The End is Nigh

While the title of this post is inspired by the upcoming theatrical release of WATCHMEN, I can't help but feel the same way about The US Gov't, The Stock Market, and most importantly, my portfolio.

After a smart and promising January, February has handed my portfolio a real stress test. I haven't tallied the results yet...but they won't be pretty. Downright awful, actually. And today, the last day of the month was the icing on the cake.

Short put verticals in some select Health Care related stocks are putting me to the test. Thanks President Pork Sandwich.

The positions I'm currently in will surely test my hypothesis that time, time decay, and patience will yield positive results. I'm fighting several positions (constantly readjusting my spreads) in an effort to scratch out wins. It is my hope (and tepid expectation) that this month's losses will be next month's gains (...and then some).

In the meantime, in an effort to play it safe, I've decided to play Iron Condors in SPY while I let the remaining stock positions play themselves out to a conclusion. Small, slow, and steady. In times of crisis, the best action is to stay small, stay conservative, and stay watchful. This is my gameplan until we come to a final resolution of this 4-alarm fire drill.

February Expiration Results

February expiration happened on Friday. And the results were mixed. I experimented with hedging via the SPY contract. There is probably some merit in doing this, but I think the strategy I was employing isn't the proper way to do it. The "hedging" provided a significant drag on my results in February options. As such, I will shelve this idea for now.

In closed stock positions, my portfolio gained a robust 27% on equity. However, my hedging ops in SPY cost me an equally robust 16% hit against my equity. Combined then, the total gain in closed positions equals = a shade above 10%.

However, a troubling situation is beginning to brew. I've rolled-over 4 losing positions from February into March positions. And I'm fighting with a couple more March positions. My stance is to stick with these positions (continuing to roll up/down as they move, and/or roll to the next month if necessary) until such time that I can profitably exit these positions.

This would seem to fly in the face of conventional wisdom (cut your losers short, let your winners run). However, considering that each of these positions has a known maximum loss, and time decay is always working in my favor, I figure I should be able to be patient and eventually the position will come to me.

Unfortunately, this mentality forces me to endure some swings in equity which are larger than I originally thought. For now, I'm going to continue to bite the bullet and trust my intuition, while continuing to ruminate on alternatives.

The calendar month of February is almost up, and if it ended today....my account would be down about 10% since January 31. Let's hope this next week repairs some damage.

The Smartest Guys in the Room?

The market has spoken. A sweet 5% drop in the S&P 500 in one day. All in response to the Government's "stimulus" plan to save the economy.

Say what you will about Wall Street and the shit that has happened in the past year and a half. But if you think for one second that bureaucrats in Washington are better equipped to solve the crisis than the highly educated, highly trained, and highly experienced risk managers at the largest banks, institutional funds, mutual funds, and trading desks in the world - you are absolutely out of your mind.

The more the Gov't gets involved, the more this crisis will perpetuate itself. More damage will be done. More innocent people (rich AND poor) will be hurt. More businesses will fail. And more jobs will be lost. But at least the Obamamaniacs can be happy there will be several billion dollars set aside for their liberal birth control/HIV awareness campaign. God help us.

The Calm Before the Storm?

The S&P 500 has managed to bounce around between 800 on the low end and 890 on the high end since I began trading February options in the second week of January.

Keeping my portfolio delta-neutral (via some assistance from hedging in SPY) has proven to be relatively uneventful. However, with February expiration a mere 11 days away, 11 open Feb positions, and the ticking time-bomb Federal Stimulus package winding its way through Washington.... these next 11 days may prove to be very interesting.

I don't know which way the market will move once the final stimulus package is decided on...but it'd be a safe bet to assume the market will blow out of it's current range. The delta-neutrality of my portfolio will surely go through a trying test.

As such, I am attempting to reduce risk. Up to this point, each day when I balance the neutrality of my portfolio, I've done so by selling a credit spread in SPY that provides the needed delta to get me back to zero. Today, instead of selling more spreads (and increasing my potential risk), I've begun to buy back "in-the-money" SPY spreads within my portfolio to achieve my delta repositioning.

By buying back spreads that are "in the money", I'm adhering to the principle of "buying intrinsic value and selling extrinsic value". It is smart for any professional options trader to adhere to this adage. In the long run, the statistics work in your favor. In the trading world, this is called EDGE. And no trader should trade without an edge - whether real or perceived. This realization has had a major effect on my trading.

Stay tuned over the next week or so. Should get interesting. Hopefully it doesn't....but if it does, here's hoping my portfolio is constructed as well as I think it is :)

Calendar January Results, Setting goals

It's probably weird to report monthly results twice a month. How does that make sense?

Well, it's due to the expiration schedule of options. Two weeks ago I reported my January options results. What that is is the percentage gain to my portfolio from trading in options that expired in January (options expire on the third Friday of every month). I want to know how I perform in each option series.

Now, I'll report the traditional monthly gain. The gain in my portfolio from the close of business on December 31 to the close of business on January 31. For the calendar month of January, my net gain was 11.9%. This was achieved through maintaining a delta-neutral portfolio of vertical credit spreads. Toward the end of the month, I also began experimenting with portfolio hedging. I'm achieving this by selling vertical spreads in SPY (S&P 100 ETF, a broad gauge of the stock market as a whole) to bring my delta as close to zero as possible each day. Selling vertical spreads also gives me the opportunity to collect time premium on the hedges, possibly making my hedging operations another source of revenue. Though, as long as I don't lose much money on this, it would be a success.

As stated before, my targeted monthly gain is 10%. So, we are ahead of schedule. Only 58 more months of this to reach my ultimate goal :)

This is probably a good time to mention the importance of setting goals and milestones along the way.

I am finding that it is very advantageous to not only have an end-goal in mind, but to build a road map that guides you strategically to your stated goal. Sure, this isn't groundbreaking news. I'm sure you've been beaten over the head by these platitudes since grade school (or Tony Robbins late night infomercials).

For me, I have what many would perceive to be a very aggressive goal in mind. And it is. However, I've broken down what I need to accomplish on a monthly and weekly basis. And when I take it one week and one month at a time, the aggressive goal doesn't seem so unattainable. I recognize the value in being consistent in hitting my smaller, incremental targets, knowing that the small steps are taking me along the correct path to my ultimate destination.

As elementary as this sounds, this has been a major EUREKA moment for me. I have victimized myself in the past, repeatedly, by swinging for the fences. My impatience tripped me up many times. I would set a goal - and then set about achieving it as quickly as possible. Nevermind that what I was trying to accomplish was statistically improbable. If there was a sliver of a possibility...I went full-steam ahead to get there as quickly as possible. Predictably, the end result was rarely satisfactory.

Now, with the road map I've built for myself, I can visualise my goal as well as see every incremental step along the way that I need to take to get there. It really is a liberating feeling. Trust the plan, stick to the map, be patient. Good things will come.