Trade The Journey

Trade The Journey

Trade Review: 10-6

Trade Review: 10/17

Asset: Rusell 2000 ETF (IWM)

Strategy: Vertical Call Spread

Leg 1: Buy call $169

Leg 2: Sell call $174

Premium: $2.60

Profit/Loss: (0.20)

Hypothesis: Markets are oversold, the Russell ETF RSI is below oversold and a doji candle.              

Hypothesis Explained

Treasury yields have risen to multi-year highs as the market seems to finally accept that rates will be higher for longer. The economic reports released this past week still point to a resilient labor market and economic growth. Crude oil also made a high of $95. Yields took the headlines as the ten-year yield seems poised to at least test the 5% level in the coming weeks.

The indices responded to recent market events by falling sharply with the Russell 2000 drifting into the oversold level. I thought that indices were overextended to the downside and it might be a good time to place a bullish bet. Anticipating reversals is akin to picking a top and bottom, its hard to do but with some important job data scheduled to be released I felt there was a catalyst to push the market up.

Trade Management

Initially, I set the premium price I looked to pay far below what any participant was willing to sell for. The first premium I set for a limit order for entry was $2.25 but IWM didn’t seem like it would reach the level. Seeing the premium gyrate between $2.60-$2.70, I set the premium price to $2.60 and about fifteen minutes later I was in the trade.

This trade never set into direction and pretty much stayed unchanged on the first day. However, there was a period where IWM declined, and the premium price of the spread sank to $2.12.  I figured that most participants were waiting for the employment situation report scheduled to be released pre-market on the following day.

The employment situation report surprised participants with over 300,000 jobs added. However, wage growth was nil which was cheered by the market. IWM didn’t really do much and I was a little surprised. Seeing the premium drift from positive to negative, I decided to close the trade and take a small loss. About thirty minutes, IWM alongside the other indices shot up to the upside.

Trade Review

I can look at this trade in one of two ways. On the one hand, I limited my potential loss and stuck to a predetermined exit price.  On the other hand, I exited the trade about thirty minutes before the market initiated a move up. I have to admit that there was some disappointment, seeing that I was right about the direction.

In the last few trades, I have been correct in terms of forecast. However, I mismanaged each of the trades which ended in losses, some more severe than others. It’s hard not think about what could have been. Looking back at the trade, it’s easy to say that you missed out on a profitable trade but that’s after the fact. Just as easily as the market shot up, it could have fallen sharply. It’s hard to know what’s going to happen next.

Perhaps the best way to look at this trade is that the entry for this trade made all the difference. Had I would have been a little bit more patient; I would have entered the trade closer to the fair value and probably would have entered the trade on the next day with a small profit. I would have built on the trade and could have remained on the trade when it tested the previous day’s lows.

Lesson: Trade management is just as important as forecasting the direction of the trade. It starts with the fair value of the spread and finding an entry price as close as possible to that value. Managing the trade means managing your emotions and expectations.

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