January was not an easy month to stomach, but it really wasn’t as bad as many investors might feel. The first couple of weeks were gut-wrenching for bulls, but we ended with a nice rally to cut losses in half. My account looks worse than it really is. That is to say my account balance is down far more than the indexes, but I’m sitting on 20 TLT naked calls that are worth approximately $7,000. I don’t have $7,000 in time value that is set to expire in the near-term, but I do believe TLT will drop over the next few weeks or months and I’ll get the reversal I need. On top of the $7,000 I’ll get back eventually, I’ll also sell covered puts if I’m pushed into a short position due to naked call assignments. The current $124 and $125 strike (the same strikes as my naked calls) puts have fat premiums that will make the reversal in bond prices even more profitable for me.
The best trade I made over the past few weeks was rolling my January TLT naked calls out and up. I bought back my January $123 naked calls and sold March $125 calls. This option replacement reduced and delayed my risk at the same time. The worst lack of a trade I made over the past few months was not buying new hedges as I had planned to do. The last hedges I bought turned out to be profitable, but I never got around replacing them after stocks recovered and before stocks fell again.
I ended January with a Net Liquidation Value (NLV) of $88,428.50 and a Net Asset Value (NAV) of $88,425.12 according to Interactive Brokers (IB) after finishing December with an NLV of $100,000 (after withdrawing $16,743.17 on January 6). That gave me a loss of $11,571.50 (~11.57%) on paper for January and a realized gain for the month of $209.04 on two closing trades (one of which was a put assignment on DIS that I won’t take the gain on until I sell the shares). I received $221.45 in dividends in January from SPY and MDY. Quicken reported that I have an account value of $88,452.11, a penny less than IB shows. I’m leaving it for now to give another month to clear up and then I’ll make an adjustment if needed.
I have only three options in my account right now, two with a February expiration. TLT looks like it’ll be assigned at $124, but anything can happen over the next three weeks. TLT could quickly move up to $130 or down to $120. The other call is on FEZ at a $37 strike. After FEZ closed at $32.33 on Friday, I don’t think it’ll come close to being assigned. My only decisions to make are when to sell new calls and at what strike. I plan to do it well before my February calls expire and would like to do it on an up day. At some point, I’ll need to sell calls on my shares of DIS, IWM, MDY and SPY. Maybe I’ll buy some put spreads to hedge around the time I do that.
If all of my naked puts were assigned, I would be 94.13% invested in this account. I am invested 1.74 percentage points lower than I was at the end of December, after accounting for the withdrawal I made at the beginning of the month.
This is my asset allocation in my IB account as of the end of January:
- Large-cap ETF: 21.92%
- Mid-Cap ETFs: 27.14%
- Small-Cap ETF: 34.91%
- International: 7.31%
- Individual Stocks & Other Sector ETFs: 10.81%
- Bonds: 0.0% (not including my TLT naked calls)
- Short ETFs: 0.0%
These are my returns according to Quicken through January 31, 2016:
- YTD Return: -11.50%
- 1 Year Return: +8.73%
- Average Annual (not cumulative) Return since November 18, 2009 (when I opened my IB account): +8.02%
According to Morningstar, here’s how I compare to the major indexes (including dividends) through the month’s last trading day, January 29, 2016:
- Dow Jones Return: YTD change -5.39%, 1-year change -1.67%
- S&P 500 Return: YTD change -4.96%, 1-year change -0.67%
- NASDAQ Composite Return: YTD change -7.86%, 1-year change -0.46%
- Russell 2000: YTD change -8.79%, 1-year change -9.92%
- S&P Midcap 400: YTD change -5.69%, 1-year change -6.70%
The VIX ended the month at 20.20 and the VXN ended at 23.64. These readings are close to two points and four points above last month’s closing levels. Intraday, the VIX made it above 32.0 mid-month while the VXN peaked intraday above 35.0. For those who can handle some more downside potential, selling puts with the VIX far from its lows could be a good trade.
The CBOE SKEW Index finished January at 120.86, far below its average for the month of 135.58. Fear of a major bear market has subsided somewhat and traders already have pushed stocks off their lows.