Thank you for all the emails over the weekend in reference to my Series 65.
As promised, today I will try to evaluate the August trade.
I spent quite some time in OptionVue Backtrader over the weekend to identify errors and possible improvements.
First what did the market present us. 35 days out we entered the trade at the 680 level. Within a week we saw 645, which was the down side edge of the butterflies. A week after that we had a temporary top of 727. 727 was passed the top side edge of the butterfly. After setting this top we had 10 days of consolidation. This consolidation was however quite violent, twice we were made believe that a break down of the 695 was in our immediate future. Then on 8/6 we broken out to the upside and currently we are setting new recent highs.
No regrets;
- I have no regrets entering the trade and pulling the 670 and 680 butterflies off. I still think that was a good decision. The alternative had been skewing the trade around 7/22 to the upside and leaving me open to 'fear and greed' on the two sell off 7/28 and 8/4. Yes, the butterflies would have made profits, but the draw down on the sell off days would have been way bigger than prior month profits. I think prior month profits are a limit of loss in upcoming trade month. To stay in business there has to be a strict relationship between average profits and max draw.
- No regrets for entering an new butterfly on the 720 level. The trade did not work. Again within 10 days the market showed us both side of the butterfly (and beyond).
Regrets;
- Managing the second butterfly did run away from me. At 7/28 breaking the 700 and approaching the 695 I got carried away. I was not longer trading the real market but the market I wished for. Reading all the economic analyzes I expected the market to fall apart and continue down. I made an adjustment to early and got caught. From there on I was hanging on my finger nails. Having cashed in a loss on the first two butterflies, wishful thinking entered managing the 720. The 720 butterfly has been up approx $800, with hindsight I should have taken that present and gone in hiding.
My results for this month are negative. I lost on a my Theta positive trades 75% of my July profits.
Before I close shop till the September options are 35 days out (this Thursday:)) I have a couple of other points to share.
One of my favorite economist is John Mauldin. He has a free weekly news letter, the last two weeks the news letter gave great overview of an important segment of his work. I recommend you read the newsletter dated 8/1 and 8/8. The section on P/E ratios and the section on the Baby Boomers are essential parts of his work. The P/E ratio is also excellently described in his book "Bulls Eye investing".
Over the last two weeks I "played" with a new piece of software of the Worden Brothers called Blocks. Blocks is the successor of Telechart. The good news is Blocks is free in a limited version with after hours data. I really like the software although for first time users it is not easy. I went to a (also free) seminar to get a head start. What I want to share is a chart I found within Blocks; see below. It is a cumulative volume indicator. In the graph below you see the indicator for several years. Check how nicely it comes down mid summer 2007, a great early warning signal that the Oct high was suspicious
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