Fisted By PALM

Even with the contraction of IV on the short palm position(20% contraction day after earnings) my closest strike of 15 ended up significantly in the money. This was an extremely frustrating day, the stock pulled back which I waited for and expected and I entered my order at 14.90, which was the exact low for the day. I was apparently 20 seconds too late as I never got filled on my limit and the stock basically rebounded and went up all day long. In hindsight, the best thing to do would have been to sell a strangle choosing a decent range I think the stock will stay between so I can have more of a hedge in case of an extreme move.

I was asked why I would have taken any position at all ahead of such a significant announcement. The reason is because I have the IV contraction on my side helping limit a loss and I essentially have a 75% of making money. There are 5 scenarios that can essentially can take place after earnings. Palm goes up a little, goes down a little, does nothing, goes down a lot or goes up a lot. On 4/5 of those scenarios I should lose very little and likely make money. Unfortunately for me this time it did what hurt the most; go up a lot. Selling a strangle would have been better because I have IV contraction working in my favor on both positions and money lost in one direction would be more offset by the money gained from the opposing short position. The interesting thing to note is that I used to go long options ahead of earnings, which now seems fairly stupid to me because you essentially only have that 1/5 chance of making money because as a long you have so much working against you.

Palm sold back off a bit yesterday so I took the opportunity to close my ITM position at a loss, which was better than two days ago but not as good as if I had been filled when I wanted to originally. Oh well, I have learned something new and must move on and be glad I am out of my loss. I am holding my further OTM short call positions since they still have a decent chance of finishing for a profit and it will help make up the loss, I'll essentially break even. If it continues to strengthen I'll look to close those as well. This was another scenario where I took too large of a loss, which is exactly what I don't want to do and can't do if I want to keep going. I have been on kind of a bad streak lately so I am trying to be patient but it is also making me a little timid in taking more risk. I am over 30% off my highs which I don't like, I'd rather keep my drawdown to a minimum.

Total Return for 2009: 134%