The Dow Jones and S&P 500 lost close to 4.5% and 5.5% respectfully in July. My losses were more than that, but it appears some of it is tied up in time value as volatility spiked which leaves me good room to recover, even if the markets stay flat. The shift pushed me below the year to date returns for most of the major indexes. The chase for performance through December 31st is going to be interesting with only four months remaining in the year.
After the drop in equity prices, a larger portion of my account is in puts that are in-the-money. Luckily for me, I didn’t panic at the August lows and when I was assigned shares from my options I stayed long and didn’t even cover most of these stocks and ETFs with covered calls. That simple patience allowed me to ride the bounce higher into the end of the month and I regained more than $12,000 from the low.
One of the reasons for my change (previously I would have been prone to sell covered calls immediately after being assigned) was that I’m actually trading more based on a market timing model. I’ve been posting a chart of an index nearly every weekend almost since the beginning of this blog, but rarely made many trades based on my own technical analysis. That has changed. Now I’m combining my own technical analysis with another market timing system run by a friend of mine. Of course I pay attention to fundamentals somewhat and have a growing interest in dividend paying stocks, but the charts have tended to be better indicators for my trading style than most other methods. I just have to act when they “speak”.
This is the breakdown of the numbers for me:
- I ended August with a combined balance of $136,647.78
- $118,133.21 with Interactive Brokers in equities (No deposit in August)
- $18,514.57 with TD Ameritrade in bonds and longer-dated, index options
If all of my naked puts were assigned and my covered calls expired worthless I’d be 117.83% invested in my IB account, a little more than August’s ending percentage. Since more of my options are in the money than not, I might not add a lot more exposure yet, but I am tempted to sell some more, far out-of-the-money puts while volatility is still high. I’m not sure the risk is completely worth it yet. If I do add more exposure it’ll probably be coupled with selling some covered calls on the shares I’m already long. All of this mindset could change if the jobs data throws in a surprise to either side tomorrow.
This is my allocation in my IB account as of the end of August:
- Large-cap ETF: 24.93%
- Mid-Cap ETFs: 26.75%
- Small-Cap ETF: 25.56%
- International: 8.47%
- Oil: 8.93%
- Individual Stocks: 28.03%
These are my returns according to Quicken through 8/31/11:
- Year to date (YTD): -4.65%
- My 1 year return: -0.31%
- Annualized returns since April 8, 2007 (my blog’s beginning): -7.06%
- Deposits for month: None (I forgot about it until this week, so I’m waiting for September’s deposit)
According to Morningstar, here’s how I compare to the major indexes through the last day of trading for August 31, 2011:
- Dow Jones Return: YTD +2.14%, 1 year +19.03%
- S&P 500 Return: YTD -1.77%, 1 year +18.50%
- NASDAQ Composite Return: YTD -2.77%, 1 year +22.02%
- Russell 2000: YTD -6.54%, 1 year +22.19%
- S&P Midcap 400: YTD -2.72%, 1 year +22.89%
The VIX ended the month at 38.96 and the VXN ended at 31.37. Both of these are up substantially from the prior few months’ levels and help increase the premiums on the options we sell. The trick with rising volatility is always whether or not the ascent is over yet or not. If your riding the option all of the way to expiration and don’t mind taking ownership of the stock/ETF, the increase in volatility is just good news.