Before we get into this, we're profitable in October and outperformed the market by 10% in September so this isn't meant to be a "we're doing terribly but we'll do better" post. We're doing very well overall this year. But we've had that success despite a few mistakes over the last few weeks which I think are important to call out and improve upon. In fact, this is how our monthly performance looks since May. So if we can make big mistakes in September and October without losing too much ground, I'm excited to see how things will look once those mistakes are addressed.
This post will focus on how we can clean up a few things and make our performance even better. Let's get into it.
I've identified about 3/4 different mistakes just over the last 3 weeks which I calculate have cost us around $11,000 in potential profit. Now you would think that we've been getting crushed if we left $11k on the table over a 3-week period, but we're actually still outperforming during that timeframe despite that. More evidence that our core strategy is operating effectively. It's okay to make mistakes, but the important thing is that we don't make those same mistakes twice. So I think it's helpful to call these out and discuss where we've gone wrong.
Mistake #1: Post-merger SPACs: We've made the mistake before of playing SPACs above their NAV of $10/share. HYLN taught us a very expensive lesson in that regard. But a few weeks ago we had this happen with PGY:
A loss of $4,050. So what happened? We had a stock that we figured was going down due to inflated put premiums (mistake #1) but we figured that the put premiums were large enough to protect against that fall. We effectively had a 30-40% cushion for less than a week. In theory that sounds good.
However the literal day after we opened the trade, PGY effectively announced an offering to double their available shares and dropped to about $2/share. Way below our $5ish breakeven price. See below for a beautiful (1 month!) chart detailing the drop from $11 to $1.45.
What I will give us credit for is that we closed the trade out and just took the loss on the chin. It continued to slide so we only would have lost more.
Lesson learned: Just avoid post-merger SPACs altogether. They can have complicated equity structures and typically aren't the best companies. Those types of conditions lend themselves to decisions made against the interest of shareholders. Additionally, when put premiums are way higher than call premiums, the stock is going to go down. No matter how big of a cushion you think you can get, don't open a bullish position (selling a put) on a stock that you know will go down.
Value of mistake: $-4,050
Mistake #2: Long expiry IV reversion trade I'll start by saying that IV reversion trades are great. Quick spikes in implied volatility are often given back and it's a great way to have a position that trades differently from the overall market. But the emphasis here is on the quick spike. We got caught holding an IV reversion trade a little bit too long with MNMD, and similarly to PGY they announced share dilution which cratered the price and left us holding the bag.
So in the future I'm still all about the IV reversion trades, but they need to be 5DTE or fewer, and when we get the dip in price we want, we need to close out. These were October 21st expiry options that we were holding in September. Can't have that going forward.
Value of mistake: $-1,400
Mistake #3: Poorly-sized hedges
Let me start this section by saying that there is nothing wrong with hedging. In fact I encourage it via the SPX credit spreads we've used. The big issue we've had over the last few weeks has been sizing those hedges and putting ourselves where too green of a day in the market hurt us. Such was the case the week of October 2nd, when we had the following string of SPX call credit spreads:
As you can see, we gave away about $4k on Monday and Tuesday of that week. So what happened? The logic we were following was that we were happy to set up a bearish call credit spread so we could make a little cash if the market went against our largely bullish portfolio. The issue we ran into was that we increased the size of the hedge so much that it ended up putting us in a position where we hurt ourselves if the market ran upwards. We never want to put ourselves in that kind of a position.
Additionally, the timing of these hedges in the week (Monday, Tuesday) don't exactly create a great hedge. Since our core positions all expire on Fridays, hedging against downward movement in the market on Monday/Tuesday leaves a Wed-Fri window for things to move against us. And that's exactly what happened. The market ran up 4-5% on Monday and Tuesday and then fell back down to only finish +1.57% on the week. Despite that huge mistake and dip in the market we still took home $3k that week and outperformed the market, but there was definitely some money left on the table.
Value of mistake: $-4,012
The most encouraging thing is that all of these mistakes are outside of our core HT Wheel strategy which gives me continued confidence in our approach to the market. Now there's a lot that happens over the course of the year, but if you eliminated just these 3 mistakes, we'd be positive YTD in a historically bad market.
Again it's okay to make mistakes. These won't be the last mistakes we make. But when mistakes are made we need to recognize where there was a shortcoming and do everything we can to make sure we do not make the same mistake twice. Experience is a great teacher and every lesson we learn along the way will make us better traders and investors in the long-run. And to prove that point, I'll leave you with our long-term performance chart against SPY and NASDAQ. Several visible mistakes have been made along the way, but we're absolutely crushing the major indices.