As I sat in my office late into the evening yesterday pondering what, if any, really useful market analysis I could give members, I got stuck. “Unpredictable”, “news-driven”, “risk-on-risk-off”,…we already know all that. I began to write about the pretty uncanny resemblance of yesterday’s intraday chart of SPY to a chart of the S&P for the month of November, but the charts speak for themselves:
…for what it’s worth. Fractal patterns can be found all over stock charts, and I don’t know whether they have any predictive value. History rhymes, and all that.
Then I started thinking, it’s precisely when market analysis is the most difficult that a delta-neutral strategy, with rigorous risk-management rules and techniques, stands out as one of the only ways to continue consistently generating returns without becoming an expert day- or swing-trader. Yes, these periods of uncertainty are challenging for any market-neutral income strategy, and especially strategies that are sensitive to changes in implied volatility. But Calendar Options, for example, has closed out each of the past five, volatile expiration cycles with a profit (or at least with little or no loss after subtracting a reasonable discount commission rate).
A Matter of Discipline
Is Calendar Options immune from losses? Certainly not. But the road to long-term profitability requires discipline—not just the discipline to follow the strategy rules consistently and without emotion, but the discipline to stay with a strategy that has outperformed, on a risk-adjusted basis—not every month, every quarter, or even every year—but over longer periods encompassing all types of market conditions.
It’s times like this, when extreme market volatility—and volatility of volatility—test an option-trader’s willpower, that become the downfall of many inexperienced and/or undisciplined traders. A losing month, a few underperforming months, and they move on to something else that’s been doing especially well for the past few months. And then, market conditions change, the “hot” new strategy underperforms, and it’s on to another…and another and another.
Not having the discipline to keep trading a winning strategy month after month, quarter after quarter, year after year—constantly switching to whatever strategy (or fund or stock) did best in the prior quarter— is a sure path to long-term losses. The inherent uncertainty of the market, not just right now but at all times, really, makes it essential to pick a diverse combination of strategies appropriate for your investment goals and risk-tolerance (long-term stock positions, covered calls, credit spreads, iron condors, calendar spreads) and stick to it—because one never really knows when conditions will change and the strategy that had been languishing, or just suffered a significant loss, will suddenly become the best-performing strategy in the next month, or quarter, or year.
So I promised market analysis and ended up giving you a lecture on discipline. For those of you looking forward to some unique insight into where the markets are headed from here, I’m sorry to disappoint, and I hope I’ll have many such insights to share in the future. But if seven years trading stocks, options and futures through all kinds of crazy conditions has taught me one thing, persistence and discipline are more important than making the “right” call about what the market will do tomorrow, next week or next month.