The Art of the Strategy Pivot

It's very hard to time markets and it is also very hard to see a bear coming or a bull starting - especially when you are in the thick of things.  When you zoom out after the fact, there are always some great lessons to learn and that can help you in the future.

I didn't time the bear market that started in January 2022, but I was prepared for a change in the market trend.  My Fractal Energy Indicator was telling me something was up.  In fact, in my annual Year in Review webinar for students, I predicted a large sideways to down market.  If you zoom out and look at things over the last 12-15 months, that is exactly what we are in.  

But, I still was trading deep out of the money puts and put spreads because they had been so effective for the last several years.  When the market did fall preciptously, some of my positions were caught in the drop causing me to have to roll then out and move positions lower.  I still have some left to manage as I write this, especially in tech, but so far, I am managing the challenge of them and mitigating losses.  I fully expect that it will take into 2023 to unwind some of these.  I've had it happen before and will just methodically work through them.

One thing I did share at the beginning of 2022 with my students and started doing in mid-Janaury was to pivot to selling wide, out of the money Iron Condors on shorter time frames (5 and 20 days out).  My reasoning was that if we were going to be in a sideways to down market, adding trades beyond a month out would have a better chance of being attacked and I could achieve a higher velocity of money by turning my cash over faster with smaller returns that would add up to larger returns.  I created two new strategies:  Target 100 and Double Double.  The goal of Target 100 was to achieve 2% returns on capital risked each week and the goal with Double Double was to create a 4% return on capital risked each week selling further out.  In contrast, my typical return on risk per trade prior was 12-20% - so it was a big pivot.  But, if you do the math, 2% per week on capital risked is a 100% return per year and 4% is 200%.  Now, I'm a realist and know that not every trade will work out as planned and some weeks may just be risk off weeks, but if I am able to achieve 40-50% (basically half of the targets), I would be happy, especially in a bear market.

After trading the strategies for 5 months, I am excited to say that my students and I have not had a losing trade yet.  We have had a couple that we had to manage pro-actively, but have been able to consistently win with the strategies.  These strategies work well because of the higher volatility we have in the markets right now, so there will probably be a day when they are not as effective, but that would mean I can go back to my other strategies and trade them as they work well in low IV environments.

The important lesson is that "You cannot trade the market you want, you have to trade the market you have."  This means that you have to recognize when it is time to pivot.  This doesn't mean that you throw away your strategies or abandon them for new ones.  I am still selling options like I've always done.  It does mean, that you need to be realistic in trading what is working in the markets for the type of markets you have.  You will still find opportunities for your different strategies, some just may trade easier than others depending on the type of market you are in.

Ask yourself, how can I pivot or adjust my strategies to maximize my success in the markets in front of me?  Then go to work and figure out how to adjust them.