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Tuesday, June 14, 2016

Options Trading Monthly Digest (May 2016)

Well, the time has come once again to go over the Options Trading performance for the month that just concluded: May 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 oldest position that was closed during May, was a May31 SPX 2125/2150 Credit Call Spread. This position was initially opened on February 4 (Details here). So, it's ancient history.

In retrospective, it was a stupid play. In fact, it didn't meet my "overbought" criteria. But remember that, until February 11 (the bottom), it had been a crazy and very pessimistic year, so I let my bias dominate me and ended up entering this CCS in order to complete an Iron Condor, but it needs to be said, we were far from overbought.

This is the chart I saved that day:

(Click on image to enlarge)
As usual, the Stock Gods make you pay for the smallest of your mistakes. So, of course, the market started to stabilize and quickly threaten my glorious CCS play.

On April 4, two months after entering my position, it was still struggling and the market was being bought aggressively. The CCS position was in danger and rather than closing the CCS, taking a loss and deploying at higher strike prices, I bought more of the options that I was long in the Credit Call spread, just to smooth out the T+0 Line (pink) and partially financed them by selling out of the money Credit Put spreads.

Bought 2 SPX 2150 Calls @5.60 debit ($1,120)
Sold 20 SPX 1890/1885 Credit Put spreads @0.35 credit ($700)

And this was the resulting profit picture:
 Now, It became a waiting game. Waiting for that T+0 line to go up over time, and I wasn't too concerned about the market strength as my losses to the upside wouldn't pile up, in fact at some point in the chart, the market strength would start to help me and even make me money (see T+0 pink line).

One month and a week later (May 11), this was the profit picture:

I was able to close the whole thing for a small manageable loss of just $165 which represents less than 0.2% of a 100-grand portfolio.

I'm proud of the way I defended the original 2125/2150 Credit Call spread. The defense plan worked beautifully. But that doesn't mean I get a free pass for having initiated that CCS when my rules didn't dictate. I don't really know what I was thinking about. Sometimes it is hard to not get contaminated by the general bias of traders/investors out there. The world was being too pessimistic, and I somehow became part of it despite my usual contrarian approach. Fortunately, in the end, the damage was well controlled.



On March 17, I found myself playing a July29 SPX 1650/1675/2200/2225 unbalanced Iron Condor. More details about that trade here. This is how the chart was looking that day:
(Click on image to enlarge)
The market was rallying non-stop and it actually kept going a little further, but in the end, there were no significant threats and adjustment points were not reached. The position was closed on May 13 for a gain of $1,356  or 56% of max potential profit. No regrets with this position. I think it was well traded.


On April 19, I traded an SPX 2200/2225 Credit Call spread. 8 contracts, 2.60 credit each, which I got to close on May 5, just 17 days later for 0.60 debit. So it was a quick 2.00 gain per spread in a little more than two weeks. Net dollar gain: $1,600. More details about this position can be read here.


Finally, the last position closed during May was an August SPX 2250/2260 Credit Call spread for a $980 gain. Details here. This CCS was part of an Iron Condor whose Put side (1760/1750) is still in play as of this writing.


Overall it was a solid result. My best month so far in 2016 and finally putting the portfolio in positive territory for the year.

Final balance for the month +3.87%. Subtracting commissions, +3.63%

YTD Results for 2016
The above chart compares the equity curves up to May 31, so it's a little out-dated at the moment (June 14). The market has been retracing a little and all the existing positions in the portfolio are looking healthy. Still under-performing the index, but I expect that to change over the next months.
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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