- 9-month portfolio gain: +73% (~6% per month)
- # of completed round-trip trades: 28 (56 individual trades)
- Profitable trades: 26.
- Unprofitable trades: 2
- Average length of trade: 40 days (shortest: 5 days, longest: 93 days)
- Average portfolio gain per completed trade: ~2%
- Average # of simultaneous open positions: 4
- Avg percentage of original premium retained: 70% for profitable trades
While everything looks like it has gone better than expected, I did do something really stupid and encountered a worst-case scenario, and just about lost all my gains because of it...
May Craziness:
One of the important rules is to not overposition yourself. When the Canadian Dollar (CAD) was around 0.98 at the end of april, I sold puts at 0.90. For the CAD, I was at the limit of what I should be putting into one position. However, on the morning of May 6th, the CAD started to drop and the premiums were rising, and I didn't want to miss out, so I sold some 0.86 puts as well.
Of course, the May 6th craziness happened that afternoon, and the CAD matched its biggest ever intraday point move -- about a 4 cent drop to 0.93 cents before recovering a bit. What was scariest was that there were no "asks" during the few hours when the price was plumetting, so I don't know if I could have exited my trade if I wanted to. That's something I never expected -- that in a worst-case scenario, I may not be able to get out of a trade because liquidity just disappears. When the asks started showing up again, my 0.90 puts were at 7x their value.
I usually place my trades such that I can easily handle a 10x increase in premium, even 20x. But in this case I had double my normal position. I never did exit the trade, as the dollar started recovering. but it gets worse...
Later in May, the dollar had recovered pretty good, but the premiums were still nice and high on the puts, and I bought some 0.89 puts. Now I was 3x overpositioned in the CAD. Sure enough, the CAD dropped 2 cents in one day and eventually ended up around 93 cents again. The premiums on each trade were up 6x, 3x, and 2.5x. On top of that, I had some other trades temporarily in the red, and so the 50% portfolio gain I had at the beginning of May was now completely wiped out on paper.
My margin was maxed out, so I had to exit a couple of trades at a loss. I should have never entered more CAD trades, and I should've exited them when they reached 3x my premium. I didn't want to lose all I had built up though, and I was fairly confident the CAD would stay above 90 cents. If the CAD dropped anymore, I would've been in big trouble. I got lucky though -- the CAD recovered, and I held onto all the CAD trades until they were profitable again a couple of months later.
The good that came out of this was:
- I saw how the markets behave in a panic situation
- I learned first-hand how important it is not to overposition
- The panic situation kicked some sense into me so I doubt I'll do a stupid move like that again.
- I saw that my "rules" do work (my strike price choices, position limits, exit strategy, etc.), if followed, and with them I can handle a typical "worst-case scenario". Even with being 3x overpositioned and not exiting when I should have, my portfolio was down 'only' 35% in a nightmare of a scenario. Imagine if I only had the one CAD position as I should have, and if I exited it properly. I would've only lost about 10%. (Of course, there's always the never-before-seen worst-case scenario that could theoretically wipe me out, but that's the small risk I take with option selling to make incredible gains)
- It reinforced that the most important thing is to be far enough out of the money.
