Thursday, April 12, 2012

Trade Conviction - don't give up so easily $AAP $CMI $CAT


THIS IS AN OLD POST THAT IS TIMELESS IN MY OPINION. I REFERRED TO IT TODAY IN MY $CF SHORT POSITION AND SAVED ME FROM THROWING AWAY A PERFECT GOOD SHORT (SO FAR ;-)
POSTED THIS FIRST IN APRIL 2012... examples are old but still convey the message.
Here it is:
previously I posted a write up about credit spreads that was very well received so I figured I owe you one today as well.
This is a lesson on CONVICTION and why I don't panic into closing positions that appear to have soured beyond repair. In the words of Jim Cramer: 'no one made a dime panicking.'
I currently have three positions that can serve as examples:

*** $CAT CREDIT PUT SPREAD POSITION: I sold-to-open a caterpillar April credit put spread. This is a bullish position on CAT.
* Sold April 105 put
* Bought April 100 put to limit my dollars at risk (my potential loss is $5 per contract)
On Mar 29, the stock broke my upper leg (short put) but I didn't panic and left it alone. I was even tempted to add to my lots.
On April 10, the stock dipped further and went below 100 (99.8). Here too I didn't budge nor did I add to my lots (hindsight I probably should have). At this point my whole position was in-the-money (not good when it's a credit spread)
IMP: No, I was not smoking 'hopium'; I wasn't HOPING for it to rebound. The reason I didn't budge is that my thesis was still intact. Nothing had changed since I put the position ON except market sentiment. My view was that the US is still doing well, China is still growing leaps and bounds, and Euro-Zone still is in trouble so the sell-off was not warranted. This is an exceptionally well-managed company and it will execute on its plans.

*** $CMI CREDIT PUT POSITION: This is an almost identical position to the CAT my position above. Here are the levels for this trade:
* Sold April 110 put
* Bought April 105 put to limit my dollars at risk
This too is a bullish play on CMI and for the same reasons as the CAT position.
April 10th and 11th, the stock kissed the 110 level threatening to break into my short put/leg. For the same reasons as described above, I stuck to my guns and didn't sweat it. For more conviction, CMI had received a positive nod from some analyst but still got dragged down by the broad market sell-offs. If we get good China numbers tomorrow and we get another run up like today, I may revisit closing these positions for a good profit and not risk another early week sell-off next week.

*** $AAPL CREDIT PUT POSITION: This one is a little different as it's part of an iron condor but the upper legs are far enough from current price that I will only discuss the lower leg of the trade:
* Sold $AAPL 625 April put 
* Bought $AAPL 620 April put to limit my dollars at risk
Today aapl closed 622.77 so it broke my short put leg (it's in-the-money). Here too I didn't fold yet. I still believe that the pullback in aapl is undeserved. This is a company that is selling every nut and bolt it can make and at a premium. Why in the world would I want to sell it? to go long RIMM? NFLX? there is no better and safer bet out there!
Next week I can update this post to see how wrong I was in doing (or not doing) with these positions.
If I forget to do so.... someone nudge me please and thank you.

Btw, if you like these posts spread the word+ folo @racernic (twitter and stocktwits). Also peruse rest of my posts including the sides to help finance the java (if you know what I mean ;-). I do these post for free and have no subscription pitches etc.

Conviction is very important BUT more important that we don't blur the line between conviction and hardheadedness. How can I tell the difference? If I've never admitted I was wrong then It's likely to be hardheadedness ;-) 

MY TWEETS AND POSTS ARE REAL TRADES WITH REAL PROFITS AND REAL LOSSES. NO PAPER TRADING HERE! I HAVE A FEW INTERESTING TRADES POSTED.

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As with any trade there are risks but in this case the I am very comfortable with the dollars at risk. I always try to know and manage my risk; I ask 'what will I lose if the crap hit the fan in the worst possible way.' If I know the answer to this and am ok with it then I should be ok.

THIS IS NOT A RECOMMENDATION OF ANY KIND. I ONLY INVEST MONEY I CAN AFFORD TO LOSE.

$AAPL $AMZN $bidu $SPX $NDX $RUT $C $GS $wynn $SPY $GOOG