Paper vs Realized Losses and Gains

Today is an important day to remember this, a gain or loss is not realized until you exit your position.  I’m taking a beating today – down 3%, but only on paper.  Out of the 17 positions I have open right now, 11 are down, but I haven’t sold any of these.  That means I’ve taken no losses.  When I went through one of my sanity checks to see how I’m doing in real terms I found I wasn’t looking so bad after all.  Out of these 17 positions, I have a paper loss on only two, BA and MOT.  I’ll be able to sell covered calls on these to work them back to a profit without to much trouble I think.  On the other hand, I could accept these as losses and move on past November with a more cash in my account.  I’ve sold so many options for this expiry that taking a loss on a couple of positions doesn’t hurt me much. 

I mentioned the farm my family owns in an earlier post.  The cliche “Make hay while the sun shines” explains paper vs realized gains quite simply.  When cut, hay has to be baled before it rains or it’s ruined as mold will quickly settle in.  If a farmer sits back and thinks that’s a lot of hay I cut, I’m going to buy a new widescreen TV now before I bale it, but the cut hay gets rained on he’s lost it all possibly.  If an investor sees her stock rise a few bucks (CSCO is my painful example of the day) and thinks all is guaranteed to be a profit, earnings can come around and knock it down to a loss even quicker. (CSCO doesn’t show below because it’s in my IRA, lucky I sold covered calls on it.)

To run this analogy into the ground now… if the skies are always cloudy and the farmer never cuts his crops, he’ll never have the opportunity to make money.  At some point you have to get in the dirt and take a chance.  Don’t get scared by every dip in the market or dire warning that the economy will cease to exist.  Be careful, but find your entry points, even if it’s only slow going, one portion of a field at a time.

Here’s my sanity check from around 2:15 today, not counting commissions: