seem very exciting but if you do that every month that’s $4,200 a year, a very nice return on the $10,000 you allocate to the trade. Since you know your downside stop (and when I say stop it’s "stop or adjust") is a $1,100 loss, you can allocate 10 active round one trades and assume that you won’t be doubling down on more than 5. That would put about $10-$15K directly in play with perhaps another $10K in margin (usually you are charged 50% of the naked put strike you sell) and leave you with $10-15K to hedge to the downside and $10K in cash to make adjustments.
I do not recommend you start out juggling that much. Try 2 or 3 trades and see how they go. Like I said, if you make $350 on 3 trades 10 times a year, that’s still a $10,500 return on your $50,000 and you are outperfoming 95% of all investment vehicles on the planet. Your X trade was good, by the way, just watch the caller in case they start to run on you but you have good position.
LOL Micro!
Pres was great, I am very pleased – still need follow-through on specifics though but he bought them until next week for sure!
DB/Ilene – That’s an important point to new members. The Phil’s Favorites section is a must read. Ilene does a great job putting up a great cross-section of opinions and these guys are all analysts I have great respect for. Some totally disagree with me and that is a very healthy thing for all of us to read!