I did some house cleaning this week in more ways than 1. First I removed a covered call in ABBV due to a low liquidity options market with huge spreads. The next thing I did was implement a few new strategy rules in my never ending conquest to reduce risk and improve performance. Finally I sold part of my ABBV buy-and-hold position because it was far too large for my account size.
The Week Behind
Overall my portfolio held out much better this week than I expected. Even through holding negative delta's all week and the markets constant rallying, I was able to end the week at 1% profit. This is not the blowout week I was hoping to have but it is not the massacre that a short premium portfolio like mine could/should have had.
Tough being a short premium trader this month
Many people over complexify options. At the end of the day options sellers are making money due to IV regularly overstating RV. This is similar to how insurance companies profit, because they regularly take in more in premium(IV) than they pay out in claims(RV).
The next article sums it all up pretty well. In 30 days time we had the worst December and worst Christmas Eve in history with the Nasdaq selling off over 20% from it's highs. Followed by the strongest comeback in 10 years.
As I mentioned at the beginning of the article, this was a week of house cleaning. First let me remind everyone that this is my first attempt at this type of portfolio. One that implements buy-and-hold, options selling and price-action trading. This portfolio is rough around the edges but I am tiding things up as I go along.
One of the first things I want to do is to ensure going forward that all of my options are in a liquid market. Unfortunately ABBV does not fit that bill. The answer was simply to close my covered call and rely on short delta's from my QQQ's position to provide some covered call effect.
This was also a week where I looked at my strategy and thoughts about any new rules that might help moving forward. One of the rules I decided on was to ensure no single buy-and-hold position took up more than 10% of my account balance. I will be injecting my account with some more capital next month, so for right now this rule is being violated, but will naturally correct itself next month. Even after the added capital my ABBV position was still going too be to large so I cut it in half, from about $10,000 to around $5,000.
The Week Ahead
While I was able to stay green throughout the rallying this week, that will not be the case next week if the rallying continues. The delta's in the position are getting increasingly negative (-43 as of this post), my gamma is increasing, and a lot of volatility has been sucked out of these options, not giving me a lot of buffer from contracting vega.
I would like to believe that the market is due for at least a small pullback, but I also know the market will do whatever it wants. It may decide to rally another 12% next week, who knows. With that in mind I am going to simply stick to the rules and stay mechanical. That means my QQQ position will be rolled up(in strikes) and out(in time) if price reaches my break-even at around 166. If this does occur then my P&L will likely be a few percent red on the year.
On a final note, I am still glad to have negative delta's in place for now because I know how quickly markets change. All it would take is one materially down day and those negative delta's quickly become positive.