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Tuesday, October 20, 2015

Options Trading - Monthly Digest (October 2015)

Well, the time has come to go over my Options Trading performance for the cycle that just concluded: the October 2015 monthly option expiration cycle.

The goal of these articles is to recap and determine what went wrong, what went well, mistakes that were made, things that could have been done better, etc. These articles are intended to make us better traders with constant feedback from our own recent actions and the community of like-minded readers that contribute to this site.

Although the main focus is the long term viability of the strategy and not the month to month seesaws, hopefully these monthly updates will provide confidence and serve as an authentic guide of what can be achieved with a realistic and sustainable approach to the business of selling Credit Spreads and Iron Condors.

It's important to realize that we don't need to double our accounts every year, which entails unsustainable risks. With a simple 2% monthly return, money grows at a rate of +26.82% per year. Start trading with $10,000 and obtain that return annually while investing 5,000 additional dollars out of your own pocket every year and you get close to the 1 million dollar mark in 15 years. And you don't even need to get there to make it worth it. Relatively small portfolios can consistently generate $400, $500, $600 a month, a meaningful help in the budget of the average family. Whether you want to trade for a living or only as a side activity for supplemental income, you are only truly limited by your own will. How much are you willing to dedicate to studying and training hard? That's all there is to it.

And while there is absolutely no guarantee that anyone will achieve any arbitrary numerical return in the future, the fact is: the power of compounding is truly remarkable and can do wonders even with small amounts of money.


The Trades
This is how the SPX looked back on August 18.

(Click on image to enlarge)
The SPX index closed the session at 2096.92. Up until that point the market had been trading inside the 2040 - 2135 range for more than six months. Little did we know that a crash would take place in less than a week.

I started trading the October cycle that day with an SPX 1890/1895/2195/2200 unbalanced Iron Condor. Perhaps the worst day ever for initiating a Delta neutral and Vega negative trade, but we only know that in retrospective.

By Friday, August 21, only three days after my Iron Condor entry, the market had already corrected by 6% and closed at 1970. Still 75 points above my short Put. The VIX closed at 28 that day. I defended the Iron Condor by taking a loss on the Puts and then I deployed a new 1700/1710 Credit Put spread. The new Iron Condor was 1700/1710/2195/2200

(Click on image to enlarge)
We were right there around previous support and I thought I was safe. Nobody imagined that the worst was still to come. Next session, Monday August 24. Panic takes over, but my 1700/1710 Put was still far enough from the 1867 lows made that day by SPX. Since then it was easy and it all expired worthless. Final balance: a $40 loss, which I consider to be a very decent result for the kind of situation we lived. This trade would have been a winner overall had I only sold a standard Iron Condor instead of an unbalanced one. Had I originally sold as many Calls as Puts, this would have been a profitable position even after taking the loss on the initial Puts.

We move on from the mini-crash and live a month of relative peace, until fear takes over again and on September the 29th the world is falling apart according to the financial media, my family, my friends and my dog. So, naturally I sell a RUT 980/970 Credit Put spread betting on the exaggeration of fear.

This is how RUT was looking by the end of that day.
(Click on image to enlarge)
We get a nice rebound afterwards and suddenly, the financial media, Twitter, my dog and my grandpa in his grave all have faith in the future again. Little by little "experts" start turning bullish as the market relentlessly moves up and my trade makes easy profits. Final balance: a $120 gain for the model portfolio.

Summing up, I ended up the month with a positive $80 balance which represents a +0.7% gain for the initial balance of the model portfolio. Nothing spectacular, but I am satisfied with this result. This cycle was a testament to the robustness of our approach. Many people, including experienced ex-credit spread traders, believe that credit spreads are weapons of mass destruction that inevitably destroy your account in the long run. They are not. We are not trading naked options whose value can sky rocket to infinity. We are playing risk defined trades and well out of the money by the way. More importantly, the secret sauce: Not being stubborn and knowing when to take losses early. That's the real key. Ending this cycle with a positive balance reinforces my conviction that market falls are not the worst scenario for Credit spread traders. The unstoppable 2013 Bull. That's your worst, always underestimated enemy.

Year to Date, using expiration dates as check-points:


So, +0.7% return for the month. That was my number. What was yours?


If you are interested in a responsible and sustainable way of trading options for consistent income, consider acquiring LTOptions, my options trading system revealed to the last detail.


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