AFI Hedge Fund Update #3: Slow Recovery and Lessons Learned

Better but Still Underperforming the S&P

Early in 2017 I decided I was going to take $10k from my Roth IRA in Vanguard and use it to trade options.  I’ve always had an itch for making speculative investments and I’ve wanted to try options trading for a long time.

After basically breaking even with $10k I decided to move over another $10k as well as $3k that was in my wife’s Roth IRA.  I probably should have spent more time learning with paper money accounts but oh well, live and learn.  The $23k I have invested represents about 15% of my total retirement account balance between my 401k and Roth IRAs.  I’m also maxing out my 401k each year while not contributing to my Roth IRAs unless I have extra funds from my Amazon business so that 15% will continue to shrink.  This is why I don’t feel too bad about any performance issues since the majority of my retirement savings is tucked away safely in low cost index funds (boooring but a good idea…).

In my last update I did not have great results.  Since then I’ve bounced back and while not even with the S&P yet, I’m definitely closing the gap.  My account balance has swung up by almost $2,000 in the last 45 days. 

Here’s the chart showing how I’m performing since March 2017:

What Changed?

I noticed that as I did less trading, my results got better.  My problem was I would create a defined risk position like a put credit spread or an iron condor and as soon as I started to show a loss I would close the position out.  This seemed like a good idea because if I was facing a max loss of $750 I would close out at a $300 loss and avoid a max loss.  The problem is I was constantly locking in small losses without giving the trade enough time to work back in my direction.

Once I stopped being so trigger happy on closing the trades and letting the odds play in my favor I started to see some great results.

My reaction when I realized less is more

Plans for the Rest of 2017

For the first half of the year I was really focused on using neutral strategies.  Betting that stocks would stay range bound and then I would get destroyed when they didn’t do that.  From now on I’m abandoning the neutral outlook.  I’m going to use my opinion on stocks and place bets accordingly.  If I’m bullish long term on Amazon then I won’t sell call spreads, just put spreads.  If I’m bearish on brick and mortar stores like Wal Mart and Kroger, I’m not going to sell iron condors, I’ll sell call credit spreads.  In the last few months this has worked out very nicely for me, especially with a new strategy I’ve been using that’s like an iron butterfly but with tighter wings on the side I expect the stock to move towards (I’ll show some examples in an upcoming post).

Here’s a look at my account right now.  I’ve got fewer positions on than normal and I plan to keep it this way.  Since volatility is low across the entire market, there’s no point in loading up on positions now.  I’ll hold on to some of my cash for when volatility spikes so I can sell some richly valued options.  I’m also going to keep at least 10% of my portfolio in XIV which is inverse volatility.  This is kind of a hedge for my account since it’s banking on volatility being low.  If volatility spikes, XIV will tank, but then I’ll be able to sell a bunch of options and collect that premium so it’s a nice hedge against my overall strategy and adds some diversity.

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