Trade The Journey

Trade The Journey

Trade Review: Week of April 14th

Trading Asset:

SPY (S&P 500 ETF)

Strategy: Vertical Spread

1ST Spread (SPY)

Leg 1: Buy $521 Call

Leg 2: Sell $525 Call

Premium: $4.50

Profit/Loss: ($3.81)

2nd Position

Strategy: Vertical Spread

2nd Spread

SPY (S&P 500 ETF)

Leg 1: Buy $518 Put

Leg 2: Sell $513 Put

Premium: $2

Profit/Loss: 2.79

2nd Position

Total Premium: (1.03)

Hypothesis: I think inflation will reaccelerate in the near term forcing the Fed to keep rates unchanged.

Hypothesis Explained: Inflation has been edging higher the past two months, and I believe that inflation will reaccelerate as ISM manufacturing expanded for the first time in a while. The economy is still strong, the job market remains robust although there are some signs that it’s cooling. In the coming months, I believe that the Fed will have a tough time reining inflation back to its 2% mandate.


Trade Management: I initiated the trade with a put debit spread on Monday, timing it around what seemed to be the day’s lowest point. This was strategic, anticipating a bullish surprise from the upcoming inflation report. Despite the rocky days leading up to the CPI release, my commitment to holding was firm. On Tuesday, the SPY dipped but managed to climb back near its opening level by day’s end.

As the week progressed, volatility intensified. By the eve of the CPI release, the SPY was moving laterally, heightening my anxiety about the impending report. When the CPI data finally emerged, indicating a rise, the SPY dropped from its recent peak of $521.35 to open at $511. Although profitable, the gains were muted due to the distant expiry date of the following Monday, restricting the immediate accrual of time value.

In response to last week’s losses and aiming to enhance risk management, I opted for a call debit spread, guessing the CPI might meet or fall short of predictions. This position was set to expire shortly after the CPI announcement. Unfortunately, as the market declined, the value of the SPY calls plummeted, leading to a nearly total loss of the premium. However, I kept the put spread, anticipating further market dips as technical indicators suggested a potential peak formation.

The DMI and ADX pointed to a weakening upward trend, with the negative DMI overtaking the positive, indicating a possible downturn. Thursday’s PPI matched forecasts, pushing the SPY higher, but I chose to maintain my position with major bank earnings and consumer sentiment reports due on Friday.

Friday brought a mix of results with varied bank earnings, a bearish Federal Reserve speaker, and declining consumer sentiment, all contributing to a market drop. Unprepared for the magnitude of this fall, I exited my position when SPY tested and held a support level, acting prematurely in a moment of panic.

Regretting the early exit, I searched for a reentry at a presumed low, only to find the market had further to fall. While the SPY recovered slightly at the close, the session was fraught with volatility, ending in a loss for me but providing valuable lessons.

Trading Review: My initial analysis was correct, and I managed a strong entry; this was my first attempt at using a hedging spread to mitigate potential losses. The concept was sound, but the execution was flawed. The put should have had a shorter duration, as markets often rebound quickly from sell-offs, allowing buyers to capitalize on dips. Conversely, the call spread should have been longer-term to benefit from any subsequent recovery.

Looking ahead, I must detach from past trades and focus on the current opportunities, avoiding premature exits based on fear. Engaging in a new trade anticipating a market correction proved risky and could have led to greater losses. Moving forward, I aim to set clearer test points before entering trades, avoiding assumptions about market movements based purely on preliminary signs, a critical step towards professional trading in volatile conditions. I also recognize the need to manage position sizes more conservatively and cut losses more decisively in uncertain market environments.

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