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A new year calls for a new strategy

A very Happy New Year to anyone who follows Cape Cod Doug, and I hope it will be a good one for you! Obviously, I haven’t been posting here much recently, as my work has overwhelmed me for much of the autumn of 2011, and my trading therefore ground to a halt.

A preliminary review of 2011 shows a trading profit of around 31%, which doesn’t match up to the 69% of 2010, but which certainly isn’t bad in a year where the S&P 500 was essentially flat. I will post a fully updated year end report in the trading log shortly, one that will account for commissions accrued.

With added work responsibilities this year, I am going to have to face facts and devise a new trading strategy that meshes with my availability and schedule. It’s going to be market neutral, and hopefully involve just one or two days where trades get placed each week, and which can be left a little more on auto pilot in the meantime.

So here goes — what we are doing is SELLING at-the money spreads on the WEEKLY S&P500 options market, and then rooting for them to decay over the course of the week (hoping for a flat market, in other words). To hedge this exposure, I am also simultaneously BUYING an equal amount of S&P spreads set to expire about four months out. The idea is that these, theoretically, will not decay as fast.

So, by way of example, with the market at 1280, today I sold three S&P Jan 13th 128 calls for $1.18 and sold three Jan 13th S&P 128 puts for $1.10 — a total credit to my account of $684, not counting commissions. Next Friday, I will buy these back, hopefully with them close to worthless.

As my longer term hedge, I also bought three S&P April 128 calls for $5.55 and three S&P April 128 puts for $596; a total outlay of $3,453 for the protection, again not factoring in commissions for the time being. The idea with these is to buy them in as the market moves, and try to minimize any decay.

This strategy is never going to produce a 100% profit in a year like I managed in the first year of this blog, but I’m hoping its less time consuming, and that it ultimately might produce a profit in the range of $1,000 a month over time.

I’ll keep my fingers crossed, and keep you posted!

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