Saturday, August 15, 2009

Investing Update #4

I sold all of my silver and silver options the other day for some very nice gains, and today I bought some silver put options. I was afraid that silver would keep on going up, but it had a pretty bad day today. I think there will be a small recovery on Monday, though. If that does happen, I will probably increase my silver put option position.

I am extremely annoyed by the fact that financials have been stronger than the overall market no matter what happens. When the broad market goes up 1%, financials will go up 2%. When the broad market goes down 1%, financials will go down 0.5%... or sometimes even go up 1% anyway. The banking sector is still rotten to the core -- nothing has changed -- but I've been waiting for three months now, and the options-like decay of leveraged funds has probably wreaked havoc on my positions.

I also need to work on my risk management. Almost all of my trades so far have been winning trades, except for two: FAZ and SDS. Although I'm annoyed by the size of my loss in SDS, I'm not that worried about it because it's such a small position. But when I bought FAZ, it formed somewhere around a third of my portfolio. I made two big mistakes buying FAZ. First, I bought too much of it. Except for gold and silver, which I know very well, I've decided that I should not be putting any more than 20% into any single investment. Second, I didn't sell it sooner. What I should have done was sell it when the loss got beyond a certain point, say 20%. I could then easily get back in if I saw that it had reversed itself and starting posting gains. Related to this point, the majority of my trades have been very short, typically no more than a month or a month and a half long. A 20% loss would have been bad, but it would have stopped me from getting even bigger losses (I'm down nearly 70% on FAZ), but equally important, I would have had the extra capital to invest in something else and hopefully make 20% on some other investment to make up for my 20% loss.

I've also learned that buying leveraged ETFs is like playing with fire: It's all fun and games until somebody gets hurt. I've been burned enough times now that the next time I want to bet against the financial sector, I'll buy put options on XLF (the single-leveraged financial ETF) instead of risking my money on SKF or FAZ. Options are certainly more volatile, but at least they're a little more predictable.

I'm still up overall, but my bad bets on SDS and FAZ have been dragging my performance down a lot. I'm effectively subsidizing my losses with the gains I've made on my other investments. I would sell them, but I'm still hoping for that long-awaited stock market crash, and it's been so long now that I might as well hold them until the end. I'm not asking for much; the best I'm hoping for is to break even. As they say, hope springs eternal.

Closed Trades
7. LONG iShares Silver Trust (SLV)
Bought 150 shares at $13.53; sold 150 shares at $14.74; gain of 8.9%; held for 51 days.

8. LONG iShares Silver Trust October 14 Call Options (SLVJN)
Bought 15 contracts at $0.90; sold 15 contracts at $1.34; gain of 48.9%; held for ~34 days.

9. LONG iShares Silver Trust October 15 Call Options (SLVJO)
Bought 5 contracts at $0.87; sold 5 contracts at $0.83; loss of 4.6%; held for 47 days.

10. LONG iShares Silver Trust January 14 Call Options (SLVAN)
Bought 5 contracts at $1.27; sold 5 contracts at $1.78; gain of 40.2%; held for 20 days.

Open Trades
1. LONG ProShares Ultra Short S&P 500 (SDS) (effectively SHORT)
Bought 5 shares at $67.14; currently at $45.35; loss of 32.5%; held for 112 days.

2. LONG Direxion Daily Financial Bear 3x Shares (FAZ) (effectively SHORT)
Bought 32 shares at $78.86; currently at $25.73; loss of 67.4%; held for ~109 days.

3. LONG SPDR Gold Trust January 100 Call Options (GLDAV)
Bought 2 contracts at $4.13; currently at $3.50; loss of 15.3%; held for 22 days.

4. SHORT Intel Corp (INTC)
Sold short 15 shares at $19.17; currently at $18.77; gain of 2.1%; held for 22 days.

5. LONG iShares Silver Trust January 13 Put Options (SLVMM)
Bought 10 contracts at $0.76; currently at $0.74; loss of 2.6%; held for 0 days.

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