33% draw down in 2018

New Year

2018 year turned out to be volatile and as I expected all our accounts saw a quite large draw down.

But I am not grumpy about it nor regret anything I have done and the way I traded, except on my TD account. I now regret closing bad trades in January 2018 and collecting a large loss instead of managing those trades. Managing those trades I believe, our TD account would be in a lot better shape.

2018 brought a great opportunity. Increased volatility allowed us to create great premiums income. I can’t believe, we earned over $72,000 dollars in 2018 in options premiums. So a draw down is insignificant compared to the income. As long as I can keep those trades open and manage them, there is no worry about a temporary net-liq loss. It will recover as quickly as the market.

And one more thing I learned this year – hedging. I still do not feel very comfortable about hedging as I still see it as possibly losing money but lately, I do it very often and it seems I can preserve the capital. Thus there are two outcomes – make money or preserve existing funds but no loss (or very minimal).

For every put spread or call spread of an Iron Condor I have open I use debit spreads as a hedge.

If I see the market going down (or up) I buy a debit spread for the existing credit spread converting the trade into a butterfly or just add higher debit put spread (or lower debit put spread, depending on the market). These additions then allow me to close an entire busted credit spread and debit spread for a small credit and thus profitable or just allow me to roll the busted credit spread lower using proceeds of the hedge to help offset the cost.

In this whipsaw market I use the debit spreads as hedge only. I tried to use it as money making tool but too often I ended up with a wash or a small loss, many times converting the debit spread into a credit spread.

And that is another benefit of debit spreads. If you are wrong, you can always salvage the trade converting it into a credit spread by reversing either a higher long put into a lower long put or lower short put into a higher short put:

1) original debit put spread:

-1 SPX 2470 put
+1 SPX 2475 put

Converting the short put up into a credit spread:

close -1 SPX 2470 put
leave +1 SPX 2475 put
open -1 SPX 2480 put

Or converting long put into a credit spread:

leave -1 SPX 2470 put
close +1 SPX 2475 put
open +1 SPX 2465 put

All above mentioned strategies add risk as normal credit spread and they will require buying power. So in order to do this, you must be sure that your assessment of a market direction is correct. In a whipsaw market this can be tricky.

But debit spreads can add a significant value to the portfolio. Therefore in 2019, I plan using them a bit more often.

What’s next in 2019?

My strategy for 2019 will be same as in 2018 with a few modifications.

I will keep actively trading in IRA account and use 50% of all options trading proceeds to buy a high quality dividend growth stocks. And if we see the market selling more in 2019 (and I expect the next 6 months of more selling) it will be a great opportunity to buy more cheap dividend growth stocks.

In our TD account I will not be trading as of now. Only managing open trades. I will be saving as much as possible to raise capital. Or account equity is over $27,000 but it is low. It is not enough to trade successfully. It is my opinion and experience. Trading such small account is stressful and I do not have a luxury of being stressful. Thus the entire 2019 year I plan on saving money and I start trading again once free buying power increases above $3,000, then I will be opening one credit spread (with hedging) and max. risk of $500 per trade for every $1,000 of free buying power above $3,000. Majority of our assets are in stocks or open trades. I do not plan on liquidating the stock positions to free BP nor closing open options trades as these would result in a loss. Thus saving more is the only option and plan here.

The similar situation is in our ROTH account. This account is also significantly under-capitalized. I will do the same strategy as for TD account and will be saving first.

In my next posts, I will write a review of December 2018 and overall 2018 year review. This is just a quick review.

Stock market 2019?

I am still not convinced that we are heading into a recession. The economy is still very good and solid – low unemployment, low inflation, still all time high consumer confidence (although slowing), all time high earnings, retail sales, manufacturing orders and production. Markets do not fail in this economy. The economy must show signs of troubles as it did many times before.

But this doesn’t mean that it cannot change. Trump’s trade wars, ignorance, dilettantism, an no economic policy can damage this economy (and we are already witnessing this to be happening). However, until we see the economy showing signs of trouble, we need to be open to a possibility that this market is just driven down by fear and needed correction.



This market is somewhat similar to 1962, 1987, 1990, 1998, 2002, 2011, and 2015 market. If this observation is correct and history repeats itself (in a similar manner) then we may expect additional up to 6 more months of selling before this market settles, bottoms, and starts rising again.

But time will show, as always. Until then, manage the trades to keep them open and close them as winners.

Happy New Year!

2 responses to “33% draw down in 2018”

  1. Sean says:

    Thanks for the article.

    You mentioned that you regret closing the bed trades in the TD account in January 2018.

    Had you decided to manage these trades, how would you have do e that?

    • Martin says:

      I would attempt converting them into SPX trades to avoid early assignments danger and then kept rolling and hedging them. By closing them at a loss I deprived the account of the needed buying power and now I can’t do much and cannot trade much.

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