The following is daily commentary for the Week of Jan. 17, 2022. You can scroll down to see portfolio positioning throughout the week along with various performance metrics. This post gets updated every morning prior to market opening so be sure to check back for daily updates.
Tuesday 1/18/2022
Broad market indexes continued to selloff on Tuesday while energy and resource stocks held up fairly well. The rotation into energy since the beginning of the year has led many of the oil and gas names to become fairly overbought. I am waiting on a pullback on XLE or an S&P 500 test of the 200 day moving average before allocating into more oil and gas exposure. In the meantime, I’m happy to hold onto coal longs as the fundamental backdrop continues to improve and these names are not as overbought as the oil and gas sector.
My primary source of alpha over the last week or so has been long volatility positioning (puts) in non-profitable tech and momentum names. On Tuesday I began taking profits on puts in low-quality tech names and used the proceeds to leg into puts on high-quality tech names. Specifically, I closed my ARKK position and bought some AAPL and MSFT puts (long dated for me; Oct. and Sep. ‘22 respectively). I’m anticipating a test of S&P 500 and/or Nasdaq 100’s 200 day moving average, and I this will require a sharp pullback in the high-quality names who’ve been holding indexes up for the past 6 months. Once we test the 200dma, I believe the low-quality tech names which have been beat up fairly well will rally hard and I don’t want any low-quality long volatility exposure remaining on the books. Instead, I may choose to hold the high-quality tech puts while buying calls on oil and gas stocks to play the bounce (and hedge the puts).
I’ve finally traded my way out of the drawdown I created for myself in October and it feels good to recover and reach new all time highs on a performance basis. The strategy laid out since November is working well and I feel like I’ve got a good pulse on the markets and for where we’re headed.
Wednesday 1/19/2022
Equity indexes continued their persistent trend lower on Wednesday. Bulls put in a few attempts to put in a bounce intraday, but in the end markets closed near the lows of the day. Energy took a much needed break, along with coal equities unfortunately. I’m starting to think broad indexes need to flush lower and get it over with in order to find supportive levels with which to consolidate from.
I am looking to take profits on most of the low-quality tech and momentum puts in the portfolio as soon as possible. I don’t want to risk a snap back rally where junk gets bid and I lose a material portion of unrealized gains. I’m watching the energy sector with the intent of buying it for a bounce, but I’d prefer that bounce to coincide with a bounce in broad markets. This would help me hold onto the high-quality tech puts which I plan on holding for a while.
To reiterate the game plan:
Take profits on low-quality tech puts (avoid a junk rally).
Buy energy and materials for a broad market bounce.
Hold high-quality tech puts throughout the bounce because when the bounce fails the high-quality names will get punished.
Thursday 1/20/2022
Equity markets continued to slide on Thursday after being up almost 2% early intraday. I wrote around 2:30 pm how the type of trading action we were witnessing, the continual fading of rallies, typically leads to some kind of flush lower which signals that bulls have given up. We saw part of that flush at the end of the day on Thursday and I expect the remaining part of the flush to occur on Friday. The earnings miss from NFLX (-20% premarket) points to that thesis being correct.
I wrote the following this morning on @TheCoalTrader private feed (for Foundation level members who get my trades in real-time):
Thoughts for today: if we close and take profits on all puts we’ll be left exposed to the long side (coal & energy bets). Fundamentally these bets are safe, but when markets get crazy correlations go to 1. I’m currently far overweight puts vs calls, & the goal is to get balanced.
So I’ll be closing a lot if puts today, but not all. I want to remain hedged, or market neutral. Priority will be to close puts closest to expiration first, and lock in profits. I’d like to hold long dated, high quality tech puts only by the end of the day (+coal & energy calls).
Friday 1/21/2022
There was a lot of trading action on Friday as equity markets finally flushed lower. I was anticipating this flush going into Friday’s trading having 42.1% of my portfolio in puts. By mid-day I had closed all of the February expiry put options which I held going into Friday, those being NVDA & TSLA. You can see on Thursday’s Open Positions table below that these were very large position sizes, especially for options positions, coming in at 18.4% and 9.7% of net portfolio weight, respectively. I also closed puts on the Bitcoin proxy RIOT. After I took profits on these positions I was anticipating a bounce in equities and I entered into calls on SXC, CNQ and HAL, as well as warrants on AMR.
Unfortunately, the market never bounced and I felt exposed to all of the long oriented trades in the portfolio. The only hedges I was left with were puts on DOCU, TWLO, AAPL and MSFT. It’s important to note that the AAPL and MSFT positions are long-dated puts without much convexity so they weren’t helping to cushion the blow from all of my coal and resource stocks getting crushed. I therefore re-entered RIOT puts, lowering the strike down from 18 to 13 relative to the ones I closed earlier in the day, with the idea that if we get another gap down on Monday these puts will offer a lot of protection.
The probabilities of a bounce next week are very high:
Stocks are basically down 6 days in a row.
The VIX is at 29.
Implied volatility rank and percentile is at 62% and 97%, respectively.
Put/Call Ratio is at 1.31, the highest it’s been since the March 2020 Covid Crash.
After reviewing these statistics towards the end of Friday’s trading I decided to play the odds and bought some weekly call options on SPY. When you see that much fear it’s usually a good time to buy.
Therefore, I entered Friday having 42.1% of capital allocated to puts and 11.7% allocated to calls, with the remaining being long common positions with net cash at -5.5% (on margin). I ended the day with 17.8% of capital allocated to puts and 16.1% allocated to calls, with a cash position of 10.3%. I ended up with a 2.6% gain on the day and 10.3% gain on the week, which is not bad given the carnage.
I’m actually a little disappointed that I didn’t do better given I had the right ideas at the right time and a large amount of leverage deployed. Here’s a few areas where I could’ve done better, or where I went wrong:
I did a terrible job of holding puts through the volatility of the last week; I generally took profits too soon. You can look back at all of my long volatility trades of the last few weeks and imagine all of the gains if I’d held them through now.
I didn’t anticipate enough carnage in coal, energy and resource stocks. If I expected a flush I should have also expected that correlations would go to 1 and everything would get killed.
Lastly, I entered additional calls on Friday too early expecting a bounce. This may still work out next week however.
I believe the detailed summary above may be valuable for readers wondering about my thought process and activities going into and during some fairly turbulent markets.
I do think we’ll get a material bounce next week and I hope that the coal, energy and resource stocks participate in that bounce; we could see the trash rally instead which would be unfortunate. Moves like we’ve seen the past week or so typically take a few weeks to consolidate and back-fill. I anticipate a strong bounce which will give us the opportunity to take profits on the long positions and perhaps re-enter or add to puts on some of our short positions. My portfolio is fairly balanced in terms of puts vs. calls so if I’m wrong and we don’t get a bounce I will still do ok. The coal positions could get saved by positive earnings which are only a week away - which is largely why I held them throughout the carnage of this week.
I’ve added an Option Trades table at the very end of this post so you can see all of the recent trading activity and performance of each trade. The performance of closed positions looks very healthy, but of course the long positions (calls) which are still open are mostly in the red. Please let me know if you have any questions or comments.
Tuesday 1/18/2022
Wednesday 1/19/2022
Thursday 1/20/2022
Friday 1/21/2022
Please let me know if you have any questions with regards to strategy and positioning, or anything coal related.
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Hi - Can you assist, I've just upgraded to a founding member from standard. Can you let me know how to access the real time trade feed. Thanks, and keep up the good work.
I appreciate this comprehensive and analytical writeup. While I am a seasoned trader, I've never used options as such a large percentage of my portfolio. I kind of marvel at what you are doing. I can of course see from your post-game reports how you have sized each put position (generally 2%-4% of portfolio), but I wonder if you might include position sizing in your real-time trade updates for us founding members. That would be helpful to me.