when to take profit in play money?

The play money portfolio that I have is a contratian portfolio. Getting in a trade is one thing: I base myself on oversold assets that look to be bottoming out. Sometimes I place an outright bet. Getting out is another thing. So, when to get out?

There are multiple points to consider when getting out of the trades

  • Are the assets now on a “fair” price or slightly overvalued?

One of the trading principles that you read often is to limit your losers and to let the winners run. This is actually the opposite of what I do while trading options. Interesting and in both cases a justified approach.

It then comes down to trying to maximise the remaining profit in the trade. As I did not enter the asset based upon a valuation model, I discover this is difficult.

I consider this a first lesson learned

When entering a trade, also decide when to exit the trade

  • What alternative investments do I see

Imagine that I sell the assets. What other assets do I buy? Will there be better opportunities out there or not?

If I can not find other investable assets, than the cash will be sitting idle. The current interest rates are so low, that I loose compared to inflation.

Looking at some concrete examples let’s to decide on some approaches

Kinder Morgan

kmi
KMI  is a stock that I bought at a time I considered it oversold. It was right after the announcement of the dividend cut. For me, that was a reassuring gesture that the company would be on the right track again.

Wit an average cost 16.3USD , it is clear that I entered too soon. The share dropped to 12USD in January. With the oil price going up and Warren Buffet joining the party, the price peaked at 19.2 early March.

The plan with this stock is to gain additional income by writing covered calls above my cost price. I decided that I am willing to sell at 20. This means a return of 22,7 pct. I hope to get this within a year of my first trade. The final return will be boosted by the dividends and premiums I get.

Gold

IMG_0075A second major holding in my play portfolio is GDX. This ETF tracks the stock price of gold mines. As such, this investment is heavily correlated to the price of gold. Next to that, I also have a gold tracker that is quoted in EUR.

After a lot of time and reflection, I see these positions more as a hedge against a serious problem in the financial system or a serious bear market.

For me, that defines the time to sell them: when there is major massive fear in the market. That would translate to gold worth north of 1400 USD/oz. At that time, I expect some of my core trackers  and DGI stock to be cheap to pick up. I would then exchange the GDX for some other sectors.

Update: I could not resist selling covered calls and could now be forced to sell 2/3 of my position… I guess I learn little…! And the bad non farm payrolls last Friday did not help.

Conclusion

It looks like I have defined the exit points for 2 of my play money  positions. Lets see how it goes

Given all these consideration points, I come to appreciate more and more the boring indexing portfolio that I have at the core. Reaching this state of mind is one of the goals of the play portfolio. Mission accomplished.

Do you have some feedback on my exit strategies? How do you define exit strategies?

 

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17 thoughts on “when to take profit in play money?

  1. ATL, you and I are SO much alike! I have the exact same problem, and react much the same as you. I sold some calls on NG (a Jr Minor) at $5, it’s now trading at $6. I’ve taken to continually rolling the call a week or two prior to expiry. At some point, it may get called away prior to expiry, but in the meantime I’m earning 11-13% annual yield every time I roll it. I’ll continue forever, if possible. If gold keeps increasing, it may become impossible to roll, and I’ll be forced to sell at $5. In the meantime, I’ll continue to harvest call premium as long as possible.

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    1. It happened to me once before with GDX… I waited too long to roll and then it was no more possible to do so… At least the strike is far enough away to make a profit on the underlying as well..

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  2. Don’t do much option trading but I like your idea of setting an entry and exit price. I think your strategy of buying undervalued or oversold stocks is a key to investing. Many people when they now start out look for the hottest stocks and try to jump on the “winning” train. I got burnt for this with Apple but hoping they can recover in the coming years.

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    1. That is indeed the idea of my playmoney: try to find the oversold stock in the market. So far, so good. And that gave me then the question: when to exit. It is a simple answer: when it is overbought… and that is not so easy to see…!
      The options are an attempt to make a recurring income. I am curious to see where it goes.

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  3. Interesting question, and I suppose you could apply it to all types of investing, and other things in life like where you live or your job. I probably depends on expectations as well. Eg many people say never sell (ie exit) real estate but I’m sure that’s not true in all cases. When you do start the new job?

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  4. Do you do any technical stock chart research? When I traded for about 6 months that is what I lived by – MACD was my favorite

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    1. I do not do any real technical analysis. I base myself a lot on what i read. I do use the charts to see if it bottoms out or not. Till ow, in all cases I entered too early. As i have a long term view, i am not too worried. The fact that it is playmoney also helps.

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  5. One question on gold – it seems like the price of GDX has been rising even though the overall market is so high right now. I would’ve thought that they would be inversely related, especially since, like you mentioned, gold is usually used as a hedge against bear markets. Any thoughts? Thanks in advance!

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    1. Good question… gold is now hovering around 1280/oz and in 2008 it was 1800/OZ. There is thus some upside potential. GDX is a sort of leverage on gold as goldmines react very hefty to moves in gold. Why gold is up? Reading the press, it is because of fear of recession, fear of Brexit,… I am in it for the long term, or at least till I reach my exit point.
      Will it go higher? maybe, Will it drop? maybe. I do think one day it will be sky high again. In my play portfolio, I have the time to wait…

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  6. I think there is a lot more upside to gold than 1400/oz. Its the reason why I am so bullish on the sector — thats where I see some great opportunities that cannot be found elsewhere in the market.

    Personally I dont mind writing covered calls – its a decent strategy…let the market decide when you sell since its hard to make a call sometimes.

    Best
    R2R

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    1. Agreed, covered calls are great to take profit. I just have a hard time to then see the stock go even higher. I guess I could write aggressive puts with the money collected from the covered calls.

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  7. Hi atl,
    I’m all for play money if it protects the main portion of your portfolio from the game and you can afford to lose all of the play money 🙂

    What I would find interesting is a comparison or journal of the (tax-adjusted) performance / income from your play money portfolio vs the performance / income from that money being invested in an index and left alone, or even just being left in the same initial stocks.

    I guess I just have trouble in seeing how market-timing is a viable long-term strategy when it seems like a sequence of coin-flips to me. I still hope your play money portfolio crushes the market though! 🙂

    Best wishes,
    -DL

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  8. Hey, ATL,

    You have a good entry point in KMI.
    My entry price is a little bit higher. I will the stocks only if the price goes above 27 dollars. Looks like I have to wait a few months

    best regards
    Chri

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