Commentary
Mea Culpa. Mea Culpa. Mea Culpa!
One of the rules I embedded in the method I created for option trading is
that I don't keep a position for longer than 21 days. This is win, lose or
draw by the 21st day. Now I may bail out sooner if the trade either hits my
target or is about to announce a corporate event like its quarterly
earnings. The reason for rules, in general, is to take my personal biases
and emotionalism out of my decisions. And the reason for the 21-day stop
rule is that I figure if the underlying stock isn't moving my way in this
time then I want to close it out (BTC ) in order that I may free up funds to
invest in a more promising candidate. I'm thinking that my original
probability based selection is not going to work and that it might even turn
against me. However, as I mentioned in an earlier report, I am not fully
invested at this time but I am trying to "catch up".
If you've been reading or viewing the news, or even keeping up with my
reports, you know that the price of oil per barrel has been quite volatile
for some time. This means that in any particular day (or week) its price can
swing considerably up or down. As you can imagine, closely related to oil's
price swings are companies in the Transportation Sector like Airlines and
Trucking. As Transportation fuel expenses go up, their profits fall
accordingly.
One of the NLV's holdings is UAL Corp. (UAUA). Just when I should have been
dumping UAUA (on a 21-day stop) oil reached a relative high in its recent
price range. So I rationalized that since I don't see any really bad news as
to why oil was going up (like when British Petroleum's Alaska pipeline shut
down a few months back and it looked like the US was going to have to buy
more Mid-East oil to the tune of 400,000 barrels per day to make up for the
deficiency), it looked to me that all that was happening was traders were
just running scared; like maybe they had a collective bad hair day.
Another reason for my rationale, today was one of those rare days that my
screens gave me nothing, nada, zip to invest in. That's right, out of the
more than 100,000 individual option contracts that I screen each night,
there wasn't one candidate that met all of my criteria. The market simply
refused to give me any probability-based opportunities to place any "bets".
And since I wasn't fully invested anyway, and I had nothing else to invest
in and UAUA looked like it might make a nice continuing investment, and I
also thought that oil was bound to drop during Monday's session, I asked
myself, "Why not?" So I did. Bad boy! Naughty Boy! I really should be
punished for this so whip me, flog me, take away my penchant for food but
please let me reduce the pending $187 dollar loss I was looking at!
We'll see how things turn out Monday where several other holdings hit their
21-day stop as well.
Net Liquidating Value (NLV) Portfolio
Paper Profits Table
Good News: While oil and interest rates (which increased slightly)
negatively affected the S&P and me, the NLV lost slightly less that the S&P
so that we were able to widen the gap positively, percentage-wise, between
the index and our portfolio.
Bad News: The S&P and NLV still both lost equity today. We just lost it more
slowly.
Closed Transactions Table
Good News: None
Bad News: None
We found no buying or selling opportunities, today. Accordingly, we had no
runs, no hits, and no errors. It's doubtful we'll find many days like today
so next week should be a little more thrilling, especially since there's
going to be a lot of economic news, not the least of which Fed Chairman Ben
Bernanke will be telling us whether the Fed will be increasing our interest
rates (doubtful) or just letting everything ride. Depending upon how his
words are parsed, we will get a reaction from the market and here's my
fearless prediction: you'll be able to read into his statement that the Fed
will continue to do nothing about rates; increase them because inflation is
rearing its head; or decrease them later this year. You invests yer money
and you takes yer cherce! I kid you not. <g>
Put Trading Activity for Report Date
Generally, we want STO Premiums to be as big as possible and we was BTC
Premiums to be as small as possible. This would give us
optimum profits. In other words, we want to buy low and sell high, but with
put writing its always in reverse order. Note that all Premium, STO, and
Profit/Loss Columns should be multiplied by 100 to get the per contract
numbers and that all positions we enter into will always be for as least two
but probably more contracts per position.
Abbreviations: STO-Sell to Open; BTC-Buy to Close; AROM-Annualized Return on
Margin
As mentioned earlier, there were no transactions today, so there is nothing
to report.
Sell to Open (STO)
Symbol Expires Strike Premium Target Price Sell By Date Stop-Loss
Price
None
Buy to Close (BTC)
Symbol Expires Strike STO BTC Profit/Loss
Days Held AROM
None
Administration
Regardless of whether delaying the UAUA BTC proves successful or not (saving
me $$$), I will try harder in the future not to break any more of our rules.
Chronic rule-breaking is a sure-fire way to get burnt really bad.
This does not mean that I won't be amending the rules from time to time.
That's fair, if implemented in advance, of any new tactics. To that end, I
will be changing some of the rules in my screening process beginning
February 1, 2007. I will be basing the size of each of the STOs on a
different probability algorithm, as well as increasing the amount I will
allow at risk at the beginning of each new STO. This will get the NLV to a
fully-invested position a lot quicker, and one hopes a lot smarter. I also
hope that a big, nasty bear doesn't come along to spoil my party before we
get some of those bigger net profits rolling our way.
Disclaimer:
This is the fine print and is designed to protect me in these litigious
times, and until I get better wording for this disclaimer, you are under
notice that I am not selling my services nor any other product, nor am I
trying to induce you to trade along or independently, with me. I am merely
offering a journal, so to speak, of my portfolio's transactions and results
with the hope that you will glean information and educate yourselves in the
stock market in general and option trading dynamics in particular. Trading
in the stock market and in options involves substantial risk and much money
may be lost. Beginners, especially those with little or no understanding of
the stock market, lose most, if not all of their capital in a relatively
short time. In other words learn from me and my mistakes and if you want to
risk your money in the markets, that's your business and has nothing to do
with me. I am not your representative, broker, advisor or any other type
agent acting in your interests. As a matter of fact, if you want to invest
your money, I recommend you hire your own advisor other than me.
Copyright (c) 2007 Leonard Mednick, MBA, CPA (Ret); Managing Member LIME
Holdings LLC
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