Long GSAT (oversold)

9月12日

For those new to following me and how I trade, I encourage you to read my idea on CAN for my basic principles. This is a log of my trades or ideas, in this particular case an actual trade, and is not intended to be used as trading advice. The way I trade uses significant capital reserves and is prepared for long drawdowns which can and inevitably do occur. So trade with me at your own risk.

Quick summary of what I'm about to do here: Buy equal DOLLAR AMOUNT lots each time the stock reaches oversold status based on my proprietary algorithm that is a weighted composite of multiple indicators. I sell each lot as it becomes both overbought AND profitable.

I chose GSAT this time for 2 reasons - one is selfish and one because it's instructional for those who follow me.

First the selfish reason. On a percentage basis, it's easier to make large % wins on lower priced volatile stocks than large ones. Also, GSAT has weekly options, which I will often sell (covered calls) for income while I wait for the shares to become profitable that can SIGNIFICANTLY improve results. I'll explain how and why I do that if and when I do that. I will also sell cash-secured puts sometimes instead of purchase outright if premiums are rich enough. I probably won't do that with this trade, though, as that will make things more confusing to follow.

Now why I chose this one for you. I marked on the chart all the trades my system would have made since the first of the year. The fact that if I had made these actual trades, I would be still holding the first two lots and be down over 30% on each is instructional on a couple of levels. First, it reminds people who think that just because my system wins 90+% of the time, that lots don't always become wins immediately and can cause significant drawdowns in an account where it is a large position. DON'T BE GREEDY.

Secondly, despite those 2 lots being down 30+% each, and one recent one being down around 5%, I'd only be down around 3% overall at this point because the profits from the other 12 winning trades have almost completely offset the losses - and that's the secret of how and why what I do works. A high enough win rate and enough trades taken cancels out the losers, even if they never become profitable trades. 10 5% wins cancel out completely 1 50% loss, as a hypothetical example.

This stock is also not the only one I trade, and others have even better results, and their gains can offset losses here as well.

So wish me luck! I've never traded this stock with my system before. That tells you the confidence I have in my system, though. I'll eventually do a backtest over this stock's entire history using my system, but I haven't yet. I'll post the results here when I do.

By the way, I opened 2 lots at 1.175 before the close, because the signal from August 28th would still be an open trade, so I'm getting that first lot at a 5% discount (since that's how much it would be down if I had bought it on the 28th).

Lot 1 cost - 1.175
Lot 2 cost - 1.175

9月13日

交易進行

Added 1 lot just before the close.
Lot 3 - 1.165

I also ALMOST sold a covered call. For the newbies, I'll explain what I was going to do even though I didn't do it. Anyone familiar with option trading will likely want to skip the rest of this update. Call it my boredom trigger warning for you. Feel free to call me out for anything you feel I misrepresent if you do decide to read it. Newbies, if anything here doesn't make sense, feel free to comment and I'll be sure to answer any questions you have as best I can.

Here was my thought process:

First, oversold stocks can always go lower. I hope I've stressed that enough, but I can never stress it too much. There is ALWAYS that possibility. Selling calls can reduce some of that risk and sometimes allow you to make money even if they do. As I've said before though, nothing in the market is free. There is a trade off. Here, the trade off is capping my upside. So I had to decide whether limiting my upside was worth it. I actually put in a bid to sell a $1 call, but got no takers. I'm not sad about it because to be honest, I have enough faith in my system that I'm gonna make money either way, that it didn't really matter.

So here was the potential trade and its risks and rewards:
Sell 1 September 20 $1 call. The bid was .15 and the ask was .25). I entered an ask (bid to sell) at .20 ($20). To be honest, it isn't a great deal, but it's one I'd have been satisfied with. If my price had been accepted, I'd have gotten $20 for someone to have the right to buy 100 shares of my GSAT stock next Friday (Sep. 20) for $1 per share. That may sound like a loss, but it really isn't. Here's why.

The first thing I do when looking at an option trade is to look at how it would affect the cost of my shares and what the return would be if it were just a stock trade. So while I would only get $1 per share for the stock, the money I got for selling the option (.20/share) means they would really have effectively paid me $1.20 per share (minus option commissions) in total...$1 for the stock and .20 for the privilege of buying it at that price. So the question becomes first - am I willing to take 1.20 for my stock in a week? The answer is yes, but not an enthusiastic one.

The stock cost me 1.175 per share, so selling it at 1.20 would only give me a return of 2.1%. But 2.1% a week, if you could do that every week, is an annualized return of over 100%. So yes, sign me up. Plus, that capital would now be freed up for other trades. Given that the strike price (the price I agreed to sell it for) is almost 15% below my purchase price, it's very likely that the option would have been taken by whoever bought the option I sold. Basically if the stock was still above $1 next Friday, my 100 shares would be sold and I'd have made 2.1% in 5 trading days. OK fine. Remember my mantra - nobody ever went broke taking a profit, especially one that works out to a 100+% annualized return.

But there's another scenario that is the biggest reason I considered selling that call. What if the stock price plummets next week? I don't expect it to, but does anyone when they go long? What I did was basically insurance against that, only instead of buying insurance, the .20/share I was paid was like a cushion against losses. It's like having the first .20 (15%) drop in the stock cost you nothing.

When you sell a call, if the stock is below the agreed upon sale price (strike price) at expiration (Sep 20th in this case), the option generally expires worthless. What does that mean for me as a seller? It means I get to keep all my stock AND the $20 I sold the now worthless option for. Another way to think of that is that .20/share just got deducted from my cost. So now, those shares that I originally purchased for 1.175, now effectively cost me .975 (1.175-.20). Now going forward, at any price above .975 I make money selling the stock, when before it would have had to go above 1.175 to be profitable.

Another way to think of it is this: since the only time the option expires worthless (theoretically) is if the price of the stock is below $1 next Friday, the stock is now WELL under my original 1.175 purchase price and without the option, I'd have lost at least 15% on the trade so far. But with the option proceeds, the first .20 of price drop doesn't affect me at all because it's offset by the .20/share I got from the option. So I'm basically insuring my 100 shares of stock from the first .20 of share price drop.

But there's an important catch. If I have an option contract outstanding, I can't sell the stock I wrote the option on. It's a CONTRACT just like a business one and is binding. I MUST keep 100 shares available until expiration, even if the stock drops 50% in that time. If you use stop losses, they won't work in this situation - this contract supersedes them and brokers won't allow those 100 shares to be sold. So if the stock plummets, your're stuck.

But remember, I don't care. I normally hold that lot until it becomes overbought AND profitable, so I'm going to be holding onto it anyway. So for me, my only "risk" is if the stock goes up more than 2.1%. Limiting upside is a significant "risk", especially when a stock is oversold. My whole system is based on the fact that the stock SHOULD go up from this point, not down. In fact, I almost exclusively write covered calls when the stock is overBOUGHT but not yet profitable, because then the odds favor the stock going down and me keeping the stock AND the money from selling the option. But really the "risk" on the profit side is just making less money than I might otherwise. I'm happy with any profit, and given the parameters of this trade, the odds were that I was basically guaranteeing at least 2.1% profit (or not having to sell the stock at all and getting 15% taken off its cost). To me, both of those are good outcomes. Reducing the cost of that stock by 15% is effectively making 15% in a week - also good work if you can get it.

Again, I generally sell the calls when the stock is overbought but not yet profitable. I actually prefer to sell them with strike prices well above the level of the stock at that point too. So far above, ideally, that even if they are exercised, I make a ton. If I ever do that trade I'll let you know. It's not worth doing in most cases, but it occasionally makes a lot of sense. In this case, the $1.50 wasn't a possibility. What I virtually NEVER do, is write a covered call that, if exercised and combined with the money I get from selling the option, would cause me to sell at a loss. That's just dumb when you have a system that generates 90% chances of a win.

9月18日

註釋

OK so my backtest is done and WOW, what a roller coaster. This thing is an ulcer waiting to happen. I went back to look at how many times this stock went down 50% or more in its 18 year history and I lost count at around a dozen so it's more than that. This one would certainly have tested every fiber of my will and not gonna lie, probably would have broken it somewhere along the way. But in the end, it is a testament to my system and its core principles.

First off, for comparison, the stock is down 93% from its IPO price. Hard not to beat that.

Trades: 600
Wins: 575
Losses/still open lots: 25 (that's a record for me)

The crazy part - the 25 losers are down an AVERAGE of 71% while at the same time, 1 out of every 8 trades taken in this stock would have gained over 20%. Both of those are records for stocks I've backtested with my system.

Average gain per lot traded (includes losers): 6.9%
Median gain per lot: +7.02%
Average hold = 216 days!!! (ballooned by 10 trades open for over 4000 trading days)
Median hold = 13 days which shows how not illustrative of a typical trade the average is
Most common trade length = 5 days

Max number of lots held = 54 (anyone who overextended could have gotten smoked at least two dozen different times during this test)

Return per lot per day held = .03%
Annualized rate of return - .03% x 252 trading days = 7.56%

Because of the number of losers and how long they've been held, that ruined the return/lot/day. Using median numbers it would be a .53%/day and that's extraordinary.
1 in 4 trades in this stock gained 13% or more. At the same time, almost 1 in every 8 trades took over 180 trading days (9 months) to close - I don't like that at all. A rare long held trade is part of the cost of doing business this way but that's WAY to frequent for my liking.

I don't think I'll trade this one again. I like a little more predictability in my stocks and this thing is definitely the most Jekyll and Hyde of any stock I've ever backtested. Sorry, I like boring, consistent money makers that let me recycle capital quickly a LOT more. It is good to know, though, that the system would still have been profitable despite the stock's abysmal and volatile performance.

10月17日

交易結束：目標達成

Sold all 3 lots this morning. It was overbought yesterday but I got caught up with other trades and didn't get a chance to sell it and couldn't close it at the day's closing price after hours. Closed the position at 1.215. Average gain of 3.7% in just over a month is fine, but unspectacular. The lack of movement prevented both a big gain and an opportunity to add to the position, but a +40% annualized rate of return is nothing to really complain about, even if it is well below average for this stock.

10月17日

註釋

Trade summary for my records

Wins 3 Losses 0

Lot 1 - Bought at 1.175 sold at 1.215 = +3.4% gain in 24 trading days
Lot 2 - same result
Lot 3 - Bought at 1.165 sold at 1.215 = +4.3% in 23 trading days

Average gain per lot = +3.7%
Average days held = 23.7
Avg gain per lot per day held = +0.16%
Annualized per lot per day return = 0.16% x 252 trading days = +40.3%