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Part 3: Why August Was The Worst Trading Month Of My Life



September 28, 2011 – Comments (0) | RELATED TICKERS: SPY

Frustrated? Yes! Disgusted? Absolutely! In denial? Perhaps just a bit.

I had looked at the chart of the SPY, SDS, SSO, UPRO, the stars in the sky, and glued to the news for political developments over seas. The market was getting ready to close on Friday, and it had undoubtedly been a long week, with the Euro crisis and the debt ceiling saga. The only thing that probably made me more irate than those calls in my portfolio was the idiocy in both parties up in D.C. debating how to drive our country more into debt. 

The bell rings and I can get some relaxation in for the next few hours, but then all of a sudden, I see on the television in my office that the S&P had downgraded the U.S.

I can't say I was honestly expecting it - the other rating agencies had announced earlier in the week that no downgrade was coming, so I just assumed the same would be said of the Moody's. At this point, I knew I might be in a heap of trouble with those calls, but I did some research that countries like Ireland, Japan, and others had actually rallied after their downgrade surprisingly, and who knows, maybe it will be one of those "sell the rumor, buy the news effects".

Once 6pm Sunday night rolled around, t stung seeing the S&P open 20+ points lower. 

But that was nothing compared to what would follow the next morning on August 8th... PURE CARNAGE!

(Before reading further, you might want to read Part One and Part Two of my Month from Hell)

There really was no hope for me at this point, I knew those calls which were depleting capital at an unbelievable pace, and those calls, I remind you, represented 27% of my total capital. They were borderline worthless, and at this point, the biggest fear became the dead-cat emerging as I had originally expecting and ripping the shorts a new one and I have nothing to show for it despite my once huge committment. So I stayed in there. 

It was near the afternoon, and watching the market drop on this downgrade was more than I really cared to see. So, I decided to catch flick at the local theatre. I knew I wasn't going to sell those positions, and was going to go against everything I was taught in order to stick it out for better or worse. 

I had chosen to go see Rise of the Planet of the Apes  and on my drive over there, of course I'm still checking the market, as if there could be some miraculous recovery in the past 15 minutes. Of course there was not. 

But then suddenly, I realized, if the bounce is going to come, it won't do me any good because my calls are +20 strikes now out of the money. I'll need a 100-150 point rally on the S&P before we see some positive action in those calls. 

So while I'm driving I decide to pull out that iPhone of mine (which at this point I'm ready to chuck out the window at 75mph) and looked up the Sept SPY 124 calls, which is going for $1.18. If I can get that bounce those calls are going to be unbelievable and I'm too vested in this market (unfortunately) not to benefit from the inevitable bounce. I bought more calls that added up to another 12% of portfolio allocation, so now I'm basically 39% long in these calls - staggering when I consider how much I stand to lose if I can't get out of them. 

The movie starts, and I'm enjoying it, but I find myself looking at the trade screen on my phone repeatedly, and even my newest calls are going down the tubes. At 3:50pm, I would look at them again and decide what to do from there. 

At that time, the movie is still playing, nearing and end, and I pull the phone out to check the market and it is down 80+ points on the S&P. Some guy sitting a few rows behind me yelled at me to turn my phone offbecause he could see the light from the screen. Now usually I'm pretty laid back, but that was the absolute worst thing that some one could say to me at that moment. I was pissed, and that dude just made it ten times worse.

I decided I would take the camera flash built into the iPhone and turn it on, stand up and point it directly at him and ask if he had anything else he wanted to say. He didn't, and wisely so...I was in no mood!

That wasn't right of me and I know that - and it was out of character for me to act in such a way but it definitely adds to the drama unfolding in my personal life. And thank goodness he was just a little guy, or else I might have walked away with a black eye.  

Instead of throwing in the towel (which I should have done a looooong time ago), I see those same calls that I bought a few hours earlier trading at a 20% discount. So I doubled down on those Sept SPY 124 calls $0.97, four minutes before the closing bell. 

Within a few hours, I had added 22% in additional stress and misery to my current positions. 

I came home that night and felt not a lick better about things - stayed nearly up all night (at this point I am working on 10-15 hours in total sleep during the past week). I bring myself to go to bed at 3:30am after seeing some hope in the European markets. But wake up to see total carnage in the markets. It was literally one of those moments where you ask yourself "why do I put myself through this misery, when all my friends have cake jobs they work at and make a descent pay that's guaranteed!?!" I wasn't sure if I saw the end of the global markets or my own portfolio at this point, but nonetheless, that daring bet that I took in late July, that seemed like an innocent trade, turned into a slippery slope of miserty and turmoil. 

We ended up recovery quite a bit off the previous day's sell-off, but as I expected the 136's for both August and September were gaining little sympathy. The 124's were on fire and over the next few days I would see an amazing chop festival followed by a rally that would take us 103 points off of our worst lows. 

Did I sell, No! Instead I held on. I was about 10% down from my portfolio highs and from where I started this whole mess. Easy to recover from and exit with grace. But no - my business with Mr. Market was personal, and I was blinded with pride which kept me from getting out with a modest loss (compared to what was at risk). 

It was August 15th, I was 49% committed, and with no idea that the market was getting ready to put me through my greatest test yet...

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