Thursday, May 04, 2006

Losing a hand or an arm

I want to quote a conversation I had today with a trader (I'm croc)

[10:33] (rr): i'm scared sh1tless about VPHM earnings tomorrow
[10:33] (rr): q vphm
[10:33] (HeartBot): VPHM  10.97  -0.13 (-1.16%)  <10.93 x 11.05> May 3
[10:33] (croc): cover your trade rr
[10:33] (rr): puts?
[10:33] (rr): hmm
[10:34] (croc): if your scared but hold onto it, it's just gambling
[10:34] (rr): lo
[10:34] (rr): true
[10:34] (rr): i'm confident in the company
[10:34] (rr): i'm worried about investors
[10:34] (rr): the company is alrady insanely discounted
[10:34] (rr): it's artificially low
[10:34] (rr): IMO
[10:34] (croc): or hedge it
[10:35] (croc): but usually the course of action is cover it, if you are not a big investor
[10:36] (croc): not worth to lose 1 h of sleep over a position
[10:36] (rr): i know man
[10:36] (rr): i have 1400 shrs and 16 call options
[10:36] (rr): i had 1600 but my broker liquidated cuz i ran out of cash
[10:39] (croc): well, if you ran out of cash, that might mean, you have all your eggs in 1 basket now. The 3% rule doesn't apply for smaller accounts but nonetheless 25%-30% should be max in 1 pos. aka in a 10k account max 3k in one position, if you swing it
[10:41] (rr): yeah i see
[10:41] (rr): does margin count?
[10:41] (rr): maybe 45%
[10:41] (rr): when i break the rules i pay for them
[10:41] (croc): Once I read, if a position scares you, scale it down until it no longer scares you. Sell 700 of your longs and 8 of your options, this means you lose most likely on your position, but you might sleep better. If your play is correct, you are already in and can add after earnings, if it goes against you, you lose a hand now and the other tomorrow, but otherwise it's 2 arms you lose

...and btw. (rr) had all reason to be scared.
[20:03] (croc): q vphm
[20:03] (HeartBot): VPHM  8.98  -1.83 (-16.68%)  <9.14 x 9.15> 2:03pm