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
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.
A 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.
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?