May was a volatile month in the market but a great one for us. We took home a profit of $9,240 (6.77%) despite a return of only 0.79% from the S&P 500 during the period. Let's take a look at our performance, what we did well, what we could have done better, and our outlook for the rest of the year moving forward from here.
A month that started on a rough note where we lost about $5k despite a flat market quickly turned around for us as we followed the basic principles surrounding our strategy, averaged down, and were rewarded when stocks finally rebounded. See below for screenshots of the weekly detail.
What we did well:
1) Spreads: First and foremost, our dip back into the world of credit spreads has been very successful so far. I was definitely a little inspired by some of the trading I saw from some of the members of our discord server and had to jump back in. We were +$4,320 in May with the credit spreads that we opened. That's almost half of our monthly profit and it was done mainly via short-term SPX spreads thanks to the introduction of daily expiries. I think this is a huge area of opportunity for us in a volatile market and I plan to keep these up. The strategy is simple: Wait for a big move (1.5-2%+) in SPX, find the next support/resistance level, and sell a 25% RoR (4:1 risk to reward ratio) credit spread to sell. Then just sit back and let the spreads go to work.
Now this is another area where it's important to stay conservative with your initial entries because while this works most of the time, you WILL get your strikes breached at some point. A great example of this happening to us above was in the week of 5/15 when we opened put spreads at the 3940 level, closed for a loss and rolled down to the 3850 level, and has those breached too. The important rule with these is DO NOT TAKE MAX LOSS. You can always live to trade another spread. But we then rolled down a third time, increased position size, and ended up with a $1,440 profit the week afterwards, which essentially erased the $1,500 loss from the prior week. So that's a breakeven 2-week performance despite a disaster.
Also for a little spoiler, we're currently 2 weeks into June and have racked up $1,600 in profit on credit spreads so far again.
2) Trusting the process: Despite huge intra-month dips in AFRM and RBLX, we stuck with our strikes, added where it was smart, and came out profitable on both of those tickers despite dips of almost 40% at one point. This type of volatility make the psychological aspect of trading really important. We have to stay focused and can't let a messy P/L affect our judgment. Keep lowering those breakevens, keep collecting premium, and we will eventually come out on top.
We love to benchmark ourselves against other indices. After May we are now outperforming NASDAQ (orange) and gaining serious ground on SPY (Red)
What we could have done better:
The biggest issue we kept running into was not taking profits. We had several weeks where after Tuesday/Wednesday we were in the driver's seat before a brutal Thursday and Friday snuck in to take all of our gains. It's important to remember just how long a week in the market is. A LOT can happen in five days. We'll be aggressively taking profits when it makes sense moving forward.
I also want to stay away from IV reversion trades when the expiry is more than 2 weeks away. ALVR was going well until it wasn't and that one took a little chunk out of our profits.
Outlook from here:
2022 has definitely been a tough year. Outside of January though we've actually been profitable despite a continued skid in the market. So the biggest takeaway I can offer is that what we are doing is working. We've seen how much we can make in a week when the market bounces and likewise we've seem how effectively we can hang in tight when things are headed south.
I don't think inflation and the fed are going anywhere and I plan to trade cautiously until at least September. This means covered calls closer to the money. Cash secured puts further OTM. And smaller initial positions. We have all the flexibility in the world when we start off a position with 1/3 or 1/2 of or total anticipated size. What gets us in trouble is when we get in too big, too quickly, and the market doesn't behave. So going forward we're going to be taking a lighter portfolio into the beginning of each week and adding on red days. Because there will always be more red days.
For those of you who are following along, hang in there. 2021 wasn't a realistic view of the market but I also feel the first half of 2022 isn't either. But all we can do is trade what we're given. Adapt to market conditions, never bet more than you can afford to lose, and let the numbers work themselves out. Even though it can feel like it sometimes, things aren't going to zero tomorrow. Step up and make sure you have the cash on hand to sell option premium when others are fearful.