You Need the Process Down

Feedback today:

“Michael, I’m writing to you for advice. I got myself in a jam and don’t know what to do. I recently got long an equity called Rambus. I built five units (10 Leap contracts) over a price from 36 to 38.5. The stock ran up to the mid to upper 40’s and within a few weeks I was up around $6k. The company issued earnings last Wednesday after the market closed. The earnings were ok, nothing bad, nothing spectacular. The stock traded off a point or two, no big deal, normal volatility. However, the company is awaiting a verdict on a patent infringement case. Thursday afternoon, rumors were being spread that the verdict was released and it was negative for Rambus. The stock sold off roughly 15 points to hit a low of $29, but closed the day in the high 30s (around 38.5). While all of this was happening, I’m on the golf course playing golf with my dad and two brother-in laws. I had one contract at Ameritrade that got sold for a nominal loss, because I had a trade trigger in place. However the other nine contracts housed at my Fidelity account did not have trade triggers so I still have them. I basically lost $5,400 in one day (all gains) and still have nine contracts with a small profit of $500. Hence the subject title … easy come easy go. Since this event, the stock has been trading above my exit signal. My question. Technically I should be out of those nine positions, but because I didn’t have the trade triggers in I’m still long. Can I ignore the event because the price is back above my exit price? What would a trend follower do? A verdict is due out soon on this case. Many think the verdict will be positive for the company, however, if it is not, the market has given a clear indication that Rambus will be thrown under the bus. I sense you like to avoid answering questions like this, but I thought this was an interesting situation and maybe you can use it for educational purposes. Obviously I would not hold you to any guidance you provide. Best regards, Vinnie”

Some quick thoughts:

1. You are asking me for fundamental opinions to some degree. I don’t have them.
2. You need to focus on a portfolio perspective so one market or stock is not the be all and end all.
3. Follow the price. That’s all you can do.
4. You need to have precise rules to follow the price. If the rules are not followed, for whatever reason, no one can offer you after the fact “proper” advice.

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