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Monday
Jan272014

2013 Report

Here you may find the 2013 Report for SK OptionTrader. This may be read directly or as a PDF here.

After another successful year, we would like to take some time to review our record and how it was achieved. In 2013 we closed 30 trades without a single loser. Yes, every single position that we closed made a profit.

The average gain for one of our closed trades last year was 38.49%, bringing our total return to 92.28% on the year. This means that if one had followed each of our trading signals with a $10,000 portfolio, profits of $9,228 would have been earned; more than 10 times the cost of a year’s subscription.

Not only were our gains phenomenal, but we achieved them with prudent risk management. Every position that we held was designed to have the best possible risk reward dynamics in the situation at hand.

A variety of trading vehicles, including outright options, vertical spreads, leveraged ETFs and pair trades were used to provide winner after winner. By the year’s end we had outperformed the record setting S&P by 60.48%, beat gold by 119.63%, and achieved gains 146.41% better than the HUI.

Included Herein

  • Introduction
  • Key Figures
  • Outlook For 2013
  • Profits to Start the Year
  • A New View on the Gold Market
  • The Collapse in Precious Metals
  • Precious Metals Grind Lower
  • Will the Fed Taper?
  • Government Shutdown
  • Improving Employment
  • The Value of SK OptionTrader

Key Figures

  • Record: 30 Winners from 30 trades
  • Return on the year: 92.28%
  • Average gain per trade: 38.49%
  • Length of trade on average: 42.6 Days
  • The profits from a $10,000 portfolio would have paid for a subscription 11.55 times over.

 Outlook for 2013

We began the year with a new view on the economy, monetary policy, precious metals, and equities. Weakness in the economy following the global financial crisis had required quantitative easing measures, which had pushed gold to all-time highs. However, consistent improvement in the employment situation indicated that more easing would be unlikely to come, and that in fact a reduction of stimulus, or a taper, was much more likely. This meant that the gold bull market was effectively over. In line with this view, we decided to take a bearish stance on the precious metals. We believed that gold would fall below $1200 and that silver would go to the teens during the course of the year.

If gold and silver were heading lower, then the poor performing mining sector would likely be decimated. This prediction led to many profitable trades being made throughout the year, including our puts trade on Hecla Mining that earned profits of 212.5%.

We saw that economic strength had already begun to fuel a bull market in equities, and believed that this trend would be likely to continue. Specifically, we saw the S&P 500 rising to all-time highs and trading above 1800 before the year’s end.

The year played out as we expected it to. Economic growth was consistent enough to allow the Fed to taper, which they did in December. This strength lead to all of our targets levels being reached in gold, silver, and equities. The trades that we made on these movements resulted in our overall return since inception rising above 850% and returns on the year of more than 90%.

Profits to Start the Year

We opened 2013 with quick short on the VIX, an index that tracks the volatility of the S&P. As the fiscal cliff catastrophe loomed we were able to take advantage of the spike in volatility with a limited risk short trade. Of course, an eleventh hour solution was reached and the crisis was deterred and as a result we were able to bank a 24.01% only 2 trading days into the New Year!

In the same month we were able to take advantage of the equities market for another profitable trade. We had begun to hold a bullish view on general equities in late 2012 and had bought SSO, a double long ETF on the S&P, as a result. The position benefited from the rising equities market and we banked a gain of 15.91%; our second winner in less than a month.

A New View on the Gold Market

During January 2013 we changed our view on the precious metals market to bearish, having been bullish up until that point; this was rewarded with the first trade we made in the market. After one week of holding Coeur d’Alene puts we were able to add another, more substantial, profitable trade to our record. Thus, on February 19th we signalled our subscribers to close the position for a 53.33% gain.

Shortly after we had bought puts on CDE we also purchased puts on Hecla Mining, a silver miner that we considered to drastically overvalued. This trade then became our most profitable to date, more than tripling in value in under three weeks.

When we closed the trade we took profits of 212.50%, topping our previous best of 197.14% in 2011. This would go on to be only our first position to earn us triple digit returns in the year. Following these profits we banked another three winners before the collapse in gold two months later.

The Collapse in Precious Metals

 April 15th saw the largest one day drop in the gold price in history of COMEX. We had held the view since the beginning of the year that the bull market was over, which this drop then confirmed. As we had already examined the gold market and taken bearish positions, our portfolio rocketed more than 10% in a single day. The reason for this was the understanding that when gold fell, the stocks mining the yellow metal would have much of their expected profits eradicated; thus, a short position on the sector would provide significant leverage on the market.

Among the positions that we had in place ahead of this collapse were two short trades on GDXJ, an ETF that tracks the performance of the junior miners. The first was a pair trade that was long gold and short the juniors, thus removing the risk of a movement up in the gold price while still being short that part of the sector. The other was an outright puts position that we held, which aimed to be more aggressive in taking advantage of the downtrend in gold prices.

Both trades were profitable and performed as we had hoped. Although the pair trade only returned 11.18%, it achieved the objective of being a trade that was short the poor performing miners without the risk of a rally in gold negating profits. Our aggressive puts on GDXJ benefitted hugely from the collapse of the gold market and allowed us to bank triple digit returns of 135.71%.

In addition to the trades that we held on the junior mining sector, we had short position on the industry overall through a vertical put spread on GDX. These were purchased on Thursday April 11th; the following two trading days saw gold lose more than $200. In two days we more than doubled our money, making this a near perfectly timed trade.

In the days following the gold collapse we moved almost completely into cash. Having banked 10 winners in a row with a 68.08% average return on each, we decreased our exposure to any potential bounce in the gold market and began to position ourselves for the next move in gold.

Precious Metals Grind Lower

We held a view that the dramatic collapse of April would be unlikely to repeat itself, and that a slow grind down was much more likely. As a result, we targeted positions that either had positive theta or that were without a time premium component. This would allow us to hold positions for a greater period of time without fear of losses due to sideways movement in gold.

Therefore, through May and June we allocated a significant amount of our portfolio to a variety of trades that were short the metals market. Our vehicles included vertical call spreads, leveraged ETFs, and outright stock shorts, all of which enabled us to take advantage of the movements in precious metals and their miners.

Using short vertical call spreads on GLD, which have positive theta, we were able to close two winners on June 17th. One of these we had held through the collapse in gold and the other we had opened shortly after. The trades returned profits of 20.15% and 104.48%; adding yet another winner with more than triple digit gains for the year.

The next week would see our returns for the year rise to 70.11% as we closed seven winning trades in just two days! June 26th saw the first two closures of short gold trades.

This time we used DZZ, a double short gold ETF, to benefit from the yellow metal’s fall under $1250. In less than three weeks these positions added more than 10% to our portfolio.

The following day we closed another five winners, this time from the fall in silver mining companies. Both Coeur d’Alene and Hecla mining were companies that we believed were highly overvalued, which meant that they would suffer greatly from falling silver prices. Rather than use puts, as we had done earlier in the year, we built a position that used outright shorts, thus giving us exposure without the risk of losing money on time premium.

Will the Fed Taper?

It had become widely expected that the Fed would begin reducing QE3 at their September meeting; we were among those viewed this as probable. We believed that gold still had further to go and that it would likely challenge the July lows if tapering were announced. Such action from the Fed would also show confidence in the economy, which would have pushed equities higher in the long run. Therefore, we began building a more diverse position, taking advantage of movements in volatility and the stock market, as well as gold itself.

Through July we bought DZZ, and SSO (an ETF double long the S&P 500), as well as selling vertical call spreads on GLD. The next month we added to this position with a short on the gold miners via DUST (an ETF triple short the gold mining sector). Then, in September during the lead up to the FOMC meeting, uncertainty as to whether the Fed would taper caused volatility to rise and for us to consequently short it. With eight trades all in profit and 65% of our portfolio allocated, we upheld our top target of risk management and decreased our exposure. If the Fed decided to leave QE untouched then equities would quickly price out tapering but decline from the lack of confidence in the economy. Gold, on the other hand, would rally on both the lack of confidence and the pricing out of a taper.

This decision lead us to close a long vertical call spread trade on SPY for a gain of 41.67% on September 16th. The following day we exited our short call spread position on GLD and our long DUST trade for gains of 19.59% and 41.74% respectively. We left only positions that could be profitable without a tapering announcement, but would also benefit from a reduction in stimulus.

As we now know, the Fed did not taper that month. Previously, we had considered a three month average gain of 150,000 per month to be necessary for tapering. As the Fed had not reduced stimulus when this level had been maintained for some time, it was clear that they were looking for significantly greater employment strength. Consequently, we raised our tapering threshold to a gain near 200,000 new jobs per month.

The Government Shutdown

After the FOMC meeting in September, the next major event was the ever growing potential for a government shutdown. Before covering this period, it should be noted that we have no political preference either way here, all we are interested in is how government actions affect the market.

In the recent past, an eleventh hour decision had averted such an occurrence from taking place, as was the case with the Fiscal Cliff. During the run up to the October 1st deadline it appeared that this would take place once more, so we left our positions as they were; keeping short positions on gold, volatility, and long trades on equities open.

However, congress did not reach a last minute solution. This lack of agreement drastically changed the market situation. It meant the government was willing to allow a shutdown, and potentially a default. Therefore, the risk of a collapse in stocks or a rocket upwards in gold became much greater. Accordingly, we closed our DZZ, SSO, and XIV positions for a small profit on October 1st to reduce our risk to any of the events mentioned previously. We were also prepared to close our remaining two short positions on gold if the situation prevailed.

Fortunately, an agreement was reached before any severe movements in the markets occurred. This allowed us to keep our profitable call spread trades open through till early November, when they were closed to bring our 2013 returns above 90% for the year.

Improving Employment

Once the government returned to full activity we finally received the employment data for September. While this data was initially less than expected, upward revisions raised the three month average gain. Payrolls improved to the point that tapering could be on the table for the December FOMC meeting, if the NFP figure released in that month was strong enough. However, if it was soft then it could rule out tapering. Therefore, one could take a guess as to the nature of the next batch of employment data, and take a position accordingly; we do not, and have never, and will never, simply guess.

So, rather than take a punt, we used the following to aid our decision. Tapering in the three months after the November print was all but inevitable, which meant the drop in gold that would follow would occur in that time period. If gold headed lower, the poor performing gold miners would also move down. This meant that shorting that sector would very likely be profitable, regardless of the December NFP print or outcome of that Fed meeting; the risk reward dynamics made it the best trade to have open in the situation.

On November 19th we bought DUST and doubled our position 3 days later. Then, before data or tapering could spark a rally, we closed the trades for gains of 20.33% and 43.20%. These would be the closed in a perfect 30 for 30 year. To find out what action we took beyond this, become a client and we will be able to disclose all information at once.

The Value of SK OptionTrader

In our opinion the value of information is the probability that the information will change one’s action, multiplied by the expected benefit that one would get from changing one’s action.

Our focus is on delivering results as that is how we believe we can best deliver value to our subscribers. Our updates and trading signals are usually brief and concise, since we do not see the added value of flooding our subscribers with mountains of data, research and reports that do not contribute significantly to the actual value our service. We keep our trading signals clear and concise and make no attempt to bury them in a haystack of other information for our subscribers to sift through.

We continually perform extensive research and analysis on the financial markets and a great deal of effort goes into designing each of our trades. However it is our job to sift through the myriad of data points and reports, not the job of our subscribers. We provide trading signals based on our analysis. These trading signals is where 99% of the value of our service, and in fact any similar service, is contained. All else is just noise and designed to create an impression of value for, without actually providing value.

So what is the value of our service to you?

Well to each subscriber it will be different. We suggest using the formula detailed above and one only has to ask oneself two simple questions;

1. If you subscribe to our service, what are the chances of you actually following our trading signals?

2. If you choose to follow our trading signals, how much capital would you commit?

For example, say you think that you have a 50% chance of following our signals and have decided to commit $20,000.00

In which case the value to you of our service in 2013 was as follows:

Our model portfolio return for closed trades in 2013 was 92.28%. That means $20,000 in our model portfolio would have grown to $38,456. Therefore the profit made was $18,456, this is the benefit to you. However, you only gave yourself a 50% chance of following our model portfolio so that means the value of our service was $4,095 – and yet it only costs $799 per year. Mathematically speaking, that is fantastic value for money.

However please keep in mind that past performance is no guarantee of future success. Also remember that all trading decisions are yours to make, we are simply saying what we are doing, what you do is your call.

Finally, we would like to take this opportunity to thank our subscribers for their custom, loyalty and understanding through the last trading year. We feel incredibly proud and privileged to have such a diverse range of people as a client base, consisting of experienced trading professionals to part time traders who are learning the ropes, residing in all corners of the globe.

Your questions, comments and feedback have allowed us to continually improve our service for which we are extremely grateful.

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