Friday, 20 May 2016

Debriefing L Brands

I previously posted about a gamble in my IB account, and I believe that the only way to learn from mistakes is to debrief and sort out what went wrong.

I posted the following chart pre-earnings release on Wednesday, and I was wrong.  I bought one June $67.50 / $70 combo for a net debit of $.60 in anticipation of a positive reaction to an event:

And here's what happened:

So, despite my thinking LB was likely to react positively to an earnings surprise, my thinking (or hoping) for an outcome is completely different than waiting to observe the market's reaction and then taking action.  I exited the combo for a credit of $30, so I lost $33 on the trade, which is manageable.  It's basically beer money (or lost beer money).

I believe the lessons here are as follows:

  1. Anticipatory trading is a fool's game, especially given that the odds are stacked against participants in the way of options premiums going into an event being adjusted upwards (vol is typically high going into earnings)
  2. If I am going to make an attempt to devise a system of trading combos, I am better off waiting and observing the market's reaction prior to risking capital.  The obvious point of support to participants is the very nice linear trendline catching all the lows from 2009, rather than the $60 round # "cry-uncle" target.  
  3.  I am likely correct in keeping bet size small enough to not matter, but given 1. above, I wonder why i bother?  It almost feels like death by 1,000 paper cuts.  
  4. I don't have any edge here.  Going back to 3., why bother?

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