The bull continues to run and “risk on” remains the name of the game. Here is my retrospective for August.

Theme of the Month

C If you carried a bullish portfolio and didn’t make money in August, then something is wrong with your process. Further investigation is warranted to discover the culprit. If your portfolio was leaning bearish, then your losses are understandable. You tried to be a contrarian and bet against the trend. Losses ensued. Shocker! Finally, neutral-portfolio-toting traders that ended the month with a loss have two choices. First, either chalk it up as an adverse month and trust that your system will return to profitability once better conditions arise. Or, second, figure out how to deploy bullish trade concurrent with your neutral systems to deal with strong bullish moves like August.

This was a momentous month for one BIG reason. The S&P 500 officially notched a new record, eclipsing the previous peak set in January before the crash. Consider this exhibit 579 of the stock market’s resilience.

What I Did Wrong

Mistakes come in a variety of forms. An honest look back at your month often reveals areas where improvement is possible. I’m happy to report I dodged any significant blunders in August. The few losing trades were contained, and my win rate kept pace with historical norms. As mentioned earlier I had two trades that prevented me from growing my account as much as last month. The first was an ill-timed bear call I entered to reduce my portfolio delta when the market was weakening on Aug 15th. The market screamed higher right after entry. It was until Aug 27th that I finally waved the white flag and took the loss.

Taking losses on these types of market hedges is annoying, but let’s think about this for a second. Would I have preferred the market continued tanking after Aug 15th? Would I rather be vindicated on my hedge or have it turn out to be unnecessary? The answer is the latter. My portfolio was still bullish. I still made money during the market rally. The hedge simply reduced the amount of profit.

The second trade that is thus far misbehaving and chipped away at some of my profits last month is my RUT October Condor. Ever since inception, this puppy has been losing. While it remains redeemable and can certainly return to boost my profits for September, it was one of the factors that prevented my good August from being great.

What I Did Right

I’m keeping this section short and sweet this month. I took calculated risks this month and got paid. As it should be. Here’s a list of strategies and tickers I played with:

Bear Calls: SBUX, FDX, FXE, TLT, DIA

Jade Lizard: GLD

Put Calendar: UAL, SPX, AAPL

Bull Put: NFLX, V, ATVI, DIS, WMT, BIDU

Bull Call: LULU, KO, SQ

Naked Put: TWTR, YELP, ROKU

Trade of the Month

I want to highlight my adventures with Apple for my trade of the month. It will illustrate my thought process for put calendars and how I think about adapting when wrong.

On Aug 6th, AAPL stock was becoming a touch overbought after gapping and running higher four days in a row after its earnings release. Reasoning it may be due for some consolidation after tagging $209, I deployed a Sep/Oct $205 put calendar for $1.42. The ideal scenario was to have the stock pause for a few weeks or head back down to $205. The implied vol rank was 21% at the time supporting a long volatility play. Because the put calendar was set using strikes below the current stock price, the spread started out slightly bearish.

As expected, AAPL did pause for a spell. But, on Aug 13th, it started to break out of its high base pattern. To defend against higher prices, I purchased an Oct $210/$215 bull call spread for $2.57.

By Aug 20th, AAPL had rallied as far as $218. My $205 put calendar was down money, but my Oct bull call spread was profitable. My typical plan for the put calendar is to add a second tier at this stage, but since my $205 put calendar was so far OTM I decided to close it out. I also closed the bull call and essentially broke even overall.

I was happy with the outcome at this stage. I started with a slightly bearish trade, AAPL rallied $9 from $209 to $218, and I was able to exit virtually unscathed. But the trade saga didn’t end there. On Aug 20th, after exiting the two existing trades, I entered a Sep/Nov $215 put calendar for $4.30. I betted that with AAPL now even more extended it may pause for a bit near the $215 level. Like the previous calendar, this one started out slightly delta negative so a further rise in AAPL stock would necessitate some type of adjustment.

This time I was right long enough to take a profit. By Aug 24th, the put calendar had risen from $4.30 to $4.70 netting a 10% return in four days. My timing was fortuitous. Over the next five days, AAPL ripped to $227. Had I stayed in the put calendar would have dropped from $4.70 all the way down to $3.90.

Here are my key takeaways.

First, adding bull calls to hedge a put calendar is effective.

Second, leaning slightly against the trend (as a put calendar in an uptrend does) can work but you have to take profits when you have them. Shoot for a 10% to 20% gain, not a giant one.

Third, it’s often better to exit a put calendar if the stock is breaking out and redeploy after the stock gets extended again. Aug 6th,  Aug 20th, and potentially now (Sep 4th) are attractive entry points for how I like to trade these.

Obviously, the better play on AAPL in hindsight was to go straight bullish after the earnings gap. But, whatever. The goal with trading is to make the best choice you can at the time and roll with the punches if they arrive.

If you missed last month’s resurrection of this series. You can find it here.

And all of my 2017 retrospectives can be found here.