One of the best lessons a trader can learn is to be consistent with a plan, most of the time. No plan works in every market environment, but abandoning a plan and not returning to it when conditions improve can be a mistake. In 2007, I destroyed the market’s return and luckily I paired my risk-taking some in 2008. I should’ve restrained myself more, but the mistake I made was not continuing on the aggressive path when the turn happened in March 2009. I got gun-shy and would have profited much better over the next half-decade. Instead, I became more risk averse. I learned to take profits when they accounted for the majority of my planned gains.
I favor this approach still, but as the year turned to 2014, I strayed. I spent most of 2013 closing cheap options and leaving money on the table. I started 2014 by letting some of those options run. Neither way is essentially better, but by switching my M.O., I got the worst of both worlds. Well, not exactly the worst. I stayed with mainly out-of-the-money puts, but did leave a couple of options (FEZ and SPY) in place when I could’ve taken profits earlier. Now I don’t have profits to take on those two positions. If I had kept my trading plan from 2013, I’d have a higher balance right now.
However, I still believe 2014 will end higher than it is as of today. Based on that belief, I’m letting these paper losses run and will manage the option assignments if they come in the next three weeks. Thanks to my strategy of selling out-of-the-money on most trades, I’ve barely taken a paper loss in my account overall. This means I have a great start to the year compared to the indexes. As long as the sell-off doesn’t go much beyond 8-12%, I’ll be set for another positive year.
I ended January with a Net Liquidation Balance (NLB) of $98,739.07 and a Net Asset Value (NAV) of $98,698.42 according to Interactive Brokers (IB) after finishing December with an NLB of $123,749.64, before withdrawing $23,749.64 to start the year with $100,000 again. That gave me a loss of 1,260.93 (~1.26%) on paper for January and a realized gain for the month of $1,420.86 on only two closing trades (IWM and DIS puts). I received no dividends in January since I still don’t own shares of any stocks or ETFs. Quicken reported that I have $98,698.42. This matches what I have according to IB. (I upgraded to Quicken 2014 and will probably write a review of it after I’ve had a couple of months of activity in it. The first impression is that not much changed.)
If all of my naked puts were assigned, I would be 90.79% invested in this account. That’s down about 13.5 percentage points from how I ended 2013. I picked a good time to lighten up, but as I mentioned above, I could’ve done better. I’m still wondering if I should close any other positions. I have three that still show a paper profit (UWM-April $72, UCO-July $25 and FEZ-Feb $40). All three are low enough strikes that I can stomach buying in at the lower prices if values continue to fall. FEZ is the only one in-the-money, but only by $0.50. (Remember, I could’ve closed it for $0.25 a few weeks ago.) If I allow the FEZ assignment, but avoid the UWM and UCO assignments, I’ll only be 71% invested. That’s a good position to be in if a bear market has started. SSO is the only other leveraged ETF I have and if assigned, I’ll pay $18,200 for the new 200 shares. At the end of January, it was a bit more than $4 out-of-the-money and that’s on top of the $3+ I sold it for.
We’re seeing the “little correction” that I said I wanted in my end of the year summary and I wish I had followed through on my plans to buy a SPY ratio spread. At least for now, I’m ahead of the indexes and have more room to open the gap before I try to call a bottom (or at least a decent entry point). I have no mid-cap exposure and my small-cap exposure is with a far out-of-the-money leveraged ETF. I’ll probably add to one or both of these allocations when I see a good opportunity. I might even create a limit order after I publish this post to hit on further weakness.
This is my asset allocation in my IB account as of the end of January:
- Large-cap ETF: 36.79%
- Mid-Cap ETFs: 0.0%
- Small-Cap ETF: 14.43%
- International: 16.64%
- Oil: 5.01%
- Individual Stocks & Other Sector ETFs: 20.95%
- Bonds: 0.0%
- Short ETFs: 0.0%
These are my returns according to Quicken through January 31, 2014:
- YTD Return: -1.31%
- 1 Year Return: +15.53%
- Average Annual (not cumulative) Return since November 18, 2009 (when I opened my IB account): +7.52%
According to Morningstar, here’s how I compare to the major indexes (including dividends) through the month’s last trading day, January 31, 2014:
- Dow Jones Return: YTD change -5.19%, 1 year change +16.07%
- S&P 500 Return: YTD change -3.46%, 1 year change +21.52%
- NASDAQ Composite Return: YTD change -1.74%, 1 year change +30.61%
- Russell 2000: YTD change -2.77%, 1 year change +27.03%
- S&P Midcap 400: YTD change -2.12%, 1 year change +21.87%
The VIX ended the month at 18.41 and the VXN ended at 18.97. These numbers are up by five and four percentage points from the end of December. On top of that, both moved above 20.0 today for the first time since October. 20 is often a number traders look for to get a feel of sentiment shifting more towards a bear market. One or two days isn’t enough to get overly spooked, but it does point out that times have changed from last year when volatility spiked over 20.0 only twice during the full year. The big benefit is that option sellers can get a lot more in premiums for the same downside risk and that’s on top of the already lowered equity prices.