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Wednesday, September 7, 2016

Options Trading Monthly Digest (August 2016)

Well, the time has come once again to go over the Options Trading performance for the most recent month: August 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.

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.


Market Environment
 
August was the aftermath of Brexit. Remember that SPX went from 1991 at the end of June (Brexit) to above 2170 by mid July. Huge vertical two-week rally that challenged a couple of July Credit Call spreads I had as part of Iron Condors. The rally looked unstoppable back then, but defending the Call positions, betting that such a vertical move could not go on indefinitely, was the right move, as the market has been on sideways mode since then.



The Trades

SPX - Sep. Credit Call Spread 2260/2270
Entered on July 12 as an adjustment to the Call side of an August 1890/1900/2190/2195 Iron Condor. Closed 3 weeks later for a $900 gain.


SPX - Oct. Credit Call Spread 2300/2310
Entered on July 14 as an adjustment to the Call side of a July 1890/1900/2175/2185 Unbalanced Iron Condor. Closed 19 days later for a $1,000 gain.


SPX - Aug. Credit Call Spread 2210/2215
A pure Credit Call spread play during a short term overbought signal on July 11.
(Click on image to enlarge)


Only 2 weeks later, on July 25 the position was in a bit of trouble. Tired of taking losses on the Call spreads, I decided to use a different defense strategy where I:

Bought 2 August SPX 2215 Calls (4.20 debit each)
Sold 15 August SPX 2055/2060 Credit Put spreads (0.30 credit each)

Turning the position into this:
 (Click on image to enlarge)

With a pretty flat risk curve (T+0 Line) to the upside, I could now afford to wait and let the market really prove itself without me having to increase the magnitude of the losses.

10 days later, on August 4 I was able to close it all for an overall small gain of $225. It felt good to close this position as a small winner, where in the past I would have closed it as a loser. Even more beautiful when taking into account that risk was not increased in order to achieve this.
The first Lazy Elephant trade. Held from August 1 to August 26. 
The RUT index kept going up and up, outperforming the rest of the market, yet I didn't feel too much pressure given the relatively flat T+0 line to the upside during the early stages of this type of position.
The Elephant was closed early for a small $355 gain before commissions as I wanted to reduce capital exposure in order to start trading the October expiration cycle with a new income position, full size. The elephant would have been a full winner at expiration, but no regrets. I'm never too comfortable with excessive capital exposure.



Overall it was a decent month where we kept fighting the upside and low volatility environment. I can say I have no regrets regarding any of the trading decisions made in August. Looking back, there is absolutely nothing I would have done differently and that certainly feels good.

Gross profits of $2,480 for the month. $2090 after commissions.

Final balance for the month +2.45%. Subtracting commissions, +2.07%

YTD Results for 2016
Up +3.21% at the end of September, whereas the SPX closed at +6.21%.
There's no denying it has been a very challenging year for Option premium sellers. The blue line is now pointing in the right direction though, and there are still chances to outperform this year. We'll see how the rest of the months unfold.

Thanks for reading.
Cheers,
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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