The Recovery is not as Advertised

Bernanke and Co told us this past week what we should know:

*The FEDS are likely to do something, as they may have to.
*The recovery is not as advertised. Or better put, the recovery is not what we had anticipated, blindly believing that years of excess would suddenly result in a jobs market getting better when we make nothing, and consume everything.

*Retail sales only showed growth in autos and gasoline.

*The GM profit was not noticed. FEAR showed and real positives were forgotten.

All this means is that the market was ripe for correction.

We open this week with NEW Dow Projections and again a double play, a straddle in which we hope to profit both ways, if we are careful.

And a story from new Level 3 trader JC:


"Well Floyd

In a nutshell not the best of weeks for me. To remind you here's what I did:

11th Aug - Bought 10 contracts 510 calls at $5.33.

12th Aug - Bought 20 @ $2.33 - average now down to $3.35. Placed limit order to sell at $4.10.

13th Aug. Futures neutral, no major news breaking, 9.32 to 9.35 am marginally up and trading first hour moving above the pivot. Buy 30 more call contracts at $0.822, average cost now $2.10.

Reasoning behind 3rd tranche. There seemed the possibility of a rally but if there was, perhaps unlikely it would take the call price from about $0.50 to my break even point of $3.35. I judge that there is a possibility of a move up that takes the option to $2.10. the trade was placed at about 9.45am ET.

By the time I go to bed at 1pm ET the market has moved up but seems to lack conviction, in other words I have serious doubts I will hit £2.10 and I decide not to be greedy and see if I can recover some loses and place limit orders at $1.20 & $1.50, which would have meant a loss of about 30% on my position.

I set my alarm before the close but unfortunatley to end a far from impressive week, I did not close the position.

Whilst painful to lose this much, there will be learning points, and my first is to get back to paper trading for your recommended 90 days. Any observations / advice on whether my thinking in placing these trades is off beam, please feel free.

I asked JC for permission to publish and he responded also with:

Please feel free to use whatever you wish Floyd, but there is one other point you may wish to consider.

As I am new to OEX options (less than 90 days) knowing fully the risks involved I decided to "dabble" a little and over the last three weeks (that is two weeks excluding the one just past), I have had 3 successful trades, all 1st tranche.

In view of my location in the world I will only ever be able to trade the first couple of hours or so of the US market, and therefore I suspect I may have more 1st buys than 2nd or 3rd.

What has happened this week is my one and only 2nd then 3rd tranche trade has wiped out and more the profits from the 3 successful 1st tranche trades.

In trying to analyze what I could do better, I appreciate your point about taking more notice of the news and an eye on the futures market, and if I had more experience this may have kept me out totally, so that is one learning point.

Another could well be my position sizing. I decided that I would risk a max of 10% of my pot, and my first 3 trades where about 4% each. The 4th and losing trade, after adding to it, came nearer to my 10% limit, and here I would appreciate your views on whether I should be approaching this differently?

Floyd's Response:
1. Paper trade again
2. Do NOT take third buys. The risk increases and one is showing signs of fear. Taking a larger second buy (twice that of the first) and averaging costs returns in the positive territory 73% of the time in the last 3 months. It returned even higher before this massive amount of volatility.
3. It is the sum of the parts. There will be losses. Re-examine your allocations.
4. Make sure you follow Bloomberg Online news and futures, the best site for all of this, each morning pre-market. I usually begin the evening before and study only Bloomberg.
It simplifies what I am reading to professionally presented, without political gestation, commentary.
5. Now that you still hold, continue to Monday and watch futures. Don't hold past Tuesday afternoon unless highly risk oriented.