Feb 27 – Trade Plan

That “almost” 3 point fall in TLT and red close for SPY put the pair trade at -7% for the month. I did manage to close probably 30% of the trade during the rise the past few days.

I am closing the trade either today or Monday/Tuesday latest. I’ll probably take most of TLT off it it falls another 0.5 points. We’ll gauge the market.  The most well respected people I follow are looking to get into TLT as a slight hedge. So I am a bit more OK with allowing the trade to go on a bit. Steady options is also still in the trade.  So I’ll use all of that info as a gauge but the most likely thing is taking the trade off in parts.

 

 

Feb 26 – Trade Report

The SPY/TLT pair trade is now at break-even. The trade went from around -23% to ~0% thanks to Yellen. Both the equities and bond market rallied the past few days sending the pair trade into break even status. We’ll likely come out with a slight profit. I’ve been closing portions as it rallies, it’s conservative, but we want to have it closed by Monday latest anyways. No harm in reducing exposure. I’ve closed some at 128.5, 129.5, and 130.  I am not a huge fan of the trade itself mostly for its future prospects and the unknown ongoing correlations with SPY. There are times when they both go down. I have this feeling that SPY/TLT may not necessarily be negatively correlated in the next few years. Rates are super low, spy is at all time highs, it feels like there’s more tendency for downwards movement for both. Who knows though, I don’t know enough about it and won’t pretend to. Probably another reason why I will continue to reduce my allocation whilst increasing the MIC allocation.

Feb 25 – Trading Report

Simply said: Yellen was dovish

I watched the testimony and essentially they don’t anticipate raising the rates in the next few FOMC meetings but reserve the right too if the data supports it.  As of now, the data does not support it and they do not want to hinder the recovery process. It’s unlikely that rates will be raised in H1 2015.  This sent bonds/treasuries flying. TLT hit 129.5.

The SPY/TLT trade is only down about 2% now. I closed off about another 8-10% yesterday.  Just being cautious.  I was going to close it Friday or Monday any how. We should get out at break-even or slightly higher. If we have any luck maybe we come out with 10%. Would only take another 2 point rise in TLT.

My Feb RUT MIC is up 5.5%. I just put on a small one this time around (15 units). I’ve made one adjustment (took off some call spreads yesterday during the testimony) It was a conservative move but I felt that the market could move around pretty quickly as it sometimes does during these types of events. My short call had 1.5x in value and it was in my 1.5 week window. I followed the plan. Of course, I closed it right at the RUT peak but a plan is a plan and the trade is still up 5.5%. Any quick up move and I’ll be chilling without worry while if I hadn’t I’d be stressing overnight.

I saw some results from another person (Amy Meissner) doing the MIC trade style. I posted her results below:

 

Screen Shot 2015-02-25 at 9.20.34 AM

 

She sets it up just a bit differently. She has a much lower ratio of call spreads sold. This would have helped a lot during the period she traded.   The thing is, downside is easier to adjust, so starting off with less calls is kind of interesting. She uses 10 puts to 2 calls.  I use 15 puts to 5 calls.  So it’s a 1:5 ratio vs a 1:3 ratio.  I am kind of interested in that or at least exploring using specific kinds of setup depending on the current environment situation. If we’ve just come off a big correction/drop, I’d probably opt for a 1:5 ratio but if we just came off of a large run-up and things were getting over bought on a variety of metrics, I’d probably opt for the 1:3 ratio.  Right now, according to sentiment trader, we’re kind of over-bought on a lot of metrics. So I’d be looking at a 1:3 ratio setup, as an example.  Each type, whether it is 1:5 or 1:3 has its own style. As long as the plan is set in place before hand, and you manage it correctly. There’s no real discretionary issues.

Her results are quite good and based on REG T margin. All of my backtesting shows around the same overall result 3.5%. Use Portfolio margin, lever it up a bit, and you’re getting 9-10% returns. The idea with that is, use less capital to get similar returns.

 

 

Feb 24 -Results

Update:

The Feb pair trade is obviously recouping a lot of the loss as TLT marches up to 129.25. I believe we’re close to break even on that trade now. I’ll be able to tell tomorrow when I can do the calculations on the reports. Oh how nice it would be for it to bounce up to 131 right in time for closing. Might even be able to pull in a profit on this one.

With leverage my entire account is up about 12% for the year.

—-

So far this year :

Alpha Portfolio: 3.2415% (with the equity portion being 4.78% vs SPY 2.3%!!!)

SPY/TLT Pair Trade (January): 10%

Momentum: 2.159%

Our SPY/TLT February is down about 10%. I’d love to get out at break even.

The alpha protector is sitting at 3.2415% (4.78% in equities less 1.538% for hedge cost) for the year so far. The Hedge portion is down about 1.538% as expected in a rising market. The goal is for the hedge to pay for itself but it takes time. It’s a full year strategy. Each week we target enough extrinsic to eventually pay for the hedge.   The alpha portion is almost double SPY!  Awesome.  Especially given our early results with OCN and QCOM.

The momentum portion as of yesterdays close is up about 2%. We were up about 10% in January but it’s been a bad month for TLT.

Feb 23 – Trade Update

TLT had a nice open due to soft housing numbers.

Our portfolio had a nice jump these past few trading days. I’m looking to get into the RUT mic trade for April today.

I’m looking at 1110-1090 April puts and 1300-1320 calls with 1220-1200 debit spread

Feb 22 – Update

My portfolio has hit a yearly all time high.  Not bad considering our SPY/TLT is down about 19%.  I am going to wait for a bit of a down day next week to roll up our spy pair for more credit.  Any movement up in TLT will get the trade towards the profit zone (captain obvious). This is a smaller portion of our portfolio and we expect these sorts of swings.

The momentum portion is still positive but just barely

The alpha protector is doing very well.

TLT roared to 128 on Friday and closed back down to 126.65 after news of a Greece deal. This also pushed up SPY about a half percent in a minute. At 128, I think our pair trade was only down 10%.

I think I personally will start to increase the MIC (modified iron condor) portion to a significant amount of my portfolio (20%). My portfolio will mostly consist of MIC (20%), Alpha Protector (40%) and very small leveraged portions of momentum rotation (10%), earnings based volatility trades (10%) and a small portion of spy/tlt pair trades (10%) and some bond rotation (10%). I’ve also got a  position in the optimal fund at Covenant capital but I don’t include that in the above percentages. I gotta say, I am kind of excited about the optimal fund, I like the way they approach risk and volatility. The idea is to use a lower amount of capital with a higher volatility trade style to achieve the same results. I am looking forward to seeing how this performs in 3-5 years.

I will post all my MIC trade entries and adjustments on this forum under the heading “MIC – Month”.  So anyone who is interested can follow along.

 

 

Feb 18 – update

The FOMC minutes are out in about 12 minutes. They may give clues to whether the fed will increase rates in June

This should have an affect on TLT obviously. Let’s see what happens.

The little relief bounce was nice this am. Maybe it’s found some support?

Positive news from the minutes. Dovish.

Portfolios recovered a lot today. Good day.

It was an inside day today for TLT. Maybe we have some real hopes at a rebound? Would be greedily nice 🙂

A good quote below:

“The least amount of decision
making you have in your process
the more likely you are to make
money.” – Richard Chignell

Feb 18 – Trade Plan (MIC analysis and thoughts)

I’ve looked at a few new adjustment parameters to the MIC trade

Adjustments on the Upside:

First two weeks of trade

1. Delta @ 25 = Roll up debit spread 10 points

2. Short Call doubles in value = Remove 1 unit or roll up 10 points

Next 1.5 weeks of the trade

1. Short call reaches 1.5x value = remove 1 unit

Last portion of the trade

1. Short call reaches 1x value = remove 1 unit

The basic tenet is that the first two weeks we want to give the trade a little room to breath. If Delta of the entire position hits 25, we’ll roll up the debit spread portion by 10 points and we’ll monitor with an alert when the short call doubles in value. If it doubles in value, we’ll either roll that up 10 points or close off 1 call spread unit.

During the next 1.5 weeks we’ll be a bit more aggressive on upside adjustments. Why? Well Gamma starts to play a big role when we’re halfway through the trade. We’ll have an alert on when the short call reaches 1.5x value and we’ll close a spread.  Our upside risks at this point will be drastically reduced. We’ll sacrifice a bit in whipsaw markets but we’d likely still end up with a profit at the end of the month. That’s the goal.

 

Upside is the toughest part of the trade to manage. It’s what crushed me in October. If I had managed the trade THIS way, I’d be out for a profit.  I don’t necessarily hate how I managed October, it just turned the trade into a high variance one and that was not really the intent.  It was the same way I managed the trade successfully before and I was profitable while other guys were -8%.  I would push the upside with rolling calls (instead of removing them).  It adds profit and for the most part, it’d work like 95% of the time, the other 4% you’d lose and 1% you’d get absolutely annihilated like what happened in Oct/Nov. The only way I would run into trouble at that time is if we broke all time records in all sorts of metrics, and if SPX marched 220 points in very short order, which it did :). It was the most pronounced V recovery.  I think the market rose 220 points (SPX) in like 9 trading days.  Annnyways, not to dwell on the past, but the changes above would allow for a much lower variance way of achieving similar results over time.  It’d generate an average of 3% a month with a positive rate of 97%.  It has been backtested with similar parameters in all market types since 2007. We’re going to manage the upside in such a manner that worst case we should end up positive regardless of how the market goes.  The downside is/was easy for me to manage. I don’t mind downside/bear markets with the MIC. I successfully navigated the early October fall (10%) with ease.  The upside is what ALWAYS hurt the trade with the way I managed it.  I’ve given the trade a 2 month break and I’ve thought about how to manage it.

 

Adjustments on the Downside:

Like I’ve mentioned a few times, I used to manage the MIC like a job, I’d be making small adjustments throughout the trade and at times felt like I was playing the market like a fiddle. Eeking out 4%-5% returns until the small adjustments got me killed in October. There’s a trade off to everything. I am convinced normal moderate adjustments based on a trading plan is much better. It removes discretion, it removes yourself as an enemy and it keeps the stress low. This is how I trade now. (Well it’s getting better and better!).

Here’s some things I’ve found that I’d like to continue to explore

1. Instead of buying the monthly disaster (black swan) put (which loses effectiveness towards end of trade as time value shrinks and effects of Vega are reduced). Why not use long dated puts which are packed full of time value (and hence Vega effects are pronounced)? Then I thought, why not use the same disaster insurance method we use for the protector portfolio? It’s perfect. We’d likely end up paying for the long puts over time reducing the costs of the trade AND we’d be much more protected in any correction/flash crash or what have you. The risk profile with a monthly put vs a year put with increased volatility is astounding. The trade would always be profitable in a flash crash or large correction.  Using the protector portfolio method of buying long dated puts (130%) and selling against each week (30%) to pay for it.  Needs more exploration. On my list of to-dos.

2. On downside movements add butterfly spreads as a hedge method. We used to just add either a debit spread or a long put but a butterfly spread could be a lot cheaper. Obviously, there trade offs here.  A long put will be very expensive in whipsaw but very effective if the market keeps falling. A debit spread is the second best, it’ll be less effective in a downward market than a long put but it still helps, and you can keep adding them with less cost if it ends up being a whipsaw movement. The next is a butterfly spread which is the least effective in a downward movement but much less costly and hence less harmful if a reversal should occur.  So we have three things in our arsenal

1. Buy long put

2. Debit spread

3. Butterfly spread

On the downside, I’d like to adjust @ delta 25 for the first two weeks and delta 20 for the last 1.5 weeks.

 

How were my latest results

May: 5.69%

Jun: -2.65%

July: 1.01%

Aug: 7.24%

Sep: 4.8%

Oct: 0.78%

Nov: -9.7%

Dec: 2.01%

 

I skipped January and February.

November was a very difficult month. On the up trend I was rolling my calls forward on large up days. I started the trade when SPX was @1820 and it ended at @2060.  If it was anywhere close to say 2020 or 2030, it would have worked out. But it didn’t. I find that lately anythign that can go wrong with a trade will often go wrong 🙂  In November it was this trade, in February its the TLT trade. Things often go way past what you think they can.  It’s protecting against that and yourself and that is the key.  I mean, hey, in November this affected my portfolio quite a bit but this month with the equally annoying move in the TLT trade, I am so diversified, that I am still up overall.  That’s the key, diversification and proper sizing and proper allocations to a variety of strategies.

 

Feb 17 – Trade Update

TLT continues to wreak some havoc on some of the portfolio. TLT fell another 1.5% reaching a critical support line. It’s fallen 10% this month. Just 9 trading hours ago TLT was around 131 and our SPY/TLT pair trade was negative but still OK. Now the TLT/SPY pair trade is down over 20% and our momentum trade is just above break even for the year. TLT rose 9.9% in January only to fall the same in February. Quite volatile for Long term treasuries.

Screen Shot 2015-02-17 at 10.30.06 PM

 

The 10 year yield is up 50 bps this month and if it ended here today it’d be the largest 1-month increase since 2009 (Dec).    We should hopefully see support on the B line above.

Frustrating that through the last 6 weeks we’ve navigated well despite a volatile environment and were profitable in month 1 only to be quite affected in month 2 by a pretty large and RARE drawdown in TLT (10% in 15 days?) Bonds? Really?  Anyways, I digress, we’ll see how the month ends. The accounts are up but they’d be up a ton more if we didn’t have this insane 15 day relentless fall in treasuries. Not only that, I personally just got out of watching my US equivalent balance collapse because of the EURO (I keep about 1/3rd in EU because I live in EU). Always something 🙂

Any positive news? The protector portfolios are doing well, especially the alpha portion. Fucking love this hedged portfolio. It’s truly brilliant.  I get tempted to just do this and some MIC and cut the other bull shit.  I especially love the use of the alpha quant signals and the results it brings.

I am not sold that the SPY/TLT correlation will remain as it was for the past 5 years (which we back tested). We’ve had a 30 year bond bull market and treasury rates are very low (I know in EU some are negative) but I just don’t ‘trust’ in the strategy as a main element of the portfolio and I don’t trust that US rates will necessarily drop. I don’t trust the correlation is present in all market types and I don’t trust that the correlation has to continue. Though the backtests for the last 5 years are fantastic, I want (and have) downsized the allocation. This month I did about 1/3rd the amount.

I’ve re-analyzed the old annoying MIC (modified iron condors) trade and have added a small amount earlier this month, it’s doing v. well. I’ve changed the adjustment parameters and have set it to be strictly non-discretionary and alert based. I am comfortable with it, especially with proper sizing and I’ve rethought how to handle the upside risks. This method produces a 97% win rate (anything above 0%) with an average of 3% per month with a max loss of 7%. It works in any market type. I swore away from getting back into it, but it’s sort of like home for me. I’ve got so much experience running the things albeit I ran it very discretionary which causes an insane amount of stress. The only way to run it is with proper position sizing within the portfolio and with alerts and a proper trading plan. No discretion. So far I’ve got one alert this month, loaded up the application, adjusted my debit spreads. That was that. No thoughts, no checking, no discretion.