YTD Performance Snapshot (4-17-10)

Background: 


For many new readers who joined this past four weeks, the attached snapshot below illustrates the profit/loss year-to-date since I started the blog on Jan 13, 2010.  If anyone having difficulty viewing the files, please let me know.  


For those who don't know, unlike many other websites, the model portfolio is not set up to show starting portfolio balance and returns year-to-date.  The model portfolio is set up to show profit per trade based on dollar and percentage terms assuming each trade was done with exactly $5,000 buying power effect. 


When I put on a trade, don't expect to hit home run right off the bat.  You're looking at the wrong place if that's your motto.  If you have good controls over these four commonly forgotten attributes: risk control, conviction, patience and proper position sizing, the last thing you should care about is profits.  I know it sounds stupid, but I look at profits as given and assured if the rest of attributes are present.  


With this background, lets review this last option cycle performance.  April option cycle produced $10,978 profit.  This was less than profits achieved during March option cycle of $18,390.  Nonetheless, spectacular performance given that the number of new originating trades during April option cycle were 48% less than during March option cycle.  This is primarily because the first quarter earnings season was mostly over, and VIX had dropped significantly, giving out fewer setups for bull put spread trades using my 5-10-20 rule.  For more on 5-10-20 rule, refer to 5-10-20 Rule.  During April option cycle there were 15 winners and 5 losers.  Here is a review of biggest winners and losers.


Winners:


GE - The trade set up was based on technical breakout.  Employing straight long call strategy, we sold half for 64% profit and the other half for 96% profit.  


WYNN - Using strictly technical setup, we had the advantage of getting into the trade well before the momentum started on the street.  We sold half for 72% profit and other half for 115% profit.  


LVS - Similar to WYNN, we sold half for 56% profit and the other half for 103%.  


LPX - We saw the valuation was ridiculously cheap.  We noticed product pricing was getting better well before the street got excited.  Using fundamentals and technicals, we made a trade that produced exactly 100% profit.  


ZION - Long before the street got excited, we saw the fundamentals improving based on stabilizing charge-offs and delinquencies.  We closed half for 91% profit and the second half for 133% profit.  


ATPG - I give full credit to one of my readers from Texas who brought this up to my attention.  After reviewing technicals and fundamentals, we put on a fast and furious trade that produced 50% profit within 2 days.  We only closed half, the rest is still open.  


C - We made the call well before the street got excited when Citi was trading around ~$3.60.  After booking 114% profit, we rolled the trade further out in time and money, thus reducing the exposure significantly while keeping number of contracts exactly the same.  More profits are on the way.  


AAPL - This was the best trade for April option cycle by a long shot and it warrants good explanation.  We did numerous roll outs that can get very confusing, but I want to illustrate how powerful the strategy was:
- We bought April/March $230 call calendar for $2.85 debit.  Since the model portfolio assumes $5,000 allocated to each trade, $2.85 debit bought us 17 contracts.
- We rolled short March $230 calls to short April $240 calls for $1.85 credit, thus converting to April 230/240 call spread for net cost of $1.00 debit.
- We rolled long April $230 calls to long May $240 calls for $0.90 debit, thus converting to April/May $240 calendar for net cost of $1.90 debit.
- We rolled short April $240 calls to short May $250 calls for $2.30 credit, thus converting to May 240/250 call spread for net cost of "negative" $0.40.  In other words, we have already cashed out the original principal plus $0.40, while we are still in the game with same number of contracts.  
- We rolled long May $240 calls to long July $250 calls for $0.35 credit, thus converting to July/May $250 calendar for net cost of "negative" $0.75.  


This current July/May $250 calendar is going for $5.40, while our cost after all these rollouts is negative $0.75.  Therefore, using original 17 contracts in model portfolio, we're sitting on ($5.40 + $0.75) x 17 contracts = $10,455 profit or 209%.  And the story is not over yet.  Short May $250 calls are going for $8.30 and Theta decay is on our side.  More profits are still on the way.  


There are very few, if any, strategies you could show me that could have worked flawlessly with as little risk as we employed in above AAPL trades to produce the same % profits.  


V - Here is another beautiful trade.  
- We bought June/April $95 call calendar for $1.60 debit when Visa was trading at $90.38  Assuming $5,000 allocated to this trade, we bought 31 contracts.
- We bought back April $95 calls for $0.29 debit.
- We resold April $95 calls for $0.68 credit.
- We bought back April $95 calls for $0.18 debit.
- We sold May $95 calls for $1.63 credit.  


$1.60 + $0.29 - $0.68 + $0.18 - $1.63 = -$0.24.  Currently, the stock is trading at $93.84.  Unlike AAPL which continued to run-up, Visa has yet to cross $95 level where calendar was originally done, and yet we have already cashed out the entire original principal plus $0.24 per contract, and we still have same 31 contracts of May/June $95 calendar which is going for $0.70.  That's $2,914 or 58% profit already achieved with little movement in the stock since the trade was first opened.  


Losers:


There were five large losers that effected the model portfolio pretty hard.  


NFLX - The trade was April 60/65/70 butterfly.  On Friday, the stock closed at $85.31.  What I missed to recognize was Netflix app made for iPad is one of the highest downloaded app so far.  Fundamentally, it may not mean anything down the road, but for short-term momentum traders fundamentals mean squat.  The stock is up 77% in just 3 months, now trading at 42x earnings.  Go figure.  The trade lost 90% value before I finally gave up.  What could have I done differently?  I think the prudent thing to do was to get out when I reached 50% loss mark.  But instead I decided to stand in front of the train and got run over.  


POT - This is a stock that I may not trade again in the future.  When they reported 4Q09 earnings, they guided 2010 earnings down 23%.  About 45 days later, they raised guidance to the same level where they were before.  Then last week, GS went negative on POT.  The fact is nobody knows where the heck the fertilizers stocks are heading, given a very mix picture of supply, demand, product pricing and inventories.  In textbook finance, this kind of behavior warrants significantly less PE multiples.  We had bullish April 125/135/140 skip-strike butterfly that lost 100%.  What could have I done differently?  I should've just never entered the trade given the management and analysts cannot be trusted with estimates.  This is a lesson I will remember for fertilizer stocks going forward.


MEE - The stock was trading at $54 and we had April 44/45 bull put spread.  We were already in the trade when the news hit of mining disaster.  It was a race between stock falling and time erosion due to Theta decay.  Until three days before expiration, the stock was still trading above $45, but then a wave of fresh selling came in and bull put spread lost 50%.  Nobody could've known about the disaster beforehand and the trade was done with right intentions.  Still you ask, what could have I done different?  Just get the hell out of the way in the face of massive selling pressure driven by fear among traders.


GS - On Thursday afternoon, May/July $190 calendar was showing 21% profit.  By Friday afternoon, the trade was showing 35% loss.  That was $2,800 swing in model portfolio as SEC spoiled the fun just two days after analysts raised price targets on GS to $210 or higher.  On Friday, GS lost $10 billion market cap, while the maximum potential liability to SEC is $1 billion.  GS has $165 billion trading capital (highest of anyone).  It trades at 8x earnings and 1.2x book value (lowest of anyone).  Enough said.  I am sticking with the trade.  


SPY and IWM hedges - In total, the model portfolio lost $8,100 or 81% in April option cycle.  The portfolio was significantly betting on the upside, which was the right decision, but these hedges were necessary to protect from precipitous fall.  What could have I done differently?  I should've gone further out in time to put on a hedge and should've done it through calendar spread.  A few readers even brought this up.  


Bottom Line:


Despite losses due to unexpected mining disaster (MEE), lawsuit and fines (GS), analysts and management flip-flopping (POT), momentum traders ignoring fundamentals (NFLX), and hedges (SPY and IWM), the model portfolio produced nearly $11,000 profit during April option cycle driven by technical breakouts (GE, WYNN, LVS, ATPG and C), improving fundamentals (ZION and LPX) and carefully designed trades for sideways-to-upside momentum (AAPL and V).  The profit was achieved despite 48% fewer trades in April option cycle vs. March.  


The other noteworthy open positions that I am excited about is CRM, IBM, DNDN, RIMM, YRCW and LEAP.  


Lastly, the earnings season is upon us.  We're going to get extremely busy again.  


Stay tuned and good luck!