Miserable week

The market finally underwent that correction (well, just a breather so far) that I had been anticipating for a couple of weeks now. Of course, I turned out to be exactly ONE day late...with the pullback starting the very next market day after my February SPY put options expired.  I learned many lessons about protecting profits, and telling the difference between a natural price pullback and a outright trend reversal.  In addition, I witnessed how perfectly rational moves can be quickly overpowered by irrational behavior in the stock market. Overall, I had a horrible week...erasing every cent I had made throughout the entire month. All I can do now is lick my wounds, learn my lessons, and make that money back.

As I had mentioned in my last post, the situation in Libya shot the price of oil sky high, instilling a lot of fear into the market, while boosting oil related stocks. GPOR was an example of this, rising 8.5% for the week. However, this served as a negative catalyst for the overall market, and the S&P 500 fell hard for three days before recovering some of those losses in light trade on Friday.  LULU, one of my best performers this month, gave back all its gains in a matter of days, triggering my poorly set stop loss before promptly bouncing back Thursday and Friday. After reexamining the chart, I realize I should have placed the stop loss about a dollar below where I had it. Drawing trend lines on the earlier consolidation period created a level of support that held perfectly. Unfortunately, I did not see this support previously, and my stop loss was above it. A $1000+ gain was suddenly turned into a $313 loss. However, the correction in LULU came hard and fast in heavy volume, with the upward bounce coming in relatively light volume, so I'm not sure how strong the support can hold. APKT also underwent a hard correction, but recovered and actually ended the week with a positive gain.  Lesson learned: price pullbacks are natural and should not cause reason to panic. Setting the stop loss points at reasonable prices will provide a safe cushion for natural pullbacks to occur and recovery to happen.

I don't get it...

Despite the mistakes I made with my long stock positions, the real damage to my portfolio came as a result of options. The general consensus is that options should not be toyed with by beginners, but I feel like a year of research and learning had provided me with a sufficient grasp of how options worked. Like many things, however, theory rarely applies to the real world. A previous post talked about how to play an earnings short squeeze. I used this strategy, but in hindsight (for now), I greedily used options to overleverage my bet.  Deckers (DECK) was set to announce earnings on Thursday afternoon, and I expected that they would beat expectations. My analysis (and firsthand experiences with how the UGG boot craze has not subsided...even I had bought a pair for someone in December) indicated a strong 4th quarter showing for 2010, so I had bought 5 March 19th DECK call options.  This essentially gave me control over 500 shares of DECK stock...around $45000. I stomached a treacherous price pullback throughout the week, confident that the earnings short squeeze would more than make up for the losses. After the close on Thursday, Deckers beat earnings expectations by 28 cents/share, and share prices rose. Friday morning saw DECK gap up to an all time high of $94.00, and I was elated. However, despite a strong day in the overall markets, DECK plummeted to $88.30 by the close, and the value of those options alone erased my gains for the month.  I probably won't be touching options for awhile...at least not until I have a set plan as to how to use them. Overleveraging with 5 contracts was just greedy, no matter how sure I was of my bet.  If it were stock, I would barely be buying 100 shares (equivalent to 1 option contract). I could have risked just $700 and controlled $9000 of stock. Just live and learn...no real strategy to talk about today, just a bunch of whining.

Friday, February 25th, 2011

Weekly Change: Down $3702.18 (-16.9%)

Daily Changes (Starting Tuesday, Feb 22nd):  -$1977.92, -$468.68, -$556.57, -$699.01 

Current Porfolio Value ($20000 on January 24th, 2011): $18096.05  (Down 9.51%)

February Performance: Down $937.51 

Market Outlook: Short term bearish, long term bullish. Uncertainty over Libya continues to push oil higher and instill fear into the market. Volume was much heavier on the down days than the lone up day (on the S&P 500 and Dow Jones Industrial Average), perhaps indicating that correction is not quite over. Positive domestic economic data continues to be positive, and the market's reaction to positive and/or negative news will be telling as to the viability of this bull market. 

Holdings:

APKT - 100 shares - $76.65/share

GPOR - 300 shares - $29.39/share

MDF  - 400 shares - $5.08/ share

ZAGG May 21 $10.00 Call - 5 contracts - $1.05

ERX July 19 $86.00 Call - 1 contracts - $12.60

DECK March 19th $90 Call - 5 contracts - $2.50

Trades: Tuesday, February 22nd, 2011 - Friday, February 25th, 2011

Sold LULU (100 shares) - Stopped out...however, bounced off of support that I had not seen soon after

Sold ARUN (100 shares) - Stopped out when price fell below the top of the gap (from last week's gap up)...price did recover somewhat

Bought GPOR (100 shares) - Added to position during a strong week

Bought DECK March 19 $90.00 Call (5 contracts) - Speculating on Thursday's earnings report...