Trade The Journey

Trade The Journey

Trading Review: Week of January 06

Trading Overview:

  • Asset Traded: SPY (S&P 500 ETF)
  • Strategy Applied: Vertical Call Spread
  • Position Details:
    • Leg 1: Buy Call at $474
    • Leg 2: Sell Call at $479
  • Expiration Date: January 8, 2024
  • Premium Paid: $7
  • Profit/Loss Realized: $7

Rationale Behind the Trade: My hypothesis for this trade centered on the potential catalyst effect of economic reports related to the job market. Despite the indices not reaching new highs, the market recently experienced a pullback. I believed this setup created an opportune moment to leverage these reports, which could spark a significant market movement and drive the value of the SPY. This belief informed my decision to engage in a vertical call spread strategy with the specified legs and expiration, aiming to capitalize on potential market shifts.

Detailed Analysis of Trading Hypothesis: My trading hypothesis was anchored on the belief that bullish market sentiment would re-emerge, spurred by an improving inflation landscape and the resilience of the job market. Observing that most indices were either approaching or already at all-time highs, I anticipated a resurgence in market optimism. Additionally, I had the expectation that the Federal Reserve’s minutes would bolster this rally, culminating in a jobs report that indicated a healthy increase in employment, but not excessively so. My strategy was straightforward: capitalize on the market’s bullish momentum during its prolonged uptrend.

Reflection on Trade Management: In retrospect, my trade management was significantly flawed. The market, while experiencing an upswing, was dangerously overstretched. I was caught off guard by the sudden shift in yields and the rapid transition from euphoria to uncertainty in market sentiment. Although aware of the market’s overextension, I had hoped to leverage the final phase of the bullish trend.

Unfortunately, my position was undermined by various factors, including Federal Reserve speakers dampening expectations of early rate cuts and job reports that exceeded forecasts, shifting the market mood. My trade, never truly profitable, hinged on the hope that forthcoming reports would steer it towards profitability. Yet, each report either fell short of expectations or was outright disregarded by the market. The anticipated market-moving reports did materialize, but negatively impacted on my position.

By the second day, it was clear that my trade was floundering with no viable recovery strategy, leaving me with no option but to wait for its expiration.

Trade Review and Lessons Learned: This trade was a misjudgment on my part, both in terms of the market’s reaction to economic reports and the overall viability of my strategy. Not only did I lose the profits from the previous week, but this experience also highlighted my ongoing struggle with cutting losses promptly. A critical error in this trade was my failure to acknowledge the shift in market sentiment. I clung to the hope that subsequent reports would reverse my fortunes, even as the SPY continued its downward trend.

Experiencing a market pullback in real-time was a new and sobering experience for me. It underscored the reality that sometimes markets don’t rebound as expected, or the timeframe for a potential recovery is insufficient. Reflecting on this, I recognize that I should have allowed more time for the position and better anticipated scenarios where market reports could lead to surprises. Going forward, I am determined to approach trading with a revised strategy and heightened caution, especially considering the significant impact this trade had on my trading capital.

Trading Journal:

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