Another victorious month snatched from the jaws of defeat! The bizarre rally leading up to the Fed meeting was quickly negated, and we had another month with no losing trades - and more importantly, another month in which we handily beat our 10% target return.
The Market
Sure enough, the same buzzwords we identified last month are still driving events now. Some market news of note:
- The Fed is trying to do too much. While cuts may be having some slight effect on the economy (cf. stronger November retail sales), rate cuts have not improved the credit situation. LIBOR is practically unchanged, and there are real concerns now about the Fed’s credibility.
- Former Fed chairman Alan Greenspan now puts the odds of a US recession at 50%
- Merrill Lynch puts the odds of a US recession at 100%, based on analysis of the yield curve and corporate spreads
- Although Goldman Sachs made some nice profits betting against the mortgage industry, other big names like Citigroup are increasingly feeling the crunch. It’s hard to envision a sustained bull market without leadership from the financials.
- And by everyone’s estimates, we haven’t seen the bottom of the housing situation yet, and may not for quite some time.
In terms of tradable sentiment, we recently noted that there’s no clear signal at the moment where the markets will finish out the year. In short, it’s a good time to be neutral.
Our Iron Condors
We will post a full annual review later next week, but for now we’d just like to mention that this was yet another in an unbroken string of winning months.
December DIA iron condor
Result: We held this trade for 26 days for a final net credit of $0.35 per position, which is a 26.71% return on capital risked. Clean and complete exit before expiration. We were reminded of one important fact this month, which is that the probability of an underlying touching our short strikes is always higher than the probability of the underlying expiring beyond our short strikes. That’s a fancy way of saying that just because our short strikes get hit is not a reason for panic or for hasty action. Calm, cool heads prevailed this month (in spite of some nervous exclamations from our members), and the extremely overbought pre-Fed conditions gave way to the attendant selling. The DIA liquidity is always nice, and the return on this trade is obviously hard to argue with.
December SPY iron condor
Result: We held this trade for just 17 days for a final net credit of $0.19 per position, which is a 16.23% return on capital risked. Clean and complete exit before expiration. Our short call on this trade was at 150, and as you can see on any chart the Spyders spent quite some time above 150. We were glad to exit this trade and take our profits when we did.
December QQQQ iron condor
Result: We held this trade for 29 days for a final net credit of $0.18, which is a 14.75% return on capital risked. We only closed the call side of this trade, and will allow the puts to expire worthless. We actually exited this trade at the market top, prior to the Fed meeting, as we were still able to take some profits there and reduce our risk. We left the put side of the spread open in order to reduce exit costs (and thus improve performance) and to reduce commissions. We like to do this when we can to help keep your costs lower - and to our nervous nellies out there, letting those puts expire really shouldn’t be a cause for concern, but if it really bothers you then simply close out the puts and sleep soundly! :)
Conclusion
One minor change to the site was made this month: we’ve started having our trading links posted automatically every night. This is a free service we provide to all of our readers, and many of you have written in to say how useful you find the condensed list of links. We’d just like to remind you that you’ll only receive our blog posts - including the trading links - in your email inbox (and/or RSS reader) if you sign up via the link at the end of this post.
That wraps up the December expiration cycle. We’re really pleased with our performance this quarter, especially given the market turmoil. Hopefully these results will help disprove the naysayers out there who (erroneously) claim that market-neutral trading is only suitable for quiet markets.
Remember that no matter how much money you make from trading, money is only as good as the time it allows you to spend with friends and family. Ultimately, the gifts are irrelevant, the trades don’t count, and the only things that matter in the end are the people you’ve loved and the people you’ve helped in your life. Happy holidays, everyone.
