Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market

2.7. 2001—A LESSON IN SHORTING

In February, I pyramided a short position in the Powershares QQQ Trust (QQQQ). I remember as profits were building, I started calling this my "Modena trade." A Ferrari Modena back then was the hottest new model and cost about $250,000 with the mark-up. Thus, a profit of $500,000 on a trade would pay for the car, after federal, state, and miscellaneous taxes were paid. I finished the trade at a profit of over $600,000, but I never bought the car. I learned that even though I had always wanted to own a Ferrari, I did not buy it because it was not the act of possessing the car that was important. Psychologically, it was the idea that I could easily possess it. So buying it became unnecessary. It brought me greater pleasure to keep the capital on hand to invest in the markets. As I learned from O'Neil in the years I worked with him, one should never make the market pay for one's luxuries.

Then in March, I re-shorted my QQQQ position. I pyramided the position as before, and profits eventually amounted to over $1,000,000. The problem was that greed got the best of me and I thought the market was going to crack wide open, and my profit of over $1,000,000 would turn into $2,000,000 or more in the event of a market crash. I was heavily leveraged on the short side and failed to consider the more likely outcome that the market could bounce big after having sold off so hard. On April 5, the market gapped up fiercely and rallied the rest of the day (Figure 2.14 ...