Results: A sell-off that wasn't...
Missed direction, but small profits captured
Quick summary:
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The CPI number was supposed to send markets on a sell-off
Instead, the options expiry prevented this
We missed direction, but were precise enough to earn a minimum profit
We are still up 67% in 2022, while the S&P is down 19%
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Last week’s accuracy & precision
It was a very interesting week. On Wednesday, just as our predictions were closed, the new CPI numbers came out and printed a 9.1% inflation rate, 0.3 p.p. higher than the consensus estimate. Even core inflation was higher than expected, and the next day the probability of a 100bps rate hike in the July FOMC meeting jumped to over 80% (it was 0% a week before).
The BASON - before the inflation number came out - expected a strong market reaction, a sell-off. And it started with a 2% decline on Wednesday, only to jump back and reverse the entire sell-off. Exact same thing on Thursday - large decline on open, reversed by close.
A sell-off that wasn’t.
The puts were killed already on Thursday as the sell-off reversed, while the condors (split into two legs) survived briefly on Friday but were sold early to grab at least some profits and close the week green.
What happened?
Friday was options expiry day, and the 3800 and 3850 SPX levels had large open interest, so this could have been driving the rebounds on both Wed and Thu, as well as the final rally on Friday. It’s hard to tell obviously, but with options expiry days it could have easily gone the other way around - it has happened during the last two inflation prints. But it didn’t happen last week.
We therefore ended up with another 7/7 missed directions, but somewhat decent precision for DJI and S&P. The S&P and DJI did end the week lower than the previous week, but our directional prediction is with respect to Tuesday’s close, not the Monday open. So we were off, no doubt.
Performance: small profits taken
We traded 370/371 to 384/385 SPY 15/07 as-if iron condor (10 contracts) for $460 immediate gain. But as emphasized, we bought separately the bull put spread (370/371), and the bear call spread (384/385), placing a 50% stop-loss on each strategy.
We also bought an ITM put for downside protection, 1 SPY 385p 15/07 for $9.72.
Same thing for DIA, 301/302 to 311/312 DIA 15/07 (10 contracts) for $420 immediate gain, with separate put (301/302) and call legs (311/312).
And one ITM put, DIA 15/07 312p for $5.9.
This time both legs were sold with the condor still active, so some profits were taken there to offset the loss from the puts. In particular, the SPY legs gave us $321, while the DIA legs gave us $333. Both were sold in the first hour of trading on Friday. Why? Because this was the point in time where the overall strategy finally yielded a profit, so that opportunity was taken immediately.
The puts both lost money, limited to $274 for SPY, and $210 for DIA (sold on Thursday).
Overall, we gained $170 in a week where direction went against us. We expected much more after Wednesday’s CPI data (over $1000 surely), but we’ll take it. Btw, S&P also finished the week lower, -0.9%, but our directional prediction is with respect to Tuesday’s close, not Monday’s open.
Our annual performance is up 67% for the year, and 249% overall, while the S&P is down 19% for the year, and 7.8% since we started this competition.
A worrying trend is the BASON stagnating over the past 4 weeks. Whenever the market has no clear sense of direction, it’s difficult for us to make consistent profits.
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