Sep 13 Update

Not a whole lot going on,

On the super low vol pump up during the last 13 days, I did enter a bunch of BSHs and set and enter much of the Jan STT at a higher UEL on the one down day we had. So the higher UEL is helping financing some of the BShs but not completely and I wait for ANY return of vol to get them paid off. When will this period end? This is the last time I work BSHs like this. I will enter a BSH factory and do opportunistic STTs, Sails and T5s. I just suck at financing these things.

My year is pretty crappy, I’m positive but it must be around 10% or so max thus far. I guess I can’t complain but I feel like I am just waiting for some sort of vol to happen so I can get out of my Dec STTs and start entering all the new setups I have (which all require some volatility to enter). The whole year went to shit re returns from the original Rhinos I had on in Jan-Mar and my poor payoff of BSH financing (RC’s didn’t work well enough and my over-patience for high vol entries of NPs didn’t go as planned). All of the poor performance is to do with my poor financing and using archaic strategies that we no longer use (it was all we had at the time). I attribute this year as a final year to my on-going learning and setup of the dream trading portfolio 🙂 If I can’t break 50% next year, I will question everything. I know that sounds crazy.

I did put on a small Rhino the other day but the up move has it in negative currently. I am still trying to get out of my T5 which I am seeing some value come back in.

As I mentioned, I am convinced that a BSH factory is a great core trade and pairing it with some opportunistic STTs, some Sail trades (High Vol entries and trend following entries with bias) will be the move going forward. I’ve been backtesting it like mad and I am getting crazy returns on any date I enter for the BSH factory, within 6 months or so. It’s a great income trade, but I can only use a fraction of the account on it re initial risks at the beginning. We have exposure for like 10-20 days. I will likely try to tool old structures I have on to compensate this risk so I can put on more and more.

I am back in Cayman now, boredom is starting to set in more regularly but I am getting a lot more work done 🙂

16 thoughts on “Sep 13 Update”

  1. Hey Patrick,

    Glad you returned home safely with your family, and hopefully you haven’t been impacted by hurricane season.

    I’m not a member of Trading Dominion, so it’s a bit difficult for me to parse all of the acronyms used on your blog, but I think I’ve got a decent handle on what you’ve been discussing. A little confusing though is differentiating between a BSH and a BSH Factory. It seems like a BSH refers to the purchase of a ratio spread far below the money, while a BSH Factory is a structure that can be initiated as a Condor, Fly, etc. which is converted to a debit spread over time. (In other words, the PCS finance the PDS.) Is that more or less what’s going on?

    Also, when you use NP’s (naked puts), are these contracts truly naked in your portfolio – i.e., are you at any point in time a net-seller of option contracts, where every short does not have a corresponding long?

    Thanks,
    Joe

    1. Hi Joe,

      Yeah, sorry for all the acronyms. I have no clue what I am able to share from the group or not.

      The BSH factory is something that Ron @ Trading dominion created and is part of course. I know he’s pretty protective over his BSh stuff the most. IT’s worth joining the community if you can. Well worth the money. All we do is work on ideas. We meet once a week as well on conference.

      The NPs aren’t truly naked because I have more longs in my BSh than shorts. So that’s how it works. You double up the BSh and sell 1 NP. You’re still net long puts.

      1. Patrick,

        No worries, I understand that you’re hesitant to say the wrong thing. I have to laugh sometimes, though – many in the community seem to think that they’re inventors in the spirit of Newton, Tesla and Einstein. IMHO, if you’re successful enough at trading, why do you need to sell courses? This is not to discount Ron’s contributions. I’ve definitely gleaned some insights from him, and appreciate his efforts.

        Regarding the backratio, I think I understand. Say you’ve got on a +2 x -1. If you’ve got two of those and sell another put to help finance the cost, you’ve now got a +4 x -3.

        It sounds as if you’re running quite a few different strategies, but they all seem to be highly correlated. However, from your post, you’re considering a leaner approach going forward. Has correlation between your P&L’s been a motivating factor in your decision?

        Joe

        1. Hi Joe,

          I know what you mean. At first I thought the same thing, but having been around since the actual idea came about (STT and BSH) and having created the initial Skype group that helped Ron spawn the idea, or at least, he posted his ideas and we consistently gave feedback, I see how he values a group and how the group functions to consistently challenge him and the trades themselves. I think we’ve looked at 35 different trades and variations there-in. But yeah, I was like (to myself), why on earth would you ever sell this, it’s quite valuable, start a fund or something. What could you make from the 1-1.5k fee (maybe 200-300k max) but all your trades are now out there. But he’s always said he sees value in starting a community that will have many minds work on the same problem, and even then I still didn’t think it was net positive for him. I do really believe it is a net positive now though, having seen it grow. Most of the trades, the financing and even the structures are becoming archaic bases with new spins that are vastly improved. This only happened because we got a variety of smart people constantly working ideas. Having seen this group consistently work to improve and discover ideas is pretty cool and it benefits him big time now. Did he have the forethought to see this happening? I have no idea, but it seems so. I mean even the T5 (cross expiration skew mean reversion style strategy) was an idea that a member found from some fund in Germany. The combos we came up with (even mine) were furthering what he put out there and benefit him.

          Creating and monetizing a mastermind group like this can do a lot for one’s psych re transitioning from a job to trading full time. With income coming in, one can then start risking more and growing. So I can see the point and I can see that he risked the initial trade setups being out there in exchange for future improvements and ideas being exchanged.

          re back ratio, It’s a different ratio and its position is specific.

          The strategies are all somewhat different and are meant for different entry types. They should complement well.

  2. I am on similar boat – transitioning from more ATM structures to PM margin based structures operating at lower strikes.

    Still getting used to massive numbers of contracts the trade needs to carry. The structure requires far deeper knowledge about the in-and- outs of options as the trader needs to preemptively envision how much STT will react and how much BSH will help to protect the STT in a spike down. Software can only do too much, and in a a fast selloff, ATM IV will spike, Vomma and vonna will come into play.

    Vertical skew and contango will move on top of that to further complicate things.

    1. Hi Rui!

      Q: Did you actually find Ron/Trading Dominion via my blog? That’s awesome if so.

      Glad to have you here. You are one of the biggest contributors to the group.

      1. Definitely. I was googling info on bwb last December and stumbled on your blog. I read them all and then found your pointer to the skype group.

        From there I joined Ron’s course and it started a new journey.

        Rui

        1. That’s really cool. I think we’re on our way now with these trades. The group is super solid and partially thanks to you, we’re lucky to have you on there re your knowledge on skew and the more mathematical side of options.

  3. Hi Patrick,

    Have you looked at going in to the weeklies to buy some cheap puts or verticals to protect the factory during the first 10-20 days? You can even throw on some 1×2’s at a pretty low cost. Helps with PM margin too. I would think that the cost would be negated by the ability to ramp up your BSH factory trade. Especially in this market, 100 wide put spreads in the weeklies are pretty cheap once you get otm far enough.

    1. I’m starting to look at this. If we could eliminate risks (or at least keep it reasonable) in case of any BS or Jan/Feb 2016 market, it’d be a fantastic trade (the BSH factory). Thanks for the ideas, I’ll be testing things out this weekend.

      A newer leaner trade that uses 3 different options contracts (much less contracts and legs) might be replacing the entire STT+BSH setup for me. The backtests so far are fantastic and it performs almost like a dream during Aug 24 2015 and the grind down market of Jan/Feb 2016. It’s kinda like the sail trade. The sail trade and this new trade (I think it’s going to be called the 15-35) is kinda replacing (at least for me) the need for the standard STT and BSH setup as a pair trade. THey’re all similar in profile we’re just getting further and further along re # of contracts required, margin, slippage concerns and commissions.

      The PC2 as backtested is great but it does require a LOT of legs and slippage would be a concern with such small profit target. These newer trades are using a similar risk profile but with FAR less moving parts.

  4. Patrick,

    I’ve done Ron’s course. I’m not active or part of the community though. I’ve seen you refer to the BSH Factory many times…but I don’t recall Ron using that terminology in the course (but I could be wrong!) I’ll try to ask my question without divulging Ron’s ideas…Are you referring to BSH Variant #1…the first one that he describes, whereby new shorts are entered after a few tranches of BSH are in place? Then longs later? This is the only thing I can think of that was in the course that might be a “BSH Factory.” If so, my related question is this: Although I traded BSH this way for a while, I was very uncomfortable with using existing BSH longs as cover for new BSH shorts. It effectively nullifies the the existing BSH as a hedge because the new shorts have to be covered. It didn’t make much sense to me, given the BSH is a hedge to begin with. Your thoughts? Or am I wrong about the variant that is being called the factory?

    1. I call method 1 the factory and consider it both an income trade as well as a lotto ticket.

      Once you get net long puts, it’ll be a viable BSH

      1. It makes sense to use it as an income trade, if done properly. But if you use even part of the net long put position to cover new shorts, you dramatically diminish the trade’s ability to function as a hedge. I understand all of Ron’s “financing” methods, including this variant. The problem with all of them is that during the period of “financing,” the hedge is greatly diminished. The BSH is great as a hedge once it’s stand-alone. But when the overall hedge ratio is reduced – which happens with any finance method – the entire BSH structure is really a far OTM directional play and not an effective hedge, at least not until the finance is taken off or the net longs to shorts are back at the proper hedge ratio.

        Similar to 13, I tend to use weeklies to protect the “factory” and keep the hedge ratio intact for existing BSH, rather than use up the net longs to cover new shorts for new BSH. I also use far OTM short diagonals frequently as a hedge in lieu of the BSH. I think they work much better…much easier to set up with net $0, or profit if so desired.

        1. If you’re referring to the BSH factory setup as per method 1, it’s definitely an income trade with lotto aspects but the entire process is detailed as to how its traded. You have initial risk at the start (probably 10-12 days) and soon after you’re net long puts the entire way through and if you are harvesting these become the lottos. I’ve done about 20 different starting date backtests and it works quite well. To cover the initial risk, a member came up with a new trade idea the other day that probably will fit perfectly. So I am exploring that. Once you start the factory for a specific amount of money, after it’s matured, you won’t have the same exposed risk again with that money. You kinda have to pick your poison too. Do you want to use it as a hedge or as an income trade? Though, any income factory I started made incredible amounts through Aug 24 if net long and somewhat matured.. However, not if you started it 10-20 days before and had exposed shorts :).

          I wait for down days to initiate new legs, I harvest old ones and I keep rolling forward, eventually you’re full of long puts and new BSHs. It doesn’t take long to get on the longs for any new shorts you put on. Even if you’re short 1 or maximum 2 BSH starts in the front, the back will make up for especially if you’re harvesting. If you start any of these in July 2015 and work your way towards the crash day, you’ll end up with a lotto win. If you started 1-2 weeks before, you will not. Ideally, you had some matured ones that compensated. Same goes for Jan 2016. You will have 50% draw downs if you had started at the wrong time. There is some initial risks at the start.

          1. If you have no other factories, and you’re starting the very first one and let’s say you decide to do a 100k unit. Then you have to accept the very very small risk that you will draw down significantly on that 100k for the first sets of days. The idea is that you cross your fingers and close your eyes for the first 12 days and accept the risk 🙂 After those sets of days, forever after if you continue the factory, that 100k won’t have the same risks. I’ve found that it does about 100% in income based on PM per 7 months or so.

            However there is a new trade that might be perfect to eliminate risks at the start.

  5. That sounds right. I think you said it best: “You kinda have to pick your poison too. Do you want to use it as a hedge or as an income trade?” This was my original point. The BSH loses it’s hedge ability if you try to use the “factory” variant. When you take away the acronyms for the cute names.. but when the “factory” is operational, it really becomes a collection of time spreads (mostly diagonals). The risks and rewards are the same that they’ve always been for PBRs, diagonals, and calendars. Just as Ron says in the course, time spreads are unpredictable, difficult to trade, and have impossible to define expiration graphs. Yet, turning the BSH/PBR by allowing near month longs cover further out new shorts is exactly that…nothing more than a far OTM time spread. Being far OTM makes them less likely to be hit, but they’re still time spreads, and all the risks of a time spread are still present. The only thing that putting it far OTM does is reduce the actual $$ amount of the risk and reward, and it decreases the reward for risk ratio…and allows portfolio margin to dramatically increase the leverage.

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