Below is my best % trade return yet. I bought a Put for $1.40, and sold at $90 and $95 (say average at $92.50). The % return = 92.5 / 1.40 - 1 = 6507%. This is what Peter Lynch calls a "65-bagger". Note I sold this the week prior, making this trade approximately 1 week holding. Here are the relevant screen shots:
Does this mean I am a better trader than Warren Buffett?
Hell no! (keep reading).
Does this mean I am a better trader than the Market Wizards?
Hell no again! (keep reading).
Is this a rare result?
Perhaps. But to be honest, I have only started trading /ES for 4 months, so, it cannot be that rare if a 4 month old /ES trader can produce this type of results *grin*
(Disclaimer: This is actually misleading, as total years of experience trading is perhaps closer to a decade and I probably have made thousands of trades in my lifetime ... but for the /ES instrument itself, it is only 4 months experience).
To be honest, a few trader in Daniel's FB account also reported the same thing. So, it's not very rare. I believe anyone who trade the same credit spread system before the stock market corrected violently are very likely to get the same type of result if they are disciplined to repair the trade at the appointed time.
A non-directional trade that went wrong
Actually, this trade started off as a non-directional trade that intended to earn very little and risking a lot *grin* (Terry: take a note of this)
It is still positive expectancy because normally, the probability of winning is very high. But in this case, even high probability can result in a loss.
You see, what happened is that when the index was 2100 and dipped, I sold a 1970/1940 Bull Put Spread for income. At the time, the income looked safe.
What transpired was amazing and totally unexpected.
On Thursday, markets start to drop violently. I had to repair the above trade, because as price drops, Margin expanded and it became a huge concern for me. During that time, I discovered that if I closed just the Sell Put leg, and keep the Buy Put leg, my Margins would improve, and so, I did just that. In other words, when I closed the Sell Put leg, I effectively went from "non-directional bullish" position to a "directional short" position.
The truth is I did not expect markets to fall so violently the next 2 days on Friday and Monday.
But it fell and it hit the low of 1831. When I saw that, I closed the Put very near the bottom of 1831, at $90 and $95 .. I recalled seeing the price exceed $100 in split seconds, before pulling back very fast.
The actual returns are less than that shown above, because I still have to net off the earlier loss prior to Thursday. But that trade was a huge % winner still.
Is this repeatable?
I hope so, but market must cooperate, otherwise, nothing I can do.
It is definitely much easier to do this on the short side, than on the long side. Why? Simply because market takes a long time to grind upwards, which is bad for options because options tend to loses value over time, plus options also loses value when VIX falls. However, on the short side, markets tend to crash very fast plus, VIX expands (which helps options values to explode temporarily, even for a few seconds/minutes - enough to trigger the anticipated Limit Sell orders).
My Next Plan on the next Bull market high
So, after experiencing this, my strategy for next year is that if the Bull market is still intact, then, I will wait until market makes new highs. At these new highs, I will buy very far OTM options that are most likely to expire worthless. But I have seen how these have the potential to create 65 baggers. I can be wrong 11 out of 12 months in 2016, but if I catch just 1 month, I will be wildly profitable. It is not easy being wrong 11 months out of 12 months, but I think this is possible and likely in this ageing bull market. I don't expect the same opportunity to present itself in 2015. It will take at least a few months for the market to grind its way back. A new higher high is unclear at this stage, although, in 2016, I believe it has good chance of doing so.
Can it be done on the reverse side?
I think so, but it won't be that spectacular for a couple of reasons mentioned above (bull markets takes time to grind to a new high, but option loses values due to Theta decay).
Today, when markets were below 1900, I took the following trades:
Basically, I'm betting a small amount of monies, that market has bottomed at 1831, and will slowly grind its way back upwards. There is a very small possibility that it might repeat Oct 2014, where for the next 20 days it went V shape up to make a higher high, but very unlikely although no one knows.
To take advantage of both possibilities, I bought 5 net Calls of 2000 with 23DTE, and 5 Calls of 2025 with 51DTE. My average cost is $8.9 and $10.9 respectively.
The costs of these options were actually FREE for me. This is because I financed these by selling very far OTM Put Spreads, lots of them. So, if markets has indeed bottomed, then, these should expire worthless and the credits offsets the premiums above.
So, if market stayed flat, whilst I would lose 100% of the above premiums, they did not cost me any monies since it was Market's monies in the first place.
So, what's the Trade Plan?
Already entered, so, do nothing.
No Stop Loss (since Market's monies).
Wait until either expiry, or when /ES hits 2000, whichever comes first.
Ignore daily P&L
Ignore large unrealized gains turning into losses.
Ignore losses turning into large unrealized gains.
Just focus on either expiry or when /ES hits 2000, whichever comes first.
Isn't this like playing the Lottery?
Yes, many similarities.
Psychologically, it can be the same too. We think that we've lost the monies spent on these premiums, as we already bought the lottery ticket.
Normally, I don't encourage lottery tickets - the vast majority of the time, markets will ensure that these lotteries will expire worthless.
However, we now have a unique opportunity with the huge market fall in such a short time. It is during these exceptional times, that I think it is worth a small punt.
For me, it is Market's monies, not my money, so, it's like a Free Lottery ticket. If win, great. If lose, nothing to cry over.
What are the likely outcome of these trades?
Option chain thinks there is 85% chance that all these trades will go to zero.
Do I recommend doing this?
Only if you can accept the scenario that all this might go to zero. If you can't, don't do it. And I don't recommend doing this every month from the long side too.
So, what's the payoff?
First, I think Option Chain probabilities are too pessimistic. I think the odds of me losing everything is perhaps 50% only. The other 50% is positive value, perhaps majority chance out of that 50% being profitable. And if profitable, the % returns can be hugely variable, from 0% to 500%-1000% returns, maybe more if market is very, very cooperative. A 5 to 10-bagger is very possible, if the 6507% example shows. Overall, taking into account a 50% chance that it will expire to zero, the trade still have a positive expectancy.
What if Volatility / VIX contracts and the premiums contracts?
This is actually one of my biggest risk, that /ES makes a very, very slow grind upwards, not quite reaching 2000 by expiry date. Then, I lose all the premiums.
Here, I'm taking a bet that the /ES will end the year at around 2050, which means the /ES earned zero returns for 2015. (/ES closed at 2054 on 31/12/2014).
This means for 2015, the US markets have ZERO returns. What's the chance of this happening? Perhaps 50/50. I think no one really knows.
Why no Trailing Stop Loss?
Because the market will make it extremely difficult for anyone who bought at the bottom, to get to the new high. It will show huge returns, then, falls back down a lot, before going back up. A trailing stop loss will just be stopped out unnecessarily.
So, the strategy is easy - either huge returns, or zero returns. Whatever the outcome, I don't care!
Why not bet huge?
There is still 50% chance of losing everything :-)
Yes, it means my capital will not really grow that much, even if this is a 10-bagger ...
This and the 6507% trade returns are only for "bragging rights", when we sit in the pub and talk about "fishing for the giant fish", and some of us might tell about this really big fish that was almost caught and got away.
This is not a serious method to accumulate wealth.
But it makes a great fishing tale!
Cheers, and happy trading.
Always trade safely!
