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Tuesday, April 5, 2016

Options Trading Monthly Digest (March 2016)

Well, the time has come once again to go over the Options Trading performance for the month that just concluded: March 2016.

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.

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 those returns 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
The first trade I was able to close in the month of March was a May31 SPX 1475/1500 Credit Put spread. The position had been entered on January 11 as part of an adjustment to the Put side of an unbalanced Iron Condor. Remember that on January 11 it was still the holocaust. Well, this spread never gave any problem. I should have bet all my money there. Just kidding. The position was closed for a net 1.55 gain, resulting in $1,240 in 8 spreads.

The second position closed during the month was a Synthetic IWM Stock hedged
This was a small bullish bet entered on December 11 of last year. It really never had a chance. Thinking about these type of positions, I could have considered taking the gains on the hedge, as the market precipitously fell. With those huge gains in my pocket I could have then invested in a new hedge with cheaper, farther out Puts. After that, with any small rebound, as soon as the synthetic stock position recovered some of the earlier open losses, everything could have been closed for an overall gain, even though the initial combo didn't work in our favor. It is something I will consider going forward. Still, no regrets, just a small bet, which I made with an all or nothing mentality from the beginning. The portfolio suffered a $520 loss here.

Third position closed was a June30 SPX 1525/1500 Credit Put spread. Net gain here of $1,240. This was the Put side of an unbalanced Iron Condor, which I was able to close early thanks to the super rally that started on February 11. The Call side is still in play.

Finally, I wanted to talk about a position that was closed during the month of February, but now seeing what happened in March we can better asses how good or bad a decision it was at the time. I'm talking about the Long April SPY 204 Calls. These Calls were bought on January 13. Of course, they were timed pretty badly, and the market was a mess from there and until February 11. Twenty Nine days of misery for these Calls. However, with the rally that followed Feb 11, these kids became men. They eventually got to reach values above 3.60 during the recent rally. Taking them off  basically for a scratch too early in February, was not a mistake simply because of the super strong rally that came after, but because, my original plan with positions like this one is to take them off at 100% to 150% ROI, and for that, it is necessary to give them time to work. I was a chicken little and took it off after being tired of having spent a month going nowhere with them. But it was little money. That's why they can expire worthless if need be, but they may need time to work, because they had been entered during a severely pessimistic market. In reality these long Calls were also a necessary component in the portfolio, as a hedging tool to alleviate pain in the three Credit Call spread positions that were eventually accumulated. Having taken these long SPY Calls off for basically a scratch was not a terrible decision, but not the smartest one either when considering the overall upside risk accumulation at the portfolio level. I could have done a little better in March just by following logic and better risk management, not because of hunches or recency bias. That's why it was a mistake: not because the market rallied, we are not wizards; but because keeping them on would have made sense in terms of risk management.

Final balance for the month +2.01%. Subtracting commissions, +1.92%

YTD Results for 2016
The first Quarter of 2016 is over. It went to the books as the most challenging one I have faced since I started writing on this site in 2011.
LT

Check out 2016 Track Record

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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