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Sunday, December 22, 2013

Analysis of Options trading results in 2013

2013 was not what I expected in terms of Options trading results. It wasn't bad, but it wasn't good either. The final number for the model portfolio is +12.22% versus +28% for the S&P 500 as I write this article (SPX is at 1818). Basically you could have purchased some shares of SPY at the beginning of the year and without watching the markets at all anymore, without making any additional trades nor spending anything else in commissions, you could have beaten my +12.22%. This is what proponents of index investing suggest. And I admit it makes sense. If 90 to 95% of traders lose money in the long run, and 75% of "professional" money managers can't beat the market year after year, then just follow an index and mimic its performance. You'll be better off than the majority out there.

But, I still want to believe in the dream. Let me leave in my bubble. Beating the market is certainly tough, specially in years like this one, where the market just shot higher from the get go. It won't be too complicated for mutual funds out there to have a positive return in a year where the markets went up so much. But beating that 28%, forget it, just the minority, once again. But when you look at periods like 2000 - 2010, where the American markets went no where, man it is scary to think you could have spent the best decade of your life following an index investing approach and having nothing to show for it in the end,...That's why it also makes sense to find a strategy that works for you regardless of market direction. This strategy will outperform my passive long term investing one in Bear markets and less Bullish environments than what we saw this year.

36 winners, 11 losers.
Trading balance +$2242, which represents +22.42% for a $10000 portfolio before commissions.
Final Portfolio balance $11222, representing a +11.22% performance after commissions (Assuming commissions of $1.50 per contract).

Equity curve growth
I traded January and February with the same reckless and aggressive style of 2012. Essentially trying to time the market tops and bottoms perfectly and placing credit spreads with a 20% probability of expiring in the money (80% probability of success). Never entering an Iron Condor at once, always trying to leg in. With this style of play I would only adjust a position if the price was close by 2 points to my short option strike price (in large indexes SPX, RUT) or if it was 0.2 away from my short option strike in the cases of ETFs like IWM or SPY. Delaying the adjustments allowed many positions to recover and result in winners in 2012. The downside is that when the adjustment condition is present, the position has caused a large loss by that point. I payed dearly for this aggressiveness in a low volatility environment in the first two months of 2013. I changed the strategy for a more conservative one, entering spreads with a 90% probability of success and adjusting as soon as that probability of success had decreased to 70% or less (30% probability of being in the money). This causes more adjustments to be necessary, but losses would be smaller, and my positions would never be in extreme danger.

In the last ten months of the year, that is after February expiration, the model portfolio went from $8578 up to $11222, which represents a spectacular growth of +30.82% in ten months. And that is after fees. I definitely feel much more comfortable with this style. And even though the performance in 2012 was +36.47% versus +12.22% in 2013,  I can say I was definitely a better trader in 2013. 2012 was simply easier to trade, but the 36.47% was more influenced by luck than technique and appropriate risk management. I'm a much better options seller right now.

2013 is, without a doubt in my mind, the toughest scenario for an options premiums seller. A market where implied volatility is very low, limiting your opportunities, yielding less premium for selling options and forcing traders to sell spreads that are closer to the price action at the moment in order to obtain decent returns, thus increasing the risks. What are the other two markets to face? 1- Sideways markets. But those are heaven for a credit spread seller. 2- Bear markets, which are good too. Implied volatility expands, and suddenly not only are options more expensive, which is good for the sellers, but also you can go farther out of the money and still obtain decent credits, thus playing safer. So, yes, 2013 in my mind is as challenging as it gets for a credit spreads seller. And if I managed to end up in positive territory, I'm only destined to do better in the other two scenarios.

I'll keep sharing my trades for 2014. I believe selling out of the money premium is a viable strategy and that it can be a great weapon to outperform in negative years and years where the market is more range bound and doesn't reach double digits growth.

Thanks for dropping by and reading the site. Thanks for the comments, suggestions, fun interaction on Twitter and thanks for your support all this year!

Check out 2013 Track Record trade by trade

Related Articles:

Analysis of Investing results in 2013
Analysis of Forex trading results in 2013

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  1. I was about the same. **BUT I made a momo trade in July that cost me a SIGNIFICANT portion of my return. Lesson learned and since then have been killing it. Take out my momo moment, I would have been around 20-25%.

    I'll take 20-25% ROI every year even if it means not beating the market for a given year. In the long haul, 20% is significant compared to historic returns.

    1. Yes, you're right. 12% is also a above the market average returns, so it's not bad. I guess it's just that internal instinct of always wanting more and having higher expectations. Thanks for dropping by and leaving your feedback!

  2. Excellent analysis of 2013. I hope you much better results for 2014. It sounds like you found a risk management strategy that works for you.

    1. Thanks Jonathan. I also wish you a very profitable and stress free 2014!

  3. 12.22% is EXCELLENT! Thanks for a very well written blog post. I appreciate the information. My 2013 disaster occurred in October as the SPX went up 100 points in less than 3 weeks.... Oh well.


  4. And have a great time in Florida!

    1. Thanks for your support LEN. One of the long term readers of this site when it was still in diapers. Happy holidays for you ad your family.