Tuesday, March 15, 2011

Get out of the Game

The stock market price action (that's what you see when you watch the chart of the market tick by tick) reminds me of something I said to a Seminary class years ago. I'm LDS and our youth show up each school day before school (about 6:20am) and we talk with them and teach them about the "Four Standard Works". For us, that includes the Old Testament (Hebrew Bible), New Testament, Book of Mormon, & the Doctrine and Covenants (including the Presidents of the Church).

Waking up this early (many youth are up at 5-5:30am to be at Seminary on time) is a lot to ask any teenager. Waking up early to talk about religion may even make this feat of strength even more powerful. One morning I got all fired up and told them that if they didn't believe this stuff then they are wasting their time being at Seminary. Seriously, other teenagers get an hour or more of sleep EVERY DAY. None of them would even dare wake up at the crack of dawn to go talk about their religion for 45 minutes before high school. They sure as heck wouldn't give up sex, drugs, and rock 'n' roll (OK, so we don't tell our youth to give up rock and roll...but I'm on a roll here)!

The bottom line, if you don't believe in the Church/Religion, then there is no reason to waste time living by it's standards and attending 8 hours of Church every week (3 hours on Sunday, then 5 days a week for 45 minutes in Seminary, and 1.5 hours one night a week to hang out and do something fun). To get the most out of being a member of a Church...you actually have to believe what they teach you there about how the world works.

So why all this talk about Church/Religion on a financial blog? This morning, millions of people hit the sell button this morning and I have to believe that many of those people all of a sudden "didn't believe" that they made the right choice when they bought their stock. Don't get me wrong, we sold some things we were up in this morning and exercised puts we were long (we owned the puts to protect big profits we had). But we'll be here all day. We'll be here tomorrow, and we'll be trading for clients for many years to come. Why should we play this game that so many think is rigged? We own stocks/options, we trade, because we believe it's the right thing to do.

When life gets hard, when you don't want to get out of bed...it's what you believe that will get you out of bed in the morning. It's true for the stock market and it's sure as heck was true for those kids. You must stick by your guns (when you are right). If you're wrong on a stock...then by all means, sell the dang thing. We've been trying to get investors to sell stock and raise cash for weeks and weeks now. If you did, then you can stay in the dang game right now. But if you were fully invested, all in, with no cash and no hedges...then you probably think about getting out of the game every day. You probably get sick to your stomach when you see price action like we've seen over the last 10 trading days or so.

You know what, maybe you should get out of the game. If you're "all in" with no cash, you don't know what you own (or even worse why you own what you own). If you have no cash right now and you're getting your head lopped off with no end in sight. If you just wont listen to Jim Cramer and do one hour of homework per week per position that you own...then you really should consider getting someone else to be your advisor and getting out of the game.

Stocks can be rewarding, especially when you buy on days like today (usually selling on days like today end up being the wrong move more often than it is the right move). Having conviction (on more than just your religious beliefs) often means that you're willing to stick around to earn the "easy money". That seems strange huh. The "easy money" is the money that's made when the stock gets to its lowest levels. The lowest levels on most stocks happen when the markets look their worst.

What are we doing today? Well, we are rolling positions down and out that we are simply running out of time on. With March options expiration on Friday and Salesforce.com trading at $124 and change...we can no longer wait on the 130/125 put spreads that we're short. We are rolling those down and out to April 120/115 short put spreads (and increasing the size to stay profitable).

We rolled some of the Freeport McMoRan short 50/45 put spreads we're short out to April (keeping the size and strike's the same). But, since the LOD (lows of the day) the stock has traded back above $50 so we'll hold tight on the rest of the FCX spreads we're short. We'll keep holding onto NFLX, FFIV, and FIRE spreads that we're short. In case you missed yesterday's L@tM, we're waiting until Wednesday to see where markets are before we make final decisions on those names.

We also added to Qualcomm (QCOM) January 2012 strike calls and Potash (POT) January 2012 50 strike calls. Both of these names got hit with the overall market on the open. But, since the gap down, POT is up $2/share and QCOM is up about the same $2. We want to emphasize that having cash ready on the open is when we got the best prices. The same was true for our VIX call spreads that we had on as hedges. We sold our VIX May 17/21 call spreads for $2.75 and let you know real time on Twitter when we did it. We continue to maintain our S&P500 (SPX) 1300/1275 long put spreads in case we see further decline. This $25 spread (which is nearly completely in the money) wasn't selling for anywhere near the $25 it should have been worth on the open (thanks to time value and volatility) so we will hold on until we get prices we want or it gets closer to May and it looks like we need to take action (if the markets rise dramatically).

The stock market isn't an easy place to make money. Your conviction will be tested frequently if you're around long enough. Despite the risks of loss, the opportunities to profit can be regularly found...if you're looking for them and you're ready for them. If you have done your homework, then you need to believe yourself when you see a price that you've been looking for. Don't bail on a stock you believe you're right in just because of temporary market fluctuations...believe in your homework when you do it well.

And those kids that I issued the challenge to stop coming to Church if they didn't believe it...not a single one of them took me up on it. When it comes to my stock market challenge to get out...maybe you shouldn't either.