Monday, May 23, 2005

Fighting my own greed

I know I said I would work on a synopsis of the May trades. I didn't get that done this weekend. One preliminary conclusion I have about the May trading is that I need to avoid over-trading. Over trading and impatience, turned what could have been a profitible month into a losing month.

The June portfolio is in excellent shape. Every position currently shows a profit. I'm more diversified then I have been in the past. Not only am I more diversified by holding more positions, but my positions are spread out over a wider variety of sectors. Typically in the past they have been concentrated in the internet and tech sectors. Furthermore I am currently using just a little under 50% of my margin. This represents a little under 2:1 leverage which is where I like to be.

Switching to naked puts from bull credit spreads is working beautifully. My one worry stock ONXX illustrates the benefit of the current strategy over the previous strategy. The stock took a huge plunge, but because I didn't pay for the insurance of a vertical spread I was able to be 20% out of the money, and I have not taken large losses. In fact I currently have a profit on that position. The price of the stock has stabalized, and IV has plunged.

I took profits in MOVI and NVDA today. They were both trading 5 dollars on the offer so I took it. I don't like paying the bid/ask spread twice, but when my options are allready almost worthless it would be a poor risk/reward decision to keep my capital tied up and at risk for another 28 days just to make another $5 per contract. This is the lesson I learned from my INTC position earlier this year, when I could have gotten out at $5 but waited and ended up getting out at I don't know $40 or so?

These stocks are another illustration of how the new methodology is an improvement over the old. Profits on MOVI were $33 a contract. Profits on NVDA were $43 a contract. If I had been in bull-put spreads, they would have been closer to in-the-money and would still be too wide to take profits this early. Even when the underlying moves in your favor strongly, vertical spreads tend to reach full profitability slowly. Furthermore if I was in bull spreads, and the spreads had narrowed enough to consider taking profits at this point, I would potentially have to pay double the transaction costs to close the spread...which makes it even harder to get out early at a good profit.

I want to put the capital that was in these positions to work in new positions. The loss of NVDA takes away tech exposure. I actually want tech exposure this month. I am tempted to put the capital to work right now by selling INTC June 25 puts, especially if I could get $0.20 for them. These puts have high theoretical odds, but yield a smaller return than I would normally like, but the money made from NVDA and MOVI probably exceeded 50% annualized return on capital (I haven't computed the exact numbers yet.) so putting that money to work at a smallerROI for the remainder of the month wouldn't be to bad, since I've "allready made my money for the month" with that capital so to speak. Any more returns on that capital would be gravy.

However, one lesson I learned from the last expiration period was to not over-trade. I recognize that I am starting to succomb to greed. The portfolio is in great shape, and I have benefitted from a strong rally, and yet I'm thinking about putting more capital to work to squeeze out even more returns. This feeling of greed, reminds me of how I felt in late December and January, when I had large gains and I became more agrressive buying more and more stock and calls as the market rallied hard, and then took some of my largest losses ever. I need to be ever vigilent against my own greed.

Because of this, I am intentionally trying to avoid watching the market and to avoid searching for new positions. When I am allreay almost fully invested and when the market has been rallying is not the time to put more capital to work. I need to be patient and wait for a good pull back.

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