Did ITM Beat The Market?

Heather Cullen

Heather Cullen

In The Money

Did ITM Beat The market?

I have been getting some queries about how ITM has been performing (some of them less than pleasant) so I decided to review all the trades that we have made since the book was published on 24 Sep 2020 and see what the up to date performance has been.  The trades we would have made since then are:

So, the first bull trade was on the 24 Sep 20, and we stayed in the trade simply rolling our options until 31 Mar 22. Since then, we have made 3 other trades:

    > A bull trade on the 31 Mar 22

    > 2 bear trades on the 14 June and 22 Sep 22.

The table shows above that the first trade was successful, and the next 3 were not; we bailed out of them when we got the signal that the market was going against us.

ITM Bull Market Performance

If you had decided to sit out the bear market and not trade it, let’s look at your results. You can’t simply add up the rises and falls in the table above, you have to check the effect on your account.

Using $10,000 as our starting point (as it is easy to understand the figures and, obviously, you can adjust this to whatever you want) let’s look at the account balance, using different leverages. The standard ITM is to use double leverage (2X) but some higher leverages (3X) also meet the criteria but are inherently more risky. In the table below:

  • 1X is if you used no leverage at all (i.e. you just bought SPY but used the ITM signals to get in and out of the market.
  • 2X is using ITM signals, and double leverage (i.e., if SPY was trading at $300 you would buy an option with strike $150)
  • 3X is using ITM signals and triple leverage (i.e., if SPY was trading at $300 you would buy an option with strike $200)
  • Buy & Hold is simply buying SPY for the long term, not buying or selling.

You can see that even with no leverage and just using the ITM signals you would beat the market by a factor of 1.7. If you were using 2X leverage you would more than triple the market return, and at 3X leverage it is almost 5 times the market return.

ITM Bull and Bear Performance

Not everyone sat out the bear market, so let’s look at the results if you had done the bear trades, neither of which were successful.

When you compare the results with the bull-only results you can see that trading the bear did not work very well, and reduced our profits, but not hugely. We still beat the market (buy and hold) quite definitively.

If we check the profits:

In the Money Book Series by Heather Cullen

You can see that even with 2 failed bear trades ITM still beat the market quite markedly.

Not everyone gets the same results

Not everyone would have bought on the publication date and not everyone would have bought at the closing prices. If you had bought into the market at the peak in January, then you will have had a very unpleasant experience, as you would not have the buffer of the 30% / 60% / 90% rise to cushion you.

The other thing that the bear book, and this blog, cautions you against is using too much of your capital in a bear trade. If you had only used one-half of your capital then your losses would have been comparatively smaller as I have calculated the results on using the entire capital on the bear trades so it really is the worst case scenario.

The Worst Possible Results

So, let’s look at the absolutely worst possible case: You bought in at the market peak on January 3rd 2022, when SPY was trading at $477.71 (oh, those were the days!), and you used your entire capital on the bear trades. The relative performances are:

Bull trades only:

In the Money Book Series by Heather Cullen

Bull and bear trades:

In the Money Book Series by Heather Cullen

So you can see that both the 2X and 3X underperformed the market, although simply using the ITM signals with no leverage did beat the market. That’s the danger of leverage; it’s great when it is going with you, but not good when it is against you.

There’s no getting away from it: this year has been horrible, but it has been horrible for long-term buy-and-hold investors also. Let’s hope that after the midterms we get some clear direction about what the market is doing.

A Look at the Market

The latest chart shows that SPY has just popped up over the bear threshold:

In the Money Book Series by Heather Cullen

I’ve drawn a trend line (blue) which seems to indicate that the downwards trend is still intact. SPY will have to rise by around another 30 – 40 points before it is challenged. But remember, these are just lines on a chart; the market does what the market does!

Bull Trade Signal

I just want to reiterate that this is not the time for a bull trade. As I say in the book:

The Bear OUT Signal is NOT the same as the Bull IN signal.

Just because we have exited a bear trade does not mean that we enter a bull trade. The criteria are quite different. And from looking at the chart, we are quite a way away from a bull trade IN signal (around 30 – 40 points) Interesting that the 200 SMA has been shadowing the trend line since early June.

Reader Q&A

 1. Have you ever reviewed the strategy of buying near the money puts out 70 to 90 days, and the selling weekly puts for income. If so, does it work? 

This is a variation on a covered call, using an option rather than the stock position itself. I reviewed the strategy in previous posts, here are the link: Are Covered Calls Worth It? and Covered Calls Revisited.

2. I’m curious as to how well this strategy has done in 2022’s bear market? 

Hopefully, the above explanations cover this query?

3. Surely buying a 2X or 3X inverse ETF would be a lot less hassle and get the same results?

Actually, no, they don’t work the same way. at all. They have quite different results. There is a section in ITM Bull in Chapter 11, and in ITM Bear in Chapter 1. There is also a blog post on it here: Why Not Use a Leveraged ETF? 

4. On the AmeriTrade one or 2 day chart, the 10 day is  above the 200 day ema. The death cross occurs when the 200 crosses above the 10 day. Thus, it looks like we should already be in a bull market

I have looked at the charts and both the 10 day SMA and EMA are well below the 200 Day SMA / EMA. If you have a look at the chart above you will see what I mean.

It is possible that I am not understanding what you are seeing, so if you want to get back to me with a snapshot of the chart you are looking at then I would be able to be more helpful.

And one last thing . .

Last night I suddenly remembered something I wanted to put in this post, so I wrote it down so that I wouldn’t forget it. Here’s the note:

In the Money Book Series by Heather Cullen

Unfortunately, I can’t read my own writing. What’s made? Marcle? Woicle? No idea. Possibly what’s inside? But that’s not helpful, inside what??

If anyone can figure it out please let me know – it was really important!

So we’re still on the sidelines, not in any trades. Let’s hope that after the mid terms are over we have a clearer picture of what’s happening and can get back in the market.

(and just noticed there is a typo in the email subject – dit instead of did. Embarassing. Apologies – but too late to do anything they have all gone!)


Heather Cullen

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