Trade The Journey

Trade The Journey

Trade Review: IWM Vertical Call Spread

Top of the Afternoon! This past week I decided to open a bulll vertical call spread on IWM thinking that the CPI report might provide the needed catalyst for IWM to rally. And it did.

Unfortunately, I didn’t plan on the Mary Daly, the San Francisco Fed president, speaking on the current trajectory for rates after the CPI report was released. Ms. Daly spoke on inflation and why rates need to stay higher for longer. With the treasury issuing an increased amount of long-term debt securities, this proved to be too much for the indices to continue their rally.

Asset: IWM

Strategy: Verticall Call Spread

Leg 1: $191

Leg 2: $193

Premium Paid: $0.85

Premium Recieved: $0.50

Profit/Loss: ($0.35)

This trade worked as planned up until the comments by Ms. Daly. After the comments, all of the indices retreated and never recovered during the course of the week. With the exception of the Nasdaq which fell sharply, the other indices remain close to their highs. Volatility also fell as the CPI report was released in line with expectations. Rising yields could have contributed to the Nasdaq’s pullback.

While I did prepare for this trade, there’s always some uncertainity involved when placing a trade and the trick is to know when it’s time to take profit or let the trade run. After the CPI report was released, IWM reached $194 which turned out to be high of the day before it fell sharply. I had the opportunity to take a nice profit but unforunately I kept the trade on, thinking I could capture the entire premium.

I was wrong and there really wasn’t another catalyst that would spark rally. There really wasn’t much to this trade as it was mostly a play to take advantage of a CPI report that would show inflation pressures easing. On a positive note, I entered this trade on the low of the day for IWM which is a skill in itself. One of the things I did differently this time was wait to enter instead of just entering the trade at the available price. I set a price that I was comfortable paying and held firm to that price. My original entry price was around $1.15.

Below are my entries into my trading journal.

Trade Review written upon closing:

This trade played out like the previous trade, with me seeing a profit and being hesitant to close because I thought that IWM might have further up to go. Once Mary Daly made an apperance on Yahoo Finance, speaking on the persitence of inflation and how rates would need to remain higher for longer, my trade went from profitable to a quick loss. To be honest, I didn’t know she was speaking. Luckily, I was able to manage the position and take a much smaller loss than I originally thought, as the position drifted towards a loss of $70. Patience is an important trading skill especially if you don’t have a crystal ball. Knowing when to get in and when to get out is another skill to be honed.

Lesson: Anything can happen and when your position profitable, you should consider unforeseen events and how they may affect your position.

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