It was a successful January to kick off 2024. While I will never complain about the overall profit figure, it is a little bittersweet because it could have been better. I'm confident though that the good result is overall confirmation of the effectiveness of our strategy, while we objectively made 1-2 mistakes which we can learn from to improve going forward.
Let's recap:
So overall we've accomplished our goal and effectively doubled the return of the S&P 500 and NASDAQ. However, that's mainly due to our great performance in week one. We scaled into some losing positions in December and then got to see the benefit of that for the first week of the year. But frustratingly, we gave a little bit back at the end of the month. Why is that? The answer is our poor management of the AMD trade. So let's talk about the issue, and then our plan to prevent this from happening again in the future.
Biggest monthly mistake: AMD Management
Similarly to when we livestream, I like to spend more time talking about the mistakes and the losing trades, since there's more to be learned there and our biggest focus is conversation of our capital and limiting the magnitude of our losses.
In short, we were not patient enough with AMD scaled into our position far too quickly. In the last two weeks of January, we lost $5,300 on AMD. Without that, we would've had a $14k monthly gain. But that's a little optimistic. I think we should have still lost money on AMD, but ideally if we managed properly we'd only be looking at a $1k loss in each week, which would have had us in a $3,300 better position. But what specifically was it that we could have done better?
Here are the AMD trades from week 3:
We started with a 145c for $4.83. That's all good and well. That carried a breakeven price of 145 + 4.83 = 149.83. The biggest mistake we made off the bat was adding the 148c. We really don't ever want to scale in and double our position size until we need to. That 148c for $1.87 had a 150.87 breakeven price. That's BARELY higher than the original 149.83 breakeven price. Really braindead move by myself here and it was rooted in greed.
Rule/Takeaway #1: When scaling into a position and increasing size, make sure your new strike or breakeven is 5-6% away from the initial strike.
With that rule in mind, we should have waited to sell a strike around 145 + 6% = ~$154
Rule/Takeaway #2: When scaling into a short position (selling calls), use a credit spread off the bat.
Here's another rule we should have heeded to which would have helped. Not only was that 148c added way too quickly, we sold it naked. If we had sold a $5 or $10 wide spread, the max loss on it would have only been $400-800 rather than the $1,500 we lost on it. Again, the point here isn't to say that we shouldn't have lost money. We're going to lose money when a position moves against us like this. But we should have lost far less than we did.
The Good:
While the AMD trade was awful, just about everything else we did last month was great. Ignoring AMD, we made $3,000 on our other trades in the back end of the month. Some notable winners:
Profit of $485 on PENN despite the stock dropping from $26 to $23.50
Profit of $3,500 playing AFRM bearishly
Profit on CHWY despite stock dropping from $23 to $19
Not a ton to learn from those, but scaling in and scaling out has been so important, especially with our management of PENN and CHWY. Our ins and outs of the "double downs" has been incredibly effective in managing the overall position. Having both bullish and bearish trades each week has been very effective in allowing us to collect premiums and extrinsic value on both sides of the fence.
Let's talk about how we're using these lessons and looking ahead for February:
February Outlook
From an overall market perspective, I don't expect February to be a great month in the market. The S&P 500 RSI is 71, which historically results in some corrections. I've beautifully circled these below.
These dips, in order from left to right:
#1 - 4200 to 3800 From 2/1/23 to 3/13/23 (9.5%)
#2 - 4445 to 4320 From 6/16/23 to 6/23/23 (2.8%)
#3 - 4600 to 4345 From 7/27/23 to 8/18/23 (5.5%)
#4 - 4800 to 4680 From 12/28/23 to 1/5/24 (2.5%)
So that's a 9.5% max dip, a 2.5% min dip, and a 5.1% average. Here is what those would all look like on the SPX chart:
At the very least, I think a minor correction back to 4800 is in play. I think we could be in for something worse after that, but short-term that's where I'm targeting and will start to cut down on my bearish positions.
As far as my strategy is concerned to play this: Scale into bearish trades and give ourselves upside (meaning we'll sell things ITM so we benefit from downward movement) and be very cautious on the bullish side.
With all of that said, here is how we're set up for next week:
Biggest potential swings here are going to be ABNB and NFLX. At Friday's closing prices, those trades are -221 and +383 respectively. However, at max profit they would bring in 1,203 and 1,925 respectively, for a potential total profit of 3,128 between just those two trades.
We mentioned that our mistake with AMD was scaling in too quickly, which is why we see an initial 139c for ABNB and then a 146c after that (5% gap between strikes).
Similarly with NFLX, we start with a 555c and then added a credit spread with a 580 strike on the short leg (4.5% gap between strikes).
We're also looking at being a little slower in how we build into these short positions. The bottom 3 rows of the table above are a great example of that. HELE, FTNT, and SPOT were sold a couple weeks before expiry, and were wide spreads that allow us some cushion if things go against us, while giving profit if they move in our favor. FTNT has moved the most against us, but important to note that even though it has run up a good bit, our max loss on that spread is $766 - a far cry from anything near those AMD losses.
And finally we mentioned that we want our trades to give us a little bit of upside. While our initial weekly profit is $1,219 at the current prices of these stocks, we stand to make $7,164 if every trade hits max profit.
I want to be clear that this is NOT going to happen. There is no way we hit max on the bull and bear side. But there could be a world where if we have a bearish week in the market, our large bearish position sizing will benefit, and we could see something like this:
So that's where we're at for this week. Hopefully we'll get off to a good start with the first week of February. Thanks to all who have followed along with us and participated in the Discord. Looking forward to what will hopefully be another profitable year.