Friday, October 28, 2005

I think I got shaken out.

Yesterday as I was watching most my profits over the past month or so evaporate, I was saying to myself if only the market could come back I'll do the right thing and hedge like I should have a few days ago when I wrote my last post. This morning with the market up I felt that the fear I had experienced yesterday shows that I was too leveraged right now. I didn't want to end up being negative on the year because I got too bullish near the end (this happened last year). The market at this point wasn't up enough so that I could put on the hedges that would make me feel good about weathering a downside while still having plenty of opportunity to benefit from more upward movement, like I could have when I made my last post. So I decided to use the up day to do a little bit of liquidating. I think I liquidated too much, and now I feel worst then I did yesterday. Obviously if the bottom falls out of the market I'll be happy that I lightened up so heavily, but I really feel that my bearishness got out of hand this morning.

My take away is that when I'm up big I need to take some profits. When I wrote my last post, I could have hedged most of my spy inventory for almost a guaranteed profit and still be long wing gamma. I could have hedged all of my XLE for a guaranteed profit, by completing a bullish butterfly for a credit, and still had the opportunity to benefit for further major upside gains. I could have liquidated half of my SMH position and eliminated almost all of the risk going forward in SMH as well.

(NOTE: I'm only talking about my short-term options portfolio. My long term portfolio is untouched.)


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