As I mentioned last week with my TWM trade and in my $SPX chart on Sunday, I’ve grown more bearish lately and I made some more changes today. I started with a basic sell to lighten my overall exposure to the markets. I sold 200 shares of SSO for $41.88 and received $8,375.01 after commissions. I thought about selling covered calls to bring in some cash and help reduce my cost per share, but decided that left too much downside risk with too little upside potential. Selling the shares outright seemed to fit my new plan I’m working on. More on that at the bottom of this post.
Once the day moved along and pessimism stayed the prevailing mood of the day I started to wonder if it was getting overdone. Bonds had rallied, but were not getting out of control yet. I checked TBT (ultra inverse 20 year bond ETF) to see if there was a trade to be had with options on it. The low for TBT on October 4th was 18.00. I don’t think the yields are going to get any smaller than they were back then and if they do it won’t be by much, so naked puts on the inverse ETF started to look like a reasonable trade for a nice potential return. While TBT was trading at $18.79 I sold five TBT December $18 naked puts for $0.52 each and received $256.38 after commissions. I almost went out to the January expiration and also considered the $17 strike, but I wanted a short duration and a cost if assigned of only $17.49 seems not to be too risky for something I wouldn’t mind holding longer and selling out of the money covered calls on. Eventually bond prices will go down again and I’ll be able to profit from the rise in TBT. I think my chances are good I’ll profit in four weeks, but with a potential return of almost 3% in four weeks (more than 38% annualized) apparently many others think it’s a risky trade. It’s not a full position for me, so the risk is somewhat limited in that respect too.
Soon after that order hit, my MVV trade hit too. Unlike my SSO order that I just cut bait and ran from, I opted to sell covered calls on the ultra mid-cap ETF. While MVV was trading at $50.88 I sold two MVV December $51 covered calls for $3.60 each and received $718.54 after commissions. The potential return is great, but the upside risk of selling too low is high as is the downside risk of a bigger sell off. Essentially it was a compromise after dumping SSO. I wanted to keep some exposure and I don’t have a lot right now so this and TBT won out. As with TBT, I wanted a short duration on the options. It all builds towards my goal of starting the year with a clean slate.
I’m working on a new trading plan for next year that does not include selling LEAPS again. I liked the idea in theory and it would’ve been great if the market didn’t sell off 20%, but it did and it messed me up. I made better returns when I kept the durations shorter for my options. In general, my plan is to focus mainly on SPY, MDY, IWM, UCO and maybe TLT. I’ll keep working UCO similar to how I am already. Aside from my lack of hedging my entry earlier this year, my UCO trade series tend to turn a nice profit. For the indexes I’ll sell ITM naked puts to enter the position when I think the markets are bottoming and then I’ll stay long and uncovered while I think the markets are in rally mode. When I see a turn lower coming I’ll sell either at the money or in the money covered calls. The essence of the theory is that I’m not beating the indexes by trading individual stocks most of the time. If my goal for my own account and some of my clients’ accounts is to beat indexes I need to invest in them more directly. I’ll try to nibble an edge higher with options when my own market timing and the system I subscribe to predict changes coming.
Don’t get me wrong, I’ll still make trades on individual stocks like shorting NFLX when I see an opportunity, but for the most part I seem to better timing indexes than individual stocks. Keeping my option durations short allows me to be more nimble with my trades and not get caught out with big bid/ask spreads like I have with my current ultra ETF longer dated options. Earlier this year I was concerned about not having time to juggle trades each month or two. By limiting my focus to only a few ETFs I should be able to group trades better and get more done with few trades. I ran this type of model for one of my clients this year who wanted less volatility in her account. So far her account is beating mine nicely, so I thought I should do the same for me that I did for her. Hopefully it wasn’t a fluke and I’ll go back to my winning ways.
What has worked for some of you this year? What do you see changing next year for your trading model (if anything) and what do you think of my potential changes?