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Part 2: Why August Was The Worst Trading Month Of My Life

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September 27, 2011 – Comments (2) | RELATED TICKERS: SPY

Here is the first installment of the "Month from Hell"

So if there was good to come out of the month of August, there was definitely a few things worth highlighting....for one, I've always been a crummy bowler, but needing an avenue to vent some of my frustrations that I was experiencing with the market, I found myself taking a break around lunch time and bowling five or six games at a setting, about three to four times a week and all by myself. And I saw my scoring average improve from the meager 80's up into the 140's. Heck, I was learning how to really get some crazy spin and pinpoint accuracy on my shots. But while that might have been helping me forget about things for a little while, I was caught in the middle of a storm that I was unsure how I would ever get out of it. 

I had the absolute pleasure of waking up (sarcasm implied) to another gap down of about 10 points on August 2nd. And I knew exactly what that would mean for those calls of mine. I realized I was rolling the dice at this point, and it was really a journey that I was taking on my own. I didn't want people on SharePlanner taking these trades with me, because I knew there was a lot of risk factored into this kind of trading, and didn't want the burden on my shoulders of knowing that I took them down an ill-advised road like the one I was currently on. The stress was enough just having my own portfolio involved with this brewing mess. 

The neckline on that glaring head and shoulders pattern (S&P 500), which at this point I believed would be a bear-trap just like the others we had seen over the past few years, was where I saw price opening up at. Believing that the market was well-over due for that bounce, and that if yesterday's weakness was worth buying into, that I probably should just add some more contracts to my gluttoning position. So I used the open at 9:31am to add more contracts to my position, beliving that we'd have a hard time sustaining this gap-down in the market, without a fill back up at some point. It was my way of trying to "outsmart" the market. With that trade I added another 2.7% of my portfolio to bring my total commitment at this point to 9.4%. 

My rationale for the trades were sound (or so I thought). We were down seven straight days, which by any measure is very difficult to sustain. We were stretched well outside the lower bollinger band, at levels that had seen a bounce nearly every time in recent past. So when the market continued to drop throughout the day, and boy, did it ever, I continued to add to the 'cheapening' option plays of September 136 calls. This time I added further to those same calls at $0.45, $0.42, $0.38, $0.34, $0.27. And shockingly (at least looking back it feels that way), I added another 11.5% to my portfolio, to bring my toal option commitment to 20.9%.

I've always subscribed to the rubber-band theory, that if you stretch the market enough in one direction, you are going to get a violent, and sometimes equal reaction in the opposite direction. At this point, the market had limited to downside still remaining. We've been talking about the crisis in Europe for over a year now, the debt ceiling issues had passed and the government was now able to waste away trillions more of our hard earned tax money. So the bad news has to be baked in. I mean...c'mon, how many times can they recycle the "fears of a Greece and Italy default", right?.

At this point I know I'm breaking my rules and its becoming frustrating too. I was going from a disciplined trader into a guy who's getting his kicks off of playing Russian Roulete. I had a huge chunk of my portfolio dedicated to these Sept Calls at 136 that were about 45 days away from expiration but still but I was underwater on these pretty bad. My buy-in was at $0.42, but they were only worth $0.27. 

However, I knew that once we get that bounce, these options would take on a completely different picture, and I'd like be able to get out with a nice profit. I swore to myself, that after this episode passes, that I'd never let this happen again. 

On August 3rd, we put in a nice doji hammer - FINALLY! The bleeding had appeared to stop. We're going to see this market bounce for sure tomorrow, I really believed, and the bears would feel the pressure of the squeeze. I had determined, that I would buy every dip I could get my hands on, and on the intra-day dip that we saw that same day, I made sure that I added to my position, but this time only 1.6% of additional calls and with the end of the day rally, those option plays turned into something very nice for me - but overall i was still underwater. At $126 on the SPY, there's no doubt that we could easily rally 100 points in the coming days and weeks and here I am getting these calls at an unbelievable bargain. 

But the bounce never came off of the hammer, and we dropped another 60 handles like it was nobody's business. This was capitulation, the bears would be crazy to hold another day. Who the heck would continue to hold their short positions, after the 140 point drop we'd seen in the last 9 trading sessions. We had also pulled back to a long-term trendline too off of the July '09 lows. I added, what I determined was my last position in these Sept. 136 calls. The market had dropped down to 1200, and my commitment to these options was almost 27%. Absolutely nuts!

During this time, I spent a lot of time at night at the movies (probably because I was developing some funky tendanitis in my wrist from all the bowling). Within a week or so, I saw Cowboys and Aliens and Captain America (both alright movies), but it wouldn't be until I saw Planet of the Apes, that I would I take an action that would be the eqivalent of pushing my chips towards the middle of the table.  

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2 Comments – Post Your Own

#1) On September 28, 2011 at 1:47 AM, Zack907 (99.46) wrote:

This story is really well written! You express your emotions so well I feel them as I read the story. I can't wait for the next two parts!

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#2) On September 28, 2011 at 8:44 AM, SharePlanner (< 20) wrote:

Thanks Zack!

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