Thursday, July 17, 2008

PM post

Bamboo and Orchids I
Ives Mccoll

I closed out my UYG today. Dan Fitzpatrick at Real Money said something (but from another trader) that stuck with me. It had to do with reasons to sell. One of those reasons was when the stock has moved too far too fast.

I believe that that much of the financial sector's EPIC move forward had to do with the SEC's announcing that they would enforce naked short selling rules. You do know that if hold stock in a margin account (as opposed to a cash account) that you do not own the stock, don't you? Also, if you hold dividend paying stocks on margin, you get credited with the dividend but you may not get favorable tax treatment.

If you hold stock on margin, then those shares can be lent out to people who short--a lovely irony is it not? You hold long in a margin account and they lend the shares for someone that wants to take you down. I've never seen such an advance in my life. Perhaps it keeps going tomorrow: financials up, oil down and technology is one of Dante's Seven Circles of Hell.

Utility stocks are looking a little weak to me. I bought a smidgen of SDP the double short of the utility index. My WX continues to do well; but I've not added here. I'm still very underinvested, but I'm adding slowly. My DUG and SUN options are nicely green today. I've been nursing DUG along for a while. I bought these in APR (for OCT expiration) thinking we'd have been there, done that already. Oil and gas has now gone negative for the year. Massive sector rotation. But if the Nigerians eat a big bowl of Wheaties and start to feel frisky, who knows where the price of oil will be.

I hope that you are fairing well through all this stuff.


nice said...

Congrats on the 'nice' gain with UYG Leisa...

In one of your previous posts you were pondering 'how does one know when to sell' and discussing things like 'averaging down' etc...


IMHO I like to keep money management simple....

I accept the fact that I cannot 'Know' when to sell

I accept I can't call the top (short-term, intermediate term or definitely long term)

... So, borrowing a simple money management technique that leveraged futures traders use:

I find it best to sell out a profitable trade/investment in 3 stages.

(1) A "Trading Portion"
Sell 1/3rd when the trade goes positive with a respectable gain (especially in a case like UYG where we got 10-20% in a short period)
Having sold 1/3 profitably - now even if the entire position reverses itself - at least you will have made some money.

(2) A Swing - 'The Meat':
Sell the 2nd 1/3 when some predefined target you set gets hit (trailing it with a large stop).
This is the 'meat' of the trade/investment.

(3) 'Let the Rest Ride':
Let the last 1/3 of the position ride until it makes obscene Activedollars..
(or returns back to where you bought it).
After all - There is no limit to how high something will go.


As far as averaging down - I prefer averaging up.

Add to what is working as opposed to pressing a bet which is not.

As a caveat though,
Averaging down can work in very volatile 'trading markets' like we have today - ones which trend much less and eventually will gyrate back up into the green.

Essentially the volatility compensates for the bad entries.

But I still say averaging up is better - hands down.


Leisa said...

Nice--thank you for this exposition. I've been disciplining myself to average up using 1/3 tranches. I've completely reversed my averaging down proclivities. Though I can say that I've only done so when I thought there was a knee jerk reaction.

I've had good success in selling on exponential up moves--SEED was my best trade last year. My last 1/3 came withing a sneeze of the top-tick. That move fit the too far too fast. It has never seen that level.

Sometimes the best move is the hardest move (sell when you think it will go on forever and buy when you think that bottom of the barrel swill will pollute your taking a ladle full).

The UYG was like nothing I've seen in my short time as an observer. I only wished I had the fortitude to have stepped into the trade a little less tentatively. I've a post on that percolating--the "vanguard of the moment".