Saturday, November 22, 2014

39-8 for November Grade C

Modest profits for me, as I count 38 wins, 8 losses for the November cycle. Again, before anyone gets excited by the high win percentage, those tend to be the odds going in. I enter most trades with a 80% to 90% chance of a profit. The other side of high probability is that profits are small, and losses can be substantial. 

Traders buy options with a 10% chance of profit, hoping for a 10-to-1 payout or more. With the market moving straight up, many call buyers got rewarded. Call sellers like me got skewered. Fortunately, I am one to take my losses (vs. wait and hope or doubling down), so my losses were contained, though painful.

I covered the call side of many short strangles for losses: AMGN ASH HON SPY VRX YHOO. For some positions I resorted to buying stock because of wide spreads on the options. Buying stock means adding capital and risk, but helps with the bid/ask spread. Another cost is an extra level of commissions for assignment, when the stock gets called away.

Some strangles came in safe, but the percentage was not what I wanted. During these straight up moves, I tend to lag an all-in long strategy. There is no getting around this for hedgers. The alternative is to be directional, and my history with directional trades is poor. Two recent examples are in gold and bonds (GLD, TLT). I recently bought calendar spreads, taking a long position in gold, short bonds, both directions were wrong. Gold went down, bonds went up. For gold, I reverse the position so I am at a profit. The bond position is near worthless now.

What next? There remain many red flags for the stock market. QE in the U.S. is ending. Bullish sentiment is high. Valuations are near red line, though not nose-bleed bubble territory. Again, my directional predictions tend to be no better than coin flips. This is one reason that I hedge the way I do, because it is a way to make money in the market while being just okay on direction. The risk management side came into play this past month and saved my bacon. While some losses were huge percentage losers, overall I made money.

No comments: