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Saturday, November 22, 2014

Weekend Portfolio Analysis (November 22, 2014)

All right, the time has come to admit defeat. Yesterday was November expiration, my worst month ever. With my current trading style, I can make an adjustment to one of my spreads and still pull off a positive month. I can generally make two adjustments in the cycle and still pull off a break even month. I start losing money if I'm forced to make a third adjustment in the cycle. Well, in November I had to close 4 positions for a loss. With the added sin that I didn't make the last adjustment. I just closed my fourth loser without entering that last revenge trade, which would have been a winner. So, this exaggerated the losses a little bit in the end. I did enter my fifth order, it just never got filled for the price I wanted.

November resulted in a -10.81% return for the portfolio, trading costs included. With this result it will be very hard to outperform the market this year via the Options trading strategy (I did out perform via Dividend growth investments). The options portfolio is now up +4.07% year to date, whereas the SPX index is up 12%. Unbelievable. Just two months ago I was up 17.88% while the SPX was up only 9% and it looked like I would easily beat the index by year end. I was also pretty confident that I would end up above the 20% mark in 2014.

But then September + October happened. In just 45 days the market went down 10% and back up 10%. A very challenging and infrequent environment. A pretty tough one for any options seller. Once again, the weapon of mass destruction was the same: Credit Call spreads. Moving forward I will be much more conservative with them. I just have to, after three years of clear evidence. Up moves are consistently underestimated by probability models. While down moves are consistently over estimated. These are lessons I have learned the hard way. Equipped with them I will do my best to outperform in 2015. If I have a crappy performance in 2015 and can't beat the SPX index, I will have to re-consider my stance regarding options selling. Meaning I will probably stop doing it and be more focused on automated Forex trading and Dividend growth oriented Investments. Of course, I now know that in years where the market has double digits growth, it is be very hard to outperform via premium selling strategies. So, I won't be too hard on myself in that case. But if we have single digit growth for the market in 2015, or a flat market or a negative one, there will be absolutely no excuse. Absolutely none. Notice how I haven't lost my ass selling options at all. In fact after three years publicly disclosing all my trades, I haven't experienced a negative year. Not even in the very challenging 2013, not in 2014 either, and I have grown my capital quite substantially since 2012.

But, this is not about quitting when you lose your ass, but rather focusing your energies on things that work better. I don't want to be dramatic, and frankly I think I will do much better in 2015. I'm just saying, if you have been under-perfoming for a while, and do no question your methods, there's gotta be something wrong with you. I know I will sell Calls much more conservatively. I know I won't be afraid to buy lotto tickets via out of the money Calls during market bearish extremes. I know I will play Calendar Put spreads more frequently during overbought extremes rather than just Credit Call spreads etc.

Market conditions
(Click on image to enlarge)
Stochastics: 80 (overbought)
McClellan: +72 (neutral)
57% of stocks trading above their 20 Day Moving Average (neutral)

With two neutral readings I consider the market to be in no man's land and therefore ready for strong moves in either direction. That's my typical approach. Last week however, it was in no man's land and I mentioned that I thought it should go down first, due to a bearish divergence between price and the McClellan Oscillator. Well, this week the market closed higher than last week, and yet the number of stocks trading above their 20 DMA decreased. Suggesting that the index went up aided by a smaller number of stocks with a greater weight in the index, but that, overall, more stocks went down than up. That's another bearish divergence. But what good could come out of it? So many of us have been burned on the call side so many times in the last two years......And why would you follow the opinion of a premium seller who is under-performing anyways?

I wouldn't sell Calls at this point. Just as I didn't do last week, regardless of all the divergences and technical signs of weakness. I will only sell Calls if all three indicators I follow are aligned signalling and extreme. On the Put side, unfortunately, I don't find it attractive either at the moment. So, time for me to stay Put and just defend existing positions if need be.

December positions
SPX 1750/1760/2110/2115 Iron Condor
$340 credit. 74% probability of success. 26 days to expiration. May need an adjustment if SPX hits 2085 or so this week.

SPX 2110/2120 Credit Call Spread
$100 credit. 74% probability of success. 26 days to expiration. May need an adjustment as well.

Action plan for the week
For the December expiration cycle I will just focus on defending existing positions.

It is time to start thinking about the January 2015 cycle now that we are less than 8 weeks away from expiration. The 1860/1870/2150/2160 looks like an attractive Iron Condor to me. I may sell it unbalanced. That is, fewer contracts on the Call side. We'll see.

Economic Calendar
Tuesday: German GDP. US GDP. US CB Consumer Confidence.
Wednesday: US Core Durable Goods Orders. New Home Sales. Pending Home Sales. Chicago PMI.
Thursday: German Unemployment and CPI.
Friday: European CPI

Good luck this week folks!

Check out 2014 Track Record

Go to the bottom of this page in order to see the Legal Stuff


  1. Great write up and review LT. As I said earlier in the month, November was one amazing expiration cycle.

    I found this article in my wanderings around the interweb... great stuff... this is the guy John Locke learned his trade from: (click my motu2 link for the pdf).

    Happy Christmas everybody (early I know!!) and Thanksgiving for all you southern canadians ;-)

  2. doesn't work... copy and paste this:

    1. Thank you for the feedback and Thank you for sharing man.

  3. Hi LT and Jonathan
    (Moto2 I like that article, I keep it saved in my trading folder for reference)
    I'm still here, and I still read every one of your posts. I especially appreciated LT's r analysis of his return from credit call spreads a couple weeks ago. As a result I have been rethinking my trading style as well. I sold some very deep out of the money put spreads for December to try to make the year a slightly positive year.
    You know I got pounded down to zero gain for the year last month, so you are definitely not alone. But to the upside you did plan your trades and trade your plan, and you kept your eye for protecting capital all the way. The most powerful weapon of mass destruction is losing trade discipline. You can put credit call spreads number two.
    Good luck from South Canada

    1. Hey Dave,

      It happens. I should say, the difference between selling Calls vs Puts was not new to me.
      What really hit me pretty badly was the violent upside rally.
      good lessons for the future.

      We'll do better in the next few months.


  4. This comment has been removed by the author.

  5. Hi LT and Dave,

    “All right, the time has come to admit defeat.”

    Thank you for your transparency and honesty. I enjoy this weekend’s analysis very much. I had about 2% portfolio gain for November expiration.

    I know most credit call spread sellers got punished in November. I learned my lesson the hard way in 2013 when I was selling credit call spreads and getting my head handed to me. After some serious losses, I did an extensive backtesting on SPX/RUT going back to 1990 to see if there is a better strategy for selling spreads. I spent hundreds of hours trying out different strategies. Based on what I learned, I want to share with you 4 things I did during this current rally:

    1. I sell credit call spreads when the market is in an extreme overbought condition.
    2. I sell far fewer credit call spreads than credit put spreads to limit the upside exposure.
    3. I adjust my call spreads when it is around triple the cost of the credit received.
    4. I sell an iron condor after closing the credit call spread for a loss. By selling an iron condor, I am able to neutralize the loss from the adjustment.

    What I did last week:

    1. Let Nov IWM 97/95 credit put spread expire for max profits.
    2. Let Nov IWM 100/98 debit put spread expire worthless.
    3. Closed Dec RUT 950/945 credit put spread for .05 debit.
    4. Closed half of Dec SPX 2100/2105 credit call spread for a loss.
    5. Opened Jan RUT 1050/1040 & 1250/1260 iron condor.

    My current positions:

    Dec SPX 1900/1895 credit put spread
    Dec SPX 1915/1910 debit put spread (This position was opened to protect the 1900/1895.)
    Dec SPX 2100/2105 credit call spread (This position currently represents about 2% of my portfolio.)

    Dec5 IWM 93/91 credit put spread
    Dec5 IWM 105/103 credit put spread
    Dec5 IWM 125/127 credit call spread

    Dec5 SPY 190/188 credit put spread
    Dec5 SPY 212/214 credit call spread

    Jan RUT 1050/1040 credit put spread
    Jan RUT 1250/1260 credit call spread

    You can follow me on Twitter @lienjonathan where I tweet my 90% probability credit spread trades in real-time for free.

    1. That's a great result for November Jonathan. It should give you more confidence in your mechanics as I don't think it can get harder than that.
      Thanks for your feedback.

    2. My strategy have been backtested with many different market conditions including a 25%+ crash and a 25%+ rally. I am confident that I will be able to handle most market conditions in the future using my current strategy.

      There are 4 core principles for successful credit spread trading:

      1. Have a trading edge
      2. Manage your risk
      3. Keep it simple
      4. Be consistent

  6. Hey, sorry to hear about your recent loss. It is because of these 'unforeseen' events that I prefer to stick to individual stocks when it comes to trading stocks and options rather than indexes.

    I find that you're usually pretty good at reading the market, but your strategy assumes that the market won't move in extremes and that either eats in your profits or forces you to take a loss and rebalance.

    My strategies:
    - When I buy options (usually calls because I'm terrible at calling tops), I buy ATM leaps so I can weather out the short-term movements.
    - I hedge with either buying weekly puts or selling weekly calls if I feel worried that there will be a major movement.
    - I don't buy any speculative companies and stick to the ones that have performed consistently in the last 10 years (at least)

    It's more expensive but I don't have to trade as often and over the year the profit grows a fair bit.

    Hope the remaining days of the year remain positive for you. I feel the market is overbought as well, so I'm mostly in cash.

  7. Dan from Theta TrendNovember 30, 2014 at 7:08 AM

    Hey Henrik,

    Really good, honest stuff here. It's always hard to struggle with your trading and be public about it . . . props for that. I was fortunate and missed the big down move, but I struggled through the up move with you. The speed was hard and I was glad to be trading Butterflies rather than IC's. I'm sure that whatever changes you make going forward will work out well. Keep on keeping on.


    1. Thanks Dan,

      Tough cycle indeed. And reason why many traders don't disclose their performance, so they can still look wise in front of their readers. I say screw all that! Trading's hard, challenging. I'll underperform this year but I'm infinitely wiser now.