Trading in the Zone by Mark Douglas

I recently finished reading the book: Trading in the Zone by Mark Douglas 

 

My overall impression is that the book is worthwhile. Yes, there is some fluff, some pop psych, some things I might not agree with. I've been trading a long time, so even a few small insights, a nugget or two of information, is worthwhile to me. If I can improve on a couple of trades a year, that made it well worth my time to read the book, and type up these notes. Yes, hope for more, but as a person learns more, each increment of improvement tends to be more marginal.
 

Notes for Chapters 1 & 2:

Like markets, others may find other high points, other things that stick in their mind. I'm not going to go into great detail, just hit a few high points. I suggest reading the book for yourself and taking your own notes. I'm sure another person's notes will be far different from mine.

There is a long questionaire in the preface, with questions about how a person perceives the markets. Here are two sample questions (agree or disagree):

"I often find myself feeling that markets are against me personally."

"As much as I might try to let go, I find it very difficult to put past emotional wounds behind me."

Why do people want to be traders? The action, the freedom are two big reasons. Douglas asks why so many would-be traders fail. An interesting follow up question is why so many traders avoid taking responbility for their trades. Another follow up is why so many ask for or take advice. There is a bit about how often a child is told "no," or "you can't."

Douglas is big on rules, a person might imagine given the title of his other book The Disciplined Trader. I have a few rules, though I do bend mine on occasion. My Rule #1 is "live to trade another day," meaning never YOLO your account, no matter how sure you are. Someone with better gut instincts might find this to be silly, but my forays into directional trading are no better then coin flips, perhaps worse.

There is a bit on random rewards. A simple real life example is a slot machine in a casino. The occassional winning spin is enough to addict some people to the things. People that are prone to be addicts can become addicted to more than a few things.

Some people that come to the market with huge success in other fields are often frustrated. Many of them owe their success to charm, personality, the ability to bend others to their own will. Markets can't be charmed by individual traders.

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Chapters 3 and 4

Taking responsibility, by shaping your mental environment. The ultimate goal is consistency, to be able to trade without fear, without recklessness. Ironically, many beginner traders lack fear. It is when the beginner experiences losses does he/she feel the fear. The average reaction is to study more, try and find more indicators, do more back testing. The aim is to conquer the market with knowledge.

Brief discussion of athletes in the zone (hence the book title). Musicians, artists can also feel like they are in the zone. Douglas describes it as acting instinctively, just doing. The zone is a state of mind that is inherently creative. Another phrase is a winning attitude. In many sports and competitive activities, the competitors are all highly skill. What often separates winner from loser is a winning attitude. If there is a significant skill difference, the competitor with much more skill will usually win.

My thought: Oprah Winfrey popularized The Secret, that attitude, intent are the keys to the kingdom. Douglas is saying something similar.

Back to Douglas, the market owes you nothing. The market is not your adversary. Any meaning is in your mind. The market does have a flow, though it can be erratic. To start sensing the flow of the market, a mind has to be relatively free of fear, anger, regret, betrayal, despair and disappointment. Knowing about markets while carrying the burder of these emotions will usually result in losses. The emotion will override the knowledge.

A trader that has to win, has to be right, will tend to have a distorted image of the market. That trader is unlikely to be able to flow with the market, because the ego, the need to be right is often primary. Losses can not be avoided.

Douglas observes three groups: consistent winners, which are about 10% of traders. Consistent losers are about 30 to 40% of traders. The losers often have horrible habits such as trading emotionally (fear of loss, fear of missing out, revenge trading, freezing when all their indicators line up). The other 50% to 60% or so, win some and lose some. Those in this large group that lack risk management skills tend to blow up their accounts.

Hypothetical question: if you undid every trade that was flat out stupid (eg: revenge trade) or reckless, how much would your profit/loss improve for the past year? Next question: did you ever think to try to identify how your might change your perspective, your attitude, and eventually your behavior? The market has nothing to do with a trader being reckless.

A difficult concept is that the market acts as a mirror, reflecting back what's inside you. Like an ink blot, different people see different things in the same market. Premise: the solution is in your mind, not in the market, not in studying the market. Your state of mind is a by product of your beliefs and attitudes. Douglas drifts into Yoda's famous line from Star Wars, there is no try. A trader is consistent by nature, he/she doesn't have to try to be consistent. It becomes second nature.

There is a book for musicians called Effortless Mastery by Kenny Werner with similar thoughts. To become a good musician requires a lot of time, effort, practice. The master musician can make it seem effortless. When the musician is in the zone, like the athlete in the zone, it feels effortless.

Back to Douglas: learn to create a state of mind that is not affected by the market's behavior, and the struggle will cease to exist. When the internal struggle ends, everything becomes easy. The challenge is that losses are part of trading. Can the mind accept the losses, without feeling pain or regret or despair? Can a person experience those losses and enter the next trade without fear?

Knowledge is not enough. One trader that Douglas worked with was terrified of snakes. That trader understood that some snakes were relatively harmless, but the physical and emotional reaction was one of terror. For that person a lot of training, cognitive behavioral therapy is one form of training needed to overcome a deep rooted fear.

My comment: Many of us have deep thoughts, emotions that we don't fully understand. Suzy Orman asks you about your first memory about money. Her's was picking up a coin in a sand box and her mom telling her that it was dirty and to put it back. A person with that kind of first memory of money is likely to have a lot of emotional baggage attached to money.

Douglas uses the analogy of a computer program with one typo in the thousands of lines of code. That one typo might cause terrible problems in that program. Douglas compares that faulty program to a person's state of mind. It might be one click away, or a thousand clicks away. Of course, Douglas tended to work with traders that had some degree of success. If a person never had any success, why would they see 

Douglas and pay his hefty fee? So the analogy might be to top athletes, all with a high degree of skill, not top athletes vs. the players at the local gym.

Douglas mentions the movie Cool Hand Luke. For those not familiar with the movie, Luke is a prisoner on a chain gang. He escapes, then is recaptured and beaten severely. Luke escapes a second time. The warden and guards tell him not to try a third time, because they will kill him. Spoiler alert. Luke escapes a third time. To Douglas this is analogy for some traders, that the market punish, and eventually kill. Maybe I have to see the movie again, because the analogy doesn't click with me.
==

Chapters 5 and 6

People see what they want to see, or as Douglas puts it: People see what they've learned to see, and everything else is invisible until they learn how to counteract the energy that blocks their awareness of whatever is unlearned and waiting to be discovered.

Example about a kid seeing a dog for the first time. The first encounter will generate history. If the first dog is friendly, it is likely the kid will see the second dog as friendly. If the first dog is dangerous or angry, the kid will likely think the next dog will be similar. Now take this to trading, a trader is considering a certain trade. Does the recent history color his/her perception? What if the last three similar setups resulted in winners? What if losers? What if the last ten were winners? Or losers?

I go back to Douglas' earlier categorization of traders, with about 30% to 40% that tend to generate consistent losses. Ten losers in a row, may mean doing the opposite trade is a better path. I am huge fan of keeping a trade journal. There is a time to go back and look at what's working, what's not. However that time is not in the middle of a trade. Markets do change. Winning strategies in one kind of market often become losers after the change.

Every trader that Douglas has worked with had to train their brain to focus on the now. Like a baseball relief pitcher, a short memory, letting go of any pain, is vital to success.

Douglas gives his secrets to trading:

1 ) trade without fear, without over confidence

2 ) perceive what the market is offering from its perspective

3 ) stay completely focused on the "now moment of opportunity flow."

4 ) spontaneously enter the "zone"

Traders who have experienced being tapped into the collective consciousness of the market can anticipate a change of direction just as a bird in the middle of a flock or a fish in a middle of a school will turn at the price moment that all others turn. To get there, a person needs to focus entirely on the now moment, to tap the creative side of the brain (vs. the logical side). True inspiration, intuition can not be readily explained.

The best traders believe that anything can happen. To me the obvious corollary is that while anything can happen, the profits tend to be with the odds in your favor (vs. long odds against you). The bit about intuition, I categorize as gut. A few people have what I call "golden guts." They have remarkable market instincts and their gut feelings can lead to huge profits. I don't have this. I think I am average, and that my "gut" is more often emotion (greed or fear), and tends to lead to bad decisions. Not bad enough to be a contrary indicator, but bad enough that trading on my gut would likely lead to the poor house.

Back to Douglas: most people believe that a successful trader is a good market analyst. In his experience, this isn't close to true. In his travels, analysis and trading are separate, though analysis can contribute to trading success. To Douglas, way too much attention is paid to analysis, not enough inner work on your own psyche and biases.

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Chapter 7 and 8

Thinking in probabilities is the trader's edge. My comment: This will come naturally to experienced options traders. If markets are efficient, every trade has the same expected value (zero), but have different odds, different payouts.

Douglas uses the example of Las Vegas casinos. He goes on to say that an individual can't anticipate how other players will play their Blackjack hands. The casino has the edge, so won't attach any emotion on the outcome of any individual hand.

Douglas tells the story of a client who consistently made 12 to 18% per year for 30 years. However, the client had analysis that indicated he was leaving a lot of money on the table. Douglas goes through one futures trade, where the trade goes against his client. It doesn't reach the stop loss level, however, when the trade comes back, he exits for break even. The trade would have gone on to be a big winner. My comment is that if there is some rule in place to exit at break even in that instance, there is no problem. The problem is the client "felt bad" about the trade, and just wanted to get out at even. There was no plan or rule to exit at that point. Perhaps prior experience of a trade that moves against the client, then gets back to even, then blows through the stop level, influenced the exit.

I think back to the analogy of the kid that meets an angry aggressive dog as his first dog. That experience imprints and fear becomes built in. Recent trading losses can influence us, but the deep dark history is often where the bigger demons are.

Everyone experiences some degree of anger, resentment, despair, regret, disappointment, or betrayal. A trader that feels great when the market moves in his/her favor, or feels terrible when it moves against them, is human. However, that person often loses objectivity, and acts like the client in the story, allowing emotion to influence the decision making.

An experienced trader watching a market he has no position in, no possibility of putting on a position, tends to be objective. My comment: this is one reason many traders take a break after a bad stretch, to clear their mind, to become objective again.

Douglas: when I put on a trade, all I expect is that something will happen. Ideally, losses don't do any emotional damage, because there is no expectation. If and when the market tells them their edges aren't working, they accept what the market is offering them. My comment, the fine line is objectivity, vs. emotion. It is the rare person that can trade consistently on emotion. More rare might be a person that never gives into to emotion.

Back to Douglas: putting on a winning trade or even a series of winning trades requires no skill. Creating consistent results and being able to keep what we've created does require skill. Making money consistently is a by-product of acquiring and mastering certain mental skills. The degree to which you understand this is the same degree to which you will stop focusing on the money and focus instead on how your can use your trading as a tool to master these skills.

Consistency is the results of a carefree, objective state of mind, where we are making ourselves available to perceive and act upon whatever hte market is offering us (from its perspective) in any given "now moment."

Carefree means confident, but not euphoric. You don't feel any fear, hesitation or compulsion to do anything because you've effectively eliminated the potential to define and interpret market information as threatening. To remove the sense of threat, you have to accept the risk completely. When you have accepted the risk, you will be at peace with any outcome.

Edge is an indication of a higher probability of one thing happening over another. Trading isn't about hoping, wondering or gathering evidence. Adding random variables makes it difficult, if not impossible to determine what works and what doesn't. To the degree that you lack confidence, you will experience fear.

Every moment in the market is unique.
==

Chapter 9 and 10

Story about a TV show doing a stunt. They dress up a man in a suit, hang a big sign that says "free money," on him and have him try to give out cash in a high end business district. Virtually no one wants his money. Note, this stunt was back in 1987. My comment is that I am city kid, so the scam radar goes way up when I see something like this. In this case it was a stunt, but a lot of offers of "free money" are scams. The other thought is about expectations and beliefs. If a person believes that money has to come hard, that tends to be self-fulfilling.

Beliefs take on a life of their own. My thought is about confirmation bias. How many people will only seek out information and sources that confirm their existing beliefs. These days it is easier and easier to slide into these kind of protective bubbles. Harders and harder to find objective groups of people. Even facts can no longer be agreed upon. Almost everyone believes they are objective. In the markets, results speak volumes.

Douglas believed in both the tooth fairy and Santa Claus as a child. (I believed in neither.) Beliefs can be active or inactive. Active beliefs are energized. Douglas believes that creativity is boundless, limitless. Beliefs keep on working in the background, even if they are not on a conscious level.

Everyone has a sense of self-valuation. It is a core belief. There can be huge gaps between how much money we desire, how much we perceive is available, how much we think we deserve. The dynamics can be complex and go beyond the scope of any book. My stray thought is Warren Buffett visualized money as being like a snowball rolling down a mountain. Find a high mountain with a lot of snow, start the ball rolling early and you will accumulate a large pile, and that's what he did. Buffett bought real estate before graduating high school and was earning more than most of his teachers by the time he graduated, all from businesses he started when he was a kid (paper routes, golf balls from the lake, pinball machine repair and leasing).

For young people that want to be the next Buffett, perhaps think about starting a simple business, instead of trying to get that first little pile by trading. Buffett eventually hired other kids to deliver papers, eventually outsourced the retrieval of golf balls from the lake and found an unfilled niche with the pinball machines. I'm sure others have seen the many posts from people with next to no money asking for advice. Best advice might be to be like Buffett and make that first pile of money with a job or a business, before thinking about equity or option investing.

Douglas worked with many traders that would acheive a certain level of success, but their core beliefs limited them. They had an invisible ceiling in their mind, and when they reached a certain dollar level or certain annual percentage gain, they would start losing. A trader that demonstrates this kind of consistent pattern may have to do a lot of psychological work to alter their belief system to lift or remove the ceiling.

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Chapter 11 (last chapter)

Douglas writes about becoming intuitive. This might seem opposite of discipline (his other book is The Disciplined Trader). He also talks about mechanical sets of rules. Most people have to learn how to execute a mechanical system before they can use an intelligent intuitive system. The irony is that many beginners trade mostly on their intuition, their gut. 

However, with little or no training, the beginners tend to bumble and stumble around. There is that fine line where skill, training, and intuition all can line up--that's the zone that is mentioned in the title. Musicians can be in the zone, athletes too, and traders. The mind trick is to go through all that training, and still be able to go back to the "beginners mind" that Zen philosophers talk about.

The dog analogy used in many chapters is a good one (kid meets their first dog, it is angry and aggressive, so it imprints on the young person that all dogs are dangerous). In this chapter Douglas introduces a second analogy, about walking across a bridge without any rails on the sides. If the bridge is wide, say 20 feet (6 meters) wide, a person may feel a bit of discomfort. If the bridge is say 3 feet wide, most people are going to be nervous if the bridge is of any length. Narrow it down to one foot or less and most will not want to cross. A few adrenaline junky types may want the thrill, but average folks are going to turn away. In trading, the risk can be like the width of the bridge. Those doing YOLO (you only live once, bet the farm) trades have very little margin for error. Those that continuous do them are almost sure to fall off before they reach their goal.

It can be difficult to observe yourself. Douglas thinks this is a critical step in trader development.

Douglas writes about his road to becoming a runner. Being relatively young and fit, he thought it would be easy, even though he had never run before. First time out, he ran maybe 50 yards, before running out of steam. This was so discouraging that he didn't try again for weeks. Eventually, the weather turned nicer and he gave it another go. It wasn't much better. Douglas decided that setting a goal of running five miles by the end of summer would be helpful to him. He started keeping a running diary of distance, time, and how he felt. There were a lot of excuses, distractions.

After several weeks of running, he was able to run one mile, and felt elated. Douglas found his happiness to be troubling, so he decided to add what he calls his "five-mile rule." Each time he went out running, he would go at least one yard further than the last time. He could do more than that if he felt like it, but even if he felt terrible, or the weather wasn't so good, he decide that each time out he would go a bit further. With this rule in place, he reached his goal of a five mile run, on schedule.

My thought is that running five miles is a fair enough goal for a relatively young, relatively fit person with no major physical limitations. Douglas writes about doing 20 trades as a decent sample size, though for some people a lot more than 20 trades are going to be needed to feel confident.

Back to Douglas, beliefs can be changed. The goal is to create the belief that "I am a consistent winner." Like the first dog story, if a person has imprinted early with stories of discouragement or loss, the road can be long and hard. My other thought that this book is 17 years old. Thousands of traders have read and processed the material. Think about golfers in a tournament. If only a few golfers have worked on sport psychology to try and improve their results, that small group might have an advantage (assuming the program is worthwhile). After all these years, a new trader just going through the cycle, will only get to even with the other more experienced traders that have already been through training. That said, if a person is new, any training is likely to have a positive effect.

==

Five fundamental truths:

1. Anything can happen

2. You don't need to know what is going to happen next in order to make money.

3. There is a random distribution between wins and losses for any given set of variables that define an edge.

4. An edge is nothing more than an indication of a higher probability of one thing happening over another.

5. Every moment in the market is unique

==

There are some comments on Reddit:

https://www.reddit.com/r/options/comments/616o4t/discussion_trading_in_the_zone_by_mark_douglas/

Dreams and Nightmares TSLA

Its been a dream run for TSLA call buyers, and a nightmare for call sellers. I got caught and closed one leg for a monster 2500% loss. Call buyers dream of these kind of big moves.

Mon Telsa booms higher causing much discomfort. The market recovers from a modest sell off. I rebalance closer to delta neutral in TSLA and BRKB, but it stinks.
 

Sell TSLA Apr 265 p 110
Sell BRKB May 170 c 168
 

Sell TSLA May 235 p 182
Sell TLSA AprW2 275 p 73
 

Tue Tesla continues to run and I cover one leg for a monster loss
Cover TSLA Apr 300 C 998 for a 2500% loss
 

Sell TSLA AprW1 280 p 60
Sell VRX Jul 17.5 c 15
 

Wed Sell VRX Apr 11 c 11
Sell SPY Apr 228 p 19
 

Sell TSLA Apr 335 c 32 and 30
I sold two of these calls because there a lag in my connection and thought the first order hadn't gone in.
 

Cover TSLA Apr 220 p 02 for a 98% profit

Weekly: SPY finds support at the 50 day

SPY holds the 50 day moving average. Anecdotally, I observe fewer new investors believing in technical analysis. Also in the news this week, is BlackRock firing a bunch of portfolio managers and replacing with robots. It is a strange time we live in. It was a quiet week for me. I did a few adjustment trades.

Here are the trades (p = puts, c = calls, cover means buy to close, number at the end is price per contract.

Mon Scary morning sell off, then the buy-the-dip crowd steps in to bring it back to near even.

Sell TSLA Apr 230 p 95
Sell MAR May 105 c 20

Tue Sell TLSA Apr 240 p 92

Sell IWM May 119 p 32

Sell SPY May 218 p 63

Wed BRKB May 175 c 93

Thu Sell IWM Apr 127 p 20

Weekly: first hard down day of the year

The stock market went over 100 days without a 1% decline, before Tuesday's hard down day. Like the first rain of the year in dry climates, there was a lot of slipping and sliding. I came in to the week with a lot of dry powder from the recent option expiration. I took some lumps, but my overall losses were modest.

Here are the trades (p = puts, c = calls, sell means sell-to-open, number at the end of the line is price per contract).

Mon Sell SPG strangle: 

Sell SPG May 140 p 38
Sell SPG May 190 c 25
 

Sell WYNN Apr 97.5 p 32
Sell JPM May 77.5 p 22
 

Sell TIF May 80 p 28
 

Sell IWM strangle: 

Sell IWM May 123 p 53
Sell IWM May 150 c 19
 

Tue Sell NTES strangle: 

Sell NTES Apr 240 p 51
Sell NTES Apr 350 c 21
 

Sell DIA Apr 214 c 16
Sell IWM Apr 144 c 14
 

Sell SPY Apr 243 c 16
Sell BA Apr 190 c 16
 

Sell AAPL backratio: 

Buy AAPL May 130 p 132
Sell 2x AAPL May 120 p 40 each
 

Sell GS Apr 262.5 c 31
Sell JPM May 97.5 c 22
 

Cover BRKB Apr 165 p 111 for a 20% gain
 

Wed Sell AAPL May 125 p 64
Sell MAR May 80 p 45
Sell TLSA Apr 300 c 42
 

Thu Sell SPY May 214 p 67
 

Sell NVDA strangle: 

Sell NVDA Apr 90 p 20
Sell NVDA Apr 130 c 17
 

Sell TIF May 82.5 p 31
Sell DIA May 183 p 38
 

Fri Sell DIA 215 c 28
Sell SPY May 245 c 34
Sell IWM 145 c 34

Monthly 39-6, Grade C+ Signs of a Market Top?

First the recap, I count 39 winners 6 losers for the March option cycle. Grade is C+. The steam roller rally caused losses on some sold calls. I also took a loss on some COST puts and some legs of multi-legged strategies. Overall, I felt frustrated and out of synch for most of the month.

I am up about 4.8% for calendar 2017. As usual, that's good news and bad news. Good news is a decent gain. Bad news is that I am well behind the 6.0% for SPY buy and hold investors. Here are a few other etfs (dividends are not included, SPY already paid about a 0.5% div):

EEM +12.8% Emerging markets equity

SLV +9.0% silver

GLD +6.7% gold

SPY +6.0% U.S. large cap

IWM +2.7% U.S. small cap

TLT -0.4% U.S. 20 year Treasuries

Again, my trading account +4.8%. With the rally, there are lot of posts and questions about market tops. It's been a while since I posted a full list so will do it again:

Signs of a market top:

1 ) Inverted yield curve, when short term rates exceed long term rates.

2 ) Transports lead the first leg lower. IYT is a good proxy for the DJ Transport index.

3 ) Confirmation will come with the technical breakdown on major indices. SPY, IWM, DIA break their 50 day and 200 day moving averages.

4 ) Excessive optimism. It isn't scientific, but the sentiment at the local "coffee shop" or similar arena can be extremely powerful. When novices start giving advice, when novices start bragging about their big profits, that's a time to head for the hills. Not sure fire, but still something to look for.

4a) Look a bull on the cover of Barrons or Fortune or similar publications. The sign of the bull is often the sign of the top.

4b) Look for projections for huge future gains from talking heads on TV, and lead articles on financial magazines and websites.

Of course nothing is 100%. Corrections can happen at any time. However, major tops tend to have most if not all of the above.

Weekly: Long VRX

Another quiet week. I initiate new longs in Valeant Pharma VRX. Bill Ackman dumped the last of his shares. News like that can mark an intermediate or long term low. As always nothing is 100% and I sold out of the money puts.

Here are the trades (p = puts, c = calls, cover means buy to close, number at the end is price per contract.

Mon Cover SPY Mar 215 p 02 for a 96% gain

Sell BA Apr 165 p 73

Roll COST down and out: 

Cover COST Mar 165 p 122 for a 400% loss

Sell COST Apr 155 p 57

Tue Sell VRX Apr 7.5 p 14

Sell TSLA strangle: 

Sell TSLA Apr 210 p 82

Sell TSLA Apr 310 c 44

Roll BRKB up and out: 

Cover BRKB Mar 165 c 990 for a 340% loss on this leg

Sell BRKB Apr 170 c 666

Wed Sell COST Apr 155 p 39

Sell VRX Jul 7.5 p 50

Thu Roll TSLA: Cover Mar 220 p 01 for a 98% profit

Sell TLSA Apr 220 p 82

Fri Sell BRKB Apr 180 c 80

Weekly: Waiting for the Fed

It is a quiet week for me. Many of the new trades involve Costco. Fed may raise rates on Wednesday. Oldtimers will remember "Three steps and a stumble," made popular by Marty Zweig and others. Under this system, the third rate hike was a sell signal. 

Personally, I am still looking for the transports to turn down first, and also an inverted yield curve. Though market action tends to be the main thing. If and when the 50 day and 200 day moving averages are broken to the downside, I will tend to be much more defensive.

Here are the trades: (p = puts, c = calls, sell means sell-to-open, number at the end is price per contract).

Mon Sell COST Mar 172.5 c 28

Wed Sell COST Apr 180 c 21

Sell GS strangle: Sell GS Apr 220 p 78

Sell GS Apr 295 c 18

Thu Sell COST Mar 170 c 22

Sell XLE Mar 72 c 08

Fri Sell COST Apr 175 c 50

Weekly: Was that the top?

Will the big rally day mark an intermediate top? My guess is nay, no top yet. Transports are still confirming the highs. Financials, semiconductors are still leading groups. Most of the major averages are moving together to new highs. Other signs of a market top are an inverted yield curve, bullish sentiment infecting common people. 

 

Today's anecdote is from the local coffee shop about someone saying the market has to back down, because it has gone up too far too fast. This isn't the chatter at major tops. At a major top, people are bragging about their huge profits and looking forward to making a lot more money in the next leg up. Now, there is a hint of that, but not the exuberance, the naive excitement that is often seen at tops, not yet.

The stock market was up this week, my trading account down a bit. So it was a frustrating week for me. I covered sold calls in BA BRKB DIA for huge losses. It stinks, but it is what I do, I take the loss when my mental stop levels are violated. There is always the risk of a whipsaw, the market reversing immediately after you cover. Rule #1 is to live to trade another day.

Here are the trades for my frustrating market week: (p = puts, c = calls, sell means sell-to-open, cover means buy-to-close, number at end is price per contract):

Mon Sell BRKB Apr 165 p 144

Sell DIA Apr 194 p 69

Sell BA Mar 170 p 42

Sell TSLA strangle: 

Sell TSLA Mar 210 p 55

Sell TSLA Mar 287.5 c 36

Tue Cover BA Mar 180 c 345 for a 1200% loss vs. premium collect. Crunch. I gave it as much rope as I was willing to give it.

Wed I am blown out of the water with the gap up open and cover some sold calls for huge percentage losses.

Cover DIA Mar 208 c 305 for a 1800% loss
Cover BRKB Mar 165 c 1018 for a 240% loss

Sell TIF Mar 82.5 p 50

Sell COST Apr 160 p 63

Sell RCL Apr 85 p 42

Sell TLSA Mar 220 p 45

Fri Costco lower on earnings news.

Sell COST 185 c 28

Sell COST Mar 180 c 10

Sell DIA Mar 214 c 14

Sell BA Apr 210 c 11

Weekly: Elephants on the move

The rally rolls on. The DJIA is now at 11 record high closes in a row. Something that hasn't happened since 1987. 1987 had the huge October crash. There was a euphoric run up before the crash, and the recovery was also relatively quick. It feels like a difficult market to trade. However, the elephants, the big money is buying virtually every day. One reason is that so many were under invested before the election. More than a few sold at resistance levels, thinking a pullback was a sure thing. 

 

My take is that the public and talking heads remain skeptical, even though the newsletter marketvane is at nose bleed bullish levels. The AAII sentiment, which is mostly long term oriented, experienced, individual investors is right at the long term average of 38.5% bullish.

This week, I got back into NVDA with a short strangle, and initiated a position in NTES (rather badly I might add). Here are the trades (sell means sell-to-open, p = puts, c = calls, number at the end of line is price per contract.

Tue Sell BRKB Mar31 165 p 133

Sell IWM Apr 125 p 56

Sell DIA Apr 190 p 58

Sell BA Apr 155 p 48

Thu Sell NVDA strangle: 

Sell NVDA Mar 80 p 15

Sell NVDA Mar 122 c 19

Sell SPY Mar31 220 p 45

Sell NTES Mar 330 c 55

Sell NTES Mar 255 p 60

Sell IWM Apr 151 c 15

Sell TIF strangle: 

Sell TIF Apr 75 p 42

Sell TIF Apr 105 c 32

Sell DIA Mar 200 p 37

Fri Sell BA Mar 165 p 28

Sell NTES Mar 262.5 p 68

Monthly: Half a loaf and TINA, 59-4 Grade B

The bull market roars ahead. SPY is up 5.2% for 2017. My trading account is up 3.7%, so I am lagging. IWM is up 3.2% so I am in the game. Overall, it feels like I left money on the table. I usually lag if there is a big upside move, so it is not unexpected.

Here are some etfs year to date, best to worst:

SLV +12.9% silver

EEM +9.7% Emerging market stocks

GLD +7.4% gold

SPY +5.2% U.S. large cap (SP500)

IWM +3.2 U.S. small cap (Russell 2000)

TLT +1.0 U.S. 20 year treasury

My trading account +3.7%. This remains the most hated bull market that I can remember. A lot of people are still nervous, many have sold or are still on the sidelines. This is not the sentiment at major market tops. A correction of 5% can happen at any time, but a bigger decline remains extremely unlikely.

Why is the market up? A lot of people shorted the market. There is also TINA, there is no alternative. With bonds underperforming, CDs still paying relatively low rates. People with money have to put it some where. A bit has been flowing in precious metals with gold, and silver among the best performers for calendar 2017.

Weekly: Short Covering

As the rally accelerates I scramble and cover a couple of short calls on COST and DIA. It was a frustrating week, even though I ended up slightly in the green. My initial position in NVDA was spot on, but I exited my long leg on earnings day. 

The feeling is like a baseball hitter what he thinks is a home run and trots to first base, only to see the ball careen off the wall, and be stuck on first base. As is almost the case, I am lagging behind during the sharp rally.

Here are the trades (p = puts, c = calls, sell means sell-to-open, cover means buy-to-close, number at the end is price per contract.

Mon Cover (buy-to-close) BRKB Feb 165 c 108 for a 27% profit on this leg

Roll BRKB Feb 160 c to Mar 165 c -255 debit

Cover (buy-to-close) BRKB Feb 160 c 555 -125% loss on this leg

Sell BRKB Mar 165 c 300

Sell SPY Mar3rd 224 p 26

Sell DIA Mar 197 p 73

Sell SPY Apr 212 p 70

Wed Cover DIA Feb 206 c 56 for a 200% loss

Cover SPY Feb 205 p 01 for 98% gain

Sell COST Mar 165 p 75

Sell BRKB Jun 150 p 107

Thu Cover COST Feb 175 c 97 for a 260% loss on this leg

Cover SPY Feb 216 p 01 for a 96% gain

Sell NTES Mar 250 p 76 earnings

Weekly: More new highs

Market continues to bull ahead. These posts are sounding familiar. I am positioned a bit too conservatively. I add some long delta as the rally rolls on. Here are the trades (sell means sell-to-open, p = puts, c = calls, number at end of line is price per contract)

Wed Sell NVDA backratio for nothing:

Buy NVDA Feb 108 p 204

Sell 2x NVDA Feb 103 p 104 each

Sell PNRA strangle: Sell PNRA Mar 215 p 89

Sell PNRA Mar 255 c 32

Thu Bull is leaving without me, so I add long delta:

Sell IWM Mar 124 p 39

Sell SPY Mar 215 p 45

Sell DIA Mar 190 p 47

Fri Cover NVDA Feb 108 p 32 for a 80% loss on this leg

I am thinking the Feb 103 puts are safe

 

Sell BRKB Jun 150 p 152

Weekly: back to the highs

Stock market is back to the highs. That minor dip might all we get. February averages maybe -1.6% and that was about the size of the intraday dip. I remain cautiously bullish, a bit under invested given my bullish mood.

Here are the trades (p = puts, c = calls, sell means sell-to-open, number at the end is price per contract)

Mon Sell IBM Feb 185 c 12

Sell IWM Mar 115 p 25

Sell BA Mar 180 c 28

Sell AVGO Feb 220 c 30

Sell DIA strangle: 

Sell DIA Mar 180 p 40

Sell DIA Mar 208 c 18

Tue Sell GD Feb 170 p 47

Sell CAT Feb 86 p 14

Sell AAPL Feb 110 p 30

Thu Sell COST Mar 150 p 43

Sell WYNN Mar 115 c 27

Sell MSFT Mar 67.5 c 14

Fri Sell V Mar 77.5 p

Weekly: Plowing ahead

The bull market plows ahead. Happy Year of the Rooster for those that follow that lunar calendar. The lunar calendar is where my screen name comes from (year of the Tiger).

Anyway, Dow 20,000 came in with modest celebration. I went to a local IBD meetup. The market is in good relatively shape. So I added more longs. With option expiration, I came into the week with a lot of buying power.

Here are the trades, p = puts, c = calls, sell means sell-to-open, the number at the end is the price per contract.

Mon Sell QCOM strangle: 

Sell QCOM Feb 50 p 51

Sell QCOM Feb 63 c 23

Tue Sell BRKB Mar 155 p 138

Sell BABA Feb 92 p 25

Sell NFLX Feb 125 p 33

Sell XLE strangle: 

Sell XLE Mar 68 p 33

Sell XLE Mar 80 c 20

Sell UNH Mar 140 p 59

Sell IWM Feb 125 p 22

Sell SPY Feb 216 p 30

Thu Sell IBM Feb 165 p 37

Sell RCL Feb 85 p 25

Sell RCL Mar 82.5 p 52

Sell BRKB Feb 160 p 67

Sell BRKB Mar 160 p 1.7

Sell QCOM Feb 60 c 14

Sell AVGO Feb 187.5 p 74

Fri Sell WYNN Mar 85 p 49

Sell BA Mar 150 p 60

Sell MSFT Mar 60 p 19

So far so good, 40-1 grade A-

I count 40 winners, 1 loser for the January option cycle, for a grade of A-. This results in the small but useful gain of +1.7%. Minor negatives were some over trading in BRKB and being a bit too cautious.

Precious metals and emerging markets rebound sharply to start the year, after ending 2016 near their lows. A few etfs for 2017 year to date, best to worst:

SLV +7.1% silver

GLD +5.0% gold

EEM +4.0% emerging market stocks

SPY +1.4% S&P 500 U.S. large cap

TLT +0.7% U.S. 20 year treasuries

IWM -0.3% Russell 2000 U.S. small cap

Again, my account up 1.7%. So far so good, for three weeks. I still see a lot of online negativity and chatter about a steep stock market decline. This makes the odds of that happening exceedingly small. I am still looking at banks, defense, oil, as some secular bullish themes. The overall optimism about the economy may extend further into airlines and hotels.

Weekly: regrets?

At the end of the week, I regret some of my BRKB trades. BRKB closed at 160.22 so both side of the 160 strangle would have come in. Instead, I take a loss on one leg, and roll the other leg. There is the illusion of perfection,. that a trader can or should know future prices. As many expected the presidential inauguration did not move markets.

Here are the trades: Cover means buy-to-close, sell means sell to open, p = puts, c = call. The number at the end is the price per contract.

 

Tue Cover BRKB Jan 160 p 112 for a 200% loss

Sell UNH Feb 170 c 47

Thu Sell TSLA strangle: Sell TSLA JanW5 222.5 p 34

Sell TSLA JanW5 262.5 c 34

Roll BRKB: Cover BRKB Jan 160 c 55

Sell BRKB Feb 160 c 246

Fri Sell SWKS Feb 77.5 p 40

Sell MRK Feb 57.5 p 20

Weekly: Managing a trade vs. Mangling

Most have heard of the term "managing a trade." There are any number of ways to do this, rolling, getting stopped out, doubling down. I tend to favor rebalancing back closer to delta neutral by selling more layers of options and committing more capital. Mangling is what happens when managing goes haywire. My misadventures in BRKB this week were close to the line. 

 

Here are the trades: p = puts, c = calls, number at the end of the line is price per contract. Cover means buy-to-close.

Mon Sell UNH 172.5 23

Mildly bearish play on Facebook earnings. The debit backratio max profit occurs if FB declines to 110 (currently 124.4) at Feb expiration. If it is up or steady, it loses. A decline below 100 also loses. I sell a layer of closer in puts to make it delta neutral for now. Earnings are out after the JanW4 puts expire.

Sell FB backratio 131 debit: Buy FB Feb 120 p 299

Sell 2x FB Feb 110 p 84

Sell FB JanW4 115 p 30

Sell FB Jan 118 p 19

Tue Sell BRKB Feb 150 p 48

Sell BRKB Feb 165 c 155

Wed Sell BRKB Feb 155 p 92

Thu Sell SPY Feb 236 c 17

Sell DIA Feb 206 c 21

Sell BRKB Mar 165 c 225

Sell BRKB Jan 157.5 p 31

Sell IWM Feb 144 c 14

Sell SPY backratio: 

Mar 199/205 Buy SPY Mar 205 p 92

Sell 2x SPY Mar 199 p 58

Fri I took the "head fake" and sold on the steep decline on Thursday. I rebalance to limit the damage.

Sell BRKB Jan 160 p 39

Sell FB Jan 120 p 25

Cover (buy-to-close) SPY Jan 211.5 p 03 for a 90% profit

Sell IWM Feb 122 p 30

Weekly: Trump rally rolls on

The rally rolls on, with a few fits and starts. Overall, I find the strength to be remarkable. I expect more profit taking with some folks booking their gains for 2017. I did a few more trades, but remain cautiously bullish. I sold some out of the money calls this week, so don't believe in a runaway bull scenario. Cautious bull yes, rocket ship bull no.

Sell means sell-to-open, number at end of line is price per contract.

Tue Sell XLE Feb 67 p 22

Sell GM Feb 30 p 23

Sell NVDA Jan 125 c 34

Sell NVDA Jan 120 c 37

Wed Sell Feb SPG 150 p 44

Sell RTN Feb 125 p 33

Thu Sell SPY Feb 238 c 17

Sell TSLA Jan 192.5 p 31

Sell XLE Feb 83 c 15

Fri Sell GM Feb 42 c 13

Sell BA Feb 180 c 20

Sell COST strangle: 

Sell COST Feb 145 p 39

Sell COST Feb 175 c 30

Sell AMGN Jan 145 p 23

Sell SPY FebW1 216 p 33

Sell IWM Feb 120 p 32

Sell NVDA JanW4 87.5 p 36