Every month I publish my option trading results and thoughts. This obliges me to reflect on the past month, my strategy and my risk tolerance. I hope it also allows others to learn from what I do and from the good and bad ideas that I have. And February has a lot of lessons.
February was a month with a 10pct correction in the market due to the fear for rising interest rates. Very quickly the market as a whole made up for the losses. Individual stock do not always follow that same path. And that is visible in the February results
Option Income – 188,07€
The income is very low compared to a regular month from the past year. I only made 31pct of what I make in a regular trading month. That happens.
The question is: why did it happen? That is very clear and I have hinted on it before: I only make profit when the market goes up or stays stable or has a little decline. Here is was a big decline. Not for the market, for the stock in my option portfolio. A good lesson
Looking at the return on a yearly basis, this still represent way more than the 0,11 I would get from a savings account. This results even beats the average dividend of the S&P500 or the Bel20 index. I mainly say that to feel good… The outlook is worse
Analysis and action plan
Problem one – directional positions
It is clear that only selling puts has one big problem: when the market corrects or crashes, you end up with a lot of ITM puts that become very hard to manage. As such, You either need to take a major loss and start trading again. This requires a trader mentality that I lack at this time
Or you take the assignment of the stock. In my plan, I should be happy as my rule is to only sells puts on assets I do not mind to own. I then capture the dividend and try to sell covered calls.
Right now, I am still in the management phase of the puts. This means that I roll to get more time so that the stock can recover. This is not always easy and possible
Action plan: Get less directional. In order to do so, I will learn to add naked calls (or call spreads) to my positions. I already had a few, just not enough yet!
Problem two – concentration
Up to 40pct of my portfolio is concentrated in one stock. The stock did have a bad start of the year, loosing 15pct and not recovering as the market. That means I need to roll.
Action plan: Enforce a rule to limit exposure to one single stock. No matter how sexy the outlook is. Staying in the game is more important that getting rich fast. I want to see how option trading can become a cash flow machine for me.
Problem 3 – Need more knowledge and support
To help overcome problem one, I have bought some audio books on trading. Another source and another way of getting the messages might help me to become a trader and have a more balanced portfolio.
Safety measure 1 – reduce leverage
Leverage is great when all goes well. Leverage is extremely dangerous when sh#it hits the fan. It really can pull you down.
I looked at my risk, my cash and some other factors. I decided to reduce my leverage. As a result, I am currently trading over my limit and need to scale down my portfolio. That means that profitable trades can not be replaced with other trades as long as I am above my limit.
Less leverage also means less return…
What will the next months bring? Hard to say… I can not predict the market, I do not know what the FED and ECB will decide, I have no idea what the economical blocks will do in the light of the upcoming “trade war”. Or it takes a fool with some missiles to do something funky… all of that will impact the markets. So, this outlook is likely wrong… 🙂
As I have reduced my leverage (this means less budget to trade) and I have currently all but on postion ITM, I do not expect to make money in March. At least not something close to my previous returns.
One of my underwater positions will stay under water for ever. The company will be bought in cash at a price below my current put strikes. Due to the accumulated premium, I will be break even on tock price. That means that my loss will be the trading fees and taxes of the assignment and subsequent sales.
All in all, I will be happy when 2018 will return me around 3-4 pct in option trading