Results: Another 7/7 week, but...
First loss in Q2, despite 7/7 in direction
Quick summary:
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Last week’s performance was, again, 7/7 correctly predicted
However, the rebound was too strong, and we lost money on our hedges
We are still up 54% in 2022, while the S&P is down 13%
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Last week’s accuracy & precision
It was a strange week for us. This was the first time we got 7/7 correctly predicted in terms of direction for the week, and yet instead of making money, we lost it. A losing week had to come, no doubt, it’s just strange that it occurred when we had a perfect directional prediction (albeit with larger errors obviously).
So what happened? We predicted a slight rebound from Tuesday’s lows, hoping to see the S&P around 3,970, but it rallied by over 6% for the week, to close at 4,158, in a typical bear market rally. The bottom is most likely still not there for the markets (no fundamentals or events suggesting otherwise), but markets saw some relief last week and a powerful bear market rally pulled up everything along with it (except Bitcoin, interestingly, which finished the week lower, as we predicted).
As you can see on our performance chart, the errors for our two main indices, S&P and DJI, were much larger than usual, amidst larger than usual indicator range volatility last week. However, the same thing happened the week before, but that week we made our largest weekly profit thus far.
Performance: first loss in 8 weeks
The difference this time was that we had a directional hedge for SPY and DIA in the opposite direction from our prediction. Usually, on a normal week, when we predict markets to go up, we buy ITM calls - so that if the markets rally higher than our predictions, and break our confidence intervals, we make up for the losses with the calls. When we predict them to go down, we buy puts for the exact same reason.
Two weeks ago, we bought puts, while predicting the markets to end up lower. Last week, despite predicting the markets to end up higher, we bought puts instead of calls. Why?
Here’s why (from our Thursday post):
However, the Fed minutes that came out yesterday suggested at least two more 50bps rate hikes over the next two meetings. It’s a strong commitment from the Fed in their battle against inflation, so it will be interesting to see the immediate market reaction today and tomorrow.
This is why we are urging our readers to keep puts as downside protection (see details below).
Furthermore, we also said:
If the market continues its rally over the next two days, we pocket losses on the puts (we’ll try to contain them within 30-40%), and take the full premium from the iron condors, meaning that we are looking at a small profit of a few hundred dollars for the week. If the rally breaks the upper boundaries, then we have our first negative week in Q2, as both the puts and the condors lose money.
And that’s what happened. Our first losing week (out of 8) in Q2 of 2022.
We lost $210 on the SPY condor, and $198 on the DIA condor. But it was the hedges that cemented the losses - lost $330 on SPY put, and $356 on DIA put. In total, a loss of $1,094.
How does this affect our performance? Just a little dent.
We are still up 54% for the year (while S&P is down 13%), and we are up 224% overall since we started the competition.
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