Saturday, February 28, 2015

Review of Jan and Feb Trades and max drawdowns

In January, I started trading my option selling strategy "Selling verticals at the edges". I paper tested this strategy and traded it with real money with 1 to 2 positions last year. They were posted in the blog. This year, I decided to increase the position to 3 which means my monthly open margin is close to 25% of my capital.

I posted the individual trades, as well as the trading plan, in our study group in the last couple of months. Now, I'd like to review and share the overall trades that were closed in Jan/Feb. January was a seriously challenged month for my trades, as all 3 opening positions were tested as shown in the chart below. 

The prices of TLT and GLD moved in sync upward, pressuring my bear call spreads. The short strike $134 of the Feb$134/139c had a Delta of 0.67 when TLT rose to $137 area. So I had to adjust the position by rolling out and up on Jan 29. The next day, TLT continued to rise with a big gap up. It did give me a bit of psychological stress. I was evaluating the possibility to buy call options as insurance.

However, TLT started to turn down on the following day and had never gained strength to test the peak level so far. Interesting enough, the same behavior happened for my last October TLT adjustment (See surviving a 3 SD test on TLT). On the 1st day of adjustment, TLT shot up and my portfolio was showing the largest drawdown of the cycle. On the 2nd day of the adjustment, TLT started to pulls down.

With my TOS script, I was able to see the daily P&L for the portfolio and the largest drawdown based on closing prices. If I had not made the adjustment, the largest daily drawdown would be about $2.8K (2800/9000=31% of initially used margin). With the adjustment for which more capital was put in use, the largest daily drawdown increased to $3.5K (39%) roughly.  This is a major characteristic of the strategy, because more capital risks are added due to adjustments. But the probability of profits also gets increased after the adjustment.

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