Tuesday, August 09, 2005

First Mistake

Over-confidence can be dangerous.

So after almost 90% of my option trades in the Nov & Dec 2004 were profitable because of the "Santa Claus Rally", I said to myself "Hey, this was easy money !!".I chose my option trades in the start of the year 2005 sloppishly. I bought calls in Yahoo (YHOO) and IBM, thinking these were respectable, high-volume traded counters which were about to report earnings announcement. I was punished. Though these counters beat earnings, the shares fell, and my call options lose money. I was dumb-founded. Why? Aren't shares which beat earnings supposed to rise? Well, that wasn't the end of my nightmare. I bought EBAY calls a few days later. The counter dropped $25 (!!!) after the company reported missing its EPS earnings for the 4th qtr by 1 cent and what worst was that the co. issued downward guidance for the coming quarters. I lose my hard earned money on the EBAY calls too.

So what happened to the above trades. One thing I realised was that the market was bearish at the start of January 2005. So I should have been more cautious buying calls when the market is bearish. The stock market is dynamic, whatever works in the "Santa Claus Rally" is not going to happen indefinitely. I was punished for not studying the market and my counters thoroughly before I trade them. You've seen in most trading book advocating that "The Trend is Your Friend". Well, I didn't monitor the trend at that time and was trading against the trend. I learnt it through the hard way.