September Monthly Results -11.4% / -$26,250.19

OUCH!

We finished August pleased with our results and looking forward to learning some new techniques. Knowing we were heading off to the “land of new things” we reduced our cash holdings from $400,000 to about $230,000.

At the beginning of September I attended a High Probability Class where I met with a lot of other option investors and learned several high probility trades (better than 60% probs of profit) and a more passive method of management whereby you put on more, smaller trades and limit the loss of each trade to 3 to 5% of your total portfolio. You don’t adjust the trade so much as you adjust your entire portfolio based on greeks. Ok, so good so far.

The class was good, the instructors were great and I came home all charged up. While there I put on a broken wing butterfly on the Diamonds (DIA). Other than one severe reversal most of the month was going along fine and I was exiting my bullish trades as they reached maximum profit. Along comes the fed cut annoucement and I’m caught short and overally bearish. I compound my mistake by screwing up a day trade with the futures around the announcement and not only losing some money but missing the potential gains on the trade as well.

In the end this month goes down as our fourth worst month in three years.

So what did we learn:

1. We didn’t correctly calculate the total position exposure on the broken wing butterfly. We used the old portfolio balance of 400K instead of the new balance of 230K. Therefore we created a much larger single point of risk per single trade than we intended.
2. We should have kept our trading more heavily weighted in the old and successful style of trading instead of shifting so much to the new style.
3. We have a history of doing well, learning a new technique, and screwing up the month. We’ve done it again here. Maybe we should open up a new account just for trading new techniques?
4. As we exited each winning bullish trade we were inadvertantly creating a overbearish portfolio. We should check once a week (Monday) and before each large economic announcement (:cough:cough: Fed Cut) to see if our delta position, in our portfolio, matches our sentiment and instincts.
5. We’re really glad we reduced our cash stake, otherwise our loses could have been much larger.
6. We had the right idea around the futures trade but screwed up the execution. We will do better next time. :)

In addition to these changes, We’ve been spending a fair amount of time trading futures on the E-mini. We will continue to hone these skills and slowly bring more capital to the market.

Onward and upward… Everyday get a little smarter, a little faster, a little better.

Mojo

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Pennant on AIG

One of the advantages we have in our trading is our use of technical analysis and price patterns.  Take a look at this opening chart from AIG today:

Can you see the price pattern?  Its a pennant pattern.  Here’s the same chart with the pennant drawn in:

This is similar to the bull flag pattern in that there is a coiling pattern.  So how do you trade it?  Wait for a close above 68 on high volume.

Mojo

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CLOSE: BLPS on CSCO -31.8%

On Aug. 8th we opened a bull put spread on CSCO. CSCO had recently reported great earnings and looked to be trending up. We entered this BLPS for a credit of +.30 on a risk of 2.20.

On Aug. 16th CSCO cratered and our stop loss took us out at about the low of the day only to see the stock reverse and head up again. It cost us -1.00 to exit the short side of our spread trade so we ended up long the Sept 27.50 puts for a cost basis of -.70 and 5 weeks to expiration. So we held our puts taking a shot recovering some of our loss with a downturn in CSCO. Well the downturn never materialized. Here’s the chart:

So, you can see we ended up lossing the entire -.70 debit cost basis on the trade. This generated a loss of -31.8% in 6 weeks.

What could we have done differently?

1. Looking back at our records, we see that we violated one of our trading rules by putting on this trade prior to 2pm. Had we waited until then, we would have seen that the afternoon candle was looking pretty bearish and not taken the trade.
2. We could have sold our long Sept 27.50 puts for a small credit (say +.20) once it became clear that a large downturn wasn’t likely and time decay was eating into our position. This would have reduced our loss from -31.8% to -22.7%.
3. We should have waited for a retracement to place the BLPS. This was mentioned to us by a friend (thanks Tom!) but we ignored his advice. DOH!

This is all part of the process. We are getting paid to learn and become better traders everyday. The best way to do this is to take apart each trade and figure out what went right and what went wrong.

Any other thoughts out there? What else did we miss? (Hint: Look at the chart on the day our stop loss fired).

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CLOSE: BWB on DIA -88.8%

On August 24th I was in a High Probability class in Chicago and learned a new technique called the broken-wing-butterfly (BWB).   The fine folks at ThinkorSwim and Investools were teaching.  Basically, we were putting on a high probability of success trade (about 60%+) with a decent reward to risk. 

I put on a smallish experimental trade to try out this new spread.  You can see the original entry here.

At the time we received a credit of +.45 on a max risk of $3.55 (the $4 spread - the initial credit) with a potential maximum reward of +4.45.  In order to acheive max gain DIA would have to close at 131 and max loss would be in DIA closed above 135.45.  Well, after the 50 basis pt cut in the Fed rate the market took off and we incurred the max loss.  Here’s the chart:

You can see where we entered, the rate cut, and then expiration.  So we ended up taking -88.8% loss in this trade.

If you’ve been watching us trade for a while you might find it surprising that we waited to take a full loss instead of moving to mitigate.  Here’s why… When this technique was explained to us they said that their path of management was to put on small trades where the max loss of the trade wouldn’t effect your portfolio by more than 1 - 2%, use any large downturns to close down the embedded bear call spread and let the trade expire.  So that’s what we did.

Now, just because we were taught this doesn’t mean that the instructors or their companies are responsible for my losses.  Just like everyone, we’re ultimately responsible for all trades and took this trade knowing it was new and accepting the potential complete loss.  We take 100% blame for our losses and 100% credit for our gains.

On a personal note, I like the idea of putting on trades and letting them be, by managing my entire portfolio versus single trades.  I’m just not sure that I mentally can take large percentage losses even for small percentages of my portfolio. 

Anyway… onwards and upwards.  :)

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ADJUST: CROX roll Sept 55 put to Oct 55 put

With the market turning down a bit today and the value of our puts going up, we are going to roll our short Sept 55 put (from our calendar) into a new short Oct 55 put.  You do this by BPC (buying put to close) the Sept 55 and SPO (selling put to open) the Oct 55 for a total debit of +2.70.  We are still long the Dec 55 from our original entry with a cost basis of -5.60.  Adding a +2.70 credit to this gives you a new cost basis of -2.90 and you can still have 2 more months to sell.

Very nice!  We also like the continued lack of movement higher when the rest of market took off like a shot.  This relative weakness is a good indicator.

Mojo

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OPEN: CROX Put Calendar Spread

OK, everyone loves those dorky rubber shoes that Crocs makes right?  Crocs now has a market cap of almost $5 billion.  This is crazy and the fundamental analysis in us is screaming!!  OK, enough of that.  There are legitimate technical reasons for this trade as well.  Here’s the chart:

We have stalled out below resistance at 62.50.  We’ve penetrated the 30 day and we’ve broken trend.  This morning with the rest of the market up sharply this stock is down showing relative weakness.

So, we’ve decided to put on our first put calendar spread.  What’s a calendar spread?  Its a spread similiar to a digaonal in that you are short the front month and long the back month, but unlike a diagonal you are short and long the same strike with different months.  This is nice because it gives you good time decay, if volatility rises your long put will rise, because you are long puts you are well protected to the downside, and because there’s no difference in the strike prices this trade doesn’t require any margin.  Cool, eh?

So, here’s the option chain:

We SPO (sold put to open) the Sep 55 and BPO (bought put to open) Dec 55 for a total debit of -5.60.  Since there is no margin requirement here this initial debit is my maximum loss.  As we move forward we will sell each month to further bring down our cost basis on our long Dec 55 put.

CAUTION: Two points of caution. 

1. We’re new to calendar spreads so we’re keeping our position size very small (less than 2% of our portfolio).
2. We entered this order yesterday but didn’t get filled.  This morning we got filled because we had forgotten to cancel our order from yesterday and was filled on a GTC.  Getting an entry on a GTC is a violation of our trading rules so we’re already nervous.

 We will be watching this trade carefully,

 Mojo

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Best days of my life

I had this great realization today….  The realization that these are the best days of my life.

Business is good, my kids are happy and healthy, my marriage is fantastic, the weather is perfect, and I have an abundance of great co-workers and friends.

I couldn’t be more fortunate.  This afternoon I spent a couple of hours playing basketball with my kids (9 & 10).  We had a great time with lots of laughs and it struck me that not too long from now they won’t want to play basketball with Dad.

So thank you to my wonderful kids, thank you to my beautiful wife, and thank you to my great friends and co-workers.  My life is truly amazing and its because of you.

 Mojo

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