Like all traders and investors, I periodically review the performance of my portfolios and check in on whether they are getting the job done. I say periodically, because the temptation – a dangerous one for many – is to be constantly watching and let’s face it, this is a long term game, not a get rich quick punt, right?
For the sideways to slightly bullish market
As such, over the past few months, one of my personal favourites – the covered call, has continued to deliver the cash flow I seek from that particular portfolio. For example, this calendar year, in the Australian market, FMG being the one blot on the ledger, we have had only one loser from 13 closed positions. For those that obsess about win/loss ratios – a flawed measure in my book – that is a 92% win rate for the calendar year. Of course, this is a reflection of the underlying market conditions, which have been supportive of the strategy. *
Market conditions have been more “choppy” in the US, however, trading there still profitable, with 64% winners for the calendar year. *
For a more volatile trading market
One area that the strategy team and I sat and looked at a few months ago, is how to better trade the earnings season in the US. This has long been a great hunting ground, given the higher levels of volatility which traditionally accompanies it, however, tailoring the right strategy has been the challenge.
In April – just over the month ago now, we elected to apply the Butterfly – a three legged options strategy, to capture the potential for this particular market scenario. This reflects the importance of understanding options strategies for what they are – specialist tools – to achieve an outcome.
Enter the Butterfly
So since the first of these trades on April 15th, to 19th May, the closed Butterfly trades and there have been 7 of them, have yielded the following: 5 winners, 2 losers.
More specifically, for clients taking the all these trades and following prescribed risk levels, this has been the outcome net of brokerage:
As an observation, you will note the reduced marginal impact of brokerage on larger position sizes, reflecting the cost nature that is represented by brokerage fees.
So Strategy 3 – where should that be?
Looking at markets right now, I am expecting to see some big action across the commodities markets. Geopolitically, there are a few potential hot spots that could flare up – and as always, Gold and the US Dollar will feature in any play around this type of view.
However, the big concern for many out there, is that trading futures or fx has a high level of risk associated with it. This is true – largely due to the leveraged elements, although to be fair and to provide a balanced view, there are also strategic benefits to trading them too.
First rule for investing in these markets is to contain risk so how can this be achieved, beyond the obvious, such as stop losses and position size?
How about Options on Futures?
This is a critical offering as with the particular strategies we use in this space, risk is contained by the options contracts and the defined and dare I say guarantees that they provide. (bare in mind exchange traded options run through the novation system and are therefore effectively guaranteed by the exchange they trade on).
As such, clients wishing to trade in the “higher octane” markets can do so, along with the peace of mind that comes from robust risk management and in particular knowing your defined risk up front on the trade.
These markets are new for many – personally, I have traded them for years – and while they aren’t the core of my investing these days, they provide excellent diversification and unique trading opportunities. As such, they do require different skills to trade successfully.
If you are curious about what it takes, or how you can get a rolling start to add a further pillar to your investing make sure you contact us