Weekly trade summary 27 nov 2009

The double dip?

As the holiday approaches and volume died down, I can no longer play the strategy I played last month for earnings month. Therefore, the type of trades I used and the type stock has to be rethought. I believe that this is the reason why most people don’t make it through their first year. They try to apply the same strategy to different months. Trading is something that has to be constantly adjusted.

I admit, I screwed up on the first week of trading. I bought a few butterfly options to speculate on merger acquisitions. However, I didn’t do much research on what potential volatility might do to the butterfly option. I should’ve used an iron condor instead, but hey, I was in a hurry and didn’t have time to research. I was in the holiday mood.

Lo and behold. Dubai is contemplating defaulting on their debt. In one day, I lost about 1/3 of the starting money. Going back to the logs. I saw that HPQ wasn’t as liquid as I originally thought. A liquidity crunch happened and instead of selling at 1.5, it sold at 1. That’s about an additional 25% loss that wasn’t necessary. Who would’ve thought that HP is pretty illiquid as an option.

Performance analysis

Starting balance: $3675

Closing balance: $2158

Trade carrying over to next week: $1517(100%)

Derivative risk: $0

Increase from opening balance: $1218.60  (41.2%)

Strategy

The theme of the month is going to be Christmas. I basically bought a few butterfly spreads and wants to sit on some merger acquisition play until the options expire. It’s the holiday season and I don’t really want to work too hard or worry too much. Because of my relative lack of experience in butterfly options, I really got my ass handed to me from picking the wrong stock and wrong options.

Reflections

I have since understood that I really need to do a lot of modeling before going into a trade so that I know what buying certain options mean. Before going rogue and trying something unknown this month, I had no idea that butterflies are best used for speculation. A $100 worth of butter fly could potentially land you a $5000 reward. Go figure.