The biggest risk of using my trading model is in months like September. September 2010 was the best September since 1939 for the Dow. There’s no way an account with limited upside potential can compete with that. My trading model works best with smaller ups and downs and I miss out on big gains when those rare months come through that are outside of the norm by such a large amount. It’s frustrating, but I take the good with the bad and by understanding these limitations going in I’m not as upset as I might have been if I thought my account stood a chance to do any better than it is the way I have it set up.
I ended September with a combined balance of $114,216.93 ($100,844.61 with Interactive Brokers and $13,372.32 with TD Ameritrade) including the deposit of $1,000 I made in the first half of the month. After ending August with a combined balance of $108,954.79, I gained $4,262.14 on paper for September and had a realized gain for the month of $611.22 after taking a realized loss of $2,000 on my GES shares. That keeps my streak alive of having a realized gain each month starting in July 2009. My combined balance in Quicken was almost dead on accurate finally as it reported that I have $114,218.16.
I fell below the indexes in September due to my limited gains the way I trade as I mentioned above. The month was huge by any measure and I’m happy to have gained ~4%, even if it was less than half of the S&P 500’s gain. The lower volatility I was so happy about last month is what held me back this month and that’s how it will be as long as I invest this way and I even pointed that out last month too as I kept myself grounded. I have a quarter of the year to go to move my account back above the indexes and if other money managers are like me they’ll be chasing too which should lead to a strong finish to the year and then possibly some give back at the beginning of 2011. I have covered calls on all of my long positions now which will keep my gains capped, but it also will reduce my risk if this rally stalls and I continue to gain by the decay of time value in my favor. Along with my VXX position it gives me a little more room to be more aggressive with new trades. That could be the little difference that makes it for me through the end of the year as this see-saw action between the indexes and my account continues.
If all of my naked puts were assigned and my covered calls expired worthless I’d be around 113% invested in my IB account. That would put $13,064.60 on margin for me. I don’t see that as a big risk based on the expectation that some of my covered calls will be exercised (CSX most likely and maybe UCO, CVS, SPY and INTC too) and that at least one of my naked puts will expire out of the money (UCO most likely and maybe MS also). As I get more confident in this becoming a reality and assuming I remain comfortable with a little margin in my account I’ll add more naked puts to my account, but probably farther out of the money to reduce my risk and just add small amounts of premiums to the pot.
These are my returns according to Quicken through 9/30/10:
My 1 year return: +5.59%
Year to date (YTD): 1.47%
Annualized returns since 4/8/07 (my blog’s beginning): -8.37%
Deposits for month: $1,000 on September 10th, 2010
According to Morningstar, here’s how I compare to the major indices through 9/30/10:
Dow Jones Return: 1 year +14.12%, YTD +5.57%
S&P 500 Return: 1 year +10.16%, YTD +3.89%
NASDAQ Composite Return: 1 year +11.6%, YTD +4.38%
Russell 2000: 1 year +13.35%, YTD +9.12%
S&P Midcap 400: 1 year +17.78%, YTD +11.57%
The VIX ended the month at 23.70 and the VXN ended at 24.96. Both are down some from last month, but up from their mid-month lows. Does this mean volatility’s slide is over for now? Maybe not, but it does warrant watching and being ready for a new spike or at least a rise soon. VXX fell to an all time low in September and bottomed out just under $16.50. With its correlation to the front two month VIX futures I won’t be surprised to see this low stick as a floor for a while. I say that with some hope in my voice, but not enough to buy more VXX yet. As always, volatility will waver and although the VIX has hung out far below 20 for extended periods it is currently on the low end of its past two years’ historical range.