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reducing my real life (and CAPs game) long exposure

August 01, 2009 – Comments (7)

Today I closed (in both the CAPs game and in real life) the majority of my short positions in levered BEAR ETFs.  I had been short SKF, SDS, etc.  

I sold covered calls on a variety of my positions over the recent run-up.  My tactic is to sell well in the future calls well above the money, and also some slightly above the money front-month calls.  I am going to write a seperate blog about this, but I've found a very un-chaotic, nice way to use covered calls to hedge is to sell calls that are A) well into the future and B) well above the money.  I have gained 50% or more in a few weeks to a month on these by selling them after a big run-up (for example, I sold Jan 2011 covered calls on ASH in 

I sold a large number of calls against SPY for August.  They were above the money, ranging from SPY 100 to SPY 103.  I do not intend to hold them to expiration and if we get a 20-30 point dip in the S&P I'll cover. 

I sold a few shares, raising my cash position to 5-10% from basically zero at the bottom of the last dip and I reduced leverage by covering naked short puts. I focused on selling shares I wasn't up on all that much...  and I'm holding for tax reasons many of the shares that I'm radically up on. 

I am not bearish on the market, its still a fair chunk below fair value.  I'm just hoping for a pullback to the 930 level, and I think the market ... once it shows some weakness in the knees, will plunge quite quickly as there are a host of scared, beaten bearish people who will pile into downward momentum with a renewed round of short interest.  That will, of course, set the market up for another potentially violent move to the upside.  

My hope would be to get another correction in the market, in a perfect world all the way back to that 880ish resistance level (which is just really unlikely to be breached at this point, I also think its unlikely that we even get to it).  Then cover the short calls (or let them expire depending on timing).

Then, again in my dream world, I'd sell a new round of naked puts as the market falls and put that cash into long positions and...

The next run up would get to my long-planned exit level of 1100.  

Again, I am not bearish and I do not feel that stocks are overpriced right now.  But I think we're going to get a better entry point at some future day.  

My time in the markets, thus far, have been, in approximate chronological order

Bewildering and intimidating.  All those blogs with people that sound so smart, that pontificate so forcefully, that to a person armed only with a read of Dreman's book it seems impossibly complex.  Everybody seems smarter than you.

Humorously easy.  I bought my first shares in December with the S&P at 915.  Those shares went up nicely, and I was up 5% or so (counting professionally managed money which at that point was about 33% of my portfolio, probably 7% self bought and 60% cash) in very early january with the S&P at 934.   I'd bought based, basically, on low forward p/e.  OSK, TXT, MTW and so forth were the names. At that point these names were motoring up like crazy and I panicked and bought big.  On January 5 and 6 I blew a hoard of money, making XL my biggest position at $4.10.  I piled into ASH for 12 bucks,doubled down at 10 a couple days later.  

Bewildering and frightening.  XL promptly went to $2.60.  ASH went to 9 and then 8 and then 7 bucks.  I was in Vegas on Jan 20, and I will in my life never forget that day.  The shock of the crash, the disbelief that WFC, which I'd piled into the day before when it hit new lows, pleased with myself that i'd boughten while others were fearful, fell 5 more bucks.  I was down at this point something like 7% overall despite still having alot of cash and 33% in professionally managed money that was still up...  

More involved and interactive.  Down, I started to pour into stocks far, far more intensely.  Ibecame enamored with Nova Chemical, NCX.  I spent 100's and100's of hours researching it.  It became by far my biggest holding.  When it went under 2 bucks I bought big, when it moved near 1 buck I just kept adding and adding and adding and adding.  My logic was long and elaborate, but to summarize it I basically felt that A) if the company was telling the truth about business being relatively stable and good in Q1 and B) the company had a worlds-best asset (lower cost than any other plant int he world), it would be bought out at these extremely low levels before it was allowed into bankruptcy court, or, alternately, their lenders would work with them. 

Horrified, no, wait... Elated and amazed.   I was up Jan 27, and again on Feb 6 and 9, but then the market began its mindless, shocking march to the march bottom, and I was brutally down on Feb 20th.  I hadn't checked the balance in my account for a week, but on Sunday the 22nd I looked at about 10pm.  I got a bottle of Jack, a 6 pack of diet coke, and a bag of ice, and I looked.  It was fkn unreal.  18% of the money I'd ever made in my life was gone.  Thats 18% of my LIFETIME income.  Or about 15x my annual salary.  I sat there, had a few drinks, and made peace with the fact that at least I wouldn't have to pay taxes for a few years, and at least come waht may.  No new cars for a long time, lower life expectations, but I'll still be ok.  

And I looked on Feb 23 in 830 to a crashing market.  I left the office and went to our lounge and sat on the couch, blanket over my head, and vowed that no matter how much I was scared, no matter how strong the urge to get out was, I would just wait it out.  Mind over matter, just like hitting on a pretty girl when you're a pimple faced nobody at age 20.  You just make yourself do it, no matter how hopeless it seems.  I came out of the blanket at 9 or so, and looked at my cell.  My cousin txtd and said "Nova bought out for $6".  

And in a flash I was UP. In a second I went from down 20%+ of the money I'd made in my life to up alot.  (I had a boat load of nova shares).  The next day the market rallied and I was up BIG with the market down 15-20% from where I started.  It was epic, I was on cloud 9.  I was better than shagging the 2x running bikini contest winner from the local pub, it was better than anything.  

Horrified doesn't begin to describe this, not even close.   My gains were wiped completely out and then some by the ongoing crash to the march lows.  At the march lows I was down WORSE than I'd been before the Nova deal.  

I read Kass call the bottom, I listened to my advisor describe a convo he'd had with Art Cashin about how a monster rally was inevitable.  I sat there thinking about April tax day (when I owed about 33% , of my portfolio in taxes...).  I'd held enough cash to pay the taxes the whoel time.  I debated endlessly, not sleeping for 3 days at one point, whether to go beyond and risk some of the tax money on a bounce before april...  if I was wrong I could be enormously hurt.  If I was right, I could help myself alot, ... 

At that point I'd learned quite a bit about investing, and I'd come to realize that the epic losses at insurance companies were largely due to mark to market accounting damaging their investment portfiolios and not actual operating losses.  Similar for BDCs.  

I shuffled my portfolio, selling some things, moving into others, and came out of the march bottoms VASTLY in BDCs and insurance and (much less than the other 2) banks.  I bet, literally, the farm and my ability to live in the future (i'm not a college gradueate, I have no job skills, all the ability to live that I have is based on the proceeds from selling my various businesses last year, I cannot get a decent job, period, I have no qualitification) on a reversal of mark to market accounting losses.  I blogged as much in very early march.  If anybody ever disbelieves me saying that I'm up >2.5x my money ... read that blog.  Of all the blogs posted ever since blogs were invented, I doubt any blog comes even close to that one for predicting futgure investment returns.  It got 1 rec.  You'll see 2 if you read it but I rec'd myself once, lol.

Relieved....  no, wait, elated, no, wait, stunned, no wait, drunk with glee, no wait, a little scared again, no wait, happy again, no wait, happy i got a chance to put my cahs in, no wait, to just basically content. 

The rally began with Vikram Pandits note to Citi employees.  It ran for weeks.  It stalled and threatened to dive at the beginning of Q1 earnings season.  Wells fargo then released that memo that they were having a record quarter.  The rally shot violently forth.  On may 8th I reached some point of ecstatsy, winding up nearly double my money overall, more than 2x my money on self invested funds.  

A week later I was hurt, pissed, and scared. At the June highsI wasn't so elated.  The market was clearly heavy, clearly not looking prime for a move up.  At the July lows I was fairly excited.  A chance to deploy the large cahs hoard I'd built up over the move up.  

And in the last week....  I don't know.  I just looked at my account and realizeed I was within 3 good days of meeting the UPPER end of my goal of 2-3x my money for buying into this bear market, and I sort of unwound.  Finally, after 7 years of working >100 hours/week, after many years of not being able to afford food, after running up 100's of thousands of credit card debt and eventually looping hte interest payments from old debt onto new cards I was approved for...  After losing all quality of life, more than I'd guess any of you can imagine losing, ...  I just feel content.  

The lesson from my time investing, and if I actually posted it (you'd never believe it if I posted all the details of my time in business), is this...  :

all you are in life, is just so far.  what is today will not always be, and while people say the only thing you can count on in life is death and taxes you can absolutely, positively, without any question, also count on change.  Changein market, change in fortunes, change in how much hair you have, change in outlook, change in situation.  Change will come.  

Soon, but only after another pullback and another time when bears get cocky, my time to exit the market for now is at hand.  Don't worry...  I have strategies for great returns until the next big crash.  

And, once its time to sign out here, i'll see you at the next big crash!  Just whne the bears know they are right, know they are right, REALLYknow they are right, ...  maybe I can double my money once more.