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BookingAlpha Option Trading Advisory

Tuesday, March 1, 2016

Options Trading Monthly Digest (February 2016)

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

A Month of little Activity
February was the second transition month where we slowly moved from short term to longer term positions. The process of an organized schedule for opening positions was not totally in place yet. In the month of February, I should have been closing April positions, which should have been deployed back in December of last year. But, back then, I was still using shorter term options. For this reason, only 3 positions were closed in the month that just concluded, and only one of them being a "true" income oriented position, while the other two were just small speculative bullish bets. The transition is over now and we are fully deploying longer dated positions within an organized schedule. I expect for example, that in March, I will be able to close the May income positions, which were deployed in January and early February. Then in April, I expect to have closed June positions, initiated in February, and so on.

The Trades
On January 20, the market was still a scary schizophrenic meth-head.
(Click on image to enlarge)
This is an end of day chart, which doesn't look that scary due to that rebound that took place that afternoon. It's easy to now say "it was so obvious". But imagine you don't have the complete story that you have in your hands today. Imagine you don't have the rest of this chart describing what happened after January 20. Also, imagine you are in front of your computer, seeing this chart, live, not at the end of the day after the rebound, but during the middle of the session, seeing the lows of the day and panic taking over the universe. The last red bar is a solid bearish bar with a full body in front of your eyes. The afternoon rebound has not begun yet and all you see is a monstrous red bar, all body, attempting to break previous support established more than a year earlier. The media going crazy, doom and gloom everywhere and the market that has had its worst year start ever.

Only looking at it this way, you can partially re-live those moments and then evaluate whether what you did was right and whether you would react the same way, presented the situation. And "right" in this context, is not related to having lost or made money, but to whether you traded your plan, whether you became undisciplined, your nerves betrayed you and lead you to violate your rules; the very plan you had laid out days earlier with no time pressure and with a cold analytical mind.

I was playing an April29 1700/1725/2250/2275 Unbalanced Iron Condor position (details about that position here). The 1725 short Puts had started to take some pressure. I decided to close them (therefore the loss was registered as part of the January results) and deploy a Apr29 1475/1450 Credit Put Spread.

The rebound started right after my adjustment. The Market Gods tend to be cruel Gods. Had I not adjusted anything, I would have had a winner, but this is all about catastrophes prevention and following rules. Taking small losses is part of not suffering huge draw-downs in the long run. Would I do the same thing today, if something similar happens? ABSOLUTELY. The Credit Put spread reached and adjustment condition and we acted without hesitation. I would be disappointed and frustrated had I adjusted for example without the adjustment condition being reached. That, that would have been painful. Therefore, in my book, this was not a mistake.

The Apr29 1475/1450 Credit Put Spread was eventually closed for an $880 gain on February 18, as part of a mechanism to reduce excessive downside exposure. Remember that the market made another bottom on February 11 and the world was again falling apart with all of its Kardashians and Trump fanatics. This was the only credit position closed during February and perhaps, my true mistake was not having deployed a little more capital. Not totally doubling down, but maybe 10 contracts per leg instead of 8, seeing how far the new position was from the market.

In addition to this, in February, a speculative SPY Victory Spread was closed for a tiny $105 loss and a good old fashion SPY 204 Long Call for a small $60 loss. I don't feel bad nor do I have any regrets about these little lottery tickets. The markets just didn't react quick enough and were shaky all this time. Winning results here would have been much greater in magnitude than these negative balances which represent only 0.16% of the portfolio. Worth the risk in my book.

Am I satisfied with how February went?
Yes and No. Yes, because my trading was decent with no significant mistake. And No, because the results in terms of $$$ were not eye opening or anything. I'm content with the fact that we were just transitioning to a better way (in my opinion) of doing things, and the process is now complete. Due to this transition period we barely had any legit income position deployed as an offensive move and not the result of an adjustment or anything like that.

Final balance for the month +0.74%. Subtracting commissions, +0.68%

YTD Results for 2016

That was my February. How was yours?

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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