Trade The Journey

Trade The Journey

Losing Trade No. 13

Top of the Morning. It’s always refreshing to know that the weekend is ahead after a long week. So many experiences occur during the week, some expected and some unexpected. I sometimes sit back and wonder how life creates a new challenge, each day completely different from the last.

Life is creative thinking in action. Adapting to life is akin to adapting to a constantly changing market. You never know how people will react to a new piece of news.

For instance, the market reacted positively to the Fed’s announcement of tapering. Typically, higher rates are an up-trending market’s main deterrent. Participants took this announcement as an acknowledgment of rising inflation and a strong economy.

Monday, the market reacted negatively to the Evergrande debt situation. The company has swum in debt for a while, being one of China’s largest developers. Evergrande is on the verge of defaulting, unable to pay interest payments due to investors. Some investors have yet to receive their interest payments. China flooded its markets with liquidity to help blunt the impact of a potential default.

There was or is a concern that Evergrande’s default could spill over into other countries, also called contagion. During the latter part of the week, the market’s recovered.

Supply chains are still facing challenges due to labor shortage, Covid, and consumer demand. Ports remain crowded with containers unable to dock. In their earnings release, FED Ex spoke of the supply chain issues and margin challenges they face ahead due to labor shortages. I think we all can see that the way we shop is vastly different than in the past. Everything is almost digital, from how we pay to the medium we use to order goods and services.

Some say that a Market or Economic collapse is imminent with the rising costs, wages, and rates. Is collapse too strong of a word to describe a pullback? The FED is awaiting the September jobs report to make a more definite taper announcement. Job openings are near historic highs, but so is the amount people leaving their employers.

A lot is happening in the world, as always. One sector I want to better monitor is crypto, as countries worldwide adopt the currency as a payment method. Crypto can help countries with inflated currencies.

The Russell 2000 seems to be in a perpetual sideways trend. The Russell is mostly small-to mid-market cap companies primarily based in the US. Investing in small-cap companies means is a lot riskier than investing in stable, larger companies. The Russell turns before the indices.

The S&P 500 dropped below its 50 SMA but recovered towards the end of the week. The Dow Jones fell below its 50 SMA in early September and looks to be in a sideways trend. Nasdaq also fell below its 50 SMA but was able to recover slightly. As the Pandemic lockdown measures eased and the US population slowly increased its vaccination, the markets rose.

The markets are a discounting mechanism, meaning it looks ahead, six months to a year. Bond yields rose, with the five, ten, and thirty yields all gaping up. The five and ten-year yield bonds gapped above both their 20 and 50 SMA’s. The Thirty-year yield bonds gapped above the 20 and 50 SMA’s but remained below the 200 SMA.

I briefly looked at the market before placing a bear call options vertical spread. In this spread, you buy the call at the higher price and sell the call at the lower price. You take in a credit, hoping the market stays below the sold call.

I sold the vertical spread on American Express. American Express had been a sideways trend after and was teetering on its 50 SMA. AXP was in a sideways trend, and I felt positive that it stayed at its current level or declined a bit further.

Implied volatility was also trending downwards, so I thought volatility wouldn’t be an issue. I failed to take into account the effect of the Fed’s announcement and how it would influence the markets.

Higher rates are typically good for financial companies. As the bond yields gapped up, the financial sector did better. The Evergrande news didn’t move American Express, but the yields did.

Positive sentiment flooded the market, and my options positions lost ninety percent of its value by the end of the week. American Express rose more than thirteen dollars in the latter part of the week. It just kept gapping up.

One aspect of the trade I am happy about is that I wasn’t surprised by the stock’s action. I wasn’t delusional in assuming the stock would stop rising or pull back.

However, I still am in denial about the position and the possibility of recovery. One factor about the trade I do like is the increasing Put/call ratio which is now above one.

Unless the stock pulls back, I really don’t see this position turning into a profitable position. My breakeven is $164.32 and has probably changed since.

The return-risk ratio was 1:7 to 1, which wasn’t the 2:1 ratio I usually like to trade. This position will probably end up as a losing position, which will add to the losses for the year.

The beginner’s luck phase has officially ended. Now is the actual test of applying the knowledge in action.

Another mistake I made was placing the spread with too little time for it to work. I thought the spread would have three weeks to work, but it was only two weeks when I checked.

Options are about discerning the speed of the underlying stocks and direction with accuracy. In trading, direction and speed play a factor but not like a decaying asset like an option. The speed of the underlying is also known as volatility.

Last week’s cash flow:

I’m proud of last’s week spending. I controlled my spending throughout the week. I was able to save and invest money on a significantly smaller income for the month. My credit rating is also increasing.

Grade: B
Reason: Continued improvement.

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