February wasn’t near as pretty as January when it comes to market performance. My portfolio still eked out a gain, but it’s only because the sharp rally at the beginning of the month provided enough room for prices to retreat so much in the back half while still allowing the indexes to close green. In case you missed the implication of that prior sentence, let me clarify. My portfolio is tied to the major averages thanks to core positions in IWM, EEM, SPLG, and a smattering of other stock positions. As a result, it’s difficult to score a banner month when weakness strikes equities as it did last month.
Herein follows my usual retrospective touching on the highs and lows of my performance.
Theme of the Month: The Inevitable Arc
The bullish entrance of February was matched by its bearish exit. What brought hopes, dreams, and a good deal of profits to trend-followers ultimately bashed them all with a baseball bat on the way out. It’s a shame, yes, but the reversal of fortune was simply a matter of time.
Here’s a truth you can take the bank. It’s one you will see manifest itself time and again as you monitor the magic money game playing out on the Street each year. Rip-roaring uptrends eventually fade. Not into oblivion, mind you, but into something less extraordinary – something more sustainable.
The pace set by small caps (IWM) since that fateful November day when Pfizer announced its coronavirus-killing vaccine was record-setting. As I’ve mentioned previously, the fourth quarter marked the largest percentage gain for the little guys EVER.
It continued through January and into February until finally, we reached the apex of the ascent. Like a recently launched SpaceX rocket, we’ve burned through a great deal of fuel, shed the boosters, and are now adopting a more sustainable flight path. At least that’s the hope. Expect more turbulence, some meandering. Both are healthy and will allow the bull to last longer.
What I Did Right
One of the many silver linings to the market trajectory neutralizing is the profits it brings back to iron condors. My feathery friends are back to their cheery selves. Both March’s and April’s trades are well into the profit zone. More winning months are needed, but this is a great start for a strategy that many left for dead late last year.
What I Did Wrong
Sometimes trading feels like you’re a kid walking through a candy store. You enter committed to buying a particular sugar-laced treat. You have a history with it and a fond one at that. It’s tasty and agrees with your constitution: no post-gorging regrets, no late-night stomach ache. You know if you follow your plan, pleasure awaits.
And yet, as you walk toward the desired aisle, your eyes are bombarded with sweet-smelling alternatives. They beckon, with promise, like the Sirens to Odysseus. If you’re smart, you’ll remain fixed on your objective, buy the treat you targeted at the outset and get the heck out of dodge.
But sometimes, you’ll succumb to the temptation and start tasting this and that because, well, you got a pocket full of cash and a sweet tooth.
As the market was careening lower this month, I decided to scoop up a SPY put option for a day trade. I don’t normally do it, but I just found the opportunity too tempting to pass up. So, I steered out of my usual lane, grabbed a put, and crossed my fingers. Sure enough, by day’s end, I was stopped out during a nasty intraday rally.
Don’t worry, though. For penance, I made myself write down the following 100 times on my blackboard:
“Next time, I will buy the candy I came for.”
Keep your on the prize, you dunce!
Trade of the Month
If you’re going to play with interest rates or bonds, the only game in town is TLT. It tracks long-term bonds and has enough volatility and liquidity to make options trades interesting.
In case you’ve been hunkered in your bunker and missed the memo, long-term interest rates have been zipping higher, much to the dismay of bond owners. TLT has been getting boot stomped.
But on February 24th, my inner contrarian started hollering. TLT is way oversold! Implied volatility is sky high! Fear is dripping from the walls! So, as taught in the Bear Market Survival Guide, I decided to step up and fade the fear with bull puts.
Specifically, I sold the March $135/$130 bull put spread for around 50 cents. The plan was to scale-in to more contracts if TLT sold off further. I didn’t have to wait long. The very next day, it got monkey-hammered. But look at the volume and the size of the candle. Both were indicative of capitulation. So, as planned, I entered another tier of bull puts for $1.00, thereby raising my average credit to 75 cents.
The very next day, TLT came roaring back, and the put spread fell back in value to 50 cents. I quickly took profits on the second tier to lock-in the gain and settled in, awaiting the spread to drop to 5 cents so I could exit the first tier.
Unfortunately, TLT rolled over, and prices ramped back up. At the time of this writing, the put spread is back to 66 cents. But with only ten days remaining, there’s still a chance of the trade working. My planned stop at this point is the low of February 25th ($136.61).
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