Trade The Journey

Trade The Journey

Trade Review: 9-21

Trade Review: Fed Rate Week

Asset: SPY (S&P 500 ETF)

Expiration: 09/21/23

Strategy: Vertical Call

Leg 1: $439 (Buy Call)

Leg 2: $442 (Sell Call)

Premium Paid: $3.00

Profit/Loss: ($2.92)

Hypothesis: This is a toss-up between a hawkish and dovish pause. An equal amount gained to an equal amount loss.

Trade Review:

This trade was profitable upon opening the position as the market prepared for the Fed rate decision and press conference. Although the market factored in a high probability of rates remaining unchanged, the press conference and dot-plot projects were shrouded in uncertainty. With the rise in crude oil prices, were Fed members adjusting their outlook on inflation or did they see it as a brief spike?

The S&P had formed a small support level, and I thought it was a bit oversold so I opened bull vertical call position. As the S&P 500 recovered, my position moved further into profitability. In fact, it was set to be the largest profit I had made since I began trading. The premium I was set to receive totaled $1.80, and I was excited. As the SPY etf moved in further into the money, I began to adjust my limit order as I set my sights on receiving a premium of $2.00.

While I knew that Fed would mostly likely keep rates at the current levels, I was unsure of what would be said at the press conference and what the dot plot would show. I kept moving the premium limit order up as the option premium rose to $1.92. I was $0.08 or $8 short of the $2.00 premium I wanted to receive.

Unfortunately, the press conference included a few surprises which were another hike in one of the last two meetings and the preference of price stability over a soft landing. The dot plot also surprised market participants with one member seeing rates rise as high as 6%. As the news filtered through the markets, yields began to rise, and the indices began to fall. Yields made multi-year highs.

After this information was released, my position profits were erased, and my position was close to losing its full premium. Thinking that maybe the market was oversold, I kept the position open. That was a huge mistake as the S&P 500 gapped down and I nearly loss the entire premium. I was eight dollars short of losing the entire premium, so I guess I did lose the entire premium.

As I watched the premium turn from a profitable position to a losing position, I felt sick to my stomach. This was the second time I allowed greed to overtake me. The previous trade I did the same thing, allowing the position to turn into a loser. I also didn’t want to leave money on the table as I have closed the positions in the past for a small profit only to watch it rise further.

Its not so much my forecasts that need adjustments but my trade management. I’ve been pretty accurate in my forecasts, but I’ve been unable to capitalize on the trades. Moving forward, I will make the following adjustments.

  • 20/60: I must limit my losses to 20% of the premium and take the profit when it reaches 50-60%. I had a hard time closing the trade when it turned against me because I had a sizeable profit, and I just couldn’t accept that the trade had turned.
  • What happened the past few minutes or hours shouldn’t affect your decision making in the present. I allowed what happened before to affect what I did in the future and in trading things change in an instant.

While my confidence is growing, I cannot allow losing trades to drain my trading account. Moving forward, I think that once my trade management skills improve, I have a good shot at becoming a profitable trader.

Trade Journal:

 

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