February 6, 2013 (12:30 pm)
We’ve been reviewing our recent trades and thought this would be a good opportunity to lay out our current record and discuss areas where (1) we have successfully improved our strategy and (2) areas where we need to continue improving.
Long/Short Portfolio. This portfolio attempts to take advantage of clear-cut, actionable chart patterns and technical indicators across a number of stocks that we closely follow. This is a lower risk portfolio that invests only in common stock (not options or other derivatives). The portfolio is down slightly (1.8% based on current prices) largely due to 2 trades: being short NFLX heading into earnings and being long Apple heading into earnings. These two trades account for a negative 4.9% impact on the portfolio.
So what went wrong here? In these two cases, it wasn’t the lack of a stop loss (both stocks saw a significant gap). Our failure had to do with holding too large a position in stocks just prior to a significant, price-moving event. Going forward, we will substantially decrease positions heading into price-moving events (product introductions, earnings releases, etc.).
Multi-Strategy Portfolio. This portfolio is positioned similarly to the Long/Short Portfolio; however, we replace common stock positions with options and derivatives in order to leverage near-term opportunities. This is a higher-risk portfolio that invests based on near- and intermediate-term expectations and may experience significant draw downs from time to time in order to achieve outsized returns over the longer-term.
The Multi-Strategy Portfolio is currently down 38.3% (based on current prices). This is, of course, not how we wanted to start off. In reviewing our trades, we found a number of key areas for improvement. The first is a similar story to the L/S Portfolio, in that our 40% allocation of Apple calls heading into earnings became quickly and significantly impaired after earnings.
Aside from decreasing allocations heading into price-moving events, we also need to take profits earlier. During our recent trades, we’ve been doing this more successfully. Our first few trades were simply held for far too long, turning a trade into a (bad) investment. We purchased puts on BRK/B and LVS on January 3, and they were profitable initially. We held on to them (without a specific exit in mind) and took a serious hit for it. We were simply waiting for the correction in price, which never came. Going forward, we will have specific exits in mind (both the price where we plan to sell as well as a stop loss). Placing stops is more difficult for options, but we will have a price associated with the underlying shares that mandate specific exits.
We have decided to grade each position’s entry and exit using a +/- system. This will have the effect of forcing us to consider exit expectations before we even enter a trade.
Outside of the Apple holdings, however, this portfolio is up 7.8%. And excluding the Apple holdings along with the BRK/B and LVS busted trades, we’d have a 17.3% gain (we don’t pat ourselves on the back for this, but thought it was interesting to note).
On a more positive note, we had two fantastic trades this week. The first was entering a SPY put on Friday afternoon, which we sold for a 59% profit on Monday. The next was a NFLX call entered on Monday morning that we sold for a 46% profit that same afternoon.
SPY Portfolio. We don’t have much to say about our SPY portfolio. Clearly we took our bearish positions too early in January. That said, we didn’t take a significant hit because of it. The SPY climbed almost 9% in the six weeks heading into January. We took our initial bearish positions around the $146 level, and the SPY continued up. But it only climbed an additional 3.5%. We took an opportunistic exit during the steep sell-off on Monday before re-entering the trade the next day on a dramatic rebound.
An interesting side note is that these back-to-back reversals tend to signal an impending change in trend. When you see multiple reversals back-to-back after a sustained rally, it means that the bulls and bears have reached an equilibrium. The bulls no longer have full control. That’s why we re-entered a number of short positions yesterday (and long VXX, a proxy for market volatility).
We welcome any thoughts and feedback.