January is in the books. And while it wasn’t as epic as the two months preceding it (thanks in large part to a late-month rug-pull), it nonetheless adding to my bottom line. Let’s take a look at the highs and lows of my trading last month.
Theme of the Month: A Small Revolution
Small-caps ended 2020 with their best quarterly performance in history. Thanks to that and the booming start to the new year (did you know the Russell 2000 is up 16.5% so far in 2021!?), small caps have now outperformed large caps for not just the past 6 months and 1 year but the past 3 and 5 years as well! It’s incredible given just how long they had been underperforming.
I must admit, for the 18 months after I purchased IWM in early 2019, I regretted not having bought SPY. Curse you small caps – why you suck so?
Fortunately, they heard my inner grumblings and flipped the script. Now it’s the little guys that reign on stock mountain. Since last October I’ve been selling far OTM covered calls on my IWM positions thinking surely, surely, the ETF won’t be able to reach it. Twenty to thirty days later, I’m proven a happy fool.
One day the fuel will run out, but I haven’t a clue when. All I know is I just rolled up to the March $250 calls so if my track record continues, it looks like that’s the next stop.
What I Did Right
One thing I’ve gotten right is sticking with what’s working and not fighting the trend. Maintaining exposure is the way to maximize gains in times like this. For covered calls, that means rolling up and out. For naked puts and bull puts, that means taking profits and redeploying.
What I Did Wrong
My biggest regret of the month was getting shaken out of two stock positions due to the market selloff at the end of February. I purchased CRM (1/20 @ $223.50) and ZM stock (1/13 @ $362.50) at great entry points based on bottoming patterns. My original intent was to hold them as long-term core stock positions. I like the fundamentals of both companies and, more importantly, liked the technical entry point.
Unfortunately, I allowed short-termism to enter the equation. They both built profits and then proceeded to return to my entry point during the late-February market rug-pull. Not willing to let either position go negative, I went ahead and exited at breakeven.
Fast forward to today, and ZM is sitting at $430, a full 19% higher than my entry. For its part, CRM is up 6%. I have mixed feelings about the outcome. On the one hand, I could argue I let volatility spook me out of positions. On the other hand, had the market correction continued, I would have been happy I pared down exposure. I should have been more clear at the outset of my trade if I was really committed to these long-term positions. If so, then my exit ultimately was a mistake.
Trade of the Month
I’m going with a bull call diagonal spread on XLF as my trade of the month. My conviction was tested and it required patience to work, but ultimately, I prevailed.
On January 22nd, the financial sector had a beautiful bull retracement pattern with low implied volatility. I bought the March 29 call and sold the Feb $31.50 call against it to create a bull call diagonal for $1.70. The ideal scenario was to have XLF work its way higher to $31.50 by expiration.
Over the next five trading sessions, XLF tumbled to the 50-day moving average bringing immediate losses to my trade. Because no major support zones were breached, I let it ride.
Now, XLF has risen back to $31.30 and the diagonal spread has increased from $1.70 to $2.21, netting me an unrealized gain of 51 cents or 30%. I could exit now with a tidy profit, or wait it out for the next ten days to try and capture some of the remaining 30 cent profit.
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