The theme for July was most certainly risk management. The broad-based decline this summer has been quite breathtaking to watch, especially as all of the technical and sentiment-based indicators that we follow moved from oversold status to extremely oversold status to something like doubleplusungood. Our attitude throughout late June and early July was that the unending litany of bad news deserved to be taken seriously, and that waiting around for the “inevitable bounce” and “inevitable VIX spike” would be a fool’s errand.
As a result of this warranted concern, we only published two newsletter positions for July, and we exited those two positions a bit on the early side in order to preserve capital and shift our risk into August. By taking advantage of the brief rally on July 8, we were able to exit the put spreads of those trades for very small net debits. While a few members were understandably disappointed about voluntarily taking some small hits with two weeks to expiration, we were plenty happy to dodge the expiration week SEC-inspired shenanigans. Holding out for monster rallies and oversold bounces is a dangerous game, and over the long run, evidence-based trading beats faith-based trading every time.
Performance Comparison
Here’s how the major market indexes, the S&P 500 Covered Call Fund (BEP), and the Condor Options trades performed over the past month:
- S&P 500: -4.47%
- Dow Jones Industrials: 0.38%
- Russell 2000: -4.71%
- S&P 500 Covered Call Fund: -8.26%
- Condor Options: -8.45%
- Note: the period measured is from expiration to expiration, rather than from the start of the month.
Given the leverage inherent in options trades, it is to be expected that any options-only strategy will have a higher standard deviation than the equity indexes, outperforming the indexes by a wide margin during good months, and underperforming by a wide margin in bad months. And given that tendency, it is encouraging that our index positions only slightly trailed the market averages, and were just a hair behind the S&P 500 Covered Call Fund (BEP), our chosen benchmark.
One other important point here is that we intentionally kept our powder dry through July: we typically open about 3 newsletter trades per expiration cycle, and if we factor in that third “cash” position, our average return per trade for July was a not-unreasonable (and BEP-beating) -5.63%.
We are traveling back to New York today, and will have to skip this month’s individual trade review and monthly reading sections.
We understand why retirees and families and everyone but our hipster friends flee the city in the summer. Conservatives have been accusing the fantastic WALL·E of being some kind of dystopian humorless lecture for its portrayal of a dirty, dehumanized urban wasteland. But if they think that Pixar is trying to scare us with some unlikely view of the future, rather than simply extrapolating from the present, then they haven’t been to Times Square in July.