"Those That Do Not Hear, Feel."

Whenever I, or one of my siblings, disobeyed our parent's warnings or rules, they would often tell us, "Those that do not hear, feel." To this day, it still comes to mind when I find myself feeling the effects of going against some sort of warning or rule. Friday was one of those days.

While reviewing my last few trades, I have come to realize that I have been going against one of the rules I learned in my options training. That rule would be "Buy Long, Sell Short." Usually this has a figurative meaning in regards to stocks. Let me explain.

To "Buy Long" means you are buying shares of an actual stock with the intent of holding on to it for a 'long' period of time, because you believe it will go up in price. After it has gone up in price you will sell it and pocket the profit. This is how most people understand how to make money in the stock market.

To "Sell Short" means you are selling the shares of a stock that actually belong to the brokerage house for a 'short' period of time, because you believe the price will go down. After it has gone down in price, you will buy back the same number of shares with some of the money that you received for selling them and the brokerage house will have their shares back at no cost to them and a little commission from you. You, however, get to pocket the difference and whatever interest you gained while holding the cash in your brokerage account. The number of people that understand how to make money this way is not so great, and the number that actually succeed at it is even less.

But when it comes to options, to "Buy Long, Sell Short" has a slightly more literal meaning. The meaning has to do with the amount of time that is available until expiration when the in ITM (In-The-Money) options are assigned, and the rest just expire as worthless.

To "Buy Long" means to buy the option with multiple months until expiration. The benefit of this is that the value generally moves in smaller percentages than shorter term options. This allows more time to average out anomalous price movements that go contrary to technical signals. Price movements like the ones that stopped me out recently. (Friday, September 25, 2009 You Win Some, You Lose Some). This is something that I should of remembered back when I made earlier posts. (Thursday, September 10, 2009 Investor's Personal Portfolio Update and Wednesday, July 8, 2009 Back Again, Finally) The negative is that it costs more to get into the position.

To "Sell Short" means to sell the option with the fewest months until expiration. This is something I refereed to in the post I made Wednesday, September 16, 2009 Position Update. The benefit here is that the sooner the stock expires worthless, the sooner you get to sell another one. The negative is that the amount you get to sell it for is not as great as for longer ones. But then again, you don't have as long to wait to see what happens.

I now fully understand the benefit of following this rule and I will try to remember it for my benefit from now on. I hope what I wrote here helps someone else, also. That is my opinion, you can take it or leave it.

Disclaimer: See bottom of page.

You Win Some, You Lose Some

Today I was a victim of a potential fake-out by the market. While on a break at work I logged into my brokerage account to see that I had been stopped out of one position and stopped into another. To prevent too much loss of my principle on my new position, I quickly did the math and set my stop for it, using the execution price as my base price. Next come the details.

The position i was stopped out of was my FPL Put. The price movement of FPL rose above the trend line momentarily today just high enough to cause my stop to trigger, only to close the day under the trend line and low enough that the Put option price would have been acceptable to me. Those are just the breaks. next week I will see if that was truly an effective strategy or not.

The position I was stopped into was my CVX Put I mentioned in my last post. It's price movement moved low enough that I was able to acquire it. However, when I saw it, it had already started to retreat from that price. So I quickly did the math and set my stop order to prevent any excessive loss. After the market's closing bell, I was able to again log into my brokerage account and I am having a little deja vu. CVX also moved enough that my stop was triggered but then reversed enough that it would have been acceptable to me.

Looking at the charts for these two stocks, I see that FPL may simply have been a fake-out and CVX appears to have done the same thing. I will have to wait until next week to see if this was a real reversal or not. These are the kinds of things that make setting a stop frustrating. I keep thinking maybe I should set my option stops according to different standards, but then I have to remind myself that I don't have the capital to experiment so much. So we have to remember, 'you win some, you lose some. Let the winners run, and keep your losses small.' That is my opinion, you can take it or leave it.

Disclaimer: See bottom of page.

Portfolio Update

This post is a portfolio update with some commentary. To begin, NG traded lower bringing my Covered Call closer to exiting contention for assignment, but that is still 24 days out and anything can happen. As I stated in the previous post I put in Put orders for FTP and ETP. On the first day after posting that the FPL order executed and I am currently showing 20% profit. I still suspect that it will continue to move down from here. ETP is another story.

The Put order for ETP expired on the first day because ETP moved slightly up from the previous days high. However, it's movement was small and actually closed lower than it's open. For that reason, I resubmitted the order with a tighter BTO (Buy-To-Open) range. This decision to tighten the BTO range is based on two reasons. The first is that the market-maker made the asking price cheaper. The second is speculation that despite the closing price being higher, the small movement is an indication to me that there are not enough buyers to prevent it from heading South. Something additional that I noticed is that on this same day that my BTO executed, the stock created a bearish doji whose body is within the body of another bearish candle. If it had been a bullish doji candle I would be second guessing myself just a little. However, a bearish candle within another bearish candle is not indicative of anything significant that I know of.

As is current protocol, both my positions have in place a STC (Sell-To-Close) Stop in the event that I am wrong. Unfortunately, for ETP I had to go against my decision to set tighter stops because of the market-makers decision to set the current bid and ask price lower than the closing price. In order to prevent premature execution of the order, I had to set my stop 5 cents lower than the bid. That puts me right at my previous acceptable-loss percentage. Not ideal but we do what we have to do to give the technical analysis the opportunity to work. That is my opinion, you can take it or leave it.

Disclaimer: See bottom of page.