Once again, I proved that selling options can beat buy and hold investing. 2015 was an even better year for me than 2014 and it was more fun since the major indexes did very little to please investors. I finished 2015 off of my highs reached a few days earlier and below my ending balance from November, but I exceeded my growth goal for the year. The last time I beat the indexes by such a large margin was in 2007 when I gained 26.27% and the S&P 500 gained 3.53%. 2007 and 2015 were very similar in their small ebbs and flows that are built for option sellers to exploit. Following 2007, 2008 was a terrible year for me and I am set-up not to make the same mistake again if we get a bad bear market (not that I think we are due for one yet).
I ended December with a Net Liquidation Value (NLV) of $116,743.17 and a Net Asset Value (NAV) of $116,740.30 according to Interactive Brokers (IB) after finishing November with an NLV of $118,231.16. That gave me a loss of $1,487.99 (~1.26%) on paper for December and a realized gain for the month of $3,527.35 on six closing trades. Quicken reported that I have an account value of $116,518.85, which matches what IB shows when I include the $221.45 in dividend accruals that IB counts in my balance since I’ve already earned them. I just haven’t received them. My realized gains came from 10 TLT naked calls, two IWM naked puts, two IWM covered calls, one SPY covered call, one SPY naked put, one MDY covered call, and $178.22 in dividends from IWM and FEZ.
I only have two options set to expire in January (DIS $115 naked put and TLT $123 naked call) and two in February (TLT $124 naked call and FEZ $37 covered calls). I made the mistake of not selling covered calls on my 300 shares of IWM and 100 shares of both MDY and SPY. I did it for my clients who ask me to work with options in their accounts, but I didn’t want to take the time to write up my trades while I was busy wrapping up the year. Little did I know, the S&P 500 would fall 1.5% (up from its lows in the morning) on the first trading day of the year. Luckily, I already thinned down my account from the over exposure I had before December options expiration. I opted not to start the first day of the year by selling covered calls while traders were in panic mode and will reconsider selling covered calls tomorrow.
If all of my naked puts were assigned, I would be 82.12% invested in this account. I am invested 34.55 percentage points lower than I was at the end of November. I cut back on my exposure some because I wasn’t sure how the year would open and was growing nervous, but mainly because I knew I had plans to make my annual profit withdrawal of any amount over $100,000.00 in my account. I initiated a withdrawal of $16,743.17 today to bring my account balance back down to $100,000.00 to start the year. Based on this new balance and drop in cash, I’m starting the year 95.87% invested (very different than the beginning of 2008).
Looking back at the full year, I finished with $25,223.52 in realized gains. This sum doesn’t match my returns for the year for two reasons. One, I came into the year with some options that gave me big profits in the first quarter. Two, I have unrealized losses on my shares of FEZ, IWM, MDY and SPY and my DIS naked put. After being assigned these four long positions, I sold covered calls that were not assigned. I closed those calls and had realized gains while the share prices fell. I might turn some of these shares into realized losses sooner than later if the weakness in stocks continues.
TLT was my biggest winner for 2015. TLT accounted for 10 of my 14 biggest realized gains. UWM claimed two of the top four spots, while MDY, SPY and IWM contributed nicely too, not counting the paper losses I have on the shares right now. I only had six losing trades in 2015 (including a loss of $0.08 on a BABA naked put) out of 58 total trades. Along with being my smallest loss, BABA has the dubious honor of being the cause of my biggest loss too. TLT placed in the next two slots for biggest losses. XOM had one spot, but it was part of a vertical put spread that turned in a combined profit of $0.81, so I probably shouldn’t count it. SSO had the remaining loss, but I made much more on another SSO trade than I lost, so it doesn’t bother me either. The biggest keys to my success in 2015, along with working TLT most months, was being consistent with my trades and not taking stupid risks. I cut losses when they started and didn’t chase trades that were overly risky. I focused on pocketing regular small gains rather than trying to do it all on any single trade.
This is my asset allocation in my IB account as of the end of December:
- Large-cap ETF: 17.46%
- Mid-Cap ETFs: 21.76%
- Small-Cap ETF: 28.91%
- International: 6.36%
- Individual Stocks & Other Sector ETFs: 9.85%
- Bonds: 0.0% (not including my TLT naked calls)
- Short ETFs: 0.0%
These are my returns according to Quicken through December 31, 2015:
- 2015 Return: +17.34%
- Average Annual (not cumulative) Return since November 18, 2009 (when I opened my IB account): +9.45%
According to Morningstar, here’s how I compare to the major indexes (including dividends) through the month’s last trading day, December 31, 2015:
- Dow Jones Return: YTD/1-year change +0.21
- S&P 500 Return: YTD/1-year change +1.38
- NASDAQ Composite Return: YTD/1-year change +5.73
- Russell 2000: YTD/1-year change -4.41
- S&P Midcap 400: YTD/1-year change -2.18
The VIX ended the month at 18.21 and the VXN ended at 19.63. These readings are roughly two points and one and a half above last month’s closing levels. The VIX made it to 25.27 and the VXN made it to 24.97 on December 11, but the move higher was short-lived and volatility settled down again before Christmas only to begin ramping up again in the final days of the year. As I said last month, the VIX and VXN in the mid to upper teens allows for reasonable option premiums and indicates that investors are overly not worried or complacent.
The CBOE SKEW Index finished December at 124.43, nearly three points below the end of November.