End of Week 7

I ended this week today on Thursday. This was a good week and I wished I could have let the profits run. However, my CFA is on Saturday and dont want too much movement on the portfolio on Friday as I want to relax. The other reason I closed today, was that the portfolio touched $7,000 or 40% returns today. A nice round, auspicious number to close at.

Additionally, now my account is no longer eligible for free trades. I had 100 free trades for 2 months. I used only 63, but the two months are up so high commissions from now. I will be increasing the amount of money I work with so that the commissions are a smaller percentage of profits. If all my current trades were commissioned, I would be sitting on $6,100 instead of $7,000. This strategy is heavy on trades and commissions and thus, I need atleast three times the money so that the commissions are around 1/6th of profits rather than 1/2 of profits.

Here is the graph with the SPY till now:

Next are some stats with the SPY as the benchmark:

Also below is the return histogram - red being SPY daily returns and blue being Portfolio daily returns:

Adios till 6/8 then.

Week 7:Day 2

Best Day till now: 9.1% gains in a day. While stocks moved down 1.47%, since they had moved up 1.2% yesterday, it was a blessing in disguise. These are the days that the strategy works for. Over the past 5 days - there was a 3 day weekend, stocks did not much much (over five days) and volatility increase around 15%. All the good ingredients for a massive rise. I am still inside the top and bottom limits for the trade for this week, so unless there is another bad day tomorrow (highly unlikely unless there is some bad news from Spain/Greece, which is not already built in), I should be able to hold on to these gains. Closed at $6,885.59 today, highest till now.

Week 7: Day 1

Markets jumped today - 1.21%. Usually these kind of jumps are not the best for my portfolio, but still managed to keep some value. Mostly because I got the long time decay of the long weekend. My hunch is that the markets will dive or stay stable tomorrow, moving the vol a bit higher. Should provide more gains. FB and ZNGA were in news today. Options started trading on FB and stock went lower still. Most options traders are predicting $25/share by mid-July. I am not trading FB, as shares are costly to short...

End of Week 6

Great week. The SPY did not move much despite the Greek fiasco, and the strategy gained a lot - around 16%. Covered up the average performance from last week. There was one adjustment I had to make, which propped up the value somewhat. Ended this week at $6,423 and rolled over to next week.

On Thursday, I was already up 14%, so I decided to reduce market exposure. Thus I gained only around 2% despite a favorable market move. Had I not decreased exposure, the gain would have been around 4%. But that is the price you pay for downside protection.

I have also reduced my exposure to the market for next week. A few things to test out - (a) effect of the long weekend - there will be major time decay but my guess is that there wouldn't be much directional movement - unless the other markets move too much or something surprising happens over the weekend. I hope the European bureaucracy enjoys the weekend instead of trying to resolve the crises :)

Below is the performance chart for the 6 weeks:

Week 5

One of those brutal weeks. SPY went down 4%. Any such major movements are bad from the strategy. I was also traveling so couldnt keep a good eye, though made many adjustments. I was down 1% only thanks to elevated volatility. I went up to $6000 (20% gain) on Tuesday last week, but couldnt hold on to those gains in the wake of falling markets.

Closed the week at $5,607.02. Below is the strategy returns versus the market proxy (SPY).

End of Week 4

I ended at $5,670.18 today. Most of the losses of the week were recouped and overall, a positive week.

Week 4:Day 4

Rolled over to new options on Thursday. Current strategy was becoming too volatile with the European problems. So moved to new spreads. Closed at $5,643.99.

Week 4, Day 3

I recouped some of the losses from yesterday. Kept on removing topline protection as I need more bottomline protection now. The Spanish recession and other developments in Greece continue to weigh in on the market. I am at $5,394.14 today. If the markets stabilize tomorrow, I may still get to a week to week gain, albeit a very small one. If markets fall tomorrow, which I think shouldnt happen as there have been 4 down and 2 flat days in the past 6 days. I think the market will cling on to any good news tomorrow and rise. 

Week 4: Day 2

So the big down day has finally come. The Spanish recession weighted heavily on the market and I reached my 40% stop loss figure. So I had to liquidate some of my top line protection. Ended the day at $5,144.27. Yes, that is a 12.5% loss in a day. That is this strategy, I am afraid. Huge losses and major gains are a part of the game. Good thing I can sit on them now, a similar loss a few years ago, would have ruined my day - not today :)

Lesson learnt: If there is an impending doom and gloom scenario, decrease exposure to the market. Lock in some gains. 

Week 4, Day 1

The Spanish recession is still weighing on the market. SPY was up 0.1%. These are the best days for my strategy - high volatility and low movement. I removed some upward protection from the strategy. So unless the market moves up radically, I should be ok. Obviously, it should move down radically either. That is the whole point. Anyways, closed at $5,878.95 today.

End of Week 3

Barely positive week - 1% up. Not good.

My decision to roll on Thursday instead of Friday was accurate. But Spain had to go in recession and mess up my calculations. Still the portfolio is standing still at around $5,474.48. Comforting fact is that, the strategy has preserved value in the "worst week of 2012".

More scary part is that the heavy options trading that was done on Monday betting that SPY will close below 138 has reaped profits to those who made the bet. This smacks of insider trading. The news of Spain's recession must have leaked and people opened options positions on Monday which were expiring on Friday. Scary stuff happens every week in the market.

My guess is that Monday will be a positive day and hence I havent made much changes in the positions - though I removed some top-side protection. No chance that the market will go above this weeks highs of 141.48. In fact, I should come up with a strategy to capitalize on that. Maybe sell some calls at 141 and buy others at 143.

Below are the strategy returns for 3 weeks.

Killer bid-ask spreads

Given my position was not exactly where I wanted it to be - SPY was 139.75 instead of 140.75, I decided to roll out my options on Thursday instead of Friday. Also, I have a busy morning on Friday in the city so I may not have gotten the chance to execute my trades. I checked the option liquidity and it seemed high. One of the legs - 137 had really high bid ask spreads of around 3%. Others looked liquid at 0.5% bid ask spreads. (Reminder to self - establish measures of spread liquidity). Anyways, I rolled my positions and also tried a new set of positions, which arguably should not increase the risk but keep transaction costs down (Reminder to self - need detailed analysis of that). This position is equivalent to over/under weighting the options so that the risk reward ratio can be achieved with smaller number of transactions.

Also, I increased my options open positions from around 10 each to around 25 each. While this is little difference on money in the market (which is still around $3,500), it does waste money in bid ask spreads and later on in transaction costs as well. Imaging buying 1 share at $1,000 instead of 1,000 shares at $1. Not that extreme, but still. So I did three different things this time: (a) traded on Thu, (b) traded in high bid ask spread situations, (c) increased option position exposure.

The bid ask spreads killed me - around $100 lost in there. I am hoping the gain in the strategy offsets that, otherwise I will have a loosing week this week. As of this writing, things seem to have changed (Reminder- analyse why?). I am only down $30 after executing all those inefficient transactions. Not bad!

One thing I noticed is that when you have 25/30 options out there, each tick movement in the price is worth 0.01*100*25 = $25 and thus positions can wildly fluctuate even on small movements. My hope is that the movements are in my favor!

Second thing I noticed: It takes around 1 hour to execute trades. Thus, 1 hour per week, unless I come up with some smart trade execution strategies (Reminder to self: do that!)

Mid Week 3

This news yesterday got me thinking.

http://blogs.wsj.com/marketbeat/2012/05/01/options-traders-cast-cold-eye-on-stock-rally/

Options traders, the smart money, has bet on the downside. That too by the end of the week. There are these substantial bets that were being discussed. I had two choices yesterday: (a) take a similar stance on my positions - and create a heavier downside protection (or remove upside gains), (b) do nothing.

I decided on (b) as my original strategy entails no changes to the portfolio unless it looses 40% of its value. I am also trying to optimize this decision - 40% seems just too large. The jobs report as was speculated yesterday, was bad but the stocks did not move too much lower. While SPY started low, iut has gained back most of its gains since the morning and is at -0.29% while the NASDAQ is in green.

There are two more major reports in the next two days and they could hurl the market downwards. I still think it will hang around these levels till the end. My strategy makes most money if SPY closes around 140.75. Portfolio at $5,622.73.