Apr 19 STT Trade Plan

I’ve now neutralized May STT so I’ve only got on June and July units. For some strange reason, my net liquid went down drastically over the past 2 days (in one account it went from 200k to about -10k within a night). I am not sure why. I know IB re-calculated the stress test from 12% to 15% but that was as of April 13th. Ah well, strange. I’ve sent closed out May STTs in that account and the net liquidity is back up to about 160k. Maybe it was the approaching expiring of the April BSHs?

I am going to wait for an opportunity in the next 2 trading days to put on more July STTs before the French elections. They are a decent way to play binary events. I probably won’t put many more on after this and will instead wait for Aug expiry to come out. Another odd thing, a lot of time value came out of the trades today (all of a sudden), P/L is mostly recovered from Apr 6. More of this will happen next week after French elections pass. Maybe I’ve missed a good opportunity to enter more July STTs which admittedly I am light on. The bulk of the trades are in June and June is almost nearing profit target…

10 thoughts on “Apr 19 STT Trade Plan”

  1. I found STT trade has quite a bit of short vega exposure. There is a donut hole b/w STT and BSH. For a slow grinding down in SPX and a slow ramp up in VIX, position will lose on a MTM basis.

    1. You want to initiate the STT in higher vol while initiating the BSH in lower vol settings. But you can initiate both at the same time quite safely. You can backtest the STT and see how it behaves in all market types, it’s the most resilient trade I’ve seen.

      If you have a slow grinding down environment like say Jan/Feb of 2016 then you have to adjust the STT to the downside by either adding new STT structures, debit spreads or by rolling the structure as per the guidelines. There’s many ways to adjust. Add bearish STTs etc etc. If you left it and never touched it, then it is likely you’d lose as the BSH would not have activated at all. However, you will definitely profit in those times if you’re adjusting appropriately.

      The donut hole between STT and BSH is typically 15%-20% below the current market and is not real re modelling as a fall that large during an STT cycle of 45-60 days will have seen increased vol and the sinkhole would start to lessen. However, as you mentioned, if we had some strange grinding down without a subsequent vol increase to the tune of 12% or more market move (very unlikely) but possible, AND you did not adjust the STTs on the way down (i.e. you actually were in real time approaching this sink hole) then you’d have problems. You can backtest a sharp fall Aug 21/24 (Which is what the BSH is for.. after all, it’s Black Swan hedge, not bearish market hedge) and see how great it performed. The BSH itself will not perform in a slow moving downward market but the STT will if you’re diligent and appropriately managing it. It prefers bearish markets. You’re getting paid more for the risks on new trades initiated AND this is where the profit tent builds up.

      If you look at the trade just based on the risk profile, you’ll have seen only the tip of the iceberg. Have you signed up to Ron’s course? Highly recommend it if so. All of this is covered. I am not sure I can expand on much more without infringing on his content?

  2. Thanks T&T for the elaboration. I have gone through Ron’s course and is in the process of quantifying the theta costs and gains from STT vs. BSH. As a matter of fact, I found the whole Index Trading group and then Ron’s course after bumping into your blog.

    You are exactly correct when mkt grinds down like Jan-Feb 16, then dynamic adjustment will keep delta in control and the IV difference between strikes near ATM and more OTM will help to sustain profitability. While BSH will not be activated in such environment (it is designed for Aug 2015 type environment), BSH likely will not lose value (no theta cost) in those grinding down type scenario. So readjustment (roll STT down or adding PDS or adding downside BF) religiously is the key.

    That however took away one attractive side of STT – low maintenance. But those type of scenarios are not that frequent.

  3. One more thing. I will to keep a regular symmetric BF above STT (closer to ATM). Kind of like JL’s downside PUT BF idea. It is negative delta and positive theta. That way I can let STT go a bit more bullish. It is my first line of defense.

    1. I had thought of a combination of Bearish Butterfly and a more bullish structure as well. But usually the bullish structure does not make enough money to compensate the huge losses of the BB. For the STT this certainly is the case.

    2. I was going to do that as well but sort of like the Bearish STT instead of the bearish butterfly (symmetric as per JL). We haven’t had to do that yet live yet. But I imagine that any downside move that has increased vol will have me adding Rhinos (very cheap with high vol) and probably bearish butterflies OR the bearish STT. I actually haven’t backtested the bearish STT yet which is on my list. The bearish inclining ATM trades will be my first line of defence for the 5-8% down moves. I guess he calls this the “three amigos”. The naming for these things are terrible. I really wish that Harvey didn’t call his one trade the “Road Trip Trade” which let to the “Space trip trade”. I hate the names 🙂

  4. One more thing. I will to keep a regular symmetric BF above STT (closer to ATM). Kind of like JL’s downside PUT BF idea. It is negative delta and positive theta. That way I can let STT go a bit more bullish. It is my first line of defense.

    1. Agreed. My initial thought was to always have a ratio of ATM trades (rhinos) or bearish butterflies but up until about 2 weeks ago the vol was so low and the up grind was so great that the pricing was terrible. On Friday of last week, I did enter some Rhinos because the price was good.

    1. Definitely. I can’t see much weakness when combining an ATM trade with the STT+BSH combo. Maybe some small upside risks but that can be adjusted for.

Leave a Reply

Your email address will not be published. Required fields are marked *