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BookingAlpha Option Trading Advisory

Wednesday, December 23, 2015

Options Trading Monthly Digest (December 2015)

Well, the time has come once again to go over the Options Trading performance for the cycle that just concluded: the December 2015 monthly options 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. 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 our strategies 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 Options for Income.

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 that far 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
On August 24, day of the mini crash this year, a December SPY 213 Call was purchased. A small speculative play during the most pessimistic day of the year. Of course, the goal was not for SPY to hit 213 at a time when SPY was trading below 190. The goal was to simply take advantage of an eventual rebound. On October 26, more than two months later, we were able to close this small position for a 55% return on investment. Not bad for a long option play.

The main position for December was opened on October 22, and it was an SPX 1790/1795/2135/2140 unbalanced Iron Condor for $220 credit. This is how the SPX chart was looking that day.

(Click on image to enlarge)

On October 23, a day later, another Iron Condor was entered. I rarely do something like this: two Iron Condors, back to back days, same expiration month. I just wanted to be more aggressive with December options to improve the returns for the year, so I was deploying more capital than usual. This time I went with RUT, but it was a small position, half the typical size: RUT 1010/1015/1240/1245 balanced Iron Condor.

Here's the RUT chart after position entry.
(Click on image to enlarge)

Now, I had two Iron Condors: an unbalanced one in SPX, and a standard one, half the size on RUT. But the market kept going just looked like it wanted to reach the moon and no one could stop it.

October 28, only 6 days after the SPX unbalanced Iron Condor entry, the market had rallied like an unstoppable train and it was time to defend the upside. The unbalanced Iron Condor was closed for $400 debit, which represented a net loss of $180 when considering the initial credit received. A new Iron Condor was deployed. This time, a balanced one: 1880/1885/2190/2195. New credit received of $240. This position eventually expired worthless. Final balance of the whole maneuver: $220 - $400 + $240. A small $60 net gain. It's always good to have a winner in a position that initially went wrong.

On the other hand, while the RUT Iron Condor was being held, the Call side was experiencing losses almost all the time. Never reached an adjustment point, but it was hanging there with uncomfortable negative balances for weeks. I get tired of positions that make me feel uneasy for too long. So, as soon as the market retraced, giving a chance to close for a small profit I just took the opportunity. This happened on November 12. The Put side, on the other hand, would remain open and eventually expire worthless. Final total profit from this small Iron Condor was $84, out of the initial maximum potential of $160.

Summing up:
- Small speculative long SPY Call bet during the crash: +$48
- SPX unbalanced Iron Condor, initially lost money and the adjustment later on paid off. Net: +$60
- Small RUT Iron Condor whose Call side was closed early. Final profit: +$84

Final balance for the month +1.74%. Subtracting commissions, +1.29%
Not a super strong month, but not terrible either, especially when considering that it all started with the wrong foot in the middle of the October rally.

This concludes the trading activity with 2015 options. The final return for the portfolio, after commissions, was +11.80%, while the SPX is negative for the year. The worst draw-down in the equity curve was a very mild and manageable 7.46% from August ($11,928) to November ($11,038). The Return to Max Draw-down ratio was therefore a very decent 1.58. Keep in mind, audited professional discretionary traders have averaged around 0.7 for almost three decades, as reported by the Barclay Discretionary Traders Index. A 1.58 Annual Return to Max Draw-down ratio means a +23.60% return could have been obtained had I been willing to suffer a 14.92% draw-down, through greater capital exposure. It also means a theoretical maximum possible account growth of 158% per year before entirely blowing up the account with a 100% draw-down. Of course, from +11.80% to +158% return, I would have needed to use 13 times the capital exposure, which is not possible taking into account that the Average Capital Exposure throughout the year was around 40% of the portfolio. The most the portfolio could have been stretched was 2.5 fold by having had 100% of the capital at risk all the time. Had that been the case, the return would have been +29.50% with a max draw-down of  only 18.65%, which means that the Risk of Ruin has been totally eliminated.

There are limits to profitability, and there is just so much you can make before your risk inevitably becomes excessive. Long time readers know I'm a rather conservative trader with an emphasis in avoiding greater than 10% account draw-downs. This principle becomes more and more important as the account grows over time.

2015 Positions Break down:

- 13 Iron Condors: 9 winners, 4 losers. Balance before commissions: +$1,036
This includes the adjustments made to the Iron Condors. In other words, if an Iron Condor lost money on one side, and a new credit spread was deployed as adjustment, resulting in a net winning position in the end, the Iron Condor was considered a winner. 

- 7 Credit Put spreads: 6 winners and 1 loser. Balance before commissions: +$330
These are just the Credit Put spreads entered individually, not initiated as part of Iron Condors and not as adjustments to Iron Condors.

- 1 Credit Call spread: 1 winner, 0 loser. Balance before commissions: +$76
Credit Call spreads entered individually, neither as part of Iron Condors nor as adjustments to Iron Condors.  

- 1 Long Put: 0 winner, 1 loser. Balance before commissions: -$47

- 1 Long Call: 1 winner, 0 loser. Balance before commissions: +$48

Overall: 23 positions, 17 winners and 6 losers. Looking at each trade individually, meaning, each adjustment is a separate trade, the track record reflects 34 plays, 26 winners and 8 losers. After 4 years, the total is now 124 winners and 36 losers. A 77.5% winning rate.
Trading Balance: +$1,443 before expenses. 
Commissions: $263.

I wanted a +30% return this year so badly, and I was well on my way when the portfolio was up +19.88% at August expiration. Unfortunately, the rest of the year was much more challenging and I couldn't achieve that ambitious goal. But, still, the account grew for the year, while most investors lost money in 2015. The draw-down, and therefore the stress were very small throughout these 12 months. 2015 was not a failure. Not a spectacular success, but certainly far from a failure.

Thanks for reading, and here's to a better 2016!

PS: This is your chance to show off. Share your results in the comments section!

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

Related Articles:
Options Trading Monthly Digest (November 2015)
Options Trading Monthly Digest (October 2015)

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