We started testing this Option Trading Strategy on 6/1/2006. On Oct 3rd, we came close to breaking $12.00. Unfortunantly the market moved against us and even suffered from a losing trade in Nov. Although we are not completely out of the water yet for the month of Nov, we do have 19 points of room with 5 trading days to go. This gives us a secure winning percentage of about 90%.
The NAV breaking $12.00 also means our YTD return finally break the 20% barrier. We are now up 20.45% since Jun 1st. If we continue at this pace, our annual reaturn by next Jun will be 47.24%. Not too shabby.
The next stage is to generate ~20% return for my mom and my girlfriend’s portion of the fund. Once we successfully do that, we will open up the fund and help more family and friend invest and build wealth.
Mom’s $3000 @ 11.71 = 256.12 Shares
Girlfriend’s $2000 @11.71 = 170.74 Shares
New Account Total: $32131.68
New Total Shares Count: 2728.68
Our delta is at -2.38. That means we are near our optimal point (0 delta). The risk EV of the Nov position has shrunk to $161.11. The Dec risk EV is at $190.41 for a total of $353.52. We are only using up a little over half of our allowed risk, $669.16. That means we are at a very safe point and will most likely have winning positions for the rest of Nov and Dec.
The down side to having very safe positions is that we will not be maximizing our reward. But after suffering from our first loss of the season last month, it is probably best to slow things down and refocus on minimizing risk before we start trying to maximize profits again.
The last two down days helped our position. Our portfolio’s EV is now positive for the month of Nov. The risk EV is below the max allowed by the strategy. However, it is not below enough for us to establish a position for Dec without going over the allowed risk threshold.
From a technical point of view, it is also not a good time to establish a new position. The risk and reward ratio is poor because the 3 month up move has removed much of the volatility in the market. Additionally, the high slope of the upwards trend would require us to establish a stike price that is far out of the money, resulting in very little reward on the upside. On the down side, there is very little support as many of the short sellers have been forced out of the market to cover their positions.
The best case scenario for Nov will not happen as it took all but one trading day for the market to penetrate 1375. The closing trade was buying the Nov 1375 at 16.2 and selling the Nov 1400 at 4.6.
Both of the Oct options expired when the market opened this morning for a total profit of $1090. This marks the fourth straight month of profit and our portfolio’s winning percentage of 100% stays in tact. Our positions are now 7 for 7. This brings our total realized gain to $2900. Looking forward:
There are 3 likely outcomes for our Nov position.
- The market will correct from here (1366) and will realize $1118 of profit. Statistically and technically, however, this is not a likely outcome.
- The market moves above 1375 but does not pass 1400. In this case the Sep 11th trade would cost us about -$1000 while the Sep 21st and 25th trade would gain $772 for a net loss about $230.
- In the worst case scenario, the market would past 1400 by Nov 17. In this case all three Nov positions would suffer a loss in the $4000 - $4500 range.
The current EV of the Nov position is -472.35. Yikes!
The delta is -76.74.
The combination of high risk in our portfolio and low volatility will likely prevent us from establishing a Dec position until one or both factors improve.
NAV: $11.78
YTD%: 17.77%
Annualized: 47.33%
The expiration date for all listed stock options in the U.S. is the third Friday of the expiration month.
So as long as the S&P does not move up 8+ points tomorrow, our Oct options will expire worthless and the portfolio’s realized gains will increase by $1090.
Looking forward, our Nov position is still very much at risk. We will take a minor loss if the S&P index advances beyond 1375; a major loss if it advances beyond 1400.
Next week we will also decide if we will establish a Dec position. Option premiums are very low right now because volatility is low. volatility is low because the market, for the most part, has been moving in one direction, up. So it may be difficult to find positions that offer enough reward to justify the risk.
Three straight weeks of impressive gains have left us with very little breathing room (9 points with one week to go before the Oct options expire). Additionally the Nov 1375 call is on life support. Only a market correction next week can save it from becoming a losing position. Unfortunantly with the strong up trend, this is not likely to happen.
