Results: stellar performance amidst FOMC-induced decline
+7.45% up for the week, 6/7 correct predictions
Quick summary:
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Last week’s performance was driven by the FOMC meeting on Wed
We warned our users not to put up any positions until after Powell’s speech, depending on the initial market reaction
The puts placed after it paid off handsomely
Portfolio was up 7.5% for the week, 165% overall
US Midterm elections are on Tuesday; CPI numbers coming up on Thursday!
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Last week’s performance and portfolio update
The key event last week happened on Wednesday. No, not the FOMC statement, which was interpreted as a signal of easing, but the Powell speech that came up half an hour later. The message was very close to what he said at Jackson Hole back in August (a statement that also killed the rally and set the stage for more declines in September). First he said that terminal rates will be *higher* than what the market currently expects. This was the first strong turning point of the day. And then he came out with this:
''Risk management is key here: if we were to overtighten, we could use our tools to support the economy later on; but if we failed to tighten enough, inflation would become entrenched and that would be a much bigger problem''.
In other words, for the Fed, a greater risk than over-tightening is not tightening enough. The Fed is clearly committed to restoring its credibility and will do whatever it takes to combat inflation, which is still stubbornly high. The reaction was brutal, but expected:
We opened our positions (according to our weekly predictions) 15 minutes into his speech, after these crucial messages. Already on Wednesday, in that final trading hour, we were up almost 50% for our option positions.
It turned into a fine week in terms of performance. As explained on Thursday, no long-shorts (no need to take on more risk than necessary during such turbulent weeks). The options plays were more than enough to drive the whole performance.
7.45% for the week, profits taken, cumulative portfolio is up 165% since the start.
What about precision? 6 out of 7 called correctly!
The most important ones, S&P and DJI were very accurate (too bad the SPY bull leg got stopped out too early - see below), as was the 10year T-Bill. Interestingly, despite a prediction of a general market decline, we didn’t see the VIX going up. Something’s cooking there. The VIX has been on a steadily downward path for over a month now. The only surprise, BTC, was actually also on target before rallying on Friday to finish up over 21,000 for the first time since early September.
What’s coming up this week? It’s going to be another roller-coaster, so get ready. First, the US Midterm elections are today. Some are anticipating a Wed rally if the Republicans win over the majority in Congress (suggesting a gridlock would be good for markets - not sure about that one, but ok). But then, if the CPI comes in hotter than expected (again!), we might have another slump on Thursday and Friday. Or not. Maybe the elections produce a dump already on Wed, and the CPI another short-covering rally like last month. We shall see :)
Options: 73% return
As mentioned last week, we opened the following options positions:
25 SPY bull put spread at 374/375 and 25 SPY bear call spread at 390/391 for a total of $1000 premium.
We also bought 2 SPY 390 04/11 puts for $8.2. The price at the close of trading yesterday was at $15.46. So we raised the stop-limit order to $14 to pick up immediate profits today in case it starts going against us.
Similar for DIA: 25 DIA bull put spread at 319/320 and 25 DIA bear call spread at 330/331 for a total of $950 premium.
In addition, we got 2 DIA 330 04/11 puts for $5.9. The price at the close of trading yesterday was at $8.8. We raised the stop-limit order to $7 to pick up immediate profits today in case it starts going against us.
The stop-losses were raised again on Thursday after another down day post-FOMC, as we mentioned on Twitter:
On Friday, an initial up move triggered the stop-limit orders and we pocketed the profits. As for the condor spreads, the SPY bull put spread was killed on Thursday, but the bear call spread was bought back for a few bucks, pocketing the entire premium. For DIA, both spreads delivered (expiring worthless), and were bought back also for a few bucks.
Given that we were already very bearish (the puts and the macro positions), we decided not to go for the long-shorts. If we had, the performance would have been even better, but it was a risk management move. Overall, excellent performance.
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