To extract every last ounce of goodness from market movements this year, I’m launching a new feature here at Tales of a Technician. It will be a retrospective where I look back on the previous month to highlight what I did right, what I did wrong and key trades that defined my bottom line.
By systematically documenting my analysis no lesson will go unlearned, no mistake uncorrected. You’ve heard us teach the importance of journaling and reviewing your trading systems. This exercise will allow you to see me practicing what I preach.
A Premium Seller’s Perfect Storm
The market gods finally heard the cries of Condor sellers begging for some sideways action. And boy did they deliver. The Russell 2000 Index (RUT) traveled a circuitous route to nowhere. With yesterday’s pop into month end, the RUT was able to eke out a minuscule 0.003% gain for January. Profits reigned not just for Condor caretakers, but premium sellers of all stripes.
And it wasn’t just the markets mindless meandering that had theta raiders hootin’ and hollerin’. It was the utter lack of realized volatility. Want to know how much actual movement we saw in the S&P 500? Look no further than the historical volatility indicator. A 20-day reading for this “actual movement measurement” closed out the month at 6%. In case you didn’t know, that means the stock market exhibited the pulse of a corpse. We’re talking deader than dead. And here’s the thing. The CBOE Volatility Index spent most of the month at a 12%.
Selling 12% volatility in a 6% volatility world is the bee’s knees.
What I Did Right (aka why my mommy should be proud)
For starters, I efficiently used my capital by deploying the bulk of my portfolio in well-thought out trading systems. In favorable environments the more trades I have going, the more coin I bank. This principle was on full display this month. Admittedly, this works against me in hostile environments but let’s cross that bridge when the time comes.
Win #1: Took Risk, Got Paid
For my next back-pat let’s talk about my process. Traders should be process oriented, not results oriented. If the process is sound, the profits will come. Rather than obsessing over my P/L column each day, I did a decent job on simply focusing on executing my plan.
Win #2: My Process Reigned
What I Did Wrong (aka the last vestiges of stupidity)
My principle mistake this month was the mismanagement of a few hedges. Given my good fortune over the first few weeks of the year, I was looking to reduce exposure at the first sign of market weakness (my portfolio was leaning bullish). So, when the RUT slid below minor support at $1,354 on Jan 12th, I promptly sold a Feb 1410/1420 bear call for $1.60. Fast forward a week (to Jan 23), sprinkle in some time decay and choppy-chop price action for good measure and voila! The position was thriving. The call spread had fallen in value to 60 cents netting a $1.00 gain per spread. Rather than exit, I let it ride. At that point, I should have placed a stop to bail of the market ripped returning me to break-even on the hedge. Instead, I gave it too loose of a leash and ended up taking an unnecessarily large loss on Jan 25th. I had equally horrible management on bear calls in IWM and SPY.
Loss #1: Manage your hedges better, ya dummy!
Trade of the Month
SLV was the largest contributor to my bottom line this month. My experience reinforced the necessity of process. I got hit on my SLV naked puts in December and stuck to my plan of allowing assignment and then selling January covered calls. This tactic allowed me to extend the duration of my position in hopes that silver would finally straighten up and fly right.
I netted the max gain for the covered call in January and then reverted to selling puts for February (which I just exited today at my target). A double dose of wins for SLV made it the big winner of the month.
Check out the entire 2017 retrospective series:
- The January that was
- The February that was
- The March that was
- The April that was
- The May that was
- The June that was
- The July that was
- The August that was
- The September that was
- The October that was
- The November that was
- The December that was
Financial freedom is a journey
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