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.
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.
Special Month
January 2016 was treated differently in terms of keeping the track record. In the past I would compute results for a monthly expiration cycle based on the positions played using options of that cycle and ignoring the rest. For example, if I traded a March Credit Call spread in February, and I got to close it in the same February, it would not be part of February results but the March results as it was a position that was traded using March options. Going forward, positions that are closed throughout the month will be included in that month's results. This will allow me to quickly compute the positions that were closed and you won't see me next month talking about them. This is also convenient now that I am playing positions 4 months out. Because of this there are a lot of trades included in the January 2016, those started in November with January options, plus anything else closed throughout January regardless of which expiration month they were in, as I was transitioning to this new way of keeping the track record.
In addition to this, I used to write the Monthly Digest right after monthly expiration (third Friday of the month), computing the results for the cycle at that point in time. However, the folks involved in the friendly competition have a tendency to compute results at the end of the month, so I am also in transition mode in this area too in order to be in sync with them. Going forward, the monthly digest will come out during the first week of the month. Summing up, keeping the track record in January has been a little messy due to all these transitions but it will be cleaner and simpler from now on.
The Trades
This is how the market was looking on November 20 of last year.
(Click on image to enlarge)
We were about to enter December, a historically strong period, and the
markets were looking very healthy with the likes of Morgan Stanley and
Goldman Sachs forecasting SPX values near or above 2,200 by year end.
First trade with January options came at that point via the 1865/1875/2200/2210 unbalanced Iron Condor. We all know what happened in January and from the time this position was initiated to the January lows, the SPX index went from 2,089 to 1,812 (-13%). The Put side naturally lost money and the Call side eventually expired for Max profit. Looking back, I think I could have played that call side a little bigger. Still an unbalanced Iron Condor, but a few more contracts for extra credit given the fact that the 2200 level was way above all time highs. The second mistake, was to not close the Put side early for the majority of the profits. For example, on December 29, the 1875/1865 Put spread could have been closed for 0.10-0.15 debit. That is 75%-80% of the maximum potential profit. I left it on, thinking we were in the middle of the historically strongest period of the year, but looking back, being mechanical was the right thing to do. Not only would I have taken profits, but also avoided the loss that came later. Had I taken a $900 profit (0.45 per spread) from those Puts, instead of a $3400 loss later, today the portfolio would be better off by $4300 and January would have brought a positive return to the portfolio despite the challenging price action. Misplaying this position was in the end, the main reason for the negative month.
(Click on image to enlarge)
First trade with January options came at that point via the 1865/1875/2200/2210 unbalanced Iron Condor. We all know what happened in January and from the time this position was initiated to the January lows, the SPX index went from 2,089 to 1,812 (-13%). The Put side naturally lost money and the Call side eventually expired for Max profit. Looking back, I think I could have played that call side a little bigger. Still an unbalanced Iron Condor, but a few more contracts for extra credit given the fact that the 2200 level was way above all time highs. The second mistake, was to not close the Put side early for the majority of the profits. For example, on December 29, the 1875/1865 Put spread could have been closed for 0.10-0.15 debit. That is 75%-80% of the maximum potential profit. I left it on, thinking we were in the middle of the historically strongest period of the year, but looking back, being mechanical was the right thing to do. Not only would I have taken profits, but also avoided the loss that came later. Had I taken a $900 profit (0.45 per spread) from those Puts, instead of a $3400 loss later, today the portfolio would be better off by $4300 and January would have brought a positive return to the portfolio despite the challenging price action. Misplaying this position was in the end, the main reason for the negative month.
On December 9, the Russell Index had started to lead on the way down:
(Click on image to enlarge)
That day I went with a January RUT 1015/1025 Credit Put spread. Profits were taken early from this position only 15 days later, on December 24, due to too excessive downside exposure and it was the right decision looking at what came later.
On December 24, an SPX Apr29 1700/1725/2250/2275 unbalanced Iron Condor was initiated. The Put side eventually lost money, but in this case, there was never a chance to save it. Even though it was a losing position, I don't have any criticisms with the way I played this one. Call side was eventually closed for 80% of the max profit potential.
The last Income position closed in January was the March SPX 1650/1675 Credit Put spread, basically for a scratch. The decision was made to reduce excessive downside risk in the portfolio.
In addition to the income plays, 8 directional Long Put positions were used and they turned out pretty good. 6 were winners, 2 were losers and overall they brought a +1.1% return for the portfolio while keeping us protected against a severe market crash.
Am I satisfied with how January went?
Partially. We ended up the month down 2.92%, but with such a market sell-off, it is satisfying to be doing better than the overall market and therefore most investors. However, there is always that feeling that a couple of things could have been done differently (sell more Calls in the January SPX Unbalanced Iron Condor and also close the Put side for 75%-80% max profit), not being a wizard who knows the future, just being mechanical. We would have ended the month with a positive return despite the violent price moves.
The market has been very challenging since late August last year. The good times will come. They always do.
Final balance for the month -2.49%. Subtracting commissions, -2.92%
That was my January. How was yours?
LT
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 to the last detail.
On December 24, an SPX Apr29 1700/1725/2250/2275 unbalanced Iron Condor was initiated. The Put side eventually lost money, but in this case, there was never a chance to save it. Even though it was a losing position, I don't have any criticisms with the way I played this one. Call side was eventually closed for 80% of the max profit potential.
The last Income position closed in January was the March SPX 1650/1675 Credit Put spread, basically for a scratch. The decision was made to reduce excessive downside risk in the portfolio.
In addition to the income plays, 8 directional Long Put positions were used and they turned out pretty good. 6 were winners, 2 were losers and overall they brought a +1.1% return for the portfolio while keeping us protected against a severe market crash.
Am I satisfied with how January went?
Partially. We ended up the month down 2.92%, but with such a market sell-off, it is satisfying to be doing better than the overall market and therefore most investors. However, there is always that feeling that a couple of things could have been done differently (sell more Calls in the January SPX Unbalanced Iron Condor and also close the Put side for 75%-80% max profit), not being a wizard who knows the future, just being mechanical. We would have ended the month with a positive return despite the violent price moves.
The market has been very challenging since late August last year. The good times will come. They always do.
Final balance for the month -2.49%. Subtracting commissions, -2.92%
That was my January. How was yours?
LT
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 to the last detail.
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