July 21, 2017

Stodgy market, Condors, and ETF Extremes

Due to the stodgy nature of the market today we were unable to receive the $.70 premium in our SPX Short Iron Condor strategy. A decent directional move over the next day or two should allow us to receive the anticipated premium  in the position that mentioned in the last weekend’s April Expiration report.

Remember, this a four week cycle and the VIX is hovering around 13. At the open on 3/19 (the beginning of last month’s expiration cycle) it was in the high 15’s. What does this mean? Lower option premiums for the cycle. Although, even with lower premium expectations a monthly return of $.70 (per contract) or 6.8% (includes typical options commission schedule) is still well-within the range of our monthly performance goals.

follows. Following excerpts from April Expiration report.

By staying diligent and sticking with our guidelines the ETF Extremes strategy has a cumulative win ratio of 92.3% (12 out of 13 trades) since our first trade a little over a year ago. Our total return since we initiated the strategy is 45.3% (if compounded monthly over 200% – read below). Furthermore, we have been exposed to the market less than 15% of all trading days.

Many of you have written in about the performance of the strategy and why we choose to use a standard 10 contracts with each trade. Position sizing is arguably the most important aspect of successful trading and cannot be emphasized enough. Over the next few weeks we will be sending out several articles (members only) about position sizing and how it applies to our strategies. 

The sample portfolio is currently worth $7,265 or 45.3% (including commissions) since its inception (1/06). The win ratio in the strategy currently stands at 92.3%, 12 out of 13, (check out the Performance page on our site for further details). Based on 10 contracts per trade. 

If we took the initial $5,000 and invested the entire compounded amount with each trade our initial investment would have an overall return that exceeds 200%. The return is far greater than using a fixed number of contracts, but the volatility is greater when using a percentage-based system. Furthermore, a percentage-based system typically has greater risk associated with it, particularly when 100% is allocated. Remember, no matter how good a system, strategy, stock, mutual fund or any type of investment for that matter, never put all of your eggs in one basket. Diversify, diversify, diversify! 

Obviously we are pleased with the win ratio, but we are realists. We realize there is no holy grail in trading. One thing we do know for certain is that we have found a rare, unique, and concrete opportunity that makes the world of sense to us and we trade it to hopefully make money over the long-term. Furthermore, we realize that the less we trade, the better the strategy will do in the long run. And the long run is what matters. This is what makes our ETF Extremes strategy unique and so far, successful. Hopefully, we can continue our winning ways and extend the gains going forward. 

Patience is the key ingredient to the success of this strategy and forcing a trade is, in most cases, detrimental to any strategy. Our exact words on the site are as follows: “This strategy requires patience coupled with a disciplined approach. The strategy will make approximately, on average 1 to 3 recommendations a month with holding periods of 1 to 15 days, however; there will be some months when no recommendations are made. The key to this strategy is patience. Waiting for the appropriate scenario to recommend trades with a high probability of success is what makes this strategy a success.” 

Again, patience is the key.  As Todd Harrison states “Opportunities are made up easier than losses”. So if you let a few pass you by don’t dwell on what could have been. There will always be more opportunities around the corner. Remember, this is a marathon not a sprint. 

We will continue to patiently wait for opportunities to arise and only trade scenarios where the probability is overwhelmingly on our side. Couple this approach with sound risk management and you can see why we have been able to beat the major benchmarks by a substantial margin. 

Overbought/Oversold levels for April 23, 2007

  • SPY –  76.3 (overbought)
  • DIA – 81.0 (very overbought)
  • IWM – 64.8 (neutral)
  • QQQQ – 79.6 (overbought)
  • GLD – 58.2 (neutral)
  • OIH – 51.2 (neutral)

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Have a great night!